Q3 2019 Earnings Call
Good day, ladies and gentlemen, and welcome to the.
For Q3 2019 earnings Conference call today's conference is being quite good.
Hi, I would like to turn the conference over to Mr., Stephen Cooper head of Investor Relations. Please go ahead sorry.
Thank you.
[laughter], that's probably [noise].
Joining us to discuss our results for the third quarter 2019, I'm joined by or New co Coos agenda from Oregon and could you outline.
So let us look what's your choice CFO will make opening remarks on the call. Today also joining us for Q1 agents Executive Board member adept books, Martin President of all coal because operations and Ryan Smith CEO Quadrex.
Well, we get started I would like to say few words about forward looking statements and all the use of known Isis financial measures any statements made during this call that's not to start to affect all forward looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.
Words, such as anticipated believe estimate expect for cost intend may plan protect predict should outlook and will and similar expressions of today, it's everyday to at CP are intended to identify such forward looking statement.
If you undertakes no obligation to publicly update or revise any forward looking statements.
I was thinking statement that subject to various risks uncertainties.
Actual results could differ materially from expectation.
Factors that could affect <unk> future financial results I'll discuss mostly.
<unk> filings with the U.S. Securities and Exchange Commission, including Sep is annual report on form 20-F, 2018, plus the FCC and temporary 28 2019.
But it depends on this call I cautioned not to place undue reliance on these forward looking statements, which speak only as of that days.
But on this relationship that you can find a quality statement and financial summary, slide six both documents are intended to supplement our prepared remarks. Today that include early reconciliation for all non <unk> numbers to face numbers.
Thats otherwise noted all financial numbers refer to on this conference call, our non I fs and growth rates and Percentish. What changes are non I said as reported year over year. So knife at financial measures, we provide should not be considered a substitute for or superior to the measures of financial performance compared to the core.
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All right.
And finally, just a reminder, today's call is focused in our Q3 earnings results.
We weeks on November 12, we will hold our special capital markets Day in New York City. So we'll provide more color and our growth strategy at mid Trump revenue and margin ambitions and with that I'd like to turn things over telco C O Jennifer Morgan.
Good morning, Thanks, everyone for joining todays call first I'd like to say cost to flatten or the supervisory board their trucks in honor of leading companies forward together with Christian Yeah, It's an honor to help right Sep chartering policy.
Before I begin I want to start with the news we learned about on Friday regarding the passing of marker.
Mark how to profound impact on our industry and on behalf of all of US 80, I want to extend our deepest sympathies to the entire Oracle community, and but especially tomorrow family and friends you are talking prints during this difficult.
Now, let me dive into our Q3 performance.
Today, we reported strong Q3 and year to date result, which Luka will detail shortly.
Clearly our experience management vision powered by culture is resonating with customers in a key differentiator across all aspects of intelligent enterprise.
The topline accelerating and operational excellence initiatives in full swing, we're on track to reach our full year midterm ambition.
Let me spend a minute on the macro our strong Q3 performance was achieved despite headlines about slowing global economy trade wars and political uncertainty.
We had some impact due to macro challenges for example in Asia, and the German auto and manufacturing sector, but even in times of uncertainty technology investment remains a focus for every company and our business is resilient due to the breadth of our global coverage.
Companies continue to try to sep to transform to accelerate their growth organically and through faster M&A to drive efficiencies competitiveness and successfully navigate a changing macro and regulatory environment. Our global pipeline is robust as we head into our seasonally strong Q4 ethnicities resilience is further under.
And by more predictable revenue approaching 70% of them.
Let me now highlight our strategic growth drivers in the class.
We made a bold move with the acquisition of culture.
Customers are excited about the holistic experienced management platform watches for five.
Addition to what the combination of absent of data can do.
We're very pleased with Walter growth and we are starting to see the scale of that they'd be helping drive and closed pipeline, especially in the enterprise segment.
I'll just talk some impressive wins in Q3 dish network Flash technology Akamine.
Sharper image Stanley Black <unk> Decker garment international and many other select is Paul tricks in Q3 to move beyond systems of record New systems is action and achieve breakthrough results.
We continue to beat our competition in both the enterprise and falling apart.
Walter I mentioned is helping I say, Peter Ben footprint into new account and it's helping US open doors for other Sep cloud solution.
We're also seeing an acceleration of our win rates against medallion customers are choosing culture.
Technology, and analytics capability and the breadth of accent solutions across customer experience employee experience.
Experience Brent.
What do you additional culture to softer we've redefined the traditional human capital category human experience management H. access.
Every company needs to understand factors that impact employee experience to attract and retain their talent.
Celebrating called tricks that factor Sweet we've seen a tremendous demand so factor customer base for culture. This may we've acquired over 300 customers for the culture platform.
They see the evolution towards human experience management is proving to be an accelerant, Chris Hoy central which added more than 150 customers in the quarter and have now more than 3500 customers globally competitive wins included British Telecom Hugo boss.
In our joint sales motions are paying dividends.
Walter had its largest employee experience dealing history this quarter as a direct result of our joint go to market motion.
The proof point for success factor, we just eclipsed 1000, successfactors customers, an 80, Jay and when you add China. That's another 400 customer in Latin America, we're approaching 800, even in mature markets like Europe , we see significant growth over 2800 customer UK in Ireland, so triple digit new bookings.
Growth in Q3.
We're also making great progress lining posture, so fire in our partner ecosystem, we announced a partnership with Ernst and young with you why delivering excellent practices and solutions to clients through people advisory services and its workforce in the future solution.
He will also become the first Walter partner network member to adopt paltry experience.
Employee experience across the organization 20, 600000, 260000 point and then we'll combine data and data for success factor.
In addition to accelerating that's factored business and axiom.
Rcs business continues to benefit with the infusion of culture across the 400 portfolio. We introduced the connector between culture before Honda that developers and partner can use to build new integration scenarios.
Starting to see organizations, combining customer feedback and operational data to listen I understand.
He on and Brazilian retailer Swift also chose at 8400 solutions in Q3 over our competition based on ethic is unique and compelling vision.
Tetra Pak and Perfumery Douglas went live on before.
We're continuing to invest in our customer experience portfolio, we've announced that popped up a leader who continue to redefine Cfts arena, it's both Microsoft and most recently Salesforce has rejoined us they see as president of engineering NRC exit.
Experiences for site will take new places in the future.
Our intelligent spends solutions provide collaborative commerce without taking a rebound effortless travel and expense processing with S&P concur and flexible workforce management with S&P Fieldglass together they represent the largest commerce platform in the world with more than 3.4 trillion and global Commerce annually transacted.
In more than 180 countries. This is nearly eight times the side.
We are making strong progress on delivering integrate expense scenarios, starting with services procurement cross sale glass and everybody BT, Sony music product and many other trying to ethic eat intelligence solutions in Q3, specifically concur starting to gain traction, especially in China.
So I only had one of its marquee customer.
Another incredibly exciting announcement in key strategic driver future growth is our expanded relationship with Microsoft, which we call in bright.
We listen to our customer to help them to find it accelerate their journey to I think he asked for hot in the public cloud.
Many of our enterprise customers, such as an Azure and response ethic and Microsoft has established a partnership move on premise.
ERP and at 400 customer to the cloud <unk> industry specific best practices, our joint reference architecture, and S&P cloud delivered services on Azure.
Partnership with both accelerate simplify customer migration.
On Azure.
Microsoft with bundle ethic he'd class platform services into a bundle we call in Britain and they'll sell the directly through their field organization to their customers, who will run ethic any asset class by putting the customer first we've combined ethic innovation with Azure, Ukraine optimize environment for efficacy as well.
I want to enable the integration orchestration and extension of efficacy systems in the asset class as always choice will prevail and we recognize that many of our customers also run Sep I need a U.S. and GDP for example, and take our customers will still have the benefit of the best Brian I'd say.
And their public cloud of choice.
[laughter] Sunrise is delivering on winning strategy and its promises as validated by our strong Q3 and year to date result.
Fundamentals and future about safety could not be stronger now I'd like to hand over to my partner and Coke Christian Fine we share similar vision and with highly complementary skill sets and experiences. We will record next chapter of S&P success together. Thank you again Christian over to you.
Thanks.
Thanks, everyone for joining us today, let me begin with a person than we might why they.
By the news about the coffee market.
Yes, I'll never adequate in moments like.
Oh lighting industry loss that we should never leader and liquidity in mind and my thoughts on Lukas family. It's one.
We want it over.
Being at the always the Walmart this responsibility and an owner tool.
Onto expressed my heartfelt. Thanks, Rocco block now the P. supervisory board for the two up they put into China and myself.
Turning off with water liked it certainly helps.
I also want to thank bill not only for is amazing quarter, but also for the unique journey tooling to possibly Kate This is an outstanding quarter across all key Pelham either.
Cloud and on premise order entry wherever you cut cost margin operating margins and cash flow.
Look I will walk us through those in a minute.
Let me add some color home decor applications affected.
In the piece, yes, ERP flagship Spano continues its success, though.
Bought a suite in the market serving over 25 into suite.
160 country work, we're continuing to get into artificial intelligence further increase the business value and help our customers to quote and twice automation into digital age.
Until the end of this year.
We'll have 200 use cases and more than 1800 feature.
Descending 60% increase in school.
As far as product gaining market share and we see positive software license growth and high double digit cloud revenue quote.
Percentof, the dark companies and 65%.
<unk> Global 2000 companies already rely on Stps long.
We are now at more than 12, South Latin customer, we put sending a 25% year over year quote.
We also very happy with regard to adoption, especially at for more than tough. The technically my question and it allows them a customer a complete redesign of the business model and business School.
We see 60% of cost them apply for implementing and the out of the craving the culture.
The next up if you this quarter, so Jones and Callaway golf in the U.S. and quietly in Switzerland went live on that for Honda.
Did you own Prama in Korea.
Contact stuff that we are making rapid progress in cloud ERP.
On our cloud, including supply chain management.
We are now at cloud revenue, one way more than half a billion euro and close to 2000 cost.
For Kolowich books, 17 industries already in the cloud and we are investing heavily in do you think experience.
This quarter, we saw subsidiary we thought from Mcdonald's and seen young Jamie mining in China go live on Aethlon close.
I also like to provide you with an update on our platform business.
During our in memory database Sep Hannah with more than 31000 cup them up as of today.
One important use cases aethlon on other LP applications, such as Successfactors wanting on top of Sep hot but over the last two years.
Well, obviously expanded beyond at the P. applications to third party applications.
This is reflected in the shale will use licenses.
We are more than 60% already and it continues to pop.
We are evolving Sep cloud platform at the business technology platform with both focus on business services and integrating our it'll be application.
If you cloud platform is also key when we talk about integration, including our master data integration content incremental services like security and I've done.
No doubt the cloud is becoming mainstream into end up quite a fair market and so we're happy to get caught increasing cloud cost margins across all business model.
Looking hard on further increasing the efficiency of our internal cloud delivery.
Concede that into margin front, and I will provide additional color the capital democracy.
At the same time, we understand some into suites with high close with complexity like manufacturing and ultimately to get your peak optimization is needed we keep making a profit that core on premise for the foreseeable future. The same it to a company's inconclusive hi, political instability limited infrastructure or increased data. Thank you.
But he comes up and a lot of landscape will remain high quit for many years.
The P. allows companies to combine cloud and on climate and the landscape Hey, let to then taking into.
Concentration that business requirements and strategic vendor relationship. It's all about customer choice. This is also reflected in our multi cloud strategy, allowing both our customer.
To leverage the hyperscaler highly elastic and globally available infrastructure to deliver at the peak levels.
Jim discussed earlier, the Microsoft partnership and how excited we above that bill west assure the customer choice in this context remains unchanged.
Well I handed over to Luca I'd like to point out we focus area that I believe will be critical for our subset. The next chapter.
One customer success.
He has always been better when we listen to our cost.
Got the must have been vocal about their feedback, which we greatly appreciate and or actively seek we're listening and taking action integration solution that can you will and upselling.
A key directly related to customer success.
Yes.
If the piece and other stuff that is computer.
Piece of software engineering, Pablo our continued close through innovation based on our ability to leverage on D. with thoughts is effectively and efficiently.
Yeah, we for you and closed the moving overlap.
Focusing resources and accelerating innovation cycle. So we get the most out of our armed.
Chuck critical saw future took them.
Also we will further strengthen co innovation with our customer who we like to business, while you with the help of new technology.
Suite.
It is our colleagues at twice in a way should provide value to our customer and consistently promote our quote unquote capability. We are proud at Sep has been recognized for Lumos Embley Awards worldwide.
The only company to went on all five classical best places.
To work completed however, the engagement index, yeah were across high.
We don't stop here. In addition to further simplifying our internal processes, we are cone conducting our annual employee survey.
Yeah with our own at the peak walks with technology, which gives us detailed insight into the good Tibet and oxy PEPM lease up productive and innovative and therefore critical to our success.
That I would like to handed over to Luka Luka I am happy with the number [laughter] yeah. Thanks, Chris John as you know usually it's hard to get reset is fine, but this time, indeed, absolutely happy with the results this quarter.
I would also like to take the opportunity to grow Gretchen date, both you and then on being named co Ceos.
Took in April we promised a strong focus on profits and we're clearly deliberate I'm very pleased to say that our operational excellence measure us allowed us to achieve double digit operating profit growth and the substantial operating margin expansion and just as important we achieved this research with continued strong topline momentum.
Let me know provide you with some background on the key drivers of the third quarter.
Both cloud and software revenue as well as total revenue grew 13% this quarter cloud revenue was again, a big drive off this growing 37%.
New cloud bookings were up 39%, an up 51% excluded or infrastructure as a service business. This is a good trend for S&P and that's positive for the margin profile of our cloud business.
As mentioned by then we also signed a large public contract with Microsoft. This contributed 18 percentage points to new cloud bookings growth this quarter.
Issue as Chris said, we saw significant growth as far as our cloud offerings.
Software license and support revenue, who had a solid focus set in the quarter.
After licenses revenue declined by 1% and with this our software license revenue was actually slightly better than expected despite macro uncertainties.
This was primarily driven by continued growth in our asphalt flagship solution and our digital supply channels.
In Q3 sales more predictable revenue increased to 69% up two percentage points year over year.
No quickly to the regions, but we had a very solid performance in the EMEA region with cloud and software revenue, increasing 10% cloud revenue increased 48% with Germany, the UK being highlights, France and the UK.
That's exceptional quarter us in software license revenue.
We had a strong performance in the Americas region.
I would and softer revenue increased 16% cloud revenue increased 32% with Canada, Brazil, and Mexico being highlights. In addition, the United States and Brazil, both had strong quarters and software license revenue.
In the DJ region, we had a solid quarter amidst a challenging market environment cloud and software revenue was up 9%.
Revenue increased 14% with Japan, and Australia being highlights Japan had an exceptional quarter in software license revenue as well.
Let's go look at profitability and gross margins for the third quarter.
Our cloud gross margin rose sharply year over year and increased by five percentage points to 69%.
As Chris said already mentioned, we continue to make progress on efficiency gains in our cloud delivery. This marks the third straight quarter in a row that weve increased our cloud gross margin sequentially.
Our most profitable cloud segment, the intelligent spend group gross margin remained steady year over year at 78%.
Gross margin of our other sauce, Pos businesses expanded massively by 10 percentage points year over year and reached 70%, which is an acceleration compared to last quarter.
Similarly, as in Q2, we benefited from primarily for effects first successfactors no running solely on our converged platform based on the wholesale data base.
The extended lifetime of hardware.
Continued high gross margin from Quad tricks and also benefits from restructuring.
For our infrastructure as a service offerings the cloud gross margin improved by nine percentage points year over year up to 25%.
You see infrastructure as a service, becoming a smaller sales mix going forward as Hyperscale us continue to expand their capabilities to operate sep workloads into data centers.
Our cloud and software gross margin increased by one percentage point, 82%.
Very positive contribution from the cloud margin.
Our services gross margin was up five percentage points to 27% increase up to services margin mainly results from a strong revenue performance path with Steve successful execution of operational excellence measures and restructuring benefits.
Well all operating profit was up 20% year over year, driven by a combination of strong topline and further acceleration of our operational excellence and restructuring benefits.
Led to a stellar operating margin, which which expanded 170 basis points year to date, we expanded our operating margin by 70 basis points.
Turning quickly to IRS operating profit.
This was up 36% benefiting from lower share based compensation expenses.
Nine months stall I have for us operating profit was down 28%.
Let me just give you a brief recap to an update on the effects that led to this result.
After the first nine months of 2018, we had close to 100 million Euro higher acquisition related charges in revenue adjustments, mainly from the acquisition of CLO tricks.
Most of 500 million euro higher share based compensation expenses, and approximately 1.1 billion Euro IR restructuring expenses.
As mentioned last quarter. These effects are obviously much higher than usual this year.
Still expect high for us operating profit to be up significantly mix, yet since we don't expect any meaningful restructuring expenses and acquisition related charges Likewise decline.
Therefore, our eye for us operating profit growth rate in 2020 will be much high up that on a non for us basis.
Moving onto EPS in Texas, where for April Cps, we saw strong increase of 28% year over year, well know for US EPS was up 14%.
The third quarter or I have for us and not for us effective tax rate each increased close to two percentage points year over year. However, our tax rate guidance for 2019 remains unchanged.
In Q3 operating cash flow was up 28% free cash flow rose softly and was up 116% due to strong operating cash flow.
And the reduction of our Capex spend by 50%.
Well the first nine months operating cash flow was 3.3 billion euros stalled 5% year over year.
Patrick the prior year operating cash flow was impacted by the following effects first the benefit of roughly 290 million euros from the application of I have for Sixtym.
But then higher restructuring payouts of around 240 million euros, hi, our share based compensation payouts of close to two under 10 million euros antibiotics payout of 490 million euros.
For the full year 2019, with EFO still expect operating cash flow to be slightly lower than in 2018.
Similar to I have for US operating profit, we expect a steep increase in operating cash flow in 2020 as restructuring and text payouts were decreased sharply.
Free cash flow stabilized so the first nine months and was flat at 2.3 billion euros. This reflects our disciplined capex spend which was 703 million euros 443 million euros lower than the previous yet for the full year 2019, we now expect our capex to stay below the 1 billion Euro look.
Before I conclude I would like to give you an update on our non financial performance and sustainability highlights the proud to be recognized as the number one software company in the Dow Jones sustainability index for the 13th year in a row.
Developments in diverse leading to increased demand for S&P to enable customers to implement sustainable business models connecting economic social and environmental objectives, we want to help ensure that smart integration of impact measurement and valuation will ultimately become standup practice. So this end Sep is a founding member of the.
You balancing alliance a nonprofit organization that helps businesses measure the overall society will impact and dependencies.
We aim to lead by example, continuing to steer sustainability realistically in our own operations.
Employee retention was down slightly to 93.3% in Q3 year over year.
Made great progress in women and management, which is now at 26.3% up from 25.9% year over year, and obviously with Gen. Sep has named the first few medical CEO of a Ducs company.
In Q3, our carbon emissions for 65 kilo tons, which is slightly higher than we anticipated. Despite this we expected our admissions in 2019 will stay stable at a minimum.
Remain committed to our goal of becoming carbon neutral by 2025.
So to summarize we delivered an exceptional quarter across revenue profit and cash flow.
We achieved double digit growth in cloud revenue double digit growth in cloud and software revenue double digit growth in total revenue double digit growth and operating profit substantial operating margin expansion double digit growth and earnings per share and triple digit growth in free cash flow.
To reiterate our 2900 outlook with great confidence.
We are on track to reach our midterm ambitions.
Thank you very much and we will now be happy to take your questions.
Thank you. Thank you offer that we can I will start to today's session. Thank you. So.
Ladies and gentlemen, if you would like to ask a question. Please signal now by pressing star one on your telephone keypad. If you are using his speakerphone. Please make sure. Your mute function is turned off we'll now take notes will be Charles.
So again, please press star one to ask a question we pause for just a moment to an hour or an opportunity to signal for questions.
Our first.
Comes from Jonathan Chang from Bank of America. Please go ahead. Your line is open.
Yeah, Hi, and good afternoon, everybody couple of questions for me Firstly, just on the mechanics of the Microsoft Steel thing you're implying is about a 70 475 million Euro run rate of revenue can you just explained to how quickly we will see that kind of revenue run rates in the numbers. Please.
Perhaps per liter I guess.
And I'm, just coming back to the cloud bookings the second question I.
I guess you could look at this in a number of ways, but depending on the accounting for that Microsoft feel I guess the implied a.
Clouds organic cloud bookings growth was too I would say, maybe a little bit below what you're expecting in terms of cloud revenue growth over the next few years and I guess the questions would you agree with documents I.
I want to step. So you are looking to take in order to try and improve the run rates on the cloud bookings side. Thank you.
Yes, perhaps I'll take both of those and then please.
Chris done at your color if you want so on the Microsoft side, It's very simple revenue recognition will begin in Q4 and then basically.
We will have.
Roughly the figures that you're citing on an annualized basis or other costs over the next three years basically.
On the new cloud bookings side look I mean first of all thing nobody should arguable with.
39%, new cloud bookings growth and 51% without infrastructure as a service.
Good result of course, it was so influenced by the Microsoft transaction, but business representative with the strategic choices that we are making we're doubling down on the partnerships with our Hyperscalers, we drive healthy and highly profitable cloud platform and as for on a business as a result of those partnerships.
And.
We focus our Hana enterprise cloud infrastructure as a service business on high value opportunities. This is expected to direction that we've owned our business to take.
When it comes to the.
Growth rates in new cloud bookings that we need in order to hit or Miss some of the objectives I think I've been talking about this already it's on a number of cause previously it's important to note.
First of all the new cloud bookings are not the only saw some of our revenues enough our growth of costs. The renewal performance plays a role the rent in TCV contracts plays a role and we have quite a few of them that actually have a higher number of use us or other capacity matrix of that are kicking in.
In later years of a multi year.
Contract.
And on the other hence obviously the pay as you go revenues that we had primarily in our intelligent spend group.
So not captured a new cloud bookings when you take a look at our performance across the different clout segments, you will actually find that we run basically only healthy businesses that are growing exactly the way they should in the intelligence spend group, we have been very consistent around to 20% a constant currency growth Mark.
Now for a number of caught us into with via the stability of our transactional revenues. So we expect that this move continuing and in the high growth customer experience management segment has been growing close to 100%.
Yes, actually many of the cloud assets that are now reaching scale like Esfahan analytics cloud have actually.
Had a very very strong performance and as they become a bigger piece of the pilots. They will those costs also influence the revenue performance in a much bigger wave cloud ERP is an almost untapped opportunities do for us a Christian as I mentioned the run rate that we have achieved by now the opportunity in the market is huge so you shouldn't be close.
Sunday at all about our momentum in the cloud. Please yes, punctuate a couple of different areas of focus for Perclot growth.
Microsoft deal is important because it goes beyond our traditional partnership safe, but pretty big ticket and again and their sales teams across the world are now selling Sep solution that can help us say two things accelerate the movement of ask more Hannah to the cloud and accelerate the sales about they paid club.
Form services in cloud revenue, so the stickiness of that.
Partnership we believe we'll continue to pay broader Devin dividends.
Two other client call Trex is another area, where we see huge potential from a platform perspective.
And well just giving us an opportunity to have new conversation, especially in places like Asia. This is where we can hit the ground running and really drive growth faster and then finally, we heard you. We know that you want to see more organic innovation in the cloud from S&P it'll be something we talk a little bit more around at our capital markets day, but as I mentioned, whether it be analytics.
Customer facing solutions or supply chain. This is an engine that we need to get humming and more.
Okay. Thank you.
Let's take the next question please.
Sorry, any our next question comes from Walter charge from Citi. Please go ahead.
Hi, Thanks, I'm wondering between some of the things you talked about on the call with would thats for public ERP ramping up with it looked like the percentage of your EPS for customers that were new actually came down implying that the installed base might be moving faster as well as what you talked about with Microsoft and the Azure relationship do you expect that you saw.
Sorry to see a little bit more of a pickup here in the installed base migration around S. Four and I'm just curious on your investors get little nervous around cloud versus on Prem, but how do you expect that will will influence those two revenue streams. If there's any change that you're highlighting here. Thanks.
Yes, Thank you Walt and for the question. So I thought on handing over to that they're going into Q suite. So we have seen actually.
Swung, Florida for Us for I mean, as I mentioned, we have been positive flows across the on premise apps for.
And we also have been high double digit calls for as long on cloud and actually we see both I mean, we see many industries like automotive on in the topic Indus, we see a lot of movement autumnal customers migrating to Aethlon climate. We see also now that we are increasing.
Business value as well with serving new business models, putting more and more AI into the broader driving more automation file a high intelligence into pauses. We see now that also to move it's really picking up and then on the cloud side, especially in the finance area, we see major when low in Q suite and asset.
Now close to 2000 customers. This is now a major business with the even more important that into cloud, we see that the adoption.
Even kicking in faster. So we see go lives within trendy date, which is really strong and is also shows that not only in detail willing FHFA, but also customers adopting we thought.
Maybe just out of illustrates that Walter.
Hi, Thanks to our colleagues in development.
Increasing exponentially the functionality that.
Yes.
It means that as our customers the asset value case for them.
There is a very strong value proposition now, Iran far environment.
We are putting a whole range of different.
And then Iran facilitating.
The cost effectiveness, our customer base, we can see very significant post from the ESI can you see on par sold by we haven't strong value assurance program on the implementation partners are doubling down on it.
General business space, we now have 27 conversion factories various different.
We're seeing our customer segments.
With our colleagues and Dcs our model company approach. It means that we are seeing.
With Preconfigured solutions and content the implementation of as far as customers environment.
We're working to automate as much as we kind of thought process.
Sure, it's actually tax incentive pay a cost effective as high value transformation far.
Thank you.
Thank you.
Let's take the next question please.
We will now take our question from countries from UBI. Please go ahead your line is.
Great. Thank you good afternoon, and congratulations John and a question on your on your promotions I'm just following up on the topic of the private cloud I mean, you're obviously repeating the ambition.
2023 cloud revenues of 15 billion, but looking at this Microsoft relationship in pop back could be cannibalistic to the growth in hag do you see any change in the mix in 2023 are you expecting this fast pass business, perhaps be bigger than previously as a result at this and then related to that luker on the side I think you said.
Respecting less than a billion this year six months ago. It was going to be one and a half I'm wondering how much that relates to this change in hyperscalers relationships and how much maybe to you will you have some quite large capital projects building offices in Munich, and such like is that contribution to the to the reduction in Capex.
So maybe I can take the first part of the question. We don't see this cannibalizing our revenue because we see that customers want choice right and so many of our customers absolutely want a safety to manage at four in the cloud whether be the public cloud or whether it be Hana enterprise cloud, but we see many of our customers.
They are making rotter public cloud enterprise decisions and for US we wanted to make sure that we didnt limit our conversation to customers.
Only specific to one cloud offering and said what we found is that customer has so many voices around their table right now whether it be movement public cloud or at four or other innovation, we just found that by coming together and giving them prescriptive options, depending on what's important to them with their industry et cetera that we can make sure regardless we are getting it.
Each of the pie, we can influence that decision. So we'll continue to see both of those revenues revenue stream grow but now we're going to be.
Far more conversations and impacting the direction with that yes.
Just a last sentence on this one I think we have been talking for a while know about the fact that we expect indeed, the infrastructure as a service due to our focus on high value engagements a will not for the increase as a percentage of cloud revenues actually we believes that there is no an acceleration in SaaS Pos but that is very positive.
For the overall margin endorsed for cost of other gross margins in the telco when it comes to Capex.
Correct I mean, we've made great progress this year in our topic sufficiency main contributing factors our first of all the progress that we've been making with I'll send us an our partnerships in this respect.
They are at all really powering a lot of the infrastructure support that we need for our applications and that is of course are helping us a lot, but it's also due to the fact that Gary slate and Chris Jones organization and the cloud infrastructure team has done a terrific job to rationalize the demand for our own data center.
Hawk and consolidating the procurement centrally and they have also successfully renegotiated the maintenance contracts for our popular and update us sent us in a way that makes it now a highly economic to extend the lifetime of the hardware.
Total five years and that helps of course also in the Capex intensity and we believe that this will continue to either case, yes of course, we also have general capex needs through facilities.
The other topics areas, but they are largely planned for and they have not been subject to main a major changes. So it's really mainly the infrastructure efficiency and achieve and in our data send us and we believe that this will continue its also for the next couple of years.
Perfect no significant increases from the level that we have reached right now.
Maybe Mike and tough to give you one concrete example, alcohol on enterprise cloud offering slave to kind of our hyper scale, but actually I mean, one of our main competitor talked about.
The PFP replacement and I had to actually have no evidence I didn't find any pickup them are moving over to the competition, but what we couldn't be doing that one.
Customer from the competition, there now, saying we want to move to at Florida. They have not the Gil you get to one on onto one if on a so date that put at Bano NASA and we go to to Hana Enterprise cloud. So you will help us.
It lays the database second the ERP and then you know as if you health system migration and this is done with the on the enterprise cloud offering slot.
Infrastructure. So you also can see that both offering so ultimately we well together and helps US also to win market share.
Going forward.
Okay. Thank you. That's six next question. Please Sir our next question is from peers churn from Evercore ISI. Please go ahead your line is.
Oh, yes, thanks, very much and Oh, my congrats to Gen for Christian on your new appointments I guess the question is probably for Jennifer just on call tricks.
Sapphire you all mentioned the business had been accelerating versus the pre IPO growth rates and I was just kind of curious where are you in terms of being in the leverage.
Global distribution capabilities, and that's a p. with qual tricks and then I guess secondly, what kind of Halo effect is maybe culture is having on some of the other SaaS properties. I think you mentioned sort of the change in terminology around success factors. So it's just weren't if you give us it sort of a broader update there on on sort of the ability to leverage the conference brand across all of that CP.
Sure. Thanks, Thanks for the question, Chris I'll start and Ryan Smith is actually on the call I'll hand, it to happen to give a little bit more color.
So I look at it from a couple angles.
One is that when you look at Successfactors or HR right and you look at the traditional category of HR. It was very much and event driven you know kind of after the fact solution to track track different events. It happens unemployment and an employee lifecycle. When you look at what's happening in the workforce today the war for talent and fully.
Variant haul trucks has really allowed us to really redefine how are having a conversation right not just about understanding why things are happening or why do I have attrition. It's understanding how to go further upstream and understanding who is going to attract what are my she's going to be and so being able to have those kind of conversations.
And take action much further upstream and in the business is key to that given at the huge kick in success factor because it really changes the nature of the conversation and it makes it a secret discussion because now we're talking to people about how experience actually shows up in the income statement, how it can actually lower your at GM.
Or it's going to allow you to be more product productive and getting employees on retail on the floor and more productive in selling more as one example, successfactors is one the other one clearly as around.
My experience you know when you look at our Commerce solution, we see a really strong correlation between bringing together commerce and all track the quality also allowing its start conversations in places maybe we wouldn't traditionally go so it's allowing us to be whether you're in customer service or other parts of the enterprise it's getting us.
Broader conversations and broader audience it.
I would just been fantastic from a geographic perspective.
You look at a region like 80 Jack.
The companies in the brands overnight TJ, our Foundationally based on this concept of experience you look at the airlines in Asia and compare them to any other airlines in the world. These companies already understand experience now they very quickly can understand how technology can help and scale that new and different ways, Ryan and I were in Korea and.
Japan launching that over the summer and we had incredible growth in our 80 Jay regions around call track, we're able to hit the ground much much quicker our employees are super excited about this solution because they're able to have these conversations and we're really starting to have this enterprise conversation Ryan I had its you'd add any additional color.
I think I think you said a great June I do think yielding I would add would be you know if you look back a year ago. We were on the road at this time kind of starting or IPO roadshow getting ready to go public kind of you would have told me that here. We are almost a year later, we've seen a massive increase in our growth rate from what was already out there.
We're also seeing anytime we go in with Sep or deal size anyways.
30% plus.
We've already seen massive adoption on the next product with combination of Successfactors, we've always been known as the company with the best technology in the space by far I think the question was always out there is hey can we go from seven figure deals to high seven figure deals that you figure deals.
And with the combination of Sep with a partnership network. We just launched a massive partnership was Ernst and young sponsor quadrants development platform, where last week, we had 300 partners in Utah.
We are starting to answer all of those question. So like I said, if you would have told me last year at this time that this is where we would be after the announcement with Sep with you accelerated growth rate on an already fast growing company I would have said hey that looks like success. So with this combination we've done everything we said we were going to do plus some so I couldn't be happier.
Okay. Thank you.
Let's take next question please.
Next question is from Adam Walsh from Morgan Stanley . Please go ahead.
Hi, good afternoon, and thanks for taking my question I know say, congratulations I from my side, but instead to gen into Christian on the new roles.
Two questions if I could I just wanted to come back to Microsoft and the partnership that just off within I'm just to understand that a little bit better technically exactly what's happening as Microsoft pools of volume of software from you then they can resell onto that customers bundled on as you said in effect, they're acting as a reseller for that and there's a volume of business that you get directly up from.
From Microsoft the otherwise you may or may not golf, but that would have come through over time with customers directly and could you maybe help us understand whether there's upside or downside to those numbers and then also whether you would envisage doing similar deals with other hyper scale is in future whether there's other products you could also see that type of deal happening for so just a little bit more detail.
Around the actual technical details of that Microsoft partnership will be ready helpful. And then secondly, probably for Luke on the margins.
Big benefits on the uptick on the cloud gross margin side from the changes you've made around SAP successfactors and integration of of the landscapes that could you maybe just help us around that and the restructuring.
Should we expect to slightly slower pace of margin expansion over the next few quarters, because we've got that kind of one one big benefit I'm other or are there still benefits from restructuring, particularly to come through thank you.
No.
I'll start ups are so as it relates to Microsoft really what this was about is making sure we were being very prescriptive with our customers around what what are the cloud services from Sep and what do you know what are the different services from Microsoft the customer should be thinking about when they're combining our solution right today.
Hey, there kind of it.
Oh, that's from Microsoft This summer as they peak, we come together and been very very clean clear on the business platform around epic Ti as it relate to the integration of I think Peterson as it relates to extensions of S&P orchestration of S&P system, we have a set up at the peak class platform services that do that we bundle.
Together and embraced Microsoft made a commitment to that I can reseller customer.
No downside to those numbers only outside the way that we really want about estimating kind of our initial started this market was really in a few key areas of the world and we put a vary a lot of scrutiny around the pipeline business, where we thought of customers moving those who told us where they plan to move so we see that adds up at star we.
We also want to make sure we're very clear here that we provide our customer choice.
Say for example, we have lots of customers, who maybe Ron on E.W. out 40, chestnuts recipe on AAMC.
Cloud platform services that I, just mentioned around the integration orchestration and extension that customers can buy that directly from us.
Right. So they can still got X 18 reference architecture on eight of U.S. or on GCP from Essakane. The difference here as Microsoft skin and again, they are really killing whether they are doubling down on the innovation and engineering weather and they're going to have their sales people out selling this as well.
Yes, perhaps.
Quickly on the on the margins pronto.
No we have not yet so you know last off I apologize if additional benefits to gain from the platform convergence. So I think I've been talking a lot in the past years about this being a or an opportunity alone in the low triple digit million Euro SIGA year to date. So we have.
Had a benefit of just above 50 million from the Replatforming that means so that at least so the same amount to students who come.
I believe actually we will do slightly more I'm done this because of the benefits are really significant and done all will be of paves the way for further efficiency increases for automation and other areas.
And secondly, this is only successfactors, we have still to fully complete the job on the our repo business network. The application side of that everybody is already done the business netbook side will be finished as well come Q1 mix do you have and with that you will see also the additional benefits.
In our intelligent spend group business network cloud margins.
Which certainly will then help us up to further increase the cloud margin also strongly and 2020 by the way a in the sauce Pos business. So we are now at 70.4% margins. This is what we had predicted or only for next year. So we are clearly ahead of our plants and all you can continue to expect.
Just to do very well on the cloud margin.
Thank you.
Let's take next question please.
The next question is from Phil Winslow from Wells Fargo. Please go ahead.
Hi, Thanks, taking my question Congrats again on a great a Q3 and congrats see ride Jennifer and Christian I look forward to working closely going forward.
Just wanted to focus on the manufacturing vertical <unk>, Yeah, I think everybody on this call knows that the manufacturing industry really run.
The P. and you all the Q2 call obviously, you flagged some somebody who's worked with China.
And then yeah, you called out.
Germany, but you actually continue to put up the good results.
Overall, what are you hearing from the these manufacturing customers.
In terms of just their spending intentions, because as you mentioned last call changes supply chain might need to drive more spending with you all but there's obviously some macro issues you're just if you could just double click on that vertical that'd be great.
Yeah, So I thought and on the on one or two at the airport from specific about China, I mean under manufacturing side, we are doing extremely well I mean, we have both know of every competitive offering falling from that's all that's on the cloud we won the solution on different type hyper scale up so we often choice and also.
In China now at fall will also go lives now and Ali cloud in Q4 bulk of that we will also have aethlon ahwahnee on Chinese infrastructure, starting in Q4, no actually discipline.
Yeah.
Yeah, maybe are just on on the job inside of any color as actually we had a very choppy.
In Germany, you too.
We did enter Q3 with an exceptionally strong.
Hi.
In Germany.
Well we thought.
On their numbers.
But we definitely saw during the quarter three.
I mean execution, particularly for the customer screen manufacturing.
[laughter] segment I would say it was really arise.
Caution here off and recession.
We enter now Q4 with a very strong pipeline not just seasonal perspective, but also because there's an element.
Okay, and or using and how you see opening.
Water to rebuild that.
Okay.
The validation out those cases on the validation of fine.
Customer.
Segment, so I remain quite optimistic.
Our.
In any particularly because I'm not going forward for.
Hi line is much broader than that.
Segment.
In China, we have had just starting businesses in China or 27 years now.
Very strong.
It's about 70% 14 too.
I think.
In China.
Nevertheless, I will tell you that we are seeing slowdown we are seeing customers who are adopting.
Strategy, specifically focused not so much on the software south but on the challenges of continuity, India that are increasing attention.
Nice to.
But the macro political and economic scenarios, we have.
There is also very strong focus from the Chinese government and watch site will take time indigenous innovation.
The young company in China in order to add to have a Chinese.
I accept try and their supply chain.
Nevertheless, I would say to you that as a result off some of the work that we have been doing Iran's out without a cloud and the ability to land our product.
Garments in China, or China, I'm confident that we won't be able to address those.
The issue that we're right on that part.
Correct.
China Atherectomy thing wrong it over the last time.
And perhaps just one sentence on a global level believe it did not our two best performing verticals, so actually services and discrete manufacturing [noise].
Okay.
Thank you.
Isn't the best of luck a in Q4 actually.
Thanks.
Thanks, a lot but take next question. Please turn to me. The next question is from Stephens showing ski from Exone BNP. Please go ahead. Your line is open.
Yes. Thanks for taking my question I was just following up on a previous question I apologize if you've answered this already but on the Microsoft deal I was just wondering if you think you could be able to put similar partnerships in place with some of the other hyperscale. The partners you've mentioned I mean, obviously, you just talked about Alibaba and now the cloud in China. I mean is it's something that you sense.
Please see Ali Baba doing in terms of helping helping you sell direct in China. Thank you.
Yeah, so so I think that out.
We're open to the future obviously, we have a very specific end on relationship that we define in motion that we define with Microsoft that won't be.
You know very specific in preferred by the two of US. So in looking at other partnerships for so we already have pretty strong partnership with of GDP and HW. After users up that technology continue to be and so there's a possibility for the teacher, but today, it's really just on lifestyle.
Maybe I can comment on me all the size because typically hobbies. Thank you dr., none or very welcome.
In China I back sure everybody's aware, there's a unique set of licensing laws around so far.
Wow.
Let's talk security laws.
So therefore, it with Ali we have physically land that top off to the Ali infrastructure in China, and we want physically lot that for up to the Ali infrastructure in China.
That means that we have the opportunity with reality class team ticked up to solutions directly mock up a very large scale market all basketball make an enterprise.
Thanks there.
Thank you that's taken next question. Please thank you.
Your next question is from Charles Brennan from Credit Suisse. Please go ahead your line is up.
Oh, thanks very much. Thanks, taking my question cannot just asking about the competitive landscape in your prepared remarks, you you made reference to both from a dollar in cheaper.
Can you talk about your win rates again, some of the larger more conventional competitors and it worked and sells fulsome I guess the driving force behind the question is the recent comments from workday, that's been out penetrated in and 40% to the fortune 500.
That sounds like they're making some some reasonable fragrance. Thank you.
Thank you I can add onto the comments that I made before I think you know one of the things that I wanted to strengthen my in my remarks, with just the size and scale from from everybody perspective of the network that we do have right and the work that we've done and we've had several wins over our competition. The enterprise say last quarter. So we feel very good about our win rates.
What's happening there.
As it relates to pick up factor, we had our largest successfactors customer events in Q3 and again the conversations that we're having they're moving beyond just talking about each are you know that the traditional HR processing. So we've actually seen got some really great wins using six using not fall truck.
Within North America, but more importantly, the advantage that we have it's just the ability to scale up broadly you know outside the United States and we're not a German company, we're not an American company were a global company and we got feet on the street everywhere. So when you look over in Asia. When you look over in Latin America, and you look at some of the customers that were adding we have.
Let's start now when you bring in culture can you start to differentiate solutions like that factor that allows us to accelerate even further further so we feel really good about where we are right now with the when the thing I like about fall trick.
Think about all trend right Patrick that not about survey you know, it's not just about surveys and sentiment. We think about yeah. I think he did with ERP back you know decades ago, we saw silos systems supply chain manufacturing financial running the operations of a company, we saw an opportunity to bring that interdependent.
Functions together have better insight to the business and being more efficient that was back when the data within the four wall for the company and that became fully operational data platform.
Take a very similar analyses that most data about your consumers. Even your point is not just inside the company, but outside the company businesses, our gathering sentiment and engaging with customers employees across multiple functions of a company outside the company et cetera lots of companies they surveyed lots of cuts.
Functions within companies, you know take employee sentiment or customer sentiment the differentiated false starts as they figured out how all that interdependent and it created a platform.
Platform approach and technology that Ryan talked about earlier. This is what differentiates us a Pete this is what our Salesforce knows how to talk about and this is where we're really starting to see the uptick and getting a big deals that Ryan mentioned earlier, it's an enterprise discussion on the agenda of every CEO today. So those are just a couple a couple of things.
Yeah.
Thanks, a lot and we're kind of a one final question. Please.
Demand. This question is from on how much more why that from Goldman Sachs. Please go ahead.
Great. Thank you very much and Jennifer and Christian My congratulations as well on your new roles.
I had a couple firstly Luca.
Obviously have some pretty strong gross margin tailwinds continuing into next year, but also.
Some of the big Opex benefits kicking in are you also talked about so reinvestments back in the business can you talk about sort of the flexibility you have around delivering the margin and perhaps the shape of the margin expansion over the next couple of years.
India, India event that the topline.
Potentially faces risky they macro or anything else.
Yeah sure can do so so first of all [noise].
Obviously the benefits from the restructuring program this year have.
Not been significant because it takes a while for the program to take effect. So the big impact will come next year and what you see this year in terms of progress on the gross margin side, it's really.
On the Replatforming and increased operational efficiency, so through consolidation of data center operations and infrastructure operations.
And therefore, I'm very very confident that we can continue to scare this business with increasing gross margin contributions also next year and even beyond next year I've always said that in 2019 against our target open and on average so one percentage point of margin increase.
The market should not expect a flu percentage point are already this year, because we have to dilutive impact from our acquisitions that we have to digest and given that this is a 40 basis points dilutive headwind I think you can see though the underlying is already performing against the average one person.
And that we have in mind that in turn means that we will plan to do slightly more than the 1% next year I'm to catch up because next year, we have to food runrate benefit from a the restructuring, but it's clear the restructuring is not a cost cutting exercise I want to be a very very clear about that we have.
I've done the restructuring in order to tailor our investments in our capacity to those areas, where we have the biggest growth opportunities and we're putting actually our actions to over our plans up we are seeing tremendous investment in htwo tricks, we're seeing a tremendous investment in our different cloud constituents.
Adding additional capacity only into productive areas in research and development in sales and services that will continue to be the case to propel our growth in terms of optionality.
Our business model, that's become way more resilient, we have no close to 70% of our revenues in highly predictable revenue sauces contrast to only one such when we hit the financial crisis in 2008 and that gives you a good.
Specs just on how resilient our business model has become a and therefore, if we have two I'm going to optimize our level of investments.
Only 30% variability in the top line that would be a much easier than in the past. So you should take a lot of confidence out if those so that we kind of will hit or mid term ambition. So as we have unknowns.
Thank you wont did you have a follow up or.
That's not the case well. This concludes our Q3 earnings call today. Thank you so much for joining and we look forward to speak to you again, our C.M.D. on November 12 to New York City, Thanks, very much and goodbye.
Thank you.
Gentlemen, that's now [laughter] conference call. Thank you for your participation you may now disconnect.