Q2 2020 SAP SE Earnings Call
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Good day and when it comes to date Cpqd to Twentytwenty earnings Conference call Today's conference is being recorded.
This time I would love to talk a conference over to Mr. Stephanie.
<unk> Investor Relations. Please go ahead Sir.
Good morning.
Thank you for joining us to discuss our results for the second quarter Twentytwenty.
I always feel 'cause Sinclair and let's see if all of which the both make opening remarks on the call today, what's the joining Phil cutaneous Executive Board member flux, Martin will detail, what customer success organization, and Rhinesmith founder and CEO called rigs.
Before we get started is usually like to see if you worth about forward looking statements in our use of known I've asked what actually Madras any statements made during this call that I'm not historically all public institutions as defined in the U.S. Private Securities Litigation Reform Act up 1995.
Words, such as anticipated. The do you estimate expect for cost intend may plan projected predict should always looking well and similar expressions as they relate to Sep are intended to identify such forward looking statements.
You know takes no obligation to publicly update all device any public statements. All forward looking statements are subject to various risks and uncertainties that could cause actual results could differ materially from expectations. The factors that could affect I see piece, which is financial results are discussed muffled, leaving that see piece filing to the U.S. Securities and Exchange Commission the FCC yeah.
<unk> report on form 20-F, what 2095 at the FCC and Peppery 20 Sevens Twentytwenty.
That's it spend on this call a caution not to place undue reliance on these forward looking statements, which speak only as of the days.
Well that's relations website, you can find a half your report our quality statement and financial somebody like stake, which are intended to supplement well prepared remarks today.
Any cooter reconsideration of all nice last numbers twice last numbers.
Otherwise noted all potentially numbers, we thought to on this conference call or not I says and growth rates and percentage point changes are not the s. as reported year over year.
Our next Imagitas, we pull that should not be considered as a substitute for superior to the measures of financial performance could get in accordance with I apologize.
And finally as you've seen in our quality statement, we plan to hold a virtual capital markets day in the fourth quarter later this year.
Well, we plan to provide an update on Mitra strategy more information will be quite didn't you time and with that I'd like to topics over to all the CEO, Chris Young Guy.
Yeah, Thanks, Stefan and welcome everyone to our Q2 earnings call.
I hope that you you'll families and friends safe.
Managed to keep your spirits up in these challenging times.
This is our second quarterly earnings call chilling dependent.
But how about first full quarter under the Colby to impact and given the situation. It was a fantastic work that's cost declines. This is far from Milwaukee, but still have always solid reflect the Paul Quest. We asked me at the company since dependent and make it taught in March.
We have adapted to the situation by 20 transforming into a watch what organization and allowing our customers to continue with that business.
17000 customer go lives and deposits six months alone are showing it see piece with billions. In this crisis also go lives into cloud happening now in weeks wet and months. It shows how sep enables our customers to we actually have had chablis tea and speed and just classes.
As we have set before.
C. P is crucial to the business transformation of our customer and we are walking to a much stronger how it off the crisis.
Customer sign a difficult spot financially white now we will pull wide commercial relief when needed E costs, we want to build partnerships for lies.
Inside <unk>, we continue to selectively high out into our future close opportunities.
Well I can get balance between near term profit and innovation.
But we also have an obligation to watch society.
Our purpose is to help the world, one better and improve People's lives and I'm proud that ever since the crisis Htwo, we have been supporting the public with public sector financial assistance donations.
And technology, a wall to wall.
That's moved to the quarter now do club will take us through the numbers in a minute, but let me say.
East with does show yet again, a well our intention and that's why it's why did she is with Canadian just customer.
They completely understand digitalization, it's no longer on option, but it must to achieve <unk> business outcomes, we see it again see profitability and sustainability.
And it was thoughts pools as well our own pull quest in that we got.
In shouldn't be completed our first ever watch all the stuff I know a milestone when this 100 and such a thousand participants and close to 600000 session fuse into first week alone.
And chilling to quietness digitalization and remotely what we ensure that customer service continued without disruption.
We have added over 500, that's behind our customers in Q2.
Close to 40% of stem net new.
And we have seen a lot of competitive wins, such as Copfour, which also subscribed to a set of cloud solutions, including people.
Hi, guys for Ana wins included Telefonica, Aon, BNP pottery barn, Neptune energy, they've done to comics and Deutsche a bus.
Taking the total as for Honda custom I call it now to more than 14600, but.
We have also seen more than 700 custom must go live on the Esfahan out in Q2, including Colgate Sandal and be line.
And you have probably seen that I do see chest swings at sauna as leader in cloud ERP enterprise applications.
Looking at sales performance into second quarter. It. It's no surprise you saw a huge demand for solutions that increase resiliency, while offering weapons, we Todd.
Our portfolio is extremely well went into classes.
Almost obviously has an absolute blow out quarter asked it. It's just supply chain management led by our cloud night Native IBP solution, which matches weapons lead changing demand to supply.
Madonna at U.S. Biotechnology company pioneering a vaccine candidate against Colby 19 shop selected Sep two houses to distribution of the potential vaccine.
We also saw a very significant number of I'd be Pico lives such that's my wife and ends got no plus seal and of course continued to be ranked number one in supply chain management by I did see and got now.
In addition, our business technology platform showed excellent performance its customers to use it to quickly integrate and flexibly. It takes 10 solution.
Got enough.
It's just went up leader in domestic let one on multi experience development platform and May check you to deal slot include it's lumpy on it and as $12 Department of defense.
I would off the books integration for our SaaS applications remains key far.
We're making excellent progress in delivering a seamless business post integration, including key elements like how many station of Sep stayed at domain model, you say experience workflow management, and we do times Debbie.
We are not 50% donnelly with into equation.
Targeting 90% by year end.
Successfactors had a good quarter, including an important competitive replacement and a major competitive win this fall scope.
More than 8000 customer success fact does continue to lead to close in age the end market by a wide margin.
They also about two weeks at 100 times 100, K milestone 100 global customers using success sector to manage more than 100000 employees each and.
Yeah, well be happy to report Google has gone life on out either.
And finally, qual tweaks had yet another fantastic quarter with strong close.
It's helping us to differentiate our core applications by adding experience management.
That's actually a combination of the success factors do human experience management suite Wesson needs really well with all of a customer.
By now I'm confident you have all seen didn't use please allow me a couple of remarks before moving beyond Q2.
Why and then I convinced that the proposed partial IPO marks a win win situation and creates the best set up well call tweaks to fully tapped the potential of a fast growing experience management market.
Under the leadership of wine and his outstanding team.
For two weeks will enjoy create autonomy in expanding and leveraging its footprint both within as the piece customer base and beyond.
Okay main qual tweaks Mitchell with your shareholder.
We will also be main its largest and most important go to market, an R&D partner, while giving qual tweaks to independence two important it space by partner wing and building out the anti experience management ecosystem.
Against this background I want to emphasize that walks fix it.
And continues to be a key element of our intelligent and apply strategy.
Moving beyond Q2, let me with it a few killer key elements of our strategy number one.
Yeah full course in our existing markets.
Drilling down on categories, where Sep has the wide tubing.
Differentiating why are the participant deepest sweet end to end integration will time analytics.
Really enabled artificial intelligence with concrete outcomes for our customers.
Harmonized user experience and well be importantly, our leadership in experience management.
PLM and intelligent asset management partnership with Siemens is supply mix sample for this new focus.
Two markedly that's coming together to take over the lead in industry photos seeable.
Number two.
So that would close by expanding into new markets.
Let me just give you two examples industry cloud.
All into suites, transforming and every new business model that we client data and the swung into equation into the backbone, which in many cases using these AC peace Corps applications.
This is how worldwide to when.
We will build much align just we apps, helping our customers to stay competitive in that industry by adapting to new business models, so fast time to value.
Yeah coin awaiting on our platform with <unk> nothing customer.
Because plans in the world.
This is a 170 billion to your market.
Well this quarter, we close the significant deal there's a lot utilities provider.
Also we will doubling down on building the world's largest business network.
Why is this shows more than ever.
Well, just becoming increasingly complex and companies need to react faster and more at child for changing market conditions. This is why we will change the way enterprise. This one by connecting customers manufacturing supply and logistics, Hawaii in one network, where they can manage cost dependencies in real time.
Grading win win situation for all stakeholders in the network number sweet sustainability and climate 21.
We are expanding our solutions to allow customers to measure and could you comment missions along that value chain.
Since earlier this year, we're wanting twox with cost them off from industries like auto chemicals, food and engineering listed.
Pete takes another important step in turning about customer into sustainable intelligent enterprises.
Ultimately pooling that intelligent enterprises can make sustainability profitable and profitability sustainable.
And finally number four.
For white additional options to move to the cloud.
That's the most want to move to the cloud at that own pace and scope based on the individual situation.
We will have formed by expanding the options to move a seller waiting to cloud migration.
Yeah, we will launch a tightly integrated preconfigured public cloud suite.
Pending beyond ERP, and we will introduce a new private cloud offering for custom most definitely quite a high levels of differentiation, we have an easy to consume.
Commercial model.
Well all about cloud offerings, we will continue to lever, which hyperscale and system integrator to match most of the cloud ERP infrastructure workloads.
Let me now turn to our financial prospects, who got we'll talk about to trend to trendy outlook in a minute.
Let me briefly comment on the mid term perspective.
20 trend, yes, we ambition remains unchanged from what we announced in Q1, because it continues to reflect our fuel as of today.
That said, we on the process of updating our strategy.
Yeah, we focusing to company identifying close ever yes, evaluating additional business opportunities.
We'll be ready to give you an up an update at the capital markets day towards the end Dusty yeah.
We hope and expect that I was assessment of the implications of Colgate 19 on our midterm ambition will also be clear well that then it would be today.
Now I know some of you are concerned about sep might neglect its efficiency focus as part of the pulls a lot.
Let me assure you will continue to see Atlanta actually execute the best one program as laid out at our capital markets Day last November.
Execution is in full swing.
We moved from a complex metrics organization to lean functional set up it's clear responsibilities.
Finally moved overlaps and overhead, making it easier to work with and within that they Pete.
We have streamlining our portfolio focusing on every ourselves twins U.S.U.S.C.
The divested shelf digital interconnect in Q2.
We are putting customer success first everywhere, including compensation.
We are consolidating away when schedule and we'll continue to build out our digital marketing capabilities.
We have continued to work on our cloud delivery efficiency cleaning the cloud cost much in up by seven percentage points over the last 18 months.
And if you look at Q2.
Operating margin is up almost two percentage points.
By the heavy toll on topline declines the sustaining.
But let me make one thing CLIA, we will continue to manage this company for value not short term option maximization.
If we believe strategic move this white.
If we think it makes sense to a seller way to cloud migration of our customer base.
If we see an opportunity to quo wherever you have to why to win we will investigate and not pass by default just because when you mix shift might happen adverse impact on operating margin and India saltwater.
And with that or what do you look off.
It's a lot Christian I'm really proud that our team successfully navigated the very challenging environment to deliver better than anticipated quota.
Happy to see a strong sequential improvement in software licenses revenue robust margin expansion and a strong free cash flow development.
In Q2.
Cloud backlog showed a strong growth of 20%, reaching 6.7 billion euros. There's continued high demand for digital supply chain E Commerce cloud platform and quote trick solutions.
Revenue was up 19%.
Reflecting the strength of our contractually committed cloud business, which was partially column taught by lower pay as you go transactional revenue due to the corporate 19 crisis.
This cloud revenue growth together with our consist softness applaud revenue stream demonstrates the resilience of our business model.
Our more predictable revenue expanded by approximately five percentage points, reaching 73% in second quarter.
In Q2, our cloud and software revenue grew by 3%. So the first six months or cloud and software revenue was up 5% opus under constant currencies, so very strong showing given the impact of cold It 19.
Before moving to the bottom line, let me briefly give you some color on a regional softer results.
Licenses revenue.
Well still below normal levels recall, but more than expected.
In particular, the P.J. region had a stellar performance backed by a very strong recovery driven by Japan, South Korea and Indonesia.
In the Americas, we saw a modest recovery primarily from a strong sequential improvement in the United States [noise].
Now moving onto the bottom line.
Our overall cloud gross margin grew by two percentage points to almost 70%.
Cloud business models contributed to this margin expansion.
Our SaaS Paas margin grew by one percentage point, our intelligence Ben margin grew by two percentage points.
Infrastructure as a service margin, who even by 14 percentage points.
In Q2, our cloud and software gross margin was impacted by the decline in software licenses revenue and the mix shift effect from our cloud business still our software license and support gross margin was up by 30 basis points.
Cloud and software gross margin only decreased by 20 basis points to 81%.
Our services gross margin increased by two percentage points and reached 26%.
This is mainly the result of further efficiency gains in Arkansas dig in premium engagement business.
Despite the slow a topline growth operating profit grew strongly by 8% to almost 2 billion euros.
Operating margin expanded by 1.8 percentage points to 29.1 person.
The beginning of the crisis, we were quick to initiate putting measures such as the slowing of hiring and a reduction in discretionary spending to ensure our financial flexibility.
Yes, I speak for themselves showing that those swift actions have paid off in Q2.
We are also benefiting from natural savings like lot travel expenses lower facility related costs and virtual rather than physical events.
Now, let me turn to I have for us operating profit TPS in Texas.
You are too high for us operating profit increased by 55% to 1.3 billion euros benefiting from lower restructuring expenses.
For the same reasons or I have for as earnings per share increased by 54%.
I have for S.P.S. increased by 7%.
You also updated our effective tax rate guidance for the full year. We now expect these tax rates to be between 28.5% to 29.5%.
I have for us and 27.5% to 28.5% for non life for us.
The increase in comparison to the previous outlook, mainly results from a tax ruling in Q2, where the German federal fiscal Claude partly confirmed Sep his opinion and final decision.
Well that decision leads to a significant reduction of contingent liabilities for the whole case. The part of the ruling that was decided against Sep leads to additional income tax expenses and financial income to related interest expenses there on.
The cash flow ever will show a positive impact in a few Chuck water at Sep is partially reimbursed for previously made tax payments.
This is also a good segue into talking about our test results.
First six months or operating cash flow was strong and improved by 40, 41% two or 3.8 billion euros.
This was supported by positive effects from lower restructuring related payments and lower income tax payments as expected.
Our free cash flow was up even further and grew by 59% to 3.1 billion euros.
Free cash flow. Additionally, benefited from lower capex spend compared to the previous yet.
Now to our financial guidance, we are reconfirming, our twentytwenty revenue and profit outlook matrix as detailed in the quarter. Your statement published earlier today.
In addition, we increased our cash flow guidance for the full year 2020.
Based on the strong performance that we've seen in the first half year. We now expect an operating cash flow of above 5 billion euros and the free cash flow of approximately 4 billion euros.
Before closing I wanted to talk about some of our social and environmental highlights and update you on a few of our key nonfinancial matrix.
Chris just spoke already about how we're fulfilling our role of an enabler of positive impact from human experience software to climb a 21 I wouldn't know likes to talk about our role as an exemplar.
In Q2, our employee retention increased to 93.9% up 60 basis points since last quarter. We made further progress increasing the shelf women and management by 1.1 percentage points to 27.3 person.
Driven by a strong decrease in trouble due to the cobot 19 crisis, our carbon emissions, but 25 kilo tons decrease of 50 kilo tons. So 2020, we've adjusted our greenhouse gas emissions target from 238 to 210 kilo tons.
And finally last year, we announced the creation of the value of balancing aligns. This alliance aims to create a slow to stand up for the disclosure of positive and negative impacts of corporate activities across the complete value chain.
After having worked intensively on the first version of the methodology over the last nine months. The piloting phase has now started across all participating companies.
Excited to be a default.
To summarize abroad solution portfolio, our unmatched industry and geographic diversification, coupled with our strong base of more predictable revenue have allowed us to weather Cobot 19 crisis this quarter.
A quick response to the crisis and because so much drove strong operating profit and margin expansion.
Disciplined investments and strategic growth areas. We are confident we will not only with other crisis, but kind of emerge from it even stronger I.
Im proud of all of our employees will show remarkably resilient as they continue to collaborate by virtual means and operate effectively through this challenging environment.
Thank you very much and we will now be happy to take your questions.
Thank you. Thank we could start to kinase action.
Thank you, ladies and gentlemen, if you wish to ask a question at this time he's taken by pressing star one on your telephone keypad piece make sure. Your mute function is switched off go now your signature equipment and that's again.
Sure I'll ask a question and we take our first question from Cherokee branded from Credit Suisse. Please go ahead.
Great. Thanks, very much taking my question and congratulations on a cool so.
Card just start with a question few Christian I think a lot of the focus today, it's going to be around your comments around oh, stating the medium term targets.
When you're thinking about investing in the business can you tell us whether those investments.
Include M&A or do you just think about organic investments and then no doubt the market is gonna be speculating between.
The gross in the margin tradeoff.
Well, you only type margins lower or if you think you could accelerate top line growth.
Can you see a scenario where margins needs to be love to school the existing top line growth ambitions. Thank you.
Yes.
Thank you for your question on the call side off the how first of all you have me talking about the new close opportunities of Sep like industry cloud and disclose initiative, so not taking out of the blue I mean, these categories, which on the one inside showing be close but also clearly, whereas if he has the wide to win with organically built.
Cloud solutions as a lot of the data and close the says you need to Verticalized your industry specific poultices sitting actually in the core of Sep.
On top as you also have seen our ambition is not to build the industry cloud only by alone we fall no major partnerships with Siemens down the PLM side to scaling to sleep product sale, providing even more value to our customers. We have closed a partnership with Honeywell to also make the really real estate industry and intelligent.
And apply it and of course on top we're constantly screening the market for potential tuck in acquisitions, but only if it really makes sense to fill white spots in our portfolio, which also close to the call Sep on the margin side I mean, clearly what we see now in disquiet Stacey.
You chest celebration with the move to the cloud I mean coma supply chain, we had the they're willing to solutions you know even more to the cloud when I talk to Coos. These days they actually if way, though if there was syrians of wanting to own data set up. So this is why I also talked about launching a new business model because I believe a business transformation is now.
Not only happening by moving your workloads to and cloud infrastructure.
Business transformation is happening with the help of Sep within tenants and applications with partner of the ecosystem, helping to transform your business Poles and this is what we have what we are going to launch in half year too and this will definitely also celebrate our quotes in the cloud now we still have to see what this means we got to the when your mix.
Now up here now, but you can also be where we sure. We will also doubled down on our efforts to we also managing our bottom line in the extreme tied way we tested one off the biggest we organizations in Sep now finally, gaining also dis synergies on the bottom line and this is why we will do both and later.
On this yet when we also see how to market will do develop in light of core with we will also give you. Then then update on them meet midterm outlook.
Perfect. Thank you. Thank you that's it.
We'll go next question please.
Thank you next question comes from James Gordon with Barclays. Please go ahead.
Oh good afternoon. Thank you very much yet let me come back to the quote tricks announcement. Please.
Really just from the decision now, especially I guess since such a focus sapphire round around tighter integration and you know I. Appreciate your comments that you will remain very focused on the combined go to market in R&D, but is there any effect here in terms of product integration and kick in.
Sort of HR and area and then also relating to quote tricks can you say anything around either the size. If the minority stake you are considering listing and and what you plan to do with the proceeds thank you.
Yeah. Thanks for your question. Let me go first and then I will hand over to wine and look I can talk about the listing laid on.
Yeah. So first I guess into last week month, the person to which I talked to most is definitely wine.
Because when I took over the company has socio of costs a huge focus on was on how to also more qual tweaks to the next level I mean, when you look back 19 month quarterbacks came into Sep and since then called fixed has beaten all of our expectations all of the objectives. We have set in the initial business case and you see this.
Also in our external segment.
But why and then I will actually we I'm never satisfied with the cooling statues quo. So we kicked around certain ideas and really lift up I'm the with the underlying condition to a seller way to close of quarterly and why we have seen big success with the help of Adair salesforce to sell quality mix into our installed base.
We also have seen that experience management, it's really a fast close category out and the market.
So then the idea of the IPO came up and actually we figured out that this is a win win situation and honestly I'm till today I'm still figuring out what is actually the downside, but for me that isn't that with downside as we will continue to further embedded wall twix within our intent and apply it part of our products that achieved besides you many.
Parents management, we now figure it out for other categories, which will launch into next quarter to calm and which we will also sell to get that so there's no change because of the partial IPO on top we give why and then the leadership team the flexibility to ought to go out in the market for the non Sep customer base.
It's also huge gross adds the of course also make sure that they have to capitalization to ought to go after that that market and also quota to quality mix business outside of the Sep customer base and last but not least coming back to Sep.
Another win this of course that it also gives us the fat financial power to also then go after our own close initiatives like I just mentioned the industry cloud and this way in a nutshell the main reasons and of course.
We also want to retain the quaint leadership team of wine and his key executives and lift that over to you why.
Yes, so thanks Christian and thanks for the question. It's a good one look I mean, I started Walter Ics 20 years ago, and my parents basements and from the day, one that we got into Sep. They have done a phenomenal job just treating this like a partnership and you know it's been.
Probably the most founder friendly an entrepreneurial real friendly company that a founder could go integrate themselves into because of how it's been treated so the way. This came about what is no different than how it's gone the whole time, Hey, Ryan what do you see what do we see and how do we actually go do something together and as Christian when.
I've gotten to the roles first thing. He said was hey, how can we really take advantage of this category, we kicked around a bunch of different ideas and by the way if I if I take a step back there's not one of the top five software companies in the world that hasn't thought about this or want to do this at some point with either one.
There are multiple assets because they figured that hey, we could go bigger with it and we could go bigger because of focus.
And some of that some of the the benefits of being together, but also the benefits of going after the market, but they don't do it because either they don't have confidence that the business can perform as a standalone as well with the integrations or when they pull out the integrated product.
At some point, they spend out or uncoupled little bit that it will destroy or they don't have the founding team that actually built it should be a distant cousin of what was there.
And a lot of times, they're not innovate enough to say hey, we're going to go down that road well none of those are true in this case, that's a piece clearly innovative enough to do this they're willing to have conviction to move we get the benefit of being together, which is the true partnership that we have as anything we're gonna doubled down on that and we're starting to get some great Gray.
Momentum and the team they've done a phenomenal job keeping that seen here, which makes all of this possible and people are super fired up and ready to go now there's another macro trend here, which is you know experience management and the category that we created.
We've seen through co that there's not one CEO out there that's not.
Trying to understand on not an annual base.
But a weekly basis, what's going on and how the customers are feeling that they're serving so we're allowing them to have a conversation to scale with their customer base.
And how their employees are doing which has never been more important than right now.
So we're seeing just absolute commitment from every single leader.
The we talk to bolt on the government side the academic side.
In the corporate side, all trying to understand the hearts and minds of their stake holders and that's where qual trick sits and so integrating that into every single one of the the major Sep products from commerce to to the Successfactors platform, where they can have the ability to get a pulse at any moment.
This is what's also really driving so.
You know, there's a there's a long rent on the decision making process here, but like I said Christian Luca and.
And the team have been nothing but innovative in this process you have to give them a lot of crops.
Oh, Thanks, a lot. So let me then a complete the onset just with those three aspects that you've asked for a moment from a more technical perspective, and indeed, I mean, there's probably one of the most of US questions that I've received since this morning in terms of the IPO sizing, we frankly don't know it exactly yet I mean, if you look.
Got a benchmark you as take IPO is typically they flowed at a rate of somewhere between 10 and 15, perhaps another trip off that and we will not be miles away from that kind of a.
Broad size range. So it's clear that also after the IPO as if you will definitely a majority of the shareholding in terms of the use of proceeds.
We follow two primary objectives here first of all you want to make sure that call tricks is properly capitalized so that they can pursue their investment plans and can you know properly sees the opportunities that exist out in the market, but clearly we also expect that there will be.
Proceeds after having set aside this purpose so that will go to Sep and on those proceeds. So we would clearly use them in order to close the on strategic growth priorities, whether they'd be organic also perhaps selective tuck in M&A activities and in terms of the timing of a listing that is.
Really something which we cannot.
Comment on at this point in time, clearly we need to prepare for all of the documentation in the U.S. as you know on this is the quite sophisticated process to go through the good news is that we actually have a pretty good basis to to work from because CLO tricks that been going a very far they already but it's still will take us a couple months before we already.
And then it's really going to be a question of the market conditions that are prevailing at that point in time, but Ah you will of course as the rest of the market then receive updates when we're ready to fight.
That's great. Thank you. Thanks for the day seven all the best for the IPO.
Thank you. Thank you, let's take next question. Please.
Thank you next question comes from Mark Martin up from Bernstein Research. Please go ahead.
Absolutely Luke that cash flow was real strong this quote in the press release you drive you discussed the main drivers a lower payments to suppliers that Greg tax rates can you give us some more clarification on lower payments to suppliers is this just didn't see any is there the reorganization how soon.
Staying nimble do you see that and then quickly for Christian can you give us some more color on the mix of all the CP customers added this quarter I think it surprised people that you added so many thank you.
Yeah. Thanks, a lot I'll start with the cash flow question, so behind lower supply out payments is really the combined.
Efforts that we have taken to trim down on a discretionary expenses, but also some of the natural savings that we've seen in the first off you Oh. So it's a of costs things like the T E spend which has been dramatically down in Q2 as you might guess, but it's also facility related.
Pendings during the office locked down some that we have seen it's a and additional discretionary spending on things like you know I'm IP hardware and so on and so forth you have seen as well that our capex or even against the varies a low level that we had reached last year's Florida.
Down so we are really a double clicking and challenging any of those expenditures for whether they're truly necessary and that basically shows in this space, but also to be clear. The main effect of the significantly improved cash flow is mainly lower restructuring related cash payouts I'm as.
Hello substantially lower.
Tax payments because last year was still at a a huge amount of significant one time.
Correct, there and this year, we're not seeing any as I have shifts during my prepared remarks, we actually getting cash spec Oh from it takes perspective very likely later this year. So that's actually not a headwind anymore, but a tailwind to our cash flow progress.
On the mix off the custom must we on boarded this quarter I will hand this over to adapt maybe just one quick comment I mean I of course was personally very happy to see also again.
Huge net new customers half last fall on our cloud at this clearly demonstrates that we are not only moving our installed base based customers sort of cloud, but that we also winning out there net you, which also prove the value of to solution that I'm actually also very excited about the November we leads coming faster on a public cloud apps that will be again in a.
A major improvements in that like in new business configuration opening up you know more features and functions pharma customers the integration and done by 90%, enabling us to cross sell our it'll be cloud applications in a much better way, but for now over to adapt to give you more details about the customer mix. Yes. Thank you. Thanks for the question Mark. Thank you.
Question on net new name acquisition is actually a very important focus for us in the execution of every single quarter.
Very refreshing in this particular quarter to see net new names added right across our customer segments right. So in some cases that would be a competitive win back, particularly in the enterprise space and in the general business space. This was the transition of companies to enterprise.
Great software as their business is growing.
I also think is very important element of our success in net new names aside from the focus that we put on it directly with our own cells chain is the roll up our partner ecosystem, particularly in the general business space, where more than 80% to fill that new names better leverage to sep into space are delivered by our very Viper.
And I am very active at partner ecosystem.
Okay. Thank you.
Thank you next question please.
Thank you next question comes from.
That sounds Konwinski from Exane BNP. Please go ahead.
Yes. Good morning. Good afternoon. Thanks for taking my question, maybe just looked a question for you on on the call trucks potential IPO and and the impact on cash flows I appreciate there's going to be a lot of moving parts and we'll get a full update later this year, but on the one hand as an independent company. It sounds like Kautex is going to go for growth and maybe we won't see.
The cash flow improvements there between now and the mid term that maybe we would have hoped but on the other hand, I guess or the stock based compensation will be coming down as as they move to a more traditional U.S. style.
Stock option plan can you give us any indication as to the stock based comp.
Key and at what percent maybe is it's kind of call tricks driven.
Yeah, absolutely so I think you.
Right on this assumption.
I would argue that actually call tricks has even been before we acquired them actually I'm quite I wouldn't call it frugal, but quite a successful.
No managing to a positive cash flow situation. So the business has all of the ingredients to even in a high growth scenario.
The or be a positive cash flow growth, that's primarily because of its very high efficiency in terms of cloud gross margins. So the business scales.
Very effectively so I wouldn't I wouldn't bet against them being able to a peak like leasing on in terms of cash flow performance also after an IPO when it comes to the share based compensation you're right at Sep, obviously share based compensation is cash settled after an IP or.
The thesis that this U.S. listed company will employ U.S. equity based.
Stock compensation is obviously accurate. So this will be some relief on the cash flow side at the moment, we have a couple of hundred million.
Steve of of option. So Rs use on the Sep side outstanding for management employees from acquired tricks and obviously that over time would then go away after an IPO so on that side, you're very accurate.
Great. Thanks for the detail if I, if I could just squeeze in one one other one for dare just wondering if you've seen anything in July that has changed from what you saw in Q2 any shifts anything's opening and closing it back down and that would give us a window and what's going on today. Thank you.
Thanks, I don't really think that we saw much of a significant difference between July and sometimes the activities that we saw true at Q2, because I think Q2, how the whole gamut of various different geographies navigating the current situation.
From first to lock diamonds in some parts of the world's to the recurrence than others and then the closing of cities are jurisdictions as a result of bad so nothing in July that and initially gave us any additional cause for concern or our movements that deferral.
Okay, that's very significantly in anyway from from what we experienced during the course of kick it.
Okay. Thank you.
Let's take next question please.
Thank you next question comes from John King of Bank of America. Please go ahead.
Hi, everybody. Thanks for taking the questions and congratulations on the quarter I was just one follow up on one of the one of the weaker areas in the course.
Obviously, a big slow down there.
Again, the rest of the cloud asked it seemed pretty robust I'm. Just wondering you know I think I got the sense of actually transactional wasn't such it I think a big part of can cause so was that all the transactional business slowing down or with any kind of pulling a subscriptions anywhere there just given the soft environment I suppose that we see for travel so that would be the first one.
And then maybe I'm not sure visions for liquor or Christian but on the second.
Point was around Capex could you just I appreciate you've already given us.
Hi, good insight into your thinking around at the analyst day coming off and on that it's not finalized but on the Capex itself. I think you mentioned that you will continue to partner with hyper scale. So does that suggest the capex should continue to be constrained.
Okay.
Yes, let me let me take a first crack at both question. So first of all on the topic side.
You have seen we had already at our capital markets day.
Guided to pretty much flat capex a year over year, we saw perhaps the potential for slight increase in line with the growth of the business, but this year actually we believe that we will not see an increase over last year.
Given the resides in the first off you I think there is scope to even have a lower capex spend and 2020 I'm done in 2019 and I would expect that also about of course, if the next couple of years.
The Capex will actually remain pretty flat with the main contributing factor being obviously the partnership so hyperscale us but beyond that there are also other sources of capex or like facility topics for example, and there with some of the new trends on the future work that we'll see no emanating from coal that more hybrid.
Look models I think the needs for expanded Capex spend also in this area will be probably more restricted than what we might have planned perhaps one or two years ago second point on the transactional revenues.
Right of course concur has been most hard hit so don't underestimate the transactional element of the revenues they.
Actually have a on a per annum basis or.
Something like a couple hundred million. So the other second largest source of transactional revenues after rebar and that basically has almost disappeared. So usually a they would have a couple of hundred.
HM 202, or 300 million they posted a low double digit million figo transactional values in Q2 and that of course has a has an impact. So these revenues were down more than 80%, but it's not the only in Houston, we disclose as well in.
In our quarterly reporting I'm be contribution from the intelligence spend or assets in totality and there you can also see that their revenue also outside of conquer has been coming down to a single digit.
Number of a usually those assets would all grows somebody in the mid teens and so also in our rebar transactional revenues.
Slowing down a basis not immediately at the same pace as concur and no of course. The Big question is what will happen in the second half year as you know, we assume a gradually improving demand environment in the second tough year that holds for software licenses, but obviously holds for our new cloud auto.
Entry as well as transactional revenues as well and that juries, obviously still out there with some of the relaxed restrictions here in Europe in other parts of the but there is certainly some light at the end of the talent here, but clearly in Q2, the perfect storm was.
Hitting us in concur, but you rightfully say as well, but the rest of the business are contractually committed business is very brasilia and you have seen that our SaaS Pos.
Assets have been up into high Twentys and also our infrastructure as a service business is still growing somewhere in the mid twentys. So our business fundamentally is healthy and other transactional revenues are undoubtedly will come back as you know the restrictions ease and as we see the tail end of the crisis.
And China as usual, our our CFO already answered that question in a very professional manner tough to maybe one common for my side as there's a lot of talk about the hyper scale lessen the partnerships, we are having and be very clear I mean, we have caused stay well we committed to those partnerships as we don't want to play into cloud info.
Such a market, but what is also very important for me is that our customers also understand that the business transformation is not only happing happening by moving workloads tuned cloud infrastructure. This is only happening. If you are transforming business causes us if he adapting to new business models and there's a slide two gotta would fit then team we are working also on.
Moving to make sure that our cast customers really get you know both on dive on inside the move to the cloud, but also with our as ipod a transformational step business and this is something what we are working on two redeploying the partnership to the next level.
Thank you okay.
We moved from next question please.
Thank you next question comes from Adam Walsh of Morgan Stanley. Please go ahead.
Hi, Thank you very much for taking my question is well I've also got to place maybe just festival predicts a question on the integration side, you've spoken about there's quite a lot now would it be possible. It's got a little bit of feedback from all the customer response has been and how much you think that could accelerate some drives that migration to asana more quickly than would have.
In the case, otherwise and then maybe just secondly, you've talked about say eight doubling down in areas that you have the right to win could you talk a little bit in terms of where we are on the react reallocation of resources from areas you de prioritizing two areas, you're focusing on and if you could give any examples of how that benefit you do that would be really helpful. Thank you.
Yeah, I mean, two points on that so first Adam when we talk about as far as planned in the equation and I'll add by the end of the year, 90% off that will be done and also as I said in the past this will not only be a technical into equation. I mean, we also harmonizing our data domain model at the segment.
Kicks off the data has to fit together when you talk about seamless business processes. When you talk about us with 60 saving of the business and that again can only be done as it by Sep and when we then put our data domain model on our platform by the way. The platform also becomes more attractive far away ecosystem add to build new application as its now.
Much more easier to expand and extend our core applications and with that of course also comes at a much better cross sell potential and then our installed base I mean, our ERP customers I use that an HR solution talks to and violent solution that a procurement solution talks to again also to a fine and solution for procure to pay and this is what we are now.
Building and with that of course, we see enough celebration, both last fall on our cloud, but also of course for our co quite lumpy applications that that bill.
Huge potential also to do cross sell into our existing ERP customers and then last but not at least when we're talking about the new close initiative I mean, the industry cloud is from each of the natural expansion of our core application portfolio as I mentioned before when you talk about industry product sale on digitizing effectively.
Again, probably addictive maintenance do need data from ERP from the supply chain and this is what we are now delivering and Dan. It's all about focus you heard you know on used with Siemens, we're not giving up that you know a huge existing market of Sep, it's not like that we invested a lot of told us in the last years on in PLM now, we're giving act.
Finally, our customers to clear what Matt we will of course bundle now in a seamless way our supply chain, our ERP solution with Siemens add to really make the integration work from the fact that we into the ERP actually I expect that we can accelerate the sales of our supply chain any approved PD solutions with that and data parts of the.
Ah portfolio, where we of course doubled down on we had an absolute blow out brought on common so we definitely doubled down on auto again, they're integrating commerce to the supply chain integrating come up to deflect license model to kind of wanting S. Four and with that of course, we want to boost and in the product strategy in a walk we did in the last three months weaker.
Really emphasize that and that we'd be more news to come where you see that ethic Sep will also increase to focus.
Also for each of the industries as we will also not stuff all the 25 industries. We will also use that partner solutions to expand our portfolio, maybe can I add perhaps add to that maybe just had a little bit of cuts that and adding or when you look at our customer base and our expectation around migration to ask.
For integration is absolutely one of those expectations and we can see a very clear rather not across four clear end to end business processes that will be complete by the end of this year.
This has an incredible impact on the business case that underpins the migration to ask for and the business case has a series of costs and that if of course to cost of integration. This release from that business case, and the total cost of ownership is much lower for the customer and aside from the value that ESPN.
Our itself to leverage the as a business transformation.
Piece of software the cost of ownership becomes and much more attractive and much more tangible if our customers.
And then I would just like to add in addition to the you know the double down which Christian has mentioned and many of our product and engineering team that is a end to end double down so where there is a focus for instance on a particular solution a particular industry a particular investment.
That focus includes the go to market engine Sep to ensure that there's alignment between what our colleagues and product engineering, designing and delivering and the capabilities of the go to market team to clearly articulate the value propositions that does solutions to our customers.
Okay. Thank you.
Thanks next question please.
We take our next question from Phil Winslow of Wells Fargo. Please go ahead.
Fortunately no congrats on great quarter, though.
That's correct.
Two questions first for.
Let me see you're placing conversation because.
Sure, let me switch that maybe they hope.
We continue to lightness just here you're breaking up the operator can you take the next question. Please note we switched to Phil Winslow later on.
Sorry meet the next question comes from Kirk Materne from Evercore ISI. Please go ahead.
Oh, yeah, thanks very much.
Congrats on a quarter actually my question was for Ryan if I'll pull them back in as he is going to have to get used to answering analyst questions more often.
But rhinos just wondering could you just give us an example of.
How you think the separation is going to help you accelerate the business meeting and Christian please add on as well, but you were their partners that you thought you can do more with then maybe we're a little bit now in a nervous about the ownership structure or is it just the ability for you to higher sales people at a more rapid pace I was just kind of curious you. Obviously this is all about sort of expanding.
Or accelerating quadrex growth in expanding the category you can just give us a couple of examples are your conversations.
This is the right way to go.
Yeah. That's a great question. So I think first on when we created this category in 2017.
And I remember going on our first road show I don't know how many people can say that but we're going to be able to say that going first road show you know I think the market was going hey, what's this experience management. It makes sense. Its intriguing we just see that there's so much more that we couldn't do to help create that category. That's gonna be a lot easier to do with one microphone in one voice.
And Sep has been the ultimate amplifier and has the global reach that is unprecedented and I think Tom we continue to get that from a strategic standpoint on two fronts. We see massive opportunity number. One is look there are a bunch of other pool.
TJ providers that I think that we could go partner with its not that they weren't willing to partner, but we want to do big things with them and I think this this will help and I think we'll try to pattern a little bit after what we're doing with S.J.P., where you know experience management as a core part of all products and platform and you start thinking about Hey every single App on the Internet should.
Have a quality mix component built in to be able to have a conversation with the end user right. You think about every product either back office or front office could have that same integration you start to see how important the call six platform is but but probably most importantly, there's lot of technology that we like out there. So I think this.
Give us an opportunity to go make our own acquisition.
And be able to truly expand.
Our vision for what experience management can be and and really continue to paint what we saw years ago. I mean I've been doing this for 20 years solving the same problem. We have we have this this vision of where this can go in to have Sep behind us and then be able to go run and go get you know the best.
Talent in the world.
To go do this and get people onboard. It's there's Christian said, we just can't see any downsides to this.
And.
I think that is we've slipped on this for quite a few weeks now, we're saying hey, we still feel.
More excited than we did when we first came up with it. So that's that's a pretty good science.
That's great Thanks, Ron and conventional from my side.
Oh, sorry, I touched on my side, I mean talking about Sep side of the house I mean, you look I mean, even in then you know model going forward. Once we you know when the IPO quite a CPM quad fix it will be even more important than to build out continuous revenue streams and we did a lot of work in the last few months on the park fetishes.
With that Dan team together with quality expose our defense engagement model, which really perfectly in a works today. We won some very large transformational deals in Q2 with the help of their CP as Salesforce and that will just continue into future.
Okay. Thank you.
The next question please.
Thank you. The next question comes from Phil Winslow from Wells Fargo. Please go ahead.
Hi, there I think my eye for you from.
Oh, no congratulations great quarter and.
And maybe a there can chime in too.
Yeah, you change the telephone conversations with your line.
Is there something about the line breaks up again so we.
We probably give you a question on the next earnings call I think operated we need to switch to the next question. Please.
The next question comes from Julien I see me from Jefferies. Please go ahead.
But a 300 million 16 actionable insights into the.
Free cash flow good.
Look out in terms of free cash flow guidance for 2020, you talked about a 300 million dollar euro safety cushion baked into the guidance is that still included in your guidance. There nothing removed and then second evolves in terms of new business are you able to provide any color just in terms of the new cloud bookings in terms of how that performed in the quarter I know you don't disclose that metric anymore.
Yeah. So on the second one that is really is that it was really on so we have replaced it by the current cloud backlog can you have seen that are those numbers, though very healthy and though if given some individual Carla, Ontario, So I'm very about developing solutions into bought dog arkoma.
The chicken supply chain management, though it was obviously call tricks.
And so from that perspective, and that's about all that we can do here, but in terms of the free cash flow guidance. So so we have basically increased it by 500 million there may still be slope to be quite honest to do more about that depends very much Oh no.
How the payment behavior of customers will develop in the second talk to you I must say that in the first off your weve seen a pretty good.
Development in this respect or it initially concerns that we had oh as we end up at prices are not coming through but I'm still of course are we want to cater to this risk and therefore have student I'm left ourselves a bit off of cushion in particular given that Oh.
Capex assumptions for the second talk Youre, probably stewed wide conservative so if everything goes well and we don't see a major deterioration on the customer from an age too I think there were a spoke to do a little bit mall.
Okay. Thank you. Thank you.
Thank you we have time for US one final question.
Thank you define the question comes from my how much more data from Goldman Sachs. Please go ahead.
Great. Thank you very much just a quick one I mean, you are unchanged guidance for Twentytwenty essentially it assumes no meaningful acceleration in the second half I know you had said that do you anticipate to environment to sort of progressively improve so is it just you're being conservative and maybe can you go.
Give us a sense aside from the strength you saw in Asia, How's the other geographies or sort of coming back, particularly in North America and.
The.
A European.
Market.
And and sort of how the pipeline is and how you kind of expect second half seasonality to develop thank you.
Yeah. So on the on the richness called I will hand over to they're in a second but or on the guidance, let's be real here I think we're very confident now based on how we have ended the first off your but this is not get the time to frolic or break a nation paying call bills or anything like that so.
Let's not forget.
The guidance assumes I continue to you know a improvement or further demand environment. We cannot take this for granted necessarily though still substantial uncertainty in the system what about the development of infection rates is there a risk go from second locked out when I think nobody can roll this out at this.
Just in time, even though everybody is hoping of course that it will not occur let's also not forget that the seasonality for software licenses is becoming a much larger in the second half year with a Q4 in particular that has a much higher weight on software licenses and given that a uncertainty I think it does.
Absolutely understandable that are we don't want to get ahead of ourselves. We are glad that we did well in Q2 better than we expected ourselves, but that is not a guarantee success in the second half year, we need to half our value story right for the customers need to you know rely on our culture.
<unk> efforts to achieve customer success across all functions of the company and then we are able to demonstrate a transformational valued at our solutions can bring to our customers and even in difficult times rightfully I'm asked for an order, but in that sequence and we need to first proof that old.
And perhaps the how much I, just maybe add a little bit of regional color and then just a little bit as to the sentiment of the team looking forward into the second half that to conclude.
As you saw from our Q2 results, we had a very strong showing in Asia.
And and that this was certainly related to the emergence of certain geography and from the lockdown environment and but of course, we also saw a resurgence in China and specifically in Beijing.
Yeah right at the tail end of our quarter end factor and you know for US 45% of our Salesforce located and not particular office and natural restrictions. So these are the unknowns that we're going to have to navigate as we go into the second half and the team has taken as Luke I had already.
Indicated a value based on a customer orientated and empathetic approach towards the business and the second half we have come out of a large digital sapphire. The first time that we ran a digital event lost and there are different new and says I thought it.
An event that scale out a digital level one of the benefits for us was our ability to deliver that event in five languages in the time sounds our customers across the world and so we were able to reach a much broader audience.
We're also really focusing very much in the second half as we did in Q2 on the ability to control the controllable. So those things that are within our control the execution of our engagement with our customers, our creativity and engaging with our customers and the value propositions that we pursue.
And I think as long as a team execute while controlling the controllables that's pretty much all that we can ask faster than going into the second half.
Pretty good great. Thanks very much.
Well this could do see second quarter Twentytwenty Sep earnings call. Thanks, So much for joining you can now disconnect. Thank you.
Take care.
[noise], ladies and gentlemen. This concludes today's conference call. Thank you for your participation you may now disconnect.
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