Q3 2020 SAP SE Earnings Call
[music].
[noise] good day and welcome to the S.J.P. hardcore shirt Twentytwenty earnings conference call.
A reminder, today's conference is being recorded.
At this time I would like.
Trying to confidence or to Mr., Stefan Gruber head of Investor Relations. Please go ahead.
Thank you. Good morning. Good afternoon. This is Stefan Gruber. Thank you for joining us for extended earnings call today to discuss our strategy update.
<unk> third quarter results and the updated guidance I'm joined by our CEO cooking light kind of what's the Oh do cabotage will make opening remarks on the call. Today also joining us for Q in Adas Executive Board member at the airports Martin will lead our customer success organization and.
And as usual before we get started I would like to say a couple of words about forward looking statements and our use of non ice class financial measures.
Any statements made during this call, but I'm not historically say Oh forward looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995 work.
Words, such as anticipated believe.
But expect well cost intend may plan project predict should outlook and will and similar expressions as they relate to Sep are intended to identify such forward looking statements as he undertakes no obligation to publicly update or revise any color looking statements.
All forward looking statements are subject to various risks and uncertainties that could.
Cause actual results to differ materially from expectations.
Factors that could affect that see future financial results are discussed more fully in our filings with the U.S. Securities and Exchange Commission, the FCC, including <unk> annual report on form 20-F for 2019, but could be as he looked at Btwenty seven this year.
Participants on this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of their dates.
In addition on the Investor Relations website, you can find a slide deck intended to supplement today's call available for download the addresses www dot <unk> dot com slash investor well those of you. Following the webcast the slides will be show them as we proceed through the prepared remarks.
Unless otherwise noted all financial numbers reflect on this conference call that nor nitropress and growth rate the percentage point, our non ice class at constant currencies year over year.
No no that's financial measures, we provide should not be considered as a substitute for or superior superior to the measures of financial performance prepared in accordance with <unk>.
And this extended earnings call today's being held in lieu of the capital markets day, we discussed last quarter, but that I'd like to come things over to our CEO 'cause downside.
Thank you Stefan welcome and thank all timing I hope, everyone is well and stay safe at Covidien faction weighed on ought to be increasing again in most countries.
Today's announcement, Mark an important milestone for <unk>.
Not only published our Q3, what's called an updated our 2020 outlook.
More importantly, we have Hawaii, adding additional insight into how we are walking our strategy.
Well updated strategy it took us bonds to the fundamental changes in the market called on by the COVID-19 pandemic.
Call. It 19 is an inflection point for our customer.
Many enterprises will issue its what you sell and deliver that product in time, so can be locked down and people working from home.
For most of our 400000 customers with millions he is the chief not shocked by the seller waiting to move to the cloud.
But more importantly, acquiring a fundamental change in how that business operates and to add.
It means transforming how we process for the digital world on the customer facing go to market function, all the way to supply chain management.
C P uniquely position to partner with our customers to make this transformation happening combined with the move to the cloud.
Which is why we are determined to lead the way our business is one that coin a waiting with all our cost them up and partner across the part of cloud solution portfolio in the market.
Responding decisively to the requirements of our customers in a fast changing world because you know when you financial need some ambition, but.
Before going down let's take a.
A quick look at you suite any update its trying to try and the outlook.
Interest, we how are we still young business model allowed us to continue to close to only into cloud and again growing operating profit and margin.
Apart from the intelligence Ben business, our sovereign power cloud revenues were up by 26%.
We continue to see a very rapid growth in categories, such as common as far as supply chain quality and our foundation the business technology platform.
Colin cloud backlog is up significantly by 16% to 6.6 billion go.
At the same time, the lack of the Callaway Hong Kong COVID-19, it's visible in the lower than expected transactional cloud revenue the cost of our travel and expense of loosening concur, which it's hard to sell in times of call. It.
Software license performance. This on a similar level compared to our quake Q2 with top on the bottom line the benefits of our best long transformation coal checked has continued to show tremendous poker.
As stated we yet again expanded significantly our operating margin and free cash flow.
In addition, 28000 cost demarco like over the last nine months demonstrate our ability to deliver remotely in a challenging environment.
Juice. We also saw many notable customer wins, including some competitive replacement deals included.
No we'll fight for Hannah Bible Bung flats on a cloud so it's coming back he left for customer experience.
H.P. and humid uniboss for the business technology platform.
As she volleyball, Walgreens Boots alliance for supply chain management Lululemons aquatic <unk>.
Tropical plane this week level and as I am apoptosis success factor for success factors actually more than 4000 customer and around 40% to 45% of the fortune 500 that are already running on our call solution Embley essential.
This quarter, we added more than five times, but so when I talk to them, a while to 45% where net you.
Take up to a total of more than 15100 customer 20% up over last year.
In Q suite, we also added a new deployment option follow private cloud service high end up by the cloud. So far we have offered deployment in sep or Hyperscale update.
But that's also demand by cost them up to 100 services in their own data and match buyers. They Pete. This is why we have now launched on the enterprise cloud customer additions and we are very excited that in this quarter. They know we'll have decided to become a global partner, but a customer addition, we've got to scale offering.
This supplement the global Green Lake partnership with the Embraer and HP.
Finally in back when Chuck issued that Twentytwenty Backloaded plans, we'd call and I'm very proud that Sep came in at number 18 globally up two spots, where it was last year and combing its plans well you by 12% to more than 28 billion U.S. dollar.
I will now provide additional insights into Q suite, and our updated trendy trendy outlook Luka over to you yeah.
Yeah. Thanks, very much for standing welcome also from my side. So we again navigated through a challenging environment in Q3.
It's totally headwinds, we improved our operating profit and operating margin against a very strong prior year comparison.
Our cash flows saw exceptional improvement and our earnings per share was very strong.
Our resilient business model with a consistent year over year increase and more predictable revenue helped us to weather the storm and these unprecedented times.
Now, let's go into more detail on the quarter, starting with the top line, where our current Kelk backlog grew by 60%, reaching 6.6 billion euros amid continued corporate line to in effect on our cloud business.
Our cloud revenue was up 14% with continued lower transactional revenues this negatively impacted our cloud growth rate by six percentage points, especially in concur.
Well our on premise software license business continue to see scrutiny of a large project as uncertainty persisted outperformance. This quarter was similar to the one in Q2, especially considering the very good Q3 last year.
From a regional perspective, Europe had a resilient performance this quarter the strong results in Russia in Switzerland.
Latin America had a remarkable performance driven primarily by Brazil, and Mexico and in a P.J. Japan.
Japan had a solid quarter and Australia, India the highlights.
In Q3, our cloud and software revenue grew by 2% for the first nine months, our cloud and software revenue was up a solid 4%, even though the challenging demand environment.
Did not cause a repeatable as we had hoped.
Our services revenue was down 11%.
Well, we continue to live to deliver most of our projects very efficiently and effectively remotely we do see an impact in particular on our training business as the reopening of our global training centers have been to date.
As a result, our total revenue was flat year over year.
Now moving onto the bottom line.
Where in Q3 again, all of our businesses cloud on premise and services increased their gross margins.
Our overall cloud gross margin continued its positive trend and grew by 70 basis points year over year to 70%.
All cloud business models contributed to this margin expansion.
Our SaaS Paas margin grew by 110 basis points to 71%.
Our intelligence better margin grew by 20 basis points to 78%.
And our infrastructure as a service margin by 800 basis points to 33%.
In Q3, our software licenses and support gross margin was up 60 basis points to 88%. Despite the decrease in software licenses revenue.
Our services gross margin increased significantly by 500 basis points and reached 31% it's.
This was mainly driven by a larger share of our high margin premium engagement business, which has proven to be effective in this virtual environment.
As you will recall, our operating profit as well as our operating margin was up significantly in Q3 of last year. This quarter. Our operating profit grew strongly by 4% and our operating margin expanded by 1.3 percentage points to 31.9%.
As uncertainty persisted remained cautious on hiring and discretionary spend.
On an IRS basis, our operating profit and operating margin decreased this was primarily due to higher share based compensation expenses.
Now turning to your P.S. and Texas.
I have friends Cps increased by 26%, while never as easy as increased by 31%.
This was mainly driven by yet another exceptional contribution from Sapphire ventures, which had a significant positive impact on our finance income as well as an hour I have for us and not alive for us effective tax rates.
Therefore, we now expect an improvement in our effective tax rates for 2020.
Our IRS tax rate is expected to be in the range of 27% to 28% and our long life for us tax rate is expected to be in the range of 26.5% to 27.5%.
Now turning to cash flow.
In particular, the bright spot in the first nine months, our operating cash flow was strong and improved by 54% to 5.1 billion euros.
As expected, we experienced lower restructuring related payments and lower income tax payments.
Our free cash flow was up even further and grew by 79% 4.2 billion euros free.
Free cash flow. Additionally, benefited from lower capex compared with the previous year.
Therefore, we are again, raising our cash flow expectation for 2020.
We now expect an operating cash flow of approximately 6 billion euros and the free cash flow above 4.5 billion euros.
Let me now turn to the remaining part of our previous Twentytwenty outlook that was issued on April 20, Eightth and reflected our best estimates concerning the timing and pace of recovery from the covered 90 crisis.
Back then we had assumed that the demand environment would gradually improve in the third and fourth quarters.
And while we still see robust customer interest in our solutions to drive digital transformation Regrettably Lockdowns have recently been reintroduced in some regions infection rates up re accelerated and as a result, the mob recovery has been more muted.
Carla and for the same reasons, we no longer anticipate a meaningful recovery in Sep concur business travel related revenues for the remainder of the year.
Therefore, we now expect cloud revenue in a range between eight to 8.2 billion euros cloud and software revenue in a range between 23.1 to 23.6 billion euros.
Total revenue in a range between 27.2 to 27.8 billion euros and operating profit in the range between 8.1 to 8.5 billion euros.
So to summarize on Q3.
This quarter we saw.
Okay tremendous results as we continue to improve operating profit and margin even against the strong as comparison based on a resilient topline performance path with discipline on the cost but.
We had high double digit free cash flow growth and exceptional earnings per share numbers.
All of this and our resilient business model position us well to emerge stronger out of the crisis and meet our new mid term ambition, we would like to discuss next until this let me hand, it back to Chris John Yeah. Thank you Luka now before looking at our strategy and midterm ambition, let me start with a brief recap of what we have achieved.
Over the last six to nine month Sep was definitely not showed only when we have streamlined our walk away.
All of our customer facing operations were combined into one customer success organization and.
And on our application development within one product engineering unit to simplify at the peak.
Thanks to our dedicated focus on customer success like what they see Pete you have seen a very encouraging year to date customer satisfaction score.
The first time in several years, that's a clear positive trend.
We have increased focus in our existing portfolio, we have decided to defer evaporates noncore assets, such as SVP digital interconnect and we end up partnerships to coin a way with industry, leading companies like Siemens Honeywell and Bosch.
Instead of doing anything other fabs, we are calling awaiting trial.
Finally, we have started to establish sep as the leading cloud platform company.
We have always been the leading on premise application platform thousands of partners and customers have built applications and extension on that the people almost 50 yet.
Our intention is to keep had repeat that for the cloud to position Sep at the leading cloud platform to transform and try and change the way enterprises want in the digital age to get there. They have put a lot of work into our cloud platform over the past 12 months and we will continue to invest in in a way.
And we are very pleased to see that hot work being recognized Gartner test ranked us leader for both enterprise Indieclick integration platforms and development platform.
The times when as the P. develop and engaged with customer dialogue over.
Now before we go deeper into our strategy.
Let me pause here for a moment and talk about why we are doing this now.
The COVID-19, pandemic, which we all hope would be eating by now scaling our plant an additional way.
It's quite that have created an inflection point, okay, Omar a true catalyst to celebrate that I'm coming up.
Has put a spotlight on with the Silicon Valley.
It's more than shocked about the underlying infrastructure and it's moved to cloud.
It it's about changing the way our company one to hit that two new digital business models and trifle automation.
CMC and sustainable long term growth and profitability comes only by transforming the company to the needs of the consumer and employees in a digital world.
Take we take for example.
And brick and mortar stores shut down because of the pandemic and supply chains were disrupted retailers that have made the move to digital it much better than those who have it.
We're able to continue to sell my E commerce, and the digital supply chain ensure that despite the lockdown. They can continue to sell produce and deliver that product.
To adapt new business model and to do so with a chiller team of a customer need innovative business software platform and showing harmonized medical data models, one new digital business models and to and this.
This is where sep comes there.
But our strategy accelerated technique the migration of our customers' most important business applications to the cloud and we agnostic when it comes to that choice between I think Pete data then our hyper scale, we can make it work with near Bath PCR into market, no matter, which choice of our customers make second.
And more importantly, we will bring the full force of our business applications and platform to drive holistic business transformation by enabling our customers to seamlessly to time evolve on when new business models with agility and speed to.
To do so all our main solutions will adopt the cloud platform and share once a magical data model, one AI and analytics layer on common security and authorization model and same application business. So it was the success of our CLO management.
Our cloud platform powered by Sep Hana also says can be changed enabling a child workflows.
Relations can extend that can be developed quickly I caught them up and partner accessing our open platform using exactly the same data model in business services as our own Sep apps.
We are convinced that the real value driver of intelligent enterprises, and the cloud will be that ability to adapt and won new business models holistic end to end with one consistent data model. This is where we take a different approach than up.
They don't impose the silos are the biggest inhibitor for enterprises to offer a seamless customer and employee experience you.
Suneet integration extensibility and innovation to truly drive business outcomes, the civilian see profitability and sustainability.
That is the only way forward.
What gives me confidence at this unique time in our history is our position our sense of our progress to date and our heritage.
Our applications more than 10 billion euros worth of workloads.
And we won them semantically consistent across the entire value chain at Sep, we are drawing on almost 50 years of business expertise of defining redefining and lean blending the most important both doses of our customer.
And only Sep can mobilize the partner ecosystem, consisting of the best plan to fully realize the potential of any customer no matter the size the truly become an intelligent and apart. This is in our DNA. If I want to go to enable every customer to become an intelligent and apart.
And we are determined to leave no customer behind.
Especially now in times of Kogut, we reaffirmed our deep commitment to our customers to help them through the quarter.
This new strategy.
And as well as macroeconomic factors have implication for our financial data.
They are the reason for the change of our mid term guidance John.
I'm going to speak about next.
So coming from our previous financial midterm ambition what are the changes let.
Let me start with to two macroeconomic factor Quvenzhane Corbett.
First over the last three months, we have experienced currency headwind versus our previous assumption. This translates into a negative suite to four percentage effect on revenue and operating profit second we now anticipate a more conservative COVID-19 recovery, we assume that covered will impact their economies.
At least the first half of next year.
And then we have two strategic decision.
We are chatting to financial guidance to the new reality, and first and foremost to the needs of our customers one.
Just discussed.
We want to win win how business is one enabling our customers business transformation in the cloud to gain higher resiliency income for Glenn we will accelerate the transition of our customer base to the cloud this.
This is Tyler weight it moved to the cloud, we clearly at value over the long haul one by increasing cloud revenue.
I mean, the short term there will be a revenue mix effect as we see less on premise and more cloud revenue, resulting in a negative operating margin impact of four to five percentage points in Twentytwenty suite to we will continue to relentlessly execute on productivity improvements another best one program.
That's laid out last year's capital markets day, we are not moving away from these commitments by a seller waiting to move into the cloud we will even further increase the productivity improvements in our cloud delivery operations.
We have decided to speed up the modernization of our cloud illegally to enable a more hits billion and scalable cloud in Russia.
This will require additional investments in the next two year, but allow us to largely complete the modernization in this time frame and achieve a cloud cost margin of approximately 80% in trying to 25.
We will provide more background on those two strategic decisions in a moment.
First I'd go a bit Eva on the macroeconomic impact.
Nobody can predict the COVID-19 economic impact beyond Twentytwenty, but given the recent development. It is important to US you more Quechua recovery, which we have now done well.
Our on premise business, we have seen significant investment delays and 2020 in parallel hearted in the sweet.
And across all industries and geographies, we see an increasing demand to accelerate the move to the cloud. We just expect software license revenues to decline further from today's levels also in the future.
So doing our seller way to cloud transition.
Our cloud business, we assumed that the negative COVID-19 impact will start to ease in mid 2021.
Let's now move to the strategic decision starting with that celebrated cloud transition for our customer base.
The increase in customer preference for cloud is ultimately positive for the P. Fcr already the second largest enterprise cloud application window, and we continue to grow rapidly even amid the COVID-19 quite.
If the journey to the cloud I previously outlined we have tried to addressing this market need.
Seller weighed a cloud transition and tripling our cloud revenue to more than 22 billion year will that 20 to 25.
The ambition is based on moving our large on premise ERP workloads to the cloud and gaining market share for our leading cloud application.
Family firmly establishing our platform as the basis for business transformation in the cloud.
Turning in new markets, increasing our R&D investment to deliver new innovation in the industry cloud business network or sustainability.
Our strong focus on our customers took steps to ensure adoption higher than you will and ultimately lifetime value.
The income and the close we're solving some of this accelerated cloud transition will be even more profitable until 20 to 25.
To deliver on this target and to retain the profit focus we have also decided to accelerate the modernization of our cloud delivery.
Luca will now take us through the financial implications of both of those decisions and then how it all comes together in our new midterm ambition Luca.
Yes. So thanks, Kristen So let me first talk about the financial implications of moving our on premise customer base to the cloud.
Chris John has already explained the strategic motivation. So let me now look at the financial rational.
To begin with as you know the cloud transition is not a new topic for us if.
You have seen the financial impact from this basically since the beginning of our cloud journey almost 10 years ago.
And over the years has rapidly grown the cloud during this first phase of the transition we had very material negative revenue mix effect margins simply because the profitability of those clothes businesses with lower than that of our on premise.
But since most of that cloud growth came from greenfield opportunities that phase of the transition was always the creative to total revenue and did not put significant pressure on absolute profit.
And finally by end of 2018.
Our cloud business has had reached a scale and efficiency that allowed us to deliver increasing operating margins and 2019 and also in trend. It trended. This quarter was actually another strong proof point for that.
No. The first important point to understand is that what we'll be doing no different.
Because this time, we'll be moving large parts of our ERP customer base from on premise to the cloud.
Move them out of that upfront software licensing model and into the ratable subscription licensing model.
A little bit like other players for instance, Adobe has done it before so it will not be as were at record in our case as we are talking about an option for the customers.
Why does this make financial sense.
That's the second important point, because we are increasing customer lifetime revenue as we are expanding our oil from a software vendor to a cloud provider for a significant part of our portfolio.
This means we not only deliver software and support services, but also the required infrastructure and operational services, but we are effectively expanding our share of wallet.
The potential uplift here is substantial but.
But even more important as the associated upselling potential of the business technology platform additional emcp solutions and top applications developed on top.
An important thing to keep in mind here is that we do not have to deliver all of that ourselves but.
Just like today can also procure required capacities from our strategic partners bundles and at scale.
However, as we all know there are timing effects just a license model is upfront and a subscription model is rated.
Now what you see here on this slide is actually a very simple model of what revenue looks like for a software license sale, although the on premise model versus an otherwise identical cloud subscription contract and it doesn't matter, if it's a new customer or an absurd to an existing customer.
In a nutshell about becomes clearer is that wasn't the cloud transition causes a push up revenue and thus profits to future periods.
To the annual cloud revenue is a bit more than twice as high as the support revenue would have been.
Three customer lifetime revenue and value are there substantially higher.
And for for the transition initial revenue and profit headwinds turn into Tailwinds over time.
And all that so just a like for like comparison, that's still excludes the upsell potential I mentioned.
I 2025, the implications should get us to a total revenue greater than 36 billion euros with cloud revenue a comfortably eclipsing all other revenue streams combined more than 22 billion euros.
This is why it is now even more important to expand our cloud gross margin.
And to do that we are now taking the final step in modernizing and harmonizing, our cloud delivery, which I'll talk about next.
Before going into the details let me first put this into perspective.
Early last year, you reminded us that after years of rapid acquisition, driven cloud expansion Sep structures and processes had reached a level of complexity and in some cases, frankly redundancy that called for for you.
Alright.
We also by setting up the best run transformation programs aimed at improving organizational efficiency and agility at the same time.
One of the key aspects of best DRAM is increasing the efficiency of our cloud delivery.
We have already made great progress in that regard as shown by the cloud gross margin expansion over the last two years.
But in order to attain the full benefits of our cloud delivery modernization, we need to take a final step.
As you can see on the left of the slide have already completed most of the required steps of our cloud delivery modernization.
The final remaining step now is to lift a part of our cloud customer base that is still running on our legacy cloud delivery platforms onto either our internal converge cloud or the hyperscalers in other words, our modernized and harmonize populous one cloud delivery.
And we are now planning to accelerate as more complete most of that lift already by the end of 2022.
We expect this to drive the temporary acceleration of cloud investments to 2022, but the benefits of doing this will be significant.
It will increase capacity utilization will allow us to procure infrastructure or infrastructure services at scale and to automate managed services.
Thats, what will allow us to achieve a cloud gross margin of approximately 80% by 2025.
On top of that further increases the stability and resiliency of our cloud solutions and speeds up innovation, even in the applications driving customer success, and thus cloud revenue by a more cross selling and higher revenues.
Again that is what our customers rightly expect from us and we have every intention to deliver.
So this all that comes together in the new 2025 ambition.
The combined impact of what we just discussed means that over the next two years, we expect to see muted growth of revenue accompanied by a flat to slightly lower operating profit.
After 2022 momentum will pick up considerably, though initially had two ends of the accelerated cloud transition will start to turn into tailwinds for revenue and profit.
In addition, we will have completed our increased investment into the accelerated cloud delivery modernization.
That translates into accelerated revenue growth and double digit operating profit growth from 2023 onwards.
And so by 2025, we expect this trajectory to take us to cloud revenue greater than 22 billion euros total revenue greater than 36 billion euros, and an operating profit of greater than $11.5 billion.
This 2025 ambition also means that one we will significantly increase our share of cloud revenue maker.
Making it by far the primary revenue stream.
Two we will significantly increase our more predictable revenue share to about 85%.
And three we will continue to focus on bottom line efficiency rest assured that we will continue to drive the best two on project streamlining Sep and setting it up for efficiency simplicity and sustainable long term success.
Aiming to come out of the transition will sustainable double digit operating profit growth 22, 23 to 2025 and beyond.
I'll now hand, it back to Chris Jones for closing remarks.
Thank you look on before we come to Kuni, let me close it out anyway.
We recognize this is a significant change when compared to the previous sweat achieve the former 2020 as we ambition.
We are at an inflection point, where customers are asking us to help accelerate that business transformation.
In the Philippines.
And position them to a much stronger out of the question.
We see that as a unique opportunity to partner with our customers on that journey in a way that only Sep Ken.
In large part due to our deep knowledge of business, both our innovative solutions and technology and the trust we have established over our operating is two weeks that's.
That's why we have adapted our strategy and financial ambition.
Ask the CEO of Sep I firmly believe the prioritizing sustainable value creation has to be our top priority. Therefore, we will not wait the success of our customers and the significant growth potential off Sep against short term margin maximization now.
Let's open it up for questions.
Yes. Thank you very much I handed back to the moderator you cannot start the kinase that's one please.
Thank you if you would like to ask a question on PC now by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment I.
Hi, Ken Taiwan to ask your question.
Well now take our first question.
This question comes from Adam much from Morgan Stanley. Please go ahead. Your line is now open.
Hi, good afternoon, and thanks, not sure I'm, taking the question I go to page, maybe just first of all you've made very clear that there's a big move to cloud underway I think everybody will understand that in the past you've given customers choice in terms of how they pay wherever they run between bringing licenses to hosting deals or paying subscription.
We understand that few there's a high lifetime value of customer in subscription and obviously for customers that means they end up paying you more over the lifetime. So could you maybe just help us understand why these large I'm sep customers now want to run I'm on subscription are you foreseeing that transitional you continue to give choice. So any help you can give us on them why not.
Change is happening would be useful and then maybe secondly on cloud revenue you highlight now there's a much bigger part of that going to come from cannibalization as on Prem moves to cloud is there any way you can help us understand what the underlying growth of new business in the cloud is going to run ascs versus how much of that cloud revenue is going to come incrementally from cannibalizing the.
On premise thank you.
Yeah. Thanks, a lot Adam let me start and then look at a day you can build on top of that.
I mean from what we have seen in the last month is definitely when I'm talking to the steel look.
I mean, how many enterprises to supply chain, it's heavily disruptive they sometimes don't even know and they produce and deliver the next day and that is that the inflection point above our customers, where they are saying, hey, I really want to move now to the cloud I want to have a resilient ovulate why should I still operate my own 90.
Data. So that's the first point and then the second point is doing a business transformation. Adam is it's it's not easy or you have to change our comedy works you have to be decided.
And also our customers, including the logical leap.
Let's move to the cloud and also let Sep how about the transform our business show us the best practices you have for the digital age Ladha standardize our solution and now that the platform a sweaty led also build the attempts in the cloud and he comes you rationalize innovations on the fly but besides that.
Commercial and it's really about <unk> billion and the transformation of that business.
And whereas this cloud revenue going to come from yes of course is the change as a seller weighted move of our installed base to the cloud, but second this quarter you have heard me, saying Paul.
25% of our Atlanta cloud customers now net you, which speaks well for the competitiveness of illusions finally, and second that lots of wins in the years to come further market share not only in there for but we are really all the little double down on a job QM and on the X. I'm focused.
We have in Seattle, and we will also invest into new innovation.
This week low I mean, all of our customer Hussein all in please help us to really digitized auto industry related business courses is because you know what again it all goes back into our ERP. It all goes back into our supply chain, let's try massive business transformation on your platform.
With the industry cloud in conjunction with our Ela be applications and Sir.
You had a death it talking about you know land adopt on fuel and expand by putting all of our customer facing functions. Together first you heard of the hunton, you're saying our customer satisfaction score increased quite significantly.
And we are convinced that we will also see hi.
Can you wait in the future and with that we've got out there any common.
Yeah. So just to quickly add I mean, oh, there is undoubtedly going to be some cannibalization effect.
Moving from established like them.
Got agreements over to subscription however that is actually nocs are the majority of the growth that we're expecting no. We actually assume that we can run them area pega that is approaching 20% or with the new solutions.
As an industry cloud business network and other a trade areas that we have discussed before the business technology platform growth that we expect a as well as also the uptick that we expect coming out of the cobot crisis again from some of the solutions are particularly Sop up.
Now that are actually clear market leaders and therefore can be expected to actually expand their lead and bridge. After the crisis is over subject to conquer so I'm the cannibalization impact and then see the cream on top of the growth rates are but it's not a major let.
The loan the excuse driver of growth and we will be transparent with you. We will starting next year, if you'd see a matrix of the number of customers.
<unk> form of installed base legacy license arrangements or two new subscription option as well as net new customers that we're adding others as well and you know this reporting from the S. Four on our side, but we will break it out with a particular view onto the cloud starting from next year.
Hey, Thank you very much.
Question.
Our next question comes from James Goodman from Bakken piece.
Please go ahead. Your line is now open.
Thank you, yes, good afternoon, maybe I could ask a couple of years as well. The first is around the there's the customer relationship I mean, a sense within this guidance that you are increasing the emphasis of S&P owning the customer relationship accretive providing the right infrastructure or at least crossing the three movies.
Then you're in contractual terms that the hyperscale their infrastructure. So can I ask you what that means for your I. I asked expectations as we look out through this transition and particularly as we look out to the 80% gross margin targets. The cloud I'm trying to think about the lexis advance within that and the second question. It's really just.
The physical work around the cost investments there is a lot of moving parts within the numbers I just wondered if you look at the four to five percentage points.
Change that you put out there for 2023 can you just help us with the split there in your modeling between the gross profit impact from the lower revenue and the transition to record that you spoke to reverses the magnitude of the incremental investment that will be annualizing in the business at that point. Thank you.
And maybe I can start and then look are you kind of again built on top of that when you said it very well actually it's about owning the customer relationship when it comes to that business transformation and.
This is why so.
You know keno, whereas the Pea.
The Sep cloud that pump, it's really the foundation of all of our cloud applications and that we actually also delivering integration for high power plant.
No platform and now that we are making tremendous progress on the question on the.
I'm not showing our business services on top of that platform to think about it when they just want the manacled data model now we can sell our partner why to modify the latter.
Let's come to the platform and building expenses that because that's now once the medical data model that the work load as the authorization as everything what you need to seamlessly band as the P. solution portfolio and this is why on top of our infrastructure as a service business definitely we want to push now the platform.
And we definitely also on a push or the application on the software services, but that now comes together at the end. We are certainly not the product we are selling the digital intelligent enterprise. We are spending business post the time now for the digital age. This is what we are doing and this is what we will also position will be yet to come.
Oh, yeah and to build on that it's very important to understand that we are not positioning and it infrastructure as a service solution the positioning in a holistic solution moving our customers to the cloud and transforming and modernizing the landscape on base.
I'll use your P. application architecture. This offering is therefore as a service offering and not an infrastructure as a service offering or where the customer basically will just bring a license and then we would do the application management talk that's just a very important and therefore this will not have a bearing on it.
So start Jos a service and secondly on the margin side are we all cause dissipating or the margin inflow from those additional costs, but most that we're getting and core ERP together with the development rest of the portfolio on to ultimately then reached 80% gross margin by.
2025, and just to also clarify on 2020 sleeves.
The investments that we are looking to put in Oh and that we are planning to make to trying to reach the home stretch of our converged clouds modernization are actually already going to turn into an operating profit tail winds in 2023. So this is not.
Negatively affecting 2023.
Any longer the impact on a 2023 margins is basically due to the change revenue mix that we assume and the shift of the business model onto ratable recognition, which I will then turn basically increasingly into a tailwind that will allow.
That was the catch up and actually increase the margin that gun on starting from 2023. So from that perspective are those incremental investments are actually immediately accretive to operating profit starting already in the year. After they are made.
Okay. Thank you.
Let's take the next question please.
Thank you. Our next question comes from Philip Winslow from Wells Fargo.
Please go ahead. Your line is now open.
Great. Thank you for taking my question My question for Christian in the end it there I think back to the financial crisis. Obviously, there were a lot of projects that were delayed and then two years later with me Oh no not but then you saw a catch up in the 2010 2011 in terms of just a license sales and in other words projects, just getting pushed out or you're talking about.
That's our current situation. Obviously, you mentioned probably is getting delayed and push what are customers, telling you about hey of those projects have been pushed out even shape they've been shifted to the cloud and show the shape of the recovery just simply different I mean, how should we think about just.
Just sort of this.
This crisis first the financial crisis in terms of how you think about sort of the shape of the recovery and what customers are telling you.
Yeah, and I set up for the question I'll go first and then perhaps scenario, okay can add any comment if they have 10.
And I I think when we describe projects being pushed I would describe it as the scale and the scope of the projects and pushed I think it's very clear in the narrative that we have with our customers that everybody understands the and the need for the Digitization of key business.
This is so that a jealousy becomes part of their business landscape.
No it isn't that the project it stopped it isn't that it isn't a journey that the customer is on I would describe it as a much more staged approach and the approach is that we've seen in the past where you know the work will continue.
Period of time, and we can see that even in our own services utilization, where we still have a very significant number in time with that utilized stays in our services business.
So I see it really is a more.
Recurring element a project stage is that the customer connects to rather than a large scale programming block initially and that's being what's underpinning some of the conversations that we've had with our customers.
Yeah, I mean, I can just comment on the cloud revenue side I mean, obviously, we are talking a lot about concur and yet.
If you exclude our cone club business travel and expense management, our cloud revenue would be up by 20% our software to service the Lucent, the increasing a 26% year. So fee. There is no real deceleration and also in all fairness to concur I mean after the crisis. This is the market leading solution.
In the market you know full stop and that will be of course, the bounce back. It of course depends on when can we you know travel again when his business trouble coming up so all of that I'm extremely confident that this business will of course come back. It's just a question of timing.
Okay. Thank you.
We move to the next question please.
Thank you and next question.
Comes from Michael price from GBM. Please go ahead your line is open.
Hi, Thank you good afternoon cheaper may as well just in terms of the the cloud gross margin trajectory Luca I'll get it back, but it's been a couple of years.
Previously you were looking for 75% gross margin in 2023 could you give us a lot of whether that still intact and also how much lower the cloud gross margin like Kevin in the next couple of years and then secondly also to you I think on the free cash flow side previously you had a target of 8 billion.
In 2023, I suspect that's no longer there, but can you talk about cash flow out stratify them on.
The capex side of things get some reassurance about what where that might go cheap bank.
Yeah. So let me start with the cloud gross margin I mean, you have seen that we have continued to make progress even in trendy trendy. Despite the deceleration that we have seen in our intelligence spend group, which is by far the highest gross margin and even compare us still managed to increase its cloud gross margin despite their unique travel.
I'm sure that they are having so I think it's very clear that we have an up most focus as a company on this and the investment as I said that we are planning for next year and the year after a to accelerate the harmonization of our cloud delivery infrastructure to our converged cloud as I said.
Before on the question of James I think it was it will be immediately accretive.
Starting from 2023, so from that perspective, well, we believe that there is no reason to anticipate any departure from what we had in mind for 2023.
And obviously then see a further acceleration up to the to the 80% that we are planning for 2025 or 420, 21 and 2022, we definitely you should assume that there is actually a slowing in progress because we need to make the investments are.
First not all of them will flow into cost of clouds to be also quite precise. We will also see some investments in our cost of R&D to make sure that you know some of the solutions that we have not yet fully shifted can run optimally.
The new infrastructure above caused a lot of it will hit cost of cloud and therefore on the progress in the next two years or will be more muted as well promote free cash flow perspective look first of all we have made tremendous progress. Obviously this year not only are we back to a be levels of.
Operating and free cash flow that we had committed at last year's capital markets Day, We of course had a completely different profit expectation for our business in 2020, but we are actually seeing even a an improvement against the original ambition. When it comes to free cash flow. So something has happened here, which I believe is also going to be sustainable and that is.
An improved and more disciplined working capital management and cash collection management I have to give up there and her team a lot of credit here as well and they have certainly intensified their collaboration with our collection teams and I believe that collaboration is sustainable and should continue to yield results.
Also after the unpriced, Nevertheless, you're obviously right on that or the free cash flow that we had anticipated for 2023 is also pegs to a significant extent onto the profit levels that we are expecting and since we are now expecting to reach.
These profit levels with are not running about two years delay or be a free cash flow levels could also be expected to then also only be achieved in a 2025, having said that that.
That is a generalized statement based on all else being equal and there are a couple of factors that I'm still play a role in this on the positive side as we have discussed I'm going call tricks, Oh completes their IP or their previous cash settled programs under the Sep.
Set up and try to plan design good to a largest extent convert to equity set of programs and that will have some relief as a consequence, so when it comes to the cash flow.
On the flip side and 2021 and 22, we expect even though that our capex spend will remain you that still moderate step up from today's very low levels due to pull that in order to procure some of the additional infrastructure elements that we need for our come own converged flow.
Good and so those two factors with a a to a certain extent balance out each other perhaps providing a small tailwind, but other than that of course cashflow follows the profits.
Thank you Christian could you maybe give us an insight into the customer base on that or today. The great 8100 light how many of them would actually be on either the private cloud or the multi tenant petition that the S. Four.
Yeah. So thanks for the question I mean first.
You know we have seen a method for celebration of the move also who to cloud washing off S. Four on as I mentioned before and Colgate was indeed, an inflection point then we will see this situation in the years to come also of some large enterprise customers and we will put them on.
The wide deployment model that says we need enough cost relating to know how standardized the customer how how did sign the other causes us to really fit into December our consolidated as to tie t. landscape. So we will make that work depending on the departure of the customer and then second.
For us it's very important that we of course, the leveling the differentiating capability and next year the public cloud worse little have 80% of the functionality, but today alone. Clemens version has this is significant and we have to live with the new configuration, where you can change post offices on the fly we infuse AI and so.
To give you an example, because it's so much talk about the value of this for just last week I had them automotive Kokomo 50, P. as you know he said cushion because of the move to S. Four on running on Hana, we actually could optimize our inventory and they have savings of over 200 million Euro because now solidly.
You can change our inventory and check it real time and can adjust it based on the demand is what we are seeing in especially in times like these when you have touched in a dynamic market that is a huge huge value far and this is something what we will call. It a push further and with the new strategy going to invest reinvest teledyne.
Innovation, we in Red cell line in R&D because this is the way to go this is what our customers want and.
And just to be precise. So currently we have close to 3000 as for cloud customers.
Okay. Thank you.
Let's take the next question please.
Thank you and next question comes from Alex Zukin from RBC Capital markets. Please go ahead. Your line is now open.
I think you guys for taking my questions. So just a quick one for me can you talk to how much of the delay in the spend that you're seeing or in the larger sales cycles due to macro versus evaluating some of your new cloud solutions and if you think about the the Tories 45 vision, you know approximately what percentage of customers.
Do you expect to shift you know over the next kind of two to three years or is there a late cycle or accelerated.
A portion of our customers are going to ship, though.
Thanks for the question I like Stan I'll take that parents parts.
And in terms of that delay that we described I would say it is less about the evaluation process and more about the uncertainty of the condition and at the start of the color that right that.
We were in the fortunate position to be able to pivot our sales force to actual engagement of our customer base.
We have high hopes and in operation for a number of years, a very strong digital selling motion and our national sales organization, and we were able to expand the use of those tools and techniques right across the entirety of our sales team. So we still managed to maintain a high level I think.
Things with our customers, albeit that we probably haven't met many customers typically in the last seven not.
Therefore, the delay time to be delayed around uncertainty in the business not all uncertainty in the business World and I'm starting to see I think relative to the industry that the customer operates and much more than Trinity evaluation kind of ask Richard proceeding I'd pairing.
Oh they are actually.
And then to your second part of the question I mean, we will of course give customers choice or in the future, but call. It will be in a smaller way down it really depends on the deposits to fund up the customer look when you you have customer you know mid sized services then we they celebrate go lives on our cloud in fact today.
Decoupled, but that's still there.
We have large enterprise customer they are now shifting the workloads to the cloud but of course, so that it takes more time to redesign the both of those who come to understand that to move the modifications out of the ERP. So this will you know now happen at a celebrated paid but every customer will move if its own speed.
Okay. Thank you understood and.
Maybe just one other thing to look at it.
Yeah, I just I wanted out is there a good like what's the right <unk> for us to think about it would point us to give US you know to give investors comfort in kind of that that transition.
You know versus cost.
Customers moving to a competitor effecting sure to a competitor or what's the right Kate the idle look at for US during this transition point around the new outlets.
Yeah, Yeah in my point of view, it's really the migrated customers as you know we're up slightly more than 30000, a classic ERP customers not systems, we are way more systems, but in terms of just Oh my calendar and that's what we have done we have 15000 customers, but as for her.
Out there as I said close to 3000 of them in the cloud so that means another 12000 basically under the license on premise and in the next couple of years, we want to move many thousands of those customers and then of course on that you customers or to our core ERP cloud solutions.
And therefore, we intend to give you in the future they absolutely regular recurring updates as part of the earnings process on those numbers and certainly the progress that we have achieved there or will now break out between the different deployment bombs that should give you the confidence.
That are were arriving to the and the cloud of 2025 ish.
Perfect. Thank you okay.
Thank you.
Let's take the next question please.
Thank you. The next question comes from Charlie Brennan from Credit Suisse. Please go ahead. Your line is now open.
Oh, great. Thanks for taking my questions.
I'm Gonna gave it to us whether thats possible. Firstly, just a clarification on your cash flow comments I'm I'm surprised you didn't commit to EUR 8 billion of free cash flow given the the variables of whole tricks and I should be and that's how it winds are there any other variables.
Should be considering for instance is there any chance if another restructuring program as you come to terms, that's kind of the exchange rate.
Couple of years.
And then secondly on a separate product related issue or how important is owning the classroom there of the sac in the strategy and sort.
What extent do you think you'd given up mindshare too to Microsoft and Google and how hard is it going to be so to claw back that's a that Martin chairman customers. Thank you.
[laughter]. That's so first of all on the commercial side, you're absolutely right of course, we will have a a benefit from a the from the Quadrex IP or and of course. We also continue to have benefit as you have seen in the significantly reduced levels of Capex. So that we had in last two years.
From our collaboration with the Hyperscale us, but that being said still be source of a recession, though or on the operating side is not entirely decouple from the level of profit that you can drive as a company and as we are achieving that level across its basically whether to you.
I'm sure in 2025 for our ambition we have good out there. That's when also I, absolutely would expect or that we're able to supply for those 8 billion free cash flow in the meantime I.
Very much believe that we actually can go better all as equal or on the in terms of the cash flow generation, because we have increased our cash inflow efficiency, our cash collection effectiveness and our working capital management, However that will not be able to to me.
Realized be a lower profit levels that we are now anticipating in the next two years before that accelerates I'm back again, perhaps on the platform side dump. It would take it look like I mean this is a very valid question on the platform [laughter] blood from definitely needs to be owned by the P. M.
Now moving our cloud applications over to the platform by solving day integration issue right, making sure that every of our application and sharing the same data showing the same observation and workloads service. That's actually will also make sure that the platform will become a natural part of.
And with that what we're doing going forward and that's not any more standalone platform. That's our business our business transformation platform that call. It like that where we then also want to ship the equal to two I mean today a lot of our as I promised a building fill extensions in the on premise long, we really know Austin and also.
Incentivize them to China to move up with up to the cloud build the extensions on the platform because now they can do it also in a much more seamless way yes. The platform is a has the highest in bottoms and again. That's the platform. Then comes all comes also at the piano and underneath me gift card.
That's true now that they can either to the hyper scale infrastructure. They can choose as the p. infrastructure that was already there in the past that that has to be proven the wide strategy.
Okay. Thank you that's.
Let's take the next question please.
Thank you. Our next question comes from Pac Mackay from Evercore. Please go ahead. Your line is open.
Thank you if I could sneak into I'll try there as well I guess just to be very clear Luca on the on the cloud revenue adjustments outside of currency is really that sort of business perspective, just simply kicker for the next year, meaning it sounds like all sorts of good quarter.
You know the other parts of the cloud doesn't seem to be going well is there any other downshifting. They concurred makes sense, while you're expecting a more slow rebound, but I just want to double double check on that and then I guess, maybe for Adair and are Christians. Yeah. The question is going to come up a lot is why are you all seeing delays when a lot of others.
Suffer companies are frankly, you're starting to see things pick back up is that the the mix of your business around more impacted industries is it you know.
I think the dare mention bigger ERP projects, just simply getting you know chopped up into smaller deals are having to rethink that I I think the big question I've got from investors today as you know why are you all sort of you're seeing this whereas your at least over the last month or two we haven't seen that perhaps everything just came.
Kind of came to a head in September, but if you could discuss that a little bit I think would be helpful. Thanks.
Yeah, Let me first start.
So first of all it's not only bunker.
Being in terms of impact or for the full year, our we're not talking about next year, yet by the way. So just to make sure that we're talking about 2020, but concur is about half the impact that we're seeing a another quarter as the rest of intelligent spend you probably have seen that in our segment reporting we are showing that progress.
It was down in the quarter by 11% and that is a business that otherwise would be expected to grow somewhere in the teens or and that is of course, all the due to due to cold weather, but it's also the case that transactional revenues in our rebar for example on ups are as high as we would have expected, but the same reasons I mean your.
You covered a lot of companies are cutting back on spend and if you have lost and then of course also spend.
Like a rebar showing less variable expenses, it's still growing that's the difference to conquer but you have seen that intelligent spend over all in the quarter was down by three percentage points and that of course means that also our rebar is down to a lower level and then what otherwise would have been the case and then the red.
The the last quarter, it's really a slight reduction in our renewal rates or a new cloud bookings across the entire rest of the spectrum versus the levels that we would have targets that fall in and all the recall that business as usual scenario, having said that however, that's something that we are mindful of the big.
Is that on the transactional revenues, we had originally anticipated recovery in the second half, which are now not earning well anymore.
And then I mentioned already to closely we are seeing in our software to service and platform as a service business and we're trying to fix for them I would say we are you know definitely also lying in India and also compared to the competition for this.
Business developed under this circumstances extremely well and.
So of course also high confidence that you know part of next year that we will you know see similar growth and then of course also you're talking about an acceleration later in the second.
Hi Fi Twentytwenty, one as you know when we talk supply chain when we talk experience management and we talk fine then changing in a license model target customer selling you know subscription selling pay up because these are all solutions, which are highly relevant Paula.
Our top I'm Oh, yes, there is a high confidence that we will definitely also see a we that we are still awaiting the next year.
Perhaps to close this out it works both ways, while in a classic subscription model or the slowdown in revenues due to such a crisis situation of course, it's happening at a slower pace or but on the other hand side to accelerate a subscription business are also takes its time because first you need to go through.
The selling than installation and then you start to recognize revenues in a business network model that is transaction volume base like with concur and our rebar both happens faster. So the downturn happens faster, but also once the business picks up again and the spend increases and trouble.
Happening again and of course, the variable revenues also start to kick in immediately and had so that's why we assume that you know if oh the uncovered a restrictions are lifted then as of the second half here, we will see actually a quite as fast a reacceleration back to normal levels.
And finally Medicalert, let me address the question, our Iran's they and the delay.
And so first of all I think it's important to keep.
Okay sets in the context of the overarching portfolios I think he said we have a very broad portfolio of products and which is and it's something that of course continues to make us extremely relevance to our customers.
In summary, our pure play SaaS solution, we just find a program that we call amplify which was that program focused on low upfront and that men on deployment in days and weeks and guy click value realization for our customer base.
In those scenarios, we definitely saw a you know some uptake of desolation because the gap between state and value well. It was very very small and we saw over 110, new customers over 1100 deals under the auspices of that particular program [noise].
Then when you look at the actual underpinning business transformation that is predicated on the S. Four as a car.
I guess, the first point of discussion with customers or is around cost and managing and mitigating cost in the current environment.
There are a series of activities that can be done to help manage that.
Then the second range. Your conversation is about the migration south are about the journey to value.
In the context of that there are different departure point each of our customers of course are the very unique environment. Today, but then also to your friends destination point and it is a matter of looking at that in a modular way so that over the lifetime not that transformation journey, you're delivering value all along the way.
In relation to the priority set the caps might attack.
And I do think there is an element of timing in terms of you know the last month of Q3 and as some of the changes that we saw you know in the retirement of coal that you know are at the point, where you know we had a transaction didn't close prior to that so I think a combination of those things we have different.
Finally, as with different profiles installations that.
Onetime transformation, becoming modular and then a little to do with the timing of our key land.
That's helpful. Thank you.
Thank you, let's take the next question please.
Thank you well now take our next question from Mac Moerdler from Bernstein Research. Please go ahead. Your line is now open.
Thank you very much and I appreciate of two parts to my question. The first is if the transactional headwind from Cove. It is expected to be over within the next year to two then how should we think about 2023 in the transactional business is.
Is there going to be a permanent to lay on the transactional side that you're modeling in or should it bounced back equivalent rate and then as a second question for new sales, which are used to create license how big a step down are you now expecting in licensed sales specifically through 2023 is basically should we be figuring.
License sales are basically going away by 2023. Thanks.
No, perhaps I'll start with the with the last one and they are please augment augment is a I mean licenses would not I'm certainly go away by 2023. However, they will certainly continue to decline and I would estimate that are similar.
A low rate of what we are seeing now in 2020.
And on the transactional business side I see no reason why I'm you know in two years time, assuming that Colgate is really pass them behind us I'm sometime next year that the transactional revenues should not by 2023 you'd be back at the level that they were before in 2019 and grow from there as they have done in the <unk>.
So sorry.
Okay. Good.
So that makes this a joint statement from out there and myself that it must be true [laughter].
Thank you.
Okay. Thank you, let's take the next question please.
Thank you. Our next question comes from Cantor swear Ma'am. Please go ahead. Your line is now open.
Yeah, Hi, good afternoon. Thanks for taking the question a couple if I may.
So when I look at your 2025 guidance.
If my calculations are correct as a mid single digit trough and maintenance revenues through 2025.
I just wanted to check if the cloud services will be profitable enough to compensate for this trial as we could be on 2023.
And how should we see the move or the substitution of maintenance Capex subscription beyond 2023.
The second question is more of a clarification Luca you mentioned that.
He's just ERP customers will move to the fast pass model. So I was just wondering would you continue selling the infrastructure as a service or royalties will discuss it must be migrated to this especially China. Thanks.
Yeah, So perhaps first with the question on a maintenance versus versus cloud I mean that as one of the reasons why we are now accelerating and planning to a kind of complete the migration to a converged cloud infrastructure more quickly because that is giving us.
Step up or in the cloud efficiency, but on the gross margin level already is in striking distance with our software and support business and that is very positive because if you then assume from a long term perspective that the cloud business has.
And ever increasing share of renewal components that are commanding a lower commission rate than a net new sales actually on the operating margin level and the cloud or will then quickly catch up with the efficiency levers of our on premise business you have actually seen a ups.
Part of that already at work today, but of course that impact will be significantly higher even a one so we have to such a high base of cloud revenues and all the infrastructure as a service or MPS.
I think you will see over time that certainly a growing proportion of our existing how to adopt price cloud customers will move over to a more holistic SaaS offering that gives them the entire scope, including also subscription we actually offer this to our customers in a buzz in the heartland.
The private cloud already today as an option, but given our increased our capabilities in the cloud that we're looking at I think it will increase significantly now and attractiveness and will.
Leads to more of a pure Hana enterprise cloud customers, making the move over.
Okay. Thank you. Thank you.
Let's take the next question please.
[noise] next question comes from Kuni and Sashimi from Jefferies. Please go ahead. Your line is now open.
All right. Thank you for taking my questions I have two questions. I think number one is look I believe you mentioned the current up which multiplier that was around two times maintenance can you confirm that so that would imply roughly a five year crossover on the revenue side, assuming all things equal that when a contract could be rendered accretive first city and then the second question is on sale competition probably.
Are there will there be changes to tilt compensation going forward than against emphasized more cloud products away from the license and maintenance model.
I can quickly go first so it's actually a bit more than twice to support revenue. If you apply a multiply or actually if you apply is 0.45, a multiplier to a 1 million.
Yes, its contract plus 20% support that would translate into a 450 pay 'em subscription that equal value so slightly more than twice.
Hi, Julie and thank you for the question I'm.
Sal compensation is certainly one lever that facilitate and me a change and transformation and this year as Christian mentioned in his opening remarks, we brought together all of the customer facing resources to that HP into a single organizational unit and.
That includes not just style, but also all of the services resources of the company together with all of the customer facing health sales support resources.
And we underpins this organizational change with an operating model that focuses not just on the landing our that bringing out a new customer into the I think he family, but also focus is very much on the adoption and the consumption all at HP solution.
Orchard should drive business outcomes and business value for our customer [noise]. Therefore in addition to this organizational change. In addition to this new operating model. In addition to the appropriate management and governance over the top of that we will of course look at our Q.
Oh station plan in order to ensure that they are aligned with that strategy and as I mentioned that strategy focuses as much on the adoption and the consumption of our software assets out on the initial transaction with our customer base.
I also and get a sense that the question was around how we would be addressing are directing our sales force is effort around their friend Alan ALDA portfolio and I think it's important again to emphasize that we have always been predicated on choice for our customers and we.
Well continue to be predicated on on choice.
And you know there are absolutely some customized but for a variety of reasons would want to remain in the Nonprime that's wild.
However, there is no doubt that the vast majority of our customers are orientate at twice that time migration on our compensation well take that into consideration.
Hi, Jim.
Thank you Larry.
Thanks next question please.
Thank you. Our next question comes from he is here from Redburn Partners. Please go ahead. Your line is open.
Hi, Thanks, very much for taking my questions I got a couple if I may I'm personally could did you could in your response to a previous question that we should think modeling at.
The maintenance revenues declining mid single digit levels by the time, we can't be on 2023 was that what you seem to be confirmed or not.
Yeah mid single digit negative decline cagar, given the accelerated transformation to the cloud is directionally correct.
Okay, and then just looking at the slide I think I understand the revenue trajectory for cloud overtly, but you seem to reference in the slide deck that youre guiding to is that an industry cloud functionality other than the industry cloud functionality ran around specifically the other investments.
Going through the hit the profitability say much in 21 and 22.
Well on the 21, and 22 thing or that is really related to planned infrastructure harmonization and best them. So we are migrating customers that are still sitting on the legacy infrastructures of some of our in particular the acquired cloud solutions, but also some of our.
Own developed solutions to our converged cloud and that has a infrastructure investment. So that has some as I said development efforts attached to it to optimize the performance of those solutions on the new.
Infrastructure and of course. It also includes the pure migration cost for our customers. So that has nothing to do with the investments that we are doing as part of our portfolio process on the R&D side to build out your organic solutions, which we are nevertheless ruling as well that's industry cloud.
It's also other areas of the portfolio investing significantly also.
Our business technology platform and of course, we continue to invest in those solutions are well I'm B. I'm clearly have a leading position in the market and want to retain it as well.
Okay. So I'm quite that softened up on <unk> question, but in the past when you talked about the converged cloud infrastructure, you've obviously talked about my great No. That's.
[laughter] factors, which I think is supposed to be done by the other front office last year. If you look at the proportional subscribers, who use is only like that that line of business now solution.
Cool all those have been my great today, what's the converged ground infrastructure and how much of those legacy line of business uses literally ties into the news or to the cloud infrastructure now.
Yeah. So.
Thanks for raising this question because I think it allows me to clarify something the migration that we have been talking about [noise] about.
About Successfactors and also our rebar.
Labour database migrations, we were migrating the underlying third party data base to haul off and that's what's giving us already significant benefits and you see them in the cloud gross margin to date.
What we have also dominance we have made sure that all of our core solution rather than.
Well know more hyperscalers and on our converged cloud infrastructure, what we have not started yet is migrating all of the existing customers that are sitting on the previous legacy infrastructure over to the new bond and that is what we are now, giving a strong push and what we are.
I'm looking to accelerate forward and once we have accomplished this we can retire legacy platforms and we have various other benefits in terms of automation that we can leverage for greater efficiencies, but the they database migration that was what we were talking about in the past and indeed this has been accomplished or.
I'd now with the current positive benefits for cloud margins that you're seeing already in our actual current numbers.
And so we can just getting that roughly 100%, but still in terms of use is still on the they're the legacy platform today is that correct.
No that's not right because we have already isn't so I'm I'm, sometimes started to on board new customers Oh, no on dollars converged cloud landscapes are but its correct. That's still the majority of the existing customers are on those legacy platforms and that's what we're going to move over to Kimo.
Yeah Okay.
Okay.
Thank you.
Looking at the time I think we have time for one final question.
Thank you well now take our last question from Patrick Walravens from JMP. Please go ahead. Your line is now open.
Oh, great. Thank you and maybe this is a good way to wrap it up so Christian thank you for all the commentary in detail today.
You know get given the stock dropped which I think is the biggest thing in quite a while if there's one key message you'd like to convey to your investors here what would that be.
Oh, Thanks, a lot for that for that question and in India of course, you know you know coming in on the stock price.
You see that we actually made today the decision, which is actually actually and also to respond to the needs of our customers and look at the C. O off Sep I cannot hold on to a financial midterm ambition, which is actually again.
The needs of our customers when they want to move and they want to transform and they want to see more organic innovation from Sep. This is for me on the long term to wide thing to do for the P. and this is actually you know my top priority as the.
The CEO of this company and this is why we are doing this change and one thing for sure because also related to the last question. We are not getting lucky showing our commitment to drive profitable growth in the future I mean, all the impacts you are now seeing is weather related macroeconomic or you see the revenue mix effect.
In school and but all the other productivity per meter no matter. If it kind of go to market related gionee related we are not getting sluggish. We will of course also have a high focus on productivity and on the investment side on the on the cloud operations. I mean, when you are now doing this math is shifting and already tripling your cloud revenue.
Towards 20 to 25, you don't want to feed your money into some legacy cloud infrastructure. This is why we want to do our homework now and come back.
Hello, Good should close on operating profit from 2023 on what's on because again I don't want to feed money into legacy infrastructure. This is why we are doing this and incumbent <unk> combination and no assets that finally to wrap it up we're doing it for our customers.
Oh, Thank you very much freight from this.
Thank you for your last question. This concludes our earnings call for today. Thank you all for joining and you can now disconnect.
Bye.
Thank you bye bye thank you.
It would take out.
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