Q4 2020 SAP SE Earnings Call

Good day and welcome to the S. I P fourth quarter and full year earnings 2020 Conference call. Today's conference is being recorded and at this time I'd like to turn the conference over to Mr. Stefan Gruber head of Investor Relations.

<unk>. Please go ahead Sir.

Thank you good morning, good afternoon, and this is Stefan Gruber, thank for joining us for todays earnings call to discuss of our fourth quarter and full year 'twenty and 'twenty results on <unk>.

And by the CEO of because of the outline and our CFO Luca <unk>, who will make opening remarks on the call. Today also joining us today for Q&A from Singapore is called the Russell, who joined the executive Board and lead the customer success organization as of February 1st.

Before we get started I'd like to say a few words about forward looking statements and our use of non <unk> financial measures and these statements made during this call that are not historical effect of public.

Forward looking statements as defined in the U S. Private Securities Litigation Reform Act of 1995 words, such as anticipate believe estimate expect forecast intend may plan project predict should outlook and will and similar expressions as they relate to the SCP are intended to identify such forward looking statements.

The CP undertakes no obligation to publicly update or revise any forward looking statement.

All forward looking statements are subject to various risks and uncertainties.

And that could cause actual results to differ materially from expectations. The factors that could affect sap's future financial results are discussed more fully and sap's filings with the U S Securities and Exchange Commission, including C piece of annual report on form 20-F for 2019, but the the SEC on February 27 2020.

Participants of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of the day.

On the SVP Investor Relations website, you can find the slides deck intended to supplement todays call available for download.

For those of you following the webcast the slides will be shown as the proceeds of the prepared remarks, unless otherwise unless otherwise noted all financial numbers referred to on this conference call on our line of <unk> and growth rates and percentage rate point of changes are non <unk>.

And at constant currencies year over year and.

Non <unk> financial measures, we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with light for us.

And finally people and over to Christian and I would like to announce that we will hold and event for financial analysts and investors and the coming on and we plan to do this in conjunction with our user conference Sapphire now more details to follow.

I'd like to turn things over to our CEO of cause of the alkali.

Thank you Stefan and welcome everyone to our earnings call now if I had to find the headline for the last couple of months I would say this SAP is.

On the move the ft defined our new strategy and we are in full execution, we have listened closely to our customers and launched whites with SAP P. This week and.

Milestone offering for a holistic business transformation and as the service.

As part of the new offering we are unlocking the business policy and intelligence layer with the planned acquisition of <unk>.

Only of SAP and how customers the William match and business models and call the sucess and to add to deliver the best business outcomes.

We also have expanded the relationships with our Hyperscale partners cooperating more closely than ever including with our Microsoft teams integration.

We have where we successfully completed the IPO of quadrants.

We have as well transform the S&P organization and make it more of least symbol lean and customer focus.

We have tremendously improve the in the equation of our acquired cloud cloud applications.

Double down on innovation, we are coin waiting with our customers across 25 industries, the turn them into more resilient and productive and sustainable and appliances.

We have announced three additions to the S&P Executive Board.

All of them with a strong cloud mindset and our board now truly represents all global regions Americas.

Mia and a P J and I.

I guess, it's now fair to say not true about you Luca and Scott, but our board from now on never sleeps, but most importantly, we have put our customers for.

And we already see strong results customer satisfaction is up 10 points and we close the wherewithal and Q4, so let's get started lots of flow to cover today.

<unk> will talk about our Q4 with salt and a minute. So let me focus on total year performance first off we beat all topline telemeter us after we wise the outlook and hit the upper end of for profit. This is highly important for 'twenty and 'twenty was the very successful year for a S. A P with very strong.

And we and Q4, which provides us a strong tailwind leading into 2021.

And that's clearly visible and our total year performance.

And <unk> cloud revenue was up 18%.

Our sauce password when you grew by 27 per se outside our intelligent spend and travel and expense business concur was especially affected by the quietest. The obviously the good news here is that this headwind turns into a tailwind once two out of it comes back and then concur will be wedding and.

The clear market leader in travel and expenses.

This year also showcased our ability to work remotely we delivered stronger than ever we added more than 25000 net new customers.

Also together with our partners, we delivered more than 35000 go lives in.

And Q4, specifically, we added almost 1000 additional S for Hana customers around 40% were net new that.

And that takes us to a total of a wound and 16000 customer up 16% over last year. We are clearly gaining market share with S. Farmer. We also saw a massive number of highly important customer wins this quarter.

Some of them again competitive replacement and.

And the ERP space alone.

We have more than 200 wins again all of that.

So let me highlight just a few wins and go lives.

And yet as chosen and that's for Hana to help increase data standards, and transparency simplify and automate processes and mitigate operational risks.

Unit level <unk> continued the strategic partnership with us by converting to ask for and I asked the future where the ERP system share.

<unk> selected S for Honda to support its upstream business and we are also called the waiting on and ambition we share.

Become net zero emission businesses <unk> has chosen as for Hana to support the development of that COVID-19 vaccine.

Okay, and general Motors selected SAP <unk> to transform the spent management processes and the same time, we posted almost 4 billion of spend in our network.

For human experience management, we added many net new customers this quarter and we are the only when the wanting Asia across 100 countries.

<unk> has further expanded use of our cloud solutions, including Quadrex. We're also exploring and partnership with Google cloud of wound artificial intelligence to enhance customer value and.

And of course by also expanding our strategic relationships and <unk>.

Customer experience, we had the biggest quarter ever with regard to cloud all of that.

The commerce with double the our cloud revenue only asap and off of a seamless consumer experience from the online shop next day delivery and flexible payment options finally, and supply chain. We extended further our number one market position and we are further expanding our industry for the civil capital.

The capabilities to offer the autonomous factory no.

Now we are fully focused on the opportunities ahead of us the direction is clear.

And we are executing our strategy to he and when our business was one let.

Let me take you through the most important updates.

I'm extremely proud that we increase the customer satisfaction score by 10 points to.

Two factors are driving this we are focusing the entire company on our customer success and to only twice integration and innovation across our business applications and platform.

Also if there was an opportunity to improve People's lives. It is now you are not the support of Clover fight against Covid, Germany with Deutsche Telecom, we are providing the corona contact tracing ex since launch the coal and our walnut for downloaded more than 20 25 million.

About 2000 and viewers and users chat the positive test results per day to break the chain of infection.

<unk> seen production 17 of the top 20 global vaccine put to use us one S. P.

In the U S.

Madonna one S. P S for Honda and supply chain management to support the distribution of the Covid vaccine and in Germany, <unk> selected SAP <unk> and Q4 the scale the production of the vaccine for vaccine distribution. The Deutsch of order caused the wet cloth in Germany, and many others one on SAP.

I'm very proud of SAP piece, well of wet and the clover value chains, and our responsibility to help the world one better.

On to strategy two days ago, we launched Weiss with SAP. This is the milestone offering together with our ecosystem. We launched this game changing offering to ensure a holistic business transformation for our customers.

Transformation requires more and just the technical my equation to the cloud.

And only of SAP he can do this.

Let me briefly go into a bit of detail.

And part and to understand.

<unk>.

Why is with SAP P is for all customers no matter, the starting point or complexity, whether it is smaller companies with simpler processes, all multinationals with the complex customized on premise landscape.

We are moving our customers' mission critical core ERP poses to the cloud along of tail up past that reflects the individual customer situation, we make sure of customers truly transform their business instead of charter replicating the on premise landscape on some public cloud infrastructure Este destination is on.

Always to become an intelligent and otherwise.

Why is for SAP piece, the China to get that based on sweet steps.

Business poses intelligence and redesign with the experience of 400000 customers, we redesign business processes and to end.

I come to seeking out beyond the second technical migration to a standard and modular solution landscape with fast time to value and finally, we are building the intelligent enterprise with S for Hana cloud of tightly integrate integrated highly intelligent and automated business processes the business technology platform ASP.

The foundation of widening our customers with integration and data to value and extensibility based on one data model and many other world class applications, though.

And of course, we provide choice on the cloud infrastructure B S. E. P. Our hyperscale and we are include the access to the world's largest business network.

The offering.

Not all need delivering our customers the superior business outcome and the return on invest.

It is a very simple commercial offering on a single contract all without high up on the investments and up to 20% lower Tcl.

On Sap's financial perspective.

As we embark on this journey, we shift existing customers out of the Opco on software and support model and into the ratable cloud subscription model.

And while this leads to some short term pressure on revenue and profit, we will significantly increase customer lifetime value by delivering more services to customers.

So we are increasing our share of wallet and make life easier for our customers at the same time as day now can turn to S. E. P. S. The responsible one.

That's why we expect to turn one year of support revenue into roughly two years of cloud revenue over time.

But most importantly, it will help us.

Celebrate our upselling of applications as well of technology, and especially drive the platform adoption.

Let me now it will into the business post as intelligently as it provides context for the sitting out of your acquisition.

Business all of this intelligence will span over time across all of our applications to continuously and wind business closes the Swan and to infuse intelligence by analyzing benchmarking and configure wing business processes based on the insights and best practices from our 401.

And customers across 25 industries.

We're seeking argue we are not only becoming wide way of leading player in the business all of those intelligence market, but we will also accelerate the business transformation of our customers and with that the move to S for her on a cloud.

And that's the kind of innovation close to our core we are acquiring.

Part of our strategy. We are also forming close strong partnerships for wide in Kuwait business outcomes for our customers and the he and wind how enterprises, one and this context, we have expanded our existing partnership with Microsoft.

With Microsoft teams and S&P coming together, we combined the.

And the leading business application suite with the leading business communication platform with this partnership we will create the friction less enterprise and determine the future of work.

We will deliver numerous collaborations and a tsunami of for procurement for HR, and finance, which will increase the productivity of millions of users worldwide.

The first use cases will be already launched in Q2, starting with S for Hana and customer experience.

Let's talk about Quadrex.

This is a fantastic success story for both.

For all of tweaks and SAP.

And it was solid and yesterday its successful IPO of Quadrex, let me be clear.

<unk> sake, and myself are fully committed to experience management and the quality of <unk> exam platform as the key element of Sap's intelligent and otherwise.

And we absolutely intend to keep up the pace of innovation spending our joint solutions quarter after quarter.

C. P will of course remain quad with the most important go to market and innovation partner in order to drive growth within Sap's customer base.

We are now providing quality mix with the opportunity to extend its business and serve customers also beyond the S&P universe.

So for quarter tweaks to future couldn't be prouder.

But let's also remember.

We acquired quality of its two years ago for around $8 billion.

Last year, the contributed more than half of 1 billion Euro of cloud revenue twice of what they used to do when we acquire them.

At yesterday's IPO Quad weeks achieved in the implied valuation of close to $18 billion.

Walt and topple the acquisition point of it.

And that debt and the first day of trading the stock increased by about 50%, increasing the implied valuation to about 27 billion.

Sure.

Congratulations wine and team on the quake, Rachel as part of the SAP family.

Now before handing over to Luca.

2021 will be and exciting year full of opportunities and then.

And I'm happy to and it is important year with very strong leadership team underscoring our clear focus on customer success and cloud quotes.

First I would like to think of death, who will depart S&P. We wish her all the best for your future and Dallas at the same time I could not be happier to announce the addition of two exceptional lead us to our executive Board.

Scott Russell succeeds Adair and heading our customer success organization and as Scott's leadership as president and for a P. J the reach and has become one of the fastest growing cloud market for SAP.

Always putting the success of our customers at the center.

We are happy to have him join us for Q&A in a minute.

Truly of White, China from Microsoft, where she led product marketing for Microsoft office during its cloud transition to 365 and for Asia over the past five years.

Julia will take on and you executive portable Sep's, chief marketing and solutions officer.

Truly up wings of cloud first mindset to S&P that will tremendously and support our own transformation and truly up perfectly knows how to pitch technology into clear business value for all of our customer at S. P. Julia will focus on demonstrating the different shading innovations.

And capabilities of our solutions to our customers by strengthening our product industry and digital marketing capabilities.

I'd like to extend a warm welcome to Julia and Scott and once again also to SAP in the pending which joined our executive Board on January 1st of our Chief people Officer.

The being at once to twice and force behind Microsoft Cloud transformation in Germany and.

And as we all know transformations at wiring by winning people and changing culture.

It's all about the wide talent the right leadership the wide attitude and also the wide processes and so I couldnt be happier and more confident for hand over her the chief operating officer of all later this year and with that let me wrap it up yeah and and it over to you Luka.

Thank you very much Christiane also from my side of warm welcome everyone.

But in my 25 years with S&P, and certainly never heard of dull moment, but 'twenty and 'twenty was unprecedented across all dimensions.

And therefore, let me start by saying that I'm Likewise proud of ultimate and navigated through this challenging environment, we had a strong finish to the year with a better than anticipated topline strong operating profit and margin performance and the record cash flow.

So let me cover our results and some more detail starting with the topline.

And 2020, we exceeded all our revised 2020 revenue targets and hit the high end of our operating profit outlook, even as the COVID-19 crisis persisted and Lockdowns were reintroduced in many regions and.

In fact, except for cloud revenue due to the impact of concur.

We manage to ultimately reach the guidance we gave in April.

Thank you for our current cloud backlog expanded by 14% and reached seven 2 billion euros cloud.

Cloud revenue was up 13% in the quarter, while for the full year. It grew by 18% of more than $8 2 billion euros exceeding our revised 2020 outlook.

Lower transactional revenue, mainly conquer of business travel related negatively impacted our cloud growth rate for the full year by four percentage points.

However continued high demand for our cloud assets like ecommerce business technology platform and Quadrex, along with several competitive wins, particularly for Successfactors human experience management produced a strong finish to the year for our cloud business.

In fact, we grew our source of Pos revenue outside of our intelligent spend business by 27% for the full year.

We also saw strong early uptake of our new holistic business transformation offering rise with S&P among pilot customers.

Contributing to the cloud performance in the quarter.

Cloud revenue and it's now more than two times larger than our software license revenue.

This cloud revenue growth and combination with our steady software support revenue stream testifies once again, the resilience of our business model on.

More predictable revenue expanded by approximately five percentage points and reached 72% for the full year.

In Q4 software license revenue saw a significant sequential improvement and only 11%, reflecting strong demand for sap's digital supply chain solutions, and particular as well as significant competitive wins and ERP as Christiane already mentioned.

And our cloud and software revenue grew by 1% and Q4 and was up a solid 3% for the full year.

Our services revenue and turn was down 8% and for the full year, reflecting the increased scrutiny around larger projects earlier in the year.

While the vast majority of consulting projects continue to be efficiently delivered remotely and.

SAP <unk> premium services remain in high demand SAP is training business was impacted due to delays and reopening of global training centers.

Despite these ongoing COVID-19 impacts our total revenue increased by one percentage point to 27 9 billion euros also exceeding our revised 2020 outlook demonstrating.

Demonstrating the increasing the resilience of our business model and of uniquely challenging environment.

Now let me quickly cover all of original results from original perspective, we had a solid year and all regions and the EMEA region cloud and software revenue increased 3% cloud revenue increased 25% with Germany, Switzerland, and France being highlights.

The Arabia, and Sweden had a strong year and software licenses revenue.

And the Americas region cloud and software revenue increased by 3% as well cloud.

Revenue increased 13% with Canada being a highlight for the United States and Mexico had a robust performance the software licenses revenue the U S, Brazil, and Mexico held up well.

And the a P J region Scott's home turf cloud and software revenue was up 2%.

Revenue increased 21% with Japan, South Korea, and Singapore being highlights in addition, Japan as well as Australia, and India at a robust performance and software licenses revenue now.

Now moving on to the bottom line.

Well the gross margins of all of our cloud business models were up in Q4 and for the full year 2020 again.

Despite the negative top line impact from the COVID-19 crisis and particular, the lower transactional revenues. Our overall the cloud gross margin was up one three percentage points to 70 per cent for the full year.

Again, all cloud business models contributed to the strength.

Our sauce Pos margin grew by two percentage points to 71%.

And our intelligent spend margin despite the topline headwinds grew by another one percentage point to 79%.

And our infrastructure as a service margin grew by five percentage points to 34%.

Our software and support gross margin ended the year of the very healthy, 88%, increasing by 30 basis points.

As a result, all the all our cloud and software gross margin decreased only modestly by 20 basis points to 81% for the full year, even with the negative revenue mix shift effect.

Our services gross margin increased by two percentage points to 27% and 2020, but certainly of benchmark margin for services business across the industry.

This was mainly driven by a larger share of high margin premium engagement business, which has proven to be very effective and this virtual environment.

Also an increase and remote delivery led to a reduction of travel spend.

For the full year operating profit increased by 4% to $8 5 billion euros hitting the high end of our revised operating profit outlook.

This reflected the resilient and topline performance further improvement of our cloud gross margin and the disciplined approach to hiring and discretionary spend while capturing natural savings from lower travel and facility related costs and virtual events for example.

As a result, our operating margin expanded by 80 basis points to 35% and 2020. This is the highest level seen since 2015.

On an IRA for S basis, our operating profit and operating margin, but positively impacted by significantly lower restructuring charges as well as lower share based compensation expenses compared to 2019.

And for US operating profit grew by 48% and I for us operating margin by eight percentage points of 24, 2%.

Let me now turn to EPS and Texas.

I for us EPS increased by 56% non Io for us EPS by 6%.

This was mainly driven by of Stella contribution from Sapphire ventures, which had a significant positive impact on our finance income for the full.

The year 2020, the IRS effective tax rate increased by 20 basis points to 26, 9%, while the non Io for us the effective tax rate increased by 30 basis points to 26, 5%.

And we came in at the low end of our non out of for us tax rate guidance.

With this let me turn to cash flow of true highlights and this year.

And the uniquely challenging environment 2020 was a record year for cash flow and every single quarter as well as the full year.

Operating cash flow benefited from lower tax and restructuring payments and the very successful work and kept the management.

As a result of the operating cash flow for the full year reached seven 2 billion euros, approximately doubling year over year and significantly above the raised outlook of around 6 billion euros.

Likewise of free cash flow and 2020 reached 6 billion more than doubling year over year and significantly above the raised outlook of about four and 5 billion euros.

Forward to 2021, we expect operating cash flow of approximately $6 billion.

Primarily to reflect the moderately lower profit adverse currency movements in particular for the U S dollar and higher income tax payments.

While free cash flow is expected above $4 5 billion euros also impacted by a modest increase in capex.

Well, our detailed 2021 outlook is available and the quarterly statement published earlier today.

It assumes the COVID-19 crisis will begin to recede as vaccine programs rollout globally, leading to a gradually improving demand environment and the second half of 2021.

Our strong finish to the year launch of our new holistic business transformation offering rise with SAP and the other key strategic initiatives outlined by Christiane and position us well to meet our new outlook targets.

Note that our outlook is provided at constant currencies and we expect reported figures to experience continued FX headwinds is laid out and the quarterly statement.

In 2021, we also expect to incur between 150 and $200 million of restructuring expenses and the big majority of which is a noncash impairment of obsolete assets related to the modernization of our cloud infrastructure.

As usual these restructuring expenses will be fully recognized upfront and the first quarter of 2021.

Let me now turn to our non financial highlights and 2020, we saw a strong performance of our nonfinancial indicators Christiane already spoke about our strong increase in customer net promoter score of.

Our employee engagement index increased by three percentage points to a record 86%.

Our measures to decrease greenhouse gas emissions were bolstered by continued reduced travel due to the COVID-19 pandemic.

As a result in 2020 on greenhouse gas emissions, but only 135 kilo tons, a decrease of 165 kilo tons.

Looking beyond the numbers for 2020 feature at some great developments on the sustainability front we were.

Recognized by a number of ratings and rankings for our achievements, including making it to Cdp's a list of climate lead us inclusion and FTSE for good index, among others and the remaining for the 14th year and erode the number one software company and the Dow Jones sustainability index.

And 2020, we launched initiatives such as climate 'twenty, one and circular economy to enable our customers to make this transition and contribute to a sustainable future and finally I would like to update you on the value of balancing alliance, where we are actively executed our first pilot ending in November 2020 details of our findings will be shared and our integrated.

The port which will be published on March 4th 2021, and which I recommend for you read it and.

So before closing let me briefly talk about the call tricks IPO as Christian just discussed we are delighted with the outcomes of the IPO. This weeks, which represents a more than doubling and values since our acquisition two years ago.

And really the IPO of maximizes for tricks of opportunity to expand that business and build the best talent, while S&P continues to reap the benefits of majority ownership.

To conclude.

And 2020 of SAP responded quickly to the crisis and demonstrated its agility and and extremely tough environment. We grew the top line, while expanding operating profit and margin and delivering record cash flow.

We're now fully executing on our strategy to drive long term sustainable growth, while significantly increasing the resiliency and predictability of our business.

The launch of Rice with SAP SAP is accelerating customers move to the cloud and their business transformation. We are receiving very positive feedback and already see strong early take up.

And this gives us all of the confidence and the World Rich R 22 billion cloud ambition by 2025 the debt.

Let's open up for question Stefan Thank you Luca and we can now start the Q&A session of operator.

Thank you if you'd like to ask the question. Please signal by pressing star one on your telephone keypad, if youre using the speaker phone. Please make sure you're on mute function is turned off to allow the signals for each of our equipment.

Again lots of star one to ask the question, we'll pause just for a moment to allow everyone. The opportunity at the signal for a question. Thank you.

We will now take the first question from James Goodman at Barclays. Please go ahead.

Good afternoon, thanks, very much and it's clear you've been working closely with customers and partners. The ahead of the launch of for.

Our eyes on Wednesday, the <unk>.

And the pilot customers are already contributing to the quarter I was wondering if you could talk a little bit more about the rate of adoption and you expect king and over the coming quarters and perhaps specifically.

Whether you're expecting to this day this more as a sort of migration of license and potential customers to the new offering we are really focusing on existing movement of maintenance customers and how are you going to help us track the progression of rise from the K T I or disclosure perspective. Thank you.

Let me start and then Luca and Scott for if we to build on top I mean look James first of all when when we started to design the new offering we as I also said, we just kind.

And we listened very carefully to our customers and.

Too many chief information officers I'm talking to.

The main issue with that digital transformation is not the fact that the technology is not there the solutions on other they all of them.

And as the wound and how can you use this technology and connected to the business poses when you are.

Mike waiting and it landscape to the new cloud infrastructure.

No single business poses will change and HR and procurement and sales and with the new offering and it's really the sum of its path.

Taking the business poses intelligently and seek now you'll stand for such equate great fit we are taking that use our experience use the best practices, we see and the market from over 400000 customers and we can tell exactly the customer how do we design that business clauses, which business model works best.

Should the customers switch from product to selling so with the shoot a switch from up on license model to subscription and pay as the go as we do for example, and then we can go from there because as for Hana cloud can do it all the.

And again, the artificial intelligence the RPE when he would also then comes to lay on auto and it's not like that is the sight element and it needs to be part of one and this is how it comes together and yes. We started pilot I didn't want to push this off of just out there to the market. We actually started with 20 pilots we ended up with one.

Hundred 30, they actually had to come the film and field, a little bit down Scott I guess, that's fair to say, because we still I and the pilot phase and now we are you know of course public and now we go and of course for smaller for midsized customers, we will push for sure and see you know.

Short and the shortened sales cycles for some others it will take a bit but for sure. It will twice the celebration of S. For her on a cloud and both as you also have heard and my equation on with the installed base with where we help the conversion rate and second with a 40 per.

And net new customer share I mean, I don't know what to say more we also clearly winning market share and Luca maybe you can talk about the Kpis, yes, absolutely and first of all on this.

And our maintenance conversion versus new license topic, just give you an idea of Oh.

What we roughly are looking forward to.

You will know that our cloud.

Good ambitions until 2025 of them call between 'twenty and 'twenty, one and 2025 for of K Cup of round about 25 per se.

And obviously rise with SAP is a material contributor and if the.

It breaks down and what we expect in terms of contribution of from it.

No we see around about two to three percentage point of.

Contribution both from the conversion of established maintenance as well as from the conversion of new software licenses to cloud subscriptions, leaving basically high teens in terms of growth CAGR for the rest.

Of the portfolio of outside of rise. Obviously, we also recognize that it's very important for the capital markets to be able to transparently track the progress that we're making and we therefore intend to begin the enhanced disclosures as of Q1 'twenty 'twenty one.

Both in terms of.

The customer pick up on that Youre interested but also financial metrics that gives you a view of the size of the core business that we are moving to the cloud as well as the new customer success that we have from a financial perspective, so stay tuned for that but as always and SAP is committed towards transparency.

And you will get it starting this quarter.

Much appreciate it thank you and thank you.

Thank you the move to the next question. Please.

Well now take the next question from Charlie Brennan of that quite of Credit Suisse. Please go ahead.

Oh, thanks, very much for taking my questions I'm going to do two if that's okay.

Firstly on for you.

And you Luca I understand the concept so you're taking ownership of the holistic contract that includes both some infrastructure and services element.

And that's going to enable you to capture greater share of the wallets.

Can you just help me understand how those services and infrastructure elements of kind of flow through through your numbers.

And so those revenue pieces flow through the cloud line and in the future.

And I'm, assuming the because you're using partners to help deliver those services, it's not going to be the 80% gross margin can you just help us on the signs how're you kept the overall division so it's the way.

It keeps us on gross margin.

And then can I, just as a follow up lift and.

As to your <unk>.

On your midterm targets I know the free cash flow of it wasn't the parts of your formal targets.

And on the previous cool you were happy to employ the 8 billion and the free cash flow.

Seemed reasonable.

And in light of the 'twenty 'twenty, one guidance of about four and a half million and I was just wondering if that's still seems achievable. Thank you.

Yeah. So let me cover of the last one quickly because that's easy yes.

What we are expecting is that Oh as also of profitability targets have been pushed out by two years for 2025, So will the of free cash flow target. So we still see this as some are achievable target for 2025.

And that was probably the quicker one.

On the infrastructure and services side here now we need to be precise. So first of all we are bundling with the rise of cost of public cloud infrastructure and also certain automated product ties services for example, we provide.

Code analysis tools that allow our customers to inspect the modifications and.

And also help our services partners and to do the migrations swiftly business process intelligence is another example of where the base functionality that we are bundling with rise will allow us allow our customers and to quickly get a view of how they stack up against benchmark so to say in terms of their own process.

The process of Cape.

Abilities and what they can achieve in terms of additional automation and efficiency and as they move to as for her and on all of those elements as well as the public cloud infrastructure will be recognized as cloud revenue as part of the overall bundle irrespective of this we are also offering ourselves, but also our service partners.

Partners of course migration services in order to set up the systems dose would be recognized as services revenue separately, that's at the high level and how does distinguishes and in terms of the of the margin actually we believe that we can gain significant efficiencies through and industrialized migration of approach.

We have a cloud native reference architecture that we apply that as part of the migration actually simplifies the.

The the ERP of loads and Standardizes, then we use the business technology platform in particular to move modifications on over to run on the platform rather than infecting so to say the ERP cost and with this structure, we can actually run quite efficient cloud infrastructure.

Operations and so while the individual margin levels that we can achieve across the entire customer base will depend on the complexity of the individual customer situations and where the starting point is and how long it will take two and move them to weigh more streamlined operations in aggregate I can only assure you that those <unk>.

<unk> of course factored into our long range margin guidance that calls for us to the land in the neighborhood of 80% by 2025.

Okay. Thank you.

Let's take the next question please.

Thank you we'll now take the next question from Stefan Slowinski of Exane BNP pay per hour of Paul. Please go ahead.

Great. Thank you and I guess just to follow up on the last question on.

I understand the.

The the infrastructure related offering, we'll we'll be going through your your cloud revenue line.

Will you also the I guess passing through the services revenue from some of the partners of all of the partners through your service is largest of confirm is that what you just said.

No no as far as services, followed migration are going to be offered by partners that will go down and separately on the paper, but we will take the holistic ownership of running the solution itself all the way from the softwares and service layer to the infrastructure is the service there.

Okay, great. Thanks for clarifying and just a follow up to that on.

I guess the Christian just on the integration work that you've been doing across your of cloud applications.

I know, it's I guess part of rise to start to cross sell more and more of that but can you just help us quantify where you are on that process and maybe if you look at your 400000 customers do you have any data in terms of how many of those customers have at least two SAP cloud apps and what the pipeline looks like for cross selling those applications. Thank you.

Okay.

And the ASO I come to the last question first.

And men's cross sell opportunity, we still have thousands of on premise customers wanting HCM.

And of the mens still I base left for procurement.

And by the way now that the integration work is almost done we are also going to offer a bundled this year with as for on a including Successfactors employee Central and <unk> is now really comes of one.

We are almost done with the in the equation work data models and think.

And user experience and think.

Pushing out now in the applicator and the analytics layer for integrated planning for integrated the reporting and.

And we will also share and more detailed announcement and the next weeks, where we also have some couple of customer references in the customer and a P. J.

You know them well and on that one.

<unk> actually eight cloud solutions on the SAP.

And they now can cut the custom integration of already by 80% and we have much more of that the customers now feeling tangible outcomes and that's the third we are almost done and we will finish the west also then during half year. One this year and yeah I already mentioned the cross sell potential.

And again, we also going now to offer the bundled so in case the customer wants to go more portal can.

Can have the bundle and then in case they want to go <unk> and of course also consume it on the modular basis.

Okay. Thank you.

Let's take the next question please.

We will now take the next question from Phil Winslow from Wells Fargo. Please go ahead.

Great. Thanks for taking my questions Congrats on the strong.

Close of the year Christian.

The question for you from what Youre hearing from customers, obviously, there are lots of different.

Flows and dynamics affecting and potentially the shape of this year, obviously, hopefully you have a sort of of post vaccine world and the economic recovery of sort of like what we saw on 2010 and sort of return of SAP projects. But then also you have a lot of technology as you just mentioned with rise with SAP.

For that you're delivering with customers that maybe needed to kick the tires on it et cetera, and maybe even expand usage of SAP. How what are you hearing from customers on I guess the flows the flow of these impacting the year and projects.

And so Scott is with US Scott I can start and Ute and churn kind of true.

Just comment on what you see across the globe and.

I mean look the what we also have seen in Q4, while the positive is how well and we are on the value chain of our customers I mean, other and talk about how they help to the.

The liver the vaccine we are wanting the supply chains. We are wanting the productions. We are now in this time, we are more closer than ever for these enterprises to help them scale the production to put them into the cloud to connect them to the business network, but that they get the ingredients for the vaccine.

From the Asia Pacific Asia Pacific to the.

The us to the fact that we and the U S. Despite the country lockdowns ease of wheel business and Navios. This is what we are doing and this also then gives us the confidence to be very positive about 2021, obviously, yes, we acquired the travel and expense solution, but also day I have to say.

We this is the by far market leading solutions. So we are of course eagerly waiting until we can all travel again, but they will come back day will come back strong and actually I'm still surprised that we are still doing business with the solution. These days and when you have heard Luca and I'll also talking about the 27% growth rate of SaaS.

Path and you look at the valuation of Quad weeks, you you know that we have many and many other assets in our portfolio will actually calling and on like what Rick. So youll see we our portfolio as well of and our portfolio of strong and maybe Scott you can give some sand demand from what is actually what you are seeing across the globe, yes sure.

Christian and thank you all.

Based on the discussions with the customers more and more of their customers are very comfortable not only in the cloud for the technology, but for the mission critical applications because they know the transform into served in the car.

Customers now and in the future the need to differentiate and not just that the technology layer, but the business process.

And the innovation and that's why they're coming more to Asia.

You combine that with the business transformation is the service and ensuring that they don't have an upfront capex investment and in fact pay over multiple years as they realize the business value so that holistic subscription offering through rides with the safety, but of all of their SaaS portfolio is giving you really strong confidence that the cost.

And as around the world are not only positive, but they're actively working on the digital transformation programs with us so the Antwerp and strong.

Okay. Thank you.

Let's take next question please.

We will now take the next question from Julian Serafini at Jefferies. Please go ahead.

Alright, Thank you and I have two questions I think one of your question I think you had mentioned that as for Hana cloud was that roughly 80% of the features of the regular for future Thats for Hana is that an impediment for the adoption of rise and I guess, how do you plan to close that gap to the regular for future, Let's Rihanna and then second question for Luca just in terms of.

Capital allocation, obviously SAP he is using and generating a lot of free cash flow right. This year, and then kind of in years and should shareholders be expecting some kind of incremental return and I know you talked back in 2019, and I believe it's about doing the annual step by step of returns and I'd be curious to get an update on and what the plan is here.

And so I thought and and Luca you can build on top.

Julian the the first point the time of lives with S&P is now and.

And to tell you why the things are now coming together and when you look at S for on our cloud we have put the data model on our platform. So yes, we have 80% of the capability is now available in the cloud publicly and some hard and now we will not exactly also develop the same kind of capabilities as we did and on plan the cost of business model.

Is that changing and you will also find customers, who put and that authority of wound the business process, which is really where we individual to this customer and that's why it's so employer part of that the platform the smelter and by the way. The platform has also not therefore successfactors for Eva and platform is now part of every deal to build the extension.

All of our customers and we also and white our partner for our ecosystem to the party because now everything is down this platform to just build seamlessly day extension and path times now why should you go to and SAP cloud platform. When we don't have the same services like our applications you know, it's there and this is why.

And we are now launching the offering Weiss with SAP and this is why we are so confident and again, you'll have seen and my keynote of customer like Siemens obviously, it will take time to transfer them completely over USD and the number of ERP part day will now start they will start and we migrate them step by step.

And on every step we will look at one business pauses after another and we will deliver them tank the business benefit.

Yeah, and perhaps on the on the use of capital look our philosophy is unchanged from what I had shared with all of you at our capital markets Day and night.

It was in November 2019, if I'm not mistaken.

And indeed, we had a very strong free cash flow and obviously now for realized additional proceeds from the call of tricks IPO, but the logic is always the same first of all we want to fund our organic investment needs and in.

And now for this year and next year that envelopes and includes also of the harmonization and modernization of our cloud infrastructure, which will result in some additional capex requirements then.

We want to continue to deleverage and payback of outstanding depth. When it is true. This year, we'll actually have a rather big chunk of debt returns that we have to still make on one we are still one and two 5 million billion of.

Of euros of the equal for its term loan outstanding that we want to repay and 2020 and another $1 4 billion of regular.

Eurobond repayments.

The.

The second beyond that of course, we want to pay an attractive and increasing dividend and we had a very strong net profit which is the baseline for the dividend payout in 2020, so while the final decision on the dividend is going to be taken by our supervisory board and the lead.

February is always.

It is safe to assume that based on this and our policy to pay out more than 40% of net profit and Io for us terms.

And we'll see an increase the dividend payout from S&P.

Last but not least we obviously also want to continue to consider value accretive tuck in acquisitions, if they make sense and the last two quarters you have seen that we have acquired the masters and the customer experience space as well as now lately Ignacio.

Those are smaller acquisitions of coupons, which we can payback from our strong cash flow and we will we will do so and then the <unk>.

The remaining.

Excess cash if we have it something that we of course, we would consider for incremental.

Capital returns, but on that one we will follow the process that we have outlined.

This will be evaluated in the context of our final year end results by the supervisory Board and.

And if there are any additional measures that we will decide to take and we would communicate them afterwards as we have done in 2020.

So the same procedure.

So in the past of let's say.

Okay. Thank you.

We'll now conclude from that.

And for Matt.

Mohammed <unk> from Goldman Sachs. Please go ahead.

Great. Thank you very much of hedged for two questions first Luca can you just help us.

Bridging the gap and.

And updated our cloud backlog disclosures that metric casino deceleration of growth, but you also talked about the 27% growth and the cloud business X transactions should we therefore anticipate over the next several quarters of that sort of momentum may potentially snow and then as the sort of bookings.

Excellent reaccelerate the based on the environment.

And we shouldn't and see that certainly accelerated yet.

And then related to that I know, you're sort of Christian alluded to the sort of the broader portfolio and I think Luca you indicated just on the 800 million revenue run rate for <unk>.

As for Hana cloud can you remind us again of the kind of big pieces of the kind of assets you have.

As we think about that sort of cloud growth rate moving forward and and the kind of on pipeline and opportunity.

Thank you.

Yeah, Let me start and MTV is always the Christiane and feel free to complement here first of all of its important to note.

When I talk about on the growth rate of our software is the service platform as the service business. This is excluding the entire intelligent spend group not only transactional revenues in the intelligent spend group, both concur as well as Aruba and feed lots of also have a fixed committed.

Subscription business and that obviously as part of this.

Revenue line as well not only the transactional revenues.

In terms of the of the growth profile of first of all the we're extremely pleased with the strong order entry performance that we had in Q4 and our cloud business side was by far the best one that we had seen in the entire year. So based on that strong performance as you know it always takes a bit for this to find its way into the P&L and due to the delay.

The nature of revenue recognition and the cloud subscription business and therefore.

And I believe that you will see and we will see the trough and our growth rate and cloud in the first quarter of.

'twenty and 'twenty, one and from there on we should see a reacceleration based on both.

The strong performance in Q4, but also the confidence that we have that now with programs like rise or new solutions that we are bringing to the market as well as the starting momentum that we see and the the rest of the portfolio.

We will actually be able to reaccelerate and grow the business at higher rates for the remainder of the year.

In terms of the businesses that we have and this soft part of strong.

The chunk of outside.

Outside of intelligence spend.

It's a variety of.

You have solutions like Successfactors on the human experience management solution in there you have solutions in there like as for her and our cloud which is growing very fast.

On the business technology platform assets.

As well as analytics in the cloud.

And you'll have our CX customer experience portfolio with commerce with the.

And the CRM.

On cloud solutions.

And finally, you also have <unk> in that space as it is also a SaaS and Paas solution that gives you a view and.

Of course, those assets are of varying size and Barry and growth levers.

But the ones that I've cited before like commerce like a platform like us for on a cloud are all at the assumed you the.

Scale and grow and also very very fast typically in the mid double digits.

Okay. Thank you, let's take the next question please.

Thank you we'll take the next question from Michael breached of UBS. Please go ahead.

Thank you and good afternoon, thanks for that.

And getting it on just two from me and Luca you gave and interesting insight into the ecosystem yesterday Wednesday on your right presentation. I think you said that the infrastructure. The third of its opportunity underneath that SAP is about 10 billion of yeah, how much of that and you're expecting to be under your pay per view like buy.

2025, and then also look are you you talked about the investments and cloud harmonization of converged infrastructure and also indicated I think in October the there might be of slower margin progression and the cloud for the next couple of years can you maybe just give us the feels the should we be expecting overall cloud modules to be flattish this year.

The increase of little bit on some.

And some insights directly.

Yeah. So first on the on the on the cloud margins because there are having on <unk>.

For you.

So our expectation is that despite the investments that we're taking all of the cause of the next two years, we should still see a modest increase and the cloud margins in 'twenty, one and and 22, but then of significant step up as of 2023. When we have concluded that work very much in line with what you saw.

And actually it's in the past, while we were going through the harmonization.

<unk> of the database layout of you might have.

Remember that we had a slower progress for a while and then after Successfactors also last year of rebar was done and you saw again, the step up and that would be a similar trajectory that we are expecting also for the cloud infrastructure of harmonization of arc and on the <unk>.

On the infrastructure as a service share I really can't give you such a share because we are not breaking out of the.

Public cloud infrastructure piece actually we are offering our customers choice as we have said they can actually select the public cloud infrastructure. All they can elect to go with SAP is one converged cloud.

So we obviously have an overarching revenue ambition for our rice with S&P the fuse as I said the.

The ambition to reach the 22 billion euros and cloud revenue by 2025, but within that.

Really cannot give you a breakdown between public cloud and converged cloud infrastructure and Michael maybe just to build on that from a business perspective, because I also saw comments around why should actually also the customers to decide to go with the bundle I mean from a business perspective, I mean, when we think about what kind of workloads.

Do we want and so here, we talk about production and here, we talk about fine and here, we talk about logistics and.

And when this is down all wet lights on and.

And in this case, you don't want to go too sweet different parties and ask Okay, who is now actually what is now actually the root cause you want to go to one accountable party ideally the one who sits on top and figuring out the wood costs with monitoring tools across the stack and this is something what we should never forget when we talk about why.

Is that there are clearly also some reasons why business wise for and Chief Information Officer. This could make sense to really go Y S. P Y while you can still have the best of the best.

Okay.

Thank you we have time for two more questions.

We will now take the next question from Adam Wood of Morgan Stanley. Please go ahead.

Hi, good afternoon, everyone and thanks for taking the question.

First of all for me can I just follow up on the last comment question around.

Many of us will see that the value of the bundle and the ability to deal with one vendor, but to the extent and youre going to be able to protect margins on the bundle of the gross profit level and therefore of Mark up some of those services, what's the risk of that bundle just becomes too expensive for customers versus independently contract and they see the value of where it is but because you're marking up to get the margin.

Do you want to be at it's just too expensive for them to go to.

And then secondly, just thinking about distribution.

There's been a lot of change and the leadership of the sales organization on the last few years could you maybe just give us under the update on the team that how you see things progressing and then maybe particularly where they are with readiness to sell rise, which is giving us the bundle again quite a different sale maybe from gathering and just starting of simple echelon of upgrade so of customer. Thank you.

Good questions. Adam So first of all of when it comes to the margin you can be rapidly and sure Luca it's watching US and then and then second no but seriously. It's potent I mean, we are talking here about billions of of <unk>.

Consumption billions of workloads and lift that we of course also getting pretty attractive cost of late and so we of course also calculated it's where of course, the stack and that's not forget for and installed based customer and now there is still also of conversion rate and so that you knew.

And really need to see this off as a holistic off of that as well you also coming on top of the commodity coming with the platform coming with F for Ana and with regard to the changes.

I mean look at the my and I were looking at it Julie and now joining us from Microsoft I guess, he will be a great credit asset to the team she will help us tremendously to pitch the.

On the product marketing to the innovations we are going to deliver and then obviously Scott feel free to comment on the on the sales side, but especially in Q4, we have seen a huge uptick and North America actually the wheat and of the quarter. We have strong swung state sales couple of sentences there with DJ but of course also with Paul.

And from the not us, but I'm really feeling confident that we have the wide team together, but Scott please chime in.

The issue and so I guess of couple of comments to two of them to give it a bit of color on the is the first is the.

The sales organization and in fact, the customer success organization as Christian mentioned, it's actually very stable leadership, that's been in place for a number of ease that understands the market understands the needs of the customers and is able to navigate the change secondly, also as Christian mentioned and as we were launching a pilot and Q4 we were on.

Also enabling our organization and 40000 women and men.

And the customer success organization about rise on the offering and as we will refining and offering we were also being ready and in fact, just this last two weeks, we've launched the largest customers succeed summit. The brought all of our of our customer success organization 40000 people, possibly the 10000.

And partners in not only of Keycorp bought it enablement and preparation so we're ready to go and and what.

What is great ease of the customers are ready to engage so.

We're looking forward to foster on.

Okay. Thank you.

Let's now take the final question. Please.

We will now take the next question from net of thought.

For the bank. Please go ahead.

Yes, hi, and thank you for taking my question.

Actually one.

Christian and I am just spent a lot of your efforts on the integration of the products, probably something that has not been and focus of S&P on the previous leadership. So can you give us the feeling about you mentioned the increasing customer satisfaction.

How would that impact your expectations regarding the whole migration cycle, two as for Hana and which percentage of your customer base are you expecting to have migrated on to 2027, when the standard maintenance scheme of the extensive maintenance runs out.

Yeah no. Thanks, Thanks, a lot for the question I guess it always helps when you have been yourself and the shoes of the Chief operating officer and when you have it now.

And now under your leadership, because then you really feel the need for having really and integrated solution landscape and as I said early on we are almost done and our core applications and I'll speak the same language. So theyre not only transferring data technically from left to right and we've set of <unk>.

And on what comes with it the cross sell opportunities and what's mentioned before and it's still thousands of customers wanting line of business solutions on Prem and with that now we of course also will bundle all of us. So that we can bundle of our solutions much better but compared to on Prem the customers left chart. They can go into a modular landscape.

Highly standardized and build the extension and then next to our core applications on our cloud platform and this is for me of course, I'm, saying and what we have factored into the plan but of course, it's the huge benefit for all of our customer. This is and what S&P does and for many many years, we are back and we are now.

Of course also innovating, let's also not forget we've talked so much about in the quake and sometimes.

And I also feel and a 15% of our development capacity is actually focused on integration and so that's 85% left yes, we're doing localization and we are going to support our customers no matter if the Brexit out there, although we do that as well, but again, there's also a lot of capacity left for building new innovations every day and.

This is what we are going to do.

And I'm really looking forward to also highlight everything what we do on their cost basis for a lot.

Okay. Thanks.

Thanks, a lot. This concludes our Q4 2020 earnings call and thanks, a lot for participating and I would say goodbye.

Thank you thanks, a lot of takeout bye bye.

That concludes today's call. Thank you for your participation you may now disconnect.

Yeah.

[music].