Q1 2021 SAP SE Earnings Call
Good day and welcome to the Q1 2021 earnings Conference call Today's conference is being recorded.
I will turn the conference over to Mr. Stefan Gruber head of Investor Relations. Please go ahead Sir.
Thank you good morning of the afternoon. This is Stefan Gruber head of Investor Relations at SAP.
Thank you for joining us for our earnings call to discuss the first quarter results 2021, and I'm joined by the CEO Christian Klein and our CFO the Cabo.
We will make opening remarks on the call today. It also joining us today for Q&A from Australia, It's called Russell, who leads our customer success organization.
Before we get started the usual I would 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 facts are forward looking statements as defined in the U S. Private Securities Litigation reform ex of 995 words, such as anticipate believe estimate expect.
Forecast intend May plan project predict should outlook and will and similar expressions as they relate to <unk> are intended to identify such forward looking statements.
SAP undertakes no obligation to publicly update or revise any forward looking statements and all forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect sap's future financial results are discussed more fully the net.
<unk> filings with the U S Securities and Exchange Commission, including SAP <unk> Annual report on form 20-F for 2020 filed with the SEC on March four 2021.
It depends of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of the dates.
On our Investor Relations website, you can find the slide deck intended to supplement todays call available for download for those of you. Following the webcast. The slides will be shown as we proceed through the prepared remarks.
Unless otherwise noted all financial numbers referred to on this conference call are non <unk> and growth rates and percentage point changes are non <unk> at constant currency year over year the.
Or non <unk> financial measures, we provide should not be considered a substitute for the superior superior to the measures of financial performance prepared in accordance with <unk>.
And finally I'd like to mention that SCE will hold its sapphire now customer conference virtually again this year kicking off on June 2nd.
And in conjunction with Sapphire, we will hold the financial analyst event on June 15th the post details and our website in the coming weeks and with that I'd like to turn things over to our CEO costs. The outline yeah. Thank you Stefan and Viacom everyone lots of our Mysore.
For calling into the detail, let me say this.
I couldnt be more proud of what our teams have achieved this quarter.
The flow just an amazing start into 2020 work and.
And our performance clearly confirms our strategy to drive business transformation and the cloud.
We saw competitive strength and our entire cloud business.
And clearly winning in the quoting market with strong order and quality across our portfolio, all and top of our rapidly growing platform, serving as the foundation for a modular integrated and innovative application of landscape for our customers and partners.
<unk> is worthy of game changer, only two months after market introduction the pass.
The offering and the market for business transformation.
Altogether on the back of swarm of new cloud business and an uptick on the renewal Cowen cloud backlog quote we accelerated sharply.
Looking at the bottom line, we achieved the highest Q1 operating profit and our history.
This quarter of one of the strongest quarter in the history of Asap.
Let me go now into a bit more detail on the most important part of the business cloud.
Q1 was the blowout quarter and the cloud with all of the fastest quotes and new cloud business and five year, which boosted our co and cloud backlog.
19% the sequential acceleration of five percentage points on cloud revenue as we all know cloud revenue trails business performance and so exactly as expected cloud revenue quotes has bottomed out at 13%. It's important to look at the quake down of disclosed of course, our cloud.
Yes.
Our soft part of cloud solutions outside of intelligence spend showed tremendous growth of 24%.
That includes the stellar 43% quotes of Esfahan of cloud.
On the other hand intelligent spend performance, which includes concur is still muted by Covid of course, both transactional and committed business. However, once travel returns, we expect concur to rebound significantly building on its market leading position.
Looking ahead 12, and by our strong order and cloud revenue growth will accelerate from here, especially.
Especially since also the strong year over year headwind and transactional revenue are coming to an end in Q2.
Rapid cloud quotes will continue to drive for Silicon and credit.
And the ability of our topline performance.
And our sales more predictable for predictor.
Predictable revenue, it's approaching 80 per se.
And also for the remainder of the year. Please note that we continue to expect the pressure on our software license revenue to increase the again and.
And we anticipate a pronounced decline for the full year aligned with our cloud first strategy as quote was of course, our cloud business of silhouettes and wise with the SAP continues to gain momentum.
Let's move onto customer success, where the strong start into the EPS also reflected and approximately 4008 hundred net new customers.
Together with our partner ecosystem, we delivered more than 6000 and go lives.
And we have now more than 6004 hundred customers wanting SAP.
As for other our market, leading core ERP solution.
And the first quarter alone we saw more than 250, when the place and competitive solutions underlining, our relentless focus on customer value.
Let me highlight a few key wins and go lives. This quarter by on Tech has chosen has chosen the SAP four Hana cloud as the integrated ERP system for the entire kokkola.
Hello, and a global medical technology leader and speeding up at the business and digital transformation with Weiss with SAP.
One of the world's largest supply of C&C controls twice and the industrial of wallboard successfully implemented successfactors.
Replacing all items similar to the sale a world leader in the animal nutrition with selected Successfactors of Walmart.
It was indeed, a strong quarter for Successfactors.
Which was also chosen by Ikea, a wealth of Liza and home furnishing.
Let me be clear.
We are and the business of customer success.
And that's what we prefer to talk about.
Seattle.
We cannot let wizened unfounded claims made by one of our competitors go entirely and commentary.
Personally I see it.
Positive sign that one of our main competitors and so much time talking about S&P on their own earnings call.
Let me tell you we.
We have been through that customer list and the confidentially, we checked this claims.
Absolutely encourage you to do your own research talk to the customers as we did.
The latest IDC ERP data also helps to put things into perspective.
It shows that S&P has taken significant ERP market share since launching <unk> and 2015.
And to those who attended the earnings call and one of our competitor.
Some of the customer names on the slide will sound familiar.
I'll leave it at that.
Of course, what ultimately matter is that so many companies continue to join our journey to the intelligent enterprise.
Consuming differentiating business capabilities retiring the old legacy systems.
And I couldnt be more proud to talk about two great customers today, Google and Toshiba, who have done just that and show what is really going on in the market.
For the last year, we further strengthened our relationship with Google.
Migrating their financial systems to ask for.
And as you already know they also selected Qual Twix and went live for Lockheed.
We continue to expand our work with Google cloud to support showing customers and that transformation to become intelligent and appliances.
Similarly, Toshiba selected SAP <unk>, the world of choice and thought tremendous value and replacing the legacy financial systems with SAP.
And so SAP.
And now front and center of Toshiba Global transformation.
And the all in the day placement of our plan.
Landscape of.
Competitive legacy software within Toshiba.
Finally, let me give you an update on the execution of our strategy and our financial disclosure.
As you know our strategy is to deliver the the intelligent enterprise and the cloud.
Providing customers with and intelligent integrated mattila cloud suite complemented by solutions built by our Wi Fi and the natural ecosystem of partners.
All based on our development and integration platform the PTP.
That has a broad range of FX.
But here are the two main things we are doing one.
Take our customer base to the cloud and core ERP the.
Most demanding but also most rewarding category and cloud tool.
The at least the S&P business technology platform Ft Foundation, allowing customers and partners to one of the enterprise based on once the medical data model and securely integrate S&P and non SVP applications and the cloud.
The business technology platform also provides the application and citizen developers the ability to quickly build new apps and extension of using the same services.
Our own SAP applications.
We are done and finalized our work on integration and in fact, the S&P indications for use suite and essential part of the PDP one of the gotten the customer Choice Award 2021 ahead of other third party platforms like most of those.
The wise with SAP offering launched in January twice both of these aspects.
This is the answer to the how the customers who are waiting for and a perfect match for the business transformation needs exposed by the crisis.
We take customers by the hand, and transform the enterprise with superior business both of the intelligent capabilities based on our unmatched pulse of expertise for <unk>.
But 25 industries.
And I'm happy to report wise is off to equate zone.
We are seeing massive early success, having already closed more than 100 deal in Q1 alone.
Now I want to provide you with transparency and our progress and taking core ERP to the cloud.
As you know the overall ERP categories broadly defined.
It's been financial management, HR and procurement capabilities SAP.
The cloud ERP revenue, one way and is now approaching 6 billion euro.
And if you remove the HR and procurement module and look at the capabilities offered and S for Hana cloud <unk>.
As for Hana cloud can be really see and that's the kind of core ERP.
And that shows we are already seeing strong adoption here.
Q1, and for Hana Cloud has achieved current cloud backlog of more than 1 billion Euro.
It also shows the momentum beyond China in Q1, <unk> of the cloud category was the largest new business contribution and amidst the impact of Covid.
Venue and current cloud backlog were up.
The <unk> suite per se.
And Thats, just the beginning of the churn and keep in mind.
We only launched wise with SVP and of January.
Now before handing over to Luca.
One of our key competitive advantages is coverage and in depth understanding of 25 industries.
As you know we are making this and innovation priority either with our all of the sauces or try and play with partners.
And what the S&P industry cloud is all about.
The recently announced dedicated unit for the financial services industry is the.
Perfect example for this.
Over 80% of the top 1000 and financial institution, and so already wanting an SAP for her.
Hello.
And now we are celebrating Dana waste and power customers on top of our platform by partnering with David.
They are investing more than half of 1 billion Youll go and do this chart and business.
And so this partnership is the showcase and not only for the importance of the platform and the ecosystem.
But also for our strategy of doubling down cloud innovation and keyword.
Let me sum it up.
Last year, we have updated our strategy completed the realignment of the company.
Focus SAP P on the success of our customers.
And now we are in execution mode, and the future for Sap's price.
Q1 was the perfect start and proof point for our strategy.
Why is with SAP already worked as a salad weighted up for customers and business transformation in the cloud.
He is also setting of SAP.
<unk> become the largest <unk> solution platform with innovations built path and our over 22000 and partners.
Last but not least and where we.
Much looking forward together with my Dear Board colleagues to welcoming all of you called for.
The financial Analyst Conference on June 15th.
Over to you Luca yes.
Thanks, a lot Christian and Hello, everybody for my side as well, yes, Indeed, as Christiana said, we had a unique start to the year in many ways. We had the highest order entry growth across cloud and software and five years, while posting the strongest increase and non <unk> operating profit and margin and a decade.
Let me and I'll provide you with some background and the key drivers behind this exceptional quarter.
And the first quarter, our total current cloud backlog re accelerated to seven 6 billion up 19%.
This was driven by a sharp acceleration of new cloud business across our portfolio as well as a strong start for rise with SAP.
As for how the current cloud backlog exceeded 1 billion euros up 43%.
This was propelled by a triple digit growth and new cloud bookings for us for her now.
Looking forward the strong new cloud business performance is expected to Reaccelerate cloud revenue growth.
In the quarter cloud revenue was resilient and increased by 13% for more than $2 1 billion euros. Despite the continued impact of global travel restrictions on coal and cross business.
In fact, we grew our SaaS pas revenue outside of our intelligence and business by 24% and the first quarter.
And as for our cloud revenue contributed 227 million euros up 43 year on percentage year on year and is approaching a 1 billion euro annual run rate already.
This cloud revenue growth together with our steady of software support revenue stream is increasing the resilience and sustainability of our business model.
Our more predictable revenue share expanded by approximately two percentage points to a record high of 78%.
Software licenses revenue also saw the fastest growth and five years and was up by 11%, reflecting significant competitive wins and both ERP and digital supply chain.
For the first three months, our cloud and software revenue grew strongly by 6%.
Our services revenue was down 14% year on year.
But this includes the effect of the divestiture of our SAP digital interconnect business in November 2020.
Consulting projects continue to be efficiently delivered remotely.
And SAP is premium services in particular remain in high demand. However, sep's training business is impacted due to delays and reopening of global trading centers.
Our total revenue increased by 2% to $6 3 billion euros.
Now before moving to the bottom line, let me briefly give you some color on our regional results.
We had a strong performance across all regions and the EMEA region cloud and software revenue increased by 7%.
Revenue increased by 24% with Germany, and Switzerland being highlights.
And the Americas region cloud and software revenue was up 3%.
Cloud revenue was up 7% with the robust performance in Canada and Mexico.
And the a P J region cloud and software revenue increased by 11% cloud revenue increased by 18% with Japan, Australia, and Singapore being particularly strong.
Let's now look at profitability and gross margins and the first quarter.
I am proud to say that the gross margins of all of our business models were again up in the first quarter.
Despite the negative top line impact from the COVID-19 crisis in particular on our transactional business. Our overall cloud gross margin was up by almost 20 basis points, reaching 70%.
And all cloud business models contributed positively to the strength.
Our SaaS Paas margin grew by 50 basis points to 71% of.
And our intelligent spend margin grew by 40 basis points, reaching 79% and our infrastructure is the service margin grew by almost two percentage points to 33%.
Our software and support gross margin grew likewise, very healthily by 80 basis points to 86%.
Overall as a result of our cloud and software gross margin increased by 10 basis points to 80%.
The gross margin of our services business increased sharply by six percentage points to 29%.
This was again, mainly driven by a larger share of high margin premium engagement business, which has proven to be very effective and this virtual environment, where the increase and remote delivery of led to a reduction and probably spend as well.
And the first quarter of our operating profit expanded significantly by 24% to $1 7 billion euros.
This reflected the strong topline performance and combination with the cloud gross margin improvement and our disciplined approach to the discretionary spend while capturing natural savings such as lower travel and facility related costs and virtual events.
Just as a reminder, the prior year of Q1 included the cost of approximately 36 million euros in relation to the cancellation of our in person and Youre Sapphire now and other customer events as well as still normal traveler behavior.
As a result of our operating margin expanded strongly by almost five percentage points to 27, 4% and the first quarter.
And in Io for S basis, our operating profit was down by 21% to $960 million and our <unk> operating margin was down over three percentage points to $15 one per cent.
Both the <unk> operating profit and margin were negatively impacted by higher share based compensation expenses, primarily related to quality ex IPO of awards as well as the restructuring expenses related to the accelerated harmonization of Sap's cloud delivery infrastructure.
Let me now turn to Texas and EPS.
And the first quarter for us the effective tax rate for a substantial reduction to 20% down by seven seven percentage points the.
For us the effective tax rate likewise saw a significant reduction to 18, 7% down eight five percentage points.
This decrease is mainly resulted from tax effects related to changes in tax exempt income and the one time change and deferred tax liabilities for taxable temporary differences associated with investments in subsidiaries.
We are also updating of our effective tax rates for the full year, we now expect and I have for as effective tax rate and the range of 26% to 27% and the non Io for as the effective tax rate of $22 five to 23 five per cent.
And for US EPS increased by 29% and non <unk> EPS significantly rose by 63%.
This was mainly driven by another stellar contribution from Sapphire ventures to our finance income.
In combination with the lower effective tax rate and the share count reduction following the share buyback and early 2020.
Let me continue with our cash flow another highlight.
After a record performance and the first quarter of 2020 operating cash flow as well as free cash flow continued to be strong.
Our operating cash flow increased by 3% two of $3 1 billion euros being positively impacted by lower share based compensation and restructuring payments.
Free cash flow was up by even 10% to $2 8 billion euros supported by a year over year reduction and Capex.
For the full year, we continue to expect operating cash flow of approximately 6 billion euros and free cash flow is expected to be above $4 5 billion euros.
So continuing with our financial guidance.
As you know we raised our 2021 revenue metrics, reflecting the strong performance of our new cloud business, which is expected to reaccelerate the cloud revenue growth.
We continue to expect the software licenses revenue decline for the full year as more and more customers will turn to the rise with SAP subscription offering for their mission critical core processes.
The outlook also continues to assume that the COVID-19 crisis will begin to recede and succeed programs rollout globally, leading to a gradually improving global demand environment and the second half of 2021.
Before closing allow me to briefly talk about our non financial objectives as well.
In early March we published a ninth integrated report another milestone on our holistic steering and reporting journey.
Well underscore our role is front runner and climate protection, we are accelerating our move towards carbon neutral operations.
The pandemic has clearly taught businesses how to work with customers and colleagues effectively and the virtual setting.
Anticipate the development towards more remote work to continue and therefore, we aim to become carbon neutral and our own operations by the end of 2023 two years earlier than previously targeted.
So to conclude we are highly encouraged by the broad strength across our solution portfolio in the first quarter of 2021 and.
And the midterm SAP expedite it shifts to the cloud will accelerate topline growth and significantly increase the resiliency and predictability of our business.
Thank you very much and we will now be happy to take your questions.
Thank you operator, you can start the Q&A session now.
Thank you.
And I asked the question. Please signal the by pressing star one on the telephone keypad.
If you're using a speaker phone. Please make sure your mute function is turned off to other signal of chance reached our equipment.
That is start once the ask the question.
Pause for just one moment.
Okay.
Well you would note.
We will now take our first question from Kartik Mehta for Evercore ISI. Please go ahead.
Yeah, Thanks, very much and and congrats on the quarter.
Yeah of course I was wondering if you could just talk a little bit about the Americas region I realized revenue was a bit of a lagging indicator.
But that was obviously you know a little bit weaker obviously culture had an amazing quarter of last night. So I was just kind of can you just parse out sort of what youre seeing I guess from a bookings perspective, and then maybe some of the dynamics on more of a product specific dynamic meaning it is a lot of that just sort of the intelligent spend side sort of weighing on the Americas I was just wondering if you got some color there.
Or are you of any thoughts there. Thanks.
Thanks, a lot of for the question Christian here and then of course as you did one year worth of successful quarter of without like to hand. It over to you look I mean, yes. As you have rightfully say cloud revenue is the lagging indicator and I don't Wanna here and I'll highlight one particular.
But I have to say, what DJ Pony and his team really delivered this quarter was just fantastic from an order and we of perspective, both cloud and also in all of our on premise business. So we are very happy how the business develops there and especially with wise with S&P also in conjunction with the Hyperscale.
We already closed some very significant deals the pipeline is strong it's very strong and also we are now ramping up for the industry cloud capabilities, which also worth of nature of the market like public sector extremely well Scott would you like to add some color to that.
Yes, sure Christian and and thank you for your kind comments look I think you said it well they had a very strong quarter. Obviously in terms of bookings I think theres a couple of other factors just to bear in mind the first piece.
And the comparison on a year on year basis.
<unk> was obviously a bit stronger we had other regions that were impacted Asia and parts of Europe with Covid and the first quarter, whereas actually and at Q1 last year was actually very strong for North America.
More importantly.
Our bookings together with the acceleration and the strong sentiment the customers in North America, telling us directly that the rise with SAP.
Is I.
Clear requirement and how they run the businesses going forward.
Together with the really strong performance across the cloud portfolio that was mentioned at the beginning of the call.
And that should Reaccelerate, the Americas cloud revenue going forward.
Together with obviously, the the research and ties concur and travel restrictions start to ease and and businesses are able to move around more going forward.
And that's really helpful and maybe just one follow up for <unk>.
No go ahead go ahead.
Sorry, guys.
Oh. Thanks, I was just got one follow up of Coca.
Yeah, if I could just one final piece of policies.
If I look at if we look if we think about sort of the balancing out of obviously the license is going down, but obviously some potential efficiency gains on the opex as we go to a more sort of hybrid world. How do you. How do you think about that meaning and when we get through the other side of Covid. What are some of the learnings you've had from an operational efficiency perspective.
And is that sort of factored in or do you think there's some upside as we come out the back end of this in terms of sales and marketing and.
And basically just the other sort of real estate costs things like that thanks.
And first of all I would argue that we have really been extremely disciplined when it comes to.
Avoidable cost we have not sacrificed the future of the company. We have continued to invest it in particular and innovation and R&D.
We are essentially.
Over the course of the last two years, including and organic growth of around about 2000 additional employees and virtually all of them.
Actually the R&D engineers. So in this respect we continue to invest and you see also that therefore of rightfully the R&D ratio goes up but as far as the rest of the concern of course, we take advantage of the natural savings on the trouble of front and we're also running a tight ship and the other discretionary ex.
And what's the what Atlas is the key reason and for the significant increase and profitability.
And all of Us Covid slowly gets behind us.
I'm absolutely certain that we will not return to a full of Pos normal sort of say because we have seen that many things can be done very efficiently and the virtual and remote environment. Nevertheless, there will be a third and move towards more of a physical meeting still I think of hybrid model is the reality and that.
We will that we will see and you rightfully mentioning as well that on the on the software and while Q1 was obviously very positive and with the growing adoption of rise and certainly we continue to expect the whole blood pressure and software licenses, having said this the main factor that contributes.
Two of our profitability is really the revenue mix that we expect.
And the beauty of this is that once this mix shift effect has.
Taking the full hold of which you expect by the end of next year.
Fully anticipate that this will make room for outsized growth and profit and therefore, the profitability of actually we expect that we will see sizable double digit Roe of already starting in 2020 three and then of further acceleration and the yet to come and so the model of shifts that we are pursuing and that we are exiting.
Upon is actually in Sap's best interest.
Okay. Thank you.
Let's take the next day.
The next question please.
We will now take our next question for Marc Modeler for Bernstein Research and you go ahead.
Thank you very much and thank you for taking my question also wanted to congratulate you on the additional information disclosures, you're giving on S. For Hana cloud I think it'll be extremely helpful and I'd like to ask a question that I've had recently for quite a number of clients can you give us some color.
On the renewal rates of on premise ERP are you seeing any meaningful change and revenue overturn overtime and then I have a quick follow up.
Mhm and perhaps I can take the question on the support of revenues and renewal rates.
No and the underlying the.
The board performance is actually quite resilient.
So that we are pilot and I'll hit the second quarter of flats and <unk>.
Cloud revenue growth, but that is obviously due to the quite negative software revenue performance and.
And then of course, we have as a proportion of support revenues that is actually wanted to churn that is converted into cloud subscription and that's part of the.
The cloud extension cases, but there we also have a very stable development in the past few years, we were always comfortably.
And beyond and above the conversion factor of two.
And actually Q1 was not an exception to this.
We had and even higher conversion and sector. So all in all of the main factor that is dictating. The support revenue development is really the development of licenses on the rest we have actually a.
Very robust and resilient performance with continued high renewal rates.
Beautiful and then a quick follow up as clients are looking at rise with the S&P are you seeing increased cross sell demand for you the other cloud offerings.
And that's.
Very good question and the actually also directly also alluded to our new strategy.
Now that we have finalized of of walk on range equation sharing one data model sharing the same security layer of sharing the same extension of layer, obviously wise with SAP will also help.
The other lines of businesses Big time, because when you are for example, today and ECC customer you move to the new platform and you move to a module of the landscape, obviously and now we have much better cross sell opportunities. The migration is much moola, you again get all of the benefits of wanting the and apply it and a really integrated way.
And the modular way, but integrated way and you will also watch out for Sapphire, We don't we don't stop with wise, there will be new offerings coming because we listen to all of our customer. The we'll see some industry of flavor to that we will also expand a little bit of a call, but again, it's all about the customer choosing the wide margin.
And for his business requirements.
Thank you and thank you.
And let's take next question please.
We will now take our next question from Stefan Slowinski for BNP Paribas. Please go ahead.
Yeah.
Yes, Thank you and good afternoon, and thanks for taking my question I guess just to start.
I'm just wondering if the S for Honda revenue and backlog, if youre seeing any maintenance migration towards the subscription contracting.
And you just mentioned maintenance of course was flat and the quarter should we now expect that to start declining and and will you breakout that conversion and if it is happening.
Yes, Stefan let me quickly answer this and so so far we have not really seen a per.
Pronounced migration of maintenance revenues it was in Q1 actually.
Negligible some of them.
Couple of millions of of maintenance revenues I mean, as we move to large engagements on the rise.
Certainly and should start to increase a bit but that effect out actually into our planning and our guidance already in Q1, and certainly we had a much more modest impact from this.
And Oh, we had originally planned for so it looks actually very healthy and very incremental what we're able to drive with rice let.
Let's see how that plays out over the coming quarters, but for now as I said also on the on Mark's earlier question and it's business as usual and the cloud extension multipliers and or actually even edging up and Q1 over the course of over the last few years.
And maybe just a great and that yeah, and just the bill on that very quickly I mean, you also have heard of those.
Saying that we have close to 5000 net new customers. So that clearly also signaled it's not only about the installed base and even for wise, it's the high and net new customer share because when we are replacing and we are really the place and competitive ERP system. Then of course, why the ideal of two <unk>.
Most of my equation for the data models building consisting of.
And the consistent data layout and of course also redesigning the business processes to truly transform the business and so its installed base, but it's also a large share of net new customers and.
Christian is absolutely right I mean, just given up and but we'll do something and as we disclosed we have more than 400 as for additional customers in Q1, and we had more than 100.
<unk> sales for the first time actually in Q1 of our share of as for on our cloud customers.
<unk> are the one of as for on premise customers, but that tells you as well and that actually more than half of the us for her and our cloud customers were not coming through rise, but we're actually net new ones.
Okay, great. Thank you very much.
Thank you Stefan let's take the next question please.
We will now take our next question for Michael price from UBS. Please go ahead.
And thanks good afternoon.
For the following on from that I guess, I mean Christian and thank you said that you expect and the licenses teach to turn more negative as the year of progressive. So can you talk a bit about the pipeline mix between rice and on premise for asphalt and.
And you know I think Luca you've set of the 60% of the licenses two years ago was that score and digital supply chain and so on the CMA is still the majority and it's good for the customers want to adopt it any which way, but just from the margin point of view. If you continue to see license outperformance will you just let that flow through to the bottom line or would you.
The accelerate your investments and.
Related to that just on the hiring it looks if I exclude the seeking the avia. The you only added about 300 people in the quarter, which seems odd given the margin guidance for the year can you maybe just elaborate on how we should expect head count to grow through the balance of the year.
Yes, I can get started and Michael and then for the pipeline question. Scott also please feel free to chime in.
And then look.
And why it's worth launched two months ago, and obviously and many many conversations with Ceos across all industries. They are completely getting at that day now need to move also with the core business processes to the cloud to get better visibility across the supply chain to get more resilience to react faster.
And to changing market conditions to adapt to new more digital business models et cetera, et cetera, and so this is what we see now of course for especially for the large transactions that take some time, but all of the customers are really and are willing to do this move and so with that obviously, we see definitely of shift now, especially.
And the next quarters to come.
And that shift from the on premise to the wise with the S&P pipeline, Scott anything to add from the arsenide, Yeah, just to give it a little bit more color. Thanks Christian so the pipeline growth for Raj. It's been accelerating every week since we launched so as we've been able to share interact and talk to the customers the.
<unk> growth has continued to expand reflecting the interest in the and the cloud based flexible architecture and and the transformation is the service.
And clearly the dialogue with the customers who of regard existing.
<unk> SAP ERP landscapes are the and validating the strategy, but the sentiment is a fast much white faster acceleration into the cloud which is represented into the pipeline.
And as compared to the on premise and we expect that to continue.
And then last but not least certainly on the hiring of the.
Organic hiring of round about 300 people and Q1 and Youre right on that and certainly not representative of what we expect to see.
And for the entirety of the years of hiring volumes will certainly go up in the.
And the quarters to come and so certainly not talk about 300, but perhaps rather of something like 3000 of additional the higher ups throughout the course of the year.
Yeah.
Thank you Luke and take on the tax rate is that is that sustainable or was that just the one year effect.
The cash flow.
Cash flow side I must say.
Thanks.
And the tax rate sorry.
Well I think two points on that.
The one time effect and certainly not sustainable just to give some flavor to it.
And we acquire quadric, so we recognized a share of deferred tax liabilities and anticipation of a legal entity integration of the quadric subsidiaries into SAP, which would have given the rise to additional tax charges now that the call tricks is gone IPO and obviously those plans are.
And not valid anymore and that's why we did recognize studies <unk> and that is certainly a one time effect of the other one around the tax exempt income debt mainly depends on the contribution of Sapphire ventures to our overall results because they are.
The value of appreciations and corresponding gains of.
Our two of logics and tax exempt income and so.
Our success kind of proceeds and the.
The contribute more in the.
Given quarter of debt part would certainly also be sustainable going forward.
Thank you.
Okay. Thank you.
Let's take the next question please.
And we'll now take our next question from Johannes Schaller from Deutsche Bank. Please go ahead.
Yeah. Thanks, and also congratulations on the good quarter for my side, maybe for my first question just coming back to the point of the U S. The.
Relatively slower growth and cloud revenues here.
And what you're saying in terms of the backlog and the order entry, but can you may be give us a bit more color for the S. Four on the cloud backlog, maybe how much of that you see coming from the Americas and stared decent size and the and also maybe for the overall cloud backlog so to give us a bit more comfort that.
The cloud revenues and the U S and the Americas start to Reaccelerate growth as well and then look at the second question you mentioned that the conversion rates in Q1 was a bit higher than the.
Normal more than two times that I think the up alluded to before I understand the numbers are quite small and probably quite volatile, but do you see that there is any kind of structure of reason for that or is that just really quarterly volatility you would see it. Thank you.
Yes, perhaps I can try two of them to cover all of those questions of sell more technical in nature. So first of all on the backlog composition of clearly the told the current cloud backlog is to a quite significant extent still influenced and fueled by the Americas and.
And North America that's.
Just simply due to the effect of that a large share of our our renewal volume of our existing contracts is there and therefore of cost of has also a significant impact on the current cloud backlog and as Scott and Christiana, a set of North America, and absolute blowout quarter of new cloud bookings and also of quite resilient renewals per.
And so you will see that number that's.
That's the technical reality move up again from a growth perspective, and then I think this discussion will quickly be.
And behind us on the as for them.
The current cloud backlog, it's slightly different because that business was established a few years ago at the point in time, where the cloud was already quickly becoming a preferred deployment model for customers on a global basis, whereas it originally started very much in North America, and therefore, the current cloud backlog and as for <unk>.
And is more evenly distributed across the different regions, but still of course with of quite a significant contribution from North America.
Well.
And so what was the last question again, Jeff.
On the conversion rate that you see with within the score being of the tire and Q1, if there was anything.
Kind of a structural trend, maybe you're absorbing all of the status more quarterly volatility.
So I think it's mainly quarterly volatility as you have seen we had a slightly higher share of net new customers. In Q1. This year then for the most part and the last few years quarters, but we were edging up from 40% to 50 per cent and by definition. If you have of net new customers and there is also no conversion chart and so to say.
And of that probably was the main contributing factor, but again, it's a rounding error and with the number in Q1 really does not play such a significant role I'm confident though that the general.
And that we have seen in the past few years will will hold and that we will certainly continue to see healthy conversion rates for maintenance to cloud.
And that's very reassuring. Thank you.
Thank you, let's take the next question please.
We will now take our next question for Adam Wood from Morgan Stanley. Please go ahead.
Hi, good afternoon, and thanks for taking the questions and congrats from me on the strong start for the air as well and can I ask two please first on rise with the feedback we get from customers. So far is there's obviously lots of interest and then we can see that and the backlogs, but there is some confusion given the complexity of the offering could you maybe talk a little bit about the educational side of this.
How long it takes to get customers over those hurdles, where the sales force is on achieving that.
And then secondly, one of the other big debates I think we have of losses around the public cloud offering that SAP has could you just give us a quick update on where do you see that in terms of functionality versus competitors and against the on premise offering and could you talk a little bit about adoption is that now and the market able to be adopted going well and how would that be different for the mid market.
The <unk> versus large enterprise in terms of how they think about cutting public or private cloud. Thank you.
Yeah.
And so Adam and thanks, a lot of first of all and I will start and and Scott you can build on the enablement side of our Luke.
Look I mean wise.
And again, it's the and offer which is now two months out I actually get very positive feedback and also about the simplicity of the day.
Because when you see what happened and the path of.
A lot of our customers really already did the move to the cloud day moved and did the technical migration to the hyperscale than they had and ERP provider than they had and operations provider. So that three parties to talk too, which is not very healthy and our win.
And one and one issue is coming up now and we take that put it into one offer and we would each of two more than one the business case on Tcl and we actually moving to the cloud, but we also driving of business transformation and we do that by taking the Hyperscale is with us with our friends of our partner and we are.
Of course, taking the existing operations of our customers with US we leave the migration part of obviously and our up to the customer to decide because of the migration is really depending on the size of the customer and again there. We also go with and ecosystem first of all of course, we also keep a strong focus on the qualification and the enablement of the.
And that's also and Thats actually.
We are estimating extremely well as you have seen already and the backlog and with regard to the internal enablement and Scott can you just share. Some comments. Please yeah sure happy to so as we mentioned at the beginning in the last earnings we were about to embark upon the the learning and enablement of all of the sales and field.
Pricing for nearly 40000 people.
And what I can say is we successfully launched that and have completed that for all employees.
Not only the sales force, but also our services customer success and and engagement teams.
Since the launch we've been done are sick and the duration because as you could and expect to as the feedback comes from the customers and.
And then working through the questions that they have we further refined and in each of raise it again and we're launching the next.
The release of the the internal enablement to be out of further explained.
I'd also add as a point of note that we have had extensive learning and engagement with all of our strategic partners. The systems integration and business partners, who have enabled the service teams their business transformation change and working in collaboration on the capability of rise with the SAP.
<unk>.
So you can expect going forward of continued capability with SAP and its partners to be able to wean the the vital questions.
And as asked about the capability of the rise and then the and the ability to be out of move with speed and agility to be able to adopt and consume the platform.
And then with regard to the question of wound therefore on a public cloud I mean, we have customers like pwc over 100000 and users of the system.
Completely wanting and as for on a public cloud because the customer cannot tier.
And to the standard template, we are having and we have many more of those customers, especially in the professional services and the suite now, let's talk about manufacturing and when Youre wanting 100 production side. The customer is not always be able to go fast why the way to the public cloud, but again their wives kicks in and we're giving choices.
Is that okay for procure to pay already quote to cash you already okay. Let's go back to the public cloud and we moved the production side at the later point when we have done the homework also on standardizing and of the business posted on standardizing the data model. So we see this and also according to different industry and of course.
All of the size of the customer met of because.
It's always thoughtful question how serious is the customer about the Greenfield approach is the willingness from the top and Thats the standardized business processes. So why we often it's about the customer because of the technology as we have some very large ones already technology is there and also the best practices of that it's all about the cost of.
And the willingness of costs and also to standardize and move forward.
Increasing cash.
And about the the move of the of with rise with the SAP. It is important to note as we announced with.
With the over 100 customers moving to rise with the SAP ease.
Even within a two month window, so despite of but between the period of launch to when we closed the quarter, we've had fast acceleration and adoption and move to cloud to rise with the CIP, which does show you the particularly for customers in that small and medium market and are able to move quickly theyre doing.
Clearly the large and very complex customers may take more discussions given their landscapes, but we're very confident that we can help them navigate that.
Okay. Thank you.
The next question please.
We will now take our next question from James Goodman from Barclays. Please go ahead.
Oh, great. Good afternoon, and thank you, yes on the cloud revenue growth and encouraging to see.
And the cloud growth healthy the key for lateral and the backlog step up materially I mean, given all of the comments on the school around the success of Rice I saw I mean, the transactional revenue is coming back in and H to call. The tricks is outperforming its standalone guidance and <unk>.
At the low end of the cloud guidance, but I'm wondering.
If you can talk to your confidence and exiting the year is the growth rate above the the guidance range of or maybe talk to what it would take and intensive rise adoption to to push and to the top end of the range for the current year and.
And secondly on the cloud gross margin, which held up across all three segments in the quarter.
I was under the impression.
The the.
The portion of the investments that you spoke to you back in October and to.
And to accelerate the migration of customers of legacy infrastructures would weigh somewhat on the on the cloud gross margin look you mentioned and I think some effect of that this quarter and the opex, but I was wondering if you could clarify that and.
And you know the extent to which you anticipate cloud gross margin to and be weighed down the tool over the coming quarters by five of those investments. Thank you.
Yes, Thanks, a lot for I'm, sorry, I'll take both questions. If I may so first of all on the cloud revenue guidance look after Q1 is now out of our way with the great performance.
And the new cloud bookings they are actually only two variables left for us and I think on both of them. We will have a much better view. After Q2. One is obviously, our Q2, new cloud bookings performance because frankly everything that comes afterwards will not significantly move the needle on the cloud revenue side anymore and.
And the second one is obviously the transactional revenues.
I think on both of those we will have a quite.
Quite a good handle after Q2 and.
And for now it obviously it feels very good on the momentum side in terms of new cloud bookings again and transactional revenues.
A little bit depending on the external circumstances.
We will certainly be and are positioned in two of a very precise view on where we will and.
And after Q2 and.
For now it looks very positive on the gross margin side and the cloud I think I said this already when we talked about our Q4 earnings.
Despite the investments that we take in.
And our harmonization of our cloud infrastructure.
We still expect that the cloud margins in the different business models will continue to edge up.
And we'll be slightly of course.
Brought down by the investments that we are taking but not to the point that it would completely overshadow the efficiency increases that we are continuing to drive actually for us and the short term. The it's more of the combination of this element with the revenue mix shift effect the.
Intelligent spend solutions as you know half of the highest gross margin and other normal circumstances, if they hadn't been a let's say normal to be anticipated proportion of the entirety of our cloud business that would have been driving our cloud gross margins already today up to a more material level.
With the transactional revenue is bottoming out and then the coming back as of next year. There is certainly potential also in 2020 two even though we will step up the additional investments and the cloud harmonization and 2022 to continue to see the cloud margin expanding slightly bigger.
Cause of all of the other components continue to grow and so it's really mainly of a picture of the mix between the three business models and then as of 2023 and we have these harmonization of investments behind US then for sure we will see a much more significant step up and similar to the levels of increases that we have seen and when we were finally.
Rising the migration of third party databases.
The success factors for example.
Very clear thank you.
Thank you and the next question please.
We will now take our next question for Neil steer for Redburn. Please go ahead.
Hi, Thanks, very much for taking the question just a quick sort of technical question and thinking into the success of variety of Hana I think Luca you mentioned that you had hundreds of right sales go through in the quarter. My understanding is as the customers embark on the rise program. The first and they need to do is sort of assessed the code base that they've got.
And of that Port make the decision as to whether they can either go immediately by the public cloud route tools and go to the the per.
Our cloud path, which is effectively moving to the subscription model.
Using the underlying on premise technology of the 100, you've signed and the first couple of months is it price received was the vast majority of gone down the second half.
No we have actually I mean, it depends on what Youre talking about from <unk> from.
From a number of transactions perspective, its actually quite balanced from a revenue contribution perspective, certainly the private cloud related portions would be contributing more just because of the volume that the customers bring.
And maybe it sounds like the build on that.
And just to build on that I mean, you have to realize that.
This was SVP, that's always the business technology platform.
Embedded and with that we also then moving our customers to a new platform.
All of the application of our technology hip on the business technology platform. So also the extensions will not any way we have done and our.
And net we were on Prem and modifying the core ERP. They are getting built now on the platform. We actually saw a massive uptick on the BGP adoption and Q1, because now also the ecosystem and of course, the customers want to keep the standout now clean and this is why we are not only shifting of workloads to the cloud.
And also the ecosystem is with us and again for some customers. It will take time until they get fully standardized system and make the move to the public cloud if they can they are doing it already now, but some for some of the lots of it will take time, but also already there the extensions will be built more and more and our cloud platform.
And less and less of modifications and the on premise flow.
Okay. Thank you and just a quick follow ons and that as we look out to your strategy and the the margin and the profit improvements are expected to country of 23 through 25 do you have in mind, what level of your customer work lately needs to be on the specifics in the public cloud platforms and go into 'twenty, four and 'twenty five.
Yeah, So I can I can take that as well when the.
And when you look at the <unk> calculation and you also of a single instance of the multi tenancy and sense of what you have to see the customer at a certain size and day you cannot go to our competitors like Salesforce and workday and at a certain size. You also it doesn't really matter because you don't put more cash.
Most of the one tenant and because it just scale the whole hardware scale the platform scale, the whole technical landscape scale of cost and ill for the cash.
Customer now with smaller T shirt sizes with less data actually that we of course to apply the multi tenant youre doing this today and they are already today. The bulk of the customers are actually going to the public cloud. So already today, we hit the ratio and there is no doubt that we are going to hit the wage nuance of going forward.
Okay. Thank you for thank you.
We have time for two final really brief questions. Please.
So we will now take our next question from Mohammed <unk> from Goldman Sachs and go ahead.
Great. Thank you and.
Afternoon, and congratulations on the quarter I had two quick ones. One you talked a lot about sort of new bookings momentum and I was wondering if you could give us some sort of qualitative color around that I know you don't give that out any more but just to give a sense of how faster and is running relative to the overall and cloud backlog and.
And then secondly, just in terms of the rise can you give us a sense of the split today because of the lower of the logo and name is seem to be more mid market customers of <unk>.
Either of the Hungary.
Sure.
Already signed up for the pipeline and what is the mix between your kind of more enterprise scale.
Our customers versus mid market.
And and related to that.
And as you as you move customers what is the sort of upsell in terms of additional product that youre getting in that and those discussions. Thank you.
And I will take the first one is I and the hobby historian.
Yeah on the table and then.
On the rise, what and I will refer to as Scott and Christiane, Yes.
Yes, you are right I mean, we're not disclosing new cloud bookings separately anymore, but we have said that this was the highest growth that we have seen in the new cloud business and the last five years and.
As the reference.
In the last five years, the second best quarter that we had where we still disclose new cloud bookings was in Q3 2019, where.
And where we had 39% constant currency growth.
The best.
In 2015, so modern and five years ago. In Q4, 2015 was actually at 63% and constant currency growth. So that tells you that our growth in the Q1 2021 will have been somewhere in between and.
I would I would hit and that it was not too far from the Golden Medal.
And with regard to the order and we makes the out between large and advisors and our SME business actually for why is it not any different than for the rest of our business and we see of course with the terms too.
Bookings for all of that.
And there we see a higher share coming out of the large enterprises. When you look at the number of transaction and the bulk of the two and transactions of course.
And what comes out of out of the SME business actually.
Actually I will check that even the and also that one we'll now move a bit more upbeat and more to the large and applies.
The segment because also with regard to number of.
Transactions, the Scott already alluded to that at this takes a bit more time the deal cycle a bit longer and Thats why we actually expect that auto and the number of transactions and I will just shift a.
A bit more than also leaned towards the large enterprise segment.
And and above one more.
With regard to the cross sell.
And that's actually now also the big competitive advantage of finally, having our business technology platform, there and again when our applications are using the same application logic. The same data model first of all day become more sticky which is why we good for the renewal rate.
And the EPS to come and second obviously cash.
Customers are forgiving and when that is the best of breed when the.
Whereas maybe two or three more cool feature.
Won't share the same data model doesn't share the same security model, especially for web and mission critical applications of sensitive data.
The reason to then go with as the Pea is of course and a much higher going forward than when you are just competing best of the fleet and this is why we definitely also expect a higher share of cross sell opportunities going forward and we will also launch of few more bundled for wise, where we also definitely.
And also now exposed.
The cost because we cannot and will also deliver it out off the box.
Okay, great. Thank you.
Now of the final question.
We will now take our final question from Waller from Baader Bank. Please go ahead.
Yes, thanks, very much just a quick one of you talked a lot about the Americas and I think it was quite remarkable to see the rebound of EMEA. Despite the ongoing headwind of the pandemic and the first quarter. So can you give us some ideas of what were the drivers here from a product perspective, and the drove the acceleration of growth and also the.
And you see here and increasing willingness of customers again looking through the pandemic to return to to do transformational projects. Thank you.
Rob would you like to take that question yes.
Yeah sure. So I think as you saw in the and the Europe region and also in the Americas as well as a P. J, we sort of couple of consistent themes, which differently came about the first.
He is the cloud portfolio across all of the different areas human experience management customer experience Kristian mentioned before the business technology platform with incredible growth.
And our contract portfolio. So we saw.
A significant.
Lift in terms of day are there net new order entry in the EMEA range of other regions across the portfolio. Notwithstanding all said the commentary that we've made about rise and also with this for Hana the.
The second is.
There is a clear indication and the feedback that we're getting from the customers that the prioritization of digitizing the businesses as they start to look and coming out of the pandemic and looking at the future of the business means the digitization to be able to transform having and agile platform to run the business is now at the very top of the.
The agenda.
And as and I look at the opportunity cost and the competing investments that theyre looking at the Digitization and being able to run their agile business to run flexible and resilient supply chain to be able to make sure that they can compete with new business models, that's driving some much of that demand. So we do expect.
And a lot of the the initiatives that are being kicked off in Q1 are the to transform the.
The businesses, whether it be around hiring and retaining the best talent or to operationalize. The mission critical ERP processes in the cloud going forward or in many other areas such as customer experience. So I guess the answer is yes, we see that the indicators and we expect that to continue going forward.
And also let's not forget the vertical I mean, and Ics EPS at best and worst last week.
Council of where we talked about the automotive line and when I see the in the S&P industry people talking on high level of Wow.
And supply chain traceability of wound, making the carbon footprint more transparent around how can we really optimize the inventory across the Oems. The supply is really down to the raw material. This is where I feel wells can do that and the software industry and this is also for of the keys to and to not only.
Lay on the Hartley from lab, but Gulf of that use the date of use the platform and built some world class vertical industry solutions and this is where all of our expertise and Y O Y O y to witness.
Thank you great. Thanks, so much.
This concludes our Q1 earnings call for today. Thank you very much for joining and we look forward to seeing you at all of Sapphire and our conference in June and thank you very much take care, everyone and thank you.
Thank you.
This concludes today's call. Thank you for the park and frequency.
Disconnect.
Okay.
[music].
Yes.