Q3 2021 SAP SE Earnings Call
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[music].
Good day and welcome to the <unk> Q3, 2021 earnings Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Mr. Anthony <unk> Chief Investor Relations Officer. Please go ahead.
Good morning, everyone, what com and thank you for joining our earnings call to discuss it could be Q3 results.
On a personal note I'm delighted towards my first earnings for therapy.
He's a distinct honor to serve in this capacity.
With me on the call today are CEO Christian Klein and chip.
Okay.
Make opening remarks.
Joining us today for Q&A from New York City is cut muscle who leads our customer success organization.
Also with us in the room is Stefan Colbert my predecessor.
We now have successfully completed though and other welcome Stephane would you like to say a few words before we start.
Thanks, Anthony and congratulations to your appointment and thanks also for the Great cooperation and the partnership during the last weeks I really enjoyed our collaboration.
They just want to say briefly here that it's been a privilege to engage with the financial community over the last 18 years and now I'm looking forward to my next chapter and I can do this at <unk>.
Because I know the financial community is in very good hands with you Anthony So back to you.
All right. Thank you Stefan and now to the Safe Harbor.
During this call we will make forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations.
Paul.
Forecasts and assumptions that are subject to risk and uncertainties that could cause actual results and outcomes to materially differ.
Additional information regarding the sweeps and uncertainties, maybe found in our filings with the Securities and Exchange Commission, including but not limited to the risk factor section of S&P.
<unk> annual report on form 20-F for 2020.
On the S&P and vessels relation website, you can find the deck intended to supplement today's call are available for download.
Yeah.
Unless otherwise stated all financial numbers on this call for us and growth rates and pathology.
It's a point changes are non Ara for it.
Here at constant currencies.
The non <unk> financial measures, we provide should not be considered as a substitute or superior to the measures of financial performance prepared in accordance with IRS.
And with that I will now turn.
Is that your question yeah. Thank you Anthony and Stefan and thanks to all of you for joining us today.
I hope everyone is staying safe and healthy.
Q3 has been an outstanding quarter.
<unk>, new cloud business led to a 22% growth.
The Colo and cloud backlog.
Which for the first time surpassed 8 billion euros.
When you were rates are also strong and keep improving reflecting where we high customer satisfaction.
It's clear that our approach with customers with <unk>.
In career facing unprecedented pressure from a combination of factors.
<unk>.
Hi chain disruptions to changing work life and of course climate change.
A year ago, we ended June our new strategy.
Which directly supports our.
Customer and that's where I think the challenge.
Sap's strategy.
Right.
Our unmatched threatened in developing deep customer partnerships to drive holistic business transformation.
At the heart of our applaud if Weiss with S. P.
Our offering for business transformation in the cloud.
Which offer suite key benefit.
First.
It helps customers develop adopt and automate new business model, thereby becoming intelligent enterprises.
Second with our business network.
To speed <unk> network in the World, we help our customers create more is still again supply chain by connecting them with the vast community of suppliers and manufacturers.
Third we are uniquely positioned to help our customers improve their queen line.
No one is.
The larger player than S&P to how companies put in place the most energy efficient business processes.
We at S&P.
Weighted by the lower we play to fulfill our mission to help the world run better and ultimately improve People's lives.
It's been a key part of improving People's lives is a strong partnership between the technology sector and government.
This critical partnership became crystal clear during the pandemic.
From contact tracing apps like our one app downloaded nearly 75 million times in Germany, two vaccine distribution.
Whereas in Germany, or the U S or elsewhere. We are encouraged by discussions about new investments in infrastructure education, and healthcare with digital transformation at that call.
Let's now turn to some of the detail behind our quarter.
We are seeing excellent progress in the cloud.
Strong growth across our lines of business applications.
Our cloud revenue growth accelerated sequentially by three percentage points to 20%.
Higher than most of our large competitors.
This is the second consecutive quarter of increasing close.
And we expect this to continue.
During Q4.
We have seen new cloud business in Q3.
With the highest Q3 close in six years.
In both ERP and human experience management, our new cloud business is growing faster than our largest competitors.
Oh.
Our revenue grew 5% year over year.
Our third consecutive quarter of increasing overall revenue.
I talked about wise with S&P at the start of my comments.
We ended June this new offering just in January this year in Q3 has already.
Already been and not a great quarter.
As an important strategic dynamic behind it.
Specifically strong wise momentum accelerates the move to <unk>, Hana cloud and even more important the S&P business technology platform, which in turn leads to strong adoption of our modular.
Wall cloud ERP, including Sap's line of business and industry applications.
Why is with S&P is DNA Pla.
Customers can analyze benchmark and redesign their business models and processes based on best practices collected.
400000.
Customers.
This dynamic enables us to more effectively cross sell to our installed base.
And led to this quarters strong momentum.
In Q3.
As for Hana cloud backlog grew by an impressive 58% up from 48% close in Q.
And building a strong foundation for future cloud revenue.
In Q3, our S. Four on our cloud revenue grew by 46% up from 39% in Q2.
At the same time, we are winning market share with more than 50% of Esfahan, our cloud revenue coming from new customers.
As that starts from the UK and Philips domestic appliance are among hundreds of new customers choosing wise with SAP.
Thanks to why it's with S&P, we're seeing equally strong momentum with our line of business applications.
In Q3.
All of our main solutions through new business.
New cloud business by double digits.
We saw double digit cloud backlog flows across our whole portfolio.
We are seeing positive cloud wins with <unk> against <unk>, including wins with Alita and global International.
And were further invested in <unk> showcasing deputy.
The belief that <unk> will continue to transform that business by simplifying the integration of acquisitions and new product harmonizing that data and lowering overall costs.
We saw several wins against workday with our human experience management solutions, including this quarter Moy Park.
<unk> UK based food company an.
In our CX business, both cloud revenue and current cloud backlog grew again by strong double digits.
Fire and selected S&P customer experience solutions as part of our broad portfolio to streamline their end to end business processes.
<unk> energy was a key win for <unk>.
We are also why are we excited about our new multi year agreement with the U S Department of defense for SAP concur.
We signed a strategic long term agreement with Reckitt for SAP analytics cloud.
Our business technology platform, which underpins.
The strengths across our lines of business applications also grew well in both cloud revenue and cloud backlog customer.
Customers. This quarter include <unk> Softbank Corporation, Yamaha Corporation, and one of the less.
For the first time, our overall cloud ERP business.
Spanning our line of business applications.
We did 6 billion of annual revenue one way as we extend our wireless offering to include Mattila, ERP and new industry solutions, we expect our overall cloud ERP business to continue to grow well.
In summary.
This has been.
<unk> another excellent quarter.
Our results demonstrate that our strategy is taking hold and it's delivering at an accelerated pace across an expanding set of markets.
We are optimistic about the momentum we are seeing and we are raising our outlook once again.
In closing I want to spotlight a critical imperative that is at the heart of our transformation.
Sustainability.
We are delivering major new advances to help our customers reached a net zero goals.
Recently introduced S&P product footprint management.
<unk> is designed to help customers reduce the footprint of their supply chain.
Later this year, we will launch S&P responsible design and production, helping companies build sustainable outcomes into product design.
Shortly after we will launch SAP sustainability control tower, providing customers with transparent.
And inside our own Deb progress to net zero.
However, our ambitions go far beyond individual product.
The U N climate change confluence Cop 26 is happening next months, putting a spotlight on the enormity of our climate change challenges.
With no Thinktank government multilateral organization, our business can solve this problem alone.
Businesses to play a significant role.
The ability to see inside and outside your organization across manufacturing supply chain and critical business processes is crucial.
This.
Is the unique advantage <unk> can offer.
We enable our customers to managed equity in line with as much as important as the bottom and the top line.
You will see US continue to lead significant innovation on this call. In addition to building strong business coalition.
Let me close.
On a personal note.
Thank you Stefan for leading Investor relations for the last 18 years.
We can actually still remember when we when we the two of US met for the first time together at work in New York and Ive often the impairment you took me out to a concept at central Pi and <unk>.
After that.
You worked with six fields our.
Our market cap increased six fold.
And due to pop believe it or not 75, earning call.
I have enjoyed really working for you and I am also very thankful for your personal friendship and of course on behalf of SAP.
We are really equate for your dedication integrity and create work.
We all wish you well for the future.
At the same time, a warm welcome to you Anthony Coletta, our new Chief <unk>.
Investor Relations Officer, Anthony has held a number of key leadership positions with SAP.
Most recently as CFO for North America.
We are delighted to have Anthony in this new role.
And I am sure you will all enjoy getting to know him.
Thank you again for joining us today, and let me know and over to Luca to talk through our results in more detail. Thank you very much.
But before I get started I would also like to say a big Thank you to you Stefan for many years of partnership and friendship.
Counted it as well and we have to get out for 31 quarters.
And of course, countless roadshows and investor one on one meetings in between.
Chris Judd.
Actually I have to say.
Unlike on the <unk> side of the House you only had to work with two Cfos I'm not sure whether you consider it a blessing or occurred but.
And I also hope that shouldn't create too many headaches for.
For you as we were going through all of these meetings, but I always Jen.
Enjoyed working with you and also the sense of humor.
Even in the wake of more difficult times, I think we were always able to uphold.
I should disclose here.
That Stefan is also an excellent piano player and recently gave a play to be in.
It was getting 50 a month ago.
And so the least that I can expect now.
Having a little bit more time to practice is to get the fluid recorded concert at least every quarter.
Ending so all the best to you Stefan and really once again, a big Thank you for all of your dedication to S&P and also.
So to all of the Great work with me personally at the same time Anthony I'm also really looking forward to working together with you in this new capacity.
Been working together, a long time and I was the CFO of <unk>.
Customer operations, you bought ahead of SPN and then.
It became a CFO in both mature and emerging.
It cuts in Mexico, Latin America, and North America, and I think youll bring a great understanding of our business on the ground as well as the transformation that we have been going through to the table and I'm sure investors will come to appreciate this and the personal dialogue with you. So once again congratulations.
King.
Looking forward to many more quarters together with you at least 31, let's see.
So with that out of the way.
Let me come onto my review of the quarter, which indeed was an excellent one across all key financial metrics Kristian just talked about some of the business.
And then customer wins, but at a macro level, what we can clearly see is that our customers are choosing us.
To redefine and optimize their end to end business processes. This is reflected in the strong rise with S&P adoption that continued in Q3, which gives us high confidence to comfortably exceeds the 1000 customers Mark.
<unk> by the end of the year.
I would now like to give you some more details on how our accelerated momentum translates into our financial results and what we expect to see going forward.
In the third quarter growth of current cloud backlog continued to accelerate reaching 22%.
That's an increase.
Mark percentage points over Q2.
That acceleration was driven by an even stronger than expected bookings and renewals in the third quarter.
This pickup for specifically driven by a strong contribution and as for Hana cloud business technology platform business process intelligence customer experience.
<unk> as well as quote tricks.
For the fourth quarter, we expect a further positive development of current cloud backlog growth similar to what we saw this quarter.
Well travel volumes are slowly picking up again concurrent backlog so far remained flat representing a three percentage point drag on.
Spirit backlog growth and it was the only solution in our entire portfolio that was not growing in double digits in the backlog.
As travel resumes in the near term, we expect concur will eventually fueled the momentum further.
For the quarter as far in our current cloud backlog grew by 58%.
Overall 3 billion euros building, a strong foundation for future cloud revenue.
As for our cloud revenue growth accelerated as anticipated and was up 46% to 276 million euros.
Our cloud revenue growth increased sequentially by three percentage points to 20%.
We are also encouraged to see that our intelligent spend category bounce back to double digit growth up three percentage points sequentially.
Concur continued to show signs of recovery, but still at a moderate rate.
Overall, our strong cloud revenue representing now 30.
5% of total revenue, it's driving up the share of more predictable revenue by three percentage points year over year to 77%.
As anticipated software licenses revenue continued to decrease as more customers adopted our holistic subscription offering rise with SAP.
Driven by the strength of our cloud business, our cloud and software revenue grew by 6%.
Services revenue in turn was down 6%, mainly attributable to the divestiture of our SAP digital interconnect business in November last year.
And our total revenue increased.
By 5% for the quarter.
Which is the fastest growth rates since the outbreak of the pandemic.
Let me now briefly provide you with some color on our regional performance.
We had a strong cloud performance across all regions.
In the EMEA region cloud and software revenue increased by 7%.
Cloud revenue increased by 28% with Germany, the UK and France being highlights.
In the Americas region cloud and software revenue was up 6%.
<unk> revenue was up 14% with a robust performance in the U S, Canada, Brazil and Mexico.
We were again pleased to see that in our largest market. The U S. We had another strong sequential acceleration in cloud revenue growth.
In the <unk> region cloud and software revenue increased by 6%.
Cloud revenue increased by 25% with Japan and Singapore.
And South Korea, being particularly strong.
Let's now look at profitability and gross margins in the third quarter.
Overall, our total gross margin remained stable at 74%, even with the higher share of cloud revenue.
Our cloud gross margin decreased by 40 basis.
To 69, 4%.
However, we were pleased to see that both our intelligent spend and infrastructure as a service margin increased strongly by approximately two percentage points year over year.
As we further executed on our next generation cloud delivery initiatives the margin of.
Our SaaS paas business outside intelligent spend where most of the related investments occur was 69, 8%.
Our cloud and software gross margin declined by 70 basis points to 84% as a result of the revenue mix shift effects from our transition to the cloud.
As part of the gross margin of our services business remained steady at 31%.
In the third quarter, our operating profit expanded by 2% and was up 8% for the first nine months.
Our operating margin declined 70 basis points to 37% primarily.
To the planned additional investments in R&D, which increased our R&D ratio by approximately two percentage points.
For the first nine months the operating margin was very strong and grew by one three percentage points to 29%.
On an <unk> basis, our operating profit was.
Down by 15% to $1 2 billion euros, and our <unk> operating margin was down over four percentage points to 18, 2%.
This decrease was mainly driven by higher share based compensation expenses, primarily related to quadrex.
Let me now turn to Texas EPA.
EPS and cash flow.
In the third quarter, the <unk> effective tax rate was down one three percentage points to 18, 9% and the non <unk> effective tax rate was down three one percentage points to 18, 2%.
Therefore, we are again lowering our non <unk>.
<unk> tax rate guidance for the full year to 20% to 21%.
And 221% to 22% and <unk>.
The decrease in comparison to the previous outlook, mainly results from changes in tax exempt income.
IRS EPS decreased.
<unk> by 10% to one euro 19 sets by non <unk> EPS was up 2%.
Too long Euro and <unk> 74.
This includes another strong contribution from Sapphire ventures.
In addition, our <unk> EPS was impact impacted by a year.
The increase in share based compensation.
As expected our cash flow slightly declined for the first nine months.
Operating cash flow was down 3% to 5 billion euros.
Positive effect from lower share based compensation and restructuring payments were compensated by higher.
Income taxes paid.
Free cash flow was down only 1% to $4 1 billion euros.
Supported by a reduction in Capex.
For the full year, our operating cash flow and free cash flow guidance remains unchanged.
But based on the strong performance we had in the first nine months we.
We are highly confident to have a very solid outcome at the end of the year.
Reflecting the strong business performance in the first nine months, we are again, raising our revenue and profit outlook for the full year for the detailed outlook. Please refer to our quarterly statement.
Before closing, let me briefly provide.
You with an update on sustainability, a topic close to our heart.
Christian already mentioned about a significant role businesses play to help solve the climate change challenges with the latest product development <unk> other companies become more sustainable at the same time. However, it is important to remain acting as an exemplar.
<unk> sustainable business in.
In Q3, we were able to keep carbon emissions at the same level as the prior year. Despite the strong growth in our business and the gradual lifting of some COVID-19 restrictions in many geographies.
In addition.
Our leadership in the environmental and social space was highlighted.
By receiving the <unk> sustainability assessment goes method.
So in summary, we had a tremendous third quarter. Our order entry was exceptionally strong renewal rates are extremely healthy with a continued focus on efficiency.
Therefore, we are confidently raising our full year guidance.
Once again.
This puts us in a great position on the path towards our midterm ambition.
Thank you and we will now be happy to take your questions.
Ladies and gentlemen, if you wish to ask a question.
Please signal by pressing star one on your telephone keypad.
Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment again. Please press star one to ask a question.
Our first question today comes from Kirk Materna of Evercore ISI.
Hi, yes, thanks, very much and I'll echo the congrats.
That's the step on on a great run at S&P and thanks for all your hard work and working with us on the Investor side.
I guess my question for you Christian just to start would be as for Hana cloud seen nice momentum.
Actually over the last couple of quarters I was wondering if you could talk about sort of how that breaks out maybe geographically.
<unk>, if you're seeing similar performance across all the years or some chairs in front of others. Just in terms of the adoption rates and then Luca I was wondering if you could sort of peel that back and maybe talk about that relative to sort of the U S or.
The Americas growth, which is which is lagging a little bit versus Europe and Asia Pac.
And I expect a lot of that's concur, but I was wondering if you could just talk about how you see that the Americas growth sort of accelerating out of the same over the next couple of quarters. Thanks guys.
Yeah. So thanks, a lot cause and Scott also please feel free to comment, especially on the regional performance. So Luca I mean, what we have seen.
In the quarter and I can also remember we had some questions around the deal sizes of Walmart as far on our cloud first I guess you also have seen it in the earnings document. We also have seen some significant large thus far on our cloud deals with effectively whites with S&P deals and that also signals that we are not only talking small.
Science Cosmos actually we see a move across our customer base. This is clearly also the case when you look at the geographical perspective, but also the industry perspective, and we even in the meantime go one step further.
When we launched <unk>, which is really a business transformation.
In mid service offering with <unk> in a cloud on the platform in the call.
We of course also asked the question what is the whole of the partners in the meantime, also the ecosystem choice some movement across the bench now the partners are coming to us and asking how can be better help to make this move have Chuck.
To give you. An example, one of our biggest Hyperscale partners just off up now that existing customers switch existing contracts over to wise.
See and feel that there is such a high market demand to do more than just the technical my equation.
And Scott maybe.
You can highlight maybe some of the regional wins we have.
Kinda efficient so first of all I think you summarized it really well the move to rise is both.
On a net new customer aimed at a scale of customers and I think it's really important to highlight that across all.
All the regions, we've had growth in both net new customers coming on board with this 400 cloud the modular cloud driving and accelerating the transformation in the cloud moving workloads doesn't drive the business change they need to transform their businesses and that's what I moved to rise, but we've also seen particularly.
<unk> in regions like the America, North America, and parts of Europe, where big companies Big customers, who have got large complex environments moving to rise to help simplify aimed to transform their businesses going forward.
We now expect that this is the third quarter in a.
That that has occurred and we continued to see that trend going forward.
Yes.
Just to complement this.
As you know we are also disclosing the relative weight of.
Contracts of different sizes against our total order entry growth in the quarter.
And there you can see this as well that in.
In the cloud Contra.
Contracts more than 5 million of annualized contract value actually represented 40% of the total order entry that's up nine percentage points from last year.
So this clearly makes this very transparent that we're now talking.
<unk>.
All sizes of customers in particular larger loans now on the Americas growth.
First of all I think even before the pandemic obviously, the other two regions EMEA and AP Jay had grown in terms of the.
The fuel of the growth rates at a faster pace.
Really Americas, just because of the higher maturity of the market in America in particular in the U S, which is by far the largest.
Market that we have in that region and as we were entering the pandemic, it's correct that the.
Growth in Americas was over proportionally hampered by the fact.
Than that.
<unk>, which obviously was particularly negatively affected has an oprah over proportionally higher share of their revenues.
The U S having said that.
We have actually seen a very evenly paced recovery and reacceleration of revenues across all.
Regions, they all actually accelerated by three percentage points each from Q2 into Q3 and the same was also the case from Q1 to Q2, so the Americas.
Showing.
At a different scale of cost the same pace and shape of recovery.
Further acceleration and I would.
To expect that also for the next coming quarters. So we're very happy about the business performance in the region overall, but in particular also in the U S.
Yes.
Thank you all.
Thank you, let's now take the next question please.
And our next question today comes from James Goodman.
Barclays.
Yeah.
Mr. Goldman. Please go ahead.
Okay.
Okay, operator, let's take the next question than we are.
The line of silence. So maybe you can take the next question.
Our next question comes from Mohammed <unk> of Goldman Sachs.
Yeah.
Hmm.
Good alright.
Can you hear me, yes, we can hear you now yes, we can hear you now thank you.
Okay, great. Thank you.
Yes.
Luca Christian helps us Stefan.
Can you all the best in the future I had two questions. Firstly as you start to see the.
Cloud growth starting to pick up Luca out my understanding was that the backlog of expectation on the backlog.
Growth acceleration was has historically been more announced into Q4.
I think you made the comment.
And he kind of moves similar levels. So can you just help us sort of explain that comment and then more broadly as we think of the kind of building blocks around our cloud growth acceleration.
Moving into 2022.
I mean, obviously, you've had a pretty strong discretionary spending environment what is your kind.
Spectation is this kind of more sustainable trend and that is obesity concur comes back.
Couldnt could we see sort of the cloud growth accelerates significantly beyond kind of the current levels and then secondly, just on.
The Opex I noticed that obviously the opex, particularly.
Marketing is starting to come back so.
So as you as you look into next year.
Some of this spending coming back.
What are the kind of key factors in.
Would you look to kind of invest more.
More to kind of sustain or accelerate chiara. Thank you.
Yes, let me cover.
Or are those questions. So first of all on the on the.
Backlog, obviously, we are coming off the heels of the spectacular quarter that was actually exceeding our expectations as we were walking into the quarter. So we would not have as in the past quarters fully expected that scale of growth that.
That we saw.
And would.
We would have expected actually that we would have some of that growth only seeing in Q4 now.
Are we expecting further growth.
Acceleration in Q4, absolutely we see.
A great strength of our business.
<unk> portfolio, and we see that renewal rates continue to trend up and are at a very healthy state already so I'm no doubt that we will see a further acceleration however.
Given the very very significant achievements that we saw in Q3.
I think it is fair and prudent to assume that we should see a similar step up but not necessarily a dramatic acceleration on top of this.
It is also underpinned by the fact that in absolute terms actually the backlog expansion that we saw in Q3 was exactly at the level.
Three if we saw two years ago entirely unaffected by the pandemic and if you recall Q3 2019 was probably until now the best quarter in the cloud in many years that we had before and so from that perspective, I think if we weren't able to achieve the same that would be.
A terrific result, and it would also set us up.
Actually exactly on where we need to be to also drive 2022 to have great success.
We see a number of important supporting drive us that make us confident that in 2022, we will actually see.
Further our continued acceleration of our cloud business compared to this year. One is as you have highlighted that concur is already showing a recovery is still a moderate one but still they are up mid single digits on a revenue perspective. They have now a very strong order entry performance in Q.
First and this will start to show in the backlog, but also in the revenues. So they will become next year.
Certainly.
A very positive contributor to our growth and secondly, with.
With S. Four Hana cloud, we have such a great wealth and breath of.
About utilities, we're only starting now to harvest.
We are very confident that the revenue growth and the backlog growth and as for Hana will continue well into next year and this will of course from an ever increasing base and more and more add to the growth of the overwatch.
Arching business. So from that perspective, yes, we are confident that our cloud business will continue to accelerate.
Not only in Q4, but also going into 2022.
In terms of the expectations from from an Opex and profit perspective I.
I think we were very clear.
We.
<unk> our.
New strategy and our associated midterm ambitions.
In 2021 and in 2022.
We expect flat to slight declines in profits.
This is what we are guiding for now in 2021, and I would say we have so far executed extremely well against this commitment.
Our current guidance is for flat to minus 2% in growth.
My expectation for 2022 remains also unchanged.
<unk> that we will also in 2020 to see flat to slight declines in profit and we will invest properly and to continue to fuel our innovation. We will look at an R&D ratio roughly in the same ballpark. So we are seeing it now with 17% of revenues, but we will scale from the.
Topline very effectively with accelerating cloud growth.
Which will also start to.
Sure.
Its positive impact on the cloud and software and total revenue line and so things are going exactly in the right direction and we will look at further investing.
To make this growth that we're seeing sustainable.
Quite frankly for many years beyond 2022.
So from that perspective that remains our planning ambition.
Okay, great. Thank you.
Yeah.
Our next question comes from James Goodman.
<unk> of Barclays.
Yeah, great. Thank you for coming back to me can you hear me now.
Yes, yes.
Jeff. Please go ahead.
Excellent.
I know that back from my side as well in terms of the performance of Verizon clearly running ahead of your initial expectations, but at the same.
The campaign not seeing the anticipated decline in the core business.
Licenses been outperforming four quarters in it right. So the question is you know.
On a two year view, even the guidance is.
Flying a very significant weakening in licenses in Q4, and I'm trying to gauge the extent to which this is really conservatism as we come into.
The largest quarter as I said.
So I'll pick a substitution effect that you are anticipating with on Prem customer switching over so he can talk a bit.
About that that'd be great.
Secondly.
Could I ask for an update on the migration project to the converge cloud and Luca you mentioned them briefly.
Briefly the project when you talk about the cloud gross margin.
Time, how is that progressing where are we on the ramp of color.
Around that project now and I still confident that those costs will.
It will dissipate by the end of next year.
Yeah. So let me let me get started.
Please in particular on the software number perhaps Scott you can get.
You as well so.
Let's be clear.
Our business Forever has been.
Basically our backend loaded most of the very large software contracts are typically closed in Q4, and therefore, obviously in a world in which we are now seeing.
<unk> and.
In greater amount also very large rise opportunities.
It's natural that we can expect that from quarter to quarter, there will be a big.
Impacts on <unk>.
Large software transactions in particular and Thats why I think it makes sense to.
Plan for a significant further search on the cloud side, but also to assume that in Q4 the impact of this such on the software license revenue side.
Should be more pronounced than what we have seen year to date.
In terms of just briefly on the converged cloud.
And then perhaps Scott can come back to the to the software comment where we are obviously pleased with the year to date performance.
Particular city.
The cloud was nevertheless, scaling very very fast, but on the converged cloud program.
We're actually making good progress we believe.
<unk> debt.
We will be done with.
Most if not all migration activities.
By the beginning of 2023 as expected and in terms of the investments.
They are actually happening as planned with a slightly lower share in 'twenty 'twenty.
And then a slightly higher share in 2022.
In terms of the impact of the program on the cloud margins, let's be clear about this as well, yes, we had a.
Slightly negative impact.
In Q3 of our margins in the cloud we're declining however.
<unk> from a year to date perspective, the margins are exactly where we have planned them to be we have actually planned that the cloud.
Harmonization program would have an increasing impact.
On it in the second half as we are ramping up the investments.
So we are up year to date by 10.
10 basis points at constant currencies of 20 basis points in nominal currencies, which was exactly in line with the slight improvement that we have planned for for 2021 and you should also expect the same for 2022 investments will be slightly higher but then on the flip side. The very strong growth that we've seen on the order entry.
Interest side, we'll obviously.
The revenue line and that should level out per our planning. So we remain confident in those planning assumptions.
Step up will then be as of 2023, when we have completed the program because we have a much higher.
Not only resiliency, but also efficiency in our.
Corporation spend with higher levels of automation. So nothing has changed in this respect and we remain absolutely on track also party slight improvements that we're expecting in this year and next year.
Scot Pep so.
Some comments around software from your side, Yeah sure sure. Thanks Luca.
Cloud of three things that I would just provide additional commentary to what Luca described on on the software and the transition to cloud.
And it's a really important iPhone to remember is that optimism moving the dashboard and our digital platform at scale.
So there is no doubt that they are originating to transform their.
I guess you have.
A clean digital core to be able to drive and running mission critical workloads.
And primarily as you saw in the cloud backlog and in the bookings performance in the cloud. The second is a reminder, that we're only nine months seem to launch abroad, and what we've seen is a progression over.
Nine months Meacham of continued expansion of our customers to move to the cloud to understand the offering to understand how it transforms the business and is accelerating.
And you see that being in the outlook that Luca described on the cloud versus the software and then the third comment.
There are.
That normally highlight is as we go forward and in the transformation of their businesses of both net new customers existing clients that are small medium and large all around the planet.
Pipeline reflects in the outlook reflects the customers are choosing to transform in the cloud and that will continue to accelerate so.
I'll be sure to look back.
B as we've we've given the outlook on the software so that gives you a bit more context.
Yes, that's very helpful. Thank you.
Thank you Scott Let me your next question comes from Fredrik.
It comes from Fredrik.
The next bank of America.
Hi.
Thanks for taking the question a couple of follow ups first of all.
On the margin question into.
Into next year. So if you can maybe spend a moment on the different cloud.
Options.
That you offer what's kind of take up you're seeing and how is that impacting margins.
And second going into 2022.
And.
When you mentioned.
R&D, but any other cost item you can.
You can discuss driving your guidance of stable to slightly.
E.
A slight reduction.
<unk> profit.
<unk> in terms of.
A impact of the migration to a single cloud platform, which will be a bit bigger but.
Thing else in terms of license and cloud mix that you think is irrelevant.
And secondly.
I'm interested more broadly considering the current disruption in supply chain that we've seen across many industries and if you've seen the increased engagement from your customers on those topics.
And more broadly.
The update you can provide on the.
Our launch of industrial cloud solutions, both the Danish.
The initial launches that you flagged back in June thank you.
So let me get started and then on the on the mall business related questions, perhaps I can hand over to Christian and then look on the margins on the cloud side going into next year.
I would expect that both in our thoughts.
<unk> parts businesses as well as in our intelligent spend businesses.
We will look at a pretty stable situation.
Right.
Unchanged with perhaps very slight improvements on our infrastructure as a service business.
We are already operating.
By a decent level of efficiency for this type of business.
But be sure of the mix of cloud business will rather trend continuously down of this business because with the advent of rise with SAP.
Driving for more SaaS, Paas business, which is positive for the.
The margins and so in the individual lines there shouldnt be a lot of changes because of the impact of the converged cloud program, but slight mixed shifts should be helpful to margins overall when it comes to the composition of the 2022 P&L just very shortly what do we expect on the top line of course are continuing.
New shifts towards more cloud business. So cloud revenue further accelerating its growth software licenses revenue trending down definitely in a more pronounced fashion than what we have seen in the first nine months to Scott's point that rise, obviously with more and more proliferate across our customer.
Yes.
And that will obviously then resulted in declines in software license revenues and will also shift an increasing amount of maintenance revenues as part of our cloud extension program.
Cloud revenues, which is actually great because we have so far driving a very healthy multipliers on this actually.
Continuously significantly above the two X factor.
We mentioned at the beginning of our transformation. So this is positive.
And then on the investment on the expense side as I said, we will continue to prioritize investments in R&D as well as in sales and marketing.
Because.
There might be see the great growth opportunities, we will also add additional feet.
Pete on the Street and go to market resources.
The current level that we have achieved with round about 23% of revenues I think.
A reasonable and appropriate one on the sales and marketing.
Because and in R&D, we have seen a significant step up in investments over the course of the next two years and we're looking to sustain that and also planning for around about 17% of our revenues on the on the R&D side for the business questions Christian I'm happy to take that question I mean, there are two.
<unk> life and challenges when we talk to our customers. These days.
First challenge is clearly about the disrupted supply chains and I come into a second to that and actually when we are talking about the intelligent enterprise in the meantime, it's not only about <unk> of new business models productivity via automation.
<unk> talked about the Green line and with everything what we do around Com and our.
Commitment to net <unk> and coming back to the supply chain.
Indeed, many customers are just reaching out to also join the business network just to give you a few examples semiconductor.
But in a lot of and appliances White now who are joining our business network to get more transparency, where the shortages in the supply chain is it the next year supply of it.
Suppliers below on which kind of region from which kind of supplier cannot get still some supply in the next month in the next quarter and we.
But I can trace that will time, that's the business network think about <unk>, we are now delivering.
The first use case with <unk> and it's not only anymore. The European kind of swing in automotive industry General Motors, just shined. What we are doing that is actually the same thing we are putting together the OEM.
With manufacturers suppliers to give them the real time transparency again unwound.
Across the supply chain, so that in the future when the car demand is changing it took sometimes up to six months until the raw material provider realize hey, the demand has changed and now youll have that real time.
With Keith.
This kind of business and now you are not talking about millions of actual Ethernet sheets youre talking billions as we are really transforming the whole industry end to end and this is what we're now doing step by step automotive we've talked about semi conductor, which is impacting many industries, but there are shortages also with regard to with regard to other hallmark.
Well. So we are doing this now step by step and the business network is definitely one of the key pillars, which will also drive our future well when you are close.
Thank you can we take the next question please.
Yeah.
Your next question comes from Michael Abreast of UBS.
Thank you and good afternoon and thanks.
So my best guess I think it'd be nice to the 75 calls with them as well.
Two if I can just just on the on the guidance.
Sure.
The guidance that the on premise business.
In the mid single digit to 10% decline in maintenance by the looks of things and.
Double digit on on license I'm trying to square that with your comments about the cloud backlog, if you're converting a two times or more support to cloud revenues surely the backlog could see a big step up in Q4, if you.
It's achieved the expected decline in court.
And then just on the rise customer to date Scotta question can you talk about that profile.
These mainly customers who are coming from 86.
This time are there any who are perhaps already in and maybe in the scale that we've decided to.
Due to rise.
And then a question Luca on concur in the business network can you just remind us how much below.
So the pre Covid levels. We are today I think you said it was about 200 to 300 million run rate pre COVID-19. So maybe we can think about how it expands next year. Thank you.
To come yes.
First of all on the guidance, so, let's just be clear.
We don't expect that materially.
Print pattern on support revenues in Q4 than in previous quarters.
The main difference in pattern that is baked into the guidance is a different level of declines.
Software revenues, let's see to what extent Hum that assumption is correct or not but I think it made sense for us to be prudent here given that Q4 is obviously by far the largest software quarter and at concur them based.
Based on the current levels I would say we.
I'm looking at a reduction in the annual run rate of a bit more than 300, probably a free on 50 to 400 million from pre Covid times and that is starting to recover now as I said Oh.
Our first positive increase in revenue was that.
<unk> posted in long time in Q3 in terms of rise, perhaps I can hand over to Scott a question.
Yes, I can start and Christian please take comments, so I guess the question around the.
The makeup of the customers rise actually is.
Is originating.
With all forms of customers, let me give you a few examples of.
All of our.
Customers that have come on rise nearly 50% of them are new customers to Asap, so attracting new companies, who was running on different legacy technologies coming to rise transforming and having.
<unk> <unk> platform to run full well, what we saw in Q3 and a continued trained with an increasing share of overall large customers that make up nearly 40% of our cloud order entry. So it's a record high.
And what that means is companies like AMD <unk>.
As the stores Philips domestic appliances, Siemens energy amongst others. So large companies that are moving with rise in the cloud.
And then the third question around existing workloads.
Maybe explore in a hyper scaler, what's been interesting.
We are seeing is customers are moving to Reits with Asap with different starting points their transformation journey. Some are going from a new customer some our existing ECC, but yes. Some are already in the hyper scaler, but they need the transformation in the cloud not.
Not just the workload in the cloud and so what we're seeing is demand on all three angles that gives us confidence going forward that no matter what your starting point, you've got the ability to transform in the cloud with ryzen and hence the outlook remains strong Christian I don't know, whether you want to add anything more to that perhaps maybe one more comment.
And Michael also just to give you some sense around Wyeth for Hana is so important in the middle of <unk>.
Customers.
In the meantime completely realize that a technical migration to the cloud is not changing their business model and in many industries.
<unk> is coming to me to the teams here and say hey.
We need to sell everything as a service we need more personalized experiences we need pay as you go we need to revenue will time our revenue.
Having a realization and then the only software vendor who couldnt do that end to end at scale. We'll time is there's no one else out there and then when you talk about you want to scale your business.
150 countries.
Go.
This is the only what S&P can do now.
Question, but always can't the technology is there, but how can I get that that's the hardest part the hardest part in our business transformation is changing the culture and then having someone.
Who knows how these processes one at scale and this is why it's and this is why even existing customers from hyperscale. Upon now coming is that we want to have that we want to learn from the best customer you have shall walk your best practices benchmark analyzed these offices and tell us how can I get that and this is why it is offering.
Forming extremely well resonating and then Scott said, it well installed base lodge once many modification takes a bit longer we move them back to the standup and over time. They also not only wanting new businesses. They are also having a much more agile IP landscape and then net new it can be if you have a fit to standup.
<unk> also happened that they go live you know come through in 'twenty 30 days. That's also the case.
Yeah.
Thanks very much.
Your next question comes from Amit <unk> of Citibank.
Thank you Hello, everyone Amit <unk>.
It comes with the and before I proceed with the question. Thank you Stefan for your support and all the best for the future.
With regard to my questions I guess, two if I may.
Firstly with regard to <unk>.
Human experience management.
I guess with your largest solution.
Within SaaS Scott could.
Could you give us a sense of the growth profile, particularly with regards to competition and how it's trending in different parts of the world.
And secondly could you also remind us please of your ambitions in customer experience.
Again, you talked about playing to our strengths.
So as.
As customers migrate to cloud what are you seeing on the customer experience side, particularly OXXO with device kicking off. Thank you. Okay. Let me start garten, please feel free to weigh in.
On human experience management actually it's pretty interesting probably also have word about some top ultra.
Check on one of our competitors when it comes to massive scale and localization in our wound the Clos.
And actually what we see is actually that the sentiment is changing more and more customers coming to us and one of digitized Hyatt hire to retire with SAP.
And then second with wise.
I mean, it's not only <unk> the move to a new platform and the move to ASP on a cloud.
When you talk about payroll when you talk about employee Central obviously are an ECC customer has HCM on Prem included and now it's only the question how can we digitize hire to retire and to and you have.
Have strong interfaces important interfaces to finance to other <unk>.
Functions inside the corporation and now with the platform with Athlon our cloud we can put it together in a modular way. So the cost fell also into the installed base is now much better also with wise as we have the underlying platform now to connect the dots.
Wanting isolated solutions with S&P anymore, plus as I said also in the net new market. We are seeing very positive momentum in the <unk>. It's all about focus so it's not about that we want to compete in every space. There is a huge focus on commerce.
We are clearly leading.
Leading with our <unk> solution in the cloud and now we just launched our <unk> solution also there we have positive momentum and obviously <unk> was quote to cash.
Of course, a very dominant space Scott anything you want to add I think you said it really well Christian I guess, two things that I would just add the first piece.
You are long term with rice and the integration of our technologies under that platform at full swing. We are seeing an acceleration of the cross sell of our line of business solutions. So not only are we winning in those categories are head to head with the competition because they stand up and are able to deliver at scale with.
With great capability around the world as Christian described but also the cross sell.
<unk> rise to allow that seamless orchestration and experience for the customer. So the estimate of the three cross sell those for every core ERP cloud continues to be reflected in that gives us confidence not only.
The stand alone, but then in the orchestrated story because from a customer when they are running their processes data look at single line of business type applications. They look at how to deliver a wonderful experience to their employees or to the customers in those two categories introduced so you need the orchestration best in class capabilities.
<unk>, which requires rise plus our high tech same or CX solutions.
Yeah.
Thank you.
We'll take two additional questions.
Thank you our next question comes from.
Mark Modeler of Bernstein.
Rich.
Thank you very much and let me first say that Stephane as we've discussed recently really appreciate all your support and assistance and how you've helped us with understanding the transition and good luck and I'm going to Miss our interactions I'm. Let me go into a multi part question I apologize on elsewhere, how the cloud Christian.
Research Luca we've discussed last year the lift in revenue that occurs with workloads shifting to the cloud one what are the expectations. You have now for what that revenue lift is going to be as workloads move to Esfahan SaaS to can you give us any sense of what the attach of the other cloud.
Offerings are today, and what you think they could be in terms of dollars or quantity or anything any sense would be helpful. And third are there certain industries adopting quicker rise with that with the S&P quicker than others. Thank you.
I mean first let me start and Luca you can build on that.
First with regard to FRE.
For our cloud <unk> also hopefully have heard in our earlier statements I mean, we remain extremely confident.
With wise. This is now the way he go not only to do with technical My equation, we do a business transformation and then of course, our installed base is huge and there is high demand.
<unk> companies also now joining the movement and when you also look at our total order and when you look at software cloud I guess Luca it's fair to say that this was one of the highest growth rates ever as we see in the cloud. These are especially with large enterprises. These are long contracts the contract lifetime value. It's extremely good extremely high.
So from my perspective also looking now in the quarters ahead.
There is no reason not to be optimistic and then second also look at the net new customers. It's not only the installed base, where we import now if someone decides to China from all of our global order, we take them and also put.
Into the public cloud into the standard and help them again to transform that business. So I guess that is no.
To be not confident thats just a few more comments and then Scott Please feel free to add some color commentary as well. So first of all Kristen is absolutely right.
Our PCV.
Growth rates, so in terms of the total contract values, including Rem contracts.
It's materially up way higher growth rates than on an annualized.
Contract value.
And only obviously a first year of that.
Progression is.
<unk>.
<unk> in the current cloud backlog. So this is making us very confident around the growth momentum in the cloud obviously and also the average contract duration continues to move upwards because of spear.
Increasing number of <unk> contracts are typically a very.
Term oriented contracts. So we are getting much closer to the full year average contract duration, which is very positive.
Well.
In terms of the attach rate I think.
From my perspective, our assumption still holds Scott has often talks and including on this call.
Longboat, the three for one opportunity and Thats clearly, what we can see as well, including in some of our large rise opportunities that had an attached to different line of business applications. Some are very very positive ones come to mind that we're also mentioned on this call like Philips.
Call of <unk> appliances, and others, which are good examples.
I think that assumption still holds from my perspective and in terms of industries.
Perhaps I can hand over to Scott, but for EMEA.
It's really a broad based adoption across all industries it might just make a difference of which.
Industries tend to more move to S. Four public cloud right away because.
They are actually less.
Modification legacy service industries would be probably one of them.
Whereas some others like discrete manufacturing automotive would rather tend to move to a private.
Set up.
Yes, I would add I think <unk> described the industry situation and the.
The scenario it is a broad based but the scenario that you describe Luca is correct I think the only two comments that I would make on the multi tenant.
<unk> four is a few things to remember is many customers.
Christian said, it well are going straight to SaaS multi tenant is full cloud, that's especially true for net new customers or customers coming from oracle or other landscapes, but.
They are still coming but a lot of our existing clients are also looking at hybrid scenarios. We see a lot of large companies that are going to mix of.
Our private cloud and public cloud and the beauty of this full cloud as we can we can support that we've got the ability to provide not.
Not only the hybrid scenario, but in a modular explore cloud that gives the benefits of not only lower subscription fee to get greater efficiency.
The option of innovation.
For these customers and to do so at scale across the landscape.
Whilst minimizing customization best practices, making sure they've got that clean coal, which we do across all parts of it.
As full cloud through rise.
That makes it very compelling for clients and I mentioned before the startup.
Of customers is is barrier eats, but the endpoint of having that agile trains hold platform that gives them the business agility.
That is clear and whether they are on a full SaaS or in a hybrid scenario. They are able to do that with with raws with this acreage.
Thank you.
Today's final question comes from Adam Wood of Morgan Stanley.
Hi, Good afternoon question Nathan Thanks for taking the question I'll say best wishes for my side to Stefan. Thanks for this of course over the years definitely appreciated I've got two please maybe just following up on the comments.
In June just made Scott around the type of cloud adoption that customer's guidance rate.
Especially again in June with investors quite a lot.
The.
For the full.
Public cloud version of that for some weather it can satisfy the demands of customers to what extent the customers care about what the cloud theyre running in versus just being able.
So you solve business problems and get a consumer get an upgradable version of the product, it's easy for them to consume.
Talk a little bit about customer reaction to that and what customers actually care about the perception is that that would be helpful. And then maybe secondly, you mentioned reckitt, taking business analytics I Wonder if you could talk a little bit about the views of how the industry evolves.
<unk>.
The extent you have been selling separate data warehousing solutions over time.
How does the competitive landscape Scott stack of that against the Hyperscale is against people like Safeway and analytics and more of an application layer breast rather than in that area is that something you can charged separately or is that something that really just helps.
Change the application. Thank you.
Yeah very good question, Adam and let me start with your last point.
So I'll talk about this partnership telco in term I mean look on the analytics space clearly.
Analytics is far off on an application where we see.
Even higher attach rates now with our.
Different business applications spanning an analytics play out across the company helps you. When you are not having integrated planning you have if you are not in CAGR company end to end you'll have for both of them and this is analytics cloud and this is why we also offer that also in many cases and many deals hasnt attached to our existing lineup.
Line of business solutions that also on the data warehouse, yes of course, we still have many many.
Happy actually BW customer and we are very proud of this legacy and now we are in full speed developing data warehouse cloud and we see where we are strong.
Deals already.
There is strong customer references to also make that move on the big data and Nevertheless, we are open for partnerships. We have trust and also negotiation pump how can we really even all of them.
The data the access to data for our customers for business, where we partner data warehouse cloud, we own and then of course on the analytics.
Clearly we see this more on the on the application lay out why we successfully business why S&P plays of course, followed over a long time.
And maybe if I can krish and I will just comment on the the first question about do the customers care about.
It's interesting to customers around the world.
And in all industries are very clear about needing three things one they need a clean digital core that is transformed to help their business navigate.
I don't want to just move that workload.
Really need that ability to be able to then respond the competition.
<unk> on their industry.
All of the other factors, we've seen around the supply chain disruption that you've heard and seen before and that requires that.
That agility and the second is then the platform to be able to innovate and scale.
Not only do you have it for today, but you were able to extend and adapt and drive your business going forward.
So having that flexibility and then the 30 speech.
Looking for the ability to transform its speed. The beauty is they are not really saying multi.
Multi tenant product.
Modularity and lowest reached bond and so as I said before some will go straight to we can run the entire value chain on SaaS multi.
Forwarded cloud today, but some will go through our journey with out we'll have that fiber blayne Skype, it's a modular ERP and what we focus on is to give them that that agility to give them that scale and to give them that speed.
I think then the outcome with the di ultimately land on.
Hi folks.
<unk> SaaS or a more modular with hybrid a combination actually they are not too concerned about it.
And last one it's tough to build on that.
Lots of S&P doesn't that lift.
The point of sale, it's very important because a lot of customers. They have a lot of complexity built alongside.
ERP and we assigned architects and partners are now coming in and we always have a discussion with the customer how can we move this modification will stand up okay.
When does it come on to halt map how can we also build extensions how can pop up till now extension on the platform. So we are also chopped into also fulfilling.
A huge ecosystem on our platform on our business technology platform, which then also is IP, we can monetize our partners can monetize.
Of course, the S&P installed base and this is also very important to.
Do not forget the ecosystem, which plays a very important role as it was.
Well, thank you Christian and that concludes our call for today. Thank you.
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