Full Year 2021 SAP SE Earnings Call
Good day and welcome to the S. I P quarter for 2021 earnings conference call.
If you have any technical issues on today's call you May press Star zero on your telephone handset anytime.
Today's conference is that recorded and at this time I'd like to turn the conference over to Anthony Kolasa, Chief Investor Relations Officer. Please go ahead Sir.
Thank you good morning, and good afternoon, everyone and welcome.
Thanks for joining our earnings call today to discuss Sap's.
Q4, and full year results for 2021.
Well now our Investor Relations website, you can find the deck intended to supplement todays call its available for download and a replay will be applauded there as well.
With me today are CEO .
Client and CFO , Luca, which will make opening remarks.
Yeah, So Rob Scott Russell, who leads our customer success organization joining us for Q&A.
Now I'd like to do the fifth album.
During this call we'll make forward looking statements, which are predictions projections or other statements about future events. These statements are based on current expectations forecasts and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ.
Additional information regarding these risks and uncertainties maybe found in our filings with the Securities and Exchange Commission.
Glued in but not limited to the risk factors section of its annual report on form 20-F for 2020.
Unless otherwise stated all financial numbers on this call know neither for us.
Well, its weights and percentage point changes a matter for us year over year.
At constant currencies.
No 95 financial measures, we provide should not be considered as a substitute.
Sure.
All to the measures of financial performance prepared in accordance with <unk>.
Now before taking questions, we'll start with a few opening remarks.
And with that I'd like to turn over to Christian.
Yeah. Thank you Anthony and thanks to all of you for joining today.
And why they come to 'twenty to 'twenty two.
We certainly hope this is the year that will start to move on from the Covid pandemic.
And make more progress on additional critical issues.
I'm gonna change supply chain disruptions and creating a sustainable future for people everywhere.
He has S. E. T. We are very excited about what we have accomplished in 2021.
Let's look at our results for Q4.
What a quarter what a year.
Hitting or exceeding the high end lifestyle.
We have seen for quarter of fantastic acceleration and coupon cloud petrol which grew 26% in Q4.
The sequential acceleration of four percentage points.
This led to current cloud backlog now standing at nearly nine and a half billion euros.
Cloud revenue also accelerated strongly up 24% in Q4 and up from 20% in Q3.
This was supported by as for Hana cloud revenue, which grew an impressive 61% in Q4.
The highest close yes.
Got it.
Colon cloud backlog for <unk> stellar 76%.
Driven by tremendous adoption of whites with S&P, our signature offering for business transformation in the cloud.
Well perfect water every solution needs to quote.
And that's indeed what hat.
Double digit revenue and cloud backlog rose across all our major product categories.
This performance sets us up well for 2022.
We expect continued acceleration of cloud is.
Up to 26% quote was reflected in our guidance.
These are very strong results during a challenging time for most businesses.
Okay demonstrate the confidence our customers have an SVP and in the unique value we offer and.
In helping them attract and unprecedented set of challenges.
We're optimistic about the year ahead, and we are well on track to achieving our 2025 ambition.
He is with us.
Outcome of the strategy, we introduced 15 months ago.
Customer attorney to our platform and solutions to help them become more intelligent network and sustainable.
And emerge even stronger from this disruptive time.
Our wives with ACP offering is designed to support our customers as they transform their businesses while at the same time moving to the cloud.
Reflecting this analysts upgrading S&P spend forecast for 2022.
Just reasonably UBS predicted a fourfold increase in the budget for 2022.
Up to 12% from 3% in previous years.
Since we launched Weiss with SVP in January 2021.
<unk> seen significant increases in customer adoption each floor.
In Q4, we more than doubled the number of new wide field <unk> suite.
This is about three times the number of deals.
$5 million.
Let me briefly describe the sweet keep benefits of the Chr offering for business transformation necessary.
Third business process redesign.
We benchmark our customers' business closes this against the best practices, we have developed from working with about 400000 customers.
Second cloud migration, we do more than a technically migration, we help our customers to move back to standard and two a modular at shot ERP and the public cloud.
Third innovation.
We also connect our customers to the latest innovations like our industry, our business network and our cloud for a sustainable enterprise.
This means that widespread SDP enables us to partner, even more deeply with our customers.
We also integrated total solutions with single end to end accountability from infrastructure to applications.
As a result of our revenue run rate for the modular cloud ERP now approaching 7 billion Euro.
From 6 billion at the beginning of the year.
In Q4 alone we added more than 400 million Euro two hour as foreigner cloud backlog.
Clearly <unk> is a blockbuster success in the market.
And we are just getting started.
Our message on premise installed base.
More than 30000, ERP customer presents a significant opportunity for whites with ACP off of them.
As these customers begin the transformation to the cloud.
At the same time why is attract many new customers who comes with a significant cross sell opportunity because of the integrated nature of our modular cloud yet.
But every dollar spend on the core ERP, yes, it's an upsell opportunity of sweet all a followup platform and four additional line of business solutions.
In Q4, the tremendous momentum for widespread SVP and turned to sales momentum across all our lines of business applications and deliver the outstanding cloud performance I discussed earlier.
Let's take a look at our key businesses starting with <unk>.
Our success with wise led to create Esfahan a moment.
We now have nearly 5000 as far on our cloud customers an hour when weighed against competitors in Q4 was more than 70%.
Many large customers are moving to <unk> pharma enabled by whites with SVP.
These include CBS , Panasonic, IBM and standard chartered bank and a number of wins of Huawei, including Siemens Philippine Airlines, Allianz technology and <unk> highlights.
CBS one of the leading health solution companies is using wise to support that journey to the cloud and make health care more affordable and more widely available.
Panasonic has chosen wise with S&P to twice a digital transformation effort, which will be played several legacy ERP systems to provide excellent customer value optimized supply chain and improve operational capability.
Another example, standard chartered bank has chosen wise with HCP to expedite their finance transformation across 60 markets.
And to.
To achieve their commitment to net zero emissions by 2030.
Novartis.
One of the largest pharma companies in the world chose <unk> to standardize and consolidate their core ERP platform.
Finally pet owners. That's also chosen S&P has fallen AEP.
Success sector continues to win significant business awards.
Including this quarter all in all the discount supermarket chain.
Recently selected SAP successfactors to transform the HR operations and support their workforce of over 80000 employees.
Doc Martens, the famous British with web brand recently invested in S&P Commerce cloud.
All of our customer mix period portfolio.
They expect a 60% reduction in <unk> <unk>.
Moving to the cloud and simplifying their operations.
Intelligent spend management, we are seeing positive indications that business flow is starting to return.
One of our customers Philippine Airlines, it's ready to take advantage of the anticipated recovery in travel.
They chose S&P for our comprehensive understanding of the airline industry and its key business causes.
HP, Inc.
Is expanding its investment in Sap's business causes intelligence solutions.
It will be using <unk> for advanced courses in the analysis to help them quickly identify and act on new opportunities.
Hitachi invested in S&P digital supply chain solutions to boost supply chain agility for its medical and industrial solutions.
Our business technology platform had an excellent quarter with both cloud revenue and current cloud backlog growing by very strong double digits in the cloud.
Etp's deformation to enable the integration and extensibility of our module our cloud offering.
Andrew has chosen S&P DTP to support various business priorities.
Including individualized sales and trade promotion management.
Let's turn to some exciting news we announced today.
Our intent to acquire <unk>.
It's a market leading Fintech company focused on working capital management and supply chain finance.
We expect them to be equate edition to our business network and procurement portfolio.
Our customers will be able to finance billions of transactions with favorable terms and improved our cash flow.
<unk> is already a strong partner with a number of joint customer such as ever Nissan and cross selling.
Two announcements are better than one.
Earlier this week, we announced an extended partnership and investment in Isa.
I'll provide off contract management solution that offers market leading contract intelligence powered by AI.
So this is equate and seamless complement to our portfolio, having multiple touch points to S&P systems ERP to procurement saves to HR.
This partnership underscores the strength of our ecosystem and the massive opportunity from Chinese forces with market leading software players.
These announcements expand our overall portfolio.
Light chain financing from <unk> and contract management solutions through our enhanced partnership with <unk>.
At the same time, if expanded many of our existing partnerships. One. Recent example is our partnership with AWS to playing Hana cloud onto AWS design Cabrito pulses.
Which helps us optimize our own operational performance and cloud cost much.
Well that support our sustainability goals.
So let me turn to another strategic priority for Asap sustainability.
There is no question that action on climate change is an imperative for businesses today.
It is certainly an imperative for us at S&P.
We have just been a lifted by CDP as one off just suite software companies worldwide.
Our belief is that sustainability does not represent an added cost to business.
Actually a competitive advantage in fact, it may be the greatest economic opportunity of our time.
It's also clear that no organization can achieve sustainability in a silo.
It requires coordination across the value chain.
We have been working and learn on this issue for many year customers like Hitachi Colgate Anglian water Heska and BMW.
We have a unique approach that supports our customers across the full spectrum of sustainability from carbon neutrality to social impact and economic progress.
Transparency insight and data are the foundation is there.
Is the unique advantage, we offer to our customers.
The ability to see inside and outside your organization across your warehouses manufacturing supply chain and critical business processes.
Chest procurement and business travel.
Our sustainability portfolio directly supports this war and helps businesses one more sustainably.
Sample through our recent introduction of S&P cloud for sustainable and appliances, which makes ESG data transparent to our customers.
We recently released our five action for every business to become a sustainable business.
This guidance provides concrete steps for any company of any size to accomplish that sustainability goals.
Collectively.
These efforts are focused on helping our customers manage directly in line with as much as important as the top and bottom line.
In closing, we have had a record year at.
Well the thing is just the beginning.
The future is part in our strategy for the cloud for business transformation for sustainability.
Continue to create opportunities for continued and accelerated quotes.
We are very confident in our long term ambition and see great potential ahead, given the strength of our 2022 guidance.
Thank you again for joining us today, and let me now hand over to Luca to talk through our results in more detail Luca.
Thank you very much John and also from my side, a happy and healthy new year 2022 to all of you.
Let me start by saying that I'm also very proud of our outstanding finish to the year.
Our team delivered an exceptional year with strong results through a far exceeding our own initial expectations.
And we kept our promises beat our guidance on both the combined topline and Bottomline after raising it multiple times in 2021.
Let me amplify a couple of the points you heard from Christian we can clearly see that more and more companies are choosing SAP to help them transform their business proved resilient supply chains and become sustainable enterprises as they move to the cloud.
As reflected in our strong adoption of Reits with SAP and.
In particular by large companies across all geographies.
Nearly exceeded our goal of at least 1000 customers by the end of the year.
But what is way more important in Q4, we saw the number of larger cloud transactions significantly increasing.
Oh, that's greater than 5 million euros contributed around 50% of our cloud order entry up from just 31% last year.
That was also driven by rise with S&P.
Now, let me cover our results in more detail.
Christiane already talked about our cloud momentum and as for Hana spectacular contribution to it. So let me just add some further data points.
Driven by the strength of our entire portfolio, our SaaS Paas cloud revenue outside of intelligence spend search to 33% growth. In Q4. This is the right hardly matched at that scale by any other cloud.
Okay.
Thus Pos intelligence spend cloud revenue also accelerated its growth to 12% and within this business model concur, a return to low double digit growth.
From a regional perspective cloud performance was excellent throughout the year, we had a healthy balance and strong cloud momentum across all geographies accelerating during the year.
Cloud revenue in EMEA increased by 27% in the Americas by 13%.
And in Asia by 20%.
So the remaining topline parameters please refer to the quarterly statement.
Now, let me move on to the bottom line.
For the full year, our total gross margin increased by 70 basis points to approximately 74%.
Was aided by a nice improvement in both our software and support as well as our services margin.
Firstly, our cloud margin was slightly down year over year.
This was due to the investment into our next generation cloud delivery program and the fact that our high margin <unk> business still had a dampening performance throughout the bigger part of 2021 .
Despite the accelerated shift to cloud our operating profit expanded by 1% to $8 2 billion euros for the full year.
Was ahead of our updated guidance.
Our operating margin declined 50 basis points to 29, 6%, mainly driven by strategic investments into our product innovation, which increased our R&D ratio by 150 basis points to approximately 17%.
On an IRS basis, our operating profit and margin were impacted by significantly higher share based compensation expenses compared to 2020, mainly due to the <unk> IPO and the appreciation of Sap's share price during the year.
<unk> operating profit decreased by 30% and <unk> operating margin by seven five percentage points to 16, 7%.
Let me now turn to EPS, the true bottom line and cash flow.
We had a decent EPS performance in 2021, growing 3% and IRS and 25% and non high for <unk>.
It was supported by a strong contribution from Sapphire ventures, and a reduced tax rate.
As expected we had another year of strong cash flows with operating cash flow was $6 2 billion slightly above the outlook of approximately $6 billion.
And free cash flow came in at 5 billion euros exceeding the outlook of about $4 5 billion euros.
Let me now turn to 2022 and beyond.
As you have seen in the pre announcement and in today's release.
Im very confident of our short and midterm prospects.
We expect to continue our Q4 current cloud backlog growth in 2022 and to significantly accelerate our cloud revenue growth.
We see 2022 as another important stepping stone towards our midterm ambition.
Let me look into the details.
Entering 2022, we are now moving into the next leg of our cloud transformation and are approaching an inflection point.
We expect to move into double digit growth territory in 2023.
First for operating profit.
Mostly followed by total revenue.
And our growth should accelerate further beyond that.
At the same time, we've become ever more resilient our share of more predictable revenue should expand to approximately 85%.
For more than 30 billion euros in absolute terms by 2025.
Let me just quickly share why our tremendous success of 2021 and the characteristics of our business model transformation are so powerful to deliver extraordinary returns for the years to come.
In 2021, we observed a strong growth in the total contract value of new cloud deals far beyond what can be seen in the already impressive search of our current cloud backlog.
Next to a sharp increase in demand for our cloud products. This was driven by two additional factors first slightly increase in contract durations and second and more importantly, more pronounced deal rooms, which means contract stepping up in volume over the course of their initial term.
We anticipate that both of those factors will help us define the law of declining growth rates for a while and continue to accelerate our cloud growth even beyond 2022.
At the same time operating profit should get an extra push as we complete our next generation cloud delivery program.
And as our sales expenses benefit from the ever increasing share of renewal business in our backlog and cloud revenue.
That in a nutshell is why we expect to see our operating profit growth jumped to double digits in 2023 and beyond.
And why it absolutely makes sense for us to fully focus on maximizing our cloud growth in the short term.
Now I'd like to turn to sustainability and non financials.
We have paid at the forefront of integrating sustainability into our business strategy. As you know we truly believe that a holistic approach to strategy and operations leads to better business decisions.
And we will publish our 10th integrated report on March 3rd reflecting this approach.
Looking at our non financial metrics in 2021, our customer net promoter score increased significantly.
Employee engagement remained at a very high level overall, despite a modest decrease.
In the area of <unk> net carbon emissions continue to decrease to 110 kilo tons in 2021, which was down 25 kilo tons year over year.
In addition to our goal of being net carbon neutral in our own operations by 2023, and we have also announced our goal to achieve net zero emissions across our entire value chain by 2030, just 20 years earlier than originally anticipated.
So to summarize 2021 was the year of perfect execution of our strategy of helping our customers become sustainable intelligent enterprises.
But most importantly, our cloud order entry was exceptionally strong renewal rates were extremely healthy.
<unk> focus on efficiency.
This success would not have been possible without the dedication innovative spirit and the discipline of our people.
And I am confident that we will continue to keep our promises as we enter the year of our 15th anniversary.
This confidence is reflected in our accelerated cloud guidance for 2022.
Making great progress towards our midterm ambition.
Thank you very much and we will now be happy to take your questions.
Alright, operator, please open the line.
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I'll take the first question from Michael Bruce at UBS. Please go ahead.
Yes. Thank you good.
Good afternoon and congratulations.
Two for me if I may.
I can hear your confidence in your in your voice there around the margin progression and EBIT progression I think investors would really appreciate understanding on the cloud margin specifically what are the.
Investments are being made this year.
And will they disappear in 2023 is the type of running it infrastructure and consulting costs.
Just what will get us to the 75% margin.
And then in terms of cash flow I think there was some confusion this morning around.
Stock buybacks and stock based cash settlement option programs can you just say relative to the $1 $1 billion that you spent in cash last year, what the likely charges in 2022 and out to 2025, but presumably some of those programs migrate over to <unk>.
Stock settled thank you.
Yes, Thanks, a lot Michael for your questions and those are really very good and important one so let me start with the cloud margins first as we have stated.
Already late in 2020, we are going through a major overhaul of our cloud delivery infrastructure. We are harmonizing. It we're migrating all of our remaining customers who are still on legacy infrastructure across various solutions on this harmonized cloud infrastructure and that reside.
It's in our cost.
<unk> 2021 and 2022.
A mid triple digit million euro.
At the outset of the program in the first half year.
B spend portion that related to 2021 was more spend in R&D to prepare our solutions for some of the migration aspects and since the second half of the year.
Essentially was hitting the cloud margins just to give you an idea.
<unk>.
Moderate decrease that we have seen in 2021 of 20 basis points actually was impacted by close to one full percentage point by the cost of this cloud delivery program and this is.
Project related costs, but mainly also.
Double bubble cost, where we build up the new landscapes, while we are still operating the OLED.
You know, we also took a restructuring charge for the accelerated.
Depletion so to say of existing law.
<unk> infrastructure. So this will also continue in 2022.
I am.
I'm expecting that in 2022, we will see as we have seen also in 2021.
Actually quite noticeable underlying regular operational scale related efficiency gains.
Which.
<unk> suggests that we will at a minimum remain at a stable cloud gross margin I think we also have the scope to slightly increase it in 2022, but certainly not more than that due to the significant.
So that is running against it when the program dissipates.
In two.
2023, where we will have two effects first of all of course all of those incremental project related expenses will be gone and that should be a.
Relief.
2023 in the range of a couple hundred million dollars is asset.
Certainly more than $200 million and then second we will see an immediate step up in the efficiency of our cloud operations due to just the greater elasticity and the greater efficiency of this converged cloud infrastructure that we have put together.
So this will result in a big step up of the cloud margin than in 2023 from which point on there will be obviously product progression towards the 2025 target as an additional element.
One of our cloud solutions I pointed to this.
He has been hard hit during the pandemic and only recently started to recover that's concur concur has one of the highest cloud margins in our portfolio. The reason why we've seen a slight decline in not a slight increase.
In 2021.
We had predicted was actually that daiwa recovering a little later than what we had originally assumed in our planning assumptions, but as we have now returned back to double digit growth and certainly see that.
Point in time.
Driving where we are going to move more into a new form of more normal and we are therefore expecting that concur will continue its recovery that will be an additional point that will support us on the further progression of our cloud margin. So I hope that kind of outlines the major point.
So that we have to consider there.
And this is not.
Rocket science, it's basically all depends on the timely completion of the program and then the effects.
Are actually relatively straightforward to see later on now on the cash flow side I think it's a it's also an important point I want to make sure that.
The effects of the move to equity settled share based compensation programs is not.
Over assessed because we are moving to equity settlement for one of our share based compensation programs, which is the so called move SAP program of restricted stock unit program.
We still have additional share based compensation schemes that S&P in place most notably the so-called own SAP program, which is a discounted stock purchase program that we subsidize for our employees who are participating in this program and will continue to be cash settled.
As you have rightfully pointed out in two.
2021, we had roughly $1 1 billion in share.
Share based compensation related cash outflows.
We.
I expect that this amount.
We'll still slightly go up in 2022, because we are first going to see the impact of the move.
The move program to equity settlement.
In the course of 2023.
Then we will see reductions, but we still expect in 2025, which will be the first year, where there is no impact from move on.
On cash anymore to still see more than 500 million euros in.
Share based compensation related cash outflows from those other programs and also from the fact that we are not going to be legally able to transform move.
SAP to equity settlement in all jurisdictions worldwide and some we will have for a regulatory constraint still left to.
To do cash settlement, so I hope that puts it into perspective of course, we are extremely confident in our 8 billion free cash flow target for 2025. We are actually ahead as you have seen in 2021 as a starting point from where we thought we would be so we definitely see scope.
Revenue this on a continuous basis and potentially also updated accordingly, as we move closer but you will appreciate that this is four years out and there are also other influencing factors like currency movements cash taxes, and so on that are very difficult to predict such a long time before but take it from <unk>.
Release, but we are very very confident in our trajectory and that certainly as of next year also free cash flow will start to significantly go up an increase as well.
Thank you for the retail level.
Thank you next question please.
Yes.
Thank you if you find that your question has been answered you may remove yourself from the queue by pressing star one.
We'll now take the next question.
Stefan Slowinski of BNP Paribas. Please go ahead.
Yes. Thank you.
Hello, Hi, Christian Thanks for taking my question just to follow up.
On the previous question around the stock compensation.
Looking at it on a holistic basis.
I think stock comp is guided to be 11% of sales. This year, which of course is up significantly from where it was a couple of years ago do you expect that 11% to kind of be the new normal or will that trend back down over time, and then associated with that just a broader question around the hiring environment, obviously, we hear about the <unk>.
<unk> in the market companies increasing compensation.
Whether it be cash or stock on the other hand, a lot of companies have option plans that are underwater. So maybe that's working in your favor. So anything you can tell us about what the hiring environment is like and how you are executing would be appreciated. Thank you.
Yes.
Perhaps I can take the first question and then on the hiring environment.
Kind of related to my operational colleagues because it finance.
We're not doing a whole lot of hirings that I think Scott is probably better suited to talk about the environment. There now look on the on the share based compensation of product and the movement front, you're right of course, we have seen quite a sizable step up in terms of percentage of revenues, but with this we are at.
Actually perfectly in line with what we see from our peers.
And.
It's.
Likely that you will see.
A.
Gradual decline of this share again, because we don't think that from an absolute.
Share based compensation expense perspective, we will see significant.
Upwards movement from now on whereas obviously on the revenue front, we are planning for significant increases so why is that.
First of all at the moment.
We are still seeing a significant share of our overall share based compensation expense being tied to the share based compensation plans that call tricks in particular, the executive management plan that was awarded at the point of the IPO and this actually will stay with us for three years from the IPO.
Because thats the periods of the measurement period of this plan and in equity based compensation plans. Unlike in cash based compensation plans, where you're constantly adjust the.
The valuation based on the share price movements, you actually until the exercise.
At the grant value.
Fixed basically at the at the $30 IPO price debt that we had so from that perspective actually more than one third of Sap's total share based compensation expense plan for 2022 is related to quality mix. This will dissipate over time and.
Go down last year it was actually.
50% Reits this year it goes down it will gradually decline, but not at the pace that you would that be.
I would assume.
In terms of the other plants in our own organic plans on the S&P side, we are moving our <unk>.
Move program from annual to quarterly vesting. In addition to the equity settlement and that results in a one time incremental expense in 2022.
200 million euros, which then also will be part of the of the baseline so to say and we're not further step up so from that perspective, that's why we believe that our expense will be relatively stable over the next coming years, whereas the revenues, obviously will increase and therefore the ratio.
Actually generally come down over the course of the next few years, so perhaps on the hiring environment as anyone.
I want to commend Scott Christian yes.
Yes, sure I can comment Christian please place that on top of I guess <unk> comments on the hiring side first of all there is no doubt that it is a competitive market where the technology sector is strong our businesses are will be able to leverage those skills and that means that the market has got a lot of movement.
Having said that we've seen continued success with our programs that we launched and have rolled out over the over the pandemic in particular last year, we flex with AIP the ability to be able to.
Work in the environment that is best suited to you together with other employee engagement programs, that's allowed us to be able to attract and retain the best talent, so even within a volatile.
And an aggressive talent market, we've been very successful to not only retain but actually expand our talent pool and then the third that I would say is it's a great industry and so what we see is early talent coming into this sector continues to expand that's not just in North America, but around the world and that allows us to be able to then bring.
Young talent early talent into the organization to bring the diversity mixed that we aspire to achieve Christian.
Thanks, a lot Scott and maybe just to close it out on the hiring side.
I mean first of all of course, we ask unlike in cyber and data scientists self cost the cost per hour go up these people of high demand in the market, but we were actually really well able to offset that I mean, we have large academies inside ACP. We ask the sales Academy. We are an engineering Academy, we are training educating.
Young talent, especially for these future skills, which we need and this is a big success on top we're also expanding our university engagement now to make sure that we have of course, the high caliber from outside of the market, but we supplement it also with strong talent from inside of the company and we are down to investing in the Reskilling.
Sure Pete.
Alright, great. Thank you for information.
We'll take the next question.
We'll take the next question from Adam Wood at Morgan Stanley . Please go ahead.
Hi.
Question Luca. Thank you very much for taking my question and congratulations on the strong quarter.
I've got two as well please I Wonder festival.
You were talking about that very strong large order intake in the cloud business and the visibility beyond that that you have on these cloud projects in house. He is I guess that makes sense as large enterprises. Obviously on are all doing this on a 12 month pilot. It's a longer term project I Wonder if you could go into a little bit more detail around that if there's any metrics you could give us on how these plans.
Scale once your three year time frames, maybe the products that these companies are adding if there is a specific example, that'd be really helpful to give us a better feeling for what you are seeing beyond that current cloud backlog in the business and then maybe following up on previous questions about stock comp and profitability and I guess this is a.
Picture, where I'm looking at it.
We've talked about talent, but we've seen very large numbers of software IPO. It was the hyperscale is becoming ever more competitive in terms of your share of voice with customers.
It gives you the confidence that when you look out to 2025, there won't be a need for you to continue spending at a higher level to maintain that engagement with customers, whether that's coming through in stock based compensation or an actual expenses on the P&L I'd just be interested to see how you feel about that thank you.
Yes, let me start.
And then Chris John I'll start from three to two.
To build on that look first of all on the on the backlog and the visibility. It's obviously very difficult to generalize. This because we have seen a large rise contracts, which.
In some cases up to <unk> 77 years transformation horizon, when we're talking about landscapes that have thousands of systems to be transformed and then we are nimble on shorter ones even for larger companies that really very much depends on what kind of landscape complexity, we are talking about that needs to be trends.
But to give you an idea at least of the magnitude.
We're talking about in general.
We had a discrepancy between our growth in annualized order entry versus total order entry into the favor of total order entry.
The low teens.
In Q4.
It was also double digits in terms of percentage differential for the full year. So this is quite sizable and on top of this you can also point to the fact.
The average duration of our contracts in the cloud has increased in Q4, two now three nine yes. So we have way more multiyear contracts, which at the same time half.
Strong our share of contracts with ramps you don't see therefore, the full impact on the full potential of those contracts in the current cloud backlog.
They have a massive backlog volume for outer years.
We are carrying with us and that's why also the share of net new business that we need to continue the same kind of backlog growth and then revenue growth, obviously diminishes over time and that is giving us increased visibility, but that's not to be said that Scott and his team can now lay back and relax of costs, we have high.
<unk>.
As I said, we have absolutely the confidence that we can accelerate our cloud revenue growth even beyond 2022 and that of course are still continues to require additional new business, which we are absolutely confident we can drive now on the on.
Share based compensation expenses, our other compensated.
Expenses.
We have made significant investments already in the last two years in particular and our innovation.
Capacity first which you have seen with the step up in the R&D ratio to 17% I think that is the ratio that will now remain relatively stable.
And.
As a percentage of the revenues also over time, especially when we get past 2023 should start to generally trend down again, we had to step up in 2021 and going into 2022 was obviously on the sales and marketing side of the house we have.
A massive pipeline that we are generating in order to drive for this extremely strong order entry growth that we're expecting and we are investing into this we have actually invested ahead even in Q4.
Into this pipeline generation. That's the reason why we have seen in Q4 also a step up in the sales and marketing ratio and of course as we are planning for another year of very significant double digit growth across our portfolio in terms of new orders, we have to invest properly in Scott's team to drive further required sales capacity, but not only.
Sales, but also post sales adoption resources in order to make sure that we have a.
Liquidity deployment of those solutions quickly and then also drive of course is an outcome for a very healthy renewal rates. So those investments have been made now and we.
Uh huh.
Obviously, our very confident based on the positive customer feedback based on the increase in customer satisfaction rates.
At this investment level, we will now start to see the return on investment we are fully determined to drive for accelerating double digit growth as of next year forward and we don't expect based on the competitive strength of our portfolio.
Need to come up with any unplanned incremental expenses are win rates as Cristiano said are extremely high.
Hard work of integration has proceeded extremely well and that means that we can also shift within the existing capacity to drive for new innovation without having a lot of this tidying up homework. So to say, it's still just to do that has been the work of the past two years.
That's very helpful.
Okay, and then and maybe it helps us build on also on one of the questions you add alone.
Cross sell opportunities, we also see in our portfolio.
This really depends from customer to customer, especially in wise now we you always have a conversation in oil and gas. For example is about how can we manage the transformation to clean energy what needs to change in the quote to cash.
I think it's oftentimes the discussion around how can we manage the re skilling of the workforce what about the total workforce management in retail it's a combination oftentimes alone.
Changing to move forward with the Omnichannel sales, we have a high demand in the CX thoughts with regard to some industry specific cloud capabilities and retain loyalty management returns management, where we develop swung and also coin away from us hundreds of retail customers and then of course, the auto and all of the other.
The suite, we also see supply chain shocks. So also the search in the business network was evident in 2021, and we actually also billing on that as we are not expecting that also days.
On the supply chain shocks will go away. So soon so you see this as really depends and then with wise, what we're actually doing I mean, it's not one year shift to Epsilon on cloud. So we're informed that you see in all of these scenarios the success factors involved.
<unk> was an even more important is our platform is anymore because with why isn't the second step. We also want to move in our customers' journey to a modular cloud ERP. So what to do with the modification of our partner joining us in the midterm and meet in the meantime, and Thats why the adoption of the platform.
When we built site by site, all the modifications, which we which the customers have an implant on the platform. How can we standardize dose we want to increase the penetration of our ecosystem the north why our marketplace. So let's not forget PDP had a very very strong quarter, but this is not because it's a stand alone.
Latam anymore. This is it's because it's tightly integrated into our module, our cloud ERP and the part of why there's also a shift to <unk>.
Equities platform.
Thank you. Thank you and we'll take the next question.
We'll take the next question from James Goodman of Barclays. Please go ahead.
Great. Good afternoon, and thank you very much so maybe switching over to the core business, which I think sits familiar with the area, where you know significantly outperformed your expectations. This year, particularly on the support line, which I think what was up 1% versus clearly the anticipated decline. So I appreciate that there was less of a license impact than perhaps you anticipated.
And really there seems to be less substitution from maintenance to cloud to fight the cloud right.
I wondered if you could comment around the support resilience and.
What do you expect that actually from here on out a larger cannibalization effect as required really to maintain the current trajectory of the backlog and maybe you can comment a little bit as well around perhaps the seasonality of any transition.
And as we go through 'twenty two.
And then just to come back briefly on the on the cloud outlet reconcile some of these comments around accelerating cloud growth in 'twenty three.
Double digit growth in.
In 23, despite the higher base for their resilience and support and you seem to be saying that the backlog will really sort of stay at these levels linker as we go through this year. So just wanted to why.
We wouldn't say that the current backlog and continue to still tick up a little bit higher this year, given particularly that non covered backlog struggles.
Thank you very much.
Yes.
Sure.
And questions let me.
Let me try to take a first step it so first of all when it comes to support revenues Youre absolutely correct. They remain extremely resilient there is close to no real churn away from SAP. So the churn that we're seeing is healthy one.
As part of the cloud migrations as part of our cloud extension.
Program.
The impact of cloud extensions on 2021 support revenues has been going up clearly.
It's a triple digit million euro figure.
Figure out by now, but we are driving for very healthy extension multipliers as we have discussed on previous calls already and that remains the case. So we are hovering significantly above the two X factor that we had flagged.
We believe that this trend.
While it will so.
Certainly not remain at this same very very high level, but it will remain extremely healthy now.
We think about the expectation.
Going forward.
I think in 2022.
I would still expect.
To be only a marginal decline in support revenues because.
The <unk>.
The impact of the rice transformations as well as.
Of other cloud migrations will.
Remain extremely healthy that might change over time as more of those.
You know a big large rise contracts are contracted and are then going through their ramp and then concomitantly with this the support revenues.
Declining to give you an idea of when you take our midterm ambition for 2025, we have said that we want to up 85% highly predictable revenues and we want to have more than 22 billion euros in cloud revenues that would tell you that.
We will have.
Round about eight and a half billion euros of support revenues left by then currently we have around about 11 and a half billion.
So there will be a.
Sliding path, so to say of increasing declines in support revenues also quite frankly, because there will be less new software revenues contracted that would fill up so to say the migration impact in terms of.
Any seasonality expectations in 2022.
Let me talk about this in three different ways first of all you have asked about the current cloud backlog.
And you're right I mean for the full year, we expect a similar trajectory.
Like in Q4, 2021, but probably with a different.
Situation for each quarter undoubtedly our order entry performance in Q1, and then Q4 was the strongest in 2020 , one and that creates obviously a tougher compare so I would assume that in Q1 and in Q4.
Might see slightly lower.
<unk> growth rates, whereas in Q2 and in Q3.
Both rates should actually be higher than what you've seen in Q4 on the cloud revenue front.
I would assume that the growth rates in the first half would be quite similar to what we have seen now in Q4, because it takes a while until the significant surge in growth in order entry that we have seen in Q4 finds its way into the cloud revenues, but then in the <unk>.
Second half a year, we definitely expect a strong or such and cloud revenue growth and when you take a look at the <unk>.
Profit develop bench than certainly we had a very strong Q1 as you will recall in software revenues.
Well as.
In support revenues to software and support was actually up in positive territory.
That will of course create a tough compare for the Q1 performance, but that will then ease in the coming quarters also because we were leaving the pandemic conditions in terms of the spend environment behind a bit and we are also increasing.
A lot of.
Spending in areas like travel and marketing in the second half year and that makes the compare then easier. So that's kind of the way out to think about seasonality at the highest level I hope that.
Yeah.
Yes, thank you very much and maybe.
And just to build on that Luca I mean.
We also have to consider which just launched 12 months ago and Gordon team did.
Tremendous chart from zero to our biggest growth driver now throughout the year 2021 and of course cooking such large deals, which you have seen and you see that the majority of the order entry is not driven by these large deals that took some time.
But there is no shortage, we have an installed base of 30000 customer plus maybe one important factors as well as a new.
But our renewal base is getting bigger because one of the key drivers and then also why we will turn back to double digit profit growth in 2023 on in there.
So our internal reorganizations that a change in the bonus plan.
While we are now much closer to the customer you're using now heavily to telematics data with why is having nausea text that the customer we work with them with <unk> adoption, we get the modification.
So we are much much closer and we saw this already at the very positive impact on revenue and this will also then continue and now in the current year and selling data yet to come.
Alright, thank you.
And with that we'll take the next question. Please.
We'll take the next question from Scott Mahoney at Evercore. Please go ahead.
Oh, Thanks, very much Christian I was wondering if you could just talk a little bit about the adoption of rise across geographies I was just kind of curious if the adoption and success has been.
Fairly balanced across all the geographies or if there's an opportunity for say Oh those make this up the Americas to sort of catch up a little bit if that's the case it might not be and then Lou.
I assume your commentary around cloud for next year includes the U S or the Americas again sort of re accelerating I assume that was served weighed down a little bit by intelligent spend this year or so.
Just a quick one for you as well thanks very much.
Yes, I can start to answer the question. The first question and Scott. Please feel free to build on it I mean first I would say, yes, when I looked at the other end we acquire.
Throughout 2021, especially in our Q4 I mean, you have seen from the locals.
Cvs in the U S and in many other large ones in the U S. But also Germany as we let me say, okay, whereas Germany stand with the digital transformation of other customers equally.
Cement the failures and thankfully we have a few other they all know making the move to the cloud all in and not only the technical move of course also the transformation of their business model. So we saw equally quote and we also see this in the pipeline for the current year, So actually wise was really.
Spanning across the world and we see an equally strong pipeline then wherever we can actually Scott anything to add.
The only thing that I would add to that Christian I think you said it well is clear.
Clearly the mix of our customers differ across regions. So we saw.
We can acceleration of our small and mid sized customers in markets like Asia.
And in Latin America or in other regions.
Whereas obviously in North America, and Christian referred to the large organization.
Together with Germany in other major markets as being a significant uptick in Q4 or did you just want to add one comment on the cross sell which I think is important to give you some.
Some context to the impact of rise heads.
Half of the bookings that we had the initial order entry.
<unk> solutions outside the core risk or so the enterprise the intelligent enterprise story, the ability to be able to do that in the wind process transformation.
Through rise as being the catalyst was there, but then as the year progressed, we saw up to 80% of those customers Zane having more than one solution at sort of the core areas. So as the customers use expand and get the benefits of rise as they roll it out I didn't look to the expanded opt.
Generally that they get with this IP and so that gives confidence when we look going forward that.
Not only does rise in its base proposition provide that transformational opportunity on mission critical workloads to customers, but then our customers as they expand the use of Sap's solutions across the suite to be able to provide that <unk> transformation and we see that in there.
Pipeline going forward.
Just quickly on the Reacceleration in the Americas, Yes, you absolutely should see a continued reacceleration in particular in the first three quarters of the year because of.
First of all conquer coming back to growth.
And in general actually the search and the current cloud backlog that we have seen in particular in the U S. We had a very healthy uptick one of the larger ones.
That will of course help the entire TLC America.
Thank you. Thank you.
We can take the next question please.
Thank you we'll take the next question from Mohammed Ahmad.
Goldman Sachs. Please go ahead.
Great. Thank you very much good afternoon, gentlemen, I have two quick questions. Firstly could you just remind us around the installed base as you look to kind of cross sell multiple products into the base, where we are in terms of the kind of remaining runway, particularly of some of your kind of prior acquired product.
And as we think of that kind of clouds acceleration.
From just a sort of migration and moved to SaaS for Hana how much more there is to kind of cross sell and up sell and then secondly, just luca coming back around your confidence on the operating profit growth acceleration.
Obviously in the pandemic youre able to kind of make some structural savings and sort of go to market.
Things are reopened and we move potentially into a more of a hybrid world.
Will there be kind of opportunity further to drive efficiencies on the kind of sales and marketing spend as as you can.
We support the growth thank you.
Yeah. So.
Perhaps I can take the second part on the on the installed base and move to us for them and I will invite christiane and start to.
To comment on this but.
Clearly youre right I mean, we've.
Fitting in particular in the first part of the pandemic from.
Obvious savings in travel facilities car fleet and other areas that were not so much in demand, but quite frankly this is already behind us.
In the second half year, we are actually.
Already returned to much more normalized.
Spending behavior, so that baseline that we have now is I would say the right one for us to then.
Leverage additional efficiencies and we are working on this of course on a continuous.
<unk> and <unk>.
We are confident that we know where the leave us.
To get us to where we have to be again, the most significant one from which a lot of the profit improvement will come as first of all significant surge in the cloud gross profits.
Secondly over time then.
As a patient of the need for <unk>.
Incremental sales and marketing investment as the.
Wait of the installed base existing cloud business increase us further and further and then also the fact that we will not have any more such a significant.
Step up in R&D expenses as we have seen it in the next in the last two years to work against and that together with the top line momentum that we expect in the fact that the mix shift effect.
Also decline because of the smaller weight of on premise should definitely carry us to the targets that we have had.
Over to you Chris ton for the first part.
Okay.
Mohammad I mean first of all the existing.
On premise space, it's still about 30000 customers and then when you look into this ERP and what is up for the conversion to the cloud obviously to look at the situation now looks much better starting with the <unk>.
Office of the CFO .
And we are converting one customer after they.
Differentiating is of course that we are wanting our ERP in many many countries localized version everywhere infusing new technology AI to automate certain final closes we're doing real time specialty management and much more so this is really great.
Now on the HR side, obviously bill most of these 30000 customers also have employee central So which we also are having now.
In the cloud and we just heard about already is that we also that can easily one customers with over 100000 users also they're heavily localized and now that also the equation established with ETP as the seamless connection to the finance and also do other module of the ERP. We are seeing of course, not only much higher.
Our cross sell way, but we're also actually seeing also a few wind back now a.
Customers, who may be made a different decision three or four years ago. So when the Successfactors business, we are seeing a huge catch up.
Extremely healthy conversion rate and then on the procurement side. It took a while but now we are there. So we just also announced in Q4, we're proud about the engineering team on procurement.
Many of these ERP customers, one direct and indirect procurement and now we can offer that no matter. If you have on premise direct procurement with ERP.
Indirect procurement, which then will one in the future with a revised now on one platform and with that we can also convert installed base much more easily travel and expense.
Well, it's a tough one and 2021 because of the pandemic, but also there we are further investing in the localization of concur. We also putting in more innovation. We are doing a lot on the <unk> side. So also there once.
It's level this bag in EBIT cover we hope that we will see.
See even stronger conversion rates going forward, Scott anything to add yes, maybe just to quantify everything that you described and give it a bit of context, we have an incredibly loyal.
And long term customer base as you Sai Christian and they continue to invest in Asap, but if you look at rise as we've described throughout the year in Q4 was no different while there was a number of large organizations and existing customers. We also had nearly 45% of.
The order entry of the bookings was net new.
New customers joining so the good news is we're not dependent on our existing customer base, although they continue to invest and expand with S&P, but we're also adding new customers to waste, helping them accelerate and transform their journeys.
And in the cloud and that gives us confidence in the pipeline going forward as well.
Alright. Thank you. Thanks for the question please.
Thank you we'll take the next question from Johanna shallow at Deutsche Bank. Please go ahead.
Yes, Thanks for taking my question and congratulations on the good cloud acceleration that you're seeing.
If we're thinking about some of the components of your cloud outlook for 2022.
Luca you already quite bullish on Successfactors in Q3, and Christian you just again made the point on competitive wins I mean should we think that successfactors could actually grow above the cloud average four for 2022 and then another factor would be on concur could you help us maybe understand a little bit better.
Assumptions, you've made around that business in terms of travel volumes for 2022 for us to better understand kind of how to think about the upward downside depending on how travel marketing was actually develop and then the second quick question just on the cloud extension multiply Luca you brought it up could you maybe share where we stand here at the moment.
There was obviously a strong upselling component in there.
We take that out and just look at the ERP conversion from licensing to SaaS without up semi where would that be right now. Thank you.
Yeah.
So first of all on the cloud extensions I cannot really tell this to you because we are not seeing it is separated.
I thought also explained and Christiane we.
We see lots of opportunities when we do these transformations to actually do a more holistic one and in that respect.
Have an extension case that spans across the portfolio and we are not segregating it and separating it.
Accordingly, It would also not makes sense to do so so as I said I mean, we are definitely far above two X conversion factor.
We.
That this will remain the case.
And.
That's also due to the fact that every one of those like for like conversions has a great opportunity for us to actually upsell.
That's good in terms of the assumptions for con call.
We are still not expecting pawn cross business volume to be fully back to where it was pre pandemic in 2022.
Our hopeful and also cautiously optimistic that this might be the case in 2023, we obviously expect that there will be a continued recovery. So we are expecting that the growth rates for <unk> will continue to moderately climbed up from where they were.
From the low double digits that we are seeing right now, but not in the sense that that would be a dramatic increase power above the.
The growth rates that we're expecting.
At the group level.
<unk> still planning for growth that might be slightly below but not as dilutive anymore as it used to be in.
In 2021 and look for Successfactors.
In terms of the forward looking growth on the order entry I think we are we.
We believe that we have strengthened our competitive momentum the solution certainly benefits greatly from innovation such as for example.
Our invention of the human experience management category, which is a clear differentiator and has resulted in many competitive wins.
Us.
Because there is nothing comparable that our competition can offer.
For what kind of growth rates that ultimately then translates that remains to be seen let's not forget that successfactors remains our largest cloud categories of some.
A law of diminishing numbers on a very high base is something that you will need to bake into it but clearly we see accelerating momentum and successfactors.
Order entry has been sequentially up.
<unk> backlog is sequentially up.
<unk> are sequentially up and that is something that we certainly expect to continue.
In <unk>.
2022.
That's very clear thank you Luca.
Okay. We have time for one final quick question. Please. Thank you. Thank you we will now take the last question from Frederic.
Bank of America. Please go ahead.
Hey, Thank you good afternoon. Thanks for that maybe your first question Chris.
Christian around your cloud.
Cloud momentum. So if you can share an update on <unk>.
A number of as for Hana customers on the cloud.
And where we expect the migration of where are we on the core ERP migration. So if you can share any numbers around sensitive businesses that have been migrated from now or are in the pipeline in which we can expect in a couple of years.
The second question.
Coming back on the free cash flow.
A discussion she can help us understand.
I mean, you gave that number or slightly more than 100 million more than $500 million.
Still cash.
<unk>.
125, how does that compare to where we were in October .
'twenty 'twenty when you gave your long term outlook.
Assuming that's a lower number.
Everything else being equal should we expect that free cash flow guidance to be to be increased by a similar number or are there are some other free cash flow items that have moved the other way.
Which prevents you from moving your guidance today. Thank you.
So let me start with your first question first.
We have in the meantime over 5000, thus far on our cloud customers. The majority of the increase of net pharma customers. In 2021 was obviously wide-awake moving to the cloud what is the remaining potential.
We have still an on premise space of 30000 customers.
Actually the movement of the cloud will further accelerate because of two factors now.
Now customers can actually afford nominally which industry you are that you're falling behind the innovation curve. So and therefore, you find all the capabilities to run this new business model. So if you want us which license model. We have pay as you go we want and that we wanted this commerce. So they can do real constantly and then.
Second, let's not forget all the.
Everything what is happening alongside.
Lot of customers with the local ICT cannot cope with the evolution what is happening on the cyber and really making sure that the data is protected so that actually also in the meantime really accelerate.
Our growth in denim with of course, the economies of scale. We're getting we also build the FEMSA conversion rates, but obviously, we are very competitive in the meantime also on how we can offer so this will all.
Fall into that we further accelerate.
Move of our 30000 remaining I based customers to the cloud and lastly, even if someone is now on <unk> on Prem that doesn't mean that they are not really also then coming to the cloud sooner than later because they need this agility they want to get rid of this modification they need this innovation.
What we are delivering and this is why a lot of sources for calls also now this year in the year to come.
Okay, then let me.
Close it out with a favorite topic of today with the free cash flow look in October 2020, obviously, we were looking at.
Cash.
Cash flow impact of our share based compensation plans in 2020, which was higher than in 2021 actually it was above $1 3 billion. However, we knew already back then.
Old tricks would go through its IPO and that therefore, there are share based compensation plans would switch to equity settlement, which which is also basically the reason why our cash impact of <unk>.
2021, and $200 million less than in 2020. So if you would follow your logic than you would have to bridge from the $1 one.
That we have.
We had expected for 2021 to.
Essentially an impact of more than $500 million that we still expect in 2025, but again there are so many additional factors to take into account on a matrix that is any way not the easiest to plan for and as four years out.
Simply the currency movements if behalf.
10 cent increase or decrease of the U S dollar against the Euro Opex again has had such a significant impact on the cash flow.
This is just a very significant factor that is completely outside of this.
Of course, the unpredictability of when for example, deferred taxes will lead to actual cash tax payouts, which is also important are very difficult to forecast at least.
Long period of time out so that's why I said at the beginning as well.
Indeed, the move of move to equity settled of costs is only further increasing our confidence into our midterm ambition. That's why we have confidence they reiterated its.
When already with our pre release and of course.
If we deliver on our <unk>.
Planned trajectory of profit increases.
We absolutely are confident that we can also as we move closed a revisit all elements of our midterm ambition, including the free cash flow guidance.
But again bear with us as we work through another as we believe very successful year 2022.
And then we will.
We'll take it.
Look at this.
So we move forward into into next year.
Same is actually true for 2022 as well.
Seem that we guided at the beginning of 2021 for about $4 5 billion in free cash flow and we ended up at slightly more than $5 billion. What was the reason not that far off in terms of.
Extra ordinary impact such as restructuring cash outflows are in carbon taxes or employee based compensation no. It was the fact that we've got coming in better than expected on the profits. We have again a range from flat to slightly declining profits for 2020 one.
If we come in at the high end.
It's also evidently will it be the case that we will also have resided in free cash flow that will be similar to what you have seen in 2021.
Therefore as of next year, you will see definitely significantly increasing free cash flow generation up to our midterm ambition and lets see perhaps a little bit of both.
Alright, Thank you Luca and this concludes our call for today, Thanks again for joining.
Thanks, everyone Bye bye.
Thank you bye bye.
That concludes today's call. Thank you for your participation you may now disconnect.
Okay.