Q1 2022 SAP SE Earnings Call
Good day, ladies and gentlemen, you're on hold for today's conference call, where you're wasting the arrival of additional participants I'll be starting shortly thank you for your patience and please continue to hold.
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Good day and welcome to the S. A P Q1 2022 earnings Conference call Today's conference is being recorded.
At this time I would like to turn the conference over to Anthony collector, Chief Investor Relation Relations Officer. Please go ahead Sir.
Thank you.
And welcome everyone. Thanks for joining us today on our earnings call to discuss <unk> Q1 'twenty results.
On our Investor Relations website, you can find the deck intended to supplement today's call.
With me today.
Christian Klein and CFO Luka, <unk>, who will make opening remarks.
So Scott Russell, who leads our customer success organization joining us for Q&A.
Now I'd like to do the test have been.
During this call, we'll make forward looking statements, which are predictions projections or other statements about future events.
Edmonds are based on current expectations forecasts and assumptions that are subject to risk 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.
Including but not limited to the risk factors section of <unk> annual report on form 20-F for 2021 .
Unless otherwise stated all financial numbers on this call a matter for us.
Well, its weights and percentage point changes.
Yeah, but yeah at constant currencies.
But as far as furniture merger, we provide to them that would be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IRS.
Before we start I would like to remind you that we will all our financial analyst conference as part of our Sapphire program in Orlando, Florida on May 11th.
Event will also be webcast on our website.
And with that I'd like to turn over to Christian.
Thank you Anthony and thanks to all of you for joining us today.
To start I want to address a topic that has been at the top of everyone's mind for the past two months, while share ongoing unjustified war in Kuwait.
Above all this is a human tragedy on a massive scale.
And our hearts and hopes continue to be with the people who quake.
Like other companies globally, we have been working closely with government and implementing all the sanctions imposed by the international community.
We are also going above and beyond those quick violent.
One of the first technology companies to stop sale.
<unk> cloud operations in Russia.
In addition earlier this week, we announced a structured exit of our direct presence in the country.
These decisions have a financial impact both on the top and bottom line, which Luca will comment on in more detail.
But despite the challenging political and macroeconomic environment Q1 has been another successful quarter and we are reiterating our 2022 outlook for revenue.
Operating profit and free cash flow today.
The ball is undoubtedly leaving its mark on the technology sector.
What's the risk of Cy biotech well I think we see more customers adopting cloud solutions for their mission critical systems.
Political realities are highlighting the appeal of selling cloud solutions like the one we announced with our auto in the first quarter for the German government.
And with NFC diversification couple of mine, our sustainability focus takes on new meaning and importance, which I will describe in more detail later in my remarks.
But first with all of that in mind, let's take a look at some of our top line number for Q1.
Cloud revenue growth further accelerated to 25% as our cloud transition gained further momentum.
Current cloud backlog continued its strong closed at 23%.
This is despite typically lower Q1 seasonality and despite the impact of our wind down of cloud operations in Russia.
Without Russia, CCP growth would be 0.8 percentage points higher.
Is that flat to current cloud backlog now standing at nearly 10 billion euros.
Current cloud backlog for SAP, four Hana hit a workhorse 17, 9% growth.
Driven by continued strong adoption of Weiss with S&P, our signature offering for business transformation in the cloud.
In Q1 alone we added more than 200 million Euro two hour as for Hana cloud backlog.
In addition.
As for Hana cloud revenue growth increased sequentially by 10 percentage points from 61% to a record 75.
Overall this strong performance sets us up well for ongoing close in the west off 2022.
In an increasingly volatile world the unique value of Sap's innovative cloud portfolio continues to be clear.
Customers want a wall continue to power our quotes as they turn to us for solutions to future proof their business and make them more sustainable secure and resilient.
And <unk> transformations are enabling our own.
We expect continued acceleration of cloud revenue was up to 26% growth by the end of 2022 reflected in our guidance.
Our strong quarterly performance is another proof point for our strategy, we introduced in 2020.
Since then we have seen COVID-19 pandemic accelerated cloud based business transformation around the world.
The new geopolitical realities, we face amid washouts ongoing one in Ukraine.
Also likely to fundamentally reshape the world we live in.
Even before the conflict again supply chain, we're under pressure worldwide.
And businesses from grocery stores to auto manufacturer will cooperate with an exponential level of uncertainty in their operations.
The <unk> in Ukraine has amplified this tension revealing even more clearly the importance of the silicon supply chain.
Across every industry companies will need to transition their supply chain to make them more resilient agile and transparent.
Our S&P business network can uniquely help our customers across industries and value chain in deep ways.
The power of the SAP business network has also been evident in our relief efforts to support the humanitarian crisis arising from work.
<unk> 2700 suppliers have waste ahead to provide humanitarian support to equate and request for over $100 million overall supplies has already been posted on the network.
<unk> just recently an acquisition firstly 100001st aid kits.
Turning to fossil fuels, it's clear that the movement towards renewables must celebrate.
Sustainability is now clearly not only an economic opportunity, but a key element of stability security and even so affinity.
Any other software company S&P is in a position to help governments and industry manage these change.
The scale and depth of our industry expertise to <unk>.
Transparency of our solutions to drive sustainable business practices.
And the ability of the S&P business networks to create the resilient supply chain.
Following the increasing relevance of Sap's portfolio.
Let's turn to an update about wise with S&P.
Wildlife S&P is our signature offering for business transformation as a service.
Since we launched <unk> in January 2021, we have seen significant increases in customer adoption each quarter.
Customers are adopting whites with S&P for three key reasons first.
Lastly, while enables them to redesign their end to end business processes based on best practices developed from working with hundreds of thousands of SAP customer.
Secondly, why it helps them transition to a new agile ERP in the cloud.
And finally, while <unk> provides a platform to innovate with industry custom and sustainability solutions.
This quarter, we have seen notable progress with our wise with S&P offering.
Our business poses intelligence offering with cloud revenue almost doubling year over year has now fully integrated S&P <unk>.
We have seen nearly 80% of <unk> customers adopting our business technology platform as part of their wide solution.
Transactional spend on the SAP business network has been calling over 95% year over year, which will drive further revenue upside.
Overall wise with S&P drive strong cost and upsell opportunities with our conversion ratio in 2021 of greater than two five. This means we are equating to five times the value from a customer after they have adopted wise.
This is flat to our revenue one wait for the modular cloud ERP now exceeding 7 billion euro up more than 1 billion Euro from Q1 2021.
In summary, whilst with Asap enables us to partner, even more deeply with our customers.
We offer integrated total solutions with single end to end accountability from infrastructure to applications.
The success of <unk> with S&P in ton 12 strong performance across our line of business applications together with the cloud momentum I mentioned earlier.
Let's take a look at our progress.
New wise with S&P customers included a center, Microsoft Repo NSE overdue and the citizen Watch company.
<unk> announced they will be expanded deaths are offering to help large enterprises to drive greater value from wanting wise with SAP.
They are able to offer bespoke support by drawing from their own experience of running their core financial operations on a single instance of SAP.
Hi.
This quarter, Microsoft announced it would become the first public cloud provider to adopt wise with S&P internally utilizing <unk> Hana to transform its own S&P ERP deployment.
This will enable Microsoft to deploy new technologies faster and establish best practices that benefit our China customers in the market.
Essentially in Microsoft together with the repo and IBM are examples of the snowball effect from our partners as they help accelerate the adoption of widespread.
Around the world.
In March <unk> chose to partner with S&P to overhaul that business and digitize the end to end processes to enhance the experience of the customers suppliers and employees.
In the increasingly important market for electric vehicles.
China's widening auto and India Excite industries also both shows wise with SAP.
One thing auto as part of one of China's largest auto groups.
<unk> selected wise to support key business processes, including forecasting collaborations with suppliers and they will be systems for electric vehicles.
Excite industries limited one of the world's foremost battery companies selected <unk> to support our growth, including the creation of a large new manufacturing facility.
Syed anticipate that their wide implementation will help them reduce cost by about 10% and support a better we recycling program Equate example, sustainability becoming profitable.
Our success with wise led to create as for Hana momentum.
We now have more than 5003 hundred S. Four on a cloud customer and our win rate against competitor was 63% for net new deals.
12700 of these customers are already lies demonstrating the fast time to value of these deployments.
Customers. This quarter include hiring and CLO motorcycles hi.
<unk> Europe's largest peer producer with over 300 global plans is transitioning to a new digital core based on SAP four Hana.
Silver motorcycle the global leader in high performance electric motorcycles, and powertrain has chosen SAP <unk> Hana overall vehicle to help them to replace their legacy infrastructure and scale their manufacturing operations to meet rising demand.
Our intelligent spend in business network portfolio had a particularly strong quarter.
Clinton's National Health service.
<unk> business services Corp, selected S&P Alibaba for its new procurement system designed to improve and simplify the engagement with its broad and complex supply chain.
F. <unk> KLM was another win for Veeva this quarter.
We also saw continued positive indications of a return to business travel with Concord transactional revenue, increasing by triple digits year over year.
L'oreal devote leader in beauty has renewed its contract for S&P concur for an additional three years.
Because they are worth it.
Turning to our customer engagement portfolio selling group the largest retailer in Denmark.
<unk> invested in S&P customer data platform and S&P emphasis these solutions will help them improve customer lifetime value and the customer experience.
Our successfactors portfolio continues to win significant business over workday.
<unk> D PSP, the leading Brazilian pharmaceutical retailer expanded sap's successfactors portfolio to better manage maintain and develop its workforce as part of its a worldwide with S&P retail implementation.
S&P business causes intelligent wins this quarter included <unk> telecom telephone Cabo Asian, Telecommunications and Montana.
And our success with their COVID-19 vaccine has transformed the company and they will be using.
BPI to redesign their business processes based on the next chapter in their quotes.
Our business technology platform continues to go from strength to strength.
As customers adopt PDP as deep backbone to integrate and extend the S&P solutions.
We are well on track to establish <unk> as a platform company with this quarter's revenue one wait for BCP exceeding 1 billion euros.
Samsung the world's largest bottler of Coca Cola beverages to adopting PDP to optimize the value from each of its product and line of business, along with billing and cash handling cost its Latin American markets.
Last quarter I saw.
Talk to you about the introduction of ACP cloud for sustainable enterprise.
Part of our sustainability portfolio.
This portfolio helps companies manage that green line with as much as been problems at the top and bottom line.
By providing radical transparency insight and data.
This quarter, we announced an important partnership with BCG focus on helping our showing customer base determined strategies for sustainability transformation.
Customer adoption of our sustainability portfolio is already strong.
So let me reiterate that this quarters strong cloud figures continue to show the strength of our strategy the relevance of our solutions.
The promise of our portfolio.
We are powering fundamental business transformation for our customers.
Which in turn is timing our own transformation.
We are very confident in our long term ambition.
And we are reiterating our 2022 outlook.
We believe.
<unk> can play a crucial role in helping our customers succeed in an increasingly volatile world.
Thank you again for joining us today, and let me now hand over to Luca to talk through our results in more detail. Thank you very much close John .
Before providing you with additional color on our results. Let me first also express my deepest solidarity with the people in our Crane our support for the people of Ukraine continues and we have already contributed more than $3 7 million euros, so far up to support refugees in the region with more to come in the weeks and months to come.
Let me also mention that we have stopped all sales starting to see is cloud operations and have now decided to wind down our direct business activities in Russia and Belarus.
Despite the impact of the challenging geopolitical and macroeconomic environment. We are pleased with the results we delivered in the first quarter.
Let me reiterate some of the key messages you just heard from Christian we are enabling the transformation of our customers around the world as they turn to us for solutions to future proof their businesses and make them more sustainable secure and resilient.
At the same time, they continue to power our growth and thus enable our own transformation.
In the first quarter the trend towards larger cloud trends transactions continued.
Deals with volumes greater than 5 million euros contributed 45% of our cloud order entry that's up from 27% in Q1 last year. This was again driven by rise with S&P.
Let me now provide you with some background on the key drivers behind this quarter.
Chris has already talked about our ongoing cloud momentum and as for Hamas record contribution, but also the impact of the new geopolitical realities.
Let me add some color here.
In the first quarter, our current cloud backlog expanded to nearly 10 billion euros and was up 23%. Despite a 0.8 percentage point headwind from our decision to actively shutdown cloud operations in Russia.
Supported by double digit growth across our solution portfolio cloud revenue grew 25% again accelerated for the fourth consecutive quarter.
Our overall soft Pos cloud revenue was up 28%.
Within that our intelligent spend business returned to a healthy 16% growth rate in our remaining soft Pos portfolio was up 11, 34% driven by outstanding contributions of the business technology platform Quadrex at most notably a 71% growth of as pharma.
Fueled by the growth in a more predictable revenue streams as well as services revenue our total revenue was up 7%.
Our cloud revenue performance was excellent across all regions in the first quarter.
EMEA increased by 29%.
<unk> costs by 24% and <unk> by 23%.
The U S and Germany showed particularly outstanding cloud revenue performances with the fastest growth in the U S put two and a half years.
Let's now take a look at the bottom line.
Neutral revenue mix effects, our total gross margin decreased by 30 basis points to 72%.
Our cloud gross margin was up 50 basis points, despite increased investments into our next generation cloud delivery program as compared to Q1 last year.
This expansion supported our cloud gross profit growth of 26%.
Mainly driven by negative impacts amounting to approximately $70 million related to the wind down of our business in Russia, as well as accelerated investments into research and development and sales and marketing or operating profit decreased by 7% to $1 7 billion.
Against the very strong prior year comparable.
Our <unk> operating profit was up 10%.
215 billion euros, primarily driven by lower restructuring expenses.
Let me now turn to EPS and cash flow.
The decrease in EPS, mainly reflects the contribution to financial income by Sapphire ventures that was more than $300 million euros lower than last year, given the current market conditions.
Our free cash flow came in at $2 $1 6 billion euros.
The year over year decrease is mainly attributable to the development of profitability in the quarter and impacts from working capital due to our continuous moved to the cloud.
The ongoing cloud business transformation provides more balance of cash inflows throughout the year.
We are reiterating our full year outlook of above $4 5 billion for free cash flow accordingly.
Considering the impact of Sapphire ventures to our financial income we are updating our effective tax rate guidance for the full year. We now expect an effective tax rate of 28% to 32% in <unk> and 23% to 27% in non life for us.
Let's now turn to the outlook.
As you have seen in today's release, we are reiterating our outlook for the full year for cloud revenue cloud and software revenue as well as operating profit.
That means that we are taking steps to absorb the expected impact of approximately 300 million euros on the top line and $350 million on the bottom line from the war in Ukraine.
This is possible because of our increased cloud momentum initiation of disciplined expense management measures and the benefits associated with the streamlining of our portfolio that we expect to execute in the coming months as we continue to focus on strategic growth drivers.
Finally, a few words on sustainability and some strategic initiatives.
I would like to highlight that we published our 10th integrated report on March 3rd we expand the disclosures around non financials, including enhanced representation of scope three emissions as well as EUR sustainable finance disclosures.
Also disclose the results of our second pilot of the value balancing alliance methodology to which we contribute as a founding member.
To complement our sustainability management solutions, we have also announced some new partnerships to build on the combined power of SAP and its ecosystem together with Boston Consulting group, we have launched a joint transformation offering to identify the business value and sustainability setting the right climate ambitions and powering and actionable.
Sustainability roadmap.
And we have joined forces with bare important to deliver carbon and environmental footprint solutions, helping accelerate our roadmap in this solution area.
So to conclude the results of the first quarter proved once more that we are on track.
Our strategy addresses the needs of our customers to become sustainable intelligent enterprises.
Continuing to build on our cloud momentum and remain confident in our 2025 ambition.
Before moving to Q&A, we're very much looking forward to welcoming you to our financial analyst conference in conjunction with Sapphire.
Including I was assured the cocktail reception.
That will take place on May 11th and Orlando and we're looking forward to meeting you there in person. Thank you.
I would like to remind you to only ask one question at a time and the risk that the price is above the line.
Thank you Sir as a reminder to ask a question. Please press star one on your telephone keypad. Please ensure the mute function on your telephone is switched off July your signal to reach our equipment. We will now take our first question from James Goodman from Barclays. Please go ahead.
Yes, good afternoon, and thank you very much.
I can start with the nearest term question just around the macro and Russia, specifically, we've had a couple of comments clearly from U S business is on weaker European outlook.
Made some commentary.
But could you add some context to what you're seeing at the end of the quarter into April .
And specifically on Russia, $350 million profit impact from the $300 million of sales.
And can you explain why the profit impact is so large and whether there is a one off element that comes back in 23. Thank you.
Do you want to do the financial impact than the business impact of macro together, maybe for Scott exactly that makes sense. So indeed I mean the question is is there a bigger profit impact than the revenue impact. Obviously, you would normally expect when you have a revenue impact some savings in variable expenses flow through and therefore.
You would have a lower impact on profits however.
A significant share of B.
Impacts that we expect on the expense side are actually from a compression of multiple periods expenses into.
The current year 2022 to explain.
When we for example decided to discontinue our cloud data center operations, we had to actually accelerate the amortization of our data center assets because the useful life is obviously much shorter than originally anticipated and recognize this as expenses. So this is the primary expense impact that has.
<unk> contributed to the 70 million that we experienced already in Q1 now in Q2, we will have.
A similar impact, but actually at a larger scale in terms of an accelerated amortization of sales commissions.
Capitalize and amortize our sales commissions for past sales.
Over a period of time dependent on the business model and given that we are also now looking at the continuum are a direct support and maintenance operations in Russia. We will also have to adjust year. The useful life of the contracts and therefore also the capitalization and amortization period of sales commissions. In addition, we have also an.
<unk> on bad debt expenses, some of which are coming from prior periods that we will have to recognize for example, with sanctions customers. That's the reason why the impact on profit is actually higher than the impact of revenues and an over proportional amount of that will actually.
Have to be reflected in Q2.
Yeah and on the macro side.
Of course, there is no headwind coming from Russia, but I mean, we are reiterating our guidance, which is actually then given there is some $350 million hit actually we are in essence actually waiting our guidance now to absorb this hit and why do we do this I mean first and foremost what we see also in Europe , that's a high.
<unk> still in the market for ongoing business transformation. So customers are now moving more than ever to new business models selling services.
<unk> supply chain is of course of high demand you have seen the transactions in our SAP business network went up by 95% year over year.
The first discussion I have especially with few P&C loss as all alone how can <unk> help to make.
<unk> chain mortgage sell them like we did with <unk> in the automotive and we have no. Further examples on semi conductor. We have further examples in life science and so on and then last but not least of course, when we are now moving in with wise.
You've heard about the conversion rates and we're seeing more and more of an uptick also in our other line of business solutions need to needless to say Scott I guess can we can say we are absolutely confident and very bullish about our pipeline for wise for the rest of the year, but what we're also seeing is with the platform underneath and a revenue run rate of $1 billion.
And uptake of the ecosystem now building extensions on the platform. This all makes us very very confident that we can even further accelerate our top line momentum Scott anything to add yes, I think you said it well question. The one thing that I would add in simple terms these businesses and companies in Europe and in fact around the world.
Need a business platform to navigate uncertainty.
That's just I think.
By leveraging SAP, because we're able to provide real time capability to deal with the regulatory change we're able to deal with the cyber security challenges, we're able to deal help them deal with their supply chain challenges.
And other.
Factors of uncertainty Decretion mentioned and that underpins not only in the move to the cloud the move to transform and Thats, what raws with the CIP bring so that's been reflected in our pipeline and our confidence that despite some of the challenges we see in the world companies are actually coming more towards IP, because they need a business.
To be able to help them transform and running in this environment going forward and Thats what were strong at.
Alright. Thank you. Thank you very much.
We take the next question please.
The next question from Toby Ogg from Credit Suisse. Please go ahead.
Yeah, Hi, thanks, Thanks for taking the question.
Could you just give us like maybe for you just give us a sense for the magnitude of the cloud gross margin headwind from the harmonization investment in Q1, and then secondly, just as we look a little bit further out into 2023 on the moving parts on the cloud gross margin can you give us a feel for the size of any potential <unk>.
Pack to costs that persist into the first half of 2023, and then just give us a feel for what you think the right cloud gross margin level would be given those costs, but also the higher portion of single tenant as for Hana and the mix. Thank you.
Yes, thanks very much for the question. So first of all the cloud margin impacts of the harmonization program in Q1 was actually quite sizable as we set.
It increases has increased over time quarter over quarter.
And.
So for Q1 it has been.
One four percentage points. So in other term in other words without these expenses the cloud margin would've been up by close to two percentage points in Q1.
In terms of the go forward.
<unk> actually in 2023 of course, a significant part of the cost run rate that we're seeing now in 2022 and 2022 is a higher run rate in 2021 in that respect.
Will.
Go away it will disappear.
I would say we will have.
Less than half of those expenses still in place in 2023, as we run off the program in the first half year with the final retirement of our.
Legacy infrastructures and the commissioning so think about a low triple digit million number.
As opposed to a significantly more than $200 million that we are that we will have.
In 2022.
And then in the second half of the year in particular, there will be a significant step up also due to the increased efficiency of that cloud infrastructure. So as we had predicted all along.
We will see an exit cloud.
Cloud margin rate in 2023 will be significantly above the current levels that we see where we've always said that in 2020 to be cloud margin development will be rather flat.
So in terms of the further progression.
There is no doubt that.
Our profitability.
The cloud business will materially increase at the same time I have to say we are ahead of the growth curve as well and that is.
I'm also predominantly fueled by the great success of rises.
Which comes along with a great uptick as for Hana cloud and also private cloud deployments Thats true, but those are quite profitable as well. So all of this and the progress in the cloud harmonization initiatives that we have achieved so far make us very confident around our 2025 ambition in particular.
As far as the absolute contribution of cloud profits to our overall operating profit.
<unk> ambition is concerned so this is on a very positive path.
Great. Thank you.
Thank you we'll take the next question please.
And the next question from Adam Wood from Morgan Stanley . Please go ahead.
Hi, Good afternoon, Kristina afternoon, Luca Thanks, very much for taking the question.
First of all.
Current cloud backlog.
You flagged that this would decelerate in Q1 I wanted to first of all you could just confirm that you would still be expecting this to accelerate back similar to or above the fourth quarter levels. Maybe you can give us any kind of background.
What gives you the confidence that would happen that would be really useful and then secondly, just on the outlook through the year, we're obviously nervous about macro.
And around the geopolitical situation could you just talk a little bit about the plans in terms of putting cost into the business.
The tech budget some companies are starting to be.
Little bit more cautious with the focus will be on making sure that the business was in good place to grow in 'twenty, three or would it be to protect debit guidance for this year. Thank you.
Yes, I think thats, probably for the most part of question to me, but Christiane feel free to chime in so first of all indeed.
When we think about the trajectory on the current cloud backlog, it's exactly as we had said on Q4 earnings we expected slightly slower start in Q1, just due to the effect that the <unk> business volume in terms of new bookings that we can move into Q1 is always the smallest and therefore, we had actually.
Expected a deceleration.
Of course, we did not have the Russia effect in our cards, but otherwise this is exactly as expected, but on the flip side. We absolutely continue to believe that we will see now from now on already starting in Q2, an acceleration again and we absolutely believe that we have.
We'll end the year with the similar growth profile last year, we had 26% in Q4 and we expect the same actually also for Q4.
2022, the reason why that is is fairly simple.
First of all in Q1 again, the lower volumes and we had an absolutely spectacular Q1 2021, driven also by some catch up effect quite frankly from the first phase of the pandemic Q1, 2022 was very good and strong from a from a bookings perspective, but compared to these various.
Spectacular outcome.
I always knew that it would be hard to do.
Top this.
In Q2, and Q3 in particular, we face an easier compare.
Based on what I see in terms of the pipeline build up and the strength there.
Are we confident that we will see the acceleration. So we're very confident about in terms of.
The outlook throughout the year on the cost spending look it's very important for us to make sure that we achieved both objectives. We of course want to make sure that we meet our commitment in terms of the guidance, but at the same time and certainly don't want to sacrifice our focus on growth in order to do this first of all.
We have already significantly invested you have seen that in Q1, we on boarded another round about 2400 employees about 400 came from the acquisition of <unk>. The rest roughly 2000, the organic hires thats clearly a bias towards R&D and sales and marketing head count.
This will slow down for the remainder of the year. It also makes a lot a lot of sense and sales and marketing for example to back end load them.
Hiring at the mid of the year, because you will need to have these folks productive towards the end of the year to drive to drive business.
Of course prudent when it comes to discretionary expenses no doubt about that we're also taking a hard look at our portfolio as we always do as we have done for a number of years now to identify areas that are.
<unk> can be deemphasize because they are not.
Strategic to our growth from a longer term perspective and in order to focus our resources on the highest growth potential areas.
In that context.
You have seen us in the past few years doing smaller divestitures that is something that were looking into as well as the impact of any such divestiture will not be significant perhaps in the low triple digit million Euro range, but that is something that is possible to happen in the second.
Half of the year.
Well, Ben perhaps a few words around the profile of <unk>.
The business as we move through the quarters I think we have also been clear already without the Russia impact that the first half year in terms of year over year profit development.
Would be more challenging than the second half year, because last year that was a much.
Better performance, so to say driven by the fact that we had the pandemic still fully in place Q1 for example, a 24% operating profit growth.
Last year.
Sure.
Isn't a surprise for us that for example in Q1. This year, we had negative profit development actually we did better than plan without the Russia effect. So that is good for Q2 as I said.
I expect that an over proportional amount of the expense impact.
Out of these $350 million will be recognized we will also recognize a.
The big part if not the entirety of the restructuring charge in Q2. So therefore Q2 will be most affected by the situation around the war and then in the second half year is first of all the comparables are getting easier.
We are seeing the fruits of the investments that we've made early on in the year and we continue to harvest.
Great strength of our cloud business.
That's where the profit levels were significantly climbed back and that's why we are confident that we will remain within the guidance and on the cloud revenue side look it's also.
Similar to what we said at the beginning of the year. We expect continued acceleration in particular in the second half of the year when the full strength of the great backlog expansion that we've seen in Q4, including the Florida business that we are booked in the first half of the year that's.
It's coming to fruition in <unk>.
Q2, you might see a small blip there in terms of the year.
In terms of the growth rates because they are for the first time, then the impact from the cloud discontinuation in Russia.
I have seen in the current cloud backlog in Q1 will then start to show in the cloud revenue figures, but again from a second half and full year effect. This will be fully overshadowed by the strength of our business at the global.
And so we absolutely.
Believe we will see continued acceleration in the second half year.
Thank you that's very helpful. Thank you.
Take the next question please.
Our next question from Stacy Pollard from Jpmorgan. Please go ahead.
Thanks, very much really this is a follow up a little bit on your comments around the seasonality of the $350 million and the other restructuring kind of how you think of the operating profit.
Or operating profit impact.
Through the quarters, but also is there a continuing impact on the base going into 2023 or do you catch up and kind of get back on track. So for example, if the base is a little bit lower 350 million lower let's say in 2022 did we get even better at double digit growth in.
Operating profit for 2023, then you might have I guess the growth goes up but maybe the number stays the same is that your thinking.
And so first of all to.
Two comments on 2023, because I wanted to be crystal clear on this.
We absolutely are.
Fully behind our commitment that you will see a double digit growth in operating profit again in 2023 that was always our commitment.
We set that in October 2020, when we established the new midterm ambition framework and the strategy refresh that in.
In 2021, and 2022, we would see only a flat to slightly declining profit development and then returned to double digit growth.
This absolutely will happen and that remains our commitment.
And that is obviously off the guidance that we have been giving for.
You know the flattens to slightly declining profits with a flat to minus five.
The ambition that we had for 2022 and as this is unchanged also the commitment for 2023 is unchanged now the one thing that I have noted before and that you should take with Europe .
The impact that we're having in 2022.
Extra ordinary expenses is partially a pulling forward of expenses that otherwise we would have seen in later periods not only in 2023, but also in 2024 because of the acceleration of the amortization periods for sales commissions. So that is obviously then translating into a help.
For 2023 and 2024.
Of course, even further ignites, our confidence in being able to drive to that double digit growth so in that sense.
Is this actually a lead a relief for later years.
But we are bearing of course now the expense load in 2022, I hope that helps to display the commitment and maybe Stacy and.
So just to quickly build on that.
That's helpful.
With our business actually also transforming our revenue streams are becoming more and more predictable. Our overall P&L performance becomes more and more predictable in the way how we now also modeled this out is.
We have strong pipeline multiples in place, which we then and who gave us confidence to actually.
Also reiterate our guidance in the cloud with strong acceleration in half year, two plus of course also on the profit side I mean, we know how to manage down our cost base. We have a plan how to offset the Russia impact and then of course next year going in we've talked about the cloud harmonization program. We know when this effect will kick in and.
Then for the West it's actually a highly predictable revenue combined of course with a good management of our cost base that actually will lead to double digit profit growth in 2020 suite.
Thank you alright.
We'll take another question. Please that's great color. Thank you.
The next question comes from Frederic <unk> from Bank of America. Please go ahead.
Hey, good afternoon.
Thank you both for taking the question.
Two follow ups one on on the revenue guidance, so you're saying the fact to increasing.
The guidance despite the hit from Russia, and those will go live of uncertainties in Europe . So maybe Christian you can spend a bit of time on the tone of discussions you have with your <unk>.
Clients, it's fair to say that you're not seeing any reduction in appetite discussions too.
Two post transitions to cloud.
And border projects and in general if you can give us a bit more munition on what is actually better than expected.
And then secondly, maybe a question for Christian around.
On the <unk> around that.
Cloud margins.
So I think last year in June you you mentioned a step in cloud gross margins of 75%.
2023 towards 80% and 25 can you confirm that this is still on the.
The agenda and the underlying assumptions you are taking on business network and SaaS Paas margins. Thank you.
I'd take the first question and then look in almost every discussion.
Yeah in Europe , but actually also have the global scale.
And these days.
One of the biggest topics and this is why we also feel confident with our pipeline in the cloud is the combination of all.
Cyber security, we see a huge increase of a tax around the world and when you look at many customers I mean, they are not big Tech players. They don't have the investments inside but what other tech players have and then with wise. When you then come and say Hey, we got to protect your stack end to end and Theres One party who takes this.
End to end accountability to make sure your data is secure.
With strong, but conversation second and when youre dealing with huge supply chain disruptions.
A year ago, we talked about semiconductor, which is still out there in the meantime, we are talking about we're talking about shortages of magnesium of.
Life Science, we are having.
A lot of customers have huge sources and with regard to that raw material and this is actually which is also been pushing more it spend.
And then again.
We still also see that when you are not transforming your business model. When you are not offering a more personalized offering for what your customers' needs in retail in utilities. When it goes a lot around customer retention. When you are not adapting your pricing, which is all going back to our portfolio to our technology than you.
Gone are loose.
Our competitiveness in the market and Thats together in this sequence I would say are the conversations we are having and this is why we also still so so confident about our pipeline and our close momentum yes.
And just quickly on the cloud margin. So absolutely we still pursue that ambition I mean, we have actually reconfirmed it.
Today and that includes of course also the 80%.
Gross margin ambition for 2025 in terms of the <unk>.
The composition of the different solution types here lets start with the intelligent spend group I mean, this has already seen a very nice uptick to more than 80%, 87% right now driven by the revenue recovery.
Particular in concur, obviously that makes a big difference, but again the growth in ISP and is still only so to say, 16% or so there was a lot of space for it even further recovery and then those very high margin businesses will actually further contribute so post the completion of the cloud harmonization.
Graham in particular for our rebar, we absolutely expect that also this business will see a further step up.
<unk> probably to the levels of 82 to 83.
Percent the rest of the SaaS path portfolio is actually where the biggest step up will occur that business at the moment bearing the brunt of the corresponding.
Additional cost of cloud investments for the harmonization program that has multiple solutions that are affected by this thats why.
The gross margin there was only around 70 on very low seventies dependent.
Dependent on the solution. So they are you should see in the second half year, a significant step up which is good because this is also the fastest growing part.
Part of the business and then you have an infrastructure as a service business with its natural margin limitations that will not really significantly further improve beyond let's say mid thirties. However, we deemphasize this business consciously as you have seen and as we have already indicated the growth.
It's coming down it will actually at some point turn even negative and so from that perspective in the mix that will be reduced so the one unknown that we continue to have as I already highlighted on prior occasions is just the.
Proportion of Esfahan, a private cloud in the mix and therefore, the great success of rice.
And that is frankly ahead of our plan we have been every single quarter. In 2021 ahead of our revenue plan in the cloud. We are again ahead of our revenue plan in the cloud in Q1 2022, and the reason is the tremendous success of right. So if that continues and therefore as far in a private cloud become.
<unk>.
A far greater part of the overall mix than what was contemplated when we devised a plan we might see a situation where we fall short on the margin side, but then we would overshoot on the absolute cloud profit side and that's why we have started also to break this out with the tremendous 32%.
And our 26% constant currency growth now that we've seen in Q1, and we will continue to provide visibility and therefore from an absolute cloud profit perspective. If we indeed saw this continued outperformance of rice's S&P that would be a very nice problem to have because it would actually provide us.
<unk> on the operating profit line.
Great. Thank you and maybe just one clarification when you took about each to step up.
Took about 23 right absolutely for 2022.
We indicated all along we should.
Consider a flattish development of cloud margins again, because the weight of the investment of the child Harmonization program was quite significant one 4% as I said in Q1 and it will actually further increase over the course of the year.
Thank you we'll take next question please.
Our next question comes from Michael <unk> from UBS. Please go ahead.
Thank you good afternoon.
Luca Christine could you give some context.
Some planned departure I mean, it doesn't seem like it was expected to know what's expected.
And in terms of succession.
The timing around that.
Consideration of internal versus external candidates and it external and he sort of criteria around software expertise.
The nationality or anything like that.
And then Christian.
On the corporate call last night, the management did suggest that in Europe .
But a slippage in order intake and Im just curious why youre seeing something different.
Especially given that license performance. It felt to me that that perhaps should have translated into a stronger cloud backlog number. If it was if it was moving from one bucket to another rather than slippage. So did you see anything in Europe or elsewhere that would fit with cortex comment. Thank you.
Perhaps you can get started.
And I guess, how about my thoughts at the Ano, but let me answer a couple of your parks.
Let me share some words here.
There is no doubt that we can.
Well I have always been very happy with having Luca.
Onboard them.
Any doubt Luca is doing a great job.
<unk> also now work for some time to get actually I work for a few years back.
<unk>.
But when Youre doing this I guess for nine years Luca now in the meantime, we're going into the <unk> I mean, it's fair to say that.
Then also Luka said he is also probably also something else what I can do going forward and we're very happy with is that we still have Luca for.
For the next 12 months, because we are talking a lot about the transformation about increasing our profit by double digit and I really want to.
Finished and then of course after months continued its journey and with Luca on the on my side and this is why I'm very happy to have Luka onboard.
Or at least another year and then actually Yada search has now started and the supervisory board will make the final call Lucas involves I'm involved so I'm pretty sure that we will also have.
Smooth transition then okay anything to add from your side now.
It's right at the end of today.
<unk>.
My job I've lost every opportunity to work with SAP.
I will love my last year, as well and it will be very hard to lease S&P.
But I have recognized through all of the work in the last many years working with customers as well as serving as a board sponsor for our businesses in Latin America, and the Middle East and Japan running now owned businesses with business process intelligence, you've heard that business actually working quite well also now with <unk>.
But I have a passion for this and I would like to expand on this passion and learn something new as well. So it's more likely that my next role it will be in general management unnecessarily.
The pure financial background, and that's just an opportunity that I think in a very.
Collaborative fashion and we have discussed that now is the right point in time also because I wanted to develop <unk> into a state where we can release it to the mainstream operations of SAP by the end of the year and therefore, it feels just naturally but and that's also the reason why.
Real estate through March 31, I, absolutely want to give you that commitment and fulfill the commitment for the return to double digit growth on the bottom line in 2023, and that's why I wouldn't Miss the opportunity to just the outlook for 2023.
Well theres not a lot more to be said about that other than that we are really doing this in a full friendship otherwise you Wouldnt book for another company.
And we are going to lead to depart as friends I will always be a member of the S&P family and on the best possible terms, so nothing more absolutely.
The company will stay on course for its 2025 ambition because it has the right strategy. It has the right operational priorities and it has a great management team with but also in the future without me.
And then Michael on the sentiment in Europe .
I would tell you if I would have to.
<unk> say, we have to scale.
<unk> scaled back our it bought chat or we have to.
<unk> certainly see people checks.
In reality, what we are talking about.
Last week, we worked with a huge savings.
Semiconductor supplier for machines.
Could you semiconductors at mass scale in Netherlands.
We are talking about building a digital twin with Siemens alone to further scale the production to help to cover the rising demand. We found out we are talking about cyber and how we can protect the landscape because they see in their on premise landscape.
Why is the number of attacks and they feel better protected and when theyre, giving this into the hands to S&P and other technology partners.
Right and then again.
A lot of customers have started with business transformation is not like that every customer now already finished our business transformation is actually the other way around and so and there is no CEO , who will now say hey icon.
Slowdown the pace of my transformation I need this as a foundation.
And then let's not underestimate the power of our platform that now more and more partners also start to build on that and also the business network I mean, it's almost I, sometimes feel this is a forgotten asset but in times like these.
Ukrainian example, what we're doing here on the milk supply that so many other and we see such a strong push into this network that we really feel this is also a new way of running businesses and supply chain going forward and that net net.
It gives us the confidence confidence that there will be no reduced demand in off year, two it will be the other way of wealth.
Yeah.
Thank you very much.
Both are excellent.
Indeed, including at the cocktail reception.
Yeah.
Thank you and we'll take a couple of more questions. So we can take the next question. Please.
The next question from Martin <unk> from Evercore. Please go ahead.
Yeah. Thanks, Thanks, very much Christian I was wondering if you could add just a little bit more color around the as for high cloud backlog growth this quarter.
What are you seeing in terms of new customers versus sort of transitions from existing customers and any color I guess geographically would be helpful. Thanks.
On the geographic Italy, a few Scott please and I'll also then.
Pardon me I can give you my global fuel first.
It's great to see and that we.
Kind of winning.
Also a lot of net new deals I guess only in Q1. It was roughly over 1500, net new customer which report on board.
So 1500. This is what other companies may be doing a year.
And then of course with the conversion.
When we designed wise of course, it was always our intention to speed up and accelerate the adoption of <unk> on a cloud, but even more important.
It's the platform is the business technology platform and now we are seeing in the next wave that we are suddenly winning huge deals against workday successfactors because we can provide this integrated fuel. This modular ERP, which then provides capabilities like total workforce management management and a mash up productivity.
On a real time, simulate a tuition weights and half the impact on the P&L.
Now we talk and this is why why provide such a great conversion factor and also allows us to increase our footprint over time and come back in fields, which maybe don't have supported so well in the last two years and this is why also on a repo men procure to pay now sitting on one procure.
<unk> platform, where you can tailor their need for direct and indirect procurement connected to the network, having supplier with management and our four new legal requirements, which they have to secure human wide that they are no human white violations in your supply chain. This is what S&P can do and this is what we are doing with wise.
We're putting them.
Enable them to adopt to this new capabilities, what customers need going forward and this is actually net new and installed base shift for both is really coming in very well and we are clearly ahead of plan when I look at our initial Wi Fi.
<unk>.
Yes, so two additional comments to add a bit of color on what Christian said first of all just on the solutions side, So as mentioned <unk> behind cloud.
<unk> continues to propel not only the growth of that at that platform driving the resiliency and the growth in the process transformation the companies need around the world, but it also then brings in the portfolio Christian mentioned earlier that 80% of ARAS behind the cloud brings the technology platform business.
Is whether they are in Europe , urs or in Asia or are looking for scale and innovation and Raj brings barkley brings the transformation capability vessel class, but I also get the innovation with the business technology platform, which means they can extend and be able to win a bite on that and that's why it's been such a strong growth.
<unk> together with <unk> being a key element as well on the regional side I guess the way I would describe it is it's it's a good position to be in when you are not dependent on a particular region or business. All of them are growing strongly you can see it in the Q1 cloud revenue that all of them are growing strongly in mid.
<unk>.
Albeit our and in particularly the Americas, given the size of that market is particularly pleasing and it's impressive and the growth rates and including the order entry in Q1 was really strong considering.
The market dynamics, but around Europe , and EMEA and in Asia, our pipeline reflects that consistency. So whilst we have some solutions that will be up or down in a particular quarter in particular.
Market overall, the pipeline continues to grow strongly in line with the revenue outlook that we've described and that's consistent across the world, which probably gives us a level a level of confidence that our capability and the solutions are more in demand than ever considering the market dynamics.
And that gives us confidence going forward.
Thank you. Thank you.
And now we will take one final question. Please.
Our final question comes from Jonas <unk> from Deutsche Bank. Please go ahead.
Yeah. Thanks for taking my question.
Quite a few economists seem to see a risk of a kind of broader recession next year on a global basis, obviously, we don't have a crystal ball, but.
Christian you talked to the resilience of the business and the predictability I think we know how good part of S&P behaves in a recession from the Pos but we also know how the licensing business will behave but how should we think about.
The new Esfahan cloud business, the rice business from your perspective, I mean, maybe you can talk a little bit a from an operational side are you seeing customers can even Paul so smoothies transformational multiyear approach as possible and then second would be just from a financial perspective, how would you expect to be impacted on that part of it.
Should we really go into a recession. Thank you.
Yes, so look.
Of course in the conversations.
<unk> come off of <unk>.
The rising inflation and can customers really put this inflation and to increase in that cost base always on top on the pricing side, but then the next part of the conversation is.
Can you help me on cash flow optimization, and then we come into the play where we say hey, Okay. We connect you with the platform with wise to our network. It gives you access to more suppliers. We have now told you are connected to it where we can hopefully also get better financing conditions, we have actually good waste with <unk> cloud.
Offering making sure you can offer much faster new services with new license models, which also can help you to acquire to drive higher customer retention and hopefully higher prices and so these are the conversations that we're having to offset.
Increasing pressure, which clearly is out I mean, there is no debate about that technology can really really help and again and this is so important we are not only talking here about the technical my equation in the cloud and this is why ACP comes into play and you can look back when cracks it happened all in auto things happened in the past.
Always.
It's always there.
Strong demand for better business software to offset some of these challenges what customers see out there in the market and even with the geopolitical tensions customers now turning to S&P and that's why also the Russia situation. This is not easy for us that we have large multinationals.
Running businesses all over the world and they need solutions that they need solutions now, which actually also twice our business. So while the world becomes more complex software needed to overcome this complexity and this is why we definitely don't see.
A hit on our pipeline, it's the other way around.
We actually see strong multiple and we remain very confident also about as further acceleration of our cloud business.
Thank you helpful. Thank you and.
And this concludes our call for today, thanks for joining.
Thank you very much bye bye. Thanks, a lot everyone. Thank you.
Thanks.
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Okay.
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Yes.
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