Q2 2022 SAP SE Earnings Call
Speaker 1: But.
Speaker 2: Good day and welcome to the SAP Q2 2022 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anthony Coletta, Chief and Pastor Relations Officer. Please go ahead, sir.
Speaker 3: Thank you and welcome everyone.
Speaker 3: Thanks for joining us today on our link score to discuss SAP C02 and PUSH-UP 2022 results.
Speaker 3: Now, invest our relations website. You can find the deck implementing to this call.
Speaker 3: With me today, I'll see you on Christian Klein and see for Luca Mochic We'll make up on the remarks.
Speaker 3: Scott Russell, who leads our customer success organization, is also with us for Q&A.
Speaker 3: Now let's do the safe harbor. During this call, we'll make forward looking statements, which are predictions, projections, or the statements about future events.
Speaker 3: These statements 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.
Speaker 3: Additional information regarding this risk and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the risk factor section of SAP's annual report on Form 20F for 2021.
Speaker 3: Unless otherwise stated, all financial numbers on this call are non-IFRS.
Speaker 3: Close waves and percentage point changes are non-RFRs. You are there at custom time.
Speaker 3: The non-IAPR is financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IAPR.
Speaker 3: And with that, I'd like to turn over to Christian.
Speaker 4: Thank you, Antony, and thanks to all of you for joining today.
Speaker 4: This has been a good quarter for SAP, despite the challenging political and macroeconomic environment. Our cloud and total revenue have exceeded market expectations and are progressing faster than we expected at 34% and 30% nominal with practically.
Speaker 4: Our top line cloud performance is clearly a head of plan. Further accelerated by the current macroeconomic environment and currency tailwinds.
Speaker 4: Customers are actually turning to us now more than ever to help them address their most pressing concerns.
Speaker 4: business model transformation and process automation, supply chain resilience and sustainable operations.
Speaker 4: We see demand for SAP technology continuing to increase with an increased focus on transforming and automating mission-critical business processes in the core functions of an enterprise. In the core functions of an enterprise.
Speaker 4: As we have seen in previous economic pullbacks, companies that balance cost efficiency measures with strategic investments in technology are more resilient and better able to offset margin pressure. to offset margin pressure.
Speaker 4: We are also seeing a powerful snowball effect from our platform and ecosystem businesses.
Speaker 4: After adoption of SAP Solutions, accelerate.
Speaker 4: Let's take a look now at some of our top line numbers for Q2.
Speaker 4: In Q2, we hit the major milestone of cloud work when you're becoming our largest program used to import the first time. This program used to be in for the first time. This program used to be in for the first time. This program used to be in for the first time.
Speaker 4: Cloudware review was up 24% at constant currency and up 34% at nominal levels.
Speaker 4: Co-uncloud backlog quotes accelerated at 25% and now exceeds 10 billion euros and not a first. And now exceeds 10 billion euros and not a first.
Speaker 4: Curven cloud backlog for SEPF for HANA hit a record 87% growth and stands at 2.3 billion euros, driven by continued strong adoption of rights with SAP.
Speaker 4: In addition, S4HANA Cloudware New Quotes continue to accelerate at 72%.
Speaker 4: Customers are choosing us for the power of our integrated portfolio. First, Core ERP. Second, the SAP Business Technology Platform. And third, our best-in-class solutions.
Speaker 4: Our strategy is focused on investing in and capitalizing on the integration of these assets.
Speaker 4: This provides unmatched superior solutions for our customers and extensive cross-sell opportunities for SAP.
Speaker 4: I'd like to now provide an update on our strategy execution.
Speaker 4: Since we initiated our transformation almost two years ago, our performance is well ahead of plans.
Speaker 4: SAP has always been acknowledged as the category leader for ERP. Now, just as SAP invented ERP decades ago, we are leading the ERP transition to the cloud. This has led to over 2.2 billion euros of current cloud backlog for SAP S4HANA, as I mentioned earlier.
Speaker 4: The momentum we are seeing today increasingly comes from the power of being a platform company.
Speaker 4: Our business technology platform now has the one way to exceeding 1.4 billion euros and there are more than 14,000 customers using the platform.
Speaker 4: Turning to our core line of business solutions.
Speaker 4: They are all growing by double digits in both cloud revenue and current cloud backlog.
Speaker 4: We see customers increasingly choosing to adopt the full portfolio from SAP, given the enhanced value from our integrated solutions. For example, many of our customers opt for our intelligence-pen solutions to achieve cost savings across their entire direct and indirect spend, as well as travel and expense and set party workforce.
Speaker 4: The potential for cross-selling is tremendous.
Speaker 4: In Q2 we saw Ysuf SAP being a cross and upsell catalyst with more than 85% of Ysuf's including additional cloud solutions.
Speaker 4: and 77% of WISE customers adopting the SAP Business Technology Platform.
Speaker 4: We have also entered key new close markets.
Speaker 4: Recognizing that no business can succeed in isolation, we pioneered a new approach in building the SAP Business Network.
Speaker 4: The SAP Business Network allows customers to connect real time across their suppliers in industry-specific networks, disboost transparency and provide so with Sillian so desperately needed in today's environment.
Speaker 4: Our new sustainability portfolio complements the SAP Business Network, enabling transparency across value chains, helping our customers to meet regulatory requirements and contribute to a sustainable future.
Speaker 4: Underpinning this leadership position is our business transformation as a service offering, WISE with SAP.
Speaker 4: Since WISE with SAP was launched at the beginning of last year, we have seen the offering going from gaining traction
Speaker 4: to gaining momentum to becoming the preferred choice for our customers as they move to the cloud. to become the preferred choice for our customers as they move to the cloud.
Speaker 4: Why is the SAP helps customers with the hardest part of their transition? We're designing how their company is one. We're designing how their company is one.
Speaker 4: We offer customers so much more than a technology transition.
Speaker 4: Why does SAP help them? First...
Speaker 4: to redesign their end-to-end business processes. Second, transition to a new agile ERP in the cloud. And third, innovate on the platform to design their own custom solutions.
Speaker 4: In Q2, WISE customers included Moderna, ABB Information Systems, RWE, Hydrovaxamant, and Pritchstone.
Speaker 4: Moderna's pioneering vaccine is helping the world overcome the COVID-19 pandemic. They selected WISE with SAP to support ambitious growth targets through scalable, automated, end-to-end processes across research and development, sourcing and distribution, and support functions.
Speaker 4: RWE, the leading German utility company, is adopting rides with SAP to support its international expansion and its sustainability initiatives as part of its growing green strategy.
Speaker 4: The success of WISE with SAP in turn 12 strong performance across our line of business applications, including S4HANA.
Speaker 4: We see continued cross-an-absol-momentum, which means we continue to create about 2.5 times the value from a customer after they have adopted rights with SAP. We see continued cross-an-absol-momentum, which means we continue to create about 2.5 times the value AP.
Speaker 4: We now have around 20,000 S4HANA customers, up 15% year-over-year with more than 60% of our customers being net new.
Speaker 4: We are also seeing strong momentum for S4HANA in the cloud, with approximately 6000 customers and over 600 wins in Q2.
Speaker 4: We are seeing increasing traction in the mid market and in the startup community.
Speaker 4: For example, the FWANTS Unicron, Dr. Lip is an online and mobile booking platform that helps users find doctors and make appointments.
Speaker 4: They selected as for HANA Cloud as an easy to implement Wabrascalable solution, providing 12 times to value.
Speaker 4: Now, our order entry calls for S4HANA Cloud and on-premise clearly exceeded 30%. Demonstrating significant gains in market share.
Speaker 4: SAP's Business Technology Platform enables customer innovation and infrastructure integration.
Speaker 4: This quarter, the global leader Heidelberg's M-N decided to move from their on-premise ERP on Oracle to S4HANA Cloud on Azure.
Speaker 4: They will be using SAP's Business Technology Platform as an integration and development platform to provide access to SAP services.
Speaker 4: Our sustainability solutions have taken on an even more important role given the energy crisis.
Speaker 4: EGO Group, one of the largest insurance groups in Europe , has chosen SAP to help them navigate the highly regulated sustainability expectations of the financial services industry, of course in Germany.
Speaker 4: ECHO aims to open new sustainable business practices, create climate-neutral business operations, and create transparency throughout its business by reporting in accordance with international guidelines set out by the GIA.
Speaker 4: Our Intelligent Spend and Business Network Division has taken on new meaning as companies plan for continued inflationary pressures and a need to diligently manage costs.
Speaker 4: Winstead Squadron includes Beijing, the leading biotech company specializing in anti-cancer trucks. The leading biotech company specializing in anti-cancer trucks.
Speaker 4: GATE shows SAP RIPA to quickly build a cloud-based procurement management platform to support different languages and regulations around the world, in addition to improving efficiency. GATE shows SAP RIPA to quickly build a cloud-based procurement management platform
Speaker 4: Turning to our customer engagement portfolio.
Speaker 4: Positivo Technologica, a Brazilian technology company, is using SEP CX solutions to automate their marketing campaigns based on customer behavior analysis.
Speaker 4: This will enable them to personalize their customer engagements and create more opportunities for customer cross-sell, upsell, conversion, and retention.
Speaker 4: In Q2, Arthas, the global leader in personal computer monitors, graphics cards and routers shows SAP SuccessFactors to bring its vision for employees to life.
Speaker 4: The solution will provide a one-stop service supported by data analysis and insights.
Speaker 4: SAP Signal View, part of our business process intelligence portfolio, is going from strange to strange. Corning, which is one of the world's leading innovators in material science, selected the full SAP Signal View Suite to drive governance and collaborative process management excellence, has they transformed the ERP systems.
Speaker 4: Customers, discwaters also include Muay, Hanesy and Altana, the German Chemicals Company.
Speaker 4: I'd like to spend a little time talking about our outlook.
Speaker 4: We are entering the second half of the year with a very strong cloud pipeline.
Speaker 4: Given our strategy maps directly onto our customers' most pressing challenges.
Speaker 4: We see the shift from CapEx to OPEX band, combined with currency tailwinds, completely offsetting the top line impact of our WASHIA exit.
Speaker 4: On the bottom line, we are adjusting our guidance based on two one time impact.
Speaker 4: First, our intended full withdrawal from Russia. The second.
Speaker 4: In the current macroeval environment, our customers are shifting to the cloud faster than expected, as they continue to move from upfront capital expenditure to re-curving operational expenditure. This leads to an additional transactional impact on our short-term profitability, with clear midterm upside as our cloud strategy continues to pay off.
Speaker 4: We are managing a significant portion of these one-time impacts with additional measures around this questionnaire with fans.
Speaker 4: Looking beyond 2022, we are clearly ahead of plan to deliver upon the promise we made in October 2020, when we announced our new strategy.
Speaker 4: We are confident we will achieve double-digit operating profit growth in 2023 while keeping the promise of flat to slightly declining operating profits through 2021 and 2022 versus 2020.
Speaker 4: And we are well on track to achieving all the performance goals for our 2025 midterm ambitions.
Speaker 4: On the bottom line, the investments we made over the last two years put us in a good position to deliver double-digit profit growth starting next year.
Speaker 4: Very importantly, we also have a strategic initiative in place to consolidate and simplify our portfolio.
Speaker 4: This will result in increased focus on our core high-flow solutions, providing even stronger synergies across our suite of solutions, complemented by potential acquisitions in our core.
Speaker 4: We will provide an update on our 2025 ambition in the next quarter, once we have more clarity on the macroeconomic situation.
Speaker 4: In summary, this has been a good quarter. We made significant investments during 2021 and the first half of 2022, which now enables us to further scale our execution.
Speaker 4: Our strategy is perfectly aligned to the challenges our customers are facing. And we look forward to helping them come out of the current environments stronger and more resilient. And more resilient.
Speaker 4: Thank you again for joining us today and I will now hand over to Luca to talk to our results in more detail. Luca?
Speaker 5: Thank you, Christian. Yeah, there are definitely many topics affecting businesses worldwide today and creating a challenging environment. In nonetheless, as Christian said, delivered a good quarter, proving that our strategy is working and our solution portfolio is meeting customer demand. Our portfolio is more relevant than ever for our customers and the transformation to the cloud continues to deliver than even more exciting opportunities. We're helping them transform their businesses, create more resilient supply chains.
Speaker 5: and accelerate their sustainability efforts. In the second quarter, we saw Robert Stubble, the Digital Cloud Order entry growth with a particularly strong momentum in North America and Latin America.
Speaker 5: The trend towards larger cloud transactions also accelerated and deals with the volume greater than 5 million euros contributed 48% to our cloud order entry in the quarter. This was again driven by our rise with SAP offering.
Speaker 5: Christian already talked about our ongoing cloud momentum and the fast accelerating growth from S4HANA and our business technology platform.
Speaker 5: To reiterate, we continue driving strong top line growth and Cloud WebNU became the largest well up ahead of Cloud WebNU's "..24%<|nl|><|translate|> revenue stream up 24%.
Speaker 5: Our current cloud backlog exceeded 10 billion euros for the first time and was up 25% accelerating from the 23% growth that we saw in the first quarter. Again, the war in Ukraine had a dampening impact of 1% point on that growth rate.
Speaker 5: As for HANA, current cloud backlog was up a record 87% and contributed more than 2.2 billion euros to the overall current cloud backlog, becoming the biggest contributor.
Speaker 5: At our financial analyst conference, we introduced a new disclosure to reflect the evolution of our strategy.
Speaker 5: Our SaaS and PaaS portfolio combined grew an impressive 26%.
Speaker 5: And breaking it down, South Cloud revenue was up 24% and past cloud revenue was up 40%.
Speaker 5: Strong cloud growth was primarily driven by an outstanding contribution of S4HANA cloud, Tricks, the Business Technology Platform and SAP Signal.
Speaker 5: In addition, we also saw strong double digit contributions from our other SaaS offerings, including Conquer, which continued its path of recovery and grew by 20%.
Speaker 5: Fueled by this cloud revenue momentum, as well as the strong growth in services revenue, our total revenue was up 5% in the quarter.
Speaker 5: Our cloud revenue performance was strong across all regions in the second quarter. The EMA increased by 27%, America's by 22%, and APJ by 26%.
Speaker 5: Germany had an outstanding cloud revenue performance, while the US, Brazil, Japan, India and Switzerland were particularly strong.
Speaker 5: Let's not take a look at the bottom line.
Speaker 5: Starting with cross margins.
Speaker 5: Due to revenue mix effects, our total gross margin decreased by 30 basis points to 73%.
Speaker 5: Very importantly, our cloud growth profit growth of 28% was supported by a continued upward trend of our cloud growth margin. The cloud growth margin. The cloud growth margin. The cloud growth margin.
Speaker 5: Year over year, it expanded by more than 2% of points and reached 72%. And that is despite increased investments into our next generation Cloud delivery program.
Speaker 5: Our non-IFRS operating profit was down by 16% to 1 billion and 68, 680 million euros.
Speaker 5: Mainly driven by reduced contribution from soft dialysis revenue, as well as significant bad depth expenses related to the war in Ukraine.
Speaker 5: In addition, we incurred restructuring expenses of 130 million euros mainly due to the exit from Russia, impacting IFRS operating profit, which was down 32% to 673 million euros.
Speaker 5: excluding the direct impact of the war in Ukraine, I for as operating profit would have been down 3% and non-I for as operating profit down 10%
Speaker 5: Let me now turn to EPS and cash flow.
Speaker 5: The decline of earnings per share that you saw in the quarter reflects the contribution to financial income by Sapphire Ventures, which was 1 billion euros lower than over the same period last year.
Speaker 5: Our IFRS effective tax rate was up 42.5 percentage points to 62.2 percent.
Speaker 5: This was mainly due to the reduction in tax exempt income contributed by Sapphire Ventures and an additional increase of non-deductible expenses in the context of share-based compensation and restructuring expenses related to the war in Ukraine.
Speaker 5: as compared to that.
Speaker 5: Our non-IFRS effective text rate was only up 10 percentage points to 29.3 percent.
Speaker 5: as it was unaffected by the increase in non-deductible expenses.
Speaker 5: Our free cash loan for the first six months came in at approximately 2.81 billion euros.
Speaker 5: The year over year decline is mainly due to the reduced profitability in the quarter and impacts from working capital caused by our continuous move to the cloud. In the second half, however, we expect a more favorable cash flow due to lower cash taxes and increased profitability.
Speaker 5: We are therefore reiterating our pre-cashlaw outlook of about 4.5 billion euros for the year.
Speaker 5: On the tax line, we are updating our full year 2022 IFRS effective tax rate guidance to 34 to 38%.
Speaker 5: This adjustment mainly results from an updated projection of non-deductible expenses and a lower expected 2022 financial income contribution of Sapphire Ventures given current market conditions.
Speaker 5: As the updated non-deductible expenses are not included in non-IFRS, we continue to anticipate a full year non-IFRS effective tax rate of 23 to 27%, but now expect to be at the upper end of the screen. Thank you. Thank you. Thank you. Thank you. Thank you. Thank you.
Speaker 5: Let's now turn to the outlook.
Speaker 5: As you've seen in today's release, we are reaffirming our revenue outlook for the full year.
Speaker 5: We are updating our operating profit outlook range to reflect the expected operating profit impact of approximately 350 million euros from the war in Ukraine and the potential continued marked decline of software licenses revenue due to the current macro environment.
Speaker 5: Finally, a few words in sustainability and some strategic initiatives. We continue to make progress on the sustainability front as both an enablem and an exemplar.
Speaker 5: We have the biggest positive impact through our solutions.
Speaker 5: And we have announced new innovations in the SAP Cloud for sustainable enterprise solution. ilk
Speaker 5: For example, the enhanced SAP Product Footprint Management solution helps customers reduce product carbon and the prints at scale.
Speaker 5: Further, Tolia announced a partnership with Ecovadis, who will provide ESG ratings for Tolia's Sustainable Supplier Finance Solution.
Speaker 5: We have also achieved positive milestones around diversity.
Speaker 5: For example, women in management have increased further to 28.8%.
Speaker 5: Demonstrating further positive impact, our SAPIO Foundries has achieved its goal of supporting 200 companies in its portfolio that are managed or founded by underrepresented individuals earlier than expected.
Speaker 5: So in conclusion, the results of this quota once again proves that our strategy is the resonating.
Speaker 5: In our discussion with customers, we are clearly seeing that they look to strategic investments in technology to help them solve their most depressing business imperatives.
Speaker 5: We are now ready to capitalize on our substantial growth investments of the last 18 months by delivering sustained growth and profitability expansion.
Speaker 5: This makes us confident that we are making strong progress towards our midterm ambition.
Speaker 5: And based on our strong cloud momentum and favorable currency development, we expect to provide an update to our ambition in the upcoming quarters.
Speaker 5: Thank you and we will now be happy to take your questions.
Speaker 3: Operator, please open the line.
Speaker 2: Thank you. If you wish to ask a question at this time, please press star 1 on your telephone keypad. Please ensure the mute function on your telephone is switched off to allow your signal to reach our equipment.
Speaker 2: Let's start one to ask a question.
Speaker 2: We will now take our first question from Frederic Boulain from Bank of America. Please go ahead.
Speaker 4: Hi, good afternoon. Fred from Bank of America, two questions, please. One is around with driving the change around license acceleration, any specific end-market size of clients that you can point to. And what has changed versus?
Speaker 6: Q1, when you gave that unchanged guidance, considering we already had a fair amount of concern to the market.
Speaker 5: growth rate that is similar to the one that we saw in Q4 2021. I'm also reasonably confident that we will be able to absorb the impact of Russia as a part of that and it should be a pretty steady growth from here on that we see in the second half here. On the cloud revenue front, it's quite similar so you should expect quite stable growth from what we have seen in Q2 as well and there is a difference on the operating profit line. So in Q3, we are still expecting negative operating profit and then a return to positive operating profit in Q4, making then the room for the return to double-digit growth in 2023. Why is that so? Well, first of all, because as we said, the front-loaded investments that we made means that we will start to scale profits in particular towards the end of the year. We will have really digested the impact of the war in Ukraine in Q4. In particular, we will have released most of the employees that we still retain in Russia by then and that will of course be released on the operating profit line as well. The comparables on the expense side will become a lot easier because last year Q4, we had already very significant hiring and significant investments in pipeline generation and so on. As well as we anticipate a close of our pending divestiture in Q4 and that will of course provide.
Speaker 5: help. Please remember last year we had the FIONIA joint venture set up in Q3 and of course we don't have a comparable event in Q3 of this year. Hopefully that helps to understand the dynamic a bit better. Thank you Christian. Thank you Luca. Thank you. Next question please.
Speaker 2: Next question from Adam Woods from Morgan Stanley . Please go ahead.
Speaker 4: Hi, afternoon, Christian, afternoon, Luca. Thanks so much for taking the question. Just first of all, maybe on the assumptions for the second half on the profitability side, I mean, you've alluded to the shift to cloud and macro having an impact. Are you basically assuming a continuation of the situation in the second quarter? IE, a little bit of weakness in parts of Europe , hitting the licenses and that continued cloud strength also impacting licenses for the second half. Or have you also made the assumption that there is normal macro cycles go, that weakness could spread to other parts of Europe , and maybe so?
Speaker 4: and is there a level of growth where it would be impossible for you to grow EBIT double-digit next year as a current guidance suggests? Thank you.
Speaker 5: Let me take this. So first of all, on the second half guide, yes, we actually, we don't see the software license to cloud transformation only happening in parts of Europe . This is actually something which is already happening at a global level. And we expect in our guidance that it will continue to happen at the same pace as what we have seen.
Speaker 5: in Q2 and obviously against this we are running already with our cost flex program and productivity program that you have alluded to and that of course means that we are taking out expenses in discretionary areas. We have already slowed down hiring in Q2 as you have seen with only 600 editions. We will further slow this down because we have actually already made the significant moves with close to 5.5,500 additional employees in the last three.
Speaker 5: cloud profitability. So from that perspective, we feel that we are appropriately covered, that the guidance is safe now because what we saw in Q2 on the license side was not confined to only parts of Europe but was actually a broad-based trend that we saw. And in 2023, look, I mean, we have said that we are committed to a double-digit growth over the 2022 numbers because