Q4 2022 SAP SE Earnings Call
Speaker 2: Ladies and gentlemen, thank you for standing by.
Speaker 3: Welcome and thank you for joining the SAP Q4 Earnings Conference call.
Speaker 4: Throughout today's recorded presentation, all participants will be in a listen-only mode.
Speaker 5: The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touch tone telephone. Please press the star key followed by zero for operator assistance.
Speaker 6: I would now like to turn the conference over to Anthony Colletta, Chief Investor Relations Officer. Please go ahead.
Speaker 7: Good morning everyone and thanks for joining us today.
Speaker 8: With me on the call are CEO Christian Klein, CFO Luka Mu?i? and Scott Russell, Head of Customer Success.
Speaker 9: On this call we will discuss SAP's fourth quarter and full year results for 2022.
Speaker 10: You can find the deck supplementing today's call as well as our quarterly statement on our investor relations website.
Speaker 11: During this call, we'll make forward-looking statements, which are predictions or other statements about future events.
Speaker 12: These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ.
Speaker 13: 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 14: Unless as always stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS, you are near at custom currencies.
Speaker 15: The non-LRS financial measures we provide should not be considered as a substitute for or compared to the measures of financial performance prepared in accordance with LRS.
Speaker 16: As you know, this is Lucca's final earnings call with SAP. So before we start, I would like to take a moment to express my personal gratitude to you, Lucca, for the close collaboration over the years, for the great partnership, and for the strong engagement with our investors.
Speaker 17: Congratulations on 27 years at SAP and a fantastic ride. So it has been a distinct honour to work with you with lots of great memories. So I wish you nothing but the best of success.
Speaker 18: On behalf of the SAP Family and the Border community, many thanks to KA.
Speaker 19: And with that, I'd like to turn the call over to Christian. Yeah, thank you, Antony, and really well said. Thanks to all of you for joining us today and welcome to 2023.
Speaker 20: This has been a good Q4 and a very important year for SAP, bringing to a close a year of great momentum.
Speaker 21: Our results in Q4 show once again a strong demand for our products and services, reflecting the confidence and trust companies have in working with SAP.
Speaker 22: Let me call out some key highlights for Q4.
Speaker 23: Current cloud backlog exceeded 12 billion euros up 24% this quarter against the swarm compare last year.
Speaker 24: Cloud Revenue grew 22% and Cloud Revenue for S4HANA further accelerated once again, growing at 90%.
Speaker 25: We reach the tipping point in our transformation as we return to positive operating profit growth of 2%.
Speaker 26: with a recurrent revenue share of 76%, which is up six percentage points compared to Q4 2021.
Speaker 27: For 2023, this is setting us up to deliver expected, accelerated total revenue and our promise of double-digit operating profit growth.
Speaker 28: For full year 2022, we delivered upon all our top and bottom line guidance.
Speaker 29: with cloud revenue growing 24% up 5% from 19% in 2021.
Speaker 30: S4HANA Cloud Revenue grew 79% for the full year. This is compared with 47% full year growth in 2021 and brings our S4HANA Cloud Revenue to over 2 billion euros for the first time ever.
Speaker 31: Our cloud transformation is in full swing, and we have also built a highly resilient business, with recurring revenue up from 75% in 2021 to 79% in 2022.
Speaker 32: I believe we will look back at 2022 as one of the most important years in our history.
It is now over two years since we launched our strategy for transformation.
We kept our promise and delivered, despite the combined impact of three factors, our exit from Russia, our divestiture of litmus and the macroeconomic volatility facing the world.
Why is our position so much stronger and SEP more relevant than ever?
Because our Wyzewith SAP offering is much more than only a shift of our technology to the cloud.
It is a true business transformation offering and we are focused on helping our customers solve their biggest challenges.
First...
We enable companies to transform their existing business models and drive simplification and automation of their core business processes to offset inflation pressure.
Second, SAP enabled supply chain resilience.
Supply chains are disrupted and need to be diversified as a result of the pandemic, geopolitical tangents and shifting business dynamics.
We are helping our customers to build more resilient supply chains by connecting the suppliers and providers, from the raw material provider to the manufacturer.
SAP's business network facilitated over $4.9 trillion of global commerce.
and 730 million of B2B transactions in Q4 alone.
Sir, we are delivering the Queen lecture for every industry and every customer.
to measure ESG based on actual instead of average data.
Data that is fully auditable and based on industry specific standards.
with Scope3 emission tracking across value chains via our network. And we will give our customers the ability to act by embedding sustainability into every business process and every company decision.
WISE with SAP is at the heart of our strategy and is one of our most successful offerings ever.
As stated, it is much more than a technical lift and shift to the cloud for our install base. It is a true business transformation offering and around 50% of our customers are net new customers to SAP.
I'd like to walk you through some of our why's with SAP Q4.1.
As part of Merck's long-term collaboration with SAP, they will be using SAP S4HANA Cloud to help further digitize their business processes and make them more efficient, agile and adaptable.
This will enable them to react to disruptions and capitalize on business opportunities more quickly.
Porsche, the German sports car manufacturer, has selected Wyze with SAP to support their move to the cloud and maximize value through innovation and speed.
PwC, one of the largest professional services networks in the world, significantly increased their user base for SAP S4HANA public cloud.
to support Lenovo's group Everything as a Service transformation strategy, a fundamental change of their business model,
They will be moving their digital core to S4HANA Cloud.
Earlier this month, I had the pleasure of meeting with the leadership team of Alpha Time, a group from the United Arab Emirates. They operate across a number of sectors and will be embarking on a full digital transformation powered by WISE with SAP.
We also announced a joint collaboration with ExxonMobil to establish and adopt industry best practices and help them with their sustainability efforts.
Finally, we are very proud to announce that we signed a long-term strategic deal with BMW this week, based on WISE with SAP.
We have been partners for more than 30 years and their cloud strategy is based on SAP across all dimensions on all key end-to-end business processes.
The SAP Business Technology Platform is the foundation behind Wwise and our portfolio momentum. Already today, more than 80% of Wwise with SAP deals include the Business Technology Platform as the foundation for integration and extensibility.
This is powered by thousands of APIs, integration flows and low-code, no-code content packages.
Lockheed Martin of the US is an example of this.
Lockheed's collaboration with SAP began in 1998. They will be now leveraging Wwise with SAP to move their core business processes to a secure, managed, FedRAMP compliant cloud.
They will be using the SAP Business Technology Platform for emerging technology and the SAP Analytics Cloud to enhance their strategic data management.
With S4HANA and BTP at the core, our line of business applications also benefit from a flywheel effect, as it is twice as likely that these ERP customers buy another SAP line of business application.
More than 30% of SAP's current customers use two or more SAP solutions. And we see this increasing through this flywheel effect created by the business technology platform.
At the same time, coming out of a strong year, we will not rest as we continue to focus on our core strengths to increase both win weight and productivity.
In previous quarters, we spoke with you about our continued focus to simplify and consolidate our portfolio with S4HANA and BTP at the core.
Our diversity chart litmoz in Q4 is an example of this.
In 2023, we intend to sharpen this portfolio focus further.
As we continue to build on our core strengths, we will be pivoting our CX and industry areas to be more focused on specific industries, complemented by a strong ecosystem.
This focus on our core, together with our ongoing optimization of SAP structure for cloud success, are behind the announcement we made today.
They intend to carry out a targeted restructuring in select areas of the company.
This will impact up to 3000 positions and will include a headcount reduction amounting to about 2.5% of our workforce.
While we know these changes are necessary, it is never easy to make decisions that affect our colleagues in this way.
In the same context, SAP has determined to explore a sale of its stake in Qualtrics.
This would be a continuation of the strategy we set at the time of the Qualtrics IPO in 2021.
SAP believes that this potential transaction could unlock significant value for both companies.
for SAP to focus more on its core business and profitability, and for Qualtrics to extend its leadership in the exam category that it pioneered.
Since the acquisition, Qualtrics has increased revenue by 3.5x to 1.5 billion USD while delivering profitability.
and has significantly expanded its offerings and enterprise customer adoption.
In the event of a successful transaction, SAP intends to remain a close partner.
A final decision is subject to market conditions, agreement on acceptable terms, regulatory approvals, and the approval of the SEP SE Supervisory Board.
SAP has retained Morgan Stanley as financial advisor to assist in the exploration of the sale of its stake in Qualtrics.
I'd like to close by taking a look at our outlook and ambitions.
As these results have shown, the power of SAP solutions in an increasingly uncertain world is clear. We are providing strong guidance for 2023 despite the continued macroeconomic pressures.
The strategic transformation we announced over two years ago is in full swing and has reached a significant inflection point.
The strength of our Recurving Revenue Base is the foundation which will power our next 50 years at the forefront of business and technology.
We will already see a positive impact in 2023, including the promise we made to return to double-digit operating profit growth as well as accelerated cloud and total revenue growth.
For our 2025 ambitions, we are ahead of plan and expect to provide an update to these ambitions later in the first half after the arrival of Dominik Assam, our new CFO . In closing, I can sense both the possibilities as well as the caution that will be required to navigate the next step.
And of course, the whole FEP formally will be always grateful for your commitment and your contributions to our success. I guess today also marks the 37th earnings in your CFO career. And personally, I would like to say not only many, many thanks, especially over the last two years as a CFO .
as usual, thank you so much for your kind words, but also from my side, a happy and healthy 2023 to everyone. Let me start by saying that I'm extremely proud of SAP Solid Finish 2022, demonstrating great resilience in a year that saw certainly many challenges.
Despite the extremely volatile business environment, we delivered on our financial commitments for 2022. And we are likewise on track to deliver our growth and profitability commitments for 2023.
Our financial performance shows that we kept our promise and thoroughly executed on our plan by being laser focused on building cloud momentum through agility and great cost-assist.
This resulted in a successful finish to the year and I am personally extremely confident that we will carry this strong momentum into the new year.
Customers around the globe continue to choose RISE with SAP to drive their end-to-end business transformations.
Large cloud transactions with a volume greater than 5 million euros contributed 48% to our cloud order entry for the full year and an impressive 50% in Q4, the highest number on record.
Now let me dive into more details around our financial highlights.
Current cloud backlog now exceeds 12 billion euros, continuing its growth at scale to 24%. Despite being negatively impacted by approximately 1.5 percentage points from the divestiture of our litmus business and the wind down of our business operations in Russia and Ben
S4HANA current cloud backlog growth accelerated to 82%.
driven by the strong adoption of rice with SAP.
In Q4 alone, we added more than 500 million euros to our S4HANA current cloud backlog, leading to a total of 3.17 billion euros.
Cloud revenue this year surpassed support revenue and became the largest single revenue stream for SAP.
Our combined SaaS and PaaS portfolio for 2022 continued to grow an impressive 27%.
with SaaS cloud revenue up 25% and past cloud revenue up 45%.
This strong cloud growth was primarily the result of an outstanding contribution of S4HANA Cloud and the business technology platform.
Driven by this strong double-digit cloud growth and an outstanding performance in services, total revenue was up 5% year-over-year, showing great traction compared to the year-ago period.
Now let's take a brief look at our regional performance, where in the fourth quarter all regions delivered a strong double-digit cloud performance, with Brazil, Germany and Japan being standouts.
For the full year, the Americas increased by 22%, EMEA by 26% and APJ likewise by 26%.
Germany, the United States and Japan had outstanding performances, while Brazil, Chile, China, Italy, Saudi Arabia, South Korea and Switzerland were all particularly strong.
Now moving on to the bottom line, where our cloud gross margin for the full year continued its upward trend from last year and expanded 2.1 percentage points to 71.3 percent.
This increase was driven by expanding gross margins across all cloud business models, with efficiency gains overcompensating increased investments into the next generation cloud delivery program.
The improvement of the cloud gross margin contributed nicely to our cloud gross profit growth of 28%.
In the fourth quarter, non-IFRS operating profit grew by 2%, reaching an inflection point in our cloud transformation towards double-digit growth in 2023.
Full year 2022 non-IFRS operating profit came in at 8.03 billion euros, a 7% decline, mainly impacted by the decision to wind down business operations in Russia and Belarus, a reduced contribution from software licenses revenue, as well as accelerated investments into R&D sales and marketing.
throughout the year was significantly lower than in the same period last year.
The IFRS effective tax rate for the full year was 44.6% and the non-IFRS tax rate was 29.5%.
This year-over-year increase mainly also resulted from changes in tax-exempt income related to Zephyr ventures.
Free cash flow for the full year came in at 4.35 billion euros in line with the revised outlook of approximately 4.5 billion euros.
This is predominantly due to lower profitability and adverse working capital impacts in other assets.
While tax payments developed positively, smaller negative impacts came from share-based payments as well as capital expenditures and leasing.
In addition, the increased volume of trade receivables sold in 2022 amounting to 800 million euros versus 500 million euros in 2021 had a positive impact on Free Cash Flow. As you already heard from Christian, we will be initiating a targeted restructuring program this year with two main objectives.
First, to focus our portfolio on our key strategic growth areas and second, to improve overall process efficiency as we continue to accelerate our cloud transformation.
We are highly confident in our short and midterm prospects.
We see 2023 as another pivotal year that will help deliver on the accelerating top line and double digit operating profit growth that is reflected in our outlook.
Finally, let's discuss our non-financial targets.
Our greenhouse gas emissions were 95 kilotons within our adjusted target range.
We remain on track to be net neutral in our own operations this year, and we are continuing on the path to achieve net zero across the entire value chain by 2030.
Employee engagement index was down 3 percentage points.
This decrease is in line with global industry trends and related to external factors such as the lasting impact of the pandemic and microeconomic conditions.
We achieved 35% of women in the overall workforce and 29.4% women in management.
In November , we brought the latest release of SAP Sustainability Control Tower to market.
which effectively shares and organizes ESG data so companies can more accurately and readily report their performance to various reporting requirements and frameworks.
This enables companies to set targets, actionable insights into core processes, and create role-specific actions to improve sustainability performance.
As many of you may know, I not only have a passion for the financials, but also for sustainability and non-financial metrics.
It has been an honor to drive this topic together with my colleagues during my tenure.
We have been a pioneer in integrated reporting and it has been a privilege to have a role shaping this area.
So to summarize, 2022 was another strong year for SAP, highlighted by our cloud performance across all regions, despite the macroeconomic environment.
This demonstrates our continued progress with customers who want to transform their businesses into more intelligent enterprises.
Even with the challenges that we are seeing in the world today, we are confident in the opportunity ahead.
Our 2023 outlook best illustrates that we are now entering the next phase with a pivotal year characterized by business momentum acceleration.
Finally, on a personal note again, as you all know, this is my 37th and final earnings call with SAP.
I'm proud to have been part of such a great company.
As I'm about to pass the torch, it is exciting to see that SAP is in such a position of strength and moving along on its growth trajectory.
Let me also take the opportunity to share my own personal appreciation to all of you and to the broader financial market community.
Providing transparency in an open and constructive dialogue has always been my goal.
I hope that I was able to live up to this goal despite the often volatile times and the unprecedented transformation of our company in the last nine years. It has always been a privilege.
Thank you very much and we will now be happy to take your questions. All right, thank you, Luca. I would like to remind you to limit yourself to one question only, please. So, Natalie, please open the line.
Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch down telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you are using speaker equipment today, please lift the handset before making your selection.
So anyone who has a question may press star followed by one at this time. Now first question is from the line of Adam Wood from Morgan Stanley . Please go ahead.
Hi, good afternoon, Christian. Good afternoon, Luca and also Luca, best wishes from my side for the future. So the question was just around the fourth quarter cloud growth. We went into the quarter with the 26% cloud backlog growth and ended Q4 with 24%. And yet the cloud growth was 22%. Could you just help us understand why that anomaly is now?
Let me get started and then in the overarching momentum perhaps Christian you may want to add some comments or Scott on what you see in the market. So essentially in the fourth quarter I think you have to remember a couple of effects. One and that is something that I've lacked on the CCP growth to be expected.
and we had the divestiture of litmus which obviously affected ccb negatively and together with the continued effects from the russia exit that resulted in the 24 percent ccb growth versus the 26 percent that we had actually it is also sometimes a matter of
on the revenue front, you need to take into account that next to all of those impacts of course the divestiture of Litmos also meant that we lost some revenue due to the closure early December . We had also the anniversary of the Clara Bridge acquisition that Qualtrics had done in the fourth quarter a year prior and that
a bit that in Q4 they were already back in volumes to the pre-pandemic levels. So they grew actually in the 20s which was a very decent performance. It's really mainly down to those divestiture impacts and the anniversary of Clara Bridge. When we think about...
you know, one to two quarters of delay. And so you should see already a reacceleration in Q1 that would then further build up during the year. I'm sure there will be more questions around seasonality, but I'll leave it on that comment for cloud revenues. And then in terms of the forward-looking momentum.
I think Christian has already talked about the great success that we had with BMW with the signing yesterday. But perhaps you want to add some more comments around what you see in the market. Adam, on my side, we also provided for the first time today also the total cloud backlog, including not only the annual contract value.
Q4 and so this is also signal that deals like BMW. I mentioned Porsche, I mentioned Merck. There are a lot of large enterprises now following our move and of course they have a certain WAMP in their contract so we actually super confident that we already have the backlog.
to deliver on our ambition for 2023 and even beyond, together with the recurring revenue share, I mean the business is super resilient and I mean for the year to come, I mean Scott we look into Q1 already, Luca already mentioned there will be a re-acceleration and you know and the cloud no matter if it's now
on customers like BMW where we are driving automation in manufacturing, in finance where we are working on analytics or if we are working on the supply chains of this world to make them more resilient. Or last but not least if we are helping customers like Exxon and others to measure ESG in a standardized way and act on circular and other.
Yeah, it's probably only two comments to add to what you and Luca mentioned, Christian. So Adam, the first is you would see in Q4 that we not only continue to grow and rise as the enabler and the flywheel.
that Christian mentioned at the beginning in the Total Cloud Backlog. The proportion of large customers continues to expand. That gives health to our broader portfolio. So we mentioned many of them today, but you think about Fujitsu, Natusi, Tech Mahindra, Sumitomo, Renault, the list goes on. So large organisations which will have that ramp that Christian mentioned.
whether it be supply chain or sustainability or other aspects. And the other thing that we saw in Q4 was consistent performance across the world. We're a business that we see momentum in all of the regions. We obviously, Luca mentioned some of the countries, but that gives a level of confidence but also strength that as we move forward.
We have a consistent portfolio, we have a consistent business, and no matter where a customer is based and they're headquartered, they're trusting SAP to move forward. So I guess we look ahead with relative confidence, not despite the factors that are outside of our control.
Appreciate the detailed answer. Thank you.
Thank you Adam. We'll take next question, please.
The next question is from the line of Amit Hashandani from Citi. Please go ahead.
Thank you. Hello, everyone. I'm a person Danny from city and before I ask my questions. Thank you, Luca for the partnership over the years. It's been a pleasure over the past decade.
Moving on to my question, my question is really with respect to the free cash flow trajectory.
in 2023 and if we look at it relative to what played out in 2022, quite a few moving parts, right? You have the sale of receivables, there's the dynamic around prepayments to hyperscalers, potentially deferred revenue, there's obviously restructuring next year. If you could kindly help us build a bridge towards...
how we arrive at the free cash flow for 2023. And more importantly, how should we get confidence that you're on track to get to $8 billion or potentially higher by 2025. Thank you.
Yeah, thanks for the question. That's a detailed one that I guess goes to me. So, first of all, when you take a look at where we ended with the 4.35 billion euros and then you build up there are a couple of elements here.
First on the negative front, yes, you're right. We have a restructuring that will result also in cash outflows of roughly 300 million. So you need to subtract that sort of say back on the sale of receivables.
Actually SAP has a long history of engaging in customer financing in 2022. The 800 million was actually a step up over the roughly 500 million that we had in the year before. But you need to understand the prior year was in the long term average actually quite a low figure.
So that is actually more or less a wash in terms of how you build the bridge for for 2023 and beyond. When you then think about the progression, first of all, of course, we expect that we will have a significantly higher profitability in
that we did with hyperscalers that were kind of a working capital headwind for us but made sense for us in the long run because we were able to capitalize on better conditions as a part of that. So that is something that we don't expect to the same extent to see in 2023.
actually a one-year vesting period and then essentially payouts on a rolling basis. That is now changing and the majority of our awards that now start to vest actually already after six months, will then be paid out in equity. We will see starting this year and then with further increases of tail. Will new Legal Servicesing engagement with US while Palmer weakly
cash flow headwinds so to say in the results. And so it's basically mainly the combination of the increase in profitability as well as the positive impacts from the move to equity settled programs that will define the trajectory.
2022, I would expect a slight moderation of those. And then it's at the end of the day, the growing profitability in the business, but obviously we don't intend to rest with the growth that we have guided for in 2023, but actually see a strong prospect to further increase the growth rates on the profitability side in 2024 and beyond.
Please go ahead. Yes, good afternoon. Thank you very much. And Luca, all the best for the next chapter. My question is on the Qualtrics announcement. If I could ask you to elaborate perhaps a bit further there on the rationale. Why now when, as you say, the business has matured so much since the original acquisition and
The SAP has worked very hard around the integration with certain other assets in the portfolio on the cross-selling opportunities as well. I mean, you talked about a strong ongoing relationship with Qualtrics, clearly, but any detail there would be helpful, including those circumstances under which you would or wouldn't sell it given what's happened to valuations in the space.
be our journey together. So you are right, we invested heavily in the last years into the integration and embedding XM into our solutions and we have seen great sales success and go to market successfully.
But then also, I would say around Q3, Q4, we were sitting together with the Qualtrics management team with SICK and WINE and said, hey, actually what we are doing, we can continue to do also in the future by embedding Qualtrics and our products go to market together.
While we can also consider SAIL, which allows SAP on the one hand side to free up investments and efforts to double down on our growth in the core, which is super strong. You have seen the F400 cloud numbers, the platform is booming. While Qualtrics can also go even more out and close another great partnership with SAP.
and it's a great asset. It's by far the best product in the XM category. So we're actually also seeing a lot of interest and we are very positive about the ongoing process. The process should also be straightforward because Qualtrics is really set up independently already since some time. They have a dedicated leadership team.
we want to make sure we maximize value as Christian has said to the shareholders of both Qualtrics as well as SAP is that we have seen in the in particular in the last year that while I think both Qualtrics and SAP make progress in the partnership and we drive good results also Qualtrics I think
that Qualtrics and SAP are not at the moment set up to optimally crystallize the value that is behind the company and therefore exploring that sale could be a way to unlock more of this value to the benefit of the Qualtrics shareholders and SAP at the same time. But it means at the same time that we absolutely expect this value to crystallize.
to ultimately not consummate a transaction in the unlikely event that we would not generate the value that is fair for all stakeholders of Qualtrics including also the SAP shareholders and that's why we cannot at this point in time tell you with precision when this process would be over.
Of course, assuming that we are able to strike a deal at a strong valuation, we would have a range of options with any proceeds which could range all the way from reinvestment in some interesting assets around our core that are closely associated with our strengths.
all the way to enhance capital returns to shareholders. We will determine this when we have greater visibility in the process, but it gives us great optionality of course to crystallize more value also for the SAP shareholders.
Thank you. Thank you, Jim. Thank you very much. And we'll take the next question, please.
The next question is from the land of Michael Brace from UBS. Please go ahead.
Yes, thank you. Good afternoon. Luca, I can let you get away without a question on cloud margin. Could you say a little bit about the convergence costs for 2022 and 2023 and how much of those went into the cost of sales rather than R&D? And then obviously you've now got several thousand customers on rise.
Do you have a better view on where cloud margins are going to mature to in the next few years or certainly the end of this year as well, given that those investments will fade in the second half? Thank you.
Yeah, and you're always very welcome to pose your cloud margin questions. That allows me to be the only one in the room who can answer them and that always makes me proud. No, seriously speaking. In terms of the convergence cost, it was significant in 2022 as we accelerated in order to be ready and ready tocendo the gel of our rotation.
more than double actually more than what we had in 2021. And approximately 200 million of those with roughly 50 million per quarter were actually spent on the cost of cloud line. This cost will, as I said, for a couple of quarters fade away in 2023.
run rate and then as we have now a full visibility into the completion of the program there is essentially only one line of business left with some data center migrations and then the final asset retirement but that is absolutely certain now to happen on time the second half year will be completely free of one of these cloud delivery harmonization related expenses and therefore in terms of the program.
for the first half year. I'm also confident that despite the remaining headwinds from the program, you will already see some further acceleration in the cloud margin in the first half year. And then obviously a more pronounced one in the second half year. I would not be surprised if we had an exit rate.
is really the success in sales of S4 and the private cloud deployment option in the first half here. Because especially as you start the build of those landscapes, of course you have a small ramp yet you have already a relatively high level of cost and set up cost for those landscapes.
So that's the remaining uncertainty here, but certainly the exit rate will be significantly ahead of where we are currently. And then for 2025, it's basically unchanged from what I said at our capital markets, Dave. Assuming that RISE with SAP and S for private cloud remain as successful as they are today and we're...
will end up come 2025 above the 80% mark. But then again, with the dampening impact of the private cloud, we could end up a couple of percentage points below the 80% mark. But if that was the case, then we would actually have at the same time a massive surge in cloud gross profit, which would be actually.
our performance to a certain extent, the development of prepaid expenses that you saw on the free cash flow side and that we discussed are also a means to set us up for a more efficient consumption of cloud infrastructure entitlements that will further help the term margin. And maybe just to prove, Luca, that also the CEO has been a little upset by it.
We have to do some work on the decommissioning. We have our hyperscaler strategy clear, set, and done with a lot of failover and backup scenarios. So that's super modern and super resilient. But what we still do as part of our continuous efforts is we are working on further scale out capabilities of our database, which has significant
impact on the TCO. Scott did some great work on putting higher incentives on price versus volume. That led to a very good trend on keeping our prices up and running. Infusing the CPI clauses we announced in a very successful way.
So both from an engineering perspective as well as from a pricing perspective, I'm actually very confident that we are also going to see some good levels also in the years ahead. And no worry also after Luca is not here anymore, there will be someone looking at this KPI very closely. So Christian you have just proven that I have indeed been mentoring you very well.
from an engineering perspective as well as from a pricing perspective. I'm actually very confident that we are also going to see some good levels also in the years ahead and know where we are also after Luca is not here anymore. There will be someone looking at this KPI very closely. So Christian, you have just proven that I have indeed been mentoring you very well. Thank you.
Thank you. Thank you. All the best, Luca. Thank you. Thanks, Michael. We'll take the next question, please. The next question is from the line up behind us, Shala, from Deutsche Bank. Please go ahead. Yeah, thanks for taking my question. And also, Luca, thank you very much for the great collaboration over the last years.
I may have missed that, but did you provide the cloud extension multiplier for the quarter? That's just a housekeeping item. And then I think it's very useful that you give the total cloud backlog number now. How should we think about the kind of average duration or average contract lifetime of that number, maybe? And then just on S4HANA cloud, I mean, that continues to grow really impressively, despite what's going on with the cloud. And then on S4HANA, I mean, it's just a couple of days before it's going to be displayed. So I think it's really useful to think about the kind of average duration and average contract lifetime of that number, maybe? And then just on S4HANA, I mean, that's just a housekeeping item. I mean, that continues to grow really impressively, despite what's going on with the cloud. And then just on S4HANA, I mean, it's just a housekeeping item.
around the cloud extension policy. So when you look at the full year, actually, the multipliers continue to hover rather around the 3X than the 2X factor. However, you will always have a seasonality in Q4 because you sign up the largest transactions that you have a slightly higher exposure. So for Q4, we had an extent.
multipliers and then as we sign up the very large deals, then it might moderate a bit. But this continues to show the same behavior as we have seen actually since we launched RISE. And you can see it also in the resilience of our support.
revenues. I mean with those heavy software license declines, having actually only a flat support revenue development for the year is actually very resilient in absolute numbers. We had roughly 200 million euros of support revenues that
changed sites to the cloud line, so to say, over the entire business here. So this is very resilient. In terms of the total cloud backlog, I'm happy that you find it useful and indeed, I think it follows the kind of verbal comments that we had.
figure that we are currently prepared to produce on an annual basis. So we'll provide an update at the end of next business year as well. And in the meantime we'll also provide color commentary on what we are seeing. But I would expect this trend to continue for a while.
average contract duration at SAP in the cloud is up. It's by now almost reaching four years and that is another function of those large multi-year deals that we are signing up. And so therefore the TCP is actually a helpful measure even though of course as it's not broken down to individual business years we'll rather give you a measure of
it will certainly remain a high growth solution for quite a while. And this morning, I got also the question in the press conference, what about the end of maintenance for our ECC and older ERP version, and do we going to expand and extend this timeline again? No, we are not going to extend that.
because we actually giving customers already a lot of choice to move with us to S4HANA. We still have on-prem and guaranteed until 2040, but we of course see now in the meantime big success with our move to the cloud with Wwise. And we are seeing that a lot of customers are now left who are now starting with S4HANA.
the timeline is coming closer with 2027. But of course, we also have seen a 50% net new customer share and we are putting a lot of work currently into our volume business. So let's not forget with Julia, Scott and Thomas, we are working now on, you know, we have customers like.
Dr. Lib Unicorns will actually celebrate Go Live in weeks. And we want to activate this channel even more because the product is really designed also for the small and the mid-sized customer. So while we are moving the large ones and the installed base, it's definitely also not going to rest on the small and mid-sized segment. We see good business coming in there. We want to activate...
bottom line. But also even more important, we also with this strategy activate our cross-cell potentially because the BTP is now the factor standard. S4HANA is booming and then we can also increase the win rate of our applications who are circumventing the core as we have shown on this one slide. That is working.
and this is what we are doubling down on. So you can definitely expect a further acceleration, but at a certain point we should really look at the absolute terms because of course mathematically the percentage growth rates, this is just mathematically done at a certain point of time.
It's very clear. Thank you, Christian. Thank you, Luca. Thank you. We'll take another question.
The next question is from the line of Stefan Slawinski from BNP Paribas Xane. Please go ahead.
Yes. Hi. Thanks for taking my question and Luca all the best as well. Your next endeavor enjoyed working with you over these past few years. Um, so I just wanted to follow up. I guess two quick points just on the hyperscale of relationships. Obviously, they're seeing a bit of pressure in terms of consumption.
Does that give you an opportunity to negotiate some better bulk transactions? And is that maybe what we saw there in Q4? Can that also be a tailwind to margin? And then just a second one on the backlog you just talked about, the multipliers, the visibility there. How confident are you about getting to double-digit revenue growth?
Could that happen as early as 2024 or would that require a much better macro environment in 2024? Thank you. On the hyperscale engagements I would definitely say yes, the environment is good.
We of course in constant talks around our partnership both technical as well as
in constant talks around our partnership, both technical as well as commercially.
And second about double digit total revenue growth. 2024, it's yeah, absolutely. It's possible. And as you're going to see the recurring revenue share is growing and growing. We are talking about 83% already in 2023. It's absolutely feasible to come to double digit total revenue in 2024. Yep, this is clearly our ambition. Yes, Stefan.
Thank you, and we'll take one last question. The last question is from the line of Toby from JP Morgan. Please go ahead.
Yeah, hi, thanks for taking the question and Luca, all the best for the future. Just thinking about the EBIT growth trajectory that we're on, clearly minus 8% in Q3 plus 2% in Q4. How should we think about this phasing as we move through 23? If I look back through 22, it looks as though the easiest comps are in Q1 and Q2.
but also mindful there are now cost savings in the mix here as well and there's a phasing element to that. So could you just help us understand the exact phasing or the trajectory of the EBIT growth through 323. Thank you.
Yeah, absolutely. Thanks for the question. I have actually expected it and waited for it. It's a very good one. So we actually believe that our easiest compares and therefore the best performance will be in Q2 and Q3. In Q2 for the obvious reason that last year we had the significant impact of the exit of Russia. Most of it was realized in Q2.
And why Q3? Well, because it will be the first quarter where we will be entirely free of the cloud delivery harmonization expenses. And that will be a significant help to the P&L. The difficult, the toughest compared are actually Q1 and Q4 for different reasons. In Q4 it's because last year we had the litmus divestiture which brought a one-time gain of 109 million in non-
some revenues in Russia, mainly in support revenues and also in cloud revenues. And for 2023, we essentially we plan with zero revenues in Russia. Nevertheless, I would say already in Q1, we should be pretty close to, if not already achieving a double digit growth, then we would have in Q2 the highest.
program will be behind us and that will of course provide next to additional efficiency gains that we expect across our business and further progress on the cloud margin will provide some significant further relief. I hope that's helpful from a planning perspective.
will be behind us and that will of course provide next to additional efficiency gains that we expect across our business and further progress on the cloud margin will provide some significant further relief. I hope that's helpful from a planning perspective. That's great, thank you.
All right, thank you, and this concludes our call for today. Thanks for joining. Thanks a lot. Yep, thank you very much. Thank you, everybody. s
Ladies and gentlemen, the conference is now concluded and you may disconnect. Thank you for joining us.
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