Q1 2024 SAP SE Earnings Call

Operator: Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode.

Throughout today's recorded presentation, all participants will be in a listen only mode.

Operator: The presentation will be followed by a question and answer session. If you would like to ask a question, you may press hash, followed by one on your touchtone telephone. I would now like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer. Please go ahead.

The presentation will be followed by question and answer session.

If you would like to ask a question you May press hash followed by one on your Touchtone telephone.

I would now like to turn the conference over to Anthony collateral Chief Investor Relations Officer. Please go ahead.

Anthony Coletta: Good evening, everyone, and welcome. Thank you for joining us. On this call, we will discuss SAP's first quarter 2024 results. You can find the deck accompanying this call as well as our quarterly statement on our investor relations website. During this call, we will make forward-looking statements, which are predictions, projections, or other statements about future events.

Anthony Coletta: Good evening, everyone and welcome.

Anthony Coletta: Thank you for joining us.

Anthony Coletta: With me today are CEO Christian Klein CFO Dominik.

Anthony Coletta: And Scott Russell head of customer success.

Speaker Change: On this call, we released curse Sap's first quarter 2024 results.

Speaker Change: You can find the decks implementing this call as well as our quarterly statement on our Investor Relations website.

Speaker Change: During this call, we'll make forward looking statements, which are predictions projections or statements about future events.

Anthony Coletta: 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. Additional information regarding these risks 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 20-F for 2023. Unless otherwise stated, all numbers on this call are non-IFRS, and growth rates and percentage point changes are non-IFRS year-on-year at Custom Currents. The non-IFRS financial measures we provide should not be considered a substitute for or superior to the measures of financial performance prepared in accordance with IFRS.

Speaker Change: 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 Change: Additional information regarding these risks and uncertainties maybe found in our filings with the Securities and Exchange Commission.

Speaker Change: <unk>, but not limited to the risk factors section of <unk> annual report on form 20-F for 2023.

Speaker Change: Unless otherwise stated all numbers on this call are.

Speaker Change: Non <unk> and growth rates and percentage point changes are non <unk>.

Speaker Change: Year on year at constant currencies.

Speaker Change: The non <unk> financial measures, we provide will not be considered a substitute for or superior to the measures of financial performance prepared in accordance with IRS.

Anthony Coletta: Before we start, I'd like to first remind everyone of the adjustments to our reporting practices announced on December 18th last year. These adjustments, notably incorporating share-based conversations into our non-IFRS results, are now fully reflected in our Q1 results. I would also like to call your attention to our upcoming Financial Analyst Conference, which will take place on June 5th as part of our Sapphire event in Orlando, Florida. This will be broadcast on our website. And with that, I'd now like to turn the call over to Christian.

Speaker Change: Before we start I'd like to first remind everyone of the adjustment to our reporting practices announced on December 18th last year.

Speaker Change: These adjustments, notably incorporating share based compensation into our non <unk> results are now fully reflected in our Q1 results.

Speaker Change: I would also like to call your attention 12 upcoming financial Analyst Conference, which will take place on June 5th as part of our Sapphire event in Orlando, Florida.

Speaker Change: This will be broadcast on our website.

Speaker Change: And with that I'd like to now turn the call over to Christian. Thank you Anthony and thanks to everyone on the line for joining our first earnings call for 2024.

Christian Klein: Yeah, thank you, Anthony, and thanks to everyone on the line for joining our first earnings call for 2024. When we look at SAP's longer-term growth journey, 2024 is the key year. It's the year to scale up revenue and profitability, and I'm so proud to say what we saw in Q1 makes us very confident about our goals.

Christian Klein: When we look at S&P for longer term quality journey 2024 is the key here.

Christian Klein: The year to scale up revenue and profitability.

Christian Klein: And I'm so proud to say what we saw in Q1 makes US why are we confident about our goals. We are off to a strong start and we have laid a solid foundation for 2025 and beyond.

Christian Klein: We are off to a strong start, and we have laid a solid foundation for 2025 and beyond. Let's look at the key metrics for Q1. Current cloud backlog is 28% to 14.2 billion euros.

Christian Klein: Let's look at the key metrics for Q1.

Christian Klein: Goldman cloud backlog grew 28% to $14 2 billion Euro.

Christian Klein: This is the fastest growth on record and demonstrates the strong momentum across our portfolio with business AI as an enabling factor with a strong impact already on our Q1 package. Cloud revenue increased 25% and reached 3.9 billion euros. Our operating profit came in at 1.5 billion euros in Q1, 19% higher than a year ago.

Christian Klein: This is the fastest quotes on record and demonstrates the strong momentum across our portfolio with business AI as an enabling factor with a strong impact already on our Q1 backlog.

Christian Klein: Cloud revenue increased 25% and reached $3 9 billion euros.

Christian Klein: Our operating profit came in at $1 5 billion euros in Q1, 19% higher than a year ago.

Christian Klein: The new disclosure of cloud ERP suite create transparency for you and us. It shows how we are executing on moving our installed base to the cloud and how we at Wyoming, Sep's ERP leadership position with our land and expand strategy.

Christian Klein: The new disclosure of Cloud ERP Suite creates transparency for you and us. It shows how we are executing on moving our installed base to the cloud and how we are driving SAP's ERP leadership position with our land and expense strategy. The Cloud ERP Suite contains all the modules for a company's core processes, from Finance, Spend Management, and HR, to Supply Chain Commerce and our business technology platform, including data and analytics.

Christian Klein: The cloud ERP suite contains all of the modules for our company's core processes from finance bed management, and HR to supply chain commerce, and our business technology platform, including data and analytics together. These modules have the same functional scope as our monolithic on premise.

Christian Klein: Pete.

Christian Klein: Our modular and integrated cloud ERP is unmatched in covering the car processes for over 25 industries and 130 countries in the world.

Christian Klein: And 8%, a 700 billion dollar market opportunity by 2027.

Christian Klein: Together, these modules have the same functional scope as our monolithic on-premise ERP. Our modular and integrated cloud ERP is unmatched in covering the core processes for over 25 industries and 130 countries in the world and represents a $700 billion market opportunity by 2027. In Q1, revenue from the cloud ERP suite was up 32% and reached 3.2 billion euros. We have seen exponential growth in this metric for two consecutive years as we are successfully expanding our footprint in our installed base.

Christian Klein: In Q1.

Christian Klein: <unk> on the cloud ERP suite was up 32% and reached $3 2 billion euros.

Christian Klein: We have seen exponential quotes in this metric for two consecutive years as we are successfully expanding our footprint in our installed base.

Christian Klein: The land and expand strategy she works beautifully.

Christian Klein: OE customer why now has to redesign core processes end to end to master the business transformation in the industry.

Christian Klein: And this is only the beginning the flywheel has just started to spin I wouldn't go deeper into that in a minute.

There are many exciting customer stories behind our strong start to the year in Q1, a range of exciting companies signed up for whites with S&P to name just a few examples the premium chocolate maker Lindt and truly the global manufacturing company S. K S and the U S Aerospace company.

Christian Klein: But as wide. We also saw Kuwait customer take up across the portfolio mask a world leader in container logistics adopted the BGP SD integration and development platform spanning across the S&P and non S&P it landscape.

Christian Klein: The land and expand strategy works beautifully. Every customer right now has to redesign core processes end-to-end to master the business transformation in their industry. And this is only the beginning. The flywheel has just started to spin.

Our quote with SVP of a wing was very successful with hundreds of new customers and a 64% share of net new customers in Q1, one of them is the carbon capture startup client works.

Christian Klein: As for our sustainability solutions, we want another 100 customers in Q1 on top of more than 1000, we had before new customers like Ericsson the global leader in wireless technologies and violent a leader in energy saving technologies chose SVP sustainability control tower for the air worker Laboratory.

Christian Klein: I will go deeper into that in a minute. There are many exciting customer stories behind our strong start to the year. In Q1, a range of exciting companies signed up for Rise with SAP. To name just a few examples, the premium chocolate maker Lind & Sprüngli, the global manufacturing company SKF, and the U.S. aerospace company Curtis Wright.

Christian Klein: ESG reporting.

Christian Klein: So in summary, we had a strong start in Q1, and we are happy to confirm our 2024 outlook as well as our 2025 ambition.

Christian Klein: We are also very confident about the resilience of our close though beyond 2025.

Christian Klein: Cost we have all the wide ingredients in place.

Christian Klein: Our suite closed 12 us R whites with S&P as the leading transformation offering for our installed base quote with S&P for net new customers smaller subsidiaries and acquisitions.

Christian Klein: The innovations, we deliver and we will release in the upcoming years above all business AI.

Christian Klein: We also saw great customer take-up across the portfolio. Merv, a world leader in container logistics, adopted the BTP as the integration and development platform spanning across the SAP and non-SAP IT landscape. Our Grow with SAP offering was very successful, with hundreds of new customers and a 64% share of net new customers in Q1. One of them is the carbon capture startup Climeworks.

Christian Klein: Let's first look at whites with S&P.

Christian Klein: Our installed base is large with over $11 billion remaining support revenue to be converted to the cloud typically buy effect off of one two to suite on top to 700 billion cloud ERP market offer significant cross selling opportunities and I have no doubt that S&P.

Christian Klein: <unk> integrated best of suite capabilities will win in the core business of our customers.

Christian Klein: As part of wise and wire to clean Carcione, S&P and our ecosystem will help our customers to move that ERP custom code and instead develop integrated ERP extensions on BTT.

Christian Klein: As for our sustainability solutions, we won another 100 customers in Q1, on top of more than 1,000 we had before. New customers like Ericsson, the global leader in wireless technologies, and Violant, a leader in energy-saving technologies, chose SAP's Sustainability Control Tower for their WACKER Laboratory ESG reporting. So, in summary, we had a strong start in Q1, and we are happy to confirm our 2024 outlook as well as our 2025 ambition. We are also very confident about the resilience of our growth story beyond 2025 because we have all the right ingredients in place.

Christian Klein: It gives us an immense additional revenue potential considering that customers in the on premise world spend up to seven euros on custom code for every U de invest in ERP software.

Christian Klein: Customers like a touchy high Tech for example, it used a number of custom code add ons by a 119%.

Christian Klein: Wise has just become the de facto standard for our installed base and their offers a holistic business closest redesign combined with the migration to our modular cloud ERP with solving and fast time to value and being always on the latest release consuming new innovations without tie.

Christian Klein: Intensive ERP upgrades like in the past.

Christian Klein: Let's have a brief look at quote with S&P, our second close driver.

Christian Klein: Sep's Greenfield cloud ERP offering for net new customers or new business unit of large enterprises Whoa delivers go lives in weeks for every business model in every industry in every country.

Christian Klein: With our ERP solution SME customers can claw and scaled our business without migrating to a new ERP.

Christian Klein: Our three growth drivers are Rise with SAP as the leading transformation offering for our installed base, Grow with SAP for net new customers, smaller subsidiaries, and acquisitions. And the innovations we have delivered and we will release in the upcoming years, above all, business AI. Let's first look at why it's with SAP.

Christian Klein: Ultimately why isn't kuo off our customer similar advantages innovation modularity scalability and integration.

Christian Klein: Coming to the third driver of our clothes, which is innovation with business AI at the core.

Christian Klein: S business AI will once again transform how businesses won and how end users will work in the future.

Christian Klein: At S&P, we infuse business AI across our portfolio first of all two will be our new user experience wire natural language, our one front end.

Christian Klein: Our installed base is large, with over 11 billion remaining support revenue to be converted to the cloud, typically by a factor of around 2 to 3. On top, the 700 billion cloud ERP market offers significant cross-selling opportunities, and I have no doubt that SAP's integrated best-of-suite capabilities will win in the core business of our customers. As part of WISE and WIRED's Clean Core journey, SAP and our ecosystem will help our customers to remove their ERP custom code and instead develop integrated ERP extensions on BTP.

Christian Klein: We have based our tool hope map on an analysis of the most frequent business analytical transactions of our end users. This way we make sure that the most heavily used transactions will be fully AI enabled by the end of this year.

Christian Klein: Second we are embedding Chennai directly in our cloud products. Since Q4, we have released over 30, new AI scenarios across our cloud portfolio additional wont come out almost every week with more than 100 in the pipeline for the remainder of the.

Christian Klein: So our customers partners and S&P can use the AI foundation on the PTP, including the China I have to build custom AI scenarios.

Christian Klein: Over 60 ecosystem partners are taking advantage of these capabilities already and working on a 80 use cases right now.

Christian Klein: This gives us an immense additional revenue potential, considering that customers in the on-premise world spend up to 7 euros on custom code for every euro they invest in ERP software. Customers like Hitachi Hitech, for example, reduce the number of custom code add-ons by over 19%.

Christian Klein: Among the over 27000 customers already using our business AI is set up for it with her from a leading automotive supplier set F is lifting significant financial value by optimizing demand and supply chain planning with embedded AI.

Christian Klein: Together with our partner and we each year. We are currently building huge and AI capabilities. One use case will revolutionize how software will be developed into future Janssen and I are looking forward to telling you more about this partnership at Sapphire.

Christian Klein: WISE has just become the de facto standard for our installed base. It offers a holistic business process redesign combined with the migration to our modular cloud ERP, resulting in fast time to value and being always on the latest release, consuming new innovations without time-intensive ERP upgrades like in the past. Let's have a brief look at QoW with SAP, our second QoS driver.

Christian Klein: Commercially customers can buy FEP business AI as consumption based AI units, which can be used across the entire portfolio or why our premium why isn't quo offerings that include AI units. So customers can get started right away.

Christian Klein: Both commercial offerings have already seen high demand and many Q1 deals were influenced by our CP business AI.

Christian Klein: Overall, we offer a unique value proposition versus the competition with three elements.

Christian Klein: S business AI works out of the box.

Christian Klein: For the old Gen AI enabled extensions customers and partners have full choice, which leading model they want to use including multiple some oatmeal, Google the best open source alternatives or using their own modules and.

Christian Klein: As SAP's Greenfield Cloud ERP offering for net new customers or new business units of large enterprises, QoW delivers Go Live in weeks for every business model, in every industry, in every country. With our ERP solution, SME customers can grow and scale their business without migrating to a new ERP. Ultimately, Rise & Grow offers customers similar advantages: innovation, modularity, scalability, and integration. Now, we come to the third driver of our growth, which is innovation, with business AI at the core.

Christian Klein: In S E T business AI comes with our leading enterprise standards and is deeply integrated with our data and security months.

Christian Klein: In summary, we had a strong start to 2024 and we are confident we will achieve our goals for the year.

Christian Klein: Looking ahead, we have powerful close to I was in place and many innovations in our R&D pipeline.

Christian Klein: <unk> development of our cloud backlog is a testament to that momentum.

Christian Klein: With regard to our transformation program, we are making even better progress than expected, especially with hiring new talent for future oriented areas such as AI.

Christian Klein: The program will help us to capture close and increase efficiency at the same time, among other things by pushing to internal use of AI.

Christian Klein: We expect a triple digit million amount in efficiencies from embedding AI across all our processes.

Christian Klein: Equally important for us as an employer wherever asap colleagues are affected by restructuring we are moving with care and empathy always aware of our social responsibility and with that I'm handing over to Dominique.

Christian Klein: SAP Business AI will once again transform how businesses run and how end-users will work in the future. At SAP, we infuse business AI across our portfolio. First of all, AI will be our new user experience, via natural language, our one front-end.

Dominique: Thank you Christian and thank you all for joining us this evening.

Dominique: Let me start by echoing Christian sentiment that the fundamentals remain exceptionally strong.

Dominique: <unk> marks my first anniversary at SAP.

Dominique: CFO.

Dominique: And I consider myself very fortunate to have joined the company just in time with the business in pole position to capitalize on the tremendous opportunities lying ahead of us.

Christian Klein: We have based our JUUL roadmap on an analysis of the most frequent business and analytical transactions of our end users. This way, we make sure that the most heavily used transactions will be fully AI-enabled by the end of this year. Second, we are embedding GenAI directly in our cloud products. Since Q4, we have released over 30 new AI scenarios across our cloud portfolio. Additional ones come out almost every week, with more than 100 in the pipeline for the remainder of the year.

Dominique: The hard work over the prior year starts to pay off handsomely.

Dominique: Also for those investors, who kept the faith in the company during these turbulent times.

Dominique: It is because of the dedication of our workforce that we continue to experience strength across the business.

Dominique: Our solutions are becoming increasingly differentiated demonstrated by continued revenue growth throughout the world.

Dominique: Spanning cloud gross profit and improved cash conversion.

Dominique: We've kept the promise and walk the talk and setting the stage for sustained growth in the coming years.

Fiscal year 2024 is already off to a strong start.

Dominique: We continue to build on our robust foundation as evidenced by the impressive growth of our current cloud backlog and continued momentum of our cloud revenue.

Christian Klein: Third, our customers, partners, and SAP can use the AI foundation on the BTP, including the GenAI Hub, to build custom AI scenarios. Over 60 ecosystem partners are taking advantage of these capabilities already and working on over 80 use cases right now. Among the over 27,000 customers already using our business AI is ZF Friedrichshafen, a leading automotive supplier. ZF is achieving significant financial value by optimizing demand and supply chain planning with embedded AI.

Dominique: In addition, non <unk> operating profit showed significant double digit growth, even when including stock based compensation.

Dominique: Our key priorities, including our investments in business AI.

Dominique: Our commitment to leading the charge in this new era of business transformation and exemplify our relentless drive for growth and operational excellence.

Dominique: The company wide transformation program, we initiated in January is progressing well focusing on enhancing our operational efficiencies and setting the stage for improved financial performance.

Dominique: He also deploying our own AI solutions internally is a powerful lever to drive productivity.

Dominique: Digital transformation is imperative in today's evolving landscape and S&P remains the partner of choice building.

Building on our strategic commitment the introduction of the Claudia P suite is a pivotal step in aligning our product offering more closely with our core ERP and integrated business solutions.

Christian Klein: Together with our partner in WETIA, we are currently building new GenAI capabilities. One use case will revolutionize how software will be developed in the future. Jensen and I are looking forward to telling you more about this partnership at Sapphire. Commercially, customers can buy SAP Business AI as consumption-based AI units, which can be used across the entire portfolio, or via our premium Ryzen core offerings that include AI units, so customers can get started right away.

Dominique: All of this has helped foster the trend towards larger cloud transactions with.

Dominique: With deals greater than $5 million in volume contributing more than half of our cloud order entry. This.

Dominique: This is a remarkable for the first quarter of beer.

Dominique: I will now go into further details on our financial highlights.

Dominique: Current cloud backlog was $14 2 billion euros accelerating its impressive growth to 28% solidly keeping us on the trajectory towards our fiscal year 2020 for outlook and fiscal year 2025 top line ambition.

Dominique: Revenue grew 25% year on year, mainly driven by the continued strength of our cloud ERP suite.

Christian Klein: Both commercial offers have already seen high demand, and many Q1 deals were influenced by SAP Business AI. Overall, we offer a unique value proposition versus the competition with three elements. SAP Business AI works out of the box. For their own GenAI-enabled extensions, customers and partners have full choice of which leading model they want to use, including modules from OpenAI, Google, the best open-source alternatives, or using their own modules.

It grew by 32% in Q1, its ninth consecutive quarter of growth in the thirties.

Dominique: The sustained momentum underscores our expectations the cloud piece with we continue to capture a growing share of our cloud business. Thanks to its critical role in our customers' digital transformation journeys.

Dominique: It actually already represents 84% of our combined past source revenue up.

Dominique: Up three percentage points as compared to the prior year's quarter.

Dominique: Software license revenue saw a decrease of 25%.

Dominique: So the dilution of its share of the total revenue from 9% to 5% in only one year impressively illustrates the continued secular shift in market preference towards cloud based solutions in the enterprise.

Christian Klein: And SAP Business AI comes with our leading enterprise standards and is deeply integrated with our data and security models. In summary, we had a strong start to 2024, and we are confident we will achieve our goals for the year. Looking ahead, we have powerful growth drivers in place and many innovations in our R&D pipeline. The strong development of our cloud backlog is a testament to that moment. With regard to our transformation program, we are making even better progress than expected, especially in hiring new talent for future-oriented areas such as AI.

Dominique: Finally, total revenue surpassed 8 billion in Q1 up 9% year over year, showing unabated growth momentum now.

Dominique: Now, let's take a brief look at our regional performance in the first quarter Sap's cloud revenue performance was particularly strong in a P J and EMEA and robust in the Americas region, Brazil.

Dominique: Brazil, Canada, Germany, Italy, the United Arab Emirates, India, and South Korea had outstanding performance in cloud revenue growth, while the U S, Japan, and Spain were particularly strong.

Dominique: Now, let's move further down the income statement, our cloud gross profit grew by 28, 28% driven by cloud revenue growth and further efficiency gains.

Dominique: This resulted in cloud gross margin improving from the year ago period, expanding by one eight percentage points to 72, 5%.

Dominique: <unk> operating profit in the first quarter was impacted by $2 2 billion euros of restructuring provisions associated with the transformation program initiated in January.

Dominique: This resulted in an operating loss of 787 billion.

Christian Klein: The program will help us to capture growth and increase efficiency at the same time, among other things, by pushing the internal use of AI. We expect a triple-digit million increase in efficiency from embedding AI across all our processes. Equally important for us as an employer, wherever SAP colleagues are affected by restructuring, we move with care and empathy, always aware of our social responsibility. And with that, I'm handing over to you, Dominik. Thank you, Christian, and thank you all for joining us this evening.

Dominique: This accrual represents the vast majority of the total restructuring expenses. We currently expect to incur in the context of the program.

Dominique: The amount is closer to the upper end of what we had anticipated initially.

Dominique: Which is primarily driven by the strong share price performance in the first quarter and the higher than expected acceptance rate of the early retirement program in the U S.

Dominique: We continue to be in the very early stages of executing the program, which we expect to be concluded by the beginning of 2025 and projected expenses are based on preliminary assumptions, we expect visibility to further improve over the course of the second quarter and plan to provide an update once the related measures are fully assessed.

Dominique: Finally, non <unk> non <unk> operating profit grew by 19% evidenced our sustained push towards enhanced profitability.

Dominique: The underlying profit extension expansion was tempered by a 135 million increase in stock based compensation expense, mainly as a result of the very strong appreciation of our share price in the first quarter.

Dominique: Q1, 2024 was actually the quarter with the highest increase in sap's market capitalization ever.

Dominik Asam: Let me start by echoing Christian sentiment that the fundamentals remain exceptionally strong. March marked my first anniversary as SAP CFO, and I consider myself very fortunate to have joined the company just in time with the business in the perfect position to capitalize on the tremendous AI opportunity lying ahead of us. The hard work of the prior years is starting to pay off handsomely for those investors who kept the faith in the company during these turbulent times. It is because of the dedication of our workforce that we continue to experience strength across the business.

Dominique: As we settled.

Dominique: For the last time, the entire tranche of obligations under the move to 2021 move.

Dominique: Program in Q1 fully in cash.

Dominique: We expect a significantly lower sensitivity in the coming quarter as we move to equity.

Dominique: Therefore, the non <unk> operating profit outlook is reaffirmed for the full year 2024. Despite this headwind.

Dominique: No my first earnings per share in the quarter increased 8% to 81 since.

Dominique: The first effective tax rate for Q1 was 16% in the non average fixed rate was 32, 4%.

Dominique: Now onto our cash generation free cash flow for Q1 came in at $2 49 billion up 28% again, putting us on the right trajectory to maintain our full year outlook.

Dominique: There was only a minor cash flow impacts from our transformation program in the first quarter.

Dominique: Yeah.

Dominique: So we reiterate our 2020 for outlook on all parameters for the detailed outlook. Please refer to our quarterly statement published earlier today.

Dominique: Our Investor Relations website.

Dominique: In summary, Q1 marks a strong start to the year highlighted by continued growth in both our current cloud backlog in cloud ERP suite.

Dominik Asam: Our solutions are becoming increasingly differentiated, demonstrated by continued revenue growth throughout the world, expanding cloud gross profit, and improved cash conversion. We've kept the promise and walked the talk, setting the stage for sustained growth in the coming years. Fiscal year 2024 is already off to a strong start. We continue to build on our robust foundation, as evidenced by the impressive growth of our current cloud backlog and continued momentum of our cloud revenue. In addition, non-IFRS operating profits showed significant double-digit growth even when including stock-based compensation.

Dominique: This traction combined with our focus on execution is positioning us well to meet our objectives for the remainder of the year.

Speaker Change: Before we open it up to Q&A I would like to say that we are very much looking forward to welcoming you to our financial Analyst Conference in June as already mentioned by Anthony It will take place in conjunction with Sapphire in Orlando.

Speaker Change: And the team and I are very much looking forward to meeting you there in person. So thank you and we'll now be happy to take your questions.

Speaker Change: <unk>. Please open the line.

Speaker Change: Ladies and gentlemen at this time, we will begin the question and answer session.

Speaker Change: Anyone who wishes to ask a question press has followed by one on the touch tone telephone.

Speaker Change: If you wish to remove yourself from the question queue. You May press has followed by three.

Speaker Change: You are using speaker equipment today, please lift the handset before making your selection.

Dominik Asam: Our key priorities, including our investments in business AI, demonstrate our commitment to leading the charge in this new era of business transformation and exemplify our relentless drive for growth and operational excellence. The company-wide transformation program we initiated in January is progressing well, focusing on enhancing our operational efficiencies and setting the stage for improved financial performance. We're also deploying our own AI solutions internally as a powerful lever to drive productivity. Digital transformation is imperative in today's evolving landscape, and SAP remains the partner of choice.

Speaker Change: And he wanted to ask a question May press hash followed by one.

Speaker Change: One moment for the first question please.

Speaker Change: And there is already just the first question is from the line of Tobey Hawk with JP Morgan Cazenove Limited go ahead. Your line is open.

Toby Ogg: Yes, hi.

Toby Ogg: Thanks for the question.

Toby Ogg: Perhaps just just sort of taking a step back on the margin side clearly.

Toby Ogg: There is a big step up in the margins embedded in your 10 billion EBIT guidance for 2025, I don't know dominant you talk to Q4 about the potential for continued.

Toby Ogg: Margin expansion beyond 2025.

Toby Ogg: Know that the rule of 40 is something that's being discussed in the market.

Toby Ogg: Looking at the software ecosystem could you, perhaps just give us a sense of how youre thinking about.

Toby Ogg: The rule of 40 and whether this is something that you think could achieve thank you.

Speaker Change: Well I mean, the rule of 40 is simply an observation if you do benchmarking with our core competitors and if you look at the median or average it doesn't actually matter, you'll see that that's what they trade it.

Dominik Asam: Building on our strategic commitment, the introduction of the Cloud EMP Suite is a pivotal step in aligning our product offering more closely with our core EMP and integrated business solution. All of this has helped foster the trend towards larger cloud transactions, with deals greater than $5 million in volume, contributing more than half of our cloud order entry. This is remarkable for the first quarter of the year.

Speaker Change: The stats show us that for 2023 20.

Speaker Change: 25% and if you combine our free cash flow to sales margin plus the growth we achieved in that year.

Speaker Change: And if you do if you look at the midpoint of the ambition. The ambition 2035, basically you will see that would kind of bring us a little bit more than half the way towards that and all the rest is really much very much dependent on how much can we accelerate revenue growth. This is why we highlight again and again.

Speaker Change: The revenue mix improving.

Speaker Change: 84% of the SaaS Pas revenue is already in cloud ERP suite, which is kind of running at 30% plus growth rates on a year on year basis.

Dominik Asam: I will now go into further details on our financial highlights. Current cloud backlog was 14.2 billion euros, accelerating its impressive growth to 28%, solidly keeping us on the trajectory towards our fiscal year 2024 outlook and fiscal year 2025 top-line ambitions. Cloud revenue grew 25% year-on-year, mainly driven by the continued strength of our cloud EIP suite. It grew by 32% in Q1, its ninth consecutive quarter of growth in the 30s

Speaker Change: I'll also highlight that the strongest headwinds to the decline in the software business is becoming smaller and smaller it's now down to 5% of the revenues, though the fundamentals are actually there to support strong revenue growth and then of course. There is also some improvement in margins. We said that we want to clearly scale the cost base.

Speaker Change: Not at the same growth rate as revenues, but again, we look at benchmarking and see that our core competitors achieve between 80% to 90%.

Speaker Change: Both of the cost base versus the we're going to face that that's an indication of the kind of ballpark. We aim at with our transformation program and now then you can basically play the math of Rolling These numbers forward to see how long it will take us to come to that rule of 40, which by the way we have no idea where it will be 510 years down the road because of course.

Speaker Change: Our competitors will also extend still.

Speaker Change: But that's the way I can describe it so don't take it as a guidance that we can get there at any specific given quarter, but obviously, we have to acknowledge that this is where the market is running and this is a little bit of the Northstar, we havent on top of our head and I think with the measures we are taking.

Dominik Asam: This sustained momentum underscores our expectations that Cloud EAP Suite will continue to capture a growing share of our cloud business thanks to its critical role in our customers' digital transformation journey. It actually already represents 84% of our combined past SAAS revenue, up three percentage points as compared to the prior year's quarter, while software license revenue saw a decrease of 25 percent.

Speaker Change: Now to really.

Speaker Change: A cutoff cover more than half of the gap. We currently have an ability to accelerate growth and also to grow more slowly than revenues.

Speaker Change: The ingredients to gradually move towards to talk.

Speaker Change: Alright, thank you.

Toby will take the next question please.

Speaker Change: The next question comes from the line of Adam Wood with Morgan Stanley Go ahead. Your line is open.

Adam Dennis Wood: Hi, good evening, thanks for taking the question.

Wanted to first of all just on the AI side, if you could help us a little bit around how thats been monetized today. It's just more of the customers are accelerating the shift to asked for because they want to take advantage of the chosen to be available there and the future Orient you all you're starting to monetize already that business AIC churn charging directly for that and then maybe just secondly, you talked about 7%.

Dominik Asam: So the dilution of its share of the total revenue from nine to 5% in only one year impressively illustrates the continued secular shift in market preference towards cloud-based solutions in the enterprise. Finally, total revenue surpassed $8 billion in Q1, up 9% year over year, showing unabated growth momentum. Now, let's take a brief look at our regional performance. In the first quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and robust in the Americas region. Brazil, Canada, Germany, Italy, the United Arab Emirates, India, and South Korea had outstanding performances in cloud revenue growth, while the US, Japan, and Spain were particularly strong.

Adam Dennis Wood: The rise of custom code.

Adam Dennis Wood: Just one of software, obviously, a massive opportunity to capture more of that how realistic is it that you can cover enough of.

Adam Dennis Wood: The customer areas to be able to capture that or is this more monetization of the platform.

Adam Dennis Wood: Companies and partners develop on the <unk>. Thank you.

Speaker Change: Thanks, a lot for the questions Adam.

Speaker Change: Hi.

Speaker Change: First when you look at the commercial model, we actually included some.

Speaker Change: Standout AI use cases for automation of repetitive tasks in our base packages on top of costs. We have now we are delivering more and more AI models, which also require high computing power and I talked about tool and tool will cover the most used transactions of our end use.

Speaker Change: By the end of the year. So no matter if you to work on travel on finance and supply chain and procurement and it will all happen while human language that is included in our premium AI or forming which is consumption based we package. It some AI units already in our wise and quote.

Dominik Asam: Now, let's move further down the income statement. Our cloud gross profit grew by 28 percent, driven by cloud revenue growth and further efficiency gains. This resulted in cloud cross-margin improving from the year-ago period, expanding by 1.8 percentage points to 72.5%. IFRS opening profit in the first quarter was impacted by 2.2 billion euros of restructuring provisions associated with the transformation program initiated in January. This resulted in an IFRS operating loss of $787 million.

Speaker Change: Packages and that is actually wanting extremely well and on top of course, you can also of course consume business AI by of course buying more consumption packages of our offerings and what's.

Speaker Change: With regard to the adoption I mean, the way how it works Adam is of course tool will become the de facto user experience on them for our end users second when you're then talking to the customers what we're already doing and they will use our chennai scenarios for asset management.

Speaker Change: For manufacturing for shop floor automation for more personalization of down off of wings of the services of the products why our configure way to or they also build custom AI use cases, why why do you do that with our NII hop on BTB, because you'll get the native integration into the data and we can all.

Dominik Asam: This accrual represents the vast majority of the total restructuring expenses we currently expect to incur in the context of the program. However, the amount is closer to the upper end of what we had anticipated initially, which is primarily driven by the strong share price performance in the first quarter and the higher than expected acceptance rate of the early retirement program in the US. We continue to be in the very early stages of executing the program, which we expect to be concluded by the beginning of 2025, and projected expenses are based on preliminary assumptions.

Speaker Change: So pre trained some modules.

Speaker Change: You have integration into the secure routine authorisation, which mass in the in the business World and these are all the benefits the value why our partners and customers already start to develop new AI use cases custom for their individual business and.

Speaker Change: <unk>.

Speaker Change: Once we got to your to your second question I guess here. It's also very important to mention that and when you look at the momentum of our topline I mean, it's evident when that we are not only scaling our business lift as for Hana findings.

I am sitting in many of these are wise makeup transformations and what we often doing is we start with finance then we go into higher to retire we go into finance and payroll we'd talk about total workforce. We feel clarksons success factors. So we are closing make deals, but we are doing it step by step in our model.

Dominik Asam: We expect visibility to further improve over the course of the second quarter and plan to provide an update once the related measures are fully assessed. Finally, non-IFRS operating profit grew by 19%, demonstrating our sustained push towards enhanced profitability. However, the underlying profit expansion was tempered by a $135 million increase in stock-based compensation expense, mainly as a result of a very strong appreciation of our share price in the first quarter.

Speaker Change: Ludwig given our architecture, which ensures fast time to value and then you scan to custom code and custom code is actually in all sometimes seven times more than standard called ERP standard code on plan and then you are looking into what kind of extensions have been built in for example in oil and gas.

Speaker Change: We brought in all of the 10 largest oil and gas companies of the world together, we talk about trade promotion, we talk about product revenue accounting, all the extensions, which make a ton of sense to not custom code it anymore and ERP to sit always on the latest release, but then developing it side by side, because you need a native integration into the data.

Dominik Asam: Q1 2024 was actually the quarter with the highest increase in SAP's market capitalization ever. For the last time, the entire tranche of our obligations under the 2021 MOVE SAP program in Q1 was fully in cash. We expect a significantly lower sensitivity in the coming quarter as we move to the equity set. Therefore, the Non-IFRS Operating Profit Outlook is reaffirmed for the full year 2024 despite this headwind. Non-IFRS earnings per share in the quarter increased 8% to $0.81. The IFRS effective tax rate for Q1 was 16%, and the non-IFRS tax rate was 32.4%.

Speaker Change: Couple of S&P and of course, the security concept plays in there as well and indeed, Adam this is massive.

Speaker Change: Tick and what we have and its platform consumption and.

Speaker Change: Customers partners can actually then also develop their own IP can offer it in our App store and then again.

Speaker Change: Set for oil and gas same will happen for detailed for manufacturing can cross sell it across the industry and lift that I guess you also feel that this is also a massive transformation part of our ecosystem no custom coding.

Speaker Change: <unk> building developing software on the platform and building a massive ecosystem around our cloud ERP.

Speaker Change: Great question I appreciate all the detail there. Thank you.

Speaker Change: We will take the next question please.

Speaker Change: The next question is from the line of Johan <unk> with Deutsche Bank. Please go ahead.

Johan: Yes, Thanks for taking my question Christian you mentioned.

Johan: <unk> already at the kind of.

Johan: Noticeable impact on the PCB from AI, and obviously last year.

Dominik Asam: Now on to our cash generation. Free cash flow for Q1 came in at 2.49 billion euros, up 28%. Again, putting us on the right trajectory to maintain our full outlet. There was only a minor cash flow impact from our transformation program in the first quarter. So we reiterate our 2024 outlook on all parameters. For a detailed outlook, please refer to our quarterly statement published earlier today on our investigations website. In summary, Q1 marks a strong start to the year, highlighted by continued growth in both our current cloud backlog and our cloud EIP suite.

Johan: The CCP soft target within the mid Twenty's now it looks like we're more at 2728, I mean tough to quantify the impact that guests, but it's the delta is that largely I'd within and also should we look at the kind of high <unk> more sustainable growth run rate for CCP now going forward.

Johan: I mean on business AI.

Speaker Change: To answer your first question.

Speaker Change: Scott. It's also on the line. Please comment Scott I mean, I have no C level conversation anymore without talking about business AI and the impact on the business Amtrust.

Scott E. Russell: Last week I had a conversation about production towns in manufacturing and how our tiny IHOP can help to get the machines faster up and running again, which actually we took a salt and hundreds of millions of efficiency gains for this large chemical company and you'll see in these conversations are these AI use case.

Dominik Asam: Business traction combined with focus on execution is positioning us well to meet our objectives for the remainder of the year. Before we open it up to Q&A, I would like to say that we are very much looking forward to welcoming you to our Financial Analyst Conference in June. As already mentioned by Anthony, it will take place in conjunction with Sapphire in Orlando, and the team and I are very much looking forward to meeting you there in person.

Scott E. Russell: This is already live in fully adopted no theyre now in the making but with that comes more and more consumption and we can monetize that in the upcoming quarters in India upcoming years, and we have many more of them and of course. When you are now using successfactors conquer everyone is looking for more efficiencies for new way of working.

Scott E. Russell: So tool will be kept become the de facto standard and with that we are going to see an uptake of all of our premium packages. Now we are building for each line of business and of course also for wisely.

Operator: So thank you, and we'll now be happy to take your questions. Operator, please open the line.

With regard to CCP.

Scott E. Russell: I mean, we are very confident when we look at the pipeline for the year and we see healthy.

Scott E. Russell: We see a good pipeline to close business in the upcoming quarter Sapphire is around the corner, where we also make some exciting announcements around data and of course AI. Yes. So we are very confident also when it comes to CCP for the remainder of the year, but Scott Dominique Please feel free to comment as well.

Operator: Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press hash followed by one on their touchstone. If you wish to remove yourself from the question queue, you may press hash followed by three.

Scott E. Russell: Yeah, I'll, probably give two additional.

Dominique: <unk> data points just to add on what you described Christian So first as you saw in the update the cloud ERP suite roads and that covers the end to end capability for an enterprise is growing and it continues to grow strongly ninth quarter in a row, 30% plus.

Operator: If you are using speaker equipment today, please lift the handset before making your selection. Anyone who has a question may press hash followed by one at this time. One moment for the first question, please. And there it is. The first question is from the line of Toby Ogg with JP Morgan Casanova Ltd. Go ahead, your line. Yes, hi, and thanks for the question.

Dominique: But the reasons why our evolving there is no doubt companies want best in class processes be able to automate their enterprise building efficiency.

Dominique: But what they clearly now seeing is not all data is equal.

Dominique: Not all data in the enterprise's equaled the data that sits in the Asap platforms is the most valuable data that they have and when they think forward and I look at our innovation roadmap with business AI and they see the capabilities that we bring inside the core not only will they get the benefit out of the generator.

Toby Ogg: Perhaps just sort of taking a step back on the margin side. Clearly, there's a big step up in the margins embedded in your 10 billion EBIT guidance for 2025. And I know, Dominic, you talked in Q4 about the potential for continued margin expansion beyond 2025. And I know that the Rule of 40 is something that's being discussed in the market. And when looking at the software ecosystem, could you perhaps just give us a sense for how you're thinking about the Rule of 40 and whether this is something you think SAP could achieve? Thank you. Well, I mean, the rule of 40 is simply an observation.

Dominique: AI capabilities that we do in FY <unk> and generated by our hub, but then the data.

Dominique: That is the most valuable to them is it's got the integrity is got the context. It's got the mirror data. It's got the semantics and then you can get the innovation insights and a lot of the growth that we're now seeing Christians point, there is not a single conversation that sap's, having with customers.

Dominique: That is not linking best in class innovation.

Dominique: Underlying valuable data and the generated by AI capabilities in that combination and Thats why they are excited about the roadmap, but its already stimulating the growth and to give you one additional data point, our cloud pipeline growth. So the pipeline that we generating first quarter was the based on <unk>.

Dominique: Record, we continue to see strong demand not only in what we booked and what we're generating in the cloud backlog, but also the interest from the market and a lot of that is stimulated by our business AI Road map.

Dominik Asam: If we do benchmarking with our core competitors, and we look at the median or the average, it doesn't actually matter; you see that that's what they trade at. The stats show us that for 2023, we are at 25 percent if you combine our free cash flow to sales margin plus the growth we achieved in that year. And if you do, if you look at the midpoint of the ambition of the 2020s, basically, you will see that would kind of bring us a little bit more than half the way towards that.

Dominique: Okay.

Dominique: Maybe just to complement that view on the kind of dynamics in the business to the financial model.

Dominique: Note that the.

Dominique: Biggest single most important dilutive factor so to speak from CCP onto cloud revenue growth with a certain time lag is actually the transactional business.

Dominique: This is now.

Dominique: Kind of stagnating, it's actually very very slightly decreasing the market isn't great.

Dominique: There's also these changes in the kind of supply and that work happening.

And we think that over time that will become smaller and the mix by the way that dilutive effect has also embarked on our cloud ERP suite growth numbers. So you show that 30%, 32% growth despite that headwind, but that's the biggest bridge item between CCD and cloud revenue is now if you look at what we've kind of.

Dominik Asam: Now, the rest is really very much dependent on how much we can accelerate revenue growth. This is why we highlight again and again the revenue mix improving. I highlighted 84% of the SaaS PaaS revenue is already in Cloudera P Suite, which is kind of running at 30% plus growth rates on a year-on-year basis. We also highlight that the strongest headwind, the decline in the software business, is becoming smaller and smaller.

Dominique: <unk> indicated in our ambition 25, you'll see that with 28% CCP and you don't need to see much acceleration to basically get there because you take off the dilutive effect.

Dominique: 5% of the revenues basically stagnating and we do believe that in 25, there will be some acceleration there. So it's what we need to take to get to our 2025 ambition.

Dominique: So anything beyond that would be upside and Stanley and last but not least when you look at the current cloud backlog.

Dominique: The lease ACB numbers.

Dominique: And we are going to talk about <unk>, but customers are trending more and more to also know sign longer term commitments with dams, which also then going over five years and of course there is.

Dominik Asam: It's now down to 5% of revenues, though the fundamentals are actually there to support strong revenue growth. And then, of course, there's also some improvement in margins. We said that we want to clearly scale the cost base, not at the same growth rate as revenues.

Dominique: Enough into books also when it comes to <unk>.

Dominique: And then to close is even higher than in the ACB.

Speaker Change: Very clear thank you very much.

Sure.

Speaker Change: We will take the next question please.

Speaker Change: The next question is from the line of Frederic belong with Bank of America. Please go ahead.

Dominik Asam: But again, we look at benchmarking and see that our core competitors achieve between 80% to 90% growth of the cost base versus the revenue base. That's an indication of the kind of ballpark we aim at with our transformation program. And now, you can basically play the math of rolling these numbers forward to see how long it will take us to come to that rule of 40, which, by the way, we have no idea where we will be five, 10 years down the road because, of course, our competitors will also not stand still.

Frederic Emile Alfred Boulan: Hi, Good evening two quick questions. Please so first of all coming back on the CCD.

Frederic Emile Alfred Boulan: So you mentioned.

Frederic: The PCB is being held by the demand for <unk>, but can you discuss a bit more specifically what's driving that.

Frederic: The sequential acceleration in your specific modules or yes, where you see demand or is it just.

Frederic: The momentum in the S. Four.

Frederic: And then second question on the cloud migration.

Frederic: If you can give us an update on your current.

Peter landscape since your customers.

Frederic: <unk> migrated to the cloud.

Frederic: What are you seeing in terms of momentum.

Dominik Asam: But that's the way I can describe it, so don't take it as a guidance that we can get there in any specific given quarter. But obviously, we have to acknowledge that this is where the market is running, and this is a little bit of the North Star we have on top of our heads.

Frederic: Are we seeing some of those largest customers continuing to migrate.

Speaker Change: So any update on that would be great. Thank you.

Speaker Change: Yeah.

Speaker Change: To take that question and Scott Please feel free to comment as well I mean first to you.

Speaker Change: Second question is also actually related to your question number one and what we are seeing now with business AI is actually that a lot of customers, who probably blend down my.

Dominik Asam: And I think with the measures we are taking now, to really, A, kind of cover more than half of the gap we currently have, and B, to accelerate growth and also to grow costs more slowly than revenues, we have the ingredients to gradually move toward the target. Great. Thank you. Thank you, Toby.

<unk> start date for as for end of the CEO next year that they actually now want to move faster because they see the capabilities with S&P business AI as I mentioned on the asset management on just automating many many workflows in their company, but also when it comes to analytics, especially in <unk>.

Speaker Change: Apply chain planning, which is an extremely important part of many companies right now and that actually also has driven now we ought to sequential increase but this is not only business AI stand alone business helps us to sell more supply chain to sell more HR to sell more finance and then last one.

Operator: We'll take the next question, please. The next question comes from the line of Adam Wood with Morgan Stanley. Go ahead. Your line is open. Hi, good evening.

Speaker Change: And at least which makes me. So confident also about the growth potential for 2025, plus I mean, when you start with finance when you talk about your business model you talk immediately about the billing about the commissions then you actually moving into the supply chain and when Youre doing demand and supply you also then talking about design.

Adam Dennis Wood: Thanks for taking the question. I wonder, first of all, just on the AI side, if you could help us a little bit with how that's being monetized today. Is this more that customers are accelerating the shift to S4 because they want to take advantage of the tools that will be available there in the future? Or actually, are you already starting to monetize that business AI feature and charging directly for that? And then maybe just secondly, you talked about seven euros of custom code versus one of software. Obviously, a massive opportunity if you could capture more of that. But how realistic is it that you can cover enough of the custom areas to be able to capture that?

Speaker Change: And now we are seeing a huge uptick in our manufacturing cloud business and then youre going module by module because when you talk to these customers they see more and more that the best of fleet really doesn't work when you have to stitch together manual manually data modules or the identity audio Tokyo station. So.

Speaker Change: What we are seeing in many of our Ais customers over time that that a lot of cross sell potential in that we it's the first phases only about lending and then start positioning stopped to 80 sign the policy landscape and then we go and we already talked about the custom code NDA ecosystem, we are more and more building.

Speaker Change: On <unk> and to also removed the custom code and moved to the clean coal.

Speaker Change: And I'll just add one additional comment to what Christian described and that is the growth on the CCP is consistent around the world and so this is not a particular region across all regions. We saw healthy growth, obviously, <unk> and parts of Europe, and greater China was strong but.

Christian Klein: Or is this more monetization of the platform as companies and partners develop on the BTP? Thank you. Thanks a lot for the questions, Adam. I mean, on AI, first, when you look at the commercial model, we actually included some standard AI use cases for the automation of repetitive tasks in our base packages. On top, of course, we now are delivering more and more next-gen AI models, which also require high computing power.

Speaker Change: Across the World and secondly, it is across that portfolio people aren't doing I move only they're doing I move and transform and that requires those extended capabilities and if I just link it back if you've already got the data architecture of <unk> and it's the most valuable thing you can do so many.

Speaker Change: More things not on the IR related but also innovation related that you can do in your business. So it is definitely means that our short mid and long term growth.

Speaker Change: It has.

Speaker Change: It's definitely got confidence based on the capabilities the innovation roadmap, but also buying signals that we see from the market here and now.

Christian Klein: And I talked about JOOL, and JOOL will cover the most used transactions of our end users by the end of the year. So no matter if you do work on travel, finance, supply chain, procurement, it will all happen via human language. And that is included in our premium AI offering, which is consumption-based. We package it.

Speaker Change: Definitely.

Speaker Change: Thank you Fred.

Speaker Change: Next question please.

Speaker Change: The next question is from the line of Jackson Ader with Keybanc capital markets.

Jackson Ader: Great. Thanks, guys for taking our question.

Jackson Ader: Just one on the large deal strength.

Jackson Ader: But think Christian or maybe Dominic you called it out in terms of.

Jackson Ader: The 5 million dollar plus deals driving a lot of strength in cloud ERP just curious.

Christian Klein: Some AI units are already in our WISE and Crow packages, and that is actually running extremely well. And on top of that, you can also, of course, consume business AI by, of course, buying more consumption packages of our offerings. And with regard to adoption, I mean, the way it works, Adam, is, of course, JOOL will become the de facto user experience front end for our end users. Second, when you are then talking to customers, as we are already doing, they will use our Gen AI scenarios for asset management, for manufacturing, for shop floor automation, for more personalization of their offerings, of the services, of the products by our configurator, or they will also build Why?

Jackson Ader: Are you are you seeing I mean, I assume the preponderance of that is migrations or rise, but are you seeing any large deal.

Jackson Ader: Net new customers or net new land that are also driving some of the CCP growth. Thank you.

Jackson Ader: Scott do you want to go fast.

Scott: Kick it off and then Christian please add in so.

Scott: I think we're going to be clear when customers decide to move to rise theyre not just doing I move their current environments and replicating the same capability in fact far from it.

Scott: To transform operationally process all of their all of their capability to serve now and into the future the sitting their business up and so when they look at these which is why to answer your question the larger deals because they look at a multiyear roadmap of capability transitioning from a.

Scott: Oldest site, including non <unk>. So what we see is many situations, where our customers will say, okay I might be using SA pay per call finance, but all they extend.

Scott: ERP suite the other capabilities and then we're able to have a competitive displacement that happens on a regular so whether you look at the Sky asked the Curtiss Wrights and the others that Christian mentioned in his opening and you see the chart of all the other rise customers. They nearly always bringing the PTP, which is displacing other.

Christian Klein: Why do you do that with our Gen AI hub on BTP? Because you get native integration into the data. We can also pre-train some modules. You have integration into security and authorization, which matters in the business world. And these are all the benefits, the value, why our partners and customers have already started to develop new AI use cases custom for their individual business. And with regard to your second question, I think here it's also very important to mention that when you look at the momentum of our top line, it's evident that we are not only scaling our business with S4HANA Finance. I'm sitting in many of these wise mega transformations.

Scott: G platforms and using that as the innovation platform. They are using other extension would there be a rebid concur successfactors to be able to provide its people. Its a spin. So yes, we are seeing that but then the compelling advantage. Obviously, an initial move and then a multiyear journey when they're on a large deal at which makes up.

Scott: A big portion.

Scott: Of the Q1 results that you see.

Speaker Change: Maybe to shed some more light on pulp on the numbers.

Speaker Change: What you'll also see with wise, it's not only that we are landing of cost and converting maintenance with the effect of two to three X and to the cloud, but we didnt seeing after is that new.

Speaker Change: Next up land and expand customers, who want to replace the HCM module and this is done.

Christian Klein: And what we are often doing is we start with finance. Then we go into hire to retire. We go into finance and payroll. We talk about the total workforce. We feel close to success factors. So we are closing mega deals, but we are doing it step by step in a modular way, given our architecture, which ensures fast time to value. And then you scan the custom code.

Speaker Change: Often times, a double digit successfactors employee central deal Needless to say payroll is a massive business, which we are also more and more now shifting to the cloud. So they are.

Speaker Change: A lot of cross sell large cross sell opportunity. After we landed with flights on PTP I mentioned, one customer actually for PDP. We also often times see now double digit ACB deals with our large customers as they are not only using the platform for integration, but also for the extension.

Speaker Change: For the clean culturally and then last but not least when it comes to the volume business quo. That's why fleet women by our ecosystem by what we sell us, but oftentimes you'll start with a 500 K deal with some users at scale and then you'll stop finance HR and then you expand into manufacturing cloud.

Christian Klein: And the custom code is actually sometimes seven times more than standard code, ERP standard code on-prem. And then you are looking into what kind of extensions have been built. Then, for example, in oil and gas, we have now brought the 10 largest oil and gas companies in the world together.

Speaker Change: Or into billing et cetera, and in the meantime, you'll see that customers are growing from 500, K to $2 million to $3 million ACB and of course. This is not the end, but do you see that this massive volume business will also further contribute to the close and these customers will also become after landing in signing deals net new customer.

Speaker Change: We will also become big over time.

Christian Klein: We talk about trade promotion. We talk about product revenue accounting. All the extensions, which make a ton of sense to not custom code it anymore in ERP, to sit always on the latest release, but then develop it side by side because you need a native integration into the data module of SAP.

Jackson Ader: Jackson excellent. Thank you.

Speaker Change: Next question please.

Speaker Change: The next question is from the line of Michael J brief with UBS Limited. Please go ahead. Your line is open.

Speaker Change: Yes, good evening.

Michael Briest: Just on your comments Christine about applying AI in term I think you mentioned.

Michael Briest: Million can you give us a sense of where that comes from and.

Michael Briest: $100 million to $150 million or high triple digit million and over.

Christian Klein: And of course, the security concept plays in there as well. And indeed, Adam, this is a massive uptick in what we have, and it's platform consumption. And customers, partners can actually then also develop their own IP, can offer it in our app store, and then again, as I just said for oil and gas, the same will happen for retail, for manufacturing, and they can cross-sell it across the industry. And with that, I guess you also feel that this is also a massive transformation for our ecosystem. No custom coding.

Michael Briest: What time, you might realize that and just a quick clarification Dominic on the free cash flow if I could get that include the final.

Michael Briest: Repayment of the factoring or thinking about $200 million spilled out a bit from last year.

Speaker Change: And obviously.

Speaker Change: Saying that the restructuring not quite finalized yet potentially.

Speaker Change: <unk> three and a half billion number is safety.

Speaker Change: But thats creep up a bit thank you.

Speaker Change: I can start on the internal rollout of AI and yes. Indeed it is.

Speaker Change: Triple digit million dollars of efficiencies and what we're already doing right now we have all our tool, especially for Sap's Successfactors. So top description learning co pilot interviews feedback that's all automated now why atul in procurement, we have content recommendations rollout in category.

Speaker Change: Tools in it.

Christian Klein: But rather building, developing software on the platform, and building a massive ecosystem around our cloud ERP. That's great, Chris. I appreciate all the detail there. Thank you. Thank you, Adam.

Speaker Change: On the cost function for example, take M&A, we have to screen hundreds of thousands of contracts every year that is now completely automated with generating AI in Scott's world in the sales World. We actually also use now AI for content generation game on T mall for actually for the business case.

Operator: We will take the next question, please. The next question is from the line of Johannes Schaller with Deutsche Bank. Please go ahead. Christian, you mentioned you've seen a kind of, noticeable impact on CCB from AI and obviously last year. CCB's soft target was in the mid-20s; now it looks like we're more 27, 28. I mean, tough to quantify the impact, I guess.

Speaker Change: Nation, which saves a lot of time, so we are rolling out AI <unk>.

Speaker Change: Development of course, we have get up but then also we are using our own S&P build automated co generation tool for example for up and if you think about that we can increase the productivity of each developer by up to 32, 4% already this year.

Speaker Change: Our own S&P build solution and also if I get up you can imagine the scale and the efficiencies we are going to generate in the years to come also by applying AI internally.

Johannes Schaller: But is the Delta, is that largely AI driven? And also, should we look at the kind of high 20s as the more sustainable growth run rate for CCB now going forward? I mean, on business AI. To answer your first question, Scott is also on the line, and please comment, Scott. I mean, I have no C-level conversation anymore without, you know, talking about business AI and its impact on the business.

Speaker Change: On the free cash flow side.

Speaker Change: Have you asked about the account just combination of affecting I would say.

Speaker Change: It's partially not fully because there are some deals which much spend longer term, but we basically in 2020 for discontinued. This practice. So you already see a part of the roll off I want to highlight though that the bigger thing so to speak in Q1 still is that we pay the fines and the famous $4 2 billion.

Speaker Change: On Doj.

Speaker Change: And other authorities so top was waiting.

Speaker Change: In Q1 and is already digested. So we're also very pleased with our free cash flow performance in Q1.

Speaker Change: Thank you Michael.

Speaker Change: We'll take the next question please.

Speaker Change: The next question is from the line of James Goodman with Barclays Capital. Please go ahead.

James Arthur Goodman: Great. Thank you very much.

Johannes Schaller: Just, you know, last week, I had a conversation about production downs in manufacturing and how our Gen AI app can help to get the machines, you know, faster up and running again, which would actually result in hundreds of millions of efficiency gains for this large chemical company. And you see, in these conversations, are these AI use cases already live and fully adopted? No, they are now in the making.

James Arthur Goodman: Maybe with Investor focus I think increasingly shifting beyond 25% I wanted to come back just some commentary around the transition at a high level and specifically sort of framing that in a financial sense.

James Arthur Goodman: Maintenance space that still remains in the business today.

James Arthur Goodman: You help us a little bit with just how much of that really needs to transition to cloud I mean, I'm conscious that there was sales for example of high school before the rise program for example came in.

James Arthur Goodman: And really then just when does that substantially need to be done by given the 2027 deadline, but also the extended support period beyond that so just how much of the base rate and over what period and just a related.

Christian Klein: But with that comes, you know, more and more consumption, and we're going to monetize that in the upcoming quarters and in the upcoming years. And we have many more of those. And of course, when you are now using success factors, conquer, everyone is looking, you know, for more efficiency, for a new way of working. So this tool will become the defacto standard. And with that, we're going to see an uptick in all of our premium packages now that we are building for each line of business. And, of course, also for wise and grow.

James Arthur Goodman: Second question just around the services business that are growing 1% this quarter I know its a slightly tougher comp, but given given the demand for.

James Arthur Goodman: Implementation work and such like here around as four months expected that to be a little higher or are you expecting it to pick back up or is there a structural reason alright. Thank.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: So now I will focus on the services. The first one we will see.

Speaker Change:

Speaker Change: Sorry.

Speaker Change: The good maintenance excuse me, okay. So maintenance.

Speaker Change: A little bit more than half of our.

Speaker Change: 11 billion maintenance base, we have today is in products, which.

Speaker Change: Go out of regular maintenance.

Speaker Change: The end of 2027.

Speaker Change: And then the question is how much of that will still not convert to cloud, but we'll go to extended maintenance.

Christian Klein: With regard to CCB, I mean, we are very confident when we look at the pipeline for the year. We see, you know, healthy renewals; we see a good pipeline, you know, to close business in the upcoming quarter. Sapphire is around the corner, where we also make some exciting announcements around data and, of course, AI. Yeah, so we are also very confident when it comes to CCB for the remainder of the year. But Scott, Dominik, please feel free to comment as well.

Speaker Change: A higher cost.

Speaker Change: So thats the parameter and I think it's safe to assume that the lion's share of all of that by 2030 will in some fashion disappear because we will not.

Speaker Change: As we said so many times prolonged maintenance on these products of course, the risk being on other products also of course. It is for which you know has a kind of a lifetime through 2040, so theres ample of room, there, but indeed, there is an anticipation that there will be an acceleration in conversions from that angle.

Speaker Change: As people need to transition from ECC.

Speaker Change: Cloud given what I just described.

Speaker Change: On the services business.

Speaker Change: Scott. Please also feel free to comment I mean look on services first of all.

Speaker Change: We are delivering 90% of our poll checks wire ecosystem.

Scott E. Russell: Yeah, I'll probably give two additional data points just to add to what you described, Christian. So first, as you saw in the update, the cloud ERP suite growth, which covers the end-to-end capability for an enterprise, is growing, and it continues to grow strongly, ninth quarter in a row, 30%. But the reasons why are evolving. There is no doubt companies want best in class processes and to be able to automate their enterprise building. But what they're now clearly seeing is that not all data is.

Scott: The remainder of the 10% share of course, what we are doing that yes. There was some seasonality with the Easter holidays now in Q1, we had some onetime months last year in Q1, but in a nutshell no of course. This business will of course continue to also so close going forward.

Scott: What and what is very important with regard to our services business. What we are focusing more on the high margin services like when youre going into a wide deal you need equate to architect who connect pulses to system and the data layer to twice. This holistic transformation than we have the best policy experts here when you talk about <unk>.

Scott: This model transformation when you talk about designed to operate obviously of course, our consultants need to be leading and also sharing best practices of our customers while of course.

Scott: Part of the technical my equation of the technical consulting will be delivered by by our ecosystem wide fully delivered bioware ecosystem.

Scott E. Russell: Not all data in the enterprise is equal. The data that sits on the SAP platforms is the most valuable data that they have. And when they think forward and look at our innovation roadmap with Business AI and see the capabilities that we bring inside the core, not only will they get the benefit of the generative AI capabilities that we do in our platform and generative AI hub, but then the data that is the most valuable to them is it's got the integrity, it has got the context, it's got the metadata, it's got the semantics, and then you can get the innovation insight.

Scott: So I just wanted to add one thing on the back onto the support revenue that maintenance.

Scott: Dominic described bear in mind that when we talk on one hand about large deals when you've got these large programs of transformation that includes a period of co existence, where customers will keep the maintenance of their of their on premise capability until such time that.

Scott: They are transformed into the cloud so no.

Scott: Not only do you have that so is that steady progress accelerated transformation is happening in tandem. So as you see the cloud revenue growth you will also see the corresponding draw.

Scott: Takedown of the support revenues, but it is in the in light of a customer's transformation. So all the right customers that were existing customers that you saw in Q1 importers in the past go through that journey and.

Scott E. Russell: And a lot of the growth that we're now seeing, to Christian's point, there is not a single conversation that SAP is having with customers that is not linking best-in-class innovation, underlying valuable data, and generative AI capabilities in that combination. And that's why they are excited about the roadmap, but it's already stimulating growth. And to give you one additional data point, our cloud pipeline growth. So the pipeline that we generated in the first quarter was the best on record.

Scott: And so you can see a measured and managed.

Scott: Downgrade of the support in light with the cloud lifting in correspondence.

Speaker Change: And maybe one word regarding the maintenance because I guess this is an important factor in all the module.

Speaker Change: On the model I mean look there are certain parts of an ERP as I also mentioned at the beginning it's a monolithic ERP.

Speaker Change: Texture and India. For example, also BW system and for example, MPW system is not so easily replace there's also a lot of custom code. It's a massive reporting engine and with date of sphere and with our partners. We of course also now more and more shifting just to the cloud will all be double use completely migrated to the cloud by 2027.

Dominik Asam: We continue to see strong demand, not only in what we've booked and what we're generating in the cloud backlog, but also from the market, and a lot of that is stimulated by our business AI roadmap. Maybe just to complement that view on the kind of dynamics in the business to the financial model, you know that the biggest, single most important dilutive factor, so to speak, from CCB down to cloud revenue growth with a certain time lag is actually the transactional business, which is now kind of stagnating. It's actually very, very slightly decreasing. The macro isn't great.

Speaker Change: No, but we will of course, partially replace them over time. So it's fair to assume that of course, some maintenance revenue will also be after 2027%. That's all modules in and I want to see now with business AI upside in accelerating the move of our installed base because every customer now final.

Speaker Change: He gets it that in the cloud is so much innovation is also with AI differentiation. So I actually expect that we see a further acceleration of our installed base move to the cloud.

Speaker Change: Very helpful. Thank you.

Speaker Change: So James we have time for two more questions. So we'll take the next one please.

The next question is from the line of Muhammad more Waller with Goldman Sachs International. Please go ahead.

Mohammed Essaji Moawalla: Great. Thank you.

Dominik Asam: There are also these changes in the kind of supply network happening, and we think that over time, that will become smaller in the mix. By the way, that dilutive effect has also been evident in our cloud ERP suite growth numbers, so we show that 30 percent, 32 percent growth despite that headwind, but that's the biggest bridge item between CCB and cloud revenues. Now, if you look at what we've kind of indicated in our Ambition 25, you see that with 28 percent CCB, you don't need to see much acceleration to basically get there, because you take off the dilutive effect on 5 percent of the revenue, which is basically stagnating, and we do believe that in 25, there will be some acceleration there. So it's what we really need to get to our 2025 ambition. So anything beyond that would be an upside in some way.

Mohammed Essaji Moawalla: Two quick ones, if I may 1st one for Dominic.

Mohammed Essaji Moawalla: You talked about kind of a minimal amount of the transformation charges taken in Q1, how should we think of the phasing of that over the course here.

Mohammed Essaji Moawalla: I understand that you're still kind of in discussion with kind of affected employees.

Mohammed Essaji Moawalla: And how should that kind of pace through the course of the year.

Speaker Change: And then secondly for Dominic as well you alluded to earlier in the year that you are kind of 2025 still doesn't assume any significant working capital.

Speaker Change: Improvements, but I know, there's seasonality in the working capital, particularly in Q1.

Dominic: Are there any kind of plans or initiatives, whether it's around sort of shifting the kind of the invoicing to annual or other kind of collections that leverage that you can compress on and would you be inclined to perhaps pass on some of those savings elsewhere and investments in the business or could that be seen as a potential upside risk. Thank you.

Dominic: Little questions in one go so to speak almost like a planning discussion.

Christian Klein: And last but not least, when you look at the current cloud backlog, we release ACV numbers at the end. We are going to talk about TCV, but customers are also trending more and more to also now sign longer-term commitments with RAMs, which are also going over five years. And of course, there is enough in the books also when it comes to CCB-TCV, and there the growth is even higher than in ACV. Very clear. Thank you very much.

Dominic: So in terms of phasing what I mentioned is that of the $2 2 billion accrued for restructuring.

Dominic: Very little if anything has been kind of paid already in Q1, So I've talked about the cash out as opposed to the crew. The accrual has been taken and we said the vast majority of the accruals. We currently expect them have been taken in Q1.

Dominic: We will run throughout the year and actually into Q1 2025.

Dominic: So it's not the final number yet.

Dominic: Voluntary programs in there, where we have to wait for the acceptance rate, they're still negotiation with social partners I did mentioned that in the U S. We actually had a very high acceptance.

Christian Klein: Thank you, Johannes. We will take the next question, please. The next question is from the line of Frederic Boulan with Bank of America. Please go ahead. Hi, good evening.

Dominic: Acceptance rates, which kind of drove that crew up a little bit closer to the share price increases.

Dominic: Given the cool off a little bit because obviously you have to compensate more for the entitlements of the people that are leaving because they could leave us if we want them to leave so to speak.

Frederic Emile Alfred Boulan: Two quick questions, please. First of all, you mentioned the CCB is being held by the demand for AI, but can you discuss a bit more specifically what's driving that, that sequential acceleration, any specific modules or areas where you see demand? Or is it just the momentum in S4?

Dominic: And.

Dominic: But we also said that let's see what's coming.

Dominic: That if anything of course, we will only go for more reductions than what we've planned in case the business case, otherwise it wouldn't make sense. So so I think you can rest assure that one now with regards to the cash flow 2025, you mentioned that you have been not super aggressive in terms of working capital improvements in 2025.

Dominic: We're making some progress as we speak I want to caution that we have really a very comprehensive transformation program and really executing the head count reductions is of utmost importance. So that's the key priority right. Now there are certainly opportunities. We did mentioned that the 10, sorry, the 8 billion free cash flow ambition for 2025 was assuming.

Christian Klein: And then, second question on the cloud migration. If you can give us an update on your current ERP landscape, the percentage of customers that have migrated to the cloud, and what you are seeing in terms of momentum? Are we seeing some of the largest customers continuing to migrate? So any update on that would be great. Thank you. Yeah, happy to take that question. And Scott, please feel free to comment as well. First, your second question is actually related to your question number one.

No spillover of restructuring cash out into 2025, so that is kind of a potential risk there that if your spillover some cash out from 2024 on restructuring in 2025 that will weigh on that but then the question is I mean to what degree can be offset so I.

Dominic: I don't want to kind of go into more details at that point in time, but obviously this is one of the questions as we mature our restructuring program with more clarity on how many people are leaving at what cost with the phasing of the cash out we can sharpen our pencil and update you later.

Dominic: Yes.

Speaker Change: Maybe one word from my side.

Speaker Change: On the workforce transformation.

Speaker Change: As Dominic is saying we are little bit ahead. After we started the restructuring program on people, leaving S. E T and we do this in a very controlled manner and we have indentified, the chop profiles, which we either re skill actually one of it was also why are we swapped showing and then second we bring all the data scientists knew.

Christian Klein: And what we are seeing now with business AI is actually that a lot of customers who probably planned their migration start date for S4, you know, the end of this year or, you know, next year, that they actually now want to move faster because they see the capabilities with SAP business AI, as I mentioned, for asset management, for just automating many, many workflows in their company, but also when it comes to analytics, especially when it comes to supply chain planning, which And that actually has also driven the sequential increase now.

Speaker Change: Capabilities also on board for the platform.

Speaker Change: We need to capture our future growth opportunity and if there are more levers of cost the business case needs to make sense. So you can actually expect that we also then of course manage it so it's a tightly in the next quarters.

Speaker Change: Okay, well thank you we.

Speaker Change: We will take one final question now.

Speaker Change: Yes. The final question for today comes from the line of Charles Brennan with Jefferies. Please go ahead. Your line is open.

Charles Brennan: Great. Thanks, very much for squeezing me in I was wondering if you could just say something very quickly about the cloud and sensors.

Charles Brennan: Rolled out in Q1, I know you started those in Q4 of last year. It sounds like there were a bit more extensive in the quarter.

Charles Brennan: You think that made much of an impact to the accelerating CCP.

Charles Brennan: And I know the incentives were only for the first year of <unk>.

Charles Brennan: The transformation does actually act as a potentially a headwind to the CCP.

Christian Klein: But, you know, this is not only business AI standalone; business AI helps us to sell more supply chain, to sell more HR, and to sell more finance. And then, last but not least, which makes me so confident, also about the growth potential for 2025 plus. I mean, when you start with finance and you talk about your business model, you talk immediately about the billing, about the commissions, then you're actually moving, you know, into the supply chain. And when you're doing demand and supply, you're also talking about design to operate. And now we are seeing a huge uptick in our manufacturing cloud business. And then you go, module by module.

Speaker Change: And then secondly can I just squeeze.

Speaker Change: Financial clarification in.

Speaker Change: Just on the stock based comp I think you said it was 100 million incremental charge in the quarter, but what are you assuming on a full year basis, and then youre unchanged EBIT guidance.

Speaker Change: Helping to offset that higher share based comp.

Speaker Change: I am Scott I can go first and please build on it.

Scott: First of all on the migration incentives. So I guess, the major change, which we did which is not impacting margins is that we are not only incentivising now anymore as for Hana finance, but we incentivize in cloud ERP as we have to also move our.

Scott: Our monolithic ERP on premise system to the cloud and that we are talking about HR travel procurement all the modules I mentioned already at the beginning of the call and they are now also incentivize to Mike weight, which just makes a ton of sense because you actually have one time migration from but then you actually.

Christian Klein: Because when you talk to these customers, they see more and more that the best of three really doesn't work when you have to stitch together manually, you know, data modules or the identity or the authorization. So what we are seeing with many RISE customers over time is that there is a lot of cross-sell potential and that the first phase is only about landing, and then start provisioning, and start to redesign the process landscape.

Scott: Building a recurring revenue stream in this deal you also see it in the multiple multiple.

Scott: <unk> has not going down are extremely healthy and then while you have this onetime efforts on the <unk>.

Scott: Equation fund, you'll see then the recurring revenue coming in the cross sell upsell, we do or what the cause of the year. So I actually see this as a very positive incentive for our customers and it will also of course also help us to further expand our footprint in the installed base Scott Yes.

Scott: Just two things to wait to what you described Christian the first is.

Christian Klein: And then we go, and we've already talked about the custom code and the ecosystem. We are more and more building on BTP to also remove the custom code and move to a clean core. And I'll just add one additional comment to what Christian described, and that is that growth on the CCB is consistent around the world. And so this is not a particular region. Across all regions, we saw healthy growth. Obviously, APJ and parts of Europe and Greater China were strong, but across the world.

Scott: These customers. Many of these customers has invested heavily with <unk> over a long period of time.

Scott: And we acknowledge that with those investments made in the past our role about helping them on the transformation becomes more important than ever so the transformation incentive to be able to migrate is a part of a broader picture, helping them on an ongoing roadmap driving to that clean core architecture, and making sure that.

Scott: Can leverage the business. So it's not just provides.

Scott: Financial benefit, but there's also the role and the method and the tooling that <unk> brings to help them on that journey and the tubing combination then becomes a more compelling factor for customers to drive and then and then secondly, it can be applied in multiple ways. So that <unk> can be used against not only on the that may be there.

Scott E. Russell: And secondly, it is across that portfolio. People aren't doing a move only; they're doing a move and transformation. And that requires those extended capabilities. And if I just link it back, if you've already got the data architecture of SAP, and it's the most valuable thing, you can do so many more things, not only AI-related, but also innovation-related, that you can do in your business. So it definitely means that our short, mid, and long-term growth has, you know, it's definitely got confidence based on the capabilities, the innovation roadmap, but also the buying signals that we see from the market here. Thanks. Thank you, Fred.

Scott: Maintenance, but also to services and for other capabilities, including our ecosystem partners to help them drive that.

Scott: And one last word on the <unk> on cloud cost margin I mean, you have seen if you would exclude stock based and the higher share price in Q1.

Scott: Actually we have a very healthy expansion of our cloud cost option and what is coming from a <unk> perspective in the next weeks months quarters is we are now embedding.

Scott: Postal service into our solutions, we are moving more and more of our <unk>.

Scott: Solutions also now to Oklahoma cloud in a non disruptive way, it's already all baked in also cost wise in our guidance, which will also give us enormously more scale and to also balance peak workloads much better in the future and then when you look at the wife journey.

Operator: Next question, please. The next question is from the line of Jackson Eder with KeyBank Capital Markets. Go ahead.

Scott: The customer.

Scott: Now at 20% to 30% of the migration done.

Jackson Eder: Great. Thanks, guys, for taking our question. Just one on the large steel strength.

Scott: Of course, the more workloads, you're putting on the architecture on the infrastructure. The more economies of scale you are getting so we're also very happy with the progress we are seeing on margin, especially profits in the private cloud.

Operator: But I think Christian or maybe Dominik, you called it out in terms of the $5 million plus deal is driving a lot of strength in cloud ERP. Just curious, are you saying, I mean, I assume the preponderance of that is migrations or rises? Are you seeing any large deals for net new customers or net new land that are also driving some of the CCB growth? Scott, do you want to go first? Let me kick it off, and then Christian, please add in.

Scott: So no actually we where are we confident about a further cost margin expansion. Then also not only this year, but also in the years to come.

Maybe on the stock based compensation shows.

Scott: So that kind of a $135 million increase was kind of the.

Scott: But order of magnitude, which was unexpected because we actually said that.

Scott: We had $2 2 billion in stock based compensation last year in 2023.

Scott: We set that and our ambition update when we included stock based compensation included about $2 billion. In 2025. You also said that 2024 will be somewhere in the middle where we now see that because of that very very strong share price increase in Q1.

Scott E. Russell: So I think we've got to be clear; when customers decide to move to RISE, they're not just doing a move of their current environments and replicating the same capability; in fact, far from it. They're trying to transform, operationally process all of their data, all of their capability to serve now and into the future. They're setting their business up.

Scott: That's kind of $135 million increase will basically feed through the year why don't we think that will reoccur.

Scott E. Russell: And so when they look at these, which is why to answer your question, the larger deals are because they look at a multi-year roadmap of capability transitioning from an older state, including non-SAP. So what we see is many situations where our customers will say, OK, I might be using SAP for core finance, but I'll then extend, i.e. ERP suite, the other capabilities, and then we're able to have a competitive displacement. That happens regularly.

Scott: Because simply there are two parts to that which drove it up one is the exceptionally high increase in the share price I mean, if you think about the 2930% we've seen in Q1 and you compare it to the normal standard deviation you are in any given quarter over the last 10 20 years is two three to $2 four standard deviation variance will it happen.

Scott: This once every 100 quarters actually from a statistical point of view secondly.

Scott: We are losing the sensitivity so to speak because this was the last kind of fully cash settled trench under this moved 2021 program, which is by far the largest and as we move to more equity settled which is not flowing through the P&L. We don't expect that sensitivity to stay so high. So now yes, we did compensate to a certain degree.

Scott E. Russell: So whether you look at SKF, the Curtis Wrights, and the others that Christian mentioned in his opening, and you see the chart of all the other RISE customers, they're nearly always bringing the BTP, which is displacing other technology platforms and using that as the innovation platform. They're using other extensions, whether it be Ariba, Concur, success factors to be able to provide their people with their spend. So, yes, we are seeing that.

Scott: Our guidance and that is simply that we kind of grind on all corners to see how we can make up for that because we don't want to kind of be burdened by that but compensate. It also demonstrates how important it is to embark stock based compensation in the overall equation the real factor in actually it becomes more and more valuable the better the complete performs so from that perspective I think it was.

Scott: Right decision to make sure we manage it holistically the cost base, including stock based compensation.

Scott: Okay.

Speaker Change: Thank you Charlie for your question.

Scott: Okay.

Scott E. Russell: But then the compelling event is obviously an initial move and then a multi-year journey when they're on the large, which makes up a big portion of the Q1 results. Maybe to shed some more light on top of the numbers, I mean, what you also see with WISE, it's not only that we are landing, of course, and converting maintenance with a factor of two to three X to the cloud. What we are then seeing after is that next on land and expand, customers want to replace the HCM module, and this is then oftentimes a double-digit success factor and a very central deal.

Speaker Change: The kitchen, Scotland, Dominican well, we'll conclude the call for today. Thanks for joining thank you.

Speaker Change: Thank you bye bye.

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Christian Klein: Needless to say, payroll is a massive business, which we are also more and more now shifting to the cloud. So there are a lot of large cross-sell opportunities after we landed with WISE. For BTP, I mentioned one customer.

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Christian Klein: Actually, for BTP, we also often see double-digit ACV deals with our large customers now as they are not only using the platform for integration but also for the extension, for the clean cord journey. And then, last but not least, when it comes to volume business growth, that's rightfully driven by our ecosystem, by our resellers. But oftentimes, you start with a 500K deal with some users, it scales, and then you start finance HR, and then you expand into manufacturing cloud or into billing, et cetera.

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Christian Klein: And in the meantime, you see that customers are growing from 500K to 2 to 3 million ACV. And, of course, this is not the end, but you see that this massive volume business will also further contribute to the growth. And these customers will also become, after landing and signing deals, net new customers will also become way bigger over time. Thank you, Jackson.

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Operator: Excellent. Next question, please. The next question is from the line of Michael J. Briest with UPS Ltd. Please go ahead. Your line is open.

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Michael Briest: Yes, good evening. Just on your comments, Christian, about applying AI internally, I think you mentioned a figure of sort of triple digit millions. Can you give a sense of where that comes from? And, you know, is this 100 to 150 million or high triple digit millions? And over what time might you realize that?

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Christian Klein: And just a quick clarification, Dominic, on the pre-cash flow. It's obviously very good. Did that include the final repayment of the factoring? I think about 200 million that spilled over from last year.

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Dominik Asam: And obviously, you're saying that the restructuring is not quite finalized yet, but potentially, your three and a half billion number is safe, even if that number does creep up a bit. Thank you. I can start on the internal rollout of AI. And, indeed, it's a triple digit million in efficiencies. And what we are already doing right now, we are rolling out JOOL, especially for SAP success factors. So job description, learning, co-pilot, interviews, feedback, that's all automated now via JOOL. In procurement, we have content recommendations rolled out in category tools.

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Christian Klein: In IT, or in the cost function, for example, take F&A, we have to screen hundreds of thousands of contracts every year. That's now completely automated with generating AI. In Scott's world, in the sales world, we actually also use AI for content generation, for demo, actually for business case creation, which saves a lot of time. So we are rolling out AI. For development, of course, we have GitHub.

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Christian Klein: But then also, we are using our own SAP-built automated code generation tool, for example, for ABAP. And if you think about that, we can increase the productivity of each developer by up to 30 to 40% already this year, thanks to our own SAP-built solution. And also, by GitHub, you can imagine the scale and the efficiencies we are going to generate in the years to come, also by applying AI internally. Dominik?

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Dominik Asam: On the pre-cash flow side, if you ask about the kind of discontinuation of the factoring, I would say it was partially, not fully, because there are some deals which might span longer terms. But we basically discontinued this practice in 2024. So you've already seen a part of the roll-off. I want to highlight, though, that the bigger thing, so to speak, in Q1 is still that we paid the fines. The famous 0.2 billion on DOJ and other authorities.

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Dominik Asam: So that was weighing on Q1 and is already digested. So we are also very pleased with the pre-cash flow performance in Q1. Thank you, Michael. We'll take the next question, please. The next question is from the line of James Goodman with Barclays Capital; please go ahead. Great, thank you very much.

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James Arthur Goodman: Maybe with investor focus, I think increasingly shifting beyond 25 now, I want to come back just to some commentary around the transition at a high level and specifically sort of framing that in a financial sense, that the maintenance base that still remains in the business today. Can you help us a little bit with just how much of that really needs to transition to the cloud? I mean, I'm conscious that there were sales, for example, of S4 before the RISE programme, for example, came in. And really, then just when does that substantially need to be done by given the 2027 deadline, but also the extended support period beyond that? So just how much of the base is really being taken and over what period?

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Dominik Asam: And just a related second question, just around the services business only growing 1% this quarter. I know it's a slightly tougher comp, but given the demand for, you know, implementation work and such like here around S4, I might have expected that to be a little higher. Are you expecting it to pick back up? Or is there a structural reason that remains lower?

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Christian Klein: Sorry, no, I was focused on the services. The first one was the maintenance, excuse me. Okay, so maintenance. A little bit more than half of the 11 billion maintenance base we have today is in products that will go out of regular maintenance by the end of 2027. And then the question is how much of that will still not convert to the cloud but will go to extended maintenance at a higher cost. So that's the parameter.

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Dominik Asam: And I think it's safe to assume that the lion's share of all that by 2030 will, in some fashion, disappear because we will not..., as we say so many times, prolonged maintenance on these products. Of course, the rest being on other products. Also, of course, on S4, which you know has a kind of lifetime through 2040, so there's plenty of room there. But indeed, there is an anticipation that there will be an acceleration in conversions from that angle, as people need to transition from ECC to cloud, given what I just described in the services business. I mean, Scott; please also feel free to comment.

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Christian Klein: I mean, look, on services. First of all, we are delivering 90% of our projects via ecosystem, and the remainder, the 10% share. Of course, what we are doing there, yes, there was some seasonality with the Easter holidays now in Q1. We had some one-timers last year in Q1.

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Christian Klein: But in a nutshell, of course, this business will, of course, continue to show growth going forward. And what is very important with regard to our services business, what we are focusing on are more high-margin services. Like when you are going into a wide deal, you need a great architect who connects the process, the system, and the data layer to drive this holistic transformation. Then we have the best process experts. When you talk about business model transformation, when you talk about design to operate, obviously, of course, our consultants need to be leading and also sharing best practices with other customers.

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Scott E. Russell: While, of course, the main parts of the technical migration and technical consulting will be delivered by our ecosystem, rightfully delivered by our ecosystem. I just wanted to add one thing back onto the support revenue that Dominic described. Bear in mind that when we talk on the one hand about large deals, when you've got these large programs of transformation, that includes a period of coexistence where customers will maintain the maintenance of their on-premise capability until such time that they've transformed into the cloud.

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Scott E. Russell: So, not only do you have that steady progress accelerated transformation, but it's happening in tandem. So, as you see the cloud revenue growth, you will also see the corresponding takedown of the support revenues, but this is in light of a customer's transformation. So, all the new customers that were existing customers that you saw in Q1 importers in the past go through that journey. So, you can see a measured and managed downgrade of the support in light with the cloud lifting in correspondence. And maybe one word regarding maintenance, because I guess this is an important factor in all the modules, in all the models.

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Christian Klein: I mean, look, there are certain parts of an ERP, as I also mentioned at the beginning; it's a monolithic ERP architecture. And in there is, for example, also a BW system. And, for example, a BW system is not so easily replaced.

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Christian Klein: There's also a lot of custom code built. It's a massive reporting engine. And with Datasphere and with our partners, we are, of course, now more and more shifting this to the cloud. But will all BWs completely migrate it to the cloud by 2027? No.

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Christian Klein: But we will, of course, partially replace them over time. So it's fair to assume that, of course, some maintenance where you will also be after 2027, that's all built in. And I want to see now with business AI, the upside of accelerating the move of our install base because every customer now finally gets it that in the cloud, there's so much innovation. There's also AI differentiation.

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Christian Klein: So I actually expect that we will see a further acceleration of our installed base move to the cloud. Very helpful. Thank you, James. We have time for two more questions, so we'll take the next one, please. The next question is from the line of Mohammed Moawalla with Goldman Sachs International. Please go ahead. Great, thank you. I had two quick ones, if I may. First one for Dominik: you talked about kind of a minimal amount of the transformation charge taken in Q1.

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Mohammed Essaji Moawalla: How much do you think of the phasing of that over the course of the year? You know, and I kind of understand that you're still kind of in discussion with affected employees. And how should that kind of phase through the course of the year?

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Dominik Asam: And then secondly, for Dominik as well, you alluded earlier in the year that your kind of 2025 guidance still doesn't assume any significant working capital improvements. But I know there's seasonality in working capital, particularly in Q1. Are there any kind of plans or initiatives, whether it's around sort of shifting the kind of invoicing to annual or other kind of collections that levers that you can press on? And would you be inclined to perhaps pass on some of those savings elsewhere in investments in the business?

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Dominik Asam: Or could that be seen as a potential upside risk? Thank you. Well, thanks. A lot of questions in one go, so to speak, almost like a planning discussion. So in terms of phasing, what I mentioned is that of the 2.2 billion accrued for restructuring, very little, if anything, has been kind of paid already in Q1. So I talked about the cash out as opposed to the accrual.

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Dominik Asam: The accrual has been taken, and we said the vast majority of the accruals we currently expect have been taken in Q1. The program will run throughout the year and actually into Q1 2025, so it's not the final number yet. There are voluntary programs in there where we have to wait for the acceptance rate. There's still negotiation with social partners. I did mention that in the US, we actually had very high acceptance rates, which kind of drove that number up a little bit.

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Dominik Asam: Also, the share price increase has driven the accrual up a little bit because obviously, we have to compensate more for the entitlements of the people that are leaving because they're good leavers if we want them to leave, so to speak. But we also said that we'll see what's coming beyond that, if anything. Of course, we will only go for more reductions than what we've planned in case there is a good business case. Otherwise, it wouldn't make sense.

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Dominik Asam: So I think you can rest assured on that one. Now, with regard to cash flow 2025, you mentioned that we have not been super aggressive in terms of working capital improvement in 2025. We are making some progress as we speak. However, I want to caution that we really have a very comprehensive transformation program and really executing the headcount reductions is of utmost importance. So that's the key priority right now. There are certainly opportunities.

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Dominik Asam: We did mention that the $8 billion free cash flow ambition for 2025 was assuming no spillover of restructuring cash out into 2025. So that is kind of a potential risk there, that if we spill over some cash out from 2024 or restructuring into 2025, that will weigh on that. But then the question is, I mean, to what degree can we offset? So I don't want to kind of go into more details at that point in time, but obviously, this is one of the questions.

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Christian Klein: As we mature our restructuring program with more clarity on how many people are leaving, at what cost, with the phasing of the cash out, we can sharpen the pencil and update you later. Yeah, maybe one word from my side on the workforce transformation. I mean, as Dominik is saying, we are a little bit ahead after we started a restructuring program on, you know, people leaving SAP, and we do this in a very controlled manner.

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Christian Klein: We have identified the job profiles, which we either reskill or, you know, actually want to reduce also via restructuring. And then, second, we bring all the data scientists and new capabilities also on board for the platform, which we need to capture our future growth opportunities. And if there are more leavers, of course, the business case needs to make sense.

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Mo: So you can actually expect that we also then, of course, will manage this also tightly in the next quarter. Thank you, Mo. Thank you. We will take one final question now. Yes, the final question for today comes from the line of Charles Brennan with Jeff Rees. Please go ahead, your line is open.

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Charles Brennan: I know you started those in Q4 of last year, but it sounds like they were a bit more extensive this quarter. Do you think that made much of an impact on the accelerating CCB?

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Christian Klein: And I know the incentives were only for the first year of the transformation, but they do actually act as a potentially a headwind to the CCB. And then, secondly, can I just squeeze a financial clarification in on the stock-based comp, I think you said it was a 100 million incremental charge in the quarter. I mean, Scott, I can go first and please build on it. I mean, first of all, on the migration incentives. I guess the major change which we did, which is not impacting margins, is that we are not only incentivizing now anymore as for HANA Finance, but we are incentivizing cloud ERP as we have to also move, you know, our monolithic ERP on-premise system to the cloud.

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Christian Klein: And there we are talking about HR, travel, procurement, all the modules I mentioned already at the beginning of the call. And they are now also incentivized to migrate, which just makes a ton of sense because you actually have, you know, a one-time migration fund, but then you actually have a recurring revenue stream. And these deals, you know, you also see it in the multiple; the multiple is not going down, and they are extremely healthy.

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Christian Klein: And then while you have this one-time effort on the migration fund, you see the recurring revenue coming in, the cross-sell, and the upsell we do over the course of the years. So I actually see this as a very positive incentive for our customers. And it will also, of course, also help us to further expand our footprint in the installed base. Scott Yeah, I think just two things to add to what you described, Christian. The first is that many of these customers have invested heavily with SAP over a long period of time.

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Scott E. Russell: And we acknowledge that with those investments made in the past, our role in helping them with the transformation becomes more important than ever. So the transformation incentive to be able to migrate is a part of a broader picture, helping them on an ongoing roadmap, driving to that clean core architecture, making sure they can leverage business AI. So it not just provides a financial benefit, but it's also the role, the method, and the tooling that SAP brings to help them on that journey. And the two, in combination, then become a more compelling factor for customers to drive. And secondly, it can be applied in multiple ways.

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Scott E. Russell: So the incentive can be used not only for maintenance but also for services and for other capabilities, including our ecosystem partners to help them drive that. Yeah. And one last word on the TCO and on cloud cross-margin. I mean, you have seen, if you would know, we exclude the stock-based and higher share price in Q1.

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Christian Klein: Actually, we have a very healthy expansion of our cloud cross-margin. And what is coming from a TCO perspective in the next weeks, months, quarters is that we are now embedding ARM processors into our solutions. We are moving more and more of our solutions also now to HANA Cloud in a non-disruptive way.

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Christian Klein: It's already all baked in, also cost-wise, in our guidance, which will also give us enormously more scale to also balance peak workloads much better in the future. And then when you look at the ride journey, I mean, customers are now at 20 to 30% of the migration done. And of course, the more workloads you're putting on the architecture, on the infrastructure, the more economies of scale you are getting.

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Christian Klein: So we are also very happy with the progress we are seeing on margin, especially profits in the private cloud. Now actually, I'm very confident about a further cross-margin expansion then also not only this year but also in the years to come, maybe on stock-based compensation, Charles. So the kind of $135 million increase was kind of of an order of magnitude that was unexpected because we actually said that we had $2.2 billion in stock-based compensation last year in 2023.

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Christian Klein: We said that in our ambition update, when we included stock-based compensation, we included about $2 billion in 2025. We also said that 2024 will be somewhere in the middle. We now see that because of that very, very strong share price increase in Q1, that kind of $135 million increase will basically feed through to the year. Why don't we think that will reoccur? Because simply, there are two parts to that which drove it up.

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Christian Klein: One is the exceptionally high increase in the share price. I mean, if you think about the 29, 30% we've seen in Q1 and you compare it to the normal standard deviation you have in any given quarter over the last 10, 20 years, it's actually a 2.3 to 2.4 standard deviation variance.

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Dominik Asam: So it happens once every 100 quarters, actually, from a statistical point of view. Secondly, we are losing the sensitivity, so to speak, because this was the last kind of fully cash-settled tranche under this MOVE 2021 program, which is by far the largest. And as we move to more equity settled, which is not flowing through the P&L, we don't expect that sensitivity to stay so high. So now, yes, we compensated to a certain degree in our guidance, and that's simply that we kind of grind on all corners to see how we can make up for that because we don't want to kind of be burdened by that, but compensate. It also demonstrates how important it is to include stock-based compensation in the overall equation.

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Dominik Asam: It's a real factor, and actually, it becomes more and more valuable the better the company performs. So from that perspective, I think it was the right decision to make sure we manage it holistically, the cost-based, including stock-based compensation. Thank you, Charlie, for your question, and thanks, Dominik. Thanks, Christian, Scott, and Dominik, and we will conclude the call for today. Thanks for joining us. Thank you. Thank you. Bye-bye. Thanks for watching!

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Speaker Change: Yeah.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Thank you.

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Speaker Change: Yes.

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Speaker Change: Sure.

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Speaker Change: Yes.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Thank you.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Sure.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Sure.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: Okay.

Speaker Change: Okay.

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Speaker Change: Okay.

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Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Okay.

Speaker Change: Yes.