Q4 2024 SAP SE Earnings Call
Ladies and gentlemen, thank you for standing by.
Welcome and thank you for joining the S. A P Q4, 'twenty 'twenty four earnings conference call.
Throughout today's recorded presentation, all participants will be in a listen only mode.
The presentation will be followed by a question and answer session.
If you would like to ask a question you May press star followed by one on your Touchtone telephone.
I would now like to turn the conference over to Alexandra Steiger Global head of Investor Relations. Please go ahead.
Alexandra Steiger: Good morning, everyone and welcome. Thank you for joining US with me today are CEO, Christian Klein, and CFO domenic or something.
Alexandra Steiger: On this call, we will discuss Lp's fourth quarter and full year results for 2024, you can find the deck supplementing this call as well.
Quarterly statement on our Investor Relations website.
Alexandra Steiger: During this call we will make forward looking statements, which are predictions projections or other statements about future events.
Alexandra Steiger: These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to differ materially.
Alexandra Steiger: Additional information regarding these risks and uncertainties may be found in our filings with the SEC, including but not limited to the risk factors section of our annual report on form 20-F for 2020 three.
Alexandra Steiger: Less otherwise stated all numbers on this call are non I forget and growth rates and percentage point changes are non ibreath year on year at constant currencies.
Christian Klein: The non <unk> financial measures, we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with Arafat Christian now over to you.
Christian Klein: Thank you Alexandra and thanks to everyone for joining our earnings call.
Speaker Change: Fifth we bill yet.
Speaker Change: That is S. A piece total cloud backlog at the end of 2024.
Speaker Change: 40% over the previous year, hitting a new record high.
Speaker Change: Totally cloud backlog is just one figure out but it does illustrate how far we have come as a company.
Speaker Change: Four years ago.
Speaker Change: C. P shares took a hit when we announced our plan to transform the company the markets had some serious doubts if we could pull it off but we did it.
Speaker Change: We did live up on all of our strategic Congresses.
Speaker Change: We more than doubled cloud revenues in 2020 and waste into half of S&P's total Avenue to date no major competitor is growing as fast as I say Pete.
Speaker Change: Total cloud backlog of 63 billion euros.
Speaker Change: And as we we calling revenue share we are on a mortgage affiliated growth path than ever.
Speaker Change: C. P has enormous potential and applied future over the last several years, we have developed.
Speaker Change: Palin business, we'd offering in the cloud to one hour Costa months, most mission critical business processes end to end.
Speaker Change: We also have access to business data that no other tech company has.
Speaker Change: And with regard to AI yesterday's.
Speaker Change: Yesterday's Tech news provided another strong validation of our strategy.
Speaker Change: Thanks to our ecosystem approach under China IHOP, we are flexible when it comes to AI infrastructure and large language modules, we benefit from cost reductions and pro Quest, India LLM space, because we are truly differentiating element in AI. Today. However, it is deep.
Speaker Change: Joseph and industry know, how combined with access to unique context switch business data. So well your equation is more and more moving up the application layer and to building born semantical data late this is exactly what C. P has been focusing all we havent been embedding C. P.
Speaker Change: Because I say I deeply into business closes of our customer.
Speaker Change: Do we solve instead of C suite executives see us.
Speaker Change: The leading the leading AI company in Europe, and the mall the top five globally.
Speaker Change: Business data and then understanding of it semantics those are key ingredients to generate nature, while you and to expand our competitive edge.
Speaker Change: I will touch on that and then an exciting innovation in the data space and shops to make it.
Speaker Change: If you're not in the financial results for 2024 are another proof point of the successful journey, we started we.
Speaker Change: We had the courage to change our business module and four years later, we are winning in the cloud and in AI Big time.
Speaker Change: Becoming the number one enterprise application and business AI company is a huge achievement by T. C. P. It took a lot of effort dedication and openness for change to get there.
Speaker Change: A big thank you to our over 100000 colleagues worldwide.
Speaker Change: Before we take a closer look at Sap's future, Let's review, how we ended 2024.
Speaker Change: Q4 was a very strong finish off part of you without going into all the details let me mention sweet points cloud.
Speaker Change: Cloud revenue expanded 27% and 12 double digit total revenue growth for the third quarter in a row, calling cloud backlog once again increased 29% on top of an already large base.
Speaker Change: And the most exciting thing about half of our cloud order entry in Q4 were deals that included AI use cases.
Speaker Change: This shows how successful we are involving our business AI innovations to our customers.
Speaker Change: And for the full year 2024, we achieved all of our cloud goals, despite macro headwinds and the ongoing transformation inside that's a Pete.
Speaker Change: This wasn't easy, but we did it and we are very proud of that.
Speaker Change: The customer stories that capped off the if you a good idea of where S&P is heading.
Speaker Change: In Q4 more of the world's leading companies decided to embark on that why it's Chinese.
Speaker Change: The energy companies BP and total energies are two great examples.
Speaker Change: B P chose wise, if the digital backlog backbone for the transformation into an integrated energy company, helping to accelerate digitization enhance performance and reduce costs E.
Speaker Change: E C access to technological innovation was another important factor in B piece decision.
Speaker Change: And total energies has been partnering with S&P for over 30 years why is will be the starting point for the company's transformation towards new business much rules and it will help to drive efficiency and from there we will take our partnership to the next areas.
Speaker Change: Yes.
Speaker Change: The world's largest chemical company is also banking on wise to get out or we will try it also simplification and standardization and we will enable <unk> to take advantage of AI powered automation and innovation.
Speaker Change: I could go on and on.
Speaker Change: Many more global leaders chose wise in Q4, including Red Bull E y.
Speaker Change: European truck store chain, Deanna, and the automotive supplier, Robert Bosch and Schaeffler.
Speaker Change: Well, if we got to cool, we once again celebrated major wins in the it industry.
Speaker Change: <unk> a rapidly growing data and AI company with over 10000 customers have selected <unk> to modernize its financial systems and support at schools.
Speaker Change: <unk> will now have a solution that can scale fast in over 60 countries supports new revenue module and provides the company with instant access to business. They are in.
Speaker Change: Outreach.
Speaker Change: Soft company focusing on sale solution signed up for in Q4 as well.
Speaker Change: Let me say this where we clearly.
Speaker Change: C P add hundreds of net new cloud SME customer every quarter.
Speaker Change: Go onto celebrates go lives in months not in yet.
Speaker Change: And users are delighted about the product experience of the suite and the new innovations coming in every quarter.
Speaker Change: Is this then U S E P.
Speaker Change: Next to these customer wins, we also saw some major go lives, let me name some big blocks.
Speaker Change: Wildlife with Successfactors and <unk>.
Speaker Change: 275000 employees in over 80 countries. It's one it was one of the largest and most complex deployments of successfactors into history.
Speaker Change: And delivered completely on time.
Speaker Change: And IBM also went live with S&P feel cloth in S. E. P O EBA in F. Two four it's firewall business as the first customer to use both solutions in DNS to cloud.
Speaker Change: We also had major wise go lives in the automotive sector, those who at general Motors, and a Germany based automotive supplier Mala International.
Speaker Change: All of the examples I gave make it very clear.
More and more customers appreciate the comprehensive and integrated character of Sap's cloud suite.
Speaker Change: They stopped refinanced PDP and our business transformation portfolio and from that they turn to our full suite to all our line of business solutions falling our wise Aqua Chinese.
Speaker Change: For our customers it isn't shop, so easy to adopt more and more of our solutions.
Speaker Change: The number of customers with over four as a piece of illusions more than doubled since 2021.
Speaker Change: Oh, one fifth of our customers are now part of that pool.
Speaker Change: Land and expand is clearly working.
Speaker Change: So we had a really great work.
Speaker Change: 24 was not a very good year for the company.
Speaker Change: But we are not stopping here, we are raising the bar for the years to come.
Speaker Change: We expect accelerated double digit total revenue growth and an expansion of operating profit through 2027.
Can say this with confidence because we have all the wide pieces in place.
Speaker Change: But product innovation.
Speaker Change: Overall, we bought over 130, <unk> use cases to our customers and 2024 over delivering on our plans and we integrated 1300 skills ensure making it capable of automating 80% of the most used activities of our end users.
Speaker Change: And so 30000 customers now use S&P business. They are among them many great brands, such as comparably Henkel, Mcadow Libre, BT Coupe and standup child that back and the other big names for example, ABB buyer and swiftly Taylor miele.
Speaker Change: <unk> signed deals for S. P business in Q4.
Speaker Change: All of this is a very good start, but we are once again doubling down on AI in 2025.
Speaker Change: We will significantly increase our AI investments with all of our more than 30000 developers working to enhance our AI Foundation and building new use cases.
Speaker Change: One key ambition is to make sure it truly was a 30% more efficient by the end of 2025.
Speaker Change: In addition, a counterweight to launch a game changing innovation very soon that will give us a great boost in the data and AI space.
Speaker Change: Today companies spend up to 50% of their it budget on data and analytics.
Speaker Change: And despite all of that investment so many companies fall short of realizing the potential of that data.
Speaker Change: Awesome data stays locked in silos, all stock in so called data forms without business context.
Speaker Change: Companies have no complete view of their business that way and without access to high quality data AI agents, they far below that potential as well according to the principle garbage in garbage out.
Speaker Change: We will address these challenges in the data and AI space with one of the biggest innovations S&P has ever delivered.
Speaker Change: We will harmonize flux up and unstructured data as a P and known as C. P data always with the Willow and semantics and by that.
Speaker Change: We will make AI agent much more powerful tool will become the Super August weight of these agents carrying out complete tav autonomously and end to end, taking a significant workload from humans.
And our business unleashed event on February 13, we will talk more about this innovation.
Speaker Change: It would be our placer if you joined the webcast.
Speaker Change: Let's now move to the second piece commercial innovation.
Speaker Change: First.
Speaker Change: We will make it even simpler for why isn't Guo customers to land and adopt our latest innovation.
Speaker Change: We will introduce licensing options that allow customers to upgrade and switch easily to our newest cloud solutions across the whole FPP business, we'd all without additional negotiations.
Speaker Change: Second for customers that have landed with a Z P will enhance strategic my equation incentives to expand across our Asap business suite.
Speaker Change: All the customers go the more they benefit.
Speaker Change: Third we will evolve our wise with S&P offering.
Our whole business transformation toolkit will be part of the why is offering going forward, including <unk>, Sydney RVO and walk me in.
Speaker Change: In addition, we will leverage tune for consultants and tune for developer for our customers transitions to Akamai equation call.
Speaker Change: Supported by the enterprise architecture, we will accelerate time to value and allow customers to benefit from our food business, we'd even possible.
And now to the third piece simplification.
Speaker Change: We are very diligent and committed to making it simpler leaner and more efficient.
Speaker Change: By Rolling out AI internally, we enable our business to scale quickly while keeping costs in check to give some details in development over 20000, S&P developers use AI powered tools, including tool for developers already today, we have.
Speaker Change: Theme average efficiency gains above 20%.
Speaker Change: On the go to market side AI assisted contact validation has reduced our average contract booking time by 75%.
Speaker Change: And in the corporate functions, we have seen a 20 fold productivity gain through AI assisted quote to cash process automation.
Speaker Change: Overall, we expect the one way the efficiency effect of our existing AI implementations of roughly 300 million euros already this year and for the very near future, we expect to cross the half billion Mark.
Speaker Change: In parallel our transformation towards a better more resilient more simple S&P continues.
Speaker Change: 'twenty 'twenty four we started to March our seven go to market regions into fall.
Speaker Change: We have also consolidated our operations teams to reduce shadow functions and streamline to deliver real solutions to customers.
Speaker Change: And we are putting the right people in place.
Speaker Change: This morning, we went we were happy to announce to Chief revenue Officer co, leading our go to market execution and transformation reporting directly to me.
Speaker Change: Unbilled as Chief Revenue Officer America, and global business suite.
Speaker Change: And Manav Gupta of <unk>, as Chief revenue Officer, APAC, EMEA and Ami.
Speaker Change: They will be supported by Stefan the pasta.
Speaker Change: Stefan <unk> from <unk>, where he was chief revenue officer, he will serve as business week leader and ensure the success of our sweet motion across regions.
Speaker Change: This combination from in depth product knowledge to world class sales experience will allow us to further improve our go to market, while staying focused on our commercial success.
Speaker Change: On the R&D side, we are extending the mandate of our Chief AI Officer Phillip Hurst sick to also have our cross company innovation efforts as new global CTO, continuing to drive innovation for Sap's customers and partners.
Speaker Change: Also this morning, we announced that the supervisory board has appointed the Boston Steinhoff Isa as an executive Board member effective February 1st 2025 in the role of Chief operating Officer, Sebastian overseeing the execution of our strategy as well as the simplification of our.
Speaker Change: Our internal operations.
Speaker Change: In addition, the supervisory board extended the executive Board contract of Thomas our ASIC for three additional years until 2028.
Speaker Change: I'm very much looking forward to working with this strong and extended team.
Speaker Change: Let me now summarize.
Speaker Change: Our success over the last four years peak, a clear language, we are capable turning ambition into reality.
Speaker Change: And we intend to continue that way, we are curious about our future and set the bar higher because being the best it's never done.
Speaker Change: With this life and energy, we are continuing our profitable growth journey in 2025 and beyond.
Speaker Change: That is our aspiration. This is our promise to you and with that I'm handing over to Dominic.
Dominic: Thank you very much Christian and thank you all for joining us this morning.
Dominic: I would also like to wish everyone. Good health piece and success in 2025.
Dominic: It's a strong finish to 2024 once again demonstrates great resilience.
Dominic: In a year that presented new challenges and opportunities.
Dominic: We not only delivered on our financial commitments for the year.
Dominic: But also built strong momentum that positions us firmly on track to achieve our stated financial goals for 2025 and beyond.
Dominic: 2024 was a year of transformation.
Dominic: Highlighted by both top and bottom line growth.
Dominic: Well as exceptional free cash flow strength.
Dominic: Our success in cloud revenue and robust non <unk> operating profit throughout the year reflect the effectiveness of our strategic growth initiatives and our relentless focus on operational efficiency.
Customers worldwide continue to choose arise with S&P as their solution of choice for the end to end business transformations in large scale enterprises.
Dominic: Small and medium sized companies rely on grow with S. A P to drive their growth and innovation.
Dominic: This is reflected in strong order intake in large cloud transactions with a volume greater than 5 million euro contributing 63% to our cloud order entry for the full year and an impressive 68% in Q4.
Dominic: Now, let me provide more details around our financial highlights.
Dominic: Turning to our backlog reached $18 1 billion.
Dominic: Up 29%.
Dominic: Total cloud backlog for the year grew at 40% to $63 3 billion Euro.
Dominic: Cloud revenue grew 26% year on year supported by cloud revenue growth of 27% in Q4.
Dominic: Primarily driven again by the strong performance of cloud ERP suite.
Dominic: It actually had an impressive year demonstrating its role as sap's core driver of growth.
Dominic: With an increase of 34% in 2024 up from 33% in the prior year.
Dominic: Claudia P suite reached 84% of total cloud revenue in Q4, underscoring its growing contribution to our success.
Dominic: Software licenses revenue decreased by 21%.
Dominic: Finally total revenue for the full year exceeded 34 billion euro up 10%.
Dominic: This performance was mainly driven by strong growth in cloud revenue and resilience of our support business, reflecting the ongoing progress of our strategic pivot towards cloud based solutions.
Dominic: Now, let's take a brief look at our original performance.
Dominic: The full year, Germany, Spain, China, India, and Japan, all had outstanding performances in cloud revenue.
Canada in Saudi Arabia were particularly strong.
Dominic: Moving down the <unk>.
Dominic: Some statements.
Dominic: Non <unk> cloud gross margin for the full year continued its upward trend from last year and expanded by one four percentage points to 73, 3%.
Dominic: I think cloud gross profit up by 28%.
Dominic: In the fourth quarter and a lot of efforts operating profit was up 24%.
Dominic: Operating profit growth in Q4 was mainly driven by the strong performance in Sap's software licenses and support business as well as disciplined execution of the 2024 transformation program.
Dominic: For the fiscal year, we delivered outstanding operating profit growth of 26% year over year, reaching $8 2 billion Euro.
Dominic: I'm sorry.
Dominic: Sorry, I Everest effective tax rate for the full year was 34% and the non <unk> tax rate was 32% in line with what has been previously guided.
Dominic: Free cash flow for the full year was down 19% to $4 1 million euro exceeding the revised outlook range of three five to 4 billion Euro which both provided in the prior quarter.
Dominic: Recall that on top of payouts for restructuring of $2 5 billion Euro. We also absorbed opened 2 billion of cash out for compliance related settlement matters.
Dominic: And fully discontinued S&P triggered financing weighing with another couple of hundred million Euro on free cash flow.
The other hand, we received a couple of hundred million euros from customers for receivables due in 2025 before the turn of the year, which in combination with strong profitability enabled us to slightly exceed even the upper end of the previously guided range of three five to 4 billion Euro.
Dominic: Non <unk> basic earnings per share in fiscal year 'twenty four increased by 22% to four euro 53 cents.
Dominic: Now, let's move onto our outlook.
Dominic: As you've likely seen the quarterly statement published earlier today.
Dominic: We have provided this year's outlook.
Dominic: Years ago, S&P outlined bold long term goals to guide our transition towards cloud based solutions. Today, we are proud that this year's outlook solidly aligns with the ambitions. We set in 2020, demonstrating the progress we've made in executing our strategy.
Dominic: Before I move on I want to provide an update on our compensation metrics and foreign exchange hedging hedging strategy that we will adopt going forward.
Dominic: As of 2025, we will enhance our compensation framework by incorporating free cash flow as a metric alongside non <unk> operating profit.
Dominic: This will ensure heightened attention towards working capital and other drivers of free cash flow.
Dominic: Additionally to reduce foreign exchange related impact on free cash flow. We have further developed our hedging strategy in particular for the U S dollar.
Dominic: As a reminder, we currently provide all income statement kpis that are relevant for compensation purposes.
Dominic: Constant currency basis.
Dominic: Free cash flow, however has been and will continue to be provided on a nominal currency basis.
Dominic: The compensation of the relevant income statement Kpis. It does include the results from foreign exchange hedging.
Dominic: We continue implementing our hedging strategy with a lead time of up to a year to mitigate risks from U S dollar Euro exchange rate fluctuations.
Dominic: By aligning hedging instruments with a forecast of cash flow and maintaining a one to one hedge ratio where possible.
Dominic: We aim to reduce volatility and minimize the impact of exchange rate fluctuations on our free cash flow.
Dominic: This approach is largely completed by now and reflected in the free cash flow outlook, we have provided to date.
Dominic: So while the average exchange.
Dominic: Right for 'twenty to 'twenty, four and as a result constant currency exchange rate for 2025 underlying our outlook for income statement Kpis is 108.
Dominic: The spot rate today and at year end 2020 for relevant for PCB was 104.
Dominic: The forward rate of our hedge portfolio for free cash flow for 2025 seats logically in between at around one six.
Dominic: Now, let's quickly discuss our nonfinancial kpis.
In 2024, we continue to see strong uptake for S&P sustainability solutions portfolio with a robust growth of approximately 70% for our sustainability innovations.
Dominic: Q4 was a very successful, particularly in our M E and EMEA regions, including a key win with <unk> in Australia logistics automation company purchasing SAP sustainable control tower S sustainable footprint management, and S&P sustainability data exchange with substantial sustainability.
Dominic: Closure and carbon accounting, including supply chain engagement.
Dominic: Companies like club turning to S&P to be the foundation of their sustainability reporting.
Dominic: Regulations customer need for supply chain transparency and the ongoing convergence of sustainability and financial standards continue to drive and play to our strength globally, demonstrating sustainability as a core business and ERP requirement.
Dominic: Now in Q4, we released the highly anticipated S. A pea green ledger.
Dominic: Together with our sustainability portfolio capabilities, which provide data collection calculation and audit ability. The S&P Green lecher allows customers to sink emissions data with financial data for strategic and contextualized business decisions that are both financially and environmentally.
Dominic: We felt.
Dominic: This also helps companies fulfill our regulatory requirements.
Dominic: Okay.
Dominic: So in summary.
Dominic: We delivered on our key objectives for 2024, achieving strong top and bottom line results, while demonstrating resilience in a dynamic environment.
Dominic: Customers continue to choose our solutions to help transform their businesses into more intelligent sustainable enterprises as reflected in our cloud performance across all regions of the world.
Dominic: With our foundation now firmly established in 2025, we must remain vigilant in our executions to sustained growth and set the stage for long term success for years to come.
Dominic: This progress would not have been possible without the dedication and hard work of all people both of those who remain with us and those who have moved on with deeply appreciate their contributions to helping us navigate their transformational journey in this year.
Dominic: We remain optimistic about the opportunities ahead and.
Dominic: Confident that our commitment to innovation and disciplined operating strategy will continue to drive positive results.
Dominic: And we will now be happy to take your questions. Thank.
Speaker Change: Thank you Dominic and with that we will now take your questions I would like to kindly remind you to only ask one question when prompted operator. Please open the line.
Dominic: Ladies and gentlemen at this time, we will begin the question and answer session.
Dominic: Anyone who wishes to ask a question press star followed by one on their Touchtone telephone.
Dominic: If you are using speaker equipment today, please lift the handset before making your selection.
Dominic: Again anyone who has a question May press star followed by one at this time one moment for the first question. Please.
Speaker Change: My first question is from the line of Adam Wood with Morgan Stanley. Please go ahead.
Adam Wood: Hi, good morning, and congratulations on the excellent density, yes, maybe if I could ask just a little bit around C. C. B.
Adam Wood: Kind of stage of the upgrade cycle to that store in the base.
Adam Wood: Just in that context, we've obviously got very strong <unk> growth at the end of 'twenty, so without acceleration TCP accelerating but you're talking about a little bit of a slight deceleration on CCP for 25 could you just help us understand how much of that is just the fact that you cant keep accelerating number of ever bigger numbers and in that context give us a little bit of a sales way they install bases.
Adam Wood: In terms of the upgrades restful, how much up there is it still to do basically you know are we hitting the peak of that upgrade.
Adam Wood: And then S. Each or do you think there's actually a lot more to go for as you look out over the next few years. Thank you.
Speaker Change: Oh, Yeah, good morning, Adam and I can start and look at CCP. Indeed, we had a record Q4 exceeding all our expectations now for next year to give you a few installed base.
Speaker Change: We are roughly 40% of our customers are on the move with wise to our business suite in the cloud, 40% that doesn't mean, even that all of their landscapes are already in the cloud. So that contracts include significant wham towards delayed a year. So that gives us even the 40% who are on the.
Speaker Change: <unk> will also give us further acceleration in the in the years to come and then also when you look at coal I mean, we actually adding hundreds of net new names as I mentioned and also our win rates in the public cloud John when you look at the different lbs, and when weighed against the best of breed, it's going up because clearly.
Speaker Change: Clearly in our customers seeing hey, it's really about land expand and wanting my core business processes integrated end to end and of course, then with AI out of the box. So yes. The basis is getting bigger indeed, but when you look at the absolute growth. It's also further accelerating I mean, we are putting a ton of new business on top and also let's not forget it.
Speaker Change: At the certain point, it's also now important to drive adoption and our retention rates are getting better and better and so I feel the outlook is actually really ambitious also given honestly the macroeconomic environment and you see in the cloud revenue. There is no slowdown this is actually an acceleration so the two things coming together.
Speaker Change: Higher retention and higher adoption further acceleration of the customers who are already on the move to the cloud higher win rates in the different line of businesses. So Adam absolutely. We are very confident for the year ahead and honestly also for the year beyond the installed base look at the maintenance revenue number still gives us a lot of potential to move.
Speaker Change: Customers to the cloud and then again also not only upselling. These customers, but also cross selling as I mentioned.
Speaker Change: At one point there.
Speaker Change: If you look in the sell side estimates, we see that there is still a little bit of a kind of doubt in terms of our revenue acceleration thesis through 'twenty seven.
Speaker Change: And what I encourage you to do is to kind of back solve how much TCP can actually decelerate.
Speaker Change: Before you would cut of luxury that acceleration to consolidated revenue. So the mix factor I'd say at the sweet spot of the revenue mix play, giving us a boost on total revenues.
Speaker Change: And so there's this kind of slight deceleration you have guided here.
Speaker Change: Is actually.
Speaker Change: Probably much better than what is embarked in in some of the models, we see on the sell side. These days.
Speaker Change: And maybe one one piece to add I mentioned, two large energy companies, but we also signed up for many many automotive so that's a given they are not in a good position right now given all the concerns which are existing in this industry, but still they're shifting maybe now the first.
Speaker Change: Part or maybe one third of the landscape to the cloud, but then really focusing on that as the value at they are not only lifting and shifting to a cloud infrastructure. We are intensively working now on process simplification they need to one new business module and then you'll give them a year or two and then they will actually sign another contract. So Adam it's also a.
Speaker Change: Facing.
Speaker Change: We wanna be reasonable in our outlook. How we also reflected phasing of these wireless deals because customers need time, I mean changing business models, it's not only a technological move it's about change management at sometimes I have seen this for years ago also.
Speaker Change: Breaking the balls.
Speaker Change: There is some change the systems, but cloud software need simplification, we moved to a new technological architecture with PDP. So let's also give the customer some time, but there is enough potential also in the installed base left.
Speaker Change: The next question is from the line of Jack Sennott with Keybanc capital markets.
Speaker Change: Please go ahead.
Speaker Change: Great.
Speaker Change: Thanks for taking our questions guys R.
Our questions around migrations in 2025, so if we expect some.
Speaker Change: Of the CCP, the slow down a little bit and our cloud revenue growth to accelerate overall revenue growth to accelerate I'm curious what should be the expectation for support revenue in 2025 as you continue to drive more of those migrations in the coming year and how that flows into.
Speaker Change: Cloud revenue as well thank you.
Speaker Change: Yeah. It's a very good question and it gives me an opportunity also to comment on what looks to be a slightly odd Q4 will actually increase and maintenance. This is certainly not a trend. It is simply related to the fact that actually we caught up on some revenues we carved our previously because to our financials.
The stress of a larger customer that had a financial restructuring and then we could re embarked these revenues while in Q4 of the prior year there were actually some compliance related costs or maintenance revenues and that made the whole thing flip if you deep polluted for that you'll see it's a very steady slight decline and as previously guided no change to that we will see a graph.
Speaker Change: Decline, obviously slightly higher than anticipated license revenues indicate that also maintenance revenues have a little bit of a longer life.
Speaker Change: So, but overall, we would not deviate from that hypothesis.
Speaker Change: Slight acceleration over the coming years in maintenance revenues, but don't expect the complete collapse and again. The good news is we have a gradual roll over from the maintenance space into cloud revenues.
Speaker Change: And maybe just to build on that sometimes the weldment geopolitical tensions increase the customers already see again, even more well you are coming also back to ACP. So ICP support I mean, given legal and regulation support in over 130 countries, It's a real asset.
Speaker Change: I mean, the same it's also what we see now in the cloud if customers want to expand their business. They need localization. So it's a real asset. So that's why you also see this very high retention rate on support revenue and also with the move now that we allow our customers to move to the cloud and while they have 100 ERP format.
Speaker Change: The P&A need time to consolidate we offer them now to replace some third party assets in the stack and to really allow them to continue to our transformation, while not getting hit by the end of men and end of maintenance, which will stay in place of course that of course is even these more.
Speaker Change: To come back to ACP and allow you know and see really to create them.
Speaker Change: Value of SVP support.
Speaker Change: The next question is from the line of Johan.
Speaker Change: Deutsche Bank. Please go ahead.
Speaker Change: Yeah. Thanks. Good morning, Thanks for taking my question Christian I think you'd probably just touched on this topic and your last remark, but there's obviously been a bit of press coverage around potentially extended maintenance I think some people, suggesting 23.
Speaker Change: Three is the new 2030, which is clearly not the case, but can you maybe help us a little bit more with some detail understanding what's the reasoning behind this SAP ERP private Additionally option and what is generally going on in the installed base. I mean is this really what some of your larger.
Speaker Change: Legacy customers needed to get them kind of over the life and the size of some of these deals or is it really that you maybe not seeing the kind of momentum with some customers that you were hoping thank you.
Speaker Change: Yeah happy to answer that question Johan I think look I mean, as I mentioned some of our customers have.
Speaker Change: Oh, 100, Erp's I mean, they're wanting factories manufacturing and logistics with that and now the end of maintenance by 2027 will not be changed we will stick to that but you also have to consider in some parts of the stack.
Speaker Change: They are third party components included and they are wanting out of maintenance as well. So we don't want to leave the customers behind and you know as we moved all of our cloud solutions already on our cloud. We do now the same with these on premise customers, we move them to the cloud we replaced the third party component.
Speaker Change: And with that we can also you know one in the cloud.
Speaker Change: They are 100 ERP is now in a in a complete sustainable and supported way and that is about this offering it's actually four.
Speaker Change: A few large customers, who will not making the time, because again to transform and consolidate ERP and business processes and over 100 countries is sometimes not that easy and that is what is offering its about so it's not about the extension of unplanned maintenance and clearly we see the acceleration in the <unk>.
Speaker Change: But it's really you know reaching out with them, helping hand to a very few large customers who need this offering to fully transform and my equate to the cloud. This is what this offering is about.
Speaker Change: The next question is from the line of Mohammed <unk> with Goldman Sachs. Please go ahead.
Mohammed: Alright, Thank you morning, Dominic good morning Christian.
Speaker Change: I Wonder if you could just clarify the thought process around some of the moving parts on the FY 'twenty five outlook.
Speaker Change: Obviously, you raised your EBIT guidance, but I know those are definitely shouldn't change on the free cash flow I know what the tax rates also gone up a little bit.
Speaker Change: And there's more restructuring.
Speaker Change: Has anything else changed just to kind of bridge the gap.
Speaker Change: In terms of assumptions around working capital.
Speaker Change: And what are the plans in terms of the impact you expect on that over the next couple of years. Thank you.
Speaker Change: Yeah, I mean, working capital is always extremely hard to predict around the turn of the year.
Speaker Change: And you might receive some payments you didn't expect.
Speaker Change: Or take the massive.
The performance we had in Q4, new bookings, we recall that we are also offering transformation credits to customers to incentivize them and help them with the transformation period, which is actually creating some upfront cash out relatively to the phasing of the profit in these customers and all of that taken together has resulted in the.
Speaker Change: Yeah outlook, we have given that you've seen that we have kind of pulled in some cash in 2024. So we were we were ahead of plan and 23 four.
Speaker Change: And then obviously like money you received early you won't receive any more than 25 on the other hand, we also operationally make good progress I think it's interesting to look.
Speaker Change: Looking to our cash flow statement, it's page 14 of the quarterly statement and you'll see some promising signs for instance, trade receivables increased under proportionate lethal the cash out is lower than in the prior year. Despite the fact that we had the <unk>.
Speaker Change: Normalization of these vendor financing things so that should actually increase in accounts receivable.
You'll see that we are quite disciplined in another extremely important topic for cash conversion is actually stock based compensation and it was a little bit strange in 2024, because we had this huge increase in the share price and we still had quite some cash settled units.
Speaker Change: Which are partially also paid out in 2025, and what I can tell you on that one because again you look at the cash flow statement and you'll see share based compensation in the P&L was $2 4 billion.
Speaker Change: Which frankly.
Speaker Change: Is higher than what we thought because of the strong share price increase you'll recall that for 2020, we actually said it should be more about $2 billion, sorry for 2025, which would be more about $2 billion. When we adjusted for inclusion of stock based compensation, where most of the couple of quarters ago, a year ago almost.
Speaker Change: And we had $2 2 billion in 'twenty three we said it will transition to $2 billion for because of the huge increase in share price, but we continue to believe that the P&L impact of stock based compensation will go down but once he has this.
Speaker Change: We reduced from share price moves.
And.
Speaker Change: Then the cash out is much smaller of course, so you'll see $1 3 billion in the statement both in 2023 and 'twenty 'twenty four there was a $1 1 billion.
Speaker Change: Positive from conversion of stock based comp, which is simply the equity settled part and that is a number I can tell you will be quite similar next year. So as you strongly reduced stock based compensation that reduction will then if the delta is the same could very much the cash flow. So all these things need to be taken to account our embarked here and.
Speaker Change: Yeah, I agree its not not straightforward, but I encourage you to look at cash conversion and look at basic.
Speaker Change: Basically the deep diluted free cash flow, if we add back restructuring we add back the compliance charges. We add back. The factory. These are the three factors I would always kind of alstom depollute to come with an underlying cash conversion number and then on stock based compensation I gave you. The hints how this will evolve and we can also go in more details offline.
Speaker Change: About that and.
Speaker Change: That number is a very high number honestly, if you think about EBIT tax affected you will see that we actually currently running better.
Speaker Change: And that is also because of the catch up we have on some of the working capital items.
Speaker Change: And we will need to continue to grind on that to really keep that extremely good cash conversion that we had in both 24 and it's actually also applied for 'twenty one.
Speaker Change: The next question comes from the line of Mark with Barclays. Please go ahead.
Mark: Great. Good morning, Thanks for taking the questions and congratulations on the strong quarter.
Mark: And if you look back to 2024, South coffee added about $3 5 billion euros can you guys give us just a rough indication of how this breaks down into maintenance conversion to up and cross selling as well as.
Mark: Yourself and then maybe how you see this evolve into 2025. Thank you.
Yes.
Let me share.
Get more insights about how of course, we closed cloud or cloud order entry and then how this translates into CCP and when you look at Q4 of course by far our biggest quarter on.
Mark: I have to say really a record quarter.
Mark:
Mark: 60% roughly from the cloud order entry comes from.
Mark: I based customers moving to the cloud then you get another 30% on net new.
Mark: Lastly, our 10% about upselling into the existing installed base. So youll see the mix in my eyes is actually really healthy and for me you know next to the strong move of the installed base, which still as I mentioned before it has a lot of potential for the years to come for me even more important is of course the net new.
Mark: Because that is what has really been you know, adding completely incremental business on top which then also gives US you know to Kuwait.
Mark: A performance on total revenue now on maintenance conversions.
Mark: We always have these multiples that developed in Q4 also extremely well actually we have a multiple of slightly roundabouts, we ask which is very strong given also and you can see that in our cloud cloud cost margins I mean, we clearly did our homework there both for the private cloud into the public cloud business.
Mark: The expansion of the gross margins is very strong and I have to say looking at our plans for the year to add and everything what you see you saw yesterday the cost reduction on large language modules and other things we are trying to get down to T. C. O in our cloud operations gives us actually also the potential to further reduce.
Mark: <unk> Tcl and lift it also expands our very healthy cloud gross margin in the years to come.
The next question comes from the line of Toby Ogg with J P. Morgan. Please go ahead.
Toby Ogg: Yeah, Hi morning, and thanks for the question, perhaps just on on AI could you give us an update just on how July is tracking in terms of adoption you know, whether you're actually seeing any revenue generation yet from the monetization of June and then just how we should think about the timeline for potential contribution to revenue growth.
Mark: From the monetization of Juul and agents. Thank you.
Mark: Yeah, and I can actually share with you a story from yesterday, where we had the CFO of big large German company here with us in our headquarter and we looked at and <unk> were to list. The so called Orca play.
Mark: Sure you know what is coming in 2025 and we shared.
Mark: Example.
Mark: To improve cash collection and what we did is actually we looked into some delayed payments in the life system of the customer we actually showed them what are the reasons to will actually showed what are the reasons for the delay is just logistics is it a supply or is it actually some issues that are in the delivery or is it commercial.
Mark: Issue and then you saw our jewel was reaching out to the different agents on looks on the logistical side on the procurement side supply chain on the sales side and was really able to handle to pull in a dispute and really helping to resolve the case fully automated still of course, a human being sitting atop the note sale.
Speaker Change: Yes, I wanted to have two created this disputed that way, we should reach out to the customer in that way. We showed a copilot an equation to very deep. So you can put it in the mail.
Speaker Change: <unk> pre scripted and then actually you know the human being sits there and you can look at it how tool is orchestrating the whole process of course with different options under white outcomes, meaning and improved cash flow and this is you know.
Speaker Change: When I look at that I can only say, what we did with fill it with the team to really not focus so much on the large language models that we are partnering we are super agnostic and given yesterday I mean this is super good news for us, but really focusing our R&D our innovation on building the strongest AI foundation for businesses, meaning understanding of <unk>.
Speaker Change: MS data contextualized business data I mean this is when I have seen this yesterday for me. This was absolutely the right strategy now talking numbers I mean, you have seen 50% of the deals.
Speaker Change: In Q4 were driven by AI and Trust me on one thing given also my other role in sales I mean, it was not only one factor it was in my eyes defect.
Our value engineers could go in and so the automation the productivity in various functions of the company also showing what you can do with two less than new UX and so that was really for us. The key driver of our Q4 order entry and yes, given that we actually always started with a concern.
Speaker Change: <unk> based commercial module I mean of course adoption is key from day. One on also a good decision and now we are seeing how this significant order entry also two of them by tool and business. AI is also turning into revenue, we see oftentimes, let us give us a three months delay between.
Speaker Change: Signing and then the go live of the first AI use cases, and then the revenue is tweak owing and again, it's already very healthy and fast growing business.
Speaker Change: The next question comes from the line of Rodrigo <unk> with Bank of America. Please go ahead.
Speaker Change: Hey, good morning can we spend a moment on the cost side, maybe she can share a bit your.
How are you kind of go to market strategy is evolving and when you look at the.
Speaker Change: The main cost levers beyond 2025 can you guidance for this year implies a still very disciplined cost gross.
Speaker Change: <unk> versus revenue growth, so definitely less than the 80% to 90% you were alluding to before so can you shed a little bit because of moving to call. It beyond.
Speaker Change: Beyond 'twenty five in terms of our go to market and overall efficiency of the business. Thank you.
Speaker Change: Yeah, I mean coming out of the kick off beginning of this year I have to say in the transformation of our go to market function is in full swing just to illustrate on.
Speaker Change: Well, what we are working on.
Speaker Change: First the ecosystem is.
Speaker Change: Also now even more excited about <unk> potential with SAP <unk>.
Speaker Change: Signing them now partner led territories, so they get that dedicated territories to quote business to invest into S&P. They also very much like the fact that they can sell with SVP of Sweet answer the same like we do land and expand and so they see big growth potential and of course further investing into <unk>.
Speaker Change: And for Us that gives us scale pure efficiency I mean, we actually have enormous growth plan for the channel in 2025, given all the changes we are doing and then on the direct sales side I mean, we want to be much more disciplined around the number of calls we are having around you know the commissions, we pay and so we are rolling.
Speaker Change: This out the change management is in full swing. It will also give us even honestly some efficiencies beyond 2025. So that is in is in full swing and maybe Dominic you can comment on the overall cost side.
Speaker Change: The good news is we are derisking the cost base.
Speaker Change: He is also a big role as Christian has been explained from yes from the guidance you've kept them from US you can see that you are doing better in the bridge from 2024 to 2025, then the 80% to 90% benchmark in logic, we have applied.
Speaker Change: I think for the years beyond 'twenty five 'twenty six 'twenty seven it is still good.
Speaker Change: Yeah measurement to stay in that ballpark, we should end up and this gives US then by virtue of the acceleration in the topline. We had also indicated a good expansion opportunity.
Speaker Change: For further improving the free cash flow and then also.
Speaker Change: The combination of cash flow margin growth and then the revenue growth at.
Speaker Change: Both of course, what we called the rule of 40 performance of the company.
Speaker Change: The next question is from the line of Mark <unk> with Bernstein. Please go ahead.
Speaker Change: Thank you very much and congratulations on the quarter.
Speaker Change: Dominic you've been hyper focused on driving efficiency and improving margins, while driving growth in the business with the internal implementations of AI can you discuss exactly how you see that translating is it purely going to drive.
Speaker Change: Margins you talked about for what could be a half a billion dollars of improvement do you see that dropping to the bottom line do you see that as investing do you also see the efficiency, you're you're dealing within sales in other parts of it being able to accelerate our revenue growth and revenue growth per sales person. Thank you.
Speaker Change: Now of course, these kpis and need to improve going forward otherwise the ratio of selling expenses to revenues can improve.
Speaker Change: As we grow the base.
Speaker Change: The incremental bookings we need are growing so it's a mathematical necessity that the answer to your question is yes.
Speaker Change: I would say we are very firmly on plan our confidence level on these initiatives is significant.
Speaker Change: I'd say the organizational changes that Christian has highlighted to consolidate all the operations functions in one cluster under the bus there steinhauser was exactly the right move to do to really come to end to end process optimization.
Speaker Change: And that gives us the confidence because we have the visibility now of where the building blocks are where the kind of also impediments lie we need to eliminate them.
Speaker Change: But again I think from a financial modeling point of view.
Speaker Change: We still want to preserve the capability to also invest in our growth and keep both the growth.
Speaker Change: Investment and the efficiency in sync.
Speaker Change: At $80 to 90% leverage I'd say operating leverage in a certain way for <unk>.
Speaker Change: <unk> thousand 697 is still a good yardstick.
Speaker Change: And I have to say cost dominated is laser focused on efficiency cash flow conversion, but also the CEO with of course in our focus to make S&P more efficient, but I have to say, so kudos to Dominique Ciena Muhammad and all the other.
Speaker Change: When you look back one year ago, when we did our head count planning for the year I mean, all of US now committed because of AI on a completely under proportional head count growth I mean, a year ago. The head count asking the commercial deal support was up to the roof. Yet because we are closing a lot of new business now behalf we have.
Speaker Change: AI capabilities to ask tool and a lot of the contract checking that aflac checks. The compliance check has been taken over by and you see this in cloud delivery you see this in R&D with tool for developers and also the board colleagues I know, it's not only like pulling out an AI use case and see here are the efficiencies it's about change management.
Speaker Change: Also about explaining to people what these technologies can do because it's changing also chops, but I have to say looking also at the plan for this year now I mean, we are growing so much under proportionally in many functions of the company also because of AI.
Michael <unk>: The next question is from the line of Michael <unk> with UBS. Please go ahead.
Speaker Change: Yes, good morning.
Just a clarification on the comments around maintenance.
Speaker Change: Are you not then making this extended maintenance 2030.
Speaker Change: 33 opened to all customers. It just a handful of sort of especially collected one and I'm just curious on licenses.
Speaker Change: Another good quarter, but what is the thinking about potentially taking that option off the price list.
Speaker Change: Maybe maybe for public sector and a few sectors, it's still relevant but for the general customer base and Dominic can you quickly just clarify what you mean by deceleration of its 100.
Speaker Change: Basis points 200 basis points.
Speaker Change: Thank you.
Speaker Change: I can take the.
The maintenance question and look I mean first.
Christian Klein: We are legally of course, we will opening up this offering to all of our customers, but who does really needed is really a few large customers who really ask Christian.
Speaker Change: Christian and team we have all of these ERP.
Speaker Change: We are already on the move by the way I mean, many of them, they're just saying Hey, I can do you know North America. This year I can do EMEA next year, but give us. Some time also for a P. J before maintenance is wanting our let's say, okay, let's move to the cloud we replaced the third party components in your stack. So that you can still.
Speaker Change: One our comp line business in which we and that we can support the end to end stack. This is what this offering is about and of course, it's available to all customers, but while the move is working so well I mean, if very few large customers, which I expect will make use of this offering which is great. Because we are showing we are seeking to them.
Speaker Change: Hey, we got to take you with US on this journey, we are not leaving someone behind and you are focused on your transformation doing the right things for your business. While we are making sure that you can still wanting a compliant and supported landscape also going forward in the cloud.
Speaker Change: The amount of the slight deceleration on CCP I don't want to give you precise numbers, but what I can say is what I've into two before.
Speaker Change: Is this statement we make this growth ambition, we express that through 2027, we want to see total revenues accelerate though.
How the game from CCP to cloud revenues works and you can make some educated assumptions about maintenance and license revenues going forward and services kind of that low growth rates, you've seen very low growth rate this year.
Speaker Change: And then you can back solve how much deceleration can be actually afford to come to kind of a steady growth rate. So proud about what we guided I think it's about 11% at the midpoint, we guided for 25.
Speaker Change: And of course, the deceleration lies somewhere in between because on the one hand, it will be slower than what we have today and also don't forget there is still a little bit of a positive impact from the first time inclusion of walk me in the 2009 numbers. So that's the more technical aspects of that so that one you can intellectually take out because as soon as we have the kind of comparable to the prior.
Speaker Change: The year, including walk me, it's gone and then there's a slight deceleration which is kind of in between that kind of.
Speaker Change: Deceleration you would need to see to not see the revenues on group revenues accelerated by more than 11% and where we sit as of the end of the year. So that ballpark gives you a little bit of a feeling where that might end up.
Speaker Change: Thank you very much Dominic and this concludes our call for today. Thank you all for joining us.
Speaker Change: Thanks drew.
Speaker Change: Ladies and gentlemen, the conference has now concluded and you may disconnect. Your telephone. Thank you for joining and have a pleasant day goodbye.
Speaker Change: [music].
Speaker Change: Yeah.
Speaker Change: Okay.
Speaker Change: [music].