Q1 2025 SAP SE Earnings Call
Right.
During this call we will make forward looking statements, which are predictions projections or other statements about future events.
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 maturity.
Additional information regarding these risks and uncertainties, maybe 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 2024.
Unless otherwise stated all numbers on this call are non IRS and growth rates and percentage point changes are non I for us year on year at constant currencies.
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 IRS.
Before we begin I'd like to call your attention to our upcoming financial Analyst Conference, which will take place on May 21st is power of our separate event in Orlando, Florida, If you're interested in joining us in person. Please reach out to our Investor relations team for more information for those who cannot attend onsite it livestream will be provided.
Kristian: Website and with that over to you Kristian.
Kristian: Thanks, Alexandra and a warm welcome to everyone on the line.
Kristian: Q1 was a very fast pace start to the year given the macroeconomic environment.
Kristian: Happy to say that if it did really well in the quarter.
Kristian: Thanks to our transformation and C P and at the Cowen Phase off the wall to Konami was queda resilient than.
Kristian: Than ever.
Kristian: Our current backlog expanded 29% to $18 2 billion in Q1.
Kristian: Our quarterly cloud, where I mean, you. It's now close to the 5 billion Mark showing a 26% increase.
Kristian: Overall, the share of more predictable revenue is now at 86%.
Kristian: Our very large cloud backlog and higher coatings revenue share with BD Foundation for double digit total revenue growth in 2025 and for many years to come.
Kristian: Operating profit was up 58% in Q1, and our stellar cloud Cross-match, an impulse buy two six percentage points to 75%.
Kristian: Thanks to the diligent execution of every piece of information.
Kristian: But waiting profit will quote double digit in 2025 and the years to come.
Kristian: Just last week, IDC, and Gartner released newly port underlining our market momentum.
Kristian: D. C is update on software market share for the full year 2024 confirms S&P as the worldwide number one enterprise application software window spanning cloud. According to IDC is C. P experienced the strongest year over year close among the top 10 enterprise application soft company.
Kristian: Asphalt Gardner.
Kristian: Ww Enterprise software report S&P is the number one by revenue in 2024 for overall ERP.
Kristian: Of course, no one can really predict how the global economy will develop throughout 2025.
Kristian: Without any doubt.
Kristian: The market remains high.
Kristian: However, several factors make us confident today S&P remains on track towards our 2025 outlook ranges.
Kristian: First <unk>.
Speaker Change: Chuck mentioned, Sep's highly resilient business and financial module and our excellent market position second.
Kristian: Our pipeline for the year continues to look very solid.
Kristian: No other tech company can offer a solution portfolio, which is more shallow and in times of new regulations tariffs and business uncertainty.
Kristian: Our globalization team localized with S&P's portfolio, including solutions like Global trade services management that enables our.
Kristian: Our customers to manage and with single global transaction in real time and fully compliant in a 130 countries.
Kristian: To steer the company through uncertain times, our customers can one real time financial simulations based on internal and external data with S&P business data cloud.
To adapt the company's business plan to new market realities, S&P's analytics cloud and IPP integrate in real time sales supply chain HR spend and financial planning with each other to make cost company decisions fast and in harmony.
Kristian: And finally across our portfolio embedded AI and shore up boosting the productivity of our company to offset the financial pressure.
Kristian: Net net this means sep's portfolio is highly relevant.
Kristian: The comp change external uncertainty, but we can help our customers like no other company to manage those challenges combined with high agility and empowered by AI.
Kristian: Now, let me share a quick summary of the quarter.
Kristian: To pick up on the line one small piece grows formalized solid we have done our homework and we benefit from that.
Kristian: Current cloud backlog kept quality and with a very high pace in Q1.
Kristian: Revenue continued to grow strongly even after base has expanded.
Kristian: Total revenue for us move further into double digit territory operating profit operating margin and cloud cost margin performance has and will heavily benefit from our transformation program and again about half of our cloud order entry where deals that included AI use cases.
The deals in Q1 of our compelling insights into how customers and navigating the current business environment.
Kristian: Let me start with an impressive series of major deals in the automotive sector. As you know the car industry is undergoing an extensive transformation new business modules and competitors that matching cost pressure is increasing sustainability continues to be a challenge and that's the need to adapt to.
Kristian: The change in global trade system, including tariffs.
Speaker Change: How does the industry deal with these challenges.
Speaker Change: As our customer wins indicate auto companies rely on Sap's industry best practices solutions and tools to transform the value chains by employee thing to cloud and AI.
Speaker Change: In Q4, as you'll remember, but Boston Shephelah signed up for the wider Chinese and Molla wildlife.
Speaker Change: Now in Q1 order from the who's who in the industry trying to wax.
Speaker Change: Kiosks.
Martha: And Martha as well as the automotive supplier with BASCO.
Martha: Customers in other sectors rely as well on Sap's business transformation offering wise in.
Martha: In Q1 boss Tyson foods, and the Chemical Corp, Science, co and Japan right away.
Martha: In the public sector, the chairman Federal employment agency, putting to talking to you all but as well as the police force in the state of Penguin bag decided to put that trusted S&P solutions and so on cloud technology.
Martha: For our customers on their wives Chinese we have been accelerating time to value, while reducing the implementation costs of SAP <unk> project.
Martha: With excellent AI tools, such as true for developer tool for consultants and business transformation tools, Lexington, Aveo, <unk> X and walk me.
Martha: Therefore with S&P.
Martha: <unk> of our deals in Q1 were net new customers, which underlines the attractiveness of our offering for fast growing companies in the mid market. One example, if Jim shock a fitness plan who selected us.
Martha: A competitor.
Martha: Convinced them to choose Asap, what's the scalability and functionality of our suite offering as well as our industry specific solutions for retail.
Martha: Other examples include a sustainable steel companies stay car as well as <unk>, a global provider of visa application services selecting our end to end business suite applications.
Martha: Finally, some tier one customer examples from our lines of businesses and supply chain management. We won key on Corp, a global leader in supply chain and logistic solutions Human capital management, we want to travel company Bouquet and Oxford services, the largest electricity provider in Switzerland went live from Successfactors.
Martha: Business networks, we wanted to media company time, Scoop, India, and the mining firm amount of minerals.
Martha: And the chocolate company Altra Davita AUM to the famous 400 sport celebrated a go live in our network.
Martha: Last but not least Beth F coatings went live in Q1 on our sustainability portfolio.
Martha: All of these customer stories show, how we are winning with our module business suite and our transformation offerings wise and claw with S&P, capturing OE customer size and industry.
Let me now summarize what happened in Q1 in terms of product innovation commercials and simplification.
Martha: First let me start with product innovation in.
Martha: In February we presented one of S&P's, most exciting innovations ever and the greatest opportunities since wise.
Martha: Business data cloud.
Martha: It's a state of cloud if the new center of gravity for business data, it's unifies and galvan for all data alone.
Martha: SAP structure and unstructured.
Martha: It builds a strong semantic layer with the context connections and meaning of data.
Martha: And thanks to our new partnership with data bricks business data cloud will become the number one offering into data analytics market.
Martha: Thanks to the business data cloud strong value proposition pipeline for the coming quarters is building up very nicely in Q1 alone. We closed 20 deals, including key envelope will allow embark the pharma company filing and the metals manufacturer chip now.
Martha: Business data cloud, it's not only one quaking in how it brings together data.
Martha: It's also a pillar for high performing end to end AI agents why.
Martha: <unk>.
Martha: Because it takes sweet thing to build truly powerful AI agents first access to a harmonized data layer with strong semantics.
Martha: Sap's business data cloud second.
Speaker Change: <unk> tying on the best Shanghai modules and technologies that is S&P business AI.
Martha: Ed.
Martha: Fully integrated applications. So agents can core business processes end to end.
Martha: That is our Asap business suite.
Martha: S&P is the only company to have all three of these pillars in place.
Martha: And that puts us in a unique and very strong position to win India churn take AI space.
Martha: When we work with customers AI adoption is more than a one time event its a journey.
Martha: Take for example standard chartered bank. They went live with our first AI use cases in Successfactors. They then released tool to over 80000 employees on a level, which is the churn AI hub.
Martha: With all our customers, we systematically twice adoption.
Martha: First implementations of use cases, all the way through to attending AI.
Martha: At Sapphire, we all make exciting announcements about our AI capabilities.
Martha: Continuing now on the topic of innovation, we are also evolving our commercials.
Martha: We updated our rights offering with enhanced packages. They now include the solutions for business transformation management solutions, well integrated into our business, we'd portfolio to accelerate time to value and cap S&P polshek costs.
Martha: And with the flexible cloud addendum, we make it easier for customers to switch from private to public cloud within the existing contract.
Martha: Besides innovation, we continue to focus on our own productivity in this turbulent times and we are transforming the company along the way.
Martha: We are fully on track to deliver the internal AI efficiencies for this year.
Let me share some examples with you.
Martha: Our consultant save up to 90 minutes per day with tool for consults tool helps them for instance to find and use best practices analyze unfamiliar coat and they went sub optimal design and implementation islands.
Martha: And with AI tools, such as tool for developers our COO.
Martha: <unk>, a 30% more productive accelerating our innovation pace.
Martha: Finally in addition to the internal use of AI, we are rolling out standardized and automated cloud contract starting this quarter, reducing the time from quote to provisioning system to under 24 hours.
Martha: All in all our productivity gains help us to decouple topline growth and cost.
Martha: They also give us flexibility to higher less than originally planned.
Martha: And when we hire we can focus on close areas with targeted charter profile for example in AI.
Martha: Now let me conclude we delivered a strong Q1.
Martha: Customer seek our advice and solutions and uncertain times.
Martha: And we have laid a very strong foundation for a resilient company and we will continue to do so through product innovation simplification and an even better go to market setup.
Martha: It is difficult to make projections for the entire year.
Martha: But all the aspects I just mentioned make us confident for the longer term we.
Martha: We are in the right place we are doing the right things and this will pay off.
Martha: At Sapphire in May we will go deeper into these areas and look at the next chapters of Sap's growth story.
Martha: I would be delighted to see you all there and with that.
Speaker Change: What do you Dominik.
Dominik: Thank you very much Christian and thank you all for joining us this evening.
Speaker Change: We kicked off 2025 on a high note.
Speaker Change: And by the continued acceleration of total revenue and a whopping increase in operating profit in the first quarter.
Speaker Change: Our current cloud backlog remains healthy despite the volatile and challenging macro environment.
Speaker Change: This performance reflects the strength of our strategy the momentum of the cloud ERP suite and the impact of our strict cost discipline, which windows, our profitability and free cash flow more resilient.
Speaker Change: With the 2024 transformation program now concluded.
Speaker Change: Well positioned to execute on our priorities this year.
Speaker Change: Including focused investments as we expand our suite first AI first approach throughout our portfolio.
Speaker Change: Across industries and organizations of all sizes.
Speaker Change: The world's largest enterprises to growing businesses looking to scale quickly.
Speaker Change: To see higher customer engagement as companies turn to us for end to end business transformation.
Speaker Change: Now, let me provide more details around our financial highlights.
Speaker Change: Tower cloud backlog reached $18 2 billion up 29%.
Speaker Change: Cloud revenue grew by 26% year on year supported by the strong performance of the cloud ERP suite.
Which maintained its high growth momentum with a 33% increase in Q1.
Speaker Change: It accounted for 85% of total cloud revenue in the first quarter underlying its strengthening position as a key contributor to our growth.
Speaker Change: As cloud bookings were again very back end loaded in the fourth quarter of last year.
Speaker Change: <unk> contracts, which entered council backlog as of year end 2024, the provision or the later during the first quarter. So they will only be visible in cloud revenues for full quarter in Q2.
Speaker Change: The deterioration in macroeconomic conditions.
Speaker Change: Q2 way on transactional cloud driven.
Speaker Change: Software licenses turned out to be surprisingly resilient and decreased by only 10%.
Speaker Change: But given that Q1 tends to be a small quarter for software licenses.
Speaker Change: Caution you not to extrapolate too much from that.
Speaker Change: Finally total revenue came in at 9 billion up 11%.
Speaker Change: So now let's take a brief look at our regional performance in the first quarter Sap's cloud revenue performance was particularly strong in APG and EMEA.
Speaker Change: And robust in the Americas region.
Speaker Change: <unk>, Chile, Germany, Italy, South Korea, and Spain had outstanding performances, while Canada, China, France, Japan, Singapore, and the U S were particularly strong.
Speaker Change: Now moving down the income statement.
Speaker Change: Our non <unk> cloud gross margin for the quarter continued its upward trend and expand by two six percentage points to 75% driving cloud gross profit up by 30%.
Speaker Change: <unk> operating profit increased to $2 3 billion euros in the quarter positively impacted by a restructuring expense decline.
Speaker Change: $2 2 billion.
Speaker Change: In the context of the 2020 for transformation program.
Speaker Change: In the first quarter Nana first opening profit was up 58% to $2 5 billion euros way above the 26% to 30% growth rate guidance for the full fiscal year 2025.
Speaker Change: Heidi welcome head start to Derisk, our bottom line guidance in times of environment, which I Trust you would all agree has becomes much more risky.
Speaker Change: Both <unk> and non <unk> operating profit growth benefited from the operational efficiencies realized through successful execution of the 2024 transformation cocoa.
Speaker Change: The <unk> effective tax rate in Q1 was 27, 2% and non <unk> tax rate was 29, 4%.
Speaker Change: Operating cash flow in the first quarter was up by 31% to $3 8 billion euros and free cash flow increased by 36% to $3 6 billion euros.
Speaker Change: The increase was mainly attributable to the higher operating profit.
Speaker Change: Finally basic.
Earnings per share increased to 150, 52%.
Speaker Change: Non <unk> earnings per share increased to one Europe 44 cents.
Speaker Change: So moving on to the outlook.
As you've likely seen in our quarterly statement published a little bit earlier today.
Speaker Change: We decided to leave our 2025 outlook across all metrics unchanged.
Speaker Change: While our pipeline remains healthy conversion rates could be negatively affected by a further deceleration of current trade disputes needless to say that the rapid unwinding of the cadence of productivity gains.
Speaker Change: Given by the benefits of globalization in the context of an escalating trade war.
Speaker Change: Would likely result in a severe global recession.
Speaker Change: I want to stress that our outlook is not based on such an adverse scenario, but rather assumes conversion rates consistent with prior quarters and years.
Speaker Change: In light of the risk of escalation, we remain fully focused on disciplined execution and safeguarding both our bottom line and free cash flow, but prudent cost management and other elements within our control.
Speaker Change: In summary Q.
Q1 reflects a strong start to the year highlighted by continued total revenue acceleration and standout profitability.
Speaker Change: The momentum we continue to see the cloud ERP suite provides a certain degree of visibility and reinforces our confidence in <unk> long term success.
Speaker Change: As macro uncertainty persists, we are more focused than ever on disciplined execution protecting our bottom line and free cash flow throughout the remainder of the year.
Before we move onto the Q&A I would like to say that we are very much looking forward to welcoming as many of you as possible to our financial analyst conference in May.
Alexandra: As Alexandra mentioned already interest into it will take place again in conjunction with Sofia in Orlando.
As a unique opportunity to do some serious tire kicking of our solution portfolio and ecosystem and the team and I are very much looking forward to meeting you there in person.
Speaker Change: Alright, Thank you Dominic and with that we will now take your questions.
Speaker Change: Like to kindly remind you to only ask one question when prompted operator, 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 May press star followed by one on their Touchtone telephone.
Speaker Change: If you are using speaker equipment today, please lift the handset before making your selection.
Speaker Change: Again anyone who ask a question May press star followed by one at this time one moment for the first question. Please.
The first question is from the line of Michael <unk> with UBS.
Speaker Change: Your line is now I guess I'll stop.
Speaker Change: Thank you.
Speaker Change: I'll start with a question on <unk>.
Speaker Change: And sort of current trading.
Speaker Change: Some other companies have talked about.
Speaker Change: Disruption at the end of the quarter, obviously vanilli through April as well.
Speaker Change: Said Youre assumption is.
Speaker Change: Historical close rates continue.
Speaker Change: That valid given what you've seen in the last few weeks I know you called out deal Tonight are examples of our.
Speaker Change: Our success is there anything else you can give us to underpin the confidence on the cloud revenue guidance.
Speaker Change: Especially given the transactional business as he mentioned dominant.
Speaker Change: Yes, Michael I can start and then place the dominant comment as well I mean look I just did.
Due to travel to the United States, and Australia, and Wilson Korea. So.
Speaker Change: And when you talk to our customers also also all the new calculations hit the market I mean, the conversation really centers around.
Speaker Change: How can we help to gain resiliency in supply chain, how we can we help to manage tariffs.
Speaker Change: All of these especially the multinationals to half to one compliant business everywhere in the world.
Speaker Change: The sourcing side, how can we pick the wide supply us given all of the tariffs which are in place and then obviously what can we do on with the business data cloud you, just released which landed extremely well in the market.
Speaker Change: To assimilate into adjust our plans to the new market reality, so that actually gives me the confidence I mean, Michael but of course also came up as the cost for an FC people checked and there. We are targeting also with tune for developer tool for consultants, which are also.
Speaker Change: We're getting really really good feedback about how can we cut costs and implementing our business suite, how can we accelerate the faster time to value. These are not the days, where you can come to a customer and lay down in our <unk>.
Speaker Change: $100 million, Paul check down without having you know also some instant value in the business case and that actually has.
Speaker Change: In our west donated really well in the last weeks the pipeline and also for the year as I mentioned remains intact.
Speaker Change: We really see that we have solid really good pipeline for the year and so far so not in April we have not yet seen that there is any deterioration of conversion rates in the pipeline, but of course, Michael who has the crystal ball These days.
Speaker Change: We are watching the geopolitics very closely.
Speaker Change: And of course also observe what is coming.
Speaker Change: Yeah.
Ben Castillo: The next question is from the line of Ben Castillo with BNP Paribas.
Speaker Change: Your line is now open.
Speaker Change: Good evening and thanks very much for taking my question just on the cloud revenue growth Decelerates, a little from what we saw in Q4.
Speaker Change: Much of that deceleration was caused by you mentioned that later timing of some.
Speaker Change: Found deals that you signed in Q4, how much of that came from maybe some delayed ramp ups from some deals or how much came from the transactional apps. If you could just help us.
Speaker Change: Break apart that slight deceleration and I guess as a follow up you need a bit of an acceleration here to get back to that guidance.
Speaker Change: Gross range for cloud revenue.
Speaker Change: When can we expect that to come back is that something that can come back in Q2 as those Q4 deal start to ramp up or is that something that needs to happen later in the year. Thank you.
Speaker Change: Yeah. Maybe this is also a good opportunity to them also answered the transactional revenue question, which has been also raised in a.
Speaker Change: Brian question. So indeed, the transactional revenues in Q1, we're back to a slight decline you recall in Q4, we were actually calling up a little bit slightly up.
Speaker Change: And each year.
Speaker Change: Given that this is the most exposed business to macro not surprisingly it has also seen a relatively.
Speaker Change: Weak performance in the first quarter.
Speaker Change: On the.
Speaker Change: Backend loading of the transactions there is a certain lead time for provisioning. These cloud deals. So it's very clear that when you embark these deals in the backlog at the very end of the quarter in Q4 that maybe January February they are not fully.
Speaker Change: Effective in revenues.
Speaker Change: And then I have a step up in Q2, when its full year full quarter effective. So that's that's a meaningful delta in <unk>.
Speaker Change: It's been a little bit of that effect also seen in Q1 of prior years, but not to the same extended this year.
Speaker Change: We do think that also in Q2 will see a certain acceleration again.
Speaker Change: Because the comps I think easier, let's not forget at any single quarter in cloud revenue can always be a little bit distorted by what happened in the prior years quarter in terms of maybe some deep bookings so placements in Q2 last year, we had a.
Speaker Change: With a customer that one.
Speaker Change: The financial distress situations that we stopped booking cloud revenues.
Speaker Change: And that of course, it makes the comps for Q2 easier so.
Speaker Change: Still we believe that the CCP is a good indicator of how the next four quarters. We're looking at all it's the kind of contractually committed to rolling four quarters ahead, yes, we have to take the haircut from transaction revenues, which is maybe a little bit.
Speaker Change: Higher than what we had initially expected.
Speaker Change: Then it also leaves the question about the macro which we discussed on the prior question.
Speaker Change: Needless to say that before the upper half of our guidance range to materialize all the cloud revenues they will need to see a pretty benign outcome of these trade disputes that actually we would need to see some resolutions on these disputes quite quickly and to a large extent.
Speaker Change: In an adverse scenario of course, it's anyone's guess as.
Speaker Change: Christian mentioned, what type of <unk> impact that might be and I think also that is premature now to try to forecast. So there's a little bit the color I want to give around that.
Speaker Change: So not an easy environment, but as Christian mentioned, we are solidly on track the fundamental pillars of our growth.
Speaker Change: Stable.
Speaker Change: Customers are grappling for productivity gains and trying to reduce.
Speaker Change: Cost with our tools.
Speaker Change: Okay.
Speaker Change: The next question is from the line of Toby Ogg at with J P. Morgan. Please go ahead.
Toby Ogg: Yes, hi, and thanks for the question.
Toby Ogg: Perhaps just on the current cloud backlog grew 29% in the quarter stable versus the 29% exit rate and tracking.
Toby Ogg: I know, it's just Q1, but tracking above the current full year guidance for slight deceleration.
Speaker Change: Current cloud backlog tracked above your expectations in Q1, and if so what was the driver of that and then could you also just give us a sense for what you're seeing under the surface and the backlog, particularly in March and April across various end markets and customer groups are you seeing any any different dynamics because.
Speaker Change: Of all the tariff uncertainty with some verticals potentially holding back a bit but others, perhaps moving a bit quicker or are you seeing very similar trends to what you've been seeing over the past few quarters. Despite all the incremental tariff uncertainty. Thank you.
Okay, maybe on the <unk> it was actually expected because of the same technical effect. I described was the provisioning lead times is also affecting CCP. If you have these late quarter and closings. They are of course in the backlog, but for the CCP. So then.
Speaker Change: For 12 months in the backlog, but maybe for 10 or 11, and then when you roll US forward to end of March they are actually in the backlog for food 12 months plus the Rems included in these deals.
Speaker Change: So that is clearly something we would expect that so it's a little bit kind of an artifact I'd say from the backend loading of the seasonality of Q4, which will normalize.
Speaker Change: Fully.
Speaker Change: In line with the guidance, we've given to a slight deceleration also recall that towards the end of the year.
Speaker Change: CCP boost by the.
Speaker Change: The acquisition of walk me will also fade out so they are very much on track I would say.
Speaker Change: Yes.
Speaker Change: And maybe on the eastern until July.
Speaker Change: Yeah on the industry question do we see differences now in the industry the pipeline and the conversion rate smell unfold.
Speaker Change: No I mean, you see that in Q1, we signed many auto companies and to Dominic's point in these conversations with the auto companies oftentimes the business cases filled around supply chain to build around productivity with AI. It's also about the change of the business module alone to orders.
Speaker Change: Cash so it's not right to say these industries, which are maybe hit it hard and our short term by tariffs now by less software now we are not seeing this correlation and yet in the pipeline.
Speaker Change: Okay.
Charlie Brennan: The next question is from the line of Charlie Brennan with Jefferies. Please go ahead.
Charlie Brennan: Hi, Thanks for taking my question.
Charlie Brennan: Understandably a lot of questions around the macro and visibility in the business, but can we just touch on product innovation for a moment.
Charlie Brennan: Obviously, a lot of focus on the business day to clouds can.
Charlie Brennan: Can you just give us a very simple explanation to how that differs from the original assay data for an.
Charlie Brennan: And how do we think about that being incremental to what you're doing as opposed to just the rebranding.
Charlie Brennan: Over original data strategy. Thank you.
Charles: Happy to do so Charles I mean look data fear or Swedish send it around.
Charles: By the way many other offerings in the market, we'll send out around optimizing the technical integration between.
Charles: Our business warehouse Hana and.
Charles: Non <unk> data lakes.
Charles: To avoid the application of data, which is costly cost performance and also imposes a security risk.
Charles: <unk> is definitely a good step into right direction now.
Charles: Business data cloud is much much more.
Charles: And its also playing a little bit with you.
Charles: Our strategy, what <unk> had in the past around data.
Charles: The on premise world and BW, we never shared our data much more data module is actually the Holy Grail of.
Charles: Our treasurer.
Charles: Now, what we're doing with business data cloud when I'm, saying.
Charles: If you're on our retailer and you have consumer data sitting in an S&P auto you have consumer data sitting in the supply chain and the logistics muscle in many places in CX Commerce etcetera could you for sure also have consumer data.
Charles: Non sap's systems marketing data other data social media data et cetera.
Charles: And it was.
Charles: A single company.
Charles: While the world a big challenge.
Charles: How can we match dose data how does it really fit to really come to a one customer 360 same material. The same for a supplier the same for nimbly and now what we are saying is we are sharing our data module.
Charles: For example for a customer.
Charles: And what we are doing with data breaches, we are allowing our customers to match all the customer data that they have semantically.
Charles: What that does to suddenly you understand more about your customer and to add this is a real 360 and that doesn't require an army of people data scientists to make meaning of your data.
Charles: And then when you think about business data cloud.
Charles: Obviously, it's a pure value if you can steer your business and if you can delight our customers with a true understanding of that data, but then what you can do on AI.
Charles: We are seeing this in many AI use cases, we are building.
Charles: AI is great technology, but what you'd meet what you also need is high data quality and now suddenly tool and our <unk> are not only building and kind of consume SVP high quality data nowadays consume data product, which are combining also semantically non ATP data.
Charles: So again I.
Speaker Change: I guess youll see the tongs, Tom well, you and I have to tell you when we launched <unk>.
Charles: I mean of course, we saw some momentum at the beginning.
Charles: And when I compare now to two business data cloud I mean, we see at least.
Charles: An equal if not stronger momentum with regard to pipeline buildup.
Speaker Change: The next question is from the line of Muhammad Muller with Goldman Sachs. Please go ahead.
Muhammad Muller: Great. Thank you Hi Christian.
Speaker Change: Nick.
Speaker Change: I just had a question around kind of the number of deals over $5 million in the order entry continued to tick up.
Speaker Change: The environment I think it was 54% versus 52% a year ago.
Speaker Change: When you think of when you talk about close rates, but when you think of perhaps some of these larger deals are you seeing anything from the conversations with customers as they kind of still want to kind of proceed as planned in terms of size and scope of projects, but when we tend to see some uncertainty often there can be some some shifting in irrigation there so I'd be keen to kind of.
Speaker Change: Get your perspective on.
Speaker Change: On whether this is kind of sustainable.
Speaker Change: If I could fit in a follow up just on the FX Dominic.
Speaker Change: We've assumed one await current rates of $1 14, any specific reason why.
Speaker Change: So are you using that one away. Thank you.
Speaker Change: I mean I can start on the large deals and indeed, youll see youll see a tick up and.
Speaker Change: Also photo secured those large deals also in the quarters to come.
Speaker Change: I mean, we of course wanting an extremely diligent account planning process, where we really want to understand.
Speaker Change: The value of a deal.
Speaker Change: Art quantified value not only blah blah, but really quantified value what does it deliver not only <unk>, but also our second to which C level. We are connected as the CFO in the loop as CEO in the loop as the head of supply chain in the loop, who is in the loop it is great.
Speaker Change: We also need the lines of businesses, especially in times like that.
Speaker Change: And then when you look into some of the larger deals I mean, you'll see it actually every time when we report our total cloud backlog, you'll see days are facing in that yeah. So these 5 million plus deals they are not hitting opex why isn't a wide away at the P&L dates are facing and is facing its natural given.
Speaker Change: The mission critical nature of SAP.
Speaker Change: <unk>, sorry, you need time for the architects to finalize the architecture the way how to.
Speaker Change: Move to our business fleet, you need time to work with the business on the business processes. So it's more than only.
Speaker Change: Our commodity business, where you move to a new hardware I mean, it's really about business transformation and soft.
Speaker Change: Soft costs and also then you know good times like that were customers of course want to see with the web of the subscription fee of course in the same way the value we are delivering especially to those large customers.
Speaker Change: To me also.
Speaker Change: It's of course, a weaker dollar.
Speaker Change: As a headwind for us in the mid to long term, but.
Speaker Change: Hmm.
Speaker Change: We have as you know our methodology of forecasting at constant currencies and we had $1 eight last year is the average exchange rates. So that is what we've guided for for 2025 now with the weaker exchange rate.
Speaker Change: Of course, then the revenues and operating profit will decline the hedges we are implementing our effective on free cash flow. They are basically below the line on non <unk> operating profit.
Speaker Change: This is why we need that kind of constant currency methodology.
Speaker Change: For free cash flow, we've actually hedged a large part.
Speaker Change: Of the exposure already.
Speaker Change: Much higher rates. So that's reasonably protected the sensitivities are such that for a center of Euro dollar exchange rate because of the revenue mix and assuming I'm certain correlation you would see about $30 million decline in revenues for the full year and that's the total revenues and on cloud.
Speaker Change: More than half of that 55% cloud revenues in the mix.
Speaker Change: Cloud revenue versus total revenues not so so different.
Speaker Change: A bit higher inflow revenues in total revenues.
Speaker Change: And then Opex, but opex would also kind of decline.
Speaker Change: Because of the dollar expenses, we have close to 40% of all expenses in U S. Dollar.
Speaker Change: Not a huge exposure, but while we are protected on free cash flow for 2025 to a certain degree 2026 is more more difficult then because then we would suffer really from the.
Speaker Change: Decline in the exchange rate, but I mean.
Speaker Change: This is why the guidance.
Speaker Change: In constant currencies in the past on free cash flow because it's really embarking also the hedges it doesn't make sense anymore.
Speaker Change: The total currency impact will hit us elect fashion once the hedges basically expire.
Speaker Change: Okay.
Speaker Change: The next question is from the line of Adam Wood with Morgan Stanley. Please go ahead.
Speaker Change: Hi, Good evening, Christine good evening, Dominic congratulations on the first quarter.
Speaker Change: Just first of all I don't even reasonably clear.
Speaker Change: Willingness to protect the profitability and cash flow the business could you maybe just reiterate back but also and more importantly, maybe just give us a little bit of a feeling for how much flexibility. There is you obviously come into this year in a great position with headcount down slightly year on year and kind of flattish for us the fourth quarter, and then how far you'd be willing to go in terms of protecting that.
Speaker Change: If the top line were to weaken further and if I could sneak in just a cheeky follow up on Charlie's question.
Speaker Change: On the business day to cloud I mean, we've talked about maintenance payments. So the notional 20 coming up by two to three X.
Speaker Change: In that context could you give us a feel for how big those business dates of cloud sales could be if a customer is also to add that into the contract I just wanted to say other things theyre upgrading when they go to rise. Thank you.
Speaker Change: Maybe on the profitability, yes, indeed, we are pretty low on head count I mean, we've seen about 3000 people leave we hired some people.
Speaker Change: But currently we are probably looking for a little bit more backend loading to see how the situation on the trade dispute will evolve.
Speaker Change: So yes, we are talking about let's say.
Speaker Change: A cushion of several thousand employees, we can play with without having any major impact no.
Speaker Change: But at some point in time, we want to invest in important topics like AI like business data cloud like the further integration of our portfolio. So we will make sure that we balance the kind of near term pressure versus the mid to long term needs to be future proof. There is also some more discretionary spending on marketing and topics like that.
Speaker Change: But again I mean for the time being I would not.
Speaker Change: We see that we throw all that in we have to watch what's happening it's very unpredictable, but we just want to make a comment there are some levers and we are currently.
Speaker Change: Little bit prudent on how we are going to phase. These expenses to make sure that we have some room for maneuver should the situation deteriorate.
Speaker Change: Yes.
Speaker Change: Just to close this out.
Speaker Change: Dominic it's absolutely wide.
Speaker Change: And then of course, we're also not running out of ideas business wise I mean, when you look at the cloud cost margin.
Speaker Change: When you look at the <unk> of our solutions stay harmonization of the technical staff now we are working hard towards a photo harmonize our delivery our lifecycle management around those solutions. So we offered all demise Aloha cloud database, which by the way if you lever developing really well not all.
Speaker Change: Only underneath our solutions, but always also in terms of extensions.
Speaker Change: Our business suite, so with regard to clean coal and then obviously also core analytical scenario. So we are not wanting out of operational levers to further improve our cost ratios and then on the business data cloud.
Speaker Change: Look at them I mean that can really differ a lot.
Speaker Change: The first really important level for big deal sizes is does the customer have a BW system. These BW instances.
Speaker Change: A very very large.
Speaker Change: A lot of data.
Speaker Change: And similar.
Speaker Change: Oftentimes to an ERP system.
Speaker Change: Now if a customer is convinced not only to lift and shift those PW systems now to the cloud, but really what differentiates business data cloud is the medical layout, if they go that way.
Speaker Change: Hi, this is can be pretty significant but we also have other customer net new customers, we have customers, who didn't use of BW and daystar water smaller they start with.
Speaker Change: Our data warehouse de integrating it with our apps with our business suite. They are trying out to us we data products now on the <unk> side and then we go from there.
Speaker Change: Such accounts, obviously, while it's great that we are now in position ourselves into stack, where we probably without business data cloud would have never ever have a chance to land and then when you hopefully garner visit us at Sapphire, you're going to see how we are now building a real market.
Speaker Change: Base around this data products I mean, we are not only developing dose semantics with our own workforce, we are unwinding customers partners.
Speaker Change: To build those data products.
Speaker Change: Then we have cost them can also turn of cost increase.
Speaker Change: <unk> footprint in already existing PTC customers over time with these kind of data products.
Jackson Ader: The next question is from the line of Jackson Ader with Keybanc capital markets. Please go ahead.
Jackson Ader: Alright. Thank you thanks for taking my questions guys.
Jackson Ader: In the event that there would be some potential disruption from the macro environment and the pipeline conversion rates you.
Speaker Change: Do you guys think that it would be.
Speaker Change: Maybe cloud migrations or or would it be net new activity that would have maybe a bigger impact I guess asked a different way is there any part of your pipeline that you feel is better insulated from a potential macro disruption than another part of your of your pipeline. Thank you.
Speaker Change: Yes.
Speaker Change: <unk> already shared.
Speaker Change: The one you saw some back.
Speaker Change: Factors in the cloud revenue, which has a lot to do with.
Speaker Change: And all of the heavy foods.
Speaker Change: In order and we have seen in Q4 on the time it takes to position now.
Dominic: Dominic also fat is in Q2, you can assume already slide.
Dominic: Slide acceleration of cloud revenue given the strong Q4, which we had on the CCP side, it's one or the other way around I mean, obviously this is not a large large installed base Q Q2, it's also not volume wise.
Dominic: Our biggest quarter and now for the rest of the year when you look at.
Dominic: The kind of uncertainty we will see obviously.
Dominic: Still Q2 pardon me Q3 will matter for our Q4 cloud revenue performance Q4 itself will not have a big impact anymore on DCF guidance, because the revenues will come the next year. So the good pieces. When you when you read into this I mean, there is not.
Dominic: Now a large swing on on cloud revenue on total revenue still obviously, we assume conversion weights are not all of them like <unk> last.
Dominic: Last year like the last quarters and still we are seeing this now in.
Dominic: Also happening now with regard to is it then more net new or installed base look I mean, when I I mentioned, some net new customers.
Dominic: <unk> extremely <unk>.
Dominic: Successful they have outgrown.
Dominic: The equivalent ERP by a lot in order to now reach the next step.
Dominic: <unk> to have a suite, which allows them to scale that business. So in this case customers will buy software.
Dominic: So in the installed base I mean, it really depends on kind of where does the customer says if youre sitting on a very outdated ERP.
Dominic: The time that the value of moving now I mean is in my eyes. So big.
Dominic: Still the business cases should really no actually makes sense, even if the macro now gets worse now of course, how much does it get worse I mean, we are walking into a recession. I mean, then we are talking about all kinds of scenarios, which will at some point of time impact every business.
Dominic: In the world.
Dominic: But this is an old Hartford predict what we said and this is why given what we see right now the pipeline the relevance of our portfolio.
Dominic: We actually remain confident for the rest of the year.
Speaker Change: The next question is from the line of Frederic <unk> with Bank of America.
Speaker Change: Please go ahead.
Speaker Change: I appreciate it.
Speaker Change: For taking my question, if I can touch on EBIT and free cash flow a very strong Q1.
Speaker Change: If you can discuss some of the moving parts into the rest of the year any phasing to bear in mind.
Speaker Change: He said.
Speaker Change: Improvement in cloud margin.
Speaker Change: Any specific driver there in terms of mix or.
Private cloud in particular improvement there.
Speaker Change: And maybe as it leads to free cash flow, we significantly accelerated the buyback in April.
Speaker Change: You've reached.
Speaker Change: No.
Speaker Change: More than 90% of it.
Speaker Change: Beating plan now.
Speaker Change: So whats next in terms of potentially further expanding the or your <unk>.
Speaker Change: Program cars in your your very healthy balance sheet. Thank you.
Speaker Change: So maybe on the margin composition. It was quite broad if you look at the expansion. We have achieved now you mentioned that the gross profit expansion, which was quite favorable but also the selling expenses to sales ratio improve to massively the R&D ratio improved and even the G&A ratio, which is already quite low.
Speaker Change: Further improved because we could lever some new technology and to really contain head count growth.
Speaker Change: Now in terms of I'm, sorry, the second question.
Speaker Change: Okay, then when we went into the free cash flow well on the free cash flow. Yes. We also did very well, but again I mean, I think we can all agree that it would not.
Speaker Change: To touch the guidance upward so to speak on any of these parameters given the uncertainty we currently see.
Speaker Change: Yes, we are going to complete our 5 billion share repurchase program no doubt about that.
Speaker Change: And yes, we have to think post the end of this year, what we're going to do.
Speaker Change: You could also say, maybe it's an opportunity when the valuations come under pressure that we gobble up the one or the other asset, but then we have to see what sellers already adjust their price expectation to a reasonable level.
Speaker Change: There is no M&A.
Speaker Change: Any magnitude and then we still have some firepower to launch new programs. So.
Speaker Change: We don't see that some of the cash generation capability of the company is fundamentally changing.
Speaker Change: And it makes us confident for further.
Speaker Change: Capital returns program absent any major M&A M&A moves.
Speaker Change: The next question is from the line of Mark <unk> with Bernstein Research. Please go ahead.
Speaker Change: Thank you very much and congratulations on the strong start to the year and the reiteration of the guidance I'd like to look at the question of tariffs and more generally how you think about that impacting your business and more specifically.
Speaker Change: Given the tariffs that are right now on hardware in servers and data center components do you see that impacting your cloud gross margin.
Speaker Change: Something that you could pass along to the clients any color would be appreciated.
Speaker Change: Yeah. Good question Mike.
Speaker Change: I mean.
Speaker Change: Our strategy is.
Speaker Change: Is mainly based on a core plus one strategy so what do we.
Speaker Change: For Hyperscale us plus our own converged cloud and with these hyper scale ups I mean youll see the success, we're having in the cloud obviously, we have closed multiyear contracts, which give us some price security and obviously given that we are consuming really Harry.
Speaker Change: Volume.
Speaker Change: Still also today, we feel we are we are really in a solid position when it comes to extending those contracts and again, we're having four plus one we also have our own converged cloud.
Speaker Change: And actually when we look when we're looking at AI and the chips I mean, what we actually seeing is now of course.
Speaker Change: Before tariffs.
Speaker Change: The cost for the horsepower became cause materially cheaper.
Speaker Change: From many new open source modules.
Speaker Change: Well with the technology, becoming more mature I mean that helped and.
Speaker Change: And so thats why net net plus the amount of T cell improvements, what I mentioned, I mean, all of our product owners or incentivize to further bring down the <unk>, we have more ideas to come. So we first of all belief that especially on the hardware side. I mean, we are not purchasing hardware directly so much.
Speaker Change: We are consuming it oftentimes why at Hyperscale US there we have some kind of private security, we have our own converged cloud smaller from a volume perspective.
Speaker Change: And then last but not least we are not planning now short term I mean, obviously everything to be seen under the different macro environment.
Speaker Change: That we have to increase now prices for our customers because of tariffs we are not seeing this right now.
Don't forget that the supply chain for data center equipment is largely outside the U S. I mean, the components are manufactured outside just the assembly of the semiconductors the assembly of Pcbs.
Speaker Change: So.
Speaker Change: But of course, if that escalate and basically this trade barriers and globally more and more.
Speaker Change: But catastrophize at this point in time.
Speaker Change: We would have a little bit of a small impact in the U S. Because we have also some equipment like smartphones and Pcs for employees' locally in the U S, which will go to be imported from that.
Speaker Change: Non U S supply chain into U S.
Speaker Change: But that is not a meaningful number that would.
Speaker Change: Change our guidance so for the time being we can cope with this.
Speaker Change: The next question is from the line of Spindler with Barclays. Please go ahead.
Spindler: Great Good evening.
Speaker Change: Follow up question on your own infrastructure business.
Speaker Change: <unk> emphasize just a few years ago, but given recent geopolitical events have your risk.
Speaker Change: <unk>.
Speaker Change: <unk> client and your own infrastructure offering.
Speaker Change: Are there, perhaps any consideration to revitalize this somewhat or work with additional partners. Thank you.
Speaker Change: Yeah very.
Speaker Change: Good question.
Speaker Change: And look I mean, now we have so far not seen existing SAP customers changing.
Speaker Change: Infrastructure because of our firm.
Speaker Change: Political tensions or tariffs.
Speaker Change: Of course, there are customers now reaching out in one or the other country and saying Hey, what would be the cost of moving to.
Speaker Change: To an S&P infrastructure all ive.
Speaker Change: To any kind of sovereign cloud offerings, what we have.
Speaker Change: But again, we are not seeing wide now that we the customers are now taking action and the outreach as we get a lot of them you know.
Speaker Change: He will not not many now.
Speaker Change: Software and cloud.
Speaker Change: Building a piano.
Speaker Change: World Class data.
Speaker Change: Data protection and data security offerings I mean, you have seen in our Q1, we have signed a few deals large deals in the public sector in Germany.
Speaker Change: We have and as two and in the United States.
Speaker Change: Fully independent channels Company U S P.
Speaker Change: With a dedicated sovereign cloud offering, which we are heavily investing into for the United States.
Speaker Change: We have rules in Australia, Japan et cetera, and so we are building up these capabilities, but you also have to always educate our customers on especially in the public sector whatsoever entity really means I mean, so when if he can mean a lot and you have data locations. So entity, you'll have can have serenity.
Speaker Change: And it comes who is touching the data.
Speaker Change: And a half where entity with regard to access of networks to <unk>.
Speaker Change: Global networks, and so we are offering different levels and so far but we also have seen even in the public sector, but it doesn't always need to have the highest degree of serenity.
Speaker Change: And so that is also a very positive sign that oftentimes can also use our own data centers hyperscale data centers to offer them to offer sovereign cloud capabilities.
Speaker Change: Yeah.
Speaker Change: [laughter].
Speaker Change: The next question is from the line of Keith Bachman with BMO. Please go ahead.
Keith Bachman: Good evening and thank you very much I wanted to return to the business day to cloud if I could is there a way if you think about a normalization of trends over the next three years of what an average uplift on a client relationship or payments would be is it 10% 20 <unk>.
Speaker Change: Were sent something higher.
Keith Bachman: The second part of the question.
Speaker Change: There are risks that the business day to cloud.
Speaker Change: Crowds out or replaces other areas of spend that might be otherwise.
Speaker Change: Dedicated SAP he or is this in your mind.
Speaker Change: Purely an additive activity of creating this.
Speaker Change: Additional data lake to support.
Speaker Change: The broader ecosystem and the final part of the question is is there anything you can speak to on the business day to cloud associated with margins.
Speaker Change: Obviously data bricks is the underlying engine to the data cloud is it. Therefore is this business really ramps is it dilutive to margins and that's it for me and congratulations on what I suspect will be a very solid software report relative to a lot of.
Speaker Change: Other competing in similar software companies over the next few weeks. Thank you.
Speaker Change: Yeah. So.
Speaker Change: This data cloud, let's start from the beginning we will.
Speaker Change: MS data cloud replace other assets in our portfolio no.
Speaker Change: We actually in the last years already.
Speaker Change: Move in our legacy stacks in our acquire the X a lot of the data warehouse capabilities with our data warehouse cloud offering and so we are in the process of doing so.
Speaker Change: But there is now not replace.
Speaker Change: <unk> type of thing happening of Sap's software because of BDC now.
Speaker Change: What will happen in the BW space when customers wanting dislodge systems I mean, they are paying maintenance for that so similar to the wife's journey of the ERP. So I mean, it will a lot of will depend on how the how high the multiples are from on premise support to cloud revenue.
Speaker Change: There we are.
Speaker Change: Pretty confident because we believe the value proposition is strong and we can price this effort with a good margin now.
Speaker Change: On the on the on the cost margin and.
Speaker Change: The margin in a wall of BDC I mean, obviously, it's fair to say that data breaks gets a fair share of these deals now.
Speaker Change: Now that is an okay margin, but not a great March and now the margin of this offering will come via the data products and so what we are doing underneath the semantically. It's what we did with data fear that it's okay that it's delivering value.
Speaker Change: But what we want to price with a premium it's definitely the end of symantec's data products and there we actually expect to have a very healthy margin.
Speaker Change: Of this offering in the years to come obviously correlating with the value of what our customers get out of it.
Speaker Change: And then last but not least on your question of the BDC.
Speaker Change: BDC.
Speaker Change: What is the what is the percentage.
Speaker Change: Lift.
Speaker Change: <unk>.
Speaker Change: We announced just starting to deliver the data products.
Speaker Change: The technical integration, it's there the integration with data practices is there now what we are now building out a data product and you can look at our roadmap. So definitely there will be an uplift as it now 10% to 20% look I mean, it's hard to hard to say I will definitely say that it's absolutely uplift in.
Speaker Change: Uplifting and on the data products will become which are per se over the time and then we will have more so there's absolutely an uplift in upselling and cross selling now will just be 10% will this be 20%.
Speaker Change: Really hard to say at the point right now what we can definitely say the pipeline is developing really well and the multiples look wow.
Speaker Change: Really healthy.
Speaker Change: Great. Thank you Christian and this concludes our call for today. Thank you for joining us.
Speaker Change: Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone thank.
Speaker Change: For joining and have a pleasant day goodbye.