SAP SE ADS

Good day and welcome to the SAP Q1 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir.

Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations at SAP. Thank you for joining us to discuss our results for the first quarter 2020. I'm joined by our CEO, Christian Klein, and CFO, Luka Mucic. will make both opening remarks on the call today. Also joining us for Q&A is the Executive Board Member Adia Fox-Markin, President of our Customer Success Organization. Before we get started, as usual, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Security Investigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, and will, and civil expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements, and all forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's supernatural results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20F for 2019, filed with the SEC on February 27, 2020. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. On our Investor Relations website, you can find our quarterly statement and a financial summary slide deck, which are intended to supplement our prepared remarks today and include a reconciliation for our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS as reported year over year. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. With that, I'd like to turn things over to our CEO, Christian Klein. Thank you, Stefan.

As we all know, the world is facing an unprecedented crisis. Some weeks ago, many of us couldn't even begin to imagine the scale of the coronavirus outbreak. On behalf of all of SAP, I want to extend our deepest thanks to all of those who are on the front lines of battling the pandemic. Like all those affected, they are in our thoughts, and we owe them a heartfelt debt of gratitude. This crisis shows how quickly things can change and how important agility and speed are. While it is hard to project how long it will continue, it shows that SAP's business is more well-earned than ever. Since we were founded nearly 50 years ago, SAP has been trusted to run the world's most mission-critical business and this also holds true today. I want to thank the SAP colleagues who are always fully focused on our customers and go above and beyond to ensure we support them in this challenging time. You have probably all seen the news, so let me briefly touch upon this leadership change. More than ever, the current environment requires quick and determined action for companies and this needs a very clear leadership structure. Jan realized that our leadership model was not the best fit for these times and mutually agreed with the supervisory board that she will depart the company effective April 30 and that we will switch to a sole CEO model. Jan has always been a strong believer in the long-term potential for SAP No matter which role she was in, and we would not be where we are today without her. As she leaves SAP, she does so with the respect and heartfelt appreciation of all her board colleagues, our customers, partners, and the entire SAP family. I know SAP will always have a true champion in Chen, whatever she decides to do next. Let me now turn to what I see as the three relevant points for SAP right now. Our resilience in the current crisis, the balance we now need to strike, and why we will emerge stronger than before. If anything, the current crisis shows that our intelligent enterprise strategy is more relevant than ever, both for our customers and SAP. First, it leads to more resilience and enables business continuity. Our more than 400,000 customers worldwide make the world one, We enable them to continue to do so. Thanks to our transformation into an intelligent enterprise, we can continue our operations without any disruption. We have automated many of our processes and made them more intelligent. And remote operations across all functions have been a reality at SAP. With 95% of our employees currently working from home, all of SAP is as close to a virtual organization as it can get. and we continue to run at nearly 100%. The feedback from my conversations with CEOs and customers worldwide shows that they are extremely happy with the way SAP is delivering in this crisis. Second, becoming an intelligent enterprise enables new business models and accelerates the move to the cloud. This leads to a high top-line stability. Luca will provide more details on our Q1 financial performance shortly. Let me give you a few key highlights. More than 70% of SAP's revenues are what we refer to as more predictable and underline SAP resilience also in times of crisis. Support is SAP's largest and most stable revenue stream, as evidenced in the 2008 and 2009 downturn. For most companies, shutting down SAP support would essentially mean shutting down their entire business. We expect cloud revenue to continue its rapid growth in 2020. Backed by the 25% expansion of the current cloud backlog. Talking about other revenue streams. Services revenue was up in Q1 and we expect it to be rather stable in 2020, given its backlog and the tailwind provided by the S4HANA migration. As the spread of COVID-19 intensified, we saw a meaningful amount of new business postponed and purchase decisions put on hold for the time being, especially in our upfront licenses business. Software licenses, which unsurprisingly were most affected, only accounted for around 15% of revenue in 2019. And while at minus 31% the impact was significant, we have no reason to believe we have lost a lot of business. But assume most of it has rather just been pushed out. I have no doubt that revenue will ultimately come to SAP. Talking about our flagship solution, SAP S4 HANA, with Q1 additions like Danone, ENA, AO Tenda, and Indorama Ventures, we are continuing to build the customer base amidst this crisis. Indorama Ventures, one of the world's leading chemical companies, went all in with the intelligent enterprise, with S4 in the core and surrounding applications to enable new business models, artificial intelligence, and real-time analytics. We saw around 500 customers go live on S4HANA and Q1, underscoring our partners and our own remote service delivery capabilities. S4HANA Cloud continued to grow in the upper double digits. Over the last months, we have significantly simplified migration and massively accelerated time to value. This has helped us to add live customers like Sun Life Financial, Hitachi Hitech, and MTU Rolls-Royce. Third, our transformation enables us to continue to perform strong with regards to the bottom line. Thanks to automated and intelligent processes, we were able to significantly increase our profitability. As an example, we are already running 30% of our transactional volume via the SAP Digital Store with no touch downstream processes. We will not make unfavorable trade-offs between 2020 profitability and future growth. Our customers have placed long-term trust in us and they have every right to expect unchanged high levels of innovation from us. We won't cut innovation and R&D. And while we will slow down hiring, we will continue to hire carefully selected people into carefully selected roles that rapidly contribute to our competitive edge. With our just completed restructuring program, we approach the current environment from a position of strength, and we want our people to focus on our customers and the tasks at hand, not to worry about their jobs. We updated our 2020 outlook to reflect the estimated impact of the COVID-19 crisis. The revised outlook assumes the current COVID-19 includes challenging demand, environment deteriorates, Thank you very much. Thank you very much. Only an intelligent enterprise can deal with uncertainty and rapid change. Digital transformation is no longer an option. It is essential. We are perfectly positioned to guide our customers through this journey, and here's why. Only SAP can enable new business models and digitize the entire value chain seamlessly end-to-end, making companies more resilient to cope with such a crisis. SAP HANA well helps customers predict the demand and pipeline every minute, every day to dynamically adjust the supply chain. With Qualtrics, we help customers navigate this fluid reality, gaining real-time insight into which behaviors are trending in a fast-changing environment where every day brings more uncertainty. Our strong technology foundation with SAP Cloud Platform and SAP HANA allows us to integrate SAP and non-SAP applications, extend existing ones, and build new business applications. These are trends we can build upon. I already mentioned that we will double down on innovation. Let me give you some examples. In every industry, processes are affected by the digital transformation. SAP traditionally was strong through vertically differentiating in industries. To run their value chain end-to-end, our customers want SAP to try more vertical industry-specific processes in the cloud with seamless integration to SAP core solutions based on the SAP Cloud Platform. We will respond decisively to that demand. We at SAP have the unique opportunity to build one business network. We will connect our networks beyond our intelligence-bound networks and utilize data to help our customers transform their traditional value chain model to enable end-to-end visibility, collaboration, agility, and optimization. Finally, before closing, there is one more important item on my list. Earlier this month, the SAP Supervisory Board extended Luca's contract to 2026. I don't need to say much. You all know him well. He has been with SAP for nearly 25 years. He knows SAP top to bottom, is one of the world's top-ranking CFOs, and we are very fortunate to have him. I would like to use this opportunity to thank him for all that he has already done for SAP and we look forward to writing the next chapter together with him.