SAP SE ADS

Good day and welcome to the SAP fourth quarter and full year earnings 2020 conference call. Today's conference is being recorded and at this time I'd like to turn the conference over to Mr. Stefan Gruber, head of investor relations. Please go ahead, sir.

Thank you. Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us for today's earnings call to discuss our fourth quarter and full year 2020 results. I'm joined by our CEO, Christian Klein, and our CFO, Luca Mucic, who will make opening remarks on the call today. Also joining us today for Q&A from Singapore is Scott Russell, who will join the SAP Executive Board and lead the Customer Success Organization as of February 1st. Before we get started, I'd 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 US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar 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. 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 future financial results are discussed more fully in SAP's filings of the U.S. Securities and Exchange Commission, 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 the SAP Investor Relations website, you can find the slide deck intended to supplement today's call, available for download. For those of you following the webcast, the slides will be shown as we proceed through the prepared remarks. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage rates point changes are non-IFRS at constant currencies 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. And finally, before I hand over to Christian, I would like to announce that we will hold an event for financial analysts and investors in the coming month. And we plan to do this in conjunction with our user conference, Sapphire Now. More details to follow. With that, I'd like to turn things over to our CEO, Christian Klein.

Yeah, thank you, Stefan, and welcome everyone to our earnings call. Now, if I had to find a headline for the last couple of months, I would say this. SAP is on the move. We have defined our new strategy. and we are in full execution. We have listened closely to our customers and launched right with SAP this week, a milestone offering for holistic business transformation as a service. As part of the new offering, we are unlocking the business process intelligence layer with the planned acquisition of Signabio. Only SAP can help customers to reimagine business models and processes end-to-end to deliver the best business outcomes. We also have expanded the relationships with our hyperscale partners, cooperating more closely than ever, including with our Microsoft Teams integration. We have very successfully completed the IPO of Quadrix. We have as well transformed the SAP organization to make it more simple, lean, and customer-focused. We have tremendously improved the integration of our acquired cloud applications. We doubled down on innovation. We are co-invading with our customers across 25 industries to turn them into more resilient, productive, and sustainable enterprises. We have announced three additions to the SAP executive board, all of them with a strong cloud mindset. And our board now truly represents all global regions, Americas, EMEA, and APJ. And I guess it's now fair to say, not sure about you, Luca and Scott, but our board from now on but most importantly, we have put our customers first. And we already see strong results. Customer satisfaction is up 10 points and we closed a very strong Q4. So let's get started. Lots of ground to cover today. Luca will talk about our Q4 results in a minute. So let me focus on total year performance. First off, We beat all top line parameters after we rise outlook and hit the upper end for profit. This is highly important for us. 2020 was a very successful year for SAP with a very strong order entry in Q4, which provides us a strong tailwind leading into 2021. And that's clearly visible in our total year performance. Overall, cloud revenue was up 18%. Our SaaS pass revenue grew by 27% outside our intelligence band and travel and expense business. Concur was especially affected by the crisis, obviously. The good news here is that this headwind turns into tailwind once travel comes back. And then Concur will be ready as the clear market leader in travel and expense. This year also showcased our ability to work remotely. We delivered stronger than ever. We added more than 25,000 net new customers. Also, together with our partners, we delivered more than 35,000 goalies. In Q4 specifically, we added almost 1,000 additional S4HANA customers. Around 40% were net new. That takes us to a total of around 16,000 customers, up 16% over last year. We are clearly gaining market share with S4HANA. We also saw a massive number of highly important customer wins this quarter. Some of them, again, competitive replacements. In the ERP space alone, we had more than 200 wins against Oracle. So let me highlight just a few wins and go-lives. Gilead has chosen S4HANA to help increase data standards and transparency. Simplify and automate processes and mitigate operational risks. Unilever continued their strategic partnership with us by converting to S4HANA as their future ready ERP system. Shell selected S4HANA to support its upstream business and we are also cooperating on an ambition we share to become net zero emission businesses. CureVac has chosen S4HANA to support the development of their COVID-19 vaccine. In procurement, General Motors selected SAP to transform the spend management processes. At the same time, we post almost 4 billion of spend in our network. For human experience management, we added many new customers this quarter, and we are the only vendor running HR across 100 countries. Google has further expanded use of our cloud solutions, including Qualtrics. We are also exploring, in partnership with Google Cloud, around artificial intelligence to enhance customer value and, of course, by also expanding our strategic relationship. In customer experience, we had the biggest quarter error with regard to cloud order entry. For commerce, we doubled our cloud revenue as only SAP can offer a seamless consumer experience from the online shop, next day delivery, and flexible payment options. Finally, in supply chain, We extended further our number one market positions and we are further expanding our industry 4.0 capabilities to offer the autonomous factory. Now we are fully focused on the opportunities ahead of us. The direction is clear and we are executing our strategy to reinvent how businesses run. Let me take you through the most important updates. I'm extremely proud that we increased the customer satisfaction score by 10 points. Two factors are driving this. We are focusing the entire company on our customer success and strongly drive integration and innovation across our business applications and platform. Also, if there was an opportunity to improve people's lives, it is now. We are honored to support a global fight against COVID. In Germany, with Deutsche Telekom, we are providing the Corona Contact Tracing App. Since launch, the Corona Warn App was downloaded more than 25 million times. About 2,000 users shared their positive test results per day to break the chain of infection. For vaccine production, 17 of the top 20 global vaccine producers won SAP. In the US, Moderna wants SAP S4HANA and supply chain management to support the distribution of the COVID vaccine. And in Germany, CureVac selected SAP in Q4 to scale their production of the vaccine. For vaccine distribution, the Deutsche Rote Kreuz, the Red Cross in Germany and many others won on SAP. I'm very proud of SAP's relevance in the global value chains and our responsibility to help the world run better. On to strategy. Two days ago, we launched Rise with SAP. This is a milestone offering. Together with our ecosystem, we launched this game-changing offering to ensure a holistic business transformation for our customers. A business transformation requires more than just a technical migration to the cloud. And only SAP can do this. But let me briefly go into a bit of detail here. It's important to understand. Rise with SAP is for all customers, no matter their starting point or complexity, whether it is smaller companies with simpler processes or multinationals with a complex, customized on-premise landscape. We are moving our customers' mission-critical core ERP processes to the cloud along a tailored path that reflects the individual customer situation. We make sure customers truly transform their business instead of just replicating Thank you for joining us today. with FastTime to Value. And finally, we are building the intelligent enterprise with S4HANA Cloud for tightly integrated, highly intelligent and automated business processes. The business technology platform, SD Foundation, providing our customers with integration, data to value and extensibility based on one data model and many other world-class application services. And of course, we provide choice on the cloud infrastructure. Be it SAP or Hyperscaler. And we include the access to the world's largest business network. The offering is not only delivering our customers a superior business outcome and return on invest. It is a very simple commercial offering on a single contract, all without high upfront investments and up to 20% lower TCO. From SAP's financial perspective, As we embark on this journey, we shift existing customers out of the upfront software and support model and into the ratable cloud subscription model. And while this leads to some short-term pressure on revenue and profit, we will significantly increase customer lifetime value by delivering more services to customers. So we are increasing our share of wallet and make life easier for our customers at the same time, as they now can turn to SAP as their responsible vendor. That's why we expect to turn one euro of support revenue into roughly two euros of cloud revenue over time. But most importantly, it will help us accelerate our upselling of applications as well as technology and especially drive the platform adoption. Let me now drill into the business process intelligence layer as it provides context for the Signavio acquisition. Business process intelligence will span Over time, across all of our applications, to continuously reinvent how business processes run and to infuse intelligence by analyzing, benchmarking, and configuring business processes based on the insights and best practices from our 400,000 customers across 25 industries. With Signavio, we are not only becoming right away a leading player in the business process intelligence market, But we will also accelerate the business transformation of our customers and with that the move to S4HANA Cloud. And that's the kind of innovation close to our core we are driving. As part of our strategy, we are also forming close, strong partnerships providing great business outcomes for our customers and reinvent how enterprises run. In this context, we have expanded our existing partnership with Microsoft. With Microsoft Teams and SAP coming together, we combine the leading business application suite with the leading business communication platform. With this partnership, we will create a frictionless enterprise and determine the future of work. We will deliver numerous collaboration scenarios for procurement, for HR, for finance, which will increase the productivity of millions of users worldwide. The first use cases will be already launched in Q2, starting with S4HANA and Customer Experience. Let's talk about Qualtrics. This is a fantastic success story for both Qualtrics and SAP. And it resulted in yesterday's successful IPO of Qualtrics. Let me be clear. Wayne, Sig and myself are fully committed to experience management and the Qualtrics XM platform as a key element of SAP's intelligent enterprise. And we absolutely intend to keep up the pace of innovation, expanding our joint solutions quarter after quarter. SAP will, of course, remain Qualtrics' most important go-to-market and innovation partner in order to drive growth within SAP's customer base. But we are now providing Qualtrics with the opportunity to extend its business and serve customers also beyond the SAP universe. So for Qualtrics, the future couldn't be brighter. But let's also remember, we acquired Qualtrics two years ago for around $8 billion. Last year, they contributed more than half a billion euro of cloud revenue, twice of what they used to do when we acquired them. So at yesterday's IPO, Fortrix achieved an implied valuation of close to $18 billion, more than double the acquisition price. And at that end, the first day of trading, the stock increased by about 50%, increasing the implied valuation to about $27 billion. Congratulations, Ryan and team, on a great, great job as part of the SAP family. Now, before handing over to Luca, 2021 will be an exciting year full of opportunities. And I'm happy to end this important year with a very strong leadership team, underscoring our clear focus on customer success and cloud growth. First, I would like to thank Adair, who will depart SAP. We wish her all the best for her future endeavors. At the same time, I could not be happier to announce the addition of two exceptional leaders to our executive board. Scott Russell succeeds Adair in heading our customer success organization. Under Scott's leadership as president for APJ, the region has become one of the fastest growing cloud markets for SAP, always putting the success of our customers at the center. We are happy to have him join us for Q&A in a minute. Julia White joins us from Microsoft, where she led product marketing for Microsoft Office during its cloud transition to 365 and for Azure over the past five years. Julia will take on a new executive board role as SAP's chief marketing and solutions officer. Julia brings a cloud-first mindset to SAP that will tremendously support our own transformation. And Julia perfectly knows how to bridge technology into clear business value for our customers. At SAP, Julia will focus on demonstrating the differentiating innovations and capabilities of our solutions to our customers by strengthening our product, industry, and digital marketing capabilities. So I'd like to extend a warm welcome to Julia and Scott, and once again also to Sabine Bendig, who joined our Executive Board on January 1st as our Chief People Officer. Sabine was the driving force behind Microsoft Cloud Transformation in Germany. and, as we all know, transformations are thriving by winning people and changing culture. It's all about the right talent, the right leadership, the right attitudes and also the right processes. And so I couldn't be happier and more confident to hand over her the Chief Operating Officer role later this year. And with that, let me wrap it up here and hand it over to you, Luca.

Yeah, thank you very much, Christian. Also from my side, a warm welcome, everyone. Well, in my 25 years with SAP, I certainly never had a dull moment, but 2020 was unprecedented across all dimensions. Therefore, let me start by saying that I'm likewise proud of how we ultimately navigated through this challenging environment. We had a strong finish to the year with a better than anticipated top line, strong operating profit and margin performance, and a record cash flow. So let me cover our results in some more detail, starting with the top line. In 2020, we exceeded all revised 2020 revenue targets and hit the high end of our operating profit outlook, even as the COVID-19 crisis persisted and lockdowns were reintroduced in many regions. In fact, except for cloud revenue due to the impact of Concur, we managed to ultimately reach the guidance we gave in April. In Q4, our current cloud backlog expanded by 14% and reached 7.2 billion euros. Cloud revenue was up 13% in the quarter, while for the full year it grew by 18% to more than 8.2 billion euros, exceeding our revised 2020 outlook. Lower transactional revenue, mainly Concur business travel related, negatively impacted our cloud growth rate for the full year by 4 percentage points. However, continued high demand for our cloud assets like e-commerce, business technology platform and Qualtrics, along with several competitive wins, particularly for success factors human experience management, produced a strong finish to the year for our cloud business. In fact, we grew our SaaS pass revenue outside of our intelligent spend business by 27% for the full year. We also saw a strong early uptake of our new holistic business transformation offering rise with SAP among pilot customers. This contributed to the cloud performance in the quarter. Cloud revenue is now more than two times larger than our software licenses revenue. This cloud revenue growth in combination with our steady software support revenue stream testifies once again the resilience of our business model. Our more predictable revenue expanded by approximately five percentage points and reached 72% for the full year. In Q4, software license revenue saw significant sequential improvement, down only 11%. Reflecting strong demand for SAP's digital supply chain solutions in particular, as well as significant competitive wins in ERP, as Christian already mentioned. Our cloud and software revenue grew by 1% in Q4 and was up a solid 3% for the full year. Our services revenue in turn was down 8% for the full year, reflecting the increased scrutiny around larger projects earlier in the year. While the vast majority of consulting projects continue to be efficiently delivered remotely and SAP's premium services remain in high demand, SAP's training business was impacted due to delays in reopening of global training centers. Despite these ongoing COVID-19 impacts, our total revenue increased by one percentage point to 27.9 billion euros, also exceeding our revised 2020 outlook. demonstrating the increasing resilience of our business model in a uniquely challenging environment. Let me quickly cover our regional results. From a regional perspective, we had a solid year in all regions. In the EMEA region, cloud and software revenue increased 3%, cloud revenue increased 25%, with Germany, Switzerland, and France being highlights. Saudi Arabia and Sweden had a strong year in software licenses revenue. In the Americas region, cloud and software revenue increased by 3% as well. Cloud revenue increased 13%, with Canada being a highlight, while the United States and Mexico had a robust performance. For software licenses revenue, the US, Brazil, and Mexico held up well. In the APJ region, Scott's home turf, cloud and software revenue was up 2%. Cloud revenue increased 21%, with Japan, South Korea, and Singapore being highlights. In addition, Japan as well as Australia and India had a robust performance in software licenses revenue. Now moving on to the bottom line, where the gross margins of all of our cloud business models were up in Q4 and for the full year 2020 again. Despite the negative top line impacts from the COVID-19 crisis, in particular the lower transactional revenues, our overall cloud gross margin was up 1.3 percentage points to 70% for the full year. Again, all cloud business models contributed to this trend. Our SaaS pass margin grew by two percentage points to 71%. Our intelligence spend margin, despite the top line headwinds, grew by another one percentage point to 79%. And our infrastructure as a service margin grew by five percentage points to 34%. Our software and support gross margin ended the year at a very healthy 88%, increasing by 30 basis points. As a result, overall, our cloud and software gross margin decreased only modestly by 20 basis points to 81% for the full year, even with the negative revenue mix shift effect. Our services gross margin increased by two percentage points to 27% in 2020. That's certainly a benchmark margin for services business across the industry. This was mainly driven by a larger share of high margin premium engagement business, which has proven to be very effective in this virtual environment. Also, an increase in remote delivery led to a reduction in travel spend. For the full year, our operating profit increased by 4% to 8.5 billion euros, hitting the high end of our revised operating profit outlook. This reflected the resilient top-line performance, further improvement of our cloud gross margin, and a disciplined approach to hiring and discretionary spend while capturing natural savings from lower travel, facility-related costs, and virtual events, for example. As a result, our operating margin expanded by 80 basis points to 30.5% in 2020. This is the highest level seen since 2015. On an IFRS basis, our operating profit and operating margin were positively impacted by significantly lower restructuring charges as well as lower share-based compensation expenses compared to 2019. IFRS operating profit grew by 48% and IFRS operating margin by 8 percentage points to 24.2%. Let me now turn to EPS and taxes. IFRS EPS increased by 56%, non-IFRS EPS by 6%. This was mainly driven by a stellar contribution from Sapphire Ventures, which had a significant positive impact on our finance income. For the full year 2020, the IFRS effective tax rate increased by 20 basis points to 26.9%, while the non-IFRS effective tax rate increased by 30 basis points to 26.5%. We came in at the low end of our non-IFRS tax rate guidance. With this, let me turn to cash flow, a true highlight in this year. In a uniquely challenging environment, 2020 was a record year for cash flow in every single quarter as well as the full year. Operating cash flow benefited from lower tax and restructuring payments and a very successful working capital management. As a result, operating cash flow for the full year reached 7.2 billion euros, approximately doubling year over year and significantly above the raised outlook of around 6 billion euros. Likewise, our free cash flow in 2020 reached 6 billion euros, more than doubling year over year, and significantly above the raised outlook of above 4.5 billion euros. Looking forward to 2021, we expect operating cash flow of approximately 6 billion, primarily reflecting moderately lower profit, adverse currency movements, in particular for the US dollar, and higher income tax payments, while free cash flow is expected above 4.5 billion euros, also impacted by a modest increase in capex. Now, our detailed 2021 outlook is available in the quarterly statement published earlier today. It assumes the COVID-19 crisis will begin to recede as vaccine programs roll out globally, leading to a gradually improving demand environment in the second half of 2021. Our strong finish to the year, the launch of our new holistic business transformation offering Rise with SAP and the other key strategic initiatives outlined by Christian position us well to meet our new outlook targets. Note that our outlook is provided at constant currencies and we expect reported figures to experience continued FX headwinds as laid out in the quarterly statement. In 2021, we also expect to incur between 150 and 200 million of restructuring expenses. The big majority of which is a non-cash impairment of obsolete assets related to the modernization of our cloud infrastructure. As usual, these restructuring expenses will be fully recognized upfront in the first quarter of 2021. Let me now turn to our non-financial highlights. In 2020, we saw a strong performance of our non-financial indicators. Christian already spoke about our strong increase in customer net promoter score. Our employee engagement index increased by three percentage points to a record 86%. Our measures to decrease greenhouse gas emissions were bolstered by continued reduced travel due to the COVID-19 pandemic. As a result, in 2020, our greenhouse gas emissions were only 135 kilotons, a decrease of 165 kilotons. Looking beyond the numbers, 2020 featured some great developments on the sustainability front. We were recognized by a number of ratings and rankings for our achievements, including making it to CDP's A-list of climate leaders, inclusion in FTSE for Good Index, among others, and remaining for the 14th year in a row the number one software company in the Dow Jones Sustainability Index. In 2020, we launched initiatives such as Climate 21 and Circular Economy to enable our customers to make this transition and contribute to a sustainable future. And finally, I would like to update you on the Value Balancing Alliance, where we have actively executed our first pilot ending in November 2020. Details of our findings will be shared in our integrated report, which will be published on March 4th, 2021, and which I recommend for your reading. So before closing, let me briefly talk about the Qualtrics IPO. As Christian just discussed, we are delighted with the outcomes of the IPO this week. which represents a more than doubling in value since our acquisition two years ago. Importantly, the IPO maximizes Qualtrics opportunity to expand their business and build the best talent while SAP continues to reap the benefits of majority ownership. To conclude, in 2020, SAP responded quickly to the crisis and demonstrated its agility. In an extremely tough environment, we grew the top line while expanding operating profit and margin and delivering record cash flow. We are now fully executing on our strategy to drive long-term sustainable growth while significantly increasing the resiliency and predictability of our business. The launch of Rise with SAP is accelerating customers' move to the cloud and their business transformation. We are receiving very positive feedback and already see strong early take-up. This gives us all the confidence in the world to reach our 22 billion cloud ambition by 2025. With that, let's open up for questions, Stefan. Thank you, Luca.

And we can now start the Q&A session operator.

Thank you. If you'd like to ask a question, please signal by pressing star 1 on your telephone keypad. If you're using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, that is star 1 to ask a question. We'll pause just for a moment to allow everyone the opportunity to signal for a question. Thank you. We'll now take the first question from James Goodman at Barclays. Please go ahead.

Good afternoon. Thanks very much. It's clear you've been working closely with customers and partners ahead of the launch of Rise on Wednesday. You mentioned that pilot customers are already contributing to the quarter. I just wondered if you could talk a little bit more about the rate of adoption you're expecting over the coming quarters and perhaps specifically whether you're expecting to see this more as a sort of migration of license Thank you. Let me start and then Luca and Scott feel free to build on top. I mean, look, James, first of all, when we started to design the new offering, as I also said, we listened very carefully to our customers. And

To many chief information officers I'm talking to, the main issue with their digital transformation is not the fact that the technology is not there. The solutions are not there. They are all there. The point is around how can you use this technology and connect it to the business processes. When you are migrating an IT landscape to a new cloud infrastructure, no single business process will change in HR, in procurement, in sales. and with the new offering, and it's really the sum of its parts, we are taking the business process intelligence layer and Signavio is therefore such a great, great fit. We are taking that, use our experience, use the best practices we see in the market from over 400,000 customers and we can tell exactly the customer how do we design their business processes, which business models works best, should the customer switch from product to selling services, should they switch from and others. And then we can go from there because S4HANA Cloud can do it all. And again, the artificial intelligence, the RPA, when it also then comes to Leonardo, it's not like that this is a side element. It needs to be part of one. And this is how it comes together. And yes, we started pilots. I didn't want to push this offer just out there to the market. We actually started with 20 pilots. We ended up with 130. We actually had to, you know, calm the field a little bit down, Scott. I guess that's fair to say because, you know, we still are in a pilot phase. And now we are, you know, of course, public. And now we go. And, of course, for smaller, for midsize customers, we will for sure see, you know, shortened sales cycles. For some others, it will take a bit. But for sure, it will drive the acceleration. of S4HANA Cloud, and both, as you also have heard, the migration with the installed base, with very healthy conversion rates, and second, with a 40% net new customer share, I mean, I don't know what to say more. We are also clearly winning market share. And Luca, maybe you can talk about the KPIs.

Yeah, absolutely. And first of all, on this, you know, maintenance conversion versus new license topic, just give you an idea of what we roughly are looking forward to. You will know that our cloud ambitions until 2025 call between 2021 and 2025 for a CAGR of around about 25%. And obviously Rise with SAP is a material contributor. And if we break down what we expect in terms of contribution from it, then we see around about two to three percentage point contribution, both from the conversion of established maintenance, as well as from the conversion of new software licenses to cloud subscriptions, leaving basically high teens in terms of growth CAGR for the rest Thank you very much. to the cloud, as well as the new customer success that we have from a financial perspective. So stay tuned for that. But as always, SAP is committed towards transparency and you will get it starting this quarter.

Okay, thank you. Much appreciated. Thank you. Thank you. Let's move to the next question, please.

Well, I'll take the next question from Charlie Brennan at Credit Suisse. Please go ahead.

Thanks very much for taking my questions. I'm going to do two, if that's okay. Firstly, for you, Luca, I understand the concept of you taking ownership of a holistic contract that includes both some infrastructure and services elements, and that's going to enable you to capture greater share of the wallet. Can you just help me understand how those services and infrastructure elements are going to flow through your numbers? Do those and many more. Thank you very much. But I think on the previous call, you were happy to imply that 8 billion of free cash flow seemed reasonable. In light of the 2021 guidance at 4.5 billion, I was just wondering if that still seemed achievable. Thank you.

Yeah, so let me cover the last one quickly because that's easy. Yes. What we are expecting is that as also our profitability targets have been pushed out by two years to 2025, so will the free cash flow target. So we still see this as our achievable target for 2025. That was probably the quicker one. On the infrastructure and services side here, now we need to be precise. So first of all, we are bundling with RISE, of course, the public cloud infrastructure and also certain automated productized services. For example, we provide code analysis tools that allow our customers to inspect their modifications and also help our services partners then to do the migrations swiftly. Business process intelligence is another All of those elements as well as the public cloud infrastructure will be recognized as cloud revenue as part of the overall bundle. Irrespective of this, we are also offering ourselves, but also our service partners, our SI partners, of course, migration services in order to set up the systems. Those would be recognized as services revenue separately. That's at a high level how this distinguishes. And in terms of the margin, actually, we believe that we can gain significant efficiencies through an industrialized migration approach. Thank you very much. and the ERP core still. And with this structure, we can actually run quite efficient cloud infrastructure operations. And so while the individual margin levels that we can achieve across the entire customer base will depend on the complexity of the individual customer situation and where their starting point is and how long it will take to move them to way more streamlined operations, in aggregate, I can only assure you that those impacts are of course factored into our and the long-range margin guidance that calls for us to land in the neighborhood of 80% by 2025.

Okay, thank you. Let's take the next question, please.

Thank you. We'll now take the next question from Stefan Slowinski at Exane BNP Baharabad. Please go ahead.

Great, thank you. And I guess just to follow up on the last question, I understand the infrastructure-related offering will be going through your cloud revenue line. Will you also be, I guess, passing through the services revenue from some of the partners or all of the partners through your services line? Just to confirm, is that what you just said?

No, no. As far as services for the migration are going to be offered by partners, that will go down separately on their paper. But we will take the holistic ownership of running the solution itself all the way from the software as a service layer to the infrastructure as a service layer.

Okay, great. Thanks for clarifying. And just to follow up to that, I guess, Christian, just on the integration work that you've been doing across your cloud applications, I know it's, I guess, part of Rise to start to cross-sell more of that. Can you just help us quantify where you are in that process? And, you know, maybe if you look at your 400,000 customers, do you have any data in terms of how many of those customers have at least two SAP cloud apps? And, you know, what the pipeline looks like for cross-selling those applications? Thank you.

Yeah, so I come to the last question first. There is immense cross-sell opportunity. We still have thousands of on-premise customers wanting HCM. There are immense still eye-based left for procurement. And by the way, now that the integration work is almost done, We are also going to offer a bundle this year with S4HANA including SuccessFactors, Employee Central and Ariba as this now really comes as one. We are almost done with the integration work, data models in sync, user experience in sync. We are pushing also now in the analytics layer for integrated planning, for integrated reporting. and we will also share a more detailed announcement in the next weeks where we also have some customer references in. The customer in APJ, Scott, you know them well, they are wanting actually eight cloud solutions from SAP and they now can cut the customer integration already by 80% and we have much more of that, so customers now feeling tangible outcomes and as I said, we are almost done and we will finish the rest also then during Thank you. Let's take the next question, please.

We'll now take the next question from Phil Winslow from Wells Fargo. Please go ahead.

Great. Thanks for taking my question. Congrats on a strong close of the year. Christian, a question for you from what you're hearing from customers. Obviously, there are lots of different flows and dynamics affecting potentially the shape of this year. Obviously, hopefully you have a sort of post-vaccine world and economic recovery is sort of like what we saw in 2010 and sort of return of SAP projects. But then also you have a lot of technology, as you just mentioned, with RISE with SAP that you're delivering with customers that they maybe needed to kick the tires on it, et cetera, maybe even expand usage of SAP. What are you hearing from customers on, I guess, the flow of these impacting the year and projects?

Yeah, so Scott is with us. Scott, I can start and you can just comment on what you see across the globe. I mean, look, what we also have seen in Q4, Very positive is how relevant we are in the value chains of our customers. I mean, others talk about how they help to deliver the vaccine. We are running the supply chains. We are running the productions. We are now in this time really are more closer than ever to these enterprises to help them scale their production, to put them into the cloud, to connect them to the business network so that they get the ingredients for the vaccine from Asia Pacific to the U.S., to the factory in the U.S., despite the country lockdowns. These are real business scenarios. This is what we are doing. And this also then gives us the confidence to be very positive about 2021. Obviously, yes, we acquired a travel and expense solution. But also there, I have to say, this is by far a market-leading solution. So we are, of course, eagerly waiting until we can all travel again. But they will come back. They will come back strong. And actually, I'm still surprised that we are still doing business with this solution these days. And when you have heard Luca now also talking about a 27% growth rate for SARS-CoV-2, and you look at the valuation of Qualtrics, you know that we have many, many other assets in our portfolio who are actually growing like Qualtrics. So you see our portfolio is relevant. Our portfolio is strong. And maybe, Scott, you can give some sentiment from What is actually what you are seeing across the globe?

Yeah, sure, Christian. Thank you. Look, based on the discussions with the customers, more and more of our customers are very comfortable, not only in the cloud for the technology, but for their mission-critical applications, because they know that to transform and to serve their customers now and in the future, they need to differentiate not just at the technology layer, but at the business process and innovation layer. And that's why they're Coming more to SAP, you combine that with the business transformation as a service, ensuring that they don't have an upfront CapEx investment and in fact pay over multiple years as they realize the business value. So that holistic subscription offering through Rise with SAP, but all of our SaaS portfolio is giving you a really strong confidence that the customers around the world are not only positive, but they're actively working on their digital transformation programs with us. So the outlook is strong.

Thank you. Let's take the next question, please.

We'll now take the next question from Julian Serafini at Jefferies. Please go ahead.

Hi, thank you. I have two questions. I think one for Christian, I think you'd mentioned the S4 HANA Cloud were at roughly 80% of the features of the regular full-featured S4 HANA. Is that an impediment for the adoption of RISE? And I guess, how do you plan to close that gap to the regular full-featured S4 HANA? And then second question for Luca, just in terms of capital allocation, obviously SAP is generating a lot of free cash flow, right, this year and in coming years. And should shareholders be expecting some kind of incremental return? I know you had talked back in 2019, I believe, about doing annual step-by-step returns. I'd be curious to get an update on what the plan is here.

Yeah, so I start and then Luca, you can build on top. I mean, Julian, the first point, the time of wise with SAP is now and, you know, to tell you why the things are now coming together. And when you look at S4HANA Cloud, we have put the data model on our platform. So yes, we have 80% of the capabilities now available in the cloud. Probably in some parts, you know, we will not exactly also develop the same kind of capabilities as we did in on-prem because business models are changing. And you will also find customers who put another circle around the business process, which is really, you know, very individual to this customer. And that's why it's so important that the platform is not there. And by the way, the platform is also not there for success factors for Ariba. The platform is now part of every deal to build the extensions for our customers. and we also invite our partners our ecosystem to the party because now everything is there on this platform to just you know build seamlessly the extensions in past times now why should you go to an sap cloud platform when we don't have the same services like our applications use now it's there this is why we are now launching the offering wise with sap and this is why we are so confident and again You have seen in my keynote a customer like Siemens. Obviously, it will take time to transfer them completely over. You have seen the number of ERPs, but they will now start. They will start and we migrate them step by step. And on every step, we will look at one business process after another and we will deliver them tangible business benefits.

Yeah, and perhaps on the On the use of capital, look, our philosophy is unchanged from what I had shared with all of you at our Capital Markets Day in late, I think it was in November 2019, if I'm not mistaken. And indeed, we had a very strong free cash flow and obviously have realized now additional proceeds from the Qualtrics IPO. But the logic is always the same. First of all, we want to fund our organic investment needs. And in particular now for this year and next year, that involves and includes also the harmonization and modernization of our cloud infrastructure, which will reside in some additional CapEx requirements. Then we want to continue to deliver and pay back outstanding debt when it is due. This year, we'll actually have a rather and a big chunk of debt returns that we have to still make. One, we have still 1.25 billion of Euros of the Qualtrics term loan outstanding that we want to repay in 2020 and another 1.4 billion of regular Euro bond repayments. Second, beyond that, of course, we want to pay an attractive and increasing dividend. and we had a very strong net profit, which is the baseline for the dividend payout in 2020. So while the final decision on the dividend is going to be taken by our supervisory board in late February, as always, it is safe to assume that based on this and our policy to pay out more than 40% of net profit in IFRS terms, you will see an increased dividend payout from SAP. Last but not least, we obviously also want to continue to consider value-accretive tuck-in acquisitions if they make sense. In the last two quarters, you have seen that we have acquired Amasis in the customer experience space, as well as now lately Signavio. Those smaller acquisitions are obviously ones which we can pay back from our strong cash flow. and we will do so. And then the remaining excess cash, if we have it, something that we of course will consider for incremental capital returns. But on that one, we will follow the process that we have outlined. This will be evaluated in the context of our final year end results by the supervisory board. and if there are any additional measures that we would decide to take, we would communicate them afterwards as we have done in 2020. So same procedure as in the past, I would say.

Okay, thank you. Let's take the next question.

We'll now take the next question from Muhammad Mawaralla from Goldman Sachs. Please go ahead.

Great. Thank you very much. I had sort of two questions. First, Luca, can you just help us bridge the gap and write an updated cloud backlog disclosures? That metric has seen a deceleration growth, but you also talked about the 27% growth in the cloud business X transactions. Should we therefore anticipate over the next several quarters that that sort of momentum may potentially slow? And then as that sort of bookings Thank you very much. Thank you.

Yeah, let me start and then please also Christian feel free to compliment here. First of all, it's important to note when I talk about the growth rate of our software as a service platform, as a service business, this is excluding the entire Intelligent Spend Group, not only transactional revenues. In the Intelligent Spend Group, both Concur as well as Ariba and Fieldglass also have a fixed committed Thank you very much. Thank you very much. into the P&L due to the delayed nature of revenue recognition in the cloud subscription business. And therefore I believe that you will see and we will see the trough in our growth rate in cloud in the first quarter of 2021. And from there on, we should see a reacceleration based on both the strong performance in Q4 but also the confidence that we have that now with programs like RISE, our new solutions that we are bringing to the market, as well as the starting momentum that we see in the rest of the portfolio, we will actually be able to re-accelerate and grow the business at higher rates for the remainder of the year. In terms of the businesses that we have in this SARS past chunk outside of intelligence spend, It's a variety. You have solutions like SuccessFactors, the human experience management solution in there. You have solutions in there like S4HANA Cloud, which is growing very fast, the business technology platform assets, as well as analytics in the cloud. You have our CX customer experience portfolio with commerce, The CRM cloud solutions. And finally, you also have Qualtrics in that space as it is also a SaaS pass solution that gives you a view. And of course, those assets are of varying size and varying growth levels. But the ones that I cited before, like commerce, like platform, like S4HANA cloud, are all at a similar scale and grow also very, very fast, typically in the mid-double digits.

Okay, thank you. Let's take the next question, please.

Thank you. We'll take the next question from Michael Breesch at UBS. Please go ahead.

Thank you. Good afternoon. Thanks, sir. Thank you for getting me on. Just two from me. Luca, you gave an interesting insight into the ecosystem yesterday or Wednesday on your RISE presentation. I think you said that the infrastructure, the service opportunity underneath SAP is about 10 billion a year. How much of that are you expecting to be under your paper, if you like, by 2025? And then also, Luca, you talked about the investments in cloud harmonization, a converged infrastructure, and also indicated, I think, in October that there might be a slower margin progression in the cloud for the next couple of years. Can you maybe just give us a feel for should we be expecting overall cloud margins to be flattish this year? Should they increase a little bit? Some insights there, please.

Yeah, so first on the cloud margins, because there I have an answer for you. So our expectation is that despite the investments that we are taking over the course of the next two years, we should still see a modest increase in the cloud margins in 21 and in 22, but then a significant step up as of 2023 when we have concluded that work very much in line with what you saw actually in the past while we were going through the harmonizations of the database layer. You might have might remember that we had slower progress for a while and then after success factors also last year Ariba was done you saw again a step up and that would be a similar trajectory that we're expecting also for the cloud infrastructure harmonization work and on the On the infrastructure as a service share, I really can't give you such a share because we're not breaking out the public cloud infrastructure piece. Actually, we are offering our customers choice. As we have said, they can actually select the public cloud infrastructure or they can elect to go with SAP's own converged cloud. So we obviously have an overarching revenue ambition for a rise with SAP that fuels, as I said, the ambition to reach the 22 billion euros in cloud revenue by 2025. But within that, I really cannot give you a breakdown between public cloud and converged cloud infrastructure.

And Michael, maybe just to build on that from a business perspective, because I also saw comments around Why should actually also the customers to decide to go with that bundle? I mean, from a business perspective, I mean, when we think about what kind of workloads do we want? So here we talk about production, here we talk about finance, here we talk about logistics. And when this is down, all red lights are on. And in this case, you don't want to go to three different parties and ask, okay, who is now actually, what is now actually the root cause? You want to go to one accountable party ideally the one who sits on top and figuring out the root cause with monitoring tools across the stack. And this is something what we should never forget when we talk about why is that there are clearly also some reasons why business-wise for a chief information officer this could make sense to really go via SAP while you can still have the best of the best.

Okay, thank you. We have time for two more questions.

We'll now take the next question from Adam Wood at Morgan Stanley. Please go ahead.

Hi, good afternoon everyone and thanks for taking the question. First of all, for me, can I just follow up on that last comment, Christian, around, you know, I think many of us will see the value of the bundle and the ability to deal with one vendor. But to the extent you're going to be able to protect margins on the bundle at the gross profit level and therefore mark up some of those services, what's the risk that that bundle just becomes too expensive for customers versus independently contracting? And they see the value of where it is, but because you're marking up to get the margins you want to be at, it's just too expensive for them to go to. And then secondly, just thinking about distribution, there's been a lot of change in the leadership of the sales organization over the last few years. Could you maybe just give us a little update on the team there, how you see things progressing, and then maybe particularly where they are with readiness to sell Rise, which is, given it's a bundle, again, quite a different sale maybe from going and just selling a simple S4 HANA upgrade to a customer. Thank you.

Good questions, Adam. So first of all, when it comes to the margins, You can be vastly unsure. Luca is watching us. And then second, no, but seriously spoken, I mean, we are talking here about billions of consumption, billions of workloads. And with that, we, of course, also are getting pretty attractive cost rates. And so we, of course, also calculated it through across the stack. And let's not forget, for an install-based customer, There is still also a conversion weight. So you really need to see this offer as a holistic offer. You're also coming on top of the commodity, coming with the platform, coming with S4HANA. And with regard to the changes, looking at Julia now joining us from Microsoft, I guess she will be a great, great asset to the team. She will help us tremendously to bridge the product marketing to The innovations we are going to deliver. And then obviously, Scott, feel free to comment on the sales side. But especially in Q4, we have seen a huge uptick in North America. It's actually the region of the quarter. We have strong, strong sales representatives there with DJ, but of course also with Paula Hansen and others. So I'm really feeling confident that we have the right team together. But Scott, please chime in.

Yeah, sure. So I guess a couple of comments to give a bit of colour on this. The first is the sales organisation and in fact the customer success organisation, as Christian mentions, is actually very stable. Leadership that's been in place for a number of years that understands the markets, understands the needs of the customers and is able to navigate that change. Secondly, also as Christian mentioned, as we were launching our pilot in Q4, we were also enabling customers our organization of 40,000 women and men in the customer success organization about Rise, the offering. And as we were refining that offering, we were also being ready. And in fact, just this last two weeks, we've launched the largest customer success summit. We brought all of our customer success organization, 40,000 people plus over 10,000 partners in not only a kickoff, but an enablement and preparation. We're ready to go, and what is great is the customers are ready to engage, so we're looking forward to a fast start.

Okay, thank you. Let's now take the final question, please.

We'll now take the next question from Nutt Waller at Baader Bank. Please go ahead.

Hi, thank you for taking my question. It's actually one, Christian, you spent a lot of your efforts on the integration of the products, probably something that has not been in focus of SAP on the previous leadership. So can you give us a feeling about, you mentioned the increasing customer satisfaction, how that impacts your expectations regarding the whole migration cycle to S4 HANA? and which percentage of your customer base are you expecting to have migrated until 2027 when the standard maintenance scheme or the extended maintenance runs out?

Thanks a lot for the question. I guess it always helps when you have been yourself in the shoes of a chief operating officer and when you had IT under your leadership because then you really feel the need for having really an integrated solution landscape. As I said earlier on, we are almost done. Our core applications now speak the same language, so they are not only transferring data technically from left to right. And with that, of course, what comes with it? The cross-sell opportunities. It was mentioned before. We have still thousands of customers running line-of-business solutions on-prem. and with that now we of course also will bundle our, we can bundle our solutions much better. But compared to on-prem, the customers have choice. They can go into a modular landscape, highly standardized and build the extensions then, you know, next to our core applications on our cloud platform. And this is for me, of course, something, you know, what we have factored into the plan, but of course it's a huge benefit for our customers that this is, you know, what SAP does. For many, many years, we are back and we are now, of course, also innovating. Let's also not forget, we talk so much about integration. Sometimes, you know, I also feel, you know, 15% of our development capacity is actually focused on integration. So there's 85% left. Yes, we are doing localization. We are going to support our customers, no matter if there's a Brexit out there or not. We do that as well. But I guess there's also a lot of capacity left for building new innovations every day and this is what we are going to do. And I'm really looking forward to also highlight everything what we do around there because this is a lot.

Okay. Thanks a lot. This concludes our Q4 2020 earnings call. Thanks a lot for participating and I would say goodbye. Thank you. Thanks a lot. Take care. Bye-bye.