SAP SE ADS

Welcome and thank you for joining the SAP Q1 2024 Financial Results Conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press hash, followed by one on your touchtone telephone. I would now like to turn the conference over to Anthony Colletta, Chief Investor Relations Officer. Please go ahead.

Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO Christian Klein, CFO Dominique Azam, and Scott Russell, Head of Customer Success. On this call, we will discuss SAP's first quarter 2024 results. You can find the deck supplementing this call, as well as our quarterly statement on our investor relations website. During this call, we will make forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the risk factors section of SAP's annual report on Form 20F for 2023. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-year at custom currencies. The non-RFS financial measures we provide should not be considered a substitute for or superior to the measures of financial performance prepared in accordance with RFS. Before we start, I'd like to first remind everyone of the adjustment to our reporting practices announced on December 18th last year. This adjustment, notably incorporating share-based compensation into our non-RFS results, are now fully reflected in our Q1 results. I would also like to call your attention to our upcoming financial analyst conference, which will take place on June 5th as part of our Sapphire event in Orlando, Florida. This will be broadcast on our website. And with that, I'd like to now turn the call over to Christian.

Yeah, thank you, Anthony. And thanks to everyone on the line for joining our first earnings call for 2024. When we look at SAP's longer-term growth journey, 2024 is the key year. It's the year to scale up revenue and profitability. And I'm so proud to say what we saw in Q1 makes us very confident about our goals. We are off to a strong start and we have laid a solid foundation for 2025 and beyond. Let's look at the key metrics for Q1. Current cloud backlog grew 28% to 14.2 billion euro. This is the fastest growth on record and demonstrates the strong momentum across our portfolio with business AI as an enabling factor with a strong impact already on our Q1 backlog. Cloud revenue increased 25% and reached 3.9 billion euros. Our operating profit came in at 1.5 billion euros in Q1, 19% higher than a year ago. The new disclosure of Cloud ERP Suite creates transparency for you and us. It shows how we are executing on moving our installed base to the cloud and how we are driving SAP's ERP leadership position with our land and expense strategy. The Cloud ERP Suite contains all the modules for a company's core processes, from finance, band management and HR, to supply chain, commerce and our business technology platform, including data and analytics. Together, these modules have the same functional scope as our monolithic on-premise ERP. Our modular and integrated cloud ERP is unmatched in covering the core processes for over 25 industries and 130 countries in the world and represents a $700 billion market opportunity by 2027. In Q1, revenue from the cloud ERP suite was up 32% and reached 3.2 billion euros. We have seen exponential growth in this metric for two consecutive years as we are successfully expanding our footprint in our installed base. The land and expand strategy works beautifully. Every customer right now has to redesign core processes end-to-end to master the business transformation in their industry. And this is only the beginning. The flywheel has just started to spin. I will go deeper into that in a minute. There are many exciting customer stories behind our strong start to the year. In Q1, a range of exciting companies signed up for Rise with SAP. To name just a few examples, the premium chocolate maker Lind & Sprüngli, the global manufacturing company SKF, and the US aerospace company Curtis White. We also saw great customer take up across the portfolio. Maersk, a world leader in container logistics, adopted the BTP as the integration and development platforms spanning across the SAP and non-SAP IT landscape. Our grow with SAP offering was very successful with hundreds of new customers and a 64% share of net new customers in Q1. One of them is the carbon capture startup Climeworks. As for our sustainability solutions, we won another 100 customers in Q1, on top of more than 1,000 we had before. New customers like Ericsson, the global leader in wireless technologies, and Weiland, a leader in energy-saving technologies, chose SAP's Sustainability Control Tower for their regulatory ESG reporting. So in summary, we had a strong start in Q1, and we are happy to confirm our 2024 outlook as well as our 2025 ambition. We are also very confident about the resilience of our growth story beyond 2025, because we have all the right ingredients in place. Our three growth drivers are right with SAP as the leading transformation offering for our installed base. Grow with SAP for net new customers, smaller subsidiaries and acquisitions. And the innovations we delivered and we will release in the upcoming years. Above all, business AI. Let's first look at why with SAP. Our installed base is large with over 11 billion remaining support revenue to be converted to the cloud, typically by a factor of around two to three. On top, the 700 billion cloud ERP market offers significant cross-selling opportunities. And I have no doubt that SAP's integrated best of suite capabilities will win in the core business of our customers. As part of WISE and via the Clean Core journey, SAP and our ecosystem will help our customers to remove their ERP custom code and instead develop integrated ERP extensions on BTP. This gives us an immense additional revenue potential, considering that customers in the on-premise world spend up to 7 euros on custom code for every euro they invest in ERP software. Customers like Hitachi Hitech, for example, reduced the number of custom code add-ons by over 19%. WISE has just become the de facto standard for our installed base. It offers a holistic business process redesign combined with the migration to our modular cloud ERP, resulting in fast time-to-value and being always on the latest release, consuming new innovations without time-intensive ERP upgrades like in the past. Let's have a brief look at Grow with SAP, our second growth driver. As SAP's Greenfield Cloud ERP offering for net new customers or new business units of large enterprises, Grow delivers go-lives in weeks for every business model in every industry in every country. With our ERP solution, SME customers can grow and scale their business without migrating to a new ERP. Ultimately, Rise and Grow offer customers similar advantages. Innovation, modularity, scalability and integration. Coming to the third driver of our growth, which is innovation with Business AI at the core. SAP Business AI will once again transform how businesses run and how end users will work in the future. At SAP, we infuse business AI across our portfolio. First of all, CHOOL will be our new user experience via natural language, our one front end. We have based our CHOOL roadmap on an analysis of the most frequent business and analytical transactions of our end users. This way, we make sure that the most heavily used transactions will be fully AI enabled by the end of this year. Second, we are embedding Gen AI directly in our cloud products. Since Q4, we have released over 30 new AI scenarios across our cloud portfolio. Additional ones come out almost every week, with more than 100 in the pipeline for the remainder of the year. Third, our customers, partners, and SAP can use the AI Foundation on the BTP, including the GenAI Hub, to build custom AI scenarios. Over 60 ecosystem partners are taking advantage of these capabilities already and working on over 80 use cases right now. Among the over 27,000 customers already using our business AI is ZF Friedrichshafen, a leading automotive supplier. ZF is lifting significant financial value by optimizing demand and supply chain planning with embedded AI. Together with our partner NVIDIA, we are currently building new GenAI capabilities. One use case will revolutionize how software will be developed in the future. Jensen and I are looking forward to telling you more about this partnership at Zephyr. Commercially, customers can buy SAP Business AI as consumption-based AI units which can be used across the entire portfolio or via our premium rise and grow offerings that include AI units so customers can get started right away. Both commercial offers have already seen high demand and many Q1 deals were influenced by SAP Business AI. Overall, we offer a unique value proposition versus the competition with three elements. SAP Business AI works out of the box. For their own GenAI-enabled extensions, customers and partners have full choice which leading model they want to use, including modules from OpenAI, Google, the best open source alternatives, or using their own modules. And SAP Business AI comes with our leading enterprise standards and is deeply integrated with our data and security module. In summary, we had a strong start to 2024 and we are confident we will achieve our goals for the year. Looking ahead, we have powerful growth drivers in place and many innovations in our R&D pipeline. The strong development of our cloud backlog is a testament to that momentum. With regard to our transformation program, we are making even better progress than expected, especially with hiring new talent for future-oriented areas such as AI. The program will help us to capture growth and increase efficiency at the same time, among other things by pushing the internal use of AI. We expect a triple-digit million amount in efficiencies from embedding AI across all our processes. Equally important for us as an employer, wherever SAP colleagues are affected by restructuring, we are moving with care and empathy, always aware of our social responsibility. And with that, I'm handing over to you, Dominik.

Thank you, Christian, and thank you all for joining us this evening. Let me start by echoing Christian's sentiment that the fundamentals remain exceptionally strong. March marked my first anniversary as SAP CFO, and I consider myself very fortunate to have joined the company just in time with a business in pole position to capitalize on the tremendous AI opportunity lying ahead of us. The hard work of the prior year starts to pay off handsomely also for those investors who kept the faith in the company during these turbulent times. It is because of the dedication of our workforce that we continue to experience strength across the business. Our solutions are becoming increasingly differentiated, demonstrated by continued revenue growth throughout the world, expanding cloud gross profit, and improved cash conversion. We've kept the promise and walked the talk, setting the stage for sustained growth in the coming years. Fiscal year 2024 is already off to a strong start. We continue to build on our robust foundation as evidenced by the impressive growth of our current cloud backlog and continued momentum of our cloud revenue. In addition, non-IFRS operating profits showed significant double-digit growth, even when including stock-based compensation. Our key priorities, including our investments in business AI, demonstrate our commitment to leading the charge in this new era of business transformation and exemplify our relentless drive for growth and operational excellence. The company-wide transformation program we initiated in January is progressing well, focusing on enhancing our operational efficiencies and setting the stage for improved financial performance. We are also deploying our own AI solutions internally as a powerful lever to drive productivity. Digital transformation is imperative in today's evolving landscape and SAP remains the partner of choice. Building on our strategic commitment, the introduction of the Cloud ERP Suite is a pivotal step in aligning our product offering more closely with our core ERP and integrated business solutions. All of this has helped foster the trend towards larger cloud transactions with deals greater than 5 million in volume, contributing more than half of our cloud order entry. This is remarkable for the first quarter of the year. I will now go into further details on our financial highlights. Current cloud backlog was 14.2 billion euros, accelerating its impressive growth to 28%, solidly keeping us on the trajectory towards our fiscal year 2024 outlook and fiscal year 2025 top-line ambition. Cloud revenue grew 25% year-on-year, mainly driven by the continued strength of our Cloud ERP suite. It grew by 32% in Q1, its ninth consecutive quarter of growth in the 30s. The sustained momentum underscores our expectations that Cloud Air P Suite will continue to capture a growing share of our cloud business, thanks to its critical role in our customers' digital transformation journeys. It actually already represents 84% of our combined past SaaS revenue, up three percentage points as compared to the prior year's quarter. Software license revenue saw a decrease of 25%. So the dilution of its share of the total revenue from 9% to 5% in only one year impressively illustrates the continued secular shift in market preference towards cloud-based solutions in the enterprise. Finally, total revenue surpassed $8 billion in Q1, up 9% year over year, showing unabated growth momentum. Now, let's take a brief look at our regional performance. In the first quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and robust in the Americas region. Brazil, Canada, Germany, Italy, the United Arab Emirates, India and South Korea had outstanding performances in cloud revenue growth, while the US, Japan and Spain were particularly strong. Now let's move further down the income statement. Our cloud gross profit grew by 28%, driven by cloud revenue growth and further efficiency gains. This resulted in cloud gross margin improving from the year-ago period, expanding by 1.8 percentage points to 72.5%. IFRS operating profit in the first quarter was impacted by 2.2 billion euros of restructuring provisions associated with the transformation program initiated in January. This resulted in an IFRS operating loss of 787 billion. This accrual represents the vast majority of the total restructuring expenses we currently expect to incur in the context of the program. The amount is closer to the upper end of what we had anticipated initially, which is primarily driven by the strong share price performance in the first quarter and the higher than expected acceptance rate of the early retirement program in the U.S. We continue to be in the very early stages of executing the program, which we expect to be concluded by the beginning of 2025, and projected expenses are based on preliminary assumptions. We expect visibility to further improve over the course of the second quarter and plan to provide an update once the related measures are fully assessed. Finally, non-IFRS operating profit grew by 19%, evidencing our sustained push towards enhanced profitability. The underlying profit expansion was tempered by a $135 million increase in stock-based compensation expense, mainly as a result of a very strong appreciation of our share price in the first quarter. Q1 2024 was actually the quarter with the highest increase in SAP's market capitalization ever. As we settled... For the last time, the entire tranche of our obligations under the Move 2021 Move SAP program in Q1, fully in cash. We expect a significantly lower sensitivity in the coming quarter as we move to equity settlement. Therefore, the non-IFRS operating profit outlook is reaffirmed for the full year 2024, despite this headwind. Non-IFRS earnings per share in the quarter increased 8% to 81 cents. The IFRS effective tax rate for Q1 was 16% and the non-IFRS tax rate was 32.4%. Now on to our cash generation. Free cash flow for Q1 came in at 2.49 billion euros, up 28%, again putting us on the right trajectory to maintain our full-year outlook. There was only a minor cash flow impact from our transformation program in the first quarter. So we reiterate our 2024 outlook on all parameters. For the detailed outlook, please refer to our quality statement published earlier today on our Investor Relations website. In summary, G1 marks a strong start to the year, highlighted by continued growth in both our current cloud backlog and cloud ERP suite. Business traction combined with focus on execution is positioning us well to meet our objectives for the remainder of the year. Before we open it up to Q&A, I would like to say that we are very much looking forward to welcoming you to our financial analyst conference in June. As already mentioned by Anthony, it will take place in conjunction with Sapphire in Orlando. And the team and I are very much looking forward to meeting you there in person. So thank you. And we'll now be happy to take your questions.

Please open the line.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press hash followed by one on their touchstone telephone. If you wish to remove yourself from the question queue, you may press hash followed by three. If you are using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press hash followed by one at this time. One moment for the first question, please. And there it already is. The first question is from the line of Toby Ock, with JP Morgan Casanova Limited. Go ahead, your line is open.

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

Well, I mean, the rule of 40 is simply an observation. If we do benchmarking with our core competitors and we look at the median or the average, it doesn't actually matter. You see that that's what they trade at. The stats show us that for 2023, we are at 25%. If you combine our free cash flow to sales margin plus the growth we achieved in that year, And if you look at the midpoint of the ambition or the ambition 2035, basically, you see that would kind of bring us a little bit more than half the way towards that. Now, the rest is really very much dependent on how much can we accelerate revenue growth. This is why we highlight again and again. The revenue mix improving. I highlighted 84% of the SaaS past revenue is already in Cloud ERP Suite, which is kind of running at 30% plus growth rates on a year-on-year basis. We also highlight that the strongest headwind, the decline in the software business is becoming smaller and smaller. It's now down to 5% of the revenues, though the fundamentals are actually there to support strong revenue growth. And then, of course, there is also some improvement in margins. We said that we want to clearly scale the cost base, not at the same growth rate as revenues, but again, we look at benchmarking and see that our core competitors achieve between 80 to 90% growth of the cost base versus the revenue base. That's an indication of the kind of ballpark we aim at with our transformation program. And now then you can basically play the math of rolling these numbers forward to see how long it will take us to come to that rule of 40, which, by the way, we have no idea where it will be five, 10 years down the road, because, of course, our competitors will also not stand still. But that's the way I can describe it. So don't take it as a guidance that we can get there at any specific given quarter. But obviously, we have to acknowledge that this is where the market is running. And this is a little bit of the North Star we have on top of our head. And I think with the measures we are taking, And now to really a kind of cover more than half of the gap we currently have and a B to accelerate growth and also to grow costs more slowly than revenues. We have the ingredients to gradually move towards the target.

That's great. Thank you. We'll take the next question, please.

The next question comes from the line of Adam Wood with Morgan Stanley. Go ahead, your line is open.

Hi, good evening. Thanks for taking the question. I wanted, first of all, just on the AI side, if you could help us a little bit around how that's been monetized today. Is this more that customers are accelerating the shift to S4 because they want to take advantage of the tools that will be available there in the future? Or actually, are you starting to monetize already that business AI feature and charging directly for that? And then maybe just secondly, you talked about seven euros of custom code versus one of software. Obviously, a massive opportunity if you could capture more of that. How realistic is it that you can cover enough of the custom areas to be able to capture that? Or is this more monetization of the platform as companies and partners develop on a BTP? Thank you.

Thanks a lot for the questions, Adam. I mean, on AI, first, when you look at the commercial model, we actually included some standard AI use cases for automation of repetitive tasks in our base packages. On top, of course, we have now we are delivering more and more gen ai models which also require high computing power and you know i talked about jewel and jewel will cover the most used transactions of our end users by the end of the year so no matter if you do work on travel on finance on supply chain on procurement It will all happen via human language, and that is included in our premium AI offering, which is consumption-based. We package it, some AI units already in our Wise and Quo packages, and that is actually running extremely well. And on top, of course, you can also, of course, consume business AI by, of course, buying more consumption packages of our offerings. And with regard to the adoption, I mean, the way how it works, Adam, is, of course, Juul will become the de facto user experience front end for our end users. Second, when you are then talking to the customers, what we are already doing, they will, you know, use our Gen AI scenarios for asset management, you know, for manufacturing, for shop floor automation, for more personalization of their products. offerings of the services of the products via our configurator, or they also build custom AI use cases. Why? Why do you do that with our GenAI Hub on BTP? Because you get the native integration into the data. We can also pre-train some modules. You have integration into the security and authorization, which matters in the business world. And these are all the benefits, the value, why our partners and customers already start to develop new AI use cases custom for their individual business. And with regard to your second question. I guess here it's also very important to mention that when you look at the momentum of our top line, I mean, it's evident that we are not only scaling our business with S4HANA Finance. I mean, I'm sitting in many of these wise mega transformations. And what we are often doing is we start with finance. Then we go into hire to retire. We go into finance and payroll. We talk about total workforce. We feel class and success factors. So we are closing mega deals, but we are doing it step by step in a modular way, given our architecture, which ensures fast time to value. And then you scan the custom code. And this custom code is actually, you know, sometimes seven times more than standard code, ERP standard code on-prem. And then you are looking into what kind of extensions have been built. Then, for example, in oil and gas, we brought now the 10 largest oil and gas companies of the world together. We talk about trade promotion. We talk about product revenue accounting. All the extensions, which make a ton of sense to not custom code it anymore in ERP, to sit always on the latest release, but then developing it side by side, because you need a native integration into the data module of SAP. And of course, the security concept plays in there as well. And indeed, Adam, this is a massive... uptick what we have and its platform consumption. And, you know, customers, partners can actually then also develop their own IP, can offer it in our app store. And then again, as I just said, for oil and gas, same will happen for retail, for manufacturing, can cross sell it across the industry. And with that, I guess you also feel that this is also a massive transformation for our ecosystem. No custom coding. but WADA building, developing software on the platform and building a massive ecosystem around our cloud ERP.

That's great, Christian. Appreciate all the detail there. Thank you.

Thank you, Adam. We will take the next question, please.

The next question is from the line of Johannes Schaller with Deutsche Bank. Please go ahead.

Yeah, thanks for taking my question. Christian, you mentioned you've seen already a kind of noticeable impact on CCB from AI. And obviously, last year, I think the CCB soft target was in the mid-20s. Now, it looks like we're more at 27, 28. It's tough to quantify the impact, I guess, but is the Delta, is that largely AI-driven? And also, should we look at the kind of high 20s as the more sustainable growth run rate for CCB now going forward?

I mean, on business AI, to answer your first question, I mean, Scott is also on the line. Please comment, Scott. I mean, I have no C-level conversation anymore without talking about business AI and the impact on the business. Just... Last week, I had a conversation about production downs in manufacturing and how our Chennai can help to get the machines faster up and running again, which actually would result in hundreds of millions of efficiency gains for this large chemical company. And you see in these conversations, are these AI use cases already live and fully adopted? No, they are now in the making. But with that comes more and more consumption. And we're going to monetize that in the upcoming quarters and in the upcoming years. And we have many more of that. And, of course, when you are now using success factors, conquer, everyone is looking for more efficiencies, for a new way of working. So tool will become the de facto standard. And with that, we're going to see an uptick of all of our premium packages. Now we are building for each line of business and, of course, also for rise and grow. With regard to CCB. I mean, we are very confident when we look at the pipeline for the year. We see, you know, healthy renewals. We see a good pipeline, you know, to close business in the upcoming quarters. Sapphire is around the corner where we also make some exciting announcements around data and, of course, AI. Yes, so we are very confident also when it comes to CCB for the remainder of the year. But Scott, Dominic, please feel free to comment as well.

Yeah, I'll probably give two additional data points just to add on what you described, Christian. So first, as you saw in the update, the cloud ERP suite growth, and that covers the end-to-end capability for an enterprise, is growing and it continues to grow strongly. Ninth quarter in a row, 30% plus. But the reasons why are evolving. There is no doubt companies want best-in-class processors, be able to automate their enterprise, build in efficiency. But what they're clearly now seeing is not all data is equal. Not all data in the enterprise is equal. The data that sits in the SAP platforms is the most valuable data that they have. And when they think forward and they look at our innovation roadmap with business AI and they see the capabilities that we bring inside the core, not only will they get the benefit out of the generative AI capabilities that we do in our platform and generative AI hub, but then the data that is the most valuable to them is it's got the integrity, it has got the context, it's got the metadata, it's got the semantics, and then you can get the innovation insights. And a lot of the growth that we're now seeing, and to Christian's point, there is not a single conversation that SAP is having with customers that is not linking best-in-class innovation underlying valuable data and the generative AI capabilities in that combination. And that's why they are excited about the roadmap, but it's already stimulating the growth. And to give you one additional data point, our cloud pipeline growth. So the pipeline that we generate in first quarter was the best on record. We continue to see strong demand there. not only in what we booked and what we're generating in the cloud backlog, but also the interest from the market. And a lot of that is stimulated by our business AI roadmap.

Maybe just to complement that view on the kind of dynamics in the business to the financial model, you know that the biggest, single most important dilutive factor, so to speak, from CCB down to cloud revenue growth with a certain time lag is actually the transactional business. This is now kind of stagnating. It's actually very, very slightly even decreasing. The macro isn't great. There's also these changes in the kind of supply network happening. And we think that over time that will become smaller in the mix. By the way, that dilutive effect is also embarked in our cloud ERP suite growth numbers. So we show that 30%, 32% growth despite that headwind. But that's the biggest bridge item between CCB and cloud revenues. Now, if you look at what we've kind of indicated in our ambition 25, you see that with 28% CCB, you don't need to see much acceleration to basically get there because you take off the dilutive effect on 5% of the revenues basically stagnating. And we do believe that in 25, there will be some acceleration there. So it's what we really take to get to our 2025 ambition. So anything beyond that would be upside in some way.

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

Very clear.

Thank you very much.

Mr. Arnaz, we will take the next question, please.

The next question is from the line of Frederick Boulan with Bank of America. Please go ahead.

Hi, good evening. Two quick questions, please. So first of all, coming back on the CCB, so you mentioned the CCB is being held by the demand for AI, but can you discuss a bit more specifically what's driving that sequential acceleration, any specific modules or areas where you see demand, or is it just the momentum in S4? And then second question on the cloud migration, If you can give us an update on your current ERP landscape, percentage of customers that have migrated to the cloud, and what are you seeing in terms of momentum? Are we seeing some of the largest customers continuing to migrate? So any update on that would be great. Thank you.

Yeah, happy to take that question. And Scott, please feel free to comment as well. I mean, first, your second question is also actually related to your question number one. What we are seeing now with business AI is actually that a lot of customers who probably, you know, plan their migration start date for S4, you know, end of this year or, you know, next year, that they actually now want to move faster. because they see the capabilities with SAP Business AI, as I mentioned, on asset management, on just automating many, many workflows in their company, but also when it comes to analytics, especially in the supply chain planning, which is an extremely important part of many companies right now. And that actually also has driven now the sequential increase. But this is not only business AI standalone. Business AI helps us to sell more supply chain, to sell more HR, to sell more finance. And then last but not least, which makes me so confident, also about the growth potential for 2025+. I mean, when you start with finance and you talk about your business model, you talk immediately about the billing, about the commissions. Then you're actually moving into the supply chain. And when you're doing demand and supply, you're also then talking about design to operate. Now we are seeing a huge uptick in our manufacturing cloud business. And then you're going module by module because when you talk to these customers, they see more and more that the best of breed really doesn't work when you have to stitch together manually data modules or the identity or the authorization. So what we are seeing in many RISE customers over time that they're a lot of cross-sell potential and that we it's the first phase is only about landing and then start provisioning start to redesign the process landscape and then we go and we already talked about the custom code and the ecosystem we are more and more building on btp and to also remove the custom code and move to the clean core

And I'll just add one additional comment to what Christian described, and that is the growth on the CCB is consistent around the world. And so this is not a particular region. Across all regions, we saw healthy growth. Obviously, APJ and parts of Europe and greater China were strong, but, you know, across the world. And secondly, it is across that portfolio. People aren't doing a move only. They're doing a move and transform, and that requires those extended capabilities. And if I just link it back, if you've already got the data architecture of SAP and it's the most valuable, then you can do so many more things, not only AI-related, but also innovation-related that you can do in your business. it definitely means that our short, mid, and long-term growth has, you know, it's definitely got confidence based on the capabilities, the innovation roadmap, but also the buying signals that we see from the market here and now.

Okay, thanks. Thank you, Fred. Next question, please.

The next question is from the line of Jackson Ader with KeyBank Capital Markets. Go ahead.

Great. Thanks, guys, for taking our question. Just one on the large deal strength. But I think Christian or maybe Dominic, you called it out in terms of the $5 million plus deals driving a lot of strength in cloud ERP. I'm just curious, are you seeing, I mean, I assume the preponderance of that is migrations or rise with SAP, but are you seeing any large deals for net new customers or net new land that are also driving some of the CCB growth? Thank you.

Scott, do you want to go first? Let me kick it off, and then Christian, please add in. So I think we've got to be clear. When customers decide to move to RISE, they're not just doing a move of their current environments and replicating the same capability. In fact, far from it. They're trying to transform, operationally process all of their data, all of their capability to serve now and into the future. They're setting their business up. And so when they look at these, which is why, to answer your question, the larger deals are because they look at a multi-year roadmap of capability transitioning from an older state, including non-SAP. So what we see is is many situations where our customers will say, okay, I might be using SAP for core finance, but I'll then extend, i.e. ERP suite, the other capabilities, and then we're able to have a competitive displacement. That happens on a regular. So whether you look at the SKFs, the Curtis Wrights, and the others that Christian mentioned in his opening, and you see the chart of all the other RISE customers, They're nearly always bringing the BTP, which is displacing other technology platforms and using that as the innovation platform. They're using other extension, whether it be Ariba, Concur, SuccessFactors to be able to provide its people its spend. So, yes, we are seeing that. But then the compelling event is obviously an initial move and then a multi-year journey when they're on a large deal, which makes up a big portion of the Q1 results that you see.

Maybe to shed some more light on top on the numbers is, I mean, what you also see with WISE, it's not only that we are landing, of course, and converting maintenance with a factor of two to three X to the cloud. What we are then seeing after is that next on land and expand customers who want to replace the HCM module. And this is then oftentimes a double-digit success factor, employee central deal. Needless to say, payroll is a massive business, which we are also more and more now shifting to the cloud. So there are... You know, a lot of cross-sell, large cross-sell opportunities after we landed with Wise. On BTP, I mentioned one customer. Actually, for BTP, we also oftentimes see now, you know, double-digit ACV deals, you know, with our large customers as they are not only using the platform for integration, but also for the extension, you know, for the clean core journey. And then last but not least, when it comes to the volume business grow, that's rightfully driven by our ecosystem, by our resellers. But oftentimes you start with a 500K deal with some users, it scales, and then you start finance HR, and then you expand into manufacturing cloud or into billing, et cetera. And in the meantime, you see that customers are growing from 500K to 2 to 3 million customers. And, of course, this is not the end, but you see that this massive volume business will also further contribute to the growth, and these customers will also become, after landing and signing deals, net new customers will also become way bigger over time.

Thank you, Jackson. Excellent. Thank you. Next question, please.

The next question is from the line of Michael J. Priest with UBS Limited. Please go ahead. Your line is open.

Yes, good evening. Just on your comments, Christine, about applying AI internally, I think you mentioned a figure of sort of triple-digit millions. Can you give a sense of where that comes from? And, you know, is this 100 to 150 million or high triple-digit millions? And over what time you might realize that? And just a quick clarification, Dominic, on the free cash flow. It's obviously very good. Did that include the final repayment of the factoring of about 200 million that spilled over from last year? And obviously, you're saying that the restructuring is not quite finalized yet, potentially. Clearly, your three and a half billion number is safe, even if that number does creep up a bit. Thank you.

I can start on the internal rollout of AI. And yes, indeed, it's a triple-digit million of efficiencies. And what we are already doing right now, we roll out Joule, especially for SAP success factors, so job description, learning. co-pilot, interviews, feedback, that's all automated now via Joule. In procurement, we have content recommendations rolled out in category tools. In IT or in the cross functions, for example, take F&A, we have to screen hundreds of thousands of contracts every year. That's now completely automated with generating AI. In Scott's world, in the sales world, we actually also use now AI for content generation, for demo, demo, actually for the business case creation, which saves a lot of time. So we are rolling out AI development, of course. We have GitHub. But then also we are using our own SAP built automated code generation tool, for example, for ABAP. And if you think about that, we can increase the productivity of each developer by up to 30 to 40 percent already this year by our own SAP built solution. And also by GitHub, you can imagine the scale and the efficiencies we are going to generate in the years to come also by applying AI internally.

On the free cash flow side, you asked about the kind of discontinuation of the factoring. I would say it was partially, not fully, because there are some deals which might spend longer term. But we basically in 2024 discontinued this practice. So you already see a part of the roll off. I want to highlight, though, that the bigger thing, so to speak, in Q1 still is that we paid the fines and the famous 0.2 billion on DOJ. and other authorities. So that was weighing in Q1 and is already digested. So we are also very pleased with the free cash flow performance in Q1.

Thank you, Michael. We'll take the next question, please.

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

Great. Thank you very much. Maybe with investor focus, I think, increasingly shifting beyond 25 now, I wanted to come back just to some commentary around the transition at a high level and specifically sort of framing that in a financial sense. The maintenance base that still remains in the business today, can you help us a little bit with just how much of that really needs to transition to cloud? I mean, I'm conscious that there was sales, for example, of S4 before the RISE program, for example, came in. And really then just When does that substantially need to be done by given the 2027 deadline, but also the extended support period beyond that? So just how much of the base reading over what period? And just a related second question, just around the services business only growing 1% this quarter. I know it's a slightly tougher comp, but given the demand for implementation work and such like here around S4, I might have expected that to be Are you expecting it to pick back up, or is there a structural reason that it remains lower? Thank you.

Sorry. No, I was focused on the services.

The first one was the maintenance.

Excuse me. Okay. So, maintenance. A little bit more than half of our 11 billion maintenance base we have today is in products which go out of regular maintenance by end of 2027. And then the question is how much of that will still not convert to cloud, but will go to extended maintenance at a higher cost. So that's the parameter, and I think it's safe to assume that the lion's share of all that by 2030 will in some fashion disappear because we will not, as we say so many times, prolong maintenance on these products. Of course, the rest being on other products, also, of course, on S4, which you know has a kind of lifetime through 2040, so there's ample of room there. But indeed, there is an anticipation that there will be an acceleration in conversions from that angle as people need to transition from ECC to cloud, given what I just described.

On the services business, I mean, Scott, please also feel free to comment. I mean, look, on services, first of all, we are delivering 90% of our projects via ecosystem and the remainder, the 10% share, Of course, what we are doing there, yes, there was some seasonality with the Easter holidays now in Q1. We had some one-timers last year in Q1. But in a nutshell, of course, this business will, of course, continue to also show growth going forward. And what is very important with regard to our services business, what we are focusing is more on the high-margin services like warehousing. When you are going in into a wise deal, you need a great architect who connect the process, the system, and the data layer to drive this holistic transformation. Then we have the best process experts. When you talk about business model transformation, when you talk about design to operate, obviously, of course, our consultants need to be leading and also sharing best practices of other customers. While, of course, main parts of the technical migration of the technical consulting will be delivered by our ecosystem, rightfully delivered by our ecosystem.

I just wanted to add one thing back onto the support revenue that Dominic described. Bear in mind that when we talk on one hand about large deals, when you've got these large programs of transformation, that includes a period of coexistence where customers will keep the maintenance of their on-premise capability until such time that they've transformed into the cloud. So Not only do you have that, so that steady progress accelerated transformation, it's happening in tandem. So as you see the cloud revenue growth, you will also see the corresponding takedown of the support revenues. But it is in light of a customer's transformation. So all the rise customers that were existing customers that you saw in Q1 and quarters in the past, go through that journey and so you can see a measured and managed downgrade of the support in light with the cloud lifting in correspondence.

And maybe one word regarding the maintenance, because I guess this is an important factor in all the modules, in all the models. I mean, there are certain parts of an ERP, as I also mentioned at the beginning, it's a monolithic ERP architecture. And in there is, for example, also BW systems. And, for example, a BW system is not so easily replaced. There's also a lot of custom code built. It's a massive reporting engine. And with DataSphere and with our partners, we, of course, also now more and more shifting this to the cloud. Will all BWs completely migrate to the cloud by 2027? No. But we will, of course, partially replace them, you know, over time. So it's fair to assume that, of course, some maintenance revenue will also be after 2027. That's all moduled in. And I rather see now with business AI the upside in, you know, accelerating the move of our installed base because every customer now finally gets it that in the cloud there's so much innovation. There's also with AI differentiation. So I actually expect that we see a further acceleration of our installed base move to the cloud.

Very helpful. Thank you. Thank you, James. We have time for two more questions, so we'll take the next one, please.

The next question is from the line of Mohamed Morawalla with Goldman Sachs International. Please go ahead.

Great. Thank you. I had two quick ones, if I may. First one for Dominic. You talked about kind of a minimal amount of the transformation charge taken in Q1. How should we think of the phasing of that over the course of the year? And I kind of understand that you're still kind of in discussion with kind of affected employees. And how should that kind of phase through the course of the year? And then secondly, for Dominic as well, you alluded to earlier in the year that your kind of 2025 guidance still doesn't assume any significant working capital kind of improvements. But I know there's seasonality in the working capital, particularly in Q1. Are there any kind of plans or initiatives, whether it's around sort of shifting the kind of the invoicing to annual or other kind of collections that levers that you can press on? And would you be inclined to perhaps, you know, pass on some of those savings elsewhere in investments in the business? Or could that be seen as a potential upside risk? Thank you.

Well, thanks. A lot of questions in one go, so to speak, almost like a planning discussion. So in terms of phasing, what I mentioned is that of the 2.2 billion accrued for restructuring, very little, if anything, has been kind of paid already in Q1. So I talked about the cash out as opposed to the accrual. And we said the vast majority of the accruals we currently expect have been taken in Q1. The program will run throughout the year and actually into Q1 2025. So it's not the final number yet. There are voluntary programs in there where we have to wait for the acceptance rate. There's still negotiation with social partners. I did mention that in the U.S., we actually had a very high acceptance rates, which kind of drove that accrual up a little bit. Also, the share price increase has driven the crew up a little bit because obviously we have to compensate more for the entitlements of the people that are leaving because they are good leavers if we want them to leave, so to speak. But we also said that let's see what's coming beyond that, if anything. Of course, we will only go for more reductions than what we've planned in case there is a good business case. Otherwise, it wouldn't make sense. So I think you can rest assured on that one. Now, with regards to the cash flow 2025, you mentioned that we have been not super aggressive in terms of working capital improvements in 2025. We are making some progress as we speak. I want to caution that we have really a very comprehensive transformation program and really executing the headcount reductions is of utmost importance. So that's the key priority right now. There are certainly opportunities. We did mention that the $8 billion free cash flow ambition for 2025 was successful. assuming no spillover of restructuring cash out into 2025 so that that is kind of a potential risk there that if we spill over some cash out from 2024 or restructuring into 2025 that will weigh on that but then the question is i mean to what degree can we offset so um i don't want to kind of go into more details at that point in time but obviously this is one of the questions As we mature our restructuring program with more clarity on how many people are leaving, at what cost, with the phasing of the cash out, we can sharpen the pencil and update you later.

Yeah, maybe one word from my side on the workforce transformation. I mean, it's as Dominic is saying, we are a little bit ahead after we started a restructuring program on people leaving SAP. And we do this in a very controlled manner. We have identified the job profiles, which we either reskill or actually want to reduce also via restructuring. And then second, we bring all the data scientists and new capabilities also on board for the platform, which we need to capture our future growth opportunity. And if there are more levers, of course, the business case needs to make sense. So you can actually expect that we also then, of course, manage this also tightly in the next quarters.

Thank you, Mo. Thank you. We would take one final question now.

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

Great. Thanks very much for squeezing me in. I was wondering if you could just say something very quickly about the cloud incentives that you rolled out in Q1. I know you started those in Q4 of last year. It sounds like they were a bit more extensive in the quarter. Do you think that made much of an impact to the accelerating CCB? And I know the incentives were only for the first year of the transformation. Does it actually act as a potentially a headwind to the CCB? And then secondly, can I just squeeze a financial clarification in just on the stock based comp? I think you said it was 100 million incremental charge in the quarter. But what are you assuming on a full year basis? And in your unchanged EBIT guidance, what's helping to offset that higher share based comp? Thank you.

I mean, Scott, I can go first and please build on it. I mean, first of all, on the migration incentives, I guess the major change which we did, which is not impacting margins, is that we are not only incentivizing now anymore as for HANA Finance, but we incentivizing cloud ERP as we have to also move forward. our monolithic ERP on-premise system to the cloud. And there we are talking about HR, travel, procurement, all the modules I mentioned already at the beginning of the call. And they are now also incentivized to migrate, which makes a ton of sense because you actually have a one-time migration fund But then you actually have a building, a recurring revenue stream. And these deals, you also see it in the multiple. The multiple has not going down, are extremely healthy. And then while you have this one-time efforts on the migration fund, you see then the recurring revenue coming in, the cross-sell, the up-sell we do. over the course of the years so i actually see this as a very positive incentive for our customers and it will also of course also help us yeah to further expand our footprint in the installed base scott

Yeah, I think just two things to add to what you described, Christian. The first is these customers, many of these customers have invested heavily with SAP over a long period of time. And we acknowledge that with those investments made in the past, our role about helping them on the transformation becomes more important than ever. So the transformation incentive to be able to migrate is a part of a broader picture, helping them on an ongoing roadmap to driving to that clean core architecture making sure they can leverage the business ai so it not just provides a financial benefit but is also the role and the method and the tooling that sap brings to help them on that journey and the two in combination then becomes a more compelling factor for customers to drive and then and then secondly it can be applied in multiple ways so The incentive can be used against not only on maybe their maintenance, but also for services and for other capabilities, including our ecosystem partners to help them drive that.

Yeah. And one last word on the TCO and on cloud cross-margin. I mean, you have seen, if you would now exclude the stock-based and the higher share pricing you want, actually we have a very healthy expansion of our cloud cross-margin. And what is coming from a TCO perspective in the next weeks, months, quarters, is we are now embedding ARM processors into our solutions. We are moving more and more of our Solutions also now to HANA Cloud in a non-disruptive way. It's already all baked in. Also cost-wise in our guidance, which will also give us enormously more scale to also balance peak workloads much better in the future. And then when you look at the wise journey, I mean, the customers, you know, are now at 20 to 30 percent of the migration done. And of course, the more workloads you're putting, you know, on the architecture, on the infrastructure, the more economies of scale you are getting. So we are also very happy with the progress we are seeing on margin, especially profits in the private cloud.

and so now actually we i'm very confident also about a further cross-margin expansion then also not only this year but also in the years to come maybe on the stock-based compensation shelves um so um the kind of 135 million increase was kind of the order of magnitude which was unexpected because we actually said that um we had 2.2 billion stock-based compensation last year in 2023 We said that in our ambition update when we included stock-based compensation, we included about $2 billion in 2025. We also said that 2024 will be somewhere in the middle. But we now see that because of that very, very strong share price increase in Q1, that kind of $135 million increase will basically feed through the year. Why don't we think that will reoccur? because simply there are two parts to that which drove it up. One is the exceptionally high increase in the share price. I mean, if you think about the 29%, 30% we've seen in Q1, and you compare it to the normal standard deviation you have in any given quarter over the last 10, 20 years, it's actually a 2.3 to 2.4 standard deviation variance. So it happens once every 100 quarters, actually, from a statistical point of view. Secondly, we are losing the sensitivity, so to speak, kind of fully cash settled trench under this move 2021 program, which is by far the largest. And as we move to more equity settled, which is not flowing through the P&L, we don't expect that sensitivity to stay so high. So now, yes, we did compensate to a certain degree in our guidance. And that's simply that we kind of grind on all corners to see how we can make up for that because we don't want to kind of be burdened by that, but compensate. It also demonstrates how important it is to embark stock-based compensation in the overall equation. It's a real factor and actually it becomes more and more valuable the better the company performs. So from that perspective, I think it was the right decision to make sure we manage it holistically, the cost base, including stock-based compensation.

Thank you, Charlie, for your question. Thanks, Christian, Scott, and Dominic. And we will conclude the call for today. Thanks for joining.

Thank you. Thank you. Bye-bye.