SAP SE ADS

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q4 2024 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. I would now like to turn the

Good morning, everyone, and welcome. Thank you for joining us. With me today are CEO Christian Klein and CFO Dominic Assam. On this call, we will discuss SAP's fourth quarter and four-year results for 2024. 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 risk and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding these risk and uncertainties may be found in our findings with the SEC, including but not limited to the risk factor section of our 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 constant currencies. 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. Christian, now over to you.

Thank you, Alexandra. And thanks to everyone for joining our earnings call. 63 billion euros, that is SAP's total cloud backlog at the end of 2024. 40% over the previous year, hitting a new record high. Total cloud backlog is just one figure, but it illustrates how far we have come as a company. Four years ago, SEP shares took a hit when we announced our plan to transform the company. The markets had some serious doubts if we could pull it off, but we did it and we delivered on all of our strategic promises. We more than doubled cloud revenue since 2020 and raised it to half of SAP's total revenue today. No major competitor is growing as fast as SAP. And with a total cloud backlog of 63 billion euros and an 83 week growing revenue share, we are on a more resilient growth path than ever. SAP has enormous potential and a bright future. Over the last several years, we have developed a very compelling business suite offering in the cloud to run our customers most mission critical business processes end to end. We also have access to business data that no other tech company has. And with regard to AI, yesterday's tech news provided another strong validation of our strategy. Thanks to our ecosystem approach on the GenAI Hub, we are flexible when it comes to AI infrastructure and large language modules. We benefit from cost reductions and progress in the LLM space because we are truly differentiating an element in AI today. However, it is deep process and industry know-how combined with access to unique, context-rich business data. So value creation is more and more moving up the application layer and to building one semantical data layer. This is exactly what SAP has been focusing on. We have been embedding SAP Business AI deeply in the business process of our customers. The result is that C-suite executives see us as the leading AI company in Europe and among the top five globally. Accurate business data and an understanding of its semantics, those are key ingredients to generate major value and to expand our competitive edge. I will touch on that and an exciting innovation in the data space in just a minute. The financial results for 2024 are another proof point of the successful journey we started. We had the courage to change our business module and four years later, we are winning in the cloud and in AI big time. Becoming the number one enterprise application and business AI company is a huge achievement by Team SAP. It took a lot of effort, dedication and openness for change to get there. A big thank you to our over 100,000 colleagues worldwide. Before we take a closer look at SAP's future, let's review how we ended 2024. Q4 was a very strong finish for the year. Without going into all the details, let me mention three points. Cloud revenue expanded 27% and drove double-digit total revenue growth for the third quarter in a row. Current cloud backlog once again increased 29% on top of an already larger base. And the most exciting thing, about half of our cloud order entry in Q4 were deals that included AI use cases. This shows how successful we are in rolling out business AI innovations to our customers. As for the full year 2024, we achieved all our cloud goals, despite macro headwinds and the ongoing transformation inside SAP. This wasn't easy, but we did it, and we are very proud of that. The customer stories that kept up the year give you a good idea of where SAP is heading. In Q4, more of the world's leading companies decided to embark on their wise journeys. The energy companies BP and TotalEnergies are two great examples. BP chose WISE as the digital backbone for the transformation into an integrated energy company, helping to accelerate digitization, enhance performance and reduce costs. Easy access to technological innovation was another important factor in BP's decision. And Total Energies has been partnering with SAP for over 30 years. WISE will be the starting point for the company's transformation towards new business modules, and it will help to drive efficiency. And from there, we will take our partnership to the next areas. BSF, the world's largest chemical company, is also banking on WISE. Together, we will try process simplification and standardization, and we will enable BSF to take advantage of AI-powered automation and innovation. I could go on and on. So many more global leaders chose Ryzen Q4, including Red Bull, EY, the European truck store chain DiEM, and the automotive suppliers Robert Bosch and Schaeffler. With regard to Grow, we once again celebrated major wins in the IT industry. Databricks, a rapidly growing data and AI company with over 10,000 customers, has selected Grow to modernize its financial systems and support its growth. Databricks will now have a solution that can scale fast in over 60 countries, supports new revenue modules, and provides the company with instant access to business AI. And Outreach, a SaaS company focusing on sales solutions, signed up for growing Q4 as well. Let me say this very clearly. SAP adds hundreds of net new Cloud SME customers every quarter, who go on to celebrate go-lives in months, not in years. End users are delighted about the product experience of the suite and the new innovations coming in every quarter. This is the new SAP. Next to these customer wins, we also saw some major go-lifes. Let me name some big ones. IBM went live with success factors for its over 275,000 employees in over 80 countries. It was one of the largest and most complex deployments of success factors in the history and delivered completely on time. And IBM also went live with SAP Fieldglass and SAP Ariba in NS2 for its federal business, as the first customer to use both solutions in the NS2 cloud. We also had major WiseGo lives in the automotive sector. Those were General Motors and the Germany-based automotive supplier Mahle International. All the examples I gave make it very clear More and more customers appreciate the comprehensive and integrated character of SAP's cloud suite. They start with finance, BTP, and our business transformation portfolio. And from there, they expand to our full suite, to all our line of business solutions, following our rise or grow journeys. For our customers, it is just so easy to adopt more and more of our solutions. The number of customers with over four SAP solutions more than doubled since 2021. Over one fifth of our customers are now part of that group. Lend and expand is clearly working. So we had a really great run. 2024 was another very good year for the company. But we are not stopping here. We are raising the bar for the years to come. We expect accelerated double-digit total revenue growth and an expansion of operating profits through 2027. We can say this with confidence because we have all the right pieces in place. First, product innovation. Overall, we brought over 130 Gen AI use cases to our customers in 2024, over delivering on our plans. And we integrated 1,300 skills in Joule, making it capable of automating 80% of the most used activities of our end users. More than 30,000 customers now use SAP Business AI. Among them, many great brands such as Camperi, Hengel, MercadoLibre, Bt Group, and Standard Chartered Bank, and other big names. For example, ABB, Bayer, and the Swiss retailer Micros signed deals for SAP Business AI in Q4. All this is a very good start, but we are once again doubling down on AI in 2025. We will significantly increase our AI investments with all of our more than 30,000 developers working to enhance our AI foundation and building new use cases. One key ambition is to make every tool user 30% more efficient by the end of 2025. In addition, I can't wait to launch a game-changing innovation very soon that will give us a great boost in the data and AI space. Today, companies spend up to 50% of their IT budget on data and analytics. And despite all of that investment, so many companies fall short of realizing the potential of their data. Too often, data stays locked in silos or is stuck in so-called data swarms without business context. Companies have no complete view of their business that way, and without access to high-quality data, AI agents stay far below their potential as well. According to the principle, garbage in, garbage out. We will address these challenges in the data and AI space with one of the biggest innovations SAP has ever delivered. We will harmonize structured and unstructured data, SAP and non-SAP data, always with the relevant semantics. And by that, we will make AI agents much more powerful. Joule will become the super orchestrator of these agents, carrying out complete tasks autonomously and end-to-end, taking over significant workload from humans. At our Business Unleashed event on February 13, we will talk more about this innovation. It would be our pleasure if you joined the webcast. Let's now move to the second piece, commercial innovation. First, we will make it even simpler for Rise and Grow customers to land and adopt our latest innovation. we will introduce licensing options that allow customers to upgrade and switch easily to our newest cloud solutions across the whole SAP Business Suite, all without additional negotiations. Second, for customers that have landed with SAP, we will enhance strategic migration incentives to expand across our SAP Business Suite. The broader customers go, the more they benefit. Third, we will evolve our Wwise with SAP offering. Our whole business transformation toolkit will be part of the Wwise offering going forward, including LinearX, Signavio, and WarpMe. In addition, we will leverage Shule for Consultant and Shule for Developer for our customers' transitions to cut migration costs. Supported by the enterprise architects, we will accelerate time to value and allow customers to benefit from our full business suite even faster. And now to the third piece, simplification. We are very diligent and committed to making SAP simpler, leaner, and more efficient. By rolling out AI internally, we enable our business to scale quickly while keeping costs in check. To give some details. In development, over 20,000 SAP developers use AI power tools, including Joule for Developer, already today. We are seeing average efficiency gains above 20%. On the go-to-market side, AI-assisted contract validation has reduced our average contract booking time by 75%. And in the corporate functions, we have seen a 20-fold productivity gain through AI-assisted quote-to-cash process automation. Overall, we expect a one-way efficiency effect of our existing AI implementations of roughly 300 million euros already this year. And for the very near future, we expect to cross the half billion mark. In parallel, our transformation towards a better, more resilient, more simple SAP continues. In 2024, we started to merge our seven go-to-market regions into four. We have also consolidated our operations teams, reduced shadow functions, and streamlined the delivery of solutions to customers. And we are putting the right people in place. This morning, we were happy to announce two chief revenue officers co-leading our go-to-market execution and transformation, reporting directly to me. Jan Gilk as Chief Revenue Officer, Americas and Global Business Suite. And Manos Rappopoulos as Chief Revenue Officer, APEC, EMEA and MEE. They will be supported by Stefan de Basle. Stefan joins us from 09, where he was Chief Revenue Officer. He will serve as Business Suite Leader and ensure the success of our suite motion across regions. This combination from in-depth product knowledge to world-class sales experience will allow us to further improve our go-to-market while staying focused on our commercial success. On the R&D side, we are extending the mandate of our chief AI officer, Philipp Herzig, to also head our cross-company innovation efforts as new global CTO, continuing to drive AI innovation for SAP's customers and partners. Also this morning, we announced that the Supervisory Board has appointed Sebastian Steinhäuser as an Executive Board Member, effective February 1, 2025, in the role of Chief Operating Officer. Sebastian oversees the execution of our strategy, as well as the simplification of our internal operations. In addition, the supervisory board extended the executive board contract of Thomas Sauer-Issig for three additional years until 2028. I am very much looking forward to working with this strong and extended team. Let me now summarize. our success over the last four years speak a clear language we are capable turning ambition into reality and we intend to continue that way we are curious about the future and set the bar higher because being the best is never done with this drive and energy we are continuing our profitable growth journey in 2025 and beyond That is our aspiration. This is our promise to you. And with that, I'm handing over to Dominic.

Thank you very much, Christian, and thank you all for joining us this morning. I would also like to wish everyone good health, peace, and success in 2025. SAP's strong finish to 2024 once again demonstrates great resilience in a year that presented new challenges and opportunities. We not only delivered on our financial commitments for the year, but also built strong momentum that positions us firmly on track to achieve our stated financial goals for 2025 and beyond. 2024 was a year of transformation, highlighted by both top and bottom line growth, as well as exceptional free cash flow strength. Our success in cloud revenue and robust non-IFRS operating profit throughout the year reflect the effectiveness of our strategic growth initiatives and our relentless focus on operational efficiency. Customers worldwide continue to choose Rise with SAP as their solution of choice for the end-to-end business transformations in large-scale enterprises, while small and medium-sized companies rely on Grow with SAP to drive their growth and innovation. This is reflected in strong order intake and large cloud transactions with a volume greater than 5 million euro contributing 63% to our cloud order entry for the full year and an impressive 68% in Q4. Now let me provide more details around our financial highlights. Current cloud backlog reached 18.1 billion euro up 29%. Total cloud backlog for the year grew at 40% to 63.3 billion euro. Cloud revenue grew 26% year-on-year, supported by cloud revenue growth of 27% in Q4, primarily driven again by the strong performance of Cloud ERP Suite. It actually had an impressive year, demonstrating its role as SAP's core driver of growth with an increase of 34% in 2024, up from 33% in the prior year. Cloud ERP Suite reached 84% of total cloud revenue in Q4, underscoring its growing contribution to our success. Software licenses revenue decreased by 21%. Finally, total revenue for the full year exceeded 34 billion Euro, up 10%, This performance was mainly driven by strong growth in cloud revenue and resilience of our support business, reflecting the ongoing progress of our strategic pivot towards cloud-based solutions. Now let's take a brief look at our regional performance. For the full year, Germany, Spain, China, India and Japan all had outstanding performances in cloud revenue, while Brazil, Canada and Saudi Arabia were particularly strong. Moving down the income statement, our non-IFRS cloud gross margin for the full year continued its upward trend from last year and expanded by 1.4 percentage points to 73.3%, driving cloud gross profit up by 28%. In the fourth quarter, non-IFRS operating profit was up 24%. Operating profit growth in Q4 was mainly driven by the strong performance in SAP's software licenses and support business, as well as disciplined execution of the 2024 transformation program. For the fiscal year, we delivered outstanding operating profit growth of 26% year over year, reaching 8.2 billion euro. The IFRS effective tax rate for the full year was 34%, and the non-IFRS tax rate was 32%, in line with what has been previously guided. Pre-cash flow for the full year was down 19% to €4.1 billion, exceeding the revised outlook range of €3.5 to €4 billion, which was provided in the prior quarter. Recall that on top of payouts for restructuring of 2.5 billion euro, we also absorbed 0.2 billion of cash out for compliance related settlement matters and fully discontinued SAP triggered financing weighing with another couple of hundred million euros on free cash flow. On the other hand, we received a couple of hundred million euros from customers for receivables due in 2025 before the turn of the year. which in combination with strong profitability enable us to slightly exceed even the upper end of the previously guided range of 3.5 to 4 billion euro. Non-IFRS basic earnings per share in fiscal year 24 increased by 22% to €4.53. Now, let's move on to our outlook. As you've likely seen in the quality statement published earlier today, we have provided this year's outlook. Four years ago, SAP outlined bold long-term goals to guide our transition towards cloud-based solutions. Today, we are proud that this year's outlook solidly aligns with the ambitions we set in 2020, demonstrating the progress we've made in executing our strategy. Before I move on, I want to provide an update on our compensation metrics and foreign exchange hedging strategy that we will adopt going forward. As of 2025, we will enhance our compensation framework by incorporating free cash flow as a metric alongside non-IFRS operating profit. This will ensure heightened attention towards working capital and other drivers of free cash flow. Additionally, to reduce foreign exchange related impacts on free cash flow, we have further developed our hedging strategy, in particular for the US dollar. As a reminder, we currently provide all income statement KPIs that are relevant for compensation purposes on a constant currency basis. Free cash flow, however, has been and will continue to be provided on a nominal currency basis, as unlike the compensation-relevant income statement KPIs, it does include the result from foreign exchange hedging. We continue implementing a hedging strategy with a lead time of up to a year to mitigate the risk from US dollar-euro exchange rate fluctuations. By aligning hedging instruments with forecasted cash flows and maintaining a one-to-one hedge ratio where possible, We aim to reduce volatility and minimize the impact of exchange rate fluctuations on our free cash flow. This approach is largely completed by now and reflected in the free cash flow outlook we have provided today. So while the average exchange rate for 2024 and as a result, constant currency exchange rate for 2025 underlying our outlook for income statement KPIs is 108, The spot rate today and at the end 2024 relevant for CCB was 104. The forward rate of our hedge portfolio for free cash flow for 2025 sits logically in between at around 106. Now let's quickly discuss our non-financial KPIs. In 2024, we continue to see strong uptake for SAP Sustainability Solutions portfolio with robust growth of approximately 70% for our sustainability innovations. Q4 was very successful, particularly in our MEE and EMEA regions, including a key win with KNAPP, an Austrian logistic automation company, purchasing SAP Sustainable Control Tower, SAP Sustainable Footprint Management, and SAP Sustainability Data Exchange for sustainability disclosure and carbon accounting, including supply chain engagement. Companies like KNAPP are turning to SAP to be the foundation of their sustainability reporting. Regulations, customer need for supply chain transparency, and the ongoing convergence of sustainability and financial standards continue to drive and play to our strength globally, demonstrating sustainability as a core business and ERP requirement. Now, in Q4, we released the highly anticipated SAP Green Ledger. Together with our sustainability portfolio capabilities, which provide data collection, calculation and auditability, the SAP Green Ledger allows customers to sync emissions data with financial data for strategic and contextualized business decisions that are both financially and environmentally sound. This also helps companies fulfill regulatory requirements. Now, in summary, we delivered on our key objectives for 2024, achieving strong top and bottom line results while demonstrating resilience in a dynamic environment. Customers continue to choose our solutions to help transform their businesses into more intelligent, sustainable enterprises as reflected in our cloud performance across all regions of the world. With our foundation now firmly established in 2025, we must remain vigilant in our executions to sustain growth and set the stage for long-term success for years to come. This progress would not have been possible without the dedication and hard work of our people, both those who remain with us and those who have moved on. We deeply appreciate their contributions to helping SAP navigate their transformational journey in this year. We remain optimistic about the opportunities ahead, confident that our commitment to innovation and disciplined operating strategy will continue to drive positive results. Thank you, and we will now be happy to take your questions.

Thank you, Dominic. And with that, we will now take your questions. I would like to kindly remind you to only ask one question when prompted. Operator, please open the line.

Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you are using speaker equipment today, please lift the handset before making your selections. Again, anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Adam Wood with Morgan Stanley. Please go ahead.

Hi, good morning and congratulations on the excellent end to the year. Maybe if I could ask just a little bit around CCB and the kind of stage of the upgrade cycle to S4 in the base. Just in that context, we've obviously got very strong CCB growth at the end of 24 with that acceleration, TCB accelerating, but you're talking about a little bit of a slight deceleration on CCB for 25. Can you just help us understand how much of that is just the fact that you can't keep accelerating that number of ever bigger numbers? And in that context, give us a little bit of a feel for where you think the install base is in terms of the upgrade to S4. How much of there is there still to do? Basically, are we hitting the peak of that upgrade in the near future, or do you think there's actually a lot more to go for as we look out over the next few years? Thank you.

Good morning, Adam. And I can start and look at CCB. Indeed, we had a record Q4 exceeding all our expectations. Now for next year, to give you a few installed base, we are roughly 40% of our customers are on their move with WISE to our business suite in the cloud. 40%. That doesn't mean even that all of their landscapes are already in the cloud. So that contracts include a significant ramp towards the later year. So that gives us even the 40% who are on their way will also give us further acceleration in the years to come. And then also when you look at Quo, I mean, we are actually adding hundreds of new names, as I mentioned, and also our win weights in the public cloud. When you look at the different LOBs and the win weights against the best of Preet is going up because. Of course, clearly now the customers seeing, hey, it's really about land expand and running my core business processes integrated end to end. And of course, then with AI out of the box. So yes, the pace is getting bigger indeed. But when you look at the absolute growth, it's also further accelerating. I mean, we are putting a ton of new business on top. And also, let's not forget, Adam, at a certain point, it's also now important to drive adoption. Our retention rates are getting better and better. And so I feel the outlook is actually really ambitious. Also, given, honestly, the macro environment and you see in the cloud revenue, there is no slowdown. This is actually an acceleration. And so the two things coming together. higher retention, higher adoption, further acceleration of the customers who are already on the move to the cloud, higher win rates in the different line of businesses. So Adam, absolutely, we are very confident for the year ahead. And honestly, also for the year beyond the installed base, look at the maintenance revenue number still gives us a lot of potential to move customers to the cloud. And then again, also not only upselling these customers, but also cross-selling, as I mentioned.

May I add one point there? If you look in the sell side estimates, we see that there is still a little bit of a kind of doubt in terms of our revenue acceleration thesis through 27. And what I encourage you to do is to kind of back solve how much CCP can actually decelerate before you would kind of not see that acceleration and consolidated revenue. So the mix factor, I'd say at the sweet spot of the revenue mix play, giving us a boost on total revenues. And so this kind of slight deceleration we have guided here is actually significant. probably much better than what is embarked in some of the models we see on the sell side these days.

And maybe one piece to add. I mentioned two large energy companies, but we also signed up for many automotives. They are not in a good position right now, given all the concerns which are existing in this industry. but still you know they're shifting you know maybe now the first part or maybe one third of the landscape to the cloud but then really focusing and that is the value add they are not only lifting and shifting to a cloud infrastructure we are intensively working now on process simplification they need to run new business modules And then you'll give them a year or two and then they will actually sign another contract. So Adam, it's also a facing and we want to be reasonable in our outlook, how we also reflect this facing of these wise deals because customers need time. I mean, changing business modules, it's not only a technological move, it's about change management. It's sometimes, I have seen this four years ago, also, you know, breaking the walls, you know, there is some change resistance, but cloud software, need simplification. We move to a new technological architecture with BTP. So let's also give the customer some time, but there is enough potential also in the installed base left.

The next question is from the line of Jackson Adair with KeyBank Capital Markets. Please go ahead.

Great. Thanks for taking our questions, guys. Our are questions around migrations in 2025. So if we expect some of the CCB to slow down a little bit and cloud revenue growth to accelerate, overall revenue growth to accelerate, I'm curious, what should be the expectation for support revenue in 2025 as you continue to drive more of those migrations in the coming year and how that flows into cloud revenue as well? Thank you.

It's a very good question, and it gives me an opportunity also to comment on what looks to be a slightly odd Q4 with actually an increase in maintenance. This is certainly not a trend. It is simply related to the fact that actually we caught up on some revenues we carved out previously because to a financial distress of a larger customer. that had a financial restructuring, and then we could re-embark these revenues, while in the Q4 of the prior year, there were actually some compliance-related calves on maintenance revenues, and that made the whole thing flip. If you depollute it for that, you see it's a very steady, slight decline. And as previously guided, no change to that. We will kind of see a gradual decline. Obviously, the slightly higher than anticipated license revenues indicate that also maintenance revenues have a little bit of a longer life. But overall, we would not deviate from that hypothesis of a slight acceleration over the coming years in maintenance revenues, but don't expect a complete collapse. And again, the good news is we have a gradual rollover from that maintenance base into cloud revenues.

And maybe just to build on that, sometimes in the world when geopolitical tensions increase, customers already see again even more value coming also back to SAP for SAP support. I mean, given Legal and regulation support in over 130 countries is a real asset. I mean, the same is also what we see now in the cloud. If customers want to expand their business, they need localization. So it's a real asset. So that while you also see this very high retention rates on support revenue. And also with the move now that we allow our customers to move to the cloud and while they have 100 ERPs from SAP and they need time to consolidate, we offer them now to replace some third party assets in the stack and to really allow them to continue their transformation while not getting hit by the end of maintenance, which will stay in place, of course. That, of course, is even a reason more to come back back to SAP and allow, you know, and see really the great, you know, value of SAP support.

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

Yeah, thanks. Good morning. Thanks for taking my question. Christian, I think you probably just touched on this topic in your last remark, but there's obviously been a bit of press coverage around potentially extended maintenance. I think some people are suggesting 2033 is the new 2030, which is clearly not the case. But can you maybe help us a little bit more with some details? PRP private edition option and what is generally going on in the installed base. I mean, is this really what some of your larger legacy customers needed to get them kind of over the line and then sign some of these deals? Or is it really that you maybe not seeing the kind of momentum with some customers that you were hoping? Thank you.

Yeah, happy to answer that question, Johannes. And look, I mean, as I mentioned, some of our customers have Over 100 ERPs, I mean, they're running factories, manufacturing and logistics with that. And now the end of maintenance by 2027 will not be changed. We will stick to that. But you also have to consider in some parts of the stack, There are third party components included and they are running out of maintenance as well. So, you know, we don't want to leave the customers behind. And, you know, as we moved all of our cloud solutions already on HANA Cloud, we do now the same with these on-premise customers. We move them to the cloud. We replace the third-party components. And with that, we can also, you know, one in the cloud, you know, there are 100 ERPs, you know, in a complete sustainable and supported way. And that is about this offering. It's actually for a very few large customers who will not make it in time because, again, to transform and consolidate ERP, and business processes in over 100 countries is sometimes not that easy. And that is what this offering is about. So it's not about the extension of on-premise maintenance. And clearly we see the acceleration in the cloud, but it's really reaching out with a helping hand to a very few large customers who need this offering to fully transform and migrate to the cloud. This is what this offering is about.

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

Great. Thank you. Morning, Dominic. Morning, Christian. Dominic, I wonder if you could just clarify the thought process around some of the moving parts on the FY25 outlook. You obviously raised your EBIT guidance, but I know there was a definition change on the free cash flow. I know the tax rate's also gone up a little bit, and there's more restructuring. Has anything else changed just to kind of bridge the gap in terms of assumptions around working capital? And what are the plans in terms of the impact you expect on that over the next couple of years? Thank you.

Yeah, I mean, working capital is always extremely hard to predict around the turn of the year. You might receive some payments you didn't expect or take the massive performance we had in Q4 on new bookings. You recall that we are also offering transformation credits to customers to incentivize them and help them with the transformation period. which is actually creating some upfront cash out relatively to the phasing of the profits in these customers. And all that taken together has resulted in the outlook we have given. You've seen that we have kind of pulled in some cash in 2024. So we were ahead of plan in 2024. And that obviously, like money you receive early, you won't receive any more in 2025. On the other hand, we also operationally make good progress. I think it's interesting to look into our cash flow statement. It's page 14 of the quarterly statement. And you see some promising signs, for instance, trade receivables increased under proportionately. So the cash out is lower than in the prior year, despite the fact that we had the normalization of these vendor financing things. So that should actually increase accounts receivable. You see that we are quite disciplined. Another extremely important topic for cash conversion is actually stock-based compensation. And it was a little bit strange in 2024 because we had this huge increase in the share price and we still had quite some cash settled units, which are partially also paid out in 2025 still. And what I can tell you on that front is, again, you look at the cash flow statement and you see share-based compensation in the P&L was $2.4 billion. which frankly is higher than what we thought because of the strong share price increase. You recall that for 2020, we actually said it should be more about $2 billion. Sorry, for 2025, it should be more about $2 billion when we adjusted for inclusion of stock-based compensation. One was a couple of quarters ago. a year ago almost. And we had 2.2 billion in 23. We said it will transition to 2 billion. Now it's 2.4 because of the huge increase in share price. But we continue to believe that the P&L impact of stock-based compensation will go down once we have this effect reduced from share price moves. And then the cash out is much smaller, of course. So you see 1.3 billion in the statement. Both in 2023 and 2024, there was a 1.1 billion positive from conversion of stock-based comp, which is simply the equity settled part. And that is a number I can tell you will be quite similar next year. So as you strongly reduce stock-based compensation, that reduction will then, if the delta is the same, hit very much the cash flow. So all these things need to be taken into account are embarked here. And yeah, it's I agree. It's not not straightforward, but I encourage you to look at cash conversion and look at Basically, the depolluted free cash flow, if we add that restructuring, we add back the compliance charges, we add back the factoring. These are the three factors I would always kind of depollute to come with an underlying cash conversion number. And then on stock-based compensation, I gave you the hints how this will evolve, and we can also go in more details offline. And that number is a very high number, honestly. If you think about EBIT tax affected, you will see that we are actually currently running better. And that is also because of the catch up we have on some of the working capital items. And we will need to continue to grind on that to really keep that extremely good cash conversion that we had in both 24 and actually also applied for 25.

The next question comes from the line of Sven Merck with Barclays. Please go ahead.

Great. Good morning. Thanks for taking the questions, and congratulations on the strong quarter. If you look back to 2024, you added about 3.5 billion euros. Can you give us just a rough indication how this breaks down into maintenance, conversion, up and cross-selling, as well as net new sales, and maybe how you see this evolve into 2025? Thank you.

Yeah, let me share a bit more insights about how, of course, we close cloud order entry and then how this translates into CCB. And when you look at Q4, of course, by far our biggest quarter and I have to say really a record quarter. 60% roughly from the cloud order entry comes from, you know, iBase customers moving to the cloud. Then you get, you know, another 30%, you know, from net new and roughly 10% about, you know, upselling, you know, into the existing instance. So you see the mix in my eyes is actually really healthy. And for me, you know, next to the strong move of the installed base, which still, as I mentioned before, has a lot of potential for the years to come. For me, even more important is, of course, the net new, because that is, you know, what is really then, you know, adding completely, you know, incremental business on top, which then also gives us, you know, the great, you know, potential. a performance on total revenue. Now, on maintenance conversions, I mean, we always have these multiples that developed in Q4 also extremely well. Actually, we have a multiple of slightly around about three X, which is very strong given also. And you can see that in our cloud cross margins. I mean, we clearly did our homework there. I mean, both for the private cloud and the public cloud business, the expansion of the cost margins is very strong. And I have to say, looking at our plans for the year to add and everything, what you saw yesterday, the cost reduction on large language modules and other things we are trying to get down to TCO in our cloud operations gives us actually also the potential to further reduce TCO and with that also expand our very healthy cloud cost margin in the years to come.

The next question comes from the line of Toby Ogg with JP Morgan. Please go ahead.

Yeah, hi, morning, and thanks for the question. Perhaps just on AI, could you give us an update just on how Juul is tracking in terms of adoption, whether you're actually seeing any revenue generation yet from the monetization of Juul, and then just how we should think about the timeline for potential contribution to revenue growth from the monetization of Juul and agents. Thank you.

Yeah, I can actually share with you a story from yesterday where we had a CFO of a big, large German company here with us in our headquarter. And we looked at agendic AI with Joule as the so-called orchestrator. And we shared, you know, what is coming in 2025 and we shared an example. to improve cash collection. And what we did is actually we looked into some delayed payments in the life system of the customer. We actually showed him what are the reasons. Joule actually showed what are the reasons for the delay. Is it logistics? Is it a supplier? Is it actually some issues in the delivery? Or is it a commercial issue? And then you saw how Joule was reaching out to the different agents on the logistical side, on the procurement side, supply chain or on the sales side and was really able to handle, to pull in a dispute and really helping to resolve the case fully automated. Still, of course, a human being sitting at top, you know, say, yes, I want to have to create this dispute in that way. We should reach out to the customer in that way. We showed the co-pilot integration. They're very deep. So you can put it in a mail, you know, the mail gets prescripted and then, you know, actually, you know, the human being sits there and you can look at it, how Joule is orchestrating the whole process. And of course, you know, with different options and the right outcomes, meaning an improved cash flow. And this is, you know, when I look at that, I can only say what we did with Philip and the team to really not focus so much on the large language models. We are partnering. We are super agnostic and given yesterday. I mean, this is super good news for us. But really focusing our R&D, our innovation on building the strongest AI foundation for businesses. meaning understanding of business data, contextualized business data. I mean, when I have seen this yesterday, for me, this was absolutely the right strategy. Now talking numbers, I mean, you have seen 50% of the deals in Q4 were driven by AI. And trust me on one thing, given also my other role in sales, I mean, it was not only one factor. It was, in my eyes, the fact that our value engineers could go in and show the automation, the productivity in various functions of the company. also showing what you can do with Joule as the new UX. And so that was really, for us, a key driver of our Q4 auto entry. And yes, given that we actually always started with a consumption-based commercial module, I mean, of course, adoption is key. from day one on also a good decision. And now we are seeing how this, you know, significant order entry also driven by Joule and business AI is also turning into revenue. We see oftentimes, let us give us a three months delay between signing and then the go-live of the first AI use cases. And then the revenue is triggering. And again, it's already a very healthy and a fast-growing business.

The next question comes from the line of Frederic Boulat with Bank of America. Please go ahead.

Hey, good morning. Can we spend a moment on the cost side? Maybe if you can share a bit how your kind of go-to-market strategy is evolving. And when you look at the main cost levers beyond 2025, I think your guidance for this year implies that still very disciplined cost growth versus revenue growth, so definitely less than the 80% to 90% you were alluded to before. So can you share a little bit the kind of moving parts beyond 25 in terms of go-to-market and overall efficiency of the business? Thank you.

I mean, coming out of the kickoff beginning of this year, I have to say the transformation of our go-to-market function is in full swing. Just to illustrate on what we are working on. First, the ecosystem is also now even more excited about growth potential with SAP as we are They're assigning them now partner-led territories, so they get dedicated territories to grow their business, to invest into SAP. They also very much like the fact that they can sell with SAP a suite. I mean, also the same like we do, land and expand. and so they see a big growth potential and of course further investing into sap and for us that gives us scale pure efficiency i mean we actually have enormous growth plans for the channel in 2025 given all the changes we are doing and then on the direct sales side i mean we want to be much more disciplined around the number of roles we are having around you know the commissions we pay and so we are rolling this out the change management is in full swing It will also give us even honestly some efficiencies beyond 2025. So that is in full swing. And maybe, Dominik, you can comment on the overall cost side.

I think the good news is we are de-risking the cost base and AI plays also a big role, as Christian has explained. Yes, from the guidance you have gotten from us, you can see that we are doing better in the bridge from 2024 to 2025 than the 80 to 90% benchmarking logic we have applied. I think for the years beyond 25, 26, 27, it is still a good measurement to say in that ballpark we should end up. And this gives us then by virtue of the acceleration in the top line, we've also indicated a good expansion opportunity for further improving the free cash flow and then also the combination of cash flow margin growth and then the revenue growth boosts, of course, what we call the kind of rule of 40 performance of the company.

The next question is from the line of Mark Mordler with Bernstein. Please go ahead.

Thank you very much, and congratulations on the quarter. Dominic, you've been hyper-focused on driving efficiency and improving margins while driving growth in the business. With the internal implementations of AI, can you discuss exactly how you see that translating? Is it purely going to drive Margins, you talked about what could be a half a billion dollars of improvement. Do you see that dropping to the bottom line? Do you see that as investing? Do you also see the efficiency you're doing within sales and other parts of it being able to accelerate the revenue growth and revenue growth per salesperson? Thank you.

Yeah, of course, these KPIs need to improve going forward. Otherwise, the ratio of selling expenses to revenues can't improve. I mean, obviously, as we grow the base, the incremental bookings we need are growing. So it's a mathematical necessity that the answer to your question is yes. I would say we are firmly on plan. Our confidence level on these initiatives is significant. I'd say the organizational changes that Christian has highlighted to consolidate all the operations functions in one cluster under Sebastian Steinhäuser was exactly the right move to do to really come to end-to-end process optimization. And that gives us the confidence because we have the visibility now where the building blocks are, where the kind of also impediments lie we need to eliminate. But again, I think from a financial modeling point of view, we still want to preserve the capability to also invest in our growth and keep both the growth investment and the efficiency in sync. And that 80 to 90% leverage, I'd say operating leverage in a certain way for 26, 27 is still a good yardstick.

And I have to say, of course, Dominic is laser focused on efficiency, cash flow conversion, but also the CEO is, of course, focused to make SAP more efficient. But I have to say kudos to Dominic, Gina, Mohamed and all the others I mean, when you look back one year ago and we did our headcount planning for the year, I mean, all of us now committed because of AI on a completely underproportional headcount growth. I mean, a year ago, the headcount asking the commercial deal support was up to the roof because we are closing a lot of new business. Now we have an AI capability, so ask Joule. And a lot of the contract checkings, the refreg checks, the compliance check has been taken over by AI. And you see this in cloud delivery. You see this in R&D with Joule for developer and also the board colleagues. It's not only like pulling out an AI use case and see here are the efficiencies. It's about change management. It's also about explaining to people. what these technologies can do because it's changing also jobs. But I have to say, looking also at the plan for this year now, I mean, we are growing so much underproportionately in many functions of the company also because of AI.

The next question is from the line of Michael Breast with UBS. Please go ahead.

Yeah, good morning. Just a clarification on the comment around maintenance. Are you not then making this extended maintenance to 2033 open to all customers? Is it just a handful of sort of specially selected ones? And I'm just curious on licenses, you know, another good quarter, but what is the thinking about potentially taking that option off of the price list? And, you know, maybe for public sector and a few sectors, it's still relevant, but for the general customer base. And Dominic, can you quickly just clarify what you mean by deceleration? Is this 100 basis points, 200 basis points for CCB? Thank you.

I can take the maintenance question. And look, I mean, first, we are legally, of course, we will opening up this offering to all of our customers. But who does really need it is really a few large customers who really ask, hey, Christian and team, we have all of these ERPs. They are already on the move, by the way. I mean, many of them, they're just saying, hey, I can do, you know, North America this year. I can do EMEA next year, but give us, you know, some time also for APJ before, you know, maintenance is running out and say, OK, let's move to the cloud. We replace the third party components in your stack. so that you can still run a compliant business and that we can support the end-to-end stack. This is what this offering is about. And, of course, it's available to all customers. But while the move is working so well, I mean, very few large customers, which I expect, will make use of this offering, which is great. Because we are showing, we are signaling to them, hey, we're going to take you with us on this journey. We are not leaving someone behind. And you are focused on your transformation, doing the right things for your business, while we are making sure that you can still running a compliant and supported landscape also going forward in the cloud.

Yeah, I'm on a slight deceleration on CCB, and I don't want to give you precise numbers, but what I can say is what I hinted to before. And there is this statement we make, this kind of ambition we express that through 2027, we want to see total revenues accelerate now. You know how the game from CCB into cloud revenues works, and you can make some educated assumptions about maintenance and license revenues going forward and services kind of at low growth rates. You've seen a very low growth rate this year. And then you can back solve how much deceleration can we actually afford to come to kind of a steady growth rate of around about what we guided. I think it's about 11% in the midpoint we guided for 25%. And, of course, the deceleration lies somewhere in between, because on the one hand, it will be slower than what we have today. And also, don't forget, there is still a little bit of a positive impact from the first time inclusion of WalkMe in that 29 number. So that's a more technical aspect of that. So that one you can intellectually take out, because as soon as we have the kind of comparables of the prior year, including WalkMe, it's gone. And then there is a slight deceleration, which is kind of in between that kind of deceleration you would need to see to not see revenues on group revenues accelerate by more than 11% and where we sit as of the end of the year. So that ballpark gives you a little bit of a feeling where that might end up.

Thank you very much, Dominic. And this concludes our call for today. Thank you all for joining us.

Thanks. Thanks to you.

Ladies and gentlemen, the conference is now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.