SAP SE (SAP) 2020 Q4 法說會逐字稿

Good day, and welcome to the SAP Fourth Quarter and Full Year Earnings 2020 Conference Call.

Today's conference is being recorded.

And at this time, I'd like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations.

Please go ahead, sir.

Thank you.

Good morning, or good afternoon.

This is Stefan Gruber.

Thanks for joining us for today's earnings call to discuss our fourth quarter and full year 2020 results.

I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will make opening remarks on the call today.

Also joining us today for Q&A from Singapore is Scott Russell, who will join the SAP Executive Board and lead the customer success organization as of February 1.

Before we get started, I'd like to say a few words about forward-looking statements and our use of non-IFRS financial measures.

Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.

Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking statements.

All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission including SAP's annual report on Form 20-F for 2019, filed with the SEC on February 27, 2020.

Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

On the SAP Investor Relations website, you can find the slide deck intended to supplement today's call available for download.

For those of you following the webcast, the slides will be shown as we proceed to the prepared remarks.

Unless otherwise -- unless otherwise noted, all financial numbers referred to on this conference call and on IFRS, and growth rates in percentage rates, point changes are non-IFRS at constant currencies year-over-year.

The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS.

And finally, before I hand over to Christian, I would like to announce that we will hold an event for financial analysts and investors in the coming months, and we plan to do this in conjunction with our user conference, SAPPHIRE NOW.

More details to follow.

With that, I'd like to turn things over to our CEO, Christian Klein.

Yes.

Thank you, Stefan, and welcome, everyone, to our earnings call.

Now if I had to find a headline for the last couple of months, I would say this, SAP is on the move.

We have defined our new strategy, and we are in full execution.

We have listened closely to our customers and launched RISE with SAP this week, a milestone offering for a holistic business transformation as a service.

As part of the new offering, we are unlocking the business process intelligence layer with the planned acquisition of Signavio.

Only SAP can help customers to reimagine business models and processes end-to-end to deliver the best business outcomes.

We also have expanded the relationships with our hyperscale partners, cooperating more closely than ever, including with our Microsoft Teams integration.

We have very successfully completed the IPO of Qualtrics.

We have as well transformed the SAP organization to make it more simple, lean and customer focus.

We have tremendously improved the integration of our acquired cloud applications.

We doubled down on innovation.

We are coinventing with our customers across 25 industries to turn them into more resilient, productive and sustainable enterprises.

We have announced 3 additions to the SAP Executive Board, all of them with a strong cloud mindset.

And our Board now truly represents all global regions: Americas, EMEA and APJ.

And I guess it's now fair to say, not sure about you, Luka and Scott, but our Board from now on never sleeps.

But most importantly, we have put our customers first.

And we already see strong results.

Customer satisfaction is up 10 points, and we closed a very strong Q4.

So let's get started.

Lots of ground to cover today.

Luka will talk about our Q4 results in a minute.

So let me focus on total year performance.

First off, we beat all top line parameters of the revised outlook and hit the upper end of our profit.

This is highly important for us.

2020 was a very successful year for SAP, with a very strong order entry in Q4, which provides us a strong tailwind leading into 2021.

And that's clearly visible in our total year performance.

Overall, cloud revenue was up 18%.

Our SaaS/PaaS revenue grew by 27%, outside our intelligence spend and travel and expense business.

Concur was especially affected by the crisis, obviously.

The good news here is that this headwind turns into tailwind once travel comes back.

And then Concur will be ready as the clear market leader in travel and expense.

This year also showcased our ability to work remotely.

We delivered stronger than ever.

We added more than 25,000 net new customers.

Also, together with our partners, we delivered more than 35,000 go-lives.

In Q4, specifically, we added almost 1,000 additional S/4HANA customers, around 40% were net new.

That takes us to a total of around 16,000 customers, up 16% over last year.

We are clearly gaining market share with S/4HANA.

We also saw a massive number of highly important customer wins this quarter.

Some of them, again, competitive replacements.

In the ERP space alone, we have more than 200 wins against Oracle.

So let me highlight just a few wins and go-lives.

Gilead has chosen S/4HANA to help increase data standards and transparency, simplify and automate processes and mitigate operational risks.

Unilever continued their strategic partnership with us by converting to S/4HANA as their future-ready ERP system.

Shell selected S/4HANA to support its upstream business, and we are also cooperating on an ambition we share to become net zero-emission businesses.

CureVac has chosen S/4HANA to support the development of their COVID-19 vaccine.

In procurement, General Motors selected SAP to transform the spend management processes.

At the same time, we post almost EUR 4 billion of spend in our network.

For human experience management, we added many new customers this quarter, and we are the only vendor running HR across 100 countries.

Google has further expanded use of our cloud solutions, including Qualtrics.

We are also exploring in partnership with Google Cloud around artificial intelligence to enhance customer value and, of course, by also expanding our strategic relationship.

In customer experience, we had the biggest quarter ever with regard to cloud order entry.

For commerce, we doubled our cloud revenue as only SAP can offer a seamless consumer experience from the online shop, next-day delivery, and flexible payment options.

Finally, in supply chain, we extended further our #1 market position, and we are further expanding our Industry 4.0 capabilities to offer the autonomous factory.

Now we are fully focused on the opportunities ahead of us.

The direction is clear.

And we are executing our strategy to reinvent how businesses won.

Let me take you through the most important updates.

I'm extremely proud that we increased the customer satisfaction score by 10 points.

2 factors are driving this.

We are focusing the entire company on our customer success and strongly drive integration and innovation across our business applications and platform.

Also, if there was an opportunity to improve people's lives, it is now.

We are honored to support a global fight against COVID.

In Germany, with Deutsche Telekom, we are providing the corona contract tracing app.

Since launch, the Corona-Warn-App was downloaded more than 25 million times.

About 2,000 users shared their positive test results per day to break the chain of infection.

For vaccine production, 17 of the top 20 global vaccine producers won SAP.

In the U.S., Moderna wants SAP S/4HANA in supply chain management to support the distribution of the COVID vaccine.

And in Germany, CureVac selected SAP in Q4 to scale the production of the vaccine.

For vaccine distribution, the Deutsche Rotes Kreuz, the Red Cross in Germany and many others won on SAP.

I'm very proud of SAP's relevance in the global value chains and our responsibility to help the world run better.

On to strategy.

2 days ago, we launched RISE with SAP.

This is a milestone offering.

Together with our ecosystem, we launched this game-changing offering to ensure a holistic business transformation for our customers.

A business transformation requires more than just a technical migration to the cloud, and only SAP can do this.

But let me briefly go into a bit of detail here.

It's important to understand.

First, RISE with SAP is for all customers, no matter the starting point or complexity, whether it is smaller companies with simpler processes or multinationals with a complex, customized on-premise landscape.

We are moving our customers' mission-critical core ERP processes to the cloud, along a tailored path that reflects the individual customer situation.

We make sure customers truly transform their business instead of just replicating their on-premise landscape on some public cloud infrastructure as the destination is always to become an intelligent enterprise.

RISE with SAP is the journey to get there based on 3 steps.

Business process intelligence and redesign.

With the experience of 400,000 customers, we redesigned business processes end-to-end.

I come to Signavio in a second.

Technical migration to a standard and modular solution landscape with fast time to value.

And finally, we are building the intelligent enterprise with S/4HANA cloud for tightly integrated, highly intelligent and automated business processes.

The business technology platform as the foundation, providing our customers with integration, data to value and extensibility based on one data model and many other world-class application services.

And of course, we provide choice on the cloud infrastructure, be it SAP or hyperscaler.

And we include the access to the world's largest business network.

The offering is not only delivering our customers a superior business outcome and a return on invest.

It is a very simple commercial offering on a single contract.

All without high upfront investments and up to 20% lower TCO.

From SAP's financial perspective, as we embark on this journey, we shift existing customers out of the upfront software and support model and into the ratable cloud subscription model.

And while this leads to some short-term pressure on revenue and profit, we will significantly increase customer lifetime value by delivering more services to customers.

So we are increasing our share of wallet and make life easier for our customers at the same time as they now can turn to SAP as the responsible vendor.

That's why we expect to turn EUR 1 of support revenue into roughly EUR 2 of cloud revenue over time.

But most importantly, it will help us accelerate our upselling of applications as well as technology and especially drive the platform adoption.

Let me now drill into the business process intelligence layer as it provides context for the Signavio acquisition.

Business process intelligence will span over time across all of our applications to continuously reinvent our business process as one.

And to infuse intelligence by analyzing, benchmarking and configuring business processes based on the insights and best practices from our 400,000 customers across 25 industries.

We're seeking our view.

We are not only becoming wide way a leading player in the business process intelligence market, but we will also accelerate the business transformation of our customers.

And with that, the move to S/4HANA cloud.

And that's the kind of innovation close to our core, we are driving.

As part of our strategy, we are also forming close, strong partnerships, providing great business outcomes for our customers and reinvent our enterprise.

In this context, we have expanded our existing partnership with Microsoft.

With Microsoft Teams and SAP coming together, we combine the leading business application suite with the leading business communication platform.

With this partnership, we will create a frictionless enterprise and determine the future of work.

We will deliver numerous collaboration scenarios for procurement, for HR, for finance, which will increase the productivity of millions of users worldwide.

The first use cases will be already launched in Q2, starting with S/4HANA and customer experience.

Let's talk about Qualtrics.

This is a fantastic success though for both Qualtrics and SAP, and it resulted in yesterday's successful IPO of Qualtrics.

Let me be clear.

Ryan, Zig and myself are fully committed to experience management and the Qualtrics XM Platform as a key element of SAP's Intelligent Enterprise.

And we absolutely intend to keep up the pace of innovation, expanding our joint solutions quarter after quarter.

SAP will, of course, remain Qualtrics most important go-to-market and innovation partner in order to drive growth within SAP's customer base.

But we are now providing Qualtrics with the opportunity to extend its business and serve customers also beyond the SAP universe.

So for Qualtrics, the future couldn't be pride.

But let's also remember, we acquired Qualtrics 2 years ago for around $8 billion.

Last year, they contributed more than EUR 0.5 billion of cloud revenue, twice of what they used to do when we acquired them.

So at yesterday's IPO, Qualtrics achieved an implied valuation of close to $18 billion, more than double the acquisition price.

And at that end, the first day of trading the stock increased by about 50%, increasing the implied valuation to about $27 billion.

Congratulations, Ryan and team on a great, great job as part of the SAP family.

Now before handing over to Luka, 2021 will be an exciting year full of opportunities.

And I'm happy to enter this important year with a very strong leadership team, underscoring our clear focus on customer success and cloud growth.

First, I would like to thank, Adaire, who will depart SAP.

We wish her all the best for her future endeavors.

At the same time, I could not be happier to announce the addition of 2 exceptional leaders to our Executive Board.

Scott Russell succeeds Adaire in heading our customer success organization.

Under Scott's leadership as President for APJ, the region has become one of the fastest-growing cloud markets for SAP, always putting the success of our customers at the center.

We are happy to have him join us for Q&A in a minute.

Julia White joins us from Microsoft, where she led product marketing for Microsoft Office during its cloud transition to 365 and for Azure over the past 5 years.

Julia will take on a new Executive Board role as SAP's Chief Marketing and Solutions Officer.

Julia brings a cloud-first mindset to SAP that will tremendously support our own transformation.

And Julia perfectly knows how to bridge technology into clear business value for our customers.

At SAP, Julia will focus on demonstrating the differentiating innovations and capabilities of our solutions to our customers by strengthening our product, industry and digital marketing capabilities.

So I'd like to extend a warm welcome to Julia and Scott and once again, also to Sabine Bendiek who joined our Executive Board on January 1, as our Chief People Officer.

Sabina was the driving force behind Microsoft Cloud transformation in Germany.

And as we all know, transformations are driving by winning people and changing culture.

It's all about the right talent, the right leadership, the right attitudes and also the right processes.

And so I couldn't be happier and more confident to hand over her, the Chief Operating Officer role later this year.

And with that, let me wrap it up here and hand it over to you, Luka.

Yes.

Thank you very much, Christian.

So from my side, warm welcome, everyone.

Well, in my 25 years with SAP, I certainly never had a dull moment, but 2020 was unprecedented across all dimensions.

Therefore, let me start by saying that I'm likewise proud of how we ultimately navigate it through this challenging environment.

We had a strong finish to the year with a better-than-anticipated top line, strong operating profit and margin performance and a record cash flow.

So let me cover our results in some more detail, starting with the top line.

In 2020, we exceeded all revised 2020 revenue targets and at the high end of our operating profit outlook, even as the COVID-19 crisis persisted and lockdowns were reintroduced in many regions.

In fact, except for cloud revenue due to the impact of Concur, we managed to ultimately reach the guidance we gave in April.

In Q4, our current cloud backlog expanded by 14% and reached EUR 7.2 billion.

Cloud revenue was up 13% in the quarter, while for the full year, it grew by 18% to more than EUR 8.2 billion, exceeding our revised 2020 outlook.

Lower transactional revenue, mainly Concur business travel related, negatively impacted our cloud growth rate for the full year by 4 percentage points.

However, continued high demand for our cloud assets, like e-commerce, business technology platform and Qualtrics along with several competitive wins, particularly for SuccessFactors, Human Experience Management, produced a strong finish to the year for our cloud business.

In fact, we grew our SaaS/PaaS revenue outside of our intelligence spend business by 27% for the full year.

We also saw a strong early uptake of our new holistic business transformation offering RISE with SAP among pilot customers.

This contributed to the cloud performance in the quarter.

Cloud revenue is now more than 2x larger than our software licenses revenue.

This cloud revenue growth, in combination with our steady software support revenue stream, testifies once again the resilience of our business model.

Our more predictable revenue expanded by approximately 5 percentage points and reached 72% for the full year.

In Q4, software license revenue saw a significant sequential improvement, down only 11%, reflecting strong demand for SAP's digital supply chain solutions, in particular, as well as significant competitive wins in ERP, as Christian already mentioned.

Our cloud and software revenue grew by 1% in Q4 and was up a solid 3% for the full year.

Our services revenue in turn was down 8% for the full year, reflecting the increased scrutiny around larger projects earlier in the year.

While the vast majority of consulting projects continue to be efficiently delivered remotely and SAP's premium services remain in high demand, SAP's training business was impacted due to delays in reopening of global training centers.

Despite these ongoing COVID-19 impacts, our total revenue increased by 1 percentage point to EUR 27.9 billion, also exceeding our revised 2020 outlook, demonstrating the increasing resilience of our business model in a uniquely challenging environment.

Now let me quickly cover our regional results.

From a regional perspective, we had a solid year in all regions.

In the EMEA region, cloud and software revenue increased 3%, and cloud revenue increased 25%, with Germany, Switzerland and France being highlights.

Saudi Arabia and Sweden had a strong year in software licenses revenue.

In the Americas region, cloud and software revenue increased by 3% as well.

Cloud revenue increased 13%, with Canada being a highlight, while the United States and Mexico had a robust performance.

The software licenses revenue, the U.S., Brazil and Mexico held up well.

In the APJ region, Scott's home turf, cloud and software revenue is up 2%.

Cloud revenue increased 21%, with Japan, South Korea and Singapore being highlights.

In addition, Japan as well as Australia and India had a robust performance in software licenses revenue.

Now moving on to the bottom line, where the gross margins of all of our cloud business models were up in Q4 and for the full year 2020, again.

Despite the negative top line impact from the COVID-19 crisis, in particular, the lower transactional revenues, our overall cloud gross margin was up 1.3 percentage points to 70% for the full year.

Again, all cloud business models contributed to this trend.

Our SaaS/PaaS margin grew by 2 percentage points to 71%.

Our intelligence spend margin, despite the top line headwinds, grew by another 1 percentage point to 79%.

And our Infrastructure-as-a-Service margin grew by 5 percentage points to 34%.

Our software and support gross margin ended the year at a very healthy 88%, increasing by 30 basis points.

As a result, overall, our cloud and software gross margin decreased only modestly by 20 basis points to 81% for the full year, even with the negative revenue mix shift effect.

Our services gross margin increased by 2 percentage points to 27% in 2020, but certainly a benchmark margin for services business across the industry.

This was mainly driven by a larger share of high-margin premium engagement business, which has proven to be very effective in this virtual environment, also an increase in remote delivery, led to a reduction in travel spend.

For the full year, our operating profit increased by 4% to EUR 8.5 billion, hitting the high end of our revised operating profit outlook.

This reflected the resilient top line performance, further improvement of our cloud gross margin and a disciplined approach to hiring and discretionary spend, while capturing natural savings from lower travel, facility-related costs and virtual events, for example.

As a result, our operating margin expanded by 80 basis points to 30.5% in 2020, this is the highest level seen since 2015.

On an IFRS basis, our operating profit and operating margin were positively impacted by significantly lower restructuring charges as well as lower share-based compensation expenses compared to 2019.

IFRS operating profit grew by 48%, and IFRS operating margin by 8 percentage points to 24.2%.

Let me now turn to EPS and taxes.

IFRS EPS increased by 56%, non-IFRS EPS by 6%.

This was mainly driven by a stellar contribution from Sapphire Ventures, which had a significant positive impact on our finance income.

For the full year 2020, the IFRS effective tax rate increased by 20 basis points to 26.9%, while the non-IFRS effective tax rate increased by 30 basis points to 26.5%.

We came in at the low end of our non-IFRS tax rate guidance.

With this, let me turn to cash flow, a true highlight in this year.

In a uniquely challenging environment, 2020 was a record year for cash flow in every single quarter as well as the full year.

Operating cash flow benefited from lower tax and restructuring payments and a very successful working capital management.

As a result, operating cash flow for the full year reached EUR 7.2 billion, approximately doubling year-over-year and significantly above the raised outlook of around EUR 6 billion.

Likewise, our free cash flow in 2020 reached EUR 6 billion, more than doubling year-over-year and significantly above the raised outlook of above EUR 4.5 billion.

Looking forward to 2021, we expect operating cash flow of approximately EUR 6 billion, primarily reflecting moderately lower profit, adverse currency movements, in particular, for the U.S. dollar and higher income tax payments, while free cash flow is expected above EUR 4.5 billion, also impacted by a modest increase in CapEx.

Now our detailed 2021 outlook is available in the quarterly statement published earlier today.

It assumes the COVID-19 crisis will begin to recede as vaccine programs roll out globally, leading to a gradually improving demand environment in the second half of 2021.

And our strong finish to the year, the launch of our new holistic business transformation offering RISE with SAP and the other key strategic initiatives outlined by Christian position us well to meet our new outlook targets.

Note that our outlook is provided at constant currencies, and we expect reported figures to experience continued FX headwinds as laid out in the quarterly statement.

In 2021, we also expect to incur between EUR 150 million and EUR 200 million of restructuring expenses.

The big majority of which is a noncash impairment of obsolete assets related to the modernization of our cloud infrastructure.

As usual, these restructuring expenses will be fully recognized upfront in the first quarter of 2021.

Let me now turn to our nonfinancial highlights.

In 2020, we saw a strong performance of our nonfinancial indicators.

Christian already spoke about our strong increase in customer Net Promoter Score.

Our Employee Engagement Index increased by 3 percentage points to a record 86%.

Our measures to decrease greenhouse gas emissions were bolstered by continued reduced travel due to the COVID-19 pandemic.

As a result, in 2020, our greenhouse gas emissions were only 135 kilotons, a decrease of 165 kilotons.

Looking beyond the numbers, 2020 featured some great developments on the sustainability front.

We were recognized by a number of ratings and rankings for our achievements, including making it to CDP's A list of climate leaders, inclusion in FTSE for Good Index, among others.

And remaining for the 14th year in a row, the #1 software company in the Dow Jones Sustainability Index.

In 2020, we launched initiatives such as Climate 21 and Circular Economy to enable our customers to make this transition and contribute to a sustainable future.

And finally, I would like to update you on the value balancing alliance, where we have actively executed our first pilot ending in November 2020.

Details of our findings will be shared in our integrated report, which will be published on March 4, 2021, and which I recommend for your reading.

So before closing, let me briefly talk about the Qualtrics IPO.

As Christian just discussed, we are delighted with the outcomes of the IPO this week, which represents a more than doubling in value since our acquisition 2 years ago.

Importantly, the IPO maximizes Qualtrics opportunity to expand their business and build the best talent, while SAP continues to reap the benefits of majority ownership.

To conclude, in 2020, SAP responded quickly to the crisis and demonstrated its agility.

In an extremely tough environment, we grew the top line, while expanding operating profit and margin and delivering record cash flow.

We are now fully executing on our strategy to drive long-term sustainable growth while significantly increasing the resiliency and predictability of our business.

The launch of RISE with SAP is accelerating customers move to the cloud and their business transformation.

We are receiving very positive feedback and already see strong early take up.

This gives us all the confidence in the world to reach our EUR 22 billion cloud ambition by 2025.

With that, let's open up for questions, Stefan.

Thank you, Luka, and we can now start the Q&A session, operator.

(Operator Instructions) We'll now take the first question from James Goodman at Barclays.

It's clear you've been working closely with customers and partners ahead of the launch of RISE on Wednesday.

You mentioned that pilot customers are already contributing to the quarter.

I was wondering if you could talk a little bit more about the rate of adoption you're expecting over the coming quarters?

And perhaps specifically, whether you're expecting to see this more as a sort of migration of license potential customers to the new offering?

Or you're really focusing on existing movement of maintenance customers?

And how you're going to help us track the progression of RISE from a KPI or disclosure perspective?

Let me start, and then Luka and Scott feel free to build on top.

I mean, look, James, first of all, when we started to design the new offering.

We -- as I also said, we listened very carefully to our customers.

And to many chief information officers, I'm talking to, the main issue with their digital transformation is not the fact that the technology is not there, the solutions are not there.

They're all there.

The point is around how can you use this technology and connect it to the business processes when you are migrating an IT landscape to a new cloud infrastructure, no single business process will change in HR and procurement and sales.

And with the new offering, and it's really the sum of its parts, we are taking the business process intelligence layer.

And Signavio is, therefore, such a great, great fit.

We are taking that, use our experience, use the best practices.

We see in the market from over 400,000 customers, and we can tell exactly the customer how do we design their business processes?

Which business models works best?

Should the customer switch from product to selling services?

Should they switch from upfront license models to subscription and pay as it go, as we do, for example?

And then we can go from there because S/4HANA cloud can do it all.

And again, the artificial intelligence, the RPA, when it also then comes to Leonardo, it's not like that is a side element, it needs to be part of one.

And this is how it comes together.

And yes, we started pilots.

I didn't want to push this offer just out there to the market.

We actually started with 20 pilots.

We ended up with 130.

We actually had to come the field a little bit down, Scott.

I guess that's fair to say, because we still are in a pilot phase.

And now we are, of course, public, and now we go and of course, for smaller for midsized customers, we will, for sure, see shorten sales cycles.

For some others, it will take a bit.

But for sure, it will drive the acceleration of S/4HANA cloud and both, as you also have heard, a migration with the installed base with very healthy conversion rates; and second, with a 40% net new customer share, I mean I don't know what to say more, we are also clearly winning market share.

And Luka, maybe you can talk about the KPIs?

Yes, absolutely.

And first of all on this, maintenance conversion versus new license topic to just give you an idea of what we roughly are looking forward to.

You will know that our cloud ambitions until 2025 call it between 2021 and 2025 for a CAGR of around about 25%.

And obviously, RISE with SAP is a material contributor.

And if we break down what we expect in terms of contribution from it, then now we see around about 2 to 3 percentage point contribution, both from the conversion of established maintenance as well as from the conversion of new software licenses to cloud subscriptions, leaving basically high teens in terms of growth CAGR for the rest of the portfolio outside of RISE.

Obviously, we also recognize that it's very important for the capital markets to be able to transparently track the progress that we are making.

And we, therefore, intend to begin enhance disclosures as of Q1 2021 both in terms of the customer pickup that you're interested, but also financial metrics that give you a view of the size of the core business that we are moving to the cloud as well as the new customer success that we have from a financial perspective.

So stay tuned for that.

But as always, SAP is committed towards transparency, and you will get it starting this quarter.

We'll now take the next question from Charlie Brennan at Crédit Suisse.

I'm going to do 2, if that's okay.

Firstly, for you, Luka.

I understand the concept of you taking ownership of a holistic contract, that includes both some infrastructure and services elements, and that's going to enable you to capture greater share of the wallet.

Can you just help me understand how those services and infrastructure elements are going to flow through your numbers?

Do those revenue pieces flow through the cloud line in the future?

And I'm assuming that because you're using partners to help deliver those services, it's not going to be an 80% gross margin.

Can you just help us understand how you get the overall division to 80% gross margin?

And then can I just, as a follow-up lift eyes to your midterm targets.

I know that free cash flow wasn't explicitly part of your formal target.

But I think on the previous call, you were happy to imply that EUR 8 billion of free cash flow seemed reasonable.

In light of the 2021 guidance at EUR 4.5 billion, I was just wondering if that still seems achievable?

Yes.

So let me cover the last one quickly because that's easy.

Yes.

What we are expecting is that as also our profitability targets have been pushed out by 2 years to 2025 so will the free cash flow target.

So we still see this as our achievable target for 2025.

That was probably the quicker one.

On the infrastructure and services side, here, now we need to be precise.

So first of all, we are bundling with RISE, of course, the public cloud infrastructure and also certain automated, productized services.

For example, we provide code analysis tools that allow our customers to inspect their modifications and also help our services partners than to do the migrations swiftly.

Business process intelligence is another example where the base functionality that we are bundling with RISE will allow our customers to quickly get a view of how they stack up against benchmarks, so to say, in terms of their own process, existing process capabilities and what they can achieve in terms of additional automation and efficiency as they move to S/4HANA.

All of those elements as well as the public cloud infrastructure will be recognized as cloud revenue as part of the overall bundle.

Irrespective of this, we are also offering ourselves, but also our service partners, our SI partners, of course, migration services in order to set up the systems.

Those would be recognized as services revenue separately.

That's at a high level how this distinguishes.

And in terms of the margin actually, we believe that we can gain significant efficiencies through an industrialized migration approach.

We have a cloud-native reference architecture that we applied as part of the migration actually simplifies the ERP loads and standardizes them.

We use the business technology platform, in particular, to move modifications over to run on the platform rather than infecting, so to say, the ERP cost still.

And with this structure, we can actually run quite efficient cloud infrastructure operations.

And so while the individual margin levels that we can achieve across the entire customer base will depend on the complexity of the individual customer situation and where their starting point is and how long it will take to move them to way more streamlined operations.

In aggregate, I can only assure you that those impacts are, of course, factored into our long-range margin guidance that calls for us to land in the neighborhood of 80% by 2025.

Okay.

Thank you.

Let's take the next question, please.

We'll now take the next question from Stefan Slowinski at Exane BNP Paribas.

Great.

And I guess just a follow-up on the last question.

I understand the infrastructure-related offering will be going through your cloud revenue line.

Will you also be, I guess, passing through the services revenue from some of the partners or all of the partners through your services line, just to confirm, is that what you just said?

No, no.

As far as services, or the migration are going to be offered by partners that will go down separately on their paper, but we will take the holistic ownership of running the solution itself all the way from the Software-as-a-Service layer to the Infrastructure-as-a-Service as a service layer.

Okay.

Great.

And just a follow-up to that.

I guess, Christian, just on the integration work that you've been doing across your cloud applications.

I know it's, I guess, part of RISE to start to cross-sell more backlit.

Can you just help us quantify where you are in that process?

And maybe if you look at your 400,000 customers, do you have any data in terms of how many of those customers have at least 2 SAP cloud apps?

And what the pipeline looks like for cross-selling those applications?

Yes.

So I come to the last question first.

There is immense cross-sell opportunity.

We still have thousands of on-premise customers wanting HCM, meant still eye based left for procurement.

And by the way, now that the integration work is almost done, we are also going to offer a bundle this year with S/4HANA, including SuccessFactors, Employee Central and Ariba, as this now really comes as one.

We are almost done with the integration work, data models in-sync and user experience in-sync.

We are pushing also now in the analytics layer for integrated planning, for integrated reporting.

And we will also share a more detailed announcement in the next weeks where we also have some customer references in.

It's a customer in APJ.

Scott, you know them well.

They are wanting actually 8 cloud solutions from SAP.

And they now can cut the customer integration already by 80%.

And we have much more of that.

So customers now feeling tangible outcomes.

And as I said, we are almost done, and we will finish the rest also then during half year, one this year.

And yes, I already mentioned the cross-sell potential.

And again, we're also going now to offer the bundle.

So in case if the customer wants to go more portal, he can have the bundle.

And then in case they want to go LoB by LoB, they can, of course, also consume it on a modular basis.

Okay.

Thank you.

Let's take the next question, please.

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

Congrats on strong close of the year.

Christian, a question for you from what you're hearing from customers.

Obviously, there are lots of different flows and dynamics affecting and potentially the shape of this year.

Obviously, hopefully, you have a sort of post-vaccine world and economic recovery, sort of like what we saw in 2010 and sort of return of SAP projects.

But then also, you have a lot of technology, as you just mentioned with RISE with SAP that you're delivering with customers that they maybe need to kick the tires on, et cetera, maybe even expand usage of SAP.

How -- what are you hearing from customers on, I guess, the low flow of these impacting the year in projects?

Yes.

So Scott is with us.

Scott, I can start, and you then can just comment on what you see across the globe.

I mean, look, what we also have seen in Q4, very positive is how relevant we are in the value chains of our customers.

I mean, others talk about how they help to deliver the vaccine, we are wanting the supply chains, we are wanting the productions.

We are now in this time, we are more closer than ever to these enterprises to help them scale their production, to put them into the cloud, to connect them to the business network, so that they get the ingredients for the vaccine from Asia Pacific -- Asia Pacific to the U.S. to the factory in the U.S. despite the country lockdowns.

These are real business scenarios.

This is what we are doing.

And this also then gives us the confidence to be very positive about 2021.

Obviously, yes, we acquired a travel and expense solution.

But also there, I have to say we -- this is the, by far, market-leading solution.

So we're, of course, eagerly waiting until we can all travel again, but they will come back.

They will come back strong.

And actually, I'm still surprised that we are still doing business with this solution these days.

And when you have heard Luka, now also talking about a 27% growth rate for SaaS/PaaS.

And you look at the valuation of Qualtrics, you know that we have many, many other assets in our portfolio who are actually growing like Qualtrics.

So you see we -- our portfolio is relevant.

Our portfolio is strong.

And maybe, Scott, you can give some sentiment from what is actually what you are seeing across the globe.

Yes, sure, Christian.

Thank you.

Look, based on the discussions with the customers, more and more of our customers are very comfortable, not only in the cloud for the technology, but for their mission-critical applications.

Because they know that to transform and to serve their customers now and in the future, they need to differentiate, not just at the technology layer, but at the business process and innovation layer.

And that's why they're coming more to SAP.

You combine that with the business transformation as a service, ensuring that they don't have an upfront CapEx investment and, in fact, pay over multiple years as they realize the business value.

So that holistic subscription offering through RISE with SAP, but all of our SaaS portfolio is giving really strong confidence that the customers around the world are not only positive, but they're actively working on their digital transformation programs with us.

So the outlook is strong.

Thank you.

Let's take the next question, please.

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

I have 2 questions.

I think one for Christian.

I think you had mentioned that S/4HANA cloud was at roughly 80% of the features of the regulator future S/4HANA.

Is that an impediment for the adoption of RISE?

And I guess, how do you plan to close that gap to the regular full feature S/4HANA?

And then second question for Luka.

Just in terms of capital allocation, obviously, SAP is using -- generating a lot of free cash flow, right, this year and in coming years.

And should shareholders be expecting some kind of incremental return?

I know you talked back in 2019, I believe, about doing annual step-by-step returns.

I'd be curious to get an update on what the plan is here?

Yes.

So I'll start, and then Luka, you can build on top.

I mean, Julian, the first point the time of RISE with SAP is now and to tell you why things are now coming together.

When you look at S/4HANA cloud, we have put the data model on our platform.

So yes, we have 80% of the capabilities now available in the cloud.

Probably in some parts, we will not exactly also develop the same kind of capabilities as we did in on-prem because business models are changing.

And you will also find customers who put another circle around the business process, which is really very individual to this customer.

And that's why it's so important that the platform is not there.

And by the way, the platform is also now there for SuccessFactors, for Ariba.

The platform is now part of every deal to build the extensions for our customers.

And we also invite our partners, our ecosystem to the party because now everything is there on this platform to just build seamlessly the extensions.

In past times, why should you go to an SAP cloud platform when we don't have the same services like our applications use.

Now it's there.

This is why we are now launching the offering RISE with SAP and this is why we are so confident.

And again, you have seen in my keynote, a customer like Siemens.

Obviously, it will take time to transfer them completely over.

You have seen the number of ERPs, but they will now start.

They will start and we migrate them step by step.

And on every step, we will look at one business process after another, and we will deliver them tangible business benefits.

Yes.

And perhaps on the use of capital, look, our philosophy is unchanged from what I had shared with all of you at our Capital Markets Day in late -- I think it was in November 2019, if I'm not mistaken.

And indeed, we had a very strong free cash flow and obviously, have realized our additional proceeds from the Qualtrics IPO.

But the logic is always the same.

First of all, we want to fund our organic investment needs.

And in particular now for this year and next year, that involves and includes also the harmonization, modernization of our cloud infrastructure, which will result in some additional CapEx requirements then.

We want to continue to deleverage and pay back outstanding debt when it is due.

This year, we'll actually have a rather big chunk of debt returns that we have to still make.

One, we have still EUR 1.25 billion of the Qualtrics term loan outstanding that we want to repay in 2020 and another EUR 1.4 billion of regular euro bond repayments.

Second, beyond that, of course, we want to pay an attractive and increasing dividend.

And we had a very strong net profit, which is the baseline for the dividend payout in 2020.

So while the final decision on the dividend is going to be taken by our Supervisory Board in late February as always, it is safe to assume that based on this and our policy to pay out more than 40% of net profit in IFRS terms, you will see an increased dividend payout from SAP.

Last but not least, we obviously also want to continue to consider value-accretive tuck-in acquisitions, if they make sense.

In the last 2 quarters, you have seen that we have acquired a masses in the customer experience space as well as now lately Signavio.

Those smaller acquisitions are obviously ones which we can pay back from our strong cash flow, and we will do so.

And then the remaining excess cash, if we have it, something that we, of course, will consider for incremental capital returns.

But on that one, we will follow the process that we have outlined.

This will be evaluated in the context of our final year-end results by the Supervisory Board.

And if there are any additional measures that we would decide to take, we would communicate them afterwards, as we have done in 2020.

So same procedure as in the past, I would say.

Let's take next question.

We'll take the next question from Mohammed Moawalla from Goldman Sachs.

Great.

I had sort of 2 questions.

First, Luka, can you just help us bridge the gap and provided updated cloud backlog disclosures, that metric has seen a deceleration growth, but you also talked about the 27% growth in the cloud business ex-transactions.

Should we, therefore, anticipate over the next several quarters that, that sort of momentum may potentially slow?

And then as that sort of bookings accelerate -- reaccelerate based on the environment, we should then see that sort of reaccelerate again?

And then related to that, I know you sort of -- Christian alluded to the sort of the broader portfolio.

And I think, Luka, you indicated just an EUR 800 million revenue run rate for S/4HANA cloud.

Can you remind us again of the kind of big pieces of the kind of assets you have as we think about that sort of cloud growth rate moving forward and the kind of pipeline in the?

Yes.

Let me start, and then please also Christian, feel free to complement here.

First of all, it's important to note, when I talk about the growth rate of our Software-as-a-Service platform as a service business, this is excluding the entire intelligence spend group, not only transactional revenues.

In the Intelligence Spend Group, both Concur as well as Ariba and Fieldglass also have a fixed committed subscription business.

And that obviously is part of this revenue line as well, not only the transactional revenues.

In terms of the growth profile, first of all, we are extremely pleased with the strong order entry performance that we had in Q4 in our cloud business.

It was by far the best one that we had seen in the entire year.

So based on that strong performance, as you know, it always takes a bit for this to find its way into the P&L due to the delayed nature of revenue recognition in the cloud subscription business.

And therefore, I believe that you will see and we will see the trough in our growth rate in cloud in the first quarter of 2021.

And from thereon, we should see a reacceleration based on both the strong performance in Q4, but also the confidence that we have that now with programs like RISE or new solutions that we are bringing to the market as well as the starting momentum that we see in the rest of the portfolio, we will actually be able to reaccelerate and grow the business at higher rates for the remainder of the year.

In terms of the businesses that we have in this SaaS/PaaS chunk outside of intelligent spend, it's a variety.

You have solutions like SuccessFactors and the human experience management solution in there.

You have solutions in there like S/4HANA cloud, which is growing very fast the business technology platform assets as well as analytics in the cloud.

You have our CX customer experience portfolio with commerce, with the CRM cloud solutions.

And finally, you also have Qualtrics in that space as it is also a SaaS/PaaS solution.

That gives you a view.

And of course, those assets are of varying size and varying growth levels, but the ones that I cited before, like commerce, like a platform, like S/4HANA cloud are all at a similar scale and grow also very, very fast, typically in the mid-double digits.

Okay.

Thank you.

Let's take the next question, please.

We'll take the next question from Michael Briest at UBS.

Just 2 from me.

Luka, you gave an interesting insight into the ecosystem yesterday or Wednesday on your RISE presentation.

I think you said that the Infrastructure-as-a-Service opportunity underneath SAP is about EUR 10 billion a year.

How much of that are you expecting to be under your paper, if you like, by 2025?

And then also, Luka, you talked about the investments in cloud harmonization of a converged infrastructure and also indicated, I think, in October that there might be a slower margin progression in the cloud for the next couple of years.

Can you maybe just give us a feel for should we be expecting overall cloud margins to be flattish this year?

Should they increase a little bit?

Some insights there, please?

Yes.

So first, on the cloud margins because there, I have an answer for you.

So our expectation is that despite the investments that we are taking over the course of the next 2 years, we should still see a modest increase in the cloud margins in '21 and in '22, but then a significant step-up as of 2023, when we have concluded that work very much in line with what you saw actually in the past.

While we were going through the harmonizations of the database layer, you might have might remember that we had slower progress for a while and then after SuccessFactors, also last year, Ariba was done, you saw again a step up, and that would be a similar trajectory that we're expecting also for the cloud infrastructure harmonization work.

And on the Infrastructure-as-a-Service share, I really can't give you such a share because we're not breaking out the public cloud infrastructure piece.

Actually, we are offering our customers choice, as we have said can actually select the public cloud infrastructure or they can elect to go with SAP's own converged cloud.

So we obviously have an overarching revenue ambition for RISE with SAP that fuels, as I said, the ambition to reach the EUR 22 billion in cloud revenue by 2025.

But within that, I really cannot give you a breakdown between public cloud and converged cloud infrastructure.

Yes.

And Michael, maybe just to build on that from a business perspective because I also saw comments around why should actually also the customers to decide to go with that bundle?

I mean, from a business perspective, I mean, when we think about what kind of workloads do we want?

So here we talk about production, here we talk about finance, here we talk about logistics.

And when this is down, all wet lights are on.

And in this case, you don't want to go to 3 different parties and ask, okay, who is now actually -- what is now actually the root cause?

You want to go to one accountable party, ideally, the one who sits on top and figuring out of root cause with monitoring tools across the stack.

And this is something what we should never forget when we talk about why is that there are clearly also some reasons why business-wise for.

And Chief Information Officer, this could make sense to really go via SAP while you can still have the best of the best.

Okay.

Thank you.

We have time for 2 more questions.

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

First of all, for me, can I just follow-up on our last comment question around -- I think many of us will see the value of the bundle and the ability to deal with one vendor.

But to the extent you're going to be able to protect margins on the bundle of the gross profit level and therefore, mark up some of those services.

What's the risk of that bundle just becomes too expensive for customers versus independently contracting, and they see the value of where it is?

But because you're marking up to get as the margins you want to be at, it's just too expensive for them to go to.

And then secondly, just thinking about distribution, there's been a lot of change in the leadership in the sales organization over the last few years.

Could you maybe just give us a little update on the team there, how you see things progressing?

And then maybe particularly where they are with readiness to sell RISE, which is given it's a bundle, again, quite a different sale maybe from going and just selling a simple S/4HANA upgrade to a customer?

Good questions, Adam.

So first of all, when it comes to margin, you can be wresting to -- Luka is watching us.

And then second, not seriously spoken.

I mean, we are talking here about billions of consumption, billions of workloads.

And with that, we are, of course, also are getting pretty attractive cost weights.

And so we, of course, also calculated it through across the stack.

And let's not forget, for an installed base customer, there's still also a conversion weight.

So that you really need to see this offer as a holistic offer as well, you're also coming on top of the commodity coming with the platform, coming with S/4HANA.

And with regard to the changes, I mean, look at my -- looking at Julia now joining us from Microsoft, I guess she will be a great, great asset to the team.

She will help us tremendously to bridge the product marketing to the innovations we are going to deliver.

And then obviously, Scott, feel free to comment on the sales side, but especially in Q4, we have seen a huge uptick in North America.

It was actually the region of the quarter.

We have strong, strong sales representatives there with DJ, but of course, also with Paula Hansen and others.

So I'm really feeling confident that we have the wide team together.

But Scott, please chime in.

Yes, sure.

So I guess a couple of comments to give a bit of color on this.

The first is the sales organization and in fact, the customer success organization, as Christian mentioned, is actually very stable.

Leadership that's been in place for a number of years that understands the market, understands the needs of the customers and is able to navigate that change.

Secondly, also, as Christian mentioned, as we were launching our pilot in Q4, we were also enabling our organization 40,000 women and men in the customer success organization about RISE, the offering.

And as we were refining that offering, we were also being ready.

And in fact, just these last 2 weeks, we've launched the largest customer success Summit, we brought all of our customer success organization, 40,000 people, plus over 10,000 partners and not only a kickoff, but an enablement in preparation.

So we're ready to go.

And what is great is the customers are ready to engage.

So we're looking forward to a fast start.

Okay.

Thank you.

Let's now take the final question, please.

We'll now take the next question from Knut Woller at Baader Bank.

It's actually one.

Christian, you spent a lot of your efforts on the integration of the product, probably something that has not been a focus of SAP on the previous leadership.

So can you give us a feeling about -- you mentioned the increasing customer satisfaction, what's -- how that impacts your expectations regarding the whole migration cycle to S/4HANA?

And which percentage of your customer base are you expecting to have migrated until 2027 when the standard maintenance scheme or the extended maintenance runs out?

Yes.

Thanks a lot for the question.

I guess, it always helps when you have been yourself in the shoes of a Chief Operating Officer and when you had IT under your leadership because then you really feel the need for having really an integrated solution landscape.

And as I said early on, we are almost done.

Our core applications now speak the same language.

So they are not only transferring data technically from left to right.

And with that, of course, what comes with it, the cross-sell opportunities, it was mentioned before, we have still thousands of customers wanting line of business solutions on-prem.

And with that, now, we, of course, also will bundle our -- so we can bundle our solutions much better.

But compared to on-prem, the customers have choice.

They can go into a modular landscape, highly standardized and build the extensions then next to our core applications on our cloud platform.

And this is, for me, of course, something what we have factored into the plan.

But of course, it's a huge benefit for our customers that this is what SAP does for many, many years.

We are back, and we are now of course, also innovating.

Let's also not forget, we talk so much about integration.

Sometimes, I also feel 15% of our development capacity is actually focused on integration.

So there's 85% left.

Yes, we are doing localization.

We are going to support our customers.

No matter if there's a Brexit out there or not, we do that as well.

But I guess, there's also a lot of capacity left for building new innovations every day, and this is what we are going to do.

And I'm really looking forward to also highlight everything what we do around there because this is a lot.

Okay.

Thanks a lot.

This concludes our Q4 2020 earnings call.

Thanks a lot for participating.

And I would say goodbye.

Thank you.

Thanks a lot.

Take care.

Bye-bye.