SAP SE (SAP) Earnings Call Transcript & Summary

Well, good afternoon, good morning to everybody. I'm Adam Wood, I look after European tech research in Morgan Stanley. Thank you very much for joining us at our conference once again. This afternoon, I'm very pleased to have Luka Mucic, the CFO of SAP with us. Luka, thank you very much again for joining us. Really appreciate you taking the time.

Yes, absolutely. Thanks for having me. It's great to be on the show.

Excellent. Yes. So I wanted to get the safe harbor out of the way so we can get into more interesting things. I'll just read the disclaimer quickly. Please note that except for certain information, matters discussed during today's presentation may contain forward-looking statements, which 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 fully in SAP's most recent filings with the Securities and Exchange Commission. There's obviously a GAAP for reading out the safe harbor now at SAP. So I'm going to put myself forward to that or Luka in the future.

But let's go on to some questions. I wanted to start off with a major release this year of RISE. And I think there's probably still a little bit of investor confusion about whether is that a new product, is it a product bundle. Could you maybe just clarify a little bit about what's included in that RISE offering for us, please?

Yes. Happy to do so, Adam. Let's dissect it clearly. So first of all, RISE is not a product. It is indeed a combination of products that we're providing to our customers under the offering. So it comprises obviously a subscription to S/4HANA Cloud as well as to our business technology platform as 2 of the core components. And then we augment this with access to our business network as well as to our business process intelligence, business transformation suite. But it's also more than just a simple bundle of products because we have defined a set of reference services and a reference approach, together with our ecosystem of partners, for how we actually will bring those solutions to bear, to not only make simple lift and shift of our customers' ERP systems to the cloud, but actually utilize this as a force multiplier to simplify and standardize their landscape. So for example, we have dedicated service offerings to take out custom code from the inherited on-premises applications and put that on top of our business technology platform to have a cleaner architecture with a cleaner core afterwards. And we are obviously utilizing business process intelligence as well as a means to scan the as-is processes of the customers and benchmark them against best-in-class process capabilities that we have accumulated from our experience in working with thousands of customers. And then, of course, there are additional value-added services that our customers can opt in for example, for application management, either from ourselves or also largely from our partners and so on. So we call it really a business transformation as a service offering rather than a product or a simple bundle.

So I guess from a customer point of view, this really means that it goes from kind of technical, as you described it, lift and shift of one product to another, to where you're really engaging around what the business processes are, how you optimize them and what new things you could do with SAP versus what you were doing before. So it opens up new avenues for discussion.

Absolutely, and it's also a great means for us to extend that discussion beyond just the pure core ERP aspect of the conversation. Because with our customers moving to S/4HANA Cloud and the business technology platform, they have immediately access to the much-improved native integration capabilities to other line of business solutions as part of the Intelligent Enterprise suite that we are offering, for example, to human experience management with SuccessFactors or to our procurement solutions or to customer experience solutions from SAP. And we see this actually happening as well that the move with RISE to the Cloud with core ERP is opening up significant cross-sell and upsell opportunities. As you can see from the fact, for example, that in the last quarter, our share of order entry from contracts with above EUR 5 million in annualized contract value, has actually gone up year-over-year from 31% to 40%, and we expect this trend to continue.

That's very clear. And that leads me nicely into the next question, which is, could you give us a little bit of a help in terms of what companies are spending on RISE and the difference? So maybe we can think about it in 2 different ways. So a company that's on ECC6, it's an installed base customer. What type of uplift would you get taking them to RISE versus what they were spending beforehand? And then how would that be different to if they just went to S/4HANA as a simple lift and shift?

Yes, that's a very good and important question because if we were assuming that this ECC customer would make a classic upgrade to S/4HANA on-prem, what essentially would happen is if they don't add additional users or additional modules that we would simply sell them the incremental HANA database entitlements, that's typically a 15% uplift on their existing maintenance base. Typically, we would also, in that scenario, add some more modules. So perhaps you would rather talk about 20% and 15%. And then, of course, they would pay the associated maintenance going forward on the higher maintenance space. But with the move to the cloud with RISE, with SAP, we are actually able to provide more value because we're providing the infrastructure support as well, we're providing the additional value-added modules that I've just described. And of course, the additional business transformation service. And so we can actually drive for typically around twice or higher on the existing annual support revenue stream that the customers are paying on their classic ECC license, which is, over time, of course, a higher amount than just the incremental database license and the associated maintenance with that. So we expand our share of wallet with our customers and have a total -- a higher total customer lifetime value, which obviously is very positive, while at the same time providing a more active and more accountable support towards the simplification of their business processes based on a modern technology.

So it's a much more material uplift than you were getting from a simple lift and shift, because of that transformation, attach rate of different products and so on?

Absolutely. And that is only what I've described now is actually, only indeed, the lift and shift portion to the cloud. And on top of that, we have, as explained before, the additional expansion opportunities based on a modern core that is natively integrated with best-in-breed -- best-of-breed line of business solutions that we're offering as well. So typically, we see a further up to $3 upsell opportunity on top of the $1, so to say, that we add through the simple lift and shift. And that's a tremendous growth opportunity that is actually fortifying the prospects for our entire solution portfolio, not only for the core S/4HANA piece of it.

So just want to make sure I understand this correctly. So the lift and shift element, you can basically double the maintenance revenue that you were getting from the customer in an on-premises environment. And that's because of what you can do around business transformation when S4 with RISE and what you could do in simple lift and shift. And that's a permanent uplift there, it's not kind of one-off services revenue, it's a permanent subscription revenue uplift. And then on top of that doubling, then you've got the opportunity to cross-sell the line of business cloud solutions that gives you -- you are saying $3 to $1? That's...

That's exactly right, yes. But of course, that does not apply for every single case. But we have seen these types of uplift potentials with actual customer situations. So I think it's definitely an opportunity that is out there for us to grab.

And that $3 to $1 was that with a large installed base customer? Or is that a kind of blue sky, the best possible scenario? Or is that with a reasonably large existing customer that you can see?

This typically occurs in scenarios like, for example, carve-out scenarios. You might have a large enterprise customer that has already a significant established SAP footprint but perhaps augmented by heterogeneous LoB applications. And in the context of a corporate restructuring, they have a chance to rethink that landscape and apply a more greenfield approach towards what they really need for that new business area that they are forming. And in those cases, the game is actually open again also to rethink the surrounding application landscape. And those are typically the scenarios where we can really then score an entire clean Intelligent Enterprise deal across the portfolio.

And the attach of line of business solutions, do you think that's RISE driven? Or do you think that's also being helped by the better integration that you've delivered, I guess, over the last kind of, what, 6 to 12 months?

Yes. I think we have been working on that, quite frankly, probably for the last 3 years in honesty, and we have now achieved a very decent level. But I wouldn't say that it's only the one or the other aspect. Of course, the better integration was a prerequisite for driving this cross-sell opportunities, as it also drives differentiation from, let's say, pure LoB competitors. But at the same time, in order to benefit from this better integration, you need to actually modernize the core as well. And that means that the move to S/4HANA cloud that is happening in an accelerated fashion due to the RISE offering is, of course, playing a critical role here as well.

And could you -- I guess, one of the conversations I have a lot with investors, we do these CIO polls where very clearly, digital transformation comes out as a top priority for CIOs, this is what they want to invest in. And I guess I get a lot -- asked a lot by investors, how is SAP positioned for that? Does this also -- it sounds as if this changes the discussion you have, relationships that you might have had more than SI or starting to have with other vendors that you can bring back and really have that transformation discussion with them. Is that fair? Or...

It's fair, even though I think the transformations that we are driving with RISE and with the Intelligent Enterprise, certainly don't crowd out or alienate our ecosystem from the customers because we see a critical role for them that they have to play. But they have to play it, and I think they want to play it as well by adhering to those reference principles that I've outlined at the beginning. And that means that they will have a chance to drive these transformations at a faster pace with more velocity and therefore, of course, also in a more replicable fashion. For other vendors, obviously, we are confident that with the moves, we have increased the competitiveness of SAP, and it really shows us well in our -- in the win rates that we are tracking. And we are clearly confident that we are gaining ground in a lot of the areas of the portfolio now, as you can also see from the accelerating growth that we're seeing actually in Q3, for example. There was not a single solution in our portfolio, which didn't grow the order entry in double digits. So it is certainly strengthening our position versus the vendors that we typically compete with at the edges. But the most important thing for us is that it changes the strategic nature of the conversation with our customers and that they understand as well that SAP is ready to take on more accountability for their overarching system landscape. And that shows, in particular, in the customer Net Promoter Scores, who have been materially up in 2021. That, for me, is not a soft sector. It's really a hard KPI that will drive business opportunities in the years to come.

No, that's very clear. That's very helpful. We've already started to talk a little bit about this because we've talked about those attach rates of line of business cloud as you move. But if I look at your cloud guidance out to '25, it implies about 23% is compound growth. I guess that's another area where I get a fair amount of skepticism from investors. How is SAP going to maintain that level of growth over that time frame? The growth of the mix is a little bit below that. And investors always like spreadsheets that go high to low in terms of growth. Could you just help us a little bit with what the drivers are of sustaining that cloud growth at that level for that amount of time?

Well, first of all, I think it's important to note that the cloud revenue performance in the actuals to date is actually a story of the past. So we have to look forward and see what the current order entry performs, and renewal performance is to extrapolate from that to the future. And as you have seen, we have seen all along during the year, our current cloud backlog, which is that kind of forward-looking metric combining the committed bookings-related revenue growth for the next 12 months with the renewals that we have already brought in, that has always been ahead of the cloud revenue growth that you're seeing in a given quarter. I would also note that investors should take comfort from the fact that in just 9 months, we have been increasing our growth rates in both cloud revenues as well as the current cloud backlog from 13%, respectively, 14% in Q4 of last year to now 20%, respectively, 22%. And within that, we still have the dampening impact, which is now fading away, of one of our largest cloud businesses, which is Concur, which obviously was particularly hard hit by the pandemic conditions, but which has also returned now to a still moderate mid-single-digit growth in revenues. But on the order entry front has already had a meaningful double-digit growth quarter as well. Without Concur, our rest of the business actually would have grown current cloud backlog by 25% already in Q3. And it's safe to say that you will see further acceleration, both on cloud revenue growth as well as current cloud backlog growth, not only in Q4 but also going into 2022. And the more we prove that I think there were less concerns you will hear from market participants. Why am I so confident about that for a number of reasons? First of all, of course, the RISE with SAP movement has just started, we are very confident that we will reach a 4-digit number of contracts by the end of this year. But then again, there is a vast installed base still out there, with more than 10,000, 15,000 customers easily that still need to make the move. And then of course, there is a whole additional net new opportunity that we're also harvesting more and more. So that is a great leverage. Again, we've talked already about the cross-fertilization opportunities that we have on the rest of the portfolio. I talked about the consistency of growth that we have seen in terms of new order entry across the entire portfolio. Of course, not every solution is growing in the triple digits like S/4HANA Cloud, but that does not need to be the case in order to deliver the growth rates that we need until 2025. Then the third aspect to remember is, again, Concur will come back to growth. We are seeing it already happening. It has happened on the order entry side, actually quite meaningfully. That will translate into a more meaningful contribution to growth in 2022 and then in particular, as of 2023. And fourth, we are not keeping our feet still. We are marching forward with new innovation that you don't see yet in the revenue figures. Industry cloud solutions, which have started a moderate contribution in 2021, but will have a much larger contribution from 2022 onwards, Business Process Intelligence, our new sustainability solutions, Business Networks and so on and so forth. So with all of those levers, actually, we will very early on see next year that we are reaching those CAGRs and probably even exceeding them that we need for the 2025 situation. And with all of the leverage that we still have from RISE and the S/4HANA core to cloud migrations, I think we can be really sure that those targets are readily achievable and that the trajectory and the momentum that we are enjoying is going to underpin this more and more.

Just to dig into one of those and I sympathize on the Concur side, that's been a material drag for you. Could you give us a feel for in the context of the business, if that was to go back to 2019 levels, I appreciate probably is over 2 years, what sort of a percentage uplift that could give you for the cloud business overall?

Well, look, I mean, as I said in Q3, to give you an example, our growth in SaaS/PaaS outside of intelligent spend was 27%. Concur, at the moment, has been in Q3, growing in mid-single digits. And if it returns to the levels of 2019, that would mean very significant double-digit growth for Concur because it has lost during the pandemic around about 30% of its revenue base. And it was obviously a business that was operating significantly above the EUR 1 billion mark. So there is a quite substantial uplift. Again, it will build up over time. I think we still have moderate expectations for Concur to return back to double-digit growth in 2022, but not kind of outsized growth. But of course, in 2023 and going forward, if we assume that we will return to more normalized travel behavior, there is also an opportunity for even higher growth rates in the outer years.

Perfect. That's very helpful. And as part of that 23% compound growth, you've also helped us that 6%, 7% of that, I think, comes from the on-premises business getting cannibalized, particularly the license business getting cannibalized into subscription. I mean, I guess a part of that is you're obviously helping the market by assuming a fairly material license decline over the next few years. But I guess the problem with companies that allow customers choice is you're never exactly sure how companies are going to buy. So could you help us -- what control does SAP have in this in terms of the pricing you offer customers? How you can incentivize them to go one or another? What you're doing with salespeople to push one model or the other?

So first off, you're absolutely right. I mean we are giving our customers choice, and that's the only thing to do when you're talking about core ERP, you cannot just simply cut the cord on billions of investments that customers have made and operating mission-critical systems. It would even completely overwhelm our capability to move them all in a short time frame in advance to the cloud. So what you have to do is just having a convincing offering, and we believe our offering is convincing because on the one hand, it can certainly drive for some TCO savings to customers, even though this is not kind of the primary argument, the primary argument comes with a much simplified IT governance with an overarching accountability of SAP as their strategic partner with the capabilities that we're offering to simplify their landscapes and provide them more agility to be faster in terms of transformation with all of the benefits of the modular suites that we are offering. So that argument, I think, needs to be compelling and needs to stand in its own right. And it needs to be worth the value that we are ascribing to it because what we are certainly not wanting to engage in is diluting that value by massive commercial incentives, because we are confident that we have a compelling value proposition. If you think about it, any classic IT operations in an on-premises world is -- I'm simplifying here a little bit, probably consisting of 1/3 of cost in software application licenses and maintenance, 1/3 in infrastructure and hardware costs and 1/3 in the actual IT operations. Well, if we double the 1/3 of the software application and maintenance costs, as we have said, that still leaves 1/3 for the customer to optimize. So that needs to be compelling actually enough. And we see from the multipliers that we're able to drive, which are actually above the 2x mark at the moment and quite consistently have been for quite some time. And this is actually an equation that works for our customers as well. You have talked about internal steering and incentives. Yes, of course, this plays a role. To be honest, of course, we are meanwhile, incentivizing our sales force to focus on driving our cloud business instead of the on-premises business. There are heavier incentives weighted on the cloud business and that's well understood by the sales organization. But we would not do anything crazy here to kind of set overly aggressive biases only towards the cloud. I think it's a well-balanced approach and it works. And around that is, of course, also governance. I mean, we are mainly at least focused now on the growth of our cloud business, but also the health of our cloud business, like renewal rates, the adoption of the solutions and so on, whereas in our forecast calls we continue to deemphasize the look on the on-premises business and that sends a signal to the organization as well. So it's a variety of those measures and also a gradual change in culture, quite frankly, to focus on the recurring nature of our business, which is driving this focus. And as the results show, it works.

That's very clear. Thank you. I wanted to bring you back, you talked earlier, start a year ago, 13%, 14% growth in cloud, cloud backlog up now 20%, 22%. So a nice acceleration. I still get asked by investors, though, look, we listened to SAP on a quarterly call, and they're telling us that the new business is incredibly strong. What we're seeing in the quarters, Q1, the best business we've had for many years. Actually, they hear the same from partners like [ Espedia ] and Accenture are talking about similar things. And they like that acceleration in cloud, but they kind of feel there's a bit of a disconnect between your messaging on the calls and some of the things they're hearing, an acceleration but not a dramatic acceleration. Could you maybe just talk a little bit about how the new business turns into revenues and into backlog? Because one of the theories we've had is that maybe there is a bit of a delay and what we're hearing about is now, and it takes a little bit of time to feed into the metrics that you're giving investors.

That's absolutely correct, but it's also evident. I mean in a cloud business, when you book a deal, let's say, at the end of a quarter because even in the cloud, there is a certain linearity, expect that most of the particular larger transactions tend to be contracted towards the end of the quarter. You see 0 revenues from those bookings in the respective quarter. Let's make an example. We are now in December, and we booked a material cloud transaction. Typically, those contracts can have a start date of up to 1 quarter later. Let's say it has a start date then of end of Q1, right? It does not show up in the cloud revenues until Q2 of next year. It shows up in the current cloud backlog with the portion of the contract from the start date to the end of a 12-month period from today. So with 3 quarters essentially, right? And then it builds up, of course, from there. And what we see as well, in particular, with the growing trend towards larger contracts and as for cloud movement with RISE, is that quite a few of those contracts have a ramp, meaning that their volumes and therefore, also the revenue contribution scales up over time, so that years 3, 4 and 5 actually have a much higher committed value that neither shows in revenues for the next few quarters, nor does it show in the current cloud backlog that shows in the total backlog, but not in the current cloud backlog for the next 12 months. But of course, it gives us incredible confidence in the midterm runway that we have for our business. And actually, what we have seen in -- all the way through 2021 actually, is that our total contract value, so our total order entry in the cloud has actually grown meaningfully more and higher than the annualized contract value, which we are including in the current cloud backlog. So you can't see that in the numbers that are disclosed, but in the underlying, we, of course, know therefore that a much higher share than perhaps a few years ago in the past, is already committed for years to come. And therefore, our additional jobs, so to say, to be done in the next quarters, to add further fuel to the fire in terms of new bookings, is still there. But it is, of course, already risk-adjusted through all of the higher TCV bookings that we do with the higher end. And that's also another reason why we are so confident about the trajectory that we are on.

That's really helpful, and that clarifies a lot what some people have thought is a bit of a disconnect. I think that's very understandable. Coming back to that digital transformation conversation and how SAP remains relevant to that, I think investors always like tangible examples of what companies have done. Could you maybe talk a little bit about a customer example where they took the RISE bundle and that move to S/4HANA is really the core of their digital transformation planning? What did they buy? Which products? And what were the benefits they were expecting to get out of that change?

Yes. I think for me, the best example also from the recent past is probably a company called Philips Domestic Appliances. It's a new carve-out from the well-known Philips Company. As you probably know, Philips is really concentrating on their core business as a health care company, and they have already disposed a couple of years ago, their lighting business, which is now called Signify. And now they have done the same with their consumer electronics business, which has been going to private equity basically earlier in the year. And now Philips Domestic Appliances needed a new landscape that is nimble, that is agile, that is well connected and well suited for their focus, way more focused business model that they have to drive. And that was an ideal showcase for not only RISE but the entire Intelligent Enterprise approach. So they have adopted -- they have selected S/4HANA Cloud as part of a RISE movement for their core ERP operations plus the business technology platform. But then they have surrounded this with all of the surrounding line of business applications, even in cases where previously Philips had been using other solutions. So they are doing their customer experience needs with SAP customer experience, they are driving their HR processes with SuccessFactors because of the tight integration of Employee Central with the digital core, with S/4HANA cloud. They're adopting the procurement solutions. So we have now a much cleaner footprint there and of course, all with a view towards driving standardization and simplification. So that's a good example. Another one that is very similar, would be Cirque du Soleil. Obviously, a business that is in a completely different space and certainly also a different volume. But they also have been a long-term ECC customer and have now decided to make the move to S4 Cloud and we have basically sold the very same solution portfolio also to them. So this Intelligent Enterprise vision really works in that respect. Those would be 2 simple examples that all point to the same business objectives that starts with our customer pursue.

That's very clear and helpful. I think it's always good to get those tangible customer examples to understand what people are doing. I wanted to ask a little bit kind of back to the line of business side and the market shares in some of those areas. Again, there's a concern that SAP has been losing a little bit of share in the line of business activities. Do you see that? Do you see now that with the integration and the RISE model that you can start to move things back the other way? And maybe the same question on ERP that people are nervous, that as ERP goes to cloud, there's a risk that you could see more competition and see more threats to that core ERP business.

I am really very confident that the tide has already turned in our favor actually from what we are seeing currently in terms of growth. Obviously, we are not disclosing directly the new cloud order entry that we are driving in different lines of business. But I can confidently state that what we saw year-to-date so far in essentially, almost all of them is actually exceeding the published growth rates of their most typical competitors that you would watch in the open market. When we go through the individual lines of business, there is no doubt that human experience management is a heavily contested and battled market, no doubt about that. But I truly feel that SuccessFactors is currently in a better competitive position than for a long time, for a number of reasons. Not only the integration and the fact that we are now actually offering a RISE package for human experience management, bundling again the HR capabilities with S/4HANA cloud due to the better integration, which helps, of course, but also the fact that we have highly differentiated scenarios that we can offer, like, for example, the experience management capabilities of Qualtrics bundled with SuccessFactors. Some others are trying to replicate this with some niche acquisitions. But clearly, Qualtrics is undeniably, by far, the superior market leader in this space. The same with total workforce management, bundling Fieldglass and SuccessFactors together for both temporary contingent workforce and permanent workforce management. Those are differentiating capabilities that only SAP can offer. And on top of that, of course, the fact that SuccessFactors is now completely built on the business technology platform and therefore, offers also extensibility across the other elements of the Intelligent Enterprise suite, are key differentiators. When we turn to customer experience there, we have clearly said we want to focus. We select our battlegrounds in all of those. We want to have a very strong market position, and I'm confident that we do. E-commerce, B2B commerce, Hybris is clearly, a leader. When we think about CPQ, Callidus is clearly a leader to think about customer engagement platform. So we have made a great acquisition of Emarsys, which is scaling very fast and doing extremely well. Customer data platform with [ BDO ] is a very robust solution with -- which is addressing a very imminent need through all of the heightened attention on GDPR aspect. So in those spaces, I think we have a very strong position and can scale from that. And then finally when I talk about procurement, I mean, nothing has changed there. We are, by a wide margin, the market leader, about 6x larger in revenues than the next competitor. And these businesses are very sticky. Yes, they have suffered a bit on the transactional part during the pandemic, but we are seeing also there that the growth is coming back, the intelligence and networks have returned to double-digit growth on the revenue front in Q3. And that will certainly also further improve. So I'm not concerned about our competitive position actually in that segment as well. And when it comes to ERP, look, we have grown our new cloud bookings in cloud ERP in triple digits in Q1 and Q2 and Q3. I'm not aware that the cloud ERP market is growing in triple digits. So clearly, we are gaining market share there.

That's reassuring. That's good detail. Can we maybe just talk a little bit about margins. So on the Q3 call, you reminded investors of your previous guidance that EBIT could be flat, maybe even down next year. Could you just talk a little bit about the margin headwinds there? How much of that is due to the migration to the cloud? How much of it is incremental investments into R&D to support a lot of the things you've been talking about, where is that investment going?

Yes. So first of all, I think we have been extremely consistent ever since we established our new midterm guidance. I think we are meeting what we promised in 2021. We will also meet what we promised in 2022, which is essentially a slight increase in the growth rates on the revenue side. But of course, continued impact from the business model transformation and the investments we are making, which is going to lead to the flat to slightly negative operating profit performance. But then we are equally determined that as of 2023, we will actually return to accelerating growth on the top line and to double-digit growth on the profit line. So what is happening in 2022? Just simply put, 4 different drivers. One is that we definitely expect that we will see an accelerating decline in our classic on-premises business, which has been holding up still very well in 2021, with only minus 6% of the license growth. We definitely believe that starting with Q4 and then in particular, going into 2022, this will actually increase, and that will also start towards result in declines on the support revenue line, which has also been holding up very well. Now this will be outweighed by accelerating growth on the cloud side. And that means on the total revenue line, we will already see the first green shoots of incremental acceleration versus 2021. But of course, on the profitability side, this accelerating decline of upfront revenues on the software license revenue side will take a certain toll on the short-term profits. The second aspect is that we believe -- or we expect a higher impact from our next-generation cloud delivery program, where we are harmonizing basically and migrating all of our installed base customers to a new modern cloud infrastructure, which will provide significant benefits to us from an efficiency perspective starting in 2023, when we have completed the migration. But in 2022, this will consume a slightly higher share of the mid-triple-digit million-euro investment that we highlighted for 2021 and 2022 combined. So that is another aspect of headwind that will then go away in 2023, obviously. The third aspect is that obviously, in particular, the first half of 2021, we're still operating under full COVID conditions with only virtual events, no traveling and so on. We expect that this will continue to normalize in 2022 and that we will at least return to hybrid events on the marketing and customer engagement front. So that will normalize also to a certain extent, the spend side on marketing expenses, travel expenses and so on. And the fourth element is that we had both in 2020 and 2021, divestitures, that obviously, were creating onetime profit impacts in 2021, around about EUR 80 million from the divestiture of our financial services business. We are not expecting any such one-off contributions in 2022. So that represents an admittedly more moderate, but still a headwind that we need to fight against. But then again, most of those impacts will actually dissipate in 2023 with a smaller base on the on-premises business, with the next-generation cloud delivery program out of our way, with then the run rates more normalized from a beginning post-COVID period. And that will make room for the much-accelerated growth on the profit line that we fully commit to for 2023 and going forward.

So that brings me on to that question about that longer term, that exactly as you described, those headwinds fall away, and we get that accelerating growth and the margin improvements in '24 and '25. I totally understand technically is license headwinds fall away, et cetera. I get how that happens. But bigger picture, if you want to keep the business growing at a high single, close to 10% growth rate, given the competition in the software industry, the amount of new software companies that are being created, the share of voice that they're getting with corporates, is there not a risk that you need to keep the investment levels higher to sustain that growth, just because of the change in the software market overall?

Yes. First of all, I mean, we are certainly not going to start to starve the company as of 2023 to hit a specific margin objective. We have an absolute operating profit target out there for more than EUR 11.5 billion in operating profit in 2025. We absolutely intend to hit this, but we don't need to starve the company for that. In our planning assumptions, we have seen a significant step-up in R&D expenses to around about 17% of revenues at present. We expect that we will sustain this level through 2025. So that's something that will definitely stay in place. What will not stay in place is obviously, the investment into the harmonization of the cloud infrastructure. And that alone will give us a significant boost, not only because those investments are gone, but also because then we can drive for a much higher cloud gross margin. So our cloud business will become way more profitable. So we will scale much more from the top line than we actually have to cut costs here. Another side effect is that in our sales and marketing line, the relative weight of contracts that we renew, obviously will further have increased by then, and that will actually have a dampening effect on the development of sales and marketing costs, even though we will continue to invest in additional capacity. So those are some of the reasons why the mechanics of this transformation will result in a significant tailwind as of 2023 without us having to cut back on the expenses that we need in order to drive success in the market.

That's very clear. Thanks, Luka. And I know we're bumping up against time, I just got an investor question. So maybe just try and sneak this one in. Just on the developer side around HANA, what community are you building around HANA on the application development side or ecosystem from that community?

Yes. I mean, not necessarily only around HANA. I mean, we are building a community around the Business Technology Platform. In the Business Technology Platform, we accumulate all of the capabilities from a database perspective, HANA, for example, is now also available in the cloud as a fully cloud-enabled version. And of course, there, we are building out an ecosystem of ISVs building on top of the HANA cloud database as well. But more broadly, on the BTP side of the house, obviously, we work very hard on making the solution as easily ecosystem accessible as possible. For example, BTP is now already since quite some time available as a premium offering, which essentially allows you to get going without any barriers and then basically you pursue through a pay-as-you-go model, the commercial returns to SAP as you scale the success of your solutions that you're building on top of the BTP yourself. So those are some of the initiatives that we are driving here. So changing the commercial paradigms in the platform, moving really to more payers. You build models, premium models and then kind of building around that a holistic ecosystem not only targeting individual areas, like database or analytics or integration and so on, but really a holistic one surrounding the entire platform.

Perfect. That's very clear. Luka, I've got lots more that we could go through, but unfortunately, we've run out of time there. Again, Luka, thank you so much for joining us. Really appreciate you taking the time. Thank you.

My pleasure. Thank you.