SAP SE (SAP) Earnings Call Transcript & Summary

Good afternoon. Welcome to Day 2 of the UBS European Technology Conference. I'm Michael Briest, head of the team and delighted to have SAP with us, represented by Scott Russell, who's Head of Customer Success. So that means he's responsible for the Group's sales, service, partner and customer engagement. Anthony Coletta from Investor Relations is also online.

But let's start with, obviously, recent events. The human tragedy in Ukraine is top of mind for everyone. But I think shareholders do want to understand the risks that it might pose to their investments. So can you explain your employee position in Ukraine and Russia, how many and what you're doing from a business point of view, your exposure and how you're managing that and sanctions, for instance. And then I mean if you think there's any second order effects that might come out from higher energy prices, lower consumer confidence, et cetera, and how that might affect SAP this year. Thank you.

Yes, sure. Good morning or good afternoon. Thank you, Michael, and great to be here. There's no doubt that this is an evolving situation for us, not just as a business but as humans. And so SAP's position is very clear. We are very desperate in the position that we would do all of our efforts to be able to support the cease of this situation as a business where our direct exposure is quite limited. So we derive a very low single-digit percentage of our revenue from the region. You will have seen Christian announced that at the end of last week, we've stopped all of our sales activities. So we no longer will accept new orders or solicit new business. And most of our emphasis to your question, has been around the safety and protection of our colleagues in the region, not only in Ukraine, of course, but also for our team that are in Russia. We are supporting for our Ukrainian team for their ability to be able to evacuate and supporting those. We're providing financial and logistical support. We're providing humanitarian support in terms of an initial EUR 1 million investment amongst others, converting our office spaces across Europe into locations where we can provide accommodation warehousing for refugees. So there's no winners in this. We're calling for the restoration of piece and we will do so as actively as we can. As it moves forward, the reality is we watch this and we are watching and evolving it. We will continue to serve our customers in the region. We obviously have existing obligations, commitments. We -- and we support and will abide by the sanctions and the export controls. As I say, we won't accept new orders and solicit new business. But we will obviously monitor that. And going forward, it's a little hard to predict what the impact would be in terms of the ongoing economic impact. What I would say is this is I always have felt with SAP that we've got a capability that helps companies expand and grow when the market or in takes all get efficiency and tighten the belt and being able to run their business more effectively when times require. In either case, we have the platform and the capabilities to allow clients to do that. So I have a relative optimism going forward that irrespective of how we, as a world, navigate this, that we can do so in a successful way as a business.

Okay. I think shareholders would be appreciating your efforts on the ground there and hopefully, as you said, it gets better sooner rather than later. I mean in terms of last year and certainly the exit from 2021, the traction with S/4HANA was very strong. I noticed that S/4HANA in aggregate had its best quarter in 5 years. Obviously, S/4HANA cloud was a big part of that, and the bookings there were up nearly 80%. I'm just curious if you feel that there are some things that have changed in the environment and SAP sort of influence on that. So we know Christian came in with a brief as Chief Operating Officer to sort of improve the integration of the products. So a lot of efforts gone in that maybe improves the value add of moving to S/4 and consuming some related cloud services. I think initially in COVID, maybe there was a focus on customer engagement in the first months and maybe that's now moved to the back office. Do you feel something has actually changed and that we're now at a very strong on-ramp for people moving to S/4 in the cloud or on-premise?

Yes, I would answer it, I guess, there's 3 factors that I've seen through 2021, and it was an increasing emphasis and continued trend in 2022 in the way that we look forward that has contributed or built to that growth. The first, as you rightly point out, is companies -- I have not met a customer yet that is not using technology to transform in one way or another. So a demand to be able to improve their business, small, medium and large, to improve their business to be able to use technology to be able to create new opportunities or drive efficiency. So often, it's around choice. And sometimes, they are force changes. So we saw in -- during Covid, a great emphasis on supply chain and continued on that around customer experience to your point. And that continues to be fueled even with on RISE and with S/4HANA, the ability to be able to have a transformed simplified model to be able to meet their business needs, give them the ability to come up with new pricing models, new commercial models, new efficient way of driving their business to be able to meet the competitive market. There's no doubt that, that demand has been stronger, and that's been a driver. The second that we saw was companies no longer want to work with just a SaaS vendor that give them an outcome. They needed a help on how to transform to get there. And I think you saw through RISE this transformation journey. They don't want to just lift and shift because that gives a short-term economic benefit, but it gives them none of the underlying capabilities to transform their business processes, give them the agility or the resilience or the flexibility, these capabilities that would allow them to be able to improve the way their business operates, not just take some cost out, and that has been undoubtedly part of the demand that we saw not only to move to S/4, but with RISE such as the offering to be able to enable all this together to give them the insights to be able to transform through that journey and accountability. And companies like Moderna were a good example of that. I think the third one, and it's an exciting one from my point of view is, whilst we had last year, I think it was up to 40% of our growth in S/4HANA was on net new customers. There's no doubt that we've hit the early majority of cloud ERP adoption where companies are saying, "Hey, look, I will move my mission-critical ERP workloads into the cloud, I'll do it with SAP." And you would have heard maybe some reticence or resistance to that maybe previously. We're now well underway in terms of the early majority. That gains confidence because they're moving their critical processes to the cloud with us. They're now looking at the future. And if I look forward to the 40-odd thousand companies that are still running existing. The next 2 to 3 years will represent a larger share of our installed base moving the ERP to the cloud. So we still want the net new growth, no doubt about it, but you'll see more and more where you've got that inertia move into a momentum. And we saw that definitely in the second half of 2021, where you saw obviously a continued uplift of S/4HANA and our RISE performance.

Okay. I mean that sounds pretty encouraging. Just in terms of the S/4 cloud within the mix. Certainly, a lot of the investors I speak to feel that some of your largest customers are unlikely to take or want a multi-tenant version of ERP in the cloud and the single tenant versions the way forward. I mean what's your perspective on that? And what you've seen, what you expect to happen? And if indeed, do you think multi-tenant is the way that large companies can go? What sort of examples can you give of that?

Yes. Yes, sure. It's interesting. I don't know we're focused on it. What I can tell you for -- and I speak to customers 3 or 4 customers a day and all through last year, I haven't had a single customer that said to me, "Hey, I want single versus multi-tenant in the cloud." That's not on their minds. What they do want and what they expect and what they demand of us is standardization and innovation. They want to be able to standardize their processes, their technology to be able to give them the efficiency and the scale that obviously multi-tenant-type architectures provide or I would argue, a modular architecture provides. But they also want the ability to innovate so that the things that are unique to their business, the things that would give them differentiation. They've also got a platform that allows them to do so. And so that's the underlying -- now that means then with some clients, and I'll give you an example, companies like PwC, which moved straight to a multi-tenant architecture, they went live with -- in Germany and Austria recently with the 16,000 users they're rolling out to other parts of Europe. They'll continue to do further global rollout. They will do so in a one-step single multi-tenant architecture, Deloitte in Africa was the same. But even for companies that are -- have maybe got a big manufacturing really complex where they might look at it, they're then looking at the architecture and say, "Give me the modularization where I can standardize, including in the single-tenant version but also then give me the innovation capability that is way more important to them than what it is versus single versus multi." The important thing for us is to give them that modular cloud architecture and that we can do so at scale, which not only achieves our top line expectations, but obviously then drives the bottom line performance in terms of cloud gross margins that you would expect under that cloud architecture, which we're able to. So hopefully, that answers it, Michael. I often get asked this question around single and multi. It's much more around standardization and innovation and giving the ability to do both. And whether we do single or multi-tenant, we're able to achieve that because it's a modular cloud architecture.

That's very helpful. Yes, I mean, the customer is always right, as I say.

That is true.

I mean, we heard that at the start of this year, the sales incentives sort of set up at SAP change quite a lot, and there was a significant deemphasis on the on-premise part of the portfolio. Can you shine any light on what actually changed in the thinking behind that?

Yes. Yes, sure. As you mentioned at the beginning, I have the responsibility of our sales teams, of our customer success, which includes our renewal expansion, consumption adoption teams, our service teams as well as the ecosystem. And the changes are very much in line with what I just described before. I introduced last year a measure of success, which we call customer lifetime value. What does that mean? Well, it means that our emphasis is around the things that are going to drive a lifetime value for our customers in terms of the benefits to them. So whether they -- we will compensate our teams on whether the customer wants on-premise or cloud in the different solutions. But clearly, to drive customer lifetime value, we put a heavy emphasis around metrics that are lagging indicators, bookings, upsell, renewals, net retention, et cetera, and that is the majority of our field teams that are measured on that. But we've also then put additional incentives and operational KPIs. So for example, all of our service teams are measured around cloud adoption and ACV deployed, for example, a cloud deployed. We're looking at measuring our handover process between the different life cycle of engagement, deployment ACV, average time to go live, cloud consumption. So the changes are a part of a holistic way of being able to manage our lifetime value with our customers and then the changes for the team very much on that incentivized for that. So 90% of our account executives are on cloud-only plans, but they will still receive commission for on-premise where a customer wants it. Last comment that I would make on that is, ultimately, the reason why that was such an important shift is if you think about it, our business model maybe historically was sales out what I know -- what we pivoted to customer in. So how do we drive value for them? What are the ways that we're able to deliver that and then work back an engagement cycle that delivers, which does include bookings, it does include renewals, it does include consumption, but it starts from a value driver from a customer point of view and you work backwards. That served us very well in 2021, and I've enhanced that through the changes that I described in 2022, which I think is in line with what not only that SAP's objectives are, but the market objectives. Customers expect that engagement model with SAP and being driving to the same measures that they look for, which is the value that they receive, not just what we get.

I mean there's comp changes every year. Would you say this was a relatively sizable shift?

Yes, I would. I would. There's no doubt that through the shift of our cloud success services and bringing the teams under a simplified deployed ACV, focusing on what's been adopted and consumed in the benefits. And then from the sales teams, putting a great emphasis on cloud-only compensation, it is a significant change. But I do want to highlight because I know there might be questions around, well, what if customers want to continue to purchase -- on the on-premise side, we continue to provide commission and support that because we, obviously, to your comment, support our customers. Customer is always right, but it is definitely a significant shift that will help accelerate our business model transformation that you saw so successfully in 2021 and continue to expand in 2022 and beyond as we go to our midterm objectives.

I mean that's probably a good sort of way to transition to the sort of customer success organization. It's a few years being in the building. But can you help investors understand how that's changing your engagement with customers? And any sort of data you can give on renewal rates, particularly in the cloud, which I think some investors feel, historically, as you said, it was sell and move on to what's in that engagement to make sure the customer move, enjoy the product, renewed, et cetera. So what data can you give to say that's been changes?

So I'll give you some quantitative and qualitative to be able to help the investors. Let me start with the qualitative or the description of the change. In very simple terms, we now have 22,000 people who are in what we call part of my organization around cloud success, who wake up every morning and have a clear mandate to do one thing, and that is helping our customers drive a cloud journey where they are able to drive the maximum value. How does that manifest? It will be where we understand our customers have purchased some technology they've booked, but they're not using some components. And we proactively then work with that customer, okay, why have you used it? What are the ways that you're able to get benefit out of that? What is inhibiting you from creating that technology. So we maximize their benefit, but obviously, that helps us ultimately in an endpoint when we get to renewal and other measures. We are doing it in terms of deployments. So making sure that we've got built in services as a part of preferred success that assures our customers that when they purchased our cloud technology that they've got a preferred engagement model that allows them to guarantee or assure the success through the implementation. What we know is when we embed that we have up to a 15% higher renewal rate when we attach preferred success services and motivated to that. And then together with the adoption using telemetry of being able to understand our customers' usage and being able to give them advice about how they could optimize the benefit. That leads to great renewals. That leads to net retention revenue of well over 110%, 120% and beyond. That leads to cross-sell, upsell opportunities because you're maximizing the benefit. And obviously, clients are more willing to do. The way that we then been able to do that -- and by the way, the measures, we don't obviously report on renewal -- renewing externally. But what I can tell you is we had up to a 5 percentage point increase and improvement on our renewal targets through 2021. We continue to expand that. It was one of our best years in our history of being able to not only book a high volume of new net new entry, but also ensure that our customers continue to adopt and consume and renew. And that's why these changes are so important. The way we're doing it for what it's worth is a combination of a center model that is dedicated cinemas where we've got solutionary knowledge because let's face it, how to best adopt a learning solution in SuccessFactors or dealing with an accounts payable process in S/4HANA. That can be done at a center level. But then in our regions, in our market units having really deep expertise, hands-on through the life cycle of engagement with trusted and doing it in a more simplified way. So they don't feel like they're dealing with multiple versions of SAP. I've simplified it where our engagement teams at a customer point become a simplified, and then we bring that expertise to them in the form that helps. So it's a significant change. I would certainly share with you that the journey of that transformation, I talked about muscle memory of our business a lot around the engagement models, the method, the tooling, the capability. We've got the assets, but we need to orchestrate that we will continue through 2022. And actually, through 2023, that I aspire to be best in class in the cloud market as a result of the work that we're doing.

Well, that's very encouraging. I mean the 5 percentage point improvement, is that something it implies that you think that can continue to sort of improve in '23 and '22?

I don't have an outlook, Michael, in terms of what the percentage point will be in 2022. But what I can say is our financial model, our revenue model implies that we must continue to expand and improve our renewal together with our bookings and then our net retention. So the way that we've tackled this challenge is not at the lagging indicator, but the leading indicator. Why don't companies renew? Well, they don't because they're not using or consuming or getting value out of it. Okay, let's gear our organization in a really meaningful way to address that challenge, then the ability and the likelihood for them to expand or to consume more or even just simply to renew what they currently have, obviously, we've seen a significant increase, and the expectation is that continues, no doubt, we would continue to improve.

Good. Excellent. And then, I mean, one of the other things that investors look at when they see the 2025 plan is clearly there's an implied shift in the maintenance installed base into the cloud. We haven't seen much of that yet. I mean I think maintenance was better than flat last year. It takes a while for a contract to convert into an actual live instance and transition of revenues. But when do you think investors should expect to see that? Or what will drive that?

Yes. So you're right, and actually you made the comment that there's no doubt that we've got to keep in mind that our support in revenue will only move away once a customer has been able to transform and move off their on-premise landscapes and then moving into the cloud. So there is definitely a lagging effect that comes there. But it's right to indicate that our support revenues have been very resilient. In 2022, I do expect to see some pressure on that due to the ongoing shift to the cloud. We had a large proportion of our customers already moved with RISE next year. That will continue. But I don't see it as a dramatic change because the deal sizes, the engagement cycle will be where you might have booked business in second half of last year, but they don't move off and we see a reduction in support revenues until 6 to 9 months later. So 2022, I don't see it sees pressure, but I don't see a dramatic change. Clearly, our 2025 ambition as we move forward. And as we move, I mentioned before this installed base at scale, tens of thousands of companies that we move from this early majority into the majority. As we do that, we're obviously going to accelerate our cloud revenues at the EUR 22 billion by 2025, but we're also expecting that we would have an increasing decline of our support revenues in line with that shift with the conversion of cloud. What I focus on, and I'm maniacal about this, is to ensure that when we've got a decreasing in cloud, it is for good reasons. It's because they move -- sorry, decreasing in support. The thing that I look for is the decrease in support is it due to the positive change to cloud? Or are there other factors? And I guess I can positively say we've had incredible resilience that we do not see erosion or any significant erosion on our support revenues other than the cloud transformation change that we're working with our customers through. That gives me confidence because we're still going to have a large -- even by 2025, there's still going to be a EUR 8.5 billion, $8.5 billion of large support revenues that will continue to be there as we continue to help our customers migrate to the cloud. So that's important that they continue to see benefit in those services as well.

Okay. I mean in terms of the relationship with the hyperscalers, this is, I think, very much a talking point with investors. We know that they want high compute, sticky workloads, ERP is perfect for that. We know they want to cross-sell analytics, data management, AI, just as you do. Can you give some reassurance on how you go to market with RISE's working because the customer has a choice to just lift and shift their ERP workloads to a Microsoft or Amazon Direct or go through RISE. Can you maybe say how many of the 1,300 or so RISE customers last year were introduced to you through these hyperscalers rather than ones that you had to sell direct and that you're not working sort of the hyperscalers frenemies, they're out there trying to sell direct. If they don't go out, they'll come in with RISE as a second choice.

Okay. So maybe I'll answer the go forward in a moment, but just to give some historical context, there's no doubt that when we launched RISE, this was maybe a broader open question with the hyperscalers than what it is today. So as of today, there is little to no conflict. All of the hyperscalers have got an incentive model where they incentivize their own teams to push RISE over direct. Why is that? Because through RISE, actually, it allows them to get enough lift in workloads than what they would otherwise try to compete head-to-head on these 4. Remembering with RISE, you get the platform, you get the network, you've got other capabilities that is a part of that offering. And so they no longer have to compete because SAP effectively provides that bundling for them and that capability for them. We've also continued to work on the technology orchestration with each of the hyperscalers to ensure that they bring their capabilities to bear so that they're able to provide that differentiated offering together with what SAP offers to be able to then enhance that in front of the customers. So Q1, Q2 last year, we were still working out how do we provide those models. That is behind us. And probably even more importantly, we now actually look at where the -- some hyperscalers have already been proactive on migration funding offers for customers, automating that with RISE, activating field and engagement team. So I work with them every week, the leadership, my peers at the hyperscalers and there's no longer any sort of -- any concern or conflict that I have in terms of the way our teams go to market. What I think is most important out of this for us both, is it from a customer viewpoint, what's the value that they get with RISE with SAP and the combination of a hyperscaler because obviously, they have non-SAP components that they will do. And I think that's where our storyline and our messaging and our value proposition to the client is much better, which I am optimistic that, that will drive even hopefully a faster move to RISE because they will see the corresponding benefits of pieces outside of RISE the hyperscale brings, and we bring an end-to-end picture. And we figured that out for the client rather than customers trying to figure that out for themselves. So it's in a position where it's no longer in frenemies or in conflict, but it's in collaboration.

I mean is it fair to say that with the initial Embrace program and then that went sort of quite Microsoft heavy and then RISE was announced in January, so probably took a few months for people to digest that there's been maybe a bit of confusion in the last 12, 18 months, which is now behind you and there's more of an understanding between you and the hyperscalers?

No. I think what I would say 2 things. First is the -- before we launched RISE, customers had to figure out their journey of moving to the cloud for their core platforms and the transformation journey themselves. And so in the absence of us providing the RISE offering, whether it be in a single or a multi-tenant architecture, our ability to be able to give them that transformation journey and that road map and an accountability to it made a massive difference. As a result of that, then the way that they are then able to leverage that, combined with their broader engagement with the hyperscaler and do so in a collaborative way. I think it's not so much of our confusion, but it's more about how do you then leverage the best of SAP's cloud capability in mission-critical applications in combination with an existing relationship with a hyperscaler and that we've been -- we're much more refined than what we were when we launched RISE. That would be -- that's a fair comment. And I think our growth in the second half that you saw is reflective of that because the hyperscalers are not resistant to it. In fact, they're promoting RISE with us rather than sort of showing an alternative model, but that required a little bit more collaboration, which I'm glad we put behind us, and we've now got a much clearer way forward for our customers.

Okay. And digging into RISE, I mean, one of the components of that is the Signavio business process intelligence element. And I think with RISE, you get a fairly slim use case for it, but it has stand-alone value. Can you talk a bit about the traction of Signavio outside of RISE or as an upsell from RISE? What sort of use cases customers are getting and how strong the momentum has been?

Yes. So I would start by saying, even though there's a relatively slim use case within RISE, the use case is really critical because what it does do is it gives them a process map around what's your current processes, what are the high value, what are low value, how efficient or inefficient are they, and then a map journey. Why is that important? Companies don't just look at the cloud. They don't want to just deal with a SaaS vendor or a cloud vendor because that's a to-be state. Customers are trying to figure out, well, how do I deal with my complex, historically, maybe heavily customized SAP and other environments and how do I move today? That's why Signavio is so critical because it's not just a platform, as you say, with RISE, we saw about 50% attach or a combination with RISE and S/4 journeys where Signavio was done. But we actually see more than nearly half of it, they are outside of S/4 and RISE. We're either -- they've either gone or they're going on a journey and they're looking at Signavio around their process architecture, allow them to get that standardization and innovation that I talked about before, and that's the platform. So whether it's the JPMorgans or Telstra or Daimler or Bosch or others, they look to that capability. So I'm expecting continued growth of our Signavio and our BPI platform independent to the rest of the SAP portfolio. But then as you would expect, with the transformation journey with RISE, with the transformation journey of multi-cloud sales and increasing our footprint. But from a customer point of view, it helps them get from where they are today, they know where they want to go. They just need that mapping and that journey to get there and Signavio is just so critical to enable that to happen.

And we've talked a bit about cross-sell and upsell. And I think the number that's come out on several earnings calls is sort of 3x or more in terms of maintenance was x and you're getting 3 or more ceiling, a floor or an average, where can it get to?

Yes. I'd start by saying that every company that I've dealt with and as I said before, I speak to clients every day and customers every day. They're trying to solve a challenge or exploit an opportunity or using technology and our solutions to be able to help resolve that. One of the advantages of SAP given the breadth of our suite is we do have a demand where companies was most undoubtedly. The other that I see quite naturally is companies are often doing their core ERP and parts of their core HR and their procurement at the same time. They're often dealing with either procurement benefits that have an end-to-end process flow or they're looking at payroll, core HR processes. And that's really centered on the office of the CFO and looking at the holistic capabilities that we offer that to be able to address we will have upsell because the thing that I'm always conscious of is clients' ability to consume. And if you want to understand the challenges we face on a sales side, it's their ability to be able to consume the change that they want to in a managed way, they've always got opportunity costs. There's always other things that they could do. So investing in it, getting fast return on investment and time to value and then continuing the journey is architecture, we sold for either, and we see both in the marketplace. So upsell happens quite a lot. Signavio is a good example. They start with RISE and then they say, okay, now that I know where I want to go, now I'm going to use Signavio to be able to help map my journey to get there. That's quite common. Whereas the platform is much more upfront, we usually see as a part of the upfront bookings where they'll do it in a multi-cloud. To give you the investors a little bit more detail in 2021, we experienced about 2.5x of cloud revenue for every [ $1 ] of support revenue. That ratio will grow. You asked the question, is 3x the top? I don't think so. Honestly, I don't. But it continues in the context of our RISE offering, being able to get that at scale at the larger enterprises because larger companies are usually the users of the multi-cloud architecture and the benefit of the suite. So I expect it to continue to rise and improve. I don't have a high point on it. And hopefully, you don't want me to either.

No, absolutely not. And I mean in terms of 2025, you've got a hard cloud number target of EUR 22 billion revenues. Can you help investors understand what's really driving that? Obviously, there's many products, Signavio and others. But what will be the top 3 or 4 that will get you there? I think probably SuccessFactors and Concur are the biggest assets today, but what will that look like in 2025?

Yes. I'll put it into 2 parts. So core need -- business needs that solve the challenges from a client point of view and what are the capabilities, which ultimately leads to the growth. Without doubt S/4HANA Cloud, irrespective of the deployment options continues to be an underpinning the RISE offering together with the business technology platform. The technology platform continued to be a key part of both the offering and our core strategy. So they get standardization with S/4. They get innovation on the technology platform. Our business technology platform is the innovation layer. So you can do all your extensions, your customizations, your unique functions and features leveraging the data model of SAP on that standard without compromising your core platform. To your point, we see significant growth and 2021 was a great year for our HXM business, where we saw continued high growth of our core HR solutions, but also human experience management in combination with Qualtrics obviously. And I see for 2025, our digital supply chain, manufacturing space. As we get to these big companies who are dealing with these complex changes that they're trying to deal with what we see in the marketplace, the demand is already there. We already have the demand, ability to be able to convert that into cloud revenue and get them to get the value of it, you will see that. So we're going to continue to compete head-to-head with the right to win on that. What I would also highlight, and it's not so much around 2025 that I'm expecting. You will continue to see an increased relevance of our network business where we drive revenues and value out of the business network through, and that will come through transactional revenues and other forms, which I think we have a great capability, but the monetization you could argue is relatively low compared to the volume of -- that happens on the network, so that will continue to grow and together with sustainability. I'll give you this story, a large oil and gas company spoke to me about 3 weeks ago and said, Scott, who's the COO, [indiscernible] SAP has to be running the carbon register of the planet because if you don't do it, who will. And sort of struck me about the expectation, but also the opportunity when if you think about being able to manage, we're really good at managing the top line, the bottom line, we're able to manage resources, ERP, enterprise resource planning. We're really good inventory, working capital, all while now we're talking about the resources of the planet. So our sustainability solutions underpinning and a continued expansion to underpin that growth, whether it's a revenue driver in its own right, it will be a revenue enabler and a growth enabler in the cloud, you'll see that. So I'm excited about those innovative solutions around that the sustainability portfolio network. But the only area that I'm concerned about, which is a key part because I just don't know when transactional cloud revenue of travel and others, it continues to be below pre-pandemic levels. We do expect it to reaccelerate, and when it does, it will become an increased portion of the revenues, but most of it is on the areas that I described.

Okay. Helpful. And just sort of looking at the cost side of things. Obviously, you've got a very broad remit, but on the sales and marketing side of things, I think when we look out to 2025, that's probably the line outside of cloud gross margin has got to give the best operating leverage. And so can you talk a little bit about what -- where the efficiencies come to drive a better sort of sales and marketing ratio?

Yes. There's 2 areas where to give you some context and some hopefully, confidence and understanding. The first is the natural revenue mix, as you undoubtedly know, our sales and marketing is very heavily emphasized around new order bookings, which doesn't immediately. So you've got the lag in revenue effect. As the revenue mix turns into a tailwind as we're able to grow and accelerate that just because of the share and the proportion, we've talked openly about the recurring revenue mix being at the 85% by 2025, your sales -- the sales and marketing ratio by naturally starts to decline and as a share of the overall business. But the things that I described earlier around the combination of moving through our tools and our technology, being able to use telemetry and data and the efficiency of our customer success that drives adoption and consumption that has a low cost to serve, that has an inherent or delivery model with our cloud delivery. So we are able to retain that with higher retention and renewal rates and then faster adoption in -- sorry, cross-sell and upsell rates, you actually have a lower sales and marketing costs relative to the incremental revenue. So you've got these 2 effects. Right now, it's obviously tough because we've got a heavy -- we've still got the ongoing on-premise revenues and managing that mix but you will see by 2025 that the sales and marketing ratio in terms of the way that we're able to serve that makes our more efficient but also our revenue mix, allowing that to become more so as well, gives us high confidence that, as you say, it's where we see the other models to be able to get adoption, get learning and do it intuitively as a part of the -- of our cloud offerings, no matter what they are becoming more and more relevant, customers are able to then do that. So they've got less reliance on big heavy implementation or skills out in the marketplace. But to that point, with the Move program that we're running, being able to continue to upskill existing consultants, we have a heavy emphasis around our learning hub with all of our major 10,000-plus partners around the world, recruiting through university talent, running the methodology and providing the methodology to faster projects driving faster return on investment and time to value for our customers, leveraging tools around data management conversions, testing automation. So we put a lot of emphasis on those areas together with increasing the capacity. So you'd be interested to know that in 2021, we improved our certified S/4 consultants, nearly by 50%. I think it was 48%. And our partners are continuing to invest and grow their workforce, their capability. Please note that all of the major systems integrators out there, their biggest part of their business is SAP. So they have a centered model around making sure that they've got the expertise. They offer an extension of professional certification, a collaboration with us, and they're investing heavily and then in areas like the platform on the network and others aligned to our strategy. So -- we watch it very closely, Michael, and it's important because we don't want capacity to be a constraint. I don't see that necessarily as a concern in the short term. But as we get to that majority of customer base that I talked about before and the expansion, we certainly need to ensure that we can deliver to the time lines our customers expect, and we work hard on that.

Okay. Thanks for the candor. In terms of the industry cloud, just to finish off, it's important that partners build with you and obviously, that you've enriched the sort of variety of solutions, industry vertical modules, you can add on to that core ERP, the modular ERP. Can you give any update on how you're engaging with partners. And I'm curious here because you haven't been SAP or your work in Korea, you would have had an outside in perspective from IBM and PwC perhaps on how SAP's engagement with partners for developing the ISCs or the big global SIs has changed. So where are you on the industry cloud evolution? Where are you on the partner engagement? And how is that changing?

It's a great question. There's no doubt that it has changed, and I would argue quite materially. There's no doubt in my background. And you're right, I have a heavy background in working with SAP historically as a partner of driving the outcomes and the value and in a software model a lot of it was a [ nilly ] a hand over the keys to the partner, and they figure out how to trend do the transformation, embed the technology and the customer landscape, we no longer do that. And so a lot of the extensions and the capability was done independently. And then historically also, SAP probably didn't have a rich history of partnering at the technology layer. So often it was either we build it ourselves or we might have a [ solex ] relationship. So we might use it as -- but in terms of a business partnership that wasn't historically, that is very different now. So our move to endorsed apps, which is obviously within industry cloud, you look at our partnership with Icertis, for example, where it is combining the collaboration through a partnership model that is both engineering and go-to-market. And then you do that at scale. So we expect the majority of our industry cloud capability and solutions to be built by partners. We will sell that. We bring the power of the SAP go-to-market 40,000 people in my organization to be able to bring that to bear in front of customers. So what we now see is these partners are now looking at viable revenue models where they've got unique innovation that surrounds SAP that they can monetize over and above maybe services and consulting capabilities that they have, that improves their business. I'm always conscious as a partner, I guess -- because I was on before. I've always got this mindset, how do we make working with SAP, the best business model for them. It cannot only be on service revenue. The partners are also competing the systems integrators, the ISVs, they're also competing on how they've got asset solutions, IP capability and by allowing them to build it on our platform and leveraging our sales and our technology teams in partnership, you'll see an expansion effect that not only we get through higher platform revenues, for example, through industry cloud, but they will get because they're able to provide differentiated value. So it's exciting. But I would say, Michael, we're -- we've got a lot of upside in front of us because of our historical model and the change to this. We work that through with our partner ecosystem. So it's exciting, but it's one where it's, I would call it an incubation and innovation area rather than a business that's a true scale going forward, I expect it to be as we build out going forward.

That's great. I mean it's got a great multiplier effect, hasn't it? So we've come up on time. I've had a great time speaking to you, Scott. I hope investors have enjoyed listening to you and have learned as much as I have. So we appreciate your time, and wish you a good success through the rest of the quarter and 2022.

Thanks, Michael, and I really appreciate the opportunity to speak to you and to the investors today and look forward to answering further questions in forums going forward.