SAP SE (SAP) Earnings Call Transcript & Summary

Thanks, everyone, for coming on the last presentation slot, great to see the good attendance. I'm Johannes Schaller, Head of the European software team here at Deutsche Bank. I have with me today, Luka Mucic, CFO of SAP. Interesting note to begin with, this is Luka's first time at our German conference. It's also very unfortunately his last time because he's going to move on to do better things in a short bit of time. I wanted to take this opportunity, Luka, really to say thank you. I've obviously taken over the coverage during COVID. All the virtual roadshows and now having you physically here at the event and all the great effort from your side, thank you very much, and it's a pleasure having you today.

Thanks for having me.

So maybe let's kick things off on a broader note. Obviously, let's go back to October 2020. You came out with a new strategy, a new financial target on 2025, very ambitious, particularly on the cloud side of the business. And you decided to accelerate the transition of your key ERP product to the cloud. If you look back now, what would you say has gone better and what would you say could have gone maybe a little bit better in this transition?

Yes. So first of all, I think we were not ambitious enough in terms of the cloud business because, indeed, what worked extremely well is that we had a conviction that we should be able to drive for an accelerated transformation of our installed base of ERP customers to the cloud also in core ERP. That was the hypothesis. And we have seen it coming to fruition faster and at a broader scale than what we had originally anticipated. Our transformation offering that is helping our customers to move their core ERP solutions to the cloud called RISE with SAP was a resounding success ever since we introduced it in Q1 2021. We drove for very significant increases in deal values. We migrated some of our largest customers to that offering already during the course of 2021. That is something that we would not have necessarily anticipated being already the case in the first year of the offering. And we have seen very successful cross-selling effects on the rest of the portfolio when we did these things on the SAP migration. So from that perspective, clearly, the cloud transformation is running ahead of plan. We have been beating our internal cloud revenue plan for the last 5 quarters in a row. And the main reason for that is overperformance in S/4HANA Cloud, plus the pull-through effect on the rest of the portfolio. So this is very positive. What I consider also very positive, even though from a market perspective, I think there is still some frustration or disappointment about it, is that we also consistently executed on our guidance for the bottom line, both in 2021. And of course, 2022 is still out there to be completed. But a cloud transformation inevitably has a mechanical impact on profitability in the short term. We guided for 2 years, 2021 and 2022, of flat to slightly declining profits as a result of that. Actually, in 2021, we did slightly better than that. And the main reason for that is that we had a much healthier conversion of support revenues to cloud revenues than originally anticipated. And as a result, our support revenues remained very, very resilient throughout. And now in 2022, we are able per our commitment to absorb a significant impact coming from the war in Ukraine, which obviously nobody had in their cards in October 2020 and still uphold that same commitment. So that is also positive. The one thing that I wouldn't necessarily call it could have gone better, but that I think has a potential to unfold slightly differently than what we had originally contemplated is the revenue mix in our cloud business. As I said before, S/4 cloud is a tremendous success, in particular, the private cloud option. We are driving significant deals with Siemens Energy, Siemens, Daimler Truck, Panasonic, CVS, many, many very large customers. And as a result, we are running ahead of our revenue plan, especially because of the tremendous performance of S/4 private cloud. And that is having the potential while we clearly see an opportunity to overshoot as a result on the cloud revenue line as well as on the cloud profit line and absolute profits versus our original 2025 plan. It might result in a slightly dampening impact. At SAPPHIRE, our customer conference, I called it out, an up to 2% potential negative impact if we continue to run ahead of the plan. But again, in absolute profits, that's a great problem to have and really not something that I would call out as being, possibly having gone worse than we have expected. It's gone differently, but with the same or even a better outcome on what really matters and that's the profit.

That's true. Let's maybe dig a little bit deeper into the growth rates of your business. I mean, S/4HANA Cloud, you mentioned it already. It's really a great success story. I mean, you're growing, if we're looking at backlog or revenues, growing at a 70%, 80% year-on-year rate at the moment. I mean, that's much better than most of your competitors. Still, there is one competitor out there that probably grows somewhere in the mid-30s, I would say, that consistently claims to gain market share. What do you really see in terms of the dynamics in the market in terms of share shifts? And also, I mean, you obviously allude to every quarter, you say, look, 50%, 60% of the deals that are coming in S/4HANA Cloud are coming from new customers, right? So who are these new customers? Tell us a little bit about that base. Who are the ones where you're winning?

Yes. So first of all, I think it's a fact of math that when you're growing twice as fast as your core competitor in the cloud and ERP, then you cannot lose market share, right? And I think I prefer to call out the independent voices for that. And if you check with IDC, for example, they clearly hold up SAP as the market leader in cloud enterprise resource management systems. And that will remain the case because, of course, we have also by far the widest and broadest installed base in on-premise. And guess what, virtually all of them will move to SAP in the cloud. So we will rather extend our market share gains in the coming years when the remainder of our massive installed base in on-premise will migrate to the cloud. Where do these customers come from? You're absolutely right. We have actually seen ever since we introduced S/4HANA Cloud, we had previously, in the years 2015 to 2018, somewhere between 30% to 40% net new shares with S/4 on-prem. Now with the shift to S/4 cloud, we have 50% to 60% net new customers. Some of them, admittedly a relatively small number, are really large enterprise customers who are migrating mostly from Oracle to SAP, banks as well like Standard Chartered, for example. Just in Q1, we closed one of the largest Canadian banks, which is going to do their finance transformation based on S/4HANA, but also BT, for example, or Ford in the U.S. But of course, the majority of those customers are rather midsized customers. When do they select S/4HANA? When they're growing. When they're growing fast, when they want to internationalize their operations, when they have to rely on globalization capabilities, then SAP is typically unbeatable. It was always the case in on-premise. And of course, it's the same in the cloud. And those customers obviously have a great potential for us because as they grow, of course, so does our potential to do more with them.

When we're talking about moving your customers to the public cloud, which is probably the ultimate goal of where things will go in the kind of bit more distant future maybe, kind of functional parity or scope parity is probably one thing that's quite important. So how much of the functionality of these on-premise solutions with all the extensions and customizations that you can also make available in the cloud. Can you give us maybe a bit of an update in terms of where SAP is here? And do you actually need full scope parity? Because obviously, with BTP, you're working on something that will probably help get rid of all of these extensions and customizations.

This is a very important question, let me be clear. I think the intent to mirror and replicate the functional capabilities that we have in private cloud or in on-premise to a public cloud solution would be wrong to begin with because what we want to do is we want streamline, we want to simplify, we want to standardize processes so that they work for a majority of customers. If we add additional bells and whistles that we have developed potentially for a very small minority of customers, then the system will become convoluted, will become more difficult to implement for customers and will slow us down and will slow them down. So in the public cloud, I think there are different qualities that we are focusing on heavily. Of course, you need to have a broad enough functional coverage. We are fully there already for, let's say, process-light industries. Like services industry, some very large customers are adopting like PwC. Accenture has this intention. I just talked about it at our SAPPHIRE customer conference and others. When you are moving more into heavyweight manufacturing, you will need add-ons. But that is by design how we are actually creating the portfolio that we want to have a very clean core that has really qualities like extensibility, for example, a great user experience for all sort of casual users in a company that has the right performance as well. So all of that feeds into the customer experience. And when you then need deep industry-specific process capabilities, we rather build them as industry cloud solutions on the Business Technology Platform. And by the way, more than 80% of those don't come from SAP ourselves. We use the Business Technology Platform also as a key enabler of our ecosystem to build value-adding solutions. On top of that, we have 200 industry cloud solutions out there at the moment. But again, 80% are coming from partners. And therefore, our customers when they move to public cloud, they do so with a view of having really a very lean and simple core with fast integrations of new innovation. But not only on the functional side, also on the experience side, which is very important, and then building the differentiating capabilities on top through the Business Technology Platform. That's the way to go. And therefore, public cloud in S/4 will never mirror exactly all of the functionality that we have in private cloud. And by the way, more and more customers are having the desire to redesign their processes over time to move more of their workloads to public cloud because then they benefit from all of these faster cycles. And this is a journey for many of them, but it's a big competitive advantage for SAP. Why are our competitors creating so much FUD about, oh, SAP does have basically a private cloud solution? Because they cannot offer the capabilities that we can offer to a Siemens to run their business end to end in the cloud. We can do that and we can work at the same time with them to over time migrate more of their structures to public cloud. It's going to be a hybrid journey for a while. But at the end of the day, most customers desire to end up with a significant part of their workload in the public cloud.

And that kind of brings me to my next topic. I mean, moving ERP to the cloud is obviously one part of the story. But with the RISE offering you launched beginning of last year, there's obviously more to it. BTP is an important building block of that and the attach rates are very high there, which is definitely very encouraging. But then you get also things like Signavio and Business Process Intelligence. So far, the attach rates for the advanced solution, we talked about this earlier, still may be a little bit low depending on how you look at things. But obviously, that's a great value-add component. So maybe talk a little bit about that, what your customers are doing with it and how you see the adoption progressing over the course of this year and medium term?

Yes. Signavio is obviously a solution now that I'm extremely excited to talk about as I'm responsible in the Board for this business outside of my CFO responsibilities. And it's probably one of our most successful acquisitions that we have ever done. You have to keep in mind that we closed the acquisition only in March of last year. So when you think about the big and chunky RISE deals where we have a base entitlement included there, when you have an upsell that means you have to sell an additional increment of the attached solutions right in the RISE transaction. Many of the large transactions that we then closed later on in the year were already well in the making by the time that we had acquired Signavio. And so then from a sales perspective, we sometimes shy away from introducing change, so to say, late in the game of a deal cycle. However, we have seen many occasions where actually after the RISE transaction was signed we were able to discuss the value of Signavio to really manage a continuous loop of business process innovation and driving the change, driving the rollout of the new enterprise processes into your business user community benchmarking, your implemented processes against best-in-class standards, understanding in the move from an ECC system to an S/4 system where actually the biggest value drivers where you can create value for your business case. And that then leads to subsequent transactions. Philips Domestic Appliances is probably a very good example, one of our poster child RISE customers who originally wanted after being disentangled from the Philips Group wanted to implement S/4HANA. They actually saw then the value of doing a greenfield implementation and extending the use to other parts of the portfolio. So we had cross-selling opportunities into SuccessFactors despite the fact that Philips runs Workday on the headquarters level. We were cross-selling into customer experience solutions despite the fact that Philips had used Salesforce at the headquarters level. And then after we did the transaction, we were very naturally able to demonstrate the value that Signavio can bring as an accelerator to the implementation. And so we sold that then one quarter later. That's the reason why Signavio is, while the attach rates are growing, but still at a level of slightly below 20%, but it's nevertheless growing in significant triple digits. So we have more than 200% growth in 2021, and that will definitely continue. And the last good thing about it is, when we acquired Signavio, it had significant business outside of the SAP installed base. And I also want to keep this and that's why I'm not entirely unhappy that Signavio is driving triple-digit growth on the one hand and is only, so to say, driving a certain fraction of that in the installed base conversion business because that means that they continue to drive home on their net new opportunities outside of the SAP installed base.

So the ERP journey is clearly going well. RISE is going well. Let's maybe talk a little bit about the non-ERP side of the business. I think you alluded to this a few times. You think you're gaining back market share in what people call the HCM. You call the HXM HR software category with SuccessFactors. And then we obviously have a few others. Coupa is benefiting from the recovery in travel. Certainly, that is starting to, excuse me, Concur.

Concur. You mean Concur. Not that we're creating rumors here.

Yes. Concur it is. And Ariba is obviously one, I think, you talk a little bit less about, but you made some interesting additions there that can probably help the relative Ariba competitiveness against Coupa with things like Taulia, with things like the Icertis partnership you have. So maybe talk a little bit about the dynamic you see here.

Actually, Ariba is one of the solutions that has seen a tremendous surge in the last 3, 4 quarters. At the very beginning of the pandemic, it was also hit in terms of demand also on the network part of the business. But to be honest, that was also due in part to the fact that we had some technical debt to clean up. It's part of the reasons why we have invested in organic innovation and in increasing our R&D capacity to finally increase the integration levels between Ariba and S/4, for example, but also finally get done with some outstanding customer functional development commitments to really have now a clean basis to continue to build the development road map for Ariba. And this has worked out extremely well since the second half of 2021. Ariba is actually consistently back to 30%-plus growth rates in new order entry. On the transactional side, the revenues are now growing fast as well. And from a market share perspective, look, Ariba is bigger than the 10 following competitors combined. So from that perspective, we are actually now significantly from a much higher base gaining share and this is definitely one very good news story. And indeed, also in procurement, we have a great opportunity to extend our ecosystem. The collaboration with Taulia is intense and very successful already. We talked about this at -- not Taulia, Icertis. And we talked about this at SAPPHIRE. Contract management is a natural addition to what we do in procurement but also in other parts of the portfolio. With Taulia, indeed, we did a very smart, I think, tuck-in acquisition that is perfect at the intersection of S/4HANA and our treasury solutions for the CFO and then the procurement solutions and our business network for the CPO and the Supply Chain Officer of a company. And in today's environment where everybody is concerned about supply chain stability, supplier stability, I think being able to offer in the wake of rising interest rates a powerful working capital management solution together also with banking partners, more banking partners are very welcome to join us on the platform, I think it's a very nice additional fit to what we can do with Ariba and the procurement network.

I think it's become quite clear that you obviously have a very broad, I would even say unparalleled portfolio of enterprise software assets. You're now integrating everything better, building more of a suite, I would say. And the ultimate goal is to get cross-selling up, I would say. And you gave a few quite interesting stats at SAPPHIRE in Orlando like 2 weeks ago basically saying 45% of our customers already have at least 2 SAP cloud solutions, 20% have even more than 4. Where do you think these rates are going to go over the next years and maybe out to 2025?

I think I even need to qualify this a little bit further. That statistic was only focused on our cloud customers, customers that have at least one cloud solution. We have actually quite a significant number of on-premise customers left who have not yet adopted cloud solutions from us. So that cross-sell opportunity is actually even wider than when we just take a look at our cloud customers. We have categorized our solutions not only into those top 5 solution areas that we are now also breaking out a little bit further in our external reporting with the Platform as a Service disclosure that is coming as of Q2. But at a subcomponent level, for example, SuccessFactors would be characterized into core HR and then learning and talent management on CRM or customer experience, however you call it. You would segregate commerce, sales and services. So it was those 20 solutions roughly, and that we then looked into how many customers are using more of that. And I think also here, RISE and the move with S/4HANA to the cloud is a great enabler. Because when you move to S/4 cloud as a customer, you immediately recognize that the integration to our cloud solutions is so much better now and so much more deeply established that the value case for doing more with SAP is just getting significantly better. We talked already about the Philips example. In such scenarios where you really have a greenfield implementation and you extend core to the edges end to end, you can easily drive for a 3-to-1 upsell opportunity on top of just the like-for-like move to the cloud in core ERP. So I don't want to speculate now on how much this contribution from cross-sell and upsell will be over the course of the next 3 years. But suffice it to say that we're very happy about the momentum that we are seeing now. I think it means that the investment that we took to accelerate the execution of our integration road map is bearing fruit significantly. All of our solution areas in the cloud are in double-digit growth territory now, including also SuccessFactors, as you have said and others. And the opportunity is certainly massive because a large share of our customers is still in on-premise and does not even count against the statistics that we laid out at SAPPHIRE.

So a healthy uptick of these upselling rates is certainly something we should expect, but I didn't expect to get proper quantification.

I think it all comes with the proliferation of the Business Technology Platform. And that's why we really decided to break this out now in the future as a transparent area of our external reporting so that you can see how the adoption, the revenue performance in BTP happens because this is what drives at the end of the day through the common data domain model, through the common user experience, through the common life cycle management, the master data integration, all services on the BTP that all of the cloud solutions are then benefiting from this cross-sell and upsell potential. So in the growth of BTP, you will see the power of our ecosystem buildup. You will see the power of the cross-sell and upsell potentials. And it will crystallize, obviously, also in growth in the platform itself in its own right.

If I look at the strong RISE attach rates of BTP, that certainly sounds like a promising future. So before we dig a little bit deeper into the financial questions, is there maybe anything from the audience? Any questions you have? While you're thinking about one, maybe let me ask kind of a housekeeping question. Russia has obviously been very topical with every fireside chat we had on the stage today. You also announced, decided to wind down your operations there. Can you just remind us because I think the expectations in the financial community still vary a little bit, I would say, what we should expect for Q2 in terms of the impact of exiting that business and then also how the margin trajectory for the group overall should look then into the second half from there?

Yes. Let me try to dissect it a little bit. So first of all, we saw an impact already in Q1. We had roughly EUR 70 million negative impact mainly due to the wind down of our cloud operations, which result in accelerated depreciation of cloud data center assets and also some accelerated amortization of capitalized sales commissions for our cloud business. So that was EUR 70 million. And the full year impact on the bottom line will be roughly EUR 350 million. EUR 300 million on the top line, mainly in on-premise revenues because Russia is an on-premise market. And that impact will be mainly felt in Q2 because we took the decision in April to wind down our operations also in on-premise. So that means we have now to account for the accelerated amortization of sales commissions. Also for our on-premise business, there will be additional bad debt expenses for sure that we will have to recognize. So actually a significant part, probably up to EUR 200 million of the EUR 350 million that we expect for the full year will actually be recognized in Q2. We also will recognize an additional restructuring provision of between EUR 80 million and EUR 100 million then also in Q2 because we have notified our employees in Russia that while we will try to bring as many as possible of them into operations of SAP internationally, there will be a significant share that, unfortunately, we will have to let go. And for that we are accounting also then at the point when we notify them, which is in Q2. So Q2 will not look nice from a bottom line perspective as a result of that. But then in the second half year as also the comparison to last year gets easier, you will remember that in Q1 last year we had a significant growth in profits were actually minus 7% that we had now in Q1 considering the additional Russia impact was actually a quite decent result in the second half year. The performance will significantly improve. And we are also planning for a smaller divestiture, which is supposed to take place in Q4. And that will, of course, then result in a positive operating profit development, in particular, in Q4. And on the top line, you saw in Q1 that we had a small blip in the current cloud backlog because of Russia. That's what we expect now in Q2 to see in the revenue line. And afterwards in the second half year, also the growth rates in the cloud will continue to further accelerate. That's roughly the modeling that you should expect.

And most importantly, what we shouldn't forget, you are reiterating your guidance for the year.

Of course.

Despite the Russia exit, which is definitely something remarkable and should be pointed out, I think. Anything from the audience at this stage? Not yet. So maybe let's go back to your 2025 guidance. You already alluded to that in terms of absolute profit numbers, you're going to get there or maybe even slightly better. Cloud revenues are definitely progressing well. But obviously, more private cloud in the mix means slightly lower cloud gross margins. Can you talk a little bit about what you're doing? You've obviously seen a trend now that is maybe a bit different than what you expected. And in terms of what you're doing in terms of maybe counteracting that trend, pushing people more to the public cloud, anything on the sales side, anything on the technology side? Or are you just basically saying, look, it is what it is. We're making good money with these deals.

Yes. First of all, indeed, we are making very good money with these deals. I mean, just to give you an idea, when you think on the one hand side about the extreme of our Infrastructure as a Service business, so-called HANA Enterprise Cloud, there we are running at 30%, perhaps 35% cloud margins because the Software as a Service element is missing. On the other side of the spectrum, you have the very mature public cloud assets in our Intelligent Spend Group. They're already above the 80% mark. And S/4 private cloud is basically right in the middle. So this is a very decent and a business that is adding significant cloud gross profit. So we definitely will not throttle it down naturally. However, in those target markets and target segments where we have identified S/4 public cloud as the sweet spot, of course, we're focused on making sure that we have all of the ingredients in place to maximize our market opportunity there. That has to do with further extending the product availability in certain geographies, very important. Localization is one inhibiting factor if in a smaller country you don't have a localized version available yet. However, there we are working strongly with a localization kit that enables our partners, the ecosystem, to build such localized versions for smaller countries. So that will help the availability in a broader scale. On the go-to-market side, when we talk about customers that are in the target market, then indeed, our sales organization benefits more from a sale of S/4 public cloud than of S/4 private cloud. But we are doing this really surgically because we want to address the right targets, so to say, with the right solution. It does not help us if we artificially try to squeeze customers at a point in time when they are not ready yet into the direction of going fully into S/4 public cloud. And in those scenarios, we will offer them the journey that is best for them. Again, that's a differentiating factor. And it does not represent any risk for us because S/4 private cloud is an extremely healthy business with a decent gross margin and in particular, very significant absolute gross profit for that.

I mean, you've given a lot of hard guidance metrics for this year for 2025. I think you gave somewhat of a soft guidance metric on 2023, the return to double-digit operating growth. I would now call that a hard guidance as well. I think you were pretty clear at SAPPHIRE you're committed.

I just wanted to say that this is a hard commitment. And definitely in January, I want to reaffirm this commitment.

I mean, look, I think a lot of the OpEx investments in sales and marketing and R&D are quite front-end loaded this year, obviously, the Russia impact in Q2. But then also all the harmonization or investments on the infrastructure side, it should come out next year over H1. So what can possibly go wrong next year for you to not make that target of double-digit operating profit growth?

Well, there is, of course, one factor that we cannot influence at all. That would be a massive macro meltdown perhaps driven by a significant escalation of the Ukraine conflict beyond the Ukraine. That's something, it does not make sense to take this into account because if it happens, then I think we are worrying probably about different things than the double digit growth in 2023. But leaving that aside, I think there is only one factor that we are really focused on and that we have to make sure we get right and get executed. And that's the conclusion, as you said, of the cloud delivery infrastructure harmonization program. We have now a very good line of sight. We are certain that we will complete all of the customer migrations in early 2023. And then until midyear, we'll have retired all of the legacy infrastructure. And once that has happened, it will in the second half year make room for significant surge in cloud margins and of course, also further expansion of cloud gross profit. So that's the one thing that we're really focused on at the moment, the mass migrations, in particular, for our largest solutions, SuccessFactors and Ariba, are going on. And we have a very tight Board monitoring cadence on that, which we look at this in the full Board every 4 weeks. So that is the only factor that could theoretically lead us to a risk, but that in practice, I think we have very well under control. And therefore, I'm extremely confident that we will hold that commitment.

That's good to hear. Any questions from the audience? There we go. Right in the back there. Ed, can you raise your hand again?

I'm just wondering how your criteria for acquisitions, corporate development has changed in light of what we've seen in the last 24 months, clearly, very robust conditions and very weak conditions. What does that mean for where SAP is going to deploy its capital over the next 5 years?

Yes. That's a good question because obviously the philosophy has changed there a bit. I would say we have always had actually a three-pronged portfolio strategy. I know that everybody is very much hung up on this build yourself versus buy as part of M&A paradigm, but we actually now, I would say, have a very strong third leg. I would say the most important one today is really the build aspect, the organic innovation. We have increased our R&D ratio to 17%. That is where we will end this year. I think we don't see a need for further increase of the R&D ratio. It probably will rather go slightly down in the subsequent years again. But that is a very important aspect of our strategy, to make sure that we have a robust integrated modular suite where the pieces really fit together and we can drive continuous innovation. The total addressable market within those categories that we are covering is massive. Actually, it's USD 670 billion. So there is no need for us to now go completely astray and buy something in a completely different category. But partnering is very important for us, as you have seen through, for example, the Icertis partnership with a couple more in the pipeline. We believe partnering can offer us smart opportunities also in the context of BTP to more quickly scale our business without going all the time, for example, through an M&A process. So M&A is something that remains a part of our portfolio build-out arsenal. Of course, a company of SAP's size will always have to look out for prudent and smart tuck-in acquisition opportunities. Of course, we are running at a very low leverage level. We are almost down to a net cash position of around about EUR 1 billion in net debt. So of course, we would be able to shoulder also a large acquisition. But from a corporate philosophy perspective, we see M&A rather as an opportunity to strengthen our strengths today rather than filling in for weaknesses, so to say, entire complete white spaces in the portfolio. That's why we have acquired Signavio because it was a great fit to our business transformation to the cloud with S/4HANA and the RISE movement. And with Taulia, we saw the great fit between 2 strongholds, S/4 in finance and Ariba in the procurement space to come up with a working capital management platform that fits nicely between those 2 pieces. So this is something that you should always expect that we would be on the lookout, but it's not kind of that we are looking for transformational deals that would kind of catapult us into completely new territories that we are not covering today, but rather nice opportunities to further complement in smaller white spaces. And that obviously means from a capital allocation perspective that we will, as of next year, return to higher profitability levels. Also, the free cash flow generation of the company will significantly increase, in particular then in the later years, '24 and '25 that there is, of course, going to be scope for enhanced shareholder returns by that time. But I would also not rule out also a slightly larger acquisition above the EUR 1 billion mark, if it makes sense. Currently, of course, the valuations in particular in the public markets have come down quite significantly. And so if we have a nice fit with a smaller company that can complement our portfolio with, we would not rule it out for sure.

Any other questions? Yes? Gentleman in the first row, please.

I apologize in advance for asking a rather standard or general question, but I'm really interested in your view. SAP undoubtedly is an extremely successful company. But if I were to think about a quick SWOT analysis, strength, I understood. Where would you see weaknesses of the company? Where would you see opportunities? And where would be any threats to the company?

I would say our biggest weakness at the moment is the share price of the company. Quite honestly, I think it's, of course, a little bit an irony that we are moving now with our accelerated growth into a period of time where, of course, volatilities and uncertainties are extremely high. And therefore, there has been a sector rotation and within the sector clearly an appreciation of value-oriented strategies. And we will return to that as of next year, undoubtedly. But at the moment, that is certainly a weakness that I think our capital markets performance does not reflect the true underlying power of the transformation that we are starting to see in the numbers as well, in particular in the top line momentum. The opportunity for SAP is, at the end of the day, to drive business process and business model transformation at scale for customers of all sizes and complexities across an unprecedented number of industries that we are able to cover as SAP compared to anyone else in the market. I do not see ourselves necessarily, first and foremost, as a cloud company. I see ourselves as a business process-centric company that happens to utilize the cloud to be faster and more agile in providing those capabilities to our customers and therefore help them to transform more quickly. And due to the fact that we have now the integration right and we have so much pressure in customers in different industries to transform their operations. Move, for example, from more product-centric to more service-centric business models, there's a great need out there. Couple this with the supply chain uncertainties and the fact that we are clearly a market leader in supply chain solutions, I think here is our great opportunity to benefit from this need to respond to digital disruption and change business process landscapes of our customers. And the threat with all of this is, of course, that we should never be arrogant and never look into the rear mirror because the most dangerous competition is the one that you don't see yet. And so clearly, there are companies out there that we are very successfully partnering with. But of course, that we also have to be aware that they're pursuing their own long-term strategies and dealing with this in a responsible fashion is very important. But I think we have found now with them the right engagement model. And there was, for example, in the past before that idea that they could actually sell our platform and therefore become the front to the customer. We have moved away from that, obviously, as part of our strategy change. And we are now leveraging their infrastructure to, at the end of the day, front a holistic service to our customers. I think that was important and necessary. Otherwise, it could have translated into a threat, even though from a profitability perspective it would perhaps have been nicer in the short term. At the end of the day, we want to build our company for the long term. We just celebrated our 50th anniversary and frankly, want to be around for the next 50 years as well.

To maybe wrap it up with one more technical question and then one general question. I mean, on the technical side, we talked a lot about the infrastructure harmonization and the investments there. I think you even quantified that as a headwind around about 140 basis points on your margins. But obviously, you're guiding for 80%, let's call it, maybe 78% now, but you're currently at 70%. So there's still a big delta on top of the 140 that you have to bridge in order to get there. So maybe for the understanding of the audience and also generalists, help us understand a little bit better kind of how we are getting there, what the blocks are that are contributing to that?

Well, first of all, the headwind, I think, will get even bigger in Q2 and Q3 because the share of investments in cost of cloud that we are going to absorb as part of the cloud harmonization is actually getting bigger now in the next 2 quarters. And this is for 2022 a total impact of substantially more than EUR 200 million in cost of cloud. More than half of that will be gone already in 2023 and all of it will be gone in 2024. So that's the first aspect. But of course, we have not done this only in order to have a new infrastructure but also to have a more efficient infrastructure. So the second element is once we have done the harmonization around our converged cloud and hyperscaler infrastructure, we can do 2 things way better than in the past. First of all, centrally manage the demand for instances on hyperscalers, which means that we can take advantage of more advantageous pricing offerings because we need less of the flexible price bands that are a little bit more costly if we can spread it across the entire landscape. Secondly, we can harmonize our cloud operations more and consolidate. At the moment, all of the line of business areas because they have still to manage a legacy that nobody else knows about, they still have separate teams. We will consolidate that together in one central organization, which will be more efficient. So that's the second one. The third one is we had an unnatural dampening of our cloud margin performance in the last 2 years when our highest margin cloud assets in the Intelligent Spend Group were actually suffering most from the pandemic downturn. They are now increasing again from a growth perspective. They have been up 16% in Q1 and the growth will further increase from here because the pandemic conditions are clearly behind us, as we can see here from this physical gathering. So this will be very good for Concur. This will also be good for Ariba and Fieldglass, which means that their contribution to the total weighted gross margin will significantly increase again. That was, by the way, the main reason why in Q1 we were increasing cloud margins by 50 basis points despite the fact that we had a 140 basis points impact there. So this will be helpful. And then last but not least, while we are facing a headwind from S/4 private cloud, we are facing a tailwind from the reduced share of Infrastructure as a Service, which is the lowest margin business that we have and that we are totally de-emphasizing. It's already not growing on the revenue side anymore, but it's actually declining and shrinking from a new order entry perspective, and that will help in the mix as well.

It's great to hear you have that visibility. And obviously, the high 70s or even 80% is clearly a very impressive target in the context of global peers as well. I know we're out of time but maybe a last quick one. I think at SAPPHIRE but also in Q1, Christian and you, you were pretty clear that you see resilient business. You see customers spending on your solutions. You don't see signs of things slowing down. Maybe give us a little bit of a quick update just in terms of what you're seeing in the market right now.

Yes. I think we are definitely still seeing a very constructive demand environment with potentially the one exception of Central and Eastern Europe, where people tend to be a little bit more cautious, but that's understandable. The closer you are to the action and the war then obviously the more affected you are as well. But nevertheless, even there, there is a clear distinction between the on-premise as well as the cloud business. And the cloud, the truly significant transformation programs continue to move forward. That's, at the end of the day, what defines our success in 1 or 2 years from now our on-premise business in terms of new licenses will be so small that it will not determine success in a quarter anymore. And therefore, I'm actually very confident that you will continue to see a very strong performance in the cloud for the remainder of the year from an order entry perspective, and that this will also continue to show in the current cloud backlog.

Great. And on that happy note, Luka, thank you very much for joining us today. Let's wrap it up for the day. The wine tasting is starting now, I heard. So please join us. Thank you very much.

Thank you.