SAP SE (SAP) Earnings Call Transcript & Summary

Hello. Hello. Welcome, everyone. My name is Phil Winslow, I'm one of the software analysts here at Crédit Suisse. I wanted to welcome everyone to the 26th Annual Technology Conference and wanted to thank really just everyone for coming, making this really, the most successful conference we've had in a decade. Plus, the attendance is up 42% year-over-year. The number of companies participating is up 48% year-over-year. So thank you to all of you for coming -- taking time to fly down. I know it's not always the easiest trip to come down to Scottsdale, but it's worth it, though, with the weather. But -- and of course, thank you to the corporates. They're really the stars of the show for taking time out of the Q4, which is always busy, of course, to spend time with us. I'd also just like to just highlight the research team for the tremendous success of putting this together. I joked sort of the battle star is sort of fully operated -- Death Star is fully operational. We have [ Chris Kasso ], recently launched in semiconductors, Fred Lee, Rich Hilliker, Building out the software team. [ Shannon Cross ], I'm not sure where Shannon is building IT -- there's Shannon in the corner there, building out IT hardware and joining the rest of us on the team. So it's great to have the full operating technology team, going in research and very excited going forward to have this team. So -- but to no further ado, we'd like to get the lunch keynote going, and I'd like to welcome Christian Klein, CEO of SAP and Board member to the stage. So Christian, welcome.

Thank you, Phil. Thank you.

Of course. And it's his first time in Arizona. So it's...

Yes and coming from the churn wind, I have to say they have worst place.

Yes -- exactly. Now before we get going, I've got a fabulous safe harbor statement. I'm going to try to do it as well as your IR team does, but don't judge me. This is my first time. So 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 more fully in SAP's most recent filings with the Securities and Exchange Commission.

All right. I think I did okay. So I've practiced that. I've heard it a few times over the years, it's a -- but Christian, we were just talking about this before we came up. It's been 2 years now that you've been -- you're CEO, actually, over 2 years now. So reflecting back on the past couple of years and since you assumed this position, can you walk us through the key initiatives that you undertook? Some of the issues that you and the team have addressed since you became CEO? And how has that evolved over time to where we are today?

Yes, indeed, I mean, the last 2 years, I mean with a pandemic, with war and then now the concerting environment on high inflation, high energy prices. I mean, it's definitely a challenging time. On the SAP, I mean, when I took the company over 2 years ago, for me, it was very important when we actually decided to launch the new strategy that we are not just copying the move to the cloud, what other companies, of course, also do these days in the tech industry. But we really looked at as the biggest business application provider in the world. We looked at how can we actually solve the biggest challenges of our customers. And when you're talking to clients, when you're talking to partners, I mean there is, of course, a high need around business model transformation. No matter if it's in oil and gas, if it's retail, if it's utilities, they need software to accommodate this change to digitize their business model. Second, now high inflation, a lot of margin pressure on every company out there. So process automation is key. So this is what we then packaged up under the notion around intelligent enterprise. Second, supply chain. We were always the #1, but how can we connect the supply chains of the world? How can we not make it work for one company? But how can we really automate and give transparency across the end-to-end supply chain of the automotive industry, something that we launched 1 year ago, and it's a big success. Now we are moving to chemicals. Now we are moving to retail and really making sure that we are giving our customers resilient supply chains. And the third notion of our strategy is, of course, around sustainability. I was just in Brazil, and we talked about with a large chemical provider there around Queen energy, about Queen hydrogen. How can we make sure that they get the certificate? How can we measure carbon footprint end-to-end in their supply chain. So these are the 3 pillars. And then, of course, when you are SAP, we are running very large ERP systems and supply chain systems. But of course, the IT needs to have a completely different landscape going forward. So the move to the cloud on the one hand, but then on to the move back to the standard. They are giving them a clean core. And so we package this up on an offering called Wise with SAP because in my time as the Chief Operating Officer, I learned a technical lift and shift to the cloud doesn't give you a business transformation. So we said, "Hey, when we are running 400,000 customers, we know what the best practices are." So we couple our business process expertise, our business model expertise with the applications we have, with the platform we have and say, we're going to help you dear customers to try for holistic business transformation. This is what we did. This is what we started 2 years ago. It resonated extremely well. We see it with the earnings, the last earnings with the acceleration, the further acceleration of the growth in the cloud. But even more important, last piece on that is also the shift, the cultural mindset. We have 110,000 people at SAP. And when you code software in a certain way, when you deliver, when you sell, when you market software in a certain way, the cloud has different requirements. And for me, the most important piece of this transformation is to see -- to really set the company up for delivering as a service seamlessly. And there, we are also on a good track.

Exactly. All right. Let's fast forward to today, as you said, it's been an interesting 2 years. So obviously, the current -- sorry , macro-economic climate, have been asking this question to every corporate, but how have your customer conversations changed? Let's say, versus the beginning of the year, where are you seeing the most resiliency versus like and saying, "Hey, look, I need to invest with SAP here in these areas," versus other areas where you may be seeing more risk of sort of push out?

Look, I just told you when we are coming here the Christmas trees up there, always remind me about its Q4. And looking at the pipeline and looking at the demand of our customers, right now, I mean what do we see the most? First of all, it's good to see that we see a strong pipeline. But when we then double-click, it's oftentimes about resiliency. Resiliency means how can I change my business model from selling as a product to selling as a service? How can I move to a subscription, to a pay-as-you-go to sell less CapEx-intensive but more OpEx? So this is what we do. And so this is a strong pillar, especially then when it clicks to S/4HANA to our billing system. And we do it with the Apples of the world, but we also do it with small and midsized enterprises. So we can do that. Now at tech, we also launched SAP Build to also say, "Hey, we're going to not only move you to the cloud and move you to our new platform, but we also have on the platform, capabilities with Signavio to analyze and benchmark our business processes." We plug it to the configuration of the system to make sure we drive higher automation just by standardization. But then we also collected it into our automation suite where we then can -- no matter if it's machine learning or RPA, that we can write out of the box, tell our customers, "Hey, this finance process once now 30% more productive going forward." And these are the conversations we have when it comes to S/4. The supply chain is, of course, of high demand. Needless to say, demand supply, high inventory. I'm also sitting on the Board of Adidas. There, of course, a lot of talk around, oh, the inflation, the macroeconomic environment, how can we make sure that the inventory is not going up? How can we manage that real-time demand supply? This is us. How can we translate it then all the way down, downstream into the supply chain? So this is the supply chain. The third one is sustainability. There is no interest now on slowing down the sustainability agenda of any COR meeting. So they're all saying, "Hey, I need, of course, resilient growth. I need more automation, but I also need a more sustainable operations." And what we are doing here, we are expanding our data model. We are actually measuring the carbon footprint on a certain standard, which we are now aligning or we are close towards. So -- be -- has a standard with the big auditors with the WAF. And then we also, with the network, we are measuring this, including Scope Suite because today, when you ask an automotive company, what is my carbon footprint of an electric car? They're going to tell you, maybe this was Scope 1 or maybe Scope 2, but they have no clue around Scope 3. And we have -- we give the commitment that we can measure that and to answer sustainability is of high demand, which is then for us, enabler also of our core products. Because again, if you buy SuccessFactors, you get the social data. If you buy the supply chain, you get the environmental data, the footprint, the carbon data. So -- and so we plugged that in, have a sustainability control tower on top to also get non-SAP data in, and that's of -- this is what customers need these days.

Yes. Now let's take on the subject to sort of macro because obviously, many investors -- I get this question all the time. If you sort of back office and let's say, middle office software projects, it's been really more risk of being deprioritized in economic slowdown. However, to your point, SAP though, it's just reported very strong order entry. Q2, Q3, the momentum you talked about, particularly ERP, HXM, as you mentioned. Whereas other areas of software spending with some other companies who had seen a more notable slowdown. I guess my question here is sort of why? Like what's different this time? And what do you view as the biggest driver of this relative strength that SAP is seeing?

Well, look, Phil, I mean, when I compare the SAP as of today and compared to 2 years ago, this company is in a completely different shape. First of all, we have now 80% of [ recon ] revenue. And oftentimes, I can just explain our transformation to our customers and tell them, this is what we did. We offer now consumption-based license models. We offer pay-as-you-go. We offer a Platform-as-a-Service. We changed our operating model with our software. And now we have a completely different resiliency also in our P&L because we are having less and less onetime revenue in from our on-premise software business. And then on top, to what I just explained, when you focus on the biggest challenges of your customers, that's, of course, also very helpful that you can tell them, "Hey, this is what the business -- how -- this is how the business case stacks up. And then -- we did some smart moves on the commercial side. There is more coming next year, where I'm very excited about. I can share that in a second. But that we also give our customers the flexibility with commit to consume. You know what? You are ExxonMobil, you are Petrobras, you are Siemens. Okay, we're going to work with you. It's never easy for such large companies to standardize, to automate. But we are working with them on the business side, and then we adopt the technology to it. And that takes some time, but we have very flexible license models to accommodate that to also not hit them too hard on the CapEx or OpEx side upfront. And so that's where we key in. Next year, we are giving also Wise a new spin. So today, with Wise, we pull, of course, a lot of platform business apart. Then we actually, of course, S/4HANA is a key pillar of that. Customers can choose the hyperscaler they want to make it really a highly resilient IT landscape. But next year, we also want to come up with a commit to consume, which includes almost all of our public cloud solutions. So when a customer then says, "Hey, in my business transformation, the highest demand is for total workforce re-skilling." Okay, let's get Fieldglass and SuccessFactors in. If I have a high demand for more intelligent sourcing. Okay, let's plug in Ariba and 4. But I really want to try Wise, even more -- a little bit away from products, but more to end-to-end solution capabilities. And now that everything comes as one with one holistic data model, this is now the time to move into the next phase, and this is exactly what our customers got.

That's awesome. All right. Let's focus in on the cloud because that's been, obviously, a key story as you just mentioned with SAP and the number that jumped out of me in Q3 was the current cloud backlog in constant currency accelerated, to your point, 26% year-over-year from 25% in Q2. S/4HANA, current cloud backlog growing 90%. What do you view as the most important drivers of sort of sustained growth here?

I mean the business technology platform is actually the most important pillar of our transformation because it holds our -- it's the foundation of our portfolio. And the last 3 years, our 45,000 engineers really worked hard that we -- it's really also a dramatic shift also in the way how we are delivering our software. So SAP and on-prem was this one monolithic ERP, time to value. But now we have a lot of modular apps. But the best piece is when you are not going best of [ breed ] , but you're going best of [ suite ], you're getting quote to cash. You are getting business model transformation out of the box and that the solutions talk to each other with one semantical data layer, with one identity, with one authentication layer. If you do a lot of best of breed, sometimes, very sensitive corporate data flying around. No, no, no, not with SAP. We have this one authorization layer also on the platform. Not even for SAP. We also have, in the meantime, a very strong integration suite, which sees high demand. So even if you then want to plug in competitive solutions, partners who build on the platform, can easily plug in. And so the BDPs, for me, this is where we are just at the start because now when the ecosystems, the Accentures, the Deloittes come in, and we are not modifying any more ERPs. We are building side-by-side new industry apps. We are building side-by-side extensions with SAP Build in a very easy way. This is actually when the flywheel effect kicks in, where the consumption of the platform goes up and up and up. And our customers are getting that. No one wants to fall behind 6 years again behind the innovation curve with an ERP modified to that so that you -- it's hard to move and not consuming all the innovations we are delivering with our 40,000 engineer. So -- and that's now -- this is the move with Wise. And then, of course, S/4HANA, it's about the business model transformation. They are great new capabilities around -- we can offer each license model. We can also offer every business model change the customers want to go to. And then, of course, we add our LOB solutions to it, which is then also, of course, a huge cross-sell opportunity we have. And that in a nutshell, drives the numbers, what we have seen.

Great. Let's break this down focusing on SaaS and then PaaS. On the most recent earnings call, you talked about several notable wins versus Workday and Oracle and HXM with SuccessFactors. Can you walk us through what you're seeing just first off, in sort of just the HXM landscape, and then sort of why is SAP and SuccessFactors winning?

In HXM, it's very important to own the core. And with the core, I mean Employee Central payroll. And when you can run the payroll in over 100 countries, this is something where I believe no one else can offer. And so this is our going-in position. And then with Employee Central, if you connect that very strongly with the S4 finance core, then you actually talk real time about when you're going to hire, when you're going to actually do compensation. That is automatically integrated into your P&L. And for -- even for midsized enterprise, for large enterprise, it's a no-brainer. This is what is very heavily needed. You cannot want these applications in isolation. So the core is super strong. And then we are building around new learning capabilities. We have with Microsoft Teams, a collaboration where we [ block ] in our team. So you don't need to send very sensitive SAP employee data with mail to someone else. No, you just fuse button and you can collaborate. A recruiter can collaborate with an HR business partner, with someone from finance, with a manager, whatever. But we have this collaboration built-in, which is unbelievable, helpful for our customers. We have a demand to build this in much more, and we will do so. And then, of course, when it comes to cross-sell. When you then have a platform with great extension capabilities, which is very much needed when you look into the banking and insurance, they have different requirements when it comes to certain employee self-services, and we are giving this to them with prepackaged content. And so there, we are -- we see a super strong momentum. And then last but not least, on HXM, same here. It's about total workforce management. So you need to reskill. When you are a Daimler, when you are BMW, and you are becoming more and more a software company, you need to have a great total workforce management solution who gives you the transparency about your skills. And then you need to connect the learning, hold maps end-to-end to this kind of database. And this is what we are doing with Fieldglass, end-to-end, out-of-the-box, which is another capability, which actually sees pretty high growth.

Yes. All right. One more SaaS question and then we'll move over to PaaS. In the most recent report, you've noted that almost 60% of new S/4HANA deals in Q3 were signed from net new customers. A lot of people, when I talk about S/4HANA, think it is just the upsell of the existing, but that number has jumped out at me. My question is what's driving these new logo wins? Why are they saying what net new customers are saying, "Hey, S/4HANA is the right platform for me."

Yes, net new. Of course, when it comes to the large enterprises, ERPs are very sticky. But no matter what other may be report, the only thing what I can tell, we didn't lose one large enterprise customer. We won the British Telecom. We won actually Carrefour. We won a few others, really because they said, "Hey, in order to make my business model transformation work, I need this and that capabilities of S/4HANA." So they came over from Oracle. But the most net new wins, obviously, is the other ones in the small and the midsized enterprise segment. And there, I can give you example. I was now in -- on my Latin America tour, and in Brazil, there's C6. It's a fintech. And they actually said, "Hey, our business is growing to the roof. And I need now a standard for [ channel ledger ] for P&L." I need to hopefully, also over time, also go into more countries. And this is the moment where they say, "Hey, with S/4HANA public cloud, this is the way to go with you." And we see go-lives happening in 3 to 4 weeks. So SAP sometimes is known from the on-premise, "Oh, until I have implemented this solution, it probably takes too long." In the public cloud, if we -- if you adhere to the template, if you adhere to the standard, 3 to 4 weeks is absolutely feasible. And so this Doctolib, it's the biggest unicorn in France, same, same thing. They are really high growth. They need a new billing solution, a new billing engine. They are offering oftentimes, pay-as-you-go, subscription-based business models. So they come to us and said, let -- "Please help us to, first of all, help us grow, scale but then also make sure that we are running a compliant business." And then when they see the localizations, and let's not underestimate these localizations. Then they are sold because they say, "Hey, that also gives me the platform to further internationalize and grow my business going forward."

Understand it. All right. PaaS side, and you mentioned it before the business -- SAP business technology platform. You mentioned that exceeded a run rate of more than EUR 1.5 billion in the most recent quarter. I mean, given just the breadth of the platform, wondering if you can walk us through some use cases, in particular, that are resonating with customers and getting the most traction lately and just why?

Yes, I'll give you an example. Schneider Electric, they just signed one of the biggest Wise deals ever. They have about 50 factories around the world, and they said, "Hey, we need a platform to standardize our landscape." And we completely get it now with the integration suite, with the extension suite that there's the data model, there is the identity, there is the authentic occasion, everything. What SAP applications are using, can we use to build the extensions on this platform. And this is one customer. On the mobile side, there is an Apple SDK. There are many more SDKs to also build low-code/no-code new mobile apps on the platform with Petrobras for 60,000 employees, we build a new mobile app for safety hazards. And this is working beautifully. And again, this mobile app is going to be built in a few days. And it has the best security layer around it because, again, it's there on the platform and you can connect it seamlessly to the SAP applications and to the data you need from the applications. So that's the second part. And the third part is that our partners finally see, there is a platform, which we can easily connect to. I mean, 3 years ago, when Ariba and SuccessFactors and S4 whatever, Fieldglass, they all talk to different languages. Why should a partner go to the business technology platform, then you can build everywhere. But now actually, you don't need a new data warehouse to harmonize the [indiscernible]. At least, for SAP, and that's already very strong, you can connect in a seamless way. And now when we talk to Accenture, when I talk to Julie, when I talk to Arvind at IBM or Punit at Deloitte, I mean they are getting it. I said to them, "Please, go with us." Don't modify the ERPs anymore, build on the -- build new apps on the business technology platform. We put it in the store. And now for McCormick, we are building one app, which we can sell across the industry 100 times, and they are getting that. And that drives and that triggers consumption on our platform. And this is such an important piece. And for the customers, it's so important because, again, no one wants to have a landscape, which is modified, which you cannot upgrade on an automated way. And this is what we are now offering, and this is why the platform performs. But honestly, for me, this is the start. I mean when you look at Accenture, they have 50,000 SAP developers, SAP consultants. Let's assume they are not building this on NetWeaver, they are going now to BDP, the [indiscernible] Java -- whatever. This is massive. And this is the move that we are currently going through.

That's fantastic. All right. Two more questions here. Now the R&D, obviously, you've had a lot of product development and integration to your point, as I go over the last couple of years. When you think about your R&D budget of EUR 5.5 billion, you report 45,000, developers, what are your highest priorities right now in terms of R&D spending? What are you trying to get ahead of, so to speak? And how are you leveraging the R&D to do so?

I mean when we talk about R&D, I mean, the good piece is there was a lot of work happening on the platform side, yes, to become one SAP when it comes to our modular application landscape, but then also share one platform. And there was a lot of work going into integration, but also the extension capabilities you need in the cloud. Second, cybersecurity. Super important where we are doing a lot of work with the hyperscalers. And why do also the hyperscalers now push also -- how to help us to push so many clients towards Wise? Because they also say, "Hey, when you're moving an ERP to the cloud, it's so mission-critical. Do you really want to have 3 parties at the end? The hyperscaler, SAP and maybe your partner being responsible for your landscape?" No, no, no. Let's do this as one and build 1 cybersecurity layer, build 1 security layer around the landscape. So that's priority number two. AI is, of course, super important. So we have a lot of use cases, travel and expense, automation, compliance, in finance, in the supply chain, demand and supply, predictive analytics. So that's a huge area. And then the user experience. When you see the modern SAP solutions in the cloud and the public cloud and compare that to the old world, we made tremendous progress, but also there on the mobile, on workflow, there we are investing. But overall, what you can expect now in the next years to come, yes, there was an increase in the R&D ratio. Yes, we invested. But of course, we went also through our own transformation. So with the software revenue decline, which is happening in this transformation and the shift to the cloud, of course, the R&D ratio also increased because of this transformation and the decrease in the software business. But now that we have 80% of our revenue recurring, you're going to see that the total revenue will accelerate further. And with that, also the R&D ratio will come down, the same is, too, also for the sales and the marketing ratio.

Awesome. Okay. Last question. Now we started this conversation talking about the last 2-plus years since you became CEO. Obviously, a lot of things have changed in those 2-plus years. But let's say we're sitting back up on stage 2 years from now. By the way, we'd love to have you back -- the -- what do you think 2, 3 years now, you're going to look back on and say, "Hey, look, this technology or this trend was more transformative for SAP's customers than maybe everyone was giving a credit for back in 2022."

Yes. On the technology side, I definitely see we are working now with Apple, with Microsoft on the first meta work scenarios in commerce in the supply chain where we definitely want to also play a big role in. The same is on crypto block chain. That's also a big part of the business network when you're connecting the supply chains of the world and you do billions of transactions. Crypto and block chain will be a key part in this business. And then third, of course, making our sustainability agenda work. Today, almost every company reports the financial ledger. Our goal is that we are also providing the green ledger for area enterprise that there is a standard with SAP coming on carbon. And that's, of course, a main goal, what we have, where we are were well on track. And then last, but not least, in 2 years, it's also 2025. We have the guidance out there, and I hope we can see it sit here and we can confidently say that we, of course, also have beaten our 2025 guidance, both on the top as well as on the bottom line.

I think that's a great place to end. All right, my friend. Thank you for coming down, Chris. Thank you, everyone.

Thanks also. Appreciate you. Thank you.

Thank you.