SAP SE (SAP) Earnings Call Transcript & Summary

Let's start our next session here. While people come back or join in from after their lunch, I'll start with the interesting part, which is the legal statement, and then we go into Q&A, if that's okay. So let me read this out. 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 to 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.

Well done.

Well done. Thank you. Yes. Julia, since you joined SAP not too long ago, like maybe give us a little bit more background on -- in you and your role?

Sure.

And then we can go into kind of more the subjects of...

You bet. Yes. So I've been at SAP coming up on 2 years now. And kind of the role I own is solution management, which is especially looking at what the growth opportunities are; where we might want to enter, where we want to invest, maybe deinvest, kind of mapping out that opportunity; working on what is our growth plan for that category; things like build, buy, partner. I'm just [ thinking ] earlier, meeting with our venture arm, kind of investments in that area. And then once we decide where we want to go invest and build or partner, then taking that and translating our investments into customer value and then on kind of all pieces of marketing, go-to-market side of it, so value prop into marketing. And then government relations, so kind of that whole remit. But previously, I spent 20 years at Microsoft, last 6 doing -- leading the business side of Azure, so a lot of hyperscaler background. And then actually before that, about 8 years helping Microsoft transition Office to Office 365 and that big cloud transition on that front. So when I saw the opportunity at SAP, big transformation and a shift in that area. It felt like it's such a great fit and a good opportunity to kind of do the next big transformation change in technology.

And on that note, like if you think about it, like so we talked earlier outside, like I'm -- I worked at PwC, at [ IN ] and the one thing that always struck me is like how mission-critical SAP is. Like at Microsoft, which were important, but like if the SAP and like, yes, you don't want to have to [ the Microsoft suite ] go down. But the SAPs were even more mission-critical. Like if you think about now, like coming from Microsoft and seeing that now, like how do you think about that special customer relationship that you have and the trust that you kind of need to kind of build up with the customers or have with the customers?

It is different. I mean SAP systems, like you said, are some of the most mission-critical. And actually, you made me think of this moment when I was leading on the Azure business at Microsoft. And Amy Hood, the CFO, we're moving Microsoft SAP system into Azure. And I mean she sat down and she's like, "If this thing goes down, we don't report to the Street." Do you understand what that means? It was before I was at SAP, obviously. But it made me realize like the consequence and the importance of SAP systems. And so in it, I mean, I think the way we invest and work with our customers, I actually -- I look at it much more as a partnership, and it is pretty unique. And I actually think coming a little bit from the outside, one of our most the differentiated and strategic assets at SAP is how we engage with our customers and that level of commitment and trust and our relationships are in decades. And it's a big decision, and so it has to be a 2-way. And so you step back and like what do we do that's different than others? First, how we build our products. We actually bring our customers to the table with us. We have a really well-honed approach we called co-innovation, where we work with leaders across industry categories, bring them together in advisory councils. And they really do kind of codesign and make sure that we really understand if they're in retail or if they're in automotive or if they're in energy what those core processes are in need. And so as we're working and developing technology to digitize that and streamline that and automate that and building AI models to advance what they're doing, that it were very much with us. And it's great for us to get that depth, which is quite unique for most technology providers from the business understanding. And then we also get proof that it's going to work in the real world, right? So we're not building tech for tech's sake. So starting there, right, that's how you earn their trust and the credibility to be building mission-critical aspects. So then as you go from the development to how we actually go to market, everything is about customer lifetime value. That's the -- what we speak as we think about it, how we talk about it. It isn't just do the deal, but how are we creating lifetime value. An example, SAP innovated one of these areas that others have replicated called value advisory, value engineering. So we sit down, really understand what the transformation or the objective that the customers are trying to do and then come up really like at depth level, understand give quantitative outcomes that they can bank on and set their business cases around. And then that's kind of the map in the guide, and then we work towards getting that there. And then, of course, in the run phase, we've seen in the cloud. We do all the things of security, performance, reliabilities. That's expected. But in addition, we have this incredible services and support organization that is 24/7 global. And we're constantly monitoring, right? But your SAP systems go down, it can't be down for hours, right? If something is going wrong, it has to be really handled immediately. And even just sitting on the Executive Board, the 7 of us get daily updates of every single customer escalation and exactly what's happening, where is [ Josh ], who's assigned. And so again, that level of visibility is required and earned to get the trust of our customers. So again, it's like we really understand the role we play and where we sit in that technology stack and the mission-critical nature of that. So from the beginning to kind of continuing run time, we have a pretty unique -- and again, I think it's one of our secret sauce of our success and are enduring kind of the trust that we have with our customers.

How does it -- like since you have the role on the marketing side as well, like how does that make a difference than on marketing? Like when classic business call marketing, you oversell your product and then off you go and try to sell as much as possible. At SAP, it's a different one because it's kind of more -- it seems more like value selling. It's more relationship building, et cetera. Like when you kind of came over, like what was the kind of the realization or the learnings for you there?

Well, actually, it's one of the reasons I chose to join as I was learning about SAP and investing. I'm like there's so much value we are offering our clients that people in the external world aren't really seeing, right? It is very understated, I think, in our -- in the core of we do. I mean there's always been big promises, and you've seen that in past leadership, of course. But I think there's a lot more credit we can take in very meaningful, deep ways. And there's -- people say, "Oh, how are you innovating?" And there's funny thing as I was looking around for innovation we're doing. And of course, there's great AI and automation. But one of the things our customers actually tell me most consistently that they love about our innovation is that we do every year about 2,000 updates to kind of the tax code, compliance, policy changes, government regulatory changes to ensure that their financial systems and their financial reporting stays compliant and current. And they're like, "That's amazing innovation. That changes my company." And tax updates and governance isn't like sexy, but it's so critical. And again, we do that better than anybody, and so there's some of that opportunity for people to see the value. And one of my opportunities from a marketing perspective on that hat, to really see how do we showcase that in those outcomes that we drive for customers.

Yes, yes, yes. Okay. And then switching gear a little bit, like so your cloud portfolio is evolving nicely but -- and it's not like a very broad-based portfolio with like lots of different components. Like if you think about the -- what SAP is offering and how they are offering is, like how do you bring this all together?

Yes. And then just for a second on the whole portfolio because it's vast. It certainly starts -- the bread and butter and what we're most known for, the core ERP, right, financial management, asset management, supply chain planning. That's the core, which, of course, we have -- we talked about the kind of cloud offerings we have there. But then built around that and then extend it from there, basically have an application portfolio that touches every, I'll call it, core business process that runs the company. So in HR, from the hire to retire, learning, all of that life cycle. Procurement, direct procurement, indirect procurement, travel, expense with a Concur application. Business network, almost $1 trillion of commerce goes through our business network, the world's largest B2B business network piece of it. And then into our -- all the way into the customer experiences. So from an e-commerce. We had a huge Black Friday, by the way, massive commerce transactions recently. That went well, thankfully. And then sales, service, marketing, so kind of all those pieces of it. And then I think maybe one of our most held secrets is our business technology platform. I think we're known for being an application portfolio, but our platform has really developed in a way that's become quite robust. So -- and that's that glue that keeps -- that provides value across the portfolio. So our data analytics capabilities or how you do all your integrations with all the other systems that SAP systems need to work with, of course, because it's a big heterogeneous ecosystem. AppDev. So we only want to do is extensions and customizations. And then our no-code, low-code workflow automation portfolio, all of that at a platform level. And then in the past handful of years, 3, 4 years, we've built on top of that a really robust set of industry-specific solutions. Obviously, our ecosystem builds most of them, but we build quite a few. And then sustainability, we're actually starting to build up an arsenal of sustainability specific solutions as well across that area.

And coming back to that sustainability later, but the one thing that I want to talk to you about is like if you think from a simplified story to say that now like U.S. investor perspective is like the SaaS. Like the U.S. names in airline, we're doing SaaS and whatever. But for you, it's -- like if you think about like how build-out SAP is in the different industries and with the different industry-specific flavors, et cetera, like your approach to kind of cloud subscription must be different. Like -- because like you can't just do like, yes, everyone is in the same solution, good luck. Like how do you kind of bring that like across? Like -- and is it maybe much better understood in the customer side than on the investor side? The investors go like, "Oh, SAP is not kind of as early in the cloud as the other guys." I guess customers might understand a lot better like...

Yes, investors do and like, "SaaS, it's all SaaS, right? It's simple." ERP, again, starting with one of the most complex, mission-critical systems that's never been created in technology, right? So it's going to be a journey, right? And it's necessary for us. We can't have a one-size-fits-all approach. But of course, and just be really, really clear, we see the world ultimately. And what we're building is about getting to a pure SaaS model with even with ERP. But it's a journey, right? And I think for those of you who aren't ERP experts, like the simple way I'd explain it is, if you go to any company in the world, they basically have a whole bunch of business process. 20% of them, 10% to 20%, are actually really differentiating. They make their business unique. They create unique differentiated value. They're worth totally invested in and customizing, 10% to 20%. 80%, they should just use the industry standard. They're not differentiating. They're not creating unique value. They -- we create the benchmark based on all of our work within the industry and continue to augment that. The reality is, though, humans, they believe 80% of what they do is totally unique and needs to be deeply customized and absolutely tailored to exactly what they want. And so our systems and over the past many years, our on-prem systems, you can customize them. They're fully open source. You can do almost anything you want to them. And so you have a bunch of business leaders in human saying, "Like 80% of what we do is super unique. We got to customize it. We got to do that." And that's what you get from an IT system, right? You get heavily customized, heavily tailored. And that's been kind of the lived experience, I'd say, of a lot of our customers on-prem, right? So then fast forward, cloud. We have to think about how do we transition that and how do we get them to -- we talk about clean core. Basically that means kind of getting all of those customizations back to standard, really understanding what is unique and what's not unique. And one of the acquisitions we did a couple of years ago, a company called Signavio, now SAP Signavio. It's a really powerful weapon in that because it actually analyzes business processes, benchmarks versus standard, really understands where that's unique, where it's not, how you get back to standards. So that's the kind of really important part of the arsenal, you get back to that. But that's -- but because of that reality, that's why we've offered our S/4HANA cloud private editions, right? Because we can enable and support more of those customizations, more akin to the on-prem because it's kind of a dedicated instance in that way. But our S/4HANA cloud public edition, pure SaaS. Again, you can configure it. Lots of configuration capability. But extensions, the tailoring, that all happens via APIs and sitting on our business technology platform in a cloud-native way. So the go forward and what the future looks like, and if you're starting now, of course, you're going to go public edition, and you're going to use all of the cloud native extensions. And we have over thousands industry applications in our SAP store that can give you all the unique things you might need for just your industry or just your business process. So they don't -- they exist. Really, it's really -- I think from those who have kind of grown up over the years, it's about a mindset change with our customers. In all of my past life, whether it be the transition of Office to Office 365 or building up Azure, I'm like the tech is not the hard part. The humans, they're the hard thing to change and that mindset and just the customers that I work with day in, day out. It's all about how do we make sure that the business stakeholders -- only -- we're only putting in kind of customization investment where we really need it and that rigor, the governance, the discipline to do that. So -- but even our most complicated customers, all of them are increasingly using our public edition in certain places and pockets. Like everyone has seen, of course, that's where this is going. I mean customers need the latest and greatest innovation that SaaS provides. They want those updates. They want the latest AI to automate and capabilities. So it's just the journey to get there and doing it in a way that works with all the -- it's a huge range of customers from the world's largest down into mid-market, and so making sure we have flavors for that.

And then I'll come to you in a second. The -- how does RISE fit in there, like RISE with SAP. Like -- because that seems to be like a big program to that number, yes.

Yes. Essentially, RISE is our way to basically provide -- to basically make something that feels really complicated and scary, simple and comfortable, right, at the meta level. But really, it is that guided journey of moving to the cloud and adopting and modernizing your business processes, right? And so again, it starts with our Signavio solution. That kind of x-ray vision into your business processes, understanding where the opportunity lies, where you want to focus, where you need to transform. Like so many customers we're working with have shifted or needing to shift from being a product company to a services company. That changes all of your processes, subscription models, business, servicing, billing, all of those things. So how do you do that, right? And as you do -- and working with us on the cloud transformation helps customers go there. But again, with -- it's a trusted partner relationship is how we think about it, and RISE kind of gives that kind of guided white glove journey for our customers. The interesting thing is, I mean, I think we originally incepted -- or the inception of RISE is thinking about our existing ERP customers from on-prem to cloud and making that a really comfortable and safe experience for them from a mindset perspective. But then we've seen, and about half of our new RISE SAP customers actually knew. I know, which I think we, at first, were like, "Huh." But it's -- we're finding that so many customers are -- want that experience and that trusted partnership and that kind of curated experience when you're thinking about your -- the core processes that run your company.

Yes, yes, yes. And it was actually one of my questions I still wanted to ask. If you think Signavio, like is that now -- is that kind of in a way now part of every deal because like it kind of really helps you to identify where you need to change, what do you need to do? And so -- and is that like a selling product? Or is it like it's part of the service that comes with RISE?

Yes, we're finding that it's become kind of a standard part of all of our kind of presales or our value advisory engagements as we sit down with the customer and understand where they are. Again, it's a way to just quickly drop in. And for the -- whether you're the IT or the business leader, saying like, "Do you know that our, whatever, order-to-cash system takes 3 months when the average company takes 10 days? What are we doing?" Like what -- there's money just sitting there waiting, right? And so it gives you those really quick wins to understand and make the case. Like, okay. Well, I really do -- I didn't know that I needed to make this change, but now I really do because I'm leaving how much money on the table. It's costing us 3x the industry standard. And so it's become a really insightful and useful tool in the kind of preplanning phase of thinking about any of the SAP systems and, of course, core ERP. But then once you're into the whole life cycle of transformation and where do we need to transform, it's kind of a continual tool as well to make sure they're getting the insight and optimizing their processes.

Yes. Amit is going to make a quick question in.

Sure.

Just one question back to the point that you were reading about.

Hang on. Just one -- I think there's a mic coming.

Yes. So just wanted to go back to the point that you made earlier on, which is that about 20% of the ERP system is really customized and of like high value to the end consumer. Historically, when it was on-prem, you had lots of like APIs, which meant for SAP that the customers could basically never leave SAP because of like all of those APIs. So in a world where you are a SaaS company, where 80% is sort of like standardized, does that lower the barrier to entry? Or can the business face higher churn because it's more like standardized?

No, I see. And just to clarify, the 20% of a company's business processes are truly differentiated and if you look where they're kind of really getting more value. Now again, most companies, when you ask the business people, they're like, "No, no, 80% of what we do is customized," right? That's why they've so deeply customized the system. It's not about the ERP. You can do anything you want with the ERP, as you've seen people do. So I think to your point, the more customized, the stickier. True at some level. But it's really about fundamentally running your business processes effectively. And again, we've seen the value of being on a cloud is it because you're getting the latest and greatest innovation. You're getting things that can only run at scale, like AI models that are kind of data-intensive. And so I think as they move to a SaaS model, you're still getting the configuration and the customization through cloud-native APIs and managed and running on as a BCP platform. So they're not creating the inability to keep the updating new innovation, but you're still getting that tailoring you want. So I don't think it will change like they're stuck with us, and so they'll never leave necessarily. And then that -- I mean, obviously, that comes down to like, are we meeting their needs better than anyone else? Are we kind of giving them the service and the experience that they want? I don't think I see a big churn difference there. And it's also like even though it isn't a SaaS model, like you're talking about the core way of business runs. You don't mess with that unless you don't really have to.

Yes. Actually, since I was at PwC, like the business processes, like everyone is so different. Like not tangible. Like each industry is different, and I haven't seen anyone that is like SAP like in terms of being able to handle all of that. Oh sorry, one more.

You've talked about converting $1 of maintenance to $2 or $3 of cloud when somebody goes through a conversion. I was just wondering, could you talk to us about -- so customer bill obviously goes up meaningfully in that scenario. Can you talk to us about where they drive savings? Like how do they justify growing their spend with SAP in that case?

When I think about -- I mean think about when you shift from running all of your own systems into running in a cloud solution, right? You're taking over all of the whole entire stack, right, from the run time, from the data center to the operations, to the maintenance of the systems as you shift over to a cloud model. So I think that ratio, if you think of anything shifting from an on-prem solution to whether it be just running on a hyperscaler or into a full SaaS, you see the whole kind of cost shift over on that piece of it. So -- and then I think there's that -- and then on top of that, particularly as RISE, which is the kind of the numbers you're quoting, is we're also helping with ongoing updating, maintenance. And we know how to do it better than anyone, right? This is our code. This is our system and versus having the customer paying PwC or others or in having to maintain internal talent around that as well, and so there's also just internal maintenance ongoing systems piece of it. And then on top, where there's value of, well, I'm getting -- upgrading more often, I'm getting more capabilities, I'm also getting more value, too. So there's the savings, but there's also the value you get on the overall model.

Last few minutes I wanted to spend on -- you mentioned earlier sustainability. Like SAP is a European company. Like sustainability, it feels a little bit, it starts in more in Europe. It's coming more to the U.S. now. It's coming up in my conversations. Like what do you see in terms of customers? What are you offering to customers? And what do you see in terms of their interest there?

Yes, I do think -- I mean as SAP being a European headquarter company, I do think we're -- we've gotten on this area quickly and in a good way and very much leading. But I'd say even to COVID and all the things that are going on and macroeconomic sustainability, it's still a top 3 priority for literally every single business leader we meet with. So it is important. I know even in the U.S. But I mean regulations are coming fast and furious. Demands from customers. Employees are continuing as well. And the interesting thing there is we've seen consistently the data show. It used to be a false premise that running a sustainable business was less profitable. We actually just did a recent customer survey. 75% say actually driving sustainability is driving increased profitability as well. So they're actually aligned. So I think about circular economy, think about supply chain optimization. It's actually a win-win when you're running more sustainably. So for several years now, we've been investing in the core like in our core ERP -- like because customers came to us and said, "You manage my finances, my top line, my bottom line. I need you to manage sustainability like this same, and it has to be part of how I run my company." So if you look at S/4HANA, building things in to help manage what we call the green line, urban counting, tracking, thinking about employee health and safety, those core aspects of that, whether in the B2B network, putting -- starting to bring visibility into carbon footprint of the suppliers you're picking or assuring that there's no labor violations going on in their supply chain because we need to be able to report those things. So we're building sustainability measurement management into the core of our products. And then additionally, as I mentioned, we're incubating a new set of very specific just for sustainability solutions. So our control tower, bringing metrics across all the different parts of your business process. As you can see, dashboard. Right now, all these CEOs and leaders have put up sustainability metrics and goals. But they're like, "I'm not exactly sure how I'm going to know where I get there." So starting with the measurement piece of it. And then things like we have an application for basically helping you design a product from the beginning to be more sustainable or thinking about the end state and the circularity at the end from the beginning, so kind of a set of very specific sustainability actually. We kind of package it all up in our cloud for sustainable enterprises, and we'll see that get more robust and again really doing that in co-innovation with our customers, They're helping guide us on where is the most important need there.

And then last question, and I think I need to let you go. If you think about like -- if I look at your numbers this year, kind of really good solid quarters. Everyone is really nervous about and demand, but you actually look like you're delivering. You're out with customers. What are you hearing from them at the moment in terms of like the current state and what to do there?

Yes. I mean we're all reading the trying to read the tea leaves. So I mean, I think things are looking steady, right? And again, I also -- I get asked by somebody, if you think about what SAP does, ups and downs, transitions, what we -- the role we play in the world is pretty durable, right? You need to continue to innovate your core processes. I mean -- and think about like supply chain. We run so many of the world's supply chain systems. There's just desperate need to be refactoring supply chains going from global to regional, a lot of big need there on that front. Sustainability, like I said, still staying a very hot topic. So we're seeing consistent steadiness. And again, I think we've been clear about our plans and as we set expectations 2 or 3 years ago now and showing up and delivering and kind of continuing on that path. I think maybe the only insight is we're seeing some of the deal decisions have to go up to more senior levels and maybe more oversight and scrutiny, so maybe a little bit more time on some of them. But overall, the pipeline still looks good, steady as she goes on in terms of seeing the growth.

That's really good news. Closing statement as well. Thank you.

Yes, absolutely.

Thank you, Julia.

Absolutely.

We really enjoyed our conversation. Thank you. Thank you.