SAP SE (SAP) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the SAP Q1 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn over the conference to Anthony Coletta, Chief Investor Relations Officer. Please go ahead.

Good afternoon, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; CFO, Dominik Asam; and Scott Russell, Head of Customer Success. On this call, we will discuss SAP's results for the first quarter of 2023. You can find the deck supplementing this call as well as our quarterly statement on our Investor Relations website. During this call, we'll make forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including, but not limited to, the Risk Factors section of SAP's annual report on Form 20-F for 2022. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-year at constant currencies. Non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Before we start, I would like to welcome Dominik, who joined SAP as our new CFO in March. It is great to have you on board, Dominik. I know the financial community is very much looking forward to speaking with you. I would also like to call your attention to our upcoming financial analyst conference, which will take place on May 16 as part of our Sapphire event in Orlando, Florida. This will be broadcast on our website. And with that, I'd like to turn the call over to Christian.

Yes. Thank you, Anthony, and thanks to all of you for joining our first earnings call of 2023. This has been a very good Q1. We continue to see strong demand across our portfolio with customers choosing our solutions to solve their most strategic and pressing needs. The strong momentum is reflected in our top line numbers. Current cloud backlog stands at over EUR 11 billion, up 25% this quarter. Cloud revenue grew 22%, up from 21% last quarter. For S/4HANA specifically, cloud revenue grew 75%, and current cloud backlog grew 79%. This strong performance has led to total Q1 revenue growth of 9%. And importantly, in Q1, we delivered double-digit operating profit growth, demonstrating the significance of Q4 2022 as a tipping point of our transformation. We have now entered a new phase. Our innovative portfolio is at the heart of our continued growth. In 2023, we are continuing to execute on our focused growth strategy with S/4HANA and BTP at the core. Our announcement in March that we came to an agreement to sell our stake in Qualtrics is an example of this focus on our portfolio. We believe that these transactions will unlock significant value for both companies and their shareholders: for SAP, to focus more on our core cloud growth and profitability; for Qualtrics, to expand its leadership in the XM category that it pioneered. This quarter, we also introduced powerful new offerings and innovations to help our customers generate significant new sources of value from their IT investments. I'd like to cover 3 examples: GROW with SAP, the launch of SAP Datasphere and the work we are doing to embed AI across our portfolio. Let's start with our new offering, GROW with SAP. We see significant growth potential with mid-market customers new to SAP. These are the companies that we expect to experience significant growth as they build their businesses. This new offering, GROW with SAP, provides them with a native ERP solution that can grow and scale with them with agility and speed. It includes our leading cloud-native ERP solution, S/4HANA Cloud. Through rapid adoption services and our modular stack, mid-market customers can go live and see rapid results within weeks at a fixed price. GROW with SAP also includes SAP Business Technology Platform, so customers can design and automate business processes in a cloud-native way using SAP Build and create industry or LoB-specific enterprise apps without writing code. The second game-changing offering I'd like to discuss is the launch of SAP Datasphere. SAP Datasphere collects and federates business data across a customer's entire landscape, no matter where the data resides, including data from SAP and non-SAP sources. Importantly, this is not only a technical integration. Datasphere enables the business data fabric a powerful, semantically rich layer that builds the foundation for managing and steering the business end-to-end as well as applying AI based on high-quality, contextualized business data. Our engineering teams are working closely together with 4 new strategic open data partners, Collibra, Confluent, Databricks and DataRobot, to integrate with SAP's Datasphere and deliver a superior data and AI layer for our customers. Datasphere is a great example of the power of our ecosystem-centric strategy. As another example, today, we announced our partnership with UiPath to offer the UiPath Automation Platform to customers, which builds upon the strong momentum of SAP Build Process Automation. UiPath is also committed to their continued adoption of S/4HANA Cloud to run their own business operations. Finally, let me touch on our efforts to embed AI across our portfolio. Our AI is built for business with AI capabilities built in to deliver strong business outcomes for our customers' most critical business functions. And with Datasphere, we laid the strongest data foundation in business. We are in advanced stages to apply generative AI across our portfolio, and we are working as an early release partner of OpenAI and together with other vendors. We are planning to announce new disruptive AI use cases. Stay tuned for Sapphire. Let's now look at how our strategy and the strength of our portfolio and innovation is addressing the specific needs of our customers in today's challenging macroeconomic environment. SAP's strategy is geared towards a world where business transformation is foundational to their success, both now and in the future, where every organization benefits from being part of a collaborative network able to effectively manage today's supply chain challenges and where everything can operate sustainably. Our offerings provide a pathway to solve many of the fundamental challenges that companies are facing today. This is behind the strong customer momentum we saw in Q1. RISE with SAP has become the preferred choice for customers transforming their businesses in the cloud. We are developing deep, broad-based partnerships around the globe. Here are some examples. In January, we announced the expansion of our long-standing partnership with BMW Group. This will help them accelerate their digital transformation and manage their end-to-end business processes in the cloud. Henkel has selected RISE with SAP to transform their digital landscape and move to the cloud. Dolce & Gabbana, the [ renewed ] luxury goods leader, recently chose RISE to drive their finance transformation. And HP, the global technology leader operating in more than 170 countries, selected RISE with SAP and expanded its investment in Q1 to support business transformation for its customers around the globe. This quarter, we also saw significant enterprise go-lives for RISE with SAP, including AMD and Air India. With S/4HANA public cloud, we are seeing strong adoption across the broad range of enterprise mid-market and start-up customers. Significant enterprise wins for S/4HANA public cloud include NEC Networks & System Integration Corporation and the benefits and reward services activity of the Sodexo Group, a global leader in employee benefits and engagement. We are also seeing strong adoption for S/4HANA public cloud and GROW with SAP with start-ups and companies new to SAP. Examples include the French aeronautic start-up, Flying Whales; in the U.S., NineDot Energy, a sustainable energy provider who got up and running in just 10 weeks; and REPETCO, the European plastics recycling company. We continue to also see excellent cross-sell and upsell through our success with RISE with SAP and S/4HANA Cloud. Our solution area momentum includes HCLTech, one of the world's leading technology companies, leading their HR transformation with SAP SuccessFactors, a competitive win against Workday; Hitachi High-Tech Corporation of Japan; and [ Prawn ], the Mexican food company, choosing SAP Business Technology Platform; A.S. Watson, the world's largest health and beauty retailer, renewing their investment in SAP Commerce Cloud; and continued momentum for our sustainability solutions, SAP Sustainability Control Tower and SAP Product Footprint Management, including the adoption of SAP Sustainability Control Tower by Soleum, the Brazilian producer of sustainable raw materials. Let me turn now to our outlook and ambitions. These customer examples show how SAP is continuing to deliver despite the continued challenges being faced across nations and industries today. This is because our vision is directly tied to solutions that fortify our customers against those challenges and lead to stronger companies. Our strategic transformation has reached a new phase where we are now a force for transformation across industries worldwide. We remain committed to our 2023 guidance updated to reflect Qualtrics as a discontinued operation. We plan to update our 2025 ambition during our Sapphire Financial Analyst Conference on May 16 and look forward to talking with many of you there. In closing, we see significant opportunities for continued growth based on our own transformation into a leading cloud company. First, the strength of our current cloud backlog provides the foundation to grow and scale through increased upsell and cross-sell to our existing customer base. Second, we expect that our new offerings will power our growth in new markets and with those customers new to SAP, for example, with mid-market customers. We have a leaner and more agile operating structure. And our game-changing solutions are creating sustainably end-to-end business processes across industries. We are off to a good start in 2023 and remain optimistic about the unique value we offer our customers. Finally, I'm, of course, very happy to welcome Dominik Asam to SAP, our new CFO since March 7. Dominik, welcome to SAP, and welcome to your first earnings call. Over to you.

Yes. Thank you, Christian, for the warm introduction. And good afternoon, ladies and gentlemen. It's my pleasure to speak with you for the first time ever as SAP's CFO, and I look forward to meeting as many of you as I can over the coming months. I'm delighted to join Christian and the rest of the management team and to actively contribute to the continued success of SAP around the globe. First off, in March, we announced the sale of our stake in Qualtrics, which is now pending customary regulatory clearances. As such, all numbers today are based on continuing operations, i.e., excluding contributions from Qualtrics. That said, fiscal year 2023 is already off to a solid start. In the first quarter, current cloud backlog and cloud revenue grew sequentially, while non-IFRS operating profit was back to double-digit growth in constant currencies. Cloud revenue was EUR 3.2 billion, up 22% year-over-year. And the trend towards larger cloud transactions continued with deals greater than EUR 5 million in value contributing 45% of our cloud order entry. This was driven by RISE with SAP. Software license revenues saw only a moderate decrease of 13%, mainly due to the favorable phasing of a few major transactions. Now let me talk and walk you through our financial performance. Current cloud backlog was EUR 11.1 billion, continuing its growth at scale by 25%. And S/4HANA current cloud backlog growth kept its strong momentum at 79%, driven by the strong adoption of RISE with SAP. In Q1, we added more than EUR 200 million to our S/4HANA current cloud backlog, leading to a total of EUR 3.4 billion. Our combined SaaS and PaaS portfolio continued to grow by 25%, with the SaaS cloud revenue up 22% and PaaS cloud revenue up 45%. This continued cloud momentum was again fueled by the strong contribution of S/4HANA Cloud and the Business Technology Platform. Supported by the underlying performance across all our revenue streams, total revenue was up 9% year-over-year, staying on the right trajectory. Now let's take a brief look at our regional performance. In the first quarter, all regions delivered a robust cloud performance. Brazil, Germany and India achieved outstanding cloud revenue growth, while China, Japan, Mexico, the Netherlands, Switzerland and the United States performed particularly strong. Now moving on to the bottom line, our cloud gross profit grew by 27%, so 5 percentage points faster than the cloud revenues, driven not only by cloud revenue, but also further efficiency gains. This resulted in cloud gross margin improving from the year-ago period, expanding 2.9 percentage points to 71.4%. In the first quarter, IFRS operating profit decreased 45%, primarily driven by the increase in share-based compensation expense by EUR 434 million, mainly reflecting the increase in our share price over the first quarter this year as compared to last year's decline over the same period; our targeted restructuring program of EUR 260 million; and finally, EUR 170 million provision for pre-existing regulatory compliance matters. Finally, non-IFRS operating profit grew by 12%, evidencing our return to more profitable growth in the future. Earnings per share in the quarter increased by 8% to EUR 1.08. For IFRS earnings per share, please also keep in mind that the sale of Qualtrics is expected to be accretive to earnings per share. And significant stock-based compensation expenses, including grants related to its IPO, will be removed with the divestiture. The IFRS effective tax rate of Q1 was 40.5%, and the non-IFRS tax rate was 28.3%. Now looking to our cash generation. Free cash flow for Q1 came in at EUR 1.95 billion, down 9%, mainly due to the impact of the sale of trade receivables in the fourth quarter last year, which was weighing on Q1, and some first cash-out for our restructuring program. If adjusted for these effects, the underlying cash flow development was positive compared to the prior year, actually quite in line with the increase in operating profit. Now let's move on to our financial outlook. Let me reiterate that we have now reflected the anticipated sale of our stake in Qualtrics and have updated the outlook accordingly. We are reaffirming our 2023 outlook for underlying continuing operations. Keep in mind, the disposal gain realized upon closing of the Qualtrics transaction will be included in profit after tax from discontinued operations. This will not impact operating profit and free cash flow for continuing operations. So please refer to our quarterly statements for additional details. Let's now discuss our nonfinancial targets. Our greenhouse gas emissions were 0 kilotons. We continue to be on track to be net neutral in our operations this year and are on track to achieve net zero across the entire value chain by 2030. SAP has successfully closed a new sustainability-linked revolving credit facility with a volume of EUR 3 billion and a tenor of 5 years, plus 2 1-year extension options, replacing the existing EUR 2.5 billion facility. In line with SAP's strategic commitment, a sustainability component has been embedded for the first time that links the margin of the new facility to the company's net zero carbon and women in management ambitions. So our Q1 results give us confidence that we are moving in the right direction and are in a good position to achieve our goals for the year. We continue to build on our cloud momentum and remain focused on ushering our customers into the new digital world. Before moving to Q&A, I would like to say that we are very much looking forward to welcoming you to our financial analyst conference where we will provide updates to our 2025 ambition. As Anthony mentioned earlier, it will take place in conjunction with Sapphire in Orlando, and I'm looking forward to meeting you all there in person. Thank you. And we'll now be happy to take your questions.

All right. Thank you. [Operator Instructions] So operator, please open the line.

[Operator Instructions] So the first question is from the line of Stefan Slowinski with Exane BNP Paribas.

Welcome to Dominik from the SAP analyst and investor community. Looking forward to discussing with you. So just to jump in with some questions for you, just one quick question and a follow-up. SAP had already indicated that they expected double-digit revenue growth in 2024. Based on what you've seen thus far in the Q1 performance, do you think you're still on track for that? And just a quick follow-up would be, when you look at the free cash flow and the conversion at SAP, what's there in terms of low-hanging fruit that you see that you can take advantage of to improve the free cash flow performance?

I can start, and Dominik, you can build on top of it. I mean with regard to the question, Stefan, around the double-digit total revenue growth, I mean, Q1, we were pretty close to it, I have to say, with 9% at constant. And look, I mean over the course of the year, we expect a continued strong cloud momentum. So the weight of our cloud revenue will become higher and higher. And I guess it's fair to say from 2024 onwards on, SAP will deliver total revenue double-digit growth as we just have such a high recurring revenue stream, and it will become a more and more predictable business. And with regard to the cloud revenue itself, maybe one last word there, I actually have to congratulate Scott and the team. And also, Scott, congratulations to your contract extension where we're happy to have you on board also for the upcoming years. I mean with the launch, as what I just mentioned, around SAP GROW and Datasphere, I mean we are also expanding now our innovation pipeline. And we actually will also harvest new bookings growth sources for the quarters to come. So we are actually very confident with regard to the total revenue growth and double digit in 2024 onwards on.

On cash, I think -- I mean, first and foremost, if you want to improve cash, you have to increase profit and the kind of cash-related part of the profit. So that's about cost management, but I want to say that's kind of well embarked in our guidance. If you want to talk about cash conversion, then you have to look into stuff like working capital. I know that in this context here, we have discussed prepayments to certain suppliers. We have also, of course, the accounts receivable. So collections is a big topic. And yes, I do want to put more focus on that because I do believe there is some potential to secure a better cash conversion. And also, our intention is really around the Sapphire Conference to give you a little bit more logic behind how the kind of profit converts into cash in our business model. So that's something I have on the agenda very clearly.

The next question is from the line of Frederic Boulan, Bank of America.

Christian and Dominik, welcome as well from my side. If I can ask a question more at the macro level. We've seen a number of peers in the U.S. and elsewhere experiencing some slowing demand. So you seem to be flagging still very strong growth in the U.S., Germany, a number of Asian countries. So can you maybe explain a little bit whether there's a shift in the type of projects, the demand you're seeing, any verticals or regions where there is some change in dynamics, any reprioritization of projects? I mean cloud, in particular, it's a big ticket for organizations. Are you seeing any shift in the pace of demand for that? Or on the contrary, the kind of underlying trends remain very much unchanged?

Yes, maybe I'll -- Christian, I'll start. This is Scott here. So I'll start and then maybe if you've got any additional comments. So first of all, I guess there's a -- the macro conditions, SAP is not immune to the macroeconomic environment that we're all experiencing and the uncertainty. But I think there's a couple of key points that we are seeing, which is reflected not only in the results that you see in Q1, but in the outlook and the pipeline that we have. Customers are focused on the main thing. They are focused on their mission-critical processes, workflows, data to be able to serve their business. They're looking for profitable growth. And to achieve that, they need to make sure that their underlying technology, the architecture being delivered in a reliable, scalable, innovative way in the cloud is able to be rendered. And that's why we see such strength in S/4 cloud, both in our public and private additions. And it means that they're able to get the agility, they're able to handle uncertainty that the markets are undoubtedly presenting to them. So whilst there might be different conditions for other cloud properties when it comes to the core business processes and doing so in a reliable, agile way, there is no doubt that, that demand continues to be strong and we certainly have a positive expectation. The second is what Christian mentioned before, and I just want to reiterate the importance of the launch of capabilities like Datasphere. Companies are not only looking to be able to have their mission-critical capability, but then they want an agile, innovative platform that they can get insights from that data real time to be able, with SAP and non-SAP data, to make better decisions, more timely decisions through their business process. So the infusion of AI, the infusion of the orchestration with their open ecosystem, we see strong demand. So I definitely see an expectation of shorter projects, shorter time line of engagements. There is no doubt that core process and data continues to be the key area, and that plays to SAP's strengths. That's where we're historically strong. And the outlook, notwithstanding the macroeconomic environment, continues to give us confidence going forward. Christian, I don't know if you want to add.

Look, I guess one important indicator is also just, I mean, we are reporting current cloud backlog ACV, but when you look at our TCV, the number is, of course, even much higher because especially our large enterprises, large clients, they really need time to fully migrate to the cloud. But I'm not aware of any single project where a customer now said, I'm going to stop or pause my ERP migration, my supply chain migration to the cloud. So also on the adoption side, we see continuous and seamless execution.

And I don't know if I may, but on that cloud point, any change in dynamics in terms of private versus public demand?

As Scott just said, I mean we have seen now an accelerated momentum in Q1. We reconfirmed our outlook for the year. We see a very healthy and strong pipeline for the year. So we're coming, thinking to execute strong in the cloud.

The next question is from the line of Michael J. Briest, UBS Limited.

You've obviously updated the guidance today for Qualtrics. There was a couple of things in the annual report which I guess were put there when Qualtrics was still part of scope. And that was current cloud backlog would grow at basically the same rate as last year, so 24%, and that you hope to be at a mid-70s gross margin in the cloud exiting the year. I wonder if you can address those 2 matters. I mean I guess Qualtrics is growing more slowly, so presumably, the cloud backlog growth rate should increase a bit from 24%?

Yes. I think on the upgrade of the -- sorry, the change of the guidance to continuing operation, we really tried to embark that one for one what was basically in the guidance of Qualtrics. And then what is true is that, of course, the cloud gross margin of Qualtrics was higher than group average. So that has a slightly dilutive effect in terms of one-for-one transmission of that. But we are driving the absolute cloud gross margin very hard here.

Yes. And I guess, Michael, important to note, what we also said last quarter is when you look actually in the second half of the year, but even more so next year, not only that S/4HANA and BTP are already growing stronger than Qualtrics today, but also our overall cloud revenue will also then over-pace the Qualtrics revenue. So we see actually in the outer years that it will actually help to accelerate our percentage growth rates, especially in the core business, but also for our overall cloud revenue stream.

Okay. And also, Dominik, I think the free cash flow guidance assumed that you would have a high triple-digit million factoring level in 2025. Can you just explain the logic of the factoring and whether it's something you think makes sense?

What I can explain is what we've seen to start with at the end of last year. So basically, we have 2 different types of transactions on the front. One is a very, I'd say, common vendor financing type of approach, I would call it, where we give very extended payment terms to certain customers who have liquidity crunches. And as we don't want to become a bank, frankly, because we have much better return opportunities in the operation business, we are selling these. So I think that's a practice which makes a lot of sense. And now on top of that is also some more, yes, from our side, induced factoring, which I need to look into, frankly. I understand this is embarked in the guidance. So it's not going in the numbers we have shown you on the cash flow update. We've done just an adjustment for Qualtrics, not for any change on that front yet. But we really need to stick our heads together also on that technique, whether that makes a lot of sense for us or not. Should we change that, then that would have, of course, an impact on the free cash flow one for one. It's quite straightforward.

The next question comes from the line of Adam Wood with Morgan Stanley.

And also, welcome, Dominik, from my side. I guess this is for you, Dominik. I think it's always interesting to have a fresh view on things from a new CFO. Obviously, you had to step in and assumed a guidance that had been made previously by the company. I think the feedback generally has been you seem to be more cautious on guidance in previous roles. Could you just talk a little bit about the work that you've done to get yourself comfortable with the outlook for this year and how you see that outlook relative to how you've guided and what you've looked at in previous companies and previous roles, please?

Okay. Sure. I'm not quite sure how I earned that reputation. I always try to provide as accurate a guidance as possible, as humanly possible. But still, of course, there's uncertainties around guidance, which also means that the further you move out, the more difficult it is to do so. So kudos to the team here who had the courage to go for that kind of '25 guidance at a time where they have entered into a very difficult transition. So I'm really impressed how closely we've been tracking to that now with the benefit of hindsight vision. Now of course, I get myself comfortable with that guidance. Otherwise, I wouldn't sit here and read it out to you. I think it has been very solidly derived with a lot of logic. And yes, I did spend quite some time on that. And I will now really focus, from now to Sapphire, on what's happening over the next couple of years. But so far, I'm very encouraged by the solidity and insightful way this has been derived. Don't forget there is this kind of already 82% of more predictable revenues. So that, frankly, makes it a little bit easier. And obviously, when you have a business model that has less uncertainty, it's also easier to predict and then you don't need to kind of put some cushion in for imponderability. So I think the quality of the business model is also part of how precisely you can guide or not.

The next question is from the line of Toby Ogg with JPMorgan.

And welcome from my side as well, Dominik. Just on the free cash flow, EUR 1.95 billion, I know we've talked about the various moving parts there, working capital restructuring, extra licenses in the quarter with a bit of tailwind. Just looking forwards on that, what specifically gives you the confidence that you can achieve the EUR 4.9 billion guidance for the year? And then just more broadly, Dominik, you talked about certain aspects of the working capital there. What are some of the other aspects of the business that are going to be a priority for you?

Yes. I mean, for this year, I mean, of course, we have a very, very detailed bottom-up process, which we kind of vetted extensively, and that comes to that kind of conclusion. On top of that, let's say, you can use some rule of thumb. I mean I already alluded to that in my intro statement. In Q1, if you really back out that kind of factoring impact, which was weighing on Q1, you back out the kind of mid-double-digit millions, which have already been paid out of the EUR 260 million restructuring plan, you're actually seeing that the cash flow is quite nicely kind of scaling in comparison to prior year with the improvement in operating profit. Now there's also a tax component you might want to consider. And if you do that same math from -- for the full year and you consider that, probably the full EUR 260 million will be paid out on the restructuring side and then you embark also that on the factoring side, you assume, well, we continue to do it, so no impact on that, you are in that ballpark. So I don't see why this should be a number that couldn't fly. And now we have to see, as discussed, what we do on the factoring, if anything, and then also what potential is there in the working capital to get something out of it. The other big kind of offset is, of course, the delta between cash settled and equity settled stock-based compensation where we have now the benefit that over time, there will be more and more equity settled. And then we have to think about how we cope with the dilution of that, of course. So that's another important topic. And last but not least, besides the working capital, there's always the question about, what do you amortize? What do you capitalize? So there is the bonuses on the commissions for new deals. And there is, of course, the capital expenditures we have to do. So this is what we need to analyze. And then what I'm trying to achieve is to really come to a simple model that what do we need? If we want to grow by EUR 1 billion of revenues, what is the kind of absorption of capital once we have reached this 2025 business model? Because I guess that is what kind of drives your valuation models, and this is something I really want to spend quite some time on in the coming weeks.

The next question comes from the line of Mark Moerdler with Bernstein.

Congratulations on the strong quarter when so many others are seeing weakness, especially in cloud. Dominik, welcome on board, and we're looking forward to spending time with you. We saw a really nice acceleration in the gross margin of the business platform. Can you give us more color on what is driving the margin improvement, how you see the trajectory of that margin going forward and how does this translate into overall S/4HANA Cloud gross margin?

Yes, Mark, happy to take that question. I mean, look, with every RISE deal, but actually also with every LoB deal we are going to sell in the future, the Business Technology Platform is front and center. We just also got a great Gartner rating that in the meantime, we have the best integration suite and we see an extremely high adoption, not only SAP to SAP where we are heavily criticized for on, which we really now fixed and now leading, but also to non-SAP. I mean you just have heard about all of our announcement, and we also have a very open API layer on the platform, which is really API first across all of our products. And then second, even more important, we see that, of course, our own services organization, but even more so the ecosystem where we have over 500,000 SAP consultants out there that they are doing with us the move from NetWeaver to BTP. And our promise is we are not only lifting and shifting ERPs and supply chains to the cloud, we are also transforming those and reduce complexity. And now when the whole application logic sits on BTP, the easiest thing is then to build all of these industry LoB extensions on the platform, which drives consumption, adoption and, with that, more and more cloud revenue. For me, personally, the BTP is one of the biggest growth assets we have in the years to come.

The next question comes from the line of James Goodman with Barclays.

A financial one from me to welcome Dominik. I mean there's a debate in the market on the OpEx intensity of SAP. You've got global peers cutting heads and costs. But of course, investors are wanting SAP to invest for growth. So I wondered if I could ask you about your first impressions around the sort of cost ratios in the business and maybe specifically what that means for the current restructuring program and how much of that needs to necessarily be reinvested in the business in your view. And also specifically on stock-based compensation, you explained why it's slightly elevated at the moment because of the stock price, that it's approaching 7% of sales. I mean should we expect that to trend back down towards sort of more 5% of sales over time in line with previous comments?

Yes. I think OpEx, in general, it's true that in comparison to what I've seen in prior industries, there are some things which strike you, which is a very, very high go-to-market cost, but I still need to learn better why that's necessary. I think as a customer or a former customer of SAP, I see there are so many well-entrenched customers where it's now really about what I call always gardening the situation as opposed to hunting. And normally, the gardening has to be a very technical discussion. But I'm sure that Scott will have his views on that. Research and development, we have a very broad portfolio. So I'm not sure it's totally comparable to real pure-play companies. But I think that's also the beauty of our portfolio that we can do that upsell and cross-sell. And then I also have the philosophy that on research and development, in every category you tackle, you really want to be leading in terms of the resources you can commit to that because the tech business is a winner-takes-it-all business, so we have to get careful on that front. And then admin, there's, of course, always opportunities to get some operating leverage out by growing without growing the G&A base. So I would hope to see the G&A base being diluted over time via SAP, via standing for productivity improvements, automation and we really have to lead by example here. So there's certainly some opportunities. Now stock-based compensation, I guess, I've of course done the kind of -- I've asked people how they came up with these kind of numbers and it makes sense. It is actually something that we clearly acknowledge as an economic burden. So it's not funny money, that's just not there. For me, as a newcomer to the industry, it's kind of baffling to see that all these other companies get away with kind of that non-SBC or pre-SBC numbers. So we have to think about what we do. We see that some large companies are changing the path there, and that's also something we have to make up our mind on. But clearly, that's a thing we need to watch and how do we avoid dilution to a larger degree for our shareholders.

By way of quick follow-up, could I just ask if the Board has reached any conclusions on the use of the Qualtrics proceeds?

First of all, the proceeds are not in the bank yet, so we are going to close that transaction in the second half of the year. And the answer is, frankly, no. But of course, it's an item we have on the agenda. And what I want to say it's, from my perspective, providing us with great optionality. I mean the deployment of that capital, what we can do with it, it's crystal clear. And so we need to establish our pecking order, so to speak. And of course, it also depends on the strategic part. So we have some colleagues in the room who are taking care of that. Again, coming here, what is very interesting is the huge organic growth opportunity we have. So I always like to be in a situation where M&A is a tool which can be done with kind of cold-blooded leap on the merits of the strategy. On the merits of the financials, we are not desperate to do anything because we have a strong organic growth opportunity. But still, there might be opportunities even with lower valuations, and that will play a role, too.

The next question is from the line of Amit Harchandani with Citi Investment Research.

Amit Harchandani from Citi. And welcome from my side as well, Dominik. Look forward to working with you. The question I have is with regards to how SAP is thinking about supporting not just cloud deployment, but also on-premise deployments going forward, particularly as it relates to driving through new innovation. There is still a significant proportion of your base that potentially needs to be migrated or is likely to want to stay on on-premise longer. So I would appreciate your thoughts on the same, where we are today, how much is left to go and how are you thinking about balancing on-premise versus cloud?

Yes. I can start and then, Scott, please also build on top of it. It's a very good question, and I'd love to answer it. And now, first, I mean, look, we have a huge installed base which is, first of all, a gift to have. And then second, what we now already communicated that there is the end of standard maintenance for all ERP releases lower than S/4HANA by the end of 2027. And I really would like to also say this today where we, clearly, there will be no extension of this time line. Because why? Because at the end, we want to also use our R&D capacity and investments in the most effective way. And there are so many new technologies which we really want to embark on that we really wanted to deploy those in the cloud where also customers, by the way, get the most value out of it just when we look at the announcements we are doing around Sapphire, around ChatGPT. And then you also have to see that the world is becoming more and more isolated. And we actually differentiate also against many others in the market around our investments into globalization, into adhering to local regulations, data privacy requirements. And this is, of course, what we're going to continue to do, but cannot continue to do for all the other releases out there below S/4HANA. And that's why we definitely want to stick to our commitment to not extend our maintenance commitment, standard maintenance commitment beyond 2027 for everything below S/4HANA. Scott?

Yes, the only thing that I would add, just from a customer perspective, Christian, just to add on the large installed base that we have, the customer base have already made the decision to move to the cloud, but what is really clear is their journey will differ. Their transformation journey differs. So a bit of a reminder with the move with RISE when we announced it, it wasn't just a target architecture of being in the cloud, but it was helping customers on a transformation journey that fit their landscape. Some will have a longer period of time in leveraging their on-premise architecture. Others go straight to a greenfield in the cloud using our public edition. No matter what the journey, there are other capabilities that SAP brings to the table. Christian talked about the platform of growth of the BTP. That is across all of our customer base, let alone our other best-in-class line of business applications and our leadership in sustainability and supply chain. So I guess my feedback is all customers are moving to a cloud-based architecture. They want the innovation, they want the ability for us to serve in a local regulatory-aligned framework, but also they want the innovation adoption at speed. And -- but then they've got a transformation road map with SAP, white-glove treatment to help them get there in their terms. I think that's different. Most other cloud companies will offer an outcome, but don't give too much guidance about how to get there. What SAP does is really leans into the journey, and that makes it much easier for customers to navigate the way forward and still benefit from where we're investing and innovating.

The next question comes from the line of Kirk Materne with Evercore ISI.

And congrats on the solid first quarter results. I was wondering -- I don't know if this is for Christian or Scott, but can you all just talk about sort of where we are on the cloud portfolio outside of S/4HANA, just where those businesses are? It looks like pretty stable, low double-digit growth. Do you feel like they can accelerate? Sort of what should we be thinking about sort of the cloud business outside of S/4HANA over the next 12 months? Or are there sort of some of the puts and takes there?

I can start and then, Scott, please comment as well. I mean, first of all, when you look at our win rates, there is no doubt, and that's why I'm also so hopeful with regard to our new offering, GROW with SAP, that our win rates even stand alone for net new are extremely high in the ERP and the platform business. Of course, in the LoBs, it's a tougher environment. But very important, SAP is winning in all of the cases where we can expand from the core. So you heard HCL. When we talk about total workforce management and you talk about new ways of packaging certain offerings, this all has to work together with the payroll, with the finance system of HCL. And also very important to mention here CX. We do a restructuring in this area, but we are fully betting on CX just in a different way. Always when we are leading with our industry capabilities, where I actually claim that we know the industry is much better than anyone else out there, and we are leading with customers like core where we can talk about customer loyalty, where we need data from the ERP, where we can also build end-to-end value chains with commerce connected to the inventory, to the supply chain. This is where we are winning. And this is what we are following. And then we will also -- we also see very strong win rates in the other lines of businesses. And I'm actually very, very happy to see Concur. I mean, of course, without any relation to the product itself, they went through a hard time through the pandemic, and they delivered another very strong quarter. So I'm very happy to also see Concur back on track. Scott?

Yes. Maybe 2 additional comments if I can add to what you described, Christian. The first is our core LoB solutions outside of S/4HANA Cloud and BTP are actually still growing quite strongly. And Christian mentioned Concur is a good example of that. So double-digit revenue growth that are strong. Each of them have their own competitive markets and dimensions, but the portfolio strengthens. And I do want to highlight transaction volumes, particularly Concur, BTP, Ariba, et cetera, where we're seeing a higher -- the supply network where we're seeing higher transaction volumes come back, which also helps from a sustainable revenue growth. The second comment that I would make, and we'll share more of this at Sapphire in more detail, but the ability for us to upsell, cross-sell our broader portfolio once you've got the base S/4 cloud and BTP, the multiples are undeniable. So as our customers move their mission-critical processes in the cloud, then their ability and the ease of which they can expand the SAP portfolio, whether it be supply chain, procurement, contingent labor, HR, they are able to do so in a really agile way. And that comes on the back of the real heavy lifting our engineering teams have done around the integration of the SAP portfolio that Christian mentioned before, that now comes to life to our customers. So that gives me confidence that the 2 go hand-in-hand. It's not about winning only in those independent markets, but the portfolio coming together and making it easier for customers to get the innovation value that they're looking for.

The final question comes from the line of Mohammed Moawalla with Goldman Sachs.

Dominik, nice to speak to you. Dominik, my question is around sort of SAP sort of cost structure as you look kind of going forward. No doubt, there's going to be leverage around the sort of gross margin. But as you look at some of the other line items, where do you think there's sort of scope for kind of efficiency? And I know, Christian, you've talked about potentially some R&D leverage in kind of the current plan. But as you talk about the great organic opportunities and given you're unlikely to do any large-scale M&A, how do you think of some of the kind of leverage areas around the cost outside of the gross margin?

Well, I think there is, of course, a kind of natural pecking order in that type of industry. What are the things that need to scale with revenue? What are the things that can be kind of providing some good operating leverage? It's a little premature, frankly, for me to now jump to conclusion to say this is what we're going to do. What I can say is that whenever I've seen businesses really delivering improvements on that front, these were rarely kind of quantum leaps. It was more about a kind of grinding over many years where people have been driving operational excellence by continuous improvement. And I think there are great opportunities. Frankly, I think the low-hanging fruit is probably harvested, and we have to now deploy some more sophisticated techniques. And what I would like to see here is that we create to spin that flywheel more strongly with a stronger focus on free cash flow. So don't expect any wild leaps in the near term on that. It will be a grinding work over many years to really mature the margin side even further.

And just a few comments from my side. I mean today also for me personally is a very important point in our transformation. I mean we came to you 2.5 years ago with a new guidance, and we also asked you to give us the permission for certain investments to reduce our technical debt. And we did our homework. Looking at the gross margin and the gross profit performance in Q1, I hope you see that we delivered. Now to Dominik's point, we have to find also additional levels. And the good piece is, yes, we have those. I mean, first of all, when you look at these RISE contracts in cloud, it's all around economies of scale. And especially in the outer years, this is where still a lot of workloads will be migrated to the cloud, and that actually allows us to scale the cloud operations also in a -- at a higher scale. And second, I mean, Thomas and Juergen, they will continue to invest. And I want to emphasize, no additional invest, but they will continue to invest also in continuously modernizing our technical stack. This is just a foundational topic for when you want to stay relevant in the cloud and to always sit on the latest and greatest technology. So no matter if it's about the elasticity of our database, no matter if it's about reducing the work you have to put in, in touching and supporting the stack. And by the way, ChatGPT will play even a role in that in cyber and the support of our cloud systems. So we have additional levers, and we will continuously work on that.

Right. Thank you, Christian, and thank you, Mo. So -- and this concludes our call for today. Thanks for joining.

Thank you, everyone. Thank you.

Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.