SAP SE (SAP) Earnings Call Transcript & Summary

Start off this next session. I'm very pleased to welcome Dominik Asam, CFO of SAP.

Thanks for having me.

Absolute pleasure. The first time here with SAP, not the first time at the conference, though. So welcome back.

So I wanted to start off, you've been in the SAP CFO seat since March this year, so several months into the job. Could you maybe just give us a little bit of a perspective from an outsider's view coming in? Where do you see the 2 or 3 main opportunities to make a difference, maybe 1 or 2 of the big strengths of the company that you found, just to help us out with your experiences so far.

Sure. I mean, I've been somewhat familiar with the company as a long-standing customer and actually all the companies I used to work for before. You alluded to my experience at Infineon, where I was also in charge of IT. And we did a very, very large S/4 transition. So I think the overall impression I have is actually, if anything, to the positive because we have very strong customer traction. I think you can very nicely see that in the cloud revenue growth and the CCB growth, 25% over the last quarters. And if you compare it to market data, it's clear that we are recovering market share on the ERP front. And I think part of the reason why that's the case is that, with the advent of AI and the shadow AI is casting on our customers, they really want to make sure that they have the right tool in place to leverage all the treasuries they have in the data in the ERP system. So that's one thing. The other thing is we have that ambition for 2025. And you have to ask yourself, what are the opportunities we have to protect that ambition to, make sure that we can do the right things on the cost side? And I think there is a good understanding by now, what can be done, which gives me even better confidence that the execution will come along properly. So I think the best is yet to come. We have, of course, still this huge installed base of ECC customers and on-prem S/4 customers. For ECC, maintenance is running out. The official maintenance period is running out in '27. And we're currently really working with these customers on the transition plans. Of course, sometimes, there is a propensity to procrastinate when the macro is difficult. But given the market backdrop, I think our ability to convert that base is quite strong, and you've seen it over the last quarter. So my confidence is actually very high.

Perfect. That's helpful. So you mentioned S/4 migration. Maybe let's dig in a little bit to that. So we've seen some macro headwinds over the last 12, 18 months. Other software companies have suffered. I think what's been particularly impressive for investors is the strength of that S/4 business, how the backlog's grown, how the revenue's grown. Could you just talk a little bit about companies are willing to invest in this product, why are they starting with this? And can you give a couple of examples of the benefits they get out of it.

Yes. Let me use a little bit of an analogy which is maybe fitting in this room here. And it's not quite perfect, but it's the best I could find, why it's, I would call, the killer application. We discussed the value of data. And if you want to analyze data, you need to have access to that data. And all of you are probably very familiar with spreadsheets. Spreadsheet is much simpler than an ERP system, but there are some similarities. And you probably build models of SAP and other companies. And depending on how much time you invest, the sophistication of these models can be quite high. There's a lot of intelligence embarked in the formulas, in the links to other spreadsheets, macros to update for certain scenarios and all that type of stuff. And now you take the kind of income statement, balance sheet and cash flow statement in that spreadsheet and you copy that, you open new spreadsheet and you paste the values. And now I asked you the question, you as a human team, if you want to run analytics intelligence on the tool, would you prefer that kind of paste-value spreadsheet? Or do you want to have the original spreadsheet? And I'd say most people who have some sense would say, "I want to have the original spreadsheet because there's much more granularity, intelligence, drill-down capability." Now our ERP systems are much more complicated, but there are some similarities. For instance, this thing changes every millisecond. Every single booking is flowing into that thing. In every cell, there is a lot of other data embarked which you don't have normally in spreadsheets. You have to regulate who can look at what cell and manipulate it in a very granular way. So it's a much more sophisticated tool. But for analytics and artificial intelligence reasons, customers see that having the ability to go into that tool and drill down, if need be, to the transaction level to understand what's really happening, to slice and dice the data by geography, by product, by even salesperson is very useful. And to connect the dots in that ERP system, to really glean insights, automated processing of the data and all these things. So that's the beauty of the tool. And I think that's the secret sauce behind why people invest a lot of time and effort to do these transitions because they just want to have the assurance that, when they need all that data, they can access it and they are not missing it. And there was, I think, a conviction 5 years ago, you take these kind of paste-value spreadsheets and you run some analytics engine on top. But with the power of the tools we see today, it's just not doing the job, and most of these approaches have actually failed. And what we also have gotten much better at, at SAP is to say -- well, the analogy is still linked to the spreadsheet. So if you need some data from Google or from other, Databricks or Snowflake, what have you, and you want to federate that with our data, we actually give you the tools to do that without you having to do the cut and paste. We federate the data. And we will ourselves provide you very powerful use cases. And if you want to consume them quickly, you have to do in the cloud model, of course. By the way, we also have to do it in the cloud model so that our models can be trained. Otherwise, I don't have access if it's kind of hidden in on-prem installation. And so from that perspective, this is, I think, what they also see, that we offer them a journey to bring their completely -- the very complicated legacy structures by the clean core approach, by segregating what's customer-specific versus the clean core of SAP in a kind of, I'd say, upward-compatible mode. So whenever we upgrade, they don't need to change all that stuff, but there are application programming interfaces that can link to that. And this is the overall package we give to them and which they find extremely compelling. And it's not only lip service that this is a vision we have. We can show them it's working today, not perfectly yet today, but that we are in the pole position to make sure that 2, 3 years down the road, it is actually perfect.

It's a pretty compelling sales pitch for me to get my SAP model into S/4 then. The other thing that's interesting is we -- you've got some enormous customers that are on a multiyear journey. And we look at the annual contract value that you sign, but you're doing multiyear deals that give you much more visibility into what customers are doing. Could you help us a little bit looking further out? What visibility do you have? How do those deals ramp up? That we don't see.

So you know we have this ambition for 2025, and we have a guidance now for this year, and there's is remain to do in terms of growth. And I'd say that everything that we have contracted now, plus the transactional business, which is also quite sticky, where we don't need to really generate new bookings, but it's more dependent on how much people are traveling and so forth. Plus some reasonable assumption on renewal. If you embark that and then say, how much incremental new bookings we need from now to then to hit that 2025 guidance? Basically, what we have in the books today is more or less the revenue base of '23 sustained into '25. So the growth part of it is something we need to do more or less with new bookings. So very roughly. But these new bookings are not like magic either, it's the conversion of the installed base, it's the growth. So it's 2 big levers. The biggest lever by far is the conversion of the installed base. You see it from the maintenance space, which has actually been remarkably resilient. There's still a lot of fish to fry there. And a good chunk of that is on the famous ECC, the old version of SAP, which will run off maintenance in 2027. So I've -- in discussions with customers, I don't really see a discussion about, well, we don't have to do that. We like other products better and it's easier for us to go to a competitor. It's all the same discussion. It's look, yes, it's still working and I don't have a budget now. Let's do it later. Or I have just invested in S/4 upgrade on-prem, $300 million, $280 million for a system integrator to customize and $20 million for SAP for the software. And why should I now invest? And I can wait later. And by the way, wouldn't you extend maintenance anyhow? And I say here again, personally only over my dead body. And I'm very clear on that front. And I tell every SAP employee who's seeing customers, before leaving the room, to say that to the customer because sometimes I get blamed by customers that they have don't -- that we have not told them clear enough. So I say we tell them now clear enough again and again. And it's more about when they are taking that step. And right now, the new bookings is really about convincing customers that now is the right time to go on a journey, don't wait until 2029. And that might mean that sometimes we give some support in terms of helping out with our IT services to make it easier, or even commercial support, because we don't want to have that dune ahead of us in '27. And so I feel we have a good pipeline. And the more we move out now, we start seeing kind of the degree of implementation tracking on the conversion for '24 now, so we still see the leads for '24. We start making models about Q1, Q2, Q3. We have certain KPIs, at what level of maturity we have to have each opportunity, each lead, to convert. So this is why I'm not really nervous about adding that kind of revenue base. But it's big, heavy lifting because people, again, in the macro environment such as the one we have currently, they tend to procrastinate. But so far, we have been able to track along the plan.

And the other part of the discussion, we've talked about moving to S/4, starting that upgrade process. When we speak to partners over the last 12, 18 months, the other feedback we've had is the product integration across the SAP portfolio has improved a lot. Could you just talk a little bit around what are you starting to see around the cross-selling? And how, when you get in with S/4, you can move and sell other products?

Maybe to put that -- my answer to that question into context. If I'm coming from the outside of the customer, look at SAP, I think it's important to understand the historic context. We have been, for very good reasons, that kind of ERP powerhouse on-prem. Then we had an activist investor in 2019 which was pushing us to do some homework on cost and improve the profitability, and that kind of led to a procrastination of the move to the cloud because the move to the cloud is very expensive. And if anything pushes revenues to the right, so it creates a J curve. So we had, I would say, almost a near-death experience with the transition to the cloud. And luckily, some people -- and I was not there, so I can't take any credit for that. In October 2020, said, "Okay, look, I mean, it will not be appreciated by capital markets, but that's what we have to do." We have to invest in the future, we have to bring it to the cloud. And it was right. Why? Because you're going to die on an on-prem model. And we have suffered from that in the past because our customers, as I mentioned, have been heavily customizing our software. They have taken the software, customized it heavily. And whenever we had to upgrade it to use new features, they did it like 5 years later than we have delivered it to the market. That meant that they were looking at an old SAP product on-prem versus a fresh, brand new cloud product from an agile competitor. And this is how we lost market share around the fringes of our ERP system. And sometimes, we've even completely left the terra to some other competitors. And now we solved this problem with the clean core strategy. And by the way, I'm really preparing some more communication with capital markets on how exactly that works. So it's [ 0, ] the BTP, which means the partitioning into clean core and then the ability to put that customization extension stuff into a compartment which is kind of almost upward-compatible with our upgrade. So we can shed that, the break we had on our own velocity of innovation with the customer. And now we are trying to turn the tide around and say, look, there are so many synergies. And I always like to use, for instance, our so-called sub-analytics cloud tools, where we have an analytics layer on top of SAP, where frankly, a lot of customers have gone to competitors of ours doing that because they had an agile, fast, modern cloud solution and we were stuck on prem. And now we've turned this around and try to expand on that core. And that's the key strategy we are pushing here. So that is what we call land and expand. So the land is really to make sure that the customer is embarking on a RISE journey. S/4, BTP and you see the Platform as a Service growth numbers, showing you how fast we grow there. But that's not the whole story. There is a whole bunch of very transactional close-to-ERP solutions, where we had lost some ground to competition, where we're currently playing catch-up. And I think our journey in terms of also trying to make it visible, is that we'll talk more about that, how we kind of integrate that. And now integration has been a key focus the last year. So it used to be, I'd say, back in 2019, 2020, lip service. So we have bought all kinds of applications and never integrated them properly, didn't have a BTP, didn't have a clean core strategy, it didn't have data sphere. Now we've invested like hell from October 2020 till now to have these tools so we can land now and expand and can offer a very compelling value to the customer. And there's one value item which is quite easy to understand, which is that we can also give them a pool of credit and say, "Well, you might not exactly know where you consume it, and I give you some flexibility to shift between applications within that core ERP offering. But for that, it's good if you take it all from us because then you are flexible, you get some more flexibility." And that's something very few, to put it mildly, can do. So we're really trying to build that kind of cohesive land and expand strategy, bundle, and try to fight back on the fringes where basically competitors have been getting into our lunch.

And you say very powerful against those point vendors that can only do that one thing.

Exactly. Because they would not, for instance, be able to say, "I give you a bunch of credit. And then if you under-consume here, you can put it on that one." And also, there is some benefits in the product because integration per se costs money and is kind of reducing your capability to run AI use cases, actually. It creates breaks in the system. It's a little bit, like to stay with my spreadsheet story, when you have 2 spreadsheets which are actually from a different vendor and they don't talk to each other, then somebody has to build a glue logic between them. And so this is why I think that's the next stage of the rocket that we can demonstrate that -- well, the land, I think, is quite visible now. But the expand, I think you can give you more meat at some point in time to show that it's also working.

Show that's working. Yes, that would be helpful. On the transactional business within the cloud, that's been a drag. I think you were saying it was only slightly growing in Q2, it was down in Q3. Could you give us a little bit of a feel for how big that transactional business is within the cloud? And what the drivers are for that to reaccelerate?

So it's a kind of high triple-digit million number and we don't disclose precise data, but to give you order of magnitude. So it's not huge. But of course, if you have, I don't know, $800-ish million of revenues which are basically flattish, it means that it dilutes the overall cloud revenue growth. And you have to understand that this business, in some pockets, is actually quite non-linear. So if you take Concur, there's a subscription part to it, but there's also some overages. And as the word overage already implies, it means that if you're doing a little more, you can have a healthy uplift on revenues. But if you then consume a little bit less, it can have a disproportionate reduction. On the contingent workforce, we already commented, we have this product called Fieldglass. Even on business network, where we have also a little bit of a kind of business model transition, which is a little bit like this J curve we had on the ERP system, it's lower. And of course, on procurement, it's also depending on GDP growth. I mean, if you procure less, then it's less than transaction revenues. So I would say that, that business on average is growing maybe not as fast as our standard subscription model, but growing quite healthy. So normally, it would be not a very noticeable dilution. But if it's because of macro, really flattish, it is a certain dilution. And it kind of is -- besides the famous Litmos divestiture which we had last year, where we basically divested the business last year, which is making the comps more difficult. The other reason why it's quite easy to bridge from our cloud revenue growth, which is about 23% in Q3, to the CCB, the current cloud backlog growth, which is a forward -- 12-month forward-looking subscription only growth indicator. So if you take into account the kind of dilutive effect of the transaction business which we think will reverse at some point in time, plus the difficult comps because we've divested a business in the prior period, you see that actually it's quite consistent with the CCB growth. So you can say the subscription business is actually growing at that kind of mid-20s growth rate.

And it will be Q2 next year that you have the base comparisons start to ease from that transactional business point of view.

Well, the transactional part is really dependent on macro. So will it -- I mean, it's tough to imagine it's staying like 0 forever because what that would mean really bad macro environment, then I think we have a different story to discuss. And then on this Litmos divestiture. I think it closed in early December. So I think in Q1, it will be already a clean comparison and that headwind in comparison will be out.

Perfect. You mentioned this before, that the support business at SAP has been very resilient. It's I think a lot more resilient than we and the investment community have expected. Could you help us understand that a little bit? And I think one issue would be, is there a risk that people are paying for premium and double maintenance, paying maintenance on subscription while they go through an upgrade process?

No. I mean, when we structure these journeys from the on-prem world into the cloud world, private cloud many times first, we exactly give the customer a very granular conversion schedule on when they can kind of reduce maintenance payments and then switch to cloud. And the customer is not one big instance where you suddenly have, day 1, everything on-prem; and then the next day, everything on cloud. It's different parts of the company which are gradually rolling over. So it's a very nice, granular portfolio. Inconceivable that there is some cliff or something in that business. What matters, of course, is also the evolution of the pricing on maintenance. You might have seen us increasing prices 3.3% last year. Now for first of January '24, we have set next 5% CPI, but capped at 5%, which is completely compliant with our contracts. And I must confess that sometimes in commercial negotiations with, some customers have been arm-wrestling and then gotten some concessions temporarily on that. So it's not necessarily 100%, but a very high share of our customers. And so it's a lagging thing. So we adjust first of January for what happened like 0.5 years back. Now with inflation falling in most of these countries, I'm not expecting that to continue. But it will also mean, on the cost side, we have less uplift. I mean, we're currently also discussing next salary rounds. And of course, when we discuss salary rounds, I want to discuss what is the expected deflation in January of '24 and not what it is not now because it's coming down like hell. So it's not something that will die quickly, but it's a very gradual thing. And we had actually also stronger license revenue. So some customers are still very, very stubborn and say, "Well, having everything under my control is more valuable to me than all of your nice pitches on cloud." And of course, we support them. And by the way, we have to because, otherwise, it would be also not the right way to deal with customers. So it's remarkably resilient, but it's not that we have doubled payments with customers. That's exactly the commercial deal that we say that maintenance payment is converted in a certain factor in the cloud. So if you take 3x the cloud revenues from us for the maintenance, you can we will -- you will not pay maintenance on that anymore. But it's normally not happening 1 day, but when the different parts of the company are switching different modules at SAP in different legal entities and so forth.

I guess that reflects your installed base, these are big complex companies that are going to go in a multiyear journey...

Not all of them. We have also some famous startups, but they will be more on the public cloud journey, which is a different game way where it's normally greenfield really that they start, we source that. And I'm also very proud that we have great traction on the public cloud with the big professional services system integrators, which I would argue should know what's the best product in the market. And so that's another growth avenue, is really to offer for these less complex business models. And of course, our ambition is to make our public cloud better and better so that the even more complicated companies can use it. And we have some first cases. I think there's a go-live in February with one huge conglomerate, for instance, which decided I want to go public cloud in one region. And we are pretty convinced this will work well. And the more evidence you can show to the customers, cool. And the more process performance improvement we can demonstrate to the customer, that the public cloud solution fully standardized is giving them some real efficiency, it's cheaper because it's on a multi-tenant installation, which by definition, is much cheaper than a private cloud. So that kind of journey will continue to the public cloud for most of them, but it will take a long time.

You talked about competition before, and some of the people kind of at the edges of ERP, you're losing share to them. But I think when I speak...

Have been losing.

Have been, sorry. Yes. But I think when I speak with investors, a lot of people feel that the competitive landscape and the battleground is going to shift. And instead of competing in that application layer, the bigger battle is going to be at the platform layer. So where you have BTP, you're trying to control data analytics, insights. And then you have people like Microsoft and other hyperscalers who are also trying to control that platform layer and data and information and insights. Could you talk a little bit about how you see that? How you -- do you agree with that? And how we can track that battle and how well you're doing in executing and getting your platform...

I'm always paranoid about competition, and I try to be as humble as possible. So I'd say we will continue to see strong competition also on application level. But what we are saying is right, that the real fundamental debate right now for our customers is how do we future-proof the company? And it's like building a house, you build the base first. And that's about data management and all the things you described, and the analytics capabilities. And this is why I try to use this spreadsheet analogy before to tell you why I think to pretty damn hard for customers to deny that what is in the ERP system should be dealt with by SAP. But of course, you can then say, "Do we do the planning on top of the ERP system with a different tool?" And the competitors you mentioned, they have their tools. The visualization of this data in a different tool because I use that tool for manufacturing, for all kinds of other things in the company and in one uniform layer of interaction. Or the copilot discussion. I mean, it's a little bit like in the old days of the Internet, when you started discussed about the start page. Is it do we put -- can I make sure that the employee is kind of going on the SAP start page? Or are they on Microsoft and Teams, and then they use the copilot to talk to my system? But the good news is we are actually cooperating with these guys because they need our stuff. And so we have some leverage in discussing how to monetize this. And we have our own ambitions. For instance, on simple stuff, you can argue you take a Microsoft copilot and then -- and you talk to this thing and say, "Please feed the following data into the SAP system to generate, I don't know, whatever document." And then the large language model can use that and stick the data using an application programming interface of SAP into our SuccessFactors if it's HR and then create something. We of course say, "No, no. You want to talk to our tool copilot and you tell that guy what to do." I think on easier cases like drafting something, you can also use another tool and then use the API to connect. But if it's really complicated stuff on the process landscape, what's the benefit of going through that bypass just to have a uniform interface? So I think I feel quite comfortable -- not comfortable, it's the wrong word. Confident that we have a super-strong position in that battle. So I like it, actually. And you see it in our numbers in the Platform-as-a-Service in the SaaS business. And this is why we acquired Signavio a couple of years ago, this is why we acquired LeanIX recently, is to really be very strongly embedded in the customer, understanding the tech stack of the customer. Being -- we are a little bit more customized. I think the intimacy we have in terms of what's the specific need of the customer is higher normally than standard Outlook product or Office product. And this is what we play there. Let me say, we know your company inside out. We know every process. And if you want to run use cases around these processes, why do you go through an intermediary? And it's like you have an architect to build your home and you want to change something, it's easier to do it with that guy than to call somebody else to come in and then try to figure out where is the plumbing and what do we do with it. So we're going to try to leverage that out. And I feel pretty good about what we can achieve on this.

Yes, that advantage of understanding the process of the company is obviously -- and the discussion about copilot's moved us nicely into a little bit of a discussion around AI. Could you talk a little bit around that? You talked around pricing would maybe be able to get a 30% premium on apps. What is the pricing strategy? Maybe let's start with that.

So the famous 30% premium is a premium bundle we have put together where we do 2 things. We basically expand the kind of minimum core S/4 offering to something that is allowing the customer to leverage the tool in a more comprehensive way. We add the journey on the green ledger, so the sustainability reporting plus the AI. So it's all linked together. And honestly, I'm not expecting wild leaps and we don't need verticals on that front for our 2025 guidance. It's a longer-term thing. I think it will be a tremendous growth opportunity in the second half of the decade. What matters now to kind of leverage AI for our revenue growth to get to '25 is exactly the type of discussion that people say, "I'm betting on that SAP platform. It's future-proof. It's the right company. They know what they do." And that, of course, puts us in a pole position then to create that value on top of that platform. We have to, of course, do some early showcases so the customer has a base. When I buy this platform, I want to see a little bit what I can do with it. And of course, we make some revenues already and we have already 70, 80 use cases and customers use them. We do that also internally. For instance, I always bring the fabulous example of 3-way matching. So the supplier sends us an invoice, we have the procurement contract, we have a purchase order. We look at the goods received, we compare it, and we then pay. And it's not so easy, but the so-called bypass ratio that we don't have human touch in this process anymore is increasing. So these are the type of things that customers want to see, that they believe in us. It's not a huge monetization opportunity in the near term, but it will exponentially inflect. And there are, I'd say, at least 5 big levers on AI which I think we can play in a powerful way. I mentioned automation already, simply getting human beings out of the way and optimizing the processes. There's, of course, the coding. I mean, it's an opportunity for productivity for us. We need less people to code the same code. But is also a big opportunity for our customers, we have to program, in old times in ABAP, now BTP. These are quite complicated, very sophisticated tools and you used to need a black belt guy for that. And now we democratized that and say, with AI tools, somebody can express the needs of the customer. And then based on all the kind of other customers that had similar problems, they are coding something and then maybe one black belt guy is still needed to fine-tune, but it can boost the productivity of these people necessarily. And these resources are scarce. There is a topic around assurance, internal controls. We often forget that SAP has a lot of very sensitive topics on governance, on the accounting. And the regulatory fantasy of what type of reporting and also monitoring efforts you impose on people is humongous. And if you're not automating like hell, your overhead will explode. So that's the other thing. Then we mentioned the processes. What I always find extremely compelling is to show a use case to the customer and say, "This is your process end to end. This is what you do today. This is the target stage." And this should not be static, we should really use the richness, the wealth of data we have on these topics with the customer to train our own models on how to optimize the customer process, which is very much about finding benchmarks that are as close as possible to the customer real IT stack and the processes. So this is why we have Signavio and LeanIX, so we can analyze that, get the data from all the customers. And we have the consent of the majority of customers on cloud to do that. And then tell the customers, "This is what you have today. This is your ugly animal here today. And this is the nice thing you can have in the future. And by the way, that's run with 50 other customers like that, and there's no reason not to believe this." What have I forgotten? Of course, the faster decision-making, that you have better analytics and come to a very good, intuitive decision-making and then the copilot things we discussed. So these are the things. I would argue our problem is not that we don't know what to do with AI. Our problem is there are so many things, that we have a task of prioritizing properly to think what's the lowest-hanging fruit. And have a good balance between showing some quick wins near term to get the customer on the hook, say yes, that sounds great; but also do the J curves on the more complicated stuff like the process mining I described which I think is super powerful, but will not be dealt with in kind of 1, 2 years, but it's a longer journey where we have to train models and do it ourselves.

We talked a lot about technology. I've got a CFO on stage, I should probably ask some financial questions as well. Maybe let's start off. The question I get a lot is around the cloud gross margins. And there's a debate around you have big customers, they've tended to go a lot into private clouds. You've talked about a customer there having low 60% gross margins. And that makes people nervous, if that's the model people go to, you're not going to be able to hit the cloud gross margin targets in '25. Could you help us with how you get there?

Yes. I mean, we think we will hit the Ambition '25. Otherwise, we would tell you. And I think the kind of near-term trajectory, depolluted for some special projects like the cloud harmonization journey, is actually pretty consistent with our trajectory. We do have strong growth in private cloud, but we also can achieve by virtue of the strong growth, economies of scale on the private cloud and improve the gross margin there. And as I mentioned, we are deeply convinced that the private cloud is not the end of the journey. And then whoever is on private cloud, over time, will try to get on public cloud step by step. So yes, it's a challenge, but it's something we have enough self-help levers, including economies of scale and also better conditions by virtue of larger scale with hyperscalers playing that competition is very tough, sourcing more cheaply, harmonizing our own lines of business so we can not use different infrastructures with different lines of business, but using the same. So I think we have enough self-help on the gross margin debate. I'd say that's even allowing us to use our commercial cloud to be aggressive with customers in that kind of effort to pull in demand from '27 to convert. So I think we can have a reasonable confidence level on the gross margin while not pricing ourselves out of the market, let's say, and you're jeopardizing the top line because of that. So it's worked, but we have measures and we track them, and they are on track.

And then the other area I get a lot of questions is around the free cash flow. That needs to grow ahead of EBIT out to '25. Again, could you help us? Where are the areas you're focusing on to improve the conversion of the business?

So on cash conversion, of course, I mean cash itself is very much driven by profits. So the first thing we have to do is to improve the profit and hit our guidance for the operating profit. And non-IFRS operating profit, we've given for 2025. And then there's the cash conversion. There are some super low-hanging fruit. I'm almost blushing if I tell you because, like the lower stock-based compensation, but that's more cosmetics because frankly, in the end, we have to repurchase the shares. What we really want to improve is stuff like working capital, CapEx to depreciation. And on working capital, we have, for my taste, too many overdues in the company. We want to kind of reinforce the collection efforts we have. I mean, people are really dependent on our system, so I don't see why they wouldn't pay us on time. I think it was not really the focus of the company before. We have been sometimes not focusing on cash and purely on profit. And for very, very low implied returns, have been prepaying stuff. And I will stop that. On CapEx, I can give you one-off, an example, you will love that. We are probably the only company in Germany or maybe on the planet, I don't know, which are buying the company cars for our employees. And first of all, almost -- I mean, the part of the population which is entitled to a company car is huge at SAP, much higher than anywhere else. And of course, in the benchmarking, we tend to forget that kind of goody and add the salary on top. So there's also a discussion about some of the perks we give to employees. Then there is the things on our balance sheet, so we have to dole out the cash for buying the whole car. I mean, I understand that IFRS accounting is also putting the value of the counter balance sheet, but only for the value of the lease, which is of course not the full value of the car. And then it comes the best. If we then divest the car, and in case we have a residual gain on the residual value, the employee gets the money. So it's not very efficient on cash. It's out of standard in terms of compensation policy. So these are things which can help. It's just to show that there are things that can be improved, self-help things that are just grinding on working capital, making sure that we say, what's our priority? Am I used car sales company or am I a software company and a cloud company? And we will turn all these stones. And then I'm pretty confident that the compound effect of all these measures will get us to where we need to be in 2025.

Perfect. We're bumping up against time. Maybe I'll just see if there's one question from the audience to close things out. Anyone got a question on the floor? Can we take one in the corner over there, please?

Yes, question on your, let's say, product road map. What can we expect after S/4, after let's say, the '27 deadline and a lot of customers have migrated to S/4. What can we expect after S/4 in terms of product road map?

Well, S/4 is very much stretching out in the '30s. So S/4 itself is not dying species. And this out-of-maintenance topic I was describing in '27 is on ECC. And there is still a lot of customers who have not transitioned to S/4. And frankly, it's a pretty complicated transition. I mean, I've been doing it at Infineon a long time ago. And it's a very comprehensive project and you need some pretty solid operational guys to get it done. And that's the thing with the out of maintenance '27. On S/4, we also have S/4 customers where it's not the out of maintenance that's the stick, it's really the kind of recognition that, as long as they are on-prem, they will not have green ledger, they will not have any AI use cases because we're not going to invest in that because it's kind of legacy structures where the whole system doesn't work. I mean, why should I start toying around with AI if I don't -- I'm not able to get access to a lot of customer data which I can use to train my models? I mean, it kind of doesn't work. And so it's about -- now if you take these ECC customers, what happens in '27, there is some prolonged maintenance which is a limited maintenance at higher cost, so that's not necessarily bad for us. But they will need to work on the platform. You mentioned it. That's the thing. Do we have a kind of future-proof platform? So they can kind of procrastinate, but sooner or later, I'm really convinced that these companies who will just go ECC, then prolong maintenance, then third-party maintenance. They will have compliance issues because they will not be able to maintain the software in 70 countries of the world, and they will not pay their VAT anymore properly and the accounting committee will shout at them. And honestly, they will not be able to use anything of cloud technology coupled with AI. So if the company had that strategy, I'm really saying -- but I don't think they will let that happen. The typical constraint is we have not the resources, we don't have the money. It's more about commercial, where is the business case? They look at the old on-prem business cases of S/4, where, frankly, the use cases have still been limited. The power of the technology have not been fully harvested. But now with AI, there is much more potential in that. And it was an inefficient deployment model with system integrators stuffing their pockets with customization. So bad IRRs, and they say, I look at that IRR, why should we do it now? And then we have to evangelize and say this is a different model and show them concrete improvement potential and say this is the business case you can run for. This is the transformation project we sell to you, where we need the system integrators to do it with you. So they will come. So far, touch wood, in my career, I heard threats about people going to Oracle but never any serious ones. That ultimately, when I then held the line and said no, it was not anymore about -- my typical response to that is, "Look, do what you think is right for you to do. We want to keep you as a customer. And we can talk about commercial aspects, and I will -- you are a great customer, and I will do everything I can for you commercially. But I'm not going to change my strategy for you. Buy your Oracle." "And by the way, if you want to have the choice between different hyperscalers at the lowest cost, well, we are completely neutral. I don't have an infrastructure to sell to you, somebody else has. So I've never seen a customer and saying, "Oh, it's worth the effort." And don't underestimate that the transition costs from the on-prem installation to the cloud. If you are SAP-to-SAP or Oracle-to-Oracle, it's really much bigger if you change the supplier because there are some ways processes run in these tools which are different, and then you have to change even more. So why would the guys who are the most penny-pinching and most budget-constrained then do the more expensive move? So I've really not seen that. And from that perspective, I think it's not a question about if, but when. And how can we make it smooth for them and how can we haggle to come to the right trajectories and how we phase the old world into the new world and convince them about our tool sets being the only tool set available to them to efficiently migrate. And this is also something I feel, as SAP, we've not done a great job yet in making that visible to you, the investors, I will want to make more work on that to show you really how technical that works because it's quite impressive and unique. And then you can ask competitors. I mean, how do you do it? And they will say, "Well, we are cloud and which is greenfield cloud." That's it. Sorry, over time already.

No. Yes, unfortunately, we'd love to carry on the conversation. Bumped up against time. Dominik, thank you again for joining us. Appreciate your time. Thank you.

Well, thanks for having me. All the best to you. Thank you.