SAP SE at Deutsche Bank Virtual Investor Conference

Nov 15, 2018 PM UTC 查看原文
SAP.DE - SAP SE
SAP SE at Deutsche Bank Virtual Investor Conference
Nov 15, 2018 / 05:00PM GMT 

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Corporate Participants
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   *  John Duncan

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Conference Call Participants
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   *  Zafar Aziz

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Presentation
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 Zafar Aziz,    [1]
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 Hello, and welcome to the Deutsche Bank Depositary Receipts' First Investor Conference, dbVIC. My name is Zafar Aziz with depositary receipts team with Deutsche Bank.

 I'm pleased to announce that our next presentation will be from SAP, Germany. Before I introduce our speaker, a few points to note. During the presentation, please submit questions in the Ask a Question box on the bottom of your screen. There'd be no need to wait till end of the presentation to typing your questions. Please remember that after the presentation and the Q&A session, lasting around 30 minutes in total, don't log out. You'll automatically be transferred to the SAP's booth where you can access additional investor material and continue via the chat screen.

 On a final note, all today's presentation will recorded and can be accessed by the Deutsche Bank website, adr.db.com. At this point, I'm very pleased to welcome John Duncan, Head of North American Investor Relations at SAP. Over to you, John.

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 John Duncan,    [2]
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 Hi, everyone. My name is John Duncan. I do Investor Relations for SAP with a focus on North America. Let me just move forward to the safe harbor slide. I'll quickly read a shorter vision of the safe harbor.

 All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. These factors are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission. Unless otherwise stated, the SAP numbers I will refer to our non-IFRS and

 growth rates are non-IFRS constant currency. I will also briefly discussed our pending acquisition o Qualtrics, and the Qualtrics numbers non-GAAP.

 So moving to the first slide. So for more than 40 years, SAP has been running company's mission-critical business processes. SAP has unmatched global reach and deep industry expertise, process knowledge and solution verticalization across 25 industries. SAP also has the largest and richest enterprise data. SAP touches 77% of the world's business transactions and runs the world's largest business network with approximately USD 2.6 trillion in commerce annually. More than 413,000 companies are turning to SAP to accelerate transformation including world-class global companies such as BMW, Shell, Unilever and Coca-Cola.

 Let me move to the next slide. So as the title of this presentation suggest, SAP is delivering the Intelligent Enterprise. So how do we do that? Let's start at the top of this slide with the Intelligent Suite. The Intelligent Suite is an integrated suite of applications with embedded intelligence that enable our customers to automate all our day-to-day business processes. These applications span everything that a company needs to manage their business: Customer experience, supply chain and manufacturing, people engagement i.e. Human Capital Management and that's to manage their workforce both permanent and flexible, and also networking spend management to manage spend on good services and travel and expense.

 At the center of this suite of applications is the Digital Core, which is the financials and ERP system, which orchestrates and records all of these interactions.

 In summary, SAP's application suite manages the entire value chain, end-to-end across all industries. Now let's jump to the bottom of the chart and our digital platform.

 The foundation of our platform is HANA, which is our next generation real-time in-memory database. There are 2 elements to the platform. Firstly, the SAP Cloud Platform also known as SBP. On this, customers can build add-on applications or extend functionalities with rapid development tools. They integrate across applications and deployment models including hybrid landscapes. It's also instrumental in the IoT revolution as it connects a rapidly growing number of external intelligent devices and machines to business processes.

 The second element is data management also referred to as the SAP Data Hub. With the SAP Data Hub, instead of spending time collating data, companies can harness data. This seamlessly orchestrates data from both SAP and non-SAP systems, providing a 360-degree view of all data relevant to the company from multiple sources, including unstructured data. So for example customer's social media posts.

 It offers one cross landscape data control server to monitor and improve data quality, and efficiently stream and processes data from all sources including IoT used cases. It optimizes data caused by eliminating data duplications and data movement. And it manages all data compliance and governance policies from one central location.

 So lastly, let's turn to the feedback loop in the middle of the slide, which is the intelligence layer. We brand this intelligence layer, Leonardo, because it's a mix of art and science. SAP Leonardo orchestrates disruptive technologies such as AI, machine learning, IoT and blockchain to create completely new ways of working and new business models. Now we embed this intelligence in the business processes. I'll give you a couple of examples. A customer experience example as a sportswear brand that connects over 200 million consumers through health and fitness app. Based on the consumer's activities running, cycling, et cetera, they can make personal highly relevant real-time offers e.g. they know that the optimal time to replace running shoes is after 400 miles and they can time personal promotions for running shoes accordingly. Another example is an agricultural equipment manufacturer that's transforming to smart farming by monitoring and performing predictive maintenance on all its big equipment in the field. They read signals from IoT sensors and predict when a part is about to fail. A replacement part order is automatically triggered through the Business Network and supply chain along with an order for a contractor to go and fit the part. And this way, this customer can offer equipment as a service rather than just making a CapEx sale. And they can generate new revenue streams based on productivity and uptime.

 Other examples where we are adopting AI machine learning include an HCM automated resume matching to specific job openings. Also, we're using machine learning to eliminate vice in hiring and promotion processes to ensure diversity.

 In accounts payable and receivable, machine learning is used to automate invoice and payment matching, and this elevates finance staff to focus on higher level tasks.

 So in summary, SAP is perfectly positioned as the business process platform for enterprise to take full advantage of artificial intelligence.

 So let's move the slide and turn our focus to financial performance. So here you see that following a strong full year 2017, we have accelerated our performance in the 9 months year-to-date 2018. We see fast growth in cloud and even excluding a few points benefit from the recent Callidus acquisition, organic cloud growth is in the low to mid-30s, which is faster than most years. We combined fast cloud growth with our resilient additional software license and support sales, and together, this drives a robust overall top line growing double-digit in the first 9 months of 2018. And we have accelerating operating profit, plus 12% in year-to-date. The fast growth in cloud and the robust support revenue stream also increases our share of more predictable revenue, recurring revenue and it's moved up to 6% to 8% of total revenue plus 2% year-over-year.

 Now our next generation ERPs for HANA adoption has grown to 9,500 customers, that's up around 37% year-over-year. And approximately 40% of those are [brand] new. So this is another key thing that analysts are monitoring this migration cycles on next gen ERP. And our own 75% of our installed base are still to be migrated to S/4HANA and the thousands of net new customers will come in as well. So this represents a huge multiyear growth opportunity.

 So moving to the next slide. So how do we continue to grow cloud greater than 30% through 2020? Well, our intelligent enterprise strategy is preparing strong adoption of our suite in the cloud, and we're taking market share and driving share of wallet. Our high potential cloud solutions like S/4HANA cloud ERP, E/4HANA customer experience, analytics cloud, Digital Supply Chain, are all growing triple digit or high double-digit and these are rapidly achieving scale and really starting to move the needle. Now these fast growers are complemented by continued solid growth in a more scaled network and HCM solutions.

 Now turning to the right hand side of the slide, on the gross margins in the cloud, you can see that as we grow rapidly, we also expect cloud gross margins to reflect the hardworks in each of our cloud business models. Now reasons for that: Firstly, our new high potential cloud solutions S/4 Cloud, C/4HANA, Digital Supply Chain, Analytic Cloud, et cetera, they are starting to exit the startup phase and their margins are starting to ramp. Secondly, to be quite frank, we inherited a hornets niche of different architectures with our cloud acquisitions but now we are migrating these to a highly standardized robust, secure, cost-effective converse cloud platform. With a single cloud based HANA as the foundation. So migrating our cloud applications to HANA will provide massive business and efficiency benefits for both customers and SAP.

 Now, we also see leverage from continuing to scale cloud and a never higher renew base. Meanwhile, our strong ever-closer strategic partnerships with the hyperscale cloud providers like Microsoft Azure, Eagle Cloud Platform, AWS, those will lessen our future infrastructure CapEx investment needs.

 So moving to the next slide. Here you can see that our cloud transition is continuing at full momentum and this slide illustrates that cloud is eclipsing software licenses faster than expected and will soon dominate the business mix.

 Note that cloud has a higher lifetime value. It has higher predictability and it attracts a higher multiple. So this is exactly where we want to be.

 Just moving to the next slide and here you can see how to share a more predictable revenue was increasing with our consistent fast growth in the cloud and robust support revenue stream with high renewal rates, we're right on track to increase our share to more predictable revenue to 70% to 75% by 2020. So we're delivering a much more resilient and sustainable business for the long-term with increasingly higher visibility.

 Moving to the next slide, I just want to look at the bottom line operating margin now. So now, we reap the benefit of an ever higher recurring base, expanding gross margins and OpEx leverage. We talked to the benefits of our converge close platform investment and scale in the cloud. We expand gross margins in each and every business, network, public cloud, private cloud and on premise software and we also see OpEx leverage. Though in sales and marketing, we see a decline in cost of new business acquisition.

 In 2018 Q3, total order intake was up plus 12% but meanwhile, sales and marketing was flat at constant currency, and it was still only up 3% when we exclude the commission capitalization benefit of the new IFRS 15 accounting rules. So this leverage is due to our higher low touch recurring and transactional revenue base.

 Moving to the R&D ratio, that's expected to remain at current levels with significant efficiency savings from moving to a single HANA cloud base, allowing us to free up resources and to invest in new cutting-edge technologies such as IoT, AI, machine learning, blockchain, Big Data.

 Finally, on General and Admin, we see benefits through AI machine learning, particularly in our shared service centers. For example, the automated invoice matching, and automated resume matching, as mentioned earlier, that's also helping SAP's G&A efficiency. So there's, more than counters, the mix shift effect of moving to cloud and that runs profitability through 2020 and beyond.

 So just moving to the next slide now. So what does all this mean for our overall financials? So we expect to see continued fast growth in cloud through 2020. In combination with resilient software and support, this will drive a robust overall top line, high single-digit is what's baked into our midterm ambition, and operating profit is expected to accelerate to double-digit growth. So in short we're driving growth, predictability and profitability.

 Now, I just want to spend a couple of minutes on the pending acquisition of Qualtrics, which we just announced on Sunday.

 So the first slide here is Qualtrics at a glance. So Qualtrics is a leader in the new category, experience management. In winning the experience economy, there are 2 pieces to the puzzle. SAP already has the first: operational data or what we're calling, O-Data from the systems that run companies; the second piece of the puzzle is owned by Qualtrics and that's experienced data of what we're calling X-Data. And this data is actual feedback in real time from actual people, people feedback, how are they engaging with the company's brand? Are they satisfied with the customer experience that was offered? Is the product doing what they expected? Why do employees -- what employees feel about the direction of their employer? So they are collecting customer feedback and employee feedback data on this online platform. So the O-Data tells you what happened and the X-Data tells you why it happened. And the reason this is important is in today's hyper connected world, it's unforgiving and if experience camp is not managed, the damage to companies is immediate. This is what's driving customer investment and rapid growth in this new category.

 Just look to the next slide. In fact, let me just go back to the last slide. I was going to talk a little bit about Qualtrics financial performance. So looking at their financial metrics, Qualtrics has subscription revenue growing greater than 40%, high renewal rates, that underscore that fantastic customer experience they deliver . They have a best in class, subscription gross margin in the high 80s, that reflects they're highly scalable, highly efficient SaaS cloud platform, and they are profitable with a 15% operating cash flow margin and 9% free cash flow margin. And they dig in free cash flow positive every year since their inception.

 Now let me flip to the next slide. So here you can see where we combine our operational data, the O-Data, which answers the question of what is happening with Qualtrics experience data, the X-Data, which answers the question, why it is happening. Only with both of these inputs when organization be able to draw correct conclusions and trigger the right actions, be it based on human or artificial intelligence triggered actions.

 Only by leveraging both of those inputs will an enterprise become really intelligent. Embedding this capability in our applications will further expand the competitive edge of our suite across all lines of business, industries and geographies. And that in turn should drive substantial incremental revenue.

 So just to conclude the presentation, SAP is perfectly positioned to address a massive and rapidly growing market opportunity, delivering the intelligent enterprise for our customers, to thrive in a digital age. Our leading innovation is pouring organic growth, which is outpacing our key competitors and this should only accelerate with the acquisition of Qualtrics. We deliver all of this through a much more predictable, resilient, and sustainable business model. We have already made the key investments and now expect to reap the benefits with strong growth, increasing profitability and cash flow through 2020 and beyond.

 Now for those interested in further detailed financial information that is more available in the appendix.

 So thank you, everyone, and I will now be happy to address some questions. I just need a few moments to collect a list of questions here. I just need a few moments.

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Questions and Answers
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 John Duncan,    [1]
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 Okay. So the first question is, who does Qualtrics compete with? And what is the role of their CEO in the SAP business post acquisition?

 So the CEO and founder, Ryan Smith is going to continue running the business and that business is going to fold into our customer experience segment. Hold on a second. Now in terms of who it competes with? So there are a couple of other companies out there that do this. One of them is Survey Monkey, who recently went public. The other one is Medallia, who are still private but they are planning to go public. Now Survey Monkey is a much more basic offerings. So they actually have a big free offering and you only start to pay when you start to use the more sophisticated services. But if you look at Gartner or Forrester, you'll see that Qualtrics is scoring 4 or 5, in most categories and Survey Monkey is scoring a lot less than that just because they're not as sophisticated a solution. Their analytics, they certainly collect, survey data online. But they don't have nearly as robust analytics engine to arrive at the correct conclusions and trigger the appropriate actions that we discussed earlier.

 Now, Medallia, they do have a good solution. The difference there with Medallia though is they're only focused on the customer experience whereas Qualtrics is much more broader than that. So Qualtrics manages experience data across customers but also employees. They can conduct extensive voice surveys online and they also monitor brand -- brand reaction and they're also working with companies on new product launches as new products are tested in the market, they collect feedback on the new products so it also covers the development area. So they are really working, Qualtrics is really working broadly across the organization, across all SAP's lines of business whereas Medallia are more limited to customer and Survey Monkey don't have the same analytical or action triggers.

 Okay. Let me just check the question list again. Okay. So this question here, will the Qualtrics acquisition impact the dividend payouts in coming years? No. It shouldn't impact dividend payouts. As I mentioned, Qualtrics is cash flow positive, they have a very healthy cash flow for a company at their stage of development and that's standalone and of course we would expect to generate synergies. And also SAP is borrowing some money to pay for this acquisition but we do -- we are able to get quite a low interest rate. We borrow in euros, continental European interest rates are still lower than the RNA in the U.S. So this shouldn't have a materially negative cash flow impact that would impact the dividend.

 I'm just looking back at the question list again. Okay. There is a question here.

 Does the CAGR, quoted on the cloud revenue at 30% plus, does it reflect organic growth?

 It is -- the vast majority of it is organic. I did mention that there was some small impact in the current year from Callidus, if you were to exclude that 37% growth, it would come down to low- to mid-30s but essentially, we're growing 30% plus without any material or inorganic benefit.

 Let me just go back to the question list here.

 Now there is a question on free cash flow, obviously, SAP's free cash flow now declining in the year-to-date, in the 9 months year-to-date. Now there has been a -- there are a couple of reasons for that, why we see a short-term dip, in cash flow this year. One of the key reasons is, as I mentioned, we're heavily investing in this new converged cloud infrastructure. So there has been a step up in IT CapEx this year, but we're coming to the end of that major initiative and we should be largely done by Q1 2019. The other factor there is we have -- because we've been growing so rapidly, we've actually been adding buildings in Waldorf and that's also increased the CapEx this year. So there has been a couple of one-time items on the free cash flow side that have depressed free cash flow this year but our CFO has reiterated that he expects next year to improve on the free cash flow front as our CapEx levels off. So we do expect free cash flow to start to grow more inline with the operating business as time from next year.

 Just going back to the question list again. Okay. I managed to hide the question list. Hold on a second. Yes. I don't know if there's a way the operator can get the question list back up on the screen there. Let me try again.

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 Zafar Aziz,    [2]
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 I can read out the questions, if that helps at all?

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 John Duncan,    [3]
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 Yes. That would help. Yes. I tried to -- wanted to see the time and I can't get it back up again. Sorry.

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 Zafar Aziz,    [4]
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 You click on the Q&A box again. You might go to come up.

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 John Duncan,    [5]
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 No.

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 Zafar Aziz,    [6]
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 Okay. The question on the top is, H1 2018 results indicate in fact that the SAP's cloud growth has accelerated in Germany, China and Japan but less so in Britain. Do you think Brexit will intensify this factor even more?

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 John Duncan,    [7]
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 Yes. So, I mean, obviously Brexit, it creates some uncertainty and it potentially slows that decision-making but I think we are so diversified geographically, there is always going to be some pockets in the world where you have slowdown but we've got such a diversified portfolio that other areas can pick up and replace that lack of growth in certain pockets. So that's the picture in SAP, our geographic on our industry diversity. So we would expect to be able to absorb that. Now having said that, in some cases it's also a benefit for SAP because whenever you have the increased complexity, for example around trade rules, tariffs, regulation, or regulatory environment, that's actually can be a good selling point for SAP because customers do need to upgrade their systems to accommodate these new rules and regulations. Frequently, their old systems can't cope with it. So it can also be an advantage. Okay. Is there another question?

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 Zafar Aziz,    [8]
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 There was one more question around, "John I love the intelligent enterprise/AI example. How do you see this will flow through to EBIT growth? Is it step change or incrementally over large number of years?"

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 John Duncan,    [9]
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 Yes. So we're already seeing the benefit. When we're going to customers and presenting these transformational examples, this is -- in some cases, there is a sense of urgency that they need to be adopting AI and machine learning in similar way or they risk of falling behind and being disrupted by others in the sector. Every sector has a disruptor. You have Square in financial services; Tesla, in auto; Airbnb in hospitality. So they really need to digitally transform and embracing AI and machine learning and our intelligent enterprise solutions is critical to do that. So we're really seeing a benefit in both top line and bottom line, I would say. But this is a multiyear process so this is going to drive our business more for many years. This whole AI and machine learning focus. Is there another question?

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 Zafar Aziz,    [10]
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 Okay. I think that's all the questions now, actually.

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 John Duncan,    [11]
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 Okay. Great. Okay. So thank you all for listening and I believe the operator will now transfer you over to the virtual booth. Thank you everyone.




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