SAP SE at Morgan Stanley TMT Conference

Nov 15, 2019 AM UTC 查看原文
SAP.DE - SAP SE
SAP SE at Morgan Stanley TMT Conference
Nov 15, 2019 / 07:55AM GMT 

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Corporate Participants
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   *  Luka Mucic
      SAP SE - CFO & Member of Executive Board

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Conference Call Participants
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   *  Adam Dennis Wood
      Morgan Stanley, Research Division - European Technology Equity Analyst

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Presentation
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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [1]
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 Okay. Perfect. Well, welcome everybody to the final day of the conference here on Friday morning. Thank you very much for joining us. I'm Adam Wood, responsible for European tech research at Morgan Stanley. Very pleased to have Luka Mucic, CFO of SAP.

 Luka, thank you very much again for joining us in Barcelona.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [2]
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 Always a pleasure. Thanks for having us.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [3]
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 So maybe I'll get the safe harbor out of the way to start off with. So please note that except for certain information, matters discussed during today's presentation may contain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's financial results are discussed more fully in SAP's most recent filings with the Securities and Exchange Commission.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [4]
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 Well done.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [5]
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 It was right, wasn't it? Was that okay, Stefan? Was that -- yes, okay. That's all right. Okay. Good.

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Questions and Answers
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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [1]
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 So you had the Capital Markets Day earlier in the week in New York, Luka, and I think the 2 things that you focused on most heavily were going into a lot of detail around what the margin drivers are at SAP to deliver on the margin expansion promise that you've made for the markets and then also on free cash flow.

 Maybe on the margins, first of all, could you just give us a quick recap of what the 1 or 2 big impacts are that you see over the next few years to get you to that margin expansion?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [2]
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 Yes, happy to do so. But first of all, I think we had 2 key themes at Capital Markets Day. It was about growth and operational excellence and about keeping the promise because we have ambitious targets out there for the next couple of years both on the top line as well as on the bottom line. And we know that after we revised our margin targets up in April, there are some concerns. We're sacrificing top line growth, and we wanted to make sure as well that people understand that what we are driving on the efficiency front are really no-regret measures that will actually rather strengthen our ability to deliver on the top line because they will make room for simplification across SAP and also provide us the necessary bandwidth in order to invest into the key innovation drivers.

 And I tried to lay out that we have a really comprehensive, holistic and robust company-wide transformation program in place to deliver those efficiencies. I'm actually quite -- or not to serve as the sponsor for this initiative, of course, collaborating with the Co-CEOs and the entire Executive Board. And on this, we have, in total, 10 work streams across the entire operations of the company to deliver efficiencies. The biggest area is the cloud and our cloud gross margin optimization. That alone will deliver more than half of the margin improvements that we need and to get to the 500 basis points improvement until 2023 that we have committed to. It means basically almost quadrupling the gross profit in the cloud from 2018 to 2023.

 What do we need? Of course, 75% gross margin by 2023 and then the $15 billion-plus in cloud revenues. On the gross margin, we have made tremendous progress already in the last 1.5 years. Basically, our gross margin is now at 69% from 63% in 2018, so we are halfway there. And we have done this by basically optimizing, so far, the smallest cost lever that we have in cost of cloud, which was the third-party licenses for legacy databases that we have migrated to HANA, and we are very well progressed on this.

 And now the big rocks that we have a lot of opportunity to further improve is the infrastructure that we run our cloud solutions on, where we are optimizing based on taking advantage of the high elasticity of our hyperscaler partnerships as well as consolidating our different legacy infrastructure stacks even above the database level when it comes to network, server, storage and other elements on one converged cloud infrastructure. That will give us better capacity utilization and will drive the gross margins up. So cloud is a significant lever in this respect.

 The second big one is sales and marketing. We have already worked hard over the course of the last 2 years to consolidate the plethora of overlay specialized sales forces that we have acquired through many M&A activities in the last couple of years into a simplified structure. That's an area that we will continue to double down on and structurally tackle to reduce overhead and optimize the ratio of feet on the street and also the go-to-market and coverage model and we'll be further streamlined as we go into next year. Marketing is another big area of improvement, where we also had still a fragmented approach to it, where some activities resided in the lines of business in our cloud areas that we are now consolidating for greater effectiveness and efficiency in a more consolidated approach. And then there are additional economy of scale-based savings that we can get out of G&A as well as through services portfolio optimization that will basically get us to where we need to be.

 And all of those areas, including also procurement-based savings through a more consolidated approach, are not really going to harm our growth at all. They will rather streamline our internal operations. And then we will have an opportunity also in R&D to repurpose significant capacity into the most important innovation areas and categories. As you know, we have a predominantly organic innovation strategy now after the significant M&A activities in the last few years, where we will want to focus on integration and on organic innovation, and that requires investment. So we will keep our R&D ratio stable, but within it, we have great room for further optimization and reshuffling of capacity. That's what we want to do and what we will do. And therefore, I'm very, very confident not only in the bottom line targets, in the margin progression but also in the top line side of our ambitions.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [3]
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 So maybe just to come back on, you mentioned there's 2 themes at the day, but also it's the first time when we heard from the new Co-CEOs. Just in terms of your experience, you've obviously worked with both of them in the past, but as now coming in as new CEOs of the business, should we expect any big changes or differences in style? What's your perceptions in terms of how they approach the business that might be different from what we've seen in the past?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [4]
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 Well, first of all, you should expect a great deal of continuity when it comes to the overarching strategy. I mean we have all been on board -- on the Board for a while but even more so in the company. Before, I mean I've been working with Christian Klein for many years. First, he has been working for me, then we have been working together with each other when he was the COO of the company. And we've all been part of the strategy.

 I think what you can expect is a slight shift in the tone by which we sell the strategy. I think both have made it very clear at our Capital Markets Day that we have to be focused on empathy with the customer, driving customer success, getting really down to the details of what it takes to ultimately make the integration of our solutions a reality and driving value at the customer front. That's something on which we will strongly focus, but that is not a directional shift in the overarching strategy at all. And I think both bring very complementary skills to the table.

 SAP, even though I recognize that this is not a very familiar structure for many companies, we have had certainly a strong history of working with the co-CEO model in the past. It gives us, on the one hand side, a great scale. We have a presence from a CEO perspective on both sides of the pond. And we have different, let's say, backgrounds that they can bring to the table. Christian has more been groomed through our internal operations and the classic SAP portfolio that he has been responsible for with S/4 and the other solutions. Jen has been recently responsible for our Cloud Business Group and has obviously been groomed more through the go-to-market ranks of SAP. So I think those skills are very complementary, and they can divide and conquer extremely well. And after all, the same old shepherds like myself or Adaire are still around. So I think this makes for a pretty solid combination with a lot of continuity and perhaps some operational stronger focus at the same time. I think this as a net positive.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [5]
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 Yes. That's very clear. And maybe just coming back to the phases of margin expansion, there was obviously a decent-sized restructuring charge that you've taken. Could you maybe just help us in terms of, first of all, where are we on reaping the benefits of that? Have we seen already all the benefits, or is there still benefit to come? And then on the linearity of that margin progression, given you've got that benefit now, should we expect a greater pace of margin expansion in the earlier years? Or is it going to be pretty linear in terms of that shift?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [6]
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 Now first of all, I'm extremely happy with where we are at this point in time for 2019. I had never expected a margin increase of 1% or above because we are working against the headwinds of the Qualtrics acquisition that we closed at the beginning of the year. That's around about a 40 basis points negative headwind from M&A. And still, we are already -- if you take constant currency view at the year-to-date mark at a 50 basis points improvement, so without the M&A effect, this would be already close to 1%. And Q4 is coming up, which was not a good margin quarter last year. So I think there is scope to do to even creep a little bit closer to this if we have a good, solid quarter execution on the top line.

 So we are actually even slightly ahead of where we thought we would be at this point in time. And the main aspects why we are slightly ahead is great execution on the cloud margin progress front, where we already are getting the first benefits from the Converged Cloud platform as well as the database migration actually slightly ahead of where we thought we would be. And then the restructuring program is not yet fully exhausted. We are looking at around about 4,000 headcount reductions from that restructuring program. And so far, around about 2,500 have left the company. In particular, in Germany and some other countries in Europe, we still have the people on the payroll. Most of them will leave by the end of the year. Very few of them -- even at the beginning of last year -- very few of them at the beginning of next year. So about 2/3, I would say, are now out. The rest will be out in a couple of months from now, and so the full run rate benefit will only play out in 2020.

 So from that perspective, I would expect that we end up 2019, obviously, slightly below the average 1 percentage point. That is quite obvious, and that we then will catch up to that average 1% next year. And then from there on, it should be actually relatively linear progression again. And all of that, there might be certain volatilities to the one or to the other side. But we certainly don't want to keep a hockey stick at the end of that process and rather want to look at next year to make a big step forward.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [7]
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 And then I think the other big thing at the Capital Markets Day that I think everyone would have appreciated is if there was more granularity in guidance on the free cash flow side. So you've helped us already on 2019 and '20 but also with the vision looking out to 2023. Can you maybe just walk us through what that target is for 2023 and how we see that cash flow improvement happening from a relatively weaker year?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [8]
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 Yes. I think it's important to first recognize where we are coming from, which is 2018 and 2019 have been significantly negatively influenced by special items. And we had -- certainly, in 2019, we have a significant cash flow pressure from the restructuring program. We have also seen significant onetime cash tax impacts in 2018 but especially in 2019. And also share-based compensation expenses have spiked up in '18 and '19 due to the acquisition activities that we had, where we brought onboard 2 cloud companies that came obviously with quite a significant bias towards share-based compensation. Now that is, first of all, now in the run rate. We don't plan any significant M&A activities for the next couple of years. And also, the restructuring program will have run its course. So we have always said that in 2020, we expect a significant step-up in operating cash flow as well as free cash flow. And that's what we have now also laid out in more concrete terms, recognizing that in cash flow, there's always volatility that you cannot fully influence because of currency movements, the share price development as well as tax matters that, of course, where you're always in the hands of tax authorities worldwide as well. We don't see at the moment any significant impacts on the horizon, and therefore, we believe that we should be able to end up around the EUR 6 billion mark in terms of operating cash flow.

 Luckily, our capital expenditure intensity has come down quite drastically due to our hyperscaler strategies, so we have less CapEx needs for our data center infrastructure. We believe that we will now remain around the EUR 1 billion mark that we are reaching this year, which is a EUR 500 million reduction from last year, also in the years to come. We include in our free cash flow definition of the impact from lease payments because that is also a quasi-cash flow diminishing aspect. And so if you recognize all of this, we are expecting around about EUR 4.5 billion in free cash flow in 2020. And that leaves us room next to the repayment of debt as well as the dividend payment -- the regular dividend payment to come forward with an additional capital return of EUR 1.5 billion that we have announced.

 And I think that's good proxy for what we should expect also in the next coming years. We're certainly not having no intention to hold cash, which makes no sense in the current interest environment anyway. We believe that our free cash flow should grow at a CAGR of between 15% to 25%, so at a higher CAGR than the revenue and the profits of the company just purely because of the CapEx efficiency that we are reaching now. And then this should give us -- even despite the fact that we want to continue to deleverage to retain our conservative approach to the balance sheet, should give us significant scope to consider further capital returns in the next years to come. We believe that we have, with all uncertainty, scope to reach around about EUR 8 billion in free cash flow by 2023. So that leaves -- even with a debt repayment of slightly more than EUR 6 billion for the next 4 years, leaves ample room for additional returns to shareholders.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [9]
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 Can I maybe just ask on that capital return and the M&A strategy? You've obviously committed to doing something in 2020. Any reason why you wouldn't give a firmer commitment and a guarantee of capital return in future years? And then on the flip side, on the M&A, is there now a commitment that there won't be large-scale M&A or would just be tuck-in? Or are you still kind of happy to take a flexible approach that there might be things that come on the horizon once a day?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [10]
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 First of all, on the first question, I think the one and only reason why we ultimately decided that it would not be in the best interest of anybody to now give a concrete commitment for the next couple of years is that, naturally, it would need to be probably more conservative than it has to be in the next couple of years because, again, there are uncertainties in the cash flow development. We might consider smaller tuck-ins but then in an individual year might diminish our ability to return excess cash. So if we right now would want to cater for all of these eventualities because, again, our second theme at the Capital Markets Day was keeping the promise, and we know that if we give out even a qualified statement, it would be built into the models of everyone in the market, and therefore, there would be a clear valid expectation. And to come up with this figure, I think it would need to be lower than it has to be. And we believe we have the scope for substantial returns. We have absolutely no line of sight and no intention to consider large-scale acquisitions at this time. Our focus needs to be on integration of what we have, and we -- this is also a matter of digestibility, how much can you can you focus on at the same time. And it's certainly clear that our customers have been waiting for the integration of what we have already for a long time, so we absolutely want to make sure that this is happening now. So that's the reason why we have not been giving now an explicit number for the next couple of years. But as I said as well at the Capital Markets Day, our approach that we took in 2020, I think, should be seen as a good proxy of how we are thinking about capital returns in the next couple of years.

 On the second question with M&A, look, I mean I've made it clear in our cash cascades presentation that I put up at the Capital Markets Day that tuck-ins might be an option if they complement our existing portfolio. We have never acquired to just simply take competition out of the market or consolidate markets. It was always to expand our portfolio. We have already by far the broadest portfolio of assets in the cloud that exists in the market, so the white spaces are getting smaller and smaller. From that perspective, you should not expect large-scale acquisitions in the next couple of years. Of course, if now valuations would come dramatically down due to a big meltdown in the market or if a completely new vertical or horizontal area of enterprise software would come up that we are not seeing at all, that might be the only option that might or will see us reconsider this. But from where we stand today, this is clearly a firm intent that we have, and we have -- we don't have large-scale M&A as a component of our strategy at all. At this present time, in our entire portfolio of possible M&A targets, there's only one in there, and that's a single-digit million one. So...

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [11]
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 That's very clear, Luka. So maybe moving away from the -- some bottom line capital allocation and so on, let's maybe talk a little bit about the other agenda -- other part of the agenda at the Capital Markets Day, which is growth. I suppose the first impact on how SAP can grow is going to be the environment around you, and I think that's a debate with investors and a discussion we've had here at the conference this week. You talked a little bit about macro and the challenges in Q2. You didn't really talk about them in Q3. Could you maybe give us a little update in terms of what you're seeing in the market where the pockets of strengths and weakness are? And is this a tailwind or a headwind to you at the minute?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [12]
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 Yes. I think it's broadly unchanged, quite frankly, from what we have been seeing in Q2. I was recently on air with Bloomberg where I've been asked the same question, and I said that we certainly see some pockets of caution but definitely not a spirit of crisis. So it's clear that when I look at East Asia, for example, some of the markets there like Hong Kong, for obvious reasons, they are not delivering at the moment. Mainland China actually is still doing reasonably well, but some of these smaller countries or small states in the periphery, they have their challenges. Manufacturing and auto in Germany was not that strong, but then funny enough, manufacturing was actually our strongest industry in Q3 because the North American market has been performing extremely well. So our global coverage, our balanced presence between emerging markets and mature markets helps us a lot. Ironically, the U.K. was actually in the last year our strongest mature market. Including in Q3, despite all of the Brexit turmoil, we had strong double-digit growth in both cloud as well as in on-premise in the U.K.

 So we see even in some respects anti-cyclical investment behavior for some of our products in the wake of uncertainty that customers are really preparing for rougher stormy seas in order to flex their digital muscles, so to say. And that means investments in SAP as a kind of a strong partner and a safe haven to lead them through digital transformation. So we are -- we continue to be very confident, and we have a balanced vertical coverage. By now our retailers are our strongest industry from a revenue perspective since a number of years, which is something that not everybody recognizes because we're often brought into conjunction with the discrete manufacturing sector that we originally were kind of strongest at, and that gives us a very good diversification. And so from that perspective, we still see a strong momentum in our business and are very confident. That's why we've also reiterated not only the guidance for this year but also for next year and for 2023 on all aspects.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [13]
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 Very clear. And then one of the subjects that comes up a lot with the SAP user groups with customers is around this topic of integration. And you described it a little bit from your business point of view of needing to integrate in a period of integration of the M&A that you've done.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [14]
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 Yes.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [15]
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 But from a technology perspective, SAP has always promised best of breed and best of suite. But to an extent, you've really been fighting more best-of-breed battle until recently. So first of all, could you talk about have you seen that as a challenge with customers, that customers are pushing back on buying? Because of the integration, they won't need to. When does the integration happen? And then how does that benefit you once you've got that in place?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [16]
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 Well, first of all, it's very clear that this is a burning topic for our customers, in particular, the very loyal customers that have bought SAP solutions across all of the different line of business pillars and are clearly requiring from SAP a swift response. Now after we have been talking about the aspect for too long and have, quite frankly, not really executed with the required sense of urgency for some time, which had to do with, of course, also the need to continue to invest in features and functions like in the different LoB products but also with some of the structural setup of the company and which was quite heavily biased towards those different LoB pillars, we are taking some measures now to bring that closer together. But it is clear for our customers this is a priority, but we have also made good progress by now. So if you talk about integration, it's very important to understand we're not talking about technical integration at an API level as some others in the market. We are talking about completing integration when the user experience is harmonized, when you have the same analytical foundation across all of the solutions, when you have the same data model underlying all of the solutions, the same master data definitions for employees, suppliers, customers and other critical master data elements, and you have the same application life cycle management, the same workflow management.

 And that is now the case for SuccessFactors. So here, the integration has been completed in Q4, actually. And we are going to complete the same for our Intelligent Spend Group solutions, Ariba, Fieldglass and Concur as well as for C/4 in 2020. And this will cover all of those elements so that you have then really a deep-level integration in place.

 And I think our customers are trusting us especially with the current leadership focus on this topic that we will complete this. But this time, we certainly cannot fumble. We cannot extend and delay. So this is a clear corporate priority and has been locked and loaded as part of our portfolio investment process as well as that. Sometimes, I get the question so is this posing a risk on having to invest more in integration now. No, because it's baked into the plan, but it's one of those aspects that has now received the big shift of investments to the favor of integration.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [17]
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 And you mentioned -- so you mentioned SuccessFactors integration done. C/4HANA, particularly Ariba and Intelligent Spend Group next year. I don't know if you would agree, but it seems to me they're the areas that SAP probably faces the most intense competition in the market on the CRM side, HR and then, maybe to a lesser extent, on procurement. How does that change the competitive battle of those players where you're able, finally, to actually bring the sweet benefit of SAP and sell all these things? And you're talking about a really deep integration. This is not simple API. This is...

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [18]
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 This is something that you -- this is something you can only achieve if you own the solutions on both sides of the fence. Yes, this is not API-level integration. And it gives you, of course, a very strong additional argument. Without a strong feature and function coverage, it will not do the job alone. But if you have a competitive product from a feature and function perspective, then the integration is giving customers the no-brainer argument why you want to go with SAP. And therefore, it will be a strong source of competitive differentiation and will strengthen our value proposition not only for the suite as a whole but also for the individual pillars. So I'm very confident that this will improve our competitive position, which anyway is already -- we are already in a pretty good spot. HR has benefited greatly from Qualtrics because you can basically now create a new story of making HCM -- actually HXM, human experience management, with all of the Qualtrics experience management capabilities; the same on the CX front as well. And if you then add the integration to it, then it really becomes an unbeatable story.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [19]
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 That's very clear. And then maybe as we move from that integration of the cloud assets back into suite, let's maybe talk about the cloud growth as a whole. So the discussions I have with investors, the cloud growth has slowed a little bit organically over the last couple of quarters, I think we were 25% organic in Q3. And I think the concern that some people have is around the cloud bookings. There's lots of gives and takes in that cloud bookings number we know. And we know it's not a perfect proxy for what happens in cloud. But could you maybe just help us over the next few quarters? We've got infrastructures there's a bit of a drag. Qualtrics comes in and maybe can be a boost. How confident are you that you can sustain the growth that you need in that cloud business to deliver at the top line?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [20]
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 Well, if I was not confident, then we would not have confirmed all of the targets for the next couple of years in cloud. I think it's important to understand, first of all, from a real like-for-like comparison perspective, we were at 27% constant currency growth in Q3 if you bake in the Qualtrics performance last year when they were still independent. And we have a target out there that calls for low-20s growth basically and from a CAGR perspective in the next couple of years, so I'm very confident. The new cloud bookings, and I've been saying this like a broken record now for not only the last few quarters but even already last year, they've become a weaker and weaker proxy for the future to be expected growth, first of all, because kind of more pay as you go revenues become bigger because now we don't only have them in the Intelligent Spend Group, we also have them as consumption-based billing in the SAP Cloud Platform area. And we have a growing number of contracts that are larger and therefore have a ramp in a multiyear contract in there. And this is not captured in the ACV-based new cloud bookings matrix. And of course, also the importance of renewals increases. And as you have a larger and larger renewal base, actually, the net new cloud bookings become a smaller piece of what you need in order to get through the number. So those are some of the reasons why as of next year, we want to really introduce newer disclosures around a more 12-month cloud backlog and more RPO type of discussion and I think will be much more relevant for investors to judge the forward-looking performance of our cloud business because then it includes also the renewal business into it.

 From a puts and takes perspective, of course, we have Qualtrics as an exciting new growth engine. They are growing above the 40% mark, and they are reaching already scale now, and so therefore, this will be a big aspect of growth that we can harvest in the next couple of years as we realize the synergies with our go-to-market sales force. But it's also the organically developed cloud assets that are now really scaling like S/4, including supply chain in the cloud, which is already a mid- triple-digit million run rate business and growing very fast in the high double digits at the same time. And we have the SAP Cloud Platform, which is now gaining a lot of traction through the collaboration with Microsoft as part of the Embrace partnership. And it's doing extremely well, reaching a similar size. We have SAP Analytics Cloud, which is still slightly smaller but growing even faster than those 2 first named organically developed cloud assets. So all of them, of course, are much -- growing much, much faster than the average and become a bigger piece of the pie at the same time. And that actually gives me a lot of confidence.

 And on Infrastructure as a Service, yes, the growth is coming down. This is consciously steered by SAP because we are emphasizing the partnerships with hyperscalers. We are focusing our own Infrastructure as a Service business on higher-margin opportunities that we have, which have a heavy bias towards active application management services from SAP. If a customer only needs pure Infrastructure as a Service business, I think the hyperscalers are a perfect option for those more straightforward engagements. This is bringing our cloud margins up. And at the same time, the partnerships actually emphasize our SaaS/PaaS business model. It's not that we are losing, so to say, cloud revenues, we are replacing a lower-margin Infrastructure as a Service business that we otherwise would drive then through, in particular, Platform as a Service business that is coming at a very high-margin through the Embrace partnership and the other partnerships that we have with GCP or with AWS. And I think that is a combination that actually makes absolute business sense for our customers, for SAP, and it's not something that anybody should be worried about. It's basically all part of the plan already.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [21]
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 That's very clear. I've got a lot of other things I want to get to, but maybe, just looking at the clock, I'll give it -- open it up to the audience to see if there's any questions at the floor. Can I take any questions from the audience? Can we get a microphone just down here, please?

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 Unidentified Analyst,    [22]
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 Yes. Two questions both on China. First of all, elaborate a little bit more on the slowdown you're seeing there that you mentioned in the conference (inaudible) and explain maybe how long do you think the slowdown would be.

 And secondly is, given the country's preference for our local software that has been announced over the past couple of years, how does your strategy in China change in light of that?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [23]
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 So first of all, I think I need to be precise in explaining what I'm seeing. When we talk about a slowdown in China, we talk -- we tend to talk about the slowdown in Greater China, which is our region -- so to say, our regional management structure. And as I've said, we have a -- despite the fact that it's obviously only one city, we have a strong business in Hong Kong usually because 7 out of the 10 largest Asian conglomerates are based there. And for obvious reasons, in the last half year, Hong Kong basically was shut down for business and all.

 That's not the case in Mainland China. I think we have seen, of course, very strong growth both across on-premise as well as cloud in Mainland China over the past couple of years. And while that has come down, it's still growing. Both on-premise as well as cloud are still growing in Mainland China at a reduced pace. But given that we have a large, large room especially of going down from the very large state-owned enterprise and private enterprises to the more mid-market, we have lots of space that we can still cover. And what is important in this respect are our partnerships. So back to your point that, of course, in China, it's very important to be considered a quasi-local vendor with strong local ties and partnerships. Our collaboration with Alibaba with AliCloud is very important. We have now the SAP S/4HANA ERP system as well as the SAP Cloud Platform available via AliCloud. And they are also serving as a go-to-market arm to position S/4 to their different -- many, many different customers that they have as trading partners on their marketplace. So these types of market partnerships are incredibly important in China. And from that perspective, we have not really dramatically changed our strategy and approach to the market, but we have stayed committed to the Chinese market. One of our competitors has recently closed down officially their R&D center in China, which I think is a devastating move that I'm sure the Chinese will remember. We have always remained committed and have actually expanded our presence in China even through more challenging times. And we see China not only as a distribution market but as a source of innovation and even co-innovation with our customers. And we will continue to do that. And I think that will be a, in my point of view, good recipe for long-term success in that market.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [24]
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 We take another question from the audience? Any other? Could I maybe move it on, again, staying on the top line and just discussing the pace of S/4HANA adoption within the installed base? Could you talk a little bit about where you are in terms of penetration of the 30,000, 35,000 kind of ERP customers that you have? And then the other discussion that we have a lot is around the pace of actual go-lives in that business. Has that been a barrier to sale? How is that progressing? And how do you see that?

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [25]
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 Well, first of all, I'm very happy with the momentum in S/4. We have now more than 12,000 customers at the end of Q3. And knowing that Q4 is always by far our largest quarter, I think there is a safe bet out there that we will have many more customers by the end of the year. About 3,700 are live, again, year-to-date, and we have another roughly 3,500 ongoing implementation projects. So the pace is now clearly picking up. It's also great to see that while S/4 stays a strong driver of on-premise license revenues, and we had double-digit growth all the way through the year actually in S/4 on-prem, it is also now becoming a real growth engine in the cloud with high double-digit growth. And a lot of the net new names that we acquire for S/4 are going to the cloud right away and implementing our public cloud version of S/4.

 In terms of the traction, I think it's clear that if customers only technically migrate to S/4, which I would never recommend if they have the chance, then they will be able to move faster. But then also the way to value capture will not be as rewarding, so to say, as if you really use it as an opportunity to fundamentally rethink your business process chains and optimize them to take maximum advantage of the new capabilities, and it might take a little bit longer, but the actual ultimate price that you can gain is much higher. This is also clearly visible from SAP's own journey towards S/4. When we originally migrated to S/4, we did so as a second company worldwide 5 years ago. And that was a very fast process. We went live after less than 3 months. And of course, during that time frame, we could not materially change our business process. We have done that hard work now in the last couple of years, and we recently went live in the summer, and with the latest version of S/4, the 1809 release back then, which now brings a lot of simplification, standardization. And our processes have been adopt -- adapted in order to take maximum advantage of that. So that's a 5-year journey, but it gives us tremendous scope for automation now and G&A simplification. It's baked into our best-run plan as well.

 And I think that's a good proxy for what I'm seeing in the market. If you go to our most sophisticated customers in the installed base, the Daimlers of this world and many others, they are currently now on the journey of migrating progressively their different business units to S/4. We have great competitive wins, something that has not happened in the extra-large enterprise space for many years, where the market was basically distributed between, typically, the 2 players that can serve the very large enterprises. In the last 5 years, we have seen a clear trend towards customers moving over from that other color to the blue color, including in your neighborhoods [LM] and the U.K., where they had their largest customer, I think, outside of the U.S. is now going to S/4.

 So I'm very happy with where we are here. I think this will give us stability in on-premise for a number of years to come as customers are migrating. But even more importantly, it will be a key source of growth in the cloud as well. And ultimately, the signal that I'm getting is that all of the customers are clearly sold on the if. It's now really a matter of executing the migration programs in the next couple of years. And then I'm super confident that virtually our entire installed base will be on S/4 and on HANA, therefore, as we progress through the decade.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [26]
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 For that, we've run out of time. Again, it's HANA, that seems to be a pretty positive note to end the discussion on.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [27]
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 Yes. Thank you.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [28]
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 Luka, once again, thank you very much for joining the conference.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [29]
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 Thank you very much, Adam.

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 Adam Dennis Wood,  Morgan Stanley, Research Division - European Technology Equity Analyst   [30]
------------------------------
 Thank you.

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 Luka Mucic,  SAP SE - CFO & Member of Executive Board   [31]
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 Thank you.




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