SAP SE (NYSE:SAP) Fourth Annual Wells Fargo TMT Summit 2020 December 1, 2020 8:00 AM ET
Christian Klein – Chief Executive Officer
Conference Call Participants
Phil Winslow – Wells Fargo Securities
Hello, thank you everyone for joining us today. We are very excited to kick off the Fourth Annual Wells Fargo TMT Summit. Yes, before we do get going I just want to say, I hope you are well, hope your families and friends are well. Yes, please take care of yourselves and take care of others.
Now we're very excited to bring you this annual event this year, although virtual, but as usual, we're always going big. This year the conference has grown by 30% in terms of number of companies attending. The number of investors attending is up 3x. And we think there's no better way to kick off this year’s session than to have Christian Klein, CEO of SAP joining me for the kickoff Keynote. Christian, thank you for being here.
Yes, thanks for having me Phil. And welcome everyone.
Great. Well, before we get going, I'm going to try to do this as well as Stefan Gruber does, but we do have a Safe Harbor. 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 future financial results are discussed more fully and SAP’s most recent filings with the Securities and Exchange Commission.
I know Christian we’re kind of great you gave me for that versus Mr. Gruber?
You did it perfect. I hope you recorded it for Stefan so that he can do it at record speed next time.
Well, I hope to raise the bar again with him. We'll practice together. Christian thank you for being here. It's been a pretty eventful year for you, obviously, becoming CEO of SAP, you also welcomed a second child. So I'm not sure which is harder these days, you having a couple of kids at home or being the CEO of SAP?
Yes, I just got another taste this morning. Actually, we had snowfall overnight here in Germany and, in the morning at 6:00 AM, my little son looked out and he couldn't believe his eyes. He saw snow actually for the first time. So from 6:00 AM to 7:00 AM, I was busy, building a snowman, jumping around. So you come all the way here you are pretty exhausted to the office, I think.
Sure. You are right. Well, you can start off to get down on the right foot. So let's get going here. So, in October, obviously SAP announced that the company would accelerate both the transition of SAP’s product portfolio, and delivery platform, as well as the migration of your customer base to the cloud. Now these are exciting, but quite meaningful changes, obviously. So let's break this down into two parts. First, how is SAP changing? And then second what's really changing the customers to drive this accelerated shift. But let's start with focusing on what's changing at SAP first.
Can you help us understand exactly what is changing in the cloud versus an S/4HANA and the SAP business technology platform, which you are positioned as really the key drivers to this next shift to the cloud by SAP. For example, you talk what kind of functionality this sort of the cloud versus S/4HANA have right now? How do you expect that to evolve? What are the enablers of the business technology platform that will accelerate the shift?
Yes, thanks a lot, Phil, for the question. And let me just start with the big picture. What has actually changed? I guess what has changed due to COVID was actually the market. And so you wouldn't believe how many phone calls I got from CEOs from all over the world across many, many industries. And their main concern in this crisis is how can I still put to use my product? How can I still deliver? How can I still make the logistics works? How can I circumvent lockdowns? And when you see what SAP software does for that, that's for these customers, we are at the heart of that. And for them it was really gaining higher resiliency.
And when you now look at what has then changed inside SAP, when you look at our portfolio, all of our apps actually already moved to the cloud before. If we talk HR, if we talk indirect procurement, if we talk travel and expense, if we talk commerce and other parts of our CM portfolio, they are all in the cloud. Now in the ERP where we are one in 15 billions of workloads and where we also then one in the world's most mission critical business processes, this is now changing as well.
Customers were – to the move to the cloud and already before the crisis, but the crisis was clearly now an inflection point, not having to run their own data center anymore. And this is really also valid for all of our customers, no matter which size. So a lot of have reached out and some customers, midsize customers, smaller customers, customers with standardized business processes, consolidate landscape, they move directly to S/4HANA cloud. And that works perfectly also in the crisis.
We have over 3000 customers, time to value, time to go live within 30 days. So they really make the move to the cloud in one step. And then we have our larger customers, customers with more poses complexity, with more ERPs in the company. And they are doing this move as well. But they are migrating to the cloud. They can pick with us one of the hyperscalers, they can move to an SAP data center and then transform their business, because it's not only gaining resiliency with moving to the cloud, but also changing your business model. And this is what has changed in this crisis, this has what’s now changed now.
And with regard to the product, I already mentioned S/4HANA, next year we will also have 80% of the functionality we have today in on-prem will be also available in the public cloud. We will also now with the business technology platform, a platform where we put a lot of work in, we are now integrating our products via this platform. So it's now, also – this is now just part of every solution we are going to sell because the data model is to add the automation services. They are all the services, what an application needs to provide really to seamless end-to-end experience. And this is how the things are together.
And I also refuse a bit to talk about products. I mean, we are a solution provider. We are talking about connecting commerce to warehouse. We are connecting procure to pay, to the warehouse, also to the S/4 finance system. And this is what SAP is about. And we are going a little bit back to the woods with regard to integration, but we also, of course, looking forward and innovating with our customers infusing AI, but also building out more and more industry verticals now into cloud, that's actually, what is changing inside SAP.
Great. Well, let's drill into that again for a couple of minutes here. First on S/4HANA, and then on the platform itself. SAP has more than 15,000 S/4HANA customers, as you announced at Q3. And I think it's more than 32,000 customers of HANA which just celebrated its 10th birthday.
Now before announcing the new offering what have customers' attitudes been regarding S/4HANA in the cloud versus on-premise? And how do you think about the evolution of the S/4HANA penetration inside SAP's installed base with your accelerated shift to cloud?
Yes, I have to share some facts. Phil, first of all, I mean, when you see that 86% of the Fortune 500 are already on S/4HANA, that already tells the story about the value. I mean, no one of these customers would move to S/4HANA if they don't see the value in running new license models and doing vary and configuration together, with their commerce store, and really also providing intelligence solutions for the supply chain side of the house. And we have 90 country versions.
When you look at what is just happening out there on the vaccine side, there we are almost supporting every manufacturing, every logistic provider who are on the vaccine with our software. And they are also reaching out telling, how can we make the production work? How can we make the logistics work these days? And so we are seeing tremendous focus. We also see competitive wins with British Telecom, with Carrefour and others where we even win big ERP projects.
On the cloud side, I mean, we are working heavily on that. We reduced the code lines, we made the stack leaner, we are now having a tool multi-tenant system, which is pure elastic, which can really also run end-to-end and scale across many tenants. So that was also where we key for us, that we also moving into cloud side into a modular application landscape. And so for that, that's where we key for us.
Got it. Now, switching gears for a moment to the cloud delivery platform, what does SAP’s current cloud infrastructure look like? And what do you envision the “target state” to be after the changes you've just outlined in October?
Yes, so on the cloud infrastructure side for us it's very important that we have an open and agnostic platform. So our cloud platform, our solutions one, on any hyperscaler, and of course we also have an own end-to-end SAP offering also, of course, with world-class SLAs. With the hyperscalers we are working also an even better system availability times. And of course also in our own infrastructure, we are moving all of our legacy infrastructure now to a new modern infrastructure, which was also part of our updated guidance we put out at the end of Q3.
And with that, obviously, we are also then just driving for gross margin of 80% around 2025. Now of course, by putting a lot of efforts in there short term, but then of course also reducing further to TCO of our solutions with various measures we have also put in place around the product itself. And so we are actually very confident that with the combination of these two, our hyperscaler strategy and making our own SAP infrastructure even more efficient, that we can also put use this world-class cost margin towards 2025.
Got it. Well, let's double click on that for a moment on the hyperscalers, because this is a question I've definitely gotten a lot over the past few weeks here. But with these cloud delivery changes, how do the structures and really the economics of SAP's relationships with the hyperscalers that you just mentioned evolve from here?
Yes, I mean, the hyperscalers are great partners of SAP, as I said, on the infrastructure layer. And definitely we are using also the hyperscalers for some of the technical services where SAP will never play a role in. For example, for face recognition, in some of the solutions we are going to build the services now in to make the customer experience even better, yes. So for that, actually the hyperscaler relationships are really key to us. And on the other hand for us it's very important, now, now that with the business technology platform, we provide all the necessary services for our applications. We also invite now the partners to build extensions on that platform. We have to position that platform front and center because that's the epicenter that's the foundation of the intelligent enterprise.
And there, the customers can really put our modular applications together to really one end-to-end solutions for their business processes in the company. We infuse AI and of course the partners can build extensions. And that's extremely important also for us that our platform is the platform to also build now in the future extensions to the ERP, because we want to get rid of the modifications in the ERP, want to get rid of this complex ERP landscapes and keeping the standard clean and building the extensions with a seamless integration next to the core.
So infrastructure, technical services, we partner, on the business application platform, that's our platform. And of course, on the apps, we want to partner as well with our ecosystem to build the necessary extensions, especially for some of the industry verticals.
Got it. Well, let's switch gears to SAP's customers now for a moment. SAP obviously has a very impressive install base of customers and is really expected to generate license revenue about €3.5 billion this year, and about €11.5 billion in support revenue. However, if you look at your 2025 ambitions, it really implies a steep shift towards cloud, license revenue falling €2 billion or below, maybe €1 billion and support revenue to about €8.6 billion. But cloud growing to more than 60% of revenue.
So my first question here is what are you hearing from the customers themselves, because obviously I'm not sure if I cover another company that has sort of deeply integrated the relationship with their customers as SAP does that really gives you this confidence, not only their intentions, but also more importantly, their ability to shift their SMB investments to the cloud at this type of pace.
Yes, so Phil, I get this question of course, a lot with regard to our 2025 guidance, but one point is very clear. I mean, the question like around will SAP ERP customers move to the cloud? I mean, that move already happened before the crisis also for the large ones. I mean, they are picking one of the hyperscalers are going with SAP, the Nestlé and the like, they are all moving to the cloud. But with SAP, what customers now realizing they are also getting a better customer lifetime value. Now, because again, resilience is coming with move to the cloud, you can outsource your IT operations, can get a better TCO, can get better scalability, hopefully you get also better system availability and response time, so it’s a good middle-class set up, but you are not transforming your business.
And this is what I want to see what I want to make work with our customers together that we are moving them to the cloud, but also going into omni-channel sales, that we are connecting vary and configuration to that that with industry [indiscernible] we're also automating their processes in the factory that we enable them to remote – to work remotely from home, by putting more automation into our transactional business processes in HR and finance. This is what SAP is about.
And our customers want to see that, they want to see that we take them by the hand, move them to the cloud, be completely agnostic on the infrastructure side that's the winning strategy, but then, change the business. But again, and this is, I guess, also a big change with a platform place, which is not different for all of our applications in the cloud with one platform where we share one domain model, one authentication service, one workflow and the likes, because this integration, when you're looking at these customers, no one wants to one payroll, not integrated to an SAP employee central solution. No one wants to make the financials work with having not procure to pay integrated to that. And the good piece about that in the future, customers don't need to invest into expense as part of the integration software are only going via technical APIs. You get this out of the box and you steer your company real time without having here 200 people behind the boardroom stitching the numbers together so that they make semantically sense.
I mean, that's all about SAP. Think about the success we have in ERP that didn't come 50 years ago because of artificial intelligence. Maybe also not because of the user experience. But what SAP had was this real-time steering of a company based on consistent data models and integration of business processes. And so that for me very key and every engineer in SAP got that message. We already far ahead on the work we are doing on integration, we're going to do even more in 2021 because that's, for me the winning strategy, when we also, don't – not only compete against the best-of-breed, but that we can really offer solutions.
And I don't want to talk about Ariba, I don't want to talk about S/4, I don't want to talk about Fieldglass, I'm talking about procure-to-pay in an intelligent way. I'm talking about total workforce management, because this is what our customers want, and this is what they get from SAP in the cloud.
Yes. I agree. I don't think customers think about specific names or branding of applications. It's helped me with my business process. Yes. And what do I need, to help me be more efficient in that business process. So…
And Phil one thing to mention as well, I mean, what do I believe? Why I'm so confident with regard to our 2025 guidance? Obviously, I see ERP now moving into the cloud. We are talking about €15 billion of workloads. This is also a reason why, of course, the hyperscalers are very keen to partner with SAP and I see a higher share of wallet and now going into the SAP P&L because that's also for me very important. It's about owning the customer relationship on the business transformation side, but it's also of course owning a greater share of wallet when we talk about SAP workloads. And that's something what we are going to ensure next year.
And then second, I mean, when you look at our LoB applications, and I hear, a lot of feedback, how they are doing? Your cloud revenue is going down. Our cloud revenue is going down because of Concur. And I can tell you, I have a lot of respect for all the people in Concur who are out there selling a travel and expense solution for business. And that's a very hard sell and this solution will also bounce back, because it's the best solution in the market period.
And then when we talk about, commerce, when we talk about procurement, when we talk about HR, there actually we have very, very healthy business, our SaaS business is increasing revenue by 26% in Q3, that's actually a very healthy business. And I see a higher growth rates to come, just because Concur is coming back. And now think about it. In the future when you don't sell Ariba, but you sell procurement, if you're selling a cloud ERP, if you're selling a SuccessFactors connected with Fieldglass and you sell total workforce management, you also, again, increasing your share of wallet and even better, this is what the customers want, and this is what others don't have to offer. And this is actually why I'm so confident also towards 2025 to make this cloud numbers work.
All right. That makes sense. So, yes, I think my last T&E filed on Concur was back in March. So what you mean there. I just want to double click on the business technology platform for a minute, from the customer perspective. If I think back to TechEd in Barcelona, there were the four sort of big pillars that were laid out as sort of the foundations of the business technology platform. One of the things that you also just mentioned before was that unified data model. What do you view as sort of, I guess the key selling points from a customer's perspective? Or what is the sort of the customer feedback to you then about sort of, what's sort of the key elements of the business technology platform and S/4HANA to get them to accelerate the shift?
Yes. So look, Phil, I mean, take for example now, let's go back to product for a second SuccessFactors solution, which we acquired and now displays by heart. I was there two years together – with last 10 years, it's already 10 years ago, almost time flies. And, look, I mean, in the past years when you have SuccessFactors in place, first, you had to model out the data model within the different SuccessFactors solutions to really one hire-to-retire, end-to-end, this is now solved.
So you can run the whole employee life cycle now with one data model, with one user experience and so on. Now we also connect that to the finance module of SAP, because there are many business processes which have to go back and forth. And that's why key for me that there is a consistent data model underneath. Yes, because when you now want to report sales productivity, or when you want to talk about other employee and financial related KPIs, just the data model has to fit. You need to talk about one employee.
Or if you then also talk about planning so that you have a total workforce planning in place, again, you need a harmonized data model where you can compare actual against plan, and this is going to happen next year. And the business technology platform is actually part of every SuccessFactors HR deal we are doing next year because the data model is there, the authentication, the identity service is there. So technically the solution doesn't want even anymore without the business technology platform. So now we having a platform which is getting adopted by all of our acquired applications, of course, including S/4. So that's very important that you get this adoption in place. And now it's not only about having a harmonized data model when you are using SAP solutions.
Now in the crisis, a lot of customers want to build employee apps to enable employees to work from home, analytical app, or not a time recording app. And this is now what you can do on the BDP better than in any other platform, because using the same data model, then actually your SuccessFactors core application is using. You can use the same workflow. You don't need to go to another third-party platform who says I can automate business processes, but they have no freaking clue around what actually the data model looks like in SuccessFactors. The workflow is completely independent. Yes, so maybe you can build a surface on top, but what you cannot change is the way how your people work in the core applications. And this is SAP and this is now happening with the business technology platform.
Fantastic. All right. Let's switch gears a little bit and dig into the financials. Obviously, Luka and you provided a lot of detail in the shape of the path the SAP’s 2025 ambitions. Where do you have the highest degree of confidence in these numbers and why?
I have a high confidence on all the metrics, of course. But I would say, first, let's start at the top of the P&L and start with the cloud revenue. And there, I just see how massive our installed basis. And when I see the workloads there, which are still on-prem and listening now to our customers and see, how they want to accelerate the move, seeing how S/4HANA matures more and more, we can run a public cloud. We can run S/4 in the hybrid cloud for our larger customers who are not coming to 100% standard. I'm sure this move is happening.
For some of the larger customers of course, it will take a time. You have to plan it wide. But then, the technical migration we are working on that also with the hyperscalers will happen.
On the LoB side, as I also mentioned before, we have market winning solutions today, they will become better. Integration is a key differentiator, but we also now have with our new Q3 guidance, also some home for innovation, we are building industry verticals, giving the industry flavor, what our customers by the way also had in the – on-prem – in the on-premise systems. But now we are also putting them on our platform again, to also create a seamless user experience for our customers.
And then, industry cloud I talked about that. Let's not forget the business network. We have formed networks today in SAP, which just today announced the automotive alliance here in Germany with BMW, with ZF Friedrichshafen, with Bosch, with Siemens, where we actually want to create complete transparency across the supply chain of a car manufacturer, for many use cases where they can drive productivity, increased growth. We have over 40 use cases and guess what, why did they pick SAP? Because they all SAP customers in one way or another, we have the data. We have the data in different networks, but if we bring the data together and connect the suppliers with the car manufacturers, if we can connect the logistic providers, if we can connect the assets all in this network, you can create unbelievable use cases.
So that's the business network today for automotive. We are working on that for utilities and many more to come. We have to monetize our data in a way better form, than we did it in the past. Yes. And then let's not forget about experience management. We are having an IPO ahead of us. I was very – with the Qualtrics performance in Q3, I don't allow to talk about Q4, but as I said the – as I said before in earnings, the solution performs incredibly well since talking about a sensitivity of customers, employee, again, matching it to a workflow to also connect our experience data with operational data that also wants perfectly well with the IPO.
And then, having Qualtrics out there in the market, but still being part of the SAP P&L, I also see the big win-win. I see high growth rates then the year to come. So I'm extremely confident on the top line. And on the bottom-line, I have a CFO with me, Luka Mucic, you can be best and throughout he has a close eye on me and my board colleagues. And you heard me talking about the cloud gross margin with more scale in the cloud. You also automatically get better gross margins. We are doing our homework with parts of our legacy infrastructure. We have the hyperscaler partnerships cooking. So also there I'm extremely confident.
And last but not least on the bottom-line, let's not forget SAP was definitely not short of events, but one major event was actually reorg we did in March and getting the efficiencies out of that takes time. But also there, they will come. I mean, we reorganized and put it all our sales functions together inside the company. We had some of them. We are now, put marketing together, services together. We put development together and there were always overlaps. And also the engagement model with the customer was not that easy. Now we have that. And we also now of course working on gaining this efficiency. So also in the other parts of the P&L, I am really confident that we also will see after of course we did the cloud transformation completely in ERP. You see then of course also the operating profit coming back from 2023 onwards with a double digit growth rate as well.
All right. In the last, just few minutes here, obviously, we've talked a lot about SAP’s technology transformation and accelerated shift to the cloud, as well as your medium term aspirations. But I really want to focus in on 2020 and 2021 for a bit. Now, if I think back to the financial crisis having covered you guys for a long time. There were a lot of projects that were delayed or moved to more a phased in model, back in 2008, 2009. But then SAP saw it really catch up in 2010 with about 20% organic license growth. The next year then it followed by another strong year in 2011 in terms of license revenue.
When you think about our current situation with the COVID-19 and the resulting economic crisis, what were their similarities to the financial crisis? And obviously you talked about a similar thing of downsize deals, more phased in transactions on the Q3 call, but what are your customers telling you about these projects? Is it similar to the financial crisis? And how do you think about sort of the post-COVID recovery for SAP and its customers?
Yes, Phil, this is a mixed bag, I would say. We have a few industries and I was just talking to a CEO of an aerospace company and look, I mean, that's more about how can SAP help on the short term to overcome this crisis and to make this customer even stronger after the crisis. They – even they do a few projects with now as to if you know the transformation, but obviously they are hard hitted by the pandemic. And of course, we see this as well on the demand side of the house.
But the other industries and these are the majority where CEOs are saying now or never. Now I need to move ahead with my transformation supply chain commerce. I would say these numbers can hardly become any better after the crisis, we are almost seeing that triple digit growth this year. And I really see that this will sustain in the year to come. Supply chain is I guess really back in the focus for way too long. I personally feel we talk about CM and others, but when your supply chain is not connected to your CM, if your supply chain is not automated, not intelligent, you are losing a ton of money. And this is where we of course play as the number one in a marketplace out there.
And then in the ERPs, I know there are some concerns around the big project. They are all continuing, obviously, do we have a few delays? Yes, we have them, but that's not because the customer lost interest. That's just about, when you're driving this massive transformation projects and you cannot go to a whiteboard and really redesign business processes, adapt them to new business models, that's of course takes a bit longer. This is where sometimes it's better. If you can meet onsite and our architects, our business process concern and the customer can sit together and really remodel, how the enterprise will work after, for example, an S/4HANA migration.
So yes, there are a few delays, but what – I'm actually extremely confident. Now we, of course will see the shift from more on-prem to the cloud. That's actually now also reflect in the earnings and in the midterm guidance now of SAP. So I am actually very confident also for the year 2021 with the ongoing transformation and knowing that SAP can do both the move to the cloud, but also adapting, the end applies to the new realities in the digital edge.
Exactly. As you just mentioned, obviously we spent a couple of decades focusing on efficiency, but I think whether it be even just the trade wars last year, COVID this year that there's a need to focus on resiliency, but that's why I think enterprises need a partner like SAP that can enable really resiliency, but you don't have to give up the efficiencies to drive that?
Just look at, everything going on the trade side between the U.S. and China. But we have so many customers who have to do both. Yes. They have to make business in China, have to produce, sell and deliver and they want to also do it in the U.S. but they need to reconstruct their supply chains. We need to find solutions to adapt them to new political laws. And this is also what SAP does, also not for QUAND we spend over $1 billion in localization over the next four years to make that work. So this is also hitten in our P&L, but this is also what it takes to warm the multi-nationals of this globe. And I honestly, this is also what, on the one hand side, yes, it's 1 billion, but show me one other software when the – who does that at that scale, with that knowledge and with that expertise. So this is also then where you can see how strong the basis of SAP.
Perfect. Well, Christian, our time is up here for the Cree now, [ph] went really fast. But I think you did a phenomenal job, thank you for taking off this conference. I want to wish you, your family, your company, all your employees all the best this holiday season and into 2021.
Yes. Thanks a lot, Phil, next time onsite and back in the U.S. I would say, and then also to you, and of course all to the listeners also from my side, happy holidays already. There's some business to close, but for everyone out there already happy holidays.
Exactly. I got to make you for. All right. Thank you, and talk to you soon.
Yes. Thanks a lot, Phil.