Welcome to
the SAP Q1 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir.
Thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations, SAP. Storz. Thank you for joining us for our earnings call to discuss our Q1 results 2021.
I'm joined by our CEO, Christian Klein and our CFO, Dukan Mucic, Storz who will make opening remarks on the call today. And also joining us today for Q and A from Australia is Scott Russell, who leads our customer success organization. Storz. Before we get started, as usual, I would like to say a few words about forward looking statements and our use of non IFRS financial measures. Any statements made during this call that are not historical facts Storff.
Our forward looking statements as defined in the U. S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, Expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar His expressions as they relate to SAP are intended to identify such forward looking statements. SAP undertakes no obligation to publicly update or revise any forward looking statements Stifel.
And all forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. Stuels. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U. S. Securities and Exchange Commission, Storz, including SAP's Annual Report on Form 20 F for 2020 filed with the SEC on March 4, 2021.
Storz. Participants of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of their dates. Storoz. On our Investor Relations website, you can find the slide deck intended to supplement today's call available for download. Storoz.
For those of you following the webcast, the slides will be shown as we proceed through the prepared remarks. Unless otherwise noted, our financial numbers referred to on this conference call are non IFRS and growth rates and percentage point changes are non IFRS at constant currencies year over year. The non IFRS financial measures we provide should not be considered as C-four for Superior 2, the measures of financial performance prepared in accordance with IFRS. Mr. St.
And finally, I'd like to mention that SEP will hold its SAPPHIRE NOW customer conference virtually again this year kicking off on June 2. In Stenel. In conjunction with Stenel. We will hold a financial analyst event on June 15. We'll post details on our website in the coming weeks.
St. With that, I'd like to turn things over to our CEO, Christian Klein.
Yes. Thank you, Stefan, and welcome everyone also from my side. St. Before going into the details, let me say this. I couldn't be more proud of what our teams have achieved this quarter.
Stuels. This was just an amazing start into 2021, and our performance clearly confirms our strategy to drive business transformation in the cloud. We saw competitive trends in our entire cloud business, Stuels. Clearly winning in a growing market with strong order entry grows across our portfolio, all in top of our rapidly growing platform Stavros, serving as the foundation for modular, integrated and innovative application landscape for our customers and partners. Wise is already a game changer.
Only 2 months after market introduction, the best offering in the market for business transformation. St. Altogether, on the back of strong new cloud business and an uptick on renewals, current cloud backlog growth reaccelerated sharply. St. Looking at the bottom line, we achieved the highest Q1 operating profit in our history.
So this quarter was one of the strongest quarters in the history Stifel of SAP. Let me go now into a bit more detail on the most important part of the business, cloud. Stu. Q1 was a blowout quarter in the cloud. We saw the fastest growth in new cloud business in 5 years, Stryss, which boosted our current cloud backlogs, up 9% to 10% to 10% to 10% to 12% to 14% to
15% to 19% to 19%
to 15% to 19% to 20% to 20% to 20% Storz. On cloud revenue, as we all know, cloud revenue trails business performance. And so exactly as expected, Cloud revenue growth has bottomed out at 13%. It's important to look at the breakdown of this growth across our cloud business. Our SaaS path cloud solutions outside intelligence spend showed tremendous growth of 24%.
That includes Estella, 43% growth of S4HANA Cloud. On the other hand, Intelligent Spend performance, which includes Concur, Stuels. He's still muted by COVID across both transactional and committed business. However, once Trello returns, we expect Concur to rebound significantly Stuels building on its market leading position. Looking ahead, driven by our strong order entry, cloud revenue growth will accelerate from here, St.
Especially since also the strong year over year headwinds in transactional revenue are coming to an end in Q2. St. Rapid cloud growth will continue to drive resilience and predictability of our top line performance. Storff. Already now our share of more predictable revenue is approaching 80%.
Also for the remainder of the year, Storozynski. Please note that we continue to expect the pressure on our software license revenue to increase again. And we anticipate a pronounced decline for the full year aligned Stifel with our cloud first strategy. As growth across our cloud business accelerates and rise with SAP continues to gain momentum. Stu.
Let's move on to customer success, where the strong start into the year is also reflected in approximately 4,800 net new customers. St. Together with our partner ecosystem, we delivered more than 6,000 go lives and we have now more than 16,400 Customers. SAP S4HANA, our market leading core ERP solution. In the Q1 alone, Stu.
We saw more than 250 wins replacing competitive solutions underlining our relentless focus on customer value. St. Let me highlight a few key wins and go live this quarter. Biontech has chosen SAP S4HANA Cloud as the integrated ERP S. P.
System for their entire core processes. Bill Rue, a global medical technology leader is speeding up its business Storz. And digital transformation with Wise with SAP. Banuk, the world's largest supplier of CNC controls, drives an industrial robot Schaller. We selected SuccessFactors overall.
It was indeed a strong quarter for SuccessFactors, which was also chosen by IKEA, a world leader Stifel in Home Furnishing. Let me be clear. We are in the business of customer success. That's what we prefer to talk about. Stil, we cannot let recent unfounded claims made by one of our competitors go entirely uncommented.
St. Personally, I see it as a very positive sign that one of our main competitors spent so much time talking about SAP on their own earnings call. Let me tell you, we have been through their customer list and we confidentially reject these claims. St. I absolutely encourage you to do your own research, talk to the customers as we did.
Stifel. The latest IDC ERP data also helps to put things into perspective. It shows that SAP has taken significant ERP market share Stifel launching S4HANA in 2015. And to those who attended the earnings call from one of our competitors, St. Some of the customer names on this slide will sound familiar.
I leave it at that,
because what Stuels. Ultimately matters is that so many companies continue to join our journey to the intelligent enterprise, consuming differentiating business capabilities, retiring their old legacy system. And I couldn't be more proud to talk about 2 great customers today, Google and Toshiba, who have done just that Stryss and show what is really going on in the market. Over the last year, we further strengthened our relationship with Google. Storz.
They are migrating their financial systems to S4HANA. And as you already know, they also selected Qualtrics and went live on Ariba. We continue to expand our work with Google Cloud to support joint customers in their transformation. Mr. Toshiba selected SAP as the vendor of choice and saw tremendous value in replacing their legacy financial systems with SAP.
Staudigl, SAP is now front and center of Toshiba's global transformation and the all in replacement of our broad landscape of Competitive Legacy Software within Toshiba. Finally, let me give you an update Staudiglio on the execution of our strategy and our financial disclosure. Our strategy is to deliver the intelligent enterprise in the cloud, St. Providing customers with an intelligent, integrated modular cloud suite, complemented by solutions built by Wipro and an agile ecosystem of partners, Stryst, all based on our development and integration platform, the PGP. That has a broad range of aspects, Stuels.
But here are the 2 main things we are doing. 1, take our customer base to the cloud in core ERP. Stifel. The most demanding, but also most rewarding category in cloud. 2, establish the SAP Business Technology Platform as Mr.
Stephane Stu and non SAP applications in the cloud. The Business Technology Platform also provides application and citizen developers the ability Storz to quickly build new apps and extensions using the same services as our own SAP applications. St. We are done and finalized our work on integration. In fact, the SAP Integration Series Suite, Stu.
An essential part of the BTP won the Gartner Customer Choice Award 2021 ahead of other third party platforms like Moozsoft. Stu. The Wise with SAP offering launched in January, twice now that customers were waiting for Storz and a perfect match to the business transformation needs exposed by the crisis. We take customers by the hand Storz and transform the enterprise with superior business process intelligent capabilities based on our unmatched process expertise for over 25 Industries. And I'm happy to report Wise is off to a great start.
We are seeing early success, Stryss, having already closed more than 100 deals in Q1 alone. Now I want to provide you with transparency on our progress in taking C. C. Core ERP to the cloud. As you know, the overall ERP category is broadly defined in financial management, HR and procurement capabilities.
SAP's cloud ERP revenue run rate is now approaching €6,000,000,000 And if you remove the HR and procurement modules Stifel and look at the capabilities offered in F1. Storozynski. As of Q1, S4HANA Cloud has achieved a current cloud backlog of more than €1,000,000,000 St. It also shows the momentum we are enjoying. In Q1, S4HANA was the cloud category with the largest new business contribution.
And Stu. Amidst the impact of COVID, revenue and current cloud backlog were up 43%. And that's just the beginning of the journey. Storz. Keep in mind, we only launched Vyze with SAP end of January.
Now before handing over to Luca, St. One of our key competitive advantages is coverage and in-depth understanding of 25 industries. As you know, we are making this an innovation priority, Storz, either with our own resources or jointly with partners. That's what the SAP Industry Cloud is all about. St.
The recently announced dedicated unit for the financial services industry is a perfect example for this. Storz. Over 80% of the top 1,000 financial institutions are already running on SAP S4HANA. St. And now we are accelerating the innovation for our customers on top of our platform by partnering with Dedek.
Stryss. They are investing more than €500,000,000 into this joint business. And so this partnership is a showcase Storz. Not only for the importance of the platform and the ecosystem, but also for our strategy of doubling down cloud innovation in key verticals. St.
Let me sum it up. Last year, we have updated our strategy, completed the realignment of the company Stuewon was a perfect start and proof point for our strategy. RISE with SAP already worked as a salarator for customers' business transformation in the cloud. Skarva Financial Analyst Conference on June 15. Over to you, Luka.
Yes. Thanks a lot, Christian. Hello, everybody, from my side as well. Stifel. Yes, indeed, as Christian has said, we had a unique start to the year in many ways.
We had the highest order entry growth across cloud and software in 5 years, Storz, while posting the strongest increase in non IFRS operating profit and margin in a decade. Let me now provide you with some background on the key drivers behind this In the Q1, our total current cloud backlog reaccelerated to €7,600,000,000 up 19%. This was driven by a sharp acceleration in new cloud business across our portfolio as well as a strong start for RISE with SAP. S. As for HANA, our current cloud backlog exceeded €1,000,000,000 up 43%.
This was Stroop. Business performance is Spector to reaccelerate cloud revenue growth. In the quarter, cloud revenue was resilient and increased by 13% to more than €2,100,000,000 Storz, despite the continued impact of global travel restrictions on Concur's business. In fact, we grew our SaaS Pass revenue outside our intelligence spend business by 24% Sande in the Q1. S4HANA Cloud revenue contributed €227,000,000 up 43% year on year Stuels.
And is approaching a €1,000,000,000 annual run rate already. This cloud revenue growth, together with our steady software support revenue stream, Stu is increasing the resilience and sustainability of our business model. Our more predictable revenue share expanded by approximately 2 percentage points to a record high of 78%. Software licenses revenue also saw the fastest growth in 5 years and was up by 11%, Stuels, reflecting significant competitive wins in both ERP and Digital Supply Chain. For the 1st 3 months, Our cloud and software revenue grew strongly by 6%.
Our services revenue was down 14% year on year, St. But this includes the effect of the divestiture of our SAP Digital Interconnect business in November 2020. Consulting projects continue to be efficiently delivered remotely and SAP's premium services in particular remain in high demand. Stu. However, SAP's training business is impacted due to delays in reopening of global training centers.
Our total revenue increased by 2% to €6,300,000,000 Now, before moving to the bottom line, let me briefly give you some color on our regional results. Storz. We had a strong performance across all regions. In the EMEA region, cloud and software revenue increased by 7%. Stu.
Cloud revenue increased by 24% with Germany and Switzerland being highlights. In the Americas region, Cloud and software revenue was up 3%. Cloud revenue was up 7% with the robust performance in Canada and Mexico. Storz. In the APJ region, cloud and software revenue increased by 11%.
Cloud revenue increased by 18% with Japan, Australia and Singapore Stig, particularly strong. Let's now look at profitability and gross margins in the Q1. Storz. I'm proud to say that the gross margins of all of our business models were again up in the Q1. Storz.
Despite the negative top line impacts from the COVID-nineteen crisis, in particular on our transactional business, Stu. Our overall cloud gross margin was up by almost 20 basis points reaching 70%. Again, all cloud Business models contributed positively to this trend. Our SaaS PaaS margin grew by 50 basis points to 71%. Storz.
Our Intelligence spend margin grew by 40 basis points reaching 79% and our Infrastructure as a Service margin grew by almost 2 percentage points Stu 33%. Our software and support gross margin grew likewise very healthily by 80 basis points to 86%. Stu. Overall, as a result, our cloud and software gross margin increased by 10 basis points to 80%. Stu.
The gross margin of our services business increased sharply by 6 percentage points to 29%. Stuels. This was again mainly driven by a larger share of high margin premium engagement business, which has proven to be very effective in this virtual environment, Storz, where the increase in remote delivery led to a reduction in travel spend as well. In the Q1, our operating profit expanded Sisi significantly by 24% to €1,700,000,000 This reflected the strong top line performance Storz. In combination with the cloud gross margin improvement and our disciplined approach to discretionary spend, while capturing natural savings such as lower travel, Facility related costs and virtual events.
Just as a reminder, the prior year Q1 included a cost of approximately €36,000,000 Storz in relation to the cancellation of our in person annual SAPPHIRE NOW and other customer events as well as still normal travel behavior. Stuarts. As a result, our operating margin expanded strongly by almost 5 percentage points to 27.4% in the Q1. Storoz. On an IFRS basis, our operating profit was down by 21% to €960,000,000 And our IFRS operating margin was down over 3 percentage points to 15.1%.
Sainz. Based compensation expenses primarily related to Qualtrics IPO awards Stas. As well as restructuring expenses related to the accelerated harmonization of SAP's cloud delivery infrastructure. Stu. Let me now turn to taxes and EPS.
In the Q1, the IFRS effective Tax rate saw a substantial reduction to 20%, down by 7.7 percentage points. The non IFRS effective tax rate likewise Stor, a significant reduction to 18.7%, down 8.5 percentage points. These decreases mainly resulted from tax effects Stu, related to changes in tax exempt income and a one time change in deferred tax liabilities for taxable temporary differences Stuels associated with investments in subsidiaries. We are also updating our effective tax rates for the full year. Stuels.
We now expect an IFRS effective tax rate in the range of 26% to 27% and a non IFRS effective tax rate of 22.5% to Sain. This was mainly driven by another stellar contribution from Sapphire Ventures to our finance income Storz. In combination with the lower effective tax rate and the share count reduction following the share buyback in early 2020. Storz. Let me continue with our cash flow, another highlight.
After a record performance in the Q1 of 2020, Storz. Operating cash flow as well as free cash flow continue to be strong. Our operating cash flow increased by 3% to €3,100,000,000 Storz being positively impacted by lower share based compensation and restructuring payments. Free cash flow was up by even 10% to €2,800,000,000 supported by a year over year reduction in CapEx. For the full year, we continue to expect operating cash flow of approximately 6 Cees.
And free cash flow is expected to be above €4,500,000,000 So continuing with our financial guidance. As you know, we raised our 2021 revenue metrics reflecting the strong performance of our new cloud business, which is expected to reaccelerate cloud revenue growth. Stu. We continue to expect the software licenses revenue decline for the full year as more and more customers will turn to the rise of SAP Subscription offering for their mission critical core processes. The outlook also continues to assume that the COVID-nineteen crisis will begin to recede as We have seen programs roll out globally, leading to a gradually improving global demand environment in the second half of twenty twenty one.
Storz. Before closing, allow me to briefly talk about our non financial objectives as well. In early March, we published our 9th integrated report, Stuels. Another milestone on our holistic steering and reporting journey. To underscore our role as front runner in climate protection, Storz.
We are accelerating our move towards carbon neutral operations. The pandemic has clearly taught businesses how to work with customers and colleagues Simely in a virtual setting. We anticipate Staudigliere, 2 years earlier than previously targeted. So to conclude, we are highly encouraged by the broad strength Scripps our solution portfolio in the Q1 of 2021. In the mid term, SAP's expedited shift to the cloud will accelerate top line growth Storz.
And significantly increase the resiliency and predictability of our business. Thank you very much and we will now be happy to take your questions.
Stifel. Thank you. Operator, you can start
the Q and A session now.
Thank Mr. Starr, one to ask a question. You can now pause for just one moment. Mr. Stone.
We will now take our first question from Kirk Materne from Evercore ISI. Please go ahead.
Stu. Yes. Thanks very much and congrats on the quarter. Christian, I was wondering if you could just talk a little bit about the Americas region. I realize revenue is a bit of a lagging indicator, but that was obviously a little bit weaker.
Obviously, Qualtrics had an amazing quarter last night. So I was just kind of Could you just parse out sort of what you're seeing, I guess, from a bookings perspective? And then maybe some of the dynamics on more of a product specific Dynamic
meaning is a lot
of spend side sort of weighing on the Americas. I was just wondering if you got some color there or Luca, if you
have any thoughts too? Thanks.
Thanks a lot for the question. Christian here and then of course, you did run your very first Successful quarter. I would also like to hand it over to you. Look, I mean, yes, as you are rightfully saying, cloud revenue is a lacking indicator. And Stu.
I don't want to hear now highlight one particular region, but I have to say what DJ Paoni and his team really delivered this quarter Stuels. It's just fantastic from an order and we have perspective both cloud and also in our on premise business. So we are very happy how the business develops there. And And especially with wise with SAP also in conjunction with the hyperscaler, we already closed some very significant deals. Stu.
The pipeline is strong. It's very strong. And also we are now ramping up further industry cloud capabilities, which also resonates in the market Stag Patrick, Executive extremely well. Scott, would you like to add some color to that?
Yes, sure, Christian, and thank you for your kind comments. Look, I think you said it well. They had a very strong quarter obviously in terms of bookings. I think there's a couple of other factors just to bear in mind. The first in year basis was obviously a bit Stronger, we had other regions in Asia and parts of Europe with COVID.
Citi, in our Q1 last year was actually very strong America. But more importantly, things Together with the acceleration and the strong sentiment, the customers in North America Telling us directly that the rise with SAP is a clear requirement in how they run their businesses going forward Together with the really strong performance across the cloud portfolio that was mentioned at the beginning of the call, and that should reaccelerate the Americas Cloud revenue going forward together with obviously the resurgent as concur And travel restrictions start to ease and businesses are able to move around more going forward.
That's really helpful. And maybe
one follow-up. Stuels. Yes, go ahead. Go ahead, Stan.
Go ahead, Stan. Go ahead.
No, thanks. I was just going to one follow-up for Luca.
Stifel. Yes. If I could, just one follow-up
for Luca. Apologies. Luca, if we look if we think about sort of the balancing out of obviously license going down, But obviously, some potential efficiency gains on OpEx as we go to a more sort of hybrid world. Yes. How do you think about that?
Meaning, when we get through the other side of COVID, what are some of the learnings you've had from an operational Steve perspective. And is that sort of factored in? Or do you think there's some upside as we come out the back end of this in terms of sales and marketing Stuels. Yes. And basically just how there's real estate costs, things like that.
Thanks.
Yes. First of all, I would argue that we have really been Extremely disciplined when it comes to avoidable cost. We have not sacrificed the future of the company. We have continued to invest Sted in particular in innovation and R and D. I mean, we have essentially hired over the course of the last 2 years, including inorganic growth, roundabout 2,000 additional employees and virtually all of them were actually R and D engineers.
So in this respect, we continue to invest Storz. And you see also that therefore rightfully the R and D ratio goes up. But as far as the rest is concerned, of course, we take advantage Of the natural savings on the travel front and we are also running a tight ship in other discretionary expenses. And what was the key reason for the significant increase in profitably? As it slowly gets behind us, I'm absolutely certain that we will not return to a full past normal, so to say, because we have seen that many things It can be done very efficiently in a virtual and remote environment.
Nevertheless, there will be a certain move towards more Physical meetings still, I think a hybrid model is a reality that we will see. And you're rightfully mentioning as well that on the Sommers. While Q1 was obviously very positive with the growing adoption of RISE, certainly Stuels. We continue to expect downward pressure on software licenses. Having said this, the main factor that Storozynski.
So, contributes to our profitability is really the revenue mix that we expect. And Stu. The beauty of this is that once this mix shift effect has taken full hold, which we expect by the end of next year, Stu. We fully anticipate that this will make room to outsize growth in profits and therefore also profitability. Actually, we expect that we will see sizable double digit growth already starting in 2023 and then a further acceleration in the years to come.
So the model shift that we are pursuing and that we're acting upon is actually in SAP's best interest. Stifel.
Okay. Thank you. Let's take the next question. The next question please.
We will now take our next question Mr. Mark Moerdler from Bernstein Research. Please go ahead.
Thank you very much and thank you for taking my question. Also, I want to Congratulate you on the additional information disclosures you're giving on S4HANA Cloud. I think it will be extremely helpful. Schuss. I'd like to ask a question that I've had recently from quite a number of clients.
Can you give us some color on the renewal rates of on premise ERP. Are you seeing any meaningful change in revenue over time? And then I have a quick follow-up.
Stu. Perhaps I can take the question on the support revenues and renewal rates. No. The underlying support performance is actually quite resilient. I know that we have now had the 2nd quarter of flat Storoz.
Support revenue growth, but that is obviously due to the quite negative software revenue performance. Stuarts. And then, of course, we have a proportion of support revenues that is actually wanted churn that is converted into Cloud subscription as part of cloud extension cases, but there we also have a very stable development. In the past few years, Stu. We were always comfortably beyond and above a conversion factor of 2.
And actually, Q1 was not an exception to this. Actually, we had an even higher conversion factor. So all in all, the main factor that is dictating the support revenue development is really the development Licenses, on the rest, we have actually a very robust and resilient performance with continued high renewal rates.
Stifel. Beautiful. And then
a quick follow-up. As clients are looking at RISE with SAP, are you seeing increased cross sell demand for your other cloud offerings?
Yes, indeed. That's a very good question and actually also directly also alludes to our new strategy. Stu. I mean, now that we have finalized our work on the integration, sharing one data model, sharing the same security layer, sharing the same extension layer, Obviously, WISE with SAP will also help our other lines of businesses big time, because when you are, for example, today an ECC customer, Stu. You move to the new platform, you move to a modular landscape.
Obviously, now we have much better cost of opportunities. The migration is much smoother. Stu. You again get all the benefits of running the enterprise in a really integrated way, in a modular way, but integrated way. And you will also watch out for Sapphire.
Stu. We don't stop with why there will be new offerings coming because we listen to our customers. We will see some industry flavor to that. We will also Spand a little bit of our core. But again, it's all about the customer choosing the right modules for his business requirements.
Stifel. Thank you.
Let's take next question, please. Stifel. We
will now take our next question from Stefan Slowinski from BNP Paribas. Please go ahead.
Stu. Yes. Thank you and good afternoon. Thanks for taking my question. I guess just to start, just wondering if the S4HANA revenue and backlog, If you're seeing any maintenance migration towards subscription contracting, you just mentioned maintenance, of course, was flat in the quarter.
Schuh. Should we now expect that to start declining and will you break out that conversion if it is happening?
Stifel. Yes. Stephane, so let me quickly answer this. So, so far, we have not really seen A pronounced migration of maintenance revenues. It was in Q1 actually a negligible sum, a Couple of millions of maintenance revenues.
I mean, as we move to larger engagements on the rise, that certainly Storz. Should start to increase a bit, but that is factored actually into our planning and our guidance already. In Q1, certainly, we had a much more modest impact from this than we had originally planned for. So it looks Actually very healthy and very incremental what we are able to drive with Rice. Let's see how that plays out over the coming quarters.
But for now, Stu. As I said also on Marc's earlier question, it's business as usual and the cloud extension multipliers Storoz. Actually even hedging up in Q1 over the last few years. And maybe just
to build
on that. Yes.
Stifel. And just to build on that very quickly, I mean, you also have others saying that we have close to 5,000 net new customers. So that clearly also signals Stu. It's not only about the installed base. And even for Wiese, it's a higher net new customer share.
Because when we are replacing St. And we are really replacing competitive ERP systems. Then of course, why is the ideal offer, yes, to make it It's Moose Migration for the data model, building consisting consistent data layer. And of course, also redesigning the business processes to truly transform the Stifel. And so it's installed base, but it's also a large share of net new customers.
Yes. And Christian is absolutely right. I mean to just give a number to this, I mean, as Stifel. We disclosed we have more than 400 S4HANA additional customers in Q1, and we had more than 100 RISE deals. For the first time actually in this Q1, our share of S4HANA Cloud customers exceeded Storz.
The one of S4HANA on premise customers, but that tells you as well that actually more than half of the S4HANA cloud Stomas. We're not coming through RISE, but we're actually net new ones.
Okay, great. Thank you very much.
Stifel. Thank you, Stefan. Let's take the next question, please.
We will now take our next question from Michael Briest from UBS. Please go ahead.
Stu. Thanks. Good afternoon. Sort of following on from that, I guess, I mean, Christian, I think you said that You expect the licenses to turn more negative as the year progresses. Can you talk a bit about the pipeline mix between RISE and on premise Mr.
Stifel S4. And I think, Luca, you've said over 60% of licenses 2 years ago was S4 and digital supply chain. I'm assuming it is still the majority and it's good the customers want to adopt it any which way. But just from a margin point of view, if you continue to see license outperformance, Will you just let that flow through to the bottom line? Or would you perhaps accelerate your investments?
And related to that, just on the hiring, it looks Stifel. If I exclude Signavio, that you only added about 300 people in the quarter, which seems odd given the margin guidance for the year. Can Stu. Can you maybe just elaborate on how we should expect headcount to grow through the balance of the year? Thanks.
Stu. Yes. I can get started, Michael. And then for the pipeline questions, Scott, also please feel free to chime in. I mean, look, Wise was launched Stuarts 2 months ago.
And obviously, in many, many conversations with CEOs across all industries, they are completely getting it that Stu. They now need to move also with their core business processes to the cloud to get better visibility across the supply chain, Stryst to get more resilient, to react faster, to changing market conditions, to adapt to new more digital business models, Etcetera, etcetera. And so this is what we see. Now, of course, for especially for the Lush transactions, it takes some time, Stu. But all the customers are really now willing to do this move.
And so with that, obviously, we see definitely a shift now, especially in the next quarters to come, Storff. And I'll shift from the on premise to the WiseWolf SVP pipeline. Scott, anything to add from your side? Yes. Just to give
it a little bit more color. Thanks, Christian. So the pipeline growth for RISE, it's been accelerating every week since we launched. Stu. So as we've been able to share, interact and talk to the customers, the pipeline growth has continued to expand, Reflecting the interest in the cloud based architecture and the transformation as a service, Stu.
Where and clearly the dialogue with the customers who have got existing ECC or SAP ERP landscapes Are they validating their strategy, but the sentiment is a fast much way faster acceleration into the cloud, which is represented into the pipeline Stifel. As compared to the on premise and we expect that to continue.
And then last but not least, certainly on the hiring, the organic Schirring of around about 300 people in Q1, you're right on that. Certainly not representative of what we expect to see Storoz. For the entirety of the year, so hiring volumes will certainly go up in the quarters to come. And so we'll certainly not talk about 300, but Perhaps rather something like 3,000 of additional hires throughout the course of the year.
Thank you. And Luca, just on the tax rate, Is that sustainable or is that just a 1 year effect?
The cash flow? No, I mean, on the cash flow side, I must say Storozynski. The tax rate, sorry. Well, I think two points on that. The one time effect is certainly not Sustainable.
Just to give some flavor to it, when we acquired Qualtrics, we recognized a share of deferred tax Stifel. In anticipation of a legal entity integration of the Qualtrics subsidiaries into SAP, which would have given rise Stu. To additional tax charges, now that Qualtrics has gone IPO, obviously those plans are not valid anymore and that's why we did recognize Stavridis DTLs and that is certainly a one time effect. The other one around the tax exempt income that mainly depends Storoz. On the contribution of Sapphire Ventures to our overall results, because their value appreciations and corresponding gains Are to a large extent tax exempt income.
And so as their success kind of proceeds and they contribute more in a given quarter. That part would certainly also be sustainable going forward.
Thank you.
Stifel. Okay. Thank you. Let's take the next question, please.
We will now take our next question Johann Schaller from Deutsche Bank. Please go ahead.
Yes, thanks. And also congratulations on the good quarter from my side. Stifel. Maybe for my first question, just coming back to the point on the U. S.
And the relatively slower growth in cloud revenues here. I I mean, I get what you're saying in terms of the backlog and the order entry, but can you maybe give us a bit more color here for the S4HANA cloud backlog? Schuh. Maybe how much of that you see coming from the Americas? Is there a decent size in there?
And also, maybe for the overall cloud backlog, So to give us a bit more comfort that the cloud revenues in the U. S. Or in the Americas start to reaccelerate growth as well. And then Luca, as a second question, you mentioned that the conversion rate in Q1 was a bit higher than the St. Normal, more than 2 times that I think you have alluded to before.
I understand the numbers are quite small and probably Si, quite volatile. But do you see that there is any kind of structural reason for that? Or is that just really quarterly volatility you would see here? Thank you.
Stu. Yes. Perhaps I can try to cover all of those questions as they are more technical in nature. So first of all, Stu. On the backlog composition, clearly, the total current cloud backlog is to a quite Significant extent, still influenced and fueled by the Americas, in particular, North America.
That's Stuels. Just simply due to the fact that a large share of our renewal volume of our existing contracts is there. And therefore, of course, it has also a significant impact on the current cloud backlog. And as Scott and Christian have said, North America had an absolute blowout Scott in new cloud bookings and also quite resilient renewals performance. So you will see that number, that's a Technical reality move up again from a growth perspective, and then I think this discussion will quickly be behind us.
Storoz. On the S4 current cloud backlog, it's slightly different because that business was established a few years ago Stuarts. At a point in time where the cloud was already quickly becoming a preferred deployment model for customers on a global basis, whereas it originally started Stuarts very much in North America. And therefore, the current cloud backlog in Sfour is more evenly distributed across the different regions, but still, of course, with a quite Significant contribution from North America as well. And so what was the last question again?
Just on the conversion rate that you see within S4 being a bit higher in Q1, if there is anything Steiner. Kind of a structural trend maybe you're observing or if that is more quarterly volatility?
No, I think it's mainly quarterly volatility. As you have seen, we had a Slightly higher share of net new customers in Q1 this year than for the most part in the last few years' quarters. We were edging up from 40% to 50%. And by definition, if you have a net new customer, then there is also no conversion churn, so to say, happening. And that probably was the main contributing factor.
But again, it's a rounding error and with the numbers in Q1 really Does not play such a significant role. I'm confident though that the general trend that we have seen in the past few years We'll hold and that we will certainly continue to see healthy conversion rates from maintenance to cloud.
Staudiglio. That's very reassuring. Thank you.
Thank you. Let's take next question, please.
We will now take our next question from Adam Wood from Morgan Stanley. Please go ahead.
Thanks for taking the questions and congrats from me on the strong start to the year as well. Can I ask 2, please? First on RISE, the feedback we get from Customers so far is there's obviously lots of interest in it and we can see that in the backlogs. But there's some confusion given the complexity Schof the offering. Could you maybe talk a little bit about the educational side of this?
How long it takes to get customers over those hurdles? Where the sales force is on achieving that? Stifel. And then secondly, one of the other big debates, I think we have a lot, is around the public cloud offering that SAP has. Could you just give us a quick update on Where do you see that in terms of functionality versus competitors and against the on premise offering?
And could you talk a little bit about adoption? Is that now In the market able to be adopted going well and how would that be different from a mid market customer versus large enterprise in terms of how they think about going public or private cloud? Thank you. Storz.
So, Adam, thanks a lot first of all and I will start and then Scott you can build on the enablement side of the house. Stu. Look, I mean, why and again, it's an offer which is now 2 months out. I actually get very positive Steve feedback and also about the simplicity of the offer. Because when you see what happened in the past, Stifel.
A lot of our customers really already did the move to the cloud. They moved and did a technical migration to hyperscale. Then they had an ERP provider. Then they had an operations provider. So there are 3 parties to talk to, which is not very healthy, yes, when one issue is coming up.
Stifel. Now we take that, put it into one offer and really just do more than only a business case on TCO. We are actually moving to the cloud, but we are also driving a business transformation. And we do that by taking the hyperscalers with us as our friends, as our partner Stifel. And we also, of course, taking the existing operations part of our customers with us.
We leave the migration part of obviously up to the customer to decide because the migration Sifini depending on the size of the customer. And again there, we also go with an ecosystem first support. Of course, we also keep a strong focus on Cashion and the enablement of these resources. And that's actually we are formating extremely well as you have seen already in the backlog. Storz.
And with regard to the internal enablement, Scott, can you just share some comments please?
Yes, sure. Happy to. So as we mentioned at the beginning in the last earnings, Sims. We were about to embark upon the learning and enablement of all of the sound and field facing force nearly 40,000 people. What I can say is we successfully launched that and have completed that for all employees, not only the sales force, but also our services, Customer Success and Engagement Teams.
Since the launch, we've then done a second iteration because as you could expect, as the feedback comes from the customers And we've been working through the questions that they have. We further refined and then iterated again and we're launching the next Stu. A release of the internal enablement to be able to further expand. I would also add, as a point of note that we have had extensive Learning and engagement with all of our strategic partners, the systems integration and business partners who have enabled their service teams, Their business transformation teams and working in collaboration on the capability of RISE with SAP. So you can expect going forward a continued capability with SAP and its partners to be able to answer the vital questions Customers ask about the capability of the price and then the ability to be able to move with speed And Agility to be able to
adopt and consume the platform. And Adam, with regard to the question around that for HANA public cloud, I I mean, we have customers like PwC, over 100,000 end users of the system completely wanting an S4HANA Slade, because the customer can adhere to the standard template we are having. And we have many more of those customers, especially in the professional Sussan. Now let's talk about manufacturing. When you're running 100 production sites, the customer is not always be able to go St.
First, right away to the public cloud. But again, their wife kicks in. We are giving choice with that, okay, for procure to pay already, Quote to cash, you're ready. Okay, let's go there to the public cloud and we move the production side at a later point When we have done the homework also on standardizing the business, also on standardizing the data model. So we see this Stuels.
Also according to different industry and of course also the size of the customer matters because it's always also a question how serious is the customer About the greenfield approach, is there willingness from the top to standardize business processes. So very often, it's about the customer Because the technology, as we have some very large ones already, technology is there and also the best practices are there. Stifel. It's all about the customer and the willingness, of course, then also to standardize and move forward.
And Christian, if I can just add, because
I think there was a question Stu.
About the move of the with RISE with SAP, it is important to note as we've announced with the over 100 Customers moving to RISE with SAP even within a 2 month window. So despite between the period of launch to when we closed the quarter, We've had fast acceleration and adoption and move to RISE with SAP, which does show that particularly for customers In that small and medium market, they are able to move quickly. They are doing so. Clearly, the large and very complex customers may take Stifel. More discussions given their landscapes, but we're very confident that we can help them navigate that.
Okay. Thank you. Stifel. The next question please.
We will now take our next question from James Goodman from Barclays. Please go ahead. Stifel.
Great. Good afternoon. Thank you. Yes, on the cloud revenue growth, encouraging to see the cloud growth hold the Q4 level and the backlog Stepp up materially. I mean given all the comments on this call around the success of RISE so far, I mean the transactional revenues coming back in H2, Qualtrics is outperforming its standalone guidance.
I mean, you nudged up the low end of the cloud guidance, but I'm wondering if you can talk to your Confidence in exiting the year at a growth rate above the guidance range or maybe talk to what it would take in terms of RISE adoption To push to the top end of the range for the current year. And secondly, on the cloud gross margin, which held up across all three segments in the quarter, I was under the impression that the proportion of the investments that you spoke to back in October to accelerate the migration of customers of legacy Infrastructures would weigh somewhat on the cloud gross margin. Luca, you mentioned, I think some effect of that this quarter on the OpEx. But I was wondering if you could clarify that and Mr. The extent to which you anticipate cloud gross margin to be weighed down at all over the coming quarters by those investments?
Thank you.
Mr. Storozynski. Yes. Thanks a lot, James. I'll take both questions, if I may.
So first of all, on the cloud revenue guidance, look, after Q1 is now Stifel away with the great performance on our new cloud bookings. There are actually only 2 variables left for us. And I think on both of them, we will have a much Speta view after Q2. 1 is obviously our Q2 new cloud bookings performance because frankly everything that comes afterwards will not significantly Move the needle on the cloud revenue side anymore. And the second one is obviously the transactional revenues.
Storoz. I think on both of those, we will have quite a good handle after Q2. For now, It obviously feels very good on the momentum side in terms of new cloud bookings. Again, transactional revenues, a little bit depending on the Sterling's circumstances, but we will certainly be in a position and to have a very precise view on where we will end in after Q2. Stu.
And for now, it looks very positive. On the gross margin side in the cloud, I think I said this already when we Stu. Talked about our Q4 earnings. Despite the investments that we take in our harmonization of our cloud infrastructure, We still expect that the cloud margins in the different business models will continue to edge up. It will be slightly, of course, Storoz.
Brought down by the investments that we are taking, but not to the point that it would completely overshadow the efficiency increases That we are continuing to drive. Actually for us in the short term, it's more the combination of this element With the revenue mix shift effect, the Intelligent Spend Solutions, as you know, have the highest gross margin. Cinder. And under normal circumstances, if they had been a, say, normal to be anticipated proportion of the entirety of our cloud business, That would have been driving our cloud gross margins already today up to a more material level with Revenue is bottoming out and then coming back as of next year. There is certainly potential also in 2022, Stifel.
Even though we will step up the additional investments in the cloud harmonization in 2022 to continue to see And the cloud margin expanding slightly, because all of the other components continue to grow. So it's really mainly Stifel of the mix between the three business models. And then as of 2023, when we have these harmonization investments behind us, Stu. Then for sure, we will see a much more significant step up similar to the levels of increases that we have seen when we were finalizing the migration of third party data Sipes' success factors, for example.
Very
clear. Thank
you. Thank you. The next question please.
We will now take our next question from Neil Steer from Redburn. Please go ahead. Mr.
Hi. Thanks very much for taking the question. Just a quick sort of technical question and digging into the success of RISE with HANA. I think, Luca, you mentioned that you've had 100 RISE deals go through in the quarter. My understanding is as the Customers embark on the RISE program, the first thing they need to do is sort of assess the code base that they've got and at that point make a decision as to whether they can either go Immediately via the public cloud route or then go to the private cloud path, which is effectively moving to the subscription model, Mr.
But using the underlying on premise technology, of the 100 you signed in the 1st couple of months, is it fair to assume that the vast majority have gone down the second half?
Stu. No,
we have actually I mean, it depends on what you are talking about. From a number of transactions perspective, it's actually quite balanced. From a revenue contribution Spector. Certainly, the private cloud related portions would be contributing more just because of the volume that the customers bring. Stifel.
And maybe just to build on that, I mean, you have to realize that wise with SAP, Stu. There's always the business technology platform embedded. And with that, we're also then moving our customers to Stifel. So also the extensions will not anyway be done No. Net, we were on prem and modifying the core Snell.
We actually saw a massive uptick on the BGP adoption in Q1 because now also the ecosystem.
And of course, the customers want
to keep the standard now clean. This is why we are not only shifting our workloads to the cloud, Storoz. Also the ecosystem is with us. And again, for some customers, it will take time until they get fully standardized business process and make the move to the public cloud. Stifel.
If they can, they are doing it already now, but for some of the large, it will take time. But also already there, the extensions will be built more and more on our
cloud platform and less and less as modifications
in the on premise Sloane. And less and less of modifications in the on premise world.
Okay. Thank you.
And just a quick follow on from that. As we look out to your strategy And the margin and the profit improvement expected to come through 2023 through to 2025, can you remind what level of your customer workloads need to be on specifically public cloud platforms as we go into 2024 and 2025?
Yes. So I can take that as well. I mean, when you look at the TCO calculation, you also offer single instance or multi tenancy instance.
Stuarts. What you have to
see, a customer at a certain size and there you can also go to our competitors like Salesforce and Workday. Stu. At a certain size view also, it doesn't really matter because you don't put more customers on one tenant because it's just scaled. The whole hardware scale, Stifel. The whole technical landscape scale.
Of course, for the customer, with smaller T shirt Stember actually going to the public cloud. So already today, we hit the ratio and there is no doubt that we are going to hit the ratio also going forward. Stifel. Thank
you. We have time for 2 final really brief questions, please.
Stifel. So we will now take our next question from Mohammad Mowala from Goldman Sachs. Please go ahead. Stu.
Great. Thank you and good afternoon and congratulations on the quarter. I had 2 quick ones. One, you talk a lot about sort of new bookings momentum. I was wondering if you would give us some sort of quantitative color around that.
I know you don't give that out anymore, but just to give a sense of how fast Stu. That is running relative to the overall cloud backlog. And then secondly, just in terms of the RISE, Can you give us a sense of the split today because a lot of the logo names seem to be more mid market customers, but of either the 100 that you have Already signed up or the pipeline, what is the mix between your kind of more enterprise scale customers versus mid market. And related to that, as you move customers, what is the sort of Seld in terms of additional product that you're getting in those discussions. Thank you.
I will take the first one as I'm the hobby Storion here on the table. And then on the RISE one, I will refer to Scott and Christian. Yes, you're right. I mean, we are not disclosing new cloud bookings separately anymore, but we have said that this was the highest growth that we have seen Storz. In new cloud business in the last 5 years and as a reference, in the last 5 years, the 2nd best The quarter that we had where we still disclosed new cloud bookings was in Q3 2019, where we had 39% constant currency growth.
The best quarter in 2015, so more than 5 years ago, in Q4 2015, Stifel. Well, actually at 63% constant currency growth. So that tells you that our growth in Q1 2021 We'll have been somewhere in between, and I would hint that it was too far from the gold medal.
Stu. And with regard to the order entry mix between large enterprises and our SME business, actually for Wiese, it's not Stuels. Any different than for the rest of our business. We see, of course, with the terms to bookings dollars Staudigl. There we see a higher share coming out of the London Enterprises.
When you look at the number of transactions, the bulk of the 2 The question comes also out of the SME business. Actually, I project that even the also that one will now move Stuels. A bit more, a bit and more to the large end of this segment because also with regard to number of Storoz. And transactions, Scott already alluded to that. This takes a bit more time.
The deal cycles are a bit longer And as we actually expect that also on the number of transactions, it will a bit more than also lean towards the large enterprise segment. Stifel. And there was one more with regard to the core sell. I mean, that's actually also the big competitive Steve Advantages of finally having our business technology platform there. And again, when our applications are using Sisi.
The same application logic, the same data model. First of all, they become more sticky, which is where we give you rates Storozynski in the years to come. And second, obviously, customers are forgiving when there is a best of breed vendor Stuels. Well, maybe 2 or 3 more cool features, but don't share the same security, especially for Stu. We have a mission critical application sensitive data.
The reason to then go with SAP is, of course, Storz. Much higher going forward than when you are just competing best of breed. And this is why we definitely also expect a higher share of Costello, but going forward, and we will also launch 4 bundles for Weisz, where we also definitely also now Staudiglio. No, the core, because we can now also deliver it out of the box.
Okay. Thank you.
Mr. Staudigl. We will now take our final question, Noot Waller from Bad Air Bank. Please go ahead. Stu.
Yes. Thanks very much. Just a quick one. We talked a lot about the EMEA, and I think it was quite remarkable to see the Rebound of EMEA despite the ongoing headwind of the pandemic in the Q1. So can you give us some ideas what were the drivers here from a product perspective Sundaram that drove the acceleration of growth.
And also, do you see here an increasing willingness of customers again looking through the pandemic Schuh to return to do transformation projects. Thank you.
Rod, would you like to take that question? Stifel.
Yes, sure. So I think as you saw in the Europe region and also in the Americas as well as APJ, We saw a couple of consistent themes which definitely came about. The first, our portfolio across All of the different areas, customer experience, Christian mentioned before the business technology Saad. Our Qualtrics portfolio. So we saw a lift in terms of their net new order Stry in the industry and the industry's focus across the portfolio notwithstanding also the commentary that we've made about RISE and also with Esperhana.
The second, there is a clear indication in the feedback that we're getting from the customers that the prioritization Of digitizing their businesses as they start to look and coming out of the pandemic and looking at the future of their business Means the digitization to be able to transform having an agile platform to run their business is now at the very top of the agenda. And as they look at the opportunity cost and the competing investments that they're looking at, the digitization Being able to run their agile business, to run flexible and resilient supply chain, to be able to make sure that they can compete with new business models, That's driving so much of that demand. So we do expect and a lot of the initiatives that have been kicked off in Q1 They are there to transform their businesses whether it be around hiring and retaining the best talent or to operationalize their mission critical ERP Citi is in the cloud going forward or in many other areas such as customer experience. So I guess the answer is yes, we see that Storoz. The indicators and we expect that to continue going forward.
And also let's not forget the word. I mean, Stu. When I see SAP as its best, it was last week, the O'O Council where we talked about the automotive lines. And Stu. When I see then the SAP industry people talking on eye level around supply chain traceability, Around footprint more transparent, around how can we really optimize the inventory across the OEMs, the suppliers, really down to the raw material.
This is where I feel wealth can do that in the software industry. And this is also for us the key trends to not only St. You know, play on the horizontal layer, but go from there, use the data, use the platform and build some world class Vertical Industry Solutions and this is where also our expertise is and where our Y2 win is.
Thank you.
Great. Thanks very much. St. This concludes our Q1 earnings call for today. Thank you very much for joining, and we look forward to seeing you at our Sapphire and our conference in June.
Thank you very much.
Stifel. Take care, everyone. Thank you. Bye bye. Bye bye.
Thank you.