Earnings Call Transcript - SAP Q2 2020

Operator, Operator

Good day and welcome to the SAP Q2 2020 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please, go ahead, sir.

Stefan Gruber, Head of Investor Relations

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss our results for the second quarter 2020. I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will both make opening remarks on the call today. Also joining us for Q&A is the Executive Board member, Adaire Fox-Martin, who leads our customer success organization; and Ryan Smith, Founder and CEO of Qualtrics. 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 are 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 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. All forward-looking statements 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 in SAP's filings with the U.S. Securities and Exchange Commission, the SEC, including SAP's Annual Report on Form 20-F for 2019 filed with the SEC on February 27, 2020. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. On our Investor Relations website, you can find our half year report, our quarterly statement, and a financial summary slide deck, which are intended to supplement our prepared remarks today and include a reconciliation of our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS, as reported year-over-year. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance compared in accordance with IFRS. And finally, as you have seen in our quarterly statement, we plan to hold a virtual Capital Markets Day in the fourth quarter later this year, where we plan to provide an update on our mid-term strategy. More information will be provided in due time. And with that, I'd like to turn things over to our CEO, Christian Klein.

Christian Klein, CEO

Yes. Thanks, Stefan, and welcome everyone to our Q2 earnings call. I hope that you, your families and friends are safe and manage to keep your spirits up in these challenging times. This is our second quarterly earnings call during the pandemic, but our first full quarter under the COVID impact. And given the situation, it was a fantastic one. Of course, the crisis is far from over. But still our results reflect the progress we have made as a company since the pandemic hit hard in March. We have adapted to the situation by truly transforming into a virtual organization and allowing our customers to continue with their business. 17,000 customer Go-Live in the past six months alone are showing SAP's resilience in this crisis. Also, Go-Live in the cloud are happening now in weeks rather than months. This shows how SAP enables our customers to react with agility and speed in this crisis. As we have said before, SAP is crucial to the business transformation of our customers and we are working to emerge stronger out of the crisis. If customers are in a difficult spot financially right now, we will provide commercial relief when needed, because we want to build partnerships for life. Inside SAP, we continue to selectively hire into our future growth opportunities, striking a balance between near-term profit and innovation, but we also have an obligation towards society. Our purpose is to help the world run better and improve people's lives. And I'm proud that ever since the crisis broke, we have been supporting the public with projects, financial assistance, donations, and technology around the world. Let's move to the quarter now. Luka will take us through the numbers in a minute, but let me say, these results show yet again how well our intelligent enterprise strategy is resonating with customers. They completely understand digitalization is no longer an option but a must, to achieve desired business outcomes, resiliency, profitability, and sustainability. And the results prove as well our own progress in that regard. In June, we completed our first ever virtual SAPPHIRE NOW, which was a milestone event with 130,000 participants and close to 600,000 session views in the first week alone. During the crisis, digitalization and remote delivery ensured customer service continued without disruption. We have added over 500 S/4HANA customers in Q2, close to 40% of them net new. We have also seen a lot of competitive wins such as Carrefour, which also subscribed to a set of cloud solutions including Ariba. Other S/4HANA wins included Telefónica, Aeon, BNP Paribas, Neptune Energy, Vedanta, Comix, and Deutsche Börse, taking the total S/4HANA customer count now to more than 14,600. We have also seen more than 700 customers go live on S/4HANA in Q2, including Colgate, Zalando, and Beeline. You have probably seen that IDC just ranked S/4HANA as a leader in cloud ERP enterprise applications. Looking at sales performance in the second quarter it is no surprise, we saw huge demand for the solutions that increase resiliency, while offering substantial returns. Our portfolio is extremely relevant in the crisis. Commerce, obviously, had an absolute blowout quarter as did digital supply chain management led by our cloud-native IBP solution, which matches rapidly changing demand to supply. Moderna, a U.S. biotechnology company pioneering a vaccine candidate against COVID-19, just selected SAP to help with the distribution of the potential vaccine. We also saw a very significant number of IBP Go Live such as Verizon and Renault Brazil and of course, continue to be ranked number one in supply chain management by IDC and Gartner. In addition, our business technology platform showed excellent performance as customers use it to quickly integrate and flexibly extend solutions. Gartner has just ranked us leader in their Magic Quadrant on multi-experience development platform and major Q2 deals included L'Oréal and the Australian Department of Defense. Out-of-the-box integration for our SaaS applications remains key for us. We are making excellent progress in delivering a seamless business process integration, including key elements like harmonization of SAP's data domain model, user experience, workflow management, and real-time steering. We are at 50% done with integration, targeting 90% by year-end. SuccessFactors had a good quarter including an important competitive replacement and a major competitive win with Bosch Group. At more than 8,000 customers, SuccessFactors continues to lead the global HCM market by a wide margin. They are also about to reach the 100 times 100k milestone, 100 global customers using SuccessFactors to manage more than 100,000 employees each. And we are very happy to report Google has gone live on Ariba. Finally, Qualtrics had yet another fantastic quarter with strong growth and is helping us to differentiate our core applications by adding experience management. Especially, the combination with SuccessFactors in the human experience management suite resonates really well with our customers. By now I'm confident you have all seen the news. Please allow me a couple of remarks before moving beyond Q2. Ryan and I are convinced that the proposed partial IPO marks a win-win situation and creates the best setup for Qualtrics to fully tap the potential of a fast-growing experience management market. Under the leadership of Ryan and his outstanding team, Qualtrics will enjoy greater autonomy in expanding and leveraging its footprint both within SAP's customer base and beyond. We will remain Qualtrics' majority shareholder. We will also remain its largest and most important go-to-market and R&D partner while giving Qualtrics the independence to broaden its base by partnering and building out the entire experience management ecosystem. Against this background, I want to emphasize that Qualtrics is and continues to be a key element of our intelligent enterprise strategy. Moving beyond Q2 let me revisit a few key elements of our strategy: number one, a clear focus in our existing markets, doubling down on categories where SAP has a right to win; differentiating via the broadest and deepest suite; end-to-end integration; real-time analytics; fully enabled artificial intelligence with concrete outcomes for our customers; a harmonized user experience; and very importantly our leadership in experience management. Our PLM and intelligent asset management partnership with Siemens is a prime example of this new focus; two market leaders coming together to take over the lead in Industry 4.0. Number two, accelerate growth by expanding into new markets. Let me just give you two examples. The industry cloud, all industries are transforming and every new business model requires data and a strong integration into the backbone which in many cases is in SAP's core application. This is our right to win. We will build modular industry apps helping our customers to stay competitive in their industry by adapting to new business models with a fast time to value. We are co-innovating on our platform with our partners and customers, the biggest brands in the world. This is a €170 billion market. Already this quarter we closed a significant deal with a large utilities provider. We will also be doubling down on building the world's largest business network. The crisis shows more than ever. The world is becoming increasingly complex. And companies need to react faster and more agile to changing market conditions. This is why we will change the way enterprise is won by connecting customers, manufacturers, suppliers, and logistic providers in one network where they can manage cost dependencies in real-time creating win-win situations for all stakeholders in the network. Number three, sustainability and Climate 21. We are expanding our solutions to allow customers to measure and reduce carbon emissions along the value chain. Since earlier this year we are running trials with customers from industries like auto, chemicals, food, and engineering. With this, SAP takes another important step in turning our customers into sustainable intelligent enterprises, ultimately proving that intelligent enterprises can make sustainability profitable and profitability sustainable. And finally, number four, provide additional options to move to the cloud. Customers want to move to the cloud at their own pace and scope based on their individual situation. We will respond by expanding the options to move accelerating the cloud migration. Later this year, we will launch a tightly integrated, pre-configured public cloud suite expanding beyond ERP and we will introduce a new private cloud offering for customers that require high levels of differentiation with an easy-to-consume commercial model. For all our cloud offerings, we will continue to leverage hyperscalers and system integrators to manage most of the cloud ERP infrastructure workloads. Let me now turn to our financial prospects. Luka will talk about the 2020 outlook in a minute. Let me briefly comment on the midterm perspective. Our 2023 ambition remains unchanged from what we announced in Q1 because it continues to reflect our view as of today. That said, we are in the process of updating our strategy. We are refocusing the company, identifying growth areas, evaluating additional business opportunities. We will be ready to give you an update at the Capital Markets Day towards the end of the year. We hope and expect that our assessment of the implications of COVID-19 on our midterm ambition will also be clearer then than it would be today. Now I know some of you are concerned about SAP might neglect its efficiency focus as part of the process. Let me assure you, we will continue to relentlessly execute the best one program, as laid out at our Capital Markets Day last November. Execution is in full swing. We moved from a complex metrics organization to a lean functional setup with clear responsibilities. We have removed overlaps and overhead, making it easier to work with and within SAP. We are streamlining our portfolio, focusing on areas of strength. You have seen the divestiture of digital interconnect in Q2. We are putting customer success first everywhere, including compensation. We are consolidating our event schedule and will continue to build out our digital marketing capabilities. We have continued to work on our cloud delivery efficiency, bringing the cloud gross margin up by seven percentage points over the last 18 months. If you look at Q2, our operating margin is up almost two percentage points despite the heavy toll on top line the crisis has taken. But let me make one thing clear. We will continue to manage this company for value, not short-term margin maximization. If we believe a strategic move is wise, if we think it makes sense to accelerate the cloud migration of our customer base, if we see an opportunity to grow where we have a right to win, we will investigate, and not pass by default just because a revenue mix shift might have an adverse impact on operating margin in the short run. With that, over to you Luka.

Luka Mucic, CFO

Yeah. Thanks a lot, Christian. I'm really proud that our team successfully navigated a very challenging environment to deliver a better-than-anticipated quarter. We were happy to see a strong sequential improvement in software licenses revenue, robust margin expansion, and a strong free cash flow development. In Q2, our current cloud backlog showed a strong growth of 20%, reaching €6.7 billion with continued high demand for digital supply chain, e-commerce cloud platform, and Qualtrics solutions. Cloud revenue was up 19%, reflecting the strength of our contractually committed cloud business, which was partially countered by lower pay-as-you-go transactional revenue due to the COVID-19 crisis. This cloud revenue growth together with our consistent software support revenue stream demonstrates the resilience of our business model. Our more predictable revenue expanded by approximately five percentage points, reaching 73% in the second quarter. In Q2, our cloud and software revenue grew by 3%. For the first six months, our cloud and software revenue was up 5% or 4% at constant currencies, a very strong showing given the impact of COVID-19. Before moving to the bottom line, let me briefly give you some color on our regional software results. Software licenses revenue, while still below normal levels recovered more than expected. In particular, the APJ region had a stellar performance backed by a very strong recovery driven by Japan, South Korea, and Indonesia. In the Americas, we saw a modest recovery primarily from a strong sequential improvement in the United States. Now, moving on to the bottom line. Our overall cloud gross margin grew by two percentage points to almost 70%. All cloud business models contributed to this margin expansion. Our SaaS/PaaS margin grew by one percentage point, our intelligent spend margin grew by two percentage points, and our infrastructure-as-a-service margin grew even by 14 percentage points. In Q2, our cloud and software gross margin was impacted by the decline in software licenses revenue and the mix shift effect from our cloud business. Still, our software license and support gross margin was up by 30 basis points, and our cloud and software gross margin only decreased by 20 basis points to 81%. Our services gross margin increased by two percentage points and reached 26%. This is mainly the result of further efficiency gains in our consulting and premium engagement business. Despite the slower top line growth, our operating profit grew strongly by 8% to almost €2 billion. Our operating margin expanded by 1.8 percentage points to 29.1%. At the beginning of the crisis, we were quick to initiate prudent measures, such as slowing hiring and a reduction in discretionary spending to ensure our financial flexibility. Our results speak for themselves, showing that those swift actions have paid off in Q2. We are also benefiting from natural savings like lower travel expenses, lower facility-related costs, and virtual rather than physical events. Now, let me turn to IFRS operating profit EPS and taxes. In Q2, IFRS operating profit increased by 55% to €1.3 billion, benefiting from lower restructuring expenses. For the same reasons, our IFRS earnings per share increased by 54%. Non-IFRS EPS increased by 7%. We also updated our effective tax rate guidance for the full year. We now expect these tax rates to be between 28.5% to 29.5% for IFRS and 27.5% to 28.5% for non-IFRS. The increase in comparison to the previous outlook mainly results from a tax ruling in Q2, where the German Federal Fiscal Court partly confirmed SAP's opinion as final decision. While that decision leads to a significant reduction of contingent liabilities for the whole case, the part of the ruling that was decided against SAP leads to additional income tax expenses and financial income to related interest expenses thereon. The cash flow, however, will show a positive impact in a future quarter where SAP is partially reimbursed for previously made tax payments. This is also a good segue into talking about our cash flow results. In the first six months, our operating cash flow was strong and improved by 41% to €3.8 billion. This was supported by positive effects from lower restructuring-related payments and lower income tax payments as expected. Our free cash flow was up even further and grew by 59% to €3.1 billion. Free cash flow additionally benefited from lower CapEx spend compared to the previous year. Now, to our financial guidance, we are reconfirming our 2020 revenue and profit outlook metrics as detailed in the quarterly statement published earlier today. In addition, we increased our cash flow guidance for the full year 2020. Based on the strong performance that we have seen in the first half year, we now expect an operating cash flow of above €5 billion and a free cash flow of approximately €4 billion. Before closing, I wanted to talk about some of our social and environmental highlights and update you on a few of our key non-financial metrics. Christian spoke already about how we are fulfilling our role of an enabler of positive impact from human experience software to Climate 21. I would now like to talk about our role as an exemplar. In Q2, our employee retention increased to 93.9%, up 60 basis points since last quarter. We made further progress increasing the share of women in management by 1.1 percentage points to 27.3%. Driven by a strong decrease in travel due to the COVID-19 crisis, our carbon emissions were 25 kilotons, a decrease of 50 kilotons. For 2020, we have adjusted our Renault gas emissions target from 238 to 210 kilotons. Finally, last year, we announced the creation of the Value Balancing Alliance. This alliance aims to create a global standard for the disclosure of positive and negative impacts of corporate activities across the complete value chain. After having worked intensively on the first version of the methodology over the last nine months, the piloting phase has now started across all participating companies. We are excited to be at the forefront. To summarize, our broad solution portfolio, our unmatched industry and geographic diversification, coupled with our strong base of more predictable revenue, have allowed us to weather the COVID-19 crisis this quarter. Our quick response to the crisis on the cost side drove strong operating profit and margin expansion. With disciplined investments in strategic growth areas, we are confident we will not only weather the crisis but can emerge from it even stronger. I'm proud of all of our employees who have shown remarkable resilience as they continue to collaborate by virtual means and operate effectively through this challenging environment. Thank you very much, and we will now be happy to take your questions.

Stefan Gruber, Head of Investor Relations

Thank you. We can start the Q&A session.

Operator, Operator

Thank you. And we take our first question from Charlie Brennan from Credit Suisse. Please go ahead.

Charlie Brennan, Analyst

Great. Thanks very much for taking my question and congratulations on a good quarter. Can I just start with a question for you Christian? I think a lot of the focus today is going to be around your comments around updating the medium-term targets. When you're thinking about investing in the business, can you tell us whether those investments include M&A or do you just think about organic investments? And then no doubt the market is going to be speculating between the growth and the margin trade-off. Will you only take margins lower if you think you can accelerate top-line growth? Or can you see a scenario where margins need to be lower to support the existing top-line growth ambitions? Thank you.

Christian Klein, CEO

Yeah. Thank you for your question. On the growth side of the house first of all, yes, you heard me talking about the new growth opportunities of SAP like industry cloud. These growth initiatives are not taken out of the blue; these are categories which are on the one hand showing big growth but also clearly where SAP has a right to win with organically built cloud solutions. A lot of the data and processes you need to verticalize your industry-specific processes are sitting actually in the core of SAP. On top, as you also have seen, our ambition is not to build the industry cloud only by our own. We formed now major partnerships with Siemens on the PLM side to scale Industry 4.0, providing even more value to our customers. We have closed a partnership with Honeywell to also make the real estate industry an intelligent enterprise. And of course, on top, we are constantly screening the market for potential tuck-in acquisitions, but only if it really makes sense to fill white spots in our portfolio, which are also close to the core of SAP. On the margin side, I mean clearly what we see now in this crisis, there is a huge acceleration with the move to the cloud. I mean commerce supply chain, we are delivering the solutions even more to the cloud. When I talk to CEOs these days, they are actually afraid of the resilience of running their own data centers. This is why I also talked about launching a new business model. Because I believe the business transformation is not only happening by moving your workloads to a cloud infrastructure. And business transformation is happening with the help of SAP with intelligent applications and partners of the ecosystem helping to transform your business processes. This is what we are going to launch in H2. And this will definitely also accelerate our growth in the cloud. Now, we still have to see what this means with regard to the revenue mix in our P&L. But you can also be very sure, we will also double down on our efforts to really also manage our bottom line in an extremely tight way. We just did one of the biggest reorganizations in SAP now finally, gaining also the synergies on the bottom line. And this is why we will do both. And later on this year, when we also see how the market will develop in light of COVID, we will also give you an update on the mid-term outlook.

Stefan Gruber, Head of Investor Relations

Thank you. Let's move to the next question please.

Operator, Operator

Thank you. The next question comes from James Goodman of Barclays. Please go ahead.

James Goodman, Analyst

Good afternoon. Thank you very much. Let me come back to the Qualtrics' announcement please. Really just what's prompted the decision now, especially I guess, since such a focus at SAPPHIRE around tighter integration? And I appreciate your comments that you'll remain very focused on the combined go-to-market and R&D. But is there any effect here in terms of product integration, and particularly in the sort of HRM area? And then also relating to Qualtrics, can you say anything around either the size of the minority stake you're considering listing and what you plan to do with the proceeds? Thank you.

Christian Klein, CEO

Thank you for your question. I'll start and then pass it to Ryan, with Luka addressing the listing later. Over the past three months, I have been in close communication with Ryan. When I became the sole CEO, my main focus was on elevating Qualtrics to the next level. Reflecting on the past 19 months since Qualtrics joined SAP, it has exceeded all our expectations and the goals set in our original business case. This is evident in our external segment as well. However, Ryan and I are always looking to improve and are never satisfied with the current situation. We've discussed various ideas designed to accelerate Qualtrics' growth. While we've had significant success leveraging their sales force to market Qualtrics within our existing client base, we've also recognized that experience management is rapidly expanding in the market. That led us to consider the IPO, which we see as mutually beneficial. Honestly, I still haven’t identified any downsides, as we will continue to integrate Qualtrics into our intelligent enterprise. In addition to focusing on human experience management, we've identified four other categories that we will be launching in the upcoming quarters, which we plan to sell together. The partial IPO will not change anything; it actually allows Ryan and the leadership team the flexibility to target the non-SAP customer base, where there's considerable growth potential. We will ensure they have the necessary resources to pursue that market and expand Qualtrics outside of the SAP customer base. Lastly, concerning SAP, it also provides us with financial strength to pursue our growth initiatives, such as the industry cloud. Those are the key reasons driving this decision, and we are keen to retain Ryan and his leadership team. Now, I’ll hand it over to you, Ryan.

Ryan Smith, CEO of Qualtrics

Thank you, Christian, for the question. It's a great one. I started Qualtrics 20 years ago in my parents' basement, and since we joined SAP, they've treated us like partners. It's been an incredibly founder-friendly environment for integration. Our approach has always been collaborative—Ryan, what do you see? How can we work together? When Christian took on his role, he immediately focused on maximizing this category. We explored different ideas, and it's clear that the top five software companies didn't pursue this opportunity; they thought they could achieve more elsewhere. We, however, have the advantage of focus and the benefits of partnership. SAP is clearly innovative and confident enough to support this venture. We're committed to strengthening that partnership and are gaining some impressive momentum. The team has excelled at keeping everyone engaged, which is vital right now; everyone is energized and ready to move forward. There's also a significant macro trend in experience management that emerged during COVID. Every CEO wants to understand their customers' feelings on a weekly basis, not just annually. We facilitate those conversations, helping them gauge employee sentiment too. This is more crucial than ever. We're seeing strong commitment from leaders across government, academia, and corporate sectors who want to know the perspectives of their stakeholders. Qualtrics is positioned perfectly for this. Integrating our offerings into major SAP products from commerce to SuccessFactors enables them to stay attuned to real-time feedback. This integration is a driving force behind our strategy. In summary, Christian, Luka, and the team have been incredibly innovative throughout this process, and they deserve recognition for their efforts.

Luka Mucic, CFO

Thanks a lot. Let me then complete the answer just with those three aspects that you've asked for from a more technical perspective. Indeed, they are probably one of the most asked questions that I've received since this morning. In terms of the IPO sizing, frankly, we don't know it exactly yet. If you look at benchmark U.S. tech IPO, they float at a rate of somewhere between 10-15%. We will not be miles away from that kind of broad size range. After the IPO, it’s clear that SAP will have the majority of the shareholding. In terms of the use of proceeds, we follow two primary objectives here. First of all, we want to make sure that Qualtrics is probably capitalized so that they can pursue their investment plans, and can properly seize the opportunities that exist out in the market. But clearly, we also expect that there will be proceeds after having satisfied this purpose that will go to SAP. We will clearly use them in order to foster our own strategic growth priorities, whether they will be organic or also perhaps selective tuck-in M&A activities. Regarding the timing of a listing, that's something which we cannot comment on it at this point in time. Clearly, we need to prepare all of the documentation in the U.S. This is quite a sophisticated process. The good news is that we have a pretty good basis to work from because Qualtrics has been going very far there already. But it still will take us a couple of months before we are ready. Then it’s really going to be a question of the market conditions that are prevailing at that point in time. But you will, of course, as the rest of the market, receive updates when we are ready to file.

James Goodman, Analyst

That's great. Okay. Thanks, Stefan and all the best for the RPA.

Stefan Gruber, Head of Investor Relations

Thank you. Let's take the next question please.

Operator, Operator

Thank you. The next question comes from Mark Moerdler from Bernstein Research. Please go ahead.

Mark Moerdler, Analyst

Absolutely, Luka, cash flow was real strong this quarter. In the press release you discussed the main drivers of lower payments to suppliers and tax rates. Can you give us some more clarification on lower payments to suppliers? Is this just the T&E? Is there the reorganization? How sustainable do you see that? And then quickly for Christian, can you give us some more color on the mix of all the SAP customers you added this quarter? I think it surprised people that you added so many. Thank you.

Luka Mucic, CFO

Yeah. Thanks a lot. I'll start with the cash flow question. The lower supplier payments are really the combined efforts that we have taken to trim down on discretionary expenses, but also some of the natural savings that we have seen in the first half year. Of course, things like T&E spend have been dramatically down in Q2 as you might guess. But it's also facility-related spendings during the office lockdowns that we have seen. It's additional discretionary spending on things like IT hardware and so on and so forth. You have seen as well that our CapEx even against the very low level that we had reached already last year is further down. We are really double-clicking and challenging any of those expenditures to see whether they are truly necessary. That basically shows in this aspect. But just to be clear, the main effect of the significantly improved cash flow is mainly lower restructuring-related cash payouts as well as substantially lower tax payments, because last year we still had a huge amount of significant one-time effects. This year, we are not seeing any, as I shared during my prepared remarks. We are actually getting cash back from a tax perspective, very likely later this year. So that's not a headwind anymore, but a tailwind to our cash flow progress.

Christian Klein, CEO

Yeah. And on the mix of the customers we onboarded this quarter, I will hand this over to Adaire, maybe just one quick comment. I mean, I was personally very happy to see again the huge net new customer share for S/4HANA cloud. This clearly demonstrates that we are not only moving our installed base customers to the cloud, but that we are also winning out there net new, which also proves the value of the solution. I'm actually also very excited about the November release coming for S/4HANA public cloud, as there will be again major improvements like a new business configuration, opening up more features and functions for our customers. The integration is targeted at 90%, enabling us to cross-sell our LoB cloud applications in a much better way. For now, over to Adaire to give you more details about the customer mix.

Adaire Fox-Martin, Executive Board Member

Yeah. Thank you. Thanks for the question Mark. Net new name acquisition is actually a very important focus for us in the execution of every single quarter. It was very refreshing in this particular quarter to see new names added right across our customer segment base. In some cases, that would be a competitive win back, particularly in the enterprise space. In the general business space, this was the transition of companies to enterprise-grade software as their business is growing. I think a very important element of our success in net new names, aside from the focus that we put on it directly with our sales team, is the role of our partner ecosystem, particularly in the general business space, where more than 80% of the net new names that are delivered to SAP in this space are delivered by our very vibrant and active partner ecosystem.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. Let’s take the next question, please.

Operator, Operator

Thank you. The next question comes from Stefan Slowinski from Exane BNP. Please go ahead.

Stefan Slowinski, Analyst

Yes. Good morning, good afternoon. Thanks for taking my question. Maybe just Luka, a question for you on the Qualtrics' potential IPO and the impact on cash flows. I appreciate there's going to be a lot of moving parts and we will get a full update later this year. But on one hand, as an independent company, it sounds like Qualtrics is going to go for growth and maybe we won’t see cash flow improvements there but we now in the mid-term might have hoped. On the other hand, I guess, the stock-based compensation will be coming down as they move to a more traditional U.S. style stock option plan. Can you give us any indication as to the stock-based comp at SAP? And what percent maybe is kind of Qualtrics-driven?

Luka Mucic, CFO

Yes, absolutely. I think you are right on this assumption. I would argue that actually Qualtrics has even been before we acquired them quite – I wouldn’t call it frugal but quite successful in managing to a positive cash flow situation. So the business has all of the ingredients to even in a high-growth scenario be a positive cash flow growth, that's primarily because of its very high efficiency in terms of cloud gross margins, so the business scales very effectively. I wouldn't bet against them being able to be positive cash flow after an IPO. Regarding the share-based compensation, you're right at SAP, obviously, share-based compensation is cash-settled after an IPO. The fact that this U.S.-listed company will employ U.S. equity-based stock compensation is obviously accurate so this will be some relief on the cash flow side. At the moment, we have a couple hundred million USD of options or RSUs on the SAP side outstanding for management and employees from Qualtrics. That over time will then go away after an IPO. On that side you're very accurate.

Stefan Slowinski, Analyst

Great. Thanks for the detail. If I could just squeeze in one other one for Adaire. Just wondering if you've seen anything in July that has changed from what you saw in Q2, any shifts, anything's opening up, closing back down that would give us a window on what's going on today. Thank you.

Adaire Fox-Martin, Executive Board Member

Thanks. I don't really think that we saw much of a significant difference between July and some of the activities that we saw throughout Q2. Because I think Q2 had the whole gamut of various different geographies navigating the COVID situation from first lockdowns in some parts of the world to the reoccurrence in others and then the closing of cities or jurisdictions as a result of that. So nothing in July that initially gave us any additional cause for concern or movements that differentiate it very significantly in any way from what we experienced during the course of Q2.

Stefan Gruber, Head of Investor Relations

Okay, thank you.

Operator, Operator

Thank you. The next question comes from John King of Bank of America. Please go ahead.

John King, Analyst

Hi, everyone. Thank you for the questions and congratulations on the quarter. I want to address one of the weaker areas from the quarter. Concur has experienced a significant slowdown, while the other cloud assets appear to be performing well. I’m curious if my understanding is correct that the transactional side wasn’t a major component of Concur. Was the slowdown entirely due to transactional business, or were there any subscription pauses related to the soft travel environment? That would be my first question. For my second question, I’m not sure if it’s for Luka or Christian, but regarding CapEx, I appreciate the insights you've provided about your thoughts leading up to the upcoming Analyst Day, even if the details aren't finalized. You mentioned that you will continue to partner with hyperscalers; does this imply that CapEx will remain constrained? Thank you.

Luka Mucic, CFO

Yes. Let me take the first crack at both questions. So first of all, on the CapEx side, you have seen we had already at our Capital Markets Day last year guided to pretty much flat CapEx year-over-year. We saw perhaps the potential for a slight increase in line with the growth of the business. But this year, actually we believe that we will not see an increase over last year. Given the results in the first half year, I think there is scope to even have a lower CapEx spend in 2020 than in 2019. I would expect that also over the course of the next couple of years, CapEx will actually remain pretty flat with the main contributing factor being obviously the partnerships with the hyperscalers. Beyond that, there are also other sources of CapEx like facility CapEx that we are seeing now emanating from COVID in new trends on the future of work. The needs for expanded CapEx spend in this area will be probably more restricted than what we might have planned one or two years ago. The second point on the transactional revenues. You're right. Of course, Concur has been most hard hit. The transactional element of their revenues is actually significant. They often have a couple of hundred million. They posted a low double-digit million figure of transactional values in Q2. That of course has an impact. So these revenues were down more than 80%. But it's not the only reason we disclose as well in our quarterly reporting the contribution from the intelligent spend assets in totality. There you can also see that their revenue also outside of Concur has been coming down to a single-digit number, where usually those assets would all grow somewhere in the mid-teens. There is certainly some light at the end of the tunnel here.

Christian Klein, CEO

And John as usual, our CFO already answered that question in a very professional manner. Tough to maybe add one comment from my side as there's a lot of talk about the hyperscalers and the partnerships we are having. And that will be very clear. We are of course committed to those partnerships as we don't want to play in the cloud infrastructure market. But what is also very important for me is that our customers also understand that the business transformation is not only happening by moving workloads to a cloud infrastructure. This is only happening if you're transforming business processes and adapting to new business models. This is why together with Adaire and team, we are working to make sure that our customers really get growth on the one hand side and the move to the cloud but also with our SI partners for the transformation of that business. We are working to bring the partnership to the next level.

John King, Analyst

Thank you.

Stefan Gruber, Head of Investor Relations

We move to the next question please.

Operator, Operator

Thank you. Next question comes from Adam Wood of Morgan Stanley. Please go ahead.

Adam Wood, Analyst

Hi. Thank you very much for taking my question as well. I've also got two please. Maybe just first of all probably for Christian. On the integration side, you've spoken about this quite a lot now. Would it be possible to get a little bit of feedback from what the customer response has been and how much do you think that could accelerate and drive the migration to S/4HANA more quickly than would have been the case otherwise? And then maybe just secondly, you've talked about SAP doubling down in areas that you have the right to win. Could you talk a little bit in terms of where we are on the reallocation of resources from areas you're deprioritizing to areas you're focusing on? If you could give any examples of how that's benefited you that would be really helpful? Thank you.

Christian Klein, CEO

Yes, I have two points to make on that. First, Adam, regarding S/4HANA and its integration, we expect that 90% of this will be completed by the end of the year. As I mentioned earlier, this will involve not just technical integration, but also the harmonization of our data domain model. The semantics of the data need to align to enable seamless business processes and comprehensive business management, which is something only SAP can achieve. Once we place our data domain model on our platform, it will be more appealing for our ecosystem to develop new applications, as it will be easier to enhance our core applications. This, in turn, will improve our cross-selling opportunities. Our installed base sees our ERP customers familiar with HR solutions interacting with finance solutions and procurement solutions also connecting with finance for the procure-to-pay process, which we are currently developing. We are witnessing growth in S/4HANA cloud as well as our line of business applications, seeing significant potential for cross-selling within our existing ERP customer base. Now, concerning our new growth initiatives, the industry cloud represents a natural expansion of our core application portfolio. As I previously mentioned, when addressing Industry 4.0 and the digitization of factories for predictive maintenance, data from ERP and supply chains is essential, and we are delivering on that. Our focus is crucial here. You heard about our partnership with Siemens. We are not abandoning a substantial existing market for SAP. Over the last few years, we haven't invested heavily in PLM, but we are now providing our customers with a clear roadmap. We will seamlessly integrate our supply chain and ERP solutions with Siemens to ensure effective integration from the factory to the ERP system. I anticipate that this will help us accelerate sales of our supply chain and ERP solutions. Additionally, we are fully committed to areas like commerce, which have seen remarkable success. We are working on integrating commerce with the supply chain and aligning it with the flexible license models in S/4 to drive growth. In our product strategy efforts over the last three months, we clearly highlighted this focus, and further updates will follow. SAP will also refine its focus on specific industries, moving away from serving all 25 industries and leveraging partner solutions to broaden our portfolio.

Adaire Fox-Martin, Executive Board Member

Perhaps I could add to that? Maybe just add a little bit of color to that Adam. When you look at our customer base and our expectation around migration to S/4, integration is absolutely one of those expectations. We can see a very clear roadmap across four end-to-end business processes that will be complete by the end of this year. This has an incredible impact on the business case that underpins the migration to S/4. The business case has a series of costs. If of course the cost of integration is removed from that business case then the total cost of ownership is much lower for the customer. Aside from the value that S/4 itself delivers as a business transformation piece of software, the cost of ownership becomes much more attractive and much more tangible for our customers. In addition to the double-down which Christian has mentioned, in many of our product and engineering teams, that is an end-to-end double-down. Where there are focus, for instance, on a particular solution, a particular industry, a particular investment, that focus includes the go-to-market engine of SAP to ensure that there is alignment between what our colleagues in product engineering are designing and delivering and the capabilities of the go-to-market team to clearly articulate the value propositions of those solutions to our customers.

Adam Wood, Analyst

Okay. Thank you.

Stefan Gruber, Head of Investor Relations

Let’s take the next question please?

Operator, Operator

We take our next question from Phil Winslow of Wells Fargo. Please go ahead.

Phil Winslow, Analyst

Congrats on a great quarter. I have two questions. First for the conversations discussed.

Stefan Gruber, Head of Investor Relations

Phil, you’re breaking up. Maybe operator, can you take the next question please? And then we switch to Phil Winslow later on.

Operator, Operator

Certainly. The next question comes from Julian Serafini from Jefferies. Please go ahead.

Julian Serafini, Analyst

About a €300 million safety cushion being baked into the free cash flow guidance. Luka, in terms of free cash flow guidance for 2020, you talked about a €300 million safety cushion being baked into the guidance. Is that still included in your guidance today? Or has that been removed? And then second of all, just in terms of new business. Are you able to provide any color just in terms of the new cloud bookings in terms of how that has performed in the quarter? I know you don't disclose the metric anymore.

Luka Mucic, CFO

Yes. Regarding the second point, that's really the answer. We have replaced it with the current cloud backlog, which shows very healthy numbers. We've provided some individual insights. Notably, strong developments this quarter were in commerce, particularly with digital supply chain management and Qualtrics. That's about all we can say at this point. As for the free cash flow guidance, we've increased it by €500 million. There may still be room for further increases, but that largely depends on how customer payment behavior evolves in the second half of the year. I must mention that in the first half, we observed a positive trend in this area. Our initial concerns as we entered the crisis did not materialize. However, we still want to manage that risk, so we've kept some cushion, especially as our CapEx projections for the second half seem somewhat conservative. If everything goes smoothly and we don’t see major issues with customers in the second half, I believe there is potential for further increases.

Julian Serafini, Analyst

Okay. Thank you.

Stefan Gruber, Head of Investor Relations

Thank you. We've time for one final question.

Operator, Operator

Thank you. The final question comes from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Mohammed Moawalla, Analyst

Great. Thank you very much. Just a quick one. I mean, your unchanged guidance for 2020 essentially assumes no meaningful acceleration in the second half. I know you had said that you anticipated the environment to progressively improve. So is it just you being conservative? Can you give us a sense aside from the strength you saw in Asia, how the other geographies are sort of coming back particularly in North America and the European market? How the pipeline is, and how you kind of expect second half seasonality to develop? Thank you.

Luka Mucic, CFO

Yes. On the regional color, I will hand over to Adaire in a second. But on the guidance, let's be real here. I think we are very confident now based on how we have ended the first half year. This is not yet the time to frolic or break any champagne corks or anything like that. Let's not forget while the guidance assumes a continued improvement of the demand environment, we cannot take this for granted necessarily. There is still substantial uncertainty in the system. What about the development of infection rates? Is there a risk of a segment lockdown? Nobody can rule this out at this present time even though everybody is hoping of course that it will not occur. Let's not forget that the seasonality for software licenses is becoming much larger in the second half year with Q4 in particular having a much higher weight on software licenses. Given the uncertainty, it is absolutely understandable that we don't want to get ahead of ourselves. We are glad that we did well in Q2, better than we expected ourselves, but that is not a guarantee for success in the second half year. We need to have our value story right for the customers. We need to rely on our collective efforts to achieve customer success across all functions of the company. Then we are able to demonstrate the transformational value that our solutions can bring to our customers and even in difficult times rightfully asked for an order. But in that sequence, we need to first prove that out.

Adaire Fox-Martin, Executive Board Member

Perhaps, Mohammed, I'll just maybe add a little bit of regional color, and then just a little bit of the sentiment of the team looking forward into the second half to conclude. As you saw from our Q2 results, we had a very strong showing in Asia, which was certainly related to the emergence of certain geographies from the lockdown environment. But of course, we also saw a resurgence in China and specifically in Beijing right at the tail-end of our quarter. For us, 45% of our sales force are located in that particular office in that jurisdiction. So these are the unknowns that we are going to have to navigate as we go into the second half. The team has taken as Luka has already indicated a value-based and a customer-oriented, empathetic approach towards the business in the second half. We have come out of a large digital SAPPHIRE, the first time that we ran a digital event. While there are different nuances about an event of that scale at a digital level, one of the benefits for us was our ability to deliver that event in five languages across the time zones of our customers around the world. We are also focusing very much in the second half as we did in Q2 on the ability to control the controllable. Those things that are within our control, the execution of our engagement with our customers, our creativity and engaging with our customers, and the value propositions that we present. As long as the team executes well, controlling the controllable is pretty much all that we can ask from them going into the second half.

Luka Mucic, CFO

Are you good?

Mohammed Moawalla, Analyst

Thank you very much.

Stefan Gruber, Head of Investor Relations

Well, this concludes the second quarter 2020 SAP earnings call. Thanks so much for joining and you can now disconnect. Thank you.

Christian Klein, CEO

Thanks a lot.

Luka Mucic, CFO

Thank you so much.

Christian Klein, CEO

Take care.