Earnings Call Transcript
SAP SE (SAP)
Earnings Call Transcript - SAP Q4 2022
Operator, Operator
Ladies and gentlemen, thank you for being here. Welcome to the SAP Q4 Earnings Conference Call. During today's presentation, all participants will be in a listen-only mode. Following the presentation, there will be a question-and-answer session. I will now hand the conference over to Anthony Coletta, Chief Investor Relations Officer. Please proceed.
Anthony Coletta, Chief Investor Relations Officer
Good morning, everyone, and thanks for joining us today. With me on the call are CEO, Christian Klein; CFO, Luka Mucic; and Scott Russell, Head of Customer Success. On this call, we will discuss SAP's fourth quarter and full year results for 2022. You can find the deck supplementing today's call, as well as our quarterly statement on our Investor Relations website. During this call, we'll make forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the risk factors section of SAP's annual report on Form 20-F for 2021. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-year at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. As you know, this is Luka's final earnings call with SAP. So before we start, I would like to take a moment to express my personal gratitude to you, Luka, for the close collaboration over the years, for the great partnership and for the strong engagement with our investors. Congratulations on 27 years at SAP and a fantastic ride. So it has been a distinct honor to work with you, with lots of great memories. So I wish you nothing but the best of success. On behalf of the SAP family and the broader community, many thanks, Luka. And with that, I'd like to turn the call over to Christian.
Christian Klein, CEO
Yes. Thank you, Anthony, and really well said, and thanks to all of you for joining us today, and welcome to 2023. This has been a good Q4 and a very important year for SAP, bringing to a close a year of great momentum. Our results in Q4 show once again a strong demand for our products and services, reflecting the confidence and trust companies have in working with SAP. Let me call out some key highlights for Q4. Current cloud backlog exceeded €12 billion, up 24% this quarter against a strong compare last year. Cloud revenue grew 22%, and cloud revenue for S/4HANA further accelerated once again, growing at 90%. We reached a tipping point in our transformation, as we returned to positive operating profit growth of 2%, with a recurring revenue share of 76%, which is up 6 percentage points compared to Q4 2021. For 2023, this is setting us up to deliver expected accelerated total revenue and our promise of double-digit operating profit growth. For full year 2022, we delivered upon all our top and bottom line guidance, with cloud revenue growing 24%, up five percentage points from 19% in 2021. S/4HANA cloud revenue grew 79% for the full year. This is compared with 47% full year growth in 2021 and putting our S/4HANA cloud revenue to over €2 billion for the first time ever. Our cloud transformation is in full swing, and we have also built a highly resilient business with recurring revenue up from 75% in 2021 to 79% in 2022. I believe we will look back at 2022 as one of the most important years in our history. It is now over two years since we launched our strategy for transformation. We kept our promise and delivered despite the combined impact of three factors; our exit from Russia; our divestiture of Litmos; and the macroeconomic volatility facing the world. Why is our position so much stronger and SAP more relevant than ever? Because our RISE with SAP offering is much more than only a shift of our technology to the cloud. It is a true business transformation offering, and we are focused on helping our customers solve their biggest challenges. First, we enable companies to transform their existing business models and drive simplification and automation of their core business processes to offset inflation pressure. Second, SAP enables supply chain resilience. Supply chains are disrupted and need to be diversified as a result of the pandemic, geopolitical tensions, and shifting business dynamics. We are helping our customers to build more resilient supply chains by connecting suppliers and providers from the raw material provider to the manufacturer. SAP's business network facilitated over $4.9 trillion of global commerce and €730 million of B2B transactions in Q4 alone. Third, we are delivering the green letter for every industry and every customer to measure ESG based on actual instead of average data, data that is fully orderable and based on industry-specific standards. With Scope 3 emission tracking across value chains via our network, we will give our customers the ability to act by embedding sustainability into every business process and every company decision. RISE with SAP is at the heart of our strategy and is one of our most successful offerings ever. As stated, it is much more than a technical lift and shift to the cloud for our installed base. It is a true business transformation offering and around 50% of our customers are net new customers to SAP. I'd like to walk you through some of our RISE with SAP Q4 wins. As part of Merck's long-term collaboration with SAP, they will be using SAP S/4HANA cloud to help further digitize their business processes and make them more efficient, agile, and adaptable. This will enable them to act to disruptions and capitalize on business opportunities more quickly. Porsche, the German sports car manufacturer has selected RISE with SAP to support their move to the cloud and maximize value through innovation and speed. PwC, one of the largest professional services networks in the world, significantly increased their user base for SAP S/4HANA public cloud. To support Lenovo's Group Everything as a Service transformation strategy, a fundamental change of their business model will – they will be moving their digital core to S/4HANA cloud. Earlier this month, I had the pleasure of meeting with the leadership team of Al-Futtaim Group from the United Arab Emirates. They operate across a number of sectors and will be embarking on a full digital transformation powered by RISE with SAP. We also announced a joint collaboration with ExxonMobil to establish and adopt industry best practices and help them with their sustainability efforts. Finally, we are very proud to announce that we signed a long-term strategic deal with BMW this week based on RISE with SAP. We have been partners for more than 30 years and their cloud strategy is based on SAP across all dimensions on all key end-to-end business processes. The SAP business technology platform is the foundation behind RISE and our portfolio momentum. Already today, more than 80% of RISE with SAP deals include the business technology platform as the foundation for integration and extensibility. This is powered by thousands of APIs, integration flows, and low-code, no-code content packages. Lockheed Martin of the US is an example of this. Lockheed's collaboration with SAP began in 1998. They will be now leveraging RISE with SAP to move their core business processes to a secure, managed cloud compliant environment. They will be using the SAP business technology platform for emerging technology and the SAP Analytics Cloud to enhance their strategic data management. With S/4HANA and BTP at the core, our line of business applications also benefit from a flywheel effect as it is twice as likely that these ERP customers buy another SAP line of business application. More than 30% of SAP's current customers use two or more SAP solutions, and we see this increasing through this flywheel effect created by the business technology platform. At the same time, coming out of a strong year, we will not rest as we continue to focus on our cost trends to increase both win rates and productivity. In previous quarters, we spoke with you about our continued focus to simplify and consolidate our portfolio with S/4HANA and BTP at the core. Our divestiture of Litmos in Q4 is an example of this. In 2023, we intend to sharpen this portfolio focus further. As we continue to build on our core strengths, we will be pivoting our customer experience and industry areas to be more focused on specific industries, complemented by a strong ecosystem. This focus on our core, together with our ongoing optimization of SAP's structure for cloud success are behind the announcement we made today. The intent to carry out a targeted restructuring in select areas of the company. This will impact up to 3,000 positions and will include a headcount reduction amounting to about 2.5% of our workforce. While we know these changes are necessary, it is never easy to make decisions that affect our colleagues in this way. In the same context, SAP has determined to explore a sale of its stake in Qualtrics. This would be a continuation of the strategy we set at the time of the Qualtrics IPO in 2021. SAP believes that this potential transaction could unlock significant value for both companies. For SAP, to focus more on its core business and profitability; and for Qualtrics, to extend its leadership in the experience management category that it pioneered. Since the acquisition, Qualtrics has increased revenue by 3.5x to US$1.5 billion, while delivering profitability, and has significantly expanded its offerings and enterprise customer adoption. In the event of a successful transaction, SAP intends to remain a close partner. A final decision is subject to market conditions, agreement on acceptable terms, regulatory approvals, and the approval of the SAP SE Supervisory Board. SAP has retained Morgan Stanley as financial adviser to assist in the exploration of the sale of its stake in Qualtrics. I'd like to close by taking a look at our outlook and ambitions. As these results have shown, the power of SAP solutions in an increasingly uncertain world is clear. We are providing strong guidance for 2023 despite the continued macroeconomic pressures. The strategic transformation we announced over two years ago is in full swing and has reached a significant inflection point. The strength of our recurring revenue base is the foundation which will power our next 50 years at the forefront of business and technology. We will already see a positive impact in 2023, including the promise we made to return to double-digit operating profit growth as well as accelerated cloud and total revenue growth. For our 2025 ambitions, we are ahead of plan and expect to provide an update to these ambitions later in the first half after the arrival of Dominik Asam, our new CFO. In closing, I can sense both the possibilities as well as the caution that will be required to navigate today's uncertain world. And lastly, on a more personal note, you all know that our CFO, Luka Mucic, is passing the torch to Dominik Asam on March 7. Luka, as Anthony said, you have enjoyed an impressive career at SAP. And of course, the whole SAP family will always be grateful for your commitment and your contributions to our success. I guess today also marks the 37th earnings in your CFO career. And personally, I would like to say you not only many, many thanks, especially over the last two years as the CFO and supporting this significant transformation, but as well for your partner and even more important, your personal mentorship. So many thanks to you, Luka, and all the best.
Luka Mucic, CFO
Yes. Thank you very much, Christian. It's a bit hard to follow with business as usual. Thank you so much for your kind words. But also from my side, a happy and healthy 2023 to everyone. Let me start by saying that I'm extremely proud of SAP's solid finish to 2022, demonstrating great resilience in the year that saw certainly many challenges. But despite the extremely volatile business environment, we delivered on our financial commitments for 2022. And we are likewise on track to deliver our growth and profitability commitments for 2023. Our financial performance shows that we kept our promise and thoroughly executed on our plan by being laser-focused on building cloud momentum through agility and great cost discipline. This resulted in a successful finish to the year, and I am personally extremely confident that we will carry this strong momentum into the new year. Customers around the globe continue to choose RISE with SAP to drive their end-to-end business transformations. Large cloud transactions with a volume greater than €5 million contributed 48% to our cloud order entry for the full year and an impressive 50% in Q4, the highest number on record. Now, let me dive into more details around our financial highlights. Current cloud backlog now exceeds €12 billion, continuing its growth at scale to 24%, despite being negatively impacted by approximately 1.5 percentage points from the divestiture of our Litmos business and the wind down of our business operations in Russia and Belarus. S/4HANA current cloud backlog growth accelerated to 82%, driven by the strong adoption of RISE with SAP. In Q4 alone, we added more than €500 million to our S/4HANA current cloud backlog, leading to a total of €3.17 billion. Cloud revenue this year surpassed support revenue and became the largest single revenue stream for SAP. Our combined SaaS and PaaS portfolio for 2022 continued to grow an impressive 27%, with SaaS cloud revenue up 25% and PaaS cloud revenue up 45%. This strong cloud growth was primarily the result of an outstanding contribution of S/4HANA cloud and the business technology platform. Driven by this strong double-digit cloud growth and an outstanding performance in services, total revenue was up 5% year-over-year, showing great traction compared to the year ago period. Now, let's take a brief look at our regional performance, where in the fourth quarter, all regions delivered a strong double-digit cloud performance with Brazil, Germany, and Japan being standouts. For the full year, the Americas increased by 22%, EMEA by 26%, and APJ likewise by 26%. Germany, the United States, and Japan had outstanding performances, while Brazil, Chile, China, Italy, Saudi Arabia, South Korea, and Switzerland were all particularly strong. Now, moving on to the bottom line, where our cloud gross margin for the full year continued its upward trend from last year and expanded 2.1 percentage points to 71.3%. This increase was driven by expanding gross margins across all cloud business models, with efficiency gains overcompensating increased investments into the next-generation cloud delivery program. The improvement of the cloud gross margin contributed nicely to our cloud gross profit growth of 28%. In the fourth quarter, non-IFRS operating profit grew by 2%, reaching an inflection point in our cloud transformation towards double-digit growth in 2023. Full year 2022 non-IFRS operating profit came in at €8.03 billion, a 7% decline, mainly impacted by the decision to wind down business operations in Russia and Belarus, a reduced contribution from software licenses revenue, as well as accelerated investments into R&D and sales and marketing to capture current and future growth opportunities. Earnings per share decreased 39% to €4.08. The year-over-year decline reflects the contribution to financial income by Sapphire Ventures, that due to market conditions faced throughout the year was significantly lower than in the same period last year. The IFRS effective tax rate for the full year was 44.6% and the non-IFRS tax rate was 29.5%. This year-over-year increase mainly also resulted from changes in tax-exempt income related to Sapphire Ventures. Free cash flow for the full year came in at €4.35 billion, in line with the revised outlook of approximately €4.5 billion. This is predominantly due to lower profitability and adverse working capital impacts in other assets. While tax payments developed positively, smaller negative impacts came from share-based payments as well as capital expenditures and leasing. In addition, the increased volume of trade receivables sold in 2022 amounting to €800 million versus €500 million in 2021 had a positive impact on free cash flow. As you already heard from Christian, we will be initiating a targeted restructuring program this year with two main objectives. First, to focus our portfolio on our key strategic growth areas; and second, to improve overall process efficiency as we continue to accelerate our cloud transformation. We are highly confident in our short and mid-term prospects. We see 2023 as another pivotal year that will help deliver on the accelerating top line and double-digit operating profit growth that is reflected in our outlook. Finally, let's discuss our non-financial targets. Our greenhouse gas emissions were 95 kilotons within our adjusted target range. We remain on track to be net neutral in our own operations this year and we are continuing on the path to achieve net zero across the entire value chain by 2030. Employee Engagement Index was down three percentage points. This decrease is in line with global industry trends and related to external factors, such as the lasting impact of the pandemic and macroeconomic conditions. We achieved 35% of women in the overall workforce and 29.4% women in management. In November, we brought the latest release of SAP Sustainability Control Tower to market, which effectively shares and organizes ESG data so companies can more accurately and readily report their performance to various reporting requirements and frameworks. This enables companies to set targets in actionable insights into core processes and create role-specific actions to improve sustainability performance. As many of you may know, I not only have a passion for the financials, but also for sustainability and non-financial metrics. It has been an honor to drive this topic together with my colleagues during my tenure. We have been a pioneer in integrated reporting, and it has been a privilege to have a role in shaping this area. So to summarize, 2022 was another strong year for SAP, highlighted by our cloud performance across all regions despite the macroeconomic environment. This demonstrates our continued progress with customers who want to transform their businesses into more intelligent enterprises. Even with the challenges that we are seeing in the world today, we are confident in the opportunity ahead. Our 2023 outlook best illustrates that we are now entering the next phase with a pivotal year characterized by business momentum acceleration. And finally, on a personal note, again, as you all know, this is my 37th and final earnings call with SAP. And I'm proud to have been part of such a great company. As I'm about to pass the torch, it is exciting to see that SAP is in such a position of strength and moving along on its growth trajectory. Let me also take the opportunity to share my own personal appreciation to all of you and to the broader financial market community. Providing transparency in an open and constructive dialogue has always been my goal. I hope that I was able to live up to this goal, despite the often volatile times and the unprecedented transformation of our company in the last nine years. It has always been a privilege. Thank you very much, and we will now be happy to take your questions.
Anthony Coletta, Chief Investor Relations Officer
All right. Thank you, Luka. And I would like to remind you to limit yourself to one question only, please. So, Natalie, please open the line.
Operator, Operator
Ladies and gentlemen, we will now start the question-and-answer session. Our first question comes from Adam Wood at Morgan Stanley. Please proceed.
Adam Wood, Analyst
Hi. Good afternoon, Christian. Good afternoon, Luka. And also, Luka, best wishes from my side for the future. So the question was just around the fourth quarter cloud growth. We went into the quarter with the 26% cloud backlog growth and ended Q4 with 24%. And yet the cloud growth was 22%. Could you just help us understand why that anomaly is there? And also help us understand how that accelerates into a higher level 22% to 25% in 2023? Specifically, is there any issue with rational revenue growth in that side of the business that you're seeing in the fourth quarter that would have explained that, please. Thanks so much.
Luka Mucic, CFO
Yes. Thanks for the question, Adam. And let me get started and then in the overarching momentum. Perhaps Christian, you might want to add some comments or also, Scott, on what you see in the market. So, essentially, in the fourth quarter, I think, you have to remember a couple of effects. One, and that is something that I flagged on the CCB growth to be expected, we had the divestiture of Litmos, which obviously affected CCB negatively, and together with the continued effect from the Russia exit that resulted in the 24% CCB growth versus the 26% that we had. Actually, it is also sometimes a matter of rounding where you exactly end up on that. But we are actually very happy with the 24% that we reached. And I can also spend a few words on how we expect this to unfold in 2023. But just to round this up, on the revenue front, you need to take into account that next to all of those impacts, of course, the divestiture of Litmos also meant that we lost some revenue due to the closure up to early December. We had also the anniversary of the Clarabridge acquisition that Qualtrics had done in the fourth quarter a year prior. And that obviously then brought the year-over-year growth rates down a bit, together with all of the other effects. Transactional revenues were actually quite resilient in particular in Concur. I have to say that business is back. And I was surprised actually a bit that in Q4, they were already back in volumes to the pre-pandemic levels. So they grew actually in the 20s, which is a very decent performance. So it's really mainly down to those divestiture impacts and the anniversary of Clarabridge. When we think about 2023, I would expect general re-acceleration throughout the year already starting in Q1 because of the strong backlog that we have been building that always comes into the revenue lines with one to two quarters of delay. And so you should see already a reacceleration in Q1 that would then further build up during the year. I'm sure there will be more questions around seasonality, but I'll leave it on that comment for cloud revenues. And then in terms of the forward-looking momentum, I think Christian has already talked about the great success that we had with BMW, the signing yesterday. But perhaps you want to add some more comments around what you see in the market.
Christian Klein, CEO
Yeah. Luka, and also adding from my side, I guess we also provided for the first time today also the total cloud backlog, including not only the annual contract value, but the total value over the lifetime of the contracts. And there you're also going to see that we are also, in the meantime, have that €34 billion in the books. And this has increased by 35% versus the 27% we saw a normal growth in Q4. And so this is also a signal that deals like BMW, I mentioned Porsche, I mentioned Merck, there are a lot of large enterprises now following our move. And, of course, they have a certain ramp in their contract. So we're actually super confident that we already have the backlog to deliver on our ambition for 2023. And even beyond, together with the recurring revenue share, I mean, the business is super resilient. And I mean, for the year to come, I mean, Scott, we look into Q1 already. Luka already mentioned there will be a reacceleration in the cloud, no matter if it's now on customers like BMW, where we are driving automation in manufacturing, in finance where we are working on analytics, or if we're working on the supply chains of this world to make them more resilient, or last but not least, if we are helping customers like Exxon and others to measure ESG in a standardized way and act on circular and other sustainability capabilities. The pipeline is actually very strong, and we are as confident as we have been last quarter. And Luka mentioned the one-timers we had in Q4, especially in the cloud revenue. Scott?
Scott Russell, Head of Customer Success
I'll just add a couple of comments to what you and Luka discussed, Christian. First, in Q4, we not only continued to grow, but RISE has also become a key driver for our total cloud backlog. The proportion of large customers is steadily increasing, which enhances our overall portfolio. We highlighted many of these customers today, including Fujitsu, Natuzzi, Tech Mahindra, Sumitomo, and Renault, among others. These large organizations will experience the growth that Christian referred to. They are choosing SAP and RISE with SAP because there is a strong need for companies they can trust. Trust in technology, partnerships, and capabilities that provide scale, resilience, and superior features to help manage challenges like supply chain issues or sustainability efforts. Additionally, in Q4, we observed consistent performance worldwide. We see momentum across all regions, which Luka also mentioned regarding specific countries. This consistency in our portfolio and business fosters confidence, regardless of where our customers are headquartered. Therefore, we look ahead with a sense of confidence, even considering factors beyond our control.
Adam Wood, Analyst
Appreciate the time. Thank you.
Anthony Coletta, Chief Investor Relations Officer
Thank you, Adam. We'll take next question, please.
Operator, Operator
The next question is from the line of Amit Harchandani from Citi. Please go ahead.
Amit Harchandani, Analyst
Thank you. Hello, everyone. Amit Harchandani from Citi. And before I ask my questions, thank you, Luka, for the partnership over the years, it's been a pleasure over the past decade. Moving on to my question, my question is really with respect to the free cash flow trajectory in 2023 and if you look at it relative to what played out in 2022, quite a few moving parts, right? You had the sale of receivables, there's the dynamic around pre-payments to hyperscalers, potentially deferred revenue. There's obviously restructuring next year. So if you could kindly help us build a bridge towards how we arrive at the free cash flow for 2023? And more importantly, how should we get confident that you're on track to get to €8 billion or potentially higher by 2025? Thank you.
Luka Mucic, CFO
Yeah. Thanks for the question. That's a detailed one that, I guess goes to me. So first of all, when you take a look at where we ended with the €4.35 billion and then you build up, there are a couple of elements here. First, on the negative front, yes you're right. We have a restructuring that will result also in cash outflows of roughly €300 million. So you need to subtract that, so to say, back. On the sale of receivables, actually, SAP has a long history of engaging in customer financing. In 2022, the €800 million was actually a step-up over the roughly €500 million that we had in the year before. But you need to understand, the prior year was in the long-term average, actually quite a low figure. So the long-term average is more around €700 million. So we, yes, would expect that also in the future in 2023 and in the years beyond, we will have customer financing-related cash inflows at the same levels as what we have seen in 2022. So that is actually more or less a wash in terms of how you build the bridge for 2023 and beyond. When you then think about the progression, well, first of all, of course we expect that we will have a significantly higher profitability in 2023 compared to 2022 that will result also in a higher cash flow performance. You pointed to the fact that, we had, in 2022, significant prepaid expenses from some strategic transactions that we did with hyperscalers that were kind of a working capital headwind for us, but made sense for us in the long run, because we were able to capitalize on better conditions as a part of that. So that is something that we don't expect to the same extent to see in 2023 for the further years. Then you need to keep in mind that, we have started in 2022 to move our share-based compensation plans to equity-settled plans. And under the old plans, we had actually a one-year vesting period and then essentially payouts on a rolling basis. That is now changing. And the majority of our awards that now start to vest actually already after six months will then be paid out in equity. And so, we will see starting this year and then with further increases of tailwinds in the following years as the old programs, the large cash settled anniversary and therefore, don't affect the cash flow anymore a reduction, to the point that we would expect in 2025 to end up only with roughly a bit more than €500 million of cash-settled cash flow headwind, so to say, in the results. And so it's basically mainly the combination the increase in profitability, as well as the positive impact from the move to equity-settled programs that will define the trajectory. The receivables financing should be neutral for the performance in the future years as we would expect to finance similar volumes as we have done in the past. On the working capital impacts that were particularly pronounced in 2022, I would expect a slight moderation of those and then it's at the end of the day, the growing profitability in the business. Obviously, we don't intend to rest with the growth that we have guided for in 2023, but actually see a strong prospect to further increase the growth rates on the profitability side in 2024 and beyond. I hope that's helpful, at least at the level that we can cover in such a call.
Amit Harchandani, Analyst
Thank you very much Luka. Appreciate the detail.
Anthony Coletta, Chief Investor Relations Officer
Thank you, Amit. We'll take the next question please.
Operator, Operator
The next question is from the line of James Goodman from Barclays. Please go ahead.
James Goodman, Analyst
Yes, good afternoon. Thank you very much and Luka, all the best for the next chapter. My question is on the Qualtrics announcement, if I could ask you to elaborate perhaps a bit further there on the rationale. Why now when if you say the business has matured so much since the original acquisition and has worked very hard around the integration with certain other assets in the portfolio on the cross-selling opportunities as well? I mean you talked about a strong ongoing relationship with Qualtrics, clearly. But any detail there would be helpful, including no circumstances under which you would or wouldn't sell it, given what's happened to valuations in the space and whether there are specific use of the proceeds? Thank you.
Christian Klein, CEO
I'm glad to address that question. When we took the initial step with the IPO in 2021, we had already considered and planned our ultimate goals and the path forward. You're correct that we have made significant investments in recent years to integrate and embed experience management into our solutions, leading to impressive sales growth, including tripling our sales. However, around Q3 and Q4, we had discussions with the Qualtrics management team, reflecting on our strategy. We realized that we can continue to embed Qualtrics with our offerings while also exploring a sale that would allow SAP to free up resources and focus on our strong core growth, evident in the booming S/4HANA cloud numbers. Meanwhile, Qualtrics could pursue additional valuable partnerships in the market. We also collectively agreed that this move could enhance value for both Qualtrics and SAP shareholders, which is why we decided to consider a potential sale. Qualtrics is an outstanding asset and the leading product in experience management, and we are seeing considerable interest, so we are optimistic about the ongoing process.
Luka Mucic, CFO
The process should be straightforward because Qualtrics has been operating independently for some time now. They have a dedicated leadership team and a strong organizational culture, so it doesn't require any significant separation efforts. One key reason we are considering this is to maximize value for both Qualtrics and SAP shareholders. In the past year, while both companies have made progress together, Qualtrics has shown decent performance in 2022 and is now guiding for stronger profitability while continuing to gain market share in experience management. However, there is some concern regarding SAP’s majority stake, as I believe that Qualtrics and SAP are currently not structured to fully realize the company's value. Therefore, exploring a sale could help unlock greater value for both sets of shareholders. That said, we expect this value to be realized before considering a transaction. We will prioritize achieving optimal value for Qualtrics and are willing to not proceed with a transaction if we do not find a fair value for all stakeholders. At this moment, we cannot provide a precise timeline for this process, but we wanted to offer early insights and transparency. While discussions about the use of proceeds are understandable, they may be a bit premature. If we can secure a strong valuation, we will have various options for the proceeds, ranging from reinvesting in valuable assets related to our strengths to enhancing returns to shareholders. We will make decisions as we gain more clarity in the process, but it certainly gives us a good opportunity to create more value for SAP shareholders as well.
Anthony Coletta, Chief Investor Relations Officer
Thank you. Thank you, James.
James Goodman, Analyst
Thank you very much.
Anthony Coletta, Chief Investor Relations Officer
And we'll take the next question, please.
Operator, Operator
The next question is from the line of Michael Briest from UBS. Please go ahead.
Michael Briest, Analyst
Yes. Thank you. Good afternoon. Luka, I can't let you get away without a question on cloud margins. Could you say a little bit about the convergence costs for 2022 and 2023? And how much of those went into the cost of sales rather than R&D? And then obviously, you've now got several thousand customers on RISE, do you have a better view on where cloud margins are going to mature to in the next few years or certainly the end of this year as well, given that those investments will fade in the second half? Thank you.
Luka Mucic, CFO
Yes, please feel free to ask me any questions about cloud margins. I am the only one in the room who can address them, which I appreciate. Regarding convergence costs, they were significant in 2022 as we ramped up to finalize the program. We incurred about €450 million in total costs related to the harmonized cloud delivery program, which is more than double what we spent in 2021. Approximately €200 million, or around €50 million per quarter, was specifically allocated to cloud line costs. These costs will diminish over several quarters in 2023. A portion will still remain in the first half of 2023, but it will be considerably smaller than the rate we saw in 2022, roughly half of that rate. Now that we have full visibility on the program's completion, we only have one line of business left involving some data center migrations and the final asset retirement, which we are confident will be completed on schedule. The second half of the year will not include any expenses related to cloud delivery harmonization. In terms of cloud margin, we saw good progress in 2022, increasing by more than two percentage points despite the headwinds, which I did not fully expect this early in the year. I believe that we will see further acceleration in cloud margin in the first half of the year, and even more significant growth in the second half. By the end of the year, I would not be surprised if we reached an exit rate close to the target we previously set for 2023, which is around 75% plus or minus. This will depend on the sales success of S/4 in the private cloud deployment option during the first half. As we build those landscapes, there will be a small ramp-up, leading to higher initial costs. Looking ahead to 2025, my expectations remain unchanged from what I shared at our Capital Markets Day. If RISE with SAP and S/4 private cloud continue to perform well, with an increasing number of clients like BMW transitioning their entire landscapes to our cloud, we may face headwinds that could halt our progress in the public cloud. However, I believe our main assets will sit above the 80% mark by 2025. If private cloud dampens this slightly, we may still end up just below the 80% mark. Nevertheless, we would likely see a significant increase in cloud gross profit, helping us meet our profit goals for 2025. This is a favorable situation, and we remain committed to leveraging all available strategies to enhance our performance. The changes in prepaid expenses reflected in our free cash flow also help us ensure more efficient use of cloud infrastructure entitlements, further supporting our margins.
Christian Klein, CEO
And just to demonstrate, Luka, that the CEO has some expertise in this area, Michael, you shouldn't expect that the infrastructure isn't clean now. It's clearly defined; on one side, we have our own infrastructure that is now fully harmonized. Yes, we need to do some work on the decommissioning. Our hyperscaler strategy is clearly established with many failover and backup scenarios, making it modern and resilient. Additionally, as part of our ongoing efforts, we are enhancing the scalability of our database, which significantly affects the total cost of ownership. Scott has done an excellent job of putting higher incentives on price relative to volume, resulting in a positive trend in maintaining our prices. We are incorporating CPI clauses, which we announced successfully from both engineering and pricing perspectives. I am quite confident that we will see strong performance in the coming years. Now, as Luka is no longer here, someone will be monitoring this KPI closely.
Luka Mucic, CFO
So, Christian, you have just proven that I have indeed been mentoring you very well.
Michael Briest, Analyst
Thank you. All the best Luka.
Anthony Coletta, Chief Investor Relations Officer
We will take the next question please.
Operator, Operator
The next question is from the line of Johannes Schaller from Deutsche Bank. Please go ahead.
Johannes Schaller, Analyst
Thank you for taking my question, and I appreciate the great collaboration over the past years, Luka. I might have missed it, but did you share the cloud extension multiplier for the quarter? That's just a minor housekeeping detail. I find it very helpful that you now provide the total cloud backlog number. How should we interpret the average duration or average contract lifetime of that figure? Additionally, regarding S/4HANA cloud, it continues to grow impressively even though the comparisons are becoming significantly tougher mathematically. How should we expect that to develop in 2023 in terms of revenue and CCP? Will there come a time when it normalizes, or should we anticipate these strong growth rates to persist? Thank you.
Luka Mucic, CFO
Yes. Let me start with the more technical aspects here, in particular, around the cloud extension policy. So when you look at the full year, actually, the multipliers continue to hover rather around the 3x than the 2x factor. However, you will always have a seasonality in Q4 because you sign up the largest transactions that you have a slightly higher exposure. So for Q4, we had an extension factor of roughly 2.6 now, which still made it in total for the full year, a 2.9 factor. So you see that this is substantially ahead. And I would also expect as we go into the next year, that in the first half, we will rather have higher multipliers. And then, as we sign up the very large deals, then it might moderate a bit. But this continues to show the same behavior as we have seen actually since we launched RISE. And you can see it also in the resilience of our support revenues. I mean, with those heavy software license declines having actually only a flat support revenue development for the year is actually very resilient. In absolute numbers, we had roughly €200 million of support revenues that changed sites to the cloud line, so to say, over the entire business year. So this is very resilient. In terms of the total cloud backlog, I'm happy that you find it useful. And indeed, I think it follows the kind of verbal comments that we had already on the past earnings calls, that we have seen the total order entry actually moving with even greater speed and pace in terms of growth than the annualized performance or the current cloud backlog, for that matter. It's a figure that we are currently prepared to produce on an annual basis. So we'll provide an update at the end of next business year as well. And in the meantime, we'll also provide color commentary on what we are seeing. But I would expect this trend to continue for a while, in particular as long as our upgrade cycle of customers to S/4 and in the cloud is in full swing, which certainly will be the case for the next three, four years. And because there, you have then those large contracts with more significant ramps. Perhaps as a last case in point that we did not discuss yet, also, the average contract duration at SAP in the cloud is up. It's by now almost reaching four years, and that is another function of those large multi-year deals that we are signing up. And so therefore, the TCB is actually a helpful measure even though, of course, as it's not broken down to individual business, yes, we'd rather give you a measure of the underlying orders that we have already under the belt for our midterm ambition than a really good predictor of in-year revenues for the years beyond 2023. Perhaps on the S/4 cloud revenue, number you might have a view, Christian, but I think it will certainly remain a high growth...
Christian Klein, CEO
Look, this morning, I got also the question in the press conference, what about the end of maintenance for our ECC and older ERP version? And do we go to expand and extend this timeline again? No, we are not going to extend that, because we're actually giving customers already a lot of choice to move with us to S/4HANA. We still have on-prem and guaranteed until 2040. But we, of course, see now in the meantime, big success with our move to the cloud with RISE. And we're seeing that a lot of customers are now left who are now starting with us in this journey. You have seen all the large logos. But also important to mention, while there is a lot of business left in our installed base and we give customers choice, the predominant share will move with us to the cloud, especially that the timeline is coming closer with 2027. But of course, we also have seen 50% net new customer share, and we are putting a lot of work currently into our volume business. So let's not forget with Julia, Scott, and Thomas, we are working now on we have customers like Doctolib unicorns who actually celebrate go-lives in weeks. And we want to activate this channel even more because the product is really designed also for the small and the midsized customers. So while we are moving the large ones and the installed base, we're definitely also not going to rest on the small and midsized segment, and we see good business coming in there. We want to activate the channels here much stronger across the world. And last, but not least, I mean, what we are doing also with the restructuring. Look, this is – has a moderate impact on 2023, but we're already doing this now and also for the years to come, to also have their strong results, especially also both top and bottom line. But also even more important we also, with this strategy activate our cross-sell potentially, because the BTP is now the de facto standard. S/4HANA is booming. And then we can also increase the win rates of our applications, which are circumventing the core, as we have shown on this one slide. That is working, and this is what we are doubling down on. So, you can definitely expect a further acceleration. But at a certain point, we should really look at the absolute terms because, of course, mathematically, the percentage growth rates, this is just mathematically then at a certain point of time, a question mark.
Johannes Schaller, Analyst
It's very clear. Thank you, Christian. Thank you, Luka.
Anthony Coletta, Chief Investor Relations Officer
Thank you. We'll take another question.
Operator, Operator
The next question is from the line of Stefan Slowinski from BNP Paribas Exane. Please go ahead.
Stefan Slowinski, Analyst
Yes. Hi. Thanks for taking my question. And Luka, all the best as well in your next endeavor, I enjoyed working with you over these past few years. So I just wanted to follow-up, I guess, two quick points. Just on the hyperscaler relationships. Obviously, they're seeing a bit of pressure in terms of consumption. Does that give you an opportunity to negotiate some better bulk transactions? And is that maybe what we saw there in Q4? And can that also be a tailwind to margin? And then just a second one on the backlog, you just talked about the multipliers, the visibility there. How confident are you about getting to double-digit revenue growth? Could that happen as early as 2024, or would that require sort of a much better macro environment in 2024? Thank you.
Christian Klein, CEO
On the hyperscaler engagements, I would definitely say, yes, the environment is good. We, of course, in constant talks around our partnership, both technical as well as commercially. And second, about double-digit total revenue growth, 2024, it's – yeah, absolutely. It's possible. And as you're going to see the recurring revenue shares growing and growing, we are talking about 83% already in 2023. It's absolutely feasible to come to double-digit total revenue in 2024.
Luka Mucic, CFO
This is clearly our ambition. Yes, Stefan.
Anthony Coletta, Chief Investor Relations Officer
All right. Thank you very much. And we'll take one last question.
Operator, Operator
The last question is from the line of Toby Ogg from JPMorgan. Please go ahead.
Toby Ogg, Analyst
Yes, hi. Thanks for taking the question and Luka, all the best for the future. Just thinking about the EBIT growth trajectory that we're on, clearly, minus 8% in Q3, plus 2% in Q4. How should we think about this phasing as we move through 2023? If I look back through 2022, it looks as though the easiest comps are in Q1 and Q2, but also mindful there are now cost savings in the mix here as well. And there's a phasing element to that. So, could you just help us understand the exact phasing or the trajectory of the EBIT growth through 2023? Thank you.
Luka Mucic, CFO
Yes, I appreciate the question and was anticipating it. We believe that our strongest performance will be in Q2 and Q3. In Q2, this is mainly due to the significant impact from exiting Russia last year, which was primarily seen in that quarter. For Q3, it will be the first quarter without the expenses related to cloud delivery harmonization, which will positively impact our profit and loss statement. The most challenging comparisons are in Q1 and Q4 for different reasons. In Q4, we had the Litmos divestiture last year, which resulted in a one-time gain of €109 million in non-IFRS results, and we do not have similar items planned for this year's Q4. Q1 is difficult because it was less affected by the exit from Russia, as we still had some revenues there, particularly from support and cloud services. For 2023, we are planning for zero revenues in Russia. However, I believe we should be close to or already seeing double-digit growth in Q2, which should be the highest of the year, followed by solid performance in Q3. In Q4, growth is expected to moderate again. Looking ahead to future years, we anticipate an accelerating growth trajectory as the cloud delivery harmonization program will be completed in 2024, which, along with additional efficiency gains across our business and improved cloud margins, will provide significant relief. I hope this helps with your planning.
Toby Ogg, Analyst
That’s great. Thank you.
Anthony Coletta, Chief Investor Relations Officer
All right. Thank you and this concludes our call for today. Thanks for joining.
Christian Klein, CEO
Thanks a lot.
Luka Mucic, CFO
Yes. Thank you very much. Thanks, everybody.
Operator, Operator
Ladies and gentlemen, the conference has now concluded, and you may disconnect. Thank you.