Earnings Call Transcript
SAP SE (SAP)
Earnings Call Transcript - SAP Q3 2021
Operator, Operator
Good day, and welcome to the SAP Q3 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Anthony Coletta, Chief Investor Relations Officer. Please go ahead.
Anthony Coletta, Chief Investor Relations Officer
Good morning, everyone. Welcome and thank you for joining our earnings call to discuss SAP's Q3 results. On a personal note, I'm delighted for my first earnings call for SAP. It is a distinct honor to serve in this capacity. With me on the call today are our CEO, Christian Klein, and CFO Luka Mucic who will make opening remarks. Joining us today for Q&A from New York City is Scott Rusell, who is part of our customer success organization. Also, with us in the room is Stefan Gruber, my predecessor, as we now successfully conclude our handover. Welcome, Stefan. Would you like to say a few words before we start?
Stefan Gruber, Former Chief Investor Relations Officer
Thanks, Anthony, and congratulations on your appointment. And thanks also for the great cooperation and the partnership during the last weeks, I really enjoyed our collaboration. What I just want to say briefly here is that it has been a privilege to engage with the financial community over the last 18 years. And now I'm looking forward to my next chapter and I can do this at ease because I know the financial community is in very good hands with you, Anthony. Back to you.
Anthony Coletta, Chief Investor Relations Officer
All right. Thank you, Stefan. And now to the forward-looking statements. During this call, we will make forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations, forecasts, 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. SAP's Annual Report on Form 20-F for 2020. On the SAP Investor Relations website, you can find the deck intended to supplement today's call available for download. Unless otherwise stated, all financial numbers on this call are non-IFRS and growth rates and percentages point changes are non-IFRS, year-over-year at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute or superior to the measures of financial performance prepared in accordance with IFRS. And with that, I will now turn the call over to Christian.
Christian Klein, CEO
Yeah, thank you, Anthony and Stefan. And thanks to all of you for joining us today. I hope everyone is staying safe and healthy. Q3 has been an outstanding quarter. Our new cloud business led to 22% growth including cloud backlog, which for the first time surpassed EUR8 billion. The newer waves are also strong and keep improving, reflecting very high customer satisfaction. It's clear that our approach with customers is resonating. They're facing unprecedented pressure from a combination of factors: the pandemic, supply chain disruptions, changing workplaces, and of course, climate change. A year ago, we introduced our new strategy, which directly supports our customers in addressing these challenges. SAP's strategy is based on our unmatched trends in developing deep customer partnerships to drive holistic business transformation. At the hub of our approach is RISE with SAP, our offering for business transformation in the Cloud, which offers three key benefits. First, it helps customers develop, adopt, and automate new business models, thereby becoming intelligent enterprises. Second, with our business network, the largest B2B network in the world, we help our customers create more resilient supply chains by connecting them to a vast community of suppliers and manufacturers. Third, we are uniquely positioned to help our customers improve their green line, as no one is better placed than SAP to help companies put in place the most energy-efficient business processes. We at SAP are motivated by the role we play to fulfill our mission: to help the world run better and ultimately improve people's lives. A key part of improving people's lives is a strong partnership between the technology sector and government. This critical partnership became crystal clear during the pandemic, from contact tracing to apps like our OneApp, downloaded nearly 35 million times in Germany to vaccine distribution. Whether it's in Germany, the U.S., or elsewhere, we are encouraged by discussions about new investments in infrastructure, education, and healthcare, with digital transformation at their core. Let's now turn to some of the details behind our quarter. We are seeing excellent progress in the Cloud and strong growth across our line of business applications. Our Cloud revenue growth accelerated sequentially by 3 percentage points to 20% higher than most of our large competitors. This is the second consecutive quarter of increasing growth, and we expect this to continue in Q4. We have seen record new Cloud business in Q3 with the highest Q3 growth in 6 years in both E&P and human experience management. Our new Cloud business is growing faster than our largest competitors. Overall, our revenue grew 5% year-over-year, our third consecutive quarter of increasing our revenue growth. I talked about RISE with SAP at the start of my comments. We introduced this new offering just in January this year and Q3 has already been another great quarter. As an important strategic dynamic behind this, specifically, strong RISE momentum accelerates the move to S/4HANA Cloud, and even more importantly, the SAP business technology platform, which in turn leads to strong adoption of our modular Cloud ERP, including SAP's line of business and industry applications. RISE with SAP is the enabler. Customers can analyze, benchmark, and redesign their business models and processes based on best practices collected from our 400,000 customers. This dynamic enables SAP to more effectively cross-sell to our installed base and lead to this quarter's strong momentum. In Q3, S/4HANA Cloud backlog grew by an impressive 58%, up from 48% close in Q2, and building a strong foundation for future cloud revenue. In Q3, our S/4HANA Cloud revenue grew by 46%, up from 39% in Q2. At the same time, we are winning market share, with more than 50% of S/4HANA Cloud revenue coming from new customers. Clients from the U.K. and Philips Domestic Appliances are among hundreds of new customers choosing RISE with SAP. Thanks to RISE with SAP, we're seeing equally strong momentum with our line of business applications. In Q3, all of our main solutions, new cloud business grew by double digits. We saw double-digit cloud backlog growth across our whole portfolio. We are seeing positive cloud wins with S/4HANA against our records, including wins with Adidas and Global International. VMWare further invested in S/4HANA, showcasing definitely that S/4HANA will continue to transform their business, simplify their integration of acquisitions and new products, harmonizing their data, and lowering overall IT costs. We saw several wins against Workday with our human experience management solutions, including this quarter from a large U.K.-based food company. In our CX business, both Cloud revenue and Cloud backlog grew by strong double digits. Via has selected SAP customer experience solutions as part of its SAP portfolio to streamline the end-to-end business processes. Siemens Energy was a key win for SAP Ariba. We are also very excited about our new multi-year agreement with the U.S. Department of Defense for SAP Concur. We signed a strategic long-term agreement with Reckitt for SAP Analytics Cloud. Our business technology platform, which underpins the strengths across our line of business applications, also grew well in both cloud revenue and cloud backlog. Customers this quarter include Robert Bosch, SoftBank Corporation, Yamaha Corporation, and many more. For the first time, our overall Cloud ERP business, spanning our line of business applications exceeded EUR6 billion of annual revenue runway. As we extend our RISE offering to include modular ERP, a new industry solution, we expect our overall Cloud ERP business to continue to grow well. In summary, this has been another excellent quarter. Our results demonstrate that our strategy has taken hold and is delivering at an accelerated pace across an expanding set of markets. We are optimistic about the momentum we are seeing, and we are raising our outlook once again. In closing, I want to spotlight a critical imperative that is at the heart of our transformation: sustainability. We are delivering major advances to help our customers reach their net-zero goals. Recently introduced SAP Product Footprint Management is designed to help customers reduce the footprint of their supply chain. Later this year, we will launch SAP Responsible Design and Production, helping companies build sustainable outcomes into product design. Shortly after, we will launch SAP Sustainability Control Tower, providing customers with transparency and insight around their progress to net zero. However, our ambitions go far beyond individual products. The UN's Climate Change Conference, COP 26, is happening next month, putting a spotlight on the enormity of our climate change challenges. No single government, multilateral organization, or business can solve this problem alone; businesses do play a significant role. The ability to see inside and outside your organization across manufacturing supply chains and critical business processes is crucial. This is the unique advantage SAP can offer. We enable our customers to manage their green line with as much importance as the bottom line and the top-line. You will see us continue to lead significant innovation on this call, in addition to building a strong business coalition. Let me close on a personal note. Thank you, Stefan, for leading Investor Relations for the last 18 years. I can actually still remember when the two of us met for the first time together. It was in New York, and I was an intern, and you took me out to a concert at Central Park. After that, you worked with six CEOs. Our market cap increased six-fold, and you took part, believe it or not, in 75 earnings calls. I really enjoyed working for you, and I'm also very thankful for your personal friendship. On behalf of SAP, we are incredibly grateful for your dedication, integrity, and great work. We all wish you well for the future, and at the same time, a warm welcome to you, Anthony Coletta, our new Chief Investor Relations Officer. Anthony has held several key leadership positions with SAP, most recently as CFO for North America. We are delighted to have Anthony in this new role and I'm sure you will all enjoy getting to know him. Thank you again for joining us today, and let me now hand over to Luka to talk through our results in more detail.
Luka Mucic, CFO
Thank you very much, Christian. But before I get started, I would also like to say a big thank you to you, Stefan, for many years of partnership and friendship. I counted it as well and we have worked together for 31 quarters and of course countless road shows and investor one-on-one meetings in between. I actually have to say, unlike on the CEO side of the house, you only had to work with two CFOs. I'm not sure whether you consider that a blessing or curse, but I also hope that I didn't create too many headaches for you as we were going through all of these meetings, but always genuinely enjoyed working with you and your sense of humor that even in the wake of more difficult times, I think we were always able to uphold. I should disclose here that Stefan is also an excellent piano player and recently gave a play when I was turning 50 a months ago. So, the least that I can expect now, as you're having a little bit more time to practice, is to get a fully recorded concert at least for every quarter that we're ending. So, all the best to you, Stefan. And once again, a big thank you for all of your dedication to SAP and all of the great work with me personally. At the same time, Anthony, I'm also really looking forward to working together with you in this new capacity. We've been working together a long time, and I was the CFO of Customer Operations. You were the head of FP&A and then became a CFO in both mature and emerging markets in Mexico, Latin America, and North America. I think you'll bring a greater understanding of our business on the ground, as well as the transformation that we have been going through to the table. And I'm sure investors will come to appreciate this in the personal dialogue with you. So once again, congratulations and looking forward to many more quarters together with you. At least 31, let's see. So, with that out of the way, let me come to my review of the quarter, which was indeed an excellent one across all key financial metrics. Christian just talked about some of the business highlights and customer wins. But at the macro level of what we can clearly see is that our customers are choosing SAP to redefine and optimize their end-to-end business processes. This is reflected in the strong RISE with SAP adoption that continued in Q3, which gives us high confidence to comfortably exceed the 1,000 customers mark by the end of the year. I would now like to give you some more details on how our accelerated momentum translates into our financial results and what we expect to see going forward. In the third quarter, growth of current cloud backlog continued to accelerate, reaching 22%. That's an increase of 2% over Q2. That acceleration was driven by an even stronger than expected bookings and renewals in the third quarter. This pickup was specifically driven by a strong contribution in S/4HANA Cloud, our business technology platform, business process intelligence, customer experience, as well as Qualtrics. For the fourth quarter, we expect a further positive development of current cloud backlog growth, similar to what we saw this quarter. While travel volumes are slowly picking up again, Concur's backlog so far remains flat, representing a three-percentage point drag on overall backlog growth and it was the only solution in our entire portfolio that was not growing in double-digits in the backlog. As travel resumes in the near term, we expect Concur will eventually fuel the momentum further. For the quarter, S/4HANA current cloud backlog grew by 58% to EUR1.3 billion, building a strong foundation for future cloud revenue. As for cloud revenue growth, accelerated as anticipated, up 46% to EUR276 million. Our Cloud revenue growth increased sequentially by 3 percentage points to 20%. We are also encouraged to see that our intelligent spend category bounced back to double-digit growth, up 3 percentage points sequentially. Concur continued to show signs of recovery, but still at a moderate rate. Overall, our strong Cloud revenue represents now 35% of total revenue, driving up the share of more predictable revenue by 3 percentage points year-over-year to 77%. As anticipated, software licenses revenue continues to decrease as more customers adopted our holistic subscription offering RISE with SAP. Driven by the strength of our cloud business, our cloud and software revenue grew by 6%. Services revenue, in turn, was down 6%, mainly attributable to the divestiture of our SAP Digital Interconnect business in November last year. Our total revenue increased by 5% for the quarter, which is the fastest growth rate since the outbreak of the pandemic. Let me now briefly provide you with some color on our regional performance. We had a strong Cloud performance across all regions. In the EMEA region, Cloud and software revenue increased by 7%. Cloud revenue increased by 28%, with Germany, the UK, and France being highlights. In the Americas region, Cloud and software revenue was up 6%. Cloud revenue was up 14%, with a robust performance in the U.S., Canada, Brazil, and Mexico. We were again pleased to see that in our largest market, the U.S., we had another strong sequential acceleration in Cloud revenue growth. In the APJ region, Cloud and software revenue increased by 6%. Cloud revenue increased by 25%, with Japan, Singapore, and South Korea being particularly strong. Let's now look at profitability and gross margins in the third quarter. Overall, our total gross margin remained stable at 74%, even with the higher share of cloud revenue. Our cloud gross margin decreased by 40 basis points to 69.4%. However, we were pleased to see that both our intelligent spend and infrastructure as a service margin increased strongly by approximately 2% year-over-year. As we further executed on our next-generation Cloud delivery initiatives, the margin of our Paas business outside intelligent spend was 69.8%. Our Cloud and software gross margin declined by 70 basis points to 80.4% as a result of the revenue mix shift effects from our transition to the Cloud. The gross margin of our services business remained steady at 31%. In the third quarter, our operating profit expanded by 2%, and was up 8% for the first 9 months. Our operating margin declined 70 basis points to 30.7%, primarily due to the planned additional investments in R&D, which increased our R&D ratio by approximately 2%. For the first 9 months, the operating margin was very strong and grew by 1.3% to 29%. On an IFRS basis, our operating profit was down by 15% to EUR1.2 billion. Our IFRS operating margin was down over 4% to 18.2%. This decrease was mainly driven by higher share-based compensation expenses primarily related to Qualtrics. Let me now turn to taxes, EPS, and cash flow. In the third quarter, the IFRS effective tax rate was down 1.3% to 18.9%. The non-IFRS effective tax rate was down 3.1% to 18.2%. Therefore, we are again lowering our non-IFRS effective tax rate guidance for the full year to 20% to 21%, and to 21% to 22% in IFRS terms. This decrease in comparison to the previous outlook mainly results from changes in tax-exempt income. IFRS EPS decreased by 10% to EUR1.19, while non-IFRS EPS was up 2% to EUR1.74. This includes another strong contribution from Sapphire Ventures. In addition, our IFRS EPS was impacted by a year-over-year increase in share-based compensation. As expected, our cash flow slightly declined for the first 9 months. Operating cash flow was down 3% to EUR5 billion, positive effects from lower share-based compensation and restructuring payments were compensated by higher income taxes paid. Free cash flow was down only 1% to EUR4.1 billion, supported by a reduction in capex. For the full year, our operating cash flow and free cash flow guidance remains unchanged. But based on the strong performance we had in the first nine months, we are highly confident to have a very solid outcome at the end of the year. Reflecting the strong business performance in the first 9 months, we are again raising our revenue and profit outlook for the full year. For the detailed outlook, please refer to our quarterly statement. Before closing, let me briefly provide you with an update on sustainability, a topic close to our heart. Christian already mentioned, but it's a significant role businesses play to help solve the climate change challenges. With the latest product developments, SAP's other companies become more sustainable. At the same time, however, it is important to remain an exemplar of sustainable business. In Q3, we were able to keep carbon emissions at the same level as the prior year, despite the strong growth in our business and a gradual lifting of some COVID restrictions in many geographies. In addition, our leadership in the environmental and social space was highlighted by receiving the Eco Vadis Sustainability Assessment gold medal. So, in summary, we had a tremendous third quarter. Our order entry was exceptionally strong. Renewal rates are extremely healthy with a continued focus on efficiency. Therefore, we are confidently raising our full-year guidance once again. This puts us in a great position on the path towards our midterm ambition. Thank you, and we will now be happy to take your questions.
Operator, Operator
Ladies and gentlemen, our first question today comes from Kirk Materne of Evercore ISI.
Kirk Materne, Analyst
Thank you very much. I want to congratulate Stefan on his successful tenure at SAP and appreciate all his hard work with us from the investor side. Christian, my initial question is about S/4HANA Cloud, which seems to be gaining momentum, particularly in the last few quarters. Can you discuss how its performance varies by region? Are you seeing consistent adoption rates across all regions, or are some doing better than others? Additionally, Luka, could you explore the growth in the U.S. or Americas, which appears to be lagging compared to Europe and Asia-Pacific? I assume this has a lot to do with Concur, but I'd like your perspective on how you anticipate Americas growth to pick up in the next few quarters. Thank you.
Christian Klein, CEO
Yeah. Thanks a lot, Kirk. And Scott, also please feel free to comment, especially on the regional performance. Look at what we have seen in the quarter, and I can also remember we had some questions around the deal sizes went as far on our cloud. First, I guess you also have seen it in the earnings document. We have also seen some significant large S/4HANA Cloud deals, respectively RISE with SAP deals. That also signals that we are not only targeting small and mid-sized customers; actually, we see a move across our customer base. This is clearly also the case when you look at the geographical perspective, but also the industry perspective. And we even in the meantime, go one step further. When we launched RISE with SAP, which is really a business transformation as-a-service offering with S/4HANA Cloud and the platform in the COO. We of course also asked the question, what is the role of the partners? In the meantime, also the ecosystem joins some movement across the bench. Now the partners are coming to us and asking, how can we better help to make this move happen? Just to give you an example, one of our biggest hyperscale partners just offered now their existing customers to switch existing contracts over to RISE as they see and feel that there is such a high market demand to do more than just the technical migration. And Scott, maybe you can highlight maybe some of the regional wins we have.
Scott Rusell, Customer Success Officer
I can do it, Christian. First of all, I think you summarized really well the move to RISE, both at net new customers and at a scale of customers. I think it's really important to highlight that across all regions we've had growth in both new customers coming on board with S/4HANA Cloud, the modular Cloud driving an acceleration of the transformation in the Cloud. Moving workloads doesn't just drive the business change; they need to transform their businesses, and that's what I moved to RISE. But we've also seen, particularly in regions like North America and parts of Europe, where big companies, large customers who have complex environments are moving to RISE to help simplify and to transform their businesses going forward. And we now expect that this is the third quarter in a row that this has occurred, and we continue to see that trend going forward.
Luka Mucic, CFO
Yeah. And just to complement this, as you know, we are also disclosing the relative weight of contracts of different sizes against our total order entry and growth in the quarter. There you can see better that in the cloud contracts, more than 5 million of annualized contract value actually represented 40% of the total order entry, that's up nine percentage points from last year. This clearly makes this very transparent that we're now talking really about all sizes of customers, in particular larger ones. Now on the Americas growth. First of all, I think even before the pandemic, obviously, the other two regions, EMEA and APJ, had grown in terms of the few of growth rates at a faster pace than the Americas. Just because of the higher majority of the markets in America, and particularly in the U.S., which is by far the largest market that we have in that region. And as you are entering the pandemic, it's correct that the growth in America's was over-proportionately hampered by the fact that Concur, which obviously was particularly negatively affected had a proportionately higher share of their revenues in the U.S. Having said that, we have actually seen a very evenly-paced recovery and re-acceleration of revenues across all regions. They all actually accelerated by 3%, each from Q2 into Q3. The same was also the case from Q1 to Q2. So, the Americas is showing, at a different scale, of course, the same pace and shape of recovery and further acceleration. I would continue to expect that also for the next coming quarters. So, we're very happy about the business performance in the region overall, but in particular also in the U.S.
Kirk Materne, Analyst
Thank you, all.
Anthony Coletta, Chief Investor Relations Officer
Thank you. Let's now take the next question, please.
Operator, Operator
Our next question today comes from James Goodman of Barclays. Mr. Goodman, please go ahead.
Anthony Coletta, Chief Investor Relations Officer
Operator, let's take the next question then. The line is silent, so maybe you can take the next question.
Operator, Operator
Our next question comes from Mohammed Moawalla of Goldman Sachs.
Anthony Coletta, Chief Investor Relations Officer
Operator?
Mohammed Moawalla, Analyst
Can you hear me?
Anthony Coletta, Chief Investor Relations Officer
Yeah, we can hear you now. Go ahead.
Mohammed Moawalla, Analyst
Thank you. Good morning, Luka, Christian, and Stefan. I hope everything goes well for you in the future. I have two questions. Firstly, as cloud growth begins to pick up, I understood that historically, expectations around backlog acceleration have been more evident in Q4. You mentioned that it would remain at similar levels. Could you clarify that statement? Also, considering the foundations for cloud growth acceleration moving into 2022, given the strong discretionary spending environment, what is your expectation for sustainability in this trend? With Concur’s return, could we see cloud growth accelerate significantly beyond current levels? Secondly, I observed that operating expenses, particularly in sales and marketing, are on the rise again. Looking into next year, as spending increases, what are the key factors you will consider, and will you be looking to invest more to sustain or accelerate growth? Thank you.
Luka Mucic, CFO
Let me cover those, Christian. First of all, on the backlog, of course, we're coming off the heels of the spectacular quarter that was actually exceeding our expectations as we were walking into the quarter. So, we would not have as in the past quarters fully expected that scale of growth that we saw, and would have expected actually, that we would have some of that growth only seeing in Q4. Now, are we expecting further growth acceleration in Q4? Absolutely. We see a great strength of our business portfolio. We see that renewal rates continue to trend up and are at a very healthy state already, so no doubt that we will see further acceleration. However, given the significant achievements that we saw in Q3, I think it is fair and prudent to assume that we should see a similar step up, but not necessarily a dramatic acceleration on top of this. This is also underpinned by the fact that in absolute terms, actually, the backlog expansion that we saw in Q3 was exactly at the level that we saw two years ago, entirely unaffected by the pandemic. If you recall, Q3 2019 was probably, until now, the best quarter in the Cloud in many years that we had before. So, from that perspective, I think if we weren't able to achieve the same, that will be a terrific result, and it would also set us up exactly on where we are. Need to be to also drive 2022 to a great success. We see a number of important supporting drivers that make us confident that in 2022 we will actually see a further continued acceleration of our cloud business compared to this year. One is, as you have highlighted, that Concur is already showing a recovery. It's still a moderate one, but they are up in mid-single digits on a revenue perspective, now a very strong order entry performance in Q3. This will start to show in the backlog, but also in the revenues. They will become next year certainly a very positive contributor to our growth. And secondly, with S/4HANA Cloud, we have such a great wealth and breadth of opportunities, we are only starting now to harvest. We are very confident that the revenue growth and the backlog growth in S/4HANA will continue well into next year, and this will, of course, from an ever-increasing base and more and more add to the growth of the overarching business. So, from that perspective, yes, we are confident that our Cloud business will continue to accelerate not only in Q4, but also going into 2022. In terms of the expectations from an OpEx and profit perspective, I think we were very clear when we communicated our new strategy and our associated mid-term ambitions, that in 2021 and in 2022, we expect flat to slight declines in profits. This is what we are guiding for now in 2021, and I would say we have so far executed extremely well against this commitment. Our current guidance is for flat to minus 2% in growth. My expectation for 2022 remains also unchanged. That we will also in 2022 see flat to slight declines in profits. And we will invest properly to continue to fuel our innovation. We will look at an R&D ratio roughly in the same ballpark as we're seeing it now, with 17% of revenues. But we will scale it from the top line very effectively with accelerating cloud growth, which will also start to show its positive impact on the cloud and software and total revenue line. So, things are going exactly in the right direction, and we will look at further investing to make this growth that we're seeing sustainable quite frankly, for many years, beyond 2022. And so, from that perspective, that remains our planning ambition.
Mohammed Moawalla, Analyst
Okay. Great. Thank you.
Operator, Operator
Our next question comes from James Goodman of Barclays.
James Goodman, Analyst
Great. Thank you for coming back to me. Can you hear me now?
Anthony Coletta, Chief Investor Relations Officer
Yes.
James Goodman, Analyst
Excellent. And Stefan, all the best from my side as well. In terms of the performance of RISE, it's clearly running ahead of your initial expectations. But at the same time, we're simply not seeing the anticipated decline in the core business. I mean, license has been outperforming four quarters in a row, so the question is: on a two-year view, even the guidance is implying a very significant weakening in license in Q4. I'm trying to gauge the extent to which this is really conservatism as we come into the largest quarter versus a far bigger substitution effect that you are anticipating with on-prem customers switching over. So if you could talk a bit about that, that would be great. And secondly, just could I ask for an update on the migration project to the converged cloud? And Luka, you mentioned briefly that the project, when you took the cloud gross margins, but how is that progressing? Where are we on the ramp-up cost around that project now? And are we still confident that those costs will dissipate by the end of next year?
Luka Mucic, CFO
Yeah. So, let me get started, but please in particular on the software, and perhaps Scott, you can give your view as well. So, let's be clear: our business for ever has been basically back-end loaded where most of the very large software contracts will typically close in Q4. And therefore, obviously, in a world in which we are now seeing a greater and greater amount also of very large RISE opportunities, it's natural that we can expect that from quarter-to-quarter, there will be a bigger impact on large software transactions in particular. And that's why, I think, it makes sense to plan for a significant further surge on the cloud side, but also to assume that in Q4 the impact of this surge on the software license revenue side should be more pronounced than what we have seen year-to-date. In terms of just briefly on the Converged Cloud, and then perhaps Scott can come back to the software comment of where we are obviously pleased with the year-to-date performance in particular, since the cloud was nevertheless scaling very, very fast. But on the Converged Cloud program, we're actually making good progress. We believe that we will be done with most, if not all, migration activities by the beginning of 2023 as expected. In terms of the investments, they are happening as planned with a slightly lower share in 2021, and then a slightly higher share in 2022. In terms of the impact of the program on the Cloud margins, let's be clear about this as well. Yes, we had a slightly negative impact in Q3 of margins in the cloud were declining. However, from a year-to-date perspective, the margins are exactly where we had planned them to be. We have actually planned that the cloud's harmonization program would have an increasing impact on it. In the second half as we are ramping up the investments. So, we are up year-to-date by 10 basis points at constant currencies, or 20 basis points in nominal currencies, which is exactly in line with the slight improvement that we have planned for 2021. You should also expect the same for 2022. Investments will be slightly higher, but then on the flip side, the very strong growth that we have seen on the order entry side will obviously help the revenue line, and that should level out per our planning. So, we remain confident in those planning assumptions. The big step-up will then be up as of 2023 when we have completed the program because we have a much higher not only resiliency but also efficiency in our Cloud operations than with higher levels of automation. So, nothing has changed in this respect, and we remain absolutely on track also for the slight improvements that we're expecting in this year and next year. Scott, perhaps some comments around software from your side?
Scott Rusell, Customer Success Officer
Yes, thank you, Luka. I want to add a few points to what Luka mentioned about the software and the transition to the cloud. First, it's important to note that customers are adopting S/4 and our digital platform on a large scale. They are clearly eager to transform their businesses by establishing a solid digital core that can support critical workloads. This is evident in our cloud backlog and bookings performance. Second, I want to remind everyone that we are only nine months post the launch of RISE. In that time, we have observed steady momentum, with more customers moving to the cloud and understanding how our offerings can transform their operations. This acceleration will be reflected in the outlook that Luka discussed regarding the cloud compared to software. Lastly, I want to emphasize that as we progress in transforming businesses for both new and existing customers of all sizes globally, our pipeline demonstrates that clients are choosing to make the shift to the cloud, and this trend is expected to continue, influencing our software outlook. This adds further context.
James Goodman, Analyst
Yeah, that's very helpful. Thank you, guys.
Anthony Coletta, Chief Investor Relations Officer
Thank you, Scott. Let's now highlight the transformation of their businesses with both new and existing customers of all sizes around the world. Our pipeline and outlook indicate that customers are increasingly opting to transform in the cloud, and this trend will continue to accelerate. This has a direct impact on our software outlook, providing additional context.
Operator, Operator
Our next question comes from Frederic Boulan of Bank of America.
Frederic Boulan, Analyst
Hi, thank you for taking my question. I have a couple of follow-ups. First, regarding margins for next year, could you elaborate on the various cloud options you provide, what you're observing, and how this is affecting margins? Second, as we approach 2022, you mentioned R&D; are there any other costs influencing your guidance for stable to slightly reduced operating profits? In particular, could you discuss the impact of migrating to a single cloud platform, which is likely to be more significant? Is there anything else regarding licensing and cloud mix that you believe is important? Additionally, I'm curious about whether you've noticed increased customer engagement concerning the current disruptions in supply chains across various industries. Lastly, any updates on the launch of industry cloud solutions that you mentioned back in June would be appreciated. Thank you.
Luka Mucic, CFO
So, let me get started and then on the more business-related questions, so I can hand over to Christian then. Look, on the margins on the Cloud side going into next year, I would expect that both in our SaaS/PaaS businesses, as well as in our intelligent spend businesses, we will look at a previous stable situation quite unchanged with perhaps very slight improvements on our infrastructure as a service business, which we are already operating at a quite decent level of efficiency for this type of business. But the share of the mix of retail business will rather trend continuously down for this business because with the advent of RISE with SAP, we are driving for more SaaS/PaaS business, which is positive for the margins. So, in the individual lines, there shouldn't be a lot of changes because of the impact of the Converged Cloud program, but slight mix shifts should be helpful for margins overall. When it comes to the composition of the 2022 P&L, just very shortly, what do we expect on the top line, of course, a continued shift towards more cloud business, with cloud revenue further accelerating its growth. Software licenses revenue trending down definitely in a more pronounced fashion than what we have seen in the first 9 months, to Scott's point, that RISE obviously will more and more proliferate across our customer base. That will obviously then result in declines in software license revenues and will also shift an increasing amount of maintenance revenues as part of our Cloud extension program to Cloud revenues, which is actually great because we're so far driving a very healthy multiplier on this, actually continuously significantly above the 2X-factor that we mentioned at the beginning of our transformation, so this is positive. And then on the investment on the expense side, as I said, we will continue to prioritize investments in R&D as well as in sales and marketing because we see the great growth opportunities. We will also add additional feet on the street and go-to-market resources. The current level that we have achieved is around about 23% of revenues. I think it's a reasonable and appropriate button on the sales and marketing line. And in R&D, we have seen a significant step-up in investments over the course of the last two years. And we're looking to sustain that and also plan for around about 17% of revenues on the R&D side. For the business questions, Christian?
Christian Klein, CEO
Let me address your questions. There are two significant challenges. When we speak to our customers nowadays, the first challenge is clearly about the disrupted supply chains. The second challenge relates to the concept of the intelligent enterprise. It’s not just about growth and new business models for productivity and automation, but also about sustainability and our commitment to achieving net zero. Regarding supply chains, many customers are seeking to join the business network. For example, in the semiconductor sector, numerous companies are now part of our business network to gain transparency regarding supply shortages. They want to know where the next year's supplier stands or which suppliers in specific regions can still provide supplies in the coming months or quarters. We are tracking and tracing this information in real time through the business network. Take Catena-X, for instance; we are now delivering the first use case with it. This initiative isn't limited to the European automotive industry anymore, as General Motors has also joined. We are connecting OEMs with manufacturers and suppliers to provide real-time transparency across the supply chain. In the past, when car demand changed, it could take up to six months for raw material providers to notice. Now, thanks to this network, businesses have real-time insights. We're not just talking about millions; we're discussing billions as we transform the entire industry from end to end. This is the step-by-step approach we are taking in the automotive sector. We also acknowledge that semiconductor shortages affect many industries, along with other raw materials. We are progressing in this area with the business network as a key component that will drive our future growth.
Anthony Coletta, Chief Investor Relations Officer
Thank you. Can we take the next question, please?
Operator, Operator
The next question comes from Michael Briest of UBS.
Michael Briest, Analyst
Thank you. And good afternoon. And also, my best wishes for my side to Stefan. Thanks for the support over the years, definitely appreciate it. I've got two, please. Maybe just following up on the guidance, the guidance for the on-premises business. It's sort of mid-single-digit to 10% decline in maintenance, by the looks of things, and double-digits on license. I'm trying to square that with your comments, Luka, about the cloud backlog. If you're converting at 2 times or more in support to Cloud revenues, surely the backlog would see a big step-up in Q4 if you do achieve the expected decline in support. And then, just on the RISE customers to date, Scott or Christian, can you talk about that profile? I mean, are these mainly customers who are coming from EP6 for the first time? Are there any who are perhaps S/4 ready and maybe in a hyperscale who’ve decided to come to RISE? And then a question, Luka, on Concur on the business network. Can you just remind us how much below the pre-COVID levels we are today? I think you said it was about 200 million to 300 million run rate pre-COVID, so maybe we can think about how it expands next year?
Luka Mucic, CFO
Yes. First, regarding our guidance, we do not expect a significant change in support revenues in Q4 compared to previous quarters. The primary variation in the guidance is related to a different rate of decline in software revenues. We will see how accurate this assumption is, but we thought it wise to be cautious, particularly since Q4 is our largest software quarter. For Concur, we anticipate a decrease in the annual run rate of slightly over 300 million, likely between 450 million and 400 million compared to pre-COVID levels, though we are beginning to see a recovery, with Q3 marking the first positive revenue increase for Concur in quite some time. Now, I will pass it over to Scott or Christian to discuss RISE.
Scott Rusell, Customer Success Officer
I can start and then Christian can comment. The question about our customer makeup is important. RISE is resonating with all types of customers. For example, nearly 50% of the new customers that have joined RISE are new to SAP. We are attracting companies using different legacy technologies to transition to RISE and leverage a digital platform moving forward. In Q3, we also observed a notable trend with an increasing percentage of large customers making up nearly 40% of our cloud order entry, reaching a record high. This includes companies like AMD, Etihad Airways, Asda Stores, Philips Domestic Appliances, and Siemens Energy. These large firms are adopting RISE in the cloud. Regarding existing workloads or S/4 in hyperscale, it's interesting to note that customers are transitioning to RISE with various starting points in their transformation journeys. Some are new customers, while others are existing ECC users. Certain customers are already in hyperscale but require cloud transformation beyond just workloads. This indicates demand from all three angles, giving us confidence that regardless of the starting point, there is potential for transformation in the cloud with RISE, and therefore, our outlook remains strong. Christian, would you like to add anything?
Christian Klein, CEO
Just maybe one more comment. Michael, just to give you some sense around why S/4HANA is so important in the middle of RISE. Customers, they, in the meantime, completely realized that a technical migration to the cloud is not changing their business model. In many industries, CEOs are coming to me, and to the teams here, and say, 'Hey, we need to sell everything as a service. We need more personalized experiences. We need pay-as-you-go. We need real-time revenue realization. The only software vendor who can do that end-to-end at scale in real-time is SAP, there's no one else out there. When you talk about you want to scale your business across 150 countries, here we go, this is only what SAP can do.' Now the crucial question was always, okay, the technology is there, but how can I get that? That's the hardest part. The hardest part in business transformation is changing the culture and then having someone who knows how these processes work on a large scale. This is RISE, and this is why even existing customers from hyperscale are now coming to say, 'We want to have that, we want to learn from the best customers you have. Show us your best practices, benchmark, analyze these offices and tell us how can I get there.' This is why this offering is resonating extremely well. Many modifications that take a bit longer. We moved them back to the standout. And overtime they also not only running new businesses; they are also having a much more agile IT landscape and then net new. It can be, if you're going to have a fit to stand up, it can also happen that they go live in 20 to 30 days; that's also the case.
Michael Briest, Analyst
Thanks so much.
Operator, Operator
The next question comes from Amit Harchandani of Citibank.
Amit Harchandani, Analyst
Thank you. Hello, everyone. It’s Amit Harchandani from Citi. And before I proceed with the questions, thank you, Stefan, for your support and all the best for the future. With regards to my question, I guess 2 if I may. Firstly, with regards to human experience management, which I guess is your largest solution within the SaaS PaaS category, could you give us a sense for the growth profile there, particularly with regards to competition and how it's trending in different parts of the world? And secondly, could you also remind us, please, of your ambitions in customer experience? Again, you've talked about playing to your strengths in the past as customers migrate to the cloud. What are you seeing on the customer experience side, particularly also with RISE kicking off? Thank you.
Christian Klein, CEO
Let me start, Scott, and please feel free then to weigh in. On human experience management, actually, it's pretty interesting. You probably also have read about some challenges from one of our competitors when it comes to massive scale and localizations around the globe. What we see is that actually the sentiment is changing, that more and more customers are now coming to us and want to digitize hire-to-retire with SAP. Furthermore, with RISE, I mean, it's not only as I said, the move to a new platform, and the move to S/4HANA cloud. When you talk about payroll, when you talk about Employee Central, obviously, our ECC customer has HCM on-prem included. Now the question is, how can we digitize hire to retire end-to-end? You have strong interfaces to finance, and other functions inside the organization. With S/4HANA cloud, we can put it together in a modular way. The cost sale also into the installed base is now much better also with RISE, as we have the underlying platform now to connect the dots. You're not running isolated solutions with SAP anymore. Plus, with the net new market, we're seeing very positive momentum, and the CX is all about focus. It's not about that we want to compete in every space. There’s a huge focus on commerce that we are clearly leading with our B2B solution in the cloud. Now, we just launched our B2C solution, and we have positive momentum. Obviously, CPQ was another space where we see great opportunities.
Scott Rusell, Customer Success Officer
Yeah, I think you said it really well, Christian. I guess two things I would just add. The first is with the momentum with RISE and the integration of our technologies under that platform at full swing, we are seeing an acceleration of the cross-sell of our line of business solutions. So not only are we winning in those categories, head-to-head with the competition because they have not been able to deliver at scale with great capability around the world, as Christian described. But also, the cross-sell with RISE allows that seamless orchestration and experience for the customer. The estimates of the three cross-sell goals for every core ERP cloud continue to be reflected, and that gives us confidence not only in the standalone, but then in the orchestrated story, because from a customer, when they're running their processes, they don't look at single line business-type applications. They look at how to deliver a wonderful experience to their employees or to their customers. In those two categories introduced, you need the orchestration based in cost capabilities, which requires RISE, plus our HXM or FCX solutions.
Anthony Coletta, Chief Investor Relations Officer
Thank you. We will take two additional questions.
Operator, Operator
Our next question comes from Mark Moerdler of Bernstein Research.
Mark Moerdler, Analyst
Thank you very much. Let me first say to Stefan, as we've discussed recently. I really appreciate all your support and assistance and how you've helped us with understanding the transition. Good luck, and I'm going to miss our interactions. Let me go into a multipart question. I apologize. S/4HANA cloud, Christian, Luka, we discussed last year the lift in revenue that occurs with workloads shifting to the cloud. 1. what are the expectations you have now for what that revenue lift is going to be as workloads move to S/4HANA SaaS? 2. Can you give us any sense of what the attach of the other cloud offerings are today and what you think they could be in terms of dollars or quantity or anything, any sense would be helpful? And 3. Are there certain industries adopting quicker RISE with SAP quicker than others? Thank you.
Christian Klein, CEO
First let me start, and Luka, you can build on that. I mean, first with regard to S/4HANA Cloud, as you have probably heard in our earlier statements. We remain extremely confident. With RISE, this is now the way we go. I'm not only just with technical migration, but doing a business transformation. Of course, our install base is huge. There is high demand, and large companies also now joining the movement. When you look at our total order, and our software-based cloud, Luka, it's fair to say that this was one of the highest growth rates ever, especially with large enterprises. These are long contracts, and the contract lifetime value is extremely good and high. From my perspective, also looking now in the quarters ahead, there is no reason not to be optimistic. Also, look at the net new customer share; it's not only the installed base where we import. If someone decides to join from a different platform, we take them and also put them into the public cloud into the standard and help them again to transform their business.
Luka Mucic, CFO
That's just a few more comments, and then Scott can add some commentary as well. First of all, Christian is absolutely right. Our total contract value growth rates, including ramp contracts, are significantly up, with much higher growth rates than on an annualized contract value basis. Only the first year of that progression is reflected in the current cloud backlog. This is making us very confident about the growth momentum in the cloud. The average contract duration continues to increase due to the rising number of RISE contracts, which are typically long-term. From my perspective, the assumptions regarding the attach rate still hold. Scott has often mentioned, including on this call, the three-for-one opportunity, which we also see reflected in some of our large RISE opportunities, such as Philips Domestic Appliances and others, which serve as good examples. I believe those assumptions still hold. Regarding industries, I can pass it over to Scott, but for me, there's broad-based adoption across all industries. The speed of transition to S/4 public cloud may vary depending on the industry, with service industries likely moving more quickly due to fewer modifications required. In contrast, industries like discrete manufacturing and automotive may prefer a private cloud setup.
Scott Rusell, Customer Success Officer
I would like to emphasize that the industry situation you described is accurate. Regarding the multi-tenant aspect, it's important to remember a couple of key points. First, many customers see access to multi-tenant as fully Cloud-based, particularly new clients or those transitioning from Oracle. However, existing clients are also exploring hybrid options. We notice that many large companies are opting for a combination of private and public cloud solutions. The strength of S/4 Cloud is its capacity to support both hybrid and modular approaches. This not only lowers subscription fees but also enhances efficiency and drives innovation for customers at scale while minimizing the need for customized solutions. It's critical to maintain a clean core, which we ensure across all S/4 Cloud components through RISE, making this approach very appealing to clients. I've mentioned before that each customer's journey begins differently, but the ultimate goal is to achieve an agile, transformed platform that provides business agility. This can be accomplished whether they choose a full SaaS model or a hybrid approach, all facilitated by RISE with SAP.
Anthony Coletta, Chief Investor Relations Officer
Well, thank you Christian. And that concludes our call for today. Thank you.