Earnings Call Transcript
SAP SE (SAP)
Earnings Call Transcript - SAP Q1 2022
Operator, Operator
Good day, and welcome to the SAP Q1 2022 Earnings Conference Call. Today’s conference is being recorded. At this time, I would like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer. Please go ahead, sir.
Anthony Coletta, Chief Investor Relations Officer
Thank you, and welcome, everyone. Thanks for joining us today on our earnings call to discuss SAP’s Q1 ‘22 results. On our Investor Relations website, you can find the deck intended to supplement today’s call. With me today, our CEO, Christian Klein; and CFO, Luka Mucic, will make opening remarks. We also have Scott Russell, who leads our Customer Success organization, joining us for Q&A. Now, let’s do the safe harbor. 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, 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 of SAP’s annual report on Form 20-F for 2021. Unless otherwise stated, all financial numbers on this call are non-IFRS. Growth rates and percentage-point changes are non-IFRS year-over-year at constant currencies. 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. Before we start, I would like to remind you that we’ll hold our financial analyst conference as part of our Sapphire program in Orlando, Florida on May 11th. The event will also be webcast on our website. And with that, I’d like to turn over to Christian.
Christian Klein, CEO
Yes. Thank you, Anthony, and thanks to all of you for joining us today. To start, I want to address a topic that has been at the top of everyone’s mind for the past two months, Russia’s ongoing unjustified war in Ukraine. Above all, this is a human tragedy on a massive scale, and our hearts and hopes continue to be with the people of Ukraine. Like other companies globally, we have been working closely with governments and implementing all sanctions imposed by the international community. We are also going above and beyond those requirements. We were one of the first technology companies to stop sales and shut down cloud operations in Russia. In addition, earlier this week, we announced a structured exit of our direct presence in the country. These decisions have a financial impact, both on the top and bottom line, which Luka will comment on in more detail. But despite the challenging political and macroeconomic environment, Q1 has been another successful quarter, and we are reiterating our 2022 outlook for revenue, operating profit, and free cash flow today. The war is undoubtedly leaving its mark on the technology sector. With the risk of cyberattacks rising, we see more customers adopting cloud solutions for their mission-critical systems. Geopolitical realities are highlighting the appeal of sovereign cloud solutions like the one we announced with Arvato in the first quarter for the German government. And with energy diversification top of mind, our sustainability focus takes on new meaning and importance, which I will describe in more detail later in my remarks. But first, with all of that in mind, let’s take a look at some of our top line numbers for Q1. Cloud revenue growth further accelerated to 25% as our cloud transition gains further momentum. Current cloud backlog continued its strong growth at 23%. This is despite typically lower Q1 seasonality and despite the impact of our wind-down of cloud operations in Russia. Without Russia, CCB growth would be 0.8 percentage points higher. This has led to current cloud backlog now standing at nearly €10 billion. Current cloud backlog for SAP S/4HANA hit a record 79% growth driven by continued strong adoption of RISE with SAP, our signature offering for business transformation in the cloud. In Q1 alone, we added more than €200 million to our S/4HANA Cloud backlog. In addition, S/4HANA Cloud revenue growth increased sequentially by 10 percentage points from 61% to a record 70%. Overall, this strong performance sets us up well for ongoing growth in the rest of 2022. In an increasingly volatile world, the unique value of SAP’s innovative cloud portfolio continues to be clear. Customers around the world continue to power our growth as they turn to us for solutions to future-proof their business and make them more sustainable, secure, and resilient. And their transformations are enabling our own. We expect continued acceleration of cloud revenue with up to 26% growth by the end of 2022, reflected in our guidance. Our strong quarterly performance is another proof point for the strategy we introduced in 2020. Since then, we have seen the COVID pandemic accelerate cloud-based business transformation around the world. The new geopolitical realities we face amid Russia’s ongoing war in Ukraine are also likely to fundamentally reshape the world we live in. Even before the conflict began, supply chains were under pressure worldwide, and businesses from grocery stores to auto manufacturers were grappling with an exponential level of uncertainty in their operations. The tragedy in Ukraine has amplified this tension, revealing even more clearly the importance of resilient supply chains. Across every industry, companies will need to transition their supply chains to make them more resilient, agile, and transparent. Our SAP business network can uniquely help our customers across industries and value chains in deep ways. The power of the SAP business network has also been evident in our relief efforts to support the humanitarian crisis arising from the war. Over 2,700 suppliers have raised their hand to provide humanitarian support to Ukraine, and requests for over €100 million of supplies have already been posted on the network, including just recently an acquisition for 300,000 first aid kits. Turning to fossil fuels. It’s clear that the movement toward renewables must accelerate. Sustainability is now clearly not only an economic opportunity but a key element of stability, security, and even sovereignty. More than any other software company, SAP is in a position to help governments and industry manage these changes. The scale and depth of our industry expertise, the transparency of our solutions to drive sustainable business practices, and the ability of the SAP business network to create resilient supply chains shows the increasing relevance of SAP’s portfolio. Let’s turn to an update about RISE with SAP. RISE with SAP is our signature offering for business transformation as a service. Since we launched RISE with SAP in January 2021, we have seen significant increases in customer adoption each quarter. Customers are adopting RISE with SAP for three key reasons. Firstly, RISE enables them to redesign their end-to-end business processes based on best practices developed from working with hundreds of thousands of SAP customers. Secondly, RISE helps them transition to a new agile ERP in the cloud. And finally, RISE provides a platform to innovate with industry, custom, and sustainability solutions. This quarter, we have seen notable progress with our RISE with SAP offering. Our business process intelligence offering with cloud revenue almost doubling year-over-year has now fully integrated SAP Signavio. We are seeing nearly 80% of RISE customers adopting our business technology platform as part of their RISE solution. Transactional spend on the SAP business network has been growing over 95% year-over-year, which will drive further revenue upside. Overall, RISE with SAP tries strong cost and upsell opportunities with a conversion ratio in 2021 of greater than 2.5. This means we are creating 2.5 times the value from a customer after they have adopted RISE. This has led to our revenue run rate for the modular cloud ERP now exceeding €7 billion, up more than €1 billion from Q1 2021. In summary, RISE with SAP enables us to partner even more deeply with our customers. We offer integrated total solutions with single end-to-end accountability from infrastructure to applications. The success of RISE with SAP in turn saw strong performance across our line of business applications, together with the cloud momentum I mentioned earlier. Let’s take a look at our progress. New RISE with SAP customers included Accenture, Microsoft, Wipro, NEC, Ooredoo, and the Citizen Watch Company. Accenture announced they will be expanding their SAR offering to help large enterprises drive greater value from running RISE with SAP. They are able to offer bespoke support by drawing from their own experience of running their core financial operations on a single instance of SAP S/4HANA. This quarter, Microsoft announced it would become the first public cloud provider to adopt RISE with SAP internally utilizing SAP S/4HANA to transform its own SAP-ERP deployment. This will enable Microsoft to deploy new technologies faster and establish best practices that benefit our joint customers in the market. Accenture and Microsoft, together with Wipro and IBM, are examples of the snowball effect from our partners as they help accelerate the adoption of RISE with SAP around the world. In March, Ooredoo Group chose to partner with SAP to overhaul their business and digitize their end-to-end processes to enhance the experience of the customers, suppliers, and employees. In the increasingly important market for electric vehicles, China’s Rising Auto and India’s Exide Industries also both chose RISE with SAP. Rising Auto is part of one of China’s largest auto groups. They selected RISE to support key business processes, including forecasting, collaboration with suppliers, and the delivery systems for its electric vehicles. Exide Industries Limited, one of the world's foremost battery companies, selected RISE to support their growth, including the creation of a large new manufacturing facility. Exide anticipates that their RISE implementation will help them reduce cost by about 10% and support their battery recycling program, a great example of sustainability becoming profitable. Our success with RISE led to great S/4HANA momentum. We now have more than 5,300 S/4HANA Cloud customers and our win rate against competitors was 63% for net new deals. 4,700 of these customers are already live, demonstrating the fast time to value of these deployments. Customers this quarter include Heineken and Zero Motorcycles. Heineken, Europe’s largest beer producer with over 300 global plants, is transitioning to a new digital core based on SAP S/4HANA. Zero Motorcycles, the global leader in high-performance electric motorcycles and powertrains, has chosen SAP S/4 HANA over Oracle to help them replace their legacy infrastructure and scale their manufacturing operations to meet rising demand. Our Intelligent Spend and Business Network portfolio had a particularly strong quarter. Britain’s National Health Service, Shared Business Services Group, selected SAP Ariba for its new procurement system designed to improve and simplify the engagement with its hard and complex supply chain. Air France-KLM was another win for Ariba this quarter. We also saw continued positive indications of a return to business travel with Concur transactional revenue increasing by triple digits year-over-year. L’Oréal, the world leader in beauty, has renewed its contract for SAP Concur for an additional three years because they are worth it. Turning to our customer engagement portfolio. Salling Group, the largest retailer in Denmark, recently invested in SAP Customer Data Platform and SAP Emarsys. These solutions will help them improve customer lifetime value and the customer experience. Our SuccessFactors portfolio continues to win significant business over Workday. Grupo DPSP, the leading Brazilian pharmaceutical retailer, expanded its SAP SuccessFactors portfolio to better manage, retain, and develop its workforce as part of its overall RISE with SAP for retail implementation. SAP business process intelligence wins this quarter included Nippon Telegraph, Telephone Corporation, Telus Communications, and Moderna. Moderna’s success with their COVID-19 vaccine has transformed the company, and they will be using SAP BPI to redesign their business processes based on the next chapter in their growth. Our business technology platform continues to go from strength to strength, as customers adopt BTP as a deep backbone to integrate and extend the SAP solutions. We are well on track to establish SAP as a platform company with this quarter’s revenue run rate for BTP exceeding €1 billion. FEMSA, the world’s largest bottler for Coca-Cola beverages, is adopting BTP to optimize the value from each of its products and line of business along with billing and cash handling across its Latin American markets. Last quarter, I spoke to you about the introduction of SAP Cloud for Sustainable Enterprises, part of our sustainability portfolio. This portfolio helps companies manage their green line with as much importance as the top and bottom line by providing radical transparency, insight, and data. This quarter, we announced an important partnership with BCG, focused on helping our joint customer base determine strategies for sustainability transformation. Customer adoption of our sustainability portfolio is already strong. So, let me reiterate that this quarter’s strong cloud figures continue to show the strength of our strategy, the relevance of our solutions, and the promise of our portfolio. We are powering fundamental business transformation for our customers, which in turn is driving our own transformation. We are very confident in our long-term ambition, and we are reiterating our 2020. We believe SAP can play a crucial role in helping our customers succeed in an increasingly volatile world. 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
Yes. Thank you very much, Christian. And before providing you with additional color on our results, let me first also express my deepest solidarity with the people in Ukraine. Our support for the people of Ukraine continues, and we have already contributed more than €3.7 million so far to support refugees in the region, with more to come in the weeks and months to come. Let me also mention that we have stopped all sales, started to cease cloud operations, and have now decided to wind down our direct business activities in Russia and Belarus. Despite the impact of the challenging geopolitical and macroeconomic environment, we are pleased with the results we delivered in the first quarter. Let me reiterate some of the key messages you just heard from Christian. We are enabling the transformations of our customers around the world as they turn to us for solutions to future-proof their businesses and make them more sustainable, secure, and resilient. At the same time, they continue to power our growth and thus enable our own transformation. In the first quarter, the trend towards larger cloud transactions continued. Deals with volumes greater than €5 million contributed 45% of our cloud order entry. That’s up from 27% in Q1 last year. This was again driven by RISE with SAP. Let me now provide you with some background on the key drivers behind this quarter. Christian already talked about our ongoing momentum and S/4HANA’s record contribution, but also the impact of the new geopolitical reality. Let me add some color here. In the first quarter, our current cloud backlog expanded to nearly €10 billion and was up 23%, despite a 0.8 percentage-point headwind from our decision to actively shut down cloud operations in Russia. Supported by double-digit growth across our selection portfolio, cloud revenue grew 25%, again accelerated for the fourth consecutive quarter. Our overall SaaS/PaaS cloud revenue was up 28%. Within that, our intelligent spend business returned to a healthy 16% growth rate, and our remaining SaaS/PaaS portfolio was up even 34%, driven by outstanding contributions from the business technology platform, Qualtrics, and most notably, a 71% growth of S/4HANA. Fueled by the growth in our more predictable revenue streams as well as services revenue, our total revenue was up 7%. Our cloud revenue performance was excellent across all regions in the first quarter. EMEA increased by 29%, the Americas by 24%, and APJ by 23%. The U.S. and Germany showed particularly outstanding cloud revenue performances with the fastest growth in the U.S. for 2.5 years. Let’s now take a look at the bottom line. Due to revenue mix effects, our total gross margin decreased by 30 basis points to 72%. Our cloud gross margin was up 50 basis points, despite increased investments into our next-generation cloud delivery program as compared to Q1 last year. This expansion supported our cloud gross profit growth of 26%, mainly driven by negative impacts amounting to approximately €70 million related to the wind-down of our business in Russia as well as accelerated investments into research and development, and sales and marketing. Our operating profit decreased by 7% to €1.7 billion against a very strong prior year comparable. Our IFRS operating profit was up 10% to €1.05 billion, primarily driven by lower restructuring expenses. Let me now turn to EPS and cash flow. The decrease in EPS mainly reflects the contribution to financial income by Sapphire Ventures that was more than €300 million lower than last year, given the current market conditions. Our free cash flow came in at €2.16 billion. The year-over-year decrease is mainly attributable to the development of profitability in the quarter and impacts from working capital due to our continuous move to the cloud. The ongoing cloud business transformation provides a more balanced profile of cash inflows throughout the year. We are reiterating our full year outlook of above €4.5 billion for free cash flow accordingly. Considering the impact of Sapphire Ventures to our financial income, we are updating our effective tax rate guidance for the full year. We now expect an effective tax rate of 28% to 32% in IFRS and 23% to 27% in non-IFRS terms. Let’s now turn to the outlook. As you have seen in today’s release, we are reiterating our outlook for the full year for cloud revenue, cloud and software revenue, as well as operating profit. That means that we are taking steps to absorb the expected impact of approximately €300 million on the top line and €350 million on the bottom line from the war in Ukraine. This is possible because of our increased cloud momentum, the initiation of disciplined expense management measures, and the benefits associated with the streamlining of our portfolio that we expect to execute in the coming months as we continue to focus on strategic growth drivers. Finally, a few words on sustainability and some strategic initiatives. Here, I would like to highlight that we published our tenth integrated report on March 3rd. We expand the disclosure around non-financials including enhanced representation of Scope 3 emissions as well as EU sustainable finance disclosures. We also disclosed the results of our second pilot of the Value Balancing Alliance methodology to which we contribute as a founding member. To complement our sustainability management solutions, we have also announced some new partnerships to build on the combined power of SAP and its ecosystem. Together with Boston Consulting Group, we have launched a joint transformation offering to identify the business value and sustainability, setting the right climate ambitions and powering an actionable sustainability roadmap. And we have joined forces with BearingPoint to deliver carbon and environmental footprint solutions, helping accelerate our roadmap in this solution area. So, to conclude, the results of the first quarter proved once more that we are on track. Our strategy addresses the needs of our customers to become sustainable intelligent enterprises. We continue to build on our cloud momentum and remain confident in our 2025 ambition. Before moving to Q&A, we are very much looking forward to welcoming you to our financial analyst conference in conjunction with Sapphire, including, I was assured the cocktail reception that will take place on May 11th in Orlando, and we are looking forward to meeting you there in person. Thank you.
Anthony Coletta, Chief Investor Relations Officer
All right. I would like to remind you to only ask one question at a time. And with that, operator, please open the line.
Operator, Operator
Thank you, sir. We will now take our first question from James Goodman from Barclays. Please go ahead.
James Goodman, Analyst
Yes. Good afternoon. Thank you very much. Maybe I could start with a nearer-term question just around the macro and Russia specifically. We’ve had a couple of comments clearly from U.S. businesses on weaker European outlook. You made some commentary here. But could you add some context to what you’re seeing at the end of the quarter into April? And specifically on Russia, $350 million profit impact on $300 million of sales. Can you explain why the profit impact is so large, and whether there’s a one-off element here that comes back in ‘23.
Christian Klein, CEO
Do you want to do the financial impact and then the business impact, the macro together maybe with Scott?
Luka Mucic, CFO
Exactly, that makes sense. So indeed, I mean, the question is fair, why is there a bigger profit impact than a revenue impact? Obviously, you would normally expect when you have a revenue impact, some savings in variable expenses flow through and therefore, you would have a lower impact on profits. However, a significant share of the impacts that we expect on the expense side are actually from a compression of multiple period expenses into the current year 2022. To explain, when we, for example, decided to discontinue our cloud data center operations, we had to actually accelerate the amortization of our data center assets because the useful life is obviously much shorter than originally anticipated and recognized this as expenses. So, this is the primary expense impact that has contributed to the €70 million that we experienced already in Q1. Now in Q2, we will have a similar impact, but actually at a larger scale in terms of an accelerated amortization of sales commissions. We capitalize and then amortize our sales commissions for past sales over a period of time, depending on the business model. And given that we are also now looking at discontinuing our direct support and maintenance operations in Russia, we will also have to adjust here the useful life of the contracts, and therefore, also the capitalization and amortization period of sales commissions. In addition, we have also an impact on bad debt expenses, some of which are coming from prior periods that we’ll have to recognize, for example, with sanctioned customers. That’s the reason why the impact on profit is actually higher than the impact of revenues, and an over-proportional amount of that will actually have to be reflected in Q2.
Christian Klein, CEO
Yes. And on the macro side, I mean, of course, there is now headwind coming from Russia, but I mean we are reiterating our guidance, which is actually then given there is a €350 million hit, actually, we are, in essence, actually weighting our guidance to absorb this hit. And why do we do this? I mean, first and foremost, what we see also in Europe, there’s a high demand still in the market for ongoing business transformation. So, customers are now moving more than ever to new business models, selling services, resilient supply chains is, of course, of high demand. You have seen the transactions in our SAP business network went up by 95% year-over-year. The first discussion I have, especially with European CEOs, is all around how can SAP help to make supply chains more resilient, like we did with Catena-X in the automotive, and we have now further examples on semiconductor. We have further examples in life science and so on. And then, last but not least, of course, when we are now moving in with RISE, you have heard about the conversion rates, and we are seeing more and more an uptick also in our other line of business solutions. Needless to say, Scott, I guess, we can say we are absolutely confident and very bullish about our pipeline for RISE for the rest of the year. But what we’re also seeing is with the platform underneath and a revenue run rate of €1 billion and an uptick of the ecosystem now building extensions on the platform, this all makes us very, very confident that we can even further accelerate our top line momentum.
Scott Russell, Chief Customer Success Officer
Yes. I think you said it well, Christian. The one thing that I would add in simple terms is businesses and companies in Europe and in fact, around the world need a business platform to navigate uncertainty. That’s SAP. Leverage SAP because we’re able to provide real-time capability to deal with the regulatory change. We’re able to deal with the cybersecurity challenges. We’re able to help them deal with their supply chain challenges and other factors of uncertainty that Christian mentioned. And that underpins not only in the move to the cloud but the move to transform, and that’s what RISE with SAP brings. So, that’s been reflected in our pipeline and our confidence that despite some of the challenges that we see in the world, companies are actually coming more to SAP because they need a business to be able to help them transform and run them in this environment going forward, and that’s what we’re strong at.
Operator, Operator
The next question from Toby Ogg from Credit Suisse. Please go ahead.
Toby Ogg, Analyst
Luka, can you provide an estimate of the impact the harmonization investment had on the cloud gross margin in Q1? Additionally, as we look ahead to 2023, could you share insights on the potential costs that may continue affecting the cloud gross margin in the first half of the year? Lastly, what do you believe would be the appropriate cloud gross margin level considering these costs and the increased share of single tenant S/4HANA in the mix? Thank you.
Luka Mucic, CFO
Thank you for the question. First, the impact of the harmonization program on cloud margins in Q1 was significant, with an increase over time, quarter-over-quarter. For Q1, it was 1.4 percentage points. Without these expenses, the cloud margin would have risen by nearly 2 percentage points. Regarding our plan for 2023, a major portion of the costs we are seeing in 2022, which are higher than in 2021, will be eliminated. I expect that we will have less than half of those expenses remaining in 2023 as we phase out the program in the first half of the year alongside the retirement of our legacy infrastructures and decommissioning. We anticipate a low triple-digit million figure instead of over €200 million in 2022. In the second half of the year, we expect a notable increase due to improved efficiency in our cloud infrastructure. As we've predicted, the exit rate for cloud margins in 2023 will be significantly higher than the current levels, which we have indicated will remain flat in 2022. There is no doubt that profitability in the cloud business will see a substantial increase. Furthermore, we are on track with growth, largely driven by the success of RISE with SAP, which has resulted in a significant uptick in S/4HANA Cloud and private cloud deployments, both of which are quite profitable. All these elements, combined with the advances we’ve made in our cloud harmonization initiatives, give us strong confidence in achieving our 2025 ambitions, particularly regarding the absolute contribution of cloud profits to our overall operating profit targets. We are on a very positive trajectory.
Operator, Operator
The next question is from Adam Wood from Morgan Stanley. Please go ahead.
Adam Wood, Analyst
Just first of all, can I ask on current cloud backlog? I know, Luka, you flagged that this would decelerate in Q1. I wonder, first of all, if you could just confirm that you’d still be expecting this to accelerate back similar to or above the fourth quarter levels. Maybe you can give us any kind of background on what gives you the confidence that would happen, that would be really useful. And then secondly, just on the outlook, through the year. We’re obviously nervous about macro and around the geopolitical situation. Could you just talk a little bit about plans in terms of putting cost into the business if the tech budgets and companies were starting to be a little bit more cautious, with the focus beyond making sure that the business is in a good place to grow in ‘23, or would it be to protect the EBIT guidance for this year? Thank you.
Luka Mucic, CFO
Yes, that's primarily a question for me, but Christian can add his thoughts. When considering the trajectory of the current cloud backlog, it aligns with what we communicated during the Q4 earnings. We anticipated a slightly slower start in Q1 due to the typically lower business volume in new bookings during that time. We expected a deceleration. While the impact of Russia was not part of our forecast, overall, things proceeded as we expected. However, we strongly believe that starting in Q2, we will see an acceleration again, and we are confident we will finish the year with a similar growth profile. Last year, we achieved 26% growth in Q4, and we anticipate the same for Q4 2022. This expectation arises from a combination of factors. In Q1, we faced lower volumes and experienced an exceptional Q1 in 2021, partly due to a catch-up effect from the pandemic's initial phase. Q1 2022 performed strongly from a bookings standpoint, but it was challenging to exceed the spectacular results of the previous year. In Q2 and Q3, we have an easier comparison, and based on the strength of our pipeline buildup, we are confident that acceleration will occur. Regarding our outlook for the year and cost management, it's essential for us to accomplish both goals. We aim to meet our guidance while also maintaining our growth focus. We have made significant investments, as seen in Q1, where we onboarded around 2,400 employees—about 400 from the acquisition of Taulia, and approximately 2,000 as organic hires, primarily in R&D and sales and marketing. This hiring pace will slow for the rest of the year, as timing is crucial for sales and marketing roles to ensure productivity towards year-end to drive business. We are being careful with discretionary spending and closely examining our portfolio to identify areas that can be deprioritized to concentrate our resources on higher growth potential segments. As we have done before, we are considering smaller divestitures, which may occur in the second half of the year, with the impact being in the low-triple-digit million euro range. Regarding the business profile as we progress through the quarter, we have indicated that without the Russia impact, the first half of the year would show more challenging year-over-year profit development compared to the second half, given last year's stronger performance during the pandemic. For instance, last year in Q1, we had a 24% operating profit growth. Therefore, it isn’t surprising that we experienced negative profit development in Q1 this year, but we performed better than our expectations without the Russia effect. For Q2, I anticipate that a substantial portion of the expense impact from the €350 million will be recognized, along with most, if not all, of the restructuring charges. Hence, Q2 will be significantly influenced by the war situation. In the second half of the year, as we face easier comparisons, we anticipate seeing the results of earlier investments and the continued strength of our cloud business. This is where profit levels will markedly improve, and we are confident we will stay within our guidance. As for cloud revenue, it aligns with our earlier remarks this year. We expect ongoing acceleration, particularly in the second half of the year, when we begin to realize the benefits of the substantial backlog growth from Q4 and additional business booked in the first half of the year. In Q2, you might notice a minor dip in growth rates due to the cloud discontinuation in Russia reflecting in cloud revenue figures. However, in the second half and across the full year, this will be overshadowed by the overall strength of our global business. We firmly believe continued acceleration is on the horizon in the second half of the year.
Operator, Operator
Our next question is from Stacy Pollard from JP Morgan. Please go ahead.
Stacy Pollard, Analyst
Thanks very much. Really, this is a follow-up a little bit on your comments around the seasonality of the $350 million and the other restructuring and kind of how you think of the operating profits or operating profit impacts through the quarters. But also, is there a continuing impact on the base going into 2023, or do you catch up and kind of get back on track? So for example, if the base is a little bit lower, $350 million lower, let’s say, in 2022, should we get even better double-digit growth in operating profit for 2023 than you might have? I guess, the growth goes up, but maybe the number stays the same. Is that your thinking?
Luka Mucic, CFO
Yes. So, first of all, two comments on 2023 because I want to be crystal clear on this. We absolutely are fully behind our commitment that you will see double-digit growth in operating profit again in 2023. That was always our commitment. We said that in October 2020 when we established the new midterm ambition framework and the strategy refreshed that in 2021 and 2022, we would see only flat to slightly declining profit development and then return to double-digit growth. This absolutely will happen and that remains our commitment. And that is obviously of the guidance that we have been giving for the flat and slightly declining profit with a flat to minus 5% on profit ambition that we had for 2022. And as this is unchanged also the commitment for 2023 is unchanged. Now, the one thing that I have noted before and that you should take with you, obviously, is that the impact that we’re having in 2022 from extraordinary expenses is partially a pull-forward of expenses that otherwise we would have seen in later periods, not only in 2023, but also in 2024 because of the acceleration of the amortization periods for sales commissions. So, that is obviously then translating into a help for 2023 and 2024. And that, of course, even further ignites our confidence in being able to drive to that double-digit growth. So, in that sense, this is actually a relief for later years. But, we are bearing, of course, now the expense load in 2022. I hope that helps to display the commitment.
Christian Klein, CEO
And maybe Stacy, and also just to quickly build on that. I mean...
Stacy Pollard, Analyst
That’s helpful. Yes.
Christian Klein, CEO
Our business is transforming, making our revenue streams increasingly predictable. This predictability extends to our overall profit and loss performance. We have established strong pipeline multiples, which give us the confidence to maintain our guidance for cloud revenue, anticipating strong acceleration in the second half of the year, along with positive profit growth. We are skilled in managing our cost base and have a plan to address the impact of the situation in Russia. Looking ahead to next year, we have discussed the cloud harmonization program and know when its benefits will materialize. For our Western market, revenue is highly predictable, paired with effective cost management, which will enable us to achieve double-digit profit growth in 2023.
Operator, Operator
The next question comes from Fredric Boulan from Bank of America. Please go ahead.
Frederic Boulan, Analyst
I have two follow-up questions. First, regarding the revenue guidance. You're indicating that the guidance is effectively being increased despite the challenges posed by Russia and the general uncertainties in Europe. Christian, could you elaborate on the nature of your discussions with clients? Is it accurate to say that there’s no decrease in interest in transitioning to the cloud and pursuing broader projects? Additionally, could you provide more specifics on what is performing better than expected? Second, I have a question for Christian and Luka regarding cloud margins. Last June, you mentioned a target for cloud gross margins of 75% in 2023, moving toward 80% by 2025. Can you confirm that this is still a goal and discuss the assumptions you're using for business network and SaaS/PaaS margins? Thank you.
Christian Klein, CEO
I will address the first question. In discussions in Europe and globally, one major topic is cybersecurity. We are seeing a significant increase in technology advancements worldwide. Many of our customers are not large tech players and lack the investment capabilities that others have. With our RISE initiative, we can offer end-to-end protection and take full accountability for securing data, which presents a strong value proposition. Additionally, we are facing substantial supply chain disruptions. A year ago, it was primarily about semiconductors, and now we are also dealing with shortages in materials like wheat and magnesium. Many customers in life sciences are experiencing significant raw material shortages, which is driving increased IT spending. Furthermore, if businesses do not transform their models or offer personalized solutions in sectors like retail and utilities—where customer retention and pricing adaptability are crucial—they risk losing their competitiveness. These elements are central to our discussions, reinforcing our confidence in our pipeline and growth momentum.
Luka Mucic, CFO
We are still committed to our cloud margin goals, which include achieving an 80% gross margin by 2025. Starting with the Intelligent Spend Group, we have seen a positive increase to 80.7%, largely due to revenue recovery, especially from Concur. However, the growth in Intelligent Spend is currently at only 16%, indicating room for further recovery. After completing the cloud harmonization program, particularly for Ariba, we expect this business to potentially reach margins of 82% to 83%. The majority of the margin improvement will come from the SaaS/PaaS portfolio, which is currently facing additional costs related to the harmonization program; this is why gross margins are around 70% or low 70s depending on the solution. In the second half of the year, we anticipate a significant margin improvement, especially since this segment is the fastest growing. On the other hand, our Infrastructure as a Service business has inherent margin constraints and is unlikely to improve beyond the mid-30s percentage. We have intentionally downplayed this segment as growth is declining and may eventually turn negative, thereby reducing its overall contribution. One uncertainty remains the share of S/4HANA private cloud in our overall mix. The strong performance of RISE has exceeded our expectations, with consistent quarterly revenue outperformance in the cloud during 2021 and again in Q1 2022. If this trend continues and the private cloud becomes a larger part of our mix than anticipated, we could see a slight shortfall in margins but an increase in absolute cloud profits. Therefore, we are actively monitoring these developments, and the robust 32% or 26% constant currency growth in Q1 supports our positive outlook. Should RISE with SAP continue to outperform, it would create beneficial issues regarding operating profit.
Operator, Operator
Our next question comes from Michael Briest from UBS. Please go ahead.
Michael Briest, Analyst
Luka and Christian, can you explain Luka’s upcoming departure? It seems unexpected, at least to me. Regarding succession, what is the timing, and how are you considering internal versus external candidates? Are there any specific criteria, such as software expertise or German nationality? Christian, during the Qualtrics call last night, management indicated there was a bit of a decline in order intake in Europe. I'm interested in why your view differs, especially since the license performance suggested there should have been a stronger cloud backlog if it was just a matter of reallocating resources rather than a decline. Did you observe anything in Europe or elsewhere that aligns with Qualtrics' comments? Thank you.
Luka Mucic, CFO
Perhaps you can get started and...
Christian Klein, CEO
I know, but let me also cover your part first. Let me share some words here. I mean, there is no doubt that we have always been very happy having Luka on board. Without any doubt, Luka is doing a great job. And I mean, Luka and I also now work for some time together. Actually, I worked for Luka a few years back. But when you’re doing this, I guess, for nine years, Luka now in the meantime, we’re going into the ninth year, I mean it’s fair to say that then also Luka said, hey, there’s also probably also something else, what I can do going forward. What I’m very happy with is that we still have Luka for the next 12 months because we are talking here a lot about the transformation about increasing our profit by double digit. And I really want to finish. And then, of course, afterwards, continue this journey with Luka on my side. And this is why I’m very happy to have Luka on board for at least another year. And then, actually, the search has now started. The Supervisory Board will make the final call. Luka is involved. I’m involved. So, I’m pretty sure that we will also have a smooth transition then. Luka, anything to add from your side?
Luka Mucic, CFO
At the end of the day, I’ve enjoyed my job and every opportunity I've had at SAP. I will cherish my last year here, and leaving SAP will be difficult. Throughout my years working with customers and acting as a Board sponsor for our businesses in Latin America, the Middle East, and Japan, I've realized my passion lies in this work. I hope to expand on this passion and learn something new. My next role is likely to be in general management rather than just finance. We have collaboratively discussed that now is the right time for this transition, especially since I want to develop a project into a state where it can be integrated into SAP's mainstream operations by the end of the year. I’m committed to fulfilling my promise for SAP to achieve double-digit growth in 2023, and I will stay until March 31st to ensure this happens. Our relationship is amicable, and I will always consider myself part of the SAP family on good terms. The company will continue to pursue its 2025 goals since it has the right strategy, operational priorities, and a capable management team, both now and in the future.
Christian Klein, CEO
Regarding the sentiment in Europe, I can tell you that if I had heard a CEO mention scaling back their IT budget or postponing SAP projects, I would be concerned. However, in reality, just last week, I met with a major semiconductor supplier in the Netherlands that is focused on building a digital twin with Siemens to enhance production and address rising demand. We also discussed cybersecurity, as many are worried about increasing attacks on their on-premise systems and feel safer entrusting that to SAP and our partners through RISE. Additionally, many customers are just beginning their business transformations; it's not the case that everyone has completed this process. In fact, it's quite the opposite, and no CEO is likely to slow down their transformation pace as they see it as foundational. Furthermore, we must recognize the value of our platform, which more partners are starting to leverage. The business network is also a powerful asset that shouldn't be overlooked. For instance, we have examples, like our response to the situation in Ukraine concerning metal supply, demonstrating that there is significant interest in this network. We genuinely believe this represents a new way of operating businesses and managing supply chains moving forward. Overall, we are confident that demand will not decrease in the second half of the year; quite the contrary, we expect it to increase.
Anthony Coletta, Chief Investor Relations Officer
Thank you. And this concludes our call for today. Thanks for joining.
Luka Mucic, CFO
Thank you very much. Bye, bye.
Scott Russell, Chief Customer Success Officer
Thanks a lot, everyone.
Christian Klein, CEO
Thank you.