Earnings Call Transcript - SAP Q4 2021

Operator, Operator

Good day and welcome to the SAP Quarter Four 2021 Earnings Conference Call. Today's conference is being recorded. And 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. Good morning and good afternoon, everyone, and a big welcome. Thanks for joining our earnings call today to discuss SAP’s Q4 and full year results for 2021. On our Investor Relations website, you can find a deck intended to supplement today’s call. It’s available for download and a replay will be uploaded as well. With me today are CEO, Christian Klein, and CFO, Luka Mucic, who 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 will make forward-looking statements, which are projections or 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 2020. 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. The non-IFRS financial measures we provide should not be considered as a substitute for or as measures of financial performance prepared in accordance with IFRS. Now before taking questions, we will start with a few opening remarks. 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 today and welcome to 2022. We certainly hope this is the year that we will start to move on from the global pandemic and focus more on critical issues like climate change, supply chain disruptions, and creating a sustainable future for people everywhere. Here at SAP, we are very excited about what we have accomplished in 2021. Let’s look at our results for Q4. What a quarter, what a year, hitting or exceeding the high end of our revised outlook. We have seen four quarters of fantastic acceleration in Current Cloud backlog, which grew 26% in Q4, a sequential acceleration of 4 percentage points. This has led to Current Cloud backlog now standing at nearly €9.5 billion. Cloud revenue also accelerated strongly, up 24% in Q4 and up from 20% in Q3. This was supported by S/4HANA cloud revenue, which grew an impressive 61% in Q4, the highest growth we have ever reported. Current Cloud backlog for S/4HANA grew a stellar 76%, driven by tremendous adoption of RISE with SAP, our signature offering for business transformation in the cloud. For a perfect quarter, every solution needs to go. That’s indeed what happened with double-digit revenue and cloud backlog growth across all our major product categories. This performance sets us up well for 2022. We expect continued acceleration of cloud revenue, with up to 26% growth reflected in our guidance. These are very strong results during a challenging time for most businesses. They demonstrate the confidence our customers have in SAP and in the unique value we offer in helping them address an unprecedented set of challenges. We are optimistic about the year ahead and we are well on track to achieving our 2025 ambitions. These results are the outcome of the strategy we introduced 15 months ago. Customers are turning to our platform and solutions to help them become more intelligent and sustainable and emerge even stronger from this disruptive time. Our RISE with SAP offering is designed to support our customers as they transform their businesses while moving to the cloud. Reflecting this, analysts are upgrading SAP's spend forecast for 2022. Just recently, UBS predicted a fourfold increase in the SAP IT budget growth for 2022, up to 12% from 3% in previous years. Since we launched RISE with SAP in January 2021, we have seen significant increases in customer adoption each quarter. In Q4, we more than doubled the number of new RISE deals over Q3 with about three times the number of deals over €5 million. Let me briefly describe the three key benefits of the signature offering for business transformation as a service. First, business process redesign; we benchmark our customers’ business processes against the best practices we have developed from working with about 400,000 customers. Second, cloud migration; we do more than a technical migration. We help our customers to move back to standard and to a modular agile ERP in the public cloud. Third, innovation; we also connect our customers to the latest innovations like our industry cloud, our business network, and our cloud for sustainable enterprises. This means that 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. As a result, our revenue run-rate for the modular cloud ERP now approaches €7 billion, up from €6 billion at the beginning of the year. In Q4 alone, we added more than €400 million to our S/4HANA cloud backlog. Clearly, RISE is a blockbuster success in the market. And we are just getting started. Our massive on-premise installed base of over 30,000 ERP customers presents a significant opportunity for our RISE with SAP offering as these customers begin their transformation to the cloud. At the same time, RISE attracts many new customers. It comes with a significant cross-sell opportunity because of the integrated nature of our modular cloud ERP. For every dollar spent on the core ERP, we have an up-sell opportunity of $3 for our platform and for additional line of business solutions. In Q4, the tremendous momentum for RISE with SAP in terms of momentum across all our line of business applications delivered the outstanding cloud performance I discussed earlier. Let’s take a look at our key businesses, starting with S/4HANA. Our success with RISE led to creating S/4HANA momentum. We now have nearly 5,000 S/4HANA cloud customers and our win rate against competitors in Q4 was more than 70%. Many large customers are moving to S/4HANA enabled by RISE with SAP. This includes CVS, Panasonic, IBM, and Standard Chartered Bank, among others, including Siemens, Philippine Airlines, Allianz Technology, and Jungheinrich. CVS, one of the leading health solution companies, is using RISE to support their journey to the cloud and make healthcare more affordable and widely available. Panasonic has chosen RISE with SAP to drive a digital transformation effort, which will replace several legacy ERP systems to provide excellent customer value, optimize supply chains, and improve operational capabilities. Another example, Standard Chartered Bank has chosen RISE with SAP to expedite their finance transformation across 60 markets and to achieve their commitment to net-zero emissions by 2030. Novartis, one of the largest pharma companies globally, chose SAP S/4HANA to standardize and consolidate their core ERP platform. Finally, Petronas has also chosen SAP S/4HANA ERP. SuccessFactors continues to win significant business over Workday, particularly in this quarter, including the discount supermarket chain. They recently selected SAP SuccessFactors to transform their HR operations and support a workforce of over 80,000 employees. Doc Martens, the famous British footwear brand, recently invested in SAP Commerce Cloud, part of our customer experience portfolio. They expect a 60% reduction in TCO from moving to the cloud and simplifying their operations. Intelligent Spend Management shows positive indications that business growth is starting to return. One of our customers, Philippine Airlines, is ready to take advantage of the anticipated recovery in travel. They chose SAP for our comprehensive understanding of the airline industry and its key business courses. HP Inc. is expanding its investment in SAP’s business process intelligent solutions. They will be using SAP Signavio for advanced process analysis to help them quickly identify and act on new opportunities. Hitachi invested in SAP Digital Supply Chain solutions to boost supply chain agility for its medical and industrial solutions. Our business technology platform had an excellent quarter with both cloud revenue and Current Cloud backlog growing by very strong double digits. In the cloud, BTP is the foundation to enable the integration and extensibility of our modular cloud offering. Angel has chosen SAP BTP to support various business priorities, including individualized sales and trade promotion management. Let’s turn to some exciting news we announced today. Our intent to acquire Taulia, a market-leading fintech company focused on working capital management and supply chain finance. We expect them to be a great addition to our business network and procurement portfolio. Our customers will be able to finance billions of transactions with favorable terms and improve their cash flow. Taulia is already a strong SAP partner with several joint customers such as Airbus, Nissan, and AstraZeneca. Two announcements are better than one. Earlier this week, we announced an extended partnership and investment in Icertis, a provider of contract management solutions that offers market-leading contract intelligence powered by AI. Icertis is a great and seamless complement to our portfolio, having multiple touchpoints to SAP systems from ERP to procurement to sales and to HR. This partnership underscores the strength of our ecosystem and the massive opportunity from joining forces with leading software players. This announcement expands our overall portfolio, the supply chain financing from Taulia and contract management solutions through our enhanced partnership with Icertis. At the same time, we have expanded many of our existing partnerships. One recent example is our partnership with AWS to bring Hana Cloud onto AWS designed to optimize processes, which helps us improve our own operational performance and cloud gross margins as well as support our sustainability goals. So, let me turn to another strategic priority for SAP: sustainability. Action on climate change is an imperative for businesses today. It is certainly an imperative for us at SAP. We have just been A-listed by CDP as one of just three software companies worldwide. Our belief is that sustainability does not represent an added cost to business; it’s actually a competitive advantage. In fact, it may be the greatest economic opportunity of our time. It’s also clear that no organization can achieve sustainability in a silo. It requires coordination across the value chain. We have been working and learning on this issue for many years with customers like Hitachi, Colgate, Anglian Water, and BMW. We have a unique approach that supports our customers across the full spectrum of sustainability from carbon neutrality to social impact and economic progress. Transparency, insight, and data are the foundation. This is the unique advantage we offer to our customers, the ability to see inside and outside the organization across your warehouses, manufacturing, supply chains, and critical business processes such as procurement and business travel. Our sustainability portfolio directly supports this work and helps businesses run more sustainably. For example, through our recent introduction of SAP Cloud for sustainable enterprises, which makes ESG data transparent to our customers. We recently released our five actions for every business to become a sustainable business. This guidance provides concrete steps for any company of any size to accomplish their sustainability goals. Collectively, these efforts are focused on helping our customers manage their green line with as much importance as the top and bottom line. In closing, we have had a record year at SAP, and we think this is just the beginning. The future is bright, and our strategy for the cloud, business transformation, and sustainability will continue to create opportunities for continued and accelerated growth. We are very confident in our long-term ambition and see greater potential ahead, given the strength of our 2022 guidance. 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 also from my side, happy and healthy new year 2022 to all of you. Let me start by saying that I am also very proud of our outstanding finish to the year. Our team delivered an exceptional year with strong results far exceeding our own initial expectations, and we kept our promises, beating our guidance on both the combined top line and the bottom line after raising it multiple times in 2021. Let me amplify a couple of the points you heard from Christian. We can clearly see that more and more companies are choosing SAP to help them transform their business, build resilient supply chains, and become sustainable enterprises as they move to the cloud. This is reflected in the strong adoption of RISE with SAP, in particular, by large companies across all geographies. We clearly exceeded our goal of at least 1,000 customers by the end of the year. But what is way more important, in Q4, we saw the number of larger cloud transactions significantly increasing. Orders greater than €5 million contributed around 50% of our cloud order entry, up from just 31% last year. That was also driven by RISE with SAP. Now, let me cover our results in more detail. Christian already talked about our cloud momentum and S/4HANA’s spectacular contribution to it. So, let me just add some further data points. Driven by the strength of our entire portfolio, our SaaS/PaaS cloud revenue outside Intelligence Spend surged to 33% growth in Q4. This is a rate hardly matched at that scale by any other cloud vendor. SaaS/PaaS Intelligence Spend cloud revenue also accelerated its growth to 12%. And within this business model, Concur returned to low double-digit growth. From a regional perspective, cloud performance was excellent throughout the year. We had a healthy balance and strong cloud momentum across all geographies accelerating during the year. Cloud revenue in EMEA increased by 27%, in the Americas by 13%, and in Asia by 20%. For the remaining top line parameters, please refer to the quarterly statement. Now, let me move on to the bottom line, where for the full year, our total gross margin increased by 70 basis points to approximately 74%. This was aided by a nice improvement in both our software and support as well as our services margin. Conversely, our cloud margin was slightly down year-over-year. This was due to the investment into our next-generation cloud delivery program and the fact that our high-margin Concur business still had a dampening performance throughout most of 2021. Despite the accelerated shift to cloud, our operating profit expanded by 1% to €8.2 billion for the full year, which was ahead of our updated guidance. Our operating margin declined by 50 basis points to 29.6%, mainly driven by strategic investments into our product innovation, which increased our R&D ratio by 150 basis points to approximately 17%. On an IFRS basis, our operating profit and margin were impacted by significantly higher share-based compensation expenses compared to 2020, mainly due to the Qualtrics IPO and the appreciation of SAP’s share price during the year. IFRS operating profit decreased by 30% and IFRS operating margin by 7.5 percentage points to 16.7%. Let me now turn to EPS, the true bottom line and cash flow. We had a decent EPS performance in 2021, growing 3% in IFRS and 25% in non-IFRS terms. This was supported by a strong contribution from Sapphire Ventures and the reduced tax rate. As expected, we had another year of strong cash flow as well. Operating cash flow was €6.2 billion, slightly above the outlook of approximately €6 billion and free cash flow came in at €5 billion, exceeding the outlook of above €4.5 billion. So, let me now turn to 2022 and beyond. As you have seen in the pre-announcement and in today’s release, we are very confident in our short and mid-term prospects. We expect to continue our Q4 Current Cloud backlog growth in 2022 and to significantly accelerate our cloud revenue growth. We see 2022 as another important stepping stone towards our mid-term ambition. Entering 2022, we are now moving into the next leg of our cloud transformation and are approaching an inflection point. We expect to move into double-digit growth territory in 2023 first, for operating profit, closely followed by total revenue and our growth should accelerate further beyond that. At the same time, we become ever more resilient. Our share of more predictable revenue should expand to approximately 85% or more than €30 billion in absolute terms by 2025. Let me just quickly share why our tremendous success in 2021 and the characteristics of our business model transformation are so powerful to deliver extraordinary returns for the years to come. In 2021, we observed a strong growth in the total contract value of new cloud deals, far beyond what can be seen in the already impressive surge of our current cloud backlog. Next to a sharp increase in demand for our cloud products, this was driven by two additional factors: first, slightly increasing contract durations, and second, and more importantly, more pronounced DRAMs, which means contracts stepping up in volume over the course of their initial term. We anticipate that both of those factors will help us defy the law of declining growth rates for a while and continue to accelerate our cloud growth even beyond 2022. At the same time, operating profit should get an extra push as we complete our next-generation cloud delivery program and as our sales expenses benefit from the ever-increasing share of renewal business in our backlog and cloud revenue. That, in a nutshell, is why we expect to see our operating profit growth jump to double digits in 2023 and beyond and why it absolutely makes sense for us to fully focus on maximizing our cloud growth in the short term. Now I’d like to turn to sustainability and non-financials. We have been at the forefront of integrating sustainability into our business strategy. As you know, we truly believe that a holistic approach to strategy and operations leads to better business decisions, and we will publish our tenth integrated report on March 3, reflecting this approach. Looking at our non-financial metrics, in 2021, our customer net promoter score increased significantly, while employee engagement remained at a very high level overall, despite a modest decrease. In the area of CO2, net carbon emissions continue to decrease to 110 kilotons in 2021, which was down 25 kilotons year-over-year. In addition to our goal of being net carbon neutral in our operations by 2023, we have also announced our goal to achieve net-zero emissions across our entire value chain by 2030, which is 20 years earlier than originally anticipated. So to summarize, 2021 was a year of perfect execution along our strategy of helping our customers become sustainable, intelligent enterprises. But most importantly, our cloud order entry was exceptionally strong. Renewal rates were extremely healthy with a continued focus on efficiency. This success would not have been possible without the dedication, the innovative spirit, and the discipline of our people. I am confident that we will continue to keep our promises as we enter the year of our 50th anniversary. This confidence is reflected in our accelerated cloud guidance for 2022, making great progress towards our mid-term ambition. Thank you very much. And we will now be happy to take your questions.

Anthony Coletta, Chief Investor Relations Officer

Alright. Operator, please open the line.

Operator, Operator

Thank you. We will now take the first question from Michael Briest at UBS. Please go ahead.

Michael Briest, Analyst

Yes, thank you. Good afternoon and congratulations. Two from me if I may. Luka, I can hear your confidence in your voice there around the margin progression and EBIT progression. I think investors would really appreciate understanding on the cloud margin specifically, what are the transitory investments that are being made this year? Why will they disappear in 2023? Is it double running of infrastructure? Is it consulting costs? And just what will get us to the 75% margin? And then in terms of cash flow, I think there was some confusion this morning around stock buybacks and stock-based cash settlement option programs. Can you just say relative to the €1.1 billion that you spent in cash last year, what the likely charge is in 2022 and out to 2025 as presumably some of those programs migrate over to the stock settled? Thank you.

Luka Mucic, CFO

Yes. Thanks a lot, Michael, for your questions. Those are really very good and important ones. So, let me start with the cloud margins first. As we had stated already late in 2020, we are going through a major overhaul of our cloud delivery infrastructure. We are harmonizing it. We are migrating all of our remaining customers who are still on legacy infrastructures across various solutions to this harmonized cloud infrastructure. And that results in a cost across 2021 and 2022 of a mid-triple-digit million euro figure. At the outset of the program in the first half year, the spend portion that related to 2021 was more expenditure in R&D to prepare our solutions for some of the migration aspects and since the second half of the year, it essentially was hitting the cloud margins. Just to give you an idea, the moderate decrease that we have seen in 2021 of 20 basis points actually was impacted by close to 1 full percentage point by the cost of this cloud delivery program. And this is project-related cost, but mainly also double bubble cost where we build up the new landscapes while we are still operating the old. As you know, we also took a restructuring charge for the accelerated depletion of existing legacy infrastructures. So, this will continue in 2022. I expect that in 2022 we will see, as we have seen also in 2021, quite noticeable underlying regular operational scale-related efficiency gains, which would suggest that we will at a minimum remain at a stable cloud gross margin. I think we also have the scope to slightly increase it in 2022, but certainly, it’s not more than that due to the significant expense that is running against it. When the program dissipates in 2023, we will have two effects. First of all, of course, all of those incremental project-related expenses will be gone, and that should be a relief to 2023 in the range of a couple of hundred million, as I said, certainly more than €200 million. And then second, we will see an immediate step-up in the efficiency of our cloud operations due to the greater elasticity and the efficiency of this Converged Cloud infrastructure that we have put together. So this will result in a big step-up in the cloud margin then in 2023 from which point on there will be further progression towards the 2025 target. As an additional element, one of our cloud solutions, I pointed to this obviously has been hard-hit during the pandemic and only recently started to recover, that’s Concur. Concur has one of the highest cloud margins in our portfolio. The reason why we’ve seen a slight decline and not a slight increase in 2021 as we had predicted was that they were recovering a little later than what we had originally assumed in our planning assumptions. But as we have now returned back to double-digit growth, we certainly see a point in time arriving where we are going to move more into a new form of normal, where we are expecting that Concur will continue its recovery. That will be an additional point that will support us on the further progression of our cloud margin. So, I hope that outlines the major points that we have to consider there. This is not rocket science. It’s basically all dependent on the timely completion of the program and then the effects are relatively straightforward to see later on. Now on the cash flow side, it’s also an important point. I want to ensure that the effect of the move to equity settled share-based compensation programs is not over-assessed because we are moving to equity settlement for one of our share-based compensation programs, which is the so-called Move SAP program, a restricted stock unit program. We still have additional share-based compensation schemes at SAP in place, most notably the so-called Own SAP program, which is a discounted stock purchase program that we subsidize for our employees participating in this program and will continue to be cash settled. So as you rightly pointed out, in 2021 we had roughly €1.1 billion in share-based compensation-related cash outflows. We expect that this amount will still slightly increase in 2022 because we are first going to see the impact of the Move program to equity settlement in the course of 2023. Then we will see reductions, but we still expect in 2025, which will be the first year where there is no impact from Move SAP on cash anymore, to still see more than €500 million in share-based compensation-related cash outflows from those other programs and also from the fact that we are not going to be legally able to transform, move SAP to equity settlement in all jurisdictions worldwide. In sum, we will have for regulatory constraints still to manage cash settlements. I hope that puts it into perspective. Of course, we are extremely confident in our €8 billion free cash flow target for 2025. We are actually ahead, as you have seen in 2021 as a starting point from where we thought we would be. So we definitely see scope to review this on a continuous basis and potentially also update it accordingly as we move closer, but you will appreciate that this is four years out and there are also other influencing factors like currency movements, cash taxes, and so on that are very difficult to predict such a long time before. But take it from our pre-release that we are confident in our trajectory, and certainly, as of next year, free cash flow will start to significantly go up and increase as well.

Michael Briest, Analyst

Thank you for the detail, Luka.

Anthony Coletta, Chief Investor Relations Officer

Thank you. Next question, please.

Operator, Operator

Thank you. We will now take the next question from Stefan Slowinski at BNP Paribas. Please go ahead.

Stefan Slowinski, Analyst

Yes. Thank you and Luka, Christian, thanks for taking my question. Just a follow-up on the previous question around the stock compensation, looking at it on a holistic basis, I think stock comp is guided to be 11% of sales this year, which, of course, is up significantly from where it was a couple of years ago. Do you expect that 11% to be the new normal, or will that trend back down over time? And then associated with that, just a broader question around the hiring environment, obviously, we hear about the tightness in the market, companies increasing compensation, whether it be cash or stock? On the other hand, a lot of companies have option plans that are underwater, so maybe that’s working in your favor. So anything you can tell us about what the hiring environment is like and how you’re executing would be appreciated? Thank you.

Luka Mucic, CFO

Yes. Perhaps I can take the first question. And then on the hiring environment, I will relate to my operational colleagues because in finance, we are not doing a whole lot of hiring. So I think Scott is probably better suited to talk about the environment there. Now look, on the share-based compensation front and the movement front, you’re right, of course, we have seen quite a sizable step-up in terms of percentage of revenues. But with this, we are actually perfectly in line with what we see from our peers. It’s likely that you will see a gradual decline of this share again because we don't think that from an absolute share-based compensation expense perspective, we will see significant upward movements from now on, whereas obviously on the revenue front, we are planning for significant increases. So why is that? First of all, at the moment, we are still seeing a significant share of our overall share-based compensation expense being tied to the share-based compensation plans at Qualtrics, in particular, the executive’s management plan that was awarded at the point of the IPO. This will stay with us for three years from the IPO because that’s the measurement period of this plan. In equity-based compensation plans, unlike in cash-based compensation plans where you constantly adjust the valuation based on the share price movements, you actually measure it at the grant value fixed at the $30 IPO price. From that perspective, actually, more than one-third of SAP’s total share-based compensation expense planned for 2022 is related to Qualtrics. This will dissipate over time and go down. Last year, it was actually 50%. This year, it goes down to one-third. So it will gradually decline, but not at the pace that you would assume. In terms of the other plans and our own organic plans on the SAP side, we are moving our MOVE program from annual to quarterly vesting in addition to the equity settlement, resulting in a one-time incremental expense in 2022 of roughly €200 million which will also be part of the baseline, so to say, and will not further step up. So from that perspective, that’s why we believe that our expense will be relatively stable over the next coming years, whereas the revenues obviously will increase, and therefore, the ratio will actually gently come down over the course of the next three years. So perhaps on the hiring environment, does anyone want to comment, Scott or Christian?

Scott Russell, Customer Success Leader

Yes, sure. I can comment, and Christian, please add on top. I guess three comments on the hiring side. First of all, there is no doubt that it is a competitive market where the technology sector is strong. Businesses are able to leverage those skills and that means that the market has a lot of movement. Having said that, we’ve seen continued success with our programs that we launched and rolled out over the pandemic in particular, last year with Flex with SAP, the ability to work in the environment that is best suited to you, together with other employee engagement programs that have allowed us to attract and retain our best talent. Even within a volatile and aggressive talent market, we’ve been very successful in not only retaining but actually expanding our talent pool. The third point I would make is it’s a great industry. Early talent coming into this sector continues to expand. That’s not just in North America but around the world, and that allows us to bring young talent into the organization to bring the diversity mix that we aspire to achieve. Christian?

Christian Klein, CEO

Yes. Thanks a lot, Scott. And maybe just to close it out on the hiring side. First of all, of course, there are areas like in cyber and data scientists, where the cost per hire goes up. These people are in high demand in the market. However, we were really able to offset that. We have large academies inside SAP including a sales academy and an engineering academy where we train and educate young talents, especially for these future skills that we need – this is a big success. On top, we are also expanding our university engagements to ensure we have high caliber from outside of the market and supplement this with strong talent from inside the company, and we are now also investing in the reskilling of our people.

Anthony Coletta, Chief Investor Relations Officer

Thank you.

Operator, Operator

We will take the next question. We will take the next question from Adam Wood at Morgan Stanley. Please go ahead.

Adam Wood, Analyst

Hi. Chris and Luka, thank you very much for taking the question. Congratulations on the strong fourth quarter. I’ve got two as well, please. I wonder, first of all, Luka, you were talking about that very strong large order intake in the cloud business and the visibility beyond that that you have on these cloud projects in out years. I guess that makes sense as large enterprises obviously are not all doing this on a 12-month plan. It’s a longer-term project. I wonder if you could go into a little bit more detail around that as there is any metrics you could give us on how these plans scale over 1, 2, and 3-year time frames, maybe the products that these companies are adding. If there is a specific example, that would be really helpful to give us a better feeling for what you’re seeing beyond that current cloud backlog in the business. And then maybe following up on previous questions about stock compensation and profitability, and I guess this is a bigger-picture way of looking at it. We’ve talked about talent, but we’ve seen very large numbers of software IPOs. The hyperscalers are becoming ever more competitive. In terms of your share of voice with customers, what gives you the confidence that when you look out to 2025, there won’t be a need for you to continue spending at a higher level to maintain that engagement with customers? Whether that’s coming through in stock-based compensation or in actual expenses on the P&L, I’d just be interested to see how you feel about that? Thank you.

Luka Mucic, CFO

Yes. Let me start perhaps and then Christian or Scott, feel free to build on that. Look, first of all, on the backlog and the visibility, it’s obviously very difficult to generalize this because we have seen large RISE contracts, which have, in some cases, a seven-year transformation horizon when we’re talking about landscapes that have dozens of systems to be transformed. Then we have nimble and shorter ones, even for larger companies depending on the landscape complexity we are talking about needing to be transformed. But to give you an idea at least of the magnitude that we are talking about in general, we had a discrepancy between our growth in annualized order entry versus total order entry to the favor of total order entry in the low teens in Q4. It was also double digits in terms of the percentage differential for the full year. On top of this, the average duration of our contracts in the cloud has increased in Q4 to now 3.9 years. So we have way more multiyear contracts, which, at the same time, have a stronger share of contracts with ramps. You don’t see, therefore, the full impact and the full potential of those contracts in Current Cloud backlog, but they have a massive backlog volume for outer years that we are carrying with us. That’s why the share of net new business we need to continue the same kind of backlog growth and then revenue growth obviously diminishes over time. That is giving us increased visibility – but that’s not to be said that Scott and his team can now lay back and relax. Of course, we have high ambitions. As I said, we have the confidence that we can accelerate our cloud revenue growth even beyond 2022. Regarding share-based compensation expenses or other compensation, we have made significant investments already in the last two years, particularly in our innovation capacity, first, which you have seen with the step-up in the R&D ratio to 17%. I think that is a ratio that will now remain stable. As a percentage of revenues, also over time, especially when we get past 2023, it should start to gently trend down again, where we saw a step up in 2021 and going into 2022, with obviously on the side of sales and marketing. We have a massive pipeline that we are generating to drive for this extremely strong order entry growth that we expect, and we are investing in this. We invested ahead even in Q4 into this pipeline generation. That’s the reason why we have seen in Q4 a step up in the sales and marketing ratio. As we plan for another year of very significant double-digit growth across our portfolio in terms of new orders, we need to invest properly in Scott’s team to drive the required sales capacity, but not only sales but also post-sales adoption resources in order to make sure that we have a full deployment of those solutions quickly and then also drive for healthy renewal rates. Those investments were made now, and we are confident based on the positive customer feedback and increase in customer satisfaction rates at this investment level we will now start to see the return on investment fully determined to drive for accelerating double-digit growth as of next year. We don’t expect, based on the competitive strength of our portfolio, a need to come up with any unplanned incremental expenses. Our win rates, as Christian has said, are extremely high. The hard work of integration has proceeded extremely well. That means we can also shift within the existing capacity to drive for new innovation without having a lot of this tidying up homework, so to say, still to do. That has been the work of the past two years.

Adam Wood, Analyst

That’s very helpful. I appreciate the detail.

Scott Russell, Customer Success Leader

Maybe Adam – and then maybe let’s just build on also on one of the questions you had around the cross-sell opportunities we also see in our portfolio. This really depends from customer to customer, especially in RISE now. You always have a conversation in oil and gas, for example, about how to manage the transformation to clean energy? What needs to change in a quote cash – in high tech, it’s oftentimes a discussion around managing the reskilling of the workforce? What about total workforce management? In retail, it’s a combination of changing to move forward with omni-channel sales. We have high demand in the CX also with regard to some industry-specific cloud capabilities in retail loyalty management and returns management, where we have developed strong co-innovations with hundreds of retail customers. In all of the other industries, we see supply chain shocks, which were evident in 2021. We are actually also building on that as we are not expecting that supply chain shocks will go away soon. That depends on its nature. With RISE, what we are doing is, it’s not only a shift to S/4HANA Cloud. An important aspect is also to see in all these scenarios; there is SuccessFactors, field cloud involved, and CX involved. Our platform is also involved because with RISE in the second step, we also want to move then our customers. It’s a journey to a modular cloud ERP. What to do with the modification? Our partners are joining us, and they meet in the meantime. That’s why the adoption of the platform, how can we build side by side with all the modifications the customers had in on-prem on the platform? How can we standardize those? We want to increase the penetration of our ecosystem and also our marketplace. Let’s not forget BTP had a very strong quarter, but this is not because it’s a standalone platform anymore. It’s because it’s tightly integrated into our modular cloud ERP. The part of RISE is also a shift to exactly this platform.

Anthony Coletta, Chief Investor Relations Officer

Thank you, and we will take the next question.

Operator, Operator

We will take the next question from James Goodman of Barclays. Please go ahead.

James Goodman, Analyst

Hi, good afternoon. Thank you very much. Switching over to the core business, which I think was the area where you most significantly outperformed your expectations this year, particularly on the support line, which I think was up 1% versus clearly the anticipated decline. I appreciate that there was less of a license impact than perhaps you anticipated. But really, there seems to have been less substitution from maintenance to cloud despite the cloud strength. I wondered if you could comment around the support resilience and whether you expect that actually from here on out the larger cannibalization effect is required really to maintain the current trajectory of the backlog. Maybe you can comment a little bit as well around perhaps the seasonality of any transition effects as we go through ‘22. Returning to the cloud outlook and reconciling some of these comments around accelerating cloud growth in ‘23, still overall double-digit growth in ‘23 despite the higher pace from the resilient support. But you seem to be saying that the backlog will really sort of stay at these levels, Luka, as we go through this year. I just wondered why we wouldn’t see the current backlog continue to tick up a little higher through this year, given particularly that strong non-current backlog. Thank you very much.

Luka Mucic, CFO

Yes. No, those are important questions. Let me try to take a first step at them. First of all, when it comes to support revenues, you’re absolutely correct. They remain extremely resilient. There is close to no real churn away from SAP. The churn that we are seeing is a healthy one as part of the cloud migrations, part of our cloud extension program. The impact of cloud extensions on 2021 support revenues has been going up clearly. It’s a triple-digit million euro figure by now. We are driving for very healthy extension multipliers as we had discussed on previous calls already, and that remains the case. We are covering significantly above the 2x factor that we had flagged; we believe that this trend, while it will certainly not remain at this same very high level, will remain extremely healthy. When we think about the expectation going forward, I think in 2022, I would still expect there to be only a marginal decline in support revenues because the impact of the RISE transformations as well as other cloud migrations will remain extremely healthy. That might change over time as more of those big, large RISE contracts are contracted then going through their ramp where concomitantly the support revenues are declining. To give you an idea, when you take our midterm ambition for 2025, we have said that we want to have 85% highly predictable revenues and we want to have more than €22 billion in cloud revenues that would tell you that we will have around about €8.5 billion of support revenues left by then. Currently, we have around about €11.5 billion. There will be a sliding path, so to say, of increasing the clients and support revenues, also quite frankly because there will be less new software revenues contracted that would fill up, so to say, the migration impact. In terms of any seasonality expectations in 2022, let me talk about this in three different ways. First of all, you’ve asked about the current cloud backlog. For the full year, we expect a similar trajectory like in Q4 2021, but probably with a different situation for each quarter. Undoubtedly, our order entry performance in Q1 and then Q4 was the strongest in 2021, creating obviously a tougher compare. So I would assume that in Q1 and in Q4, you might see slightly lower CCB growth rates, whereas in Q2 and in Q3, the growth rates should actually be higher than what you’ve seen in Q4. On the cloud revenue front, I would assume that the growth rates in the first half would be quite similar to what we have seen now in Q4 because it takes a while until the significant surge in growth in order entry that we have seen in Q4 finds its way into the cloud revenues. But then in the second half of the year, we expect a stronger surge in cloud revenue growth. When you take a look at the profit development, we had a very strong Q1, as you will recall, in software revenues as well as in support revenues. The software and support was actually up in positive territory. That will, of course, create a tough compare for the Q1 performance. But then the coming quarters ease those compares also because we are leaving the pandemic conditions in terms of the spend environment behind a bit, increasing spending in areas like travel and marketing in the second half year, which makes the compare then easier – that’s kind of the way to think about seasonality at the highest level. I hope that’s helpful.

Christian Klein, CEO

Thank you very much. Just to build on that, Luka. We also have to consider that we just launched RISE 12 months ago. Scott and the team did a tremendous job on CLO. We are now to our biggest growth driver now throughout the year 2021. Of course, cooking such large deals takes time, but there is no shortage. We have an installed base of 30,000 customers plus perhaps one important factor as well, the renewals. Our renewal base is getting bigger and bigger. It’s one of the key drivers why we will turn back to double-digit profit growth in 2023 on. Our internal reorganization had changes in the bonus plans; with RISE, we are now much closer to the customer. We are using telemetry data with RISE. We have architects at the customer and are working with them, and we have price adoption. We get the modifications. So we are much closer, and we already see this has a very positive impact on renewals. That will continue now in the current year and in the years to come.

Anthony Coletta, Chief Investor Relations Officer

Alright. Thank you. We will take the next question please.

Operator, Operator

We will take the next question from Kirk Materne at Evercore. Please go ahead.

Kirk Materne, Analyst

Thanks very much. Christian, I was wondering if you could talk a little bit about the adoption of RISE across geographies. I was just curious if the adoption and success have been fairly balanced across all the geographies or if there is an opportunity for, say, to make this up in the Americas to sort of catch up a little bit if that’s the case. It might not be. And then Luka, I assume your commentary around cloud for next year includes the U.S. or the Americas, again, sort of reaccelerating? I assume that was weighed down a little bit by intelligence spend this year. So, just a quick one for you as well. Thanks very much.

Christian Klein, CEO

Yes, I can start to answer the first question and Scott, please feel free to build on it. First, I would say yes, when I look at the order entry of RISE throughout 2021, especially in Q4. You have seen from the logos, there is CVS in the U.S., and there are many others large organizations in the U.S., but also Germany, as we say, okay, where does Germany stand with digital transformation? Customers are equally on Siemens and frankly, we have a few others. They are all now making the move to the cloud, all in and not only the technical move but also the transformation of their business model. We saw equal growth, and we also see this in the pipeline for the current year. Actually, RISE was really spanning across the world; we see an equally strong pipeline in however region. Scott, anything to add from your side?

Scott Russell, Customer Success Leader

The only thing I would add to that, Christian, is clearly, the mix of our customers differs across regions. We saw a significant acceleration of our small and midsized customers in markets like Asia and in Latin America and other regions. Whereas in North America and Christian referred to the large organizations together with Germany and there was an increase in Q4. I wanted to add one comment on the cross-sell, which is important to give context to the impact that RISE has. Over half of the bookings we had of the initial order entry had solutions outside the core S/4. So, the intelligent enterprise story, the ability to do that end-to-end process transformation through RISE is a catalyst. As the year progressed, we saw up to 80% of those customers having more than one solution outside the core areas. So, as the customers use, expand, and get benefits from RISE as they roll it out, they then look to the expanded opportunity that they get with SAP. This gives confidence when we look forward that not only does RISE provide that transformational opportunity on mission-critical workloads for customers, but then our customers will expand the use of SAP solutions across the suite to provide that end-to-end transformation. We see that in our pipeline going forward.

Anthony Coletta, Chief Investor Relations Officer

Thank you. We can take the next question please.

Operator, Operator

We will take the next question from Mohammed Moawalla at Goldman Sachs. Please go ahead.

Mohammed Moawalla, Analyst

Great. Thank you very much. Good afternoon, gentlemen. I have two more questions. Firstly, could you remind us around the installed base as you look to cross-sell multiple products into the base? Where we are in terms of the kind of remaining runway, particularly for some of your kind of acquired products? As we think of that kind of cloud acceleration, I will start from just the sort of migration and move to S/4HANA. How much more there is to kind of cross-sell and up-sell? And then secondly, just Luka, coming back around your confidence on the operating profit growth acceleration. Obviously, in the pandemic, you were able to make some structural savings on sort of go-to-market as things sort of reopen and we move into a more hybrid world. Will there be opportunities to further drive efficiencies on the sales and marketing spend as you support the growth? Thank you.

Luka Mucic, CFO

Yes. So perhaps I can take the second part on the installed base and move to S4. I mean, I invite Christian and Scott to comment on this. Clearly, you are right. We benefited, especially in the first part of the pandemic, from obvious savings in travel, facilities, car fleet, and other areas that were not in demand. This is already behind us in the second half of the year. We have already returned to much more normalized spending behavior. So that baseline that we have now is, I would say, the right one for us to leverage additional efficiencies. We are working on this, of course, on a continuous basis and are confident that we know where the levers are to get us to where we have to be. The most significant one from which a lot of profit improvement will come is first, a significant search in the cloud gross profits. Secondly, over time, we anticipate the need for incremental sales and marketing investment as the weight of the installed base, existing cloud business increases further and further. Also, the fact that we will not have such a significant step-up in R&D expenses as we have seen in the last two years to work against should help. That, together with the top line momentum we expect and the mix shift effect will also decline due to the smaller weight of on-premise should carry us to our targets. Perhaps over to you, Christian, for the first part.

Christian Klein, CEO

Mohammed, first of all, the existing ERP on-premise space still has about 30,000 customers. When you look into this ERP and what is up for conversion to the cloud, the situation now looks much better starting with the office of the CFO. It’s a win, and we are converting one customer after another. Differentiating is that we are running our ERP in many countries. We have localized versions everywhere. We are infusing new technology, AI, to automate certain finance processes. We are doing real-time treasury management and much more. Now, on the HR side, most of the 30,000 customers also have Employee Central, which we are also offering in the cloud, and we’ve just heard about Aldi; we can easily win customers with over 100,000 users, also heavily localized. The equation is there with BTP now; we have the seamless connection to finance, but also to other modules of the ERP. We are seeing much higher cross-sell weights, and we are also actually seeing a few win-backs of customers who made different decisions three or four years ago. On the SuccessFactors business, we are seeing a huge catch-up and healthy conversion rates. For procurement, it took a while, but now we are there. We just announced in Q4 about the engineering team in procurement plans as many of these ERP customers want direct and indirect procurement. We can offer that, whether you have on-premise direct procurement with ERP or indirect procurement, which will one day be on our Impact now on one platform. With that, we can convert the installed base more easily. Travel and expenses were tough in 2021, because of the pandemic, but we invest in the localization of Concur. We are also putting in more innovations and doing a lot on the UX side. Once travel is back, and we see recoveries in this area, we will see even stronger conversion rates going forward, as well.

Anthony Coletta, Chief Investor Relations Officer

Alright. Thank you, Christian. We’ll now close this call.