Earnings Call Transcript - SAP Q2 2021

Operator, Operator

Good day, and welcome to the SAP Q2 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I will turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir.

Stefan Gruber, Head of Investor Relations

Thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us for our earnings call to discuss our second quarter results. I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will both make opening remarks on the call today; also joining us for Q&A from Australia, Scott Russell, who leads our Customer Success Organization. Before we get started, as usual, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, could, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions that they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to the risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2020 filed with the SEC on March 4, 2021. Participants of this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates. On our Investor Relations website, you can find the slide deck intended to supplement today's call available for download. For those of you following the webcast, the slides will be shown as we proceed to the prepared remarks. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS at constant currencies year-over-year. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. And with that, I'd like to turn things over to our CEO, Christian Klein. Christian?

Christian Klein, CEO

Thanks to all of you for joining today. I hope you're doing well as the pandemic seems to be entering a new phase despite the positive progress in vaccinations. I also want to extend our deepest sympathies to all those affected by the catastrophic floods in parts of Western Europe and China. We are working closely with the affected communities to support our rescue and relief efforts. Let's now turn to our earnings update. For SAP, Q2 has been another fantastic quarter. It shows that we are executing well against the strategy we introduced last year. This strategy is playing out against the backdrop of every industry transforming digitally and with more urgency than ever before. Our customers are partnering with us as they transform their businesses while at the same time, modernizing the IT landscape with a move to the cloud. This is reflected in the strong quarterly results we announced today. Our current cloud backlog further accelerated by 20% to €7.8 billion, our cloud revenue growth accelerated sequentially by 4 percentage points to 17%, SaaS/PaaS cloud revenue grew 25%, excluding Intelligent Spend. Most importantly, our customer satisfaction continues to improve and hit an all-time high in our most recent survey. The net key takeaway: Our strategy is working; our teams are executing excellently; and we are delivering incredible value to our customers. Let's now take a look at some of the drivers behind our success this quarter. One of them is clearly RISE with SAP, our leading end-to-end business transformation offering. We see strong demand from both our installed base and from new customers, from companies of all sizes across industries and geographies, especially from our larger customers. AMD, for example, chose RISE to consolidate onto a single enterprise platform. Another example is Coop, who chose our RISE offering to move to S/4HANA cloud and who co-innovate with SAP as part of the industry cloud for retail. There is an important strategic dynamic, which I would like to touch on. Strong RISE momentum leads first to strong adoption of S/4HANA cloud and our business technology platform. And secondly, through our business technology platform, customers then adopt our integrated line of business applications. That's exactly the dynamic we saw play out this quarter. Our S/4HANA cloud backlog was, therefore, accelerated to an impressive 48%. This sets us up for significant acceleration of S/4HANA cloud revenue growth in half year two. S/4HANA cloud revenue was up 39% in the quarter and reached a revenue run rate of more than €1 billion. We have, in the meantime, more than 17,000 S/4HANA customers, up 16% year-over-year with 50% of these customers being net new. Let's now discuss the shift to our next-generation SAP business technology platform. Over 8,000 live customers and 4,000 partners adopted the platform for business process integration and for developing new line of business and industry-specific applications. Our B2B business had a strong quarter, powered by RISE with strong double-digit growth and customer wins, including Hilti, Lenovo, and Renault. Let me now cover the impact of RISE with SAP on our line of business and industry applications. With the move of our RISE customers to our next-generation business technology platform, we enable them to run end-to-end business processes based on our LoB industry applications. This opens up cross-sell opportunities across our entire cloud portfolio. As a result, the latest analyst research confirms that SAP increased its market share in the cloud over our competition. This quarter alone, we have again proven SAP's unique position, winning in over 350 competitive deals, the majority of which were against longstanding competitors. Net-net, we saw a fantastic performance and competitive wins across our whole portfolio. Let me share a few examples. Many companies are looking to our human experience management solutions as they navigate a new normal in the workplace. Clarins selected our full HXM suite, including Employee Essentials. And we won against Oracle and Workday to transform their HR function and better support their more than 8,000 employees. Our CX cloud revenues and current cloud backlog grew by strong double digits. Great customer wins this quarter include Dyson and DeLonghi. We also saw cloud revenue and current cloud backlog in our Ariba and Fieldglass business by double digits year-over-year. Alcon Vision chose our procurement solutions as their source-to-pay platform for direct and indirect materials, which no other competitor is able to offer. Our digital supply chain business also had a strong performance with double-digit cloud revenue and CCB growth. These solutions are key to running resilient supply chains and customers this quarter included Stanley Black & Decker and Cooper Lomaz. This is also the first full quarter that Signavio has been consolidated into our results. It has an outstanding first quarter as part of SAP's Business Process Intelligence segment, which grew in triple digits in current cloud backlog. In all my conversations with customers, one thing is always clear: They are choosing us for our unique value in helping them transform their business in this ever-changing world. I'd like to add some comments about our continued growth. We are optimistic about the future, and we have raised our guidance today to reflect the momentum we are seeing in the market. In addition to the progress in our core business, we are investing in new markets. This will expand our total addressable market by $150 billion to a total TAM of $600 billion by 2025. Let me highlight two future growth areas in more detail. With the SAP business network, we have created the world's largest and most comprehensive business network. It provides a powerful way for members to respond in real-time to disruptions in their supply chain. This quarter alone, over 350,000 new trading partners have joined. With our sustainability portfolio, SAP is the only partner who can support companies on their entire journey across the full spectrum of sustainability, from carbon neutrality to social impact and economic progress. We are partnering with more than 100 of the world's largest enterprises. Together, we are building solutions that allow customers to consider sustainability right from the design of a product, solutions that allow them to measure carbon emissions across their network and solutions that offer end-to-end transparency and real-time insights into ESG performance in line with leading best core metrics. In summary, this has been another excellent quarter. Our results demonstrate that our strategy is not just working but creating distinct momentum in the market. We are optimistic about reaching our goal of €22 billion in cloud revenue by 2025 with organic cloud growth of 22% per annum, growing twice the rate of our TAM. Thanks 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 hello from my side as well. I have to say I completely agree with Christian that customers continue to see SAP as their trusted partner in their business transformation. The strong customer momentum and adoption that we saw in the quarter is very encouraging, which is also clearly reflected in our numbers. After an excellent first quarter, our cloud transition gained even more momentum in the second quarter with growth accelerating across our cloud portfolio. Let's now take a look at some of the key drivers behind the performance in this quarter. Our total current cloud backlog continued its growth trend and accelerated sequentially to 20% growth, approaching €8 billion. This was backed by a strong performance in Business Technology Platform, Business Process Intelligence, Qualtrics, as well as customer experience. As S/4HANA current cloud backlog grew by 48% to more than €1.1 billion, propelled in particular by our U.S. business. With this strong backlog, we expect S/4HANA cloud revenue growth to significantly accelerate in the second half of the year. For the quarter, S/4HANA cloud revenue was up 39%. Only five months after the launch of RISE with SAP, it was again an important driver of S/4HANA cloud performance. Total cloud revenue showed a strong sequential uptick by 4 percentage points, resulting in 17% growth. Our Travel and Expense business showed first signs of recovery as global travel restrictions eased, which led to a sequential stabilization for the first time since the pandemic began. We are also pleased to see our Intelligent Spend category returning to growth. The Intelligent Spend cloud revenue growth rate was up 9 percentage points quarter-over-quarter, even though it continues to be impacted more than other SaaS/PaaS solutions. Our share of more predictable revenue expanded by 3 percentage points to 76%. As anticipated, software licenses revenue decreased as more customers transition to the RISE with SAP offering. In the quarter as well as for the first half year, our cloud and software revenue grew strongly by 5%. Our services revenue was down 7%, which was mainly caused by the divestiture of our SAP Digital Interconnect business in November last year. Despite the lower services revenue, our total revenue increased by 3% for the quarter as well as for the first six months. Now before moving to the bottom line, let me briefly give you some color on our regional results, where we had a strong cloud performance across all regions. In the EMEA region, cloud and software revenue increased by 5%. Cloud revenue increased by 23%, with Germany and Saudi Arabia being key highlights. In the Americas region, cloud and software revenue was equally up by 5%. Cloud revenue was up double digits with a robust performance in Brazil and Mexico. And we were also proud to see that in our largest market, the United States, we had strong sequential acceleration in cloud revenue growth, combined with an even stronger current cloud backlog growth. In the APJ region, cloud and software revenue increased by 6%. Cloud revenue increased by 23%, with Japan, Australia, and South Korea being particularly strong. Let's now look at profitability and gross margins in the second quarter. Our cloud gross margin grew by 40 basis points and reached 70%. The gross margin of SaaS/PaaS outside Intelligent Spend grew by 80 basis points to 70%. This was driven by a strong business performance while executing on our next-generation cloud delivery initiative. Our Intelligent Spend margin increased slightly and remains at 80%, while our Infrastructure-as-a-Service margin was up to 37%. The gross margin of our on-premise business, software, and support grew by 20 basis points to 87%. Overall, our cloud and software gross margin declined by 40 basis points to 80%, backed by a better cloud margin and improvements in our support margin, which were overcompensated by an expected drop in software margin. The gross margin of our services business increased to 29%. In the second quarter, our operating profit expanded by 3% and was up 12% for the first six months. Our operating margin showed a slight decline of 20 basis points to 28.8%, primarily due to the planned additional investments in R&D. For the first six months, it was very strong and grew by 2.3 percentage points to 28.1%. On an IFRS basis, our operating profit was down by 23% to €984 million, and our IFRS operating margin was down over 4 percentage points to 14.8%. This decrease was driven by higher share-based compensation expenses, primarily related to Qualtrics. Let me now turn to taxes and EPS, which had another brilliant performance in Q2. In the second quarter, the IFRS effective tax rate saw a substantial reduction to 19.7%, down by 13 percentage points. The non-IFRS effective tax rate likewise saw a significant reduction to 19.2%, down 11 percentage points. As a result, we are lowering our effective tax rate guidance for the full year. The decrease in comparison to the previous outlook mainly results from changes in tax-exempt income. IFRS as well as non-IFRS EPS increased significantly by 57% and 50%, respectively. This was again driven by a lower effective tax rate in combination with another outstanding contribution from Sapphire Ventures to our finance income. In the second quarter, we launched our next Sapphire Ventures fund with a total committed volume of $1.75 billion. This underscores our continued venture capital support of entrepreneurs that aspire to build industry-leading businesses. Let me continue with our cash flow. For the first six months, operating cash flow was €3.8 billion. Positive effects from lower share-based compensation and restructuring payments were compensated by higher income taxes paid. Free cash flow was up by 4% to €3.3 billion, supported by a reduction in CapEx. For the full year, our operating cash flow and free cash flow guidance remain unchanged. Continuing with our full-year outlook, which reflects the strong business performance in the first six months, we are again raising it. For the detailed outlook, please refer to our quarterly statement that we published earlier today. And before closing, I want to always talk about the green line as well. Christian already mentioned how we are enabling our customers to act more sustainably and transition to a circular economy through the innovations in our sustainability portfolio. We have made several public commitments to support sustainability as an integrated part of our business, including joining the World Economic Forum stakeholder capitalism coalition, and we act on our promises. Our software will support best reporting metrics, among others. Looking at our own internal metrics, we continue to make progress towards our goal of becoming carbon neutral by the end of 2023. In the first half of the year, our carbon emissions were 45 kilotons, significantly lower compared to last year. Given the ongoing pandemic in some regions and our pledge to flex initiative, we actually now anticipate the level of remote work to be even higher than previously expected. Therefore, we are decreasing our carbon emissions guidance to a range of 90 kilotons to 110 kilotons for the year. And to conclude on the topic of diversity, we continue to increase the number of women in management with nearly 28% at the end of Q2. So let me sum it up. We are highly encouraged by the strength across our solution portfolio. RISE with SAP is clearly resonating with customers. Our current cloud backlog and cloud revenue are accelerating. The strong momentum in the first half of the year gives us the confidence to once again raise our full-year outlook. Thank you very much, and we will now be happy to take your questions.

Stefan Gruber, Head of Investor Relations

Thank you. Operator, we can now start the Q&A session.

Operator, Operator

Our first question comes from Stefan Slowinski from BNP Paribas. Please go ahead.

Stefan Slowinski, Analyst

Yes. I just wanted to follow up on the cross-selling topic that you mentioned in your prepared remarks. It seems like an increasing number of projects have multiple SAP apps as customers upgrade to S/4. Yet the current cloud backlog growth ex-Qualtrics and ex-S/4HANA was probably flat sequentially, maybe even slightly down. So just wondering why, despite the acceleration we're seeing in the S/4HANA backlog growth, we're not seeing that yet feed into other lines of business areas? And when do you expect that to become more visible in the current backlog growth?

Luka Mucic, CFO

Yes. This question relates to the current cloud backlog. Let me begin and then Christian and Scott can share their thoughts on the market momentum. Firstly, it's important to mention that our current cloud backlog for both Q1 and Q2 exceeded our internal expectations, indicating strong momentum ahead of our forecasts. The significance of this number is notable, especially considering that our business is rapidly scaling and experiencing a greater influence from new cloud bookings compared to established renewals like S/4HANA cloud. This allows for a more substantial quarter-over-quarter impact in terms of growth. Typically, we see the highest increase in current cloud backlog in Q4, when the volume of new cloud bookings peaks. Under normal circumstances, we would expect a more balanced distribution of growth throughout the year, without significant increases in other quarters. For instance, when comparing our quarter-over-quarter growth from Q1 to Q2 last year with this year, we saw an increase of 1.2 percentage points in revenue last year, while this year, the increase is double at 2.4 percentage points. This indicates strong acceleration, which we anticipate will continue, especially considering the growth opportunities highlighted. We are very pleased with our momentum and are performing better than expected at this stage. Now, I'll turn it over to Christian and Scott for their insights on cross-selling opportunities.

Christian Klein, CEO

Thank you, Stefan. As Luka mentioned, it is crucial to note that in the first half of the year, we experienced the highest order entry in CloudCo in several years. While this has not yet resulted in the sequential growth in cloud revenue that you may have anticipated, we are witnessing significant order entry growth that will lead to an acceleration in cloud revenue in the second half of the year and further growth in 2022. Our backlog is strong. Additionally, regarding cross-sell opportunities, it’s important to highlight the impact of RISE, particularly on S/4HANA cloud, which has seen a 48% year-over-year increase in cloud backlog. We are also transitioning to our next-generation platform, the BTP, which unifies our solutions under one data model and security framework. For example, an ECC customer looking to migrate to HR on-prem and procurements sees the logical next step as moving to S/4HANA cloud, which would lead them to consider options like Ariba, Fieldglass, or SuccessFactors. This reasoning is a core part of RISE that we should keep in mind.

Stefan Gruber, Head of Investor Relations

Okay, thank you. Let's take the next question, please.

Operator, Operator

Our next question comes from Adam Wood from Morgan Stanley. Please go ahead.

Adam Wood, Analyst

Good afternoon. Thank you for taking my question, Christian and Luka. This is somewhat related to Stefan's question. The market seems a bit disappointed with the acceleration in cloud subscription growth. We acknowledge that there has been improvement, but perhaps not to the extent that investors were hoping for. Can you share more detail about the dynamics at play? Are you satisfied with the renewal rates of the business in relation to the incoming new bookings? How should we consider the timeline for delays between signing and recognizing revenue? Additionally, regarding new bookings, can you provide more metrics? For instance, should we look at the number of cloud orders and the balance of larger versus smaller deals to gauge the momentum of new orders? Any metrics to assure us that the situation is better than what the growth figures suggest would be helpful. Lastly, concerning Intelligent Spend, especially in relation to Concur, how quickly are you seeing recovery in markets like the U.S. as customers begin to increase spending on travel and expenses?

Christian Klein, CEO

Yes, I'll begin, and then I invite my colleagues to add. Firstly, I want to highlight that both new cloud bookings and renewals have seen substantial year-over-year growth. We have provided further insights into the performance of new cloud bookings across various segments of our portfolio. Everything is aligning within the CCP framework. The growth we've experienced is largely driven by the strong renewal base we've established, but the noteworthy change comes from the increase in new orders. I can confidently say that our results in Q1 and Q2 are significantly surpassing the compound annual growth rate we need to achieve our midterm goals. This is why we are also ahead of our internal revenue targets. We have noted impressive growth areas, including the rapid expansion in BTP and the triple-digit growth in S/4HANA. It's also worth mentioning that both Ariba and Fieldglass have returned to double-digit revenue growth in the Intelligent Spend category. Additionally, Concur has shown a strong comeback, achieving double-digit growth in new cloud bookings, which is quite impressive. We can see this business is picking up momentum. It improved from negative growth to 7% in Q2 and is expected to further accelerate in the latter half of the year, aligning with our targets for 2021. More importantly, this business will begin to make a significant contribution to the growth we anticipate for next year, particularly through transactional revenues.

Luka Mucic, CFO

Yes. And for my side, Adam, look, I mean when you take the CCP and you just have a look at the net new business we are closing. So the new order entry as well as, of course, successfully closing the upcoming renewals. We had the highest growth since many years in half year one. So we are clearly ahead of the plan, which also allows us to be already now very confident about the cloud revenue, which is a lagging indicator for half year two and 2022. So this is very important. And then, of course, we have other metrics like, for example, the customer satisfaction, that's on an all-time high now in our recent survey. So all the indicators are also showing strong signals that we are not only closing a lot of new business but also that we are building a lot of healthy business, which is equally important for the quarters and years to come. Scott?

Scott Russell, Customer Success Organization Lead

Yes. I guess you've covered most of it, Christian and Luka, but there'll be two additional comments that I guess I would share. The first is, back to the earlier question about the cross-sell, what is really pleasing when you look across the order entry in the first half in Q1 and in Q2? Yes, it was underpinned by amazing momentum with RISE, but all the categories, the major categories that we talked about before, our technology platform, customer experience, our Qualtrics Business Process Intelligence, all growing significantly in bookings in an order entry. So it's a portfolio that is proving that strength rather than being underpinned on only one dimension. And I did want to just secondly reiterate what Luka mentioned, which was our North America business, particularly showed strength and above what we're doing across the group in terms of order entry, in our cloud business with sequential growth and that gives us confidence not only in terms of the revenue implication that it will come in the second half that Christian mentioned, but also the outlook when I look at our pipeline going forward as well that gives us confidence, notwithstanding what is a very dynamic market situation with COVID amongst other things.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. We take the next question, please.

Operator, Operator

Our next question comes from Kirk Materne from Evercore. Please go ahead.

Kirk Materne, Analyst

I have two questions regarding S/4HANA cloud. First, do you think some of the recent acceleration might be linked to a broader cycle and increased investment in back-office software after last year's pullback? I'm trying to understand if there's a genuine momentum in rethinking or upgrading legacy back-office software. Secondly, regarding the competitive landscape of S/4HANA Cloud, who are your main competitors and what factors are contributing to your success? A bit more detail on that would be appreciated. Thank you.

Christian Klein, CEO

Yes, let me begin, and then Luka and Scott can share their thoughts. First, we are seeing strong momentum with S/4HANA cloud. Let me highlight one customer, Coop, which is a large retailer and a key SAP client. They recently transitioned to RISE for several reasons. They aimed to migrate to a new platform and the cloud, enhance their cybersecurity capabilities, and switch to standardized processes that allow for regular innovations and upgrades. They realize that new licensing models and significant automation of traditional processes, which currently involve a lot of manual work, are essential for them. Additionally, with our business technology platform, we provide new industry-specific capabilities for replenishment and connecting the supply chain to commerce, enabling them to deliver a personalized experience to their customers. There are numerous reasons for moving core operations to the cloud and redesigning business processes for the digital era. This also ensures an IT landscape that is more agile and responsive to emerging business needs. This is just one example, and we have hundreds of such customers. With RISE, we are not introducing a new product but an offering that leverages our expertise across 25 industries, guiding customers through their business transformation. Simply shifting to the cloud does not reinvent any business, which is why this approach resonates so well. This strategy supports the growth of S/4HANA Cloud, the platform, and our line of business applications.

Scott Russell, Customer Success Organization Lead

Yes, I'll expand on your last point, Christian, as it's quite significant. The customers we engage with and the momentum we are experiencing stem from feedback indicating that simply moving workloads to the cloud for cost savings isn't sufficient. They need to undergo transformation, digitization, and require agility and flexibility in an unpredictable market, enabling them to innovate and seize opportunities quickly. This reflects a shift from focusing solely on back office operations to adopting a platform that facilitates transformative capabilities, which is exactly what RISE with SAP offers. This explains the growth in S/4 and across our diverse portfolio in all the cloud businesses we provide. Additionally, I want to emphasize that we have seen a substantial increase in net new customers opting for RISE in our new order entries, which demonstrates that not only our current SAP clients but new organizations seeking digital transformation with speed are turning to us, further driving growth. As a result, the pipeline looks very encouraging for the second half.

Stefan Gruber, Head of Investor Relations

Thank you. The next question, please.

Operator, Operator

We will now take our next question from Julian Serafini from Jefferies. Please go ahead.

Julian Serafini, Analyst

So my one question I'm going to ask away is just on the license revenue specifically. If we look at the license revenue this quarter, it's down 13% or so year-over-year, right, and over 30% versus 2019. Are you able to quantify or give some color how much of that decline is due to customers opting for cloud solutions? And how much may you see the market environment still today? So could you help give us some color on that, please?

Christian Klein, CEO

Yes. So perhaps I can take this. I mean, it's clearly, it's broadly correlated with the move to the cloud. To give you an example, the 13% decline that you have seen for the total software license portfolio is exactly what we are seeing for S/4 as well. And as you know, S/4 has been for the longest time growing in on-prem and the fact that it's declining as a direct consequence of the massive pickup that we see in the cloud is actually really true across the entire portfolio that the shifts are happening in the digital supply chain. It's happening now as well, and we have a very strong offering there in the cloud with IBP, which is seeing strong growth as well. The rest of the portfolio, quite frankly, has already moved to the cloud for quite some time, and there you see just a continuation of those trends. We have across both cloud as well as on-prem had a very strong quarter in our SME business, in particular. That's perhaps something to note. And there, we have been still growing also in on-premise. That's also one of the reasons why you have seen across both on-premise as well as cloud quite significant uptick in the number of transactions that we have posted. A lot is coming from the mid-market. And this is actually positive news for us as well. We're clearly expanding our share also into smaller and nimbler companies that, hopefully, many of them will translate into very large enterprises in the future, like we have seen it with some of the biotech companies who have chosen SAP in recent quarters, they have now become massive companies in their own right.

Luka Mucic, CFO

Yes. And on top, I mean, you also see based on the decent performance of our support revenues that we are not buying ourselves the way to the cloud. I mean, our conversion rates from support to cloud revenue are much more healthier than initially planned. And then second, it's a move of our installed base to the cloud, which is massive. But also, let's not forget, we also had a net new customer share of 50% this quarter. So, it's not only a move of the installed base; we are also winning market share. We are actually entering new territories. We can attract new customers with our industry cloud roadmaps and with new innovations coming also on the platform.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. Take the next question, please.

Operator, Operator

Our next question comes from Johannes Schaller from Deutsche Bank. Please go ahead.

Johannes Schaller, Analyst

Congratulations on the good progress you're making. I have two questions if I could. First one, maybe for Luka. If we look at the conversion factor of support revenues to cloud subscription revenues, we have the target of 2 times or more. Look, I think in Q1 you said you're actually trending a little bit better than that 2 times factor. Could you maybe give us a sense where we stand now in the second quarter? And has that positive trend continued? And then given we talked a lot about cross-selling already, Scott, I wanted to come back to a comment from you from Sapphire, we basically said you see about $3 of upsell potential for every $1 in ERP cloud revenue you're seeing. So maybe Christian and everyone, can you only give us a little bit more color kind of how you get to that number? And now you should have seen some evidence since you launched RISE. And also maybe you could break the $3 a little bit down for us by application, give us a sense on the timing kind of when we should see that unsold, that theoretical potential of $3.

Luka Mucic, CFO

Let me take the first one very quickly. Actually, the conversion factors, as Christian already indicated, have even further improved and increased in Q2 over Q1. We're actually much closer to a conversion factor of three than to two for now. So this is extremely healthy. And it also shows in the very resilient support revenue that we are posting. I mean, we were up by 1% in Q2. Obviously, that was a factor of the strong license result in Q1, but also goes to show that our churn is extremely limited and the little churn that we have is extremely healthy one because it translates into a much higher number of cloud revenues. On the cross-selling, perhaps I can hand over.

Scott Russell, Customer Success Organization Lead

I can address the first question, and then you can follow up. As we've discussed today, RISE with SAP is fundamentally supported by S/4HANA, but there are also additional capabilities needed for businesses to effectively transform in the cloud. RISE includes the business technology platform, which has experienced significant growth in order entry. This growth enhances our customers' ability to innovate and orchestrate across both SAP and non-SAP hybrid scenarios, allowing for vertical innovation and the integration of partner applications. Additionally, Christian mentioned in his opening remarks that we’ve seen substantial growth in our network, adding 350,000 trading partners who are engaged with the business network, which further boosts activity through RISE with SAP. Each new company that joins strengthens this network and contributes to overall growth. In summary, we’re already witnessing the positive effects of the uplift we discussed during Sapphire, which has moved from the initial level to a range of one to three. We anticipate this trend to continue. Christian, would you like to add anything?

Christian Klein, CEO

Yes. Thanks a lot, Scott. And then last but not least, I mean, with regard to cross-sell, I mean imagine there's now an ECC customer. And oftentimes, these customers don't not only want finance or logistics, they also want HR. They also want procurement. And this is highly integrated. Now in the cloud when they make this move, I mean, think about it. Now you move to a new platform. There is certainly, and we did our homework on integration the same data model for all of our applications, the same security model. And when you are now wanting finance and you're wanting HR, you better make sure that for example, your vacation accruals are one to one booked in a compliant way in your P&L or when you are changing your business model, and you have to change your compensation models. Again, it's very important. We had that, for example, with a very large customer that everything is also then, at the end, book compliant in your P&L and finally, in the balance sheet. And this is why so many customers now consider not only modernizing their finance system but also modernizing their HR core system, the whole HXM suite, or for example, also moving to our one procurement platform because it also doesn't make so much sense that you do direct procurement or indirect procurement completely decoupled from your finance or production system. And this is why this makes a ton of sense to expand your SAP footprint again because the landscape looks much different. It's not so monolithic anymore. It's much more agile, but we now offer the same kind of integration capabilities as our customers were used to in on-cloud.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. The next question, please.

Operator, Operator

The next question comes from Frederic Boulan from Bank of America. Please go ahead.

Frederic Boulan, Analyst

If I can come back on the comments earlier on the current cloud backlog after the small incremental acceleration in Q2, should we read from your comments a bit earlier that we should expect further acceleration in that metric considering RISE industry cloud, et cetera? And can you just articulate the comment you made that the CCP growth you're seeing is actually enough to get to your 2025 cloud revenue CAGR, which is, obviously, higher. So do you expect that CCP to stabilize at a structurally higher level? Or is it driven by outperformance of the transactional part that contrary by, et cetera, which is not captured in CCP?

Christian Klein, CEO

Yes. Let me try to dissect this. So, first of all, we absolutely assume that our CCP growth will further accelerate but it will accelerate in a steady and gentle way during the year. And then in Q4, you should expect a more significant step-up. That's just due to the nature of how the CCP is built up and the fact that moving the needle on the absolute amount of new cloud bookings obviously demands a high absolute volume, and you see that typically in Q4 and not so much in the previous quarters to move the needle. But absolutely, we believe that growth should further come up. But again, as you said as well, CCP is not the only source of growth that we are looking at. There are two more that are very important. One is obviously the transactional revenues, which are currently sitting at a very low level. We are glad that they have started to stabilize. And certainly, we prudently don't expect for the remainder of this year a significant step up. If it happens, then great, and that's upside but, of course, we absolutely are very confident based on the momentum that we see and entering new year and then into the coming years that we will see increases there again, which will add to the pure growth that we are seeing from the CCP. The other topic is what we are focusing on today in organic innovation in different areas, just think about industry cloud solutions that we are now starting to bring to market. We see a massive revenue opportunity for those. The new solutions that we have just launched around sustainability, the new solutions around the business network, have a great total addressable market and a great potential for SAP in the years to come of purely organic net new growth opportunities, which will come on top of the current growth that we are seeing from the existing portfolio, which is already accelerating as you see in the CCP. So that is giving us a lot of confidence. As I said, we are actually ahead of our expectations of where we wanted to be at this point in time in 2021.

Frederic Boulan, Analyst

Can you provide a quick follow-up on your comments about industry cloud? Specifically, can you share any data on the reception of those industry cloud offerings? Also, please discuss your pricing as much as you can and what kind of pipeline we might expect for industry cloud offers.

Christian Klein, CEO

Yes. Good question. And look, oftentimes, we also sell our industry cloud solutions also in conjunction with S/4HANA cloud. As oftentimes, the transformation on the customer side works, I digitize my core processes, and then I went into the verticals. For example, we also released at Sapphire, our industry packages for RISE. And then, for example, in retail, it's just logical. When you are moving to S/4HANA cloud that you also think about new ways of doing replenishment, optimizing supply and demand with our industry cloud capabilities, which naturally integrate back into the core or there are new ways of doing claims management, which is another great solution, you can actually save millions, sometimes hundreds of millions of money with our intelligent claims management solution and customer loyalty, and we have that for retail, for utilities, for automotive. And then, of course, we have a lot of partner solutions that are also sitting on the platform already. And again, we are selling those stand-alone, Scott, but we oftentimes also just sell it also as a bundle as again, it's a natural expansion of the core processes we are running in the core.

Luka Mucic, CFO

Yes. It reinforces the cross-sell opportunity and the value our customers gain through the orchestration of the industry cloud with the broader RISE offering.

Stefan Gruber, Head of Investor Relations

Now we take the next question.

Operator, Operator

The next question comes from Michael Briest from UBS. Please go ahead.

Michael Briest, Analyst

I have two questions as well. First, Scott or Christian, could you provide some insights on the 250 RISE customers and 350 in the first half of the year compared to the 600 to 1,000 S/4 customers, of which about half were likely net new? I understand that sales cycles are lengthy, and many of the S/4 wins would have been initiated before RISE. What can you tell us about the profiles of the RISE customers? How many of them were part of the net new S/4 customers, and how many came from previous S/4 migrations? When do you anticipate RISE customers will surpass the net addition of S/4 customers? Secondly, Luka, regarding support, it continues to perform strongly. Based on your guidance, it seems that support is projected to decrease a couple of percent this year to reach the 75% recurring revenue target, which indicates a decline of about 4% in the second half of the year. What factors give you confidence that this outcome will hold, and why do you believe support won't stabilize or even grow throughout the year? Thank you.

Christian Klein, CEO

Scott, would you like to go first on the RISE question?

Scott Russell, Customer Success Organization Lead

I'm happy to address this, Christian, so feel free to add your thoughts. To break it down, we previously mentioned the growth in RISE, which has grown to over 100 customers in Q1 and over 250 in Q2, with more than half being new clients. We're observing significant momentum in this area, particularly with new customers and in the bidding market. Companies are eager to quickly transition to the cloud with SAP, contributing to our growth. We're also seeing interest from larger organizations like Coop, AMD, and Etihad Airways, who operate globally and seek the simplicity that RISE offers, supported by S/4. We anticipate this trend will continue. Our second half pipeline and outlook for RISE indicate strong value and volume across both large and small to medium organizations, despite fluctuating market conditions due to COVID. We maintain a strong connection with both new and existing customers, which builds our confidence in the outlook. This underscores our belief that RISE will not only enhance the growth of S/4 but also create additional cross-sell opportunities.

Luka Mucic, CFO

Yes. And for my side, look, I mean, when you take the implied outlook, it's probably on the prudent side of things. But nevertheless, there are two things that you need to keep in mind while for half year one, our support revenue was essentially flat. That was supported, first of all, in the last year by the best performance that we had in Q4 as well as the fact that we had positive software license growth in Q1. We don't expect this for the remainder of the year, and actually Q2, as you have seen, has already turned negative in the double digits, and that will inevitably bring also the growth profile of the support revenue down. The second reason is that we are now starting to see larger RISE opportunities of larger installed base customers, and therefore, also the conversion of support revenues to cloud, again, a very healthy conversion factor, but it will move up. And to what extent this will be distributed across Q3 versus Q4, and therefore, will impact already this year support revenues versus starting to impact them more in 2022. That's a little bit like looking into the crystal ball to a certain extent. It also then depends on the ramp of the corresponding cloud agreements, which, in particular, with the very complex ones, can take a while until the full ramp is reached. So I would say, taking all of that into consideration, the implied guidance is certainly one that we feel extremely comfortable with probably risks rather a little bit to the upside and the downside. But given that we are going through a substantial business model transformation, I think it makes sense to kind of err on the side of caution here a bit.

Stefan Gruber, Head of Investor Relations

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

Operator, Operator

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

Mark Moerdler, Analyst

Congratulations on the quarter, especially the strong S/4HANA cloud current cloud bookings. We saw a nice acceleration quarter-over-quarter in the S/4HANA cloud bookings. I have two related questions. First, how much of the backlog at this point is coming from RISE SAP? A number would be nice, but even an estimate would be appreciated. Second, are you seeing RISE with SAP deals consisting of many smaller cloud transitions that occurred one after another over time, affecting the current S/4HANA cloud bookings? In other words, do you have signed deals where excluding any upsell you see an increase or no increase in the backlog this year, which then generates additional backlog next year and potentially in the following years?

Christian Klein, CEO

I mean let me take the first question, Mark. And look, with regard to the correlation between RISE and S/4HANA cloud. Obviously, there's a strong correlation as many customers also choose to do their transformation on the business technology platform. They also choose our BPI offering to do a redesign of their business model to come back to the standard. So that resonates actually really well. In Q2, you can say roughly 50% of the S/4HANA cloud deals were also correlated to RISE. But I also would say, for the upcoming quarters, this share will definitely increase because we also have to consider, I mean, RISE has been around since January. So we are still in the very early days. And it's actually quite remarkable that we already closed the first larger deals because you have to work a lot with the customer, not only on the business case for the transformation on the business side, but also on the IT side. So we are actually very confident that we even see much more larger transactions also in half year two looking at the pipeline.

Luka Mucic, CFO

Yes, I agree. And for now, I mean, I can't really give you an exact number of the RISE contribution to the current cloud bookings, but it's not insignificant. So we are talking already now about a double-digit percent share of the total bookings for S/4HANA, which is coming through RISE. I hope that helps.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. I think we have time for...

Mark Moerdler, Analyst

In response to your second question, please continue.

Stefan Gruber, Head of Investor Relations

No, Mark, please go ahead.

Mark Moerdler, Analyst

I was just saying on the second question. In other words, these big deals that are made up of lots of smaller projects that are moving to RISE with SAP. Does it all end up creating an increase in the cloud bookings? Or does it end up creating some increase this year and some next year and the year after, potentially, as these deals start to convert over?

Scott Russell, Customer Success Organization Lead

Yes, I can take that one, Christian and Luka. Mark, the answer is both. We've seen a great response from customers so far with Verizon since the launch at the end of January. However, customers are at various stages of their transformation journeys. Many are looking to utilize RISE, benefiting from its simplicity to facilitate quick and comprehensive transformation. This is particularly true for larger organizations with diverse geographical and industry landscapes, who view RISE as a key platform. As you mentioned, we anticipate continued opportunities for phased rollouts over time as they integrate different aspects of their business into the unified offering RISE provides. What I want to emphasize is that when they select RISE, they're considering an overall transformation of their business, even though the pace of transformation may vary between organizations. This aspect makes RISE appealing for businesses of all sizes.

Christian Klein, CEO

Absolutely, right. And Mark, look, also with regard to what Scott said is with regard to the phasing, I mean, we have very small customers who actually go live sometimes within one or two months, so it's one project done and they move to the new platform, they adhere to the standard. So that's actually also even in a remote way, we see a lot of these volume projects. And then second, of course, with the large customers, as Scott mentioned, they, of course, do this in a step-by-step to also not overwhelm the organization. So they start with a division; they start with a certain business process. But also there, I have to say, compared to our internal business case, Luka, I see that we actually assumed a longer duration. Now we see actually that the phasing is much more towards year one and year two than initially planned for the large deals we are closing.

Stefan Gruber, Head of Investor Relations

Okay. Thank you. We have time for two final brief questions, please.

Operator, Operator

The last question comes from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Mohammed Moawalla, Analyst

Just a clarification, Luka, on a comment you made around the progression of the cloud backlog. Are you saying that we should see a sort of a significant reacceleration in the sequential growth as we get to Q4? Or is there an element of sort of pull forward in some of the better-than-expected cloud bookings that you saw? Thank you very much.

Christian Klein, CEO

Yes. To just clarify this very briefly, what I was saying is that under normal conditions, the growth and expansion of current cloud backlog across Q1 to Q3 should be relatively steady and moderate. And then you would see a more significant step-up in Q4. It's actually quite remarkable that we have seen a significant, and for us, also unexpected acceleration in Q1 and Q2. That's underpinned by the very strong growth in new cloud bookings that we had. Otherwise, the growth rate sequentially would have been expected to be less pronounced than that. And so, therefore, what I would expect is for Q3 also a further steady progress and then in Q4 a more significant one.

Stefan Gruber, Head of Investor Relations

Okay. Now the last question also brief one, I assume.

Operator, Operator

The next question comes from Knut Woller from Baader Bank. Please go ahead.

Knut Woller, Analyst

Yes. Just briefly on the regions. The growth in Asia-Pacific slowed a bit sequentially. Is that simply due to the dynamics we saw last year on the back of the pandemic with APAC coming out of the lockdown faster than Europe and North America? Or are there any other drivers behind the development? And also some color on the development in China, which you didn't mention in your highlights within the quarter for cloud revenue? Thank you.

Luka Mucic, CFO

Yes. So first of all, China actually, obviously, had at the outset of the pandemic pretty difficult conditions, including for us. Actually, in 2021, they have returned to a very substantial growth, and that will, in the future, also translate into higher cloud revenue growth. What we are seeing today in China is basically an outcome and output of the performance that they had in the first half of the year predominantly going into Q3. But in general, in Asia, I think we have a pretty strong momentum in a number of markets in particular when I take a look at the largest market in Asia, Japan, it's for me a little bit a Siamese twin to Germany, very large, very solid, very mature markets, but with great teams that have a lot of customer intimacy and strong trust in the market and therefore are driving very steady and quite significant growth overall for SAP. And then you have really absolutely stunning performances in some markets where you would expect significant difficulties, I think India in terms of the order entry performance that for me comes to mind. It was just amazing what the team has done there in the darkest days of the pandemic to post the kind of stellar growth rates that they were able to do, I think that's a testament to how relevant those solutions are to the wider market and others that we have mentioned, like Australia and South Korea are in a similar camp. But I would say, nevertheless, when I take a look at the new order entry, I wouldn't really pick out a specific region as being superior. Again, from a revenue perspective, you see the story of the past. When you take a look at the present, I mean, MEE, North America, as we mentioned before, all had a stellar performance in terms of new cloud bookings. From that perspective, it's really hard to differentiate across the different regions because there would just be some that we won't do appropriate justice because they all have been doing very well. Scott, anything that you would like to add?

Scott Russell, Customer Success Organization Lead

I think you summarized it really well. Luka, I think the bookings performance. It's great because we're not relying on any particular region to underpin the growth and their business performance, it really is consistent across the world, including some amazing performances in markets like India, as you mentioned. But also it reinforces the strength of some of our bigger markets like in Germany and in the United States and others, which obviously have a large customer base but are also driving huge momentum into the cloud, which is, obviously, very heartening for us as we move forward.

Stefan Gruber, Head of Investor Relations

Thank you very much. This concludes the Q2 earnings call. Thank you so much for joining. The replay will be available very soon on our Investor Relations website. Thank you very much, and goodbye.

Christian Klein, CEO

Yes. Thanks, everyone, for joining.

Luka Mucic, CFO

Thank you, everybody.

Christian Klein, CEO

Take care. Bye-bye.