SAP Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
July 20, 2023

There are 12 speakers on the call.

Operator

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q2 2023 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session. I would now like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer.

Operator

Please go ahead.

Speaker 1

Good day, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein CFO, Dominik Hazam And Scott Russell, who leads customer success. On this call, we will discuss SAP's Q2 and first half twenty twenty three results. You can find the deck supplementing this call as well as our quarterly statement on our Investor Relations website.

Speaker 1

During this call, we'll make forward looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the Risk Factors section of SAP's Annual Report on Form 20F for 2022. Unless otherwise stated, all numbers on this call are non IFRS and growth rates, percentage point changes and our 2023 financial outlook on non IFRS at constant currencies. The non IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS.

Speaker 1

Before we start, I would like to remind you that SAP completed the sale of its stake in Qualtrics in June of this year. Therefore, all figures shared on this call are based on SAP Group results from continuing operations. And with that, I'd like to turn the call over to Christian.

Speaker 2

Yes. Thank you, Antoni. And as always, thanks for joining us for our earnings call today. This has been a good Q2. At the halfway point of 2023, SEP continues to perform well, despite a macroeconomic environment that remains uncertain.

Speaker 2

After reaching the turning point in our transformation, Our sharpened focus has yielded real momentum, and we are seeing strong demand across our portfolio. Customers are looking to our game changing solutions to foster sustainable end to end business processes across diverse industries on a global It is also worth pausing on the watershed moment we are experiencing with generative AI. It's clear that generative AI will fundamentally change the way businesses won. In the business world, No one is better positioned than SAP to empower businesses to take advantage of this transformational moment, giving them the solutions to harness AI to improve business outcomes. We believe we are uniquely placed to become the leader in Business AI.

Speaker 2

At our most recent SAPPHIRE conference in May, we shared specifics of our AI approach with SAP Business AI. Later on in my remarks today, I will talk in more detail about our ambitions on this front. So let's first turn to a summary of our numbers. In Q2, Operating profit grew at an impressive 28%, up from 12% in Q1, clearly demonstrating the strength of this new phase in our transformation. This puts us in a strong position as we work towards our goal of double digit operating profit growth in 2023.

Speaker 2

Current cloud backlog Stands at over €11,500,000,000 with continued strong growth, up 25% this quarter. Cloud revenue continues to grow steadily at 22%, and total Q2 revenue grew at 8%. For S4HANA specifically, cloud revenue grew 79%, up from 75% in Q1 And current cloud backlog grew 70%. Our results this quarter demonstrate the strength of our solutions in Addressing the specific needs of our customers during challenging times. Customers are choosing SAP to help them transform their business processes, Collaborate across their supply chain and operate sustainably.

Speaker 2

Wise with SAP continues to be the preferred choice for customers adopting the SAP portfolio to transform the end to end business processes in the cloud. Key new Wise deals this quarter include Bayer AG and Bacardi Martini. As one of the world's largest pharma and biotech companies, Bayer chose wise with SAP to facilitate its extensive business transformation program known as Core. Barkhadi is the world's largest privately owned international spirits company with a portfolio of more than 200 brands. They have chosen Wise with SAP to meet their ambitious growth targets.

Speaker 2

There were also a number of important Wise go lives this quarter, including Hanesbrands, Levi's, Tech Mahindra and Versuni. Tech Mahindra of India deployed wise with SAP in record time, going live in just 3.5 months. Versuni, a new company formed from Philips Domestic Appliance, Undertook one of the largest Wise transformations ever, and it was completed in just 18 months. The success of Wise with SAP is clear. This is SAP signature offering, which helps customers move to the cloud and transform their business processes at the same time.

Speaker 2

It's also very important to emphasize That SAP's newest innovations and capabilities will only be delivered in SAP Public Cloud and SAP Private Cloud using Wwise with SAP as the enabler. This is how we will deliver these innovations with speed, agility, quality and efficiency. Our new innovations will not be available for on premise or hosted on premise ERP customers on hyperscalers. For example, new ERP capabilities as well as sustainability and carbon accounting solutions and All our new AI innovations will only be available in the cloud and delivered via Wise and Core with SAP. Last quarter, we introduced the powerful new offering, Grow with SAP, designed for mid market customers Who are new to SAP and likely to be growing quickly as they build their businesses.

Speaker 2

Grow has quickly become popular, Just likewise with SAP, for which around half of the customers are net new to the SAP family. The momentum I've described with both wise and core with SAP is underpinned by the SAP Business Technology Platform. This is the foundation for integration and extensibility across our portfolio. We have reached an important milestone this quarter with over 20,000 live BTP cloud customers. This quarter new wins included Visa, the world leader in digital payments And Santander, the Spanish financial multinational, who are using SAP Business Technology Platform to revolutionize and streamline the banking experience.

Speaker 2

Increasing adoption of S4HANA and the SAP Business Technology Platform is also driving significant cost and upsell opportunities across our portfolio. Let's now discuss the latest updates To our approach with SAP Business AI. As I said earlier, we believe we are uniquely placed to become The leader in AI built for business. Customers will benefit from new AI powered solutions that step change How processes can self learn and self automate to self optimize business outcomes. For example, Imagine supply chains that automatically initiate a different delivery route based on weather and congestion data.

Speaker 2

There will be a step change in how employees can interact with solutions in radically more efficient and personalized ways. For instance, imagine your ERP system using embedded ESG data and business data to decarbonize the supply chain by 5% Simply by asking for it. And there will be a step change in uncovering new insights that lead to better business decisions. Imagine one trusted data layer across your entire company that enables AI to pull together the right data in seconds. This will bring us significant opportunities for market expansion through new AI based solutions and new premium offerings.

Speaker 2

Based on external forecasts and our own calculations, we see a potential doubling of our addressable market to $1,000,000,000,000 by 2028 with AI being a key contributor. We will be introducing new premium wise offerings With an uplift of up to 30% in the fall. Our approach with SAP Business AI is unmatched in the industry, Delivering our customers the most relevant, reliable and responsible AI built for business. Firstly, Our AI is relevant because it's embedded into every part of our portfolio. More than 24,000 SAP Cloud customers today can already use SAP Business AI across hundreds of built in AI capabilities and partner use cases.

Speaker 2

To provide a couple of new tangible examples, in SAP Transportation Management, Generative AI will save up to 55% of the processing cost of delivery notes. The new intelligent collections in SAP S4HANA Finance can reduce the time between invoice and payment by up to 10%. Secondly, based on unique business data and business process context, We can deliver the most reliable business AI. Reliable AI hinges on applying the right data to the right model. By using SAP DataSphere to leverage substantial context switch industry specific data, Business AI System can Certainly, responsible AI is not a buzzword for us.

Speaker 2

Our customers trust us with their most critical data and can confidently deploy Our AI offerings, knowing we prioritize the highest levels of security, privacy, compliance and ethics. We comply with the highest standards when it comes to customer consent, security, GDPR regulations. This is what SAP stands for. We will continue to innovate and deliver by creating an AI ecosystem for the future, Combining SAP and partner innovation built on the SAP Business Technology Platform. Let me give you some examples of this approach.

Speaker 2

At SAP Sapphire, we announced a partnership with Microsoft to collaborate on joint generative AI offerings to help customers address the talent gap With new recruitment and development tools. Last week, SAP Sapphire Ventures, the technology focused VC Backed by SAP announced that it will dedicate US1 $1,000,000,000 to AI powered enterprise technology startups. Earlier this week, we announced strategic investments in 3 leading generative AI companies, Alibaba, Answarfeq and Cohere. In the fall, we plan to announce new AI solutions and capabilities across our portfolio. All told, we see a huge opportunity with new innovation in AI and believe SAP is uniquely poised to help customers take advantage of this watershed moment.

Speaker 2

As our Q2 results show, SAP continues to deliver. We are optimistic about the future based on SAP's core value of delivering technologies that build stronger companies. As we start the second half of the year, we remain fully committed to delivering on our promise of accelerated revenue and profit growth. This is reflected in our increased guidance for cloud and software revenue and for operating profit. In closing, Let me quickly look back on what we have accomplished in recent years.

Speaker 2

Our own transformation into a cloud company, Our leaner and more agile operating structure, new offerings that bring the power of SAP to more companies, Solutions that harness the power of data wherever it resides and tools that create sustainable business processes across industries. Now is another threshold moment. While nearly every company is working on the AI revolution in some way, No one sits at the nexus of technology and business like SAP, and we think there is enormous opportunity ahead. Dominik, over to you.

Speaker 3

Thank you, Christian, and good afternoon, everyone. We are very pleased with our 2nd quarter's growth Non IFRS operating profit, putting some upward pressure on our outlook on that metric for the full fiscal year 2023. In Q2, we also maintained a steady growth of our cloud business with current cloud backlog and cloud revenue again growing by 25% and 22% year over year respectively. The trend towards larger cloud transactions continued with deals greater than €5,000,000 in volume contributing to nearly half of our cloud order entry. As a reminder, on June 28, SAP completed the sale of its stake in Qualtrics.

Speaker 3

Therefore, the following results are for continuing operations. Let me talk you through our financial performance in more detail. Current cloud backlog was €1,500,000,000 growing by 25% with S4HANA current cloud backlog growing by 70%, driven by the continued strong adoption of RISE with SAP. Our combined SaaS and PaaS portfolio Continued to grow by 26% with SaaS cloud revenue up 22% and PaaS cloud revenue up 45%. Sustained momentum was again fueled by the strong contribution of S4HANA Cloud and the Business Technology Platform.

Speaker 3

Software licenses revenue saw a decrease by 24%. Total revenue was up 8% year over year, demonstrating the great resilience of our overall business in the current macro environment. Now let's take a brief look at our regional performance. In the Q2, all regions delivered strong cloud performance. Germany, Brazil and India had outstanding cloud revenue growth, While the United States, the Netherlands, France, China and Chile performed particularly strong.

Speaker 3

Now moving further down the income statement, Our cloud gross profit grew by 24%, supported by the completion of SAP's next generation cloud delivery program. This marks a key milestone in terms of portfolio integration and harmonization for our customers. This in turn resulted in cloud gross margin improving from the year ago period expanding by 1.1 percentage points to 72.2%. In the Q2, both IFRS as well as non IFRS operating profit increased by 28%, mainly driven by sustained high growth in cloud revenue, the completion of the next gen cloud delivery program, Efficiency gains resulting from spending discipline across the entire organization as well as gradual relief from the impacts of the war in Ukraine. Additionally, our IFRS operating profit benefited from restructuring expenses in Q2 last year, but was negatively affected by higher share based compensation expenses primarily due to share price development over the quarter.

Speaker 3

Finally, the operating margin landed at 27.2%, a 4.4 percentage point improvement compared to the prior period. Earnings per share in the quarter increased 12% to €1.07 The IFRS effective tax rate for Q2 was 33.8% and the non IFRS tax rate was 30.4%. The reduction of the IFRS effective tax rate from Q1 to Q2 mainly resulted from the increase in profit before taxes. Now looking to our cash generation. Free cash flow for Q2 significantly increased to €604,000,000 driven by the strong expansion of operating profit and the reduction of payments primarily for share based compensation, but also for CapEx and Leasing.

Speaker 3

Now let's move on to our financial outlook. As you've seen in today's release, we are updating our revenue and operating profit outlook for the full year For continuing operations, the outlook range for cloud and software revenue is being narrowed by moving the lower end slightly up Despite moving the upper end of the range for cloud revenues down, the latter being mainly driven by lower than anticipated transactional revenue. As a result of this slight shift in mix and overall marginally higher midpoint of our cloud and softer revenue outlook, The operating profit outlook range has been increased accordingly. Note that this update implicitly leaves the overall margin profile intact for the year and provides confidence in achieving the free cash flow outlook, which is reaffirmed. As you know, our 2023 Financial outlook is based on constant currency assumptions, I.

Speaker 3

E, a prior year's exchange rate of USD 1.05 per euro. Let's now discuss our non financial targets. The non financial outlook for 2023 is reiterated. In Q2, SAP once again achieved net carbon emissions of 0 kilotons. Our focus continues to be on reaching net 0 emissions Across our value chain by 2,030, to get there, we're establishing a multi phased supply chain engagement program with our suppliers to significantly reduce our upstream greenhouse gas emissions.

Speaker 3

As a first step, we are working with our top 100 suppliers to ensure they report emissions at product level and follow a net zero plan, leveraging our own technology to do so. Our first half results give us confidence that we are heading in the right direction and continue to be well established and positioned to achieve our revenue and profit growth goals for the year. The resilience of our businesses combined with the focus and cost discipline across the organization are evidenced by strong profit growth. Q2 results continue to demonstrate that SAP has entered the 2nd phase of its transformation characterized by Sustained cloud momentum now turning into significant profit growth. In addition, we are laser focused on our core and continue to streamline the business as demonstrated by our successful divestiture of Qualtrics in the last quarter.

Speaker 3

We firmly believe that we offer best in class solutions to our customers serving as a trusted strategic partner in their digital transformation journey. Thank you, and we will now be happy to take your questions.

Speaker 1

All right. And I would like to kindly Remind you to only ask one question, if possible, when prompted. So operator, please open the line.

Operator

Ladies and gentlemen, at this time, we will begin the question and answer session. And the first question comes from the line of Toby Och with JPMorgan Casanova Limited. Please go ahead.

Speaker 4

Yes. Hi, and thanks for the question. Perhaps just firstly on the cloud revenue side. Dominic, you mentioned the transactional revenues there as the driver of the shortfall. Could you just give us a sense for what you're seeing there with Back to those transactional revenues and whether you're seeing any other macro headwinds across any of the other lines of business applications outside of S4HANA?

Speaker 4

Thank you.

Speaker 3

So I think on the transactional side, you know What types of businesses are in there? It's the kind of travel expense conquer tool, external workforce, contingent labor field class, Business network transactions and where we really took a little bit of a hit was on the Fieldglass contingent workforce side. There indeed the macro with low flows and Reduced levels of contingent workforce was actually slightly shrinking. So that was a little bit of a headwind, which was not expected to that degree. Otherwise, I'd say it's pretty much in line.

Speaker 2

Yes. I guess, Toby, maybe just to build on that and Scott can also give a sentiment on the pipeline. I mean, being out there, We definitely see no slowdown in our SaaS and PaaS business. I mean, as for HANA, the cloud revenue even accelerated once again. The PTP, the platform sees more and more adoption now also with the CleanCore.

Speaker 2

It's not only very important for the integration, but also for building the Tensions for new building new apps, either by our customers, partners or SAP. And then certainly, I mean, for half year, too. Also when you look at the geopolitics, I guess, we see really strong demand also still on relying on SAP in Order to be able to do business in over 130 countries. So just coming back from China, we see a huge demand on fiber Software of doing business in China for China. When you look at the utilities or retail and auto, I mean, they continue that transformation full speed.

Speaker 2

And you need the ERP supply chain procurement systems in order to run these new businesses. And then last but not least, As we are building already hundreds of UI use cases for machine learning and embedding that with generative AI, we definitely also see now stronger demand Also moving now to the next generation ERP in the cloud because only there our customers can consume all this new innovation. So that will help us well to drive further momentum in half year, too.

Speaker 4

Thank you.

Speaker 1

Thank you. So we'll take the next question please.

Operator

The next Question is from the line of Frederic Boulan with Bank of America. Please go ahead. Hi, good evening, Fadel, Bank of America. A question on the balance sheet now that Qualtrics is now closed, Any further thoughts on what's the optimal leverage for SAP? What's the right capital allocation?

Operator

And would you consider increasing the $5,000,000 buyback absent any large M and A opportunities? Or we want to keep powder dry considering opportunities in AI and elsewhere? Thank you.

Speaker 3

Yes. Indeed, our balance sheet right now is very strong. I think we have snapped back to a net cash position of SEK 4,200,000,000. We've already announced that the lion's share of the proceeds will be invested in a share repurchase, which will stretch through 2025, And this will be commenced very shortly. So for the time being, let's also look at what opportunities there might be on the many side for the time being.

Speaker 3

I don't want to kind of make more commitments than what we have already said with regards to the 5,000,000 Share repurchase, but it is true that we have a very strong balance sheet and are very much able to act.

Speaker 1

Thanks Fred. We'll take the next question please.

Operator

The next question comes from the line of Adam Wood with Morgan Stanley. Please go ahead.

Speaker 5

Hi, thanks very much for taking the question. I wanted to come back to that subject of AI. I wonder if you could talk a little bit about How you're applying AI internally and what cost benefits you see from that? And how that balances against the need for you to increase R and D investments To deliver on the AI functionality, you're talking about pulling in apps. And could you talk a little bit about how the time frame of delivering on those two things might be different and one might come before the other.

Speaker 5

Thank you.

Speaker 2

Yes. So Adam, thanks for the question. I mean to shed a further light and Give you better insights into the product and the tech and the commercials and how we go to market. I mean, first, It's very important to emphasize, I mean, we have today roundabout 300 AI use cases. And for example, take Liedel Kaufland, They actually have massive demand forecast data, over 400 input levels going into the demand forecast.

Speaker 2

We are taking this data, Petabytes of data and analyzing it to predict better demand, and now they can actually have optimized their inventory and their supply chain costs Over 10%, which is massive for a company of the size and scale of Kaufland and Lidl, and This is here. And so now we have certain scenarios on cash flow automation and where we actually could actually improve the DSO by 10%. We have many of these examples. Now with generative AI, I think we really sit on a Data of over 400,000 customers and the material flows, the financial flows, employee customer data. And now we are taking this data only with Signavio to benchmark and give business process recommendations.

Speaker 2

I mean, we see it in the first prototypes That we are going to be able to not only that the system can self learn on these data on how to improve Process workflows. No, no, no. The systems itself will also drive further automation of workflows going forward. They can look into the of an ERP, which is huge in on prem, they can help customers to generate code on the platform to build differentiating capabilities To fasten the time to value. And last but not least, I just did something yesterday where we said, hey, when I have a skill gap here in my company and that and that space, From where did I hire the best skills in the past, in which country, from which university?

Speaker 2

And the system gives you unbelievable smart Recommendations. And this is something what SAP can do. And this is where we're going to launch further generative AI use cases. They will come with a 30% premium Because we believe in the immense value and we see how customers respond to that. And we are going to embed that in every wise, In every LOB deal going forward, this will not be like, okay, here's our generative AI portfolio.

Speaker 2

No, no, this will be embedded Because there we also believe that our sales team and our partners can sell it best when it comes integrated with our application portfolio.

Speaker 1

Thanks, Adam.

Speaker 5

Very helpful. Thank you.

Speaker 1

We'll take the next question please.

Operator

Before the next question, I will remind you that you want if you want to raise a question, You have to press hash followed by 1 on your telephone. And the next question is from the line of Michael J. Briest with UBS Limited. Please go ahead.

Speaker 6

Thank you. Good evening. Just on the cash flow actually, Dominik. I noticed that you cut your CapEx outlook for the year by about €50,000,000 And obviously, you've raised the profit target by €50,000,000 Left the free cash flow goal for the year unchanged. It still feels like free cash flow is part of the business that needs maybe more work than other parts.

Speaker 6

What are you actually doing to improve it? And how linear should we think about the progression to the SEK 7,500,000,000 in 2025 to be?

Speaker 3

I mean, the key levers on free cash flow are quite obviously on the profit side first and then working capital. And of course, also the CapEx and leasing part of it, which should be kept as low as possible. We are, as we speak, Starting to initiate pressure on these matrices to improve the cash conversion. I think for the current fiscal year, we are on a good trajectory. If you just look at the phasing of H1 versus H2, as we've seen in prior year, you take that kind of receivable sale into account, that kind of was At year end last year into H1 Q1 to be precise, this year, you see that we're actually a little bit ahead of that kind of completion rate.

Speaker 3

So For this year, we're fine. Now how linear or not that will be through 2025, I find it challenging to predict because that is really notoriously difficult to predict. But obviously, we have that kind of ambition 2025 very firmly in mind and would need to show some progress between 2023 2025 To give you confidence about that kind of materializing.

Speaker 7

Thank you.

Speaker 1

Thank you, Michael. And we'll take the next question, please.

Operator

The next question is from the line of Johannes Schaller with Deutsche Bank. Please go ahead.

Speaker 8

Yes. Thanks for taking my question. Kristian, you referred to those 3 strategic investments you made on the AI Hi, Adelofar for Coherent and Tropic. Can you maybe talk a little bit more about what each of those really bring to the technology side for you and where you feel those assets That are really uniquely positioned and how they can help you become more competitive on the AI side. Thank you.

Speaker 2

Yes. To give you two examples, Take Alibaba for. They have very good technology, not that they can only integrate their large language models with our own, But they actually also are able to put their large language models in that technology in the customer's data center. Now you can imagine, When you talk to a public sector customer in the European Union, this is actually a unique selling point for them To keep the data in the data center while actually also having access to the SAP data and then really build one model for generative AI For these type of customers with Cohere, we are seeing that they have unbelievable good also technology for businesses for B2B. So we are using them in retail and in some others where we already in some concrete customer projects where we are applying our technology And also go to market together.

Speaker 2

And of course, you're doing these investments also to have a seat at the table. I mean, they we want to have them as part of our huge ecosystem Because while we are sitting on immense valuable data, our offering becomes even stronger if we can also embed non SAP content and data. This is what we are also doing with these investments to have them on our side and make our AI offering even more valuable.

Speaker 1

Thank you, Johannes. And we'll take the next question, please.

Operator

The next question is from the line of James Goodman with Barclays Capital. Go ahead.

Speaker 7

Good evening. Thank you. I wanted to ask on the EBIT upgrade of $50,000,000 I think the beat this quarter was over $100,000,000 I think €50,000,000 last quarter. So really the question is why not a little bit more generous in terms of the EBIT upgrade? I think the Low end of the full year guide now implies a decline year on year in the second half.

Speaker 7

And just I guess as part of that, The statement note that you completed the converged cloud project, I think early in Q2, is that right? And if so, why not more of an impact on the Cloud gross margin, SaaS. Thank you.

Speaker 3

Maybe on the upgrade, I mean, this was again a pretty mechanical update. I mean, you've seen That we basically took the midpoint of the cloud revenue guidance down by €100,000,000 We took the overall software and cloud revenue up by £50,000,000 so there's £150,000,000 offsetting that. And if you think about the delta in gross margin between cloud and software And a slight increment that gives you exactly that €50,000,000 kind of uptick. So it was quite mechanical. It is true that we are on a very good trajectory in H1 on the cost side.

Speaker 3

Honestly, we have to also say that on the EBIT side, the comps were quite easy. So Q2 is more difficult. If you think about prior years impacts we had And yes, indeed, we think we have a high degree of confidence on reaching the new kind of updated guidance on EBIT Non IFRS and Operating profit to be precise.

Speaker 1

All right. Thanks, James. And on

Speaker 7

Converge Cloud?

Speaker 3

Converge Cloud is largely now done. So it is actually benefiting our gross margin. And I think from now on, the kind of increase in gross margin will be a little bit more modest. I think the best way to think about it is you start from Q2, the gross margin we have. And while there will be fluctuations Quarter by quarter because of some seasonality, we then will kind of gradually go up to reach that overall cloud gross profit target, which we've In our ambition for 2025, and I want to reiterate that the main thought for us is really to deliver that absolute year amount of cloud Gross profit, we've also highlighted at Sapphire that the private cloud deals have slightly lower margin than public.

Speaker 3

But on the other hand, they give us a huge boost on volume and We're really on a good trajectory, we think, to hit that kind of gross profit target for 2025.

Speaker 7

All right. Thank you.

Speaker 1

Thank you. We'll take the next question please.

Operator

The next question is from the line of Ben Castillo Bernaus with Exane BNP Paribas, go ahead.

Speaker 6

Good afternoon. Yes, thanks very much for taking my question. My question is on the embedding and the selling of the generative AI and the uplift that you mentioned, Christian, the 30% uplift, I think, in the fall. My question here is, you're embedding this in every new RISE project or migration rather than being sold as an sort of opt in Bolt on, is this a choice for customers or is this kind of mandatory part of the package? And I guess following that, customers who have already began their RISE roadmap, would you then go back And add this on retrospectively given the option to I'm just curious how this sort of go to market and the rollout of that happens in the time frame.

Speaker 6

Thanks.

Speaker 2

Yes. I can start and then Scott, please feel free to comment. I mean, first, it's very important also, as I shared in my opening remarks, And this is also quite a bit of a change of our strategy. We are not offering AI, generative AI Sustainability capabilities and also quite differentiating capabilities in our LOB products in on prem. And also when a customer decides to go to a hyperscale and get hosted with still customizations and not aligned data models and doing this Outside of Wise, then this offering is not available.

Speaker 2

And because we cannot apply AI With high quality, with high data quality, in a hugely customized ERP on premise system as AI is anyway only available in the cloud. That's very important. Now on Wise, the customers have choice. We give them our standard offering with Wise and the methodology on standardizing and simplifying business policies with Using the custom code, building this one data layer, which is important, otherwise AI, the quality and the accuracy will fail. And then we actually then say, hey, and you can get a premium offering as part of Wise, where we then going to embed generative AI capabilities.

Speaker 2

And so to really, for example, improve decision making or to improve process automation or to improve transportation Management. So and that actually comes on top. To the existing customers, they of course also can now decide to buy the premium And actually, in consume it out of the box. And this is also something where we actually also expect, of course, also an uptick On the existing Wyze installed base?

Speaker 9

Yes, maybe let me add a little bit more at the macro context and then how that will apply for the customers. So I guess I just want to reiterate what Christian had mentioned in the beginning. Digital transformation and the demand for the Digital change in their core businesses for customers around the world continues unchanged, demand level is very high. And we definitely see across that all parts of the world in the regional performance. Customers are also Seeing with RISE, we've now got a large set of customers that were the early movers that have now successfully transformed and are operating and are proof points in that success journey.

Speaker 9

Part of that digital transformation is to be able to drive value and early return on that investment And that's where the AI becomes an accelerator. So if you're a new customer, the embedding of that into RISE, In to grow with SAP to accelerate value in the use cases that were described is a reason to move forward quickly. And for our large number of customers have already moved across as Christian mentions, they've got the ability to not only have the transformation in the Cloud existing, but they then have a premium uplift and the ease of innovation adoption is one of the beauties of this program. So whilst there is definitely markets there, there's a level of prudence out there in terms of the return on investment and making sure these digital programs Our delivering the outcomes, the use of AI embedded into our processes and technology is one of the factors that is driving the strong demand that we continue to see.

Operator

The next question is from the line of Charles Brennan with Jefferies. Please go ahead.

Speaker 10

Great. Thanks so much for taking my question. I just wanted to ask one actually on the inter Play between the CCB growth and the cloud growth. When I think about assets like Concur and Fieldglass, Even in normal economic conditions, I wouldn't expect them to be doing mid-20s growth. Is it likely that Cloud growth will always remain below the CCB growth.

Speaker 10

And in the context of your updated cloud revenue guidance, can you just give us some insight on how you expect the CCB to evolve in the second half of the year? Thank you.

Speaker 3

Actually, If you look at historic data, for instance, now we have guided basically what's happening on cloud revenues for the year. We've updated that and narrowed the guidance And compare that to the CCP growth a year ago, it's fitting actually quite nicely. Indeed, as we mentioned, The volume was a little bit of a headwind in this context, and it usually is because, as you say, the growth in that business has not been as frothy as overall. But don't forget, The other thing that's driving our cloud revenue is the ramp embedded in the RISE deal. So and that is the bigger thing and there you still have a good traction.

Speaker 3

And We do believe that the 25% current cloud backlog growth is actually a meaningful indicator. So I don't think we've guided second half numbers for current cloud backlog. So I would like to stick to the methodology of what we guide and not convert another KPI guidance beyond what we have, but it should be good enough to get to the

Speaker 1

Thank you. And we'll take the next question, please.

Operator

Yes. And before we take the Next question, once again a short reminder how to raise a request to speak to ask a question. You have to press And now the next question is from the line of Mohammad Moorwala with Goldman Sachs International. Please go ahead.

Speaker 11

Yes, great. Good evening. My question was really focused on The non S-four side, Dominic, you talked about Glass on the transaction revenue side. Was there any softness you've seen on Ariba or Concur? And thinking about the kind of rest of the line of business portfolio, what sort of impact have you seen there?

Speaker 11

Obviously S4 remains pretty strong, but curious to get Any color on sort of success factors and some of the other line of business products? Thank you.

Speaker 3

I mean, we don't That now by line of business and line of business, but what you can do is, of course, decompose and look at SaaS and what's embarked in terms of S4HANA growth in there, and And you get some indication, but don't forget to also adjust for the infrastructure as a service piece of it, which is declining, and that's by intention and by design. So within the transactional part, indeed, Fieldglass was a little bit of an outlier to the downside with really significant negative numbers in growth terms Because of the macro on that front, otherwise, I'd say it was pretty much in line and was maybe a little bit decelerated, but not much.

Speaker 11

Got it. Thank you.

Speaker 1

Thank you, Mo. And we'll take the next question, please.

Operator

Well, the next question comes from the line of Patrick Walravens with JMP Securities LLC. Please go ahead.

Speaker 8

Great. Thank you. Hey, Christian, do you feel that SAP needs more PhD level data scientists to Do advanced research and all the AI topics that are relevant to SAP?

Speaker 2

Oh, my God. I mean, look, first of all, and I don't have a Ph. Dean, data scientist, but in my time in leading S4HANA, actually I learned a lot about our data model and you could almost need The PhD, yes, we are sitting on a ton of data. But seriously spoken, look, we have actually Someone with a PhD leading our AI organization is one of our best engineers. And when I see what we are doing here as a team, I mean, actually, almost every day, we are going through all the use cases, which are not only exist on PowerPoint, but we are looking into the prototypes.

Speaker 2

We are measuring the business value. We are lining on the commercials. We are talking about the go to market. And of course, we have lined up our vision very well. Now, did we have to lift and shift some R and D capacity to AI?

Speaker 2

Absolutely. Are we really well Equipped on the leadership level with great data scientists, absolutely, I have high confidence. And look, even our line of business leaders, You take Mohammed Alam, responsible for ISBN, when you take Jan Gilk, responsible for S1, I mean they are deep on AI. They know their stuff. And so this is really a team effort.

Speaker 2

And again, what we did is we lifted and shifted some capacity because now with generative AI, We see further powerful use cases. So we de prioritize some other things on features and functions while we put more capacity on AI. And one thing is also very important. You learn a lot by the way. This is also very important.

Speaker 2

You learn a lot By all these AI startups and you actually we're exchanging a lot of knowledge and best practices. I mean, the reason why we are doing these investments is to team up Technology wise and go to market wise, but we, of course, also exchanging a lot of thoughts, a lot of insights on how to build best this LLM model. So We are also gaining a lot of knowledge and insights by these investments what we are doing, not to forget.

Operator

Yes,

Speaker 1

All right. Thank you. And I think this will conclude our call for today. Thanks for joining. Operator, you can close the call.

Speaker 1

Thank you.

Speaker 2

Thanks a lot, everyone.

Operator

Goodbye. Thank you. Thank you.

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Earnings Conference Call
SAP Q2 2023
00:00 / 00:00