SAP - SAP SE (SAP) Goldman Sachs 2023 Communacopia & Technology Conference (Transcript)

2023-09-05 17:22:07 ET

SAP SE (SAP)

Goldman Sachs 2023 Communacopia & Technology Conference

September 05, 2023 01:50 PM ET

Company Participants

Scott Russell - Head of Customer Success

Conference Call Participants

Mohammed Moawalla - Goldman Sachs

Presentation

Mohammed Moawalla

Good morning, everyone. Again, we are delighted to have with us SAP at the conference today, Representing the company is Scott Russell, executive board member and Head of Customer Success. Scott, a pleasure to have you.

Scott Russell

Great to be here, Mo. Thank you.

Mohammed Moawalla

Great. Before we kick off, I need to read out some disclaimers. And then we'll get right into it. So please note that except for certain information matters discussed during today's presentation may contain forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP, future financial results are discussed more fully in SAP's most recent filings with the Securities and Exchange Commission.

Question-and-Answer Session

Q - Mohammed Moawalla

So, with that, Scott, maybe you're obviously in a, your role is very kind of customer facing. Give us a sense of the discussions you're having with your customers, with your partners, and the broader kind of ecosystem. How is spending on IT and digitization shaping up, especially in the context of the current macro environment?

Scott Russell

Sure. And I think it's still a good morning. Great to be here. So, my responsibility within SAP’s, Chief Revenue Officer and responsible for all of the customer-facing functions. So, every day, my team and I spend our time serving prospecting and existing new and customers who are going through a journey of transformation and change. There's a few data points that we see.

Number one, IT budgets have not reduced, or at least not as it relates to SAP. Mission critical capability to run your businesses to be able to respond to threats, seize opportunity, transform to be able to take advantage of the latest innovation continues to be strong. The data for us represents continued growth in our rolling four-quarter pipeline. So, we're not immune to the macroeconomic market, but if you look at the data our pipeline continues to grow significant by double digit. Our customers are continuing to invest in having a capability in the cloud to be able to run their businesses more effectively.

Most of the conversations that I have with our clients, whether they be Fortune 500 or Fortune 100 customers, of which 99 out of a hundred are SAP clients, or whether they're net new companies, most of it is how to transform, how to make the benefit, how to leverage generative AI, how to use the capabilities that we clearly are investing in to be able to get time to value.

And so most of the conversation is more that side rather than the macroeconomic or budgetary concerns which are there. But we've shown so far to be resilient in being able to weather that because of the nature of the platform and the capabilities we run mission-critical processes to run these companies. So, the technology and the investment and the focus with us is a little different than maybe other players who may be more affected, by macroeconomic concerns.

Mohammed Moawalla

Yeah, and when I was at the Sapphire Visa conference and speaking to a lot of their kind of customers and partners, it was unusual that amidst the macro uncertainty, normally in the past this was a very discretionary type of spending, and the sheer kind of optimism and what customers are sort of doing. I mean, what do you attribute it to? Is it an SAP thing? Is it more broader IT digitization thing?

Scott Russell

I think it's a combination. We've got some natural advantages in SAP, I'll give you a very simple example. We launched drives with SAP our cloud ERP for at scale two and a half years ago. In those last two and a half years, we've had over three and a half thousand customers. About 50% are net new and half of them are existing. Those customers over half have gone live getting benefit, and the results are not only meeting what their original expectations, but they're exceeding.

Secondly, we've got over 20,000 customers that are still on-prem versions of SAP that have got a plan to move to the cloud. So, we've got a natural install base together with new that gives, a level of confidence about the pipeline, the outlook, and that. So that's SAP specifically. Then you take the more broader market trends and as I said before, I have seen definitely a trend amongst, in certain markets where there is an increase in prudence and spend on really focused areas. So, they're no longer discretionary, they're no longer speculative in that IT spend.

They're focused on things that will give substantial and sustainable results. Well, that tends to be the things that run your company. SAP is the organization that has a portfolio that runs your company. So that gives us a higher proportion, in my view, of available spend that will go towards a company like ours maybe than to our peers.

Having said all of that, which is very positive. The one thing that I'm very clear on is business cases, value cases, justification, time to value has increased dramatically, they will definitely put governance in place to ensure that when we are going to spend that, the results are very predictable. And that puts an onus not only on ourselves but the 30,000 partners that work with SAP around the world to ensure that we deliver the outcome that is promised when they go on a cloud journey with us.

Mohammed Moawalla

Got it. So maybe just you had your Q2 earnings a couple of months back. And it's clear that S/4 momentum remains pretty robust. And as we just discussed, the transactional side of the business perhaps was a bit softer. I think the message on the call was that these are kind of maybe more temporary in nature and you expect. So maybe give us an update on kind of where you are, and particularly in the understanding of the transaction business. where was perhaps the weakness concentrated? And why do you believe these are temporary?

Scott Russell

Yes, there's no doubt. So, if you look at the SAP earnings in Q2 and then you look at our current state of business, the good news is in Q2, what wasn't so visible was that our SaaS and PaaS portfolio, which is the steadfast that the business that we are driving was growing actually at 26%, so it was growing above our reported earnings at the 22%.

There is no doubt we had a couple of one-off effects. In particular, we took the majority of our Russia impact in Q2 last year, together with the sale of Litmos, which equated for nearly 1.5 percentage points in growth rate compared to what we would normally see.

So, we had some one-off effects in Q2, but as you rightly point out, the transactional revenue, which is an important part, but it's more unpredictable because it definitely comes in at the end of the call or end of each month in usage. And the main area was in field glass. We saw a trend where across our customer base, we sort of reduced contingent labor, external workforce spends, which reduced that transactional, but for us, if you take the bigger picture and the trend line and what we're building, the sustained business of our cloud revenue growth, that's why we maintain such confidence in our earnings and what we are expecting not only for 2023.

But in what we updated for 2025, where we updated our guidance, it's the foundational elements of our cloud portfolio continue to perform strongly, together with strong pipeline data gives us the confidence that we can deliver against those expectations.

Mohammed Moawalla

Got it. So maybe if we look forward to kind of the drivers, and I wanted to spend a few minutes on S/4 because this is the momentum is particularly strong. I think you talked about 20,000 customers that are still on-premise. So maybe help us understand sort of the building blocks around that. You've got the maintenance deadline in '27, but there's also the kind of the broader structural benefits of moving to cloud. So just curious to understand the drivers and are we kind of in a sweet spot of S/4 right now?

Scott Russell

You can see it. So, each quarter, we obviously update in our earnings on S/4, and it is a catalyst for so many different things. First and foremost, as companies rely on SAP's ERP platform to run their most critical processes, and it works. Why we've got such a loyal customer base? Why 99 of the top 100 companies on the planet use SAP, why the majority of those customers are focused on S/4 is because they know the platform works.

What they're really questioning is, what's the benefit of moving it to SAP's cloud, what do I get? And there are a few factors that they see. First is reducing complexity. Many companies have invested in their SAP portfolio and they've got a lot of customization. So, we use the term clean core. What that really means is you go back to standard process -- standard data. With our RISE offering, you get that out of the box, which means you can reduce your customization from a technical and a business point of view and make it easier.

Second is we invest all this innovation, we build it into the product. But if you're running in an on-premise world, you're usually running a five-year cycle between your last upgrade in your current one and companies are refusing to invest in something where they are not getting immediate value. So, innovation and adoption and timely use of that if they're partnering with SAP, they're much more focus on it.

Third, we're able to deliver at scale in a more financially predictable and cost-effective way. We are running this for tens of thousands of systems and instances for customers all around the world. And so, when they look at SAP delivering that service, we can deliver it with better cyber security, better redundancy, we obviously had the cloud harmonization program that we invested in to give more resilience and so customers look at that and it gives them predictability going forward.

And then last but not least, if you take things like Gen AI, sustainability, and the innovation that is coming in, it becomes available out of the box. So, all of this leads to a demand environment that's strong. We also have the benefit, as you rightly point out, that we've got an existing customer base that want to continue to use SAP and most of the conversation, as I mentioned before, is about how to drive that change.

So, companies like Versuni which are a domestic appliance company, they transformed them went straight to the cloud, straight to Verizon in all the portfolio of SAP in one go, whereas others like BMW or Lockheed Martin and many others will go on an incremental journey over a couple of years.

I want to highlight one other thing, if I can, Moe, and that is, our strategy is clearly to be able to not only win cloud ERP but use it as a platform to drive a multi-cloud approach. If you think of it from a company point of view, once they've moved to our cloud ERP, they are four times more likely to buy four or more solutions. We've proven that through the move to RISE, which means from an SAP point of view, there is incrementality in terms of not only revenue, but the average margin that we have got because of our SaaS portfolio obviously runs at a higher margin than what our private cloud does.

And then the other is that we can then deliver the innovation, Generative AI cuts across all of those applications. The data of SAP becoming much more usable through the business technology platform, so it gives us more use cases, more scenarios than what an on-premise environment. So, it's not just the move to the cloud, where we see the benefit, but once they're in the cloud, SAP sees a much a significant expansion of our portfolio of SaaS applications, and that helps us to compete way more effectively against best-of-breed players than maybe what we did in the past.

Mohammed Moawalla

Yes, it's interesting. You talked about this kind of flywheel effect because now in the cloud, best-of-breed was supposed to sort of function better, but people sort of forget that there's still the kind of integration with a lot of other legacy. And so, I'm curious to understand because your kind of cloud applications product is a lot more broader than some of the other kind of your competitors out there. Which of the kind of maybe talk to your customer examples kind of as they migrate as you drive that kind of value uplift. And I remember a stat from many years ago that something along the lines of 70% of the customer base barely used like the full extent of SAP's product portfolio. So, help us kind of bridge that gap and maybe an example of kind of how.

Scott Russell

Yes. I'll give you a really simple example, and I'll just pick on Versuni because I mentioned it before. And it's a great company that provides air fryers and products all around the world. They -- when you are going in a best-of-breed environment, you are integrating your data to somebody else's data and to somebody else's data and you're trying to match that. Master data is a nightmare. It is a nightmare to manage. Integration as it innovates is a nightmare.

Not only have we got BTP and if I make it simple, business technology platform underpins every single SAP application, which means your data matching of your -- of all of your master data is seamless and out of the box when you buy that first application, which means when you then so for Versuni, they had a clear change on their manufacturing that they needed and their financial process is running in S/4 or in the cloud. But then they needed to connect that to their human resources information. So, all of their HR data, then they need to connect to their supply chain data with integrated business planning all of that on the same data architecture running on BTP.

They didn't have to worry about integration. They didn't have to worry about the data flows. They didn't have to worry about master data integrity. When you go to enterprise organizations and you try to manage this, there is departments of IT staff that are focused on managing the operational nature of it. When they move to SAP's cloud, one of the things that I found most interesting in the last three years Mo is so much of the value proposition is those IT teams are no longer doing operationally tedious work.

We bring that out of the box let alone with, and then they're doing the interesting innovative areas of using the data for more effective ways, which is why Datasphere and other products become more -- so the way that they can gain value out of their SAP investment in the cloud is way more effective than what they did in an on-premise because they're managing and operating an environment rather than gaining value out of it and we can give countless examples of where we've seen that.

Most importantly, when we launched RISE, it took us a while to prove to the market that the promise was written over half now live using operational. So, we've now got proof points such as Versuni which went live with all of our applications in less than 15 months, we're able to not only get success, but we're able to do so in a time-to-value basis.

Mohammed Moawalla

Got it. So when we think about kind of line of business applications and the kind of the runway in the installed base, can you kind of help us paint a picture of what kind of the adoption has been to date, but where the opportunity lies and you look at the different HR, procurement, all the different kind of lead supply chain, where are you kind of most excited about once kind of customers move to S/4.

Scott Russell

It depends a little bit on the dimension that you look at it with you take Gen AI versus what you see across the landscape. But One of the things that we've made a commitment to, which I know that has been of interest to this community is about sales and marketing as a percentage of revenue and the expense.

Right now, three years ago, before we embarked on this journey, we had separate sales teams, separate engagement teams, separate focused adoption teams only on a per-product basis. What we've done in the last three years is technically everything being orchestrated together. You can still sell it independently, but the data and the technical architecture running on that single platform on BTP.

Secondly, from a go-to-market, from my organization from revenue management, we are then able to do that on an end-to-end basis for the customer. So, I do have specialization, HR experts, procurement experts, supply chain experts, but my incremental sales and incremental revenue has a lower customer acquisition cost than what we did historically because we're able to then seamlessly drive that because technically, it's more, but also in a coverage model, they don't have independent organizations.

Then you add in using of tools and artificial intelligence and using digital means to do the tens of thousands of renewals and transactions every quarter, I'm able to do that in a complete digital way that either minimizes or reduces to zero human interaction for a lot of those transactions.

All of that means is from a customer point of view, they have a financially better proposition from SAP to do multiple cloud. Technically, it's much simpler to me and that means where -- whether their pain point is HR, supply chain procurement, travel and expense, contingent labor, commerce or just pure data management, they are able to do so in a more cost-effective in a simplified way, and they get the innovation that we're building immediately.

So, I'm not particularly -- there's not one area that I'm excited about from that portfolio because every company needs to manage their human resources, they need to manage their financial resources, they need to manage their supplier and their network and their relationships and they need to do so in an industry-relevant way, and we are the best at it. And I say that without being arrogant, it's just I know that we are able to do that better than anybody else. Our challenge has been helping them do it in the cloud in a cost-effective and timely way. And that's where most of the conversation that we have rather than the end outcome, we know we can deliver.

Mohammed Moawalla

Got it. So, I wanted to move on to AI, and I know there are multiple threads here we can talk about. But if we think of it as a starting point, there's a treasure trove of data in kind of any corporate SAP system. How do you think about, first of all, in terms of monetizing that? And then what are the kind of applications or use cases that you see from a kind of revenue monetization standpoint? And then the third part is, how can you use sort of AI? You talked about some of the automation in sales organization? How can you use that to kind of improve your efficiency? It's a multipronged question, sorry, but I wanted to get your perspective on.

Scott Russell

I'll do my best. First of all, AI is not new to SAP. You might be interested to know, we have over 20,000 customers using AI capability in our business applications and have done for many years. So now with the expansion of generative AI, clearly, that gives an opportunity. And if I was to break out your question in multiple parts.

First of all, what do you need for generative AI to work? Well, you need two things. you need data and you need a foundational model. There is nothing more powerful inside an enterprise than SAP data. There is nothing more powerful. I'm not talking large language outside of SAP, which are available data, I'm talking about the SAP data that runs their business in a secure way that they need to trust that information.

And secondly, you need a foundational model to be able to then intelligently analyze that and use Gen AI algorithms to be able to then create outcomes. No one is better placed than SAP to be able to do that because we understand the data, how it's designed, how it's built, what are the needs for it, what is the timeliness of it, the -- all of the different aspects of that data better than anybody. And so, we're building that out of the box in business applications.

We call it AI for business, which is responsible, reliable, and relevant. The responsibility being probably the most important aspect because the one thing about Gen AI, if you're doing your financial application, you don't want to ask it a question a different way and get a different answer. You need to know that no matter how you've asked you've got a level of predictability and assurance. And so, we're able to deliver against that. But we are incredibly excited about what that brings together with through partnerships like we announced with Microsoft, Google, with Databricks, with Adafalfa [indiscernible].

We've got a series of partnerships where we then use SAP data and non-SAP data through that collaboration to give even further value. You asked how we monetize it. There are two primary mechanisms of which SAP sees clear revenue opportunity. The first is through premium commercial bundling. For example, with RISE with SAP, having -- and we announced even net earnings about a 30% premium. So, packaging in a very simple, easy way as we build AI capability on top of the RISE platform, you can automatically use that in a simplified way. And so, we have those -- we have our road map and what we build in there.

And then secondly, is when we've got stand-alone use cases, which will be separate SKUs, which will be monetized in their own right. For example, in the supply chain area, doing predictable planning of inventory and being able to automate and update your inventory management without any human interaction using the data of SAP to be able to then do and forecast and replenish against that or whether it's on learning, hundreds of millions of people log into SAP success factors to do their learning and their planning for their skills, being able to give tailored intelligent road maps of the learning journey for an individual that can be done in seconds through the combination of SAP offered together with Microsoft and Copilot to be able to help learning journeys for employees.

So, we've got a series of use cases. We've got over 130 that we've been building out that we've come down in the road map, and that gives us both monetization opportunities for SAP, relevance within the business data that we have, but also through the extended partnerships that we've already announced and we'll continue to exploit how we help customers use their SAP data and non-SAP data to be done in many -- in a secure way, but in a way that drives business value.

The point that I would make to everybody is Gen AI is only as valuable as the benefits that it's delivering for the business. And so, our company has spent 52 years focusing on business value, optimizing, managing, deploying, running business processes. We understand what a retailer has done, is currently doing, and is going to do better than anyone, consumer product manufacturers, financial institutions, service companies, we serve all of those companies in those industries because we understand how business is done because it's done on SAP applications.

So, when we think about Gen AI, we're trying to enhance that, that business uses that capability that makes our solutions even more valuable. And then we've got a variety of ways to be able to monetize that, but also for them to get benefit out of it.

Mohammed Moawalla

Got it. If we've got any questions from the audience, we have a few mics. So please raise your hand. So maybe while we kind of wait for the question. Just an update on the competitive landscape. Obviously, Salesforce, Workday, I mean, they're all -- we see everyone so talking about AI, but when you come back to the kind of the basics of kind of the applications. Can you talk us about your kind of win rates, any changes you've sort of seen from Oracle, Workday, Salesforce?

Scott Russell

We've got a few examples. I -- just on the AI side, I'm intrigued about how it's being represented by competitors in the market. And I think there's been a flurry of tech companies that have rushed to announce products. But if you look underneath the cover and you look at the value and what's being delivered and how it's being monetized, I think you've got to look at it and see, are they able to deliver on the promise, given the data and the limited set of data that they have and their reliance on data that they don't have managed on own.

So, for SAP, we have the entitlement, tens of thousands of customers have already given us the authorization to be able to build those data and those Gen AI models on that data already. So, we don't have any of those limitations whereas other companies with their limited data sets will have a lot of difficulty in my view.

Notwithstanding that, from a competitive landscape with our multi-cloud strategy, it's no doubt that when we are winning in cloud ERP, our win rates are increasing significantly higher. For example, in North America, here in North America, we have a unit that is focused only on winning non-SAP environments. So-net new for us or our competitors' landscape growing at triple-digit have done for a number of over the last couple of years.

Why? Because they're able to sell the promise of that end-to-end proposition of RISE plus those cloud in a simplified environment. And let's face it, SAP can offer something that practically nobody else can. And the one organization who might argue that they can is a locked-in environment. You are stuck there. You don't -- you can't work with multiple Hyperscalers. You can't work with multiple partners. We have an open platform. The others are very focused only on their platform, on their applications.

So, we've seen significant growth as a result of that in our competitive win rates. I think the main thing that I focus on is competing on SAP terms. If we try to compete with our competitors in HR or in procurement or in travel and expense or in ERP, and we go only against them in the -- Well, we're making it easy for the competitors to compete on terms that are commensurate because they don't have our portfolio.

So what you've seen from SAP since we launched RISE we try to differentiate not only on being best in our particular best-of-breed category, and we stand strong in top right-hand quadrant, no matter which analysts you speak to, we're always in that top right-hand corner, but then the opportunity through our portfolio of driving a more cost-effective, more incremental value to our customers that the others can't compete on, that's proven to be very successful.

Last but not least, and I've said this before, is our growth in usage and adoption, and you've sort of mentioned that and I didn't mention -- I didn't -- we continually see a rapid expansion of our usage and adoption, which leads to a higher net retention rate, a higher usage rate. And for SAP, that means high stickiness of those customers continuing to use at a minimum and then potentially expand the portfolio. And that's been a big pivot. Selling products is not enough. Selling a promise is not enough. Delivering on that promise and then making it easy to expand and use has been a key change in the go-to-market that I've been leading in the last three years, and that's led to the cloud growth that you've seen, the backlog growth that you've seen that we continue to have confidence in.

Remembering that with the contracts that we've signed, most of these big contracts are three, five or even longer in basis. So, our backlog without selling anything else, just our backlog of delivering against that customer promise already gives us a significant growth outlook let alone the 20,000, let alone the net new, let alone winning against the competition. That's why SAP is confident. It doesn't mean that we automatically win. We still have to fight. We still have to compete.

We still have to show that, but we clearly have natural benefits through our customer base. The technology proving an incremental benefit that maybe we couldn't argue before, commercially more viable propositions. And now with Gen AI, the ability to be able to get time to accelerate on the latest innovation that our industry continues to deliver.

Mohammed Moawalla

Great checking here if there were any more. So, I guess the other topic to close with was sustainability, which I know for the company is a big focus. So beyond just SAP being kind of more sustainable as an organization, I think you've developed a number of product offerings around this area, which I guess are resonating more and more. Maybe talk us through what are -- where -- which products are kind of resonating? And do you see a new breed of competitors here? Or is it some of your traditional competitors trying to do the same?

Scott Russell

To answer the second one, the competition, if they're doing it, I certainly don't see it and it's not active in the market compared to what we have. So, a quick summary of our strategy around the sustainability of what we offer to the market. It's under three categories: Record, Report, Act. Record is actually the most important because it's foundational. You think about your SAP, what SAP does for businesses, hundreds of thousands of companies around the world, we are able to accurately record the financial information, the working capital, your P&L, your inventory, any material and financial flow we can do so with a level of accuracy and timeliness. But the carbon data, the sustainability data is built on averages. It is certainly not based on specifics. And it has -- it doesn't have the same level of granularity.

So, we've announced the green ledger, which is effectively a carbon ledger that will be commensurate with your financial and your material ledger that you get. But recording is not enough. You then need to be able to act upon it. So, solutions for example, responsible design and production, carbon footprint management, discrete solutions that uses that data and helps them manufacturer be able to then get reusability. So, for example, how much reusable materials are versus raw materials in the factors of production, we've got an application that sits on top of our S/4 that allows a manufacturer to be able to do so in a more effective way.

So, they can record it, they can manage it and then ultimately report. I don't know what the financial markets will do. All I know is the CFOs that I speak to every day are constantly asking for SAP's ability to be able to give them nonfinancial reporting, be regulators, be financial institutions. Clearly, consumers are demanding greater level of transparency in terms of nonfinancial data to the same extent that they have financial data.

And as far as I can see, SAP is the only organization that is able to deliver that in this space, and I would argue it's a reason why many companies, when they're evaluating their core systems, they will come over because of the sustainable capability -- sustainability capabilities that we bring.

Mohammed Moawalla

Got it. So maybe in closing, in your view on -- as you think of sort of SAP, what do you think is the most kind of underappreciated aspect of your kind of growth story?

Scott Russell

I think there's two parts of our growth story that feel that we haven't quite got well understood. The first is the business technology platform. It's growing at 40%. It's a $1.5 billion business and it is a business that is now the foundation. So, every time we sell SuccessFactors, Concur, Ariba, S/4HANA, Commerce our Commerce Cloud, all of our business applications have the BTP embedded out of the box.

Why is that important? Because it's an immediate monetization for a business technology platform, but everything like Gen AI requires the data. Every time you want to integrate to a different business system uses BTP. Every time you want to expand and build extensions on your SAP application, on BTP. So, the platform opportunity for SAP, not just our business applications is significant as a growth driver in its own right. And we are extremely confident that we're able to then deliver incremental value.

And then the second is a lot of questions that I get are about our installed base customers and how many of those customers are moving across and what happens on the maintenance revenue. Remember that over half of our cloud ERP is net new customers to SAP. Companies that don't have a footprint, don't have a history, and they are coming to SAP for the first time, and they're able to immediately get the benefits of that innovation.

So, we have more new companies coming in, clearly from competition. And we've got an installed base of customers, which we don't lose. They're not going anywhere. The only decision they're making is do we go straight to the cloud? How do we go to SAP's cloud with SAP and it's a matter of when, not if? So, you combine those two factors, I think it gives us strong confidence that we have around our outlook that is not just based on what the macroeconomic conditions are, but our confidence in terms of the existing market that we know and the new market that is coming to us that gives us a strong future ahead.

Mohammed Moawalla

Great. Scott, thank you, great -- for the great insights. And thanks, everyone, for joining.

Scott Russell

Thank you, Mo, appreciate it.

Mohammed Moawalla

Thank you.

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SAP SE (SAP) Goldman Sachs 2023 Communacopia & Technology Conference (Transcript)