SAP SE
Q4 2012 Earnings Call Transcript

Published: 24 Jan 2013

[Stefan Gruber:]

So hello, everyone, and welcome to SAP's Fourth Quarter Results Conference Call today. My name is Stefan Gruber, I'm Head of Investor Relations at SAP. I would like to give you an overview on the agenda for our event today. First, our CFO, Werner Brandt, will walk you through our 2012 results and our outlook for 2013, then Bill McDermott and Jim Hagemann Snabe, co-CEOs of SAP, will talk about the regional growth in 2012 as well as our growth and innovation strategy and how the strategy will drive further our profitable growth. Then, Vishal Sikka, Executive Board Member in charge of technology and innovation, will speak briefly about our flagship innovation, SAP Business Suite powered by SAP HANA. And Lars Dalgaard, Executive Board Member and CEO of SuccessFactors, will join us for the Q&A session. I would like to point out that some of the statements we'll be making today will be based on a new line item we began reporting this quarter, software revenue together with cloud subscription. We believe this metric gives you a comprehensive view of SAP's overall business performance. And as usual, I have a couple of technical comments. This conference is being webcast on our investor relations website, www.sap.com/investor. After the prepared remarks, we'll be taking your questions. For those of you on the phone, the operator will give you instructions on how to submit the questions. And for those participating online, you can email your questions to [e-mail]. The slides for today's presentations are available for download on our website. And finally, the Safe Harbor statement. 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, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as 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 various 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, including SAP's annual report on Form 20-F for 2011 filed with the SEC on March 23, 2012. Participants of this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates. And with that, it is my pleasure to hand over to our CFO, Werner Brandt.

[Werner Brandt:]

Thank you, Stefan. I will start with the income statement, talk briefly about balance sheet, cash flow analysis and then focus on outlook and additional information. If you look to our performance versus the guidance, you'll see that we outperformed our guidance. On the top line, software and software-related service revenue, non-IFRS at constant currency, plus 13%. You see the guidance here. And I think this achievement is also driven by very strong organic growth with more than 10%. On the operating profit side, non-IFRS at constant currency, we are below our guidance by EUR 30 million, achieving EUR 5.02 billion for the year 2012. You see also the tax rate. Here, are -- we are in-line, and I do not want to refer to it in more detail. If you look to the top line, on the non-IFRS SSRS side. We exceeded, as we said, our guidance and we have the 12th consecutive quarter of double-digit growth. Software grew by 10% at constant currency; as reported, 13%, to EUR 4.7 billion. And here I mentioned HANA and mobile

[William R. McDermott:]

Well, Werner, thank you very much. I know many people were curious as to what SAP would do after its best year ever in 2011. Well, we came roaring back in 2012 and essentially bested our best. We told you last January we would grow 10% to 12% SSRS. We actually did 13% at constant currency. And it was, in fact, the best year in the 40-year history of SAP, and we're pretty proud of that. Some color. What are the standout numbers? First, we reached EUR 5 billion in software and cloud subscription revenue, which was a 17% increase in constant currency. Amazing. We reached EUR 13.2 billion in SSRS revenue and EUR 16.3 billion in total revenue, which was 14% at actual rates, 10% in constant currency. All of our regions delivered in significant double-digit form, and Q4 was the best single quarter in the history of our company. And Werner, Jim and I are proud to inform you that it was the 12th consecutive quarter of double-digit growth since the new co-CEOs and the executive board came together in 2010. What about Q4? Well, over EUR 2 billion in software and cloud subscription revenue, which was a 16% increase in constant currency; over EUR 5 billion in total revenue, and that is the first time we've ever eclipsed EUR 5 billion in total revenue in a single quarter. Pretty exciting. We're clearly outperforming the marketplace. Our software and software-related service growth of 13% is 4x as fast as the market growth based upon Gartner's research estimates for the overall software market. Our software and cloud subscription revenue grew by 21%. Let me be clear

[Jim Hagemann Snabe:]

Thank you, Bill. Well, as Bill mentioned, our strategy is clearly working and gaining significant momentum. In many ways, 2012, besides being a great financial performance, was a tipping point in the industry. And for SAP, a new era of enterprise computing has started through our innovations for the last 3 years. And the core of our success is really our innovation. And you may recall that, in 2010, in February, we declared this innovation-oriented strategy. We said we will add 3 new areas of technology that would radically change the way business is done

[Stefan Gruber:]

Yes, thank you, Jim. As you know, we had an important announcement 2 weeks ago when many investors and financial analysts were unable to listen to the press conference, so it's my pleasure to hand over to Vishal Sikka, our Executive Board Member in charge of technology and innovation, who will speak briefly about our flagship innovation, SAP HANA. Vishal, good morning to you.

[Vishal Sikka:]

Good morning, Stefan, and thank you. Thank you, Jim. As you've just heard, 2012 was a breakthrough year for SAP on many different fronts, especially in technology and innovation which is driving SAP's overall growth. In particular, with HANA, our flagship in-memory technology, we revolutionized the data warehouse and analytics markets as well as in the application development market. HANA gives us an opportunity to reinvent the entire enterprise software platform. As Jim just mentioned, in 2012, HANA experienced strong momentum, with 142% year-over-year growth. The success with HANA is because of many factors, and a key point is that we have really embraced design thinking principles and have partnered closely with more than 1,000 customers so far to build solutions that address typical customer needs. HANA is a modern platform for delivering new applications, analytics and entirely new user experiences. And at the heart of this innovation is the ability to conduct business within the smallest windows of opportunity in real-time and analyze the business, predict outcomes, make decisions and drive new business transactions that the reality of today's markets demand. HANA is changing the way business gets done today. With HANA, customers can not only rethink their existing business processes and applications without disruption but, more importantly, can deliver an entirely new class of applications and business processes that were not possible before. Co-innovation and design thinking exercises together with customers have been a key contributor to our success so far with HANA. Bill already talked about this. It is clear that design thinking is key to our collaboration with customers and a significant differentiator that we have in delivering value to our customers. And we have sparked that high print [ph] in the existing SAP development community and new development communities in an unprecedented way. We have opened new ecosystems for the developers from more than 160 start-ups and others who are building on HANA, cloud and mobile. We are focusing on the total developer experience, from how they can find, try and experience our software, through the software development experience itself, which we believe can be retaught with the power of HANA. And on January 10, SAP achieved a significant milestone, the culmination of the HANA and the SAP Business Suite teams working together over the last year, with the delivery of SAP Business Suite now powered by HANA. Customers are now using HANA as their transactional database under their Business Suite instances. Once again, SAP is changing the game in the enterprise software industry, just like we did 20 years ago with R/3. SAP is also committed to customer choice and an open ecosystem. This means we will deliver all the Business Suite innovations and optimizations across all the reported databases, firmly delivering on customer choice and an open ecosystem. So what does all of this mean for SAP in 2013? It means that HANA will continue to be a strong driver of growth, with expected revenues of EUR 650 million to EUR 700 million and a triple-digit number of Suite on HANA customers by the end of the year. To sum it up, with this delivery of Suite on HANA and the work that we have done on consumer applications and on the HANA platform, we have set the stage for next-generation enterprise computing, one with a new modern platform like HANA as a foundation and one that will enable us to scale new heights in 2013 with some amazing initiatives that we have coming. And with that, I will hand it back to Stefan.

[Stefan Gruber:]

Yes, thank you, Vishal, for the overview on one of the most exciting innovations we have at SAP. I would now like to start the Q&A session. We are happy to take your questions. [Operator Instructions] And I think we have to wait a short moment in order to line up all the questions.

[Philip Winslow:]

It's Phil Winslow from Credit Suisse. This question's for Bill. Bill, you've had a lot of sales headcount in 2012 and you talk about sort of leveraging those going forward. Wondering if you could kind of step us through in how you're going to focus the sales force across HANA, mobile, the core and the cloud? And then also similarly, for Jim, you've seen a similar kind of increase in R&D expenses in '12. How do you sort of imagine leveraging that in '13?

[William R. McDermott:]

Well, Phil, it's Bill, I'll go first. The first thing we want to do is create an organization where we know more, care more and do more for customers than any other company in our space. So we have our sales and services business aligned around the customer. That was one shift that we made to get service and sales working together so we can rapidly deploy prepackaged software and services with a rapid fuse to value. If you think about Ariba and you think about SuccessFactors, you think about database technology in HANA, think about those categories as having a specialist sales force that works in collaboration with the SAP account executive. So we have the best of both worlds. We have the account executive who owns this very strong SAP relationship plan, but it's a specialized world and you can't go against best-of-breed competitors without the best-of-breed specialist. So we combine our AE, who's an expert in our suite and analytics, with our specialist who knows the cloud, database technology, in-memory HANA and, of course, mobile. And that's the way we've structured it in a highly consistent way across all regions of the world. And incidentally, Phil, some of that headcount also went after some real growth markets such as Turkey, the Middle East, North Africa and China, just to name a few, where we know the size of the prize is big. And we don't want to undersell the opportunity. That's the key to get the growth now so we can get the scale later.

[Jim Hagemann Snabe:]

Phil, let me take the question on R&D effectiveness. We have, for the third year in a row, improved the R&D ratio to revenue. And I'm proud of that in particular in '12 because it included 2 acquisitions where the strategy was not to take out costs but to accelerate innovation. So if you look at that -- and don't forget, these were cloud-based revenue companies so they don't add the full value, so to say, on the top line. We have a very consistent program in place since 2010 and we have a significant increase in R&D. And because we are not planning big acquisitions in the near future, we see part of the margin expansion also happening in R&D in 2013.

[Philip Winslow:]

Yes, okay. And then just one quick one follow-up, for Werner. Just one quick follow-up for Werner. On the Ariba break out, the cost of revenue was a little higher than we've seen previously for Ariba standalone. Was there anything sort of onetime? Or it's the change in the allocation of cogs versus what they had in the past?

[Werner Brandt:]

These are integration-related expenses.

[Operator:]

Next question is from Adam Wood from Morgan Stanley.

[Adam Wood:]

Just 2, if I could. First of all, on the guidance on the license fees and the cloud subscription. So obviously, you've given -- you have very strong growth guidance around HANA and also in the cloud, and of course, that implies slightly slower growth in some of the other business areas. I wonder if you could just help us out in understanding what you're seeing on the core business units around ERP and BI. And then maybe on some of the areas that have been growing very quickly in the near past, the database business and the mobile business, are there any headwinds or kind of unusual items there that we'd expect to see that slow? Or are you confident that the kind of growth rates we've seen can continue on those? And then just secondly, on the U.S. side of things, we've seen another change on the U.S. again. Can you just reassure us on what's happening in that market and how quickly you expect the execution to be back to where it was in the past?

[William R. McDermott:]

Adam, thank you very much for the question. This is Bill. First of all, I want your help because, when I saw the headlines reading the U.S. is slow at 3% growth, I knew we had a communication problem because when you combine the on premise and the cloud, it grew at 24%. So the swing can be quite large, and we need you all to adjust your thinking around -- the license growth is now going to be a combination of the on premise and the cloud. We give choice and the customer gets to consume our software anyway they want. That's a competitive advantage. Incidentally, our nearest competitor also has recognized the need to record revenues this way, so please keep an eye on that. As it relates to our innovation products, HANA continues to be a breakout growth story. We guided EUR 650 million to EUR 700 million, but let's face it, the Suite on HANA is one of the greatest inventions of all time. Let's see. As it relates to the cloud, we have been triple-digit growth in the cloud. We expect that to continue. Werner gave very strong guidance, EUR 750 million in the cloud, EUR 1 billion when you add up the services with the software. Beautiful. And mobile continues to grow well above 50% on a year-over-year basis. So we feel great about the innovation but we also feel great about the core. Make no mistake, the core applications and analytics of the company have to grow very well for us to have given you an 11% to 13% SSRS guidance. Incidentally, is there any other software company this transparent that breaks out a cloud as a line of business, software plus cloud and SSRS? So you have it all, and everything is growing.

[Werner Brandt:]

And if you will look to the midpoint of our SSRS guidance, the underlying software would be around 10%.

[William R. McDermott:]

In the quarter.

[Werner Brandt:]

Yes.

[Operator:]

Next question is from Rick Sherlund from Nomura. [Audio Gap]

[Richard G. Sherlund:]

calibrate as we try to look at organic growth. What is the -- if you were to put SuccessFactors and Ariba numbers in last year, what kind of revenue growth or billings growth are we seeing? And then if we could just drill down with Lars, maybe get his perspective on what he's seeing in the field, how this is working out for him and how much of a benefit he is seeing from being part of SAP.

[William R. McDermott:]

Maybe I could just answer one question, Rick, which is the organic growth is 98%. Don't forget, SuccessFactors came to us in February. We didn't even get Ariba until October. So it's 98%. And I think Lars is on the line who, I'm sure, is very excited to tell you how unbelievable the cloud story is. Lars?

[Lars Dalgaard:]

Absolutely, Bill. So Rick, what we're seeing is a shocking uptake, extremely fast. I have to say I had not expected it to be this fast, and it's fast everywhere. And what you're really realizing is the global access of SAP. SAP is in 160 countries, no other cloud company is. And we are now, therefore, with our cloud products and Ariba and SuccessFactors and the SAP cloud products in all those markets instantly in one brand. And you'll see it in our acceleration of growth. We've accelerated our growth, and not only have we accelerated it, the way we've accelerated, the way you want to do it, all yield sizes are up and they're up significantly. In most categories, particularly the big ones, you're quadrupling. So you're running into a quadrupling of your multimillion-dollar deals, and that's just not done and heard of in cloud. It took around, I'd say, 6 to 8 months to get there. Q3 and Q4 have just been shocking in the growth, and now we're feeling it. We are right now at FKOM, this is our global launch, with all our sales forces in all the regions, and the energy is just astounding and shocking the way everybody is talking to each other about how great and legendary 2013 is going to be. But most people say they've never seen market conditions, products opportunity and market position like this ever in their life before. And the partnership we're doing with people like Rob Enslin, who has become a friend, who is a -- truly a real rock star in the sales world globally, the way we're working together with his teams in every region and all of the people working to him [ph] and both of us accelerating our sales forces so we have complete access to all the opportunities that are there is increasing our total available market. But what's more exciting to me personally, and I know you like to drill in, Rick, is that we're doing deals now that couldn't have been done before. When Bill McDermott invited me to the Executive Advisory Board meeting of SAP's largest customers in Washington, DC, I met several customers that have been SAP customers for 20, 30 years. They were not ready to buy cloud, and they told me cloud is not for them. Well, in Q4, 6, 7 months later, they all bought multimillion-dollar deals in all regions, APJ, DACH, EMEA and North America and Latin America. That's just shocking to me, but that's the power of SAP and the real cloud products coming together and the real people in the field getting together. So that's the way we're increasing the total available market, which is unique to me and, quite frankly, unbelievable so quickly. When you look at a deal like the Pepsi deal, this is now the world's biggest cloud core HRS market deal with 100,000 seats, the biggest at 300,000 in total, they came up to me after I got off the stage at SAPPHIRE -- so you're getting essence of the true SAP power working, off the stage at SAPPHIRE, Mick Ere [ph] walked up and said, "You sound like you're ready. With the type of engineering resource, the experience of growing global the way only SAP goes global and being double as big as #2 in terms of apps, you now have the knowledge and the local access and all the specifics that are so complicated to achieve and takes a decade to achieve in terms of content for local HR knowledge in each of these regions. I'm going to get Oswald and Ben Lyka [ph]," who runs these areas and said, "Can we get all that content, please?" And they gave us the 200 people and then they said, "You can have them as long as you want." That's the type of a partnership that makes us unstoppable and that's what's going on everywhere we are. We are now also powering the whole suite on HANA, launching that this year. And in totality, what we've experienced is that, when we go to these customers first the way we do when they see cloud, they not only buy cloud at a great price, they also accelerate their on prem buys. That's what I have to say.

[Werner Brandt:]

And maybe -- Werner here, Rick. The last comment from my side. You asked for the contribution of the acquisitions to our SSRS growth rates. If you look to it at constant currency, the contribution was 2.7 percentage points. And on the margin side, I mentioned before, it was 100 basis points.

[Operator:]

Next question is Michael Briest from UBS.

[Michael Briest:]

If I could follow up on Rick's question. In terms of Employee Central, can you give us a sense of how many customers you have out there now? And I appreciate there was nearly 100% growth in the subscription billings at SuccessFactors in Q4. I don't think we have a like-for-like number from Q4 '11. Could you actually give us the hard figure for that? And then finally, on HANA, you're now over 100 -- over 1,000 customers. How many of those are actually live?

[William R. McDermott:]

Lars, do you want to comment on the cloud? And Vishal, do you want to comment on HANA? Do you want me to?

[Lars Dalgaard:]

Yes, sir. So the story is, in SuccessFactors, our real -- our growth in yield, which is what matters, it's what adds to our recurring, it's 100% in each quarter. It's basically -- we've -- as you heard Jim say, we're in a situation where we've doubled our win rate. When we show up in this constellation with the powerful industry expertise of SAP and the knowledge of these people in the field, we just win. And we win pretty much everywhere we show up. In terms of Employee Central, what we're able to do there, which is I've not heard about a acquisition of a company being so powerful in terms of positive synergies, not negative synergies, what happened with Employee Central is that we've grown it 4x. And the reason we've grown it 4x is because we were able to take some of the amazing engineering power in Germany and in Palo Alto and put that uniquely on SuccessFactors the day we got acquired, and that has accelerated not only our capabilities but our content and, thereby massively, our competitiveness. And so there is no better but also better-looking and fresher experience in core HRS system of record than the total ERP in the cloud that we can now deliver in 2013. We have MyFinance, which is built from the people who built R/3. They're working for me on this cloud product. It's a beautiful financial product. We have the core HRS. And we have suppliers from the company that absolutely have had the most success in that market, Ariba. And then we have the sales and the customer and all of the support piece and marketing on the customer side of the business. This is a excellent and really relevant offering to all of our customers. And I'll hand it over to Vishal.

[Vishal Sikka:]

Thanks, Lars. We have more than 500 implemented HANA projects already. We are -- in terms of the number of live customers, we are approaching 200. And in addition to that, we have close to 300 live implementations of HANA One, which is the HANA installation running on the cloud, on Amazon's cloud or other clouds. And we have more than 17,000 hours of development systems of HANA that's already been turned on. So we are seeing tremendous adoption of HANA not only in the sales but also in the go lives. And across-the-board, we see that the time it takes for a HANA instance to go live is rapidly coming down. We have had customers that have gone live, for example, with BW on HANA, or with CO-PA Accelerator on HANA or even standalone HANA instances, within days. We have major customers who have gone live with BW on HANA within 9 days and so on. So we are seeing tremendous adoption not only in the sales but also in the go live of HANA.

[Operator:]

Next question is from Laura Lederman from William Blair.

[Laura Lederman:]

If you look at HANA and ECC all working together, can you kind of talk a little bit about the adoption curve? In other words, BW in HANA happened very quickly because it's so logical and, I guess, a little less of a change than running an OLTP system on HANA. So can you talk a little bit about how we would expect that curve to look in terms of adoption?

[Stefan Gruber:]

Vishal, do you want to comment on that?

[Vishal Sikka:]

Yes, I can say something about the billing on demand [ph]. Our sense is that we will have triple-digit customers on Suite on HANA before the end of this year. As Jim talked about and I talked about earlier, we expect that -- Suite on HANA is a nondisruptive evolution for customers so that it is not only an opportunity for our customers to accelerate and simplify their Business Suite deployment, but also it is an opportunity to simplify the underlying landscape by bringing together royalty pieces in terms of OLAP systems in one -- with one underlying foundation. In terms of the adoption, these are complex systems, complex deployments, complex choices that customers have to make, so we are assuming that we will get to a triple-digit number of customers this year, and then we will take it from there as we go forward.

[Laura Lederman:]

Okay. And Bill, a question for you. When you look at this Q4, obviously if you add in the cloud revenues, the quarter looks quite good. Can you talk a little bit about was there any impact at all from fiscal cliff? Was this Q4 different than any Q4? Any more slippage to the normal? Just a general feel versus expectations, when you want to -- what was different?

[William R. McDermott:]

Yes, Laura, one of the things we try to encourage the SAP team to recognize is there's always going to be challenges, whether it was the European debt crisis or the fiscal cliff in the U.S. So we seek no cover behind challenges. Having said that, there is no doubt that, in the United States, on a CapEx basis in particular, there were some large customers that, right to the end, were rationalizing their CapEx budgets. And if they had handed out that budget already and you were late in that cycle, you simply were left at the waiting line. So that was the biggest thing, just really dealing with the big ones on the CapEx side. Having said that, we see early evidence already, now that we're through the fiscal cliff, that into the new calendar year, that has loosened up and returned to a normal state again, which is quite encouraging.

[Operator:]

And the next question is Mohammed Moawalla from Goldman Sachs.

[Mohammed E. Moawalla:]

Can you perhaps talk a bit about the profitability of the cloud business? You talked at length that you're seeing this big acceleration in both bookings and revenues. Does that change your thinking with regards to the profitability goals for that business and time line? And then also, can you give us a sense of when this business can be cash flow positive given that this is a sort of the revenues build over time?

[Werner Brandt:]

Yes, Mo, let me take this question, yes? I think whatever you said about the cloud business is factored into our 2015 guidance. And I think I mentioned before, Q1 from a segment perspective -- sorry, Q4 from a segment perspective provided EUR 50 million in profit. And I think we are in a good way with our run rate in the cloud, with the expectation on our total cloud revenue for the full year 2013 that we will definitely be profitable in the cloud in 2015. More is going to come and we do not want to disclose it at this point in time.

[Mohammed E. Moawalla:]

Great. And just following up on the cash flow side, can you comment any further?

[Werner Brandt:]

We will do this in combination with regard to the -- an overview on the total cloud business in 2015.

[Stefan Gruber:]

Thank you very much. This concludes our Financial Analyst Call for today. Thank you, all, for joining, and hope to see you soon. Thank you very much, and bye-bye.