Operator: Good day and welcome to the SAP Third Quarter 2020 Earnings Conference Call. As a reminder, today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead.

Thank you. Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to our extended earnings call to discuss our strategy update as well as our third quarter results and the updated guidance. I'm joined by our CEO, Christian Klein, and our CFO, Luka Mucic, who will make opening remarks on the call today.

Also joining us for Q&A is the Executive Board member, Adaire Fox-Martin, who leads our customer success organization. And as usual, before we get started, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the US 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 US Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2019 filed with the SEC on February 27, 2020. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. In addition, on the Investor Relations website, you can find a slide deck intended to supplement today’s call available for download. The address is www.sap.com/investor.

For those of you following the webcast, the slides will be shown as we proceed through the prepared remarks. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS at constant currencies year-over-year year. The non-IFRS financial measures we provide should not be considered as a substitute for, or superior to, the measures of financial performance compared in accordance with IFRS. And this extended earnings call today is being held in lieu of the Capital Markets Day we discussed last quarter. With that, I'd like to turn things over to our CEO, Christian Klein.

Christian Klein: Thank you, Stefan. Welcome. And thanks for joining. I hope everyone is well and staying safe as COVID infection rates are unfortunately increasing again in most countries. Today's announcements mark an important milestone for SAP.

We have not only published our Q3 results and updated our 2020 outlook, but more importantly, we are providing additional insight into how we are evolving our strategy. Our updated strategy is in response to the fundamental changes in the market brought on by the COVID-19 pandemic. COVID-19 is an inflection point for our customers. Many enterprises have real issues to produce, sell and deliver their products in times of country lockdowns and people working from home. For most of our 400,000 customers, resiliency is achieved not just by accelerating the move to the cloud, but more importantly, by driving a fundamental change in how their business operates end to end.

It means transforming every process for the digital world, from the customer facing go-to-market function all the way to supply chain management. SAP is uniquely positioned to partner with our customers to make this transformation happen, combined with the move to the cloud, which is why we are determined to reinvent how businesses run by co-innovating with our customers and partners across the broadest cloud solution portfolio in the market. Responding decisively to the requirements of our customers in a fast-changing world results in our new financial midterm ambition. But before going there, let's take a quick look at Q3 and the updated 2020 outlook. In Q3, our resilient business model allowed us to continue to grow strongly in the cloud and again growing operating profit and margin.

Apart from the Intelligent Spend business, our SaaS and PaaS cloud revenues were up by 26%. We continue to see a very rapid growth in categories such as commerce, S/4, supply chain, Qualtrics and, our foundation, the business technology platform. Current cloud backlog is up significantly by 16% to €6.6 billion. At the same time, the lack of recovery from COVID-19 is visible in the lower-than-expected transactional cloud revenue, the cause of our travel and expense solution, Concur, which is hard to sell in times of COVID. Our software license performance is on a similar level compared to our great Q2 result.

On the bottom line, the benefits of our Best Run transformation project has continued to show tremendous focus. As stated, we yet again expanded significantly our operating margin and free cash flow. In addition, 28,000 customer go-lives over the last nine months demonstrate our ability to deliver remotely in a challenging environment. Q3 also saw many notable customers, including some competitive replacement. Deals included Lenovo for S/4HANA, Rabobank for S/4HANA Cloud; Swisscom and Barilla or Customer Experience; HPE and Uniper for the business technology platform; Elshi [ph] for Ariba; Walgreens Boots Alliance for supply chain management; Lululemon for Qualtrics; Schwarz Group for industry cloud; and Bahrain Airport for SuccessFactors.

For SuccessFactors actually, more than 4,000 customers and around 45% of the Fortune 500 are already running on our core solution Employee Central. This quarter, we added more than 500 S/4HANA customers. Around 45% were net new. Take us to a total of more than 15,100 customers, 20% up over last year. In Q3, we also added a new deployment option for our private cloud service HANA Enterprise Cloud.

So far, we have offered deployment in SAP or hyperscalers data center. But there's also demand by customers to want these services in their own data center, managed by SAP. This is why we have now launched the HANA Enterprise Cloud Customer Edition. And we are very excited that, in this quarter, Lenovo has decided to become a global partner for the Customer Edition with their Lenovo TruScale offering. This supplements the global GreenLake partnership with VMware and HP.

Finally, Interbrand just issued their 2020 Best Global Brands report. And I'm very proud that SAP came in at number 18 globally, up two spots versus last year, improving its brand value by 12% to more than $28 billion. Luka will now provide additional insights into Q3 and our updated 2020 outlook. Luka, over to you.
Luka Mucic : Yeah.

Thanks very much, Christian, and welcome also from my side. We again navigated through a challenging environment in Q3. Amidst COVID headwinds, we improved our operating profit and operating margin against a very strong prior-year comparison. Our cash flow saw an exceptional improvement and our earnings per share was very strong. Our resilient business model, with a consistent year-over-year increase in more predictable revenue, helped us to weather the storm in these unprecedented times.

Now let's go into more detail on the quarter starting with the top line where our current cloud backlog grew by 16%, reaching €6.6 billion amid continued COVID-19 effects on our cloud business. Our cloud revenue was up 14%, with continued lower transactional revenues. This negatively impacted our cloud growth rate by 6 percentage points, especially in Concur. While our on-premise software license business continued to see scrutiny over large projects as uncertainty persisted, our performance this quarter was similar to the one in Q2, especially considering the very good Q3 last year. From a regional perspective, Europe had a resilient performance this quarter, with strong results in Russia and Switzerland.

Latin America had a remarkable performance, driven primarily by Brazil and Mexico. And in APJ, Japan had a solid quarter and Australia and India were highlights. In Q3, our cloud and software revenue grew by 2%. For the first nine months, our cloud and software revenue was up a solid 4% even though the challenging demand environment did not further recover as we had hoped. Our services revenue was down 11%.

While we continue to deliver most of our projects very efficiently and effectively remotely, we do see an impact, in particular, on our training business as the reopenings of our global training centers have been delayed. As a result, our total revenue was flat year-over-year. Now moving on to the bottom line, where, in Q3, again, all of our businesses – cloud, on-premise and services – increased their gross margins. Our overall cloud gross margin continued its positive trend and grew by 70 basis points year-over-year to 70%. All cloud business models contributed to this margin expansion.

Our SaaS/PaaS margin grew by 110 basis points to 71%. Our Intelligent Spend margin grew by 20 basis points to 78%. And our infrastructure as a service margin grew by 800 basis points to 33%. In Q3, our software licenses and support gross margin was up 60 basis points to 88% despite the decrease in software licenses revenue. Our services gross margin increased significantly by 500 basis points and reached 31%.

This was mainly driven by a larger share of our high margin premium engagement business which has proven to be effective in this virtual environment. As you will recall, our operating profit as well as our operating margin was up significantly in Q3 of last year. This quarter, our operating profit grew strongly by 4% and our operating margin expanded by 1.3 percentage points to 31.9%. As uncertainty persisted, we remained cautious on hiring and discretionary spend. On an IFRS basis, our operating profit and operating margin decreased.

This was primarily due to higher share-based compensation expenses. Now, turning to EPS and taxes. IFRS EPS increased by 26%. Non-IFRS EPS increased by 31%. This was mainly driven by yet another exceptional contribution from Sapphire Ventures, which had a significant positive impact on our finance income, as well as in our IFRS and non-IFRS effective tax rates.

Therefore, we now expected an improvement in our effective tax rates for 2020. Our IFRS tax rate is expected to be in a range of 27% to 28% and our non-IFRS tax rate is expected to be in a range of 26.5% to 27.5%. Now turning to cash flow. In particular, a bright spot. In the first nine months, our operating cash flow was strong and improved by 54% to €5.1 billion.

As expected, we experienced lower restructuring related payments and lower income tax payments. Our free cash flow was up even further and grew by 79%, €4.2 billion. Free cash flow additionally benefited from lower CapEx compared with the previous year. Therefore, we are again raising our cash flow expectation for 2020. We now expect an operating cash flow of approximately €6 billion and a free cash flow above €4.5 billion.

Let me now turn to the remaining part of our previous 2020 outlook that was issued on April 8 and reflected our best estimates concerning the timing and pace of recovery from the COVID-19 crisis. Back then, we had assumed that the demand environment would gradually improve in the third and fourth quarters. And while we still see robust customer interest in our solutions to drive digital transformation, regrettably, lockdowns have recently been reintroduced in some regions. Infection rates have reaccelerated, and as a result, demand recovery has been more muted. Further, and for the same reasons, we no longer anticipate a meaningful recovery in SAP Concur business travel related revenues for the remainder of the year.

Therefore, we now expect cloud revenue in the range between €8 billion to €8.2 billion, cloud and software revenue in a range between €23.1 billion to €23.6 billion, total revenue in a range between €27.2 billion to €27.8 billion and operating profit in the range between €8.1 billion to €8.5 billion. So, to summarize on Q3. This quarter, we showed tremendous results as we continued to improve operating profit and margin even against the strongest comparison. Based on a resilient top line performance, paired with discipline on the cost side, we had high double-digit free cash flow growth and exceptional earnings per share numbers. All of this, and our resilient business model, position us well to emerge stronger out of the crisis and meet our new midterm ambition, which we would like to discuss next.

And for this, let me hand back to Christian.
Christian Klein : Yeah. Thank you, Luka. Now before looking at our strategy and midterm ambition, let me start with a brief recap of what we have achieved over the last six to nine months. SAP was definitely not short of events.

We have streamlined our operations. All our customer-facing operations were combined into one Customer Success organization and all our application development within one product engineering unit to simplify SAP. Thanks to our dedicated focus on customer success across SAP, we have seen a very encouraging year-to-date customer satisfaction score. For the first time in several years, there is a clear positive trend. We have increased focus in our existing portfolio.

We have decided to divest non-core assets such as SAP Digital Interconnect. And we entered partnerships to co-innovate with industry-leading companies like Siemens, Honeywell, and Bosch. Instead of doing everything ourselves, we are co-innovating. Finally, we have started to establish SAP as a leading cloud platform company. We have always been the leading on-premise application platform.

Thousands of partners and customers have built applications and extensions on SAP for almost 50 years. Our intention is to repeat that for the cloud, to position SAP as the leading cloud platform to transform and change the way enterprises work in the digital age. To get there, we have put a lot of work into our cloud platform over the past 12 months, and we will continue to invest in innovation. And we are very pleased to see that hard work is being recognized. Gartner has ranked us leader for both enterprise integration platforms and development platforms.

The times when SAP developed and engaged with customers in silos are over. Now, before we go deeper into our strategy, let me pause here for a moment and talk about why we are doing this now. The COVID-19 pandemic, which we all hoped would be easing by now, is gearing up for an additional wave. This crisis has created an inflection point for customers, a true catalyst to accelerate their transformation effort, has put a spotlight on the resiliency which is more than just about the underlying infrastructure and its move to cloud. It is about changing the way our company wants to adapt to new digital business models and drive automation.

Resiliency and sustainable long-term growth and profitability comes only by transforming the company to the needs of the consumers and employees in a digital world. Take retail, for example. When brick and mortar stores shut down because of the pandemic and supply chains were disrupted, retailers that had made the move to digital did much better than those who hadn't. They were able to continue to sell via ecommerce and the digital supply chain ensured that, despite the lockdown, they can continue to sell, produce and deliver their product. To adapt new business model and to do so with agility, our customers need innovative business software, a platform ensuring harmonized, semantical data models to run new digital business models end to end.

This is where SAP comes in. With our strategy, accelerate the technical migration of our customers’ most important business applications to the cloud, and we are agnostic when it comes to their choice between an SAP data center or hyperscalers. We can make it work with the bear best PCO in the market, no matter which choice our customers make. Second, and more importantly, we will bring the full force of our business applications and platform to drive holistic business transformation by enabling our customer to seamlessly design, evolve all-in-one new business models with agility and speed. To do so, all our main solutions will adapt to the cloud platform and share one semantical data model, one AI and analytics layer, one common security and authorization model, and the same application business services such as workflow management.

With our cloud platform powered by SAP HANA, processes can be changed, enabling agile workflow. Innovations and extensions can be developed quickly by customers and partners accessing our open platform using exactly the same data model and business services as our own SAP apps. We are convinced that the real value driver of intelligent enterprises in the cloud will be the ability to adapt and run business models holistically end to end with one consistent data model. This is where we take a different approach than other. Data and process silos are the biggest inhibitors for enterprises to offer a seamless customer and employee experience.

You need integration extensibility and innovation to truly drive business outcomes, resiliency, profitability and sustainability. That is the only way forward. What gives me confidence at this unique time in our history is our position of strength, our progress today and our heritage. Our applications are more than €10 billion worth of workload, and we want them semantically consistent across the entire value chain. At SAP, we are drawing on almost 50 years of business expertise, of defining, redefining and reinventing the most important processes of our customer.

And only SAP can mobilize the partner ecosystem, consisting of the best plans to fully realize the potential of any customer, no matter the size, to truly become an intelligent enterprise. This is in our DNA. It’s our goal to enable every customer to become an intelligent enterprise. And we are determined to leave no customer behind. Especially now in times of COVID, we reaffirm our deep commitment to our customers to help them through the crisis.

This new strategy and as well as macroeconomic factors have implications for our financials. They are the reason for the change of our midterm guide, which I'm going to speak about next. So, coming from our previous financial midterm ambition, what are the changes? Let me start with the two macroeconomic factors – currency and COVID. First, over the last three months, we have experienced currency headwind versus our previous assumption. This translates into a negative 3% to 4% effect on revenue and operating profit.

Second, we now anticipate a more conservative COVID-19 recovery. We assume that COVID will impact the economies through at least the first half of next year. And then, we have two strategic decisions. We are charting the financial guidance to the new reality and, first and foremost, to the needs of our customers. One, as just discussed, we will reinvent how businesses run, enabling our customers’ business transformation in the cloud to gain higher resiliency.

In consequence, we will accelerate the transition of our customer base to the cloud. This accelerated move to the cloud will clearly add value over the long run by increasing cloud revenue. And in the short term, there will be revenue mix effects as we see less on-premise and more cloud revenue, resulting in the negative operating margin impact of 4 to 5 percentage points in 2023. Two, we will continue to relentlessly execute on productivity improvements under the Best Run program as laid out at last year's Capital Markets Day. We are not moving away from these commitments.

By accelerating the move into the cloud, we will even further increase the productivity improvements in our cloud delivery operations. We have decided to speed up the modernization of our cloud delivery to enable a more resilient and scalable cloud infrastructure. This will require additional investments in the next two years, but allow us to largely complete the modernization in this timeframe and achieve the cloud gross margin of approximately 80% in 2025. We will provide more background on those two strategic decisions in a moment. But first, I'll go a bit deeper on the macro economic impact.

Nobody can predict the COVID-19 economic impact beyond 2020. But given recent developments, it is prudent to assume a more gradual recovery, which we have now done. For our on-premise business, we have seen significant investment delays in 2020 in several hard-hit industries. And across all industries and geographies, we see an increasing demand to accelerate the move to the cloud. But we also expect software license revenues to decline further from today's levels also in the future, considering our accelerated cloud transition.

For our cloud business, we assume that the negative COVID-19 impact will start to ease in mid-2021. Let's now move to the strategic decision, starting with the accelerated cloud transition for our customer base. The increasing customer preference for cloud is ultimately positive for SAP as we are already the second largest enterprise cloud application vendor. And we continue to grow rapidly even amid the COVID-19 crisis. With the journey to the cloud I previously outlined, we are further addressing this market need, accelerate the cloud transition and tripling our cloud revenue to more than €22 billion by 2025.

The ambition is based on moving our large on-premise ERP workloads to the cloud and gaining market share for our leading cloud applications, firmly establishing our platform as the basis for business transformation in the cloud; winning in new markets; increasing our R&D invest to deliver new innovations in the industry cloud, business network or sustainability; a strong focus on our customer success to ensure adoption, higher renewals, and ultimately lifetime value. The incremental growth resulting from – of this accelerated cloud transition will be even more profitable until 2025. To deliver on this target and to retain the profit focus, we have also decided to accelerate the modernization of our cloud delivery. Luka will now take us through the financial implications of both of those decisions and then how it all comes together in our new midterm ambition. Luka?
Luka Mucic : Yes.

Thanks, Christian. So, let me first talk about the financial implications of moving our on-premise customer base to the cloud. Christian has already explained the strategic motivation, so let me now look at the financial rationale. To begin with, as you know, the cloud transition is not a new topic for SAP. We have seen the financial impact from this basically since the beginning of our cloud journey almost 10 years ago.

And over the years, as we rapidly grew in the cloud during this first phase of the transition, we had very material negative revenue mix effects on margins, simply because the profitability of those cloud businesses was lower than that of our on-premise business. But since most of that cloud growth came from greenfield opportunities, that phase of the transition was always accretive to total revenue and did not put significant pressure on absolute profit. And finally, by end of 2018, our cloud business had reached the scale and efficiency that allowed us to deliver increasing operating margins in 2019 and also in 2020. This quarter was actually another strong proof point for that. Now, the first important point to understand is that what we'll be doing now is different.

Because this time, we'll be moving large parts of our ERP customer base from on-premise to the cloud, move them out of the upfront software licensing model and into the ratable subscription licensing model, a little bit like other players. For instance, Adobe have done it before, though it will not be as rapid in our case as we are talking about an option for the customers. Why does this make financial sense? That's the second important point because we're increasing customer lifetime revenue as we're expanding our role from a software vendor to a cloud provider for a significant part of our portfolio. This means we not only deliver software and support services, but also the required IT infrastructure and operational services. So, we are effectively expanding our share of wallet.

The potential uplift here is substantial. But even more important is the associated upselling potential of the business technology platform, additional SAP solutions and partner applications developed on top of it. An important thing to keep in mind here is that we do not have to deliver all of that ourselves. Just like today, can also procure required capacities from our strategic partners, bundled and at scale. However, as we all know, there are timing effects because the license model is upfront and a subscription model is ratable.

Now, what you see here on this slide is actually a very simple model of what revenue looks like for a software license sale under the on-premise model versus an otherwise identical cloud subscription contract. And it doesn't matter if it's a new customer or an upsell to an existing customer. In a nutshell, what becomes clear is that, one, the cloud transition causes a push of revenue and thus profit to future periods. Two, the annual cloud revenue is a bit more than twice as high as the support revenue would have been. Three, customer lifetime revenue and value are thus substantially higher.

And four, for the transition, initial revenue and profit headwinds turn into tailwinds over time. And all that is for just the like-for-like comparison that still excludes the upsell potential I had mentioned. By 2025, the implication should get us to a total revenue greater than €36 billion, with cloud revenue comfortably eclipsing all other revenue streams combined at more than €22 billion. This is why it is now even more important to expand our cloud gross margin. And to do that, we are now taking the final step in modernizing and harmonizing our cloud delivery, which I'll talk about next.

Before going into the details, let me first put this into perspective a bit. Early last year, you reminded us that after years of rapid acquisition-driven cloud expansion, SAP structures and processes had reached the level of complexity and, in some cases, frankly, redundancy that called for reform. You were right. We answered by setting up the Best Run transformation programs, aimed at improving organizational efficiency and agility at the same time. One of the key aspects of Best Run is increasing the efficiency of our cloud delivery.

And we have already made great progress in that regard, as shown by the cloud gross margin expansion over the last two years. But in order to attain the full benefits of our cloud delivery modernization, we need to take a final step. As you can see on the left of this slide, we have already completed most of the required steps of our cloud delivery modernization. The final remaining step now is to lift the part of our cloud customer base that is still running on our legacy cloud delivery platforms on to either our internal converged cloud or the hyperscalers. In other words, our modernized and harmonized four plus one cloud delivery.

And we are now planning to accelerate this move and complete most of that lift already by end of 2022. We expect this to drive a temporary acceleration of cloud investments through 2022, but the benefits of doing this will be significant. It will increase capacity utilization, it will allow us to procure infrastructure or infrastructure services at scale and to automate managed services. That's what will allow us to achieve a cloud gross margin of approximately 80% by 2025. On top, it further increases the stability and resiliency of our cloud solutions and speeds up innovation even in the applications, driving customer success, and thus cloud revenue via more cross-selling and higher renewals.

Again, that is what our customers rightly expect from us, and we have every intent to deliver. So, this all then comes together in the new 2025 ambition. The combined impact of what we just discussed means that, over the next two years, we expect to see muted growth of revenue accompanied by a flat to slightly lower operating profit. After 2022, momentum will pick up considerably though. The initial headwinds of the accelerated cloud transition will start to turn into tailwind for revenue and profit.

In addition, we'll have completed our increased investment into the accelerated cloud delivery modernization, and that translates into accelerated revenue growth and double-digit operating profit growth from 2023 onwards. And so, by 2025, we expect this trajectory to take us to cloud revenue greater than €22 billion, total revenue greater than €36 billion and an operating profit of greater than €11.5 billion. This 2025 ambition also means that, one, we will significantly increase our share of cloud revenue, making it by far the primary revenue stream. Two, we will significantly increase our more predictable revenue share to about 85%. And three, we will continue to focus on bottom line efficiency, rest assured that we will continue to drive the Best Run project, streamlining SAP and setting it up for efficiency, simplicity, and sustainable long-term success, aiming to come out of the transition with sustainable double-digit operating profit growth from 2023 to 2025 and beyond.

I'll now hand back to Christian for closing remarks.
Christian Klein : Thank you, Luka. And before we come to Q&A, let me close it out. We recognize this is a significant change when compared to the previous strategy, the former 2023 ambition. We are at an inflection point where customers are asking us to help accelerate their business transformation to gain resiliency and position them to emerge stronger out of the crisis.

We see that as a unique opportunity to partner with our customers on their journey in a way that only SAP can, in large part due to our deep knowledge of business processes, our innovative solutions and technology, and the trust we have established over our operating history. That's why we have adapted our strategy and financial ambition. As the CEO of SAP, I firmly believe that prioritizing sustainable value creation has to be our top priority. Therefore, we will not trade the success of our customers and the significant growth potential of SAP against short-term margin maximization. Now, let's open it up for questions.

Stefan Gruber : Thank you very much. I hand it back to the moderator. You can now start the Q&A session please.

Operator: [Operator Instructions]. We’ll now take our first question.

This question comes from Adam Wood from Morgan Stanley.

Adam Wood: I've got two please. Maybe just, first of all, you've made very clear that there's a big move to cloud underway, and I think everybody will understand that. But in the past, you've given customers choice in terms of how they pay wherever they run, between bringing licenses to hosting deals or paying subscription. We understand that, for you, there's a higher lifetime value of customer in subscription.

And obviously, for customers, that means they end up paying you more over the lifetime. So, could you maybe just help us understand why these large SAP customers now want to run on subscription? And are you forcing that transition or you continue to give choice? So, any help you can give us on why that change has happened would be useful. And then, maybe secondly, your highlight now there's a much bigger part of that going to come from cannibalization as on-prem moves to cloud. Is there any way you could help us understand what the underlying growth of new business in the cloud is going to run at versus how much of that cloud revenue is going to come incrementally from cannibalizing the on-premise? Thank you.

Christian Klein: Let me start and then, Luka, Adaire, you can build on top of that.

First, what we have seen in the last six months is definitely, when I'm talking to the CEOs, for many enterprises, the supply chain is heavily disrupted. They sometimes don't even know, can they produce and deliver the next day. And that is the inflection point of our customers where they are saying, hey, I really want to move now to the cloud, I want to have a resilient operation, why should I still operate my own IT data center. So, that's the first point. And then, the second point is doing a business transformation, Adam, is not easy.

You have to change how a company works, you have to redesign business processes. And also, our customers, including the large ones, believe let's move to the cloud and also let SAP help us to transform our business, show us the best practices you have for the digital age, let us standardize our solution and, now that the platform is ready, let’s also built the extensions in the cloud and really consume regular innovations on the fly. So, besides the commercial aspect, it's really about the resiliency and the transformation of the business. And where's this cloud revenue going to come from? First, yes, of course, there is a change. There’s accelerated move of our installed base to the cloud.

But second, this quarter, you have heard me saying 45% of our S/4HANA cloud customers are net new, which speaks, first, for the competitiveness of the solution finally, and second, that we will also win in the years to come further market share, not only in S/4, but we really also will double down on HR, procurement, on CX, on focused areas in CX and we will also invest into new innovation, the industry cloud. All of our customers are saying, all in, please help us to really digitize also our industry related business processes because, you know what, again, it all goes back into our ERP, it all goes back into our supply chain. Let's try massive business transformation on your platform with the industry cloud in conjunction with our LoB applications. And third, you heard others talking about land, adopt, consume and expand by putting all of our customer-facing functions together. First, you heard me saying our customer satisfaction score increased quite significantly.

And we are convinced that we will also see high renewal rates in the future. And with that, Luka/ Adaire, any comments?

Luka Mucic: Yeah. Just to quickly add, there is undoubtedly going to be some cannibalization effects from customers moving from established license and support agreements over to subscription. However, that is actually not the majority of the growth that we are expecting. We actually assume that we can run a CAGR that is approaching 20% with the new solutions that we're adding in industry cloud, business network, and other adjacent areas that we have discussed before, the business technology platform growth that we expect, as well as also the uptick that we expect coming out of the COVID crisis again from some of the solutions that have particularly suffered now that are actually clear market leaders and therefore can be expected to actually expand their lead and reach after the crisis is over, such as Concur.

So, the cannibalization impact has been, so to say, the cream on top of the growth rates, but it's not the major, let alone the exclusive, driver of growth. And we will be transparent with you. We will, starting next year, give you clear metrics of the number of customers that have transformed from install base legacy license arrangements to new subscription options as well as net new customers that we're adding for this as well. You know this reporting from the S/4HANA side, but we will break it out with a particular view to the cloud starting from next year.

Operator: Our next question comes from James Goodman from Barclays.

James Goodman: Maybe I could ask a couple as well. The first is around the customer relationship. I sense within this guidance that you are increasing the emphasis of SAP owning the customer relationship, providing your own infrastructure or at least passing through more than your own contractual terms, so the hyperscaler infrastructure. So, can I ask you what that means for your own IaaS expectations as we look out through this transition. Particularly as we look out to the 80% gross margin targets for the cloud, I'm trying to think about the mix of IaaS within that.

And the second question is really just a simple one around the cost investments. There's a lot of moving parts within the numbers. I just wondered, if you look at the 4 to 5 percentage points change that you've put out there for 2023, can you just help us with the split there in your own modeling between the gross profit impact from the lower revenue in the transition that you spoke to versus the magnitude of the incremental investment that we'll be annualizing in the business at that point? Thank you.

Christian Klein: Maybe I can start and, Luka, you can again build on top of that. You said it very well actually.

It's about owning the customer relationship when it comes to their business transformation. This is why it's so key now for SAP that the SAP cloud platform is really the foundation of all of our cloud applications and that we’re actually also delivering the integration for hybrid landscapes that we have now in platforms. And now that we are making tremendous progress on the integration front, we are maturing our business services on top of that platform. The thing about it, when there is one semantical data model, now we can tell our partners why to modify the ERP, let's come to the platform and build the extensions there because there is now one semantical data model, there’s the workflow, there’s the authorization. There’s everything what you need to seamlessly expand the SAP solution portfolio.

And this is why, on top of our infrastructure as a service business, definitely, we want to push now the platform. And we definitely also want to push all the applications from the software as a service business that that now comes together. At the end, we are selling not the product. We are selling the digital intelligent enterprise, we are selling business processes designed for the digital age. This is what we are doing.

And this is what we will also position in the years to come.

Luka Mucic: And to build on that, it's very important to understand that we are not positioning an infrastructure as a service solution here. We’re positioning a holistic solution, moving our customers to the cloud, and transforming and modernizing the landscape based on our new ERP application architecture. This offering is therefore a software as a service offering, and not an infrastructure as a service offering where the customer basically will just bring a license and then we would do the application management on top. It’s just very important.

And therefore, this will not have a bearing on infrastructure as a service. And secondly, on the margin side, we are, of course, anticipating the margin inflow from those additional customers that we're getting in core ERP together with the development of rest of the portfolio to ultimately then reach the 80% gross margin by 2025. And just to also clarify on 2023, the investments that we are looking to put in and that we are planning to make to kind of reach the homestretch of our converged cloud modernization are actually already going to turn into an operating profit tailwind in 2023. So, this is not negatively affecting 2023 any longer. The impact on 2023 margins is basically due to the changed revenue mix that we assume and the shift of the business model to ratable recognition, which will then turn basically increasingly into a tailwind and will allow us to catch up and actually increase the margin again starting from 2023.

So, from that perspective, those incremental investments are actually immediately accretive to operating profit, starting already in the year after they have been made.

Operator: Next question comes from Philipp Winslow from Wells Fargo.

Philipp Winslow: A question for Christian and Adaire. If I think back to the financial crisis, obviously, there were a lot of projects that were delayed into 2008 and 2009. But then you saw a catch up in 2010, 2011 in terms of just the license sales.

In other words, projects just getting pushed. How do you think about our current situation? Obviously, you mentioned projects getting delayed and pushed. What are customers telling you about, hey, have those projects – have they been pushed? Have they been changed? Have they been shifted to the cloud? Is the shape of the recovery just simply different? How should we think about this crisis versus the financial crisis in terms of how you think about sort of the shape of the recovery and what customers are telling you?
Adaire Fox-Martin: Thanks for the question. I'll go first, and then perhaps Christian or Luka can add any comments if they have them. I think when we describe projects being pushed, I would describe it as the scale and the scope of the projects being pushed.

I think it's very clear in the narrative that we have with our customers that everybody understands the need for the digitization of key business processes, so that agility becomes part of their business landscape. So, it isn't that the project is stopped. It isn't that it isn't a journey that the customer is on. I would describe it as a much more staged approach than the approaches that we've seen in the past, where the work will continue over a period of time. And we can see that even in our own services utilization where we still have a very significant number in terms of utilized days in our services business.

So, I see it really as a more recurring element of project stages that the customer commits to rather than a large-scale program of work initially, and that's being what's underpinning some of the conversations that we've had with our customers.

Christian Klein: I can comment on the cloud revenue side. Obviously, we are talking a lot about Concur. And yes, if you exclude our Concur business for travel and expense management, our cloud revenue would be up by 20%. Our software as a service solutions are increasing by 26%.

So, you see, there is no real deceleration. And also, in all fairness to Concur, after the crisis, this is the market leading solution in the market, full stop. And there will be, of course, a bounce back. It, of course, depends on when can we travel again, when is business travel coming up. So, today, I'm extremely confident that this business will, of course, come back.

It's just a question of timing.

Operator: Our next question comes from Michael Briest from UBS.

Michael Briest: Two from me as well. Just in terms of the cloud gross margin trajectory, Luka, obviously, there’s investments for next couple of years. Previously, you were looking for a 75% gross margin in 2023.

Could you give us a feel of whether that's still intact? And also, how much lower the cloud gross margin might go in the next couple of years? And then, secondly, also for you I think, on the free cash flow side, previously, you had a target of €8 billion in 2023. I suspect that's no longer there. But can you talk about cash flow out to 2025? And on the CapEx side of things, give some reassurance about where that might go to. Thanks.

Luka Mucic: Let me start with the cloud gross margin.

You've seen that we have continued to make progress even in 2020 despite the deceleration that we have seen in our Intelligent Spend group, which has by far the highest gross margin, and even Concur has still managed to increase its cloud gross margin despite their unique challenges that they are having. So, I think it's very clear that we have an utmost focus as a company on this. And the investments, as I said, that we are planning for next year and the year after to accelerate the harmonization of our cloud delivery infrastructure to our converged cloud, as I said before on the question of James, I think it was, it will be immediately accretive starting from 2023. So, from that perspective, we believe that there is no reason to anticipate any departure from what we had in mind for 2023. And obviously, then see a further acceleration up to the 80% that we are planning for 2025.

For 2021 and 2022, we definitely – you should assume that there is actually a slowing in progress because we need to make the investments first. Not all of them will flow into cost of clouds to be also quite precise. We will also see some investments in cost of R&D to make sure that some of the solutions that we have not yet fully shifted can run optimally on the new infrastructure. But of course, a lot of it will hit cost of cloud and, therefore, the progress in the next two years will be more muted as well. From a free cash flow perspective, look, first of all, we have made tremendous progress, obviously, this year.

Not only are we back to the levels of operating and free cash flow that we had committed at last year's Capital Markets Day where we, of course, had a completely different profit expectation for our business in 2020, but we are actually seeing even an improvement against this original ambition when it comes to free cash flow. So, something has happened here, which I believe is also going to be sustainable. And that is an improved and more disciplined working capital management and cash collection management. I have to give Adaire and her team a lot of credit here as well. And they have certainly intensified their collaboration with our collection teams.

And I believe that collaboration is sustainable and should continue to yield results also after the crisis. Nevertheless, you're obviously right that the free cash flow that we had anticipated for 2023 is also pegged to a significant extent to the profit levels that we are expecting. And since we are now expecting to reach these profit levels with around about two years’ delay, these free cash flow levels should also be expected to then also only be achieved in 2025. Having said that, that is a generalized statement based on all else being equal. And there are a couple of factors that still play a role in this on the positive side as we have discussed.

When Qualtrics completes their IPO, their previous cash settled programs under the SAP setup and plan design would, to the largest extent, convert to equity settled programs and that will have some relief as a consequence when it comes to the cash flow. On the flip side, in 2021 and 2022, we expect, even though that our CapEx spend will remain muted, still a moderate step up from today's very low levels due to COVID in order to procure some of the additional infrastructure elements that we need for our own converged cloud. And so, those two factors will, to certain extent, balance out each other, perhaps providing a small tailwind. But other than that, of course, cash flow follows the profits.

Michael Briest: And, Christian, could you maybe give us an insight into the customer base on S/4 for today.

We’ve got 8,100 live. How many of them would actually be on either the private cloud or the multi-tenant [indiscernible] S/4?

Christian Klein: First, we have seen a massive acceleration of the move also to the cloud version of S/4HANA. As I mentioned before, COVID was indeed an inflection point. And we will see this acceleration in the years to come also for some large enterprise customers. And we will put them wide [ph] deployment model.

This is really then, of course, relating to how standardized is the customer, how designed are the processes to really fit into the standard, how consolidated is the IT landscape. So, we will make that work depending on the departure of the customer. And then second, for us, it's very important that we’re, of course, delivering the differentiating capabilities. And next year, the public cloud version will have 80% of the functionality. But today, our on-premise version has.

This is significant. And we have delivered a new configuration where you can change processes on the fly. We infuse AI. And just to give you an example, because there's so much talk about the value of S/4, just last week, I had an automotive customer of SAP. He said, Christian, because of the move to S/4 and running on HANA, we actually could optimize our inventory and they have savings of over €200 million because now, suddenly, we can change our inventory and check it real time and can adjust it based on the demand what we are seeing and especially in times like these where you have such dynamic markets, that is a huge, huge value for us.

And this is something what we are going to push further. And with the new strategy, we’re going to invest, we’re going to invest further in innovation, we invest further in R&D because this is the way to go, this is what our customers want.

Christian Klein: And just to be precise, currently, we have close to 3,000 S/4 cloud customers.

Operator: Our next question comes from Alexandra from RBC Capital Markets.

Alex Zukin: Just a quick one for me.

Can you talk to how much of the delay in the spend that you're seeing are in the larger sales cycle is due to macro versus evaluating some of your new cloud solutions? And if you think about the 2025 vision, approximately what percentage of customers do you expect to shift over the next kind of two to three years? Or is there a late cycle accelerated proportion of customers that are going to shift over?
Adaire Fox-Martin: I'll take the first part. In terms of the delay that we described, I would say it is less about the evaluation process and more about the uncertainty of the condition. At the start of the COVID process, we were in the fortunate position to be able to pivot our sales force to a virtual engagement of our customer base. We have had in operation, for a number of years, a very strong digital selling motion in our commercial sales organization. And we were able to extend the use of those tools and techniques right across the entirety of our sales team.

So, we still managed to maintain a high level of engagement with our customers, albeit that we probably haven't met many customers physically in the last seven months. Therefore, the delays tend to be delays around uncertainty in the business model, uncertainty in the business world and uncertainty, I think, relative to the industry that a customer operation, much more than to the evaluation process, which is proceeding as per norm, albeit virtually.

Christian Klein: To your second part of the question, we will, of course, give customers choice also in the future, but COVID will be an accelerator. It really depends on the departure point of the customer. Look, when we have customers, mid-sized, services industry, they celebrate go-live with S/4HANA cloud in 20 days.

That’s possible. That’s absolutely possible. WE have large enterprise customers. They are now shifting the workloads to the cloud. But of course, for them, it takes more time to redesign the processes, [indiscernible], to move the modifications out of the ERP.

So, this will now happen at an accelerated pace. But every customer will move with its own speed.

Alex Zukin: I wanted to ask, what's the right KPI for us to think about that you would point us to, to give investors comfort in kind of that that transition versus customers moving to a competitor or defecting to a competitor? What's the right KPI to look at for us during this transition point around that cloud revenue?

Christian Klein: My point of view is really the number of migrated customers. As you know, we have slightly more than 30,000 classic ERP customers, not systems. We have way more systems, but in terms of just the customer count, that's what we have.

And we have 15,000 customers for S/4HANA out there. As I said, close to 3,000 of them in the cloud. So, that means another 12,000, basically that have licensed on-premise. And in the next couple of years, we want to move many thousands of those customers. And then, of course, also net new customers to our core ERP cloud solutions, and therefore, we intend to give you, in the future, absolutely regular recurring updates as part of the earnings process on those numbers and, certainly, the progress that we have achieved there where we will now break out between the different deployment forms.

That should give you the confidence that we are arriving fully in the cloud come 2025.

Operator: The next question comes from Charlie Brennan from Credit Suisse.

Charles Brennan: I'm going to go with two as well, if that's possible. Firstly, just a clarification on your cash flow comments. I'm surprised you didn't commit to € 8 billion of free cash flow given that the variables of Qualtrics and CapEx should be a net tailwind.

Are there any other variables we should be considering? For instance, is there a chance of another restructuring program as you come to terms with scale of the change over the next couple of years? And then secondly, on a separate product related issue, how important is owning the platform layer of a stack in this strategy? And to what extent do you think you've given up mindshare to Microsoft and Google? And how hard is it going to be to claw back that mind share with customers? Thank you.

Luka Mucic: First of all, on the cash flow side, you're absolutely right, of course, we will have benefits from the Qualtrics IPO. And, of course, we also continue to have benefits, as you have seen in the significantly reduced levels of CapEx that we had in last two years from our collaboration with the hyperscalers. But that being said, still, the source of free cash flow on the operating cash flow side is not entirely decoupled from the level of profits that we can drive as a company. And as we are achieving that level of profits, basically, with a two year shift in 2025 for our ambition that we have put out there, that's when also I absolutely would expect that we are able to provide for those €8 billion in free cash flow.

In the meantime, I very much believe that we actually can do better, all else being equal, in terms of the cash flow generation because we have increased our cash inflow efficiency, our cash collection effectiveness, and our working capital management. However, that will not be able to fully equalize the lower profit levels that we're now anticipating in the next few years before that accelerates back again. And perhaps on the platform side, Christian?

Christian Klein: This is a very valid question. And the business platform definitely needs to be owned by SAP. And now moving our cloud applications over to this platform by solving the integration issue, by making sure that every of our application is sharing the same data model, is sharing the same authorization and workflow service.

That's actually – we'll also make sure that the platform will just become a natural part of every sale we are doing going forward. That's not anymore a standalone platform. That's our business transformation platform. Let's call it like that, where we then also want to shape the ecosystem through. Today, a lot of our SI partners are building still extensions in the on-premise world.

We really now ask them and also incentivize them to join us to move up with us to the cloud to build the extensions on the platform because now they can do it also in a much more seamless way. Yes, the platform is of the highest importance. And again, with the platform then comes also S/4HANA. And underneath, we get customers from. There, they can either choose the hyperscaler infrastructure, they can choose the SAP infrastructure.

That was already there in the past, and that has to be proven the right strategy.

Operator: Our next question comes from Kirk Materne from Evercore.
Stewart

Kirk Materne: If I could sneak in two, I'll try to as well. I guess just to be very clear, Luka, on the cloud revenue adjustments outside of currency, is really that, from a business perspective, just simply Concur for the next year? Meaning it sounds like Qualtrics had a good quarter, the other parts of the cloud business seem to be going well, is there any other downshift at Concur that makes sense while you're expecting a more slow rebound? I just want to double check on that. And then, I guess, maybe for Adaire and/or Christian, the question is going to come up a lot is, why are you all seeing delays when a lot of other software companies are frankly starting to see things pick back up? Is it the mix of your business around more impacted industries? Is it, as you, I think, Adaire, mentioned, bigger ERP projects just simply getting chopped up into smaller deals or having to rethink that? I think the big question I've got from investors today is why are you all sort of you're seeing this, whereas – at least over the last month or two, we haven't seen it.

Perhaps everything just kind of came to a head in September. But if you could discuss it a little bit, I think it'd be helpful. Thanks.

Christian Klein: Let me first start. So, first of all, it's not only Concur, what we're seeing in terms of impact for the full year.

We're not talking about next year yet, by the way. So, just to make sure that we're talking about 2020. But Concur is about half, the impact that we are seeing. Another quarter is the rest of Intelligent Spend. You probably have seen that in our segment reporting, we are showing that Concur is down in the quarter by 11%.

And that is a business that otherwise would be expected to grow somewhere in the teens. And that is, of course, all due to due to COVID. But it's also the case that transactional revenues in Ariba, for example, are not as high as we would have expected for the same reasons. Due to COVID, a lot of companies are cutting back on spend. And if you have lower spend, and of course, [indiscernible] like Ariba, ensuring less variable expenses.

It's still growing. That's the difference to Concur. But you have seen that Intelligent Spend overall in the quarter was down by 3 percentage points. And that, of course, means that also Ariba is down to a lower level than what otherwise would have been the case. And then, the rest of – the last quarter is really slight reductions in renewal rates or new cloud bookings across the entire rest of the spectrum versus the levels that we would have targeted and planned for in a normal, pre-COVID business, as usual scenario.

Having said that, however, that's something that we had planned for. The big shift is that on the transactional revenues, we had originally anticipated a recovery in the second half year, which we are now not planning for anymore.

Luka Mucic: And I mentioned already the growth rate we are seeing in our software as a service and platform as a service business. And with 26%, I would say we are definitely also lying in the upper end also compared to competition. So, this business developed under these circumstances extremely well.

And there’s, of course, also high confidence that, for the next year, that we will see similar growth. And then, of course, also, we are talking about an acceleration latest in the second half year of 2021. When we talk supply chain, when we talk experience management, when we talk finance changing, license model to our customer, selling subscription, selling pay as you go, these are all solutions which are highly relevant for our customers. So, yes, there is a high confidence that we will definitely also see a reacceleration then next year.

Christian Klein: And perhaps to close this out, it works both ways.

While in a classic subscription model, the slowdown in revenues due to such a crisis situation, of course, it's happening at a slower pace. But on the other hand side, to accelerate a subscription business also takes its time because, first, you need to go through the selling, then the installation, and then you start to recognize revenues. In a business network model that is transaction volume based, like with Concur and Ariba, both happens faster. So, the downturn happens faster, but also once the business picks up again and the spend increases and travel is happening again, then, of course, the variable revenues also start to kick in immediately. And hence, that's why we assume that, if the COVID restrictions are lifted, then as of the second half year, we will see actually a quite a fast reacceleration back to normal levels.

Adaire Fox-Martin: And finally, Kirk, let me address the question around the delay. So, first of all, I think it's important to place this in the context of the overarching portfolio of SAP. So, we have a very broad portfolio of products, which is something that, of course, continues to make us extremely relevant to our customers. In some of our pure play SaaS solutions, we defined a program that we call Amplify, which was a program focused on low upfront investment on deployment in days and weeks and very quick value realization for our customer base. And in those scenarios, we definitely saw some uptake of those solutions because the gap between speed and value was very, very small.

And we saw over 110 new customers over 1,100 deals under the auspices of that particular program. Then when you look at the actual underpinning business transformation that is predicated on S/4 as a core, I guess, the first point of discussion with customers is around cost and managing and mitigating costs in the current environment. And there are a series of activities that can be done to help manage that. Then the second range of conversations is about the migration itself or about the journey to value. And in the context of that, there are different departure points.

Each of our customers, of course, has a very unique environment today. But then also different destination points. And it is a matter of looking at that in a modular way, so that over the lifetime of that transformation journey, you are delivering value all along the way in relation to the priorities that the customers have set. And I do think there was an element of timing in terms of the last month of Q3, and as some of the changes that we saw in the resurgence of COVID at the point where we had transactions in closed process. So, I think a combination of those things.

We have different portfolios with different profiles of solution set, long-term transformation becoming modular, and then a little to do with the timing of our Q end.

Operator: We’ll now take our next question from Mark Moerdler from Bernstein Research.

Mark Moerdler: I have two parts to my question. The first is, if the transactional headwind from COVID is expected to be over within the next year to two, then how should we think about 2023 in the transactional business? Is there going to be a permanent delay on the transactional side that you're modeling in? Or should it bounce back equivalently? And then, as a second question, for new sales which used to create license, how big a step down are you now expecting in licensed sales, specifically, through 2023? Basically, should we be figuring license sales are basically going away by 2023? Thanks.

Christian Klein: Perhaps I'll start with the last one.

And, Adaire, please augment this. Licenses would not certainly go away by 2023. However, they will certainly continue to decline. And I would estimate at a similar rate of what we are seeing now in 2020. And on the transactional business side, I see no reason why, in two years’ time, assuming that COVID is really past and behind us sometime next year that transactional revenues should not, by 2023, be back at the level that they were before in 2019 and grow from there as they have done in the past.

Adaire Fox-Martin: All good.

Christian Klein: Okay, good. So, that makes this joint statement from Adaire and myself. Then it must be true.

Operator: Our next question comes from Chandra Sriraman.

Chandramouli Sriraman: A couple, if I may. When I look at your 2025 guidance, if my calculations are correct, there’s a mid-single digit drop in maintenance revenues through 2025. Now, I just wanted to check if the cloud business will be profitable enough to compensate for this drop as we go beyond 2023. And how should we see the move or the substitution of maintenance with subscription beyond 2023? The second question is more of a clarification. Luka, you mentioned that these ERP customers will move to the SaaS/PaaS model.

So, I was just wondering, would you continue selling the infrastructure as a service? Or will these customers be migrated to the SaaS/PaaS model? Thanks.

Christian Klein: Perhaps first with the question on maintenance versus cloud, that is one of the reasons why we are now accelerating and planning to kind of complete the migration to converged cloud infrastructure more quickly because that is giving us a step up in the cloud efficiency that, on a gross margin level already, is in striking distance with our software and support business. And that is very positive because if you then assume from a long-term perspective that the cloud business has an ever-increasing share of renewal components that are commanding a lower commission rate than a net new sale, actually, on the operating margin level, the cloud will then quickly catch up with the efficiency levels of our on-premise business. You have actually seen a part of that already at work today. But of course, that impact will be significantly higher even once we have built such a high base of cloud revenues.

And on the infrastructure as a service piece, I think you will see over time that, certainly, a growing proportion of our existing HANA enterprise cloud customers will move over to a more holistic SaaS offering that gives them the entire scope, including also subscription. We actually offer this to our customers within the HANA enterprise cloud already today as an option. But given our increased capabilities in the cloud that we are looking at, I think it will increase significantly now in attractiveness and will lead to more pure HANA enterprise cloud customers making the move over.

Operator: Next question comes from Julian Serafini from Jefferies.

Julian Serafini: I have two questions.

I think number one is on – Luka, I believe you mentioned the cloud plus multiplier. It was around 2 times maintenance. Can you confirm that? So, that would imply roughly a five-year crossover on the revenue side, assuming all things equal, that when a contract would be revenue accretive for SAP. And then the second question is on sales compensation probably for Adaire. Will there be changes to sales compensation going forward? And, I guess, to emphasize more cloud products away from the license and maintenance model.

Luka Mucic: I can quickly go first. It's actually a bit more than twice to support revenue. If you apply a multiplier – or actually, if you apply a 0.45 multiplier to €1 million license contract plus 20% support, that would translate into a €450,000 subscription at equal value. So, slightly more than twice. Adaire Fox-Martin: Sales compensation is certainly one lever that facilitates change and transformation.

This year, as Christian mentioned in his opening remarks, we brought together all of the customer-facing resources of SAP into a single organizational unit. And that includes not just sales, but also all of the services resources of the company, together with all of the customer-facing post-sales support resources. And we underpinned this organizational change with an operating model that focuses not just on the landing or the bringing of a new customer into the SAP family, but also focuses very much on the adoption and the consumption of SAP solutions in order to drive business outcome and business value for our customer. Therefore, in addition to this organizational change, in addition to this new operating model, in addition to the appropriate management and governance over the top of that, we will, of course, look at our compensation plans in order to ensure that they're aligned with that strategy. And as I mentioned, that strategy focuses as much on the adoption and the consumption of our software as it does on the initial transaction with our customer base.

I also get a sense that the question was around how we would be addressing or directing our sales forces’ efforts around the different elements of the portfolio. And I think it's important, again, to emphasize that we have always been predicated on choice for our customers and we will continue to be predicated on choice. There are absolutely some customers that, for a variety of reasons, would want to remain in an on-premise world. However, there is no doubt that the vast majority of our customers are orientated towards this cloud migration and our compensation will take that into consideration.

Operator: Our next question comes from Neil Steer from Redburn Partners.

Neil Steer: I've got a couple, if I may. Firstly, Luka, could you confirm, in your response to a previous question, that we should think modeling the maintenance revenues declining mid-single digit levels by the time we get beyond 2023? Was that what you seem to be confirming or not?

Luka Mucic: Yeah. Mid-single digit negative decline CAGR, given the accelerated transformation to the cloud is directionally correct.

Neil Steer: And then, just looking at the slides, I think I understand the revenue trajectory for cloud, obviously. But you seem to reference in the slide deck that you're going to invest in industry cloud functionality.

Other than the industry cloud functionality, where are specifically the other investments coming through that hit the profitability so much in 2021 and 2022?

Christian Klein: Well, on the 2021 and 2022 thing, that is really related to plant infrastructure harmonization investment. So, we are migrating customers that are still sitting on the legacy infrastructures of some of our – particularly acquired cloud solutions, but also some of our own developed solutions to our converged cloud. And that has infrastructure investments, that has some, as I said, development efforts attached to it to optimize the performance of those solutions on the new infrastructure. And of course, it also includes the pure migration costs for our customers. So, that has nothing to do with investments that we are doing as part of our portfolio process on the R&D side to build out new organic solutions, which we are nevertheless doing as well.

And that's industry cloud, that is also other areas of the portfolio. We're investing significantly also in our business technology platform. And of course, we continue to invest in those solutions where we clearly have a leading position in the market and want to retain it as well.

Neil Steer: In the past, when you’ve talked about the converged cloud infrastructure, you've obviously talked about migrating over SuccessFactors, which I think is supposed to be done by the first half of last year. If you look at the proportion of subscribers or users on the legacy line of business cloud solutions, what in total also have been migrated over to the converged cloud infrastructure? And how much of those legacy line of business users need to move over to the cloud infrastructure now?

Christian Klein: Thanks for raising this question because I think it allows me to clarify something.

The migrations that we have been talking about, about SuccessFactors and also Ariba, they were database migrations. We were migrating the underlying third-party database to HANA. And that was giving us already significant benefits, and you see them in the cloud gross margin today. What we have also done is we have made sure that all of our solutions run on one or more hyperscalers and on our converged cloud infrastructure. What we have not done yet is migrating all of the existing customers that are sitting on the previous legacy infrastructures over to the new one.

And that is what we are now giving a strong push and what we are looking to accelerate forward. And once we have accomplished this, we can retire our legacy platforms. And we have various other benefits in terms of automation that we can leverage for greater efficiencies. But the database migration, that was what we were talking about in the past. And indeed, this has been accomplished already with the current positive benefits for cloud margins that we are seeing already in our actual current numbers.

Neil Steer: And so, we can just [indiscernible] 100% in terms of users are still on their existing legacy platforms today, is that correct?

Christian Klein: No, that's not right because we have already, since some time, started to onboard new customers on those converged cloud landscapes. But it's correct that still a majority of the existing customers are on those legacy platforms. And that's what we are going to move over quickly now.

Stefan Gruber: Looking at the time, I think we have time for one final question.

Operator: We’ll now take our last question from Patrick Walravens from JMP.

Patrick Walravens: Maybe this is a good way to wrap it up. Thank you for all the commentary and detail today. Given the stock drop, which I think is the biggest thing in quite a while, if there’s one key message you’d like to convey to your investors, what would that be?

Christian Klein: Indeed, of course, coming from the stock price, you see that we actually made today a decision which is actually to respond to the needs of our customers. Look, as the CEO of SAP, I cannot hold on to a financial mid-term ambition, which is actually again the needs of our customers. When they want to move, when they want to transform, when they want to see more organic innovation from SAP, this is from me, on the long term, the right thing to do for SAP.

And this is actually my top priority as the CEO of this company, and this is why we’re doing this change. One thing for sure, because also related to the last question, we are not getting sluggish on our commitment also to drive profitable growth in the future. All the impact you are now seeing is whether related macroeconomics or you see the revenue mix effect coming through. But all the other productivity parameter, no matter if it’s go-to-market related, G&A related, we are not getting sluggish. We will, of course, also have the high focus on productivity.

And on the investment side, on the cloud operations, when you are doing this massive shift and already tripling your cloud revenues towards 2025, you don't want to feed your money into some legacy cloud infrastructure. This is why we want to do our homework now and come back with double-digit growth in operating profit from 2023 onwards on because, again, I don't want to feed money into legacy infrastructure. This is why we’re doing this in combination and, as I said, finally, to wrap it up, we are doing it for our customers.

Stefan Gruber: This concludes our earnings call for today. Thank you all for joining.

And you can now disconnect. Bye-bye.

Luka Mucic: Thank you. Bye-bye.

Christian Klein: Thank you.

Take care.