SAP SE (SAP) Q4 2024 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q4 2024 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Alexandra Steiger, Global Head of Investor Relations. Please go ahead.

Good morning, everyone and welcome. Thank you for joining us. With me today are CEO, Christian Klein; and CFO, Dominik Asam. On this call, we will discuss SAP's fourth quarter and full year results for 2024. You can find the deck supplementing this call as well as our quarterly statement on our Investor Relations website. During this call, we will make forward-looking statements which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding these risks and uncertainties may be found in our filings with the SEC, including but not limited to, the risk factors section of our annual report on Form 20-F for 2023. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-year at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Christian, now over to you.

Yes. Thank you, Alexandra. Thanks to everyone for joining our earnings call. €63 billion. That is SAP's total cloud backlog at the end of 2024, up 40% over the previous year, hitting a new record high. Total cloud backlog is just 1 figure but it illustrates how far we have come as a company. 4 years ago, SAP shares took a hit when we announced our plan to transform the company. The markets had some serious doubt if we could pull it off but we did it and we delivered on all of our strategic promises. We more than doubled cloud revenue since 2020 and wasted to half of SAP's total revenue today. No major competitor is growing as fast as SAP. And with a total cloud backlog of €63 billion and an 83 recurring revenue share, we are on a more resilient growth path than ever. SAP has enormous potential and bright future. Over the last several years, we have developed a very compelling business suite offering in the cloud to run our customers' most mission-critical business processes end to end. We also have access to business data that no other tech company has. And with regard to AI, yesterday's tech news provided another strong validation of our strategy. Thanks to our ecosystem approach on the China AI hub, we are flexible when it comes to AI infrastructure and large language modules. We benefit from cost reductions and progress in the LLM space. Because we are truly differentiating an element in AI today. However, it is deep process and industry know-how, combined with access to unique context-rich business data. So value creation is more and more moving up the application layer and to building 1 semantical data layer. This is exactly what SAP has been focusing on. We have been embedding SAP business deeply in the business process of our customers. The result is that C-suite executives see us as the leading AI company in Europe and among the top 5 globally. Accurate business data and an understanding of its semantics, those are key ingredients to generate major value and to expand our competitive edge. I will touch on that and an exciting innovation in the data space in just a minute. The financial results for 2024 are another proof point of the successful journey we started. We had the courage to change our business module and 4 years later, we are winning in the cloud and in AI, big time. Becoming the number one enterprise application and business AI company is a huge achievement by team SAP. It took a lot of effort, dedication and openness for change to get there. A big thank you to our over 100,000 colleagues worldwide. Before we take a closer look at SAP's future, let's review how we ended 2024. Q4 was a very strong finish for the year. Without going into all the details, let me mention 3 points. Cloud revenue expanded 27% and drove double-digit total revenue growth for the third quarter in a row. cloud backlog once again increased 29% on top of an already larger base. And the most exciting thing about half of our cloud order entry in Q4 were deals that included AI use cases. This shows how successful we are in rolling out business AI innovations to our customers. As for the full year 2024, we achieved all our cloud goals despite macro headwinds and the ongoing transformation inside SAP. This wasn't easy but we did it. And we are very proud of that. The customer stories that capped off the year gives you a good idea of where SAP is heading. In Q4, more of the world's leading companies decided to embark on their wise journeys. The energy companies BP and Total Energies are 2 great examples. BP chose wise as the digital backbone for the transformation into an integrated energy company, helping to accelerate digitization, enhance performance and reduce costs. Easy access to technological innovation was another important factor in BP's decision. And Total Energies has been partnering with SAP for over 30 years. Why it will be a starting point for the company's transformation towards new business models and it will help to drive efficiency. And from there, we will take our partnership to the next areas. BASF, the world's largest chemical company is also banking on us. Together, we will drive both simplification and standardization and we will enable BASF to take advantage of AI-powered automation and innovation. I could go on and on. So many more global leaders chose wise in Q4, including Red Bull, EY, the European truck store chain DM and the automotive suppliers, Robarts and Chesler. With regard to grow, we've once again celebrated major wins in the IT industry, data puts a rapidly growing data and AI company with over 10,000 customers has selected go to modernize its financial systems and support its growth. Data Bricks will now have a solution that can scale fast in over 60 countries support new value modules and provides the company with instant access to business AI and Outreach, a SaaS company focusing on sales solutions, signed up for growing Q4 as well. Let me say this very clearly. SAP adds hundreds of net new cloud SME customers every quarter, we go on to celebrate go-lives in months, not in years. End users are delighted about the product experience of the suite and the new innovations coming in every quarter. This is the new SAP. Next to these customer wins, we also saw some major go lives. Let me name some big words. IBM went live with SuccessFactors for its over 275,000 employees in over 80 countries. It was 1 of the largest and most complex deployments of SuccessFactors in the history and delivered completely on time. And IBM also went live with SAP Fieldglass and SAP Ariba in NS2 for its federal business as the first customer to use both solutions in the NS2 cloud. We also had major wide go lives in the automotive sector, those who are General Motors and the Germany-based automotive supplier, Mala International. All the examples I gave make it very clear. More and more customers appreciate the comprehensive and integrated character of SAP's cloud suite. They start with finance, BDP and our business transformation portfolio. And from there, they expand to our full suite to all other line of business solutions following otherwise upward [ph] journeys. For our customers, it is so easy to adopt more and more of our solutions. The number of customers with over 4 SAP solutions more than doubled since 2021. Over 1/5 of our customers are now part of that group. Land and expand is clearly working. So we had a really great one. 2024 was another very good year for the company. But we are not stopping here. We are wasting the bar for the years to come. We expect accelerated double-digit total revenue growth and an expansion of operating profit through 2027. We can say this with confidence because we have all the white pieces in place. First, product innovation. Overall, we bought over 130 Gen AI use cases to our customers in 2024, over delivering on our plans. And we integrated 1,300 skills in total making it capable of automating 80% of the most used activities of our end users. More than 30,000 customers now use SAP Business AI. Among them, many great brands such as Campari, Hendel, MercadoLibre, BT and Standard Chartered Bank and other big names. For example, ABB, Bayer and the Swiss retailer, Mikros, signed deals for SAP Business AI in Q4. All this is a very good start but we are once again doubling down on AI in 2025. We will significantly increase our AI investments with all of our more than 30,000 developers working to enhance our AI foundation and building new use cases. One key ambition is to make a tool user 30% more efficient by the end of 2025. In addition, I can't wait to launch a game-changing innovation very soon that will give us a great boost in the data and AI space. Today, companies spend up to 50% of their IT budget on data and analytics. And despite all of that investment, so many companies fall short of realizing the potential of their data. Too often data stays locked in silos or stuck in so-called data swarms without business context. Companies have no complete view of their business that way and without access to high-quality data, AI agents stay far below their potential as well; according to the principal, garbage in, garbage out. We will address these challenges in the data and AI space, with 1 of the biggest innovations SAP has ever delivered. We will harmonize structure and unstructured data, SAP and non-SAP data, always with the relevant semantics. And by that, we will make AI agents much more powerful. Joule will become the super orchestrator of these agents, carrying out complete tasks autonomously and end-to-end taking over significant workload from humans. At our business unleashed event on February 13, we will talk more about this innovation. It would be our pleasure if you joined the webcast. Let's now move to the second piece, commercial innovation. First, we will make it even simpler for wise and go customers to land and adopt our latest innovation. We will introduce licensing options that allow customers to upgrade and switch easily to our newest cloud solutions across the whole SAP business suite, all without additional negotiations. Second, for customers that have landed with SAP, we will enhance strategic migration incentives to expand across our SAP business suite; the broader customers go, the more they benefit. Third, we will evolve our Wise with SAP offering. Our whole business transformation toolkit will be part of the Wise offering going forward, including Linac, Signavio and Walkman [ph]. In addition, we will leverage Joule for Consultant and Joule for Developer for our customers' transitions to put migration costs. Supported by the enterprise architects, we will accelerate time to value and allow customers to benefit from our full business suite even faster. And now to the third piece, simplification. We are very diligent and committed to making SAP simpler, leaner and more efficient. By rolling out AI internally, we enable our business to scale quickly while keeping costs in check to give some details. In development, over 20,000 SAP developers use AI-powered tools, including Joule for Developer already today. We are seeing average efficiency gains above 20%. On the go-to-market side, AI-assisted contract validation has reduced our average contract booking time by 75%. And in the corporate functions, we have seen a tenfold productivity gain through AI-assisted quote-to-cash process automation. Overall, we expect the one-way efficiency effect of our existing AI implementations of roughly €300 million already this year. And for the very near future, we expect to cross the €0.5 billion mark. In parallel, our transformation towards a better, more resilient, more simple SAP continues. In 2024, we started to merge our 7 go-to-market regions into 4. We have also consolidated our operations teams, reduced shadow functions and streamline the delivery of solutions to customers. And we are putting the right people in place. This morning, we were happy to announce 2 Chief Revenue Officers co-leading our go-to-market execution and transformation reporting directly to me; Jan Gil, as Chief Revenue Officer, Americas and Global Business Suite, and Manos Captolus as Chief Revenue Officer, APAC, EMEA and ME. They will be supported by Stefanek. Stephane joins us from '09, where he was Chief Revenue Officer. He will serve as business suite leader and ensure the success of our sweet motion across regions. This combination from in-depth product knowledge to world-class sales experience will allow us to further improve our go-to-market while staying focused on our commercial success. On the R&D side, we are extending the mandate of our Chief AI Officer, Philip Herzig, to also have our cross-company innovation efforts as new global CTO, continuing to drive AI innovation for SAP's customers and partners. Also this morning, we announced that the Supervisory Board has appointed the Boston Steinhauser as an Executive Board member, effective February 1, 2025, in the role of Chief Operating Officer. The question oversees the execution of our strategy as well as the simplification of our internal operations. In addition, the Supervisory Board extended the Executive Board contract of Thomas Saueressig for 3 additional years until 2028. We I'm very much looking forward to working with this strong and extended team. Let me now summarize. Our success over the last 4 years speak a clear language. We are capable turning ambition into reality and we intend to continue that way. We are curious about the future and set the bar higher because being the best is never done. With this drive and energy, we are continuing our profitable growth journey in 2025 and beyond. That is our aspiration. This is our promise to you. And with that, I'm handing over to Dominik.

Thank you very much, Christian and thank you all for joining us this morning. I would also like to wish everyone good health piece and success in 2025. SAP's strong finish to 2024 once again demonstrates great resilience in a year that presented new challenges and opportunities. We not only delivered on our financial commitments for the year but also build strong momentum that positions us firmly on track to achieve our stated financial goals for 2025 and beyond. 2024 was a year of transformation, highlighted by both top and bottom line growth as well as exceptional free cash flow strength. Our success in cloud revenue and robust non-IFRS operating profit throughout the year reflect the effectiveness of our strategic growth initiatives and our relentless focus on operational efficiency. Customers worldwide continue to choose arise with SAP as their solution of choice for the end-to-end business transformations in large-scale enterprises, while small- and medium-sized companies rely on grow with SAP to drive their growth and innovation. This is reflected in strong order intake and large cloud transactions with a volume greater than €5 million, contributing 63% to our cloud order entry for the full year and an impressive 68% in Q4. Now let me provide more detail around our financial highlights. Current backlog reached €18.1 billion, up 9% and Total cloud backlog for the year grew at 40% to €63.3 billion. Cloud revenue grew 26% year-on-year, supported by cloud revenue growth of 27% in Q4 and primarily driven again by the strong performance of cloud ERP suite. It actually had an impressive year demonstrating its role as SAP's core driver of growth with an increase of 34% in 2024, up from 33% in the prior year. Cloud ERP suite reached 84% of total cloud revenue underscoring its growing contribution to our success. Software Licenses revenue decreased by 21%. Finally, total revenue for the full year exceeded €34 billion, up 10% and this performance was mainly driven by strong growth in cloud revenue and resilience of our support business, reflecting the ongoing progress of our strategic pivot towards cloud-based solutions. Now let's take a brief look at our regional performance for the full year, Germany, Spain, China, India and Japan all had outstanding performances in cloud revenue, while Brazil, Canada and Saudi Arabia were particularly strong. Moving down the income statement. Our non-IFRS cloud gross margin for the full year continued its upward trend from last year and expanded by 1.4 percentage points to 73.3% and driving cloud gross profit up by 28%. In the first quarter, non-IFRS operating profit was up 24% and Operating profit growth in Q4 was mainly driven by the strong performance in SAP's software licenses and support business as well as disciplined execution of the 2024 transformation program. For the fiscal year, we delivered outstanding operating profit growth of 26% year-over-year, reaching €8.2 billion. The IFRS -- sorry, IFRS effective tax rate for the full year was €0.34 and the non-IFRS tax rate was 32%, in line with what has been previously guided. Free cash flow for the full year was down 19% to €4.1 billion, exceeding the revised outlook range of €3.5 billion to €4 billion which both provided in the prior quarter. Recall that on top of payouts for restructuring of €2.5 billion, we also absorbed €0.2 billion of cash out for compliance-related settlement matters and fully discontinued SAP triggered financing being with another couple of hundred million euros on free cash flow. On the other hand, we received a couple of hundred million euros from customers for receivables due in 2025. before the turn of the year which, in combination with strong profitability enabled us to slightly exceed even the upper end of the previously guided range of €3.5 billion to €4 billion. Non-IFRS basic earnings per share in fiscal year '24 increased by 22% to €4.53. Now let's move on to our outlook. You've likely seen in the quarterly statement published earlier today, we have provided this year's outlook. 4 years ago, SAP outlined both long-term goals to guide our transition towards cloud-based solutions. Today, we are proud that this year's outlook solidly aligns with the ambitions we set in 2020, demonstrating the progress we've made in executing our strategy. Before I move on, I want to provide an update on our compensation metrics and foreign exchange hedging strategy that we will adopt going forward. As of 2022, we will enhance our compensation framework by incorporating free cash flow as a metric alongside non-IFRS operating profit. This will ensure heightened attention towards working capital and other drivers of free cash flow. Additionally, to reduce foreign exchange-related impact on free cash flow, we have further developed our hedging strategy, in particular for the U.S. dollar. As a reminder, we currently provide all income statement KPIs that are relevant for compensation purposes on a constant currency basis, free cash flow, however, has been and will continue to be provided on a nominal currency basis as unlike the compensation relevant income state KPIs, it does include the results from foreign exchange hedging. We continue implementing a hedging strategy with a lead time of up to a year to mitigate the risk from U.S. dollar euro exchange rate fluctuations, by aligning hedging instruments with forecasted cash flows and maintaining a 1:1 hedge ratio where possible, we aim to reduce the volatility and minimize the impact of exchange rate fluctuations on our free cash flow. This approach is largely completed by now and reflected in the free cash flow outlook we have provided today. So while the average exchange rate for 2024 and as a result, constant currency exchange rate for 2025, underlying our outlook for income statement KPIs is 108, the spot rate today and at the end, 2024, relevant for CCB was 104, the forward rate of our hedge portfolio for free cash flow for 2025 sits logically in between at around 1.06. Now let's quickly discuss our nonfinancial KPIs. In 2024, we continue to see strong uptake for SAP Sustainability Solutions portfolio with a robust growth of approximately 70% for our sustainability innovations. Q4 was very successful, particularly in our MEE and EMEA regions, including a key win with Knap, an Austrian logistics automation company purchasing SAP sustainable control tower, SAP sustainable footprint management and SAP sustainability data exchange for sustainability disclosure and carbon accounting, including supply chain engagement. Companies like Knap are turning to SAP to be the foundation of their sustainability reporting. Regulations, customer need for supply chain transparency and the ongoing convergence of sustainability and financial standards continue to drive and play to our strength globally demonstrating sustainability as a core business and ERP requirement. Now in Q4, we released the highly anticipated SAP Green ledger Together with our sustainability portfolio capabilities which provide data collection, calculation and auditability, the SAP Grain ledger allows customers to sink emissions data with financial data, for strategic and contextualized business decisions that are both financially and environmentally sound. This also helps companies fulfill regulatory requirements. Now in summary, we delivered on our key objectives for 2024, achieving strong top and bottom line results while demonstrating resilience in a dynamic environment. Customers continue to choose our solutions to help transform their businesses into more intelligent, sustainable enterprises as reflected in our cloud performance across all regions of the world. With our foundation now firmly established in 2025, we must remain vigilant in our execution to sustain growth and set the stage for long-term success for years to come. This progress would not have been possible without the dedication and hard work of our people, both those who remain with us and those who have moved on. We deeply appreciate their contributions to helping SAP navigate their transformational journey in this year. We remain optimistic about the opportunities ahead, confident that our commitment to innovation and disciplined operating strategy will continue to drive positive results. Thank you and we will now be happy to take your questions.

Thank you, Dominik. And with that, we will now take your questions. I would like to kindly remind you to only ask 1 question when prompted. Operator, please open the line.

[Operator Instructions] The first question is from the line of Adam Wood with Morgan Stanley.

Congratulations on the excellent end to the year. Maybe if I could ask just a little bit around CCB and the kind of stage of the upgrade cycle to S4 in the base. Just in that context, we've obviously got very strong CCB growth at the end of '24 with that acceleration, TCB accelerating but you're talking about a little bit of a slight deceleration on CCB for '25. Can you just help us understand how much of that is just the fact that you can't keep accelerating that number of ever bigger numbers in that context, give us a little bit of a feel for where you think the installed base is in terms of the upgrade to S4, how much of their is there still to do? Basically, are we hitting the peak of that upgrade in the near future, do you think there's actually a lot more to go for as you look out over the next few years?

Adam and I can start and look at CCB Indeed, we had a record Q4 exceeding all our expectations. Now for next year to give you a few installed base, we are roughly 40% of our customers are on the move with wise to our business suite in the cloud. 40%, that doesn't mean even that all of their landscapes are already in the cloud. So that contracts include a significant ramp towards the later year. So that gives us even the 40% who are underway will also give us further acceleration in the years to come. And then also, when you look at quo, I mean, we are actually adding hundreds of net new names, as I mentioned and also our win rates in the public cloud. When you look at the different LOBs and the win rates against the best of breed is going up, because clearly, now the customer is seeing, hey, it's really about land expand and running my core business processes integrated end-to-end and of course, then with AI out of the box. So yes, the base is getting bigger indeed. But when you look at the absolute growth, it's also further accelerating. I mean we are putting a ton of new business on top. And also, let's not forget, a, at a certain point, it's also now important to drive adoption. Our retention rates are getting better and better and so I feel the outlook is actually really ambitious. Also given, honestly, the macro environment and you see in the cloud revenue, there is no slowdown. This is actually an acceleration. And so the 2 things coming together, higher retention, higher adoption, further acceleration of the customers who are already on the move to the cloud higher win rates in the different line of businesses. So Adam, absolutely, we are very confident for the year ahead. And honestly, also for the year, beyond the installed base, look at the maintenance revenue number still gives us a lot of potential to move customers to the cloud. And then, again, also not only upselling these customers but also cross-selling, as I mentioned.

Let me add 1 point there. If you look in the sell-side estimates, we see that there is still a little bit of a kind of doubt in terms of our revenue acceleration thesis through '27. And what I encourage you to do is to kind of back solve how much CCP can actually decelerate before you would kind of not see that acceleration in consolidated revenue. So the mix factor I'd say, at the sweet spot, of the revenue mix play, giving us a boost on total revenues. And so this kind of slight deceleration we have guided here is actually probably much better than what has embarked in some of the models we see on the sell side these days.

Yes. And maybe 1 piece to add I mentioned 2 large energy companies but we also signed up for many, many automotive given they are not in a good position right now, given all the concerns which are existing in this industry. But still, they're shifting maybe now the first part or maybe 1/3 of the landscape to the cloud but then really focusing and that is the value add, they are not only lifting and shifting to a cloud infrastructure. we are intensively working now on process simplification. They need to run new business modules. And then give them a year or 2 and then they will actually sign another contract. So Adam, it's also a phasing. And we want to be reasonable in our outlook, how we also reflect this phasing of these wise deals because customers need time. I mean changing business modules, it's not only a technological move, it's about change management. It's sometimes I have seen this 4 years ago, also breaking the walls, there is some change resistance but cloud software need simplification. We move to a new technological architecture with BGP. So let's also give the customer some time but there is enough potential also in the installed base left.

The next question is from the line of Jackson Ader with KeyBanc Capital Markets.

Great. Questions around migrations in 2025. So if we expect some of the CCB have slowed down a little bit and cloud revenue growth to accelerate overall revenue growth to accelerate. I'm curious what should be the expectation for support revenue in 2025 as you continue to drive more of those migrations in the coming year and how that flows into cloud revenue as well?

Yes, it's a very good question and it gives me the opportunity also to comment on what looks to be a slightly odd Q4 with actually an increase in maintenance. This is certainly not a trend. It is simply related to the fact that actually we caught up on some revenues we carved out previously because to a financial distress of a larger customer that had a financial restructuring and then we could reembark these revenues while in the Q4 of the prior year, there were actually some compliance-related cars on maintenance revenues and that made the whole thing flip. If you depolluted for that, you see a very steady slight decline. And as previously guided, no change to that, we will kind of see a gradual decline. Obviously, the slightly higher-than-anticipated license revenues indicate that also maintenance revenues have a little bit of a longer life. So -- but overall, we would not deviate from that hypothesis of a slight acceleration over the coming years in maintenance revenues but don't expect to complete collapse. And again, the good news is we have a gradual rollover from that maintenance space to cloud revenues.

And maybe just to build on that. Sometimes, the world went geopolitical tensions increase, customers already see again, even more value coming also back to SAP for SAP support. I mean, given legal and regulation support in over 130 countries is a real asset. I mean the same is also what we see now in the cloud is customers want to expand their business, they need localization. So it's a real asset. So that while you also see this very high retention weight on support revenue. And also with the move now that we allow our customers to move to the cloud and while they have 100 ERPs from SAP and they need time to consolidate, we offer them now to replace some third-party assets in the stack and to really allow them to continue their transition while not getting hit by the end of maintenance which will stay in place, of course, That, of course, is even more come back to SAP and allow and see really to create value of SAP support.

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

Christian think you probably just touched on this topic in your last remark. But there's obviously a bit of press coverage around potentially extended maintenance. I think some people suggesting '23 is the new 2030 which is clearly not case. But can you maybe help us a little bit more with some detailed understanding, what's the reasoning behind this SAP private edition option? And what is generally going on in the installed base? I mean, is this really what some of your large legacy customers needed to get kind of over the line and then sign some of these deals? Or is it really that you're maybe not seeing the kind of momentum with some customers that you were hoping.

Yes. Happy to answer that question, Johannes. And look, I mean, as I mentioned, some of our customers have over 100 ERPs. I mean they are 1 in factories, manufacturing and logistics with that. And now the end of maintenance by 2027 will not be changed. We will stick to that. But you also have to consider, in some parts of the stack, there are third-party components included. And they are running out of maintenance as well. So we don't want to leave the customers behind. And as we moved all of our cloud solutions already on HANA cloud, we do now the same with these on-premise customers. We move them to the cloud. We replace the third-party components. And with that, we can also 1 in the cloud. Now there are 100 ERPs in a complete sustainable and supportive way. And that is about this offering. It's actually for a very few large customers will not making the time because, again, to transform and consolidate ERP and business processes in over 100 countries is sometimes not that easy. And that is what this offering is about. So it's not about the extension of on-premise maintenance. And clearly, we see the acceleration in the cloud but it's really reaching out with a helping hand to a very few large customers who need this offering to fully transform and migrate to the cloud. This is what this offering is about.

The next question is from the line of Mohammed Moawalla with Goldman Sachs.

Dominik, I wonder if you could just clarify the thought process around some of the moving parts on the FY '25 outlook. You obviously raised your EBIT guidance but I know there was a definition change on the free cash flow I know the tax rate has also gone up a little bit and there's more restructuring. Has anything else changed just to kind of bridge the gap in terms of assumptions around working capital and what are the plans in terms of the impact you expect on that over the next couple of years?

Yes. I mean working capital is always extremely hard to predict around the turn of the year. You might receive some payments you didn't expect or take the massive performance we had in Q4 on new bookings. You recall that we're also offering transformation credits to customers to incentivize them and help them with the transformation period which is actually creating some upfront cash out relatively to the phasing of the profits in these customers. And all that taken together has resulted in the outlook we have given. You've seen that we have kind of pulled in some cash in 2024. So we were ahead of plan in 2024 and that, obviously, like money you received early, you won't receive any more in '25. On the other hand, we also operationally made good progress. I think it's interesting to look into our cash flow statement. It's Page 14 of the quarterly statement. And you see some promising signs, for instance, trade receivables increased under proportionately, so the cash out is lower than in the prior year. despite the fact that we had the normalization of these vendor financing things, so that should actually increase accounts receivable. You see that we are quite disciplined. And another extremely important topic for cash conversion is actually stock-based compensation. And it was a little bit strange in 2024 because we had this huge increase in the share price and we still had quite some cash settled units which are partially also paid out in 2025 still. And what I can tell you on that front is, again, you look at the cash flow statement and you see share-based compensation in the P&L was €2.4 billion which frankly is higher than what we thought because of the strong share price increase. You recall that for 2020, we actually said it should be more about €2 billion, sorry, for 2025, it should be more about €2 billion when we adjusted for inclusion of stock-based compensation was that a couple of quarters ago -- a year ago, almost and we had €2.2 billion in '23. We said it will transition to €2 billion, now it's €2.4 billion because of the huge increase in share price. But we continue to believe that the P&L impact of stock-based compensation will go down once we have this effect reduced from share price moves. And then the cash out is much smaller, of course. So you see €1.3 billion in the statement. Both in 2023 and 2024, there was a €1.1 billion positive from version of stock-based comp which is simply the equity settled part. And that is a number I can tell you will be quite similar next year. So as you strongly reduce stock-based compensation, that reduction will then if the delta is the same hit very much the cash flow. So all these things need to be taken into account are embarked here. And yes, it's -- I agree it's not straightforward but I encourage you to look at cash conversion and look at basically, the depolluted free cash flow, if we add that restructuring, we add back the compliance charges, we add back the factoring. These are the 3 factors I would always kind of depollute to come with an underlying cash conversion number. And then on stock-based compensation, I gave you the hints how this will evolve and we can also go in more details off-line about that. And that number is a very high number, honestly. If you think about EBIT tax affected, you will see that we're actually currently running better. And that is also because of the catch-up we have on some of the working capital items and we will need to continue to grind on that to really keep that extremely good cash conversion that we had in both '24 and is actually also applied for '25.

The next question comes from the line of Sven Merkt with Barclays.

Thanks for taking the questions and congratulations on the strong quarter. If you look back to 2024 I am doubtful [ph], you added about €3.5 billion. Can you go to just a rough indication how this breaks down into maintenance conversion up and cross-selling as well as net new sales and maybe how you see this evolve into 2025?

Yes. Let me share bit more insights about how, of course, we close cloud order entry and then how this translates into CCB. And when you look at Q4, of course, by far, our biggest quarter, I have to say really a record quarter, 60% roughly from the cloud order and we comes from base customers moving to the cloud, then you get another 30% from net new and roughly 10% about upselling into the existing installed base. So you see the mix in my eyes is actually really healthy. And for me, next to the strong move of the installed base which still, as I mentioned before, has a lot of potential for the years to come. for me, even more important is, of course, the net new, because that is what is really then adding completely incremental business on top which then also gives us to create performance on total revenue. Now on maintenance conversions, I mean, we always have these multiples that developed in Q4 also extremely well. Actually, we have a multiple of slightly around about 3x which is very strong, given also and you can see that in our cloud gross margins, I mean, we clearly did our homework there. I mean, both for the private cloud and the public cloud business, the expansion of the gross margin is very strong. And I have to say, looking at our plan for the year to add and everything what you see -- what you saw yesterday, the cost reduction on large language modules and other things we are trying to get down the TCO in our cloud operations gives us actually also the potential to further reduce TCO and with that also expand our very healthy cloud gross margin in the years to come.

The next question comes from the line of Toby Ogg with JPMorgan.

Perhaps just on AI, could you give us an update just on how Joule is tracking in terms of adoption whether you're actually seeing any revenue generation yet from the monetization of Joule? And then just how we should think about the timeline for potential contribution to revenue growth from the monetization of Joule and agents?

Yes. I can actually share with you a story from yesterday where we had a CFO of a big, large German company here with us in our headquarter and we looked at agenda with less the so-called orchestrator. And we shared what is coming in 2025 and we shared an example to improve cash collection. And what we did is actually we looked into some delayed payments in the life system of the customer. We actually showed him what are the reasons Trull actually showed what are the reasons for the delay. Is it logistics? Is it a supplier? Is it actually some issues that are to deliver? We are -- or is it and a commercial issue. And then you saw how Joule was reaching out to the different agents on the logistical side, on the procurement side, supply chain on the sales side and was really able to handle to pull in a dispute and really helping to resolve the case fully automated. Still, of course, a human being sitting at top say, yes, I want to have to create this disputed that way. We should reach out to the customer in that way. We showed a copilot in equation, they're very deep; also you can put it in a mail, the mail gets prescripted. And then actually, the human being sits there. and you can look at it how Joule is orchestrating the whole process. And of course, with different options and the wide outcomes, meaning an improved cash flow. And this is -- when I look at that I can only say what we did with Philip with the team to really not focus so much on the large language models. We are partnering, we are super agnostic and given yesterday. I mean, this is super good news for us. but really focusing our R&D, our innovation on building the strongest AI foundation for businesses, meaning understanding of business data, contextualized business data, I mean this is -- when I have seen this yesterday for me, this is absolutely the right strategy. Now talking numbers, I mean, you have seen 50% of the deals in Q4 were driven by AI. And trust me on 1 thing, given also my other role in sales, I mean, it was not only 1 factor. It was in my eyes defect that our value engineers could go in and show the automation, the productivity in various functions of the company, also showing what you can do with Joule as the new UX and so that was really, for us, a key driver of our Q4 order entry. And yes, given that we actually always started with a consumption-based commercial module, I mean, of course, adoption is key from day 1 on, also a good decision. And now, we are seeing how this significant order entry also driven by Joule and business AI is also turning into revenue. We see oftentimes -- let us give us a 3 months delay between signing and then the go-live of the first AI use cases. And then the revenue is triggering. And again, it's already a very healthy in a fast-growing business.

The next question comes from the line of Frederic Boulan with Bank of America.

Can we spend a moment on the cost side? Maybe if you can share a bit your -- how your kind of go-to-market strategy is evolving. And when you look at the main cost levers beyond 2025. Any guidance for this year implies a still very disciplined cost growth versus revenue growth, so definitely less in the 80% to 90% you were alluded to before. So can you share a little bit the kind of moving parts beyond '25 in terms of go-to-market and overall efficiency of the business?

I mean, coming out of the kick-offs beginning of this year, I have to say the transformation of our go-to-market function is in full swing, just to illustrate on where -- what we are working on. First, the AX system is also now even more excited about growth potential with SAP. As we are assigning them now partner-led territories, so they get dedicated territories to quote their business, to invest into SAP. They also very much like the fact that they can sell with SAP, a suite. I mean also the same like we do land and expand. And so they see a big growth potential and, of course, further investing into SAP. And for us, that gives us scale pure efficiency. I mean we actually have enormous growth plans for the channel in 2025, given all the changes we are doing. And then on the direct sales side, I mean, we want to be much more disciplined around the number of calls we are having around the commissions we pay. And so we are rolling this out. The change management is in full swing. It will also give us even, honestly, some efficiencies beyond 2025. So that is in full swing. And maybe, Dominik, you can comment on the overall cost side.

I think the good news is we are derisking the cost base and AI play is also a big role, as Christian has explained. And yes, from the guidance you've gotten from us, you can see that we are doing better in the bridge from 2024 to '25, then the 80% to 90% benchmarking logic we have applied. I think for the years beyond '25, '26, '27, is still a good measurement to say in that ballpark, we should end up. And this gives us then by virtue of the acceleration in the top line, we've also indicated a good expansion opportunity for further improving the free cash flow and then also the combination of cash flow margin growth and then the revenue growth boost, of course, what we call the kind of Rule of 40 performance of the company.

The next question is from the line of Mark Moerdler with Bernstein.

Thank you very much and congratulations on the quarter. Dominik, you've been hyper focused on driving efficiency, improving margins while driving growth in the business. With the internal implementations of AI. Can you discuss exactly how you see that translating? Is it purely going to drive margins, you talked about -- what could be $0.5 billion of improvement. Do you see that dropping to the bottom line? Do you see that as investing? Do you also see the efficiency you're doing within sales and other parts of it being able to accelerate the revenue growth and revenue growth per salesperson?

Yes, of course, these KPIs need to improve going forward. Otherwise, a ratio of selling expenses to revenues can't improve. And obviously, as we grow the base -- the incremental bookings we need are growing. So it's a mathematical necessity that the answer to your question is yes. I would say we are firmly on plan. Our confidence level on these initiatives is significant. I'd say the organizational changes that Christian has highlighted to consolidate all the operations functions in 1 cluster under Sebastian Steinhauser was exactly the right move to do to really come to end-to-end process optimization. And that gives us the confidence because we have the visibility now where building blocks are where they kind of also impediments like we need to eliminate. But again, I think from a financial modeling point of view, we still want to preserve the capability to also invest in our growth and keep both the growth investment and the efficiency in sync and that 80% to 90% leverage, I'd say, operating leverage in a certain way for '26, '27 is still a good yardstick.

Yes. And I have to say, of course, Dominik is laser focused on efficiency, cash flow conversion but also the CEO is, of course, focus to make SAP more efficient. But I have to say, to coders to Dominik, Gina, Mohammed and all the others; I mean when you look back 1 year ago and we did our headcount planning for the year. I mean all of us now committed because of AI on a completely underproportional headcount growth. I mean a year ago, the headcount ask in the commercial deal support was up through the roof because we are closing a lot of new business. Now, we have an AI capability to as Joule and a lot of the contract checking, the reference [ph] check, the compliance check has been taken over by AI and you see this in cloud delivery where you see this in R&D with tool for developer. And also the Board colleagues, you know, it's not only like pulling out an AI use case and see here are the efficiencies. It's about change management, it's also about explaining to people what these technologies can do because it's changing all such shops. But I have to say, looking also at the plan for this year now, I mean we are growing so much under proportional in many functions of the company also because of AI.

The next question is from the line of Michael Briest with UBS.

Just a clarification on the comment around maintenance. Are you not then making this extended maintenance to 2033 open to all customers. It's just a handful of sort of specially selected ones. And I'm just curious on licenses, not a good quarter but what is the thinking about potentially taking that option off of the price list and maybe for public sector in a few sectors, it's still relevant but for the general customer base. And Dominik, can you quickly just clarify what you mean by deceleration? Is this 100 basis points, 200 basis points for CCB?

I can take the maintenance question. And look, I mean, first, we are legally, of course, we will opening up this offering to all of our customers but who does really need it is really a few large customers who really ask, Christian and team, we have all of these ERPs. They are already on the move, by the way. I mean, many of them, they're just saying, "Hey, I can't do North America this year, I can do EMEA next year but give us some time also for APJ before you know maintenance is running out and say, okay, let's move to the cloud. We replaced the third-party component in your stack so that you can still want a compliant business and which we -- and that we can support the end-to-end stack. This is what this offering is about. And of course, it's available to all customers. But while the move is working so well, I mean, very few large customers which I expect will make use of this offering which is great because we are showing, we are signaling to them, hey, we're going to take you with us on this journey. We are not leaving someone behind and you are focused on your transformation, doing the right things for your business while we are making sure that you can still running a compliant and supported landscape also going forward in the cloud.

Then on a slight deceleration on CCB, I don't want to give you precise numbers but what I can say is what I entered to before. And there is this statement we make this kind of ambition we expressed that through 2027, we want to see total revenues accelerate now. You know how the game from CCB to cloud revenues works and you can make some educated assumptions about maintenance and license revenues going forward and services kind of that low growth rates, you've seen a very low growth rate this year. And then can back solve how much deceleration can we actually afford to come to kind of a steady growth rate of round about what we guided, I think, is about 11% in the midpoint we guided for '25. And of course, the deceleration lies somewhere in between because on the 1 hand, it will be slower than what we have today. And also don't forget there is still a little bit of a positive impact from the first-time inclusion of walk me in the '29 numbers. So that's a more technical aspect of that. So that 1 you can intellectually take out because as soon as we have the kind of comparables of the prior year, including walk-me, it's gone and then there is a slight deceleration which is kind of in between that kind of deceleration you would need to see to not see revenues on group revenues accelerated by more than 11% and where we sit as of the end of the year. So that ballpark gives you a little bit of a feeling where that might end up.

Thank you very much, Dominik and this concludes our call for today. Thank you all for joining us.

Thanks. Thanks to you.

Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.