SAP - Q4 2023 (Media)
January 24, 2024
Transcript
Monika Schaller (Chief Communications Officer)
Good morning, and welcome to today's fourth quarter and full year press conference. Thank you for joining us here in Walldorf in person, and of course, thank you to everyone joining us virtually. I'm Monika Schaller, Chief Communications Officer, and for today's flow, we have our CEO, Christian Klein, and our CFO, Dominik Asam, who will talk a little bit about our earnings, full year results, and strategy. Following the presentation, you will have the opportunity for a Q&A session, and for everyone being dialed in virtually, you can, of course, use the Joule as of now and ask your questions. With that, Christian, let's not waste time. Over to you.
Christian Klein (CEO)
Yeah. Thank you, Monika. Thanks to everyone who is joining us here on-site despite the train strike here in Germany, but of course, also, a very warm welcome to those of you who are joining us virtually from all over the world. And it's still January, so I guess it's fair to say also a Happy New Year to everyone. When the mic is on, that helps. Thanks a lot, Monika. Look, 2023 earnings, what a great year for SAP! I mean, we meet and exceeded the outlook on all key metrics, and this is also a day when you remember back, when we were sitting here three years ago, we just started the transformation of SAP, and we made a promise. We made a promise that we are going to accelerate cloud revenue, and that we come back to profitable growth, and we delivered.
At that day, I cannot thank enough all our 100,000 employees, because to turn around such a tanker like SAP in over 180 countries, that's not a given, and this is a remarkable result. Behind all of these numbers, when you look behind the scenes, when you look at our tech, when you look at our platform, who is more modern than ever, how we reduce the technical debt, I mean, the platform is the platform who actually integrates the businesses the best, who helps them to remove complexity, who helps them to re-remove data silos in a world of AI, which is super important, and I come into that in a second. Today, it's fair to say that SAP is stronger and more relevant than ever.
But also in tech, and this is not only to SAP, there's no time to rest. I believe there is no faster-moving industry than the technology industry, and it's our job to always think ahead, what comes next. And that's also part of the earnings, how we will continue. We will see accelerated growth in the next two years, but we want to make SAP the number one enterprise application company in the years to come, 2025 and beyond, and that's why we are not stopping. We are not resting. We are continuing with our transformation, and we want to do that based on a position of strength. When you look at Q4, again, also thanks to Scott and the team, it was a fantastic year-end, and the numbers speak for themselves. I mean, the current cloud backlog is up 27%.
Further acceleration, it was the highest growth we have ever seen, and also the cloud revenue, as a result, accelerated by 25%. There were also other highlights in Q4. We completed the LeanIX acquisition. They are now also part of the SAP family. We got very good feedback from our customers and partners, and also we made, you know, further announcements around NVIDIA. I will come to that in a second. We also were at COP28. It was remarkable, the interest in our technology to create further transparency around carbon footprint, around ESG, also beyond Scope 2 and Scope 3, where SAP is also extremely well-positioned. For the full year, there is one number which really stands out for me, and that just shows the massive resilience what SAP has in the meantime.
That's this total cloud backlog of EUR 44 billion, which is increasing 39% year-over-year. And also, it's remarkable to say that we also actually... Our new customers, the new customer share is up by 50% year-over-year. When I just quickly go into the key success factors for SAP's strong momentum, I mean, first, I have to mention our customers. They are loyal, they co-innovate, they are moving with us. And this is not a lift and shift to the cloud. These are real transformations. Maybe to highlight a few, NVIDIA, great partner, instrumental for our AI platform, but also a great customer. Now, they decided to select SAP to build further resilience in their supply chain. They need scale. They have not a lack of pipeline, and they are looking to our technology to digitize and build a more resilient operations end to end.
Volkswagen, I mean, I was part of SuccessFactors some years back, and the comeback of SuccessFactors is remarkable. It's one of our strongest lines of businesses, and to run a Volkswagen or a Nestlé in over one hundred countries, there is no other HR player in the market who can do that. Also, not with the type of integration into payroll, into finance, to really also make sure you can really manage the employee experience end to end. AES was an Oracle replacement, LG Chemicals moving over to SAP. So these are the kind of net new customers who actually see who see the value and see by far more than only lift and shift systems to the cloud. I just said it in the room, I had a fantastic experience going with the train to Davos, and-...
Taking the train in Switzerland is actually even more exciting as the CEO of SAP, because they are one of our best companies. So the trains come on time, they are maintained in the right way, they have a great total workforce, they are really ready for the future, and this is done with SAP technology end-to-end across the whole Swiss railway. Again, we also actually welcomed over 11,000 net new customers in 2023. So second, and the most important pillar, our employees. I mentioned it at the beginning. There was a lot of change in the last three years inside SAP, and the strategy is one thing, but to execute on the strategy, to drive the change management, is actually immense, and you should never underestimate that.
The way how we develop, the way how we deliver, the way how we serve, the way how we sell, is fundamentally different with the customer success in mind. I want to thank again to all of our 100,000 employees. It's not a given to do such a turnaround within only three years. Another lever is the innovation. You saw our outlook. We are very confident, we are resilient, but we are also very relevant, especially in business AI. Why? To give you a glimpse about what happened at the World Economic Forum, there were a lot of concerns from business leaders about keeping up the productivity in times of inflation, keeping up the growth in times of macroeconomic challenges, keeping up the supply chain and build more resilient supply chain in times of geopolitical tensions.
And in all of that, Gen AI can actually provide solutions for these challenges. And even more interesting is when you talk to the Microsoft, to the NVIDIAs and all of them, they're actually also looking at our AI platform and say, "Hey, how can we connect? How we can extend the AI platform?" Because as Jensen from NVIDIA said, we have a treasure. Our treasure is that we are sitting on very mission-critical business data, where 30,000 customers already gave us a consent to use their data to build to infuse more intelligence on how to better predict sales and optimize inventory, where we can take out billions of CapEx by optimizing the whole supply chain for our customers.
But a question on how to attract and retain the best total workforce, I mean, what we are announcing today is a big total transformation on our workforce, and technology can help to find the best talents, to retain the best talents, and that's SAP Business AI. And Joule, our digital AI system, which we will also harmonize with some of the AI assistants of our partners, will not only speak finance, Joule will help to not only automate activities, Joule will help to solve some of the most pressing challenges our customers have by guiding the end users, by giving smart answer to some of the challenges I just mentioned. The 2024 outlook: confidence. I mean, with a backlog of EUR 44 billion, we have much better predictability than three years ago. Pipeline remains strong, the business cases are compelling for all the innovation I just mentioned.
We imply a growth rate of 25.5%, which also, you know, actually indicates acceleration of growth in the cloud. We raised our ambition for 2025 because clearly we are also applying AI internally to gain further scale. Of course, we are already working now with the transformation program we announced to not only give SAP significant growth until 2025, but also in the years beyond. The growth formula. What do we have? RISE and GROW. Smiling, because when I look back again 3 years, it was exactly the right thing to not only say we follow the trend in lifting and shifting systems to the cloud. No, no, no. We have 400,000 customers. We know how Samsung wants, we know how NVIDIA wants, we know how ASML wants, we know how we are doing pay-as-you-go, consumption-based business models. Let's infuse that.
Let's really help our customers to transform. And with the new board area, this is actually a commitment to double down on that. So Thomas Saueressig and team will further actually help our customers to really also gain the business outcomes, what they expect from the investment into SAP. GROW, I mentioned it, 11,000 net new customers. It's actually remarkable how many mid-sized customers are actually also helping us to fuel our growth because they see that they can globalize and localize their business best with SAP software. And of course, every one of these mid-sized companies wants to become the next SAP, wants to become the next big retailer, and this is possible seamlessly with our platform. Talking about platform, it's a platform which in the meantime drives EUR 2.5 billion.
I mean, this was a platform three years ago, which was hardly not integrated with our applications. Now, there's a harmonized data model, there's strong integration, and we can run the IT landscapes of our customers with much less complexity in the cloud, with much better integration also to non-SAP solutions. And of course, that also gives us now the leverage to also actively cross-sell. I mean, when you look into some of our customers, also here in Germany, they often start with finance and logistics. Then we move on to total workforce, then let's really digitize procurement, then let's really look into the supply chain, and all is happening on BTP. Last but not least, let me also shed a little bit light on the transformation program, what we actually announced today. We invest. We invest heavily into future growth.
SAP is a growth company, and we will not fall short on investments to really capture these massive opportunities we have. We're gonna invest nearly EUR 1 billion in AI by the end of 2025. We will invest heavily into really stellar portfolios like supply chain, like sustainability, to further accelerate the innovation for our customers. We're gonna invest into new architects, to the point earlier, to make sure that our customers are transforming and not only lifting and shifting. Second, of course, we are also going to apply AI internally, so we're gonna reach more scale. We're gonna automate activities, and with that, of course, comes also a transformation of our workforce. Also, have you seen today that we are going to allocate roughly EUR 2 billion into this transformation program for restructuring? The transformation program is actually impacting over 8,000 people.
And here, at that point, I want to highlight one thing: To make that, such decisions is never easy. I'm partner of SAP since over 24 years in the meantime. I'm, I'm a child of SAP, and when you impact people, that's never easy. But the same what we did 3 years ago, we are doing here now again. We are giving SAP the best future. We are giving SAP the future, a future with high growth, to compete in the tech industry, and this is, for us, very important, to give our 100,000 people the best future we can. And then you, yes, you have to make tough decisions, and out of the 8,000 people, two-thirds, hopefully, we can also handle with voluntary measures, like early retirement, like lift and shift.
We are going to invest over EUR 100 million in education to help people to find new jobs in the growth areas I just mentioned. So we have the people in mind, and we do our best to make this as smooth as we can. To net it out, actually, we had a very strong 2023. We're now ready to build the next phase of our transformation. We're gonna see that we are accelerate cloud revenue and profit towards 2025, and also, the years beyond. Again, many thanks to all of our employees, to our partners, to our customers, for being with us on this journey, a journey which will not stop here. We're gonna continue, and we're gonna make SAP also a great company in the years to come. Thanks a lot, and now over to you, Dominik.
Dominik Asam (CFO)
Thank you, Christian, and thank you all for joining us this morning. A happy and healthy 2024 to everyone. We once again delivered on our financial targets for the year and are making great progress towards our ambition, 2025. Our financial results demonstrate our commitment to our stated goals. With a strong finish in Q4, we're exceeding our own expectations in cloud and software revenue, non-IFRS operating profit, and free cash flow. A strong order intake and resulting current cloud backlog gives us confidence that we'll keep the momentum this year. This is underpinned by the success we've seen with RISE with SAP. It is the solution of choice for our global customers to help drive their end-to-end business transformations.
This is evident as large cloud transactions with a volume greater than EUR 5 million contributed 55% to cloud order entry for the full year, and an impressive 62% in Q4. I'd like to remind everyone about the reporting changes we announced a good month ago and give you a brief update on the new Cloud ERP Suite disclosure. Cloud ERP Suite is our growth engine. It is representing 82% of our combined SaaS and PaaS revenues, and growing by 33% in fiscal year 2023, up from 32% in the prior year. We expect Cloud ERP Suite to sustain very high growth rates, and therefore, to represent a growing share of our cloud business going forward. Current cloud backlog reached EUR 13.7 billion, continuing its growth at scale to 27%. That is the fastest pace on record.
Total cloud backlog for the year even grew at 39%. Cloud revenue grew 23% year-over-year, underpinned by cloud revenue growth of 25% in the last quarter, and underlying strong performance across all geographies. Cloud revenue now surpasses the combined software licenses and software support revenue. It is effectively our largest and fastest-growing revenue stream. Our combined SaaS and PaaS portfolio for 2023 continued to grow by an impressive 26%. SaaS revenue was up 23% and PaaS up 46%. This strong performance was primarily driven by outstanding contribution of the aforementioned Cloud ERP Suite, including the Business Technology Platform. Total revenue for the full year was up 9%, supported by cloud and also service revenue. Now, going down the P&L, our cloud gross margin for the full year continued its upward trend from last year.
It expanded by 2.4 percentage points to 72.6%, driving cloud gross profit up by 27%. In the fourth quarter, non-IFRS operating profit was up 2%, but as a reminder, there are some special effects. Operating profit was negatively impacted by the accelerated amortization of capitalized sales commissions related to on-prem business, higher bonus accruals because we had an extremely strong finish to the year in Q4, and don't forget, prior year operating profit baseline included a disposal gain of EUR 109 million related to the sale of Litmos. For the entire fiscal year, we kept our promise and delivered double-digit operating profit growth of 13% year-over-year, reaching EUR 8.72 billion.
I'm particularly pleased that we have snapped back to growth on non-IFRS operating profit, especially as starting in 2024, we will no longer exclude share-based compensation expenses from our non-IFRS results. I recall that was an issue some of you took at it. So we announced last month that we will report based on post-stock-based compensation, and I can also confirm that we turned the corner in terms of snapping back to growth on that profit measure. Earnings per share increased by 24% to €5.01, and free cash flow for the full year was up 16% to €5.1 billion, exceeding the revised outlook of approximately €4.9 billion.
The positive development was primarily driven by obviously the profitability improvement and working capital improvements, but we also had some positive impact on phasing of capital expenditures and leasing, which we pushed out into 2024. Overall, we are making good progress on our journey to solidify our free cash flow plans. Now, restructuring expenses in the context of the planned transformation program, already described by Christian, are projected to amount to approximately EUR 2 billion. The vast majority is expected to be recognized in the first half of 2024. I have to caution you, though, we're just starting the negotiation with social partners in some countries and need to make certain assumptions on the specific mix of measures and its geographic composition. So this might require some material adjustments to these numbers as we move forward, and then, of course, the related cash out.
Simultaneously, we are stepping up our investment in business AI to drive automation. We see significant growth opportunities lying ahead, and we want to improve what we call operating leverage, i.e., the ability to contain cost growth at lower levels than the revenue growth. The incremental savings will allow us to increase our non-IFRS operating profit ambition before stock-based compensation for 2025 from EUR 11.5 billion to EUR 12 billion. Now, net of share-based compensation of approximately EUR 2 billion, this translates into EUR 10 billion under our new non-IFRS operating profit definition. The benefits of the planned program and from the investments in business AI will become more apparent in subsequent years as we capitalize on improved operating leverage at increased scale. This also allows us to increase the free cash flow ambition for 2025 to EUR 8 billion.
This is net of any cash out for restructuring that might spill over from 2024 into 2025. As we have to absorb about EUR 400 million of cash out for pre-existing compliance-related measures and the unwinding of some kind of SAP-triggered factoring we've done in the past, on top of the preliminary estimate of EUR 2 billion cash out for restructuring, the corresponding underlying free cash flow number, net of these effects in 2024, is EUR 5.9 billion. So EUR 5.1 last year, EUR 5.9 depolluted for these effects. And now you might wonder, how do we get to EUR 8 billion, which is a steep increase in 2025?
Well, it's simply the improvement in the profitability, net of taxes, plus the fact that we have switched stock-based compensation from cash settled to equity settled, and then that actually gives you almost a full bridge to that EUR 8 billion in 2025. Now, our investments in the winning sustainability solution portfolio have been very well received by the market. We now have approximately 1,000 Cloud for Sustainable Enterprise customers. We view sustainability as an additional growth space, with market trends that as the convergence of sustainability and financial standards and increasing disclosure requirements playing to our strength. In Q4, we released two new sustainability solutions. One is called Sustainability Data Exchange, which helps businesses gain transparencies on suppliers' CO2 emissions. And then there's GreenToken, which enables companies to provide traceability and transparency across the supply chain.
I'm also happy to confirm that we have met our 2023 non-financial metric targets, including being carbon neutral in our own operations. In summary, we have achieved all key objectives in 2023. Our strategy works and remains consistent. However, also we have to evolve and continue to adapt to fast-changing environments.... Our outlook illustrates that we are on the right trajectory to achieve our updated 2025 ambition. In 2024, we will focus on staying the course. Also, delivering on that ambition is a compelling argument to convince our customers to build intelligent, sustainable enterprises based on business AI, and to attract and retain the best talent to master the challenges lying ahead. With continued focus and strong execution, we remain confident about SAP's future. Thank you, and we'll now be happy to answer your questions.
Monika Schaller (Chief Communications Officer)
Yes, thank you, Christian. Thank you, Dominik. With that, we are going to move into the Q&A session. As I pointed out earlier on, use the chat Joule to send us your question. Please also let us know your name and outlet. But I would like to start it here in the room. Do we have any questions from the audience? Robin Wille, Deutsche Presse-Agentur.
Robin Wille (Journalist)
Yes, good morning. Mr. Klein, one question regarding your restructuring program. So you said that you want to focus on strategic growth areas such as AI, but in which areas or functions do you specifically want to make savings? Where exactly are the 8,000 jobs affected by the program located?
Christian Klein (CEO)
Yeah, thanks a lot for the question, Robin. Look, indeed, we invest, and we invest a few billion EUR to fuel SAP's growth. Main investment area, clearly AI. We are applying AI internally, broadly, in development, in delivery, in services, in sales, in finance, and the jobs will change. And when you're looking into some of our ratios, where we actually see the most productivity levels, it's clearly on the go-to-market. It's also in some of the supporting functions, so it will go cross SAP. But very important, as you also heard, out of the 8,000, two-thirds, hopefully we're gonna find voluntary measures, so we also invest in reskilling. Some of these people, we can definitely also see in future growth functions of SAP, so I really want to underscore that.
So we are very, very confident that we can run this program as smooth as we can also for our employees. Yeah.
Robin Wille (Journalist)
Thank you, Christian. We got a similar question via our Joule from Capital, also asking which job profiles will change. So Hannah, I hope we have answered that question, but let's stick to the topic of restructuring, Christian. A question from Reuters Breakingviews: We are wondering if this is one of those situations where tech companies overhired during the pandemic and are now using the shift towards AI as an opportunity to straighten that out. So we'd appreciate details on what kinds of jobs are being cut.
Christian Klein (CEO)
Yeah, I mean, we definitely didn't overhire. I mean, first of all, you have seen the growth we delivered, and when you're growing, you're also gonna see in the future, investments and also, of course, headcount, growth in headcount, also in many parts of this company, but of course, under proportional. And, you know, as we are also sharing with our customers, look at the impact of AI on their business model, on their business processes, and it's not different to SAP. And also, very important, when you look into our hiring, we are hiring some of the best PhDs from Berkeley. We are hiring some of the best PhD from the HPI. We are bringing in great data scientists. We are bringing in great engineers. We are hiring in UX. We are hiring in Southeast Asia to capture the growth market there.
We are doing business in 160 countries, so we for sure didn't overhire. But what is our job, and this is also what we owe to our employees, actually, is to always make sure that we also have, you know, the best workforce in the market. And sometimes, you know, while the technology helps us to scale, you also have to make sure that you drive the necessary transformation to secure the future growth, to really build on the strong foundation, what SAP does. So there was for sure no overhiring. We, and again, you know, we're also going to continue to invest, and on the other side, we, of course, also, you know, gain the necessary productivity to also build a successful future for SAP.
Monika Schaller (Chief Communications Officer)
Thank you, Christian. I have one more question on restructuring from the online Joule, but before I go back to the online Joule, any other questions here from the audience? Excellent. Herr Kros, Rhein-Neckar-Zeitung.
Matthias Kros (Business Editor)
Now it's on. In your outlook, it is said that you expect approximately EUR 500 million savings from this restructuring, this transformation. So maybe you can explain how is it possible when the total number of employees will be the same in the end of the year?
Dominik Asam (CFO)
Yeah, I mean, that's really the net amount of what we do, as Christian has highlighted. On the one hand, we are reducing headcount. On the other side, we are investing, also in IT, i.e., automation, already in 2024, which will make our people more productive. So then in 2025, we start reaping that improved efficiency, because in 2024, actually, you don't see any savings yet. First of all, we start the program only in Q2 in terms of really starting to see some departures. Secondly, we will redeploy money here to really make us more productive. I think artificial intelligence, business AI, gives us some unique opportunities to become more efficient. And don't forget, I mean, our customers always very closely watch how we are doing on that front.
If we cannot demonstrate the capability to become more productive ourselves, how should we convince them that we are the right partner for them to make them more productive on their own digital transformation journeys? So it's a net number, kind of fueled by the combination of, kind of making-
Christian Klein (CEO)
... our resources fit better to what our needs are, and then also boosting some, using some of the savings to boost productivity.
Matthias Kros (Business Editor)
Dominic, to add on that one, I have one other question for you from Bloomberg. Is there clarity on a regional breakdown of the restructuring? Will Germany be most affected?
Christian Klein (CEO)
We are just fine-tuning these numbers, so, bear with us a little bit on that one, but, don't expect anything that's kind of wildly different from our footprint we have today. So it would be quite balanced throughout the world.
Monika Schaller (Chief Communications Officer)
Thank you. So I think here in the room, Herr Freitag, I think you were next, right?
Michael Freitag (Deputy Editor-in-Chief)
Um, okay.
Monika Schaller (Chief Communications Officer)
Mm-hmm.
Michael Freitag (Deputy Editor-in-Chief)
Yeah. Okay. Hasso Plattner is leaving the company. What impact does this mean for you or and your strategy? This is my first question, and the second question, what role will M&A activities play in the future?
Christian Klein (CEO)
Yeah, Hasso. Look, first of all, it was great to see actually over the weekend. I studied the press, the media, and I guess he got the credit, you know, about all of his achievement, achievements for this company. I got so many nice mails also from our employees who didn't forget, or don't forget, what Hasso did for this company. And personally, I have to say, I mean, to manage such a turnaround, especially three years ago, where we actually had a different share price reaction, it also means you need a lot of backing by Hasso and the supervisory board, and I'm extremely thankful that I always felt that. With Punit now coming on board, I mean, Punit knows us. I mean, he was a CEO of a large partner of SAP. He knows our business.
The transition is working, and he's coming on board, and I'm very, also very confident that we're gonna also manage that transition in the best interest of SAP. And with regard to M&A, it's a good situation to be in, where you can look into the market, and of course, we are looking, and see, you know, where are fields in our portfolio where customers are actually asking us to get, you know, acceleration, you know, of certain roadmaps. Where customers are asking us, "Hey, I don't want to use actually a third-party solution because it's mission-critical data, and I don't want to replicate this data from system A, SAP, to non-SAP system." So you saw LeanIX, you saw Signavio. LeanIX, rather new, but already had a great Q4, and we see positive momentum, and Signavio was one of the best acquisitions we did.
This will really remain the strategy that we are only looking for what is very complementary to our core. We are, of course, listening to our customers, and I would not rule it out, but again, there is no need to buy revenue, which is a good position to be in.
Monika Schaller (Chief Communications Officer)
So, Christian, at the moment, I don't have any other questions on restructuring. Why don't we move to the topic of AI? I have two AI questions for you: Is SAP planning any further investments in AI companies following up on our investment in Aleph Alpha? And are we considering investing in Mistral AI?
Christian Klein (CEO)
I mean, you heard our announcement this morning with the partnership of NVIDIA. We're gonna use, and we're gonna integrate our two AI platforms, the NVIDIA DGX, with SAP. As you know, we can definitely also ensure that we can deliver together more trustworthy AI, a very important topic, especially in the business world. And you're gonna probably hear a few more announcements, but for us, it's also very important, as I mentioned, to also work together with top universities around the world on research, because what we can deliver organically is super strong.
We have a treasure, that's our data, and now we need to make sure that our AI digital assistant is the smartest in the industry, who can talk various languages, can process data across the company, and with that, solve some of the hardest challenges of our customers, and we are on a good track for that. There is no shortage of partners asking us, you know, to further co-innovate. And also, our services partner, be it Accenture, Deloitte, PwC, EY, could now go on and on and on. I mean, they are actually reaching out, and they are building up SAP AI practices, which is always a good sign. When they're investing, you know there is something going on in the market.
It's a good early indicator, and so also our services partners are ramping up more and more now to really move in with SAP into the field of business AI. So yes, further partnerships, but also strong focus on organic innovation.
Monika Schaller (Chief Communications Officer)
So the second one for you before we go back to the, to the room, from Bo from IDC: What are your thoughts on what elements of AI to include in existing licenses, subscriptions, and which ones do you charge extra for? Some SAP competitors are claiming not to charge extra for AI.
Christian Klein (CEO)
Naya. Okay, so let's go. I mean, first of all, we have two commercial offerings out there, and before I start with the commercial offerings, I really want to emphasize that it's very important to sit there with customers, and this is what Philipp and Walter and the team are doing, looking at our use cases and measuring outcomes. Measuring what do you do today, and how much more automated is this? Or when you do sales forecasting or inventory planning, what do you do today, and how much smarter you can do it in the future, and what are the outcomes? Because if there's no outcome, there's no commercial, there is no success. And on the commercial side, we are embedding AI also in our standard offerings. Yes, there are machine learning scenarios.
There are other scenarios which we are embedding in our standard offerings, but of course, there are also certain high-value use cases, our digital assistant, Joule, a few others, which we also package up in premium packages, and the result in Q4 was really strong. To give you a flavor, with our core offering, where we got a lot of net new customers on board, 60% of those customers decided to also embed AI right away in the solution of SAP, and they pay a upside for that, but they see the value. And then last but not least, we also have a kind of a token offering. What does this mean? The customer buys a certain package of tokens. It's a consumption-based offering.
You only pay when you're gonna use it, you only pay when you're gonna see the value, and that's also a very attractive offering, and you can use those tokens, you know, for our HR, for our finance, for our supply chain. So we also give the customers the flexibility they need, and it's all coming back always to, you know, also figuring out the right price according to the value for our customers.
Monika Schaller (Chief Communications Officer)
Thank you, Christian. Back to the floor, yeah. Christoph Kerkmann?
Christoph Kerkmann (Technology Correspondent)
Thank you. AI is not a magic wand that you can wave to gain, to have efficiency gains. So could you specify a bit how you want to use the technology internally in order to make the organization more efficient?
Christian Klein (CEO)
I mean, Christoph, thanks for the question. I mean, when you look into AI, I give you three examples now, internal. Development: can our developers code faster? Absolutely, they can. I would say the technology will more and more mature, we will see huge productivity gains. Today, do we then need to still do some more quality checks? Yes, but that comes with, you know, more maturity, less quality, but the outcome is already great. When you look into our sales, figure out the right price, figure out the right demo, figure out the right content for this customer, it's sometimes, you know, very cumbersome. You need time, you know, to really pull together the right business case for our customers.
This is now where we already embedded AI, and to be much smarter in the way how we attract and convince our customers to build on our... or to buy our technology. And then, no matter if you are in accounting or commercial deal support, our contracts are today a bit too long. We are working on that. This is not what AI can do for us, but, you know, when you're looking, when you're going through hundreds of pages, I mean, this is what AI can do for you, and can do certain checks. So you need much less time to make sure that we have commercially and accounting-wise, the right offering, the right contract signed. And these are only a few examples.
When you are working in HR, we rolled out our Joule, and Joule will make sure that you don't have to type all the employee details in the system. Joule does this for you. Joule helps on the recruiting side, Joule helps on the retention side. So these scenarios are either already rolled out or will be rolled out in the next coming months.
Monika Schaller (Chief Communications Officer)
Thank you, Christian. I'll give you a short break. I have one for Dominik.
Christian Klein (CEO)
Good.
Monika Schaller (Chief Communications Officer)
Dominik, in the financial analyst call this morning, you mentioned that you see growth potential for SAP in the sustainability space. Where exactly do you see this, and why would SAP have higher potential than your competitors?
Dominik Asam (CFO)
Yeah, thank you for that question. I mean, first of all, we at SAP strongly believe that global warming is the challenge for humankind, and that we have an ability to contribute to solving that challenge or helping solve that challenge. I mean, just to give you an order of magnitude, if you think about burning 1 barrel of oil, you basically emit close to half a ton of CO2. And then, if you look at the price of oil and what it costs you to abate CO2, you will figure out that many technologies, like electrification of cars, carbon capture and storage, and so forth, have price tags which by far exceed EUR 200, which would mean that these technologies, the market for CO2 abatement, will become bigger than the oil market, and the oil market is a gigantic market.
Now, we think it's a little bit naive to assume that the world will continue to estimate approximately what type of CO2 volumes are kind of transacted, because it's such a huge market and such a huge value. There's a lot of companies who invest enormously to contribute to that abatement, and they wanna see that investment being protected by giving assurance that there's reliable data about that, and this is why we are focusing on leveraging our ERP engine to add data about CO2. It's a little bit like value-added tax. You know, when you have value-added tax, it's booked through the supply chain. So why not really book it in a hard way, the same way you book dollars or euros? It's a new currency.
It will never have the same price because there's good reasons why it's very tough to establish one uniform market price for that. But it's extremely important that we have strong assurance on where our CO2 footprint is, and given the complexity of our supply chains, it's very important to have that network built up, and this is where we have a pole position and think that we can capitalize on that opportunity going forward.
Monika Schaller (Chief Communications Officer)
Thank you, Dominik. Before we come back to Walldorf, why don't we go to Spain?
Dominik Asam (CFO)
Mm-hmm.
Monika Schaller (Chief Communications Officer)
And the question is from Pablo Fernández, from Silicon Spain: Can you talk a little bit more on how SAP ensures data privacy and governance to its clients when it comes to use AI and training models?
Christian Klein (CEO)
I mean, I can do this in, you know, with an example in Spain. And, you know, we have many customers in Spain, and of course, they're also reaching out to SAP and say, "Hey, what is your deployment model for AI, and where do you store the data? Will it be stored in the European Union, or will it be stored in the U.S.?" And we can guarantee that it will be stored in the European Union. Who is touching the data? European people, European citizens, or people everywhere in the world. We can give them a guarantee that we also have the European Union citizen touching only the data of the Spanish customer.... And then second, cloud doesn't mean that the customer data is our data. I mean, it's still the customer data, so we're asking for consent. We are not violating any copyrights.
It's for us very important that we also gain the trust, and we are asking for consent if we can anonymize the data, if we can train with this data our algorithms. It's another important factor. And then last but not least, when you talk about trustworthy, it's also very important that you look into the algorithms and what kind of impact do they have on a business in Spain, so that you have non-bias in your algorithms. And we have even external counsels who are actually working with us to make sure that we're also delivering AI which is good, good for the company and good for our society.
Monika Schaller (Chief Communications Officer)
Back to the room. Alexander Jungert, Mannheimer Morgen?
Alexander Jungert (Business Editor)
Yes. Now, hi, and thank you for having my two questions. The first one is, how can you combat the growing uncertainty of the employees? And the second one, how is your position according to the IFRS? Thank you.
Christian Klein (CEO)
Yeah, Alexander, I guess also with regard to concerns employees, I mean, first of all, I feel that the SAP employees, they see that what we did together as a team the last three years, and this turnaround is remarkable. And I guess every SAP employee understands that they are working for a winning company, a growing company, which also ensures that they have a safe and secure working place in the future. This is a high asset also for the years to come, and will also, by the way, attract many new talents to join SAP, because we are in a very attractive employer. Hybrid work, back to office, it's a change. And look, it's for me, very important also to mention here, and we will have that also for sure, in the all hands this afternoon.
It's not about getting the people 5 out of 5 days back to the office. It's not about controlling people, but we... I'm actually a big believer. Look at me. I built my career here in SAP by having great mentors, by having sitting next to people who showed me how to run the best analytics, how to actually, how our products are getting applied, applied. I was sitting together, you know, with great architects to really better understand on how we're gonna build our products. Would this have been possible in the home office? No. So we need to find the right balance, and I don't want to go back to the time where I actually had to ask my manager for every hour I had to go to a doctor, or my kids were ill, or not being able to school or to kindergarten. That's not about it.
People should stay home and find the right balance together with their manager. I really want to emphasize that. But what we cannot allow, because it's part of our culture as well, that we only work from the home office, because then we are losing our culture, and we have to be a team. And teamwork also comes with, to a certain extent, also being in the office. And the other piece is around performance culture. We are competing in an industry with a lot of competitors around the world. And, you know, for me, a performance culture, what is this about? It's about that you are sitting together with your manager, that you get coaching, that you know what is, what you have done great, but also that you know where you have upside, where you can do better.
If my people only tell me how good I am, it doesn't help. I also want to see, you know, where can I improve? Everyone can improve. Everyone can learn every day, and this is something what we lost a few years ago, which I want to reestablish. This is not about moving people out of the company, this is about helping the people, coaching the people to get better every day. What I also want to make sure is, that if you are a high performer in SAP, that you're also going to see that in your compensation. Because otherwise, why would you set targets and bonus plans if there is no relation to your performance?
This is true in business, this is true in sports, this is true in every part of our life, and this is something what I really want to have also as part of SAP. This is the changes what we are doing, and I feel it's really also to the benefit of our employees, it's to the benefit of SAP.
Monika Schaller (Chief Communications Officer)
Christian, let's continue with the topic. It's slightly different, but a similar one way or the other. From Michael, from WirtschaftsWoche. I read both out to you, and I think you can cover with one answer. "The European Works Council has written an open letter to the SAP board, which massively criticizes the back to office initiative. SAP employees would not focus their priorities on the first quarter's goal, but would search for a stable work elsewhere instead. What do you reply to such allegations?" And similar, same question, again, from WirtschaftsWoche: "The back to office initiative has really caused some internal stir among SAP employees. Don't you fear to scare off talent and harm our brand?
Christian Klein (CEO)
I mean, first, when we talk about talents, when I see who is now joining right now, SAP, as I said, we get top people, top data scientists all over the world. Our, you know, attrition and people leaving SAP is, I guess, on an all-time low, which we don't take for granted, but it's a fact. So we are a very good employer, and we are delivering results. We are securing the future of this company. With regard to the back to office, as I just mentioned, I'm a big believer of a hybrid workspace, and we will also talk about that in the afternoon. I have two kids, and they are sometimes getting ill.
When you have a kid in a kindergarten, they get all kinds of colds, or especially over the winter, and then someone has to stay at home, and I don't want to lose the people who have to stay at home. Or you have very, sometimes very personal reasons why you have to work from home, and we are not saying that this is not possible. Absolutely, it's possible. But what I cannot allow to happen as a CEO, I really want to mention that, that I have empty offices where we are onboarding this year over 15,000 people, just to mention that we stay flat, but we also, of course, have some kind of attrition, and we're getting new people on board, and we have internal transfers.
How can this ever happen when you are new to SAP or in a new job inside SAP because you decided to grow your career and there's no one in the office? I'm not a big believer that on a video conference platform, you can understand our culture, you can get educated, you can get enabled to do your job best. This is something where we just, you know, put up some guidance, but again, it's not about controlling people, it's about our belief, what is best actually for our people. I'm sure we will find good solutions also to enable and foster a culture of hybrid work for sure.
Monika Schaller (Chief Communications Officer)
Thank you, Christian. Let's move to France. Philippe from TechTarget France: "Many SAP user groups seem to fear that your innovation, AI Sustainable Cockpit, will only be available for the RISE with SAP customers. What is your position on innovations? Will your cloud customer outside RISE will also benefit from those new disruptive?
Christian Klein (CEO)
Yes. I mean, first, I really want to emphasize that we are not leaving one customer behind. If you look at our Q4 results, you have seen we still have a pretty decent software business. We are not stopping here, you know, or allowing our customers to not further also invest into their existing SAP on-premise landscape. We gave a commitment to also extend the maintenance or the maintenance for—until 2040. We are not going to extend the maintenance for the older releases, because otherwise, SAP is losing the speed of innovation, what we need, against all the competitors, who, by the way, when you want to, buy a piece of on-premise software and one of our competitors, I would say, good luck, it's not possible. Then second, why cloud, and why certain innovations only in the cloud?
I mean, when you're sitting on a 10-year-old on-premise release, you're anyway not seeing any kind of innovation because all the code what we are producing is, of course, not available in a 10-year-old on-premise release. And when we are talking about cloud having consent from thousands of SAP customers, yeah, to really train algorithms to infuse AI, I mean, this is cloud. This is not on-prem. It's just a fact. And also, on the Green Ledger, on sustainability and further innovations, the Green Ledger, the what also Dominik mentioned is, we also want to give transparency around Scope 2 and Scope 3. So we not only connecting supply chains, we are also measuring ESG. We are actually aggregating data across supply chains, which is possible in the cloud.
So please also understand that while SAP is committed to take every customer with us, we are also, of course, innovating much faster in the cloud, which, by the way, all our competitors already do. And we do our very, very best with RISE and with GROW to take the customers with us, and again, not only with us to lift and shift and have suddenly a system in the cloud with no impact on the business. No, no, no. We want to also help them on their business transformation.
Monika Schaller (Chief Communications Officer)
So before we go to Marco, as promised, I have one other one for Dominik. Börse Online from Klaus. This is a bit of a longer one. So, "SAP is one of many large investors in OpenAI competitor, Anthropic. How do you secure the value of this investment for your company in regard with the other major investors? Please talk a little bit, in short, about SAP's value from partnerships with Google Cloud, IBM Watson, Microsoft," short, please, "like this is the only way to lift the value of SAP customers' data in AI.
Dominik Asam (CFO)
Okay. So before I answer that, I cannot resist the temptation to answer a question about IFRS you asked. I know it's,
Monika Schaller (Chief Communications Officer)
Yeah, we, we have it here that we
Dominik Asam (CFO)
... let me try the following one. I've learned in my history lessons that it's always extremely dangerous when some people think they have extremely easy answers to very complicated questions. Now, coming to the investment about artificial intelligence investments, we have different paths, how we explore these partnership and leverage these partnerships. We are really playing with a couple of dozen of foundation models, to figure out which of those are really the best suited, to support use cases we infuse in our portfolio, and I think that's the strength we can offer. Using the BTP, we make them accessible for the developers of, these applications in a very seamless way. So, we are not nervous about other people investing alongside or taking much larger stakes in that.
We just want to make sure that we are not missing the train, and we have a good overview on all the models out there to identify the best, the best value for money, actually, because it's sometimes amazing how different the pricing is for these models. So we can not only deliver the best effectiveness on the use case, but also the lowest cost for that.
Monika Schaller (Chief Communications Officer)
... thank you on the-
Christian Klein (CEO)
Yeah, maybe one topic on that one. I mean, when you look at Watson, when you look at Microsoft and their Copilot, of course, we are focusing heavily on our, our organic innovation. But you can extract even more value if you're using Joule for HR, and suddenly you can also have binding our Copilots together with Microsoft, and you can also extract data from an Excel or from Word or from PowerPoint. I mean, why wouldn't we do that? It just makes our Copilot and our AI even more compelling. And with regard to the question around the AfD, I said it also in Davos, when you walk around here in the campus, you're gonna find a lot of people from India, from all over Asia. You'll find people from the United States, from Latin America.
I just saw a young talent there, down there from Brazil, and she was so happy because we welcomed her. She finds a country which is welcoming her. We are onboarding her, and we make her part of the team. And we have to be very careful in Germany that we are not allowing any kind of form of, you know, discrimination or moving, you know, more to the right side, because we need these talents. They need to feel welcome in, in Germany. For us, this is important. I mean, they are delivering here out of Berlin, out of Munich, out of Walldorf, our headquarter. They're delivering new innovations, and we need to make sure in Germany that we stand up and that we really make sure that these people really feel welcome when they are joining or when they're coming to Germany.
Monika Schaller (Chief Communications Officer)
Thank you, Christian. So, we have three more minutes to go, to go. Mark, it looks like this is the final question for today.
Speaker 8
Okay. Thank you very much. Back to the AI aspect a little bit, and maybe more on the sell side opportunities. Just to get the sense of the scope and size, I remember, Mr. Klein, you were talking about a possible price markup of 30% on an AI-enhanced products. How much of the planned growth until 2025, and maybe even through 2027, is from AI, or is there upside to those targets from AI?
Christian Klein (CEO)
Yeah.
Speaker 8
Thank you.
Christian Klein (CEO)
Yeah, thanks a lot, Michael, for the question. I mean, first, as I also illustrated before, we are also embedding AI in our standard offering, yeah. There will be certain standard AI use cases which will come out of the box with our existing products. Then there will be some packages where we also have an uplift. But very important there, also, especially in our consumption offering, consumption-based offering, is that we, of course, also always compare it to the value of these AI use cases so that customers can see what kind of cost, what kind of OpEx can I take out of the P&L? How much more smarter do I become in making those decisions? So, you know, we're gonna see it over the course of the year, but now, having the first customers already live, we see absolutely the value, and that determines the price.
The price, as I said, can differentiate. There is a premium price, and there is a standard price, and it really depends on the AI use case around, you know, how much, what will be then the final market price we charge, you know, to our customers.
Monika Schaller (Chief Communications Officer)
Yeah, thank you very much. We are getting to an end. Thanks, Christian, thanks, Dominik. Thanks to the more than 600 people who joined us today in our virtual stream. Should you have any other questions, please feel free to reach out to our media relations team. Thank you for all of you joining us here in Walldorf, and with that, have a great day. Thank you, and bye-bye.
Christian Klein (CEO)
Thanks a lot.
