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Good day, and welcome to the SAP Q1 2022 Earnings Conference Call. Today's conference is being [ recording ].
At this time, I would like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer. Please go ahead, sir.
Thank you, and welcome, everyone. Thanks for joining us today on our earnings call to discuss SAP's Q1 '22 results. On our Investor Relations website, you can find the deck intended to supplement today's call.
With me today are CEO, Christian Klein; and CFO, Luka Mucic, will make opening remarks. We also have Scott Russell, who leads our customer success organization, joining us for Q&A.
Now let's do the safe harbor. During this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations, forecasts and assumptions that are subject to risk and uncertainties that could cause actual results and outcomes to materially differ. Additional Information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the risk factors section of SAP's annual report on Form 20-F for 2021.
Unless otherwise stated, all financial numbers on this call are non-IFRS. Growth rates and percentage point changes are non-IFRS year-over-year at constant currencies. 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.
Before we start, I would like to remind you that we will hold our financial analyst conference as part of our Sapphire program in Orlando, Florida on May 11. The event will also be webcast on our website.
And with that, I'd like to turn over to Christian.
Yes. Thank you, Anthony, and thanks to all of you for joining us today. To start, I want to address a topic that has been at the top of everyone's mind for the past 2 months: Russia's ongoing unjustified war in Ukraine. Above all, this is a human tragedy on a massive scale. And our hearts and hopes continue to be with the people of Ukraine.
Like other companies globally, we have been working closely with governments and implementing all sanctions imposed by the international community. We are also going above and beyond those requirements. We were one of the first technology companies to stop sales and shut down cloud operations in Russia. In addition, earlier this week, we announced a structured exit of our direct presence in the country.
These decisions have a financial impact, both on the top and bottom line, which Luka will comment on in more detail. But despite the challenging political and macroeconomic environment, Q1 has been another successful quarter, and we are reiterating our 2022 outlook for revenue, operating profit and free cash flow today.
The war is undoubtedly leaving its mark on the technology sector. With the risk of cyber attacks rising, we see more customers adopting cloud solutions for their mission-critical systems. Geopolitical realities are highlighting the appeal of sovereign cloud solutions like the one we announced with Arvato in the first quarter for the German government. And with energy diversification top of mind, our sustainability focus takes on new meaning and importance, which I will describe in more detail later in my remarks.
But first, with all of that in mind, let's take a look at some of our top line numbers for Q1. Cloud revenue growth further accelerated to 25% as our cloud transition gains further momentum. Current cloud backlog continued its strong growth at 23%. This is despite typically lower Q1 seasonality and despite the impact of our wind down of cloud operations in Russia. Without Russia, CCB growth would be 0.8 percentage points higher. This has led to current cloud backlog now standing at nearly EUR 10 billion.
Current cloud backlog for SAP S/4HANA hit a record 79% growth, driven by continued strong adoption of RISE with SAP, our signature offering for business transformation in the cloud. In Q1 alone, we added more than EUR 200 million to our S/4HANA cloud backlog. In addition, S/4HANA Cloud revenue growth increased sequentially by 10 percentage points from 61% to a record 71%.
Overall, this strong performance sets us up well for ongoing growth in the rest of 2022. In an increasingly volatile world, the unique value of SAP's innovative cloud portfolio continues to be clear. Customers around the world continue to power our growth as they turn to us for solutions to future-proof their business and make them more sustainable, secure and resilient. And their transformations are enabling our own. We expect continued acceleration of cloud revenue with up to 26% growth by the end of 2022, reflected in our guidance.
Our strong quarterly performance is another proof point for the strategy we introduced in 2020. Since then, we have seen COVID pandemic accelerate cloud-based business transformation around the world. The new geopolitical realities we face amid Russia's ongoing war in Ukraine are also likely to fundamentally reshape the world we live in.
Even before the conflict began, supply chains were under pressure worldwide. And businesses, from grocery stores to auto manufacturers, were grappling with an exponential level of uncertainty in their operations. The tragedy in Ukraine has amplified this tension, revealing even more clearly the importance of resilient supply chains. Across every industries, companies will need to transition their supply chains to make them more resilient, agile and transparent. Our SAP business network can uniquely help our customers across industries and value chains in deep ways.
The power of the SAP Business Network has also been evident in our relief efforts to support the humanitarian crisis arising from war. Over 2,700 suppliers have raised their hand to provide humanitarian support to Ukraine, and requests for over EUR 100 million of supplies have already been posted on the network including just recently an acquisition for 300,000 first aid kits.
Turning to fossil fuels. It's clear that the movement towards renewables must accelerate. Sustainability is now clearly not only an economic opportunity, but a key element of stability, security and even sovereignty. More than any other software company, SAP is in a position to help governments and industry manage these changes. The scale and depth of our industry expertise, the transparency of our solutions to drive sustainable business practices and the ability of the SAP Business Network to create resilient supply chains, showing the increasing relevance of SAP's portfolio.
Let's turn to an update about RISE with SAP. RISE with SAP is our signature offering for business transformation as a service. Since we launched RISE with SAP in January 2021, we have seen significant increases in customer adoption each quarter.
Customers are adopting RISE with SAP for 3 key reasons. Firstly, RISE enables them to redesign their end-to-end business processes based on best practices developed from working with hundreds of thousands of SAP customers. Secondly, RISE helps them transition to a new agile ERP in the cloud. And finally, RISE provides a platform to innovate with industry, custom and sustainability solutions.
This quarter, we have seen notable progress with our RISE with SAP offering. Our business process intelligence offering with cloud revenue almost doubling year-over-year has now fully indicated SAP Signavio. We have seen nearly 80% of RISE customers adopting our Business Technology Platform as part of their RISE solution. Transactional spend on the SAP Business Network has been growing over 95% year-over-year, which will drive further revenue upside.
Overall, RISE with SAP drives strong cost and upsell opportunities with a conversion ratio in 2021 of greater than 2.5. This means we are creating 2.5 the value from a customer after they have adopted RISE. This has led to our revenue run rate for the modular cloud ERP now exceeding EUR 7 billion, up more than EUR 1 billion from Q1 2021. In summary, RISE with SAP enables us to partner even more deeply with our customers. We offer integrated total solutions with single end-to-end accountability, from infrastructure to applications.
The success of RISE with SAP in turn drove strong performance across our line of business applications, together with the cloud momentum I mentioned earlier. Let's take a look at our progress. New RISE with SAP customers included: Accenture, Microsoft, Wipro, NEC, Ooredoo and the Citizen Watch Company.
Accenture announced they will be expanding their SOAR offering to help large enterprises drive greater value from running RISE with SAP. They are able to offer bespoke support by drawing from their own experience of running their core financial operations on a single instance of SAP S/4HANA.
This quarter, Microsoft announced it would become the first public cloud provider to adopt RISE with SAP internally, utilizing SAP S/4HANA to transform its own SAP ERP deployment. This will enable Microsoft to deploy new technologies faster and establish best practices that benefit our joint customers in the market.
Accenture and Microsoft, together with Wipro and IBM, are examples of the snowball effect from our partners as they help accelerate the adoption of RISE with SAP around the world.
In March, Ooredoo Group chose to partner with SAP to overhaul their business and digitize their end-to-end processes to enhance the experience of the customers, suppliers and employees.
In the increasingly important market for electric vehicles, China's Rising Auto and India's Exide Industries also both chose RISE with SAP.
Rising Auto is part of one of China's largest auto groups. They selected RISE to support key business processes, including forecasting, collaboration with suppliers and the delivery systems for its electric vehicles.
Exide Industries Limited, one of the world's foremost battery companies, selected RISE to support their growth, including the creation of a large new manufacturing facility. Exide anticipate that their RISE implementation will help them reduce cost by about 10% and support their battery recycling program, a great example of sustainability becoming profitable.
Our success with RISE led to great S/4HANA momentum. We now have more than 5,300 S/4HANA cloud customers and our win rate against competitors was 63% for net new deals. 4,700 of these customers are already live, demonstrating the fast time to value of these deployments. Customers this quarter include Heineken and Zero Motorcycles.
Heineken, Europe's largest beer producer, with over 300 global plants, is transitioning to a new digital core based on SAP S/4HANA. Zero motorcycle, the global leader in high-performance electric motorcycles and powertrains has chosen SAP S/4HANA over Oracle to help them replace their legacy infrastructure and scale their manufacturing operations to meet rising demand.
Our intelligence spend and business network portfolio had a particularly strong quarter. Britain's National Health Service Shared Business Services group selected SAP Ariba for its new procurement system designed to improve and simplify the engagement with its broad and complex supply chain. Air France KLM was another win for Ariba this quarter. We also saw continued positive indications of a return to business travel with Concur transactional revenue increasing by triple digits year-over-year. L'Oreal, the world leader in beauty, has renewed its contract for SAP Concur for an additional 3 years because they are worth it.
Turning to our customer engagement portfolio. Selling Group, the largest retailer in Denmark, recently invested in SAP Customer Data platform and SAP MRS. These solutions will help them improve customer lifetime value and the customer experience.
Our SuccessFactors portfolio continues to win significant business over Workday. Grupo DPSP, the leading Brazilian pharmaceutical retailer, expanded its SAP SuccessFactors portfolio to better manage, retain and develop its workforce as part of its overall RISE with SAP for retail implementation.
SAP Business Process Intelligence wins this quarter included Nippon Telegraph Telephone Corporation, TELUS Communications and [ ModernaTX ]. Moderna's success with their COVID-19 vaccine has transformed the company, and they will be using SAP BPI to redesign their business processes based on the next chapter in their growth.
Our Business Technology Platform continues to go from strength to strength. As customers adopt BTP as deep backbone to integrate and extend the SAP solutions. We are well on track to establish SAP as a platform company, with this quarter's revenue run rate for BTP exceeding EUR 1 billion. FEMSA, the world's largest bottler for Coca-Cola beverages, is adopting BTP to optimize the value from each of its products and line of business along with billing and cash handling across its Latin American markets.
Last quarter, I spoke to you about the introduction of SAP Cloud for sustainable enterprise, part of our sustainability portfolio. This portfolio helps companies manage their green line with as much importance as the top and bottom line by providing radical transparency, insight and data. This quarter, we announced an important partnership with BCG, focused on helping our joint customer base determine strategies for sustainability transformation. Customer adoption of our sustainability portfolio is already strong.
So let me reiterate that this quarter's strong cloud figures continue to show the strength of our strategy, the relevance of our solutions and the promise of our portfolio. We are powering fundamental business transformation for our customers which in turn is driving our own transformation. We are very confident in our long-term ambition, and we are reiterating our 2022 outlook. We believe SAP can play a crucial role in helping our customers succeed in an increasingly volatile world.
Thank you again for joining us today. And let me now hand over to Luka to talk through our results in more detail.
Yes. Thank you very much, Christian. And before providing you with additional color on our results, let me first also express my deepest solidarity with the people Ukraine. Our support for the people of Ukraine continues, and we have already contributed more than EUR 3.7 million so far to support refugees in the region with more to come in the weeks and months to come. Let me also mention that we have stopped all sales, started to cease cloud operations and have now decided to wind down our direct business activities in Russia and Belarus.
Despite the impact of the challenging geopolitical and macroeconomic environment, we are pleased with the results we delivered in the first quarter. Let me reiterate some of the key messages you just heard from Christian. We are enabling the transformations of our customers around the world as they turn to us for solutions to future-proof their businesses and make them more sustainable, secure and resilient. At the same time, they continue to power our growth and thus enable our own transformation.
In the first quarter, the trend towards larger cloud transactions continued. Deals with volumes greater than EUR 5 million contributed 45% of our cloud order entry. That's up from 27% in Q1 last year. This was again driven by RISE with SAP.
Let me now provide you with some background on the key drivers behind this quarter. Christian already talked about our ongoing cloud momentum and S/4HANA's record contribution, but also the impact of the new geopolitical reality. Let me add some color here.
In the first quarter, our current cloud backlog expanded to nearly EUR 10 billion and was up 23% despite a 0.8 percentage point headwind from our decision to actively shut down cloud operations in Russia. Supported by double-digit growth across our solution portfolio, cloud revenue grew 25%, again accelerated for the fourth consecutive quarter.
Our overall SaaS/PaaS cloud revenue was up 28%. Within that, our Intelligent Spend business returned to a healthy 16% growth rate. And our remaining SaaS/PaaS portfolio was up even 34%, driven by outstanding contributions of the Business Technology Platform; Qualtrics; and most notably, the 71% growth of S/4HANA.
Fueled by the growth in our more predictable revenue streams as well as services revenue, our total revenue was up 7%. Our cloud revenue performance was excellent across all regions in the first quarter. EMEA increased by 29%, the Americas by 24% and APJ by 23%. The U.S. and Germany showed particularly outstanding cloud revenue performances, with the fastest growth in the U.S. for 2.5 years.
Let's now take a look at the bottom line. Due to revenue mix effects, our total gross margin decreased by 30 basis points to 72%. Our cloud gross margin was up 50 basis points despite increased investments into our next-generation cloud delivery program as compared to Q1 last year. This expansion supported our cloud gross profit growth of 26%.
Mainly driven by negative impacts amounting to approximately EUR 70 million related to the wind down of our business in Russia as well as accelerated investments into research and development and sales and marketing, our operating profit decreased by 7% to EUR 1.7 billion against a very strong prior year comparable. Our IFRS operating profit was up 10% to EUR 1.05 billion, primarily driven by lower restructuring expenses.
Let me now turn to EPS and cash flow. The decrease in EPS mainly reflects the contribution to financial income by Sapphire Ventures that was more than EUR 300 million lower than last year, given the current market conditions.
Our free cash flow came in at EUR 2.16 billion. The year-over-year decrease is mainly attributable to the development of profitability in the quarter and impacts from working capital due to our continuous move to the cloud. The ongoing cloud business transformation provides more balance of cash inflows throughout the year. We are reiterating our full year outlook of above EUR 4.5 billion for free cash flow, accordingly.
Considering the impact of Sapphire Ventures to our financial income, we are updating our effective tax rate guidance for the full year. We now expect an effective tax rate of 28% to 32% in IFRS and 23% to 27% in non-IFRS terms.
Let's now turn to the outlook. As you have seen in today's release, we are reiterating our outlook for the full year for cloud revenue, cloud and software revenue as well as operating profit. That means that we are taking steps to absorb the expected impact of approximately EUR 300 million on the top line and EUR 350 million on the bottom line from the war in Ukraine. This is possible because of our increased cloud momentum, the initiation of disciplined expense management measures and the benefits associated with the streamlining of our portfolio that we expect to execute in the coming months as we continue to focus on strategic growth drivers.
Finally, a few words on sustainability and some strategic initiatives. Here, I would like to highlight that we published our tenth integrated report on March 3. We expanded disclosure around non-financials, including enhanced representation of Scope 3 emissions as well as EU sustainable finance disclosures. We also disclosed the results of our second pilot of the value balancing alliance methodology, to which we contribute as a founding member.
To complement our sustainability management solutions, we have also announced some new partnerships to build on the combined power of SAP and its ecosystem. Together with Boston Consulting Group, we have launched a joint transformation offering to identify the business value in sustainability, setting the right climate ambitions and powering an actionable sustainability road map. And we have joined forces with BearingPoint to deliver carbon and environmental footprint solutions, helping accelerate our road map in this solution area.
So to conclude, the results of the first quarter proved once more that we are on track. Our strategy addresses the needs of our customers to become sustainable intelligent enterprises. We continue to build on our cloud momentum and remain confident in our 2025 ambition.
Before moving to Q&A, we are very much looking forward to welcoming you to our financial analyst conference in conjunction with Sapphire, including, I was assured, a cocktail reception, that will take place on May 11 in Orlando. And we are looking forward to meeting you there in person. Thank you.
[Operator Instructions] And with that, operator, please open the line.
[Operator Instructions] We will now take our first question from James Goodman from Barclays.
Maybe I could start with a nearer-term question just around the macro and Russia specifically. We've had a couple of comments clearly from U.S. businesses on weaker European outlook, you made some commentary here. But could you add some context to what you're seeing at the end of the quarter into April?
And specifically on Russia, EUR 350 million profit impact on EUR 300 million of sales. Can you explain why the profit impact is so large? And whether there's a one-off element here that comes back in '23.
Do you want to do the financial impact? And then the business impact, the macro, together maybe with Scott.
Exactly, that makes sense. So indeed, I mean, the question is fair: Why is there a bigger profit impact than a revenue impact? Obviously, you would normally expect, when you have a revenue impact, some savings in variable expenses flow through, and therefore, you would have a lower impact on profits. However, a significant share of the impacts that we expect on the expense side are actually from a compression of multiple period expenses into the current year 2022.
To explain. When we, for example, decided to discontinue our cloud data center operations, we had to actually accelerate the amortization of our data center assets because the useful life is obviously much shorter than originally anticipated and recognized this as expenses. So this is the primary expense impact that has contributed to the EUR 70 million that we experienced already in Q1.
Now in Q2, we will have a similar impact, but actually at a larger scale, in terms of an accelerated amortization of sales commissions. We capitalize and then amortize our sales commissions for past sales over a period of time depending on the business model. And given that we are also now looking at discontinuing our direct support and maintenance operations in Russia, we will also have to adjust here the useful life of the contracts, and therefore, also the capitalization and amortization period of sales commissions.
In addition, we have also an impact on bad debt expenses, some of which are coming from prior periods that we will have to recognize, for example, with sanctioned customers. That's the reason why the impact on profit is actually higher than the impact of revenues. And an over-proportional amount of that will actually have to be reflected in Q2.
Yes. And on the macro side. I mean, of course, there is no headwind coming from Russia, but I mean, we are reiterating our guidance which is actually then, given there is a EUR 350 million hit, actually we are in essence actually raising our guidance to absorb this hit.
And why do we do this? I mean, first and foremost, what we see also in Europe, there's a high demand still in the market for ongoing business transformations. So customers are now moving more than ever to new business models, selling services. Resilient supply chains is, of course, of high demand. You have seen the transactions in our SAP Business Network went up by 95% year-over-year. The first discussion I have, especially with European CEOs, is all around how can SAP help to make supply chains more resilient like we did with Catena-X in the automotive? And we have now further examples on semiconductor, we have further examples in life science and so on.
And then last but not least, of course, when we are now moving in with RISE, you have heard about the conversion rates. And we are seeing more and more an uptick also in our other line of business solutions. Needless to say, Scott, I guess, we can say we are absolutely confident and very bullish about our pipeline for RISE for the rest of the year.
But what we're also seeing is, with the platform underneath and a revenue run rate of EUR 1 billion and an uptick of the ecosystem now building extensions on the platform, this all makes us very, very confident that we can even further accelerate our top line momentum.
Scott, anything to add?
Yes. I think you said it well, Christian. The one thing that I would add in simple terms is businesses and companies in Europe, and in fact, around the world, need a business platform to navigate uncertainty. That's SAP. They leverage SAP because we're able to provide real-time capability to deal with a regulatory change. We're able to deal with the cybersecurity challenges. We're able to deal -- help them deal with their supply chain challenges and other factors of uncertainty that Christian mentioned.
And that underpins not only in the move to the cloud, but the move to transform, and that's what RISE with SAP brings. So that's been reflected in our pipeline and our confidence, that despite some of the challenges that we see in the world, companies are actually coming more to SAP because they need a business to be able to help them transform and run in this environment going forward. And that's what we're strong at.
The next question, from Toby Ogg from Credit Suisse.
Could you just give us -- Luka, maybe for you. Just give us a sense for the magnitude of the cloud gross margin headwind from the harmonization investment in Q1.
And then secondly, just as we look a little bit further out into 2023 and the moving parts on the cloud gross margin, can you give us a feel for the size of any potential impact to costs that persist into the first half of 2023? And then just give us a feel for what you think the right cloud gross margin level would be, given those costs, but also the higher portion of single-tenant S/4HANA in the mix.
Yes. Thanks very much for the questions. So first of all, the cloud margin impact of the harmonization program in Q1 was actually quite sizable. As we said, it increases -- has increased over time, quarter-over-quarter. And it's -- for Q1, it has been 1.4 percentage points. So in other term, in other words, without these expenses, the cloud margin would have been up by close to 2 percentage points in Q1.
In terms of the go-forward plan. Actually in 2023, of course, a significant part of the cost run rate that we are seeing now in 2022, and 2022 has a higher run rate than 2021 in that respect, will go away, will disappear. I would say we will have less than half of those expenses still in place in 2023 as we run off the program in the first half year with the final retirement of our legacy infrastructures and the decommissioning. So think about a low triple-digit million number as opposed to significantly more than EUR 200 million that we will have in 2022.
And then in the second half of the year in particular, there will be a significant step up also due to the increased efficiency of that cloud infrastructure. So as we had predicted all along, we will see an exit cloud margin rate in 2023, will be significantly above the current levels that we see, where we've always said that in 2022, the cloud margin development will be rather flat.
And so in terms of the further progression, there is no doubt that our profitability in the cloud business will materially increase. At the same time, I have to say we are ahead of the growth curve as well, and that is also predominantly fueled by the great success of RISE with SAP, which comes along with a great uptick in S/4HANA cloud and also private cloud deployments, that's true. But those are quite profitable as well.
So all of this and the progress in the cloud harmonization initiatives that we have achieved so far make us very confident around our 2025 ambition, in particular, as far as the absolute contribution of cloud profits to our overall operating profit commitment and ambition is concerned. So this is on a very positive path.
The next question, from Adam Wood from Morgan Stanley.
Just first of all, can I ask on current cloud backlog? I know Luka, you flagged that this would decelerate in Q1. I wonder, first of all, if you could just confirm that you'd still be expecting this to accelerate back similar to or above the fourth quarter levels. Maybe you can give us any kind of background on what gives you the confidence that would happen, that would be really useful.
And then secondly, just on the outlook through the year. We're obviously nervous about macro and around the geopolitical situation. Could you just talk a little bit about the plans in terms of putting cost into the business if the tech budgets and companies were starting to be a little bit more cautious? Would the focus beyond making sure that the business is in a good place to grow in '23? Or would it be to protect the EBIT guidance for this year?
Yes. I think that's probably, for the most part, a question to me. But Christian, feel free to chime in.
So first of all, indeed, I mean, when we think about the trajectory on the current cloud backlog, it's exactly as we had said on Q4 earnings. We expected a slightly slower start in Q1 just due to the fact that the sheer business volume in terms of new bookings that we can move in Q1 is always the smallest. And therefore, we had actually expected a deceleration. Now of course, we did not have the Russia effect, in our cards. But otherwise, this is exactly as expected.
But on the flip side, we absolutely continue to believe that we will see now, from now on, already starting in Q2, an acceleration again. And we absolutely believe that we will end the year with the similar growth profile. Last year, we had 26% in Q4, and we expect the same actually also for Q4 in 2022.
The reason why that is, it's fairly simple. First of all, in Q1, again, the lower volumes, and we had an absolutely spectacular Q1 2021, driven also by some catch-up effect, quite frankly, from the first phase of the pandemic. Q1 2022 was very good and strong from a bookings perspective. But compared to this very spectacular outcome, we always knew that it would be hard to top this. In Q2 and in Q3 in particular, we face an easier compare. And based on what I see in terms of the pipeline buildup and the strength there, we are very confident that we will see the acceleration. So we are very confident about this.
In terms of the outlook throughout the year and the cost planning. Look, it's very important for us to make sure that we achieve both objectives. We of course want to make sure that we meet our commitment in terms of the guidance. But at the same time, we certainly don't want to sacrifice our focus on growth in order to do this.
First of all, we have already significantly invested. You have seen that in Q1, we onboarded another round about 2,400 employees. About 400 came from the acquisition of Taulia. The rest, roughly 2,000, are organic hires with clearly a bias towards R&D and sales and marketing headcount. This will slow down for the remainder of the year. It also makes not a lot of sense in sales and marketing, for example, to back-end load hirings at the middle of the year because you will need to have these folks productive towards the end of the year to drive business.
We are of course prudent when it comes to discretionary expenses, no doubt about that. We're also taking a hard look at our portfolio as we always do, as we have done for a number of years now, to identify areas that are -- can be deemphasized because they're not strategic to our growth from a longer-term perspective, and in order to focus our resources on the highest growth potential areas.
In that context, you have seen us in the past few years doing smaller divestitures. That is something that we are looking into as well. The impact of any such divestiture will not be significant, perhaps in the low triple-digit million euro range. But that is something that is possible to happen in the second half of the year as well.
Then perhaps a few words around the profile of the business as we move through the quarters. I think we have also been clear already without the Russia impact, that the first half year in terms of year-over-year profit development would be more challenging than the second half year because, last year, that was a much better performance, so to say, driven by the fact that we have the pandemic still fully in place. Q1 for example at 24% operating profit growth last year. So it isn't a surprise for us that, for example, in Q1 this year, we had negative profit development. Actually, we did better than plan without the Russia effect. So that is good.
For Q2, as I said, I expect an over-proportional amount of the expense impact out of this EUR 350 million will be recognized. We will also recognize a big part, if not the entirety, of the restructuring charge in Q2. So therefore, Q2 will be most affected by the situation around the war.
And then in the second half year, as first of all, the comparables are getting easier, we are seeing the fruits of the investments that we have made early on in the year. And we continue to harvest the great strength of our cloud business. That's where the profit levels will significantly climb back, and that's why we are confident that we will remain within the guidance.
And on the cloud revenue side. Look, it's also similar to what we said at the beginning of the year. We expect continued acceleration in particular in the second half of the year when the full strength of the great backlog expansion that we have seen in Q4, including the further business that we have booked in the first half of the year is coming to fruition.
In Q2, you might see a small blip there in terms of the growth rates because there, for the first time then, the impact from the cloud discontinuation in Russia that you have seen in the current cloud backlog in Q1 will then start to show in the cloud revenue figures. But again, from a second half and full year effect, this will be fully overshadowed by the strength of our business at a global level. And so we absolutely believe we will see continued acceleration in the second half year.
Our next question, from Stacy Pollard from JPMorgan.
Really, this is a follow-up a little bit on your comments around the seasonality of the EUR 350 million and the other restructuring and kind of how you think of the operating profits or operating profit impacts through the quarters. But also, is there a continuing impact on the base going into 2023? Or do you catch up and kind of get back on track?
So for example, if the base is a little bit lower, EUR 350 million lower, let's say, in 2022. Should we get even better double-digit growth in operating profit for 2023, than you might have? I guess the growth goes up, but maybe the number stays the same. Is that your thinking?
Yes. So first of all, 2 comments on 2023 because I want to be crystal clear on this. We absolutely are fully behind our commitment that you will see double-digit growth in operating profit again in 2023. That was always our commitment. We said that in October 2020 when we established the new midterm ambition framework and the strategy refresh, that in 2021 and 2022, we would see only a flat to slightly declining profit development and then return to double-digit growth. This absolutely will happen, and that remains our commitment. And that is obviously of the guidance that we have been giving for the flat and slightly declining profit with a flat to minus 5% profit ambition that we had for 2022. And as this is unchanged, also the commitment for 2023 is unchanged.
Now the one thing that I have noted before and that you should take with you, obviously, is that the impact that we're having in 2022 from extraordinary expenses is partially a pull-forward of expenses that otherwise we would have seen in later periods, not only in 2023, but also in 2024, because of the acceleration of the amortization period for sales commissions. So that is obviously then translating into a help for 2023 and 2024. And that of course even further ignites our confidence in being able to drive to that double-digit growth. So in that sense, this is actually a relief for later years. But we are bearing of course now the expense load in 2022. I hope that helps to display the commitment.
And maybe, Stacy, and also just to quickly build on that.
That's helpful. Yes.
I mean, with our business actually also transforming, our revenue streams are becoming more and more predictable. Our overall P&L performance becomes more and more predictable. And the way how we now also model this out is we have strong pipeline multiples in place, which we then gave us the confidence to actually also reiterate our guidance in the cloud with strong acceleration in half year 2.
Plus of course also on the profit side. I mean, we know how to manage then our cost base. We have a plan how to offset the Russia impact. And then of course next year going in, we talked about the cloud harmonization program. We know when this effect will kick in. And then for the rest, it's actually a highly predictable revenue, combined of course with good management of our cost base. That actually will lead then to double-digit profit growth in 2023.
The next question comes from Frederic Boulan from Bank of America.
Two follow-ups, please. One on the revenue guidance. So you're saying you de facto increasing the guidance despite the hit from Russia. And overall color of uncertainties in Europe. So maybe, Christian, you can spend a bit of time on the tone of discussions you have with your main clients. Is it fair to say that you're not seeing any reduction in appetite, discussions to post transitions to cloud and broader projects? And in general, if you can give us a bit more ammunition on what is actually better than expected.
And then secondly, maybe a question for Christian around -- sorry, it's on -- for Luka around cloud margins. So I think last year, in June, you mentioned a step in cloud gross margins of 75% in 2023, towards 80% in '25. Can you confirm that this is still on the agenda, and the underlying assumptions you're taking on business network and SaaS/PaaS margins?
I take the first question. And look, in almost every discussion here in Europe, but actually also at a global scale. And these days, one of the biggest topics, and this is why we are also so confident with our pipeline in the cloud, it's the combination of, first, cybersecurity. We see a huge increase of attacks around the world. And when you look at many customers, I mean, they are not big tech players. They don't have the investments in cyber, what other tech players have. And then with RISE, when you then come and say, "Hey, we're going to protect your stack end-to-end. And there's one party who takes this end-to-end accountability to make sure your data is secure." It's a very strong value proposition.
Second, and when you are then dealing with huge supply chain disruptions. And a year ago, we talked about semiconductor, which is still out there. In the meantime, we are talking about wheat. We are talking about shortages of magnesium, of -- in life science, we are having a lot of customers have huge shortages in -- with regard to their raw material. And this is actually which is also then pushing more IT spend.
And then again, we still also see that, when you are not transforming your business model, when you are not offering a more personalized offering for what your customers need in retail, in utilities, when it goes a lot around customer retention, when you are not adapting your pricing, which is all going back to our portfolio, to our technology, then you're going to lose your competitiveness in the market.
And that's, together in this sequence, I would say, are the conversations we are having. And this is why we're also still so, so confident about our pipeline and our growth momentum.
Yes. And just quickly on the cloud margin. So absolutely, we still pursue that ambition. I mean, we have actually reconfirmed it today, and that includes of course also the gross margin ambition for 2025.
In terms of the decomposition of the different solution types here, let's start with the Intelligent Spend Group. I mean, this has already seen a very nice uptick to more than 80%, 80.7% right now, driven by the revenue recovery in particular in Concur. Obviously, that makes a big difference. But again, the growth in ISBN still only, so to say, 16%. So there is a lot of space for an even further recovery. And then those very high-margin businesses will actually further contribute. So post the completion of the cloud harmonization program, in particular for Ariba, we absolutely expect that also this business will see a further step up, probably to the levels of 82% to 83%.
The rest of the SaaS/PaaS portfolio is actually where the biggest step-up will occur. That business is, at the moment, bearing the brunt of the corresponding additional cost of cloud investments for the harmonization program. There are multiple solutions that are affected by this, that's why the gross margin there is only around 70 or very low 70s, dependent on the solution. So there, you should see in the second half year a significant step-up, which is good because this is also the fastest-growing part of the business.
And then you have an Infrastructure as a Service business with its natural margin limitations that will not really significantly further improve beyond, let's say, mid-30s. However, we deemphasized this business consciously. As you have seen and as we have already indicated, the growth is coming down. It will actually at some point turn even negative. And so from that perspective, in the mix, that will be reduced.
So the one unknown that we continue to have, as I already highlighted on prior occasions, it's just the proportion of S/4HANA private cloud in the mix. And therefore, the great success of RISE that is frankly ahead of our plan. We have been, every single quarter in 2021, ahead of our revenue plan in the cloud. We are again ahead of our revenue plan in the cloud in Q1 2022. And the reason is the tremendous success of RISE.
So if that continues, and therefore, as far in our private cloud becomes a far greater part of the overall mix than what was contemplated when we revised our plan, we might see a situation where we fall slightly short on the margin side, but then we would overshoot on the absolute cloud profit side. And that's why we have started also to break this out with the tremendous 32% or 26% at constant currency growth that we've seen in Q1, and we will continue to provide visibility.
And therefore, from an absolute cloud profit perspective, if we indeed saw this continued outperformance of RISE with SAP, that would be a very nice problem to have because it would actually provide upsides on the operating profit line.
Great. And maybe just one clarification. When you talk about H2 step-up, you talk about '23, right?
Absolutely. For 2022, as we indicated all along, we should consider a flattish development of cloud margins, again, because the weight of the investment of the cloud harmonization program is quite significant, 1.4%, as I said, in Q1. And it will actually further increase over the course of the year.
Our next question comes from Michael Briest from UBS.
Luka and Christian, could you give some context to Luka's planned departure? And I mean, it doesn't seem like it was expected, certainly wasn't expected by me. And in terms of succession, the timing around that and the consideration of internal versus external candidates. And if external, any sort of criteria around software expertise, German nationality, anything like that?
And then Christian, on the Qualtrics call last night, the management did suggest that, in Europe, there was a little bit of slippage in order intake. And I'm just curious why you're seeing something different, especially given that license performance, it felt to me that, that perhaps should have translated into a stronger cloud backlog number if it was moving from one bucket into another rather than slippage. So did you see anything in Europe or elsewhere that would fit with Qualtrics' comments?
Perhaps you can get started with that part and I'll cover my part...
I don't know, but let me also cover your part first. Let me share some words here. I mean, there is no doubt that we have always been very happy with having Luka on board. Without any doubt, Luka is doing a great job. And I mean, Luka and I also now worked for some time together. Actually, I worked for Luka few years back. And -- but when you're doing this, I guess, for 9 years, Luka now in the meantime, we're going into the ninth year, I mean, it's fair to say that -- then also Luka said, "Hey, there's also probably also something else, what I can do going forward."
What I'm very happy with is that we still have Luka for the next 12 months because we are talking here a lot about the transformation, about increasing our profit by double digit. And I really want to finish, and then of course afterwards, continue this journey with Luka on my side. And this is why I'm very happy to have Luka on board for at least another year.
And then actually, yes, the search has now started. The Supervisory Board will make the final call. Luka is involved, I'm involved, so I'm pretty sure that we will also have a smooth transition then.
Luka, anything to add from your side?
No, it's right. At the end of the day, I've loved my job. I've loved every opportunity to work at SAP and I will love my last year as well. And it will be very hard to leave SAP. But I have recognized, through all of the work in the last many years working with customers, as well as serving as a Board Sponsor for our businesses in Latin America, in the Middle East and Japan, running our own businesses with Business Process Intelligence. You have heard that this is actually working quite well, also now with Taulia, that I have a passion for this.
And I would like to expand on this passion and learn something new as well. So it's more likely that my next role will be in general management than necessarily in a pure financial background. And that's just an opportunity that, I think, in a very collaborative fashion, we have discussed that now is the right point in time. Also, because I want to develop BPI into a state where we can release it to the mainstream operations of SAP by the end of the year. And therefore, it then feels just naturally.
And that's also the reason why I will stay through March 31. I absolutely want to give you that commitment and fulfill the commitment for the return to double-digit growth on the bottom line in 2023. And that's why I wouldn't miss the opportunity to give the outlook for 2023 as well.
There's not a lot more to be said about that, other than that we are really doing this in a full friendship. Otherwise, you wouldn't work for another year at the company. And we are going to depart as friends. I will always be a member of the SAP family, and on the best possible terms. So nothing more.
And absolutely, the company will stay on course for its 2025 ambition because it has the right strategy, it has the right operational priorities, and it has a great management team, with, but also in the future, without me.
And then Michael, on the sentiment in Europe. I would tell you, if I would have heard a CEO say, "We have to scale back our IT budget," or "We have to postpone certain SAP projects." But in reality, what we are talking about, I mean, last week, we -- I was with a huge semiconductor supplier for machines to produce semiconductors at mass scale in Netherlands. And there, we are talking about building a digital twin with Siemens around -- to further scale the production to help to cover the rising demand.
With others, we are talking about cyber and how we can protect the landscape because they see, in their on-premise landscape, rising number of attacks. And they feel better protected when they are giving this into the hands to SAP and other technology partners of SAP with RISE.
And then again, a lot of customers also just have started with their business transformation. It's not like that every customer now already finished the business transformation, it's actually the other way around. And so -- and there is no CEO who will now say, "Hey, I'm going to slow down the pace of my transformation. I need this as a foundation."
And then let's not underestimate the power of our platform that now more and more partners are also start to build on that. And also the business network. I mean, it's almost -- I sometimes feel this is a forgotten asset. But in times like these, there's the Ukrainian example, what we are doing here on the medical supply, there are so many others. And we see such a strong push into this network that we really feel this is also a new way of running businesses and supply chains going forward. And that, net-net, gives us the confidence that there will be no reduced demand in half year 2. It will be the other way around.
And look forward to seeing you both in person next month.
Indeed, including at the cocktail reception.
The next question, from Kirk Materne from Evercore.
Christian, I was wondering if you could add just a little bit more color around the S/4HANA cloud backlog growth this quarter. Just what are you seeing in terms of new customers versus sort of transitions from existing customers? And any color, I guess, geographically would be helpful.
On the geographic, if you, Scott, please also then support me. I can give you my global view first. It's great to see that we are winning also a lot of net new deals. I guess, only in Q1, it was roughly over 1,500 net new customers which we brought on board. So 1,500. This is what other companies maybe do in a year.
And then of course with the conversion, when we designed RISE, of course, it was always our intention to speed up and accelerate the adoption of S/4HANA Cloud. But even more important is the platform, it's the Business Technology Platform. And now we are seeing in the next wave that we are suddenly winning huge deals against Workday and SuccessFactors because we can provide this integrated view, this modular ERP, which then provides capabilities like total workforce management, management measure productivity on the real time, simulate attrition rates and have the impact on the P&L.
And now we talk. And this is why RISE provide such a great conversion factor and also allows us to increase our footprint over time and come back in fields which maybe don't have supported so well in the last 2 years. And this is why, also on Ariba, I mean, procure to pay now sitting on 1 procurement platform, where you can tailor the needs for direct and for indirect procurement, connected to the network, having supplier risk management for new legal requirements, which we have to secure human right, that there are no human right violations in your supply chain.
This is what SAP can do, and this is what we are doing with RISE. This is where we, putting them or enable them to adopt to this new capabilities, what customers need going forward. And this is actually net new and the installed base shift. So both is really coming in very well, and we are clearly ahead of plan when I look at our initial RISE plan.
Scott?
Yes. So 2 additional comments to add a bit of color on what Christian said. First of all, just on the solutions side. So as mentioned, the S/4HANA Cloud just continues to propel not only the growth of that platform, driving the resiliency and the growth and the process transformation that companies need around the world. But it also then brings in the portfolio. Christian mentioned earlier that 80% of our S/4HANA Cloud brings the technology platform.
Businesses, whether they're in Europe, U.S. or in Asia, are looking for scale and innovation, and RISE brings both. It brings the transformation capability of S/4 Cloud, but they also get the innovation with the Business Technology Platform, which means they can extend and be able to innovate on that. And that's why it's been such a strong growth driver, together with Signavio being a key element as well.
On the regional side, I guess the way I would describe it is it's a good position to be in when you're not dependent on a particular region or business. All of them are growing strongly. You can see it in the Q1 cloud revenue that all of them are growing strongly, in mid-20s or better. And in particular, the Americas, given the size of that market, is particularly pleasing. And it's impressive in the growth rates, and including the order entry in Q1 was really strong, considering the market dynamics. But around Europe and EMEA and in Asia, our pipeline reflects that consistency.
So whilst we have some solutions that will be up or down in a particular quarter or particular market, overall, the pipeline continues to grow strongly in line with the revenue outlook that we've described. And that's consistent across the world, which probably gives us a level of confidence that our capability and the solutions are more in demand than ever, considering the market dynamics. And that gives us confidence going forward.
And now we will take one final question, please.
Our final question comes from Johannes Schaller from Deutsche Bank.
Look, quite a few economists seem to see a risk of a kind of broader recession next year on a global basis. Obviously, we don't have a crystal ball, but Christian, you talked to the resilience of the business and the predictability. I think we know how a good part of SAP behaves in the recession from the past, and we also know how the licensing ERP business will behave. But how should we think about the new S/4HANA Cloud business, the RISE business from your perspective?
I mean, maybe you can talk a little bit, a, from an operational side. Do you think customers can even pause or slow these transformational multiyear projects? Is that possible?
And then secondly, just from a financial perspective. How would you expect to be impacted on that part of the business, should we really go into a recession?
Yes. So look, of course in the conversations, concerns come up about the rising inflation and can customers really put this inflation and then the increase in their cost base always on top on the pricing side. But then, the next part of the conversation is, can you help me on cash flow optimization? And then we come into the play where we say, "Hey, yes, okay. We connect you with the platform, with RISE, to our network to give you access to more suppliers. We have now Taulia connected to it, where we can hopefully also get better financing conditions. We have actually good ways with S/4HANA Cloud on offering -- making sure you can offer much faster new services with new license models, which also can help you to drive higher customer retention and hopefully higher prices."
And so these are the conversations that we're having to offset this increasing pressure, which clearly is out. I mean, there's no debate about that. But technology can really, really help. And again, this is so important. We are not only talking here about the technical migration in the cloud, and this is where SAP comes into play.
And you can look back when Brexit happened or when other things happened in the past, always, that was always there, was strong demand for better business software to offset some of these challenges, what customers see out there in the market. And even with the geopolitical tensions, customers are now turning to SAP, and that's why, also the Russia situation. This is not easy for us. I mean, we have large multinationals wanting businesses all over the world, and they need solutions and they need solutions now, which actually also drives our business.
So while the world becomes more complex, software is needed to overcome this complexity. And this is why we definitely don't see a hit on our pipeline. It's the other way around. We actually see strong multiples. And we will remain very confident also about the further acceleration of our cloud business.
Thank you. And this concludes our call for today. Thanks for joining.
Thank you very much. Bye-bye.
Thanks a lot, everyone.
Thank you.