SAP SE
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SAP SE
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Ladies and gentlemen, good day and welcome to the SAP Q4 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir.
Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss our results for the fourth quarter of 2019. I'm joined by our Co-CEOs, Jennifer Morgan and Christian Klein, as well as our CFO, Luka Mucic, who will make opening remarks on the call today. Also joining us for Q&A is Ryan Smith, the CEO of Qualtrics. Before we get started I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, short outlook and will and similar expressions related to SEC are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2018 filed with the SEC on February 28, 2019. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. On our Investor Relations website, you can find our quarterly statement and financial summary slide stack which are intended to supplement our prepared remarks today and include a reconciliation from our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS as reported year-over-year. The non-IFRS financial measures, which we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. With that, I'd like to turn things over to our Co-CEO, Christian Klein.
Thank you, Stefan, and thanks to everyone on the phone and webcast for joining. First of all, I hope everybody had a great start into 2020. SAP certainly had a great finish in 2019. Q4 was strong finish to yet another record year. Once again, we have kept the performance and delivered on our raised business outlook. The 2019 results speak for themselves. Total revenue up 12%, operating profit up 15%, and our operating margin pushing to 30%. Our on-premise business continues to grow, our cloud business continues to soar. With cloud revenue up 40%, we outperformed our major competitors and continue to rapidly gain cloud market share. We are combining growth with increased profitability harvesting the initial benefits of the Best-run program. Operating margin has jumped up by 80 basis points, and we expect to see more of that as we continue with SAP's transformation to drive operational efficiency. An important driver of that success is the cloud gross margin, up more than 5 percentage points. We are steadily increasing the efficiency of our cloud delivery, and we continue to leverage our hyperscale partners. This also shows in our Capex, down 45%, despite supporting a much bigger cloud business now. We are proud of these results and energized by the many opportunities ahead. Customers across all industries turn to SAP to help them master the digital transformation and become intelligent enterprises. Together with us, our customers are driving complete business transformations, embedding the latest technology innovations we deliver using real-time data as a tremendously powerful asset, and we are seeing an increased number of these large transformational deals. Deals greater than EUR 5 million now contribute 1/3 of our total order entry. So our winning product strategy of delivering the intelligent enterprise is in full execution. And it builds upon these key principles: One, integration. As our customers introduce new business models, they need a seamless customer experience to support their success. This requires 2 elements; a strong business process integration across the entire value chain and the harmonized data model to provide a 360-degree view of the business using real-time SAP and non-SAP data. Two, innovation. New technology such as artificial intelligence, is changing how enterprises work. SAP has a history of automating business processes across the value chain. Now by embedding AI into our applications, we believe we can increase productivity up to 40%. Three, flexible deployment. Modern landscapes are hybrid, a combination of cloud and on-premise solutions, depending on customer priorities and performance. As you know, our flagship ERP suite, S/4HANA, is an important building block of intelligent enterprise and it had a record year. In on-prem, software licenses revenue grew at high single digits and our cloud revenue growth has continued to expand rapidly. We are now at more than 13,800 S/4HANA customers across 25 industries, an annual increase of 24%. This number includes 86% of the BCG top 50 most innovative companies. In Q4, S/4HANA wins included marquee customers such as Ford, Bristol Myers Squibb, Lockheed Martin, E.ON, Roche, Decathlon, Clemens Group, [ Sure ], Waberer, KIA and Zalando. Equally important, 65 of our licensed S/4HANA customers are already live or implementing. This is an excellent rate, especially considering most of our customers leverage the migration as an opportunity to achieve business transformation rather than just going for a technical upgrade. Vodafone recently went live on S/4HANA. This is one of the largest go-lives we have seen. And they are now running the global business on S4. They are, by the way, a perfect example for a hybrid landscape, where customer's license and operate a combination of on-premise and cloud technology, allowing them to gradually transition to cloud at their own speed. Further S4 go-lives in Q4 included Aareal Bank, BDO, PayPal Giving Fund, Deutsche Telekom, [ Be In Stock, Ficola, Centrica, ] ARAMEX and BBC. Today, around 40% of the S/4HANA customers are net new and competitive wins for SAP. That's reflected in our increasing ERP market share, which is by now approximately double that of our closest competitor. Most of those net new customers are midsized companies. But at the same time, we have also seen a very notable number of large enterprises with no previous SAP presence decide to implement S/4HANA, replacing competitive software at scale, Standard Chartered, British Telecom, Tech Mahindra, Avianca, Kubota, or Ford to just name a few. In Q4, S/4HANA Cloud continued its massive growth. S/4HANA Cloud is now at more than 2,300 customers and at a cloud revenue run rate of more than EUR 500 million. I invite you to compare that to the early track record of any other cloud application vendor out there. We are delighted to see how rapidly we are expanding the reach of S/4HANA cloud. Customers from more than 20 industries and close to 70 country-specific versions. No other cloud ERP solution can match its scope. U.S. S/4HANA Cloud customers included Kubota, Gate Gourmet, Centaur Holdings and Tom Tailor. Among many others, ESLGaming and the Mercedes Benz Formula E team have gone live. At the same time, SAP HANA, our high-performance in memory database, continues to rapidly penetrate our customer base, replacing legacy database solutions. HANA adoption within key accounts is at close to 60% now, up from less than 30% in 2015. In the cloud, by the end of Q1 this year, all our major cloud solutions will be up already. Let's look ahead now to some of our key priorities for 2020 and beyond. One, integration of acquired cloud assets remains at the top of our list. Integration drives customer satisfaction. It increases the value and stickiness of our solutions. It drives cross-selling. As explained at the Capital Markets Day, 70% of our ERP customers have yet to adopt to our cloud solutions. And these customers expect seamless process integration in one data model. Two, we will increase our focus on vertical cloud solutions. That's a big lever to further accelerate our ERP market share gains. The SAP industry cloud will be jointly driven by SAP, our partners and start ups, building cutting-edge vertical solutions on top of the SAP cloud platform powered by SAP HANA. We estimate the market size for these solutions to reach more than EUR 150 billion by 2023 and have just signed several partner agreements, including one with Accenture to cover cloud for utilities. Last but not least, I just returned from Davos, where everyone was focused on sustainability. The world's perspective on company performance continues to rapidly expand beyond financials. From where we are today, the importance of managing aspects such as the carbon footprint will massively increase. So far, SAP was focused on helping customers optimize business models and processes. Now we are adding a complete new dimension. We will enable our customers to measure and manage their carbon footprint along their entire value chain, including manufacturing and supply chain operations. Let me put this into perspective. We estimate that our top 2,000 customers manage an aggregate carbon footprint of around 10 billion tons. That's close to 25% of the global carbon emissions. So imagine the impact a reduction of just 10% would have. Finally, and as you know, this is very close to Jen and myself, let me briefly talk about customer success and some of the adjustments we are implementing here. Customer success is the #1 priority at SAP. Customer success drives it all: upselling and cross-selling, sales to peers, renewals and thus, profitability. This is not new. Our customers have always been in our focus. Customer success matters even more in the cloud. And so we are further increasing our focus on building long-term relationships by implementing 2 important changes: one, we will link bonus metrics directly to customer solution consumption rather than purely focusing on deal signature; two, we are adapting our external reporting. We are moving from the new cloud bookings to the current cloud backlog which captures our success in contracting new business but as well as renewing existing business. Luka will provide some additional background in a minute. In closing, our 2019 performance sets us up to achieve not only our 2020 outlook, but also gives us great confidence that we are on track to meet our 2023 goals. We are investing in the wide areas driving growth, and we are improving our operational efficiency, driving profitability, and we will see the benefits of those play out in our favor in the years to come. With that, I'd like to hand it over to Jen.
Thank you, Christian. In our first 3 months of Co-CEOs, we spent a lot of time listening to our customers, our partners, our employees and our investors. And we continue to form our views of the business and we'll share more of these perspectives and plans throughout 2020. Like any new CEOs, we bring a fresh perspective to our roles, and we see that there are areas where we will be more focused, where we will accelerate and we find unique opportunities for further growth. Let me highlight some early priorities, which we're executing on. Successful and satisfied customers remain front and center for achieving long-term growth and profitability goals. This starts with engineering world class products. We're breaking down the silos and cross-pollinating our engineering teams, removing redundancy, tightening the integration between our cloud solutions and cloud to S4. This allows us to focus our R&D resources more effectively and efficiently, disinvesting in long tail solutions that do not serve the broader market to free up an investment and accelerate innovation in high growth priority must-win segments. Together with our partners, we will focus on delivering smooth and faster implementations and higher adoption of our solutions. This ultimately drives higher customer renewals and expansion into additional products across our portfolio. With our Best-run program and increased focus on operational excellence, we are creating a simpler and more agile SAP for our customers and employees. We have an amazing workforce of over 100,000 employees who are committed to our customers' success, and we're off to a fast start in 2020. Coming out of our kickoff meetings around the world, our workforce is energized. We've further integrated our sales team to gain scale and create a better experience for our customers as they work with SAP. Our services and support teams are laser-focused on adoption and customer success. Our R&D teams have clear road maps with priorities and are accountable to deliver an integrated intelligent enterprise and new innovation that differentiates SAP. Our employee engagement index was a strong 83% for 2019 and above industry benchmarks. Our employee retention rate also remained high at just over 93%. These metrics are supported by the external feedback given on Glassdoor. SAP made the best employer list in 7 countries, taking the #1 spot in Argentina and Brazil. As we continue to foster a diverse and inclusive culture, we're proud that SAP was at the very top of the Forbes America's Best Employers for Diversity list, reflecting our industry-leading metrics, like roughly 34% women in our workforce today and nearly 27% women in leadership positions. We're far from finished on this front. There is much more work to be done, but we're proud of the progress to date. Let me spend a moment on the macro. Our strong 2019 performance was achieved amidst macroeconomic and geopolitical uncertainty. Every company today is focused on growth, whether organically via acquisition, through new markets and new industries, and these companies turn to SAP to run their enterprise today, knowing they can scale, change and address macro uncertainties such as regulatory changes or supply chain flexibility in the future. And this means a sustainable relevance for SAP. As a result, our global pipeline is robust heading into 2020, and our predictable revenue is approaching 70% of the mix. As Christian just mentioned, SAP is proud that we once again delivered double-digit growth across all key revenue lines. Cloud, cloud and software and total revenue. And we see clear proof that our operational excellence measures are kicking in with significant increase in both operating profit and margin. Now for Qualtrics, it's clear our experience management vision is resonating with our customers and prospects and driving enhanced interest in our other solutions. Companies understand that if they are not competing on experience, they're on a race to the bottom. Qualtrics continues to successfully drive a land and expand strategy and has expanded to over 11,450 customers. Add to that, the scale and geographic reach of SAP, and we see rapid growth in both the volume and enterprise segments. As we sell Qualtrics to SAP's traditional enterprise base we've helped Qualtrics increase the deal size, deals over EUR 100,000 are up 40%, deals over EUR 1 million are up nearly 60% in 1 year. We're also seeing a massive increase in growth in win rates in the customer experience. Customers are realizing there is a much better offering than inflexible legacy customer experience vendors like Medallia and others. I have personally been involved in many of these deals and the technology and opportunity for our approach is game changing. We also continue to see amazing success in employee experience with the strength of the SuccessFactors/Qualtrics combination, carrying forward incredible momentum from previous quarters, and we're seeing strong traction in brand experience and product experience. In each of these areas, we've seen early success selling Qualtrics to our installed base. In Q4, many of our existing customers, such as Volkswagen Group Australia, JPMorgan Chase, Autodesk, Alliance, Exxon Mobile, Alaska Airlines, Santander, Lazy Boy, the Hertz Corporation and Samsung, all selected Qualtrics to move beyond systems of record to new systems of action and achieve breakthrough results. Despite high-growth achieved in 2019, the opportunity in front of us is much, much larger as the vast majority of SAP's installed base does not have Qualtrics yet. We invite you to join us at our Qualtrics X4 Summit on March 10 through 13 in Salt Lake City. Moving to HXM, together with Qualtrics and SuccessFactors, we've redefined traditional human capital management to human experience management. Since we launched the SuccessFactors/Qualtrics' Employee Experience micro suite in May, we've acquired over 450 customers who use both solutions. Our evolution toward human experience management is also proving to be an accelerant for Employee Central, which has ramped to more than 3,700 customers globally, up more than 700 from a year ago. Our broader suite of SuccessFactors has almost 7,000 customers globally. Computer Center, JetBlue, Eurobank and Chalhoub Group went live with SuccessFactors in Q4, while NTT Group, Landesbank Baden-Württemberg, STADA, Genting Hong Kong Universal Beijing Resort, United Launch Alliance were among many other competitive wins. And customers are returning to SAP from the competition. Klosterfrau Healthcare Group, a leading pharmaceutical product supplier in Europe, have come back to SAP, selecting SuccessFactors, HXM, including Employee Central. Now moving to customer experience, this is the largest and fastest-growing category in enterprise software. With Bob Stutz returning to SAP 3 months ago, he is putting his proven track record into action by bringing focus to the largest market opportunities and doubling down on execution in these fast growth segments. The fastest-growing areas of CS play directly to SAP's strengths, such as customer data platform, commerce, customer experience management and connecting demand to the supply chain seamlessly in real time. We've accelerated the delivery of our customer data platform. Interestingly, the customer data market is a highly fragmented and young market with no leaders. This is an opportunity to become a new system of engagement, complementing any CRM system of record. We're recognized market leader in digital commerce by Gartner, and we're innovating every day. We built AI into order fulfillment using real-time intelligence to get packages to customers more efficiently. And this is what allows customers to shop and pick up anywhere. We've integrated our sales and service solutions as contact centers are quickly becoming revenue centers in need of better sales tools and by leveraging Qualtrics, we will combine customer feedback and operational data to list and understand and, most importantly, take action in the moment to improve the customer experience. Case in point, one of the largest frustrations for commerce is card abandonment, which amounts to $280 billion a year in lost revenue. XM is how retailers can manage abandonment and solve issues in real time. We saw many wins across commerce to provide Commerce Everywhere in Q4. The Nielsen company, Royal Dutch Shell, Chevron, Carhartt, INTERSPORT Deutschland, Tom Tailor, Aldo Group and many other selected our CX solutions in Q4. Orexia, Perfumery Douglas are now live on multiple elements of the portfolio. In intelligent spend, we deliver truly integrated spend management across the Ariba Field Glass and Concur. Together, they represent one of the largest commerce platforms in the world with transactions in over 180 countries. And we're the only platform addressing global leads compliance and risk across all areas of spend. Christian mentioned Ford Motor Company, one of the largest global automakers. Ford purchased Ariba and SAP digital supply chain, along with S/4HANA to replace many legacy systems. As an intelligent enterprise running S/4HANA, Ariba and digital supply chain, Ford's turning insight into action in real time, streamlining global finance and purchasing processes and massively simplifying their overall IT landscape. Ford sees substantial business benefits, such as the reduction of procurement approval flows from 25,000 by over 95%. Kärcher, Electrolux, Allegiant Travel Company, Ford, GA Group, Coca-Cola, Hellenic Bottling, Repsol, the New York Yankees, Bristol Myers Squibb and CVS Health are among the many others that selected our intelligent spend solutions in Q4. And we're also using Qualtrics across intelligence spend. Every Ariba screen will have Qualtrics embedded to enhance experience and create a continuous feedback loop for buyers and suppliers on our network. Christian spoke of our strong S4 acceleration, and we see we have a much higher percentage of customers using at least one of our cloud solutions when they've moved to S/4 versus those who have not yet moved in both the enterprise and volume market. There's a strong tendency for many of these cloud solutions to sell very well together as well as invigorating excitement and acceleration to move to S/4HANA, and we see huge cross-sell opportunities for customers to adopt micro suite such as SuccessFactors and Qualtrics together, commerce and Qualtrics, Ariba and S/4HANA. The strength of our ecosystem continues to accelerate and out of flywheel effect to our progress. Last quarter, as you know, we announced a strategic partnership with Microsoft to accelerate the move of S4 to the cloud. While we're off to a fast start. In Q4, one of the largest on-premise customers committed to move most of their SAP landscape to SAP HANA Enterprise Cloud on Microsoft Azure over the next 3 years. This is just the beginning. Other partners have developed their own programs to accelerate our customer's S4 transformation to the cloud, such as Deloitte's Reimagine Everything Anywhere program with Google Cloud. Our S4 and SaaS solutions run on GCP and AWS so the hyperscalers are also incentivized to advocate for SAP. In contrast, our traditional competitor has a go-it-alone strategy. Gartner Peer Insights, we see that SAP customers completed 1,100 new product reviews of SAP, with 87% rating SAP 4-plus stars and a 42% surge in 5-star reviews from 2018. When you compare performance, it's clear from the math which strategy is winning. To summarize, SAP is evolving a highly differentiated and winning strategy around experience management and the intelligent enterprise with the hyperscalers and ecosystem as a force multiplier. Our approach is validated by our strong full year results, and with our strong top line momentum and operational excellence initiatives in full swing we are positioned to continue to outperform our business software peers. So with that, Luka, I'll hand it over to you.
Yes. Thanks a lot, Jen. Let me start by saying that I'm likewise very proud of our 2019 results. In particular, our strong increase in profits and margins, while continuing our remarkable top line momentum. So let me cover our results in some more detail. First, in 2019, we hit all revenue and profit targets. In fact, we have kept our promise for half a decade now, successfully hitting or beating all revenue and profit targets in that time frame, even those that we have raised. I'm very proud that we continue to keep our promise in 2019. For the full year, new cloud bookings was EUR 2.3 billion and grew by 25% and 31%, excluding infrastructure-as-a-service. As discussed at our Capital Markets Day, starting with Q1 2020, we will replace the disclosure of future out bookings with a new KPI, the current cloud backlog or CCB for short. This metric gives you the contractually committed cloud revenue that we expect to recognize over the upcoming 12 months. The CCB starts as a subset of the remaining performance obligations number that we disclosed under IFRS 15. It is cloud-only, at 12 months only. Its expansion between 2 key days, reflects our success in both contracting new cloud business as well as renewing existing business. So compared to new cloud bookings, it is a more holistic indicator of our cloud success. The cloud revenue has grown by 40% in 2019. We have now surpassed the EUR 7 billion mark. This makes our cloud revenue now more than 50% larger than our software licenses revenue. We also continued our strong double-digit growth in cloud and software, total revenue and operating profit. We are seeing really strong growth rates in Qualtrics and a very positive effect in SuccessFactors and Human Experience Management. Now I also wanted to underscore what Jen and Christian said about our unique positioning with S4 HANA cloud and our digital supply chain offering. So you see, we are driving strong growth in both our acquired and our organically developed cloud services. Now moving to our on-premise performance, which was in line with our expectations. Q4 software licenses revenue was solid, especially if you consider a really tough year-over-year comparison. With that successful Q4 as a backdrop, we had only a 2% decline in software revenue for the full year 2019. Together with our ever resilient maintenance business, which grew by 5%, our software and support business continues to be rock-solid with 3% growth in 2019. Now to the regional results for the full year. We had a solid performance in the EMEA region with cloud and software revenue increasing 9%. Cloud revenue decreased 47% with Germany, the Netherlands and the U.K. being highlights. Spain and Switzerland had a strong year in software license revenue. We had a strong performance in the Americas region. Cloud and software revenue increased 16%, cloud revenue increased 35%, with Canada and Brazil being highlighted. The software licenses revenue, the U.S. had a solid year, while Brazil and Canada's performance was strong. In the APJ region, finally, we had a solid year amidst the challenging market environment. Cloud and software revenue was up 10%, while cloud revenue increased 43% for cloud revenue and software licenses revenue alike, both China and Japan were highlights in 2019. Now moving on to the bottom line. Our overall cloud gross margin growing 5 percentage points and operating profit grew 15% year-over-year. You can imagine that I'm absolutely happy with this result. Actually, the gross margins of all of our business models were up in both Q4 and for the full year 2019, respectively. With the impressive growth of our overall cloud gross margin reached 68% for the full year, the Q4 even saw us ending at 70%, which is already within striking distance of our 2020 target of 71%. And we also have a clear line of sight to get to the 75% by 2023. As expected, the strongest contribution to this came from the gross margin of our public cloud or other Saas/PaaS offerings. Here, we had a significant expansion of 8 percentage points and reached 68%. The key factor that drove this result was benefits from the successful completion of the SuccessFactors migration to HANA. We are also starting to see benefits from our other cloud assets as they start to scale and increase their efficiencies. And of course, we get a benefit from Qualtrics since they are already running at a gross margin around the 90% mark. The gross margin for our intelligence spend group continued its steady course with the full year gross margin in the high 70% range. We were happy to keep that momentum going in 2019. This year, we expect a positive bump, mainly coming from Ariba when it finalizes its migration of third party database onto HANA. Our infrastructure-as-a-service gross margin improved by an impressive 17 percentage points to 29% in 2019. This strong result proves that we are making great progress in our renewed strategy within this business. We continue to focus on higher-margin infrastructure-as-a-service deals. And at the same time, we continue to expand strategic partnerships with hyperscalers. Our software and support gross margin ended the year at a very healthy 87%, increasing by 10 basis points. Overall, our cloud and software gross margin increased to 82% for the full year. This shows that the hard work from our transition to the cloud has paid off as this metric is now trending upwards despite the continued headwind from the revenue mix. Our services gross margin increased by 2 percentage points and reached 25% for the full year. This was mainly driven by efficiency gains in our projects and surge in engagements. At this point, I would like to thank my colleague and friend Michael Kleinemeier for the tremendous turnaround that he has achieved in our services organization. The combination of strong top line exceptional cloud gross margin improvement and operational discipline led to the double-digit operating profit growth. We achieved our rate [Audio Gap] position at the expenses from the restructuring program that we had announced a year ago, was also impacted by higher share-based compensation, primarily due to the Qualtrics acquisition and the strong development of our share price. This resulted in a decrease in IFRS operating profit of 21% to EUR 4.5 billion. For the same reason, our IFRS earnings per share decreased by 18%, whereas under non-IFRS, we reported a strong growth of 18% to over EUR 5 per share. For the full year 2019, the IFRS effective tax rate decreased by 30 basis points to 26.7% while the non-IFRS effective tax rate decreased by 20 basis points to 26.2%. Both tax rates were within our guidance ranges. As expected and discussed at our Capital Markets Day, our cash flow performance in 2019 was likewise impacted by higher restructuring payments, higher share-based compensation payments and higher tax payments than in 2018. It significantly overcompensated the benefit we received from IFRS 16. Our operating cash flow in 2019 hence decreased by 19% to EUR 3.5 billion. This, of course, also negatively impacted our free cash flow in 2019. On the positive side, 2019 was a year where we were really able to dramatically improve our CapEx efficiency. Compared to last year, we reduced our CapEx by more than 40% to EUR 800 million as we harvest the benefits of our converged cloud platform and expanding hyperscaler partnerships. As we also stated at our Capital Markets Day last November, we expect that both our operating and free cash flow will increase significantly in 2020. Since we see that our CapEx will remain at a reduced level and the negative impact that we have in 2019 should be much more. For our 2020 outlook and the 2023 ambition, please refer to our quarterly statement published earlier today. Before closing, I wanted to talk about some of our social and environmental highlights and update you on a few of our nonfinancial metrics. At SAP, we know that we can have an impact beyond our own operations, as Christian already mentioned, and driving economic, social and environmental impact in a holistic manner continues to be a key priority for us. We support the UN Sustainable Development Goals. One example is the value balancing alliance, which we are a founding member. This nonprofit organization aims to change the way companies measure and value performance to create a global standard. Another example of how we can have a positive impact with our products is the plastics cloud. The global ocean plastic crisis, SAP joins the World Economic Forum's global plastic action partnership. Together, we are launching the next phase of the plastics cloud, which will allow businesses to rapidly shift to single-use alternatives, invest in material collection infrastructure and ensure a better consumer experience. Looking to our nonfinancial metrics, Jen already talked about where we stand with employee retention and women in management. I would just like to add that we, again, decreased our CO2 emissions despite our company's strong growth. We remain committed to be carbon neutral by 2021. So to summarize, we delivered on our full year outlook in 2019, that marks the fifth straight year in a row. We had an exceptional year with double-digit top line growth in cloud, cloud and software in total revenue, and our operational excellence measures continue to produce results. We finished the year with more than EUR 8 billion operating profit growing at 15%. That's impressive. This success would not have been possible without the dedication, innovative spirit and discipline of our people. SAP will remain fast growth and highly profitable company. And I'm very confident that we will continue to keep our promises, starting by delivering on our 2020 guidance, then following through with our 2023 assumptions. Thank you, and we will now be happy to take your questions.
Thank you. Operator, we can open up the Q&A session.
[Operator Instructions] And we will take our first question from James Goodman with Barclays.
I wanted to ask you a couple of things about the cloud business, if I may. Firstly, you noted the 10 percentage point benefit to new cloud bookings from this major shift from an on-premise customer to the cloud, which is coming under embrace, which is clearly encouraging. But you're taking, I guess, a benefit already there from Microsoft in terms of revenue in the SAP cloud platform. So my question is, can you expand on what this customer is doing precisely and where additional revenues are coming to you through the cloud business? And then the follow-up cloud question is just on the ISG business, where we moved to about 14% growth from 20% over the last quarters.
Yes. So on this large deal question here, first of all, on this large deal, just to give you some context to it, this is not directly related now to employees. So what is large multinational customer really decided is to move with existing on-premise landscape to the cloud and to go with the SAP's HANA Enterprise cloud offering in order to not only migrate the landscape to the cloud but do a real business transformation. I mean, this customer really has certain requirements in adapting new business model, driving automation, and this is why this customer decided to shift its complete landscape to a hyperscaler, plus SAP will work with this customer hand-in-hand to migrate and transform this customer into an intelligent enterprise. And that's, by the way, also not a one-off deal. I'm actually expecting that more and more customers really focus on their own transformation while shifting more and more of these projects to hyperscalers plus SAP to drive the transformation.
And this is Jennifer. Maybe let me hit the point on the cloud bookings, because I know that this is a topic. I want to make a couple of points here. You remember earlier in 2019, we made the strategic decision to really focus on our SaaS business and move away from infrastructure as a service because we knew that we could get better focus on what we do well and leverage a lot of the motion to the hyperscalers in our business. So that was a strategic decision that we made early in 2019, which did have an impact on the top line revenues. When you look at where the growth is coming from, Qualtrics is going to be an incredible growth engine. The results we had in 2019 were really specific to Qualtrics continuing to execute within their customer base and the customers that they were growing. We did really start to pick up steam towards the second half in terms of expanding and doing some nice large deals in our installed base accounts. And what we've also done is, Ryan and I together have learned quite a bit, and we placed one of our most seasoned sales executives from SAP to be the Chief Revenue Officer within Qualtrics. So we can both bring that really strong sales execution into Qualtrics and also the knowledge of SAP and where we can really focus Qualtrics to drive the large deals and scale across the globe. I mentioned our C4 portfolio. Now you all know that Bob came in, bought Stutz in Q3, and this was an area where we needed somebody who brought experience in this market, who understood the differentiation that SAP could bring to focus on that differentiation and, frankly, to execute. So we've learned here. You're going to see us move and make progress here. You're going to see new product development happen this year. And we're very confident that this portfolio is now more focused and we'll execute. And I don't want to forget about our organic cloud solutions. Christian talked about S4 in the cloud. We also have analytics, which has really strong growth, digital supply chain. While these might be smaller in terms of the revenue size the growth and the steam of these are picking up. And then finally, when you look at how we get the scale of all these solutions in our customer base, we made the decision to move all of our sales resources within the different specialized sales forces under Adaire Fox-Martin, who now owns overall go-to-market responsibility and can get better focus and scale and really get all these businesses humming and get the synergies of the micro suite as we go out and sell the cloud. That's really the plan for how we're going forward with the growth.
Yes. And perhaps just quickly to come back to your precise question. So to reiterate, that very large deal was a net new incremental deal and was not cannibalized by any of the Embrace transaction. And you have a specific question around ISG and the 14% cloud growth that you saw there in Q4. On that business, you really have to take a look at the full year results because it is significantly influenced by transaction volume-based pay as you build revenues. There's a mid- triple-digit million euro amount of revenues in there. And in that business, you have greater variability than in a classic SaaS business. And that portion actually came in, in Q4, a little bit shorter than in the other quarters, and that basically is the reason why you've seen Q4 revenues being a little bit smaller. But all in all, the 19% that you see in ISG has been actually very consistently a result around the 20% mark, that these businesses, despite their scale, has been posting for a number of years now. So there is really nothing except for this small seasonality blip on the transaction volume-based revenues that you should read into this.
We will take our next question from Kirk Materne with Evercore ISI.
Maybe I have 2 quick ones. One, just for Luka. Just on this new metric you're going to be giving us in terms of cloud or cloud current backlog. I guess some debate this morning would be looking at the cloud bookings growth, it wouldn't necessarily appear to be robust enough to support your longer-term targets, I assume this new metric maybe lines up a little bit better with what you're hoping for over the next few years. Is that fair? I know you don't want to give us the number exactly right now, but I'm just trying to get a sense on if that's going to be a better metric in your view to gauge, say, ACV growth in the cloud business.
Yes, Kurt. Thanks a lot for the question, and it's exactly that. I mean, as you know, I've been preaching this some time now, the correlation between our new cloud bookings performance and our actual revenues has been weakening over time. And that's quite natural because the impact of our renewal business as our baseline growth is, of course, getting heavier and heavier. And therefore, moving to current cloud backlog, which gives you the entirety of our success in both driving new order entry, but also successfully renewing what we have and then spending up, the impact that this will have on the next 12 months' revenues, it is going to give you a much better holistic picture of the expected cloud revenues so that you can read much better introduce them by taking only the singular view on the new cloud bookings. So it's a qualitatively much more meaningful disclosure that you will see starting from Q1.
Okay. Great. And then just one for Jennifer. Jennifer, I know you all hosted your sales kick off events over the last couple of weeks. And you mentioned having a new Chief Revenue Officer for Qualtrics. Were there any other things you all changed heading in this year that we should be aware of? I know you always will change something generally going into a fiscal year, but any other sort of call-outs you'd make in terms of either ways you're thinking about going to market a little bit different this year? Or just some general sort of normal procedures around that?
Yes. The great thing is that when you look at our leaders across the various geographies and even the leaders within the different cloud businesses, we have really strong stability and experience and that helps, that really helps us to continue to execute and get the synergy and scale that we need, depending where every region is in terms of their cloud growth and where they see the opportunity. One of the things that we did put a strong focus on is when you look at these leaders in the businesses that they run now, making sure we're putting just as strong of a focus. Obviously, the bookings is going to continue to drive and be key to driving our revenue growth but we also want to make sure that our leaders and the people in the field are also just as focused on consumption. So we have put accelerators in there for our sales teams to be rewarded for ensuring that our customers are not only just buying our solutions, but they're consuming that. So they're incented to help accelerate that consumption and focus on our customers' success.
Our next question is from Charlie Brennan with Crédit Suisse.
I've got 2 actually. Firstly, just a question on core ERP and particularly this deal that you flagged in the statement as moving to the cloud. You have been flagging up S/4HANA on-premise licenses as being a positive factor to license growth. Can you just help us quantify, is the shift of core ERP to the cloud going to be a material driver going forward? And does this start to change your license outlook for the group? And then secondly, just around the cloud bookings and backlog metric, there is a fair amount of investor focus on it. We have seen increasing volatility in the cloud bookings number. As we move to the backlog, does that smooth out the volatility? And does it start to give us a much more even pattern of the business going forward?
Okay. So let me start. Christian here. On the S/4HANA question, Cloud ERP, so after that quarter, we have now roughly close to 14,000 customers, S/4HANA customers, and we are seeing, of course, that our installed base is moving. And if they are now moving to on-prem and cloud, and by the way, I really feel this is a winning strategy because sometimes, in some industries, with higher process complexity, large customers still decide to choose S/4HANA on prem, where we will also continue to deliver innovations and also functionality for certain kind of industries. Other industries with lower process complexity utilities, professional services, they are more and more moving to the cloud. And especially also for some LOP's also in the core, like finance, we are seeing this traction now coming. And with having now over 2,000 customers for S/4HANA Cloud in over 20 industries we also now have to prove that our cloud ERP is really also broad enough to really also courage to go for larger customers going forward. So we see actually this hybrid part really pays off. And also, last but not least, I mean, we have seen that our S/4HANA customers, 40% of them are net new. So that's also a clear signal that we are also attracting new customers that we are winning market share. And that doesn't only now mean that we are only moving our installed base, but really also entering new fields, especially on the cloud side of that.
Yes. And therefore, let me just add that, of course, we are anticipating this shift. It's a gradual one when it comes to the core and therefore, you have seen or not seen, but you've heard us confirming that S/4HANA was again, a major growth engine across both deployment models with high single-digit growth also in on-premise licenses. And we continue to expect that S/4HANA in on-premise will post positive growth also in 2020 and beyond. However, at the same time, it's great news, actually, that we start to see the engine going and more customers adopting S/4HANA also in the cloud with the steep increase in customers to 2,300 with the increase on the revenue side where this is becoming a meaningful engine. And it is baked into both our assumptions for continued growth in the cloud as well as the implicit assumptions around the development of our on-premise business. So we're not seeing anything that would change our perspective of the business and how it will unfold in the next couple of years.
We will take our next question from Phil Winslow with Wells Fargo.
Congrats on a great close to the year. I just wanted to focus on the comments you mentioned about the change in how bonus metrics are calculated for your sales team going to more of a consumption-based model versus purely sales, so I guess, kind of a jump out about Christian and Jen, just sort of how are you sort of rolling that out? Is there sort of differentiation between your cloud deals versus on-premise deals with that? And just how do you sort of expect to roll that out, sort of the impacts from that?
Yes, thanks for the question, Phil. Let me just add some context to this new bonus plan change. First of all, it's very important to highlight that this is not only related to sales. All of our people in development and service and support in cloud operations will have a cloud consumption metric. And why is that? Because in the cloud, especially the deal doesn't stop with the point of sale, we have to make sure that we support our customers all the way along on the point-of-sale to onboard, to support to one and really showing their business value, showing our customers the business value out of our cloud solutions. And then at the end, of course, we have to make sure that we have high renewal rates. And that's a common exercise. This is not only related to sales. This is also up to development services to operations to really make this a top priority. And Jen and I really a hold the flag high on customer success. And this is one of the measures now we are driving to really make sure that we are going to execute that. And that also, of course, our customers feel the benefit of that.
We will take our next question from Adam Wood with Morgan Stanley.
I've also got 2. Just the first one, maybe for Christian, on the integration of the products. Could you talk a little bit about the time frame of getting all of the cloud products integrated into S/4HANA? And then maybe where you've completed that integration, what benefits have you seen in terms of cross-selling adoption? And any metrics you can give would be very helpful for benefit on that side? And then maybe as a follow-up on the license side of the business and how that evolves as more customers move to cloud, could we also talk about support, traditionally, it's kind of been an all on offering model on support for customers, but as more of those landscapes run on cloud subscriptions rather than on license and support, how does that impact the support business? And was that a factor behind the lowering of the percentage of predictive revenue looking out to 2023?
Thank you, Adam. Let me just give you some more details about what we are doing on the integration front. So first and foremost, it's really important to understand that when customers buy SAP solution, we are talking about a real business policy integration based on one data model. So it's not just the technical integration, where you shift data from the left to the right, it's really about making business processes run across the value chain. How did we progress? So with SuccessFactors, HR and with S4 and Finance, there are of course core mission critical processes that we actually finished on the cloud side, the integration in Q4, so that customers have really waterline data model and all the business services, what you need to run business processes cost, they have been delivered in Q4 last year. Now what comes next? Ariba Procure-to-pay connects front-office to back-office. This will now happen during the course of 2020. So the same is true for Concur. And we will also actually announce the detailed format for that in a few weeks to come. So that also our customers, and of course, our whole community has more details around when is the integration being delivered. And as I said, everything will happen throughout 2020. The engineering teams are already working on that since quite a while. So this will be done in 2020.
And let me quickly expand on support because really, there has been no change at all in our assumptions surrounding support revenues. Actually, we have been even slightly ahead of our own internal planning in terms of our support performance. We continue to enjoy extremely high renewal rates. We're renewing around about 96% on a revenue basis. So this remains a very, very sticky business for us with very reliable growth profile as well. The fact that we have adjusted -- slightly adjusted the outlook for the percentage of recurring revenues, highly predictable revenues for 2020. There's actually nothing to do with our predictable revenue streams, it has to do with the fact that when we devised the original range we were actually having a more conservative assumption for the development of our nonpredictable revenue streams, the software revenues, in particular, as well as our service revenues, but as we have, actually, for a number of years, not seen mid-single-digit declines in software licenses as implicitly assumed in our guidance, but actually have held the software license revenues at a high level, and therefore, we have a higher backline now for those revenues. And that is one of the driving reasons that the percentage of highly predictable revenue is around 70% and not at the high end of this range. And the other reason is that we had not assumed that our services business will bounce back so strongly with our posting double-digit growth quite honestly. And from that perspective, this is the other factor. But in terms of our predictable revenue streams, everything works as expected.
Our next question is from Neil Steer with Redburn.
I've just got 2 hopefully quick questions. The first is, Luka, would you care, you mentioned, obviously, that you're expecting quite a bounce in the operating cash flow and free cash flow in 2020. Would you hazard a guess to what those levels would be, please? And secondly, when do you assess the commitment to remove or stop the standard support on ECC in 2025? Is that to be reviewed at some stage? Or are you sticking by that?
Yes. Let me start with the free cash flow and operating cash flow figures. I would expect a positive balance here of around about EUR 2.5 billion, so very much in line with what we had discussed at our Capital Markets Day. About EUR 1.5 billion would come from those increased cash items that we have seen in 2019 dissipating, in particular, the income tax cash payments as well as the restructuring payments, which basically have for the largest part run their course and the rest is basically the positive development of our business and the growth that should then translate into those increased cash flow performance. So basically, what I shared in November still is our planning for 2020.
With regard to the maintenance expansion, I mean, we are in constant talks with our customers with the user portal. SAP also in the past has left no customer behind. And this notion will, of course, continue and you can expect the communication going out where we give more clarity around this topic.
Our next question is from Alex Zukin with RBC.
Two quick ones. So first, I want to ask on S/4HANA. On the positive side, we've observed over the past few quarters kind of steady rate of ads and go-lives. When will we see an acceleration on the go-live portion? And what do you expect the impact on the P&L from these go-lives to be?
I mean, I can take the first one. But I guess, Luka can take the second one with the impact on the P&L. So the go-live actually, as you also have seen now, they went up quite significantly in line with, of course, also the increase we have seen on the license customers. As I also said at the beginning and also knowing this from being the CEO of SAP, oftentimes when you are implementing S/4HANA, the technology is not actually the biggest problem. Actually, to technically upgrade to S/4HANA, we have smoothened that a lot with new tools for the data migration and for the upgrade itself. Oftentimes, it's really about changing business processes, changing the business model of a company where you have to get the people with you where you have to readapt and redecide business policies which were standing there for a very long time. That's, for sure, one of the major reasons why we see a certain delay between the license customers and the go-live customers. Certainly, what we are doing with our partners because they see now this huge demand out there in the market. And they clearly have, in some parts of the world, a lack of skilled resources. So we are working heavily together with our -- with the largest SSIs to further upscale people because these days the demand is so high that they have to qualify much more resources in the months to come. So -- and we are on that. And then with regard to the P&L, I mean, when we close an S/4HANA deal, we realize the revenue right way. And then also on S/4HANA cloud, we are having the go-live dates after -- when the deal -- 20 days after the deal signature. So there, you have a very fast time to value. And then when you have access to the system, this is, I guess, also when we start realizing the revenue. Luka, correct me if I am wrong.
Christian, I taught you well, correct. But let me just add on top of that. Of course, S/4 go-lives typically have an indirect flywheel effect because we see that a lot of customers that are modernizing their core and transforming it show at the same time an increased demand and ambition to extend this to the edges and are really completely digitize their entire extended value chain, including suppliers, for example, with the ISG solutions. Ariba is a very, very common attach, so to say, for an S/4 transformation. And the same, of course, goes on the HR side, but then a modernization of the HR system landscape going from on-prem to SuccessFactors is quite frequent combination with an S-4 go-live. So in that respect, it has a cross fertilizing effect on the rest of the portfolio, but in terms of the direct revenue recognition, Christian, is absolutely correct.
But what we saw in Q4, what was interesting is we saw that over 50% of the license revenue from S/4 was actually from existing S/4 customers, right? So it's not just the customers who are moving from ECC to S/4, we're seeing customers who -- yes, we've already maybe tracked them as moving to S/4, but they're expanding their deployment. So we're going to continue to see the revenue effect from new customers, customers moving from ECC and S/4 customers expanding.
We will take our next question from Stefan Slowinski with Exane BNP Paribas.
A couple of quick ones. Just on that large deal with the 10% contribution to the cloud bookings, were there any cloud apps as part of that deal? Or was it just HANA Enterprise cloud? And if so, is there, therefore, still upsell potential on top of that deal by adding some of your cloud apps to that? And then the second question I had was just on Europe, in particular, and especially the cloud growth in Europe, 44% was quite strong. And just wondering, obviously, a couple of the names you highlighted BT, Vodafone are in Europe. And are you seeing an accelerating dynamic there in Europe more broadly in terms of cloud adoption? Or is it just kind of execution on your side?
Yes, perhaps I can quickly answer both questions. So first of all, that large deal also had SaaS cloud apps components attached to them, but not -- no, we are not sold out with them. So we clearly have the ambition to come back for more. And upon the successful migration to the cloud, there is no reason why we should not see further benefits from that one. And in terms of the proliferation of cloud in Europe, you're absolutely correct. I mean, the cloud is now prevalent here. The concerns around the cloud have largely vanished. Of course, it's important to European customers that you have a tight handle on data privacy topics that you have options around local data residency that you have the appropriate security certification and quality certifications in place. There is a tight amount of inspection among European customers, especially around this. But of course, they know that SAP as the European domiciled company with full data center availability across the region is a trusted partner, and therefore, we can take advantage of this. And of course, we also have a particularly strong account control here in our kind of heritage markets. That's why also Germany now is really a very, very strong performer across the cloud. A couple of years ago, perhaps it was still lagging behind a little bit. Now it has already been for a while, the second largest of our countries when it comes to the cloud revenue performance.
We'll take the final question, please.
Our question comes from Julian Serafini with Jefferies.
So I just want to ask one quick question on the guidance, particularly the cloud revenue guidance for 2010. So if you're looking correctly at the numbers, I mean, the new guidance implies 24% to 28% constant currency growth, right? Whereas previously, it was 29% constant currency growth. So I guess, I'm trying to understand what led to this reduction in the guidance? I mean, is it really just the deemphasis of the infrastructure business. Is there something changed in your end market? Or is it just conservatism? And any color would be helpful that you could share here?
Yes. Perhaps quickly just as a point of note, I mean, our midterm ambitions, while they were, of course, set with an average currency development of the past in mind, they are not strictly constant currency guidance, that's only true for the current year guidance. So that just as a backdrop for you to take with you. And indeed, I mean, we -- what we are expecting is that infrastructure-as-a-service will not grow as a proportion of our total cloud revenues any longer. We have seen, of course, for a long period of time that this business has been growing faster than the rest of the portfolio that has actually already pretty much normalized to around about the same growth rates from a revenue perspective and much lower growth rates from a bookings perspective in 2019. So we expect that it will remain at or below 10% roughly contribution to our total cloud revenues. But the rest of the portfolio is definitely in a strong shape, not only through our acquired assets that for a long time, we're carrying our growth, we see now a great opportunity, especially in the next coming years post-2020 that given the very strong momentum in the core going to the cloud and that this can become a very material business for SAP. At the moment, it is just reaching scale and growing, of course, much faster than the average. But I think if we continue to play our cards well like in those few deals that we have highlighted that this actually can be beyond 2020, a really material contributor that can easily make up for any kind of reduced revenue expectations that we have for the low-margin infrastructure-as-a-service business.
Thank you very much. This concludes the SAP Q4 2019 earnings call. Thank you so much for joining, and we look forward to seeing you at one of the SAP events in 2020. Thanks so much, and goodbye.
Thank you.
Thanks a lot.
Ladies and gentlemen, this concludes today's call, and we thank you for your participation. You may now disconnect.