SNP Schneider Neureither & Partner SE

XETRA:SHF

Earnings Call Transcript 2020-Q1

[Operator]

Good day, and welcome to the Q1 results 2020 conference call. Today's conference is being recorded.At this time, I would like to turn the conference over to Mr. Christoph. Please begin, sir.

[Christoph Marx, Global Head of Investor Relations]

Yes. Thank you, operator. Hello, everybody, and welcome to our conference call for the Q1 2020 results. I hope you all had the chance to see and read the information we published this morning, namely our interim report as well as the corresponding press release. If not, both can be found on our home page under the section, Investor Relations Financial Publications, where you can also find the presentation we prepared for this call. On top of the Q1 results, we have also the update on our sales and earnings forecast, which we published yesterday evening. Yes, well, so this is the second call we are hosting during this corona crisis, and we have again gathered the SNP management in a virtual room to give you some more details on the Q1 results as well as on the recent and future developments. So in person, we have here our COO, Michael Eberhardt; our CFO, Heiner Diefenbach. And our CEO and Founder, Andreas Schneider-Neureither, who will start with the presentation.So Andreas, if you're ready, the floor is yours.

[Andreas Schneider-Neureither]

Good afternoon or good morning. First of all, our heartfelt thoughts are with everyone who has been impacted by the COVID-19. We recognize the effect of COVID-19 are far-reaching and the changes will be significant and also long-lasting.Now more than ever, transformation innovation are essential as businesses reinvent their operations to solve for issues like declining or surge in demand, disruptive supply chain, managing a remote workforce. As always, we remain fully focused on serving the growing needs of our customers. With our BLUEFIELD approach and our data transformation platform, CrystalBridge, our customers are fully equipped to quickly navigate the challenges of today and also have the chance to strengthen their core business. So we had a good start in the first quarter. We had a very good order entry and also from the revenue side. Details are coming later from our CFO.We signed new contracts with partners, which is aligned with our strategy. We have a partnership now with MHP, affiliate from Porsche; and a Spanish partner, Common Management Solutions.Our software revenue was increasing from the order entry significantly above last year's level, which is also following our strategy, and this is for us a good sign. And more or less, in the Q1, we had no effect from the COVID-19 crisis. But now it starts. We have the first signs because some of our big customers, some system supported which are in our backlog, some for some months, some for -- was also telling this year, they don't see anything even meant in our backlog. And this is why we have to update our guidance. I think this -- when the crisis now the lockup period are going down in Europe and the market opens, then there's not a huge second wave, I think it's like a V, we are going down and going up. So what we are doing now is we changed also our marketing campaigns from S/4 because also SAP extended the maintenance of the ERP solution to 2027. So our campaign is now M&A divestitures and restructuring of companies. This is what we are doing in the last 25 years. And also, with our big partners, we do mutual campaigns. And I think we can come through the crisis really good, but at the moment because of lack of high utilization we have to reduce our expectations.So I hand over now to our CFO, Heiner Diefenbach. Heiner, please.

[Heiner Diefenbach, CFO & MD]

Yes. Andreas, thank you very much, hello, and everybody from my side. I would like to cover 5 topics actually: the profit and loss, the segments, balance sheet, cash flow and order entry and backlog. So I would like to start with the key figures out of our P&L, which you can find -- those of you who have downloaded our presentation on Slide #5. In revenue compared to last year, we were able to improve the revenue top line by almost 20%, up to EUR 34.4 million revenue, which is almost EUR 6 million -- EUR 5.6 million more compared to last year. Half of it is in the software arena and half of it in the service arena, topics I will cover on my next slide.We have also, compared to last year, increased our personnel expenses by EUR 4.4 million based on the effect that we have almost 140 people more on board. That's because we invested in our partner management and partner strategy in the sales arena and also in the regions and in research and development. The first results out of this strategy, you can really see in our sales increase in the software arena.At the bottom line, our net income is with negative EUR 3.5 million, in line with the original budget and the outlook we have given in end of March when we presented our year-end figures. So there were no surprises. We invested in Q4 last year and in Q1 this year. And we believe we should also stick to our investments because we think that the current situation is more a V, which means rapidly downside and then also rapidly an upside, and we believe that this is the case, and we should stick to our employees to be ready when the economy is going up.I would like now to switch to the sales and EBIT situation by segments. And as I said before -- this is on Slide #6. As I said before, we increased by 20% compared to last year in overall revenue, which -- half of it is sales and in services and half of it is in the software arena. That means exactly what Andreas just mentioned that we increased our revenue in the software arena by 45%, which shows and demonstrates that we are developing towards a software company instead of a more service-oriented company.So in the service area, we made in the first quarter 2020, a loss of EUR 1.2 million, which is EUR 1.3 million lower than last year. Anyway, it's a loss, but this is in the first quarter exactly what is in our business, I would say, normal because the first quarter is really the weakest of the year in the service arena.In the software area, our sales development has a positive trend, as I just explained. And now software revenue are 26% of our sales compared to last year, where this was only 21%. Having said this, what is the effect on the balance sheet? Actually, no big changes compared to the end of fiscal year 2019, we still have a healthy balance sheet and our equity ratio is 38.5% is also very good.Having said this, what is the situation in the cash flow area? We have a slightly better than previous years cash flow of, of course, negative EUR 6.6 million in change in cash. Nevertheless, we are solid in our financials. We have a good equity situation, and we are working on our working capital improvements, that is where the slight improvement is coming from. We have a good and well-managed cash situation because we have a headroom of more than 1-month revenue and still working and improving on that. And as a CFO, I may say that my focus at the moment in this situation is more on taking care of our costs and especially taking care of our cash situation.Before we enter into the details about the sales situation, where are we with our order entry and the backlog, you can see that on Slide #9, the order entry improved compared to last year by 23%, which is EUR 3.4 million more in software and EUR 4.4 million more in services. In the order backlog, we are showing 41 -- EUR 44 million in the software and EUR 62 million in the service arena, which is a quite impressive improvement in -- compared to last year. And especially in these 2 areas, you can see that the software segment contributes really largely to this development.In the service area, the growth is really based on a lot of projects where we are working together with big clients, and we are moving into long-lasting contracts. And we are really a partner of the digital journey to our clients and based on that, I would like to finish with the numbers and hand over to Michael Eberhardt.

[Michael Eberhardt, MD & COO]

Okay. Thanks, Heiner, for the update here. So let me just go to Page #11. I think Andreas hit all of these in his introduction. Our strategy is essentially what we introduced in all the calls before. So our strategy around BLUEFIELD and around CrystalBridge to move SNP from a service company to a software company to be the market leader in digital data transformation around the SAP ecosystem is exactly what echoes very well in the market, and we get very positive feedback across all the regions and also across all industries.What we see, this is a couple of, let's say, delays on the market side, push backs, let's say, more in the area -- when we go to the right side of the slide, and we talk about implementation of S/4HANA or it's more upgrades and new implementations, this is somehow, let's say, still -- there are a couple of good projects in the market. But in the last 4 weeks, the number of RFPs, the number of RFIs and the number of, let's say, decisions around new S/4HANA implementation, which doesn't much -- which does not compare to, okay, the buying an S/4HANA license. This is a different part. But doing the implementation, which is our, let's say, stage where we come in, when the customer is moving from, let's say, SAP ECC to S/4, not only by licensee, but also, let's say, typically to use the license, this has slowed down.On the other side, we see -- and therefore, we've had the case, this is still our -- one of our major growth areas when we talk about 4, 5 years plan. And this is our -- still a very important focus area for us. But now we're refocusing slightly, let's say, on more merger and acquisition and carve-out area because we see big market opportunities in this area caused by COVID-19. You see that a lot of companies are forced to get, let's say, fresh capital in. Now it's also time to streamline your business model, and this implies and gives us a very good, let's say, estimate about an increased number of merger, acquisition, carve-out, which is one of our scenarios we always induce as a major focus areas going forward.And then on the right side, you see the cloud area. We have right now with one of the big hyperscaler -- and this is under NDA, therefore, I will not give you the name, but we are in very good progress to start to get, let's say, SAP workloads highly automated to the cloud. We have finished phase 1 already, which is all the analysis phase and the differentiation part can be more or less automated, which is really important to understand how do I move an existing current mode of operation SAP installation to the cloud because a one-to-one move doesn't make sense, otherwise, the cost will explode. Therefore, let's say, we said okay to get healthy through this COVID-19 time, we will focus on besides the area of S/4HANA and these kind of things, we will, let's say, primarily focus on merger, acquisition, carve-outs and move to the cloud.If we go next to the next page, therefore, we said, okay, but we see a couple of things. Let me just give you without customer names, but we are across industries. But let's say major industries for us are also automotive, the airline business, we can talk about the manufacturing business. We have utility in our, let's say, consideration. We have, for sure, the IT industry because we partnered with Accenture, IBM, MRP (sic) [ MHP ], Common MS and others, also Indian players. But let's say, when we look to, let's say, specifically in Central Europe on an industry, we see challenges in automotive. We, for example, have a couple of project delays, which are signed and we started already to deliver and ask us -- customer ask us to postpone the project because he has sent all his people in his financial department to short-time work. That means on the customer side, there's no resource left to execute this project in parallel. This happens to a couple of bigger projects, most likely in the automotive and the airline industries. We had a couple of customers, which decided to start an S/4HANA implementation, and they stopped it again because they had to take now more time to focus on exactly what Heiner said, do I have the right cost? How do I protect my company from a cash flow point of view? So they did not, let's say, terminate, but they stopped the project and said, okay, we will restart maybe in a couple of months, but now is not the time to execute. And one customer who stopped, also in the airline business, he just called us this morning and said, hey, but maybe we should restart at least half of the project because we don't need to do -- to consolidate the company cost, but we should do -- at least we should introduce the general nature going forward. And I think it would be a good idea to start, let's say, latest by middle of May. So this is the volatility of the market, what we see.Our pipeline, as of today, is on all record high. So we have more than EUR 0.5 billion pipeline. We see, let's say, that the pipeline -- the existing pipeline is moving. So we made progress. We engage with the customer on a day-to-day basis, but we see, let's say, a slowdown in the final decision. And we see that the big RFPs, the last 4 to 6 weeks are getting, let's say, to a significant decreased number compared to, let's say, the quarter before and the Q4 in last year. That was one of the reasons that we decided together to say, hey, it could be, let's say, not to disappoint the market. To be really, let's say, a reliable partner, I think our revenue will more develop towards, let's say, in minimum on the same level, I believe we will do more. But we will be -- we have no assurance to hit the EUR 185 million, and I think it will be also hard to hit the EUR 175 million. Also, this one we are asked we say, we would like to get our software business also moved more to a business, which is, let's say, based on subscription and percentage of completion. That means we try to align, let's say, to get more recurring revenue from a software business at the same time. That means there will be -- let's say, we are not focusing on getting as much as possible onetime impact in the company, but we have a long-term success growth story going forward.So our new estimate and our updated outlook will be on the revenue side, EUR 145 million, which is last year let's say level, up to EUR 170 million. And for sure, when we can do more, we will do more. And I still hope that we can at least hit, let's say, the higher number.And then on the margin side, this was a second important decision. We hired, let's say, roughly 40, 45 people in strategic areas around partner management, around software development and around sales and filling up the support for our partner business. We said, hey, this is something which is fixed in our strategy. We believe in our strategy. We see the market momentum. We see the customer feedback and we will not, let's say, do any stupid things just because of this crisis. And this was a common decision. So we discussed money and right now, that means this eased a little bit of our profitability, but we are highly convinced that we will meet at least, let's say, a mid-single-digit range for fiscal year '20. And then hopefully, in Q2, Q4 or latest in Q4, we see hopefully an improved market at the same time.So what we said last time, I'm now on Page #13. Nothing has changed compared to our last call in terms of our priorities. Still, let's say, the people, our employees and the health of our employees and customers and partners is the most important one. We are now at 6 weeks in the home-office structure. It's getting boring. So we don't like it, but I can -- from my point of view, we do not see, let's say, any significant damages in how we serve our customers. We did a lot of customers go live. We signed new deals with customers, and we have not seen the customers even once. That means also our digital engagement model will work. We will introduce in the next -- in May, we will have the biggest digital 24-hour conference we ever had in our history because SAP canceled or terminated the SAPPHIRE in the U.S., which was the right decision because it was physically not possible, but we can do a digital. We had -- yesterday, we had, together with Deloitte and SAP, a webinar for -- in our JPAC region, and we had 200 customer participants with very positive feedback and very strong -- let's say, asked about more details, more information in getting, let's say, in the next phase of digital engagement. So I think the way how we serve the market, how we engage with the market is working. And this was also one reason why at the end, as of today, our impact also on the health side from our employees is very limited.In the industry, for sure, we said, okay, this is an advantage of the IT industry that a lot of our -- what we do right now, what's built up, let's say, in the last couple of years. So all our people are mobile, all our people have, let's say, all the connections from home. We have a secured network, a very strong VPN so that we can attack that -- that we can lock in, in all our business-critical systems to do all the customer -- we have customer projects remotely. Heiner and the team is hardly working on the strong balance sheet and having enough working capital. Even if the time is, let's say, harder, we do not see, let's say -- we see a slightly different behavior in how customer pays. But on the other side, we also see that the customer understands that if they need -- if they receive a good service, they also need to protect, let's say, us as a partner. So we did not have, let's say, a lot of pushback. We even got, let's say, some long-term outstanding cash position cleared up positively for SNP. So overall, I would say, this is not the time that we like. It is that they like something, okay, we started for a long journey. We started very acquisitively. We are still aggressive on the market. We took a little bit of speed out. We will only hire in very critical areas going forward right now. But we also said, okay, we do everything to avoid any separation, let's say, besides local foreign management and these kind of things. But our people are our assets and, therefore, we try to get, let's say, together with them through the crisis. And as of today, I believe we are on a good way to get this done.So I would say, not a big concern as of today, but something which is, let's say, hopefully nothing when we look to the long term, but it was, let's say, strong enough from a signal point of view that we need to have this, let's say, a short correction about our outlook.So with that, I think I hand over, Christoph, to you again.

[Christoph Marx, Global Head of Investor Relations]

Yes. Thank you, Michael and to all of you. I think, operator, we will now open the Q&A session.

[Operator]

[Operator Instructions] We'll take our first question from [ Claus Svan ] of [ Unolist ].

[Unknown Analyst]

My first question is on the new partnership with Common MS. And when we're reading the publication about this, it seems that this partnership also includes a minimum revenue share. Is this assumption a right assumption?

[Michael Eberhardt, MD & COO]

Yes. It is right. There was a small minimum revenue commitment from Common MS as well. The more important decision parts with this partner, this is like a partner in the Spanish market. So this also -- besides a lot of partner cases, this demonstrates that our go-to-market purely partner go-to-market is, let's say, paying off. That means we have a couple of customer engagements in Spain, in Italy and in France, where we only go in we are partners and not directly.

[Unknown Analyst]

Okay. And then on the last call, Dr. Diefenbach mentioned concerning the contract assets, that it is expected that about EUR 12 million to EUR 13 million will turn into cash this year. So the question on this is, when could we expect this -- that this will happen?

[Michael Eberhardt, MD & COO]

Heiner over to you.

[Heiner Diefenbach, CFO & MD]

Heiner Diefenbach here. Yes. This will happen in the second half.

[Unknown Analyst]

Okay. So in Q3 and Q4?

[Heiner Diefenbach, CFO & MD]

Yes.

[Unknown Analyst]

Okay. And then, again, to you, Mr. Eberhardt. You mentioned that you signed an NDA with a hyperscaler. So I accept or understand that you can't give us a name or a special company behind. But what can we expect on this?

[Michael Eberhardt, MD & COO]

I didn't catch the last -- what you can expect from it?

[Unknown Analyst]

Yes, what can we expect on this topic?

[Michael Eberhardt, MD & COO]

Okay. That's good. When you look to the market and you look at the hyperscaler and you can take all the hyperscalers. Take, for example, Amazon Web Service, take Google, take Microsoft, take Alibaba and all the others, they have slightly different, let's say, strategy what -- for what kind of workload they go. When you look, for example, in Europe, I think Microsoft and Amazon Web Service, they are all -- both are shooting for the SAP workload because this is a real, let's say, a cash-generating engine in terms of volume and let's say, dependency on the application. This kind of thing -- that means there's a lot of, let's say, pushes from the hyperscaler side to get not only the IoT business and the Office 365 and this kind of thing, but also, let's say, critical SAP workloads on their platform. And when you look to the customer side, when you look to COVID, the feedback I receive from customers is, we have -- COVID show -- demonstrate 2 things. First of all, it's the crisis. In a crisis, customers are focusing to move CapEx to OpEx so that they get less dependent on capital spend. The second part is COVID also demonstrate that being dependent from, let's say, a small amount of people who are operating your most critical application, it's really dangerous going forward. That means you look for somebody who is less depending on single persons or who is highly automated, how he operates a data center, which is the case for all the hyperscaler. And then in the meantime and we are now in a couple of years in this cloud discussions, the worry for the customers about data protection and dependency and cost development on the cloud side is less, let's say, a concern. That means everybody understands to move a workload in the cloud needs to be, let's say, cleaned up upfront. So you do systems consolidation, you move -- you don't move your existing scenario 1:1 in the cloud. But if you do this, if you clean it up, if you do your company consolidation, if you do systems consolidation, systems merger, these kind of things, and you use the volatility, let's say, with the flexibility of a cloud provider, then you can save significantly money. That means there are 3 reasons why we will see a significant increase in moving SAP to the cloud: one is the CapEx to OpEx; the second part is the dependency from a single people; and the third one is that you flexibilize your cost structure in total.So the way to move to [ cloud ] today is very complicated, I mean, just to understand your current mode of operation. And what we do is, we will generate the transparency about the existing system. We will suggest the customer how we can consolidate. We can develop different business cases so that we can -- customer can choose options. And at the end -- and Andreas and the team is working hard to get this finalized on our software development side. At the end, you can move, let's say, the workload more or less automated towards the different cloud providers. And that is what we do, let's say -- we do it with a couple of the hyperscaler, but we have one very deep engagement with one of these big ones I mentioned before, 1 of the 4, but I do not tell you which one it is. So that, for me, this is maybe one of the -- when you look to -- and then you can combine all the scenarios when we do a carve-out. Whatever you carve out just to do it directly, bring it directly in the cloud. When you do an S/4HANA upgrade, you take it out from a data center, let's say, from -- let's say, DXC or from and move it directly to Amazon or to Microsoft. And still then we don't have a problem with the partners because the partners are managing all the SAP applications. But the data center power will be provided from the hyperscalers. So I think that's an optimal model going forward. And if we get this ready and we are in the status of -- we did a couple of projects in between already for phase 1, which is the analysis phase, very good results. So this really is very promising. And this is also something, which Andreas and we all see something which will maybe specific work in a crisis mode because everybody needs to get less dependent from cash from people from everything.

[Unknown Analyst]

Okay. And then this would end also in a contract like IBM? Or what can we expect from this?

[Michael Eberhardt, MD & COO]

As I said before, IBM was a good contract. It's a good contract and it's very important for us. It will be, for sure, something which is a commitment level. But I think when you talk about the cloud, it will be more kind of subscription kind of model because -- and we are also in discussion with the midsized companies for this area, and we talk more about the subscription. But then we have a commitment, let's say, for 5 years and we get money for each customer. We move for each SAP system, and we move from wherever to the cloud, we will receive directly money. And our aim is also to get recurring revenue so that we also have a couple of tools to monitor the systems. And if we can get, let's say, paralyze our growth with a hyperscaler, I think that's something we are shooting for.

[Operator]

We'll take our next question from Gerhard Orgonas of Berenberg.

[Gerhard Orgonas, Analyst]

And just a question on the partnerships with MHP and Common SM. Are these pure software partnerships? Or is this also involving some of your services business?

[Michael Eberhardt, MD & COO]

So it's both. So we do not have a pure software partner business. So our aim is that we try to make our partners, let's say, self-standing. So that means we offer training. Let's say, that they pay for a license, they pay for training, and they pay for the support at end. In the meantime, we -- because the support is not good enough, the customer -- the partner need to be trained. You need to have a little bit of experience to serve our software. We will have something like, call, delivery projects so that we do projects together. But the medium-term engagement model is they will pay for service, they will pay for training, and they will pay for support, not only software support, but also services support. So they can reach out to a team, which is dedicated to them, where they can ask how-to questions. They can also receive on-site support, but we will go to something like a support model.

[Gerhard Orgonas, Analyst]

Okay. And my second question is on the margin on software in Q1. I'm a little bit surprised that you were loss-making in Q1 even though you grow your sales so much. Can you give us maybe an indication of how much you invested into your partner searches? Or I mean, how much of the additional workforce, it has an effect on your P&L? And also maybe the split of software. You used to give external software versus the internal software. Has there been a shift in the mix? Or how much is external software makeup versus internal in Q1?

[Michael Eberhardt, MD & COO]

Heiner, that's you.

[Heiner Diefenbach, CFO & MD]

Sure. I can -- sorry, I didn't get the last part of your question. What was the internal and external split?

[Gerhard Orgonas, Analyst]

Yes, of the software sales, yes.

[Heiner Diefenbach, CFO & MD]

Okay. I don't understand what you mean?

[Michael Eberhardt, MD & COO]

With third party.

[Heiner Diefenbach, CFO & MD]

Okay. You might mean direct sales and partner sales?

[Gerhard Orgonas, Analyst]

Yes. I mean you're reselling, I think, SAP licenses as well.

[Heiner Diefenbach, CFO & MD]

All right. Yes. Okay. Would you cover that, Michael? Or -- and then I talk about the margin in the software arena? We have invested, as I said before or grow by 140 people in the area, and this is mainly in the partner management and really in the sales area, where you can say the region development and investment, for example, in Australia and Japan, that's for both for the services and for software and of course, the R&D. So you can say that third quarter, I would say of the personnel expenses of EUR 4 million are really part in the software area.

[Michael Eberhardt, MD & COO]

Well, when it comes to software sales regarding SAP, reselling software, we do this only in 2 regions. We do this a little bit in Latin America and we do this in Poland. And I do not have the exact number, but out of this EUR 9.1 million, I personally -- I needed to look in our systems. But this is for sure, this quarter, it was less than EUR 1 million. And then you may include maintenance, which is 20% out of this. It is maybe something -- if at all, it's maybe EUR 1.5 million in that case. And the rest is more or less dedicated to our confirmation business. There's a little bit of business in Poland, which is not SAP at all. They have our own product, which is BeeOffice, but that's not really -- let's say, this is a business only focusing on the Polish market. Our software business will be most likely -- it will be everything about CrystalBridge, yes, and -- but that's a good point. Maybe we should report this directly, let's say, at least as a comment either in the future as a separate item.

[Gerhard Orgonas, Analyst]

Okay. I mean, you -- I think you said, I think, the different software sales historically, not over the last year, I don't think. My last question is on the debt, your financing. Do you have any covenants on the promissory note, on the EUR 40 million promissory note? I think they will wait for last year, but do you have any covenants for 2020?

[Heiner Diefenbach, CFO & MD]

Yes. We do have covenants, and we are fully in line to fulfill all the requested covenants, yes. And also based on the budget and the outlook also no problem at all.

[Operator]

We'll take our next question from [ Carlo Schmid of MedLife ] Capital Markets.

[Unknown Analyst]

Can you hear me now?

[Michael Eberhardt, MD & COO]

Yes.

[Unknown Analyst]

Yes. Okay. So the first question is, I saw that your revenue in the U.S. market was down. I mean, what is the issue that you are facing in the U.S. market? I mean, the business development in the U.S. market seems to be in stark contrast to a very successful business in the DACH region. That's the first one. The second one, you mentioned that you have some extraordinary expenses due to the S/4HANA migration in your own organization. Do you expect to see further extraordinary expenses in the remainder of the year? And then the next one is, could you give some color with regards to your revenue expectations for the current quarter?

[Michael Eberhardt, MD & COO]

Okay. Heiner, can you start and I can add -- I lost some connections between. Maybe you just start and I will step in if I need to add something.

[Heiner Diefenbach, CFO & MD]

Yes. Okay. So the first question was, do we have extraordinary expenses in our S/4HANA, our own organization. No, for our S/4HANA internal use, we do not see extra project costs so in the remaining of the year. Of course, we do improvements, but nothing significant. The other question was revenue in U.S. I think your question was whether -- or what's the situation over there? Is it going better or improvement? I think that's the question for Michael. And your question was also the revenue expectation in the current quarter. The current quarter should be at the same level or even better than the first quarter.

[Michael Eberhardt, MD & COO]

Okay. And maybe just at the U.S., we had just [ recently ], we closed a very big deal in the U.S. And on the overall side, we have a plan to grow in the U.S. with something like 25%. Our plan was before we did this correction on budget to go with 40%. We have a couple of big projects. One ended by the end of last year with [ Depot ]. And we got, let's say, one smaller venture there. We had not the best order entry in -- we had, let's say, a solid revenue development, but we had not the best order entry in Q1 in the U.S. but now since yesterday, we worked on a couple of big deals. One big deal was signed yesterday, which is a multiyear contract with a very big company with a lot of additional opportunities. So I personally believe we will see, let's say, a solid performance growth year-over-year in the U.S. But what we see is and that's interesting, it's like the COVID, let's say, discussion in the market, we see the best, let's say, improvement we see now in CapEx. So we see that they get more or less back to normal in almost all regions. We have a very strong push from the Chinese market. We see good development in the Japanese market. And we believe this is fully, let's say, following how the crisis went in. We started in Asia Pacific. We start now to recover partly there. The U.S. is a little bit behind us. But with the closures lifting, and we have a couple of very big customer opportunities in the U.S. as well, I am really bullish about the U.S. market. But again, you know that the U.S. was also hit very hard on the COVID side. On the other side, the Americans are easier to recover this kind of crisis. So overall, I would say U.S. is a must win market for us. And it was, let's say, Q1, it was disappointing, and we made it very clear to the management team as well but it was a timing issue. We -- this big opportunity we closed this evening, this slipped from Q1 to Q2.

[Unknown Analyst]

Okay. There's one follow-up question with regard to your utilization in the service business, you mentioned that the capacity utilization improved in the first quarter. How much has it improved? And at what absolute level has it been?

[Michael Eberhardt, MD & COO]

This is different country region-by-region and also different because we build up this kind of digital transformation center in Poland, in Latin America and in India. So this is part of the investment you see for the software support and this kind of thing. So let me just -- outside the center, we have a net utilization, which means, let's say, all available days for the employees around 70% to 80% in most of the regions. The only 1 which was -- 2 areas where we had, let's say, below that, one was the U.S., as we mentioned before, and the second part was -- partly in Q1 was partly in Asia because this was in middle of the crises in Asia. But now Asia, we adjusted the call, which I expect to something like 70%, 72% right now, with a forecast above 80%. U.K. had a very good forecast. They had a very good Q1. And they're also, let's say, a good April. But we have 2 customers, 3 customer projects which were, let's say, delayed now and we just recently informed they will go down to something like, I think, below -- even in June, they will be -- if everything goes bad, they will be below 60%. But there is not a high number of people. We only talk about, let's say, a couple of handful people. So -- and then our ECCs are accepted, getting better and better accepted, so we move more work towards the center. So we hire only -- if possible, we hire most of the people in the center in Poland. So we have already 60 people in Poland, but the utilization in the center is below 50% because we are investing every day. And then we hire new people from the market, we need 4, 6 weeks to get them trained. That means they will be -- they hit us on the utilization side. But we monitor this on a weekly basis. They are obviously costs on the company. And what we did with the employees, we report employees. If there is a forecast, let's say, below a specific threshold -- yes, we try to get the people motivated to take the patience, to take over time to prepare for the growth scenario after those gains. And so far, I think it's worked very well. We are prepared to -- if needed to go to a short term work as well. As of today, we don't see that necessarily, but if something, let's say will break, which we don't hope, and we don't see, we have a couple of, let's say, tools which we can reuse to protect the growth part on the one side, but also to get rid of the cost in parallel temporarily.

[Operator]

We'll take our next question from Johannes Ries of Apus Capital.

[Johannes Ries, Founder]

Also, a couple of smaller questions from me. Maybe first on your partner discussions. You mentioned already this hyperscale partner with the traditional service guys during your Capital Markets Day, you mentioned also connections and discussions with other large guys next to IBM, large guys in the market, for example, like Accenture or Deloitte. So how is the discussion has gone on? Are they also a little bit pushed out by COVID? Or is -- as a discussion corner, we can hope in the possible future, maybe another big guy could sign up maybe in what kind -- if ever is it the same like with -- in a comparable way like with IBM on one the way you do with hyperscaler?

[Michael Eberhardt, MD & COO]

Okay. Yes. Very good question. Thanks a lot for that. Let me, very honestly, we have more engagements than ever before. We talk right now with 5, 6 partners with each of them, let's say, in the software commitment, which is, let's say, in the lower double-digit million area. As I said before, we are not pushing so much anymore to get a onetime payment. We push more to be -- let's say, to be a long-term partner in a subscription kind of model. And the partners we are talking about, just to get you a clue, with our big European system integrated companies. So as you know we have already an agreement with T-Systems, that there are not a lot of, let's say, European providers. We have engagement with a very important partner for us in the Japanese market, where we hopefully close something soon. And then we are talking right now with one Indian and one American system integration company for a long-term partnership. And this is all -- the good thing is this is not, let's say, that they go all, let's say, against each other. They all bring in their customer base. They have all, let's say, a kind of outsourcing business, where they try to move their customers to S/4HANA or where they try to move like, for example, their -- to get their customer out of their own data center and move the business directly to the cloud. So the engagements are really very solid. The negative side is we started with, let's say, 2 or 3 of them with a huge, let's say, commitment, what they would like to bring to the table in the first 18 months. And then when it comes closer to the contract signature, they ask for, okay, can we get an 18 months, let's say, commitment because we don't know what COVID will do to our business. So there's a little bit of a, let's say -- not a de-commitment. That's the wrong word, but they get careful because they see also that they're taking the same conversation we have right now what will this COVID crisis do with us? I think that's the unsecurity in the market, but the commitment and the interest is significantly high from all of them.

[Johannes Ries, Founder]

Okay. Super. Maybe follow-on to this. You mentioned that maybe one other go-live project on S/4HANA is a little bit pushed out because companies have internally other problems. So the people are not maybe available because they are in the home office and your partner needs them on site. But my feeling, if I listened to the SAP call and you mentioned it even indirectly, the interest for S/4HANA goes on and even maybe the signing for licenses is more maybe how fast they are installed. And here, you come in the game. But nevertheless, your pipeline is growing because the interest for moving to S/4HANA is unbroken even to COVID. Is that right?

[Michael Eberhardt, MD & COO]

Yes, that's absolutely right. What I said is I said, you see this movement, customer has no other choice. And I think the commitment from SAP to go more to an integrated software in the future again is convincing the customers as well. So I think they did a couple of very good decisions going forward, which is convincing the customer that this will be a long-term -- a good long-term partnership. But then we, besides buying the license, we will only participate when the real project starts. And we are now 6 weeks in the crisis. So we have seen the last 6 weeks that, let's say, the number of active hours from partners are not -- are decreasing. That, for example, we signed 3 deals in the S/4HANA space only with IBM. And we had 2 go-lives in S/4HANA only in our Latin America region in April. So we do a lot of significant business in this area. But we believe that the customers get careful to start a project, which takes, let's say, a lot of time and effort from an organization when you are in the middle of such, let's say, insecurity in the market.

[Johannes Ries, Founder]

But coming back to your own pipeline, you mentioned that you have record level. We heard from other software companies that the pipeline, because some projects are gone or totally pushed out, have been reduced. That is not the case then for you.

[Michael Eberhardt, MD & COO]

No. Yes, we have -- right now, we have a pipeline above EUR 500 million, which is -- and this is a really good pipeline. And when I look to, let's say, the average between wages and upgrades, this also very positive. Our software -- when I look to the software partners, this is significantly, let's say, increased compared to last year as well. So the pipeline is great. I do not -- I'm not concerned about the pipeline. I'm more concerned about how fast can we convert pipeline to order entry, order entry to revenue. That is the message I try to send here. So pipeline is not the challenge at the point in time.

[Johannes Ries, Founder]

And pipeline is primary -- is majority software, yes, to make it clear.

[Michael Eberhardt, MD & COO]

No, it's only from software.

[Johannes Ries, Founder]

Okay. But more so software, yes.

[Michael Eberhardt, MD & COO]

Our software -- our portion of software compared to services will increase quarter by quarter by quarter. So when you look to where we are today, we increased it, let's say, from last quarter to this quarter, but the company is still -- let's say, we still do more services compared to software, but this is only a question of time and software will dominate this company. So from a focus point of view, when you look to the partner, as more deals we deliver via partners, the service business will not grow. So overall, our strategy is to grow our software business, let's say, significantly above the services.

[Johannes Ries, Founder]

Okay. Maybe a more question about accounting. I heard yesterday that you are -- the onetime payments you get every year from IBM and from T-Systems in only in one quarter, is that right? And why you're not maybe accounted -- maybe divide it to 4 in every quarter, like, for example, SAP is doing for maintenance business which they also get in maybe as a payment in the first quarter, but it's divided to 4 and counted in every quarter as 1/4 of the total sum? Is that right that there will be a peak in -- maybe in licenses because of these onetime payments coming in Q3 also?

[Heiner Diefenbach, CFO & MD]

I know, because it's an accounting question, I will answer. So the revenue recognition was done already last year. So the cash collection will happen. It's only cash collection in Q3 or Q4.

[Johannes Ries, Founder]

Okay. That's like with maintenance, okay.

[Heiner Diefenbach, CFO & MD]

Yes.

[Johannes Ries, Founder]

And the payment for this year, was it only a onetime thing? Every year, you have this base payment from IBM.

[Heiner Diefenbach, CFO & MD]

Yes. Alongside the contract, of course, yes.

[Johannes Ries, Founder]

And it's also paid once and then you divide it to 4, like in the accounting, how you...

[Heiner Diefenbach, CFO & MD]

No, the payment is recognized whenever the payment will be on our bank account. The revenue is already recognized last year in a onetime event. But as Michael Eberhardt just explained, in the future, our partner contract might shift instead from a full-blown onetime revenue recognition more into a subscription model where we can see recurring revenues.

[Johannes Ries, Founder]

Okay. But I always thought you get follow-on payments every year from IBM.

[Michael Eberhardt, MD & COO]

For the EUR 10 million one?

[Johannes Ries, Founder]

Yes.

[Michael Eberhardt, MD & COO]

Yes, what -- the EUR 10 million we talked about, we show directly when we signed the deal for the first portion. There is a second and a third portion. This was the deal with IBM. This will not -- in the future -- and then we get when we sell the opportunity to the customers, the end customers, we get the payment. IBM is paying then for that. That means the time effect, the cash comes in, let's say, as the contract with the end customer concurs. In the future, when you look to, let's say -- when I look through all the future discussion, we will move much more to exactly what you said to a more, let's say, a subscription kind of model. That means revenue and order entry revenue and cash will come in parallel. So we just talked to a company. They have something like a couple of thousand worldwide, a couple of thousand midsized SAP customer. And they will -- when we get this deal done, they will go actually with our software to, let's say, to move their existing customer base to S/4HANA. If we do that together, we will get only a payment if we win a customer. And then we get, let's say, depending on the contract length with the partner, maybe get 24 up to 60 months payments every month. And this is, let's say, the model we are all aiming for because this is our -- this is a stable model where you can manage a business in a much better predictability. And you will grow, let's say, more continuous. You need more time to grow, let's say, double digital because you don't get onetime payments, but also is a much more stable one.

[Johannes Ries, Founder]

Okay. So only final -- only remark maybe you can answer to this. You mentioned this 24-hour customer event you will do instead of the SAPPHIRE. You have 2 very well-known partners there as important maybe supporters. It's T-Systems and is IBM and the third name, which is new there is Microsoft. Anything to read in this?

[Michael Eberhardt, MD & COO]

IBM and also T-Systems. And I think Microsoft will be even part of this digital conference. So we will come...

[Johannes Ries, Founder]

The question was as Microsoft also highlighted like the other 2, is anything behind this?

[Michael Eberhardt, MD & COO]

I didn't get it, sorry. You just...

[Johannes Ries, Founder]

No, no, I got -- I know that IBM and T-Systems are -- they're very important partners for you. Microsoft is a little bit new on this list. Therefore, should we read anything out of this highlight...

[Michael Eberhardt, MD & COO]

I know what you would like to hear. I will not confirm, but Microsoft in this ecosystem between SAP and Microsoft with this Embrace partnership. For sure, Microsoft is a very important partner also for us.

[Operator]

We'll take our next question from Simon Bentlage of H&A.

[Simon Bentlage, Analyst]

Maybe just one follow-up on the personnel expense. I'm wondering if you could give a little more color on what those goals are when you're talking about partner management and where you stand in terms of ramping this up. Are you catching up? Or is it more other investments for further growth in the future? And this is then seen to stabilize going forward? And then the second question would be, if you could maybe quantify a bit your end market exposure a little bit. I mean you've touched upon this earlier, saying that you have the exposure to automotive and also to air and travel. So maybe you could just give also quantitative color on those 2 end markets. That would be great.

[Michael Eberhardt, MD & COO]

Okay. So on the resource side the answer is very easy. We have ramp-up costs. So the costs will not develop, let's say, in the same way going forward. We needed to start, let's say, a global partnership organization. We had only one person in this organization. And we have hired, let's say, 5 people not the most, let's say, key people to be able to manage good partners globally in the world. Then we have, let's say, also partner alignment in the region. So we have in each region 2 or 3 people which are in charge to make, let's say, the commitments happen, to do, let's say, daily pipeline review to get, let's say, to get to develop customers together to support the partners in this area. But these are upfront investments. We are not totally done. So that means if we grow from EUR 170 million to EUR 400 million, for sure, we will add a couple of people. But the ramp-up costs are done, so the cost will not develop in line with the revenue. So our profitability will be, let's say, significantly better going forward. That's for sure. That's one part. Then we started to build up the support model so that -- we have already a maintenance part. So the partner will get all the basements for the software. This is done by Andreas' team. So our R&D team is also in charge to do the maintenance for our CrystalBridge and this kind of thing, but we agreed with a couple of partners that we will move from a, let's say, joint delivery model to a purely support model. That means they will sign for also, let's say, on a monthly base, they will sign for a support contract. And then they can call us 7 days, 24 hours around the world, for example, when they have a customer problem, how-to questions that they need support. Up to, okay, depending on which support package you booked, you can -- you will even get on-site support within a committed time frame this kind of thing. So this is -- a lot of these investments are upfront investments. And most of the investments we did in -- we hired a couple of people in our R&D departments, we hired people in the partner organization locally and centrally. And then we increased, for example, our team significantly in JPAC, in Australia, in Singapore and partly in China. So that's one part. Did I forget something significant, Heiner or Andreas?

[Heiner Diefenbach, CFO & MD]

No, no. That's it pretty much. Yes.

[Michael Eberhardt, MD & COO]

And then from an industrial point of view -- yes, go ahead.

[Heiner Diefenbach, CFO & MD]

Yes. Yes, we can say in the automotive and air and travel industry, I would guess, is between 15% and 20% of our revenue stream is this -- in this arena.

[Operator]

We'll take our next question [ Bern Ross ] of [ Blackwell Capital ].

[Unknown Analyst]

I have only one left. You have a couple of group flat fee contracts with large corporate customers for several years already. As far as I remember, not so favorable terms for SNP. Can you comment on the remaining lifetime of such contracts and your efforts to possibly renew them at better terms?

[Michael Eberhardt, MD & COO]

First of all, yes, you are right. We talk about 5, 6 customers, all of them are in Germany. And they have all a different contract duration. And for all of them, we have a specific counter FX strategy. So we -- for one, for example, the contract is only valid for all legacy SAP platforms, but not for S/4HANA, and this customer is moving more and more business to S/4HANA. We have one with Siemens, for example, I can mention this one. But we make a lot of additional business with Siemens right now because they have a significant increased amount of, let's say, volume, which was not all covered by the flat fee. So we will not -- first of all, we will not find this kind of fees anymore going forward. And second, we have for each of these deals, we have somehow an exit strategy. In worst cases, I think with 1 or 2 contracts we just need to wait until 2023 and then the contract finished anyhow. But there will be, let's say -- this will cleaned up in the next -- latest by 2023. And some of them hopefully earlier. And we have for, let's say, one customer situation, which is really, let's say, very tough there. We have a very tough conversation because customer believes he should get all the S/4 content for free and we have exactly the opposite. So we need to -- we are in tough negotiations.

[Operator]

At this time, there are no further questions in the queue.

[Christoph Marx, Global Head of Investor Relations]

Okay. Then maybe I'll do some closing remarks. So thank you for your time, your interest. As you can see in the presentation, we have depicted our financial calendar, and it shows that we will be back with fresh results on Q2 on August 7. In the meantime...