SAP SE O.N. (SAP) Q4 2020 Earnings Call Transcript

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SAP SE O.N. (SAP 0.59%)
Q4 2020 Earnings Call
Jan 29, 2021, 8:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the SAP Fourth Quarter and Full Year Earnings 2020 Conference Call. [Operator Instructions]

And at this time, I'd like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations. Please go ahead, sir.

Stefan Gruber -- Head of Investor Relations

Thank you. Good morning or good afternoon. This is Stefan Gruber. Thanks for joining us for today's earnings call to discuss our fourth quarter and full year 2020 results. I'm joined by our CEO, Christian Klein; and our CFO, Luka Mucic, who will make opening remarks on the call today. Also joining us today for Q&A from Singapore is Scott Russell, who will join the SAP Executive Board and lead the Customer Success organization as of February 1.

Before we get started, I'd 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 US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will, and similar expressions as they relate to SAP 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 US Securities and Exchange Commission, including SAP's Annual Report on Form 20-F for 2019 filed with the SEC on February 27, 2020. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

On the SAP Investor Relations website, you can find the slide deck intended to supplement today's call available for download. For those of you following the webcast, the slides will be shown as we proceed through the prepared remarks. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage rate -- point changes are non-IFRS at constant currencies year-over-year. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS.

And finally, before I hand over to Christian, I would like to announce that we will hold an event for financial analysts and investors in the coming month, and we plan to do this in conjunction with our user conference SAPPHIRE NOW. More details to follow.

With that, I'd like to turn things over to our CEO, Christian Klein.

Christian Klein -- Chief Executive Officer

Yeah. Thank you, Stefan. And welcome everyone to our earnings call. Now, if I had to find a headline for the last couple of months, I would say this. SAP is on the move. We have defined our new strategy, and we are in full execution. We have listened closely to our customers and launched RISE with SAP this week, a milestone offering for holistic business transformation as a service. As part of the new offering, we are unlocking the business policies intelligence layer with the planned acquisition of Signavio. Only SAP can help customers to reimagine business models and processes end to end to deliver the best business outcomes.

We also have expanded relationships with our hyperscale partners, collaborating more closely than ever, including with our Microsoft Teams integration. We have very successfully completed the IPO of Qualtrics. We have as well transformed the SAP organization to make it more least simple, lean and customer focus. We have tremendously improved the integration of our acquired cloud applications. We doubled down on innovation. We are co-innovating with our customers across 25 industries to turn them into more resilient, productive and sustainable enterprises.

We have announced three additions to the SAP Executive Board, all of them with a strong cloud mindset. And our Board now truly represents all global regions, Americas, EMEA and APJ. And I guess, it's now fair to say, not sure about you Luka and Scott, but our Board from now on never sleeps. But most importantly, we have put our customers first. And we already see strong results. Customer satisfaction is up 10 points, and we closed a very strong Q4.

So let's get started. Lots of ground to cover today. Luka will talk about our Q4 results in a minute. So let me focus on total year performance. First off, we beat all top line parameters after revised outlook and hit the upper end of our profit. This is highly important for us. 2020 was a very successful year for SAP with a very strong order entry in Q4, which provides us a strong tailwind leading into 2021. And that's clearly visible in our total year performance. Overall cloud revenue was up 18%. Our SaaS/PaaS revenue grew by 27% outside our Intelligent Spend and travel and expense business. Concur was especially affected by the crisis obviously. The good news here is that this headwind turns into tailwind once travel comes back. And then, Concur will be ready as the clear market leader in travel and expense. This year also showcased our ability to work remotely. We delivered stronger than ever. We added more than 25,000 net new customers. Also together with our partners, we delivered more than 35,000 go-lives.

In Q4 specifically, we added almost 1,000 additional S/4HANA customers. Around 40% were net new. That takes us to a total of around 16,000 customers, up 16% over last year. We are clearly gaining market share with S/4HANA. We also saw a massive number of highly important customer wins this quarter, some of them again competitive replacements. In the ERP space alone, we have more than 200 wins against Oracle.

So let me highlight just a few wins and go-lives. Gilead has chosen S/4HANA to help increase data standards and transparency, simplify and automate processes, and mitigate operational risks. Unilever continued a strategic partnership with us by converting to S/4HANA as the future-ready ERP system. Shell selected S/4HANA to support its upstream business, and we are also collaborating on an ambition we share to become net-zero emission businesses. CureVac has chosen S/4HANA to support the development of their COVID-19 vaccine.

In procurement, General Motors selected SAP to transform the spend management processes. At the same time, we posted almost EUR4 billion [Phonetic] of spend in our network. For human experience management, we added many net new customers this quarter, and we are the only vendor running HR across 100 countries.

Google has further expanded use of our cloud solutions, including Qualtrics. We are also exploring in partnership with Google Cloud around artificial intelligence to enhance customer value and of course, by also expanding our strategic relationship. In customer experience, we had the biggest quarter ever with regard to cloud order entry. For commerce, we doubled our cloud revenue as only SAP can offer a seamless consumer experience from the online shop, next day delivery, and flexible payment options.

Finally in supply chain, we extended further our Number 1 market positions, and we are further expanding our Industry 4.0 capabilities to offer the autonomous effectively. Now, we are fully focused on the opportunities ahead of us. That direction is clear. And we are executing our strategy to reinvent how businesses run.

Let me take you through the most important updates. I'm extremely proud that we increased the customer satisfaction score by 10 points. Two factors are driving this. We are focusing the entire company on our customer success and strongly drive integration and innovation across our business applications and platform. Also if there was an opportunity to improve people's lives, it is now. We are honored to support the global fight against COVID. In Germany with Deutsche Telekom, we are providing the corona contact tracing app. Since launch, the Corona Warn app was downloaded more than 25 million times. About 2,000 users shared their positive test results per day to break the chain of infection.

For vaccine production, 17 of the Top 20 global vaccine producers run SAP. In the US, Moderna runs SAP S/4HANA in supply chain management to support the distribution of the COVID vaccine. And in Germany, CureVac selected SAP in Q4 to scale their production of the vaccine. For vaccine distribution, Deutsches Rotes Kreuz, the Red Cross, in Germany and many others run on SAP. I'm very proud of SAP's relevance in the global value chains and our responsibility to help the world run better.

On to strategy. Two days ago, we launched RISE with SAP. This is a milestone offering. Together with our ecosystem, we launched this game-changing offering to ensure a holistic business transformation for our customers. A business transformation requires more than just a technical migration to the cloud, and only SAP can do this.

But let me briefly go into a bit of detail here. It's important to understand. First, RISE with SAP is for all customers, no matter the starting point or complexity, whether it is smaller companies with simpler processes or multinationals with a complex, customized on-premise landscape. We are moving our customers' mission-critical core ERP processes to the cloud, along a tail pass that reflects the individual customer situation. We make sure our customers truly transform their business, instead of just replicating the on-premise landscape on some public cloud infrastructure as the destination is always to become an intelligent enterprise.

RISE with SAP is the journey to get there based on three steps, business process intelligence and redesign. With the experience of 400,000 customers, we redesigned business processes end-to-end. I come to Signavio in a second. Technical migration to a standard and modular solution landscape with fast time to value. And finally, we are building the intelligent enterprise with S/4HANA Cloud for tightly integrated, highly intelligent and automated business processes, the business technology platform as the foundation providing our customers with integration, data-to-value and extensibility based on one data model and many other world-class application services. And of course, we provide choice on the cloud infrastructure, be it SAP or hyperscaler. And we are included the access to the world's largest business network. The offering is not only delivering our customers a superior business outcome and a return on invest. It is a very simple commercial offering on a single contract, all without high upfront investments and up to 20% lower TCO.

From SAP's financial perspective, as we embark on this journey, we shift existing customers out of the upfront software and support model and into the available cloud subscription model. And while this leads to some short-term pressure on revenue and profit, we will significantly increase customer lifetime value by delivering more services to customers. So, we are increasing our share of wallet and make life easier for our customers at the same time as they now can turn to SAP as the responsible vendor. That's why we expect to turn EUR1 support revenue into roughly EUR2 of cloud revenue over time. But most importantly, it will help us accelerate our upselling of applications as well as technology and especially, drive the platform adoption.

Let me now drill into the business process intelligence layer, as it provides context for the Signavio acquisition. Business process intelligence will span over time across all of our applications to continuously reinvent how business processes run and to infuse intelligence by analyzing, benchmarking and configuring business processes based on the insights and best practices from our 400,000 customers across 25 industries. With Signavio, we are not only becoming right away a leading player in the business process intelligence market, but we will also accelerate the business transformation of our customers and with that, the move to S/4HANA Cloud. And that's the kind of innovation close to our core we are driving.

As part of our strategy, we are also forming close strong partnerships, providing great business outcomes for our customers and reinvent how enterprise run. In this context, we have expanded our existing partnership with Microsoft. With Microsoft Teams and SAP coming together, we combine the leading business application suite with the leading business communication platform. With this partnership, we will create a frictionless enterprise and determine the future of work. We will deliver numerous collaboration scenarios for procurement, for HR, for finance, which will increase the productivity of millions of users worldwide. The first use cases will be already launched in Q2 starting with S/4HANA and Customer Experience.

Let's talk about Qualtrics. This is a fantastic success story for both Qualtrics and SAP, and it resulted in yesterday's successful IPO of Qualtrics. Let me be clear. Ryan, Mucic and myself are fully committed to experience management and the Qualtrics XM platform as a key element of SAP's intelligent enterprise. And we absolutely intend to keep up the pace of innovation, expanding our joint solutions quarter-after-quarter. SAP will, of course, remain Qualtrics' most important go-to-market and innovation partner in order to drive growth within SAP's customer base, but we are now providing Qualtrics with the opportunity to extend its business and serve customers also beyond the SAP universe. So, for Qualtrics, the future couldn't be brighter.

But let's also remember, we acquired Qualtrics two years ago for around $8 billion. Last year, it contributed more than EUR0.5 billion of cloud revenue, twice of what they used to do when we acquired them. So, at yesterday's IPO, Qualtrics achieved an implied valuation of close to $18 billion, more than double the acquisition price. And at that end, the first day of trading, the stock increased by about 50%, increasing the implied valuation to about $27 billion. Congratulations Ryan and team on a great, great job as part of the SAP family.

Now, before handing over to Luka, 2021 will be an exciting year, full of opportunities. And I'm happy to end this important year with very strong leadership team, underscoring our clear focus on customer success and cloud growth.

First, I would like to thank Adaire, who will depart SAP. We wish her all the best for her future endeavors. At the same time, I could not be happier to announce the addition of two exceptional leaders to our executive board. Scott Russell succeeds Adaire in heading our Customer Success organization. Under Scott's leadership, as president for APJ, the region has become one of the fastest growing cloud markets for SAP, always putting the success of our customers at the center. We are happy to have him join us for Q&A in a minute.

Julia White joins us from Microsoft, where she led Product Marketing for Microsoft Office during its cloud transition to 365 and for Azure over the past five years. Julia will take on a new executive board role as SAP's Chief Marketing and Solutions Officer. Julia brings a cloud-first mindset to SAP that will tremendously support our own transformation. And Julia perfectly knows how to bridge technology into clear business value for our customers. At SAP, Julia will focus on demonstrating the differentiating innovations and capabilities of our solutions to our customers by strengthening our product, industry and digital marketing capabilities.

So, I'd like to extend a warm welcome to Julia and Scott and once again, also to Sabine Bendiek, who joined our executive board on January 1 as our Chief People Officer. Sabine was the driving force behind Microsoft Cloud transformation in Germany. And as we all know, transformations are driving by winning people and changing culture. It's all about the right talent, the right leadership, the right attitudes, and also the right processes. And so, I couldn't be happier and more confident to hand over her the Chief Operating Officer role later this year.

And with that, let me wrap it up here and hand it over to you, Luka.

Luka Mucic -- Chief Financial Officer

Yeah. Thank you very much. Christian. Also from my side, warm welcome, everyone. Well, in my 25 years with SAP, I certainly never had a dull moment, but 2020 was unprecedented across all dimensions. Therefore, let me start by saying that I'm likewise proud of how we ultimately navigated through this challenging environment. We had a strong finish to the year with a better-than-anticipated top line, strong operating profit and margin performance, and a record cash flow.

So, let me cover our results in some more detail, starting with the top line. In 2020, we exceeded all revised 2020 revenue targets and hit the high end of our operating profit outlook even as the COVID-19 crisis persisted and lockdowns were reintroduced in many regions. In fact, except for cloud revenue due to the impact of Concur, we managed to ultimately reach the guidance we gave in April. In Q4, our current cloud backlog expanded by 14% and reached EUR7.2 billion. Cloud revenue was up 13% in the quarter, but for the full year, it grew by 18% to more than EUR8.2 billion, exceeding our revised 2020 outlook.

Lower transactional revenue, mainly Concur business travel-related, negatively impacted our cloud growth rate for the full year by 4 percentage points. However, continued high demand for our cloud assets like e-commerce, business technology platform and Qualtrics, along with several competitive wins, particularly for SuccessFactors Human Experience Management, produced a strong finish to the year for our cloud business. In fact, we grew our SaaS/PaaS revenue outside of our Intelligent Spend business by 27% for the full year.

We also saw strong early uptake of our new holistic business transformation offering, RISE with SAP among pilot customers. This contributed to the cloud performance in the quarter. Cloud revenue is now more than two times larger than our software licenses revenue. This cloud revenue growth, in combination with our steady software support revenue stream, testifies once again the resilience of our business model.

Our more predictable revenue expanded by approximately 5 percentage points and reached 72% for the full year. In Q4, software license revenue saw significant sequential improvement, down only 11%, reflecting strong demand for SAP's digital supply chain solutions in particular, as well as significant competitive wins in ERP, as Christian already mentioned.

Our cloud and software revenue grew by 1% in Q4 and was up a solid 3% for the full year. Our services revenue, in turn, was down 8% for the full year, reflecting the increased scrutiny around larger projects earlier in the year. While the vast majority of consulting projects continue to be efficiently delivered remotely and SAP's premium services remain in high demand, SAP's training business was impacted due to delays in reopening of global training centers.

Despite these ongoing COVID-19 impacts, our total revenue increased by 1 percentage point to EUR27.9 billion, also exceeding our revised 2020 outlook, demonstrating the increasing resilience of our business model in a uniquely challenging environment.

Now, let me quickly cover our regional results. From a regional perspective, we had a solid year in all regions. In the EMEA region, cloud and software revenue increased 3%. Cloud revenue increased 25%, with Germany, Switzerland and France being highlights. Saudi Arabia and Sweden had a strong year in software licenses revenue.

In the Americas region, cloud and software revenue increased by 3% as well. Cloud revenue increased 13%, with Canada being a highlight, while the United States and Mexico had a robust performance. For software licenses revenue, the US, Brazil and Mexico held up well.

In the APJ region, Scott's home turf, cloud and software revenue was up 2%. Cloud revenue increased 21%, with Japan, South Korea and Singapore being highlights. In addition, Japan, as well as Australia and India, had a robust performance in software licenses revenue.

Now, moving on to the bottom line, where the gross margins of all of our cloud business models were up in Q4 and for the full year 2020 again. Despite the negative top line impacts from the COVID-19 crisis, in particular, the lower transactional revenues, our overall cloud gross margin was up 1.3 percentage points to 70% for the full year. Again, all cloud business models contributed to this trend.

Our SaaS/PaaS margin grew by 2 percentage points to 71%. Our Intelligent Spend margin, despite the top line headwinds, grew by another 1 percentage point to 79%. And our infrastructure as a service margin grew by 5 percentage points to 34%.

Our software and support gross margin ended the year at a very healthy 88%, increasing by 30 basis points. As a result, overall, our cloud and software gross margin decreased only modestly by 20 basis points to 81% for the full year, even with the negative revenue mix shift effect.

Our services gross margin increased by 2 percentage points to 27% in 2020. That's certainly a benchmark margin for services business across the industry. This was mainly driven by a larger share of high margin premium engagement business, which has proven to be very effective in this virtual environment. Also, an increase in remote delivery led to a reduction in travel spend.

For the full year, our operating profit increased by 4% to EUR8.5 billion, hitting the high end of our revised operating profit outlook. This reflected the resilient top line performance, further improvement of our cloud gross margin and a disciplined approach to hiring and discretionary spend, while capturing natural savings from lower travel, facility-related costs and virtual events, for example. As a result, our operating margin expanded by 80 basis points to 30.5% in 2020. This is the highest level seen since 2015.

On an IFRS basis, our operating profit and operating margin were positively impacted by significantly lower restructuring charges as well as lower share-based compensation expenses compared to 2019. IFRS operating profit grew by 48% and IFRS operating margin by 8 percentage points to 24.2%.

Let me now turn to EPS and taxes. IFRS EPS increased by 56%, non-IFRS EPS by 6%. This was mainly driven by a stellar contribution from Sapphire Ventures, which had a significant positive impact on our finance income.

For the full year 2020, the IFRS effective tax rate increased by 20 basis points to 26.9%, while the non-IFRS effective tax rate increased by 30 basis points to 26.5%. We came in at the low end of our non-IFRS tax rate guidance.

With this, let me turn to cash flow, a true highlight in this year. In a uniquely challenging environment, 2020 was a record year for cash flow in every single quarter as well as the full year. Operating cash flow benefited from lower tax and restructuring payments and a very successful working capital management. As a result, operating cash flow for the full year reached EUR7.2 billion, approximately doubling year-over-year and significantly above the raised outlook of around EUR6 billion. Likewise, our free cash flow in 2020 reached EUR6 billion, more than doubling year-over-year and significantly above the raised outlook of about EUR4.5 billion.

Looking forward to 2021, we expect operating cash flow of approximately EUR6 billion, primarily reflecting moderately lower profit, adverse currency movements, in particular for the US dollar, and higher income tax payments, while free cash flow is expected above EUR4.5 billion, also impacted by a modest increase in capex.

Now, our detailed 2021 outlook is available in the quarterly statement published earlier today. It assumes the COVID-19 crisis will begin to recede as vaccine programs roll out globally, leading to a gradually improving demand environment in the second half of 2021. Our strong finish to the year, the launch of our new holistic business transformation offering, RISE with SAP, and the other key strategic initiatives outlined by Christian position us well to meet our new outlook targets.

Note that our outlook is provided at constant currencies, and we expect reported figures to experience continued FX headwinds as laid out in the quarterly statement.

In 2021, we also expect to incur between EUR150 million and EUR200 million of restructuring expenses, the big majority of which is a non-cash impairment of obsolete assets related to the modernization of our cloud infrastructure. As usual, these restructuring expenses will be fully recognized upfront in the first quarter of 2021.

Let me now turn to our non-financial highlights. In 2020, we saw a strong performance of our non-financial indicators. Christian already spoke about our strong increase in customer net promoter score. Our Employee Engagement Index increased by 3 percentage points to a record 86%. Our measures to decrease greenhouse gas emissions were bolstered by continued reduced travel due to the COVID-19 pandemic. As a result, in 2020, our greenhouse gas emissions were only 135 kilotons, a decrease of 165 kilotons.

Looking beyond the numbers, 2020 featured some great developments on the sustainability front. We were recognized by a number of ratings and rankings for our achievements, including making it to CDP's A list of climate leaders, inclusion in FTSE4Good Index, among others, and remaining for the 14th year in a row the Number 1 software company in the Dow Jones Sustainability Index.

In 2020, we launched initiatives such as Climate 21 and Circular Economy to enable our customers to make this transition and contribute to a sustainable future. And finally, I would like to update you on the Value Balancing Alliance where we have actively executed our first pilot ending in November 2020. Details of our findings will be shared in our integrated report, which will be published on March 4, 2021, and which I recommend for your reading.

So, before closing, let me briefly talk about the Qualtrics IPO. As Christian just discussed, we are delighted with the outcomes of the IPO this week, which represents a more than doubling in value since our acquisition two years ago. Importantly, the IPO maximizes Qualtrics' opportunity to expand their business and build the best talent, while SAP continues to reap the benefits of majority ownership.

To conclude, in 2020, SAP responded quickly to the crisis and demonstrated its agility. In an extremely tough environment, we grew the top line while expanding operating profit and margin and delivering record cash flow. We are now fully executing on our strategy to drive long-term sustainable growth, while significantly increasing the resiliency and predictability of our business.

The launch of RISE with SAP is accelerating customers' move to the cloud and their business transformation. We are receiving very positive feedback and already see strong early take up. This gives us all the confidence in the world to reach our EUR22 billion cloud ambition by 2025.

With that, let's open up for questions, Stefan.

Stefan Gruber -- Head of Investor Relations

Thank you, Luka. And we can now start the Q&A session, operator.

Questions and Answers:

Operator

Thank you. [Operator Instructions] We'll now take the first question from James Goodman at Barclays. Please go ahead.

James Goodman -- Barclays Capital -- Analyst

Good afternoon. Thanks very much. It's clear you've been working closely with customers and partners ahead of the launch of RISE on Wednesday. You mentioned that pilot customers are already contributing to the quarter. I just wondered if you could talk a little bit more about the rate of adoption you're expecting over the coming quarters and perhaps specifically whether you're expecting to this -- see this more as a sort of migration of license potential customers to the new offering or you are really focusing on existing movement to maintenance customers and how you're going to help us track the progression of RISE from a KPI or disclosure perspective? Thank you.

Christian Klein -- Chief Executive Officer

Let me start, and Luka and Scott feel free to build on top. I mean, look James, first of all, when we started to design the new offering, as I also said, we just -- we listened very carefully to our customers and to many Chief Information Officers I'm talking to. The main issue with their digital transformation is not the fact that the technology is not there, the solutions are not there, they are all there. The point is around how can you use this technology and connect it to the business processes.

When you are migrating an IT landscape to a new cloud infrastructure, no single business policies will change in HR and procurement and sales. And with the new offering and it's really the sum of its parts, we are taking the business process intelligence layer and Signavio is therefore such a great, great fit. We are taking that, use our experience, use the best practices we see in the market from over 400,000 customers and we can tell exactly the customer how do we design that business processes, which business models works best, should the customer switch from product to selling services, should they switch from upfront license models to subscription and pay-as-you-go, as we do, for example. And then we can go from there, because S/4HANA cloud can do it all.

And again, the artificial intelligence, the RPA, when it also then comes to Leonardo, it's not like that is a side element, it needs to be part of one and this is how it comes together. And yes, we started pilot. I didn't want to push this offer just out there to the market. We actually started with 20 pilots. We ended up with 130. We actually had to come to fill a little bit down, Scott, I guess, that's fair to say, because we still are in a pilot phase, and now we are of course public and now we go. And of course for smaller, for mid-sized customers, we will for sure see shortened sales cycles. For some others, it will take a bit, but for sure, it will drive the acceleration of S/4HANA Cloud and goes as you also have heard, a migration with the installed base with very healthy conversion rates and second, with a 40% net new customer share, I mean, I don't know what to say more. We are also clearly winning market share.

And Luka, maybe you can talk about the KPIs?

Luka Mucic -- Chief Financial Officer

Yeah, absolutely. And first of all, on this maintenance, conversion versus new license topic, just give you an idea of what we roughly are looking forward to. You will know that our cloud ambitions until 2025, call between 2021 and 2025 for a CAGR of around about 25%. And obviously RISE with SAP is a material contributor. And if we break down what we expect in terms of contribution from it, then we see around about 2 percentage point to 3 percentage point contribution, both from the conversion of established maintenance, as well as from the conversion of new software licenses to cloud subscriptions, leaving basically high teens in terms of growth CAGR for the rest of the portfolio outside of RISE.

Obviously, we also recognize that it's very important for the capital markets to be able to transparently track the progress that we're making, and we therefore intend to begin enhanced disclosures as of Q1 2021, both in terms of the customer pickup that you're interested, but also financial metrics that give you a view of the size of the core business that we are moving to the cloud, as well as the new customer success that we have from a financial perspective. So stay tuned for that. But as always, SAP is committed toward transparency, and you will get it starting this quarter.

Christian Klein -- Chief Executive Officer

Okay. Thank you.

James Goodman -- Barclays Capital -- Analyst

Much appreciated. Thank you.

Luka Mucic -- Chief Financial Officer

Thank you. Let's move to the next question please.

Operator

We'll now take the next question from Charlie Brennan at Credit Suisse. Please go ahead.

Charles Brennan -- Credit Suisse Securities (USA) LLC -- Analyst

Thanks very much for taking my questions. I'm going to do two if that's OK. Firstly, for you Luka, I understand the concepts of you taking ownership of a holistic contract that includes both some infrastructure and services elements, and that's going to enable you to capture greater share of the wallet. Can you just help me understand how those services and infrastructure elements are going to flow through to your numbers? Do those revenue pieces flow through the cloud line in the future? And I'm assuming, because you're using partners to help deliver those services, it's not going to be a 80% gross margin. Can you just help us understand how you get the overall division to 80% gross margin?

And then, can I just as a follow-up lift eyes to your mid-term targets, I know that free cash flow wasn't explicitly part of your formal target, but I think on the previous call you were happy to imply the EUR8 billion of free cash flow seemed reasonable. In light of the 2021 guidance at EUR4.5 billion, I was just wondering if that still seems achievable? Thank you.

Luka Mucic -- Chief Financial Officer

Yeah, so let me cover the last one quickly, because that's easy. Yes, what we are expecting is that as also our profitability targets have been pushed out by two years to 2025 so will be the free cash flow target. So we still see this as our achievable target for 2025. That was probably the quicker one.

On the infrastructure and services side, here now we need to be precise. So first of all, we are bundling with RISE across the public cloud infrastructure and also certain automated productized services. For example, we provide code analysis tools that allow our customers to inspect their modifications and also help our services partners then to do the migrations swiftly. Business Process Intelligence is another example where the base functionality that we are bundling with RISE will allow our customers to quickly get a view of how they stack up against benchmark so to say in terms of their own process -- existing process capabilities and what they can achieve in terms of additional automation and efficiency as they move to S/4HANA. All of those elements, as well as the public cloud infrastructure will be recognized as cloud revenue as part of the overall bundle.

Irrespective of this, we are also offering our sales, but also our service partners, our SI partners of cost migration services in order to set up the systems. Those would be recognized as services revenue separately, that's at a high level how this distinguishes. And in terms of the margin actually, we believe that we can gain significant efficiencies through an industrialized migration approach. We have a cloud native reference architecture that we apply that is part of the migration. It actually simplifies the ERP loads and standardizes them. We use the business technology platform, in particular, to move modifications over to run on the platform rather than infecting, so to say, the ERP cost still. And with this structure, we can actually run quite efficient cloud infrastructure operations.

And so, while the individual margin levels that we can achieve across the entire customer base will depend on the complexity of the individual customer situation and where their starting point is and how long it will take to move them to weigh more streamlined operations, in aggregate, I can only assure you that those impacts are of course factored into our long-range margin guidance that calls for us to land in the neighborhood of 80% by 2025.

Charles Brennan -- Credit Suisse Securities (USA) LLC -- Analyst

Okay.

Stefan Gruber -- Head of Investor Relations

Thank you. Let's take the next question please.

Operator

Thank you. We will now take the next question from Stefan Slowinski, Exane BNP Paribas. Please go ahead.

Stefan Slowinski -- Exane BNP Paribas -- Analyst

Great. Thank you. And I guess, just to follow up on the last question. I understand the infrastructure related offering will be going through your cloud revenue line. Will you also be, I guess, passing through the services revenue from some of the partners or all of the partners through your services line. Just to confirm, is that what you just said?

Luka Mucic -- Chief Financial Officer

No, no. As far as services for the migration are going to be offered by partners that will go down separately on their paper but we will take the holistic ownership of running the solution itself all the way from the software-as-a-service layer to the infrastructure as a service layer.

Stefan Slowinski -- Exane BNP Paribas -- Analyst

Okay. Great. Thanks for clarifying. And just a follow-up to that. I guess, Christian, just on the integration work that you've been doing across your cloud applications, I know, I guess, part of RISE to start to cross-sell more backlit, can you just help us quantify where you are in that process? And maybe if you look at your 400,000 customers, do you have any data in terms of how many of those customers have at least two SAP cloud apps and what the pipeline looks like for cross-selling those applications? Thank you.

Christian Klein -- Chief Executive Officer

Yes, so I come to the last question first. There is immense cross-sell opportunity. We still have thousands of on-premise customers wanting HCM, meant still eye based [Phonetic] left for procurement. And by the way now that the integration work is almost done, we are also going to offer a bundle this year with S/4HANA, including SuccessFactors, employee central and Ariba as this now really comes as one. We are almost done with the integration work, data models in sync and user experience in sync. We are pushing also now in the -- the analytics layer for integrated planning, for integrated reporting, and we will also share a more detailed announcement in the next weeks where we also have some customer references in, it's a customer in APJ. Scott, you know them well. They are wanting actually eight cloud solutions from SAP, and they now can cut the customer in the equation already by 80%, and we have much more of that. So customer is now feeling tangible outcomes.

And as I said, we are almost done, and we will finish the rest also then during half year one this year. And yeah, I already mentioned the cross-sell potential, and again, we also going now to offer the bundles. So in case, if the customer wants to go more portal, you can have the bundle. And then in case they want to go LoB by LoB, they can of course also consume it on a modular basis.

Stefan Gruber -- Head of Investor Relations

Okay. Thank you. Let's take the next question please.

Operator

We'll now take the next question from Phil Winslow from Wells Fargo. Please go ahead.

Philipp Winslow -- Wells Fargo Securities, LLC -- Analyst

Great. Thanks for taking my question and congrats on a strong close to the year. Christian, my question for you from what you're hearing from customers, obviously, there are lots of different flows and dynamics affecting potentially the shape of this year, obviously. Hopefully, you have a sort of a post vaccine world and economic recovery is sort of like what we saw in 2010 and sort of return of SAP projects, but then also you have a lot of technology as you just mentioned with RISE with SAP that you're delivering with customers that maybe needed to kick the tires on it, etc., maybe even expand usage of SAP. How -- what are you hearing from customers on, I guess, the flow -- flow these impacting the year and projects?

Christian Klein -- Chief Executive Officer

Yeah, so Scott with us. Scott, I can start, and you can just comment on what you see across the globe. I mean, look, what we also have seen in Q4, very positive is how relevant we are in the value chains of our customers. I mean, others talk about how they help to deliver the vaccine, we are wanting the supply chains, we are wanting the productions, we are now -- in this time, we are more closer than ever to these enterprises to help them scale their production to put them into the cloud, to connect them to the business network so that they get the ingredients for the vaccine from Asia -- Asia Pacific to the US to the factory in the US, despite the country lockdowns. These are real business scenarios. This is what we are doing, and this also then gives us the confidence to be very positive about 2021.

Obviously, yes, we acquired the travel and expense solution, but also there I have to say, we -- this is the -- by far market leading solution. So we, of course, eagerly waiting until we can all travel again, but they will come back, they will come back strong. And actually, I'm still surprised that we are still doing business with this solution these days. And when you have heard Luka now also talking about a 27% growth rate for SaaS/PaaS and you look at the valuation of Qualtrics, you know that we have many, many other assets in our portfolio who are actually growing like Qualtrics. So you see, we -- our portfolio is relevant, our portfolio is strong.

And maybe, Scott, you can give some sentiment from what is actually what you are seeing across the globe?

Scott Russell -- Head of Customer Success Organization

Yeah, sure, Christian. Thank you. Look, based on the discussions with the customers, more and more of our customers are very comfortable not only in the cloud for the technology but for their mission-critical applications, because they know that to transform and to serve them their customers now and in the future, they need to differentiate not just at the technology layer but at the business process and innovation layer. And that's why they're coming more to SAP, you know combine that with the business transformation as a service, ensuring that they don't have an upfront capex investment and in fact pay over multiple years as they realize the business value. So that holistic subscription offering through RISE with SAP, but all of our SaaS portfolio is giving a really strong confidence that the customers around the world are not only positive but they are actively working on their digital transformation programs with us. So the outlook is strong.

Stefan Gruber -- Head of Investor Relations

Thank you. Let's take the next question please.

Operator

We'll now take the next question from Julian Serafini at Jefferies. Please go ahead.

Julian Serafini -- Jefferies -- Analyst

Hi, thank you. I have two questions. I think one for Christian. I think you had mentioned the S/4HANA cloud, was that roughly 80% of the features of the regular full featured S/4HANA. Is that an impediment through the adoption of RISE, and I guess, how do you plan to close that gap to the regular full featured S/4HANA?

And then second question for Luka, just in terms of capital allocation. Obviously, SAP is using -- generating a lot of free cash flow right this year and then coming years, and should shareholders be expecting some kind of incremental return? I know you had talked back in 2019, I believe, about doing annual step by step returns. I'd be curious to get an update on what deployments here?

Christian Klein -- Chief Executive Officer

Yeah, so I'll start, and Luka you can build on top. I mean, Julian, the first point, the time of RISE with SAP is now and to tell you why, the things are now coming together. When you look at S/4HANA cloud, we have put the data model on our platform. So yes, we have 80% of the capabilities now available in the cloud, probably in some parts, we will not exactly also develop the same kind of capabilities as we did in on-prem because business models are changing. And you will also find customers who put another circle around the business process, which is really very individual to this customer, and that's why it's so important that the platform is not there. And by the way, the platform is also not there for SuccessFactors, for Ariba. The platform is now part of every deal to build the extensions for our customers, and we also invite our partners, our ecosystem to the party, because now everything is down this platform to just build seamlessly the extensions.

In past times, you know why should you go to an SAP Cloud platform when we don't have the same services like our applications used. Now it's there, and this is why we are now launching the offering RISE with SAP, and this is why we are confident. And again, you have seen in my key note the customer like Siemens, obviously, it will take time to transfer them completely over. You have seen the number of ERPs, but they will now start, they will start and we migrate them step by step, and on every step, we will look at one business process after another and we will deliver them tangible business benefits.

Luka Mucic -- Chief Financial Officer

Yeah, and perhaps on the use of capital, look, our philosophy is unchanged from what I had shared with all of you at our Capital Markets Day in late, I think, it was in November 2019, if I'm not mistaken. And indeed, we had a very strong free cash flow and obviously have realized now additional proceeds from the Qualtrics IPO, but the logic is always the same.

First of all, we want to fund our organic investment needs. And in particular now for this year and next year that involves and includes also the harmonization and modernization of our cloud infrastructure, which will result in some additional capex requirements. Then, we want to continue to deleverage and pay back outstanding debt when it is due. This year will actually have a rather big chunk of step returns that we have to still make. One, we have still EUR1.25 million -- billion of the Qualtrics term loan outstanding that we want to repay in 2020, and another EUR1.4 billion of regular Eurobond repayments.

Second, beyond that, of course, we want to pay an attractive and increasing dividend, and we had a very strong net profit, which is the baseline for the dividend payout in 2020. So while the final decision on the dividend is going to be taken by our supervisory board in late February as always, it is safe to assume that based on this and our policy to pay out more than 40% of net profit in IFRS terms, you will see an increased dividend payout from SAP.

Last but not least, we obviously also want to continue to consider value accretive tuck-in acquisitions if they make sense. In the last two quarters, you have seen that we have acquired a masses in the customer experience space, as well as now lately Signavio. Those smaller acquisitions are obviously ones which we can pay back from our strong cash flow and we will do so.

And then, the remaining excess cash, if we have it, something that we of course will consider for incremental capital returns. But on that one, we will follow the process that we have outlined. This will be evaluated in the context of our final year end results by the Supervisory Board and if there are any additional measures that we will decide to take, we would communicate them afterwards as we have done in 2020. So same procedure as in the past, I would say.

Stefan Gruber -- Head of Investor Relations

Okay. Thank you. Let's take the next question.

Operator

We will now take the next question from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Mohammed Moawalla -- Goldman Sachs International -- Analyst

Great. Thank you very much. I had two questions. First, Luka, can you just help us bridge the gap and provide an updated cloud backlog disclosures, that metric has seen a deceleration growth, but you also talked about the 27% growth in the cloud business ex transactions. Should we therefore anticipate over the next several quarters that that sort of momentum may potentially slow, and then as that sort of booking -- reaccelerate based on the environment we should then see that certainly accelerated again.

And then related to that, I know you sort of -- Christian alluded to the sort of the broader portfolio, and I think, Luka, you indicated just a 800 million revenue run rate for S/4HANA Cloud. Can you remind us again of the kind of big pieces of the kind of assets you have as we think about that sort of cloud growth rate moving forward and the kind of pipeline [Technical Issues]. Thank you.

Luka Mucic -- Chief Financial Officer

Yeah, let me start, and then please also Christian feel free to complement here. First of all, it's important to note, when I talk about the growth rate of our software-as-a-service, platform-as-a-service business, this is excluding the entire Intelligent Spend group, not only transactional revenues. In the Intelligent Spend group, both Concur as well as Ariba and Fieldglass also have a fixed committed subscription business, and that obviously is part of this revenue line as well, not only the transactional revenues.

In terms of the -- the growth profile, first of all, we are extremely pleased with the strong order entry performance that we had in Q4 in our cloud business. It was by far the best one that we had seen in the entire year. So based on that strong performance, as you know, it always takes a bit for this to find its way into the P&L due to the delayed nature of revenue recognition and the cloud subscription business. And therefore, I believe that you will see and we will see the trough in our growth rate in cloud in the first quarter of 2021. And from thereon, we should see a reacceleration based on both the strong performance in Q4, but also the confidence that we have that now with programs like RISE, our new solutions that we are bringing to the market, as well as the starting momentum that we see in the lowest of the portfolio we will actually be able to reaccelerate and grow the business at higher rates for the remainder of the year.

In terms of the businesses that we have in this SaaS/PaaS chunk outside of Intelligent Spend, it's a variety. You have solutions like SuccessFactors and the Human Experience Management Solution in there. You have solutions in there like S/4HANA Cloud, which is growing very fast on the Business Technology Platform, assets, as well as analytics in the cloud. You have our CX, Customer Experience, portfolio with commerce, with the CRM cloud solutions. And finally, you also have Qualtrics in that space as it is also a SaaS/PaaS solution. That gives you a view, and of course, those assets are of varying size and varying growth levels, but the ones that I cited before like commerce, like platform, like S/4HANA Cloud are all at a similar scale and grow also very, very fast typically in the mid-double digits.

Stefan Gruber -- Head of Investor Relations

Okay. Thank you. Let's take the next question please.

Operator

Thank you. We will take the next question from Michael Briest of UBS. Please go ahead.

Michael Briest -- UBS Limited -- Analyst

Thank you, and good afternoon. Thanks for getting me on. Just two from me. Luka, you gave an interesting insight into the ecosystem yesterday or Wednesday on your RISE presentation. I think you said that the infrastructure as a service opportunity underneath SAP is about $10 billion a year. How much of that are you expecting to be under your paper, if you like, by 2025?

And then also Luka, you talked about the investments in cloud harmonization of a converged infrastructure, and also indicated, I think in October, that there might be a slower margin progression in the cloud for the next couple of years. Can you maybe just give us a feel for, should we be expecting overall cloud margins to be flattish this year? Should they increase a little bit and some insights there, please?

Luka Mucic -- Chief Financial Officer

Yeah, so first on the cloud margins, because there I have an answer for you. So our expectation is that, despite the investments that we are taking over the course of the next two years, we should still see a modest increase in the cloud margins in '21 and in '22, but then a significant step up as of 2023 when we have concluded that work. Very much in line with what you saw actually in the past while we were going through the harmonization of the database. There you might have -- might remember that we had slower progress for a while, and then after SuccessFactors, also last year, Ariba was done, you saw, again, a step-up, and that would be a similar trajectory that we are expecting also for the cloud infrastructure harmonization work.

And on the infrastructure as a service share, I really can't give you such a share, because we are not breaking out the public cloud infrastructure piece. Actually, we are offering our customers choice as we have said. They can actually select the public cloud infrastructure or they can elect to go with SAP's own converged cloud. So we obviously have an overarching revenue ambition for RISE with SAP that fuels, as I've said, the ambition to reach the EUR22 billion in cloud revenue by 2025, but within that, I really cannot give you a breakdown between public cloud and converged cloud infrastructure.

Christian Klein -- Chief Executive Officer

And Michael, maybe just to build on that from a business perspective, because I also saw comments around why should actually also the customers to decide to go with that bundle. I mean, from a business perspective, I mean, when we think about what kind of workloads do we want. So here we talk about production, here we talk about finance, here we talk about logistics, and when this is down, all wet lights are on.

And in this case, you don't want to go to three different parties and ask, OK, who is now actually, what is now actually the root cause. You want to go to one accountable party, ideally the one who sits on top, and figuring out the root cause with monitoring tools across the STACK. And this is something what we should never forget when we talk about why is that there are clearly also some reasons why business-wise for. And Chief Information Officer, this could make sense to really go via SAP while you can still have the best of the best.

Stefan Gruber -- Head of Investor Relations

Okay. Thank you. We have time for two more questions.

Operator

We'll now take the next question from Adam Wood of Morgan Stanley. Please go ahead.

Adam Wood -- Morgan Stanley & Co. International Limited -- Analyst

Hi. Good afternoon everyone, and thanks for taking the question. First of all, for me, can I just follow-up on the last comment Christian around, you know, I think many of us will see the value of the bundle and the ability to deal with one vendor. But to the extent, you're going to be able to protect margins on the bundle of the gross profit level, and therefore mark up some of those services. What's the risk if that bundle just becomes too expensive for customers versus independently contracting and they see the value of where it is, but because you're marking up to get us the margins you want to be at, it's just too expensive for them to go to.

And then secondly, just thinking about distribution. There's been a lot of change in the leadership of the sales organization over the last few years. Could you maybe just give us a little update on the team there? How you see things progressing, and then maybe particularly where they are with readiness to sell RISE which has given us a bundle, again, quite a different sale may be from going and just starting a simple S/4HANA upgrade to a customer? Thank you.

Christian Klein -- Chief Executive Officer

Good questions, Adam. So first of all, when it comes to the margin, you can be wrestling to -- Luka is watching us. And then second, not seriously spoken, I mean we are talking here about billions of consumption, billions of workloads. And with that, we of course also are getting pretty attractive cost weights. And so, we of course also calculated it through across the stack. And let's not forget, for an installed base customer, you know there is still also a conversion rate, so that you really need to see this offer as a holistic offer there as well. You also coming on top of the commodity, coming with the platform, coming with S/4HANA.

And with regard to the changes, I mean look Adam -- looking at Julia now joining us from Microsoft, I guess, she will be a great, great asset to the team. She will help us tremendously to pitch the product marketing, the innovations we are going to deliver. And then obviously, Scott, feel free to comment on the sales side, but especially in Q4, we have seen a huge uptick in North America. It was the region of the quarter. We have strong, strong sales representatives there with DJ, but of course also with Paula Hansen and others. So I'm really feeling confident that we have the wide team together. But Scott, please chime in.

Scott Russell -- Head of Customer Success Organization

Yeah, sure. So I guess, a couple of comments to give a bit of color on this. The first is the, sales organization, and in fact, the Customer Success organization as Chris mentioned is actually very stable. Leadership, it's been in place for a number of years that understands the markets, understands the needs of the customers and is able to navigate that change.

Secondly, also as Christian mentioned, as we were launching our pilot in Q4, we were also enabling our organization of 40,000 women and men in the Customer Success organization about RISE, the offering. And as we were refining that offering, we were also being ready. In fact, just this last two weeks, we've launched the largest Customer Success summit, brought all of our Customer Success organization, 40,000 people plus over, 10,000 partners and not only a kick off, but an enablement and preparation. So we're ready to go. And what is great is the customers are ready to engage. So we are looking forward to a fast start.

Stefan Gruber -- Head of Investor Relations

Okay. Thank you. Let's now take the final question, please.

Operator

We'll now take the next question from Knut Woller of Baader Bank. Please go ahead.

Knut Woller -- Baader Bank AG -- Analyst

Yeah, hi. Thank you for taking my question. It's actually one. Christian, you spend a lot of your efforts on the integration of the products, probably something that has not been in focus of SAP under previous leadership. So can you give us a feeling about, you mentioned increasing customer satisfaction. What's -- how that impacts your expectations regarding the whole migration cycle to S/4HANA and which percentage of your customer base are you expecting to have migrated until 2027 when the standard maintenance scheme of extent maintenance runs out?

Christian Klein -- Chief Executive Officer

Yeah. Thanks. Thanks a lot for the question. I guess, it always helps when you have been yourself in the shoes of a Chief Operating Officer and when you had IT under your leadership, because then you really feel, you know the need for having really an integrated solution landscape. And as I said earlier on, we are almost done. Our core applications now speak the same language. So they are not only transferring data technically from left to right. And we've said, of course, you know what comes with it, the cross-sell opportunities. It was mentioned before. We have still thousands of customers you know wanting line of business solutions on-prem. And with that now, we of course also will bundle our -- we can bundle our solutions much better.

But compared to on-prem the customers have choice, they can go into a modular landscape, highly standardize and build the extensions then, you know next to our core applications on our cloud platform. And this is for me, of course, something what we have factored into the plan, but of course is a huge benefit for our customer that this is, you know what SAP does for many, many years. We are back and we are now of course also innovating.

Let's also not forget. We talk so much about integration. Sometimes I also feel 15% of our development capacity is actually focused on integration. So there is 85% left. Yes, we are doing localization. We are going to support our customers. No matter if there is a Brexit out there for us. we do that as well, but I guess, there is also a lot of capacity left for building new innovations every day and this is what we are going to do. And I'm really looking forward to also highlight everything what we do along there, because this is a lot.

Stefan Gruber -- Head of Investor Relations

Okay. Thanks a lot. This concludes our Q4 2020 earnings call. Thanks a lot for participating, and I would say goodbye.

Christian Klein -- Chief Executive Officer

Thank you. Thanks a lot. Take care. Bye-bye.

Duration: 67 minutes

Call participants:

Stefan Gruber -- Head of Investor Relations

Christian Klein -- Chief Executive Officer

Luka Mucic -- Chief Financial Officer

Scott Russell -- Head of Customer Success Organization

James Goodman -- Barclays Capital -- Analyst

Charles Brennan -- Credit Suisse Securities (USA) LLC -- Analyst

Stefan Slowinski -- Exane BNP Paribas -- Analyst

Philipp Winslow -- Wells Fargo Securities, LLC -- Analyst

Julian Serafini -- Jefferies -- Analyst

Mohammed Moawalla -- Goldman Sachs International -- Analyst

Michael Briest -- UBS Limited -- Analyst

Adam Wood -- Morgan Stanley & Co. International Limited -- Analyst

Knut Woller -- Baader Bank AG -- Analyst

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