Financial Data and Key Metrics - Current cloud backlog increased by 29% to EUR15.4 billion, driven almost entirely organically [5] - Cloud revenue growth accelerated to 27%, reaching EUR4.4 billion, with Cloud ERP Suite growing 36% to EUR3.6 billion [5] - Operating profit increased by 28% to EUR2.2 billion, with an operating margin of 26.5% [5] - Total revenue grew by 10% year-over-year to EUR8.5 billion, primarily driven by cloud revenue strength [18] - Free cash flow increased by 44% to EUR1.2 billion in Q3, with a 47% increase to EUR5 billion for the first nine months [21] Business Line Performance - Cloud ERP Suite was the main driver of growth, accounting for 84% of total cloud revenue [18] - 30% of cloud order entry in Q3 included AI use cases, with strong uptake in sourcing, supply chain, and manufacturing [4][26] - The company completed the acquisition of WalkMe, which contributed EUR14 million to cloud revenue in Q3 [18][42] Regional Performance - Cloud revenue performance was particularly strong in APJ and EMEA, with robust growth in the Americas [20] - Key markets such as Brazil, Chile, Germany, Italy, India, Japan, and Spain showed outstanding cloud revenue growth [20] Strategy and Industry Competition - The company is focusing on its "land and expand" strategy, with a strong emphasis on adoption and consumption [10] - SAP is leveraging its AI strategy, with over 100 AI use cases embedded across its solutions and significant growth in GenAI hub consumption [13] - The company is restructuring its go-to-market model to improve productivity and sales efficiency, with a focus on empowering its partner ecosystem [10][11] Management Commentary on Operating Environment and Future Outlook - Management expressed confidence in the company's resilience and strategic execution, despite macroeconomic challenges [22] - The company raised its 2024 outlook, expecting an operating profit of EUR7.8 to EUR8 billion, and remains on track for its 2025 financial goals [15][21] - Management highlighted strong demand for cloud solutions, particularly from large enterprises, and expects continued double-digit revenue and operating profit growth [15][22] Other Important Information - The company announced a major upgrade to its digital copilot, Joule, which now includes collaborative AI agents and over 500 skills [12] - SAP introduced the SAP Knowledge Graph, which leverages decades of business process knowledge to enhance GenAI capabilities [14] Q&A Session Summary Question: Large deals contribution and demand environment [24] - Large deals exceeding EUR5 million accounted for over 60% of cloud order entry, reflecting strong momentum from the installed base [24] - Management noted that macroeconomic challenges persist, but demand for cloud ERP solutions remains strong, particularly in Germany [25] Question: AI use cases and pricing [24][26] - 30% of deals included AI use cases, with upside potential in sourcing, supply chain, and manufacturing [26] - AI-driven deals are bundled with premium offerings like RISE and GROW, providing value to customers and growth opportunities for SAP [26] Question: Management changes and reorganization risks [29] - Management changes are part of the company's ongoing restructuring, with a focus on improving productivity and sales efficiency [29] - The company is confident in its ability to execute its strategy and close deals in Q4, despite the reorganization [34] Question: Free cash flow drivers [30] - Free cash flow growth in Q3 was primarily due to increased profitability and lower tax payments, with some phasing effects [41] Question: Cloud ERP Suite growth drivers [36] - Growth in Cloud ERP Suite was driven by large customer migrations to RISE, strong net new customer acquisition, and platform extensions [37] Question: Gross margin outlook [36] - Cloud gross margin improved by 0.6 percentage points to 73.7%, with further expansion expected in 2025 due to operational efficiencies and scale [39][40] Question: US federal business and investigations [45] - The US federal business is a small fraction of total revenue, and recent investigations are unrelated to SAP's case from 2022 [46][48] Question: Cross-sell and upsell opportunities [51] - The company sees significant cross-sell and upsell potential in its installed base, particularly in HR, finance, and supply chain [52] Question: Support revenue trends [64] - Support revenue declined by 2% in Q3, with a gradual decline expected as more customers migrate to the cloud [65] Question: Q4 cost and operating profit outlook [64] - Q4 operating profit guidance is conservative due to phasing effects in software revenue, employee bonuses, and WalkMe integration costs [68] Question: Backlog growth and go-to-market changes [71] - Backlog growth of 29% was largely driven by the inclusion of WalkMe, with organic growth remaining flat [72] - Go-to-market changes, including partner ecosystem expansion and cross-sell incentives, will be implemented starting January 2025 [73][74]
SAP(SAP) - 2024 Q3 - Earnings Call Transcript