Q3 2022 SAP SE Earnings Call
Hello, and welcome to the SAP <unk> third quarter earnings Court.
Our customers' request this conference will be recorded.
Maybe I will hand, you over to Mr. Anthony collector, Chief Investor Relations Officer, the largest U S.
Good morning, everyone and thanks, Paul joining us today.
With me on the call are so you'll get some client CFO Luca <unk> head of customer success.
On this call we will discuss it would be sub quarter results of 2022.
You can find the decks implementing today's call as well as our quarterly statement on our Investor Relations website.
In this call will make forward looking statements, which are predictions projections or the pigment about future events.
These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ.
Additional information regarding these risks and uncertainties maybe found in our filings with the Securities and Exchange Commission.
Including but not limited to the risk factors section of <unk> annual report on form 20-F for 2020.
Unless otherwise stated all numbers on this call, our Minneapolis and graduate and percentage point changes are my knife right, yeah, but yeah. Some glitches.
So 95 financial measures, we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IRS.
And with that I'd like to turn over to Christian.
Yeah. Thank you Anthony and thanks to all of you for spending time with us today.
Businesses are.
Dealing with the combination of profound challenges, including inflation labor and NFC shortages and disrupted supply chain.
Despite these challenges I've always felt that month weight, the well went up almost try to cheat. During this volatile time and reflect how sap's uniquely positioned to help our customers become stronger for the future.
The hall of technology is clear.
S. A piece illusions directly helping our customers address their most pressing needs.
Whether that means redesigning or automating their business processes.
Helping them with supply chain resiliency are stepping up to meet their sustainability goals and you regulations.
And I'll just point to the growing <unk> for strategic ERP implementation and that S&P should benefit from our wall. That's a mission critical partner in these challenging times.
Let's take a look at our top line numbers.
We still live up and not a strong quarter in Q suite.
We have seen accelerating momentum across all our key cloud indicators with cloud why wouldn't you know grip defending our largest revenue stream for two sequential quarters.
Cloud revenue was up 25% coupon cloud backlog grew by 26% and now exceeds 11 billion euros.
It's a P F honor quotes accelerates once again with current cloud backlog growing at 90% now at $2 7 billion.
As far as our cloud revenue is calling at 81%.
We are clearly expanding our leadership in ERP with net new customers once again, representing nearly 60% of our new <unk> deals in Q suite.
To get a nearly 800 go lives.
The S&P business technology platform has become the foundation for our customers business transformation.
The platform offers different trading data and application services, which customers and partners use to integrate the S&P and non SAP system landscapes on top of this customers are able to develop their own custom apps alongside the S&P apps and benefit from process automation across the integrated.
Inscape.
This leads to a powerful flywheel effect from the S&P business technology platform, which now has a one weight exceeding $1 5 billion euros contributing to overall Pos cloud revenue growth of 44% in Q3.
Hello Wise with S&P openly is the easiest and most flexible way for customers to take advantage of our portfolio.
It has amended its place as the preferred choice for customers as they move their ERP to the cloud.
Why is with ACP includes the technology support and best practices to help customers redesign how their companies want.
We are seeing strong year over year take up since we introduced our rights offering at the beginning of 2021.
Overall, there are nearly 2500 customers wanting and over 100, S&P and partner data center at the wound the globe, who have selected Weiss with S&P to transform their business processes and it landscapes. This also reflects the increasing demand for independent government cloud solutions.
S P.
Why it's also continues to be equate mechanism for cross sell and upsell with more than 80% of wide customer deciding for our business technology platform and 86% of wise also including additional cloud solutions.
Let me give you some examples of this strong customer momentum.
In Q3, <unk> wins included Prada, FICO, the BBC and Schneider electric.
Nevada, one of the most recognizable players in the luxury industry have selected Weiss with S&P.
To further accelerate their digital transformation and improve outcomes and efficiency from their global network of 635 stores.
This expansion includes SVP of EBA, and NTP seek value, enabling them to analyze and transform business processes.
He co op, Japan have selected Weiss with S&P to accelerate that transformation into a digital services company. This will accelerate standardization and efficiency improvements of their production and service parts management operations.
And used car product process automation to automate internal business processes.
Schneider electric.
Local leader in the digital transformation of energy management and automation selected.
As for her in a public cloud so standardized end to end operations across finance manufacturing and logistics based on proven industry best practices.
Following a comprehensive review the BPC has selected <unk> cloud as the foundation for its future ATP and partner platform.
Moving to PTP in Germany.
Of a pandemic vaccines, if using the S&P business technology platform <unk>.
Technical Foundation, especially given the crucial importance of data protection and security.
We are proud to host a complete vaccine distribution system and our German data center.
Our sustainability solutions continue to take on increasing importance for our customers as they navigate the energy crisis and aligned with new regulations.
Our customers need to record a pot and act.
And that's the value our solutions provide this.
This will become increasingly important as new SEC and EU regulations take effect.
<unk>, one of Europe's leading and most efficient producers of steel selected portfolio of S&P sustainability solutions to gain insights into their environmental data and through a safe and sustainable operations and take actionable steps toward sustainable business performance.
In Q3 take a park.
World's leading food processing and packaging solutions company started their adoption of SVP responsible design and production, helping them comply with the UK plastic packaging tax regulations.
We have also seen important wins across our lines of business solutions, including many competitive win against <unk> and workday with SAP Successfactors.
Ship whole, Netherlands, that's airport for European and Intercontinental flights, who chose SAP Successfactors <unk> as part of that strategy to in source that HR data and processes back to ship hold.
Deutsche Bomb Shankar the global logistics provider part of Deutsche Bahn chose SAP, successfactors or both workday and I'll let.
They will be providing an enhanced employee experience with harmonize data improved self service offerings and talent management solutions.
Our intelligent spend in business network is benefiting from a return to business travel combined with the increased focus on managing costs with cloud revenue growth in the mid teens.
Pennsylvania State University in the U S has been using S&P concur solutions for more than 15 years.
They expanded now our partnership in Q3.
Just on the increase in student faculty and administrators travel.
More than ever customers need to be able to easily adapt and automate the end to end business processes and at the same time monitor analyze and understand the data flowing through the system.
This reality is behind our new SVP seeking RVO quote market, which nearly doubled in cloud revenues since Q3 last year.
As an example, cognizant the U S professional services organization has chosen <unk> to help its customers indentified process inefficiencies and defined improvement.
Let me now conclude with some comments about our outlook for the rest of the year and beyond.
Yeah.
Our financial outlook for 2022 remains on track both for the top and bottom line.
Overall, our strong cloud momentum has offset the topline impact from exiting Russia on.
On the bottom line, we anticipate meeting the guidance, we provided last quarter.
We are expecting our largest Q4 on workhorse for overall order entry and new cloud business.
Sap's cloud transformation has reached a tipping point.
And we are at an important inflection point for the company.
After beginning our transformation two years ago.
We feel very positive about the resilience, we have built into our future business.
Predictable revenue now accounts for 80% of revenue up from 72% in 2020, the starting point of our cloud transformation.
Despite the macro challenges, we see strong demand.
Our SaaS portfolio is especially relevant during these times and we anticipate that the flywheel effect of our business technology platform together with our partner ecosystem will power strong cloud consumption.
We are also excited about our innovation pipeline and we look forward to announcing new innovations at our annual <unk> event in November .
As we mentioned last quarter, we are continuing to simplify and consolidate our portfolio to focus on high quality solution, which may also be complemented by potential future acquisition to strengthen our core.
As such we remain committed to deliver our 2023 commitments, including double digit operating profit growth in 2020 suite.
We are also very confident in delivering our 2025 midterm ambitions.
Thank you again for joining us today Luka over to you to cover our results as always in more detail.
Thanks, a lot Christian yes, indeed, we have again delivered a strong cloud quarter. Despite the continued macro headwinds Christian just talked about some of the business highlights and I think it's becoming very clear from the S&P solutions are directly helping our customers in their digital transformation journeys.
The third quarter was highlighted by cloud revenue growth of 25% to $3 3 billion euros. Likewise current cloud backlog growth continued its upward trajectory driven by strong growth across our SaaS and paas portfolio.
Large cloud transactions with volume greater than 5 million euros contributed again more than 40% to our cloud order entry.
Now, let me dive into some more details around our financial highlights starting with the topline where current cloud backlog is now at 11 3 billion accelerating its growth to 26%.
Growth here was strong across our solution portfolio with all main solutions, except our infrastructure business, achieving double digit growth rates.
Similar to last quarter the war in the Crane had a dampening impact of approximately one percentage point on that growth rate.
As for our current cloud backlog growth accelerated to 90%.
Driven by the strong adoption of rise with S&P.
In Q3 alone we added more than 400 million euros. Our S. Four on our current cloud backlog, leading to a total of $2 7 billion euros.
For cloud revenue, our combined <unk> and Pos portfolio continued to grow an impressive 28%.
With SaaS cloud revenue up 26% and Pos cloud revenue up 44%.
Driven by this cloud performance and augmented by double digit growth in services revenue total revenue was up 5%.
Now, let's take a brief look at our original performance, where cloud revenue growth was very strong across all regions.
<unk> increased by 26% EMEA, 23%.
P J by 27%.
The U S and Germany had an outstanding cloud revenue performance, while Brazil, China, India, and Switzerland were all particularly strong.
Now moving onto the bottom line.
I am really proud to say that all of our main business models cloud software licenses and support as well as services increased their gross margins in the quarter.
Our cloud gross margin expanded to eight percentage points to 71, 7%, marking the third consecutive quarter of year over year increase.
This was driven by a strong increase of the Fas margin with efficiency.
<unk> gains Overcompensating increased investments into the next generation cloud delivery program.
The improvement of the cloud gross margin also contributed nicely to our cloud gross profit growth of 30%.
Non <unk> operating profit came in at $2 1 billion euros, reflecting an 8% decline this.
This was mainly driven by a reduced contribution from software licenses revenue and accelerated investments into research and development and sales and marketing to capture current and future growth opportunities.
In addition, let me remind you of the prior year third quarter results included a disposal gain of 77 million euros related to the S&P five only a divestiture.
Yeah.
Let me now turn to EPS, Texas and cash flow.
Earnings per share was down 36% to one euro and 12 cents, mainly resulting from the decrease in operating profit.
And more solar a pronounced decline in finance income, which was driven by valuation adjustments in the Sapphire ventures investment portfolio, reflecting broader market conditions.
<unk> effective tax rate in the quarter was 35, 7% in the non <unk> tax rate was 26%.
Year over year increase mainly resulted from changes in tax exempt income again, primarily driven by the aforementioned valuation adjustments.
The current volatility in capital markets also leads to a lower level of predictability regarding the effective tax rate outlook.
Based on current estimates, we now expect the full year 2022 effective tax rate for <unk> of around 45%, which was previously 34% to 38% and four non Io for us of around 30% previously 23% to 27%.
As to further developments strongly depends on the 2022 financial income contribution of Sapphire ventures, we may face major deviations in either direction given current market conditions.
Free cash flow for the first nine months came in at $2 5 billion.
The year over year decline was attributable to the development of profitability and adverse impacts in working capital.
In the fourth quarter, we continue to expect a more favorable cash flow development due to our focus on working capital management and lower payouts for cash taxes share based compensation and Capex. However, based on our year to date position, we are adjusting our free cash flow outlook for the year slightly to approximately.
$4 5 billion.
As Christian already mentioned all other parameters of our outlook remain unchanged.
In terms of our nonfinancial targets, our greenhouse gas emissions, where 25 kilo tons in the quarter due to catch up effects business travel as COVID-19 restrictions receded.
As a consequence, we will increase our 2022 carbon emissions outlook to a range of 90% to 95 kilo tons down from 110 kilo tons in 2021.
Reflecting year to date customer survey results. We are also adjusting our net promoter score outlook range from plus three to plus 8%.
Finally, let me just briefly share that we have made great progress with our acquired <unk>, adding to our core capabilities and providing our customers and their suppliers with access to liquidity and improving cash flows.
This is obviously critical especially in the current economic climate to help avoid supply chain disruptions.
<unk> has signed a number of key clients such as toll Asia, and Toparch Lloyd AGM and established a new strategic bank partnership with standard chartered Bank.
Further to this Toyota has also signed an agreement with Mastercard to provide embedded payment capabilities by integrating with the Mastercard virtual card platform.
So in summary, Q3 proved to be another solid quarter highlighted by growth in current cloud backlog and strong cloud revenue performance.
Customers continue to prioritize digital transformation and they put their trust in SAP to guide them on their journeys.
Even with the challenges that we're seeing in the world today, we are confident in the opportunity ahead.
We are as Christiane is set at an important inflection point in our transformation roadmap, which we expect to lead to accelerating revenue and double digit operating profit growth in 2023.
Thank you very much and we will now be happy to take your questions.
Alright. Thank you operator, please open the line.
Yes.
Yes.
I'll begin.
<unk> and answer session. If you would like to ask a question. Please press star one on you touched on the telephone.
The operator will announce your name when switching to ask the question in case you wish to cancel your question. Please press star two.
First question is coming by.
Michael <unk> from UBS Your line is open.
Yes. Thank you.
Good afternoon and congratulations.
Two if I may.
Christian I think on the last call you said that the timing that you would probably revisit the 2025 plan would be early next year. So basically after the Q4 results I think will dominate not arriving until March does that change your thinking about when you might come back to those plans.
And then secondly, just in terms of the visibility.
<unk> you have on the right customers.
Really great to see the current cloud backlog growing as quickly as it is but you mentioned two and a half thousand customers arise could you maybe say what book maintenance that represents that might converge. Even if it is awfully contracted over the next three or four years, perhaps just give us a sense of visibility beyond the current backlog. Thank you.
Yes, Thanks Paul.
For the question Michael I would start and then Luca you can build on the maintenance on the conversion factors which were.
Better than ever before this quarter, but Luca can share more details on that look on.
And the first part of the question with regard to the midterm guidance. We are now entering in Q4 and.
Scott who is sitting next to me and team have to deliver big quarter pipeline is looking very good but I would like to also ask you for some patients to let us deliver this quarter and now hopefully successful quarter for S&P. It's looking very good on the cloud and then you also have alluded to Michael to the current cloud.
That gives us of course also very high confidence.
That week.
Also achieved or even overachieve, our midterm guidance 2025, we also in the middle of a CFO transition.
And Luca myself and Dominique will also touch base and really decide short term when we are going to update our mid term guidance 2025. So it's not so much out there, but please hang on and let us deliver another strong Q4, and then we will also update it sooner than later once our midterm guidance for 2025.
Luca Thanks, a lot Michael for the question actually on the on the rise related conversions.
In fact, those have never been more favorable.
Actually really pleased with this so for the first time, we have actually seen a conversion factor that was more than <unk>. So this is extremely healthy.
We will.
Luiz really a very digestible low triple digit million amount of some maintenance in 2022 and it will convert at much higher rates as part of the rice transaction why is that.
Not only because of the value of the solution is understood, but as Christian has said, we see an ever increasing share of cross sell and upsell along with rice.
Almost 90% of the rice transaction set of additional solution areas attached to them and that is the reason why the conversion sectors continued to develop very favorably.
Yeah.
Thank you, but presumably the rise contracting year, one potentially amongst smaller.
At the end of the state that these are very large customers can you give any sense on how much bigger over time.
The existing book of business.
Yes, it's Scott here, Michael So maybe I can I can talk to that I think Luca mentioned at the beginning there are over 40% of our.
There are deals where.
Over 5 million Euro most of those are three to five year contracts and on a multiyear basis and as you rightly point out they often have a low ranked in the first year and then accelerate as the transition and as they are able to adopt not R&D rise, but associated solutions. So you can expect that with a larger proportion of larger.
<unk>.
On a multiyear basis that that would increase in the outer years.
In terms of not only the backlog, but ultimately.
<unk> cloud revenues for S&P and great solutions for our customers and perhaps just the last comment on this I mean in the last.
I would say one year plus we have seen that our growth in total order entry as a result of the introduction of rise as always been exceeding our growth in annualized order entry by <unk>.
More than 10% every quarter and that is of course.
Adding to the predictability of results.
And one of the reasons why you have seen the current cloud backlog even on a.
Ever growing number continuing.
To grow fast.
Thank you very much.
Thanks, Michael we'll take the next question.
Mr. Adam Wood from Stanley Morgan anywhere you are.
Question. Please.
Hi, Christian Thanks for taking the question and congrats from me as well on a very good quarter.
I've also got two please the first one is just I get a lot of questions from investors around the risks on the macro and I guess, the biggest issue and challenge for you going into Q4 as the licenses we will let it come down a loss is still quite a big number that you need to close in the fourth quarter could you just talk a little bit about pipeline going in and then the correlation between licenses in that base.
We see a kind of minus 25 session licenses would that get you to the upper end of the EBIT range would be kind of minus 40 that we've seen this quarter to get you to the Boston or is that kind of the way we should be thinking about it.
And then maybe secondly, Christian you've talked about <unk>.
Quite a few times on the call.
I Wonder if you could just talk a little bit about the <unk>.
Competition, you face in that market, when we think about automating business processes.
Send us people like service now.
Best of breed RPI lenders could you talk a little bit about what customers are doing and how it positions in those markets face. Thank you yeah. Thanks, a lot Adam for the question. If you allow me I would like to start with.
Second question first and then together we can also answer the question around macro and pipeline for Q4 look on <unk>.
First of all.
<unk> was probably one of the most strategic acquisitions, we ever did because why is this not a lift and shift wise, it's about business transformation. It's about business process automation and we are seeing this to the question earlier on for Michael.
Is not a lift and shift customers are now start adopting we see huge consumption also especially after the first six months when customers did the redesign did the bolsa standardization and they're seeking our view it was actually the missing pillar in our portfolio.
Compared to other players there is no data that you don't want to replicate very sensitive data from one system to another when you were talking about financial logistics production or HR data on the future. When we have built integration answer to our CX portfolio.
On top of.
<unk>, we're going to do an announcement.
One announced deal the Thunder of the team.
What will clearly differentiate S&P in this market is that you don't need to deal with a lot of best of breed solutions to analyze.
<unk> actually benchmark, and then automate and configure business Paul says.
So the business process automation layer will be delivered by S&P out of the box. Our engineering teams put a lot of work into that technical wise, but also content wise and with the business technology platform, where the data layers, that's where all the other services offsetting the combination of these assets is.
Not something what others can easily match.
To the first part of the question.
Macro.
Of course, I mean, Adam.
These times are challenging for every customer in almost every industry.
But why is the business case for S&P, and especially on the cloud side stacking so much off first of all.
It's about digital transformation business transformation. So for example, we talked to you about clean energy in Germany energy crisis.
Neat new software.
For to deliver to transport to put to use clean energy and that technology plays a crucial role in ERP and supply chain solution and that can be replicated to many many more industries second the supply chain. This business network is not just a vision. It's there they have millions of suppliers, which we cannot.
Act two by Us and built Cillian supply chain across the globe. It was a major close driver also now in Q3 and last but not least sustainability and this is also important part of the business case, not only on a standalone basis. When we are building a business case for <unk>. It has a business transformation.
I mentioned it has a cost.
Cost efficiency by mentioned, but it also has the sustainability ESG dimensions. So while we are making good business in the meantime, with our sustainability portfolio. It's also a level to justify the business case for our core applications.
And of course, it's a different game. If you look at software Capex and if you look into cloud, but for both elements, we see actually of course for the cloud a much better pipeline, but with that Scott. Maybe you can also share some more details around how is the pipeline looking in both businesses actually for the quarter, Yes, sure happy to Christian.
Let me try to use the <unk>.
Keep it pretty simple first of all from a pipeline perspective, whilst the macroeconomic conditions continue to be considered across the world our pipeline on our core solutions that address the CFO and how they need to help companies navigate this.
These uncertain times have increased significantly that gives us confidence not only in rise with S&P, but when you consider the spend management portfolio managing your procurement expenses you travel expense your operating expense managing your working capital. These core assets are in higher demand.
In helping businesses to navigate secondly, we're seeing actually an acceleration to the adoption kristian mentioned because speed to consumption and using these solutions is helping us on those multi year agreements that.
Christian mentioned in terms of enabling and consuming that capability and then last but not least is.
The impact that that has we did see obviously the continuation in software.
To the negative 40% or thereabout that was indicated.
The reality is the market continues to look for its capability in the cloud for Mississippi and as a result, we don't see the same pipeline on the software side, but the good news is it's a one not only to our strategy, but the strategy of being able to adopt and consume innovation at.
At all times in the cloud. So it provides a long term capability not just a short term.
Addressing the current business needs and maybe Luca you can talk about the P&L, let me translate this into the P&L. So I think you can take from Chris Johnson Scott's comments.
We are extremely confident about the underlying momentum of our cloud business.
Business and also our order entry protection.
Going into Q4 now as far as it relates to our cloud business in terms of current cloud backlog in cloud revenue.
Nickel aspects that I need to quickly allude to one is that we expect now in Q4 to complete the divestiture of litmus and on top of that we will see the anniversary of the acquisition of.
Clara Bridge that Quadrex performed in Q4 of last year.
So those two effects together will have a dampening effect on growth of round about one and a half percentage points.
On top of what we have been dealing with already.
With the impact of the bar in Ukraine, and so on so from a prudent perspective, I think it's fair to assume that we will therefore likely see a slightly lower growth rate on both of those metrics in Q4.
But the underlying momentum is tremendous and certainly it gives us incredible scope and visibility into continued further strong growth in 2023 as well when it comes to software licenses as Scott has said, we don't expect the turnaround.
Going to be our biggest quarter also for software licenses that's for sure.
But in our planning we are actually assuming that we will see a similar performance of software licenses in Q4, as we have seen it in Q3 and actually throughout the entire year and that means if that is the ultimate outcome that we would rather expect to arrive at the lower end.
Of our combined cloud and software revenue guidance at constant currencies of cost currency will be a significant help then on a nominal level.
And ultimately on the EBIT line given also the strength in the cloud profits that we're generating we actually confident that Q4 will see finally, a turnaround and a return to positive operating profit growth, we would expect on a nominal level.
<unk> somewhere at or above.
Single digit growth with a flattish development.
Constant currency basis, and then as we move into 2023, clearly our commitment to double digit growth stance and actually you wouldn't need to wait for that.
Because obviously in half year, one our profit performance was worse than what we expect in half year. Two so the seasonality will lead to us starting to fulfill that commitment already in the first quarter.
Hope that's helpful.
Thank you for the detailed answer thank you.
And we'll take the next question please.
Let's turn to James Goodman from Barclays. Your line is Europe .
That's great. Thank you and good afternoon.
A couple for me, please as well firstly and clearly extremely strong on the S. Four cloud backlog at 90% I think it was I said double digit in all the main other product areas I just wondered if we could focus in on these for a second I calculate something like low teens.
Constant FX growth rate in the backlog for the excess for portfolio.
So could you add <unk> to the sort of growth rate in that business versus the 2025 plan I think we originally looking for more of a high teens growth rate in those lines of business assets. Thank you.
And then the second question.
Just a follow up really on the cost development as it relates to EBIT I was a little surprised just to see the head count tick up this quarter I think by more than than we've seen in a few years for Q3.
Can you talk about where the head count is going from here I know you've been doing some restructuring cost containment as well. Thank you.
Yeah. So thanks, a lot James for the question Luca can take the question on head count.
To your first part of the question I guess, it's important to mention that when you look at wise.
And when customers starting the journey, it's not only about Esfahan finance I mean this is some movement.
When we then in.
Talking about the business priorities of the customer and when it's about higher to retire employee experience.
We're replacing.
Old HCM on premise Montreal, all we are going into a repo, sometimes even if customers didn't get have it in place. There also that even land towards net new customers with wise and you have seen our high net new customers and not only <unk>, but also in other lines of.
Yes.
The most important impact for us out of wise.
It's not even only as for Hana, it's about the business technology platform, because what we are seeing days.
Standardizing ERP building side by side, New applications will drive massive consumption for Asap and now that there is the whole application logic on the platform.
Hi developer productivity on the platform, we are seeing not only customers doing this we are seeing now our ecosystem moving with US we had last week, our partner connect and the number one topic most of business technology platform and how great. It is in the meantime for developers to building on that platform and Thats.
Very very important because lift that comes out of the standardization and with that comes not only the move to the private cloud, but also to the public cloud, which then leads also to the cost margin performance, we have seen this quarter.
Just a few more effects first of all.
As far as not the only solution in our portfolio that enjoys very high current cloud backlog growth rates.
Just add sick Navios Christiane has alluded to this already the business technology platform extremely strong also in the current cloud backlog <unk> seen their numbers. They also have a very strong result, so there are actually.
Mainly our infrastructure as a service business that is dragging the CCP down and Thats, absolutely intended as such because of the driving the de emphasis of this business and the transformation towards rise so infrastructure as a service is a 3% drag on the CCP.
Sure.
The other solution that used to be a drag concur is actually recovering very nicely, they're only representing this quarter, a 1% drag on the CCP growth and actually on the transactional revenue side. They are already showing very high growth in the high double digits, so that business will definitely exceeds.
Pre pandemic state next year as we had projected so we have a lot of very healthy gross and.
The other large solutions like intelligent spend is operating at the mid teens level.
Indicated from a head count perspective, yes, we are.
Significantly more incremental heads in Q3 than in Q2, but they were not hired unnecessarily in the sense in terms of initiated hiring in Q3, that's a spillover effect.
From deferred hiring that was initiated in Q2 as of July .
<unk> established a very restrictive incremental hiring practices. So that means that in Q4 and also going into next year, you should not expect incremental growth in the total head count, but we're hopefully high up in a very disciplined sense basically almost entirely into roles research and development and in sales and market.
<unk> again, because we are confident about our growth opportunities next year, and we are frontloaded hiring to be ready and productive as we start the new year and in engineering.
<unk> see great scope to further extend the innovation leadership of SAP in our core categories and we continue to invest in this but with this addition, we are now at the run rates that we believe is.
Both healthy and necessary, but also sufficient to go into the next deal.
Okay. Thank you guys.
Thank you James and from now on we will.
You got to ask only one question and we'll take the next one please.
Next question, Mr. Phil Winslow from Credit Suisse Securities.
Great. Thanks for taking my question and congrats on another strong quarter Christian obviously, I think there's a very broad product portfolio and you named a lot of wins across different different segments financials supply chain HCM and when I talk about some of these some of these these are.
Pretty significant transformation projects implementation cycles.
But my question to you is obviously customers continue to spend and buy from S&P. On these what are you hearing from some of those verticals that maybe a little bit more cyclical you know call. It discrete manufacturing CPG you know why they continue to go through these projects and in and been on a Saturday right now despite the macro uncertainty.
Yeah.
Good question and.
Let me highlight maybe one customer.
Really proud about this quarter, which Scott.
Scott and team closed I mentioned Schneider electric and what I mentioned there is that we did it we.
We did a fit to stand out with Schneider electric they had clear expectations with regard to policy automation and really efficiencies in the business. We went down five levels designed to operate hire to retire quote to cash all the financial business processes, and we came out with.
Fit for over 30 factories for the end to end operations and this is what we're now doing step by step and we have modulus, where they can also see along that journey with why small every quarter business benefits on the automation side on the business model change and we also Korean awaiting on sustainability.
And that customer is probably accurately reflected very well our strategy is the best of suite in a different way than in the past.
Because it <unk> take much less time now and this is actually a good reference for many many other customers we are closing and working with under the umbrella of life.
And with regard to the.
The portfolio of course, there is not a lack of market which is.
Good on the one hand side, but you also have seen little more you'll also have seen fire.
So we are taking also very serious steps to keep the focus and to invest where it really matters, where we see high close where we see the mission critical business processes, where we can differentiate and this is of course, something but we also take very serious.
Excellent keep up there.
Good morning.
Yeah.
Thanks, Phil.
Next question please.
Next question is coming from Charles Brennan from Jefferies, Jim BH.
Perfect. Thanks, so much I will keep this very brief.
Christian in your prepared remarks, you called out the possibility of M&A.
Are you flagging up the chance you do something a little bit bigger than a bolt on.
And then in the current market, there's a little bit more focused on profitability.
Can you confirm that the double digit profit growth is going to be on a constant currency and organic basis.
Yeah for sure and look at and talk about that.
I'm not sure if I wanted to flag something that look.
Actually the way how we also manage our portfolio.
And also together with the teams on the ground is we're always looking and build partner or buy and this is what we're doing every quarter and look we know that from my perspective for great shop, and with its use the technical depth of our portfolio by a lot you'll see this in the cloud cost Martin.
And this will elevate even into next year.
So we are doing our homework there.
And but it's of course also a good position to be in to look at white spots of our portfolio. We are very happy with partnerships like we do with ISO tests. So it doesn't need to always be an expectation.
But of course, when we see white spots and our customers are telling us.
This is high value this should come integrated.
In a very strong wage would come out of the box with S&P also leading on the go to market I would never rule out.
Also the acquisition, but the good piece is also that it's not an urgent need now to buy weapons, we only do it if we see the value for our customers and I can keep my answer very short, yes, our profit commitment for 'twenty to 'twenty three is on a constant currency basis and organic.
Okay.
Yes.
This is Toby Ogg from Jpmorgan.
Question. Please.
Yeah.
Beef remains not too.
On mute yourself.
Now onto your retina.
Hey, Yeah, Hi, Krishna Luca.
Thank you for taking the questions I just wanted to touch on the development of EBIT into the fourth quarter now clearly we touched on the license aspect.
To consider but there is obviously the disposal is the easier comparable EBIT from Q4 'twenty. One now Luca you've just said you expect mid single digit on a nominal basis and flat in constant currency could you just walk us through the specific building blocks that gives you the confidence in the ability to achieve that level of growth in the fourth quarter.
Thank you.
Yeah, well first of all.
I have no other reference point for the development of nominal versus constant currency growth rates than what we are observing today. So that's all that I can say about this I don't think that in the short term the euro bounced massively back but of course I don't have a crystal ball about that so I can.
And only concentrate on what we are focused on what we are.
<unk> is continuing to drive a very healthy high renewal low churn recurring revenue business with our support revenues, which are very resilient with cloud, which has been very resilient with the services business that is doing very well as actually increased its margins.
Year over year. Despite the fact that it's probably already the highest margin services business that you can find in our industry. So we will continue to be focused on that and then on the expense front look we are getting to the final stretch of our cloud delivery harmonization program I think you've seen the progress that we've made on the cloud.
<unk> side.
In Q4, we will have a lost water of similarly significant investment as we have seen it in the last two quarters or.
So of course.
We will have to account for that but on the flip side, we see that the efficiency gains in the cloud are actually.
Already now higher let alone what we will see next year. Once the program is finished.
So that is actually not going to be a direct but in.
In the cloud I think we have a very.
Stable and strong profit performance and then we have what we are focused since July actually on a significant.
Spence measures to make sure that we don't have any discretionary spend that is not absolutely necessary happening in the organization I'm hosting weekly spend countless meetings that our favorite beta.
And the curriculum probably for our senior leaders.
Well Im scrutinizing personally every expense above 500, K, we're doing the same at the port area level with my colleagues <unk> controlling offers us. So we will make sure that those discretionary expenses stay in check and as I've said, we've close the doors essentially for incremental high.
So we will keep also head count growth in check and that in combination with the resilience and recurring revenues.
Should allow us to counter the impact from declining software licenses and deliver to our ambitions.
Great. Thank you.
Thank you Toby we'll take the next question.
Yeah.
Next question is from.
<unk> from Bank of America.
Hey, good afternoon I'll keep it brief can you give us an update on your.
Catch on your adoption of AR.
Cloud solution on U S on a base and she can share a bit of an update on where the take up is in terms of private versus public go lives.
And what you can see in terms of margin differential between the two solutions. Thank you.
Look I can start and then the team can build on it.
So so first.
As for Hana in the cloud extremely high retention rates youre not shifting around ERP.
A very sticky business.
Specially then when Youre building side by side, new extensions on the platform. It becomes also an extremely sticky business together with the business technology platform second.
On the adoption.
Hi adoption on therefore on a public cloud assume that many many of our net new customers Greenfield go immediately to us on a public cloud even some large enterprises now like Schneider electric decided to go to the public cloud.
Of course, it's a longer journey, sometimes because standardizing business processes changing business models, it's not something what you do easily asset on the customer side and the churn is take.
Sometimes also of one to two year, but in on this journey, we are replacing the old stack also with public cloud solutions. So you are seeing also immediate business well your debt. So while of course, such a transition can take time.
Modular architecture I'm, Ken Mahon will make sure that you will see also immediate benefits. So these are two different <unk>.
<unk> private and public.
The large ones what are private but again, you'll see also the maturity of the public cloud ultimately serving some larger enterprises, but of course, the bulk of the net new going on.
On a public cloud, maybe all adding Christian.
A bit more of a nuance on what we're also saying so in addition to what we're seeing in terms of the overall sentiment that Christian described we're also seeing many large customers with.
With multiple public and private deployments as I look at scaling the business today, but they've got assets around the world and companies that they want the agility and the flexibility of the public cloud.
But we're also able to drive that and we can support that that architecture and the other thing is irrespective of whether it's public or private cloud DSP approach of being able to have a clean call to be able to have a digital platform that you can innovate you can scale you can grow around with the business technology platform fast adoption.
Is is consistent in all of the deployment, which means it has a lower <unk> faster time to value low subscription fees and ultimately an architecture that they will get the benefits from the innovation. So we see the benefits no matter, which Ralph.
And just briefly first of all.
Actually very encouraging to see that the trend in terms of profitability of rise engagement is on the rise as well. So I think after we have proven the model and our early engagement in the first half of 2021, you see that the engagements are getting healthier and healthier from a margin perspective, as we frankly also have better learnings.
But how to efficiently deploy those those customers. So that's on a positive trend for sure and just as an additional data point.
Cloud delivery harmonization program in Q3, it actually a one eight percentage point negative impact on the cloud margin so without those expenses and they will leave the P&L next year actually our cloud margin already this quarter would have been already 73, 5%. So this I think shows you that.
We are in a very positive path and in terms of absolute cloud profit, which is anyway. What we are focused on very strongly we are tracking very very nicely against.
The derivatives that you would derive from.
The 2025 cloud margin target. So there was really nothing to be concerned about here rather the opposite.
Okay.
Thanks, Patrick and now we'll take one final question.
Okay.
Question is from.
From Goldman Sachs. So long as you have.
Great. Thank you thanks for fitting me in.
Hi Christian.
And Luka I had to look at it just a clarification on your comments on the cloud backlog growth evolution can you clarify that excluding some of those onetime factors the cloud backlog should still sort of accelerate in Q4 as it normally does.
Or should it be more flattish.
And then secondly, I just wanted to come back to this kind of broader point in the portfolio.
Just curious just sort of touch base again on the kind of runway you have within just the installed base as these customers move to us for and.
I had a few clients now and when I compare the situation right now compared to three years ago, Let's take Aviva, what Scott Scott just mentioned not only that we can offer direct and indirect procurement on one platform with intelligent sources with embedded AI with one user experience.
Santa Luca.
We want to thank Paul.
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