Q3 2024 SAP SE Earnings Call
Thank you for watching!
Ladies and gentlemen, thank you for standing by.
Speaker Change: Welcome, and thank you for joining the SAP Q3 2024 earnings conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star or followed by one on your touch-tone telephone.
Speaker Change: I would now like to turn the conference over to Alex Andrew Steiger, Global Head of Investor Relations. Please go ahead.
Speaker Change: Good evening everyone and welcome. Thank you for joining us. With me today, our CEO Christian Klein and CFO Dominica Sam. On this call, we will discuss SAP's third quarter 24 results. You can find the deck of supplementing this call as well as our quarterly statement at no investor relations website.
Speaker Change: During this call we will make forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risk an uncertainties that could cause extra results and outcomes to deformatarily.
Speaker Change: Additional information regarding this risk and uncertainty may be found in our findings with the SEC, including but not limited to the risk factor section of our annual report on form 20F for 2023.
Speaker Change: On this other way stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS, year and year at constant currencies.
Speaker Change: 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.
Speaker Change: Christian, now over to you. Yes, thank you Alexandra and hello to everyone on the line. Welcome to today's learnings call.
Christian Klein: As we are already getting closer to the end of the year, I'm happy to say we are well ahead of our plans for 2024 and fully on track for our 2025 financial goals.
Christian Klein: Daily, if you swede was another successful step on SAP's transformation journey.
Christian Klein: Let me quickly explain you why.
Christian Klein: Again, total and cloudware when you close accelerated also by winning many new customers.
Christian Klein: of our waiting for office development better than expected, because many underlying measures of our transformation program start to unfold. And at the same time, we continue to deliver innovation, focusing on business AI.
Christian Klein: Our AI strategy plays a key role across our cloud-ear piece with.
Christian Klein: Workly about 30% of our cloud order and re-incuse we were deals that included AI use cases. Finally, we successfully completed the target acquisition of Workmea, which is a perfect fit for our business transformation portfolio.
Christian Klein: Let me now talk to you through the key metrics for a few weeks. Coventile backlog increased 29% and reached 15.4 billion euros. The increase was almost entirely organic, with work me adding only a slight bit on top.
Christian Klein: Told you where when you close was once again in double-digit territory, with passing glass when you will wait for cloud and our superbisms.
Christian Klein: Claude Warrung, who was accelerated to 27% and came in at 4.4 billion euros.
Christian Klein: And even more important, our Cloud EOP Suite, was again the main driver of the top line growth with accelerated growth of 36% to 3.6 billion euros.
Christian Klein: Operating Profit increased 28% and reached 2.2 billion euros with an excellent operating margin of 26.5%.
Christian Klein: The shout of more predictable revenue is now at 84%.
Christian Klein: I guess it's fair to say that all the hard work to drive SAP's cloud transformation over the last four years has led to a highly resilient, as well as innovative company and offers us a strong foundation for many successful years to come.
Christian Klein: Behind the impressive results, there are so many exciting customer stories. It's impossible to mention all the McKee wins, but let's have a look for example at the retail industry.
Christian Klein: In Q3, we find a wise deal with Schwadsel. Schwad's is the parent company of the well-known supermarket change, little and household, operating about 14,000 store with a mount with almost 600,000 employees.
Christian Klein: I was closely involved in the conversation for this partnership.
Christian Klein: It was all about wise as a key enabler to redesign the end-to-end core processes of Schwartz to leverage in the cloud the latest innovations around business AI and to achieve the long-term growth and sustainability quality calls, for example with the green ledger.
Christian Klein: In addition, Schwart Group and NDP will jointly offer Wise on Stacket, Schwart Group Digital Cloud Infrastructure, which offers a high degree of digital sovereignty.
Speaker Change: Why is we facing peace protected by XM Cyber? The Schwart Groups provide a cloud security solution. Speaking of world-class retailers.
Christian Klein: St. Spowis, one of the UK's largest supermarket chains decided to become part of the S&P family and selected wise in QSweet.
Christian Klein: and so did Macadolipra. And e-commerce leader, operating in 18 Latin American countries. We advise we will help Macadolipra to swim some decision-making through real-time data, front office back office supply chain amongst other things.
Christian Klein: They are also a business AI customer and have major expansion plans in this area.
Christian Klein: Auduring Q-Suite.
Christian Klein: Also in Q3, Mondaleth closed a wide field to expand the North America business over to Latin America and to Emia.
Christian Klein: It's just great to see water by quarter, more and more of the world's hottest companies are joining the wise movement.
Christian Klein: So, let's now look at tech. In Q3, one of your most exciting tech startups opted for growth with SAP. Our cloud of journey of a wing for net new customers.
Christian Klein: Mr. LAI is creating some of the world's best large language models. They are growing rapidly and see the need for a complete ERP solution to scale their business on a global level.
Christian Klein: We also have a technology partnership with Mistwo.
Christian Klein: The last language models are available on the Chennai I have and we are wanting large two, one of mistrust latest modules on SAP infrastructure.
Christian Klein: Our partner and customer now have access to an excellent LLM alternative hosted on European territory.
Christian Klein: Staying with the tech and VGR when life on wife in Q3 and that was a rapid implementation that took only six months thanks to our close collaboration.
Christian Klein: Also in Q3, the software company gain site, a specialist in customer success solutions, signed a quote with SAP Deal.
Christian Klein: It's just great to see, quarter by quarter, more and more of the world's hottest tech companies are choosing SAP.
Christian Klein: They consider our cloud solutions as solid foundation for exponential growth and value creation.
Christian Klein: They see us as an innovative leader in ERP, business AI, supply chain solutions and more.
Christian Klein: To say it in short, they trust us to bring out the best in their business and that's something we are very proud of.
Christian Klein: To close it out, there are many other great wins in Q3, for example, Dawn Foods, DXC, Technology, and Soldiers Anero, a subsidiary of Luxiton Group and PlaySquope. And for wise, we also won Mondalef Roche and Eon Aquino on Tetra Park, the fool-through in the end of the series.
Christian Klein: As you can see, SAP is already very successful at reaching and winning customers.
Christian Klein: But we can't do even better. So how will our future go to market model look like?
Christian Klein: Let me start by saying thank you to Julia Wyzen's God Wastler for that great contributions to our marketing and sales achievements over the past years. Together we shaped the growth company well positioned to tap into the many opportunities ahead.
Christian Klein: Going forward, and in the context of our ongoing research showing, we will send our go-to market setup even more strongly around our land and expense strategy With a strong focus on adoption and consumption First
Christian Klein: We are making our operating model clearer and more streamlined.
Christian Klein: We're using the number of the different shop profiles with the goals to improve productivity and our sales ratio. Second, we'll learn how our partner ecosystem to go bring in the mid-market. By that, we are expanding the highly profitable sales channel and pushing our future growth.
Christian Klein: Sir, to get even more steam behind our land and expense strategy, we are all hauling our commercial, including our package our solutions. This will go hand in hand with the revised incentive structure for our colleagues in sales.
Christian Klein: Let me tell you, Q3 was not only a successful quarter in terms of custom-use, but also in terms of innovation. This was very evident at TechEd, our technology and developer conference.
Christian Klein: Let me share some highlight to you. Starting with two.
Christian Klein: Our Digital Co-Pilot just set up rated its first day and we announce the major major upgrade. We have supercharging tools with color-weighted AI agents. Most AI chances are fit to perform only one type of task it sails in HR. It's a blighting, but however many key processes cut across departments.
Christian Klein: Financial Traditions for instance involved data on failed supply chain management HR and other functions.
Christian Klein: Sure, we'll soon be able to orchestrate several AI agents to carry out such complex processes and to end.
Christian Klein: That's possible because ACP speaks the language of all corporate functions. We are not trapped in one silo.
Christian Klein: So, while many in the software industry talk about AI agents these days, I can assure you true will be the champion of them all.
Christian Klein: So far, we have added over 500 skills to Chul and we are well on track to cover 80% of the most frequent business and analytical transactions by the end of this year. And in Q3 alone, several hundred customers license Chul.
Christian Klein: Our focus was also accelerating with regard to the other elements of our AI architecture.
Christian Klein: Well ahead of time, we reached goal to embed over 100 AI use cases across our solutions.
Christian Klein: and the Genaei Hub, consumption by our partners, modern tripled from Q2 to Q3, and even better the consumption by our customers more than 4.
Christian Klein: Finally, there was one more thing at Pegatus, where we got to business AI.
Christian Klein: Something we worked on since a few years. We announced the SAP Knowledge Quest.
Christian Klein: The knowledge curve captures the case of business process knowledge and allows Chen AI to deeply understand SAP systems with regards to structured data, the tables, the connections.
Christian Klein: That in turn enabled Chennai to provide much more relevant, reliable, and context sensitive answers. It will allow to rule, for example, to carry out the complex tasks path I just mentioned.
Christian Klein: The knowledge class will, and is a real game change in our industry, and we are the first to accomplish it at this gate.
Christian Klein: We have had a bit of an unfair advantage, of course, we can rely on decay of Domain O'How and the wealth of data in a CP system.
Christian Klein: So, when someone reads
Speaker Change: Q3 was another strong forward for SCP, where when you close accelerated, and our profitability continued to develop very positively. Again, this background, we are confidently waiting our outlook for 2024.
Speaker Change: We are now expecting an operating profit of 7.8 billion euros and we are also happy to confirm that we have to on track towards our revised 2025 financial and business with continued double-digit total revenue and operating profit growth in the years to come.
Speaker Change: and verse that over to your Dominik.
Dominik: Thank you, Christian, and thank you all for joining us this evening.
Dominik: We have successfully navigated another quarter despite the ongoing complexities of the macroeconomic environment.
Dominik: The Man for Auslution remained solid in Q3, driving steady expansion about current cloud backlog and strong cloud of Nukrot, which grew by 29% and 27% year over year respectively.
Dominik: In Q3, deals exceeding 5 million euros accounted for more than 60% of cloud-order entry, reflecting continued confidence in our offensive and strategic direction.
Dominik: The continued discipline execution of our transformation program combined with a slower than anticipated ramp in our hiring activities contributed to exceptional growth in non-ifers operating profit and a significant increase in free cash flow.
Dominik: for investment in business AI, also starting to so positively results, creating new opportunities and deepening customer engagement.
Dominik: Now, with the edit capabilities of Walkmea, we are able to further improve workflow execution and use experience for positioning SAP well to deliver unparalleled value to our stakeholders.
Speaker Change: Let me now go into further details regarding our financial highlights.
Speaker Change: Count Claude Becklock, which 15.4 billion euros up 29%.
Speaker Change: Absent the first time inclusion of a walk me, CCB growth would have remained virtually flat compared to the prior quarter.
Speaker Change: Cloud Revenue Group by 27% fueled by the sustained strength of our cloud, your peace feed, which saw another impressive quarter with an increase of 36%.
Speaker Change: This marks the 11th consecutive quarter of Claudia peace with growth in the 30s. Now representing approximately 84% of total cloud revenue.
Speaker Change: He maps in the first time inclusion of an approximately 15 million for revenue contribution of Wachtme, Cloud Revenue would have accelerated by 1 percentage points sequentially.
Speaker Change: Softly licensed the revenue short remarkable resilience with a decrease of only 14% of the quarter.
Speaker Change: Finally, total revenue was 8.5 billion euros and Q3 up 10% year over year.
Speaker Change: This performance was primarily driven by the strength and cloud revenue and demonstrates how the positive revenue makes effect his driving, gradual acceleration in our top line.
Speaker Change: Now let's take a brief look at our regional performance.
Speaker Change: In the third quarter, SCP's cloud revenue performance was particularly strong in APJ and Imia and robust in the Americas region.
Speaker Change: Breville, Chile, Germany, Italy, India, Japan, and Spain have outstanding performances in cloud revenue growth while China, Saudi Arabia and the US were particularly strong.
Speaker Change: Now moving on to the bottom line. Our non-IVS cloud growth profit increased by 28%. This was supported by an improvement in cloud growth margin from the year-go period, expanding by 0.6 percentage points to 73.7%.
Speaker Change: Hi, here's operating profit in the third quarter, was up to 29% to 2.2 billion euros. Finally, in non-IFF's operating profit rules by 28%
Speaker Change: 2.2 billion euros.
Speaker Change: Operating Profit Growth was mainly driven by strong revenue growth as well as discipline execution of the 2024 Transformation Program.
Speaker Change: Basic non-hyperser earnings per share in the quarter increased 6% to 1 Euro 23 cents. The I-1st effective tax rate for Q3 was 33% and the non-hyperser tax rate was 33%
Speaker Change: Now on to our catch generation.
Speaker Change: 3 FLO4Q3 increased the normal terms by 44% to 1.2 billion euros
Speaker Change: with approximately 3 million.
Speaker Change: were paid out for restructuring, the positive development was primarily attributable to the increased profitability and lower tax payments. And for the first nine months, three cash flow was up 47% to five billion euros.
Speaker Change: Now, let's move on to our outlook. As you have seen in today's release, we are increasing our 2020 outlook for cloud and revenue, cloud and software revenue, operating profits and free cash flow, which we are adjusting to reflect our updated expectations.
Speaker Change: Right to suit Q3 was another solid quarter in terms of cloud bookings. We would like to remind everyone that Q4 is typically our largest quarter and performance here will be crucial in achieving our full-year targets and our 2025 ambition, which remains unchanged for none.
Speaker Change: It's essential that we stay focused on executing our strategic initiatives and managing through evolving market conditions. We've also seen that we now expect to end the year at a slightly higher headcount in last year, including the colleagues joining us from Bworkme.
Speaker Change: This year in Headcounting, we're still including a few thousand colleagues who will leave the company as part of the transformation program on January 1, 2025.
Speaker Change: For additional details, please refer to our Quality Statement, published the earlier today on our investor relations website.
Speaker Change: So in summary, in 23, we were yet again able to prove our resilience and strategic execution on all fronts.
Speaker Change: We continue to help our customers navigate digital transformation journeys to the cloud.
Speaker Change: As a result, we are on track to achieve or over achieve all of our financial KPIs guided in our outlook at the beginning of this year and a further solidifying the trajectory towards our ambition 2025 as well as accelerate the revenue growth through 2025.
Speaker Change: Thank you, and we will now be happy to take your questions.
Speaker Change: Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touch tone telephone.
Speaker Change: If you are using Speaker equipment today, please list the handset before making your selections.
Speaker Change: Anyone who has a question may press star followed by one at this time.
Speaker Change: One moment for the first question, please.
Speaker Change: We'll take our first question.
Speaker Change: from Michael Breast with U.S.
Speaker Change: Please go ahead.
Michael Breast: Thank you very much, good evening. I think Dominik, you called out the very strong contribution of large deals this quarter, I think over 60% of the order and take it, normally about 50% in a Q3. Can you say about the total volume of deals with AAP year on year? And what the pipeline looks like for Q4, and you're messaging around the sort of volatile conditions.
Michael Breast: You can use characterize whether the environment is the same as it was when you start at the court or are things getting a bit more challenging And then just Christian very quickly on the 30% of deals with AI, can you talk to maybe the price that you're realizing on that? Thank you
Speaker Change: When we have a first step at the 60% I mean what we do observe is really the kind of installed based large enterprises
Speaker Change: Turning with Grave momentopso here, we really see the flywheel spinning.
Speaker Change: So that explains the strong momentum we have that which gives us of course tremendous stability because you know that kind of installed base is only partially tapped into and even the ones who are on the rise journey have not fully converted the installed base on prem onto cloud. So I think that's the point we want to make here. I think on the demand environment, I think probably Christian is better suited to comment.
Christian Klein: I look at the AI question. I mean clearly Michael, of course we hear a lot about macroeconomic challenges and I mean look at our whole market in Germany, I mean definitely the economy has its challenges but still.
Christian Klein: I would say after Q4 there's rarely a DAX 40 company left, who is not yet on the move to the cloud with a CPM-wise
Christian Klein: and especially in Germany Dominik and I also had today a few customer calls, I mean when you are in a transformational matter if it's in the chemical industry or on the auto industry.
Christian Klein: Actually, we see no slow down. I mean, they really see our cloudy appease with us the only way.
Christian Klein: to Restructure Deportfolio, to Transform, to New Business Models, and of course also to Drive Productivity. So, when I can draft my business AI with regard to the predictive focus for Q4, and actually we are positive. And now still, of course, every year, there is a huge order entry to close. That's every year the same. So, yeah, let's get the execution done in the next two and a half months, but then I'm confident.
Speaker Change: And on the 30% of the IU cases, yeah, absolutely. I mean the ones which are mentioning, they all come with upside. First of all, with value for the customers, I mean this is, you know, in sourcing and supply chain and manufacturing these are the areas.
Speaker Change: Well, I would say we'll see if we can go to embed it, they are the strongest uptick.
Speaker Change: and all that comes with you know, with our premium wife offering all this clothes.
Speaker Change: And so yesterday's good upside, but the good piece is also there. I mean in all 30% of the deals, I mean I mentioned my card or leapre, you know, they are starting now with some use cases by found out with everyone. So we also see here the land and expand motion in the headquarters to come. And then when you see that the innovation pipeline is now also accelerating with regard to embedded AI, the Chen AI happened to, I mean by SA, we will also see an expansion of the business AI footprint in the customers where we already landed.
Speaker Change: i
Speaker Change: Hi, good evening. Thanks very much for taking the question. Special congrats on the course are very strong again. Can I just ask you alluded to the management changes during the call, and obviously we've got, you know, a random sense, the workforce leaving to the year. And Christian, you also talked about the Salesforce reorganization. Did you just talk a little bit about how you're managing the risks of making sure that the reorganization doesn't cause disruption as you said you're going now into a fourth quarter, whether there's a lot of business to cross, but culturally what you're doing to make sure things don't slip through the cracks. And you're able to close the deals that you need and maybe just quickly on free cash flow, Dominik, a very, very strong quarter. Could you just talk a little bit about how much of that is structural changes and improvements that we should expect to continue and how much is maybe one off things from working capital to the great to come in but. Thank you very much.
Speaker Change: and maybe not repeatable every year. Thank you.
Speaker Change: I can start with the management changes and also the outlook for the next year on clothes on the execution with skewer mentioning I mean first.
Speaker Change: Let me clearly again stay here. I mean, Scott and Julia did a fabulous job in transforming SAP to the state where we are and I guess today's results also improve of the great job we as a team have done over the last years. Now Adam, the good piece is when you look into the planning for next year, how we then, you know, assemble our bookings closes first, what do we have still in the tank for wise. And then you can see out of the 11 billion of maintenance. [inaudible]
Speaker Change: I mean, one force of the customers has started the transformation journey, but there's a web.
Speaker Change: So even in the one force of the customers, you know, who on their journey there is potential left and I mentioned here some customers in the past who are deeply in in the journey and on the journey to the public loud sweet like an axon and others and they are, you know, now wamping up, wamping, wamping, wamping and they are very satisfied with the way how we, you know, used this methodology to transform and then over time, twice adoption and of course high value for the company. Then second. Thank you.
Speaker Change: Net you, so this is with Gwowl, you know, a huge uptick and I see there even further potential I come in a second to that then the land and expand costs up. I mean when you look into a typical easy system, we were good in finance.
Speaker Change: or Curement Supply Gym and Effecturing, but where we transactional? Now in the cloud, when you look at demand and supply chain planning, workforce planning, skillspace, not profile pace, when you look into omnichannel or the volume, high-billing scenarios.
Speaker Change: These are all things which we didn't even offer at the ECC. So, you also see that there is no question anymore about value. There is a ton of value, and to do this not only the speed and the agility what you get with the cloud sauce offering, but also with the capabilities. So, that is also offering is once we land it for example on finance.
Speaker Change: We are now making sure that we land then with EC next and kick some of the best of complete players out. Then we go to sourcing. Then we go to supply chain because sourcing needs to be connected to manufacturing. Now we should go to the execution with Luke.
Speaker Change: I have to say I'm very close to of course I'm of the large deal, I mean I'm I'm of course talking to our top customer frequently
Speaker Change: I also want to feel the power of how our product portfolio works, how we also positioned the value and now I have just had the team to get up marketing, the saves leadership and our services leadership in for some days.
Speaker Change: and we really talk through about what can we do more? Not in the here now, next year we are seeing a really good, healthy pipeline, but what is about in two or three years? How can we expand the channel? We have a huge mid-market, you know, where we still, where we can massively call, but not with direct sales. So what can we do better to enable the ecosystem? Let them sell the sweet, give them territories, give them more demand coming from marketing. Why are we digital channels, which are way better than two years ago? So what can we do now? What can we do now?
Speaker Change: And then second, when you talk about direct pop at the top of the house, what can we do better on value engineering with less walls?
Speaker Change: But better architect, you know, even better specialist, we need to foster the land and expand opportunity I just talked about. And then with more targeted incentives, this is something that we all know matters in sales. So these are just some examples.
Speaker Change: Thank you for watching!
Speaker Change: The next question is from the line of Fred Blon with the other A.
Speaker Change: Thank you for watching!
Speaker Change: Brad, your line is no open.
Speaker Change: Yeah, thank you. So first of all, on the cloud momentum, so cloud, the app is sweet, accelerated quite significantly in the quarter. I wish you can come up with an underneath specific.
Speaker Change: Driver's there and then from a specific perspective, are you trading ahead of your target?
Speaker Change: Consider that can you share a little bit the scenario around the 27% guidance for this year. I mean, I know some comment for you around the macro, but at the same time a lot of abolitionists. So it would be good to get some of the...
Speaker Change: That's some of the different dynamics here at play.
Speaker Change: And then second here on Ghost Mountain, if you can spend a moment on your outside gear and in cloud ghost mountains, particularly what you have considering in a private contraction, still remains pretty strong, but improving makes up for us as this is a structure of so many of it. There would be great, thank you.
Speaker Change: I mean, talking about the cloud ERP, where it's the strong cause coming from, I mean, of course, as we also mentioned on some of the customer wins, you see some of the largest customers also now making the moves to wise.
Speaker Change: It really depends a little bit on being the sweep if the customer's preferred to start with a manufacturing
Speaker Change: With the shop floor transformation, if they go with finance and HR for commerce, it's obviously a strong area.
Speaker Change: And then, you know, end-to-end, and then over time, even for the existing customers, we see really healthy upsell, you know, also, this quarter where we can deliver value and then expand.
Speaker Change: and the footprint over time. Second, and that you also were with the longest, especially in the area of HR, finance, where we typically land also in the first step.
Speaker Change: And then last month, not least, I mean, let's also not underestimate our platform, I mean, all for the ecosystem is...
Speaker Change: Much more into this now that we not only integrate our sweet, but we also extend our sweet developing our own IP, not customizing the ERP anymore, but building extensions in a way if apps.
Speaker Change: and for the different verticals of our customers and so that is also, of course, charging the really
Speaker Change: Great Rose, we have seen in Q3. And then on Macro versus Pipeline, I mean, look, I mean, without any doubt also when you look at, you know, some of the, you know, numbers, you know, our PSF deliver.
Speaker Change: We are actually seeing an ongoing strong momentum, the pipeline, again, the cover which is healthy. But again, before we are now jumping into 2025, let us first deliver Q4. It's a big water, it's naturally a big water.
Speaker Change: And when once we have closed Q4 we will see our judge again in January and then we will give you also a guidance for 2020-25.
Speaker Change: On cross marching, maybe one last piece.
Speaker Change: As I also mentioned before, the cloud transformation, the underlying measures we have taken is not really taken off. I mean it was the good, the wide decision and to centralize our cloud operations. It was Thomas Sarvesi.
Speaker Change: The life cycle management of the apps gets harmonized, we are, you know, and all in our cloud version of HANA, much more scale, better TCO, better Vizilians, and of course we also work in with the hyperscenas. I mean, we have with wise.
Speaker Change: and on the cloud infrastructure we have really some really strong measures we are driving to further optimize not only performance, but again also the scalability of our cloud running on the high-rescale infrastructure. But of course also on the data side we are doing several things.
Speaker Change: To further improve both.
Speaker Change: Performance, as well as the scalability of our stack. And that will also lead to a very healthy expansion of our cross-marchings in 2025 and with the uptake of our suite.
Speaker Change: and the land in the expand and really you're wanting all of these solutions on a multi-tenant infrastructure. And we are actually where we're confident that we also can expand our cross-match in especially in 2025.
Speaker Change: Maybe even one comment I'm supposed to then open question on free cash flow, whether that's a stock flow Topic or just more of a phasing topic, I'd say
Speaker Change: It appears to be more of phasing topic nevertheless to underlying performances quite solid. I mean, you've seen us increase the guidance of the midpoint by a quarter of a billion.
Speaker Change: have not changed the cash law outlook for 20-25.
Speaker Change: I'll be there.
Speaker Change: I raised it in the last, the quarterly communication, but of course, the current cash performance helps us further solidify our outlook, you know, we're going to move in the very near future AI in January from a cut off ambition 2025 to an outlook 2025 and of course.
Speaker Change: You want to make sure that we have a typical kind of high quality high confidence level on whenever we guide the outlook. So I think there is more confidence level than what we usually have in kind of mid to long term and a bit.
Speaker Change: No.
Speaker Change: on the CCB growth, and I want to add that we do still see quite some significant headwind from the transsection of business, actually our transsection of business has, if anything decline with the single digit per percentage point. So the macro is very much...
Speaker Change: Yeah, sales at SCP-2, but on the other side you see that Claudia P.C. growth following a 36% despite that headwind.
Speaker Change: and it's important to keep that in mind for the bridge from CCB into Cloud Runnal Growth. I mean, from the midpoint, 25, to our ambition, sorry, midpoint, 24, outlock 24 to the ambition, 25 target of 21.5 billion. If you take the forex into account, we need about a 26.5 percent.
Speaker Change: and Claude Revenu-Groves, which is almost there yet. There is a very, very minor impact from our North明 air position on Claude Revenu's. I think if it is closed, it is 14 million in the Q3, so it is very, very little.
Speaker Change: By the way, we've also a little bit of a headwind from losses we've solved in integration. But that's completely a lot better out performance. And on the CCB, we have initially said that we will exit the year 2020.
Speaker Change: I'm actually at the year 2024 and a similar level as a prior year which was 27%.
Speaker Change: and actually if you want to be a 26.5 and even if you have a very adverse scenario on.
Speaker Change: Connexion revenue in your head which is not necessarily a default assumption.
Speaker Change: You have probably not more or certainly not more than one person is going to loosen so as soon as you are going to start off 27.5
Speaker Change: You're pretty much secured for next years and this is a little bit of framework.
Speaker Change: How to train you lead into next year, so it's just from the right trajectory for hitting our ambition.
Speaker Change: The next question comes from the line of Jacksonator with key bank capital markets.
Speaker Change: Great, thanks for taking our questions, guys.
Speaker Change: 1st one is on
Speaker Change: Just your current assessment of I guess the risks are due to some of the investigations that are underway in the US related to the practices with government agencies and then how can you size how large your U.S. federal business aims in terms of the mix of the overall business? Thanks.
Speaker Change: I have a stab at that type. Yeah, first of all, there's actually not really new news on this one, but maybe for the benefit of everyone here, it's a small kind of reminder of what has happened.
Speaker Change: First of all, for many youths, like many other tech companies, we've been serving you with governmental entities via the typical reselling partners such as Carousel, so that's really common industry practice.
Speaker Change: Now in August 2022, we received a so-called Civil Investigator demand, so see ID from the U.S. Department of Justice and that involves us and care source and others.
Speaker Change: and since then we have fully been cooperating with the DOG and we plan to continue to do so of course. Now in September this year, the model search of the carousel offices by the SPI.
Speaker Change: and I say by now we can say that we are really confident that there is nothing to do with our case here. And we have actually gotten assurance in writing like her assault that the FBI search was completely unrelated to SAP and NS2.
Speaker Change: and well as to the DOJ civil investigative demand from 2022. So this is a different story.
Speaker Change: And of course we continue to be fully committed to ensuring that our sales practice is comply with all applicable regulations So this is all I can say at this stage and that's the state where we currently have
Speaker Change: and look also the relationship that I was the US public sector like
Speaker Change: The DOD and other, you know, agencies, I mean, it remains strong in tact and...
Speaker Change: and then as you know, Dominik Joseph, I mean the recent investigations have nothing to do with the case, so I will start it two years ago.
Speaker Change: and we'll forget to decide, I mean, obviously next to Germany.
Speaker Change: A US, strong in Australia and the UK, it's actually sort of the same size like we've seen in other countries, but also there, I mean in all public sectors, I have to say, I mean, this was clearly the part of the customer base, which took some time, and I was to move to the cloud, but now also with the build up of so-and-flowers.
Speaker Change: We see strong momentum in many countries in the world.
Speaker Change: I recall the US is about a third of our rebel base and if you apply a typical kind of government agency ratio, which is certainly a small section of that, you see that kind of we talk about low, low single digits, a revenue contribution. But again, that's still an extremely appealing market we want to fight for going forward.
Speaker Change: Hi Christian, he's Dominik and congrats on the court now. That too from me, the first one, Christian, you talked a lot about the kind of life of business support for you and the opportunity to kind of cross and up so into the base, even as customers sort of migrate to kind of S4 and the cloud. Can you talk about the specific domains and the kind of one where you have still to go in the install base to kind of garage some of that uplift?
Speaker Change: and then secondly, Dominik, your comments around the transaction revenue. Outside of the kind of transaction revenue, maybe you see any kind of impact in terms of closing in the business around.
Speaker Change: Claude's rates or kind of migrations, perhaps impacting the CCB or being ahead of in their unsccb or is that going to continue to hold as you expected. Thank you.
Speaker Change: Now with the goto you first question I'm in Luke I'm in the bathroom.
Speaker Change: Last week with the whole leadership team and we really deep dive in.
Speaker Change: in the into the install base and into our land and experience where the G. and I have to say it's remarkable, the kind of growth which has got us to date date and the swoon cube, could we perform and but...
Speaker Change: And when you look at the metrics and when you look at how we go to market today, I'm so convinced that you know much more outside for us and why.
Speaker Change: We'd land.
Speaker Change: Our customers in the cloud typically they start with finance. Today, you have to imagine, therefore, financials, we have a rebar, we have conquer, but they are also serving the finance community. Why not connecting them much better? Why not giving them the health and incentive to break these silos?
Speaker Change: When you talk about when you land with sourcing, you have to have also the auto management in the billing in place. By this word, if you do private procurement with our Fahana Finance solution, why not actually building one procurement platform with our e-bop?
Speaker Change: And so we want to play the silos and we want to connect the dots around the business process of our customers.
Speaker Change: and when we see how many cross-cell potential we have in our HR installed base in finance and spend and see actions of light change, this is massive.
Speaker Change: And then...
Speaker Change: Our Israel has always sold the Sweden-Nion premises. Today we have Israel's for Finance.
Speaker Change: for procurement or conqueror.
Speaker Change: They are for sure can do the same like they did in the on-premise days. Let them capture the mid-market by enabling our research across. Bring our partner teams together, enable them to sell this weed, to sell business processes. That is for sure upside. And then last but not least, when you look into the install base and still see the complexity and a customer spilled into their earpiece.
Speaker Change: This is a much more upside on the roof of the head size.
Speaker Change: We regard to certifications and enablement and be also a little bit more prescriptive in the way how we build certain things on the platform which then also gives us upside in the installed base. And these are just three, you know, levers. In the marketing side, we are doing a lot to excite the CIOs.
Speaker Change: But I'm also convinced we can do a bit less and then we can also expand our footprint to the other bikes and then connect the L.B. when we are driving and really show them also the benefits of the suite.
Speaker Change: When you're looking at the CFO, the CFO should be happy when he sees how his EP can connect the financial planning with the HR planning in the supply-gen planning which I've met at CFO over a large US customer.
Speaker Change: He didn't even know how we can one end to end planning and today he has a lot of best of greed with a lot of data integration layers on top because everything is stuck in silos.
Speaker Change: And this is something what we can even do even much better than what we do today and this is the upside.
Speaker Change: We are talking about, of course, Needless to say, that only one force of our customers, you know, started now that transformation and that journey to the cloud. So there's also per se upside, you know, also coming from our own premise in so base, which we are then adding on top to the point by just mentioned.
Speaker Change: I mean, maybe one last piece is I know that maybe some of you see this as a risk, I see this as a great opportunity.
Speaker Change: To have the team together for some months. I mean, I know the team.
Speaker Change: I actually also quite confident that we know how to connect the dots.
Speaker Change: And so I can make also no fast decisions with the team, push the two information forward.
Speaker Change: and I guess the team also feels now how the different elements of our goal to market structure now comes together. So I'm actually really excited about the work we are currently doing with the team on our transformation and the kind of upside we have just building for the years to come.
Speaker Change: The Christian transaction revenue and CCB development, I mean, the only thing to call out on CCB Q4 is that it's more difficult comes, you know, we have integrated last year.
Speaker Change: The acquisition of Linux, so that makes it a little harder to kind of generate the growth in CCP. And then there was a huge booking quarter in Q4, of course, and we try as well as we can this quarter.
Speaker Change: This is the only thing I'm going to call out otherwise, it's a very normal development I would say.
Speaker Change: and on Transaction Revenue was the most unauthicycally sensitive part of it in particular.
Speaker Change: temporary workforce which are suffering most. It's not surprising in the current barcode backdrop, so we would anticipate that soon, and macro is coming a little more conducive that would also recover. And then let's not forget at the end of the transformation on our business network, there is opportunities to resuscitate growth once we have gone through the phase of transforming the business model.
Speaker Change: Um...
Speaker Change: As you know, we have basically waived and seized for suppliers and a test pin.
Speaker Change: The next question is from the line of Mark Mordler with Furnstein.
Mark Mordler: Thank you so much for taking my question and congratulations on the strong quarter. You know mine I'm going to ask each of you a question.
Mark Mordler: Can you give us any color on how you think about Jenny, I, whether it's going to have any negative impacts on cloud gross margins, especially as it becomes more used in scale. And then Christian given macro concerns about large complex projects, can you give any color on how the ECC customers are starting to move to S4 and cloud is the rate in line with prior expectations. Are they planning to directly move to the cloud? Really appreciate thanks.
Speaker Change: If you look at ambition 20-25, we see continuous expansion.
Speaker Change: In line with the improvements we've shown in prior years, and I'd say really the more gradual improvement which is more due to economies of scale than the one of strong improvements we have been reaping by virtue of the Cloud Convergence Project which was a big transformation project. So now of course the kind of initial ramp of our AI activities already reflected in that.
Speaker Change: I think beyond years 2025, so if you're looking to 2067 it's kind of speculative, one way exactly that will move across margin because thank you the pricing is still in flux
Speaker Change: We have to see how much of that will kind of be a creedist or part of the normal offering. But it will definitely add incremental growth profit. I mean, our focus is very much on maximizing growth on the absolute growth profit we drive, because that will ultimately drive free cash flow and the company valuation. So we're not too hung up about the margin itself, but for 2025 there is no kind of risks out of that I would say.
Speaker Change: and we've got to latch enterprises, large projects, ERP projects in the context of today's market environment, look Mike.
Speaker Change: I'm so happy to see that finally wise is the kind of methodology offering what I always aspire it has to be.
Speaker Change: Today, last cast of our flight today, the morning, we're at Dominik
Speaker Change: Really, after SAP, to really give our best practices from 20,000 customers and day in the three, to really get the complexity out of that business processes.
Speaker Change: This large car comes clearly under 3rd and I really want to transform. It's not about putting my EP on a cloud infrastructure. It's about the business policy so first.
Speaker Change: and actually the cloud is also giving SAP and the customer the discipline to get the complexity out of the business processes and the differentiation with AI with the vertical extensions we build but we don't customize.
Speaker Change: We tried discipline, we tried productivity.
Speaker Change: And now when we look at the methodology and how we can measure the custom code, how we can support this project and really giving them the productivity numbers before and after and giving them the set use.
Speaker Change: This is great, and then obviously it's on the customer, as I said earlier Mike, I mean no one goes in and says hey I do it all at once, I mean this would completely overload every IT organization on the planet But what we then saying is hey where is your highest pressure is it in the front, this is in the supply chain, is it in the core processes, you know, of your back officers?
Speaker Change: And then we go in and then we have the architects, we have our partners with us and we have to customize the table.
Speaker Change: And I have to say the methodology now is really proven and customers come to us and ask us, please challenge us as a P to really get the complexity out of the business process and give us your best practices when we see that you're running in video and we see that you're running Amazon and you see that you're running the lots of customers on this planet. While also supporting some unicorns to scale around the planet.
Speaker Change: You have this knowledge what we need to transform and that is the sentiment that we are seeing so despite the Maxwell
Speaker Change: The next question comes from the line as Finn worked with Barclays.
Speaker Change: Good evening, thanks for taking my questions and congratulations on the great quarter. Maybe first, can you provide us a bit more colour on the supporter of the news? Through a wide-adjusted supporter of this decline, less in-cute reading and in-cute to
Speaker Change: and secondly, how should this kind from your base on what you see in the Cloud Migration Pipeline, should we see a visible acceleration, the client of support revenues over the coming quarters?
Speaker Change: And then it would be also great if you could comment just if there's anything specific we should take maybe in the account around the cost for Q4, E implied to for operating profit guidance looks very conservative especially at the moment. Thank you.
Speaker Change: On software support, indeed you write a constant currency, a growth more or minus 2%.
Speaker Change: Hi!
Speaker Change: I think it's a kind of very gradual decline, obviously, I mean this is a hugely diversified portfolio across customers' meetings
Speaker Change: even according to the phasing of the transformation, the Christian described how they roll over from their on-premise state into the cloud. So, if there is a percentage point up and down on any given quarter, it's more noise around the trend line and the trend line will gradually see accelerating the client because more and more growth, which both well on the other hand for the cloud revenues. And it's quite intuitive if you want to kind of continue to sustain the high growth numbers on cloudy a piece wheat. [inaudible]
Speaker Change: You need basically to be the bigger and bigger base and for that, you need to convert more and more maintenance based. Of course, if you have only penetrated, so to speak, as Christian I mentioned before, a quarter of the installed base and then I'll pay in both.
Speaker Change: The maintenance of certain instances and on instances they have already converted the cloud revenues.
Speaker Change: As this place is gross and then the cannibalization will also grow, that's just mathematics, so it would be very gradual.
Speaker Change: Now a good question on the Q4. You said cost development, I would put a little larger. It's kind of the operating profit development.
Speaker Change: and the biggest sector in there is actually what we have been kind of embedding on software. You recall that we were a little bit scared of.
Speaker Change: AirFull in Social for the full year guide, and now especially Q3 was, as I mentioned in my introductory comments, extremely resilient and we had...
Speaker Change: Only as little as last year's declarative was 14% of inconstant currencies.
Speaker Change: and that's the way we know what we think is a kind of normal right there. And so we have made the assumption that's more of a phasing topic. Also, we really want to be well protected in terms of making sure that any distraction from the transformation that Christian describes is not healing our cloud business but it's anything the software business because you know this is where we are most vulnerable.
Speaker Change: If he closed the deal by end of the year or not
Speaker Change: So we have...
Speaker Change: I've been really prudent on that and said, okay, it's not clear if we will be able to have such a second loaded software business as last year, last year, it's 48% of the total license income in Q4. This year we have kind of dialed it down to about 42% or so. So that's still a significant number, but we also wanted to keep it manageable, given all of the disruption we're currently going through in the transformation. So that's a quarter of a billionish ticket. How do I calculate that? I look at last year, 6% decline, and then I look at how much?
Speaker Change: Gloss margin loss you have if you decline by 6% and then I look at the kind of implied much higher decline into for this year, which shapes off much more profit, frankly. And then the other topic is frankly some phasing topics on cost. They have a little bit of a back-and-loaded NQE bonus program. We've also decided to increase the matching share for Q4 for the program, which is called own SAP, where our employees get a kind of a subsidy to buy shares. We really wanted to use the strong momentum in the business to make more of them participate while also avoiding that stock-based conversation goes through the roof.
Speaker Change: and Container and we also have the inclusion of...
Speaker Change: The work with business now, you've seen that in Q3 that was diluted for the tune of 14 million losses because of the losses they have and integration costs that's post-stop phase compensation again. And then there is the delayed ramp where we're going to reramp. So if you put it all together, it gets you actually a number of around 400 million, which is kind of explained the bridge from Q3 to Q4. The deceleration on the year and your growth.
Speaker Change: And what it all means for next year is we're not going to change a touch, the 10.2 billion non-ipers operating profit guidance for next year because we think that's not not right the right thing to do right now. We are really solidly on track on delivering that. And as I mentioned, we really want to convert that kind of ambition into something really solid with an outlook we're going to give in January .
Speaker Change: Our last question comes from the line of Toby Og with JP Morgan.
Speaker Change: Yes, hi, thanks. Thanks, excuse me. A couple of questions just on the back clock, both of 29, just wanted to double check the contribution to the year over year growth there from Walk Me. And whether that was actually any slight panic, acceleration in the back lock there versus the 28 in Q2.
Speaker Change: and then just on the go-to-market transformation, Christian, you mentioned a number of factors earlier on in the call.
Speaker Change: What changes have already been made and already been implemented and what changes are still to come and out of those changes, which ones do you think are the biggest needal movers and the most important ones. Thank you.
Christian Klein: I said in my introductory comments that the CCB growth
Speaker Change: Excluding, as of absentee, first time inclusion of Walkmea was virtually flat, so it is indeed the one percentage point increase is largely stemming from
Speaker Change: The inclusion of of walk me, by the way, I already want to mention at this point that we're not going to be able to really comment quarterback quarter on how that will evolve going forward. Why? Because we also have a cannibalization effect on a business which is called enable now, which is doing very much what walk me is doing, but given that walk me is a much broader and better offering. We're kind of phasing that out and displacing it with walk me. So this is why it's a little bit blurry. We also had some so next business on . . . . . . .
Speaker Change: Walk Me, which is kind of advising the revenues to some degrees, so we'll see a counter effect, so to speak, in the transformation phase, when we integrate Walk Me.
Speaker Change: I looked at them the go-to-market again, you know, after
Speaker Change: A very strong Q3 order entry and a very healthy pipeline for Q4. Obviously, I don't want to now change the operating model of our go-to market in Q4, but starting January , what you're going to see is, first of all, the massive expansion of our volume business, starting with marketing on the digital, connecting this to territories which are partner owned, and then fully automated no touch. Thank you.
Speaker Change: What we have never had at this scale, and of course we are also then expecting the partners to invest more into SCP, which they all signal they will do. That's a very great momentum in the ecosystem, because
Speaker Change: And now we don't want to go too deep and to before our direct sales team into this mid-market territory is anymore.
Speaker Change: Second, what I also mentioned around the land in expand, we will change a little bit that the line of business set up, we are having today, finance, pens.
Speaker Change: Let's combine that. It's also have to cross-cell incentives and the cross enablement in place.
Speaker Change: To really harvest that we have thousands of employees central customers, so why can they not do you know next step finance and connected teams?
Speaker Change: to join the Crown Planning to various measures to really expand the footprint.