SAP SE Q3 FY2024 earnings call

• Christian Klein highlighted Q3 was successful with accelerated cloud and total revenue growth, strong operating profit, and progress in AI strategy. Notable customer wins included Schwarz Group, Sainsbury's, Mercado Libre, Mondelez, Mistral AI, NVIDIA, and Gainsight. Discussed go-to-market model restructuring, including streamlining operating model, empowering partner ecosystem in mid-market, and overhauling commercials. Mentioned Joule digital copilot upgrade with collaborative AI agents and the SAP Knowledge Graph.
• Dominik Asam talked about solid demand, strong cloud backlog and revenue growth, disciplined execution of transformation, positive free cash flow, regional performance with strong APJ, EMEA, and Americas, and financial highlights including cloud gross margin expanding 0.6 percentage points to 73.7%.

Total revenue was EUR8.5 billion in Q3, up 10% year-over-year. Cloud revenue growth accelerated to 27% to EUR4.4 billion, with Cloud ERP Suite driving growth at 36% to EUR3.6 billion, representing approximately 84% of total cloud revenue. Current cloud backlog increased 29% to EUR15.4 billion. Non-IFRS operating profit increased 28% to EUR2.2 billion with an operating margin of 26.5%. Software license revenue showed resilience with a 14% decrease. Support revenue had a constant currency decline of -2%.

• Raised 2024 outlook for cloud and software revenue, operating profit, and free cash flow.
• Q4 is crucial for achieving full-year targets and Ambition 2025.
• Expect year-end headcount slightly higher than last year, including colleagues from WalkMe, with some colleagues leaving as part of transformation program on January 1, 2025.

• US government investigations related to sales practices, but clarified they are unrelated to the 2022 Civil Investigative Demand.
• Macroeconomic challenges affecting transaction revenue, particularly temporary workforce-related parts.

Q: Michael Briest asked about large deals, pipeline, macro, and AI pricing.

A: Dominik Asam noted over 60% of cloud order entry was from deals over EUR5 million, citing strong momentum from installed base large enterprises. Christian Klein commented on macroeconomic challenges but saw no slowdown in customer transformation efforts and mentioned 30% of deals had AI use cases with upside.

Q: Adam Wood asked about management changes, execution risk, and free cash flow.

A: Christian Klein discussed go-to-market model restructuring, healthy pipeline, and confidence in execution, while Dominik Asam noted free cash flow was more phasing-related but solid.

Q: Frederic Boulan asked about Cloud ERP Suite drivers, CCB growth, and gross margin.

A: Christian Klein cited customer wins, platform ecosystem, and net new as drivers for Cloud ERP Suite growth. Dominik Asam talked about CCB growth headwinds from transactional business but strong Cloud ERP Suite growth, and gross margin expansion due to cloud transformation measures.

Q: Jackson Ader asked about US government investigations and US federal business size.

A: Dominik Asam clarified investigations were unrelated to SAP's case and US federal business was low single-digit revenue contribution. Christian Klein noted strong relationship with US public sector and momentum in sovereign clouds.

Q: Mohammed Moawalla asked about installed base runway and transaction revenue impact.

A: Christian Klein discussed cross-sell and land-and-expand opportunities in installed base, and Dominik Asam talked about transaction revenue impact from macro and phasing of transformation.

Q: Mark Moerdler asked about GenAI impact on gross margin and ECC to cloud migration.

A: Dominik Asam said GenAI impact on gross margin was gradual and incremental, while Christian Klein noted strong interest in ECC to cloud migration driven by business process transformation needs.

Q: Sven Merkt asked about support revenue trend and Q4 costs.

A: Dominik Asam said support revenue decline was gradual, and Q4 costs were affected by phasing, employee bonuses, WalkMe integration, and other factors.

Q: Toby Ogg asked about cloud backlog contribution from WalkMe and go-to-market changes.

A: Dominik Asam noted WalkMe's contribution to cloud backlog was slight, and Christian Klein discussed go-to-market changes including digital marketing expansion and partner ecosystem empowerment starting in January.