SAP SE Q3 FY2025 earnings call

• Cloud revenue has consistently grown over 25% for 5 quarters, with Q3 at 27% and cloud gross margin around 75%. • Strong customer wins in Q3 including Alphabet, Ericsson, Lufthansa, etc., with adoption of SAP Business Data Cloud, Business AI, and expansion of SAP footprint. • U.S. public sector business picking up, with SAP NS2 awarded a major framework contract and first orders from the U.S. Army in Q3. • Acquisition of SmartRecruiters strengthens talent acquisition capabilities. • AI is a key enabler of growth, with AI assistants in development, Joule everywhere functionality released in Q4, and partnerships with Perplexity and Google Gemini. • Internal AI adoption boosting productivity, with examples like Johnson Controls, Bosch, and JK Cement seeing efficiency gains.

In Q3, cloud revenue rose 27%, with cloud gross margin around 75%. Total revenue grew 11%. Current cloud backlog increased 27%. Software licenses revenue decreased by 42%. Regionally, SAP's cloud revenue performance was particularly strong in APJ and EMEA and solid in the Americas region. Brazil, France, Germany, India, Italy, and South Korea had outstanding performance, while Japan, Spain, and the U.S. were particularly strong. Cloud ERP suite delivered 31% growth in Q3, representing 87% of cloud revenues and more than 100% of the year-over-year increase in cloud revenues.

• Expect to reach the lower end of cloud revenue outlook for fiscal 2025 due to delayed bookings in H1. • Now expecting to land towards the upper end of operating profit outlook range and forecast free cash flow to exceed EUR 8 billion. • CCB growth expected to slightly decrease in 2025, but robust pipeline and competitive momentum support ambition to accelerate total revenue growth through 2027.

• Macro-economic uncertainties and elongated sales cycles in sectors like U.S. public sector and manufacturing. • Impact of case law changes affecting tax provisions, with approximately EUR 100 million negative impact in Q3 and expected further EUR 100 million in Q4. • Workforce transformation expenses, with related costs partially offsetting profitability. • Delayed bookings in H1 affecting cloud revenue guidance if not picked up in Q4.

Q: Just on the demand backdrop, Christian. I know you talked previously about elongated sales cycles across various sectors, U.S. public sector and manufacturing. Could you just give us an update on what you're seeing now with respect to these sectors? Obviously, there's a shutdown at the moment, but it sounds like you're seeing some positive early signs. And then just related on the backlog, Dominik, I think you said at a recent conference that 4 percentage points of decline would be a bit more than a slight decline, which is the guidance. So is it right for us to interpret that as a 25% exit rate being unlikely as that would be 4 points deceleration from the 29% that you did in 2024?

A: Yes. So happy to take your question. And first, I mean, on macro and deal cycles and just to give you also a bit insights into our Q4 pipe. I mean first, what is not only very positive is that we have the coverage. Q4 is, by far, as you know, our biggest bookings quarter and coverage looks really good. We even see in the U.S. public sector, I mean, you saw the adjusted cloud revenue guidance. I mean when you're going to miss in the U.S. public sector and also in a few deals in the manufacturing space, somehow the bookings in half year 1, and it's hard to catch up. Now the good piece is looking at our Q4 pipeline, I find a lot of these deals now coming back. And that gives us a lot of confidence for Q4. The good piece is also when you look at the pattern of the pipeline and not even Q4, we had also a broader look on rolling 4 quarter. The good piece is I always ask the question, are we connected to the C level? Is it only about IT and end of maintenance? Or is there high value? And I can tell you in over 90% of the deals, we are talking to the C level. We are talking about cost optimization with AI, I would say, especially in the chemical industries. But this is not about do we do it or do we not do it? It's actually a done deal that they want to do it. But it's also about AI being the leading factor for doing this deal and not only to be more safe in the cloud. Second, when we also then look at the Q4 pipeline, what is also very promising is that when we have seen in the past this kind of pipeline cover, which we could definitely see that when we are executing it in the right way, when we are connected to the C level, when there is a compelling business case, I mean then it's all about execution. It's in our hands, nothing else, no macro, no elongated sales cycles. And then last but not least, when it comes to the CCB, I mean, I definitely don't see in '25. Q4 can have a big swing. And so I would be rather a bit more optimistic when we are talking about the CCB and the exit rate for this year given the momentum in our business.