Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q3 2023 Earnings Conference Call. Throughout today's recorded presentation, all participants will be in the listen-only mode. The presentation will be followed by a question-and-answer session. I would now like to turn the conference over to Anthony Coletta, Chief Investor Relations Officer. Please go ahead.

Good evening, everyone, and thank you for joining us to discuss our third quarter results for 2023. With me on this call are CEO, Christian Klein; CFO, Dominik Asam; and Scott Russell, who leads Customer Success. You can find the deck supplementing this call, as well as our quarterly statement on our Investor Relations website. During this call, we'll 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 risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including but not limited to the Risk Factors section of SAP's Annual Report on Form 20-F for 2022. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-over-year at constant currencies. 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. Before turning over the call to Christian, I would like to take a moment to recognize a significant milestone for SAP. This quarter marked the 25-year anniversary of its listing on the New York Stock Exchange. Reflecting on this journey, SAP began with a primary listing in Frankfurt 35 years ago and now stands as the number one company on the DAX. This dual listing is a testament to an amazing growth story. It signifies our dedication to providing our investors with prime access across the major capital markets. As we celebrate this milestone, note that the focus on sustainable growth remains unwavering and that the company is poised to keep innovating and creating shareholder value. And with that, I'd like to turn the call over to Christian.

Thank you, Anthony, and thanks, everyone, for joining us for our Q3 earnings call today. First of all, I want to express my shock and sadness at the heartbreaking events that have unfolded over the last few weeks. SAP condemns in the strongest possible terms all acts of terror, and we are deeply concerned by the escalating conflict. We offer our deepest sympathies to all those impacted and are committed to supporting our colleagues, customers, and partners during this most difficult time. I'm sure I speak for everyone here at SAP when I say that we hope for a swift resolution to this tragic situation. Let me now turn to more positive news and SAP's earnings. Our results clearly reflect the strong foundation we've built over the last three years for the next phase of SAP's transformation. In Q3, we once again achieved strong cloud growth and double-digit operating profit growth, up 16% for Q3 and 19% for the first nine months, confirming what we have said all along: 2023 is the year of double-digit profit growth, underlining the fact that we have reached the second phase of our transformation, the phase of acceleration. The numbers tell the story best. Current cloud backlog is up 25%, driven by strong order entry across the portfolio and backed by significantly lower churn. Cloud revenue growth is 23%. Within that, SaaS and PaaS are up 26%. The foundation of SAP's success story is the business technology platform which underpins both our RISE and GROW offerings. BTP is also the foundation for SAP's business AI to ensure high-quality data and data privacy standards. Over 22,000 BTP live customers contribute to almost 50% cloud revenue growth in our PaaS business. This business has a run rate of well over EUR2 billion. We achieved the overall cloud gross despite pressure on transactional revenue which was flat year-over-year due to the macroeconomic situation. Our total order entry, combining on-premise and cloud, grew at the fastest rate in almost two years. Behind the strong numbers are many new and existing customers who turned to us to future-proof their businesses. In the third quarter, we had key customer wins like Adobe and ALDI SOUTH across our solution portfolio. We also saw a number of important go-lives including BMW Group, Ducati, and SCOTT Sports. This quarter, we once again saw significant momentum in our RISE customer number, reaching well over 4,300 RISE customers. Key customer wins include Puma, Siemens Healthineers, and LG with its Energy Solution and Electronics units. There are multiple factors that drive the value of RISE with SAP for our customers. With the migration to the cloud, responsibility for IT operation shifts over to SAP and the hyperscaler. The combination of cloud ERP and SAP's process expertise is key for business model transformation. For example, LG Energy Solutions chose SAP to help meet the growing demand for electric vehicle batteries. Process standardization and embedded AI increased the productivity of customers in manufacturing, supply chain, HR, and finance. And by always being on the latest release, our customers also gain greater agility through continuous innovation. Finally, we are removing data silos with RISE with SAP and building one strong data layer to allow steering the business 360 with real-time data. RISE and GROW are also very exciting opportunities for SAP. The two offerings result in net new customers and an installed base maintenance conversion of more than 2x. At the heart of RISE and GROW, we have the Business Technology Platform. It is the B2B platform for customers, partners, hyperscalers, and, of course, our own developers because it is the platform for the development of mission-critical business applications to extend our core. This represents a massive business opportunity for the years to come. More than 80% of our RISE and GROW customers use BTP to integrate and extend their cloud ERP portfolio with differentiating capabilities. We are already seeing strong cross-sell potential with customers replacing legacy ERP with public cloud ERP components such as SAP SuccessFactors, Ariba, and Concur. That trend continues to grow. S/4HANA Cloud customers are four times more likely to have four or more of our Cloud Line of Business products with the BTP as the extension layer for cloud ERP. We are able to deliver innovation to customers much faster, allowing us to focus our R&D spend on innovation and not on maintenance and localization. It's a win-win for our customers and SAP, even under difficult macroeconomic conditions. Last week, we took RISE to the next level. We launched a new premium plus package for RISE, including differentiating AI, sustainability, and advanced finance capabilities such as cash flow optimization. It also simplifies how our customers consume AI with a new consumption-oriented license model. Furthermore, we introduced a new conversion program for RISE with SAP, offering commercial incentives to support customers on their transformation journeys and accelerate their move to SAP's cloud ERP. Likewise, GROW with SAP had a great start with strong adoption among startups and companies new to SAP, with over 440 customers in over 80 countries selecting GROW with SAP's cloud ERP to accelerate their business, innovate and grow globally. Business transformation is much more than the technical migration of ERP legacy landscapes to the cloud. It's key to connect end-to-end processes and the entire data and system landscape to drive tool transformation. In 2021, we acquired Signavio to cover the process perspective, and in Q3, we announced our intent to acquire LeanIX to ensure processes, systems, and data yield the best outcome for every SAP customer. Together, LeanIX, Signavio, and SAP Cloud Application Lifecycle Management create a unique business transformation suite. Earlier this year, we also introduced our business AI strategy to the market, bringing together our existing AI capabilities with the potential of generative AI. We have made significant progress in the last few months. We have consent from thousands of customers to use their anonymized data to develop and train our AI use cases and foundational data model. The launch of our digital co-pilot tool was a huge success, and we are starting to roll it out across our portfolio this fall. Just last week, we announced our new RISE premium plus commercial offering, as I mentioned. SAP business AI is reliable, and we are making promising progress on building foundational models to enable generative and predictive capabilities from structured business data. SAP Datasphere combines structured SAP data with data from other sources to produce highly accurate results, essential in the B2B world. Our new co-pilot tool will work with many LLM models to ensure we can offer this technology globally. As a result, SAP business AI is also more relevant. Our co-pilot can manage finance, HR, procurement, sales, marketing, industries, and ESG data, providing answers and recommendations to complex questions, automating many activities currently performed manually by millions of SAP end users. Recent announcements by key partners such as Accenture and Deloitte further underscore the central role played by SAP. Let's be clear; this is just the beginning. Business AI will revolutionize the business landscape, and SAP will be at the center of that. So stay tuned for more exciting announcements at CX LIVE and TechEd next month. In closing, let me summarize. We have had a strong Q3 and I'm excited by the results. First, SAP continues to deliver on our commitments, and we are well into the second phase of our transformation. Second, SAP's unique position at the nexus between business and technology allows us to continue translating innovations into business outcomes for our customers. Finally, despite ongoing macroeconomic headwinds, our cloud momentum remains strong and growth continues to accelerate, all in all, putting us well on track to achieve our 2025 ambition. This is just the beginning of the next phase.

Thank you very much, Christian, and good evening, ladies and gentlemen. In light of the current macroeconomic environment, we are pleased with the results of the third quarter across the globe. With the added capabilities of LeanIX in June, SAP is even better positioned to develop and deliver unparalleled value to our stakeholders. In Q3, we saw continued momentum of our cloud business with current cloud backlog growing by 25% for the third consecutive quarter. Cloud revenue in the third quarter grew by 23%, maintaining the growth rate we had achieved in Q3 of last year. The trend towards larger cloud transactions continued, with deals greater than EUR5 million in volume contributing approximately half of our cloud order entry. Let me walk you through our financial performance. Current cloud backlog was EUR12.3 billion, growing by 25%, fueled by the success of RISE with SAP offerings. Our combined SaaS and PaaS portfolio continued to grow by 26%, with SaaS cloud revenue up 23% and PaaS cloud revenue up 46%. This continued momentum was again fueled by the strong contribution of the Business Technology Platform, which underpins every single SAP application. Software licenses revenue saw a decrease of only 14%, demonstrating resilience thanks to a few major transactions. Finally, total revenue was up 9%, driven by broad-based strength across all predictable revenue streams. In the third quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA, and solid in the Americas region. Brazil, India, and the Netherlands had outstanding cloud revenue growth while Canada, China, France, Germany, Japan, and Switzerland performed particularly well. Now, let's move down the income statement. Our cloud gross profit grew by 28%, driven by effective leveraging of economies of scale and operational efficiencies, as evidenced by reduced cost ratios across the board. Growth in cloud gross margin improved for the third consecutive quarter, expanding roughly 2.9 percentage points to 73.7% year-over-year. In Q3, non-IFRS operating profit increased by 16%, supported by the resilience of our on-premise business and operational discipline, which overcompensated for the negative impact of accelerated amortization of capitalized sales commissions. Finally, the operating margin landed at 29.4%, which is a 1.9 percentage point improvement compared to the prior year. IFRS earnings per share in the quarter increased by 45% to EUR1.09. Our IFRS effective tax rate for Q3 was 27.8%, and the non-IFRS tax rate was 27.1%. On to our cash generation: free cash flow for Q3 increased to EUR865 million driven by SAP's profitability, improvements in working capital, and lower payments for CapEx and leasing. For the first nine months, free cash flow was EUR3.4 billion, an increase of EUR761 million. Now, let's move on to our financial outlook. As you've likely seen by now, we are reiterating the outlook we had updated in July. For the detailed outlook, please refer to our quarterly statement published earlier today. Let's now discuss our non-financial targets. We can confirm our non-financial guidance for 2023, as we are well on track to meet our targets. In Q3, SAP once again reported net carbon emissions of zero kilotons. We continue to focus on achieving net-zero emissions across our value chain by 2030. In summary, Q3 proved to be another solid quarter as evidenced by strong revenue and current cloud backlog growth. The structural move to the cloud and the interest of our customers in future-proofing their businesses remain strong. Despite the macro headwinds, SAP continues to be mission-critical in helping our customers transform their businesses. LeanIX and Joule are prime examples of our ongoing efforts to innovate around all solutions, giving customers access to a full suite of tools to fundamentally change the way they run their businesses. In addition to the top-line, we continue to balance growth and profitability, allowing us to boost our bottom line. All of this gives us confidence in our ability to capitalize on the massive market opportunity presenting itself to SAP. Thank you, and we will now be happy to take your questions.

Ladies and gentlemen, at this time, we will begin with the question-and-answer session. The first question comes from the line of Mark Moerdler with Sanford C. Bernstein. Go ahead, your line is open.

Thank you very much for taking my questions. Congratulations on the strong quarter. In fact, I'd like to ask about that specifically. ERP has generally been thought of as core workloads that's not really impacted by macro. But I was seeing some other vendors in the market that there are persistent macro concerns of slowing, slowing to the pipeline, etc. Can you give us some color on, are you seeing anything in terms of slowing in the pipeline build, time to transition through the pipeline? Is there any difference between existing customers migrating versus new customers adoption? How should we think about that going forward? Thank you.

Thanks a lot, Mark, for the question. From the customer base perspective, we see strong momentum both in converting our installed base, as you heard, with a very healthy conversion factor to the cloud. Second, GROW with SAP has also had an exceptionally strong start, and these are really representing new customers to the SAP family. Regarding the pipeline, I highlighted LG Electronics as an example, and this is a very good example of many ERP deals we are doing. This company is going through a massive transformation, producing electric vehicle batteries at mass scale. They not only need a new ERP, they need a new way of running LG Electronics and that's essential to their business. While the macroeconomic times are tough, we are extremely relevant to our customers' transformation. You heard the announcement around SAP Business AI and we have to deliver that in the cloud, which is another strong driver for our pipeline in the next quarter. Scott, over to you to give some more light on the quarter and the pipeline.

Sure. Happy to, Christian. Broadening that out, we see across all geographies that companies, small, medium, and large, are focusing on their core: what's mission-critical? How do they get efficiency and set themselves up to seize opportunities or protect against threats in their business? That's why ERP in the cloud is so important. It’s not just the move to the cloud; it’s the transformation of their business using our ERP cloud and extended capabilities. That’s why there’s such resilience, because when things are uncertain, you make sure your core operating model is fit for the future. LG is just one example, but customers like Adobe, 3M, and many others are going through this journey with us to future-proof their business. I also want to highlight that when large customers with RISE with SAP come in, they are not just looking at the core ERP; they are looking at extended capabilities across various sectors.

Excellent. Thank you.

Thank you. And we'll take the next question, please.

The next question is from the line of Toby Ogg with JPMorgan Cazenove Limited. Please go ahead.

Yes, hi, and thanks for the question. Perhaps just on the cloud revenue growth side, the guidance implies continued acceleration into Q4. I know there’s the Litmos divestiture, which is going to annualize, but I think you exited that in December, so probably not the full benefit. With that in mind, Dominik, what are the drivers of that implied cloud revenue growth acceleration into Q4, and how confident are you in achieving that, given the more difficult macro and potential for transactional to be a headwind there as well? Thank you.

Yeah, maybe a little bit of granularity on some things you already mentioned. For the full year, we think Litmos will add a good percentage point of headwind. Based on the cumulative year-to-date, it's already pulled down by that. The real underlying growth rate is already very close to the 24% or so we need to fulfill the lower end of guidance. On top of that, there is of course the discussion about the transactional business, where Q2 has already been difficult. We were very slightly up, but Q3 was actually flattish or even slightly down. That business has been challenging, and the timing of improvement is dependent on the macroeconomic environment. However, we believe our trajectory for revenue is strong, and we are on track for growth despite the challenges.

With regard to 2025, especially the large transactions foresee a ramp. When we look at the current cloud backlog of over EUR12 billion ACV, there is a ramp included in the contracts that will help us in the coming years. RISE is out there for three years, and with the adoption, we will see further cloud revenue acceleration.

That’s great. Thank you.

Thank you, Toby. And we will take the next question, please.

Next question is from the line of Adam Wood with Morgan Stanley & Co. Please go ahead.

Hey, Christian. Hi, Dominik. Thanks for taking the question and congratulations from me as well on the quarter. I wanted to go back to the AI topic. You've obviously announced the products there, given us some details. I think some of your competitors have come out and said they feel that the AI copilots and so on are really just table stakes in the battle, and they don't feel there's room to extract a lot more value for customers. Could you talk about what's different in the SAP portfolio? Is it the data you have access to, the complexity of the processes, the value of the roles that you can further automate that would make you different in terms of being able to extract value on this versus some of your peers? Thank you.

Thanks a lot, Adam, for the question. An example of why SAP is relevant in the business AI space is with our traditional use cases, which we developed over 100 specific use cases. For example, AI helps to source the best suppliers in procurement based on cost, quality, and soon on ESG data. With generative AI, the opportunities and elements will significantly increase. Joule will be able to answer complex questions like how to reduce the carbon footprint in my supply chain by 10% while maintaining profit levels. We can cross-correlate data and build a foundational data model in a neural network. With Datasphere, we can enhance insights with unstructured data. Accuracy and data quality are crucial in the B2B world. All the work we’ve done on BTP to integrate our data model pays off in high-quality data, which is vital for SAP Business AI. Furthermore, SAP has a robust authorization concept for accessing business data, ensuring relevance and security for customers.

That’s very helpful. Thank you.

Thank you. We will take the next question, please.

The next question comes from the line of Mohammed Moawalla with Goldman Sachs International. Please go ahead.

Great. Thank you. And well done on the quarter. I had one question for Dominik, please. Your implied operating profit growth guidance implies a significant decline at the low-end. I'm trying to understand the cost dynamics, what we should think about in Q4, particularly around some of the changes in sales capitalization. Is there anything on the OpEx base that we should be mindful of in Q4? Thank you.

It's clear from the numbers that what remains to be done in Q4 is relatively manageable. The elements driving that include our software. We had a mild decline in software, especially Q1 and Q3. For Q4, we expect to see volatility due to the larger license deals, which magnify our performance. We have added 1,200 FTEs, which will impact the P&L fully in Q4. The accelerated amortization of commissions, which was based on the software business where we see the shift to the cloud, will also weigh. Overall, we are focusing on financial discipline, and it's essential to see the broader picture of gross margin improvements over time.

And with regard to the software momentum, the end of maintenance is coming for our ECC customers and other S/4HANA releases. However, we maintain a commitment until 2040 for mainstream S/4HANA customers. We are focusing on innovation in the cloud, which is essential for our customer engagements.

The large customers transitioning to the cloud are not just moving to S/4HANA; they're undergoing a full business transformation that allows them to innovate and optimize their operations, which strengthens our portfolio.

Thank you. Let's take the next question, please.

The next question comes from the line of Kirk Materne with Evercore Partners. Please go ahead.

Hi, thanks very much. Congratulations on the quarter. I was wondering if Scott could share his insights on the Americas market. We are seeing really strong orders and acceleration in Europe and Asia-Pacific when considering constant currency. However, America experienced a slight decline quarter-over-quarter. Is that simply due to market dynamics or macroeconomic factors? Is there more competition at play? I would appreciate any additional details you could provide about what's occurring in that region.

We had a very balanced performance across the world. The Americas is our largest market and where we see significant innovation. It is indeed experiencing macroeconomic pressure, similar to other regions. In North America, small and medium companies are focusing on efficiency, utilizing GROW for fast expansion without heavy investments in technology. Larger clients are engaging in multi-year investment journeys with us. While we face challenges, we maintain strong competitive performance in North America.

The transactional business of Concur, Fieldglass, and Ariba has significant presence in the U.S., affecting performance. However, the recent innovations in our intelligence spend portfolio have enabled us to provide a much better customer experience, especially in the last three years.

Thanks very much for the color. Helpful.

Thanks, Kirk. We'll take the next question, please.

The next question comes from the line of James Goodman with Barclays Capital. Please go ahead.

Thanks for taking mine. I wanted to ask you just on the implied guidance also a bit around the revenues ex cloud. I think like EBIT, it looks pretty conservative throughout the range. Even taking into account the comments that you've made around the anticipated Q4 license trajectory. Maintenance has been down, I think, 1% for three quarters in a row. Why should we see that certainly decelerating in Q4? And maybe you can extend the answer to some commentary around maintenance for next year. I think we've now seen that you can raise prices up to 5% next year. Should that offer sufficient support to maintenance to keep a similar trajectory? Thank you.

The key point is not really maintenance but the licenses where there is more volatility. We have been prudent on that front. Q4 is the largest quarter for licenses, which has a big impact. This allows us to demonstrate commercial discipline on software deals as we shift towards cloud. The range remains open due to the unpredictability in this market. Regarding maintenance, we believe that the possibility of pricing adjustments to 5% next year will provide support but further clarity will emerge in our next quarterly guidance.

We have maintained our 2025 guidance amid various challenges, including COVID and macroeconomic impacts. It is commendable that our portfolio remains strong despite these headwinds.

Yes, good evening. My congratulations as well for the momentum. A little teaser on next year: Your revenue outlook is driven by cloud, and it's quite predictable and linear. For maintenance, you've offered clear guidance on 2025. Is there any reason we shouldn't think profit and cash flow will grow in a linear progression between here and 2025? Are there factors we should be considering that may prevent that?

We will provide guidance for 2024 in January of next year. Our focus currently is on derisking 2025 to ensure solid delivery on our goals. Moreover, we are contemplating ways to drive earnings growth beyond 2025, building upon the strong trajectory established through our cloud business.

Thank you. Next question, please.

The next question comes from the line of Chandramouli Sriraman with Stifel Nicolaus Europe Ltd. Please go ahead.

Yeah, thanks for taking my question and congrats from my side as well. Just one on the amortization period change. I'm just wondering from a business sense, what it means for the end of support of R3 and how does this fit in with the license strength that you have seen in '23? Thanks.

This is an accounting policy driven by forward-looking assumptions regarding support revenues. We felt it prudent to reflect a shorter amortization period, as we aim to encourage a focus on cloud transition while still supporting our existing customers. It will not have a significant impact on our guidance for 2025 due to adjustments we will implement by then.

For our ECC customers, the end of maintenance is approaching, but we will maintain support for current S/4HANA customers until 2040. Our focus remains on driving cloud innovation and supporting our customers during this transition.

Our clients transitioning to the cloud are not merely adopting S/4HANA but are leveraging a comprehensive business transformation that enhances their operational capabilities.

Thank you. We'll take the next question, please.

The next question comes from the line of Johannes Schaller with Deutsche Bank. Please go ahead.

Thanks. Christian, thank you for providing a bit of detail on the AI side from a technical and functionality perspective. I wanted to ask about pricing. You discussed the potential for a 30% pricing uplift with AI features. Can you share feedback on this pricing strategy from customers? How should we envision the initial AI revenues in terms of profitability?

On the product engineering side, we are focusing on creating efficient AI ecosystems. Our foundational data model is key to maximizing value. We are leveraging existing infrastructure commitments with hyperscalers to minimize hardware costs. The premium offering includes advanced capabilities like AI and financial optimization, and we're seeing positive feedback from early adopters. Customers can also choose a consumption-based pricing model for AI, enhancing flexibility in how they utilize these features.

Thank you.

Thank you. We will take one final question now. Thank you.

The final question comes from the line of Ben Castillo Bernaus with BNP Paribas. Please go ahead.

Good evening. Thanks very much for squeezing me in here. Just one question on the free cash flow, I guess, in the full year guidance. It looks like you're running comfortably on track there. It's up close to 30% year-to-date. It would imply that Q4 free cash flow would potentially be down year-over-year. If there's anything specific you could call out there to justify that, and if unwinding some of the extra factoring done last year is still on the agenda?

Cash flow volatility makes it difficult to predict at year-end, but we're tracking well. We aim for a clean underlying free cash flow by 2025. There are some phasing topics, but no major surprises are anticipated. Ultimately, we remain optimistic about our free cash flow trajectory.

Thank you, Ben. With that, we will conclude the call. Thank you for joining.

Thanks a lot. Have a nice evening. Bye-bye.