Earnings Call Transcript
SAP SE (SAP)
Earnings Call Transcript - SAP Q3 2025
Operator, Operator
Thank you for your patience. Welcome to the SAP Q3 2025 Financial Results Conference Call. I would like to introduce Alexandra Steiger, Global Head of Investor Relations. Please proceed.
Alexandra Kasper Steiger, Global Head of Investor Relations
Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; and CFO, Dominik Asam. On this call, we will discuss SAP's third quarter '25 results. You can find the deck supplementing this call as well as our quarterly statement on our Investor Relations website. 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 risks and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding these risks and uncertainties may be found in our filings with the SEC, including, but not limited to, the Risk Factors section of our annual report on Form 20-F for 2024. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS year-on-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. And with that, over to you, Christian.
Christian Klein, CEO
Yes. Thank you, Alexandra, and a warm welcome to everyone on the line. We are already entering the final stretch of 2025, and I'm very happy to report SAP had a great Q3 and keeps delivering. Our cloud revenue growth and current cloud backlog performance have been strong. Business in the U.S. public sector has started to pick up again. Overall, we are gaining market share as our customers are adopting solutions across the entire business suite, including Business Data Cloud and AI at an accelerated pace. A recent IDC study shows that we grew 10 percentage points faster than the rest of the market in 2024. Looking ahead, the pipeline for Q4 and 2026 looks great as we unlocked a few key industries where business had stalled in half year 1. As a result, we can confirm with high confidence our ambition to accelerate total revenue growth through 2027. And I'm very excited about that AI is becoming the key enabler of our growth. So first, let's have a closer look at the quarter's financial results and our customer wins. In Q3, cloud revenue rose 27%. Cloud revenue has consistently grown more than 25% for 5 quarters in a row, and it was coming with a very solid cloud gross margin of about 75% in Q3. Total revenue growth came in again double digits at 11%. Current cloud backlog increased 27%, a strong performance considering that the WalkMe acquisition is now in the base. And once again, our bottom line performance was excellent. Free cash flow increased by 5%, while operating profit came in 19% higher despite negative impact of around EUR 200 million, which Dominik will explain happily in a moment. The customer stories from Q3 add color to the picture. Alphabet, Ericsson, Lufthansa, The Magnum Ice Cream Company, STIHL, Syngenta Crop Protection, Tapestry. These companies are known around the world. They are industry leaders with iconic brands, and they all opted for the RISE journey in Q3. But that business transformation journey doesn't stop at cloud ERP. Ericsson, Lufthansa, Magnum, Syngenta, STIHL and Tapestry also adopted SAP Business Data Cloud and Business AI and expanded their SAP footprint with our Business Suite LoB solutions. Alphabet for its part selected BDC, and we deepened our relationship with plans to further support our business AI road map with Google Gemini. The picture is the same wherever you look. In addition to their new RISE journeys in Q3, we won JYSK for CX, Jack Wolfskin for supply chain, Takeda for Ariba and supply chain, and all 3 customers also signed up for Business Data Cloud. Panasonic for their part signed up for RISE in 2022 and now in Q3 selected our complete human capital management portfolio. As you already know from the Analyst Conference at Sapphire, we see the potential to convert EUR 1 of on-premise revenue into EUR 5 and more of cloud revenue by transforming the end-to-end value chain of our customers through RISE with SAP. About half of that potential is upselling and cross-selling. The conclusion from these stories is very clear. Our strategy works, land and expand works and the AI-infused integrated business suite is the way forward for customers as well as for SAP. As for the growth journey, our strategy is playing out very nicely as well. Among those that embarked on their growth journeys were the AI companies Perplexity, Konecta and Kodiak AI. It is great to see that many fast-growing tech companies build their unique growth stories with SAP's business suite. Next to the Q3 wins, also Bending Spoons, Top and Solid, for example. They all embrace our growth journey because of the following reasons. They will be able to go live in a matter of weeks. They can scale our platform from small to big without any effort in over 60 countries, growing towards the IPO and beyond. And they will never have to think about upgrades again and can instead invest their IT money in continuous innovation like AI. Finally, let's have a look at our Software and Cloud offering. I already mentioned that business in the U.S. public sector is picking up again. SAP NS2 was awarded a major framework contract with the U.S. government, and we are very happy that we have already won first orders under this framework in Q3. For example, the United States Army signed a contract enabling the migration from on-premise systems to the cloud. In the U.S. and worldwide, more and more customers are approaching us with their software needs. While some companies pursue high growth in the infrastructure business, we are sticking to our strategy. SAP will not build gigafactories. Instead, we provide software and cloud solutions together with strong cloud infrastructure partners. This allows us to offer customers the best of the best across the technology stack. And it allows us to reach great global coverage at a healthy margin without any long-term bets. Together with AWS, we recently launched software offerings for India and Europe. And with OpenAI, we launched a partnership providing German public sector customers software and access to one of the world's leading LLM. On top of that, we just introduced a game-changing new software and cloud offering for highly regulated customers and governments. We can now offer our entire cloud portfolio in a customer data center at a highly competitive cost. The offering delivers the highest levels of data, operational, technical and legal sovereignty, while customers have access to all SAP cloud solutions, BTP, BDC and AI. We see tremendous customer interest in this software and cloud on-site offering and have built already strong pipeline for 2025 and 2026 within a few weeks. With regard to AI, our strategy is playing out as well. For high-value AI cases in B2B, a large language model alone is not sufficient. To make it simple, no apps, no data, no AI. Only the combination of LLMs with business process and contextual data results in high-value AI use cases. That is our strategy. That is where SAP is better than anyone else, and that is where we innovate and invest. We are proud of releasing more and more AI agents. But it is not the number that counts. It is about how we automate and infuse intelligence across end-to-end business processes. It is about orchestrating AI agents across the company's value chain, something only SAP can do. That's why we are introducing AI assistants in June, orchestrating our agents to support specific personas and functions in a company. Imagine, for example, an AI assistant for supply chain management, supporting a planner to reroute goods, optimize inventories or connect new suppliers seamlessly. Think of these assistants as team leads who bring just the right technical agents into the conversation from a pool of hundreds. For example, bringing in a maintenance planner agent as part of the production planning process and supporting the planner to reduce downtimes of important assets significantly, increasing the productivity of the planner by up to 40%. We are currently working with customers across all industries and functions to co-develop and refine these assistants to maximize the business value. We are also releasing the Joule everywhere and everything functionality to customers in Q4. Thanks to our partnership with Perplexity, our AI Copilot can now work with both SAP and non-SAP data, and it can provide high-quality answers to very complex business questions. Finally, our latest research publication on SAP's foundation module for tabular data will be a spotlight paper at one of the world's top AI research conferences this year. We are at the cutting edge of research and turning now these insights into tangible benefits for our customers. In Q4, we are going to sign RISE deals initially planned in 2026 because customers want to start using SAP Business AI now. And even more important for us at SAP, AI adoption is going up significantly because end users are consuming SAP Business AI at a higher frequency and across a broader scope. Some examples. Johnson Controls saves 3,000 hours annually by automating routine IT system monitoring with our IT agent. Bosch saves 2,500 hours per customer service center per year with our services agent. JK Cement from India has cut the time for purchase-related processes by 50% with our sourcing agent. But we build use cases not just for the horizontal layer. Super happy to report that we are going in the meantime deep into the industry verticals as well. To give you 2 examples. Wärtsilä, a manufacturing company, is infusing SAP Business AI in their mission-critical spare part quotation process. This results in a significantly higher process accuracy and a much better customer and supplier experience. And with CHS, an agriculture company, we are enabling traders to create commodity contracts in natural language with SAP Joule with estimated efficiency gains in the tens of thousands of dollars per trader as well as improved data integrity and accuracy. Looking at the data layer and our business data cloud offering, we are also pushing ahead. For example, with the hundreds of data products released to date and new capabilities for intelligent apps such as people intelligence and revenue intelligence. We are also strengthening our position in data with our new offering, SAP Business Data Cloud Connect, a zero-copy service to connect BDC with partner data platforms such as Databricks and also Google BigQuery. Customers receive live and secure access to Google's AI ecosystem and Gemini modules among many other things. More exciting data partnerships will soon follow at our TechEd event in November. Internally, at SAP, we are also doubling down on AI adoption. Acting as customer zero for our own solutions, we boost productivity. Some of the greatest internal levers are in development, go-to-market, customer support, pricing and process simplification in the corporate functions, for example, in the deal approval process. SAP wants SAP. That is the guiding principle. As for Joule, our AI Copilot answers thousands of employee questions every day from simple tasks such as travel bookings to complex quoting support at quarter end. We believe that simplification and internal AI adoption will enable our headcount to grow significantly below revenue. Let me now summarize. SAP is in a very good shape. We closed a great Q3 and are ready for Q4, thanks to a very healthy pipeline. At the same time, we are building a strong position for SAP to be a leader in the AI race with apps, data and AI as the winning formula. As 2025 is coming to a close, we are already looking ahead to the next chapter. Our product strategy and business model are spot on. This gives us resilience across regions and industries. AI will be the key enabler for accelerating double-digit total revenue growth through 2027. Given all that and more, I'm very much looking forward to the future. And with that, I'm now handing it over to Dominik.
Dominik Asam, CFO
Thank you, Christian, and thank you all for joining us this evening. As Christian mentioned, SAP delivered yet another great quarter with performance that underscores the momentum we see across the business despite the persistent challenges and uncertainties in the broader macroeconomic backdrop. In Q3, we saw strong execution on current cloud backlog and cloud revenue. This, coupled with the healthy growth in operating profit reflects the safeguards we put in place and the discipline with which we are managing the business. The cloud ERP suite delivered its 15th consecutive quarter with growth exceeding 30%, highlighting the progress we are making in helping customers migrate to the cloud and validating the strength of our strategy. These achievements show that SAP remains a bellwether for digital transformation, reflecting the trust customers place in our mission-critical solutions and positioning us for durable growth in the years ahead. Now more details around our financial highlights. Current cloud backlog exceeded EUR 18.8 billion, up 27%. Cloud revenue also increased 27%, driven once again by the strong performance of cloud ERP suite. It delivered 31% growth in Q3, demonstrating the unabated momentum of strong market share gains in what by now represents 87% of cloud revenues and actually more than 100% of the year-over-year increase in cloud revenues. The magnitude of these market share gains becomes even more evident if adjusted from 31% cloud ERP suite growth at constant currencies with the reporting currency of our competitors, which is obviously the U.S. dollar. During the quarter, we also closed our acquisition of SmartRecruiters. This tuck-in strengthens our capabilities in talent acquisition and supports our long-term strategy. Despite our solid operating momentum in Q3, please keep in mind that as we progress through the remainder of 2025, we need to stay mindful of the broader environment. We were also awarded a major U.S. public sector framework agreement in Q3 with the United States Army, which we expect will expand our access to future opportunities in this market, giving us confidence that this industry is seeing early signs of improving engagement. Software licenses revenue decreased by 42% in Q3. Finally, total revenue came in at EUR 9.1 billion, up 11% and the share of more predictable revenue rose by 2 percentage points to 87%. Now a brief look at our regional performance. In Q3, 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 all had outstanding performance, while Japan, Spain and the U.S. were particularly strong. Now moving down the income statement. Our non-IFRS cloud gross margin for the quarter expanded by 1.1 percentage points to 75.1%, driving cloud gross profit up by 28%. IFRS operating profit increased 12% to EUR 2.5 billion in the quarter. In the third quarter, non-IFRS operating profit was up 19% to EUR 2.6 billion. Both IFRS and non-IFRS operating profit growth were negatively impacted by approximately EUR 100 million as a result of a change in case law that affected SAP's other tax litigation provisions as well as more than EUR 100 million related to the workforce transformation. In light of the timing for some of the measures related to this program, we anticipate another EUR 100 million of expenses to be recognized in the fourth quarter of 2025. I'll now touch on our results below the operating line. The IFRS effective tax rate in Q3 was 25.3% and the non-IFRS tax rate was 27.9%. The IFRS effective tax rate is lower than the non-IFRS effective tax rate due to the tax benefits from tax-exempt income. Operating cash flow in the third quarter was up by 7% to EUR 1.5 billion and free cash flow increased by 5% to EUR 1.3 billion. The increase was mainly attributable to the higher profitability and to lower restructuring payments, which were partially offset by higher tax payments. Finally, basic IFRS earnings per share increased to EUR 1.72 and non-IFRS earnings per share increased to EUR 1.59. Now on to our outlook. As you've seen in today's release, we now expect to reach the range of our cloud revenue outlook for fiscal year 2025 towards its lower end due to delayed bookings in the first half of the year, as already highlighted in July. We have seen this dynamic of back-end loaded bookings again in Q3, especially in sectors such as industrial manufacturing and public sector. Nonetheless, we are now expecting to land towards the upper end of our operating profit outlook range and forecast free cash flow to exceed the previous target of EUR 8 billion. We continue to expect CCB growth to slightly decrease in 2025. While by now, we have a quite precise view as to where we will end up within our guided range for cloud revenues for fiscal year 2025, given that Q4 is by far the biggest quarter in terms of bookings seasonality, we still have a larger range of potential outcomes for CCB growth. Nonetheless, our robust pipeline of opportunities and our strong competitive momentum give us confidence to reiterate our ambition to accelerate total revenue growth through 2027. This performance underscores the strength of our portfolio, operational discipline as well as our ability to deliver results. For additional details, please refer to our quarterly statement published earlier today on our Investor Relations website. And thank you, and now we will be happy to take your questions.
Alexandra Kasper Steiger, Global Head of Investor Relations
Thank you, Dominik. Again, we will take your questions now. Again, I would kindly remind you to only ask 1 question when prompted. Operator, please open the line.
Operator, Operator
The first question is from Toby Ogg with JPMorgan.
Toby Ogg, Analyst
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?
Christian Klein, CEO
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 quarters. 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.
Operator, Operator
The next question is from the line of Mohammed Moawalla with Goldman Sachs.
Mohammed Moawalla, Analyst
Just for me, again, on the sort of the delay you're seeing in terms of the backlog and the back-end loaded nature of the deals falling into cloud revenue. How should we think of that? Because the Q4 implies a kind of significant step down. But when we think of kind of cloud revenue going into next year, do you still expect to be around that sort of mid-20s level, plus or minus?
Christian Klein, CEO
Yes. And I mean, Q4 is, of course, a very important quarter, as you know, for the cloud revenue guidance for next year. We have the pipeline, we have the coverage. We have the industry back, which we were waiting for, and we have the AI in order to build these compelling business cases. And so yes, we are definitely very confident that we can not only deliver a good Q4, but also pick up some of the stalled pipeline in half year 1 now that we were able to open up these markets for SAP again.
Operator, Operator
We'll move to our next question from Michael Briest with UBS.
Michael Briest, Analyst
Yes. Christian, I know that you announced some of the details around the SAP ERP transition option for those customers who need longer to move over to S/4 in the cloud. Can you say something about the uptake? And I think you've done quite a smart thing on pricing by flagging increases if people don't sign by the year-end. What sort of uptake do you expect? And does this give you sort of visibility on this hopefully a small number of customers who will adopt this option?
Christian Klein, CEO
I'm glad to share that, Michael. Looking at the pipeline over the last three to four months, we've experienced positive momentum. While there is a transition option available, it's important to not overestimate its potential. We have many large customers, but they can't all transform their ERP businesses at once. I've previously mentioned a few examples, and for these customers, the transition is beneficial. It’s facilitating their move to the cloud, enhancing security, support, and operational SLAs. Over the past three months, I’ve observed that our pipeline growth has been driven by software and cloud developments. Unlike others focusing on infrastructure, SAP is concentrating on creating value at the higher levels. However, we remain competitive in the software and cloud space, expanding our solutions with infrastructure partners globally, especially in public sectors including regions like MENA and Germany. Australia is also progressing well. An important point I raised is our ability to implement the entire stack within a customer’s data center, allowing us to operate in a SaaS-like capacity. This has generated significant interest among customers, and I anticipate we could finalize some deals in Q4 if everything aligns. The transition option and software advancements have both contributed, along with developments in AI. I understand you're looking for specific AI numbers, but I prefer to focus on meaningful applications. For instance, our discussions with companies like Wärtsilä and a major hardware store highlight their interest in creating AI-driven use cases for targeted marketing and better consumer insights. We provide solutions that might not encompass the entire technical framework but align with the customers' specific needs, focusing on business processes and productivity improvements, particularly in supply chain planning. Even if there are some missing technical components, we emphasize our strength in collaborating with clients to develop standard agents that address their essential business capabilities. This collaborative approach is becoming a key factor in many of our upcoming Q4 deals, significantly reducing the risk of project delays. Customers are not just considering the cloud and product lifecycle but are also motivated by solid business reasons. This enhances my confidence in our pipeline conversion for the quarter. A strong pipeline is essential, but it's crucial to convert that into actual sales, and I believe we are on the right track for Q4.
Operator, Operator
The next question is from Mark Moerdler with Bernstein Research.
Mark Moerdler, Analyst
Great to hear in terms of the strength of what we should see at the back half of the year. I've got a higher-level question I'd like to ask. SAP is taking the approach through Business Cloud in terms of allowing the data to flow out to systems like Databricks and Google for analytics and the rest. How should we think about the effect that could have on the future economics for SAP for AI, analytics, et cetera?
Christian Klein, CEO
Thank you for your question, Mike. It's a crucial topic as there are others with similar inquiries regarding BDC. I want to clarify that in discussions about the future roles of SaaS and applications, I haven't identified any significant AI use case in the B2B sector that relies solely on an LLM module for high value. Whether it's predictive asset management, autonomous payroll processing, quicker quarter-end closings, or strategic workforce management in HR, it's always about the integration of both elements. It's essential to have data, and high-quality data is crucial. Many customers come to us reporting challenges because, despite having numerous customer agents, they're getting inaccurate predictions. This happens because the underlying data structure isn't harmonized. Technical agents can't perform optimally if they don't communicate or lack an understanding of the business context. Regarding BDC and the data aspect, BDC is engaged in every AI RISE deal because clients realize that these data products provide the harmonization and data quality necessary for high-value AI applications. As for our partnerships with Google and Databricks, the focus is on enhancing data processing, with zero data copies creating value. The data products, along with the semantics, business context, and the orchestration of agents, are all part of SAP. While some data products can be used for data engineering with Databricks, any activities involving AI agents within the realm of SAP applications, business processes, and enterprise analytics belong to SAP. We will always retain this core competency, as it is where we excel. We are indeed gaining the best of both worlds. Additionally, there are more partnerships on the horizon in Q4 that are already relevant to BDC, as customers are responding positively to our open data platform, which is essential for nearly every AI use case we are collaborating on with them.
Operator, Operator
The next question comes from Adam Wood with Morgan Stanley.
Adam Wood, Analyst
I just wondered if we could come back to the confidence on the revenue acceleration for next year. I think you're suggesting we probably end the year on CCB of 26%, but obviously, there is a little bit more risk of the range on that one. And it sounds like the cloud guide suggests that we exit Q4 maybe around 25% growth. I think on my calc, you need around 24% growth on cloud revenues next year to get that revenue acceleration. And you're exiting at 25%. It doesn't feel like there's a huge amount of room for error on that to be able to hit that revenue acceleration. Could you maybe just give us a few more insights into why that confidence is there? Is it the other revenues within cloud that you're more optimistic on? Is it that CCB just starts to slow dramatically less because you're starting to close some of the deals that slipped earlier in this year?
Christian Klein, CEO
I'm happy to clarify. The adjusted cloud revenue guidance reflects some delays in our pipeline from the first half of the year. Even if we close deals in August and September, it's challenging to recover six months of missed revenue. Looking ahead to next year's revenue run rate, everything from the backlog will contribute positively, along with a strong pipeline for Q4. Regarding CCB, although there can be significant fluctuations, I remain more optimistic than the 25% estimate because our pipeline indicates we can achieve more. While large deals can impact projections, they are well-developed, which boosts my confidence beyond the 25%. This also positions us well for overall revenue growth in 2026. With our strong recurring revenue, I am confident that if we deliver on our Q4 pipeline, you will see this reflected in next year's guidance for SAP. Dominik?
Dominik Asam, CFO
No, just adding that the difference between CCB growth at the end of '25 and cloud revenues should not exceed a percentage point because the transactional business is still struggling. The main reason for this is the reduced travel activity for Concur on bookings, which is significantly tied to the shutdown leading to lower travel activity among government officials.
Operator, Operator
The next question comes from Ben Castillo with BNP Paribas.
Ben Castillo-Bernaus, Analyst
Question maybe for you, Dominik, on free cash flow. Obviously, you've nudged up the guidance for this year up to EUR 8.2 billion. You're at EUR 7.2 billion through 9 months this year. I guess I can't recall the last time Q4 was less than EUR 1 billion in free cash flow, excluding one-offs. So is there anything that's different this year that we should be thinking about? And I guess the cash conversion so far this year has been very strong. I know you've given us some indications for next year with various headwinds. But nevertheless, just welcome any comments on this year's free cash conversion and thoughts into next year.
Dominik Asam, CFO
One factor influencing the situation is the timing of tax cash outflows. We experienced moderate cash tax outflows in the first half of the year, with an increase in the third quarter, and we expect the fourth quarter to show even higher outflows. Additionally, we need to be mindful of the consumption of transformation credits and how much will be utilized by year-end, which may create some cash challenges. There isn't anything extraordinary here; it's really a combination of smaller factors in working capital that can make the figures somewhat volatile. We've tried to be as precise as possible for the fourth quarter and arrived at this estimate. Ultimately, it’s about the timing of various receipts and payments that occur at year-end, which can impact the cash flow in either direction.
Operator, Operator
The next question comes from Frederic Boulan with Bank of America.
Frederic Boulan, Analyst
If I can ask a question on your competitive position versus Oracle. Do you see an incremental risk from their people towards infrastructure in terms of offering? And also they mentioned you guys a number of times at their recent CMD. So keen to get a bit of an update on where you see yourself position in this?
Christian Klein, CEO
Yes. Look, I mean, for me, when I see the recent developments out there in the market, I know that some of our competitors are playing the game on scaling their infrastructure, training LLMs. I mean when I listen to our customers, and that is super important, they are super positive around the value creation we are now providing to them for the end users, Joule, supply chain, HR, finance. And for us, the infrastructure is, of course, part of the stack. And when you look at software and cloud, I mean, we can actually always offer highly competitive offerings in all parts of the world. And so there is no need in my eyes at all to change our strategy and to suddenly start building data centers everywhere in the world. So our strategy is proven, and it works. And I'm deeply, deeply convinced that when we are now looking at some of the large language models, I mean our goal is not to train them, but our goal is to use them. And many of them, like in OpenAI, you saw our announcement in Germany are now coming to SAP and say, 'Hey, for this applied AI, I want to do business in the public sector.' Can you work with us? Can you give us the BDP? Can you give us Joule Studio to build all of these agents because we need a development platform. We need to apply AI thing. Now over time, we need to move up and deliver that. And so we see a huge momentum there also working with these LLM providers and really not only infusing them in our technical stack but really now going to customers together and actually deliver AI agents together. And so that is actually, for me, the absolute winning formula. And again, it's for us super, super important to make our AI foundation world-class, and we will stick to the winning formula we had throughout the whole year, and it's about the apps. They give us high-quality data. BDC was a genius move for us. And now with the high-quality data, together with the LLMs, we can provide more and more value to our customers, and we see it in the numbers. We see it in the pipeline, it's working. And again, on software and cloud, we are having everything what we need also on the infrastructure level without building those data centers.
Dominik Asam, CFO
From a financial perspective, Infrastructure as a Service now represents approximately 1% of our cloud revenues. With sovereign services, this figure may stabilize or even increase, but we are pursuing a different strategy. Regarding competitive benchmarking, organizations like Gartner and IDC present their figures in U.S. dollars. It's important to recognize that euro constant currency figures in a strongly depreciating dollar context tell a different story than those in dollars. When we convert our figures to dollars, we observe even greater numbers than those in constant currency. Therefore, what acts as a headwind for us due to the depreciating dollar is actually a tailwind for our U.S. competitors. This is the point I aimed to convey in my opening statement, so I'm puzzled by any concerns regarding the 31% growth of our Cloud ERP suite in constant currencies, which amounts to even more in U.S. dollars because of the dollar's depreciation. Furthermore, I challenge anyone to identify a competitor performing anywhere close to this level.
Operator, Operator
The next question comes from Jackson Ader with KeyBanc Capital Markets.
Jackson Ader, Analyst
I want to revisit the back-end bookings occurring in the first half or during the quarter. I believe we've discussed the competitive landscape. However, Christian, you've mentioned that you want to prioritize price discipline. I'm interested in how that price discipline is affecting the booking patterns throughout the quarter and how it is maintaining as we approach the end of these quarters.
Christian Klein, CEO
Another great question. Let me provide a real-life example of how our AI functions. I asked in the afternoon about the valuation of this earnings call, specifically regarding Joule. With my pipeline, sentiment, and everything we have compared to previous years, I wanted to see how we would finish the year. When analyzing the pipeline and considering what we foresee for next year along with our business cases, it's encouraging to recognize that it's not merely about transferring systems. It's not just about training an LLM module and scaling commodity hardware. In the majority of deals, the focus is on engaging with C-level executives regarding cost optimization programs. We are examining how we can assist with expenses, automation, and enhancing shop floor operations to achieve in-time, real-time manufacturing with improved demand forecasting. This approach is beneficial for us as it mitigates pricing pressure. It’s not just the CIO stating they want to finalize a deal; it’s the C-level executives affirming that we are integral to a business case. This extends to company transformations, regardless of whether they are under cost pressure or exploring new AI-driven business models, and this positions us advantageously regarding price protection. As I mentioned earlier about pricing in software and cloud services, we’ve undertaken extensive engineering efforts to make this possible, and now we are seeing the rewards. Customers are also willing to pay a premium because these capabilities are highly sophisticated. It's not simply about placing an ERP system on a public cloud infrastructure; sometimes we meet much higher standards, and customers recognize the need to pay a premium for that. Furthermore, our sales team understands that to achieve their goals, they must balance both volume and pricing. We are not just giving away deals to meet our sales targets. It’s essential to have the right mix of volume and pricing. Regarding migration credits, as Alexandra often reminds me, we don’t take this lightly and don’t use them all the time. However, when a customer mentions they have cost challenges but acknowledges the value they see in AI and in what RISE can provide for their business, we can strategically help make their business case more appealing, including considering discounts on the exit price at renewal. This method allows us to protect our pricing on the cloud subscription side.
Operator, Operator
The next question is from Charlie Brennan with Jefferies.
Charlie Brennan, Analyst
Can I just ask a high-level question around investment levels? I think we all want you to remain at the front of the curve with AI and leading the industry. And I think we all understand that investment comes before revenue streams. Are you confident that you can fund the required AI investment by reallocating R&D spend and maybe reinvesting the efficiencies that you're driving? Or do you think there's a business case for an acceleration in investment to guarantee that you remain a leader in this space? And then separately, can I just ask a quick question about the support revenues. It looks like we're finally into the stage where we're seeing an accelerating decline. That's obviously an indication that you've got customers going live, which is very healthy. Is there anything you can say about the total cloud backlog moving into the CCB? Does that take some of the in-quarter pressure away to sign new deals because of that transfer of TCB into CCB?
Christian Klein, CEO
Yes. So happy to take the first question on support revenue. Maybe, Dominik, you can help me, but we're happy to...
Dominik Asam, CFO
On the support revenue, yes, I mean, it's just the acceleration we've always indicated that will come sooner or later. And again, don't look too much at one single quarter. I think it's always a bit noisy for whatever reasons, and there are some backs and forth on this. But the trend is clearly towards a slight acceleration for the reasons you have highlighted yourself.
Christian Klein, CEO
Yes, this demonstrates our customers' increasing adoption of the cloud, allowing their RISE journey to not only continue but also accelerate, particularly for those we signed a couple of years ago. Regarding AI, when discussing our R&D portfolio, Philipp has indicated that his priority isn’t to hire a large number of AI developers, but rather to bring in the top talent, specifically PhDs from leading institutions. We’re collaborating with MIT on our knowledge graph, emphasizing the importance of quality over quantity. Our research on tabular data is crucial, enabling Joule to analyze both HR and finance. For our financial result predictions this year, Joule must correlate sales contextual data and unstructured content with financial data, which is at the core of our AI foundation. In terms of our various business lines with Muhammad, we've already implemented some changes this year. We conducted a targeted restructuring and made slight adjustments to our workforce, mainly in R&D. Instead of having many developers focused on coding features, we are shifting towards AI developers and data scientists who are developing predictive models for our intelligent applications, and that transition is already underway. We expect to see further shifts next year, but they won't be drastic since a lot of changes have already taken place. I am always keen to invest in R&D. We are also applying AI internally; Muhammad's work with code generation tools is impressive. For Joule for developer, we're expanding our tools, including our own code generation tool within Joule Studio, and we’ve seen a remarkable 300% increase in adoption over the last three months. While we have a substantial development backlog, we are also experiencing efficiencies due to AI. The portfolio changes are positive, and our pipeline looks strong. Additionally, we are successfully finding valuable resources in India, Singapore, and parts of the U.S. for our AI team. Ultimately, we place greater importance on the quality of the individuals we can hire and onboard.
Operator, Operator
The next question is from Michael Turrin with Wells Fargo.
Michael Turrin, Analyst
Dominik, you mentioned the range of potential outcomes on 4Q CCB. It sounded like from some of Christian's comments, AI is actually pulling RISE deals forward in some cases. So I would just be curious to hear more around potential swing factors in either direction there on that metric and any higher-level commentary you're willing to share to help size the range of potential outcomes as you're exiting the year on the stronger seasonal bookings quarter.
Dominik Asam, CFO
The key factor influencing the CCB moving forward is net bookings, which includes gross bookings and churn. We aim to perform well in both areas. A notable advantage of the CCB is that a significant portion depends on whether you close deals by the quarter's end, given a specific deployment timeline. This doesn't apply to cloud revenues. I can't provide additional insights beyond what has already been discussed in this call. It's important to recall where we began the year, starting at 28.7%, slightly below the 29% mark. We anticipated a slight decline, including an impact from M&A, which at that time accounted for about 1.5 percentage points. SmartRecruiters provided a minor offset, making M&A roughly a percentage point in that transition. As we consider our position post-Q3, it offers perspective on the beginning of the year versus now. I wouldn't focus too much on individual quarters, but reflecting on the three quarters we've accumulated shows a trend when adjusted for CCB growth. We should also consider the ongoing challenges in the transactional business, although these do not significantly affect CCB, which is more influenced by cloud revenues. When analyzing these numbers and considering the uncertainties regarding bookings, net bookings suggest a range for the expected outcomes that isn't overly broad.
Christian Klein, CEO
Yes. I want to emphasize how crucial the CCB will be for the end of this year and for our outlook next year. Looking at the first half of the year, with so much pipeline stalled, I believe a 25% outcome is the most realistic scenario. However, I've noticed a shift in sentiment within several significant industries. Thus, I would be quite disappointed if we only achieved 25%. A 26% outcome would be a fantastic result when considering the base and the impact of the WalkMe acquisition. I'm seeing a better outlook now, and we've been working hard on it. While Q4 has a lot of unpredictability and can swing in various directions, I feel more optimistic about it than I did three months ago, especially since Q4 is by far our largest bookings quarter of the year.
Operator, Operator
We'll take our next question from Johannes Schaller with Deutsche Bank.
Johannes Schaller, Analyst
Christian, I wanted to come back to this comment that you made that you're now hoping to sign maybe some RISE deals in Q4 that were initially planned for '26. I guess that's quite a rare comment in an industry that often sells quite large multiyear transformational deals that are maybe not that easy to accelerate. So could you zoom in a little bit more on the customer discussions you had around that and really kind of what role your AI offering played here? And then just as a quick follow-up, you used to give the AI attach rate on new deals. I may have missed that, but could you share that maybe for the third quarter?
Christian Klein, CEO
I was recently in Japan where a customer expressed the significant pressure they are facing for transformation. BCG involved us, and they asked for support not only with the cloud and alleviating the burden of difficult ERP upgrades but also regarding cost optimization potential. They are seeking a new approach to monetize their diversified portfolio. We are also seeing AI applications in areas like process automation and intelligent quoting and pricing. An unexpected deal emerged from this context, and it’s encouraging that the ecosystem recognizes SAP's strengths. It's clear that these opportunities stem from business transformation and AI, not just maintenance or IT needs. We have several deals in the pipeline that look promising, and that's a positive indicator. Additionally, I'm feeling more optimistic than I was during the Q2 earnings call, despite having previously highlighted a 25% target back then. The sentiment has shifted, and having access to C-level executives has contributed to my increased optimism.
Alexandra Kasper Steiger, Global Head of Investor Relations
Great. Thank you, Christian. And this concludes our call for today. Thank you all for joining.
Operator, Operator
Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day.