Image source: The Motley Fool.

DATE

Oct. 21, 2026

CALL PARTICIPANTS

• Global Head of Investor Relations - Alexandra Kasper Steiger
• CEO - Christian Klein
• CFO - Dominik Asam

TAKEAWAYS

• Current Cloud Backlog -- €24.1 billion, representing a 26% increase in constant currency.
• Cloud Revenue -- €6.7 billion, up 25% in constant currency, reflecting a 1 percentage point catch-up effect from customers returning from financial distress.
• Total Revenue -- €10.3 billion, growing 12% year over year and marking the first time quarterly revenue exceeded €10 billion.
• Non-IFRS Operating Profit -- €3 billion, increasing 18% due to revenue growth and a disciplined approach to cost management.
• Cloud ERP Suite Revenue -- up 28% year over year, now representing 89% of total cloud revenue.
• Non-IFRS Earnings Per Share -- €1.89, an increase of 19% year over year.
• Engineering Productivity -- up approximately 70% in code contributions since the beginning of the year, driven by AI-first development principles.
• Internal Productivity Gains -- 20% in central functions such as finance, HR, and procurement, resulting from the deployment of Joule Work Desktop.
• Non-IFRS Cloud Gross Margin -- 74.3%, down 0.7 percentage points year over year due to investments in AI transformation and higher infrastructure costs.
• Quarterly Free Cash Flow -- €1.7 billion, supported by robust operating performance despite an increase in accounts receivable.
• Software License Revenue -- down 9% year over year, reflecting the ongoing shift toward cloud subscriptions.
• Services Revenue -- decreased 5% year over year, as management intentionally limits billable hours to focus on AI adoption support.
• Strategic Deal Composition -- 90% of the 50 largest deals included Business AI and Business Data Cloud.
• Market Outperformance -- growing 11 percentage points faster than the broader market according to IDC data.
• Internal Joule Adoption -- more than 110,000 employees are live on the Joule Work Desktop.
• HCM Growth -- 1.7-fold faster than the overall human capital management market according to IDC estimates.
• Non-GAAP Effective Tax Rate -- 25.8% for the third quarter.

Need a quote from a Motley Fool analyst? Email [email protected]

RISKS

• Asam stated, "Given the continued political and macroeconomic uncertainty we face today, this could weigh on Q4 bookings, and as a result, our 2027 trajectory," regarding potential headwinds to future revenue acceleration.
• Asam warned that higher interest rates are beginning to impact customer behavior, noting that "interest rates reached 5%+, and they have reached that in US now, these interest rates start to develop teeth."

SUMMARY

SAP SE (SAP +1.64%) reported its first quarter with total revenue exceeding €10 billion, driven by 25% growth in cloud revenue at constant currency. Management stated that the company is transitioning toward an autonomous enterprise model by integrating AI agents and natural language processing across its core software suite. The company reported significant adoption of its Business AI and Business Data Cloud platforms, with these technologies included in 90% of its largest deals during the quarter. Management indicated that internal AI adoption among its 110,000 employees has yielded 20% productivity gains in corporate functions and a 70% increase in developer code contributions. While raising its outlook for cloud and software revenue, the company noted that the fourth quarter remains critical for its 2027 growth trajectory amid macroeconomic uncertainty and interest rate pressure.

• CEO Klein stated that Joule Work functions as a "workbench for the autonomous enterprise," utilizing 400 assistants and 3,000 agents across the software suite.
• Management reported that SAP provides access to more than 70 AI models, emphasizing that the company avoids committing to a single preferred model to give customers flexibility.
• The company's knowledge graph maps more than 7 million fields and 500,000 tables, which management indicates allows Joule to solve complex tasks with higher accuracy.
• CFO Asam noted that AI-enabled alternatives will increasingly challenge business models that rely solely on selling billable hours in knowledge-worker industries.
• The intent to acquire WalkMe is intended to extend the company's ontology into skills and workforce intelligence while placing SAP at the center of people transformations.
• Management reported that Danish retailer Salling Group used Industry AI to improve time-to-shelf by up to 66% and reduce manual category management time by up to 70%.
• Asam noted that the upper end of the current cloud backlog growth range for the fourth quarter could reach 24% depending on the macroeconomic environment.

INDUSTRY GLOSSARY

• BDC (Business Data Cloud): A data management platform designed to provide a unified context layer for enterprise data.
• RISE with SAP: A comprehensive offering that bundles cloud ERP software, infrastructure, and migration services into a single contract.
• S/4HANA: SAP's next-generation enterprise resource planning (ERP) software suite designed to run on the HANA in-memory database.
• Business Technology Platform (BTP): An integrated platform that brings together data and analytics, artificial intelligence, application development, and automation.
• Joule: SAP's natural-language generative AI assistant that works across the SAP software portfolio.
• Knowledge Graph: A structured representation of data that maps relationships between different business entities like materials, suppliers, and customers.
• SaaS (Software as a Service): A software distribution model in which a cloud provider hosts applications and makes them available to end users over the internet.
• PaaS (Platform as a Service): A cloud computing model where a third-party provider delivers hardware and software tools to users over the internet for application development.

Full Conference Call Transcript

Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the SAP Q3 pardon the interruption, everyone. We are going to start that 1 more time. We are not live with our audience. We are going live right now. And I am going to do that countdown again. Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the SAP Q3 26 Financial Results Conference Call. Throughout today's recorded presentation, all 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 followed by 1 on your touch tone telephone.

I would now like to turn the conference over to Alexandra Kasper Steiger, Global Head of Investor Relations. Please go ahead.

Alexandra Kasper Steiger: Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; and our CFO, Dominik Asam. On this call, we will discuss SAP's third quarter 26 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 report on Form 20 F for 2025. 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 currency. 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. With that, over to you, Christian.

Christian Klein: Thank you, Alexandra. And welcome. to everyone joining us. Q3 was an outstanding quarter. We brought the Autonomous Enterprise to life. Customers are now getting their hands on our latest AI capabilities, and the response has been incredible. Our strategy is not just resonating. it is being adopted. Here's what that looks like in the Q3 numbers. Proven cloud backlog reached €24.1 billion, up 26%. Cloud revenue was €6.7 billion up 25% in constant currencies. The strong growth in cloud revenue was significantly driven by our Business AI, data, and platform business. Continuing to trend from recent quarters 9 out of 10 of our 50 largest deals included AI and the Business Data Cloud.

Total revenue for the quarter was €10.3 billion, up 12%. This is the first time in SAP's history that quarterly revenue crossed €10 billion. Operating profit grew 18% to more than €3 billion. And we are extending our leading position by winning market share at scale. According to IDC, we are growing about 11 percentage points faster than the market. In Q3, AI was the main driver behind our customers move to the cloud. There are 3 key reasons. First, AI accelerates the RISE with SAP cloud migration. Second, AI makes the business case for our suite more attractive. And finally, our customers embrace our Business AI platform with RISE with SAP.

They know it is essential for building the data and process foundation required for high quality enterprise grade AI. RISE and Business AI are winning across every sector. We added new customers in financial services with Banco Bilbao and First Loan Bank of Canada. Technology and research with Infineon and Fraunhofer Gesellschaft. Manufacturing with NTN Corporation. Logistics with Nagel-Group and the U.S. Defense Logistics Agency. On the growth side, AI is also a key differentiator. For example, Greenbrier Maxion, South America's largest freight railcar manufacturer plans to use Joule to boost real time operational visibility. Other core wins included Petropoulos, ASX, and Blackwall. Industry AI is becoming a critical differentiator. especially in large enterprises.

We saw wins such as AstraZeneca, where we are actively co-developing AI solutions for the life sciences industry. Decathlon will be leveraging our AI to build a foundation for a more intelligent, automated, and customer focused business. Meanwhile, Danish retailer Salling Group uses Industry AI to manage suppliers classify new products, and trigger supply chain actions. Time to shelf improved by up to 66%. Manual category management time was cut by up to 70%. Further AI wins came from MAN Industries Limited. Building what they call a once in a generation digital foundation. To unify operations. Henkel chose our business AI platform for more efficient finance processes and improved decision making. Austrian Post, Kommatt-Freyal, and Fraport selected BDC.

In solution areas and LOBs, Kaoho Corporation went with SAP Signavio. NTT DATA with our procurement solutions and Helvetia holding with success factors. IDC estimates that SAP is growing more than 1.7x faster than the overall HCM year over year. Many customers went live with RISE with SAP in Q3, including Mondelez, Panasonic, Roche, Infosys, and Amasvis. We also saw HUGO BOSS, with SuccessFactors and Bortoli, and Galliker with SAP Warehouse Solutions, and Battlesmann with SmartRecorders. In Q3, we already saw the great impact of the autonomous enterprise strategy on our business and in our numbers. Let's start with what customers see. Joule Work. This is where enterprise AI finally becomes usable.

Our 400 million SAP users can now work with SAP in natural language and Joule gets the job done. It is based on 3 key capabilities. First, conversations. The way users get work done. Here, users ask questions and delegate tasks in natural language. Joule handles every work directly. But when a task requires more than just a query, the user can use Joule to call a specialized agent. Take a supply chain planner. They can ask Joule to summarize the supplier contract then delegate the resolution of a supplier's shortfall, to an agent that identifies an alternative source and triggers the production adjustment directly in SAP. Second, spaces. The live view across systems.

Joule spaces brings data together into a single always up to date view so users do not have to build PowerPoints and Excel spreadsheets. For our supply chain planner, they have a space combining live IBP and S/4HANA data with a real time supply chain risk summary. They can see current demand, supply, and the risk all in 1 place. Third, Joule Studio. The way to extend our agents or build your own. From no code to pro code and with seamless integration from end to end. With Joule Studio, customers extend SAP's agents or create new ones for their specific needs.

Here, the planners team can use the supplier resolution agent and tailor it to their own sourcing rules without starting from scratch. As the example showed, Joule Work serves every business user. It is much more than an AI chatbot. It is the workbench for the autonomous enterprise. This is true for users who need a presentation, a dashboard, an email, or solutions for even the most complex enterprise challenges. Thanks to our 400 assistants and 3 thousand agents across the autonomous suite. While I am pleased with the progress we made, the focus is quality over quantity. 1 well designed agent can outperform several fine grained ones. That is how we built.

With Joule Work Desktop, companies like Rheinhausen see the potential to permanently transform how their teams interact with business data. The same shift is happening in finance at Accenture. In their words, the Joule journey is not about deploying another AI tool. It is about working differently. And Danfoss shared that the sourcing assistant has significantly improved the efficiency and quality of RFP creation. What makes Joule Work and the Autonomous Suite different is what lies behind the simple experience. Our SAP Business AI platform, the place to build contextualize, and govern AI. Let's look at this in more detail. Starting with build.

Joule Studio every developer and domain expert the tools to create, extend, and deploy agents on top of SAP's platform. And when building custom solutions, customers can select the best model for each use case. SAP offers access to more than 70 models, both frontier and open-weight. Unlike some of our peers, SAP is not committing to a preferred model. We give our customers choice, and we will always make sure that they have access to the best options available. Moving on to context and reason. Joule draws from the deepest business context in the industry through our knowledge graph. Anchored in BDC, mapping more than 7 million fields and 0.5 million tables, along with 400 data products.

And our full process knowledge. With our acquisitions of Tremio and Retro, we extend that reach far beyond SAP data and give customers a unified context layer across the entire data landscape. This structured business ontology means Joule can solve even the most complex tasks. With high accuracy, faster results, and better Pardon the interruption.

Operator: 1 moment while we re our audio. Thank you everyone for your patience. Please continue to standby while we reestablish the audio. I am up stay. And we are live now again. Please go ahead.

Christian Klein: Okay. Thank you. You. Okay. Here we go again. Starting with Bill. Joule Studio gives every developer and domain expert the tools to create, extend, and deploy agents on top of SAP's platform. And when building customer solutions, customers can select the best model for each use case. SAP offers access to more than 70 models, both frontier and open-weight. Unlike some of our peers, SAP is not committing to a preferred model. We give our customers choice, and we will always make sure they have access to the best options available. Moving on to context and reason. Tool draws from the deepest business context in the industry. Through our knowledge graph.

Anchored in BDC, mapping more than 7 million fields and 0.5 million tables. Along with 400 data products and our full process knowledge. With our acquisitions of Dremio and Reltio, we extended reach far beyond SAP data. Give customers a unified context layer across their entire data landscape. The structured business ontology means Joule can solve even the most complex tasks with higher accuracy, faster results, better price performance. In Ariba, Joule delivers 2x the accuracy of leading frontier models at 0.5x the total cost. And we are continuously deepening the ontology itself Our intent to acquire WalkMe is a good example.

It puts us at the heart of every people transformation and extends our ontology into skills and workforce intelligence. Finally, governance. Joule Work comes with governance and security baked in. Every agent built on the Business AI platform is 1 and governed by SAP. We ensure identity and authorization management, compliance with regulations across 60 countries and 26 industries 60 countries and 26 industries and certifications by auditors. Our AI agent hub, the Agent Hub, provides 1 central inventory to manage and govern. Every SAP and non SAP agent. And 1 key principle is very important. At SAP, the customer's data remains the customer's data. We never upload customer data or process IP into large language models.

Not for training, not for model improvement, not for any purpose. And that commitment shapes every partnership with the model providers we make. In a nutshell, we bring together the best models with the deepest business context and govern all of that across our customers' entire agent landscape. That is why SAPRE provides business AI for the enterprise. And we will share more announcements across all these areas at TechEd next week. But the story is not just what we ship. It is how we transform into an autonomous enterprise ourselves. We are reinventing once again SAP's own operating model. First, in engineering, our 40 thousand developers are not just building AI. They are working AI first.

Guided by clear principles, are co-innovating with customers, increasing speed, and focusing on the data and ontology our AI agents need. The results are clear. Our developers completed approximately 70% more code contributions since the beginning of the year. Second, in go to market, we are using AI everywhere. To transform how we engage with customers. This includes running targeted campaigns to attract the right leads and evolving our consulting services into as an AI to accelerate adoption. The same holds true for AI across our corporate functions. And across SAP, our Joule Work Desktop is live for more than 110 thousand employees. We are already seeing productivity gains of 20% across our central functions like finance, HR, and procurement.

With even more productivity gains on more complex analytical and planning tasks. Let me summarize. Q3 was an outstanding quarter. We are successfully executing in a volatile world because our customers see AI as a critical lever for competitiveness and resilience. Our pipeline for Q4 looks strong, At the same time, we remain mindful that Q4 is always our biggest and most important quarter with the greatest movement. Our teams are in full execution mode. The best enterprise AI is not the loudest. It is the AI you can trust to run your business. SAP is that AI. And we are turning that opportunity into results today. With that, I will hand over to Dominik Asam.

Dominik Asam: Thank you very much, Christian. And thank you all for joining us this evening. Q3 was another strong quarter as reflected by current cloud backlog expansion healthy operating profit growth. We continue to see our work bearing fruit as we move closer towards our vision of an autonomous enterprise. SAP remains mission critical for its customers who want to fundamentally change the way they do work by virtue of AI As Christian alluded to, in his prepared remarks, SAP continues to set the standard for large scale business transformation and now leads the way in redefining how enterprises run in the age of AI.

Today, our early adopter care program validates our progress and has been overwhelmingly positively received by customers a step change versus a year ago. The second half is off to a strong start, and we remain committed to invest investing in growth by preserving our bottom line in lockstep with the operational framework we have put in place for balancing expense versus revenue growth. We continue to be excited for what is to come, and remain focused on capitalizing on what is clearly a once in a lifetime opportunity for SAP and our customers. Now let me provide more details on our financial highlights. Current cloud backlog surpassed €24 billion, up 26%.

SAP continues to be the undisputed large enterprise SaaS and PaaS vendor in terms of growth. While we continue to expect a slight deceleration in constant currencies current cloud backlog growth in 2026, we do foresee continued market share gains. As we outlined at the beginning of the year, the slight deceleration is attributable to several factors, including the continued political macroeconomic uncertainty we see today, that could impact our largest booking quarter which is, of course, the fourth as well as a rapidly expanding base that continues to grow in absolute terms every year. Cloud revenue grew to approximately €6.7 billion up 25% helped by several 1-off positive effects, which added approximately 1 percentage point of growth in Q3.

This was due largely to a positive revenue recognition effect which in turn mainly stem from a catch up of revenues from customers returning from financial distress. Cloud ERP suite revenue increased by 28% in Q3 now accounting for 89% of total cloud revenue. Software licenses revenue decreased by 9%. Finally, total revenue in the third quarter was €10.3 billion up 12% remarkable result when taking a -5% year on year decline in services into account. Now let's take a brief look at our regional performance. In the third quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA, and solid in The Americas region. Brazil, France, Germany, Italy, India, South Korea, and Spain had outstanding performance.

While Switzerland, The United Kingdom and The United States were particularly strong. Now moving down the income statement. Our IFRS cloud gross margin in Q3 was 73.9% and non IFRS was 74.3%, down 0.7 percentage points year on year. Average operating profit increased by 18% to €2.9 billion, Non IFRS operating profit was also up by 18%, now surpassing €3 billion. IFRS and non-IFRS operating profit growth benefited from prior year negative impacts of €100 million each from a change in case law affecting SAP's other tax litigation and from a workforce transformation, which were both recorded in the third quarter of 25.

While the operating profit strength this quarter was a result of the factors I mentioned above, it is important to remember that investments to accelerate our AI transformation and to further enhance our products are in full swing. We are managing the business and associated costs with a disciplined approach aware that this is a long term endeavor, and we expect to see these ongoing investments continue in the near term. The IFRS effective tax rate was 24.4%, and the non-IFRS effective rate was 25.8%. Free cash flow in Q3 was robust at €1.7 billion. Finally, IFRS earnings per share increased by 14%. €1.96, and non-IFRS earnings per share increased by 19% to €1.89. Now on to our outlook.

As disclosed in the quarterly statement issued earlier today, now expect to lend towards the upper end of our previously guided range for 2020 cloud. And cloud and software revenue reaffirming our previous guidance for current cloud backlog operating profit, and free cash flow. Finally, we continue to believe that we are well positioned to accelerate total revenue growth in 2027. While we are committed to this goal, I would like to take a moment to provide some additional context help you better understand our path forward. First, as a reminder, the fourth quarter accounts for around 50% of our annual bookings volume.

Given the continued political and macroeconomic uncertainty we face today, this could weigh on Q4 bookings, and as a result, our 2027 trajectory. Second, we mentioned in the first quarter of this year and as you can see in the 5% decline, we want to leverage services more intentionally to promote the adoption of our AI solutions and build critical mass. This strategy has served SAP well to date. And as we are seeing positive return on investment, we will continue to double down on delivering even stronger adoption support to our cloud and AI customers, which will likely put more downward pressure on billable hours and services revenue also next year.

In fact, we believe in knowledge worker industries, business models, which solely rely on selling more hours to customers will be more and more challenged by AI enable lower cost, more scalable and nevertheless higher margin alternatives. So further portfolio adaptation in services is a necessity. And lastly, as mentioned earlier, Q3 was another strong quarter as evidenced by growth across top line parameters. As a result, we expect to trend towards the upper end of our cloud and software revenue outlook which will raise the bar against which we will measure our 2027 revenue acceleration.

Taken together, we are still planning for total revenue growth to accelerate in 2027, but must be cognizant of all the factors that make this trajectory more challenging. To close, SAP was once again able to navigate a choppy environment executing on its strategy and driving commercial success. Second half of 26 is off to a strong start and we continue to make progress against the operating plan we set at the beginning of the year. While we have been able to maintain steady momentum year to date, we will put our full focus on the decisive fourth quarter bookings required to maintain our growth acceleration against now even more challenging comparables in 2027. Thank you.

And we will now be happy to take your questions.

Alexandra Kasper Steiger: All right. And we now take your questions. As always, I would kindly remind you to only ask 1 question when prompted. Operator, please open them up.

Operator: Ladies and gentlemen, at this time, we will begin the question-and-answer session. If you are using speaker equipment today, please lift the handset before making your selections. Again, anyone who has a question may press star followed by 1 at this time. We will take our first question from the line of Adam Wood with Morgan Stanley.

Adam Wood: Hi. Thanks very much for taking the question and congratulations on very strong third quarter. Maybe if I could just ask on the CCB guide, probably for Dominik. I think you have still guided a slight deceleration and changed the language around the macro expectations. Think you have said before that slight decel meant about 2%. Which would imply 23% for the fourth quarter versus we ended Q3 at 26% Could you just talk a little bit about why you are not willing to be a bit more optimistic here? Is it just an abundance of caution given the scale of the quarter?

Is there anything you are seeing in pipelines or in customer decision making that would give you that greater caution at this point in the year? Thank you.

Dominik Asam: Yes, thank you for the question. I mean, obviously, we had a very robust performance on CCB growth so far this year. But, again, there is half of the bookings of the year to be still executed in Q4, and if I look at the current macro backdrop, it is not so great. I mean, you have seen the oil price going up. Luckily, the conflicts in the Near East have not really resulted in massive disruptions of supply chains, but the huge pressure on pricing of many of the commodities that are relevant for the globe. Think about oil price going up $60 to $110.

Interest rates have gone up, and we have all seen long term analysis that when interest rates reached 5%+, and they have reached that in US now, these interest rates start to develop teeth. So I would say it is probably reasonable to not assume that the macro is super conducive in Q4. And, yes, I would not kind of like to be understood that we gave a precise guidance on what exactly slightly means. We just refer to what was kind of implied in the prior guidance. it is a little bit of a range, and so I would say the upper end of that range might be 24% or so.

So I do not wanna be necessarily saying that there is a point value of 23%. there is a certain range, and a possible outcome, and let's see how the rest of the quarter shapes out.

Operator: We will take our next question from Toby Ogg with JPMorgan.

Toby Ogg: Yes. Hi, good evening and thanks for the question. Just on the backlog again, so 26% constant currency stable versus Q2 and looks to be slightly accelerating on an organic basis. But your guidance has always been for that slight deceleration. And that is unchanged. So is the backlog currently growing faster than your own internal expectations at this point? And if it is, could you help us with what products specifically are surprising you on the upside and why that is happening? Thank you.

Christian Klein: Yeah. I can take that. And yeah, first, as I also already highlighted in my remarks, I mean, what a difference a year can make You know, we see in every RISE with SAP journey first. Just today, I had a large mining company here in Walldorf in our headquarters, and the first thing they said is, your agents, you know, to accelerate the migration and the transformation with RISE are really outstanding. Yeah. So Joule for consultants, all our data migration agents, They are up to the roof, and we get very, very good feedback.

Also, by the way, by all the partnerships we are closing in that space as well, And we have a good partnership with Cognizant and many others. And also GSIs are now helping us, yeah, to even, you know, disrupt their own business model and accelerate the migration. Of our SAP customers to the cloud. Second, the business case. I mean, you know, every business case is now, you know, with AI, as I said. The majority of our deals are closed with AI. Even more important, the business data Cloud, after now 2 years now being in the market. This value LeanIX acquisition is spot on.

I just come from a 2-day engineering workshop, and what I have seen there is outstanding. Now in Q1, we will be able to even, you know, auto generate non SAP data products, put it into the knowledge graph, and we can extend the ontology layer almost automated also for non SAP data. Also, I mean, this AI matching, you know, with master data records, be the customer, the material, the supplier, we are on that. will come very soon, and that already creates now a really huge excitement, and BDC is just the foundation. Yeah? And customers understand I have a really messed-up data model, also for non SAP data, I have to work on that.

Because we also see with AI adoption. Obviously, we can adopt AI very fast on the customer side, but it takes longer if you have a messy system. And that has nothing to do with our AI or with the technology. it is just the same as with every ERP implementation. You still need a clean core. So with that, the BDC is, I would say, this outstanding business, and it is great. And then last but not least, as we said, you know, in Q4 now, it is prime time. All of our new AI capabilities. I mean, you know, the excitement inside SAP about Joule Work is fantastic.

I mean, I love to hear, you know, all the feedback from our employees. And, you know, no matter if you were building power points for finance, for HR, for workforce, in sales, creating, you know, customer previewing decks. This is all done now with Joule Work. Again, it is not only about, you know, another copilot who creates all of these spreadsheets and PowerPoints automatically. it is also giving you always the data context and the governance, yeah, about who is allowed to see actually which data. And of course, the identity and the authorizations, you know, also sitting in our underlying system of record. So that actually explains it very well, but I probably. You heard it.

Was also very keen this time to share our line of business wins because now we always said the sweet wins, Yeah. But now we can go into every customer and says, you know what? You can build the ontology in pieces with your best of breed landscape, or you can have it out of the box with an end to end ontology layer coming with the suite. And that is, you know, the value proposition for every app in every line of business is also now way easier for us because we can always sell the end to end ontology layer, which only SAP can provide.

And when you then say hey, this ontology comes as a service and governed by SAP, This is really huge. And then finally, you know, also with my engineering team, I mean, are fighting hard. Yeah. it is-- we-- it is always good to stay humble. I mean, there is, of course, also things we have to still improve. Mean, 1 thing that is really outstanding in my eyes is we are really also making sure that we are not uploading any data or process IP of our customers into these large language models.

I mean, which customer wants to see, you know, their own process IP, their own data, trained in with this large language models and being available to the public. So there is, you know, this is very, very important. And then last but not least, obviously, now in the next months and quarters, continuously work on the response times of the agents of Joule Work. The accuracy. But all of that together really delivered already, strong quarter, and we see it also reflected in the pipeline. And also what makes me now so confident is also, again, when I see on the product side, the situation now compared to 12 months ago, everything works out of the box.

Again, we have to work on certain things like agent response times accuracy, but it is so much better And the customers see the value proposition, and that is also now reflected in the numbers.

Operator: Our next question comes from Charles Brennan with Jefferies.

Charles Brennan: Great. Thanks very much for taking my question. Actually, a follow-up to your previous answer there, Christian. You talked about needing to continue to improve the agents both in response times and accuracy. Can you give us a sense of how far away you are today from where you want to be? Is that a matter of months to close, or is it a longer body of work than that? And I guess related to AI, I am getting partners beginning to feel the push towards AI credits into the business model Dominik, can you shed some light into whether that is influencing some of the metrics in the P and L yet?

And the dynamics between perhaps what you can book a CCB and what ends up in revenue? Thank you.

Christian Klein: I am happy to take the first question, Charles. Look. Probably on accuracy, we will never be done. I mean, you know, and transformation is always also a mindset change. And when product managers come to me and show me in our daily agent review, oh, I have an accuracy of 95%. I said, oh, no. You raised the bar on your test cases because we wanna then solve even more complex problems. I mean, that is what SAP is known for. So we will.

We continuously work on accuracy And, again, when I look at, you know, the new harness, when I look at the knowledge graph, when I see how we are training those models I mean, this is, again, a big difference also compared to 12 months ago. Of course, there is always work that we have to do. Response time is also something. And we are tracing every query, you know, down to the data layer, to the ontology layer. We are tracing and how respondent, how good are the APIs, do we need to extend the ontology when agents are going into the loop, And, again, this is also a mindset change. I mean, this is really so different to.

Compared to what we did in software development. But we are making good progress. And I see everyone is so energized to move into that and build the best agents for the industry. So there is always work to do, and. Yeah. But we are making we are making great progress.

Dominik Asam: So maybe, Charles, on the question of the credits and whether there is any impact visible I would say first of all, it is very important to note that whenever we give credits to a customer, we basically amortize these so they are kind of spread over the life of the contract. And that means that you do not have to worry about some clips or anything happening on that front. And if your question more refer to this more consumption based approach, which we wanna gradually ramp into the mix that is a very gradual process.

So I would say in the near term, this kind of logic how to bring CCP down to cloud revenues is still quite intact. Yes. It will loosen over time as we are going into more and more hybrid models all the way to full consumption based and as we wanna sell outcomes to customers as opposed to tokens, And for outcomes, it needs consumption and adoption. Which also means that all our incentives are gravitating towards more adoption. That is not something you should be kind of concerned about in the bridge to 2027. This will be still quite traditional, I would say.

And by the way, it was also good to see that maybe our famous transaction business, which has been lingering along for a long time, has now bottomed out a little bit, and we have actually seen a pretty nice growth year on year in that bucket.

Operator: We will move to our next question from Jackson Ader with KeyBanc Capital Markets.

Jackson Ader: Hey, thanks for taking our questions guys. The 1 that I had was on regions. EMEA and APAC growing again on the in cloud revenue, growing again ahead of The Americas. And I am curious as AI becomes more of a part of the customer decision making, do you think that some of the other regions, i.e., the Americas could start to catch up to EMEA and APAC in terms of their cloud revenue growth? And as AI might be being adopted faster in 1 region versus others? Thank you.

Christian Klein: No. I mean, when I look at the regional performance both on AI and data, I mean, the regions really perform equally strong. Yes. there is 1 quarter where you might see an outlier. But I would say when you look at it over the last 4 quarters, there is really great consistency And also, especially North America, I would even say the customers are really you know, oftentimes the front runner for AI behind many AI projects especially on industry AI where we are now co-developing with customers very open from a calculation standpoint perspective anyway, more easier than when I compare this to all the regulations we find in Europe.

So I would say, no. it is actually the U.S. being the front-runner and EMEA and APJ in the meantime following really well. So there is really also a great consistency in the performance across all regions. But, clearly, they are the front runner. They are also much more penetrated in cloud. So I think that is the main Yes. factor. Yes.

Operator: Our next question comes from Mark Mortimer with Bernstein Research.

Analyst: Thank you very much for taking my question. And congratulations on the solid quarter and the numbers and the details. Dominik, we have been talking about current cloud backlog. Maybe I want to focus on the way you are you are thinking about or guiding to the Q4 and the total revenue, you have given us numbers for FY 2026. FY 2025 grew at 11% constant currency. First 9 months has grown faster than that.

Is it just simply there is just so much that the close obviously helps CCB, but a lot of what closes in Q4 is really not going to necessarily generate revenue in Q4 So what is the factors that are going into the bridge between the 9 months and the full year, 2026 revenue guide.

Dominik Asam: Yeah. I mean, you are absolutely right that our visibility for Q4 cloud revenue terms, which is, of course, the key driver of total revenues, is quite high at this stage. And this is why we now say it is kind of towards the high end of the range, and then you can back solve the implied cloud revenue growth. And you will find it is around 23% there, So there is no magic. Now you might wonder why is it actually 23% given that we jump off a pretty healthy 25% in Q3? And there are a couple of reasons I wanna call out. Some I have already mentioned in my introductory remarks.

I wanna recall that Q3 last year, we had of 2 factors that kind of weighed on the cloud revenue in that quarter, so it makes the comps easier. Secondly, there is still a little bit of a kind of quarter on quarter decel effect by the fact that SmartRecruiters was actually embarked in our P&L on the 11th of September last year, so we have a tiny kind of Q3 contribution. So there is still some good growth from M&A, so to speak, in Q3 of 26. Which the comps will be out, so it will be we lose that kind of edge, but it is, let's say, 0.5 percentage points or so.

And then last but not least, do not forget that we have seen the decel in the CCB. Growth from Q3 last year where it was 27% in Q3 to 25% in Q4. it is quite natural that we see the global dampening effect. So. But you are right. I mean, there should not be any massive surprises on cloud revenues anymore. there is always some customer stories where some customers might recover from a certain situation or go in a certain situation which is adverse to revenues. This noise is always normal. But otherwise, it is a quite clear minus sight for Q4 on the cloud revenue side.

So now the other items licenses are always notoriously difficult to predict, so do not nail me on that 1. And. But it is getting smaller and smaller, and then we mentioned that we had -5% constant currency decline in services, and so it is €1 billion roundabout run rate per quarter. And that. that is another factor that, yeah, will be there probably because we really have good experience now. and we think that this conversion of billable hours into adoption support of customers is paying off handsomely. it is quite straightforward.

You get a meager margin on an hour you sell, but if you can convert that into recurring high margin AI data business, and we feel there is more value to be had from that.

Operator: We will take our next question from Michael Briest with UBS.

Michael Briest: Congratulations. Perhaps for Dominik, I think you need to do about $2 billion in Q4. First, I know that is been the recurring. You confidence in that And I noticed disabilities becoming less and wind than it has been for the last couple of years. Are you starting to see from the migration credit being, if you like, utilized by customers? Yeah.

Dominik Asam: Indeed, I mean, we always pointed out to the fact that migration credits at some point in time will affect our free cash flow, not to the degree that I would feel nervous about the full year guidance of €10 billion. Yes. there is a remainder to do, as you mentioned. But I think we have opportunities, and I am relatively confident that this is something we can manage. But to be honest, on Q3, you see a little bit of a for my taste, high accounts receivable. So we have to tighten the screws on our collections a little bit more. Maybe the high interest rates create some incentives here to.

For customers to be a little bit slower sometimes if they find a good excuse. So we are now all over this and collecting money to make sure that we are harvesting not only sending up invoices, but also getting the money back into the shop.

Operator: We will take our next question from Johannes Schaller with Deutsche Bank.

Johannes Schaller: Yes. Thanks for taking my question. Christian, you talked a little bit about how you are not overly reliant on a single AI model out there? And then also you made some decent investments in model routing tools, routing the right task to the right, most efficient model. In the light of the gross margin for the business, we obviously have some headwinds at the moment, but this model routing could become quite a nice source of potential cost savings that you can either pass on to your customers or maybe keep some of that in your margins. Just how should we think about that conceptually going forward?

Christian Klein: Yeah. Absolutely right. Johannes, I mean, obviously, we are also now checking every agent use case we are shipping also on what is the best model and not only from a performance from an outcome but also from a price perspective. Yeah. And we are just at the beginning. Yeah. So we are switching the models now more often. And we see also that we, you know, have an increasing share of open weight models. By the way, not only for what we ship to our customers, but also what we do internally.

Then the second part is, I mean, when you look onto the gross margin, as I also said in the last earnings call, I mean, yes, this year, we have some 1 timers. We are investing in software and cloud. We, of course, have higher hardware prices. Now we are not super invested in the infra business, but still, next year, what we are also working on is, of course, you know, on a huge AI automation initiative across the delivery lifecycle, of our cloud operations, be it on the deployment side, be it on you know, the monitoring, on the incident management, the whole application management.

We are working heavily on further automation opportunities so that we are also able to cut some of third-party contractors we deploy in our cloud delivery. So we remain confident that we also see in the upcoming years a healthy development of our cloud gross margins. Including switching off the models and being agnostic is in my view, is a big blast as we also said before.

Operator: Our next question comes from Ben Castillo-Bernaus with BNP Paribas.

Ben Castillo: Good evening. Thanks for taking my question. Christian, the 2 more recent debates forming. You know, firstly, around software potentially going more headless, so accessing data and insights from a plug in versus retaining that AI UX. And then secondly, perhaps, as you mentioned earlier, you know, a divergence between those staying AI model agnostic, giving choice, and those partnering more exclusively. it is an open question. Just curious on your thoughts. And what gives you confidence you have the right strategy And is that being validated with your customer discussions that is aligned to how they want to deploy their own AI roadmap. Thank you.

Operator: Please standby. Pardon the interruption everyone please standby while we reestablish our audio. Come on. Please resume.

Christian Klein: Okay. Okay. Sorry for the for the disruption. You know, as I said that before, you know, it is it is very important that what I mentioned is that you know, we are, of course, also now using, you know, AI to, you know, train the models and further work on the accuracy on, you know, and the outcomes of the agent. that is what we are continuously now doing. And with that, we see also then, of course, also further optimization of the price outcome ratio. So again, we are working there, and we see very, very good progress quarter over quarter.

Operator: Our next question comes from Frederic Boulan with Bank of America. Frederic, your line is open.

Frederic Boulan: Yeah. Thank you for taking the question. If I can come back to the question around the margin side. You talk a bit more about the moving parts on margins this year and next? We have gross margins down. You seem pretty confident about the ability to return to growth, but it would be good to have your bit more detail on the rest of the model in terms of operating leverage and ability to keep on expanding margin next year.

Christian Klein: Yeah. I mean, you know, we are working on an all in on AI program, you know, internally at SAP. And I mentioned it, you know, in R&D, obviously, we see you know, huge productivity gains just not only applying AI code generation tools, we are also applying AI for testing and for the whole delivery life cycle. And that is why I am, as I said before, I am also really optimistic on cloud delivery and our gross margins because, again, we will switch models to always optimize for the best price outcome.

But also then, for all the manual activities we are doing today in really delivering and onboarding the systems, but also the whole application management of our operations we will see huge efficiency gains also next year. And we will also adjust our third party contracts also during the course of the next 12 months. If you look at sales, I mean, Joule Work is fantastic. And when you go to a customer, the customer previewing with all the details, with all the business data of the customer pipeline, adoption data, the tickets, everything is there. That helps the salespeople a lot. The whole account planning is done via Joule Work.

Then if we move on to finance, we are just doing the financial planning for the year. Also there, we use our Tableau AI We use a lot also to work there to do the simulation to do the reporting, and including HR now with TechWolf. I mean, it is all about skill transformation. So HR business partners are using Joule Work heavily. To analyze skills, to check, okay, where to recruit, how to-- who to offer which training, and so on. So also there. I mean, I. We are confident, as I also said, we are confident to really also gain up to €3 billion efficiency gains over the course of the next 2 years.

And, yes, we will continuously update you on the progress. We are very confident that on all cost items in our P and L, you will see the impact of AI. Yep.

Dominik Asam: I just wanna make sure that, I mean, these are all extremely powerful levers. I think Christian has also mentioned we have the sovereign cloud. Still. We have some retailing business, which is expanding fast. You know, the BDC structures and we have embarked. We are going to embark quite some acquisitions, which is not so much topic on gross margin, but more a topic on operating margin, which have to be absorbed, so we will need all these levers to really make sure that our gross margin, the cloud gross margin is stable and we can sustain that. But the overall model is intact.

I mean, we are firmly committed to keeping that to containing the growth in operating expenses, total operating expenses, including cost of goods sold, to this 80% to 90% growth of the top line. So that is we have always been very careful to not be too specific on any 1 of the line items, and I think serves us well because there are all these puts and takes happening every quarter, and we want to be really flexible to steer the business to make sure we maximize economics here, do not forget we want to really drive the absolute amount of money we harvest from these opportunities as opposed to purely on the margin side.

Operator: Our next question comes from Kirk Materne with Evercore ISI.

Analyst: Yes. Thanks very much for taking the question. Dominik, I just wanted to follow-up on something you said earlier about the transactional business. I realize it is very small for you all, but it seemed like you mentioned that it was stabilizing. Was just wondering, do you see that continue to stabilize? Can that be a little bit more of a tailwind for you all as you go into 2027? I realize it can fluctuate, but it is good news that it is obviously stabilizing. Wondering how you are thinking about it going forward. Thanks.

Dominik Asam: Tailwind is a strong word because it might imply that it is higher than the group average cloud growth, which is definitely not. it is far below that. But you recall it was kind of hovering around zero in slightly negative, and now we are back to some positive territory, which is just reducing the headwind as opposed to being a tailwind.

Operator: We will move to the next question from Richard Nguyen with Bernstein. Richard, your line is now open. We will move on to our next question from Patrick Walravens with Citizens.

Analyst: Oh, great. You very much. I really appreciate it. Christian, this is maybe a little bit on the smaller side of the business opportunity, but I am wondering what you think about the travel and expense side of the business where Concur has been so dominant for so long, but now you are seeing some new competitors growing fast?

Christian Klein: Yeah. I mean, absolutely. I mean, Concur is a sizable business for us, and I would say, god, thanks. We are more on the expense side, so travel to expense. With a lot of regulations, customers have Concur in the meantime extremely deeply integrated to our finance solutions. So it is a very, very stable business. Obviously, the very, very minor part is on the booking side, and there are, of course, a lot of new incumbents in the market. But this is not the main part of Concur's business. We are also seeing there with our agents, we are developing already, you know, great adoption.

I would even say from all of the lines of business solution, see even the highest adoptions on the Concur side. So we are very happy with this business. And, again, we are this is predominantly focused on the expense to pay. So that is very, very important. And so the travel to record is intact. And also there, I mean, we are also now announcing new. We will announce new partnerships with some credit card providers, some airlines. So also there is a huge interest in the ecosystem. So the business is intact and very healthy.

Operator: Our next question comes from Balaji Terrapati with Citi.

Analyst: Hi. Good evening, and thank you for taking my questions. Would it be possible to share color on constituents within your backlog growth? And as the ECC maintenance deadline is approaching, is it getting more skewed towards migration or AI and BDC actually growing share from very small base?

Christian Klein: No. I yeah. As I said, I mean, what we are seeing is in every RISE journey to the cloud, and customers use these RISE journeys more and more to really do a business transformation. And while, you know, 2 to 3 years ago, it was more about greenfield process redesign, process automation. Now it is also, of course, a huge lever to also completely reinvent how business processes run with AI. Plus, as I said, in every RISE journey, customers are not only moving to s 4 and our line of business solutions, but they are really also making use of our BTP platform to really also build a harmonized data layer both SAP and non SAP.

So we are seeing that the RISE contracts overall, they are getting richer. There are more solutions embedded. First AI on the process layer, our Business AI platform with BTP, and then, you know, customers are using all kinds of migration tools now to also then accelerate the journey. So overall, you see RISE definitely become. Became a Witcher from a scope perspective with AI, with BTP, And we also see it, by the way, in the Q4 pipe, which, again, looks strong. it is actually also there. You see the consistency that in every RISE deal, we are leading with AI, and the data layer is always part of it.

Alexandra Kasper Steiger: Great, and with that, thank you, Christian. Thank you, Dominik. This concludes our call for today. Thank you for joining, and apologies again for the disruption.

Christian Klein: Thank you.

Dominik Asam: Thank you.

Christian Klein: Bye.

Operator: Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining and have a pleasant day. Goodbye.