Q3 2024 Summary
Published Feb 18, 2025, 5:23 PM UTC- Strong Cloud Growth Driven by Cloud ERP Suite and RISE Adoption: SAP's cloud revenue grew by 27% in Q3, fueled by the sustained strength of the Cloud ERP Suite, which saw an impressive increase of 36%. This marks the 11th consecutive quarter of Cloud ERP Suite growth in the 30s and represents approximately 84% of total cloud revenue , ,. This growth is driven by large customers moving to RISE with SAP, with healthy upsell opportunities over time.
- Expanding Cloud Gross Margins and Profitability: SAP's non-IFRS operating profit increased by 28% to reach EUR 2.2 billion, with an excellent operating margin of 26.5% ,. The cloud gross margin improved by 0.6 percentage points to 73.7% ,. Cloud transformation measures, such as centralizing cloud operations and optimizing with hyperscalers, are taking effect, leading to confidence in further expanding gross margins, especially in 2025 ,.
- Significant Upsell and Cross-Sell Opportunities with Business AI and Installed Base: Approximately 30% of SAP's cloud order entry in Q3 included AI use cases, which come with additional upside in deals. SAP sees massive cross-sell potential across its installed base in finance, procurement, HR, and supply chain, aiming to break down silos and connect offerings to drive additional growth. With only one-quarter of customers having started their cloud transformation journey, there remains substantial potential for future growth ,.
- SAP faces execution risks due to management changes and workforce reductions, including around 10% of the workforce leaving and a salesforce reorganization, which could cause disruptions, especially during critical periods like Q4.
- The U.S. Department of Justice investigation involving SAP and Carahsoft presents potential legal and regulatory risks, which could impact SAP's U.S. federal business, though management downplays its significance.
- SAP's transactional business has declined mid-single-digit percentage points, indicating that macroeconomic challenges are impacting certain revenue streams, and recovery in transactional revenues depends on macro conditions.
| Metric | Period | Previous Guidance | Current Guidance | Change |
|---|---|---|---|---|
Cloud and Software Revenue | FY 2024 | no prior guidance | increased outlook | no prior guidance |
Operating Profit | FY 2024 | no prior guidance | raised guidance | no prior guidance |
Free Cash Flow | FY 2024 | no prior guidance | adjusted outlook upwards | no prior guidance |
Current Cloud Backlog | FY 2024 | no prior guidance | 27% growth rate target | no prior guidance |
| Topic | Previous Mentions | Current Period | Trend |
|---|---|---|---|
Cloud ERP Suite Growth and Cloud Adoption | Q1–Q4 2023 and Q1–Q2 2024 consistently reported strong cloud ERP growth (32–33% YoY) with a robust cloud backlog, a proven land‐and‐expand strategy, and significant cross‐sell and upsell opportunities. | Q3 2024 noted 36% YoY growth with the Cloud ERP Suite representing 84% of cloud revenue, and a 29% YoY increase in the current cloud backlog, driven by net new customer wins and healthy upsell opportunities. | Consistent strong growth. The metrics are slightly improved and the strategy remains robust with added emphasis on large deals and AI integration. |
Business AI Strategy and Investment | Across Q1–Q4 2023 and Q1–Q2 2024, SAP emphasized embedding Business AI in its portfolio with initiatives like Joule, the Gen AI Hub, and dozens of AI scenarios, supported by partnerships (e.g. with NVIDIA) and premium AI use cases driving customer adoption. | Q3 2024 further highlighted the rollout of over 100 AI use cases, with about 30% of cloud order entries including AI use cases, plus major upgrades such as the SAP Knowledge Graph and enhanced Joule Copilot features. | Continued and deepened integration. The investment in AI remains a key growth driver and is increasingly interwoven into cross‐sell opportunities and product innovation. |
Transformation Programs and Operational Efficiency | Q1–Q4 2023 and Q1–Q2 2024 discussed a broad company transformation program focused on centralizing cloud operations, harnessing AI for internal efficiency, and improving non‐IFRS operating profit and free cash flow through disciplined cost management and restructuring activities. | Q3 2024 reiterated that the transformation program is beginning to positively impact operating profit, emphasizing smoother cloud operations and automation improvements that drive overall efficiency. | Steady progress yielding positive results. Operational efficiencies and productivity gains continue to support improved profitability. |
Restructuring, Workforce Reductions and Execution Risks | Q1–Q4 2023 and Q1–Q2 2024 outlined significant restructuring measures affecting thousands of positions—with substantial provisions, early retirement programs, and managed workforce reductions—while noting potential execution risks and the need for controlled reorganization. | Q3 2024 again referenced workforce reductions (around 10% of the workforce) and acknowledged execution risks (notably in sales reorganization), while stressing a cautious and controlled approach. | Recurring with cautious optimism. Restructuring remains a continuous theme, but execution risk is being managed while retaining focus on strategic hiring and reorganization. |
Transactional Revenue Challenges and Stagnation | Q4 2023 highlighted stagnation in transactional revenue (with a noted headwind and modest double-digit impacts) and Q2 2024 reported slight declines, while Q1 2024 had no specific commentary on this topic. | Q3 2024 described transactional revenues as cyclically sensitive (especially in the temporary workforce segment) with expectations for recovery as macro conditions improve, supported by a strong cloud backlog. | Ongoing challenge with recovery potential. Despite continued cyclicality and headwinds, a recovery is expected as broader cloud growth offsets these challenges. |
Legal and Regulatory Risks | Q4 2023 addressed compliance issues with DOJ, SEC, and Brazilian cases through settlements and associated provisions, while Q1 and Q2 2024 had no detailed discussion on legal risks. | Q3 2024 provided updates on a DOJ-related investigation involving U.S. reselling practices and clarified that a recent FBI search was unrelated, reaffirming SAP’s commitment to compliance. | Emerging emphasis. Legal risks remain managed but new developments (DOJ inquiry) signal an area requiring continued attention. |
Macroeconomic Headwinds | Q4 2023 mentioned a "continued subdued macro" environment affecting expectations, whereas Q2 2024 emphasized that deal slippages were not macro-related; Q1 2024 did not address macro factors. | Q3 2024 acknowledged macroeconomic challenges, particularly in Germany and the temporary workforce segment, while remaining confident in cloud and transformation momentum. | Mixed signals. Recent calls show increased attention to macro factors, though overall confidence persists due to strong underlying growth. |
Transition of Maintenance Base to Cloud | Q1, Q2 and Q4 2023 detailed a strategic shift as part of cloud migration—with discussions on the potential decrease in maintenance revenue as customers move to cloud solutions, and emphasis on a large untapped maintenance base. | Q3 2024 reiterated the gradual acceleration of maintenance-to-cloud transition, highlighting both the expected gradual decline in maintenance revenue and significant ramp-up potential as more customers migrate. | Steady strategic focus. The transition remains central, with an ongoing, gradual shift from legacy maintenance to growth in cloud adoption. |
Strong Customer Pipeline and Demand | Q1, Q2 and Q4 2023 consistently demonstrated a robust customer pipeline with strong demand across regions and industries, including significant net new customer wins and large deals. | Q3 2024 maintained this emphasis with reports of a healthy pipeline, strong cloud bookings across key industries, and continued AI-driven deal momentum. | Consistently robust. Customer demand remains a major strength, with a durable pipeline and continued strong order intake expected to fuel growth. |
Cloud Gross Margin Expansion and Profitability | Q1–Q4 2023 and Q1–Q2 2024 noted steady cloud gross margin improvements (from around 72.5% to 73.3%) and increasing non‐IFRS operating profit, backed by scaling efficiencies and positive cost management initiatives. | Q3 2024 reaffirmed this trend with continued margin expansion, reporting improvements in cloud gross margin and a favorable profitability outlook, especially as they look ahead to 2025. | Continuous improvement. Cloud profitability is on an upward trajectory with disciplined execution and expectations of further gains. |
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Cloud ERP Growth and Guidance
Q: What drove the acceleration in Cloud ERP Suite, and are you confident in hitting guidance?
A: Strong growth came from large customers moving to RISE, net new wins in HR and finance, and our platform's ecosystem extensions. Our Cloud ERP Suite grew 36%, driven by large deals and new customers. Despite macro challenges, we have ongoing strong momentum and a healthy pipeline. To reach our 2025 ambition, we need about 26.5% cloud revenue growth, and we're on the right trajectory. -
Cloud Gross Margin Outlook
Q: What's the outlook for cloud gross margins?
A: With our cloud transformation measures taking off, we expect to significantly expand our cloud gross margin, particularly in 2025. Rolling out the cloud version of HANA brings better TCO and resiliency. Our Q3 results align with our Ambition 2025 to reach a 75% gross margin. -
Management Changes and Execution Risk
Q: How are you managing reorganization risks to avoid disruption?
A: We're confident the team is strong and excited about the massive opportunities ahead. Despite management changes and a 10% workforce reduction, we have plans to grow next year by leveraging RISE and GROW. Only 25% of customers have begun their cloud transformation, so there's significant potential left. For Q4, all hands are on deck, and we're confident in our execution. -
Free Cash Flow Outlook
Q: Is the strong free cash flow structural or one-off?
A: The strong free cash flow performance appears to be more due to phasing, but the underlying performance is solid. We've increased guidance at the midpoint by €0.25 billion, and while we haven't changed the cash flow outlook for 2025, current cash performance helps solidify our outlook. -
U.S. Investigations Impact
Q: What's the risk from U.S. investigations, and how large is your U.S. federal business?
A: The investigations are ongoing, but we're confident they're unrelated to recent events involving Carahsoft. We've fully cooperated with the DOJ since 2022, and the FBI search of Carahsoft's offices was unrelated to us. Our relationship with U.S. public sector agencies remains strong. The U.S. accounts for about one-third of our revenue, but the government sector is a low single-digit percentage. -
Gen AI Impact on Margins
Q: Will Gen AI usage negatively impact cloud gross margins?
A: For our 2025 ambition, we expect continuous expansion of cloud gross margins, with initial AI activity already reflected. Beyond 2025, it's speculative as pricing is still in flux, but for 2025, there's no risk to margins from AI usage. -
Support Revenue Decline
Q: Why did support revenue decline less in Q3, and what's the outlook?
A: The support revenue decline was 2% in constant currency, a gradual decline due to timing factors. Over time, we expect an accelerating decline as more customers migrate to the cloud, converting maintenance revenue to cloud revenue. As we sustain high Cloud ERP growth, cannibalization of support revenue will grow naturally. -
Cross-Sell Opportunities
Q: Can you discuss the runway to cross and upsell into the installed base?
A: We see massive potential to expand within our installed base. Typically, we land customers with finance, but there's significant opportunity to cross-sell solutions like Ariba and Concur, connecting them to create integrated business processes. We aim to break silos and expand in HR, finance, spend, customer experience, and supply chain. Only 25% of our customers have started their cloud transformation, so there's significant upside. -
Cloud Adoption Amid Macro Concerns
Q: How are ECC customers moving to S/4 and cloud amid macro concerns?
A: We're seeing strong momentum with large enterprises moving to S/4HANA Cloud via RISE. Customers understand it's about transforming business processes first, and cloud adoption helps reduce complexity. Despite macro challenges, there's high interest to move forward, with customers prioritizing areas of highest pressure. -
Backlog Growth and WalkMe Impact
Q: Was the 29% backlog growth organic, or did WalkMe contribute?
A: The 1 percentage point increase to 29% backlog growth was largely due to the inclusion of WalkMe; excluding WalkMe, growth was virtually flat compared to 28% in Q2. Going forward, displacement of SAP's Enable Now by WalkMe makes quarter-over-quarter comparisons challenging. -
Q4 Cost Considerations
Q: Are there specific costs to consider for Q4 as profit guidance looks conservative?
A: The implied Q4 operating profit reflects prudence. We're expecting lower software license revenue in Q4 compared to last year and have included costs such as back-end loaded bonus programs, increased employee share matching, inclusion of WalkMe's losses, and delayed ramps. These factors account for about €400 million, explaining the year-over-year deceleration in operating profit growth for Q4. -
Go-to-Market Transformation
Q: What go-to-market changes have been implemented, and which are most impactful?
A: Starting in January, we'll massively expand our volume business with digital marketing connected to partner-owned territories. We'll combine our finance and spend line of business setups to encourage cross-selling and increase productivity in our go-to-market model. These changes aim to capture the mid-market more effectively and expand within our installed base. -
Impact of Transaction Revenue
Q: Are transaction revenues or migrations impacting CCB?
A: The only callout for CCB in Q4 is more difficult comparisons due to last year's integration of LeanIX and a huge booking quarter. Transaction revenues are pressured, particularly in temporary workforce areas, but we anticipate recovery when macro conditions improve. We are prepared for continued pressure but have a strong CCB. -
Large Deals and AI Upside
Q: Can you comment on large deal volume and AI price uplift?
A: We see strong momentum with large deals making up over 60% of order intake, driven by installed base conversions. Demand remains strong despite macro challenges, especially in Germany. About 30% of deals include AI use cases, which come with price uplift and upside, particularly with our premium RISE offering or GROW. We expect expansion with our accelerating innovation pipeline in embedded AI, gen AI hub, and Joule.