SAP (SAP.US) Q3 Earnings Call: Rising U.S. Treasury Yields and Oil Prices Put Pressure on Q4, the Largest Order Season

German software giant SAP SE (SAP.US) achieved a milestone in the third quarter with quarterly revenue exceeding 10 billion for the first time, and cloud business growth surpassing expectations, indicating that the artificial intelligence (AI) boom has not weakened market demand for its products. The company also expects full-year cloud business revenue to reach the high end of its previous guidance range. Financial results show that SAP's third-quarter revenue grew 13% year-over-year to 10.27 billion, marking the first time quarterly revenue has exceeded 10 billion. On profitability, non-IFRS operating profit was 3.03 billion, up 18% year-over-year, exceeding 3 billion in a single quarter for the first time; non-IFRS operating margin was 29.5%, up 1.2 percentage points year-over-year. IFRS basic earnings per share were 1.96, up 14% year-over-year; non-IFRS basic earnings per share were 1.89, up 19% year-over-year, above the analyst consensus of approximately 1.83. Free cash flow grew 36% to 1.72 billion. Third-quarter cloud business revenue grew 26% to 6.67 billion, beating the analyst consensus of 6.57 billion. SAP said cloud revenue growth was driven by customers resuming investment after emerging from "financial difficulties." At constant currency, SAP's cloud backlog grew 26% to 24.14 billion, above UBS Group AG's prior forecast of 24% to 25% growth. SAP's backlog is viewed as an important indicator of global enterprise technology spending, as the company's software suite provides accounting and payroll management services to many large enterprises worldwide. SAP develops enterprise-grade software for managing finance, human resources, and other core business functions. In recent years, SAP has been encouraging customers to migrate from legacy software systems installed on local servers to the cloud. Currently, most of SAP's revenue already comes from remote access services. The company plans to end regular support for legacy products next year, after which the cost of maintaining traditional services will rise. SAP now expects 2026 subscription revenuewhere customers rent software access remotely rather than purchasing and running software themselvesto reach the upper end of the 25.8 billion to 26.2 billion range, corresponding to 23% to 25% year-over-year growth. Including the declining traditional software licensing business, SAP expects full-year revenue of 36.3 billion to 36.8 billion, up 12% to 13% year-over-year. SAP maintained its full-year operating profit guidance unchanged at 11.8 billion to 12.2 billion at constant currency. Below is the full transcript of SAP's earnings call (translated with AI tool assistance): I. Executive Remarks CEO Christian Klein We delivered an outstanding third quarter, moving the "autonomous enterprise" from vision to reality. Customers are experiencing our latest AI capabilities with unprecedented response. The strategy not only resonates but is translating into results. On key metrics, current cloud backlog reached 24.1 billion, up 26% year-over-year; cloud revenue was 6.7 billion, up 25% at constant currency, driven primarily by AI data and platform business, with 9 out of our 50 largest deals including AI and Business Data Cloud (BDC). Total revenue for the quarter was 10.3 billion, up 12%the first time in SAP's history that quarterly revenue has exceeded 10 billion; operating profit grew 18% to over 3 billion. According to IDC data, we are growing approximately 11 percentage points faster than the market. AI is the three major DRIVEs for customers moving to the cloud: accelerating RISE and GROW cloud migrations, making the suite's business value more prominent, and enabling customers to embrace the business AI platform through RISE/GROW. RISE and business AI are gaining traction across industries, with new customers including financial services (BBVA, Canada's Fairstone Bank), technology and research (Infineon, Fraunhofer Society), manufacturing (Japan's NTN), logistics (Nagel-Group, U.S. Defense Logistics Agency), among others. On the GROW side, Greenbrier Maxion, South America's largest rail manufacturer, plans to use Joule to enhance real-time operational visibility; Astrazeneca PLC Sponsored ADR, Decathlon, Denmark's Salling Group, Henkel, and other customers have also adopted industry AI, with Salling Group reducing time-to-shelf by up to 66% and category management time by up to 70%. On the solutions front, Kao adopted SAP Signavio, NTT DATA adopted procurement solutions, and Helvetia adopted SuccessFactors; IDC estimates we are growing more than 1.7 times faster than the overall human capital management (HCM) market. RISE customers going live this quarter include Mondelez, Panasonic, Roche, Infosys, and others. At the core of the autonomous enterprise strategy is Joule Work, which enables 400 million SAP users to interact with SAP in natural language, built on three capabilities: First, "Conversations," where users ask questions and delegate tasks, calling on specialized agents when neededfor example, a supply chain planner can have Joule summarize supplier contracts and delegate an agent to resolve supply shortages and directly trigger production adjustments; Second, "Spaces," which aggregates real-time data across systems, presenting IBP and S/4HANA data side by side to show supply-demand and risk; Third, "Joule Studio," which supports extending or building agents from no-code to professional code. The autonomous suite currently includes 40 assistants and 300 agents, and we adhere to "quality over quantity." Technologically, Joule is built on the business AI platform, offering over 70 models (including frontier and open-weight models), not locked into a single model and giving customers choice; the knowledge graph is anchored in BDC, mapping over 7 million fields, 500,000 tables, and 400 data products, and through the acquisitions of Dremio and Reltio, extends context to data outside SAP. In the Ariba scenario, Joule achieved twice the accuracy at half the total cost of leading frontier models. On governance, every agent is run and governed by SAP, covering compliance and auditor certification across 26 industries and 60 countries and regions; we commit that customer data is never used for large model training or improvement. We are also transforming ourselves into an autonomous enterprise: 40,000 developers work "AI-first," with code contributions up approximately 70% since the beginning of the year; go-to-market is fully AI-enabled; Joule Work Desktop has been deployed to over 110,000 employees, improving productivity in finance, HR, procurement, and other functions by 20%. The Q4 pipeline is strong, but Q4 is always the largest and most critical quarter, and the team is in full execution mode. CFO Dominik Asam: Financial Data and Outlook The third quarter continued strong performance. Current cloud backlog exceeded 24 billion, up 26%, and SAP remains the undisputed growth leader in large enterprise SaaS/PaaS. We still expect cloud backlog growth at constant currency to slow slightly in 2026, but market share will continue to increase, due to macroeconomic and political uncertainty potentially affecting the largest Q4 order season, as well as the continuously expanding base. Cloud revenue was approximately 6.7 billion, up 25%, including approximately 1 percentage point of positive one-time impact (mainly from revenue recognition for customers in financial difficulty). Cloud ERP suite revenue grew 28%, accounting for 89% of cloud revenue; software license revenue declined 9%; services revenue declined 5%. Total revenue was 10.3 billion, up 12%. By region, cloud revenue was particularly strong in Asia Pacific Japan (APJ) and Europe, Middle East and Africa (EMEA), and solid in the Americas; Brazil, France, Germany, Italy, India, South Korea, and Spain performed notably, with Switzerland, the UK, and the U.S. particularly strong. On profitability, IFRS cloud gross margin was 73.9% and non-IFRS 74.3% (down 0.7 percentage points year-over-year); IFRS operating profit grew 18% to 2.9 billion, and non-IFRS operating profit also grew 18%, exceeding 3 billion (both benefiting from one-time negative impacts in the prior-year period). IFRS effective tax rate was 24.4% and non-IFRS 25.8%; free cash flow was 1.7 billion; IFRS earnings per share grew 14% to 1.96, and non-IFRS earnings per share grew 19% to 1.89. On the outlook, we expect 2026 cloud and "cloud plus software" revenue to land at the upper end of the original guidance range, while maintaining the original guidance for cloud backlog, operating profit, and free cash flow. We remain committed to accelerating total revenue growth in 2027, but must flag three points: First, Q4 accounts for approximately 50% of full-year order volume, and macroeconomic uncertainty could weigh on Q4 orders and affect the 2027 trajectory; Second, we intentionally use the services business to drive AI adoption, which will further reduce billable hours and services revenue; Third, as revenue improves and the base rises, acceleration in 2027 becomes more difficult. Overall, we remain in planning mode regarding 2027 revenue acceleration but must acknowledge the above factors. II. Q&A Session Morgan Stanley Analyst Adam Wood Question: Why is the cloud backlog (CCB) guidance still conservativeis it just caution about Q4 volume, or are you seeing concerns in the pipeline or customer decision-making? Dominik Asam: CCB growth has indeed been strong this year, but half of the full-year orders still need to land in Q4. The current macro environment is not idealoil prices have risen from $60 to $110, and U.S. interest rates have reached above 5% and are starting to biteso it would not be prudent to assume a very favorable Q4 macro environment. We have not given a precise point estimate for "slight deceleration"; this is simply a range implied by prior guidance, with the upper end at approximately 24%, and ultimately it depends on how the remainder of Q4 unfolds. JPMorgan Analyst Toby Ogg Question: Has backlog growth exceeded internal expectations, and which products brought unexpected upside? Christian Klein: Every RISE/GROW journey brings surprises. Just today I hosted a large mining company that spoke highly of our data migration agent, and consultant and partner feedback has been equally excellentsystem integrators are even willing to disrupt their own models to accelerate customers' cloud migration. Second, most deals now include AI, and two years after BDC's launch, the Dremio and Reltio acquisitions are well-timed; next year in Q1 we will also be able to automatically extend the ontology layer for non-SAP data. Customers are increasingly understanding that messy data models slow AI deployment, which requires a "clean core," just like any ERP implementation. Finally, Q4 is the golden period for our new AI capabilitiesJoule Work already covers finance, HR, sales, and other scenarios, always with data context and permission governance, which is precisely SAP's unique value. Jefferies Financial Group Inc. Analyst Charles Brennan Question focus: How far are agent response times and accuracy from target; have AI credits already affected income statement metrics? Christian Klein: On accuracy, we will never be "done"when a product manager demonstrates 95% accuracy, I ask him to raise the testing bar and solve harder problems; this is an ongoing process. On response times, we trace every query to the data layer, ontology layer, and API, and the team is highly motivated with good progress. Dominik Asam: AI credits are amortized over the contract term after issuance, so there will be no cliff effect. The consumption-based model is being introduced gradually, and in the short term the traditional logic of "CCB converting to cloud revenue" still holds; evolving toward outcomes in the future requires consumption and adoption, and all incentives are tilted toward adoption, but this is not something to worry about in the 2027 bridge. It is worth noting that the long-depressed transactional business has essentially bottomed out and delivered decent positive year-over-year growth this quarter. KeyBanc Capital Markets Analyst Jackson Ader Question focus: As AI becomes a decision factor, can Americas cloud revenue growth catch up with EMEA and APAC? Christian Klein: All regions are performing equally strongly on AI and data, highly consistent over the past four quarters. North American customers tend to be AI pioneers, and the regulatory environment is also looser than in Europein practice, the U.S. leads, with EMEA and APJ following closely. Dominik Asam: Precisely because the U.S. is the pioneer, its cloud penetration is already higher, which is the main reason for the growth differential. Bernstein Analyst Mark Moerdler Question focus: What are the bridge factors between the first nine months and the full-year revenue guidance? Dominik Asam: Q4 cloud revenue visibility is already quite high, which is why we raised to the upper end of the range, implying cloud revenue growth of approximately 23%there is no mystery. The deceleration from 25% in Q3 has several factors: the prior-year period had two negative factors totaling 200 million that lowered the base; SmartRecruiters was only consolidated on September 11 last year, so the M&A benefit will disappear from the year-over-year comparison (approximately 0.5 percentage points); and the natural flow-through of CCB growth slowing from 27% in Q3 last year to 25% in Q4. License revenue has always been difficult to predict but accounts for an increasingly small share, and services revenue continues to decline at a quarterly scale of approximately 1 billion, because converting billable hours into adoption support delivers rich returns. UBS Group AG Analyst Michael Briest Question focus: Confidence in the approximately 2 billion cash flow target for Q4, and whether migration credits are starting to be used by customers? Dominik Asam: Migration credits will eventually affect free cash flow, but not enough to shake the full-year 10 billion guidance. Q3 receivables were elevated, and we are tightening collectionsin a high interest rate environment, customers sometimes use excuses to delay payment, and we will ensure the money is actually collected. Deutsche Bank Aktiengesellschaft Analyst Johannes Schaller Question focus: Can model routing become a potential cost-saving source for gross margin? Christian Klein: We are selecting the optimal "performance and price" model for each agent use case, and the share of open-weight models is increasing (both externally and internally)and this is just the beginning. On gross margin, there were some one-time investments this year and hardware prices were elevated, but next year we will advance large-scale AI automation in cloud operations deployment, monitoring, incident, and full application management, and reduce third-party outsourcing, so we remain confident in the healthy development of cloud gross margin. BNP Paribas Analyst Ben Castillo-Bernaus Question focus: The "headless" trend in software, and the divergence between "model-agnostic" and "exclusive partnership" strategiesis SAP's strategy being validated by customers? Christian Klein: We are using AI to train models, continuously optimizing agent accuracy and outcomes, and simultaneously optimizing the "price and outcome" cost-effectiveness, with good quarter-over-quarter progress. Being model-agnostic and giving customers choice is our advantage. Bank of America Corp Analyst Frederic Boulan Question focus: Margin moving factors for this year and next, and operating leverage and room for continued expansion? Christian Klein: We are driving an "all-in-one" AI program internally, applying AI across the entire R&D and delivery cycle, and will also adjust third-party contracts over the next 12 months. On the sales side, Joule Work already covers customer briefings and account planning; on the finance side, Tableau AI and Joule Work are used for simulation and reporting; on the HR side, TechWolf is used for skills transformation. We expect to achieve up to 3 billion in efficiency gains over the next two years, with AI impacting costs across the income statement. Dominik Asam: These levers are all extremely powerful, while sovereign cloud, retail business, and BDC structures are also expanding, and several acquisitions will mainly affect operating margin. We are firmly committed to keeping total operating expense growth at 80% to 90% of revenue growth, while focusing more on the absolute amount earned from opportunities rather than fixating on margin alone. Evercore ISI Analyst Kirk Materne Question focus: Once the transactional business stabilizes, can it become a tailwind in 2027? Dominik Asam: "Tailwind" is an overstatementit is well below the group's average cloud growth rate, merely returning to positive territory from near-zero growth previously; essentially it is "less headwind" rather than "contributing tailwind." Citizens JMP Securities Analyst Patrick Walravens Question focus: How does SAP view Concur's travel and expense business facing new competitors? Christian Klein: Concur is a sizable business for us and is more focused on the "expense-to-pay" link; customers have deeply integrated it into their finance solutions, and the business is very stable; the booking side accounts for a very small share. Among all line-of-business solutions, Concur actually has the highest agent adoption, and we will also announce new partnerships with credit card companies and airlinesecosystem interest is strong, and the business is healthy and intact. Citi Analyst Balaji Tirupati Question focus: The internal composition of backlog, and as ECC maintenance business decline approaches, is there more bias toward migration or AI/BDC? Christian Klein: Every RISE journey today is not just about moving to the cloud but about reshaping business processes with AI; customers adopt S/4, line-of-business solutions, and the BDC platform simultaneously to build a harmonized data layer unifying SAP and non-SAP. RISE contracts are becoming thicker overall, embedding more solutions, process-layer AI, and BDC, and customers are also using various AI migration tools to accelerate deployment. This trend is also reflected in the strong Q4 pipeline, where every RISE deal is AI-led with a mandatory data layer.