• Current Cloud Backlog: Increased by 29% to EUR15.4 billion.

• Cloud Revenue Growth: Accelerated to 27%, reaching EUR4.4 billion.

• Cloud ERP Suite Growth: Increased by 36% to EUR3.6 billion.

• Operating Profit: Increased by 28% to EUR2.2 billion.

• Operating Margin: Achieved 26.5%.

• Share of Predictable Revenue: Now at 84%.

• Total Revenue: EUR8.5 billion, up 10% year-over-year.

• Non-IFRS Cloud Gross Profit: Increased by 28%.

• Cloud Gross Margin: Improved by 0.6 percentage points to 73.7%.

• Non-IFRS Earnings Per Share: Increased by 6% to EUR1.23.

• Free Cash Flow: Increased by 44% to EUR1.2 billion for Q3.

• 2024 Operating Profit Outlook: Raised to EUR7.8 billion to EUR8 billion.

• Warning! GuruFocus has detected 7 Warning Signs with SAP.

Release Date: October 21, 2024

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

Positive Points

• SAP SE (NYSE:SAP) reported accelerated total and cloud revenue growth, with cloud revenue increasing by 27% to EUR 4.4 billion.

• The Cloud ERP Suite was a significant driver of growth, with a 36% increase, marking the 11th consecutive quarter of growth in the 30s.

• Operating profit increased by 28% to EUR 2.2 billion, with an excellent operating margin of 26.5%.

• SAP SE (NYSE:SAP) successfully completed the acquisition of WalkMe, enhancing its business transformation portfolio.

• The company raised its 2024 outlook, expecting an operating profit of EUR 7.8 billion to EUR 8 billion, and confirmed it is on track for its 2025 financial ambitions.

Negative Points

• The macroeconomic environment remains challenging, with potential impacts on future performance.

• There is a risk of disruption due to ongoing restructuring and management changes, including a 10% workforce reduction.

• Transactional business revenue has declined mid-single digits, reflecting macroeconomic pressures.

• The integration of WalkMe is expected to be dilutive in the short term, with EUR 14 million in losses reported.

• The company anticipates a gradual decline in software support revenue as more customers transition to cloud solutions.

Q & A Highlights

Q: Can you discuss the strong contribution of large deals this quarter and the pipeline for Q4? Also, how are macroeconomic conditions affecting your business? A: Dominik Asam, CFO: We observed strong momentum from large enterprises, which gives us stability. The demand environment remains solid despite macroeconomic challenges. Christian Klein, CEO: We see no slowdown in transformation projects, especially in industries like chemicals and automotive. Our AI use cases are adding value, and we expect continued growth.

Q: How are you managing the risks of salesforce reorganization and ensuring it doesn't disrupt business? Also, can you elaborate on the strong free cash flow this quarter? A: Christian Klein, CEO: We are confident in our team's ability to execute. We have a strong pipeline and are focusing on expanding our partner ecosystem. Dominik Asam, CFO: The strong free cash flow is partly due to structural improvements and partly due to timing. We expect continued solid performance.

Q: Can you comment on the cloud ERP suite's growth and the outlook for cloud gross margins? A: Christian Klein, CEO: Growth is driven by large customers moving to the cloud and strong upsell opportunities. We are also seeing strong platform growth. Dominik Asam, CFO: We expect continued expansion of cloud gross margins due to economies of scale and improvements in our cloud infrastructure.

Q: What is the current status of the US Department of Justice investigation, and how significant is your US federal business? A: Dominik Asam, CFO: We are cooperating fully with the DOJ. The recent FBI search of Carahsoft's offices is unrelated to our case. Our US federal business is a small fraction of our revenue, but it's an important market for us.

Q: Can you discuss the potential impact of Gen AI on cloud gross margins and the migration of ECC customers to S4 and the cloud? A: Dominik Asam, CFO: We expect Gen AI to add incremental gross profit without negatively impacting margins in the near term. Christian Klein, CEO: Large enterprises are moving to the cloud to transform their business processes, and we see strong interest despite macroeconomic concerns.

For the complete transcript of the earnings call, please refer to the full earnings call transcript.

This article first appeared on GuruFocus.