SAP SE (SAP) Earnings Call Transcript & Summary

Okay. Good morning, everybody. Thank you for joining us today. I'm delighted to have SAP's CEO, Christian Klein, with me. Before we start on the fireside chat, just a quick safe harbor statement to read through. So during this conversation, SAP will make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in SAP's filings with the SEC, including, but not limited to, the Risk Factors section of SAP's 2024 annual report on Form 20-F.

Well, with that out of the way, Christian, welcome to Phoenix today. I want to start with a look back. So it's just over 5 years actually since you announced RISE. A lot of analysts and investors, myself included, saw it as a brave move with quite a lot of risks around it. But I think it's clearly been very successful. Casting your mind back to your expectations in November 2020, what do you think has been the biggest single factor that's gone in your favor or you've executed perhaps the most well upon?

Yes. Thanks a lot. First of all, Michael, for having me. I mean, being in Phoenix at that time of the year is actually not a bad thing, I have to say. Yes, look, 5 years back and now sitting here with some more quay has -- I mean, definitely, it was a ride. I would say, indeed, it's -- it was a very successful ride. I mean the biggest achievement, I mean, you probably are not surprised is technology-wise, it was pretty clear. The product strategy was pretty clear. I mean the co-CEO model broke back then, but I was super clear that SAP can't compete only with this many, many best-of-breed competitors when we are running businesses end-to-end that we are smarter than others to understand how to connect an omnichannel sales to the warehouses, the inventories, the commercial models of our customers. And so that was pretty clear. I would say that the biggest achievement was around on the people and the cultural side. I mean, to turn such a company around who was then successful for 50 years in coding a very successful ERP, you have to communicate a lot. And not only the investors were a bit skeptical back then, but also, of course, also people, they needed a belief. And when you have to start and share price is not doing that well, I mean, obviously, there was skepticism back then. But we turned it around. And the good piece is there is no debate anymore about cloud. I mean, think about our customers. I just said this morning, a customer and he thanked me 3 times that I forced him to the cloud because now he gets all the AI, the last-mile delivery capabilities of our supply chain in the cloud on the latest release. So at the end, I would say the cultural change was definitely the biggest achievement we actually had at SAP.

Okay. And if we think back to the financial targets you communicated around then, I think EUR 22 billion in the cloud, that included Qualtrics. So if we take that out, actually, you're heading a little bit ahead of that. But implicitly, maintenance or support was somewhere below EUR 9 billion, and it's maybe 20%, 30% above that today, which is quite an achievement. Intuitively, that would suggest you've been more successful in cross-sell and upsell, but the migrations have gone more slowly. Maybe you can elaborate.

Yes. For sure. I mean, there were some lessons learned. I mean, first of all, it's great to see my former CFO, Luka Mucic tells me question. I mean, look at 5 years and how close we really or even nailed all the targets we have set ourselves. This is HANA. This is our analytics. But now kidding aside, I would say there are 2 factors to it, why we are also seeing still the sticky support revenues. First, I mean, the world has changed. I mean you see the war in Ukraine, the cybersecurity attacks. There's a lot of new regulations coming and our customers understand really well to get support from SAP is a high asset. So there was actually the churn is the lowest ever. I mean there is hardly no churn. I mean they really appreciate when a company says, hey, in over 100 countries in the world, we're going to make sure that you are running a compliant business. Second, clearly, on the cloud side, I mean, the BTP was a lonely island back then, a platform without any apps. And imagine that happens at SAP, that tells you something. And now there is actually a large developer community and not only an ABAP community, also the next generation is now joining, building, we come, I guess, to that in a second, also now AI agents on the platform. So also the multiples, what we gain out of RISE was way higher because we see better upsell, better cross-sell, first of all, in the platform business. But then second of all, I mean, of course, now we are seeing when the customer on the RISE journey 2 or 3 years, I mean, they definitely expand now the SAP footprint. I said it before, an ECC on-premise customer of SAP, I mean, despite having an ERP, didn't necessarily use all of the modules in an ERP on-prem. So now we are expanding from finance oftentimes, we landed, went into HR. Payroll is anyway SAP, even if you buy your stuff from Workday, guess what, is an SAP payroll behind. So we are going into ECC, and now we are going into the supply chain. And when you then think about AI agents who need to collaborate cross company because this is only how you get really extract high value out of that. That is, of course, now another lever in the RISE journey to really bet more on SAP line of business solutions than probably going with a best-of-breed vendor here in some areas.

Okay. And I talked about sort of a 5-year look back. We're not quite there yet. So on the last earnings call, you sounded very excited about the health of the pipeline for Q4 and beyond, and you would be disappointed with your words if you only exited the year at 25% CCB growth. Obviously, a few weeks left, but can you give us an update on how your conversations are going with customers? And thinking beyond Q4, I think an important question, given the sort of imminency of the RISE completion, do you ever believe that current cloud backlog can accelerate again?

Yes. Look, yes, indeed. I mean, it's actually a good timing that you're asking the question when after my gym session in the morning, there was the forecast call worldwide. So I got the latest. And you see I'm smiling. I mean, yes, indeed, I was confident, and I'm confident about the quarter. I mean we know usually when we see the pipeline, when we have the material that we can execute now, of course, Q4, there's always a big swing. I mean there are 3, 4 mega transactions which we never had before, deal size also proving the value of AI because these customers would never ever now sign up for such a large end-to-end transaction on RISE if we would not have our AI and data strategy, our act together. Now of course, is this quarter nailed? No. So that's why also, I guess, Dominik rightfully said, hey, there is still a swing in the number. Now I said 25% would be a disappointment, and I stick to that so clearly and we're going to want to make this quarter work. We have the material. There was also some commentary around where I said we pulled some deals forward. Now that doesn't signal that we are then running out of pipeline next year. I mean, with a EUR 10 billion maintenance revenue, I mean, there is obviously enough pipeline. I would say the growth trajectory then after Q4 and the guidance, what we're going to pull out is -- has a lot to do with data and AI because we need to see that we are not building -- that customers are not building an agentic AI layer on top, but they really use our agents, that they use our software to have agent orchestration to have really agents serving end-to-end business processes. And that is, I guess, the most important factor. SAP will, for sure, not run out of pipeline next year. That's for sure. I mean, just look at the installed base, what we are having. And then last piece, also this quarter, I'm here just touring through U.S. Last week, I was in MENA. There are a lot of new start-ups, also midsized customers who are now leaning towards SAP. They want to expand their global footprint and also the net new customer business is actually running pretty well. I mean the focus we put gave the team, to our partners, to the ecosystem to build out more capacity to hunt more net new mid-market customers via the channel, not via our semi-expensive salespeople. I was definitely the right choice. So we are also seeing there's good growth there. And we are just getting started. So for me, the mid-market is also a big growth engine also in the years to come. So Q4, yes, I'm still confident. And let us work the last few weeks and then at earnings, we will know more about it.

And as you look forward to sort of 2027, 2030, does that catalyze a reacceleration potentially? Or is the business too large now to sort of sustain that?

Yes. I mean, acceleration of total revenue, as I said, definitely. I mean we will deliver so that the total revenue will accelerate through 2027, and I would even say beyond that will clearly be the case. Now on the CCB side, it's really about now the magic thing, but now we need to prove. And in my eyes, we will prove it. I see the AI use cases now that we not only tell our customers to transform with SAP on process automation, on efficiency, on and on but also go into the data platform. I guess you have Oli here as well. I mean ask him, I mean, the pipeline is phenomenal because I have not seen one AI use case in the B2B sector who delivers high value only with a large language model. I mean you always need to somehow -- without data, I mean, there would be no AI at SAP and so -- and I would not have data without software. So this discussion, I'm somehow not getting because I feel we are in a super strong position. And we are building now AI use cases, and we are committing to someone now in Q4 where we are saying, hey, we actually will be much better in predicting your volatile demand in a -- for semiconductor company in the future. This agent on sales forecast projection will talk natively out of the box to your inventory to see do you have the right products, the right chips at the right place, at the right warehouse? Should we ship it that way? Should we ship it that way? And then talk to the procurement agent to tell the procurement agent, hey, I'm running out of stock, you're better now going to negotiate the next order with this and that supplier. And these are the use cases. And if we build that use cases, I mean, I definitely have no worry that also the CCB will deliver strong growth rates, but the numbers are also getting bigger. So it's fair to say what we always said is that there will be a slight deceleration, but I guess a lot will now really depend on data and AI.

Okay. I mean I think you've almost answered the question I'm going to come in with, but just to see if there's any more you want to add. I mean, a theme over the last few months has been this death of software, death of SaaS at the hands of AI. What do you think investors are misunderstanding if they subscribe to that?

I mean looking at what happened at the stock market in the last 3 months, obviously, as a CEO, you would not do your job if you wouldn't ask yourself, what is happening there on the infrastructure? And is there not a way to get back into it? And I can answer that question clearly, no, no, no. We will not go back to the infrastructure business because our strategy was much -- was really successful in the last years. And we are convinced that over the time, let's see how long this will continue this flywheel of infrastructure chips, building data centers. But we are convinced that all of our customers are looking at SAP and say, "Hey, give me the best, the smartest agent for manufacturing automation, give me the best agent for demand and supply chain inventory optimization." And these are the cash flow optimization. I mean we have many. And that is, I guess, what we have to focus on. And with that and with our software, we have the business context. I mean, there is no way I can see it. I just had H&M with me last week, and we showed them the future of retail in our experience center. And we literally said, okay, you can shop online, you can go into the store and rebuild the store and then not demo, real live. Then the agent came and said, in commerce, do you have this dress? Is this the right size for you? Yes or no. Click buy, oh, sorry, it's not available in the store next door, but we can ship it to you maybe to this store or we deliver it to you in 2 days. So that is really the sales agent sitting in our commerce. But this sales agent needs to understand the material workflow into the inventory and that is what the software does. So the software gives me the data and the software gives me the business process context and the workflow. No LLM, no other AI will sit on top of SAP having the understanding of our business -- of the business processes of the customers. And then lately, obviously, you also then need to make sure when we then show them how we can even solve some of their challenges in the supply chain functions and the fulfillment functions of the company, then we talked about how do we deliver it standard. We're going to train it. We're going to optimize these agents going forward. And actually, what we're also doing, making sure that the identity and the authorization rights also is managed because somehow not everyone in H&M should see every piece of every financial data or customer data. So that is actually why I'm a big believer that our software and our data what we are having gives us a huge advantage when it comes to business AI. I could not see a business AI without software and data. I just can't.

That's very persuasive and I think a lot of investors would sort of agree with me there. I mean there's a maturity issue here perhaps. And I think the financial ambition that Dominik communicated is around EUR 1 billion of AI-related revenues in 3 to 4 years. Given what you've just described and the size of the business, that feels potentially cautious. What could make you more ambitious in your expectations?

The AI units and how much will be consumed, it's going well, by the way, especially in the last 3 months with -- now with Perplexity being GA. We see a good uptick in tool usage. Is it now EUR 1 billion? Is it EUR 1.5 billion? Is it EUR 2 billion? Is it EUR 3 billion? At the end, I'm going to win against Workday if my HR agents are the best. I'm going to win against Coupa inside out if our procurement agent is well integrated and orchestrated with the financial agent or with the supply chain agent. So for me, when we are doing next week our portfolio around with Muhammad and Philipp, I'd rather going to look at, okay, what do my Chief Revenue Officer telling me what they need on AI to beat all of these competitors. So for me, I would be -- actually say, I'm totally fine if it's EUR 2 billion and not EUR 3 billion as long as I'm winning market share in the apps. And the apps will become more and more an agentic AI layer for our customers. And so for me, this really comes together. And then on the monetization, it's a good question. We rather also follow the strategy, by the way, that I'm saying, infuse this AI units in every deal, make it work, show them the use cases, the customers, make them adopt. And I'm sure the next HR deal will come to us anyway so that we land and expand. So I'm rather not saying, let's just overprice it like hell because everyone believes AI is the next big thing, just rather land and make us win in the whole category. And that actually works. In every customer, when we delivered a successful agentic AI user scenario say, I want more. Let's go and look into from HR core, we go into learning. Let's go into recruiting with our latest acquisition. So let's put on the recruiting agent. And so that is, for me, I guess, Michael, at the end, much more important. And when I then look at the financial plan of SAP, I look at CCB, I look at how the LoBs are performing, how is the platform performing. And I want to see how is AI contributing literally to every deal, yes. I don't get the deals anymore through the door if AI is not changing the game on commerce for H&M. If it's not changing the game for supply chain for the U.S. Army. And that is, I guess, more important than now discussing, will it be EUR 1 billion, EUR 2 billion. I believe it could be more. But at the end, I want to win in all of these categories with AI.

Okay. I mean turning sort of the lens inwards, I think the margin improvement over the last 18 months has been pretty phenomenal. Can you talk about how AI has contributed to that? And what are the still largest opportunities internally in leveraging AI?

I mean, first, it would not be true to say now to sit here and say it's all AI. I see some statements out there where I sometimes wonder. But anyway, so I -- to give you the truth, I would say, when you look at the margin progression of SAP, I would say there are 40,000 developers using code agents, they become 20% more productive. We would have loved to see that at 30%. Let's see Joule for Developer, GitHub, WinFIRST, a few others, we are just getting there. And I'm see -- you're going to see more productivity gains. On quoting, pricing and deal approval, heavy usage. I mean this is a no deal in Q4 will not be touched by any AI -- will be touched by every AI use case we are having in our quote-to-cash process, and that helps a lot to accelerate also the handling the managing of this huge volume what we are having in Q4. So overall, I definitely see that we have, what we always said, a triple-digit million amount of efficiencies already through AI. Next year, you're going to see it in the guidance. Obviously, we have high ambitions on margin and cash flow. So this is where we definitely also now just infused further AI use cases across SAP. So all of our managers have now the task, tell us which AI use case you are implementing next year and don't ask, first of all, for headcount. You don't ask headcount, ask AI. And then IT and our product owners will help you to drive more efficiencies. And that is actually pretty promising. We are finalizing this now in the month of December. And you can definitely expect that some of the good performance you have seen because of AI will further accelerate. I would say the other half of the good progress of SAP is just discipline. I mean we -- as you know, we removed a lot of overhead functions inside the company. We reduced hierarchies, decision-making. I ask for a bit more entrepreneurship to take further risk and not having 10 people around you to tell you what you shouldn't do, but rather take decisions and move forward as the industry is moving fast, and that will continue as well. We -- I will not allow the company now to get lazy on efficiencies also without AI. I just want to see that we are driving as a company also further efficiencies, for example, expanding our sales channel via partners. I want to see in development that we are not going crazy in 5 new categories. Let's also see what can we co-innovate. We have great SIs. We have Databricks. We have Snowflake, we can build data products together. So that is something what I really would also want to see out of the product organization that we keep this discipline, focusing on the core where we are good at and then also expanding our portfolio via very smart partnerships. And that is -- that these are big efficiency levers as well.

Yes. I mean coming on to that, you recently added both Microsoft Fabric and Snowflake as partners on BDC. How is that affecting conversations with customers? And it's, I guess, 9 months since you announced the sort of launch. What's the uptake of that been and maybe the impact on the rest of the business?

I mean for me, BDC really moved the needle. And now it becomes pretty evident that in every AI use case we are building and we are then deploying with our customers that BDC is actually a prerequisite. And BDC not only for SAP data, there is oftentimes, of course, in many of the AI agent agentic scenarios, what we are then deploying at the customers, you also need non-SAP data. And BDC is the common nominator now for not only doing 0 copy, which we already did with Datasphere, but really to harmonize the semantics of data. And it's a good sign then when I was sitting here 2 years ago talking about Databricks that immediately Snowflake, Microsoft, Google, they all reached out and said, we want to be part of that. And I want to underscore BDC, and Hasso always told me that Christian, the biggest crowned jewel of SAP is our data. And you see also, by the way, with a few lawsuits, which I don't understand. But anyway, that we are sitting on a crown jewel, and that is our data. And with the BDC, we are not just exposing our data everywhere, we are keeping the semantics within BDC. So when you are not under BDC and when you are not signing a contract with SAP, you don't have access to the semantics. And that is super important to also protect our IP, to also protect our unique differentiation, and that is the mission-critical business data, which we are having in our apps. And that's why software will not go away. Without software, I don't have data and without data, I don't have AI. I repeat this now in every session, Michael.

Okay. That's a good point and I try to remember that one. So just moving back to the installed base. I mean, you mentioned at the beginning how AI is helping the conversation around RISE. There's a fairly large cohort there who went to S/4 on-premise, and I know you have a transformation and incentive program to help them on the journey to the cloud. Can you give us an update on how those customers are evolving?

Yes. Actually, the journey actually is very promising. I mean you know some customers who joined us really early in the game to mention some large brands, BMW, Exxon, they are now a heavy also customer of BTP. They are now really progressing on clean core. I mean companies like that, which we can almost run like a SaaS, landscape is actually huge. So there are no upgrades anymore. These are updates, and that is huge for them. And now it's, of course, on us to infuse our agentic AI knowledge, which is much easier when the landscape is clean, and we can just plug the AI agents in and almost play without doing a lot of groundwork on the customer side. Now what is, of course -- what the customers are asking us, and I guess this will be a big market for us. And I guess this is not so much seen in the public yet is they're all telling us, Christian, these migrations are much more expensive than the software itself. I said yes, that we should change that equation. And they are now asking for AI tooling, for data cleansing, for data migration, for system configuration, et cetera. So we are investing heavily in this AI tooling for the IT migration of legacy ERP into our modular public cloud ERP because we understand the data models on both sides, so we can clean and we can migrate with AI tooling. We can give this intelligence to AI and also on system configuration. I mean, we know our system configuration tools pretty well. So that is something what we are investing. And what we also want to monetize because it's real money. At the end, it's a win-win-win, yes, for the customer, they can go faster to the cloud and into the future with us. We actually win because we have those tools and we can accelerate the RISE journey, and we hopefully get higher multiples on the RISE journey because customers don't need to spend so much money on SI and services. And last but not least, I would assume also the ecosystem is actually a winner because they now also are with us in building this AI agent in this agentic AI tools to accelerate the customer's journey and their business model will change also quite drastically in the next years for sure.

Just a reminder, if you want to ask a question, I have an iPad up here and you can submit through the conference app. But just we're almost up on time. But just on M&A, we obviously discussed at the beginning or earlier around sort of that is dead. How does that influence your M&A strategy? Are you looking -- SmartRecruiters sort of AI-first business? Is that where investors should expect activity to come?

Yes. I mean SmartRecruiters, yes, you can say, oh, why they are still buying software. I mean I have 8,000 recruiting customers sitting on a legacy platform and before they go to Workday, there was no way that we can catch them if we are not having a modern platform. and SmartRecruiters, by the way, had already also pretty good AI. We are now harmonizing their AI platform with us. But this was for me also a tactical move to give our existing SuccessFactors a path to the cloud or to a modern cloud platform. And then second is, of course, it opens up now cross-sell opportunities. Going forward, when we will do M&A, I mean, needless to say, we are focusing a lot on data and AI. So we have this narrative that in the future, you're going to work with our software and there are agents supporting you along your business processes and you can press a button and you can build your own agent. So there must be a native agent builder built into the software where you see the business process logic and you say, why do I need to put so much work into this business process. And here, you can build your own agent. We need to further leverage what we can see on the data layer with the Business Data Cloud platform. We had a good start. But everything what helps SAP to accelerate our road map on agentic AI and on the data platform could be a potential acquisition target. Nothing what we have to do again out of growth, acquiring growth, nothing what we have to do right away because we believe organically, we won't get there, but acceleration in such a fast-moving market could be a reason to go for the one or the other M&A.

And you mentioned context of the data that you have, the consistency across the whole platform is important. So what is the future for stand-alone solution extension partners? Obviously, one of them has been mentioned in the press or newswires recently. You partnered with these companies historically. They fill a niche need, but they're not exclusive to SAP. They have their own management teams, their own strategies. Do you need to fill these gaps now organically? How do you sort of ensure full control of that data end-to-end?

Yes. Good point. I mean we are working with all of our partners now also how to connect them to tool. That works now better and better. So also there, we have a strong API layer. They actually get some pieces of our AI foundation built into their products. We're actually asking them to do. That is not any more option so that they are really connecting to our agentic AI layer to our AI foundation. And then second, no, I mean, the partnership will not change dramatically. We are relying on the SOLEX partnerships. I actually love those because, again, we cannot code every piece of software by our own as long as they are integrating natively into our stack. And now in the future, they need to natively integrate also into our agentic AI layer so that there is clear differentiation against some of the competitors, yes, when customers really want to run an end-to-end business processes with one of those partners.

Okay. And then I think we've got time for one last one. You mentioned BTP earlier as one of the drivers of the sort of success of your 2025 plan. I think a couple of years ago at Sapphire, you highlighted the ambition to take that to maybe 1/4 or 1/3 of the business from maybe 15% today. And I know you're not going to give numbers -- but can you give a sense of progress on that ambition?

Yes. No, it progressed really well. I mean today, actually, the BTP is a native part of our stack. So when you're going to sell, I mean, we completely replatformed Ariba, we completely replatformed our CX portfolio. BTP is, of course, the platform now which wants these businesses. What you get is out-of-the-box integration, out-of-the-box extensibility, and you're going to see that in the number. I mean BTP is getting now a natural boost just by being the underlying platform, native platform of those apps. And we -- you're going to see that also going forward that now with agentic AI, we want to build the native AI agents into the solutions. But actually, our AI foundation is actually sitting on BTP. So BTP will see in my eyes also in the years to come, accelerated growth also based on the fact that everything what we do around building AI agents and also then deploying it standard into the solutions is coming via BTP.

Okay. Well, we're up on time. It's a full agenda today. So Christian, thank you very much for your insights and investors for your attention, and good luck with the last 3, 4 weeks of the quarter.

Yes. Thanks for having me. Thank you.