SAP SE

XETRA:SAP

Q3-2025 Earnings Call

[Operator]

Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the SAP Q3 2025 Financial Results Conference Call. [Operator Instructions].

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

[Alexandra Kasper Steiger, executive]

Good evening, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; and CFO, Dominik Asam. On this call, we will discuss SAP's Third quarter '25 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 annual report on Form 20-F for 2024.

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 currencies. 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.

And with that, over to you, Christian.

[Christian Klein, executive]

Yes. Thank you, Alexandra, and a warm welcome to everyone on the line. We are already entering the final strategy of 2025, and I'm very happy to report, SAP had a great Q3. and keep still going. Our cloud revenue growth and current cloud backlog performance have been strong. Business in the U.S. public sector has started to pick up again. Overall, we are gaining market share. So our customers are adopting solutions across the entire business suite, including Business Data Cloud and AI at an accelerated pace. A recent IDC study shows that we grew 10 percentage points faster than the rest of the market in 2024.

Looking ahead, the pipeline for Q4 and 2026 looks great as we unlocked a few key industries where business had stalled in half year 1. As a result, we can confirm with high confidence, our ambition to accelerate total revenue growth through 2027. And I'm very excited about that AI is becoming the key enabler of our course.

So first, let's have a closer look at the quarter's financial results and our customer wins. In Q3, cloud revenue rose 27%. Cloud revenue has consistently grown more than 25% for 5 quarters in a row. And it was coming with a very solid cloud gross margin of about 75% in Q3. Total revenue growth came in again double digits at 11% -- cloud backlog increased 27%, a strong performance considering that the workmen acquisition is now in the base. And once again, our bottom line performance was excellent. Free cash flow increased by 5%, while operating profit came in 19% higher despite negative impact of around EUR 200 million, which Dominik will explain heavily in a moment.

The customer stories from Q3 and color to the picture. Alphabet. Ericsson, Lufthansa, the Magnum ice cream company, [ Steel, Syngenta ] Crop Protection, [ Tapestri ]. These companies are known around the world. They are industry leaders with iconic plans. And they all opted for the wise journey in Q3.

But their business transformation journey doesn't stop at cloud ERP, Ericsson, Lufthansa, Magnum, Syngenta, Steel and Tapestry also adopted SAP Business Data Cloud and Business AI and expanded the SAP footprint with our business with LOB solutions.

Alphabet for its part, selected BDC and we deepened our relationship with plans to further support our business AI road map with Google Gemini. The picture is the same wherever you look. In addition to their new wise journeys in Q3, we won [ GSK ] for CX. Czech Wall Skin for supply chain, Takeda for Ariba and supply chain and all 3 customers also signed up for Business Data Cloud.

Panasonic, for their part, signed up for wise in 2022 and now in Q3, selected our complete human capital management portfolio. As you already know from the analyst conference at Sapphire, we see the potential to convert EUR 1 of on-premise revenue into EUR 5 and more of cloud revenue by transforming the end-to-end value chain of our customers through wise with SAP. About half of that potential is upselling and cost saving.

The conclusion from these stories is very clear. Our strategy works, land and expand works and the AI infused integrated business suite is the way forward for customers as well as for SAP.

As for the journey, our strategy is playing out very nicely as well. Among those that embark on their growth journeys where the AI companies publexity, Connector and Codiak AI. It is great to see that many fast-growing tech companies build their unique growth stories with SAP's business suite.

Next to the Q3 wins also bending spoons top -- for example. They all in place our growth journey because of the following reasons. They will be able to go live in a matter of weeks. They can scale our platform from small too big without any effort in over 60 countries going towards the IPO and beyond. And they will never have to think about upgrades again and can instead invest their IT money in continuous innovation like AI.

Finally, let's have a look at our soft and cloud offering. I already mentioned that business in the U.S. public sector is picking up again. SAP NS2 was awarded a major framework contract with the U.S. government. And we are very happy that we have already won first orders under this framework in Q3. For example, the United States Army signed a contract enabling the migration from on-premise systems to the cloud.

In the U.S. and worldwide, more and more customers are watching us with their software niche. While some companies pursue high growth in the infrastructure business, we are sticking to our strategy. SAP will not build Giga factories. Instead, we provide soft and cloud solutions together with strong cloud infrastructure partners. This allow us to offer customers, the best of the best across the technology stack. And it allows us to reach great global coverage at a healthy margin without any long-term bets.

Together with AWS, we recently launched software offerings for India and Europe. And with OpenAI, we launched a partnership, providing German public sector customers softer in access to one of the world's leading LLM. On top of that, we just introduced a game-changing new soft and cloud offering for highly regulated customers and governments. We can now offer our entire cloud portfolio in a customer data center at a highly competitive cost. The offering delivers the highest levels of data, operational, technical and legal software, while customers have access to all SAP cloud solutions, BTP, BDC and AI. We see tremendous customer interest in this soft and cloud on-site offering and have built already strong pipeline for 2025 and 2026 within a few weeks.

With regard to AI, our strategy is playing out as well. For high-value AI cases in B2B, a large language model alone is not sufficient to make it simple. No apps, no data, no AI. Only the combination of Lamps with business process and contextual data results in high-value AI use cases. That is our strategy. That is where SAP is better than anyone else. And that is where we innovate and invest.

We are proud of releasing more and more AI agents, but it is not the number that counts. It is about how we automate and infuse intelligence across end-to-end business processes. It is about orchestrating AI agents across the company's value chain, something only SAP can do. That's why we are introducing AI assistance in June. Orchestrating our agents to support specific personas and functions in the company.

Imagine, for example, an AI assistant for supply chain management, supporting a planner to rewire goods, optimize inventories or connect new suppliers seamlessly. Think of these assistance as team leads who bring just the wide technical agents into the conversation from a pool of hundreds. For example, bringing in a maintenance planner agent as part of the production planning process, and supporting the bladder to reduce downtimes of important assets significantly increasing the productivity of the planner by up to 40%.

We are currently working with customers across all industries and functions to co-develop and refine these assistance to maximize the business value. We are also releasing the tune everywhere and everything functionality to customers in Q4. Thanks to our partnership with Caplexity, our AI copilot can now work with both SAP and non-SAP data. and it can provide high-quality answers to very complex business questions.

Finally, our latest research publication on SAP's foundation module for tabular data will be a spotlight paper at one of the world's top AI research conferences this year. We are at the cutting edge of research and turning now these insights into tangible benefits for our customers.

In Q4, we are going to sign Wise deals initially banned in 2026 and because customers want to start now using SAP Business AI. And even more important for us at SAP, AI adoption is going up significantly. Because end users are consuming SAP business AI at a higher frequency and across a broader scope, some examples. Jonson control saved 3,000 hours annually by automating out IT system monitoring with our IT agent. Bosch saves 2,500 hours per customer service center per year with our services agent. JK Cement from India has cut the time for purchase-related processes by 50% with our sourcing agent. But we build use cases not just for the focus on sound layer. Super happy to report that we are going in the meantime, deep into the industry verticals as well.

To give you 2 examples. [ Ratle ], a manufacturing company is infusing SAP business AI in their mission-critical spare part quotation process. This results in a significantly higher process accuracy and a much better customer and supplier experience. And with CHS, an agriculture company, we are enabling traders to create commodity contracts in natural language with [ SPC 2 ] with estimated efficiency gains in the tens of thousands of dollars per trade as well as improved data integrity and accuracy.

Looking at the data are and our business data cloud offering, we are also pushing ahead. For example, with the hundreds of data products released to date, and new capabilities for intelligent apps such as people intelligence and [ Gemino ] intelligence. We are also strengthening our position in data with our new offering, SAP Business Data Cloud Connect, a serial copy service to connect BDC with partner data platforms such as Databricks and also Google BigQuery.

Customers receive life and secure access to Google's AI ecosystem and Gemini modules among many other things. More exciting data partnerships will soon follow at our target event in November. Internally, at SAP, we are also dialing down on AI adoption. Acting as customers for our own solutions, we boost productivity. Some of the greatest internal levers are in development, go-to-market, customer support, pricing and process simplification in the corporate functions, for example, in the deal approval process.

SAP wants SAP, that is the guiding principle. As for Joule, our AI copilot answers thousands of employee questions every day from simple tasks such as travel to bookings, to complex quoting support at quarter end. We believe that simplification and internal AI adoption will enable our headcount to grow significantly below revenue.

Let me now summarize. SAP is in a very good shape. We closed a great Q3 and are ready for Q4, thanks to a very healthy pipeline. At the same time, we are building a strong position for SAP to be a leader in the AI was with apps, data and AI as the winning formula. As 2025 is coming to a close, we are already looking ahead to the next chapter. Our product strategy and business model are spot on. This gives us resilience across regions and industries. AI will be the key enabler for accelerating double-digit total revenue growth through 2027. Given all that and more I'm very much looking forward to the future.

And with that, I'm now handing it over to Dominik. Dominik?

[Dominik Asam, executive]

Thank you, Christian, and thank you all for joining us this evening. As Christian mentioned, SAP delivered yet another great quarter with performance that underscores the momentum we see across the business despite the persistent challenges and uncertainties in the broader macroeconomic backdrop.

In Q3, we saw strong execution on current cloud backlog and cloud revenue. This, coupled with the healthy growth in operating profit reflects the safeguards we put in place a disciplined with which we are managing the business. The cloud ERP suite delivered its 15th consecutive quarter with growth exceeding 30%, highlighting the progress we are making in helping customers migrate to the cloud and validating the strength of our strategy.

These achievements show that SAP remains a bellwether for digital transformation, reflecting the trust customer place in our mission-critical solutions and positioning us for durable growth in the years ahead.

Now more details around our financial highlights. Countless -- backlog exceeded EUR 18.8 billion, up 27% and Cloud revenue also increased 27%, driven once again by the strong performance of Cloud ERP suite. It delivered 31% growth in Q3, demonstrating the unabated momentum of strong market share gains in what by now represents 87% of cloud revenues and actually more than 100% of the year-over-year increase in cloud revenues. The magnitude of these market share gains becomes even more evident if adjusted from 31% Cloud ERP growth at constant currencies with the reporting currency of our competitors, which is obviously the U.S. dollar.

During the quarter, we also closed our acquisition of Smart Recruiters. This tuck-in strengthens our capabilities and talent acquisition and supports our long-term strategy. Despite our solid operating momentum in Q3. Please keep in mind that as we progress through the remainder of 2025, we need to stay mindful of the broader environment.

We were also awarded a major U.S. public sector framework agreement in Q3 with the United States Army which we expect will expand our access to future opportunities in this market, giving us confidence that this industry is seeing early signs of improving engagement. Software licenses revenue decreased by 42% in Q3, Finally, total revenue came in at EUR 9.1 billion, up 11% and the share of more predictable revenue rose by 2 percentage points to 87%.

Now a brief look at our regional performance. In Q3, SAP's cloud revenue performance was particularly strong in APJ and EMEA and solid in the Americas region. Brazil, France, Germany, India, Italy and South Korea all had outstanding performance while Japan, Spain and the U.S. were particularly strong. Now moving down the income statement. Our non-IFRS cloud gross margin for the quarter expanded by 1.1 percentage points to 75.1%, driving cloud gross profit up by 28%. IFRS operating profit increased 12% to EUR 2.5 billion in the quarter. In the third quarter, non-IFRS operating profit was up 19% to EUR 2.6 billion. Both IFRS and non-IFRS operating profit growth were negatively impacted by approximately EUR 100 million as a result of a change in case law that affected SAP's other tax litigation provisions. As well as more than EUR 100 million related to the workforce transformation. In light of the timing for some of the measures related to this program, we anticipate another EUR 100 million of expenses to be recognized in the fourth quarter of 2025.

I'll now touch on our results below the operating line. The IFRS effective tax rate in Q3 was 25.3%, and the non-IFRS tax rate was 27.9%. The IFRS effective tax rate is lower than the non-IFRS effective tax rate due to the tax benefits from tax-exempt income. Operating cash flow in the third quarter was up by 7% to EUR 1.5 billion, and free cash flow increased by 5% to EUR 1.3 billion.

The increase was mainly attributable to the higher profitability and to lower restructuring payments, which were partially offset by higher tax payments. Finally, basic IFRS earnings per share increased to EUR 1.72 and non-IFRS earnings per share increased to EUR 1.59.

Now on to our outlook. As you've seen in today's release, we now expect to reach the range of our cloud revenue outlook for fiscal year 2025 towards its lower end due to delayed bookings in the first half of the year, as already highlighted in July. We've seen this dynamic of back-end loaded bookings again in Q3, especially in sectors such as industrial manufacturing and public sector.

Nonetheless, we're now expecting to land towards the upper end of our operating profit outlook range and forecast free cash flow to exceed the previous target of EUR 8 billion. We continue to expect CCB growth to slightly decrease in 2025. Well, by now, we have a quite precise view as to where we will end up within our guided range for cloud revenue for fiscal year 2025. Given that Q4 is by far the biggest quarter in terms of bookings seasonality, we still have a larger range of potential outcomes for CCB growth. Nonetheless, our robust pipeline of opportunities and our strong competitive momentum give us confidence to reiterate our ambition to accelerate total revenue growth through 2027. This performance underscores the strength of our portfolio, operational discipline as well as our ability to deliver results.

For additional details, please refer to our quarterly statement published earlier today on our Investor Relations website. And thank you, and now we will be happy to take your questions.

[Alexandra Kasper Steiger, executive]

Thank you, Dominik. Again, we will take your questions now. Again, I would kindly remind you to only ask 1 question when prompted. Operator, please open the line.

[Operator]

[Operator Instructions]. The first question is from the line of Toby Ogg with JPMorgan.

[Toby Ogg, analyst]

Yes. Just on the demand -- just on the demand backdrop, question. I know you talked previously about elongated sales cycles across various sectors, U.S. public sector and manufacturing. Could you just give us an update on what you're seeing now with respect to these sectors? Obviously, there's the shutdown at the moment, but it sounds like you're seeing some positive early signs.

And then just related on the backlog, Dominik, I think you'd said at a recent conference that 4 percentage points of decline would be a bit more than a slight decline, which is the guidance. So is it right for us to interpret that as a 25% exit rate being unlikely as that would be 4 points deceleration from the 29% that you did in 2024.

[Christian Klein, executive]

Yes. So happy to take your question. And first, I mean, on macro and deal cycles and just to give you also a bit insights into our Q4 pipe. I mean, first, what is not only very positive is that we have to cover it. Q4 is, by far, as you know, our biggest bookings quarter and coverage looks really good. We even see in the U.S. public sector, I mean, you saw the adjusted cloud revenue guidance. I mean, when you're going to miss in the U.S. public sector and also in a few deals in the manufacturing space, somehow the bookings in half year 1, and it's hard to catch up.

Now the good piece is looking at our Q4 pipeline, I find a lot of these deals now coming back. And that gives us a lot of confidence for Q4. The good piece is also when you look at the pattern of the pipeline and not even Q4, we had also order look on rolling for quarter.

The good piece is I always ask the question, are we connected to the C level? Is it only about IT and end of maintenance? Or is there a high value? And I can tell you in over 90% of the deals, we are talking to the seed level. We are talking about cost optimization with AI, especially in the chemical industries. But this is not about, do we do it or do we not do it? It's actually a done deal that they want to do it. but it's also about AI being the leading factor for doing this deal and not only to be more safe in the cloud.

Second, when we also then look at the Q4 pipeline, what is also very promising is -- then when we have seen in the past, this kind of pipeline cover, which we could definitely see that when we're executing it in the right way, when we are connected to the C level, when there is a compelling business case I mean then it's all about execution. It's in our hands, nothing else, no macro, no elongated sales cycles. And then last but not least, when it comes to the CCB, I mean, I definitely don't see a 25. Q4 can have a big swing and so I would be rather a bit more optimistic when we are talking about the CCB and the exit rate for this year given the momentum in our business.

[Operator]

The next question is from the line of Mohammed Moawalla with Goldman Sachs.

[Mohammed Moawalla, analyst]

Just for me, again, on the sort of the delay you're seeing in terms of the backlog and the back-end loaded nature of the deals falling into kind of cloud revenue how should we think of that because the Q4 implies a kind of significant step down. But when we think of cloud revenue going into next year, do you still expect to be around that sort of mid-20s level, plus or minus?

[Christian Klein, executive]

Yes. And I mean, Q4 is, of course, a very important quarter, as you know, for the cloud revenue guidance for next year. We have the pipeline. We have the coverage. We have the industry back, which we were waiting for. And we have AI in order to build these compelling business cases. And so, yes, we are definitely very confident that we can not only deliver a good Q4, but also pick up some of the store pipeline in half year 1 now that we were able to open up these markets for SAP again.

[Operator]

We'll move to our next question from Michael Briest with UBS.

[Michael Briest, analyst]

Christian, I know that you announced some of the details around the SAP ERP transition option for those customers who need longer to move over to S/4 in the cloud, can you say something about the uptake? And I think you've done quite a smart thing on pricing by flagging increases that people don't sign by the year-end. What sort of uptake do you expect? And does this give you sort of visibility on hopefully a small number of customers who will adopt this option?

[Christian Klein, executive]

Yes, happy to do so, Michael. I mean, first, when you look at the pipe and analyzing the pipeline we also delivered now the increase in pipeline over the last, I would say, 3 to 4 months, there was positive momentum. I mean, first, yes, it's this transitioning option.

But also, Michael, don't overestimate the potential. I mean, yes, we have a lot of large customers and they cannot transform all ERPs businesses at the same time. I mentioned in the past a few examples. And for these customers, it's great. And yes, then indeed, it's helping to move those customers also more faster to the cloud to secure their landscape to give them also the security on the support on the cyber side, on the SLAs around the operations of the system.

Even more important, I would say, is when I saw now in the last 3 months that really moved the pipeline was a -- cloud. And I know others playing a big bet on infrastructure SAP rather focusing on the value creation at the upper part of the stack. But that doesn't mean that we're not competitive in the software and cloud. I mean we are opening up in every country in the world almost now new options with our infrastructure partners on software and cloud and especially the public sector, be it in MENA be in Germany. So not only the U.S. or Australia, it's not really, really coming along. And what I also mentioned in my statement that we can put the whole stack into a customer data center and can operate in a SaaS-like environment, and that was for many customers in these industries really great news, and we see now high interest. And I would say we can even sign the first deals in Q4, if everything works out well.

So yes, the transition option helped soft and helped and then as I mentioned, AI. And look, I know you're always looking for numbers on AI. And I'm also not want to play into a hype on, oh, we deliver now 800 agents in the cloud. I mean what do 800 agents do, which salesperson can actually sell 800 technical agents. For me, it's more important when we talk to [ Availa ], when we talk now to the Q4 opportunities that, for example, a big carberstore market, one of the largest in the world, they want to build AI use cases, giving them a marketing agent to do more targeted marketing campaigns to understand better the consumer trend. So we are delivering an agents on supply chain. All these agents having all the technical agents underneath to cover the complete supply chain, no. But the customers are seeing, hey, this is what we want. We don't want to get sold on 800 technical agents. We need -- actually, here's a business process. He has a persona, SAP tell me what does it do for this persona, how much productivity and how much more intelligence do I get, for example, in the supply chain planning process.

And that is working, and again, and even if then there is 20%, 30% of the technical agents missing underneath, to orchestrate an end-to-end process, then we say, hey, corn, I mean, this is also what SAP is stronger for how we come to you and we develop together standard agents to really make sure that you can cover this very important business capability. And that is, in the meantime, really the key reason for many of our deals, especially now in Q4.

And that last piece also reduces the slippage risk because you not only talk about cloud, you not only talk about end of maintenance, you have a compelling business reason. And that, again, gives me also a good confidence that we will also see a good pipeline conversion because a pipeline, a strong pipeline alone doesn't help. You need to close it. But there, I see also the wide maturity in the pipeline in Q4.

[Operator]

The next question is from Mark Moerdler with Bernstein Research.

[Mark Moerdler, analyst]

Great to hear in terms of the strength of what we should see at the back half of the year. I've got a higher-level question I'd like to ask. SAP is taking the approach through Business Cloud in terms of allowing the data to flow out to systems like Databricks and Google for analytics and the rest. How should we think about the effect that could have on the future economics for SAP for AI, analytics, et cetera?

[Christian Klein, executive]

Yes. Mike, a very good question because I know there are also other people asking similar questions around PDC. I mean first, and Mark, I want to also make this very clear because some of the discussions around the role of SaaS, the wall of the apps in the future, I don't see 1 AI use case in the B2B world where you can only deliver high value with an LLM module. I mean no matter if it's about predictive asset management. We are talking -- we are working on autonomous payrolls, faster quarter ends, strategic workforce in HR. It's always about the combination of the 2. So if you always need the data, you always need high-quality data, by the way. I mean, you wouldn't imagine some of the adoption challenges customers sometimes have and they are coming to us that, Christian, I have here a lot of customer agents, but they are really constantly delivering the wrong prediction. I mean, okay, because again, the agent can do magic if the underlying data structure is not harmonized. And if the agent technical agent, again, to my point, you can deliver 800 agents when they don't talk to each other when they don't understand the business context, they are lost.

And now to BDC and the data side of the house. So BDCs, in the meantime, involved in every AI while still we are doing because customers are getting, okay, I get it. These data products give me the harmonization, the data quality I need to deliver the high value I use cases on top.

Now to your question, what does this mean when we are now closing partnerships with Google and Databricks? First, it's all about better data processing still data copy is value. The data products, the semantics, the business context, the orchestration of the agents in a business context is all with SAP. I mean, obviously, you can use some of the data products for data engineering on in the DataBricks world. But everything, what happens on AI agents in the context of the SAP applications in the context of the business processes in the context of enterprise analytics, that is SAP.

And of course, we will never ever give up this crown tool because this is clearly what SAP is best at. And so we are getting the best of both worlds. And I mean, as I mentioned, it's not only Google, there are a few more now coming in Q4, which, again, is even also we already now in the Q4 pipeline for BDC because customers are loving what they see and that SAP is really having now this open data platform which is, again, also very essential for almost every AI use case we are building together with our customers

[Operator]

The next question comes from Adam Wood with Morgan Stanley.

[Adam Wood, analyst]

I just wondered if we could come back to the confidence on the revenue acceleration for next year. I think you're suggesting we probably end the year on CCB of 26, but obviously, there is a little bit more risk of the range on that one. And it sounds like the lower guide suggests that we exit maybe around 25% growth. I think on -- you need around 24% growth on ad revenues next year to get that revenue acceleration. You're exiting at 25%. It doesn't seem like there's a huge amount of room for error on that scale to get that revenue acceleration. Could you just maybe just give us a few more insights into why that confidence is there. Is it the other revenues within power that you're more optimistic on? Is it the CCB just starts to slow dramatically less because you're starting to close some of the deals that slipped earlier in this year?

[Christian Klein, executive]

No, happy to do so. I mean, look, the adjusted cloud revenue guidance is just a result of some of the stall pipeline we had in half year 1. And yes, I mean, mathematically, you know how it works. It's hard to pick up. Even if you close these deals in August, September, some of the deals we started to close in September, you cannot make up 6 months of revenue you couldn't realize.

Now for the revenue run rate next year, obviously, I mean, they're fully in the backlog. So there, actually now everything what we can pick up from half year 1, plus having a good pipeline, a strong pipeline for Q4 helps. And on the CCB side, as I said before, I mean, yes, I mean there's always a big swing. But I would be, again, also a bit more optimistic than the 25%. We have the pipeline to do more. And again, yes, there is a big swing. There are large deals, but they are very mature. So I'm more confident than the 25%. And with that, obviously, that also sets us up for the total cloud -- for the total revenue acceleration in 2026. And given the high -- the high recurring revenue share we are having in the meantime, I mean we can say this was confident with confidence that if we now deliver on our strong pipeline that it's very likely that you're also going to see this guidance for SAP next year. Dominik?

[Dominik Asam, executive]

No, just adding that probably the delta between CCB growth exiting '25 and cloud revenues should be not more than a percentage point because the famous transactional business is really currently still languishing, I would say. And the biggest reason for that, actually, the overwhelming reason for that being lower travel activity for conquer on bookings, and that's again very much related to the shutdown, which is actually resulting in lower travel activity on government officials.

[Operator]

The next question comes from Ben Castillo with BNP Paribas.

[Ben Castillo-Bernaus, analyst]

Question maybe for you, Dominic, on free cash flow. Obviously, you've nudged up the guidance for this year up to EUR 8.2 billion. You're at EUR 7.2 million through 9 months this year. I guess I can't recall the last time, Q4 was less than EUR 1 billion in free cash flow, excluding one-offs. So is there anything that's different this year that we should be thinking about? And I guess the cash conversion so far this year has been very strong. I know you've given us some indications for next year with various headwinds. But nevertheless, just welcome any comments on this year's free cash conversion and thoughts into next year.

[Christian Klein, executive]

Yes. I mean 1 source is really also the phasing of tax cash out because we had moderate cash takes out in H1, a little bit higher in Q3, but Q4 will be higher. Then obviously, we have to always be cautious about the consumption of transformation credits, and how much of that will be used at the end, which can trigger some cash headwind. So there's nothing magic in there. It's just a myriad of smaller things that happen in the working capital that can make that number a little bit noisy, but we sharpen the pencil as well as we could for Q4 and come up with this number. So I think this is a is the best we can estimate as of today. And yes, it's really -- phasing topic within the quarter, and it's always a question of receipts and payments of certain activities that happened at the year-end, which can be flipping either side of the term.

[Operator]

The next question comes from Frederick Boulan with Bank of America.

[Frederic Boulan, analyst]

Christian, Dominik. If I can ask a question on your competitive position versus Oracle. Do you see an incremental risk from their people to -- structure in terms of offering. And also they mentioned you guys a number of times at their recent CMD. So can you get a bit of an update on where you see yourself in the...

[Christian Klein, executive]

Yes. Look, mean for me, when I see the recent developments out there in the market, I know that some of our competitors are playing the game on scaling the infrastructure, training LLMs. I mean, when I listen to our customers and that is super important. They are super positive around the value creation we are now providing to them for the end users tool -- HR, finance.

And for us, the infrastructure is, of course, part of the stack. And when you look at software and cloud, I mean, we can actually always offer highly competitive offerings in all parts of the world. And so there is no need in my eyes at all to change our strategy and to suddenly start building data centers everywhere in the world.

So our strategy is on and it works. And I'm deeply, deeply convinced that when we are now looking at some of the large language modules, I mean our goal is not to train them, but our goal is to use that. And many of them like in old MI, you saw our announcement in Germany are now coming to SAP and say, "Hey, for this applied AI, I want to do business in the public sector. Can you work with us? Can you give us the BDP? Can you give us tool studio to build all of these agents because we need a development platform? We need to supply thing. Now over time, we need to move up and deliver that. And so we see a huge momentum there also working with these LLM providers in really not only fusing them in our technical stack, but really now going to customers together and actually deliver AI agents together. And so that is actually, for me, the absolute winning formula.

And again, it's for us, super, super important to make our AI foundation world class, and we will stick to the winning formula we have throughout the whole year, and it's about the apps. They give us high-quality data. BDC was a genius move for us. And now with the high-quality data together with the LLMs, we can provide more and more value to our customers, and we see it in the numbers. We see it in the pipeline. It's working. And again, on software and cloud, we are having everything what we need also in the infrastructure level without building those data centers.

[Dominik Asam, executive]

Maybe just from a finance numbers point of view. First of all, indeed, Infrastructure as a Service is now at around 1% of our cloud revenues. Now we're on that might stabilize or even go up, but we talk about a completely different path we are taking. And on the competitive benchmarking, I mean, when you look at the Gartner, IDC and so forth, they all put the numbers into U.S. dollars and don't -- I mean, at the risk of stating the obvious, euro constant currency numbers with a strongly depreciating dollar is a different story than dollar. If we convert our numbers in dollar, we see even higher numbers than the constant currency number.

So what is the headwind for us than depreciating dollar is, of course, a tailwind for our U.S. competitors. That's the comment I tried to make an interstatement. So I don't quite understand where there is any nervousness -- if you see Cloud we're growing at 31% constant currencies, which is even more in U.S. dollars because of the depreciation of the dollar. And if you then look at the market data, our competitor data, please name us one who is actually anywhere near that.

[Operator]

The next question comes from Jackson Ader with KeyBanc Capital Markets.

[Jackson Ader, analyst]

I wanted to just go back to the back-end bookings that are happening either in the first half or through the quarter. I mean I think we've address the competitive dynamics. But I'm curious, Christian, you've said that you guys want to focus a little bit on price discipline. And so I'm curious how -- whether that price discipline is impacting the linear of the bookings through the quarter, and then how that price discipline is actually holding up as we get closer and closer to the end of the quarter.

[Christian Klein, executive]

Great question. I mean, look, actually -- gives you actually a real life example how our AI works. I asked in the afternoon in valuation of this earnings call, Joule -- with my pipeline with the sentiment, with everything what we have compared to the years before, how we're going to end up the year. And Joule, happily enough, gave me pretty confident answer. And what I also got out is when you look at the pipeline and you look at also about what we see for next year, and the business cases we have in the system, it's actually good to see that, it's not only about, again, a lift and shift of a system. It's not about training an LLM module and scale commodity hardware.

It's in many, many, I would say, in the predominant number of the deals really about, okay, talking to the C level, there is a cost optimization program. How can we have on the spend side? How can we help on the modern automation side? How can we help on the shop floor automation and moving more to in time, real-time manufacturing with a better prediction of the demand? And that is also, of course, giving us not so much pricing question. Because this is not only the CIO who is standing up and says, oh, SAP wants to get a deal done. This is the sea level saying, hey, you are part of a business case when it comes to the transformation of the company. No matter if this company has cost pressure, I was looking into new business models with AI, but we are playing in this game. And that is, of course, also then helping us on price protection. As I also mentioned before, on pricing, look at all of the software and cloud. I mean, this is mainly a lot of engineering work, what we have done to make this happen. And now it's paying off. But customers are willing to pay also a premium for that, because honestly, these are highly sophisticated capabilities. This is not only about putting an ERP system on a public cloud infrastructure in a data center in a country, these are sometimes much higher standards, which we can fulfill, but customers again, understand that they have to pay a premium for that.

And last but not least, our sales team knows that they -- when they want to make the year and they want to make their quota. There is, of course, a volume included in the quarter, but we also have a pricing element in to it. So we are not just giving deals away in order to hit our numbers. So it always has to be at the right mix of both of volume and pricing.

Yes. And then one piece because Alexandra always reminds me about the questions around the migration credits. We are not taking this lightly, and we are not pushing them out every time. But when a customer says, oh, I have now cost pressure. But I want to do this. I see AI, I see what is can do for me on the business side. But can you help me to make this the business case a bit more attractive then before we discount the exit price at the point of renewal, we then, in this case, where we targeted and then also work with this migration credits, and that's also how we protect our prices on the cloud on the subscription side.

[Operator]

The next question is from Charlie Brennan with Jefferies.

[Charles Brennan, analyst]

Can I just ask a high-level question around investment levels. I think we all want you to remain at the front of the curve with AI and leading the industry. And I think we will understand that investment comes before revenue streams. Are you confident that you can fund the required AI investment by reallocating R&D spend and maybe reinvesting the efficiencies that you're driving? Or do you think there's a business case for an acceleration in investment to guarantee that you remain a leader in the space?

And then separately, can I just ask a quick question about the support revenues, it looks like we're fining into the stage where we're seeing an accelerating decline that's obviously an indication that you've got customers going live, which is very healthy. Is there anything you can say about the total cloud backlog moving into the CCB. Does that take some of the in-quarter pressure a way to sign new deals because of that transfer of TCB into CCB?

[Christian Klein, executive]

Yes. So happy to take the first question on support revenue. Maybe Dominik, you can help me, but we're happy to...

[Dominik Asam, executive]

On the support revenue, yes, I mean it's just the acceleration we've always indicated that will come sooner later. And again, don't look too much at 1 single quarter. I think it's always a bit noisy for whatever reasons, and there are some impacts and forth from this. But the trend is clearly towards a slight acceleration for the reasons you have highlighted yourself.

[Christian Klein, executive]

And it also speaks for the adoption of our customers in the cloud is the wise journey now continues and even accelerates for many customers we signed a few years back. Now on AI. So when you look at our R&D portfolio, and I will now talk first about Philip and our AI Foundation. When you would ask Philip for his budget request next year is, Christian, I don't need 2,000 more AI developers. I need the best. I need the PhDs of the Berkley. We are working with MIT, our knowledge are -- it's really about the quality of the people. It's not necessarily about the quantity of the people.

And what we are doing, and you had me saying about our research on table data, mean that is for us very important that Joule can talk not only HR and finance. I mean, I'm asking this question this afternoon about our financial with -- prediction for the year. I mean then you need 2 needs to call it sales, contextual data, unstructured content with finance data. And this is what we are building on the AI Foundation.

Now in the lines of businesses with -- there we already did some work this year. I mean we -- you have seen us, we did another slightly surgical restructuring want with this year, which we ended and now we adjusted here and there with the workforce. That was predominantly in R&D. And what we are doing there is when you see the lift and shift in our portfolio. We have now much less developers on sitting, coding features and functions, but a really solid shift, I would say, into AI developers, data scientists building the predictive modules on BDC for the intelligent apps, et cetera. And that is actually already happening. And so we will see next year probably a further shift, but not a radical shift because a lot of that has already been done.

And overall, the investment into R&D, I mean, when there is one area where I would I'm always open to invest is R&D. But I also talked about applying AI internally. And obviously, more of that is great in the team applying cogeneration tools. So tool for developer, we have [ kita ], we are now rolling out a few more -- we have also our own cogeneration tool now as part of Joule studio. So -- and we even see an increase of adoption of 300% for Joule for developer only in the last 3 months.

And so also there, we are working on efficiency to -- while on the one hand side, we, of course, have a strong development backlog. We also, of course, see the efficiencies now kicking in with and the lift and the shift in the portfolio is good. The pipeline is good. And we also find the right resources in India, in Singapore parts of the U.S. for -- also for our AI team. So we are very happy with the quality of the people. And again, I want to underscore for us, it's more about the quality of the people we can onboard in Ohio.

[Operator]

The next question is from Michael Turrin with Wells Fargo.

[Michael Turrin, analyst]

Dominik, you mentioned the range of potential outcomes on 4Q CCB. It sounded like from some of Christian's comments, AI is actually pulling rides forward in some cases. So just be curious to hear more around potential swing factors in either direction there. on that metric and any higher level commentary you're willing to share to help size the range of potential outcomes as you're exiting the year on the stronger seasonal bookings quarter.

[Dominik Asam, executive]

I mean the obvious number that drives the CCB from now onwards is the net bookings, i.e., the gross bookings and then the churn and on both we want to do as well as we can. And the good thing about the CCB is that the lion's share is really -- if you close by the end of the quarter with a certain kind of deployment time to embark that in your CCB, which you can do that, which is not the case for cloud revenues, of course.

So now I don't -- I can't really not give any more hens than have already been shared on this call. I mean it's just useful to, I think, remind ourselves where we started the year. We started the year at exactly 28.7%. That was the 29% we jumped off, we said we're going to be slightly down, including an effect from M&A, which back then was 1.5 percentage points around the bold and, of course, walk me -- sorry, sorry, smart recruiters was kind of a slight offset. So M&A is around about 1 percentage point in that bridge. And so if you now think where we are post Q3, It actually gives you a little bit of feeling between kind of what happened at beginning of the year, what's there now. I would not look at any individual quarter and read too much into this. But if you think about the kind of 3 quarters and that we now have under our belt and the gradient there and then depollute that for CCB growth, you see a little bit of a trend. And yes, let's not forget, there's still a difficult situation on the transactional business, but that doesn't impact the CCB with more heavy on the cloud revenues.

And yes, if you put these numbers into the trajectory and then think about the type of importability Bookings net bookings, it gives you actually this kind of, I'd say, bandwidth, which the numbers need to be gravitating and it is not too wide actually.

[Christian Klein, executive]

Yes. And maybe just to get it up because I know -- I mean, how important the CCB will be for the -- at the exit of the year also for the outlook next year. I mean, look, 25% mean when I look into the first half year, how much pipeline was stalled, I would say 25% would be probably the most likely scenario. In the meantime, as I mentioned, the sentiment in some of these industries, which are not unsignificant from a size perspective has changed. So now I would be rather disappointed on '25, '26 would be in my eyes, a great result, see me. Look at the base, look at the acquisition impact of -- but we definitely see now that there is a better pipe. And we worked hard on some of these things. So we have it in our hands. But again, Q4 has a big swing. It can go in all directions.

But right now, if you ask me, and if you look at the pipeline and I've seen it many times, I would rather see 25% as a disappointment. Again, there is a swing, but I'm now definitely more optimistic than I was 3 months ago when it comes to Q4, which is by far, of course, our biggest in quarter we have in the year.

[Operator]

We'll take our next question from Johannes Schaller with Deutsche Bank.

[Johannes Schaller, analyst]

Yes. Christian, I wanted to come back to this comment that you made that you're now hoping to sign maybe some rise deals in Q4 that were initially planned for '26. I guess that's wide rare comment in an industry that also sells quite large multiyear transformational deals that are maybe not that easy to accelerate. So could you assume in a little bit more on the customer discussions you had around that? And really kind of what role your AI offering played here? And then just as a quick follow-up, you used to give the AI attach rate on new deals. I may have missed that, but you share that maybe for the third quarter?

[Christian Klein, executive]

I mean, look, to give you a real-life example, I was last week in Japan, customer and the big transformation pressure BCG pulled us in and actually also share with us a question, can you help not only on now cloud and making sure they get rid of this painful ERP upgrades, but really about -- we're really looking for cost optimization potential. They are looking for a new template on how to monetize their new businesses as they diversify their portfolio. And of course, we see that you have the AI use case is here and there on process automation and then also on the CPQ side from more intelligent quoting and pricing. And that is a deal, for example, which I didn't see coming.

And there, you see that in the meantime, it's also great that the ecosystem pulls us in and say, "Hey, this is where SAP is in the meantime, really, really good. And that, of course, helps that we -- to get such deals, again, not because of maintenance, not because of IT. It's really about the business transformation and AI. And we have some of these deals again, they need to materialize. I mean they came now in. We have it in the pipe, they are looking good, but we see some of them. And that is a good sign.

And then last but not least, as I also mentioned AI I mean, half year 1, even here when we did the Q2 earnings. I mean back then, I would also say I would have underscored the 25%. And now in the meantime, given the sentiment, what we are seeing and also, again, having the access to the C level, I'm definitely more optimistic than I was at the Q2 earnings.

[Alexandra Kasper Steiger, executive]

Great. Thank you, Christian, and this concludes our call for today. Thank you all for joining.

[Operator]

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