Hello, and welcome to the SAP's Third Quarter Earnings Call. At our customers' request, this conference will be recorded. May I now hand you over to Mr. Anthony Coletta, Chief Investor Relations Officer? The line is yours.

Good morning, everyone, and thanks for joining us today. With me on the call are CEO, Christian Klein; CFO, Luka Mucic; and Scott Russell, Head of Customer Success. On this call, we will discuss SAP's third quarter results of 2022. You can find the deck supplementing today's call as well as our quarterly statement on our Investor Relations website. In this call, we'll 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 risk and uncertainties that will cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission, including, but not limited to the Risk Factors section of SAP's annual report on Form 20-F for 2021. Unless otherwise stated, all numbers on this call are non-IFRS, and growth rates and percentage point changes are non-IFRS year-over-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, I'd like to turn over to Christian.

Yes. Thank you, Anthony, and thanks to all of you for spending time with us today. Businesses everywhere are dealing with a combination of profound challenges including inflation, labor and energy shortages and disrupted supply chains. Despite these challenges, our results demonstrate the relevance of our strategy during these volatile times and reflect how SAP is uniquely positioned to help our customers become stronger for the future. The role of technology is clear. SAP solutions are directly helping our customers address their most pressing needs, whether that means redesigning or automating their business processes, helping them with supply chain resiliency or stepping up to meet their sustainability goals and new regulations. Analysts point to the growing IT priority for strategic ERP implementations and that SAP should benefit from our role as a mission-critical partner in these challenging times. Let's take a look at our top line numbers. We've delivered another strong quarter in Q3. We are seeing accelerating momentum across all our key cloud indicators with cloud revenue now representing our largest revenue stream for two sequential quarters. Cloud revenue is up 25%. Current cloud backlog grew by 26% and now exceeds €11 billion. SAP S/4HANA growth accelerates once again, with current cloud backlog growing at 90%, now at €2.7 billion. S/4HANA cloud revenue is growing at 81%. We are clearly expanding our leadership in ERP with net new customers once again representing nearly 60% of our new S/4HANA deals in Q3, together nearly 800 go-lives. The SAP Business Technology Platform has become the foundation for our customers' business transformation. The platform offers differentiating data and application services which customers and partners use to integrate their SAP and non-SAP system landscapes. On top of this, customers are able to develop their own custom apps alongside their SAP apps and benefit from process automation across their integrated landscape. This leads to a powerful flywheel effect from the SAP Business Technology Platform, which now has a run rate exceeding €1.5 billion, contributing to overall past cloud revenue growth of 44% in Q3. Our RISE with SAP offering is the easiest and most flexible way for customers to take advantage of our portfolio. It has cemented its place as the preferred choice for customers as they move their ERP to the cloud. RISE with SAP includes the technology support and best practices to help customers redesign how their companies run. We are seeing strong year-over-year take-up since we introduced our RISE offering at the beginning of 2021. Overall, there are nearly 2,500 customers running in over 100 SAP and partner data centers around the globe who have selected RISE with SAP to transform their business processes and IT landscapes. This also reflects the increasing demand for independent government cloud solutions from SAP. RISE also continues to be a great mechanism for cross-sell and up-sell with more than 80% of RISE customers deciding for our Business Technology Platform and 86% of RISE also including additional cloud solutions. Let me give you some examples of this strong customer momentum. In Q3, RISE with SAP wins included Prada, RICOH, the PBC and Schneider Electric. Prada, one of the most recognizable players in the luxury industry, have selected RISE with SAP to further accelerate their digital transformation and improve outcomes and efficiency from their global network of 635 stores. This expansion includes SAP Ariba and SAP Signavio, enabling them to analyze and transform business processes. RICOH of Japan have selected RISE with SAP to accelerate their transformation into a digital services company. This will accelerate standardization and efficiency improvements of their production and service parts management operations and use robotics process automation to automate internal business processes. Schneider Electric, a global leader in the digital transformation of energy management and automation, selected SAP S/4HANA public cloud to standardize their end-to-end operations across finance, manufacturing and logistics based on proven industry best practices. Following a comprehensive review, the BPC has selected S/4HANA cloud as the foundation for its future SAP and partner platform. Moving to PTP. In Germany, Center for Pandemic Vaccines is using the SAP Business Technology Platform as its technical foundation especially given the crucial importance of data protection and security. We are proud to host a complete vaccine distribution system in our German data center. Our sustainability solutions continue to take on increasing importance for our customers as they navigate the energy crisis and align with new regulations. Our customers need to record, report and act, and that's the value our solutions provide. This will become increasingly important as new SEC and EU regulations take effect. Salzgitter AG, one of Europe's leading and most efficient producers of steel, selected a portfolio of SAP sustainability solutions to gain insights into their environmental data, ensure a safe and sustainable operations and take actionable steps towards sustainable business performance. In Q3, TetraPak, the world's leading food processing and packaging solutions company, started their adoption of SAP responsible design and production, helping them comply with the UK's plastic packaging tax regulations. We have also seen important wins across our lines of business solutions, including many competitive wins against Oracle and Workday with SAP SuccessFactors. Schiphol Nederland, the Dutch airport for European and intercontinental flights, which chose SAP SuccessFactors over Oracle as part of their strategy to in-source their HR data and processes back to Schiphol. Deutsche Bahn Schenker, the global logistics provider, part of Deutsche Bahn chose SAP SuccessFactors over both Workday and Oracle. They will be providing an enhanced employee experience with harmonized data, improved self-service offerings and talent management solutions. Our intelligence spend and business network is benefiting from a return to business travel combined with the increased focus on managing costs with cloud revenue growth in the mid-teens. Pennsylvania State University in the U.S. has been using SAP Concur Solutions for more than 15 years. They expanded now our partnership in Q3 based on the increase in student, faculty and administrator travel. More than ever, customers need to be able to easily adapt and automate their end-to-end business processes and, at the same time, monitor, analyze and understand the data flowing through their systems. This reality is behind our new SAP Signavio growth market, which nearly doubled in cloud revenue since Q3 last year. As an example, Cognizant, the U.S. professional services organization, has chosen SAP Signavio to help its customers identify and process inefficiencies and define improvements. Let me now conclude with some comments about our outlook for the rest of the year and beyond. Our financial outlook for 2022 remains on track both for the top and the bottom line. Overall, our strong cloud momentum has offset the top line impact from exiting Russia. On the bottom line, we anticipate meeting the guidance we provided last quarter. We are expecting our largest Q4 workup for overall order entry and new cloud business. SAP's cloud transformation has reached a tipping point, and we had an important inflection point for the company after beginning our transformation two years ago. We feel very positive about the resilience we have built into our future business. Predictable revenue now accounts for 80% of revenue, up from 72% in 2020, the starting point of our cloud transformation. Despite the macro challenges, we see strong demand as our SaaS portfolio is especially relevant during these times. And we anticipate that the flywheel effect of our Business Technology Platform together with our partner ecosystem will power strong cloud consumption. We are also excited about our innovation pipeline, and we look forward to announcing new innovations at our Annual TechEd event in November. As we mentioned last quarter, we are continuing to simplify and consolidate our portfolio to focus on high growth solution, which may also be complemented by potential future acquisition to strengthen our core. As such, we remain committed to deliver our 2023 commitments including double-digit operating profit growth in 2023. We are also very confident in delivering our 2025 mid-term ambitions. Thank you again for joining us today. Luka, over to you to cover our results, as always, in more detail.

Yes. Thanks a lot, Christian. Yes, indeed, we have again delivered a strong cloud quarter despite the continued macro headwinds. Christian just talked about some of the business highlights. I think it's becoming very clear from that, that SAP solutions are directly helping our customers in their digital transformation journeys. The third quarter was highlighted by cloud revenue growth of 25% to €3.3 billion. Likewise, current cloud backlog growth continued its upward trajectory driven by strong growth across our SaaS and PaaS portfolio. Large cloud transactions with a volume greater than €5 million contributed again more than 40% to our cloud order entry. Now let me dive into some more details around our financial highlights, starting with the top line. The current cloud backlog is now at €11.3 billion, accelerating its growth to 26%. Growth here was strong across our solution portfolio with all main solutions, except our infrastructure business, achieving double-digit growth rates. Similar to last quarter, the war in Ukraine had a dampening impact of approximately 1 percentage point on that growth rate. S/4HANA current cloud backlog growth accelerated to 90% driven by the strong adoption of RISE with SAP. In Q3 alone, we added more than €400 million to our S/4HANA current cloud backlog, leading to a total of €2.7 billion. For cloud revenue, our combined SaaS and PaaS portfolio continued to grow an impressive 28%, with SaaS cloud revenue up 26% and PaaS cloud revenue up 44%. Driven by this cloud performance and augmented by double-digit growth in services revenue, total revenue was up 5%. Now let's take a brief look at our regional performance, where cloud revenue growth was very strong across all regions. Americas increased by 26%; EMEA by 23%; and APJ by 27%. The U.S. and Germany had an outstanding cloud revenue performance, while Brazil, China, India and Switzerland were all particularly strong. Now moving on to the bottom line, where I'm really proud to say that all of our main business models, cloud, software licenses and support as well as services increased their gross margins in the quarter. Our cloud gross margin expanded 2.8 percentage points to 71.7%, marking the third consecutive quarter of year-over-year increases. This was driven by a strong increase of the SaaS margin with efficiency gains overcompensating increased investments into the next-generation cloud delivery program. The improvement of the cloud gross margin also contributed nicely to our cloud gross profit growth of 30%. Non-IFRS operating profit came in at €2.1 billion, reflecting an 8% decline. This was mainly driven by a reduced contribution from software licenses revenue and accelerated investments into research and development and sales and marketing to capture current and future growth opportunities. In addition, let me remind you that prior year third quarter results included a disposal gain of €77 million related to the SAP Fioneer divestiture. Let me now turn to EPS, taxes and cash flow. Earnings per share was down 36% to €1.12, mainly resulting from the decrease in operating profit and more so a pronounced decline in finance income, which was driven by valuation adjustments in the Sapphire Ventures investment portfolio reflecting broader market conditions. The IFRS effective tax rate in the quarter was 34.7% and the non-IFRS tax rate was 26%. The year-over-year increase mainly resulted from changes in tax exempt income, again, primarily driven by the aforementioned valuation adjustments. The current volatility in capital markets also leads to a lower level of predictability regarding the effective tax rate outlook. Based on current estimates, we now expect the full year 2022 effective tax rate for IFRS of around 45%, which was previously 34% to 38%; and for non-IFRS of around 30%, previously 23% to 27%. As the further development strongly depends on the 2022 financial income contribution of Sapphire Ventures, we may face major deviations in either direction given current market conditions. Free cash flow for the first nine months came in at €2.5 billion. The year-over-year decline was attributable to the development of profitability and adverse impacts in working capital. In the fourth quarter, we continue to expect a more favorable cash flow development due to a focus on working capital management and lower payouts for cash taxes, share-based compensation and CapEx. However, based on our year-to-date position, we are adjusting our free cash flow outlook for the year slightly to approximately €4.5 billion. As Christian already mentioned, all other parameters of our outlook remain unchanged. In terms of our nonfinancial targets, our greenhouse gas emissions were 25 kilotons in the quarter due to catch-up effects in business travel as COVID-19 restrictions receded. As a consequence, we will increase our 2022 carbon emissions outlook to a range of 90 to 95 kilotons, down from 110 kilotons in 2021. Reflecting year-to-date customer survey results, we are also adjusting our Net Promoter Score outlook range from plus 3% to plus 8%. Finally, let me just briefly share that we have made great progress with our acquired asset Taulia, adding to our core capabilities in providing our customers and their suppliers with access to liquidity and improving cash flows. This is obviously critical especially in the current economic climate to help avoid supply chain disruptions. Taulia has signed a number of key clients such as Dole Asia and Hapag-Lloyd AG and established a new strategic bank partnership with Standard Charter Bank. Further to this, Taulia has also signed an agreement with Mastercard to provide embedded payment capabilities by integrating with the Mastercard Virtual Card platform. So, in summary, Q3 proved to be another solid quarter highlighted by growth in current cloud backlog and strong cloud revenue performance. Customers continue to prioritize digital transformation and they put their trust in SAP to guide them on their journeys. Even with the challenges that we are seeing in the world today, we are confident in the opportunity ahead. We are, as Christian has said, at an important inflection point in our transformation roadmap, which we expect to lead to accelerating revenue and double digit operating profit growth in 2023. Thank you very much. And we will now be happy to take your questions.

All right, thank you. Operator, please open the line.

Yes. We may now begin the question-and-answer session. [Operator Instructions] First question is coming by Mr. Michael Briest from UBS. You line is open.

Yes. Thank you. Good afternoon and congratulations. Two if I may. Christian, I think, on the last call you said the timing that you would probably revisit the 2025 plan would be early next year. So implicitly after the Q4 results, I think, with Dominic not arriving until March, does that change your thinking about when you might come back to those plans? And then secondly, just in terms of the visibility you have on the RISE customers was obviously great to see the current cloud backlog growing as quickly as it is. But you mentioned, 2,500 customers on RISE. Could you maybe say what book of maintenance that represents that might convert even if it's not fully contracted over the next three or four years, perhaps? Just give us a sense on visibility beyond the current backlog. Thank you.

Yes, thanks for the question, Michael. I would start and then Luka, you can build on the maintenance and the conversion factors, which were better than never before this quarter. But Luka can share more details on that. On the first part of the question with regard to the midterm guides, we are now entering Q4 and Scott, who is sitting next to me and team have to deliver a big quarter, pipeline is looking very good. But I would like to also ask you for some patience to let us deliver this quarter another hopefully successful quarter for SAP. It's looking very good on the cloud. And then as you also have alluded to Michael, to the current cloud backlog, that gives us, of course, also very high confidence that we are going to also achieve or even overachieve our midterm guidance 2025. Yes, we are also in the middle of a CFO transition and Luka, myself and Dominik will also touch base and really decide short term when we are going to update our midterm guidance 2025. So it's not so much out there, but please, hang on and let us deliver another strong Q4 and then we will also update at sooner than later also our midterm guidance for 2025. Luka?

Yes, thanks a lot Michael for the question. Actually on the RISE related conversions the conversion factors have never been more favorable. I'm actually really pleased with this. So for the first time we have actually seen a conversion factor that was more than 3x. So this is extremely healthy. We will lose really a very digestible low triple digit million amount of firm maintenance in 2022, and it will convert at much higher rates as part of the RISE transactions. Why is that? Not only because the value of the solution is understood, but as Christian has said we see an ever increasing share of cross-sell and upsells along with RISE. I mean almost 90% of the RISE transactions have additional solution areas attached to them and that is the reason why the conversion factors continue to develop very favorably.

Thank you. But presumably the RISE contracts in year one are potentially much smaller than at the end state if these are very large customers. Can you give any sense on how much bigger over time the existing book of business would grow to?

Yes, it's Scott here, Michael. So maybe I can chime to that. I think Luka mentioned at the beginning that over 40% of our deals were over €5 million. Most of those are three- to five-year contracts and on a multi-year basis. And as you rightly point out, they often have a low ramp in the first year and then accelerate as the transition and as they are able to adopt not only RISE, but associated solutions. So you can expect that with a large proportion of larger customers on a multi-year basis that that would increase in the outer years in terms of not only backlog, but ultimately resulting in cloud revenues for SAP and great solutions for our customers.

Perhaps just a last comment on this, I mean in the last, I would say, one year plus we have seen that our growth in total order entry as a result of the introduction of RISE has always been exceeding our growth in annualized order entry by more than 10% every quarter. And that is, of course, further adding to the predictability of results and one of the reasons why you have seen the current cloud backlog even on a ever growing number continuing to grow fast.

Thank you very much.

Thanks Michael. We'll take the next question.

Mr. Adam Wood from Stanley Morgan [ph], may we have your question please?

Hi, Christian. Hi, Luka. Thanks for taking the question. And congrats from me as well on a very good quarter. I've also got two please. The first one is just I get a lot of questions from investors around the risks on the macro. I guess the biggest issue and challenge for you going into Q4 is the licenses. Although they have come down a lot, are still quite a big number that you need to close in the fourth quarter. Could you just talk a little bit about pipeline going in and then the correlation between licenses and EBIT, if we see a kind of minus 25, 30 on licenses, would that get you to the upper end of the EBIT range with the kind of minus 40 that we've seen this quarter to get you to the bottom? Is that kind of the way we should be thinking about it? And then maybe secondly, Christian, you've talked about Signavio quite a few times on the call. I wonder if you could just talk a little bit about the competition you face in that market. When we think about automating business processes, there is the Absentis, there is people like ServiceNow, there is the best-of-breed RPA vendors. Could you talk a little bit about what customers are doing and how SAP positions in those markets please? Thank you.

Yes thanks a lot Adam, for the question. If you allow me, I would like to start with the second question first, and then together we can also answer the question around macro and pipeline for Q4. Look on Signavio, first of all, Signavio was probably one of the most strategic acquisitions we ever did because why is this not a lift and shift? Why is it about business transformation? It's about business process automation, and we are seeing this. To the question early on from Michael, this is not a lift and shift. Customers are now start adopting. We see huge consumption also, especially, after the first six months when customers did the redesign, did the process standardization. And there Signavio was actually the missing pillar in our portfolio. And compared to other players, there is no data [indiscernible]. You don't want to replicate very sensitive data from one system to another when you are talking about financial, logistics, production or HR data or in the future, when we have built integration also to our CX portfolio. On top at TechEd, we are going to do an announcement. I don't want to now steal the funder of the team, but what will clearly differentiate SAP in this market is that you don't need to deal with a lot of best-of-breed solutions to analyze, to actually benchmark and then automate and configure business processes. So the business process automation layer will be delivered by SAP out-of-the-box. Our engineering teams put a lot of work into that technical wise, but also content wise. And with the Business Technology Platform where the data layer sits, where all the other services are sitting, the combination of these assets, is not something what others can easily match. To the first part of the question, macro, of course, I mean, Adam, these times are challenging, for every customer in almost every industry. But why is the business case for SAP and especially on the cloud side stacking so much up? First of all, it's about digital transformation, business transformation. So for example, we are talking about green energy in Germany, energy crisis, you need new software to deliver, to transport, to produce green energy. And there technology plays a crucial role in ERP, a supply chain solution, and that can be replicated to many, many more industries. Second, the supply chains. This business network is not just a vision, it's there, we have millions of suppliers, which we connect to buyers and build resilient supply chains across the globe. It was a major cost driver also now in Q3. And last but not least, sustainability. And this is also important part of the business case, not only on a standalone basis, when we are building a business case for S/4HANA, it has a business transformation dimension, it has a cost efficiency dimension, but it also has a sustainability ESG dimension. So while we are making good business in the meantime with our sustainability portfolio, it's also a lever to justify the business case for our core applications. And of course, it's a different game if you look at software CapEx and if you look into cloud. But for both elements we see actually, of course, for the cloud a much better pipeline, but with that, Scott, maybe you can also share some more details around how is the pipeline looking in both businesses actually for the quarter.

Yes, sure. Happy to Christian. Let me probably use the keep it pretty simple. First of all, from the pipeline perspective, whilst the macroeconomic conditions continue to be considered across the world, our pipeline on our core solutions that address the CFO and how they need to help companies navigate these uncertain times, have increased significantly. That gives us confidence not only in RISE with SAP, but when you consider the spend management portfolio, managing your procurement expenses, your travel expense, your operating expense, managing your working capital, these core assets are in higher demand in helping businesses to navigate. Secondly, we're seeing actually an acceleration to the adoption Christian mentioned because speed to consumption and using these solutions is helping us on those multi-year agreements that Christian mentioned in terms of enabling and consuming that capability. And then last but not least is the impact that that has. We did see obviously the continuation in software to the negative 40% or thereabout that was indicated. The reality is the market continues to look for its capability in the cloud from SAP. As a result, we don't see the same pipeline on the software side. But the good news is it's aligned not only to our strategy, but their strategy of being able to adopt and consume innovation at all times in the cloud. So it provides a long-term capability, not just a short term addressing the current business needs. And maybe Luka you can talk about the P&L.

Yes, let me translate this into the P&L. So I think you can take from Christian and Scott's comments that we are extremely confident about the underlying momentum of our cloud business and also our order entry projection going into Q4. Now as far as it relates to our cloud business, in terms of current cloud backlog and cloud revenue, there are two technical aspects that I need to quickly allude to. One is that we expect now in Q4 to complete the divestiture of Litmos. And on top of that, we will see the anniversary of the acquisition of Clarabridge that Qualtrics performed in Q4 last year. So those two effects together will have a dampening effect on growth of round about 1.5 percentage points on top of what we have been dealing with already the entire year with the impact of the war in Ukraine. So from a prudence perspective, I think, it's fair to assume that we will therefore likely see a slightly lower growth rate on both of those metrics in Q4. But the underlying momentum is tremendous and certainly gives us incredible scope and visibility into continued further strong growth in 2023 as well. When it comes to software licenses, as Scott has said, we don't expect to turnaround, it's going to be our biggest quarter also for software licenses, that's for sure. But in our planning, we are actually assuming that we will see a similar performance of software licenses in Q4 as we have seen it in Q3 and actually throughout the entire year. And that means if that is the ultimate outcome that we would rather expect to arrive at the lower end of our combined cloud and software revenue guidance. At constant currencies, of course currency will be a significant help than on a nominal level. And ultimately on the EBIT line given also the strength in the cloud profit that we are generating, we are actually confident that Q4 will see finally turnaround and a return to positive operating profit growth. We would expect on a nominal level to land somewhere at or above mid-single-digit growth with a flattish development on a constant currency basis. And then as we move into 2023, clearly our commitment to double digit growth stance and actually you wouldn't need to wait for that for long because obviously in half year one, our profit performance was worse than what we expect in half year too. So the seasonality will lead to us starting to fulfill that commitment already in the first quarter. I hope that's helpful.

Thank you for the detailed answer. Thank you.

Thanks, Adam. We'll take the next question please.

Next let’s turn this to James Goodman from Barclays. The line is yours.

Yes. Great, thank you. Good afternoon. Couple from me please as well then. So firstly, I'm clearly extremely strong on the S/4HANA cloud backlog at 90%. I think you also said double digit in all the main other product areas. I just wondered if we could focus in on these for a second, but I calculate something like a low teens, constant FX growth rate in the backlog for the ex-S/4 portfolio. So could you speak to the sort of growth rate in that business versus the 2025 plan? I think we were originally looking for more of a high teens growth rate in those line of business assets. Thank you. And then the second question just to follow-up really on the cost developments as it relates to EBIT, I was a little surprised just to see the headcount tick up this quarter, I think, by more than we've seen in a few years for Q3. Can you talk about where the head count is, is going from here? I know you have been doing some restructuring cost contain as well. Thank you.

Yes, so thanks a lot James for the question. Luka can take the question on headcount. I mean to your first part of the question. I guess it's important to mention that when you look at RISE and when customers starting the journey, it's not only about S/4HANA Finance, I mean this is a movement of when we are then in, we are talking about the business priorities of the customer. And when it's about hire to retire employee experience, we are replacing the old HCM on-premise module or we are going into Ariba. Sometimes even if customers didn't yet have it in place, they are also, there is even land to also grab net new customers with RISE and you have seen our high net new customer share, not only in S/4HANA, but also in the other lines of businesses. The most important impact for us out of RISE, it's not even only S/4HANA, it's about the Business Technology Platform. Because what we are seeing there is standardizing ERPs, building side by side new applications will drive massive consumption for SAP. And now that there is the whole application logic on the platform there is high developer productivity on the platform, we are seeing not only customers doing this, we are seeing now our ecosystem moving with us. We had last week our partner connect, and the number one topic was the business technology platform and how great it is in the meantime for developers to building on that platform. And that's very, very important because with that comes also the standardization, and with that comes not only the move to the private cloud, but also to the public cloud, which then leads also to the cross margining performance we have seen this quarter. Luka?

Just a few more effects. First of all, S/4 is not the only solution in our portfolio that enjoys very high current cloud backlog growth rates. Let me just add Signavio. Christian has alluded to this already. The Business Technology Platform extremely strong also on the current cloud backlog. Qualtrics, you have seen their numbers. They also have a very strong result. So they are actually mainly our Infrastructure-as-a-Service business that is dragging the CCP down. And that's absolutely intended as such because we're driving the de-emphasization of this business and the transformation towards RISE. So Infrastructure-as-a-Service has a 3% drag on the CCP. The other solution that used to be a drag, Concur, is actually recovering very nicely. They are only representing this quarter 1% drag on the CCP growth. And actually on the transactional revenue side, they are already showing very high growth in the high double digits. So that business will definitely exceed its pre-pandemic state next year as we had projected. So we have a lot of very healthy growers and the other large solutions like intelligence spenders operating at the mid-teens level as I indicated. From a headcount perspective, yes, we had significantly more incremental heads in Q3 than in Q2, but they were not hired necessarily in the sense in terms of initiated hiring in Q3. That's a spillover effect from deferred hiring that was initiated in Q2. As of July we have established a very restrictive incremental hiring practices. So that means that in Q4 and also going into next year you should not expect an incremental growth in the total head count. But where have we hired in a very disciplined sense, basically almost entirely in two roles: research and development and in sales and marketing. Again because we are confident about our growth opportunities next year, and we are front loaded hiring to be ready and productive as we start the new year. And in engineering we obviously see great scope to further extend the innovation leadership of SAP in our core categories, and we continue to invest in this. But with this addition, we are now at the run rates that we believe is both healthy and necessary, but also sufficient to go into the next year.

Okay. Thank you guys.

Thank you, James. And from now on we will can ask you to ask only one question and we'll take the next one please.

Next question is from Phil Winslow from Credit Suisse Securities.

Great, thanks for taking my question and congrats on another strong quarter. I mean, Christian, obviously SAP is a very broad product portfolio and you named a lot of wins across different, different segments: financial, supply chain, HCM. And what I think about some of these – some of these, these are pretty significant transformation projects, implementation cycles, but my question to you is obviously customers continue to spend and buy from SAP on these. What are you hearing from some of those verticals that maybe a little bit more cyclical, called it discrete manufacturing, CPG, why they continue to go through these projects and bet on SAP right now despite the macro uncertainty?

Yes. Good question and let me highlight maybe one customer where I'm especially proud about this quarter, which Scott and team closed. I mentioned Schneider Electric and what I mentioned there is that we did a fit-to-stand up with Schneider Electric. They had clear expectations with regard to process automation and really efficiencies in the business. We went down five levels design to operate, hire to retire, quote to cash all the financial business processes and we came out with a fit for over 30 factories for the end-to-end operations, and this is what we are now doing step-by-step and we have modulars where they can also see a longer journey with RISE now every quarter business benefits on the automation side, on the business model change and we also co-innovating on sustainability. And that customer story actually reflects it very well. Our strategy is the best of suite in a different way than in the past, because as each projects take much less time now, and this is actually a good reference for many, many other customers we are closing and working with under the umbrella of RISE. And with regard to the portfolio, of course there is not a lack of market, which is good on the one hand side, but you also have seen Litmos, you also have seen Fioneer, so we are taking also very serious steps to keep the focus to invest where it really matters, where we see high quotes, where we see the mission critical business puzzles, where we can differentiate and this is of course, something but we also take very serious.

Excellent. Keep up the good work.

Thanks, Phil. Next question, please.

Next question is coming from Charles Brennan from Jefferies GmbH.

Perfect. Thanks so much. I will keep this very brief. Christian, in your prepared remarks you called out the possibility of M&A. Are you flagging up the chance that you do something a little bit bigger than a bolt-on? And then in the current markets there's a little bit more focus on profitability? Can you confirm that the double-digit profit growth is going to be on a constant currency and organic basis? Thank you.

Yes, for sure. And look at and talk about that. Not sure if I wanted to flex something, but look, actually when the way how we also manage our portfolio SAP and also together with the teams on the ground as we always looking in build partner buy, and this is what we are doing every quarter. And look we now did from my perspective a great job. We reduced the technical depth of our portfolio by a lot. You see this in the cloud cost margins, and this will elevate even into next year. So we are doing our homework there and, but it's of course also a good position to be in to look at wide spots of our portfolio. We are very happy with partnerships like we do with Icertis, so it doesn't need to always be an acquisition. But of course when we see wide spots where customers are telling us this is high value, this should come integrated and in a very strong way, it should come out of the blocks with SAP also leading on the go-to-market, I would never rule out also the acquisition, but the good piece is also there's not an urgent need now to buy revenue. We only do it if we see the value for our customers.

And I can keep my answer very short, yes. Our profit commitment for 2023 is on a constant currency basis and organic.

Perfect. Thank you.

Mr. Toby Ogg from JP Morgan. Maybe we have your question, please. [Operator Instructions]

Hey yes. Hi, Christian and Luca. Thank you for taking the questions. I just wanted to touch on the development of EBIT into the fourth quarter. Now, clearly we've touched on the license aspect to consider, but there's obviously the disposal, there's the easier comp on the EBIT from Q4 2021. Now, Luca, you've just said you expect mid-single digit on a nominal basis and flat in constant currency. Could you just walk us through the specific building blocks that give you the confidence and the ability to achieve that level of growth in the fourth quarter? Thank you.

Yes. Well, first of all I have no other reference point for the nominal versus constant currency growth rates than what we are observing today. So that's all that I can say about this. I don't think that in the short-term the Euro will bounce massively back but of course I don't have a crystal ball about that. So I can only concentrate on what we are focused on. What we are focused on is continuing to drive a very healthy, high renewal, low-churn recurring revenue business with support revenues, which are very resilient with cloud which has been very resilient with the services business that is doing very well has actually increased its margins year-over-year, despite the fact that it's probably already the highest margin services business that you can find in our industry, so we will continue to be focused on that. And then on the expense front, look we are getting to the final stretch of our cloud delivery harmonization program. I think you have seen the progress that we have made on the cloud margin side. In Q4, we will have a last quarter of similarly significant investment as we have seen it in the last two quarters. So of course we will have to account for that. But on the flip side, we see that the efficiency gains in the cloud are actually already now higher let alone what we will see next year once the program is finished. So that is actually not going to be a drag. But in the cloud, I think we have a very stable and strong profit performance. And then we have focused since July actually on significant spend measures to make sure that we don't have any discretionary spend that is not absolutely necessary happening in the organization. I'm hosting weekly spend council meetings that are the favorite meeting in the curriculum probably for our senior leaders where I'm scrutinizing personally. Every expense above 500K we're doing the same at the board area level with my colleagues and their COOs and Chief Controlling Officers and so we'll make sure that those discretionary expenses stay in check. And as I said, we've closed the doors essentially for incremental hiring. So we will keep also headcount growth in check, and that in combination with the resilience and recurring revenues should allow us to counter the impact from declining software licenses and deliver to our ambition.

Great. Thank you.

Thank you, Toby. We'll take the next question.

Next question is from Frederic Boulan from Bank of America.

Hey, good afternoon. I'll keep it brief. Can you give us an update on your adoption of cloud solution on S/4HANA base? And you can share a bit of an update on where are the big updates in terms of private versus public go-lives and what you can see in terms of margin differential between the two solutions? Thank you.

Look, I can start and then the team can build on it. Yes. So first S/4HANA in the cloud, extremely high retention rates and you are not shifting around ERPs, it's a very sticky business, especially then when you are building side-by-side new extensions on the platform, it becomes also an extremely sticky business together with the business technology platform. Second on the adoption, high adoption on S/4HANA public cloud assume that many, many of our net new customers, greenfield go immediately to S/4HANA public cloud. Even some large enterprises now like Schneider Electric decided to go to the public cloud. And of course it's a longer journey sometimes because standardizing business processes, changing business models is not something what you do easily as a, on the customer side. And these journeys take sometimes also one to two years. But in on this journey, we are replacing the old stack also with public cloud solutions. So you are seeing also immediate business value there. So while of course such a transition can take time, the modular architecture can make – will make sure that you see also immediate benefits. So these are two different businesses, private and public. The large ones were the private, but again you see also the maturity of the public cloud also now serving some larger enterprises, but of course the bulk of the net new going S/4HANA public cloud.

Yes. Maybe I'll add in Christian just a bit more of a nuance on what we're also seeing. So in addition to what we're seeing in terms of the overall sentiment that Christian described, we're also seeing many large customers with multiple public and private deployments as they look at scaling their business they've got – they've got assets around the world and companies that they want the agility and the flexibility of the public cloud. But we're also able to drive that and we can support that that architecture. And the other thing is, irrespective of whether it's public or private cloud, the SAP approach of being able to have a clean core to be able to have a digital platform that you can innovate, you can scale, you can grow around with a business technology platform. Fast adoption is consistent in all of the deployments, which means it's a lower TCO, faster time to value, low subscription fees and ultimately in architecture that they will get the benefits from the innovations. So we see the benefits no matter which route.

Yes. And just briefly, first of all it's actually very encouraging to see that the trend in terms of profitability of rise engagements is on the rise as well. So I think after we have proven the model in our early engagement in the first half of 2021, you see that the engagements are getting healthier and healthier from a margin perspective, as we frankly also have better learnings about how to efficiently deploy those customers. So that's on a positive trend for sure. And just as an additional data point, the cloud delivery harmonization program in Q3 had actually a 1.8 percentage point negative impact on the cloud margin. So without those expenses, and they will leave the P&L next year, actually our cloud margin already this quarter would have been already 73.5%. And so this I think shows you that we are on a very positive path and in terms of absolute cloud profit, which is anyway what we are focused on very strongly we are tracking very, very nicely against the derivative that you would derive from the 2025 cloud margin target. So there is really nothing to be concerned about here, rather the opposite.

Okay, thank you guys.

Thanks Frederic. And now we'll take one final question.

Okay. The final question is from Mohammed Moawalla from Goldman Sachs. The line is yours.

Great. Thank you. Thanks for letting me in. Hi Christian, Scott and Luca. I had two. Luca, just a clarification on your comments on the cloud backlog growth evolution; can you clarify that excluding some of those one-time factors the cloud backlog should still sort of accelerate in Q4 as it normally does or should it be more flat? And then secondly I just wanted to come back to this kind of broader point on the portfolio in sort of more challenging times. We've often seen the pendulum switch back to sort of best of suite from best of breed. You talked a lot about the kind of the breadth of the portfolio. I'm just curious to sort of touch base again on the kind of runway you have within just the install base as customers move to S/4. And if you can remind us on the kind of penetration opportunity still to go and how that can drive the strength you talk about over and above the macro? Thank you.

Yes. Let me just quickly get the first question out of the way because I thought that I've answered this already earlier. So our current cloud backflow growth in Q3 was 26%. That's also ex- the special factors what we would have seen as a Q4 factor. But as we have now the impact from the Litmos divestiture we should land slightly below that. Of course, you rightfully note the big significance of the auto entry performance in Q4 but it's a safe assumption that this is something that will slightly bring the growth rate down in Q4, and the rest we will see based on the actual performance.

Okay.

And in terms of the, I guess, the question regarding the multi solutions, I guess there's a couple of data points to, Scott here, that I would add. First of all, we don't see customers buying necessarily about best-of-breed and best-of-suite, which we would argue that we are actually competing strongly on both parameters. What we do see though is customers are looking for end-to-end outcomes to solve their challenges, to solve for example their supplier visibility and resilient, they need supply chain solution, they need spend management to manage their suppliers, they need a core ERP to be efficient and they need a data, process and workflow architecture that that is aimed to win. So it's more about the end to end capabilities that they're looking for, rather than necessarily trying to buy best-of-suite versus best-of-breed. That is resulting on the outcome where, which only we can offer the opportunity to be able to have an integrated solution end-to-end that drives transformation and that results in more solutions being required together. But I would highlight this that in today's market they are very focused on time to value. So the speed of execution and deployment continues to improve. So irrespective of whether they buy it once and then the next and the next, they buy it together, the deployment models are accelerated and that helps us from a time to revenue. It helps them from a time to value. Christian, maybe you can comment.

Yes. And Scott, I had a few clients now and when I compared the situation right now compared to three years ago, let's take a look [ph] of what Scott – Scott just mentioned. Not only that we can offer direct and indirect procurement on one platform with intelligent sources, with embedded AI, with one user experience. Once you have landed that and connected to supply chain planning, you can make demand and supply checks, which is very important when it comes to the supply chain disruptions we are seeing today. We couple this to financial planning, then the CFO is happy because you have really an integrated planning also form financial planning towards the supply chain into the verticals. We have HR planning connected to that. So you see we land but then we continue the business conversation. And sometimes I felt this equation is something what we have to do, it's a necessary thing. It's not only a necessary thing, this is how companies won and this is how you learn and expand. And when there is a data model underneath, when there are workflow underneath, we talk to each other, I mean, this is how large enterprise, not only large, also midsize enterprises work and this is how what we have to play out in the next years and the years to come.

And Christian, I just need to correct you on one statement. CFOs are by definition never happy possibility. Thank you.

All right, thanks. Thanks Mo. And thanks Scott, Christian and Luka. And this concludes our call for today. Thanks for joining.

Yes, thanks everyone. Thank you. Have a great day. Bye-bye.

Bye.