Toby Ogg: That’s great. Thank you.
Anthony Coletta: Thank you, Toby. And we will take the next question, please.
Operator: Next question is from the line of Adam Wood with Morgan Stanley & Co. Please go ahead.
Adam Wood: Hey, Christian. Hi, Dominik. Thanks for taking the question and congratulations from me as well on the quarter. I wanted to go back to the AI topic. You’ve obviously announced the products there, given us some details. I think some of your competitors have come out and said, they feel that the AI copilots and so on really are just kind of table stakes in the battle and they don’t feel there’s room to extract a lot more value for customers. Could you talk a little bit about what’s different in the SAP portfolio? Is it the data that you have access to, the complexity of the processes, the value of the roles that you can automate further that would make you different in terms of being able to extract value on this versus some of your peers? Thank you.
Christian Klein: I mean thanks a lot, Adam, for the question. And look, I can give you an example on why SAP is so relevant in the business AI space. With our traditional use cases, which we have over 100, we actually, of course, develop great individual use cases. So for example, in procurement, AI was helping to source out of thousands of suppliers, the best supplier based on cost, on quality, in the future also on ESG data. With generative AI, the opportunities and the elements will significantly increase. Joule will be able to answer questions like, please help me to reduce the carbon footprint in my supply chain by 10% while making sure that my profit is not getting under pressure. Give me the suppliers, give me the suppliers where I can still deliver on time, but on the same time, also reduce my carbon footprint and keep my third-party cost, the contingent cost actually at the same level.
Because we can cross-correlate the data, we build this foundational data model in the neural network. And then with Datasphere, we can also enhance that with actually also unstructured data. Yesterday, I just also met Satya in Berlin. And he also — I mean, Microsoft is extremely interested on how can we join forces to also further combine our data. And what is also very important in the B2B world, I already mentioned it. I mean, in the B2C end, you can ask ChatGPT for a question for speech and you get a proposal for a speech. In the B2B world, accuracy and data quality is of utmost important. So all the work we did on BTP over the last three years to integrate, but also to harmonize our data model is extremely now paying off in high-quality data and is the foundation for SAP Business AI.
And last but not least, you can ask Joule a question, but not every employee and every company should see your group P&L. So you need an authorization concept. And so this is also very important that we have the authorization layer for almost every business data in the company. And all of that is a good example why SAP will be so relevant in that space.
Adam Wood: That’s very helpful. Thank you.
Anthony Coletta: Thank you. Thank you, Adam. We will take the next question please.
Operator: The next question is from the line of Mohammed Moawalla with Goldman Sachs International. Please go ahead.
Mohammed Moawalla: Great. Thank you. And well done on the quarter. I had one question for Dominik, please. Your implied operating profit growth guidance implies sort of at the low-end significant sort of decline. I’m just trying to understand around some of the cost dynamics, what we should think about in Q4, in particular. And I know you alluded to sort of some of the changes in the sales capitalization. But also, is there anything on the kind of OpEx base that we should be mindful of in Q4? Thank you.
Dominik Asam: Yeah, excellent question. I mean, it’s clear from the numbers that remain to do in Q4 is kind of relatively manageable, it appears. And now what are the kind of elements which drive that. First of all, it’s on the software side. We had a really a very mild decline in software in especially Q1 and Q3. I think Q2 was a little bit closer to normal. And actually, on average, we have been declining more slowly than, for instance, in the prior year. If you think about the prior year, we were down 39% constant currency. And now Q2, which was a more tipping quarter, mid-20s, I think, if I recall correctly. So we think that Q4 will be probably in that order of magnitude, somewhere between these two data points. It’s not quite clear.
I mean, it’s notoriously difficult to predict that. And I think it’s also clear that the Q4 is the biggest quarter on licenses, so it has a big disproportionate impact. And I think it’s also — there’s some good news in this, which means that we can be commercially quite rigorous on the software side, and we really can aggressively push on the cloud side. Second point I want to highlight is that we have added a net of 1,200 FTEs. So of course, they will hit the P&L in Q4 and will be basically full quarter effective there. You mentioned that kind of accelerated amortization of commissions that was still based on the software business where we see now the kind of shift to the cloud happening. That was a EUR65 million ticket. By the way, we will see a similar order of magnitude in Q4.
So that’s another item I want to mention. And then I think it’s very important to really look at the gross margin. It has evolved very strongly in Q3. But I want to say it’s always a little dangerous to look at any single quarter. If you want to have a more stable estimate about how the gross margin is evolving, take the first nine months. And you see that we basically expanded gross margin year-on-year by about 2.5 — or 2.4 percentage points. Now in the 2.4 percentage points, there is, I’d say, almost 1 percentage point of tailwind from the famous cloud conversion program. So we had costs incurred still in the prior year, which is now gradually out of the equation. So that gives us a boost. So they kind of still underlying continuous improvement without that one strike project, so the cloud convergence project is more about 1.5%, which, by the way, again, is putting us exactly on the trajectory for the 2025 cloud gross profit guidance.
So if you think about that kind of boost being fully harvested, if you take these four elements I mentioned together, this is explaining why we have been more prudent on the Q4 and year-on-year growth. I think it’s very much in line with what also Luca has guided already a year ago, also driven on the year-on-year comparison by the Litmos divestiture, which was not there or will not be there in Q4.
Mohammed Moawalla: That’s great. Thank you so much.
Anthony Coletta: Thank you, Mo. And we will now take the next question please.
Operator: The next question is from the line of Frederic Boulan with Bank of America. Please go ahead.
