SAP Q2 FY26 Earnings Call | $SAP | 🔴 WATCH LIVE

Thank you very much Christian and thank you all for joining us this evening. To build on what Christian shared in his opening remarks, Q2 was a strong quarter for SAP, supported by sustained current cloud backlog growth and further improving free cash flow generation. These results were delivered against the backdrop of a complex and uncertain operating environment with the ongoing conflict in the Middle East continuing to weigh on customer sentiment and decision-making. Despite these headwinds, we remain focused on executing our strategy and continue to see progress across our strategic priorities. At Sapphire in May, we outlined our vision for the autonomous enterprise and the expanded role of AI across our portfolio. While these innovations are still at an early stage, we believe they can create new commercial opportunities over time and support durable growth beyond the current cloud transition. Importantly, we continue to invest in these areas while maintaining our commitment to the operating leverage framework we've laid out. These results reflect the resilience of our business model and give us confidence in the path ahead. Now, let me provide more details on our financial highlights. Current cloud backlog reached almost 23 billion, up 26%, benefiting from the first time inclusion of Rellio which only contributed less than one percentage point to the constant currency growth rate. While CCB growth sequentially accelerated, we continue to expect a slight deceleration exiting the year. As you are all aware, the situation in the Middle East remains fluid and the longer it persists, the more it weighs on customer decision-making, particularly in directly affected industries and supply chains. That said, the breadth of our pipeline, the mission-critical nature of our solutions, and the fact that the second half of the year typically accounts for the lion's share of our bookings give us confidence in our ability to execute against the opportunities in front of us. As expected, the year-over-year cloud revenue growth rate declined sequentially to 24%, reflecting several quarter-specific effects that particularly benefited the 2025 year-on-year comparison in the preceding first quarter. You might recall the comments we made in that regard in our last quarterly earnings call. Also recall that in Q2 2025 we had roughly two percentage points higher cloud revenue growth than in Q1. So there is a strong basis effect here. SaaS and PaaS combined continue to perform strongly with growth again far above the overall market. Cloud ERP suite revenue increased by 27% in Q2, now accounting for 88% of total cloud revenue. Software licenses revenue decreased by 32%. Finally, total revenue in the second quarter was 9.9 billion euros, up 11%. Now, a brief look at our regional performance. In the second quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and solid in the Americas region. Brazil, France, Germany, Italy, India, South Korea, and Spain had outstanding performance while Australia, Singapore, and the US were particularly strong. Now moving down the income statement, our IFRS cloud gross margin in Q2 was 74.3% and non-IFRS was 74.6%, down 0.7 percentage points year-over-year at constant currencies. IFRS operating profit increased by 8% to 2.6 billion euros. Non-IFRS operating profit was up by 9% to 2.7 billion. The quarter-over-quarter deceleration in IFRS and non-IFRS operating profit growth is mainly caused by lower cloud and total revenue growth in Q2 as compared to Q1 2025, an unusually low stock-based compensation expense in the first quarter of 2025, accelerated investments into research and development, higher marketing expenses in the quarter of the launch of the autonomous enterprise, and finally, the slightly dilutive impact of the Rellio acquisition, which just closed on May 7th. Additionally, we are investing to accelerate our own AI transformation. This includes rapid internal adoption of our AI solutions as well as targeted hires. These investments enable us to further enhance our products and drive efficiencies. At the same time, we are applying disciplined governance to manage our cost base and improve spend predictability. The IFRS effective tax rate was 26.5% and the non-IFRS effective tax rate was 30.8%. The IFRS effective tax rate is lower than the non-IFRS expected tax rate due to tax benefits from tax-exempt income. Free cash flow in Q2 was robust at 3 billion euros. Finally, IFRS earnings per share increased by 30% to 1.89 euros and non-IFRS earnings per share increased by 6% to 1.59 euros. Now on to the outlook. As you will have seen in the quarterly statement issued earlier today, we are maintaining our financial outlook for all topline parameters and free cash flow. We are adjusting our operating profit outlook by 0.1 billion euros and now expect 11.8 to 11.2 billion euros to reflect the dilutive impact of the recent Dreo and Prior Labs acquisitions. As announced last quarter, we are planning to fully offset the slightly dilutive effect of the Rellio acquisition on our non-IFRS operating income. As you will see in the half-year report, Rellio has generated an IFRS loss after tax since closing on May 7th to the tune of 10 million euros in Q2. Adjusting to non-IFRS operating profit by taking taxes and items such as amortization of acquisition-related intangibles out, we are down to a high single-digit million euro amount. However, Dreo and Priaps in combination will weigh on H2 2025 with a very low triple-digit million euro amount. We feel that the current environment and the investment needs in our own AI transformation do not support what would effectively be a noticeable upgrade of the underlying organic non-IFRS operating profit outlook we gave at the beginning of the year. To cut it short, we are fully on track on our initial non-IFRS operating profit outlook which obviously did not include any M&A events despite all macro headwinds so far this year. We continue to target an 80 to 90% expense to revenue ratio despite the J-curves of the recent M&A investments coming weeks. We have great confidence in the impact of AI-driven productivity measures as they are going to pay off over the coming years. With respect to current cloud backlog, our expectation of a slight deceleration over the course of the year remains unchanged. The second half typically accounts for the lion's share of our annual bookings and we remain focused on converting the pipeline we have built. As the situation in the Middle East remains in flux, the range of possible outcomes for the metric continues to be wider than we would like. To close, while there has been no shortage of volatility in the macro environment and massive noise around the alleged SaaS apocalypse over the last quarters, the underlying trajectory of our business remains fully intact as evidenced by solid and sustained current cloud backlog growth. By virtue of starting to harvest the fruit of our successful cloud transformation, we are well positioned to honor our commitments to capital markets while at the same time heavily investing in our own transformation towards an autonomous enterprise to ensure the sustainability of our strong growth trajectories for years to come. The recent debate about exploding token costs at most enterprises supports our strategy of leveraging a unique combination of both deterministic, highly scalable and low-cost mission-critical enterprise applications on the one hand and probabilistic agentic AI-powered solutions on the other where highly assured deterministic solutions are not yet attainable and heavy human intervention is the baseline. AI can very effectively compete with labor. This dexterity at unrivaled levels of functional breadth, reliability, semantic richness, industry-specific process know-how, cost competitiveness, and last but not least, enterprise-grade governance makes us the partner of choice for those enterprises who do not see AI as a destination but a means to reach better efficiency. All this without enterprise-grade assurance requirements and risk. We are more convinced than ever that our strategy to not be locked into any generic large language model but to flexibly benefit from the vibrant competition amongst them in terms of both performance and cost is the right one. And in times of high geopolitical uncertainties, customers do value the resilience of this model delivered by a provider headquartered in Germany. Sovereign requirements are taking center stage for more and more customers. We will continue to work very hard every day to re-earn the trust they put into us. Our priorities for the second half of the year are clear: sustain the momentum in our cloud business, deliver on the operating leverage we have committed to, and close the year with strength. Thank you and we are happy to take your questions now.

All right, we will now take your question. I would like to kindly remind you to only ask one question when prompted. Operator, please open the line for the first question.

Ladies and gentlemen, at this time we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on your touchtone telephone. If you are using speaker equipment today, please lift the handset before making your selection. Again, anyone who has a question may press star followed by one at this time. We will take our first question from Adam Wood with Morgan Stanley.

Hi, thanks for taking my question. It's probably one for you, Dominic. I think investors have got used to the kind of beat and raise cycle from SAP on the operating income line and there is maybe a little bit of surprise to see the weaker second quarter. Appreciate there are good reasons behind that, but maybe also the cut to the full year suggests there was a little bit less room for maneuver than people thought. I know you have given that 80 to 90% expense to revenue growth guide, continue to guide for that for 2027, but could you just talk a little bit going into a bit more depth there around how you think about how much room there is for margin expansion in the business over the next 12 to 24 months? Has there been a shift in focus in terms of what you need to invest in the business and what you need to invest to drive topline growth versus driving the margins higher? And maybe specifically on the AI investments you are making and the returns in the business, any more detail you can give us on the scale and time frame of payoffs to those? Thank you.

Well, that's a lot of questions, but all centering around the operating profit for Q2. First of all, let me reiterate that it's from my perspective not really conducive to look at one single quarter, but really over several quarters. For instance, if you look at the first half, you see that our operating leverage envelope has been well respected and we will also see that for the full year 2025 we will be well in that operating leverage formula, even including the acquisitions we have made. Of course, that pushes the point a little bit more to the downside of the range. But we think the real absolute highest priority is to drive the AI transformation forcefully and to protect the top line in the current environment while still preserving discipline on the growth. In many areas like development, we are in a stage where we are ramping capacities. We mentioned the hirings we did for selective, very selective but very high performing resources, but also the widespread token usage where we are improving the efficiency and improving the bang for the buck, introducing model routing technologies and so forth to optimize the bang for the buck. So this is why I mentioned in my introductory remarks that from my perspective there is no point in extrapolating just one single quarter where we had a concentration of all the factors I have already mentioned. It was a little bit of a special quarter, so don't read too much into that now. It is true though that the M&A acquisitions we did will have an impact which is in excess of 100 million, and we had a debate: should we upgrade the underlying organic guidance and absorb that on top, or should we keep the wiggle room to drive aggressive growth? We decided to go for the latter. So that is the backdrop on that.

We will move to our next question from Mohamad Moawad with Goldman Sachs.

Great, thank you. Good evening, Christian. Good evening, Dominic. My question was more focused on the top line. Given you haven't really seen any deceleration to date in CCB, can you talk about the visibility you have for the rest of the year on cloud revenue? And then just to extend that one step forward, Christian, can you talk a bit about how the pipeline has evolved coming out of Sapphire with the launch of the roadmap and some of the agents? When do you expect to drive both adoption and monetization of some of your AI solutions? Could you see that effect potentially towards the end of the year or is it still more into next year and beyond? Thank you.

Quantitatively, comparing the evolution of 2025 to what happened in 2024, in 2024 we had a higher than expected deceleration in CCB growth. We guided slightly and then it turned out to be more than slightly. Now we had a much better start actually in 2025. We guided slightly but you have seen not much attrition. Even if you adjust for M&A, it is actually very stable CCB development. The reason why we still stick with slightly is very much the macro uncertainty for the second half of the year where the outcomes can be more nuanced depending on what type of escalation you might see. But operationally, CCB growth development is much more stable this year. And also in relation to cloud revenue growth, we now see that while last year there was a big gap where cloud revenues were below CCB growth, that now has flipped. So that is really positive from my perspective.

We will move to our next question from Ben Castillo with BNP Paribas.

Hi, good evening. Thanks for taking my question. Just on that cloud revenue outlook, please. H1 is running slightly ahead of your guidance, so we are looking at quite a material deceleration in cloud revenue growth in the second half to get to your guidance midpoint. This despite adding more M&A, despite CCB growth re-accelerating in Q2 and also growing ahead of cloud revenues, which is usually positive directionally for trailing cloud revenue growth. How much of this is just prudence given what is going on in the world, and how much is actually what you really expect? How can we get comfortable with that deceleration implied in the second half? A quick follow-up on the macro side: did you actually see any impact on sales cycles and pipeline conversion in Q2? Could the backlog growth be better in Q2 without that? Thanks.

We will take our next question from Kirk Materne with Evercore ISI.

Yeah, thanks very much, Christian. Can you just follow up on that last point on the most two recent acquisitions you have done? I would be curious to go over the thought process behind specifically Prior Labs and the idea of bringing on technologists around tabular models. What is the strategy for taking that IP and monetizing it across the customer base? Give us an idea of how we should think about the return on that acquisition, and I realize Dreo plays into it a little bit as well. Thanks.

Maybe at the risk of stating the obvious, what is also so interesting about Priaps is that it is trained on tabular databases. SAP has probably the biggest reservoir of data in tabular databases, and that is not public data, it is proprietary data. So that is a very different ballgame from large language models where a lot of public data is scraped. The combination of that technology with the unique treasure of data that we have in that format positions us extremely well to run this frontier model.

We will take our next question from Michael Briest with UBS.

Great, thank you. Good evening. A question on the R&D side of things. Headcount looks to be up 3% year on year and costs up 14%. In Q1, the numbers were 2% and 2%. At Sapphire, you were talking about some compensation structure change. Can you elaborate on whether there has been either targeted or significant increase in rates for R&D staff and also where your token costs would go? Would those go into cost of sale or if they are related to developing products, would they go into R&D? Is that part of this increase? Thank you.

We will take our next question from Charlie Brennan with Jefferies.

Great, thanks for taking my question. Can you say something on the recent European ruling on maintenance? There is some suggestion that giving customers more maintenance options potentially opens the door to them staying on ECC for longer. Do you think this ruling actually changes any behavior on the ground? And maybe as a small modeling follow-up, Dominic, you have given us the loss run rate for Dreo and Prior Labs, but can you say anything about the revenue and CCB contribution from them? Thank you.

Let's start with the last question. It is negligible. Contrary to what was just said, a less than one percentage point increment in CCB growth, not much different on cloud revenue growth. It is basically negligible on these two acquisitions. That is why we didn't comment much. Now on the EU ruling. This is an agreement between the EU and SAP to commit to certain mitigations in terms of flexibility on maintenance. First, I want to stress that maintenance is extremely highly valued by the lion's share of our customers. They clearly see the value of being current on cyber patches, compliance patches, legal patches, and some functional improvements we bring. We have also in the past granted flexibility for customers to adjust their software spend to needs. That has been to some degree formalized in this agreement, and some more flexibility has been granted in limited scenarios. For customers that are prioritizing lower spend over the advantages of maintenance and support, there might be an impact, but we think we can manage it. Don't forget that maintenance is also phasing out as we convert customers to cloud and RISE, and that has nothing to do with ECC versus S/4 transition because at some point maintenance will expire. ECC maintenance is basically zero anyway. Last point, we see a nice pickup in returns from third-party maintenance. That gives us confidence. When people try third-party maintenance for a while, they tend to be more nervous about incidents and come back. Some discussions are about how to deal with customers who want to come back and how much back maintenance they need to pay.

Our next question comes from Frederick Baird with Bank of America.

Hi, good evening Christian, Dominic. If I can come back on the cost side, can you comment on the decline we have seen in cloud margins this quarter and more broadly on the R&D side? There is a bump as well in terms of sales and marketing. Is it something structural in terms of rebalancing from sales and marketing into R&D, or is it more about an initial investment that should normalize over time? Thank you.

And recall, we have always given that formula that total expenses will grow at 80 to 90% of revenue growth. We always said we want some wiggle room within any specific line item. That has served us well and gives us flexibility to optimize the business while sticking to that envelope. We have no reason to change that. The longer we wait, the more it turns out to be a very solid corridor for how we can leverage revenue growth down to the bottom line.

We will take our next question from Toby Aag with JPMorgan.

Hi, good evening and thanks for the question. Perhaps just on the new EBIT guidance. Dominic, EBIT slowed to 9% in Q2 for the reasons you laid out, but you had a strong Q1. Overall H1 EBIT growth constant currency was 16%. The guidance midpoint implies sort of mid-teens EBIT growth in the second half, which would imply a re-acceleration relative to Q2 EBIT growth. Can you help us understand what would drive that re-acceleration from the Q2 EBIT growth rate and what gives you confidence in that as we think about the second half? Thank you.

I did mention in my introductory comments that Q2 was a little bit of an abnormal situation because we had a strong contribution from cloud revenue growth acceleration. We are optimizing massively on how we spend tokens by virtue of tight controlling. We can now on a very granular basis see who is using what tool, what is output driven, and we will funnel tokens in a way that gives better bang for the buck. There are also measures on cost containment to focus resources where it matters. You nicely summarized the thinking in terms of H1 and H2. This is exactly what we are going to do.

We will take our next question from Michael Turrin with Wells Fargo.

Hey, great. Thanks for taking the question. I just want to ask a little bit of a different flavor on the questions around bookings and margins. CCB growth improved this quarter. I think that is a surprise to many given the backdrop, but margins coming in a touch, Dominic. Walk us through both what drove the Q2 growth improvement and then why that doesn't flow through to operating income. Is there anything outside of M&A impacting that relationship? Are you saying on the organic side things are generally improving and it is all tied to just some dilution impacts?

Let me do it step by step. If you look at the deceleration in the growth of non-IFRS operating profit, Q1 was extremely high at 24% versus Q2. First, there was a strong positive from lower stock-based compensation because of a 60 euro share price drop in Q1 that didn't recur in Q2. So that is sequentially going down. We had a heavy R&D investment discussed at length. We had slower growth in cloud revenue growth, predominantly driven by the comparison in the prior year. In the prior year, we had an increase of two percentage points in cloud revenue growth from Q1 to Q2, so the comps are less favorable. That will flip around in the next quarter. We had some pointed marketing investment around the launch of the autonomous enterprise, and a minor negative effect from first-time inclusion of Rellio in early May. That gives you the bridge why Q1 had a higher growth rate on non-IFRS operating profit than Q2. Put it together, you see a kind of mid-teens increase in operating profit for the two quarters taken together. We are expecting something similar with the measures I highlighted in the second half. This is more comfortable to achieve than topline topics because it is entirely under our control. CCB is the more important measure for bringing that home because it requires customers to sign contracts, whereas our spend is entirely under our control.

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