SAP Q2 2026 Earnings Call | Cloud Backlog Expansion Drives Double-Digit Revenue Beat

Ladies and gentlemen, thank you for standing by. Welcome and thank you for joining the SAP Q2 and half-year 2026 financial results conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. I would now like to turn the conference over to Alexandra Stiger, global head of investor relations. Please go ahead.

Good evening everyone and welcome. Thank you for joining us. With me today, our CEO Christian Klein and CFO Dominic Asan. On this call, we will discuss SAP's second quarter 2026 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 risk and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding this risk and uncertainties may be found in our filings with the SEC, including but not limited to the risk factor section of our annual report on form 20F for 2025. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates and percentage point changes are non-IFRS 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.

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 acceleration 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 2026 year-on-year comparison in the preceding first quarter. You might recall the comments we made in that regard in our last Q4 earnings call. Also recall that in Q2 2025 we had roughly two percentage points higher cloud-driven growth than in Q1. So there is a strong base 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-on-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 2026, an unusually low stock-based compensation expense in the first quarter of 2026, 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 hiring in the most critical roles. 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 12.2 billion euros to reflect the dilutive impact of the recent TMIO and Wire 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 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 out taxes and items such as amortization of acquisition-related intangibles, we're down to a high single digit million euro amount. However, TMIO and Wire Labs in combination will weigh on H2 2026 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 in, 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 cloud backlog growth. By virtue of starting to harvest the fruit of our successful cloud transformation, we're 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. We're highly assured deterministic solutions are not yet attainable and heavy human intervention is the baseline. AI can very effectively compete with labor. This ambidexterity 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 not to be locked into any generic large language model but to flexibly benefit from the vibrant competition amongst them in terms of both performance but also cost is the right one. And in times of high geopolitical uncertainties, customers do value the resilience of this model delivered by a provider actually 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, delivering on operating leverage we have committed to, and close the year with strength. Thank you and we're happy to take your questions now.

All right, we will now take your questions. 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 their touchtone telephone. If you are using speaker equipment today, please lift the handset before making your selections. Again, anyone who has a question may press star followed by one at this time. We'll 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's 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. And I know you've given that 80 to 90% expense to revenue growth guide, continue to guide for that for 27, but could you just talk a little bit about 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 it 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're making in turn in the business, any more detail you can give us on the scale and time frame of payoffs? Thank you.

Well, that's a lot of questions, but all centering around I think the operating profit for Q2. I mean, first of all, let me reiterate that it's from my perspective not really conducive to look at one single quarter. But it's 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 you will also see that for the full year 2026, we'll be well in that kind of operating leverage formula and that even including the acquisitions, all the acquisitions we have made. And so of course it pushes the kind of 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. Of course 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 where basically we also now 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 from my perspective there's no point in extrapolating just one single quarter where we had a concentration of all the factors I've already mentioned which I can also reiterate if you're interested. 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, they will have actually an impact which is in excess of 100 million and we of course had a debate now: Should we basically upgrade the underlying organic guidance and say we absorb that on top, or should we keep the wiggle room to drive aggressive growth? And we decided to go for the latter. So that's the backdrop I think on that.

We'll move to our next question from Mohamad Moala 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 sort of to date in the U CCB, can you talk about the kind of now the visibility you have for the rest of the year on the cloud revenue? And then just sort of to extend that one step forward, Christian, can you talk a bit about how the pipeline has evolved kind of coming out of Sapphire, with obviously the launch of the roadmap and some of the agents? So when do you sort of expect to sort of drive some of the both the adoption but monetization of some of your kind of AI solutions? You know, could you see that effect potentially towards the end of the year or is it still kind of more into next year and beyond? Thank you.

Quantitatively, I think just comparing the evolution of '26 to what happened '25, in '25 we had a quite 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 '26. We guided slightly but you've seen not much attrition, even if you adjust for M&A, that's actually a very stable CCB development. Now 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, just depending on what type of escalation you might see. But I think operationally, deep-rooted CCB growth development is much more stable this year, and also in relation to the cloud revenue growth, we now see that while last year there was a big gap that cloud revenues were below CCB growth, that now has flipped. So that's really positive from our perspective.

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

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

We'll take our next question from Kirk Bern with Evercore ISI.

Yeah. Thanks very much Christian. Can you just follow up on that last point on the most two recent acquisitions you've done? I'd be curious, sir, if you could just go over again the thought process behind specifically Prior Labs and the idea of bringing on technologists around tabular models, and then sort of what is the strategy for taking that IP and then monetizing it across the customer base? Just give us an idea of how we should think about the return on that acquisition in particular. Obviously I realize DMO plays into it a little bit as well. Thanks.

Maybe one, maybe at the risk of stating the obvious, what is also so interesting about Prior Labs is that it's trained on tabular databases. I mean no secret, SAP has probably the biggest reservoir of data of tabular databases, and that is not public data, it's proprietary data. So that is I think a very different ballgame from the large language models where a lot of public data is scraped. So the combination of that technology with the unique treasure of data that we have in that format I think positions us extremely well to run this frontier model.

We'll take our next question from Michael Bri with UBS.

Great. Thank you. Good evening. A question on the R&D side of things. So headcount looks to be up 3% year-on-year and the costs 14%. In Q1, the numbers were 2% and 2%. And I know Gina Sapphire was talking about some sort of compensation structure change. Can you elaborate on whether there's been some either targeted or sort of significant increase in rates for the R&D staff, and also where your token costs would go? Would those go into costs of sale, or if they're related to developing products would they go into R&D, and is that part of this increase? Thank you.

We'll take our next question from

We'll take our next question from Charlie Brennan with Jefferies.

Great. Thanks for taking my question. Can you just say something on the recent European ruling on maintenance? There's some suggestion, I think, 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 then maybe as a small modeling follow-up. Dominic, you've given us the loss run rate for Dreo and Prior Labs, but can you say anything about the revenue and the CCB contribution from them? Thank you.

Let's start with the last question. It's negligible. So contrary to Elio which had I said a less than 1 percentage point increment in CCB, not much different on cloud revenue growth, it's basically negligible on these two acquisitions. This is why we didn't comment on it much. Now you said EU ruling. This is an agreement between the EU and SAP to commit to certain mitigations in terms of flexibility on maintenance. I mean, first of all, I want to stress that the maintenance is extremely highly valued by the lion's share of our customers. They clearly see the value of being current on cyber patches, on compliance patches, legal patches, on some functional improvements we bring to the table. And we have actually also in the past granted flexibility and opportunities for these customers to adjust their software spend to the needs. And that has been to some degree now formalized in this agreement. And in some degrees, some more flexibility has been granted in limited scenarios for the customer. And for some customers that are actually prioritizing lower spend over the advantages of maintenance and support, I describe there might be an impact, but we think we can manage it. And don't forget that one is also phasing out more and more as we convert the customers onto cloud and RISE, and that has nothing to do actually with ECC versus S/4 transition because at some point in time that maintenance will anyhow expire. You know, 2030, ECC maintenance is basically zero anyhow. And last point I want to mention, we do actually see quite a nice pickup in returns from third-party maintenance. That gives us also confidence. When people try that for a while, they tend to be more nervous over time about incidents happening and then come back. And actually some of the discussions in that context are about how do we deal with the customers who are knocking our door and say we want to come back, and how much back maintenance do they need to pay and that stuff.

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

Hi, good evening Christian, Dominic. Fred at Bank of America. If I can come back on the cost side, if you can comment on the decline we've seen in cloud margins this quarter and more broadly on the R&D side. So a bump as well in terms of percentage of sales. Is it something structural in terms of rebalancing from sales and marketing into R&D, or as you were saying it's more about an initial investment that should then normalize over time? Thank you.

And recall we've always gave that kind of formula to say that total expenses will grow 80-90% of the revenue growth, and we always said we want to have some wiggling room within any specific line item. I think that served us well, that gives us flexibility to optimize the business while sticking to that envelope, and we have no reason whatsoever to change that. So I think the longer we wait, the more it turns out to be a very solid corridor with regards to how we can leverage the revenue growth down to the bottom line.

We'll take our next question from Toby with JP Morgan.

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

Yeah, I didn't mention in my introductory comments that Q2 was a little bit of an abnormal situation because also from the cloud revenue growth acceleration we had a strong contribution. We are frankly optimizing massively now on how we spend tokens by virtue of a very tight controlling. We can now on a very granular basis see who's using what tool, what is output driven here, and we will funnel the tokens in a way that gives us a better bang for the buck. And there are also measures on cost containment to really make sure that we focus our resources where it really matters. So you nicely summarized the thinking we have in terms of H1, H2. This is exactly what we're going to do.

We'll take our next question from Michael Turan with Wells Fargo.

Hey, great. Thanks. Appreciate you taking the question. And I just want to ask a little bit of a different flavor on the questions around bookings and margins. So CCB growth improved this quarter. I think that's a surprise to many given the backdrop, but the margins coming in a touch, Dominic. Maybe walk us through both what drove the Q2 growth improvement and then given that 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's all tied to just some of the dilution impacts?

Okay. So let me do it step by step. So if you look at the deceleration so to speak in the growth of the non-operating profit, Q1 which was extremely high 24% versus Q2, first of all we have to understand there was a very big strong positive from lower stock-based compensation because a 60% roundabout share price drop in Q1 that didn't reoccur in Q2. So that is sequentially going down. We mentioned a heavy R&D investment that was discussed at length on this call already. We had a slower growth in cloud revenue growth and this was predominantly driven by the comparison in the prior year as I tried to explain. So we had basically in the prior year an increase of two percentage points in the cloud revenue growth from Q1 to Q2, and that just mathematically means that the comparables on cloud revenue growth are less favorable. So we had much harder comps in Q2, and by the way that will of course flip around also in the next quarter. We did have some pointed marketing investment around the launch of the autonomous enterprise, and then there was also a minor effect but still negative on first time inclusion from Renzio in early May. So that is giving you basically the bridge why Q1 had a higher growth rate on non-operating profit than Q2. And again, if you put it together, you see a mid-teens increase in operating profit for the two quarters taken together, and we're expecting something similar with all the measures I have been highlighting we're going to take in the second half of the year. And of course this is actually so to speak a little bit more comfortable to achieve than topline topics because it's entirely under our control, we can do these things. So the CCB is the more important measure from our perspective in terms of bringing that home because that is also requiring customer to sign a contract, whereas our spend is something we are 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.