SAP SE (SAP) Q2 2026 Earnings Report, Transcript and Summary

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

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

Yes. Thank you, Alexandra, and a warm welcome to everyone joining this call. Q2 was an outstanding quarter, highlighted by our flagship customer conference, Sapphire. The event was a huge success. We saw record attendance generated significant additional pipeline and received very, very positive feedback on our Autonomous Enterprise launch. In parallel, our AI transformation is progressing well, both among our customers and our employees reflected in growing AI consumption and tangible outcomes. This momentum contributed to our strong top line performance in Q2. Let's look at this in detail. Current cloud backlog grew 26%, an acceleration compared to Q1. And after two quarters where our CCB was lagging behind cloud revenue growth, it was a welcome trend reversal in this important forward-looking indicator, a great result, especially given the volatile environment. AI and SAP Business Data Cloud were embedded as key pillars in more than 90% of our 50 largest deals, giving us strong confidence for the second half of the year. Cloud revenue grew 24% to EUR 6.3 billion, backed by a solid execution of on-premise to cloud ERP migrations in our installed base. Total revenue was up 11% to EUR 9.9 billion. This comes despite a slight decline in services revenue as we reallocate consultants to build agents and foster AI adoption. Our top line performance translated into an operating profit of EUR 2.7 billion, an increase of 9%. Our indirect channel continues to be a strong growth pillar. Q2 growth again significantly outpaced direct channel cloud revenue, reflecting our successful go-to-market transformation over the last two years. As mentioned, a key highlight in Q2 was, of course, SAP Sapphire and the launch of the Autonomous Enterprise. It resonated strongly because it gets to the root of why enterprise AI is so hard and what that means for our customers. The reality for many enterprises today is that LLMs don't understand business data, processes and governance. AI token spend doesn't mirror outcomes. Log-in to single frontier vendors is a growing concern and AI sovereignty is becoming more important. At Sapphire, we explained how the combination of the Autonomous Suite and Business AI platform will solve those challenges. The new business AI platform is being delivered this quarter. The platform covers three key pillars. First, the build pillar, where we offer the best experience for pro code and citizen developers to create and extend agents. With Joule Studio, you can choose from a range of leading LLMs, including Anthropic, Cohere, Google, Mistral AI, OpenAI and other open weight models. Joule Studio is integrated with the second pillar, the context and reason pillar. This pillar provides the agents with the context and the knowledge they need to run business processes autonomously. It starts with our data foundation. SAP Business Data Cloud provides broad data access to the agents. And with our latest acquisition of Dremio and its Apache Iceberg native technology, we are bringing mission-critical SAP and non-SAP data together to become a true enterprise lighthouse, meaning SAP and non-SAP data can be analyzed together in real time without moving or copying it first. On top of the data foundation, we are able to build one semantic data layer for SAP and non-SAP data. By joining data products, we are creating semantic data models centered around the customer, supplier, material and other master data objects of a company. Our acquisition Reltio will govern these master data models end-to-end to ensure high data quality. And then these semantic models are connected with our ontology layer and knowledge graph, which we offer for every LOB and industry domain. They are the plane infused into the agents developed with Joule Studio on the new platform. Most importantly, all three layers will be extensible by partners and customers to cater for their specific business needs. Our acquisition of Prior Labs will enable agents to generate accurate tabular predictions out of the box. After providing the agents with the context, they also need to run the business with trust and high scalability, which brings me to the third pillar, one and govern. This pillar addresses another key challenge of AI adoption. Here, we take the complexity of our customers' shoulders by managing and governing the agents embedded in the Autonomous suite and beyond. SAP manages the agents across the complete agent life cycle, including SAP, partner and customer build agents. Specifically in the governance layer, we will ensure the agents meet your compliance frameworks and data privacy requirements from over 130 countries, checking all the identity and authorization rules to ensure the response is not only accurate, but also compliant. Furthermore, we are able to switch between different models safely and dynamically inside customers' SAP landscapes. This means we will run the agents without any lock-in, adhere to local sovereignty requirements and ensure the best price-to-outcome ratio. Powered by the new platform, our Autonomous suite will consist of SAP partner and customer agents, all managed by SAP. The AI Agent Hub is our command center to discover, manage and govern SAP and non-SAP agents, MCP servers and more. The AI Agent Hub gives customers transparency across a universe of agents for every LOB and every industry. And finally, this quarter, we will also launch our new end-to-end user experience, Joule Work. It's a single entry point and interface across all our portfolio solutions for all tasks where users can collaborate with our AI agents. Connected to our business AI platform, Joule Work dramatically accelerates outcomes for our 350 million end users. For example, a salesperson can create a complete data rich customer pitch in just a few minutes. A finance business partner can pull together a financial analysis, including all structured and nonstructured data from his or her company. After Sapphire, the beta programs for our new platform, Suite and Joule Work were immediately oversubscribed and initial customer feedback has been excellent. This makes us very confident about the successful launch in Q3. In addition, we will release close to 50 assistants by the end of Q3, underpinned by more than 400 Autonomous suite agents by the end of the year. To accelerate our customers' journey to the autonomous enterprise, we are also releasing three additional ERP migration assistants with 10 underlying agents later this quarter. Let me now share some tangible outcomes from our customers. On the Autonomous Suite side, SAP and Amadeus, a platform for global travel, developed an AI agent that autonomously reconciles unstructured payment data already clearing around 40,000 incorrect transactions. One example from our Business AI platform. To prepare for business AI, Norsk Hydro transitioned from a legacy BW to an end-to-end data platform with BTP. This delivered significant agility, cutting BI solution build time by around 75% and accelerating report creation time by 50%. Moving on to industry AI. With NTT DATA, Denmark's largest wholesaler for steel and technical equipment, Lemvigh-Muller deployed custom AI agents to verify purchasing orders. The solution achieved over 90% touchless processing and 98% matching accuracy. For AI agents to deliver the accurate outcomes at scale that all of these companies need a harmonized data foundation and simplified process layer is essential. That's why the modernization of legacy system landscapes is still very important. To support our customers in this transformation, we launched our new RISE and GROW with SAP offering, which has already been very well received in Q2. As part of this new offering, we are seeing a strong uptake of our AI ERP migration tool chain. Customers are achieving faster time to value and up to 30% lower ERP migration costs. A great example of this in action is Dexco, who used their RISE with SAP migration to eliminate 97% of legacy customizations, driving a 75% faster accounting growth. In parallel, our new offering also includes a firm commitment to our customers to activate and adopt AI assistants and agents within the first year of their journey. We also saw many Wise deal highlights in Q2. They include Shell, Morgan Stanley, Samsonite Group, Vonovia, Eli Lilly, retailer Shoprite Group and Electrolux. We also see great momentum around SAP GROW with companies such as Parloa, Gooroo Credito, Modular Data Centers and Techem Energy Services. Turning to the AI deals. Key wins included PwC, one of the world's largest professional services firms. They selected our AI to transform a complex billing process, cutting a 35-minute task to just 5 minutes while improving accuracy and end user satisfaction. Travel platforms, Booking.com and GOL as well as Oki Electric Industry selected many of our LOB and industry AI offerings in addition to PC. Our Software and Cloud offerings also gained significant momentum with key wins, including companies like Airbus. Successful go-lives included Fonterra, Dohler and Natura Cosmeticos. To deliver our AI vision, we also continue our own transformation. We are moving with full speed to turn SAP into an autonomous enterprise. In engineering and technology, we are transforming our operating model from software development to building AI at scale. We are doubling down on our oncology development with our best domain experts working on knowledge first for every industry and LOB. And we are accelerating innovation, targeting complete agent delivery in under three weeks. By applying tools like low-code, we're also increasing overall developer productivity by up to 30%. In go-to-market, we are also evolving our operating model. The consulting AI factory is a prime example. Over 3,000 SAP consultants are driving AI adoption directly with more than 2,000 customers. Over the next few weeks, we will roll out Joule Work desktop internally to drive additional productivity across all functions. While we are driving significant efficiency gains with AI, we are making investments in our workforce, both by investing in world-class AI talent as well as up and reskilling at full speed. We are rolling out a range of code camps and in-person training offerings across our key locations with the target of reaching more than 90% of our employees over the next few months. In addition to upskilling our people, we are focusing our hiring efforts to bring in the industry's best data scientists and AI experts. Their leading skills will complement our deep business process and domain know-how. Let me summarize. In Q2, we delivered a strong quarter with strong momentum in our business. In the age of agentic AI, SAP is leading the way. The autonomous enterprise is anchored in AI agents that can run end-to-end business processes accurately, compliantly and cost effectively and always with the human in the loop. SAP successfully completed our transformation to the cloud, and we will once again successfully transform in the AI era to deliver accelerated growth and profitability. And with that, I'll hand over to Dominik.

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 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 EUR 23 billion, up 26%, benefiting from the first-time inclusion of Reltio, which only contributed less than 1 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 these 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 quarterly earnings call. Also recall that in Q2 2025, we had roughly 2 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 EUR 9.9 billion, 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 U.S. 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 EUR 2.6 billion. Non-IFRS operating profit was up by 9% to EUR 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 Reltio acquisition, which just closed on May 7. 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're 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 effective tax rate due to tax benefits from tax-exempt income. Free cash flow in Q2 was robust at EUR 3 billion. Finally, IFRS earnings per share increased by 30% to EUR 1.89 and non-IFRS earnings per share increased by 6% to EUR 1.59. 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 top line parameters and free cash flow. We are adjusting our operating profit outlook by EUR 0.1 billion and now expect EUR 11.8 billion to EUR 11.2 billion to reflect the dilutive impact of the recent Dremio and Prior Labs acquisitions. As announced last quarter, we are planning to fully offset the slightly dilutive effect of the Reltio acquisition on our non-IFRS operating income. As you will see in the half year report, Reltio has generated an IFRS loss after tax in closing since closing on May 7 to the tune of EUR 10 million 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 high single-digit million euro amount. However, Dremio and Prior 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 will 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 effects 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 investment coming. 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'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, semantical 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 at risk. We are more convinced than ever that our strategy not to be locked into any generic large language frontier 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 reearn 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.

Alright. We will now take your question. I would like to 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'll begin the question-and-answer session. [Operator Instructions] We'll take our first question from Adam Wood with Morgan Stanley.

It's probably one for you, Dominik. I think investors have got used to the kind of beat and raise cycle from SAP on the operating income line and just maybe a little bit of a surprise to see the weaker second quarter. I appreciate there are good reasons behind that. But maybe also the cut for the full year suggests there was a little bit less room for maneuver than people thought. 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 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 top line growth versus driving the margins higher? And maybe specifically on the AI investments you're making internally in the business, any more detail you can give us on the scale and time frame of payoffs of those?

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 we will also see -- we also see that for the full year '26, we'll be well in that kind of operating leverage formula. And that's 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 widespreading talking where basically we are 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 is 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 in. 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 EUR 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 bigger room to drive aggressive growth and we decided to go for the latter. So that's the backdrop, I think, on that.

And maybe, Adam, just to build on what Dominik said, I mean, as we are also now building the plan for the next 12 months, and I always draw a little bit of comparison to our cloud transformation. I mean, the good piece this time is when you think about our gross margin, I mean there is nothing which now stops us with the ability to switch models to always choose the best model for an ideal price outcome. And we see already that for many agents we are now developing, especially for Joule Work, we don't always need to use the expensive frontier models. So that will always help us to manage the gross margin at a very healthy level. Second, when you think about the productivity overall of the company, when I look at development, I mean, right now, we are very busy to shift the backlog from SaaS features, UI enhancements to AI development. But what you need is what we already have in-house. We have a lot of domain know-how. We have a lot of domain know-how in data and business processes. Now we need to hire a few great data scientists to build the ontology layer. That's what we need. But there's nothing like now in DevOps where we need to build up a massive operations like in the cloud transformation. The good piece is on the go-to-market side, we need our consultants now to drive massive agent extensions and also adoption. And there, we are now reshuffling parts of our consulting to really work with the customers' hands-on in the hybrid landscapes to really drive that. And so we have a lot of the capabilities already in-house. In the second half now, it's all about also reskilling, enabling our workforce to work with AI. But when I also look at the productivity levels, what I just mentioned in development, depending on the area, we see on an average a 30% productivity increase. And I'm convinced, especially when it comes to now adding more agents, adding more data layers to our applications, I actually see that this is not even the end. We can easily reach a higher productivity level, but we need to give ourselves a little bit of time in the second half. But again, the outlook for the next 12 months, I don't see anything now similar to the cloud transformation where we had to invest massively into the buildup of our operations.

We'll move to our next question from Mohammed Moawalla with Goldman Sachs.

My question was more focused on the top line. Given you haven't really seen any deceleration sort of to date in the 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 road map 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? Could you see that effect potentially towards the end of the year? Or is it still kind of more into next year and beyond?

I can get started and Dominik, please add. I mean being seven months now in the year, I mean, of course, the predictability on cloud revenue is becoming better and better. So we are very confident to hit our guidance for the year despite the volatility we still see and we had in -- especially in Q1. Now the pipeline after Sapphire is for half year 2 better than expected, and it's a better coverage than the last year, especially where customers saw the new platform, and we have a lot of customers, hundreds of customers now in the beta testing, the feedback is extraordinary good. The good piece is also that a lot of our customers, obviously, truth to be told, build custom agents. And -- but they all somehow came back and said, hey, we are really missing a good price outcome ratio. We are missing the efficiency gains, the value we expected. And also the IT teams are oftentimes really completely overwhelmed by managing the agents in the hundreds of countries. So also the governance is not easy. And there, the customers really saw now SAP with the new platform, with the announcement we did. That definitely also reconfirmed the belief that SAP will deliver the leading AI platform. So net-net, despite the macro volatility, we see a very positive pipeline for the half year, too. And obviously, now when the customers also see now by building the agents in their hybrid landscapes, they also see continuously the need to modernize the landscapes. I mean that's also a very important pillar now in Q2. You saw the big RISE deals we closed. And all of these customers said, hey, with the current data quality, with the current complexity in my ERP landscapes, AI is going nowhere. So we need to modernize while we need to implement and drive adoption of AI. And both they are getting with SAP. And that actually also now was really reassuring in Q2 that a lot of customers are realizing, hey, we need to do both. We can't stop on ERP migrations while, of course, we want to lever the power of AI.

Quantitatively, I think just comparing the evolution of '26 to what happened in '25, in '25, we had a quite 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 '26. We guided slightly, but you've seen not much attrition even if you adjust for M&A, it'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, different depending on what type of escalation you might see. But I think operationally kind of depolluted CCB growth development is much more stable this year. And also in relation to the current -- sorry, the cloud revenue growth, we now see that while last year, there was a big gap of 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.

Just really on that cloud revenue outlook, please. H1 is 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 to be better in Q2 without that?

Yes. I mean because of the macro now in Q2, definitely, I mean, look at the CCB, super strong. We don't see any major backlog because of macro. I mean, obviously, in the Middle East, a few deals here and there got delayed, but definitely not at the broader scale. And let's hope that it continues like that in the second half. Now obviously, with regard to the revenue in the second half, very important for me to mention is, I mean, all three acquisitions now we did was not to acquire growth. I mean, first of all, all three acquisitions have only a very, very minor impact on CCB and revenue. The latest two actually have no impact on cloud revenue. And so for us, this was very important to just strengthen our data and ontology layer, what I just outlined in my intro. And then last but not least, obviously, now with being seven months in the year, as I just said, of course, the predictability becomes better and better. So we are more and more confident that we can also hit the guidance what we outlined at the beginning of the year despite all of the volatility we see out there in the market.

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

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

Yes. I mean, first, I mean, I said it last time, we went definitely over the last two years through a learning curve in development when it comes to building accurate and reliable AI. Now what we are now doing with the new platform, and again, the test, the accuracy tests we are doing very, very promising. First, the agents, they have access to a lot of mission-critical data in the ERP, the most mission-critical data of a company, which is great. Now when you're doing replenishment, when you're doing financial forecasting, when you're doing workforce planning, obviously, oftentimes, you not only need SAP data, you need also non-SAP data. That's why we acquired Dremio, and that gives us access to this data without copying it, we have real-time access. That is very important. Now with Reltio, obviously, the second layer is then now you have a lot of data. I mean you can have that also with Databricks with Snowflake and others. But now you need high-quality data. We have a very strong master data governance solution, but we were missing a master data governance solution for non-SAP data because we want to build one semantical data layer. So, in development, we are shifting now our developers more and more to really not only expose data products on our new platform, but also joining data products. I mean a customer model for customer churn, for example, includes over 100 data objects across the ERP, plus oftentimes over 400 data objects in the non-SAP world. So, for example, in the Salesforce system, also sometimes even on social media on the web. And we are joining the data products to build the semantical modules. And then Prior Labs comes in, and we want to keep this open source, but we want to monetize it via our agents. I mean, we are pricing our agent based on value. And Prior Labs will give our agents the ability to predict more accurately than any other agent in the industry because we will use the tabular AI modules to really -- where we can source SAP and non-SAP data and they can run predictions without curating data, without managing a data pipeline and they drive predictions up to a level of 99% accuracy where you need it before a bunch of data scientists to get this done. So we can deliver these predictions out of the box. And when you look at predictions, you need it in finance, you need it in sales, you need it in a lot of industry AI agents. And that's why we want to use the Prior Labs tabular AI module to include that into our agentic AI layer and monetize it via the agents. We don't want to monetize the model on its own. We want to monetize it via the value of our agents.

Maybe one -- maybe at the risk of stating obvious, what is also 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 ball game from the large language models where a lot of public data is great. 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 here.

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

Great. 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 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 cost of sale or if they're related to developing products, would they go into R&D? And is that part of this increase?

Good question, Michael. I mean, first of all, in the last 12 months, indeed, we still invested into new job profiles in R&D, data scientists, data engineers, we invested into full stack developers for industry AI. But we will now continuously heavily slow down the hiring for the other profiles because now that the AI productivity is kicking in and indeed, the highest token consumption is in R&D, we see productivity gains of an average of 30%. So there is no need anymore now to hire additional people. You also see that the costs are more up than the headcount, that is actually the token effect, yes, because we charge the tokens, of course, to the functions who are using it. And then second, obviously, we also -- for very few top caliber people, we hired a few top caliber people, which came in with a higher personnel expense per FTE than the average what we are having. And that's what also what Gina was alluding to. But you can expect now in the next 12 months, not a further increase of headcount. It's just about getting a few experts in and then, of course, driving the productivity of R&D up in line with the token consumption. Maybe one addition. I guess what is also very important, Michael, what we are doing, and that also depends -- it also relates to our customers. We are now also managing with our customers, the development backlog from SaaS features to AI development. And obviously, with this change in the backlog, I mean, we don't want to incrementally just add to the development backlog. We want to now change the backlog from feature development into agentic AI development. And obviously, that is also a transition period, not to forget. We cannot just say from one day to another, we stop feature development of our SaaS solution. But this will be a transition, which is, by the way, already on its way. The customers, of course, are heavily now interested in shifting their feature requirements into agent requirements, and that process is also ongoing to really, at the end, also see the wide R&D productivity in the next 12 months.

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

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, Dominik, you've given us the loss run rate for Dremio and Prior Labs. But can you say anything about the revenue and the CCB contribution from them?

Let's start with the last question. It's negligible. So contrary to Reltio, which had less than 1 percentage point incremental 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 mitigants 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 spend, lower spend over the advantages of maintenance and support I described, 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. In 2030, ECC maintenance is basically zero anyhow. So, and the 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 stuff.

Our next question comes from Frederic Boulan with Bank of America.

Frederic 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?

Absolutely the latter one. I mean, give us some time, please. I mean, look, I mean, this is the second transformation we are now in. And as I mentioned before, first, you need to reshuffle the backlog. I mean our backlog was full of feature requests from our customers, and we need to have the time to reshuffle this now to AI -- and we are on a good path there. We already see that the share of agentic AI development in the backlog has substantially increased. And the second part of it, now we invested into getting the right experts into SAP. We invested into the AI tools. But at the same time, we are already seeing the productivity gains. And now in the next 12 months after I have done that, you will see very healthy R&D ratios going forward. So there is no structural shift. And the same is true for the gross margin. Now in Q2, we had some onetime investments into the test environments for our new platform into Joule Work. So we had to do that. And we have a cost increase for the sovereignty environments we are delivering end-to-end. But still for the bulk of our cloud operations delivered by the hyperscalers, we see no cost increase. So, also there, there were some minor onetime impacts now in Q2, but nothing where we believe will continue now in the second half of the year on a 12-month outlook.

And recall, we always gave that kind of formula to say that total expenses will grow at 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.

Yes. And maybe one last point. When our AI business now is really starting to scale, I mean, think about the price levels, what we can also then achieve in the market. I mean, for 50 years, this company has sold system of works, ERP, first on-prem, then cloud. But the customers were used to a certain discount level. Now we always, in the last years, very successfully maintained very healthy price levels. You have seen this in the gross margin development of SAP. We have thought that we're going to achieve such a gross margin, by the way, five years ago. Now with AI, I mean, now we can completely reset the price level. I mean now you're going to a customer and said, "Hey, it's not your end user. It's not your financial accounting team who does the financial close. It's the agents doing this autonomously. -- and here is outcome-based pricing. So there is nothing that you can relate to when you come from the system of record pricing. And that is, in my eyes, a unique chance also for SAP to do a reset and really price outcome value-based. And that is our clear task also to our salespeople to make sure, hey, don't even go to the SaaS world, don't even go to the price levels you have given. That is a new way of selling, and it's a new way of actually pricing our solutions. And for me, this is a unique chance, which, first of all, will hopefully end up in the next 12 months in an acceleration of our AI cloud revenue, but second and also in very healthy gross margins going forward.

We'll take our next question from Toby Ogg with JPMorgan.

Perhaps just on the new EBIT guidance, Dominik, 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 rate. 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?

I did 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 and 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 -- but 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 Turrin with Wells Fargo.

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, Dominik. 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 seeing 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-IFRS operating profit in Q1, which was extremely high, 24% versus Q2 -- and first of all, we have to understand there was a very big strong positive from lower stock-based compensation because the EUR 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 2 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 Reltio in early May. So that is giving you basically the bridge why Q1 had a higher growth rate on non-IFRS shopping 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 are expecting something similar with all the measures I have been highlighting, we are 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 top line 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 have entirely under our control.

Yes. And maybe just to close it out on the bottom line. Just last week also, we reviewed our hiring plans for the next 12 months and for 2027. And seeing the increase of the AI, seeing the increase of the productivity, now not only development with Joule Work, we're going to see it cross company. We have now 4,000 users inside SAP using Joule Work with tremendously good feedback that will now hit the market in Q3 as well. I mean we also adjusted our hiring plans. For this year, we will nowhere near hire the number of people we plan to hire at the beginning of the year. And also for next year, we see that we are balancing AI to consumption and own headcount in the right way so that we see the productivity increase to hit the 80% to 90% revenue cost revenue ratio we committed to you.

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