SAP SE (SAP) Earnings

Management highlights

### Business & Product Strategy - Q2 2026 was highlighted by the successful Sapphire customer conference, which drew record attendance, generated significant new pipeline, and launched SAP's new Autonomous Enterprise vision centered on agentic AI. - SAP launched its new Business AI Platform, built on three core pillars: 1) Build: Joule Studio enables pro and citizen developers to build AI agents with support for multiple leading LLMs; 2) Context & Reason: Combines SAP Business Data Cloud, acquired Dremio's Apache Iceberg technology, master data governance from acquired Relgeo, and industry-specific ontology/knowledge graphs to give agents accurate, integrated business context; 3) Run & Govern: Manages the full agent lifecycle, ensures compliance with global data privacy and sovereignty requirements, and dynamically switches between LLMs to optimize cost and performance. - The new Autonomous Suite, supported by an AI Agent Hub for discovery and governance, and Joule Work (a unified end-user experience for all SAP solutions and AI agents) will launch in Q3 2026. Beta programs for all new offerings were immediately oversubscribed, with very positive initial customer feedback. - SAP launched the new Rise and Grow with SAP offering to support customers modernize legacy landscapes for AI adoption, which includes AI-powered ERP migration tools that reduce migration costs by up to 30% and cut time to value. The new offering requires customers to activate AI adoption within their first year, and saw strong uptake and multiple large deal wins in Q2. ### Operational Progress & Customer Traction - 90% of SAP's 50 largest deals in Q2 include AI and SAP Business Data Cloud as core components. Key deal wins include large Rise with SAP agreements with Shell, Morgan Stanley, Samsonite, Eli Lilly, and Electrolux, and AI deals with PwC, Booking.com, and Booking Holdings. - Multiple early customer use cases have delivered tangible outcomes: an AI agent for Amadeus already autonomously clears 40,000 incorrect payment transactions; Northwood cut BI build time by 75% after transitioning to SAP Business Data Cloud; Lemvigh-Müller achieved 90% touchless order processing and 98% matching accuracy with custom AI agents; Dexco cut accounting close time by 75% after migrating to SAP S/4HANA with the new offering. - SAP's indirect channel continues to outpace direct channel cloud revenue growth, reflecting the success of the company's multi-year go-to-market transformation. ### Internal Transformation - SAP is restructuring its engineering operating model to prioritize AI development at scale, with a focus on building industry-specific ontology layers and cutting agent delivery time to under three weeks. AI tools have already increased developer productivity by up to 30%. - Over 3,000 SAP consultants are participating in the Consulting AI Factory, which drives direct AI adoption with more than 2,000 customers. SAP is also reskilling 90% of its global workforce in AI over the coming months, while selectively hiring top AI talent and data scientists to complement existing domain expertise. - SAP is already using its own Joule Work internally, with 4,000 internal users delivering strong productivity results, ahead of the Q3 2026 customer launch.

Guidance

- Management maintained its full-year 2026 financial guidance for all top-line metrics and free cash flow. - Non-IFRS operating profit guidance was adjusted downward by 0.1 billion euros to a range of 11.2 to 11.8 billion euros, to account for the dilutive impact of the recent Dremio and Pryor Labs acquisitions. Management confirmed that the underlying organic operating profit outlook set at the start of 2026 remains on track, and all M&A dilution will be absorbed within the existing guidance range. - Management continues to expect a slight deceleration in current cloud backlog growth over the second half of 2026, consistent with prior guidance. The wider-than-desired range of outcomes for CCB remains due to ongoing macro uncertainty, but management remains confident in converting the strong existing pipeline. - SAP reaffirmed its long-term target of an 80-90% expense-to-revenue ratio, and expects AI-driven productivity gains will offset near-term M&A and investment J-curve effects over the coming years.

Segment performance

Cloud: Revenue grew 24% year-over-year to 6.3 billion euros, with SaaS and PaaS (S/4HANA cloud) revenue growing 27% and accounting for 88% of total cloud revenue. Current cloud backlog (CCB) grew 26% year-over-year to almost 23 billion euros, an acceleration from Q1 2026, with the acquisition Relgeo contributing less than 1 percentage point to this growth. Software licenses: Revenue decreased 32% year-over-year. Total company: Total revenue grew 11% year-over-year to 9.9 billion euros. Non-IFRS operating profit grew 9% to 2.7 billion euros, while IFRS operating profit grew 8% to 2.6 billion euros. IFRS cloud gross margin was 74.3% and non-IFRS cloud gross margin was 74.6%, down 0.7 percentage points year-over-year. Non-IFRS earnings per share grew 6% to €1.59, and IFRS earnings per share grew 30% to €1.89. Free cash flow in Q2 was robust at 3 billion euros. Regional performance: Cloud revenue growth was particularly strong in APJ and EMEA regions, and solid in the Americas. Brazil, France, Germany, Italy, India, South Korea, Spain, Australia, Singapore and the U.S. all posted outstanding or strong performance.

Risks & headwinds

- The ongoing conflict in the Middle East continues to create macro uncertainty, weigh on customer decision-making, and increase the range of possible outcomes for full-year bookings. Longer duration of the conflict could have a larger negative impact on customer spending, particularly in directly affected industries and global supply chains. - The dilution from recent acquisitions (Dremio, Relgeo, and Pryor Labs) will create a triple-digit million euro headwind to non-IFRS operating profit in the second half of 2026. - The recent EU maintenance ruling formalizes additional flexibility for customers to adjust their on-premise maintenance spending, which could lead to a small number of customers choosing to extend their time on legacy ECC systems rather than migrating to cloud ERP, though SAP expects this impact will be manageable.

Analyst Q&A

• Q: How much room is there for margin expansion over the next 1-2 years, and how have AI investment priorities shifted the balance between top-line growth and margin expansion? /

  A: Management noted that Q2 2026's slower operating profit growth was driven by one-time, quarter-specific factors including the comparison base from 2025, low Q1 2026 stock-based compensation, and higher investment around the new AI platform launch. The company's overall operating leverage framework remains intact, with first-half 2026 results well within the target expense-to-revenue range. Management chose to absorb recent M&A dilution within the existing guidance range to retain room to aggressively invest in AI transformation, rather than upgrade the underlying organic outlook. AI-driven productivity gains are already material: developer productivity is up 30% on average, and SAP can use cheaper, non-frontier LLMs for many use cases to control token costs. SAP already has most of the required capabilities in-house, and is only selectively hiring AI expertise while reshuffling existing resources from legacy feature development to AI work, avoiding the massive infrastructure build-out required during the cloud transformation.

• Q: What is the visibility for full-year cloud revenue, how has the pipeline evolved after Sapphire, and when will AI solutions start driving meaningful monetization? /

  A: Management confirmed that after seven months of 2026, predictability for full-year cloud revenue is strong, and SAP is confident in hitting its full-year guidance. The pipeline post-Sapphire is better than expected with higher coverage than 2025, as customers recognize SAP's new AI platform solves key unmet pain points: poor price-to-outcome ratios, lack of governance for AI agents across global operations, and the need for data foundation modernization to enable reliable AI. Most customers are now pairing ERP migration (to modernize their data landscape) with AI adoption, driving strong momentum for the new Rise and Grow with SAP offering. Operationally, CCB growth has been far more stable in 2026 than in 2025, and CCB growth is now outpacing cloud revenue growth (a reversal of 2025's gap), which is a positive signal for future top-line growth.

• Q: What is the strategic rationale for the Pryor Labs acquisition, and how will SAP monetize its technology? /

  A: Dremio was acquired to enable real-time access to SAP and non-SAP data without copying or moving data, while Relgeo added end-to-end master data governance for non-SAP data to support SAP's unified semantic data layer for AI. Pryor Labs adds best-in-class accurate tabular prediction capabilities that work directly on raw data without manual curation or complex data pipelines, delivering up to 99% prediction accuracy for use cases like financial forecasting, replenishment, and workforce planning that require combining SAP and non-SAP data. Unlike general-purpose LLMs trained on public data, Pryor's technology is built for the tabular enterprise data that makes up the vast majority of SAP's customer data repository. SAP will not monetize Pryor's technology as a standalone product; instead, it will embed the tabular AI capabilities into its AI agents, and monetize the bundled solution via value-based pricing for agents.

• Q: What explains the recent decline in cloud margins, and is the higher R&D spend as a percentage of sales structural? /

  A: The Q2 cloud margin decline and higher R&D spend are driven by one-time, near-term initial investment, not a structural shift. SAP is in a transition period, reshuffling its development backlog from legacy SaaS feature requests to agentic AI development, which requires upfront investment in test environments, sovereign AI infrastructure, and hiring specialized AI talent. One-time investments around the Q3 launch of the new platform also impacted Q2 costs. Management reaffirmed the long-standing framework that total expenses will grow at 90% of revenue growth, and there is no plan to change this. As AI scales, SAP expects to benefit from a pricing reset: moving from legacy system-of-record pricing to outcome-based pricing for AI agents, which will support stronger margin expansion over time.