Prepared remarks
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. 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 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. 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 reallocated 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 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. 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. These semantic models are connected with our ontology layer and knowledge graph, which we offer for every line of business 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 to 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 off 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-built agents. Specifically in the governance layer, we will ensure the agents meet 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 line of business and every industry. 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 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 unstructured 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 purchase orders. The solution achieved over 90% touchless processing and 98% matching accuracy. For AI agents to deliver 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 close. 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 wins 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 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 line-of-business and industry AI offerings in addition to other SAP cloud solutions. Our Software and Cloud offerings also gained significant momentum with key wins, including companies like Airbus. Successful go-lives included Fonterra, Döhler and Natura Cosméticos. 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 knowledge-first development with our best domain experts working on knowledge for every industry and line of business. 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 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 upskilling 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 for 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 11.1 billion to EUR 11.8 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 a 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 investments 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, semantic richness, industry-specific process know-how, cost competitiveness and 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 without putting 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 and cost is the right one. And in times of high geopolitical uncertainties, customers 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, deliver 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.
Questions and answers
Ladies and gentlemen at this time we'll begin the question-and-answer session. 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 it's 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 guide, continue to guide for that for '27. But could you talk a little bit more about 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 the operating profit for Q2. First of all, let me reiterate that it's not really conducive to look at one single quarter; 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. We will also see for the full year 2026 that we'll be within that operating leverage formula, and that's even including the acquisitions we have made. Of course, it 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 but very high-performing resources, and we are also improving efficiency and the bang for the buck by introducing model routing technologies and so forth to optimize value. So that is why I mentioned in my introductory remarks that there is no point in extrapolating just one single quarter where we had a concentration of all the factors I've already mentioned. It was a little bit of a special quarter, so don't read too much into that. It is true, though, that the M&A acquisitions we did will have an impact in excess of EUR 100 million. We had a debate about whether we should upgrade the underlying organic guidance to absorb that on top or keep room to drive aggressive growth, and we decided to go for the latter. That's the backdrop on that.
And maybe, Adam, just to build on what Dominik said: as we build the plan for the next 12 months, I draw a comparison to our cloud transformation. The good piece this time is that when you think about our gross margin, we have the ability to switch models to always choose the best model for an ideal price-to-outcome ratio. We already see that for many agents we are now developing, especially for Joule Work, we don't always need to use the expensive frontier models. That will help us to manage the gross margin at a very healthy level. Second, when you think about productivity overall, in development we are shifting the backlog from SaaS features and UI enhancements to AI development. 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. There's no need to build massive new operations like in the cloud transformation. In go-to-market, we are reshuffling parts of our consulting to work hands-on with customers in hybrid landscapes to drive adoption. We have many capabilities already in-house. In the second half it's about reskilling and enabling our workforce to work with AI. For development, depending on the area, we see on average a 30% productivity increase. I believe we can reach higher productivity levels but we need to give ourselves a little time in the second half. For the next 12 months, I don't see anything 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 is more focused on the top line. Given you haven't really seen any deceleration to date in the CCB, can you talk about the kind of 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 your AI solutions? Could you see that effect potentially towards the end of the year, or is it more into next year and beyond?
I can get started and Dominik will add. Being seven months into the year, predictability on cloud revenue is becoming better. We are very confident to hit our guidance for the year despite the volatility we still see. The pipeline after Sapphire for the second half is better than expected and has better coverage than last year, especially now that customers saw the new platform and many are in beta testing with extraordinary feedback. The good piece is a lot of customers build custom agents but often lack a good price-to-outcome ratio and efficiency gains. IT teams are often overwhelmed by managing agents across many countries and governance is not easy. Customers saw SAP's new platform and that reconfirmed the belief that SAP will deliver a leading AI platform. Net-net, despite macro volatility, we see a very positive pipeline for the second half. When customers build agents in hybrid landscapes, they see the need to modernize landscapes. We saw big RISE deals closed. Many customers realize they need to modernize and implement AI adoption together; both are required and both are delivered by SAP. That was reassuring in Q2 that customers are realizing they need to do both simultaneously.
Quantitatively, comparing 2026 to 2025: in 2025 we had a higher-than-expected deceleration in CCB growth. In 2026 we had a much better start. We guided to a slight deceleration but there's not much attrition even after adjusting for M&A; it's a very stable CCB development. The reason we still say 'slight' is macro uncertainty for the second half, where outcomes can be nuanced depending on escalation. But operationally, depolluted CCB growth development is much more stable this year. Also, in relation to cloud revenue growth, last year cloud revenues were below CCB growth; now that has flipped. That's very positive from our perspective.
We'll move to our next question from Ben Castillo with BNP Paribas.
Just on that cloud revenue outlook: 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, 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. How much of this is just prudence given what's going on in the world, and how much is what you really expect? How can we get comfortable with the deceleration implied in the second half? 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?
Because of the macro in Q2, the CCB was super strong; we don't see major backlog impacts from macro. Of course, in the Middle East a few deals got delayed, but not at a broad scale. Regarding revenue in the second half: the three acquisitions we did were not to acquire growth. All three have only a very minor impact on CCB and revenue; the latest two have no impact on cloud revenue. For us, these acquisitions strengthen our data and ontology layer. Being seven months into the year, predictability becomes better, and we are confident to hit our guidance despite market volatility.
We'll take our next question from Kirk Materne with Evercore ISI.
Christian, on the two most recent acquisitions: could you go over again the thought process behind specifically Prior Labs and bringing on technologists around tabular models? What is the strategy for taking that IP and monetizing it across the customer base? How should we think about the return on that acquisition in particular? I realize Dremio plays into it as well.
We went through a learning curve over the last two years in development when it comes to building accurate and reliable AI. With the new platform, accuracy tests are very promising. Agents have access to mission-critical ERP data. For scenarios like replenishment, financial forecasting or workforce planning, you often need SAP and non-SAP data. That's why we acquired Dremio, which gives us access to this data without copying it, enabling real-time access. With Reltio, we add a master data governance solution for non-SAP data to build one semantical data layer. We are shifting developers to expose data products and join data products. For example, a customer churn model might include over 100 ERP objects and over 400 non-SAP objects; we join data products to build semantic models. Prior Labs enables tabular AI models; we plan to keep the models open source but monetize via our agents. We will price agents based on value. Prior Labs will give our agents the ability to predict more accurately because we can source SAP and non-SAP data and run predictions without curating data or managing complex pipelines. That will drive predictions up to very high accuracy levels, delivering predictions out of the box for finance, sales and many industry AI agents. We will monetize the model through agent value, not sell the model on its own.
At the risk of stating the obvious: Prior Labs is trained on tabular databases. SAP has probably the biggest reservoir of proprietary tabular data. That is a very different ball game from large language models that rely heavily on public data. The combination of that technology with our unique proprietary tabular data positions us extremely well to run these frontier models.
We'll take our next question from Michael Briest with UBS.
A question on the R&D side of things: headcount looks up 3% year-over-year and costs up 14%. In Q1 the numbers were 2% and 2%. I know Gina was talking about some sort of compensation structure change. Can you elaborate on whether there's been targeted or significant increases in rates for R&D staff? Also, where would token costs go? Would those go into cost of sales, or if they're related to developing products, would they go into R&D? Is that part of this increase?
Good question, Michael. Over the last 12 months we invested in new job profiles in R&D: data scientists, data engineers, and full-stack developers for industry AI. We will now heavily slow down hiring for other profiles because AI productivity is kicking in and we see productivity gains averaging 30%. There is no need to hire additional people at scale. The costs being up more than headcount is the token effect: we charge token usage to the functions using it. We also hired a few top-caliber people who came with higher personnel expense per FTE than the average. Expect no further large increases in headcount over the next 12 months; it's about getting a few experts and driving R&D productivity in line with token consumption. Additionally, we are managing the development backlog with our customers, shifting from SaaS features to AI development. We don't stop feature development overnight, but the backlog change is ongoing and will lead to wide R&D productivity gains in the next 12 months.
We'll take our next question from Charlie Brennan with Jefferies.
Can you say something on the recent European ruling on maintenance? There are suggestions that giving customers more maintenance options opens the door to them staying on ECC for longer. Do you think this ruling changes behavior on the ground? And a quick follow-up for Dominik: you've given the loss run rate for Dremio and Prior Labs, but can you say anything about the revenue and CCB contribution from them?
On the last question: it's negligible. Contrary to Reltio, which had less than 1 percentage point incremental CCB, Dremio and Prior Labs are basically negligible on these metrics, which is why we didn't comment on it much. Regarding the EU agreement, it's an agreement between the EU and SAP to commit to certain mitigants in terms of flexibility on maintenance. Maintenance is highly valued by the majority of our customers; they see the value of being current on cyber patches, compliance patches, legal patches and functional improvements. We have granted flexibility in the past and it has been formalized to some degree in this agreement. Some limited additional flexibility has been granted in specific scenarios. For customers prioritizing lower spend over the advantages of maintenance and support, there might be an impact, but we think we can manage it. One should also consider that maintenance phases out as we convert customers onto cloud and RISE. That is unrelated to ECC versus S/4 transition because at some point maintenance will phase out. In 2030 ECC maintenance is basically zero. We also see pickup in returns from third-party maintenance; customers who try it tend to be more nervous over time and come back. Some discussions are about how to handle customers who want to come back and how much back maintenance they need to pay.
Our next question comes from Frederic Boulan with Bank of America.
If I can come back on the cost side: can you comment on the decline we've seen in cloud margins this quarter and more broadly on the R&D side, with a bump in terms of percentage of sales? Is it structural rebalancing from sales and marketing into R&D, or is it more about an initial investment that should normalize over time?
Absolutely the latter. Give us some time. This is the second transformation we are in. First, you need to reshuffle the backlog. Our backlog was full of feature requests and we need time to reshuffle to AI. We're on a good path and already see the share of agentic AI development in the backlog substantially increased. Second, we invested in getting the right experts into SAP and in AI tools. We are already seeing productivity gains. In the next 12 months you will see very healthy R&D ratios. So there is no structural shift. For the gross margin, in Q2 we had some one-time investments into test environments for our new platform and Joule Work and costs for sovereignty environments we are delivering end-to-end. But for the bulk of our cloud operations delivered by hyperscalers, we see no cost increase. These are minor one-time impacts in Q2, but nothing we believe will continue over the next 12 months.
Recall we always gave the formula that total expenses will grow at about 90% of revenue growth. We always said we want some wiggle room within any specific line item. That has served us well. It gives us flexibility to optimize the business while sticking to that envelope. We have no reason to change that. The longer you wait the more it turns out to be a very solid corridor for how we can leverage revenue growth to the bottom line.
One last point: when the AI business starts to scale, think about the price levels we can achieve in the market. For decades SAP sold systems of record; customers were used to certain discount levels. We have maintained healthy price levels. With AI, we can reset the price level. Now you're going to a customer and you can price outcome-based: agents run processes autonomously and you can price based on outcomes. This is a unique chance for SAP to reset pricing to value-based pricing. We have to instruct our salespeople not to revert to traditional SaaS price levels. This is a new way of selling and pricing, and it could lead to acceleration of AI cloud revenue and very healthy gross margins going forward.
We'll take our next question from Toby Ogg with JPMorgan.
On the new EBIT guidance: EBIT slowed to 9% in Q2 for the reasons you laid out, but you had a strong Q1. So overall H1 EBIT growth constant currency was 16%. The guidance midpoint implies 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 what gives you confidence in that for the second half?
I mentioned in my introductory comments that Q2 was a bit abnormal because of several effects. We are optimizing massively on how we spend tokens by very tight controlling. We can now see on a granular basis who is using what tool and what output is being produced, and we will funnel token usage to give us a better bang for the buck. There are measures on cost containment to focus resources where they matter. The H1/H2 split you described is exactly the thinking we have: we will take these measures to reaccelerate operating profit growth.
We'll take our next question from Michael Turrin with Wells Fargo.
CCB growth improved this quarter, which was a surprise given the backdrop, but margins came in a touch weaker. Dominik, can you walk us through what drove the Q2 growth improvement and 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 generally improving and it's all tied to dilution impacts?
Let me go step by step. The deceleration in the growth of non-IFRS operating profit from Q1 to Q2 is due to several factors. In Q1 there was a very strong positive from lower stock-based compensation because of the share price drop in Q1 that did not reoccur in Q2. We mentioned heavy R&D investment, a slower growth in cloud revenue in Q2 due to comparables in the prior year — in Q2 2025 there was about a 2 percentage point increase in cloud revenue growth versus Q1 2025, which makes comparables less favorable this Q2. We also had pointed marketing investment around the launch of the Autonomous Enterprise and a minor negative effect from the first-time inclusion of Reltio in early May. Put together, that explains why Q1 had a higher growth rate on non-IFRS operating profit than Q2. If you take the two quarters together, you see a mid-teens increase in operating profit, and we expect something similar with the measures we are taking in the second half of the year. Importantly, many of these measures are under our control: spend management, token optimization and other cost efficiencies.
Last week we reviewed hiring plans for the next 12 months and for 2027. Seeing the increase in AI and productivity, we will not hire the number of people we planned at the beginning of the year. For next year, we are balancing AI consumption and own headcount so that we see productivity increases hit the 80% to 90% expense-to-revenue ratio we committed to.
Ladies and gentlemen, the conference has now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.