Q2 2024 SAP SE Earnings Call

Okay.

Operator: Ladies and gentlemen, thank you for standing by. Welcome, and thank you for joining the SAP Q2 2024 earnings conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode.

Ladies and gentlemen, thank you for standing by.

Welcome and thank you for joining the.

Q2, 2024 earnings conference call.

Throughout today's recorded presentation, all participants will be in a listen only mode.

The presentation will be followed by a question and answer session.

If you would like to ask a question you May press star followed by one on your Touchtone telephone.

Operator: The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one on your touchtone telephone. I would now like to turn the conference over to Alexandra 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 24 results. You can find the deck accompanying this call, as well as our quarterly statement, on our investor relations website.

I would now like to turn the conference over to Alexandra Steiger Global head of Investor Relations. Please go ahead.

Unknown Attendee: Good evening, everyone and welcome thank you for joining us.

Speaker Change: With me today are CEO, Christian Klein and CFO Dominic as some.

Speaker Change: On this call we will discuss <unk> second quarter 'twenty four results.

Can find the deck supplementing this call small several quarterly statement on our Investor Relations website.

Unknown Attendee: During this call, we will make forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risk and uncertainties that could cause actual results and outcomes to differ materially. Additional information regarding 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 2023.

Speaker Change: During this call we will make forward looking statements.

Speaker Change: Which are predictions projections or other statements about future events.

Speaker Change: These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual result, and outcome 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 2023.

Unknown Attendee: Unless otherwise stated, all numbers on this call are non-IFRS, and growth rates and percentage point changes are non-IFRS, year-on-year at constant currency. 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. Christian, now over to you.

Speaker Change: Unless otherwise stated all numbers on this call are non IRS and growth rates and percentage point changes are non IRS year on year at constant currency.

Speaker Change: The non <unk> financial measures, we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IRS com.

Speaker Change: <unk> now over to you yeah. Thank you Alexandra and welcome to the ACP family as our new Global head of Investor Relations. It's great to have you on board.

Christian Klein: Yeah, thank you, Alexandra, and welcome to the SAP family as our new Global Head of Investor Relations. It's great to have you on board. A warm welcome also to everyone on the line. My main message to you in this call is that we continue to deliver. Despite the volatile environment in the software industry, our growth momentum remains strong in Q2. More and more customers are moving to the cloud, and our portfolio is becoming ever more attractive thanks to SAP's business AI capabilities. In Q2, we also significantly increased our profitability. We continue to execute on our transformation program with great discipline, with free hiring only for the skillsets we need.

Speaker Change: A warm welcome also to everyone on the line mine method My main message to you in this call. We continue to deliver despite the volatile environment in the software industry. Our close momentum remains strong in Q2, more and more customers are moving to the cloud and our portfolio is becoming.

Speaker Change: Ever more attractive thanks to Acp's business AI capabilities in Q2, we also significantly increased our profitability. We continued to execute on our transformation program with great discipline with pretty high wing only for the skill sets we need.

Christian Klein: As you have seen, we are increasing the volume of the program. That's why we are able to announce an upgrade of roughly $200 million on the bottom line of our ambition 2025. SAP's strong momentum was already evident a few weeks ago at Sapphire. Our customers and partners have never before shared so much positive feedback about SAP's innovative best-of-three portfolio and position in the market. Business AI was, of course, at the center. And there is no doubt that everyone perceives SAP as a major AI player, given how well we are positioned to embed AI in the operating systems of our customers.

Speaker Change: As you have seen we are increasing the volume of the program. That's why we are able to announce an upgrade of roughly $200 million on the bottom line of our ambition 2025.

Speaker Change: Strong momentum was already evident a few weeks ago at Sapphire, our customers and partners have never before she had so much positive feedback about sep's innovative best of suite portfolio and position in the market business area, but also of course at the center and there is no.

Speaker Change: No doubt that everyone policies.

Speaker Change: Hai player given how well we are positioned to embed AI into operating systems of our customers.

Christian Klein: This perception manifested itself in our Q2 numbers. In every ERP and LOB deal we closed, our AI strategy played a key role, and AI had a direct impact on our bookings. In the second quarter, almost 20% of all deals included premium AI use cases. And this is just the beginning.

This perfection manifested itself now also in our Q2 numbers.

Speaker Change: L P and L. O B deal we closed our AI strategy played a key role and AI had a direct impact on our bookings in the second quarter almost 20% of all deals included premium AI use cases, and this is just the beginning customers have cleared.

Christian Klein: Customers have clear plans to expand AI consumption on their wise and growth transformation journeys. Let me give you some quick updates on our key items in business AI. JOOL is quickly becoming our new user experience, our one front end. We are making our AI co-pilot an incredible productivity engine for the 300 million people worldwide using our cloud software. Q2 examples include the Indian automotive leader Mahindra and Mahindra and the Belgian manufacturing company Bacard.

Speaker Change: Plans to expand the AI consumption on their wives and quote with transformation journeys.

Speaker Change: Let me give you some quick updates on our key items in business AI tool is quickly, becoming our new user experience. Our one front and we are making our AI copilot and incredible productivity engine for the 300 million people worldwide using our cloud software.

Speaker Change: Q2. Examples include the engine automotive leader, Mahindra and Mahindra and the Bell churn manufacturing company be Pei Cobb.

Christian Klein: Besides the JOOL innovations, we continue to release embedded AI use cases across our portfolio. In Q2, customers selected our CX AI toolkit to boost the productivity of sales teams by up to 10% and e-commerce teams by up to 50%. Our Chen AI features in Concur were very popular, too.

Speaker Change: Besides the tool innovations, we continue to release embedded AI use cases across our portfolio in Q2 customer selected our CX AI toolkit to boost the productivity of sales teams by up to 10% and e-commerce teams by up to 50%.

Speaker Change: Our churn AI feature can conquer were very popular to 150000 users and we week now use. These features processing nearly 1 million hotel bills per month.

Christian Klein: One hundred and fifty thousand users every week now use these features, processing nearly one million hotel bills per month. Overall, we have published over 60 GenAI use cases to date and are on track to deliver more than 100 scenarios by the end of this year. Last but not least, our GenAI Hub on BTP is buzzing with activity. Since Sapphire, we have seen a lot of additional interest from big customers. Over 90 partner use cases are now in co-innovation, including use cases with big systems integrators. One example is Smart Dispute Management developed by Ernst & Young.

Speaker Change: A wall, we have published over 60 churn AI use cases to date and are on track to deliver more than 100 scenarios by the end of this year.

Speaker Change: Last but not least our Chennai IHOP on PTP is bustling with activity since Sapphire, we have seen a lot of additional interest from big customers over 90 partner use cases, allowing co innovation, including use cases with big systems Integrators. One example is smart dispute management.

Speaker Change: By Ernst and young you use case streamlines the returns management process for choosing bad Daniel effort and minimizing errors.

Christian Klein: The use case streamlines the returns management process, reducing manual effort and minimizing errors. Sapphire also helped to significantly boost our WISE pipeline. WISE is not just a lift and shift to the cloud.

Speaker Change: Sapphire also helped to significantly boost our wise pipeline wise is not just a lift and shift to the cloud. It's a holistic offering to increase competitiveness through a deep business transformation to replace the legacy ERP with our module, our cloud ERP and to increase agility.

Christian Klein: It's a holistic offering to increase competitiveness through a deep business transformation, to replace the legacy ERP with our modular cloud ERP, and to increase agility and infuse innovation every quarter. The evolution of WISE will include one dedicated enterprise architect for each customer, and it will rely on an integrated business transformation suite. With Signavio, we cover the process layer.

Speaker Change: T and infuse innovation every quarter.

Speaker Change: The evolution of Wise will include one dedicated enterprise architect for each customer and it will rely on an integrated business transformation suite with scenario, we carve out a process layer with lean IX recover enterprise architecture and wants to walk me acquisition is closed we will also cover the end user.

Christian Klein: With Lenax, we cover enterprise architecture, and once the WalkMe acquisition is closed, we will also cover the end user and guide and enable them to get the best out of our solution. Together with Invitia, we also bring AI capabilities into our wise journey via Joule for consultants and Joule for developers. With the latter, for example, users can generate, understand, and test modern ABAP cloud code and boost productivity in coding by up to 30%.

Speaker Change: And guide and enable them to get the best out of our solutions together and within retail we also bring AI capabilities into our way whites journey wire tool for consultants and Shaw for developers with the ladder. For example, users can generate understand and test modern App cloud code.

Speaker Change: And boost productivity and coding by up to 30%. So our customers benefit from a significant increase in time to value and seb benefits to us and we are successful wife journeys and the opportunity to cross sell and generate revenue across the portfolio.

Christian Klein: So our customers benefit from a significant increase in time to value. And SAP benefits too, as every successful Wise journey is an opportunity to cross sell and generate revenue across the portfolio. Customers will spend less on implementation and custom code, and they will spend more on building innovative applications on BTP. The momentum, so evident at Sapphire and Orlando and Barcelona, carried us throughout the whole quarter. Let's see how far we have come, in concrete numbers.

Customers will spend less on implementation and custom code and they will spend more on building innovative applications on PTP.

Speaker Change: The momentum so evident at Sapphire in Orlando in Barcelona carried out throughout the whole quarter, let's see how far in concrete numbers.

Christian Klein: Current cloud backlog was 28% and came in at 14.8 billion euros. Cloud revenue expanded 25% to 4.2 billion euros. This expansion was driven by the cloud ERP suite, which came in 33% higher year over year and reached 3.4 billion euros. Thanks to the increasing share of cloud revenue, total revenue growth entered double-digit territory for the first time since Q1 2019. We also performed extremely well on the bottom line. Our operating profit jumped 35% to 1.9 billion euros year over year.

Speaker Change: Current cloud backlog was 28% and came in at $14 8 billion euros cloud revenue expanded 25% to $4 2 billion euros. This expansion was driven by the cloud ERP suite, which came in 33% higher year over year and reached three.

Speaker Change: One 4 billion euros.

Speaker Change: Thanks to the increasing shelf of cloud revenue total revenue closed end up double digit territory for the first time since Q1 2019.

Speaker Change: We also performed extremely well on the bottom line, our operating profit jumped 35% to one two grew one 9 billion year over year and the operating margin was four point.

Christian Klein: And the operating margin was 4.4 percentage points higher. The diligent and speedy implementation of our transformation program to date was a key factor here. Let me now share some of the customer stories behind this great number. ExxonMobil, a leader in the energy sector, has entered a long-term partnership with us to leverage WISE.

Speaker Change: Four percentage points higher the diligent and speedy implementation of our transformation program to date was a key factor here.

Speaker Change: Let me now share some of the customer stories behind this great number Exxonmobil a leader in the energy sector has entered a long term partnership with us to lever, which wise the deal marks the next chapter in a multi phase transformation journey with tangible business value in each phase.

Christian Klein: The deal marks the next chapter in a multi-phase transformation journey with tangible business value in each phase. The overarching goal is to enhance ExxonMobil's operational efficiency and agility. As for Quo, about 60% of customers in Q2 were net new. Among the Quo deals were the international beverage company Campari Group and Fotera, a Silicon Valley firm working on cement production with zero emissions.

Speaker Change: The overarching goal is to enhance Exxon mobil's operational efficiency and agility.

Speaker Change: As for quote about 60% of customers in Q2 were net new among to quo deals where the international beverage company Campari group and for Terra a silicon valley firm working on cement production with zero emissions.

Christian Klein: Quo with SAP is driven by our fantastic reseller partners. Today, we have won almost 1,500 customers. Many of them started a journey with S4 Public Cloud Finance and are now expanding the SAP ERP footprint. Let's now look at an example of business AI and the BTP. Lenovo is using business AI to identify supply chain and finance risks, reduce repetitive tasks, and optimize supply chain management.

Speaker Change: <unk> with S&P is touring driven by our fantastic reseller partners today, we have one almost 1500 customers. Many of them started their journey with S. Four public cloud finance and are now expanding that S&P ERP footprint.

Speaker Change: Let's now look at an example for business AI and the PTP Lenovo is using business AI to identify supply chain and finance with reduce repetitive tasks and optimize supply chain management and with the PDP Lenovo will integrate S&P S&P solution.

Christian Klein: And with the BTP, Lenovo will integrate SAP and non-SAP solutions. As for our SAP Business Transformation Suite, BASF, the world's largest chemical company, is adopting SAP Signario. The strategic move underlines BASF's commitment to complete its massive ERP transformation quickly and confidently. Beyond these customer wins, we put our partnership with the global HR services leader, ADP, on a new footing just yesterday. Together, we will shift ADP's entire SAP on-premise payroll offering to a cloud-based solution. As always, you can find a summary of major customer wins in the quarterly statement. They all speak one language.

Speaker Change: As for our S&P business transformation suite.

Speaker Change: As the world's largest chemical company is adopting Sap's thing of you the strategic move underlines payouts apps commitment to complete its massive ERP transformation quickly and confidently.

Speaker Change: Beyond these customer wins, we put our partnership with the global HR services leader ADP on the new footing, just yesterday together, we will shift adp's and tier S&P on premise payroll offering to a cloud based solution.

Speaker Change: As always you can find a summary of major customer wins in the quarterly statement.

Speaker Change: They all speak one language SCP is the operating system of the global economy.

Christian Klein: SAP is the operating system of the global economy. Looking at the larger picture, our QoS formula is clearly working. We have the right ingredients in place in our cloud ERP suite. Just to reiterate, WISE brings best-of-suite ERP to our installed base, enabling large enterprises to transform deeply. QoS is the perfect choice for greenfield projects, for net new customers, and subsidiaries of large companies, always in the public cloud.

Speaker Change: Looking at the larger picture our clothes Formula is clearly working.

Speaker Change: We have to wide ingredients in place in our cloud ERP suite just to reiterate.

Speaker Change: <unk> brings best of suite ERP to our installed base, enabling larger enterprises to transform deeply quote is the perfect choice for Greenfield projects for net new customers and subsidiaries of large companies always in the public cloud the PTP brings everything together as the.

Christian Klein: The BGP brings everything together as the leading platform for B2B transformation. Once we have landed with WISE, QoW, and the BTP, we go into the expand mode with our line of business solutions. Finally, business AI is infused everywhere and lifts the whole portfolio to a new level. All of these are SEP-sized opportunities.

Speaker Change: A leading platform for B to B transformation.

Once we have landed with wise Clos and the PTP, we go into the expand mode with our line of business solutions.

Speaker Change: Finally business AI is infused everywhere and lifts the whole portfolio to a new level.

Speaker Change: All of these are S&P sized opportunities they will allow us to massively increase market share.

Christian Klein: They will allow us to massively increase market share. Side-by-side with our growth story, the transformation we launched earlier this year is gaining traction. In the second half of 2024, we are strongly focusing on simplifying our go-to-market even further. The goal is to strengthen our channel business and to promote our land and expand our activities. At the same time, we are making major progress with the automation of internal processes through AI, using the GenAI Hub on the BTP. The expected savings are in the triple-digit million range.

Speaker Change: Side by side with our close to <unk>. The transformation, we launched earlier this year is gaining traction and.

Speaker Change: In the second half of 2024, we are strongly focusing on simplifying our go to market. Even further the goal is to strengthen our channel business and to promote our land and expand motions at the same time, we are making major progress with the automation of internal processes through AI using the Chennai IHOP on.

Speaker Change: The PDP the expected savings are in the triple digit million range.

Dominik Asam: Given the increased scope of our transformation program, we are confidently raising the operating profit ambition for 2025. In summary, our growth momentum in the cloud remains strong in Q2, and we continue to execute our transformation program with great discipline. Business AI is embedded in all our solutions and will boost success across the portfolio, with more powerful use cases on their way. Given our progress and our exciting product pipeline, we are confident that we will be able to achieve accelerating top-line growth through 2027. And with that, over to you, Dominik. Thank you, Christian, and thank you all for joining us this evening.

Speaker Change: Given the increased scope of our transformation program, we are confidently raising the operating profit ambition for 2025.

Speaker Change: In summary, our growth momentum in the cloud remain strong in Q2, and we continue to execute our transformation program with great discipline business AI is embedded in all our solutions and will boost success across the portfolio with more powerful use cases on their way.

Speaker Change: Given our progress and our exciting product pipeline. We are confident that we will be able to achieve accelerating topline growth through 2027.

Speaker Change: With that over to you Dominik.

Dominik: Thank you Christian.

Dominik: Thank you all for joining us this evening.

Dominik Asam: As you can see from the financial results Christian just shared, our strong performance continued into the second quarter. In the first half of the year, we have delivered impressive results, further reinforcing our confidence in the trajectory of the business. We continue to enjoy robust demand for our solutions in Q2.

Dominik: As you can see from the financial results Christian just shared our strong performance continued into the second quarter.

Dominik: In the first half of the year, we have delivered impressive results further reinforcing our confidence in the trajectory of the business.

Dominik: We continue to enjoy robust demand for our solutions in Q2.

Dominik Asam: This demand was fueled by a healthy pipeline, cloud conversions of existing customers, and substantial upselling and cross-selling opportunities. Our business AI strategy is making progress, playing a key role in these opportunities and customer interactions, and is helping to drive pipeline growth. SAP solutions are an integral part of our global customers' core operations, and we're seeing a strong, unabated shift from on-premises to cloud.

Christian Klein: Driven by both net new customers and our broad installed base.

This demand was fueled by a healthy pipeline.

Christian Klein: Cloud conversions of existing customers.

Christian Klein: The potential upselling and cross selling opportunities.

Christian Klein: Our business AI strategy is making progress playing a key role in these opportunities and customer interactions and is helping to drive pipeline growth.

Christian Klein: S&P solutions, an integral part of our.

Christian Klein: Our global customers core operations and you are seeing a strong unabated shift.

Christian Klein: To cloud.

Dominik Asam: Our building blocks are firmly in place, as evidenced by the growth of our current cloud backlog and cloud revenue, as well as the strong expansion of our non-IFRS operating profit. The company-wide transformation program we initiated in January continues to progress well, further enhancing our operational efficiencies and laying the groundwork for sustained long-term growth. All of this has paved the way for a positive trend towards larger cloud transactions with deals greater than 5 million euros in volume, yet again contributing more than half of our cloud order entry.

Christian Klein: Our building blocks are firmly in place as evidenced by the growth of our current cloud backlog and cloud revenue as well as the strong expansion of our non <unk> operating profit.

The company wide transformation program, we initiated in January continues to progress well further enhancing our operational efficiencies and laying the groundwork for sustained long term growth.

Christian Klein: All of this has paved the way for Poland. This trend towards larger cloud transactions with deals greater than $5 million Euro and the volume hit again contributing more than half of our cloud order entry.

Dominik Asam: Now let me go into further details regarding our financial highlights. We are on track to achieve our fiscal year 2024 top-line outlook and fiscal year 2025 ambition, as demonstrated by our current cloud backlog, reaching 14.8 billion euros, growing by 28% year over year. Cloud revenue grew 25%, mainly driven by the continued strength of Cloud ERP Suite. Specifically, Cloudera Peaceweed grew by 33% in Q2, its 10th consecutive quarter of growth in the 30

Christian Klein: Now let me go into further details regarding our financial highlights.

Christian Klein: We are on track to achieve our fiscal year 2024 top line outlook and fiscal year 2025 ambition as demonstrated by current cloud backlog, reaching $14 8 billion euros growing by 28% year over year.

Christian Klein: Cloud revenue grew 25%, mainly driven by the continued strength of cloud ERP suite, specifically Claudia peaceful grew by 33% in Q2, its 10th consecutive quarter of growth in the thirties.

Dominik Asam: This ongoing momentum reinforces our belief that Cloud EFP plays a pivotal role in our customers' digital transformation journey. Software license revenue decreased by 27% compared to the same period last year, demonstrating the continued shift towards cloud solutions.

Christian Klein: This ongoing momentum reinforces our believe that Claudia P plays a pivotal role in our customers' digital transformation journey.

Christian Klein: Software licenses revenue decreased by 27% compared to the same period last year, demonstrating the continued shift towards cloud solutions.

Dominik Asam: Finally, total revenue was 8.3 billion euros in Q2, up 10% year over year, demonstrating the resilience of our overall business in the face of evolving market dynamics. Now, let's take a brief look at our regional performance. In the second quarter, SAP's cloud revenue performance was particularly strong in APJ and EMEA and robust in the Americas region. Brazil, Canada, Germany, India, Japan, and South Korea all had outstanding performances in cloud revenue growth, while China, the U.S., and Saudi Arabia were particularly strong.

Finally, total revenue was $8 3 billion in Q2 up 10% year over year, demonstrating the resilience of our overall business in the face of evolving market dynamics.

Christian Klein: Now, let's take a brief look at our regional performance.

Andrew: In the second quarter Sap's cloud revenue performance was particularly strong in a P J and EMEA Andrew.

Speaker Change: And robust in the Americas region.

Speaker Change: Brazil, Canada, Germany, India, Japan, and South Korea, all had outstanding performances in the cloud revenue growth, while China, the U S and Saudi Arabia, with particularly strong.

Dominik Asam: Now moving on to the bottom line. Our cloud cross profit grew by 29% driven by cloud revenue growth and further efficiency gains. This resulted in the cloud growth margin improving from the year-ago period, expanding by two percentage points to 73.3%. IFRS operating profit in the second quarter was down 11% to €1.22.

Speaker Change: Now moving onto the bottom line.

Our cloud gross profit grew by 29% driven by cloud revenue growth and further efficiency gains.

Speaker Change: This resulted in cloud gross margin improving from the year ago period.

Speaker Change: Spending by two percentage points to 73, 3%.

<unk> operating profit in the second quarter was down 11% to one year of 'twenty two.

Dominik Asam: Sorry, to one euro, 1.22 billion euros. This decrease was driven by approximately 600 million in incremental restructuring expenses associated with the transformation program initiated at the beginning of this year. These additional expenses primarily resulted from the positive reception of the voluntary leave programs. While restructuring expenses recorded in the first half of 2024 total 2.9 billion euros, the overall expenses associated with the program are currently expected to be approximately 3 billion euros.

Sorry to one euro 1.22 billion.

Speaker Change: This increase was driven by approximately for this decrease was approximately was driven by approximately $600 million in incremental restructuring expenses associated with the transformation program initiated at the beginning of this year.

Speaker Change: These additional expenses primarily resulted from the positive reception of the voluntary leave programs.

While the restructuring expenses recorded in the first half of 2024 totaled $2 9 billion.

Speaker Change: The overall expenses associated with the program are currently expected to be approximately 3 billion euros.

Dominik Asam: Finally, non-IFRS operating profit grew by 35% to 1.94 billion euros, supported by strong revenue growth, continued operational efficiency, as well as disciplined execution of the 2024 transformation program. Non-IFRS earnings per basic share in the quarter increased 59% to €1.10. The IFRS effective tax rate for Q2 was 33.8%, and the non-IFRS tax rate was 33.6%.

Speaker Change: Finally, non <unk> operating profit grew by 35% to $1 94 billion euros supported by strong revenue growth continued operational efficiency as well as disciplined execution of the 2024 transformation program.

Non <unk> earnings per share basic in the quarter increased 59% to one euro 10 cents.

Speaker Change: Okay.

Speaker Change: The effective tax rate for Q2 was 33, 8% in the non life with fixed rate was 33, 6%.

Dominik Asam: Now on to our cash generation. Free cash flow in the second quarter increased by 114% to 1.3 billion euros. The improvement was primarily attributable to increased non-IFRS profitability and enhanced working capital management. Additionally, there was a timing benefit that contributed to the strong performance. While we paid out approximately 500 million euros for restructuring this quarter, we expect the majority of payouts associated with the restructuring to occur in the second half of the year due to the phasing of the underlying program. Now let's move on to the outlook. As you've seen in today's release, we keep our 2024 financial outlook unchanged. We had a very good first half of 2024.

Speaker Change: Now onto our cash generation.

Speaker Change: Free cash flow in the second quarter increased by 114% to $1 3 billion euros improvement.

Speaker Change: The improvement was primarily attributable to increased non <unk> profitability and enhanced working capital management. Additionally, there was a timing benefit that contributed to the strong performance, while we paid out approximately 500 million for restructuring this quarter.

Speaker Change: We expect the majority of payouts associated with the restructuring to occur in the second half of the year due to the phasing of the underlying programs.

Speaker Change: Now, let's move onto the outlook as you've seen in today's release, we keep our 2024 financial outlook unchanged, but.

Dominik Asam: Q4 is typically our largest quarter, and our Q4 performance will be crucial in achieving our full year targets and our 2025 ambitions. So we continue to be prudent and vigilant in terms of observing the evolving market dynamics, executing our strategic initiatives, and driving operational efficiency. Where we intend to make some adjustments, though, is on our transformation program and its impact on our financial performance. We now estimate that between 9,000 and 10,000 positions will be affected, with the corresponding impact on restructuring provisions, cash out, and run rate settings after completion of the program. As compared to what we had indicated in the first quarter, we added about 800 million in restructuring expenses and cash out.

Speaker Change: While we had a very good first half of 2024 Q4 is typically our largest quarter.

Our Q4 performance will be crucial in achieving our full year targets in our 2025 ambitions.

Speaker Change: So we continue to be prudent and vigilant in terms of observing the evolving market dynamics executing on our strategic initiatives and driving operational efficiencies.

Speaker Change: Where we intend to make some adjustments, though is on our transformation program and its impact on our financial performance. We now estimate that between 9000 10000 positions will be affected.

Speaker Change: With a corresponding impact on restructuring provisions cashed.

Speaker Change: Cashel and run rate savings after completion of the program.

Speaker Change: As compared to what we had indicated in the first quarter, we added about $800 million of restructuring expenses and careful.

Dominik Asam: Now expecting a total of 3 billion euros. This is expected to yield additional run rate savings of approximately 200 million euros. A mid-triple-digit million amount of incremental cash out is expected to spill over into the year 2025, more than offsetting the cash contribution from the additional savings. It's important to note that the increase in the number of affected positions does not imply a complete elimination of these roles but allows us to refine our setup in terms of skills and location.

Speaker Change: Now expecting a total of 3 billion euros.

Speaker Change: This is expected to yield additional run rate savings of approximately 200 million euros.

Speaker Change: A mid triple digit million amount of incremental cash out is expected to spill over into the year 2025 more than offsetting the cash contribution from the additional savings.

Speaker Change: It's important to note that the increase in the number of effective positions does not imply a complete elimination of these roles, but allows us to have final setup in terms of skills and locations.

Dominik Asam: By now, we've also made some progress on working capital measures and do see a path to nevertheless deliver the 8 billion euros of free cash flow we've previously announced in our 2025 ambition. For the detailed outlook and ambition 2025, please refer to our quality statement published earlier today on our investor relations website. So to sum it up, we have demonstrated strong momentum in the first half of the year, underpinned by unabated growth momentum for our solutions and great progress on strategic transformation initiatives.

Speaker Change: But now we've also made some progress on working capital measures.

Speaker Change: Do you see a path to nevertheless delivered the 8 billion of free cash flow, we've previously announced in our 2025 ambition.

Speaker Change: For the detailed outlook and ambition 2025, please refer to our quarterly statement published earlier today on our Investor Relations website.

Speaker Change: So to sum it up we haven't demonstrated strong momentum in the first half of the year underpinned, but unabated growth momentum for our solutions and great progress on strategic transformation initiatives.

Dominik Asam: This puts us in a strong starting position for the second half of 2024, thereby solidifying the bridge into our ambition 2025. Thank you, and we will now be happy to take your questions. Thank you very much, Dominik.

Speaker Change: This puts us into a strong starting position for the second half of 2024, thereby solidifying the bridge into our ambition 2025.

Speaker Change: You.

Speaker Change: And we will now be happy to take your questions.

Operator: And with that, we will now take your questions. I would like to kindly remind you to only ask one question when prompted. Operator, please open the line.

Speaker Change: Thank you very much Dominic and with that we will now take your questions I would like to kindly remind you to only ask one question when prompted operator. Please open the line.

Speaker Change: Yeah.

Operator: Ladies and gentlemen, at this time, we will begin the question and answer session. Anyone who wishes to ask a question may press star followed by one on their touchtone telephone. If you are using speaker equipment today, please lift the handset before making your selection.

Speaker Change: Ladies and gentlemen at this time, we will begin the question and answer session.

Speaker Change: Anyone who wishes to ask a question you May press star followed by one on their Touchtone telephone.

Speaker Change: If you are using speaker equipment today, please lift the handset before making your selection.

Operator: Anyone who has a question may press a star followed by one at this time. One moment for the first question, please. We'll take our first question from Mark Moerdler with Sanford Steeper and Steaming Company, LLC. Please go ahead.

Speaker Change: Anyone who has a question May press star followed by one at this time.

Speaker Change: One moment for the first question please.

Speaker Change: We will take our first question from Mark <unk> with Sanford C Bernstein <unk> company LLC.

Speaker Change: Please go ahead.

Mark L. Moerdler: Thank you very much, Alexandra. Welcome on board. Dominik, why do you think that you are not showing any signs of macro impact that others are calling out? Could this be a timing issue in terms of the flow through the pipeline?

Speaker Change: Thank you very much Alexandra will come on board.

Speaker Change: Dominic why do you think that you are not showing any signs of macro impact that others are calling out could this be a timing issue.

Speaker Change: In terms of the flow through through the pipeline and could it be a worry for next year or is it just simply the way you're executing or the business model any color would be appreciated.

Speaker Change: Yes, I mean I can go first and then <unk> also share your feedback I mean, mark Indeed, I mean, we have seen a fantastic performance in our fee of one and now endo in half year, two we see.

Christian Klein: And could it be a worry for next year? Or is it just simply the way you're executing or the business model? Any color would be appreciated.

Dominik Asam: Yeah, I mean, I can go first and then, please, Dominik, also share your feedback. Mark, indeed, I mean, we have seen a fantastic performance in half year one and now entering half year two, we see a very healthy pipeline, and pipeline means sales pipeline, but also I see a very strong innovation pipeline. Now, when you sit together with our product owners and see what we are delivering for GenAI use cases and the customers who are sharing their feedback early on, it's pretty exciting.

Speaker Change: A very healthy pipeline and pipeline sales pipeline, but also I see a very strong innovation pipeline now and when you sit together with our product owners and see what we are delivering on China AI use cases, and the customers who are sharing their feedback early on it's pretty exciting I mean, they see a ton of value and.

Dominik Asam: I mean, they see a ton of value, and you have seen the first impact of business AI on our numbers already in Q2. And then second, what I also see clearly working now is the best of suite. I mean, four years ago, we were rightfully criticized for having a bunch of best of breed solutions. But when you want high-quality AI, when you want to steer your business end to end, when you want to connect your commerce and your omnichannel with the supply chain, and when you want to connect your procurement with the warehousing, I mean, that all comes together on BTP. And I would say we are also just at the beginning. Please don't forget.

We have seen now in Q2 already the first impact of business AI on our numbers and then second what I also see clearly working now is the best of suite I mean four years back we were rightfully criticized for having a bunch of best of breed solutions, but when you want to have a high quality.

Speaker Change: <unk> when you want to steer your business end to end when you go on and connect their commerce and your Omnichannel with supply chain and when you want to connect your procurement with the warehousing I mean that all comes together on BTT and I would say we also are just at the beginning I mean, please don't forget when.

Christian Klein: When customers are using their ECC solution, so their on-premise monolithic ERP solution today, that doesn't mean that they use all the modules, you know, in the past. And now, with our land and expense strategy, we have a movement that customers are really, you know, landing on, and then they realize that they have to connect the different parts of their company and the different parts of the supply chain. And that's why we also stay, you know, confident for the second half of the year. Dominik?

Speaker Change: When customers are using the ECC solutions, so down premise monolithic ERP solution today.

Speaker Change: That doesn't mean that they use all the modules in the path and now with our land and expand strategy. We have really I mean, the emotion. The customers are really in our lending and then they get that they have to connect to different parts of the company in the different parts of the supply chain and that's why we also stay confident for the <unk>.

Dominik Asam: Maybe just to add some numbers, I mean, you have heard us talk and comment about this cloud ERP suite growth now at 33% in Q2, about 30% for 10 quarters in a row. What I want to call out is that the dilutive effect of both the extension suite and infrastructure as a service is going down, just from a mix point of view. A year ago, these two items in the cloud revenue mix represented about 23%. Now, that's only 18%.

Dominic: Half of the year, Dominic and maybe maybe just add some numbers I mean, you have heard us talk and comment about this cloud ERP suite close now.

Dominic: At 33% in Q2 about 30% for 10 quarters in a row when I want to call out is that the dilutive effect of both the extension suite and infrastructure as a service is going down just from a mix point of view a year ago. These two items in the cloud revenue mix represented about 23%.

Dominik Asam: And if you then look at the kind of delta and growth between the two, you will see that the dilutive effect last year, oh, sorry, for this year with the mix we had last year. If you do a year-on-year comparison, you have to start with the mix last year and then look at the different growth rates. So the dilutive effect on the past year's mix is 8 percentage points. Now, if you just apply the same delta in growth between Claudia P. suite and just assume that the rest would continue to be at a similar growth rate on the other now 18%, this dilutive effect would go down to 6%.

Dominic: Now that's only 18% and if you then look at the kind of Delta in growth between the two.

Dominic: You will see that the dilutive effect last year Oh.

Dominic: Sorry for this year with the mix, we had last year. If you do a year on year comparison, you have to start with the mix last year, and then look at the different growth rates. So the dilutive effect on past years mixes eight percentage points now if you just apply to the same delta in growth between Claudia piece of it and just assume that the risk would continue to be at a similar growth rate on the other now.

Dominic: 18%.

Dominic: This dilutive effect would go down to 6%. So what you see here is that the mix is really playing all favor and combined with all the sectors Christian as I mentioned in a very unique feature that we can convert holders installed base, which.

Operator: So, what you see here is that the mix is really playing our favor and, combined with all the factors Christian has mentioned and that very unique feature, we can convert all this installed base, which is really scrambling now for productivity and sees AI and the offering we have as a big driver for that. The next question comes from Adam Wood with Morgan Stanley. Please go ahead.

Dominic: Which is really scrambling now for productivity and seize AI and the offering we have is a big driver for that.

Dominic: The next question comes from the line of Adam Wood with Morgan Stanley. Please go ahead.

Adam Wood: And Christian, hi Dominik, thanks for the question and congratulations on the new quarter. And then just on the business AI side, Christian, you know, you've clearly flagged this as a big driver. Is this a general desire of the customer base to be able to adopt the technologies that you deliver, given they're going to have to migrate over a few years, they want to start that now, and that's accelerating the export move? Or are you seeing a couple of key use cases that are really responding with the base? And if so, could you talk us through what they are, please?

Adam Wood: And Christian Thanks for.

Adam Wood: Congratulations on another good quarter just on the <unk>.

Speaker Change: All right.

Christian Klein: I'm Christian you clearly flagged this as a big driver is just the general desire.

Speaker Change: The base should be.

Speaker Change: Able to adopt the technologies that you deliver.

Michel: The migration of a few years they want to start that now and that's accelerating next school mood or are you seeing a couple of key use cases that are really resonating with base Michel could you took us through.

Speaker Change: Thank you.

Christian Klein: Thank you. I mean, Adam, what we clearly see is responding very well. I mean, we have now the first use cases live for JOOL in the HR, in the finance, in the supply chain space. Everything that we do in order management is already enabled via JOOL.

Michel: Yeah, I mean, Adam what but we clearly see resonating very well I mean, we have now the first use cases live for tooling gauge I and to finance in the supply chain space everything what we do and order management has already enabled wire tool and the end users will benefit a lot from efficiency gains.

Christian Klein: And, you know, the end users will benefit a lot from efficiency gains. They do a lot of content search, no matter if it's HR content or actually travel or supply chain-related content. That is also, of course, a massive efficiency booster.

Speaker Change: Do a lot of content search no matter, if it's HR content or actually travel or supply chain related content that is also of course, a massive efficiency booster and then last but not least also what we see everything around document management I mentioned the Coker for example, where 150000 end users.

Christian Klein: And then last but not least, also what we see, everything, you know, around document management. I mentioned the Kokoro example, where 150,000 end users already benefit today from embedded AI. But really, by itemizing, you know, the hotel bills and processing them real time automatically in the system. And then second, everything you do around supplier, contract management, employee contract, customer contract. I mean, we by ourselves, I mentioned it.

Already benefit today from embedded AI, but really by Itemizing the hotel builds and posing it will time automatically in the system and then second.

Speaker Change: Everything what you do around supplier contract management employee contract customer contract I mean, we buy a house I mean, I mentioned it we see already now massive efficiency gains so that because of all the contract customer contracts are coming in and there are many which is positive.

Christian Klein: We are already seeing massive efficiency gains because all the customer contracts are coming in, and there are many, which is positive. I mean, they are getting screened by our system.

Speaker Change: They are getting screened why our system and so we need way less people on all these compliance checks that <unk> checks. The document checks closing the books will become more easier and these are the two big use cases, so document content analytics and of course in our just by taking over a certain path.

Christian Klein: So we need way fewer people on, you know, all these compliance checks, the web work checks, the document checks. Closing the books will become easier. And these are the typical use cases. So document, content, analytics, and, of course, you know, just by taking over certain tasks which are pretty manual today. These are the Gen AI use cases that are resonance with the world at the moment. Operator, our next question comes from the line of Michael Briest with UBS Limited. Thanks, and good evening.

Speaker Change: Which are pretty manual today. These are the China, AI use cases, which resonate with a well let them.

Speaker Change: Okay.

Speaker Change: Yes.

Our next question comes from the line of Michael <unk> with USB Limited UBS Limited sorry. Please go ahead Sir.

Speaker Change: Yeah.

Operator: Just in terms of the restructuring, I think that SAFIRE, Dominic, you suggested there was higher take-up in the US. But just looking at the increased expense, it's a billion euros for 1,000 to 2,000 employees. That feels more like a European program.

Speaker Change: Good evening.

Speaker Change: Just in terms of the restructuring I think you suggested it was client take up in the U S.

Speaker Change: But just looking at the increased expense 1 billion euros, along 2000 employees that feels more like a European program can you give some sense of where the people who will be leaving from.

Michael Briest: Can you give some sense of where the people will be leaving from? And looking at the second half, you've banked a very strong profit performance and only just beginning to see people leave now. You know, is there upside risk, you'd say, to 2024 profits as well as 2025, given the expanded program? I mean the phasing as you mentioned has been very positive in Q2. Q2 is a little bit of a kind of abnormal quarter because we've seen a lot of reduction and to your right especially in those countries where we had either fast voluntary measures like in the U.S. but also non-voluntary measures frankly so these people have been on average leaving early May so we have been seeing big release for May-June two months out of three in the quarter while the hiring has been more gradual and now you'll see the hiring actually accelerate because these kind of initiatives to hire are a little bit more back and loaded they take some time.

Speaker Change: And looking into the second half, you've banked and very strong profit performance.

Speaker Change: Only just beginning to see people leave now.

Speaker Change: Yeah.

Is there upside with Keith made to 2024 profit as well as 25, given the expanded program.

Speaker Change: I mean, the phasing as we mentioned.

Speaker Change: Has been very positively in Q2, Q2 is a little bit of a kind of abnormal quarter because we've seen.

Speaker Change: Lot of reduction in to your right, especially in those countries, where we had either fast voluntary measures like in the U S. But also non voluntary measures shrinking. So these people have been on average leaving early may. So we have been seeing big relief for May June two months out of three in the quarter, while the hiring has been more gradual.

Speaker Change: And now Youll see the hiring actually accelerate because these kind of initiatives to higher or a little bit more back end loaded as it takes some time and you might have noticed that while we increase the reductions by one to 2000 positions being affected and we are still keeping the targets for the full year constant so that means there is a significant.

Dominik Asam: You might have noticed that while we increased the reductions by 1,000 to 2,000 positions being affected, we are still keeping the target for the full year constant, so that means there is a significant ramp-up in head count. So from that perspective, what we do see is that we have been, of course, seeing more departures from the relatively expensive German voluntary early retirement programs, but these are also expensive resources, and we also use the opportunity to think about skill mix and location mix to improve profitability. And based on that, we have now increased the ambition for 2025 by these 200 million you've seen in the press release. So that's the story.

Speaker Change: Ramp up in headcount.

Speaker Change: So from that perspective, while we do see it is that we have been of course seeing more departures on the relatively expensive German voluntary early retirement program, but these are also expensive resources and they also use the opportunity to think about it.

Speaker Change: Skilled mix location mix to improve the profitability and based on that we have increased now.

Speaker Change: The ambition for 2025 by these 200 million you've seen the press release.

Speaker Change: So that's that's the Sony we feel pretty confident about.

Dominik Asam: We feel pretty confident about our profitability this year. Yes, the amount remaining to do doesn't look overwhelming, so maybe it would be prudent. I just want to call out one thing.

Speaker Change: Our profitability. This year is to remain to do doesn't look overwhelming so may be prudent.

Speaker Change: I want to call out one thing we had reasonably still okay ish decline in software, 27% decline in Q2, which was 24% by the way last year. So the comps have been kind of similar now we had extremely favorable software mix last year.

Dominik Asam: We had a reasonably still occasional decline in software, a 27% decline in Q2, which was 24%, by the way, last year. So the cons have been kind of similar. We had an extremely favorable software mix last year, with a 10% decline, and we anticipate that to decelerate. So now, of course, it's always hard to break software revenue, as you know, but I think we don't want to kind of bet our guidance on very frothy development there. So that certainly gives us some protection for this year.

Speaker Change: With a 10% decline.

Speaker Change: And we anticipate that to decelerate. So now of course, it's always hard to predict software revenue as you know.

Speaker Change: But I think we don't want to kind of better or guidance on very 40 of development. There. So that gives us certainly some protection for this year.

Dominik Asam: And it also puts us in a strong position to negotiate with customers on software to be commercially robust and to really push our strategic direction into the cloud. And maybe, Michael, on the TRAFO program overall, I mean, we are very diligent also on the future workforce planning of SAP. We really want to use this moment now to invest in where we are targeting future growth areas. We are bringing on board data scientists.

Speaker Change: And it also puts us in a strong position to negotiated with customers and software to be commercially robust and to really push our strategic direction into the cloud.

Speaker Change: And maybe Michael on the tougher program overall I mean, we are very diligent on the future workforce planning of our SAP <unk> really want to use this moment now to invest and where we targeted in future growth areas and we are bringing onboard data scientists we are bringing on toward all of this.

Christian Klein: We're bringing on board all of these architects to further enrich the wise journey for our customers. While, of course, also, like Dominic mentioned, we are optimizing our location mix. I mean, for many years, yeah, we worked on that.

Speaker Change: Architects out to further enrich the wife's journey for our customers. While of course also I'd like Dominique mentioned, we are optimizing our location mix I mean for many years now we've worked on that and now we have a unique chance to really optimize also the location and to scale makes sense. So far I mean, the program is sweetly.

Speaker Change: Our success and we are very happy with the execution so far.

Speaker Change: Yeah.

Okay.

Christian Klein: And now we have a unique chance, you know, to really optimize the location and the skill mix. And so far, I mean, the program is really a success. And we are very happy with the execution so far. We'll move to our next question for Mohammed Moawalla with Goldman Sachs. Please go ahead. Good evening. Thank you. Hi Christian.

Speaker Change: Well move to our next question from Mohamed Law with Goldman Sachs. Please go ahead.

Operator: Hey, Dominik. My question, Dominik, is you alluded to some working capital savings that you started to see as well. I'm curious about, as you look at the kind of free cash flow development, you've obviously been able to retrade the $8 billion despite the additional restructuring charges, but also some of the improved EBIT improvements. I'm just curious to understand, you know, where we are.

Good evening. Thank you Hi, Christian here Dominic My question Dominic as you alluded to some working capital savings that you started to see as well I'm curious on as you look at the kind of free cash flow development, you, obviously being able to reiterate the 8 billion. Despite the additional <unk>.

Speaker Change: Restructuring charges, but also some of the improved EBIT improvements I'm just curious to understand where we are we still kind of early in that and the longevity around more of the specific initiatives and then sort of linked to that also as you look to kind of reinvest in you're talking about from a re skilling, how do you look at sort of savings dropping.

Mohammed Moawalla: Are we still kind of early on that and the longevity around more of the specific initiatives? And, sort of linked to that also, as you look to kind of reinvest and you're talking about kind of reskilling, how do you look at sort of savings dropping to the bottom line versus the quantum of kind of reinvestment back into the business over the next two years? Thank you.

Speaker Change: The bottom line versus the quantum of kind of reinvestment back into the business over the next two years. Thank you.

Dominik Asam: I think with regard to free cash flow, yes, you have seen that the payouts for restructuring have increased. So to $3 billion, approximately, everything is kind of added up for this wave that we've done. And nevertheless, we keep both our Outlook for 2024 and the ambition for 2025. The restructuring also has some benefits, so that doesn't explain everything.

Speaker Change: I think Kevin with regards to free cash flow, yes, you have seen that.

Speaker Change: The payout for restructuring have increased.

Speaker Change: So two 3 billion approximately.

Speaker Change: Anything kind of ended up for this wave and we have done and nevertheless, we keep both our.

Speaker Change: Outlook.

Speaker Change: Outlook for 2024, and the completion for 25.

Speaker Change: The restructuring has also some benefits so that doesn't explain everything you're right. There were also some working capital improvements and so we made good progress maybe a little faster than what we thought and now I would caution that beyond 25, the cash conversion.

Dominik Asam: You're right, there were also some working capital improvements. So we made good progress, maybe a little faster than we thought. And now I would caution that beyond 2025, the cash conversion is hard to improve rapidly because we are really benefiting a lot from 2024-2025 from a change in stock-based compensation. That gives us a big boost in cash conversion. And then we are actually converting at a very, very good level. And from there on, we actually need some gradual further improvement in working capital to compensate for the fact that this kind of tailwind from stock-based compensation as a percent of revenues will actually be diluted a little bit over time due to the strong growth. And we don't think that stock-based compensation will grow at the same rate as the top line. So that's the story.

Speaker Change: It's hard to improve rapidly because we have we really benefiting a lot from 'twenty four 'twenty five from.

Speaker Change: From a change on stock based compensation that gives us a big boost.

Speaker Change: On cash conversion and MBIA converting at a very very good level.

Speaker Change: And from there on we actually need some gradual further improvement of working capital.

Speaker Change: Compensate affect this.

Speaker Change: This kind of tailwind from stock based compensation as a percent of revenues will actually be diluted a little bit over time due to the strong growth and we don't think that stock based compensation will grow at the same rate as the top line. So that's the story.

Speaker Change: On the cash flow.

Speaker Change: The second question was key.

Speaker Change: Skilling and how it's going with the cost I mean, you recall that we said.

Speaker Change: Heavy lifting in terms of catch up to get to 25, the run rate savings, we believe we'll be there.

Dominik Asam: [inaudible] pretty much 1st January 2025. There's some later restructuring, but it's really moderate. We've accrued 2.9 billion. So this means these offers are out to people. We've made commitments. There is a certain error range around it because we still don't have the firm commitment from all people. There are expectation values in there, but not a huge variance we expect.

Speaker Change: Pretty much first of January 2020, so there's some.

Speaker Change: Later restructuring, but it's really moderate if accrued $2 9 billion. So this means these offers out people. We've made commitments to is a certain era a range around it because we still don't have a firm commitment from all people there are expectations of others in there, but it's not a huge variance we expect.

Dominik Asam: So line share will be done. For instance, in the largest country, the way it will work is that a lot of people will still be on payroll through the end of this year, so the 31st of December. And on that basis, we will have a set headcount. But on the 1st of January, there will be a lot of people leaving. So that gives us a big lift in 2025. And you see a line share of run rate savings in 2025 from the program.

So lion's share will be done.

Speaker Change: For instance, in the largest country the way it would work is that a lot of people will.

Speaker Change: Still be on payroll to end of this year for 30 <unk> of December.

Speaker Change: On that basis, we will have a slight head count, but first of January there will be a lot of people exiting.

Speaker Change: So that gives us a big lift in 2025, so youll see a lion's share of run rate savings of 25 from the program and then it will be a more gradual grinding leveraging economies of scale.

Dominik Asam: And then it will be a more gradual grind, leveraging economies of scale, coming to a ratio of cost increase, total expenses increase, to revenue increase, which is more in line with our competitors at about 80 to 90%. That's the way we think about it. But don't expect that we can repeat that every year.

Speaker Change: Coming to <unk>.

Speaker Change: The ratio of cost increased total expenses increased two revenue increase which is more in line with our competitive at about 80% to 90%. That's the way to think about it. So don't expect that we can repeat that.

Operator: It's really then a more gradual and slower increase. But come 2025, we think we've already made big strides in terms of closing the gap to where we see competition in terms of free cash flow margin and also growth. Thank you. For our next question, we'll move to the line of Jackson Ader with Key Bank Capital Markets. Please go ahead.

Speaker Change: Every year, it's really been more gradual slower increase but.

Speaker Change: Come 2025, King before we made big strides in terms of closing the gap to where do you see competition.

Speaker Change: In terms of free cash flow margin and also grow shrinking.

Our next question will move to the line of Jackson Ader with Keybanc capital markets. Please go ahead.

Jackson Ader: All right, thanks for taking our questions, guys. Mine is really about cloud migration activity. Christian, you mentioned, I think, earlier in the year, that some customers were actually looking to pull forward their move to the cloud ERP suite, maybe thinking about going in 2025, trying to go in 2024. And I'm, I'm just curious whether that type of pull-forward demand is still holding up here as some other software companies have seen the macro environment cool.

Alright, thanks for taking our questions guys.

Speaker Change: Minus released about a cloud migration active Christian you mentioned I think earlier in the year.

Speaker Change: Some customers were actually looking to pull forward their move to the cloud ERP suite.

Speaker Change: <unk>.

Speaker Change: You may be thinking about going into 2025 trying to grow in 2024.

Speaker Change: And I'm I'm, just curious whether that type of pull forward demand is holding up here as kind of some other software companies in the macro environment cool.

Jackson Ader: Yeah, I mean, I already mentioned the very positive pipeline momentum we have, and that actually includes both. I mean, we see the installed base moving to the cloud. Sapphire helped. I have to say, in the 20 Sapphires I've experienced at SAP, there was never better feedback from our customers about the product, the product itself, the best of the suite, how everything comes together, and then also how SAP has now more skin in the game when it comes to the transformation. I mean, we are not sitting anymore on the sidelines.

Speaker Change: Yeah, I mean I already mentioned.

Speaker Change: The.

Speaker Change: We have a positive pipeline momentum, we have and that actually includes both I mean, we see the installed base moving to the cloud.

Speaker Change: <unk> I have to say in my <unk>.

Speaker Change: 20th Sapphire experienced SVP and was never better feedback from our customers about the product.

Speaker Change: The product itself the best of suite. However, seeing comes together and then also how S&P has now more skin in the game when it comes to the transformation I mean, we are not sitting anymore on the sideline reactively, helping and that resonates extremely well and then when you see the channel and I guess, there is even much more room to grow going forward.

Christian Klein: We are actively helping, and that resonates extremely well. And then when you see the channel, and I guess there's even much more room to grow going forward, SAP has a very solid channel business. This is also a highly profitable sales channel, but we now see way more opportunities to further expand that channel. There are a lot of resellers knocking on our door because they see this modular best of suite. This is also a highly profitable business for them.

Speaker Change: <unk> has a very solid channel business. This is also a highly profitable sales channel, but we see I don't know way more opportunities to further expand their channel. There are a lot of retail is knocking on our door because they see this module a best of suite. This is also a highly profitable business for them and so we are also expanding.

Speaker Change: <unk> our partner territories.

Christian Klein: And so we are also expanding our partner territories. We will do that also throughout 2025. So both from an installed base move and further to also accelerate our net new customer growth. We remain very optimistic about the year and for 2025. The next question is from the line of Toby Ogg with J.P. Morgan. Please go ahead. Yeah, hi.

Speaker Change: We will do that also swap out 2025, so both from an installed base move and as a further to also accelerate our net new customer growth.

Speaker Change: We remain very optimistic for the yen for 2025.

Speaker Change: Yeah.

Speaker Change: Okay.

Speaker Change: Yes.

Speaker Change: The next question is from the line of Tobey Ark with Jpmorgan. Please go ahead.

Operator: Hi, thanks. Thanks for the question. I'm just coming back on the backlog growth of 28% in the quarter. Clearly, as we've talked about, there's obviously a difficult macro environment in software. And I know there are other factors like migration credits in the mix for you as well. Did you see any sort of incremental headwinds from the macro in the quarter? And did you see any tailwinds from the migration credits?

Toby Ogg: Yeah, Hi, thanks, Thanks for the question.

Toby Ogg: Just coming back on the just coming back on the backlog growth of 28% in the quarter pillars. We've talked about that is obviously a difficult macro environment in salt flat and I know there are other factors like migration credits in the mix, but you as well. So did you see any sort of incremental headwinds from the macro in the quarter.

Speaker Change: Did you see any tailwind from the migration credits and then just just on the backlog for the second half.

Toby Ogg: And then just on the backlog for the second half, what are the drivers of your confidence around the backlog growth into the second half and particularly into Q4, where the comp starts to get a little bit more difficult? Thank you. I mean, every quarter, you win a few upside deals, and you have a few slippages, but all of these slippages were not macro-related. Actually, we had a good start in July.

Speaker Change: What are the drivers of your confidence around the backlog growth into the second half and.

Speaker Change: Early into Q4 weather comps start to get a little bit more difficult. Thank you.

I mean every quarter I mean, you.

Speaker Change: You win a few upside deals and you have a few slippage, but all of the slippage is.

Speaker Change: We're not macro related actually we had a good start in July we saw that some of the deals.

Christian Klein: We saw that, you know, some of the deals that slipped were already signed now, so we didn't see, you know, any kind of macroeconomic impact. Now, you're mentioning a good point, and the cloud backlog is super strong, but this also gives us another opportunity. In the cloud backlog, it's a wham of wise deals, first year, 10, 20% consumption, then we go up to 40%, and then we do the rest in year three, year four. And what we typically also do is upsell. I mean, these customers are ideally growing their business.

Speaker Change: Well slipped while were defined now so we didn't see any kind of macroeconomic impacts now you're mentioning a good point.

Speaker Change: <unk> backlog is super strong, but this is also then gives us another opportunity in the cloud backlog sits a web of wireless deals.

Speaker Change: First year 10, 20% consumption than we're going up to 40% and then we do the Westin, Yes, we are for and what we typically also do is to upsell. These customers ideally are growing that business. So we of course will and.

On Baltimore users, but what we also do what I mentioned and that's now really coming together under Thomas our ethics leadership with the wife methodology. So take Exxon, we start with Successfactors and <unk>.

Christian Klein: So we, of course, you know, we'll onboard more users. But what we also do, what I mentioned, and that's now really coming together under Thomas Sauer's leadership with the WISE methodology. So take Exxon.

Christian Klein: We start with success factors, you know, hundreds of thousands of users. We modernize payroll, we modernize the commission system, we go finance, then we go downstream, and then we work our way through the supply chain. And what you see in such a transformation journey, if we explain it right, and if we lead them, and if we guide them together with our SI partners, you can see that suddenly we are talking about transportation, we are talking about warehousing, we are talking about demand and supply capabilities, which were all used in the on-premise days. And so we see this land and expand. And that's for the LE, for the large enterprise space. Now, when we talk about the SME,

Speaker Change: Hundreds of thousands of users, we modernized payroll and modernize the commission system. They go Finance then we go downstream and then we are working our way through the supply chain and what you see in such a transformation journey. If we explain it widen if we lead them. If we guide them together with our Si partners, who can.

See that suddenly we are talking about transportation and talking about warehousing, we are talking about demand and supply capabilities, which not we're all used India on premise days and so we see this land and expand.

Speaker Change: That's for the LTE for the large enterprise space and now when we talk about the SME.

Christian Klein: We are putting a lot of emphasis now on our channel, because when you look at our sales ratio, the channel is key. We need more channel business in the mid-market. And there we are now just enabling our customers to not only sell finance and sell HR; they say, let's do procurement. And then, because of the great integration capabilities, we have a seeding, a commercial model where we seed in a few units, you know, for entering the procurement space, for entering the travel space.

Speaker Change: We are putting a lot of emphasis now in this transformation also on our channel because when you look at our sales ratio to channel is key we need more channel business in the mid market and then we are now just enabling our customers to not only sell finance sell HR.

Speaker Change: Let's do procurement and then because of the create integration capabilities, we have for seeding a commercial model, where we see it in a few units for entering the procurement space for entering the travel space and then we can actually provision the system on the fly so mid market customers can be life. After they landed with finance that can be life on travel.

Christian Klein: And then we can actually provision the system on the fly. So mid-market customers can be live after they have landed with finance; they can be live on travel in two weeks from now in procurement, you know, and then we're going to move our way to expand our footprint. And that's the same module.

Speaker Change: In two weeks from now in procurement.

Speaker Change: And then we got to move our way to expand our footprint and that's the same multiple and this is where we are massively also now expanding our partner channel and that works.

Christian Klein: And this is where we are now massively expanding our partner channel. And that works. And this is also, you know, somehow not yet reflected in the cloud backlog because, clearly, of course, there is way more business to gain during such a transformation journey. And maybe one thing about the cloud backlog. I mean, we always talk about renewal rates and the health of the business. I mean, you can rely on this statement that once, you know, a customer makes this move to the cloud, and you're running the most mission-critical systems of your company in the cloud, of course, this business is sticky.

Speaker Change: And this is also you know somehow not yet reflected in the cloud backlog.

Speaker Change: Clearly of course, there is way more business towards to gain touring such a transformation journey.

Speaker Change: Yeah.

Speaker Change: And maybe one thing on the cloud backlog I mean, we always talk about renewal rates and the health of the business I mean, you cannot rely on.

Speaker Change: The statement that once an old customer made this move to the cloud and you're wanting to most mission critical systems.

Speaker Change: Company in the cloud of course this business is sticky it was sticky in the on premise days and you'll see it in the support revenue and it will be also sticky in on the cloud side of the house. Despite of course, it's in our very module Aztec.

Speaker Change: Okay.

Speaker Change: Yeah.

Christian Klein: It was sticky in the on-premise days, and you see it in the support revenue, and it will be also sticky on the cloud side of the house, despite, of course, it's now a very modular stack. We'll move to our next question from Charles Brennan with Jeffreys. Please go ahead. Yeah, hi, thanks for taking my question. Can I ask you two questions, if I can?

Speaker Change: Well move to our next question from Charles Brennan with Jefferies. Please go ahead.

Speaker Change: Yeah.

Operator: Firstly, just a question on the enterprise architects that you're going to be allocating to your customers. There's some concern in the channel that you don't have enough of them. Can you give us some numbers around how many you have today and how many you think you're going to need, and how are you going to close that gap?

Charles Brennan: Yes, hi, Thanks for taking my question can I ask two if I can.

Speaker Change: Dan.

Firstly, just a question on the enterprise architects that youre going to be allocating to your customers. There are some concern in the channel.

You don't have enough of them can you give us some numbers around how many you've got today.

Speaker Change: How many you think youre going to need and how are you going to close that gap.

Charles Brennan: And then secondly, just as a financial follow-up, Dominik, you've given us some moving parts on the cash flow. If I think about your comments that it's going to be hard to improve cash conversion going into 2026, is there any reason that we don't take the $8 billion starting number from 2025 and add to that? Operating Profit, After Tax, add some assumptions for this mid-triple digit millions of restructuring spend in 2025 to get us to our 26th number. Thank you.

Speaker Change: Then secondly, just as a financial follow up Dominic you've given us some moving parts on the cash flow.

Speaker Change: If I think about your comments that it is.

Dominic: Going to be hard to improve cash conversion.

Dominic: In 2026.

Speaker Change: Is there any reason that we don't take the billion starting number from 25.

<unk>.

Speaker Change: <unk> profit after tax.

Speaker Change: Some assumption for this mid triple digit millions restructuring spend 25, that's what got us throughout 'twenty six number frankly.

Christian Klein: I can start with the question about enterprise architects. I mean, important to mention is that we don't start from zero. Now, when you look into our max attention offering, we have architects. Now we need to reskill them.

Speaker Change: I can't stop.

The question on the enterprise architecture and important to mention is we don't start from civil and when you're looking to.

Speaker Change: Our Max attention offering we had the architects now we need to reskill them, so with PTP, our enterprise architecture, the data layer with data via the modular stack and we have to do re skilling and up scaling but that works and we already have also enterprise architecture and our services team. So we are now moving them to <unk>.

Christian Klein: So with BGP, our enterprise architect at the data layer, and DataSphere, the modular stack, we have to do reskilling and upskilling, but that works. And we already have enterprise architects in our services team, so we are now moving them to our wise customers. Second, we have great academies for sales, for services, and for product engineering. And there, especially in the product academy and the services academy, we are now doubling down, especially on these enterprise architect skills.

Speaker Change: Your wife's customers second we have where we have great Academy is for sale for services for product engineering, and there, especially on the product Academy and the services Academy. We are now doubling down, especially on this enterprise architect skills. So there will be further you know lead sources now coming out of our academies plus we are doing extra.

Christian Klein: So there will be further resources coming out of our academies now. Plus, we are doing external hiring. And there, the truffle program, of course, helps a lot that we see higher attrition in places where we don't need the skills anymore in the future. And now we can lift and shift and further invest in the skills we need. And one of those is, of course, the enterprise architect. And what is so important about the enterprise architect? Of course, Accenture, Deloitte, EY, PWC; they are delivering.

Speaker Change: Hiring and data tougher program of course helps a lot and that we see higher attrition in places, where we don't need to skills anymore in the future and now we can lift and shift them and I'll.

Speaker Change: Further invest into the skills, what we need in one of those is of course, the enterprise architecture and what is so important with the enterprise architect of cost Accenture Deloitte E Y Pwc, they're delivering and theyre doing the migration itself, but it's also important for our Seattle with regard to land and expand that we are guiding the customer on how to build the same.

Christian Klein: And they are doing the migration themselves. But it's so, so important for us with regard to land and expand that we are guiding the customer on how to build a semantic layer with SAP, on how to connect the dots between business processes, and how to infuse workflow automation with SAP on the BTP, how to use the integration suite. And the customers are so excited. I mean, the feedback has been so, so good.

Medical layout with S&P on how to connect the dots on the business processes and how to introduce in a workflow automation with S&P on the PTP how to use the integration suite and the customers are.

Speaker Change #100: So excited I mean, the feedback was so so good and that also helps to make our whites off a more attractive because others are hearing that and say hey, SCP is really doing a business transformation, Dan not only doing a technical my equation and so that was a great move to hiring machine and so on.

Christian Klein: And that also helps to make our wise offer more attractive because others are hearing that and saying, hey, SAP is really doing a business transformation. They are not only doing a technical migration. And so that was a great move. The high wing machine is on, and we will further increase the coverage of our wise customer base in the next month. Dominik?

Speaker Change #101: And we will further increase in order to cover which you know of our wide customer base into next month's.

Dominik Asam: Yeah, on the bridge from 25 into 26, your logic is certainly quite quite straightforward. It makes sense. But don't forget, if you take 8.5 billion, so I add back basically the mid triple digit million restructuring cash out. If you add kind of depolluted for that, 8.5 billion free cash flow in 2025, and you divide that by 10.2, you come up with 83% cash conversion. And of course, your math detects that the increment of operating profit has to be taxed, and just the taxation gives you a lower cash conversion on that increment.

Dominic: Dominic on the bridge.

Dominic: From 2576 geologic is certainly quite quite straightforward makes sense.

Speaker Change #102: But don't forget if you take eight 5 billion basically the mid triple digit million restructuring cash out.

Speaker Change #103: If you add the kind of people loaded for that $8 5 billion free cash flow in 'twenty, five and you divided by $10 two will come actually to 83% cash conversion.

And of course, your math would take the increment of operating profit has to be tax affected and just it takes affecting gives you a lower cash conversion of that increment.

Dominik Asam: And that's the challenge that you basically need to find other sources for that, not to see the cash conversion being diluted, so to speak. So that's the math. So your approach is actually a prudent approach, I would say. Our next question comes from Frederic Boulan with Bank of America. Please go ahead. Hi, Christian, Dominik, and Alexandra.

And that's the challenge that you basically need to find other sources for that not to see the cash conversion being actually diluted so to speak. So that's the math. So you approach is actually a prudent approach I would say.

Speaker Change #103: Okay.

Speaker Change #103: Yeah.

Our next question comes from Frederic de <unk> with Bank of America. Please go ahead.

Speaker Change #104: Hi, good evening.

Speaker Change #105: Christian in Dominican and then if I can come back on on the call.

Operator: If I can come back on the commentary in the release, about Q4 being decisive for Clara Ravnigolos in 2025, can you clarify a little bit what you mean by that? There are specific caveats around that quarter.

Speaker Change #106: Inventory in the release.

Speaker Change #107: About Q4, besides the two.

Speaker Change #106: Two.

Speaker Change #108: What kind of revenue growth in 2025.

Speaker Change #109: Clarify a little bit what you mean by that.

Speaker Change #110: Specific caveats around around the quarter.

Speaker Change #111: You will face a tougher comp in Q4, but the rest of the country very bullish there would be great to hear a bit more what you're trying to say here and that's a message around beside you.

Frederic Boulan: You will face a tougher competition in Q4, but the rest of the commentary is very bullish. It would be great to hear a bit more about what you're trying to say here in that message around decisive. Thank you.

Christian Klein: Yeah, look, I mean, Q4 is always our biggest quarter with regard to order entries, so also for cloud bookings. And of course, our pipeline looks good. I mean, when I compare the pipeline coverage this year compared to last year and last year, we had a very strong half-year too. It looks really good.

Speaker Change #112: Yeah look I mean Q4 is always our biggest quarter with regard to order entry. So also for cloud bookings and.

And of course, our pipeline looks good I mean, when I compare the pipeline averaged this year compared to last year and last year, we had a very strong half year two it looks really good and but now we have to execute.

Christian Klein: But now we have to execute, and we want to see this execution now coming. And we executed really well in half-year two, in half-year one. And now let's do it again in half-year two. But this is, you know, of course, still up.

Speaker Change #112: And we want to see this execution now coming and we executed really well in half year, two and half year, one and now let's do it again in half year two but this is an off cost still.

Dominik Asam: And so we have to do it. That is a comment related problem. More importantly, from our perspective, all of you tell us how difficult the market is out there, and we just want to say that we will really watch the market. But for the time being, there's nothing that should come in our way, we think. But if you don't want to skin the bear before we really kill it, it's clear that mathematically, there is an impact on what we do in Q4, 4.25 and the full year.

Speaker Change #112: And so we have to do it.

Speaker Change #113: His comment related more acknowledging from all perspective that all of you will tell us how difficult the market is out there.

When I acknowledge that people really watch the market but.

Speaker Change #113: For the time being and there's nothing that should come in our way we think but.

Speaker Change #114: If you don't want a skin repair before we really killed it it's clear that mathematically there is an impact of what we do in Q4 425, and the full year actually it's still a full year not much but also about 24.

Dominik Asam: Actually, it's still the full year, not much, but also 4.24. But it's just to recognize that we don't want to come across as being completely carried away and thinking nothing can happen to us. We just want to be very cautious and prudent about what the environment is doing.

Speaker Change #115: But it's just to recognize that you don't want to come across as being completely carried away and taking nothing can happen to us.

Speaker Change #115: Just want to be very cautious and prudent about what the environment is doing but so far.

Dominik Asam: But so far, we don't see these bumps in the road that so many others are talking about. We'll move to our next question from Sven Mert with Barclays Capital. Please go ahead.

Speaker Change #116: <unk> beat all see these bumps in the road that so many others are talking about yes.

Speaker Change #117: Well move to our next question from Stan <unk> with Barclays Capital. Please go ahead.

Operator: Great, good evening. Thank you for taking my question. I was wondering if you could comment on the growth of transaction-related cloud revenues in the quarter and the outlook for H2. And I'm particularly interested if there's anything in terms of communications we should consider for the second half. Thank you.

Stan: Good evening. Thank you for taking my question.

Stan: I'm wondering if you can comment on the growth of transaction related cloud revenues in the quarter and the outlook for a true and I'm, particularly interested if there's anything in terms of the comments, we should consider for the second half.

Stan: Yeah.

Sven Mert: Unknown Attendee Yeah, the comps between half year one and half year two, I mean, what we are seeing in the forecast is actually minus 2% growth in Q2 on transactional cloud revenue. So far, we see a similar trend in half year two, slightly better. What we see in the west of the concurred business is actually really good on the subscription side. I mentioned the Gen AI use cases, so the concurred business is doing well on the transaction side. It also depends a little bit on the economy. I mean, what do our customers do? How much do they travel?

Speaker Change #119: In terms of comps and the comps between offer one and half year. Two I mean, what we are seeing in the forecast is actually U S. A we have a minus 2% close in Q2 on transactional cloud revenue. So far we see actually a similar trend in the half year to slightly better.

Speaker Change #119: What we see in the west of the cone core business, that's actually really good on the subscription side I mentioned the churn AI use cases, so conquest business subscription is doing well on the transaction. It also depends a little bit on the economy I mean, what do our customers how much do they how much do they travel how much will they rely on contingent workers fulfill class so.

Christian Klein: How much will they rely on contingent workers for field class? So far, what you can expect is more or less a similar, slightly better performance in half year two. That's what the current forecast says. And the good news is, by the way, that the transactional revenues – sorry, let me just add that, please.

What you can expect is more or less a similar slightly better performance in half yet to that's what the equivalent forecast that.

Speaker Change #119: Yeah.

Speaker Change #120: And the good news is by the way.

Speaker Change #122: With England, sorry, let me just add up please.

Dominik Asam: The good news is that transactional revenues as a percent of revenues given what Christian just described are continuously diluted. So the impact in the bridge from the current cloud backlog to cloud revenues is getting smaller and smaller. You see that already in the first half of this year compared to last year's impact, and now moving to the second half, it's getting smaller, and then, of course, in 2025, it's getting even smaller because if you're not really kicking back into significant growth there, it becomes a smaller and smaller part.

Speaker Change #122: The transactional revenues.

Speaker Change #122: As a percent of revenue given the book Christian just described continuously diluted.

Speaker Change #122: So the impact in.

Speaker Change #121: In the bridge from current cloud backlog to cloud revenues is getting smaller and smaller we see that already in the first half of this year compared to last year's impact and now moving into second half of it is getting smaller then of course in 'twenty five is getting even smaller because if you are not really kicking back into a significant growth there it becomes a smaller and smaller part and I also want to <unk>.

Dominik Asam: And I also want to highlight, at the risk of stating the obvious, these kind of slightly lower numbers in transactional revenues are within cloud year P3 growth. So the 33% we print there is already absorbing that. Our next question comes from Balaji Tripathi with City Investment Research. Your line is now open.

Speaker Change #125: At the risk of stating the obvious these kind of slightly down numbers in transaction revenues the hub within cloud ERP suite growth. So the 33% of the print there is already absorbing about.

Biology, Chapati: Our next question comes from Biology, Chapati with Citi Investment Research. Your line is now open.

Speaker Change #121: Yes.

Hi.

Operator: Hi, thank you. I have two questions from my side. Firstly, on the ongoing transformation program, which would conclude in the first half of 2025. Would all the benefits of the program already be visible in the year, or would it be fair to assume that some of the benefits will also move to 2026, and 2026 will be the first year where the full benefits of the program will be visible? And a second question on the AI side.

Biology, Chapati: Two question from my side, Firstly on the ongoing transformation program.

Speaker Change #127: Given the program would conclude and cross shopping.

Speaker Change #121: Yes.

Speaker Change #121: With all the benefit from Xiaomi already in the year.

Speaker Change #124: Would it be fair to assume that.

Speaker Change #124: Some of the benefits.

Speaker Change #124: And if you can kind of exited the year.

Speaker Change #124: At the program.

Operator: We have seen some of your other global software peers indicate that there has been some delay in the plan decision-making as there have been green options with regard to AI development. Are you seeing any such signs from the customer side as well? Thank you.

Alright.

Speaker Change #126: A second question on <unk>.

Speaker Change #124: Alright.

Speaker Change #124: Some of the other.

Speaker Change #128: Oh software peers.

Speaker Change #124: Yeah.

Uh huh.

Speaker Change #124: There has been some.

Speaker Change #124: Billing client decision, making as they have been beam option.

Speaker Change #124: Regards to AWS.

Speaker Change #129: Are you seeing any subprime question I think that's right.

Speaker Change #129: Thank you.

Balaji Tripathi: The connection was not very good, but let me try to answer your question. I mean, first, I guess your question was around, is there any kind of restructuring left in 2025? And as Dominik said, the bulk of the program will be executed in 2024. Yes, there are some pieces left, but this is a smaller share of the overall program.

Speaker Change #130: The connection was not very good but let me try to answer your question I mean.

I guess your question was around.

Speaker Change #130: Is there any kind of restructuring and are left in 2025 and as Dominic said the bulk of the Oklahoma will be executed in 2024, yes. They are.

Speaker Change #131: It's some pizza is a laugh, but this is a smaller share of the overall program on the one weight savings and what you're going to see is of course also the bulk of the one weight savings will be realized in 2025, but it's very important that this is not just you know a one off program for one year or what.

Christian Klein: On the one-way savings, what you're going to see is, of course, also the bulk of the one-way savings will be realized in 2025. But it's very important that this is not just a one-off program for one year. What we are doing with this program is also optimizing the cost base of SAP. We are reducing a lot of skills, optimizing our location base, and reallocating some, but not all, of the investments to our strategic growth areas.

We are doing with this program is also optimizing the cost base of Asap.

Speaker Change #131: It's using a lot of skills, we are optimizing our location base and we are reallocating. Some some not all some of the investments to our strategic growth areas. So that will also then lead in 2026 to come also in a better and more cost efficient.

Christian Klein: So that will also lead, you know, in 2026 to come up with a better, more cost-efficient structure in our P&L. And then second, of course, also, it will help us to further close on the top line. And the second question was really hard to understand. Can you please repeat it?

Speaker Change #131: Structure in our P&L and then second of course also it will help us to fall further yano to close on the topline.

Speaker Change #132: And the second question was really hard to understand can you can you repeat it.

Christian Klein: Yes, please. The second question was more on client decision-making processes in the wake of the development around Gen AI business, and business AI use cases. Some of your global peers have alluded that there has been some delay in the decision-making process on account of these developments, while you are seeing some acceleration or tailwind because of embedded Gen AI in your offering. So how should we see that? What is working for SAP versus some of the other global software companies? Thank you.

Speaker Change #133: Yes. Please.

Speaker Change #134: Second question was more on client decision, making process in vehicle development around general business.

Speaker Change #135: Frankly, our use cases.

Of your global peers have alluded that there have been some delaying decision making process on account of these development why you are seeing some acceleration of tailwind.

Speaker Change #136: Hum because of embedded generic in your offering so how should we see that what is.

Speaker Change #137: Working prototypes.

Speaker Change #138: The global software companies. Thank you.

Christian Klein: OK, OK. I guess I've got the question now. I mean, first, when we are deciding on our AI roadmap, especially for Gen AI now, what we are looking at is first off the telemetry data and the activities of our customers, of our end users in the cloud. And we have a lot of insights. That's why a lot of the roadmap we have for our AI co-pilot tool is really built on what do our end users do? How much efficiency gains can we make if we put this tool on top?

Speaker Change #139: Okay, I guess I got the question now I mean first and we are deciding on our AI roadmap on especially also for <unk> I know what we're looking at is first off on the telemeter way data and activities of our customers of our end users in the cloud and we have a lot of insight that's why a lot of the whole map what we have.

Speaker Change #139: For our AI co pilot tool is really built on what do our end users to how much efficiency gains can be do if we put tool on top what can we do on the analytics, where do we see a lot of analytical request into system second on the embedded AI use cases and before we start coding. It we always tested we have industry.

Christian Klein: What can we do with the analytics? Where do we see a lot of analytical requests in the system? Second, on the embedded AI use cases, before we start coding them, we always test them. We have industry consortiums. And we then test it for what kind of use cases work for energy, for oil, and gas? What kind of use cases work for retail? I mean, I mentioned, for example, returns claims management. It's actually a big cost driver for many retailers.

Speaker Change #140: Consortiums and we then tested for what kind of use cases work for energy for oil and gas what kind of use cases work for heating I mentioned for example, if it turns claims management it's actually.

Speaker Change #141: A big cost driver for many retailers and that we can help that we can actually embedded in the order management in the channel solutions of S&P and so this is embedded and then we actually do with Accenture.

Christian Klein: And there we can help. We can actually embed it in the order management, in the channel solutions of SAP. And so this is embedded.

Christian Klein: And then we actually do, with Accenture, EY, Deloitte, and others. We have our Gen AI hub, where especially large customers are coming to us and saying, hey, in this part of the supply chain, we could see a high value for a Gen AI use case. And then we do a prototyping, and then we build it via the Gen AI hub. We give them native access to our data. We also give them native access to our data sources across our base. And last but not least, of course, they can also benefit from the identity in the security layer.

Essentially why Deloitte another half hour 10, AI hardware, especially large customers are coming to us and say hey in this part of the supply chain, we could see a high value.

Speaker Change #142: <unk> Chen AI use case, and then we do a boarder typing and then we build it via the churn a IHOP, we give them native access to our data we give them Nader native access also to our data sources across our base and then last one at least of course. They can also benefit from the identity and the security layer that we built together where we individually.

Christian Klein: And there, we do build together very individual use cases. So that's, in a nutshell, how we decide and develop our Gen AI use cases. We'll move to our next question from Ben Castillo-Bernaz with Exsane BNP Petaraba. Please go ahead.

Speaker Change #142: Use cases, so that's in a nutshell, how we decide and develop our churn AI use cases.

Okay.

Speaker Change #142: Yeah.

Speaker Change #143: Well move to our next question from Ben Castillo Berna, <unk> with Exane BNP Paribas. Please go ahead.

Operator: Good evening, thanks very much for taking my question. Just on the headcount, just coming back to your comments there, obviously an additional 1,000 to 2,000 impacted roles here, and you seem to be inferring that headcount will still end roughly flat, so more hiring and rehiring than initially planned. I'm curious what prompts that decision to hire more versus drive cost savings, given this is effectively a free pass within the existing restructuring plan.

Speaker Change #144: Good evening, thanks, very much for taking my question.

Speaker Change #145: Just on the head count just coming back to your comments.

Speaker Change #146: An additional one to 2000 impacted roles here and there.

Speaker Change #147: You seem to be incurring the head count will still and roughly flat so more hiring rehiring than initially planned.

Speaker Change #148: I'm curious what prompts that decision to hire more buses.

Speaker Change #149: To drive cost savings given this is effectively a free pass within the existing restructuring plan.

Operator: And in terms of where you are hiring for those additional roles, could you talk about where those incremental hires are? Is this in the same areas you initially planned, or is it in different areas? Thank you.

Speaker Change #150: And in terms of where you are hiring on those additional roles could you talk about where those incremental hires or it's in the same areas. You. Initially planned or is this in different areas. Thank you.

Ben Castillo: I mean, the way it works in voluntary programs is, in Germany at least, that employees register their interest in participating, and then we can decide whether to accept it or not. And then again, the employee has a right to say, "Okay, I'll ultimately take it or not." We have some quite good precedent information on how that should pan out. We've seen higher adoption, so to speak, than initially planned in voluntary programs, also to some degree in voluntary early departure programs.

Speaker Change #151: I mean, the way it works on the voluntary programs is in Germany at least that.

Speaker Change #152: Please register their interest in participating and then we can decide whether we accept it or not and then again the MPV is it right to say, okay ultimately take them.

Speaker Change #153: We have some quite.

Speaker Change #154: Precedent information on how that should pan out we've seen higher adoption so to speak than initially planned.

Speaker Change #154: On the voluntary program also to some degree on voluntary early departure programs and then on any of these cases, what we basically had to do is to judge whether there would be certain critical skills, leaving and they would simply need to re hire one for one in which case you could of course decline because there's no business case is however.

Ben Castillo: And then in any of these cases, what we basically had to do was to judge whether there would be certain critical skills leaving, and they would simply need to rehire one for one, in which case you would, of course, decline because they had no business case.

Dominik Asam: If, however, we could combine it with reskilling so that we say, OK, maybe I can reduce that headcount now that I have the opportunity, but I will put it in a different skill set where you have even more scarcity, or consolidate certain teams in regions which are, frankly, more cost-effective, we can use these. Of course, the efficiency of that kind of rehiring is not as high as not replacing them at all, but it's still there, and the couple hundred million we added are basically the kind of partial derivative of saying more restructuring costs but also more savings. So the factor is a kind of 4x factor, which is pretty similar to the overall package.

Speaker Change #154: Combined with the re skilling that we say, okay, maybe I can reduce that head count now that I have the opportunity, but put it in a different skill set where it is more scarcity or.

Speaker Change #154: Consolidate certain teams in regions, which are frankly more cost effective we can use these of course the efficiency of that kind of rehiring is not as high as not replacing at all but it's still there and a couple of hundred million. We ended up basically the partial derivative of thing more restructuring costs, but also more savings so the sector as a kind of Forex factor.

Speaker Change #154: Which is pretty similar to the overall package.

Dominik Asam: It's not super quick because of the high cost of these restructuring programs and because we need to rehire in some areas, but we still have a business case on these incremental headcount reductions. Even if we rehire because we do it in a more cost-effective way than what was the status before, and sometimes we don't rehire at all. We'll move to our last question from Johannes Schaller with Deutsche Bank.

Speaker Change #154: It's not Super Creek, because of the high cost of these restructuring programs and because we need to rehire in some areas, but we still have a business case on these incremental.

Speaker Change #154: Head count reductions.

Speaker Change #154: Even if he be higher because we do it in a more cost effective way than what was this status before and sometimes we don't re hurdle.

Well move to our last question from Johan <unk> with Deutsche Bank. Please go ahead.

Operator: Yeah, thanks for thinking about it. Yeah, thanks for taking my question. Another one on the efficiency program, I'm afraid. I wanted to understand a little bit better how you're thinking about this kind of in the medium term and conceptually. I mean, I guess the increased number of people affected now is probably not that surprising.

Johan: Yes, thanks for taking months.

Johannes Schaller: I think Christian already alluded to that a little bit after Q1, that there may be some more areas of efficiency. But would you say we're really done now? Or how should we think about this going forward? I mean, we're in a scenario where, you know, your required skill set keeps on changing in the workforce; probably, you're introducing more AI tools within SAP, becoming more effective. Is there scope to do more? Or how should we think about this on a maybe five-year view?

Speaker Change #156: Yes, Thanks for taking my question another one on the especially the program I'm afraid I wanted to understand a little bit better. How are you thinking about this kind of more medium term and conceptually I mean, I guess the increased number of people affected now, it's probably not that surprising I think Christian already alluded maybe two.

Speaker Change #157: That a little bit after after Q1 that there may be some more areas of efficiency, but.

Speaker Change #158: Would you say were really done now or how should we think about this going forward I mean, we had.

Speaker Change #159: Scenario, where you're required skill set keeps on changing into workforce, probably youre introducing more AI tools within this AP, becoming more effective.

Speaker Change #160: Is there scope to do more how should we think about the sort of maybe five year view.

Christian Klein: I would say, yeah, thanks, first of all, for the question, Johannes. And I mean, the good thing is, we are never running out of ideas, also not on efficiency. I mean, when you look at what we did at the beginning of the year, we combined all the essential COO teams in SAP, we centralized our cloud operations, and what we are going to see, you know, when you take, for example, the headcount, you know, out of the equation for a second, what we see, of course, we can gain huge synergies.

Speaker Change #161: And let's say I mean, thanks first of all for the question, you're honest and I mean, the good pieces I mean, we are never wanting out of ideas a lot on efficiency.

Speaker Change #162: When you look at what we did at the beginning of the year, we combined all this teeth central.

Speaker Change #163: C O teams.

We centralize.

Speaker Change #163: Centralized our cloud operations and what we are going to see.

Speaker Change #163: When you take for example, the head count.

Speaker Change #163: Out of the equation for a second what we see of course, we can gain huge synergies I mean, when you see how we can streamline our operations, where we can expand our digital marketing channel and connected to our E.

Christian Klein: I mean, when you see how we can streamline operations now, we can expand our digital marketing channel, connect it to our, you know, reseller channel in sales, or we can connect it, you know, to our, you know, back office function. I mean, that will actually just unveil a lot of additional synergies, just by really wanting SAP more end-to-end.

Speaker Change #163: He fell a channel and sales or we can connect it to our back office function. I mean that will also actually just unreal a lot of additional synergies just by really wanting more end to end and then we can infuse of course automation when we talk about AI coding.

Christian Klein: And then we're going to infuse, of course, automation. When we talk about AI, coding, ABAP development, we'll see, you know, a huge productivity gain. When it comes to our support for the ticketing, of course, we're going to apply GenAI. We will automate a lot of the ticketing, and ticket following will be done, of course, also via our co-pilot.

Up up development will see a huge productivity gain when you look into our support to ticketing.

Speaker Change #163: Last week on our implied churn AI, we will automate a lot of the.

Speaker Change #163: The ticketing ticket following will be done of course also why our co pilot and then as I already mentioned in contracting and weak on applied we are now rolling it out so overall in inside S&P, we are rolling out currently.

Christian Klein: And then, as I already mentioned, in contracting, we're going to apply it. We are now rolling it out. So, overall, inside SAP, we are currently rolling out 30 AI use cases, and that's the way to go.

Speaker Change #164: I use cases, and that's the way to go in on a cloud cost margin as these centralized our cloud operations under Thomas our ASIC now what we can do is we can harmonize the patching we can harmonize the on boarding we can harmonize kind of all the different steps in the cloud lifecycle management and when you see that.

Christian Klein: And on the cloud cost margin, as we centralized our cloud operations under Thomas Sauer, I think now what we can do is harmonise the patching. We can harmonise the onboarding. We can harmonize, you know, all the different steps in cloud lifecycle management. And when you see that, when you see that we have, you know, 20 different core ERP products, that is, of course, also giving us more efficiency gains over time. And so, these are the things which are already, you know, in the making, next to, of course, the whole transformation on the headcount side with also the re-hiring then in the strategic growth areas.

Speaker Change #164: When you see that we have 20 different.

Speaker Change #164: For ERP product that is of course also giving us more efficiency gains over time and so these are the things which are already in the making next to of course, the whole transformation on the head count side with also the rehiring down in the strategic growth areas.

Christian Dominik: Great, thank you very much, Christian Dominik, and this concludes our call for today. Thank you very much for joining.

Operator: Great. Thank you very much, Christian, Dominik, and this concludes our call for today. Thank you very much for joining us. Thanks, everyone. Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining us and have a pleasant day. Goodbye.

Speaker Change #165: Great. Thank you very much Christian Dominic and this concludes our call for today. Thank you very much for joining thanks, everyone.

Unknown Attendee: Thanks everyone. Bye.

Right.

Speaker Change #164: Okay.

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

Speaker Change #166: Ladies and gentlemen, the conference is now concluded and you may disconnect. Your telephone. Thank you for joining and have a pleasant day goodbye.