SAP SE (SAP) Earnings Call Transcript & Summary

Great. Good morning, everyone. Thank you for joining us. We are delighted to have the CEO of SAP, Christian Klein, join us today at the conference. Christian, thank you for joining us.

Yes. Thanks for having me, Mo.

That's great. Before we start, I just need to read a safe harbor statement, so if you could bear with us. SAP will make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations, forecasts and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in SAP's filings with the Securities and Exchange Commission, including, but not limited to, the risk factors in section of SAP's 2025 annual report or Form 20-F.

So with those sort of nice fees out of the way, Christian, -- maybe to start with, can you give us a sense of the conversations you're having with your customers? You come off the back of what were very strong Q2 results, at least certainly, given where fears were in the marketplace. What are the kind of key priorities in the context of both the geopolitical uncertainty, but all the structural disruption around AI that you're seeing? And maybe your sort of perspective on kind of the discussions of AI deployment in the boardroom and particularly how do they think about before they commit to spend those returns?

Yes. That's a lot in this question. So let's start with the geopolitical situation. I mean, throughout the whole year, we were always mentioning the geopolitical conflict, especially in the Middle East. I mean now we are so much into the year that I can say, at least for SAP, we don't see now an impact at a global scale. Obviously, the Middle East is not a small business for us. So it's a very well-run business for SAP, but definitely, it will not have an impact now on the cloud revenue anymore. Now on CCP for Q4, obviously, It's still a sizable business, but that's why it could have a certain swing. But it's not something that we are heavily concerned about anymore. Now the board level, the C-level conversations, and I can also shed some light on the conversations we're having with our ecosystem partners where you also hear a lot about what they are hearing from the market and the customers. I mean when we are going to send our customers to the cloud, I mean, 12 months ago, 24 months ago, it was more about, okay, Christian, let's get it done, automate my business processes, let's get rid of the custom code and show me the outcome of the [indiscernible] journey. So how you're going to make it work together with us. Now the C-level conversation is, Christian, I can't wait another for these business processes to be automated or infused with intelligence via AI. So AI is now in every conversation, yes. Even if the customers in the C-level doesn't have a really concrete idea, they just want to see AI connected to it. And that's why when we are now doing this, it's very important for us to really look into what -- first of all, what business use cases have the best [indiscernible], customers also are asking more and more for, okay, the TCO token because they see the total spend running away. And then the last piece, which I feel is a very good sign for all the announcements we did at Sapphire is that customers who did some -- built some agents with [indiscernible] modules on third-party platforms, they are coming and saying, Christian, I'm honestly completely overwhelmed my IT organization by making sure that these agents delivered a wide outcome, accuracy is a big problem oftentimes and the governance of these agents. I mean, we have so many compliance requirements, audibility of a financial clause, payroll needs to run 100% perfect. So a lot of customers are saying, "Hey, SAP, can you not do this for us before my IT teams are dying a lot of complexity on running and managing those agents."

So obviously, we're going to delve into AI because there's a lot to talk about with kind of upcoming releases. But maybe just touch on the kind of [indiscernible] journey and the kind of S/4HANA migration. Can you kind of tell us kind of where you are in that? Because I think CCB is still growing quite healthily. And how much of that journey is there. And there were some fears, I think, earlier in the year around potential slowing of that migration, but Q2 sort of told us that perhaps that's in decent shape. So I would love to get your perspective on that.

Yes. Being here in San Francisco, it's also -- memories are coming back at the time when I was the CFO of SuccessFactors. And right after the acquisition, we didn't have so many good times also with some other acquisitions, not integrated, sitting on a stack, which was not really scalable, not performing. I mean that has changed a lot. Looking at the CCB growth of 26% in Q2. It's not only S/4, all LOBs are winning market share and I'm so happy that when we did this cloud move, a lot of customers were really quite concerned, "Oh, how do we do this?" Are the product competitive, et cetera. In the meantime, we are winning market share in all LOBs, which was definitely not the case in 2 or 3 years. And also the channel is performing even better than our direct sales, which I always find a good indicator that we are not only converting installed base to the cloud. But that also, we are winning a lot of new family members with [indiscernible], with SAP also here and while a lot of startups who want to scale their business say, okay, SAP has localization for over 100 countries. The platform works, public cloud, end-to-end. Why not SAP. And also some private investors are saying, "Okay, let's really close a framework contract for SAP because our start-ups should just use the best platform to scale their business. So that's good. Now going forward, we talk a lot about AI. But in my financial plan for the next few years, I mean, still there's 60% of our installed base is not yet in the cloud. So there's stuff to come, work to be done. Just this morning, I talked to Julie Sweet from Accenture. And she asked me Christian, I have so many SAP consultants, how long will this party continue? And I said this party will continue, but in a different way and form also for the existing -- for the customers who are now moving to the cloud because they want to be moved to the cloud with AI tooling, with the AI use cases, which are then showing them the value, not just do a technical migration. So there is enough potential also on the cloud side. The maintenance is coming to an end, extended maintenance, 2030 is then the end of the extended maintenance. And again, 3 years, sometimes for such an ERP modernization is not a long time. But again, it's not even the dominating factor for the next 3 years, why to move to the cloud. Even some customers who moved before my tenure as CEO to S4 on prem, they see now the value with AI and to make the move to the cloud. So yes, there is enough business left to be converted. And yes, I'm not seeing that our subscription business will decline. It's just the opposite. I still see very healthy quote. Maybe one last piece, which is maybe also important for the audience to understand when now Lockheed Martin, BMW and other are coming, say, Christian, we need more features in our S/4 system. I said features. I would love to talk about agents. So how can we convert that? And even there, we are now seeing that we see a lot of growth also in the subscription business by adding features, but we are not only adding features for spare parts management, we are telling the customer, okay, we can add a feature, but only if there is some data missing to the system of record, and then we want to build an agentic AI layer right away on top. And so you see both the subscription business and as well as, of course, the consumption related AI business will see growth in the future, I'm sure about that.

Got it. So maybe let's turn to kind of AI. You laid the road map out at Sapphire earlier this year in May. And obviously, you've got the autonomous suite, the SAP business AI platform. Maybe for the benefit of the audience, kind of help us kind of understand that sort of vision what you sort of see in terms of the role SAP plays, particularly as we move in the LOB solutions to more kind of agenetic workflows.

Yes, happy to do so. And I saw also some comments about is SAP may be a little bit late on shipping all of these assets now. I don't believe that we are late. We want to get it right. And as I mentioned also before, at earnings, there was a learning curve. It's not like that we understood everything in perfect right away from the beginning when we started to build the first AI use cases 2 years ago. Now what is different with the announcements we did this year. First, I told my product managers, which are all gathered together in our all-in on AI workshop here in Palo Alto, I told them, "Hey, when you believe we are developing an agent for document scanning and we are going to win with this agent, you are completely [indiscernible]." Our ERP wants the most complex business processes in the world and we need to solve the most complex challenges of our customers with our agents. So all the agents we are shipping 400, 200 now in September, will solve complex business challenges, not the low-hanging fruit, which you can easily do with any LLM you pick from the market, first. Second, lessons learned was accuracy. Data, ontology, BDC is super important. I just saw [indiscernible] here on the floor, Snowflake, Ali, Databricks. We don't want to give away our crown jewels, our semantics. But we want to make sure that our agents also understand non-SAP data, that the ontology layer, the semantic layer, you can build it with Palantir, but with SAP, you get a lot of that out of the box. We have 7 million triples in the ERP system. And this 7 million triples need to be understand. I mean the data correlations need to be understand via knowledge graph, via the semantic layer, which sits on our new AI platform. So that is the first element. And then the second element, what we really saw in our learnings curve is what I mentioned before. A lot of customers came to us and said, "Christian, even for the simple AI use case, identity management, authorization, has the agent now read access, change access or white bank access, compliance requirements. [indiscernible] here in the U.S. In Germany, we are not short of bureaucracy as well. So there are a lot of requirements as well, which is understood by our ERP, but not yet understood if a customer tries to run those agents on their own. So with the new platform, we are going to manage every agent, which is built on this platform. Either is it's built by SAP, built by our partners or built by a customer, which is a huge differentiator next to the contact player because we are saying no matter [Audio Gap] people, the type of people, type of profile, type of skills. So I I can sleep well enough. Again, we need to get our act together with the new platform. We need to prove that our agents can work more accurate, that should work is way more accurate. We need to prove that the governance is managed by SAP. And if we can prove that, I mean, we will use all of these LLMs, not one. So they will be partners. But I see not a scenario now where I would now say, "Oh, my God, this could disrupt my my ERP business or the overall portfolio of SAP, it's 1 plus 1 is 3 on our platform and not 1 plus 1 is 2.

And I just wanted to touch one other product area. Business Data Cloud has been out for kind of 18 months. It's somewhat been sort of forgotten a little bit. But as we now roll out kind of the Agentic workflows and the kind of data consumption drives, where are we in terms of kind of the adoption, the kind of customer feedback. You've obviously signed up now a very comprehensive list of partners as well.

And also I can answer this question also giving a little bit of context to the acquisitions we did in the data space. BDC, obviously, is fundamental for our new AI platform. Why? We see even that for billing assistance, sometimes you need to check a ticket in a ServiceNow system to see, "Okay, why is the company not paying." There is an escalation, et cetera, et cetera. So extensibility to non-SAP data source. This is key. And if a customer now has Databrics or Snowflake, et cetera, they love that they have 0 copy. They don't need to change now the data layer. They can just use BDC, and we build a semantical layer as part of the BDC data platform. With [indiscernible], then we can also govern the data, now also non-SAP data because data quality is key so that the agents really understand, okay, the whole context of the business and the tasks they need to fulfill. And so these partnerships are great. Now with [indiscernible], we did it because take, for example, H&M, we build a shopping assistant. They want to have social media data to not only do the same nonintelligent recommendations on certain products they have on the stock. They want to check the sentiment on social media. They want to check the sentiment coming from other stores, et cetera, et cetera. So they said, no, SAP, I have this data nowhere now. I want to store it, but please give me this AI scenario end-to-end SAP. So we infused [indiscernible]. If a customer really says, okay, I want to be agnostic. I don't want to use one of the other data lake providers. So we can do that. And again, with Reltio, I already explained the data governance part. So yes, BDC is actually a core part of the new platform of the contact layer. And in every AI scenario, we are now going to launch and which we are already implementing, we see, of course, there is a great pull-through now also to the data platform because you need sometimes more data product, sometimes you need a better governance of the data, sometimes you're missing certain parts of non-SAP data. Okay, give me [indiscernible]. It has a great TCO. It's built on Apache. So it's all good. And that's why BDC is for us connected to our AI platform. And we'll see, of course, a huge upside potential now just by building more and more agents on the new platform.