Earnings Call Transcript - SAP Q2 2023

Operator, Operator

Thank you all for being here. Welcome to the SAP Q2 2023 Earnings Conference Call. I will now hand the call over to Anthony Coletta, Chief Investor Relations Officer. Please proceed.

Anthony Coletta, Chief Investor Relations Officer

Good day, everyone, and welcome. Thank you for joining us. With me today are CEO, Christian Klein; CFO, Dominik Asam; and Scott Russell, who leads Customer Success. On this call, we will discuss SAP's Q2 and first half 2023 results. You can find the deck supplementing this call as well as our quarterly statement on our Investor Relations website. During this call, we'll make forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to materially differ. Additional information regarding these risks and uncertainties may be found in our filings with the Securities and Exchange Commission including, but not limited to the Risk Factors section of SAP's annual report on Form 20-F for 2022. Unless otherwise stated, all numbers on this call are non-IFRS and growth rates, percentage point changes and our 2023 financial outlook are non-IFRS at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Before we start, I would like to remind you that SAP completed the sale of its stake in Qualtrics in June of this year. Therefore, all figures shared on this call are based on SAP Group results from continuing operations. And with that, I'd like to turn the call over to Christian.

Christian Klein, CEO

Yes. Thank you, Anthony. And as always, thanks for joining us for our earnings call today. This has been a good Q2. At the halfway point of 2023, SAP continues to perform well despite a macroeconomic environment that remains uncertain. After reaching the turning point in our transformation, our sharpened focus has yielded real momentum, and we are seeing strong demand across our portfolio. Customers are looking to our game-changing solutions to foster sustainable end-to-end business processes across diverse industries on a global scale. It is also worth pausing on the watershed moment we're experiencing with generative AI. It's clear that generative AI will fundamentally change the way businesses run. In the business world, no one is better positioned than SAP to empower businesses to take advantage of this transformational moment, giving them the solutions to harness AI to improve business outcomes. We believe we are uniquely placed to become the leader in business AI. At our most recent Sapphire conference in May, we shared specifics of our AI approach with SAP Business AI. Later on in my remarks today, I will talk in more detail about our ambitions on this front. So let's first turn to the summary of our numbers. In Q2, operating profit grew at an impressive 28%, up from 12% in Q1, clearly demonstrating the strength of this new phase in our transformation. This puts us in a strong position as we work towards our goal of double-digit operating profit growth in 2023. Current cloud backlog stands at over €11.5 billion, with continued strong growth, up 25% this quarter. Cloud revenue continues to grow steadily at 22%. And total Q2 revenue grew at 8%. For S/4HANA, specifically, cloud revenue grew 79%, up from 75% in Q1, and current cloud backlog grew 70%. Our results this quarter demonstrate the strength of our solutions in addressing the specific needs of our customers during challenging times. Customers are choosing SAP to help them transform their business processes, collaborate across their supply chain, and operate sustainably. RISE with SAP continues to be the preferred choice for customers adopting the SAP portfolio to transform the end-to-end business processes in the cloud. Key new RISE deals this quarter include Bayer AG and Bacardi-Martini. As one of the world's largest pharma and biotech companies, Bayer chose RISE with SAP to facilitate its extensive business transformation program known as Core. While Bacardi is the world's largest privately owned international spirits company with a portfolio of more than 200 brands. They have chosen RISE with SAP to meet their ambitious growth targets. There were also a number of important RISE Go Live this quarter, including HanesBrands, Levi's, Tech Mahindra, and Versuni. Tech Mahindra of India deployed RISE with SAP in record time, going live in just 3.5 months. Versuni, a new company formed from Philips Domestic Appliances undertook one of the largest RISE transformations ever, and it was completed in just 18 months. The success of RISE with SAP is clear. This is SAP's signature offering, which helps customers move to the cloud and transform their business processes at the same time. It's also very important to emphasize that SAP's newest innovations and capabilities will only be delivered in SAP public cloud and SAP private cloud using RISE with SAP as the enabler. This is how we will deliver these innovations with speed, agility, quality, and efficiency. Our new innovations will not be available for on-premise or hosted on-premise ERP customers on hyperscalers. For example, new ERP capabilities as well as sustainability and carbon accounting solutions, and all our new AI innovations will only be available in the cloud and delivered via RISE and GROW with SAP. Last quarter, we introduced the powerful new offering, GROW with SAP, designed for mid-market customers who are new to SAP and likely to be growing quickly as they build their businesses. GROW has quickly become popular just like RISE with SAP, for which around half of the customers are net new to the SAP family. The momentum I've described with both RISE and GROW with SAP is underpinned by the SAP business technology platform. This is the foundation for integration and extensibility across our portfolio. We have reached an important milestone this quarter with over 20,000 live BTP cloud customers. This quarter, new wins included Visa, the world leader in digital payments; and Santander, the Spanish financial multinational who are using SAP business technology platform to revolutionize and streamline the banking experience. Increasing adoption of S/4HANA and the SAP business technology platform is also driving significant cross and upsell opportunities across our portfolio. Let's now discuss the latest updates to our approach with SAP Business AI. As I said earlier, we believe we are uniquely placed to become the leader in AI built for business. Customers will benefit from new AI-powered solutions that step change how processes can self-learn and self-automate to self-optimize business outcomes. For example, imagine supply chains that automatically initiate a different delivery route based on weather and congestion data. There will be a step change in how employees can interact with solutions in vertically more efficient and personalized ways. For instance, imagine your ERP system using embedded ESG data and business data to decarbonize the supply chain by 5%, simply by asking for it. And there will be a step change in uncovering new insights that lead to better business decisions. Imagine one trusted data layer across your entire company that enables AI to pull together the wide data in seconds. This will bring us significant opportunities for market expansion through new AI-based solutions and new premium offerings. Based on external forecasts and our own calculations, we see a potential doubling of our addressable market to $1 trillion by 2028 with AI being a key contributor. We will be introducing new premium RISE offerings with an uplift of up to 30% in the fall. Our approach with SAP Business AI is unmatched in the industry, delivering our customers the most relevant, reliable, and responsible AI built for business. Firstly, our AI is relevant because it's embedded into every part of our portfolio. More than 24,000 SAP cloud customers today can already use SAP business AI across hundreds of built-in AI capabilities and partner use cases. To provide a couple of new tangible examples. In SAP Transportation Management, generative AI will save up to 55% of the processing cost of delivery notes. The new intelligent collections in SAP S/4HANA Finance can reduce the time between invoice and payment by up to 10%. Secondly, based on unique business data and business process context, we can deliver the most reliable business AI. Reliable AI hinges on applying the wide data to the wide model. By using SAP DataSphere to leverage substantial context-switch industry-specific data, business AI systems can drastically improve accuracy, generate more relevant content, and minimize AI hallucinations. Thirdly, responsible AI is not a buzzword for us. Our customers trust us with their most critical data and can confidently deploy our AI offerings, knowing we prioritize the highest levels of security, privacy, compliance, and ethics. We comply with the highest standards when it comes to customer consent, security, GDPR regulations. This is what SAP stands for. We will continue to innovate and deliver by creating an AI ecosystem for the future, combining SAP and partner innovation built on the SAP business technology platform. Let me give you some examples of this approach. At SAP Sapphire, we announced a partnership with Microsoft to collaborate on joint generative AI offerings to help customers address the talent gap with new recruitment and development tools. Last week, SAP Sapphire Ventures, the technology-focused VC backed by SAP announced that it will dedicate USD 1 billion to AI-powered enterprise technology startups. Earlier this week, we announced strategic investments in 3 leading generative AI companies, Aleph Alpha, Anthropic, and Cohere. In the fall, we plan to announce new AI solutions and capabilities across our portfolio. All told, we see a huge opportunity with new innovation in AI and believe SAP is uniquely poised to help customers take advantage of this watershed moment. As our Q2 results show, SAP continues to deliver. We are optimistic about the future based on SAP's core value, delivering technologies that build stronger companies. As we start the second half of the year, we remain fully committed to delivering on our promise of accelerated revenue and profit growth. This is reflected in our increased guidance for cloud and software revenue and for operating profit. In closing, let me quickly look back on what we have accomplished in recent years. Our own transformation into a cloud company, our leaner and more agile operating structure, new offerings that bring the power of SAP to more companies, solutions that harness the power of data wherever it resides, and tools that create sustainable business processes across the industries. Now is another threshold moment. While nearly every company is working on the AI revolution in some way, no one sits at the nexus of technology and business like SAP. And we think there is enormous opportunity ahead. Dominik, over to you.

Dominik Asam, CFO

Thank you, Christian, and good afternoon, everyone. We are very pleased with our second quarter's growth in non-IFRS operating profit, putting some upward pressure on our outlook on that metric for the full fiscal year 2023. In Q2, we also maintained a steady growth of our cloud business with current cloud backlog and cloud revenue again growing by 25% and 22% year-over-year, respectively. The trend towards larger cloud transactions continued with deals greater than €5 million volume contributing to nearly half of our cloud order entry. As a reminder, on June 28, SAP completed the sale of its stake in Qualtrics. Therefore, the following results are for continuing operations. Let me talk you through our financial performance in more detail. Current cloud backlog was €1.5 billion, growing by 25% with S/4HANA, current cloud backlog growing by 70%, driven by the continued strong adoption of RISE with SAP. Our combined SaaS and PaaS portfolio continues to grow by 26%, with SaaS cloud revenue up 22% and PaaS cloud revenue up 45%. The sustained momentum was again fueled by the strong contribution of S/4HANA cloud and the business technology platform. Software licenses revenue saw a decrease of 24%. Total revenue was up 8% year-over-year, demonstrating the great resilience of our overall business in the current macro environment. Now let's take a brief look at our regional performance. In the second quarter, all regions delivered strong cloud performance. Germany, Brazil, and India had outstanding cloud revenue growth, while the United States, the Netherlands, France, China, and Chile performed particularly strong. Now moving further down the income statement. Our cloud gross profit grew by 24%, supported by the completion of SAP's next-generation cloud delivery program. This marks a key milestone in terms of portfolio integration and harmonization for our customers. This, in turn, resulted in cloud gross margin improving from the year-ago period, expanding by 1.1 percentage points to 72.2%. In the second quarter, both IFRS as well as non-IFRS operating profit increased by 28%, mainly driven by sustained high growth in cloud revenue, the completion of the next-gen cloud delivery program, efficiency gains resulting from spending discipline across the entire organization, as well as gradual relief from the impacts of the war in Ukraine. Additionally, our IFRS operating profit benefited from restructuring expenses in Q2 last year but was negatively affected by higher share-based compensation expenses primarily due to share price development over the quarter. Finally, the operating margin landed at 27.2%, a 4.4 percentage point improvement compared to the prior period. Earnings per share in the quarter increased 12% to €1.07. The IFRS effective tax rate for Q2 was 33.8%, and the non-IFRS tax rate was 30.4%. The reduction of the IFRS effective tax rate from Q1 to Q2 mainly resulted from the increase in profit before taxes. Now looking to our cash generation. Free cash flow for Q2 significantly increased to €604 million, driven by the strong expansion of operating profit and the reduction of payments, primarily for share-based compensation but also for CapEx and leasing. Now let's move on to our financial outlook. As you've seen in today's release, we are updating our revenue and operating profit outlook for the full year for continuing operations. The outlook range for cloud and software revenue is being narrowed by moving the lower end slightly up despite moving the upper end of the range for cloud revenues down. The latter being mainly driven by lower-than-anticipated transactional revenue. As a result of this slight shift in mix and overall marginally higher midpoint of our cloud and software revenue outlook, the operating profit outlook range has been increased accordingly. Note that this update implicitly leaves the overall margin profile intact for the year and provides confidence in achieving the free cash flow outlook, which is reaffirmed. As you know, our 2023 financial outlook is based on constant currency assumptions, i.e., a prior year's exchange rate of USD 1.05 per euro. Let's now discuss our nonfinancial targets. The nonfinancial outlook for 2023 is reiterated. In Q2, SAP once again achieved net carbon emissions of 0-kilotons. Our focus continues to be on reaching net zero emissions across our value chain by 2030. To get there, we're establishing a multiphase supply chain engagement program with our suppliers to significantly reduce our upstream greenhouse gas emissions. As a first step, we are working with our top 100 suppliers to ensure they report emissions at product level and follow a net zero plan, leveraging our own technology to do so. Our first-half results give us confidence that we are heading in the right direction and continue to be well established and positioned to achieve our revenue and profit growth goals for the year. The resilience of our businesses, combined with the focus and cost discipline across the organization are evidenced by strong profit growth. Q2 results continue to demonstrate that SAP has entered the second phase of its transformation, characterized by sustained cloud momentum, now turning into significant profit growth. In addition, we are laser-focused on our core and continue to streamline the business as demonstrated by our successful divestiture of Qualtrics in the last quarter. We firmly believe that we offer best-in-class solutions to our customers, serving as a trusted strategic partner in their digital transformation journey. Thank you, and we will now be happy to take your questions.

Operator, Operator

So operator, please open the line. The first question comes from Toby Ogg with JPMorgan Cazenove Limited.

Toby Ogg, Analyst

Yes. Perhaps just firstly on the cloud revenue side, Dominik, you mentioned the transactional revenues varies as the driver of the shortfall. Could you just give us a sense for what you're seeing there with respect to those transactional revenues? And whether you're seeing any other macro headwinds across any of the other lines of business applications outside of S/4HANA?

Dominik Asam, CFO

So I think on the transaction side, you know what types of businesses are in there. It's the kind of travel expense Concur Tool, external workforce, contingent labor, Fieldglass, business network transactions. And where we really took a little bit of hit was on the Fieldglass contingent workforce side. There, indeed, the macro with low flows and reduced levels of contingent workforce was actually slightly shrinking. So that was a little bit of a headwind, which was not expected to that degree. Otherwise, I'd say it's pretty much in line.

Christian Klein, CEO

I would like to expand on that point, and Scott can also share his thoughts on the pipeline. From our observations, there is certainly no slowdown in our SaaS and PaaS business. The cloud revenue from S/4HANA has continued to accelerate. The platform, PGP, is experiencing increased adoption, especially with the clean core, which is crucial not only for integration but also for developing extensions and new applications by our customers, partners, or SAP. Additionally, looking at the geopolitical landscape, we see robust demand for SAP in enabling business operations across more than 130 countries. For instance, after returning from China, we noticed significant demand for software that facilitates business in and for China. Industries such as utilities, retail, and automotive are rapidly transforming, requiring ERP and supply chain systems to thrive in the new business landscape. Finally, as we create numerous UI use cases for machine learning and integrate them with generative AI, we are witnessing increased demand for next-generation ERP solutions in the cloud. This is essential for our customers to access these innovations, which will also contribute to driving further growth in the upcoming half year.

Operator, Operator

Next question is from the line of Frederic Boulan with Bank of America.

Frederic Boulan, Analyst

A question on the balance sheet now that Qualtrics is now closed. Any further thoughts on what's the optimal leverage for SAP was the right capital allocation? Would you consider increasing the €5 million buyback absent any large M&A opportunities or we want to keep powder dry considering opportunities in AI and elsewhere?

Dominik Asam, CFO

Yes. Indeed, our balance sheet right now is very strong. I think we have snapped back to a net cash position of €4.2 billion. We've already announced that the lion's share of the proceeds will be invested in a share repurchase, which will stretch through 2025. And this will be commenced very shortly. So for the time being, let's also look at what opportunities there might be on the M&A side for the time being. I don't want to kind of make more commitments than what we have already said with regards to the €5 million share repurchase, but it is true that we have a very strong balance sheet and are very much able to act.

Operator, Operator

The next question comes from the line of Adam Wood with Morgan Stanley.

Adam Wood, Analyst

I wanted to come back to that subject of AI. I wonder if you could talk a little bit about how you're applying AI internally? And what cost benefits you see from that, and how that balances against the need for you to increase R&D investments to deliver on the AI functionality you're talking about putting in apps? And could you talk a little bit about how the time frame of delivering on those two things might be different and one might come before the other?

Christian Klein, CEO

Yes. So Adam, thanks for the question. I mean, to shed further light and give you better insights into the product and tech and the commercials on how we go to market. I mean, first, it's very important to emphasize. I mean, we have today around about 300 AI use cases. And for example, take Lidl and Kaufland, they actually have massive demand forecast data, over 400 input levels going into the demand forecast. We are taking this data, petabytes of data and analyzing it to predict better demand. And now they can actually have optimized their inventory and their supply chain costs by over 10%, which is massive for a company of the size and scale of Kaufland and Lidl. This is huge. And so now we have certain scenarios on cash flow automation and where we actually could improve the DSO by 10%. We have many of these examples. Now, with generative AI, and I think we really sit on a data of over 400,000 customers and the material flows, the financial flows, employee customer data. And now we are taking this data, not only with Signavio to benchmark and give business process recommendations. I mean, we see it in the first prototypes that we are going to be able to not only that the system can self-learn on this data on how to improve all these workflows. No, no, no, the systems itself will also drive further automation of workflows going forward. They can look into the customization of an ERP, which is huge in on-prem. They can help customers to generate code on the platform to build differentiating capabilities to fasten the time to value. And last but not least, I just did something yesterday where we said, 'Hey, when I have a skill gap here in my company and that in that space, from where did I hire the best skills in the past, in which country, from which university?' and the system gives you unbelievable smart recommendations. This is something what SAP can do. And this is where we're going to launch further generative AI use cases. They will come with a 30% premium because we believe in the immense value and we see how customers respond to that. We are going to embed that in every RISE, in every GROW, in every LoB deal going forward. This will not be like, okay, here’s our generative AI portfolio. No, no, this will be embedded because there, we also believe that our sales team and our partners can sell it best when it comes integrated with our application portfolio.

Operator, Operator

The next question comes from Michael J. Briest with UBS Limited.

Michael Briest, Analyst

Just on the cash flow, actually, Dominik. I noticed that you cut your CapEx outlook for the year by about €50 million. And obviously, you've raised the profit target by €50 million, less the free cash flow goal for the year unchanged. It still feels like free cash flow is part of the business that needs maybe more work than other parts. What are you actually doing to improve it? And how linear should we think about the progression to the €7.5 billion in 2025 to be?

Dominik Asam, CFO

I mean the key levers on free cash flow are quite obviously, on the profit side first and then the working capital. And of course, also the CapEx and leasing part of it, which should be kept as low as possible. We are, as we speak, starting to initiate pressure on these metrics to improve the cash conversion. I think for the current fiscal year, and we are on a good trajectory. If you just look at the phasing of H1 versus H2, as we've seen in prior years, you take that kind of receivable sale into account that kind of at the year-end last year into H1, Q1 to be precise. And this year, you see that we're actually a little bit ahead of that kind of completion rate. So for this year, we're fine now. How linear or not that will be through 2025, I find it challenging to predict because that is really notoriously difficult to predict. But obviously, we have that kind of ambition 2025 very firmly in mind and would need to show some progress between '23 and '25 to give you confidence about that materializing.

Operator, Operator

The next question is from the line of Johannes Schaller with Deutsche Bank.

Johannes Schaller, Analyst

Christian, you referred to those three strategic investments you made on the AI side, Aleph Alpha, Cohere, and Anthropic. Can you maybe talk a little bit more about what each of those really bring to the technology side for you? And where you feel those assets are really uniquely positioned and how they can help you become more competitive on the AI side?

Christian Klein, CEO

Yes. To provide two examples, consider Aleph Alpha. They possess excellent technology, allowing integration of large language models with our own, as well as enabling the deployment of their large language models in the customer's data center. This feature presents a unique selling point for public sector customers in the European Union, as they can retain their data while accessing SAP data and developing a unified model for generative AI. With Cohere, we are witnessing remarkable technology for B2B applications. We are utilizing them in retail and other sectors, engaging in specific customer projects to apply our technology and collaborate in the market. These investments are made to secure a position within a larger ecosystem. Our extensive valuable data becomes even more potent when we integrate non-SAP content and data, which is a key goal of these investments to enhance our AI offerings.

Operator, Operator

The next question is from the line of James Goodman with Barclays Capital.

James Goodman, Analyst

I wanted to ask about the EBIT upgrade of €50 million. EBIT this quarter was over €100 million, and it was €50 million last quarter. So, the question is why not a bit more generous with the EBIT upgrade. The lower end of the full year guidance now suggests a decline year-on-year in the second half. Additionally, the statement mentions that you completed the converged cloud project early in Q2. Is that correct? If so, why hasn't there been more impact on the cloud gross margin SaaS?

Dominik Asam, CFO

Maybe on the upgrade, I mean, this was, again, a pretty mechanical update. I mean you've seen that we basically took the midpoint of the cloud revenue guidance down by €100 million. We took the overall software and cloud revenue up by €50 million. So there's €150 million offsetting that. And if you think about the delta in gross margin between cloud and software and a slight increment that gives you exactly that €50 million kind of uptick. So it was quite mechanical. It is true that we are on a very good trajectory in H1 on the cost side. Honestly, we have to also say that on the EBIT side, the comps were quite easy. So Q2 is more difficult if you think about prior year's impacts we had. And yes, indeed, we think we have a high degree of confidence on reaching the new kind of updated guidance on EBIT and IFRS and operating profit be precise.

James Goodman, Analyst

And on converged Cloud?

Dominik Asam, CFO

Converged cloud is largely now done. So it is actually benefiting our gross margin. And I think from now on, the kind of increase in gross margin will be a little bit more modest. I think the best way to think about it is you start from Q2, the gross margin we have. And while there will be fluctuations quarter-by-quarter because of some seasonality, we will kind of gradually go up to reach that overall cloud gross profit target, which we've highlighted at Sapphire that the private cloud deals have slightly lower margin than public. But on the other hand, they give us a huge boost on volume, and we're really have a good trajectory, we think, to hit that kind of gross profit target for 2025.

Operator, Operator

The next question is from the line of Ben Castillo-Bernaus with Exane BNP Paribas.

Ben Castillo-Bernaus, Analyst

My question is on the embedding and the selling of the generative AI and the uplift that you mentioned, Christian, the 30% uplift, I think, in the fall. My question here is you're embedding this in every new RISE project or migration rather than being sold as a sort of opt-in bolt-on? Is this a choice for customers? Or is this kind of mandatory part of the package? And I guess following that, customers who have already begun their RISE roadmap, if you think go back to them and add this on retrospectively given the options? I'm just curious how the sort of go-to-market rollout of that happens in the time frame.

Christian Klein, CEO

I can start, and then Scott can add his thoughts. It is crucial to note that, as I mentioned earlier, we are making a significant shift in our strategy. We are now providing AI, generative AI, sustainability features, and distinct capabilities in our line of business products on-premise. When a customer opts to work with a hyperscaler for hosting, while still requiring customizations and not utilizing aligned data models outside of RISE, they will not have access to this offering. We cannot implement AI effectively, with high data quality, in a heavily customized on-premise ERP system, as AI is only feasible in the cloud. This is essential to understand. With RISE, customers have options. We offer our standard RISE package, which includes a methodology for standardizing and simplifying business policies using customer-specific coding to build a unified data layer. This is critical; otherwise, the quality and accuracy of AI will suffer. Additionally, we offer a premium option under RISE that embeds generative AI capabilities aimed at enhancing decision-making, automation, or transportation management. Existing customers also have the flexibility to choose this premium offering and use it immediately. We anticipate an increase in adoption among our current RISE customer base.

Scott Russell, Customer Success Lead

Yes. Let me provide some additional macro context and how it relates to our customers. I want to emphasize what Christian mentioned earlier: the need for digital transformation and the ongoing demand for digital changes in core businesses among customers globally remains strong. Demand levels are very high, and we observe this across different regions. Customers are experiencing success with RISE, where a significant number of early adopters have effectively transformed and are demonstrating proof points in their success journey. A key aspect of this digital transformation is the ability to deliver value and achieve early returns on investment, enhanced by the integration of AI as an accelerator. For new customers, incorporating this into RISE and GROW with SAP helps accelerate value through the outlined use cases, providing a strong incentive to act swiftly. For the many customers who have already made the transition, as Christian noted, they can not only transform their operations in the cloud but also benefit from a premium upgrade and the simplicity of adopting innovations, which is a significant advantage of our program. While we acknowledge that there is some market caution regarding return on investment and the effectiveness of digital initiatives, the integration of AI into our processes and technology is one of the key factors fueling the sustained demand we continue to see.

Operator, Operator

The next question is from the line of Charles Brennan with Jefferies.

Charles Brennan, Analyst

Great. I just wanted to ask one actually on the interplay between the CCB growth and the cloud growth. When I think about assets like Concur and Fieldglass, even in normal economic conditions, I wouldn't expect them to be doing mid-20s growth. Is it likely that cloud growth will always remain below the CCB growth? And in the context of your updated cloud revenue guidance, can you just give us some insight on how you expect the CCB to evolve in the second half of the year?

Dominik Asam, CFO

If we examine historical data, we have provided updates on our cloud revenue guidance for the year, which aligns well with last year's CCB growth. However, the transactional volume has been somewhat of a challenge, as growth in that area has not been as strong as overall trends. It's important to note that another significant factor driving our cloud revenue is the progress from the RISE deal, which continues to show promise. We believe that the 25% growth in our cloud backlog is a significant indicator. While we haven't provided specific second half numbers for the current cloud backlog, I prefer to adhere to our original guidance methodology without adding extra KPI guidance. However, it should be sufficient to achieve the updated numbers we shared today.

Operator, Operator

The next question is from Mohammed Moawalla with Goldman Sachs International.

Mohammed Moawalla, Analyst

My question was really focused on the non-S4 side. Dominik, you talked about Fieldglass on the transaction revenue side. Was there any softness you've seen under Rebar or Concur? And thinking about the kind of rest of the line of business portfolio, what sort of impact have you seen there? Obviously, S4 remains pretty strong, but I'm curious to get any color on sort of success factors in some of the other line of business products?

Dominik Asam, CFO

I mean we don't guide that now by line of business and line of business. But what you can do is, of course, decompose and look at SaaS and what's impacted in terms of S/4HANA growth in there. And then you get some indication, but don't forget to also adjust for the infrastructure as a service piece of it, which is declining, and that's by intention, by design. So within the transactional part, indeed, Fieldglass was a little bit of an outlier to the downside with really significant negative numbers in growth terms because of the macro on that front. Otherwise, I'd say it was pretty much in line and was maybe a little bit decelerated but not much.

Operator, Operator

The next question comes from the line of Patrick Walravens with JMP Security LLC.

Patrick Walravens, Analyst

Christian, do you feel that SAP needs more PhD level data scientists to do advanced research in all the AI topics that are relevant to SAP?

Christian Klein, CEO

Oh my God. First of all, I don't have a PhD in data science, but during my time leading S/4HANA, I learned a lot about our data model, and we are sitting on a lot of data. Seriously, we have someone with a PhD leading our AI organization, and he's one of our best engineers. When I look at what our team is doing almost every day, we are going through all the use cases that exist not just on PowerPoint, but are also being prototyped. We are measuring the business value, aligning on commercials, discussing our go-to-market strategy, and we have clearly defined our vision. Did we have to transfer some R&D capacity to AI? Absolutely. Are we well-equipped on the leadership level with excellent data scientists? Absolutely. I am very confident in this. Even our line of business leaders are deeply engaged in AI. For instance, Muhammad Alam, who is responsible for ISBN and Jan Gilg, who is in charge of S/4HANA, really know their stuff. This is a true team effort. We shifted some resources because, with generative AI, we encountered more powerful use cases. Consequently, we deprioritized some features and functions to allocate more capacity to AI. Additionally, it's important to note that we learn a lot from various AI startups. We are exchanging significant insights and best practices. The investments we are making are aimed at teaming up both technologically and in terms of market strategy, while also gaining knowledge on how to effectively build this LLM model. We're gaining valuable insights through these investments, which should not be overlooked.

Anthony Coletta, Chief Investor Relations Officer

All right. Thank you. And I think this will conclude our call for today. Thanks for joining. Operator, you can close the call. Thank you.

Christian Klein, CEO

Thanks a lot, everyone.

Operator, Operator

Goodbye.

Christian Klein, CEO

Thank you.

Dominik Asam, CFO

Thank you. Bye-bye.