SAP SE Earnings Call: Cloud Strength, AI and Cash

SAP SE (US) ((SAP)) has held its Q4 earnings call. Read on for the main highlights of the call.

SAP SE (US) used its latest earnings call to underline a story of strong execution and financial resilience, even as it acknowledged growing pains in its cloud transition and a more demanding macro backdrop. Management leaned heavily on record cloud backlog, accelerating cloud ERP adoption and sharply higher earnings and cash flow to argue that the company is structurally stronger than a year ago. At the same time, they were candid about slower current cloud backlog growth, pressure on legacy license revenues, and one-off costs, but stressed that these headwinds are manageable against the scale of SAP’s cloud and AI opportunity.

Record Cloud Backlog Underpins Multi‑Year Growth

SAP’s cloud engine is now backed by a record total cloud backlog of €77 billion, up 30% year-on-year, providing multi‑year revenue visibility with an average contract duration of roughly four years. The current cloud backlog (revenue expected over the next 12 months) rose 25% to €21 billion. Management highlighted that the fourth quarter was the best bookings quarter in the company’s history, with very large contracts dominating the mix: deals above €5 million accounted for a record 71% of Q4 cloud order entry. This deep, long-dated backlog is central to SAP’s claim that growth is increasingly “locked in” even if quarterly dynamics fluctuate.

Cloud Revenue and ERP Suite Power Top-Line Expansion

Cloud revenue grew 26% in 2025, confirming SAP’s pivot away from traditional on-premise software towards subscription-based services. The cloud ERP suite remains the key growth engine, with revenue up 32% (34% in U.S. dollar terms) and now representing 86% of total cloud revenue. This concentration underscores that SAP’s core strength still lies in mission‑critical ERP, but now delivered as a cloud service. As more customers modernize and consolidate core processes in the cloud, SAP is deepening its strategic footprint and increasing recurring revenue visibility.

Profitability and EPS Step Up Sharply

Beyond growth, SAP delivered meaningful profit and earnings expansion. Non‑IFRS operating profit for the year climbed to €10.4 billion, while IFRS operating profit in the fourth quarter rose 27% to €2.6 billion despite one-off charges. Non‑IFRS basic EPS jumped 36% to €6.15 for fiscal 2025, reflecting both operational leverage and a richer mix of high-margin cloud business. Management framed this as evidence that the cloud transition is not only scaling but doing so with improving economics, easing investor worries that growth might come at the expense of margins.

Cash Generation Fuels Aggressive Capital Returns

Free cash flow reached about €8.2 billion in 2025, coming in at the top end of the revised outlook and signaling robust underlying cash conversion. With this cash generation as a foundation, SAP announced a new €10 billion share repurchase program to be executed over two years starting in February. Management also pointed to an expected step-up in free cash flow to roughly €10 billion in 2026, positioning SAP to both fund growth and return substantial capital to shareholders, a combination that could appeal to investors seeking both stability and upside.

Cloud Margins March Higher

Profitability in the cloud business is improving. SAP’s non‑IFRS cloud gross margin increased by 1.6 percentage points to 75%, driving a 29% year-on-year rise in cloud gross profit. Management attributed this to better unit economics, scaling benefits in hosting infrastructure, and more efficient service delivery. These margin gains support the broader narrative that as SAP’s cloud base grows, each incremental euro of revenue becomes more profitable, a critical factor for long‑term value creation.

Business Data Cloud Shows Early Traction

SAP’s Business Data Cloud (BDC), positioned as a central data and harmonization layer enabling AI and analytics across SAP and non‑SAP sources, is showing early commercial momentum. In its first 12 months, BDC generated more than €2 billion in order entry. This signals strong demand from enterprises that want a unified data foundation for AI use cases, and reinforces SAP’s strategy to monetize not only applications but also the underlying data fabric that powers intelligent automation and decision-making.

AI-Driven Products and Strategic Wins Build Momentum

Product innovation, especially in AI, was another prominent theme. Management showcased recent wins with customers such as H&M and Fresenius/Avelios as proof points for AI‑embedded applications and industry-specific AI agents. They emphasized that AI capabilities, agent orchestration and extensibility are increasingly decisive in competitive deals, while churn remains low and discounting stable. The message: SAP sees AI as a value driver tightly integrated into its application stack, helping it defend and expand its strategic role within customer landscapes rather than ceding ground to infrastructure players.

Slower Current Cloud Backlog Growth Raises Questions

Despite the strong backlog, SAP acknowledged that current cloud backlog growth of 25% represented a more pronounced slowdown than it had anticipated and fell slightly below some prior expectations. Management tied this to the mix of large, complex transformation projects whose revenue ramps are back‑end loaded, dampening near-term backlog recognition. While SAP argued that the economics of these deals remain attractive over their full term, the slower CCB trajectory is likely to keep investors focused on how quickly these contracts translate into realized cloud revenue.

Legacy Software License Revenue in Structural Decline

Traditional software license revenue fell 27% year-on-year in 2025, a drop the company framed as the expected consequence of customers shifting from perpetual licenses to cloud and subscription models. While this pressurizes legacy revenue lines and can make reported growth look uneven, SAP underscored that the shift improves long-term visibility and recurring revenue quality. For investors, the key question is how effectively cloud growth outpaces the decline in licenses, and current numbers suggest that the transition is gaining momentum.

Geopolitics and Data Sovereignty Prolong Deal Cycles

Management flagged rising geopolitical tensions and growing sovereignty and regulatory requirements as a source of complexity, particularly for state-owned and defense-related customers. These factors are lengthening negotiation and deployment cycles and, in some cases, pushing out near-term revenue recognition. While these deals can be large and strategically important, they require more bespoke architectures and compliance work, underscoring that macro and regulatory risk remains an operational reality even for a cloud-heavy business.

One-Off Charges and Litigation Weigh on Reported Numbers

SAP’s 2025 results included notable one-time costs. Non‑IFRS operating profit was reduced by roughly €100 million tied to a workforce transformation program, while IFRS operating profit absorbed around $200 million in expenses related to Teradata litigation. Management presented these as non-recurring items that temporarily obscure the underlying operational progress. Investors will be watching to ensure such charges do not become a pattern, but the company’s strong profit and cash flow suggest it has ample buffer.

Market Skepticism and Share Price Volatility

Despite the robust financial metrics, SAP’s share price was volatile around the earnings release, with management noting an intra-day decline of about 10% during Q&A. Some investors questioned how much value will reside in application software versus infrastructure in an AI-dominated future, and whether SAP can capture a disproportionate share of AI economics. Management responded by stressing the strategic importance of its application layer, data fabric and AI agents. The episode highlights a gap between SAP’s internal confidence and lingering market doubts about where AI value will ultimately accrue.

Deal Mix Pushes Revenue to the Back End

The structure of SAP’s recent wins is also shaping reported metrics. A high proportion of very large transformation deals—those above €5 million, accounting for 71% of Q4 order entry—typically begin with smaller initial deployments and scale over time. This pattern depresses near-term contributions to current cloud backlog and delays revenue recognition, even as it builds a larger long‑term opportunity. Management argued that this “back-end loaded” ramp profile is a trade-off they are willing to accept for securing strategic, multi‑year engagements with blue-chip clients.

Forward Guidance: Moderate CCB Slowdown, Accelerating Revenue and Record FCF

Looking ahead, SAP expects only a slight further moderation in current cloud backlog growth in 2026—less than the deceleration observed in 2025—while forecasting an acceleration in total revenue growth supported by its €77 billion total cloud backlog and €21 billion current cloud backlog. For 2025, the company highlighted key metrics including 26% cloud revenue growth (cloud ERP up 32%), total revenue around €37 billion (up 11%), a 75% cloud gross margin with cloud gross profit up 29%, IFRS operating profit of €9.8 billion, non‑IFRS operating profit of €10.4 billion, non‑IFRS EPS of €6.15 (up 36%), and free cash flow of roughly €8.2 billion. For 2026, management is targeting record free cash flow of about €10 billion, a midterm non‑IFRS tax rate between 28% and 30%, and continued operating discipline aimed at pushing the expense‑to‑revenue growth ratio toward the lower end of its 80–90% operating leverage objective, while executing the €10 billion, two-year share repurchase plan.

In sum, SAP’s earnings call painted a picture of a company that is executing strongly on its cloud and AI strategy, with record backlog, rising cloud margins, robust earnings growth and powerful cash generation underpinning a sizable buyback program. The main pressure points—slower current cloud backlog growth, declining license revenues, geopolitical complexity and one-off charges—are real but appear outweighed by the scale and quality of SAP’s cloud franchise. For investors, the key debate now centers less on whether SAP can grow, and more on how much AI-driven value it can capture within the enterprise stack as the market’s focus shifts from infrastructure to intelligent applications.