SAP SE (US) ((SAP)) has held its Q1 earnings call. Read on for the main highlights of the call.
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SAP SE’s latest earnings call struck an upbeat tone, as management highlighted strong cloud growth, expanding margins and solid cash generation, even against a backdrop of macro and geopolitical uncertainty. Executives emphasized that operational momentum and early benefits from AI more than offset headwinds from falling license sales and softer services revenue.
Cloud Backlog Underpins Revenue Visibility
SAP stressed that its cloud engine continues to drive the business, with current cloud backlog up 25% year-on-year to EUR 21.9 billion. This expanding backlog gives investors solid visibility into future recurring revenue and reinforces confidence in the durability of SAP’s cloud transition.
Cloud Revenue and ERP Suite Power Growth
Cloud revenue jumped 27% year-on-year and came close to EUR 6 billion for the quarter, underscoring the shift to subscription models. The Cloud ERP Suite was the standout, accelerating 30% and accounting for 87% of cloud revenue growth, confirming SAP’s strength at the core of enterprise operations.
Revenue Expansion and Margin Acceleration
Total revenue rose 12% to EUR 9.6 billion, while non-IFRS operating profit climbed 24% to EUR 2.9 billion, pushing the operating margin to 30%, up 2.9 percentage points. IFRS operating profit increased 17% to EUR 2.7 billion, highlighting that SAP is converting top-line momentum into meaningful profitability gains.
Earnings Growth and Solid Free Cash Flow
Non-IFRS EPS improved 20% to EUR 1.72, with IFRS EPS up 9% to EUR 1.66, reflecting both revenue growth and better efficiency. Free cash flow reached EUR 3.2 billion in the quarter, even after a EUR 408 million legal settlement, giving SAP ample financial firepower for investment and shareholder returns.
Share Gains and Strong Order Momentum
Management pointed to robust demand indicators, noting that public cloud order entry made up over 70% of quarterly volume. The indirect channel grew even faster than direct and now represents nearly 30% of order entry, while Gartner data suggested SAP grew about 15 percentage points faster than the global enterprise applications cloud market.
High-Profile Customer Wins and Go-Lives
The call showcased a roster of large clients choosing or expanding with SAP, including ConocoPhillips, Thales, Air Liquide, Bristol-Myers Squibb, PayPal, Hyundai Europe and Aptiv. Major go-lives such as Samsung Electro-Mechanics, Alibaba Cloud, Fonterra and ExxonMobil’s large SuccessFactors rollout highlighted SAP’s ability to execute at scale.
AI Delivers Tangible Customer Outcomes
SAP detailed concrete AI use cases, such as Daimler Trucks lifting bid win rates from 10% to over 40%, delivering an estimated EUR 70 million impact in 12 months. Other customers saw substantial efficiency gains, with Hormann slashing manual tender work, Martur Fompak speeding invoicing and innovation, and consulting partners accelerating ERP migrations.
Internal AI Boosts Productivity and Efficiency
Internally, SAP is using AI to raise productivity across development, support, consulting and demand generation, including double-digit efficiency gains for support and developers. Management targets about EUR 2 billion in annual run-rate efficiencies by the end of 2028, suggesting AI will increasingly support margin expansion.
Cloud Margins Remain Healthy
Cloud profitability stayed robust, with IFRS cloud gross margin at 74.6% and non-IFRS at 75.2%, roughly flat year-on-year. Stable margins at these high levels indicate SAP is scaling its cloud infrastructure efficiently while continuing to invest in innovation and growth.
Geopolitics Adds a Layer of Risk
Executives flagged the conflict in the Middle East and potential disruption in the Strait of Hormuz as key external risks that could affect global supply chains and customer investment. While these factors have not yet derailed performance, management cautioned that a prolonged escalation could materially impact SAP’s ability to deliver against its outlook.
Planned Deceleration in Cloud Growth
Management guided to a slight deceleration in current cloud backlog and cloud revenue growth in coming quarters, noting that some Q1 strength was driven by quarter-specific effects. Investors were reminded that cloud growth remains strong in absolute terms, but should not extrapolate the quarter’s exceptional pace.
License Revenue Falls as Cloud Shift Accelerates
Software licenses revenue dropped 33% year-on-year, reflecting the ongoing move away from perpetual licenses toward cloud subscriptions. While negative for that line item, the shift supports more predictable recurring revenue and aligns SAP with long-term industry trends.
Services Revenue Faces Temporary Pressure
Services revenue saw a slight decline as SAP invests in automation, migration tooling and adoption support that reduce billable hours in the near term. Management framed these as deliberate choices, creating a one-off headwind that should be absorbed over time while improving customer outcomes and scalability.
Enterprise AI Still in Early Stages
Despite promising case studies, SAP stressed that enterprise AI is still early, with current agents often achieving about 85% to 90% accuracy, below what many mission-critical processes require. The company sees further work on data models, governance and ontologies as necessary before fully autonomous AI can be widely deployed in production.
One-Off Financial Factors in the Quarter
Results also reflected several non-recurring elements, including a EUR 135 million decline in share-based compensation partly linked to a lower share price, and the legal settlement that weighed on cash flow. Management noted these factors to help investors distinguish underlying operating performance from temporary swings.
Guidance Hinges on Macro Stability and M&A
SAP reaffirmed its full-year 2026 outlook, underpinned by 25% cloud backlog growth, 27% cloud revenue growth, a 30% operating margin and strong EPS gains. However, the guidance assumes near-term de-escalation in the Middle East, benefits from the Reltio acquisition and disciplined cost growth at 80% to 90% of revenue, with management acknowledging a wide range of potential macro outcomes.
SAP’s earnings call painted a picture of a cloud and AI-driven growth story with strengthening margins, albeit overlaid with geopolitical and transition-related risks. For investors, the key takeaway is that SAP’s fundamental trajectory remains positive, but performance will depend on both execution and a relatively stable external environment.