SAP's cloud sales fell short of expectations, with concerns over tariffs and exchange rate fluctuations looming, dropping 3% in after-hours trading | Earnings Report Insights
SAP's cloud revenue, total revenue from cloud and software, and cloud business backlog orders in the second quarter all fell short of market expectations, primarily affected by exchange rate fluctuations and tariff uncertainties. Although the company maintained its full-year targets, it warned that exchange rate changes would hinder growth, causing its stock price to drop by as much as 3% in after-hours trading
German software giant SAP announced its second-quarter results after U.S. stock market hours on Tuesday, revealing that the pressure from a weaker dollar led to cloud business revenue falling short of analysts' expectations, causing its U.S. ADR to drop by as much as 3% in after-hours trading.
Here are the key points from SAP's second-quarter financial report:
Key Financial Data:
Total Revenue: SAP's total revenue for the second quarter reached €9.027 billion, a year-on-year increase of 9% (12% growth at constant currency), falling short of analysts' expectations of €9.07 billion.
Cloud and Software Revenue: SAP's cloud and software revenue for the second quarter reached €7.97 billion, an 11% year-on-year increase, slightly below the average analyst expectation of €7.99 billion.
Operating Profit: SAP's non-IFRS operating profit for the second quarter grew to €2.568 billion.
Earnings Per Share: SAP's IFRS basic earnings per share increased by 91% to €1.45, while diluted earnings per share rose by 92% to €1.44.
Free Cash Flow: SAP's free cash flow surged to €2.357 billion in the second quarter, a year-on-year increase of 83%.
Cloud Business Data:
Cloud Revenue: SAP's cloud revenue in the second quarter climbed to €5.13 billion, a 24% increase (28% growth at constant currency), falling short of analysts' expectations of €5.17 billion.
Cloud ERP Suite Revenue: SAP's cloud ERP suite revenue (including S/4HANA Cloud) reached €4.422 billion in the second quarter, a 30% year-on-year increase (34% at constant currency).
Cloud Backlog: SAP's cloud backlog reached €18.052 billion in the second quarter, a 22% year-on-year increase (28% at constant currency), falling short of analysts' expectations of €18.5 billion.
Cloud ERP Suite: SAP's cloud ERP suite revenue (including S/4HANA Cloud) reached €4.422 billion in the second quarter, a 30% year-on-year increase (34% at constant currency).
Cloud Business Gross Profit: Under non-IFRS standards, SAP's cloud business gross profit grew to €3.856 billion in the second quarter, with a gross margin of 75.2%, significantly up from 73.3% in the second quarter of 2024.
Other Business:
Software License Revenue: SAP's software license revenue decreased by 15% to €190 million in the second quarter, a 13% decline at constant currency.
Service Revenue: SAP's service revenue fell by 5% to €1.06 billion in the second quarter, a 2% decline at constant currency.
Regional Data:
Asia-Pacific and Japan: SAP's revenue in the Asia-Pacific and Japan region grew by 33% (37% at constant currency) in the second quarter.
Europe, Middle East, and Africa: SAP's cloud revenue in the Europe, Middle East, and Africa region grew by 29% (30% at constant currency) in the second quarter
Americas: SAP's cloud revenue in the Americas region grew by 16% in the second quarter (22% at constant currency).
Performance Guidance:
2025 Cloud Revenue: SAP is optimistic about the full year of 2025, expecting cloud revenue to be between €21.6 billion and €21.9 billion, a year-on-year increase of 26% to 28%.
2025 Total Revenue: SAP expects total cloud and software revenue in 2025 to be between €33.1 billion and €33.6 billion, an increase of 11% to 13%.
2025 Operating Profit: SAP expects non-IFRS operating profit to be between €10.3 billion and €10.6 billion, an increase of 26% to 30%.
2025 Free Cash Flow: SAP expects free cash flow in 2025 to be approximately €8 billion (compared to €4.22 billion in 2024 at actual exchange rates).
SAP sells software for business functions such as finance, human resources, and procurement to enterprises. In recent years, the company has heavily promoted artificial intelligence services to encourage customers to migrate from traditional on-premises servers to cloud IT architectures, as customers in the cloud typically have higher average spending.
Over the past year, SAP's cloud business has continued to grow strongly. This is because once customers decide to migrate to the cloud, they usually need to invest in complex multi-year projects that are difficult to interrupt. Over the past year, SAP's stock price has soared by 40%, and the company has surpassed Dutch chip equipment manufacturer ASML Holding NV to become the most valuable company in Europe.
However, according to the financial report, SAP's cloud computing and software sales in the second quarter were slightly below expectations due to tariff uncertainties. Although the company maintained its full-year cloud revenue expectations, it indicated that exchange rate fluctuations would impact this growth by 3.5 percentage points.
SAP's largest market is the United States, accounting for over 30% of its total sales. The weakening dollar has put pressure on the company regarding exchange rates. Excluding exchange rate factors, SAP's cloud revenue grew by 24% to €5.13 billion, slightly below analyst expectations.
SAP's Chief Financial Officer Dominik Asam stated in a statement:
“As we enter the second half of the year, we remain cautiously optimistic and closely monitor geopolitical developments and public sector trends.”
Additionally, SAP's cloud backlog—an indicator of future cloud sales prospects—grew to €18.1 billion in the second quarter, but was below analyst expectations of €18.5 billion. This data measures cloud revenue that has been contracted but not yet realized within the next 12 months.
The company also stated,
“We expect the growth of current cloud backlog at fixed exchange rates to slow slightly in 2025.”
After the financial report was released, SAP's U.S. ADR fell by as much as 3% in after-hours trading, with the decline narrowing to around 1.7%.
Morningstar senior stock analyst Rob Hales stated that the greater risk facing SAP's stock price will come from the outlook on the impact of exchange rate fluctuations next year.
"Once management begins to reveal the potential impact of exchange rates for next year, it could lead to volatility in the stock price."
UBS Group AG analysts pointed out in a report last week that the incentives promised by SAP to attract customers to migrate to the cloud are likely to increase significantly. While this "drove cash inflows in the first quarter," it will put pressure on cash flow when the incentives are realized next year
