"SAP, the largest weighted stock in European markets, reported third-quarter cloud revenue below expectations; its stock price fell 4% after hours | Earnings Report News"
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Europe's largest software company by market capitalization, SAP SE, released its third-quarter financial report, in which its cloud business revenue fell short of analyst expectations, and its stock price fell as much as 4% in after-hours trading. Media reports indicate this shows trade disputes and economic weakness are putting pressure on the company's sales.
The following are highlights from SAP's third-quarter financial report:
Main Financial Data:
Operating Profit: IFRS operating profit rose by 12% to €2.49 billion, with the operating margin up 1.3 percentage points to 27.4%. Non-IFRS operating profit increased 14% to €2.57 billion, up 19% at constant currency; non-IFRS operating margin rose 1.8 percentage points to 28.3%.
Earnings Per Share: IFRS basic EPS increased 37% to €1.72; non-IFRS basic EPS rose 29% to €1.59, surpassing analyst expectations of €1.49.
Cash Flow: Third-quarter operating cash flow increased 7% to €1.5 billion, and free cash flow rose 5% to €1.27 billion.
Cloud Business Data:
Cloud backlog: Cloud backlog increased 23% to €18.84 billion, up 27% at constant currency.
Cloud revenue: Up 22% to €5.29 billion, up 27% at constant currency, below analyst expectations of €5.33 billion; among this, cloud ERP suite revenue rose 26% to €4.59 billion, up 31% at constant currency.
Software license revenue: Software license revenue dropped 43% to €160 million, down 42% at constant currency.
Total cloud and software revenue: Total cloud and software revenue grew 8% to €8.02 billion, up 12% at constant currency.
Service revenue: Service revenue increased 2% to €1.06 billion, up 6% at constant currency. Overall revenue increased 7% to €9.08 billion, up 11% at constant currency.
Cloud gross profit: Under IFRS, cloud gross profit rose 24% to €3.95 billion; on a non-IFRS basis, cloud gross profit grew 24% to €3.97 billion, up 28% at constant currency.
Cloud gross margin: IFRS cloud gross margin rose 1.5 percentage points to 74.6%; non-IFRS cloud gross margin was up 1.3 percentage points to 75.1%, up 1.1 percentage points to 74.9% at constant currency.
2025 Full-Year Guidance:
Cloud revenue: At constant currency, cloud revenue will be at the low end of the expected range, €21.6 to 21.9 billion (2024: €17.14 billion), a year-on-year increase of 26% to 28%.
Operating profit: At constant currency, non-IFRS operating profit will be at the high end of the expected range, between €10.3 and €10.6 billion (2024: €8.15 billion), a year-on-year increase of 26% to 30%.
Free cash flow: Free cash flow is expected to be €8.0 to €8.2 billion (2024: €4.22 billion), previously expected to be about €8.0 billion.
Cloud and software revenue: At constant currency, cloud and software revenue is expected to be €33.1 to €33.6 billion (2024: €29.83 billion), up 11% to 13% year-on-year.
SAP's share price has performed poorly recently. Its US ADR shares have dropped about 9% over the past three months, so investors had hoped this quarterly report would help the company get back on track. However, due to cloud revenue coming in below expectations, the report saw SAP's ADRs fall about 4% after hours, with the loss narrowing somewhat later.
Previously, SAP was considered the only European tech company with a chance to challenge the US "Magnificent Seven". Over the past three years, driven by the AI boom fueling cloud business growth, SAP's share price has tripled. Last year, SAP alone contributed half of Frankfurt's DAX index gain.
Media reports say that since CEO Christian Klein shifted the company's strategy from selling traditional on-premise software licenses to offering subscription services, investors have closely followed SAP's cloud business progress. Last quarter, SAP management warned that global trade wars and a weak US dollar could affect customer investment decisions.
Klein said in the earnings release:
"SAP delivered a strong performance in the third quarter, with robust 27% cloud revenue growth. As customers are adopting solutions covering the entire Business Suite—including the Business Data Cloud and AI services—at a faster pace, we are continuously expanding market share. Looking ahead to Q4, we're actively executing a strong sales pipeline, which gives us confidence in achieving even faster overall revenue growth by 2026."
SAP CFO Dominik Asam said Wednesday that despite macroeconomic uncertainty, the company has maintained its growth momentum.
"Our strong third-quarter results highlight the resilience and flexibility of our business model. Through disciplined execution and a strong focus on profitability and cash flow, we've continued to progress steadily amid a highly uncertain macroeconomic environment. We're entering the fourth quarter with plenty of confidence, confident we can deliver on our promises, as reflected by our raised operating profit and free cash flow guidance."
SAP has also updated its 2025 cloud revenue guidance. The company expects this revenue figure to approach the lower end of the previous range, at €21.6-21.9 billion (at constant currency). If calculated at the lower end, sales will show a 26% year-on-year increase. However, SAP expects adjusted operating profit to reach the upper end of the expected range, between €10.3-10.6 billion.
TD Cowen analyst Derrick Wood and colleagues noted in a pre-earnings report that SAP experienced some deal delays in Q3, with tariff disruptions causing particular pressure from manufacturing customers.
Wood added that analysis of US government spending showed that SAP's order volume in the US weakened in Q3, with government spending cuts hurting the company.
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