SAP SE (SAP) Q4 2025 Earnings Call Transcript
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Overview
SAP's earnings call reveals strong cloud revenue growth, a robust pipeline, and significant AI integration, all of which are positive indicators. The announcement of a EUR 10 billion share repurchase program further boosts shareholder confidence. While there are concerns about deal mix and geopolitical tensions, the company's strategic focus on AI and cloud solutions, along with improved financial metrics, suggests a positive outlook. The market is likely to react positively, with stock price expected to increase between 2% and 8% over the next two weeks.
Key Financial Performance
Total Cloud Backlog EUR 77 billion, up 30% year-over-year. This growth reflects strong customer retention, low churn, and stable discount rates. However, a higher share of large deals and government deals with specific terms led to a slight deviation from expected growth.
Current Cloud Backlog EUR 21 million, up 25% year-over-year. The growth was slower than anticipated due to a deal mix weighted towards larger transformations with longer ramp periods and geopolitical tensions leading to more complex sovereign SaaS options.
Cloud Revenue Grew 26% year-over-year in 2025, primarily driven by the strong performance of the cloud ERP suite, which increased by 32%. This growth highlights the scalability and demand for cloud solutions.
Software Licenses Revenue Decreased by 27% year-over-year, reflecting the ongoing shift from traditional software licenses to cloud-based solutions.
Total Revenue Approached EUR 37 billion, up 11% year-over-year, driven by strong cloud revenue growth and operational efficiency.
Cloud Gross Margin Expanded by 1.6 percentage points to 75%, driving cloud gross profit up by 29%. This improvement reflects operational efficiencies and scalability of cloud services.
Non-IFRS Operating Profit EUR 10.4 billion, up 21% year-over-year. Growth was supported by operational discipline and efficiency improvements.
Free Cash Flow EUR 8.2 billion, at the high end of the revised outlook range, driven by higher profitability and lower payments for restructuring and share-based compensation.
Non-IFRS Basic Earnings Per Share Increased by 36% to EUR 6.15, reflecting strong profitability and operational performance.
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Operating Highlights
SAP Business AI: More than 2/3 of Q4 cloud order entry includes business AI, increasing by over 20 percentage points compared to Q3. 90% of the 50 largest deals in Q4 included AI or SAP Business Data Cloud. The number of customers using the AI CoPilot tool grew ninefold in 2025.
SAP Business Data Cloud: Secured around EUR 2 billion in total contract value within a year of launch.
AI-powered migration tool chain: Integrated into the RISE journey, reducing migration costs and accelerating ERP migration for customers.
Cloud revenue growth: Cloud revenue grew 26% year-on-year in 2025, driven by a 32% increase in the cloud ERP suite. Total cloud backlog reached EUR 77 billion, up 30%.
Mid-market expansion: Partner-first strategy and reseller ecosystem expansion led to mid-market business growing 1.5x faster than direct business.
Public sector demand: High demand for offerings in the public sector, with notable agreements like OneGov with the U.S. General World Services Administration and HMRC in the U.K.
Operational efficiencies through AI: Internal AI transformation program aims to achieve EUR 2 billion in cost efficiencies by 2028, equating to 15%-20% of addressable costs.
Cloud gross margin improvement: Non-IFRS cloud gross margin expanded by 1.6 percentage points to 75%, driving a 29% increase in cloud gross profit.
Cloud transformation: 40% of support revenue base has initiated a move to cloud ERP. Public cloud order entry grew 5x faster than private cloud in 2025.
AI and Business Data Cloud focus: SAP is leveraging its unique combination of apps, data, and AI to drive growth, including tools like Joule and embedded AI agents.
Sovereign SaaS options: SAP is well-positioned to meet growing demand for sovereign SaaS solutions, particularly in sensitive geographies and industries.
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Risk or Challenges
Geopolitical Uncertainty: Geopolitical tensions and trade issues are causing delays in deal negotiations, particularly for state-owned and defense-related entities. This is also affecting commercial customers in sensitive geographies and industries, leading to longer deployment and ramp-up times for deals.
Macroeconomic Volatility: Macroeconomic challenges in the first half of 2025 impacted financial performance, requiring operational discipline to navigate the shifting environment.
Cloud Backlog Growth Deceleration: The current cloud backlog growth slowed more than anticipated, partly due to a deal mix weighted towards larger transformations with longer ramp periods and flexible structuring, reducing near-term contributions.
Sovereign SaaS Demand: Mounting geopolitical tensions have increased demand for sovereign SaaS options, which take longer to negotiate and deploy, impacting short-term revenue growth.
Dependency on Large Deals: A higher share of large deals in Q4, while beneficial for long-term revenue, has limited immediate impact on the current cloud backlog due to back-end loaded ramps.
Regulatory and Legal Risks: The company faced litigation expenses related to Teradata and challenges in negotiating sovereign SaaS deals due to regulatory complexities.
Economic Uncertainty in Key Markets: Economic conditions in certain regions, such as China, Japan, Saudi Arabia, and the U.K., have created challenges despite strong performances in other markets.
Operational Efficiency Challenges: The need for significant internal transformation to leverage AI for operational efficiency, including reskilling the workforce and integrating AI into business processes, poses execution risks.
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Guidance & Outlook
Cloud Revenue Growth: SAP expects to further expand its market share for cloud revenue and accelerate total revenue growth through 2027. The total cloud backlog grew by 30% to EUR 77 billion, providing a strong foundation for future revenue acceleration.
Cloud ERP Suite: Cloud ERP suite revenue increased by 32% in 2025 and is expected to continue being a key growth driver. SAP anticipates further expansion of its installed base to the cloud, representing a multibillion-euro revenue opportunity.
AI and Business Data Cloud: SAP plans to heavily accelerate the development of data products in 2026 to enrich the semantic layer for customers. The company aims to secure its position as the leading business AI company by leveraging its unique combination of apps, data, and AI.
Operating Profit and Cost Efficiencies: SAP aims to achieve a run rate of around EUR 2 billion in real cost efficiencies by the end of 2028 through the internal use of AI, equating to efficiency gains of 15%-20% of addressable costs.
Free Cash Flow: SAP expects to generate a record free cash flow of approximately EUR 10 billion in 2026, supported by efficiency improvements and operational rigor.
Geopolitical and Sovereign SaaS Opportunities: SAP is well-positioned to capitalize on the growing demand for sovereign SaaS solutions, particularly in sensitive geographies and industries. This is expected to contribute to long-term growth.
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Shareholder Return Plan
Share Repurchase Program: SAP has decided to further step up its capital returns with a new 2-year share repurchase program of up to EUR 10 billion scheduled to start in February. This decision reflects SAP's confidence in the sustainable strength of the business and its continued commitment to returning capital to shareholders in a disciplined and balanced way.
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Key Q&A
Q:Could you explain the factors behind the 25% CCB at the end of the year and the pipeline for Q1?
A:The 25% CCB was influenced by a change in deal mix during Q4, with larger deals being closed that required more time for implementation. Additionally, public sector deals with termination clauses were excluded from the CCB. Despite slippages, sales execution was strong, and the pipeline for 2026 looks better compared to 2025, with 90% of deals including AI.
Q:How will the EUR 2 billion savings from AI be achieved, and what is the focus of R&D on AI?
A:The EUR 2 billion savings will be achieved through natural growth and scaling the business with AI, without a restructuring plan for now. R&D is heavily focused on AI, with 35% of code generation already automated and significant investment in AI talents and tools to drive innovation and efficiency.
Q:What percentage of existing cloud customers are using AI offerings, and are there risks from customers using other AI tools?
A:Around 60% of cloud customers are actively using AI, with 20% on the way. SAP is winning deals due to its AI capabilities, combining LLMs with business data to deliver high-value AI solutions. There is no evidence of customers switching to other AI tools for core ERP or HCM needs.
Q:How should we think about the midterm trajectory of total cloud revenue growth?
A:The growing mix of large deals with longer ramps impacts short-term CCB growth but strengthens the renewal base for long-term cloud revenue. The trajectory is expected to stabilize, with strong pipeline coverage and reduced transactional dilution effects.
Q:What caused the steep deceleration in CCB growth, and what is the momentum for BDC?
A:The deceleration was due to a shift towards larger deals with phased revenue recognition. BDC has strong momentum, with many partners signed and a growing pipeline. It is expected to contribute significantly in 2026.
Q:What were the most impactful factors for the lower-than-expected CCB, and what is the economic impact of sovereign cloud deals?
A:The most impactful factor was the shift of revenue from the first 12 months to later years due to larger deals. Sovereign cloud deals have similar margins but take longer to negotiate due to regulatory and geopolitical considerations.
Q:What explains the improved free cash flow guidance of EUR 10 billion?
A:The improvement is due to operational efficiencies and an increase in the delta between stock-based compensation in the P&L and cash. This new base is sustainable, with no future mortgages expected.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the exact rounding details of the 25% CCB and 26% adjusted figure, as well as the specific range of deceleration for 2026. Additionally, they did not provide detailed financial impacts of sovereign cloud deals or precise revenue uplift from AI adoption.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
AI Cloud
AI agent
AI enterprise
AI solution
ERP migration
IFRS EUR
PaaS
SAP AI
SAP Cloud
SAP suite
SaaS
ability
agent process
backlog EUR
beginning
booking
capability
care
cloud backlog
cloud order
combination
contribution
decision
efficiency
experience
foundation
gain
increase
mission
order entry
partner
progress
ramp
record
scale
statement
tax
transformation SAP
user
value AI
vendor
workforce
SAP Transcript
SAP SE (SAP) Q4 2025 Earnings Call Transcript
Positive1-29
SAP's earnings call reveals strong cloud revenue growth, a robust pipeline, and significant AI integration, all of which are positive indicators. The announcement of a EUR 10 billion share repurchase program further boosts shareholder confidence. While there are concerns about deal mix and geopolitical tensions, the company's strategic focus on AI and cloud solutions, along with improved financial metrics, suggests a positive outlook. The market is likely to react positively, with stock price expected to increase between 2% and 8% over the next two weeks.
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