SAP (SAP.US) Q3 Revenue Surpasses 10 Billion Euros for the First Time; Full-Year Cloud Revenue Expected to Reach the Upper End of Guidance Range

According to Golden Ten Data, German software giant SAP SE (SAP.US) achieved a quarterly revenue milestone of surpassing 10 billion euros for the first time in the third quarter, with cloud business growth exceeding expectations and indicating that the artificial intelligence (AI) boom has not diminished market demand for its products. The company also expects full-year cloud business revenue to reach the high end of its previously guided range. As of press time, SAP's shares had risen over 2% in after-hours US trading on Wednesday.

The financial report shows that SAP's third-quarter revenue increased by 13% year-on-year to 10.27 billion euros, marking the first time single-quarter revenue surpassed 10 billion euros. In terms of profitability, non-IFRS operating profit was 3.03 billion euros, an 18% year-on-year increase and the first time it surpassed 3 billion euros in a single quarter; non-IFRS operating profit margin was 29.5%, up 1.2 percentage points year-on-year. IFRS basic earnings per share were 1.96 euros, a 14% year-on-year increase; non-IFRS basic earnings per share were 1.89 euros, a 19% year-on-year increase, beating analysts' consensus of about 1.83 euros. Free cash flow grew by 36% to 1.72 billion euros.

Cloud business revenue grew 26% in the third quarter to 6.67 billion euros, surpassing the consensus estimate of 6.57 billion euros. SAP stated that the growth in cloud revenue was due to customers resuming investment after overcoming "financial difficulties."

At constant exchange rates, SAP's cloud backlog grew 26% to 24.14 billion euros, higher than UBS's previous forecast of a 24% to 25% increase. SAP's backlog is considered an important indicator of global enterprise tech spending, as the company's software suites provide accounting and payroll services for many large companies worldwide.

SAP develops enterprise-grade software for managing finance, human resources, and other core business functions. In recent years, SAP has encouraged customers to shift from legacy on-premises systems to the cloud. Currently, the majority of SAP's revenue already comes from remote access services. The company plans to end regular support for legacy products next year, after which the cost of maintaining traditional services will rise.

SAP now expects subscription revenue in 2026—that is, customer fees for remotely renting software use rights rather than buying and running the software themselves—to reach the upper end of the expected range, at 25.8 billion to 26.2 billion euros, representing year-on-year growth of 23% to 25%. If declining traditional software license businesses are included, SAP expects full-year revenue to reach 36.3 billion to 36.8 billion euros, a year-on-year increase of 12% to 13%. SAP maintained its full-year operating profit guidance, remaining at 11.8 billion to 12.2 billion euros at constant exchange rates.

SAP CEO Christian Klein called it "an outstanding quarter." He stated that customers are "investing in technologies that support their AI strategies." New cloud customers include AstraZeneca, Infineon, and Henkel.

After a massive sell-off in software stocks earlier this year due to market concerns that powerful new AI tools would replace traditional applications, SAP's share price has rebounded. Christian Klein is driving a reorganization of the company around AI at its headquarters in Walldorf, Germany. After customer uptake of SAP's AI tools was slower than expected and criticized for lacking cost-effectiveness, Christian Klein began to take direct responsibility for new technology development. He has said that AI will be key to the company’s future growth.

TD Cowen analyst Derrick Wood and others wrote in a report ahead of the results release that adoption of SAP AI tools "is progressing better than many other enterprise-grade AI products, but is not yet the main driver of order growth."