"Europe's largest weighted stock" SAP's third-quarter cloud revenue fell short of expectations, with shares dropping 4% in after-hours trading | Earnings Report Insights

Europe's highest-valued software company SAP SE announced its third-quarter financial report, revealing that its cloud business revenue fell short of analysts' expectations, causing its stock price to drop by as much as 4% in after-hours trading. Media reports indicate that this reflects the pressure on the company's sales from trade disputes and economic weakness.

Here are the key points from SAP's third-quarter financial report:

Key Financial Data:

Operating Profit: IFRS operating profit increased by 12% to €2.49 billion, with the operating profit margin rising by 1.3 percentage points to 27.4%. Non-IFRS operating profit grew by 14% to €2.57 billion, a 19% increase at constant currency; non-IFRS operating profit margin rose by 1.8 percentage points to 28.3%.

Earnings Per Share: IFRS basic earnings per share increased by 37% to €1.72; non-IFRS basic earnings per share rose by 29% to €1.59, exceeding analysts' expectations of €1.49.

Cash Flow: Operating cash flow for the third quarter grew by 7% to €1.5 billion, while free cash flow increased by 5% to €1.27 billion.

Cloud Business Data:

Cloud Business Backlog: Cloud business backlog orders grew by 23% to €18.84 billion, a 27% increase at constant currency.

Cloud Business Revenue: Revenue grew by 22% to €5.29 billion, a 27% increase at constant currency, falling short of analysts' expectations of €5.33 billion; among which, cloud ERP suite revenue increased by 26% to €4.59 billion, a 31% increase at constant currency.

Software License Revenue: Software license revenue decreased by 43% to €160 million, a 42% decline at constant currency.

Total Cloud and Software Revenue: Total cloud and software revenue grew by 8% to €8.02 billion, a 12% increase at constant currency.

Service Revenue: Service revenue increased by 2% to €1.06 billion, a 6% increase at constant currency. Overall revenue grew by 7% to €9.08 billion, an 11% increase at constant currency.

Cloud Business Gross Profit: According to IFRS, cloud business gross profit increased by 24% to €3.95 billion; according to non-IFRS, cloud business gross profit grew by 24% to €3.97 billion, a 28% increase at constant currency.

Cloud Gross Margin: The cloud gross margin under IFRS rose by 1.5 percentage points to 74.6%; the cloud gross margin under non-IFRS increased by 1.3 percentage points to 75.1%, rising by 1.1 percentage points to 74.9% at constant currency.

2025 Full-Year Performance Guidance:

Cloud Business Revenue: At constant currency, cloud business revenue is expected to be at the lower end of the guidance range, between €21.6 billion and €21.9 billion (compared to €17.14 billion in 2024), representing a year-on-year growth of 26% to 28%.

Operating Profit: At constant currency, non-IFRS operating profit is expected to be at the upper end of the guidance range, between €10.3 billion and €10.6 billion (compared to €8.15 billion in 2024), representing a year-on-year growth of 26% to 30% Free Cash Flow: Free cash flow is expected to be between €8 billion and €8.2 billion (for 2024, it is €4.22 billion), compared to the previous expectation of around €8 billion.

Cloud and Software Revenue: At constant exchange rates, cloud and software revenue is projected to be between €33.1 billion and €33.6 billion (for 2024, it is €29.83 billion), representing a year-on-year growth of 11% to 13%.

SAP's recent stock performance has been poor, with its U.S. ADR stock price falling about 9% over the past three months, leading investors to hope that this quarterly report could help the company get back on track. However, due to cloud business revenue falling short of expectations, SAP's stock dropped about 4% in after-hours trading following the earnings report, although the decline later narrowed.

Previously, SAP was seen as the only technology company in Europe capable of challenging the U.S. "Magnificent Seven." Over the past three years, driven by the AI boom, SAP's cloud business growth has led to a threefold increase in its stock price. Last year, SAP alone contributed half of the gains in the Frankfurt DAX index.

Media reports indicate that since CEO Christian Klein shifted the company's strategy from selling traditional software licenses installed on local servers to offering subscription services, investors have been closely monitoring SAP's cloud business progress. In the last quarter, SAP's management warned that the global trade war and a weak dollar could impact customers' investment decisions.

Klein stated in the earnings report:

"SAP performed exceptionally well in the third quarter, with cloud business revenue growing strongly by 27%. As customers adopt solutions covering the entire Business Suite, including Business Data Cloud and AI services, at a faster pace, we are continuously expanding our market share. Looking ahead to the fourth quarter, we are actively executing a strong sales pipeline, which gives us confidence in achieving faster overall revenue growth targets by 2026."

SAP's Chief Financial Officer Dominik Asam stated on Wednesday that despite the uncertain macroeconomic environment, the company has maintained its growth momentum.

"The strong performance in the third quarter highlights the resilience and flexibility of our business model. Through disciplined execution and a strong focus on profitability and cash flow, we continue to move steadily forward in an uncertain macroeconomic environment. We enter the fourth quarter with ample confidence, assured of delivering on our commitments, which is also reflected in our raised expectations for operating profit and free cash flow."

SAP also updated its revenue expectations for the cloud business in 2025. The company expects this revenue to approach the lower end of the previously provided range, which is between €21.6 billion and €21.9 billion (at fixed exchange rates). If calculated at the lower end of the range, sales would grow by 26% year-on-year. However, SAP expects adjusted operating profit to reach the upper end of the forecast range, between €10.3 billion and €10.6 billion TD Cowen analyst Derrick Wood and others pointed out in a report prior to the earnings release that SAP experienced some transaction delays in the third quarter, affected by tariff disruptions, particularly under pressure from the manufacturing customer base.

Wood added that an analysis of U.S. government spending also indicated that SAP's order volume in the U.S. weakened in the third quarter, with government spending cuts impacting the company