The miss is likely to weigh on shares although the rest of the Q2 earnings print seems solid, including the modest lift to the full-year forecast. The company also said it will transition its enterprise business to cloud subscriptions from licensing models to take advantage of the faster-growing market.
Market Was Expecting More From Cloud
SAP said that it generated Q2 revenue of 7.55 billion euros ($8.4 billion), just below the expected 7.6 billion euros. Cloud revenue was up 19% year-over-year to 3.32 billion euros, missing the analyst target of 3.40 billion euros.
“This has been another strong quarter. We see significant opportunities ahead, in particular through the transformative power of AI. We are focused on delivering SAP Business AI that’s relevant, reliable, and responsible and we see significant possibilities for market expansion through these technologies and new premium offerings,” Christian Klein, CEO, said.
The Software-licenses business – once SAP’s biggest revenue stream – saw its revenue down 26% YoY to 316 million euros while revenue for SAP’s Software Support business segment came in at 2.87 billion euros. SAP reports on a non-IFRS (International Financial Reporting Standards) basis, meaning that the reported figures exclude share-based compensation, restructuring expenses, and acquisition-related charges.
Operating profit rose to 2.06 billion euros, topping the consensus of 1.93 billion euros. The closely-watched operating margin was reported at 27.2%, up 390 basis points on a YoY basis, and better than the expected 25.6%.
The company also made changes to its full-year forecast. It now sees operating profit at 8.8 billion euros (at the midpoint of the range), up from the prior forecast of 8.75 billion euros. On the other hand, the FY cloud revenue forecast is slashed from 14.4 billion euros to 14.1 billion euros.
FY cloud and software revenue is seen at 27.2 billion euros, compared to the prior forecast of 27.15 billion euros. The software company reaffirmed its FY free cash flow (FCF) target of 4.9 billion euros.
The cloud revenue guidance cut is likely the biggest driver of weakness in shares as SAP updated its 2025 targets in May when it said it expects cloud revenue of over 21.5 billion euros and total sales of 37.5 billion euros.
“We are very pleased with our first half results. The revenue growth and increased profitability, combined with sustained growth of our cloud backlog, demonstrate the strength of our business model. Q2 performance puts us on the right trajectory and allows us to raise our cloud and software revenue, as well as the operating profit outlook for the year,” said Dominik Asam, CFO.
In response to Q2 results, Jefferies analyst Charles Brennan wrote that these figures are likely to have investors “scratching heads” following the guidance cut.
“Given management optimism through the quarter, we doubt investors will be sympathetic,” he wrote in a note to clients.
Last month, SAP said it completed the sale of its stake in Qualtrics at a price of $18.15 per share in cash. The company generated an after-tax profit on the sale of approximately 2.6 billion euros, it said.
Updates On AI Progress
In early May, SAP announced it has partnered with IBM to utilize the latter’s Watson technology, with a special focus on Watsonx – IBM’s AI-focused platform. In the same month, SAP also announced partnerships with Microsoft and Google Cloud, though Google is busy working on its own AI development as even co-founder Sergey Brin is directly involved.
SAP said it uses the technology to generate “new AI-driven insights and automation to help accelerate innovation and create more efficient and effective user experiences across the SAP application portfolio.”
More particularly, IBM’s AI technology will power SAP Start’s digital assistant, which helps users to engage with apps in a more efficient manner. The overall aim is to increase productivity by utilizing natural language capabilities and forecasting insights from the latest generative AI technology.
“Working together to incorporate additional AI, machine learning and other intelligent technologies into SAP solutions can lead to better business outcomes for our joint customers,” said Klein.
The software company further enhanced its commitment to AI by investing in 3 startups – Aleph Alpha GmbH, Anthropic PBC, and Cohere. SAP will hope to improve its Business AI product and make it more reliable and responsible.
The investments come after Sapphire Ventures, the SAP-backed global venture capital firm focused on software startups, announced it will invest more than $1 billion in AI-focused enterprise tech startups.
“We are at a watershed moment, with generative AI poised to fundamentally change how businesses run. SAP is committed to creating an enterprise AI ecosystem for the future that complements our world-class business applications suite and helps our customers unlock their full potential,” added Sebastian Steinhaeuser, Chief Strategy Officer, SAP.
SAP said that Business AI is now used by over 26,000 customers. Business AI is a part of SAP’s Business Technology Platform and it uses AI technology to automate and optimize corporate processes.
Summary
SAP shares fell on Friday after the Germany-based software company reported weaker-than-expected Q2 cloud figures, and was forced to slash its full-year forecast for this segment. The guidance revision comes just two months after SAP updated its mid-term targets and at a time when the company ramps up investments in AI-focused technology and startups.
Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.
