Shares of German enterprise software company SAP SE ADS (NYSE: SAP) declined sharply on Thursday after the release of the firm’s fiscal 2025 fourth-quarter financial results, which presented a blend of positive growth figures alongside signs of deceleration in certain areas. The company’s revenue showed a modest increase, while earnings surpassed expectations; however, concerns over the pace of backlog growth and changing deal dynamics have clouded sentiment.
For the quarter, SAP reported total revenue of 9.68 billion euros, marking a 3% increase year-over-year. When adjusted for constant currency effects, the growth rate was more pronounced at 9% compared to the previous fiscal year. The non-International Financial Reporting Standards (non-IFRS) earnings per share (EPS) rose 16% year-over-year, reaching 1.62 euros. Translated into U.S. dollars, SAP posted earnings of $1.89 per share, exceeding analyst projections of $1.76, although total revenue in USD at $11.27 billion fell short of the expected $11.46 billion.
Operating profit under IFRS grew significantly by 27% year-over-year, while the non-IFRS operating profit increased by 16%, and even higher at 21% when accounting for constant currency fluctuations. Cash flow generation remained healthy, with operating cash flow recorded at 1.30 billion euros and free cash flow at 1.03 billion euros during the quarter.
One of the notable highlights was the cloud backlog, which stood at 21.05 billion euros, reflecting a 16% increase from the prior year, or 25% on a constant currency basis. This growth was primarily fueled by large-scale transformational contracts, which are expected to ramp cloud revenue substantially in the longer term. Nonetheless, the company noted that European legal requirements mandating termination-for-convenience clauses have somewhat tempered backlog growth in the quarter. Specifically, SAP indicated that such contractual conditions diminished the constant currency cloud backlog expansion by about one percentage point during the fourth quarter.
During the earnings conference call, Chief Financial Officer Dominik Asam acknowledged that while the current cloud backlog rose 25% in constant currency terms, the trajectory was a sharper slowdown than both internal forecasts and prior guidance, which had anticipated only a slight deceleration. Asam explained that this more substantial slowdown stemmed from a shift in the deal mix toward larger digital transformation initiatives that inherently have extended ramp-up timelines and more flexible commercial agreements. These structures inevitably defer the near-term contribution to the backlog.
Additionally, Asam highlighted that increasing geopolitical tensions are influencing customers to prioritize sovereign software-as-a-service (SaaS) solutions, which brings additional complexities to deal negotiations and implementations. Although SAP remains optimistic about a robust pipeline in this sovereign cloud segment, these government, defense, and sensitive commercial sector-related contracts typically require lengthier closure and ramp-up periods compared to standard U.S. infrastructure-based offerings. Consequently, this evolving sales dynamic is now exerting pressure on near-term backlog growth rates.
On the revenue front, cloud sales achieved 5.61 billion euros in the quarter, representing an increase of 19% year-over-year and 26% on a constant currency basis. The cloud enterprise resource planning (ERP) suite also experienced growth, advancing 23% year-over-year, or 30% when adjusting for currency effects. At the close of the year, the total cloud backlog expanded 22% year-over-year to 77.29 billion euros, with a 30% increase on a constant currency basis.
In light of these results, SAP’s Executive and Supervisory Boards have authorized a new share repurchase program valued at up to 10 billion euros. This buyback initiative is expected to commence in February 2026 and conclude by the end of 2027.
Looking forward, the company outlined its 2026 outlook, anticipating cloud revenue between 25.8 billion and 26.2 billion euros, total cloud and software revenue ranging from 36.3 billion to 36.8 billion euros, and operating profit in the vicinity of 11.9 billion to 12.3 billion euros. Free cash flow is projected to approximate 10 billion euros. SAP also expects constant-currency revenue growth to accelerate over the course of 2027, while foreseeing a faster decline in constant-currency software support revenue due to customers more rapidly migrating to cloud-based solutions.
CEO Christian Klein remarked on the quarter, emphasizing the vital role of the current cloud backlog growth in establishing a foundation for accelerating total revenue growth through 2027. He pointed to SAP Business AI as a significant growth driver, integrated into two-thirds of the company’s cloud order entries in the fourth quarter, alongside widespread adoption of AI capabilities across the ERP suite.
Echoing this positive note, CFO Dominik Asam stated, "We closed 2025 on a high note, delivering strong operating profit and free cash flow ahead of our expectations. This performance reflects focused execution, financial discipline, and the continued trust our customers place in us as the North Star for their digital transformation." Despite this, market response was cautious, with SAP shares declining 14.88% to $200.98 during premarket trading, reaching a new 52-week low.
Key Points:
- SAP reported a 3% year-over-year revenue increase in Q4 fiscal 2025, or 9% at constant currency, with non-IFRS EPS rising 16% year-over-year.
- Current cloud backlog grew 16% nominally and 25% at constant currency, driven by large transformational contracts but tempered by termination-for-convenience clauses.
- CFO highlighted a sharper-than-expected slowdown in cloud backlog growth, attributed to longer ramp periods for larger deals and complexities from growing geopolitical considerations.
- Leadership announced a €10 billion share buyback program starting in 2026 and reaffirmed optimistic outlook for revenue and profit growth through 2027.
Risks and Uncertainties:
- The deceleration in cloud backlog growth due to a shift toward transformational deals with longer ramp-up periods may impact near-term revenue realization.
- Rising geopolitical tensions are complicating deal negotiations and may extend sales cycles, especially in sovereign SaaS offerings.
- Termination-for-convenience clauses mandated by law reduce backlog growth, potentially adding unpredictability to future revenue streams.
- Customer migration toward cloud solutions will accelerate the decline of traditional software support revenue, challenging revenue mix stability.