SAP SE (SAP) Q4 & FY2025 Earnings Call Transcript

Date: January 29, 2026 | Source: Investing.com / SAP Investor Relations

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Alexandra Steiger (Global Head of Investor Relations, SAP): Today are CEO Christian Klein and CFO Dominik Asam. On this call, we will discuss SAP's fourth quarter and full year results for 2025. You can find the deck supplementing this call, as well as our quarterly statement, on our investor relations website. During this call, we will make forward-looking statements, which are predictions, projections, or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties that could cause actual results and outcomes to differ materially. Unless otherwise stated, all numbers on this call are non-IFRS, and growth rates and percentage point changes are non-IFRS, year-on-year on constant currencies. With that, I would like to turn the call over to Christian.

Christian Klein (Chief Executive Officer, SAP SE): Thank you, Alexandra, and a warm welcome to everyone joining this call. In countless conversations with business leaders in Q4 and at the World Economic Forum, it became clear: customers are facing geopolitical uncertainty, macroeconomic volatility, and they would like to leverage AI to make their companies more resilient and more productive, driving growth as well as cost efficiencies. At the same time, it is very encouraging that more and more customers and partners are turning to SAP to gain real business value from AI. Why? Because they realize that they don't gain value by developing a number of custom AI agents or by applying commodity large language models on top of transactional business applications. The formula for gaining real value from AI as an enterprise is becoming clear: it's important to reimagine first how AI will change existing business models and mission-critical business processes.

To boost process automation and efficiency, AI agents must be embedded in business processes and trained with context-rich business data that is not available to large language model providers. This is a unique combination only SAP can deliver, because our business suite provides us with access to the world's largest volume of business data, and we directly infuse our agentic AI layer in the most mission-critical business processes of a company. This momentum of SAP Business AI is also clearly visible in our Q4 numbers. More than two-thirds of our Q4 cloud order entry includes Business AI, increasing by more than 20 percentage points compared with Q3. Looking at the 50 largest deals in Q4, 90% of them included AI or SAP Business Data Cloud. We also saw the number of customers using our AI copilot tool growing ninefold over the course of the year.

Now, let's have a broader look at our financial performance. Q4 was the best bookings quarter of 2025, ahead of our expectations. This resulted in a total cloud backlog of EUR 77 billion, up 30%. This also clearly shows the underlying momentum of our business, as well as our potential in the future. In addition, we achieved our 2025 financial outlook for cloud revenue, as well as cloud and software revenue. A great performance, considering the macroeconomic challenges we faced in half year one. The ongoing transformation of SAP's operating model, combined with applying AI across the company, allowed us to even beat our operating profit and free cash flow outlook in 2025.

Some of you might remember, back in 2020, we started our disruptive cloud transformation with very ambitious targets for 2025, and today I'm happy to say we have delivered what we promised and even outperformed this ambition. Let me directly turn to a Q4 number where I expect some questions: our current cloud backlog. In Q4, it grew 25%. Back in Q3, we expected to reach 26%. Before I explain the deviation, let me outline that in Q4, new bookings came in clearly ahead of plan, and we saw strong customer retention, low churn, and stable discount rates. This resulted in a 30% increase to EUR 77 billion total cloud backlog, an impressive growth on an already large base. Despite the strong Q4 performance, two factors led to the deviation. First, we closed a higher share of significantly large deals in Q4 compared to our forecast in October, which is great for total cloud backlog. But large customers often don't move their mission-critical ERP in the first year. These deals always have more back-end-loaded ramps, and as a consequence, a limited impact on current cloud backlog in the first 12 months. Second, we closed a higher share of government deals in Q4 that included a termination for convenience by law. Such deals are not reflected in the CCB. So, while we even overperformed on bookings and are very satisfied with the outcome of Q4, the combination of both effects resulted in a one percentage point difference to what we expected in October, and consequently, a slight shift of cloud revenue from 2026 to 2027 and beyond.

The great bookings performance included some impressive wins in Q4: adidas, L'Oréal, and H&M Group are embarking on the RISE with SAP journey. Deloitte, Pirelli, RTX, Nokia, and the U.S. Navy chose RISE, too, while Toyota and Daimler Truck are even expanding their ongoing RISE journey. Lockheed Martin went live on RISE with SAP in one of their business areas. On business AI, new customers included names such as Tech Mahindra, Mondelēz, Kirin, and Sun Chemical. In healthcare, Fresenius selected SAP Business AI to sustainably improve patient care. We also saw the Bosch Group select SAP Business AI in Q4 to help boost innovation across all four of its business sectors. At Siemens, consultants can reinvest 25% of their weekly working time into higher value activities, thanks to Joule for Consultants.

Looking back at 2025, we made huge progress. Let me name a few highlights. First, our cloud transformation is in full swing. Customers representing 40% of our support revenue base have now initiated a move to cloud ERP, using the RISE and GROW with SAP offerings. On the go-to-market side, we established a partner-first approach for the mid-market, and our focus on public cloud pays off, with order entry growing more than five times faster than private cloud in 2025. We have also expanded our software and cloud capabilities and continue to see high demand for our offerings in the public sector. In Q4, for example, we closed a new OneGov agreement with the U.S. General Services Administration and with the HMRC in the UK. Finally, SAP Business Data Cloud secured around EUR 2 billion in total contract value in less than a year since its launch.

Now, let's turn to our growth ambition for 2026 and beyond. This confidence is based on several key growth drivers. First, our total cloud backlog of EUR 77 billion grew by 30%, outperforming our current cloud backlog growth by 5 percentage points. In short, we have a significant amount of our future cloud revenue in the books, and given the ramps of the large deals over the next four years, we are increasingly building a strong foundation for total revenue acceleration through 2027. Second, we will continue converting our installed base to the cloud with a multiplier of 2-3x. Considering our support revenue base of EUR 10.5 billion, this represents a multi-billion-euro cloud revenue opportunity. Third, the vast majority of our cloud customers are expanding their SAP footprint across the SAP Business Suite. In Q4 alone, almost two-thirds of our deals exceeding EUR 1 million involved four or more lines of business, a remarkable increase of 25 percentage points. Overall, we outperformed the cloud market by 10 percentage points in 2025. Fourth, with our business suite in the public cloud, SAP's mid-market business is growing, too, through our Partner First strategy. Finally, let's conclude with the growth driver that has the highest potential and, of course, the greatest strategic relevance: our business AI and Business Data Cloud.

Let me explain how we drive growth with SAP's unique combination of apps, data, and AI. First, Joule. We are reinventing the user experience and the way people work across all our apps with our copilot, Joule. Unlike other digital coworkers, Joule doesn't just access the world's leading LLMs, it also has broad access to business data. Second, embedded and extensible AI agents. We are embedding AI agents across the main business processes of every company. To extend where differentiation is needed, we provide a powerful agent builder with capabilities that are unique to SAP, such as the access to a semantic BDC data product. Third, we have always differentiated ourselves by our deep industry and business process knowledge. Now, we are reimagining these strategic industry capabilities with AI. Fourth, BDC addresses one of the biggest roadblocks for AI adoption that our customers face today: data silos. BDC brings together SAP and non-SAP data, providing our customers with the harmonized data they need to enable their agentic AI vision. And fifth, accelerated ERP migration. Often, customers spend 10x more on their ERP migration compared to what they spend on their ERP software. With our integrated AI-powered migration toolchain in the RISE journey, we are shrinking this ratio by cutting migration cost and making it faster and easier.

Finally, to be credible in the AI market, we role model the use of business AI and kicked off an extensive AI transformation program internally. Altogether, our goal is to achieve a run rate of around EUR 2 billion in real cost efficiencies by the end of 2028, thanks to the internal usage of AI. This equates to efficiency gains of 15%-20% of addressable costs. So to sum it all up, we closed 2025 with strong momentum. Our strategy is validated by our customers, and we have all the ingredients to win in the age of AI. The groundwork is done, and 2026 will be the year AI delivers enterprise-scale return on investment. With that, I'll hand over to Dominik.

Dominik Asam (Chief Financial Officer, SAP SE): Thank you very much, Christian, and thank you all for joining us this morning. SAP's strong close to the year reflects steady execution against our priorities. Our ability to drive top-line growth while consistently exceeding our profitability and free cash flow expectations reflects consistent execution against the outlook we provided at the beginning of the year. RISE with SAP and GROW with SAP both remain core pillars of our transformation strategy. As highlighted by Christian, AI and the Business Data Cloud are beginning to show real commercial impact, emerging as a meaningful contributor to customer decision and deal activity. This combined momentum continues to materialize in large cloud transactions, with deal volumes greater than EUR 5 million contributing a record 71% to our total cloud order entry in the fourth quarter.

Now, let me provide more details around our financial highlights. Current cloud backlog reached EUR 21.9 billion, up 25%. This is a more pronounced slowdown than what we had anticipated and more than the slight deceleration we guided to at the beginning of last year. Echoing Christian's remarks, this outcome reflects a deal mix weighted towards larger transformations, many of which include longer ramp periods or flexible structuring, reducing their near-term CCB contribution. Also, further mounting geopolitical tensions have led to many customers putting even more emphasis on exploring sovereign SaaS options. Total cloud backlog for the year grew 30% to a record EUR 77 billion, again significantly exceeding our current cloud backlog and cloud revenue growth. Cloud revenue actually grew 26% year-on-year in 2025, again primarily driven by the strong performance of Cloud ERP Suite. Cloud ERP Suite had another notable year, reinforcing its position as a key engine of growth with an increase of 32% in 2025 — a constant currency number; in U.S. dollars, the number would be two percentage points higher. Cloud ERP Suite now accounts for 86% of total cloud revenue for the year. Software licenses revenue decreased by 27%. Finally, total revenue for the full year approached EUR 37 billion, up 11%.

For the full year, Brazil, France, Germany, India, Italy, South Korea, and Spain all had outstanding performances in cloud revenue, but China, Japan, Saudi Arabia, and the United Kingdom, as well as the U.S., were particularly strong. Now, down to the income statement. Our non-IFRS cloud gross margin for the full year continued its upward trend and expanded by 1.6 percentage points to 75%, driving cloud gross profit up by 29%. In the fourth quarter, IFRS operating profit increased 27% to EUR 2.6 billion. Non-IFRS operating profit was up 21%. Both IFRS and non-IFRS operating profit growth were negatively impacted by approximately EUR 100 million related to a 2025 workforce transformation. In addition, IFRS operating profit growth was negatively impacted by EUR 200 million related to Teradata litigation expenses. For the full year, IFRS operating profit increased to EUR 9.8 billion and non-IFRS operating profit to EUR 10.4 billion.

The IFRS effective tax rate for the full year was 28.5%. The non-IFRS tax rate was 30.4%, which is below the outlook of approximately 32%. Looking forward, we expect the midterm non-IFRS effective tax rate to be in a range of 28%-30%. Free cash flow for the full year was a rounded-down EUR 8.2 billion, i.e., at the very high end of our revised outlook range of EUR 8 billion to EUR 8.2 billion. This increase was mainly attributable to higher profitability and to lower payments for restructuring and share-based compensation. We are very proud of the progress we've made this year and the business momentum that contributed to our strong net cash position. As a result, SAP has decided to further step up its capital returns with a new two-year share repurchase program of up to EUR 10 billion, scheduled to start in February. Finally, non-IFRS basic earnings per share in fiscal year 2025 increased by 36% to EUR 6.15.

Now, let's move on to our outlook. We have provided this year's outlook in the quarterly statement published earlier today. We expect CCB growth to moderate slightly over the course of 2026. While some deceleration is anticipated, it is expected to be meaningfully less than what we saw in 2025 in terms of deceleration. At the same time, we see a path for total revenue growth to accelerate, supported by the foundation we've built. Our operating profit outlook reflects sustained operating discipline, driving our expense-to-revenue growth ratio towards the lower end of our long-term operating leverage objectives of 80%-90%. In addition, in 2026, we expect to generate a record free cash flow of approximately EUR 10 billion, supported by continued efficiency improvements and operational rigor. While geopolitical and trade tensions have taken a certain toll on our top-line performance in 2025, the growing need for sovereignty and resilience also offers unique opportunities for those vendors that can offer technologies and tools to reduce dependencies from dominant offerings. As the largest non-U.S. software, SaaS, and PaaS vendor, there's no company better positioned than SAP to satisfy this rapidly growing demand. Thank you, and we will now be happy to take your questions.

Questions & Answers

Adam Wood (Morgan Stanley): Hey, good morning. Firstly, good morning, Dominik. Thanks so much for taking the question. Maybe if we go to the main focus for investors, the CCB at the end of the year. You know, you spoke obviously at the end of the year of 25% being disappointing, which is unfortunately where we ended up. Could you maybe talk us a little bit through the end of the fourth quarter close? Was it entirely that you had these large deals with later ramps and deals with cancellation clauses in them, or did you also see some slippage? And maybe if that was also the case, could you help us with what the pipeline looks like going into Q1? And then you talked about slight deceleration. I guess everybody's gonna say, well, slight deceleration last year was 4 points, I guess we could say 3 points organic. Is that the same type of range that people should be thinking about?

Christian Klein (Chief Executive Officer, SAP SE): Yeah, thanks a lot, Adam. So look, let me start with the CCB of 25%. As we said in October, 26% would be the target. First, let me reiterate: compared to October, we even overachieved our bookings plan, and the churn came out lower than expected, and we also, very importantly, had stable discount rates. Now, why did we end up at 25%? What we have seen is that during the course of Q4, the deal mix has changed. We closed larger deals. It's quite standard that for a larger customer, oftentimes in the first year, they are shifting some smaller solutions to the cloud because the larger ERPs need time — first, to figure out how they would love to run their business processes, and there are also a lot of technical things to be figured out before you really lift and shift your most mission-critical system to the cloud. So that was clearly the largest factor. And the second one is that we perform much better in the public sector. And in some deals, you have a termination for convenience by law, so per se, we are not including this in the CCB. Again, bookings performance was ahead of plan. Now, for some of the larger deals, there's slippage — in every quarter you have slippages, but I would say the sales execution was really good. Clearly, for 2026, we see a better pipeline coverage than where we were at in 2025. Also, one thing to consider, as Dominik also mentioned, is sovereignty. In some countries of the world, in some industries, deal cycles took a little bit longer. Now, for 2026, what does marginal decline or slight decline over the year mean? Definitely not a 4% decline. That is not what we are seeking for. It will not be such a decline like what you have seen in 2025.

Charlie Brennan (Jefferies): Great. Good morning. Thanks for taking my question. I'll do two, if I can. Firstly, everyone's preoccupied with AI at the moment. I think you referred to a EUR 2 billion saving at SAP over the next couple of years. Can you talk to how that's going to flow through the business? Are you gonna extract that through natural churn in the organization, or do we have to think more about, say, another restructuring program? And then, as you rewire the business towards an AI age, how much of your R&D today do you think is based on AI-driven tools? And how much of your output today is focused on AI as opposed to some of the core products?

Christian Klein (Chief Executive Officer, SAP SE): Yeah, talking about our internal transformation, obviously it's super important for us to also be credible to our customers. And indeed, all our business leaders are already working with our product management teams on implementing certain AI use cases. For the EUR 2 billion that will be reached by 2028, first, we will have a heavily growing business, and with that, we will just under-proportionally grow our cost and headcount base. You will see the efficiencies, obviously, in R&D — this is where the LLM modules alone can do magic, especially on the code generation side. Today, as of today, there is no restructuring plan. Can you hold this out forever? No. But today, I can tell you, we're gonna achieve that by just scaling our business way more than in the past with AI. On the R&D side, we already lifted and shifted a lot of our AI talent into the work to build the AI foundation, to train our foundational model, to build those AI agents. We already automated 35% of the code, and that will increase again significantly this year. So the profile of a software developer is already changing quite significantly within SAP.

Dominik Asam (Chief Financial Officer, SAP SE): Maybe on the R&D side, let's not forget the challenge we used to face very heavily is the enormous rigorous prioritization of what we are actually developing. Let's not forget there is ample wood to chop on R&D using modern technologies. This is also why, in terms of financial model, we stick to our 80%-90% operating leverage. Yes, we are going to be at the lower end of that in 2026, but the last thing we want to have is putting mortgages on the top line. We really want to push the top line very hard by aggressively investing.

Frederic Poulat (Bank of America): Good morning, Christian and Dominik. If I can follow up on the AI side. We've seen growing concerns about risks from AI impacting enterprise SaaS. You made a strong pitch around the software, data and agent ecosystem. It would be good to share, in terms of AI traction, what percentage of existing cloud customers are currently using your AI offering? And give us a range of revenue uplift you're seeing, in particular with some of the customers where you've seen earlier adoption. From a risk standpoint, do you see any of your customers starting to use different tools to respond to needs that they were previously addressing with SAP, either in core ERP or across HCM, et cetera?

Christian Klein (Chief Executive Officer, SAP SE): I can start, and Dominik, please also comment. First, on customer adoption, customer adoption of Joule increased by ninefold, which is really significant. What we see is in the cloud base, a healthy penetration of our AI: around 60% of our customers are already using our AI actively, and 20% are on the way to it. Let me give you practical examples. We won a large deal with H&M — we built a prototype for them and showed them the personalized shopping experience in commerce, obviously also using an LLM, but we combine it again with our AI foundation to better understand what the consumer bought in the past. We also went into returns claims management, reimagining this industry capability with AI. We are winning deals because of AI — we are not losing deals because of AI.

Dominik Asam (Chief Financial Officer, SAP SE): Maybe to give a little bit of financial color around winning deals. I'm always a little bit nervous about how people compare our numbers to the industry. We have a constant currency disclosure, but don't forget we had a massive devaluation of the U.S. dollar — over the year it was about 13% appreciation of the euro. We have delivered in Q4 a whopping 27% constant currency growth for SaaS and PaaS, and if you transform that into comparable U.S. dollar numbers, that's above 30%. Some of our competitors are hovering around the 20s, some not even reaching 10%. I'd say that is the evidence that we are actually winning in AI as opposed to losing.

Ben Castillo (BNP Paribas): Hi, good morning. Yeah, thanks for putting me on. There's lots of positives in here — lots of large deals in the mix, the sovereign cloud opportunity, the high volume of AI and the backlog, record TCB. But we ultimately still have CCB growth of sort of 25% in Q4 and still indicating cloud revenue will decelerate this year. Could you help us just think about the changing landscape here — that growing mix of large deals in the pipeline that are converting with longer deal ramps — how should we think about the midterm trajectory of total cloud revenue growth into 2027 and perhaps beyond?

Dominik Asam (Chief Financial Officer, SAP SE): Yeah, I mean, good question. When I'm looking back to October, there is definitely a lessons-learned at Q4, and we didn't see this in the forecast. But obviously, when you go into a Q4, it's not unnatural that you have large deals, but you see it in the order entry. We really closed many more large deals this time. What should you do? We saw this during the course of December, where customers then said, "Okay, deal done, and now we are doing the phasing." The phasing — should we now incentivize our people to keep the first twelve months up? That would be the wrong thing to do because it's against the nature of how these transformations work. Also, I don't want to discount the renewal base — at the end, what matters for the company on the mid and long term is the renewal base, because that is what is driving cloud revenue and profits on the long term. When you look into 2026, Q1, Q2, Q3, we are not having this larger share of large deals, and that's why we will see a similar pattern. Maybe on cloud revenue going forward: we guided cloud revenues for 2026, and just looking back at 25, I venture to say the accuracy of forecasts on cloud revenues is by now extremely high. This is also due to the extremely high share of recurring, more predictable revenues. Rest assured that our revenue guidance also for 2026 is of a similar kind of confidence level.

Mohammed Moawalla (Goldman Sachs): Great, thank you. Morning, Christian. Morning, Dominik. My question was really on the TCB. You talked a lot about delays in recognizing some of this business into the CCB. We saw quite a steep deceleration in CCB growth versus a year ago, almost sort of 9-10 points. Is there anything you can comment on that's kind of going on here, because you obviously talked about record numbers of larger deals? And as a follow-up, could you update us on BDC and the momentum — you're saying you've signed up a flurry of partners. How is that pipeline shifting, and what do you really expect in terms of contribution in 2026?

Christian Klein (Chief Executive Officer, SAP SE): Yeah. I can start with the total cloud backlog. At the end, the number is getting, of course, much bigger. When you look at the absolute quotes we put on top, I don't see any other competitor producing similar kinds of numbers when it comes to total cloud backlog, not even close. And this year, yes, there were larger customers coming, but when you look at the RISE journey, when we started this four years back, of course we started with smaller customers, mid-sized customers, and now there are these mega deals, and that will also continue, and they will just take a higher share in the overall order entry of what we are converting to the cloud with RISE. I'm actually super proud — the TCB is always then also, of course, dependent on the contract duration, and that actually was stable. So we are not actually increasing TCB with longer contract duration; we are actually increasing it by putting real business on top. And that, combined with lower churn, is for me a super positive sign also when it comes to cloud revenue development, not only in 2026, but then also for many, many years to come. And then finally, when you look into GROW — just last year, overall, we won over 3,000 net new customers, and that is, of course, mid-sized customers, but they will grow over time.

Dominik Asam (Chief Financial Officer, SAP SE): Maybe it's also worthwhile mentioning — if you look at the TCB minus CCB, which is basically the backlog in year two and the following years, that ratio is increasing, so it gives you also more visibility in the outer years.

Mark Moerdler (Bernstein): Sorry, had my mic off. So, I'd like to make sure that we're really clear on the CCB, and I know it's been a lot of the questions put on it. Can you give some ordering to what you think was the most impactful for why the number was less than the street might have expected? And can you also give us any sense on the economic impact of these sovereign cloud deals — does it impact revenue lift, multiple, or margin in any way, shape, or form, other than that it may take longer for the deals to close?

Christian Klein (Chief Executive Officer, SAP SE): Yeah. The one factor, Mark, clearly, which changed over the course of the quarter, and again, it's absolutely positive for the years 2026 to 2027 plus, is that we closed more larger deals. When you think about the phasing of such a deal, first of all, you negotiate on the business case, on the ROI, the AI use cases. You think about which pillars are really important — supply chain first, finance first, logistics, et cetera. As you then have many larger deals, and this was actually quite a significant shift, we saw that a lot of the revenue moved out from the first 12 months to years 2, 3, and 4. That was by far the highest impact we have seen compared to October. On sovereign cloud, the deal margins are almost the same, but the deal negotiation per se takes longer — we are winning not only very mission-critical ERP systems, we are also winning customers in regulated industries, and they have questions about sanctions, export control, AI data protection regulation. So these discussions take just longer than they have been a year ago, and it's a reflection of what is happening in the world. This is not a reflection of a demand issue. Actually, it's good.

Dominik Asam (Chief Financial Officer, SAP SE): And there's also this certification step which is required in many countries. We now really see the first countries certifying these products. So we are really at the embryonic phase of what could become something really big, but it's really happening because capital is flowing there. It takes some time to groom and mature these projects.

Toby Ogg (J.P. Morgan): Hi, Christian, Dominik, thanks for the question. Just on the free cash flow guidance, Dominik, of EUR 10 billion, clearly well ahead of expectations and looks to imply a pickup in cash conversion. I know we talked through the year about cash tax, FX, and the migration credit headwinds. Could you just help us reconcile these headwinds with the better free cash flow outlook and improved cash conversion you're now expecting?

Dominik Asam (Chief Financial Officer, SAP SE): Yeah, sure. I would say the upside is from two sources, partially from operational further improvements, which we have matured to a point that we feel comfortable guiding now, but also from the fact that the delta on stock-based compensation between the P&L and cash is increasing. We've always said, take the effective tax rate off the non-IFRS operating profit and add back around EUR 1 billion. So now I say around EUR 1 billion plus, so that gives us part of the upside, and the good news is that's sustainable — that's the new base to jump off. On the transformation credits, it's always the game of the overall working capital, and from that perspective, for 2026, this is the best estimate we can give today.

Alexandra Steiger (Global Head of Investor Relations, SAP): Great. Well, thank you, Dominik, and this concludes our call for today. Thank you all for joining.

Christian Klein (Chief Executive Officer, SAP SE): Thank you.

Dominik Asam (Chief Financial Officer, SAP SE): Thank you.

Operator: Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.