The 2027 deadline forces customers to accelerate "cloud migration"; SAP (SAP.US) Q2 cloud business exceeds expectations with 24% growth

According to Zhitong Finance APP, German software giant SAP SE (SAP.US) announced on Thursday that, driven by customers accelerating their migration from on-premises licenses to the cloud ahead of the company's deadline to terminate support for older software versions, second-quarter cloud revenue grew 24% year-on-year at fixed exchange rates to 6.28 billion euros (approximately $7.1 billion), surpassing the market's average analyst forecast of 6.26 billion euros.

For the quarter ended June 30, the German enterprise software giant reported earnings per share of $2.15, exceeding the consensus analyst expectation of $2.00. Second-quarter revenue rose 9% year-on-year to $11.24 billion, roughly in line with expectations. The current cloud backlog increased 26% year-on-year to $26.06 billion, also beating the market's expected growth rate of 23.8%.

As of press time, SAP shares were up 1.8% in after-hours US trading.

Looking at the full-year outlook, SAP expects cloud and software revenue to be between $41.31 billion and $41.88 billion, above the market's consensus forecast of $40.9 billion. The company also expects full-year free cash flow to reach $11.38 billion. SAP previously projected 2026 cloud revenue to be between 25.8 billion and 26.2 billion euros.

As the largest software company in Europe by market capitalization, SAP is currently facing challenges from artificial intelligence technology to its traditional business model, while also needing to drive customers to shift systems from on-premises installations to its cloud offerings. This migration process is often lengthy and costly, and conflicts in the Middle East have further increased the complexity—these conflicts have disrupted supply chains in key industries such as oil and gas, which are important SAP clients.

The window for customers to switch systems is rapidly narrowing: standard support for the old software versions will end in 2027, after which only extended maintenance—at a much higher cost—will be offered. CEO Christian Klein noted in January that geopolitical uncertainties were slowing the negotiation process for cloud deals.

Klein is also focused on driving the adoption of SAP’s self-developed AI tools and promoting cost reductions. This year, he announced two rounds of organizational restructuring and has personally taken charge of AI R&D, in order to focus on this emerging technology—but investors worry AI may eventually erode the traditional moat of software companies. SAP’s stock has dropped 38% year-to-date.

SAP CEO Christian Klein stated: "We delivered strong current cloud backlog growth for the second consecutive quarter—26% at fixed exchange rates. This performance is driven by our ‘Autonomous Enterprise’ strategy, where both the Autonomous Suite and the Business AI Platform showed robust growth momentum. Customers are choosing SAP to achieve precise and compliant AI outcomes based on their most critical business processes and data."

SAP CFO Dominik Asam added: "Amid continued macroeconomic volatility, we again delivered a solid performance in the second quarter, with both cloud backlog and free cash flow continuing to grow. These results reflect our disciplined execution and our ongoing ability to meet operational goals."

In a research report prior to the earnings release, TD Cowen analyst Derrick Wood and others pointed out that SAP’s increased investment in AI has yet to translate into actual growth, citing feedback from a major customer noting that SAP’s AI products still contribute only “negligibly” to orders.

Industry analyst Josh Christensen believes that the ongoing conflict has lengthened SAP's sales cycles. He wrote ahead of the earnings release: "SAP’s exposure to the EMEA (Europe, Middle East, and Africa) region—accounting for over 40% of revenue—is higher than that of other large enterprise software vendors, making SAP more susceptible to disruptions in these turbulent regions."