Cloud transformation enters the realization phase, SAP's operating profit in the fourth quarter increased by 27% year-on-year after adjustments, and the guidance for cloud revenue growth in 2026 has been raised

Wallstreetcn
2026.01.29 07:14
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SAP cloud transformation welcomes explosion: After adjustments in the fourth quarter, operating profit surged by 27%, with AI applications becoming the strongest engine, and two-thirds of cloud orders containing AI products. The company raised its 2026 cloud revenue growth forecast to 23%, targeting €26 billion, while simultaneously launching a €10 billion repurchase plan. The cessation of local product support in 2027 will accelerate customer migration to the cloud

Europe's largest software company SAP's cloud transformation strategy has entered a performance realization phase. Driven by customers accelerating their migration from traditional on-premises systems to the cloud, the company's profits surged in the fourth quarter, and it raised its cloud revenue growth expectations for this year.

The enterprise software giant, headquartered in Walldorf, Germany, announced on Thursday that its adjusted operating profit for the fourth quarter increased by 27% year-on-year to €2.83 billion. The full-year cloud revenue for 2025 is expected to reach €21.7 billion at constant exchange rates, exceeding analysts' expectations.

SAP anticipates that its cloud revenue will grow by at least 23% at constant exchange rates in 2026, reaching between €25.8 billion and €26.2 billion. According to data compiled by Bloomberg, this guidance is slightly higher than the analysts' average expectation of €26 billion.

The company's CEO Christian Klein stated that SAP Business AI has become a major driver of growth, with two-thirds of cloud orders in the fourth quarter including AI business, and the adoption rate of AI in the ERP suite is strong. This statement addresses market concerns about the potential impact of AI programming tools on traditional enterprise software companies.

Cloud Business Performance Exceeds Expectations

SAP delivered results in the fourth quarter that exceeded market expectations. The full-year cloud revenue of €21.7 billion was better than analysts' previous forecasts. The company's stock price rose 0.3% to €196.14 on Wednesday. Although it is still down 30% from the historical high set last February, SAP remains the highest-valued company in Germany.

Since 2020, Klein has led SAP's strategic transformation from selling software licenses for customers to run on local servers to providing cloud software subscription services. This transformation has been recognized by investors, driving the company's stock price to record highs last year.

AI Business Becomes New Growth Engine

SAP is encouraging customers to migrate from local servers by offering AI business applications in the cloud, where average spending by cloud customers is higher. Klein emphasized in a statement that SAP Business AI has become a major growth driver, with this business included in two-thirds of cloud orders in the fourth quarter, and the adoption rate of AI across the entire ERP suite is performing strongly.

With the growing demand for AI technology, software companies are increasingly focusing on AI agents that can complete tasks with less human involvement. SAP's cloud business backlog (reflecting sales to be recognized over the next 12 months) grew by 16% in the fourth quarter to €21.1 billion, with a 25% increase at constant exchange rates.

According to previous reports by Bloomberg, the rise of AI programming tools had raised concerns in the market about the potential impact on Europe's most valuable software company, while SAP's current performance indicates that it is successfully transforming AI into a growth driver.

Accelerating Cloud Migration

To promote customer migration to the cloud, SAP has set a timeline: it will stop supporting most of its major on-premises product lines by the end of 2027 and will eliminate extended maintenance options by 2030. The company expects that as more customers transition to the cloud, the decline in software support revenue at constant exchange rates will accelerate SAP also announced that it will repurchase up to €10 billion in shares by the end of 2027, demonstrating confidence in future performance. This large-scale repurchase plan sends a positive signal from management regarding the long-term value of the cloud transformation strategy.

The company is currently at a critical juncture in its business model transformation. On one hand, traditional on-premises software support revenue will accelerate its decline, while on the other hand, cloud subscription revenue and AI business are growing rapidly. From the fourth quarter performance, this transformation is progressing as planned and beginning to fully realize its potential

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