Reasons behind the slowdown
In its earnings statement, SAP attributed roughly one percentage point of the backlog slowdown to two factors: lengthy “large transformational deals” that back-load revenue into later years, and termination-for-convenience clauses mandated by local regulations. These contractual elements reduced the portion of revenue recognized in the current backlog, dampening the headline figure even as the overall contract volume expanded.
Chief Executive Officer Christian Klein described the backlog total as a “strong foundation” for revenue acceleration through 2027, signaling confidence that deferred revenue will convert as projects advance. Nevertheless, the company also warned that backlog growth is likely to “slightly decelerate” in 2026 as the cloud business matures.
Quarterly revenue and profit rise
Total fourth-quarter revenue increased to €9.7 billion from €9.4 billion a year earlier, while operating profit climbed to €2.6 billion from €2.0 billion. The performance reflects steady demand for SAP’s enterprise resource planning, analytics and supply-chain applications, even as the company pushes customers toward its flagship S/4HANA cloud suite.
SAP has spent the past several years shifting its model from one-time, on-premise license sales to recurring cloud subscriptions. The strategy aims to deliver more predictable revenue and capture long-term customer relationships, but it also exposes the company to closer scrutiny of near-term growth metrics such as the current cloud backlog.
Investor concern over AI disruption
The rapid adoption of generative artificial intelligence has added a layer of uncertainty for established software vendors. Some investors worry that AI-driven code automation could enable enterprises to build more capabilities in-house, potentially shrinking the addressable market for commercial platforms.
Chief Financial Officer Dominik Asam acknowledged the debate in an interview with CNBC, noting that one “killer application” of AI is to “transform the way companies develop code.” He emphasized that SAP is integrating AI into its own research and development to preserve scale advantages. The company employs about 35,000 developers, many of whom now focus on embedding machine-learning and generative-AI features across SAP’s product portfolio.
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Guidance for 2024 capitalizes on that approach. Management reiterated plans to expand AI-enabled functionality, especially within finance, procurement and supply-chain modules. According to the European Commission’s Digital Single Market initiative, companies that accelerate cloud and AI adoption can benefit from improved interoperability and cost efficiencies—factors SAP intends to highlight in customer engagements this year.
Outlook through 2027
During the earnings call, Klein reiterated that SAP expects its pivot to cloud subscriptions to underpin an increase in total revenue growth over the next three years. The company’s medium-term plan projects compound annual growth in the mid-single-digit range, driven by backlog conversion and upselling of adjacent services.
Management is also targeting margin expansion as more workloads migrate to SAP’s cloud platform, reducing the reliance on lower-margin consulting services. Operating profit in the fourth quarter rose more quickly than revenue, but investors will be watching for sustained improvement as cost efficiencies materialize.
Market reaction and analyst views
UBS analysts described the backlog numbers as a “disappointment” relative to prior expectations, reinforcing concerns that near-term growth may normalize faster than previously thought. However, several brokerage houses maintained long-term “buy” or “overweight” ratings, citing stable renewal rates and a robust pipeline of large enterprise deals.
SAP is listed on Germany’s DAX benchmark index, where technology shares have generally benefited from Europe’s digitalization push. The company’s market capitalization, though reduced by Thursday’s drop, still places it among the region’s most valuable tech firms.
Looking ahead, investors will seek clearer evidence that deferred revenue from multi-year contracts, particularly those carrying termination clauses, will translate into recognized cloud sales. Progress on AI integration and additional disclosures on customer adoption rates are also likely to influence sentiment during upcoming quarters.
Crédito da imagem: Getty Images
