SAP's Cloud Backlog Rebounds, but Growth Now Costs More

SAP’s second quarter showed genuine momentum in cloud bookings and cash generation, yet two acquisitions completed just after the period closed forced management into a narrower profit outlook for the year ahead.

Key Takeaways

• Current cloud backlog reaccelerated to 26% growth at constant currencies, reaching €22.9 billion and reversing two straight quarters of deceleration that had unsettled investors.
• Operating profit growth slowed as heavier R&D spending, Sapphire-related marketing costs, and acquisition dilution combined, prompting a roughly €100 million cut to 2026 profit guidance.
• Shares rose only modestly on the results, a subdued reaction against a stock still down nearly half over the past year as enterprise software valuations reset broadly.

The Metric That Finally Turned

For two quarters, SAP had been living with an uncomfortable divergence. Cloud revenue kept climbing, but current cloud backlog, the figure that tells investors what is actually queued up behind that revenue, kept growing more slowly than the number it was supposed to precede. It is the kind of gap that invites the wrong kind of questions on an earnings call, and Christian Klein knew it. So when SAP reported that current cloud backlog had jumped 27% year over year, 26% at constant currencies, to €22.9 billion, the chief executive did not bury the significance. He called it a welcome trend reversal, and for once the phrase was doing real work rather than filling space.

The underlying numbers back him up. Cloud revenue rose 22%, or 24% at constant currencies, to €6.28 billion. Within that, Cloud ERP Suite, the product line SAP treats as the true measure of its migration story, grew 25%, or 27% at constant currencies, to €5.53 billion. Total revenue reached €9.88 billion, up 9% and 11% at constant currencies, even as software support revenue, the on-premise legacy business SAP has spent a decade dismantling by design, fell 8% to €2.44 billion. That decline is not a warning sign. It is the plan working.

Some of the backlog gain came courtesy of Reltio, the master data specialist SAP absorbed in May, though the company was precise about the boost: less than one percentage point of the constant-currency growth rate. Remove it and the underlying acceleration still outpaces what most models had assumed going into the print, which is the part of the story that mattered most to investors trying to decide whether the first-quarter slowdown was structural or seasonal.

Where the Margin Went

Profitability is where the quarter loses its shine, though not in a way that should alarm anyone paying attention to the reasons. IFRS operating profit rose 8% at constant currencies to €2.64 billion. Non-IFRS operating profit rose 9% at constant currencies, but only 7% at actual exchange rates, to €2.74 billion, a clear deceleration from the pace SAP posted in the first quarter. Cloud gross margin slipped to 74.3% on an IFRS basis and 74.6% on a non-IFRS basis, down roughly half a point year over year.

Chief financial officer Dominik Asam did not dress this up. He walked analysts through a cluster of causes: heavier research and development spending, marketing costs tied to May’s Sapphire conference, an unusually favorable prior-year comparison built on low stock-based compensation in the first quarter, and dilution from the Reltio deal. He was explicit that none of it should be read as the start of a longer trend, which is the kind of specificity that tends to earn credibility rather than skepticism from institutional analysts who have heard vaguer excuses before.

Earnings per share complicate the picture in the opposite direction. IFRS basic EPS rose 30% to €1.89, flattered by a lower effective tax rate and gains that the non-IFRS figure strips out. Non-IFRS basic EPS rose a more modest 6% to €1.59. Free cash flow, meanwhile, told the cleanest story in the entire release: up 27% to €3.0 billion for the quarter, up 5% to €6.25 billion for the first half, giving SAP the room to defend its full-year cash target even while it digests two new acquisitions.

The Price of Two Acquisitions

The line that will matter most in twelve months was not a second-quarter number at all. SAP trimmed its 2026 non-IFRS operating profit outlook to €11.8 billion to €12.2 billion at constant currencies, down from €11.9 billion to €12.3 billion, to absorb more than €100 million of dilution from Dremio and Prior Labs, two deals that closed on July 6 and July 16 respectively, after the quarter itself had already ended.

What stands out is what SAP chose not to do. It could have offset the drag with organic strength elsewhere and kept the headline number intact. It chose instead to take the cut publicly and preserve the room to keep investing through the second half. That is not a small decision. It tells you SAP is treating 2026 as a year for building its data and AI infrastructure rather than a year for defending a specific profit figure, and it is comfortable being transparent about the trade-off rather than smoothing it away.

Everything else in the framework held. Cloud revenue guidance stayed at €25.8 billion to €26.2 billion at constant currencies. Cloud and software revenue guidance stayed at €36.3 billion to €36.8 billion. Free cash flow guidance stayed near €10 billion. And current cloud backlog growth, SAP cautioned, should still decelerate slightly by year-end, a reminder that one strong quarter does not repeal the mathematics working against a backlog now nearing €23 billion.

Betting on the Autonomous Enterprise

SAP’s growth story increasingly runs through artificial intelligence, and this quarter the company backed the narrative with numbers rather than adjectives. Management said AI and the Business Data Cloud platform featured in more than 90% of SAP’s fifty largest deals, and reiterated plans to field dozens of AI assistants and more than 400 autonomous suite agents by year-end. These figures extend the Autonomous Enterprise concept introduced at May’s Sapphire conference, alongside partnerships with Anthropic, Amazon Web Services, NVIDIA, Palantir, Accenture, and workflow specialist n8n.

The two new acquisitions sit inside that same architecture rather than beside it. Dremio strengthens Business Data Cloud’s ability to combine SAP and outside data for real-time analytical and AI workloads. Prior Labs brings a research team focused on tabular foundation models, building on work SAP had already started with its own SAP-RPT-1. Reltio, quieter than either, supplies the master data discipline that determines whether any of this AI output can be trusted in the first place.

Regionally, the growth was not shared evenly. Asia-Pacific and Europe led, the Americas were merely solid, and the country-level detail sharpened the picture further: Brazil, France, Germany, Italy, India, South Korea, and Spain stood out, while Australia, Singapore, and the United States were singled out within their own regions. Given how concentrated AI infrastructure spending is in the United States, the comparatively restrained American performance is worth watching in the quarters ahead.

A Muted Verdict, and a Punishing Year Behind It

The market’s response was measured rather than celebratory. SAP’s shares rose roughly 2% in the session following the release, with the beat in cloud growth offsetting the trimmed profit outlook, though some of that gain faded as traders weighed the deceleration in operating profit against the strength in backlog. Reported non-IFRS earnings, converted for dollar-based investors, came in near $2.15 per share against a consensus closer to $2.00.

The more revealing number sits above the quarter entirely. SAP’s shares have fallen roughly 48% over the trailing twelve months, far steeper than the broader software industry’s decline of roughly 29%. That repricing has left the stock trading at a price-to-earnings ratio in the high teens to low twenties, a discount that would have seemed implausible when the shares traded near their all-time high above $300 in mid-2025.

That gap between a genuinely strong operating quarter and a badly bruised share price is the real story for institutional allocators. The market appears to have already priced in a slower, more capital-intensive phase for SAP, one in which near-term profit gets diluted in exchange for AI and data capabilities the company believes will compound over years rather than quarters. SAP’s own guidance carries an unusual amount of that uncertainty explicitly, conditioned as it is on a near-term de-escalation of the Middle East conflict rather than left as background risk. On a smaller but still meaningful note, the company disclosed on July 9 that the European Commission had closed its investigation into SAP’s on-premise maintenance practices through a commitment decision, clearing one item of regulatory overhang before the second half begins.

What the quarter offered, in the end, was proof that demand is real and an honest account of what meeting it will cost. Whether that honesty gets rewarded will depend less on this quarter’s arithmetic than on whether the backlog keeps its footing through December.