SAP Delivers mixed Q2 With Strong Margins and AI Momentum, But Flags Tariff Headwinds

SAP posted a robust second quarter, reporting strong margin expansion but cloud growth fell short of expectations in key areas, even as management warned of elongated sales cycles tied to macro uncertainty and tariff-related disruptions. While results were broadly in line with consensus, the German software giant’s tone was marked by cautious optimism as it reaffirmed its full-year outlook and touted accelerating adoption of its Business AI and ERP platforms.

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SAP reported non-IFRS EPS of €1.50, beating estimates of €1.45, while adjusted operating profit reached €2.57 billion, above the €2.42 billion consensus. Total revenue of €9.03 billion missed slightly, but rose 12% year-over-year in constant currency. Cloud revenue, a key growth driver, reached €5.13 billion, up 28% in constant currency, just below the €5.15 billion consensus. Cloud ERP rose 34%, with the Cloud ERP Suite now accounting for 86% of total cloud revenue. Operating margins expanded impressively, with adjusted EBIT margin rising to 28.5%.

Segmentally, growth was supported by the Cloud ERP Suite’s continued momentum, marking its 14th consecutive quarter of 30%+ growth. Cloud backlog increased 28% to €18.1 billion, although management noted a slight deceleration from Q1. Software licenses, in line with the company’s shift to subscription-based offerings, fell 13%. Regional cloud performance was strongest in APJ and EMEA, with standout markets including India, France, Brazil, and South Korea.

AI adoption emerged as a major theme throughout the quarter. SAP highlighted that over half of its cloud order entry volume included AI use cases. Business AI use cases spanned across industries, with notable wins from customers like ABB, Siemens, and SA Power Networks. SAP launched 14 AI agents in H1, with plans to expand that to 40 by year-end. These agents streamline processes in customer service, finance, and supply chain, helping clients cut costs and boost productivity. The Joule platform is also rolling out more broadly, integrated with WalkMe and enhanced through a partnership with Perplexity.

Despite the strong execution, SAP’s tone turned cautious regarding the macroeconomic landscape. CEO Christian Klein flagged elongated sales cycles in sectors such as the U.S. public sector and manufacturing—both notably impacted by tariffs and global trade uncertainty. He emphasized that while SAP’s pipeline for H2 remains solid, external pressures, particularly around tariffs, are dampening near-term decision-making for some clients. This commentary echoed broader market concerns about rising geopolitical tension and trade barriers.

Tariffs were cited multiple times as a headwind, particularly for manufacturing clients and public sector entities in the U.S. SAP noted these uncertainties have extended customer approval workflows, delaying some deals. CFO Dominik Asam remarked that global trade policy uncertainty continues to cloud the outlook and acknowledged that sustained pressure from tariffs could weigh on H2 performance. Nevertheless, SAP maintained its 2025 full-year guidance, signaling confidence in its pipeline and margin management.

On margins, SAP turned in one of its strongest quarters in recent memory. Operating profit rose 35% y/y, aided by cost controls, cloud mix shift, and reduced share-based compensation. Non-IFRS cloud gross margin improved by 180bps to 75.2%, boosting cloud gross profit by 31%. Operating cash flow surged 71% to €2.6 billion, and free cash flow rose 83% to €2.4 billion. The company attributed margin gains to disciplined execution, internal AI usage, and cost transformation efforts, which included a restructuring in Q1 and ongoing workforce optimization.

Management expects margin gains to moderate in H2, noting that a large portion of cost benefits—including a €331 million reduction in stock-based comp—were front-loaded. Asam indicated the company will now focus on “brushing-teeth-style” ongoing workforce optimization rather than large-scale restructurings, signaling a steady approach to maintaining cost efficiency while investing in talent aligned with SAP’s AI roadmap.

Customer wins helped reinforce the underlying demand story. SAP cited Alibaba, GSK, BMW, Delta, and L’Oréal among major clients expanding their SAP footprints in Q2. The Business Data Cloud (BDC) offering saw rapid adoption, with over 100 SAP-managed data products launched so far, and another 100+ expected by year-end. Adobe and Palantir were highlighted as key BDC partners, underscoring SAP’s traction in data-centric enterprise solutions.

In sum, SAP delivered a solid Q2 characterized by healthy cloud growth, margin expansion, and growing AI adoption. While geopolitical risks and trade frictions have introduced some caution into the sales cycle, the company appears well-positioned to weather the volatility, with a robust pipeline and increasingly AI-powered business model. With SAP’s full-year outlook unchanged and operating discipline firmly in place, investors are likely to remain focused on how H2 bookings shape up—particularly in tariff-sensitive sectors.