German enterprise software giant SAP SE reported second-quarter cloud revenue growth that exceeded market forecasts, driven by customers accelerating their migration to the cloud as the deadline for ending support for legacy software approaches.

On Thursday, SAP SE announced that its cloud revenue for the second quarter reached 6.28 billion euros, surpassing analysts' expectations of approximately 6.26 billion euros. Cloud revenue grew 22% year-over-year, or 24% on a constant currency basis.

Total revenue increased 9% year-over-year, or 11% on a constant currency basis. Second-quarter non-IFRS operating profit rose 7% year-over-year, or 9% on a constant currency basis.

CEO Christian Klein stated that customers are choosing SAP SE to enable accurate and compliant AI applications on key business processes and data foundations, adding that the company's "intelligent enterprise" strategy continues to gain market traction.

SAP SE previously forecast full-year 2026 cloud revenue between 25.8 billion and 26.2 billion euros. The quarterly figures indicate the company remains on track to achieve its full-year targets.

However, ongoing geopolitical conflicts in the Middle East, uncertainty in the AI competitive landscape, and the high costs of migrating legacy operations to the cloud remain key risk factors for investors.

SAP SE shares have fallen 38% year-to-date. Following the earnings report, the stock rose 4.5% in after-hours trading.

Cloud Business Continues as Core Growth Engine, Backlog Reaches New High

The biggest highlight of SAP SE's second quarter remains its cloud business.

The company disclosed that as of the end of the second quarter, its current cloud backlog reached 22.9 billion euros, up 27% year-over-year, or 26% on a constant currency basis. This metric, reflecting contract sizes that can be recognized as revenue over the next year, is widely regarded as a key leading indicator of demand for enterprise software.

Meanwhile, SAP SE's core cloud ERP business performed even more strongly:

Cloud ERP suite revenue grew 25% year-over-year, or 27% on a constant currency basis.

Cloud and software revenue increased 11% year-over-year.

Enterprise customers continued to expand their adoption of products like S/4HANA Cloud.

Previously, there were market concerns that the entry of AI tools into the enterprise market could pose a risk of demand being replaced by large language models. However, SAP SE management believes that AI is actually driving businesses to upgrade their software infrastructure, as companies require more structured data and business process systems to deploy AI applications.

Total Revenue Grows Steadily, Legacy Software Accelerates Decline

SAP SE's second-quarter total revenue rose 9% year-over-year to 9.878 billion euros, or 11% on a constant currency basis. First-half total revenue reached 19.432 billion euros, up 8% year-over-year, or 11% on a constant currency basis.

In contrast to the rapid growth of the cloud business, the legacy business continued to shrink. Software license revenue fell 32% year-over-year to 131 million euros, while software support revenue declined 8% to 2.439 billion euros.

In its outlook, SAP SE explicitly stated that as more customers accelerate their migration to the cloud, the decline in software support revenue will accelerate further in the coming years.

Service revenue edged down 3% to 1.027 billion euros. Overall gross margin stood at 73.2% (IFRS), roughly flat compared to the same period last year.

Deadline Approaches, Customer Migration Momentum Intensifies

Standard support for SAP SE's legacy on-premises software is set to end in 2027, after which customers will have to pay higher fees to continue maintenance services. This time pressure is prompting more enterprises to accelerate their system migrations, serving as a significant backdrop for the second-quarter cloud business exceeding expectations.

The migration process is typically time-consuming and costly. Bloomberg Intelligence analyst Josh Christensen noted before the earnings release that conflicts in the Middle East have disrupted supply chains in the oil and gas sector and other industries deeply integrated with SAP SE, thereby extending the negotiation cycles for related transactions.

Christensen also pointed out that over 40% of SAP SE's revenue comes from Europe, the Middle East, and Africa, giving it a relatively concentrated exposure to this region among large enterprise software vendors, making it more susceptible to regional disruptions.

Analysts Note AI Products Have Yet to Make Meaningful Contributions

CEO Christian Klein has invested heavily in artificial intelligence this year. He announced two rounds of organizational restructuring and personally oversees AI development efforts, aiming to establish a competitive advantage in this emerging technology field.

However, these initiatives have not yet translated into substantial business growth. According to Bloomberg, TD Cowen analyst Derrick Wood and others noted in a pre-earnings research report that one large customer indicated SAP SE's AI products have had a "negligible" contribution to their contract signings.

Analysts believe that the continued emphasis on AI has not yet generated incremental revenue, and investor concerns that AI could weaken traditional software business models persist.

Klein stated in January that geopolitical uncertainty was slowing the pace of cloud contract negotiations, which aligns with the impact of the current external environment on SAP SE's business rhythm.