Shares of the business software company SAP SE were trading higher late today after it reported third-quarter earnings and sales that came in just ahead of the Street’s estimates and raised its full-year outlook for cloud and software revenue.

The company reported earnings before certain costs such as stock compensation of €1.23 per share on revenue of €8.47 billion ($9.21 billion), up 9% from a year earlier. Wall Street analysts had forecast the earnings of just €1.21 per share on sales of €8.36 billion.

All told, the company reported a net profit of €1.44 billion, up from €1.27 billion in the year-ago period.

SAP’s cloud computing revenue was the main growth engine, rising 25% from a year ago to €4.35 billion, but it still came in slightly below the Street’s target of €4.39 billion.

The company also reports a novel metric it calls Current Cloud Backlog or CCB, which refers to the amount of cloud sales that will be booked over the next 12 months. It said CCB rose 25%, to €15.4 billion. Analysts had been expecting CCB growth of 28%, the same as in the previous quarter.

Chief Executive Christian Klein (pictured) hailed what he said was “another strong quarter” for the company, adding that cloud revenue growth “developed remarkably well, especially for our cloud ERP suite.”

It’s notable that SAP continues to prosper even as the broader economy in Germany stalls, as the country’s gross domestic product is expected to contract for a second straight year in 2024. The company, which is the biggest tech firm in Europe, has been looking to migrate customers from its legacy, on-premises systems to the cloud. To entice customers, it has been luring them with the promise of advanced artificial intelligence services that can enhance their business processes

The company’s bottom line benefits from its customers’ shift to the cloud, where it has been able to pitch its growing range of AI services. When SAP’s customers move to the cloud, they generally spend more money on subscription fees than they do on its legacy, on-premises licenses.

On a conference call, Klein told analysts that the company is pushing to accelerate its customers’ transition to the cloud through its AI services, which aren’t available to on-premises users. He said about 30% of its new cloud deals in the quarter contained AI use cases.

Constellation Research Inc. analyst Holger Mueller said AI is providing SAP with the incentive it needs to convince more skeptical enterprises that the cloud is the place to be.

“SAP has struggled with earlier initiatives like SAP Grow and Rise, which accounts for less than a third of its cloud revenue, but that doesn’t matter now as AI is the big pull,” he said.

SAP is also better catering to its cloud customers with new products such as its tool for managing ABAP code assets and the SAP DataLake, the analyst said. This, combined with the lure of AI, is what helped the company reach a key milestone, with cloud revenue now accounting for more than 50% of its total sales.

“What’s also remarkable is that SAP has become more profitable while doing this,” Mueller added. “Traditionally, SAP’s now-shrinking perpetual license revenue has always been more profitable than cloud subscriptions, but the company has been charging more customers directly for their IaaS costs, before passing these fees onto the likes of AWS and Google, while taking a cut for itself.”

Looking ahead to the fourth quarter, SAP raised its outlook for a number of financial metrics, including its free cash flow, which is now viewed at between €3.5 billion to €4 billion, up from a figure of about €3.5 billion previously. The company’s guidance for cloud revenue remains steady at €17 billion to €17.3 billion, which would represent growth of 24% to 27%.

SAP’s American depository receipts gained more than 3% on the report. Prior to today’s gains, its stock had risen 51% in the year to date.

Photo: SAP SE