Technology stocks act as "stable ships"! SAP (SAP.US) demonstrates resilience against tariff impact: Q1 profits exceed expectations, maintaining full-year cloud revenue guidance.

SAP's (SAP.US) first quarter performance. Q1 total revenue reached 9.013 billion euros, a year-on-year increase of 12% (11% growth at fixed exchange rates). Adjusted operating profit rose to 2.5 billion euros, a year-on-year increase of 60% (58% growth at fixed exchange rates), equivalent to 1.44 euros per share, higher than market expectations, demonstrating the scalability of SAP's cloud business model. Cloud revenue increased by 26% at fixed exchange rates, to 4.99 billion euros. Following the announcement of the performance, as of the time of writing, the company's stock price surged 9.69% after hours, to $276.87. Cloud revenue was 4.993 billion euros, a year-on-year increase of 27% (26% growth at fixed exchange rates), with expectations at 5.05 billion euros. The company's cloud backlog grew to 18.202 billion euros, a year-on-year increase of 28% (29% growth at fixed exchange rates), indicating huge future revenue potential. Backlog orders reflect sales over the next 12 months. SAP's enterprise resource planning software - used for accounting, procurement, and human resources - typically requires customers to sign contracts, locking in stable revenue streams. Last year, 85% of SAP's sales came from recurring revenue, which helped SAP avoid the economic turmoil caused by the Trump administration's imposition of tariffs. The company is also beginning a corporate restructuring and layoffs in early 2024 to help boost profits. Looking ahead, SAP said that despite the ongoing trade wars, there may be "increased uncertainty and decreased visibility" for the 2025 fiscal year, but the company still expects full-year cloud and software revenue to be between 33.1 billion and 33.6 billion euros. Cloud revenue is expected to be 21.6 billion to 21.9 billion euros. However, SAP added that based on fixed exchange rates, the current growth of cloud backlog orders is expected to slow slightly by 2025. Although SAP has not been directly affected by U.S. tariffs, its customers may already be reacting to economic uncertainty. A survey by Morgan Stanley analysts of 30 SAP distributors this month showed a slowdown in growth in SAP license and cloud subscription business in the first quarter. The slowdown was mainly driven by its largest market, the United States. In a call late Tuesday, CFO Dominik Asam said an escalation in trade wars could lead to a "severe global recession." He said, "I want to emphasize that our outlook is not based on such unfavorable conditions, but assumes conversion rates remain consistent with previous years. With the risk of escalation, we remain fully focused on disciplined execution and assurance, including our profits and free cash flow." SAP CEO Christian Klein said everyone is closely watching the situation for the next 90 days. Klein has prioritized the company's shift to a subscription-based cloud business model to increase average spending per customer. Under his leadership, the company is aggressively promoting cloud-based artificial intelligence business services to incentivize customers to switch from traditional servers. Compared to some other European tech giants, SAP's direct impact from U.S. trade barriers is relatively small compared to competition with Salesforce, Inc. (CRM.US). For example, ASML Holding NV ADR (ASML.US) last week announced first quarter orders were nearly 1 billion euros below expectations and warned that the impact of recent tariff announcements remains unclear. Investment firm CFRA believes that the backlog of orders, which includes a growing number of artificial intelligence-related orders, makes the company a "stable ship in a time of tariff uncertainty for tech stocks." SAP demonstrated strong execution, expanding cloud gross margins by 250 basis points to 75.0%, driving overall gross margin improvements to 73.6% (exceeding their expected 72.9%). Meanwhile, the share of predictable revenue increased to 86%. CFRA believes SAP is poised to achieve revenue growth of 10%-13% by 2027, in line with their previous expectations, with cloud revenue growth expected to be between 26%-28% in 2025, maintaining a similar level in 2027. According to CFRA, the combination of cloud and software sales will drive highly recurring revenue flows to achieve 11%-13% annual growth over the next three years, with the realization of cloud economies of scale expected to achieve 14%-16% growth in free cash flow. In addition, in May 2023, SAP announced a share repurchase plan totaling up to 5 billion euros, with the repurchase period extending until December 31, 2025. As of March 31, SAP repurchased 18.985 million shares at an average price of 164.79 euros, amounting to approximately 3.1 billion euros under the plan. The third part of the plan was completed on April 8, with a purchase amount of around 1.5 billion euros.