European software companies have outperformed expectations during the current earnings season, overcoming concerns about risks from artificial intelligence (AI) disruption and the impact of Middle East conflicts on business confidence. For instance, SAP SE, Europe's largest software company, reported results that beat analyst forecasts, driven by sustained demand for its cloud solutions. Analyst Anurag Rana noted that its cloud backlog "should alleviate concerns about AI disruption risks and potential deal delays due to Middle East tensions."
Similar issues affected ServiceNow. The U.S. peer, which reported earnings on the same day as SAP, posted better-than-expected first-quarter results and raised its full-year guidance. However, the company indicated that conflict in the Middle East weighed on subscription revenue growth. Combined with persistent market anxiety about AI disruption risks, investors remained uneasy about ServiceNow, sending its shares down 17.75% on April 23.
In contrast, SAP's share price rebounded strongly after months of weakness, as its earnings report clearly demonstrated the company's superior handling of these same pressures. Deutsche Bank analyst Johannes Schaller wrote in a report, "SAP's earnings release represents 'a relief in terms of good news.' The recovery in cloud order backlog and growing demand for cloud enterprise management products 'clearly indicate that demand for SAP's solutions, including its AI portfolio, remains healthy.'"
Beyond SAP, European digital transformation consultancy Capgemini SE also surpassed analyst expectations, with organic sales growth in North America, Asia, Latin America, and the UK and Ireland far exceeding projections. Nemetschek SE, a provider of software for the construction and media industries, achieved 17% revenue growth in the first quarter, beating estimates.
Dassault Systemes SE, a French 3D simulation software provider and one of the main casualties in this year's so-called "software wreck," also delivered a positive earnings surprise. Most of its financial metrics met or exceeded expectations, boosting its stock price, with analysts highlighting the company's resilience in a challenging macroeconomic environment.
Citi analyst Balaji Tiruputi suggested that Dassault Systemes' performance shows that software companies working with industrial clients—requiring engineering and physics expertise and leveraging specialized data—face lower disruption risks. Swedish visualization technology firm Hexagon AB and Swiss banking software provider Temenos AG also reported results that beat forecasts.
Citi analyst Pavan Daswani noted that Temenos AG benefited from growth in the U.S. market, resilience in its core banking business, progress in AI-driven capabilities, and stable sales in the Middle East, which helped ease investor concerns.
Market worries about AI disrupting the industry have intensified since Anthropic introduced new tools capable of automating tasks in areas like marketing and data analysis. These developments have raised questions about whether such AI tools will pressure traditional software firms, potentially harming their future revenue growth and profitability.
A pessimistic "AI disrupts everything" narrative since February has led to a sustained sell-off in the software sector across global equity markets. The impressive earnings from European software companies may now help soothe some investor anxieties. However, caution remains.
Tiruputi pointed out that, due to tougher year-on-year comparables and an uncertain macro environment, Dassault Systemes' execution bar is higher in the second half of the year, making its growth targets appear ambitious. Despite optimism about SAP, Schaller expects "sentiment and headline risks" to continue affecting the broader software sector.
Furthermore, data indicates that while positive surprises this earnings season suggest a need for more nuanced analysis, earnings per share growth for major European software firms is still projected to slow this year. A Barclays analyst team led by Hanna Greenberg stated, "We expect the AI narrative to shift from a uniform industry-level trend to a more differentiated, company-specific story."