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SAP Q1 Earnings Improve Y/Y, Cloud Strength Drives Top Line

Zacks Equity Research

SAP SE SAP reported first-quarter 2019 non-IFRS earnings of €0.90 (approximately $1.02) per share, which surged 23.3% from the year-ago figure. The Zacks Consensus Estimate was pegged at 94 cents.

On IFRS basis, the company reported loss of €0.10 (loss of 11 cents) per share compared with year ago earnings of €0.59.

Total revenues, on non-IFRS basis, came in at €6.118 billion (around $6.947 billion), up 16.3% year over year (up 12% at constant currency). The Zacks Consensus Estimate was pegged at $6.744 billion.

On IFRS basis, revenues were €6.091 billion (almost $6.916 billion), up 15.8% year over year.

New cloud bookings — a key indicator of sales success in cloud business — surged 32.2% (26% at cc) to €324 million.

Stock Performance

Shares of SAP are up approximately 9% in the pre-market. This can primarily be attributed to optimism regarding raised guidance for operating profit in 2019 outlook. Moreover, per Reuters, U.S. based activist investor Elliott recently revealed a €1.2 billion stake in SAP, which is a key catalyst driving momentum in the stock.

 

Notably, SAP stock has returned 15.3% year to date, underperforming the industry’s rally of 22.5%.

Upbeat Cloud Results

Cloud and software business includes Cloud subscriptions & support (previously known by “cloud subscriptions & support”) and Software licenses & support.

On a non-IFRS basis, Cloud and software business (82.9% of total revenues) reported revenues of €5.07 billion, up 16% year over year (up 12% at cc).

Cloud revenues of €1.581 billion, surged 38% on a year-over-year basis at cc (non-IFRS). Software licenses & support reported revenues of €3.489 billion, up 3% at cc on a year-over-year basis (non-IFRS).

Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 40% at cc to €1.355 billion. Cloud revenues — Infrastructure as a Service (IaaS) related — rallied 45% year over year to €152 million.

Services revenues (17.2% of total revenues) increased 15% from the year-ago quarter (up 11% at cc) to €1.048 billion (non-IFRS).

SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Business Network segment (formerly known as SAP Business Network segment). Approximately, $3.1 trillion in global commerce is transacted annually through this platform across more than 180 countries.

Segment wise, Applications, Technology & Services (AT&S) revenues increased 9% at cc to €4.993 billion. Business Network revenues jumped 18% at cc to €740 million. Moreover, Customer and Experience Management (CXM) revenues were up more than 100% year over year at cc to €305 million.

Expanding Customer Base Remains Noteworthy

S/4HANA adoption grew 30% year over year to around 10,900 customers. In the reported quarter, net new customers comprised approximately 40%.

S/4HANA clientele continues to expand with the addition of CVS Health, Schaeffler Technologies, Levi’s, and Puma among other notable companies. Notably, companies including AEG, Computacenter, ESL/Turtle Entertainment, among others selected S/4HANA solution in the cloud.

Moreover, SAP’s C/4HANA customer experience solution was selected by Groupe PSA Brazil, AmerisourceBergen and Isuzu Motors South Africa in the reported quarter.

SAP SE Price, Consensus and EPS Surprise

SAP SE Price, Consensus and EPS Surprise | SAP SE Quote

SAP’s Human Capital management (HCM) flagship solution — SuccessFactors Employee Central — ended the reported quarter with more than 3,200 customers. Notable deal wins in the quarter comprise Calzedonia Group and Tapestry.

Management is optimistic on conclusion of SuccessFactors’ migration to SAP HANA platform. This move is anticipated to enhance SuccessFactors solution with integrated predictive analytics and other capabilities. Notably, SAP SuccessFactors suite is available across 96 countries in 42 languages.

Premier Foods and Bumble Bee Foods selected SAP’s Leonardo solution in the reported quarter. Notably, Leonardo integrates IoT, Big Data, ML, Analytics and Blockchain capabilities on the SAP Cloud platform.

Digital Platform comprises SAP Data Management and SAP Cloud Platform solutions. In the reported quarter, a notable deal win for the company’s Digital Platform offerings includes Kontinental Hockey League.

Furthermore, SAP Ariba recently inked deal with American Express AXP with an aim to design new financing and payment options on Ariba Network. Moreover, Omnicom opted for the company’s Business Network solutions.

Management is optimistic regarding the recent acquisition of Qualtrics, concluded on Jan 23, 2019, for $8 billion in cash. Financials pertaining to Qualtrics fall under CXM segment. Notably, the company’s experience management solutions were selected by Cirque du Soleil and CVS Health in the reported quarter.

Asia Pacific & Japan (APJ) Witnessed Solid Growth

APJ Cloud revenues jumped approximately 51% at cc. Cloud & software revenues increased around 12% at cc. The top line benefited from strong cloud revenue growth in Greater China and Japan. Growth in Software license revenues across the U.K., Germany and Spain was noteworthy.

Europe, Middle East & Africa (EMEA) Cloud revenues advanced 39% at cc. Cloud & software revenues increased 11% at cc. The top line was driven by strong cloud revenues in the U.K., Spain and Switzerland. Management is elated on robust software revenue growth witnessed in the U.K., Germany and Spain.

Americas’ Cloud revenues soared more than 39% at cc. Cloud & software revenues increased 12% at cc. The United States, Mexico and Canada delivered strong performance in cloud revenues in the first quarter. Further, solid adoption of software license solutions across the United States and Canada aided growth.

SAP SE Revenue (Quarterly)

SAP SE Revenue (Quarterly) | SAP SE Quote

Margin Details

Non-IFRS gross margin of 69.5% contracted 70 basis points (bps) from the year-ago figure.

SAP reported non-IFRS operating expense of €4.651 billion, up 15.5% from the year-ago quarter (up 12% at cc).

Non-IFRS operating profit of €1.467 billion grew 19% on a year-over-year basis (up 13% at cc). However, per IFRS, SAP reported operating loss of €136 million, which management attributed to restructuring expenses of around €886 million in the reported quarter. Additionally, other charges pertaining to Qualtrics acquisition impacted operations negatively.

Operating margin expanded 20 bps at cc to 23.7% (non-IFRS).

Segment wise, Applications, Technology & Services profit increased 7% at cc to approximately €1.809 billion on a non-IFRS basis. Business Network profit surged 51% at cc to €161 million. However, CXM segment reported a loss of €11 million.

Balance Sheet & Cash Flow

The company ended the first quarter with cash and cash equivalents of approximately €7.332 billion compared with the previous quarter’s figure of €8.627 billion.

The company generated operating cash flow of almost €2.802 billion in the reported quarter compared with previous quarter’s reported figure of €818 million.

Free cash flow came in at €2.365 billion compared with previous quarter’s figure of €506 million.

Updated Operating Profit Guidance for 2019

SAP anticipates upbeat pipeline and momentum in cloud to continue through 2019. Non-IFRS cloud subscriptions and support revenues are expected in the range of €6.7-€7.0 billion, up 33-39% at cc.

Non-IFRS cloud and software revenues are now anticipated between €22.4 million and €22.7 billion, up 8.5-10% at cc.

Additionally, non-IFRS operating profit for 2019 is estimated in the band of €7.85-€8.05 billion (previously €7.7-€8.0 billion), indicating year-over-year growth of 9.5-12.5% at cc.

For 2019, the company now projects total revenues to report robust growth, at a lower rate (previously predicted “slightly lower”) than the increase in operating profit.

Outlook for 2020

For 2020, SAP projects non-IFRS cloud subscriptions and support revenues to €8.6-€9.1 billion. Non-IFRS total revenues are expected to come in the range of €28.6-€29.2 billion.

Notably, the company now envisions non-IFRS operating profit in the range of €8.8-€9.1 billion, compared with earlier predicted range of €8.5-€9.0 billion.

Zacks Rank & Stocks to Consider

Currently, SAP carries a Zacks Rank #3 (Hold).

A couple of better-ranked stocks in the same industry are Synopsys, Inc. SNPS and Pegasystems Inc. PEGA, both sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Synopsys and Pegasystems is pegged at 10% and 8%, respectively.

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