SAP SE SAP reported second-quarter 2020 non-IFRS earnings of €1.17 per share, which improved 7% from the year-ago quarter.
Moreover, earnings of $1.29 per share beat the Zacks Consensus Estimate by 0.8%.
On IFRS basis, the company reported earnings of €0.73 ($0.80) per share, up 54% year over year.
Total revenues, on a non-IFRS basis, came in at €6.744 billion ($7.42 billion), up 1% year over year and 1% at constant currency (cc). The Zacks Consensus Estimate was pegged at $7.296 billion.
Revenues amounted to €6.743 billion on IFRS basis, up 2% year over year.
Current cloud backlog— a key indicator of go-to market success in cloud business — increased 20% (21% at cc) year over year to €6.65 billion. Solid current cloud backlog with high demand for e-commerce, digital supply chain, Qualtrics and cloud platform solutions contributed to growth.
Qualtrics Set for an IPO
SAP announced plans to spin out Qualtrics and file an initial public offering (IPO) in the United States. The aim is to aid Qualtrics increase its autonomy and expand presence in Experience Management domain within SAP’s customer base and beyond. Notably, the company had “agreed to acquire Qualtrics just four days before Qualtrics was to go public in 2018,” for approximately $7.9 billion.
Notably, SAP will hold majority ownership of Qualtrics. SAP noted that it is focused on enhancing its Experience Management domain and that the Qualtrics XM Platform is a primary component of its intelligent enterprise strategy. The company will continue to remain Qualtrics’ most important and closest go-to-market and co-innovation partner.
The company also notes that as a majority shareholder, SAP will continue to fully consolidate Qualtrics, and thereby, the deal is not anticipated to have an impact on its 2020 or longer-term financial goals.
The final call on the IPO and terms and conditions pertaining to it, and the timing is pending and subject to market conditions. Also, Qualtrics founder, Ryan Smith, proposes to be Qualtrics’ largest individual shareholder.
Notably, shares of SAP were up more than 3% in the pre-market trading on Jul 27, after the announcement. Shares of the company have returned 21.8% on a year-to-date basis compared with the industry’s rally of 22.4%.
Impressive Cloud Results
On a non-IFRS basis, Cloud and software business (84.7% of total revenues) reported revenues of €5.709 billion, up 3% year over year (up 3% at cc).
Cloud revenues came in at €2.044 billion, up 19% year over year on a non-IFRS basis (up 18% at cc).
However, software licenses & support revenues of €3.665 billion plunged 4% year on year (down 3% at cc). The company noted Software licenses revenues of €773 million, down 18% (down 18% at cc) year over year.
Nevertheless, this indicates significant improvement on a quarter-over-quarter basis. In the first quarter, SAP reported software licenses revenues of €451 million, which plunged 31% year on year. The downside was primarily due to the impact of the coronavirus outbreak that intensified in March and led to postponement of new business.
Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 17% at cc to €1.817 billion. Cloud revenues — related to Infrastructure as a Service (IaaS) — rallied 26% year over year at cc to €217 million.
Services business (15.3% of total revenues) reported revenues of €1.034 billion, down 9% from the year-ago quarter (down 9% at cc).
SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Intelligent Spend Platform. Approximately $3.8 trillion in global commerce is transacted annually through this platform across more than 180 countries.
The company has four reportable segments — Applications, Technology & Support (AT&S), Concur, Qualtrics and Services.
Notably, AT&S revenues improved 3% (up 3% at cc) to €5.314 billion. Concur revenues fell 4% (down 5% at cc) to €379 million. Revenues were impacted by lower pay-as-you-go transactional revenues owing to coronavirus crisis led reduction in business travel.
Qualtrics segment revenues surged 34% (up 32% at cc) to €168 million. Revenues in the Services segment declined 6% (down % at cc) to €796 million on a year-over-year basis.
Expanding Clientele Favors Business Prospects
S/4HANA adoption rallied 22% year over year to around 14,600 customers. In the reported quarter, net new customers comprised 37% of additional S/4HANA customers.
S/4HANA clientele continues to expand with the addition of Vedanta, Neptune Energy, Comix, BNP Paribas, and Deutsche Börse AG, among others.
Notably, an increasing number of companies have begun deploying S/4HANA solution in part or entirely in the cloud. Moreover, beeline GmbH, RAK Ceramics, and Zalando went live on SAP S/4HANA Cloud.
SAP SuccessFactors HXM solutions ended the reported quarter with more than 640 customers. Notable deal wins in the quarter include Capgemini, Bechtle AG, Migros Group and JSC Lithuanian Railways, while Group Erste Group Bank, Royal London Mutual Insurance Society and Etihad Aviation, went live utilizing the platform.
SAP Customer Experience (CX) solutions were selected by Commission de la construction du Québec, Lumileds, Delivery Hero, Telefônica Vivo, Jiangsu Hengshun Group Co. Ltd., and Hirose Electric Co., in the second quarter.
SAP’s business technology platform comprises SAP HANA, SAP Data Warehouse Cloud, SAP Cloud Platform, SAP Analytics Cloud, SAP Intelligent Robotic Process Automation and SAP Data Intelligence solutions. In the reported quarter, SAP’s business technology platform and analytics cloud solutions were adopted by the Australian Department of Defence, the Swiss Canton of Zurichand and L’Oréal.
Additionally, NEC Corporation and Carrefour opted for the company’s ARIBA solutions in the reported quarter, while Google went live with it. SAP’s Fieldglass solutions were adopted by Apache Corporation in the second quarter.
Further, Concur was adopted by Royal Voluntary Service while Qualtrics solutions were selected by Etsy, Inc. ETSY, Tableau, Kendra Scott Design, Blue Cross and Blue Shield of Alabama, among others, in the reported quarter.
EMEA Witnesses Robust Cloud Growth
Europe, Middle East & Africa (EMEA) Cloud revenues surged 29% at cc to €660 million. Cloud & software revenues increased 3% at cc to €2.526 billion. The top line was driven by strong cloud revenues in the Germany and Switzerland. Moreover, SAP witnessed robust software license revenue growth in Saudi Arabia and Spain.
Asia Pacific & Japan (APJ) Cloud revenues jumped 18% at cc to €251 million. Cloud & software were up 4% at cc to €903 million. Improving business activity during the second quarter aided recovery in software licenses revenues. Management is optimistic about performance across the APJ region, which witnessed robust recovery in software licenses revenues particularly, Japan, Indonesia and South Korea. Notably, Japan, South Korea and Singapore delivered strong performance in cloud revenues in the second quarter.
SAP SE Price, Consensus and EPS Surprise
SAP SE price-consensus-eps-surprise-chart | SAP SE Quote
Americas’ Cloud revenues improved 13% at cc to €1.122 billion. Cloud & software revenues increased 3% at cc to €2.281 billion. Mexico and Canada delivered strong performance in cloud revenues in the second quarter. Further, solid adoption of software license solutions across the United States aided growth.
Non-IFRS gross margin of 72.6% expanded 120 basis points (bps) from the year-ago quarter’s figure.
SAP reported a non-IFRS operating expense of €4.78 billion, down 1% from the year-ago quarter’s level (down 1% at cc).
Non-IFRS operating profit of €1.964 billion increased 8% on a year-over-year basis (up 7% at cc).
Non-IFRS operating margin of 29.1% expanded 180 bps on a year-over-year basis. At cc, the figure came in at 28.9%, expanding 170 bps.
Balance Sheet & Cash Flow
As of Jun 30, 2020, SAP had cash and cash equivalents of €6.205 billion compared with €7.816 billion as of Mar 31, 2020.
The company generated €788 million of operating cash in the reported quarter compared with €2.984 billion in the first quarter.
Free cash flow came in at €540 million compared with previous quarter’s €2.58 billion.
The company reaffirmed 2020 projections. For 2020, SAP continues to project non-IFRS cloud revenues in the range of €8.3-€8.7 billion, up 18-24% at cc.
Non-IFRS cloud and software revenues are anticipated between €23.4 billion and €24 billion, up 1-4% at cc.
Non-IFRS total revenues are projected in the range of €27.8-€28.5 billion, up 1-3% year over year and at cc.
Notably, the company anticipates non-IFRS operating profit in the band of €8.1-€8.7 billion.
However, the company revised cash flow projections. Operating cash flow is now expected to be above €5 billion, compared with prior expected figure of approximately €5 billion. Free cash flow is anticipated to be approximately €4 billion, which was previously envisioned at approximately €3.5 billion.
Zacks Rank & Other Stocks to Consider
Currently, SAP carries a Zacks Rank #2 (Buy).
Some other top-ranked stocks in the broader technology sector are Synaptics Incorporated SYNA and Microchip Technology Incorporated MCHP. While Microchip sports a Zacks Rank #1 (Strong Buy), Synaptics carries a Zacks Rank #2, at present. You can see the complete list of today’s Zacks #1 Rank stocks here.
Synaptics and Microchip are set to report earnings on Aug 5 and Aug 4, respectively.
Long-term earnings growth rate of Microchip and Synaptics is pegged at 14.5% and 10%, respectively.
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