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SAP Q3 Earnings Rise Y/Y, Cloud Strength Aids Top-Line Growth

Zacks Equity Research

SAP SE SAP reported third-quarter 2019 non-IFRS earnings of €1.30 (approximately $1.45) per share, which improved 14% from the year-ago figure. The Zacks Consensus Estimate was pegged at $1.44.

On IFRS basis, the company reported earnings of €1.04 (almost $1.16) per share, up 28% year over year.

Total revenues, on non-IFRS basis, came in at €6.809 billion (around $7.569 billion), up 13% year over year (up 10% at constant currency). The Zacks Consensus Estimate was pegged at $7.570 billion.

On IFRS basis, revenues were €6.791 billion (roughly $7.549 billion), up 13% year over year.

New cloud bookings advanced 39% (34% at cc) to €572 million.

Impressive Cloud Results

On a non-IFRS basis, Cloud and software business (82.9% of total revenues) reported revenues of €5.647 billion, up 13% year over year (up 10% at cc).

Cloud revenues came in at €1.807 billion, up 37% year over year on a non-IFRS basis (33% at cc). Software licenses & support reported revenues of €3.840 billion, up 4% (up 1% at cc).

Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 34% at cc to €1.582 billion. Cloud revenues — Infrastructure as a Service (IaaS) related — rallied 29% year over year at cc to €170 million.

Services revenues (17.1% of total revenues) improved 15% from the year-ago quarter (up 11% at cc) to €1.162 billion (non-IFRS).

SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Intelligent Spend Group (formerly named Business Network). Approximately $3.4 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% (6% at cc) to €5,518 billion. Intelligent Spend Group revenues jumped 23% (18% at cc) to €828 million. Moreover, Customer and Experience Management (CXM) revenues were up 75% year over year (69% at cc) to €371 million.
 

SAP SE Price, Consensus and EPS Surprise

 

SAP SE Price, Consensus and EPS Surprise

SAP SE price-consensus-eps-surprise-chart | SAP SE Quote

Expanding Clientele Favors Business Prospects

S/4HANA adoption grew 25% year over year to around 12,000 customers. In the reported quarter, net new customers comprised approximately 40%.

S/4HANA clientele continues to expand with the addition of BrandX, State of Nevada, and Grupo Crystal, among others. Notably, Dow Jones, Breitling, Daewoong Pharmaceutical and Callaway Golf, have gone live with S/4HANA solution in the cloud.

Moreover, SAP’s C/4HANA customer experience solution was selected by Swift, Cintac Mining and E.ON in the reported quarter.

SAP’s Human Capital management (HCM) flagship solution — SuccessFactors Employee Central — ended the reported quarter with more than 3,500 customers. Notable deal wins in the quarter comprise Vonovia SE, and the International Committee of the Red Cross.

SAP’s business technology platform bundles 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, notable deal wins include Amazonas & Roraima Energia, Impossible Foods Inc and Nippon Express.

Additionally, Xiaomi Communications, British Telecom, and Prada opted for the company’s Intelligent Spend Group solutions in the quarter.

Notably, the combined solution of SAP SuccessFactors and Qualtrics Employee Experience Management solutions were selected by Proximus Group in the reported quarter. Specifically, Qualtrics solutions were selected by Sharper Image Corp, U-Haul, Stanley Black & Decker, Dish Networks, Garmin International, and Slack Technologies, among others, in the reported quarter.

EMEA Witnessed Robust Cloud Growth

Europe, Middle East & Africa (EMEA) Cloud revenues surged 46% at cc. Cloud & software revenues increased 9% at cc. The top line was driven by strong cloud revenues in the U.K. and Germany. Management is elated on robust software license revenue growth witnessed in the U.K. and France.

Asia Pacific & Japan (APJ) Cloud revenues jumped approximately 37% at cc. Cloud & software revenues increased around 5% at cc. The top line benefited from strong cloud revenue growth in Australia and Japan. Growth in Software license revenues across Japan was noteworthy.

Americas’ Cloud revenues soared 26% at cc. Cloud & software revenues increased 12% at cc. Mexico, Brazil and Canada delivered strong performance in cloud revenues in the third quarter. Further, solid adoption of software license solutions across Brazil and the United States aided growth.

Margin Details

Non-IFRS gross margin of 72.3% expanded 130 basis points from the year-ago figure.

SAP reported non-IFRS operating expense of €4.613 billion, up 10% from the year-ago quarter (up 8% at cc).

Non-IFRS operating profit of €2.011 billion grew 20% on a year-over-year basis (up 15% at cc).

Non-IFRS operating margin of 30.4% expanded 170 bps year over year (expanded 150 bps at cc).

Segment wise, AT&S profit increased 17% (13% at cc) to approximately €2,475 billion on a non-IFRS basis. Intelligent Spend Group profit advanced 36% (31% at cc) to €211 million. Customer and Experience Management (CXM) segment reported a profit of €2 million, down 84% (down 88% at cc).

Balance Sheet & Cash Flow

The company ended the third quarter with cash and cash equivalents of approximately €5.525 billion compared with the previous quarter’s figure of €5.168 billion.

The company generated €638 million of operating cash in the reported quarter compared with €122 million utilized in the second quarter.

Free cash flow came in at €370 million compared with prior-quarter figure of (€409 million).

Reiterates 2019 View

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

Non-IFRS cloud and software revenues are anticipated between €22.4 billion 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, indicating year-over-year growth of 9.5-12.5% at cc.

For 2019, the company projects total revenues to report robust growth, at a lower rate than the increase in operating profit.

Guidance for 2020

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

Notably, the company envisions non-IFRS operating profit in the band of €8.8 billion to €9.1 billion.

2023 Outlook

SAP provided outlook for 2023 as well. The company continues to expect non-IFRS total revenues to grow significantly and exceed €35 billion.

SAP anticipates non-IFRS cloud subscription and support revenues to more than triple over 2018-2023. Moreover, the company projects non-IFRS cloud gross margin to hit 75%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Alteryx AYX, Synopsys SNPS and Keysight Technologies KEYS , each flaunting 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 Alteryx, Synopsys and Keysight is currently pegged at 17.62%, 12% and 10%, respectively.

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