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SAP SE (SAP) Q3 Earnings Rise Y/Y, Revenues Top, View Up

Zacks Equity Research

SAP SE SAP reported third-quarter 2017 IFRS earnings per share of €0.82 (95 cents), reflecting a surge of 35% on a year-over-year basis. This improvement was primarily attributable to growth in the cloud subscriptions as well as software license order entry. The bottom line, however, misses the Zacks Consensus Estimate of $1.14 per share.

Total IFRS revenues for the third quarter were €5,590 million ($6,497.3 million), up 4% year over year. Also, the figure marginally surpassed the Zacks Consensus Estimate of $6,470 million. A flourishing cloud business along with strong growth of support revenues, aided the top-line growth during the third quarter.

Also, new cloud bookings — a key indicator of sales success in cloud business — were significantly up 14% to €302 million ($351 million) in the reported quarter.

Inside/Behind the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported third-quarter revenues of €4,657 million ($5,412.8 million), up 4.5% year over year. IFRS Cloud Subscriptions & Support garnered revenues of €937 million ($1,089.1 million) in the quarter, up 21.8% year over year; while non-IFRS Cloud Subscriptions & Support garnered revenues of €938 million ($1,090.2 million) in the quarter.

Software licenses & support reported revenues of €3,720 million ($4,323.8 million), up 0.9% on a year-over-year basis. Also, for third-quarter 2017, Services revenues inched up 1.3% year over year to €932 million ($1,083.3 million). Overall, IFRS Cloud and software revenues witnessed growth, mainly driven by strong IFRS Cloud Subscriptions and support revenue.

The EMEA region observed double-digit software license revenues rise in majority of the end markets, including Germany, Russia and the Middle East & North Africa region. For the APJ region, SAP witnessed a strong performance in both cloud and software revenue plus cloud subscriptions, along with robust performances in Australia and China, acting as key catalysts.

The company reported IFRS operating margin of 23.5%, up 300 basis points from the figure recorded in third-quarter 2016. Also, the company recorded a 19.1% rally in operating profit amounting to €1,314 million ($1,527.3 million).

SAP SE Price, Consensus and EPS Surprise

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

Quarter in Detail

SAP’s human capital management (‘‘HCM’’) applications continue to act as a key growth-driver with SuccessFactors Employee Central surpassing the 2,000-customer base at the end of the third quarter. In addition, SAP’s Customer Engagement and Commerce solutions once again achieved double-digit growth in new cloud bookings as well as software revenue.

Additionally, consistent strong market traction of the SAP S/4HANA platform is proving to be a strong profit-churner. During the reported quarter, the company gained 600 additional customers with more than 40% being entirely new. This uptrend hugely drove the company’s revenues. With little competition in its core market, the software and service provider experienced strong results in the third quarter in the aforesaid segment.

This apart, SAP’s business networks (which it manages through three main players namely, Ariba, Fieldglass and Concur) burgeoned 19% during the reported quarter. Currently, the Ariba network handles trading worth around $1 trillion of 3 million connected companies. This upside hugely drove the company’s revenues. While Concur manages travel and expenses of more than 50 million end users, Fieldglass helps managing 3.9 million flexible workers.

Other Financial Details

For the nine-month period ended Sep 30, 2017, the company’s operating cash flow came in at €4.1 billion ($4.8 billion), up 14% on a year-over-year basis. While free cash flow was €3.2 billion ($3.8 billion), up 7% compared with the year-ago tally.

Guidance Improved

Fueled by continued strong momentum of the cloud business, SAP raised its view for full-year 2017 non-IFRS total revenue projection from €23.3-€23.7 billion to €23.4-€23.8 billion at constant currency (cc).

The company believes the non-IFRS cloud subscriptions and support revenue to lie in the €3.8-€4.0 billion range at constant currencies. Also, non-IFRS cloud and software revenue outlook has been revised upward. It is expected to grow in the band of 7-8.5% instead of the previous 6.5-8.5% view at cc. Also, non-IFRS operating profit forecast for 2017 has been tweaked at the lower end of the earlier guided range. It is now estimated to be in the range of €6.85-€7 billion compared with the former €6.80-€7 billion band  at cc.

Our Take

SAP’s resilient Cloud and Software business, an enviable business network spread and dominance over critical client demand areas continue to act as staple growth-drivers. The company’s S/4HANA has proved to be a solid profit-yielder, fueled by an increase in cloud subscriptions as well as support-revenue rise in recent times.

Also, SAP’s new class of solutions that power the next generation of business applications — SAP HANA — has been its biggest top-line driver ever since its introduction. The company’s latest offering from the SAP HANA family, S/4HANA, has established itself as a mission critical control center for businesses pursuing digital transformation. This apart, the company constantly upgrades the existing products and launches new ones to expand its customer base, thereby offering a competitive edge over peers.

However, dull prospects of the global IT industry in recent quarters along with flat customer spending projections have affected the company’s performances. Also, over the past few quarters, many of the company’s emerging markets have faced fiscal imbalances besides general economic slowdowns, which have adversely impacted the consumers’ purchasing power. Currency fluctuations in many of the company’s key markets are also hurting its financial performance.

Zacks Rank & Stocks to Consider

SAP currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Adobe Systems Inc. ADBE, Analog Devices, Inc. ADI and Nutanix Inc. NTNX. While Adobe Systems and Analog Devices carry a Zacks Rank #2 (Buy), Nutanix sports a Zacks Rank #1 (Strong Buy).

Adobe Systems has a striking earnings surprise history over the trailing four quarters, having outpaced estimates all through with an average beat of 7.8%.

Analog Devices has delivered earning beats in each of the trailing four quarters. It boasts an average beat of 19.1%.

Nutanix has an excellent earnings surprise history, beating estimates in all the trailing four quarters with an average beat of 12.9%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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