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SAP SE (SAP) Q4 Earnings Improve Y/Y, 2018 View Buoyant

Zacks Equity Research

SAP SE SAP reported fourth-quarter 2017 IFRS earnings per share of €1.55 ($1.83), reflecting a surge of 21% on a year-over-year basis. This improvement is primarily attributable to growth in the cloud subscriptions as well as software license order entry. The bottom line also came ahead of the Zacks Consensus Estimate of $1.59.

For the full year, IFRS earnings came in at €3.36 per share, up 10% over the past year, driven by the robust operating performance, and meaningful contribution from Sapphire Ventures.

Total IFRS revenues for the quarter were €6,805 million ($8,014.9 million), up 1.2%year over year. Also, the figure surpassed the Zacks Consensus Estimate of $7,985 million. A flourishing cloud business, along with strong growth of support revenues, aided top-line growth during the quarter.

Also, new cloud bookings — a key indicator of sales success in cloud business — were up an impressive 22% to €591 million ($696.1 million) in the reported quarter.

Full-year revenues came in at €23,461 million, reflecting growth of 6.3% year over year.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported fourth-quarter revenues of €5,807 million ($6,839.5 million), up 1% year over year.

Cloud Subscriptions & Support garnered revenues of €995 million ($1,171.9 million) in the quarter, up 20% year over year. On the other hand, Software licenses & support reported revenues of €4,813 million ($5,668.8 million), down 2% on a year-over-year basis.

Also, for fourth-quarter 2017, Services revenues went up 4% year over year to €998 million ($1,175.4 million).

The EMEA region observed phenomenal growth in Cloud subscriptions and support revenues, particularly in Germany and Russia. SAP also witnessed double-digit software revenue growth in Russia, Switzerland and the Netherlands.

For the APJ region, SAP witnessed a strong performance in both cloud and software revenue plus cloud subscriptions, led by robust performances in Japan and China. However, the Americas region faced significant currency headwinds.

The company reported IFRS operating margin of 28.9%, almost flat from the figure recorded in fourth-quarter 2016. Also, the company recorded a 1% upswing in operating profit, which came in at €1,964 million ($2,313.2 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 2,300-customer base at the end of the year. In addition, SAP’s Customer Engagement and Commerce (CEC) solutions once again achieved impressive double-digit growth in new cloud. During the quarter, SAP concluded the acquisition of Gigya, an established player in customer identity and access management. The buyout will boost SAP’s CEC solutions.

Additionally, continued strong market traction of the SAP S/4HANA platform is proving to be a sturdy profit churner. During the reported quarter, the company gained 1,000 additional customers, with more than 40% being new. This uptrend hugely propelled the company’s revenues. With little competition in its core market, this software and service provider experienced strong results in the quarter in the aforesaid segment.

This apart, SAP’s business networks (which it manages through three main players, namely Ariba, Fieldglass and Concur) burgeoned 18% during the reported quarter. Currently, the Ariba network handles trading worth more than $1 trillion of 3.1 million connected companies, which boosted the company’s quarterly revenues. While Concur manages travel and expenses of more than 50 million end users, Fieldglass helps users manage 4.3 million contingent workers.

Other Financial Details

For the year ended Dec 31, 2017, the company’s operating cash flow came in at €5.05 billion ($4.8 billion), up 9% on a year-over-year basis, while free cash flow rose 4% year over year to €3.77 billion ($3.8 billion). The company bought back shares worth €500 million in the year and paid a dividend of €1.5 billion.

Acquisition

The company also announced that it had inked an agreement to buy cloud-based human resources-software company — Callidus Software, Inc. CALD — for $2.4 billion. The terms of the deal represent a purchase price of $36 per share, which reflects a premium of about 10% to Callidus's closing price of $32.70 on Monday. The buyout will give SAP access to new sales analytic and customer engagement tools.

SAP expects the deal to be neutral to its non-IFRS earnings for 2018 and accretive to 2019 non-IFRS earnings. SAP plans to fund the deal with existing cash balances and an acquisition term loan. The transaction is anticipated to close in the second quarter of 2018, subject to regulatory approval and other closing conditions.

This is SAP’s first sizeable acquisition in about three and a half years. The company played relatively cool in the acquisition space after buying Ariba Inc., Concur Technologies Inc. and SuccessFactors Inc., for an aggregate $15 billion between 2012 and 2014.

Guidance

Fueled by continued strong momentum of the cloud business, SAP released optimistic view for full-year 2018. The company expects non-IFRS total revenue to come within a range of €24.6-€25.1 billion at constant currency (cc), which represents a growth of 5-7% year over year.

The company expects the non-IFRS cloud subscriptions and support revenues to lie in the €5.8-€5.0-billion range at constant currencies. Also, non-IFRS cloud and software revenue outlook is expected to grow in the band of 6-8% to €20.7-€21.1 billion. Additionally, non-IFRS operating profit forecast for 2018 is estimated to be in the band of €7.3-€7.5 billion reflecting year-over-year growth of 8-11%.

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 in recent times.

Also, SAP’s latest class of solutions that power the next generation of business applications — SAP HANA — has been the biggest top-line driver ever since its introduction. The company’s recent 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 fresh 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 affected 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 presently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the same space include GTT Communications, Inc. GTT and DXC Technology Company DXC. While GTT Communications sports a Zacks Rank of 1 (Strong Buy), DXC Technology carries a Zacks Rank of 2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

GTT Communications has a solid earnings surprise history for the trailing four quarters, having beaten estimates thrice for an average of 101.1%.

DXC Technology generated four strong beats during the same time frame, for an average positive surprise of 25.4%.

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Note:€1 = $1.1778 (Period average from Oct 1, 2017 to Dec 31, 2017)


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