SAP SE (SE) Beats Q3 Earnings On Robust Cloud Business

SAP SE (DE:SAPG) (NYSE:SAP) reported third-quarter 2016 IFRS earnings of €0.61 (68 cents) per share, a decline of 18.7% from €0.75 earned a year ago.

Higher stock-based compensation expenses and lower non-operating and financial income hurt the bottom-line performance on a year-over-year basis.

Total IFRS revenues in the third quarter were €5,375 million ($5,996.6 million), up 7.8% year over year.

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 up 24% to €265 million in the quarter under review.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported third-quarter revenues of €4,455 million ($4,970.2 million), up 8.1% year over year. Individually, Cloud Subscriptions & Support garnered revenues of €769 million ($857.9 million) in the quarter, up 28.4% year over year; while Software licenses and support reported revenues of €3,686 million ($4,112.3 million), up 4.6% on a year-over-year basis.

Also, for third-quarter 2016, Services revenues were up 6.6% year over year to €920 million ($1,026.4 million).

Overall, IFRS Cloud and software revenues, mainly driven by IFRS Cloud Subscriptions & Support strength, witnessed the highest growth in the APJ region (up 50%), followed by EMEA (up 34%) and the Americas (up 24%).

The EMEA region witnessed double-digit software license revenues growth in majority of the end markets, including Germany, France, UK and South Africa. Moreover, growth of software licenses revenue in Brazil and Mexico proved conducive to the sales growth of the Latin American region. This supplemented top-line growth in the Americas. For the APJ region, double digit software license growth in Japan, Malaysia and Singapore, along with robust performance in China, acted as catalysts.

SAP reported IFRS operating margin of 20.5%, down 380 basis points from the figure recorded in third-quarter 2015. Also, the company recorded an 8.4% increase in its operating profit, which came in at €1,103 million ($1,230.5 million).

Quarterly Highlights

SAP’s human capital management (‘‘HCM’’) applications continue to act as the key growth driver, with SuccessFactors Employee Central surpassing the 1,350-customer at the end of the third quarter. Also, SAP’s Customer Engagement and Commerce solutions grew in double digits during the quarter.

Moreover, consistent strong market traction of the SAP S/4HANA platform is proving to be the strongest profit churner. During third-quarter 2016, the company gained 400 customers, of which 40% are entirely new. This hugely fuelled the company’s revenues. The SAP HANA Cloud Platform (HCP) has been aiding clients in extending functionalities, build new applications and integrate across cloud and on–premise platforms, which in turn is bosltering its growth.

This apart, SAP’s business, which it manages through three main players – namely Ariba, Fieldglass and Concur – experienced 17% growth in cloud subscriptions and support revenue during the quarter under review. In the past 12 months, Ariba network handled the trading of 2.4 million connected companies worth over $840 billion, Concur managed travel and expenses of more than 44 million end users and Fieldglass helped in managing 2.8 million flexible workers.

Other Financial Details

For the nine-month period ended on Sep 30, 2016, the company’s operating cash flow came in at €3.6 billion ($4.0 billion), up 12.5% on a year-over-year basis; while free cash flow was €3.0 billion ($3.4 billion), up 5% compared to the year-ago tally.

As on Sep 30, 2016, SAP had cash and cash equivalents of €4,112 ($4,609.8 million) compared with €3,411 million recorded at the end of Dec 31, 2015.

Outlook Reiterated

Supported by lucrative opportunities in the market, the company has raised its full-year 2016 outlook. The company now expects full-year 2016 non-IFRS cloud subscriptions and support revenues in the range of €3.00-€3.05 billion from the previous guided range of €2.95–€3.05 billion, at constant currency (cc).

Also, non-IFRS cloud and software revenue guidance has been revised upward. It is expected to grow in the range of 6.5%-8.5% instead of the previous guided range of 6–8%, at cc. Also, 2016 non-IFRS operating profit forecast has been tweaked at the lower end of the previously guided range. It is now estimated to be in the range of €6.5 billion- €6.7 billion, from the earlier range of €6.4 billion and €6.7 billion, at cc.

Our Take

SAP has managed to deliver a robust top-line performance despite what Gartner and other research firms had to say about IT spending woes. The company has established dominance over three of the most critical client demand areas, namely efficient customer engagement, human capital management and interconnected commerce network. Stiff industry rivalry and cutthroat competition in contemporary business enterprises are causing firms to scour for technological platforms that can help them outshine peers.

We believe that robust demand momentum for efficient software tools by leading business enterprises offers SAP excellent opportunities for future growth. Strong key financial metrics of the company and upward guidance revision signals brighter days ahead.

SAP currently holds a Zacks Rank #3 (Hold). Some better-ranked stocks in the same space include Adobe Systems Inc. (NASDAQ:ADBE) , Autodesk, Inc. (NASDAQ:ADSK) and Exa Corp. (NASDAQ:EXA) . While Adobe Systems and Autodesk carry a Zacks Rank #2 (Buy), Exa sports a Zacks Rank #1 (Strong Buy).

Adobe Systems is a leading player in the computer software space. The company has a striking earnings surprise history over the trailing four quarters, having beaten estimates all through, for an average beat of 5.6%.

Autodesk is one of the world's leading design software and digital content companies for architectural design and land development, manufacturing, utilities, telecommunications, and media and entertainment. This company also has posted earning beats each time in the trailing four quarters. It boasts an average beat of 52.4%.

Exa Corporation develops, markets, sells, and supports software products, and provides professional services for simulation-driven design. The company has an excellent earnings surprise history beating each time over the trailing four quarters and has an average beat of 52.4%. You can see the complete list of today’s Zacks #1 Rank stocks here.

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