SAP's Q3 Preliminary Results Impress Even As McDermott Exits

SAP SE (DE:SAPG) (NYSE:SAP) recently reported preliminary third-quarter 2019 results. The company will release final third-quarter 2019 results in detail on Oct 21.

The company also stated that CEO Bill McDermott is stepping down. SAP announced the appointment of its Executive Board Members Christian Klein and Jennifer Morgan as co-CEOs, per its succession plan.

The change has been approved by the company’s Supervisory Board and is effective immediately.

Shares of SAP are up approximately 8.5% in the pre-market post the release of third-quarter preliminary results even as the CEO steps down.



Notably, the stock has gained 16.9% year to date compared with the industry’s rise of 30.5%.

McDermott’s Journey in SAP

McDermott joined SAP as head of North America in 2002 and has led the company as a CEO since 2010. McDermott became the first American to be at the helm of the Germany-based enterprise software giant.

McDermott’s efforts in transitioning the company’s product portfolio to cloud, which are likely to drive growth going ahead, are commendable. Under his leadership, SAP expanded its portfolio with robust AI, ML, blockchain and cloud-computing capabilities.

Moreover, McDermott has made a mark by strengthening the company’s business model through strategic acquisitions — Qualtrics, Concur and SuccessFactors, to name a few.

SAP prudently timed McDermott’s exit with impressive growth in cloud business that drove third-quarter preliminary results.

We are optimistic that the new co-CEOs will be consistent with efforts in cloud computing technologies and fortify SAP’s competitive position in enterprise software market.

Upbeat Preliminary Results

Per the results, SAP reported non-IFRS earnings of €1.30 (approximately $1.45) per share, up 14% from the year-ago quarter’s figure. The Zacks Consensus Estimate for non-IFRS earnings is pegged at $1.32.

On IFRS basis, the company reported earnings of €1.04 (almost $1.16 cents) per share, up 21% year over year.

SAP generated total revenues, on a non-IFRS basis, of €6.81 billion (around $7.57 billion). The figure rose 13% year over year, up 10% at constant currency (cc). The Zacks Consensus Estimate for non-IFRS revenues is pegged at $7.45 billion.

On IFRS basis, revenues were €6.79 billion (roughly $7.55 billion), up 13% year over year.

Growth in Cloud Business Bodes Well

New cloud bookings advanced 38% (33% at cc) to €0.57 billion. Excluding bookings from IaaS (or Infrastructure-as-a-Service), new cloud bookings were up 50% year over year. The company inked a major cloud deal that raked in growth of 17% points to new cloud bookings.

On a non-IFRS basis, Cloud and software business reported revenues of €5.65 billion, up 13% year over year (up 10% at cc). The business contributed 83% to total revenues.

Cloud revenues came in at €1.81 billion, up 37% year over year on a non-IFRS basis (33% at cc). Software licenses & support reported revenues of €3.84 billion, up 4% (up 1% at cc) year over year.

S/4HANA adoption rose 25% year over year to nearly 12,000 customers. The company added 500 new customers in the third quarter.

Non-IFRS Margin Details

Cloud gross margin of 69% expanded 540 basis points (bps) from the year-ago quarter’s figure.

Operating profit of €2.09 billion grew 20% on a year-over-year basis (up 15% at cc).

Operating margin of 30.6% expanded 170 bps year over year.

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 range of €7.85-€8.05 billion. This suggests 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 increase in operating profit.

Guidance for 2020

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

Notably, the company envisions non-IFRS operating profit in the band of €8.8-€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 other top-ranked stocks in the broader technology sector are Alteryx (NYSE:AYX) , Synopsys (NASDAQ:SNPS) and Keysight Technologies (NYSE: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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