SAP SE (SAP) Q2 Earnings Grow On Strong Cloud Business

SAP SE (DE:SAPG) (TO:SAP) reported second-quarter 2016 IFRS earnings of €0.68 (77 cents) per share, growth of 74.4% from €0.39 earned a year ago.

Over time, SAP’s business transformation initiatives have helped it to channel investments from non-core to strategic core areas, thereby creating a streamlined lean structure that has been supporting top and bottom line performances. Apart from the solid business transformation initiatives, modest top-line growth supplemented bottom-line growth in the quarter under review.

Total IFRS revenue in the second quarter was €5,237 million ($5,913.7 million), up 5.4% year over year.

A flourishing cloud business coupled with strong growth of support revenues aided the top-line growth during the second quarter. However, weak Software licenses & support revenues weighed on the revenue performance to a certain degree.

Also, new cloud bookings – a key indicator of sales success in cloud business – were up 28% to €255 million in the quarter under review.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported second-quarter revenues of €4,359 million ($4,922.2 million), up 7.3% year over year. Individually, Cloud Subscriptions & Support garnered revenues of €720 million ($813.0 million) in the quarter, up 30.4% year over year; while Software licenses and support reported revenues of €3,639 million ($4109.2 million), relatively flat on a year-over-year basis.

However, for the second quarter of 2016, Services revenues were down 3.3% year over year to €878 million ($991.4 million).

Overall, IFRS Cloud and software revenues, mainly driven by IFRS Cloud Subscriptions & Support strength, witnessed the highest growth in the APJ region (up 44%), followed by EMEA (up 38%) and the Americas (up 26%).

Also, the EMEA region witnessed double-digit software license revenues growth in majority of the end markets including France, Netherlands, Switzerland and Germany. After a dismal start to the first quarter of 2016, North America is back on track, supporting growth in the Americas region. Moreover, growth of software licenses revenue in Brazil and Mexico added to the overall sales in the region. For the APJ region, triple digit software license growth in Japan coupled with double-digit growth in India and China acted as key growth catalyst.

SAP reported IFRS operating margin of 24.2%, up 1,010 basis points from the figure recorded in the second quarter of 2015. Also, the company recorded an 81% increase in its operating profit, which came in at €1269 million ($1433.0 million).

Quarterly Highlights

SAP’s human capital management (‘‘HCM’’) applications continue to act as the main growth driver with SuccessFactors Employee Central surpassing the 1,250-customer at the end of the second quarter. Also, on-premise and cloud offerings of SAP’s Customer Engagement and Commerce solutions grew in double-digits during the second quarter.

Moreover, consistently strong market traction of the SAP S/4HANA platform may be a threat to its peers. During the second quarter of 2016, the company gained 500 customers of which 40% are entirely new, which greatly supplemented the company’s top-line performance. The SAP HANA Cloud Platform (HCP) and its partners are helping clients extend functionalities, build new applications and integrate across cloud and on–premise platforms, which in turn is fuelling its growth. Some of the noteworthy customers added during the quarter include Hershey Company (NYSE:HSY), the Targin Group, Cathay Pacific and Roy Hill Holdings Pty Ltd.

This apart, SAP’s business, which it manages through three main players, namely, Ariba, Fieldglass and Concur, experienced 21% growth in cloud subscriptions and support revenue during the second quarter of 2016. In the past twelve months, Ariba network handled the trading of 2.2 million connected companies worth over $820 billion, Concur managed travel and expenses of more than 42 million end users and Fieldglass helped in managing 2.6 million flexible workers.

Other Financial Details

For the six months ended on Jun 30, 2016, the company’s operating cash flow came in at €2.9 billion ($3.2 billion), up 5% on a year-over-year basis; while free cash flow was €2.5 billion ($2.8 billion), relatively flat compared to the year-ago tally.

As on Mar 31, 2016, SAP had cash and cash equivalents of €4,206 ($4,670.3 million) compared with €3,923 million recorded at the end of Mar 31, 2015.

Outlook Reiterated

Based on the present market scenario, the company reiterated its full-year 2016 guidance. Full-year 2016 non-IFRS cloud subscriptions and support revenues are estimated in the range of €2.95–€3.05 billion, at constant currency (cc). The upper end of this projection reflects growth of 33%. Overall, non-IFRS cloud and software revenues are expected to increase by 6–8%, at cc. Also, the company expects full-year 2016 non-IFRS operating profit within €6.4 billion and €6.7 billion, at cc.

We wait to see how the stock fares following the second-quarter outperformance.

To Conclude

SAP posted yet another quarter of solid year-over-year earnings and revenue growth, largely attributable to the strength of its cloud business. We believe the company will continue to fare satisfactorily as business enterprises keep reinventing in business models and making transition toward digital businesses processes. The company’s dominance over three critical client demand areas, namely, customer engagement, human capital management and interconnected commerce network signals at the bright prospects ahead.

Despite the cloud business strength, cut-throat competition from technology heavyweights including Microsoft Corporation (NASDAQ:MSFT) , International Business Machines Corporation (NYSE:IBM) and Amazon.com, Inc. (NASDAQ:AMZN) may pose challenges for the company. Also, vagaries of client spending in the technology sector may play spoilsport for in the forthcoming quarters. In addition, prolonged weakness in some of the company’s key end markets in Latin America may pose headwinds for this Zacks Rank #4 (Sell) company, thwarting its growth momentum.

Note: €1= $ 1.12921 (average for the period Apr 1, 2016 – Jun 30, 2016)

€1= $1.11979 (average for the period Jan 1, 2016 – Jun 30, 2016)

€1= $1.11038 (on Jun 30, 2016)

1 SAP ADR= 1 Ordinary Share