SAP SE Gears Up For Q2 Earnings: Is A Surprise In Store?

SAP SE (DE:SAPG) (NYSE:SAP) is slated to report second-quarter 2017 results on Jul 20.

The company posted a negative earnings surprise of 19.3% in the last reported quarter. Overall, SAP has a dismal earnings surprise history, beating estimates only once in the trailing four quarters. Consequently, it has an average negative surprise of 3.0% for the observed period.

Let’s see how things are shaping up for this announcement.

Factors to Consider

SAP’s staple growth drivers include its resilient Cloud and Software business, an enviable business network spread and dominance over critical client demand areas, namely, customer engagement and human capital management. The company’s S/4HANA has proved to be a solid profit churner, fueled by growth of cloud subscriptions and support-revenue growth in recent times. During first-quarter 2017, the company gained 400 customers, of which, 50% is entirely new.

We believe sustained growth in the cloud business and robust momentum of software business will prove conducive to operating profit and bottom-line growth for the second quarter. Over the past few months, the company has strategically expanded its innovation portfolio – SAP Leonardo – to integrate machine learning, the Internet of Things (IoT), Big Data, analytics and so on.

SAP’s renewed focus on bolstering its IoT foothold is expected to boost second-quarter top line as it has resulted in significant client wins. This apart, the company’s business networks, which had experienced 24% growth in first-quarter 2017, is likely to act as a catalyst for the soon-to-be-reported quarter as well. Also, solid adoption of the company’s human capital management (‘HCM’) applications, led by SuccessFactors Employee Central, is also expected to supplement second-quarter revenue increase.

Despite these positives, economic slowdown in certain end markets is likely to hurt second-quarter financials. Weak sales in Latin American countries and China are expected to play spoilsports. Unfortunately, this trend might continue in the soon-to-be-reported quarter as well.

A weaker global client spending in the technology sector is also expected to weigh down on the company’s profitability. Moreover, the cloud domain is characterized by sturdy competition from technology biggies like Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and Amazon (NASDAQ:AMZN). Stiff competition in the IT industry may also dampen the second-quarter financials. Furthermore, currency fluctuations are likely to thwart sales for the upcoming results.

Earnings Whispers

Our proven model does not conclusively show that SAP will beat earnings estimates in this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is currently pegged at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.03. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: SAP has a Zacks Rank #3. Though Zacks Rank #1, 2 and 3 increase the predictive power of the ESP, the company’s ESP of 0.00% makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or 5 (Sell-rated) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Broadcom Limited (NASDAQ:AVGO) has an Earnings ESP of +1.71% and a Zacks Rank #1.

Applied Optoelectronics, Inc. (NASDAQ:AAOI) has an Earnings ESP of +6.09% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Axcelis Technologies, Inc. (NASDAQ:ACLS) has an Earnings ESP of +3.03% and a Zacks Rank #2.

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