Will Q3 Earnings Hold A Surprise For SAP SE's (SAP) Stock?

SAP SE (DE:SAPG) (NYSE:SAP) is slated to report third-quarter 2016 results on Oct 21.

Last quarter, the company had posted a negative surprise of 2.6%. SAP has an unimpressive earnings surprise history, with one beat, two misses and one in-line earnings, over the trailing four quarters. Overall, the company has an average positive surprise of 1.7%.

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

Factors to Consider

SAP’s efficient software tools have gained huge popularity among clients, transforming their critical areas, namely customer & human capital management and interconnected commerce network. In this regard, SAP HANA – a new class of solutions that powers next generation of business applications – has been a key profit churner. During second-quarter 2016, the company gained 500 customers, of which 40% are entirely new.

Leveraging on SAP HANA’s popularity, during the third quarter, the company launched SAP HANA express edition. The express edition is a powerful downloadable version of its in-memory platform and will assist the company in expanding its customer base. We believe that the burgeoning demand for S/4 HANA will be a fundamental catalyst, driving third-quarter top-line growth. Also, SAP commenced the shipment of its cloud-based prototyping and user research tool – Build – that has gained major clients like ATB Financial, Convergent IS and Linklaters.

Moreover, SAP’s cloud business, including cloud subscriptions & support revenues and software support, have been making huge profits for the company over the past few quarters. We perceive that solid performance of both traditional and cloud business will boost revenues for the quarter to be reported.

This apart, SAP’s wide business network, managed through three players – namely Ariba, Fieldglass and Concur – is expected to escalate the company’s third-quarter figures, by gaining clients.

Each of these three units launched new offerings during the second quarter that bode well for SAP’s future. Notable launches include TripLink by Concur, introduction of Time Entry mobile app by Fieldglass and launch of Direct Materials Sourcing capability by Arbia. Further, excellent traction of SAP’s human capital management solutions, led by SAP SuccessFactors, is anticipated to propel the company’s revenues. During the third quarter, it gained five new clients and positive industry trends suggest this momentum is unlikely to fizzle out anytime soon.

Despite these positives, weakness in the company’s key end markets, including some Latin American countries and China, continues to thwart top-line performance. Per a recent report by Gartner, the global IT industry has dull prospects, with flat customer spending projections, for the rest of 2016. Irregular client spending in the technology sector has persistently put pressure on the company’s top-line performance in the past and might play a spoilsport for the to-be-reported quarter as well.

Additionally, SAP operates in the highly competitive IT services industry, exposing the company to pricing risks. The cloud domain is characterized by cutthroat competition from technology biggies like Microsoft (NASDAQ:MSFT), IBM (NYSE:IBM) and Amazon (NASDAQ:AMZN), adding to the company’s woes.

Moreover, post Brexit referendum, SAP believes erosion in business confidence, along with price increases, to hurt global IT spending. Such political tension also threatens the company’s financials for the third quarter.

Earnings Whispers

Our proven model does not conclusively show that SAP is likely to beat earnings 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. That is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company currently stands at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 79 cents.

Zacks Rank: SAP's Zacks Rank #3 when combined with 0.00% ESP makes surprise prediction difficult.

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

Stocks That Warrant a Look

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:

Apple Inc. (NASDAQ:AAPL) has an Earnings ESP of +0.61% and a Zacks Rank #2. The company is scheduled to report results on Oct 25.

Littelfuse Inc. (NASDAQ:LFUS) has an Earnings ESP of +1.38% and carries a Zacks Rank #2. The company is slated to release results on Nov 3.

Vocera Communications, Inc. (NYSE:VCRA) has an Earnings ESP of +10% and a Zacks Rank #1. The company is slated to report earnings on Oct 27. You can see the complete list of today’s Zacks #1 Rank stocks here.

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