After a couple of disappointing earnings reports, SAP SE (SAP Quick QuoteSAP - Free Report) turned its performance around remarkably, as it reported fourth-quarter 2016 IFRS earnings of €1.26 ($1.36) per share, which reflected an impressive 18% growth from the year-ago figure of €1.07 per share. The figure also beat the Zacks Consensus Estimate of $1.10 by a striking 23.6%.

Robust growth in Cloud subscriptions and support, along with consistent strength in Cloud and software business, drove earnings.

For full-year 2016, IFRS earnings jumped 18% year over year to €3.03 per share, on the back of rapidly expanding cloud business and sturdy growth in support revenue.

Total IFRS revenues for the fourth quarter were €6,724 million ($7,255 million), up 6% year over year. A flourishing cloud business, along with strong growth of support revenues, aided top-line growth during the quarter. Also, new cloud bookings – a key indicator of sales success in cloud business – were up a whopping 40% to €483 million in the reported quarter.

However, quarterly revenues lagged the Zacks Consensus Estimate of $7,298 million.

Revenues for 2016 went up 6% year over year to €22.06 billion, driven by a 31% increase in new cloud bookings and cloud, and software growth.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported fourth-quarter revenues of €5,760 million ($6,215 million), up 7% year over year. Individually, Cloud Subscriptions & Support garnered revenues of €827 million ($892 million) in the quarter, up 31% year over year; while Software licenses and support reported revenues of €4,933 million ($5,323 million), up 4% on a year-over-year basis.

In addition, for the reported quarter, Services revenues came inflat year over year at €963 million ($1,039 million).

Overall, IFRS Cloud and software revenues, mainly driven by IFRS Cloud Subscriptions & Support strength, witnessed the highest growth in the EMEA region and APJ (both up 9%), followed by the Americas (up 5%).

The EMEA region recorded double-digit software license revenues growth in Germany and the UK. Moreover, growth of software licenses revenue in 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 China, India and Japanacted as a strong catalyst.

SAP reported IFRS operating margin of 28.8%, up200 basis points from the figure recorded in fourth-quarter 2015. Additionally, the company recorded an almost 14% increase in its operating profit, which came in at €1,936 million ($2,089 million).

Quarterly Highlights

SAP’s human capital management (‘‘HCM’’) applications continue to act as the key growth driver, with SuccessFactors Employee Central surpassing the 1,580-customer mark at the end of the fourth quarter. Also, SAP’s Customer Engagement and Commerce solutions grew in double digits during the quarter.

Moreover, consistent solid market traction of the SAP S/4HANA platform is proving to be the strongest profit churner. Year over year, S/4HANA adoption doubled to more than 5,400 customers in 2016. The company also gained 1,300 customers in the reported quarter, of which 30% are new. This hugely fuelled the company’s revenues. The SAP  HANA  Cloud  Platform ("HCP") has been aiding clients in extending  functionalities, building new  applications,  and  integrating across  cloud  and  on–premise platforms, which in turn is bolstering its growth.

This apart, SAP’s business networks (which it manages through three main players – namely Ariba, Fieldglass and Concur) experienced 19% growth in cloud subscriptions and support revenue during 2016. Over the past year, the Ariba network handled the trading of 2.5 million connected companies, which was worth over $885 billion; while Concur managed travel and expenses of more than 45 million end users, and Fieldglass helped in managing 3.1 million flexible workers.

Other Financial Details

For the year ended Dec 31, 2016, the company’s operating cash flow came in at €4.63 billion (approximately $5 billion), up an impressive 27% on a year-over-year basis; while free cash flow generated by the company came in at €3.63 billion ($3.92 billion), up 21% compared to the year-ago tally.

As on Dec 31, 2016, SAP had cash and cash equivalents of €3,702 million ($3,893 million) compared with €3,411 million recorded at the end of Dec 31, 2015.

Guidance Raised

The company is highly optimistic about its sturdy backlog paired with a robust pipeline, which positions it for profitable growth in 2017. Full-year 2017 non-IFRS total revenue is now expected to lie in the range of €23.2–€23.6 billion at constant currencies (cc), which is higher than the expectations at the beginning of 2016.

Also, 2017 non-IFRS operating profit is projected to be in a range of €6.8–€7.0 billion (at cc), which is also an improvement over the prior projections.

We are optimistic about the company’s strong momentum in its cloud business, which will boost growth.

In fact, in light of sustained rapid growth in the cloud, robust software momentum and operating profit expansion, SAP raised its 2020 ambition as well. SAP now aims to achieve €8.0–€8.5 billion non-IFRS cloud subscriptions and support revenues (previously €7.5 − €8.0 billion) in 2020. Further, it will strive to generate €8.5–€9.0 billion non-IFRS operating profit (previously €8–€9 billion) on non-IFRS total revenues of €28–€29 billion (previously €26–€28 billion).

SAP SE Price, Consensus and EPS Surprise

SAP SE Price, Consensus and EPS Surprise | SAP SE Quote

Our Take

SAP has managed to deliver a robust top-line performance despite the so-called 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 cut-throat competition in contemporary business enterprises are causing firms to scour for technological platforms which 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 strongly signal brighter days ahead.

Zacks Rank & Stocks to Consider

SAP currently carries a Zacks Rank #3 (Hold). Some better-ranked stocks in the Zacks categorized Computer Software industry include Exa Corp. , Check Point Software Technologies Ltd. (CHKP Quick QuoteCHKP - Free Report) and Progress Software Corporation (PRGS Quick QuotePRGS - Free Report) . While Exa and Check Point Software sport a Zacks Rank #1 (Strong Buy), Progress Software holds a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

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, with an average beat of 68.1% for the trailing four quarters, beating estimates strongly all through.

Check Point Software offers software and combined hardware products and services for IT security worldwide. This company also has posted earning beats thrice in the trailing four quarters. It boasts an average beat of 6%.

Progress Software provides software solutions for various industries worldwide and has an average surprise of 4.3% for the last four quarters, having strongly beaten estimates twice.

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Note:

€1 = $1.07902 (Period average from Oct 1, 2016 to Dec 31, 2016)

€1 = $1.05155 (As at Dec 31, 2016)