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Will SAP Beat Q4 Earnings on Cloud Business Strength?

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SAP SE (SAP - Free Report) is slated to report fourth-quarter 2015 results on Jan 22, 2016. Last quarter, the company had posted in-line earnings. For the trailing four quarters, the company reported an average positive surprise of 4.86%.

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

Factors at Play

SAP expects its fourth-quarter performance to be driven by its cloud business, which has proved to be its strongest growth driver of late. Moreover, the company’s latest offering from the SAP HANA family, S/4HANA, has established itself as a powerful “mission critical control center” for businesses that seek digital transformation. The product’s enviable market traction will likely bolster the company’s growth in the to-be-reported quarter.

Moreover, SAP’s human capital management (‘HCM’) applications and Internet of Things (‘IoT’) & Big Data platform powered by SAP HANA have enjoyed huge client gains over the past couple of quarters and are expected to be conducive to its top- and bottom-line performance in the fourth quarter as well. This apart, robust performance by SAP’s business network, managed through three main players, namely Ariba, Fieldglass and Concur, is expected to drive its fourth-quarter and 2015 results.

A few days back, SAP came up with preliminary results for both fourth-quarter and full-year 2015 and going by the key statistics, it shows promise. Per the preliminary assessment, the company projects non-IFRS total revenue for the quarter to grow 16% and operating profit to rise 7%, both on a year-over-year basis. Management believes that cloud subscriptions, support revenues and core license business will act as the main growth drivers for the fourth quarter.

At the same time, we remain enthusiastic about SAP’s strategy to exercise product upgrades for meeting pressing customer demand. During the fourth quarter, the company announced the availability of two advanced back-to-back products (SAP TM 9.3 and SAP EWM 9.3) for logistics clients and banking domain (Banking Services 9.0) to cater to the existing gaps in the respective industries.  Also, the company’s efforts to upgrade its family of innovative enterprise information management (“EIM”) solutions, launch SAP Digital for Customer Engagement solution and measures to innovate SAP S/4 HANA will likely accelerate its growth momentum during the quarter.

Despite these positives, stiff competition in the IT services industry exposes SAP to risks of pricing pressure which can prove to be a drag on its financials. This apart, company statistics show that its revenues have been subjected to significant fluctuations led by inherent seasonality in clients’ technology spending, with software revenues being hit the most. Such factors can also bother the company’s financials in the fourth 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, that represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.23.

Zacks Rank: SAP’s Zacks Rank #3, when combined with a 0.00% Earnings ESP, makes surprise predictions difficult.

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

Stocks That Warrant a Look

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

Ethan Allen Interiors Inc. (ETH - Free Report) has an Earnings ESP of +9.30% and carries a Zacks Rank #1.

SolarWinds, Inc. (SWI - Free Report) , with an Earnings ESP of +2.27% and a Zacks Rank #1.

MicroStrategy Inc. (MSTR - Free Report) , with an Earnings ESP of +3.46% and a Zacks Rank #1.

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