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SAP's Q3 Earnings and Revenues Rise Y/Y on Cloud Strength

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SAP SE (SAP - Free Report) delivered third-quarter 2023 non-IFRS earnings per share (EPS) of €1.45 ($1.58), which increased 32% from the year-ago quarter. The Zacks Consensus Estimate was pegged at $1.40.

Driven by strength in the cloud business, SAP reported total revenues on a non-IFRS basis of €7.744 billion ($8.428 billion), which increased 4% year over year (up 9% at constant currency or cc). The Zacks Consensus Estimate was pegged at $8.578 billion.

SAP SE Price, Consensus and EPS Surprise

SAP SE Price, Consensus and EPS Surprise

SAP SE price-consensus-eps-surprise-chart | SAP SE Quote

Cloud Results

Current cloud backlog — a key indicator of go-to-market success in cloud business — increased 19% (up 25% at cc) to €12.269 billion.

On a non-IFRS basis, the Cloud and software business (86.3% of total revenues) registered revenues of €6.679 billion, up 4% year over year (up 9% at cc).

Cloud revenues were €3.472 billion, up 16% year over year on a non-IFRS basis (up 23% at cc). SAP’s cloud business gained momentum across Asia-Pacific, Europe, the Middle East, and Africa and the Americas region. It remained strong in Brazil, India, and the Netherlands. Also, it gained momentum in Canada, China, France, Germany, Japan, and Switzerland.

Software licenses and support revenues totaled €3.208 billion, which decreased 6% (down 2% at cc) year over year. Non-IFRS software license revenues of €335 million declined 17% (down 14% at cc) year over year.

On a non-IFRS basis, cloud revenues related to Software as a Service increased 23% at cc to €2.727 billion. Cloud revenues related to Platform as a Service rose 46% at cc to €558 million. Cloud revenues related to Infrastructure as a Service declined 16% at cc to €186 million.

Services business (13.8% of total revenues) delivered revenues of €1.06 billion, which remained unchanged from the year-ago quarter (up 4% at cc).

The company previously had two reportable segments — Applications, Technology & Services (AT&S) and Qualtrics. However, in June 2023, it completed the sale of its entire stake in Qualtrics as part of the acquisition of Qualtrics by funds associated with Silver Lake and Canada Pension Plan Investment Board.

SAP now has AT&S as its only reportable segment and the Qualtrics segment is treated as discontinued operations. AT&S’ revenues were up 3% year over year (up 9% at cc) to €7.46 billion owing to solid cloud revenue growth on the back of rising demand for SAP S/4HANA and SAP’s Business Technology Platform.

Expanding Clientele Bodes Well

Rise with SAP solution was adopted by clients including ADAC, Alnatura, BC Hydro, Bobst Mex, Constellium, Graybar, Hitachi Zosen Corporation, KAESER KOMPRESSOREN, LG Electronics, LG Energy Solution, PUMA, Siemens Healthineers, and the University of Leeds.

More companies have begun deploying S/4HANA solution partly or entirely in the cloud. SAP S/4HANA cloud revenues increased 67% (up 77% at cc) year over year to €914 million. SAP S/4HANA’s current cloud backlog was up 58% (up 66% at cc) year over year.

In the reported quarter, BMW Group, Celltrion Healthcare, City of Vancouver, Schneider Electric, Toll Group, and UPL Limited went live on SAP S/4HANA Cloud.

SAP’s clientele continues to expand with additions of Accenture, Adobe, Ecovacs, freenet DLS, Fressnapf, Heidelberger Druckmaschinen, Hyundai Motor Company / Kia, Jollibee Foods Corporation, Lenovo, and RICOH. These brands adopted SAP’s various solutions during the quarter under review.

GROW with SAP was adopted by Atria, Northstar Clean Technologies, Phoenix Global, Tait International, and Ziegler Holding.

On Aug 29, 2023, SAP announced that it will collaborate with Google Cloud to introduce new generative AI-powered solutions by merging their integrated open data cloud utilizing SAP Datasphere with Vertex AI solutions.

On Sep 7, 2023, SAP announced that it is set to acquire LeanIX for undisclosed financial terms. Subject to customary closing conditions and regulatory approvals, the transaction is anticipated to conclude in the fourth quarter of 2023.

On Sep 26, 2023, SAP unveiled Joule, which is an innovative AI copilot driven by natural language and generative capabilities. Joule will be released with SAP SuccessFactors solutions and SAP Start later this year, followed by integration with SAP S/4HANA Cloud, a public edition in the near future.

Margin Details

Non-IFRS gross margin of 74.5% increased 10 basis points (bps) from the year-ago quarter’s figure.

SAP reported non-IFRS operating expenses of €5.466 billion, up 1% from the year-ago quarter’s level (up 6% at cc).

Non-IFRS operating profit of €2.278 billion increased 10% on a year-over-year basis (up 16% at cc).

Non-IFRS operating margin of 29.4% expanded 160 bps on a year-over-year basis. At cc, the figure came in at 29.6% and increased to 190 bps.

Balance Sheet & Cash Flow

As of Sep 30, 2023, SAP had cash and cash equivalents of €9.378 billion compared with €14.142 billion as of Jun 30, 2023.

For the nine months that ended on Sep 30, 2023, the company generated operating cash of €4.284 billion compared with €3.653 billion in the prior-year period.

Free cash flow was €865 billion for the quarter under review.

2023 Outlook

For 2023, management anticipates cloud revenues in the range of €14-€14.2 billion, suggesting an increase of 23-24% at cc.

For 2023, cloud and software revenues are now expected to be between €27 billion and €27.4 billion, implying a 6-8% rise at cc.

Management projects non-IFRS operating profit in the range of €8.65-€8.95 billion, indicating a rise of 8-12% at cc.

Free cash flow is estimated to be €4.9 billion.

Zacks Rank

SAP currently carries a Zacks Rank #4 (Sell).

Stocks to Consider

Some better-ranked stocks in the broader technology space are Asure Software (ASUR - Free Report) , Synopsys (SNPS - Free Report) and Watts Water Technologies (WTS - Free Report) . Asure Software and Synopsys currently sport a Zacks Rank #1 (Strong Buy), whereas Watts Water Technologies carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Zacks Consensus Estimate for Asure Software’s 2023 EPS has increased 5.9% in the past 60 days to 54 cents.

Asure Software’s earnings beat the Zacks Consensus Estimate in all the last four quarters, the average being 676.4%. Shares of ASUR have surged 78.5% in the past year.

The Zacks Consensus Estimate for Synopsys’ 2023 EPS has gained 2.5% in the past 60 days to $11.09. SNPS’ long-term earnings growth rate is 16.4%. Shares of SNPS have surged 72% in the past year.

The Zacks Consensus Estimate for Watts Water’s 2023 EPS has increased 1% in the past 60 days to $7.78. The company’s long-term earnings growth rate is 7.5%.

Watts Water’s earnings beat estimates in all the trailing four quarters, delivering an average surprise of 12.5%. Shares of WTS have rallied 42.4% in the past year.

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