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Is Disappointment in Store for SAP SE (SAP) in Q2 Earnings?

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SAP SE (SAP - Free Report) is slated to report second-quarter 2016 results on Jul 20.

Last quarter, the company posted a positive surprise of 14.3%. Also, for the trailing four quarters, the company reported an average positive surprise of 9.1%.

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

Factors to Consider

SAP operates in the IT services industry which is extremely competitive exposing the company to pricing risks and proving to be a drag for the second-quarter 2016 financial performance. The cloud domain is characterized by cut-throat competition from technology heavyweights, including Microsoft, IBM and Amazon who can steal SAP’s thunder this earnings season.

Also, vagaries of client spending in the technology sector have persistently pressurized the company’s top-line performance in the past and might play a spoilsport for the soon-to-be reported quarter. This apart, prolonged weakness in some of the company’s key end markets in Latin America, particularly in Brazil, has maligned SAP’s sales performance over the past few quarter’s; and might weigh on the second-quarter 2016 performance as well.

On the positive side, in the quarter to be reported,  SAP’s thriving cloud business and growing market traction from S/4HANA applications from the few previous quarters to the reported one is expected to boost sales momentum.. In the first quarter of 2016, and possibly the drive will continue during the second quarter as well, the company gained 500 customers riding on the success of S/4HANA offerings.. Increasing popularity of SAP HANA Enterprise Cloud is fuelling the growth of SAP S/4HANA platform, boding well for the company’s profitability.

Further, bolstered sales are expected from the company’s relentless upgrades of existing products and new launches. Toward the end of second-quarter, at SAPinsider, a conference organized by the company and its partners, in Vienna from Jun 20–22, 2016, the company released a host of products, namely:.  SAP Cloud Identity Access Governance, SAP HANA smart data integration, SAP HANA smart data quality, SAP Data Services. Other newly launched products like SAP Exchange Media and SAP Vehicle Insights are also expected to augment sales of its cloud portfolio. 

In the second-quarter of 2016, other significant profit-churners from which clients are gaining are SAP’s human capital management (‘HCM’) applications, Internet of Things (‘IoT’) & Big Data and business network. Finally, the company’s strategic partnerships have been a staple in its market growth strategy and are expected to drive growth for the quarter-to-be reported, and beyond. Deals with IBM, Apple, and Microsoft inked during the second-quarter look promising in this regard.

SAP AG ADR Price and EPS Surprise

SAP AG ADR Price and EPS Surprise | SAP AG ADR Quote

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 stand at 0.00%. This is because both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at 78 cents.

Zacks Rank: SAP's Zacks Rank #4 when combined with 0.00% ESP makes surprise prediction difficult.

As it is, 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 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:

QUALCOMM Inc. (QCOM - Free Report) has an Earnings ESP of +3.61% and a Zacks Rank #2. The company will report results on Jul 20.

Intel Corporation (INTC - Free Report) has an Earnings ESP of +3.77% and a Zacks Rank #2. The company will report results on Jul 20.

Core Laboratories NV (CLB - Free Report) has an Earnings ESP of +2.86% and a Zacks Rank #3. The company is expected to release earnings results on Jul 20.

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