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SAP SE (SAP) Q1 Earnings Miss, Revenues Beat, View Intact

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SAP SE (SAP - Free Report) reported first-quarter 2017  IFRS earnings per share of €0.43 (46 cents), which missed the Zacks Consensus Estimate of 57 cents. The figure declined 9% on a year-over-year basis. An increase in the share-based compensation expenses, primarily attributable to greater employee participation, proved to be a drag on the bottom line.

Total IFRS revenues for the first quarter were €5,285 million ($5,630.1 million), up 12% year over year. The figure also surpassed the Zacks Consensus Estimate of $5,501 million. Robust performance of both the company’s segments, namely, Cloud and Software and Services, drove revenues. Also, new cloud bookings – a key indicator of sales success in cloud business – were up a whopping 49% to €215 million in the reported quarter.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported fourth-quarter revenues of €4,328 million ($4,610.6 million), up 12% year over year. Individually, Cloud Subscriptions & Support garnered revenues of €905 million ($964.1 million) in the quarter, up 34% year over year; while Software licenses and support reported revenues of €3,422 million ($3,645.4 million), up 8% on a year-over-year basis.

In addition, for the reported quarter, Services revenues rose 9% year over year to €957 million ($1,019.5 million). Overall, IFRS Cloud and software revenues, mainly driven by IFRS Cloud Subscriptions & Support strength, witnessed the highest growth in APJ (up 21%), followed by the Americas (up 12%) and EMEA region (up 10%).

In the EMEA region, Cloud subscriptions and support revenue growth was driven by strong performance of Germany, France and Italy. Also, stellar growth in software revenue in South Africa and the Netherlands proved conducive to the overall performance in the EMEA region. For the Americas, impressive performance of Canada and Mexico along with robust software revenue in North America drove growth.

After a few uninspiring quarters, software revenue growth in Brazil rebounded, adding to the company’s strength. For the APJ region, impressive cloud subscriptions and software revenue growth in India and Japan acted as a strong catalyst.

SAP reported IFRS operating margin of 12.7%, down 450 basis points from the figure recorded a year ago. Additionally, the company recorded an almost 17% drop in its operating profit, which came in at €673 million ($716.9 million).

SAP SE Price, Consensus and EPS Surprise


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

Quarterly Highlights

SAP’s human capital management (HCM) applications continue to drive growth, with SuccessFactors Employee Central surpassing the 1,700-customer mark at the end of first-quarter 2017. Also, SAP’s Customer Engagement and Commerce solutions grew double digits in the quarter.

Moreover, consistent market traction of the SAP S/4HANA platform is proving to be the highest profit churner. To date, S/4HANA has earned 5,800 customers. The company also gained 400 customers in the reported quarter, of which 50% are new. This has fueled the company’s revenues to a great extent.

This apart, SAP’s business networks (which it manages through three main players – namely Ariba, Fieldglass and Concur) experienced 24% growth in cloud subscriptions and support revenue during the reported quarter. Currently, Ariba network handles the trading of 2.7 million connected companies, which was worth over $900 billion; while Concur managed travel and expenses of more than 47 million end users, and Fieldglass helped in managing 3.3 million flexible workers.

Other Financial Details

For the quarter ended Jan 31, 2017, the company’s operating cash flow came in at €2,872 million (approximately $3,067.6 million), up 15.7% on a year-over-year basis, while free cash flow generated by the company came in at €2,581 million ($2,756.8 million), up 11.6% from the year-ago tally.

As on Jan 31, 2017, SAP had cash and cash equivalents of €5,937 million ($6,341.3 million), compared with €5,743 million recorded at the end of Jan 31, 2016.

Guidance Reiterated

The company is highly optimistic about its solid backlog coupled with a robust pipeline, which positions it for profitable growth in 2017. The company reiterated its full-year 2017 non-IFRS total revenue projection at the range of €23.2–€23.6 billion at constant currency (cc).

Also, the non-IFRS operating profit guidance for 2017 has been reiterated at the €6.8–€7.0 billion (at cc) band. We are optimistic about the company’s strong momentum in its cloud business as well.

To Conclude

SAP’s first-quarter 2017 results have been largely mixed. While the decline in the bottom line and operating profit has been discouraging, the resilient cloud business fared better than expectations. Going forward, we believe this Zacks Rank #3 (Hold) company’s cloud business will continue to act as a catalyst. Lucrative prospects in support revenues and a stable outlook reinstate our confidence in the stock. 

Also, the company’s effort to fortify its foothold in the Industrial Internet of Things domain is likely to unlock fresh avenues for revenue generation. We also believe that the company’s strategic ventures with IT frontrunners like General Electric Company (GE - Free Report) and Accenture plc (ACN - Free Report) will help fortify its IoT foothold, thus boosting profits.

A better-ranked stock in the industry is Avid Technology, Inc. (AVID - Free Report) , which boasts a positive average surprise of 167.0% for the trailing four quarters. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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