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SAP SE (SAP) Q4 Earnings Decline Y/Y, 2019 View Upbeat

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SAP SE (SAP - Free Report) reported fourth-quarter 2018 non-IFRS earnings of €1.51 ($1.72) per share, which declined 15% from the year-ago figure. The Zacks Consensus Estimate was pegged at $1.78 per share.

Moreover, on IFRS basis, earnings of €1.41 ($1.61) per share declined 8% on a year-over-year basis.

Total revenues, on non-IFRS basis, came in at €7.434 billion ($8.484 billion), up 9% year over year (up 13% at constant currency). The Zacks Consensus Estimate was pegged at $8.281 billion.

On IFRS basis, revenues were €7.428 billion (almost $8.477 billion), up 9% year over year.

New cloud bookings — a key indicator of sales success in cloud business — surged 25% (23% at cc) to €736 million.



Shares of SAP are down 3.5% in the pre-market, primarily owing to year over year decline in earnings, and announcement of restructuring program. Notably, the stock has slumped 4.8% in the past year against the industry’s rally of 11.7%.

2018 at a Glance

For the full year, non-IFRS earnings came in at €4.35 per share, declining 2% year over year.

New cloud bookings of €1.81 billion, grew 25% (28% at cc). SAP ended the year with backlog for Cloud subscriptions and support segment of €10 billion, surging approximately 30%.

Full-year revenues (non-IFRS at cc) of €25.961 billion grew 11% year over year, ahead of management’s anticipated range of €25.20-€25.50 billion.

Impressive Cloud Results in Q4

On a non-IFRS basis, Cloud and software business (85.1% of total revenues), which includes Cloud subscriptions & support and Software licenses & support, reported revenues of €6.327 billion, up 9% year over year (up 11% at cc).

Cloud subscriptions & support revenues of €1.413 billion, surged 40% on a year-over-year basis at cc (non-IFRS). Callidus buyout (concluded in April 2018) contributed €56 million to revenues. Software licenses & support reported revenues of €4.914 billion, up 5% at cc on a year-over-year basis (non-IFRS).

Cloud subscriptions and support revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 39% at cc to €1.256 billion. Cloud subscriptions and support revenues — Infrastructure as a Service (IaaS) related — rallied 47% year over year to €138 million.

Services (14.9% of total revenues) increased 11% from the year-ago quarter (up 21% at cc) to €1.108 billion (non-IFRS).

Segment wise, Applications, Technology & Services revenues increased 10% at cc to €6.264 billion. Business Network revenues jumped 24% at cc to €721 million. Moreover, Customer Experience revenues surged 50% at cc to €349 million.

SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Business Network commerce platform. Approximately, $2.9 trillion in global commerce is transacted annually through this platform across more than 180 countries.

SAP Benefiting From Expanding Customer Base

S/4HANA adoption grew 33% year over year to around 10,500 customers. In the reported quarter, almost 600 additional customers signed up, of which approximately 40% were net new customers.

S/4HANA clientele continues to expand with the addition of Infosys, Verizon Wireless, Nestlé, and Cargill among other notable companies. Notably, companies including Sonos, among others selected S/4HANA solution in the cloud.

Moreover, SAP’s C/4HANA customer experience solutions achieved a whopping triple-digit year-over-year growth in cloud subscription revenues. McLaren Group, Prada,Rubbermaid, Dyson and National Geographic selected the solution in the reported quarter.

SAP’s Human Capital management (HCM) flagship solution — SuccessFactors Employee Central — ended the reported quarter with more than 3,000 customers. Notable deal wins in the quarter comprise Volkswagen,Yahoo Japan, Volvo, State of Illinois, and Stadt Zürich.

Barclaycard selected SAP’s Leonardo solution in the reported quarter. Notably, Leonardo integrates Internet of Things (IoT), Big Data, Machine Learning, Analytics and Blockchain capabilities on the SAP Cloud platform.

Asia-Pacific & Japan (APJ) Witnessed Strong Growth

APJ Cloud subscriptions & support revenues jumped approximately 50% at cc. Cloud & software revenues increased around 6% at cc. The top line benefited from strong cloud revenue growth in Greater China and Japan.

Europe, Middle East & Africa (EMEA) Cloud subscriptions & support revenues advanced more than 39% at cc. Cloud & software revenues increased more than 7% at cc. Top-line growth came on the back of strong cloud revenues in Germany, Middle East, Africa and Spain. Management is elated on robust software revenue growth witnessed in the U.K., Sweden and Italy.

Americas’ Cloud subscriptions & support revenues soared more than 38% at cc. Cloud & software revenues increased more than 20% at cc. The United States, Mexico and Brazil delivered strong performance in both cloud and software revenues in the fourth quarter.

SAP SE Price, Consensus and EPS Surprise

 

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

Margin Details

Non-IFRS gross margin of 74% contracted 120 basis points (bps) from the year-ago figure.

SAP reported non-IFRS operating expense of €4.89 billion, up 10% from the year-ago quarter (up 15% at cc).

Non-IFRS research & development (R&D) and general & administration (G&A) expenses, as percentage of revenues, expanded 80 bps and 30 bps to 12.7% and 3.6%, respectively. However, selling & marketing (S&M) expenses, as percentage of revenues, contracted 190 bps from the year-ago quarter to 23.2%.

Non-IFRS operating profit of €2.55 billion grew 8% on a year-over-year basis (up 8% at cc as well). Operating margin contracted 150 bps at cc to 33.2%.

Segment wise, Applications, Technology & Services profit increased 7% at cc to approximately €2.926 billion on a non-IFRS basis. Business Network profit jumped 38% at cc to €147 million. Moreover, Customer Experience profit surged 32% at cc to €102 million.

Balance Sheet & Cash Flow

The company ended the fourth quarter with cash and cash equivalents of approximately €8.627 billion compared with the previous quarter’s figure of €4.507 billion.

The company generated operating cash flow of almost €818 million in the reported quarter compared with previous quarter’s reported figure of €499 million.

Free cash flow came in at €505 million in the reported quarter compared with previous quarter’s reported figure of €171 million.

Acquisitions

SAP is benefiting from synergies of Callidus buyout. In 2018, Callidus accounted for €156 million to non-IFRS cloud subscriptions and support revenues, and €46 million in non-IFRS operating profit.

Management is optimistic regarding the recent acquisition of Qualtrics, concluded on Jan 23, 2019, for $8 billion in cash. The financials pertaining to Qualtrics will be reported under SAP’s Customer Experience segment which has been renamed to ‘Customer and Experience Management’.

Notably, Qualtrics specializes in providing Software-as-a-Service (SaaS) based experience management (“XM”) software. The buyout of Qualtrics’s comprehensive XM software, encompassing customer, brand, employee and product experience solutions is anticipated to strengthen SAP’s intelligent enterprise platform.

New Restructuring Program

In 2019, SAP intends to commence a restructuring program aimed at keeping pace with evolving consumer demands. The company anticipates incurring restructuring expenses in the range of €800-€950 million.

Notably, this is the first restructuring program post 2015. Management notes that major portion of the anticipated expenses "will be recognized in the first quarter of 2019".

The company envisions the strategic program to reflect as a minor cost benefit in 2019 and contribute €750-€850 million as cost savings in 2020.

Guidance for 2019

SAP anticipates upbeat pipeline and momentum in cloud to continue through 2019. Non-IFRS cloud subscriptions and support revenues are expected in the range of €6.7-€7.0 billion, up 33-39% at cc.

Non-IFRS cloud and software revenues are now expected between €22.4 million and €22.7 billion, up 8.5-10% at cc.

Additionally, non-IFRS operating profit for 2019 is estimated in the band of €7.7-€8.0 billion, reflecting year-over-year growth of 7.5-11.5% at cc.

For 2019, the company projects total revenues to report robust growth, at a little lower rate than the increase in operating profit.

Raised Revenue Outlook for 2020

SAP raised 2020 guidance for non-IFRS cloud subscriptions and support revenues to €8.6-€9.1 billion (previously €8.2–€8.7 billion). Non-IFRS total revenues are now expected to come in the range of €28.6-€29.2 billion (previously €28–€29 billion).

Notably, it continues to expect non-IFRS operating profit in the range of €8.5-€9.0 billion.

View for 2023

SAP provided an outlook for 2023, as well. The company expects non-IFRS total revenues to grow meaningfully to exceed €35 billion. Over the span of upcoming five years, SAP anticipates non-IFRS cloud subscription and support revenues to more than triple.

Non-IFRS operating profit is anticipated to witness CAGR of 7.5-10%.

Zacks Rank & Stocks to Consider

Currently, SAP carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the broader Computer and Technology sector are Cloudera (CLDR - Free Report) , Marvell Technology Group Ltd. (MRVL - Free Report) and MeetMe (MEET - Free Report) , each sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Long-term earnings growth rate for Cloudera, Marvell and MeetMe is forecast at 8%, 9.4% and 20%, respectively.

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