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SAP Q2 Earnings Up Y/Y on Cloud Strength & Growing Clientele

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SAP SE (SAP - Free Report) reported second-quarter 2019 non-IFRS earnings of €1.09 (approximately $1.22) per share, which grew 11.2% from the year-ago figure. The Zacks Consensus Estimate was pegged at $1.20.

On IFRS basis, the company reported earnings of €0.48 (almost 54 cents) per share compared with year ago figure of €0.60.

Total revenues, on non-IFRS basis, came in at €6.656 billion (around $7.479 billion), up 11% year over year (up 8% at constant currency). The Zacks Consensus Estimate was pegged at $7.474 billion.

On IFRS basis, revenues were €6.631 billion (roughly $7.451 billion), up 11% year over year.

New cloud bookings advanced 17% (15% at cc) to €494 million.

Price Performance

Shares of SAP are down approximately 6% in the pre-market, which can be attributed to decline in software licenses revenues on account of trade-war headwinds.


Notably, SAP stock has returned 36.1% year to date, outperforming the industry’s rally of 34.3%.

Upbeat Cloud Results

On a non-IFRS basis, Cloud and software business (82.9% of total revenues) reported revenues of €5.52 billion, up 11% year over year (up 8% at cc).

Cloud revenues came in at €1.717 billion, up 40% year over year on a non-IFRS basis (35% at cc). Software licenses & support reported revenues of €3.802 billion, up 2% (flat on a cc basis). Growth in Software support revenues averted the decline in software licenses revenues, which were impacted by macroeconomic trade-related headwinds.

Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 34% at cc to €1.49 billion. Cloud revenues — Infrastructure as a Service (IaaS) related — rallied 46% year over year at cc to €164 million.

Services revenues (17.1% of total revenues) increased 8% from the year-ago quarter (up 5% at cc) to €1.136 billion (non-IFRS).

SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Intelligent Spend Group (formerly named Business Network). Approximately $3.3 trillion in global commerce is transacted annually through this platform across more than 180 countries.

Segment wise, Applications, Technology & Services (AT&S) revenues increased 4% at cc to €5,382 billion. Intelligent Spend Group revenues jumped 17% at cc to €786 million. Moreover, Customer and Experience Management (CXM) revenues were up 74% year over year at cc to €365 million.

Expanding Clientele Favors Top Line

S/4HANA adoption grew 29% year over year to around 11,500 customers. In the reported quarter, net new customers comprised approximately 50%.

S/4HANA clientele continues to expand with the addition of the Texas Department of Transportation and Wanhua Chemical Group, among others. Notably, companies including Colgate-Palmolive, Hitachi, Touche Southern Africa and Deloitte, have gone live with S/4HANA solution in the cloud.

Moreover, SAP’s C/4HANA customer experience solution was selected by NH Hotel Group, Hamburg Commercial Bank and Aritzia in the reported quarter.

SAP’s Human Capital management (HCM) flagship solution — SuccessFactors Employee Central — ended the reported quarter with more than 3,350 customers. Notable deal wins in the quarter comprise Burger King Brazil, Claas, CONA Services, and Keolis.

Patentes Talgo selected SAP’s Leonardo solution in the reported quarter. Notably, Leonardo integrates IoT, Big Data, ML, Analytics and Blockchain capabilities on the SAP Cloud platform.

Digital Platform comprises SAP Data Management and SAP Cloud Platform solutions. In the reported quarter, notable deal wins for the company’s Digital Platform offerings include Grupo Energia Bogota and the State of Illinois. Moreover, Follett Corporation and Uniper adopted SAP Analytics Cloud.

Additionally, Uniper and Kawasaki Heavy Industry opted for the company’s Intelligent Spend Group solutions in the quarter.

Management is optimistic regarding the acquisition of Qualtrics, concluded on Jan 23, 2019, for $8 billion in cash. Financials pertaining to Qualtrics fall under CXM segment. Notably, Qualtrics solutions were selected by the United States Department of State and Chalhoub Group in the reported quarter.

EMEA Witnessed Robust Cloud Growth

Europe, Middle East & Africa (EMEA) Cloud revenues surged 44% at cc. Cloud & software revenues increased 8% at cc. The top line was driven by strong cloud revenues in Spain and Germany. Management is elated on robust software revenue growth witnessed in Italy and France.

SAP SE Price, Consensus and EPS Surprise

SAP SE Price, Consensus and EPS Surprise

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

Asia Pacific & Japan (APJ) Cloud revenues jumped approximately 37% at cc. Cloud & software revenues increased around 6% at cc. The top line benefited from strong cloud revenue growth in Japan. Growth in Software license revenues across India and Australia was noteworthy despite trade-war related headwinds.

Americas’ Cloud revenues soared 30% at cc. Cloud & software revenues increased 10% at cc. The United States, Brazil and Canada delivered strong performance in cloud revenues in the first quarter. Further, solid adoption of software license solutions across the United States and Canada aided growth.

Margin Details

Non-IFRS gross margin of 71.4% contracted 10 basis points from the year-ago figure.

SAP reported non-IFRS operating expense of €4.84 billion, up 11% from the year-ago quarter (up 8% at cc).

Non-IFRS operating profit of €1.816 billion grew 11% on a year-over-year basis (up 8% at cc).

Operating margin of 27.3% remained flat year over year (non-IFRS).

Segment wise, AT&S profit increased 6% at cc to approximately €2,279 billion on a non-IFRS basis. Intelligent Spend Group profit advanced 12% at cc to €154 million. However, CXM segment reported a loss of €3 million.

Balance Sheet & Cash Flow

The company ended the second quarter with cash and cash equivalents of approximately €5.168 billion compared with the previous quarter’s figure of €7.332 billion.

The company utilized €122 million of operating cash in the reported quarter compared with previous quarter’s reported figure of €2.802 billion.

Free cash flow came in at (€409 million) compared with prior quarter’s figure of €2.365 billion.

Reiterates 2019 View

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

Non-IFRS cloud and software revenues are anticipated 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 €7.85-€8.05 billion, indicating year-over-year growth of 9.5-12.5% at cc.

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

Outlook for 2020

For 2020, SAP projects non-IFRS cloud revenues to €8.6-€9.1 billion. Non-IFRS total revenues are expected to come in the range of €28.6 billion to €29.2 billion.

Notably, the company envisions non-IFRS operating profit in the band of €8.8 billion to €9.1 billion.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Alteryx (AYX - Free Report) , Lattice Semiconductor (LSCC - Free Report) and Rosetta Stone (RST - Free Report) , each flaunting 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 Alteryx, Lattice Semiconductor and Rosetta Stone is currently pegged at 13.7%, 12.5% and 12.5%, respectively.

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