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SAP Earnings Miss Estimates in Q1, Revenues Increase Y/Y

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SAP SE (SAP - Free Report) reported first-quarter 2020 non-IFRS earnings of €0.85 per share, which declined 5% from the year-ago quarter’s figure.

Moreover, earnings of 94 cents per share lagged the Zacks Consensus Estimate by 6.9%.

Notably, SAP’s stock closed at $116 on Apr 21, dropping 5.4% after the announcement. Shares of the company have inched up 1.1% in the past year compared with the industry’s rise of 20.6%.

On IFRS basis, the company reported earnings of €0.68 per share, up 3% year over year.

Total revenues, on a non-IFRS basis, came in at €6.522 billion ($7.19 billion), up 7% year over year and 5% at constant currency (cc). The Zacks Consensus Estimate was pegged at $7.117 billion.

Revenues amounted to €6.521 billion on IFRS basis, up 7% year over year.

Current cloud backlog increased 25% (24% at cc) year over year to €6.65 billion.

SAP SE Price, Consensus and EPS Surprise

 

 

Impressive Cloud Results

On a non-IFRS basis, Cloud and software business (82.8% of total revenues) reported revenues of €5.398 billion, up 6% year over year (up 5% at cc).

Cloud revenues came in at €2.012 billion, up 27% year over year on a non-IFRS basis (25% at cc).

However, software licenses & support revenues of €451 million plunged 31% year on year. The downside was caused by the impact of the coronavirus outbreak that intensified in March and led to postponement of new business.

Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — surged 25% at cc to €1.777 billion. Cloud revenues — related to Infrastructure as a Service (IaaS)— rallied 27% year over year at cc to €201 million.

Services business (17.2% of total revenues) reported revenues of €1.124 billion, up 7% from the year-ago quarter’s figure (up 6% at cc).

SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur) under its Intelligent Spend Platform. Approximately $3.7 trillion in global commerce is transacted annually through this platform across more than 180 countries.

The company updated its structure to have four reportable segments — Applications, Technology & Support (AT&S), Concur, Qualtrics and Services.

Notably, AT&S revenues increased 5% (3% at cc) to €4.986 billion. Concur revenues rose 14% (11% at cc) to €428 million. Qualtrics segment revenues surged 82% (76% at cc) to €161 million. Revenues in the Services segment rose 5% (4% at cc) to €851 million on a year-over-year basis.

Expanding Clientele Favors Business Prospects

S/4HANA adoption rallied 23% year over year to around 14,100 customers. In the reported quarter, net new customers comprised approximately 45% of additional S/4HANA customers.

S/4HANA clientele continues to expand with the addition of Danone, Dehner Holding, AO Tander, Indorama Ventures and Cogna Educaçao, among others. Notably, an increasing number of companies including Sun Life Financial and Hitachi High Tech have begun deploying S/4HANA solution in part or entirely in the cloud. Moreover, MTU Rolls Royce is now live on SAP S/4HANA Cloud.

SAP SuccessFactors HXM solutions ended the reported quarter with more than 550 customers. Notable deal wins in the quarter comprised Chobani, Volaris, and Hyundai Motor Europe, while Nexa went live on the platform.

SAP’s business technology platform comprises SAP HANA, SAP Data Warehouse Cloud, SAP Cloud Platform, SAP Analytics Cloud, SAP Intelligent Robotic Process Automation and SAP Data Intelligence solutions. In the reported quarter, the platform was adopted by Trident Group while Mercedes-Benz Brazil went live with the same.

Additionally, Mabe, Helaba and Vestas Wind Systems opted for the company’s ARIBA solutions in the reported quarter, while Furukawa Electric LatAm S.A. went live. SAP’s Fieldglass solutions were adopted by Hitachi Systems in the first quarter.

Further, Concur was adopted by Marzam and General Motors while Qualtrics solutions were selected by Sainsbury’s Supermarkets, Mars Incorporated, Energia and Impossible Foods, among others, in the reported quarter.

EMEA Witnesses Robust Cloud Growth

Europe, Middle East & Africa (EMEA) Cloud revenues surged 34% at cc to €612 million. Cloud & software revenues increased 6% at cc. The top line was driven by strong cloud revenues in the Germany and Netherlands. Moreover, SAP witnessed robust software license revenue growth in France, Italy and Switzerland.

Asia Pacific & Japan (APJ) Cloud revenues jumped 24% at cc to €248 million. However, cloud & software were flat at cc. The top line benefited from strong cloud and software license revenue growth in Japan, Australia and South Korea.

Americas’ Cloud revenues increased 21% at cc to €1.118 billion. Cloud & software revenues increased 7% at cc. Brazil and Canada delivered strong performance in cloud revenues in the first quarter. Further, solid adoption of software license solutions across Brazil and Mexico aided growth.

Change in Dual CEO Structure

SAP abandoned its dual CEO structure to simplify leadership amid the global coronavirus pandemic.

Notably, Jennifer Morgan will depart the company on Apr 30, leaving Christian Klein as the sole CEO.

Margin Details

Non-IFRS gross margin of 69.8% expanded 30 basis points (bps) from the year-ago quarter’s figure.

SAP reported a non-IFRS operating expense of €5.040 billion, up 8% from the year-ago quarter’s level (7% at cc).

Non-IFRS operating profit of €1.482 billion inched up 1% on a year-over-year basis (flat at cc).

Non-IFRS operating margin of 22.7% contracted 130 bps each on a year-over-year basis and at cc.

Segment wise, AT&S profit increased 4% (3% at cc) to approximately €1.843 billion on a non-IFRS basis. Concur advanced 18% (14% at cc) to €161 million. Qualtrics segment reported a loss of €12 million, while Services delivered profit of €84 million.

Balance Sheet & Cash Flow

As of 31 March, 2020, SAP had cash and cash equivalents of approximately €7.816 billion compared with the previous-quarter’s figure of €5.314 billion.

The company generated €2.984 billion of operating cash in the reported quarter compared with €178 million utilized in the fourth quarter of 2019.

Free cash flow came in at €2.58 billion compared with previous quarter’s free cash outflow of €50 million.

Guidance for 2020

Thanks to the impact of the coronavirus outbreak, SAP had trimmed its 2020 guidance in its earning pre-announcement, which has been maintained in the earnings release.

For 2020, SAP projects non-IFRS cloud revenues in the range of €8.3-€8.7 billion, up 18-24% at cc.

Non-IFRS cloud and software revenues are anticipated between €23.4 billion and €24 billion, up 1-4% at cc.

Non-IFRS total revenues are projected in the range of €27.8-€28.5 billion, up 1-3% year over year and at cc.

Notably, the company anticipates non-IFRS operating profit in the band of €8.1-€8.7 billion.

Moreover, operating cash flow is expected to be €5 billion and free cash flow is anticipated to be €3.5 billion.

2023 Outlook

SAP reaffirmed its guidance for 2023.

The company continues to expect non-IFRS total revenues to grow significantly and exceed €35 billion.

Moreover, it anticipates non-IFRS cloud subscription and support revenues to more than triple over 2018-2023. Moreover, the company projects non-IFRS cloud gross margin to hit 75%.

Zacks Rank & Stocks to Consider

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

Some better-ranked stocks in the broader technology sector are Avid Technology, Inc. , Netlist, Inc. (NLST - Free Report) and Zoom Video Communications, Inc. (ZM - Free Report) , which sport a Zacks Rank #1 (Strong Buy) at present. You can see the complete list of today’s Zacks #1 Rank stocks here.

The long-term earnings growth rate for Avid, Netlist and Zoom is currently pegged at 20%, 15% and 26.6%, respectively.

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