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SAP SE (SAP) Posts Impressive Q1 Earnings, Keeps Guidance

SAP SE SAP reported first-quarter 2016 IFRS earnings of €0.48 (53 cents) per share, a growth of 37.1% from €0.35 earned a year ago.

The year-over-year improvement in the bottom line reflected management’s effort to channel investments from non-core to strategic core areas to create a streamlined organization that can leverage on growth opportunities. Moreover, modest top-line growth supplemented the earnings performance.

Total IFRS revenue in the first quarter was €4,727 million ($5,213.4 million), up 5.1% year over year.

Double-digit growth in cloud subscriptions and support revenues acted as a primary growth driver during the first quarter. The overall robust performance of the company’s cloud business coupled with strong growth in support revenues drove the top line. However, weak Software licenses & support revenues thwarted the first-quarter revenue performance to a certain degree.

Also, new cloud bookings – a key indicator of sales success in cloud business – were up 23% to €145 million in the quarter under review.

Inside the Headlines

Cloud and Software business, which includes Cloud Subscriptions & Support and Software licenses & support, reported first-quarter revenues of €3,850 million ($4,246.2 million), up 5.4% year over year. Individually, Cloud Subscriptions & Support garnered revenues of €677 million ($746.7 million) in the quarter, up a robust 34.6% year over year; while Software licenses and support reported revenues of €3,172 million ($3498.4 million), relatively flat on a year-over-year basis.

On the other hand, Services revenue accounted for €877 million ($967.2 million) of total revenue, recording 4% year-over-year growth.

Overall, IFRS Cloud and software revenues, mainly driven by IFRS Cloud Subscriptions & Support revenues, witnessed highest growth in the EMEA region (up 49%), followed by Americas (up 29%) and the EMEA region (up 26%). EMEA witnessed an overall growth in the Cloud and Software business with both Cloud Subscriptions & Support and Software licenses posting stellar performances.

On the other hand, North America witnessed a slower start to the first quarter after a remarkable fourth-quarter 2015, on account of macroeconomic volatility in Latin American countries, primarily Brazil. Growth in the APJ region was largely attributable to double-digit software revenue growth in China.

SAP reported IFRS operating margin of 17.2%, up 300 basis points from the figure recorded in the first quarter of 2015. Also, the company recorded a 28% increase in its operating profit, which came in at €813 million ($896.7 million).

Quarterly Highlights

SAP’s human capital management (‘‘HCM’’) applications continue to act as the main growth driver with SuccessFactors Employee Central surpassing the 1,100-customer mark in the first quarter. Also, cloud subscription and support revenues of SAP’s Customer Engagement and Commerce solutions witnessed double-digit growth during the first quarter.

Moreover, increased market traction of SAP S/4HANA platform will pose a serious competitive threat to the company’s peers. During the first quarter of 2016, the company gained 500 customers which in turn drove the top line. The company believes that the increasing popularity of SAP HANA Enterprise Cloud (HEC) is compounding the adoption of SAP S/4HANA platform. Some of the noteworthy customers added during the quarter include Benetton, Norton Rose Fulbright, Beiqi Foton Motor and Huaxin Cement.

This apart, SAP’s business network experienced solid growth, managed through three main players, namely, Ariba who is in charge of supervising business-to-business commerce, Fieldglass for managing contingent workforce and Concur for organizing travel.

Few Developments

SAP announced the merging of its small and medium-sized customers focused solutions SAP Anywhere, SAP Business One and SAP Business ByDesign into one end-to-end organization, effective Apr 1, 2016. This organization will be under the leadership of Executive Board member Steve Singh. Singh will also be responsible for supervising healthcare strategy and solutions in addition to SAP Business Networks. On account of these changes, the company is likely to make changes in its segments in the second quarter of 2016.

Other Financial Details

The company’s operating cash flow came in at €2.5 billion ($2.7 billion), up 5% on a year-over-year basis; while free cash flow was €2.3 billion ($2.6 billion) compared with €2.2 billion in 2015.

As on Mar 31, 2016, SAP had cash and cash equivalents of €5,743 ($6,521.3 million) compared with €3,411 million recorded at the end of Mar 31, 2015.

Outlook

Based on the present market scenario, the company reiterated its full-year 2016 guidance. Full-year 2016 non-IFRS cloud subscriptions and support revenues are estimated in the range of €2.95–€3.05 billion, at constant currency (cc). The upper end of this projection reflects growth of 33%. Overall, non-IFRS cloud and software revenues are expected to increase by 6–8%, at cc. Also, the company expects full-year 2016 non-IFRS operating profit within €6.4 billion and €6.7 billion, at cc.

To Conclude

SAP has established itself as a trusted partner for business enterprises who seek to transform the entire landscape of their operations including applications, cloud, business networks and platforms. Notably, stiff rivalry in contemporary markets calls for technological superiority over peers, and this, we believe, will keep up the demand momentum for efficient software tools. SAP, being the leader in the domain, is well equipped to meet such demand.

Going forward we believe the company will witness notable mid-term growth as contemporary business organizations are inching toward the fourth industrial revolution that will be characterized by the Internet of Things (‘IoT’) arena and cloud applications. Excellent market traction of SAP S/4 HANA coupled with a consistently strong performance of business networks and human capital management solutions signal at brighter prospects ahead.

SAP currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include Nuance Communications, Inc. NUAN, NetSol Technologies, Inc. NTWK and Dassault Systèmes SE DASTY. All the three stocks sport a Zacks Rank #1 (Strong Buy).

Note: €1= $1.1029 (average for the period Jan 1, 2016 – Mar 31, 2016)

€1= $1.1355 (on Mar 31, 2016)

1 SAP ADR= 1 Ordinary Share

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