SAP Q3 Earnings Up Y/Y, Stock Down as COVID-19 Dims View

SAP SE SAP reported third-quarter 2020 non-IFRS earnings of €1.70 per share ($1.99), which improved 31% from the year-ago quarter. The improvement can be attributed to solid contribution from Sapphire Ventures.

On IFRS basis, the company reported earnings of €1.32 ($1.54) per share, up 26% year over year.

The Zacks Consensus Estimate for earnings was pegged at $1.54.

Total revenues, on a non-IFRS basis, came in at €6.535 billion ($7.637 billion), down 4% year over year and flat at constant currency (cc).

Revenues amounted to €6.535 billion ($7.637 billion) on IFRS basis, down 4% year over year.

The Zacks Consensus Estimate for revenues was pegged at $8.049 billion.

Current cloud backlog — a key indicator of go-to market success in cloud business — increased 10% (16% at cc) year over year to €6.60 billion.

Stock Down on Lowered 2020 View

Notably, shares of SAP are down more than 20% in the pre-market trading on Oct 26, as the company adjusted 2020 guidance with regard to lingering coronavirus woes.

For 2020, SAP now anticipates non-IFRS cloud revenues in the range of €8-€8.2 billion, compared with earlier guided range of €8.3-€8.7 billion.

Markedly, SAP had reaffirmed full-year 2020 outlook, on Apr 8, 2020, in anticipation that reopening of economies and easing down of lockdowns would fuel business recovery in third and fourth quarters.

However, despite robust uptake of its digital transformation solutions, the fear of second wave and re-imposition of lockdowns in some regions, and macroeconomic weakness have muted demand recovery. Adjusting for the same, the company was compelled to issue guidance update.

Citing the above, management does not anticipate “a meaningful recovery in SAP Concur business travel-related revenues for the remainder of the year 2020.” Also, management expects software licenses revenues to “continue to trend lower from 2020 levels” on account of accelerated cloud transition.

Shares of the company have returned 11.8% on a year-to-date basis compared with the industry’s rally of 33.8%. Currently, SAP carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Cloud Results

On a non-IFRS basis, Cloud and software business (84.8% of total revenues) reported revenues of €5.544 billion, down 2% year over year (up 2% at cc).

Cloud revenues were €1.984 billion, up 10% year over year on a non-IFRS basis (up 14% at cc).

However, software licenses & support revenues of €3.559 billion plunged 7% year over year (down 4% at cc). Software licenses revenues of €714 million were down 23% (down 19% at cc) year over year.

Cloud revenues — related to Software as a Service (SaaS)/Platform as a Service (PaaS) — climbed 13% at cc to €1.852 billion. Cloud revenues — related to Infrastructure as a Service (IaaS) — rallied 24% year over year at cc to €217 million.

Services business (15.2% of total revenues) reported revenues of €992 million, down 15% from the year-ago quarter (down 11% 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 $4.1 trillion in global commerce is transacted annually through this platform across more than 180 countries.

The company has four reportable segments — Applications, Technology & Support (AT&S), Concur, Qualtrics and Services.

Notably, AT&S revenues declined 2% (up 2% at cc) to €5.172 billion. Concur revenues fell 14% (down 10% at cc) to €357 million. Revenues were impacted by lower pay-as-you-go transactional revenues due to coronavirus crisis led reduction in business travel.

Qualtrics segment revenues surged 22% (up 28% at cc) to €169 million. Revenues in the Services segment declined 16% (down 13% at cc) to €753 million on a year-over-year basis.

Expanding Clientele Remains Noteworthy

S/4HANA adoption rallied 20% year over year to around 15,100 customers. In the reported quarter, net new customers comprised 45% of additional S/4HANA customers.

S/4HANA clientele continues to expand with the addition of Naturgy, Lenovo, Æon, and Shanghai Land (Group) Co, among others.

Notably, an increasing number of companies have begun deploying S/4HANA solution in part or entirely in the cloud. Markedly, companies such as Rabobank, Iugu and Basic-Fit selected SAP S/4HANA Cloud. Moreover, Korea Gas Corporation and Sharks Sports & Entertainment are live on SAP S/4HANA Cloud.

Schwarz Produktion adopted SAP Digital Supply Chain solutions in a bid to boost business with highly automated capabilities.

SAP SuccessFactors HXM solutions ended the reported quarter with more than 775 customers. Notable deal wins in the reported quarter include Kmart Australia, Rappi, Bahrain Airport Services, Garney Holding Company, and Catholic Education Diocese of Parramatta.

SAP Customer Experience (CX) solutions were selected by Jiangsu Xingda Steel Tyre Cord Co, Swisscom AG, Barilla, Saudi Ports Authority and Renault Brazil, in the reported quarter, while Konica Energizer Brands and Minolta Business Solutions went live.

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, SAP’s business technology platform and analytics cloud solutions were adopted by Hewlett Packard Enterprise HPE, Alpina Productos Alimenticios S.A, Uniper, and the City of Munich.

Additionally, Rumo Logistica, Petrobras, Siemens Gamesa, VELUX Group, and Britvic Soft Drinks Ltd, opted for the company’s Ariba solutions in the reported quarter. SAP’s Fieldglass solutions were adopted by Algar Telecom in the third quarter.

SAP SE Price, Consensus and EPS Surprise

SAP SE Price, Consensus and EPS Surprise

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

Further, Concur was adopted by Uber Technologies UBER, Bridgestone, Keio University and Sysmex Europe, while Qualtrics solutions were selected by Lululemon Athletica LULU, Transamerica Life Insurance Company, Yamaha Motor Corporation, Telefónica Mexico, Standard Chartered Bank, among others, in the reported quarter.

EMEA Witnesses Robust Cloud Growth

Europe, Middle East & Africa (EMEA) Cloud revenues improved 24% at cc to €670 million. Cloud & software revenues increased 3% at cc to €2.492 billion. The top line was driven by strong cloud revenues in the Netherlands, Germany, and Switzerland. Moreover, SAP witnessed robust software license revenue growth in Russia, Switzerland and Spain.

Asia Pacific & Japan (APJ) Cloud revenues jumped 19% at cc to €260 million. Cloud & software were up 4% at cc to €919 million. Management noted solid cloud revenues contribution from particularly, Japan, Singapore and South Korea.  Notably, Japan, India and Australia delivered strong performance in software licenses revenues in the third quarter.

Americas’ Cloud revenues improved 9% at cc to €1.139 billion. Cloud & software revenues of €2.36 billion were flat at cc. Brazil, Mexico and Canada delivered strong performance in cloud revenues in the third quarter. Further, solid adoption of software license solutions across Brazil, Mexico and Canada drove growth.

Margin Details

Non-IFRS gross margin of 73.7% expanded 140 basis points (bps) from the year-ago quarter’s figure.

SAP reported a non-IFRS operating expense of €4.47 billion, down 5% from the year-ago quarter’s level (down 2% at cc).

Non-IFRS operating profit of €2.069 billion declined 1% on a year-over-year basis (up 4% at cc).

Non-IFRS operating margin of 31.7% expanded 110 bps on a year-over-year basis. At cc, the figure came in at 31.9%, expanding 130 bps.

Balance Sheet & Cash Flow

As of Sep 30, 2020, SAP had cash and cash equivalents of €7.434 billion compared with €6.205 billion as of Jun 30, 2020.

The company generated €1.321 billion of operating cash in the reported quarter compared with €788 million in the second quarter.

Free cash flow came in at €1.052 billion compared with previous quarter’s €540 million.

2020 Outlook In Detail

Non-IFRS cloud and software revenues are now anticipated between €23.1 billion and €23.6 billion, compared with the previously guided range of €23.4 billion to €24 billion.

Non-IFRS total revenues are now projected in the range of €27.2-€27.8 billion, compared with earlier guided range of €27.8-€28.5 billion.

Notably, the company now anticipates non-IFRS operating profit between €8.1 billion and €8.5 billion compared with earlier guided range of €8.1-€8.7 billion.

Operating cash flow is now expected to be approximately €6 billion, compared with prior expected figure of above €5 billion. Free cash flow is anticipated to be above €4.5 billion, which was previously envisioned at approximately €4 billion.

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