Will Dull Prospects of IT Industry Impact SAP's Q3 Earnings?

Germany-based enterprise application software, SAP SESAP is slated to report third-quarter 2017 results on Oct 19.

Last quarter, the company reported earnings of $1.03, reflecting a beat of 1%. Overall, SAP has a modest earnings surprise history, with an average positive surprise of 2.2% in the trailing four quarters.

Let's see how things are shaping up prior to this announcement.

Factors at Play

SAP is poised to grow on the back of resilient Cloud and Software business, a strong business network spread over critical client demand areas, superior customer management along with growth of S/4HANA and other Cloud initiatives.

Over the past few quarters, the company has recorded spectacular growth in S/4HANA and other Cloud initiatives, which in turn, has provided a boost to financials. During second-quarter 2017, the company gained 500 customers, of which 30% is entirely new. The company anticipates demand for S/4 HANA to surge, which will prove conducive to operating profit and bottom-line growth in the to-be reported quarter.

SAP's renewed focus on strengthening IoT foothold is also expected to boost the top line in the quarter under review, as it has resulted in significant client wins. With business enterprises leveraging state-of-the-art technology to outshine peers, we believe that SAP's market leading portfolio will continue to witness increased demand, thus supplementing its financials.

Moreover, SAP has been focusing on expanding cloud business to become one of the leading players in the category. The company has a competitive edge over its cloud competitors as its processes are designed to be industry-specific and can be customized to meet corresponding business requirements. Further, solid adoption of the company's human capital management ('HCM') applications, led by SuccessFactors Employee Central, is expected to drive the results in the upcoming quarter.

However, the fact remains that dull prospects of the global IT industry in recent quarters, along with flat customer spending projections are adversely affecting SAP's performances. This apart, over the past few quarters, many of the company's emerging markets have faced fiscal imbalances and general economic slowdowns, which adversely impacted purchasing power. Moreover, sluggishness in China might dent the IT spending in the country, which might reflect poorly on the upcoming quarterly results.

Furthermore, the IT services industry is characterized by stiff competition from technology behemoths, which in turn may also dampen the third-quarter financials. This apart, currency fluctuations in many of its key markets are also likely to thwart sales for the upcoming results.

Earnings Whispers

Our proven model does not conclusively show an earnings beat for SAP this time around. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. But that is not the case here as you will see below.

Zacks ESP: Earnings ESP for the company is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate are pegged at $1.14. You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

SAP SE Price and EPS Surprise

SAP SE Price and EPS Surprise | SAP SE Quote

Zacks Rank: SAP has a Zacks Rank #3, which increases the predictive power of the ESP. However, the company's ESP of 0.00% makes surprise prediction difficult.

We caution against Sell-rated stocks (Zacks Rank #4 or 5) going into an earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some companies that you may want to consider, as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Applied Materials, Inc. AMAT has an Earnings ESP of +0.19% and a Zacks Rank #1. You can see the complete list of today's Zacks #1 Rank stocks here.

Intuit Inc. INTU has an Earnings ESP of +1.82% and a Zacks Rank #2.

Amphenol Corporation APH has an Earnings ESP of +0.53% and a Zacks Rank #2.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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