SAP Q3 Preliminary Earnings: Cloud Business Continues to Expand But at a Slower Pace

European software giant SAP SE (NYSE:SAP) reported preliminary fiscal 2015 third quarter earnings on October 13th, a week ahead of schedule. ^[1] In the latest quarter, the company teamed up soaring cloud revenues with a higher non-IFRS operating margin. However, the growth rate of SAP’s legacy on-premise business continued to slow in the third quarter. Nevertheless, its on-premise business is performing better than that of rival Oracle (NYSE:ORCL), whose on-premise software revenues are on the decline. (Read: Oracle Earnings: Rapid Growth In Cloud Offset By Weak On-Premise Business) SAP’s slowing revenue growth in its on-premise software licenses business is likely due to poor adoption of its new S/4HANA platform, which the company introduced earlier this year. Furthermore, the improvement in margins is likely to be attributable to a step up in cost savings since the benefits from SAP’s ongoing restructuring program are not expected to kick in until next fiscal year. ^[2]

Investors reacted positively to SAP’s strong performance, causing its shares to jump by over 5% following the release of its preliminary results. The company is scheduled to report detailed third quarter earnings on October 20th. ^[3]

Our price estimate of $80 for SAP SE is about 10% higher than its current market price.

See our complete analysis for SAP SE here

Cloud Revenues Soar as New Products Continue to Roll Out

SAP is rapidly expanding its presence in the cloud computing business with new products and partnerships. Its efforts are evident in the sustained triple-digit revenue growth the company has achieved in  both cloud revenues and bookings. In the third quarter, SAP’s revenues from cloud subscriptions and support soared by 116% year on year on both a IFRS and non-IFRS basis. The pace of bookings growth slowed compared to the previous quarter, as bookings expanded by 102% year on year in the third quarter compared to 162% in the second quarter. ^[1]

However, we believe that SAP’s booking growth could remain in the triple digits for the rest of the year, due to the recent release of SAP Cloud for Analytics. ^[4] SAP’s Cloud for Analytics will directly compete with Salesforce’s Wave Analytics Cloud in the quickly heating up market for cloud analytics solutions.

S/4 HANA May Not be Gaining the Expected Traction

The revenue growth of SAP’s on-premise software license business has been slowing with every passing quarter. In the third quarter, revenues from on-premise software license sales and updates expanded by 7% year on year, compared to 13% in the previous quarter. The legacy on-premise business still accounts for 70% of SAP’s total revenues. Therefore, if the current trend continues, the breakneck pace of SAP’s cloud revenues may not be sufficient to prop up the company’s total revenues.

The company previously denied the suggestion that its focus on the cloud may be eating into sales of its on-premise business. ^[2] We believe that the slowing growth of on-premise software license sales may be because SAP’s latest S/4HANA platform may not be achieving the traction that the company expected. SAP has not provided details of sales or bookings of S/4HANA, so the precise reason behind the slowing growth cannot be pinpointed. Nevertheless, unless the company finds a way to boost its on-premise revenues, it may soon find its total revenue growth in low single-digit territory.

More Trefis Research

1. SAP Press Release, October 13, 2015 [↩] [↩]
2. SAP Fiscal 2015 Second Quarter Earnings Conference Call Transcript, Seeking Alpha, July 21, 2015 [↩] [↩]
3. SAP Investor Relations [↩]
4. SAP Redefines Analytics in the Cloud, SAP Press Release, October 13, 2015 [↩]