SAP Q4 Preliminary Earnings: Top-Line Surges Across The Board; S/4HANA Adoption Picked Pace

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European software behemoth SAP SE (NYSE:SAP) achieved strong revenue growth across the board in the fourth quarter, according to preliminary earnings released on January 12th. [1] The company continued its trend of announcing preliminary results ahead of the detailed earnings, which are due on January 22nd for the fourth quarter. Momentum in cloud bookings continued at a slowing pace with 75% year on year growth in the fourth quarter, compared to 102% in the previous quarter. More importantly, SAP witnessed a significant surge in acquisition of new customers for S/4HANA at the year end, doubling its number of customers quarter on quarter to reach over 2,700. This should provide some relief to investors who have been concerned about the performance of SAP’s new flagship ERP platform.

SAP did not disclose its profits and EPS in the preliminary earnings, nor did it break out the revenue growth of its core licenses business separately. This information is expected in the detailed earnings report due on January 22nd. Non-IFRS cloud and software revenue expanded by 20% year on year in the fourth quarter (12% in constant currency terms), beating the company’s guidance of 8% – 10% growth. SAP guides fiscal 2016 cloud and software revenues to grow by 6% – 8%, while cloud revenues are expected to grow by up to 33% in constant currency terms.

Our price estimate of $84 for SAP SE is about 5% higher than its current market price.

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See our complete analysis for SAP SE here

Is the Growth in Cloud Revenues Slowing?

SAP achieved a commendable growth of 75% year on year in cloud bookings in the fourth quarter. However, there is no doubt that SAP’s cloud business is growing at a slower pace than at the beginning of 2015. The fourth quarter was the first time that SAP’s cloud bookings did not grow by triple-digits.

We have  mentioned in the past that SAP’s future growth in cloud may depend upon expansion into new areas and the regular introduction of new products. The company achieved this target in 2015 by expanding into multiple industry verticals in the fourth quarter. It also entered the lucrative and hugely competitive market of cloud analytics during the year. Despite these developments, the decreasing rate of growth in cloud bookings continued in the fourth quarter. Nevertheless, it is possible that the impact of these expansion plans may get reflected more accurately in fiscal 2016.

Surge in S/4HANA Adoptions Could be Due to Year-End Activity

SAP doubled its SAP S/4HANA customer base quarter on quarter in the fourth quarter and reached a total of more than 2,700 customers. The sudden and significant surge in customer acquisition could be a good sign for S/4HANA, which so far had been struggling to achieve the expected adoption rates.

However, it is possible that the sudden surge may be on account of typical year-end activity, as many enterprises enter into major technology contracts at the end of the year. If this is indeed the case, the uptick in S/4HANA’s adoption growth rate may not repeated in the next few quarters. Moreover, surveys suggest many potential adoptees are either less interested in moving to S/4HANA or are still evaluating the impact of such a move. [2] [3] The key reason behind the unpopularity of S/4HANA is its uncertain roadmap, since customers do not know the long term value proposition involved in such a transition. Therefore, we believe that SAP still has a long way to go before S/4HANA becomes a bonafide success.

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Notes:
  1. SAP Press Release []
  2. SAP HANA Adoption Survey Results 2015, ASUG, December 8, 2015 []
  3. Results of Global SAP User Survey, Spinnaker Support, May 4, 2015 []