SAP Earnings: Cloud Offerings Propel Growth, As Adoption Rate For S/4HANA Rises

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Software giant SAP‘s (NYSE:SAP) continued its strong performance in Q4 FY’16.  Fourth-quarter revenues grew 6% over the prior year period to $7.2 billion and was in line with the market expectations. For the full year, the company’s reported revenues of $ 24.4 billion, an increase of 6% year over year. The growth in the company’s top line was reflected in its bottom line as well, which was reported at $1.6 billion or $1.35 a share. For the full year, the company’s net income grew 18% to $4 billion or $3.35 per share.

While the growth was seen across all business segments, SAP’s Cloud business, aided by a phenomenal increase in new bookings, was the standout performer. The company continued its dominance in the Enterprise Resource Planning (ERP) software market, with more than 5,400 new customers adopting its S/4HANA platform.  This was almost two times the prior year number, with over 30% of these new customers added in the last quarter alone. This should mollify  investors’ concern about the long term value of this platform, the sheer power of which is rightfully reflected in its cost. Moreover, with 85% of its customers still using the earlier platform and expected to shift to newer one in the near future, there is a tremendous potential which the company expects to tap.

Buoyed by the strong performance in the fourth quarter, SAP shared its vision of for fiscal 2020, when it expects to generate revenues in the range of €28 – €29 billion, primarily on the back of strong growth in cloud businesses.

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In line with the strong performance so far, the company expects around 34% growth in cloud business for the year ahead, while software revenues to grow by 6% – 8% in constant currency terms.

Our price estimate of $79 for SAP SE is about 10% lower than its current market price. We are currently reviewing our estimates in the light of recent earnings, and will have an update ready soon.

Cloud Offerings Continue Phenomenal Growth Under Increased Adoption

As more and more companies adopt cloud services, the overall cloud market size has been expanding at a rapid rate. Aided by 31% increase in new cloud bookings, the SAP’s revenue  from cloud support and services grew 30%. The growth was evident across all geographies, with its revenues growing by 35% year over year in EMEA region, 27% in Americas region and a robust 55% in Asia-Pacific. The company’s acquisition of Altiscale, a startup that offers cloud-based versions of the Hadoop and Spark open source software for storing, processing, and analyzing data, is likely to have added to the growth in cloud subscriptions. Moreover, the company’s leading positions in ERP and SCM segments are likely to have benefited the respective cloud solutions in both the domains.

SAP is also rapidly expanding its presence in the Internet of Things (IoT) with new products and partnerships. These are mult-billion dollar markets which could very well be responsible for driving the next phase of SAP’s cloud revenue growth. SAP’s acquisition of PLAT.ONE, the First Enterprise-Grade IoT Application Platform, is likely to strengthen its offerings in the Internet of Things (IoT) space and further the uptake of cloud products. Combined with its ongoing efforts to strengthen its offerings in the machine learning space, the company is expected to do well in the ever-evolving and highly competitive software industry.

 

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