Key Takeaways From SAP’s Q1 Earnings

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Software giant SAP‘s (NYSE:SAP) stock rose by nearly 5% over the past two days as the company announced strong Q1 earnings. With Non-IFRS revenue of $965.5 million, the company saw 8% growth in constant currency over the prior year quarter. Aided by a phenomenal increase in new cloud bookings, revenues from cloud business continued to be the primary growth driver. The cloud and software gross margins saw a marginal decline, but a substantial improvement in the services gross margin led to a slight improvement in overall margins. We expect cloud margins to continue declining in the near term, as the company faces tough competition from software behemoths like Microsoft, Oracle and Salesforce. Operating expenses grew nearly 17% in comparison to the prior year, as the company continued to improve on its existing technology and sales and marketing capabilities, and we expect them to remain around same level for the year.

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Increased Adoption Of S/4HANA And Phenomenal Growth Globally

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While growth was seen across all business segments, SAP’s Cloud business, aided by a 44% year-on-year increase in new bookings, was the standout performer. The company continued its dominance in the Enterprise Resource Planning (ERP) software market, with more than 5,800 customers adopting its S/4HANA platform. Out of the 400 customers which were added in Q1, around 50% of them were new customers. Moreover, with 80% of its customers still using the earlier platform and expected to shift to the newer one in the near future, we believe its customer base should remain strong. We estimate around 5% growth in SAP’s ERP revenue for the entire year.

As more and more companies adopt cloud services, the overall cloud market size has been expanding at a rapid rate. For SAP, whose revenue from cloud support and services grew 30%, growth was evident across all geographies, with its revenues growing by 42% year over year in EMEA region, 22% in the Americas and a robust 56% in Asia-Pacific.

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Outlook for the Year

Buoyed by the results in the quarter, SAP has reiterated its guidance for the full year. The company expects its revenue from the cloud to be in range of €3.8 – €4 billion. We expect nearly 7% growth in the company’s overall revenue for the year, which is about in line with its guideline.

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