Investors Unhappy With SAP’s Declining Bottom Line, Company Still Optimistic

Software giant SAP‘s (NYSE:SAP) second quarter revenues grew 9% over the prior year period to $6.4 billion and managed to beat analysts’ estimates by over $130 million. However, the bottom line suffered, as the IFRS operating profit and EPS were down 27% and 18%, respectively, from the previous year’s comparable period. This is primarily due to an increase in restructuring-related expenses and share-based compensation expenses in the second quarter.

While the revenue 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 500 customers adopting its S/4HANA platform in the quarter, taking the overall count to over 6,300 customers. This should assuage some of investors’ concerns about the long term value of this platform, the sheer power of which is reflected in its cost. Moreover, with 80% of its customers still using the earlier platform and expected to shift to the newer one in the near future, there is tremendous potential which the company expects to tap.

Buoyed by the strong performance in the first half of the year, the company expects around 34% growth in the Cloud business for the year, while cloud and software revenues are expected to grow by 6.5% – 8.5% in constant currency terms.

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 a 33% increase in new cloud bookings, the SAP’s revenue from Cloud Support and Services grew 27% in constant currency. The growth was evident across all geographies, with its revenues growing by 8% year over year in EMEA, 11% in the Americas and a robust 16% in Asia-Pacific.

SAP is also rapidly expanding its presence in the Internet of Things (IoT) space with new products and partnerships. This is a multi-billion dollar markets which could very well be responsible for driving the next phase of SAP’s Cloud revenue growth. The recent addition of multiple Internet of Things (IoT) solutions to the SAP Leonardo digital innovation system highlights SAP’s renewed focus on bolstering its foothold in the IoT domain, which could drive the company’s top line in the future. Combined with its ongoing efforts to strengthen its offerings in the machine learning space, SAP is likely to fare well going forward despite heavy competition.

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