Key Takeaways From SAP’s Q3

by Trefis Team
-8.26%
Downside
114
Market
104
Trefis
SAP
SAP
Rate   |   votes   |   Share

In continuation with a strong first half of the year, software giant SAP (NYSE:SAP) continued its impressive performance in Q3.  Third quarter revenues grew 4% over the prior year period to $6.6 billion and were in line with the market expectations. 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 profit and EPS grew by 19% and 35% year-over-year respectively, due to lower share-based compensation, acquisition-related charges and restructuring costs.

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 600 customers adopting its S/4HANA platform in the quarter, taking the overall count to over 6,900 customers. This should assuage some investor 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 three quarters of the year, the company expects around 31% growth in the Cloud business for the year, while cloud and software revenues are expected to grow by 7% – 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 19% 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 46% year over year in EMEA, 19% in the Americas and a robust 37% 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.

Get Trefis Technology

Rate   |   votes   |   Share

Comments

Name (Required)
Email (Required, but never displayed)
Be the first to comment!