What To Watch For In SAP’s Q4 Earnings
European software giant SAP SE (NYSE: SAP) is scheduled to announce its fourth quarter earnings on January 30. The company’s revenues grew by about 9% in the first nine months of 2017, and the estimates suggest fourth quarter growth of 1.5%. We expect growth across business segments, as the company has maintained leading positions in the Enterprise Resource Planning (ERP) and Supply Chain Management (SCM) software markets, as well as a solid position in the CRM software market. 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. The company’s cloud and software gross margins saw a marginal decline, but a substantial improvement in its services gross margin led to a slight improvement in overall margins. We expect cloud margins to continue declining in the near term, as SAP faces tough competition from software behemoths like Microsoft, Oracle and Salesforce.
Cloud Business Stands Out
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SAP’s Cloud business, aided by an impressive increase in new bookings, was the standout performer over the past few quarters. The company continued its dominance in the Enterprise Resource Planning (ERP) software market, with customers continuing to adopt its S/4HANA platform. Moreover, with around 80% of its customers still using the earlier platform and expected to shift to the newer one in the near future, we believe the customer count will see further improvement. We forecast around 5% growth in SAP’s ERP revenue for the full year and expect the Q4 results to reflect similar growth.
SAP is also rapidly expanding its presence in the IoT space with new products and acquisitions. This space could drive substantial growth for SAP over the long run. Combined with its ongoing efforts to strengthen its offerings in the machine learning space, the company is expected to do well in the competitive software industry.