Key Takeaways From SAP’s Q1

by Trefis Team
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In continuation with its strong performance through the past couple of years, software giant SAP delivered decent earnings in Q1. Revenues of $5.4 billion fell marginally short of the previous year’s Q1 and market expectations, though they grew 9% y-o-y on a constant currency basis. Aided by a strong increase in new cloud bookings, revenues from the 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 see continued pressure in the near term, as the company faces tough competition from software behemoths such as Microsoft, Oracle and Salesforce. Operating margin and EPS grew by 7 points and 37% year-over-year, respectively, due to lower general and administrative expenses and income tax benefit.

While revenue growth was seen across segments, SAP’s Cloud business, aided by a strong increase in new bookings, was the standout performer. The company continued its dominance in the Enterprise Resource Planning (ERP) software market, with more than 400 customers adopting its S/4HANA platform this quarter, taking the overall count to over 8,300 customers. This should assuage some investor concerns about the long-term value of the platform. Moreover, with 80% of its customers still using the older platform and expected to shift to the newer one in the near future, there is tremendous potential which the company expects to tap. Our price estimate of $107 for SAP is roughly in line market price.  

The company expects its fiscal 2018 revenue to be in the range of €24.8 billion − €25.3 billion in constant currency terms. We expect nearly 7% growth in the company’s overall revenue for the year, which is about in line with its guideline. We have created an interactive dashboard where you can change the company’s forecast revenue, margins, and other key drivers to gauge how they would impact its expected results and valuation.

Cloud Offerings Continue Growth Due To Increased Adoption

As more and more companies adopt cloud services, the overall cloud market has been expanding at a rapid rate. Aided by a 25% increase in new cloud bookings, SAP’s revenue from Cloud Support and Services grew 31% in constant currency. The growth was evident across geographies, with the cloud and software revenues growing by 9% year over year in EMEA, and a robust 10% each in the Americas and 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 market which could help drive 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 boost 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.

Please refer to our complete analysis for SAP

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