Will SAP’s Cloud Business Continue To Drive Its 3Q Performance?
SAP (NYSE: SAP), the German software giant, is scheduled to announce its September quarter earnings on 18th October. The market expects the company to deliver strong growth across business segments, particularly in its cloud business. The company is likely to witness an increased adoption of its S/4HANA platform, which will drive its top-line growth. However, the revenue mix shift between cloud and on-premise business will continue to weigh on its gross margin, despite solid performance from individual segments.
In the last quarter, SAP had raised its 2018 revenue guidance as well as its 2020 cloud revenue outlook, backed by the strong momentum gained from its cloud business and the acquisition of Callidus. Accordingly, we expect the company’s cloud business to continue to drive its value in the near term as well as long term. We currently have a price estimate of $124 per share for SAP. View our interactive dashboard – SAP’s Outlook For 2018 and modify the revenue and earnings to visualize the impact of any changes on the company’s valuation.
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Last quarter, SAP had added over 600 customers on its cloud platform S/4HANA, taking the total customer number to 8,900. We expect the company to experience a similar growth in the number of customers due to increased adoption of its platform. The growth in its customer base will drive SAP’s revenue growth for the quarter as well as the full year. Further, the company’s support revenue is likely to grow during the quarter due to strong renewals and lower sales allowances, indicating stickiness for the company’s support services among its customers.
Backed by the strong performance of its high growth cloud solutions, SAP had raised its guidance for its 2018 cloud subscriptions and support revenue from €4.95-€5.15 billion to €5.05-€5.20 billion at constant currencies. Further, the company has also revised the full year revenue guidance range to €24.97-€25.30 billion, higher from the previous guidance of €24.80-€25.30 billion at constant currencies.
In addition, SAP forecasts its 2020 cloud subscriptions and support revenue to be in the range of €8.20-€8.70 billion, versus its previous target of €8.00-€8.50 billion. Accordingly, the company expects its 2020 revenue and operating profit to be in the range of €28.00-€29.00 billion and €8.50-€9.00 billion, respectively.
However, SAP’s software business will continue to be a drag on its top-line as well as bottom-line due to the shift from on-premise to cloud. We expect this to be more than offset by the growing demand for the company’s cloud platform and its Digital Supply Chain solution. However, the shift in its revenue mix between cloud and on-premise business is likely to result in a decline in SAP’s 3Q gross margin similar to the last quarter.
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