Did Elliott Management And The Oracle-Microsoft Deal Impact SAP’s Q2 Results?

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SAP (NYSE: SAP) is slated to report its Q2 results on Thursday, July 18. The company beat consensus expectations on revenue and earnings in the previous quarter. SAP become a recent addition to activist investor Elliott Management’s portfolio, and that is likely to have a material impact on the company’s performance in the near as well as long term. SAP expects to grow by attracting customers moving away from Oracle, and the company had shared expectations of expanding its operating margin by 5% in the next three years. As a part of the earnings announcement, we will be looking for management commentary about the potential impact of the Oracle – Microsoft deal for interoperability of their clouds. Notably, SAP also has an alliance with Microsoft to develop a common data model.

Per Trefis estimates, SAP’s shares have a fair value of $121, which is 10% below the current market price. Our interactive dashboard on SAP’s Earnings highlights the changes in key metrics over recent quarters and captures our forecasts and estimates for the company. You can modify any of the key drivers to visualize the impact of changes on its valuation. Additionally, you can see more Trefis technology company data here.

A Quick Look At SAP’s Revenue Sources

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SAP makes money selling enterprise software and related support services. The company reports its revenues in three segments ($28.3 billion in 2018):

  • Cloud subscriptions and support ($5.7 billion in 2018, 20% of total revenue): Revenue is derived from subscription SAP’s software, cloud platform, hosting management services and support for subscription customers.
  • Software licence ($5.3 billion in 2018, 19% of total revenue): Revenue is derived from the sale of on-premise software.
  • Software support ($12.6 billion in 2018, 44% of total revenue): Revenue is derived from the sale of support services provided for on-premise software.
  • Services ($4.7 billion in 2018, 17% of total revenue): Revenue is derived from the sale of consulting, training and other support services.

Summarizing Fiscal Q1 Performance, And Highlighting Our Expectations For Q2:

  • Total revenue: Over the last two years (2016-18), revenue reached $28.3 billion in 2018 from $24.4 billion in 2016. In Q1 2019, the revenue was $6.9 billion (14.9% y-o-y). We expect 2019 revenue to reach $31.5 billion (11.5% y-o-y)
  • Cloud Subscriptions and Support: Over the last two years (2016-18), revenue reached $5.7 billion in 2018 from $3.3 billion in 2016. In Q1 2019, the revenue was $1.8 billion (44.2% y-o-y). We expect Q2 2019 revenue to reach $1.9 billion (36.2 % y-o-y) and 2019 revenue to reach $7.7 billion (35% y-o-y)
  • Software Licenses: Over the last two years (2016-18), revenue reached $5.3 billion in 2018 from $5.4 billion in 2016. In Q1 2019, the revenue was $0.7 billion (3.2% y-o-y). We expect 2019 revenue to reach $5.6 billion (5.5% y-o-y)
  • Software Support: Over the last two years (2016-18), revenue reached $12.6 billion in 2018 from $11.7 billion in 2016. In Q1 2019, the revenue was $3.2 billion (6% y-o-y). We expect 2019 revenue to reach $13.3 billion (5.5% y-o-y)
  • Services: Over the last two years (2016-18), revenue reached $4.7 billion in 2018 from $4 billion in 2016. In Q1 2019, the revenue was $1.2 billion (14.3% y-o-y). We expect 2019 revenue to reach $4.9 billion (5.5% y-o-y)

We forecast SAP’s EPS figure for full-year 2019 to be $5.16. Taken together with our P/E multiple of 21x for the company, this works out to a $121 price estimate for SAP’s stock, which is roughly 10% below the current market price.

Do not agree with our forecast? Create your own forecast for SAP’s valuation by changing the base inputs (blue dots) on our interactive dashboard.

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