What Should You Know About SAP SE (ADR)(NYSE:SAP)?
A spike in expenses relating to revenue and administration poured cold water on SAP SE (ADR)(NYSE:SAP)’s 4Q2015 and full-year 2015 earnings. But strong cloud bookings drove top-line growth in the two reported periods.
What is the future like for SAP SE (ADR)(NYSE:SAP)? Growing competition, softness in IT spending and adverse forex movements stand out as headwinds for SAP. Nevertheless, SAP’s new offerings, especially cloud-themed solutions are showed strong performance in 2015.
The question is whether SAP’s new solutions and other efforts can help it to successfully push back against challenges stiff competition, soft IT spending environments and unfavorable forex fluctuation.
This SAP analysis article examines the company’s opportunities and challenges. But first is a brief highlight of the latest earnings report.
4Q2015 and 2015 earnings highlight
SAP posted 4Q2015 EPS of €1.07 or $1.17. The EPS figure declined from €1.09 a year and also missed the consensus estimate. However, revenue of €6.346 billion rose 16.3% YoY on constant currency terms. A spike in cost of revenue and other operating expenses hurt the bottom-line in the quarter.
For the full-year 2015, EPS of €2.56 declined 6.6% YoY, but revenue of €20.797 billion rose 17.8% from the previous year. The strong revenue growth for the year was supported by solid new cloud bookings.
The chart below shows SAP’s revenue and cost of revenue for the last five quarters:
SAP SE (ADR)(NYSE:SAP) sweetened its 2017 profit forecast to a range of €6.7 to €7 billion on non-IFRS basis. The company previously guided 2017 revenue in the band of €6.3 to €7 billion. For the topline, SAP is looking for revenue in the range of €23 to €23.5 billion in 2017, again on non-IFRS basis.
Revenue relating to cloud subscription and support is expected to be between €3.8 billion and €4 billion.
What’s exciting about SAP?
- Bright prospects in the cloud
Although it is still in its early innings, SAP SE (ADR)(NYSE:SAP) is making impressive progress in the cloud. In 2015, the company’s new cloud bookings cross its business network rose a whopping 187% to €309 million.
The development exposed the potential in SAP’s vast business network, which it can tap into to drive more cloud growth going ahead. Cloud and Software business registered an 18.1% YoY increase in revenue to €5.381 billion in 4Q2015.
- SAP S/4HANA gaining traction
SAP finished 2015 with 2,700 S/4HANA users, indicating a sharp sequentially increase in the platform’s user base. S/4HANA has continued to gain traction among large customers globally, with major names such as Merck & Co., Inc. (NYSE:MRK), Bayer AG (ADR)(OTCMKTS:BAYRY) and China Railway adopting it.
Other than S/4HANA, SAP’s offerings such as Industry Solutions, Digital Boardroom and Business Networks are also gaining adoption momentum and look poised to fuel growth in 2016.
SAP’s portfolio of new solutions should also help the company both depend its market share as it gets existing customers to upgrade and also pave the way to displace competitors.
- Earnings resilience
Unlike its peers and competitors, SAP SE (ADR)(NYSE:SAP) has demonstrated exceptional earnings resilience over the years. Even in the most difficult times SAP’s earnings have always held steady save for a few occasions over the last one and a half decade.
With the majority of SAP SE (ADR)(NYSE:SAP)’s revenue now coming from recurring sources such as subscription and maintenance, earnings are likely to be more resilient. In 2015, SAP reported that about 60% of revenue was recurring, suggesting a significant growth in recurring revenue from 29% in 2001.
- Squeezing more value from legacy business
SAP SE (ADR)(NYSE:SAP) is in the process of refreshing its ERP business, which should see the company squeeze more benefits from its core installed-base on top the new products that it is rolling out. Additionally, SAP stands to benefit from its close ties with major IT organizations. Such relationships should particularly help the company accelerate the expansion of its cloud business.
What’s worrying about SAP?
- Stiff competition
In the IT services industry, SAP SE (ADR)(NYSE:SAP) faces stiff competition from both established players and newcomers. Some of the major competitors giving SAP a run for its money in the IT services market are International Business Machines Corp. (NYSE:IBM) and Computer Sciences Corporation (NYSE:CSC).
Because of the intense competition, SAP is under pressure to continue investing in R&D to both defend its market share and keep up with the competition. Additionally, the company is forced to channel more resources to marketing campaigns. Competition with low-cost providers also means that SAP gets sucked into pricing wars that in the end hurt revenues and margins.
Panic-triggered R&D spending can also lead to risky bets that can in the end consume resources without commensurate returns, thus introducing fresh financial pressures.
- Global markets uncertainties
Having a global-scale business is the dream of many companies, but that status also comes with some curses. Because of its large global operation, SAP SE (ADR)(NYSE:SAP) is prone to pressures of adverse foreign currency movements, which can significantly affect financial performance.
Like most other IT services companies, SAP has been eying growth in emerging markets. But many of these markets are struggling with budget deficits thanks in part to global oil price collapse. Because of fiscal imbalances in these emerging markets, spending on IT is facing an uncertain future, albeit in the short-term.
Global companies are also facing a growing wave of unfavorable regulations abroad, some in the form of protectionist trade policies that create uneven playing field for foreign players in those jurisdictions. SAP is not immune from protectionist pressures.
SAP is also vulnerable to political instability in the emerging markets.
- IT spending cyclicality
SAP is prone to the risk of IT spending cyclicality and that contributes fluctuations in quarterly sales that can significantly disrupt financial performance and scuttle other growth plans.
- Reliance on new products for growth
SAP SE (ADR)(NYSE:SAP) has got to a point where it is rolling out new solutions to attempt existing customers to upgrade. However, the purchase of those additional solutions depends on customers sensing meaningful benefit in them. If customers don’t see any motivation to upgrade, growing revenue could become more difficult for SAP and its financial position could also come more under pressure if investments in the new solutions don’t pay off.
Transitioning to the cloud holds the future for SAP SE (ADR)(NYSE:SAP). But how fast that transition happens and how much revenue SAP can generate from cloud in the interim will weigh heavily on its future.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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