SAP beats estimates on cloud strength, raises outlook through 2020

SAP cloud background

Continuing to escape the malaise that has hit much of the legacy information technology industry, application software giant SAP SE posted healthy fourth-quarter earnings on a 40 percent jump in bookings for its cloud computing offerings and a 47 percent surge in its cloud backlog to $5.8 billion.

The company also raised its guidance through 2020, saying it expects to eclipse $30 billion in revenue that year. Despite the optimistic results, SAP shares nudged upward only about 1 percent in early trading, reflecting investor hopes for even more bullish guidance.

Net profit for the fourth quarter of 2016 rose 18 percent from a year ago, to $1.82 billion, as measured on an International Financial Reporting Standards basis. Revenue for the quarter rose 6 percent, to $7.2 billion. The profit number beat analysts’ forecasts of $1.79 billion in a poll by The Wall Street Journal but was at the low end of estimates obtained by Reuters.

That was about the only bad news, though. The company raised its 2017 revenue outlook for the second time in a year. SAP now expects to book between $24.9 billion and $25.3 billion in 2017, with a profit in the $7.5 billion range.

SAP also raised its 2020 revenue forecasts to between $30 billion and $31 billion. The share of predictable revenue, which the company defined as the total of cloud subscriptions and support revenue along with software support revenue, should reach 70 percent to 75 percent by that time, up from 61 percent last year. That kind of stability would put SAP an excellent position to expand into new markets.

 

“Overall, Q4 and FY16 represented a strong year and management indicated that the S/4 product cycle has resulted in upward license revisions,” Barclays Capital Inc. analyst Raimo Lenschow said in a note to clients today. “SAP will use this cycle to increase its wallet share, leading to another year of investment in FY17 before delivering operational leverage in FY18. We reflect this with lower EPS estimates, but remain bullish.”

SAP executives said the company’s S/4HANA in-memory enterprise resource planning software is hitting on all cylinders, selling strongly both on premises in the cloud. The company has 5,400 current S/4HANA customers and another 2,500 in the pipeline. It signed 1,300 new customers in the fourth quarter.

SAP CEO Bill McDermott

SAP CEO Bill McDermott

“This is a generational opportunity,” Chief Executive Bill McDermott (right) said in a conference call with analysts. “Thousands of customers are coming from other solutions to S4 HANA. The whole thing is tying together into one heck of a growth story.” McDermott said half of S4 HANA bookings in the most recent quarter were new customers.

“We continue to see not only a strong uptick in S/4, but also in HANA as a stand-alone platform, ” said Robert Enslin, president of global customer operations. “I feel really good about the pipeline moving into 2017.”

SAP has managed so far to avoid the potholes that other big enterprise software companies have hit on their journey to the cloud. In its most recent quarterly earnings, Oracle reported revenue growth of just 1.7 percent. In contrast, SAP software license and support revenue was up 4 percent and its 2016 gross margins of nearly 73 percent were 11 percent higher than Oracle’s.

McDermott attributed SAP’s success in crossing the cloud divide to a transformation in sales culture. “The way we’re going to market with cloud and end-to-end solutions, most companies can’t handle that,” he said. “We have a symphony and they have a war zone.”

Performance was particularly strong in the Asia/Pacific region, with full-year revenues up 44 percent. The Europe/Middle East/Africa region logged revenue growth of 38 percent for 2016. SAP said profits continued to surge despite “continuous investments in innovation and high-growth areas for our transformation,” including large-scale automation of its data centers.

The company also continues to successfully expand its franchise beyond ERP.  Its SuccessFactors Employee Central software had 1,580 customers at the end of the fourth quarter, and said it has surpassed Workday Inc. in the total number of employees supported.

Photos courtesy of SAP

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