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SAP Continues to Soar, Despite Earnings Miss

Posted on Monday, May 8th 2017

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Enterprise services provider SAP (NYSE: SAP) continues to ride high on the success of Hana and its Cloud initiative. In the recent result announcement, SAP missed its earnings expectations. But the market is not worried and the stock has soared to a record high. Nothing appears to be stopping this stock.

SAP’s Financials
SAP’s first quarter revenues grew 12% over the year to €5.285 billion (~$5.63 billion) compared with the market’s forecast of €5.08 billion (~$5.5 billion).

Revenues from Cloud and Software grew 12% to €4.33 billion (~ $4.61 billion) with cloud Subscriptions & Support revenues growing 34% to €905 million (~$963 million) and software licenses & support revenues growing 8% over the year to €3.42 million (~$3.65 billion). EPS of €0.69 (~$0.74) was short of the Street’s forecast of €0.72 (~$0.77) for the quarter.

For the current year, SAP reaffirmed its forecast of revenues of €23.2-€23.6 billion (~$25-$25.4 billion), marginally shy of the analyst estimates of €23.65 billion (~$25.5 billion).

SAP’s Enterprise Offerings

During the quarter, SAP continued to expand its enterprise offerings. Growth was driven by S/4Hana in-memory database which saw an addition of 400 customers. SAP now has more than 5,800 customers for its Hana platform which includes global companies like Energy SE and Citrix Systems. Within the private cloud, the HANA Enterprise Cloud also is a fast-growth business for SAP. The company has improved its offering with the release of SAP Digital Boardroom, a reinvigorated analytics portfolio that saw strong double-digits growth across cloud and software in the quarter.

Within human capital management, SuccessFactors delivered another strong quarter. SuccessFactors’ Employee Central now has more than 1,700 customers worldwide. Gartner awarded SAP the highest rankings in cloud HCM for core HR for global organizations with more than 5,000 workers.

SAP is also driving expansion within the SME segment. During the quarter, it added over 1,000 net new SME customers. It expects to maintain momentum through its API Hub, an open SAP cloud platform that actively promotes and incubates innovations.

To keep pace with the Internet-of-things and machine learning, SAP is accelerating efforts within the segment. It is focused on machine-learning and has already released its first wave of machine-learning enabled applications. The machine learning technology offers capabilities like invoice and payment matching, predictive recruiting, intelligent sales forecasting, sales discount approvals, and data-driven renewal management within its products.

SAP’s stock is trading at record high level of $103.88 with a market capitalization of $120.9 billion. It had fallen to a 52-week low of $71.39 in June last year.

SAP has always been looking to grow through acquisitions. Earlier, I had recommended that it evaluates Splunk as a target. One of its key focus areas of late has been the development of Internet of Things (IoT) offerings. Splunk’s machine-to-machine analytics capability will help SAP offer a product that will allow its customers to analyze data collected through multiple sources. Splunk ended last year with revenues growing 42% to $950 million and it generated a non-GAAP operating margin of 6.2%. It expects to end the current year with revenues of $1.185 billion with a non-GAAP operating margin of 8%. Splunk is also focused on improving its business model. It recently changed its sales team’s commission plans to get them to sell the SaaS product instead of the perpetual license product.

Players like Adobe made a similar transition earlier and are now reaping the benefits of the transition. The move will hurt Splunk in the short term, but the SaaS business model will be beneficial for it in the longer run as subscription revenues are more predictable and the cost of retaining customers continues to drop as the customer manages more of their needs over the cloud-based SaaS product. Its customers will benefit by having access to the latest version of the Splunk software at all times. Additionally, by allowing Splunk to run the software for them in the cloud, the customers will be able to save the IT infrastructure expense of having to host the software. The market has been pleased with Splunk. Its stock has been trading at 52-week high levels of $67.08 with a market capitalization of $9.3 billion.

Photo Credit: Paul Downey/Flickr.com

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