According to a Boston Consulting Report published earlier this year, B2B spending on the Internet of Things (IoT) technologies, applications, and solutions is estimated to grow to $267 billion by the year 2020. Nearly half of this spend is expected to be driven by the manufacturing, transportation and logistics, and utilities sector. This high value market is now a prime focus area for ERP giant SAP (NYSE: SAP) that already has a sizable presence in those sectors.
SAP’s second quarter revenues grew 10% over the year to €5.78 billion (~$6.46 billion) compared with the market’s forecast of €5.71 billion (~$6.38 billion). Diluted EPS fell 18% to €0.56 (~$0.62) primarily due to higher stock-based compensation and restructuring-related expenses in the quarter. Adjusted for one-time gains, the company reported an EPS of $1.03, which was marginally better than the Street’s forecast of $1.02.
During the quarter, the cloud subscription and support’s core revenue increased 27%, but fell short of the market’s forecast increase of 33%. New cloud bookings increased 33% at constant currency to €340 million (~$380 million).
By segment, revenues from the Cloud and Software business increased 9% to €4.76 billion (~$5.32 billion). Services segment saw a 17% increase in revenues to €1.02 billion (~$1.14 billion).
HANA continues to report strong growth with S/4HANA licenses sales growing 5% over the year. S/4HANA adoption grew to more than 6300 customers, up over 70% and the company added names like Duke Energy, Carrefour Belgium, and Mercadona as its customers.
While revenues were impressive, the market was concerned about the company’s margins. Operating margin for the quarter came in at 27.2%, compared with the analyst forecast of 28.1%. The analysts are forecasting margins of more than 30% starting next year, but SAP’s continued investments in cloud computing capacity are holding down margins.
For the current year, SAP increased its forecast of revenues to €23.3-€23.7 billion (~$26-$26.5 billion). The target has been increased by €100 million (~$111 million) compared with earlier forecasts. It kept its margin expectations constant at €6.8-€7.0 billion (~$7.6-$7.8 billion). The Street had forecast revenues of €23.9 billion (~$26.7 billion) and an operating profit of €7.1 billion (~$7.9 billion).
SAP’s IoT Expansion
During the quarter, SAP continued its focus on its IoT solutions. It launched several new products and services within the IoT suite. The new products launched recently include Leonardo IoT Bridge, Global Track and Trace, Leonardo IoT Edge, Digital Manufacturing Insights, and Asset Manager.
SAP’s core IoT platform SAP Leonardo can integrate machine learning, IoT, Big Data, analytics, and blockchain technologies on the SAP Cloud Platform. The new products are targeted at improving Leondardo’s capabilities. Leonardo IoT Bridge is a configurable role-based digital command center that will help improve the visibility and ability of managers to act on a real-time basis. Global Track and Trace is a cloud-based offering that will help improve end-to-end tracking, monitoring, and reporting of objects across supply chains and Leonardo IoT Edge is a software designed to improve deterministic performance of business processes. In terms of industry specific tools, it launched Digital Manufacturing Insights, which is a cloud-based manufacturing performance management solution that will help improve visibility in manufacturing.
Besides new products, SAP also launched three new Leonardo Innovation Services. The services, which include Express, Open Innovation, and Enterprise Editions of Leonardo Innovation Services, will help organizations access new technologies in a shorter time, thus helping them achieve digital transformation. The growth in these products and services is in line with the $2.2 billion expansion it announced earlier in the development of its IoT portfolio.
SAP’s stock is trading at 52-week-high levels of $106.4 with a market capitalization of $127.8 billion. It had fallen to a 52-week low of $80.93 in November last year.
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