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Cloud Stocks: SAP Riding High on the Cloud

Posted on Wednesday, Oct 23rd 2019

Earlier this week, ERP giant, SAP (NYSE: SAP) announced its third quarter results that surpassed market expectations and sent the stock climbing. The market is very pleased with SAP’s strong cloud initiatives.

SAP’s Financials
SAP’s third quarter revenues grew 13% over the year to €6.82 billion (~$7.57 billion), ahead of the market’s estimates of $7.37 billion. Net income grew 28% to €1.25 billion (~$1.40 billion). Adjusted EPS was €1.30 (~$1.45), marginally ahead of the market’s forecast of $1.31 for the quarter.

By segment, Cloud and software business revenues grew 13% to €5.647 billion with cloud revenues growing 37% to €1.807 billion (~$2 billion). Software licenses & support revenues grew 4% to €3.840 billion. Cloud revenues pertaining to SaaS and PaaS segments grew 34% €1.582 billion and cloud revenues for IaaS grew 29% to €170 million. Services revenues accounted for 17% of the quarter’s revenues and grew 15% to €1.162 billion.

For the current year, SAP reiterated its view of cloud and software revenues of €22.4-€22.7 billion (~$25.2-$25.9 billion).

SAP’s Cloud Focus

During the quarter, SAP remained focused on growing its Cloud revenues. It recently announced a tie-up with Microsoft through a partnership called Embrace. The agreement was SAP’s response to address concerns from its customers regarding the difficulty they face in shifting from SAP’s traditional on-premise model to remotely hosted services.

The three-year agreement will help SAP’s large enterprise customers move their business processes into the cloud. They will be able to run operations hosted at remote servers supported by SAP’s S/4HANA database with Microsoft acting as their reseller. The partnership is expected to accelerate and simplify customer migration to S/4HANA on Microsoft Azure, and Microsoft will embed SAP Cloud platform solutions and related services within Azure Cloud Services. SAP expects the tie-up to help generate an estimated $84 million in annual revenues.

This is not the first tie-up for Embrace. SAP has already entered into similar agreements with AWS and Google to offer its software for use on their infrastructures. While the move deprioritizes SAP’s own IaaS offering, in the longer run, it is expected to help SAP improve market reach and margins.

Earlier this month, SAP announced significant enhancements to its business technology platform to include advanced BI capabilities. Its business technology platform now includes the Data Warehouse Cloud solution, SAP HANA Cloud, SAP Analytics Cloud, and SAP HANA Cloud Services. By integrating all data and analytics capabilities, SAP is able to offer a complete interconnected service that can store, process, govern, and analyze large volumes of data.

Additionally, the self-service solution makes it easier for businesses to quickly connect their data together and translate it into valuable information. The Data Warehouse Cloud can be deployed either stand-alone or as an extension to SAP’s existing on-premise offerings. The service is offered through a flexible pricing model so that customers don’t have to provide for high up-front investment costs.

SAP’s cloud initiatives appear to be delivering strong results already. While its rival Oracle is struggling to grow its revenues, SAP has delivered double digit revenue growth. Unfortunately, Oracle does not give a detailed breakout of its cloud business performance, making it difficult to truly compare the two players.

SAP announced a change in leadership. Long term CEO, Bill McDermott, is stepping down. He will remain in an advisory capacity till the end of the year. He will be replaced by executive board members Jennifer Morgan and Christian Klein as co-CEOs. The market is looking up to the duo to help SAP compete with younger companies like Workday and continue to drive higher performance from the Cloud.

SAP’s stock is trading at $132.71 with a market capitalization of $163.3 billion. It had climbed to a 52-week high of $140.62 in July this year. It hit a 52-week low of $94.81 in December last year.

This segment is a part in the series : Cloud Stocks


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