SAP SE (SAP – Free Report) delivered second-quarter 2023 non-IFRS earnings of €1.07 ($1.14) per share, increasing 12% from the year-ago quarter’s levels. The Zacks Consensus Estimate was pegged at $1.26.
Driven by strength in cloud business, SAP reported total revenues, on a non-IFRS basis, of €7.554 billion ($8.182 billion), increasing 5% year over year (up 8% at constant currency or cc). The Zacks Consensus Estimate was pegged at $8.376 billion.
SAP has narrowed its outlook for cloud revenues. For 2023, management now anticipates cloud revenues in the range of €14-€14.2 billion, suggesting an increase of 23-24% at cc. The company earlier expected revenues in the range of €14-€14.4 billion suggesting an increase of 23-26% at cc.
Following the announcement, shares were down 6.3% on Jul 20 and closed at $133.33.
Cloud Results
Current cloud backlog — a key indicator of go-to-market success in cloud business — increased 21% (up 25% at cc) to €11.54 billion.
On a non-IFRS basis, Cloud and software business (86.1% of total revenues) registered revenues of €6.505 billion, up 5% year over year (up 8% at cc).
Cloud revenues were €3.316 billion, up 19% year over year on a non-IFRS basis (up 22% at cc). SAP’s cloud business gained momentum across Germany, Brazil and India. It remained strong in the United States, the Netherlands, France, China and Chile.
Software licenses and support revenues totaled €3.189 billion, which decreased 6% (down 4% at cc) year over year. Non-IFRS software license revenues of €316 million declined 26% (down 24% at cc) year over year.
On a non-IFRS basis, cloud revenues related to Software as a Service increased 22% at cc to €2.604 billion. Cloud revenues related to Platform as a Service rose 45% at cc to €521 million. Cloud revenues related to Infrastructure as a Service declined 21% at cc to €191 million.
Services business (13.9% of total revenues) delivered revenues of €1.05 billion, up 4% from the year-ago quarter’s levels (up 7% at cc).
The company previously had two reportable segments — Applications, Technology & Services (AT&S) and Qualtrics. However, In June, it completed sale of its entire stake in Qualtrics as part of the acquisition of Qualtrics by funds associated with Silver Lake and Canada Pension Plan Investment Board.
SAP now has AT&S as its only reportable segment and the Qualtrics segment is treated as discontinued operations. AT&S’ revenues were up 5% year over year (up 7% at cc) to €7.27 billion owing to solid cloud revenue growth on the back of rising demand for SAP S/4HANA and SAP’s Business Technology Platform.
Expanding Clientele Bodes Well
Rise with SAP solution was adopted by clients including ARAG, Bacardi-Martini, Bayer, DFS Deutsche Flugsicherung, Empresas Polar, Foodstuffs South Island, GOL, McBride, Municipality of Utrecht and Sochor.
More companies have begun deploying S/4HANA solution partly or entirely in the cloud. SAP S/4HANA cloud revenues increased 74% (up 79% at cc) year over year to €823 million. SAP S/4HANA’s current cloud backlog was up 65% (up 70% at cc) year over year.
In the reported quarter, ABN AMRO Bank, Cirque du Soleil, HanesBrands, Levi’s, Tech Mahindra, Versuni went live on SAP S/4HANA Cloud.
SAP’s clientele continues to expand with additions of Breakthru Beverage, Deutsche Börse, Endress+Hauser InfoServe, La Poste, LB Group, Sabadell Digital, Santander, TATA Projects and Visa. These brands adopted SAP’s various solutions during the quarter under review.
GROW with SAP was adopted by The Brenda Strafford Foundation, in-tech GmbH, NKK Switches, Onyx Renewable Partners, StepLock, and Sunny Sky Products.
On May 16, 2023, SAP announced a new share repurchase program with a volume of up to €5 billion.
On May 15, 2023, SAP and Microsoft have partnered to integrate their technologies to help companies address their workforce skill gap, and improve recruitment and employee development processes. SAP SuccessFactors solutions will be integrated with Microsoft 365 Copilot, Copilot in Viva Learning and Microsoft’s Azure OpenAI Service.
On May 11, 2023, SAP and Google Cloud have announced expansion of their collaboration with a new open data offering. This partnership aims to streamline data landscapes and unleash the potential of business data by allowing customers to build an end-to-end data cloud.
Margin Details
Non-IFRS gross margin of 73.8% decreased 50 basis points (bps) from the year-ago quarter’s figure.
SAP reported non-IFRS operating expenses of €5.496 billion, down 1% from the year-ago quarter’s level (up 1% at cc).
Non-IFRS operating profit of €2.058 billion increased 23% on a year-over-year basis (up 28% at cc).
Non-IFRS operating margin of 27.2% expanded 400 bps on a year-over-year basis. At cc, the figure came in at 27.7% and increased to 440 bps.
Balance Sheet & Cash Flow
As of Jun 30, 2023, SAP had cash and cash equivalents of €14.142 billion compared with €8.766 billion as of Mar 31, 2023.
The company generated operating cash of €848 billion in the reported quarter compared with €301 billion in the prior quarter.
Free cash flow was €604 billion for the quarter under review.
Updated 2023 Outlook
For 2023, cloud and software revenues are now expected to be between €27 billion and €27.4 billion, (earlier guidance: €26.9–27.4 billion) implying a 6-8% rise at cc.
Management now projects non-IFRS operating profit in the range of €8.65-€8.95 billion, indicating a rise of 8-12% at cc. The earlier guided range was €8.6–8.9 billion.
Free cash flow is estimated to be €4.9 billion.
Zacks Rank
SAP currently carries a Zacks Rank #3 (Hold).
Stocks to Consider
Some better-ranked stocks in the broader technology space are Woodward (WWD – Free Report) , Cadence Design Technologies (CDNS – Free Report) and Adobe (ADBE – Free Report) . Cadence sports a Zacks Rank #1 while each of Woodward and Adobe carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
The Zacks Consensus Estimate for Woodward’s fiscal 2023 earnings has increased 0.3% in the past 60 days to $3.59 per share. WWD’s long-term earnings growth rate is anticipated to be 13.5%. Shares of WWD have risen 23.9% in the past year.
The consensus mark for Cadence’s 2023 earnings is pegged at $5.00 per share, unchanged in the past 60 days. The long-term earnings growth rate is anticipated to be 19.5%.
Cadence’s earnings beat the Zacks Consensus Estimate in the last four quarters, the average surprise being 7.3%. Shares of CDNS have increased 41.5% in the past year.
The consensus estimate for Adobe’s fiscal 2023 earnings is pegged at $15.70 per share, up 1.8% in the past 60 days. The long-term earnings growth rate is anticipated to be 13.3%.
Adobe’s earnings beat the Zacks Consensus Estimate in the last four quarters, the average beat being 3.1%. Shares of ADBE have improved 26.4% in the past year.
