EUR 850.00 For Business Accounts Only

Morningstar | SAP Announces a Hefty Restructuring Plan; Maintain FVE of EUR 88 per Share

The key development from narrow-moat SAP’s fourth quarter earnings call, in our view, was the announcement of a new restructuring plan. We had expected the company would take a restructuring charge north of EUR 500 million in 2019 in conjunction with the closing of the $8 billion Qualtrics deal, closely mirroring a similar charge in 2015 related to the prior year's acquisition of Concur. However, the magnitude of the charge, which will be largely recognized in the first quarter of 2019, was almost double what we had expected. We will maintain our fair value estimates of EUR 88 per share and $100 per U.S. ADR and we view shares as fairly valued today.

For the fourth quarter, cloud revenue, the key driver of long-term growth, came in at EUR 1.4 billion, slightly below our forecast revenue of EUR 1.6 billion but still rising 41% year over year.  Total revenue growth came in at EUR 7.4 billion, a 9% increase year over year. This was roughly EUR 200 million ahead of our revenue forecast, driven by stronger than expected performance in software license. SAP also reported the company now has over 10,000 customers signed up for S/4HANA, up 33% year over year and indicating roughly 1/3 of their 30,000 plus legacy customers have signed up for the cloud. Operating margins were 32% compared with an expected 29%, due to higher than forecast gross margins.

Moving to 2018 full year results, SAP’s revenue of 24.7 billion EUR was slightly ahead of our revenue estimates, due to less contraction than forecast in Software licenses. SAP met or exceeded the high end of 2018 non-IFRS revenue guidance for cloud and software revenue and total revenue, due in part to EUR 1.2 billion of foreign exchange benefit. Operating margins improved to 23% from 21.5%, largely due to more efficient sales and marketing spending, while non-GAAP EPS was in line with our expectations.

Looking ahead to 2019, the company forecasts non-IFRS cloud and software revenue in the range of EUR 22.4 billion-22.7 billion, slightly above our prior expectations of EUR 22.2 billion, which remains unchanged as we're still cautious that cloud revenue growth will grow faster than the 32% seen in 2018. For cloud revenue alone, SAP provided non-IFRS guidance of EUR 6.7 billion-7.0 billion in 2019, which would represent 33%-39% growth from the EUR 5.03 billion earned in 2018.

Further out, SAP provided a non-IFRS revenue forecast of EUR 28.6 billion-29.2 billion, up from the firm's prior forecast of EUR 28.0 billion-29.0 billion. SAP has cloud revenue ambitions of EUR 8.6 billion-9.1 billion by 2020 (which represents 29% growth from the midpoint of the 2019 forecast). In 2023, SAP stated its target to generate EUR 35 billion of non-IFRS revenue and EUR 15 billion of cloud revenue by 2023. These mid-term and long-term estimates are largely in line with our forecasts.

Looking at the restructuring, SAP's annual expected savings are between 750 million EUR and 850 million EUR starting in 2020. In spite of the layoffs, SAP intends to continue to invest for growth in key areas and expects to end 2019 with over 100,000 employees, up from 96,500 at the end of 2018.