Morningstar | SAP Reports Middling 2Q Results; Increased 2020 Cloud Targets; Raising FVE Slightly to EUR 91
Narrow-moat SAP reported run-of-the-mill second-quarter results, with both revenue and net income modestly below our expectations. However, we are raising our fair value estimate to EUR 91, based on increased long-term cloud targets. Management attributed the weakness in the quarter to a tough foreign exchange environment as well as the push-out of a number of large deals into the third and fourth quarters, giving them confidence to raise full-year guidance. On top of this, the prevailing news of the quarter was raised 2020 cloud targets, with management now aiming for a non-IFRS range of EUR 8.2 billion to EUR 8.7 billion over the prior range of EUR 8 billion to EUR 8.5 billion. We modestly bumped our estimates toward the upper end of this range, but with shares still trading at a premium to our fair value, we would await a pullback before building a position in SAP.Our overall thesis around SAP remains the same: While it's a leader in enterprise resource planning, we are concerned about the long-term customer relationship management opportunity, especially against voracious competitors such as Salesforce and Microsoft. This quarter, we note that new cloud bookings increased only 29%, well below the segment’s 40% sales growth.
Looking across SAP’s businesses, the S/4HANA added nearly 600 customers in the quarter, a notable sequential increase, with 10% revenue growth. We remain intrigued by the opportunity around S/4HANA Public Cloud, given SAP’s legacy ERP customer share and the number of existing S4 license holders. SAP holds leading market share in cloud-based ERP, according to Gartner, though we acknowledge this is primarily a function of acquired properties such as SuccessFactors, Concur, and Fieldglass and a much smaller portion is attributable to core financial management.
We want to reiterate on the CRM side, that we are skeptical of SAP’s ability to make significant inroads against today’s leaders, most notably wide-moat Salesforce. SAP’s management again iterated that the firm’s ERP portfolio, business applications, and customer engagement portfolio, when coupled, will provide a path to an adoption of SAP’s suite. The addition of Callidus will bolster the company’s efforts in the space; according to Gartner, SAP generated just $233 million in cloud-based CRM revenue in 2016, while Callidus delivered $151 million in the same time frame on its own as a sales performance management and configure-price-quote solution. We iterate that these numbers are well below competitors such as Salesforce, Adobe, Oracle, and Microsoft.
For more information on SAP, please see our February Technology Observer "You Call Yourself a Salesman? Not Without a Wide-Moat Marketing Cloud."
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