Morningstar | Slowing Cloud Bookings, Trade Concerns Trip Up SAP; Maintaining FVE of 116 EUR
SAP reported mixed results on its second quarter of 2019. Concerns around slowing cloud booking growth and weakness in Asia due to recent trade disputes sent shares down roughly 5% to EUR 113 per share. On the positive side, SAP reported margin improvement as it moves business segments off Oracle databases as well as continued customer interest in Qualtrics. We are maintaining our fair value estimate of EUR 116 per share and keeping our forecasts unchanged.SAP’s cloud revenue came in just under EUR 1.7 billion, the fourth consecutive quarter of nearly 40% year-over-year cloud growth. The rise in cloud revenue is leading to an increasingly more predictable revenue base. “Predictable revenue†was 69% for the quarter, up from 63% in the same quarter two years prior. Management’s goal is for predictable revenue to approach 80% in 2023. Cloud revenue now makes up over 25% of SAP’s overall revenue, up from 16% in second-quarter 2017. New cloud bookings grew only 17% to EUR 494 million with trade-related news from Asia providing some headwinds for the quarter.
SAP’s IFRS operating profit dropped over 20% compared with the same quarter in 2018 to 12.5% as the firm continues to incur costs related to its Qualtrics acquisitions and restructuring program. Non-IFRS operating margins were flat year over year at 27.3%. A highlight in margins was SuccessFactors, which saw 5% sequential margin improvement in its first full quarter running on HANA (not Oracle) databases.
Management maintained full-year guidance and left its 2020 and 2023 targets intact. In 2020, SAP is aiming for EUR 8.6 billion-EUR 9.1 billion in cloud revenue and EUR 28.6 billion-EUR 29.2 billion for total revenue. By 2023, SAP expects cloud revenue to triple from 2018 with overall revenue surpassing EUR 35 billion. For 2023, management expects non-IFRS gross margins of 75% and 500 basis points of non-IFRS operating margin improvement over 2018. Those numbers came in at 63% and 29%, respectively, in 2018.
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