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SAP's Q2 Earnings Decline Y/Y, Revenues Up on Cloud Strength

SAP SE SAP delivered second-quarter 2022 non-IFRS earnings of €0.96 per share down 45% from the year-ago quarter’s levels. The downside was caused by tougher year-over-year comparisons pertaining to contribution from Sapphire Ventures.

Total revenues, on a non-IFRS basis, were €7.517 billion ($8.009 billion), up 13% year over year (up 5% at constant currency or cc), driven by strength in cloud business.

However, SAP has lowered full year operating profit guidance due to the €350-million negative impact from the war in Ukraine and expectations of a decline in software licenses revenue. The company now projects non-IFRS operating profit in the range of €7.6-€7.9 billion, indicating a decline of 4-8% at cc. Earlier, the company guided non-IFRS operating profit in the range of €7.8-€8.25 billion, indicating flat to down 5% at cc.

Following the announcement, shares are down 4% in the pre-market trading on Jul 21.

Cloud Results

Current cloud backlog — a key indicator of go-to-market success in cloud business — increased 34% (up 25% at cc) to €10.403 billion. The company’s suspension of Russian operations amid the ongoing Ukraine war reduced the current cloud backlog by nearly €64  million.

SAP SE Price

 

SAP SE price | SAP SE Quote

 

On a non-IFRS basis, the Cloud and software business (85.9% of total revenues) registered revenues of €6.459 billion, up 12% year over year (up 5% at cc).

Cloud revenues were €3.056 billion, up 34% year over year on a non-IFRS basis (up 24% at cc).

Software licenses and support revenues totaled €3.403 billion, down 2% (down 7% at cc) year over year. The company further noted that non-IFRS software license revenues of €426 million declined 34% (down 38% at cc) year over year.

On a non-IFRS basis, cloud revenues — related to Software as a Service (SaaS) increased 24% at cc to €2.409 billion. Cloud revenues — related to the platform as a Service (PaaS) — rose 40% at cc year over year to €389 million. Cloud revenues — related to Infrastructure as a Service (IaaS) — rose 7% at cc year over year to €257 million.

Services business (14.1% of total revenues) delivered revenues of €1.057 billion, up 15% from the year-ago quarter’s levels (up 7% at cc).

The company has two reportable segments — Applications, Technology & Services (AT&S) and Qualtrics. At the beginning of 2022, the Services segment was merged into the old Applications, Technology & Support segment, which is now re-named as the Applications, Technology & Services segment.

AT&S revenues were up 11% year over year (up 4% at cc) to €7.11 billion. Qualtrics segment revenues rallied 57% (up 39% at cc) to €330 million.

Expanding Clientele Bodes Well

The Rise with SAP solution was adopted by clients, including ABB Information Systems, Bridgestone Australia, Hisense Group, Mitsubishi Materials Corporation, Moderna, Pitney Bowes, RWE and Sumitomo Rubber Industries.

S/4HANA adoption rallied more than 15% (or 650 new clients) year over year to around 20,000 customers. In the reported quarter, net new customers comprised 60% of additional S/4HANA customers. More companies have begun deploying the S/4HANA solution partly or entirely in the cloud. SAP S/4HANA Cloud revenues increased 84% (up 72% at cc) year over year to €472 million.

SAP S/4HANA’s current cloud backlog was up 100% (up 87% at cc) year over year.

SAP’s clientele continues to expand with the addition of  ALTANA, Analog Devices, ASUS, BeiGene, Ericsson, Kyndryl, Moët Hennessy, Corning, Persán, Positivo, among others, which went live on SAP solutions during the reported quarter.

In the quarter under review, SAP announced the expansion of its partnership with IBM. According to the terms of the expanded partnership, IBM will now be switching to SAP S/4HANA, SAP’s next-generation ERP software, for centralizing and standardizing data worldwide.

SAP, in association with Google, rolled out new integrations between Google Workspace and SAP S/4HANA Cloud. These new integrations will enable clients to leverage Google Docs’ and Google Sheets’ features directly from SAP software workflows.

Margin Details

Non-IFRS gross margin of 73.1% contracted 30 basis points (bps) from the year-ago quarter’s figure.

SAP reported non-IFRS operating expenses of €5.8 billion, up 23% from the year-ago quarter’s level (up 14% at cc).

Non-IFRS operating profit of €1.68 billion declined 13% on a year-over-year basis (down 16% at cc) owing to lower software licenses and support revenues and bad debt reserves recorded on trade receivables.

Non-IFRS operating margin of 22.4% contracted 650 bps on a year-over-year basis. At cc, the figure came in at 23% and contracted 580 bps.

Balance Sheet & Cash Flow

As of Jun 30, 2022, SAP had cash and cash equivalents of €7.492 billion compared with €8.942 billion as of Mar 31, 2022.

The company generated €268 million of operating cash in the reported quarter compared with €2.482 billion in the prior quarter.

The free cash outflow was €86 billion compared with the previous quarter’s figure of €2.165 billion.

In January 2022, SAP floated a new share repurchase plan to boost the transition of SAP’s share-based compensation programs to equity settlement, which was concluded on Apr 29. Under this plan, SAP repurchased 10,004,763 shares at an average price of €99.63 with a total value of nearly €997 million. Moreover, the company announced an additional buyback plan of €500 million to be executed in the period between Aug 1 and Dec 31, 2022.

The company proposed a dividend of €2.45 per share for 2021, which includes a special dividend of €0.50 to commemorate the company’s 50th anniversary. The dividend was approved at the AGM held on May 18, 2022, added SAP

2022 Revenue Outlook Reiterated

For 2022, SAP anticipates cloud revenues in the range of €11.55-€11.85 billion, suggesting an increase of 23-26% at cc.

Cloud and software revenue is now expected to be between €25 billion and €25.5 billion, calling for a 4-6% rise at cc.

Suspension of Russian operations amid the ongoing Ukraine war is expected to affect overall revenues by €300 million in 2022.

Free cash flow is expected to be above €4.5 billion.

Zacks Rank & Other Stocks to Consider

SAP currently carries a Zacks Rank #2 (Buy).

Some other top-ranked stocks from the broader technology sector worth consideration are Synopsys SNPS, Aspen Technology AZPN and Broadcom AVGO. Broadcom sports a Zacks Rank #1 (Strong Buy) while Synopsys and Aspen 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 Broadcom’s fiscal 2022 earnings is pegged at $37.06 per share, up 4% in the past 60 days. AVGO’s long-term earnings growth rate is pegged at 14.5%.

Broadcom’s earnings beat the Zacks Consensus Estimate in all the preceding four quarters, with the average being 2.2%. Shares of AVGO have gained 7.5% of their value in the past year.

The Zacks Consensus Estimate for Synopsys 2022 earnings is pegged at $8.67 per share, unchanged in the past 60 days. The long-term earnings growth rate is anticipated to be 19.6%.

Synopsys earnings beat the Zacks Consensus Estimate in the last four quarters, the average being 2.7%. Shares of SNPS have increased 17.5% in the past year.

The Zacks Consensus Estimate for Aspen’s fiscal 2022 earnings is pegged at $5.49 per share, rising 0.4% in the past 60 days. The long-term earnings growth rate is anticipated to be 16.3%.

Aspen’s earnings beat the Zacks Consensus Estimate in three of the last four quarters, the average being 4.1%. Shares of AZPN have grown 24.3% in the past year.


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