SAP Profit Tops Estimates as Clients Move to New Softwareby
Software licenses and cloud revenue surpass expectations
European revenue grew strongly despite Brexit concerns
SAP SE reported results that topped analysts’ estimates as the company put a weak start to the year behind it and closed more software deals despite political turmoil in Europe.
Operating profit for the second quarter was 1.52 billion euros ($1.67 billion), topping the 1.45 billion-euro average of analysts’ estimates collected by Bloomberg. Sales were 5.24 billion euros, compared with the average 5.22 billion-euro estimate.
Chief Executive Officer Bill McDermott said he’s positioning SAP’s software to help companies remake sales plans and purchasing processes in light of U.K. citizens’ vote last month to leave the European Union. "Any time there’s a pressure point where things are changing, business leaders are looking for a solution," he said in an interview.
New software license revenue, an important predictor of earnings potential from support contracts, rose 10 percent to 1.04 billion euros. That followed a 13 percent decline in the first quarter, which the company blamed on a failure to close deals.
The CEO credited lower costs after last year’s job cuts for propping up the bottom line. “We closed any deal that wasn’t closed in Q1 and we had an extraordinary Q2,” he said.
Cloud subscriptions and support revenue in the quarter rose 41 percent to 721 million euros. SAP said it performed particularly well in Europe despite Brexit-related uncertainty, chalking up double-digit percentage growth in software licenses revenue from major markets such as France.
SAP shares gained 3.95 percent to 74.48 euros as of 12:20 p.m. in Frankfurt, and as much as 4.7 percent in earlier trading, the biggest intraday gain since last October. The company’s market valuation is 91.5 billion euros.
"I haven’t seen big global multinationals say, ‘I’ve changed my business strategy as a result of Brexit,’" McDermott said on Bloomberg television. He added that SAP would be "opportunistic" about smaller acquisitions. "The good news about SAP is organically we’re growing very fast," he said.
McDermott said the company would be opportunistic about acquisitions but that investors are pleased with its organic growth. He said SAP had looked at recently-acquired business software companies Qlik Technologies Inc. and Marketo Inc. but passed on them.
"They were just not at our threshold of excellence to justify an acquisition by SAP at any price," the CEO said.
SAP is trying to move its customer base to its latest S/4 Hana suite of financial and operational planning software while fighting off challenges from Oracle Corp. and Salesforce.com Inc. SAP said it added more than 500 S/4 customers during the quarter and now has 3,700 businesses running the suite.
"SAP performed better compared to its peers in terms of growth and profitability," Harald Schnitzer, an analyst at DZ Bank AG, said in a note to clients. The restructuring and job elimination last year helped profit margin, he said.
SAP reiterated its 2016 forecast for adjusted earnings before interest and taxes of 6.4 billion euros to 6.7 billion euros at constant currencies. It expects cloud and software revenue to rise 6 to 8 percent this year from 17.23 billion euros in 2015.
Tech companies that specialize in selling to businesses have reported largely positive results in the past week. Microsoft Inc.’s quarterly sales and profit was above analysts’ estimates and doubled revenue from its Azure cloud-computing platform. Data-center software maker VMware Inc.’s profit and sales topped estimates. And IBM reported revenue growth in a key data analysis software unit.
Michael Briest, an analyst at UBS, said SAP has been less vulnerable than other software companies to platforms offered by Microsoft, Google and Amazon, which offer databases and application-connecting middleware in the cloud. Most customers run SAP’s Hana database on their own computers and the company’s middleware exposure is relatively low.
SAP struck deals with Apple Inc. and Microsoft Corp. this spring to broaden use of its software. SAP will develop apps for Apple’s iPhone and iPad and make it easier for its customers and consultants to write native iOS software. The German company is also making more utilities available on Microsoft’s Azure platform for cloud computing.