(Bloomberg) -- SAP SE reported sales that topped estimates and raised the low end of its profit outlook for the year, as more customers signed up for its flagship S/4 Hana business software.
- Sales for the third quarter rose 8 percent to 5.4 billion euros ($5.9 billion), SAP reported Friday. That compares with the average 5.3 billion-euro estimate of analysts’ projections compiled by Bloomberg.
- Operating profit was 1.64 billion euros, just slightly below the 1.65 billion euro average estimate.
- Higher stock-based compensation weighed on operating profit.
- SAP said it added more than 400 S/4 Hana customers during the quarter and now has 4,100 businesses running the suite, up from 3,700 at the end of June.
- Shares were up 3 percent to 81.82 euros at 15:18 p.m. in Frankfurt.
- Adjusted operating profit for the year will be 6.5 billion euros to 6.7 billion euros, compared with the previous range of of 6.4 billion euros to 6.7 billion euros at constant currencies.
- Cloud and software revenue to climb 6.5 percent to 8.5 percent this year, adding half a percentage point at both ends of the range.
- Management sees possible share buyback in second half of 2017.
The Big Picture
Chief Executive Officer Bill McDermott is pivoting the Walldorf, Germany-based software maker toward an era in which enterprises can run their financial, logistics and HR software both in their own data centers and in an outsourced cloud. SAP sees online software subscriptions outpacing new on-premises licenses by 2018. As the top supplier of software crucial to customers’ operations, SAP is less vulnerable to losing revenue to cloud infrastructure software supplied by Amazon Web Services, Microsoft Corp.’s Azure and Google’s cloud offering, according to analysts.
SAP is garnering more profit on an operating basis as it moves past severance and early retirement costs it had to pay out last year. But that was outweighed by the 296 million euros more it paid in stock-based compensation in the third quarter as its share price rose from about 58 euros at the end of the comparable period a year ago, to nearly 81 euros at the end of September this year.
- “The pipeline is more robust than it has ever been going into the fourth quarter,” McDermott said on a conference call. “We’re in very good shape on the top line.”
- He said spending rose for software development with customers, and hired 2,500 people during the quarter. “A heavy hiring quarter.”
- “The year to date operating profit is up 5 percent and that’s perfect,” he said. “When you think of an annual guidance cycle it’s not always perfectly linear.”
- Chief Financial Officer Luka Mucic said in an interview the about 40 percent of S/4 Hana customers signed during the quarter are new to SAP and called out the oil and gas industry as a growth area.
- S/4 is also benefiting from bigger deal sizes, he said.
- “There continues to be upside to consensus estimates in terms of license growth in the course of the S/4 HANA cycle, which should be a positive trigger for the shares,” Knut Woller, an analyst at Baader Bank said in a note to clients.
- Better guidance will “outweigh margin concerns” UBS analyst Michael Briest said in a note to clients.
- Revenue in Europe, the Middle East and Africa grew 5 percent to 2.32 billion euros, boosted by Germany, where SAP gets about a third of the region’s sales. U.S. revenue grew 7 percent to 1.77 billion euros, while sales in the Asia, Pacific and Japan region was 825 million euros.
- Cloud subscriptions and support revenue in the quarter totaled 769 million euros, compared with the 787 million euro average predicted by analysts. New software license revenue, an important predictor of earnings potential from support contracts, was 1.03 billion euros.
- Operating margin on an adjusted basis was 30.5 percent of sales, compared with the 31.8 percent average estimate.
- After swallowing Ariba, Concur and SuccessFactors for $15 billion in acquisitions between 2012 and 2014, SAP has been relatively quiet in the business software arms race. In the same period, Oracle made a $9.3 billion offer for NetSuite Inc. and Salesforce.com Inc. bought Demandware Inc. for $2.8 billion.