The Cloud

Forecast of ‘Dynamite’ Q4 Boosts SAP Shares

The German business software giant sees “at least 30 percent year-over-year cloud bookings growth” in the fourth quarter.
Matthew HellerOctober 19, 2017

German business software giant SAP missed estimates for third-quarter revenue and profit but its shares rallied after its CEO predicted a “dynamite” fourth quarter.

For the third quarter, SAP’s revenue grew 8% to 5.59 billion euros ($6.6 billion) from a year earlier, while core profit excluding special items rose 4% to 1.64 billion euros at constant currency rates. Taking currency moves into account, core profit was flat.

Analysts had expected core profit of 1.69 billion euros on revenue of 5.71 billion.

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Cloud subscriptions and support revenue rose 27% in the quarter to 938 million euros, excluding currency effects, compared with the 29% analysts had expected, on average. SAP said it now has 6,900 customers for its new cloud-based S/4 Hana enterprise resource planning system, up 70% from the same quarter in 2016.

Shell and China International Marine Containers are among the new customers for S/4 Hana, which companies use to overhaul their organizations and supply chains. Deals for such products tend to close in the fourth quarter.

“You can expect a dynamite Q4,” SAP Chief Executive Bill McDermott told investors on a conference call. “Don’t worry about bookings, relax, it’s going to be terrific,” he said, adding that SAP would report “at least 30 percent year-over-year cloud bookings growth.”

Following McDermott’s comments, SAP shares erased earlier losses of more than 2% in trading Thursday. The company has a market value of 116.5 billion euros ($138 billion).

As Reuters reports, SAP “is in the midst of a transition to offering cloud-based services to business customers, and management had flagged that 2017 would see a trough in profit margins as it invested in data centers and redeployed staff.”

Profit margins have declined over the past five years as SAP spent heavily to shift its business into the cloud, instead of relying on traditional software license sales for its suite of business planning tools. “The key question for investors is whether a tipping point is at hand for SAP to return to delivering consistent growth in profit margins late this year or during 2018,” Reuters said.

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