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Thứ Năm, 23 tháng 1, 2014

SAP AG (ADR) (SAP): Weak Profitability Guidance Should Not Depress SAP's ... - Seeking Alpha

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German enterprise software manufacturer SAP AG (SAP) reported an impressive set of fourth quarter and fiscal 2013 results on January 21, 2014; beating our revenue and operating profit estimates. Fiscal revenues for the company was marginally higher than our estimate, at $22.34 billion vs. an estimated $22.26 billion. Although software revenues were 3% lower than their 2012 figures in reported terms, they were 2% higher on a constant currency basis. SAP continued to impressively scale its cloud division, with subscription revenues of €787 million (~$1,045 million), higher than the company's guidance of €750 million (~$996 million). For fiscal 2014, the company has a revenue target of €950 million - €1,000 million (~$1.28 billion - $1.35 billion at current exchange rates) from cloud subscription and support revenues, indicating a projected base growth rate of 21% year-on-year for the division.

While macroeconomic factors and industry trends have contributed in part to this cloud revenue growth rate, the company's HANA platform was a major driver for SAP's cloud strategy as well. As a high performance in-memory computing platform, HANA now includes SAPs full range of products, either on-premise or via the Cloud. And as a Cloud implementation, HANA is generating strong demand outside the Enterprise, among smaller commercial customers. Revenues from the in-memory computing HANA platform were marginally lower than guided figures at €633 million (~$841 million), impacted by significant currency volatility in 2013. Excluding currency fluctuations, revenues from the HANA platform were €664 million (~$882 million), within the range €650 million - €700 million (~$863 million - $930 million) range provided by the company.

SAP's operating profit was also above our estimates for fiscal 2013, at $5.95 billion compared to an estimate of $5.57 billion. IFRS operating margins were for the fiscal stood at 26.7% compared to our estimate of 25.1%, favored by a lower than expected stock-based compensation expense and its adoption of cloud services. In the long term, SAP's strategy of becoming a cloud service provider, rather than solely an on-premise software vendor, should contribute to an expansion in operating margins. The company has an operating profit margin target of 35% by 2017, indicating the scope to expand in adopting a cloud-based business model.

Despite its strong business performance, the company's stock has seen some weakness since the launch of its unaudited results on January 10, 2014, where management delayed profitability prospects from the cloud division from 2015 to 2017. This resulted in SAP's stock shedding close to 4% in value since January 10, 2014. In this earnings note, we present crucial takeaways from its FY13 earnings release. We have a Trefis price estimate of $80 for SAP which is under revision to reflect the recent FY13 results for SAP.

SAP Targets Pure-play Cloud Players Such As With HANA Powered Cloud

In its FY13 earnings call, CEO Bill McDermott stated that SAP aspires to become the world's leading cloud company, from being second in terms of revenues currently. Salesforce (CRM) is the leading player within the $17 billion SaaS industry, with revenues estimated to touch $4 billion for the fiscal ending January 31, 2014. In comparison, SAP had cloud subscription and support revenues of approximately $1.3 billion in 2013. However, the company is the largest cloud service provider, with a user base of approximately 35 million. With the SaaS market evolving rapidly, SAP plans to target pure-play cloud service providers such as Salesforce and Workday (WDAY) going forward, with an aggressive push into cloud. This is supported by the strong cloud pipeline it has, both in terms of deferred revenues and contracted revenues. Deferred cloud revenues and cloud backlog revenues stand at €443 million and €1.2 billion respectively as of December 31, 2013.

Powering the SAP Cloud is its high performance analytical platform, HANA. Revenues from HANA were approximately $882 million in 2013 while revenues since the launch of the platform in November 2010 were about $1,600 million. In addition to generating more than half of its overall revenues in 2013, the HANA platform witnessed greater traction during the last quarter. Revenues from SAP HANA in Q4 accounted for more than 47% of its entire fiscal 2013 revenues, reinforced by the newly launched HANA Enterprise Cloud launched in May 2013.

Additionally, the HANA plus Business Suite bundle has seen strong growth, gaining close to 750 customers since launch. Going forward, we should see strong growth in the SAP HANA platform, especially on the on-demand front, as a result of the platform's integration with other enterprise application software. Integrating application software with the HANA platform provides the customer with reduced hardware load by collapsing the entire IT stack required by the application onto HANA. We believe SAP's focus on transforming itself into a pure-play cloud operator bodes well with the company's offerings, contributing to significant future revenue growth.

Delayed Profitability Guidance Shouldn't Depress Stock Value

SAP's results have been relatively strong compared to other mega-cap software competitors such as Oracle (ORCL). However, the stock has been subject to pessimistic views about the company's profitability. While the company's strategy in moving its entire product offering to an on-demand model is a huge move, SAP has not faced any executional challenges so far and results have been strong from the company. Revenues from SAP's cloud division, which includes both subscription and support businesses, stood at €975 million (~$1.3 billion) compared to €456 million in 2012 (~$586 million).

Similarly, net income from the division increased to €140 million (~$186 million) compared to a loss of (-€51) million (~(-$66) million) in 2012. Moreover, SAP's recurring revenue ratio has expanded from 39% in fiscal 2007 to 57% in fiscal 2013. Recurring revenue ratio represents the amount of incremental revenue generated from a customer on an annualized basis, and is a crucial metric for a company operating under an SaaS model. We expect this recurring revenue ratio to expand further due to an increase in investments in growing its cloud market share. These investments in supporting its cloud business growth have resulted in the company delaying its 35% operating profit margin target from 2015 to 2017. We don't expect the delayed profitability guidance to impact the company's stock price negatively and believe this to be a prudent move, given the scale SAP could build within the cloud software industry.

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