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Thứ Tư, 29 tháng 10, 2014

SAP Lowers FY14 Profit Guidance On Faster Cloud Expansion (SAP) - Seeking Alpha (registration)

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Summary



  • SAP reported lower-than-expected earnings in the 3rd quarter of 2014. Total revenue for the software industry giant amounted to $5.4 billion for the quarter.

  • SAP is now refocusing its business towards cloud-based technology, and there is expected to be increased pressure on short-term margins for the company.

  • SAP has made several acquisitions, along with additions to its business, in an effort to move forward with the expansion of cloud-based technology.

  • Investors are having trouble adjusting to the new subscription-based model that is a feature of cloud technologies.

  • Investment in the company is definitely an attractive prospect, especially for long-term investors.



Enterprise Resource System developer SAP SE (NYSE: SAP) reported lower-than-expected earnings in the 3rd quarter of 2014. The company continued its recent adverse trend of performing below expected levels. As a result of the company missing its mark yet again, investor confidence has dropped, as most investors are currently pulling out. Share prices are currently standing at $64.37, which is their lowest point for the year 2014. SAP has also had to adjust its expectations of operating profit downwards, and the overall outlook for the software company has suffered from recent trends. It is important to point out that the outlook for operating income for SAP has been adjusted in order to accommodate the accelerating switch from packaged software to cloud-based software, in line with changing customer demands. SAP's customers are moving to cloud technologies, due to their greater appeal in terms of cost efficiency. However, as the demand for cloud technology accelerates, future revenues for the company are expected to show an increase.


Overview of SAP's financial performance for Q3 2014


Total revenue for the software industry giant amounted to $5.4 billion for the 3rd quarter of 2014. Revenues showed a 5% increase over and above the previous year, but missed the $5.8 billion mark expected by analysts. Earnings per share for the company amounted to $1.07. The company registered broad-based revenue growth across all of its major business segments. SAP's Software and Support segment generated revenues of $4.2 billion, and recorded a growth of 5% over and above the previous year. The company's Software and Software-Related Service segment also reported growing revenues of 7% over and above the previous year. The most important factor in SAP's financial performance for the quarter, which led to downward adjustment of the outlook for the fiscal year 2014, was the robust 42% revenue growth generated by its Cloud Subscriptions and Support segment. Despite its smaller contribution to total revenue, SAP's cloud subscription business generated the highest growth among all of its operational segments. SAP is now refocusing its business towards cloud-based technology, and there is expected to be increased pressure on short-term margins for the company. SAP reported a net profit of $1.1 billion, showing an increase of almost 15% over the previous year. Full-year operating profit is expected to be in the range of $7.2 to $7.4 billion, down from previously expected levels of $7.8 million.


Future outlook for SAP


SAP has experienced a change in its revenue collection model, as it is now switching towards more subscription-based revenue generation through its cloud business. Upfront revenues will be generated in the coming years through the expansion of SAP's cloud business. The cloud business is surely the next big thing when it comes to enterprise resource systems. The market has been redefined by cloud technology, as traditional software is now less fashionable. Cloud sales for the company will be recognized more gradually over the course of the next 3 years. SAP is currently in its stage of investing upfront in cloud-based technology, which is why profits are temporarily suffering. However, sales and profits will significantly increase over the subsequent years. SAP has made several acquisitions and additions to its business, in an effort to move forward with the expansion of cloud-based technology as a core component of its overall business model. It recently agreed to buy US-based cloud traveling and expense management software producer Concur Technologies Inc. (NASDAQ: CNQR). The company is pursuing a broad-based enterprise resource model for cloud technologies, and has acquired HR, e-commerce and workforce applications, namely SuccessFactors, Ariba and Fieldglass, in order to expand its model. SAP's flagship HANA software is the crown jewel of its cloud portfolio, as it is the core component which will be harnessed to offer essential enterprise software products.


Conclusion


SAP has suffered from a loss in investor confidence over the years. The company has performed below expectations for the majority of the previous quarters. It has missed the mark set by analysts for the better part of the previous 8 quarters. Share prices have shown a downward trend throughout 2014, and are at their low-point for the year currently. However, the current fall in investor confidence is stemming from the massive change in SAP's revenue model. Investors are having trouble adjusting to the new subscription-based model that is a feature of cloud technologies. However, confidence will be restored once they digest the fact that revenues will be realized over the course of the next 3-4 years. The current downward trend in prices might be an ideal opportunity to buy into the stock, as the growth potential from harnessing cloud technologies into enterprise resource models is enormous. In the current quarter, the cloud-based technology division for SAP generated 42% revenue growth. Revenues for SAP are expected to grow as subscriptions are cashed in. Investment in the company is definitely an attractive prospect, especially for long-term investors.



Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article. (More...)








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