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First signs of macro headwinds in commentary outweigh Q2 outperformance SAP''s first reference to the macro environment weighing on pipeline conversion took the shine off an otherwise healthy Q2 print, headlined by beats on Cloud Revenue, EBIT and FCF. SAP''s comments are aligned with the broader market, but the relative resilience of the past 18+ months had raised the bar of market expectations and at ~35x P/E arguably is not pricing in much top line uncertainty or execution risk. Shares closed (4)%. Shifting from top line to bottom line in the hunt for upgrades For now, SAP''s equity story is shifting from the top line cadence of beat-and-raise towards cost-driven EPS upgrades. Q2 was the first sign of this pivot. We now see up to 10% upside to Cons EBIT / EPS (we raise 2026/27 earnings estimates today) as SAP leans on further cost efficiencies. No bad thing in our view. Over the next 12 months we anticipate a return to growth upside as AI / Joule and Business Data Cloud catalysts become more tangible and apply upward pressure to 2027-30 growth expectations. While new capital may first seek reassurance on the risk of macro headwinds, we see scope to take advantage of the pullback to buy into EPS upgrades on the way. SAP using 2025 buffer in EBIT guidance to further steepen the margin trajectory in 2026/27 We update estimates post-Q2: we remain at the low end of the guided 2025 Cloud Revenue growth range at 26.0%, despite the Q2 outperformance, given the caution in the outlook commentary implying slightly slower H2 on softer pipeline conversion. We trim 2025 EBIT by 4% as we now assume some additional workforce optimisation in Q3 (cash impact in 2026) but remain ahead of FY guidance. As indicated by Co. this would be absorbed into FY guide, reinforcing the notion SAP is running well ahead of its guidance with room to take out further cost even if incurring charges to do so. In turn that should aid 2026/27 EBIT trajectory which we raise by 3-4%...
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Q2: in line CCB while Cloud Revenue, EBIT, EPS and FCF all beat. FY guide unch. CCB +28% ccy, in line with expectations and on track for Co. FY indication of a slight deceleration. Cloud Revenue accelerated 2pp sequentially to 27.6%, a relief after Q1 and comfortably back within the FY guide range (26-28%) driven by a 1pp Cloud ERP acceleration despite further softness in transaction / volume apps. On the cost side SAP continues to deliver ahead of expectations: adj. EBIT landing +6% vs. Cons and growing 35% in Q2 / 45% H1 vs. FY guide 26-30% (all ccy). Q2 EBIT was in line with our estimate as net hiring was kept broadly unch. as we flagged as possible in our Q2 preview. FCF also beat by 40% (30% ex-restructuring phasing). FY guidance unch. However incremental caution in SAP commentary weighs on top line resilience halo Despite the overall solid results, Cloud Revenue relief, earnings and FCF beats the US ADR traded down 2-3% after hours. We sensed an added layer of conservatism in SAP''s commentary, with the economic and geopolitical environment now having some tangible impact seen in delayed customer decision making in Q2 particularly in US Public Sector (new) adding to some existing softness in Manufacturing markets. While the pipeline commentary was positive - coverage remains as strong as last year - it was the comments on reduced deal conversion visibility hinting SAP''s ''cloak of invincibility'' against the economic backdrop may be starting to wear thinner which was notable. Prudence or caution? Valuation could see market tilt to the latter for now, despite EPS upside. As we flagged in our Q2 preview , near-term SAP shares may be temporarily confined to Cons EPS revisions on cost efficiency in absence of Growth ''beat-and-raises'' until AI and Data Cloud upside moves into view: we anticipate upward Cons EBIT revisions closer to our estimates sitting 5-7% higher in FY25/26 after another solid EBIT beat and conservative looking FY guide. However...
Ahead of our Global Quarterly Software Reseller survey, we here highlight key datapoints and takeaways for SAP. Note that SAP will report Q2''25 on Tues 22-Jul after US market close. Our Q2''25 preview is linked here. Software market trend for next 3 months improves for SAP and rest of peer group SAP spend score improves on a Next 3-month basis, inflecting from April sequential deterioration as tariff-driven uncertainty had weighed on enterprise IT spending. We note the magnitude of the spend score recovery slightly lags the rest of the peer group - on a Last 3-month basis, SAP spend score is flat vs April (vs peers increasing from 0.8 to 1.7); on a Next 3-month basis, SAP spend score increases from 2.2 to 2.6 (vs peers increasing from 1.1 to 2.5). More SAP resellers running in line with spending plan The proportion of SAP resellers running in line with spending plan jumps 50% in July (from c.35% in April) on a Last 3-month basis, with fewer running below plan. The overall proportion of resellers running above plan is flat, but with a wider dispersion of responses - interestingly, the 10% running 20% above plan in April has flattened out to 0% in July. On a Next 3-month basis, the data also shows a tightening of dispersion in responses around the mid-point (ie ''in line with plan''). SAP to report Q2''25 results on 22-Jul after US market close We think SAP can deliver a beat on earnings on a rarely lowered near-term bar of expectation. The shares have underperformed in the last month or so as investors cite a lack of near-term catalysts, FX and FCF headwinds to drive negative Consensus revisions and a preference to play AI in Software via AI infrastructure / consumption vendors near term. We expect focus in Q2 to be primarily on Current Cloud Backlog (CCB) growth (we expect Q2 to be the first deceleration to 28% ccy), as well as Cloud revenue performance (growth had slipped in Q1 to 25.6% vs FY guidance of 26-28%), adj. EBIT (we see c.5% upside to...
We publish the fifth and final piece of our Survey of 100 Software Buyers globally In our first report (see link) we published a summary of key findings in terms of spend intentions (down y/y in the US but flat in Europe) and category prioritizations (AI and GenAI leading priority areas). In our second report (see link) we focussed on results in the Platform and Data categories with Microsoft leading the way, but Databricks making significant improvements and gaining ground on Amazon and Google (and leapfrogging Snowflake in Data warehousing). In our third report (see link) we provided results for GenAI related questions with Microsoft and OpenAI dominating results across infra and apps (and LLMs). In our fourth report (see link) we focussed on Apps and SaaS where SAP flexed its increasing back and mid-office dominance as the ''suite part of the cycle'' takes over for ''best of breed,'' with Salesforce and Microsoft strongest in front office and productivity. We now look at IaaS and Cloud migration, which may be reaching a mid-way point In today''s report, we show cloud migration continuing - with 54% stating they are running more than half of their workloads in the cloud, up 10pp y/y. Cost, performance, and security are the main drivers. Microsoft retains the lead as the ''preferred IaaS provider'' but Amazon has re-captured some ground. Oracle has now moved solidly into the #4 preferred IaaS provider position with 12% now using OCI, up from 6% last year. Hybrid Cloud continues as a theme with 71% using multiple IaaS providers. Company specific scores. And the winner is: Microsoft on top; IBM at the bottom Finally, we asked 100 Software Buyers about incremental spending intentions this year by vendor for ~20 software vendors. Microsoft saw by far the strongest scores with 67% saying they would increase spend (although down y/y) with IBM at the bottom of the list (only 7% saying they would increase IBM spend). Some surprises in between: Databricks is now...
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SAP to report Q2''25 results Tuesday 22-Jul after US market close SAP shares are +8% ytd, outperforming the European peer group but underperforming broader European equity market and Global Software peers (IGV) both +11%. Investors cite a lack of near-term catalysts, FX and FCF headwinds to drive negative Consensus revisions and preference to play AI in Software via AI infrastructure / consumption vendors like Oracle, Microsoft and Snowflake. As a result the set up into Q2 is ok in our view. We expect in-line Revenues but see scope for a 5% beat on earnings that could help reverse the mid-single digit % Consensus cuts since Q1. We expect in-line Revenue / Backlog, but see upside to EBIT / EPS once again In primary focus will be Current Cloud Backlog (CCB) growth, where the first deceleration to 28% ccy is expected (updated analysis within). Cloud Revenue is expected to return to 26-28% growth range guided (FY) as Q4 deals ramp and catch up. Our new analysis on SAP''s opex points to ~5% upside to Q2 Cons adj. EBIT in our estimates, following the 8-9% beats delivered in Q4/Q1. We also refresh our FCF analysis which 1) drives 7% cut to our 2026 FCF to EUR9.8bn and 2) indicates Consensus has yet to fully digest the cash tax / transformation incentive vouchers / FX headwinds to 2026 FCF, though we sense investors have already adjusted their expectations here. Efficiency-led earnings revisions are ok while we wait for Data Cloud and AI growth upside We update estimates keeping growth assumptions unchanged, though FX drives low-single digit % downgrades to our PnL estimates, while the cash headwinds above drive a 7% cut to 2026 FCF. We see SAP driven by marginal EPS upgrades from continued improved efficiency until the market rolls forward to 2027 where we think a fresh cycle of growth upgrades can begin as Business Data Cloud (Databricks partnership) and GenAI (Joule) start to contribute and rekindle the market''s excitement for the story. Our EUR320 TP unch....
What happened? We spent last week and this week meeting with investors in New York, San Francisco, London and Paris (including our usual US holiday lunch in London). Below, please find feedback on what ''you'' the investor is thinking as summarise views we hear across our US Software Largecap coverage. BNPP Exane View: Accenture - Investors are either not interested in IT services or believe Accenture needs to bring down FY''26 consensus. The only question is: will it be tomorrow, or in September?'' - Sentiment long only: bearish - Sentiment hedge fund: bearish Adobe - We were surprised how many investors have said they have given up on Adobe altogether, with many investors telling us they have even taken Adobe off of their Bloomberg screens! - Sentiment long only: bearish - Sentiment hedge fund: bullish (before results, now likely less so on lack of ARR growth upgrade) Alphabet - Many investors believe the stock is too cheap, Gemini 2.5 is impressive, and the product cadence has improved, BUT are worried about (take your pick) Search Chat GPT disruption, Chrome sale, Apple default loss, Regulatory uncertainty. - Sentiment long only: bearish - Sentiment hedge fund: bullish (on near term revenues and a window where Google may still have strong Search and also start monetising AI search before the competition) Amazon - This was an investor darling last year on margin improvements. While still positive, investors are frustrated that tariff noise has interrupted the margin story, for now. - Sentiment long only: bullish - Sentiment hedge fund: bullish (but not as much as last year) IBM - With the stock ticking higher seemingly every day, without earnings revisions, investors keep asking what is driving the re-rating. - Sentiment long only: bearish - Sentiment hedge fund: bullish Intuit - Investors find Intuit a complicated story. It was nice to see the Turbo Tax Live perf in Q3, but where does the stock go from here. ''What is the story?'' - Sentiment long...
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SaaS integration with Data and PaaS to become increasingly important in an Agentic AI world Today we publish the fourth part of our Annual BNP Paribas Cloud Scanner Survey where we survey 100 Software Buyers globally (50% in EMEA, 33% in North America and 17% in APAC). In our first report, we looked at the headline survey results indicating weaker IT spend this year, but with GenAI becoming a real priority spend area. We then published the results of our GenAI questions, as well as our PaaS / Data questions, both showing Microsoft with clear leadership, but with 50%+ of respondents indicating they would spend less on SaaS as they eventually spend more on AI Agent consumption. Today, we publish the results of our Applications / SaaS related questions. In the heart of the ''suite part of the cycle'' as Cloud migrations continue One of the drivers of our Outperforms on SAP and Oracle was our view that the software industry was moving away from a preference for ''line of business'' pure plays to integrated suites. Less than 15% of respondents now prefer ''best of breed'' with 75%+ saying pre-integrated suites are important. Consumption based pricing continues to grow in preference to subscription. CRM is now the most mature Cloud category, with the next apps to move to cloud being Office of the CFO and Supply Chain. 46% of respondents expect to change FINS provider when they move to Cloud (up from 42%.) SAP king of back office. Microsoft and Salesforce hold leads in front office categories SAP, Microsoft, Oracle, Workday maintained their 1-4 ranking in Cloud FINS (with SAP extending its lead), while SAP, Workday, Oracle ranked 1-3 in ''Office of the CFO''. In HCM, SAP SuccessFactors has nearly caught up to Workday, while Oracle and UKG also showed progress (Microsoft lost some ground). SAP also remains #1 in SCM/Procurement, despite losing some ground to Microsoft and Coupa. Salesforce held its share on CRM (extending its lead over Microsoft). Microsoft held...
Speaker: Christian Klein, CEO What we learned: . Macro / Tariffs: core S/4 migrations remain resilient and the disruption created by ongoing trade headlines is accelerating customer discussions on supply chain and inventory data management cross-selling opportunities. . Innovation/ product remains high on the agenda, SAP opening the data layer of data warehouse estate, together with data cloud and agentic AI. SAP believes the opening of the data ecosystem will help it to cement SAP as a leading platform vendor and continue to win back share from single point solution providers. . Sovereignty: recent partnership with Capgemini/ MistralAI are responding to customers'' desire to have a sense of ''sovereignty'' across the tech stack. SAP remains independent across both infrastructure and Large Language Models and believes this brings flexibility and choice both to itself and its customers. . Operating efficiency: SAP continues to see SandM intensity as a big driver of operating efficiency together with internal use of GenAI. Co. does not see any structural factors limiting its ability to move more in line with best in class peers in terms of operating efficiency, while expanding their reseller channel ecosystem efforts should further help the go-to-market efficiency. . Partnerships vs. acquisitions: Co. to retain full agency on core applications/ business, while partnerships are a strategic option for other adjacent fields / technology white spots. There was no commitment around use of future cash at this stage (unch.). Overall tone: Overall we felt the tone was confident on SAP''s ability to sustain attractive growth with increasingly efficient internal operations driving continued margin expansion and cash generation, with resilience in the current environment remaining in place.
2025 Software buyer survey shows weaker US spend intentions; Cloud momentum continues Today we release the headline results of our 5th Annual BNP Paribas Cloud Scanner survey of 100 Software buyers, with 50% based in Europe, 35% in the US and 15% in APAC. We ran our survey in April to ensure we captured beginning of year budgeting changes. Our survey showed deterioration in overall IT spend intentions in the US, flat results in Europe, and some improvement in APAC. Cloud penetration has continued to increase with 46% of respondents now running mostly/entirely in the Cloud, up from 35% last year. 67% expect GenAI to accelerate their Cloud and digitalisation spending, up from 53% last year. AI and GenAI remain the stand-out spend intention areas, followed by Analytics / BI When asked to rank their spend priorities by category, buyers selected AI/ML and Cybersecurity as most important, while HCM was ranked the least important category. We also asked buyers to indicate their spend intentions by category. AI/ML and GenAI were indicated as seeing the largest y.y. growth across all geographies, though growth expectations decelerated slightly from last year. Financials/ERP was the only category where spend growth intentions accelerated vs. 2024. Other back-office app areas, such as Office of CFO, HCM and SCM, remained weak. US Largecap Software impact. Continue to prefer AI / GenAI monetisation exposure We will continue to publish results of our survey over the course of June, including more specific company results. For now, we believe the strength of AI and GenAI demand bodes well for those companies most exposed: we would highlight Alphabet (Google Cloud), Amazon (AWS), Microsoft (Azure), Oracle (OCI) and Snowflake for data platforms and infrastructure, along with Salesforce, SAP, ServiceNOW (and Microsoft) for applications/agents. Salesforce was also highlighted in our AI Agent expert access call on Friday with the CTO of a global IT Services company...
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We attended SAP Sapphire in-person in Orlando, FL over the past three days including the Financial Analyst Conference, keynotes from SAP executive board members and customers, seminars on SAP''s new technology innovation and discussions with partners. No new mid-term ambition, but plenty of ammunition to fuel new debates The two headline takeaways for markets to consider were; 1) SAPs comfort in talking to sustainable mid-teens % Revenue growth rates, and 2) commitment to achieving ''Rule of 40'' profile. Market expectations bake in 13% peak growth normalising to 10% by 2030, and ''Rule of 40'' (Growth + FCF margin) reaching no higher than 38% (2028), indicating 30% upside potential to mid-term FCF estimates. While SAP did not formally issue a new mid-term ambition, as some may have hoped, this new ammunition to fuel the debate should resonate well, in our view. If SAP needed new legs to the equity story we now have it: Data, AI, (more) efficiency. Our key takeaway from an innovation standpoint is: SAP is rapidly evolving into a leading technology provider encompassing Data and AI, added to its Application heritage. The message on operational efficiency has never been clearer (or louder), with evidence now visible in financials. Time for markets to revisit 2030 horizon with a wider variance in possible outcomes. Sustaining Revenue growth of mid-teens % has not been part of the debate to date, rather a focus on the growth peak and deceleration curve over time. Should the market begin pricing that growth potential, together with the continued impressive margin expansion, the outcomes start to close in on our Blue-Sky scenario assumptions of 14% Revenue CAGR and Rule of ~45% (and EUR450 2-year share price scenario). There remain moving parts to consider: SAP shifting to a Data / AI led company is a step change, and there is a possible question mark on 2026 FCF, but with the market seeking additional catalysts for the equity story beyond the S/4 cloud...
What happened? We are attending SAP Sapphire in Orlando, FL (19-21 May). Day 1 consisted of SAP booth tours, product demonstrations and booth visits including Capgemini, Syniti (acquired by Capgemini), UiPath and Databricks. SAP Sapphire Day 1 highlights: . Agentic AI: our discussions with SAP representatives on the Agentic AI landscape expanded into a multi-agent ecosystem, the ''Agent2Agent protocol'' / A2A Protocol (https://a2aprotocol.ai/) and where SAP can operate in such an ecosystem. A2A Protocol is an open standard that enables AI agents to communicate and collaborate across different platforms and frameworks, regardless of their underlying technologies. Similarly, the significance of the Model Context Protocol (''MCP''), an open protocol that standardises how applications provide context to LLMs. MCP provides a standardised way to connect AI models to different data sources and tools. . Business Data Cloud (''BDC'') / Business Warehouse (''BW'') / SAPDatabricks: we discussed with SAP representatives the journey customers face to leverage their BW estate: transitioning their legacy on premise SAP data warehouse with large, valuable data and business logic into a Cloud environment to leverage SAP Datasphere as well as integration with Databricks. We also discussed with Databricks representatives the opportunity in partnering with SAP. As we outlined in our recent deep dive report (Beyond 2025: Laying it (Data)brick by brick) we view the Data Cloud opportunity as a whole as a significant one for SAP, including the recently announced Databricks partnership where we highlighted the scope for this to add EUR1bn in incremental revenues by 2030. . Product demos: we experienced live demonstrations of SAP''s GenAI Copilot ''Joule'' in action for Sales, FPandA, Human Resources use cases, together with Joule Studio (link) where customers can extend Joule capabilities into micro services-type agents within the master Joule Copilot with no-code tools for...
As SAP''s 5-year strategic turnaround reaches its summit, we look into what the next 5 years could bring -we see building blocks for a potential new billion-euro opportunity. SAP''s unique enterprise customer base with giant legacy data estates has been crying out for a Data Cloud home. That''s where Databricks comes in. We think this landmark partnership can deliver EUR1bn in revenues by 2030 - or +150bps revenue growth impact in a Bull case. In this report we break ground on potential scenarios. The upcoming Sapphire event is a chance for SAP to provide a framework for the opportunity and lay out a blueprint for a new mid-term ambition. We reiterate Outperform and lift our TPs to EUR320/$355. Our bull case sees 70% upside.
Cloud Backlog relief amid tariff uncertainty plus earnings upside drives shares +11% Helped by lowered buyside expectations amid recent tariff-induced nerves, SAP''s CCB growth sustaining +29% CCB was the key headline and source of upside to the shares. This coupled with a strong earnings print coming in ~10% above Cons and even slightly above our estimates highlighting SAP''s ability to drive operating leverage. Cloud Revenue growth missed expectations, but was outweighed by the generally solid set of results helping the shares rally +11% on the day. Just like Q4''24, Q1 was solid, this time lowered valuation hurdle sees more positive reaction We expect the market to carefully monitor the Cloud Revenue outlook to ensure the Q1 disappointment can be righted. SAP''s core S/4 product upgrade cycle remains remarkably resilient, though some softness is visible around the edges (transactional apps plus LoB cross-sell). We anticipate some Cons EPS upgrades despite FX headwinds to come on stronger margins. SAP navigates challenging Q1 backdrop. Eyes ahead to May CMD as next catalyst. Q1''25 was the sternest test of SAP''s resilience to the broader economic environment in recent years, which it passed with a strong CCB, earnings and cash flow showing. Like Q4''24 however this was not a clean sweep, this time the Cloud Revenue deceleration and slight miss vs. expectations adding risk in relying on a reacceleration to meet FY25 Cloud Revenue guidance. We remain confident SAP can more than protect earnings and cash flow, evidenced by running at twice the EBIT growth guidance at Q1, but its premium valuation and resilience vs. peers to date requires sustained execution on the top line as well. SAP will host its annual Sapphire event and CMD 19-21 May. We expect the focus to be on 1) the recent Databricks partnership and helping size that opportunity and 2) scope for a new mid-term plan (current 5yr plan expires this year). We update estimates, trimming 2025 Cloud...
Backlog beats lowered expectations, Cloud Revenue misses, Earnings / FCF power through Current Cloud Backlog (CCB) delivered 29% growth ccy, the key headline in the print in our view given its sensitivity to near term demand fluctuations. Over the past month investor expectations had moved lower here given the tariff instilled uncertainty rippling through the global economy, and the +29% should now be taken positively, helping the US ADR shares jump +9% after hours. Cloud Revenue decelerated sequentially and came in below expectations, now requiring an acceleration through the year which adds risk, though Co. commentary was reassuring on revenue phasing to drive a re-acceleration as soon as Q2. Earnings and underlying FCF all beat by 9-12% demonstrating both powerful operating leverage and cost adaptability in the current environment. Overall a robust print, paired against the recent ~20% share price pullback should be well received. Conf call takeaways: core resilience and cost flexibility Co. acknowledges economic backdrop but still sees core S/4 product upgrade well insulated from external risks and Business Data Cloud kicker still to come. Some signs of economic uncertainty starting to show around the edges, contributing to slight Cloud Revenue miss but deemed manageable in current environment. We continue to see plenty of room in SAP''s opex envelope to deliver EPS upside this year, as evidenced in Q1, with a strong Q1 FCF helping alleviate investor concerns flagged earlier this year, though we expect it to remain a debate. SAP remains well positioned to drive EPS upgrades. Next up: Sapphire / CMD. Reit. O/P. SAP has outperformed ytd (6)% vs. IGV Software (15)% but since Feb highs has performed in line, both c.(20)%. At EUR220 SAP trades on 29x P/E and 4.0% FCF yield (BNPP 2026) for 20% EPS CAGR in one of Global Software''s most compelling multi-year equity stories with more macro resilience than most. We continue to see the near-term share price...
Alongside our Global Software Reseller Survey published today (here), we here highlight the key datapoints and takeaways for SAP. Note, SAP will report Q1''25 on Tue 22-Apr after US market close. Our Q1''25 preview is linked here. Overall Software market trends show deterioration over January survey, including for SAP The Total peer group Net Spend score has deteriorated for April vs. January, on both a Last 3-month and Next 3-month basis. SAP''s score has moved broadly in line with the peer group, showing some sequential deterioration. SAP''s Net Spend score remains above the peer group on both Last and Next 3-month basis, as has been the case now for four consecutive quarters since Jul-24. Fewer SAP resellers running above plan, and more running below plan in last 3-months Digging in more detail on a Last 3-month basis, 1/3 of reseller respondents are running below plan (up from just 13% in Jan) and now 1/3 of reseller respondents are running above plan down from over half in January. On a Next 3-month basis the data is relatively more stable, with a tightening of the dispersion in responses around the midpoint (in line with plan). Economic uncertainty around global tariffs to bring sternest test yet of SAP''s resilience. SAP will report Q1''25 on 22-April after US market close, see our Q1''25 preview for details. If indeed demand has been impacted ytd it should be visible in Q1 Current Cloud Backlog (CCB) growth which has been running at 29% last two quarters. Note SAP has indicated 2025 should see a ''slight deceleration'' from the Q4''24 exit growth rate of 29%. As of March we sensed Buyside expectations were to sustain 29% in Q1 with the deceleration to come later in the year, though this may have moderated some since then given global tariff news and market volatility. SAP shares sit c.20% below Feb highs with minimal Cons EPS revisions, pointing to a de-rating back to 30x P/E (2026 inc. SBC). SAP has proved to be defensive in recent times, Q1''25...
With pressure on the Tech sector intensifying with President Trump unleashing tariffs global, increasing concerns around the macro economic growth outlook in the process, we activate our Technologist to look at Large Cap US Software valuations and earnings expectations in order to identify potential areas of continued pressure, as well as potential safer corners of the sector. US Software valuations have compressed to 22x EV/EBIT, near their 10 year averages. We still see ~15% valuation downside potential (from the end of Q1) should the sector fall to the lower end of its more recent range. While historically, downside has mainly come from valuation multiples as cost cutting has preserved margins, we believe earnings downgrades are more likely in this downturn as Software companies enter the downturn with much higher margins following the year of efficiency. Overall, we would prefer enterprise exposure (Oracle, Microsoft and SAP), committed AI backlog exposure (Microsoft and Oracle) and selected attractive valuations (Alphabet and Salesforce). We would avoid stock where estimates likely need to be cut the most like Meta where the market still expects 15% revenue growth over the next two years despite 98% of revenues still coming from advertising, with ramping depreciation costs. We would avoid stocks likely to absorb a margin hit due to tariffs, namely Amazon. And we would avoid stocks still trading on high multiples relative to the sector, like ServiceNOW.
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SAP to report Q1''25 on 22-April post-US market close We expect a continued focus on Current Cloud Backlog growth which exited 2024 at 29% and is indicated to ''slightly decelerate'' exiting 2025, we sense investors expect flat 29% growth in Q1 and the deceleration to come later in the year as comps get tougher. Cloud Revenue is expected to accelerate slightly, BNPP 27.5% / Cons 27.9% from 26.7% in Q4 as mix effect, lapping Ariba fee changes and the strong Q4''24 backlog convert to revenue (all in ccy). We expect Q1 FCF to be impacted by 1) remaining EUR700m cash restructuring charges and 2) some early receivables pulled into Q4''24 hence our Q1 FCF is EUR200m below Cons (8%) though we are slightly ahead for FY25. 2025 cost efficiency to drive earnings upside. Second glimpse to come at Q1 A sizeable number of employees set to leave as part of the 2024 restructuring programme had not done so by year end, we believe this could be as much as ''a few thousand'' people that should depart in Q1. We see upside to Q1''25 Consensus earnings (BNPP +7% vs. Cons). Recall SAP beat on Q4 EBIT by 8% despite an unusually large SandM expense increase. We increasingly see the near-term SAP story driven by margin / earnings upgrades as the benefits of the 2024 restructuring and go-to-market reorganisation feed through. We will therefore closely monitor the total Opex envelope compared to the ~EUR15bn seen in FY24 (ex-SBC). Our above-Cons 2025 EBIT still assumes a ~EUR400m increase y.y. We also update FX which weighs on reported Revenues / EPS by ~1% given the recent $ depreciation. Recent pullback creates opportunity as attractive multi-year equity story remains SAP started 2025 brightly but has traded down in line with Global Software peers in recent weeks. Now back towards ~30x P/E and 3.5% FCF yield we see an attractive entry point if SAP can prove (again) its macro resilience on the top line and cost efficiency upside on the bottom line, as we believe it can. We keep our...
Debut BNPP Exane TMT conference in London sees 48 corporates and 250 investors attend. Software and IT Services feedback We hosted SAP, Amadeus, Sopra Steria and OVH in this sub-segment of TMT. Individual feedback reports from the conference can be found here: SAP , Amadeus, Sopra Steria, OVH. In this report we provide a ''sector wrap'' of the Software and IT Services companies hosted. The key topics discussed for each Company were: SAP; Business Warehouse / Data Cloud opportunity and cost efficiency, Amadeus; readx from the three US airline warnings on the day and revenue p/booking outlook in Air Distribution, Sopra Steria: its defence exposure and growth drivers in H2''25, and OVH: sovereign cloud opportunity and RandD roadmap. Date for your diary: Mon-Tue 9-10 March 2026. After a successful debut TMT conference held in London last week, we have pencilled in 2026 already. Next year will be even bigger. Thank you to corporates and investors for helping make the event a success.
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What happened? We hosted SAP COO Sebastian Steinhaeuser and IR Ulrich Wolf at our TMT Conference in London. BNPP Exane View: Global investor interest in SAP remains high with today''s group meeting discussions centred on Business Data Cloud and Group cost efficiency. The market backdrop remains cautious with the Nasdaq today having its worst day since 2022 (4)% and the Software ETF (IGV) (5)% today, extending recent declines now (18)% since 18-Feb. Key discussion points from the day of group meetings with SAP: . Business Data Cloud (BDC): was the main topic of discussion, largely focused on the opportunity of BW modernisation (''Business Warehouse'') within Business Data Cloud (BDC). Mr Steinhaeuser sees the BW Cloud opportunity ''at least as large as the ERP opportunity'' in terms of data scale. SAP Business Data Cloud is for current on-premise SAP Business Warehouse customers the route to the cloud to maximise existing BW estates with the latest products and AI capabilities. Given SAP effectively used to give away BW the incremental monetisation opportunity here is sizeable. For context 95% of RISE customers moving their ERP to S/4 Cloud have not yet moved their BW to the Business Data Cloud, highlighting how nascent the opportunity is here: . Cost efficiency: the second most popular discussion topic. Mr Steinhaeuser has led the go-to-market reincarnation since mid-2024 and highlighted the scale of simplification, realignment and efficiency measures undertaken. Two things stood out to us: 1) Efficiency: with current mid-20''s % SandM intensity (as % Revenue inc. SBC) viewed as ''unacceptable'' the intention to reach 15% over the mid-term is clear, citing peers Microsoft and Oracle as references. This would indicate ~10pp of potential margin expansion from SandM efficiency alone over the mid-term. N.B. BNPP est. 2030 Op margin 34% / EUR23bn EBIT embeds 20% SandM intensity. Achieving 15% in that time - all else equal - would indicate ~15% upside to our 2030...
SAP reveals Agentic AI, Databricks partnership and extension to non-SAP data domains Today SAP hosted a virtual product event where there were three product highlights: 1) Business Data Cloud to bring together SAP and non-SAP data for AI/ML and analytics purposes, extending the domain of SAP''s capabilities beyond SAP-native data for the first time, 2) expanding SAP''s GenAI copilot offering ''Joule'' to agentic-AI and the ability for customers to create their own copilots using no-code development based on SAP Joule Copilot, and 3) the Enterprise Data Management partnership with Databricks (details below). Finally there was a training / upskilling initiative launched with Accenture during the event. Databricks partnership a compelling offering and a key piece in the SAP puzzle The Databricks partnership is the main highlight for us. SAP already has among the broadest and deepest corporate datasets within its ecosystem of applications, and this partnership with Databricks can now extend this to non-SAP domains using Databricks'' best-in-class Data Intelligent Platform. This addresses a key market pushback where we have noted concerns that SAP''s data and AI capabilities risk confinement to the SAP ecosystem, thus limiting their scope. With this partnership SAP continues to move at pace, ensuring it leverages its unique advantage in enterprise data breadth and depth while partnering with key industry leaders on LLMs, deployment and now the data cloud market. Little in the way of new financials, for now; next up Sapphire / CMD in May As expected, today''s event was product-focused. We anticipate detail on financials and monetisation of these product announcements at the upcoming CMD at Sapphire (19-21 May). We see much of the GenAI monetisation landing in SAP''s PaaS offering (Business Technology Platform) which we laid out as a EUR16.5bn opportunity by 2030 in our recent deep dive report (link). We continue to view the CMD as the next major catalyst,...
SAP delivered a strong Q4 and a raise to 2025 growth and profit guidance, but ultimately this was met with a muted reaction due to a noisy FCF outlook, highlighting how high the bar was set. SAP sees strong end to 2024 with top- and bottom-line beats Q4''24 highlights were the +29% Current Cloud Backlog (CCB) growth above the targeted +27% and buyside expectations 27-28%, demonstrating a solid end to the year closing deal pipeline. Cloud ERP growth sustained its mid-30s growth rate in H2, also paving the way for a strong 2025 growth outlook. Q4 adj. EBIT beat Consensus by 8%, in line with BNPP estimates. But market ignores Cloud Revenue guide raise as ''noisy'' FCF outlook disappoints We had anticipated a raise to the 2025 EBIT guidance, delivered to the tune of 4% at the high end confirming 30% earnings growth (EUR) is targeted for 2025. The Cloud Revenue growth raise was not expected (to 26-28% growth or EUR21.6-21.9bn ccy) and was a key positive. This was offset by an unchanged EUR8bn FCF guidance which appears to imply softer cash conversion vs. 2024 given the higher EBIT guide. We worked through the numbers and see potential upside to that EUR8bn (detail within) assuming stable underlying cash conversion adjusted for one-offs. Some debate on the ''Extended extended'' maintenance was also present, with mixed sentiment among investors. Looking through the noise to better growth outlook and EPS upgrades. Reiterate Top Pick. SAP has had quite the run, and the bar moved ever higher with each turn of the share price and valuation multiple. The shares swung as much as (5)% intra-day before closing broadly flat, in line vs. SX8E. When the dust settles, we see near-term EPS upgrades, continued execution and significant mid-term upside to Consensus driving the shares from here. SAP is a rare Global GenAI winner without compute capex risk, with a product upgrade cycle and margin expansion story in full swing. We continue to expect the shares to outperform and...
What happened? SAP''s FY24 conf call and sell side group call have just concluded pre-market. BNPP Exane View: Additional detail on key moving parts including CCB growth and FCF conversion helpful in the context of investor debates this morning. Plenty of supportive datapoints around GenAI adoption and demand trends strong overall. Key Highlights: . Demand: Co. seeing sustained strong demand and x-sell motion, citing the number of customers buying 4 solutions has doubled over 2021. Furthermore, SAP indicated its win rates are increasing in its LoB applications against best of breed point solutions as customers opt for vendor consolidation and buying a single platform (in line with trends from our CTO surveys over recent years). SAP has expanded the RISE offering across the whole SAP toolkit now including LeanIX, Signavio, and WalkMe applications. SAP indicated CCB growth should ''slightly decelerate'' in 2025 vs. the +29% Q4''24 given the larger base, we would estimate by 1-2pp at this stage. . GenAI: AI is embedded in 50% of current order entry, and Co. went out of its way to highlight the benefit it will see from ''progress in the LLM space'' (referring to DeepSeek newsflow in recent days). Co. has delivered 130 GenAI use cases and 1,300 skills on its Copilot Joule. Joule for developers and SIs is also seeing strong traction and aiding the upgrade process for customers. SAP cites 20x productivity uplift in ''quote to cash'' automation through the SAP GenAI Hub. . Costs: SAP expects to soon reach EUR500m run rate in savings from embedding GenAI internally, mostly seen in RandD and Sales motions. The go-to-market transformation is in full swing and driving the majority of the EBIT margin uplift from here (2024 SandM inc. SBC was EUR8.9bn or 26% of Revenue). 2024 SBC was higher than expected at EUR2.4bn owing to the combination of the share price rally and an additional employee incentive plan. This should normalise in 2025 according to Co. but did not prevent SAP...
What happened? SAP reported Q4 / FY24 results (pre-market), the headlines are: Q4 beat across the board, FY24 coming in line / above guidance and consensus and FY25 guidance raised on Cloud Revenue, EBIT while unch. on FCF. Conf call starts 0600 UK / 0700 CET / 0100 ET. BNPP Exane View: Overall a very strong end to 2024 beating on all metrics and raising 2025 targets. The bar was high into results given the outperformance of late and the premium 35x P/E multiple. With that said we anticipate a positive reaction today particularly given the strong Cloud ERP growth and raised 2025 Cloud Revenue guide. We highlight the following: . Q4''24: 1) Cloud ERP +35% at ~EUR15.8bn annualised and sustaining the mid-30s growth seen at Q3, 2) Current Cloud Backlog +29% ccy beating the +27% target set at the start of the year and coming in ahead of buyside expectations (we noted 27-28%) and 3) adj. EBIT at EUR2.44bn +8% vs. Consensus and in line with BNPP ests. Overall a very strong end to 2024 beating in Q4 on every key line item. . FY24: SAP delivered +26% Cloud Revenue ccy vs. guidance 24-27%, adj. EBIT growth +26% vs. guidance of 20-23% and EUR4.1bn FCF vs. EUR3.5-4.0bn guidance. SAP has delivered double-digit group Revenue growth for FY24, a notable achievement in its Cloud transition that is now fully underway, with CEO citing half of its Cloud order entry including AI indicating strong adoption so far in our view. . FY25: SAP had existing 2025 mid-term ambitions in the market, and has now converted to formal FY25 guidance. Most notably we would highlight, 1) Cloud Revenue guided to EUR21.6-21.9bn raised by EUR0.4bn / 2% at high end implying 26-28% growth ccy (and 30% reported at high end), 2) adj. EBIT guided to EUR10.3-10.6bn raised by EUR0.4bn / 4% at high end implying 26-30% growth, 3) FCF guided to EUR8bn (on an updated definition around net interest and sale proceeds which indicates +EUR0.2bn impact before the additional EUR0.2bn restructuring charge now expected to fall...
What happened? On Friday we hosted Tom Dougherty, former MD at Accenture with over 20 years'' experience advising and implementing SAP ERP projects (among others). The call replay will be available on request. BNPP Exane View: Summary: Tom''s extensive experience ''at the coal face'' provided first-hand insight from the perspective of customers and partners on SAP''s product upgrade cycle and cloud transition. We came away with the following key conclusions: . Reinforcing why SAP''s product upgrade cycle appears to be de-coupled from the economic cycle: Tom''s first-hand insight on the extent of the customer planning across stakeholders (technical, strategic, operational, financial and even executive leadership) underscored the significance of the SAP upgrade / migration process that is almost unmatched in the software ecosystem. In our view, this helped articulate how SAP''s demand has remained resilient, despite the broader software demand environment seeing challenges over the past 12-18 months. Tom also outlined what SAP''s RISE initiative (launched Jan-2021) actually meant for customers, and why it was the necessary trigger to accelerate this process coordinating all of infrastructure, product, implementation and integration in a more structured format. . Why the music shouldn''t stop in 2027: As we recently wrote in our deep dive report (link) we think the market is focusing too much on the timeline to 2027, where SAP has imposed a deadline for customers'' legacy maintenance, with Group revenue growth expected to then decelerate back towards 6% by 2030 in Consensus estimates. Tom''s industry view supported our thesis that in reality the combination of a) capacity constraints in the partner / service integrator ecosystem and b) the lengthy migration timeframe (2+ years) should mean the upgrade cycle dynamics are in play well beyond 2027, and likely through 2030 in our view. We estimate SAP can grow Group revenue double digit % through 2029 and exit...
Shares are entering ''25 at all-time highs, and we sense investors need more to play for. After two slam-dunk years, the question is: can SAP''s hot streak continue? We''re calling for a three-peat: our new analysis shows there''s plenty left in the tank to power a third year of outperformance in ''25. And we think SAP''s winning strategy could deliver ''30 headline numbers 20% above consensus. We unpack the playbook for a longer growth runway, more cost efficiency and better cash generation. Our Top Pick in European Software, we raise our TP to EUR295/$304 to reflect the long-term potential upside. We see the Capital Markets Day in May as a catalyst to kick-start this new dawn of compounding. Also see IT SERVICES / SOFTWARE published today.
SAP clears growth hurdle(s) and upgrades EBIT and FCF guidance triggering upgrades Current Cloud Backlog and Cloud Revenue both delivered on the expected acceleration and Cloud ERP surprised further, delivering an impressive 36% growth (+3pp sequentially), now a ~EUR15bn annualised growth powerhouse. Furthermore SAP upgraded guidance again, by 2% on 2024 adj. EBIT and by as much as 14% on FCF. The shares reacted positively (+5% intraday) but faded to close +2%: we note increasingly frequent discussions on the 2026-2030 prospects as investors gradually see the shares pricing the 2024-26 upside and look for the next major catalysts beyond. Power of efficiency visible already, sets up well for 2025 Top line momentum remains resilient. However it was the cost efficiency that surprised us more with Q3 adj. EBIT / EPS beating our above-Consensus estimates by 3-6%. Despite hiring 2,200 people (net) SAP''s underlying opex declined sequentially in absolute EUR, highlighting the scope of the cost savings beyond headcount already becoming visible. That bodes well for 2025 when the bulk of the savings from the headcount departures will kick in and we continue to see upside to Co. EUR10.2bn adj. EBIT and EUR8bn FCF 2025 ambitions. Upgrades to Cons 2025/26 to drive near term, with new mid-term plan the next big catalyst We update estimates with 1-2% revisions across the board. We anticipate upgrades to Consensus estimates moving closer to ours (which have been consistently above market expectations in the past 2+ years). As expectations for 2025/26 converge and valuation better reflects this, we increasingly see the next major catalyst to arrive at 2025 CMD (May) where a new mid-term ambition may be provided to drive the next phase of the equity story. Until then the shares can continue to perform on incremental 3-8% upgrades to Consensus 2025/26 EBIT / EPS / FCF baked into our estimates with the shares trading on an attractive 4.2% FCF yield or 29x P/E inc SBC (2026)....
What happened? Following Q3''24 results (see: BNPP First Take) SAP hosted a conference call and a separate analyst group callback. SAP ADR shares were up 3-4% in after hours trading. We would anticipate a mid-single digit outperformance in Europe broadly in line with likely upgrades to Consensus 2024/25 EBIT/EPS/FCF estimates. BNPP Exane View: Overall a solid performance: Business demand remains resilient with trends in net new logo wins unchanged and large migration deal signatures improving, in line with our positive channel checks in our Q3''24 preview. We sense more investor ''relief'' on the top line - the source of most pre-results nerves - with upside surprise at the EBIT / EPS / FCF lines with healthy 6-10% Q3 beats and upgrades to FY24 guidance delivered that look promising especially in the context of 2025 expectations (BNPP 4-8% ahead of Cons 2025 EBIT and FCF). At 29x P/E or 4.1% FCF yield (2026) SAP may not be a bargain but with sustained execution, macro resilience and a path (in our view) to further upgrades to 2025 estimates we believe the shares can continue their run from here with the next major catalyst likely to arrive at 2025 CMD (May) where we anticipate a new mid-term plan to drive the next phase of the equity story. Key points: . Guidance: Co. raised ''Cloud and Software'' guide by EUR400m midpoint but Cloud Revenue growth guide unch. 24-27%, hence the raise was more driven by slower than expected decline in Maintenance/Support revenues at (3)% ytd. Cloud Revenue running on track at +25% ccy 9m''24 hence no revision to guide. . CCB: accelerated to 29% with 1pp from WalkMe acquisition so flat organic growth sequentially. Q4 faces tougher y.y. comparators and Co. still targeting exiting Q4 with 27% CCB growth that would put Co. on track for its EUR21.5bn Cloud Revenue ambition for 2025 even with a transactional/volume headwind of up to 1pp. . Biz momentum: overall remains robust. Co. still seeing net new logos contribute 40-50% of its...
What happened? SAP just reported Q3''24 results: the headlines are 1) the two key growth metrics met and beat expectations respectively with CCB growth in line with buyside at +29% (inc. 1pp from MandA) and Cloud Revenue growth above expectations at +27% vs. 26% expected (accelerating from +25% at Q2) and 2) SAP has raised its FY24 guidance for Op Profit and FCF as we had flagged in our Q3''24 preview we thought was possible: Op profit guide raised by 2% at the mid-point and FCF raised by as much as 14% at the new high end (by up to EUR500m). SAP ADR trading +4% in after hours. The conf call starts at 2300 CET / 1700 ET. BNPP Exane View: Overall a strong set of results and another guidance raise despite continued macro uncertainty demonstrating SAP''s resilience with this product upgrade cycle and strong execution on driving cost efficiency and cash conversion. While the CCB growth was only in line with buyside expectations, the 2pp acceleration in Cloud Revenue growth coming in above expectations will be taken as a relief as we sensed this was a concern of investors in the last two results. Cloud ERP growth accelerating by 3pp sequentially is also impressive now an annualised EUR14.5bn Cloud ERP asset growing at 36%. Despite headcount increasing by 2% sequentially (2,200 people) adj. Opex (ex-SBC) decreased sequentially in absolute terms by ~EUR175m highlighting the scope of the broader cost saving execution, driving the raised Op Profit guidance that we think should see 2-3% upgrades to 2024 Consensus. Note BNPP remain 4% ahead on 2025 EPS and Cons EPS could move closer to our estimates in our view. Finally the FY24 FCF guidance raise by up to EUR500m (now EUR3.5-4.0bn from ~EUR3.5bn) is up to 14% increased, and at the high end implied underlying FCF improvement by 5pp from prior guidance, which could again drive upgrades to 2025 Cons FCF assuming similar cash conversion where we are 8% above Cons. More details to follow in the conf call starting...
What happened? Today we publish the results of our Quarterly EuroVision Software Reseller Channel Check Survey, where we survey 25 resellers (~50% in Europe). We also publish the results of our proprietary quarterly Digital Advertising TRACKER. We also publish earnings previews for September quarter-end Large Cap Software and AI companies we cover, including Alphabet, Amazon, IBM, Meta, Microsoft, SAP and ServiceNOW. BNPP Exane View: Our Software Reseller Survey results were most positive for SAP and IBM (revenge of the legacy continues) They were Neutral for Google Cloud and ServiceNOW (will Neutral be good enough for NOW?) And disappointing for AWS and MSFT. (will this accelerate the continued shift away from mega caps?) Our Digital Ad TRACKER was Neutral for Alphabet and META. (is Neutral good enough for META?) For Alphabet, we also provide the results of our investor survey on what they are looking for from the new CFO (hint: more communication), as well as feedback from last week''s Google Cloud Summit that we attended in London. Software Spending Trends have improved from Q2 lows Last quarter, our survey results reflected the weakness than many Software (and IT Services) companies saw in Q2 with discretionary spend weaker, longer deal cycles, and more macro pressures, especially in Europe. The results of our October Survey indicate trends have returned to where they had essentially been for the past ~15 months (see chart below). From a Software segment basis, Cyber Security enters our Survey in top position. As a reminder, Andrew DeGasperi initiated on four Cyber Security stocks last week. That sector note is here: Mission Critical: Searching for AI Winners. BI, AI / ML, Public Cloud were the next most in demand categories. Workflow Automation, CRM and Data Warehousing all fell one to two steps. While Digital Advertising outperformed Software demand in H1, we see Advertising trends normalising as comps get more challenging, while Software...
SAP AMZN AMZN MSFT MSFT IBM GOOGL GOOGL META NOW NOW
SAP to report Q3''24 results Monday 21 October (post-US market) We sense heightened investor nerves as SAP approaches Q3 results trading at all-time highs but dogged by a string of negative news. We think Q3 will therefore be important to demonstrate that fundamentals remain intact, namely: core business demand resilience to macro softness (CCB growth) plus ability to deliver improved profitability (adj. EBIT growth/margins) and cash generation. We think a solid print can calm investor nerves and pave a path for upgrades to 2024/25 earnings and FCF expectations (BNPPE 4-5% above Cons EBIT/EPS/FCF). Puts and takes on key metrics: CCB, Cloud Revenue growth and adj. EBIT In this preview we explore BNPPE/Consensus/Buyside expectations: CCB growth and the MandA contribution debate (we estimate Q3 Buyside expectations at +29% ccy), Cloud Revenue growth (+25.7% Consensus, but we are more cautious at +24.4% on weaker volume/transaction revenue streams subject to macro environment and not seen in CCB) and adj. EBIT growth where we see scope for upside and even a possible FY guidance raise within our (broadly unchanged) estimates. We also highlight positive channel check data for SAP and re-cap recent mixed newsflow and highlight our views on each: leadership departures, DoJ investigation and employee morale. Elevated expectations maybe, but continued execution can maintain positive momentum The bar is set increasingly high as SAP''s shares continue their rally to all-time highs (+49% ytd). We continue to believe SAP''s product upgrade cycle will provide resilience to macro headwinds and that further efficiency gains can drive upside to near-term and mid-term EPS and FCF expectations. We remain 4-5% ahead of Consensus adj. EPS and FCF, delivery of which could drive the shares until a new mid-term plan is outlined (we anticipate at the May-2025 CMD) as the next major catalyst in the SAP equity story. We update estimates including for MandA but offset by additional...
What happened? Bloomberg reporting overnight SAP/Carahsoft price fixing investigation that first appeared last week could have a ''far broader'' scope than initially estimated. No further details have been provided however. BNPP Exane View: The immediate reaction last week to the first news reports of SAP / Carahsoft and a potential DoJ investigation saw the shares drop 4%, though had recovered over the next 5 days and extend beyond (before heightened geopolitical risks in Israel/Lebanon have led the market lower again this week). Given the limited information at this stage, simplistically we tether the near term share price sensitivity to the potential DoJ fine impact to SAP 2025e FCF (EUR8bn target). As a proxy SAP earlier this year settled its South African bribery case with the DoJ for EUR200m (case under previous Co. mgmt). For the shares to be down MSD % on this news we believe the market would be pricing in a EUR400-500m DoJ settlement or 2-2.5x the previous DoJ settlement. Share price risk: While this latest news update suggests the scope could be wider (implying risk of a larger potential fine) we believe the share price recovery last week after the initial move lower indicates investors'' more sanguine view on the case (for now) and we would see a low-single digit % downside risk today on the news. Investor sentiment: We had a lot of investor debate last week on this. Most concern was reputational / governance related and the potential risk to future US Govt sales (likely LSD % Group mix), rather than the quantum of a settlement impacting FCF. Co. Comment: SAP has thus far issued brief statements last week (see our previous communication for detail) simply stating it has been / is continuing to fully cooperate with authorities in the investigation. Bloomberg article (link): U.S. prosecutors are aiming to investigate business that SAP and tech reseller Carahsoft Technology have done with nearly 100 government agencies as part of a wider...
Strong H1''24 de-risks FY EBIT outlook, with underlying FCF upgrades encouraging Following our Q2 First Take here we update estimates post-Q2 and emphasise 1) 9-14% upgrades to our underlying FCF estimates FY24-25 with updated FCF analysis within, 2) continued upside to FY24 / 25 adj. EBIT guidance (even after the FY25 raise). We believe H1''24 indicates strong cost discipline ahead of restructuring benefits still to come and de-risks FY24, hints at upside to FY25 while the underlying FCF upgrades in the revised guidance point to improved cash conversion already that should be sustained in years to come and provide upside to FCF guidance too. KPIs and commentary highlight SAP''s relative resilience in the face of market uncertainty While acknowledging challenging sector dynamics SAP''s unwavering demand-related commentary in tandem with the better than expected Q2 CCB print indicated no signs of macro / end market softness, highlighting SAP''s relative resilience owing to its multi-year product upgrade cycle. Furthermore GenAI demand is booming: 1-in-5 Q2 deals including Premium AI use cases with 60 available ytd and 100 by year-end as the growing partner ecosystem scales up. Raising TP to EUR240 / $260 ADR on continued upgrades and execution We update estimates with negligible changes to Revenue, EPS but more notable FCF upgrades following Q2 developments mentioned above. We raise our TP to EUR240 / US ADR to $260 (from EUR225 / $241) using our Global Software Valuation Framework (unchanged approach) with our TP implying 1.6x ''PEG'' P/E to EPS CAGR (inc SBC), broadly in line with current Enterprise Software PEG valuations. SAP shares have performed well ytd (+41% vs. IGV Software ETF +6%) but we see upgrades to Co. guidance and Consensus estimates as well as continued execution to support the re-rating driving the shares from here. Reiterate Outperform and European Software Top Pick.
SAP passes concerns on relative demand resilience. US ADR shares +5% after hours. SAP delivered upside to more cautious Q2 investor expectations and raised FY25 EBIT target, helping US ADR shares +5% in after-hours trading. In our Q2''24 preview we highlighted the key leading indicator Current Cloud Backlog (CCB) growth as the primary focus: sustaining the +28% ccy seen at Q1 and was above investor expectations of a slight deceleration. Cloud Revenue was in line, while Cloud ERP growth accelerated to +33% ccy. Strong cost control drove an 8% adj. Op Income beat with FCF well ahead of expectations both de-risking FY24 guidance. Headline: SAP raises FY25 EBIT target. Detail: SAP raises underlying FY24/25 FCF. The headline raise of FY25 adj. EBIT to EUR10.2bn (from EUR10.0bn) on increased savings from a larger than expected take-up of its voluntary redundancy plan should be overlooked in favour of the more impressive underlying FCF upgrades to FY24/25 in our view. By reiterating FY24/25 FCF targets while absorbing an extra EUR0.8bn in restructuring charges, SAP is lifting underlying FCF targets by 6-9% and paves a way for similar Consensus upgrades to FY2026 FCF in our view. Relative resilience, upgrades to Cons estimates coming and undemanding valuation. SAP has been an outlier YTD: 1) shares are +33% vs. IGV Software Index +6%, and 2) so far has shown greater resilience in its Growth drivers against a backdrop of weakness from Software peers including disappointments from Salesforce, Workday, Dassault Systemes and further deterioration picked up in our most recent Reseller Channel Checks. We sensed some tactical investor caution into the print among both European and US investors which showed in our recent Know Thy Neighbour report. Put together the combination of a solid Q2 print, de-risking FY24 EBIT guidance, raising FY25 EBIT (and underlying FCF) targets and likely driving high-single digit % upgrades to Cons FY26 FCF estimates we would expect the...
SAP to report Q2''24 on Monday 22-July after US market close SAP faces a higher bar for its upcoming Q2 but we remain comfortable into the print. SAP''s outperformance vs. Global Large cap software YTD (+27% abs, +25% rel.) combined with recent peers'' updates on Software demand trends has raised the temperature somewhat (see: What are you thinking?! Feedback from a month of investor meetings). In this report we 1) detail our Q2 preview where we see scope for a 1-2% beat, 2) summarise recent commentary and reactions on Software peers for context, and 3) assess the scope for Consensus FCF upgrades over the mid-term following SAP''s recent CMD. Q2''24 preview: we see some upside to Cloud, License and EBIT expectations. After a strong Q1 with CCB growth accelerating to +28%, normal seasonality translating into Q+1 Cloud Revenue indicates upside to Consensus Q2 Cloud Revenue estimate. We anticipate a modest Cloud growth acceleration (to 26.5%) vs. Consensus (+25.4%), all in ccy. We also see scope for a License beat, given the particularly soft y.y. comparator (Q2''23: -24%), contributing to +2% upside to Q2 adj. EBIT vs. Consensus. Consensus expects the 28% CCB growth to be maintained in Q2: given recent sector datapoints buyside expectations are slightly lower here. Recent CMD adds detail to GenAI opportunity and mid-term financial profile. SAP hosted its Analyst Day last week (SAP Sapphire feedback), with two things standing out to us: 1) the GenAI monetisation opportunity, and 2) the CFO''s priority to drive improving ''Rule of 40'' economics. Both of which can drive upgrades to mid-term estimates in our view, with a blue sky scenario on the latter offering ~20% mid-term FCF upgrades and 50% upside potential to the shares (analysis within). Returning to the present, trading on 4.8% FY26 FCF yield for 20% FCF FY23-26 CAGR remains attractive with SAP benefitting from a multi-year product upgrade cycle and scope to drive upgrades (BNPP 4-7% above Cons...
Overall no big surprises, but incremental colour begins to paint picture for ''beyond 2025'' As part of its annual Sapphire event in Orlando this week SAP hosted its Financial Analyst Conference. We found the session to be in line with our expectations: no changes to 2024 guidance or 2025 targets, instead focusing on the GenAI innovation roadmap and the opportunity to harness the ''power of the suite''. We found the tone on the current operating environment to be more constructive than Software peers in recent weeks: we believe SAP is benefitting from a product upgrade cycle and growth driven by its installed customer base, helping insulate it from an otherwise lacklustre Enterprise Software demand environment. With the shares fading almost 10% in recent weeks on sector weakness we view the event as a modest positive catalyst aiding incremental investor confidence and scope for consensus upgrades through 2027. GenAI monetisation strategy now clear, backed up by detail on suite cross-sell opportunity In addition to the technology roadmap (100 use cases by year and 80% penetration of highest-demand tasks across the portfolio), SAP unpacked the monetisation opportunity for its GenAI offerings as a consumption-based model. ''Base'' bundles will include AI Units to enable discovery and adoption, followed by solution-specific ''Premium packages'' or add-ons sold on a consumption basis. Note we embed zero GenAI impact to 2024 estimates, and 2.5pp growth contribution to 2025 Cloud Revenue (both unch.). We continue to see SAP as a key GenAI winner. No ''big bang'' on financials, as expected, but framework for beyond 2025 becoming visible While there were no formal revisions to 2025 targets or new mid-term targets issued (as expected), the CFO''s comments around 1) levers underpinning confidence on Group Revenue growth accelerating through 2027 and 2) Rule of 40 financial profile considerations provide scope for double digit % Consensus FCF upgrades through 2027 in...
US Large Cap Software in focus for our 4th Annual Global Software Spend Survey We surveyed 100+ Software Buyers Globally, with a focus on Europe (50% of our respondents), looking at key spending trends across 20+ SaaS / PaaS / IaaS categories and spending intentions for 27 companies, mainly in the Large Cap US Software space. Overall, IT Spend Trends appear to be ''rolling along the bottom''; stable over 2023, with ~50% of respondents expecting IT budgets to be up 5%+ in 2024. The outlook has improved y/y in the US and with Large Enterprises, with more cautious y/y data in Europe and SMEs (small businesses). Key recommendations in the Large Cap US Software sector Microsoft (and Google to a lesser extent) appear to be leveraging AI to take share from AWS where spend intentions have dropped. 35% of respondents plan to use Oracle Cloud Infra. We reiterate our Outperforms on Alphabet, Microsoft and Oracle and y/ Neutral on Amazon. We also initiate coverage of Meta with an Underperform rating (AI Capex set to spike without new revenue streams to match) and IBM Underperform (spend intentions deteriorating for IBM and for Containers). We upgrade Shopify and Snowflake to Outperform. We reiterate key Outperforms on Accenture, Salesforce, SAP and Workday, and Underperforms on Adobe and Zoom. We remain Neutral on Intuit and ServiceNOW. Also see the following reports published today IBM: GenAI not a panacea for growth outlook META PLATFORMS INC: Back to Reality. Growth to slow, and investments to grow SHOPIFY: Shopping for Growth SNOWFLAKE: The Year of G.A.
SAP reports solid Q1''24 with CCB and FCF beats. Margin noisy (stock comp) but underlying trends are positive in our view. In our Q1''24 preview we flagged reduced scope for upside surprise given expectations had ticked higher, but we were too bearish as SAP delivered Current Cloud Backlog growth of 28%, accelerating sequentially and beating the Consensus 26.7% (all ccy). As we had also flagged: 1) Cloud Revenue growth came in below CCB growth and was in line with Consensus and, 2) the EBIT performance was noisy with higher stock-based compensation (sbc) from the strong share price performance weighing on headline adj. EBIT which missed by 4% and 90bps on the margin. However excluding sbc we note EBIT beat by 1% and underlying opex trends look favourable given headcount actually increased +0.5% or ~500 people over Q4''23 with no cost saving benefit from the restructuring programme yet in the numbers. Thus, adj. EBIT growth grew +19% ccy tracking at the mid point of the FY guidance range already with cost savings still to come. Q1 FCF was also strong and beat by ~EUR1bn, though we expect this was driven by timing mismatches of PnL vs. Cash restructuring charges and expect to wash out over the FY. Continued execution to de-risk 2025 targets and valuation undemanding. SAP shares have performed well both YTD and 12m and we anticipate the market to reward its continued execution through 2024 that - in our view - can gradually de-risk 2025 mid term targets where we have recently highlighted ~5% / EUR500m upside to both adj. EBIT and FCF targets baked into our estimates. SAP management struck an assured tone on the conference call on both customer demand trends and internal cost efficiencies underway. We now expect the market look ahead to SAP''s Sapphire event and Capital Markets Day (3-5th June). SAP''s Cloud transition remains on track and valuation undemanding in our view at 23x P/E (inc sbc) / or 5% FCF yield (2026) for 20% EPS and FCF CAGR. Reiterate...
SAP to report Q1 results on Monday 22-April after US market close With recent Cons. upgrades to Q1 estimates we now see less scope for a positive earnings surprise in Q1, however Q1 can show continued execution and incrementally help de-risk 2025 targets. We identify 3 points to watch for: 1) raised consensus expectations for Q1 CCB growth to 26% (from 24% at FY); while achievable and in line with FY24 guidance does reduce scope for potential upside surprise here, 2) Cloud Revenue growth is expected to come in slightly below CCB growth for Q1 (Cons: 25% / BNPP: 24%) as Co. has communicated, 3) Margins: we flag risks related to higher SBC charge - now included in Co. EBIT - may technically weigh on margins, though our new underlying opex analysis points to upside to 2025 targets, which may start to become visible at Q1. SAP will also report its new Cloud ERP KPI (2-year quarterly historical provided), further validating the growth engine at the core of SAP''s revenue growth acceleration story. Beyond Q1: Sapphire and continued execution to add excitement to mid-term equity story Beyond Q1''24 we would look to the June CMD at Sapphire to provide more visibility on the GenAI product roadmap and - importantly - monetisation opportunity. We do not expect revised or new mid-term targets this year, instead we expect SAP to provide a new mid-term outlook next year when current targets are more comfortably de-risked, which we expect to materialise through 2024. SAP remains our top pick within European Software - EUR TP unch. EUR225 / ADR to $241 Our revenue, FCF and gross margin estimates are broadly unchanged. We increase SBC charge by ~EUR100m reflecting recent share price performance, but new opex analysis highlights cushion in 2025 adj. EBIT target even embedding scope for EUR2bn reinvestment. We raise adj. EBIT 2024/25 by 4-5% accordingly, now slightly above Co. targets. SAP''s Cloud transition remains on track; with continued execution, upside to 2025 EBIT...
We upgraded SAP to Outperform a year ago (17-Mar 2023: Dear Mr Asam,) in a ''wish list letter'' to incoming CFO Dominik Asam as he joined SAP. One year on much has been achieved and the shares are up c.60%. Today we pen a follow up ''letter'' laying out our updated wishes and ''Phase 2'' of the SAP equity story, which we believe has plenty more to run. Maintain Outperform. If you missed Phase 1 of SAP''s transition, fear not! Phase 2 is just ramping up. SAP shares are rewarding ''Phase 1'' of the turnaround with Revenue growth accelerating, margins inflecting and Qualtrics divested with cash returned to shareholders. Yet we believe ''Phase 2'' is just starting: Free Cash Flow. Our new analysis finds EUR1bn potential upside to Co. EUR8bn 2025 FCF target. We bake in half of that upside for now, offering ~5% upside to 2025/26 FCF vs. Consensus. SAP transforming into a Cash Flow compounder will drive Phase 2 of the equity story, in our view. New analysis supportive of transition: new Cloud revenue build, cost analysis and FCF upside We include our new Cloud Revenue build, peeling back the layers in our assumptions behind mid-20s % Cloud CAGR (3yr) and a pathway towards EUR50bn 2030 Cloud Revenues. We also add new cost analysis and weigh in on the terminal margin debate (Hint: we''re not as bullish as some here). We also re-evaluate downside risks as we enter Phase 2, highlighting three key risks to be aware of. FCF to become the next equity story driver. Raising ests, valuation upside. Reiterate Top Pick. We raise 2025/26 FCF estimates by 6-9% as we see upside to SAP''s EUR8bn FCF 2025 target. With SAP set to compound FCF at mid-20s % over the next three years, on FCF valuations, it looks compelling vs. Global quality Software peers. As the shares increasingly reflect SAP''s execution on ''Phase 1'' of its transition to 2025, we think incremental investors can jump on board for ''Phase 2'' here with FCF the key source of upside to estimates and a re-rating towards Global...
Following FY23 results we spent two days on the road with SAP CEO and CFO in London, continental Europe and the US, meeting with 180 investors. Solid 2023 and 2024 guide, with upgrades to 2025 targets on more aggressive cost action FY23 results were solid; CCB growth (+27%) and FCF (EUR5.1bn) both beat expectations and were the key highlights. The more aggressive action on costs signalled in the EUR2bn restructuring and accompanying EUR500m (5-7%) upgrades to 2025 EBIT and FCF targets were well received, helping send the shares +8% on the day. Conversations from 2 days and 180 investors, distilled to 5 key topics Much ground was covered in discussions with management / investors post-results. We found the majority of these centred on 5 key topics we unpack with new analysis in this report highlighting Co. messaging and BNPPE view on each: 1) Restructuring, 2) Cost management / automation, 3) Revenue drivers to 2025 (and beyond), 4) FCF, 5) Transaction / volume apps. In anticipation of SAP''s new ''Cloud ERP'' KPI to be disclosed from Q1''24 (replacing S/4HANA Cloud disclosure) we have built a simulation (available on request) of this 30% growth engine underpinning SAP''s Cloud trajectory to EUR21.5bn revenue in 2025. Raising 2025 Operating profit estimate by 7%, and TP to EUR195 / USD212. We update our estimates: Cloud growth unchanged, some phasing of cost savings between 2024/25 and updated (higher) tax rates netting out at mid-single digit down/upgrades to 2024/25 respectively. Adj. Operating profit (pre-tax) estimates change by (1)/7% respectively for 2024/25. We raise our TP to EUR195/USD212. Reiterate Outperform and Top Pick in European Software.
SAP to report FY results on Wednesday 24th January (pre-market) We highlight 3 key items in each of the FY23 print and FY24 guide to focus on. For 2023 we would focus on Current Cloud Backlog (CCB) growth as the chief driver of 2024 Cloud Revenue growth, FCF as a driver of market confidence and adj. EBIT growth where we continue to see upside to guidance this year. For 2024 guidance we see the priority as the relative guide vs. the required trajectory to 2025 targets (Cloud revs, EBIT, FCF). In addition, a commitment to double-digit group revenue growth could drive revenue upside, while detail on implied EBIT growth and FCF conversion will also be important. We dive into the moving parts in detail in this report. SAP into new territory: top line growth, margin expansion, mid-teens EPS CAGR The Software sector performed well in 2023 (IGV ETF +58%), sector valuation multiples have re-rated driven by an assumed software market recovery in 2024 and by expectations of GenAI launches benefitting leading software vendors. We update our TP based on our Global Software valuation framework in line with our broader Software 2024 Outlook, published in tandem. We justify SAP''s higher TP P/E multiple (29x Non-IFRS vs. 25x historic peak) given the ~2x uplift in expected EPS CAGR to ~15% and the benefit of its Cloud transition and GenAI opportunity ahead. SAP remains top pick in European Software, raising TPs to EUR190 / USD208 We update our estimates with detail provided within on key items (FX, factoring, Cloud Gross margin, Cloud growth), with net impact of 1% changes to EPS. We also update our model to incorporate SAP''s new financial reporting framework as detailed in December by the CFO. SAP remains our top pick in European Software as we see a combination of Consensus estimate upgrades plus strategic execution driving a re-rating as SAP becomes recognised as a leading Enterprise cloud software vendor warranting a comparable valuation multiple to global...
SAP provides preview on 2024 reporting updates SAP CFO Dominik Asam hosted a webinar updating some financial disclosures, effective 2024. We detail the five key changes within. Overall we see the changes as broadly neutral, but with two key positives hidden in the detail (discussed below). Mr Asam inherited both 2023 guidance and 2025 mid-term targets on his arrival in Q1''23: having already updated and taken full ownership of the 2025 targets in May he now takes full ownership of the SAP financial communication, stamping his authority on the framework. Two positives hidden in the detail: FCF and divestitures We interpreted two positives hidden in the detail; 1) FCF: comments that some of the sale of receivables could be unwound this financial year ''if SAP has room within the guidance'' in our view hinted Co. is comfortable in its 2023 FCF guidance of EUR4.9bn, with potentially some headroom. Should SAP deliver on 2023 FCF guidance net of part of the factoring unwind we would view this positively, and 2) Divestitures: adjusting the reporting of gains / losses on divestitures (moving below the operating line) indicates SAP could be open to further streamlining of the portfolio in our view. Assuming the rational decision is to divest relative underperforming assets this could help lift Group revenue growth and profitability, while potentially freeing up capital for shareholder returns. SAP to report FY23 24-Jan. Remains European Software top pick. SAP remains our top pick in European Software, having upgraded the stock in March 2023 (Dear Mr Asam). While the stock has re-rated we continue to see upside on the current 2025 horizon, with SAP also well positioned as GenAI winner beyond. EUR150 / USD158 ADR TP unch.
SAP moves fast with GenAI with products already in the market, and more to come in 2024 Building on the first use case examples at its May CMD, SAP has since launched its own GenAI Copilot ''Joule'' followed by a countless further GenAI product announcements and use cases at recent SAP events. In this report we highlight several such highlights from GenAI being embedded into existing Cloud Applications to GenAI toolkits for customers and developers on SAP''s platform. SAP Technology Platform at the core, dynamic partner ecosystem accelerating adoption SAP states more than 24,000 of its customers are using SAP Business AI solutions in 130 use cases. In the partner ecosystem, 400+ solutions on the SAP store (out of ~2,000 available) include AI capabilities. At the heart of SAP''s GenAI roadmap lies its Business Technology Platform (BTP) underpinning the SAP application suite as a one-stop-shop for turnkey AI services, tooling for GenAI development and data connectivity. SAP''s GenAI hub accesses large language models (LLM) including Azure OpenAI Service and Falcon-40b while also connecting to enterprise data to ensure relevance, contextual awareness and data security. GenAI could add another dimension to our SAP bull case Our upgrade of SAP in March this year (Dear Mr Asam) was not related to GenAI exposure and we continue to see upside on this thesis. Since then we note SAP has moved (impressively) quickly on GenAI to invest in the technology and partner with key GenAI enablers resulting in GenAI-fuelled products already in the market and with positive signals of monetisation opportunity. The GenAI upside here is in its infancy in our view: as of today we have embedded just 2% upside impact (~EUR400m) to our 2025 Cloud Revenue estimates. With ~35,000 existing and captive enterprise customers shifting to SAP''s Cloud solutions in the coming years and a highly synergistic product portfolio to leverage GenAI technology effectively, we believe the...
Q3 top line hurdles achieved, and outperformance delivered on remaining KPIs. A strong Q3. SAP delivered in line / slightly ahead on two key top line metrics (Cloud revenue and Cloud Backlog growth) where we sensed most investor caution ahead of results given the continued challenging macro and geopolitical backdrop. Other KPIs were ahead of expectations, helping de-risk the FY23 guidance and lifting the shares by ~5%. Full Q3 details: Q3''23 First Take FY23 EBIT and FCF guidance looks too conservative, in our view. We see upside to guidance. Following the strong adj. EBIT (+19% ytd) and FCF (+29% ytd) performance we believe the FY guidance on both metrics now looks conservative even when adjusting for one-off factors in the comparators; Q4 growth on each would need to turn negative to reach Co. guidance. Our FY23 adj. EBIT / EPS estimates are broadly unchanged and imply 14.6% adj. EBIT growth ccy vs. guidance 8-12%, while we believe SAP can deliver ~EUR5.1bn FCF underlying vs. guide EUR4.9bn (before our assumption of ~EUR0.4bn of factoring unwind in our EUR4.7bn estimate, which we lift by ~EUR200m). SAP has navigated 2023 well so far, and we sense growing investor confidence on its strategic execution and improved financial communication this year. Expect investor focus to shift to 2024, and the stepping stone to 2025 mid-term targets We expect the debate will soon shift to 2024, in particular the Cloud Revenue / adj. EBIT / FCF outlook in the context of the trajectory towards 2025 targets. We believe SAP can exit FY23 with mid-20s % CCB growth paving the way for Cloud Revenue growth to accelerate, while a combination of fiscal discipline, expanding Cloud gross margins and Maintenance price increases helping drive low-teens adj. EBIT growth in 2024. Continued execution can help the market gain confidence and see both upgrades to estimates and a re-rating of the shares, which currently values SAP on just 17x P/E (vs. 15-25x 10-year range) or...
Q3 results should settle investor nerves; solid enough top line, and strong bottom line. Overall SAP Q3''23 was positive. The two key top line indicators - where we sensed some investor nerves going into results - were in line / above expectations (Cloud Revenue growth +23%; in line / CCB growth +25%; above). Upside to Consensus expectations was seen in everything below the revenue line; Cloud Gross margins +60bps, adj. EBIT +4% (in EUR) and +110bps on the margin, adj. EPS +7% and FCF well ahead. SAP ADR was up +3% after hours. We sensed the stock was well owned into the print, and with no FY23 guidance raise may limit upgrades, however the FY23 adj. EBIT and FCF guide now look particularly cautious and we expect the focus to soon shift to the 2024 outlook and how much SAP can ''de-risk'' the 2025 mid-term targets. FY23 guide maintained. We anticipate low-single digit FY23 consensus upgrades Cloud Revenue is +22% ytd (vs. FY guide 23-24%) but includes ~1pp headwind from one-offs which should fade in Q4. SAP may need a slight Q4 acceleration to comfortably reach the mid-point of the revenue guide, however maintaining the 25% CCB ccy growth (key leading indicator) despite macro / end market headwinds is impressive and should help give comfort on the Q4 outlook and the set up for 2024. As we outlined in our Q3''23 preview, SAP delivered upside to adj. EBIT which is now +19% ytd vs. FY guide of 8-12% growth and makes for a particularly cautious implied Q4. We anticipate Consensus FY adj. EBIT estimates could move higher by ~2% post-Q3 towards BNPPE estimates. Incremental execution on the path to 2025. SAP remains our European software top pick. With Q3 safely navigated, the next catalysts include further details on the GenAI product releases at upcoming SAP tech events (and the associated PnL impact calculations by the market), as well as the debate shifting to 2024 in the context of ''de-risking'' the 2025 mid-term targets. As both materialise, we...
SAP to report Q3''23 results Wednesday 18th October, after US market close A boring Q3 should be enough to protect SAP''s relative safe haven status this earnings season, in our view. We expect the market to focus on current demand indicators Cloud Revenue growth and Current Cloud Backlog (CCB) growth as priorities, with one eye on the outlook for FY23 operating profit (where we now see upside) and confidence on 2024 acceleration as secondary priorities. The shares have been tethered to the EUR120-130 range since Q2 results and likely require a catalyst to break out; we see downside risk should CCB or Cloud Revenue growth disappoint, and upside risk if Operating profit trends continue and show signs of upside to current estimates. H2 profit estimates look too conservative. Raising estimates and see upside to expectations Our analysis of the implied H2 operating profit slowdown indicates upside to FY23 Cons estimates, even after adjusting for one-offs in the H2''22 comparator and additional GenAI product investment this year. Adj. EBIT was +20% ccy in H1 (and by more underlying, detail within) yet Cons currently models a sharp slowdown to just +4% ccy in H2, which we think is too conservative. We lift 2023 EBIT / EPS estimates by 2-3% and now see a path to exceed FY guidance of 8-12% adj. EBIT growth (ccy), BNPPE +13.6% / Cons +11%. SAP our top pick in European Software. SAP remains our top pick in European Software; defensively positioned with a multi-year product upgrade cycle underway and an undemanding valuation at ~20x P/E or ~5.5% FCF yield for ~20% organic EPS CAGR and improving cash conversion (all 2025 Non-IFRS). There is also a ''GenAI'' kicker to the story, with SAP''s GenAI copilot recently announced (''Hey Joule: supercharge my business''), where we expect more details in the coming weeks. As our recent strategists highlighted (KNOW THY NEIGHBOUR) SAP ownership continues to inch higher but remains well below historic levels pre-2020...
SAP today has announced its own natural-language Generative AI copilot, with the first go-live available before year-end. Expect more details on pricing, tech and route-to-market at upcoming SAP events through October/November. SAP joins Microsoft, Alphabet, Salesforce, Adobe (and others) with GenAI product launches Today SAP announced ''Joule'', its GenAI copilot to be embedded across its application suite in finance, Enterprise Resource Planning (ERP), Human Resources (HR), supply chain, procurement and customer experience as well as its Business Technology Platform underpinning SAP''s cloud offering. Pricing. Penetration. Pedigree. The three Ps that matter with 300m SAP users to target. SAP has not (yet) communicated formal pricing of Joule. We anticipate further detail in upcoming events through October/November (more within). We note CEO Christian Klein has previously indicated a ~30% premium was possible, not dissimilar to the GenAI pricing seen at Microsoft, Salesforce and Adobe as category market leaders seek to price their GenAI offerings at a premium. While too early to gauge, the market could begin the back-of-the-envelope calculations of: ''price premium x user penetration'' for SAP: 30% premium with ~15% penetration of SAP''s cloud revenue base over the mid-term (3 year horizon or 5% p/yr), currently the market''s starting point for Microsoft (and echoed by Microsoft reseller SoftwareOne in our recent CEO roadshow) we estimate could see a ~3% uplift to 2026 Revenue. Regarding pedigree, SAP has partnered with Microsoft and Google Cloud, as well as investing in AI specialists including Cohere and Anthropic (the latter a recent recipient of a multi-billion dollar investment from Amazon), ensuring it has quality technical backing. GenAI adds further incentive for SAP Cloud adoption and suite cross-sell Beyond the direct monetary uplift we see GenAI as a catalyst to 1) accelerate customer S/4 cloud adoption and 2) drive improved cloud...
SAP to acquire LeanIX to further expand its business transformation portfolio LeanIX has been a strategic partner of both SAP and Signavio (acquired by SAP in Q1''21), operating in the Enterprise Architecture Management (EAM) software segment, giving its 1,000 customers more clarity on their IT landscapes. The transaction is expected to close in Q4''23. SAP has not indicated the revenue contribution of LeanIX, though we note dealroom.com indicates ~EUR48m revenue in 2022 so less than 1% of SAP''s ~EUR31bn Group revenues in 2022. Tuck-in MandA positive, adds to RISE offering with a side of AI With a new CFO, updated mid-term targets and EUR5bn of buybacks following the Qualtrics divestiture earlier this year we believe shareholders want to see this sort of MandA from SAP (small, tuck-in deals complementing the portfolio rather than larger scale deals). LeanIX will add to SAP''s RISE offering, giving customers more clarity on their IT landscape and confidence to begin their cloud transition with SAP. LeanIX recently launched an AI assistant to automate more processes, providing a foundation for future GenAI-driven recommendations for IT landscape transformation. SAP recently commented it has 20,000 customers still to transition to its cloud offering and with the upcoming maintenance cut-off to come end-2027, we continue to expect accelerating momentum from its customers to move to the cloud. SAP remains our top pick in European software We upgraded SAP in March this year (Dear Mr Asam,) and is our top pick in European software. EUR150 / USD167 TPs unch. Reiterate Outperform.
Q2 noisy from FY guidance tweaks. Overshadows promising underlying KPIs The strong share price performance YTD and series of mid-term catalysts in Apr/May meant SAP needed a clean quarter to avoid near-term relief in the shares. The headline trimming of the high end of the Cloud Revenue guidance by EUR200m (2%) overshadowed an otherwise solid print where margins beat by ~150bps, FCF was above expectations and the key leading indicators in Current Cloud Backlog (+25% ccy) and S/4HANA growth continued to flash green. SAP''s shift to reporting after European hours meant the ADR traded down 6% intra-day in a market where its US peers were down 2-6%; a fair reflection of the noisier-than-hoped Q2 however underlying trends remain intact in our view, with a first meaningful glimpse of GenAI upside revealed. First meaningful insight at SAP''s GenAI opportunity including timing and monetisation Our highlight from the Q2 conf call was CEO Christian Klein''s commentary on the GenAI roadmap to embed its functionality across a large portion of the SAP portfolio from as soon as (late) this year, and the scope to monetise. We saw glimpses of SAP''s GenAI potential in its HCM integration with Microsoft Teams at the CMD, and SAP''s recently announced GenAI investments have added further credibility. However the scope to infuse GenAI technology across a large portion of SAP''s product portfolio including core ERP / Financials in such a short time horizon was a key positive to us. Furthermore, like Microsoft and Salesforce, SAP is planning to price this technology at a notable premium with a ~30% uplift touted by management during the conf call. We recently embedded GenAI into our US Enterprise Software estimates (The Software FLASH Technologist - GenAI Edition) from 2025 onwards, and have now done the same with SAP using the same methodology, lifting our 2025 Cloud Revenue growth estimates by 2pp as a result. Raising TP to EUR150 as SAP continues on its path to...
SAP to report Q2''23 results Thursday 20th July after* European market close (*new) In a change to its reporting schedule SAP will now deliver Q2 results and conference call after European market close in its bid to increase appeal to the US investor base. After months of focus on the mid-term outlook, the CFO handover and the Qualtrics sale we expect the market to return focus to near term operating performance at the upcoming Q2''23 results. Q2 focus on Cloud momentum and Cloud Gross Margins We expect the focus to be on Cloud Revenue growth (Cons +23.4% ccy), Current Cloud Backlog growth (Cons +23.6%) and Cloud Gross Margins (Cons 72.3%), as well as management commentary on S/4HANA Cloud momentum and customer cross-sell across the portfolio. US peer Oracle (+) reported a solid FQ4 (May) with Fusion ERP sustaining a high-20s growth cadence indicating no deterioration in Enterprise back office demand. In April our EuroVision Reseller Checks highlighted 50% of respondents indicated increased y.y. spending on a 3m forward basis for SAP (up from 27% in January) despite generally softer spending intentions across the sector. Betting on the Back Office vendors to continue delivering Having upgraded SAP and Workday earlier this year (joining Oracle upgraded a year ago) we have Outperform recommendations on all three enterprise back office software vendors; we believe spending among their customer bases can be more resilient through macro headwinds with growth largely coming from the installed base and the cross-selling of the product suite. We believe SAP - like Oracle - can (continue to) re-rate as they execute on their cloud transitions; momentum among their installed base migrating to the cloud is now firmly underway and Group revenue growth is accelerating. SAP has successfully navigated an important transition period in recent months and has been rewarded (SAP +32% vs. Euro Stoxx +12% YTD) though we highlight has not outperformed the Global...
SAP successfully rounds off important phase with 2025 mid-term target update SAP had been under pressure since management indicated in September that it would deliver double-digit 2023 operating profit growth and upgrade 2025 mid-term targets. The macroeconomic backdrop and CFO handover presented a balancing act. SAP has now successfully threaded the needle through 2023 guidance (Jan), the CFO handover (Mar/Apr) and now updating 2025 guidance. Now all SAP has to do is deliver, which we believe it can. The stock is up close to 50% since start Q4''22, but we see further room to run as SAP cements its quality software stock standing, worthy of a valuation comparable to quality global peers of 25-40x PE (MSFT, ADBE, DSY, CRM, INTU) compared to SAP''s 24x (all calendar 2024 BNPPE adj. P/E inc. SBC). 2025 target update a net positive. FCF target clears significant hurdle. Overall the updated 2025 targets were ambitious enough to provide 1-2% upside to Consensus estimates while giving room to deliver some upside. Ironically, it was the one net downgrade that we believe could have the most positive impact: the EUR7.5bn FCF (EUR200m or 2-3% lfl reduction vs the EUR8bn guide) was in line with Consensus and likely above buyside expectations. We sensed investor nervousness in recent weeks on a larger reset, and the avoidance of such should open the door for investors. New CFO Dominik Asam''s focus on improving FCF conversion and clear communication on moving parts should instil confidence, which in turn can help valuation. Our EUR140 TP implies a ~4.5% FCF yield p/sh (2025) which we see as undemanding and leaves scope for a re-rating towards 4% as SAP delivers on its mid-term ambition. AI and Data partnerships with Microsoft and Google further validate SAPs positioning Sapphire provided an opportunity for SAP to demonstrate product innovation and key partnerships, with highlights being the Generative AI partnership with Microsoft and the Datasphere...
SAP delivering on a series of catalysts. Tuesday''s Financial Analyst Conference next. When we upgraded to Outperform in March (see Dear Mr. Asam,) we highlighted the sale of Qualtrics, the Q1 results, and this week''s Investor Day as key catalysts. The Q1 results (see our postview) delivered accelerating Cloud revenue and backlog growth, while the new CFO voiced confidence in the progress toward the 2025 targets. We still see the Investor Day as a catalyst. We see upside to consensus on 2025 guidance on most line items We see 4%+ upside to consensus 2025 non IFRS EBIT. We believe that at Q1, the new CFO highlighted operating leverage potential (lower GandA / sales, upselling and cross selling allowing for ''gardening vs hunting'' driving SandM efficiencies, and more focussed RandD on where SAP can lead) which can offset any fears around more conservative SandM capitalisation practices. This, combined with stronger Cloud revenue momentum than expected could see SAP maintain its EUR22bn 2025 Cloud revenue guide despite the sale of Qualtrics, and should drive revenue and op inc upside. We also note that our recent discussions with the Capgemini and CGI CEOs indicate SAP demand not only remains healthy, but is ''really accelerating''. We believe SAP will also highlight a focus on IFRS targets (i.e. lowering stock comp / sales). That said, the main debate remains FCF, but with consensus at EUR7.5bn (and buy side expectations as low as EUR7bn), vs the current EUR8bn guidance, we believe a guide in-line would be well received. We outline updated thoughts in this note, including answering 10 of the most recent investor questions around the 2025 guide update. Reiterate Outperform SAP shares are +27% YTD, outperforming large cap European Tech peers (ASML and Infineon +18%, Adyen +13% Dassault Systemes +8%, Capgemini +3%) but also outperforming US peers (SAP ADR +30% vs IGV ETF +16%). If SAP can eventually reach its current EUR8bn 2025 FCF target (despite EUR500m of...
Q1 just what the doctor ordered Sentiment on SAP was cautious heading into Q1 but SAP delivered. Fears of a 2023 reset from the new CFO abated as SAP delivered accelerating Cloud Revenue and CCB (Current Cloud Backlog) growth (22% and 25% respectively), Cloud Gross Margin expansion (+250bps to 71.4%) and reiterated underlying 2023 guidance (ex-Qualtrics). While License outperformance drove an ''unclean'' beat on Operating Income, and FCF was noisy, overall Q1 ticked the right boxes, with the impressive S/4HANA Cloud momentum continuing (CCB +79%, and revenues +75%, nearing a EUR3bn ARR). This was complemented by an assured debut from new CFO Dominik Asam during the conference call, highlighting medium term FCF levers, helping the shares up 5%+ on the day. Next up: update to 2025 targets at the SAPPHIRE Investor Day (16th May) Consensus 2025 estimates look reasonable; in line for Cloud and Group Revenue, and below for EBIT and FCF vs the current guidance adjusting for FX and Qualtrics. While many investors still fear a 2025 reset, during the Q1 conf call, the CFO commended SAP for being on track with those targets. We see limited risk of a re-set and believe a reiteration of underlying targets would be taken positively, with the potential for beats along the way. At 16x FY24 EV/EBIT (incl. SBC) and a 4.6% FCF yield we see potential for a re-rating as SAP delivers on its Cloud transition and 2025 ambition. Raising TP to EUR140 / USD154. SAP remains our top pick in European Software We adjust our estimates following Q1 results; the most notable being 2024 Group Revenue growth is lifted to 10% ccy, following the confident message from SAP CEO around achieving double-digit growth next year. 2023 IFRS and BNPPE EPS move slightly lower on the increased SBC expected this year (given share price performance). We also assume SAP unwinds all of the ''exceptional'' sale of receivables resulting in a one-time impact of ~EUR400m to 2023 FCF. We raise our TP...
Many moving parts for SAP''s FQ1''23 results (Friday 21 April pre market) We expect the market to focus on SAP''s new CFO communication and updated 2023 guidance for continued operations (ex-Qualtrics). After removing Qualtrics from our estimates, we now estimate 24% organic Cloud revenue growth, 69.7% Cloud gross margins, 25.0% non IFRS operating margins (up y/y!) and EUR2.2bn FCF. Given Q1''s small contribution, we would expect SAP''s new 2023 guide update to simply remove Qualtrics'' FY guide (XM results on the 20th). Given the pending sale of Qualtrics, we expect SAP to remove its 2025 mid-term targets, to be updated at its CMD on 16th May. Should SAP reiterate the 2025 targets, even without Qualtrics included, this would be a notable positive in our view indicating mid-single digit % upgrades to 2025 comparable consensus earnings estimates. Another low probably positive catalyst is the new CFO initiating quarterly guidance with a Q2 guide. Within this report, we also publish results of our Quarterly EuroVision Software Reseller Survey, highlighted by an improved outlook for SAP with 50% of respondents expecting y/y spend growth with SAP in next 3-months (up from 27% in Jan). Our conversations with SAP partners remain supportive of SAP RISE success and momentum for S/4HANA Cloud. Adjusting 2023 estimates for pending Qualtrics sale, following Thursday call with company SAP will report Qualtrics as a discontinued (profit after tax) item from Q1''23. As such we now expect FY2023 Cloud Revenue of EUR14.2bn, Group Revenue of EUR31.3bn, Operating Profit EUR6.03bn / 8.77bn with a margin of 19.2 / 28.0%, dil. EPS of EUR3.55 / 5.21 (IFRS / Non-IFRS) and CFO / FCF of EUR6.3 / 4.9bn. We model 25% organic Cloud Revenue growth. Our 2024/25 estimates are unchanged as we had already assumed the deal closes at 2023 year-end. With high recurring revs, SAP remains top pick in European Software. Outperform reiterated We had already removed Qualtrics from 2024 and...
SAP is on investors'' watchlist, with reluctance to front-run the CFO''s 2025 guidance update We upgraded SAP to Outperform in March (Dear Mr Asam,) and have since spoken to ~100 global investors on the thesis. Our three headline conclusions on investor sentiment are, 1) SAP''s profile ticks many investor checklist boxes for 2023, but confidence to own the stock near term remains low, and most investors are ''Neutral'', 2) FCF generation is the most important factor to improve sentiment, and 3) there is more concern on the 2025 Ambition update than we anticipated. What can SAP do to convince investors to go Overweight? We structured our deep-dive upgrade report as a ''wish list'' from the market to new CFO Dominik Asam, who joined SAP on 7 March, Outlining 5 priorities to improve investor sentiment. We see catalysts as soon as the Q1''23 results (21 April, with likely y/y margin improvements) and SAP''s Investor Day (16 May). We see upside to Consensus 2025 estimates even if SAP just reiterates targets like-for-like (i.e. adjusting for Qualtrics sale, Russia/Ukraine wind-down, and FX). Based on our investor conversations, even a simple reiteration would be well received, in our view, as 1) the market would be relieved that the new CFO has reviewed the mid-term plan and is comfortable with the current targets, and 2) there would likely still be the potential for operational outperformance, limiting the potential for any future disappointments. Reiterate Outperform as SAP has an attractive profile Our recent investor discussions make us incrementally more positive on SAP considering the extreme investor concern and lack of confidence in the stock. We believe the lack of a ''re-set'' from the new CFO, potential for ongoing top and bottom line upgrades, and improved communication, may lead to more investors moving overweight. With continued macro uncertainty, SAP''s high portion of recurring revs (84% in ''24), minimal license rev dependency (just 3% in ''24),...
What an opportunity! You take the reins as SAP''s CFO towards the end of a stormy 10+ year journey to the Cloud. Investments, acquisitions and business model transitions have created margin and cash flow turbulence, resulting in a flat share price over five years. But after a tough winter, spring is here. With licenses nearly melted away by 2024, the Cloud will be 50%+ of revenues, while our Cloud Scanner Survey shows SAP''s S/4HANA-powered transition resonating with customers. You, as the new CFO, could be the final piece of the puzzle. A EUR7bn welcome gift from the sale of Qualtrics creates new optionality, and we outline several further steps you could take to deliver on SAP''s 2025 Cloud ambition and galvanise investors. The sun finally looks set to RISE for SAP. We upgrade to Outperform.
As usual, a mixed set of results from SAP SAP FQ4 results were overall mixed: on the positive side, margins beat despite licenses missing, 2023 guidance was slightly above expectations (in ccy) and SAP announced its intention to sell its majority stake in Qualtrics; a positive catalyst for both stocks in our view. On the negative side; FQ4 revenues and Cloud revenue growth missed expectations, as did FCF, while Consensus 2023 estimates are unlikely to move higher with FX headwinds, 2023 FCF guidance was below expectations and 2025 targets were left unchanged, for now. SAP shares had rallied ~30% since the start of Q4''22 (in line with European Tech Index), and the shares were down on the day of results. Debate to shift to (potential) Qualtrics sale impact and 2025 targets under new CFO We expect the near term debate on SAP to shift to 1) the impact of a potential sale of Qualtrics and 2) the incoming CFO (March) and subsequent update to 2025 targets set to come in H1''23. We explore item 1 in this note, with our key takeaways being a potential 1pp negative impact to Cloud Gross Margins but a ~3pp potential uplift to EBIT margins implying a ~15% lower EV/EBIT multiple (based on BNPPE adj. metrics inc. stock-based comp). On item 2, we note Consensus estimates vs. existing 2025 targets are as follows: +3% on Cloud Revenue, +5% on Total Revenue, (2)% on Non-IFRS Operating profit, (2)pp on Cloud Gross Margins and (4)% on FCF. So there is scope for EPS upgrades should the new CFO raise the 2025 guidance, but the EUR8bn FCF target could be at risk. Puts / takes net out on revised estimates, though FY23 FCF lowered. TP unch. EUR115 We update our estimates which drive minor changes to FY23/24 EPS (5%). Within, items of note include the FQ1 restructuring charge (EUR300m), a 7% cut to FY23 FCF, ~20% cut to Software License revenue FY23/24 and a 200bps uplift to FY23 Cloud revenue growth in ccy. We continue to base our target price on our Global...
Q4 results (26 Jan) - we expect a solid top-line, but a margin (and maybe FCF) miss Our reseller discussions have improved over the last three months in general, with the worst case energy and economic scenarios not playing out this winter. Our EuroVision Software Reseller Channel Checks did show slightly more caution on SAP vs three months ago, but partner discussions have remained supportive, with signs of paused deals (like at Lufthansa) taking off again. Rise is resonating with mid-market companies, while large customers are finding comfort in S/4HANA Private Cloud (see full Survey results within). That''s the good news. However, for FQ4, we are 80bps below on Cloud revs, but 50bps above on total revs (with better licenses). We are 230bps below on non-GAAP EBIT (with a 29.6% margin vs 30.5% consensus). We believe consensus is not modelling enough of a sequential uptick in opex at just 6% (ex Litmos sale gain) vs 15% on average (note Q3 headcount was up vs Q2, so seasonal patterns should hold, and the Litmos opex will still be included for two months). FCF is also at risk with EUR2bn required in FQ4 to hit the FY EUR4.5bn target (consensus at 1.8bn). Over the last four years, SAP has delivered EUR786m in Q4 FCF on average. All eyes on 2023 (and 2025?) guidance. Neutral, but PT up from EUR105 to EUR 115. SAP''s challenge with its guidance is it will be delivered by an outgoing CFO, and thus might be discounted by investors. SAP has already signalled that revenue growth will accelerate in 2023 and op profit will grow in double digits. At EUR9bn (with ~250m from a maintenance price increase), consensus non-IFRS ''23 EBIT is already 13% above our FY23 non-IFRS EBIT estimate, and we doubt SAP will guide higher (especially with H2 23 FX headwinds now likely). SAP has also suggested that it will raise its 2025 revenue (EUR36bn) and non-IFRS EBIT (11.5bn) guidance. At current FX, we believe guidance is ~EUR37.5bn and 12bn, with consensus at EUR38.8bn...
Software Reseller Survey points to ''soft landing'' (for now) Today we publish the results of our BNPP EuroVision Software Reseller Channel Checks where we survey ~25 reseller globally, with 2/3rds outside of the US (~50% in Europe). While the overall IT spend intention score was down for the fourth straight quarter, it was down only slightly from October levels, which was reassuring. There was not much change in IT spending priorities, with Public Cloud continuing to score very well (which may ease some concerns around Azure and AWS seeing a significant deceleration) along with BI/Analytics and ML/AI. At the other end of the spectrum, Procurement, Financials, SCM and HCM remain lower priority areas. At the vendor level, a few surprises AWS saw the highest score over the last three months (i.e. ''how did the vendor do vs plan''), just as they did last quarter, although the absolute scores did fade. Microsoft was weaker as well over the last three months, but scored strongly for expectations for the next three months (i.e. what is your y/y growth plan over the next three months). Notable movers were Qualtrics, with a significant improvement in future growth expectations. On the other end, ServiceNOW was 7th out of 10 vendors over the last three months (23% of respondents indicated spending above plan last Q, down from 44% for the Sept Q), and dead last out of 10 for next three months growth expectations. Oracle also saw a deterioration in results, while SAP also faded some. We compliment our data survey with discussions with key partners Our European discussions were more upbeat than three months ago. The warm winter has thus far put off any energy rationing, and inflationary pressures are easing. Customers are approaching 2023 cautiously, but constructively. Discussions around SAP were still supportive, while Qualtrics was surprisingly upbeat despite being ''front office'', as it is a small ticket size technology that can have a noticeable...
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We spoke to SAP last week prior to them entering the close period Demand seem OK, but SAP needs a strong close to meet consensus Q4 growth Software licenses are likely to remain very weak, but are now only 6% of total revenues (but still 12% of Q4). Licenses are down 39% y/y on average in Q1-3. SAP suggests that a similar decline in Q4 to Q3 (i.e. 42%) would put SAP at the lower-end of its FY software revenue growth guide of 4-6%. For Cloud, we model 22% c/c growth (vs +24% consensus), impacted by the lapping of the Clarabridge acquisition and the removal of Russia/Ukraine revs y/y, as well as one less month of Litmos. For Current Cloud Backlog, we model 24% c/c growth, below the 25.9% consensus. While SAP appears confident, and back office is holding up in general, SAP needs a good end of quarter to meet those higher consensus expectations. See full details of pre close call feedback within. Neutral as we await new CFO We downgraded SAP from Outperform to Neutral before the Q2 results. Despite being positive on the accelerating S/4HANA Cloud transition, we believed consensus Q2 and FY expectations were too high. SAP did miss Q2 consensus and lowered the FY profit outlook at the Q2 results, and then lowered the FY FCF outlook at the Q3 results. We still have some growth concerns for Q4, but with hiring slowing, and a rise in maintenance pricing offsetting maintenance revenue declines, we believe margins will improve in 2023, allowing for the company to deliver the promised double digit operating profit growth in 2023. The arrival of a new CFO does create some risk around the expectation for a raise of the FY''25 guidance, especially on FCF. In addition, the recent rebound in the DAX (+20% from 29 Sept lows) and in SAP shares (+25% over same time period) now puts SAP on 29x 2023 P/E (including stock comp). While we still prefer SAP to Dassault Systemes (shares +2% over the same period but still trading on 32x P/E) due to Dassault''s reliance...
SAP Q3 results noisy, but not enough to scare off buyers While SAP beat constant currency Cloud revenue growth by 90bps, and came in-line on CCB growth at 26%, the company guided Q4 CCB growth below consensus of 26%, at ~24-25%. In addition, software licenses missed by 9% in Q3 (were -42% y/y) and are expected to be down another ~40% in Q4, which will weigh on Q4 EBIT (expected to be flat in c/c). Maintenance revenue also declined for the first time. Q3 EBIT margin did beat by 30bps (EUR76m), but we believe that was in part due to the reversal of bad debt provisions and the unsuspending of revenue recognition in Russia as the winding down of the operations will now drag into next year. We had expected a EUR50m negative impact in the quarter, which was only 20m. Finally, SAP lowered its FCF guidance for the FY after a 50% miss on Q3 FCF, raised its tax rate guidance and lowered its Customer NPS expectation. So why is the stock up 6%? Investors have been circling SAP for several weeks, attracted by the low valuation and the defensive characteristics (80% recurring revenue) making SAP a safe, and liquid, place to hang out until year end. Positive datapoints from Accenture, Oracle and Workday have made investors confident about trends in back-office spending. With hiring slowing, the likelihood of margins bottoming increases. And with a new CFO joining next year, communication may also improve, creating a potential 2023 story. We believe the lack of any major disappointment on growth and margins (along with a glass half full market day - Nasdaq +2%) was enough to trigger a rally. SAP sees light at the end of the Cloud transition tunnel. Raising TP to EUR105 (from 90) With licenses collapsing, the Cloud is becoming the only story. And with Cloud GMs improving the last two quarters, and cost control initiatives underway, confidence is growing that SAP can offset declines in the higher margin revenue streams. We downgraded to Neutral earlier this year...
Q3 results were slightly ahead of consensus, denoting solid execution Cloud metrics keep improving FCF guidance is lowered for 2022, but the consensus seems to be conservative
Results of our quarterly EuroVision Software Reseller Channel Checks (see results within) Each quarter, we survey 25+ Software resellers (2/3rds outside of the US) on the past quarter''s development vs plan, as well as their expected outlook for the next three months. We do this for ~15 software categories as well as for ~15 specific software vendors. Our most recent survey saw a further deteriorating in spending, although results were still above plan. Categories in most demand were ML/AI, BI/Analytics, Public Cloud and Workflow Automation. Weaker areas were UComms, SCM/Procurement, HCM/Financials and Database. Amongst vendors, we highlight positive results from AWS, Oracle, Salesforce, SAP, Snowflake and Zoom, with Microsoft slipping to an uncharacteristic middle of the pack performance, and Google Cloud also lagging. Partner discussions point to a rapidly weakening Europe and more deal slippage In Europe, customer discussions are ''pausing'' as companies prepare for next year''s recession. New Salesforce business was highlighted as suffering in Germany, with SAP stable, and Workday (namely Planning) and ServiceNOW, more resilient due to high implementation success rates. Our US discussions point to an increasing number of industries slowing decisions each quarter. A ServiceNOW partner mentioned big deals slipping from Q3 to Q4, and already into 2023. Overall, the 2023 growth outlook continues to deteriorate, but stock prices have bene telling you that. cRPO growth weakness and FX to create headwinds to 2023 numbers We recently published quarterly previews for 18 stocks (see; Preparing for the cold economic winter). We adjusted 2023 estimates, being 1-3% below on the top line and 3-5% below on EBIT. We also published our first Software Flash update on Global Software Valuations. In the upcoming CQ3 results, we believe Microsoft (+) will guide for FQ2 reported revenue 2.5% below consensus. We believe Amazon (-) will provide a disappointing Q4...
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On the face of it SAP''s Q2 print should have been a relief, but... On the positive side SAP continues to see strong Cloud demand as evidenced by accelerating S4/HANA backlog growth to 87% ccy, while it also ''de-risked'' FY22 by cutting EBIT guidance. Despite this, we continue to see risks to FY FCF guidance, which has yet to be de-risked with Co. reiterating the FY target of EUR4.5bn despite coming in light at H1 with just EUR2.1bn and an unusually weak Q2 and talk of customers looking to pay less upfront. In addition SAP missed on adj. EBIT by 4%; the miss would have been double-digit were it not for notable cuts to Consensus estimates ahead of results, along with Russia costs coming in EUR40m below guidance. Conflicting messages about Software license sales feeling macro weakness and seeing longer sales cycles, but not Cloud sales, also creates concern that it is only a matter of time before Cloud CCB growth slows. Risk of European weakness spreading globally? Europe slowed notably in Q2; Germany grew just 6% (from 11% in Q1) while the rest of EMEA grew just 1% (from 4% in Q1). US and APAC fared better, though we note Qualtrics pointed out the softness in Europe in Q1 had spread further afield in Q2, particularly among larger deals and net new customer deals. SAP reiterated top-line guidance for FY22 and talked up mid-term targets (FY25) highlighting a review of these targets could come at the Q4 results, ''if'' the macro is unchanged at that point. That could lead to higher 2025 Cloud Revenue and EBIT targets. But that''s a big ''if''. Cuts to License revenues and EBIT drive lower TP We lower our License revenue estimates by 13% reflecting both accelerated shift to cloud but also softer new license sale environment. We also cut our Non-IFRS EBIT estimates by 6-10% (''22-''24), assuming an 8% decline y.y. in reported adj EBIT vs. Co. guidance of (1)-(5)% in EUR, or (4)-(8) in c/c. With FQ3 likely to be another weak profit quarter, creating Q4...
SAP - BUY | EUR134 Q2 results and FY22 guidance negatively impacted by the war in Ukraine Non-IFRS operating margin was 1.6ppt below consensus Cloud metrics remains solid Continued markdown in licence sales leads to a 3-4% cut in FY22 non-IFRS operating margin guidance
Something has changed in the past 30 days We survey 25+ software resellers every quarter to identify software spending trends by category, as well as by vendor for 14 enterprise software vendors. Our survey is 50% weighted toward Europe and 2/3rds outside of North America. This quarter, we have complimented our survey with discussions with resellers to provide additional context. Overall, spending intentions are starting to be reined in, with cuts being made to headcount and real estate, but Cloud costs look to be next as companies look to ''better police'' their spend after two years of almost indiscriminate spending. Infrastructure over apps Our survey has shown the most incremental demand for BI / Analytics, Workflow Automation and Machine Learning, while Financials and Procurement saw the least incremental demand, with HCM and SCM remaining weak. Amazon Web Services, Snowflake, Microsoft and Google Cloud saw the highest vendor scores, while IBM, SAP, VMware and Workday saw the lowest scores. Overall, infrastructure categories appear to be favoured, while apps have fallen to the bottom of the pile. That said, some niche areas, like payroll solutions that allow for daily pay, are seeing high demand. Other trends - good for ''COVID winners'', but beware of cost optimisation hitting growth After a couple of weak quarters, we saw a bounce for COVID winners Adobe and Zoom. This may be due to companies ''giving up'' on getting employees back to the office as one reseller told us. And while Snowflake has scored very well this quarter (along with data warehousing in general) we are also hearing of more companies looking to optimise Cloud spend, which drove a disappointment at SNOW''s last set of results. As for ServiceNOW, despite Workflow Automation being a high priority, the company specific scores took a step back, as did SAP''s scores. When combined with valuation, survey results support of MSFT and ORCL Outperforms This report contains the results of...
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Q2 and FY expectations at risk The SAP story remains a complicated one. Near term, we see risks on the demand side as software spending decisions come under increased scrutiny, and Financials / Procurement / HCM and even SCM fall to the bottom of the spending priority list (as indicated in our latest BNPP Exane EuroVision Software-Reseller Channel-Check Survey). SAP specific spending intentions have also dropped over the past couple of months. In addition, on the cost side, consensus appears to not be modelling EUR200m of Russia exit costs in Q2, which will hit non-IFRS and IFRS numbers. As such, we are 12% below consensus non-IFRS EBIT for Q2. Falling venture fund profits will hit EPS, and we are 26% below consensus on Q2 non-IFRS EPS, with a 50% y/y fall. We believe a negative pre-announcement could come next week. Finally, with SAP dependent on a divestiture to hit the low end of the FY guide for a 0-5% fall in operating profit, risk to FY numbers exists. While many of these are ''one-offs'', the market is not in a mood for overly complicated stories, and these misses could be punished. But what about the 2023 inflection story? We are believers in SAP''s Cloud transition story and highlight that SAP will have ~50% of software revenues from the Cloud by the end of the year. The end of the tunnel is within sight! But SAP has pushed the gross margin inflection out to H2 2023, and considering the potential macro pressure on the top line, and near term margin weakness, we believe investors are not yet willing to look out 12+ months, especially with a CFO transition to navigate in between. Its too complicated for now. Downgrade to Neutral, and TP from EUR120 to 100. We see safety in Capgemini and Oracle Oracle (+) survived FQ4 results and de-risked its FY''23 outlook, and we see upside to Capgemini (+) consensus estimates. Both can deliver mid to high single digit revenue growth (like SAP) but with Oracle on ~13x CY23 EV/EBITA, and Capgemini on 11x...
In this series, we provide feedback on what investors are asking us and telling us. We have spent most of the past 7 weeks meeting in person with investors globally to discuss the Software sector, and our recent research. Below are some thoughts on what ''you'' are thinking. Enterprise resilient, but Europe / SME / Consumer exposure / COVID winners out of favour Q1 results showed surprising resilience in European enterprise IT demand despite the Ukraine War creating geopolitical uncertainty in March. With digital transformation projects powering ahead, investors believe enterprise IT demand is now safe until the end of the year. But high inflation is creating concerns around consumer and SME spending as recession fears mount in Europe. When combined with still tough COVID / stimulus comps, and consumers opting to return to in person shopping and experiences, SME and Consumer-facing digital technologies are out of favour. Lots of shopping lists, not much shopping One of the questions we get most is: when will it be the time to buy ''fallen angels'' like Shopify? Will easier H2 comps be enough, especially if inflation eases at the same time to free up some consumer spend? It may be, unless higher interest rates help cause a recession, putting further downward pressure on demand and multiples. In the hope that recession will be avoided, and H2 will see pressures ease, investors are putting together their shopping lists; identifying companies they would like to own (competitive positioning, growth runway, margin and return potential) but are not yet comfortable to go shopping as market volatility can quickly punish new positions. No capitulation yet (even ARKK is still seeing inflows!) We believe the drawdown in most tech stocks mainly reflects the repricing of growth in a higher rate environment, and not a more severe longer lasting recession. While tech markets have been weak, and value has outperformed unprofitable growth, we don''t yet sense...
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Business transformation is the last investment SAP customers are likely to cut The success of RISE with SAP is indisputable regarding migration to Cloud SAP stands firm on its goals for 2025
Cloud clicking on all cylinders We attended SAP SAPPHIRE this week in Orlando, including yesterday''s Financial Analyst meeting, and spoke at length with management, customers and partners. SAP outlined its successful execution on product integration, high customer NPS, SAP RISE driving S/4HANA Cloud upgrades (with large customers, like Accenture, mainly opting for the Private Cloud version but with a plan to migrate modularly to Public Cloud), and success in cross selling the suite of apps, including increased competitive wins vs Oracle in ERP, Workday in HCM (Seagate swap and Amazon being targeted now) and Coupa in Procurement. Signavio featured prominently as a crucial component of business transformation (vs Celonis'' limited capabilities), and success with smaller innovative companies was also highlighted as 60% of S/4HANA customers are now net new. Microsoft is clearly emerging as the clear #1 IaaS partner, ahead of Amazon Web Services (which is strong in the mid-market) and Google Cloud Platform (still lagging). 2025 guidance confirmed, with more interim detail provided SAP expects Cloud revenue growth acceleration this year and next, and suggested total revenues should grow double digits in 2024, and possibly as early as 2023 (well ahead of consensus expectations). Operating profit should grow double digits in 2023, with cash flows growing slightly slower. SAP suggests it is ahead of plan on its 2025 EUR22bn Cloud revenue target, and its EUR11.5bn op inc target, although Cloud GMs may be 1-2% below the 80% target due to the outperformance of Private Cloud offerings. Overall, operating profit is expected to grow at a 13% CAGR from 2022-2025, with regular buybacks also likely. Ongoing 2.5 / 1 maintenance to Cloud conversion should help drive ongoing high levels of revenues growth beyond 2025. Defensive positioning near term with catalysts medium term SAP''s enterprise positioning (low churn), high recurring revenues and FX tailwind make...
SAP - BUY | EUR134 Trying to sell the SAP Litmos enterprise learning software business SAP Litmos would be on sale for more than USD1bn SAP Litmos was inherited from Callidus, while SAP SuccessFactors provides a similar solution Non-core disposals help deleveraging SAP, but the impact on the P&L would be immaterial
Cloud taking over as the dominant revenue stream With S/4HANA Cloud backlog growth still accelerating (+79% in Q1), SAP continues to indicate that Cloud revenue growth will accelerate not only in 2022, but in 2023 as well. With maintenance revenues still growing, revenue growth (S/4Hana Cloud grew 71% in FQ1 on a EUR1.6bn ARR) is not yet coming from meaningful cannibalisation. With licenses declining to just 4% of sales in Q1, vs 40% of sales from Cloud revenues, SAP is finally starting to see the light at the end of the Cloud transition tunnel, with a return to double digit c/c revenue growth possible as early as 2024. Double digit EBIT growth targeted for 2023 H1 2022 profits will now not only be impacted by the increased investments in RandD and SandM as part of the Cloud transition, but also Russia wind down costs, including the accelerated amortisation of Cloud infrastructure and of sales commissions. But with the hiring Q1 weighted, H2 margins should show improvement, with a further step up in 2023 as Cloud gross margins start to inflect higher. The CFO has confirmed he will stay on board in order to deliver the double-digit operating profit growth guidance for next year. SAP implies the 2025 80% Cloud gross margin target may be difficult to achieve due to incremental demand for SAP RISE and S/4HANA Private Cloud, which may drive outperformance on Cloud revenues and Operating profit, but with a lower Cloud gross margin. Reiterate Outperform as a defensive profile in a challenging market We lower our non IFRS EBIT estimate by 2% this year on Russia exit costs, but our Exane EBITA estimates increase 5% due to lower FY stock comp. Our EPS comes down on a higher tax rate and lower financial income. We keep our EUR120 TP unchanged (now USD130); using our recently implemented valuation framework we continue to use a weighted EV/Sales (5x) and EV/EBITA (11x) approach applied to FY23, now weighted 75:25 (from 50:50) reflecting the recent...
SAP’s Q1 results were a mixed bag. While revenues were above consensus, profitability came in lower due to the impact of the Russia-Ukraine war. Nevertheless, the group reported better-than-expected momentum for its Cloud business. This was visible in the marked growth across all regions. The growth in S/4 HANA was also solid. Backed by these positives, the group is confident of making up for the negative impact from the war and confirmed its outlook.
SAP - BUY | EUR134 Q1 2022 results: negative impact from Russia will be minimal Q1 2022 results meet our expectations despite the suspension of the business in Russia Cloud KPIs remain encouraging FY22 guidance is reiterated
Following our 2022 BNPP Exane Global Cloud Scanner Survey report published recently (link), we publish this ''teardown'' version, unpacking trends on a more granular basis by region and by respondent profile for the 100+ Global Software buyers to dig deeper into software buyer trends. US and APAC software spending more positive than in Europe At a high level, US respondents indicated positive increases in aggregate spending scores for 8/12 software segments and APAC indicated 7/12, showing broad-based strength in spending intentions. In Europe (50% of our survey pool) however, just 3/12 software segments saw positive aggregate spending scores (and this was before the beginning of the Ukraine War). Microsoft and AWS dominate spending intentions 80% of respondents in every region indicated increasing spend with Microsoft. AWS was 2nd with 55% in every region, with 3rd place taken by Salesforce/Snowflake (US), Salesforce (Europe) and Google (APAC). In the US, Adobe and Snowflake saw the most positive y/y change in spending intentions, while ServiceNow and Coupa were at the bottom in the US on y/y spending scores. Comparing Survey results with our recent Global Software recommendation re-balancing We recently published a Software sector report with our new valuation framework, re-balancing our recommendations as part of an eCommerce Technology deep dive (link). We believe these ''tear down'' results are supportive of the Microsoft Outperform, as well as the Adobe Outperform where US spending intentions improved y/y. For ServiceNOW, where we are Underperform, the Workflow Automation data are mixed (good for spending priorities but less favourable on spending intentions, especially for large enterprises) with ServiceNOW seeing flat y/y vendor specific spending intentions with large enterprises. We see the risk vs reward as unattractive near term (link). Snowflake, where we are Underperform, delivered more reassuring results than was first...
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European sentiment poor. Q1 license sales likely challenging We spent much of the past two weeks in Paris and Frankfurt, and investor sentiment is poor. We imagine corporate sentiment is too. While in Germany, there is discussion for industrial companies to shut production several days / week in the event of a Russian gas embargo (link), in France, the increasing potential for a Far Right candidate to be elected President on April 24 (link) is increasing uncertainty. Not a great environment to sell software licenses. In addition, in our recent Cloud Scanner Survey (link) ~45% of Software Buyers now say consumption based pricing as their preferred model, vs ~30% for Subscription, and just 25% for Software Licenses (perpetual or term). Dassault Systemes particularly at risk with significant license exposure Consensus expects 19.4% of Q1 software revenues to come from licenses and 22.5% of FY software revenues. In addition, ''recurring'' software revenues have a term license component with annual renewals being largely recorded in FQ1. We also note that China, where the license model is preferred, had COVID lock downs at the end of March in the tech centric Shanghai and Shenzhen regions. Europe + APAC = 62% of revenues at Dassault. We expect just 5% c/c license growth in Q1 and the FY, vs guidance for 9-12% in Q1 and +10-12% for the FY (note, in Q3/Q4 2019, before COVID, DS delivered just ~1% licence growth when Germany/China was weak). We expect almost no EPS growth this year. We also believe margins peaked in 2021 at 34.3%, and the Cloud transition, which is in its early stages, along with weakening license demand, will limit organic EPS growth. SAP has high German exposure (15% of revs), but limited license exposure For SAP, licenses are now a much smaller contributor, at just 6% of Q1 consensus software sales and 10% for the FY as Cloud reaches ~50% of Software sales this year. We now model a 30% license decline for Q1 and FY as SAP...
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Investor feedback from our launches and recommendation changes last week We published four significant reports last week, including The shovel sellers in the eCommerce gold rush, where we cut numbers across our Global Software coverage for the weakening macro environment, especially in Europe as consumers (and businesses) adapt to rising energy costs, rising rates, and geopolitical uncertainty. We also implemented a new valuation framework, with a greater tilt toward profitability (including stock options). The report also included a deep dive analysis on eCommerce enabling technologies. We initiated coverage of Adobe with an Outperform, and Logitech, Qualtrics, Shopify, Zoom with Neutrals as we still don''t see the fallen Covid angels as cheap enough to buy across the board due to lingering top line risks and still rich valuations. We also initiated on Amazon with an Underperform (see our deep dive: I''m afraid we don''t click) and we published a report focussed on Alphabet''s eCommerce strategy (Using AI to disrupt the eCommerce TAM). We also published the results of our BNPPE 2022 Global Cloud Scanner Survey of more than 100 Software buyers globally (with a tilt toward Europe). As a result of the above, and the re-balancing of recommendations, we downgraded ServiceNOW to Underperform from Outperform, Snowflake to Underperform from Neutral, Workday from Outperform to Neutral, and upgraded Oracle from Underperform to Neutral. We reiterated Alphabet, Microsoft, Salesforce and SAP as key Outperforms. We made cuts to Dassault Systemes'' license estimates, highlighting the EPS risk and high valuation (remain Underperform). Investors struggling to identify what will work in 2022 Investors pushed back the most on ServiceNOW, which we believe highlights just how popular the stock is as it has held up well relative to other SaaS high flyers. We received less pushback than expected on Amazon, other than investors seem to be constructive on a mean...
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We recently conducted a Global roadshow with SAP CFO and Executive Board Member Luka Mucic following the company''s recent Q4 results. We highlight several key takeaways. Deal sizes getting bigger, duration extending, visibility improving, rev growth accelerating In FQ4, SAP saw S/4HANA Cloud (a EUR1.4bn run rate business) revenue grow 61%, current backlog (at EUR1.6bn) grow 76%, and we believe further acceleration is likely based on the triple digit order entry growth. Conversion rates from maintenance to subscription are outpacing expectations (above 2x), duration of contracts is extending (to 3.9 years overall, but with many RISE contracts 5+ years) and attach rates for line of business applications is improving (particularly for SuccessFactors, but also CX / Commerce, Ariba, Concur and Qualtrics). We believe this has given the company confidence to already guide for accelerating Cloud revenue growth in 2022 and again in 2023. We believe a 2025 revenue guidance upgrade may be possible as early as at the end of 2022 (we now model ~EUR39bn of revenue in 2025 vs the EUR36bn+ guidance). The margin story will have to wait until 2023, but EPS growth prospects are attractive With software licenses likely down to just 9% of sales in 2022 (Cloud at 40%), mix shift should no longer be a major drag on margins, and improvements in Cloud gross margins should eventually pull up group margins. But the inflection of Cloud GMs will not likely be seen until mid-2023. Stock comp as a % of sales should peak in 2022 (at ~10%), seeing IFRS margins also improving as of 2023. We believe non IFRS EPS can grow double digits in 2023, and then 20%+ out to 2025 (with Exane EPS, which includes stock comp, growing even faster, at ~30% as of 2024). Light at the end of the tunnel. Re-rating likely as SAP executes on Cloud transition We believe SAP shares will outperform as investors see continued signs of revenue growth acceleration this year (as Oracle saw last year),...
Which Software stocks are most vulnerable to geopolitical risks in Ukraine? Unfortunately, geopolitical risks in Russia / Ukraine remain high. The Russian stock market fell 14% on Monday as the market starts to price in more certainty of a military conflict. There is little direct exposure to Russian and Ukrainian economies across our Software coverage. SAP (likely an ERP provider to many of the Russian energy and industrial companies) may be the most directly exposed, but still only generates 1-2% of total revenues from Russia / Ukraine. We identify those companies with the highest EMEA, and Software License, exposure War in Ukraine may impact business confidence and spending across EMEA (not to mention weakening the Euro). In this note, we identify Software companies with the highest EMEA exposure, and the highest percentage of sales from Software Licenses (which are more likely to be impacted if geopolitical uncertainty increases into the end of Q1, just as we saw in Europe in Q1 2020 with COVID). Finally, we layer on a valuation overlay by looking at stocks with the highest P/Es, as high margin license weakness may more quickly result in missed earnings. European Engineering Software, and legacy global license vendors, most at risk As can be seen in the next page, European Engineering Software vendors (Aveva, Dassault Systemes, Hexagon and Nemetschek) still have 20-50% of sales from licenses (and hardware in Hexagon''s case) and have 30-60% exposure to EMEA. In that group, Dassault Systemes and Nemetsheck have the highest P/E multiples. Temenos and Microsoft (including Windows as licenses) also have high license exposure (~30%) and high EMEA exposure (near 40% of revenues at Microsoft). Legacy hybrids (Oracle and Suse) have 20% of sales from licenses + hardware exposure and 30-50% EMEA exposure. In Europe, Amadeus, Sage, SAP, TeanViewer all have sub-10% License exposure, despite high EMEA exposure. Amongst US Cloud Software vendors,...
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Throughout 2021, SAP continued to see an increasing shift towards cloud transition. The group’s ‘RISE with SAP’ programme continued to attract customers and S/4HANA showcased robust growth. These trends are expected to persist in 2022. Licensing revenues declined with a similar trend expected going forward. Operating profitability was lower than expected but the bottom line benefited from a strong contribution by Sapphire Ventures. The profitability target for 2022 is lower than expectations but it should not affect the bigger picture.
2022 to mark a (deep) margin low point After warning on non-IFRS margins at the Q4 pre-announcement (guiding for ~27-28% vs the then consensus of ~29%), SAP has warned on GAAP margins at the full FY results announcement (driven by stock comp guidance of EUR3.0 - 3.3bn, implying 2022 IFRS op margins of ~15% vs 20% consensus, and down from 24% in 2020). In addition, cash will now be used for buybacks to offset option dilution. On the one hand, moving to more option-based compensation should help free cash flow, and bring SAP more in-line with industry practices. The ~10% of sales in SBC is in-line with peers Salesforce and Intuit, and well below Workday and Coupa. On the other hand, SAP did not raise its 2025 FCF guidance, implying cashflow to shareholders will be lower in 2025 after the buybacks than originally planned, although the company suggests it may raise that target after FY''22, especially as FCF was EUR0.5bn better than expected in FY''21. In an unforgiving market, the shares traded down 6%, and are now down 11% YTD though it still outperform most other Software names. But top line dynamics promising as Cloud transition accelerates Despite the mixed communication around profitability, top line dynamics remain the bright spot (see within details about S/4HANA). SAP has guided for Cloud revenue growth to accelerate to 23-26% (from 19% in 2021), and on the conference call the company guided for further Cloud revenue growth acceleration in 2023, with total revenues growing double digits potentially by 2024. We had expected SAP to guide conservatively for 2022, setting a low point for margins, which has occurred, although at a lower point than we expected, in part driven by a better revenue outlook than expected. We believe the market will eventually start to look at 2023 as the inflection year for the stock. Maintain Outperform and EUR145 price target We raise our non-IFRS estimates on a brighter Cloud revenue growth outlook and a lower...
SAP - BUY Top Picks | EUR151 VS. EUR145 (+36%) Towards to the inflexion point We reiterate our Buy rating and raise our target price to EUR151 SAP is off to double-digit operating profit growth from 2023 onwards We are not concerned by free cash flow guidance for 2022 The purchase of Taulia strengthens SAP in working capital management
SAP - BUY Top Picks | EUR145(+20%) Delivering solid performance in 2021 and keeping up in 2022 We reiterate our Buy rating and Top Pick status for Q1 2022 Preliminary results 2021 were slightly above expectations Momentum on S/4HANA Cloud remained very strong in Q4 Guidance for 2022 is not really surprising, but offers upside potential
SAP preannounces Q4 results, highlighted by Cloud strength Cloud revenues of EUR7.98bn were 3.5% ahead of consensus (Visible Alpha), growing at 24% at c/c (consensus +22.7%) up from 18.5% last quarter. Current Cloud Backlog of EUR9.45bn grew at 26% in c/c, a good acceleration from 22% in Q3 and above the +21.8% consensus. S/4HANA CCB accelerated to 76% (up from 58% in Q3). S/4HANA is now a ~EUR1.4bn run rate business growing at 60%+. Licenses and Support revenues of EUR4.38bn was 4.1% above consensus, helped by a 9% Software License beat (although licenses down 17% y/y in c/c). Adj EBIT of EUR2.464bn was 1% ahead of consensus, but the Adj Op Margin of 30.9% missed consensus of 31.7%, despite the license beat. FY OCF reiterated at EUR6bn but FY FCF raised from EUR4.5bn+ to ~EUR5bn. 2022 outlook provides revenue upside, margin downside, with 1% EBIT upside at high end SAP has guided for Cloud revenue growth of 23-26% at c/c, vs consensus of 23.5%, which we see as a key positive, especially as SAP is still likely taking a cautious view on Concur. Cloud and Software revenue guidance of EUR25.0bn-25.5bn at c/c (up 4-6%) implies EUR25.5bn-26.0bn, 1.4%-3.4% above consensus. The EUR7.8bn-8.25bn non IFRS operating profit at c/c (flat to down 5% y/y), or EUR7.96bn-8.42bn reported, compares to consensus of EUR8.35bn, so less than 1% above at the high end. The resulting operating margin of 26.9%-27.8% is 1-2pp below consensus. 2022 consensus EBIT will likely be unchanged. The Cloud acceleration a positive, but SAP now needs to convince the market that 2023 will see margins and earnings inflect higher. Share repurchase announced to fund shift away from cash settled stock based comp SAP will buy back EUR1bn of stock in 2022, which will be primarily used for stock option plans, which have been typically settled in cash. This brings SAP more in-line with industry norms, whereas SAP''s FCF was penalised relative to peers due to cash settling stock comp. This...
SAP is set to report FQ4 results on Jan 27, however a pre-announcement is possible. SAP has pre-announced three of the last four quarters. Last year, SAP pre-announced on 14 Jan. Tik tok... In theory, we should not get any surprises Industry demand has remained strong through Q4, as evidenced by strong results from Accenture (who called out SAP ERP and Supply Chain), Oracle (although that was mainly a database license beat), Salesforce and Workday. There may be risks to licenses as omicron and supply chains may have caused some deal slippage, but consensus expects -21% y/y, which seems cautious, implying a 32% 2-year decline vs 28% on average the last two quarters. Consensus expects 23% c/c Cloud rev growth (20% y/y in Q3). CCB backlog growth was 22% y/y last Q, and SAP has suggested we should not see a meaningful acceleration. Consensus has a 31.8% non IFRS op margin in Q4, with sequential Opex up just 12.5% vs 13% on average, but FX moves may make that safe. Focus on 2022 outlook. We expect a cautious beginning to the year. SAP has already guided for 2022 operating profit to be flat to down y/y (like 2021) as the company accelerates its Cloud transition, licenses decline further, and maintenance begins to fall. We would expect SAP to begin the year with cautious guidance. If we had to guess, we would say 1) Cloud Revenues of EUR11.1 - 11.6bn, up 19-24% y/y at c/c (consensus EUR11.5bn, up 23.5% y/y) up from 18.4% in 2021, 2) Total Software revenues of EUR24.7 - 25.2bn, up 3-5% y/y at c/c (consensus EUR25.1bn, up 5.5%) vs 4% growth in 2021, 3) non IFRS Operating Profit of EUR7.9 - 8.3bn, flat to down 5% y/y (consensus EUR8.3bn) vs flat to -2% in 2021, 4) FCF of EUR4bn+ vs 4.5bn in ''21. 2023 revenue and profit growth acceleration to drive re-rating, eventually With the 2022 guidance out of the way, we believe the market will increasingly focus on the extent to which SAP can convince the market it will see revenue and profit growth...
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We recently met one on one with SAP CFO, Luka Mucic, to discuss SAP''s ESG credentials. SAP a BNPP Exane ESG leader We recently published a Global Software and IT Services ESG report, including materiality map (see link) where SAP was named as one of the 7 Leaders in the sector. The company was early to be 100% reliant on renewable energy in its data centers (in 2014, three years before Google) and has moved forward its carbon neutrality target to 2023, two years earlier than previously targeted. SAP also recently announced its entire 27,000 vehicle fleet will be electrified by 2030. CFO highlights the sustainability advantages delivered by S/4HANA Cloud SAP is increasingly helping its customers monitor and track their environmental, social and economic impact through the use of SAP''s S/4HANA Cloud solutions, including monitoring the impact along the supply chain and the procurement network. In addition, SAP is at the forefront of helping companies convert ESG data into financial reporting. We see these capabilities, along with the other benefits bundled into the SAP RISE offerings, as yet another driver that is pushing customers to upgrade to S/4HANA Cloud, a process that should accelerate in 2022. Further improved financial communications key to a 2022 re-rating We believe that SAP, with a new Head of IR, is working on continuing to improve financial communication in order to provide analysts and investors with greater visibility into the company''s accelerated Cloud transition. With 2021 and 2022 to be transition years, with limited revenue and EBIT growth as high margin license revenues decline, SAP will need to demonstrate progress on key Cloud migration signposts for investors to begin to look forward to revenue and EBIT growth acceleration as of 2023, with revenue growth approaching double digits by 2024. We note that Adobe and Microsoft started to re-rate 12 months ahead of their EPS growth acceleration during their Cloud migrations....
SAP - BUY | EUR145 VS. EUR139 (+17%) More growth and investment…and more profit from 2023 as planned We reiterate our Buy rating and raise our TP to EUR145 from 139 Cloud revenue growth acceleration is confirmed quarter after quarter We are confident in Cloud & Software sales slightly exceeding guidance Despite investments, we consider 2025 profit goals will be exceeded
SAP reminds market that 2022 is still a transition year SAP shares sold off during its conference call yesterday on cautious 2022 commentary, despite Q3 results supportive of the company''s ongoing Cloud transition. SAP''s current guidance is for non IFRS operating profit to be flat to down in 2021 and 2022, yet consensus was modelling a 3.5% uplift in 2022. SAP has been discussing RandD rising to 17% of sales where it is now (from 15% in 2020), with SandM staying at the current 23% level for now. We believe SAP''s commentary on OPEX has not changed. In addition, SAP has also been pointing to Cloud gross margin inflections to come in 2023 after two years of converged Cloud infrastructure investments. However, the 10bps / year of Cloud GM improvement now expected in 2021 and 2022 is still somewhat disappointing, but does not change the 2023 target for Cloud gross margin improvement. In addition, despite resilient software license and maintenance performance in 2021, SAP reminded investors that it still expects both line items to begin to decline more aggressively as more large customers take up the RISE Cloud transition option. Overall, the reminder that 2022 will be another transition year for group revenues and operating profit dented hopes that SAP is ahead of plan in 2021, which would lead to a more immediate improvement in group metrics in 2022. Cloud migration still heading in the right direction. Reiterate Outperform. SAP raised its FY Cloud revenue growth outlook by 100bps on the top line, now expecting 19% in c/c, and confirmed that Cloud revenue growth should accelerate in 2022. Current Cloud Backlog and cRPO are now accelerating for S4HANA, Qualtrics, and the remainder of the Cloud business. The Concur recovery remains slow, likely causing some caution on the Q4 CCB (and Cloud GM) outlook. Overall, our 2021 revenue estimate is unchanged and we raise 2022 by 1%. Our non IFRS EBIT estimate is unchanged for 2021, with a 3% downgrade for 2022...
SAP, in Q3, built up on the traction seen in cloud transition in the previous quarter. SAP posted encouraging numbers as ‘Rise with SAP’ gathered further momentum and attracted new customers as well. S/4HANA also continued to attract customers as demand remained solid. Consequently, licence revenues declined. Similar to the previous quarter, the group once again raised its outlook up a notch. However, we see no monumental change to our estimates.
SAP - BUY | EUR139(+19%) Third upward guidance revision for the year We reiterate our Buy rating Q3 2021 results exceeded expectations FY21 guidance is once again revised upwards
SAP - BUY | EUR139(+15%) Qualtrics acquires Clarabridge, boosting XM data analysis We reiterate our Buy rating Clarabridge offers customer experience as a service Clarabridge provides Qualtrics with unstructured data understanding The acquisition price does not much impact SAP’s stake in Qualtrics
We were reassured by SAP''s Q2 results, even if the market wasn''t SAP slightly beat consensus constant currency revenue growth expectations for Cloud, Software Licenses and Support (i.e. Maintenance). Op margins beat consensus by 90bps, with investments shifting from SandM to RandD, helping Customer Net Promoter scores as SAP''s product focus intensifies, while the successful SAPPHIRE Ventures investments continues to drive big EPS beats (48% beat in Q2). Hyperscale relationships are progressing well with Cloud GMs above 70% while SAP Capex was down 31% y/y as it de-emphasizes its own IaaS. SaaS/PaaS revenue (ex Intelligent Spend) grew 25% at c/c, while Intelligent Spend is growing again and Concur has stabilized. SAP reiterated the high end of the FY revenue growth guidance, raised the high end of its operating profit growth guidance while reiterating FCF guidance. Cloud revenue growth acceleration on track for H2 and 2022, as expected SAP gave insight into the progress on its Cloud acceleration program, which targets a 24% Cloud CAGR from 2020-2025, saying that H1 metrics (Revenues, Backlog, Bookings, Order Book) put SAP ahead of schedule on the CAGR target. The conversion ratio of Support to Cloud Subscription is ahead of plan at 3:1 in Q2. Yes, the Current Cloud Backlog growth was slightly below consensus (20% vs 22%), but CCB has not proven to be a good predictor of Cloud revenue growth at SAP (CCB thus far higher correlated with current period subscription growth, not future periods). New Cloud Bookings are a small portion of CCB, and most existing customer cross selling and upselling will likely occur in Q4. We still model an acceleration to low 20s Cloud growth in H2 from 15% in H1, resulting in 20% c/c Cloud growth this year vs consensus of +18%. We expect mid 20s in 2022. With Cloud revs reaching near 50% of total Software revs at SAP next year, SAP is rapidly approaching the tipping point between legacy license vendor and primarily a...
In Q2, SAP built on the good traction seen in its cloud transition through its Rise with SAP programme. This was visible in its current cloud backlog growth and cloud revenues. Licence revenues declined as expected. Good momentum was also seen in S/4 HANA and the group saw a general improvement in demand as reopening took place. After this release, the group raised its outlook albeit marginally. We will keep our recommendation unchanged.
SAP to report FQ2 results on 21 July, but a pre-announcement possible this week In 2020, SAP pre-announced Q2 results on April 8.While consensus expects software licenses to decline 18% y/y in c/c, we expect just a 10% decline, which would be more consistent with the 2 year CAGR delivered in Q1 (-14%). But we believe the focus will be on the accelerating Current Cloud Backlog growth, which was +19% in Q1, with consensus expecting 18.5% in Q2, likely +24% in c/c. We believe the S/4Hana CCB growth will also accelerate from the 39% reported in Q1. We expect 17% c/c Cloud revenue growth vs 16% for consensus in Q2, but we are 2-4% ahead on Q3 and Q4 Cloud revenues and believe the strong Q2 CCB growth could see SAP raise the FY c/c Cloud revenue growth guidance of 14-18% (we model +20% vs consensus of +18%). We do not expect a margin beat despite the license beat We are only 1% ahead on adjusted OP despite the expected license beat. This is due to slightly lower maintenance revenues (declining for the first time), and also allowing for the Signavio acquisition (deal closed at end of Q1) as well as execution on the FY hiring plan. We are below consensus on adjusted OM at 27.6% vs 27.9%, but this is a timing issue as we are ahead on the FY by 20bps. Below the operating income line, we believe another positive SAPPHIRE Ventures contribution is possible considering the successful Monday.com IPO where SAPPHIRE is an investor (note: these gains are included in non IFRS EPS, but not modelled by us or consensus). All eyes on the Cloud prize In addition to the financials, we believe investors will be looking for accelerating momentum on the SAP RISE offering aimed at facilitating customers'' shift to the Cloud. The one month long SAPPHIRE NOW event create an opportunity to build the pipeline, and recent commentary from Accenture and Capgemini indicate demand is inflecting higher. In addition, hyperscale partners, namely Microsoft and Google, have named a...
SAP - BUY | EUR139 VS. EUR133 (+16%) Sapphire Now 2021: on the right trajectory We reiterate our Buy rating and have raised our target price to EUR139 The case for moving to S/4HANA Cloud has seen increasing relevance There are more ammunition for growth acceleration after 2022 With the BTP, the promise to end the “nightmare” of SAP migrations
Financial update confirms Cloud revenue growth acceleration There was no change to the FY guidance or to the 2025 outlook, as expected, at SAP''s Financial Analyst Conference today. Cloud revenue growth should accelerate in Q2 as Concur has started to see improvements. SAP confirmed guidance for 18% c/c Cloud rev growth this year at the high end, and for 2025 EUR22bn of Cloud revs, nearly tripling the 2020 result, EUR36bn of total revs, 11.5bn of non-IFRS operating profit and EUR8bn of FCF. Overall, SAP sees a USD360bn 2020 TAM, growing at 11% to USD600bn in 2025, with SAP''s Cloud revs set to grow at a 22% CAGR from 2020-2025. While constant currency guidance was not changed, SAP now sees a 1pp greater headwind to Cloud revs and Operating Profit for Q2 and the FY as compared to April when it last gave guidance. We believe the company has left the door open to buybacks later this year. Up-sell and Cross-sell opportunities becoming more clear SAP stated that for every USD1 of S/4Hana revenue, it sees USD4 of eventual revenue once customers adopt the broader portfolio. SAP''s Cloud suite approach, built around its modular Cloud ERP platform, is taking shape as all Cloud apps are now on one data platform (Hana) and security model, and as 90% of technical integration between the applications is complete. SAP completed 350 functional integrations last year alone, helping drive up its customer NPS (net promoter score). New bundled offerings, such as SAP RISE which can incorporate five industry clouds or HXM (Human Experience Management), should also help drive more SAP adoption. So will the availability on all four hyperscalers (AliCloud, AWS, Azure, GCP) which no other firm can offer. Pipeline growth to drive backlog growth to drive revenue growth SAP will interact with 90% of its customer base through the month long digital SAPPHIRE NOW event, which should help build the S/4Hana, and RISE, pipeline. We expect Current Cloud Backlog growth to...
SAP makes several product announcements SAP kicked off its two week SAPPHRIRE Conference with keynotes from CEO Christian Klein, Founder/Chairman Hasso Plattner and Chief Marketing and Solutions Officer Julia White. SAP announced new bundled product offerings that have been made possible by 1) the completion of the migration of all of the company''s applications onto one data model; the Hana database and the SAP Business Technology Platform (BTP), and 2) the technical and UX integration of the Cloud applications. SAP is leveraging its presence from front-end to back-end to provide customers with the broadest suite of pre-integrated Cloud apps, sitting on top of SAP BTP''s database, development platform, RPA and no code tools, AI/ML capabilities, with industry specific extensions, while also providing Business Process Intelligence tools to assist in the Cloud migration process. SAP announces Upscale Commerce, Business Network integration, new SAP RISE bundles SAP Upscale Commerce will combine SAP''s existing commerce capability (formally Hybris) with SAP''s no low code tools (AppGyver) to quickly build omni-commerce capabilities, with headless API architecture, completely integrated SAP customer sentiment analysis (Qualtrics) and SAP''s Planning, Fulfilment and Supply Chain solutions. SAP announced SAP RISE for 5 industries, as well as the ability to add HXM (Successfactors/Qualtrics) or Procurement (Ariba) to RISE. And SAP announced the merging of its Business Networks offerings (including Ariba, and SAP''s Logistics, Asset Management and Supply Chain capabilities), looking to create a B2B platform / ecosystem. Interestingly, there was not one mention of the hyperscalers (AWS, Azure, GCP) as SAP continues to highlight its own value proposition, rather than infrastructure partnerships. Hasso sees a hockey stick in growth. We see S/4Hana growth accelerating We don''t expect any update on financial targets or metrics at SAPPHIRE, however, Hasso...
SAPPHIRE Conference to focus on Cloud. What else? SAP will kick off its annual SAPPHIRE Conference with a keynote from SAP CEO Christian Klein at 16h CET on Wednesday, along with Founder/Chairman Hasso Plattner, and new Chief Marketing and Solutions Officer Julia White, among others. This year''s SAPPHIRE event will take place in a 100% virtual format, and will therefore be spread over a two week period, with the main regional tracks taking place next week, and a Financial Analyst Conference eventually on the 15th. We see several likely themes this year, including integration and industries We see the conference focussing on: 1) Industry Cloud, along with new industry partnerships, 2) SAP RISE, as partners continue to get up to speed with the new cloud migration offering, 3) a new ''PartnerEdge Cloud Choice'' revenue sharing model to nudge partners toward getting more customer adoption of SAP technologies, 4) the completion of the integration of SAP''s cloud apps, leading to more SAP RISE bundles, such as ''SAP Rise + SuccessFactors'', 5) ''SAP runs SAP'', showing how SAP itself is driving value by using all of its own cloud products, and 6), more customer announcements and testimonials from customers running S4/Hana Cloud, along with a growing list of integrated SAP Cloud apps which SAP is cross selling as customers upgrade. Growing evidence of customers moving SAP to hyperscale platforms We continue to see an acceleration in the shift of workloads to the Cloud in order to benefit from advanced analytics capabilities, with the hyperscalers (AWS, Azure, GCP) as the primary destination. As the only ERP / Supply Chain offering that is architected to run on all main hyperscalers, SAP is benefiting from this shift. While Azure has been the primary destination, there have been several high profile moves recently to Google Cloud Platform, namely Vodafone, but others as well (see Google blog: link). While this is not yet related to RISE, the strong Cloud...
Google to deliver global data management and analytics capabilities to Vodafone Yesterday, we published our initial view on the extended Google Cloud / Vodafone partnership (link). Today, we look at the relationship in more detail, where Google will help Vodafone build a new data platform to drive digital products and services, and use AI/ML across its organisation and fixed / mobile networks. We believe the agreement will be complex in terms of its global reach and the technical nature of sharing large amounts of data across Vodafone and Google data centres, creating an impressive reference for Google Cloud Platform. In addition, after moving Vodafone from SAP ECC to S/4Hana, Accenture will now move Vodafone to S/4Hana Cloud on Google Cloud Platform, integrating with all big data workloads. SAP to be critical component of the Vodafone Cloud stack Vodafone runs one of the five largest instances of SAP S/4Hana globally, and also went live on Ariba, Concur and SuccessFactors (all now on the Hana platform) as part of the upgrade. Vodafone will now move its SAP landscape to the Google Cloud, which we see as a validation of SAP''s increasing push to move large customers to the Cloud. Google has also moved to SAP S/4Hana Cloud (switching from Oracle). In order to fully leverage the AI/ML capabilities of the hyperscalers by getting as much of their data in one cloud, we see more customers moving SAP to Google Cloud, AWS or Azure. We see SAP S/4Hana being architected and optimised to run in hyperscale environments (including AliCloud) as a meaningful competitive advantage for SAP vs Oracle (whose cloud apps only run on its own infrastructure) and Workday (which only runs on AWS, for now). In the near term, this generates upsell (Hana database and BTP) and cross sell (cloud apps suite) opportunities for SAP. In the long term, it ensures SAP''s strategic relevance. We are Overweight GOOGL, MSFT, SAP, CRM, Neutral ACN, WDAY, Underperform ORCL We...
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Encouraging details in Q1 results, namely 34% jump in the number of Cloud deals SAP had already pre-announced Q1''21 so there were few surprises in the results announcement this week; however new disclosures on S4/HANA Revenue (EUR227m, +43% ccy in Q1) and S4/HANA Cloud Backlog (EUR1.04bn, +43% ccy in Q1) should offer greater visibility into the impact of RISE converting SAP''s customer base to the Cloud (even though Co. commented that 50% of additional S4/HANA customers in Q1 were net new), as well as into the general evolution of Cloud ERP adoption. As highlighted in our upgrade note this week, and part of our sector note (Hyperscalers and the Battle of Industry Clouds) and our Global Cloud Scanner Survey, we see ERP as the next major category to move to the Cloud, and SAP was named by 40% of respondents as their most likely strategic Cloud ERP provider. Cloud Backlog and Cloud deal cadence gives us confidence in H2''21 Cloud Revenue With Qualtrics now reporting as a public company and SAP''s additional disclosures on S/4HANA, we estimate SAP ''ex-Qualtrics'' delivered Current Cloud Backlog growth of 17% ccy in Q1. Group Current Backlog re-accelerated to 19% ccy having fallen to mid-teens level in H2''20. Together with a 34% jump in the number of Cloud deals signed in Q1, these data points should serve as leading indicators for future Cloud Revenues and give us confidence SAP can deliver ahead of market expectations on Cloud Revenues in H2''21, where we are 3-5% ahead of Consensus. Cloud execution would in turn unlock SAP''s valuation, currently trading at 16x EV/EBIT As a result of the re-basing of expectations in 2020 and concerns around the clarity of what RISE offers, SAP now trades on 16x FY22 Non-IFRS EV/EBIT, marginally above its 5-year median, while most software companies are trading well above historic averages as COVID is driving an acceleration in digital transformation. We believe that a successful migration of SAP''s large customer...
SAP: Outperform, EUR135 TP / USD160 TP (ADR) We have published three in-depth reports on Global Enterprise Software; Hyperscalers and the Battle of Industry Clouds, The Cloud Scanner Survey, ALPHABET A: Stairway to Heaven. As part of our research we upgraded SAP to Outperform, EUR135 / USD160 (ADR) target price. This report offers a summary overview of our thesis on SAP specifically. Global Enterprise Cloud Scanner Survey We have used an external entity to gather answers to 40 questions from 100 CIOs and software procurement professionals plus 75 software resellers in order to better understand the customers and agents'' positioning on the topics that matter. In a separate report (The Cloud Scanner Survey) we provide the full results of the completed survey, while in the deep-dive report (Hyperscalers and the Battle of Industry Clouds) we combine the results of our survey with our own fundamental research to draw our conclusions. Who stands to gain and who stands to suffer? And ultimately; which companies exposed to this cloud transition should you invest in, and which companies should you avoid. Hyperscale partnerships key to unlocking Cloud potential For SAP, the hyperscale partnerships should help accelerate its customers'' shift to cloud ERP, creating cross selling opportunities for its broad range of increasingly integrated application and technology offerings. In addition, both SAP and Salesforce scored well in our Cloud Scanner Survey as 83% of respondents said that pre-integrated suites of offerings were preferable to best of breed (''suite part of the cycle''), while both companies scored as leaders across many cloud categories. SAP scored as the leading overall strategic cloud SAAS vendor, and #4 PaaS provider (behind the big 3 hyperscalers). Both SAP and Salesforce are also advanced in their Industry Cloud developments, and will be increasingly strategic cloud partners for enterprises. For SAP, we are ahead of consensus cloud...
SAP’s Q1 numbers were very similar to Q1 FY20’s in terms of revenues but lower in terms of operating profits. A clear positive, though, was the good traction in the group’s cloud business which was evident from the group’s current cloud backlog and cloud revenues. While it is still too early to call on 2025 plan, these developments are a good omen that SAP will be able to handle the transition well and deliver on its medium-term targets.
SAP - BUY | EUR133(+19%) Off to a good start in 2021 We reiterate our Buy rating with a target price of EUR133 Outperformance in Q1 stemmed from licence sales and operating costs FY21 revenue guidance is slightly raised, but not operating profit Core business refocus is confirmed with a JV on Financial Services
SAP announces Q1 software license beat on weak comp On a soft -32% comp, SAP reported 11% software license growth. Licenses beat consensus by 22% and our estimate by 11% (as we expected a license beat). Cloud revenues grew 13% in constant currency, below the +14.7% consensus (but just above our 12.3% estimate and in-line with consensus on an absolute basis at EUR2.15bn). We assume ~1.3% came from MandA, suggesting the Q1 result was a further slowdown from the 13% c/c growth in Q4. The reported current cloud backlog (CCB) growth of 14.8% was slightly below the +15.2% consensus, but the 19% c/c growth likely confirms that Q1 will be the cloud growth low, as guided for by SAP, following the 14% CCB growth in Q4. Concur should see y/y improvements starting in Q2. SAP said it saw ''a sharp acceleration in new cloud business across its cloud portfolio.'' See results table on page 2. Raising low end of FY cloud guidance despite in-line Q1 cloud revs and CCB. No license raise despite Q1 beat. SAP is raising the low end of its FY cloud revenue guidance, but not its implied software license / maintenance guidance. FY Cloud rev guide goes from EUR9.1 - 9.5bn to 9.2 - 9.5bn (in c/c), so a EUR50m raise at the mid-point (or 0.5%). Despite the EUR91m license beat, there is no license raise. And despite the EUR240m non IFRS EBIT beat (EUR1.74 vs EUR1.5bn), there is no raise to the FY EUR7.8 - 8.2bn non IFRS EBIT guidance. So is RISE working? At the Q4 results, investors shrugged off the license beat as SAP is supposed to be transitioning away from licenses and migrating customers to the cloud. In an investor survey we did earlier this year, 0% of investors said they thought a license beat would be a catalyst for the stock. SAP has beat again on licenses in Q1, and maintenance revenues were flat in c/c, so there are no tangible (financial) signs yet that RISE is having an impact. SAP has not yet disclosed any new metrics to track RISE''s success. SAP''s comments...
RISE creates low visibility, but also an opportunity for SAP to begin to outline transition SAP launched its RISE initiative in January, aimed at getting customers to convert existing on premise maintenance contracts to subscriptions while migrating their ERP to the cloud. How many customers are already signed up? Will the impact already be visible in Q1? Will the license collapse SAP guided for begin in Q1 despite the very easy comps? Will maintenance revenues decline in c/c for the first time in Q1? How much of Cloud revenue growth (and current cloud backlog) will be maintenance conversion? What new metrics will SAP begin to provide to help investors monitor the license / maintenance to cloud transition? Will SAP begin to break out S4 Hana Cloud revenues and growth? Six months after SAP''s re-basing of expectations, and now that the RISE strategy has been detailed, SAP has an opportunity to begin to improving visibility. Expect SAP to counter Oracle''s claims and fight back on success of S4 Hana uptake On Oracle''s last conference call, the company outlined 100 wins in SAP''s installed base. We expected SAP to fight back on these claims at the Q1 results. Oracle has also announced its own version of RISE (Oracle Cloud Lift) to move clients to the cloud for free (replacing a similar previous offering). We believe the competitive noise is less important than whether the market is ready for wide-spread cloud ERP adoption, and if COVID has been the catalyst for that to happen. So what do we expect in the Q1 results? SAP''s customer net promoter score improved in 2020 after a weak 2019. And our recent reseller survey work is supportive of customers spending more with SAP. But understanding of RISE remains low. We believe a license beat is possible (just like Q4) but the market will likely dismiss it (just like Q4). Cloud revs will benefit from MandA (Emarsys and one month of Signavio) and may benefit from maintenance conversion. We model 12.3% c/c...
Last week''s SAP Bull v Bear debate survey highlights deeply bearish sentiment While ''only'' 60% of respondents to our SAP survey identified themselves as Bears, it was hard to find a single Bull during the four Bull v Bear debates we held last week with ~25 investors. Many investors thought a) RISE was not compelling enough to push customers to upgrade, b) it was overly optimistic to expect a conversion ratio of 2 subscription dollars from 1 maintenance dollar, and c) the margin outlook for a largely private cloud offering was overly optimistic. In our survey, only 7% of investors said SAP would beat its 2025 cloud revenue targets, while nearly 50% thought the 2025 margin targets were unachievable. 87% saw cloud revenue growth re-acceleration as a key catalyst, while 0% thought license beats mattered. And 87% saw mis-execution as the biggest risk to SAP, rather than any individual competitor. Full survey results inside. Data from SAP Users group points to continued S4 Hana acceleration (but still on premise) While investors seem to believe that RISE is a panic signal, data from SAP''s German speaking users group suggest the S4 Hana product cycle is progressing. 43% of respondents see their SAP spend increasing in 2021 with a further 35% seeing their budget flat. 56% see S4 Hana representing medium or large investments; however, 44 pct pts of those see their investments on premise whereas only 12 pct pts see those investments in the cloud. This highlights the challenge SAP has in convincing customers to switch business models and deployment approach, especially in Europe. That said, while 24% are already live with S4, or expect to be this year, a further 39% expect to migrate over the next three years, with ''only'' 18% yet to decide to migrate. As for the cross selling opportunity, 15% expect to make medium or large investments in SuccessFactors with 14% for SAP Cloud Analytics. Microsoft Azure remains the preferred PAAS platform (27%) vs the...
We''ve got fun and games Today, we will host a series of SAP ''Bull vs Bear'' debates where we will host small group investor meetings to discuss the SAP investment case. We expect the debate to be spirited. We recently hosted investor meetings with SAP CFO Luka Mucic and new Head of Customer Success, Scott Russell, and nearly 100% of the questions focussed on SAP''s new ''RISE'' offering. SAP believes RISE will accelerate its customers'' shift to S4/HANA Cloud, with significant business model implications for SAP with license and maintenance revenues falling, and cloud accelerating. SAP can get you everything you want. They can help you find whatever you may need SAP claims its RISE offering is a ''concierge service'' which will provide customers with tools to 1) map their existing ERP estate through a new SAP SaaS offering (Business Process Intelligence through Signavio), 2) automate their move to a clean core ERP in the cloud, 3) identify the best hyperscale infrastructure option, and 4) provide migration services in three ''T shirt sizes''. Welcome to the SAP (Prime) bundle We see RISE as a bundle offering from SAP that not only includes subscriptions for S4/HANA and hyperscale infrastructure but is also a ''Trojan horse'' offering that includes usage of SAP''s Business Technology Platform (PaaS), including the HANA database and intelligent RPA, along with access points to SAP Business Networks such as Ariba and the Digital Supply Chain. By bundling offerings, and incentivising usage, SAP hopes to drive Pay As You Go revenues, create an ecosystem of developers and partners, and make SAP even more strategically relevant. We take it day by day. Maintain Neutral. Raise target price on valuation roll forward We remain Neutral rated. While we believe a soft comp, and the initial slow uptake of RISE could create a license beat in Q1, cloud revenues will likely remain weak with transaction based cloud products still under pressure. Our Exane BNPP EPS...
SAP - BUY | EUR133 VS. EUR127 (+27%) On the RISE again We reiterate our Buy rating and raise our TP to EUR133 from EUR127 SAP is ready for a reacceleration in cloud growth after Q1 2021 RISE with SAP is expected to be strong cloud growth contributor Free cash flow guidance for 2021 is not disappointing in our view
SAP completes 2020 picture, and 2021 outlook The main piece of new information in Friday''s full Q4 results was the cash flow outlook for EUR4.5bn+, down from EUR6bn in 2020. Despite SAP offloading the Qualtrics cash settled stock comp as part of the IPO, SAP is still guiding for EUR2.0-2.5bn of stock comp in 2021, up from EUR1.1bn in 2020 and EUR1.8bn in 2019. In addition, capex may rise after having fallen from EUR1.5bn in 2018 to EUR0.8bn in 2019 and 2020. With guidance for falling operating profit and FCF in 2021, on flattish revenues, we expect the shares to remain range-bound, especially as cloud revenue growth may fall further y/y in Q1, and FX headwinds will intensify as well. SAP begins to provide additional detail around business model transition At its Q3''20 warning, SAP announced it was accelerating its cloud transition, which would lead to a rapid decline in its license sales, and the beginning of maintenance revenue declines, but details remained vague. SAP''s RISE event last week outlined its new ''concierge service'' cloud offering, and SAP is beginning to provide information around potential cloud revenue drivers. For example, SAP expects its maintenance revenue to convert into 2x cloud revenues, and SAP sees a EUR10bn infrastructure as a service opportunity annually for SAP''s existing on premise footprint. However, the timing and mechanics of the transition remain unknown, and investors will be concerned that SAP is simply now re-selling hyperscale infrastructure, while taking on more execution risk by managing customers'' cloud transitions. However, the payoff for SAP will come in accelerated S4 Hana upgrades, and the cross selling of SAP''s vast cloud apps portfolio, eventually driving double digit group revenue growth. We expect more disclosure as part of the Q1 results. Awaiting more details from our meetings with management this week We will host SAP CFO Luka Mucic and new Head of Customer Success Scott Russell this week...
SAP’s Q4 figures showed a sequential improvement. They also helped it to surpass its revised FY20 guidance for revenue and achieve the high-end of the range in operating margins. FCF generation in particular was a positive and some ways ahead of the guidance. The group also put forward its FY21 outlook and reiterated its FY25 ambitions. The transformation will take time.
SAP''s Rise event focuses on new cloud services offering SAP senior management hosted SAP Rise on Wednesday, an event to announce a new cloud deployment strategy where SAP will take on the management of large customers'' existing ERP estates, including existing infrastructure, and then assist in migrating to cloud based solutions. The process would see SAP: 1) provide business process intelligence services, 2) handle technical migration of the existing landscape to cloud, with less customisations, 3) swap the infrastructure for SAP or hyperscale infrastructure, 4) offer the SAP Business Technology Platform for customers to extend the new ''clear ERP core'', 5) give customers access to the SAP Business Network, an ecosystem of SAP customers and partners, and 6) eventually move over to S4 Hana public cloud. New offering raises risks for SAP...and opportunities SAP will be the ''one throat to choke'' or ''one hand to shake'' for the customer who will have one contract and one provider (so SAP will pass through IaaS revenue to hyperscale partners). With SAP taking ownership of potentially highly complex migration processes, SAP is increasing its execution risk, as well as risking stepping on the toes of services partners. On the flip side, SAP is increasing its TAM, and believes that converting maintenance revenue to subscription could result in 2x the revenues. By stimulating and controlling the upgrade process, SAP also hopes to drive usage of its Business Technology Platform, as well as cross sell its broad cloud application offering. No details have yet been provided as to how SAP will push this transition through salesforce incentives. The potential impact of the new offering is already embedded in SAP''s guidance for licenses to fall at ~20% annually, maintenance revenues to begin falling, and for Cloud revenues to grow 21% CAGR to EUR22bn by 2025 with 80% GMs, and 32% group OMs. Near term Qualtrics IPO likely to reignite valuation debate At...
SAP - BUY | EUR127(+21%) Encouraging trends for 2021 We reiterate our Buy rating FY20 results reached the top-end of company guidance The Cloud business and cost management remained solid in Q4 FY21 guidance is aligned with the trajectory to reach FY25 targets
SAP''s upcoming Cloud Transition Kick Off event SAP is likely to unveil its ''new, new, new'' cloud strategy on January 27 at its ''RISE with SAP'' event (https://www.sap.com/about/events/rise-with-sap.html). This event (two days before SAP''s full 2020 results) may shed light on why SAP expects software licenses to collapse, despite Q4 results showing an ongoing recovery in license sales back towards trend growth. A return to trend should see licenses -3% in 2021, not -20% While we would normally expect Q1 licenses to return to +13% growth on the -32% comp, and for FY licenses to decline just 3% in 2021 if SAP were to return back toward trend growth, SAP is suggesting a 20% decline, which would be a re-acceleration downward from the -11% Q4 level (which was on a tough pre COVID comp). We believe the only way for this to transpire is if SAP forces through the change by incentivising its salesforce to sell, and customers to purchase, subscriptions rather than licenses. However, having lost its Global Head of Sales and Customer Success (Adair Fox-Martin) on Friday, that transition is likely only just beginning. Showing that it is serious about pushing through its Cloud transition, SAP hired a new Chief Marketing and Solutions Officer on Friday with Julia White joining from Microsoft, where she led Microsoft Office 365 Product Marketing during its Cloud transition, and was head of Azure Product Marketing. Klein making big changes, but near term visibility low SAP CEO Christian Klein is right to accelerate SAP''s cloud transition in our view; however, this creates little visibility near term for license / maintenance declines, and the eventual conversion to subscription sales (although the +13-18% FY cloud subscription growth guidance likely implies little conversion). We hope to gain some insight on 27 January when we expect SAP to outline its new cloud deployment options. While we expect Webscale partners to be high profile, we believe SAP will...
SAP''s strategic shift creates more questions than answers, for now At its Q3 warning, SAP signalled that it expected software license sales to continue to collapse at ~20%+ / year instead of bouncing in 2021 on soft comps. SAP has suggested that, while customers are looking to move toward more subscription models, SAP will also look to push through this change. While we believe this may create an opportunity for an eventual cloud revenue growth acceleration, details on new cloud deployment and SAP support options, pricing and salesforce incentives remain scarce, creating low visibility in the near term. Demand environment checks mixed. Licenses likely still under pressure For their November quarters, Accenture reported an uptick in demand for its Intelligent Platform Services, including SAP, back to low single digit growth, but Oracle reported a return to software license declines. For their October quarters, Salesforce demonstrated continued strong demand with near 20% cRPO growth, but Workday''s outlook disappointed (just 7-8% seq RPO growth vs +15% typically) as cloud financials demand remains muted. Considering the added uncertainty around SAP''s delivery options, and ongoing reluctance from customers to commit to capex investments, we expect licenses to remain weak in Q4, as will transaction based cloud revenues. We are below on revenues and above on op inc. in Q4 (29 Jan results) A Q4 pre-announcement is possible. We are 4% below on cloud revs and 7% below on licenses (-25% y/y at c/c vs consensus at -21%). We are 1% above on adj op inc (100bps above on adj OMs) as COVID cost savings continue. Our 9% higher than consensus EPS is largely driven by a lower tax rate. We expect an FX headwind in H1''21, and our FY''21 numbers are 2.5% below on revs and 2% below on op inc. We model 2.5% c/c Software and Cloud growth (vs +2.9% for consensus). Adjusting estimates and target price, mainly due to FX headwinds Our EPS estimates fall by 3% as we...
SAP results post mortem SAP traded 20% lower on its Q3 results, which were accompanied by a lowering of 2020 and 2023 targets, and the stock has continued to drift since, despite the Chairman / Founder purchasing EUR250m of stock at ~EUR100. The slight macro driven adjustment to guidance was understandable. However, the guidance for software license sales to collapse ~80% from 2019-2025, at a 20-25% CAGR, was surprising (as they were down just ~5% in 2018 and 2019), and, along with the accompanying ''mid-single digit'' decline in maintenance revenues, was the main driver of the lowering of 2023 margin targets by 400-500bps (not increased RandD). Considering the resulting lack of margin leverage near term, and cash flow impact, we immediately downgraded to Neutral as margins and cash flows were an important component of our Outperform thesis. Will licenses really collapse? Does SAP believe it has set itself up for a ''win win''? COVID has driven an acceleration in some shifts to the cloud, as well as shifts in purchasing patterns with a preference for subscription based pricing relative to capex driven software license purchases. However, these changes will likely continue to be gradual for large enterprise apps, including ERP, unless SAP does more to make it happen through salesforce and customer incentives, and new deployment options. As of yet, SAP has not articulated how it will push the transition, other than to say that it believes customer spending patterns will change. SAP may believe it has created a win-win: if license sales recover, then SAP will beat consensus expectations (possibly as of Q1''21); if they don''t, then SAP will be seen to be executing on its cloud transition, driving a potential re-rating of the shares, such as Autodesk saw when they accelerated their own cloud transition. We fear that, without more of a push, licenses are likely to beat expectations, but license driven earnings beats may no longer be rewarded by the...
SAP - BUY | EUR127 vs. EUR166 (+30%) Becoming a full SaaS and subscription vendor by 2025 We adjust our target price to EUR127 amidst of the new ambition SAP has started the last stage of its cloud transformation Revenue mix and cloud gross margin will help for the turnaround
SAP - BUY vs. BUY TOP PICKS | Under Review Accelerating transition to the cloud, at a faster pace than expected We remove our Top Pick status to SAP FY20 guidance is reduced primarily due to Concur Ambitions for 2025 reflect accelerated move to the cloud
SAP misses on Q3 and lowers FY''20 outlook as recovery fails to take hold SAP misses consensus Q3 revenues estimates by 5%, missing by 6% on Cloud (+14% y/y c/c, with a -6% impact from Concur) and 6% on software licenses (-19% c/c). With the adj EBIT margin beating by 80bps, EBIT missed by 3%. SAP has characterised the Q3 recovery as muted and patchy with little improvement on Q2. With a negative FX impact, SAP has lowered FY''20 reported Cloud revenue guidance to ~EUR7.9bn-8.1bn (~5.5% below consensus with just ~8% growth in FQ4) and total revenue guidance to EUR26.7bn - 27.3bn (~4% below consensus). FY adj EBIT guidance is now EUR7.9 - 8.3bn (4.5% below consensus at mid-point). SAP now expects COVID to continue to have a significant impact at least through H1 2021. SAP sees no profit growth in 2021 and 2022, with 2023 margins 400-500bps below target We suggested SAP''s stock would be in a ''holding pattern'' post Q2 results as the market awaited the formal downgrade by the new CEO to 2023 targets, which we thought could come with the Q3 results. SAP has now announced it will step up investments over the next two years to accelerate work with hyperscaler partners (MSFT, AWS, GCP) to create simpler packages to move large workloads to the cloud. This, along with the impact of COVID and an accelerated move toward cloud and subscriptions, should see profit ''flat to down'' in 2021 and 2022, with 2023 margins being 400-500bps below the original 34% target. SAP now expects EUR22bn+ of cloud revenue in 2025, a 22% CAGR from 2020 (previous guidance for EUR15bn+ in 2023), with only ~EUR1bn of license revenues, implying an accelerated ~20% annual drawdown in license sales (from -5% pre COVID). Downgrading estimates (and target price). Moving to Neutral While we expected a margin downgrade, we did not expect 400-500bps. We cut our 2021 and 2022 non IFRS EBIT estimates by 14% and 20%. We return to using a 5 year median EV/EBIT multiple of 15.5x, which we...
SAP set to announce USD10bn Cloud ARR We (and consensus) expect SAP to announce EUR2.1bn of cloud revenues in Q3, putting the company on a USD10bn annualised Cloud Revenue run rate. SAP would join Microsoft, Amazon, Salesforce, IBM and Google as companies with USD10bn of Cloud ARR, with Salesforce being the only other SaaS oriented provider larger than SAP. And yet, SAP''s core market (ERP) is only now set to move to the cloud, driven by COVID related digital acceleration. An SAP customer is going live with S4 Hana Cloud every hour as the product cycle accelerates, and the coming cloud ERP wave will see SAP much better prepared and positioned than when CRM and HCM started moving to the cloud. Not only will SAP likely be a Cloud ERP winner (with key partnerships with Amazon, Alibaba, Google and Microsoft), but with most SAP cloud apps now migrated to a common data platform (Hana) and with deeper functional integration nearly complete (90% by year end), SAP will be well positioned to cross sell its impressive portfolio of cloud solutions (ERP, HCM, eCommerce / Customer Experience, Travel and Expense, Procurement, Supply-chain, Analytics, PaaS and IaaS) into its underpenetrated customer base of 35k ERP customers and 440k overall customers. Q3 results less significant than CMD, which may point to accelerating cloud rev growth SAP will announce Q3 results (its smallest quarter) on Oct. 26. We are 2% below revenue consensus with c/c license declines of 17% and Cloud growth of 18%, with op margins of 31.4% vs 30.9%. There is a chance SAP uses the Q3 results to update its 2023 outlook ahead of its CMD (expected before year end). We expect SAP to lower its 2023 adj margin outlook (we model 33%, below the 34% guidance) but we believe the company may maintain Cloud revenue guidance for at least EUR15bn and its EUR8bn FCF guidance, which we believe would be well received. Lowering the margin target now would allow the CMD to focus on the levers management...
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