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25 Oct 2022
FQ3''22 postview: Light at the end of the Cloud tunnel
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FQ3''22 postview: Light at the end of the Cloud tunnel
SAP SE (SAP:ETR) | 0 0 0.0%
- Published:
25 Oct 2022 -
Author:
Slowinski Stefan SS | Castillo-Bernaus Ben BC -
Pages:
20
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...