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28 Jan 2022
FY21 postview: Margins under pressure, but inflection point now in sight
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FY21 postview: Margins under pressure, but inflection point now in sight
SAP SE (SAP:ETR) | 0 0 0.0%
- Published:
28 Jan 2022 -
Author:
Slowinski Stefan SS | Castillo-Bernaus Ben BC -
Pages:
21
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...