digibyte - SAP outlook for 2017 at the top of previously guided range

Den Howlett Profile picture for user gonzodaddy January 21, 2016
Summary:
SAP's forward guidance is encouraging but you have to look more closely at the constant currency numbers to note the positive impact of a strong US dollar.

This is a quick hit discussion of SAP's earnings announcement. Analyst and conference calls follow later but it is worth noting that in the blurbs, SAP is saying:

Looking beyond 2016, SAP is raising its 2017 ambition to reflect both the current exchange rate environment and excellent business momentum.

Assuming a stable exchange rate environment going forward SAP now expects non-IFRS cloud subscriptions and support revenue in a range of €3.8 - €4.0 billion in 2017. The upper end of this range represents a 2015 to 2017 CAGR of 32%. Non-IFRS total revenue is now expected to be in a range of €23.0 - €23.5 billion in 2017. The Company now expects its 2017 non-IFRS operating profit to be in a range of €6.7 - €7.0 billion.

SAP continues to anticipate that the fast-growing cloud business along with growth in support revenue will drive a higher share of more predictable revenue. Given the current software license revenue momentum the Company now expects the total of cloud subscriptions & support revenue and software support revenue to be in a range of 63% - 65% of total revenue in 2017.

By 2017 SAP continues to expect its rapidly growing cloud subscriptions and support revenue to be close to software license revenue and is expected to exceed software license revenue in 2018. At that time, SAP expects to reach a scale in its cloud business that will clear the way for accelerated operating profit expansion.

The Company is not adjusting its long term, high level 2020 ambition at this time. The Company's 2020 ambition communicated in 2015 was:

  • €7.5 - €8.0 billion non-IFRS cloud subscriptions and support revenue
  • €26 - €28 billion non-IFRS total revenue
  • €8.0 - €9.0 billion non-IFRS operating profit
  • 70% - 75% share of more predictable revenue (defined as the total of cloud subscriptions & support revenue and software support revenue).

SAP watchers will be encouraged by the way the company is managing the transition to a subscription base and especially pleased to learn the company anticipates continued double digit growth, even as its more lucrative up front license model passes into history. Three things caught my eye.

  1. Reported cloud subscription revenue has passed the 10% of total mark. It is no longer the rounding error it was just a few years ago. Looking forward, by 2017, SAP is forecasting that cloud revenue will be around 17% of total revenue. Getting there is still a challenge but one SAP clearly feels more confident about today.
  2. The assumption around stable currency rates is a big ask. In 2015, SAP benefited significantly in IFRS terms from the US dollar's relative strength. In the final quarter of 2015, that benefit amounted to €280 million or 4.6%. Total benefit for the whole year was €1.5 billion or 7.8%. For North America, the currency benefit amounted to just shy of 16% for the full year and just over €1 billion in top line IFRS revenue. Currency pundits believe the US dollar will remain strong in relation to the Euro for some time to come so realistically, SAP, should see further benefit in 2016.
  3. The amount that SAP records as stock based compensation has risen dramatically in 2015. The quarterly charge was €336 million leading to a full year charge of €724 million. In Q4 2014, stock based compensation was €171 million with a full year charge of €290 million. Stock based compensation now amounts to a 17% adjustment to IFRS profit compared to 6.7%. I'd like to understand more about the dynamics of those adjustments to overall profit going forward given that this type of compensation is normally associated with high growth SaaS vendors. Update: subsequent to publishing SAP produced a graphic that shows stock based compensation estimates for 2016 at €600-640 million.

Disclosure: SAP is a premier partner at time of writing

Image credit: the author

Loading
A grey colored placeholder image