SAP beats revenue, drops on profit in Q1 2015 earnings

Den Howlett Profile picture for user gonzodaddy April 20, 2015
Summary:
SAP reported revenues handily up but profits falling sharply in Q1 FY 2015. Introduces new method of accounting for subscription business.

SAP has reported its Q1 FY2015 results using a new method of accounting for bookings. Overall, it handily beat out revenue estimates at €4.5 billion compared with consensus of €4.3 billion year over year. That is a rise of 22% overall. Profits however fell sharply by 23% to #413 million. The results were helped by currency tailwinds of around 12%. Taking constant currency figures, SAP still reported 12% increase in Y-o-Y revenue.

See below for a table of the summarized results:

SAP Q1 2015 summary

Cloud subscriptions were clearly the stand out with SAP now benefitting from momentum with Employee Central where the company says sales were up 92% and now counting 640 customers. On go live, SAP says the average lag between deal close and go live deployment is about 90 days although that will vary from country to country. In a call, Bill McDermott, CEO SAP said:

Large companies want a supplier who has a global presence. We now have payroll in 37 countries so I think that's a significant differentiator.

There is no getting away from the fact that core application sales were flat at constant currency but that in itself was an achievement. SAP says that it signed 400 more HANA deals in the quarter. What we're seeing in the market are customers buying HANA as part of a financial mitigation exercise that lowers their overall operational cost on a year to year basis. Our best guess then is that HANA sales as perpetual license is used as a way of keeping the maintenance pot filled while the transition to cloud continues and while SAP negotiates the parking of shelfware as customers are encouraged to transition to cloud/subscription models.

Analysts will worry that margin has suffered but this is an inevitable consequence of a long haul transition to a fundamentally different business model. Whatever others may say, SAP remains one of the most profitable enterprise software businesses, well capable of generating large cashflows to support that transition.

More important, SAP is reiterating full year guidance in contrast to the softer outlook we have recently seen from ServiceNow. That pegs subscription growth at 86% of which Fieldglass and Concur will contribute 50%.

On geographies, McDermott said in a statement:

We are a strong growth company with every region growing in double digits in cloud and software revenue this quarter. We remain ever focused on seamless execution of our consistent, customer-driven strategy.

In my call with McDermott, I asked how well the HANA-S4/HANA story is being received. As CEO he talks a big vision and recounted a story about a company that made significant improvements in an oil and gas division that cascaded through to the chemicals division. My sense is that while these end-to-end business and process improvement stories play well with Global 500 companies that are already on 'all you can eat' terms, the story is very different for the bulk of SAP customers.

From an operational perspective, SAP has consolidated the Concur, Fieldglass and Ariba acquisitions into a single division under Steve Singh's leadership. That not only makes sense but is the best way for SAP to harmonize an otherwise disparate story.

New reporting method

This quarter sees SAP use a new method of reporting how its cloud business is progressing. In a pre-brief session, SAP explained that its 'New Bookings' metric is designed to provide guidance on new business ordered and committed. This means it excludes guesstimates for pay-per-use services like Fieldglass and Concur and it only covers the current year and does not cover renewals. This means the new metric will be a rolling forecast that reflects one year forward revenue momentum but it will not provide a number that describes the full order book.

The following image from the slide deck explains how this works:

New bookings SAP
While SAP says this method is in line with the way the business is managed, I believe they are missing an opportunity to provide the market with a full bookings metric which would give a clearer indication of overall momentum. From an analysis perspective, it will be difficult to understand what that number looks like.

For example, while it is common to see three year multi-year contracts, some companies are reporting they hold commitments by customers extending out five and more years. Having the comfort of those numbers adds to the perception of sustainable growth.

Check back in a week or when we give you our SAPPHIRE Now 2015 preview report.

Bonus points: here is a link to a video explaining SAP's new reporting method.

Disclosure: SAP is a premier partner at time of writing.

End note: this story may be updated since it represents a first cut when the results were published.

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