SAP's Q3 FY2016 - looking good on the top line, ups full year guidance
- Summary:
- SAP's Q3 FY2016 was marginally above expectations at the top line, albeit marred by heavy currency impact. Stock based compensation hit margin.The company ups outlook.
SAP's transition to cloud based revenue continues to work well as it posted better than expected top line revenue in Q3 FY2016 with no hiccups in the regions. As it continues to invest in its business solutions, cloud margins are impacted for the third consecutive quarter. The company felt sufficiently confident to raise guidance - just a bit but likely enough to keep investors happy.
Software license sales for on premises customers grew slightly in the quarter to €1,034 million from €1,014 million, much better than I expected and, at this stage, I assume that was because S'4 HANA is starting to pick up traction as the portfolio expands. Operating profit fell sharply from €1,214 million to €1,013 million, largely as a result of increased stock based compensation cost. Free cash flow grew 5% to €2,962 million.
Here are the company's KPIs:
Cloud subscriptions now represent 14% of total revenue. But it is in the breakdown of those results that we see how SAP is performing:
While these numbers look impressive, you have to remember that virtually all of this revenue is coming from acquired solutions in the shape of SuccessFactors, Ariba, Filedglass and hybris. We have yet to hear detail about how S4 HANA is performing although field inquiries suggest this is still mostly an on-premises play.
As to the margin shift, SAP provided detail about how the revenue mix has changed over the last year - see below. In guidance, it anticipates similar margins to those it achieved in 2015. It is hard to know, but I suspect that SAP still has a lot of work to do on data center consolidation and operational improvements. Having said that the recent deal with Microsoft to host HANA for BW and simile;ar workloads on its Azure platform alongside its ongoing Amazon Web Services relationship do provide customers with platform choice.
In a statement, CEO Bill McDermott said:
Strong customer adoption of the SAP portfolio is driving results beyond expectations. The S/4HANA innovation cycle is the fastest in our history and is catalyzing the performance of all SAP cloud solutions. We are a growth company and confidently raise our guidance for the full year.
Looking forward:
SAP now expects full year 2016 non-IFRS cloud subscriptions and support revenue to be in a range of €3.00 - €3.05 billion at constant currencies (2015: €2.30 billion). The upper end of this range represents a growth rate of 33% at constant currencies.
The full year outlook is for an increase in the range 6.5-8.5%. If SAP achieves that then almost all will be attributable to cloud growth.
My take
This is very much a quick hit on the results based upon presentations provided by the company. It was a solid result following on from a good Q2.
SAP has returned to 'boring' in the sense there were no major surprises and well telegraphed good news across the board. We like boring - it means customers are getting value.
During the last quarter, we have seen an increase in the number of good customer outcomes and now see a steady stream of SuccessFactors go lives that appear to be delivering on the promise SAP made to its customers. We have noted success with hybris and I am looking more closely at Fieldglass as we watch for changes in employment patterns and the impact those changes have on customer deployments.
