SAP's Q3 solid, company ups outlook and touts cloud subscriptions

SAP reported a solid third quarter and raised its outlook, but some analysts raised concerns about license growth as well as the pace of HANA customer additions.

The company reported third quarter net income of €725 million on revenue of €5.37 billion, up 8 percent from a year ago. Profits excluding charges and other items were €1.09 billion.

SAP said new cloud bookings were up 24 percent in the quarter with cloud subscriptions and support up 28 percent. Software licenses and support were up 5 percent from a year ago.

Regarding SAP S/4HANA and HANA Cloud Platform, the company said it added more than 400 customers in the quarter and 40 percent of that sum was new. SAP S/4HANA has 4,100 customers now.

SAP ended the third quarter with 82,426 employees.

As for the outlook, SAP said that non-IFRS cloud subscriptions and support revenue will be €3 billion to €3.05 billion with operating profit between €6.5 billion and €6.7 billion. The outlook is based on constant currency rates.

The company said EMEA had revenue growth of 6 percent with Americas up 9 percent. Asia-Pacific was up 13 percent.

Evercore analyst Kirk Materne said the results were solid, but also raise questions. He said:

EPS was slightly below expectations however, as operating profits were impacted by lower non-operating and financial income. In terms of positives in the quarter we would highlight a growing number of large deals (deals >€5m up 8% y/y) which helped drive license upside and a reacceleration in FCF with +41%. Importantly, we believe that this quarter's solid results and raised full year guidance add credibility to the company's long term outlook. With that said, we expect there may be some questions around the pace of S/4HANA adoption (+400 adds; down 100 q/q and flat y/y), as well as the sequential deceleration in Cloud bookings (+24% y/y vs +40% in 2Q16 and +24% in 3Q15)

Milan Radia, an analyst at Jefferies, said:

Many appear to believe that SAP's software licences are weak due to a substitution effect in favour of the Cloud. This is a fundamental misperception as the Cloud products are non-ERP while the licence revenue stems from the core ERP products. The difficulty with ignoring the weak licence trajectory at present is that the associated future weakness in maintenance (49% of group revenue) will be missed.

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