SAP SE (SAP) Seeing Sunny Skies Ahead As Cloud Revenue Growth Continued To Accelerate In Q4
5:16 pm Friday, January 14th, 2022
The clouds are clearing up for SAP SE (NYSE:SAP) on its upside Q4 earnings and revenue guidance. The enterprise resource planning (ERP) software provider may expect only 6% overall revenue growth yr/yr in Q4, but its cloud revenue is expected to balloon to €2.61 bln, a 28% jump yr/yr, marking one of the best quarters for cloud growth in nearly two years. Furthermore, the company’s preliminary Q4 EPS is well ahead of consensus. The company also announced a new €1.0 bln in share repurchase program, but this represents less than 1% of its total market cap, so we do not think this is affecting price movement much today.
SAP’s upside guidance is a further reflection of its success in transitioning its legacy ERP software, which runs inside data centers on companies’ premises, to the cloud. This transition hit a snag starting in 3Q20 and extending into the first half of 2021 as a slow recovery from the pandemic meant lower-than-expected transactional cloud revenue. As a result, cloud revs grew just 11% yr/yr in 3Q20 while total revs declined. The situation was slow to improve, as total revs continued to decline yr/yr over the next three quarters, with cloud revenue never growing above 17%. However, after a 20% jump in cloud revenue in Q3 this year, and in light of SAP’s forecast of an even greater jump in Q4, it seems sunny skies are finally here.
S/4HANA’s explosive growth is also good news from a competitive standpoint, as it is most similar to Oracle’s (ORCL) Fusion ERP software. ORCL has been ahead of the game in its shift to the cloud with Fusion ERP. For example, while SAP was struggling to boost cloud revenues over the past two years, during that same time, ORCL was averaging cloud growth of over 30% yr/yr.
The stark difference in cloud performance between SAP and ORCL is highlighted by the one-year difference in stock appreciation. While SAP initially got off to a great start to 2021, it mostly traded sideways for the back half of the year, ending around 10% higher. Meanwhile, ORCL shares steadily climbed by over 40% during that period. However, as SAP’s cloud offerings start to show significant growth, shares could quickly turn around.
Overall, SAP’s upbeat Q4 guidance is further evidence that the company has more recently been making the right moves in its cloud transformation. Although FY21 cloud revs are expected to come in at €9.59 bln, a ways from SAP’s goal of €22.0 bln by 2025, the current accelerating growth rates point to a solid turnaround from the disappointing growth that came before.
