Software giant SAP (SAP, Financial) delivered better-than-expected performance for the third quarter 2014. It is making significant progress into cloud-based platform. Its cloud business grew approximately 41% year-over-year to $352.6 million as it adopted subscription and support fee-based model. This shift from packed software to cloud-based software is certainly a good move taken by the company as most of its clients are now moving to cloud technologies, due to its highly cost-control efficiency. This move should accelerate its growth in the long run but it will pressurize its bottom line growth in the near term. In addition, SAP has also boosted its cloud revenue outlook for the full year.
Robust growth
Its revenue for the third quarter rose approximately 5% to $5.39 billion from $5.18 billion in the corresponding period last year. However, it fell short of Zack consensus estimates of $5.76 billion in revenue. Also, its net income for the quarter increased 15.6% to $1.10 billion or earnings of $1.06 per share, compared to $959.64 million or earnings of $0.81 per share in the same quarter a year earlier. Its earnings topped the consensus estimates of $0.94 per share.
Looking ahead, the software giant anticipates its cloud revenue to accelerate in the range of $1.30-1.34 billion from the previous guidance of $1.25-1.32 billion. The high-end of the guidance represents approximately 41% growth for its cloud revenue as compared to 2013. It also expects its software and software-related service revenue to grow in the range of 6% to 8% for the year on the constant currency basis. However, it has lowered down its operating profit for the year. The company now expects its full year operating profit to be in the range of $7.05 billion to $7.30 billion from previously announced $7.30 to $7.56 billion.
Aggressive plans
The software giant expects this customer changing cloud business to fuel growth for its top line in a more appropriate manner along with the strong growth of its support revenue. SAP indeed leads this transformation to the worldwide network economy. It has more than 1.6 million associated companies registered on its cloud-based business. The past twelve months was a record in terms of volume; SAP’s volume was around 600 billion, which is more than combined volume for Amazon, eBay and Alibaba.
In addition, the company is planning to expand its cloud business. It is investing in the upfront in the cloud-based technology, which is pressurizing its profits. It has recently announced that it would acquire Concur Technologies (CNQR), a leading United States cloud traveling and expense management software producer.
Moreover, SAP expects Concur to augment growth for its revenue in the long term. SAP should also benefit from the Concur’s 1.2 trillion corporate travel and expense market that should accelerate its business network. Also, it should benefit from the innovative business models for cloud technologies Concur has at its fold. Concur has acquired HR, E-commerce, and workforce application such as SuccessFactors, Ariba and Fieldglass that should add value to its business network.
Furthermore, it is benefiting from HANA. Its flagship SAP HANA software is already gaining traction in the cloud-based portfolio for the company in the market. This Real-Time Business Platform is winning more customers for the companies across all the industries, irrespective of the regions as it provides captivating business benefits that enhance business efficiency.
SAP HANA is being executed at its “Run Simply” strategy that integrates all SAP solutions to one single business platform in the cloud. SAP HANA is leading customer engagement and has 44 million users enrolled for its software and software-related service business, which is world’s largest business network. It has witnessed a triple-digit growth in the next generation customer engagement for its Omni-channel e-commerce platform. There are currently more than 1,600 startup companies that are creating applications of SAP HANA.
Conclusion
The software giant is possibly a great pick as it promises great returns in the long term. Though its short-term profit looks a little insecure, it will deliver handsome returns to shareholders once this upfront investment is effectively integrated to its business. Also, its cloud business really looks like a big thing in the enterprise resource system that should fuel its growth in the future. The stock is currently trading at the trailing P/E of 19.03 and forward P/E of 17.60 that indicate fair valuation for the company. It has PEG ratio of 1.28 that continues to complement its growth in the long run.
