SAP Earnings: Transactional Revenue Weighs Down Results, but Shares Nearing Our Fair Value

SAP SAP reported second-quarter results shy of expectations, as transactional revenue related to discretionary offerings—such as business expensing via Concur—performed worse than management was bracing for. SAP narrowed outlook ranges for the year slightly. We are maintaining our fair value estimate of EUR 119 per share ($132 for U.S. ADR shares given current exchange-rate changes) for this narrow-moat name, as we believe transactional revenue will be able to recover after the near-term macro slump. With shares down about 6% upon results, shares are approaching our fair value estimate. As a result, we recommend holding on to shares for the time being.

Total revenue in the quarter was EUR 7.6 billion, marking an 8% year-over-year increase in constant currency. Cloud revenue grew 22% year over year in constant currency with its backlog robust, growing at 25% year over year. Cloud and software revenue combined grew 8% year over year to EUR 6.5 billion. Under this segment, however, the transactional revenue group (which houses software such as Concur) was hard hit in the quarter. Within the group, Fieldglass, saw the worst as the solution pertains to human resources functions for contingent workforces, which have declined because of the macro environment.

With SAP having divested Qualtrics in June, earnings per share from continued and discontinued operations was EUR 2.93, while EPS from continued operations was EUR 0.62. We remind investors that we view SAP’s capital allocation strategy as poor, partially related to acquisitions, and we think the quick divestment of Qualtrics reflects this.

Revenue guidance for the year was tailored as a result of weaker transactional revenue. Cloud revenue is now expected to be between EUR 14 billion and EUR 14.2 billion (from EUR 14 billion and EUR 14.4 billion previously). Cloud and software revenue is now guided between EUR 27 billion and EUR 27.4 billion (compared with the previous range of EUR 26.9 billion-EUR 27.4 billion).