SAP SE :SAP-US: Earnings Analysis: Q3, 2017 By the Numbers : October 23, 2017

SAP SE reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of SAP SE – Adobe Systems Incorporated, Oracle Corporation, International Business Machines Corporation, Intuit Inc., salesforce.com, inc. and VMware, Inc. Class A (ADBE-US, ORCL-US, IBM-US, INTU-US, CRM-US and VMW-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 6,615.04 million, Net Earnings of USD 1,163.25 million.
  • Gross margins widened from 69.38% to 70.07% compared to the same period last year, operating (EBITDA) margins now 27.98% from 26.46%.
  • Year-on-year change in operating cash flow of -0.34% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 6615.04 6463.16 5659.97 7198.58 6012.48
Revenue Growth (%YOY) 10.02 9.88 8.58 4.8 8.28
Earnings (mil) 1163.25 746.82 557.96 1619.79 816.58
Earnings Growth (%YOY) 42.45 -18.51 -11.54 16.37 -18.36
Net Margin (%) 17.58 11.56 9.86 22.5 13.58
EPS 0.97 0.63 0.46 1.35 0.68
Return on Equity (%) 4.1 2.64 1.98 5.94 3.13
Return on Assets (%) 9.5 5.98 4.57 13.87 7.01

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Market Share Versus Profits

Revenues History
Earnings History

SAP-US’s change in revenue this period compared to the same period last year of 10.02% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that SAP-US is holding onto its market share. Also, for comparison purposes, revenues changed by 2.35% and earnings by 55.76% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 69.38% to 70.07% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 26.46% to 27.98% compared to the same period last year. For comparison, gross margins were 68.95% and EBITDA margins were 25.62% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

SAP-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days are now 24.28 days compared to 28.72 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

SAP-US’s change in operating cash flow of -0.34% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 20.56% to 22.27% and (2) one-time items. The company’s pretax margins are now 24.87% compared to 18.85% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

SAP SE provides enterprise application software and software-related services worldwide. It operates through two segments: Applications, Technology and Services, and SAP Business Network. The Applications, Technology and Services segment derives its revenue primarily from the sale of software licenses, subscriptions to cloud applications, and related services, which mainly support various professional and premium services, as well as implementation of software products and education services. The SAP Business Network segment emerged from combining all SAP network offerings into one network that covers temporary workforce sourcing, other procurement, end-to-end travel and business travel expense management. The company was founded by Hasso Plattner, Klaus Tschira, Claus Wellenreuther, Dietmar Hopp, and Hans-Werner Hector in 1972 and is headquartered in Walldorf, Germany.

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