Software giant SAP continued its strong performance in 2017, with its top line growing at more than 9% in the first three quarters of the year and beating market expectations. Aided by a phenomenal increase in new cloud bookings, revenues from its Cloud business remained the primary growth driver. The company’s cloud and software gross margins saw a marginal decline, but a substantial improvement in its services gross margin led to a slight improvement in overall margins. We expect cloud margins to continue declining in the near term, as the company faces tough competition from software behemoths like Microsoft, Oracle and Salesforce. Operating profit and EPS grew by 19% and 35% year-over-year, respectively, due to lower share-based compensation, acquisition-related charges and restructuring costs.
Owing to a good performance in the first three quarters of the year, as well as overall stock market gains, SAP’s stock is currently trading 16% higher than its price in January. While the revenue growth was seen across all business segments, SAP’s Cloud business, aided by a strong increase in new bookings, was the standout performer. The company continued its dominance in the Enterprise Resource Planning software market, with more than 1,500 customers adopting its S/4HANA platform this year, taking the overall count to over 6,900 customers. This should assuage some investor concerns about the long-term value of this platform, the sheer power of which is reflected in its cost. Moreover, with 80% of its customers still using the earlier platform and expected to shift to the newer one in the near future, there is tremendous potential which the company expects to tap.
Cloud Offerings Continue Phenomenal Growth Under Increased Adoption
As more and more companies adopt cloud services, the overall cloud market size has been expanding at a rapid rate. Aided by a 30% increase in new cloud bookings, the SAP’s revenue from Cloud Support and Services grew 28% in constant currency. The growth was evident across all geographies, with its revenues growing by 9% year over year in EMEA, 7% in the Americas and a robust 12% in Asia-Pacific.
SAP is also rapidly expanding its presence in the Internet of Things (IoT) space with new products and partnerships. This is a multi-billion dollar market, which could very well be responsible for driving the next phase of SAP’s Cloud revenue growth. The recent addition of multiple Internet of Things (IoT) solutions to the SAP Leonardo digital innovation system highlights SAP’s renewed focus on bolstering its foothold in the IoT domain, which could drive the company’s top line in the future. Combined with its ongoing efforts to strengthen its offerings in the machine learning space, SAP is likely to fare well going forward despite the heavy competition.