Software giant SAP SE released robust third quarter earnings, achieving top line growth of 9% year over year, driven by 28% growth in cloud services and favorable exchange rates. In the legacy on-premise software licenses business, the company continued to rack up new customers in the third quarter for its S/4HANA ERP platform. It added 400 new customers to its S/4HANA platform, with total customers now at 4,100. Despite the increase in revenues, the company’s operating profit declined 8% from the prior year quarter level to $1.2 billion. The decline in operating margins was mainly attributed to an 18% year-over-year increase in R&D expenses, and a 36% increase in sales & marketing expenses. The uptick in expenses was reflected in the net income, which declined from $988 million in Q3 2015 to $815 million in Q3 2016.

cloud services

Cloud Services

Cloud services continue to drive SAP’s growth. In the quarter ended September 30th, they contributed $860 million to the company’s revenue, an increase of 30% over the prior year quarter. On constant currency basis, the segment showed a growth of 28% over the same period. The growth was driven by new customers, who provided an incremental revenue of $296 million, an increase of 24% over the same quarter last year. The growth in cloud services has resulted in it contributing 15% to the company’s top line, against 11% contribution in the first quarter of fiscal year 2015.

cloud services

The increase in revenue from the segment also warranted additional investment, which was evident by higher capital expenditure by the company. For the last quarter, the company’s spending rose 180% over the prior year quarter to $285 million.

For fiscal 2016, the company guides revenues from cloud subscriptions and support to be in the range of $3.35 billion to $3.40 billion (expected at current exchange rates), an uptick of 6.5% to 8.5% over last year’s numbers.  The company expects the gross margins to be 83%, similar to 2015 figures, and operating profits to be in the range of $7.25 billion to $7.50 billion (at current exchange rates).

Author: Trefis Team