Tuesday, 21 January 2014

SAP - don't focus too much on pulling away from 2015 targets

I last wrote about SAP in October (link here) concluding that:

'At mid x11s EV/ebit rating with a 5%+ free cash flow yield and a strong balance sheet, the company is not horribly expensive at all.  Additionally, whilst I do believe that 'new style' competitors (salesforce.com etc) are impacting SAP and their closest peer Oracle, the company's products are hard to dislodge once they are embedded in a company...I am still waiting for that Euro50 print.  I think we will get it in weaker markets when perceptions to how quickly SAP's customers will ramp up licence usage will naturally decrease.   SAP is not IBM but it is not Google either'

So what about today's results?  Well, as Bloomberg noted in an article published earlier today, the initially most striking aspect of the results is the rowing away from a target:

SAP AG (SAP), the largest maker of business-management software, pushed back its profitability target by two years as it shifts sales efforts from traditional license business to programs delivered over the Internet. The shares fell the most in six months...The company said operating profit adjusted for some items will probably reach 35 percent of sales by 2017 rather than in 2015 as previously projected.

So the internet strikes again?  Well, not really.  For a start 'cloud' and related revenue sources are already an important part of SAP's offering.  Additionally there was no horrible impact, relative to hopes, on the numbers published today:

Additionally it helps contribute to recurring revenue - a ratio which is generally positively correlated with forecasting confidence about the future.  
 

Where the numbers dulling impact can be seen though is here.  Forget the company posting operating profit margin increases this year.  It is all about spending now to create business opportunities tomorrow.


And that's the structural opportunity and threat to SAP - trying to keep the ERP systems relevant, with all their embedded recurring revenues, whilst embracing cloud opportunities in order not to get blindsided by new technological upstarts.  So far the recurring revenue number suggests they have got this balance contract. 


 
I have to say that the recurring revenue statistic above has impressed me, so I am going to push up my re-review price to Euro55, a level consistent with (using the FY2013 data) a 5% free cash flow yield. 
 

 
And how have the shares acted today so far?  From -4% at the open they have rallied to be down less than 1% on the day.  The pulling away from targets is not as bad as the headlines may make out.

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