(News Bulletin 247) – The professional software publisher saw its revenues increase by 10% excluding currency effects in the third quarter and generated free cash flow up 44% year-on-year. The German company meets several of its objectives.

The Frankfurt Stock Exchange does not have a plethora of tech groups on the stock market. But the German market can boast of having in its ranks one of the great world champions of the sector: SAP.

The software package specialist has a market capitalization of around 250 billion euros and is not very far from becoming the leading tech group in Europe, following ASML (260 billion euros), itself the third largest market capitalization in the Old Continent.

Over the years, the Walldorf-based company has been able to successfully migrate its ERP software (the planning of the company’s functional resources, such as accounting, sales, human resources and even purchasing) to the cloud (the cloud computing).

More recently, the company has taken the shift towards generative artificial intelligence head on. At the beginning of January, the overseas company announced a major reorganization centered on AI which should “affect” (redeploy staff or cause voluntary departures) between 9,000 and 10,000 positions.

This emphasis on AI and the sequence of good publications allowed the action to gain 57% over the whole of 2024.

And this Tuesday, SAP shares climb again, gaining 3.4% in Frankfurt around 3:00 p.m., the action reaching new historic highs (223.20 euros at the start of the session).

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AI carries the order book

SAP once again delivered good results for its third quarter. Its total revenues increased by 10% excluding currency effects, while “cloud and software” revenues increased by 11% against 10% expected by the consensus.

The turnover generated in the cloud, in particular, jumped by 27% excluding currency effects, which marks an acceleration compared to previous quarters, notes Oddo BHF. The Cloud ERP sub-segment jumped 34% year-on-year excluding currency effects.

The cloud order book also increased by 29% excluding currency effects to 15.4 billion euros.

“Cloud revenue growth grew remarkably during the quarter, particularly for our cloud ERP suite (…) A significant portion of our cloud contracts in the third quarter included AI use cases “, declared the chairman of the management board, Christian Klein, in the group’s press release. Quoted by Reuters, the manager specified that 30% of contracts gleaned from the cloud in the third quarter presented these use cases in artificial intelligence.

Beyond the activity, analysts also highlight the company’s good performance in terms of profitability.

SAP generated an operating profit of 2.2 billion euros, up 28% year-on-year in non-IFRS data, while its earnings per share increased by 15% to 1.24 euros. Operating profit exceeded consensus by 10% according to Stifel and earnings per share by 6%. Oddo BHF notes that this good performance is explained both by the good profitability of cloud services and cost control facilitated by the transformation plan launched in January.

Cash that exceeds all expectations

Last important point: cash generation, critical for investing, acquiring companies or returning cash to shareholders. SAP generated free cash flow of 1.25 billion euros in the third quarter, up 44% year-on-year.

Stifel notes that this cash generation defied all expectations since the consensus anticipated a negative flow of 157 million euros. The company seamlessly absorbed a restructuring outlay of 300 million euros thanks to improved profitability and lower tax charges. Over nine months, free cash flow increased by 47% to 5 billion euros, almost as much as for the whole of 2023 (5.09 billion euros)

SAP has raised several of its objectives for 2024. The German group expects growth in its “software and cloud” segment of 10% to 11%, compared to 8% to 10% previously, on an operating profit of between 7.8 billion and 8 billion euros, compared to 7.6 billion to 7.9 billion euros previously and on a free cash flow of between 3.5 billion euros and 4 billion euros, compared to around 3.5 billion euros previously.

Cash generation should indeed fall into the red in the fourth quarter, due to an increase in restructuring costs and a negative impact from the variation in working capital requirements.

However, Oddo BHF describes this increase in outlook as “logical and even prudent”. A caution that the company justifies by citing the uncertain macroeconomic environment.

“SAP announced a new series of solid and reassuring results for the third quarter, despite a difficult economic environment,” nevertheless concludes Stifel.

“This is another excellent performance from SAP, which continues to buck the macroeconomic trend thanks to the upgrade cycle to S/4 Cloud (an ERP software suite, editor’s note) and which fully benefits from the restructuring plan announced at the start of the year”, adds Oddo BHF.

The research office, however, remains “neutral” on the value due to an upside potential considered limited by the broker. The stock should, however, “continue to perform well in the coming weeks thanks to the good commercial dynamics and the visibility offered by the company for the years 2024 and 2025”, recognizes Oddo BHF.