Category Archives: Cloud Computing

SAP’s Cloud-Computing Sales Keep Soaring

German business software giant SAP (NYSE: SAP) reported first-quarter results early Wednesday morning. The company also presented a strategic review under the more poetic banner of accelerating operational excellence. Investors were quick top embrace this one-two punch, sending SAP’s share prices as much as 13.4% higher. The stock closed Wednesday’s trading session at a 12.3% gain.

Here’s a closer look at SAP’s big news.

SAP’s first-quarter results: The raw numbers

Data source: SAP. Financial figures were translated from euro to U.S. dollars at the average rate of $1.14 dollars per euro in Q1 of 2018 and $1.23 per euro for the Q1 2019 period.

What happened with SAP this quarter?

  • Cloud computing is the core of SAP’s operations these days. Order bookings for SAP’s cloud services grew 26% in constant currencies. The company collected $1.37 billion of cloud-based revenues in this quarter, a 37% year-over-year increase. Software license sales rose a mere 4%. Recurring revenues, such as subscription fees for cloud services, accounted for 72% of total sales. The recent $8 billion acquisition of cloud computing start-up Qualtrics played into these growth rates.
  • The company’s bottom-line earnings were hit hard by a $777 million restructuring charge and other one-time costs. Adjusted earnings, which back out these unusual line items, rose 24% to $0.79 per share.
  • Separately, SAP started a comprehensive strategic review. A special board committee was appointed to find areas for improvement as SAP seeks to “accelerate operational excellence across all functional areas of SAP with a focus on growth, innovation and efficiency.” The results of this review should be available by November. SAP is not planning to kick off any further restructuring projects here, but that’s why they play the game — you just never know until the work has been done.
  • Activist investor firm Elliott Management also disclosed a $1.35 billion ownership stake in SAP. In that disclosure, the firm also said that they support SAP’s operational review. In Elliott’s view, SAP’s stock is “clearly undervalued” against the company’s dramatic revenue growth and the board is taking steps to unlock shareholder value here.
Two smiling business people share information on a laptop screen.Two smiling business people share information on a laptop screen.

Image source: Getty Images.

What management had to say

SAP’s strategic review is not the usual panic reaction to a failing business model. This time, it’s more of a value-boosting exercise. That’s the impression I get when listening to CEO Bil McDermott in the first-quarter earnings call.

“Let’s step back for a moment and look at the big picture for SAP,” McDermott said. “The facts are, we have an incredibly strong core business with a market-leading retention rate in our support business, demonstrating tremendous customer loyalty. We have a high-growth cloud portfolio powered by some of the best MA in the enterprise software industry. These cloud businesses have years and years of runway for continued growth. We have an incredible franchise, with 72% of our revenues now coming from highly predictable revenue streams. This is due to our strong cloud and solid on-premise support businesses.”

Looking ahead

Based on this quarter’s results, SAP left its full-year guidance unchanged. As a reminder, cloud revenues should land near $6.0 billion (assuming stable currency exchange trends) for a roughly 36% year-over-year boost. Total cloud and software sales should rise approximately 9% at constant currencies, stopping in the neighborhood of $19.8 billion.

Beyond that, SAP hopes to triple its cloud revenues over the next five years while gross margins should expand by roughly one percentage point per year. By the end of that “Ambition 2023” period, SAP aims for total annual revenues near $31 billion (up from $20 billion in 2018) with adjusted gross margins for the cloud business landing near 75%.

More From The Motley Fool

Anders Bylund has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

Microsoft Again Beats Street On Cloud Computing Strength (NASDAQ:MSFT)

Microsoft Corporation (NASDAQ: MSFT) reported a strong third-quarter earnings beat Wednesday on the back of continuing strength in its cloud computing business, coming in at $1.14 per share to top analysts’ estimates by 14 cents. The company also reported quarterly sales of $30.6 billion, beating the Street estimate of $29.84 billion by more than 2.5 percent.

Earnings per share were up 20 percent over the quarter a year ago, while revenue beat last year’s second quarter number by 14.1 percent.

Microsoft’s cloud business, known as Azure, again drove the company’s success and CEO Satya Nadella acknowledged the company’s present is now reliant on cloud computing – much different than its software-based past.

“We are accelerating our innovation across the cloud and edge so our customers can build the digital capability increasingly required to compete and grow,” Nadella said in a press release.

“Demand for our cloud offerings drove commercial cloud revenue to $9.6 billion this quarter, up 41 percent year-over-year,” added Amy Hood, executive vice president and chief financial officer of Microsoft.

Highlights

  • Operating income was $10.3 billion and increased 25 percent.
  • Net income was $8.8 billion and increased 19 percent.
  • Diluted earnings per share was $1.14 and increased 20 percent.
  • The company returned $7.4 billion to shareholders in the form of share repurchases and dividends in the quarter

Microsoft started this week as the second biggest company in total market capitalization at about $950 billion behind Apple (NASDAQ: AAPL) at $965 billion.

Price Action

Microsoft’s stock closed at $125.01 Wednesday but shares were trading up nearly 2 percent at $127.53 after hours.

Related Links

Clouds Part: Amazon And Microsoft Cloud Businesses In Focus Ahead Of Earnings

Microsoft Reports Slight Q2 Earnings Beat

As Microsoft Reports Earnings, My Focus Is on Cloud Computing

Bring It

An oldie, but a good-ie. can it be? Steady Eddie. Somehow, my twenties turned into my fifties. Somehow, being shocked that Dwight Gooden was younger than I, yet the toast of the National League… turned into being shocked when I can read anything at all without fumbling for my glasses. Through most of my career, since going public in 1986, (another Gooden reference?)… there has been Microsoft (MSFT) . Windows. Office. Still useful, but the story goes on. Way beyond.

Tonight’s The Night

Microsoft will report the firm’s fiscal third quarter this evening once those twin bells at 11 Wall Street and Times Square stop ringing. The street looks for EPS of one dollar flat on revenue of $29.84 billion. If realized, this will be a year over year increase of 11.3%, growth well above broader expectations for the SP 500.

For me, a trader long this name, the focus has to be on cloud computing, as it now has to be for the software industry altogether. Yes, recurring revenue products like those already mentioned are valuable drivers of performance. Yes, many are betting on gaming, but gaming has been balky this year. A stronger February has been followed by a weak again March decline in sales across that industry. That said, Azure is how success will be measured for Microsoft. Azure will determine the path that the stock price will take moving forward. So let’s focus on that.

Cloudy Days

Last week, KeyBanc analyst Brent Bracelin indicated that he sees subscription based APR for Azure topping the $12 billion mark, while he sees subscription APR for Office 365 beating $20 billion. By the same token, UBS analyst Jennifer Swanson Lowe, according to Barron’s sees 2019 revenue for Microsoft, along with Abobe (ADBE) , and Salesforce (CRM) topping broader industry-wide expectations. Then, also last week, Keith Weiss of Morgan Stanley named Microsoft as representing the “best risk/reward in software.” So… the analyst community is convinced. Are we? That’s more important. Analysts are fine, but unlike them, when we are wrong, we actually lose money.

I am watching closely two items regarding Microsoft’s cloud business. One is just how fast Azure’s hybrid cloud for business is growing. How attractive are businesses finding this offering versus the chief competitor, which is Amazon’s (AMZN) AWS service. That brings us to the pentagon’s JEDI program. Last week, Microsoft revealed two data centers that have been designed and created solely for classified information. Remember that Amazon has already been cleared to host top secret data for both the CIA and the DOD, while Microsoft still awaits such clearance. The DOD’s JEDI program which is what the military’s cloud contract is known as, is worth $10 billion, and has devolved into a winner takes all sort of playoffs. The last two competitors standing are Amazon and Microsoft, after IBM (IBM) , and Oracle (ORCL) were eliminated and Alphabet (GOOGL) voluntarily dropped out. We will need to hear comment on this.

The Chart

There is obviously a lot to like here. Whether one trusts the blue Pitchfork, or the orange Cup with Handle, both have been supportive throughout 2019, the breakout out of that handle probably more so of late. As you can easily see Money Flow has been robust, while the daily MACD and Relative Strength nearly too robust. Perhaps overbought.

Like I have said, I like Microsoft. That said, we are sort of closing in on my target price of $132. I would not be surprised to see a knee-jerk in either direction after the call tonight. That said, the cloud is the future (along with 5G), and Microsoft is a dominant force in providing that cloud across U.S. business. I would think that these shares continue to move higher, even if there is a spate of profit taking this evening.

Microsoft 

Target Price: $132

Add: $112

Panic: $103

Note 1: I have enough exposure, but a trader interested, but not willing to pay current prices could target next earnings season by…..

– Selling one MSFT  $115 July put (value: $1.73)

– Selling one MSFT $110 July put (value: $1.02)

Net debit: $2.75

Note 2: The trade here will have pocketed $275 upfront. In exchange, the trader has accepted the risk of having to buy 100 shares of MSFT at $115, and maybe another 100 shares of MSFT at $110 in July. Worst case… the trader ends up long 200 shares of MSFT at a net basis of $111.13, with the shares trading below $110. The point being that the net basis is below where I see the name as an add.

(Microsoft, Salesforce, Amazon and Alphabet are holdings in Jim Cramer’s Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells MSFT, CRM, AMZN or GOOGL? Learn more now.)