SAP Makes New Highs After Pre-Announcing a Q2 Revenue Beat

The software giant's license revenue fell less than expected in Q2, thanks in part to a 'strong recovery' in the Asia-Pacific region.
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SAP’s stock is up about 3.5% and has made new highs after the German software giant pre-announced better-than-expected Q2 numbers and indicated deal activity is on the upswing.

In a preliminary report that comes ahead of a full Q2 report due on July 27, SAP says its Q2 revenue rose 2% annually on a non-IFRS basis to €6.74 billion ($7.62 billion). That’s slower than Q1’s 7% growth, but slightly above a FactSet consensus estimate of €6.69 billion ($7.56 billion)

Operating profit rose by 7% on a non-IFRS basis to €1.96 billion ($2.21 billion), topping a €1.87 billion consensus.

The pre-announcement is one more sign that IT spending activity is gradually improving after taking a major COVID-related hit in March and April.

Two weeks ago, consulting and outsourcing giant Accenture ACN topped May quarter sales and EPS estimates, while reporting its bookings rose 4% annually. And a month ago, media software giant Adobe ADBE reported strong top-line numbers for its core Digital Media operations, albeit while sharing softer number for its Digital Experience (marketing and advertising software/services) segment.

SAP continues to grow faster than arch rival Oracle  (ORCL) - Get Report. Larry Ellison’s company saw its revenue drop 6% annually (4% in CC) during its May quarter, and it guided on its June 16 earnings call for August quarter revenue to be down 1% to up 1%, with a 1% currency headwind.

Digging deeper into SAP's preliminary results, total cloud and software revenue rose 3% to €5.71 billion ($6.45 billion), with cloud backlog growing 20%. Traditional software license revenue, which has been hurt badly by COVID-19’s impact on deal activity, fell 18% to €770 million ($870 million). However, that was an improvement relative to Q1’s 31% drop, and above a consensus of €683 million.

Cloud subscription and support revenue, much of which stems from deals inked in prior quarters, rose 19% to €2.04 billion ($2.3 billion), roughly matching consensus estimates. License support revenue, most of which also comes from previously-inked deals, accounted for most of the rest of SAP’s cloud and software revenue.

SAP also declared that business activity “gradually improved over the course of the second quarter,” with the Asia-Pacific region especially seeing a strong recovery in software license revenue. The company did note that cloud revenue was hurt by a drop in “pay-as-you-go transactional revenue,” much of which comes from SAP's Ariba spend management software unit.

SAP reiterated the full-year guidance it issued in its April 21 Q1 report. On a constant-currency (CC) basis, the guidance calls for revenue to be up 1% to 3%, with cloud revenue rising 18% to 24%, and operating profit to be down 1% to up 6%.