FX headwinds mask continuing improvement in SAP’s cloud strategy

In our view, large FX headwinds and some slippage in Russia (geopolitical) masked an in-line performance on both SSRS growth and operating margins. Most importantly, SAP’s cloud business demonstrated its 2nd consecutive robust quarter– cloud subscriptions (ex-FX) grew 38%, after 39% in 4Q13 and above FY14 guidance of 30%. Another quarter of strong bookings growth (+38% yoy ex-FX) and expected benefits from HANA Enterprise Cloud and line of business solutions supports our thesis that SAP can undertake a manageable transition to the cloud. License growth improvement provides further optionality.

Catalyst SAP is due to host its annual user conference SAPPHIRE NOW in Orlando, Florida, from June 3-5, 2014. We expect positive news flow around product announcements and innovations as well as customer/contract wins around HANA and its cloud portfolio. We reduce our 2014-17 EPS estimates primarily to reflect greater FX headwinds both on the top and bottom line, with the greatest impact to 2014. Near-term we also lowered our 2Q14 license revenue estimates to factor in additional EM slippage, and thus don’t expect license growth re-acceleration until 2H14. We forecast a 10% revenue and 16% EPS CAGR over 2013-18, respectively, and operating margins expanding to over 35% by 2017.

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