SAP's Cloud-Computing Sales Keep Soaring

German business software giant SAP (SAP -0.20%) 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.

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 M&A 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%.