* Accelerating cloud adoption impacts license growth, see 8% EPS CAGR Accelerating SaaS/cloud migration will in our view impact license growth (DBe 1-2% decline) in turn slowing 2013-15 revenue (+4%) and EPS CAGR's (8%) for SAP. Long-term higher vendor fragmentation suggests a risk of market share leakage in the transition to the cloud for SAP. Its 'hybrid' cloud/on-premise strategy seems sensible to mitigate this but we also expect more cloud M&A going forward. With 8% downside to 2015 EPS consensus, we would expect the recent performance 'catch up' to slow into Q114 and maintain HOLD.
* Assessing the SaaS/cloud impact – license growth assumptions lowered Accelerating SaaS/cloud adoption is a well-understood trend, but investor uncertainty as to how it impacts SAP’s longer-term growth & margin trajectory seems high. Our detailed analysis concludes that 1) The negative P&L mechanics of SaaS vs on-premise delivery will likely impact SAP’s license revenues (25% of group), which we expect to slightly decline from here (-1.6% 2014-15 CAGR). 2) We estimate gross NPV parity/‘cross-over’ of a SaaS/cloud vs on-premise customer in year 8, suggesting several years of potential P&L volatility. 3) The main long-term risk is that SAP cannot maintain its dominant on-premise market share in a more fragmented ERP SaaS/cloud environment. The company’s ‘hybrid’ strategy seems sensible to lower this risk but we would also expect further SaaS/cloud M&A going forward.
* Estimates lowered, 2014&15 guidance likely to undershoot consensus Our more cautious view on SAP’s license outlook leads us to nudge down 2014-15 EPS by 1 to 4%, implying a 2013-15 EPS CAGR of ~8%. We expect SAP’s 2014 & 2015 revenue and margin guidance to potentially undershoot consensus. For 2014 we model 6% SSRS revenue growth vs consensus of 10% putting DB 3% below consensus EPS. Investor feedback suggests some skepticism on the company’s current 2015 guidance of >E20bn revenues and 35% margins. We believe new guidance could imply a revenue range of E18 to E19bn (DBe E18.2bn, consensus E20bn) and ~34% adj. margins (DBe 34.3% cons 34.5%), implying up to 8% downside risk to 2015 consensus EPS.
* Target price maintained at E55, risks Our E55 target price is unchanged reflecting lowered forecasts offset by multiple/valuation rollover to 2014/15. Our target price is based on a blend of 1) a DCF of E56/share, 2) 14x 2015 P/E (E55/share) in line with expected P/E to EPS CAGR of global enterprise software peers, and 3) applying a 7.1x maintenance multiple, SAP’s 5-year historical average. Key risks include changes in macro/demand and/or market share, and value-destructive M&A.