German software giant SAP SE (NYSE: SAP) reported a strong set of third-quarter results on Thursday when it also announced that CEO Bill McDermott is stepping down. The stock price, which had fallen 20% since July, jumped over 10% on Friday.

Third-quarter revenues grew 12.9% from 12 months earlier to €6.81 billion, which was €140 million higher than analysts were expecting. This was the first time annual revenue growth topped 10% in 18 months.

Non-GAAP EPS were €1.30 vs the €1.19 the market expected, while GAAP EPS of €1.04 were €0.19 ahead of consensus estimates. Diluted EPS grew 19.3% over 12 months, after falling for several quarters.


Cloud Revenue Drives Growth

Cloud revenue rose 37% to €1.8 billion and now accounts for 26% of revenue.

The highlight from the results was the fact that cloud revenue rose 37% to €1.8 billion and now accounts for 26% of revenue. The gross margin in the cloud segment also expanded as the business benefited from improving scale. This could lead to a sustained acceleration of sales growth; however, it was mentioned that 17% of the cloud growth came from a deal with a “major partner.” This may or may not imply a one-off boost in growth.


Confident About the Future

The company’s take on the outlook going forward also improved. When previous results were released, the company expressed some caution related to the trade war. This time around, SAP’s CFO, Luka Mucic said, “It is with great confidence that we reiterate our 2019 outlook.”

Activist investor Elliott Management announced a stake in the company earlier in the year and appears to be pushing for a more focused strategy.

Bill McDermott announced that he will be handing over the reins to Jennifer Morgan and Christian Klein who will act as co-CEOs. Analysts were happy to see a succession plan in place. There has been some concern about the complexity of the business following a long string of acquisitions. A change in leadership may lead to more rationalization.


How Does SAP Measure Up Against Its Rivals?

SAP competes on various fronts with Oracle and Salesforce. Over the last 5 years, Salesforce has outperformed both SAP and Oracle by almost 100%. However, over 12 months, Oracle has been the outperformer.

At this point, Oracle appears to be the cheaper of the three stocks, but there is some uncertainty over future growth. The company has been very bullish about its prospects, but doesn’t disclose its revenue breakdown, and has yet to produce an uptick in revenue growth. If the company can deliver the numbers, it will continue to outperform – if not investors will lose patience.

While Salesforce has delivered very impressive numbers over the last five years, it is trading on earnings multiple above 100. It may take some time for earnings to catch up with the current valuation.

In the case of SAP, the involvement of Elliott Management, its strong cloud revenue growth, and greater disclosure may make it the more reliable and defensive of the three stocks.

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