European Software & IT Service
European Software & IT Service
17 November 2022
Following our European Software & IT Services launch in October (SAP, European Software & IT Services
Dassault Systemes, Amadeus, Hexagon, Sage & Capgemini), we provide Toby Ogg AC
a full discussion of investor feedback and questions in this Note, as well
as our view on these areas of debate. On the European Software sector J.P. Morgan Securities plc
overall, investors are attracted by the compressed valuations (much more
consistent with historical averages), though are still nervous on the
earnings trajectory into 4Q. We have also recently concluded our Digital
Twin & Industrial Software week (involvement from all major players in
the Industrial Software landscape), with feedback included in this Note.
Overall, we continue to see SAP as our top pick in European Software Snapshot of SAP earnings quality
GAAP EPS as a % of non-GAAP EPS (23-25 avg)
(upgrade to Overweight) on EBIT inflection, upgrade cycle, defensive 120%
100%
characteristics into a recession and valuation upside; we continue to 100%
80%
78%
72% 70%
60%
rate Dassault Systemes as an Underweight (downgrade following 3Q) 60%
40%
34%
22%
● SAP: investors doing the work, interest building: We are fielding Source: Bloomberg Finance L.P.
more deep-dive sessions on SAP and our sense is that work is still in
progress for many investors; key areas of pushback include back-office
upgrade risk and cyclicality, mid-term target risk given incoming CFO,
scale of cloud gross margin ramp, EBIT ramp, competitive situation and
share based compensation. We provide our thoughts on all of these
elements in the report.
● Broader coverage debates continue to centre on cyclical elements of
narratives: 1) DSY: is the 3Q license miss the early warning sign, 2)
AMS: positives include upside drivers to numbers linked to pricing and
passengers boarded implementations, but more negative investors
pointing to bookings risk in adverse macro 3) HEX: debate is around
cyclicality, given lower recurring revenues and end-market mix, 4)
SGE: most are positive on Sage given growth, margin upside, £
reporting and high recurring revenues, 5) CAP: focus is on the estimates
into 2023 and whether there is downside given the macro backdrop.
See page 35 for analyst certification and important disclosures, including non-US analyst disclosures.
J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, users should be aware that
the firm may have a conflict of interest that could affect the objectivity of this report.
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Table Of Contents
Company-specific feedback ............................................................... 4
SAP: sentiment continues to improve ............................................. 4
Dassault Systemes: Cautiousness building ................................12
Capgemini: Cyclicality the focus ....................................................15
Amadeus: All eyes on travel recovery ...........................................17
Hexagon: Questions around cyclicality ........................................19
Sage: Investors like the story...........................................................19
Digital Twin & Industrial Software Feedback ...............................20
2
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Company-specific feedback
SAP: Sentiment continues to improve
Mid-term targets getting cut given new CFO and macro
Most of our investor conversations feature the mid-term targets and the degree to which
there is any risk to these targets given that SAP will have a new CFO in March 2023
(Dominik Asam). Investors have asked us whether the new CFO will want to set himself
a lower bar to outperform and perhaps use the macro as a reason to justify this.
Our view is that the mid-term targets are underpinned, with a number of factors driving
our confidence levels
1. Christian Klein (CEO) has committed to the mid-term ambitions (i.e. not just
incumbent CFO Luka Mucic) and thus any resetting of the mid-term targets would
go against this.
2. FX is a tailwind: The mid-term targets were set when the EURUSD was 1.18 back
in 2020 (cloud revenues have a significant portion linked to the USD which acts as a
notable tailwind - we model an FX tailwind to cloud revenues of ~10% in 2022).
3. Cloud momentum is tracking ahead of expectations due to the S/4HANA private
cloud helping accelerate adoption beyond what would have been possible with just
S/4HANA public cloud.
4. SAP key peer Oracle recently announced a $65bn 2026 revenue target at its
annual Financial Analyst Meeting which at the time was above $61bn consensus and
described as “not that aggressive of a growth number” (and implies multi-year
extension of 10-11% revenue growth which was a big shift from the <5% annual
growth rates in prior decade). Given Oracle’s relevance across many on SAP’s
software end markets, we believe this should underscore mid-term growth
confidence for SAP.
5. Our bottom- up cloud model gives us further confidence: We show our bottom-
up cloud product model (spanning SAP’s ~10 cloud assets, S/4HANA,
SuccessFactors, Customer Experience, Business Technology Platform, Qualtrics,
Concur, Ariba, Fieldglass, Business ByDesign and Signavio). Our model illustrates
a cloud revenue trajectory above SAP’s mid-term targets, underscoring our bottom-
up confidence.
6. Installed base led growth: Whilst SAP is still adding a healthy number of net new
S/4HANA customers each quarter (added an average of ~420 net new customers
over past 12 months), we believe it is the larger customers from the installed base
that are driving the bulk of SAP’s S/4HANA bookings and thus revenue growth.
SAP has long-dated relationships with many of the customers it has as part of its
installed base (>30,000 on-premise ERP customers). This installed base should
contribute substantially to SAP’s mid-term and should also give SAP itself better
visibility.
7. Recent CCB was strong: SAP’s leading indicator current cloud backlog (CCB) was
+26% in 3Q, ahead of expectations against a tougher macro; we believe this should
help underscore confidence in the cloud revenue runway.
3
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Figure 1: Bottom-up cloud model illustrates growth trajectory for the cloud business
SAP's cloud asset portfolio (€, bn) 2021 2022E 2023E 2024E 2025E '21-'25 CAGR
Ariba 1.5 1.9 2.2 2.4 2.7 16%
Concur 1.1 1.3 1.5 1.7 1.9 15%
Fieldglass 0.2 0.2 0.3 0.3 0.4 16%
HXM (SuccessFactors) 1.8 2.2 2.6 2.9 3.2 16%
S/4HANA Cloud 1.1 2.0 3.1 4.6 6.7 58%
Business Technology Platform (BTP) 0.9 1.3 1.7 2.2 2.8 35%
Customer Experience 1.0 1.2 1.4 1.5 1.7 16%
Qualtrics 0.8 1.2 1.4 1.7 2.1 30%
BusinessByDesign 0.2 0.2 0.3 0.3 0.4 16%
IaaS 0.9 1.0 1.0 1.0 1.0 3%
Group cloud revenues (JPMe) €9.4bn €12.6bn €15.4bn €18.8bn €23.1bn 25%
Our view is that on a relative basis SAP is well-positioned to navigate through a more
turbulent macroeconomic environment given its high recurring revenues at ~80% of
sales; further, licenses are just ~7% of sales and we already expect them to decline
substantially thus they have less scope to de-rail numbers. We also see multiple sources
of growth which can help insulate SAP’s financial profile.
1. Cyclical licenses are small and largely de-risked: Licenses are just ~7% of sales
now and we already expected them to decline substantially and thus see them as
largely de-risked; we model -45% ex-FX growth in 4Q.
2. Recurring revenues are high at currently ~80% of sales: This is up from ~40% in
2008 and thus we see SAP’s revenues are heavily protected into a downturn.
3. SAP has a broad portfolio of enterprise applications (the broadest portfolio of
applications across the ecosystem) and thus is well positioned to meet the needs of
the specific prioritisation profile of its different customers.
4. S/4HANA product cycle adds an extra layer of support as SAP benefits from the
‘ecosystem effect’ whereby system integrators act as an incremental source of
distribution; I.e. system integrators (Accenture, PwC, Deloitte, IBM,Infosys, TCS
etc) and hyperscalers (Amazon, Microsoft and Google) building their practices and
services around S/4HANA and acting as an additional go-to market and distribution
mechanism for SAP. Our extensive conversations with a range of system integrators
and hyperscalers at SAP’s Sapphire Conference in Orlando back in July suggested
there was significant momentum in the ecosystem for RISE & S/4HANA. Further,
the introduction of RISE in 2021 has helped to turn S/4HANA upgrades from simply
technical to transformational, which unlocks a stronger business case for CIOs.
Particularly in an environment where CIOs and organisations are looking at cost
optimisation, modularised back-office upgrades and enhancements can provide a
source of ROI and cost savings.
4
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Figure 2: SAP’s recurring revenues are >80% of sales which protects financials in a downturn
Recurring revenues as a percentage of sales
100%
85% 86%
90% 79% 82%
80% 72% 75%
70%
60%
50% 39%
38%
40%
30%
20%
10%
0%
2006 2007 2020 2021 2022E 2023E 2024E 2025E
Our view is that there are a range of clear drivers of the underlying cloud gross margin
ramp from the ~71% we model in 2022 to the ~78% we model in 2025 and thus have
confidence in SAP’s ability to hit this ramp as the business scales, harmonisation costs
roll away and higher gross margin cloud assets become larger in the mix.
1. Cloud harmonisation costs rolling off in 2H23: These costs have been in place to
improve the efficiency of SAP’s cloud portfolio operations through the
decommissioning of acquired datacentres and consolidation SAP’s cloud asset
infrastructure footprint into a converged structure with hyperscaler leverage).
2. Underlying margin improvement from the investments mentioned in point (1)
as the actual cloud operations themselves become more efficient.
3. Higher gross margin and faster growing assets like Qualtrics and the Business
Technology Platform becoming a larger part of SAP’s cloud portfolio over time.
4. Concur (another high gross margin asset) recovery, SAP’s travel and expense
management asset, returning back to pre-covid levels.
5. Infrastructure as a Service (IaaS), SAP’s lowest cloud gross margin asset,
becoming smaller in the context of SAP’s overall cloud business as SAP de-
emphasises this part of its portfolio.
6. S/4HANA private cloud factored in: The higher portion of S/4HANA private
cloud (which comes at a lower gross margin than S/4HANA public cloud) does act
as a headwind to the gross margin versus a purely S/4HANA public cloud mix,
though this mix effect is captured in the ~78% 2025 cloud gross margin (vs the
original ~80% cloud gross margin indicated when SAP first presented its mid-term
plan).
5
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
7. Last quarters progression has been solid: Moreover, SAP’s cloud gross margin
performance over the past ~2 quarters has been better than expected, with ~200bps
in annual expansion despite the presence of the cloud harmonisation costs.
Figure 3: Cloud GMs have expanded despite costs Figure 4: SAP cloud GM trajectory to ~78%
SAP cloud gross margin JPMe cloud gross margin
73% 80% 78%
72% 72%
72% cloud gross margins expanded 78% 76%
72% 200bps despite harmonisation 76%
71% cost headwinds 74%
71% 74%
70% 70%
70% 72% 71%
70%
69% 70%
70% 69% 70%
69% 68%
69%
66%
68%
68% 64%
Q1'21 Q2'21 Q3'21 Q4'21 Q1'22 Q2'22 Q3'22 FY21 FY22 FY23 FY24 FY25
Source: J.P. Morgan estimates, Company data. Source: J.P. Morgan estimates, Company data.
Our view is that SAP’s EBIT margins should improve as the cloud gross margin
improves and as opex ratios begin to fall as a percentage of sales, enabling margin
expansion to materialise through opex leverage; also we expect SAP’s margins to be at
~26% in 2022 and so the starting point is very low
1. Cross-sell and up-sell motion helps drive sales efficiency: Maintenance customers
shifting to S/4HANA - $1maintenance can yield $2.5 of cloud as SAP is able to
upsell onto S/4HANA and cross-sell other products as customers go through their
transformations.
2. Sales scale effect as recurring cloud business grows in size: Renewal business
becomes larger (lower sales commissions versus new business) , driving sales &
marketing leverage.
3. Drivers of leverage in research & development include: (1) Lower R&D ratios:
significant amount of investment has already been made towards integrating the
cloud assets and harmonising data models (~15% of R&D spending was indicated to
have been allocated towards integration), meaning R&D resources can be used
elsewhere now that the heavy lifting has largely completed. (2) Focus on ecosystem
leverage (i.e. partnering and leveraging system integrators to build out Industry
Cloud solutions), (3) Streamlined portfolio: focus on profitable core (i.e. portfolio
optimisation via disposals).
4. Cost discipline more broadly: SAP are also being stricter on expenditures, limiting
travel and hiring given the investments already made in 1H’22.
5. Licenses are much smaller now and thus have less scope to de-rail any margin
expansion: Historically, licenses (high margin) have been much higher as a
percentage of sales and thus any weakness in this revenue line has hampered margin
6
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
performance; today SAP is much lighter on licenses and so its potential to de-rail the
margin expansion is no longer the risk it once was.
6. Further G&A efficiencies: SAP can also drive further G&A efficiency from current
levels through scale and automation.
7. No large M&A: Other drivers of margin weakness historically have been large-
scale M&A of cloud assets with lower margins and thus this has impacted margin
trajectory in the past.
Figure 5: SAP’s EBIT margin trough FY22 with the setup for expansion in place
SAP adj. EBIT margin
35% 31%
30% 30% 30% 30% 29%
29% 29%
30% 27%
26%
25%
20%
15%
10%
5%
0%
FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25
Our view on this topic is that SAP is entrenched in its customer base given stickiness of
enterprise ERP software and thus see SAP’s positioning as broadly stable in its core,
with growth coming from installed base migration, upsell, cross-sell and new customer
additions.
1. SAP’s entrenchment within its customer base and high switching costs add
barriers: SAP operates at the most mission critical end of the software spectrum,
with core financials (general ledger) the financial backbone of an organisation,
connected into many different processes with many different users of the software.
As such the software is very sticky and switching costs are high, adding barriers to
SAP in this domain; this gives us a degree of comfort on SAP’s competitive
positioning.
2. Unless it’s badly broken, would rarely change: We have spoken with CIOs who
have illustrated this point and indicated to us that unless something was broken on
the core financial system then it would rarely make sense to undergo a switch given
the execution risk attached; CIOs have indicated to us in the past that they wouldn’t
7
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a delayed basis.
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get fired for an SAP upgrade, yet if they attempted to replace it with another vendor
and there was an implementation issue it could be risky for them.
3. SAP’s manufacturing customer base is a barrier: The manufacturing industries
that SAP addresses has a need for highly complex functionality and tight integration
through the manufacturing back office software (MES, SCM etc), shop floor and
financial backbone; this is the area where SAP’s ERP functionality resonates most
highly with customers and as such we believe SAP’s competitive positioning is the
strongest in these domains - end-markets were last disclosed in 2016: ~25%
consumer (wholesale distribution, retail, and life sciences), ~18% discrete
manufacturing (autos, aerospace & defence, high tech, industrial equipment), ~23%
energy & natural resources (chemicals, mining, O&G). This combined is ~66% of
SAP’s revenue base, which is significant. The remainder is ~15% services, ~10%
public sector and ~9% financial services.
4. Other areas of the cloud portfolio: a) procurement - SAP is strong in direct
procurement and indirect procurement, with direct much more complex, b) travel &
expense management - SAP Concur is able to deal with complex enterprise
requirements (e.g. many corporate spending & travel policies, multiple levels of
approval flows and entities with multiple subsidiaries), c) HR - strength in Europe
given the higher complexity with many different countries and languages which
SAP can cater for. SAP has a broad payroll capability (45+ countries which have
been localised) which gives SAP the ability to address international organisations
that operate across many regions. d) CRM - SAP is strong on the commerce side
with Hybris and has other assets like Gigya and Callidus which give it strength
across identity & access management and CPQ. e) Qualtrics has a strong offering
having innovated heavily in its platform and architecture enabling high levels of
scalability and granularity across data.
Our view is that a large portion of the step up in 2021 for SAP’s share-based
compensation can attributed to the IPO of Qualtrics, as key Qualtrics management and
executives received equity compensation awards linked to the IPO; going forward, the
IPO SBC expenses should fall each year, and be almost gone and completely gone in
2025. This should act as a strong source of downward pressure on SAP’s overall share-
based compensation expense and should help SBC as a % of sales fall by 2025.
1. ~50% of SAP’s total SBC in 2021 linked to Qualtrics, most of this IPO related:
As per SAP management (2021 conference call), these expenses linked to Qualtrics
accounted for ~50% of SAP’s total SBC for 2021, equating to ~€1.4bn of SAP’s
total ~€2.8bn booked in 2021. We believe ~80% of this ~€1.4bn was linked to the
IPO of Qualtrics itself, equating to ~€1.1bn; leaving ~€300m of underlying Qualtrics
share based comp (i.e. linked to normal business operations). Going forward, the
IPO related share based compensation expenses should fall each year, and be almost
gone and completely gone in 2025. We believe this should help to keep SAP’s group
share based compensation expenses under control and enable share based
compensation as a percentage of sales to fall.
8
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
“So in absolute terms, in absolute dollars or euros, we actually don't expect to see
further increases because the Qualtrics portion will continue to come down. Those
one-off step-ups in our own programs will not be around, and then it will more be
more a normal progression, so to say. Therefore, as a proportion of revenues, the
share will also come. So that's kind of what needs to be expected. I would anticipate
that in 2025, we'll probably end up again at the total company level, even including
Qualtrics with a share of roughly 7% of the revenues that we expect in 2025, which
again I think is a healthy ratio.”
“When you take this into account, plus the fact that, indeed, we had to step up our
volumes of so-called move SAP, share-based compensation in line with the kind of
developments that we see in the market. This explains the difference. Perhaps, the
last point, of course in that range the assumption was and is as well, we will see
an increase in the share price of the company, which obviously if it doesn't
happen, then of course would also reside in less share-based compensation.
Then for the future, as you rightfully noted, we see that we're reaching a plateau
now.”
3. ~5% 2025 FCF yield fully loaded for share-based compensation: We currently
see SAP on a ~5% 2025 FCF yield, which includes share-based comp. SAP’s
financial profile for this yield offers accelerating topline growth (into high-single
digit) and accelerating EBIT growth (over double digit in 2023 and accelerating into
the mid-to-high teens towards 2025). We would also point out that European
Software has limited alternatives with an attractive equity story and thus we see
scarcity value for SAP.
4. Many of SAP’s competitors have higher SBC: When looking at SAP’s SBC (% of
sales) in the context of back office / enterprise software set of companies, it screens
lower than companies such as Workday, ServiceNOW, Salesforce etc, but higher
than peers Oracle and Microsoft. Given SAP competes directly with many of these
companies, we think it’s relevant to consider how much SBC they are paying their
employees as it is ultimately a tool to attract and retain talent (SAP does need to be
competitive). See figure 6 below.
5. Difference between GAAP and Non-GAAP earnings is wide for many US peers:
Whilst SAP’s GAAP and non-GAAP earnings have diverged due to the growth in its
share based compensation, we would also point out that many of SAP’s US
competitors also have a notable gap between their GAAP and non-GAAP earnings.
9
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Figure 7: SAP middle of the pack on quality of earnings relative to US software group
GAAP EPS as a % of non-GAAP EPS (FY23-FY25 average)
120%
100%
100%
78%
80% 72% 70%
60%
60%
34%
40%
22%
20%
0%
-20% -12%
Microsoft Adobe Oracle SAP Intuit ServiceNOW Salesforce Workday
10
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Our view is that 3Q was the first quarter we saw a notable financial impact (4-5pts on
licenses) from the license/subscription mechanics and also felt the rhetoric was
incremental with respect to the focus on recurring revenues
11
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Figure 8: PTC’s margins suffered from transition Figure 9: Siemens Software flattening of growth
PTC’s operating margin Siemens 2021 CMD
40% 35% 37%
35%
29%
30%
25% 24%
25% 22%
20%
18%
20% 16%
15%
15%
10%
5%
0%
2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
“The relevance of our portfolio is completely different when I compare today to the
situation we have in 2008. And then on-premise, when you do a Capex business
case, a CFO wants to look at this two or three times. Opex cloud is also a different
discussion.”
PLM products are tied to the R&D budget and thus more resilient in a downturn
Investors have asked the extent to which Dassault Systemes is really cyclical given it
sells into the R&D budget (as opposed to more cyclical IT budget) of its customers and
thus spending can often be tied to multi-year R&D projects.
Our view is that this is helpful and can be a source of resilience, though R&D spending
is not fully immune and Dassault’s revenue mix is on the more cyclical end of the
software scale (given licenses ~20% of sales)
12
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
leads installations). Our expert noted extended lead times on decision making for the
consulting business as a sign. Also if we look at peer Ansys they recently called out
some softening in Europe in smaller deals.
Figure 10: Licenses declined ~18% in 2020 Figure 11: Licenses declined ~29% in 2009
DSY license growth (ex-FX) DSY license growth (ex-FX)
30% 40% 36%
23%
20% 30%
11% 20% 15%
10% 6%
10%
0% 0%
-10% -3% -2%
-10%
-20%
-20%
-18% -30%
-29%
-30% -40%
2018 2019 2020 2021 2006 2007 2008 2009 2010
13
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Our view is that Capgemini is less cyclical than it has been historically and we already
forecast a substantial slowdown in organic revenue growth into 2023, from >14%
organic in 2022 to ~3.5% in 2023, suggesting that the Street has already factored in a
more pessimistic view on the macro.
14
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Figure 12: JPMe already forecast organic growth slowdown of >10pts 2023 vs 2022
JPMe organic ex-FX revenue growth (y-o-y%)
16.0% 14.6%
14.0% We already model a
12.0% 10.2% substantial slowdown in
10.0% growth into 2023
8.0%
6.0%
6.0%
3.5%
4.0%
2.0%
0.0%
2021 2022E 2023E 2024E
Source: J.P. Morgan estimates, Company data.
15
This material was originally prepared by a J.P. Morgan entity (as identified in the material) in connection with its business and is being
provided to you as a courtesy in a modified format only for informational and educational purposes (not investment purposes), and on
a delayed basis.
Toby Ogg Equity Research
17 November 2022 JPMORGAN
Our view is that yes the linearity of the recovery back to pre-COVID levels in 2024 may
not be straight, but we believe the long-term story for Amadeus is compelling and there
are some shorter term sources of support; Amadeus is a rare market share gainer in a
European market where clear share gainers are more difficult to find. We also believe
there are some offsets to any volume weakness such as pricing (revenue per booking
helped by inflation, mix shifting back to international). Volume itself could also be
supported by airline capacity coming back (operators remain upbeat) and Asian markets
continuing to recover upon the removal of travel restrictions.
1. Revenue per booking can help support numbers: Volume aside, Amadeus does
have support from pricing on the revenue per booking side which can help protect
numbers into 2023 (FX support, normalisation of international mix which brings a
higher booking fee vs local, inflation indexation in contracts with airlines).
2. Volumes can be supported by Asian markets recovering: In the event of a
recovery in China, Amadeus could benefit from this as volumes pick-up in the
region.
3. Recovery financial profile is attractive: Amadeus offers attractive exposure to
large travel software markets (Airline IT, Airport IT and Hotel IT) and a recovering
air traffic volume profile (which contributes to our EBITDA CAGR forecast of
~20% 2022-25). This recovery financial profile is much more attractive than other
assets in our European coverage.
4. Competitive positioning is robust: Amadeus has also continued to to invest in key
technology areas (NDC, merchandizing, hotel IT, move to public cloud, etc.) in
order to sustain technology leadership for the longer term. As such, we believe
Amadeus is well positioned competitively, with >40% share in both GDS (global
distribution systems) and PSS (passenger services systems for airlines), and likely
continued market share gains in the future. We also like the company’s prospects
within Hotel IT, especially after signing a second large customer for its central
reservation system (Marriott, in addition to IHG).
5. Leaner cost base today provides downside protection: Amadeus’ right sizing of
its cost base (€550m fixed cost reduction plan vs 2019 cost base) in the pandemic
provides a healthy cushion in the event travel volumes did begin to slow (though we
note historically global air traffic volumes have been resilient with ~0.2% decline in
2009).
6. Software portfolio (~50% of group sales) tracking well as of 3Q: Amadeus’
Software portfolio (~50% of group sales) continues to track well across Airline IT
(with 3Q PBs in Airline IT ~83.5% vs 2019 / 2Q was 77.7%) and Hospitality (3Q
quarterly revenue 99.2% of 2019, 94.4% in 2Q and 84.8% in 1Q). We would note
that Amadeus’ Airline IT business should benefit from customer implementations
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Downside risks:
• There could be lapses or lagging impacts from COVID-19 beyond our expectations.
Industries such as automotive, aerospace and O&G had been somewhat slower to recov-
er.
• As a large provider of hardware and software solutions to industrial companies, Hexa-
gon is exposed to cyclical slowdowns in industrial investment and capex. Slower growth
in construction and infrastructure in US public sector or emerging markets could be
harmful. A slowdown in the automotive or aerospace capex could also slow metrology
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• Macroeconomic conditions could be better or worse than anticipated, and the econo-
mies within Sage's core geographic exposure could see macro or geopolitical disruption
(UK SMB is of heightened risk). SMEs could increase their demand for digitization and
cloud accounting offerings, or negative macro impacts could cramp demand.
• Management could deliver better or worse cost efficiencies, or the reinvestments might
be different than we expected, which could alter the company’s margin potential.
• Recurring revenues could grow slower than expected; and balanced with software
licenses (SSRS) in decline, could still create weakness in revenues or margins.
• The investments into sales & marketing could be less successful than anticipated, which
could hinder growth prospects. On the other hand, new cloud products and the Sage
Intacct geographic rollout could achieve better than expected results.
• Sage could experience stronger or weaker competition from Intuit, Microsoft, SAP,
Workday, Netsuite, Xero or a number of other ERP software or SaaS providers in the
regions where Sage sells software and services. Other competitors could enter the mar-
ket, or we could see consolidation or pricing pressure in the market.
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• Macroeconomic volatility and potential lagging impacts from Covid could last longer
than expected. Economic growth (especially in Europe, which is still >60% of revenues)
could be slower than we anticipate, which would likely impact corporate IT budgets,
which directly impact Capgemini's consulting and services opportunities.
• Capgemini could experience weaker pricing or utilization rates, driven by either slower
demand or increased competitive pressure. Indian heritage companies could also
increase their penetration into the mainland European outsourcing and IT services mar-
ket, or they might slow their European strategies as they focus on core products for exist-
ing clients.
• A competitive IT labour market could potentially put pressure on costs for Capgemini.
There is a tight supply of highly-skilled digital & cloud talent, and matching resource
and location is a constant challenge of the industry. Salary inflation in certain regions
can also be an issue. That said, we do view Capgemini's workforce overall as more flexi-
ble than it was some years ago, giving the company more maneuverability when it comes
to protecting margins and profits.
• Digital & Cloud offerings are offsetting slower demand in managed services. It is impor-
tant that Capgemini remains innovative in these areas and a leading supplier to its cli-
ents. AI/ Data analytics, 5G connectivity, next gen ERP, digital manufacturing, cyberse-
curity and sustainability are also areas of strong demand. Underperformance in these
businesses could see the Capgemini shares trade lower vs. our price target.
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Coverage Universe: Ogg, Toby: AVEVA Plc (AVV.L), Amadeus IT Group SA (AMA.MC), Atos (ATOS.PA), AutoStore (AUTO.OL),
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*Please note that the percentages might not add to 100% because of rounding.
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