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SAP headquarters in Walldorf: Cloud less profitable than software licenses
Photo: Ralph Orlowski / REUTERS
The Covid-19 pandemic is affecting Europe's largest software manufacturer SAP more than previously thought.
Because the demand has recently been more restrained than expected due to new restrictions, the management around CEO Christian Klein is now assuming less sales this year, and operating profit will no longer be as high as last planned.
Klein also actually put the ambitious medium-term goals for profitability 2023 aside because he wants to align the group even more quickly with the cloud software sector.
Investors reacted promptly: In the first few minutes of trading, the shares of the most valuable German group lost up to almost 21 percent on Monday morning.
The price slipped below the 100 euro mark for the first time since the beginning of April.
Due to the fall in the share price, 32 billion euros in market value vanished.
For the stock exchange traders, the combination of weak numbers for the third quarter and trimmed forecasts was "a nasty surprise," said a trader.
SAP expects coronavirus burdens by the middle of next year, which will also postpone the medium-term targets set for 2023 by one to two years.
Because of the even faster switch to cloud software, investors now have to be prepared for the fact that SAP will hardly make any progress in terms of profitability by then.
Moving to the cloud costs margin
Klein's predecessor at the top of the group, ex-CEO Bill McDermott, had promised after years of shrinking margins that SAP would finally reap the benefits and that the adjusted operating margin (adjusted EBIT) in 2023 should be around five percentage points above that of 2018 (29 percent) .
Nothing will come of it now.
SAP adjusted the financial market so that the strong growth of cloud offerings in 2023 will cost four to five percentage points in the operating margin.
"I do not sacrifice the success of our customers to optimize our margin in the short term," said Klein in a conference call on Monday morning.
Customers increasingly asked for software from the cloud for use over the Internet, so maintaining the old medium-term goals with a focus on their own profitability would have been against their wishes.
CFO Luka Mucic added that the management does not steer the company according to the operating margin: "We want to remain a growth company."
Although the software for use via the Internet is growing faster than programs permanently installed on the customer's IT, it is still not as profitable as the one-time license fees.
Cloud software is paid for either in subscriptions over the term or for a usage fee.
US subsidiary weighs on earnings
For growth with cloud software, SAP now wants to invest more money in the technical infrastructure.
Additional expenses are expected to be required in the coming year and the year after next.
Mucic put the necessary investments at a mid three-digit million amount.
This year, SAP expects total sales of 27.2 to 27.8 billion euros based on constant exchange rates - that is, at exchange rates from last year.
If the strong euro has a particularly hard impact on the conversion of foreign revenues, values below this are also possible.
Previously, 27.8 to 28.5 billion were targeted.
Business with cloud software is also likely to be weaker.
The US subsidiary Concur, which offers customers travel expense management, is particularly suffering from the crisis.
In terms of adjusted operating profit, the company also cut its plans at the upper end of the expected range slightly to 8.1 to 8.5 billion euros.
SAP had already reduced its original annual targets in April due to the corona crisis.
Cash registers are well filled
Because the group stepped on the brakes on costs, things are looking better this year in terms of the development of the cash situation.
The Walldorfers have currently imposed a hiring freeze for administrative functions, as Mucic said.
Instead of around 4 billion euros in free cash flow, Mucic now calculates an inflow of more than 4.5 billion euros into the till this year.
Total sales shrank between July and the end of September by 4 percent year-on-year to 6.54 billion euros, with the strong euro causing the decline.
Earnings before interest and taxes adjusted for special costs were 2.07 billion euros, one percent below the previous year's figure.
The bottom line is that Mucic was able to show a significant increase in profits of 31 percent to 1.65 billion euros.
This was primarily due to valuation effects at the investment subsidiary Sapphire Ventures, which mainly invests money in start-ups.
In the next two years, SAP is anticipating subdued growth in sales, and adjusted operating profit is likely to stagnate or even decline.
From 2023, sales are expected to grow faster and the operating result to increase by a double-digit percentage.
In 2025, SAP wants to crack the 22 billion euro mark in cloud revenues and achieve total sales of over 36 billion.
The operating profit should be over 11.5 billion euros by the middle of the decade.
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mik / dpa
