Stock market crash of IT group: SAP boss defends strategy

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SAP boss Christian Klein: wants to do more than optimize short-term margins

Photo: Uwe Anspach / DPA

While the US tech companies have been doing well in the corona crisis so far, the Baden-Württemberg response to Alphabet, Amazon and Co. is again causing disillusionment.

What is meant is not the comparatively sedate image of the German SAP group - but something that the software service provider could otherwise rely on: booming business.

Now, for the second time within a few months, SAP has missed its financial targets and has seriously disappointed investors.

The first time in April, this news almost went under in the height of the corona pandemic in view of a global economy that was already in a downturn.

Now SAP attracted a lot of attention with its announcement.

The corona pandemic will have a negative impact on business at least until mid-2021, which means that previous sales and earnings targets cannot be met, it said. 

Cloud business in demand - but it has to be expanded at great cost

This led to enormous losses on the Frankfurt Stock Exchange: The shares of the software company plummeted by almost 22 percent and also dragged the German stock market into the red as a whole.

When SAP suffers, the Dax also feels it.

The share of SAP shares in Germany's leading index of the 30 largest and most liquid companies in the country makes up almost twelve percent.

No other company has such weight.

Together with Linde, Siemens, Allianz and Deutsche Telekom, SAP is one of the Big Five, which are responsible for over 40 percent of the Dax, as the ARD broken down.

And so the Dax closed extremely weakly in the evening with a minus of 3.71 percent at 12,177 points.

The MDax of the 60 medium-sized stock market stocks lost 2.11 percent and was listed at 26,704 points, and the leading Eurozone index EuroStoxx 50 also fell by two percent.

Given the difficult situation at SAP, this seems understandable.

In 2020, the group only expects total sales of 27.2 to 27.8 billion euros - but based on exchange rates from last year.

If the strong euro has a particularly hard impact on the conversion of foreign revenues, values ​​below that are also possible, according to the information.

In April, 27.8 to 28.5 billion had been targeted, before that even 29 billion euros.

This year there could even be a drop in sales.

The operating profit will also no longer be as high as targeted and will only be 8.1 to 8.5 billion euros.

In addition to the pandemic, the group is burdened by its higher investments in cloud computing, which are significantly reducing the operating margin.

Because the business with software from the cloud for use via the Internet is in greater demand, the costs are initially higher.

In the coming year and the year after that, a medium three-digit million amount will be spent on this alone.

Klein wants to have suspected a slide in the course

SAP boss Christian Klein is sticking to his company policy despite the historical collapse in price at Europe's largest software manufacturer.

"We were aware that the reaction of the shareholders could turn out like this," Klein told the "Handelsblatt".

"But the decision to correct the ambition and align ourselves even more closely to the needs of our customers was necessary," he told the newspaper.

Klein is "deeply convinced that we are pursuing the right strategy to move SAP forward in the long term."

Klein apparently finds the expansion of cloud computing in particular right.

"Many companies are suffering from the crisis because they have delivery bottlenecks or production stalls. All these processes are operated with SAP software - customers now want to get into the cloud faster," he told the "Handelsblatt".

The additional investments are necessary to expand the infrastructure.

"I don't want to sacrifice future growth potential for short-term margin optimization."

For stockbrokers, it must have been particularly drastic that SAP cut its important profitability targets.

A year and a half ago, ex-CEO Bill McDermott promised that the operating profit margin - that is, what remains of sales as profit before deduction of taxes, interest and special items - by 2023 will be around five percentage points above that of 2018 (29 percent) should.

His successors - the co-bosses Christian Klein and Jennifer Morgan - had reaffirmed this goal again and again.

Klein now runs the business alone - and expects little progress in profitability until 2023.

Many companies are cutting IT budgets

In addition, many SAP customers cut their IT budgets in the pandemic for cost reasons.

"It should stay that way until the middle of next year," said the head of the influential DSAG user association, Jens Hungershausen.

According to a survey by the association, in which thousands of SAP customers have come together, almost three quarters of all companies surveyed complain of declining sales.

The digital turnaround is being postponed in many places to be on the safe side - and a new lockdown of whatever kind is looming.

In view of these problems and due to the strong euro, total sales in the third quarter shrank by four percent year-on-year to 6.54 billion euros.

Earnings before interest and taxes between July and the end of September were 1.47 billion euros, twelve percent below the previous year's figure.

The fact that SAP was able to show a significant increase in net profit of 31 percent to 1.65 billion euros was mainly due to valuation effects at the subsidiary Sapphire Ventures, which mainly invests money in start-ups.

Regardless of this, the SAP board members Klein and Luka Mucic topped up their portfolios with (cheap) shares in their own company.

Maybe the managers want to show that they believe in their company.

Whether investors prefer to rely more on US tech companies in the future should be shown on Thursday.

Then new numbers from Amazon, Alphabet and Facebook are expected.

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apr / dpa