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Change of CEO at Dax-SchwergewichtWas investors expect the new SAP leadership duo
By Christoph Rottwilm
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New bosses with demanding shareholders: The future SAP CEOs Christian Klein and Jennifer Morgan
The software company SAP surprises with a change at the top. The future co-bosses should be as successful as the previous one - but in a different way.
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So much is already clear: The investors are quite pleased to show the change of chief on SAP stock market chart. By up to 8 percent, the stock of the software group shot up on Friday. Previously it had become known that Bill McDermott surprisingly resigns as SAP CEO and is replaced by the duo Jennifer Morgan and Christian Klein. At the same time, SAP also presented pleasing business figures. However, if investors objected to the change at the top of the group, the share price response would undoubtedly have been different.
The approval is not surprising, because the outlook for the SAP share remains good. SAP has been growing for quite some time, the share price is rising accordingly, and there is little to suggest that this should change under the new leadership. Since 2010, Bill McDermott has headed the company, first in a duet with Jim Hagemann Snabe, from 2014 then alone. The share price has almost tripled during this time. Since 2014 alone, the price has risen again to about 113 euros by about 100 percent.
The business figures that SAP presented for the third quarter on Friday night document once again what these earnings drivers are based on: strong growth in sales and profits. In the past three months alone, Group revenues increased 13 percent to 6.8 billion euros year-on-year. With the profit went even more clearly, namely by 30 percent to 1.26 billion euros upwards.
Revenues in the cloud business now higher than with software licenses
The shareholders of SAP may be satisfied with the price gains of the past. However, they expect the Group's new top management to generate similar value growth for their shares in the future. To achieve this, SAP must continue to increase profits, ideally - as in the past third quarter - faster than sales.
In short, SAP's investors have been demanding better profitability from the company for quite some time - and management has already agreed to pursue that goal.
Only in April of this year, the previous CEO McDermott screwed the SAP goals further in the air. Among other things, McDermott promised shareholders a significant improvement in profitability, as measured, for example, by the gross margin in the cloud business, which is expected to rise to 75 percent by 2023, and by the operating margin at Group level. SAP intends to increase the latter by one percentage point per year over the same period. The cloud is the future business of SAP: For 50 years, SAP has made money, especially with software licenses. Meanwhile, the revenues of the cloud business exceed those of the license business.
The latest business results show that the Group appears to be on the right track: In the third quarter, the cloud gross margin in question increased by 5.4 percent to 69 percent. The operating margin also increased across the Group, rising 1.7 percentage points year-on-year to 30.6 percent.
The task of the new SAP bosses is now to maintain this line - but by other means than their predecessor. For as much as Bill McDermott and the company emphasize that the departure of the current CEO is a peaceful process by mutual agreement, the American has probably not voluntarily evacuated the executive chair in Walldorf.
High level of restructuring in the Group
Rather, after ten years of McDermott, SAP is in trouble. And those responsible on the supervisory board - chief inspector and group co-founder Hasso Plattner - probably did not have the impression that the previous boss was the right man to eliminate these abuses.
Two merits go to the account of Bill McDermott at the top of the group: He let SAP grow, especially through a series of billions of company acquisitions, and he focused the group on the promising cloud business. The current construction sites at SAP are a direct result of these two achievements: There is a lot of adaptation and restructuring in the Group. It has often been said that SAP customers are already dissatisfied because the many individual parts that make up the group are not (yet) in harmony.
In addition, internal SAP processes and structures must be adapted to the new cloud world, as the future co-CEO Christian Klein recently carried out in an interview.
Klein is also the man to whom the main part of this work will probably come. In the leadership duo, it is more likely to be the leadership of the group inside. By contrast, American Jennifer Morgan, previously responsible for the cloud business, is considered a top salesperson and sales specialist. A kind of extension of a Bill McDermott into the future so to speak, albeit in a somewhat moderate form.
In part, SAP has already initiated the necessary measures to restructure the group in recent months. For example, several thousand employees have already been retrained for several hundred million euros this year so that they can be transferred to future-oriented positions. From the investor side, the group was well received. For example, the US hedge fund Elliott Management, which owns about 1.2 billion euros of SAP shares, is usually one of the "never satisfied" shareholders. However, compared to SAP, Elliott expressed unusually mildness in the spring of this year. The hedge fund "fully supports" the course of the group, it said in a statement in April. SAP has set itself the right goals.
Christoph Rottwilm on Twitter
So that they can be achieved in the future, from the perspective of investors, SAP must first and foremost stay on course. If Morgan and especially Klein succeeds in integrating all SAP parts and adapting the Group internally to the new orientation, the growth of the past will be achieved Continue years. Then, as promised, profitability can also improve - and the share price will continue to rise.
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