Revenue burdens: SAP shares sagging ahead of time: SAP cuts targets...

The highly regarded margin climbed to 31.7 percent on a non-IFRS basis, or 31.9 percent in constant currency, compared to 30.6 percent in the same quarter of the previous year. Analysts had estimated 31.2 percent.

The background to this is a surprising drop in sales of 4 percent to 6.535 billion euros, while the operating result fell by just under 1 percent to 2.069 billion euros. The analysts’ estimates for the quarterly figures that are actually only due on Monday morning were higher at 6.887 and 2.117 billion euros, respectively. All information is on a non-IFRS basis.

Cloud growth flattened, licensing business continues to crumble

Revenues from the promising cloud business rose by 10 (2nd quarter: 19) percent less than expected and reached 1.984 (forecast: 2.112) billion euros. The order backlog in the cloud area (current cloud backlog) mentioned since this year has also increased by 10 (2nd quarter: 20) percent to 6.6 billion euros compared to the same period last year.

In the long-established and high-margin licensing business, SAP recorded a drop of almost a quarter to 714 (previous year: 932) million euros.

In contrast to the capped revenue and profit expectations, SAP has further raised the cash flow expectations for 2020, which were lowered in April and partially increased in July, based on a sustained improvement in the third quarter. Free cash flow was just as positive at 1,052 (previous year: 370) million euros as was the operating cash flow at 1,321 (638) million.

The bottom line was a 34 percent increase in earnings at 2.098 billion euros, per share it was 1.70 (1.30) euros, triggered by a high contribution from Sapphire Ventures. The Silicon Valley-based venture capitalist from SAP posted 715 million euros, a good 500 million more from the higher valuation of its investments.

S / 4Hana continues to attract (new) customers

With SAP’s core database S / 4Hana, the number of customers increased by 20 percent to 15,100, in the previous quarter the growth rate was around 22 percent. The number of new customers was constant at around 500.

SAP cuts annual forecast and medium-term targets

The corona pandemic is putting Europe’s largest software manufacturer SAP in greater distress than expected. The recovery in demand was also more restrained than expected because of new restrictions, as the DAX group surprisingly announced on Sunday evening in Walldorf. The management around CEO Christian Klein now expects less sales and operating results than before.

Because the crisis will weigh on business at least until the middle of next year and the exchange rates have recently developed negatively, the targets for 2023 for sales and earnings are likely to shift by one to two years.

SAP boss Christian Klein has defended his shift in strategy towards more growth investments as a necessary step. “I do not sacrifice the success of our customers to optimize our margin in the short term,” said the CEO of the DAX Group on Monday in a conference call. 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, said the 40-year-old. CFO Luka Mucic adds that management does not steer the company according to the operating margin. “We want to remain a growth company,” said the manager.

With investments in the mid three-digit million range, SAP wants to focus even more on growth with software via the Internet in the next two years. Now, above all, existing customers of the SAP core software for corporate management are to be moved to cloud offerings. The planned faster changeover by customers to such programs will likely significantly inhibit the previously envisaged growth in the adjusted operating margin (adjusted EBIT) to around 34 percent by 2023, as SAP announced on Sunday evening. Klein’s predecessor still had the goal Bill McDermott after he had also long favored growth as the top priority.

Cloud contracts are only as lucrative as software licenses for high one-off payments with a longer term. At the beginning of the last decade, SAP had strengthened its own cloud offering primarily through acquisitions worth billions, but in recent years it also offered its own core programs as a cloud version. “We believe that the investments will enable us to grow more in sales in the future when the investment phase is over,” said Mucic.

This year SAP is now expecting total sales of 27.2 to 27.8 billion euros based on constant exchange rates, that is, at exchange rates from last year. Before that it was 27.8 to 28.5 billion. Above all, revenue from cloud software is likely to be weaker at 8 to 8.2 billion euros, whereas 8.3 to 8.7 billion euros were previously targeted. The operating result should now land between 8.1 and 8.5 billion euros instead of between 8.1 and 8.7 billion.

The shares of the most valuable German company lost around 14 percent shortly after eight o’clock on the Tradegate trading platform. In a first reaction, UBS analyst Michael Briest wrote that paradise had been postponed. Patience is required now. Market expectations for operating earnings in 2023 are likely to fall by around 20 percent. JPMorgan expert Stacy Pollard canceled her buy recommendation for the share and lowered the price target from 160 to 120 euros. Even if she expected shifts in the medium-term earnings targets, the new ambitions are a lot weaker than she thought.

(dpa-AFX / Dow Jones)

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