SAP said on Monday it was going all in on its shift to cloud computing as it abandoned medium-term profitability targets and cautioned that its business would take longer than expected to recover from the coronavirus pandemic.
The strategic pivot by Chief Executive Christian Klein means investors are once again being asked to wait for the promise of fatter margins at the German business software group to become a reality.
“We are at an inflection point,” Klein told journalists on a conference call. “I am not willing to trade value to our customers for short-term margin optimization.”
Investors reacted by dumping shares in Europe’s most valuable technology company, which fell by 13% before the Frankfurt market open.
JPMorgan cut its price target for SAP to 120 from 160 euros, and downgraded the stock to “neutral” from “overweight”.
The change of course follows a year of turmoil unleashed by the exit of long-time CEO Bill McDermott and a failed experiment in tandem leadership that ended in April when Klein became sole CEO as governments locked down economies.
At that time, the pandemic was already having an impact on operations, but SAP stood by a medium-term “ambition” set on McDermott’s watch that foresaw profit margins growing by a percentage point a year in the five years to 2023.
The latest shift means, effectively, that margins will languish over the next three years. Headwinds will only turn to tailwinds after that, Chief Financial Officer Luka Mucic told reporters.
Cloud revenue — from subscription-based services hosted at remote data centers — is now expected to triple to 22 billion euros by 2025. That will eclipse traditional license sales that have for decades been SAP’s cash cow.
Total adjusted revenue in 2025 is now forecast at 36 billion euros and adjusted operating profit at 11.5 billion.
That implies a margin of 31.9% – more or less in line with SAP’s third-quarter showing.
In the quarter, adjusted total revenue fell by 4% while operating profit fell 12%, based on international financial reporting standards. After adjustments and at constant currency rates, profit rose by 4%.
SAP also cut its guidance for 2020, saying the reimposition of lockdowns by some governments had hit its business while hard-hit industries would now take longer than expected to recover.
SOURCE : https://www.cnbc.com/2020/10/26/sap-forecasts-headwinds-through-2023-as-it-forces-cloud-transition.html