By Douglas Busvine
BERLIN (Reuters) – SAP on Sunday cut its guidance for the year and abandoned its forecast that profitability would expand steadily over the medium term, saying coronavirus lockdowns would hit demand well into 2021.
The German business software group, a leader in enterprise applications ranging from finance to supply-chain management, said in an ad-hoc release it was shifting strategy to accelerate its push into cloud computing.
Separately, SAP also released third-quarter results showing a 4% decline in adjusted total revenue. Operating profit was down 12%, based on international financial reporting standards, but after adjustments and at constant currency it rose by 4%.
The change of course follows a year of turmoil unleashed by the exit of long-time CEO Bill McDermott, while the leadership duo of Christian Klein and Jennifer Morgan that replaced him unraveled in April to leave Klein in sole charge as governments were locking down their economies.
At that time, the coronavirus pandemic was already having an impact on operations, but SAP stood by the 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.
In its Sunday-evening release, SAP dumped its targets for 2023 and instead replaced them with new targets for 2025.
It said the COVID-19 pandemic would have an impact on demand “through at least the first half of 2021 pushing out the achievement of key metrics such as (adjusted) cloud revenue, total revenue, and operating profit, by 1 to 2 years.”
Further, SAP said, shifting customers more quickly to lower-margin cloud hosting from its traditional cash-cow software licenses would “negatively impact the 2023 operating margin by approximately 4 to 5 percentage points relative to the previous mid-term ambition.”
An SAP spokesman declined to elaborate on the statement but, taking it at face value, it appeared that the company now expected margins to be flat through 2023 rather than grow by a percentage point a year, as originally targeted by McDermott.
In 2025, SAP now expects adjusted total revenue of 36 billion euros ($42.7 billion), of which 22 billion euros would be cloud revenues. This business is based on subscriptions and is less profitable than software licenses, which feature chunky up-front payments but generate less predictable cash flows.
Adjusted operating profit is expected to reach 11.5 billion euros by 2025, while the share of more predictable revenue should grow to 85%, SAP said.
SAP also cut its guidance for 2020, saying the reimposition of coronavirus lockdowns by some governments had hit its business while hard-hit industries would now take longer than expected to recover.
“While SAP continues to see robust interest in its solutions to drive digital transformation as customers look to emerge from the crisis with more resilience and agility, lockdowns have been recently re-introduced in some regions and demand recovery has been more muted than expected,” SAP said.
In particular, SAP added, it no longer anticipates a meaningful recovery in Concur, its business travel and expenses expenses application, for the remainder of this year.
SAP, headquartered in the southwestern town of Walldorf, now expects adjusted total revenue this year at 27.2 billion euros to 27.8 billion euros ($32.24-$32.95 billion), at constant currency, down from an earlier range of 27.8-28.5 billion euros.
Adjusted operating profit, also at constant currency, is now seen at between 8.1 and 8.5 billion euros. The earlier range had been 8.1-8.7 billion euros.
($1 = 0.8437 euros)
Reporting by Douglas Busvine; Editing by Alison Williams and Andrew Heavens.