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(new: quarterly figures and quotations in paragraphs 5 and 9 to 11.)
WALLDORF (dpa-AFX) – The corona pandemic has Europe’s largest software manufacturer SAP (SAP SE) more under control than expected. Because the demand was more subdued than expected due to new restrictions, the management around CEO Christian Klein is now assuming less sales this year, and the operating profit should no longer be as high as last planned. The most valuable DAX group missed the expectations of analysts with the figures for the third quarter.
SAP expects the infectious disease to have a negative impact by the middle of next year, which will also postpone the medium-term targets set for 2023 by one to two years. Because of the even faster switch to cloud software, investors now have to be prepared for the fact that SAP will hardly make any progress in terms of profitability by then.
That still had the ex-boss Bill McDermott Promised after years of shrinking margins: That SAP will finally harvest the fruits and the adjusted operating margin (adjusted EBIT) in 2023 should be around five percentage points above that of 2018 (29 percent). Nothing will come of that now, SAP adjusted the financial market to the fact that the strong growth in cloud offerings will probably cost four to five percentage points in the operating margin.
Although software for use over the Internet is growing rapidly, it is still not as profitable as selling software for one-off license fees. Cloud software is paid for either through subscriptions over the term or against a usage fee. The software licenses are likely to decline in the coming years compared to the level of 2020, SAP estimates.
For growth with cloud software, SAP must continue to invest money in the technical infrastructure, so additional investments will probably be required next year and next, it said. “Our accelerated move to the cloud will ensure that we continue on our path as a cloud growth company while continuing to focus on cost savings,” said CFO Luka Mucic.
This year, SAP is now anticipating total sales of EUR 27.2 billion to EUR 27.8 billion based on constant exchange rates – that is, at exchange rates from last year. If the strong euro has a particularly hard impact on the conversion of foreign earnings, values below this are also possible. Previously, 27.8 to 28.5 billion were targeted.
Above all, revenue from cloud software is likely to be weaker here, at 8 to 8.2 billion euros, whereas 8.3 to 8.7 billion euros were previously planned. The US subsidiary Concur, which offers customers travel expense management, is particularly suffering from the crisis. The operating result should now land between 8.1 and 8.5 billion euros instead of between 8.1 and 8.7 billion. SAP had already reduced its original annual targets in April due to the Corona crisis.
Because the group stepped on the brakes on costs, things are looking better this year in terms of the development of the cash situation. Instead of around 4 billion euros in free cash flow, Mucic now calculates an inflow of over 4.5 billion euros into the till.
The third quarter showed just how badly the crisis is also hurting SAP – with management remaining optimistic that the value of digitalization for companies in the crisis. “For companies, the move to the cloud, combined with a real realignment of their business, has become essential,” said Klein. “This is the only way they can become more resilient and create the conditions for them to emerge stronger from the crisis.”
Total sales shrank between July and the end of September by 4 percent year-on-year to 6.54 billion euros, with the strong euro causing the loss. Adjusted for currency effects, the proceeds would have remained stable. Earnings before interest and taxes adjusted for special costs were 2.07 billion euros, one percent below the previous year’s figure, but would have grown by 4 percent without exchange rate effects according to SAP calculations.
The bottom line is that Mucic was able to show a significant increase in profits of 31 percent to 1.65 billion euros. This was primarily due to a valuation effect at the investment subsidiary Sapphire Venturs, which mainly invests money in start-ups. With the figures for sales and operating profit, SAP was clearly below the estimates of analysts.
In the next two years, SAP anticipates subdued growth in sales, and adjusted operating profit is likely to stagnate or even decline. From 2023, sales are expected to grow faster and the operating result to increase by a double-digit percentage.
In 2025, SAP wants to break the 22 billion euro mark in cloud revenues and achieve total sales of over 36 billion. 85 percent of the sales should then be easier to plan, which means that they either come from cloud subscriptions or from maintenance contracts and do not depend solely on sales success. The operating result should then be over 11.5 billion euros. So far, SAP had expected cloud sales of more than 15 billion euros in 2023./men/he