SAP shares drop as software program maker cuts forecasts

SAP, Europe’s largest software company, has lowered its revenue and earnings guidance for this year as the resurgence of coronavirus cases weighed on business spending and the group’s shares fell by as much as 20 percent on Monday.

The German company, which is transforming into a cloud-based company, warned that its customers, which include many of the world’s largest companies, would spend less money as rising Covid-19 cases hurt business confidence.

“In some regions, lockdowns have been reintroduced, the recovery is uneven and companies are facing greater uncertainty about business,” SAP said, adding that it is expected to remain so for at least the first half of next year.

As a result, SAP lowered its revenue and operating profit forecast for 2020. Due to the negative currency effects, the impact of Covid-19 and the increasing demand for cloud-based products, the targets for 2023 announced last year were also canceled.

While licenses for on-premise software suites bring upfront revenue to the business, customers pay very little upfront for cloud subscriptions, with the bulk of payments coming three or four years later, the company said.

After a decline of up to 20 percent, shares fell 17 percent on Monday morning in Frankfurt, giving the company a market capitalization of 120 billion euros.

SAP said the pandemic has accelerated demand for cloud-based suites and now expects to generate cloud revenue of EUR 22 billion per year by 2025.

However, it added that this shift would cut its operating margin by around 4 to 5 percentage points by 2023 as money was poured into improving a cloud-based offering that rivals companies like Salesforce and Oracle.

“We will accelerate the modernization of our cloud delivery infrastructure,” Christian Klein, managing director, told reporters on Monday. “This will require additional investments in 2021 and 2022, but it prepares us for a cloud cost margin of around 80 percent by 2025.”

Last year, SAP announced that it would triple its annual cloud revenues, which were around EUR 5 billion in 2018, by 2023 and bring in a total of EUR 35 billion.

However, the Walldorf-based group said that goal had been hurt by negative currency effects that reduced sales and profits by about 4 percent, as well as the impact of the pandemic.

SAP also announced that third-quarter sales fell 4 percent to 6.5 billion euros, while operating income fell 12 percent to 1.5 billion euros.

SAP Concur, which helps the company manage travel expenses, “has not seen a significant recovery,” the software group said as it cut the range of its expected annual profit in 2020 by 200 million euros.

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