The ad hoc announcement probably destroyed many shareholders on Sunday night: Europe’s largest SAP software maker – Germany’s most important company in terms of market value – has not only cut its financial targets for 2020 and gained the promise of profitability from the previous year. In principle, the company has also removed the firm belief of many people that growing digital corporations with their business model should benefit economically from the corona crisis.
The stock market reaction followed Monday morning: Investors reacted disappointed, letting SAP shares fall by more than 20 percent from time to time. Dax was also partly clearly pushed into the red by news from Walldorf. Meanwhile, the market capitalization of more than 30 billion euros disappeared on Monday.
Free test now!
Despite some signs, very little was expected to happen. Investors were in the corona crisis until the end – even given the strong performance of large digital US corporations such as Amazon, Facebook or Google Alphabet – and even a little euphoria here and there. After all, SAP also makes its money digitally; it does not depend on global supply chains and, by this logic, should be the winner of the crisis.
In April, news fell
But nothing there: On Monday, SAP even collected its financial targets for the second time in a few months. For the first time in April, news almost drowned in falling prices due to the corona crisis. The share is now in the spotlight: The corona pandemic will have a negative impact on business until at least mid-2021, which means that previous sales and earnings targets cannot be met.
This year, SAP now expects total revenues of only € 27.2 billion to € 27.8 billion based on constant exchange rates – last year’s exchange rates. If a strong euro has a particularly severe impact on the conversion of foreign revenues, lower values are also reportedly possible. The financial forecast updated in April targeted 27.8 to 28.5 billion, previously even 29 billion euros.
Profit will also melt
Last year, the group reported sales of 27.6 billion euros, which means: This year, it could finally be a decline in sales. Operating profit will no longer be as high as planned and will amount to only 8.1 to 8.5 billion euros.
After SAP shares cost more than 125 euros on Friday, it costs only a good 96 euros on Monday night. Even the words of the board of directors in the afternoon will not change the losses after the ad hoc announcement. Analysts have always confirmed that SAP has great potential and declared a rating of up to 180 euros.
[Alle wichtigen Updates des Tages zum Coronavirus finden Sie im kostenlosen Tagesspiegel-Newsletter “Fragen des Tages”. Dazu die wichtigsten Nachrichten, Leseempfehlungen und Debatten. Zur Anmeldung geht es hier.]
There were warning signs. According to a survey by the influential DSAG user association, which brought together thousands of SAP customers, almost three-quarters of all companies surveyed complain about declining sales. This also has an impact on SAP customers’ IT budget, said DSAG chief Jens Hungershausen of the German news agency. “There’s a big part that says: We’re accelerating our IT projects now.” But there are almost as many people who say: Now we are slowing down and delaying our projects a bit. It should stay that way until the middle of next year. “
Long-term success instead of short-term margins?
The fact that the Walldorf Group quickly collected one of its important profitability goals made investors even more angry. A year and a half ago, former CEO Bill McDermott promised that the operating profit margin – ie what will remain from the sale as a profit before taxes, interest and special items – will be about five percentage points higher by 2023 than in 2018 ( 29 percent) should.
Now he has to sell the bad news itself: Christian Klein, CEO of SAP.Uwe Anspach / dpa
McDermott’s successors – co-owners Christian Klein and Jennifer Morgan – repeated this goal over and over again and promoted their company. Klein, meanwhile, is doing business on its own – and is now setting new priorities in a publicly effective way. He announced that by 2023 there would be little progress in the area of profitability. “I am not sacrificing the success of our customers to optimize our margins in a short time,” the CEO said in a conference call with journalists on Monday.
Customers have increasingly demanded cloud software for use over the Internet – a business model that now needs to grow even faster. This creates new costs that push profit margins down. CFO Luka Mucic added that management does not manage the company by operating margin: “We want to remain a growth company.”
Cloud business does not bring as much profit
It is true that the business area of software for use over the Internet is growing faster than the long-established one, which deals with programs that are permanently installed on a customer’s IT. At present, however, the cloud area still does not deliver as much as the business with one-time license fees and support offered by SAP for customer IT. In order for the group to continue to grow in the future of cloud software, the group now wants to invest more money in technical infrastructure. It is expected that additional expenditure will be required next year and the following year.
However, Corona continues to put pressure on the balance sheet. In the third quarter, total sales fell by 4 percent year on year to 6.54 billion euros. Profit before interest and taxes between July and the end of September was 1.47 billion euros, which is twelve percent less than in the previous year.
The fact that SAP was able to report a significant increase in net profit of 31 percent to 1.65 billion euros in the third quarter was mainly due to the valuation effects of the Sapphire Ventures subsidiary. Most investors were barely interested in this detail on Monday, but several were in a buying mood: SAP Klein and Mucic board members diligently supplemented their portfolios with SAP shares – and enjoyed favorable prices. (with dpa / rtr)