SAP sets new mid-term profit targets after first-quarter operating loss

SAP sets new mid-term profit targets after first-quarter operating loss

German business software company SAP set ambitious new mid-term targets on Wednesday to boost profit margins as it reported a first-quarter operating loss that chiefly resulted from a restructuring charge.

FILE PHOTO: SAP logo at SAP headquarters in Walldorf
FILE PHOTO: SAP logo at SAP headquarters in Walldorf, Germany, January 24, 2017. REUTERS/Ralph Orlowski/File Photo

FRANKFURT: German business software company SAP set ambitious new medium-term profit targets on Wednesday as it reported a first-quarter operating loss that chiefly arose from a restructuring charge.

SAP, Europe's most valuable technology company, wants to expand its adjusted operating margins by a total of 5 percentage points through 2023 as it scales up its cloud operations, where it aims to achieve a gross margin of 75 percent.

While the quarterly loss was expected, the company's announcement in January that it will shed 4,400 staff has been followed by a string of senior departures, leading some customers to fret that its transformation may be going off track.

SAP, whose shares have underperformed rivals Oracle, Salesforce and Microsoft in the past 12 months, has been downgraded by some brokers who question the pace of its cloud upgrades and its ability to generate cash.

CEO Bill McDermott, in a typically bullish answer to sceptics, said he was setting up a top team to drive margin expansion as the Walldorf-based company focus on organic growth while refraining from major takeovers.

"This is that magic moment that people have been waiting for where they are like, wow, nobody grows like SAP, but can I get some margin out of this growth?" McDermott, 57, told Reuters in an interview.

"We are going to give you a (percentage) point per year between now and 2023. And I think our shareholders are going to be super-psyched."

SAP will update investors at a capital markets day on Nov. 12 in New York. It is looking to announce a multi-year share buyback program as McDermott sets his sights on more than doubling the company's market value to US$300 billion.

Activist investor Elliott Management Corp, which disclosed a 1.2 billion euro (US$1.35 billion) stake in SAP on Wednesday, said it supported management's strategy.

SAP shares were up 3.1 percent in early trading in Frankfurt.


The quarterly operating loss of 136 million euros chiefly resulted from an 886 million euro up-front charge in relation to the layoffs, which Chief Financial Officer Luka Mucic said were on track.

After adjusting for that and other one-offs, non-IFRS operating profits rose by 13 percent at constant currencies to 1.467 billion euros, above expectations in a poll of 17 analysts.

Underlying margins also strengthened in the first quarter, as cloud led the way with a 300 basis point gross margin expansion from a year earlier to 66.2 percent, the company said.

That came as investments in infrastructure upgrades rolled off, while further improvements should come as SAP completes the migration of its cloud applications to its HANA database engine, and works more with 'hyperscale' partners.

One of those partners, Alphabet's Google, has just hired SAP's top salesman Rob Enslin, the latest executive to leave in the wake of the restructuring announcement and the US$8 billion acquisition last November of customer experience specialist Qualtrics, in a deal viewed by some as overpriced.

McDermott said he still counted Enslin as a good personal friend and the move would help to cement the relationship between the two firms as Google develops its cloud platform franchise.

"Google is a very good partner of SAP," McDermott said. "This a plus, plus, plus."

Boosting margins in the cloud - where SAP's subscription-based products are hosted remotely - is the holy grail for a company that still makes most of its money from licence fees and maintenance for software running on customers' on-site servers.

Reflecting that bullishness, SAP lifted its growth forecast for non-IFRS operating profits this year to 9.5-12.5 percent at constant currencies, while also nudging up its outlook for 2020.

SAP wants to more than triple cloud revenue by 2023 from last year's 5.03 billion euros. That would drive its overall top line to more than 35 billion euros, while the share of predictable revenues would rise to more than 80 percent from 72 percent in the first quarter.

(US$1 = 0.8912 euros)

(Reporting by Douglas Busvine; Editing by Michelle Martin and Kirsten Donovan)

Source: Reuters