SAP shares plunged on Monday after the German enterprise software giant reduced its mid-term guidance to reflect the impact of COVID-19 on its business.
In announcing its third-quarter results, SAP said it had “again demonstrated its resilience … with stable total revenue and an improvement in operating profit and margins” but its customers, particularly in hard-hit industries, “continue to be impacted by the economic consequences” of the pandemic.
“Lockdowns have been re-introduced in some regions, recovery is uneven, and companies are facing more business uncertainty,” the company noted.
For the third quarter, SAP’s revenue declined 4% to 6.54 billion euros while operating profit fell 12% to 1.47 billion euros. “Q3 for any software company is often comparatively weak as both vendors and buyers gear up for the final Q4 negotiations,” Diginomica said.
But SAP shares dipped 23.7% to $114.19 in New York trading as the company also announced its reduced mid-term outlook and that it would accelerate its shift to cloud computing from its traditional license-based business model.
“COVID-19 has created an inflection point for our customers,” CEO Christian Klein said in a news release. “The move to the cloud combined with a true business transformation has become a must for enterprises, to gain resiliency and position them to emerge stronger out of the crisis.
Cloud computing offers more reliable cash flow but lower margins. “The strategic pivot … means investors are once again being asked to wait for the promise of fatter margins at the German business software group to become a reality,” CNBC said.
SAP officials indicated margins will languish over the next three years. “I cannot trade the success of our customers and the significant revenue potential of SAP against short-term margin optimization,” Klein told CNBC.
As a result, the company now expects cloud revenue to triple to 22 billion euros by 2025, eclipsing license sales, with total adjusted revenue forecast at 36 billion euros and adjusted operating profit at 11.5 billion euros.
“SAP isn’t cloud-competitive in its core S/4HANA offering,” Diginomica warned.