SAP Profit Warning Sends Shares Plummeting -- Update
October 26 2020 - 1:50PM
Dow Jones News
By William Boston
BERLIN -- SAP SE shares plunged more than 20% Monday after
Europe's biggest technology company by sales scrapped its profit
targets for the year and said measures to thwart a rebound in
coronavirus infections would weigh on business through the middle
of next year.
The biggest intraday drop for SAP shares in 21 years wiped more
than $30 billion off the company's market value and put the
spotlight on Christian Klein, who became sole chief executive of
the business software group in April and since then has announced
two profit warnings.
SAP shares closed at EUR97.50 on the Frankfurt Stock Exchange,
down 21.94%.
Following a lackluster earnings report for the three months to
Sept. 30, Mr. Klein said weak demand from business customers meant
SAP would be two years late in meeting its goals to boost revenue
from cloud services and increase total sales and profit.
Mr. Klein inherited an ambitious five-year plan to significantly
boost profit margins and shift a large part of the company's
business from the sale of software licenses, once SAP's biggest
revenue stream, to subscription-based cloud services, a more
profitable and financially predictable business model that
emphasizes recurring revenue.
Now investors must continue to wait for SAP to deliver the
economic benefits of the transition.
After the pandemic hit, SAP revised its outlook in April. Now,
with a second wave of infections in full swing across mature
Western economies, it is having to reconsider its assumption that
demand would gradually improve in the second half of the year.
"Obviously, that's not happening," Mr. Klein said Monday.
Lockdowns have been recently reintroduced in some regions and
demand is recovering slower than expected. Some core business
units, such as its Concur business-related travel service, have
been hit hard by the virtual shutdown of corporate travel. And
companies are still putting off big investment projects amid the
economic uncertainty.
"The warning on the midterm ambitions was expected," Nicolas
David, an analyst at Oddo BHF, said. "But the new ambitions are
lower than the most pessimistic expectations."
SAP Chief Finance Officer Luka Mucic said investors hadn't fully
appreciated that accelerating the shift to the cloud meant a
tripling of cloud revenues by 2025 to as much as EUR22 billion,
equivalent to $26 billion, laying the foundation for profit
growth.
"We are not managing this company for the share price of the
day, but rather for long-term growth," he said.
Late Sunday, SAP said it would cut its outlook for the year and
delay meeting its broader growth targets until 2025. It now expects
unadjusted operating profit of up to EUR8.5 billion this year, down
from a previous estimate of up to EUR8.7 billion. The company cut
its revenue forecast to up to EUR27.8 billion, down from a previous
forecast of up to EUR28.5 billion.
"The increase in profit will still happen, but with a delay,"
Mr. Mucic said. "Given the fact that we are still guiding for a
significant level of profit by 2025, this should result in a
rerating of SAP over time."
Write to William Boston at william.boston@wsj.com
(END) Dow Jones Newswires
October 26, 2020 13:35 ET (17:35 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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