SAP Shares Fall: COVID-19 Impacts Revenue & Profit

SAP disclosed its financial performance for the third quarter yesterday, revealing a decline in overall results. The company’s failure to meet earnings predictions also led to a downward adjustment of its 2021 projections. This unfavorable combination of news caused concern among investors, resulting in a more than 20% drop in share value during pre-market trading, with no immediate recovery observed in early trading hours.

As a consequence, the German-based software corporation experienced a loss of several billion dollars in market capitalization.

The report generally presented a negative outlook, with total revenues decreasing by 4% to €6.54 billion. Both cloud and software revenue saw a 2% reduction, and operating profit declined by 12%. The sole positive aspect was the company’s pure-cloud segment, which demonstrated growth of 11%, reaching €1.98 billion.

SAP’s revenue figures were approximately €310 million below anticipated levels, although its earnings per share exceeded both adjusted and non-adjusted expectations.

The substantial shortfall in revenue alone might have prompted investor reactions, but the revised forecast amplified these concerns. Despite noting that its clientele are accelerating their transition to cloud solutions during the pandemic – a trend previously observed by TechCrunch – SAP also indicated that the pandemic is hindering sales and the initiation of large-scale projects.

According to Holger Mueller, an analyst at Constellation Research, this situation is causing an unanticipated slowdown in revenue generation.

Mueller explained to TechCrunch, “The situation at SAP involves a delay in cloud revenue as customers recognize that SAP is concentrating its investments on cloud products and will eventually need to migrate to them. The key takeaway is that SAP customers are not currently migrating to the cloud amidst the pandemic.”

Reflecting current circumstances, SAP dedicated a portion of its earnings discussion to outlining its 2025 objectives, a strategy that did not alleviate investor anxieties regarding the pandemic’s impact on the company’s present and near-future performance.

For the year 2020, SAP revised its forecasts as follows:

• €8.0 – 8.2 billion in non-IFRS cloud revenue at constant currencies (down from €8.3 – 8.7 billion)
• €23.1 – 23.6 billion in non-IFRS cloud and software revenue at constant currencies (down from €23.4 – 24.0 billion)
• €27.2 – 27.8 billion in non-IFRS total revenue at constant currencies (down from €27.8 – 28.5 billion)
• €8.1 – 8.5 billion in non-IFRS operating profit at constant currencies (down from €8.1 – 8.7 billion)

Consequently, the company now anticipates a reduction of €300 million to €500 million in cloud revenue, alongside a decrease of €300 million to €400 million in cloud and software revenue, and €600 to €700 million in total revenue. This also lowered profit expectations by as much as €200 million.

Despite these adjustments, the company is attempting to maintain a positive outlook regarding future projections, anticipating that as the effects of COVID-19 subside, existing customers will eventually adopt cloud solutions, leading to substantial revenue growth in the long term. This strategy involves accepting short-term challenges over the next year or two.

“We anticipate modest revenue growth over the next two years, accompanied by stable or slightly reduced operating profit. However, we expect momentum to increase significantly after 2022. The initial obstacles associated with the accelerated cloud transition will begin to transform into favorable conditions for both revenue and profit. […] This will result in faster revenue growth and double-digit operating profit growth starting in 2023,” stated SAP CFO Luka Mucic during a conference call with analysts this morning.

The central question now is whether the company can achieve these projections, and whether its long-term strategy will reassure investors during the ongoing pandemic. Based on market reactions this morning, investors were not yet convinced.