SAP Executives Come Out Fighting as Shares Slump on Growth

SAP SE fell the most in nearly five years on signs that its $10 billion bet on cloud-based software faces headwinds, but the companies executives are adamant there is still room to grow.

After buying U.S. startups Qualtrics International Inc. and Callidus Software Inc. to bolster its portfolio, SAP instead posted slower growth in new cloud bookings — a keenly watched metric because it indicates future revenue. With profitability diluted by the shift to internet-based computing, a push to shore up margins failed to make progress in the second quarter.

SAP fell as much as 10%, its steepest intraday drop since August 2015. The stock was down 5.9% at 3:40 p.m. in Frankfurt trading.

“What you’re not counting on is how much revenue will come SAP’s way by relying on” cloud partnerships with the likes of Amazon and Google, SAP’s Chief Executive Officer Bill McDermott told analysts during a call. “There’s no reason to think this is slowing down.”

SAP’s new cloud bookings rose 15% at constant currencies, a drop from the 26% gain in the first three months of 2019 and the weakest figure in at least a year and a half.

The lower order figure is due to the fact that SAP is focusing on higher-margin sales, and that more customers chose “pay as you go” products that aren’t counted toward that metric, Chief Financial Officer Luka Mucic said. Excluding infrastructure-as-a-service, growth would be 27%, he said.

The figures underscore the difficult transition to internet-based software as McDermott challenges rivals such as Inc. and Oracle Corp.

Cloud sales can initially be less profitable than traditional on-premise installations, and SAP has pledged to increase its operating margin by 1 percentage point a year on average through 2023. In the second quarter, the figure was flat at 27.3%, with Walldorf, Germany-based SAP blaming trade tensions for delaying software spending in Asia as well as acquisition costs.

“We’re exactly on track in what we need to hit our mid-term objectives to triple our cloud revenue by 2023,” Mucic said in an interview with Bloomberg TV. “Also the profitability in the cloud is steeply increasing.”

Cloud Challenge

SAP’s new cloud bookings growth has been slowing since its peak last year

Total sales rose 11% to about 6.7 billion euros ($7.5 billion), boosted by strong growth from existing cloud customers, with revenue for the segment jumping 40%. Operating profit increased 11% to 1.82 billion euros.

Read what analysts have to say on SAP’s second quarter here.

Uptake of SAP’s flagship S/4 Hana software accelerated in the April-June period, with the company adding about 600 customers for a total of more than 11,500 users. The software allows businesses to run tasks on their own machines or in a cloud-computing arrangement hosted by SAP or one of its partners. The company is farming out more of the low-margin computing backend to partners including Amazon Web Services and Microsoft Corp.

SAP stuck to its outlook for operating profit to rise at least 9.5% and cloud revenue to increase more than 33%. McDermott maintained his optimism that his strategy would pay off.

The Qualtrics acquisition will prove to be a “growth catalyst,” the CEO said in a telephone interview. “There’s plenty of room to continue strong cloud bookings and cloud growth.”

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