US-China trade war takes toll on SAP profits

SAP, Europe’s largest software company, blamed US-China trade tensions for disappointing second-quarter profits that sent its shares sliding on Thursday.

The trade dispute between the two economic superpowers dented software sales in Asia as companies delayed spending decisions, leaving SAP’s revenues from selling licences short of analysts’ expectations.

The group, which competes with the likes of Oracle and Salesforce to provide business software to the world’s largest companies, is the latest multinational to be caught up in the fallout from the long-running trade dispute.

“We didn’t get everything we wanted in Asia,” chief executive Bill McDermott said on a call with analysts.

The trade headwinds come as Mr McDermott spearheads SAP’s push into selling subscription-based software services. Last November, SAP agreed to buy US rival Qualtrics for $8bn as part of the push. SAP’s revenues from cloud and subscription software jumped 40 per cent to €1.72bn last quarter, matching forecasts.

Excluding acquisition and restructurings costs, as well as stock-based compensation, the Walldorf-based maker of enterprise software increased operating profit by 11 per cent year on year to €1.82bn in the quarter. Analysts polled by Vara Research had on average expected a 14 per cent increase.

That sent the shares in Germany’s largest company by market capitalisation down as much as 10 per cent in early trading. They recovered some of that drop to close down almost 6 per cent.

“While a weak [quarter] doesn’t change a story, we still feel SAP needs to maintain investment to drive growth,” Morgan Stanley analysts noted, pointing out that the stock is trading on an elevated multiple of 30 times next year’s free cash flow and that second-quarter results were “a miss across all metrics”.

The stock remains up more than a third this year after US activist fund Elliott in April disclosed a more than €1.2bn stake in SAP. The software group has since announced new, ambitious medium-term profit targets. Chief financial officer Luka Mucic on Thursday confirmed SAP’s 2019 outlook for lifting annual operating profit by 9.5 to 12.5 per cent before currency changes.

Mr McDermott added that its targets would require greater efficiency, particularly in hiring. “We will manage headcount with an iron fist,” Mr McDermott said, pointing out that new employees would be evaluated by seven people before they were hired.

Software licence and support revenue in the second quarter increased just 2 per cent to €3.8bn, trailing expectations of a 3.7 per cent increase. SAP’s profit operating margin was stable at 27.3 per cent, compared with an average of analyst forecasts of 27.7 per cent.

Despite the shadow trade tensions cast last quarter, Mr McDermott insisted the company’s pipeline of orders in China remained intact even as companies begin to examine the country’s role in their global supply chains.

“The companies that look to make changes due to trade uncertainty look to us to help make them,” he said.

On Thursday the company also announced a new partnership with Intel in which SAP’s applications will use the US company’s processors.

Leave A Comment?