SAP sets new mid-term margin targets after first-quarter operating loss

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FRANKFURT (Reuters) – German business software company SAP set ambitious new mid-term targets on Wednesday to boost profit margins as it reported a first-quarter operating loss that chiefly resulted from a restructuring charge.

SAP, Europe’s most valuable technology company, wants to expand its adjusted operating margins by a total of 5 percentage points through 2023 as it scales up its cloud operations, where it wants to achieve gross margins of 75 percent.

While the quarterly loss was expected, SAP’s announcement in January that it will shed 4,400 staff has been followed by a string of senior departures, leading some customers to fret that its transformation may be going off track.

CEO Bill McDermott, in a typically bullish answer to the sceptics, said he was setting up a top team to focus on sharpening strategic execution and driving margin expansion as Walldorf-based SAP grows the top line.

“This is that magic moment that people have been waiting for where they are like, wow, nobody grows like SAP, but can I get some margin out of this growth?” McDermott, 57, told Reuters in an interview.

“We are going to give you a (percentage) point per year between now and 2023. And I think our shareholders are going to be super-psyched.”

SAP will update investors at a special capital markets day on Nov. 12 in New York. It is looking to announce a multi-year share buyback program as McDermott sets his sights on more than doubling the company’s market value to $300 billion.

ONE-TIME CHARGE

The quarterly operating loss of 136 million euros ($153 million) chiefly resulted from an 886 million euro up-front charge taken against the headcount exercise, which Chief Financial Officer Luka Mucic said was on track.

After adjusting for that and other one-offs, non-IFRS operating profits rose by 13 percent at constant currencies to 1.467 billion euros, above expectations in a poll of 17 analysts who follow SAP.

Underlying margins also showed strength in the first quarter, as cloud led the way with a 300 basis point expansion in gross margins, compared to a year earlier, to 66.2 percent, the company said.

That came as investments in infrastructure upgrades rolled off, while further improvements should come as SAP completes the migration of its portfolio of cloud applications to its HANA database engine, and works more with ‘hyperscale’ partners, said Mucic.

Boosting margins in the cloud – where SAP’s subscription-based products are hosted remotely – is the holy grail for a company that still makes most of its money from licence fees and maintenance for software running at customers’ on-site servers.

Reflecting that bullishness, SAP lifted its growth forecast for non-IFRS operating profits this year to 9.5-12.5 percent at constant currencies, while also nudging up its outlook for 2020.

($1 = 0.8912 euros)

Reporting by Douglas Busvine; Editing by Michelle MartinOur Standards:The Thomson Reuters Trust Principles.


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