Global-based Enterprise Cloud and software application technology provider SAP SE stunned the global investment community today by cutting the company’s profit and sales outlook for the remainder of this year.  The provider further adjusted the goals for the termed Ambition 2023 strategy plan, extending the plan out to the year 2025.

SAP SE

According to a company release statement, SAP is updating its full year 2020 outlook and now expects:

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

SAP senior management attributed the change in revenue and profit expectations because a second or third wave of lockdowns attributed to the global COVID-19 pandemic have continued to impact customer demand through the first half of this year. The technology provider indicated today that it now expects reduced demand levels to extend thru the first half of 2021 as well.

Because of the dramatic negative impact on business travel, SAP further indicated that it no longer anticipates a meaningful recovery for SAP’s Concur business travel related revenues for the remainder of this year.

Further announced was that SAP is now in the advanced stages of listing its Qualtrics customer experience software unit as an independent entity, as announced in July. SAP CFO Luka Mucic indicated in today’s investor briefing: “We are well advanced in preparations for the Qualtrics IPO.” The technology provider had announced the acquisition of this innovative experience software provider in November 2018 for an $8 billion price tag. The move raised questions by many tech industry observers as to whether SAP overpaid in an attempt to scoop others.

The immediate news of this revised forecast caused the company’s stock to decline 21 percent, billed as the highest intraday fall since 1999. What perhaps may have concerned investors was the statement:

The acceleration of customers’ move to the cloud and subsequent business transformations which drive the new ambition’s cloud revenue target of more than €22 billion by 2025. SAP expects this to negatively impact the 2023 operating margin by approximately 4 to 5 percentage points relative to the previous mid-term ambition.

 

Implications of Today’s Announcement

Reporting on today’s SAP announcement, Bloomberg indicated: “The drop-off in SAP’s cloud revenue is a sign that companies are putting off making major decisions about updating their software, as the pandemic continues to limit any global economic recovery.

From our Supply Chain Matters lens, we would qualify that this likely applies to SAP specific customer movement toward upgrading to SAP S4 HANA, Digital Supply Chain  or other associated applications related to SAP’s Cloud based architecture, which often require multi-year efforts and related expense on the part of SAP customers. The ongoing uncertainties of the global economy are such that C-suite executives are opting to defer such efforts.

That stated, we remain of the belief that specific digital transformation and technology investments related to shoring-up global supply chain business process and decision-making needs will continue, but with near-term and meaningful time-to-value measures for the overall business.

Today’s SAP adjusted forecast announcement will likely have some cascading effects on the large ecosystem systems integration partners that manage SAP technology upgrades. Here again, projects will be narrower in time and scope and likely focused on very specific business process and decision-making augmentation needs.

What remains unclear at this point is whether SAP’s actions will cascade to other large enterprise level technology providers.

As an example, IBM recently announced a major re-structuring that would spin off its IT Services and computer hardware infrastructure business from its Cloud computing related business activities. This move was billed as one the biggest shifts in IBM history. According to recent reporting by The Wall Street Journal, this move came after the technology provider initiated the cutting of what is believed to be a significant number of jobs against the backdrop of COVID-19 impacts which caused IBM customers to dial back significant  technology investments on large software deals.

In September, SAP rival Oracle reported Q1 fiscal first quarter total revenue year-over-year growth of 2 percent, exceeding analyst expectations. Fusion ERP revenues were reported as increasing 33 percent and NetSuite ERP revenues were reported up by 23 percent. Operating income was up 12 percent on a year-over-year basis. Oracle provided guidance of 1-2 percent total revenue growth for fiscal Q2 that ends at the end of November but declined full-year guidance.

 

Bob Ferrari

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