However, according to the management around boss Christian Klein, day-to-day business is going so well, especially with cloud software for use over the network, that the Walldorfer announced an increase in the goals for 2025 on Thursday. At the moment, however, the group is still struggling with special costs due to the Ukraine war, high investments in the cloud business and the gloomy economic environment, which has caused profits to melt away.
The bundle of news was badly received on the market, the share temporarily lost 3.94 percent on XETRA to EUR 87.15. The strong recovery of the past four trading days stopped. The stock fell back below the 50-day moving average that it had recaptured the day before and also below the 21-day moving average, which from a technical point of view are an indication of the medium and short-term trend. In the course of the year so far, there is currently a minus of around 30 percent, which means that SAP has developed below average so far.
A trader spoke of taking profits on Thursday after a disappointing outlook. The US investment bank Goldman Sachs wrote in an initial statement that SAP had achieved mixed results in the second quarter. The new outlook for the operating result for 2022 is rather meager, it said.
A recent share buyback program of up to 500 million euros, with which SAP wants to acquire shares for share-based remuneration – and thus uses the price decline of the past few months, hardly helped. With the downturn in tech stocks in particular this year, the SAP price also came under pressure. At the beginning of January, the paper was still worth around 125 euros, in the past few weeks it has fluctuated around 90 euros.
Adjusted for currency effects, earnings before interest and taxes adjusted for special effects should fall by 4 to 8 percent this year compared to the previous year, according to the group. Klein and CFO Luka Mucic had previously aimed for stagnating or a drop in operating profit of up to 5 percent. The reasons for the weaker prospects are on the one hand costs for the discontinuation of business in Russia and Belarus, but also a possibly further significant decline in software license sales. The tax rate is also likely to be higher this year than previously thought.
JPMorgan analyst Varun Rajwanshi remains skeptical: “Although SAP has reduced operating profit for the full year given the weak macroeconomic environment in the second half of the year and the pressure on IT budgets, we do not see the forecast as completely risk-free,” he stated.
Baader Bank analyst Knut Woller is much more optimistic. The lowered operating profit target speaks for a more moderate drop in expectations than in previous recession scenarios, he argued. “We believe this reflects the success of moving towards a more predictable business model.” And while the market is likely to react negatively, he says the move is already priced into stock valuations.
In terms of sales and free cash flow, SAP is sticking to the previous assumptions for 2022. According to management, day-to-day business is going well, and the cloud software for use over the network has grown significantly. Total sales increased by 13 percent to 7.5 billion euros, also thanks to the weak euro. The cloud proceeds increased by a good third.
In a telephone conference, Klein and Mucic attributed this to the success of the “Rise” product bundle for faster customer migration to the cloud. For the medium-term ambitions for 2025, which envisage growth in annual cloud sales to over 22 billion euros (2021: 9.4 billion), Mucic announced a “positive update” in the coming quarters. According to the chief financial officer, the advantageous exchange rate development should also play a role – SAP gives the medium-term outlook including currency effects. According to Klein, the group is also ahead of schedule when it comes to converting customers to the cloud.
In autumn 2020, Klein significantly accelerated SAP’s efforts towards the cloud in a jolt that was very painful for investors. The company also sacrifices for this yield, because the conventional license software is initially more profitable thanks to its high one-time sale prices – the cloud contracts only pay off after a longer term via the subscription amounts. Because the technology is also being modified for the change in strategy and sales are trimmed with financial incentives for the sale of cloud products, it costs money.
The investments for this amounted to around 100 million euros in the second quarter, as Mucic explained. And they will last until mid-2023, from which point the group wants to bring in the harvest. In 2023 as a whole, the adjusted operating result is expected to grow in the double-digit percentage range, as Mucic confirmed.
To date, the company is still in the bottom. Adjusted operating profit fell in the second quarter by 13 percent to 1.68 billion euros and was therefore weaker than experts had expected on average. The discontinuation of business in Russia and Belarus was worth 160 million euros, not least because of the “ironic” appreciation of the Russian ruble, according to Mucic. Seen over the year, the Russian war of aggression in Ukraine will probably incur costs of around 350 million euros, which means an additional 120 million euros in the second half of the year.
In the currently difficult economic situation, customers mainly resorted to cloud software, which is good for Klein’s direction of travel, but also weighs on margins. The license software performed even weaker than feared. Goldman Sachs analyst Mohammed Moawalla wrote that the unexpectedly weak licensing business was offset by strong performance in the cloud. The rapidly growing order backlog for the core software S4 Hana indicates a faster turn of the customers in this area.
The bottom line is that the economic situation is also noticeable, with net profit falling by 86 percent to just 203 million euros. Not only the share price of SAP, but also the market valuation of smaller tech start-ups suffered significantly in the first months of the year. SAP is investing in just such companies through its stake in venture capitalist Sapphire Ventures. A year ago, this had still brought substantial profit through higher valuations of promising companies, this time the balance of such investments was even negative.
After all, the weak euro is currently playing into the hands of the Walldorfers. While SAP gives the outlook for the year without exchange rate effects, the company expects the now more advantageous conversion of foreign currencies into euros to give the reported figures a tailwind. Cloud revenue growth should be another 7 to 9 percentage points higher as a result, and the change in adjusted operating income will improve by 2.5 to 4.5 percentage points.
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