SAP Sap SE

--SAP shares drop after 3Q declines in operating profit and revenue

--The business-software maker lowered 2020 operating profit and revenue outlook as the coronavirus pandemic continues to hit core business units

--SAP replaced 2023 ambition with new 2025 targets to account for the coronavirus impact and pivot to cloud

By Mauro Orru

Shares in business-software maker SAP SE opened 20% lower on Monday after the company posted declines in operating profit and revenue for the third quarter, cut its full-year outlook on earnings and revenue, and replaced its 2023 ambition with 2025 targets as the coronavirus pandemic continues to bite.

At 0903 GMT, SAP shares traded 18% lower at EUR102.94.

Reporting on a non-IFRS basis, the Walldorf, Germany-based company said operating profit for the quarter fell to 2.07 billion euros ($2.46 billion) from EUR2.09 billion in the third quarter of 2019, with an operating margin of 31.7% compared with 30.6%.

Net profit for the period rose to EUR2.00 billion compared with EUR1.55 billion.

SAP said lockdowns which have been reintroduced in some regions made recovery uneven, prompting customers to reassess their priorities in light of mounting business uncertainty, meaning transactional revenue continues to suffer.

Total revenue slipped to EUR6.54 billion from EUR6.81 billion, with cloud revenue rising to EUR1.98 billion from EUR1.81 billion but software-licenses revenue fell to EUR714 million from EUR932 million. Services revenue dropped to EUR992 million from EUR1.16 billion.

Analysts at U.S. bank Jefferies said, while operating margin at 31.7% exceeded Street estimates of 31.0%, revenue was below expectations. Software-licenses revenue of EUR714 million missed Street estimates of EUR768 million, while cloud revenue of EUR1.98 billion was below estimates of EUR2.11 billion. Software-support revenue of EUR2.85 billion also missed Street estimates of EUR2.91 billion, Jefferies's analysts said.

SAP cut its full-year outlook on operating profit and revenue as demand recovery has been more muted than expected since the reintroduction of lockdowns in some regions, and it no longer expects a meaningful recovery in the SAP Concur business travel-related revenues for the rest of the year.

Annual non-IFRS operating profit should range between EUR8.1 billion and EUR8.5 billion at constant currencies instead of a EUR8.1 billion-EUR8.7 billion range as previously expected. Non-IFRS revenue should come in between EUR27.2 billion and EUR27.8 billion at constant currencies instead of between EUR27.8 billion and EUR28.5 billion.

Analysts at German brokerage Berenberg said the new operating profit target is 2.1% below consensus of EUR8.48 billion, with revenue 2.7% below consensus of EUR28.25 billion.

"The company lowered its 2020 cloud revenue by EUR400 million, or 5%, which implies a steep deceleration in 4Q," Berenberg analysts said, adding that the deceleration in software license and cloud growth in the third quarter is surprising.

SAP has also replaced its 2023 ambition with new 2025 targets, accounting for a greater impact from coronavirus and a faster pivot to the cloud as it expects muted revenue growth in 2021 and 2022 before accelerating from 2023 onward.

By 2025, SAP expects non-IFRS operating profit of more than EUR11.5 billion, non-IFRS revenue of more than EUR36 billion, and more than EUR22 billion in non-IFRS cloud revenue, expanding its more predictable revenue share to roughly 85%.

Analysts at U.S. bank Citi, who predicted shares would come under significant pressure at market open, expect 2023 revenue consensus to move lower to about EUR30 billion from around EUR35 billion, given SAP's expectations of muted revenue growth in 2021 and 2022.

Berenberg analysts agree on the investors' reaction.

"We believe abandoning its 2023 targets is unlikely to be well received by investors, given a more forgiving window was open at the start of the pandemic," Berenberg analysts said.

Write to Mauro Orru at mauro.orru@wsj.com; @MauroOrru94

(END) Dow Jones Newswires

October 26, 2020 05:43 ET (09:43 GMT)

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