Investors remain skeptical despite growth

Nevertheless, shareholders are skeptical about the quarterly result. The price of the software company drops by five percent during the day. Investors and badysts deplore the key figure that is not a superlative: profitability, measured in terms of operating margin, fell again. It went from 29.3% to 28.9% in the third quarter.

The most valuable DAX group, with a market value of more than € 120 billion, must once again be a tedious discussion with investors and badysts: can the new, growing business model be as profitable as the old one? – and if so, how fast? The low margins are more persistent than expected, for example, Citibank commented on the numbers.

Margin dropped

McDermott aligns SAP with cloud computing. It follows a major trend in the IT world: companies are increasingly using storage, computing power and data center programs from vendors such as Amazon, Microsoft or SAP, represented in the diagrams below. the shape of a cloud of data. They always have access to the latest software, have access to extra capacity in one click and do not have to invest in their own infrastructure.

According to the Gartner market research, nearly a third (28%) of companies' IT spending will go to cloud computing services by 2022. In the application software developed by SAP they even reach 40%. In other words, the conventional licensing sector will remain important over the next few years, but cloud computing will become more important.

To cope with this paradigm shift, McDermott has invested billions of dollars in acquisitions, infrastructure and human resources since taking office in 2010. Only in January, he bought the US company Callidus Cloud, which offers solutions for sales and marketing, in CRM jargon. Here, SAP wants to compete with the Salesforce market leader.

Everything pays off. In the third quarter, the cloud business grew by 39% to 1.3 billion euros, adjusted to reflect the monetary situation, by 41%. Group-wide solutions have contributed to this development, according to Luka Mucic, chief financial officer of SAP Handelsblatt: the business networks through which customers book materials, people and travel, marketing and sales solutions (CRM), Business Processes and others.

At the same time, traditional software sales are relatively stable. In the third quarter, license sales revenue decreased 9% to 937 million euros. Thanks to long-term maintenance contracts, sales remained at the same level as the previous year, at 3.7 billion euros. Notable compared to its competitors: In total, the software group generated 6.02 billion euros, an increase of 8%.

"We are confident that the momentum will be maintained," said Mucic. This is why SAP is raising the growth forecast again. The consolidated turnover is now between 25.2 and 25.5 billion euros, about 0.2 billion euros more than before. The operating result should also be better, but slightly.

Despite this good news, there is one detail that is bad for investors.
SAP has promised to increase its profitability after the high investments of the last years 2018. But at 28.9%, it is currently too far from the 30% expected by badysts. CFO Mucic highlights two factors.

On the one hand, the conversion of exchange rates has skewed the result. During the first months of the year, the euro was very strong against the dollar. Adjusted for currency effects, the operating margin increased by 0.5 percentage point this year. On the other hand, a change is noticeable: as more and more customers subscribe to cloud services, "the revenue mix of different business models is changing."

The new offerings, which SAP is developing with great effort, do not contribute so much to the profit, because the products are counted over time. "The level of margin increase at the company level is not the most important indicator of the current growth phase," said Mucic. However, SAP is increasing sales and profitability in all areas. "We have a portfolio of healthy business models."

There are many things that suggest that this valuation also prevails on the stock market. Most badysts still consider SAP to be positive. For example, investment bank Barclays considers the drop in the margin as a "task" and gives a target price of 122% more. Superlatives make an impression.