SAP share price tanks as COVID hits hard

Software vendor predicts cloud revenue will triple to €22bn by 2025

SAP's share price has plummeted over 20 per cent on the back of lowered earnings expectations for the rest of its financial year because of the coronavirus.

The software vendor released its Q3 results for the three months ending 30 September and revealed that extent it predicts the impact COVID-19 restrictions will impact the business.

Overall revenue declined four per cent year-on-year to €6.5bn while operating profit dropped 12 per cent to €1.5bn. However it's cloud backlog was up 16 per cent to €6.6bn, though CEO Christian Klein told investors on an earnings call that the "lack of recovery from COVID-19 is visible in the lower-than-expected transactional cloud revenue".

The German software titan saw its share price drop 22 per cent on the Frankfurt stock exchange by close of business on Monday, though it has recovered slightly this morning. The news wiped €35bn from the company's market value.

CFO Luka Mucic told investors that regional lockdowns have taken their toll on the company's operations.

"[In our April forecast] we had assumed that the demand environment would gradually improve in the third and fourth quarters," he stated.

"While we still see robust customer interest in our solutions to drive digital transformation, regrettably, lockdowns have recently been reintroduced in some regions, infection rates have reaccelerated, and, as a result, demand recovery has been more muted."

SAP's travel and expenses solution Concur was not expected to make a "meaningful" revenue recovery for the rest of the year.

Total revenue is now expected to be between €27.2bn and €27.8bn while operating profit is expected to be in the range of €8.1bn and €8.5bn and cloud revenue is now predicted to fall between €8bn and €8.2bn.

CEO Klein said he now anticipates a more "conservative" recovery from COVID-19 and expects that business uncertainty will continue into the first half of its next fiscal year.

"Nobody can predict the COVID-19 economic impact beyond 2020. But given recent developments, it is prudent to assume a more gradual recovery, which we have now done," he stated.

"For our on-premise business, we have seen significant investment delays in 2020 in several hard-hit industries and across all industries and geographies, we see an increasing demand to accelerate the move to the cloud. But we also expect software license revenues to decline further from today's levels in the future, considering our accelerated cloud transition."

The pandemic has accelerated demand for the vendor's cloud-based offerings and it now expects to triple its cloud revenue to €22bn by 2025.

"We have decided to speed up the modernisation of our cloud delivery to enable a more resilient and scalable cloud infrastructure," Klein continued.

"This will require additional investments in the next two years, but allow us to largely complete the modernisation in this timeframe and achieve the cloud gross margin of approximately 80 per cent in 2025."

The vendor's share price has climbed as much as two per cent since the market reopened today.