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SAP to Focus on Integration of Acquisitions

Posted on Tuesday, Nov 17th 2020

Tech giant SAP (NYSE: SAP) announced its third quarter results last month that failed to impress the market. Its weak outlook, driven by the impact of COVID-19, sent its stock falling 21% in a single day – a record decline in the past 25 years.

SAP’s Financials

SAP’s third quarter revenues were down 4% to €6.54 billion (~$7.7 billion), missing the market’s estimates of $8.2 billion. Adjusted net income increased 40% to €1.70 per share (~$1.99), surpassing the analyst estimates of $1.54 for the quarter.

During the quarter, Cloud revenues grew 11% over the year to €1.98 billion (~$2.3 billion). Software licenses revenue fell 7% to €3.6 billion (~$4.2 billion). Overall cloud and software revenue fell 2% to €5.54 billion (~$6.5 billion).

By segment, Applications, Technology & Support revenues decreased 2% to €5.17 billion (~$6.1 billion). Qualtrics revenue grew 22% over the year to €169 million (~$200 million). Concur revenues dropped 14% to €357 million (~$422 million) as business travel continued to remain slow in the quarter. SAP’s Services segment which includes digital transformation and the Intelligence team saw revenues decrease 16% to €753 million (~$887 million).

SAP reduced its revenue outlook significantly for the remainder of the year. It now expects its non-IFRS cloud revenue to be at €8-€8.2 billion (~$9.5-$9.7 billion) and total revenues to be at €23.1-€23.6 billion (~$27.3-$28 billion) for the year.

SAP’s Acquisition

Recently, SAP announced the acquisition of Austria-based Emarsys for an undisclosed amount. Founded in 2000 by Daniel Harari, Hagai Hartman and Josef Ahorner, Emarsys is an omnichannel customer engagement platform set up to help business owners accelerate time-to-value, deliver one-on-one experiences, and quickly produce measurable results.

SAP plans to integrate Emarsys’s offerings in its Customer Experience platform to help power a foundation of personalized engagement that can allow organizations to engage with their customers where and when they choose. Prior to the acquisition, Emarsys had raised $55.3 million in two rounds of funding from Venture Capital.

SAP’s Cloud Growth

During the quarter, SAP added more than 500 S/4HANA customers. Around 45% were net new, taking the total to more than 15,100 customers. SAP was also recently named as a Leader in Forrester Wave for Manufacturing ERP.

Recently, SAP added a new deployment option for the private cloud service called HANA Enterprise Cloud (HEC). Prior to the launch, SAP had offered HANA deployment either in SAP or hyperscalers data centers. But it has launched the SAP HEC to meet the growing demand among customers for these services to be managed within their own data centers.

SAP HEC is a scalable and secure private cloud where SAP manages the service for its customers out of the customers’ data center facilities. Each tenant has its own dedicated virtual private cloud, and the service can be hosted in whatever language, country, or region the tenant needs while ensuring that they have the entire HANA functionality. 

Despite these moves, SAP’s lowered outlook has worried the market. SAP said cloud revenues will begin to overtake software sales by 2025, with cloud revenues rising to €22 billion (~$26 billion). It also cautioned that the transition will keep profit margins flat at around 32%, another disappointing outlook for the market. Earlier, SAP had been focusing on this milestone to be achieved in 2023.

In the past few years, SAP has been migrating to a subscription-based plan instead of its license-based model. The transition has not only impacted its short-term revenues but also its profitability. Additionally, SAP plans to invest the next few years in consolidating the various acquisitions it has made in the past decade. In the past decade SAP has spent more than $31 billion in acquiring other tech players. While the acquisitions have added capabilities to its portfolio, SAP hasn’t integrated these acquisitions well and has let customers run several independent software architectures. In the next few years, it plans to fix that to help deliver an improved customer experience.

Its stock is trading at $118.95 with a market capitalization of $145.5 billion. It had climbed to a 52-week high of $169.30 in August. The stock had fallen to a 52-week low of $90.90 in March.

Photo Credit: Paul Downey/Flickr.com

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