SAP SE fell the most in nearly five years on signs that its $10 billion bet on cloud-based software faces headwinds.
After buying U.S. startups Qualtrics International Inc. and Callidus Software Inc. to bolster its portfolio, SAP instead posted slower growth in new cloud bookings — a keenly watched metric because it indicates future revenue. With profitability diluted by the shift to internet-based computing, a push to shore up margins failed to make progress in the second quarter.
SAP fell as much as 10%, its steepest intraday drop since August 2015. The stock was down 5.8% at 11:42 a.m. in Frankfurt trading.
The figures underscore the difficult transition to Internet-based software as Chief Executive Officer Bill McDermott challenges rivals such as Salesforce.com Inc. and Oracle Corp.
Cloud sales can initially be less profitable than traditional on-premise installations, and SAP has pledged to increase its operating margin by 1 percentage point a year on average through 2023. In the second quarter, the figure was flat at 27.3%, with Walldorf, Germany-based SAP blaming trade tensions for delaying software spending in Asia as well as acquisition costs.
SAP’s new cloud bookings rose 15% at constant currencies, a drop from the 26% gain in the first three months of 2019 and the weakest figure in at least a year and a half.
The lower order figure is due to the fact that SAP is focusing on higher-margin sales, and that more customers chose “pay as you go” products that aren’t counted toward that metric, Chief Financial Officer Luka Mucic said. Excluding infrastructure-as-a-service, growth would be 27%, he said.
“We’re exactly on track in what we need to hit our mid-term objectives to triple our cloud revenue by 2023,” he said in an interview with Bloomberg TV. “Also the profitability in the cloud is steeply increasing.”
Total sales rose 11% to about 6.7 billion euros ($7.5 billion), boosted by strong growth from existing cloud customers, with revenue for the segment jumping 40%. Operating profit increased 11% to 1.82 billion euros.
Read what analysts have to say on SAP’s second quarter here.
Uptake of SAP’s flagship S/4 Hana software accelerated in the April-June period, with the company adding about 600 customers for a total of more than 11,500 users. The software allows businesses to run tasks on their own machines or in a cloud-computing arrangement hosted by SAP or one of its partners. The company is farming out more of the low-margin computing backend to partners including Amazon Web Services and Microsoft Corp.
SAP stuck to its outlook for operating profit to rise at least 9.5% and cloud revenue to increase more than 33%. McDermott maintained his optimism that his strategy would pay off.
The Qualtrics acquisition will prove to be a “growth catalyst,” the CEO said in a telephone interview. “There’s plenty of room to continue strong cloud bookings and cloud growth.”