SAP Q4 Profit Down, Plans Job Cuts

by Ike Obudulu Posted on January 29th, 2019

SAP will take a restructuring charge of up to 950 million euros ($1 billion) to reshape its business after growth slowed in parts of the software maker over the last three months.

SAP, Europe’s most valuable technology company, will reassign some employees and offer early retirement to others, but still expects its overall head count to exceed 100,000 by the end of 2019, up from 96,500 at the turn of the year.

“This is not a cost-cutting move. We are a growth company,” Chief Executive Bill McDermott told Reuters in an interview at SAP’s sprawling campus in Walldorf.

Around 4,400 people would leave under the restructuring, CFO Luka Mucic said. He added that SAP remained committed to its headquarters in the small town of Walldorf in southwest Germany.

SAP will take charges of 800 to 950 million euros, mainly in the first quarter. It sees a minor cost benefit in 2019 and savings of 750 to 850 million euros from 2020.

The shakeup comes as SAP announced an 11 percent increase in 2018 non-IFRS revenues, at constant currencies, that beat its thrice-raised guidance. Operating profits rose 10 percent, in line with SAP’s own expectations.

Shares of SAP SE (SAP) were losing around 3 percent in the morning trading in Germany after the software giant reported Tuesday lower profit in its fourth quarter. Operating profit, however, climbed on higher revenues. The company noted that new order entry surged 18% in the quarter, taking the total for the full year to over 10 billion euros for the first time ever.

Looking ahead, the company projects higher profit and revenues in fiscal 2019, lifted its fiscal 2020 revenue view and also introduced a 2023 ambition. SAP also plans restructuring.

Luka Mucic, CFO said, “This stellar business momentum sets us up perfectly for continued strong profitable growth in 2019 and beyond, while we expect our cloud growth will continue to outperform our business software cloud peers.”

For the fourth quarter, Sap’s profit after tax, on IFRS basis, dropped 9 percent to 1.69 billion euros from last year’s 1.86 billion euros. Basic earnings per share dropped 8 percent to 1.41 euros from 1.54 euros last year.

Non-IFRS profit was 1.80 billion euros, compared to 2.13 billion euros a year ago. Non-IFRS earnings per share were 1.51 euros, compared to 1.77 euros last year.

Operating profit, however, increased 22% year over year to 2.40 billion euros. Adjusted operating profit went up 8 percent to 2.55 billion euros.

Total revenue grew 9 percent to 7.43 billion euros from prior year’s 6.81 billion euros. Revenues increased 13 percent at constant currency rates.

New cloud bookings were 736 million euros, up 25%. Cloud subscriptions and support revenue grew 41% from last year to 1.41 billion euros. Software revenue grew 1% year over year to 2.09 billion euros.

Software licenses and support revenue increased 2 percent to 4.91 billion euros. Cloud and software revenue grew 9 percent to 6.32 billion euros.

For fiscal 2019, the company expects non-IFRS operating profit to be in a range of 7.7 billion euros to 8.0 billion euros at constant currencies, up 7.5% – 11.5% at constant currencies. In addition, SAP expects total revenues to increase strongly, at a rate slightly lower than operating profit.

The outlook reflects SAP’s strong cloud and overall business momentum as well as the Qualtrics acquisition with a January 23rd, 2019 closing date.

The company expects full-year non-IFRS cloud subscriptions and support revenue to be in a range of 6.7 billion euros to 7.0 billion euros, up 33% to 39% from last year at constant currencies.

Non-IFRS cloud and software revenue for the year is expected to be in a range of 22.4 billion euros to 22.7 billion euros at constant currencies, up 8.5% – 10% at constant currencies.

Looking beyond 2019, SAP updated its 2020 ambition. SAP now expects 8.6 billion euros to 9.1 billion euros non-IFRS cloud subscriptions and support revenue, compared to previously expected 8.2 billion euros to 8.7 billion euros.

Non-IFRS total revenue is now expected to be 28.6 billion euros to 29.2 billion euros, compared to previous view of 28.0 billion euros to 29.0 billion euros.

SAP also continues to expect non-IFRS operating profit of 8.5 billion euros to 9.0 billion euros.

Over the next five years, the company expects to more than triple non-IFRS cloud subscription and support revenue, grow to more than 35 billion euros in non-IFRS total revenue, and grow non-IFRS operating profit at a compound annual growth rate of 7.5% – 10%.

In 2019, SAP will further increase focus on its key strategic growth areas. For the first time since 2015, SAP will execute a company-wide restructuring program to further simplify company structures and processes.

Restructuring expenses are projected to be 800 million euros to 950 million euros, the vast majority of which will be recognized in the first quarter 2019.

In Germany, SAP’s shares were trading at 89.94 euros, down 2.62 percent.

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