SAP Increases Outlook on Cost Cuts and Growth in Cloud Computing

(Bloomberg) -- SAP SE raised its annual profit forecast on growth in the cloud business, while the activist Elliott Management revealed a stake and endorsed the German software company’s change of direction.

Walldorf-based SAP reported a 26 percent increase in new cloud bookings for the first quarter at constant currencies, an acceleration from the October-December period. Separately, Elliott disclosed a stake of 1.2 billion euros ($1.3 billion) and said the stock has been “consistently undervalued” relative to its revenue growth.

SAP shares rose as much as 7.1 percent as Chief Executive Officer Bill McDermott’s bets on the cloud business start to pay off. The company has spent more than $10 billion to buy U.S. cloud startups Qualtrics International Inc. and Callidus Software Inc. to better compete with Inc. and Oracle Corp.

SAP said Wednesday that it’s planning “new initiatives to accelerate operational excellence and value creation” and will brief investors and analysts on those plans during a special capital markets day in November. The company will evaluate a share buyback program and focus on “tuck-in” acquisitions.

“We see years and years of sustained growth in the cloud,” McDermott said in a phone interview. SAP’s executive team is putting “total focus” on improving margins in the coming years, he said.

Management Shakeup

SAP now expects to reach a non-IFRS cloud gross margin of 75 percent in 2023, and increase the non-IFRS operating margin by one percentage point a year on average. For 2019, the company expects profit to rise as much as 12.5 percent, up from a previous prediction of as much as 11.5 percent.

McDermott is reassigning jobs, training workers, and drawing up voluntary leave packages -- a program that cost 886 million euros ($994 million) in the first quarter. Overall sales grew to 6.1 billion euros, driven by a strong increase in cloud revenue.

SAP is dealing with a management shakeup after the April 5 announcement that the president of its cloud business, 27-year SAP veteran Robert Enslin, was departing the company. It was later revealed he’d left for Google. A day earlier, Chief Technology Officer Bjoern Goerke, another cloud expert based in the U.S., penned a blog post saying he’s leaving the company he joined as a student in 1988. Board member Bernd Leukert, a seasoned IT executive, left SAP in February.

McDermott said there’s “reignited passion” in the company and all positions are filled with people of great competence.

SAP said Wednesday that uptake of its flagship S/4 Hana software slowed in the January-March period, with the company adding about 400 customers. It said it now has about 10,900 total 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.

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