Dusseldorf It was all about new business models, sales and profits, dividends and share buybacks – but this term was probably even more commonplace than the financial vocabulary: customer. When SAP invited investors and analysts to New York on capital market day on Tuesday, it was possible to gain the impression of attending a user conference in between.
The message of the duo is: SAP wants to become more efficient, earn better money, and get shareholders involved – but the companies that work with the software on a daily basis should not be hurt by it.
Officially, the topic was not on the agenda, which SAP had overwritten with “Growth and Operational Excellence”. The management wanted to explain how the software manufacturer can continue to grow, but at the same time become more profitable: The operating margin should increase by five percentage points by 2023, as the group announced in spring, probably in response to the entry of the aggressive hedge fund Elliott Management. But the dissatisfaction of the customers, which became more and more obvious in the last months, was also up for discussion.
Discussions at every board meeting
Over the past few years, SAP has prepared itself for the trend towards cloud computing with acquisitions totaling 30 billion euros. At the same time, the software manufacturer has revised its core product and launched it under the name S / 4 Hana. Following the high level of investment, the Group wants to significantly improve its profitability and allow shareholders to participate in it with higher dividends.
The management emphasized that this program would not be at the expense of customer satisfaction. “There is a lot of scope to increase efficiencies and profitability,” said Klein. Together, they are already implementing a plan to leverage synergies and significantly simplify the organization. At each board meeting, the topic is on the agenda, and with Deepak Krishnamurthy, an experienced manager as Chief Transformation Officer steers the initiatives.
The efficiency program has already started. For example, SAP has brought together individual teams providing infrastructure such as data centers under the leadership of the new Executive Board member Thomas Saueressig. This will generate synergies of EUR 100 million this year, Klein said.
Also overlaps in the portfolio, which result mostly from takeovers, want to eliminate the management. It also reviews the sale or discontinuation of some short-range products. What it is and what savings result from it is so far unclear.
Significant savings SAP hopes in purchasing – so far in the various organizational units comparatively independent, explained CFO Luka Mucic. By bundling the company could already reduce the costs in the coming year by 100 million euros, over several years by 250 million euros.
Sales and Marketing should thus reduce the overall costs, as well as the service division and the general administration. SAP wants to save only on research and development, the item should remain constant at 14 percent of sales.
However, management will set priorities in the future, Co-CEO Morgan said: “It will communicate internally exactly which products it does not develop and in which areas it will invest in growth and innovation. Where exactly the software company wants to save, she did not explain.
Cloud business reaches critical size
The cloud computing business that SAP has built up over the past few years offers significant potential for increasing profitability, accounting for more than half, Mucic said. This is partly due to the consolidation of the many acquisitions: The Group runs all services on a uniform technical basis and reduces the number of data centers.
There are also effects from the growing customer base. In other words, the cloud business reaches the critical size.
Partnerships also help to save money. Customers can purchase the S / 4 Hana suite on the Amazon Web Services (AWS) cloud platforms, Microsoft. Google and Alibaba let run. SAP has less capacity to spare, which puts a significant burden on infrastructure. The gross margin in the cloud business should increase from 69 to 75 percent by 2023.
Reduced administration costs, lower investment in infrastructure, more purchasing synergies: Given these savings, SAP will have “significant scope” for distributions to shareholders over the next few years beyond the regular dividend, Mucic announced. “We do not want to hoard money.”
For 2020, the Dax Group had announced an additional payout of 1.5 billion euros last week. After that, the financier did not give specific figures at the investor meeting.
The free cash flow, which describes the available cash, is dependent on external factors such as exchange rates and therefore difficult to predict, Mucic argued. In addition, SAP wants to maintain flexibility, for example for smaller acquisitions. But he barred major acquisitions.
Analysts rated the announcements mostly positive. The capital market day reinforces the impression that SAP will achieve the long-term goals, wrote the private bank Berenberg and raised the price target from 130 to 135 euros. The analyst firm Jefferies raised its target from 140 to 142 euros in anticipation of share buybacks. On Wednesday, one share cost 122 euros, one percent less than the previous day.
For customers, the message of the new leadership duo was well received. The user organization DSAG praised the “new impulses”, which set it “in the sense of the SAP customers”.
More: The new leadership duo of DaxGroup curbs shareholder expectations. This is doing the software company a favor, says Handelsblatt reporter Christof Kerkmann.
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