SAP says big margin gains to wait till 2020

FRANKFURT (Reuters) – SAP (SAPG.DE) told investors they can expect a major improvement in margins only next year as the German business software group reported a 21% decline in second-quarter operating profit on Thursday, weighed down by one-off costs.

SAP nonetheless reiterated its forward guidance as CEO Bill McDermott expressed his “absolute commitment” to meeting a strategic goal of expanding margins by 5 percentage points through 2023.

The spring quarter was marked by a decline in license revenue at Europe’s most valuable tech firm, the result of trade tensions that took their toll in particular on Asian markets.

But, McDermott told Reuters, a 4-point expansion in gross margins at SAP’s fast-growing cloud business showed that its operational performance was on track: “We’re very happy with the direction this is moving,” he said in an interview.

Operating profit of 827 million euros ($929 million) was dented by charges arising from an ongoing restructuring that will see more than 4,000 staff leave SAP; the $8 billion acquisition of customer sentiment tracking firm Qualtrics; and cash-settled staff bonuses.

Year-on-year comparisons would become more favorable in the second half of the year, CFO Luka Mucic said, adding that he expected a “very meaningful step upwards” in profitability from next year.

After adjusting for one-offs, SAP’s operating profit at constant currencies rose 8% in the second quarter – in line with revenue growth but just shy of Refinitiv estimates. Adjusted operating margins were flat at 27.3 percent.

SAP reiterated its guidance for adjusted operating profit to grow by between 9.5% and 12.5% this year.

Reporting by Douglas Busvine; Editing by Michelle Martin