Beating fourth-quarter revenue expectations, software giant SAP SE nonetheless announced its first restructuring in four years as it adjusts its skill base in anticipation of a growing shift to the cloud.

SAP said the restructuring will reduce its workforce by about 4,400 employees and result in a charge of between €800 million euros ($913.5 million) and €950 million ($1.08 billion), most of which will be taken in the first quarter of 2019.

Despite the reductions, the company said it expects its total headcount to grow for the year from the current level of 96,500. Cutbacks will come from a mix of new assignments, early retirements and separation packages, Chief Executive Bill McDermott told The Wall Street Journal.

Executives emphasized that the organizational changes aren’t a cost-cutting move but rather a rebalancing of resources to go after new opportunities in the cloud. “We’re optimizing the workforce to increase the growth of the company,” McDermott said on a call with analysts. “You’re going to see us put more emphasis on the big opportunities and put the skills in place to go after them.”

SAP’s restructuring is part of the cost of doing business in the world in which skills requirements are changing at an ever-faster rate, said George Lawrie, vice president and principal analyst at Forrester Research Inc. “I would say this is pretty normal in all companies these days,” he said. “As technology advances, you need to retain your people and make arrangements for those who choose not to join you on the journey.”

Analyst Holger Mueller at Constellation Research Inc. agreed. “Digital disruption is hard, including for the vendors that build product to enable it,” he said. “Overall, SAP is doing very well for a vendor that has to transform and upgrade its complete portfolio.”

Cloud shift quickens

The numbers indicate that SAP’s shift to the cloud is gaining momentum. New cloud bookings grew 25 percent in the fourth quarter, to €736 million ($841 million), and cloud subscription and support revenue grew 40 percent, to €1.41 billion ($1.61 billion). SAP said it ended the year with more than €10 billion ($11.4 billion) in backlogged cloud computing business, an increase of 30 percent. It expects cloud subscription and support revenue to grow up to 39 percent in 2019, exceeding the 38 percent growth in constant currency for the year just concluded.

Total revenue jumped 9.2 percent, to $7.43 billion, about 3 percent better than consensus analyst estimates of $7.22 billion. However, the company missed slightly on earnings performance, with earnings per share of $1.51 coming in about 4 cents below estimates.

For the full year, total revenue rose 11 percent in constant currency, to €24.7 billion ($28.22 billion), with cloud subscriptions and support sales jumping 33 percent, to just over €5.2 billion ($5.94 billion). Software license revenue was flat, in line with industry trends. Predictable revenue, which is a function of cloud subscriptions, now makes up 65 percent of total revenue, up 2 percent year-over-year.

Investors initially bid SAP shares up about 1 percent in trading before the opening of the New York Stock Exchange, but the stock then dropped more than 3.2 percent in early trading. In an opinion published shortly before the results were announced, analysts at DZ Bank AG wrote that while revenue performance was “rather good,” the company is experiencing a squeeze on margins. The analysts called SAP’s guidance for up to 10 percent growth in overall cloud and software revenue growth for 2019 “conservative” but maintained their buy rating.

Doubling down

McDermott continued to hammer on a message he delivered at the company’s third-quarter earnings announcement in October that SAP would not put margins ahead of growth. “This is a business model built for scale, growth and resilience,” he said. “We will remain the fastest-growing business software company in the cloud at scale.”

On a conference call, McDermott repeatedly use the phrase “double down” to describe SAP’s approach to its growth businesses. “Think about our core business as more focused on the value drivers,” he said, citing the S/4HANA enterprise resource planning system, Leonardo machine learning platform and the customer experience management business it boosted with the acquisition of Qualtrics International Inc. in November. “We’re going to double down on these things. We’re going to be in every market where we can get leverage.”

The company said all those businesses are growing nicely, with S/4HANA adoption reaching 10,500 customers in the quarter, up 33 percent for the year, and sales of the C/4HANA customer experience suite more than doubling in the quarter. Total quarterly revenue for the company’s customer experience products grew 52 percent year-over-year, to €349 million ($399 million).

SAP said it expects total revenue to exceed €35 billion ($40 billion) by 2023, which would represent a 40 percent increase over the year just ended.

Photo: SAP