Shares of enterprise software giant SAP SE plunged nearly 24% early Monday after it posted disappointing third-quarter results Sunday night and admitted the impact of the COVID-19 pandemic is likely to drag on for much longer than it first expected.

Because of that, the company has revised downward its full-year 2020 business outlook to reflect the reduced customer spending it anticipates. The stock drop took more than 28 billion euros ($33.1 billion) from SAP’s market value in trading Monday.

The third quarter wasn’t as bad as it might have been, with SAP reporting earnings of €1.32 ($1.56) per share on revenue of €6.54 billion ($7.8 billion), down 4% from a year ago. Analysts had forecast SAP to report revenue of €6.68 billion.

The company said it was encouraged by the strong performance of its cloud business, with revenue growing to €1.98 billion in the three-month period, up 10% from a year ago. The downturn caused by COVID-19 was more evident in SAP’s software licenses revenue, which was down 23% year-over-year to €0.71 billion. The company also reported lower cloud and software revenue of €5.54 billion, down 2% from a year ago.

SAP added that its current cloud backlog, a new metric the company introduced earlier this year that reflects cloud-related orders from new customers and incremental cloud business from existing customers, was up 10% year over year to €6.60 billion.

But investors will most likely be much more concerned about SAP’s revised outlook for the remainder of the year. SAP first issued its full-year outlook in April, saying at the time that it reflected its best estimates concerning the timing and pace of recovery from COVID-19. SAP had hoped that economies would reopen and population lockdowns would ease relatively quickly, but it has now admitted that it was being a tad optimistic at the time.

With lockdowns now being re-introduced in many countries due to a resurgence of COVID-19 infections, SAP said demand recovery has been more muted than it expected. As a result, SAP said, it’s expecting full-year cloud revenue of just €8 billion to €8.2 billion at constant currencies, down from its previous forecast of €8.3 billion to €8.7 billion. Cloud and software revenue has been revised to €23.1 to €23.6 billion, down from €23.4 to €24 billion.

“It was more a surprise that SAP and many other enterprise software vendors had not been affected by the pandemic more in the past – so reality is catching up with SAP and we will have to see how the other vendors are doing in the next weeks,” said Holger Mueller, an analyst with Constellation Research Inc.

SAP said the revised forecast means it’s now expecting total revenue for 2020 of around €27.2 to €27.8 billion at constant currencies, down from its previous range of €27.8 billion to €28.5 billion. Operating profit, meanwhile, is expected to come in at around €8.1 billion to €8.5 billion, down from its previous estimate of €8.1 billion to €8.7 billion.

More concerning for investors is that COVID-19 is now expected to have some far-reaching consequences for SAP’s “mid-term ambition,” which was first issued in April 2019, many months before the pandemic began.

“The COVID-19 pandemic is expected to impact the demand environment, particularly in hard hit industries, through at least the first half of 2021, pushing out the achievement of key metrics such as non-IFRS cloud revenue, total revenue, and operating profit, by one to two years,” the company said in a statement.

The company said that its previous 2023 ambition has now been abandoned, and instead of that it has provided a fresh forecast for 2025 with cloud revenue pegged at €22 billion out of a total of €36 billion. The company further said that by accelerating customers to the cloud, this will negatively impact gross margin by an additional 4% to 5% from previous guidance. In coming to this conclusion, SAP said it believes the main impact of COVID-19 has been to delay customer investments in its offerings by about one to two years.

The big questions for SAP executives, Mueller said, will be whether its cloud products are ready, and why customers are not taking them.

“Surprisingly, cloud revenue is falling behind plans, where there is a major drive to cloud by enterprises, in order to move IT cost from capital expense to operating expense,” he said. “It does not seem to be the case for SAP customers, where on the upside, traditional license sales is even making up for lost cloud revenue.”

Photo: SAP