SAP SE today met revenue expectations but missed profit estimates in its first quarter and abruptly parted ways with co-Chief Executive Jennifer Morgan after less than six months on the job.

The company also lowered revenue guidance for the full year to reflect a slowdown in business resulting from the COVID-19 pandemic but said it expects business to bounce back strongly in the third quarter.

Morgan’s departure appeared sudden given that she was prominently quoted in SAP’s earnings pre-announcement less than two weeks ago. The only woman to lead a DAX-listed business had been appointed to the job just six months ago after another surprise departure: that of former CEO Bill McDermott.

The company said only that “the current environment requires companies to take swift, determined action which is best supported by a very clear leadership structure” and that the decision to migrate to a single CEO model “was taken earlier than planned to ensure strong, unambiguous steering.” CEO Christian Klein said the Morgan’s departure was a mutual decision.

Nucleus Research Inc. analyst Andrew MacMillen called the timing of the decision surprising but said concentrating decisions in a single executive based in SAP’s Walldorf, Germany offices “makes a lot of sense. Indecision or lack of agility is probably the single more important thing to avoid,” he said. Morgan had remained U.S.-based after assuming the co-CEO role last October.

Forecast lowered

On the numbers front, quarterly earnings of 92 cents per share came in a dime worse than analyst consensus estimates of $1.02. Revenues rose 6.6% over the same quarter last year, to $7.075 billion, compared with analyst estimates of $7.08 billion.

“After a healthy start to the year we saw a significant postponement of deals during last two weeks of March,” said Chief Financial Officer Luka Mucic, echoing comments made by IBM executives yesterday when that company withdrew financial guidance for the full year.

The slowdown prompted SAP to revise its full-year revenue estimates to between $30.16 billion and $30.92 billion, slightly above analysts’ revised estimates and up 1% to 3% from 2019 revenues of $29.97 billion. The revised figures reflect an anticipated decline of $350 million in full-year subscription revenues and $100 million in maintenance revenue.

“We have no reason to believe we have lost a lot of business but believe it has just been pushed out,” Klein said. The company will focus on organic growth where “we see tremendous potential,” he told analysts.

Full-year operating profit is expected to be in the range of $8.79 billion to $9.22 billion. That’s down slightly from last year and nearly 10% lower than the $8.9 billion to $9.3 billion SAP had estimated in January but up 6% on a constant-currency basis.

The revised figures presume 18% to 24% growth in cloud revenue, down from the 25% growth rate this quarter. “Financial guidance assumes underlying demand will deteriorate through the second quarter and improve in the third and fourth,” Mucic said.

In early trading on the New York Stock Exchange, SAP shares fell nearly 4.5%.

Sounds optimistic

The revised estimate “seems optimistic based on the slowdown in the economy overall,” said Nucleus Research’s MacMillen. The International Monetary Fund now projects the global economy to contract 3% this year.

Although SAP’s core enterprise revenue planning business remains strong, the company is significantly exposed in some of its growth business like the Ariba supply chain network, Fieldglass workforce management system and Concur travel management systems, said Andrew Bartels, principal analyst at Forrester Research Inc

“They get $250 to $300 million per quarter from Ariba and $600 million from Fieldglass,  which are both transaction-based,” he said. “As demand for workers dries up, you can see those revenue streams dry up as well.”

However, the company is fortunate to have a broad geographical reach and limited exposure in some hard-hit vertical markets such as retail and transportation, Bartels noted. “Its regional and industry mixes are both relatively positive,” he said, citing SAP’s strong based of manufacturing customers and some positive signs of regional recovery from the pandemic in Germany, France, Scandinavia and parts of Asia.

The biggest surprise on the revenue side was a 31% plunge in software license revenue, to $490 million, 18% below Wall Street estimates. Bartels said unfortunate timing was most likely a factor there because many software license contracts close late in the quarter, which coincided with the onset of coronavirus-related lockdowns. “Given the timing of pandemic, it’s not at all surprising at lot of deals didn’t close,” he said.

Cloud backlog — a new metric the company introduced to replace its cloud bookings — grew 24%, to $7.2 billion. The share of predictable revenue grew by four percentage points, to 76%, in the first quarter. Gross margins, a metric SAP has been stressing recently as it drives for profitability over rapid growth, grew three points, to 69%.

Photo: Wikimedia Commons