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SAP CHANGES M&A STRATEGY Featured

SAP has announced a change in its M&A strategy, which marks an end to large acquisitions that put it in new markets. “We have made the critical M&A moves and will now focus on tuck-in acquisitions,” CEO Bill McDermott said during this week’s webcast for earnings for the first quarter ended March 31.

SAP also predicted it will expand gross margins every year for the next five years. “We expect margin expansion for this quarter will continue through 2023,” he said. McDermott said the software company will add 100 basis points to gross margin in each of the next five years. That said, the margin improvement did not translate to the bottom line during the recent quarter. The company lost about $120 million for the most recently completed quarterly, compared to net income of roughly $857 million. There was an operating loss of about $152 million, compared to an operating profit of roughly $1.6 billion a year ago. Profits were hurt by restructuring charges of about $893 million, along with the impact of acquisitions. Revenue rose 16 percent to approximately $6.8 billion, up 12 percent in constant currency. Cloud revenue reached about $1.77 billion, an increase of 45 percent over last year’s corresponding quarter. CFO Luca Mucic reported SAP had strong results in North America where cloud and software revenue was up 23 percent; cloud revenue rising by 49 percent. The United States and Canada had strong software license growth, he said. McDermott also said the company is considering a multi-year share repurchase program and it has formed a Special Executive Board Committee to focus on improvements. During a Q&A section, one analyst said despite the rosy view the underlying margin was actually down. Mucic said that was not true. McDermott also downplayed the importance of personnel changes this year, which include the departure of two executive board members, Berndt Leukert and Robert Enslin. According to recent reports, when Enslin took over cloud operations in 2017 he told the company he was interested in a career change. McDermott said Enslin has taken a job in the "SAP ecosystem" and expects Leukert to do the same.

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