By Kuldip K. Ambastha
SAP SE (SAP) is a German software company in the enterprise software sector, focused on business operations and customer relations. The company operates in many countries around the world and has well-known enterprise resource planning (ERP) capabilities. SAP stands for “Systems, Applications, and Products in Data Processing.”
On Monday, October 26, 2020, the company’s stock had a -23.2% return for the day.
In this current global coronavirus pandemic era which has more people working from home, increased demand for SAP cloud-based products has been negative for the company’s profitability. In the past, SAP had generated most of its revenues and profits by selling long-term licenses to its software offerings. With such a scenario, earnings can be booked immediately, support revenue is seen over time, and a contract renewal a few years later allows for the sale of an updated software offering.
More recently, SAP has shifted to a cloud-based subscription model in which costs are spread out over the term of a contract (typically three years). From an accounting perspective, the cloud-based subscription model affects short-term revenue and profits more significantly, since such a new setup brings new costs. Furthermore, SAP has had to invest heavily to make sure SAP’s product offerings can all work properly with each other, since in the past the company did not prioritize the integration of various product offerings gained from mergers & acquisitions. Such integration efforts are also a drag on profitability.
Costs incurred today by SAP may lead to profitability later on, but for now profits and revenues have suffered.
Keywords – SAP SE, SAP, Systems, Applications, and Products in Data Processing, SAP AG, technology, tech, software, cloud, enterprise resource planning, ERP, COVID-19, coronavirus, pandemic, profits, revenues, costs, expenses, mergers, acquisitions, mergers & acquisitions, integration.
Disclosure – The principals and clients of Ambastha Financial LLC have no positions in SAP.
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