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SAP Plans Restructuring That Includes 4,400 Job Cuts

Company reports 9 percent sales growth in Q4, but shift to cloud software continues to pressure profit margins.

SAP is launching a company-wide restructuring plan in 2019 in what the software company described as an effort to "further simplify [company] structures and processes" and ensure that its organizational setup, skills and resource allocation match strategic growth areas.

The restructuring will reportedly affect some 4,400 employees. The restructuring plan was disclosed Tuesday after the company announced mixed results for its 2018 fourth quarter and full year revenue and earnings.

SAP has been transitioning its software product portfolio from on-premise application licenses to cloud software. While maintaining revenue growth, the transition is impacting the company's profit margins.

 [Related: SAP Seeks New Channel Chief Following Cardenuto’s Departure]

The company said it hit or exceeded all of its performance metrics, including revenue and operating profit, in the fourth quarter. While the company's Q4 revenue beat consensus expectations by 210 million euro (U.S. $240 million), according to Seeking Alpha, earnings missed consensus expectations by 0.14 euro, sending the company's stock down more than 3 percent Tuesday morning.

For the fourth quarter SAP reported revenue of 7.43 billion euro (U.S. $8.49 billion), up 9 percent from 6.81 billion euro (U.S. $7.78 billion) in the fourth quarter of 2017. But after-tax profit declined 9 percent to 1.69 billion euro (U.S. $1.93 billion) from 1.86 billion euro (U.S. $2.13 billion) one year earlier.

While SAP executives disclosed few details about the restructuring on the quarterly earnings call, CEO Bill McDermott told the Wall Street Journal that about 4,400 employees would be affected. The company currently has about 96,500 employees and on the earnings call chief financial officer Luka Mucic said the company expects to have about 100,000 at the end of 2019.

On the call, McDermott took pains to emphasize that the focus of the restructuring wasn't on cost cutting.

"When some companies talk about restructuring, they're like tired companies dealing with headcount problems. We're talking about getting the necessary skills on top of the growth opportunities," he said. "What we're doing is optimizing our workforce to actually increase the growth of the company, just to be very clear."

The CEO said the cutbacks are necessary to free up resources to increase spending on growth areas such as artificial intelligence, blockchain, Internet of Things and quantum computing.

Cloud subscriptions and support revenue grew 41 percent in the fourth quarter to 1.41 billion euro (U.S. $1.61 billion) in the fourth quarter from 995 million euro (U.S. $1.14 billion) one year earlier. Cloud bookings in the quarter were up 25 percent to 736 million euro (U.S. $841 million).

But revenue generated by traditional software licenses and support revenue was up only 2 percent year over year to 4.91 billion euro (U.S. $5.62 billion) from 4.81 billion euro (U.S. $5.50 billion).

The restructuring will generate annual savings in the range of 750 million euro to 850 million euro (U.S. $857 million to $971 million) starting in 2020. The company said those savings will "fuel investments into strategic growth areas."

For all of 2018 SAP reported revenue of 24.71 billion euro (U.S. $28.23 billion), up 5 percent from 23.46 billion euro (U.S. $26.81 billion) in 2017. But after-tax profit increased only 1 percent to 4.09 billion euro (U.S. $4.67 billion) from 4.05 billion euro (U.S. $4.62 billion) one year earlier.

For the full year cloud subscriptions and support revenue grew 32 percent to 4.99 billion euro (U.S. $5.71 billion) from 3.77 billion euro (U.S. $4.31 billion) one year earlier. Cloud bookings for the year were up 25 percent to 1.81 billion euro (U.S. $2.07 billion).

But revenue generated by traditional software licenses and support revenue in 2018 was down 1 percent to 15.63 billion euro (U.S. $17.86 billion) from 15.78 billion euro (U.S. $18.02 billion).

For all of 2019 SAP is forecasting that cloud subscriptions and support revenue will be in the range of 6.7 billion euro to 7.0 billion euro (U.S. $7.65 billion to U.S. $7.99 billion), up between 33 to 39 percent. The company expects total revenue growth "to increase strongly, at a rate slightly lower than operating profit."

SAP said the restructuring would result in expenses of 800 million euro to 950 million euro (U.S. $914 million to $1.09 billion), most coming in the current (first) quarter of 2019.

Looking even further out the company expects that by 2023 its cloud subscription and support revenue will be more than triple 2018's 5 billion euro.

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