China-US Trade Friction Hurts SAP’s Q2 Numbers

China-US Trade Friction

China-US trade friction can be traced back in 2017 after an investigation on the Chinese trade policies was launched by the US that resulted in an exchange of hundred billions of dollars between the two nations.

China-US trade friction has started to hurt the German software giant, SAP, reflected on its trading performance last 19 July. Last week, the company (NYSE: SAP) was trading at $125.84 a share, which is 6.24% down from last Wednesday’s close.

SAP cited uncertainties over the China-US Trade Friction despite the astounding double-digit growth on its cloud and software revenues.

During a conference call with analysts late last week, SAP’s CEO Bill McDermott detailed that though the cloud and software growth reached 11% in the quarter year-over-year, the company was unable to achieve all of its business plans in Asia. He said:

“As software license overall was good, even with the minor headwinds in Asia due to trade uncertainties, which did postpone some deals.”

According to McDermott, experienced management was the real catalyst of SAP’s steep growth in the cloud in Q2. He said that SAP’s recent $8 billion acquisition of the leading XM company Qualtrics “created the category” of experience management.

However, despite SAP’s Q2 headline-making exemplary marks, new cloud bookings grew more slowly versus the past quarters. The 15% rise in new cloud bookings is a drop compared to the 26% gain in the first three months of 2019. It is considered to be the weakest figure in at least a year and a half.

In a BloombergTV interview with SAP CFO Luka Mucic, he explained that the decrease in numbers is due to the company’s deliberate strategy to focus on higher-margin sales. Also, the increase in the number of customers who chose “pay as you go” products weren’t accounted for in the metrics, which could have influenced the drop. He clarified that there would have been a 27% growth if infrastructure-as-a-service was excluded.

Furthermore, the CFO said:

“We’re exactly on track in what we need to hit our mid-term objectives to triple our cloud revenue by 2023. Also, the profitability in the cloud is steeply increasing.”

Regarding SAP’s cloud partnerships with Amazon and Google, McDermott shared that the collaboration resulted in increased revenue and shows a more profitable future.

In April this year, activist investor Elliott Management Corp. invested $1.3 billion in SAP, equating to a roughly 1 percent stake. As SAP boosts its cloud-based applications and partnerships among industry bigwigs, the activist investor is one with SAP’s executives’ plans for growth.

China-US Trade War by the Numbers

Here is a snapshot from the US Census Bureau, BBC Research last May 2019 showing the exchange of billions of dollars between the trading rivals.

$250bn. The worth of Chinese goods, which the US imposed tariffs on in 2018. The duties of up to 25% cover a wide range of products, from handbags to railway equipment.

$539bn. The total amount of Chinese goods imported in the US in 2018.

$110bn. The worth of US products that China imposed to place tariffs on ranging from 5% to 25%. The products include chemicals, coal and medical equipment last year.

$120bn. The total US goods imported into China.

$200bn. The worth of Chinese products that the US imposed to increased tariff of 25% from 10% in May this year, after a truce agreed last December collapsed.

$60bn. The worth of US products that China imposed to place tariffs on as a retaliation.

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