SAP misses on Q3 and lowers FY''20 outlook as recovery fails to take hold SAP misses consensus Q3 revenues estimates by 5%, missing by 6% on Cloud (+14% y/y c/c, with a -6% impact from Concur) and 6% on software licenses (-19% c/c). With the adj EBIT margin beating by 80bps, EBIT missed by 3%. SAP has characterised the Q3 recovery as muted and patchy with little improvement on Q2. With a negative FX impact, SAP has lowered FY''20 reported Cloud revenue guidance to ~EUR7.9bn-8.1bn (~5.5% below consensus with just ~8% growth in FQ4) and total revenue guidance to EUR26.7bn - 27.3bn (~4% below consensus). FY adj EBIT guidance is now EUR7.9 - 8.3bn (4.5% below consensus at mid-point). SAP now expects COVID to continue to have a significant impact at least through H1 2021. SAP sees no profit growth in 2021 and 2022, with 2023 margins 400-500bps below target We suggested SAP''s stock would be in a ''holding pattern'' post Q2 results as the market awaited the formal downgrade by the new CEO to 2023 targets, which we thought could come with the Q3 results. SAP has now announced it will step up investments over the next two years to accelerate work with hyperscaler partners (MSFT, AWS, GCP) to create simpler packages to move large workloads to the cloud. This, along with the impact of COVID and an accelerated move toward cloud and subscriptions, should see profit ''flat to down'' in 2021 and 2022, with 2023 margins being 400-500bps below the original 34% target. SAP now expects EUR22bn+ of cloud revenue in 2025, a 22% CAGR from 2020 (previous guidance for EUR15bn+ in 2023), with only ~EUR1bn of license revenues, implying an accelerated ~20% annual drawdown in license sales (from -5% pre COVID). Downgrading estimates (and target price). Moving to Neutral While we expected a margin downgrade, we did not expect 400-500bps. We cut our 2021 and 2022 non IFRS EBIT estimates by 14% and 20%. We return to using a 5 year median EV/EBIT multiple of 15.5x, which we...