September 10, 2019 / 2:13 AM / 6 days ago

SAP chief says German headquarters an advantage amid U.S.-China trade war

SAN FRANCISCO, Sept 9 (Reuters) - German business software company SAP SE has an edge over its U.S. rivals because it faces potentially fewer restrictions on doing business with China, Chief Executive Bill McDermott said in an interview.

SAP, which makes financial management and human resources software for large businesses, is targeting large, state-owned enterprises in China as customers despite the ongoing trade war between the United States and China, McDermott told Reuters.

Some of SAP's U.S.-based rivals, such as Microsoft Corp , have been barred from doing business with Chinese firms such as Huawei Technologies Co Ltd. Other American firms such as Cisco Systems Inc say Chinese state-owned firms will no longer allow them to bid on contracts because of trade tensions.

"The fact that Germany has excellent relations at the public and the private-sector level in China, it's no question it's a help to us," McDermott said in an interview in San Francisco on Sept. 6.

SAP, with a market capitalization of $131.3 billion euros ($145 billion), does not disclose its revenues from China. But the company does face trade war risks because if enough of a software product's content comes from the United States, export restrictions can apply.

SAP spent more than $10 billion last year acquiring two American software firms, Callidus Software and Qualtrics. But McDermott, the first American chief of the German firm, said SAP has made no changes to where it makes its software in response to trade tensions.

"If you have more than 25% of U.S.-driven innovation in the software, we comply with the same rules as a U.S. company," he said. "There are many solutions that we have where that isn't the case. We haven't foundationally changed our development process in anticipation of a no-deal between China and the U.S., yet."

UNEVEN MARGIN GROWTH

After a spate of acquisitions in recent years, SAP has gone into cost-cutting mode, implementing layoffs earlier this year and committing to a goal of boosting operating margins by 500 basis points over the next five years.

McDermott told Reuters that the progress could be uneven because it will take time for job cuts made this year to take effect.

"You get the bigger leverage when you get into year two and beyond," he said.

Activist hedge fund investor Elliot Management Corp also took a stake in SAP earlier this year, which analysts believe has put pressure on the company to announce a share repurchase program at a capital markets day in November.

McDermott said SAP has not yet determined how large - or even whether - a share repurchase will be announced, because the company's leaders are still gathering information to present to its supervisory board, which includes worker representatives and must approve major decisions.

"We haven't made a decision on quantity, or whether it's zero, or it's something in a range, because we haven't even presented yet," he said. "We are taking a very diligent look at it." (Reporting by Stephen Nellis in San Francisco; Editing by Stephen Coates)

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