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SAP Says Switch to Cloud Software Hurt 2014 Profit Outlook

SAP Says Switch to Cloud Software Hurt 2014 Profit Outlook

By Reuters | Updated: 20 October 2014 17:42 IST

German software maker SAP cut its 2014 operating profit forecast on Monday as customers shifted faster than expected to products delivered over the Internet, delaying when those orders can be booked as sales.

Company executives said the accelerating switch from packaged software to so-called "cloud" software would shave about EUR 200 million off a previous profit forecast, but that cloud contracts would bolster sales and profit in the future.

The corporate software industry is undergoing a rapid shift from packaged software which customers run on their computer systems to software run over the Internet in remote data centers, making data easier to manage, analyse and use on mobile phones.

SAP said it now expects 2014 operating profit, excluding some special items, of EUR 5.6 billion to EUR 5.8 billion ($7.1-$7.4 billion), down from EUR 5.8 to EUR 6.0 billion previously.

Packaged software sales are recognised immediately, while cloud orders are booked as sales over the life of multi-year contract, which officials said largely explained its new outlook.

SAP shares dropped 4.2 percent at 9.55am GMT, making it the worst performer in the German blue-chip DAX index and leading European technology stocks lower.

Analysts said there was concern that a rising proportion of cloud sales would lower the company's profitability.

"Growth dynamics are increasing, but at the cost of margins as the cloud cannibalizes SAP's licence business," said Mirko Maier, analyst at Germany's Landesbank Baden-Wuerttemberg, who has a "buy" rating on SAP shares.

SAP specialises in providing a mix of business applications for companies from accounting to human resources to supply chain software, but has come under pressure from rivals that offer cheaper services over the Internet, or in the "cloud".

Europe's largest software firm aims to boost the proportion of its software sold via the cloud to compete with arch U.S.-rival Oracle Corp and purely cloud-based competitors such as Salesforce.com and Workday Inc.

"De-acclerating in the cloud would make absolutely no sense," SAP finance chief Luka Mucic said on a conference call. "We are hitting the gas pedal as much as we can," he said. "We will then see the positive returns in the longer run."

Cloud sales rise
SAP's said third-quarter sales rose 5 percent to $4.25 billion. Solid sales in Germany and a recovery to double-digit sales growth in Japan helped offset a 10 percent drop, excluding the impact of foreign exchange, in Latin America which it blamed on macroeconomic woes and its own sales execution there.

The company expected 2014 revenue from the cloud part of its business to range from EUR 1.04 billion to EUR 1.07 billion, up from a prior forecast of EUR 1 billion to EUR 1.05 billion and EUR 757 million in cloud software sales for the whole of 2013.

The company, based in Walldorf, Germany, said new orders for cloud-based software had risen each quarter this year and were now equivalent to more than a third of revenue from its classic packaged software business. SAP's chief financial officer said cloud orders as a percentage of classic software sales stood at "somewhere in the twenties" at the end of 2013.

SAP reported a 5 percent rise in third-quarter operating profit, excluding special items, to EUR 1.36 billion, which was slightly below average expectations of EUR 1.37 billion, according to a Reuters poll of analysts.

To cut up-front spending on new data centers, SAP announced a partnership deal with IBM last week to run more of its cloud-based services in IBM facilities.

SAP's multinational customers, which include Coca-Cola, McDonald's and Vodafone, are moving to cloud computing because there are no upfront costs for software licences, dedicated hardware or installation, giving them more flexibility to respond to shifting market demand.

Reflecting that long-term shift in its business mix, SAP in January pushed back its 35 percent operating margin goal by two years to 2017, citing faster growth in its cloud business.

Its third-quarter operating margin was 31.8 percent, down from 32 percent a year earlier, but up from 29.8 percent in the second quarter of 2014.

Global business spending on cloud services is expected to jump 20 percent this year to $174 billion, research firm IHS estimates, and rise to more than $235 billion by 2017.

Last month, the German software giant agreed to buy U.S. expenses software maker Concur for $7.3 billion, aiming to strengthen its position in cloud computing.

© Thomson Reuters 2014

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