SAP Online Software Boosts Sales as Profit Lags Estimates

SAP SE, the biggest maker of business-management software, reported results in line with analysts’ estimates, helped by strong growth in cloud computing and hosted software, even as traditional license sales ebbed.

Second-quarter revenue from software and related support services rose 4 percent to 3.48 billion euros ($4.7 billion), Walldorf, Germany-based SAP said today. Operating profit excluding some items climbed 4 percent to 1.24 billion euros. Analysts on average had estimated sales of 3.45 billion euros and operating profit of 1.26 billion euros, according to data compiled by Bloomberg.

“No bad news is good news,” Thomas Becker, an analyst at Commerzbank AG in Frankfurt, said in a note to clients today. “Cloud growth momentum remains strong.” Becker recommends buying the shares.

SAP chief executive officer Bill McDermott is positioning the company to become a bigger supplier of cloud-computing software, a market where it competes against Salesforce.com Inc. and Workday Inc., which have taken market share. While total sales in the quarter rose just 2 percent, they’ve accelerated in the past two months, and deal sizes are increasing, he said. McDermott became sole CEO in May after sharing the job the past four years.

Photographer: Martin Leissl/Bloomberg

Bill McDermott, chief executive officer of SAP AG. McDermott is positioning SAP to become a bigger supplier of cloud-computing software as Salesforce.com Inc. and Workday Inc. have taken market share. Close

Bill McDermott, chief executive officer of SAP AG. McDermott is positioning SAP to... Read More

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Photographer: Martin Leissl/Bloomberg

Bill McDermott, chief executive officer of SAP AG. McDermott is positioning SAP to become a bigger supplier of cloud-computing software as Salesforce.com Inc. and Workday Inc. have taken market share.

SAP shares climbed 2.4 percent to 59.37 euros at the close of trading in Frankfurt. It was the biggest jump since Dec. 19 and pared the stock’s decline to 4.7 percent this year.

Increased Momentum

“We’ve never seen more tailwind behind SAP’s business model than right now,” McDermott said in an interview with Bloomberg TV. Business “picked up in last 60 days more so than in the prior four months” and the increased momentum is especially evident for cloud computing and the company’s Hana database, McDermott said.

SAP, whose applications help companies manage activities from financial reporting to human resources to manufacturing, has been making acquisitions -- including HR tools maker Fieldglass, announced in March -- to add online programs for HR, marketing and e-commerce.

“These are businesses that weren’t ringing the cash register and now they are,” McDermott said on a conference call with analysts.

Total revenue was 4.15 billion euros in the three months, compared with the 4.17 billion-euro estimate of analysts surveyed by Bloomberg. Operating profit on an IFRS basis declined 29 percent to 698 million euros.

Cloud Subscriptions

The company’s acquisitions in Web-delivered software, including its $3.4 billion purchase of HR software maker SuccessFactors in 2012, are bearing fruit. Second-quarter sales of cloud-computing subscriptions and support rose 32 percent to 242 million euros, topping the average 238.4 million-euro estimate.

SAP also raised its full-year forecast for cloud-computing revenue to 1 billion euros to 1.05 billion euros, excluding currency swings. The previous guidance was for 950 million euros to 1 billion euros.

The increase in cloud revenue guidance was primarily due to the Fieldglass acquisition, and the measurement also includes sales of SAP’s Hana database that the company runs on its servers on behalf of customers, McDermott said. To speed operations, the Hana database uses computer memory rather then magnetic disks.

Legal Action

The transition to online computing is cutting into sales of applications that run on businesses’ own computers. Sales of new licenses, a measure of future revenue potential, fell 2 percent to 957 million euros. That still beat the average 942.1 million euro estimate of 10 analysts surveyed by Bloomberg.

Operating profit was sapped by costs related to a long-running patent suit. The company recorded a provision of 289 million euros during the quarter to settle patent claims by Trilogy Inc.’s Versata Software after the U.S. Supreme Court in January rejected SAP’s appeal, Chief Financial Officer Luka Mucic said on the call.

SAP and Oracle Corp. have been wrestling with the industry’s transition to software delivered as an online service, and both companies have been realigning their engineering staff and making acquisitions to adapt. Oracle, the world’s biggest maker of database software, on June 19 reported fourth-quarter sales and profit that missed estimates.

The following week, Oracle agreed to buy Micros Systems Inc., a maker of software for hotels and restaurants, for $5.3 billion.

Businesses’ use of mobile applications is also changing requirements. International Business Machines Corp. this week announced a deal to develop more than 100 business apps for Apple Inc.’s iPhone and iPad.

SAP under McDermott and his former co-CEO, Jim Hagemann Snabe, has also adapted its software to run more smoothly on iOS devices, and McDermott said today the company has committed to building 300 applications for the platform.

To contact the reporter on this story: Aaron Ricadela in Frankfurt at aricadela@bloomberg.net

To contact the editors responsible for this story: Kenneth Wong at kwong11@bloomberg.net Robert Valpuesta, Kim McLaughlin

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