SAP CFO Says Cloud Deals to Outpace Traditional Software by 2020

SAP Chief financial Officer Luka Mucic
SAP SE Chief financial Officer Luka Mucic. Photographer: Martin Leissl/Bloomberg

SAP SE’s finance chief said the company’s Web-delivered computing software will outpace traditional software licenses by 2020 as it works to convince investors that the cloud business can turn a profit.

“By the end of the decade, latest, we will drive more revenue from new cloud business than software licenses,” Chief Financial Officer Luka Mucic, who took the position in July, said today at an event to promote SAP’s cloud strategy. While software installed on customers’ own computers will still account for more total revenue because of long-term support contracts, license sales “will shift very quickly in favor of the cloud business model,” he said.

SAP has spent more than $13 billion since 2010 on acquisitions, including suppliers of Web-delivered software for human resources and purchasing. This has strengthened the cloud capabilities of the world’s biggest supplier of business applications to compete with faster-growing challengers such as Salesforce.com, while still leaving it relying on traditional server software for profit.

In the second quarter, SAP had 242 million euros ($313 million) in cloud subscription sales, compared with 957 million euros in new software licenses. So-called maintenance contracts provided 2.28 billion euros in sales. It takes four years for a customer buying online-delivered software from SAP to furnish the same amount of revenue as an on-premises contract, said Mucic, speaking at SAP’s Walldorf, Germany headquarters.

Profit Margin

“You may ask why, if the cloud is such a compelling business model, why is no one making money with it?” he said. Mucic said that after seven years of subscribing to SAP software, the amount of revenue provided by a customer would exceed that of a traditional software contract.

Margins at SAP, whose products are used by companies to manage finances, inventories and supply chains, are getting squeezed by the shift to the cloud. Its sales of software delivered and updated online rather than stored on customers’ servers will exceed 1 billion euros this year, thanks to acquisitions such as HR software suppliers SuccessFactors Inc. and Fieldglass Inc.

“Cloud appears break-even today in terms of profitability for SAP,” Antonin Baudry, an HSBC analyst, said in a Sept. 3 report. Still, operating margins for software-as-a-service may reach 15 percent in 2017 as many customers renew contracts each year, said Baudry, who has the equivalent of a buy recommendation on SAP shares.

Oracle’s Acquisitions

By comparison, analysts surveyed by Bloomberg estimate SAP’s total adjusted operating profit this year will be 31 percent of sales of 17.4 billion euros. The company said in January that the figure would reach 35 percent by 2017, two years later than it previously forecast.

Chief Executive Officer Bill McDermott is looking to put more of SAP’s $4.3 billion in cash to work to fend off online-only competitors including Salesforce.com and Workday Inc., and traditional rival Oracle Corp. which has also been buying cloud companies.

One potential acquisition target is Concur Technologies Inc., a developer of software that helps businesses manage expenses. It approached SAP about a possible deal, people with knowledge of the matter said this month, and could fetch more than $7 billion in a sale.

Investors will be looking for signs SAP can wring profit out of the cloud-computing arsenal when it reports third-quarter earnings on Oct. 20.

SAP’s Goal

“Broadly, the problem for SAP is, name the pioneering cloud company that’s profitable,” said Joshua Greenbaum, an analyst at Enterprise Applications Consulting. “The main companies they have in their sights, Salesforce and Workday, are definitely not,” he said. “SAP’s goal is to be a major if not dominant player in the cloud and this means they have to beat Workday.”

Still, SAP must keep building its cloud business because it is the model that customers want, Bernd Leukert, the company’s software chief, said last month.

“We still see growth in the single digits in the on-premesis business,” whereas the company’s goal is to increase cloud-computing revenue by more than 10 percent a year, Leukert said at today’s event.

SAP shares rose 0.2 percent to 59.98 euros at 2:23 p.m. in Frankfurt, paring the decline to 3.7 percent this year. That performance puts it in the bottom third of Germany’s DAX Index. By contrast, Salesforce and Workday have climbed 7.4 percent and 9.8 percent, respectively, in New York, while Oracle has gained 5.9 percent.

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