SAP Delays Profitability Target Amid Cloud Push
SAP AG (SAP) pushed back its profitability target by two years as it shifts sales efforts from traditional business software licenses to programs delivered over the Internet. The shares fell the most in six months.
The largest maker of business-management software said operating profit adjusted for some items will probably reach 35 percent of sales by 2017 rather than in 2015 as previously projected. Analysts had predicted SAP would miss the 2015 profitability target, reaching 34.1 percent by that time, according to estimates compiled by Bloomberg.
As more companies access software via the Web instead of installing programs on their own premises, Walldorf, Germany-based SAP is searching for a balance between expanding cloud-software offerings and safeguarding its mainstay license business. A stronger focus on on-demand software promises more revenue in the future but dents immediate profitability because of high fixed costs of maintaining server farms for clients.
“We have bold ambitions in the cloud,” co-Chief Executive Officer Bill McDermott said on a call with journalists. “We choose not to harvest the margin in the short run but to go for share in the cloud.”
SAP fell as much as 2.34 euros, or 3.9 percent, to 58.31 euros, the steepest decline since July 18. It traded at 60.36 euros as of 10:40 a.m. in Frankfurt.
The company also set new revenue targets for 2017. It projects total revenue to reach at least 22 billion euros ($30 billion) that year and cloud revenue to be 3 billion euros to 3.5 billion euros. SAP, which had cloud revenue of 787 million euros last year, may make acquisitions to help reach its cloud revenue targets, McDermott said.
SAP and its rival in traditional enterprise software, Redwood City, California-based Oracle Corp. (ORCL), have been using acquisitions to beat cloud-only providers such as Salesforce.com Inc. and Workday Inc. Still, Salesforce.com’s 31 percent share-price gain last year exceeded Oracle’s 15 percent rally and SAP’s 2.7 percent increase.
While the number of available cloud targets has shrunk as SAP and its peers swallowed smaller companies, co-CEO Jim Hagemann Snabe said in an interview that he expects the company to continue the pattern of past acquisitions such as SuccessFactors Inc., Ariba Inc. and Hybris AG.
SAP is looking for market leaders in fields that strengthen SAP technologically, he said, adding it may expand offerings of its customer-relationship management software.
“There are no real limitations if you look at it from a financial point of view,” he said. SAP is “comfortable” with the size of past acquisitions in the range of $4 billion to $5 billion, and that pattern will probably recur in the future, he said.
SAP’s transition into the cloud will be helped by customers adopting the cloud-enabled version of its flagship software business suite, Snabe said. The version, which uses the fast Hana data-processing technology, gained about 800 customers since its introduction in May, almost twice Snabe’s initial projection.
Customers typically move some programs to the cloud rather than immediately switching the entire system, he said, adding that SAP aim to leave customers more flexibility in their software setup.
This year, earnings excluding some items, or what the company calls non-IFRS operating profit, will probably reach 5.8 billion euros to 6 billion euros, compared with the average analyst estimate of 6.06 billion euros. Revenue from software and software-related services, adjusted for some items, will grow 6 percent to 8 percent in 2014 following four years of double-digit growth. All forecasts assume constant exchange rates, SAP said.
SAP on Jan. 10 reported a decline in license sales as a strengthening euro reduced earnings in markets around the world. SAP’s fastest-growing product, the Hana data-processing engine, fell short of the company’s annual forecast for 2013 because of currency swings.
“We sense that investors will find some comfort that cloud will not lead to declining margins, which was a major concern of some,” Commerzbank AG analyst Thomas Becker said in a note, adding that the targets for 2014 are “soft.”
Research firm Gartner Inc. projected this month that the global enterprise-software market will grow 6.8 percent to about $320 billion this year, after a 5.2 percent gain in 2013. That pace would keep it as the fastest-growing segment of the information-technology industry, according to Gartner.
To contact the reporter on this story: Cornelius Rahn in Berlin at email@example.com