SAP Sales, Earnings Miss Estimates Amid Shift to Online

SAP AG, the largest maker of business-management software, is finding it hard to please investors as a sales boost from its shift to online programs is being muted by a slowdown for older products and a strong euro.

The company reported first-quarter sales and earnings that missed analysts’ estimates as it reckons with the costs of an industrywide shift to software delivered as an Internet service. Walldorf, Germany-based SAP’s stock fell 1.2 percent.

SAP and U.S. rival Oracle Corp. are being challenged by Inc. and Workday Inc. products delivered and updated over the Web. That has prompted SAP to spend on developing and acquiring so-called cloud-computing services, pushing back a key profitability goal. At the same time, the strength of the euro is weighing on SAP’s growth, since revenue from outside Europe is worth less when brought home.

“The on-premises software business is getting hurt by the movement to the cloud,” said Rick Sherlund, an analyst at Nomura Holdings Inc. who has a buy rating on the shares. “You have to take a long-term view with SAP.”

Sales rose 2.7 percent to 3.7 billion euros ($5.1 billion), SAP said today, short of the 3.8 billion euro average estimate of analysts surveyed by Bloomberg. Operating profit, excluding some items, added 2 percent to 919 million euros, missing the average estimate of 975 million euros.

SAP, Germany’s biggest technology company, fell to 57.73 euros in Frankfurt trading. It has lost 2 percent in the past year, compared with a 25 percent gain by Germany’s DAX Index.

Currency Impact

On a conference call with analysts, co-Chief Executive Officer Bill McDermott said the company is emphasizing its software’s ability to manage businesses’ most important tasks from their servers or through cloud computing.

“We’re running mission-critical, industry-specific processes in the cloud, which our competitors just don’t do,” he said. McDermott said SAP is “well positioned” to achieve goals of reaching 22 billion euros in annual sales by 2017 -- 3 billion to 3.5 billion euros of which would come from the cloud.

The currency effects weren’t appropriately factored into analysts’ consensus estimates, said Knut Woller, an analyst at Baader Bank AG, who recommends buying the shares. He said a 9 percent increase in software support revenue, excluding currency effects, should give succor to investors worried SAP’s transition from software that runs primarily on customers’ own computers would cause the maintenance fees to fall.

“The underlying trends are OK,” he said. “My investment thesis is intact.”

Software Sales

SAP said currency fluctuations may hurt its full-year operating profit growth by 5 percentage points. At constant currencies, the full-year operating profit will be as much as 6 billion euros, the company reiterated. The euro has advanced about 6 percent against the dollar over the past year.

Sales of new software licenses, an indicator of future revenue, fell 5.2 percent to 623 million euros, compared with the 656.1 million-euro average estimate. Cloud subscriptions rose 32 percent to 221 million euros, compared with the average estimate of 211.6 million euros. Net income rose about 3 percent to 534 million euros.

SAP isn’t the only enterprise computing company being stung by the shift to cloud services. International Business Machines Corp. said yesterday first-quarter sales fell almost 4 percent as the transition to online software means customers are less reliant on buying servers and mainframe capacity.

Goal Delayed

SAP, which supplies programs for managing inventories, deliveries, financial performance and human resources to more than 250,000 companies, in January delayed its goal of reaching a 35 percent operating margin until 2017. Analysts predict 30.6 percent for this year, according to data compiled by Bloomberg.

The company has made acquisitions to buy cloud-computing expertise. On March 26, SAP agreed to buy Fieldglass, a closely held maker of online human resources software. On a conference call with reporters, McDermott said SAP would rely mainly on “organic” growth at the moment rather than large takeovers.

“If at this point something were to happen it would be more in the tuck-in category,” he said.

Revenue from software and related services grew 10 percent in the Americas, excluding currency fluctuations. In the Europe, Middle East and Africa region, growth was 8 percent. The Crimea crisis is affecting business, McDermott said.

“We do see that some things are growing slower there,” he said. “But nothing is lost” and SAP expects the business to restore over time.

Meanwhile business in France and southern Europe is “getting much better,” McDermott said.

Online Rivals

McDermott and co-CEO Jim Hagemann Snabe are positioning the 42-year-old company to deliver products for cloud computing and analyzing large amounts of data, two trends fueling corporate software purchases.

SAP, the world’s third-biggest independent software company after Microsoft Corp. and Oracle, also sells a database program called Hana meant to make its current products run faster.

SAP’s annual license-sales growth will be in the low single-digit percentage through 2017, said Michael Briest, a UBS AG analyst. Oracle hasn’t posted sales growth of more than 5 percent in 10 quarters, and its license and cloud subscriptions grew less than 4 percent in its fiscal third quarter.

By contrast, Salesforce in February reported fiscal fourth-quarter sales that grew 37 percent, and more than 200 deals worth more than $1 million as it moves upmarket. In a recent speech at an investor conference, Salesforce Vice Chairman Keith Block said the company is targeting SAP installations at customers as candidates for replacement.

Workday, which sells a cloud-computing suite of HR and financial software and aims for the same large customers who buy SAP, in February reported fiscal fourth-quarter revenue that grew 74 percent. SAP, Oracle, Salesforce and Workday compete in a $21.6 billion market for cloud-computing applications that’s estimated to grow 19 percent annually through 2017.

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