SAP Quarterly Cloud Software Sales Top Estimates; Shares

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SAP SE reported fourth-quarter cloud-computing sales that beat analysts’ estimates as more users of traditional business software bought programs delivered through the Internet. The shares rose the most in more than a year.

Revenue from cloud subscriptions and support rose 72 percent to 360 million euros ($426 million), the world’s largest maker of business-management software said today, citing preliminary figures. That exceeded the 319.6 million-euro average estimate compiled by Bloomberg. Software and related services revenue, which captures newer cloud products, traditional on-premise software as well support sales, rose 8 percent to 4.73 billion euros, also topping estimates.

The numbers show that Chief Executive Officer Bill McDermott is convincing clients to add cloud products to the SAP software they already run in their data centers. Along with competitors including International Business Machines Corp. and Oracle Corp., SAP has found growth harder to come by as customers move from traditional software contracts to cloud-computing programs delivered from remote data centers. SAP’s stock is down 6.4 percent this year through Jan. 9.

“The results appear better than the negativity baked into the stock,” said Brad Zelnick, an analyst at Jefferies in New York. “For SAP this transition is less of a highwire act than for others in software.”

Next Week

The shares rose 4.6 percent to close at 57.05 euros in Frankfurt, giving Walldorf, Germany-based SAP a market value of 70 billion euros.

SAP will release detailed earnings on Jan. 20, when the company also plans to unveil its six-year business plan. Investors will watch closely how the online software transition will affect SAP’s profitability.

Fourth-quarter operating profit, based on non-IFRS accounting rules, was 2.13 billion euros, missing analysts’ 2.17 billion-euro average estimate. Sales of new software licenses -- the bread-and-butter products that run thousands of companies’ finances and physical operations -- fell about 2 percent to 1.87 billion euros, in line with projections.

Margins Target

SAP may delay its 2017 target of 35 percent operating margin, set a year ago, when it gives its forecast next week, said Michael Briest, an analyst at UBS AG. Cloud computing subscriptions have the effect of pushing revenue out into future years of a contract as compared with sales of products businesses install in their data centers, which yield more upfront revenue for software makers.

“Everyone’s expecting them to push it back, it suggests they’re not in control of their destiny and are reacting,” said Briest.

In October, McDermott raised SAP’s projection for cloud sales while cutting its full-year operating profit forecast -- to a range of 5.6 billion euros to 5.8 billion euros -- as revenue from those contracts take longer to be recognized than that from traditional software deals. Full-year operating profit on that basis was 5.64 billion euros.

Concur Acquisition

Moving more business to the cloud may strengthen SAP’s competitiveness against cloud-computing companies including Inc. and Workday Inc. while reducing profit margins. SAP completed its $7.4 billion acquisition of Concur Technologies Inc. last month and has named Concur CEO Steve Singh, as well as middle and eastern Europe chief Michael Kleinemeier to its managing board.

Oracle too is pushing further into cloud computing, using acquisitions to replace one-time sales of software with ongoing subscriptions. The company also makes its flagship 12c database and Java enterprise software available as online services. Its shares rose the most in more than six years on Dec. 17 as those efforts fueled profit and sales that surpassed analysts’ estimates. The stock climbed 18 percent in 2014. SAP’s stock dropped 6.5 percent last year.