SAP Must Balance Profit Margins With Cloud Growth, CEO Saysby
Software CEO speaking at analyst presentation in New York
SAP to 'brutally and aggressively manage the margins': CEO
SAP SE plans to "aggressively manage" its profit margin while not sacrificing growth in cloud-computing software, which earns less than traditional software, according to Chief Executive Officer Bill McDermott.
"We also have to be a growth company and capture the market share in the cloud while we can," McDermott said at a presentation in New York. "We know exactly what we’re doing on the margin."
The German software maker, which competes with Oracle Corp. and Workday Inc. in the the $30 billion market for enterprise resource planning software, has kept license and support sales robust as customers adopt a new version of its flagship suite called S/4 Hana. That’s helped SAP, the market leader, raise its sales forecast for next year as businesses upgrade to programs that handle functions including finance and logistics.
When SAP raised its forecast for 2017 sales last month, the stock failed to rally as an implied 29 percent to 30 percent operating margin range didn’t match some analysts’ forecasts. That’s because the cloud-computing software, which customers subscribe to over the Web and is at the heart of SAP’s growth plan, is less profitable than traditional software licenses businesses buy up front.
McDermott told analysts SAP has "slightly negative margins” in the so-called private cloud software it hosts for customers, but said that would improve. By 2020, as much as three-quarters of SAP’s sales will count as recurring revenue, the CEO said, making "a very secure investment.” That includes software subscriptions and SAP’s highly profitable technical support business for its traditional software.
McDermott also reiterated comments he made on Bloomberg Television Wednesday that SAP is outgrowing Oracle and dismissed his rival’s server hardware line as a "bad business." Earlier this week, Oracle co-CEO Mark Hurd said SAP is "not doing very much" in cloud-computing software and hasn’t bolstered its core applications through acquisitions.
SAP shares fell 1.3 percent to 69.90 euros at the close of trading in Frankfurt. The shares gained 17 percent in the past year, outperforming Germany’s Dax Index of 30 stocks, which lost 12 percent.
"There is nothing that should prevent us from scaling our cloud business, because the returns for the long term" are very positive, SAP Chief Financial Officer Luka Mucic said.
The company also plans to spend the year bolstering the capabilities of S/4. Board member Bernd Leukert said engineers’ big project this year will be getting industry-specific functions to run faster by taking advantage of SAP’s Hana database.
(A previous version of this story was corrected to show that cloud software makes less money than traditional software, but isn’t unprofitable.)