SAP Lowers Earnings Target as Cloud Shift Delays Revenue

By Aaron Ricadela

SAP SE, which supplies the software that powers tens of thousands of companies’ operations, cut its 2017 profit target as a shift to software delivered over the Web hurts margins. The stock fell as much as 4.9 percent.
Operating profit adjusted for some items will be 6.3 billion euros ($7.3 billion) to 7 billion euros on sales of 21 billion to 22 billion euros, SAP said today. That’s a step back from a previous goal of sales of at least 22 billion euros and operating margin of 35 percent, which implied 7.7 billion euros in profit.
Chief Executive Officer Bill McDermott is grappling with a sea change in the way customers buy SAP’s software -- they’re opting for cloud-computing versions delivered online, which is hurting sales of traditional programs installed on customers’ computers. While SAP’s cloud business is growing fast in a market that researcher IDC estimates will more than double to almost
$83 billion in 2018, revenue is delayed as it’s received over the course of subscriptions rather than as upfront fees.
“That SAP can expand the money it makes and not get any credit for it, to me that is like a Twilight Zone moment,” McDermott said in an interview at SAP’s headquarters in Walldorf, Germany. “Are we watching the same TV set?”

Photographer: Krisztian Bocsi/Bloomberg

Chief Executive Officer Bill McDermott has spent more than $20 billion on acquisitions... Read More

SAP fell as low as 54.69 euros for its biggest drop in three months and traded 4.1 percent lower at 11:14 a.m. in Frankfurt. The stock lost 6.5 percent last year, compared with an 18 percent gain by main rival Oracle Corp.

2020 Forecasts

SAP, whose programs are used to run large companies’ finances and operations, also gave longer-term goals. It targets 2020 revenue of 26 billion euros to 28 billion euros and adjusted operating profit of 8 billion euros to 9 billion euros. Cloud subscription and support revenue that year will be 7.5 billion euros to 8 billion euros, an increase of seven times compared with 2014, SAP projected.
This year, cloud subscription and support revenue will be 1.95 billion euros to 2.05 billion euros, SAP said, missing the 2.08 billion-euro estimate of analysts surveyed by Bloomberg.
The company predicted 2015 adjusted operating profit of 5.6 billion euros to 5.9 billion euros, compared with 5.64 billion euros a year earlier.
McDermott said the company can increase its on-premises software and cloud computing business by 8 percent to 10 percent, not counting the benefit of small acquisitions of less than $200 million in value the company might make.
“A margin rate is not as relevant a metric as it once was,” he said. “You can’t spend a margin rate.”

Little Choice

SAP has spent more than $20 billion on acquisitions, including SuccessFactors Inc. and Concur Technologies Inc., to compete with cloud specialists such as Salesforce.com Inc. and Workday (WDAY) Inc., and older rivals such as Oracle.
SAP said today it plans to unveil a product on Feb. 3 called S4Hana that lets customers run the company’s flagship Business Suite and Hana database together, while pulling in data from mobile applications and social media. The software’s functions will be written for the Hana database, said McDermott.
McDermott has little choice -- Salesforce.com and Workday are attracting customers with their business software delivered completely over the Web.
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 beat analysts’ estimates.
SAP finance chief Luka Mucic has said cloud software will eclipse on-premises products for sales by the end of the decade.