SAP Posts Drop in Operating Profit

As we have said before, SAPs growth is over, and now it shows. Aivars Lode avantce

SAP Posts Drop in Operating Profit
Shift From On-Premise Software Licenses to Cloud-Based Technology Squeezes Growth

By Christopher Alessi 

Updated Jan. 12, 2015 11:31 a.m. ET

FRANKFURT—Business software provider SAP SE posted a 3% drop in operating profit for the fourth quarter on Monday, as its shift from on-premise software licenses to Internet cloud-based technologies continued to squeeze profit-margin growth. 

The German company said that operating profit for the period ended December 31 was €1.75 billion ($2.06 billion), compared with €1.80 billion last year, largely in line with analysts’ expectations. Analysts had predicted a 2% decline in operating profit, according to a recent poll by The Wall Street Journal. 

Revenue jumped by 7% to €5.46 billion from €5.11 billion year-over-year, boosted by strong cloud-software subscription growth. Revenue growth was in line with analysts’ predictions of a 6% increase. 

SAP plans to publish its full results for the quarter and fiscal year 2014, including net profit, at its annual conference on Jan. 20. Analysts expect the company to drop its profit margin guidance of 35% for 2017 and outline modest revenue growth and operating profit targets for 2015-2020. 

SAP’s focus on its cloud offerings, including its recently completed $8.3 billion acquisition of Concur Technologies Inc., will likely contribute to reduced profitability in 2015, analysts say. Margins are expected to be lower as the company relies less on lucrative one-off licensing fees for on-premise software and more on cloud revenue that is distributed over longer periods.

“With the powerful shift to the cloud and our growing support revenues we are building a larger, more predictable business over the long term,” said SAP Chief Financial Officer Luka Mucic.

While the company is building a more “visible recurring revenue stream” aided by cloud revenues, it is not clear that the cloud can achieve high margin levels over the long term, analysts at J.P. Morgan said. 

U.S.-based Concur, which produces cloud-based travel and expense management software, could add approximately €670 million in cloud subscriptions and a total of around €750 million in revenues in 2015, according to Morgan Stanley. 

Revenue generated from cloud subscriptions and support rose 68% in the fourth quarter, compared with the year prior, the company said. 

SAP faces competition in the cloud from longtime rival Oracle Corp. The U.S.-based software provider, which last year acquired cloud software provider TOA Technologies, posted total revenues of $9.6 billion for its most recently reported quarter. 

Cloud computing company Salesforce.com Inc. is also posing a new competitive challenge to SAP as it takes on the German company on its home turf by expanding “more aggressively into Europe,” analysts at J.P. Morgan said. Salesforce’s revenues rose by 29% to $1.38 billion during the company’s most recently reported earnings period.