SAP Profit Plunges 23%

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 SAP Profit Plunges 23%

German business software provider is making a transition to cloud technology

By Christopher Alessi

Updated April 21, 2015 5:32 a.m. ETFRANKFURT—German business software provider SAP SE said Tuesday that first-quarter net profit fell 23%, in a further sign that the company’s transition to Internet-based software products in the cloud is squeezing short- to mid-term profitability.

Net profit for the period ended March 31 was €414 million ($444.17 million) compared with €534 million during the same period last year. 

The company also gave a net profit figure of €697 million based on calculations that aren’t recognized under international financial reporting standards. That was an increase of 5% from a year earlier and fell short of analysts’ expectations of €755 million, based on a poll by The Wall Street Journal.

Revenue climbed by 22% to €4.5 billion, helped by increased customer adoption of the company’s cloud offerings. Revenue based on cloud subscriptions and support jumped by more than 100% to €503 million, the company said.

SAP benefited from a weaker euro in the first quarter but the effect was “dampened by acquisition-related charges,” Chief Financial Officer Luka Mucic told reporters.

Analysts at Société Générale said the “earnings miss mainly reflects a strong push in the cloud.” While the news could adversely impact the “strong top-line performance, we would flag that [the first quarter] is historically a small quarter in terms of earnings” and the company has generally focused its investments in the first half of a fiscal year, the analysts said.

SAP’s shares were up by around 2.5% Tuesday morning. 

Chief Executive Bill McDermott—an American who was appointed sole CEO last year—has sought to move SAP away from its traditional on-premise software products, betting that the company’s long-term growth will be in the cloud. As part of that effort, Mr. McDermott has presided over a series of cloud-focused acquisitions, including last year’s $8.3 billion purchase of U.S.-based expense management software provider, Concur Technologies Inc.

In February, the company launched a redesign of its core Business Suite software, S/4 HANA, which operates on its flagship HANA real-time database and can run both in the cloud or on hardware. The company said it so far has more than 370 S/4HANA users.

However, the company’s move to the cloud has crimped profitability because revenue is increasingly spread out over longer contract periods and based less on one-off licensing fees. In January, the company dropped a 35% profit margin target for 2017 and hasn’t provided a new figure. 

Mr. McDermott said on Tuesday that margin rates would ultimately rebound. “As those investments [in the cloud] start to streamline, the margin flows through,” he said. 

SAP reiterated its guidance for 2015, saying it expects a non-IFRS operating profit of between €5.6 billion and €5.9 billion. It expects full-year non-IFRS revenue for cloud subscriptions and support to be between €1.95 billion and €2.05 billion.