SAP defers profit goal to build cloud business

WALLDORF, Germany Tue Jan 21, 2014 10:04pm IST

Shareholders arrive for the German software group SAP general shareholder assembly in Mannheim, May 25, 2011. REUTERS/Alex Domanski/Files

Shareholders arrive for the German software group SAP general shareholder assembly in Mannheim, May 25, 2011.

Credit: Reuters/Alex Domanski/Files

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WALLDORF, Germany (Reuters) - German business software maker SAP (SAPG.DE) pushed back its profit target as it waits for subscription revenue from cloud-computing to gather pace and invests more in the business to keep up with a fast-growing market.

SAP said on Tuesday it now aimed to hit its operating margin goal of 35 percent in 2017 instead of 2015. The margin was 32.6 percent last year.

The Walldorf, southern-Germany based company and global rivals such as IBM (IBM.N) and Oracle ORCL.O are racing to meet surging demand for web-based software products.

Known as cloud computing, this allows businesses to reduce their costs by ditching bulky servers for network-based software in their own offices and using remote data centres run by technology companies instead.

The global cloud services market last year grew by almost a fifth to an estimated $131 billion, according to research firm Gartner. IBM Markets Intelligence estimates the market could be as big as $200 billion by 2020.

SAP's customers, which include Coca-Cola (KO.N), McDonald's (MCD.N) and Vodafone (VOD.L), are moving to cloud computing because there are no upfront costs for programme licenses, dedicated hardware or installation, making them less vulnerable to any economic downturn.

Instead they pay smaller license fees over a longer period of time. For SAP, that means income from such services will be spread over more years in smaller chunks but will be easier to predict.

SAP entered the cloud business in 2012 after spending $7.7 billion on buying internet-based computing companies Ariba and SuccessFactors.

The company said on Tuesday that it needed to invest more in the business, but declined to give any details. SAP has not disclosed how much it has spent in total so far.

"Next year's cashflows might be spent on acquisitions of cloud companies. The aim of reaching 3-3.5 billion in cloud revenues by 2017 will hardly be achieved without acquisitions," said Warburg Research Andreas Wolf, who rates SAP stock as "hold".

Co-Chief Executive Bill McDermott told reporters he did not exclude more acquisitions but said SAP aims to grow by itself for now. "When an acquisition makes sense, we will do it," he said.

SAP shares pared earlier losses to trade 0.8 percent lower at 1211 GMT, underperforming a 0.3 percent stronger German blue-chip DAX index .GDAXI.

The company expects total revenue to rise to at least 22 billion euros by 2017, of which 3-3.5 billion is expected to come from the cloud business compared with 787 million euros last year. SAP made 16.9 billion euros in total revenue in 2013.

"Revenue from cloud services does not come up front. It is a subscription cycle with recurring revenues. So three years down the road, revenues and profits will climb based on that subscription model. But in the short term it lowers your margin rate," McDermott said.

He said SAP wants 65 percent of its revenue to be recurring by 2017. That compares with about 50 percent now.

For 2014 SAP expects operating profit at constant currencies of 5.8-6.0 billion euros, up from 5.51 billion last year.

SAP published preliminary results on January 10.

(Additional reporting by Ilona Wissenbach; Editing by Erica Billingham)

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