October 18, 2018 / 2:57 PM / in a month

SAP plays down margin fears, prioritises growth: CFO

WALLDORF, Germany (Reuters) - Faster than expected growth in its cloud business has pressured margins at German business software company SAP, but for Chief Financial Officer Luka Mucic that’s a good problem to have.

FILE PHOTO: The logo of German software group SAP is pictured at its headquarters in Walldorf, Germany, May 12, 2016. REUTERS/Ralph Orlowski/File Photo

Operating margins expanded by only 10 basis points in the third quarter, SAP said on Thursday, disappointing some investors and sending shares in Europe’s most valuable tech firm down by more than 5 percent by 1355 GMT.

That reflects the relative outperformance of new services hosted on remote servers, which have required heavy investment, over SAP’s more profitable legacy software licence business, Mucic told Reuters in an interview. He added that the best answer to that challenge was to focus on growth and efficiency.

“In the long term, the cloud is the healthier business model because it is easier to plan, because it has a higher total lifetime value,” he said in an interview at SAP’s headquarters in Walldorf.

“I am very happy with this development and would never try to hold back the cloud business to optimise our margins in the short-term.”

SAP raised its outlook for revenues and profits this year after reporting a 41 percent jump in cloud revenues in the third quarter.

MARGIN PROGRESSION

Non-IFRS operating margins, at constant currencies, were 29.4 percent in the third quarter. At a capital markets day in March the company forecast they would expand to 30.7 percent in 2020, the time horizon for its mid-term strategy.

Mucic confirmed that capex would likely peak this year at around 1.6 billion euros ($1.84 billion) as SAP partners with ‘hyperscale’ cloud providers like Microsoft Azure or Amazon Web Services for hosting.

“Next year there will be a big positive step-change regarding efficiency in the cloud because we are about to complete a multi-year process to shift significant cloud assets onto our own database technology,” he said.

Total savings from the migration would run to the low-triple-digit millions of euros, Mucic said, confirming existing guidance to analysts.

The company is also ‘long’ data centres in the United States following recent acquisitions, and will save money by consolidating their infrastructure at a site in Colorado, Mucic added.

SAP plans to unveil a new mid-term strategy at its next capital markets day in February in New York. Mucic said it would probably have a time horizon through to 2023.

“You can be sure to see plenty of optimism from SAP,” he said, declining to go into detail.

($1 = 0.8701 euros)

Reporting by Douglas Busvine; Editing by Kirsten Donovan

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