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 The German company is in industry race to deliver business planning
software via cloud-based internet services, rather than as packaged
software running on customers' in-house computers. But it says this
move will force it to backtrack on long-promised, oft-delayed margin
gains that had been a big investor draw.
SAP is battling alongside established U.S. software makers such as
Oracle, IBM and Microsoft to boost internet-based software sales and
fend off pure cloud-based rivals Salesforce.com, Workday and, less
directly, industry pacesetter Amazon.com's Web unit.
"We are in a market-share game," SAP Chief Executive Bill McDermott
told reporters. "If you can combine a healthy cloud-growth business
with high renewal rates, meaning a customer is very loyal ... you
can really expand the margin."
Shares of SAP dropped 4.4 percent, the biggest losers in Germany's
blue-chip DAX index. The stock has fallen more than 9 percent in the
past year, underperforming the STOXX Europe 600 Technology Index, up
more than 10 percent.
SAP, one of Europe's last big tech companies competing on a global
scale, said it expects 2017 operating profit of between 6.3 billion
euros ($7.3 billion) and 7 billion, excluding special items, on
revenue of 21 to 22 billion. Its prior forecast was for operating
profit around 7.7 billion euros.
At the midpoint of those ranges, the operating margin for 2017 would
be just under 31 percent, well below a 35 percent target set a year
ago. Last January, SAP pushed back its target to deliver a 35
percent margin by 2015 for two years and has now effectively dropped
that goal in favor of boosting cloud sales.
Analysts at investment bank Morgan Stanley told clients SAP's
five-year outlook could be decoded as trying to be conservative
after 18 to 24 months of struggling to meet or cutting targets. Or
on a more pessimistic interpretation, that cloud growth meant lower
margins for the foreseeable future.
CLOUDY PROFITS
"The bear (negative) view will be that lower margins (are) the new
reality and SAP is confirming that view," wrote Morgan Stanley
analyst Adam Wood, who rates the stock "overweight" but said he
would be revising his earnings estimates downwards.
Research firm IDC predicts the cloud software market will have a
compound annual growth rate of 21.3 percent over the next five
years, five times faster than classic packaged software. Cloud
delivery makes data easier to manage, analyze and use, not just on
computers but also mobile phones and other devices.
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But delivering software via the Internet requires higher initial
costs and revenue is recognized over time, rather than upfront as
for packaged software, squeezing short-term margins.
SAP said it expects cloud software subscriptions and support revenue
to approach the level of revenue from its traditional licensed
software business by 2018.
Looking further ahead, SAP said it is targeting operating profit,
excluding special items, of between 8 and 9 billion euros in 2020 on
revenue of 26 billion to 28 billion.
SAP had warned in September that it had to evaluate its mid-term
targets after buying U.S. expenses software maker Concur for $7.3
billion, its largest merger deal ever, which it said would speed up
its transition to cloud computing.
Last week, the company said 2014 cloud software revenue rose 45
percent to 1.1 billion euros, but this growth had cut margins,
resulting in just a 1 percent rise in operating profit.
Chief Financial Officer Luka Mucic ruled out further large
acquisitions over the next few years in order to concentrate on
cutting its leverage and increasing dividends to shareholders.
(Additional reporting by Ilona Wissenbach in Walldorf; Writing by
Eric Auchard in Frankfurt; Editing by Georgina Prodhan and David
Holmes)
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