German business software group SAP SE (ADR) (NYSE:SAP) announced on Monday, October 20th, that profits were off slightly as the firm positions itself for a major push into the cloud. The company is now projecting a full-year operating profit of €5.6 billion to €5.8 billion, compared with earlier guidance of €5.8 billion to €6 billion and €5.5 billion in operating profits in 2013.
SAP cloud revenue up
Despite the slowdown in overall profits, SAP increased its projections for cloud subscriptions and support revenue to between €1.04 billion and €1.07 billion. The firm had earlier projected a range of €1 billion to €1.05 billion at constant currencies, up from the €757 million in profits banked in 2013.
Shifting the business model away from installing software products directly onto customer devices and offering access to software via the cloud requires expensive investments in data centers and web-based sales and support operations.
SAP believes these expensive investments will pay off in the long run as the cloud will drive more repeat business. The new business model will almost inevitably hit profits for the first few quarters as cloud income is spread out over time, unlike installed software where the revenues are nearly all up front.
In an interview with the Financial Times on Monday, Luca Mucic, chief financial officer of SAP SE (ADR) (NYSE:SAP), said he was “extremely satisfied” with SAP’s growing cloud presence, but did concede the transition would put margins “under some pressure” in the short term.
Mucic explained: “[But] we do not plan for the short-term to optimize margins but rather we drive growth as far as we can, as in the long term profitability will be higher.”
In reference to a report in the German media claiming SAP’s year-end orders were under projections, Mucic said the business remained “as healthy as you would expect it to be entering the fourth quarter”. He called the firm’s performance in Europe “robust”.
Walter Pritchard of Citi Research pointed out that “the magnitude of the cut to operating profit for the year is more than we would have expected given a more modest raise to cloud revenue”.