Europe’s largest software maker, SAP, continues to struggle in a market currently dominated by cloud-based rivals. The German company was forced into a second warning about profits in four months. The company was surprised to discover that customers opted for internet-based software over packaged software.
SAP struggles due to shift toward cloud-based software
Late last year, SAP SE (ADR) (NYSE:SAP) had already cut its profit forecast thanks to the expense of setting up cloud-based infrastructure. Today the company explained that the costs of moving services to cloud-based servers will likely affect profits over the next two years. According to SAP, operating profit margins in the next two years will be no more than 33.3%, although it promised 35% earlier.
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The company’s management now believes they will accrue anything between €6.3 billion and €7.0 billion in operational profits on €21 billion to €22 billion in sales over the next year. It is important to note that cloud-based services are not the only issue affecting SAP. The software maker is still absorbing expenses which came from acquiring Concur. Last year, SAP bought the program for $7.3 billion in what was its largest acquisition.
Other software makers, including Oracle and IBM, also struggle to compete with completely cloud-based rivals like SalesForce.com.
A brighter outlook for the future
Fortunately, SAP SE (ADR) (NYSE:SAP) remains upbeat despite the decline in profits. The company’s management believes revenues should exceed expectations by 2018 with cloud subscription services and support. The company’s chief executive, Bill McDermott, summed it up, “We are in a market-share game. The more users and the more scale and reach you get, ultimately the more you win on the back-end when you have high renewal rates.”
Delivering software through the internet requires a higher upfront cost with revenues following at a later time. This is very different from packaged software, which usually accrues upfront revenue. The major appealing factor for cloud software services is that it makes data easier to analyze and manage on a variety of platforms, including mobile. This is key for the ever-growing mobile market.