Cloud Growth Weighs Down SAP Profits

SAP has reported strong growth in its cloud-based products during the second quarter and first half of its financial year, but it said the expansion of lower-margin cloud services meant profits would be at the low end of analysts’ expectations.

The software firm, along with the likes of IBM, Microsoft and Oracle, is investing heavily in building up its subscription-based business in the face of competition from cloud-only rivals such as Salesforce.com and Workday.

The company said this investment is paying off, with second-quarter cloud subscriptions and support revenue rising 129 percent year on year to €555 million (£387m) and new cloud bookings up 162 percent in the second quarter to €203 million (£142m). Revenues from SAP’s mainstay software licences grew 13 percent to €3.51 billion (£2.45bn).

Cloud growth

Cloud and software revenues grew 21 percent to €4.06 billion (£2.83bn), while operating profit grew 13 percent to €1.39 billion (£970m) – placing it at the bottom of analysts’ estimates, which ranged from €1.39 billion (£970m) to 1.45  billion (£1bn), according to a Reuters poll.

When currency conversion effects weren’t taken into account, operating profit rose only 1 percent, .Operating margin dropped 28 percent from 29.8 percent year-on-year, reflecting investment in the cloud.

The rising cloud income helped SAP beat analysts’ revenue expectations, however, with total revenue rising 20 percent to €4.97 (£3.47bn). The company said it would stand by its outlook for 2015 operating profit of between €5.6 billion (£3.47bn) and €5.9 billion (£4.11bn), which would be up to 5 percent higher than last year’s profit.

SAP said it saw “solid” growth in cloud and software revenues for Germany, France and the UK and 36 percent cloud and software revenue growth in the Americas, with cloud subscriptions and support revenues rising by 141 percent and new cloud bookings nearly tripling, driven by US sales.

“Our business is thriving because we have the most complete vision for how to make this transition to digital business a simple one,” said SAP chief executive Bill McDermott in a statement.

SAP ‘scared’ of Salesforce

Outspoken Salesforce.com chief executive Marc Benioff said in an interview in Munich last month that he believes SAP is “scared” of his company, and disclosed that the German firm, Europe’s largest software maker, had rejected a deal that would have improved technical compatibility between the companies’ products.

“We offered an olive branch to them,” Benioff said. “I’ve told Bill I’ve wanted to have a deeper relationship with them. Yes we’re competitors, we should also be partners. He’s scared of Salesforce.”

Benioff said at the time that Salesforce plans to invest more than $1 billion (£640m) in Germany over the next five years.

In May the company raised its revenue forecast as it reported its first profit in seven quarters.

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