By Harro Ten Wolde
FRANKFURT (Reuters) - German business software maker SAP warned on Thursday that it expects the negative impact of the strong euro to worsen after reporting lower than expected first-quarter results.
The warning comes as SAP grapples with a short-term squeeze from its shift to web-based cloud computing, prompting it to push back its profit target as it waits for subscription income to gather pace and increases investment to keep up with the fast-growing market.
Along with many other European companies that rely on revenues from abroad, SAP has been hit by the climbing euro. The currency has gained 2.3 percent on the U.S. dollar and nearly 6 percent against Japan's yen in the past six months.
SAP said its software and software-related service revenues would fall 6 percentage points in the second quarter if exchange rates remain at March levels, while the hit for operating profit excluding special items would be 8 percentage points.
That compares with a first-quarter impact of 5 percentage points on both software and software-related service revenues and operating profit.
For the full year, SAP expects exchange rates to slice 4 percentage points from revenue and 5 percentage points from operating profit, though outgoing finance chief Werner Brandt said the company's global presence would give it opportunities to balance the currency effect.
The currency warning followed what one Frankfurt-based trader described as "a weak report" on the company's first quarter.
Its 2 percent rise in operating profit, excluding special items, to 919 million euros, missed even the most pessimistic forecast of 924 million euros in a Reuters poll of analysts. The average forecast was 961 million euros.
Shares in SAP fell 3.2 percent by 1056 GMT (6.56 ET) and are down almost 9 percent this year, against a 5 percent decline for the European technology index.
The longer-term picture from the move to cloud computing looks more encouraging, however.
Competing with global rivals such as IBM and Oracle in the race to meet surging demand for web-based software, SAP said revenues from its cloud business jumped by more than a third to 221 million euros out of total first-quarter revenue up 2 percent at 3.7 billion euros.
The global cloud services market grew by almost a fifth last year to an estimated $131 billion, research firm Gartner says, while IBM Markets Intelligence says the market could be worth $200 billion by 2020.
SAP customers, such as Coca-Cola, McDonald's and Vodafone, are moving to cloud computing because there are no upfront costs for program licenses, dedicated hardware or installation, making them less vulnerable to economic downturns.
SAP entered the cloud business in 2012 after spending $7.7 billion - about 10 percent of its current market capitalization - to buy internet-based computing companies Ariba and SuccessFactors.
The company expects last year's total revenue of 16.9 billion euros to rise to at least 22 billion euros by 2017, with the cloud business contributing up to 3.5 billion euros.
Cloud operations accounted for 787 million euros of last year's revenue and analysts have suggested that SAP will need to make more acquisitions to reach its 2017 goal.
Chief Executive Bill McDermott has indicated that he would look at potential deals but on Thursday said he was not in "hot pursuit" of possible targets.
At constant currencies, SAP still expects full-year operating profit of between 5.8 billion euros and 6 billion euros, against 5.51 billion euros last year.
McDermott said the company achieved a solid performance in Europe despite uncertainty in Russia, with the Ukraine crisis having a dampening effect on its activities in the region.
"We do see that some things are moving slower there and they are growing less fast than they were, but nothing is lost and we expect the business to be restored over time," he said. ($1 = 0.7243 Euros)
(Editing by Maria Sheahan and David Goodman)