SAP raises 2017 financial targets as cloud shift presses margins

Reuters News
Posted: Jan 22, 2016 3:19 AM

By Harro Ten Wolde and Eric Auchard

WALLDORF, Germany (Reuters) - German software maker SAP on Friday raised its 2017 outlook for revenue and profit to the upper end of expectations, highlighting its progress in turning itself into an Internet-based, cloud supplier from a packaged software firm.

Europe's largest software maker said it expected 2017 revenue in the range of 23.0 billion to 23.5 billion euros ($24.91 billion to $25.45 billion), at or above the average analyst expectation of 23.01 billion, according to Thomson Reuters I/B/E/S data.

SAP said it is now targeting a non-IFRS operating profit in the range of 6.7 billion to 7.0 billion euros. The midpoint of that range, 6.85 billion, is slightly below the 6.905 billion mean estimate among analysts, according to Thomson Reuters data.

On the same basis, a year ago, SAP had forecast total 2017 revenue of between 21 billion and 22 billion euros and operating profit in a range between 6.3 billion and 7.0 billion euros.

The new outlook implies an operating margin around 29.5 percent, well below the historic 35 percent margin SAP enjoyed when it focused on selling packaged software, rather than faster growing, lower-margin cloud software as it does now.

Analysts had expected a 2017 operating margin of 30 percent.

Chief Financial Officer Luka Mucic said operating margin trends would depend on how fast the cloud business grew relative to the classic packaged software business.

"There is no structural reason why operating margins of our cloud business should not exceed those of our classical on-premise business," Mucic told journalists on a conference call, but emphasized this was unlikely to happen until after 2020.

Cloud-based software subscriptions incur smaller upfront license fees, and are thus less profitable in the short term, but SAP is counting on on-going subscription payments to bring in higher revenues, and eventually higher profits, over time.

SAP's newer cloud products include software used to manage corporate travel, procurement and contingent contract workers.

Last week, the German software maker pre-announced better-than-expected 2015 results, fueled by strong year-end renewals by existing software license customers. But it stuck a cautious tone in its outlook for 2016.

(Additional reporting by Ilona Wissenbach; Editing by Jonathan Gould and Clarence Fernandez)