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SAP Cuts Forecast as Cloud Shift Weighs on Profit


SAP SE cut its full-year earnings forecast as software customers move to applications delivered through the Internet, a trend that’s brought sweeping changes in the technology industry.

The world’s largest maker of business-management software said today its 2014 operating profit excluding some items will be in a range of 5.6 billion euros ($7.1 billion) to 5.8 billion euros. That compared with an earlier projection for as much as 6 billion euros. Third-quarter profit on that basis rose 4.6 percent to 1.36 billion euros, trailing the 1.37 billion-euro average of estimates compiled by Bloomberg.

Earnings are taking a hit as Chief Executive Officer Bill McDermott accelerates sales of cloud-computing tools that businesses access online rather than store on their own computers. That means clients pay SAP more money over time rather than at the start of a contract, reducing near-term profit. The CEO’s bet is that he can grab market share from competitors such as Salesforce.com Inc. (CRM) and Workday Inc. (WDAY) by offering businesses a more complete software lineup.

“Due to our aggressive shift to the cloud we expect to have a little less upfront and more subscription revenue,” McDermott said on a conference call with reporters. Although that will “pressure” profit margins in the short term, SAP can be more profitable over the long run because of the shift, he said.

Shares of SAP fell 3.4 percent to 52.17 euros at 9:10 a.m. in Frankfurt, giving the Walldorf, Germany-based company a market value of 66.4 billion euros. The stock had lost 13 percent this year through last week, putting it in the bottom third of performers in Germany’s 30-stock DAX Index.

Margin ‘Uncertainty’

McDermott is making acquisitions to bolster SAP’s position in cloud computing, reflecting a rapid shift in the way companies acquire technology. SAP supplies software that manages finances, manufacturing and other operations for hundreds of thousands of businesses.

“SAP has a sticky, high-margin customer base that’s very cash generative,” Paul Moran, head of research at Aviate Global in London, said before the announcement. At it moves those clients to the cloud, “the uncertainty now is what’s going to happen to margins in the next few years.”

Last month, SAP agreed to buy Concur Technologies Inc. for $7.4 billion in its biggest ever acquisition, to expand in cloud computing.

Chief Financial Officer Luka Mucic said SAP is taking steps to rein in the costs of delivering software from giant data centers, including an Oct. 14 deal with International Business Machines Corp. to manage some of SAP’s cloud software.

Euro Weakness

New sales of traditional on-premises software licenses, an indicator of future revenue potential, fell about 3 percent to 952 million euros. Analysts on average had estimated 967 million euros. Total non-IFRS revenue in the third quarter rose 5 percent to 4.26 billion euros. Analysts predicted sales of 4.23 billion euros.

SAP’s executives said currency exchange rates will probably be favorable for SAP in the fourth quarter and beyond after having hurt results in the past.

The euro fell almost 8 percent against the dollar during the third quarter. It ended the period at $1.26, compared with $1.35 a year earlier. A weaker euro translates into more revenue when SAP books overseas sales back into its home currency.

The proliferation of software on tap via remote servers and mobile devices connected to those applications has brought changes in the technology industry.

Hewlett-Packard Co. (HPQ) said on Oct. 6 that it plans to split into two companies: one producing personal computers and printers, and the other supplying data-center equipment. SAP rival Oracle Corp. (ORCL) named Mark Hurd and Safra Catz as CEOs last month to succeed Larry Ellison, who will become chairman and concentrate on products, including a platform for customers to run cloud applications.

(Source: Bloomberg)