SAP share price down, cuts mid-term profit outlook on cloud shift

Germanys SAP SE announced on Tuesday a reduction of its 2017 operating profit target, citing lower margins during the companys transition period to cloud-based products.

The largest business software company in Europe said it now expects operating profit for 2017 to range between €6.3 billion to €7 billion on a revenue of €21 billion to €22 billion, implying a profit margin of up to 33.3%.

The companys previous projection for 2017 estimated a profit margin of 35% with a revenue of at least €22 billion, which would have resulted in an operating profit of up to €7.7 billion. SAP utilizes its own accounting method, which does not fall in line with the international financial reporting standards.

Under Chief Executive Officer Bill McDermott, SAP has poured more than $20 billion on acquisitions in order to strengthen its cloud business so it could better compete with old and new rivals.

According to technology researcher IDC, the cloud market is projected to grow to nearly $83 billion, or twice its current size, in 2018 as more corporate customers would rely on cloud services.

SAPs switch to cloud technologies would hurt near- and mid-term profit growth, the company projected. Revenue would be delayed as the transition forces to company to rely on subscriptions fees rather than one-time payments.

“We expect cloud subscriptions to exceed software license revenue in 2018,” Mr. McDermott said.

SAP also released figures representing its 2014 performance. Net income for the twelve months ended December 31 stood at €1.3 billion, slightly lower than the €1.32 billion reported in 2013. However, the results surpassed the €1.26 billion estimated by analysts polled by The Wall Street Journal.

The company said that in the fourth quarter of 2014 its revenue climbed 7% helped by more subscriptions to the companys cloud services, however, profit for the quarter fell 3%.

For the full-year of 2015 SAP projected operating profit to range between €5.6 billion to €5.9 billion, while in 2020 operating profit was estimated to be around €8 billion to €9 billion. The figures were based on the companys own accounting method.

“We will continue to push relentlessly toward a much more predictable business model and are once again raising our cloud ambition to grow 7X from 2014 through 2020,” Mr. McDermott said.

SAP SE lost 0.10% on Monday and closed at €57.51 in Frankfurt. On Tuesday the stock fell 3.86% to €55.29 at 08:54 GMT, marking a one-year decrease of 8.86%. The company is valued at €70.72 billion.

According to the Financial Times, the 33 analysts offering 12-month price targets for SAP have a median target of €63.00, with a high estimate of €84.00 and a low estimate of €45.00.