SAP is still struggling to adapt to life in the Cloud

January 20, 2015, 12:34 PM UTC
Inside SAP AG Headquarters As Largest Maker Of Business-management Software Targets Cloud Push
The SAP AG logo sits on display inside an office in the business-software maker's headquarters in Walldorf, Germany, on Monday, Feb. 24, 2014. SAP AG co-Chief Executive Officer Bill McDermott, targeting the growing online software market, said he plans to tap a greater portion of customers' spending. Photographer: Krisztian Bocsi/Bloomberg via Getty Images
Photograph by Krisztian Bocsi — Bloomberg via Getty Images

Europe’s largest software maker SAP SE’s (SAP) troubles with the Cloud continue.

The Walldorf, Germany-based company was forced into its second profit warning in four months Tuesday after again being surprised by the speed at which customers want to move away from traditionally packaged software and get it from the internet instead.

SAP had already cut its profit forecast for 2014 in October, due to the high costs of setting up cloud-based infrastructure to meet with customer demand. But on Tuesday, it said that the cost of migrating its services to Cloud-based delivery would affect profits for the next two years.

It said it operating profit margin in 2017 to be no more than 33.3%, having promised 35% earlier. It now says it will make between €6.3-€7.0 billion in operating profit on €21-22 billion in revenue next year. In addition to Cloud-generated issues, the company is also still absorbing the cost of integrating Concur, an expense-processing software program that it bought for $7.3 billion last year, its largest ever acquisition.

Like its traditional rivals Oracle Corp. (ORCL) and IBM Corp. (IBM), SAP is struggling to migrate its services to the cloud to compete with pure cloud-based companies such as (CRM)

However, the company still expects the drop in profitability to be temporary. It said its revenue from cloud subscriptions and support should exceed software license revenue by 2018, reaching “a scale…that will clear the way for accelerated operating profit expansion.”

Delivering software via the Internet requires higher initial costs and revenue is realised over time, rather than upfront as for packaged software, weighing down short-term margins. Cloud delivery makes data easier to manage, analyse and use not just on computers but also mobile phones and other devices.

“We are in a market-share game,” Reuters reported SAP Chief Executive Bill McDermott as saying Tuesday. “The more users and the more scale and reach you get, ultimately the more you win on the back-end when you have high renewal rates.”

Looking further ahead, SAP said it is targeting operating profit, excluding special items, of between €8-€9 billion euros in 2020 on revenue of €26-28 billion.

Reuters quoted chief financial officer Luka Mucic as saying that the company had ruled out any more large acquisitions over the next few years in order to concentrate on cutting its leverage and increasing dividends to shareholders.

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