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SAP Meets Cloud Sales Expectations, and Then Some

January 22, 2016, 5:43 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

This story was updated Jan. 22 to clarify the customer count numbers for SuccessFactors.

SAP convinced big businesses to sign up for cloud subscriptions to its business applications faster than anticipated during 2015—with a 103% increase in bookings to €883 million (or $955 million).

But that growth is putting pressure on operating margins, which slipped to an estimated 25% compared with the 35% that SAP (SAP) used to earn traditionally, according to the company’s financial results.

SAP executives say that’s to be expected, since the cloud model spreads out fees, which reduces short-term profits. They’ve already prepared investors for that eventuality, projecting margins in the 30% range during the multi-year transition period. “The margin is really uninteresting to me,” SAP’s CFO Luka Mucic said during a call to discuss the results. “There’s no reason cloud margin shouldn’t reach the level of on-premises software, but that will take substantially longer than this decade.”

Plenty of companies still prefer to buy traditional licenses for SAP’s software. That portion of the German software giant’s revenue generated 13% growth last year, reaching €14.9 billion (or about $16.1 billion).

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When can we expect SAP to generate more value from cloud sales than traditional software licenses? That crossover could happen sometime in 2017. By that year, SAP expects revenue for cloud subscriptions and support to reach 63% to 65% of total revenue.

SAP’s cloud momentum inspired the company to boost its 2017 revenue projection to €23 billion to €23.5 billion (or $24.9 billion to $25.4 billion). Its cloud subscriptions and support revenue should reach €3.8 billion to €4 billion (or $4.11 billion to $4.33 billion) during that timeframe.

The fastest growing piece of SAP’s cloud business last year centered on the “business network” services provided by Concur (travel and expenses) and Ariba (procurement and supply chain services). Bookings reached €309 million ($334 million) in 2015, up 187%.

SAP wants to make life easier for business travelers.

Another big part of SAP’s cloud portfolio, the “Employee Central” component of the SuccessFactors human resources app, surpassed the 1,000-customer mark during the fourth quarter. SAP also reported more progress for S/4HANA, its next-generation suite of business applications. More than 2,700 SAP customers are using the technology, which means growth doubled quarter over quarter last year.