SAP profits miss forecasts as cloud shift inflates costs

SAP, Europe's most valuable technology company, missed market expectations for third-quarter profit as it invested heavily to shift business customers into cloud computing. The German software maker is in the midst of a transition to offering cloud-based services to its business customers and management had flagged that 2017 would see a trough in profit margins as it invested in datacenters and redeployed staff.
SAP shares fell 1.6 percent in early Frankfurt trading, even as management slightly raised its full-year guidance for revenues and core profits, and forecast a recovery going into next year. The company has a "very good shot" at stabilising margins in the fourth quarter, Chief Financial Officer Luka Mucic told a conference call with reporters. "Going into 2018 we see a margin turnaround."
Revenue for the German business planning software provider grew 8 percent to 5.59 billion euros ($6.6 billion) from a year earlier, falling short of the mean forecast of 5.71 billion euros from 16 analysts surveyed by Reuters. Core profit excluding special items rose by 4 percent to 1.64 billion euros at constant currency rates, SAP said, below the 1.69 billion euros expected by analysts in a Reuters poll.
The euro's strength sliced 4 percentage points off core profits, which was flat after taking currency moves into account. Analysts at Baader Helvea said they expected currency headwinds to continue for the next three quarters. The company nudged up guidance for the full-year core operating profits to 6.85-7.0 billion euros and said 2017 total revenue would range from 23.4-23.8 billion euros, marking year-to-year growth around 6-8 percent, excluding currency effects.
At Wednesday's close, the company was valued at $137 billion, and its shares remain near record highs set in June. Cloud subscriptions and support revenue rose 27 percent in the third quarter to 938 million euros, excluding currency effects, compared with the 29 percent analysts had expected, on average.
This was offset by its classic software license and support business revenue, which rose 4 percent to 3.72 billion euros, slightly above the 2.2 percent growth rate expected by analysts. Chief Executive Bill McDermott was bullish for the fourth quarter: "We are gaining share against our competitors. SAP is growing faster in the cloud - and we are doing it organically," McDermott said during a conference call, contrasting the acquisition-fuelled growth of rivals.