SAP raises guidance on cloud growth

Frankfurt

GERMANY'S SAP announced forecast-beating results on Thursday and raised its outlook as growth in the cloud accelerated, yet its shares fell as analysts focused on weakness in its legacy software licences business.

Opening declines of up to 3.7 per cent tempered chief executive Bill McDermott's bullish outlook as he told reporters SAP's new sales software suite, announced last month, was "taking the market by storm".

SAP, which with a market value of US$150 billion is Europe's most valuable technology company, raised its revenue and operating profit targets for the full year. It also upped its forecast for the cloud in 2020 after segment revenues grew by 40 per cent, at constant currency, in the second quarter.

"We are increasing guidance as a signal that a new wave of growth has been unleashed," Mr McDermott told reporters.

The comments were upbeat even by the standards of the 56-year-old New Yorker, who said that in a time of mounting trade tensions SAP offered the ideal product range for company bosses who need to reconfigure supply chains on the fly.

But investors didn't immediately share his enthusiasm, with SAP shares falling sharply in early Frankfurt trading on concern that the company's legacy software licence business was underperforming, before paring losses to trade down 1 per cent.

Analysts at Goldman Sachs highlighted a decline in software licence revenues as a negative surprise, while maintaining their "buy" rating on the stock.

"Investors will weigh lower than expected licence growth and muted underlying margin expansion against continued momentum in cloud," the analysts wrote, predicting initial share weakness after a period of strong outperformance.

Analyst Knut Woller at Baader Helvea said, by contrast, that major investments in transforming SAP were paying off.

"We are entering a phase of accelerating profit growth in the coming years after the years of investments," said the analyst, who also has a "buy" rating on SAP.

Walldorf-based SAP has been undertaking a shift to subscription-based business software services hosted on remote servers, away from its old on-premise model that generates big up-front licence fees and remains by far the bigger operation.

The cloud transition began with S/4HANA, a suite designed to handle back-office functions like supply-chain management or finance, and which now counts 8,900 customers - up 41 per cent from a year earlier.

Last month, Mr McDermott announced a major push into the sales software market by launching C/4HANA, a suite that will bundle its Customer Relationship Management (CRM) products and seek to challenge market leader Salesforce.

Gartner Research forecasts that the CRM market will grow at an annual rate of 13.5 per cent to US$82 billion by 2022, double the pace of SAP's core Enterprise Resource Planning (ERP) segment that it sees reaching US$48 billion by that time.

He said C/4HANA would be available as a fully integrated suite within nine months and forecast triple-digit growth in the CRM business, which SAP plans to break out as a separate segment in its financial reporting.

Combining SAP's back-office strengths with outward-facing sales and marketing functions gives companies unique insight into their customers' wishes and their ability to meet them, he added.

"We are taking the market by storm," said Mr McDermott, describing the two products as "a combination that nobody else has".

SAP reported a 12 per cent gain in non-IFRS operating profit in the second quarter, at constant currency, on non-IFRS revenues that grew by 10 per cent - both ahead of expectations in a Reuters poll of 14 analysts.

It raised the lower end of its forecast ranges for full-year growth in revenues and operating profit by half a percentage point to 6-7.5 per cent and 9-11 per cent, respectively.

Revenues are now in a range of 21.025 to 21.250 billion euros (S$33.45 to S$33.81 billion)

Cloud subscriptions and support are now seen growing by 34 to 38 per cent, compared to 31 to 36.5 per cent previously. In money terms, cloud revenues are seen in a range of 5.05 to 5.2 billion euros.

For 2020, SAP now expects non-IFRS cloud subscriptions and support revenue to be in the range of 8.2 to 8.7 billion euros - up from earlier guidance of 8 to 8.5 billion euros. The company left other mid-term guidance unchanged. REUTERS