SAP lifts sales outlook, buying back stock on cloud growth
SAP raised its outlook for revenue after reporting a better-than-expected 10 percent quarterly sales jump, as it kept attracting customers to a new version of its flagship software.
The German software firm is now projecting sales of 23.3 billion euros ($26.8 billion) to 23.7 billion euros for the year, based on constant currencies and up about a 100 million euros on both ends of its previous prediction. And it’s raising its outlook on cloud and software revenue for the year to 6.5% to 8.5% growth, up from 6 to 8% . SAP also announced a share buyback of up to 500 million euros this year.
Chief executive officer Bill McDermott is attracting new customers through a major update of SAP’s accounting, manufacturing and logistics software called S/4 Hana. The system had 6,300 users at the end of June, an acceleration of sales compared with 5,800 customers at the close of March, when growth had tailed off. S/4 lets businesses run software tasks on their own machines, or in a cloud-computing arrangement hosted by SAP or one of its partners.
Second-quarter revenue rose to 5.78 billion euros, SAP reported Thursday, compared with the 5.67 billion-euro estimate of analysts surveyed by Bloomberg. Operating profit, excluding share-based compensation, amortization and other charges, was 1.57 billion euros, compared with the average estimate of 1.58 billion euros.
SAP is investing heavily in research and development and sales of its business apps, data analysis and Internet of things software, which means profit – up 4% – isn’t growing nearly as quickly as sales. It hired nearly 3,000 people in the first half of the year.
Profit margin at the Walldorf, Germany-based company remained suppressed as it spends to build cloud-computing capacity. Operating margin was 27.2 percent, compared to analysts’ 28.1 percent average estimate. Investors are looking for margins above 30 percent starting next year.
“If you invest in the cloud, you expand quickly – you will look at a margin impact,” McDermott said on a call with reporters. “But here’s the good news. Because we did the hiring in the first half of the year we’ll get the leverage of that in the back half” and in 2018.
While it raised its outlook on overall revenue, SAP stuck to a forecast first issued in January for 2017 operating profit of 6.8 billion euros to 7 billion euros. It expects 2017 cloud subscriptions and support revenue of between 3.8 billion euros and 4.0 billion euros at constant currencies, up as much as 34 percent from 2016’s 2.99 billion euros.
Software license sales, a measure of revenue potential tied to traditional on-premise software were little changed at 1.09 billion euros, compared with UBS analyst Michael Briest’s estimate of 1.04 billion euros. Cloud subscription and support revenue rose 29 percent to 932 million euros, compared with UBS’s estimate of 958 million euros and Vara Research’s 923 million to 996 million euros.
Cloud computing, software licenses, and support revenue in Europe, the Middle East and Africa rose 9 percent, lifted by Germany and Russia. Those sales were up 8 percent in the Americas and 13 percent in the Asia-Pacific region, helped by demand in China, Japan and Australia.
SAP last week said it had suspended its South African management team, pending an investigation into news reports of a payment to a company linked to the son of the country’s president.
Shares of SAP have lost 2 percent since its first-quarter report April 25, while Germany’s 30-stock Dax Index was largely unchanged.
Rival Oracle Corp.’s shares reached a record closing high in June after the company reported a 58 percent jump in cloud software sales and a fourth-straight period of revenue gains for its fiscal fourth quarter that ended in May. IBM on Tuesday reported sales that missed estimates including a more than 5 percent decline in a key software and service unit.
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