Sap cuts operating profit outlook

Software firm says customers shifted to cloud faster than expected

German software maker Sap cut its 2014 operating profit forecast as customers shifted faster than expected to products delivered over the internet, delaying when those orders can be booked as sales.

Company executives said the accelerating switch from packaged software to so-called “cloud” software would shave about €200 million off a previous profit forecast, but that cloud contracts would bolster sales and profit in the future.

The corporate software industry is undergoing a rapid shift from packaged software which customers run on their computer systems to software run over the internet in remote datacentres, making data easier to manage, analyse and use on mobile phones.

Sap said it now expects 2014 operating profit, excluding some special items, of €5.6 billion-€5.8 billion ($7.1-$7.4 billion), down from €5.8-€6.0 billion previously.

Packaged software sales are recognised immediately, while cloud orders are booked as sales over the life of multi-year contract, which officials said largely explained its new outlook. Sap shares fell 4.2 per cent, making it the worst performer in Germany’s blue-chip Dax index and leading European technology stocks lower.

Analysts said there was concern that a rising proportion of cloud sales would lower the company’s profitability.

"Growth dynamics are increasing, but at the cost of margins as the cloud cannibalises Sap's licence business," said Mirko Maier, analyst at Germany's Landesbank Baden-Wuerttemberg, who has a "buy" rating on Sap shares.

Sap specialises in providing a mix of business applications for companies from accounting to human resources to supply chain software, but has come under pressure from rivals that offer cheaper services over the internet, or in the “cloud”.

Europe's largest software firm aims to boost the proportion of its software sold via the cloud to compete with arch US- rival Oracle Corp and purely cloud-based competitors such as Salesforce. com and Workday Inc. "De-acclerating in the cloud would make absolutely no sense," Sap finance chief Luka Mucic said on a conference call. "We are hitting the gas pedal as much as we can," he said. "We will then see the positive returns in the longer run." – (Reuters)