October 20, 2015 / 5:23 AM / 2 years ago

SAP says could beat targets on cloud's silver lining

A man cycles past the SAP logo at its offices in the CityWest complex, Dublin September 5, 2013. REUTERS/Cathal McNaughton

FRANKFURT (Reuters) - Europe’s biggest software company SAP said it could accelerate past full-year financial targets in the fourth quarter, its most important period of the year, as it confirmed the strong quarterly results it had outlined last week.

The German company’s 19 percent increase in third quarter operating profit contrasted with software and services rival IBM, which late on Monday posted a bigger than expected drop in revenue and cut its full-year profit forecast.

SAP results were buoyed by faster growth in its newer, Internet-based cloud business compared to the first half of the year, while sales of its mainstay packaged software held up in the face of global uncertainty sparked by a slowdown in China.

SAP, whose customers include many of the world’s biggest multinationals, specializes in business applications ranging from accounting to human resources to supply-chain management.

This focus on helping companies run far-flung business operations, together with multi-year sales contracts, helps insulate SAP from short-term economic fluctuations.

“The reason why we didn’t raise the guidance is because it is an annual guidance (target) and the biggest part of the annual operating plan is still to be determined based on our fourth-quarter execution,” Chief Executive Bill McDermott said.

“We are feeling good. We certainly have a chance to outrun it and that is why we firmly reiterated,” he told journalists.

The company expects operating profit of 5.6-5.9 billion euros this year, which would at least match the prior year figure of 5.6 billion.

CLOUD RISES

SAP is targeting an increase in cloud and software revenue of 8-10 percent in constant currencies during 2015, excluding the impact of foreign exchange fluctuations.

SAP’s cloud and software revenue were already up by 11 percent at 11.85 billion euros during the first nine months of 2015. Analysts say the swing factor in the fourth quarter will be how sales of SAP’s classic packaged software perform.

SAP shares were little changed at 0820 GMT, having gained last week when third quarter figures were released early.

SAP reported a 19-percent rise in third-quarter operating profit, excluding special items, to 1.62 billion euros ($1.84 billion) as revenue rose 17 percent to 4.12 billion euros. In constant-currency terms, revenue rose 10 percent.

IBM, the world’s largest technology services provider, blamed weakness in its consulting and storage businesses, along with a severe decline in emerging markets, where sales in Brazil, Russia, India and China plunged a combined 30 percent.

By contrast, SAP’s third-quarter results were driven by strong growth in North America and Europe, especially France and Germany, while weakness in certain emerging markets including China and Brazil was offset by strength in India, South Korea and elsewhere in Latin America.

Gross margins in its cloud business grew 9 percentage points, Luka Mucic, the company’s chief financial officer, said. That helped SAP beat expectations for profits, excluding special items, for the first time in six quarters, Morgan Stanley noted.

The final quarter of the year is traditionally SAP’s strongest period as companies renew existing software licenses but this factor could prove volatile against the backdrop of economic uncertainty, brokerage Berenberg predicted recently. ($1 = 0.8828 euros)

Editing by Maria Sheahan and Keith Weir

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