WALLDORF, Germany (Reuters) - German software maker SAP on Friday raised its 2017 revenue outlook to the upper end of forecasts but said operating margins would dip as more business comes from cheaper Internet-based cloud software instead of legacy software packages.
The mid-term outlook follows strong results for 2015 and a somewhat cautious forecast for this year as the company adapts to growing demand for cloud software paid by subscription rather than high-margin packaged products on which it has long counted.
SAP is growing faster than established competitors Oracle and IBM, while competing on price to head off cloud-based rivals such as Salesforce.com and Workday, which is partly to blame for SAP’s lower margins.
“So, should SAP decide to focus on a margin rate and not compete in those markets and let them have the marketplace? The answer is: Hell no!” Chief Executive Bill McDermott told Reuters in an interview following the report.
“You will have to compete, in some cases, on a lower profile margin rate,” the American added.
Shares of Europe’s largest software maker were trading flat by mid-afternoon, lagging the STOXX Europe 600 Technology index, which was 2.6 percent higher. The new outlook implies an operating margin of around 29.5 percent, well below the historic margins 35 percent SAP once enjoyed when it focused on packaged software. It is slightly lower than the 30 percent margin analysts had expected.
Chief Financial Officer Luka Mucic said operating margin trends would depend on how fast the cloud business grew relative to the classic packaged software business.
“There is no structural reason why operating margins of our cloud business should not exceed those of our classical on-premise business,” Mucic told journalists on a conference call, but emphasized this was unlikely to happen until after 2020.
Cloud-based software subscriptions incur smaller upfront license fees, and are thus less profitable in the short term, but SAP is counting on ongoing subscription payments to bring in higher revenues, and eventually higher profits, over time.
The SAP CEO contrasted the 13 percent revenue growth in his company’s cloud business during the fourth quarter to the performance of arch-rival Oracle, whose cloud business grew a modest 2 percent in constant currency terms last quarter.
“We are growing really fast and our competition isn‘t,” McDermott told investors on a conference call.
OUTLOOK “NOT SPECTACULAR”
Last week, the company outlined better than expected 2015 results, fueled by strong year-end renewals by existing software license customers, but cautioned that 2016 profit would be at the low end of expectations.
It forecast 2016 operating profit, excluding special items, would be between 6.4 billion and 6.7 billion euros ($7.0 and 7.3 billion), a rise of 1 to 6 percent, and 2017 operating profit of 6.7 to 7.0 billion, within consensus range.
For 2017, it now expects revenue in the range of 23.0 billion to 23.5 billion euros, at or above the average analyst expectation of 23.01 billion, according to Thomson Reuters I/B/E/S data, compared with 20.8 billion in 2015.
On the same basis, a year ago, SAP had forecast total 2017 revenue of between 21 billion and 22 billion euros and operating profit in a range between 6.3 billion and 7.0 billion euros.
“The 2017 forecast is not spectacular: SAP expects what the consensus expects’” said one analyst at a German bank, who asked not to be named.
SAP left unchanged its 2020 financial targets, which call for SAP to generate 7.5-8.0 billion euros in cloud revenue and 26 to 28 billion euros in total revenue.
Additional reporting by Ilona Wissenbach and Georgina Prodhan; Editing by Keith Weir