Just relax, Europe's tech leader SAP tells investors, fourth quarter will be dynamite

FRANKFURT/LONDON (Reuters) - SAP SAPG.DE, Europe's most valuable technology stock, predicted a "dynamite" fourth quarter for its cloud computing business, helping its shares erase losses after third-quarter results fell short of market expectations.

FILE PHOTO: The logo of German software group SAP is pictured in Vienna, Austria, July 25, 2016. REUTERS/Leonhard Foeger/File Photo

The German software maker is in the midst of a transition to offering cloud-based services to business customers, and management had flagged that 2017 would see a trough in profit margins as it invested in datacenters and redeployed staff.

CEO Bill McDermott said SAP was seeing more customers using its new cloud-based S/4HANA business planning products to overhaul their organizations and supply chains. Such large-scale deals tend to close in the fourth quarter.

“You can expect a dynamite Q4,” McDermott told investors on a conference call. “Don’t worry about bookings, relax, it’s going to be terrific,” he said, added that SAP would report “at least 30 percent year-over-year cloud bookings growth”.

SAP shares erased earlier losses of more than 2 percent to trade flat at 1310 GMT following McDermott’s bullish comments. The company, the biggest component of Germany’s blue-chip DAX index, has a market value of 116.5 billion euros ($138 billion).

Third-quarter revenue for the business planning software provider grew 8 percent to 5.59 billion euros ($6.6 billion) from a year earlier, falling short of the mean forecast of 5.71 billion from 16 analysts surveyed by Reuters.

Core profit excluding special items rose by 4 percent to 1.64 billion euros at constant currency rates, below the 1.69 billion expected.

The euro’s strength sliced 4 percentage points off core profit, which was flat after taking currency moves into account. Analysts at Baader Helvea said they expected currency headwinds to continue for the next three quarters.

The company nudged up guidance for full-year core operating profit to between 6.85 and 7.0 billion euros and said 2017 total revenue would range from 23.4 to 23.8 billion, marking year-to-year growth around 6 to 8 percent, excluding currency effects.


Cloud subscriptions and support revenue rose 27 percent in the quarter to 938 million euros, excluding currency effects, compared with the 29 percent analysts had expected, on average.

This was offset by its classic software license and support business revenue, which rose 4 percent to 3.72 billion euros, slightly above the 2.2 percent growth rate expected.

Chief Financial Officer Luka Mucic said the slowdown in new orders growth in the last quarter had coincided with accelerated investments in the cloud business.

As this spending rolls off, an improvement in margins will start to shine through in the current quarter, setting the scene for “exponential” growth in gross margins thereafter, he said.

The number of S/4HANA customers rose 70 percent, year-on-year, of which 40 percent were net new customers, SAP said.

The platform drives SAP’s core product offering - delivered via the internet or on-site - but its human resources, travel management and business-to-business marketplace products are still being integrated into it.

Competitors such as CRM.N, Workday WDAY.O and's AMZN.O web services unit offer cloud-only services, challenging the legacy businesses of SAP and its long-time rival Oracle ORCL.N.

The key question for investors is whether a tipping point is at hand for SAP to return to delivering consistent growth in profit margins late this year or during 2018.

That would reverse five years of declining growth in core profit margins as the company spent heavily to shift its business into the cloud, instead of relying on traditional software license sales for its suite of business planning tools.

SAP management has signaled that its rapid employee expansion since 2015 should slow in coming quarters as its cloud -focused hiring spree runs its course.

Reporting by Douglas Busvine and Eric Auchard; Editing by Keith Weir and David Holmes