Renewals and 'cloud' sales boost SAP, but outlook cautious

FRANKFURT (Reuters) - SAP, Europe’s largest software company, on Tuesday met or slightly beat its 2015 revenue and profit targets, driven by strong year-end software license renewals and customers moving to newer Internet-based software.

A participant sits next to a bag with SAP logo before the company's annual general meeting in Mannheim, Germany, May 20, 2015. REUTERS/Kai Pfaffenbach

Shares in the German company, which are trading near record levels, rose 3.5 percent to 74.24 euros by 0850 GMT on the preliminary results, which were announced ahead of schedule early on Tuesday because they were better than expected.

“It’s a solid set of figures, with some pros and cons,” said one Frankfurt trader, pointing to strong software license renewals on the positive side and weaker margins as a negative.

SAP’s fourth-quarter operating margin sank by 3 percentage points to 35.9 percent and was below analysts’ average forecast of 37.5 percent, according to a Reuters poll, reflecting the trade-off as it transitions to faster-growing but lower-margin “cloud” or Internet-based sales.

“Margin development is not as good as anticipated. SAP clearly favorites revenue expansion at the moment in order to gain market share,” DZ Bank analyst Harald Schnitzer wrote in a note, keeping his “hold” recommendation on the stock.

Contract renewals came on the back of sales promotions late last year to convince existing customers to upgrade to S/4 HANA, the core software platform on which SAP is betting its future.

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.

The company said it expected 2016 operating profit, excluding special items, to be between 6.4 billion and 6.7 billion euros ($7.0-7.3 billion) at constant currencies, which is at the low end of analyst forecasts.

Analysts polled by Reuters on average expect operating income of 6.72 billion euros, with estimates ranging from 6.32 billion to 7.14 billion.

SAP shares gained 27 percent in 2015, twice the European technology index’s 14 percent rise. The stock hit an intra-day high of 75.75 euros five weeks ago.

Fourth-quarter operating profit, excluding special items, rose 3 percent at constant currencies to 2.28 billion euros from the same period a year earlier.

Operating profit for the full year was 6.35 billion euros, up 13 percent. Analysts on average had forecast 6.3 billion euros.

SAP said the results were helped by renewals from existing customers of higher-margin, licensed software plus faster-growing, albeit less profitable, Internet-based software and the positive sales impact of a weaker euro against other currencies.

It said that by the end of 2015 more than 2,700 customers had signed up for its new software platform known as S/4 HANA, which promises to cut the time it takes to compile business accounts and forecasts to minutes, instead of hours or days, by analyzing vast amounts of data locally.

SAP was widely expected by analysts to pre-announce strong fourth-quarter results based on its solid performance through September, traditional year-end sales strength and upbeat executive comments over the past three months.

The company plans to publish more details about the past year at its annual press conference and on Jan. 22.

Editing by Leslie Adler and Mark Potter