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October 20, 2014

SAP slashes forecast as cloud adoption hits profit

Cloud subscriptions hit near-term profit but firm expects long-term upside.

By Ben Sullivan

SAP, the German enterprise software maker, slashed 2014 operating profit forecast because of a faster than expected shift by customers to cloud over traditional on premise licences.

SAP said that its full-year operating profit is now expected to be €5.6bn to €5.8bn, not the originally estimated €5.8bn to €6bn. Bosses at SAP said that the move to cloud-based sales would eventually boost revenue in coming quarters, but the switch has affected forecasts for 2014. Cloud revenue takes longer to be recognised.

SAP finance chief Lukik Mucic said on a conference call: "De-acclerating in the cloud would make absolutely no sense."

He said that SAP is ‘hitting the gas pedal’ for cloud and that the company will "see the positive returns in the longer run".

Sales of cloud-based software now make up more than a third of SAP’s revenue from its packaged software business, said SAP.

Whilst sales for SAP software that is stored on customer computers can be accounted for straight away, customers receiving cloud software online pay subscriptions which reduce near-term profit but are worth more to SAP in the long run.

SAP CEO Bill McDermott said on the conference call with reporters: "Due to our aggressive shift to the cloud we expect to have a little less upfront and more subscription revenue."

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The news highlights an increasing shift of end users to consuming software via the cloud.

Bernd Leukert, SAP’s software head, said in August that he plans to gradually merge SAP’s business suite with cloud applications in a step to deliver its software as a Web service. This month, SAP selected IBM as a premier strategic provider of Cloud infrastructure services for its business critical applications. The SAP HANA Enterprise Cloud offering is now available through IBM’s cloud.


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