SAP lifts sales outlook, buying back stock on cloud growth

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(Bloomberg) -- Software giant SAP SE raised its annual revenue outlook and said it would buy back up to a half billion dollars in stock after reporting a better-than-expected jump in sales, lifted by a revamped version of its flagship software.

The German maker of applications that run businesses’ finances, manufacturing and personnel is projecting sales of 23.3 billion euros ($26.8 billion) to 23.7 billion euros this year, based on constant currencies. That’s up about a 100 million euros on both ends of its prior forecast. SAP is about to start a share buyback of up to 500 million euros this year, and it raising its outlook for cloud and software revenue.

Shares of SAP fell 0.4 percent to 90.94 euros at 9:26 a.m. in Frankfurt. SAP had lost 2 percent since its first-quarter report April 25, while Germany’s 30-stock Dax Index was largely unchanged as of Wednesday’s close.

“This is very much a replay of Q1 – good revenues, but disappointing margins," said Michael Briest, an analyst at UBS. “The cloud gross margin will come in for particular scrutiny – sales are growing fast but costs faster." SAP’s gross margin for online software fell 2.4 percentage points from a year ago to 64.2 percent, reflecting R&D and sales costs.

Chief Executive Officer Bill McDermott is attracting new customers through a major update of SAP’s accounting, manufacturing and logistics software called S/4 Hana -- albeit not as quickly as investors had hoped. The system had 6,300 users at the end of June for a gain of 500 -- not much better than in the first quarter when SAP added 400 customers and growth tailed off. S/4 lets businesses run software tasks on their own machines, or in a cloud-computing arrangement hosted by SAP or one of its partners.

“If you invest in the cloud, you expand quickly -- you will look at a margin impact,” McDermott said on a call with reporters. “But here’s the good news. Because we did the hiring in the first half of the year we’ll get the leverage of that in the back half” and in 2018.

“This is all organic growth as we haven’t had a material acquisition in the past two and a half years," he said.

Payment Probe

An SAP spokeswoman confirmed the company has hired law firm Baker McKenzie to conduct an investigation into news reports of a payment to a company linked to the son of South Africa’s president. Executives there have been placed on leave, she said.

Second-quarter revenue rose to 5.78 billion euros, SAP reported Thursday, compared with the 5.67 billion-euro estimate of analysts surveyed by Bloomberg. Operating profit, excluding share-based compensation, amortization and other charges, was 1.57 billion euros, compared with the average estimate of 1.58 billion euros. Cloud and software revenue this year will grow 6.5 percent to 8.5 percent, the company said, up from its prior 6 to 8 percent target.

SAP is investing heavily in research and development and sales of its business apps, data analysis and Internet of things software, which means profit -- up 4 percent -- isn’t rising nearly as quickly as sales. It hired nearly 3,000 people in the first half of the year.

Profit margin at the Walldorf, Germany-based company remained suppressed as it spends to build cloud-computing capacity. Operating margin was 27.2 percent, compared to analysts’ 28.1 percent average estimate. Investors are looking for margins above 30 percent starting next year.

While it raised its outlook on overall revenue, SAP stuck to a forecast first issued in January for 2017 operating profit of 6.8 billion euros to 7 billion euros. It expects 2017 cloud subscriptions and support revenue of between 3.8 billion euros and 4.0 billion euros at constant currencies, up as much as 34 percent from 2016’s 2.99 billion euros.

Software license sales, a measure of revenue potential tied to traditional on-premise software were little changed at 1.09 billion euros, compared with the UBS estimate of 1.04 billion euros. Cloud subscription and support revenue rose 29 percent to 932 million euros, compared with UBS’s estimate of 958 million euros and Vara Research’s 923 million to 996 million euros.

Citigroup said in a note to clients SAP’s strong rate of booking new cloud-computing contracts, which grew 33 percent, would offset lower than expected cloud sales. Bookings indicate future revenue potential and McDermott said many of them were signed late in the quarter.

Cloud computing, software licenses, and support revenue in Europe, the Middle East and Africa rose 9 percent, lifted by Germany and Russia. Those sales were up 8 percent in the Americas and 13 percent in the Asia-Pacific region, helped by demand in China, Japan and Australia.

The transition from software that businesses run in their data centers to rented programs delivered online is leading to diverging fortunes in the IT industry.

Rival Oracle Corp.’s shares reached a record closing high in June after the company reported a 58 percent jump in cloud software sales and a fourth-straight period of revenue gains for its fiscal fourth quarter that ended in May. IBM on Tuesday reported sales that missed estimates including a more than 5 percent decline in a key software and service unit.

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