SAP's Second-Quarter Results Show Company Still in Transition to Cloud

Cloud-based revenue jumped, but margins dropped for the German software maker.
By Mariko Iwasaki ,

Business software maker SAP's   (SAP) - Get Report   second-quarter results showed that the company is still in a transitional period as it expands into the cloud business.

In the second quarter, the Walldorf, Germany company saw year-on-year total revenue growth of 9% on a non-IFRS constant currency basis, to €5.24 billion from €4.97 billion. This included a 33% jump to €721 million in revenue from its cloud subscriptions and support business. The company also said that it added more than 500 customers for its SAP S/4 Hana, a product which includes a cloud platform and which the company is promoting to existing and new clients. Customers that selected the product in the quarter included Hershey (HSY) - Get Report and Cathay Pacific (CPCAY) .

"We think new customer wins are the clearest endorsement that S4 is market leading technology that will drive a multi-year cycle," Credit Suisse said in a report. "Furthermore, there is strength across the product portfolio."

Meanwhile, operating profit in the quarter advanced 11% year-on-year, to €1.52 billion from €1.39 billion. That exceeded a market consensus of €1.44 billion.

A closer look showed that while the cloud business grew rapidly, margins from the business dropped to 65.2% from 65.7% due to investment in staff. 

By region, revenue from cloud subscriptions and support grew 47% in the Asia Pacific region, 41% in Europe, the Middle East and Africa, and 29% in the Americas.

The company said that second-quarter results were not affected by the June 23 U.K. referendum.

SAP retained its earnings outlook for the full year, calling for operating profit of between €6.4 billion and €6.7 billion. It expects revenue from cloud subscriptions and support to grow  by up to 33% to €3.05 billion.

"The company reiterates the following 2016 outlook based on the solid execution in the first half and a strong pipeline across all regions led by S/4HANA's once in a generation innovation cycle," SAP said.

In 2020, SAP aims for operating profit of €8 billion to €9 billion on total revenue of €26 billion to €28 billion. It aspires to revenue from cloud subscriptions and support of between €7.5 billion to €8 billion.

SAP shares rallied to its highest level in eight months, and were recently up 4.8% at  €75.12.

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