SAP Profit Plunges 23% Following Cloud Move -- Update

By Christopher Alessi 

FRANKFURT--German business software provider SAP SE said Tuesday that first-quarter net profit fell 23%, further illustrating how the company's transition to Internet-based software products in the cloud is squeezing short- to mid-term profitability.

Net profit for the period ended March 31 was EUR414 million ($444.17 million) compared with EUR534 million during the same period last year.

The company also gave a net profit figure of EUR697 million based on calculations that aren't recognized under international financial reporting standards. That was an increase of 5% from a year earlier and fell short of analysts' expectations of EUR755 million, based on a poll by The Wall Street Journal.

Revenue climbed by 22% to EUR4.5 billion, helped by increased customer adoption of the company's cloud offerings. Revenue based on cloud subscriptions and support jumped by more than 100% to EUR503 million, the company said.

SAP benefited from a weaker euro in the first quarter but the effect was "dampened by acquisition-related charges," Chief Financial Officer Luka Mucic told reporters.

Chief Executive Bill McDermott--an American who was appointed sole CEO last year--has sought to move SAP away from its traditional on-premise software products, betting that the company's long-term growth will be in the cloud. As part of that effort, Mr. McDermott has presided over a series of cloud-focused acquisitions, including last year's $8.3 billion purchase of U.S.-based expense management software provider, Concur Technologies Inc.

In February, the company launched a redesign of its core Business Suite software, S/4HANA, which operates on its flagship HANA real-time database and can run both in the cloud or on hardware. The company said it so far has more than 370 S/4HANA users.

However, the company's move to the cloud has crimped profitability because revenue is increasingly spread out over longer contract periods and based less on one-off licensing fees. In January, the company dropped a 35% profit margin target for 2017 and hasn't provided a new figure.

Mr. McDermott said on Tuesday that margin rates would ultimately rebound. "As those investments [in the cloud] start to streamline, the margin flows through," he said.

SAP reiterated its guidance for 2015, saying it expects a non-IFRS operating profit of between EUR5.6 billion and EUR5.9 billion. It expects full-year non-IFRS revenue for cloud subscriptions and support to be between EUR1.95 billion and EUR2.05 billion.

Write to Christopher Alessi at [e-mail]

Subscribe to WSJ: http://online.wsj.com?mod=djnwires