SAP (SAP), Europe’s most valuable technology company, missed market expectations for third-quarter profit as it invested heavily to shift business customers into cloud computing.
The German enterprise software maker is in the midst of a transition to offering cloud-based services to its customers, and management had flagged that 2017 would see a trough in profit margins as it invested in datacenters and redeployed staff.
SAP shares fell 1.6 percent in reaction but rebounded as it raised its full-year guidance for revenues and core profits, and forecast a recovery going into next year.
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The company has a “very good shot” at stabilizing margins in the fourth quarter, Chief Financial Officer Luka Mucic told a conference call with reporters. “Going into 2018 we see a margin turnaround.”
Revenue grew 8 percent from a year earlier to 5.59 billion euros ($6.6 billion), just over 2% short of consensus forecasts. Core profit excluding special items rose by 4 percent to 1.64 billion euros at constant currency rates, compared to a forecast of 1.69 billion. Cloud subscriptions and support revenue, its key source of revenue in the future rose 27 percent, excluding currency effects, compared with the 29 percent analysts had expected.
The euro’s strength sliced 4 percentage points off core profits. Analysts at Baader Helvea said they expect currency headwinds to continue for the next three quarters.
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Chief Executive Bill McDermott was bullish for the fourth quarter: “We are gaining share against our competitors. SAP is growing faster in the Cloud – and we are doing it organically,” McDermott said during a conference call, contrasting the acquisition-fuelled growth of rivals.
The key question for investors is whether a tipping point is indeed at hand for SAP. Core profit margins have been pressured for five years as the company spent heavily to shift its business into the Cloud, away from traditional software license sales. SAP management say they’re close to ending a two-year spree of hiring to fill Cloud-focused positions.