SAP SE’s sales topped analysts’ estimates for the fourth straight quarter, as business software spending grew, though the costs of transitioning to a web-delivered model weighed on profitability.
First-quarter revenue rose 12% to 5.29 billion euros ($5.7 billion), SAP reported Tuesday, compared with the 5.16 billion-euro estimate of analysts surveyed by Bloomberg. Operating profit, excluding share-based compensation, amortization and other charges, was 1.2 billion euros, compared with the average estimate of 1.23 billion euros.
However, the Walldorf, Germany-based company’s profit margin was crimped by higher stock compensation costs due to hiring and a loftier share price, chief financial officer Luka Mucic said in an interview with Bloomberg Television. “This will reverse itself in the coming quarters.”
Private cloud installations for customers also cut into profitability. “As it becomes a bigger portion of the overall pie it will have a dampening effect,” said Mucic.
Shares of SAP were up 0.77% to 93.22 euros at 9:11 a.m. in Frankfurt. SAP’s stock has been on a run–the shares were up 12% this year through April 24, versus a 7% return for Germany’s DAX index.
SAP is “firing on all cylinders,” Knut Woller, an analyst at Baader Bank in Germany, said in a note to clients Tuesday, adding that despite the fall in operating margins, SAP should be able to expand operating profit over the rest of the year. SAP posted an operating margin of 22.7%, compared with the 23.5% estimate of Woller.
Chief executive officer Bill McDermott is jousting with rivals Oracle Corp. and Salesforce.com Inc. for software spending as businesses upgrade systems that run sales, manufacturing and HR from their data centers or via the internet. Oracle last month reported a big jump in cloud services in its most recent quarter, taking advantage of its leadership in database software and the first full quarter of owning NetSuite, one of its biggest-ever acquisitions.
SAP is moving customers to a new version of its flagship software called S/4 Hana, which had 5,800 users as of the end of March, up from 5,400 at the end of last year. Software license sales, a closely watched measure of future revenue potential, rose 13% to 691 million euros, compared with the consensus estimate of 642 million euros collected by Barclays.
The company needs to begin the hard work of moving its biggest customers to S/4, said Michael Briest, an analyst at UBS who has a “neutral” rating on the shares.
Cloud subscription and support revenue rose 34% to 906 million euros, compared with the consensus estimate of 895 million euros. Barclays analyst Gerardus Vos, who has a neutral rating on the sector, wrote in a note to clients this month SAP is his top pick in European software as profit margins, which fell below 30% the past three years on the costs of the cloud transition, look poised to expand next year.
The company confirmed a forecast first issued in January that cloud and software revenues will climb this year by 6% to 8%, at constant currencies. SAP estimates 2017 sales will be 23.2 billion euros to 23.6 billion euros with operating profit of 6.8 billion euros to 7 billion euros.
A management board reshuffle this month added two women for the first time who’ll jointly head global sales. SAP also announced new roles for two other executives, Rob Enslin and Bernd Leukert, who jointly head product development and delivery.
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