SAP shakes off weak start to year as profit beats estimates

SAP reported results that topped analysts' estimates as the company put a weak start to the year behind it and closed more software deals despite political turmoil in Europe.

Operating profit for the second quarter was €1.52 billion, exceeding the €1.45 billion average of analysts’ estimates collected by Bloomberg.

Sales were €5.24 billion, compared with the average €5.22 billion estimate.

Chief executive Bill McDermott is moving the Germany-based business software maker to a model that relies more on cloud-computing applications delivered through the web and less on programs customers install themselves, a process the company has said will take years.

Despite an uncertain business outlook in the UK after citizens voted in June to exit the European Union, SAP is bouncing back from a weak first quarter in which it failed to close software deals in its pipeline. A rapidly expanding cloud business, together with solid growth in support revenue, drove up the proportion of more-predictable sales during the period.

“Despite widespread concerns, we experienced no effects from the Brexit vote,” Mr McDermott told reporters on a call Wednesday. The chief executive also credited lower costs after last year’s job cuts for propping up the bottom line. “We closed any deal that wasn’t closed in Q1 and we had an extraordinary Q2.”

New software license revenue, an important predictor of earnings potential from support contracts, rose 10 per cent to €1.04 billion, compared with the average €984 million of analysts’ estimates collected by Bloomberg. Cloud subscriptions and support revenue in the quarter rose 41 per cent to €721 million, compared with analysts’ €716 million average estimate.

SAP said it performed particularly well in Europe despite Brexit-related uncertainty, chalking up double-digit percentage growth in software licenses revenue from major markets such as France.

SAP is trying to move its customer base to its latest S/4 Hana suite of financial and operational planning software while fighting off challenges from Oracle and Salesforce. com. SAP said it added more than 500 S/4 customers during the quarter and now has 3,700 businesses running the suite.

The company reiterated its 2016 forecast for adjusted earnings before interest and taxes of €6.4 billion to €6.7 billion at constant currencies. It expects cloud and software revenue to rise 6 to 8 per cent this year from €17.23 billion in 2015.

SAP struck deals with Apple and Microsoft this spring to broaden use of its software. SAP will develop apps for Apple's iPhone and iPad and make it easier for its customers and consultants to write native iOS software. The German company is also making more utilities available on Microsoft's Azure platform for cloud computing.

Bloomberg