LONDON  - It’s rare that a company raises its financial targets and the shares fall. Shareholders in SAP, the 120 billion euro German software company, were spooked by the group’s disappointing operating margin. However, the cloud comes with a silver lining.

Corporate IT groups tend to move slowly. The big story in recent years has been customers’ shift to cloud computing. Rather than storing their files in-house and owning the hardware that runs jobs like human-resources management, companies increasingly use storage hosted remotely by software provided by SAP and its U.S. peers like Salesforce. It’s cheaper and more reliable.

In the short term, that hurts the Walldorf-based group. As the cloud business grows, SAP’s older, more profitable products account for a smaller share of group sales. That partly explains the group’s more than 3 percent share price fall on Thursday: its third-quarter operating margin of 28.9 percent was below last year’s 29.3 percent and the median forecast of more than 30.1 percent in a Reuters poll of analysts.

Those grey skies obscured a 41 percent rise in revenue at its cloud subscription business to more than 1.3 billion euros, just over a fifth of the total. Chief Executive Bill McDermott also said he thinks the company can grow revenue by as much as 8.5 percent next year, up a percentage point on previous guidance.

Over time, more clouds will mean sunnier skies for SAP. Customers using these products tend to pay recurring subscription fees rather than one-off licences, and cloud specialists tend to grow more quickly. That earns them valuations of more than seven times forecast sales, compared with around five for the German group.

Assume SAP can double its cloud business to 40 percent of sales, and that part of the business is valued at a similar multiple to Salesforce, or 7.5 times sales. That would imply an enterprise value of around 6 times sales, and a market capitalisation 20 percent higher than current levels, according to Breakingviews estimates. Investors can probably weather a bit of drizzle for those kinds of returns.

On Twitter https://twitter.com/liamwardproud

 

CONTEXT NEWS

- German software company SAP on Oct. 18 said its revenue in the third quarter of 2018 was just over 6 billion euros.

- Sales in SAP’s cloud business grew 41 percent year-on-year to 1.3 billion euros - about 3 percent above the median forecast in a Reuters poll of analysts. Software-licence revenue was 937 million euros, compared with the median analysts’ forecast of more than 1 billion euros.

- The company’s operating profit of just over 1.7 billion euros was about 3 percent lower than the median forecast.

- SAP now expects total revenues to grow by between 7.5 and 8.5 percent in 2018, up from a previous range of 6 to 7.5 percent. It raised the lower end of its forecast range for operating profit by half a percentage point, narrowing it to between 9.5 and 11 percent.

- SAP shares were down 3 percent to 97.4 euros at 0800 GMT on Oct. 18.

- For previous columns by the author, Reuters customers can click on PROUD/

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(Editing by Neil Unmack and Bob Cervi) ((liam.proud@thomsonreuters.com; Reuters Messaging: liam.ward-proud.thomsonreuters.com@reuters.net))