BALANCE SHEET SAP Rides the Cloud

The software giant’s belated investment in cloud computing has boosted earnings and improved the company’s projections through 2020.

SAP, the world leader in business software, got off to a late start in cloud computing, but it has made up for lost time with a series of risky acquisitions that finally paid off in 2016.

The German software giant’s operating profits soared 20 percent to €5.1 billion ($5.4 billion) last year, driven in large part by SAP’s cloud computing business, which grew by 30 percent to €3 billion.

SAP has made a series of acquisitions in the cloud-computing sector in recent years, the most high-profile of which was its $7.3-billion takeover of Concur Technologies in 2014.

Fears that the cloud boom at SAP would come at the expense of the traditional licensing business haven’t panned out. Mirko Maier, Analyst, LBBW Bank

The shopping spree had raised concerns among some analysts that SAP would focus on cloud computing to the detriment of its traditional software-licensing business.

That's not what the numbers say. Revenue from software licenses and support grew by a robust 3 percent to €15.4 billion in 2016. SAP’s overall revenue grew by 6 percent to €22 billion.

Buoyed by strong growth, the executive board has raised it expectations for 2020 and now aims to generate up to €8.5 billion in sales from cloud computing and total revenues of nearly €28 billion by the end of this decade.

“Fears that the cloud boom at SAP would come at the expense of the traditional licensing business haven’t panned out,” said Mirko Maier, an analyst at LBBW Bank.

The software program S4/Hana, for example, has done particularly well since its introduction in 2015, providing SAP with a stable source of revenue unlike rivals such as Oracle.

In 2016, SAP sold the program to 5,400 new customers, many of whom had never done business with SAP before. S4/Hana is used by businesses to manage everything from human resources to accounting.

Still, the future lies in cloud computing, with many companies ditching installed software and opting instead to pay monthly fees to run their programs from remote servers.

According to the market research firm Gartner, global revenue from cloud computing rose 16.5 percent to €204 billion in 2016. In response to these trends, SAP has adapted S4/Hana to the data cloud.

The software giant is also investing in other cutting-edge technologies such as artificial intelligence, blockchain and the Internet of things.

“SAP has a very good outlook in the growth areas of the future,” Luka Mucic, SAP’s chief financial officer, told Handelsblatt.

With a free cash flow of €3.6 billion, SAP still has financial breathing room, despite paying back €1.4 billion in debt from its takeover of Concur.

Mr. Mucic plans to plow the money into investments and pay out dividends for SAP’s shareholders. The software giant is even considering repurchasing shares.

“If we continue to have surplus liquidity, we may consider a modest share repurchase in the second half of the year,” Mr. Mucic said.

Christof Kerkmann covers the IT industry for Handelsblatt and is based in Düsseldorf. To contact the author: [email protected]