SAP Predicts Cloud Revenue To Surpass On-Premise Software Sales By 2018

SAP is forecasting that its cloud subscription revenue will exceed sales of on-premise software licenses in 2018, company executives said Tuesday. But the company's cloud growth is coming at the expense of profit margins and the company has reduced its profit outlook for 2017.

That news sent the price of SAP's stock tumbling more than 5 percent in early trading Tuesday.

SAP, a longtime leader in selling on-premise ERP, CRM and other business applications, is transitioning to selling cloud applications. The company reported last week that cloud subscription and support revenue grew 56 percent in 2014 and 68 percent in the fourth quarter, pushing the Walldorf, Germany-based company's annual cloud application revenue over 1 billion euros for the first time.

[Related: SAP Reports 56 Percent Cloud Application Growth In 2014]

Tuesday the company said it is targeting 7X growth in its cloud business, pushing the company's annual revenue to reach 28 billion euros ($32.4 billion) by 2020. Last year SAP's sales were 17.6 billion euros, or approximately $20.8 billion.

SAP's fourth-quarter results show how complex the company's cloud transition is. While cloud subscription revenue soared, sales of the vendor's traditional -- and higher-margin -- software products declined 2 percent to 1.87 billion euros ($2.21 billion). That resulted in a 3 percent decline in the company's operating profit to 1.75 billion euros ($2.07 billion).

Tuesday SAP said it expects 2017 operating profit (excluding special items) to be in the range of 6.3 billion to 7 billion euros ($7.3 billion to $8.1 billion) on revenue between 21 billion and 22 billion euros. Earlier the company had forecast an operating profit of 7.7 billion Euros in 2017.

SAP expects profit margins to eventually grow as the company's cloud operations scale up.

"We expect cloud subscriptions to exceed software license revenue in 2018," said SAP CFO Luka Mucic in statement Tuesday. "At that time, SAP expects to reach a scale in its cloud business that will clear the way for accelerated operating profit expansion."

"What you find with the cloud is that once you get the size, scale and reach in the cloud, the operating margins increase over time -- that's why we gave a 2017 and 2020 view on how we nearly double profits by 2020," CEO Bill McDermott said in an interview on CNBC Europe's "Squawk Box" Tuesday. But McDermott added: "I think we're doing the right transition; we're a growth company and this is what the investor wants."

PUBLISHED JAN. 20, 2015