SAP sees strong cloud growth but legal spat dents profits

Cloud revenues get a thumbs up from SAP

SAP experienced strong cloud growth for the second quarter of 2014 but profits are down, according to the company’s second quarter financial results, mainly due to an old legal spat that cost €289m.

SAP pulled in €241m revenue from its cloud subscriptions and support services, trumping 2013 results by 52 percent and hinting at the wider adoption of cloud services by businesses.

In a video statement, SAP CEO Bill McDermott said he was particularly pleased with the company’s cloud performance. “I’m psyched about the second quarter. In the second quarter SAP improved our cloud revenues, thereby performing at a level higher than any other mega cap IT company in the world in the cloud,” he said.

These strong cloud revenues have led SAP to claim it is “the fastest-growing enterprise cloud company at scale”. 

But one of the more surprising aspects of the report was that while overall business revenue was up by two percent, net profits were down significantly. Despite netting €556m, the profits after tax have dropped by 23 percent.

Further analysis reveals that a €278m litigation provision with Versata took a massive chunk out of the company’s profits. The provision comes from a seven-year-old tussle of court cases, retrials and appeals between the two companies over patent infringement.

The performance of the company’s software and services division was not so stellar, though, with a small revenue hike of five percent over the same results in the year-ago quarter.

Software revenue actually dropped two percent, topping out at €957m. Revenue growth was just about achieved thanks to a five percent rise in software support.

SAP says its software revenue in France and the UK has been strong, which adds some weight to a Forrester report published earlier this week forecasting software growth in the European technology market.

Duncan Jones, principal analyst at Forrester, told V3 that SAP seems to be on track with its cloud services. “They do appear to show encouraging growth from the SaaS [software as a service] businesses that SAP acquired. It’s not going as far as SaaS-zealot vendors but nor should it. In this respect SAP is matching customer demand for SaaS and is also offering a choice for those companies that want on-premise perpetual licenses.”

But he added: “That doesn’t make SAP a cloud provider. The leadership team is committed to driving a wider transformation but I still have some concerns that it is underestimating the level of change involved.”

Jones addressed SAP’s marginal growth in software revenue: “I still see sales teams pushing clients to buy software they don’t need, and I still read SAP spokespeople distancing themselves from failed customer projects. SAP is on the right track but has a lot of work to do.”

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