ADVANCE FOR RELEASE UNTIL 12:01 a.m. EST,THURSDAY, JAN, 24, 2013. THIS PHOTO MAY NOT BE POSTED ONLINE, BROADCAST OR PUBLISHED BEFORE 12:01 a.m. THURSDAY, JAN, 24, 2013 This March 23, 2012 photo provided by software maker SAP shows one of the company's server rooms in Walldorf, Germany. Among other tasks, SAP allows companies to use cloud computing to track sales and inventory, and to produce the reports that federal regulators require, without needing to hire IT employees. (AP Photo/SAP, Reto Klar)
SAP, which makes capital returns north of 20 per cent, is one of the great lock-in businesses

SAP predicted cloud sales would surpass traditional boxed software by 2018 but the German business software group warned this business model transformation would sacrifice some profit growth in the medium term. 

Unveiling new medium and long-term performance goals on Tuesday, SAP lowered its 2017 operating profit target from an implied total of €7.7bn to a range of €6.3bn to €7bn. The company achieved €5.6bn in operating profit last year. 

Enterprise software customers are dispensing with complex and costly installations on their own premises and instead are renting software remotely from SAP’s servers. 

That is prompting the more than 40-year-old software group to radically overhaul its sales and support operation and make big acquisitions to fend off competition from cloud companies such as Salesforce.com and longstanding rival Oracle

Cloud sales sacrifice the big upfront revenue contribution associated with traditional on-premise software in return for repeat rental income, which is spread over time. SAP argues that higher volumes will ultimately be more profitable, due to economies of scale. 

But in the short term, this revenue shortfall and the costs associated with the shift to the cloud — eg new data centres and sales staff — are weighing on profit growth. 

Operating profit is expected to increase only narrowly to a range of €5.6bn-€5.9bn in 2015, which is set to disappoint analysts who predicted SAP would reach €6.1bn in operating profit in the new financial year. 

SAP forecast operating profit to increase slowly at first to a range of €6.3bn to €7bn by 2017 before accelerating to €8bn-€9bn by 2020. SAP previously said it aimed to achieve a 35 per cent operating margin in 2017, which in view of projected sales implied a €7.7bn operating profit. 

“Anybody can hit a [profit] margin rate by depressing growth . . . The danger of that though is that in two, three or five years from now, you are not the absolute envy of the industry,” said Bill McDermott, chief executive. “I can see us leading in all dimensions [in the cloud] by 2020.”

The German business software group predicted cloud sales would jump up to 86 per cent to about €2bn in 2015, although the bulk of that increase would be due to acquisitions. 

Cloud sales and support are expected to climb to €3.5bn-€3.6bn by 2017 (compared with its previous target of €3bn-€3.5bn) and €7.5bn-€8bn by 2020 when total revenues are predicted to exceed €26bn. 

“We expect cloud subscriptions to exceed software license revenue in 2018,” Luka Mucic, chief financial officer, said. “At that time SAP expects to reach a scale in its cloud business that will clear the way for accelerated operating profit expansion.”

The CFO added that he was “very optimistic” about long-term prospects for margins in the cloud, saying he did not fear a scenario “where cloud gets commoditised and pricing gets under pressure”. 

SAP unveiled preliminary fourth-quarter and full-year figures last week. 

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