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CEO of SAP AG (ADR) (SAP): Cloud Computing Business Profitable

SAP AG (ADR) (NYSE:SAP)FRANKFURT, Germany (AP) — The co-CEO of business software maker SAP AG (ADR) (NYSE:SAP) says its push into cloud computing is starting to make money — and he predicted it would reach profits that rival or exceed those of its traditional business.

The cloud business contributed about 28 million euros ($36.72 million) to first-quarter earnings. SAP AG (ADR) (NYSE:SAP), whose software helps companies manage personnel, sales and customer relations, said Friday its overall net profit rose 17 percent to 520 million euros in the quarter. Revenues grew 7 percent to 3.6 billion euros.

“We accelerated into the cloud in a big way about a year ago and already we’re making money on it,” Bill McDermott told The Associated Press.

In cloud computing, customers pay SAP a subscription fee to use software on SAP AG (ADR) (NYSE:SAP)’s servers rather than installed at the customers’ businesses. The approach is a shift from the company’s long-standing model of selling software and then profiting both from that and the follow-up services revenue from support and training.

SAP bolstered its cloud computing business by buying Ariba last year. In size, it is still dwarfed by the traditional business, but SAP AG (ADR) (NYSE:SAP) says it is on track to account for 900 million euros in sales over the year. It expects that to more than double to 2 billion euros a year by 2015.

McDermott said that once the cloud business reaches that kind of scale, its profits should exceed those of the core business. That is because renewals of existing customers involve lower sales costs than finding and signing up new ones.

“Over time, it’s actually more profitable,” he said. “When you have low costs of sales, high renewal rates and very large chunks of money, you’ll find that the margins in the cloud business actually exceed that of the core. It’s just a question of how quickly you get to scale so you can realize that benefit.”

SAP AG (ADR) (NYSE:SAP)’s other co-CEO, Jim Hagemann Snabe, is based at the company’s headquarters in Walldorf, Germany, while McDermott is based in Philadelphia.

McDermott said the company was still growing sales even in the eurozone, where a crisis over too much public debt has pushed many countries into recession as governments cut spending: “It’s choppy in southern Europe, but we’re growing in double digits.”

Companies in financial services needed better data to comply with new regulations, while retailers had to invest in new information technology because consumers are increasingly shopping on the Internet or using mobile devices such as smartphones.

SAP AG (ADR) (NYSE:SAP)’s first-quarter figures fell short of market analyst estimates, which McDermott argued was a one-time occurrence due to difficulties in the company’s Asia-Pacific region. SAP shares fell after the earnings announcement and were down 3 percent at the close of trading in Germany, at 57.85 euros.

The article SAP CEO: Cloud Computing Business Profitable originally appeared on Fool.com and is written by Associated Press.

The Motley Fool has no position in any of the stocks mentioned.

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