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SAP Investors Shrug Off Profit Decline -- Update

By Friedrich Geiger

FRANKFURT--Shares in SAP SE jumped as much as 5% on Thursday after the software company said revenue from cloud applications rose rapidly in the second quarter, despite reporting a drop in profit.

The German company--which supplies businesses with applications for processes such as accounting and managing customer relations--reported a 23% fall in net profit from a year earlier to EUR557 million ($753 million), after it booked EUR289 million in provisions for a patent litigation with Versata Software Inc. Second-quarter revenue increased 2.2% to EUR4.15 billion.

But investors focused on revenue generated from SAP's cloud-based products, which jumped 52% to EUR241 million. Management raised its forecast for full-year cloud revenue by EUR50 million to between EUR1 billion and EUR1.05 billion, in part because of the recent acquisition of Fieldglass, a maker of workforce management cloud software.

Cloud-based products offer huge revenue potential for SAP, as the company's clients replace on-site software on computers with cloud applications to take advantage of lower maintenance costs.

SAP's cloud business will be at least as profitable as Europe's largest software maker as a whole, said Chief Executive Bill McDermott. The company is targeting an operating margin of 35% by 2017 after reaching almost 33% last year.

"Over time, you'll have a just-as-good margin in the cloud, if not better," said Mr. McDermott.

But SAP faces challenges from competing vendors of cloud applications, such as Inc. and NetSuite Inc. SAP's main rival, Oracle, is also targeting growth in the cloud sector, but last month reported a fall in fourth- quarter profit.

Société Générale analyst Richard Nguyen said the big surprise was that SAP's cloud revenue grew much more rapidly than that of Oracle and Salesforce, which reported 25% and 36% respective increases in their latest quarters.

At 1015 GMT, SAP shares were trading 3.9% higher at EUR60.25.

SAP said its operating-profit forecast for the year of EUR5.8 billion to EUR6 billion now excludes expenses related to litigation with Versata. The guidance is adjusted for currency effects and based on SAP's own accounting method. If exchange rates remain at the June level, they will diminish operating profit growth by two percentage points.

Mr. McDermott has been SAP's sole CEO since May, when his former co-chief, Jim Hagemann Snabe, moved to the supervisory board. The sole leadership has helped SAP move faster, he said.

"You have to move fast because markets are nimble," he said.

Mr. McDermott last week relocated to a new home in Heidelberg, near SAP's headquarters in Walldorf. He used to work at SAP's U.S. headquarters near Philadelphia.

"I have a little house stuck in the rock," he said, from which he can see Heidelberg's famous castle.

Write to Friedrich Geiger at

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