By Douglas Busvine and Eric Auchard
BARCELONA (Reuters) – Europe’s biggest technology company SAP <SAPG.DE> expects profit margins to flatten out during the fourth quarter after three years of declines, with improving margins to begin to show up in 2018, Chief Financial Officer Luka Mucic said on Friday.
The German software maker is in the midst of a transition to offer cloud-based services to business customers, and management have flagged that 2017 would be the low-water mark for margins as it invested in datacenters and redeployed staff.
“We see now the advent of a period when the margin inflection point should be reached soon,” Mucic told investors at the annual Morgan Stanley European Technology, Media and Telecoms conference in Barcelona.
“In Q4 (fourth-quarter) I see at least the chance to reach flat margins in non-IFRS terms,” he said.
SAP has invested heavily to shift its business to the cloud, but sees that paying off in coming years. Mucic said margins would “start to climb back up” next year and expand further in 2019 and 2020.
Analysts, on average, forecast margins to hit bottom this year at around 29 percent before starting to rebound in 2018.
Mucic also told investors not to expect any dramatic improvements in the coming year, saying that SAP would continue to invest to move its business to the cloud and would not scale this back to meet short-term margin targets.
“The market should not be overly ambitious in terms of the margin increase, especially in 2018,” he said.
The finance chief reiterated that SAP had no plans to return to the large-scale acquisitions that accelerated a shift from its classic packaged software for financial planning to deliver more cloud-based internet services.
“We will continue (to look) for opportunities to expand our portfolio in tuck-in mode,” Mucic said of small-scale, technology-focused deals. He said that SAP would continue to “strongly” invest in organic, internally generated growth.
A succession of multi-billion dollar deals earlier this decade culminated in its largest ever merger in 2014, when it paid $8.3 billion for travel and expense management firm Concur.
SAP’s shares traded roughly flat at 96.31 euros at 1038 GMT. The stock is up 16 percent so far in 2017, having touched all-time record levels above 100 euros earlier this month.
(Reporting by Douglas Busvine and Eric Auchard. Editing by Jane Merriman)