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SAP Cuts Profit Outlook as More Customers Switch to Cloud

Cloud subscription revenue won't arrive for a while.

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German business software maker SAP on Monday cut its outlook for full-year operating profit amid an accelerating shift by customers to buy its software over the Internet rather than as packaged software, delaying recognition of those sales.

SAP said it now 2014 expects operating profit, excluding some special items, of 5.6 billion to 5.8 billion euros ($7.14 billion to 7.40 billion), down from 5.8-6.0 billion euros previously.

Company executives said that the accelerating switch from license-software sales to Internet-based, so-called cloud software will cut into its 2014 profit, but that these sales would begin to bolster revenue and profit in coming quarters.

SAP specializes in providing a mix of business application software for companies, but has come under pressure from cheaper rivals that offer services over the Internet.

“De-acclerating in the cloud would make absolutely no sense,” SAP Finance Chief Luka Mucic told reporters on a conference call. “We are hitting the gas pedal as much as we can,” he said, “We will then see the positive returns in the longer run.”

SAP’s customers, which include Coca-Cola, McDonald’s and Vodafone, are moving to cloud computing because there are no upfront costs for software licenses, dedicated hardware or installation, giving the customers more flexibility to respond to shifting market demand.

While revenue from SAP’s classic packaged software is booked immediately, cloud sales are recognized gradually over three years. They require more upfront investments, temporarily hitting profit, but bolster sales and profit in future quarters.

(Reporting by Harro ten Wolde; Editing by Eric Auchard)

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