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SAP Profit Holds Up in Q4 as Cloud Shift Accelerates

Demand stable for traditional software, services.

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Germany’s SAP on Monday reported an accelerating shift by business customers to Internet-delivered cloud software, as it eked out a one percent rise in operating profit for the fourth quarter thanks to stable demand for its more classic software.

SAP reported operating profit, excluding special items, of 2.13 billion euros ($2.5 billion), broadly in line with an average forecast of 2.15 billion according to a Reuters poll of analysts.

Shares of Europe’s largest software firm extended gains to close up 4.5 percent, leading a 1.7 percent rise in the European technology sector.

SAP unnerved investors in October by cutting its profit forecast, blaming the higher initial costs required to deliver its software via the cloud, where revenue is realized over time rather than upfront as for packaged software.

The shift to cloud software sales cut profit margins for the fourth quarter by 2.1 percentage points to 38.9 percent, below company forecasts and analyst expectations. This was partly offset by strength in its mainstay packaged software, especially for maintenance services.

“It seems that SAP was able to keep the balance between cloud growth and a stable software/support business,” Commerzbank analyst Thomas Becker wrote in a note to clients.

The corporate software industry is undergoing a shift away from packaged software that customers run on their computers to software run via the Internet in remote data centers, making data easier to manage, analyze and use, not just on computers but also mobile phones and other devices.

The German company needs to boost the proportion of its software sold via the cloud to defend its customer base from cloud-based competitors such as Salesforce.com and Workday and better compete with arch-rival Oracle.

SAP said it had reached its full-year target for cloud-based software revenue, which rose 45 percent to 1.1 billion euros, suggesting that, at least for now, it is capable of expanding in the cloud market without further damaging its margins.

Fourth-quarter cloud-based revenue jumped 72 percent, or 59 percent at constant currencies, fueled by sales from Concur, the cloud-based travel-expenses software maker SAP bought last year for $7.3 billion.

SAP’s cloud revenue accounted for 6.2 percent of 2014 sales.

Oracle also reported a jump in cloud software sales of 45 percent to $516 million for its second quarter through November. That amounted to around six percent of total revenue.

SAP will publish detailed results on Jan. 20. It has promised to spell out a growth plan for its major business lines through 2020.

(Reporting by Harro Ten Wolde and Eric Auchard; editing by Georgina Prodhan and David Holmes.)

This article originally appeared on Recode.net.