Cloud Growth Lifts SAP Stock, Hurts Bottom Line

By Nina Trentmann Features Dow Jones Newswires

Shares of SAP SE's hit an all-time high Tuesday on the back of strong growth in the cloud business. But it comes at a price.

Continue Reading Below

Expenses related to share-based compensation at the German software firm rise in tandem with a bump in stock price.

An increase of EUR1 in the share price results in increased share-based compensation costs of around EUR20 million, said finance chief Luka Mucic. SAP expects to spend between EUR900 and EUR1.1 billion this year on share-based compensation.

The company's stock rose to EUR94.22 ($102.23) following the company's first-quarter earnings report. It is up more than 33% over the past year, according to FactSet.

"These are happy expenses," Mr. Mucic said in a Tuesday interview with CFO Journal. "Our share price has increased significantly, which is why costs for share-based compensation have gone up, too."

During the first quarter, such costs were more than EUR360 million, compared with EUR109 million during the first quarter of 2016.

Continue Reading Below

SAP had 85,751 employees as of March 31, of which around 65% take part in one of the firm's several share-based compensation programs.

Higher costs related to share-based compensation in part contributed to a 9% drop in net profit during the first quarter. Net income for the quarter was EUR521 million, compared with EUR572 million during the same period a year prior. Revenue climbed 12% to EUR5.3 billion, boosted by sales of SAP's cloud services.

However, the company is spending less on employee compensation programs than other firms in the cloud sector, Mr. Mucic said.

Growing competition in the cloud industry is forcing SAP to spend significantly on share-based compensation, said Mark Moerdler, an analyst at Sanford C. Bernstein & Co. "This is part of what is necessary to retain talent," Mr. Moerdler said. "SAP has a large U.S. footprint and is competing for talent against other firms that use share-based compensation," he said.

U.S. technology companies offer more stock-based compensation than their European counterparts, Mr. Moerdler said. Any decline in profit, in part due to higher expenses, isn't "critical," he said.

Despite the rise in costs, SAP doesn't plan to make changes to its share-based remuneration programs. "We want to retain our employees," Mr. Mucic said.

The firm is considering share buybacks later this year, Mr. Mucic confirmed. SAP has around EUR1 billion available for tuck-in acquisitions and share buybacks, with the supervisory board debating both in July, he said.

Write to Nina Trentmann at Nina.Trentmann@wsj.com

(END) Dow Jones Newswires

April 25, 2017 11:52 ET (15:52 GMT)