* Alliance, called "Embrace", to support S/4HANA in the cloud
* SAP clients complain cloud upgrades too hard
* Qualtrics deal size grows, selling well with SuccessFactors
* Third-quarter results, outlook confirmed (Updates on Microsoft deal, Qualtrics performance)
By Douglas Busvine
BERLIN, Oct 21 (Reuters) - Business software group SAP said on Monday it had reached a three-year deal with Microsoft to help its large enterprise customers move their business processes into the cloud.
The partnership, called "Embrace", will help clients to run operations hosted at remote servers supported by SAP's flagship S/4HANA database, new Co-Chief Executive Jennifer Morgan said as SAP released third-quarter results in line with preliminary figures released on Oct. 11.
"We bundled SAP's cloud platform services to support customers around the extension, integration and orchestration of SAP systems," Morgan told reporters, adding that Microsoft would act as a reseller for the product.
SAP said it expected annual revenues of around 75 million euros ($84 million) from the deal: "There's no downside to those numbers - only upside," she told analysts on a call.
In the third quarter, SAP reported a 10% increase in revenue and a 15% rise in operating profit, after adjusting one-off items and currencies, helping it to achieve an expansion of 1.7% in its operating margins. The company reiterated its forecast for the year and through to 2023.
Morgan also praised the performance of Qualtrics, the customer experience platform that SAP acquired a year ago in an $8 billion deal that some analysts and investors criticised as overpriced.
She said that Qualtrics had added more than 300 clients since May, with customers often buying it together with SAP's human resources product SuccessFactors. Qualtrics founder Ryan Smith - now an SAP management board member - said its deal size had grown by 30% since the takeover.
UNDER NEW MANAGEMENT
Disclosure of the Microsoft partnership comes after long-time CEO Bill McDermott stepped down to make way for Morgan - the first woman to become CEO of a company in Germany's blue-chip DAX index - and fellow Co-CEO Christian Klein.
Shares, which had rallied strongly on news of the leadership handover, added another 2.3% in trading in Frankfurt on Monday.
The deal - which helped SAP double new cloud bookings in the third quarter - addresses a complaint from many customers that it is too hard to shift from SAP's traditional on-premise model to remotely hosted services.
The partnership deepens an already close relationship with Microsoft and its Azure cloud division, although the Walldorf-based company said clients hosted by Google and Amazon Web Services could still buy direct from SAP.
De-emphasising its own-brand cloud offering is turning out to be one factor supporting a pickup in SAP's cloud gross margins. These picked up by 5.4 percentage points to 69% in the third quarter - compared with a 2023 target of 75%.
SAP is due to update investors on strategy at a capital markets' day in New York on Nov. 12. ($1 = 0.8957 euros) (Reporting by Douglas Busvine; Editing by Tassilo Hummel, Sherry Jacob-Phillips and Deepa Babington)