Business Context and Reporting Period
Company: SAP SE (SAP AG)
Filing Type: Form 20-F (Annual Report)
Reporting Period: Fiscal year ended December 31, 2009
Accounting Standards: International Financial Reporting Standards (IFRS). This was the first year SAP fully migrated to IFRS for its Form 20-F, discontinuing U.S. GAAP reporting.
Business Overview: SAP is a leading global provider of business software and services, with a portfolio including the SAP Business Suite, SAP BusinessObjects, and solutions for small and midsize companies. The company operates in three reportable segments: Product, Consulting, and Training.
Key Financial Metrics (IFRS)
| Metric | 2009 (€ millions) | 2008 (€ millions) | Change |
|---|---|---|---|
| Total Revenue | 10,672 | 11,575 | (8%) |
| Operating Profit | 2,588 | 2,701 | (4%) |
| Operating Margin | 24.3% | 23.3% | +1.0 pp |
| Profit After Tax | 1,750 | 1,848 | (5%) |
| Net Cash from Operating Activities | 3,015 | 2,158 | +40% |
| Free Cash Flow | 2,790 | 1,819 | +53% |
| Total Assets | 13,374 | 13,900 | (4%) |
| Total Equity | 8,491 | 7,171 | +18% |
| Net Group Liquidity | 1,581 | (659) | Turnaround to positive |
Material Changes vs. Prior Period
- Revenue Decline: Total revenue decreased by 8% to €10.67 billion, driven primarily by a 28% drop in software license revenue (€2.61 billion) due to the global economic crisis. This was partially offset by a 15% increase in support revenue (€5.29 billion) and a 19% increase in subscription revenue.
- Cost Containment: Total operating expenses decreased by 9% to €8.08 billion. Significant cost savings were realized through a global workforce reduction to 48,500 employees, resulting in €198 million in restructuring charges.
- Margin Expansion: Despite the revenue decline, operating margin improved by 1.0 percentage point to 24.3%, reflecting effective cost management and a shift in revenue mix toward higher-margin recurring support services.
- Liquidity Improvement: Net group liquidity improved significantly from a net debt position of €659 million in 2008 to a net liquidity position of €1.58 billion in 2009. This was driven by strong operating cash flow and the repayment of the €2.3 billion credit facility used to finance the 2008 Business Objects acquisition.
- Acquisitions: Capital expenditures for acquisitions dropped significantly to €41 million in 2009 compared to €3.5 billion in 2008 (which included the Business Objects acquisition). 2009 acquisitions were smaller and focused on specific technologies (e.g., Sky Data, Clear Standards, SAF AG).
Guidance, Outlook, and Risks
2010 Outlook (Non-IFRS)
- Revenue: Non-IFRS software and software-related service revenue expected to increase 4% to 8% at constant currencies.
- Operating Margin: Non-IFRS operating margin expected to be in the range of 30% to 31% at constant currencies.
- Effective Tax Rate: Projected at 27.5% to 28.5% (IFRS basis).
- Dividend: Proposed dividend payout ratio of approximately 34%.
- Global Economic Conditions: Persistent economic uncertainty could lead to further delays in customer IT spending and increased default risk on receivables.
- Legal Proceedings: Significant litigation includes a lawsuit by Oracle Corporation regarding the TomorrowNow acquisition (provision of $100 million recorded) and a patent infringement suit by Versata Software (jury verdict of $138.6 million, with post-trial motions pending).
- Competition: Intense competition from Oracle, Microsoft, IBM, and emerging SaaS providers like Salesforce.com.
- Foreign Currency: Approximately 64% of revenue is generated outside the Eurozone, exposing the company to exchange rate fluctuations.
- Revenue Mix Shift: Verify the sustainability of the shift from one-time license revenue to recurring support and subscription revenue, which now comprises 77% of total revenue.
- Restructuring Execution: Confirm that the targeted workforce reduction to 48,500 employees was fully achieved and that associated one-time costs (€198 million) are fully recognized.
- Litigation Exposure: Monitor the status of the Oracle and Versata lawsuits, as adverse outcomes could result in significant additional liabilities beyond current provisions.
- 2010 Guidance Achievement: Track Q1 and Q2 2010 results against the non-IFRS guidance of 4-8% revenue growth and 30-31% operating margin to assess the validity of the recovery thesis.
- Free Cash Flow Conversion: Verify the continued strong conversion of operating profit to free cash flow (€2.79 billion in 2009) to ensure sufficient liquidity for dividends and future investments without new debt.
Management Commentary
Management emphasized that while the global economic crisis negatively impacted software license sales, the company successfully adapted its cost structure. The focus shifted toward organic growth, cost efficiency, and the integration of the BusinessObjects portfolio. The company expects a gradual recovery in the IT market in 2010, driven by hardware replacement cycles and continued demand for software solutions.