SAP SE — FY2018 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2018. This filing is an annual report, not a standalone fourth-quarter report; the supplied text does not provide a clear set of Q4-only financial results. Financial statements are prepared under IFRS as issued by the IASB and presented in euros.
Business context
SAP sells enterprise software, cloud subscriptions and support, and related services. Its strategy centers on cloud growth and the “Intelligent Enterprise” portfolio. At year-end, SAP reported more than 425,000 customers in over 180 countries and 96,498 full-time-equivalent employees.
Financial performance
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Total revenue (IFRS) | €24.708bn | €23.461bn | +5% |
| Cloud subscriptions and support revenue (IFRS) | €4.993bn | €3.769bn | +32% |
| Software licenses and support revenue | €15.628bn | €15.780bn | −1% |
| Services revenue | €4.086bn | €3.912bn | +4% |
| Operating profit (IFRS) | €5.703bn | €4.877bn | +17% |
| Operating margin (IFRS) | 23.1% | 20.8% | +2.3 percentage points |
| Profit after tax | €4.088bn | €4.046bn | +1% |
| Basic EPS | €3.42 | €3.35 | +2% |
| Net cash from operating activities | €4.303bn | €5.045bn | −15% |
| Free cash flow | €2.844bn | €3.770bn | −25% |
Cloud and software represented 83% of revenue. More predictable revenue, defined as cloud subscriptions and support plus software support, rose 9% to €15.975bn and increased to 65% of total revenue from 63%. The IFRS cloud subscriptions and support gross margin improved to 58.6% from 56.0%; the overall cloud and software gross margin edged down to 79.8% from 80.1%, reflecting a higher cloud mix. Services gross margin was broadly stable at 19.2%.
Non-IFRS measures: At constant currencies, cloud subscriptions and support revenue was €5.205bn (+38%), cloud and software revenue €21.577bn (+10%), total revenue €25.961bn (+11%), and operating profit €7.480bn (+10%). These are management measures, not IFRS results; SAP excludes acquisition-related charges, share-based payments and restructuring expenses from several non-IFRS profit measures.
Liquidity, debt and capital
Cash and cash equivalents were €8.627bn at year-end versus €4.011bn a year earlier; group liquidity, including current investments, was €8.838bn. Financial debt at nominal value was €11.331bn, resulting in negative net liquidity of €2.493bn, compared with negative €1.479bn in 2017. The debt increase was principally associated with acquisition financing. Reported financial liabilities on the balance sheet were €11.678bn.
Investing cash outflow was €3.066bn, including €2.140bn for business combinations and €1.458bn for purchases of intangible assets and property, plant and equipment. Financing cash inflow was €3.283bn, including €6.368bn in borrowings; SAP paid €1.671bn in dividends. The proposed 2018 dividend was €1.50 per share, subject to shareholder approval. SAP stated that liquidity plus available facilities and expected operating cash flows should cover near- and medium-term needs. Its long-term ratings were Moody’s A2 and S&P A, both stable.
Material changes and unusual items
- Cloud growth was the main revenue driver; software license revenue fell to €4.647bn from €4.872bn, while software support rose slightly.
- IFRS 15 was adopted from January 1, 2018 without restating comparative periods. SAP reported a net positive 2018 effect of approximately €158m on revenue and €399m on operating profit, including higher capitalization of sales commissions.
- IFRS operating profit also benefited from lower share-based payment expense (€830m versus €1.120bn) and lower restructuring expense (€19m versus €182m).
- Callidus Software was acquired in April 2018 for approximately US$2.4bn. SAP reported €180m of post-acquisition revenue and a €60m post-tax loss contribution; purchase accounting remained provisional in some areas.
- Qualtrics closed on January 23, 2019, after the reporting date, for approximately US$7.1bn cash plus about US$0.9bn of assumed award-related liabilities and post-closing expenses. Its 2018 financial effects were not included in the statements.
- Financial income, net moved to a €47m expense from €188m income, reflecting lower finance income and higher finance costs. The IFRS effective tax rate rose to 27.0% from 19.5%, largely because prior-year one-time tax benefits did not recur.
- Foreign exchange reduced reported revenue by €1.219bn. Hyperinflation accounting for Argentina and Venezuela reduced revenue by €19m and operating profit by €12m.
Outlook, risks and contingencies
2019 outlook, non-IFRS at constant currencies: cloud subscriptions and support revenue of €6.7bn–€7.0bn; cloud and software revenue of €22.4bn–€22.7bn; and operating profit of €7.7bn–€8.0bn. SAP expected total revenue to increase strongly, at a rate slightly below operating profit, and assumed a mid-single-digit decline in software license revenue. The 2018 non-IFRS constant-currency results met or exceeded the raised revenue and operating-profit guidance.
SAP announced a 2019 company-wide restructuring, with projected expenses of €800m–€950m, most recognized in Q1, and estimated 2019 cash outflow of €550m–€750m. About 4,400 employees were expected to leave. SAP forecast annual cost savings of €750m–€850m from 2020, while continuing to invest and expecting year-end headcount above 100,000. It expected 2019 operating cash flow broadly in line with 2018 and moderately lower free cash flow; both were expected to increase significantly in 2020.
Key risks include macroeconomic and political uncertainty, currency exposure, intense cloud competition and execution risk in shifting business models, cloud service reliability and cybersecurity, data protection regulation, intellectual-property litigation, and integration of acquisitions. SAP disclosed ongoing investigations into alleged anti-bribery matters, including in South Africa and the United States, and potential export-control and sanctions violations. Investigations were ongoing; no provisions were recorded because SAP said it could not determine whether obligations existed or reliably estimate any financial effect. Separately, SAP disclosed income-tax disputes for which a loss could result in approximately €1.746bn of additional expense, including interest and penalties; no provision was recorded based on management’s view that the claims lacked merit. The filing also notes other legal claims whose financial effects were generally not practicably estimable.
IFRS 16 was adopted on January 1, 2019. SAP estimated initial lease-related assets of about €1.9bn and liabilities of about €2.0bn; the standard was expected to increase reported operating cash flow by approximately €0.3bn–€0.4bn through cash-flow classification changes.
Most important facts for investors to verify
- Reconcile IFRS and non-IFRS results, particularly the €399m estimated operating-profit benefit from IFRS 15 and recurring exclusions in adjusted measures.
- Track cloud revenue growth and gross-margin progress against the 2019 outlook, including the effect of declining software license revenue.
- Assess debt and cash generation after the Qualtrics acquisition, restructuring outflows, dividends, and planned debt repayments.
- Monitor the restructuring’s actual costs, employee departures, savings realization, and impact on execution and growth investment.
- Follow developments and potential financial consequences in the anti-bribery, sanctions/export-control, tax, and intellectual-property matters; outcomes and exposure remain uncertain.
- Note that KPMG issued an unqualified audit opinion on the IFRS financial statements and concluded internal control over financial reporting was effective as of December 31, 2018.