SAP SE — FY2017 Form 20-F Summary
Reporting period: Fiscal year ended December 31, 2017. This is an annual report, not a standalone Q4 filing; SAP notes that revenue is typically highest in Q4 because of year-end customer purchases. Financial statements are prepared under IFRS as issued by the IASB and reported in euros. U.S.-dollar equivalents are convenience translations and unaudited.
Business context and key financial metrics
SAP is a global enterprise software company focused on cloud subscriptions, on-premise software and support, business networks, and related services. Management’s strategy emphasizes cloud growth and the “intelligent enterprise,” including SAP S/4HANA, SAP HANA, analytics, machine learning, and IoT.
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Total revenue (IFRS) | €23.461bn | €22.062bn | +6% |
| Cloud subscriptions and support revenue (IFRS) | €3.769bn | €2.993bn | +26% |
| Software licenses and support revenue (IFRS) | €15.780bn | €15.431bn | +2% |
| Services revenue | €3.911bn | €3.638bn | +8% |
| Operating profit (IFRS) | €4.877bn | €5.135bn | -5% |
| Operating margin (IFRS) | 20.8% | 23.3% | -2.5 percentage points |
| Profit after tax | €4.056bn | €3.634bn | +12% |
| Profit attributable to parent owners | €4.018bn | €3.646bn | +10% |
| Basic EPS | €3.36 | €3.04 | +11% |
| Operating cash flow | €5.045bn | €4.628bn | +9% |
| Free cash flow | €3.770bn | €3.627bn | +4% |
Revenue growth reflected expansion in cloud and services; cloud and software revenue was 83% of total revenue. Predictable revenue—cloud subscriptions and support plus software support—rose 8% to €14.677bn, or 63% of revenue, compared with 61% in 2016. On a constant-currency, non-IFRS basis, cloud and software revenue grew 8%, total revenue grew 8%, and operating profit grew 4% to €6.92bn.
Profitability, cash flow, debt, and liquidity
- Costs and margins: Total operating expenses rose 10% to €18.584bn, faster than revenue. Sales and marketing expense increased 11% to €6.924bn and R&D expense increased 10% to €3.352bn. Management cited investment in sales, R&D, cloud infrastructure, and cloud delivery, as well as higher share-based compensation.
- Cloud margins: IFRS cloud subscriptions and support gross margin was 56.0%, versus 56.1% in 2016. Management’s non-IFRS cloud gross margin was 62.4% at constant currencies, down 2.0 percentage points, reflecting investment and revenue mix. The reported non-IFRS measure excludes specified acquisition-related, share-based payment, and restructuring costs.
- Cash conversion and investment: Operating cash flow was €5.045bn. Capital purchases of intangibles and property, plant, and equipment, excluding acquisitions, were €1.275bn; free cash flow was €3.770bn. Property, plant, and equipment capital expenditure was €1.196bn. DSO improved to 70 days from 74.
- Balance sheet and debt: Cash and cash equivalents were €4.011bn; current investments were €774m. Financial debt was €6.301bn, comprising €1.299bn current and €5.002bn non-current debt. Net liquidity after current debt was €3.486bn; after all financial debt, net liquidity was negative €1.479bn, improved from negative €3.153bn in 2016. Total assets were €42.497bn and total equity €25.540bn.
- Funding: SAP had an undrawn €2.5bn five-year syndicated credit facility, with two one-year extension options and no financial covenants. Long-term credit ratings were A2 (Moody’s, stable) and A (S&P, positive). Approximately half of financial debt was at variable rates, including debt converted through swaps.
Material changes versus FY2016
- Cloud subscriptions and support revenue accelerated 26% under IFRS; non-IFRS cloud bookings rose 30% at constant currencies to €1.50bn, and cloud backlog increased 38% to €7.5bn.
- IFRS operating profit declined 5% and operating margin contracted 2.5 points, as operating expenses grew faster than revenue. By contrast, 2016 operating profit had risen 21%, partly reflecting much lower restructuring expense that year.
- Profit after tax increased despite lower operating profit, supported in part by financial income of €185m compared with a €38m net financial expense in 2016, and a lower effective tax rate.
- Operating cash flow increased, while investing cash outflows decreased to €1.112bn from €1.799bn, including effects from purchases and sales of financial instruments. Financing outflows rose to €3.406bn; SAP repaid debt, paid €1.499bn in dividends, and repurchased €500m of shares.
- Goodwill and intangible asset balances were affected by foreign exchange translation and acquisitions. SAP completed the Gigya acquisition in November 2017; no material divestitures were reported.
Outlook, commentary, risks, and unusual items
- 2018 guidance: At constant currencies and on a non-IFRS basis, SAP forecast cloud subscriptions and support revenue of €4.8bn–€5.0bn; cloud and software revenue of €20.7bn–€21.1bn; total revenue of €24.6bn–€25.1bn; and operating profit of €7.3bn–€7.5bn. It expected the full-year effective tax rate, both IFRS and non-IFRS, to be 27%–28%.
- Medium-term ambitions: For 2020, SAP reiterated non-IFRS cloud revenue of €8.0bn–€8.5bn, total revenue of €28bn–€29bn, operating profit of €8.5bn–€9.0bn, and a predictable-revenue share of 70%–75%. The cloud gross-margin ambition was revised to approximately 71% by 2020; public-cloud margin of approximately 80% was expected one to two years later than previously targeted.
- Tax items: The 2017 IFRS effective tax rate was 19.3%, versus 25.3% in 2016. SAP cited a one-time benefit from an intra-group intellectual-property transfer and the U.S. tax reform. In December 2017 SAP had forecast a 23%–24% IFRS rate; actual results were lower. Management’s 2018 tax-rate forecast therefore implies a substantial increase from the unusually low 2017 rate.
- Accounting changes: IFRS 15 was adopted January 1, 2018 using the cumulative catch-up approach, without restating prior years. SAP estimated an approximately €0.2bn net positive 2018 operating-profit impact, mainly from capitalization of sales commissions. IFRS 16, effective for SAP in 2019, is expected to increase reported assets and liabilities; the impact was not reliably estimable.
- Acquisition after year-end: SAP agreed to acquire Callidus Software for $36 per share, approximately $2.4bn enterprise value, expected to close in Q2 2018 subject to approvals. The acquisition was excluded from the 2018 outlook presented in the filing; SAP expected to fund it with cash and an acquisition term loan, with substantial refinancing planned.
- Contingencies and compliance: SAP disclosed ongoing investigations into potential anti-bribery violations and possible sales or use of products in embargoed countries. It voluntarily disclosed potential export-control and sanctions violations to U.S. authorities in 2017, was cooperating with authorities, and reported that it could not estimate potential exposure; no provisions were recorded. SAP also cited intellectual-property, customer, tax, data-protection, cybersecurity, implementation, and geopolitical risks.
- Tax disputes: SAP had ongoing tax disputes for which it recorded no provision, believing the claims lacked merit. If authorities prevailed in the specified income-tax matters, SAP estimated additional tax expense, interest, and penalties of approximately €1.884bn.
- Dividends: SAP proposed a €1.40 per-share dividend for FY2017, subject to shareholder approval. The 2017 share repurchase was €500m. The proposal is not a completed payment as of the filing.
- Audit and controls: KPMG issued an unqualified opinion on the IFRS financial statements and internal control over financial reporting. Management also concluded disclosure controls and internal control over financial reporting were effective at year-end.
Most important facts for investors to verify
- Reconcile IFRS results with management’s non-IFRS and constant-currency measures, including exclusions for acquisition costs, share-based payments, and restructuring.
- Track whether cloud growth, bookings, and backlog convert into revenue while cloud margins improve as planned; compare actual margins with management’s revised 2020 ambitions.
- Assess the durability of earnings after the 2017 one-time tax benefits and monitor the 2018 tax rate and the €1.884bn potential exposure from tax disputes.
- Monitor cash generation, debt maturities and refinancing, negative net liquidity after total debt, and funding and integration of the Callidus acquisition.
- Follow developments in the sanctions/export-control and anti-bribery investigations, including any penalties, business restrictions, or future provisions.
- Evaluate the impact of IFRS 15 and IFRS 16 on year-over-year comparability, reported margins, and balance-sheet measures.