SAP: Quarterly Statement Q2 2019

Double-Digit Growth Across the Board:
- Cloud Revenue Growth Soars
- Double-Digit Cloud & Software Revenue Growth
- Double-Digit Total Revenue Growth

Cloud Gross Margin Up Sharply

SAP Reiterates Outlook

- Cloud Revenue Up 40%
- Cloud Gross Margin Up 4 Percentage Points
- Cloud & Software Revenue and Total Revenue Up 11%
- Qualtrics Experience Management Solutions Drive Fast Growth in Customer Experience and Employee Experience
- SAP S/4HANA Momentum Continues, Growing to More Than 11,500 Customers
- Operating Profit (IFRS) Down 21% Due to Ongoing Restructuring and Significant Share Price Increase
- Operating Profit (Non-IFRS) Up 11% Benefitting from Operational Discipline and Increased Cloud Efficiency

WALLDORF, Germany, July 18, 2019 /PRNewswire/ -- SAP SE (NYSE: SAP) today announced its financial results for the second quarter ended June 30, 2019.

"SAP delivered double digit growth in total revenue, cloud revenue and non-IFRS operating income. Qualtrics is growing fast as the global standard in the Experience Management category. As shown by our rising cloud gross margins, we are progressing nicely on our ambition to be the Best-Run SAP. With XM driving the CEO digital transformation agenda, we resolutely reaffirm our full year guidance."
- Bill McDermott, CEO

"I am pleased that our operational excellence measures are already showing effect. Our non-IFRS operating profit and margin performance is remarkable considering the margin headwinds from our latest acquisition and the recent short-term trade-related uncertainty in Asia that impacted our software revenue performance in the region. With continued strong customer demand and our tight focus on profitability we remain as confident in our 2019 outlook as we are in our mid-term ambition."
- Luka Mucic, CFO

Business Performance

Financial Highlights Second Quarter 2019^[1]

In the second quarter, new cloud bookings were up 17% to €494 million (15% at constant currencies). New cloud bookings excluding Infrastructure-as-a-Service (IaaS) were up 27% as SAP focuses on higher-margin IaaS opportunities, in line with its strategy of closely partnering with the hyperscale IaaS providers. Cloud revenue grew 40% year over year to €1.69 billion (IFRS), up 40% (non-IFRS) and 35% (non-IFRS at constant currencies). Software licenses revenue was down 5% year over year to €948 million (IFRS), down 5% (non-IFRS) and 6% (non-IFRS at constant currencies), affected by recent macro uncertainties, particularly in Asia. New cloud and software order entry was up 3% (1% at constant currencies) year over year in the second quarter. New cloud and software order entry excluding IaaS was up 9%. Cloud and software revenue grew 11% year over year to €5.49 billion (IFRS), up 11% (non-IFRS) and 8% (non-IFRS at constant currencies). Total revenue grew 11% year over year to €6.63 billion (IFRS), up 11% (non-IFRS) and 8% (non-IFRS at constant currencies).

The share of more predictable revenue grew by three percentage points year-over-year to 69% in the second quarter.

Operating profit in the second quarter benefitted from disciplined hiring as well as continued efficiency gains in SAP's cloud business. As expected IFRS operating profit in the second quarter was impacted by higher acquisition-related charges. In addition, IFRS operating profit was impacted by higher share-based compensation (due to the Qualtrics acquisition and the strong SAP share price increase over the second quarter) as well as additional restructuring charges, mainly due to an increase in the expected participation rate in the voluntary redundancy and early retirement programs in Germany. Operating profit declined 21% year over year to €0.83 billion (IFRS), up 11% (non-IFRS) and up 8% (non-IFRS at constant currencies). Operating margin (IFRS) declined 4.9 percentage points year over year to 12.5%. Operating margin (non-IFRS and non-IFRS at constant currencies) remained stable at 27.3% despite acquisition headwind. Earnings per share was down 21% to €0.48 (IFRS) and up 11% to €1.09 (non-IFRS).

Operating cash flow for the first six months was €2.68 billion, down 10% year-over-year. The decrease in operating cash flow was primarily due to higher payouts related to share-based compensation (€234 million), restructuring payouts (€183 million) and higher tax cash outflows (€412 million) compared to the first six months of 2018. In addition, operating cash flow experienced a year over year benefit of roughly €185 million from the application of IFRS 16. Free cash flow^[2] decreased 10% year-over-year to €1.96 billion. At the end of the second quarter, net liquidity was -€8.55 billion.

Segment Performance Second Quarter 2019

SAP's three reportable segments "Applications, Technology & Services", "Intelligent Spend Group^[3]" and "Customer and Experience Management" showed the following performance:

Applications, Technology & Services (AT&S)

In the second quarter, segment revenue in AT&S was up 6% to €5.38 billion year-over-year (up 4% at constant currencies). Solutions which contributed to this growth are listed below.

SAP S/4HANA

SAP S/4HANA is at the core of the Intelligent Enterprise. It drives digital transformation and delivers instant business value. SAP offers customers a choice of deployment options including cloud, on-premise and hybrid so they can choose any scenario or combination that is right for them. Built on SAP's industry-leading advanced in-memory computing platform, SAP S/4HANA is the market-leading intelligent ERP that provides unparalleled business agility, empowering companies across all industries to reinvent their business models for the digital economy and navigate dynamic marketplaces.

In Q2, SAP was ranked No. 1 by software revenue for 2018 in Gartner's May "Market Share Analysis: ERP Software, Worldwide, 2018" report. SAP was also positioned as a Visionary in Gartner's May Magic Quadrant for Cloud Core Financial Management Suites for Midsize, Large and Global Enterprises^[4].

Adding 600 customers in the quarter, S/4HANA adoption grew to more than 11,500 customers, up 29% year over year. In the second quarter approximately 50% of the additional S/4HANA customers were net new.

S/4HANA continues to be selected by world-class global companies, including Wanhua Chemical Group and the Texas Department of Transportation. SAP and Intel are partnering to simplify and accelerate adoption of S/4HANA by creating a new Center of Excellence showcasing multiple proof of concepts for shared customers migrating to S/4HANA. A growing number of companies including Mercedes-Benz EQ Formula-E Team have chosen S/4HANA in the Cloud. Hitachi, Colgate-Palmolive, and Deloitte and Touche Southern Africa have gone live on S/4HANA Cloud.

Human Capital Management Solutions (HCM)

The unique combination of SAP SuccessFactors and Qualtrics Employee Experience Management is elevating HCM solutions to the next level and has driven significant HCM demand in the quarter. IDC recently described Employee Experience Management as the next frontier. Employees are the frontline face to the customer. Delivering great customer experiences requires focusing on employees and delivering great employee experiences. Organizations that deliver exceptional employee experiences achieve better business results and outperform the competition.

For example, the combination of SAP SuccessFactors and SAP Qualtrics solutions allows Merck KGaA (Germany) to continuously capture employee feedback and, based on this insight, act with precision and in real time to drive ongoing improvements for a better employee experience.

SAP SuccessFactors Employee Central, which is the flagship of SAP's HCM offering, added more than 180 customers in the quarter and has now more than 3,350 customers globally. Competitive wins included Keolis, Claas, Burger King Brazil, and CONA Services.

In Q2, SAP SuccessFactors was named a Leader in the IDC MarketScape: Worldwide and U.S. Modern Talent Acquisition Suites – for Both "Large" and "Medium-Sized Enterprises" 2019 Vendor Assessments (April 2019).

SAP Leonardo

SAP Leonardo brings together cutting-edge technologies – AI, Machine Learning, IoT, Big Data, Advanced Analytics and Blockchain – with deep process and industry expertise, delivering completely new ways of working and powering the Intelligent Enterprise.

Companies like Patentes Talgo are among many others that adopted SAP Leonardo solutions in the second quarter, while Döhler GmbH has gone live.

Digital Platform & Analytics

Digital Platform includes SAP Cloud Platform and SAP Data Management Solutions. With SAP HANA's data rich and real-time in-memory architecture as the foundation, this represents a massive opportunity to drive full use of HANA.

The SAP Cloud Platform facilitates new app development, extensions and seamless integration. It orchestrates "hybrid" customer landscapes across on premise and cloud.

SAP Data Management Solutions bring together multi-source data including unstructured to provide a 360-degree view of all company data and manage compliance and governance policies from one central location.

In Q2, SAP launched HANA Cloud Services as a gateway to this single source of truth, making the data available to people, algorithms and data-driven applications in the cloud. It provides low total cost of ownership (TCO), elasticity, serverless principles, high availability, resilience and autonomous capabilities.

The State of Illinois and Grupo Energia Bogota chose SAP's Digital Platform solutions in the second quarter.

SAP Analytics Cloud delivers a unified, intuitive platform for business intelligence and collaborative planning, enhanced with the power of predictive analytics and machine learning technology to help users make decisions. In the second quarter, Uniper and Follett Corporation selected SAP Analytics Cloud.

Intelligent Spend Group

In the second quarter, segment revenue in the Intelligent Spend Group was up 22% to €786 million year-over-year (up 17% at constant currencies).

With the Intelligent Spend Group, SAP provides collaborative commerce capabilities (SAP Ariba), effortless travel and expense processing (SAP Concur) and flexible workforce management (SAP Fieldglass). The Intelligent Spend Group portfolio represents the largest commerce platform in the world with more than $3.3 trillion in global commerce annually transacted in more than 180 countries. 

Kawasaki Heavy Industry and Uniper chose SAP's Intelligent Spend Group solutions in the second quarter.

Customer and Experience Management (CXM)

In the second quarter, segment revenue in Customer and Experience Management was up 81% to €365 million year-over-year (74% at constant currencies). Solutions which contributed to this growth in the second quarter are listed below[5].

SAP C/4HANA

SAP's C/4HANA suite enables companies to manage and deliver personalized customer experiences across every touchpoint and across channels based on a complete view of the customer. C/4HANA combines leading solutions for marketing, sales, commerce, service and customer data. As part of the Intelligent Enterprise, C/4HANA integrates with S/4HANA to connects demand signals to fulfillment in one end-to-end process.

SAP was recently recognized by Gartner as a leader in the June 2019 Magic Quadrant for Sales Force Automation.

Aritzia, Hamburg Commercial Bank, and NH Hotel Group all chose SAP C/4HANA over competitors in Q2.

In Q2, SAP also introduced new editions of its SAP C/4HANA solutions leveraging Qualtrics CustomerXM. This enables organizations to combine customer feedback and operational data to listen, understand and act in the moment to improve the customer experience.

Experience Management Solutions (Qualtrics)

With Qualtrics, SAP combines market leadership in Experience Management (XM) with end-to-end operational power in over 25 industries to help organizations manage and improve the four core experiences of business: customer, employee, product, and brand.

The Qualtrics XM Platform is trusted by over 10,500 customers to listen, understand, and take action on experience data (X-data) by embedding X-data directly into the operational data (O-data) systems of the enterprise.

In Q2, Chalhoub Group and the United States Department of State selected Qualtrics to intelligently combine with SAP solutions to move beyond systems of record to new systems of action and achieve breakthrough results.

Regional Revenue Performance

SAP had a solid performance in the EMEA region with cloud and software revenue increasing 9% (IFRS) and 8% (non-IFRS at constant currencies). Cloud revenue increased 46% (IFRS) and 44% (non-IFRS at constant currencies) with Germany and Spain being highlights. In addition, Germany had a solid quarter in software license revenue. France and Italy had a strong quarter in software license revenue.

The Company had a strong performance in the Americas region. Cloud and software revenue increased 15% (IFRS) and 10% (non-IFRS at constant currencies). Cloud revenue increased 36% (IFRS) and 30% (non-IFRS at constant currencies) with the United States, Canada and Brazil being highlights. In addition, the United States had a solid quarter in software license revenue and Canada had a strong quarter.

In the APJ region, SAP had a solid performance despite trade related macro headwinds. Cloud and software revenue was up 8% (IFRS) and 6% (non-IFRS at constant currencies). Cloud revenue increased 41% (IFRS) and 37% (non-IFRS at constant currencies) with Japan being a highlight. For software license revenue, Australia and India had a strong quarter.

¹⁾ For a breakdown of the individual adjustments see table "Non-IFRS Adjustments by Functional Areas" in this Quarterly Statement.
²⁾ As this is an order entry metric, there is no IFRS equivalent.
Due to rounding, numbers may not add up precisely.

Business Outlook 2019

The company reiterates its outlook for the full year 2019.

SAP continues to expect:

• Non-IFRS cloud revenue to be in a range of €6.7 − €7.0 billion at constant currencies (2018: €5.03 billion), up 33% – 39% at constant currencies.
  
• Non-IFRS cloud and software revenue to be in a range of €22.4 – €22.7 billion at constant currencies (2018: €20.66 billion), up 8.5% – 10% at constant currencies.
  
• Non-IFRS operating profit to be in a range of €7.85 – €8.05 billion at constant currencies (2018: €7.16 billion), up 9.5% – 12.5% at constant currencies (previously: €7.7 – €8.0 billion, up 7.5% – 11.5% at constant currencies)

In addition, SAP expects total revenues to increase strongly, at a rate lower than operating profit.

The 2019 numbers include Qualtrics' revenues and profits only from the acquisition date of January 23^rd. The comparative numbers for full year 2018 do not include Qualtrics revenues and profits and include Callidus revenue and profits only from the April 5th, 2018 acquisition date.

While SAP's full-year 2019 business outlook is at constant currencies, actual currency reported figures are expected to be impacted by currency exchange rate fluctuations as the Company progresses through the year. See the table below for the Q3 and FY 2019 expected currency impacts.

Ambition 2020 and 2023

Looking beyond 2019, SAP continues to expect the following:

Ambition 2020

SAP continues to expect:

• €8.6 − €9.1 billion non-IFRS cloud revenue
  
• €28.6 − €29.2 billion non-IFRS total revenue
  
• The share of more predictable revenue (defined as the total of cloud revenue and software support revenue) in a range of 70% − 75%
  
• €8.8 – €9.1 billion non-IFRS operating profit

Ambition 2023

Over the period from 2018 through 2023, SAP continues to expect to:

• More than triple non-IFRS cloud revenue (2018: €5.03 billion)
  
• Grow to more than €35 billion in non-IFRS total revenue (2018: €24.74 billion)
  
• Approach a share of more predictable revenue of 80%
  
• Reach a Non-IFRS cloud gross margin of 75%
  
• Increase the non-IFRS operating margin by one percentage point per year on average, representing a total expansion of approximately 500 basis points.

The full Q2 2019 Quarterly Statement can be downloaded from http://www.sap.com/investors/sap-2019-q2-statement

Additional Information

This Quarterly Statement and all information therein is unaudited.

Definition of key growth metrics

New cloud bookings are the total of all orders received in a given period the revenue from which is expected to be classified as cloud revenue and that result from purchases by new customers and from incremental purchases by existing customers. Consequently, orders to renew existing contracts are not included in this metric. The order amount must be committed. Consequently, due to their pay-per-use nature, business network transaction fees which do not include a committed minimum consumption are not reflected in the bookings metric (e.g. SAP Ariba and SAP Fieldglass transaction-based fees). Amounts included in the measures are generally annualized (annualized contract value ACV).

Share of more predictable revenue is the total of non-IFRS cloud revenue and non-IFRS software support revenue as a percentage of total revenue

New cloud and software license order entry is the total of new cloud order entry and software license order entry. The new cloud order entry metric is identical to the new cloud bookings metric defined above except that it considers the total contract value (TCV) of the orders where the new cloud bookings metric considers the orders' annualized contract value (ACV). Software license order entry is the total of all orders received in a given period the revenue from which is expected to be classified as software license revenue. The support services commonly sold with the software license are not included in the software license order entry metric.

Global commerce is the total commerce volume transacted on the SAP Ariba, SAP Concur and SAP Fieldglass Networks in the trailing 12 months. SAP Ariba commerce includes procurement and sourcing spend.

For explanations on other key growth metrics please refer the performance management section of SAP's Integrated Report 2018, which can be found at www.sapintegratedreport.com.

Webcast

SAP senior management will host a financial analyst conference call at 2:00 PM (CET) / 1:00 PM (GMT) / 8:00 AM (Eastern) / 5:00 AM (Pacific). The call will be webcast live on the Company's website at www.sap.com/investor and will be available for replay. Supplementary financial information pertaining to the second quarter results can be found at www.sap.com/investor.

Special Capital Markets Day

SAP will host a Special Capital Markets Day on November 12, 2019 in New York City.

About SAP

As the Experience Company powered by the Intelligent Enterprise, SAP is the market leader in enterprise application software, helping companies of all sizes and in all industries run at their best: 77% of the world's transaction revenue touches an SAP system. Our machine learning, Internet of Things (IoT), and advanced analytics technologies help turn customers' businesses into intelligent enterprises. SAP helps give people and organizations deep business insight and fosters collaboration that helps them stay ahead of their competition. We simplify technology for companies so they can consume our software the way they want — without disruption. Our end-to-end suite of applications and services enables more than 437,000 business and public customers to operate profitably, adapt continuously, and make a difference. With a global network of customers, partners, employees, and thought leaders, SAP helps the world run better and improve people's lives. For more information, visit www.sap.com.

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^[1] Q2 2019 results were also impacted by changes in accounting policies, business combinations and other effects. For details, please refer to the disclosures on page 32 of this Quarterly Statement.

^[2] IFRS 16 also affects SAP's cash flow statement: operating cash flow increased and cash flow from financing activities decreased by €185 million. The Company has modified its free cash flow metric by subtracting this impact. Therefore, free cash flow is not affected by this change. For details, please refer to the disclosures on page 32 of this Quarterly Statement.

^[3] As of the second quarter in 2019, we renamed the former Business Network segment to Intelligent Spend Group segment without any changes in the composition of this segment. For a more detailed description of SAP's segment reporting, see Note (C.1) "Results of Segments" of our 2019 Consolidated Half-Year Financial Statements.

^[4] Gartner does not endorse any vendor, product or service depicted in its research publications, and does not advise technology users to select only those vendors with the highest ratings or other designation. Gartner research publications consist of the opinions of Gartner's research organization and should not be construed as statements of fact. Gartner disclaims all warranties, express or implied, with respect to this research, including any warranties of merchantability or fitness for a particular purpose

^[5] Q2 2019 results were impacted by business combinations. For details, please refer to the disclosures on page 32 of this Quarterly Statement

^[6] For details on the performance of our segments please refer to pages 21-28.

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