SAP Cloud Business Soars

• Operating Profit Up Double-Digit
• Raises 2018 Outlook and 2020 Ambition
• – Cloud Revenue Growth Accelerates, Up 30% (IFRS) and Up 40% (Non-IFRS at Constant Currencies), Outpacing Competition
• – New Cloud Bookings Up 29% at Constant Currencies on Top of a Strong Prior Year Quarter
• – Strong Digital Core Innovation Cycle – 600 S/4HANA Customers Added in Q2, S/4HANA Customer Count Now Close to 9,000
• – Double-Digit Operating Profit Growth Continues, Up 13% (IFRS) and Up 12% (Non-IFRS at Constant Currencies)

SAP SE (NYSE: SAP) today announced its financial results for the second quarter ended June 30, 2018.

“The 4th generation of enterprise applications has taken another major step forward with C/4HANA. Together with S/4HANA, SAP customers are finally able to focus their entire business on delivering a personalized experience to their customers. The intelligent enterprise is the elixir to bridge silos inside fractured businesses and beyond so CEOs get a single view of the customer. SAP is presenting a clear strategy, customers are already validating it in Q2 and we are increasing guidance as a signal that a new wave of growth has been unleashed.” – Bill McDermott, CEO

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“This quarter is exemplary for the road we have chosen: rapidly transforming the company to the cloud while substantially growing profits and margins. I am very confident that this momentum will continue to expand. That’s why we raised our 2018 outlook and 2020 ambition.” – Luka Mucic, CFO

• Business Highlights
• Financial Highlights
• Second Quarter 2018

New cloud bookings¹ grew 24% (29% at constant currencies) in the second quarter and reached €421 million. Cloud subscriptions and support revenue grew 30% year over year to €1.21 billion (IFRS), up 40% (non-IFRS at constant currencies).²  Software revenue was down 9% year over year to €996 million (IFRS), down 5% (non-IFRS at constant currencies). New cloud and software license order entry³ grew 12% at constant currencies year over year in the second quarter. Cloud and software revenue grew 4% year over year to €4.94 billion (IFRS), up 10% (non-IFRS at constant currencies). Total revenue grew 4% year over year to €6.00 billion (IFRS), up 10% (non-IFRS at constant currencies).

SAP’s rapidly expanding cloud business together with solid growth in support revenue continued to drive the share of more predictable revenue. The total of cloud subscriptions & support revenue and software support revenue as a percentage of total revenue grew 2 percentage points year-over-year to 66% in the second quarter.

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Second quarter operating profit was up 13% year over year to €1.04 billion (IFRS), up 12% (non-IFRS at constant currencies). As announced in January 2018, the Company expects a positive revenue and profit impact from the adoption of IFRS 15 in 2018. In the second quarter, this positive impact on SAP’s operating profit was around €54 million. Earnings per share increased 8% to €0.60 (IFRS) and increased 5% to €0.98 (non-IFRS).

Operating cash flow for the first six months was €2.99 billion, down 15% year over year. The decrease in operating cash flow was mainly due to timing of stock based compensation payments, currency headwinds as well as higher tax and insurance payments. Free cash flow decreased 25% year over year to €2.17 billion. Free cash flow was also lower due to the previously announced additional CapEx for 2018. At the end of the second quarter, net liquidity was -€2.97 billion.

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SAP S/4HANA

With SAP’s next generation ERP S/4HANA, customers can massively simplify their IT landscape, turn real-time data into actions and reinvent their business models for the digital economy across every industry.

S/4HANA adoption grew to more than 8,900 customers, up 41% year over year. In the second quarter, approximately 600 additional customers signed up of which approximately 40% were net new.

S/4HANA continues to be selected by world-class global companies, including McDonalds (China) in the quarter. A growing number of companies are now adopting S/4HANA in the Cloud. TechnipFMC, China Sports Lemon, and Spirit Airlines chose S/4HANA Cloud.

SAP C/4HANA (Customer Experience)

SAP’s C/4HANA solutions serve a wide range of industries across both B2C and B2B and enable businesses to manage their entire front office: marketing, sales, commerce, service, customer data cloud – seamlessly and in real-time.

In the second quarter, SAP’s C/4HANA customer experience solutions achieved high double-digit year-over-year growth in new cloud bookings and total revenue in the SAP Customer Experience segment was up 65% to €242 million at constant currencies.

Whirlpool, Deutsche Telekom, and Novartis were among those that chose SAP’s C/4HANA solutions this quarter.

Human Capital Management

With SAP SuccessFactors and SAP Fieldglass, SAP delivers total workforce management across both permanent and contingent labor. The SAP SuccessFactors suite is localized for 92 countries and 42 languages.

SAP SuccessFactors Employee Central, which is the flagship of SAP’s HCM offering, ended the quarter with more than 2,600 customers and scored numerous competitive wins including BMW, Telecom Argentina, Shiseido, and MG Motors India.

SAP Leonardo

With SAP Leonardo SAP delivers powerful innovation by bringing together deep process and industry expertise, advanced design thinking methodology and cutting edge software capabilities such as IoT, Big Data, Machine Learning, Analytics, and Blockchain. All of this is integrated on the SAP Cloud Platform with new technologies easily added as they emerge.

Toyota and Porsche are among many others that adopted SAP Leonardo solutions in the second quarter.

Business Networks

With the SAP Business Networks SAP provides collaborative commerce capabilities (Ariba), flexible workforce management (Fieldglass) and effortless travel and expense processing (Concur). SAP Business Network is the largest commerce platform in the world with approximately $2.4 trillion⁴ in global commerce annually transacted in more than 180 countries.

In the second quarter, total revenue in the SAP Business Network segment was up 21% to €688 million at constant currencies year over year. Bosch-Siemens Hausgeräte, and Avianca chose SAP’s Business Network Solutions in the second quarter.

Regional Revenue Performance in the Second Quarter 2018

SAP had a very strong performance in the EMEA region with cloud and software revenue increasing 10% (IFRS) and 12% (non-IFRS at constant currencies). Cloud subscriptions and support revenue was strong and grew by 40% (IFRS) and 46% (non-IFRS at constant currencies) with Germany and the UK being highlights. In addition, SAP had strong double-digit software revenue growth in the UK, and the Middle East and Germany had another strong software revenue quarter with solid single digit growth.

The Company had a solid performance in the Americas region with a significant currency headwind. Cloud and software revenue decreased by 3% (IFRS) and increased by 8% (non-IFRS at constant currencies). Cloud subscriptions and support revenue increased by 24% (IFRS) and 35% (non-IFRS at constant currencies) with Brazil being a highlight.

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In the APJ region, SAP had a strong performance. Cloud and software revenue was up by 4% (IFRS) and grew by 11% (non-IFRS at constant currencies). Cloud subscriptions and support revenue was exceptional and grew by 42% (IFRS) and 52% (non-IFRS at constant currencies) with China and Japan being highlights. For software revenue, Australia, China and India had impressive quarters and grew by double digits.

Financial Results at a Glance

Business Outlook 2018

Due to the strong momentum in SAP’s cloud business the Company is raising its outlook for the full year 2018:

• Non-IFRS cloud subscriptions and support revenue is now expected to be in a range of €5.050 billion − €5.200 billion at constant currencies (2017: €3.77 billion), up 34.0% – 38.0% at constant currencies. The previous range was €4.95 billion − €5.15 billion at constant currencies.
• Non-IFRS cloud and software revenue is now expected to be in a range of €21.025 – €21.250 billion at constant currencies (2017: €19.55 billion), up 7.5% – 8.5% at constant currencies. The previous range was €20.85 – €21.25 billion at constant currencies.
• Non-IFRS total revenue is now expected to be in a range of €24.975 billion − €25.300 billion at constant currencies (2017: €23.46 billion), up 6.0% – 7.5% at constant currencies. The previous range was €24.80 billion − €25.30 billion at constant currencies.
• Non-IFRS operating profit is now expected to be in a range of €7.400 billion − €7.500 billion at constant currencies (2017: €6.77 billion), up 9.0% – 11.0% at constant currencies. The previous range was €7.35 billion − €7.50 billion at constant currencies.

While SAP’s full-year 2018 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 2018 expected currency impacts.

IFRS 15 Impact

As of January 1, 2018, SAP changed several of its accounting policies to adopt IFRS 15 ‘Revenue from Contracts with Customers’. Under the IFRS 15 adoption method chosen by SAP prior years are not restated to conform to the new policies. Consequently, the year-over-year growth of revenue and profit in 2018 will be impacted by the new policies.

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As already announced in SAP’s Q4 2017 Quarterly Statement, the Company expects the full year 2018 impact of the policy change⁵ on revenue, operating expenses and profit to be as follows:

• Revenues are expected to experience a benefit of substantially less than €0.1 billion with most of the difference resulting from exercises of customer software purchase options granted in prior years which result in software revenue.
• Operating expenses are expected to benefit, in cost of sales and marketing, in the amount of approximately €0.2 billion from higher capitalization of sales commissions. Other policy changes will weigh on operating expenses with an additional cost of revenue of substantially less than €0.1 billion.
• The above-mentioned effects will result in a net positive impact on operating profit of approximately €0.2 billion.

The new revenue recognition policies are described in our Half Year Report. Details regarding the IFRS 15 impact in the second quarter and first six months can be found in the section ‘Impact of Changes in Accounting Policies’ in this Quarterly Statement.

Ambition 2020

Looking beyond 2018, SAP is updating its 2020 ambition. This update reflects the strong momentum in SAP’s cloud business, the acquisition of Callidus Software as well as a more challenging currency environment compared to 2017.

SAP now expects 2020 non-IFRS cloud subscriptions and support revenue in a range of €8.2 − €8.7 billion (previously: €8.0 – €8.5 billion).

SAP continues to expect:

• €28 − €29 billion non-IFRS total revenue
• €8.5 − €9.0 billion non-IFRS operating profit
• The share of more predictable revenue (defined as the total of cloud subscriptions & support revenue and software support revenue) in a range of 70% − 75%.

The updated ambition is based on estimated average 2018 currencies, assuming the current foreign exchange environment prevails until year-end. The previous ambition was based on average 2017 currencies. The change in currency assumptions negatively impacts the cloud subscriptions and support revenue ambition by approximately -€0.35 billion, the total revenue ambition by approximately -€1.0 billion and the operating profit ambition by approximately -€0.4 billion. These negative impacts are now included in the updated 2020 ambition.

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