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Expected Developments and Opportunities

Future Trends in the Global Economy

In its latest economic bulletin report, the European Central Bank (ECB) predicts that the global economy will continue to accelerate in 2017 although remain below its pre-crisis pace. It also expects the pace of expansion will remain relatively stable in 2017 in the advanced economies and improve slightly in the emerging economies. Adverse effects of low commodity prices on the commodity-exporting countries, the sustained realignment of the Chinese economy, and political and economic uncertainty in the United States could, however, dampen global prospects in 2017, the ECB warns.

Looking at the Europe, Middle East, and Africa (EMEA) region, the ECB believes that the euro area economy will continue to recover further in 2017.It suggests that increased investment by enterprises benefiting from favorable borrowing conditions and improved earnings could be key factors in this growth. The experts even forecast a surge in investment activity in the Central and Eastern European countries in 2017 and dynamic consumer spending, both of which should help drive economic development there. Russia’s economy should begin to expand again in 2017, for the first time since coming out of its recession, the ECB says.

With regards to the North America and Latin America (Americas) region, the ECB writes that while uncertainty about the future political and economic course of the United States following the inauguration of the new president is currently very high, it nevertheless anticipates a moderate increase in US economic growth in 2017. As for Brazil, it should be able to leave its recession behind it in 2017, the ECB says, though large fiscal consolidation needs will continue to weigh on the country.

In the Asia Pacific Japan (APJ) region, Japan’s economy is projected to continue to expand at the same restrained pace as the preceding year. The ECB predicts that the underlying economic momentum in Japan will remain weak. Lastly, economic growth in China is likely to continue to decelerate in 2017, primarily due a renewed slowdown in investment growth as Chinese enterprises cut back overcapacity, the ECB says.

Economic Trends – Year-Over-Year GDP Growth

% 2015e 2016e 2017p
World 3.2 3.1 3.4
Advanced economies 2.1 1.6 1.9
Developing and emerging economies 4.1 4.1 4.5
Europe, Middle East, and Africa (EMEA)
Euro area 2.0 1.7 1.6
Germany 1.5 1.7 1.5
Central and Eastern Europe 3.7 2.9 3.1
Middle East and
North Africa
2.5 3.8 3.1
Sub-Saharan Africa 3.4 1.6 2.8
Americas
United States 2.6 1.6 2.3
Canada 0.9 1.3 1.9
Central and South America, Caribbean 0.1 −0.7 1.2
Asia Pacific Japan (APJ)
Japan 1.2 0.9 0.8
Asian developing economies 6.7 6.3 6.4
China 6.9 6.7 6.5

e = estimate; p = projection

Source: International Monetary Fund (IMF), World Economic Outlook Update, A Shifting Global Economic Landscape, as of January 2017, p. 7.

The IT Market: The Outlook for 2017

“Worldwide IT spending is projected to total $3.5 trillion in 2017, a 2.7 percent increase from 2016,” according to a January 2017 Gartner Press Release by Gartner, a market research firm. “However, this growth rate is down from earlier projections of 3 percent.2017 was poised to be a rebound year in IT spending. Some major trends have converged, including cloud, blockchain, digital business, and artificial intelligence. Normally, this would have pushed IT spending much higher than 2.7 percent growth. […] However, some of the political uncertainty in global markets has fostered a wait-and-see approach causing many enterprises to forestall IT investments. The range of spending growth from the high to low is much larger in 2017 than in past years. Normally, the economic environment causes some level of division, however, in 2017 this is compounded by the increased levels of uncertainty. […] The result of that uncertainty is a division between individuals and corporations that will spend more – due to opportunities arising – and those that will retract or pause IT spending.”

Gartner data indicate software will be the best-performing segment with software spending increasing by 7.2% (see table below). “Buyer investments in digital business, intelligent automation, and services optimization and innovation continue to drive growth in the market, but buyer caution, fueled by broad economic challenges, remains a counter-balance to faster growth,” says Gartner.

Within the Europe, Middle East, and Africa (EMEA) region, the table below shows that IT spending in Western European countries will grow 1.5% in 2017, whereas Western European software spending will increase considerably by 6.2%.

According to the table below, IT spending in the Americas region will expand in 2017 by 2.6% in North America and 2.1% in Latin America.

IT spending in the Asia Pacific Japan (APJ) region is expected to expand by 3.0% (Mature Asia/Pacific without Japan) and 5.9% (Emerging Asia/Pacific without China) in 2017 (see table below). IT spending in Greater China is expected to grow 5.1% in 2017 (see table below).

Sources:

1) Gartner Market Databook, 4Q16 Update, 21 December 2016.

2) Gartner Says Worldwide IT Spending Forecast to Grow 2.7 Percent in 2017, Press Release, January 12, 2017 (http://www.gartner.com/newsroom/id/3568917 ).

The Gartner Reports described herein, (the “Gartner Reports”) represent research opinion or viewpoints published, as part of a syndicated subscription service, by Gartner, Inc. (“Gartner”), and are not representations of fact. Each Gartner Report speaks as of its original publication date (and not as of the date of this Annual Report) and the opinions expressed in the Gartner Reports are subject to change without notice.

Trends in the IT Market –
Increased IT Spending Year-Over-Year

% 2015e 2016p 2017p
World
Total IT 4.0 0.5 2.7
Software 9.1 6.9 7.2
Services 5.1 4.5 4.6
Western Europe
Total IT 3.6 −0.1 1.5
Software 9.6 5.3 6.2
Services 4.4 3.8 4.1
Eastern Europe
Total IT 15.8 1.8 0.8
Software 10.8 9.0 8.8
Services 3.4 3.5 3.9
Eurasia
Total IT 2.0 −2.4 0.9
Software 14.1 6.5 7.9
Services 3.2 0.9 1.4
Middle East and North Africa
Total IT 6.2 −0.2 3.0
Software 11.4 9.9 10.1
Services 5.8 4.0 4.7
Sub-Saharan Africa
Total IT 7.3 1.6 5.2
Software 13.2 11.4 11.4
Services 5.2 5.3 5.4
North America
Total IT 3.0 1.5 2.6
Software 8.2 7.2 6.9
Services 6.0 5.3 5.3
Latin America
Total IT 4.7 −2.6 2.1
Software 11.0 7.4 8.1
Services 6.9 6.7 6.9
Mature Asia/Pacific
(w/o Japan)
Total IT 4.9 1.4 3.0
Software 12.4 9.3 9.4
Services 4.4 2.9 2.6
Emerging Asia/Pacific
(w/o China)
Total IT 7.3 2.9 5.9
Software 11.4 10.8 11.1
Services 7.5 9.6 9.7
Japan
Total IT 0.4 0.3 1.9
Software 7.4 5.2 5.5
Services 3.1 2.2 1.7
Greater China (China/ Taiwan/Hong Kong)
Total IT 4.8 0.4 5.1
Software 7.8 8.4 9.3
Services 5.7 7.7 8.1

e = estimate, p = projection

Table created by SAP based on: Gartner Market Databook, 4Q16 Update, 21 December 2016, Table 2-1 “Regional End-User Spending on IT Products and Services in Constant U.S. Dollars, 2014–2020 (Millions of Dollars)”.

Impact on SAP

SAP expects to outperform the global economy and the IT industry again in 2017 in terms of revenue growth.

As last year, our 2016 results validate our strategy of innovating across the core, the cloud, and business networks to help our customers become true digital enterprises. Our innovation cycle for SAP S/4HANA is well underway and the completeness of our vision in the cloud continues to distinguish SAP from both legacy players and providers of cloud-based point solutions. We achieved all key performance indicators raised in our business outlook in October.

On this basis, we consider ourselves well-prepared for the future and expect profitable growth in 2017 as well. As such, we are raising our ambitious goals for 2020. Balanced in terms of regions as well as industries, we remain well-positioned with our product offering to offset individual fluctuations in the global economy and IT market.

A comparison of our business outlook with forecasts for the global economy and IT industry shows that we can be successful even in a tough economic environment and increased geopolitical uncertainty, and will further strengthen our position as the market leader of enterprise application software.

Operational Targets for 2017 (Non-IFRS)

Revenue and Operating Profit Outlook

The Company is providing the following 2017 outlook:

  • Based on the continued strong momentum in SAP’s cloud business the Company expects full year 2017 non-IFRS cloud subscriptions and support revenue to be in a range of €3.8 billion − €4.0 billion at constant currencies (2016: €2.99 billion), in line with the previous 2017 ambition which was raised at the beginning of 2016. The upper end of this range represents a growth rate of 34% at constant currencies.
  • The Company expects full year 2017 non-IFRS cloud & software revenue to increase by 6% − 8% at constant currencies (2016: €18.43 billion).
  • The Company expects full year 2017 non-IFRS total revenue in a range of €23.2 billion to €23.6 billion at constant currencies (2016: €22.07 billion). This is above the previous 2017 ambition which was raised at the beginning of 2016.
  • The Company expects full-year 2017 non-IFRS operating profit to be in a range of €6.8 billion − €7.0 billion at constant currencies (2016: €6.63 billion). This is above the previous 2017 ambition which was raised at the beginning of 2016.

We expect our headcount to increase at a slightly lower pace than in 2016.

While our full-year 2017 business outlook is at constant currencies, actual currency reported figures are expected to continue to be impacted by currency exchange rate fluctuations.

We expect that non-IFRS total revenue will continue to depend largely on the revenue from cloud and software. However, the revenue growth we expect from this is below the outlook provided for non-IFRS cloud subscriptions and support revenue. We expect the software license revenue in 2017 to decline by low to mid-single digit compared to 2016. However we will continuing to gain market share against our main on-premise license competitors.

We continuously strive for profit expansion in all our reportable segments leading to a SAP Group profit expansion as outlined in the given 2017 outlook. For SAP’s managed-cloud offerings, we expect a positive gross margin result in 2017 according to outlined long-term 2020 planning.

The following table shows the estimates of the items that represent the differences between our non-IFRS financial measures and our IFRS financial measures.

Non-IFRS Measures

€ millions Estimated Amounts for 2017 Actual Amounts for 2016
Revenue adjustments < 20 5
Share-based payment expenses 770 to 1,020 785
Acquisition-related charges 620 to 650 680
Restructuring 30 to 50 28

We do not expect any Company-wide restructuring programs in 2017.

The Company expects a full-year 2017 effective tax rate (IFRS) of 26.0% to 27.0% (2016: 25.3%) and an effective tax rate (non-IFRS) of 27.0% to 28.0% (2016: 26.8%).

Goals for Liquidity and Finance

On December 31, 2016, we had a negative net liquidity. We believe that our liquid assets combined with our undrawn credit facilities are sufficient to meet our present operating financing needs also in 2017 and, together with expected cash flows from operations, will support debt repayments and our currently planned capital expenditure requirements over the near term and medium term.

In 2017, we expect a positive development of our operating cash flow, which we anticipate will reach up to €5.0 billion.

We intend to repay €1 billion Eurobonds when they mature in April 2017 as well as US$443 million U.S. private placements in October and November 2017.

In the absence of large acquisitions, we expect our strong operating cash flow will generate excess cash in the next 6-12 months. Based on the actual acquisition volume and liquidity development we would consider a potential share buyback in the second half of 2017.

Investment Goals

Our planned capital expenditures for 2017 and 2018, other than from business combinations, mainly comprise the construction activities described in the Assets (IFRS) section of this report. We expect investments from these activities of approximately €365 million in 2017 (an increase of 20% compared to the previous year), and approximately €250 million in 2018. These investments can be covered in full by operating cash flow.

SAP is not currently planning any significant acquisitions in 2017 and 2018 but will rather focus on organic growth, complemented by minor acquisitions. In 2017, we intend to spend up to €1.0 billion for smaller acquisitions.

Proposed Dividend

We intend to continue our dividend policy in 2017 as well, which is to pay a dividend totaling more than 35% of the prior year’s profit after tax.

Premises on Which Our Outlook Is Based

In preparing our outlook, we have taken into account all events known to us at the time we prepared this report that could influence SAP’s business going forward.

Among the premises on which this outlook is based are those presented concerning economic development and the assumption that there will be no effects from major acquisitions in 2017 and 2018.

Outlook for SAP SE

The primary source of revenue for SAP SE is the license fees it charges subsidiaries for the right to market and maintain SAP software solutions. Consequently, the performance of SAP SE in operating terms is closely tied to the cloud and software revenue of the SAP Group.

We expect SAP SE product revenue to increase at constant currencies generally in line with the 6% to 8% constant-currency rise in non-IFRS cloud and software revenue anticipated for the SAP Group in 2017.

Assuming there are no special effects relating to acquisitions or internal corporate restructuring measures in 2017, we also expect the operating profit of SAP SE to increase slightly.

Provided the SAP Group continues to hit its revenue and profit targets, we expect SAP SE to sustain revenue and operating income growth into the medium term.

We believe SAP SE, the parent company of the SAP Group, will receive investment income in the form of profit transfers and dividends again in the future. The growth we expect from the SAP Group should have a positive effect on SAP SE investment income.

The outlook projections for the SAP Group in respect of liquidity, finance, investment, and dividend are equally applicable to SAP SE.

Among the assumptions underlying this outlook are those presented above concerning the economy and our expectations for the performance of the SAP Group.

Medium-Term Prospects

In this section, all numbers are based exclusively on non-IFRS measures.

We expect to grow our more predictable revenue business while steadily increasing operating profit. Our strategic objectives are focused primarily on the following financial and non-financial objectives: growth, profitability, customer loyalty, and employee engagement.

We raised our 2020 ambition to reflect the Company’s consistent fast growth in the cloud, solid software momentum, and operating profit expansion as well as the exchange rate development. Assuming an exchange rate environment comparable to 2016, SAP strives to reach the following in 2020:

  • €8.0 billion to €8.5 billion cloud subscriptions and support revenue (previously €7.5 billion to €8.0 billion)
  • €28 billion to €29 billion total revenue (previously €26 billion to €28 billion)
  • €8.5 billion to €9.0 billion operating profit (previously €8.0 billion to €9.0 billion)

We continue to expect the share of more predictable revenue (defined as the total of cloud subscriptions & support revenue and software support revenue) to reach 70% to 75% in 2020.

By 2020, we expect our business network and public cloud offerings to generate approximately the same portion of cloud subscriptions and support revenue. Both of these offerings are expected to each generate, in 2020, cloud subscriptions and support revenues that are significantly higher than the cloud subscriptions and support revenue generated from our private cloud offerings.

Our revenue growth trajectory through 2020 is expected to be driven by continued strong growth in the cloud, low to mid-single-digit declines in software revenue and continued growth in our software support revenue. This is all expected to drive high single-digit growth in cloud and software revenue through 2020.

We also strive for significantly improving, over the next few years, the profitability of our cloud business. In 2017, we will continue the investment phase of our cloud business. As of 2018, we expect to see the benefits from those efficiency-based investments and increasing cloud gross margin. We expect these improvements to continue in the following years to reach our envisioned long-term cloud subscriptions and support margin targets in 2020. These will continue to increase at different rates per cloud operations model: We expect the gross margin from our public cloud to reach approximately 80% (2016: 62.0%) in 2020. Likewise, we expect our business network gross margin to reach approximately 80% (2016: 75.9%) in 2020. The gross margin for our private cloud is expected to reach about 40% (2016: -5.4%) in 2020. The combined cloud gross margin is expected to be approximately 73% in 2020.

We also aim at further improving the profitability of our on-premise software business. The gross margin for our software licenses and support is expected to remain at least stable at approximately 88% (2016: 87.4%) in 2020.

In addition, we expect our services gross margin to reach approximately 20% (2016: 18.2%) in 2020.

As we look to increase our profitability through 2020, our cost ratios (cost as a % of total revenue) are expected to develop as follows through 2020: Research and development is expected to decline slightly, Sales and marketing is expected to follow the growth of the business and General and administration is expected to remain stable.

Non-Financial Goals 2017 and Ambitions for 2020

In addition to our financial goals, we also focus on two non-financial targets: customer loyalty and employee engagement.

For 2017 through to 2020, we aim to reach an Employee Engagement Index between 84% and 86% (2016: 85%).

We measure customer loyalty using the Customer Net Promoter Score (NPS). In 2017, we target achieving a combined Customer NPS of 21% to 23%, with our medium-term goal of reaching a combined Customer NPS of 35% to 40% by 2020 (2016: 19.2%).

Opportunities

Our customers rely on SAP as the trusted partner in their digital business transformation, not only for providing in-memory technology, standardized on-premise and cloud solutions, and access to business networks, but also for helping them drive new business outcomes and enabling business model innovations. To meet these expectations, we must grow consistently and accelerate the pace of our own business transformation by exploiting new opportunities.

We have established a framework for opportunity management by evaluating and analyzing four key areas: current markets, competitive landscapes, external scenarios, and technological trends. Additionally, we have delved into customer and product segmentation, growth drivers, and industry-specific success factors. Based on these combined insights, our Executive Board defines our market strategies. Our shareholder value relies heavily upon a fine balance of risk mitigation and value-driven opportunities. Therefore, our strong governance model ensures that decisions are based on return, investment required, and risk mitigation. We rely on the talent and resources within SAP and our entire ecosystem.

As far as opportunities are likely to occur, we have incorporated them into our business plans, our outlook for 2017, and our medium-term prospects outlined in this report. Therefore, the following section focuses on future trends or events that might result in an uplift of our outlook and medium-term prospects, if they develop better than we have anticipated in our forecasts.

SAP SE is the parent company of the SAP Group and earns most of its revenue from software license fees, subscriptions fees, and dividends paid by affiliates. Consequently, the opportunities described below also apply – directly or indirectly – to SAP SE.

Opportunities from Economic Conditions

Economic conditions have a clear influence on our business, financial position, profit, and cash flows. Should the global economy experience a more sustained growth than is reflected in our plans today, our revenue and profit may exceed our current outlook and medium-term prospects.

Our midterm planning is based on unchanged market conditions in emerging markets. Should their stability increase again, this would be an upside to our midterm planning.

For more information about future trends in the global economy and the IT market outlook as well as their potential influence on SAP, see the Expected Developments and Opportunities section.

Opportunities from Research and Development Traction

Our continued growth through innovation is based on our ability to leverage research and development (R&D) resources effectively. We continue to improve our development processes through design thinking and lean methodologies. We are accelerating innovation cycles especially in the area of cloud solutions and engaging more closely with our customers to ensure accuracy and success. In addition, we have generated a new structure that enables innovations in a startup-like environment and ecosystem.

While speed is a key strength, we also focus on ease of adoption and providing compelling returns. This allows our customers to easily consume technologies and software applications with immediate benefits for their businesses. If we make innovations available faster than currently anticipated, or if customers adopt the innovations faster than currently expected, for example, shifting faster to managed clouds for enterprise resource planning, or shifting faster to our new SAP S/4HANA solutions, this could positively impact our revenue, profit, and cash flows, and result in their exceeding our stated outlook and medium-term prospects.

For more information about future opportunities in research and development for SAP, see the Products, Research and Development, and Services section as well as the Expected Developments and Opportunities section.

Opportunities from Our Strategy for Profitable Growth

SAP strives to generate profitable growth across our portfolio of products, solutions, and services to keep or improve its market position. Our aim is to continue to expand our addressable market to €320 billion in 2020, based on new assets in our SAP Business Network Segment, our new technologies and innovations, and the extension of our cloud portfolio.

We see opportunities in growing product and market areas, such as in-memory computing, cloud, mobile, business networks, social media, Big Data, the Internet of Things, machine learning, artificial intelligence, predictive analytics and especially all business developments that are targeted at the digital business transformation which is key to our strategy. In addition to organic developments and tuck-in acquisitions, large strategic acquisitions in particular may boost our revenue and profits significantly. Furthermore, SAP seeks to establish new business models and leverage our expanding ecosystem of partners to achieve scale and maximize opportunities.

Our strong assets in applications and analytics, as well as database and technology, continue to offer solid multiyear growth opportunities as we bring innovative technologies with simplified consumption to our installed base and continue to add net-new customers. Unexpected portfolio growth may positively impact our revenue, profit, and cash flows, and result in their exceeding our stated outlook and medium-term prospects. Specifically, SAP HANA, cloud offerings, and SAP S/4HANA solutions, could create even more demand than is reflected in our stated outlook and medium-term prospects. Further upside potential is possible by higher than expected renewal rates of our cloud solutions.

For more information about future opportunities for SAP, see the Strategy and Business Model section as well as the Expected Developments and Opportunities section.

Opportunities from Our Partner Ecosystem

SAP continues to grow and develop a global partner ecosystem. To increase market coverage, we want to enhance our portfolio and spur innovation with the specified objective of increasing the partner revenue contribution to SAP’s overall revenue target. In addition to strengthening our core, we leverage our entire ecosystem to drive adoption of SAP HANA, cloud solutions, SAP S/4HANA, and SAP Cloud Platform (formerly called SAP HANA Cloud Platform). This includes strategic partnerships across all areas: third-party software vendors, systems integrators, service providers, and infrastructure providers. As a result, we are creating an ever-stronger setup, where SAP, along with our customers and partners, co-innovate and develop new innovative solutions on and with SAP HANA. Should the business of our partners develop better than currently expected, our indirect sales (partner revenue) could grow stronger than reflected in our outlook and medium-term prospects. This may positively impact our revenue, profit, and cash flows, and result in their exceeding our stated medium-term prospects.

Opportunities from Our Employees

Our employees drive our innovation, provide the value to our customers, and consistently promote our growth and profitability. In 2016, we significantly increased the number of full-time employees in key strategic areas to support our growth ambitions. We anticipate improvements in employee productivity as a result of our continued endeavors in design-thinking principles. As described in the Employees and Social Investment section, we continuously invest in our talents to increase engagement, collaboration, social innovation, and health.

To ensure continuous innovation and sustained business success, we need to continuously tap into the global talent pool and bring the best and brightest talent to SAP. To do so, we aim to further strengthen our brand perception in the market and optimize our recruiting experience to emphasize our mission to help the world run better and improve people’s lives. Furthermore, we will maximize mobile channels and innovative talent strategies to tap into new talent pools.

Our outlook and medium-term prospects are based on certain assumptions regarding employee turnover and our Business Health Culture Index (as defined in the Employees and Social Investment section). Should these develop better than expected there might be an upside to employee productivity and engagement. In turn, this might positively impact our revenue, profit, and cash flows, and result in their exceeding our stated medium-term prospects.

For more information about future opportunities from our employees, see the Employees and Social Performance section.

Opportunities from Our Customer Engagement

SAP goes to market by region, customer segments, line of business, and industry. We evolve and invest in our go-to-market coverage model to effectively sell industry-specific solutions while increasing our engagement with customers. We focus on the dynamic and fast-changing landscape each industry faces as technology evolves.

We offer unique services that support a significant return on investment, and continue to actively look at new opportunities to increase the value we deliver to our customers.

In general, our outlook and medium-term prospects are based on certain assumptions regarding the success of our go-to-market approaches. If the actual go-to-market success exceeds these assumptions, this could positively impact our revenue, profit, and cash flows, and result in their exceeding our stated medium-term prospects.

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