Overall Financial Position
Executive Board’s Assessment
In 2016, we delivered strong software sales, fast cloud growth, and operating profit expansion. We saw exceptional growth in our cloud and software business and reached above the midpoint of the full year outlook which we raised in October. SAP’s rapidly expanding cloud business combined with solid growth in support revenue continued to drive the share of more predictable revenue.
The strong cloud growth was driven throughout our broad cloud portfolio. Mainly due to our strong top line result, we generated an operating profit which was at the midpoint of our raised guidance range.
We made substantial progress in transforming our Company by shifting investments from non-core activities to strategic growth areas, enabling us to capture the tremendous growth opportunities in the market. We expanded our addressable market, acquired best in class assets, and innovated a new generation of ERP with SAP S/4HANA. Our strong cloud backlog and the high software support renewal rates combined with our robust pipeline positions us for yet another year of growth in 2017 and allowed us to confidently raise our high-level 2020 ambition.
Influence of Accounting Policies on Our Financial Position
For more information about our accounting policies, see the Notes to the Consolidated Financial Statements section, Note (3).
There are no off-balance sheet financial instruments, such as sale-and-lease-back transactions, asset-backed securities, and liabilities related to structured entities, which are not disclosed in our Consolidated Financial Statements.
Performance Against Our Outlook for 2016 (Non-IFRS)
Our 2016 operating profit-related internal management goals and published outlook were based on our non-IFRS financial measures. For this reason, in the following section we discuss performance against our outlook only in terms of non-IFRS numbers derived from IFRS measures. The subsequent section about IFRS operating results discusses numbers only in terms of the International Financial Reporting Standards (IFRSs), so the numbers in that section are not expressly identified as IFRS numbers.
Outlook for 2016 (Non-IFRS)
At the beginning of 2016, we projected that our 2016 non-IFRS cloud subscriptions and support revenue would be between €2.95 billion and €3.05 billion at constant currencies (2015: €2.30 billion). We expected full-year 2016 non-IFRS cloud and software revenue to increase by 6% to 8% at constant currencies (2015: €17.23 billion). We also expected our full-year operating profit (non-IFRS) for 2016 to end between €6.4 billion and €6.7 billion (2015: €6.35 billion) at constant currencies. We anticipated an effective tax rate (IFRS) of between 22.5% and 23.5% (2015: 23.4%) and an effective tax rate (non-IFRS) of between 24.5% and 25.5% (2015: 26.1%).
In July 2016, we adjusted our outlook for the effective tax rate (IFRS) to between 27.0% and 28.0% and for the effective tax rate (non-IFRS) to between 28.0% and 29.0%. The increase in comparison to the previous outlook mainly resulted from tax effects relating to changes in foreign currency exchange rates in Venezuela and the fact that the execution of the originally planned consolidation of intellectual property rights held by SAP Group company hybris AG at the level of SAP SE in Germany could no longer be achieved at this point of time.
In October, based on the strong momentum in our cloud business, we raised our outlook for 2016 non-IFRS cloud subscriptions and support revenue to a range of €3.00 billion to €3.05 billion at constant currencies. The upper end of this range represents a growth rate of 33% at constant currencies. Thanks to continued growth in our software license business, we were also able to increase our growth outlook for full-year 2016 non-IFRS cloud and software revenue to 6.5% to 8.5% at constant currencies. In view of the greater revenues expected, we also adjusted our outlook for full-year operating profit (non-IFRS) for 2016 upward to range between €6.5 billion and €6.7 billion at constant currencies.
2016 Actual Performance Compared to Outlook (Non-IFRS)
We achieved or exceeded the raised outlook for revenue and operating profit we published in October.
|Outlook for 2016
(as reported in Integrated Report 2015)
|Cloud subscriptions and support revenue (non-IFRS, at constant currencies)||€ 2.95 billion
to € 3.05 billion
|€ 3.00 billion
to € 3.05 billion
|€ 3.01 billion|
|Cloud and software revenue
(non-IFRS, at constant currencies)
|+6.0% to +8.0%||+6.5% to +8.5%||+8%|
(non-IFRS, at constant currencies)
to €6.70 billion
to €6.70 billion
|Effective tax rate (IFRS)||22.5% to 23.5%||27.0% to 28.0%||25.3%|
|Effective tax rate (non-IFRS)||24.5% to 25.5%||28.0% to 29.0%||26.8%|
Despite ongoing economic uncertainty throughout 2016, especially in Latin America, coupled with fears about the possible effects of the Brexit vote and the presidential election in the United States, our new and existing customers continued to show a strong willingness to invest in our solutions.
On a constant currency basis, non-IFRS cloud subscriptions and support revenue grew from €2.30 billion in 2015 to €3.01 billion in 2016. That represents an increase of 31% on a constant currency basis. We thus achieved our refined outlook range of €3.00 billion to €3.05 billion that we predicted in October.
Our new cloud bookings, which is the main measure for our cloud-related sales success and for future cloud subscriptions revenue, increased 31% in 2016 to €1.15 billion (2015: €874 million). In addition to this strong growth, our cloud backlog (unbilled future revenue based on existing customer contracts) climbed by 47% to €5.4 billion (2015: €3.7 billion). This reflects the unbilled committed future cloud subscriptions and support revenue that will drive strong cloud growth in 2017 and beyond.
Besides the cloud business, our traditional on-premise business also showed a remarkable growth in 2016. Cloud and software revenue (non-IFRS) was €18.43 billion (2015: €17.23 billion). On a constant currency basis, the increase was 8% and therefore well above the midpoint of the increased outlook.
Our total revenue (non-IFRS) rose 6% in 2016 to €22.07 billion (2015: €20.81 billion). On a constant currency basis, the increase was 7%.
Operating expenses (non-IFRS) in 2016 were €15.43 billion (2015: €14.46 billion), an increase of 7%. On a constant currency basis, the increase was 8%.
Our expense base in 2016 continued to be impacted by the transformation to a fast-growing cloud business. In our outlook we expected the cloud subscriptions and support gross margin to be at least stable or to slightly increase compared to 2015. The cloud subscriptions gross margin for 2016 was 64.4%, a decrease of 1.2pp on a constant currency basis and with that below our expectations. The decrease is primarily due to the change in the cloud subscription revenue mix; the share of our infrastructure-as-a-service cloud offering (IaaS) that has a lower margin than the other cloud offerings, grew at above-average rates and thus impacted the overall gross margin. The cloud subscriptions gross margins of our cloud offerings developed heterogeneously in 2016:
Our cloud subscriptions gross margin (non-IFRS) in our business network business increased by 1% and resulted in approximately 76% for 2016, already close to our long-term ambition of approximately 80%. This excellent result is attributable to the continued positive gross margin development within the Concur and SAP Ariba portfolios.
The cloud subscriptions gross margin (non-IFRS) of our infrastructure-as-a-service cloud offering (IaaS) performed much better in 2016 than in 2015. In 2016 our cloud subscription gross margin is -5% which reflects an improvement of more than 104pp on a constant currency basis. In the last two quarters break-even was already reached, we are therefore in line with our expectations. Profitability in our software-as-a-service/platform-as-a-service cloud offering (Saas/PaaS) was approximately 62% for 2016 compared to our long-term ambition of approximately 80%. Affected by the incremental investments in our cloud infrastructure, cloud profitability fell by 8pp on a constant currency basis, mainly due to significant investments in the expansion of our data center and IT infrastructure as well as in the harmonization of our various public cloud offerings into one platform.
Efficiency improvements in both our cloud and traditional on-premise business drove continued operating profit expansion. Non-IFRS operating profit in 2016 was €6.61 billion on a constant currency basis, reflecting an increase of 4%. As a result, we were able to surpass our excellent results from 2015, despite our continued investment in our business transformation during the reporting year. The positive development of our operating profit was influenced by the effects of our global transformation program carried out in 2015 as well as by the cost-conscious hiring of highly educated young talents in our fast growth areas and locations that enabled us to increase our overall headcount by 7,197 full-time equivalents in 2016. With these additional resources, we continued to invest in our innovation and growth markets. Thus, constant currency non-IFRS operating profit amounting to €6.61 billion was at the midpoint of our raised outlook range (€6.5 billion to €6.7 billion).
We achieved an effective tax rate (IFRS) of 25.3% and an effective tax rate (non-IFRS) of 26.8%, which is below the adjusted outlook of 27.0% to 28.0% (IFRS) and 28.0% to 29.0% (non-IFRS). This mainly results from taxes for prior years and from the regional allocation of income.
Operating Results (IFRS)
We break our operations down into three regions: the Europe, Middle East, and Africa (EMEA) region, the Americas region, and the Asia Pacific Japan (APJ) region. We allocate revenue amounts to each region based on where the customer is located. For more information about revenue by geographic region, see the Notes to the Consolidated Financial Statements section, Note (28).
Total revenue increased from €20,793 million in 2015 to €22,062 million in 2016, representing an increase of €1,269 million, or 6%.
This increase reflects a 7% increase from changes in volumes and prices and a 1% decrease from currency effects. The growth in revenue resulted primarily from a €707 million increase in cloud subscriptions and support revenue. Furthermore, software support revenue rose €478 million. This growth is a result of continuously high software license revenue, which increased €25 million in 2016. Cloud and software revenue climbed to €18,424 million in 2016, an increase of 7%. Cloud and software revenue represented 84% of total revenue in 2016 (2015: 83%). Service revenue increased 2% from €3,579 million in 2015 to €3,638 million, which was 16% of total revenue, in 2016.
Cloud and Software Revenue
Software licenses revenue results from the fees earned from selling or licensing software to customers. Revenue from cloud subscriptions and support refers to the income earned from contracts that permit the customer to access specific software solutions hosted by SAP during the term of its contract with SAP. Support revenue represents fees earned from providing technical support services and unspecified software upgrades, updates, and enhancements to customers.
Cloud subscriptions and support revenue increased from €2,286 million in 2015 to €2,993 million in 2016.
Despite a combination of a challenging macroeconomic and political environment and the accelerating industry shift to the cloud, we achieved a €25 million increase in software license revenue. This increase, from €4,835 million in 2015 to €4,860 million in 2016, reflects a 1% increase from changes in volumes and prices and a 1% decrease from currency effects.
Our customer base continued to expand in 2016. Based on the number of contracts concluded, 16% of the orders we received for software in 2016 were from new customers (2015: 13%). The total value of software orders received was stable year-over-year. The total number of software license contracts remained at the same level with 57,291 (2015: 57,439), while the average order value remained unchanged year-over-year. 29% of our software order entry in 2016 resulted from deals worth more than €5 million (2015: 27%), while 38% resulted from deals worth less than €1 million (2015: 40%).
Our stable customer base, continued investment in new software licenses by customers throughout 2016 and the previous year, and the continued interest in our support offerings resulted in an increase in software support revenue from €10,093 million in 2015 to €10,571 million in 2016. The SAP Enterprise Support offering was the largest contributor to our software support revenue. The €478 million, or 5%, growth in software support revenue reflects a 6% increase from new support business and a 1% decrease from currency effects. This growth is primarily attributable to SAP Product Support for Large Enterprises and SAP Enterprise Support. The acceptance rate for SAP Enterprise Support among new customers reached 100% in 2016 (2015: 99%).
Software licenses and software support revenue rose €503 million, or 3%, from €14,928 million in 2015 to €15,431 million in 2016. This increase reflects a 4% increase from changes in volumes and prices and a 1% decrease from currency effects.
We define predictable revenue as the sum of our software support revenue and our cloud subscriptions and support revenue. Compared to the previous year, our predictable revenue increased 10%, from €12,379 million to €13,564 million in 2016. Predictable revenue accounted for 61% of our total revenue in 2016 (2015: 60%).
Cloud and software revenue grew from €17,214 million in 2015 to €18,424 million in 2016, an increase of 7%. This reflects an 8% increase from changes in volumes and prices and a 1% decrease from currency effects.
Services revenue combines revenue from professional services, premium support services, training services, messaging services and payment services. Professional services primarily relate to the installation and configuration of our cloud subscriptions and on-premise software products. Our premium support offering consists of high-end support services tailored to customer requirements. Messaging services are primarily transmission of electronic text messages from one mobile phone provider to another. Payment services are primarily delivered in connection with our travel and expense management offerings.
Services revenue increased €59 million, or 2%, from €3,579 million in 2015 to €3,638 million in 2016. This increase reflects a 3% increase from changes in volumes and prices and a 1% decrease from currency effects.
A solid market demand led to a 1% increase of €26 million in consulting revenue and premium support revenue from €2,856 million in 2015 to €2,883 million in 2016. This increase reflects a 2% increase from changes in volumes and prices and a 1% decrease from currency effects. Consulting and premium support revenue contributed 79% of the total service revenue (2015: 80%). Consulting and premium support revenue contributed 13% of total revenue in 2016 (2015: 14%).
Revenue from other services increased €33 million, or 5%, to €756 million in 2016 (2015: €723 million). This reflects a 6% increase from changes in volumes and prices and a 1% decrease from currency changes.
Revenue by Region
In 2016, the EMEA region generated €9,755 million in revenue (2015: €9,181 million), which was 44% of total revenue (2015: 44%). This represents a year-over-year increase of 6%. Revenue in Germany increased 9% to €3,034 million in 2016 (2015: €2,771 million). Germany contributed 31% (2015: 30%) of all EMEA region revenue. The remaining revenue in the EMEA region was primarily generated in the United Kingdom, France, Switzerland, the Netherlands and Italy. Cloud and software revenue generated in the EMEA region in 2016 totaled €8,193 million (2015: €7,622 million). Cloud and software revenue represented 84% of all revenue in the region in 2016 (2015: 83%).
Cloud subscriptions revenue rose 39% to €703 million in 2016 (2015: €507 million). This growth reflects a 41% increase from changes in volumes and prices and a 3% decrease from currency effects. Software licenses and software support revenue rose 5% to €7,489 million in 2016 (2015: €7,115 million). This increase reflects a 7% increase from changes in volumes and prices and a 2% decrease from currency effects.
In 2016, 40% of our total revenue was generated in the Americas region (2015: 41%). Total revenue in the Americas region increased 6% to €8,931 million; revenue generated in the United States increased 6% to €7,167 million. This growth reflects a 6% increase from changes in volumes and prices and currency effect of 0%. The United States contributed 80% (2015: 80%) of all revenue generated in the Americas region. In the remaining countries of the Americas region, revenue increased 5% to €1,763 million. This increase reflects a 7% increase from changes in volumes and prices and a 2% decrease from currency effects. Revenue in the remaining countries of the Americas region was generated primarily in Mexico, Brazil and Canada. Cloud and software revenue generated in the Americas region in 2016 totaled €7,366 million (2015: €6,929 million). Cloud and software revenue represented 82% of all revenue in the Americas region in 2016 (2015: 82%).
Cloud subscriptions revenue rose by 27% to €2,000 million in 2016 (2015: €1,579 million); currency effects were 0%. Software licenses and software support revenue in 2016 of €5,366 million was virtually unchanged compared to the prior year (2015: €5,350 million).
In 2016, 15% (2015: 15%) of our total revenue was generated in the APJ region. Total revenue in the APJ region increased 6% to €3,377 million. In Japan, revenue increased 24% to €825 million. Revenue from Japan was 24% (2015: 21%) of all revenue generated in the APJ region. The revenue growth in Japan was attributable to a 10% increase from changes in volumes and prices and a 13% increase from currency effects. In the remaining countries of the APJ region, revenue increased 1%. Revenue in the remaining countries of the APJ region was generated primarily in Australia, India and China. Cloud and software revenue in the APJ region totaled €2,865 million in 2016 (2015: €2,663 million). That was 85% of all revenue from the region (2015: 84%).
Cloud subscriptions revenue grew 45% to €290 million in 2016 (2015: €200 million). This growth reflects a 43% increase from changes in volumes and prices and a 1% increase from currency effects. Software licenses and software support revenue increased 5% to €2,575 million in 2016 (2015: €2,463 million). This growth reflects a 3% increase from changes in volumes and prices and a 1% increase from currency effects.
Revenue by Industry
In 2016, we achieved above-average growth in the following industry sectors, measured by changes in total revenue: Consumer (€5,520 million, growing 12%); Services (€3,632 million, growing 10%); and Discrete Manufacturing (€3,880 million, growing 6%). Revenue from the other industry sectors was Financial Services (€1,928 million, growing 3%); Energy and Natural Resources (€4,966 million, growing 3%); and Public Services (€2,137 million, decreasing 2%).
Operating Profit and Operating Margin
SAP continued to invest in innovation and its cloud business and achieved a record revenue in 2016. Thanks to strong revenue growth and lower restructuring costs, our operating profit improved 21% to €5,135 million (2015: €4,252 million).
In 2016, our operating expenses increased €387 million or 2% to €16,928 million (2015: €16,541 million). The main contributors to that increase were our continued investment in sales activities and our greater revenue-related and investment-related cloud subscriptions and support costs.
The record revenue generated and significantly lower restructuring costs had a positive impact on our operating profit. Continuing investment in cloud infrastructure, in sales activities around the world, and in research and development also affected the results in 2016. The increased operating profit and the higher share price in 2016 pushed the cost of bonus payments to employees and share-based compensation higher. Our employee headcount (measured in full-time equivalents, or FTEs) increased by 7,197 year-over-year.
The increased operating expenses largely represent investments in the future and were offset by the increase in revenue.
As an overall result of these effects on operating profit, our operating margin widened 2.8pp to 23.3% in 2016 (2015: 20.5%).
Changes to the individual elements in our cost of revenue were as follows:
Cost of Cloud and Software
Cost of cloud and software consists primarily of customer support costs, cost of developing custom solutions that address customers’ specific business requirements, costs for deploying and operating cloud solutions, amortization expenses relating to intangibles, and license fees and commissions paid to third parties for databases and the other complementary third-party products sublicensed by us to our customers.
In 2016, the cost of cloud and software increased 5% to €3,495 million (2015: €3,313 million).
Main impact on costs was an additional €291 million year-over-year to extend our cloud business in response to the sustained strength of customer demand, with an associated increase in the expense of delivering and operating cloud applications. These investments contributed to revenue growth. Our margin on cloud subscriptions and support increased 0.8pp to 56.1% (2015: 55.3%). This improvement in margin was achieved primarily through strong growth in revenue. The investments in our cloud business were offset by the significant increase in cloud subscriptions and support revenue.
While software licenses and support revenue increased, savings in customer support, in the cost of developing custom solutions, and in license fees, enabled us to reduce our software and support costs by a total of €109 million year over year.
The gross margin on cloud and software, defined as cloud and software profit as a percentage of cloud and software revenue, widened to 81.0% in 2016 (2015: 80.8%). This change was mainly driven by the improved software license and support margin, which increased 1.2pp to 85.9% (2015; 84.7%).
Cost of Services
Cost of services consists primarily of the cost of consulting, premium services and training personnel and the cost of bought-in consulting and training resources.
As of the second quarter of 2016, we changed the way sales and marketing expenses related to our service activities are classified in our income statement. For more information see the Notes to the Consolidated Financial Statements section, Note (3b).
Although we were able to increase our service revenue by 2% year over year to €3,638 million in 2016 (2015: €3,579 million), our service business continues to be greatly affected as we trend away from classic software licensing and consulting revenue toward more subscription revenue from cloud solutions. In addition, we continue to invest in our ONE Service organization and in our customer co-innovation projects. As a result, cost of services rose 5% to €3,089 million (2015: €2,932 million). Our gross margin on services, defined as services profit as a percentage of services revenue, narrowed to 15.1% (2015: 18.1%).
Research and Development Expense
Our research and development (R&D) expense consists primarily of the personnel cost of our R&D employees, costs incurred for independent contractors we retain to assist in our R&D activities, and amortization of the computer hardware and software we use for our R&D activities.
Due to growing personnel costs driven by a 12% increase in our R&D headcount by the end of the year, our R&D expense increased by 7% to €3,044 million in 2016 from €2,845 million in 2015. R&D expense as a percentage of total revenue thus increased to 13.8% in 2016 (2015: 13.7%). For more information, see the Products, Research & Development, and Services section.
Sales and Marketing Expense
Sales and marketing expense consists mainly of personnel costs, direct sales costs, and the cost of marketing our products and services.
Our sales and marketing expense rose 8% from €5,782 million in 2015 to €6,265 million in 2016. The increase was mainly the result of greater personnel costs as we expanded our global sales force, and of increased expenditure for bonus payments prompted by the strong revenue growth. The ratio of sales and marketing expense to total revenue, expressed as a percentage, increased to 28.4% year-over-year (2015: 27.8%), an increase of 0.6pp.
General and Administration Expense
Our general and administration expense consists mainly of personnel costs to support our finance and administration functions.
General and administration expense decreased 4% from €1,048 million in 2015 to €1,005 million in 2016. This decline in costs is primarily the result of careful cost management. Consequently, the ratio of general and administration expense to total revenue decreased in 2016 to 4.6% (2015: 5.0%).
In 2016, SAP had two reportable segments: the Applications, Technology & Services segment; and the SAP Business Network segment.
For more information about our segment reporting, see the Notes to the Consolidated Financial Statements, Note (28), and the Performance Management System section.
|€ millions, unless otherwise stated
|2016||2015||∆ in %||∆ in %
|Cloud subscriptions and support revenue||1,353||932||45||47|
|Cloud subscriptions and support margin (in %)||51||52||−2pp||−1pp|
|Gross margin (in %)||74||74||−0pp||−0pp|
|Segment margin (in %)||40||41||−0pp||−1pp|
In 2016, the revenue increase in the Applications, Technology & Services segment was driven mainly by strong growth in software support revenue, which increased 5% (6% at constant currencies) to €10,464 million. As a consequence of continuous strong demand for our human capital management, customer engagement and commerce, and SAP HANA Enterprise Cloud offerings, cloud subscriptions and support revenue in the Applications, Technology & Services segment grew 45% (47% at constant currencies) to €1,353 million.
The increase of cloud subscriptions and support revenue and software support revenue resulted in an increase in the revenue share of more predictable revenue streams in this segment of 2pp at constant currencies from 58% in 2015 to 59% in 2016. Software license revenue attributable to this segment increased 1% at constant currencies to €4,814 million (2015: €4,770 million).
The segment's cost of revenue during the same time period increased 7% (8% at constant currencies) to €5,279 million (2015: €4,954 million). This increase in expenses was primarily the result of greater investment in expanding our cloud infrastructure and in providing and operating our cloud applications, as well as additional personnel expenses to support the growth of the cloud business.
|€ millions, unless otherwise stated
|2016||2015||∆ in %||∆ in %
|Cloud subscriptions and support revenue||1,595||1,337||19||19|
|Cloud subscriptions and support margin (in %)||76||75||1pp||1pp|
|Gross margin (in %)||67||68||−1pp||−1pp|
|Segment margin (in %)||18||20||−2pp||−3pp|
The segment's cost of revenue increased 21% in 2016 (22% at constant currencies) to €631 million (2015: €520 million). The SAP Business Network segment achieved a segment gross profit of €1,295 million in 2016 (2015: €1,095 million), an increase of 18% (17% at constant currencies).
Financial Income, Net
Financial income, net, changed to –€38 million (2015: –€5 million). Our finance income was €230 million (2015: €241 million) and our finance costs were €268 million (2015: €246 million).
Finance income mainly consists of gains from disposal of equity securities totaling €164 million (2015: €176 million), interest income from loans and receivables, and other financial assets (cash, cash equivalents, and current investments) totaling €40 million (2015: €41 million), and income from derivatives totaling €29 million (2015: €30 million).
Finance costs mainly consist of interest expense on financial liabilities amounting to €108 million (2015: €135 million) and negative effects from derivatives amounting to €114 million (2015: €72 million). The decrease in finance costs is mainly due to lower average indebtedness. For more information about financing instruments, see the Notes to the Consolidated Financial Statements section, Note (17b).
Our effective tax rate increased to 25.3% in 2016 (2015: 23.4%). The increase in the effective tax rate mainly resulted from changes in taxes for prior years and the increase in the profit before taxes. For more information on income taxes, see the Notes to the Consolidated Financial Statements section, Note (10).
Profit After Tax and Earnings per Share
Profit after tax increased to €3,634 million in 2016 (2015: €3,056 million).
Basic earnings per share increased to €3.04 (2015: €2.56). The number of shares outstanding increased to 1,198 million in 2016 (2015: 1,197 million).
We believe our shareholders should benefit appropriately from the profit the Company made in 2016. In recent years, the payout has always been greater than 35% of profit after tax. We aim to continue our policy to pay a dividend totaling more than 35% of profit after tax in the future.
The Executive Board and the Supervisory Board will recommend to the Annual General Meeting of Shareholders that the total dividend will be increased by 9% to €1.25 per share (2015: €1.15). Based on this recommendation, the overall dividend payout ratio (which here means total distributed dividend as a percentage of profit) would be 41% (2015: 45%).
If the shareholders approve this recommendation and if treasury shares remain at the 2016 closing level, the total amount distributed in dividends would be €1,498 million. The actual amount distributed may be different from this total because the number of shares held in treasury may change before the Annual General Meeting of Shareholders. In 2016, we distributed €1,378 million in dividends from our 2015 profit after tax. In 2016 and 2015, we did not repurchase any SAP treasury shares.
Global Financial Management
We use global centralized financial management to control liquid assets and monitor exposure to interest rates and currencies. The primary aim of our financial management is to maintain liquidity in the Group at a level that is adequate to meet our obligations. Most SAP companies have their liquidity managed centrally by the Group, so that liquid assets across the Group can be consolidated, monitored, and invested in accordance with Group policy. High levels of liquid assets help keep SAP flexible, sound, and independent. In addition, various credit facilities are currently available for additional liquidity, if required. For more information about these facilities, see the Credit Facilities section.
We manage credit, liquidity, interest rate, equity price, and foreign exchange rate risks on a Group-wide basis. We use selected derivatives exclusively for this purpose and not for speculation, which is defined as entering into a derivative instrument for which we do not have corresponding underlying transactions. The rules for the use of derivatives and other rules and processes concerning the management of financial risks are documented in our treasury guideline, which applies globally to all companies in the Group. For more information about the management of each financial risk and about our risk exposure, see the Notes to the Consolidated Financial Statements section, Notes (24) to (26).
Our primary source of cash, cash equivalents, and current investments is funds generated from our business operations. Over the past several years, our principal use of cash has been to support operations and our capital expenditure requirements resulting from our growth, to quickly repay financial debt, to acquire businesses, to pay dividends on our shares, and to buy back SAP shares on the open market. On December 31, 2016, our cash, cash equivalents, and current investments were primarily held in euros and U.S. dollars. We generally invest only in the financial assets of issuers or funds with a minimum credit rating of BBB, and pursue a policy of cautious investment characterized by wide portfolio diversification with a variety of counterparties, predominantly short-term investments, and standard investment instruments. Investments in financial assets of issuers with a credit rating lower than BBB were not material in 2016.
We believe that our liquid assets combined with our undrawn credit facilities are sufficient to meet our present operating needs 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. It may also be necessary to enter into financing transactions when additional funds are required that cannot be wholly sourced from free cash flow (for example, to finance large acquisitions).
To expand our business, we have made acquisitions of businesses, products, and technologies. Depending on our future cash position and future market conditions, we might issue additional debt instruments to fund acquisitions, maintain financial flexibility, and limit repayment risk. Therefore, we continuously monitor funding options available in the capital markets and trends in the availability of funds, as well as the cost of such funding. In recent years, we were able to repay additional debt within a short period of time due to our persistently strong free cash flow. For more information about the financial debt, see the Cash Flows and Liquidity section.
Capital Structure Management
The primary objective of our capital structure management is to maintain a strong financial profile for investor, creditor, and customer confidence, and to support the growth of our business. We seek to maintain a capital structure that will allow us to cover our funding requirements through the capital markets at reasonable conditions, and in so doing, ensure a high level of independence, confidence, and financial flexibility.
For more information about the capital structure and its analysis, see the Analysis of Consolidated Statement of Financial Position section and Notes to the Consolidated Financial Statements section, Note (21).
The long-term credit rating for SAP SE is “A2” by Moody’s with stable outlook and “A” by Standard & Poor’s with positive outlook. Standard & Poor’s raised the outlook from stable to positive on August 12, 2016.
Our general intention is to remain in a position to return liquidity to our shareholders by distributing annual dividends totaling more than 35% of our profit after tax as well as repurchasing treasury shares in future. In absence of large acquisitions, 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.
Other sources of capital are available to us through various credit facilities, if required.
We are party to a committed €2.0 billion revolving credit facility contract which matures in November 2020. The credit facility may be used for general corporate purposes. A possible future utilization is not subject to any financial covenants. So far, we have not used and do not currently foresee any need to use, this credit facility.
As at December 31, 2016, SAP SE had additional available credit facilities totaling €474 million. Several of our foreign subsidiaries have credit facilities available that allow them to borrow funds at prevailing interest rates. As at December 31, 2016, approximately €25 million was available through such arrangements. There were immaterial borrowings outstanding under these credit facilities from our foreign subsidiaries as at December 31, 2016.
Financial debt on December 31, 2016 included amounts in euros (€6,150 million) and U.S. dollars (€1,660 million). Approximately 58% of financial debt was held at variable interest rates, partially swapped from fixed into variable using interest rate swaps.
In August 2016 we issued a €400 million Eurobond with a maturity of two years and variable interest rates (3-month EURIBOR plus 0.30%).
In 2017, the Company intends to repay two Eurobond tranches of €1,000 million in total as well as two U.S. private placement tranches of US$442.5 million in total when they mature.
Cash Flows and Liquidity
|Cash and cash equivalents||3,702||3,411||291|
|Current financial debt||−1,435||−567||−868|
|Net liquidity 1||3,238||2,992||246|
|Non-current financial debt||−6,390||−8,607||2,217|
|Net liquidity 2||−3,153||−5,615||2,462|
Group liquidity consists of cash and cash equivalents (for example, cash at banks, money market funds, and time deposits with original maturity of three months or less) and current investments (for example, investments with original maturities of greater than three months and remaining maturities of less than one year included in other financial assets) as reported in our Consolidated Financial Statements. Net liquidity is Group liquidity less total financial debt as defined above.
Group liquidity on December 31, 2016, primarily comprised amounts in euros and U.S. dollars.
The increase in Group liquidity compared to 2015 was mainly due to cash inflows from our operations. They were offset by cash outflows for dividend payments and repayments of borrowings.
For information about the impact of cash, cash equivalents, current investments, and our financial liabilities on our income statements, see the analysis of our financial income, net, in the Operating Results (IFRS) section.
Analysis of Consolidated Statements of Cash Flow
|€ millions||2016||2015||∆ in %|
|Net cash flows from operating activities||4,628||3,638||27|
|Net cash flows from investing activities||−1,799||−334||>100|
|Net cash flows from financing activities||−2,705||−3,356||−19|
In 2016 cash inflows from operating activities increased by €990 million to €4,628 million (2015: €3,638 million). This result is primarily due to our revenue increase and higher profitability as well as €161 million lower payments to employees related to restructuring (2015: €476 million).
In 2016, days’ sales outstanding (DSO) for receivables, defined as the average number of days from the raised invoice to cash receipt from the customer, increased three days to 74 days (2015: 71 days).
Cash outflows from investment activities increased to €1,799 million in 2016 (2015: €334 million). The increase resulted from lower proceeds from sale of equity or debt instruments of other entities of €793 million in 2016 (2015: €1,880 million). Cash outflows from purchase of intangible assets and property, plant, and equipment increased by €365 million to €1,001 million in 2016. For more information about current and planned capital expenditures, see the Assets section and the Investment Goals section.
Net cash outflows from financing activities were €2,705 million in 2016, compared to net cash outflows of €3,356 million in 2015. The 2016 cash outflows resulted from repayments of €1,250 million bank loan that we had taken to finance the Concur acquisition. The repayment was partly refinanced through the issuance of a €400 million Eurobond. We also repaid a US$600 million U.S. private placements. Cash outflows in 2015 arose mainly from repayments of €1,270 million bank loan that we assumed in connection with our acquisition of Concur, €550 million Eurobonds and US$300 million U.S. private placements. We refinanced another portion of the bank loan through the issuance of a three-tranche Eurobond of €1,750 million in total.
The dividend payment of €1,378 million made in 2016 exceeded the amount of €1,316 million from the prior year resulting from the increased dividend paid per share from €1.10 to €1.15.
Total assets increased by 7% year-over-year to €44,277 million.
Total current assets increased by 19% in 2016 from €9,739 million to €11,564 million. This was mainly due to an increase in trade and other receivables to €5,924 million (2015: €5,274 million) on the one hand, which stemmed from our strong business in the last quarter of 2016. On the other hand it was due to investments in financial assets (2016: €1,124 million; 2015: €351 million).
Total non-current assets increased by 3% in 2016 to €32,713 million compared to the previous year’s figure of €31,651 million. This change was mainly due to foreign exchange related revaluations.
Current liabilities increased by 23% to €9,674 million in 2016 as compared to the prior year (€7,867 million) which was mainly due to reclassifications from non-current to current financial liabilities to reflect the respective maturity profile.
Total non-current liabilities decreased by €2,023 million in 2016 to €8,205 million compared to the previous year figure of €10,228 million, which was (beside of the aforementioned reclassification on financial liabilities) mainly due to a repayment of our outstanding bank loan.
Thus, the equity ratio (that is, the ratio of shareholders’ equity to total assets) improved to 60% (prior year: 56%).
Principal Capital Expenditures and Divestitures Currently in Progress
In 2016, we continued with various construction projects and started new construction activities in several locations. The expansion of our data centers is an important aspect of our investments planned for 2017. We aim to extend our office space to cover future growth. We plan to cover all of these projects in full from operating cash flow. Our most important projects are listed below:
|Country||Location of Facility||Short Description||Estimated Total Cost||Cost incurred by December 31, 2016||Estimated Completion Date|
|Germany||Walldorf||New office building for approx. 700 employees||71||8||October 2018|
|Germany||Walldorf||New data center||65||9||March 2018|
|India||Bangalore||New office building for approx. 2,500 employees||60||23||July 2017|
|Israel||Ra'anana||New office building for approx. 800 employees||63||48||April 2017|
|United States||New York City||Execution of leasehold improvements and consolidation of offices for approx. 450 employees||52||33||March 2017|
|United States||Colorado Springs, CO||New data center||122||21||January 2018|
The resources that are the basis for our current as well as future success do not appear on the Consolidated Financial Statements. This is apparent from a comparison of the market capitalization of SAP SE (based on all outstanding shares), which was €101.7 billion at the end of 2016 (2015: €90.1 billion), with the book value of our equity on the Consolidated Financial Statements, which was €26.4 billion (2015: €23.3 billion). This means that the market capitalization of our equity is nearly four times higher than the book value. The difference is mainly due to certain internally generated intangible resources that the applicable accounting standards do not allow to be recorded (at all or at fair value) in the Consolidated Financial Statements. They include customer capital (our customer base and customer relations); employees and their knowledge and skills; our ecosystem of partners; software we developed ourselves; our ability to innovate; the brands we have built up, in particular, the SAP brand itself; and our organization.
As of December 31, 2016, SAP was the most valuable company in Germany in terms of market capitalization based on all outstanding shares.
According to the Interbrand “Best Global Brands” annual survey, SAP ranked as the 22nd most valued brand in the world (2015: 26th). We went from number 26 to 22 on the list in just one year. Against other German brands, the SAP brand ranks third behind Mercedes-Benz and BMW, and ninth globally against other IT brands. The SAP brand grew faster than major competitors. Interbrand determined our brand value to be US$ 21.3 billion, an increase of 13% compared to the previous year (2015: US$18.8 billion).
The results of our current and past investment in research and development are also a significant element in our competitive intangibles.
Our customer capital continued to grow in 2016. At the end of 2016, we had more than 345,000 customers (2015: 300,000) in various market segments. The U.S. magazine Forbes revealed in its World’s Most Valuable Brands report that 98% of the 100 most valued brands, 87% of the Forbes Global 2000 companies, and 100% of the Dow Jones top-scoring sustainability companies are SAP customers. To help us improve insight into our customers’ view of SAP, in 2012, we began measuring our Customer Net Promoter Score (NPS), a metric that gives a more complete picture of customer loyalty as it answers the question of how likely our customers would be to recommend SAP. For more information about our new customers and the Customer NPS, see the Customers section.
Report on the Economic Position of SAP SE
SAP SE is headquartered in Walldorf, Germany, and is the parent company of the SAP Group, which comprises 246 companies. SAP SE is the Group holding company and employs most of the Group’s Germany-based development and service and support personnel.
As the owner of the intellectual property in most SAP software, SAP SE derives its revenue mainly from software license fees paid by its subsidiaries for the right to market SAP solutions and bears the group-wide research and development expenses for the most part.
The SAP SE annual financial statements are prepared in accordance with the reporting standards in the German Commercial Code in the amended version of the Accounting Directive Implementation Act BilRUG and the German Stock Corporation Act. The full SAP SE annual financial report and unqualified audit report are submitted to the operator of the Elektronischer Bundesanzeiger (Online German Federal Gazette) for publication and inclusion in the Unternehmensregister (German Business Register). It is available from SAP SE on request.
The first time adoption of changed reporting standards according to BilRUG led to disclosure changes in our income statement. The definition of revenues has been expanded such that the recognition of income under revenues no longer requires that the income results from sales of the products and goods or from the provision of services that are typical of the company’s line of business. So income formerly shown as other operating income is now shown as revenue.
Intercompany royalty reimbursement claims from subsidiaries from the years 2012 to 2015 in the amount of €153 million reduced in the current year both, receivables from affiliated companies and revenue, but relate to other fiscal periods. Resulting taxes of €37 million reduced tax provisions and tax expenses.
In order to improve the presentation of the income situation, expenses for licenses and commissions are no longer shown as other operating expenses. Due to the predominantly revenue-generating nature of these expenses a separate disclosure under cost of services and materials is applied.
The income statement uses the nature of expense method and presents amounts in millions of euros.
The following income statement shows the reconciliation of prior-year figures shown in the financial statements 2015 to the adjusted previous-year figures, taking into account the disclosure changes described above. The comments to income refers to the changes in relation to the adjusted previous-year figures.
|€ millions||2016||2015 adjusted||Reconciliation||2015|
|Other operating income||1,218||1,709||−10||1,719|
|Cost of services and materials||−7,337||−5,263||−1,232||−4,031|
|Depreciation and amortization||−263||−263||0||−263|
|Other operating expenses||−2,143||−2,723||1,232||−3,955|
|Income before taxes||3,370||3,502||0||3,502|
|Income after taxes||2,610||2,678||0||2,678|
The total revenue of SAP SE in 2016 was €12,805 million (2015: €10,876 million), an increase of 18%. Product revenue increased 29% to €10,384 million (2015: €8,051 million). As in previous years, product revenue was primarily generated from license fees paid by subsidiaries of SAP SE.
The disproportionate rise of SAP SE product revenue compared to SAP Group’s increase of cloud and software revenues, is mainly due to license fees paid for distribution and utilization rights of IP held by affiliated companies. In December 2015, SAP SE concluded license agreements granting SAP SE as of January 2016 world-wide distribution and utilization rights of those IP. This mainly concerns the IP rights of our acquisitions from the past years: Ariba, Concur, Fieldglass, SuccessFactors, and Sybase.
Within the scope of these license agreements, SAP SE was granted the right to further develop the existing technology, too. As a result, the volume of IP-related SAP SE services, which had previously been charged to the former IP distributers, decreased, leading to a decrease of other revenues by 15% to €1,927 million (2015: €2.280 million).
SAP SE operating profit decreased 5% to €2,442 million (2015: €2,573 million). Other operating income decreased €491 million to €1,218 million (2015: €1,709 million). The year-over-year decrease is primarily due to a decrease in gains from currency effects. SAP SE cost of services and materials increased 39% to €7,337 million (2015: €5,263 million). The granted IP rights led to an increase in expenses for licenses and commissions by €947 million to €2.179 million (2015: €1,232 million) and mainly IP-related research and development costs resulted in a rise of services received by €1,130 million to €5,137 million (2015: €4,007 million).
SAP SE personnel expenses, mainly the labor cost of software developers, service and support employees, and administration staff employed by SAP SE, increased 4% to €1,838 million (2015: €1,763 million). Other operating expenses decreased 21% to €2,143 million (2015: €2,723 million). This decrease is mainly attributable to €402 million lower losses from currency effects and a €247 million decrease in restructuring costs. The effect was partly offset by a €39 million increase in costs for maintenance and service.
Finance income was €1,155 million (2015: €929 million), an increase of €226 million compared with the previous year. The increase is primarily due to a €230 million higher income from profit transfer agreements and an increase of €5 million in net interest income. These were partly offset by an increase of €7 million in write-downs of financial assets.
SAP SE income before taxes decreased €132 million to €3,370 million (2015: €3,502 million). Income taxes decreased 8% to €760 million (2015: €824 million). After deducting taxes, the resultant net income is €2,595 million (2015: €2,664 million), a decrease of €69 million year-over-year.
Assets and Financial Position
In 2016, SAP SE total assets closed at €32,933 million (2015: €30,953 million).
|Property, plant, and equipment||1,111||998|
|Accounts receivable and other assets||4,864||3,872|
|Prepaid expenses and deferred charges||205||173|
|Surplus arising from offsetting||2||1|
|Equity and liabilities|
|Total shareholders' equity and liabilities||32,706||30,953|
Owing to investments in IT infrastructure property, plant and equipment rose by €113 million to €1,111 million (2015: €998 million). Financial assets increased €81 million compared with the previous year to €25,338 million (2015: €25,257 million), due mainly to capital contributions and loans to subsidiaries.
The increase of €992 million in accounts receivable and other assets was principally the result of higher receivables from affiliated companies mainly due to higher product revenue and higher tax receivables. Liquid assets and marketable securities increased by €760 million to €1.120 million (2015: €360 million).
SAP SE shareholders’ equity rose 10% to €15,463 million (2015: €14,024 million). Against outflows of €1,378 million associated with the payment of the 2015 dividend, there was a €2,767 million increase in net income and an inflow of €50 million from the issuance of shares to service the share-based payments of employees. The equity ratio (that is, the ratio of shareholders’ equity to total assets) increased from 45% in 2015 to 47% in 2016.
Provisions increased €146 million to €1,393 million (2015: €1,247 million). Other provisions increased €110 million to €953 million (2015: €843 million) primarily as a result of additions to the other employee-related liabilities and provision for losses from derivative forward contracts. Reserves for tax increased €38 million to €436 million (2015: €398 million).
Liabilities increased €390 million to €16,069 million (2015: €15,679 million). This increase is mainly attributable to contrasting effects: On the one hand, SAP SE issued new debt in the amount of €400 million and liabilities to affiliated companies increased €1.130 million, primarily due to increased cash contributions by subsidiaries through SAP SE centralized management of finance and liquidity; on the other hand, SAP SE repaid €1,250 million in liabilities to banks.