tbr 2q11 sap initial response

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

SOFTWARE BUSINESS QUARTERLYSM

2Q11 INITIAL RESPONSE

SAP AG

Second Calendar Quarter 2011

Second Fiscal Quarter 2011 Ended June 30, 2011

Publish Date: July 27, 2011

Author: Elizabeth Hedstrom Henlin, Enterprise Software Analyst ([email protected])

Content Editor: Stuart Williams, Software Practice Director

mailto:[email protected]

TBR

SAP 2Q11 Initial Response | Software Business Quarterly ©2011 Technology Business Research, Inc. 2

TBR Assessment Corporate Strategic Objectives

SAP’s 2Q11 performance was strong across all segments, with growth in all geographies, 14% total revenue growth year-to-year, and 26% year-to-year growth in software license revenues for both the quarter and half-year. In addition, SAP executives announced that 1H11 achieved the “highest operating cash flow for a first half-year in SAP’s history.”

Having outpaced competitors’ growth, SAP is now sitting in the driver’s seat for the second half of 2011. The company is well-positioned to capitalize on new opportunities, particularly in the aftermath of its SAPPHIRE conference and the Sybase, HANA, BusinessObjects and On-Demand product launches announced at that event.

Target growth with an “orchestrated” product portfolio centered on “on-premise, on-demand, on-device”

During 2Q11, SAP announced the global availability of SAP Sales OnDemand, HANA and SAP’s Business One hosting option, increasing the depth of, and integrations between, its core portfolio offerings.

Drive revenue growth and customer satisfaction through co-innovation

Notable expansions of SAP partnerships during 2Q11 include relationships with Amazon Web Services (delivering SAP Rapid Deployment and BusinessObjects Solutions via Amazon’s cloud), Dell (optimizing Dell’s hardware to deploy HANA applications), and Accenture (implementing new joint mobility solutions leveraging the Sybase Unwired platform within growth industries).

Leverage customer adoption of cloud, business intelligence and analytics, and mobility to drive cross-selling and increased share-of-wallet

In March, SAP announced plans to launch new industry-specific HANA applications as well as enhance existing SAP solutions with HANA technology. SAP is leveraging Sybase’s sales team to aggressively drive the growth of Sybase products within the SAP install base.

Reported euros are converted to U.S. dollars using the average quarterly exchange rate of 1.44 dollars per euro.

A stabilized, focused and reinvigorated SAP has recouped ground lost in 2008, setting the stage for a possible record performance in 2011

TBR Position

In $ Millions, except EPS Consensus Guidance Range Actual

Revenue 4,316$ SSRS 12%-15% YTY 4,747$

Operating Income N/A 30%-31% OM 1,234$

Non-IFRS EPS 0.83$ N/A 0.70$

In $ Millions, except EPS TBR Estimate Consensus Guidance Range

Revenue 4,410$ 4,574$ SSRS 12%-15% YTY

Operating Income 1,248$ N/A 30%-31% OM

Non-IFRS EPS N/A 0.51$ N/A

SAP 2Q11 PERFORMANCE VS. EXPECTATIONS

SAP 3Q11 GUIDANCE AND EXPECTATIONS

TBR


Key Developments

With its leadership thrilled by strong 2Q11 results, SAP announced its earnings a day ahead of schedule

• SAP released its 2Q11 financial results on July 26, touting double-digit growth across geographies, controlled costs, and expansion across all lines of business.

• During the conference call on July 27, co-CEOs Jim Hagemann Snabe and Bill McDermott were confident in the quarter’s performance and milestones, highlighting marquee customer wins worldwide.

• The company is dedicating resources and personnel to new initiatives aimed at improving customer value, particularly industry-specific modules of core ERP products intended to drive additional efficiencies and insights within mission-critical applications.

• SAP’s competitors should be mindful of the company’s reinvigorated state of mind. Should SAP’s new initiatives, led by HANA, as well as the open communication led by Hagemann Snabe and McDermott, win SAP new business and advocates, rivals may be facing a juggernaut in the market.

HANA – an analytic application built on core competencies and co-innovated with partners – is the vanguard of SAP’s re-envisioned portfolio

• With more than 50 deployments to date, HANA possesses credibility with leading customers and is building a more mainstream pipeline.

• Customer testimonials in support of HANA were central to SAP’s story at SAPPHIRE 2011. Nestle and Colgate Palmolive cheered the solution’s ability to accelerate time to insight while driving vision into granular detail.

• SAP executives claim a HANA pipeline of “10 million euro per week” and are spending what they must to close deals, investing in marketing and touting global reference customers like Mitsui, Bosch, BASF, and SAP itself.

While SAP touts its product innovation, numerous customer endorsements are driving acceptance of the company’s renewed portfolio

Executive Summary

TBR


Segment Revenue Performance and Strategies

Segment Financials

Software

Software revenue climbed 26% year-to-year, reaching €802 million for the quarter and €1,385 million for the first half of 2011.

TBR predicts that 2H11 will recognize growth of maintenance revenue streams, stemming from the segment’s 1H11 growth.

Support

Support revenue grew 10% year-to-year in 2Q11, reaching €1,681 million.

With 14% year-to-year growth in 1H11, TBR believes this segment will be the engine driving improved top-line profitability for SAP for the remainder of 2011.

Services

Consulting revenue held steady, growing 17% year-to-year to €579 million and remaining constant at 9% of total revenue.

With the increasing concentration of resources in its ecosystem, TBR believes SAP will scale investments to build out implementation services teams in support of jointly engineered solutions, a strategy that shares cost, risk, and revenue with partners.


Executive Summary

With a solid 2Q11 segment performance behind it, SAP can invest its record operating cash flow in solutions designed to accelerate growth

0%

10%

20%

30%

40%

50%

60%

2Q10 3Q10 4Q10 1Q11 2Q11

Pe

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pp

s R

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SAP PERCENT REVENUE BY SEGMENT

License Support Services

TBR

SOURCE: TBR AND SAP AG

$3,684 $3,878 $5,512 $4,068 $4,747 $4,410

$14,822 $16,544

$18,232

$20,684

$987 $922 $735 $803 $1,234 $1,248 $3,956 $3,414 $5,014 $5,688

26.8%

23.8%

13.3%

19.7%26.0%

28.3% 26.7%

20.6%27.5%

27.5%

$0

$4,000

$8,000

$12,000

$16,000

$20,000

$24,000

In $

Mil

lio

ns

SAP NET REVENUE, GROWTH AND PROJECTIONS

Revenue Operating Profit Operating Margin

Op

era

ting

Ma

rgin

SOURCE: TBR AND SAP

TBR

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Revenues and Cash Flows

• Total 2Q11 revenue reached €3.3 billion, increasing 14% over 2Q10’s total revenue of €2.89 billion.

• TBR feels that if SAP concludes 2011 in the same manner as it closed this quarter, the company will be well-positioned to “achieve *its+ goal of at least €20 billion in total annual revenue and a 35% operating margin by the middle of the decade, as well as for the long term,” as noted by CFO Werner Brandt in the 2Q11 earnings announcement.

Expenses

• As a percentage of total revenue, R&D climbed to 15.3% (compared to 14.6% in 1H10), demonstrating SAP’s ongoing commitment to product innovation as a vehicle for growth.

• In 1H11, total R&D spiked 22% year-to-year to €966 million and rose 70 basis points in 2Q11, primarily due to acquired headcount and the year-to-year addition of Sybase in SAP’s reporting totals.

Margins

• Operating margin for 2Q11 fell slightly year-to-year to 26%, compared to 2Q10’s recorded operating margin of 26.7%.

• While growing across the board year-to-year, SAP’s overall costs did not outpace revenue growth, allowing the company to post improved operating margins of 28.2% for the first half of 2011, compared to 27.2% a year earlier. Reported euros are converted to U.S. dollars using the average quarterly exchange rate of 1.44 dollars per euro.

Financial Model Strategy

Balanced costs and investments enable SAP to bring an array of new products to market without burdening performance

26.7% 26.0%

13.7% 14.2%

5.4% 5.2%

22.7% 22.5%

31.5% 35.4%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2Q10 2Q11

% o

f R

eve

nu

e

SAP OPERATING RATIOS

COGS

S&M

G&A

R&D

OperatingMargin

SOURCE: TBR ESTIMATES AND SAP AG

TBR

$2,523 $3,232

$505

$673 $1,036

$1,313 $987

$1,234

$0

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

$7,000

2Q10 2Q11

In $

Mil

lions

SAP OPERATING METRICS

Operating Income

SG&A

R&D

Gross Income


TBR

TBR


Partnerships will be a key resource for SAP to extend its customer base and drive the global scale of HANA into many new markets.

Solutions Offerings

TBR believes SAP’s proven business intelligence portfolio, amplified in past quarters with the BusinessObjects acquisition, increases customer assurance and confidence in both SAP and the HANA appliance, paving a path for rapid HANA adoption and subsequent share growth for SAP.

• SAP demonstrated the integral place HANA holds at the core of its business through new partnerships, new leadership, and substantial investments in product enhancements during 2Q11 – resting its strategy for near-term growth on the success of this appliance.

• The rise of Big Data among many enterprises has increased the demand for business analytic and intelligence solutions such as HANA across the market. The adeptness with which the HANA in-memory solution accelerates customers’ ability to drive value from their data empowers SAP to tap into new customer bases. SAP is investing to capitalize on that opportunity.

• In 2Q11, SAP appointed a new EVP of SAP HANA, Christoph Kollatz, and announced expanded partnerships supporting this appliance with Tier 1 partners Cisco, Dell, and Fujitsu.

• In addition, the company launched SAP ERP Rapid-Deployment, based on HANA, and BusinessObjects 10.0, a Business Analytics solution that expands HANA functionality – core products designed to improve cross-selling within SAP’s install base.

BI

Applications

Middleware & Databases

Appliances

SAP is investing in its future, launching HANA as the vanguard of a re-envisioned SAP portfolio – easier to deploy and more cost-efficient

Services Offerings

Consulting

Premium

Base Support

Education

Operating Systems

Product Strategy

TBR


Software € 802 31%

Support € 1,681

65%

Software-Related Services

€ 96 4%

Go-to-Market Strategy

SAP 2Q11 Revenue Mix (In € Millions) • As stated by co-CEO Jim Hagemann Snabe, “innovation is driving growth again at SAP.” The rapid growth of HANA proves SAP is accurately viewing customer needs and can now position both net-new and iterated products to address them.

• SAP is now pushing its “on-demand” offerings into the SME segment with its partners’ help, winning share with relatively low cost-outlay while addressing a key customer pain point – cost and time of implementation.

• 2Q11 SaaS product releases of SAP Sales OnDemand, BusinessObjects Edge 4.0, and a subscription-based hosted model of SAP Business One have armed SAP with an attractive cloud-centered arsenal with which to engage its partners and attract SME customers.

• SAP’s commitment to re-energize and expand its ecosystem will give it the opportunity to outpace competitors focused on organic or acquisition-driven growth.

• Through open and active engagement with partners, SAP can proactively position itself at the top of “sell-with” lists, cutting its major competitors out of the hearts and minds of ERP go-to-market ecosystem leaders.

With the enterprise well aware of SAP’s strengths, the company is looking to SME customers for net-new growth with its “on-demand” portfolio and to its partners for help speeding time to revenue.


SAP’s growth is being augmented by resellers, as these partners ferry SAP products into the cloud

TBR


Global Developments

• In 2Q11, SAP expanded its regional go-to-market partnerships, notably in the United Kingdom with Logica and the Onyx Group, and in Malaysia with Cisco.

• In July, SAP purchased a new development facility in Ireland, which will house 100 new R&D employees. SAP will continue developing the innovation center planned for Germany, as announced in 1Q11, and will invest €15.8 million in the location.

Leadership Announcements

• Angelika Dammann stepped down from the role of chief human resources officer. CFO Werner Brandt will assume those responsibilities until a replacement is hired.

• SAP appointed Christoph Kollatz executive vice president for HANA in June.

• Co-CEOs Jim Hagemann Snabe and Bill McDermott saw their contracts extended in 2Q11, and will serve in their current roles through June 2017.

Strategy

• Reinvent strategic outreach in wake of difficulties in prior years, including focus on centers of innovation.

• Build global market share, particularly in BRIC countries.

• Work with partners to drive modular offerings for customers in key verticals and geographies.

Resource Management Strategy

In 2Q11, SAP dedicated global resources to building leadership and a partner foundation for growth

$932 $1,292

$1,943

$2,418

$785

$1,037

$-

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2Q10 2Q11

Re

ven

ue

in

$ M

illio

ns

Ca lendar Quarter

SAP SEGMENT REVENUE

Services

Support

Software

TBR


$544 $716

$1,770

$2,322

$1,371

$1,709

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

$4,000

$4,500

$5,000

2Q10 2Q11

In $

Mil

lions

SAP REVENUE BY REGION

Americas

EMEA

Asia Pacific

SOURCE: TBR AND SAP AG

TBR

Calendar Quarter

TBR


Note:

Income Statement reported using IFRS

2Q11 Income Statement and Estimates

SAP AG

CONSOLIDATED STATEMENT OF INCOME

(in € Thousands; except shares in millions)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

FISCAL QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 Est.

Total Revenue 2,894,000€ 3,003,000€ 4,058,000€ 3,024,000€ 3,300,000€ 3,278,350€

Cost of Sales 912,000€ 1,044,000€ 1,141,000€ 1,072,000€ 1,053,000€ 1,049,000€

Gross Profit 1,982,000€ 1,959,000€ 2,917,000€ 1,952,000€ 2,247,000€ 2,229,350€

Sales and Marketing 658,000€ 642,000€ 787,000€ 677,000€ 743,000€ 656,000€

General and Administrative 156,000€ 157,000€ 177,000€ 177,000€ 170,000€ 180,000€

Research and Development 397,000€ 453,000€ 481,000€ 498,000€ 468,000€ 466,000€

Restructuring 1,000€ (2,000)€ (2,000)€ -€ 1,000€ -€

Other Expenses (4,000)€ (7,000)€ 931,000€ 3,000€ 8,000€ -€

Operating Expense less COGS 1,214,000€ 1,261,000€ 516,000€ 1,349,000€ 1,372,000€ 1,302,000€

Total Operating Expenses 2,126,000€ 2,305,000€ 1,657,000€ 2,421,000€ 2,425,000€ 2,351,000€

Operating Income 774,000€ 716,000€ 543,000€ 597,000€ 857,000€ 927,350€

Losses on Equity Investees & Other (12,000)€ (14,000)€ (42,000)€ (14,000)€ (38,000)€ -€

EBITD 676,000€ 689,000€ 451,000€ 583,000€ 804,000€ 895,350€

Income Taxes 185,000€ 188,000€ 14,000€ 180,000€ 216,000€ 278,000€

Net Income 491,000€ 501,000€ 437,000€ 403,000€ 588,000€ 617,350€

Earnings per Share 0.41€ 0.42€ 0.37€ 0.34€ 0.49€ 0.52€

Shares Outstanding (in millions) 1,189,000€ 1,188,000€ 1,188,000€ 1,189,000€ 1,189,000€ 1,189,000€

AS A PERCENTAGE OF REVENUE

Cost of Product 14.3% 17.1% 13.5% 16.4% 15.0% 15.5%

Cost of Services 17.2% 17.6% 14.6% 19.1% 16.9% 16.5%

Cost of Sales 31.5% 34.8% 28.1% 35.4% 31.9% 32.0%

Gross Margin 68.5% 65.2% 71.9% 64.6% 68.1% 68.0%

Sales and Marketing 22.7% 21.4% 19.4% 22.4% 22.5% 20.0%

General and Administrative 5.4% 5.2% 4.4% 5.9% 5.2% 5.5%

SG&A 28.1% 26.6% 23.8% 28.2% 27.7% 25.5%

R&D 13.7% 15.1% 11.9% 16.5% 14.2% 14.2%

Operating Margin 26.7% 23.8% 13.4% 19.7% 26.0% 28.3%

Other, Net -3.0% -0.4% -1.2% 0.0% -1.1% -1.0%

Investment Income 0.0% 0.0% 0.0% 0.0% 0.6% 0.0%

EBITD 23.4% 22.9% 11.1% 19.3% 24.4% 27.3%

Income Taxes 6.4% 6.3% 0.3% 6.0% 6.5% 8.5%

Minority Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Net Margin 17.0% 16.7% 10.8% 13.3% 17.8% 18.8%

YEAR-TO-YEAR CHANGE

Total Revenue 12.3% 19.7% 27.2% 20.5% 14.0% 9.2%

Cost of Services 6.4% 21.6% 34.9% 27.9% 12.3% 2.1%

Cost of Sales 5.2% 23.1% 27.3% 26.1% 15.5% 0.5%

Gross Profit 16.0% 18.0% 27.2% 17.7% 13.4% 13.8%

Sales and Marketing 17.3% 24.7% 30.7% 21.5% 12.9% 2.2%

General and Administrative 26.8% 15.4% 8.6% 19.6% 9.0% 14.6%

SG&A 19.0% 22.7% 26.0% 21.1% 12.2% 4.6%

R&D 6.4% 18.9% -1.8% 26.7% 17.9% 2.9%

Operating Income 20.7% 18.2% -48.6% 7.2% 10.7% 29.5%

Other, Net -290.9% 68.3% -194.1% 100.0% 59.3% -146.2%

EBITD 13.4% 24.8% -55.8% 11.9% 18.9% 29.9%

Income Taxes 8.8% 62.1% -94.8% 34.3% 16.8% 47.9%

Minority Interest 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%


TBR

TBR


Note:

Balance Sheet reported using IFRS

2Q11 Balance Sheet and Estimates SAP AG

CONSOLIDATED BALANCE SHEETS

(in € Thousands)

CALENDAR QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11

FISCAL QUARTER 2Q10 3Q10 4Q10 1Q11 2Q11

ASSETS

Current Assets

Cash and Equivalents 3,605,000€ 2,828,000€ 3,518,000€ 4,477,000€ 3,842,000€

Other Financial Assets 574,000€ 258,000€ 158,000€ 252,000€ 721,000€

Trade and Other Receivables 2,768,000€ 2,382,000€ 3,101,000€ 3,214,000€ 2,738,000€

Other non-financial Assets 217,000€ 223,000€ 180,000€ 210,000€ 250,000€

Tax Assets 202,000€ 311,000€ 186,000€ 135,000€ 129,000€

Total Current Assets 7,366,000€ 6,002,000€ 7,143,000€ 8,288,000€ 7,680,000€

Goodwill 5,136,000€ 8,285,000€ 8,378,000€ 8,264,000€ 8,213,000€

Intangible Assets 829,000€ 2,400,000€ 2,376,000€ 2,218,000€ 2,107,000€

Property, Plant, Equip. (Net of Dep.) 1,415,000€ 1,415,000€ 1,450,000€ 1,443,000€ 1,463,000€

Other assets 337,000€ 374,000€ 404,000€ 446,000€ 480,000€

Trade and Other Receivables 66,000€ 68,000€ 78,000€ 75,000€ 78,000€

Other non-financial Assets 34,000€ 31,000€ 31,000€ 30,000€ 36,000€

Tax Assets 125,000€ 120,000€ 123,000€ 124,000€ 125,000€

Deferred Tax Assets 364,000€ 391,000€ 735,000€ 722,000€ 714,000€

Total non-current Assets 8,306,000€ 13,084,000€ 13,575,000€ 13,322,000€ 13,216,000€

Total Assets 15,672,000€ 19,086,000€ 20,718,000€ 21,610,000€ 20,896,000€

LIABILITIES AND EQUITY

Current Liabilities

Trade and other Payables 698,000€ 766,000€ 908,000€ 794,000€ 783,000€

Tax Liabilities 3,000€ 136,000€ 160,000€ 77,000€ 108,000€

Financial Liabilities 219,000€ 238,000€ 142,000€ 141,000€ 136,000€

Other non-financial liabilities 990,000€ 1,187,000€ 1,727,000€ 1,129,000€ 1,113,000€

Provisions 354,000€ 389,000€ 1,285,000€ 1,298,000€ 1,287,000€

Deferred Income 1,919,000€ 1,334,000€ 911,000€ 2,773,000€ 2,161,000€

Total Current Liabilities 4,183,000€ 4,050,000€ 5,133,000€ 6,212,000€ 5,588,000€

Trade and other Payables 34,000€ 54,000€ 50,000€ 43,000€ 37,000€

Tax Liabilities 259,000€ 359,000€ 371,000€ 403,000€ 418,000€

Financial Liabilities 1,764,000€ 4,422,000€ 4,449,000€ 3,906,000€ 3,945,000€

Other non-financial liabilities 12,000€ 21,000€ 11,000€ 91,000€ 90,000€

Provisions 224,000€ 270,000€ 291,000€ 247,000€ 244,000€

Deferred Tax Liabilities 137,000€ 605,000€ 576,000€ 562,000€ 513,000€

Deferred Income 88,000€ 94,000€ 63,000€ 57,000€ 64,000€

Total non-current Liabilities 2,518,000€ 5,825,000€ 5,811,000€ 5,309,000€ 5,311,000€

Total Liabilities 6,701,000€ 9,875,000€ 10,944,000€ 11,521,000€ 10,899,000€

Stockholders' Equity -€ -€ -€ -€ -€

Issued Capital 1,227,000€ 1,227,000€ 1,227,000€ 1,228,000€ 1,228,000€

Treasury Shares 1,349,000€ 1,391,000€ 1,382,000€ 1,406,000€ 1,374,000€

Share Premium 331,000€ 333,000€ 337,000€ 386,000€ 394,000€

Retained Earnings 8,851,000€ 9,356,000€ 9,769,000€ 10,159,000€ 10,033,000€

Other Components of equity 104,000€ 331,000€ 194,000€ 288,000€ 294,000€

Total Shareholder's Equity 8,956,000€ 9,194,000€ 9,757,000€ 10,079,000€ 9,987,000€

Noncontrolling Interests 15,000€ 17,000€ 17,000€ 10,000€ 10,000€

Total Liabilities and Equity 15,672,000€ 19,086,000€ 20,718,000€ 21,610,000€ 20,896,000€


TBR

TBR

T EC H N O LO G Y B U S I N ES S R ES EAR C H , I N C .

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