20-F 1 d344005d20f.htm FORM 20-F Form 20-F
Table of Contents

 

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2016

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report

For the transition period from            to            

Commission file number: 1-14251

SAP SE

(Exact name of Registrant as specified in its charter)

SAP EUROPEAN COMPANY

(Translation of Registrant’s name into English)

Federal Republic of Germany

(Jurisdiction of incorporation or organization)

Dietmar-Hopp-Allee 16

69190 Walldorf

Federal Republic of Germany

(Address of principal executive offices)

Wendy Boufford

c/o SAP Labs

3410 Hillview Avenue, Palo Alto, CA, 94304, United States of America

650-849-4000 (Tel)

650-843-2041 (Fax)

(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

 

Name of each exchange on which registered

American Depositary Shares, each Representing

one Ordinary Share, without nominal value

  New York Stock Exchange

Ordinary Shares, without nominal value

  New York Stock Exchange*

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

Ordinary Shares, without nominal value: 1,228,504,232 (as of December 31, 2016)**

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes      No  

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

Yes       No  

Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes       No  

Indicate by check mark whether the registrant has submitted electronically and posted on its Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)

Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer     Accelerated filer     Non-accelerated filer  

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP                    International Financial Reporting Standards as issued by the International Accounting Standards Board                   Other  

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

Item 17      Item 18  

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes      No  

 

* Listed not for trading or quotation purposes, but only in connection with the registration of American Depositary Shares representing such ordinary shares pursuant to the requirements of the Securities and Exchange Commission.
** Including 29,880,390 treasury shares.

 

 


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Table of Contents

Introduction

     1  

Forward-Looking Statements

     1  

Performance Management System

     2  

PART I

     9  

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

     9  

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

     9  

ITEM 3. KEY INFORMATION

     9  

Selected Financial Data

     9  

Exchange Rates

     11  

Dividends

     11  

Risk Factors

     12  

ITEM 4. INFORMATION ABOUT SAP

     25  

Overview of the SAP Group

     26  

Strategy and Business Model

     27  

Seasonality

     30  

Products, Research & Development, and Services

     30  

Security, Privacy, and Data Protection

     37  

Customers

     38  

Energy and Emissions

     40  

Intellectual Property, Proprietary Rights and Licenses

     42  

Description of Property

     42  

ITEM 4A. UNRESOLVED STAFF COMMENTS

     43  

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

     43  

Overview

     43  

Economy and the Market

     44  

Performance Against Our Outlook for 2016 (Non-IFRS)

     45  

Operating Results (IFRS)

     47  

Foreign Currency Exchange Rate Exposure

     62  

Liquidity and Capital Resources

     62  

Off-Balance Sheet Arrangements

     65  

Contractual Obligations

     66  

Research and Development

     66  

Critical Accounting Estimates

     66  

New Accounting Standards not yet Adopted

     67  

Expected Developments

     67  

ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES

     73  

Supervisory Board

     73  

Executive Board

     74  

Compensation Report

     75  

Employees

     91  

Share Ownership

     92  

Share-Based Compensation Plans

     92  

ITEM 7. MAJOR SHAREHOLDERS AND RELATED-PARTY TRANSACTIONS

     92  

Major Shareholders

     92  

Related-Party Transactions

     93  

ITEM 8. FINANCIAL INFORMATION

     93  

Consolidated Financial Statements and Financial Statement Schedule

     93  

Other Financial Information

     93  

ITEM 9. THE OFFER AND LISTING

     94  

General

     94  

Trading on the Frankfurt Stock Exchange and the NYSE

     95  

ITEM 10. ADDITIONAL INFORMATION

     96  

Articles of Incorporation

     96  

Corporate Governance

     96  

Change in Control

     100  

Change in Share Capital

     100  

Rights Accompanying our Shares

     101  

Taxation

     102  

Material Contracts

     106  

Documents on Display

     106  

 

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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     106  

ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES

     107  

American Depositary Shares

     107  

PART II

     108  

ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES

     108  

ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS

     108  

ITEM 15. CONTROLS AND PROCEDURES

     108  

Evaluation of Disclosure Controls and Procedures

     108  

Management’s Annual Report on Internal Control Over Financial Reporting

     108  

Changes in Internal Control Over Financial Reporting

     108  

ITEM 16. [RESERVED]

     108  

ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT

     108  

ITEM 16B. CODE OF ETHICS

     108  

ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES

     109  

Audit Fees, Audit Related Fees, Tax Fees and All Other Fees

     109  

Audit Committee’s Pre-Approval Policies and Procedures

     109  

ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES

     109  

ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS

     110  

ITEM 16F. CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT

     110  

ITEM 16G. DIFFERENCES IN CORPORATE GOVERNANCE PRACTICES

     110  

Introduction

     110  

Legal Framework

     110  

Significant Differences

     110  

SAP SE is a European Company With a Two-Tier Board System

     111  

Director Independence Rules

     111  

Audit Committee Independence

     112  

Rules on Non-Management Board Meetings are Different

     112  

Rules on Establishing Committees Differ

     112  

Rules on Shareholders’ Compulsory Approval are Different

     112  

Specific Principles of Corporate Governance

     112  

Specific Code of Business Conduct

     112  

PART III

     114  

ITEM 17. FINANCIAL STATEMENTS

     114  

ITEM 18. FINANCIAL STATEMENTS

     114  

ITEM 19. EXHIBITS

     114  

Signatures

     115  

Index to the consolidated Financial Statements

     F-1  

Report of Independent registered public accounting firm

     F-2  

Consolidated Financial Statements

     F-3  

 

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INTRODUCTION

SAP SE is a European Company (Societas Europaea, or “SE”) and is referred to in this report, together with its subsidiaries, as SAP, or as “Company,” “Group,” “we,” “our,” or “us.”

In this report: (i) references to “US$,” “$,” or “dollars” are to U.S. dollars; (ii) references to ‘‘” or “euro” are to the euro. Our financial statements are denominated in euros, which is the currency of our home country, Germany. Certain amounts that appear in this report may not add up because of differences due to rounding.

Unless otherwise specified herein, euro financial data have been converted into dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31, 2016, which was US$1.0552 per 1.00. No representation is made that such euro amounts actually represent such dollar amounts or that such euro amounts could have been or can be converted into dollars at that or any other exchange rate on such date or on any other date. The rate used for the convenience translations also differs from the currency exchange rates used for the preparation of the Consolidated Financial Statements. This convenience translation is not a requirement under International Financial Reporting Standards (IFRS) and, accordingly, our independent registered public accounting firm has not audited these US$ amounts. For information regarding recent rates of exchange between euro and dollars, see “Item 3. Key Information – Exchange Rates.” On February 10, 2017, the Noon Buying Rate for converting euro to dollars was US$1.0650 per 1.00.

Unless the context otherwise requires, references in this report to ordinary shares are to SAP SE’s ordinary shares, without nominal value. References in this report to “ADRs” are to SAP SE’s American Depositary Receipts, each representing one SAP ordinary share. References in this report to “ADSs” are to SAP SE’s American Depositary Shares, which are the deposited securities evidenced by the ADRs.

SAP, ABAP, Adaptive Server, Advantage Database Server, Afaria, Ariba, Business ByDesign, BusinessObjects, ByDesign, Concur, Crystal Reports, ExpenseIt, Fieldglass, hybris, PartnerEdge, PowerBuilder, PowerDesigner, Quadrem, R/3, Replication Server, SAP BusinessObjects Explorer, SAP Business Workflow, SAP EarlyWatch, SAP Fiori, SAP HANA, SAP HANA Vora, SAP Jam, SAP Lumira, SAP NetWeaver, SAP S/4HANA, SAPPHIRE, SAPPHIRE NOW, SQL Anywhere, Sybase, SuccessFactors, The Best-Run Businesses Run SAP, TravelTrax, TripIt, TripLink, TwoGo, Web Intelligence and other SAP products and

services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP SE (or an SAP affiliate company) in Germany and other countries.

Throughout this report, whenever a reference is made to any website, such reference does not incorporate by reference into this report the information contained on such website.

We intend to make this report and other periodic reports publicly available on our web site (www.sap.com) without charge immediately following our filing with the U.S. Securities and Exchange Commission (SEC). We assume no obligation to update or revise any part of this report, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements and information based on the beliefs of, and assumptions made by, our management using information currently available to them. Any statements contained in this report that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations, assumptions, and projections about future conditions and events. As a result, our forward-looking statements and information are subject to uncertainties and risks. A broad range of uncertainties and risks, many of which are beyond our control, could cause our actual results and performance to differ materially from any projections expressed in or implied by our forward-looking statements. The uncertainties and risks include, but are not limited to:

   

Uncertainty in the global economy, financial markets or political conditions could have a negative impact on our business, financial position, profit, and cash flows and put pressure on our operating profit.

   

Third parties have claimed, and might claim in the future, that we infringe their intellectual property rights, which could lead to damages being awarded against us and limit our ability to use certain technologies in the future.

   

Claims and lawsuits against us could have an adverse effect on our business, financial position, profit, cash flows and reputation.

   

We might not be able to obtain adequate title to, or licenses in, or to enforce intellectual property.

We describe these and other risks and uncertainties in the Risk Factors section.

If one or more of these uncertainties or risks materializes, or if management’s underlying

 

 

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assumptions prove incorrect, our actual results could differ materially from those described in or inferred from our forward-looking statements and information.

The words “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “counting on,” “is confident,” “development,” “estimate,” “expect,” “forecast,” “future trends,” “guidance,” “intend,” “may,” “might,” “outlook,” “plan,” “project,” “predict,” “seek,” “should,” “strategy,” “want,” “will,” “would,” and similar expressions as they relate to us are intended to identify such forward-looking statements. Such statements include, for example, those made in the Operating Results section, our quantitative and qualitative disclosures about market risk pursuant to the International Financial Reporting Standards (IFRS), namely IFRS 7 and related statements in our Notes to the Consolidated Financial Statements; Expected Developments section; Risk Factors section; and other forward-looking information appearing in other parts of this report. To fully consider the factors that could affect our future financial results, both this report and our Integrated Report should be considered, as well as all of our other filings with the Securities and Exchange Commission (SEC). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date specified or the date of this report. We undertake no obligation to publicly update or revise any forward-looking statements as a result of new information that we receive about conditions that existed upon issuance of this report, future events, or otherwise unless we are required to do so by law.

This report includes statistical data about the IT industry and global economic trends that comes from information published by sources including Gartner, the European Central Bank (ECB); and the International Monetary Fund (IMF). This type of data represents only the estimates of Gartner, ECB, IMF, and other sources of industry data. SAP does not adopt or endorse any of the statistical information provided by sources such as Gartner, ECB, IMF, or other similar sources that is contained in this report. The data from these sources is subject to risks and uncertainties, and subject to change based on various factors, including those described above, in the Risk Factors section, and elsewhere in this report. These and other factors could cause our results to differ materially from those expressed in the estimates made by third parties and SAP. We caution readers not to place undue reliance on this data.

PERFORMANCE MANAGEMENT SYSTEM

We use various performance measures to help manage our performance with regard to our primary financial objectives, which are growth and profitability, and our primary non-financial objectives, which are customer loyalty and employee engagement. We view growth and

profitability as indicators for our current performance, while customer loyalty and employee engagement are indicators for our future performance.

Measures We Use to Manage Our Financial Performance

Measures We Use to Manage Our Operating Financial Performance

In 2016, we used the following key measures to manage our operating financial performance:

Cloud subscriptions and support revenue (non-IFRS): This revenue driver comprises the main revenues of our fast-growing cloud business. We generate cloud subscriptions and support revenue when we provide software functionality in a cloud-based infrastructure (software as a service, or SaaS) to our customers; when we provide our customers with access to a cloud-based infrastructure to develop, run, and manage applications (platform as a service, or PaaS); and also when we provide hosting services for software hosted by SAP (infrastructure as a service, or IaaS). Cloud subscriptions and support revenue are also generated when providing additional premium cloud subscription support beyond the regular support, which is embedded in the basic cloud subscription fees as well as business network services to our customers. We use the cloud subscriptions and support revenue (non-IFRS) measure both at actual currency and at constant currency.

Cloud and software revenue (non-IFRS): We use cloud and software revenue (non-IFRS) and constant currency cloud and software revenue (non-IFRS) to measure our revenue growth. Our cloud and software revenue includes cloud subscriptions and support revenue plus software licenses and support revenue. Cloud subscriptions and support revenue and software revenue are our key revenue drivers because they tend to affect our other revenue streams. Generally, customers that buy software licenses also enter into related support contracts, and these generate recurring revenue in the form of support revenue after the software sale. Support contracts cover standardized support services that comprise unspecified future software updates and enhancements. Software licenses revenue as well as cloud subscriptions and support revenue also tend to stimulate services revenue earned from providing customers with professional services, premium engagement services, training services, messaging services, and payment services.

Total revenue (non-IFRS): We use nominal total revenue (non-IFRS) and constant currency total revenue (non-IFRS) to measure our growth. The total of cloud subscriptions and support revenue and software support

 

 

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revenue divided by total revenue is the share of more predictable revenue. This measure provides additional insight into our sustained business success.

New cloud bookings: For our cloud activities, we also look at new cloud bookings. This measure reflects the committed order entry from new customers and from incremental purchases by existing customers for offerings that generate cloud subscriptions and support revenue. In this way, it is an indicator for cloud-related sales success in a given period and for secured future cloud subscriptions and support revenue. We focus primarily on the average contract value variant of the new cloud bookings measure that takes into account annualized amounts for multiyear contracts. Additionally, we internally monitor the total contract value variant of the new cloud bookings measure that takes into account the total committed order entry amounts regardless of contract durations. There are no comparable IFRS measures for these bookings metrics. In addition to new cloud bookings, we use the measure “cloud backlog” to evaluate our sales success in the cloud business. We define cloud backlog as a measure that represents the volume of business that, as of period end, is contracted but not yet billed.

Operating profit (non-IFRS): We use operating profit (non-IFRS) and constant currency operating profit (non-IFRS) to measure our overall operational process efficiency and overall business performance. See below for more information on the IFRS and non-IFRS measures we use.

Cloud subscriptions and support gross margin (non-IFRS): We use our cloud subscriptions and support gross margin (non-IFRS) to measure our process efficiency in our cloud business. Cloud subscriptions and support gross margin (non-IFRS) is the ratio of our cloud subscriptions and support gross profit (non-IFRS) to cloud subscriptions and support revenue (non-IFRS), expressed as a percentage.

Measures We Use to Manage Our Non-Operating Financial Performance

We use the following measures to manage our non-operating financial performance.

Financial income, net: This measure provides insight into the return on liquid assets and capital investments and the cost of borrowed funds. To manage our financial income, net, we focus on cash flow, the composition of our liquid assets and capital investment portfolio, and the average rate of interest at which assets are invested. We also monitor average outstanding borrowings and associated finance costs.

Days Sales Outstanding (DSO): We manage working capital by controlling the days sales outstanding (DSO) for operating receivables (defined as the average number of days from the raised invoice to cash receipt from the customer).

Measures We Use to Manage Overall Financial Performance

We use the following measures to manage our overall financial performance:

Earnings per share (EPS) (IFRS and non-IFRS): EPS measures our overall performance because it captures all operating and non-operating elements of profit as well as income tax expense. It represents the portion of profit after tax allocable to each SAP share outstanding. EPS is influenced not only by our operating and non-operating business as well as income taxes but also by the number of shares outstanding.

Effective tax rate (IFRS and non-IFRS): We define our effective tax rate as the ratio of income tax expense to profit before tax, expressed as a percentage.

Operating, investing, and financing cash flows and free cash flow: Our consolidated statement of cash flows provides insight as to how we generated and used cash and cash equivalents. When applied in conjunction with the other primary financial statements, it provides information that helps us evaluate the changes of our net assets, our financial structure (including our liquidity and solvency), and our ability to affect the amounts and timing of cash flows to adapt to changing circumstances and opportunities. We use our free cash flow measure to determine the cash flow remaining after all expenditures required to maintain or expand our organic business have been paid off. This measure provides management with supplemental information to assess our liquidity needs. We calculate free cash flow as net cash from operating activities minus purchases (other than purchases made in connection with business combinations) of intangible assets and property, plant, and equipment.

Measures We Use to Manage Our Non-Financial Performance

In 2016, we used the following key measures to manage our non-financial performance in the areas of employee engagement, customer loyalty, and leadership trust:

Employee Engagement Index: We use this index to measure the motivation and loyalty of our employees, how proud they are of our company, and how strongly they identify with SAP. The index is derived from surveys conducted among our employees. Applying this measure is recognition that our growth strategy depends on engaged employees.

 

 

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Customer Net Promoter Score (NPS): This score measures the willingness of our customers to recommend or promote SAP to others. It is derived from our annual customer survey that identifies, on a scale of 0–10, whether a customer is loyal and likely to recommend SAP to friends or colleagues, is neutral, or is unhappy. We introduced this measure in 2012, as we are convinced that we can achieve our financial goals only when our customers are loyal to, and satisfied with, SAP and our solutions. To derive the Customer NPS, we start with the percentage of “promoters” of SAP – those who give us a score of 9 or 10 on a scale of 0–10. We then subtract the percentage of “detractors” – those who give us a score of 0 to 6. The method ignores “passives,” who give us a score of 7 or 8.

Leadership Trust Score: We use this score to further enhance accountability and to measure our collective effort to foster a work environment based on trust. It is derived from a question in our annual global employee survey that gauges employees’ trust in our leaders. We measure leadership trust by using the same methodology as we do determining the Net Promoter Score (NPS).

Value-Based Management

Our holistic view of the performance measures described above, together with our associated analyses, comprises the information we use for value-based management. We use planning and control processes to manage the compilation of these key measures and their availability to our decision makers across various management levels.

SAP’s long-term strategic plans, including a multiyear financial plan through 2020, are the point of reference for our short-term and midterm planning and controlling processes. We initially identify future growth and profitability drivers at a highly aggregated level. In a first step, the resulting financial plan is broken down to (i) our deployment models “On Premise,” “Software as a Service/Platform as a Service,” “Infrastructure as a Service,” and “Business Networks”, and (ii) functions such as development, sales, or administration. In a second step, the planned total revenues and total expenses are allocated to the individual board areas.

Budget administration and control, including budget adjustments applied during the year to reflect changes in priorities, to achieve efficiency targets and to reflect endogenous and exogenous factors, are handled at board area level. It is then the individual board member’s responsibility to break down, in their board area, the allocated budgets and budget adjustments. The Executive Board’s efforts to assess the performance of the company and components thereof is also done on the level of the board areas. Based on an integrated portfolio process running in parallel to the budgeting process we ensure aligned investment behavior across board areas with regards to specific solutions or solution areas. In a final step, customer-facing revenue targets and cost of sales and marketing targets are broken down into sales regions.

Based on our detailed annual plans, we determine the budget for the respective year. We also have processes in place to forecast revenue and profit on a quarterly basis, to quantify whether we expect to realize our financial goals, and to identify any deviations from plan. We continuously monitor the concerned units in the Group to analyze these developments and define any appropriate actions. Our entire network of planning, control, and reporting processes is implemented in integrated planning and information systems, based on SAP software, across all organizational units so that we can conduct the evaluations and analyses needed to make informed decisions.

Non-IFRS Financial Measures Cited in This Report

As in previous years, we provided our 2016 financial outlook on the basis of certain non-IFRS measures. Therefore, this report contains a non-IFRS based comparison of our actual performance in 2016 against our outlook in the Financial Performance: Review and Analysis section.

Reconciliations of IFRS to Non-IFRS Financial Measures for 2016 and 2015

Due to rounding, the sum of the numbers presented in the following table might not precisely equal the totals we provide.

 

 

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Reconciliation of IFRS to Non-IFRS Financial Measures for the Years Ended December 31

 

millions, unless otherwise stated   2016     2015  
     IFRS     Adj.     Non-IFRS    

Currency

Impact

   

Non-IFRS

Constant

Currency

    IFRS     Adj.     Non-IFRS  

Revenue measures

                                                               

Cloud subscriptions and support

    2,993       2       2,995       12       3,007       2,286       10       2,296  

Software licenses

    4,860       2       4,862       31       4,893       4,835       1       4,836  

Software support

    10,571       1       10,572       82       10,654       10,093       0       10,094  

Software licenses and support

    15,431       3       15,434       113       15,546       14,928       2       14,930  

Cloud and software

    18,424       5       18,428       125       18,553       17,214       11       17,226  

Services

    3,638       0       3,638       39       3,678       3,579       0       3,579  

Total revenue

    22,062       5       22,067       164       22,231       20,793       11       20,805  

Operating expense measures

                                                               

Cost of cloud subscriptions and support

    1,313       247       1,066                       1,022       232       789  

Cost of software licenses and support

    2,182       238       1,944                       2,291       283       2,008  

Cost of cloud and software

    3,495       485       3,010                       3,313       516       2,797  

Cost of services

    3,089       113       2,976                       2,932       167       2,765  

Total cost of revenue

    6,583       598       5,985                       6,245       683       5,562  

Gross profit

    15,479       603       16,081                       14,548       694       15,242  

Research and development

    3,044       201       2,843                       2,845       202       2,643  

Sales and marketing

    6,265       549       5,716                       5,782       462       5,320  

General and administration

    1,005       119       886                       1,048       116       932  

Restructuring

    28       28       0                       621       621       0  

Other operating income/expense, net

    3       0       3                       1       0       1  

Total operating expenses

    16,928       1,494       15,434       192       15,626       16,541       2,084       14,457  

Profit numbers

                                                               

Operating profit

    5,135       1,498       6,633       28       6,605       4,252       2,095       6,348  
Other non-operating income/expense, net     234       0       234                       256       0       256  

Finance income

    230       0       230                       241       0       241  

Finance costs

    268       0       268                       246       0       246  

Financial income, net

    38       0       38                       5       0       5  

Profit before tax

    4,863       1,498       6,361                       3,991       2,095       6,087  

Income tax expense

    1,229       474       1,703                       935       651       1,586  

Profit after tax

    3,634       1,024       4,658                       3,056       1,445       4,501  

Attributable to owners of parent

    3,646       1,024       4,671                       3,064       1,445       4,509  

Attributable to non-controlling interests

    13       0       13                       8       0       8  

Key ratios

                                                               

Operating margin (in %)

    23.3               30.1               29.7       20.5               30.5  

Effective tax rate (in %)

    25.3               26.8                       23.4               26.1  
Earnings per share, basic (in )     3.04               3.90                       2.56               3.77  

 

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Explanation of Non-IFRS Measures

Non-IFRS Adjustments by Functional Areas

 

millions   2016     2015  
     IFRS     Acqui-
sition-rel.
    SBP1)     Restruc-
turing
    Non-IFRS     IFRS    

Acqui-

sition-rel.

    SBP1)     Restruc-
turing
    Non-IFRS  
Cost of cloud and software     3,495       395       89       0       3,010       3,313       441       74       0       2,797  
Cost of services     3,089       12       101       0       2,976       2,932       54       113       0       2,765  
Research and development     3,044       10       190       0       2,843       2,845       36       166       0       2,643  
Sales and marketing     6,265       257       292       0       5,716       5,782       202       260       0       5,320  
General and administration     1,005       6       113       0       886       1,048       4       111       0       932  
Restructuring     28       0       0       28       0       621       0       0       621       0  
Other operating income/expense, net     3       0       0       0       3       1       0       0       0       1  
Adjustments of total operating expenses     16,928       680       785       28       15,434       16,541       738       724       621       14,457  

 

 

1) Share-based payments (SBP)

 

We disclose certain financial measures, such as revenue (non-IFRS), operating expenses (non-IFRS), operating profit (non-IFRS), operating margin (non-IFRS), and earnings per share (non-IFRS), as well as constant currency revenue, expense, and profit that are not prepared in accordance with IFRS and are therefore considered non-IFRS financial measures. Our non-IFRS financial measures may not correspond to non-IFRS financial measures that other companies report. The non-IFRS financial measures that we report should only be considered in addition to, and not as substitutes for, or superior to, our IFRS financial measures.

We believe that the disclosed supplemental historical and prospective non-IFRS financial information provides useful information to investors because management uses this information, in addition to financial data prepared in accordance with IFRS, to attain a more transparent understanding of our past performance and our anticipated future results. We use the revenue (non-IFRS) and profit (non-IFRS) measures consistently in our internal planning and forecasting, reporting, and compensation, as well as in our external communications, as follows:

 

Our management primarily uses these non-IFRS measures rather than IFRS measures as the basis for making financial, strategic, and operating decisions.

 

The variable components of our Executive Board members’ and employees’ remuneration are based on revenue (non-IFRS), operating profit (non-IFRS),

   

as well as new cloud bookings measures rather than the respective IFRS measures.

 

The annual budgeting process for all management units is based on revenue (non-IFRS) and operating profit (non-IFRS) numbers rather than the respective IFRS financial measures.

 

All forecast and performance reviews with all senior managers globally are based on these non-IFRS measures, rather than the respective IFRS financial measures.

 

Both our internal performance targets and the guidance we provided to the capital markets are based on revenue (non-IFRS) and profit (non-IFRS) measures rather than the respective IFRS financial measures.

Our non-IFRS financial measures reflect adjustments based on the items below, as well as adjustments for the related income tax effects.

Revenue (Non-IFRS)

Revenue items identified as revenue (non-IFRS) have been adjusted from the respective IFRS financial measures by including the full amount of software support revenue, cloud subscriptions and support revenue, and other similarly recurring revenue that we are not permitted to record as revenue under IFRS due to fair value accounting for the contracts in effect at the time of the respective acquisitions.

 

 

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Under IFRS, we record at fair value the contracts in effect at the time entities were acquired. Consequently, our IFRS software support revenue, IFRS cloud subscriptions and support revenue, IFRS cloud and software revenue, and IFRS total revenue for periods subsequent to acquisitions do not reflect the full amount of revenue that would have been recorded by entities acquired by SAP had they remained stand-alone entities. Adjusting revenue numbers for this revenue impact provides additional insight into the comparability of our ongoing performance across periods.

Operating Expense (Non-IFRS)

Operating expense numbers that are identified as operating expenses (non-IFRS) have been adjusted by excluding the following expenses:

 

Acquisition-related charges

   

Amortization expense/impairment charges of intangibles acquired in business combinations and certain stand-alone acquisitions of intellectual property (including purchased in-process research and development)

   

Settlements of preexisting business relationships in connection with a business combination

   

Acquisition-related third-party expenses

 

Share-based payment expenses

 

Restructuring expenses, that is, expenses resulting from measures which comply with the definition of restructuring according to IFRS

We exclude certain acquisition-related expenses for the purpose of calculating operating profit (non-IFRS), operating margin (non-IFRS), and earnings per share (non-IFRS) when evaluating SAP’s continuing operational performance because these expenses generally cannot be changed or influenced by management after the relevant acquisition other than by disposing of the acquired assets. Since management at levels below the Executive Board does not influence these expenses, we generally do not consider these expenses for the purpose of evaluating the performance of management units. For similar reasons we eliminate share-based payment expenses as these costs are impacted by share price developments and other factors outside our control. We also eliminate restructuring expenses because they are volatile and mostly cannot be influenced by management at levels below the Executive Board.

Operating Profit (Non-IFRS), Operating Margin (Non-IFRS), Effective Tax Rate (Non-IFRS), and Earnings per Share (Non-IFRS)

Operating profit, operating margin, effective tax rate, and earnings per share identified as operating profit (non-IFRS), operating margin (non-IFRS), effective tax rate (non-IFRS), and earnings per share (non-IFRS) have been adjusted from the respective IFRS measures by

adjusting for the aforementioned revenue (non-IFRS) and operating expenses (non-IFRS) and the income tax effects thereon.

Constant Currency Information

We believe it is important for investors to have information that provides insight into our sales. Revenue measures determined under IFRS provide information that is useful in this regard. However, both sales volume and currency effects impact period-over-period changes in sales revenue. We do not sell standardized units of products and services, so we cannot provide relevant information on sales volume by providing data on the changes in product and service units sold. To provide additional information that may be useful to investors in breaking down and evaluating changes in sales volume, we present information about our revenue and various values and components relating to operating profit that are adjusted for foreign currency effects.

We calculate constant currency revenue and operating profit measures by translating foreign currencies using the average exchange rates from the comparative period instead of the current period.

Free Cash Flow

Among others we use the measure free cash flow to manage our overall financial performance.

Free Cash Flow

 

millions    2016      2015      D  in %  
Net cash flows from operating activities      4,628        3,638        27  
Purchase of intangible assets and property, plant, and equipment (without acquisitions)      1,001        636        57  

Free cash flow

     3,627        3,001        21  

Usefulness of Non-IFRS Measures

We believe that our non-IFRS measures are useful to investors for the following reasons:

 

Our revenue (non-IFRS), expense (non-IFRS), and profit (non-IFRS) measures as well as the measures “new cloud bookings” and “cloud backlog” (see above) provide investors with insight into management’s decision making because management uses these measures to run our business and make financial, strategic, and operating decisions. We include the revenue adjustments outlined above and exclude the expense adjustments outlined above when making decisions to allocate resources. In addition, we use these non-IFRS measures to facilitate comparisons of SAP’s operating performance from period to period.

 

 

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The non-IFRS measures provide investors with additional information that enables a comparison of year-over-year operating performance by eliminating certain direct effects of acquisitions, share-based compensation plans, and restructuring plans.

 

Non-IFRS and non-GAAP measures are widely used in the software industry. In many cases, inclusion of our non-IFRS measures may facilitate comparison with our competitors’ corresponding non-IFRS and non-GAAP measures.

Limitations of Non-IFRS Measures

We believe that our non-IFRS financial measures described above have limitations, including but not limited to, the following:

 

The eliminated amounts could be material to us.

 

Without being analyzed in conjunction with the corresponding IFRS measures, the non-IFRS measures are not indicative of our present and future performance, foremost for the following reasons:

   

While our profit (non-IFRS) numbers reflect the elimination of certain acquisition-related expenses, no eliminations are made for the additional revenue or other income that results from the acquisitions.

   

While we adjust for the fair value accounting of the acquired entities’ recurring revenue contracts, we do not adjust for the fair value accounting of deferred compensation items that result from commissions paid to the acquired company’s sales force and third parties for closing the respective customer contracts.

   

The acquisition-related amortization expense that we eliminate in deriving our profit (non-IFRS) numbers is a recurring expense that will impact our financial performance in future years.

   

The remaining acquisition-related charges that we eliminate in deriving our profit (non-IFRS) numbers are likely to recur should SAP enter into material business combinations in the future. Similarly, the restructuring expenses that we eliminate in deriving our profit (non-IFRS) numbers are likely to recur should SAP perform restructurings in the future.

   

The revenue adjustment for the fair value accounting of the acquired entities’ contracts and the expense adjustment for acquisition-related charges do not arise from a common conceptual basis. This is because the revenue adjustment aims to improve the comparability of the initial post-acquisition period with future post-acquisition periods, while the expense adjustment aims to improve the comparability between post-acquisition periods and pre-acquisition periods.

   

This should particularly be considered when evaluating our operating profit (non-IFRS) and operating margin (non-IFRS) numbers as these combine our revenue (non-IFRS) and expenses (non-IFRS) despite the absence of a common conceptual basis.

   

Our restructuring charges resulted in significant cash outflows in the past and could do so in the future. The same applies to our share-based payment expense because most of our share-based payments are settled in cash rather than shares.

   

The valuation of our cash-settled share-based payments could vary significantly from period to period due to the fluctuation of our share price and other parameters used in the valuation of these plans.

   

In the past, we have issued share-based payment awards to our employees every year and we intend to continue doing so in the future. Thus, our share-based payment expenses are recurring although the amounts usually change from period to period.

We believe that constant currency measures have limitations, particularly as the currency effects that are eliminated constitute a significant element of our revenue and expenses and could materially impact our performance. Therefore, we limit our use of constant currency measures to the analysis of changes in volume as one element of the full change in a financial measure. We do not evaluate our results and performance without considering both constant currency and nominal measures in revenue (non-IFRS) and operating profit (non-IFRS) measures on the one hand, and changes in revenue, operating expenses, operating profit, or other measures of financial performance prepared in accordance with IFRS on the other. We caution the readers of our financial reports to follow a similar approach by considering nominal and constant currency non-IFRS measures only in addition to, and not as a substitute for or superior to, changes in revenue, operating expenses, operating profit, or other measures of financial performance prepared in accordance with IFRS.

Despite these limitations, we believe that the presentation of our non-IFRS measures and the corresponding IFRS measures, together with the relevant reconciliations, provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations.

 

 

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

SELECTED FINANCIAL DATA

The following table sets forth our selected consolidated financial data as of and for each of the years in the five-year period ended December 31, 2016. The consolidated financial data has been derived from, and should be read in conjunction with, our Consolidated Financial Statements prepared in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board (IFRS), presented in “Item 18. Financial Statements” of this report.

Our selected financial data and our Consolidated Financial Statements are presented in euros. Financial data as of and for the year ended December 31, 2016 has been translated into U.S. dollars for the convenience of the reader.

 

 

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SELECTED FINANCIAL DATA: IFRS

 

millions, unless otherwise stated   

2016(1)

US$

    

2016

    

2015

    

2014

    

2013

    

2012

 
Income Statement Data: Years ended December 31,                                                      
Cloud subscriptions and support revenue      3,158        2,993        2,286        1,087        696        270  
Software licenses and support revenue      16,283        15,431        14,928        13,228        12,809        12,532  
Cloud and software revenue      19,441        18,424        17,214        14,315        13,505        12,801  
Total revenue      23,280        22,062        20,793        17,560        16,815        16,223  
Operating profit      5,418        5,135        4,252        4,331        4,479        4,041  
Profit after tax      3,834        3,634        3,056        3,280        3,325        2,803  
Profit attributable to owners of parent      3,848        3,646        3,064        3,280        3,326        2,803  
Earnings per share(2)                                                      

Basic in

     3.21        3.04        2.56        2.75        2.79        2.35  

Diluted in

     3.21        3.04        2.56        2.74        2.78        2.35  
Other Data:                                                      
Weighted-average number of shares outstanding                                                      

Basic

     1,198        1,198        1,197        1,195        1,193        1,192  

Diluted

     1,199        1,199        1,198        1,197        1,195        1,193  
Statement of Financial Position Data: At December 31,                                                      
Cash and cash equivalents      3,906        3,702        3,411        3,328        2,748        2,477  
Total assets(3)      46,721        44,277        41,390        38,565        27,091        26,306  
Current financial liabilities(4)      1,913        1,813        841        2,561        748        802  
Non-current financial liabilities(4)      6,839        6,481        8,681        8,980        3,758        4,446  
Issued capital      1,296        1,229        1,229        1,229        1,229        1,229  
Total equity      27,854        26,397        23,295        19,534        16,048        14,133  

 

(1) Amounts presented in US$ have been translated for the convenience of the reader at 1.00 to US$1.0552, the Noon Buying Rate for converting 1.00 into dollars on December 31, 2016. See “Item 3. Key Information — Exchange Rates” for recent exchange rates between the Euro and the dollar.

(2) Profit attributable to owners of parent is the numerator and weighted average number of shares outstanding is the denominator in the calculation of earnings per share. See Note (11) to our Consolidated Financial Statements for more information on earnings per share.

(3) The large increase in total assets from 2013 to 2014 was mainly due to the acquisition of Concur.

(4) The balances include primarily bonds, private placements and bank loans. Current is defined as having a remaining life of one year or less; non-current is defined as having a remaining term exceeding one year. The significant increase from 2013 to 2014 was due to a long-term bank loan and the issuance of a three-tranche Eurobond, both in connection with the Concur acquisition. See Note (17b) to our Consolidated Financial Statements for more information on our financial liabilities.

 

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EXCHANGE RATES

The sales prices for our ordinary shares traded on German stock exchanges are denominated in euro. Fluctuations in the exchange rate between the euro and the U.S. dollar affect the dollar equivalent of the euro price of the ordinary shares traded on the German stock exchanges and, as a result, may affect the price of the ADRs traded on the NYSE in the United States. See “Item 9. The Offer and Listing” for a description of the ADRs. In addition, SAP SE pays cash dividends, if any, in euro. As a result, any exchange rate fluctuations will also affect the dollar amounts received by the holders of ADRs on the conversion into dollars of cash dividends paid in euro on the ordinary shares represented by the ADRs. Deutsche Bank Trust Company Americas is the depositary (the Depositary) for SAP SE’s ADR program. The deposit agreement with respect to the ADRs requires the Depositary to convert any dividend payments from euro into dollars as promptly as practicable upon receipt. For additional information on the Depositary and the fees associated with SAP’s ADR program see “Item 12. Description of Securities Other Than Equity Securities – American Depositary Shares.”

For details on the impact of exchange rate fluctuations see “Item 5. Operating and Financial Review and Prospects – Foreign Currency Exchange Rate Exposure”.

The following table sets forth (i) the average, high and low Noon Buying Rates for the euro expressed as U.S. dollars per 1.00 for the past five years on an annual basis and (ii) the high and low Noon Buying Rates on a monthly basis from July 2016 through and including February 10, 2017.

 

Year    Average(1)      High      Low  

2012

     1.2909        1.3463        1.2062  

2013

     1.3303        1.3816        1.2774  

2014

     1.3210        1.3927        1.2101  

2015

     1.1032        1.2015        1.0524  

2016

     1.1029        1.1516        1.0375  
Month    High      Low  

2016

                 

July

     1.1168        1.0968  

August

     1.1334        1.1078  

September

     1.1271        1.1158  

October

     1.1212        1.0866  

November

     1.1121        1.0560  

December

     1.0758        1.0375  

2017

                 

January

     1.0794        1.0416  

February (through February 10, 2017)

     1.0802        1.0650  

 

(1) The average of the applicable Noon Buying Rates on the last day of each month during the relevant period.

The Noon Buying Rate on February 10, 2017 was US$1.0650 per 1.00.

DIVIDENDS

Dividend Distribution Policy

Dividends are jointly proposed by SAP SE’s Supervisory Board (Aufsichtsrat) and Executive Board (Vorstand) based on SAP SE’s year-end stand-alone statutory financial statements, subject to approval by the Annual General Meeting of Shareholders. Dividends are officially declared for the prior year at SAP SE’s Annual General Meeting of Shareholders. SAP SE’s Annual General Meeting of Shareholders usually convenes during the second quarter of each year. Beginning with the dividends payable for the 2016 fiscal year and in accordance with a recent change of the German Stock Corporation Act that aims to implement joint market standards in Europe for corporate actions processing, dividends will be remitted to the custodian bank on behalf of the shareholders on the third business day following the Annual General Meeting of Shareholders. Record holders of the ADRs on the dividend record date will be entitled to receive payment of the dividend declared in respect of the year for which it is declared. Cash dividends payable to such holders will be paid to the Depositary in euro and, subject to certain exceptions, will be converted by the Depositary into U.S. dollars.

Dividends paid to holders of the ADRs may be subject to German withholding tax. See “Item 8. Financial Information – Other Financial Information – Dividend Policy” and “Item 10. Additional Information – Taxation,” for further information.

 

 

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Annual Dividends Paid and Proposed

The following table sets forth in euro the annual dividends paid or proposed to be paid per ordinary share in respect of each of the years indicated. One SAP ADR currently represents one SAP SE ordinary share. Accordingly, the final dividend per ADR is equal to the dividend for one SAP SE ordinary share and is dependent on the euro/U.S. dollar exchange rate. The table does not reflect tax credits that may be available to German taxpayers who receive dividend payments. If you own our ordinary shares or ADRs and if you are a U.S. resident, refer to “Item 10. Additional Information – Taxation,” for further information.

 

Year Ended
December 31,
   Dividend Paid per Ordinary Share  
        US$  

2012

     0.85        1.11 (1) 

2013

     1.00        1.37 (1) 

2014

     1.10        1.22 (1) 

2015

     1.15        1.30 (1) 

2016 (proposed)

     1.25 (2)       1.33 (2),(3) 

 

(1) Translated for the convenience of the reader from euro into U.S. dollars at the Noon Buying Rate for converting euro into U.S. dollars on the dividend payment date. The Depositary is required to convert any dividend payments received from SAP as promptly as practicable upon receipt.

(2) Subject to approval at the Annual General Meeting of Shareholders of SAP SE currently scheduled to be held on May 10, 2017.

(3) Translated for the convenience of the reader from euro into U.S. dollars at the Noon Buying Rate for converting euro into U.S. dollars on February 10, 2017 of US$1.0650 per 1.00. The dividend paid may differ due to changes in the exchange rate.

The amount of dividends paid on the ordinary shares depends on the amount of profits to be distributed by SAP SE, which depends in part upon our financial performance. In addition, the amount of dividends received by holders of ADRs may be affected by fluctuations in exchange rates (see “Item 3. Key Information – Exchange Rates”). The timing, declaration, amount and payment of any future dividend will depend upon our future earnings, capital needs and other relevant factors, in each case as proposed by the Executive Board and the Supervisory Board of SAP SE and approved by the Annual General Meeting of Shareholders.

RISK FACTORS

Economic, Political, Social, and Regulatory Risk

Uncertainty in the global economy, financial markets, or political conditions could have a negative impact on our business, financial position, profit, as well as cash flows, and put pressure on our operating profit.

Our business is influenced by multiple risk factors that are both difficult to predict and beyond our influence and control. These factors include global economic and business conditions, and fluctuations in national currencies. Other examples are political developments and general regulations as well as budgetary constraints or shifts in spending priorities of national governments.

Macroeconomic developments, such as financial market volatility episodes, global economic crises, chronic fiscal imbalances, slowing economic conditions, or disruptions in emerging markets, could limit our customers’ ability and willingness to invest in our solutions or delay purchases. In addition, changes in the euro conversion rates for particular currencies might have an adverse effect on business activities with local customers and partners. Furthermore, political instability in regions such as Africa and the Middle East, political crises (including Brazil, Great Britain, Greece, Syria, Turkey, Ukraine, or Venezuela), sanctions (such as those placed on Russia), natural disasters, pandemic diseases (such as Ebola in West Africa) and terrorist attacks (including the attacks in Brussels, Belgium, in March 2016, or in Nice, France, in July 2016) could contribute to economic and political uncertainty.

These events could reduce the demand for SAP software and services, and lead to:

 

Delays in purchases, decreased deal size, or cancellations of proposed investments

 

Potential lawsuits from customers due to denied provision of service as a result of sanctioned-party lists or export control issues

 

Higher credit barriers for customers, reducing their ability to finance software purchases

 

Increased number of bankruptcies among customers, business partners, and key suppliers

 

Increased default risk, which might lead to significant impairment charges in the future

 

Market disruption from aggressive competitive behavior, acquisitions, or business practices

 

Increased price competition and demand for cheaper products and services

Any one or more of these developments could reduce our ability to sell and deliver our software and services which could have an adverse effect on our business, financial position, profit, and cash flows.

 

 

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Our international business activities and processes expose us to numerous and often conflicting laws and regulations, policies, standards or other requirements and sometimes even conflicting regulatory requirements, and to risks that could harm our business, financial position, profit, and cash flows.

We are a global company and currently market our products and services in more than 180 countries and territories in the Americas (Latin America and North America); Asia Pacific Japan (APJ); China, Hong Kong, Macau, and Taiwan (Greater China); Europe, Middle East, and Africa (EMEA); and Middle and Eastern Europe (MEE) regions. Our business in these countries is subject to numerous risks inherent in international business operations. Among others, these risks include:

 

Data protection and privacy regulations regarding access by government authorities to customer, partner, or employee data

 

Data residency requirements (the requirement to store certain data only in and, in some cases, also to access such data only from within a certain jurisdiction)

 

Conflict and overlap among tax regimes

 

Possible tax constraints impeding business operations in certain countries

 

Expenses associated with the localization of our products and compliance with local regulatory requirements

 

Discriminatory or conflicting fiscal policies

 

Operational difficulties in countries with a high corruption perception index

 

Protectionist trade policies, import and export regulations, and trade sanctions and embargoes

 

Works councils, labor unions, and immigration laws in different countries

 

Difficulties enforcing intellectual property and contractual rights in certain jurisdictions

 

Country-specific software certification requirements

 

Challenges with effectively managing a large distribution network of third-party companies

 

Compliance with various industry standards (such as Payment Card Industry Data Security Standard)

 

Market volatilities or workforce restrictions due to changing laws and regulations resulting from political decisions (e.g. Brexit, government elections)

As we expand into new countries and markets, these risks could intensify. The application of the respective local laws and regulations to our business is sometimes unclear, subject to change over time, and often conflicting among jurisdictions. Additionally, these laws and government approaches to enforcement are continuing to change and evolve, just as our products and services continually evolve. Compliance with these varying laws and regulations could involve significant

costs or require changes in products or business practices. Non-compliance could result in the imposition of penalties or cessation of orders due to alleged non-compliant activity. We do not believe we have engaged in any activities sanctionable under these laws and regulations, but governmental authorities could use considerable discretion in applying these statutes and any imposition of sanctions against us could be material. One or more of these factors could have an adverse effect on our operations globally or in one or more countries or regions, which could have an adverse effect on our business, financial position, profit, and cash flows.

Social and political instability caused by state-based conflicts, terrorist attacks, civil unrest, war, or international hostilities might disrupt SAP’s business operations.

Terrorist attacks (such as in Turkey, in March, June, August, and December 2016) as well as other acts of violence or war, civil, religious, and political unrest (such as in Turkey, Ukraine, and Venezuela; Israel, Libya, Syria, and in other parts of the Middle East; and parts of Africa); natural disasters (such as hurricanes, flooding, or similar events); or pandemic diseases (such as Ebola in West Africa) could have a significant adverse effect on the local economy and beyond. Such an event could lead, for example, to the loss of a significant number of our employees, or to the disruption or disablement of operations at our locations, and could affect our ability to provide business services and maintain effective business operations. Furthermore, this could have a significant adverse effect on our partners as well as our customers and their investment decisions, which could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

Market Risks

Our established customers might not buy additional software solutions, subscribe to our cloud offerings, renew maintenance agreements, purchase additional professional services, or they might switch to other products or service offerings (including competitive products).

In 2016, we continued to depend materially on the success of our support portfolio and on our ability to deliver high-quality services. Traditionally, our large installed customer base generates additional new software, maintenance, consulting, and training revenue. Despite the high quality and service level of our transformed and expanded service offering in the area of premium support services, we might be unable to meet customer expectations with regards to delivery and value proposition. This might lead to a potentially adverse impact on customer experience. Existing customers might cancel or not renew their maintenance contracts, decide not to buy additional products and services, not

 

 

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subscribe to our cloud offerings, or accept alternative offerings from other vendors. In addition, the increasing volume in our cloud business as well as the conversion of traditional on-premise licenses to cloud subscriptions licenses and an increased complexity in our maintenance and support cycle across our diverse solutions and offerings could have a potential negative impact on our software and maintenance revenue streams. This could have an adverse effect on our business, financial position, profit, and cash flows.

The success of our cloud computing strategy depends on positive market perception and increasing market adoption of our cloud solutions and managed cloud services. Insufficient adoption of our solutions and services could lead to a loss of SAP’s position as a leading cloud company.

The market for cloud computing is increasing and shows strong growth relative to the market for our on-premise solutions. To offer a broad cloud service portfolio and generate the associated business value for our customers, we continue to invest in innovation and acquisitions. Due to ongoing contracts and previous substantial investments to integrate traditional on-premise enterprise software into their businesses, as well as concerns about data protection, total cost of ownership, functional capacities, migration, security and integration capabilities, and reliability, customers and partners might be reluctant or unwilling to migrate to the cloud.

Other factors that could affect the market acceptance, adoption and extension of cloud solutions and services include:

 

Concerns with entrusting a third-party to store and manage critical employee or company confidential data

 

Customer concerns about security capabilities and reliability

 

Customer concerns about the ability to scale operations for large enterprise customers

 

Inadequate level of configurability or customizability of the software

 

Missing integration scenarios between on-premise products and cloud-to-cloud solutions

 

Failure to securely and successfully deliver cloud services by any cloud service provider could have a negative impact on customer trust in cloud solutions

 

Strategic alliances among our competitors and / or their growth-related efficiency gains in the cloud area could lead to significantly increased competition in the market with regards to pricing and ability to integrate solutions

 

Failure to get the full commitment of our partners might reduce speed and impact in market reach

 

Failure to comply with increasing governance on data privacy and data residence

 

Challenge in defining adequate solution packages and scope for all customer segments

If organizations do not perceive the benefits of cloud computing, the market for cloud business might not develop further, or it might develop more slowly than we expect, either of which could have an adverse effect on our business, competitiveness, financial position, profit, reputation and cash flows.

Our market share and profit could decline due to increased competition, market consolidation and technological innovation as well as new business models in the software industry.

The software industry continues to evolve rapidly and is currently undergoing a significant shift due to innovations in the areas of enterprise mobility, machine learning, augmented and virtual reality, cybersecurity, Big Data, hyperconnectivity, the Internet of Things, digitization, supercomputing, cloud computing, and social media. While smaller innovative companies tend to create new markets organically, large traditional IT vendors tend to enter such markets mostly through acquisitions. SAP faces increased competition in its business environment from traditional, new and in particular cooperating competitors. This competition could cause price pressure, cost increases, and loss of market share, which could have an adverse effect on our business, financial position, profit, and cash flows.

Additionally, related to our Applications, Technology & Services segment, customers could change their buying behavior by accelerating their acceptance of cloud solutions to reduce their investments, which might have a temporary adverse effect on our operating results. Furthermore, the trend in the market to invest more in cloud solutions might lead to a risk of the potential loss of existing on-premise customers. It might also have a temporary adverse effect on our revenue due to the number of conversions from on-premise licenses to cloud subscriptions from existing SAP customers in our installed base, as we recognize cloud subscriptions revenue over the respective service provision, and that typically ranges from one-to-three years with some up to five years.

Business Strategy Risks

Demand for our new solutions might not develop as planned and our strategy on new business models and flexible consumption models might not be successful.

Our business consists of new software licenses, software license updates, Services and maintenance fees as well as of cloud subscriptions. Our customers are expecting

 

 

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to take advantage of technological breakthroughs from SAP without compromising their previous IT investments. However, the introduction of new SAP solutions, technologies, and business models as well as delivery and consumption models is subject to uncertainties as to whether customers will be able to perceive the additional value and realize the expected benefits we deliver along our road maps. There is a risk that such uncertainties might lead customers to wait for proof of concepts or holistic integration scenarios through reference customers or more mature versions first, which might result in a lower level of adoption of our new solutions, technologies, business models, and flexible consumption models, or no adoption at all, possibly impacting customer satisfaction and retention. This could have an adverse effect on our business, financial position, profit, and cash flows.

Though downturns or upturns in cloud sales might not be immediately reflected in our operating results, any decline in our customer renewals would harm the future operating results of our cloud business.

We recognize cloud subscriptions revenue as we provide the respective services, which typically range from one-to-three years with some up to five years. This revenue recognition and our increasing subscription revenues could have a temporary adverse effect on our financial position, profit, and cash flows.

To maintain or improve our operating results in the cloud business, it is important that our customers renew their agreements with us when the initial contract term expires and purchase additional modules or additional capacity. Our customers have no obligation to renew their subscriptions after the initial subscription period, and we cannot assure that customers will renew subscriptions at the same or at a higher level of service, or at all. Our customers’ renewal rates might decline or fluctuate as a result of various factors, including their satisfaction or dissatisfaction with our cloud solution and services portfolio; our ability to efficiently provide cloud services according to customer expectations and meeting the service level agreements, service availability and provisioning, the integration capabilities of our cloud solutions into their existing IT environment (including hybrid solutions combining both cloud and on-premise solutions); our customer support; concerns regarding stable, efficient, and secure cloud operations and compliance with legal and regulatory requirements; our pricing; the pricing of competing products or services; mergers and acquisitions affecting our customer base; global economic conditions; and reductions in our customers’ spending levels.

If our customers do not renew their subscriptions, if they renew on terms less favorable to us, or do not purchase additional modules or users, our revenue and billings might decline, and our operating results could be negatively impacted. This could have an adverse effect on our business, financial position, profit, and cash flows.

If we are unable to scale and enhance an effective partner ecosystem, revenue might not increase as expected.

An open and vibrant partner ecosystem is a fundamental pillar of our success and growth strategy. We have entered into partnership agreements that drive co-innovation on our platforms, profitably expand all our routes to market to optimize market coverage, optimize cloud delivery, and provide high-quality services capacity in all market segments. Partners play a key role in driving market adoption of our entire solutions portfolio, by co-innovating on our platforms, embedding our technology, and reselling and/or implementing our software.

If partners consider our products or services model less strategic and/or financially less attractive compared to our competition and/or less appropriate for their respective channel and target market, if partners fear direct competition by SAP or if SAP fails to establish and enable a network of qualified partners meeting our quality requirements and the requirements of our customers, then, among other things, partners might not:

 

Develop a sufficient number of new solutions and content on our platforms

 

Provide high-quality products and services to meet customer expectations

 

Drive growth of references by creating customer use cases and demo systems

 

Embed our solutions sufficiently enough to profitably drive product adoption, especially with innovations such as SAP S/4HANA and SAP Cloud Platform (formerly called SAP HANA Cloud Platform)

 

Enable and train sufficient resources to promote, sell, and support to scale to targeted markets

 

Comply with applicable quality requirements expected by our customers, resulting in delayed, disrupted, or terminated sales and services

 

Transform their business model in accordance with the transformation of SAP’s business model in a timely manner

 

Renew their existing agreements with us or enter into new agreements on terms acceptable to us or at all

 

Provide ability and capacity to meet customer expectations regarding service provisioning.

 

 

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If one or more of these risks materialize, this might have an adverse effect on the demand for our products and services as well as the partner’s loyalty and ability to deliver. As a result, we might not be able to scale our business to compete successfully with other software vendors, which could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

Human Capital Risks

If we do not effectively manage our geographically dispersed workforce, we might not be able to run our business efficiently and successfully.

Our success is dependent on appropriate alignment of our internal and external workforce planning processes, adequate resource allocation and our location strategy with our general strategy. It is critical that we manage our internationally dispersed workforce effectively, taking short- and long-term workforce and skill requirements into consideration. This applies to the management of our internal as well as our external workforce. Changes in headcount and infrastructure needs as well as local legal or tax regulations could result in a mismatch between our expenses and revenue. Failure to manage our geographically dispersed workforce effectively could hinder our ability to run our business efficiently and successfully and could have an adverse effect on our business, financial position, profit, and cash flows.

If we are unable to attract, develop, and retain leaders and employees with specialized knowledge and technology skills, or are unable to achieve internal diversity and inclusion objectives, we might not be able to manage our operations effectively and successfully, or develop successful new solutions and services.

Our highly qualified workforce is the foundation for our continued success. In certain regions and specific technology and solution areas, we continue to set very high growth targets, specifically in countries and regions such as Africa, China, Latin America, and the Middle East. In the execution of SAP’s strategic priorities, we depend on highly skilled and specialized personnel and leaders, both male and female. Successful maintenance and expansion of our highly skilled and specialized workforce in the area of cloud is a key success factor for our transition to be the leading cloud company. The availability of such personnel as well as business experts is limited and, as a result, competition in our industry is intense and could expose us to claims by other

companies seeking to prevent their employees from working for a competitor. If we are unable to identify, attract, develop, motivate, adequately compensate, and retain well-qualified and engaged personnel, or if existing highly skilled and specialized personnel leave SAP and ready successors or adequate replacements are not available or we cannot allocate our workforce as required due to local regulations and associated restrictions, we might not be able to manage our operations effectively, which could have an adverse effect on our reputation, business, financial position, profit, and cash flows. Furthermore, we might not be able to develop, sell, or implement successful new solutions and services as planned. This is particularly true as we continue to introduce new and innovative technology offerings and expand our business in emerging markets. The lack of appropriate or inadequately executed benefit and compensation programs could limit SAP’s ability to attract or retain qualified employees and lead to financial losses. In addition, we might not be able to achieve our internal gender diversity objectives to increase the number of women in management from 18% in 2010 to 25% by end of 2017.

Organizational and Governance-Related Risks

Laws and regulatory requirements in Germany, the United States, and elsewhere continue to be very stringent.

As a European company domiciled in Germany with securities listed in Germany and the United States, we are subject to European, German, U.S., and other governance-related regulatory requirements. Changes in laws and regulations and related interpretations, including changes in accounting standards and taxation requirements, and increased enforcement actions, sanctions, for example United States sanction requirements for Iran, and penalties might alter the business environment in which we operate. Regulatory requirements have become significantly more stringent in recent years, and some legislation, such as the anticorruption legislation in Germany, the U.S. Foreign Corrupt Practices Act, the UK Bribery Act, and other local laws prohibiting corrupt payments by employees, vendors, distributors, or agents, is being applied more rigorously. Emerging markets are a significant focus of our international growth strategy. The nature of these markets presents a number of inherent risks. A failure by SAP to comply with applicable laws and regulations, or any related allegations of wrongdoing against us, whether merited or not, could have an adverse effect on our business, financial position, profit, cash flows and reputation.

 

 

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Non-compliance with applicable data protection and privacy laws or failure to adequately meet the requirements of SAP’s customers with respect to our products and services could lead to civil liabilities and fines, as well as loss of customers and damage to SAP’s reputation.

As a global software and service provider, SAP is required to comply with local laws wherever SAP does business. Consequently, we must ensure that any legal requirements in connection with the provision of products and services are properly implemented. With regard to data protection requirements, in May 2016, the EU enacted a “General Data Protection Regulation” (GDPR), as a successor to the Data Protection Directive of 1995, with the aim of further harmonizing data protection laws across the EU. The GDPR will be directly applicable law in all EU and EEA member states as of May 25, 2018 after a two-year transition period. Within limits, member states can supplement the GDPR with additional national rules. Overall, the GDPR does not introduce substantial new concepts. It rather focuses on stronger compliance requirements and enforces them vigorously on every business that processes personal data of individuals in the EU/EEA, regardless of where that business is established. Some of the new rules are subject to further definition by the authorities, though, and others leave room for interpretation.

Risks for SAP include:

 

Violations of the GDPR might be punished with financial penalties of up to the higher of 20 million or 4% of the responsible company’s annual global turnover. Further administrative measures include mandatory instructions by the data protection supervisory authorities relating to specific processing activities, up to their prohibition. Non-compliance might further lead to legal claims from affected individuals and consumer protection organizations. Where SAP processes data on behalf of its customers, violations might lead to damage claims from customers. Non-compliance further bears the risk of reputational losses if violations become publically known.

 

Where member states can supplement the GDPR with additional national rules, there is a risk that data protection law will not be fully harmonized across Europe. As a consequence, SAP would have to continue to adapt its products and services to the individual national requirements.

 

The data protection concepts of the GDPR do not adequately reflect the latest technological developments, such as big data and machine learning. If the GDPR cannot be interpreted in a way that allows for such technologies, or revised as necessary, SAP

   

might not be able to use and offer products and services that implement such technologies in the EU/EEA.

Overall, these laws and regulations amend and supplement existing requirements regarding the processing of personal data that SAP and SAP customers must fulfill and which we must consequently address with our products and services, including cloud delivery. Failure to comply with applicable laws or to adequately address privacy concerns of customers, even if unfounded, could lead to investigations by supervisory authorities, civil liability, fines, (in the future, potentially calculated based on the Company’s annual revenue), loss of customers, damage to our reputation, and could have an adverse effect on our business, financial position, profit, and cash flows.

Failure to meet customer, partner, or other stakeholder expectations or generally accepted standards on climate change, energy constraints, and our social investment strategy could negatively impact SAP’s business, results of operations, and reputation.

Energy and emissions management are an integral component of our holistic management of social, environmental, and economic risks and opportunities. We have identified risks in these major areas:

 

Our solutions

 

Our own operations – energy management and other environmental issues such as carbon management, water use, and waste

Because our customers, employees, and investors expect a reliable energy and carbon strategy, we have reemphasized our environmental policy and our previously communicated targets, especially our 2020 target for greenhouse gas emissions. In case these targets cannot be achieved, our customers might no longer recognize SAP for our environmental leadership and might buy other vendors’ products and services. Consequently, we could fail to achieve our revenue target. If we do not meet stakeholder expectations in the areas identified, our rating in sustainable investment indexes might decrease, which could have an adverse effect on our reputation, profit, and share price.

Unethical behavior and non-compliance with our integrity standards due to intentional and fraudulent employee behavior could seriously harm our business, financial position, profit, and reputation.

SAP’s leadership position in the global market is founded on the long-term and sustainable trust of our

 

 

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stakeholders worldwide. Our heritage is one of corporate transparency, open communication with financial markets, and adherence to recognized standards of business integrity. The SAP Code of Business Conduct, adopted by the Executive Board on January 29, 2003, and updated as necessary since then, memorialized and supplemented the already existing guidelines and expectations for the business behavior practiced at SAP.

However, we might encounter unethical behavior and non-compliance with our integrity standards due to intentional and fraudulent behavior of individual employees, possibly in collusion with external third parties. In addition to intentional behavior, problems could also arise due to negligence in the adherence to rules and regulations, especially in countries with a high Corruption Perceptions Index and continuously increasing business activities in profoundly regulated industries such as public sector, healthcare, banking or insurance. Unethical behavior and misconduct attributable to SAP could not only lead to criminal charges, fines, and claims by injured parties, but also to financial loss, and severe reputational damage. This could have an adverse effect on our business, financial position, profit, and cash flows.

Principal shareholders may be able to exert control over our future direction and operations.

If SAP SE’s principal shareholders and the holdings of entities controlled by them vote in the same manner, this could delay, prevent or facilitate a change in control of SAP or other significant changes to SAP SE or its capital structure. See “Item 7. Major Shareholders and Related-Party Transactions – Major Shareholders” for further information.

U.S. judgments may be difficult or impossible to enforce against us or our Board members.

Currently, except for Bill McDermott, Robert Enslin, and Steve Singh all members of SAP SE’s Executive Board and all members of the Supervisory Board are non-residents of the United States. A substantial portion of the assets of SAP and our Board members are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon non-U.S. resident persons or SAP or to enforce against non-U.S. resident persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the securities laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere might be unenforceable in Germany.

Communication and Information Risks

Our controls and efforts to prevent the unauthorized disclosure of confidential information might not be effective.

Confidential information and internal information related to topics such as our strategy, new technologies, mergers and acquisitions, unpublished financial results, customer data or personal data, could be prematurely or inadvertently disclosed and subsequently lead to market misperception and volatility. This could require us to notify multiple regulatory agencies and comply with applicable regulatory requirements and, where appropriate, the data owner, which could result in a loss of reputation for SAP. For example, leaked information during a merger or acquisition deal could cause the loss of our deal target, or our share price could react significantly in case of prematurely published financial results. This could have an adverse effect on our market position and lead to fines and penalties. In addition, this could have an adverse effect on our business, financial position, profit, and cash flows.

Financial Risks

Our sales are subject to quarterly fluctuations and our sales forecasts might not be accurate.

Our revenue and operating results can vary and have varied in the past, sometimes substantially, from quarter to quarter. Our revenue in general, and our software revenue in particular, is difficult to forecast for a number of reasons, including:

 

The relatively long sales cycles for our products

 

The large size, complexity, and extended timing of individual customer transactions

 

The introduction of licensing and deployment models such as cloud subscription models

 

The timing of the introduction of new products and services or product and service enhancements by SAP or our competitors

 

Changes in customer budgets

 

Decreased software sales that could have an adverse effect on related maintenance and services revenue

 

The timing, size, and length of customers’ services projects

 

Deployment models that require the recognition of revenue over an extended period of time

 

Adoption of, and conversion to, new business models leading to changed or delayed payment terms

 

Seasonality of a customers’ technology purchases

 

Limited visibility during the ongoing integration of acquired companies into their ability to accurately predict their sales pipelines and the likelihood that the projected pipeline will convert favorably into sales

 

 

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Other general economic, social, environmental, and market conditions, such as a global economic crisis and difficulties for countries with large debt

Since many of our customers make their IT purchasing decisions near the end of calendar quarters, and with a significant percentage of those decisions being made during our fourth quarter, even a small delay in purchasing decisions for our on-premise software could have an adverse effect on our revenue results for a given year. Our dependence on large transactions has decreased in recent years with a trend towards an increased number of transactions while the average deal size is more or less constant.

However, the loss or delay of one or a few large opportunities could have an adverse effect on our business, financial position, profit, and cash flows.

External factors could impact our liquidity and increase the default risk associated with, and the valuation of, our financial assets.

Macroeconomic factors such as an economic downturn could have an adverse effect on our future liquidity. We use a globally centralized financial management to control financial risk, such as liquidity, exchange rate, interest rate, counterparty, and equity price risks. The primary aim is to maintain liquidity in the SAP Group at a level that is adequate to meet our obligations at any time. Our total Group liquidity is supported by our strong operating cash flows, of which a large part is recurring, and by credit facilities from which we can draw if necessary. However, adverse macroeconomic factors could increase the default risk associated with the investment of our total Group liquidity including possible liquidity shortages limiting SAP’s ability to repay financial debt. This could have an impact on the value of our financial assets, which could have an adverse effect on our business, financial position, profit, and cash flows.

Management use of estimates could negatively affect our business, financial position, profit, and cash flows.

To comply with IFRS, management is required to make numerous judgments, estimates, and assumptions that affect the reported financial figures. The facts and circumstances, as well as assumptions on which management bases these estimates and judgments and management’s judgment regarding the facts and circumstances, might change over time and this could result in significant changes in the estimates and judgments and, consequently, in the reported financials.

There is a risk that such changes could have an adverse effect on our business, financial position, profit and cash flows.

Current and future accounting pronouncements and other financial reporting standards, especially but not only concerning revenue recognition, might negatively impact our financial results.

We regularly monitor our compliance with applicable financial reporting standards and review new pronouncements and drafts thereof that are relevant to us. As a result of new standards, changes to existing standards (including the new IFRS 15 on revenue from contracts with customers that we will need to adopt in 2018) and changes in their interpretation, we might be required to change our accounting policies, particularly concerning revenue recognition, to alter our operational policies so that they reflect new or amended financial reporting standards, or to restate our published financial statements. Such changes might have an adverse effect on our reputation, business, financial position, and profit, or cause an adverse deviation from our revenue and operating profit target.

As a globally operating company, SAP is subject to various financial risks, which could negatively impact our business, financial position, profit, and cash flows.

Because we are operating throughout the world, a significant portion of our business is conducted in foreign currencies. In 2016, approximately 71.6% of our revenue was attributable to operations in foreign currencies and therefore gets translated into our reporting currency, the euro. Consequently, period-over-period fluctuations can significantly impact our financial results. In general, an appreciation of the euro has an adverse effect while a depreciation has a positive effect. In addition to exchange rate risks, we are exposed to interest rate and share price fluctuations due to variable interest bearing assets and liabilities and share-based compensation plans for our employees and executives.

The market price for our ADRs and ordinary shares may be volatile.

The market prices of our ADRs and ordinary shares have experienced and may continue to experience significant volatility in response to various factors including, but not limited to:

 

unauthorized or inadvertent premature disclosure of confidential information, including information concerning pending acquisition negotiations or acquisition rumors;

 

 

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the announcement of new products or product enhancements by us or our competitors;

 

technological innovation by us or our competitors;

 

quarterly variations in our results or our competitors’ results of operations or results that fail to meet market expectations;

 

changes in revenue and revenue growth rates on a consolidated basis or for specific geographic areas, business units, products or product categories;

 

changes in our externally communicated outlook;

 

changes in our capital structure, for example due to the potential future issuance of additional debt instruments;

 

general market conditions specific to particular industries;

 

litigation to which we are a party;

 

general and country specific economic or political conditions (particularly wars, terrorist attacks, etc.);

 

proposed and completed acquisitions or other significant transactions by us or our competitors; and

 

general market conditions.

Many of these factors are beyond our control. In the past, companies that have experienced volatility in the market price of their stock have been subject to shareholder lawsuits, including securities class action litigation. Any such lawsuits against us, with or without merit, could result in substantial costs and the diversion of management’s attention and resources, resulting in a decline in our results of operations and our stock price.

Project Risks

Implementation of SAP software and cloud-based service deliveries often involves a significant commitment of resources by our customers and is subject to a number of significant risks over which we often have no control.

A core element of our business is the successful implementation of software and service solutions to enable our customers to master complexity and help our customers’ business run at their best. The implementation of SAP software and cloud-based service deliveries is led by SAP, by partners, by customers, or by a combination thereof. Depending on various factors, such as the complexity of solutions, the customer’s implementation, integration and migration needs, or the resources required, SAP faces a number of different risks. For example, functional requirement changes, delays in timeline, or deviation from recommended best practices might occur during the course of a project. These scenarios have a direct impact on the project resource model and on securing adequate internal personnel or consultants in a timely manner and could therefore prove challenging.

Other aspects that could potentially affect our projects and deliveries, especially during the transition to the Cloud are security breaches or unauthorized access to confidential data, operational data center and infrastructure disruptions as well as local legislation with regards to data privacy.

As a result of these and other risks, SAP and/or some of our customers have incurred significant implementation costs in connection with the purchase and installation of SAP software products and solutions. Some customer implementations have taken longer than planned and failed to generate the profit originally expected. We cannot guarantee that we can reduce or eliminate protracted installation or significant third-party consulting costs, for example, that trained consultants will be readily available, that our costs will not exceed the fees agreed in fixed-price contracts, or that customers will be satisfied with the implementation of our software and solutions. Unsuccessful, lengthy, or costly customer implementation and integration projects could result in claims from customers, harm SAP’s reputation, and could have an adverse effect on our business, financial position, profit, and cash flows. Additionally, potentially new contracting models based on subscription models for services, support, and application management might lead to challenges from a financial position perspective including profit and cash flow.

Product and Technology Risks

Undetected security vulnerabilities shipped and deployed within our products might cause damage to SAP and our customers, and partners.

Customer systems or systems operated by SAP itself to provide services could potentially be compromised by vulnerabilities if they are exploited by hackers. This could lead to theft, destruction, or abuse of data, or systems could be rendered unusable (for example, due to distributed denial of service attacks). The detection of security vulnerabilities in our software, our customers’ systems, or SAP systems used in the provision of services, especially in case of exploitation, could prevent us from meeting our contractual obligations and subsequently might lead to customer claims and reputational damage, which might have an adverse effect on our business, financial position, profit, and cash flows.

Undetected defects in the introduction of new products, product enhancements and cloud offerings could increase our costs, and reduce customer demand.

Our development investment, including new product launches and enhancements, is subject to risks. For example, software products and services might not

 

 

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completely meet our high-quality standards, including security standards; might not fulfill market needs or customer expectations; or might not comply with local standards and requirements. Furthermore, this risk also exists with respect to acquired companies’ technologies and products where we might not be able to manage these as quickly and successfully as expected. Therefore, market launches, entering new markets, or the introduction of new innovations could be delayed or not be successful.

In addition, new products and cloud offerings, including third-party technologies we have licensed and open source software components we use in those products, could contain undetected defects or they are detected, or not be mature enough from the customer’s point of view for business-critical solutions after shipment in spite of all due diligence SAP puts into quality and security. The detection and correction of any defects especially after delivery could be expensive and time-consuming and in some cases we might not be able to meet the expectations of customers regarding time and quality in the defect resolution process. In some circumstances, we might not be in a position to rectify such defects or entirely meet the expectations of customers, specifically as we are expanding our product portfolio into additional markets. As a result, we might have to fix defects in our software after shipment (so called security response) or in some cases even face customer claims for cash refunds, damages, replacement software, or other concessions. The risk of defects and their adverse consequences could increase as we seek to introduce a variety of new software products and product enhancements at a higher innovation rate. This is especially relevant for cloud products as delivery cycles are even shorter (up to daily deliveries) and our complete cloud product customer base could receive undetected defects simultaneously. Furthermore, for products that use third-party (not SAP) cloud services, we might not always be able to detect defects in advance. Significant undetected defects or delays in introducing new products or product enhancements could affect market acceptance of SAP software products and could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

The use of existing SAP software products by customers in business-critical solutions and processes and the relative complexity and technical interdependency of our software products and services create a risk that customers or third parties might pursue warranty, performance, or other claims against us for actual or alleged defects in SAP software products, in our provision of services, or in our application hosting

services. We have in the past been, and might in the future be, subject to warranty, performance, or other similar claims.

Although our contracts generally contain provisions designed to limit our exposure due to actual or alleged defects in SAP software products or in our provision of services, these provisions might not cover every eventuality or be effective under the applicable law. Regardless of its merits, any claim could entail substantial expense and require the devotion of significant time and attention by key management personnel. Publicity surrounding such claims could affect our reputation and the demand for our software.

Changes in our rights to use software, cloud services, and technologies we license from third parties that are an integral part of SAP’s products and services could slow down time to market and influence our license pricing and therefore the competitiveness with other software vendors. Furthermore, it could diminish our software’s or cloud functional capabilities and therefore could jeopardize the stability of our solution portfolio offering.

The numerous third-party solutions we have licensed and certain open source software components we use have become an integral part of our product and service portfolio. We depend on those solutions for the functionality of our software and cloud services. Changes to, or the loss of, third-party licenses as well as open source licenses being construed could significantly increase the cost of these licenses and significantly reduce software or cloud functionality and/or usability or availability of SAP’s software or cloud offerings. As a result, we might incur additional development or license costs to ensure the continued functionality of our products, experience delays in our ability to offer or have to stop offering our products for sale, which could have an adverse effect on our business, financial position, profit, and cash flows. This risk increases with each of our acquisitions of a company or a company’s intellectual property assets that had been subject to third-party solution licensing, open source software and product standards less rigorous than our own.

If we are unable to keep up with rapid technological, process and service innovations, and new business models as well as changing market expectations, we might not be able to compete effectively.

Our future success depends upon our ability to keep pace with technological and process innovations and new business models, as well as our ability to develop

 

 

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new products and services, enhance and expand our existing products and services portfolio, and integrate products and services we obtain through acquisitions. To be successful, we are required to adapt our products and our go-to-market approach to a cloud-based delivery and consumption model to satisfy changing customer demand and to ensure an appropriate level of adoption, customer satisfaction and retention.

We might not be successful in bringing new business models, solutions, solution enhancements, and/or services to market before our competitors or at equally favorable conditions. We might also face increasing competition from open source software initiatives, or comparable models in which competitors might provide software and intellectual property free and/or under terms and conditions unfavorable for SAP. In addition, we might not be able to generate enough revenue to offset the significant research and development costs we incur to deliver technological innovations or to offset the required infrastructure costs to deliver our solutions and services as part of our new business models. Moreover, we might not anticipate and develop technological improvements or succeed in adapting our products, services, processes, and business models to technological change, changing regulatory requirements, emerging industry standards, and changing requirements of our customers and partners. Finally, we might not succeed in producing high-quality products, enhancements, and releases in a timely and cost-effective manner to compete with our competitors, which could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

Our technology and/or product strategy might not be successful or our customers and partners might not adopt our technology platforms and other innovations as expected.

We might not be successful in integrating our platforms and solutions, enabling the complete product and cloud service portfolio, harmonizing our user interface design and technology, integrating acquired technologies, or bringing new solutions based on the SAP HANA platform as well as SAP HANA Cloud Platform to the market as fast as expected, in particular, innovative applications such as SAP S/4HANA or new technologies such as Internet of Things or machine learning. In addition, we might not be able to compete or partner effectively in the area of cloud services and our new applications and services might not meet customer expectations possibly impacting customer satisfaction and retention. As a result, our partner organizations and customers might not adopt our technology platforms, applications, or cloud services quickly enough or they might consider

other competitive solutions in the market. This could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

Our cloud offerings and related infrastructure might be subject to a security attack, become unavailable, or fail to perform properly.

The software used in our cloud portfolio is inherently complex and any defects in product functionality, data center operations, or system stability that cause interruptions in the availability of our application portfolio could result in the following:

 

Lost or delayed market acceptance and sales

 

Breach of warranty or other contract breach or misrepresentation claims

 

Sales credits or refunds to our customers or partners

 

Loss of customers and/or partners

 

Diversion of development and customer service resources

 

Breach of data protection and privacy laws and regulations

 

Customers considering competitive cloud offerings

 

Loss of customer satisfaction and brand reputation

The costs incurred in correcting any defects or errors might be substantial and could have an adverse effect on our reputation, business, financial position, profit, and cash flows. The availability of our cloud applications could be interrupted by a number of factors, resulting in customers’ inability to access their cloud applications or receive their service level, system outages or downtimes, failure of our network due to human or other errors, security breaches, or variability in user traffic for our cloud applications. Because of the large amount of data that we collect and manage, hardware failures, defects in our software, or errors in our systems could result in data loss or corruption, or cause the information that we collect to be incomplete or contain inaccuracies that our customers regard as significant. Additionally, any loss of the right to use hardware purchased or leased from third parties could result in delays in our ability to provide our cloud applications until equivalent technology is either developed by us or, if available, identified. Furthermore, our cooperation with partners in the area of cloud includes the co-location of data centers that might expose SAP to additional risks in the area of security and data protection, as well as the potential for breached service-level agreements by partners.

We have administrative, technical, and physical security measures in place as well as contracts that require third-party data centers to have appropriate security and data protection and privacy measures in place. In this context, customers might demand to use only specific and/or local data centers. However, if these security measures are breached as a result of third-party action, employee

 

 

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error or malfeasance, or otherwise, and if, as a result, someone obtains unauthorized access to our customers’ data, which might include personally identifiable information regarding users, our reputation could be damaged, our business might suffer, local data protection and privacy laws or regulations might be breached, and we could incur significant liability.

In addition, our insurance coverage might not cover claims against us for loss or security breach of data or other indirect or consequential damages. Moreover, defending a suit, regardless of its merit, could be costly and time-consuming. In addition to potential liability, if we experience interruptions in the availability of our cloud applications, our reputation could be harmed and we could lose customers.

Operational Risks

Third parties have claimed, and might claim in the future, that we infringe their intellectual property rights, which could lead to damages being awarded against us and limit our ability to use certain technologies in the future.

We believe that we will continuously be subject to intellectual property infringement claims as our solution portfolio grows; as we acquire companies with increased use of third-party code including open source code; as we expand into new industries with our offerings, resulting in greater overlap in the functional scope of offerings; and as non-practicing entities that do not design, manufacture, or distribute products increasingly assert intellectual property infringement claims.

Any claims, with or without merit, and negotiations or litigation relating to such claims, could preclude us from utilizing certain technologies in our products, be time-consuming, result in costly litigation, and require us to pay damages to third parties, stop selling or reconfigure our products and, under certain circumstances, pay fines and indemnify our customers, which could have an adverse effect on our business, financial profile, profit, cash flows, and reputation. They could also require us to enter into royalty and licensing arrangements on terms that are not favorable to us, cause product shipment delays, subject our products to injunctions, require a complete or partial redesign of products, result in delays to our customers’ investment decisions, and damage our reputation.

Software includes many components or modules that provide different features and perform different functions. Some of these features or functions might be subject to third-party intellectual property rights. The rights of another party could encompass technical aspects that are similar to one or more technologies in

one or more of our products. Intellectual property rights of third parties could preclude us from using certain technologies in our products or require us to enter into royalty and licensing arrangements on unfavorable or expensive terms.

The software industry is making increasing use of open source software in its development work on solutions. We also integrate certain open source software components from third parties into our software. Open source licenses might require that the software code in those components or the software into which they are integrated be freely accessible under open source terms. Third-party claims might require us to make freely accessible under open source terms one of our products or third-party (not SAP) software upon which we depend.

Claims and lawsuits against us could have an adverse effect on our business, financial position, profit, cash flows, and reputation.

Claims and lawsuits are brought against us, including claims and lawsuits involving businesses we have acquired. Adverse outcomes to some or all of the claims and lawsuits pending against us might result in the award of significant damages or injunctive relief against us that could hinder our ability to conduct our business and could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

The outcome of litigation and other claims or lawsuits is intrinsically uncertain. Management’s view of the litigation might also change in the future. Actual outcomes of litigation and other claims or lawsuits could differ from the assessments made by management in prior periods, which are the basis for our accounting for these litigations and claims under IFRS.

We might not acquire and integrate companies effectively or successfully and our strategic alliances might not be successful.

To expand our business, we acquire businesses, products, and technologies, and we expect to continue to make acquisitions in the future. Over time certain of these acquisitions have increased in size and in strategic importance for SAP, Management negotiation of potential acquisitions and alliances and integration of acquired businesses, products, or technologies demands time, focus, and resources of management and of the workforce. Acquisitions of companies, businesses, and technology expose us to unpredictable operational difficulties, expenditures, and risks. These risks include, among others:

 

Selection of the wrong integration model for the acquired company and/or technology

 

 

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Failure to properly evaluate the acquired business and its different business and licensing models

 

Incorrect assumptions during due diligence process leading to negative contribution with regards to an acquired company

 

Failure to successfully integrate acquired technologies or solutions into SAP’s solution portfolio and strategy in a timely and profitable manner

 

Failure to integrate the acquired company’s operations across SAP’s different cultures, languages, and local protocols, all within the constraints of applicable local laws

 

Failure to meet the needs of the acquired company’s customers and partners in the combined company

 

The diversion of management’s time and attention from daily operations

 

Loss of key personnel of the acquired business

 

Material unknown liabilities and contingent liabilities of acquired companies, including legal, tax, accounting, intellectual property, or other significant liabilities that might not be detected through the acquisition due diligence process

 

Legal and regulatory constraints (such as contract obligations, privacy frameworks, and agreements)

 

Difficulties in implementing, restoring, or maintaining internal controls, procedures, and policies

 

Practices or policies of the acquired company that might be incompatible with our compliance requirements

 

An adverse effect on relationships with existing customers, partners, or third-party providers of technology or products

 

Difficulties in integrating the acquired company’s accounting, HR, and other administrative systems and coordination of the acquired company’s research and development (R&D), sales, and marketing functions

 

Debt incurrence or significant cash expenditures

 

Constraints in enforcing acquired companies’ compliance with existing SAP security standards in a timely manner

 

Difficulties in customer implementation projects combining technologies and solutions from both SAP and the acquired company

In addition, acquired businesses might not perform as anticipated, resulting in charges for the impairment of goodwill and other intangible assets on our statements of financial position. Such charges might have an adverse effect on our business, financial position, profit, and cash flows. We have entered into, and expect to continue to enter into, alliance arrangements for a variety of purposes, including the development of new products and services. There can be no assurance that any such products or services will be successfully developed or that we will not incur significant unanticipated liabilities in connection with such arrangements. We might not be

successful in overcoming these risks and we might therefore not benefit as anticipated from acquisitions or alliances.

We might not be able to obtain adequate title to, or licenses in, or to enforce, intellectual property.

Protecting and defending our intellectual property is crucial to our success. We use a variety of means to identify and monitor potential risks and to protect our intellectual property. These include applying for patents, registering trademarks and other marks and copyrights, implementing measures to stop copyright and trademark infringement, entering into licensing, confidentiality, and non-disclosure agreements, and deploying protection technology. Despite our efforts, we might not be able to prevent third parties from obtaining, using, or selling without authorization what we regard as our proprietary technology and information. All of these measures afford only limited protection, and our proprietary rights could be challenged, invalidated, held unenforceable, or otherwise affected. Some intellectual property might be vulnerable to disclosure or misappropriation by employees, partners, or other third parties. Third parties might develop technologies that are substantially equivalent or superior to our technology. Finally, third parties might reverse-engineer or otherwise obtain and use technology and information that we regard as proprietary. Accordingly, we might not be able to protect our proprietary rights against unauthorized third-party copying or utilization, which could have an adverse effect on our competitive and financial positions, and result in reduced sales. Any legal action we bring to enforce our proprietary rights could also involve enforcement against a partner or other third party, which might have an adverse effect on our ability, and our customers’ ability, to use that partner’s or other third parties’ products. In addition, the laws and courts of certain countries might not offer effective means to enforce our intellectual property rights. This could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

SAP’s business strategy focuses on certain business models that are highly dependent on a working cyberspace. A cybersecurity breach could have an adverse effect on our customers, our reputation, and our business.

The key cybersecurity risks currently applicable to us include state-driven economic espionage as well as competitor-driven industrial espionage, and criminal activities including, but not limited to, cyberattacks and “mega breaches” against cloud services and hosted on-premise software. This might result in, for example, disclosure of confidential information and intellectual property, defective products, production downtimes,

 

 

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supply shortages, and compromised data (including personal data). A failure of our cybersecurity measures could impact our compliance with legal demands (for example, Sarbanes-Oxley Act, Payment Card Industry Data Security Standard, data privacy) and expose our business operations as well as service delivery to the described risks, for example, virtual attack, disruption, damage, and/or unauthorized access. Additionally, we could be subject to recovery costs, for example, as well as significant contractual and legal claims by customers, partners, authorities, and third-party service providers for damages against us, which could have an adverse effect on our reputation, business, financial position, profit, and cash flows.

We might not be able to protect our critical information and assets or to safeguard our business operations against disruption.

SAP is highly dependent on the exchange of a wide range of information across our global operations and on the availability of our infrastructure. With regards to our physical environment, we face several key security risks such as industrial and/or economic espionage, serious and organized crime, and other illegal activities, as well as violent extremism and terrorism. We might be endangered by threats including, but not limited to, social engineering, misuse, or theft of information or assets, or damage to assets by trespassers in our facilities or by people who have gained unauthorized physical access to our facilities, systems, or information. These could have an adverse effect on our business, financial profile, profit, and cash flows.

Our insurance coverage might not be sufficient and we might be subject to uninsured losses.

We maintain insurance coverage to protect us against a broad range of risks, at levels we believe are appropriate and consistent with current industry practice. Our objective is to exclude or minimize risk of financial loss at reasonable cost. However, we might incur losses that might be beyond the limits, or outside the scope, of coverage of our insurance and that might limit or prevent indemnification under our insurance policies. In addition, we might not be able to maintain adequate insurance coverage on commercially reasonable terms in the future. Further, certain categories of risks are currently not insurable at reasonable cost, which could have an adverse effect on our business, financial position, profit, and cash flows. Finally, there can be no assurance of the financial ability of the insurance companies to meet their claim payment obligations.

We could incur significant losses in connection with venture capital investments.

Through Sapphire Ventures (formerly SAP Ventures), our consolidated venture investment funds, we plan to continue investing in new and promising technology businesses. Many such investments initially generate net losses and require additional expenditures from their investors. Changes to planned business operations have, in the past affected, and might in the future affect, the performance of companies in which Sapphire Ventures holds investments, and that could have an adverse effect on the value of our investments in Sapphire Ventures, which could have an adverse effect on our business, financial position, profit, and cash flows. Furthermore, tax deductibility of capital losses and impairment in connection with equity securities are often restricted and could therefore have an adverse effect on our effective tax rate.

ITEM 4. INFORMATION ABOUT SAP

Our legal corporate name is SAP SE. SAP SE is translated in English to SAP European Company (Societas Europaea, or “SE”). SAP SE is organized in the Federal Republic of Germany under German and European law, see “Item 10. Additional Information.” Where the context requires in the discussion below, SAP SE also refers to our predecessor or previous legal forms and names, as the case may be, i.e. Systemanalyse und Programmentwicklung GbR (1972-1976), SAP Systeme, Anwendungen, Produkte in der Datenverarbeitung GmbH (1976-1988), “SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung” (1988 – 2005) and “SAP AG” (2005 – 2014). Our principal executive offices, headquarters and registered office are located at Dietmar-Hopp-Allee 16, 69190 Walldorf, Germany. Our telephone number is +49-6227-7-47474.

As part of our activities to reduce the number of legal entities in the SAP group, in 2016 we integrated certain subsidiaries into the following significant SAP subsidiaries: SAP Deutschland SE & Co. KG, SAP (UK) Limited, SuccessFactors, Inc., Concur Technologies, Inc., and SAP China Co., Ltd.

For (i) a description of our principal capital expenditures and divestitures and the amount invested (including interests in other companies) since January 1, 2014 until the date of this report and (ii) information concerning our principal capital expenditures and divestitures currently in progress, including the distribution of these investments geographically and the method of financing, see “Item 4. Information About SAP – Description of Property – Capital Expenditures.”

 

 

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OVERVIEW OF THE SAP GROUP

Our vision is to help the world run better and improve people’s lives. Together with our broad ecosystem of partners, this comes to life as we help our customers master complexity and innovate and transform to become sustainable digital businesses. SAP is involved in driving innovation in all fields of the digital economy, such as the Internet of Things, machine learning, and artificial intelligence. For more information on our vision and strategy, see the Strategy and Business Model section.

Founded in 1972, SAP is a global company headquartered in Walldorf, Germany. Our legal corporate name is SAP SE. SAP is the market leader in enterprise application software. Enterprise application software is computer software specifically developed to support and automate business processes. The company is also the fastest-growing major database company. Globally, more than 76% of all business transactions worldwide touch an SAP software system. With more than 345,000

customers in more than 180 countries, the SAP Group includes subsidiaries in all major countries and employs more than 84,100 people.

Our ordinary shares are listed on the Frankfurt Stock Exchange. American Depositary Receipts (ADRs) representing SAP SE ordinary shares are listed on the New York Stock Exchange (NYSE). SAP is a member of Germany’s DAX, the Dow Jones EURO STOXX 50, and the Dow Jones Sustainability Indexes. As at December 31, 2016, SAP was the most valuable company in the DAX based on market capitalization. For additional information regarding our stock, see the Investor Relations section.

As at December 31, 2016, SAP SE directly or indirectly controlled a worldwide group of 245 subsidiaries to develop, distribute, and provide our products, solutions, and services. For a list of our subsidiaries, associates, and other equity investments, see the Notes to the Consolidated Financial Statements, Note (33).

 

 

The following table sets forth our most significant subsidiaries based on total revenues in 2016. All of these subsidiaries are wholly owned by SAP SE.

 

Name of Subsidiary    Country of Incorporation

Germany

    

SAP Deutschland SE & Co. KG, Walldorf

   Germany

Rest of EMEA

    

SAP (UK) Limited, Feltham

   Great Britain

SAP (Schweiz) AG, Biel

   Switzerland

SAP France, Levallois Perret

   France

SAP Nederland B.V., ‘s-Hertogenbosch

   The Netherlands

SAP Italia Sistemi Applicazioni Prodotti in Data Processing S.p.A., Vimercate

   Italy

United States

    

SAP America, Inc., Newtown Square

   USA

SAP Industries, Inc., Newtown Square

   USA

SuccessFactors, Inc., South San Francisco

   USA

Ariba, Inc., Palo Alto

   USA

Concur Technologies, Inc., Bellevue

   USA

Rest of Americas

    

SAP Brasil Ltda, São Paulo

   Brazil

Japan

    

SAP Japan Co., Ltd., Tokyo

   Japan

Rest of APJ

    

SAP Australia Pty Ltd., Sydney

   Australia

SAP China Co., Ltd., Shanghai

   China

SAP India Private Limited, Bangalore

   India

 

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STRATEGY AND BUSINESS MODEL

Impact Through Innovation

SAP’s vision is to help the world run better and improve people’s lives. We strive to make our world a better, more sustainable place and help solve some of its most complex problems. Our innovations give us the power to help tackle these issues by giving our customers, partners, and consumers the tools they need to have an impact.

We execute on our vision by empowering our customers to become digital businesses through SAP technology, so they can address the challenges facing our world today and have an impact in three vital areas:

 

Economy: Economic empowerment comes from purpose-driven work. SAP software and technology enables customers to innovate and build strong industries and infrastructure and to protect the privacy of individuals and organizations.

 

Society: Health, education, and public safety are critical for a vibrant society. SAP software and technology is addressing complex challenges around disease prevention and detection, as well as providing solutions for smarter government and smarter cities.

 

Environment: Climate change touches everyone and will impact the lives of future generations. SAP software and technology is helping our customers make the world more energy efficient, and drive more sustainable supply chains around the world.

The United Nations has defined 17 Sustainable Development Goals (SDGs) to transform the world’s economy, society, and environment. These goals are a universal call to action to end poverty, protect the planet, and ensure that all people enjoy peace and prosperity. We consider the most relevant of these goals in the context of our own vision and higher purpose and they inspire us to achieve this vision.

 

LOGO

Achieving the Vision

Supporting our customers’ digital transformation

To execute our vision, we are helping customers meet the challenges of today’s changing world, and at the same time, enabling them to have a positive impact across the economy, society, and the environment.

Technology is transforming both our society and the way we do business. People and things are connected like never before. Entire industries are being disrupted by innovations that seemed unimaginable only a few years ago. Technology trends such as cloud computing, Big Data, the Internet of Things (IoT), and artificial intelligence go hand in hand with social trends that are changing how we live and work.

Organizations need to digitally transform their business processes and business models to be able to succeed in today’s marketplace. They need to become agile organizations that are laser focused on driving customer value. They also must become data-driven and run their business on real-time information to react to market and customer demands.

By providing a technology platform for innovation and digitalization, we help our customers with the challenges of digital transformation. Our solutions enable businesses, governments, and non-profit organizations in more than 180 countries to become data-driven “live” businesses.

Our platform leverages existing SAP assets that are complemented by new cloud capabilities and the real-time applications available in our next-generation business suite SAP S/4HANA. Our solutions and services – combined with the talent and expertise of more than 84,100 colleagues and a broad global ecosystem of partners – puts us in a unique position to enable our more than 345,000 customers to fulfill their goals.

We want to build on the trust of our existing customers and earn the trust of new customers. For more information, see the Customers section.

Executing on our strategy

In the past years, we have built our success in the business applications market by expanding our product portfolio to help companies meet the needs of the digital economy. We have organically innovated with groundbreaking technology such as SAP HANA and software such as SAP S/4HANA. We have also expanded our portfolio through acquisitions by integrating valuable assets in the cloud and business network spaces.

In 2016, we have increased our focus on innovation as it is the key to long-term success. Our strategy to be the most innovative cloud company powered by SAP HANA,

 

 

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will help us deliver the digital innovation that our customers need. To execute on this strategy, we are focusing our efforts on the following key areas:

 

Continue to develop market-leading applications

 

Scale our platform as the innovation platform for our ecosystem partners

 

Invest in disruptive technologies

 

Recruit and retain the right talent

Continue to develop market-leading applications

Our core ERP software is the historic foundation of our strength. To maintain our market leadership position as this market rapidly shifts to the cloud, we will continue to innovate and offer the agility and flexibility our customers require.

We will continue to deliver market-leading applications for ERP, whether in the cloud or on premise. Further, we will continue to develop best-in class, line-of-business (LoB) cloud applications combined with real-time analytics, IoT capabilities, and industry add-ons. Finally, we will leverage our expertise to deliver solutions to help small businesses and midsize companies be successful.

Scale our platform as the innovation platform for our ecosystem partners

We built an open cloud platform with cloud application programming interfaces (APIs), which means the platform can communicate with multiple sources to support a strong ecosystem – allowing developers from companies of all sizes to extend our applications or create new solutions for the digital economy. Moreover, as the rapidly growing data management and database market moves to the cloud, our cloud platform offers companies planning, predictive, visualization, and mobile capabilities.

We will continue to deliver transformational innovations in the platform, database, and analytics space. We want developers in our entire ecosystem and our customers to turn to SAP as their reference cloud platform and API hub. Finally, we want to ensure that security remains a trusted feature of all SAP platforms and applications.

Invest in disruptive technologies

To enable sustainable success, we must prepare for the future. We will continue to incubate disruptive technologies across a number of initiatives. We have begun incubating new businesses using an “open innovation” approach under the umbrella of the SAP.io program with focus on both internal and external startups. We are aggressively investing in making our business applications “intelligent” with machine learning. We are investing in delivering personalized medicine through a connected health platform – aligned with our vision of improving society and healthcare. At the same

time, we continue to create reliable security solutions across all of our products.

For more information about these investments, see the Products, Research & Development, and Services section.

Recruit and retain the right talent

We cannot bring innovations to our customers without capable, driven employees. As we strive to be the best place to work in the enterprise software industry, we look to a diverse and engaged workforce to drive innovation and value for our customers. Recruiting the right talent and unleashing their innovative power is as crucial for SAP as continuing to develop the talent of existing employees to allow them to realize their full potential.

For more information, see the Employees section.

Keeping a balanced focus on growth

We take a balanced approach on how to grow. We will continue to focus on organic investments in technology and innovations to drive our short-term and midterm growth ambitions. We will continue to look at unleashing the full potential of our employees’ talent as well as strategic partnerships with our ecosystem to foster innovation.

Additionally, we may also acquire targeted “tuck-in” technologies to add to our broad solution offerings and improve coverage in key strategic markets. In 2016, SAP made the following smaller tuck-in acquisitions:

 

Altiscale, a company providing high-performance, scalable Big Data-as-a-service (BDaaS) solutions, will help SAP accelerate and operationalize the deployment of Big Data in the enterprise.

 

Fedem Technology, a forward-thinking IoT company, will help SAP build next-generation, end-to-end IoT solutions that not only support predictive maintenance but also Industry 4.0 scenarios.

 

Hipmunk, a leader in innovative travel search, will bring a consumer-like experience for business travelers.

 

PLAT.ONE, a leading enterprise-grade IoT provider, will help SAP enhance complex IoT capabilities in SAP Cloud Platform (formerly called SAP HANA Cloud Platform).

Investing in the next generation of technology leaders

For 20 years, through venture capital funds managed by Sapphire Ventures, SAP has supported entrepreneurs that aspire to build industry-leading businesses. Sapphire Ventures currently has over US$2 billion under management and has invested in more than 130 companies on five continents – in growth-stage

 

 

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technology companies as well as early-stage venture capital funds. Sapphire Ventures pursues opportunities in which it can help fuel growth by adding expertise, relationships, geographic reach, and capital. It places a particular focus on companies in Europe, Israel, and the United States.

Additionally, we launched a new SAP.io Fund to focus on strategic, early stage investments aligned with our SAP.io innovation initiatives. This US$35 million fund will focus on “catalyzing” a startup ecosystem that can leverage or enrich SAP data sets, platform technologies, or business workflows. It is operated in partnership with Sapphire Ventures.

For more information about our consolidated investment funds, see the Notes to the Consolidated Financial Statements, Note (33).

Financial Business Model

We derive our revenue from fees charged to our customers for:

 

Support, professional services, development, training, and other services

 

Licensing of on-premise software products and solutions

 

Use of our cloud solutions

 

Activity in our business networks

Measuring Our Success

We believe the most important indicators to measure our success comprise both financial and non-financial indicators:

 

Growth

 

Profitability

 

Customer loyalty

 

Employee engagement

 

 

The table below provides an overview of the specific key performance indicators (KPIs) used to measure performance, as well as our goals and actual performance.

Outlook and Results for 2016

 

Strategic Objective    KPI   

2016

Outlook*
(non-IFRS, at
constant currencies)

    

2016

Achievement

(non-IFRS, at
constant currencies)

 

Growth

   Cloud subscriptions and support revenue      3.00bn to 3.05bn        3.01bn  
     Cloud and software revenue      +6.5% to +8.5%        +8%  

Profitability

  

Operating profit

     6.5bn to 6.7bn        6.60bn  

Customer Loyalty

  

Customer Net Promoter Score

     25%        19.2%  

Employee Engagement

  

Employee Engagement Index

     82%        85%  

 

 

* The outlook was communicated in January 2016 and raised in October 2016.

Outlook for 2017 and Ambitions for 2020

 

Strategic
Objective
   KPI   

2016

(non-IFRS)

    

2017

Outlook
(non-IFRS, at
constant currencies)

    

2020

Ambition

(non-IFRS)

 

Growth

   Cloud subscriptions and support revenue      2.99bn        3.8bn to 4.0bn        8.0bn to 8.5bn  
   Cloud and software revenue      18.43bn        +6% to +8%           
   Total revenue      22.07bn        23.2 to 23.6bn        28bn to 29bn  
     Share of more predictable revenue*      61%                 70% to 75%  

Profitability

   Operating profit      6.63bn        6.8bn to 7.0bn        8.5bn to 9.0bn  

Customer Loyalty

   Customer Net Promoter Score      19.2%        21% to 23%        35% to 40%  

Employee Engagement

   Employee Engagement Index      85%        84% to 86%        84% to 86%  

 

 

* Support and cloud subscriptions – share of total revenue

 

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SEASONALITY

Our business has historically experienced the highest revenue in the fourth quarter of each year, due primarily to year-end capital purchases by customers. Such factors have resulted in 2016, 2015, and 2014 first quarter revenue being lower than revenue in the prior year’s fourth quarter. We believe that this trend will continue in the future and that our total revenue will continue to peak in the fourth quarter of each year and decline from that level in the first quarter of the following year. Unlike our on-premise software revenues, our on-premise support revenues and cloud subscriptions and support revenues are less subject to seasonality.

PRODUCTS, RESEARCH & DEVELOPMENT, AND SERVICES

Empowering Our Customers to Become Digital Businesses

In 2016, we continued to give top priority to supporting our customers on their individual paths into the digital economy, defining our strategy around the following cornerstones:

 

Enabling business with a digital data foundation

 

Running business with modern business applications and business networks

 

Differentiating business with a digital enterprise platform

 

Steering business with real-time analytics

 

Reinventing business with machine learning and theInternet of Things

 

Making companies’ digital transformations possible with SAP Digital Business Services

SAP HANA – Enabling Business with a Digital Data Foundation

SAP HANA is our in-memory computing platform that lets companies accelerate business processes, deliver more business intelligence, and simplify their IT environment. SAP HANA removes the burden of maintaining separate legacy systems and siloed data, so companies can run live and business people can make better business decisions in the new digital economy. Emphasizing our cloud-first strategy, SAP HANA can be deployed on several public cloud infrastructures.

With our second version of SAP HANA, we launched a truly next-generation platform. It enables the reduction of time-consuming database and data management tasks and delivers intelligent applications that leverage advanced analytic processing and empowers all users with deeper insight into any data from anywhere.

Our cloud-first strategy requires a very strong offering to handle Big Data in the cloud. With SAP Cloud Platform Big Data Service, which is powered by SAP HANA, we run

multitenant-aware Hadoop systems and provide end-to-end capabilities to efficiently manage and scale Big Data initiatives.

Running Business with Modern Business Applications and Business Networks

SAP S/4HANA – Reimagining the Business Suite for the Digital Age

SAP S/4HANA, our next-generation business suite, allows our customers to embrace the digital economy. The digital core is the foundation for running a Live Business:

 

Immediate – Empowering business users with insights to act in the moment

 

Intelligent – Going beyond automation to provide predictive suggestions

 

Integrated – Connecting not only customer functions but also people, things, and businesses

Based on SAP HANA, SAP S/4HANA software can store and process huge amounts of data while significantly reducing an organization’s data footprint. This means our customers can save time and cost.

Available in the cloud, on premise, or as a hybrid deployment, in 2016, SAP S/4HANA evolved from a finance-focused offering into a full digital-age ERP system. It enables insight and understanding so businesses can predict outcomes and use that data to make decisions live, which helps companies stay competitive in the digital economy. SAP S/4HANA can replace a traditional ERP solution across all lines of business (LoBs), such as finance, human resources, sales, service, procurement, manufacturing, asset management, supply chain, and research and development (R&D).

Customers recognize the benefits and power of SAP S/4HANA and, at the end of 2016, more than 5,400 customers had chosen the suite to support their digital transformation.

SAP S/4HANA Cloud – Delivering the Power of the Digital Core

In addition to our on-premise suite SAP S/4HANA, we further strengthened our SAP S/4HANA Cloud offering, delivering the power of a digital core with the key benefits expected from a software-as-a-service solution. It provides the scalability, ease of management, and security required in today’s digital economy. A quarterly release cycle helps ensure that customers can benefit from regularly delivered innovations with minimum disruption to their business.

SAP S/4HANA Cloud is comprised of various solutions targeted to meet the specific business needs of our

 

 

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customers and enable their journey to the cloud. For example, the SAP S/4HANA Enterprise Management Cloud solution provides a next-generation ERP suite in the cloud with integrated, end-to-end processes.

SAP S/4HANA Cloud was developed to co-exist in a heterogeneous system landscape with native integration to other SAP solutions and open interfaces for further integration and extensions using SAP Cloud Platform (formerly called SAP HANA Cloud Platform). The solution also supports specific industry and LoB requirements with preconfigured content from SAP Best Practices packages and uses the award-winning SAP Fiori user experience (UX) to provide simplified, role-based usability.

Extending Our Reach Through a Broad Ecosystem

SAP’s ecosystem and partners extend our reach in the marketplace. We work closely with more than 15,000 partners worldwide to provide SAP solutions for our customers. Partners continue to drive SAP S/4HANA and our solutions for small businesses and midsize enterprises (SMEs) – SAP Business ByDesign and SAP Business One – to prospects on behalf of SAP, accounting for more than 88% of all new SAP customers.

Innovating for LoBs and Industries

As a modular integrated suite, SAP S/4HANA is the backbone of a company. And, at the same time, we are building functional innovations for LoBs and industries to address our customers’ specific and evolving needs.

SAP covers 25 industries grouped in six industry sectors and 12 lines of business:

 

Industry Sector    Industry Portfolio

Consumer

   SAP for Consumer Products
   SAP for Life Sciences
   SAP for Retail
     SAP for Wholesale Distribution

Discrete manufacturing

   SAP for Aerospace & Defense
   SAP for Automotive
   SAP for High Tech
     SAP for Industrial Machinery & Components
Industry Sector    Industry Portfolio

Energy and natural resources

   SAP for Chemicals
   SAP for Mill Products
   SAP for Mining
   SAP for Oil & Gas
     SAP for Utilities

Financial services

   SAP for Banking
     SAP for Insurance

Public services

   SAP for Defense & Security
   SAP for Healthcare
   SAP for Higher Education & Research
     SAP for Public Sector

Services

   SAP for Engineering, Construction & Operations
   SAP for Media
   SAP for Professional Services
   SAP for Sports & Entertainment
   SAP for Telecommunications
     SAP for Travel & Transportation

Lines of Business

   Asset Management
   Commerce
   Finance
   Human Resources
   Manufacturing
   Marketing
   R&D/Engineering
   Sales
   Service
   Sourcing and Procurement
   Supply Chain
     Sustainability
 

 

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In addition, we are building other functional innovations that serve specific lines of business, for example:

Human Capital Management

Our human capital management (HCM) offerings, including SAP SuccessFactors solutions, help organizations increase the value of their total workforce by developing, managing, engaging, and empowering their people. SAP SuccessFactors HCM Suite addresses a full range of HR needs and encompasses the following:

 

Core human resources – SAP SuccessFactors Employee Central and SAP SuccessFactors Employee Central Payroll solutions cover the administrative tasks required to manage an organization’s workforce. More specifically, this includes HR administration, payroll, position management, global benefits, time and attendance, shared services, and employee and manager self-service capabilities. The solutions act as the key source of employee and worker data and typically integrate with hundreds of external and internal systems, including SAP S/4HANA. At the end of 2016, customers for SAP SuccessFactors Employee Central numbered more than 1,580.

 

Talent management – Our suite comprises solutions for all pillars of talent management, recruiting (marketing and management), onboarding, performance management, development, succession planning, compensation planning and administration, learning, and workforce analytics.

We focus on delivering a simple and intuitive UX for our HCM suite through mobile device or desktop.

Customer Engagement and Commerce (CEC)

Today’s customers are digitally connected, socially networked, and individually empowered, changing the rules of engagement. Our integrated front-office suite encompasses a holistic offering across customer experience, commerce, marketing, sales, billing, and services.

By providing leading omnichannel customer engagement and commerce solutions across any touch point and channel, we enable organizations (both business-to-consumer and business-to-business) to deliver contextual, consistent, and relevant experiences – regardless of channel or device – throughout the customer journey.

Connecting Companies with Business Networks

Our business networks are best-in-class cloud applications that connect a global ecosystem of customers, suppliers, and partners. The products and services go beyond the four walls of a business to integrate and connect systems, services, partners, and data – creating more efficient, more powerful, and far

simpler ways to manage key business functions. They provide the outcomes and experiences business users need through open and connected platforms.

Included in the business networks portfolio are SAP’s market-leading Concur, SAP Ariba, and SAP Fieldglass solutions, which are at the center of our business network strategy.

Ariba Network is the world’s largest business network, with more than 2.5 million connected companies trading over US$885 billion of commerce on the network, which has grown its commerce volume close to 20% year-over-year. In 2016, we unveiled innovations that help businesses achieve efficient, intelligent connections and frictionless transactions across the entire source-to-pay process:

 

Guided buying – A new buying experience automatically leads employees to goods and services they need to do their jobs and execute purchases in compliance with company policies.

 

Light enablement – This interactive e-mail service eliminates the complexity that buyers face in onboarding and connecting suppliers, letting them send purchase orders and receive order confirmations and invoices in just a few clicks.

 

Open platform – Ariba Network offers an open application-programming interface (API) capability that allows partners to add functionality and extend solutions for all industries and business needs.

With more than 45 million users worldwide, our acquired company Concur is the world leader in travel and expense management solutions. In 2016, Concur continued to deliver on our vision of an open cloud platform for travel and expense management that enables an effortless experience for end users as well as finance departments. It provides total transparency into employee travel and spending, wherever and whenever it happens.

New innovations for travel, expense, and accounts payable automation in Concur solutions include:

 

User interface improvements and the addition of many region-specific partners to our ecosystem

 

Integration with the SAP ERP Financials and Intuit Quickbooks solutions

 

Expansion of global tax capabilities

 

Additional features in the Concur Invoice solution to help ensure a three-way match between purchase, receipt, and invoicing

SAP Fieldglass solutions help simplify procuring and managing external workforce services, connecting businesses in real time. In 2016, more than 3.1 million workers in approximately 135 countries were connected using the solution.

 

 

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Market changes, including globalization and access to talent, have led many organizations to increasingly rely on contingent workers and service providers to achieve business goals. SAP Fieldglass cloud-based solutions also help companies engage and optimize all forms of talent. The software dynamically matches business needs with the right combination of resources while helping to ensure visibility, compliance, and cost control.

In 2016, we continued to redefine how work gets done in the enterprise, with innovations in SAP Fieldglass solutions including streamlined services procurement templates and extended flexible talent-sourcing capabilities.

Data Network

Our business data network offers a comprehensive, people-first data-as-a-service solution that provides real-time, industry-specific, and data-driven benchmarks built on the world’s largest repository of networked business data and enriched by key industrial and economic indicators. In 2016, we produced a beta version of the first data-driven service based on contingent workforce data. The highly personalized user experience helps customers discover their standing in the market so that they can take advantage of live recommendations and collaboration workflows that turn insights into action. Using data strategically in this way, customers can operate more efficiently and create new data-driven business models.

SAP Connected Health

Building on many years of work in the healthcare and life sciences industries, SAP has deepened its investment in these areas. In 2016, we launched a SAP Connected Health platform with trusted partners. The platform supports new developments such as using very large data sets to conduct in-depth analysis of the human genome, proteome, and other biological data. It also enables a broad ecosystem of partners – including developers, researchers, and healthcare organizations – to accelerate the development and delivery of innovative, patient-centered solutions for improving health outcomes, reducing costs, and delivering connected healthcare services.

Building Better Solutions for Small and Midsize Enterprises

We offer a portfolio that extends the power of SAP HANA to support SMEs with their digital transformation that includes the followings solutions:

 

SAP Anywhere: Our front-office solution for small businesses has been on the market for just over a year in China, the United Kingdom, and the United States. Currently, more than 185 customers are running SAP Anywhere.

 

SAP Business ByDesign: Our ERP cloud solution is targeted to the midmarket and subsidiaries of large enterprises. At the end of 2016, 99% of SAP Business ByDesign customers ran the solution on SAP HANA.

 

SAP Business One: Our integrated ERP application is available on premise or through a partner-hosted cloud. Today, more than 2,000 SAP Business One customers run the application on SAP HANA.

Our focus for SMEs, as with larger enterprises, is on cloud technology and simplified business processes for end users and partners. End-to-end accountability and increased investments in these core cloud ERP, on-premise ERP, and front-office solutions helps foster innovation and growth for the digital economy. Customers using SME solutions include small businesses and midsize companies in more than 100 countries.

Keeping User Experience in Focus

User experience (UX) is about meeting the user’s needs in the most effective and enjoyable way. Our understanding of how to create true innovation manifests itself in the award-winning SAP Fiori UX. The concept and design principles are key components in our design-led development process, which helps ensure the delivery of SAP Fiori innovations through all SAP applications.

With SAP Fiori 2.0, users can get their work done faster and more effectively, with:

 

Direct access to relevant information and apps

 

Transparency on items needing attention and timely notifications

 

Support in deciding what needs to be done next

 

Ability to perform quick and informed actions

At the same time, our UX strategy focuses on empowering our customers and partners to design their own UX journey and execute on it – through a rich portfolio of services, educational offerings, and tools and technologies to design, develop, and deliver a simplified UX.

SAP Cloud Platform – Differentiating Business with a Digital Enterprise Platform

In the digital economy, in addition to standard applications, companies need a highly flexible platform that allows them to do the following:

 

Extend cloud and on-premise SAP applications

 

Build new applications for differentiating LoB processes

 

Integrate cloud and on-premise SAP applications

With SAP Cloud Platform, our in-memory platform-as-a-service, companies can rapidly build, run, and extend modern business applications. It offers comprehensive capabilities to help business users and

 

 

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developers create better, more agile applications in less time. Customers can apply, among other things, mobile services, advanced analytic tools, state-of-the-art authentication mechanisms, and social functionality. For maximum flexibility, portability, and agility, we use open technologies.

SAP Cloud Platform is a digital enterprise platform offering the following:

 

Analytical capabilities

 

Access to SAP applications, processes, and data

 

Robust business services that customers and independent software vendors can consume to build solutions

Furthermore, we are positioning the SAP Cloud Platform Integration service as the default integration infrastructure for SAP solutions, whether in the cloud or on premise. We deliver content to support end-to-end integration scenarios. Being able to connect and integrate all best-of-breed applications to our digital core and to any custom-built solution makes SAP Cloud Platform the center of gravity for a modular suite of business applications.

Close partnerships with customers and other leading technology companies are key to providing best-in-class solutions. In 2016, we announced a strategic partnership with Apple Inc. to build a SAP Cloud Platform software development kit for iOS that enables businesses, designers, and developers to quickly and efficiently build their own native iOS apps for iPhones and iPads.

Steering Business with Real-Time Analytics

Business leaders need to be able to discover and communicate meaningful and actionable insights in data so they can make decisions in real time. Our analytics offerings help companies to apply analytics to business data to describe, predict, and improve business performance, recommend action, and guide decision making.

With SAP BW/4HANA, we launched next-generation data warehouse software, delivering a simpler and more powerful way to achieve real-time analytics by connecting historical data with live data stored in SAP and third-party software environments. This integrated data warehouse solution is optimized to fully leverage the SAP HANA platform and simplifies development, administration, and the user interface, resulting in enhanced business agility.

We consolidated analytical functionalities across our product portfolio in one cloud analytics solution – SAP

BusinessObjects Cloud. Built on SAP Cloud Platform, it helps companies overcome the challenge of point solutions and data silos spread throughout the organization with enterprise-wide access to analytics delivered through a public cloud experience.

For the SAP Digital Boardroom solution, which offers executive decision makers ease and elegance in accessing company data in real time, we released new industry-specific and LoB-specific content for consumer products, chemicals, engineering, construction, operations, and public sector, as well as HR, finance, and marketing LoBs.

Reinventing Business with the Internet of Things and Machine Learning

There is no topic that typifies the digital transformation more than the Internet of Things (IoT). The IoT is a network of physical objects with embedded sensors to detect their environment and interact with business processes and systems. This builds a foundation for entirely new business models and completely digitized, connected businesses. Intelligent sensors, ubiquitous connectivity, and unlimited data storage are driving innovation and leading to a deeper integration of people, processes, data, and things – in one connected world.

Our IoT solutions, now marketed under the new SAP Leonardo brand, help companies digitally transform their manufacturing, logistics, and asset management processes and respond to the needs of a digital business in a highly individualized, consumer-driven economy. We strive to become a trusted partner for IoT that helps our customers link sensor data with business processes and thereby add value. With our end-to-end SAP Leonardo solutions for connected logistics, connected manufacturing, and connected assets, for example, we offer a comprehensive portfolio of standard IoT software, both cross-industry and industry specific. Furthermore, in November 2016, we announced the SAP IoT Application Enablement toolkit, providing services that allow our customers to build their own IoT applications.

Research and Innovation – Innovating for Future Growth

With businesses shifting, leading our customers through change is more important than ever before. We do this every day by empowering our employees and collaborating with our customers to develop world-class software and next-generation solutions. We further strengthened our global research and development (R&D) efforts in 2016 by investing in our SAP Labs network and expanding our SAP Innovation Center locations in India, Israel, and the United States.

 

 

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Through the SAP Innovation Center concept, we explore unconventional ideas and develop inspiring proofs of concept in a startup-like environment. We strive to open up new markets for SAP software and accelerate the integration of emerging technologies into our core products. Some of these innovations include:

 

Machine learning – Making all existing SAP solutions intelligent, bringing machine-learning services and APIs to our platform, and building intelligent business solutions in new and adjacent markets. To emphasize the importance of this topic, we have introduced the new brand SAP Clea that represents our entire machine learning portfolio.

 

Blockchain – Exploring the potential of digital finance to radically change how business transactions are conducted in the future and its impact on existing products and innovation potential of blockchain across industries.

 

Future enterprise applications – Enabling companies to successfully lead the next economic revolution by developing game-changing business applications to process intangible assets, provide contextual user assistance, and manage new business models.

We draw on the ideas of customers, partners, startups, academia, and, most importantly, our own employees. We want to foster organic innovation and support the transformation of great ideas into profitable business.

Investing in Research and Development

SAP’s strong commitment to R&D is reflected in our expenditures (see figure below).

Research and Development (IFRS)

 

LOGO

In 2016, our non-IFRS R&D expense as a portion of total operating expenses increased from 18.3% to 18.4% year over year. Our IFRS R&D expense ratio increased from 17.2% to 18.0%. At the end of 2016, our total full-time equivalent (FTE) headcount in development work was 23,363 (2015: 20,938). Measured in FTEs, our R&D headcount was 28% of total headcount (2015: 27%).

Total R&D expense not only includes our own personnel costs but also the external cost of work and services

from the providers and cooperation partners we work with to deliver and enhance our products. We also incur external costs for the following:

 

Translating, localizing, and testing products

 

Obtaining certification for products in different markets

 

Patent attorney services and fees

 

Strategy consulting

 

Professional development of our R&D workforce

Patents

SAP actively seeks intellectual property protection for innovations and proprietary information. Our software innovations continue to strengthen our market position in business solutions and services. Our investment in R&D has resulted in numerous patents. As at December 31, 2016, SAP held a total of more than 8,000 validated patents worldwide. Of these, 841 were granted and validated in 2016.

While our intellectual property is important to our success, we believe our business as a whole is not dependent on one particular or a combination of patents.

Making Digital Transformation Possible with SAP Digital Business Services

SAP offers a comprehensive portfolio of services and support designed to help our customers deploy their software faster and more efficiently – so they can focus more on innovations and realize faster, greater ROI. We provide tailored support to our customers to help them run live in the digital economy.

Through our SAP Digital Business Services unit, SAP aims to standardize services, not recreate them each time – helping companies and organizations reimagine their businesses in the new economy using a digital business framework.

We are accelerating the realization of the digital enterprise with game-changing engagements for predictive maintenance and warranty, analytics to manage Big Data, and connected intelligent manufacturing, among others.

Innovations from SAP Digital Business Services

SAP Digital Business Services offers an entire portfolio of services. Some of our top innovations in 2016 to help customers transform to a digital business include:

 

SAP Value Assurance service packages for SAP S/4HANA

 

Latest generation of SAP Solution Manager and SAP Model Company

 

Next-generation support

 

SAP Digital: Expanding the reach of SAP Store and messaging services

 

 

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SAP Value Assurance Service Packages

Our SAP Value Assurance service packages for SAP S/4HANA cover all project phases and scenarios to help customers migrate from SAP ERP to SAP S/4HANA. This includes:

 

System conversion

 

Landscape transformation

 

New implementations

 

On-premise, cloud, and hybrid deployment options

The approach consolidates services and embedded support in four distinct phases:

 

Plan and safeguard – Defining the implementation strategy, including dependencies and prerequisites for the target architecture

 

Technical implementation – Focusing on the technical aspects of implementation, including data and system migration, high availability, and disaster recovery

 

Migrate and implement – Implementing functions with preconfigured setup and ready-to-use business process templates, and analyzing operational impact

 

Innovate and optimize – Expanding the context of innovation beyond the digital core to reimagine business models across the enterprise

The packages utilize the SAP Activate methodology, an innovation adoption framework that combines SAP Best Practices packages, implementation methodology, and guided configuration to help streamline deployment.

Partners also play a key role in innovation adoption. Our open engagement approach has motivated many of our larger services partners to focus more on establishing SAP S/4HANA as the digital core.

SAP Solution Manager and SAP Model Company

SAP Solution Manager manages SAP software implementations from cloud to on premise and hybrid, and is currently rolled out as the delivery platform for SAP Digital Business Services. It addresses both IT and business needs.

The solution gives customers real-time transparency, automation, and control to adopt and manage innovations. Process experts and solution architects can explore new industry models earlier, accessing all SAP Best Practices packages.

We also offer a new modeling environment. SAP Model Company is an accelerator service that helps simplify innovation adoption. It combines standard SAP software, SAP Best Practices packages, SAP Rapid Deployment solutions, and content from SAP Activate. Customers can develop repeatable implementation scenarios and access the latest innovations for their future projects. It helps to decrease effort and ensure project success on

time and within budget. The service enables customers to accelerate implementations, reduce total cost of ownership, and get up and running quickly.

It is a ready-to-use solution that supports critical decision phases such as discovery and prototype. We provide the full system landscape with detailed business content and documentation and help lower time to value with versions specific to industries and lines of business.

Next-Generation Support

Traditional businesses are becoming digital enterprises. With more business processes “running live,” product support must be less reactive and much more proactive, predictive, and available at any moment; in other words, live support.

Our product support has implemented a next-generation support approach that includes real-time support. Named Expert Chat, this live support channel offers direct access to our experts, available for the majority of our solutions. Moreover, a universal, toll-free phone number harmonizes interaction with support across almost all of our products. We also offer customers a way to search for answers to product-related questions, by making knowledge located within SAP searchable using Google. Automating tasks with intelligent, context-sensitive tools provides customers with solutions proactively.

Customers also demand a seamless, omnichannel support experience. We plan to address this by implementing functions such as built-in, mobile, and social media-enabled support.

In addition, we launched an SAP Preferred Care offering as a premium support option for on-premise customers transitioning to digital business models. It complements the already existing SAP Preferred Care Cloud offering. The offering is an enhancement to our foundation support offerings, namely SAP Enterprise Support, and includes:

 

Advanced service-level agreements

 

Additional services

 

Dedicated contacts

SAP Digital

End users can buy both SAP and partner offerings using one-click contracts and digital payments by credit card or PayPal. Customers can discover, try, buy, use, and renew solutions in a simple online interaction. In 2016, customers from 95 different countries placed more than 55,000 orders digitally.

At the same time, SAP also provides a wide variety of intelligent, interconnected messaging and communication services that reach 97% of the world’s

 

 

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mobile subscribers and connect billions of things. Top social media companies rely on SAP solutions to reach their customers worldwide. In 2016, more than 350 billion messages passed through our networks.

We are incubating several new initiatives to more rapidly grow our digital business and expand into new areas – for example, integrating messaging services into our own applications.

A Partner on the Journey to Digital Transformation

SAP will continue to support our customers’ digital transformation through innovative software, ongoing R&D, and proactive services. By reimagining our business suite and providing world-class software, we empower businesses to continue to succeed in the new digital economy. Together, we are a force that helps further economic development, social progress, and minimizes environmental impact – and makes the world run better.

SECURITY, PRIVACY, AND DATA PROTECTION

Meeting Today’s Data Protection Challenges

Every day, organizations all around the world trust SAP with their data – either in their own premises, in the cloud, or on the move using mobile devices. Our customers need to know that we will keep that data safe, process it in a manner that complies with local legislation, and protect it from malicious use.

For this reason, data protection and security is of paramount importance to us. We have implemented safeguards to help enable the privacy rights of everyone whose data is processed by SAP, whether they are our customers, prospects, employees, or partners. In addition, we work towards compliance with all relevant legal requirements for data protection. Our global security officer and data protection and privacy officer report to our Executive Board and regularly monitor the compliance of all activities in these areas.

Facing Increasing Risks in IT Security

Safeguarding data is an increasingly challenging task today. Companies are collecting and storing more data than ever before from more and more sources. No longer is data locked away in an on-premise mainframe requiring physical security.

Data now proliferates outside the four walls of businesses with multiple endpoints exposed and vulnerable to attack. Moreover, the sheer number of and the sophistication of attacks facing businesses are at an all-time high. We are seeing the “commercialization of hacking” while new advanced persistent threats can bypass many traditional security protection techniques.

Establishing a Comprehensive Security Vision

At SAP, we want our customers and employees to be able to use our software and services anywhere, from any device, at any time, with confidence and trust. However, the growing risk and occurrence of cyberattacks reinforces the need to keep critical information systems secure.

Consequently, for SAP and for our customers, security means more than just meeting compliance demands. To secure the SAP software landscape, we offer a comprehensive portfolio of security products, services, and secure support as well as security consulting. They help our customers build security and privacy protection capabilities into their businesses.

Several of our security measures extend across all sectors of our company and thus to all of our products and services. These measures include, among other things, the regular training of employees on the subject of IT security and data protection, including the handling of confidential information and ensuring controlled and restrictive access to customer information. In addition, we have developed a three-pronged strategy focusing on the security of our products, operations, and organization:

Secure Products Strategy: Champion Product Security

Businesses use SAP applications to process mission-critical transactional data which can be highly attractive to cyber attackers. Our secure products strategy focuses on incorporating security features into our applications to minimize the risk of a security breach.

Our secure software development lifecycle is at the heart of this strategy. This provides a comprehensive methodological approach for incorporating security features into our applications. Before a release decision is made, our software is validated by independent IT security experts. This team then addresses any recommendations made before we release the application.

This approach conforms to the ISO/IEC 27034 standard for application security and is closely embedded into our ISO 9001-certified process framework for developing standard software.

Secure Operations Strategy: Running Secure Operations

Our secure operations strategy focuses on the security principles of “confidentiality, integrity, and availability” to ensure overall protection of our business, as well as our customers’ businesses. Our mission is to provide a comprehensive end-to-end cloud and IT operations security framework – from system and data access and

 

 

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system hardening to security patch management, security monitoring, and end-to-end incident handling. This involves the implementation of key security measures across all layers including physical assets as well as process-integrated controls.

Furthermore, our secure operations approach concentrates on the early identification of any deviations from the standards defined in our security framework. Deviations are identified through a combination of automated and manual reviews. Performed by third parties as well as by SAP colleagues, these reviews verify compliance with international standards and SAP global security standards.

Industry best-practice certifications are key success factors for our secure operations strategy. Many of our cloud solutions undergo Service Organization Control (SOC) audits ISAE3402, SSAE16 SOC I Type II, and SSAE16 SOC II Type II. The SOC standards are harmonized with a number of ISO certifications including ISO 9001, 27001, and 22301.

Secure Company Strategy: Taking a Holistic Approach to the Security of Our Business

At SAP, we take a holistic approach to the security of our company, encompassing processes, technology, and employees. At the heart of our secure company strategy is an efficient information security management system and a security governance model that brings together all of the different aspects of security. These include the following three main areas:

 

Security culture: Awareness and compliance with our security policy and standards are fostered through regular mandatory training, assessments, and reporting.

 

Secure environments: Comprehensive physical security measures are in place to ensure the security of our data centers and development sites so that we can protect buildings and facilities effectively.

 

Business continuity: A corporate continuity framework aimed at having robust governance in place at all times is reviewed on an annual basis to adapt to new or changed business needs.

Complying with Data Protection and Privacy Legislation

When processing data about employees, applicants, customers, suppliers, and partners, SAP respects and protects their right to data protection and privacy while implementing appropriate security measures. We develop and support our data protection and privacy strategy in accordance with our business strategy.

To comply with applicable data protection laws, SAP has adopted a global data protection and privacy policy. It outlines a Group-wide minimum standard for handling

personal data in compliance with data protection and privacy laws. The policy defines requirements for all operational processes that affect the processing of or access to personal data, as well as providing clear responsibilities and organizational structures. We actively monitor changes to applicable laws and regulations so that we can update our standards on an ongoing basis.

We have also implemented a wide range of measures to protect data controlled by SAP and SAP customers from unauthorized access and processing, as well as from accidental loss or destruction. These include, among others, the implementation of our data protection management system in areas critical to data protection. This system is certified on a yearly basis by the British Standards Institute.

In 2016, SAP did not experience any significant incidents regarding breaches of customer privacy or losses of customer data. There were no incidents reported subject to the provisions of the German Federal Data Protection Act.

CUSTOMERS

Continuing to Build Strong Customer Relationships

Customer loyalty is one of our four corporate objectives, along with growth, profitability, and employee engagement. In 2016, our combined on-premise and cloud Customer Net Promoter Score (Customer NPS) was 19.2% (2015: 22.4%). As we further harmonize processes in acquired entities, the customer segments used for customer surveys has not yet been completely harmonized across the SAP Group. Specifically, due to the nature of the business, the Concur customer sample includes a higher proportion of general business customers in comparison to other Group entities. As a result, Concur responses make up a large proportion of the total customer sample.

While we continue to have a positive Customer NPS, we did not reach our target of 25% in 2016. As a response to the feedback received from our customers throughout 2016, we have focused on improving the quality of our follow-up process to ensure a timely resolution of customer issues. We have provided more insight into how customers can migrate to our innovations without disrupting their business processes. With a sustained emphasis on follow-up, we are targeting a combined Customer NPS of 21% to 23% in 2017, with our medium-term goal of reaching a combined Customer NPS of 35% to 40% by 2020.

For more information about the Customer NPS, see the Performance Management System section.

 

 

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Continuing Strong Customer Demand

We help companies transform into digital businesses. In 2016, we saw customers do so by licensing or subscribing to the full range of SAP software, from comprehensive solutions for large enterprises to the latest mobile apps.

Some examples by region include the following customers:

North America and Latin America (Americas) Region

 

The Dow Chemical Company, based in the United States, has decided to deepen their relationship in SAP through the investment in SAP HANA, including a future state vision around SAP S/4HANA in support of their business objectives

 

Hershey, headquartered in the United States, is upgrading to the SAP S/4HANA suite to achieve enterprise connectivity through access to actionable information at the right time for everyone, anywhere. The large chocolate manufacturer will gain real-time insights from both operational and other data and can simplify global business processes to drive efficiencies and scale.

 

Itaú Unibanco Holding, based in Brazil and one of the top 20 banks in the world by market value, is currently using the SAP HANA platform. It recently added Ariba Network, through which Itaú joins the SAP marketplace for business-to-business transactions.

 

Live Nation, the global leader for live entertainment based in the United States, has purchased Concur Travel & Expense to meet the needs for an end-to-end travel solution from travel request, to online and agent assisted travel planning through to trip reimbursement. Important in the selection process was a full-featured mobile app, exceptional end-user experience, robust analytics and reporting, the ability to integrate with existing Live Nation systems, and the flexibility to configure to their travel policy and business practices.

 

Mexico Proyectos Y Desarollos chose SAP Ariba Buying, advanced edition, SAP Ariba Strategic Sourcing, and the SAP HANA platform to standardize operative, strategic sourcing, and management processes while achieving better corporate negotiations and reducing maverick purchases. The construction infrastructure company expects to transform procurement processes by leveraging technological innovation and fully achieve its functional and automatization needs.

Asia Pacific Japan (APJ) Region

 

Cathay Pacific, based in Hong Kong, chose SAP S/4HANA and the SAP HANA platform to simplify its business process, enable operational-level reporting

   

directly from the airline company’s operational system, and provide the foundation for further system migrations.

 

China National Chemical Corporation (ChemChina), China’s biggest chemical group and a Fortune Global 500 company, has invested heavily in overseas acquisitions. It chose SAP S/4HANA, the SAP HANA platform, the SAP NetWeaver Master Data Management component, and the SAP BusinessObjects Planning and Consolidation application to keep pace with rapid organizational expansion. Through this partnership, ChemChina is leveraging SAP’s leading technology to redefine its IT strategy, optimize IT infrastructure, improve efficiency and business insights, and prepare for a transition to Industry 4.0.

 

NTUC Fairprice, one of Singapore’s largest retailers, chose the SAP HANA platform, SAP Payroll Processing, and SAP SuccessFactors Recruiting Posting solutions to improve employee productivity and engagement. As a customer-oriented retailer, the company also strives to boost productivity and raise overall customer-satisfaction levels by simplifying processes, automating manual practices, and obtaining detailed insights from integrated analytics.

 

Rockland Distilleries in Sri Lanka has chosen the SAP Hybris Cloud for Customer solution over competitors to lead the company through its digital transformation journey. The solution will help increase the productivity of its salespeople and gather business insights that will enable it to make strategic and transformational decisions.

 

Roy Hill Mining Operation is an independent iron ore operation with a project to become the largest single ore mine in Australia. The project is turning to SAP software, including SAP S/4HANA, the SAP Multiresource Scheduling application, and the SAP Integrated Business Planning solution, to view its inventory in real time, make informed decisions on maintenance activities, and manage its supply chain costs more effectively.

Europe, Middle East, and Africa (EMEA) Region

 

Barry Callebaut, based in Switzerland, is one of the world’s leading suppliers of high-quality chocolate and cocoa products. It has implemented SAP solutions to integrate 65,000 small-scale cocoa farmers in Côte d’Ivoire, enable sustainable cocoa farming, and improve the livelihood of farmers, their families, and their communities. The company recently went live with the SAP Rural Sourcing Management solution, an integrated, cloud-based solution running on SAP Cloud Platform. It provides farming organizations with mobile and desktop access to important data immediately to help simplify and digitalize business processes.

 

 

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Bilfinger, a German industrial services provider, selected SAP SuccessFactors HCM Suite, including the SAP SuccessFactors Employee Central solution, to standardize HR processes and increase workforce transparency. A further aim is to establish a global talent management model and increase workforce performance. The solutions will help Bilfinger drive its strategic objectives for productivity, consolidation, and compliance.

 

Inter Cars, the largest importer and distributor of automotive spare parts in Poland, chose the SAP Hybris Commerce Cloud solution to establish a full omnichannel platform that will address the business strategy and help the company achieve its goal to double its revenue within the next few years.

 

L’OCCITANE, a French natural and organic ingredient-based cosmetics and well-being retailer, chose the SAP SuccessFactors Employee Central and SAP SuccessFactors Recruiting solutions to streamline human resources processes and gain global visibility into its workforce. It also expects to attract and hire top talents and develop a workforce that helps to support the company’s digital transformation and growth strategy.

 

Targin, a large Russian multiproduct integrated oilfield service holding, will implement SAP S/4HANA as an introduction to the next generation of SAP software. SAP S/4HANA will support Targin in transforming its business enterprises and increasing the efficiency of its business processes to reduce downtime and increase inventory turnover and the company’s market share.

Helping Customers Invest

To help companies invest in SAP solutions and associated services and hardware, SAP Payment services offers customers payment plans. SAP Payment services can help preserve liquidity, provide an alternative to credit from customers’ existing banking relationships, and balance their budgetary priorities, while giving them the flexibility to choose their preferred solution.

ENERGY AND EMISSIONS

Being a Front-Runner of a Greener Way of Working

As a role model for sustainable business operations, SAP takes its environmental responsibilities seriously. We believe that by running cleaner, greener operations, we can make a difference to our planet. In addition, we aim to enable our customers to reduce their overall carbon footprint through our software.

One of our goals is to reduce net greenhouse gas (GHG) emissions from our operations to levels of the year 2000 by 2020. This target includes all direct emissions from running our business as well as a selected subset of indirect emissions from supply chains and services.

A number of initiatives harness innovative technologies to help us run our operations in a way that minimizes our impact on the environment. In addition, our investment in renewable electricity certificates and carbon credits enables us to support sustainability projects across the globe.

Total Net Emissions

 

LOGO

In addition to our long-term commitment for 2020, we have derived annual targets for our internal operational steering. In 2016, we outperformed our annual target to reduce our emissions to less than 400 kilotons (kt) of CO2. This result stems primarily from updating our emission factors as well as compensation with carbon emission offsets. Our focus on carbon emissions has contributed to a cumulative cost avoidance of 155 million in the past three years, compared to a business-as-usual scenario based on 2007. We avoided 73.6 million of this cost in 2016.

Committing to 100% Renewable Electricity

Our commitment to 100% renewable electricity is crucial to making our operations more sustainable. While SAP produces a small amount of renewable electricity through solar panels in some locations, we rely primarily on the purchase of renewable energy certificates (RECs) to achieve our target of 100% renewable electricity. We follow robust procurement guidelines for RECs to ensure that we only invest in environmentally friendly schemes.

 

 

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Total Energy Consumption

 

LOGO

Strengthening Our “Green Cloud”

As more business moves to the cloud, data centers are a key part of how SAP provides solutions to our customers. By using our green cloud services, customers can significantly reduce their carbon footprint. However, data centers represent a significant part of our total GHG with energy consumption increasing as a growing number of customers sign up to our cloud services. For this reason, our data centers have become a primary focus of our carbon reduction efforts. We have introduced initiatives to drive efficiency and innovation around buildings, data center operations, and infrastructure. For example, in 2016, one of our main data centers in Rot, Germany, had a very efficient power usage effectiveness (PUE) of 1.35. In addition, we have tied our business strategy to our environmental strategy by creating a completely “green cloud” powered by 100% renewable electricity at SAP. Carbon neutrality is achieved by purchasing renewable electricity certificates and carbon emission offsets.

Total Data Center Electricity

 

LOGO

 

 

* We started reporting our external data center energy consumption in 2014.

Helping Our Customers Run Greener Operations

The vast majority of our overall emissions result from the use of our software. When our customers run SAP software on their hardware and on their premises, the resulting carbon footprint is about 20 times the size of our own net carbon footprint. To address this, we have developed a downstream emissions strategy to help our

customers, hardware providers, and others run greener operations. One of the most important ways we help our customers reduce their energy usage and emissions is by managing their SAP systems through cloud services provided by our carbon-neutral green cloud offerings. In addition, the solutions in our portfolio help enable our customers manage their resources, such as electricity, in an efficient manner.

The SAP HANA platform also plays a vital role in helping our customers to cut their carbon emissions. By combining the worlds of analytic and transactional data into one real-time, in-memory platform, it can help create much leaner operations, further simplifying the system landscape and reducing energy consumption.

SAP also works with customers to optimize their on-premise landscapes so that they consume less energy. We achieve this by helping them to decommission legacy systems, archive unused data, and consolidate business applications, as well as virtualizing their system landscape.

Driving Environmental Initiatives Throughout SAP

We continuously pursue strategies to help us achieve our goal of reducing emissions at a time of ongoing growth in our business. Key initiatives for 2016 included the following:

 

Sustainable programming sessions

In a new online training module, software developers and architects learn how to make a positive contribution to SAP’s sustainability goals in their daily programming work. Performance and sustainability go hand in hand as performance-optimized programming usually equates to energy-efficient programming. It also helps improve end-to-end response time and creates a great user experience for our customers.

 

Electric vehicles

As a result of our business expansion, the number of SAP employees eligible for a company car has increased annually. We want to ensure that the resulting growth in our car fleet does not undo our successes in cutting emissions. To help address this, SAP aims to increase the number of electric vehicles in our company car fleet to 20% by 2020.

All electric company cars charged at SAP are powered with 100% renewable electricity. In addition, in Germany, we provide employees with an incentive to switch to electric alternatives by offering a battery subsidy that offsets the costs of purchasing an electric vehicle.

 

Internal carbon pricing for business flights

As first introduced in 2015, we continue with our program to reduce the impact of air travel by SAP employees. In addition to avoiding business flights, we invest in carbon emission offsets for air travel in nine

 

 

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countries by charging an internal carbon price. This offset effort resulted in a compensation of 90 kt in 2016.

 

Investment in carbon credits

In 2016, we continued to realize the benefits of our investment in the Livelihoods Fund, a unique investment fund whose returns consist of high-quality carbon credits. Several years ago, we made a commitment to invest 3 million covering a 20-year participation in the fund that supports the sustainability of agricultural and rural communities worldwide. Livelihoods Funds have been designated the “Best Corporate Offsetting Program 2016” in voluntary carbon markets by the Environmental Finance magazine. In 2016, we received carbon credits from the fund, which helped us to offset our carbon footprint by 21 kt.

INTELLECTUAL PROPERTY, PROPRIETARY RIGHTS AND LICENSES

We rely on a combination of the protections provided by applicable statutory and common law rights, including trade secret, copyright, patent, and trademark laws, license and non-disclosure agreements, and technical measures to establish and protect our proprietary rights in our products. For further details on risks related to SAP’s intellectual property rights, see “Item 3. Key Information – Risk Factors – Operational Risks.”

We may be dependent in the aggregate on technology that we license from third parties that is embedded into our products or that we resell to our customers. We have licensed and will continue to license numerous third-party software products that we incorporate into and/or distribute with our existing products. We endeavor to protect ourselves in the respective agreements by obtaining certain rights in case such agreements are terminated.

We are a party to patent cross-license agreements with several third parties.

We are named as a defendant or plaintiff in various legal proceedings for alleged intellectual property infringements. See Note (23) to our Consolidated Financial Statements for a more detailed discussion relating to certain of these legal proceedings.

DESCRIPTION OF PROPERTY

Our principal office is located in Walldorf, Germany, where we own and occupy approximately 440,000 square meters of office and datacenter space including our facilities in neighboring St. Leon-Rot. We also own and lease office space in various other locations in Germany, totaling approximately 130,000 square meters. In approximately 70 countries worldwide, we occupy roughly 1,670,000 square meters. The space in most locations other than our principal office in Germany is leased. We also own certain real properties in Newtown Square and Palo Alto (United States); Bangalore (India); Sao Leopoldo (Brazil); London (UK) and a few other locations in and outside of Germany.

The office and datacenter space we occupy includes approximately 320,000 square meters in the EMEA region, excluding Germany, approximately 410,000 square meters in the region North and Latin America, and approximately 370,000 square meters in the APJ Region.

The space is being utilized for various corporate functions including research and development, our data centers, customer support, sales and marketing, consulting, training, administration and messaging. Substantially all our facilities are being fully used or sublet. For a discussion on our non-current assets by geographic region see Note (28) to our Consolidated Financial Statements. Also see, “Item 6. Directors, Senior Management and Employees – Employees,” which discusses the numbers of our employees, in FTE’s, by business area and by geographic region, which may be used to approximate the productive capacity of our workspace in each region.

We believe that our facilities are in good operating condition and adequate for our present usage. We do not have any significant encumbrances on our properties. We do not believe we are subject to any environmental issues that may affect our utilization of any of our material assets. We are currently undertaking construction activities in various locations to increase our capacity for future expansion of our business. Our significant construction activities are described below, under the heading “Principal Capital Expenditures and Divestitures Currently in Progress.”

 

 

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Capital Expenditures

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:

Construction Projects

 

millions

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

 

For more information about planned capital expenditures, see the Investment Goals section. There were no material divestitures within the reporting period.

Principal Capital Expenditures and Divestitures for the Last Three Years

Our principal capital expenditures for property, plant, and equipment amounted to 933 million in 2016 (2015: 580 million; 2014: 666 million). Principal capital expenditures in 2016 for property, plant, and equipment increased compared to 2015 mainly due to higher investments in data centers and replacement investments in hardware. Furthermore, compared to 2015, SAP had higher investments in office buildings. The decrease from 2014 to 2015 was mainly due to the lower replacement investments in hardware and fewer acquisition related additions. Principal capital expenditures for property, plant and equipment for the period from January 1, 2017 to the date of this report were 74 million.

Our capital expenditures for intangible assets such as acquired technologies and customer relationships amounted to 158 million in 2016 compared to 70 million in 2015 (2014: 1,954 million). Our investments allocated to goodwill increased to 57 million in 2016 from 27 million in 2015 (2014: 6,072 million). The respective increases in 2016 are

due to the fact that we executed several small acquisitions in 2016 compared to only one small acquisition in 2015, while the significant decrease from 2014 to 2015 was due to the significant acquisitions of Concur and Fieldglass in 2014. For further details on capital expenditures related to acquisitions, see Note (15) to our Consolidated Financial Statements.

For further information regarding the principal markets in which SAP conducts business, including a breakdown of total revenues by category of activity and geographic market for each of the last three years, see “Item 5. Operating and Financial Review and Prospects – Operating Results (IFRS)” of this report.

ITEM 4A. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS

OVERVIEW

For information on our principal sources of revenue and how the different types of revenue are classified in our income statement refer to Note (3b) to our Consolidated Financial Statements, section Revenue Recognition.

 

 

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See “Item 4. Information about SAP – Products, Research & Development, and Services” for a more detailed description of the products and services we offer.

The following discussion is provided to enable a better understanding of our operating results for the periods covered, including:

 

the factors that we believe impacted our performance in 2016;

 

our outlook for 2016 compared to our actual performance (non-IFRS);

 

a discussion of our operating results for 2016 compared to 2015 and for 2015 compared to 2014;

 

the factors that we believe will impact our performance in 2017; and

 

our operational targets for 2017 (non-IFRS).

The preceding overview should be read in conjunction with the more detailed discussion and analysis of our financial condition and results of operations in this Item 5, “Item 3. Key Information – Risk Factors” and “Item 18. Financial Statements.”

ECONOMY AND THE MARKET

Global Economic Trends

In its latest economic bulletin, the European Central Bank (ECB) concludes that the global economy grew steadily in 2016 at a similar pace as the year before, with relatively stable expansion in advanced economies and a slight improvement in emerging market economies. According to the ECB, acute uncertainty about the political and economic impact of the presidential election in the United States shaped global sentiment at the end of the year.

For the Europe, Middle East, and Africa (EMEA) region, the ECB reports that economic recovery in the euro area continued throughout 2016, supported by the ECB’s own monetary policy measures which it finds helped revitalize domestic demand in the euro area and reduce debt. According to its calculations, the real gross domestic product of the euro area countries grew 1.7% in 2016. The economies of many of the Central and Eastern Europe countries also performed well in 2016, the ECB writes. There were even signs of an economic rebound in Russia, but expansion there stayed slightly negative for the year as a whole.

In the North America and Latin America (Americas) region, continued low interest rate policies and improving labor markets stimulated the U.S. economy in 2016, the ECB reports, with economic activity in the United States improving markedly in the second half of 2016, following modest growth in the first half. In Brazil, the recession is believed to have slowly bottomed out in the second half of the year.

 

In the Asia Pacific Japan (APJ) region, soft foreign demand and weak private consumption caused Japan’s economy to advance at only a very modest pace, the ECB notes. In China, meanwhile, economic growth continued to slow in 2016 but, according to the ECB, eventually stabilized in the second half-year, supported by strong consumption and infrastructure spending.

The IT Market

According to Gartner Market Databook December 2016 by Gartner, a market research firm, “worldwide IT spending is forecast to grow 0.5% in 2016 on a constant-currency basis. However, currency rate changes will limit market growth to negative 0.6%. Software is the best-performing segment, with 6.9% growth in 2016 constant currency, while Emerging Asia/Pacific is the fastest-growing region/country, at 2.9%.”

In the Europe, Middle East, and Africa (EMEA) region, growth declined year-over-year in the Western European IT market from 3.6% to 0.1% and the Eastern European IT market declined from 15.8% to 1.8% (see table in paragraph “Expected Developments”: “Trends in the IT Market – Increased IT Spending Year-Over-Year”, created by SAP on the basis of Gartner Market Databook, 4Q16 Update, 21 December 2016). According to the same table, software spending grew significantly faster than all other submarkets throughout the region.

The Americas region likewise recorded lower growth rates in IT spending than the previous year as can be seen in the table mentioned above. According to the same table, software spending nevertheless significantly outperformed IT spending as a whole.

In the Asia Pacific Japan (APJ) region, software spending grew faster than all other submarkets in the IT industry as well, documented in the table mentioned above.

Source: Gartner Market Databook, 4Q16 Update, 21 December 2016.

The Gartner Report described herein, (the “Gartner Report”) represents 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 Report are subject to change without notice.

Impact on SAP

In 2016, we once again succeeded in significantly expanding our business and outperformed the overall global economy and IT industry in 2016 with regards to revenue growth. Our good 2016 results are further evidence that our strategy of innovating across the core, the cloud, and business networks to help our customers become true digital enterprises is the right way forward.

 

 

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In 2016, we again demonstrated that we are consistently pursuing our strategy for innovation and growth – and that globally, we are able to generate growth that few other IT companies can match – in three respects: in revenue from core business and cloud business, and in operating profit.

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.

 

 

To assist in understanding our 2016 performance as compared to our 2016 outlook a reconciliation from our IFRS financial measures to our non-IFRS financial measures is provided below. These IFRS financial measures reconcile to the nearest non-IFRS equivalents as follows:

 

millions, except
operating margin
  IFRS
Financial
Measure
   

Recurring
Revenue

not
Recorded
Under
IFRS

    Acqui-
sition-
Related
Charges
   

Share-

Based
Payments

    Restruc-
turing
     Non-IFRS
Financial
Measure
    Currency
Effect on
the Non-
IFRS
Financial
Measure
    

Non-IFRS
Financial
Measure

at
Constant
Currency

 

Cloud subscriptions and support revenue

    2,993       2       NA       NA       NA        2,995       12        3,007  

Software licenses and support revenue

    15,431       3       NA       NA       NA        15,434       113        15,546  

Cloud and software revenue

    18,424       5       NA       NA       NA        18,428       125        18,553  

Total revenue

    22,062       5       NA       NA       NA        22,067       164        22,231  

Operating profit

    5,135       5       680       785       28        6,633       –28        6,605  

Operating margin (in %)(1)

    23.3       0       3.1       3.6       0.1        30.1       –0.3        29.7  

(1) Operating profit is the numerator and total revenue is the denominator in the calculation of our IFRS operating margin and the comparable non-IFRS operating margin; operating margin numbers are included in this table for the convenience of the reader.

 

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2016 Actual Performance Compared to Outlook (Non-IFRS)

We achieved or exceeded the raised outlook for revenue and operating profit we published in October.

Comparison of Outlook and Results for 2016

 

     

Outlook for 2016

(as reported in
Integrated Report
2015)

    

Revised Outlook

for 2016

    

Results

for 2016

 

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%  

Operating profit

(non-IFRS, at constant currencies)

    

6.40  billion

to 6.70 billion

 

 

    

6.50  billion

to 6.70 billion

 

 

     6.61 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)

 

 

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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)

This section on operating results (IFRS) discusses results only in terms of IFRS measures, so the IFRS numbers are not expressly identified as such.

Our 2016 Results Compared to Our 2015 Results (IFRS)

Revenue

 

millions    2016      2015     

Change in %

2016 vs 2015

 

Cloud subscriptions and support

     2,993        2,286        31  

Software licenses

     4,860        4,835        1  

Software support

     10,571        10,093        5  

Software licenses and support

     15,431        14,928        3  

Cloud and software

     18,424        17,214        7  

Services

     3,638        3,579        2  

Total revenue

     22,062        20,793        6  

 

Total Revenue

Total revenue increased from 20,793 million in 2015 to 22,062 million in 2016, representing an increase of 1,269 million, or 6%.

Total Revenue

 

LOGO

 

 

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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.

Revenue by Line Item

 

LOGO

For more information about the breakdown of total revenue by region and industry, see Revenue by Region and Revenue by Industry below.

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 and Software

 

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Cloud subscriptions and support revenue increased from 2,286 million in 2015 to 2,993 million in 2016.

Cloud Subscriptions and Support

 

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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.

 

 

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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%).

Predictable Revenue

 

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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

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.

 

 

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Revenue by Region and Industry

 

Revenue by Region                        

millions

     2016        2015       
Change in % 2016
vs 2015
 
 

Germany

     3,034        2,771        9  

Rest of EMEA

     6,721        6,409        5  

EMEA

     9,755        9,181        6  

United States

     7,167        6,750        6  

Rest of Americas

     1,763        1,678        5  

Americas

     8,931        8,428        6  

Japan

     825        667        24  

Rest of APJ

     2,552        2,517        1  

APJ

     3,377        3,185        6  

SAP Group

     22,062        20,793        6  

 

Revenue by Industry                        
millions    2016      2015      Change in % 2016
vs 2015
 

Energy & Natural Resources

     4,966        4,834        3  

Discrete Manufacturing

     3,880        3,672        6  

Consumer

     5,520        4,934        12  

Public Services

     2,137        2,174        2  

Financial Services

     1,928        1,881        2  

Services

     3,632        3,298        10  

Total revenue

     22,062        20,793        6  

Revenue by Region

Revenue by Region

(based on customer location)

 

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EMEA 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%).

EMEA: Cloud and Software Revenue

 

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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.

Americas Region

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%).

Americas: Cloud and Software Revenue

 

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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).

APJ Region

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%).

 

 

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APJ: Cloud and Software Revenue

 

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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

We allocate our customers to one of our industries at the outset of an initial arrangement. All subsequent revenue from a particular customer is recorded under that industry sector.

 

Revenue by Industry

 

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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

 

Total Operating Expenses                                        
millions    2016     

% of total

revenue(1)

     2015     

% of total

revenue(2)

    

Change in %

2016 vs 2015

 

Cost of cloud subscriptions and support

     1,313        6        1,022        5        29  

Cost of software licenses and support

     2,182        10        2,291        11        5  

Cost of cloud and software

     3,495        16        3,313        16        5  

Cost of services

     3,089        14        2,932