SAP Reveals Preliminary 2006 Fourth Quarter and Year-End Results
by PR Newswire
SAP AG today announced its preliminary financial results for the fourth quarter and year ended December 31, 2006.
HIGHLIGHTS - Fourth Quarter 2006
Revenues
- Product revenues for the 2006 fourth quarter were euro 2.2 billion
(2005: euro 2.0 billion), which is an increase of 8% (12% at constant
currencies)(1) compared to the same period in 2005.
- Software revenues for the fourth quarter of 2006 were euro 1.3 billion
(2005: euro 1.2 billion), representing an increase of 7% (12% at
constant currencies)(1) compared to the fourth quarter of 2005.
- Total revenues were euro 3.0 billion for the fourth quarter of 2006
(2005: euro 2.8 billion), which represented an increase of 7% (12% at
constant currencies)(1) compared to the fourth quarter of 2005.
Income
- Operating income for the fourth quarter of 2006 was euro 1.1 billion
(2005: euro 980 million), which was an increase of 10% compared to the
fourth quarter of 2005. Adjusted operating income(1) was euro 1.1
billion (2005: euro 1.0 billion) for the 2006 fourth quarter,
representing an increase of 10% compared to the same period last year.
- The operating margin for the fourth quarter of 2006 was 36.6%, which
was an increase of 1.0 percentage points compared to the fourth quarter
of 2005. The adjusted operating margin(1) for the 2006 fourth quarter
was 37.7%, which was an increase of 0.9 percentage points compared to
the 2005 fourth quarter.
- Net income for the 2006 fourth quarter was euro 799 million (2005: euro
619 million), or euro 0.66 per share (2005: euro 0.50 per share),
representing an increase of 29% compared to the fourth quarter of 2005.
Fourth quarter 2006 adjusted net income(1) was euro 822 million (2005:
euro 642 million), or adjusted euro 0.67 earnings per share(1)(2005:
euro 0.52 per share), representing an increase of 28% compared to the
fourth quarter of 2005. Fourth quarter 2006 net income, earnings per
share, adjusted net income(1) and adjusted earnings per share(1) were
positively impacted by approximately euro 55 million, or euro 0.045 per
share, from a reduced fourth quarter effective tax rate primarily due
to various settlements with fiscal authorities in different countries
on different items.
HIGHLIGHTS - Full-Year 2006
Software revenues and certain other full year 2006 financial data in this press release differ from the software revenues and certain other financial data originally provided in SAP's January 11, 2007 press release titled "SAP Announces 2006 Preliminary Results." The changes are due to the reduction of software revenue by euro 30 million in the third quarter of 2006 resulting from the modification of contracts from prior years to accommodate one individual customer. The modification occurred in the third quarter of 2006. (for more information, see footnote 2).
Revenues
- Product revenues increased to euro 6.6 billion (2005: euro 6.0 billion)
for the year-ended December 31, 2006, representing an increase of 11%
(12% at constant currencies)(1) compared to the full-year 2005.
- Software revenues increased 10% (12% at constant currencies)(1) to euro
3.1 billion (2005: euro 2.8 billion) for the full-year 2006 compared to
the same period last year.
- Total revenues were euro 9.4 billion (2005: euro 8.5 billion) for the
2006 full-year, which was an increase of 10% (11% at constant
currencies)(1) compared to the same period last year.
Core Enterprise Applications Vendor Share(3)
2006 represented another year of strong share gains for SAP. Based on software revenues on a rolling four quarter basis, SAP's worldwide share of Core Enterprise Applications vendors(3), which account for approximately $16.4 billion in software revenues as defined by the Company based on industry analyst research, increased to 24.0% for the year ended December 31, 2006. This represented a gain of 2.8 percentage points for the full-year, and SAP continued to maintain more than twice the share of the next largest vendor.
Income
- Operating income for 2006 was euro 2.6 billion(4)(2005: euro 2.3
billion), which was an increase of 10% compared to the same period last
year. Adjusted operating income(1) for 2006 was euro 2.7 billion (2005:
euro 2.4 billion), representing an increase of 12% compared to 2005.
- The operating margin for 2006 was 27.3%, which was down 0.1 percentage
points compared to 2005. The adjusted operating margin(1) was 28.8% for
2006, which was an increase of 0.5 percentage points compared to 2005.
- Net income for 2006 was euro 1.9 billion (2005: euro 1.5 billion), or
euro 1.52 per share (2005: euro 1.21 per share), representing an
increase of 25% compared to 2005. Adjusted net income(1) for 2006 was
euro 2.0 billion (2005: euro 1.6 billion), or adjusted euro 1.60 per
share(1) (2005: euro 1.25 per share), representing an increase of 27%
compared to 2005. Full-Year 2006 net income, earnings per share,
adjusted net income(1) and adjusted earnings per share(1) were
positively impacted by approximately euro 85 million, or euro 0.07 per
share, from reduced second and fourth quarter effective tax rates
primarily due to various settlements with fiscal authorities in
different countries on different items.
"While we did not achieve all of our targets in 2006, we ended with solid growth at constant currencies for both product revenues and software revenues -- the fourth quarter alone marked our 12th consecutive quarter of double digit growth in software revenues at constant currencies -- and at the same time we improved our profitability," said Henning Kagermann, CEO of SAP. "Regional performance for the year was also strong -- we reported double digit software revenue growth at constant currencies in each region, the first time we have accomplished such a strong, well-balanced, regional performance since the year 2000. On top of this, we continued to gain significant worldwide share among Core Enterprise Applications vendors. Our share increased by 2.8 percentage points to 24.0% for 2006."
Cash Flow
- Operating cash flow for 2006 was euro 1.8 billion (2005: euro 1.6
billion). Free cash flow(1) for 2006 was euro 1.5 billion (2005: euro
1.3 billion), which was 16% of total revenues for the year (2005: 16%).
At December 31, 2006, the Company had euro 3.3 billion in cash and cash
equivalents and short-term investments (December 31, 2005: euro 3.8
billion). The year-over-year decrease is primarily the result of an
increase in share buybacks in 2006, expenditures on acquisitions and
increased dividend payments.
Share Buy-Back Program
- For 2006, the Company bought back 27.9 million shares at an average
price of euro 40.97 (total amount: euro 1.1 billion). This compares to
12.9 million shares bought back in 2005. At December 31, 2006, treasury
stock stood at 49.25 million shares at an average price of euro 35.37.
SAP's current share buy-back program allows the Company to purchase up
to 120 million shares. All share related numbers above have been
adjusted to account for the capital share increase that took effect in
December 2006 that effectively increased the number of shares
outstanding four-fold. Given the Company's strong free cash flow(1)
generation, SAP plans to further evaluate opportunities to buy back
shares in the future.
"2006 was a cornerstone year for SAP, a year of significant innovation that led to the launch of many new products during the year, including CRM on-Demand, Duet, Analytics, and the first services enabled ERP solution in the industry," said Mr. Kagermann. "We have already seen rapid adoption of mySAP ERP, with over 4,000 productive customers at year-end 2006. Initial customer feedback has been very positive on our new products."
Mr. Kagermann continued, "2007 will be the year in which we successfully complete our roadmap by delivering services-enabled versions of the mySAP Business Suite and our established mid-market solution SAP All-in-One. Also in 2007, we will begin delivering on what we believe is the most innovative solution in the industry designed specifically for new segments in the midmarket -- a consumption ready solution that provides our customers with fast time-to-value, quick and easy user adoption, high flexibility, low TCO, and is built by design on a fully-enabled enterprise services oriented architecture."
BUSINESS OUTLOOK
Beginning in the first quarter of 2007, and also provided for the full-year 2006 for comparative purposes, the Company will realign its income statement to provide additional transparency for reporting potential new product revenue streams. Although currently not material, the Company added a new revenue line item called "subscription and other software related services revenue" as the basis of the realignment, in addition to changing the name of the line item "product revenues" to "software and software related services revenue." Therefore, "software and software related services revenue" equals the total of "software revenue" plus "support revenue" (formerly called "maintenance revenue") plus "subscription and other software related services revenue." Total software and software related services revenue in 2006 were euro 6,605 million. SAP's 2007 outlook is based on this realignment. In addition, the operating margin outlook for 2007 is based on U.S. GAAP numbers. In previous years, SAP provided its outlook for operating margin on an adjusted basis.
The Company provided the following outlook for the full-year 2007.
- The Company expects full-year 2007 software and software related
services revenue to increase in a range of 12%-14% at constant
currencies(1) compared to 2006 growth of 12% at constant currencies(1).
- In order to address additional growth opportunities in new, untapped
segments in the midmarket, the Company will invest an additional euro
300 million - euro 400 million over eight quarters to build up a new
business. Depending on the exact timing of these accelerated
investments, this is equivalent to the Company reinvesting
approximately one to two percentage points of margin in 2007 into
additional future growth opportunities. Therefore, the Company expects
the full-year 2007 operating margin to be in the range of 26.0% to
27.0% compared to the 2006 operating margin of 27.3%.
- The Company is projecting an effective tax rate of 32.5% - 33.0% for
2007.
Regional Performance
Fourth Quarter 2006 Software Revenue by Region
(in euro millions, unaudited)
SAP Group
Software Software
Revenue Revenue
Q4 2006 Q4 2005 Change % Change
Total 1,262 1,183 +79 +7%
- at constant currency
rates +12%
EMEA 705 626 +79 +13%
- at constant currency
rates +14%
Asia-Pacific 134 132 +2 +2%
- at constant currency
rates +9%
Americas 423 425 -2 0%
- at constant currency
rates +10%
Fourth Quarter 2006 Total Revenue by Region (in euro millions, unaudited)
SAP Group
Revenue Revenue
Q4 2006 Q4 2005 Change % Change
Total 2,952 2,754 +198 +7%
- at constant
currency rates +12%
EMEA 1,631 1,483 +148 +10%
- at constant
currency rates +11%
Asia-Pacific 329 301 +28 +9%
- at constant
currency rates +16%
Americas 992 970 +22 +2%
- at constant
currency rates +12%
Full-Year 2006 Software Revenue by Region (in euro millions, unaudited)
SAP Group
Software Software
Revenue Revenue
FY 2006 FY 2005 Change % Change
Total 3,071 2,783 +288 +10%
- at constant
currency rates +12%
EMEA 1,531 1,393 +138 +10%
- at constant
currency rates +10%
Asia-Pacific 391 363 +28 +8%
- at constant
currency rates +12%
Americas 1,149 1,027 +122 +12%
- at constant
currency rates +15%
Full-Year 2006 Total Revenue by Region (in euro millions, unaudited)
SAP Group
Revenue Revenue
FY 2006 FY 2005 Change % Change
Total 9,402 8,513 +889 +10%
- at constant
currency rates +11%
EMEA 4,895 4,513 +382 +8%
- at constant
currency rates +9%
Asia-Pacific 1,114 1,000 +114 +11%
- at constant
currency rates +15%
Americas 3,393 3,000 +393 +13%
- at constant
currency rates +14%
KEY EVENTS - Fourth Quarter 2006
- In the fourth quarter of 2006, SAP demonstrated strong momentum,
announcing or closing major contracts with numerous companies in all
key regions. In the EMEA region: Vodafone Group Plc, ESPRIT, Bundesamt
fur Informationsmanagement, Krones AG, Moscow Heat Supply Company
(MOEC); in the Americas region: Ace Hardware Company, Anheuser-Busch
Companies, FirstEnergy, Cementos Mexicanos, S.A. de C.V., Neoenergia
S/A; in the Asia Pacific region: E&E Linen(Hangzhou) Co., Ltd., Kawai
Musical Instruments, Matsushita Electric Industrial, Shanghai Pudong
Development Bank, United Group Limited.
- A major milestone in Q4 was the signature of a Global Enterprise
Agreement with Unilever. Unilever is the first Consumer Packaged Goods
(CPG) Company to sign such an agreement with SAP. With this agreement
SAP strengthens its position as the strategic platform at the heart of
Unilever's destination architecture acting as a key IT partner to aide
and accelerate Unilever's business transformation.
- On December 15, 2006, SAP announced it had entered in the commercial
register the resolution of the May 9, 2006 Annual General Meeting of
Shareholders to increase the company's subscribed capital from
corporate funds. For each share held, shareholders received three
additional shares after the close of stock exchange business on
Wednesday, December 20, 2006.
- On December 4, 2006, SAP launched the Industry Value Network (IVN) for
mill products, a sector forum for the forest and paper industries.
During 2006, IVNs were launched for the chemicals, consumer products,
high tech, public sector and retail industries.
- On December 4, 2006, SAP announced the availability of the first SAP
enhancement package for mySAP(TM) ERP. The delivery of SAP enhancement
packages for mySAP ERP meets customer requirements for innovation
without disruption by making it simpler and faster to adopt new product
functionality, industry-specific features and enterprise services while
shielding them from the complexity of multiple upgrades.
- On November 15, 2006, Microsoft and SAP announced they had sold more
than 200,000 Duet licenses in just three months. The companies also
announced they would provide Duet support for Office 2007 and that
plans are in place for the release of Duet 1.5 in the summer of 2007.
- Marking the third investment for SAP's global $125 million SAP
NetWeaver(R) Fund to fuel the development of innovative solutions built
on the SAP NetWeaver(R) platform, SAP announced on November 8, 2006 a
minority investment in Visiprise, a leading provider of business
solutions for integrated manufacturing operations. The second
investment was a minority investment in ArisGlobal, thereby
strengthening SAP's Life Sciences software development partnership.
- On November 6, 2006, SAP announced the general availability of more
than 100 analytic composites in the SAP(R) xApp(TM) Analytics composite
application. In a report titled "Worldwide Business Analytics Software
2006," IDC found that SAP was the leader in the worldwide analytic
applications market, a segment of the overall business analytics
market, by revenue.
- SAP announced plans to unify its various partner programs under SAP
Partner Edge, making SAP the ideal partner for ISVs, system integrators
and resellers demonstrating its focus on building, nurturing and
supporting a broad ecosystem of partners around its solutions for
small, midsize and large customers.
- SAP cemented its market leadership position by announcing the
accumulation of more than 10,000 HCM customers in 110 countries
worldwide. This milestone follows a Gartner Dataquest study from June
2006 that named SAP as the number one software vendor in the HCM
market.
Consolidated Income Statements
SAP-Group 4th quarter
PRELIMINARY and UNAUDITED
(euro millions)
2006 2005 Change
Software revenue 1,262 1,183 7 %
Maintenance revenue 934 855 9 %
Product revenue 2,196 2,038 8 %
Consulting revenue 633 605 5 %
Training revenue 105 96 9 %
Service revenue 738 701 5 %
Other revenue 18 15 20 %
Total revenue 2,952 2,754 7 %
Cost of product -297 -295 1 %
Cost of service -560 -539 4 %
Research and development -377 -307 23 %
Sales and marketing -554 -507 9 %
General and administration -133 -127 5 %
Other income/expense, net 50 1 N/A
Total operating expenses -1,871 -1,774 5 %
Operating income 1,081 980 10 %
Other non-operating income/expense, net 6 -25 N/A
Financial income, net 31 7 N/A
Income before income taxes 1,118 962 16 %
Income taxes -319 -342 -7 %
Minority interest 0 -1 -100 %
Net income 799 619 29 %
Basic earnings per share (in euro) 0.66 0.50 29 %
Consolidated Income Statements
SAP-Group 4th quarter
PRELIMINARY and UNAUDITED
Additional information
(euro millions)
2006 2005 Change
Adjusted operating income reconciliation:
Operating income 1,081 980 10 %
LTI/STAR/SOP 22 22 0 %
Settlement of stock-based compensation
programs 0 0 0 %
Total stock-based compensation 22 22 0 %
Acquisition-related charges 9 11 -18 %
Adjusted operating income excluding
stock-based compensation and
acquisition-related charges (1) 1,112 1,013 10 %
Operating margin 36.6 % 35.6 %
Adjusted operating margin 37.7 % 36.8 %
Consolidated Income Statements
SAP-Group 4th quarter
PRELIMINARY and UNAUDITED
Additional information
(euro millions)
2006 2005 Change
Financial income, net 31 7 343 %
- thereof impairment-related charges 0 -1 -100 %
Income before income taxes 1,118 962 16 %
Income taxes 319 342 -7 %
Effective tax rate 29 % 36 %
Adjusted net income reconciliation:
Net income 799 619 29 %
Stock-based compensation, net of tax 17 15 13 %
Acquisition-related charges, net of tax 6 7 -14 %
Impairment-related charges, net of tax 0 1 -100 %
Adjusted net income excluding
stock-based compensation,
acquisition-related charges, and
impairment-related charges (1) 822 642 28 %
Adjusted EPS reconciliation:
Earnings per share (in euro) 0.66 0.50 29 %
Stock-based compensation 0.01 0.01 13 %
Acquisition-related charges 0.00 0.01 -14 %
Impairment-related charges 0.00 0.00 -100 %
Adjusted EPS excluding stock-based
compensation, acquisition-related
charges and impairment-related
charges (in euro) (1) 0.67 0.52 28 %
Weighted average number of shares
(in thousands) treasury
stock excluded 1,219,176 1,239,118
Consolidated Income Statements
SAP-Group Twelve months ended December 31,
PRELIMINARY and UNAUDITED
(euro millions)
2006 2005 Change
Software revenue 3,071 2,783 10 %
Maintenance revenue 3,534 3,175 11 %
Product revenue 6,605 5,958 11 %
Consulting revenue 2,340 2,139 9 %
Training revenue 383 343 12 %
Service revenue 2,723 2,482 10 %
Other revenue 74 73 1 %
Total revenue 9,402 8,513 10 %
Cost of product -1,100 -993 11 %
Cost of service -2,080 -1,925 8 %
Research and development -1,336 -1,089 23 %
Sales and marketing -1,915 -1,746 10 %
General and administration -464 -435 7 %
Other income/expense, net 56 6 N/A
Total operating expenses -6,839 -6,182 11 %
Operating income 2,563 2,331 10 %
Other non-operating income/expense, net -13 -25 -48 %
Financial income, net 122 10 N/A
Income before income taxes 2,672 2,316 15 %
Income taxes -804 -817 -2 %
Minority interest -2 -3 -33 %
Net income 1,866 1,496 25 %
Basic earnings per share (in euro) 1.52 1.21 25 %
Consolidated Income Statements
SAP-Group Twelve months ended December 31,
PRELIMINARY and UNAUDITED
Additional information
(euro millions)
2006 2005 Change
Adjusted operating income reconciliation:
Operating income 2,563 2,331 10 %
LTI/STAR/SOP 99 45 N/A
Settlement of stock-based compensation
programs 0 0 N/A
Total stock-based compensation 99 45 N/A
Acquisition-related charges 43 34 26 %
Adjusted operating income excluding
stock-based compensation and
acquisition-related charges(1) 2,705 2,410 12 %
Operating margin 27.3 % 27.4 %
Adjusted operating margin 28.8 % 28.3 %
Consolidated Income Statements
SAP-Group Twelve months ended December 31,
PRELIMINARY and UNAUDITED
Additional information
(euro millions)
2006 2005 Change
Financial income, net 122 10 N/A
- thereof impairment-related charges -1 -4 -75 %
Income before income taxes 2,672 2,316 15 %
Income taxes 804 817 -2 %
Effective tax rate 30 % 35 %
Adjusted net income reconciliation:
Net income 1,866 1,496 25 %
Stock-based compensation, net of tax 71 31 N/A
Acquisition-related charges, net of tax 27 21 29 %
Impairment-related charges, net of tax 1 4 -75 %
Adjusted net income excluding stock-based
compensation, acquisition-related
charges, and impairment-related charges (1) 1,965 1,552 27 %
Adjusted EPS reconciliation:
Earnings per share (in euro) 1.52 1.21 25 %
Stock-based compensation 0.06 0.02 N/A
Acquisition-related charges 0.02 0.02 29 %
Impairment-related charges 0.00 0.00 -75 %
Adjusted EPS excluding stock-based
compensation, acquisition-related
charges and impairment-related charges
(in euro) (1) 1.60 1.25 27 %
Weighted average number of shares
(in thousands) treasury stock
excluded 1,226,263 1,239,264
SAP Group
CONSOLIDATED
BALANCE SHEETS
PRELIMINARY and UNAUDITED
(euro millions)
ASSETS
12/31/2006 12/31/2005 Change % Change
Cash and cash equivalents 2,399 2,064 335 16 %
Short-term investments 931 1,782 -851 -48 %
Accounts receivables, net 2,439 2,250 189 8 %
Other assets, Inventories 370 231 139 60 %
Deferred taxes 108 129 -21 -16 %
Prepaid expenses/deferred charges 75 64 11 17 %
Current assets 6,322 6,520 -198 -3 %
Intangible assets, Goodwill 1,253 766 487 64 %
Property, plant, and equipment, net 1,206 1,095 111 10 %
Investments 95 63 32 51 %
Accounts receivables, net 3 1 2 N/A
Other assets 527 473 54 11 %
Deferred taxes 91 98 -7 -7 %
Prepaid expenses/deferred charges 23 24 -1 -4 %
Non-current assets 3,198 2,520 678 27 %
TOTAL ASSETS 9,520 9,040 480 5 %
SHAREHOLDERS' EQUITY AND LIABILITIES
12/31/2006 12/31/2005 Change % Change
Accounts payable 611 547 64 12 %
Income Tax obligations 308 409 -101 -25 %
Reserves and accrued liabilities 1,462 1,440 22 2 %
Deferred income 405 347 58 17 %
Current liabilities 2,786 2,743 43 2 %
Accounts payable 34 40 -6 -15 %
Income Tax obligations 99 68 31 46 %
Reserves and accrued liabilities 411 342 69 20 %
Deferred income 55 57 -2 -4 %
Non-current liabilities 599 507 92 18 %
Minority interests 10 8 2 25 %
Shareholders' equity 6,125 5,782 343 6 %
TOTAL SHAREHOLDERS' EQUITY
AND LIABILITIES 9,520 9,040 480 5 %
Days Sales Outstanding 68 68 0
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the years ended December 31,
unaudited (in euro millions) 2006 2005
Net income 1,866 1,496
Minority interests 2 3
Income before minority interests 1,868 1,499
Adjustments to reconcile income before minority
interests to net cash provided
by operating activities:
Depreciation and amortization 214 204
Loss (income) from equity investees 1 -1
Gains on disposal of property, plant, and equipment -2 -5
Gains on disposal of investments 0 -1
Write-ups/downs of financial assets 0 14
Impacts of STAR hedging -79 7
Stock-based compensation including income tax benefits 82 50
Excess tax benefit from stock-based compensation -3 0
Change in accounts receivables -252 -322
Change in accrued and other liabilities 136 166
Deferred income taxes -9 -16
Change in other assets -229 -64
Change in deferred income 120 77
Net cash provided by operating activities 1,847 1,608
Acquisition of minority interests in subsidiaries 0 -60
Other acquisitions, net of cash and cash equivalents
acquired -504 -177
Purchase of intangible assets and property, plant,
and equipment -367 -262
Proceeds from disposal of intangible assets and
property, plant and equipment 29 17
Purchase of investments -2,194 -4,485
Sales of investments 2,901 4,388
Purchase of other financial assets -12 -17
Sales of other financial assets 14 13
Net cash used in investing activities -133 -583
Dividends paid -447 -340
Purchase of treasury stock -1,153 -454
Proceeds from reissuance of Treasury Stock 168 205
Proceeds from issuance of common stock (Stock-based
compensation) 49 43
Excess tax benefit from stock-based compensation 3 0
Repayment of bonds -1 0
Proceeds from short-term and long-term debt 44 338
Repayments of short-term and long-term debt -43 -339
Proceeds from the exercise of equity-based
derivative instruments (STAR hedge) 57 39
Acquisition of equity-based derivative instruments
(STAR hedge) -53 -47
Net cash used in financing activities -1,376 -555
Effect of foreign exchange rates on cash and cash
equivalents -3 88
Net increase in cash and cash equivalents 335 558
Cash and cash equivalents at the beginning of the
period 2,064 1,506
Cash and cash equivalents at the end of the period 2,399 2,064
Footnotes
1) Non-GAAP Measures
This review of operations discloses certain financial measures, such as
adjusted operating income, adjusted operating margin, adjusted operating
expenses, adjusted net income, adjusted earnings per share (adjusted
EPS), and currency-adjusted year-on-year changes in revenue and
operating income, which are not prepared in accordance with U.S.
generally accepted accounting principles (U.S. GAAP) and are therefore
considered non-GAAP measures. The non-GAAP measures that SAP reports may
not correspond to non-GAAP measures that other companies report. The
non-GAAP measures that SAP reports should be considered as an additional
measure to, and not as a substitute for or superior measure to, revenue,
operating income, operating margin, net income, cash flows, or other
measure of financial performance prepared in accordance with U.S. GAAP.
The non-GAAP measures included in this report are reconciled to the
nearest U.S. GAAP measure.
ADJUSTED OPERATING INCOME, ADJUSTED OPERATING MARGIN, ADJUSTED EXPENSES, ADJUSTED NET INCOME, ADJUSTED EARNINGS PER SHARE (EPS).
SAP believes that it is useful for investors to receive, in addition to financial data determined under U.S. GAAP, information on financial data (both past and future oriented) that are important to SAP's management in running SAP's business. SAP has implemented an integrated management approach. The Company manages the performance of the group on a consistent basis for its planning, forecasting, reporting, compensation, and external communications. This approach to manage the performance of the group generally holds both management and employees responsible for financial amounts they can actually influence, and not responsible for certain amounts they cannot directly influence. Management identified two operating cost elements that management and employees cannot influence directly: stock-based compensation and acquisition-related charges.
SAP management and its employees cannot directly affect the expense for stock-based compensation because the fair value of SAP's stock which directly impacts its share-based compensation expense is heavily influenced by factors outside of the control of the Company, including the overall stock market and the share price fluctuations of other companies in the same industry. As a substantial portion of SAP's stock-based compensation plans are cash settled (i.e. liability-classified) plans, SAP's stock based compensation expense -- if not hedged -- fluctuates in response to share price movements. Although acquisition-related charges include recurring items from past acquisitions such as amortization of acquired intangible assets, they also include an unknown component relating to current year acquisitions for which the Company has not yet finalized its purchase price allocation and therefore, cannot accurately assess the impact of the acquisition-related charges. Similarly, the Company's adjusted net income also excludes any impairment-related charges resulting from other-than-temporary declines in the market value of minority investments, which by their very nature are outside of the Company's control.
The following expenses are eliminated from adjusted expenses, adjusted operating income, adjusted operating margin, adjusted net income, adjusted EPS, and other adjusted income measures:
- Stock-based compensation, including expenses for stock-based
compensation as defined under U.S. GAAP as well as expenses related to
the settlement of stock-based compensation plans in the context of
mergers and acquisitions.
- Acquisition-related charges, including amortization of identifiable
intangible assets acquired in acquisitions of businesses or
intellectual property.
- Impairment-related charges include other-than-temporary impairment
charges on minority equity investments.
Adjusted expenses and adjusted operating income reconcile to the nearest U.S. GAAP measure as follows:
euro (millions) Reconciliation
Stock-based Acquis-
U.S. related ition Adjusted
GAAP compensation charges measure
2006
Cost of software and maintenance 1,100 9 25 1,066
Cost of service 2,080 16 1 2,063
Research and development 1,336 33 15 1,288
Sales and marketing 1,915 19 2 1,894
General and administration 464 22 0 442
Other income/expense, net -56 0 0 -56
Total operating expenses 6,839 99 43 6,697
Operating Income 2,563 99 43 2,705
2005
Cost of software and maintenance 993 4 25 964
Cost of service 1,925 12 1 1,912
Research and development 1,089 11 7 1,071
Sales and marketing 1,746 9 1 1,736
General and administration 435 9 0 426
Other income/expense, net -6 0 0 -6
Total operating expenses 6,182 45 34 6,103
Operating Income 2,331 45 34 2,410
2004
Cost of software and maintenance 916 2 21 893
Cost of service 1,784 19 6 1,759
Research and development 908 6 2 900
Sales and marketing 1,524 8 1 1,515
General and administration 366 3 0 363
Other income/expense, net -2 0 0 -2
Total operating expenses 5,496 38 30 5,428
Operating Income 2,018 38 30 2,086
Adjusted net income and adjusted EPS reconcile to the nearest U.S. GAAP measure as follows:
Reconciliation
Stock- Acquisi
based tion- Impairment-
compen- related related
U.S. sation, charges charges
GAAP net of net of net of Adjusted
Measure tax tax tax measure
2006
Net income in euro (millions) 1,866 71 27 1 1,965
Earnings per share in euro 1.52 0.06 0.02 0.00 1.60
2005
Net income in euro (millions) 1,496 31 21 4 1,552
Earnings per share in euro 1.21 0.02 0.02 0.00 1.25
2004
Net income in euro (millions) 1,311 24 18 5 1,358
Earnings per share in euro 1.06 0.02 0.01 0.00 1.09
The adjusted operating income measures disclosed are the same measures that SAP uses in its internal management reporting. Adjusted operating income is one of the criteria, alongside software revenue growth, for performance- related elements of management compensation.
In addition, SAP gives full year and long term guidance based on non-GAAP financial measures. The guidance is provided on adjusted operating performance excluding stock-based compensation expenses and acquisition-related charges to focus on components that reflect the operational performance that management can directly influence and reasonably forecast for the periods covered by the guidance. Furthermore, by providing guidance based on adjusted income measures, SAP avoids frequent changes to its market guidance due to changes in acquisition-related expenses and impairment-related charges (which are non- recurring) and to the cost of stock-based compensation, which fluctuates based on changes in the price of the Company's shares (which management cannot directly influence). SAP does not provide guidance on U.S. GAAP operating margin and earnings per share measures because those measures include expenses such as stock-based compensation, impairment-related charges, and acquisition- related charges.
SAP believes that the adjusted income measures have limitations, particularly as a result of the elimination of certain cost elements that may be material to SAP. SAP therefore does not evaluate its own past performance without considering both, adjusted income measures and U.S. GAAP income measures. SAP also regularly analyzes the differences between adjusted income measures and the respective most directly comparable U.S. GAAP income measures. SAP cautions the readers of this report to follow a similar approach by considering the adjusted income measures only as an additional measure to, and not as a substitute for or superior measure to, revenue, operating income, operating margin, net income, cash flows, or other measure of financial performance prepared in accordance with U.S. GAAP.
CONSTANT-CURRENCY PERIOD OVER PERIOD CHANGES
SAP believes it is important for investors to have information that provides insight into its sales growth. Revenue amounts determined under U.S. GAAP provide information that is useful in this regard. Period over period changes in such revenue amounts are impacted by both growth in sales volume as well as currency effects. Under its business model SAP does not sell standardized units of products and services. Therefore, SAP cannot provide relevant information on sales volume growth by providing data on the growth in product and service units sold. In order to provide additional information that may be useful to investors in evaluating sales volume growth, SAP presents information about its revenue and income growth adjusted for foreign currency effects. SAP calculates constant-currency period over period changes in revenue and income by translating foreign currencies using the average exchange rates from the previous year instead of the current year.
Constant-currency period over period changes should be considered in addition to, and not as a substitute, or superior to, changes in revenues, expenses, income, or other measures of financial performance prepared in accordance with U.S. GAAP.
SAP believes that data on constant-currency period over period changes have limitations, particularly as the currency effects that are eliminated constitute a significant element of SAP's revenue and cost and may severely impact SAP's performance. SAP therefore limits its use of constant-currency period over period changes to the analysis of changes in volume as one element of the full change in a financial measure. SAP does not evaluate its growth and performance without considering both, constant-currency period over period changes and changes in revenues, expenses, income, or other measures of financial performance prepared in accordance with U.S. GAAP. SAP cautions the readers of this report to follow a similar approach by considering constant-currency period over period changes only in addition to, and not as a substitute, or superior to, changes in revenues, expenses, income or other measures of financial performance prepared in accordance with U.S. GAAP.
Constant currency period over period changes reconcile to the respective unadjusted period over period changes as follows:
Currency-adjusted
Percentage Change percentage
From 2005 to 2006 change from Currency
as reported 2005 To 2006 impact
Software Revenue 10 % 12 % -2
Maintenance Revenue 11 % 12 % -1
Software and Maintenance Revenue 11 % 12 % -1
Consulting Revenue 9 % 10 % -1
Training Revenue 12 % 12 % 0
Service Revenue 10 % 10 % 0
Other Revenue 1 % 3 % -2
Total Revenue 10 % 11 % -1
Germany(1) 5 % 5 % 0
Rest of Europe/Middle East/Africa(1) 11 % 11 % 0
United States(1) 12 % 14 % -2
Rest of America(1) 18 % 16 % +2
Japan(1) 6 % 14 % -8
Rest of Asia Pacific(1) 15 % 16 % -1
Total Revenue 10 % 11 % -1
Operating Income 10 % 11 % -1
(1) Based upon the location of the customer
FREE CASH FLOW
SAP's management believes that free cash flow is a widely accepted supplemental measure of liquidity among companies. Free cash flow measures a company's cash flow remaining after all expenditures required to maintain or expand the business have been paid off. SAP calculates free cash flow as operating cash flow minus additions to long lived assets excluding additions from acquisitions. Free cash flow should be considered in addition to, and not as a substitute, or superior to, cash flow, or other measures of liquidity and financial performance prepared in accordance with U.S. GAAP.
Free cash flow reconciles to the nearest U.S. GAAP measure as follows:
in euro (millions) 2006 2005 2004
Net cash provided by operating
activities 1,847 1,608 1,845
Additions to long lived assets
excluding additions from acquisitions -367 -262 -189
Free cash flow 1,480 1,346 1,656
2) In the process of preparing the consolidated financial statements for
the year ended December 31, 2006, SAP re-evaluated and corrected the
accounting treatment applied in the third quarter to the following
transaction: To accommodate one of its U.S. customers, SAP, in the
third quarter 2006, agreed to amend the contracts entered into with
this customer in former years. Under the amendment the customer waived
certain rights granted under the original contracts and received in
lieu certain new rights which can be exercised in the future. The
quarterly financial statements originally issued for the third quarter
2006 reflected an accounting treatment for this transaction under
which revenue had not been reduced upon granting the new rights but
revenue from that customer would have been reduced in the periods in
which the customer exercises the new rights. However, this transaction
should have been recorded by deferring, as of the date of the contract
amendment, software revenue in an amount equal to the value of the new
rights and to recognize such deferred revenue when the customer
exercises the new rights. In the light of this additional software
revenue deferral, certain accruals and the related expenses reported
in the financial statements for the third quarter 2006 for third party
royalties, variable compensation and income taxes need to be corrected
to reflect the lower software revenue reported for the third quarter
2006. The transaction and the corrected accounting therefore has not
impacted the value of licenses sold in the US in 2006. Neither has the
correction any effect on SAP's cash flows. It has however the
following effects on the income statement for the third quarter 2006
as well as on the preliminary financial data originally provided in
SAP's January 11, 2007 press release titled "SAP Announces 2006
Preliminary Results":
euro mill.
Software revenue -31
Total revenue -31
Total operating expenses 3
Operating income -28
Income before income taxes -28
Income taxes 9
Net income -19
Basic EPS (in euro)* -0.02
* based on the share count after the previously announced issuance of new
shares
3) Core Enterprise Applications Vendor Share
In previous quarters, worldwide peer group share was provided based on
a peer group of Microsoft Corp. (business solutions segment only),
Oracle Corp. (business applications only) and Siebel Systems, Inc. The
Company believes that after the large amount of consolidation that has
occurred among the larger companies in the software industry, the peer
group has become too small to provide an adequate metric for the
purpose of measuring growth of sales share. Therefore, the Company
will now be providing share data based on the vendors of Core
Enterprise Applications solutions, which account for approximately $16
billion in software revenues as defined by the Company based on
industry analyst research. For 2006, industry analysts project
approximately 4% year-on-year growth for core Enterprise Applications
vendors. For its quarterly share calculation, SAP assumes that this
approximate 4% growth will not be linear throughout the year. Instead,
quarterly adjustments are made based on the financial performance of a
sub set (approximately 30) of Core Enterprise Application vendors.
4) In the process of preparing the consolidated financial statements for
the year ended December 31, 2006, SAP re-evaluated and corrected the
classification of the expense resulting from the amortization of the
hedge premiums paid for the hedging activities in connection with SAP's
share based compensation program 2006 STAR in the second and third
quarter 2006 (this correction was already reflected in the financial
data originally provided in SAP's January 11, 2007 press release titled
"SAP Announces 2006 Preliminary Results"): SAP uses derivative
financial instruments to hedge the cash flow exposures associated with
unrecognized non-vested stock appreciation rights issued to SAP
employees under SAP's STAR program (STAR hedge). Beginning of 2006 SAP
adopted SFAS 123R to account for its share based payments and
accordingly started to recognize compensation expense related to its
STAR programs based on the STARs' vested portion of the fair value, in
contrast to the intrinsic value which was the basis for SAP's stock
based compensation expense under APB 25 applied by SAP before adoption
of SFAS 123R. Consequently, SAP ceased to evaluate the effectiveness of
STAR hedge based on the intrinsic value of the hedged STARs and started
to evaluate such effectiveness based on the STARs' fair value beginning
with the 2006 STAR program. Historically SAP reported in finance income
the amortization expense of hedge premiums paid for the derivative
financial instruments used for the STAR hedge as the change in time
value was considered ineffective. However, such expense should, upon
including the total fair value (including time value) in the
effectiveness assessment, have been reported as compensation expense in
operating income. While the correction has no effect on SAP's cash
flows it has effects on the income statements and balance sheets for
the second and third quarter 2006.
Both this correction and the correction described in Footnote 2 have no
effect on financial statements for the first quarter of 2006 or for any
period before 2006. The financial statements for the second and third
quarter 2006 have been restated as outlined below to reflect these two
corrections.
Due to the corrected classification of the amortization expense of STAR
hedge premiums as compensation expense in operating income, SAP now
regards this expense as stock based compensation for the purpose of
determining SAP's adjusted operating income, adjusted operating
expenses, adjusted operating margin and adjusted earnings per share
(EPS). Accordingly neither adjusted operating income nor adjusted
operating expenses and adjusted operating margin are affected by the
corrected classification of the amortization expense. In contrast,
adjusted EPS is affected by the correction as SAP did formerly, due to
the classification in finance income, not regard the amortization
expense of hedge premiums as stock based compensation expense.
Corrected Income Statement Line Items
in euro millions Quarter 2 Quarter 3
As As
previously Corr- As previously Corr- As
reported ections restated reported ections restated
Software
revenue 621 621 691 -31 660
Total revenue 2,195 0 2,195 2,245 -31 2,214
Total
operating
expenses -1,664 -7 -1,671 -1,662 -3 -1,665
Operating
income 531 -7 524 583 -34 549
Other
non-operating
income/
expense, net 2 0 2 -4 0 -4
Financial
income, net 21 8 29 19 7 26
Income before
income taxes 554 1 555 598 -27 571
Income taxes -139 0 -139 -209 9 -200
Minority
interest -1 0 -1 -1 0 -1
Net income 414 1 415 388 -18 370
Basic earnings
per share
(in euro)
after issuance
of new shares 0.34 0.00 0.34 0.32 -0.02 0.30
Basic earnings
per share
(in euro)
before issuance
of new shares 1.35 0.00 1.35 1.27 -0.06 1.21
Weighted
average
number of
shares (in
thousands)
treasury
stock
excluded,
after
issuance
of new
shares 1,228,597 1,228,597 1,228,597 1,221,709 1,221,709 1,221,709
Weighted
average
number of
shares (in
thousands)
treasury
stock
excluded,
before
issuance
of new
shares 307,149 307,149 307,149 305,427 305,427 305,427
Corrected Balance Sheet Line Items
in euro millions
30 June 2006 30 September 2006
As As
previously Corr- As previously Corr- As
reported ections restated reported ections restated
Assets
Deferred income
taxes 136 10 146
Total assets 8,722 10 8,732
Liabilities
Income taxes
payable 225 1 226
Total other
liabilities 1,035 -4 1,031
Deferred
income 626 31 657
Current
Liabilities 2,561 28 2,589
Shareholders'
equity 5,560 -18 5,542
Total
shareholders'
equity/liabilities 8,722 10 8,732
Corrected Revenue by Region
in euro millions Quarter 2 Quarter 3
As As
previously Correction As previously Correction As
reported s restated reported s restated
Software
revenue 691 -31 660
USA in euro 228 -31 197
Change in % 15 -16 -1
Change at
constant
currency in % 20 -16 4
Region
Americas
in euro 292 -31 261
Change in % 19 -13 6
Change at
constant
currency in % 23 -13 10
Total Revenue 2,245 -31 2,214
USA in euro 657 -31 626
Change in % 10 -5 5
Change at
constant
currency in % 15 -6 9
Region
Americas
in euro 848 -31 817
Change in % 13 -5 8
Change at
constant
currency in % 17 -5 12
Corrected Adjusted Measures
in euro millions Quarter 2 Quarter 3
As As
previously Corr- As previously Corr- As
reported ections corrected reported ections corrected
Operating
income 531 -7 524 583 -34 549
Stock-based
compensation 16 7 23 14 6 20
Acquisition-
related charges 11 0 11 9 0 9
Adjusted
operating
income
excluding
stock-based
compensation
and
acquisition-
related
charges 558 0 558 606 -28 578
Net income 414 1 415 388 -18 370
Stock-based
compensation,
net of tax 12 4 16 10 4 14
Acquisition-
related
charges, net
of tax 6 0 6 6 0 6
Impairment-
related charges,
net of tax 0 0 0 1 0 1
Adjusted net
income
excluding
stock-based
compensation,
acquisition-
related
charges, and
impairment-
related charges 432 5 437 405 -14 391
Earnings per
share (in euro)
after issuance
of new shares 0.34 0.00 0.34 0.32 -0.02 0.30
Stock-based
compensation 0.01 0.01 0.02 0.01 0.01 0.02
Acquisition-
related charges 0.00 0.00 0.00 0.00 0.00 0.00
Impairment-
related charges 0.00 0.00 0.00 0.00 0.00 0.00
Adjusted EPS
excluding
stock-
based
compensation,
acquisition-
related
charges and
impairment-
related
charges
(in euro) after
issuance of
new shares 0.35 0.01 0.36 0.33 -0.01 0.32
Earnings per
share (in euro)
before
issuance of
new shares 1.35 0.00 1.35 1.27 -0.06 1.21
Stock-based
compensation 0.04 0.01 0.05 0.03 0.01 0.05
Acquisition-
related charges 0.02 0.00 0.02 0.02 0.00 0.02
Impairment-
related charges 0.00 0.00 0.00 0.00 0.00 0.00
Adjusted EPS
excluding
stock-
based
compensation,
acquisition-
related
charges and
impairment-
related
charges (in
euro) before
issuance of
new shares 1.41 0.01 1.42 1.33 -0.05 1.28
©2012