Elliott Management Takes $1.3B SAP Stake

April 25, 2019

Elliott which manages funds that collectively own €1.2 billion in common stock and economic equivalents of SAP released a statement supporting SAP’s initiation of a comprehensive review, formation of a Special Executive Board Committee and implementation of new, multi-year operational targets. In the statement, Elliott Partner Jesse Cohn and Portfolio Manager Jason Genrich also praised CEO Bill McDermott and CFO Luka Mucic on the Company’s commitment to these initiatives:

“Elliott is highly supportive of the initiatives announced today, and we commend CEO Bill McDermott, CFO Luka Mucic and the entire SAP team for taking these steps. SAP is one of the great technology franchises in the world and one of the only scale software businesses with growing on-premise revenue alongside 30%+ growth in cloud revenue. The Company’s stock has been consistently undervalued relative to its revenue growth, and today’s announcement lays the groundwork for substantial value realization.

“With SAP’s key strategic acquisitions in place and a multi-year S4/HANA product cycle ahead, now is the time for focused execution on these operational opportunities. SAP has set the right targets with a 75% cloud gross margin and 500 basis points of operating margin improvement. These targets balance continued revenue growth and accelerating profitability. The operational review and Special Executive Board Committee should ensure that these targets are achieved, and we look forward to hearing further details and a specific timeline at the Special Capital Markets Day later this year. We believe SAP’s management team can drive toward a highly successful result.

“The combination of SAP’s growth profile, operational targets and forthcoming share repurchase analysis can generate tremendous earnings growth over the next several years. Elliott sees the potential for the Company to achieve earnings per share of €8.50 in 2023. This level of earnings growth can yield substantial returns to shareholders and realize a value-creation opportunity that is rarely available at SAP’s scale.”

"SAP's results are another illustration that we are a rarity in the enterprise applications software industry. We have a strong core business, the fastest growing cloud at scale in enterprise software and impressive non-IFRS oper-ating profit growth. We are focused on leading a best-run SAP so we can drive significant margin expansion in the quarters ahead." Bill McDermott, CEO

"I am extremely pleased that we delivered rapid growth in the cloud and a rock-solid core. Non-IFRS operat-ing profit growth saw the biggest improvement in more than three years, with both cloud gross margin and operat-ing margin beating our expectations. This gives us the con-fidence to further extend our commitment to mid-term margin improvements and stronger shareholder returns as announced today." Luka Mucic, CFO

Business Performance

Financial Highlights First Quarter 2019

In the first quarter, new cloud bookings were up 32% (26% at constant currencies). Cloud revenue grew 45% year over year to €1.56 billion (IFRS), up 48% (non-IFRS) and 41% (non-IFRS at constant currencies). Software license revenue was up 4% year over year to €650 million (IFRS), up 4% (non-IFRS) and 1% (non-IFRS at constant currencies). New cloud and software order entry was up 17% (13% at constant currencies) year over year in the first quarter. Cloud and software revenue grew 16% year over year to €5.04 billion (IFRS), up 16% (non-IFRS) and 12% (non-IFRS at constant currencies). Total revenue grew 16% year over year to €6.09 billion (IFRS), up 16% (non-IFRS) and 12% (non-IFRS at constant currencies).

SAP's rapidly expanding cloud business together with solid growth in support revenue continued to drive the share of more predictable revenue, which grew by one percentage point year-over-year to 72% in the first quarter.

As previously indicated, the IFRS operating profit in the first quarter was impacted by recognizing the expected cost of SAP's 2019 restructuring (€886 million) as well as higher acquisition-related charges and share-based compensation primarily due to the Qualtrics acquisition. This resulted in an IFRS operating loss of -€136 million (q1 2018:operating profit of €1)(q1 2018:025 million). In contrast, Non-IFRS profit was up 19% at €1,467 million (up 13% at constant currencies). Earnings per share were -€0.10 (IFRS) (q1 2018:€0.59) and up 24% at €0.90 (non-IFRS).

Operating cash flow for the first three months was €2.80 billion, up 9% year-over-year. Free cash flow[2] increased 10% year-over-year to €2.37 billion. At the end of the first quarter, net liquidity was -€6.19 billion.

Segment Performance First Quarter 2019

SAP's three reportable segments "Applications, Technology & Services", "Business Network" and "Customer and Experience Management" showed the following performance.

Applications, Technology & Services (AT&S)

In the first quarter, segment revenue in AT&S was up 12% to €4.99 billion year-over-year (up 9% at constant currencies). Solutions which contributed to this growth in the first quarter are listed below.


SAP S/4HANA is at the core of the Intelligent Enterprise. With S/4HANA, customers automate more and more of their business processes enabling employees to focus on higher-value tasks. It detects patterns, predicts outcomes and suggests actions empowering companies across all industries to reinvent their business models for the digital economy.

This quarter, SAP S/4HANA Cloud was named as a Leader in The IDC MarketScape: Worldwide SaaS and Cloud-enabled Operational ERP Applications 2019 Vendor Assessment. IDC recognizes SAP S/4HANA Cloud as an intelligent ERP that enables various business processes such as idea to design, procure to pay, plan to production, order to cash, offer to project, and core finance.

S/4HANA adoption grew to more than 10,900 customers, up 30% year over year. In the first quarter, over 40% of the additional S/4HANA customers were net new.

S/4HANA continues to be selected by world-class global companies, including Levi's, CVS Health and Schaeffler Technologies. Puma and Bausparkasse Schwäbisch Hall went live with S/4HANA this quarter. A growing number of companies including ESL/Turtle Entertainment and AEG have chosen S/4HANA in the Cloud. Computacenter went live on S/4HANA Cloud in the first quarter.

Human Capital Management Solutions

SAP delivers total workforce management across both permanent and contingent labor. The SAP SuccessFactors suite is localized for 96 countries and 42 languages.

SAP SuccessFactors successfully completed its migration to SAP HANA. This is a crucial milestone for the SAP SuccessFactors journey and the ability to embed real-time, predictive analytics capabilities and future innovations.

SAP SuccessFactors Employee Central, which is the flagship of SAP's HCM offering, added more than 150 customers in the quarter and has now approximately 3,200 customers globally. Competitive wins included Calzedonia Group. Tapestry went live with SAP SuccessFactors Employee Central in the first quarter.

SAP Leonardo

SAP Leonardo brings together cutting-edge technologies – AI, Machine Learning, IoT, Big Data, Advanced Analytics and Blockchain – with deep process and industry expertise, delivering completely new ways of working and powering the Intelligent Enterprise.

Companies like Bumble Bee Foods and Premier Foods are among many others that adopted SAP Leonardo solutions in the first quarter.

Digital Platform

Digital Platform includes SAP Cloud Platform and SAP Data Management Solutions. With SAP HANA's data rich and real-time in-memory architecture as the foundation, this represents a massive opportunity to drive full use of HANA.

The SAP Cloud Platform facilitates new app development, extensions and seamless integration. It orchestrates "hybrid" customer landscapes across on premise and cloud.

The SAP Data Hub is the "enterprise control tower" bringing together multi-source data including unstructured to provide a 360-degree view of all company data and manages compliance and governance policies from one central location.

Kontinental Hockey League is one of many customers that adopted SAP's Digital Platform solutions in the first quarter.

Business Network (BN)

In the first quarter, segment revenue in Business Network was up 25% to €740 million year-over-year (up 18% at constant currencies).

With the Business Network, SAP provides collaborative commerce capabilities (SAP Ariba), effortless travel and expense processing (SAP Concur) and flexible workforce management (SAP Fieldglass). Business Network is the largest commerce platform in the world with more than $3.1 trillion in global commerce annually transacted in more than 180 countries. 

In the first quarter American Express and SAP Ariba entered into a strategic multi-phased partnership designed to offer buyers and suppliers new payment and financing options on Ariba® Network, extending its value for joint customers. An integrated payment experience delivers seamless reconciliation, greater visibility and control, increased security and improved working capital for businesses.

Omnicom chose SAP's Business Network solutions in the first quarter.

Customer and Experience Management (CXM)

In the first quarter, segment revenue in Customer and Experience Management was up more than 100% to €305 million year-over-year (more than 100% at constant currencies). Solutions which contributed to this growth in the first quarter are listed below[3].


SAP's C/4HANA solutions serve a wide range of industries across both B2C and B2B and enable businesses to manage their entire front office: marketing, sales, commerce, service, customer data cloud – seamlessly and in real-time.

C/4HANA provides companies with a single, complete view of their customer across all channels and connects demand to the fulfillment engine in one end-to-end value chain. Isuzu Motors South Africa, Groupe PSA Brazil, and AmerisourceBergen chose SAP C/4HANA over competitors.

Experience Management Solutions (Qualtrics)

With Qualtrics, SAP now combines market leadership in Experience Management (X data) with end-to-end operational power (O data) in 25 industries and delivers four key experiences: brand, customer, product and employee. CVS Health and Cirque du Soleil chose SAP's experience management solutions this quarter.

Regional Revenue Performance 

SAP had a solid performance in the EMEA region with cloud and software revenue increasing 11% (IFRS) and 11% (non-IFRS at constant currencies). Cloud revenue increased by 42% (IFRS) and 39% (non-IFRS at constant currencies) with the UK, Switzerland and Spain being highlights. In addition, SAP had strong software license revenue growth in Germany, the UK and Spain.

The Company had a strong performance in the Americas region. Cloud and software revenue increased by 21% (IFRS) and increased by 15% (non-IFRS at constant currencies). Cloud revenue increased by 45% (IFRS) and 39% (non-IFRS at constant currencies) with the United States, Canada and Mexico being highlights. In addition, both, the United States and Canada had a strong quarter in software license revenue.

In the APJ region, SAP had a solid performance. Cloud and software revenue was up by 16% (IFRS) and grew by 12% (non-IFRS at constant currencies). Cloud revenue increased by 55% (IFRS) and 51% (non-IFRS at constant currencies) with China and Japan being highlights. For software license revenue, China, Japan and South Korea had strong quarter.

Business Outlook 2019

SAP has updated its 2019 outlook. This update reflects the results of the first quarter 2019 and the company's new initiatives to accelerate its operational excellence and value creation.

SAP continues to expect:

  • Non-IFRS cloud revenue to be in a range of €6.7 �^’ €7.0 billion at constant currencies (2018:€5.03 billion), up 33% – 39% at constant currencies.
  • Non-IFRS cloud and software revenue to be in a range of €22.4 – €22.7 billion at constant currencies (2018:€20.66 billion), up 8.5% – 10% at constant currencies.

SAP now expects:

  • Non-IFRS operating profit to be in a range of €7.85 – €8.05 billion at constant currencies (2018:€7.16 billion), up 9.5% – 12.5% at constant currencies (previously:€7.7 – €8.0 billion)(previously:up 7.5% – 11.5% at constant currencies)

p>In addition, SAP expects total revenues to increase strongly, at a rate lower than operating profit (previously:slightly lower than operating profit).

The first quarter 2019 numbers include Qualtrics' revenues and profits only from the acquisition date of January 23 [rd] . The comparative numbers for full year 2018 do not include Qualtrics revenues and profits and include Callidus revenue and profits only from the April 5th, 2018 acquisition date.

While SAP's full-year 2019 business outlook is at constant currencies, actual currency reported figures are expected to be impacted by currency exchange rate fluctuations as the Company progresses through the year. See the table below for the Q2 and FY 2019 expected currency impacts.

Expected Currency Impact Based on March 2019 Level for the Rest of the Year
In percentage points Q2 FY
Cloud revenue +3pp to +5pp +3pp to +5pp
Cloud and software revenue +1pp to +3pp +1pp to +3pp
Operating profit +1pp to +3pp +1pp to +3pp

Ambition 2020 and 2023

Looking beyond 2019, SAP has updated its 2020 and 2023 ambition. This update reflects the company's new initiatives to accelerate its operational excellence and value creation.

Ambition 2020

SAP continues to expect:

  • €8.6 �^’ €9.1 billion non-IFRS cloud revenue
  • €28.6 �^’ €29.2 billion non-IFRS total revenue
  • The share of more predictable revenue (defined as the total of cloud revenue and software support revenue) in a range of 70% �^’ 75%

SAP now expects:

  • €8.8 – 9.1 billion non-IFRS operating profit (previously:€8.5 – 9.0 billion)

p>Ambition 2023

Over the period from 2018 through 2023, SAP continues to expect to:

  • More than triple non-IFRS cloud revenue (2018:€5.03 billion)
  • Grow to more than €35 billion in non-IFRS total revenue (2018:€24.74 billion)
  • Approach a share of more predictable revenue of 80%

Over the same period, SAP now expects to:

  • Reach a Non-IFRS cloud gross margin of 75%
  • Increase the non-IFRS operating margin by one percentage point per year on average, representing a total expansion of approximately 500 basis points.

SAP's 2023 Non-IFRS operating margin ambition replaces its former 2023 ambition of growing non-IFRS operating profit at a compound annual growth rate of 7.5% - 10% (2018:€7.16 billion)

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