- By Mark Yu
SAP Societas Europaea (SAP), the $113.7 billion software company reported its fourth-quarter and full-year 2016 several weeks ago. It grew its sales by 6.1% in 2016 to 22.06 billion euros ($23.47 billion) and reported an 18% rise in profits to 3.6 billion euros.
For 2016, SAP SE logged fewer expenses related to restructuring - from 621 million euros in 2015 to 28 million euros in 2016 - which helped tame company operating expenses and improve SAP SE's profits.
The intrinsic value of SAP
For 2016, SAP SE had an International Financial Reporting Standards (IFRS) operating margin of 23.2% compared to 20.4% in 2015. On a non-IFRS measure, SAP SE had 30% operating margin in 2016.
(2016 Q4 Presentation, SAP SE)
SAP SE also provided its outlook for its fiscal 2017 and 2020 in non-IFRS figures. For fiscal 2017, SAP SE expects to increase to a midpoint of 23.4 billion euros from 22.07 billion euros in 2016.
The software company also sees its operating profits grow to a midpoint of 6.9 billion euros in 2017 from 6.63 billion euros in 2016 - giving SAP SE an operating margin of 29.5% in 2017 compared to 30% in 2016.
For 2020, SAP SE expects to have a non-IFRS sales between 28 billion euros and 29 billion euros and operating profit between 8.5 billion euros and 9 billion euros . When taken at midpoint, the figures would represent an operating margin of 30.7%.
SAP SE ADR shares rose by 1.8% the following day post-earnings announcement while Standard & Poor's 500 index rose by 0.8%.
"SAP's outstanding 2016 performance is the latest in our seven-year run of profitable growth. We expanded our addressable market, acquired best in class assets and innovated a new generation of ERP with SAP S/4HANA. We are the leader in the business software industry with a consistent trifecta of strong software sales, fast cloud growth and operating income expansion. Our innovation agenda is accelerating in Machine Learning, the Internet of Things and Blockchain. SAP is winning big and we have enormous confidence in our accelerated 2020 ambition." - Bill McDermott, CEO
SAP SE trades at premium compared to its peers. According to GuruFocus data, SAP SE has a trailing price-earnings (P/E) ratio of 28.6 times (industry median of 25.2), price-book (P/B) ratio of 4 times (industry median of 3) and price-sales (P/S) ratio of 4.7 times (industry median of 2.3).
The software company also had a trailing dividend yield of 1.42%, 41% payout ratio and a five-year dividend growth rate of 13.9% with a 0.8% share buyback ratio.
SAP SE had underperformed the broader S&P 500 index in both short- and long-term periods. According to Morningstar data, SAP SE had one- and five-year total returns of 18.7% and 9.4% while the S&P 500 index had 22.8% and 13.7%.
SAP SE was found 44 years ago and had currently developed into the global leader in business application and analytics software in terms of market share and the market leader in digital commerce, according to market share. The company also claimed to be the market leader in digital commerce.
Also, SAP is the enterprise cloud company with the greatest number of users and the fastest-growing major database.
Headquartered in Germany, the company operates its business in over 180 countries and derived 32.5%, or 6.75 billion euros, of its 2015 sales from the U.S., 13.3% from Germany and 3.2% from Japan.
SAP derives its revenue from fees charged to its customers for the use of its cloud solutions, for licensing of on-premises software products and solutions and transaction fees for activity on SAP's business networks. Other additional sources of revenue are support, professional services, development, training and other services provided by SAP.
(Q4 2016 Statement and 20-F Filings, SAP SE)
In 2015, SAP SE had two reportable segments: Applications, Technology & Services and SAP Business Network.
Applications, Technology & Services
According to SAP, its Applications, Technology & Services segment derives its revenue primarily from the sale of software licenses, subscriptions to SAP's cloud applications and related services.
The segment recorded a 5% sales growth and contributed 91%, or 19.9 billion euros, in fiscal 2016 SAP sales in actual currency. Applications, technology services also delivered strong 40.3% segment profit margin for the period.
SAP Business Network
The SAP Business Network segment emerged from combining all SAP network offerings into one network of networks that covers temporary workforce sourcing, other procurement and end-to-end travel and business travel expense management.
The SAP Business Network segment derives its revenues mainly from transaction fees charged for the use of SAP's cloud-based collaborative business network and from services relating to the SAP Business Network. SAP Business Network markets and sells the cloud offerings developed by Ariba, Fieldglass and Concur.
SAP Business Network grew its sales by an impressive 19% and contributed 9%, or 1.93 billion euros, in total SAP 2016 sales in actual currency. The segment also carried a segment profit margin of 17.6% compared to 19.6% the year prior.
Overall, SAP had five-year sales and profit growth and operating margin averages of 8.1%, 7.2% and 24%.
Cash, debt and book value
As of December 2016, SAP SE had 3.7 billion euros in cash and cash equivalents and 8.29 billion euros in financial liabilities representing a ratio to total equity of 0.31 times compared to 0.41 times the year earlier.
Further, SAP SE had 61% of its 44.4 billion euros assets in goodwill and intangibles having a book value of 26.4 billion euros compared to 23.3 billion euros last year.
(2016 Q4 Statement, SAP SE)
In 2016, SAP SE recorded 27.2% growth in its cash flow from operations to 4.63 billion euros. As observed, SAP SE received more cash inflows specifically from income tax expense, financial income and other adjustments for its noncash items in 2016 compared to 2015.
Capital expenditures were 1 billion euros leaving SAP SE with 3.63 billion euros in free cash flow compared to 3 billion euros in 2015.
SAP SE also placed 1.63 billion euros in investment purchases in equity and debt instruments and had received inflow of 869 million euros for the recent period.
Meanwhile, SAP SE allocated 38%, or 1.38 billion euros, in shareholder dividends in 2016. On average, the software company provided 41.7% of its free cash flow in dividends in the past three fiscal years (from 2014 to 2016). SAP SE also had 1.4 billion euros reduction in borrowings net proceeds for the period.
SAP SE was able to develop further its otherwise smaller business segment - SAP Business Network - by its strategic acquisitions of Ariba for $4.3 billion in 2012, Fieldglass in 2014 for over $1 billion in 2014 and Concur Technologies in 2014 for $8.3 billion in 2014.
Despite these acquisitions, SAP seemed to carry a moderately leveraged balance sheet accompanied by a markedly increased amount of goodwill and intangible figures.
Meanwhile, SAP appears to be confident in improving further its profitability in the coming years as SAP's IFRS operating margin in 2016 seemed to improve year over year but has stayed relatively in the same levels in the past recent years.
Having decent free cash flow payouts in recent years, SAP also seemed to be able to delivered dividend payout growth further in the coming years.
(SAP ADR Share Price at $92.52 per share with Trailing P/E ratio 23 times, GuruFocus)
Post-earnings announcement, BMO Capital Markets reiterated a market perform rating on SAP ADR shares and raised its target price to $95 a share from $85. This would represent a forward P/E ratio of 20 times - in contrast to its five-year earnings multiple average of 23 times.
Applying its earnings multiple average and a 20% margin would give a value of $87 a share. In summary, SAP SE is a hold at its current share price with at least a $90 per share price target.
Disclosure: I do not have shares in any of the companies mentioned.
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This article first appeared on GuruFocus.
The intrinsic value of SAP