SAP AG (SAPG.F)

KEY CONCLUSIONSEquity Research Americas

Software29 June 2016

SAP AG (SAPG.F)PROPRIETARY SURVEY

The Ideas Engine series showcases Credit Suisse’s unique insights and investment ideas.

Please contact your Sales person to access the supplemental analysis behind this report.

Survey Says, "S/4 HANA's Bringing Sexy Back…To SAP's Growth"We believe that long-term consensus estimates continue to underappreciate and SAP's share price does not properly reflect the upsell opportunity of the HANA platform and the importance of the S/4 HANA application suite, based on the following: Sizing & Surveying. We estimate SAP's license revenue opportunity underneath (1)

its massive applications installed base and (2) new application deployments through 2020 to equal €5.4 billion and €2.0 billion, respectively. Based on our survey of 102 large enterprise or upper midsized business customers of SAP, only 9.5% of transactional SAP applications are currently on HANA, but customers expect to have migrated 37.0% of these deployments to HANA by the end of 2020. Furthermore, these customers expect to increase the usage of HANA underneath new SAP application deployments from 20.7% in 2016 to 51.3% by 2020.

2020 Targets. Combining (1) our survey-driven forecast for S/4 HANA revenue with our estimates for (2) BW-on-HANA and (3) HANA as a technology platform, we project SAP to recognize €5.9 billion in software license revenue over the next five years from HANA in aggregate, which boosts our confidence in our estimates and the high-end of SAP's 2020 targets. Based on our HANA estimates, we believe the mid-to-low end of SAP's 2020 revenue guidance implies a 2017-2020 compounded annual decline in "core" software license revenue (i.e., excluding HANA) of ~6-11%—whereas the mid-to-high end suggests an annualized decline of ~1-6%, which we view as more reflective of SAP's on-premise business trends and customer dynamics.

Valuation & Return. Applying a NTM EV/E multiple of 18.5 to our 2020 EPS estimate of €5.82 and adding in our estimate of net cash of €9.06 per share would result in a share price of €116.73 at the end of 2019, which equates to a warranted next-twelve-month share price of €89.23 when discounted at 11.3%. Therefore, we reiterate our Outperform rating on SAP and increase our target price from €85 to €90.

Figure 1: Credit Suisse Survey – What percentages of (1) the existing installed base and (2) new deployments of SAP applications have already migrated to and will migrate to SAP HANA?

9%

17%

27%

37%

19%21%

28%

51%

0%

10%

20%

30%

40%

50%

60%

End of 2015 End of 2016 End of 2017 … End of 2020

Installed Base New Deplpoyments

Source: Credit Suisse.

Figure 2: Annualized Share Price Return through Year-End 2019 and Twelve-Month Share Price ReturnEPS (2020) € 5.82NTM EV/E multiple (5-year historical average + 1 standard deviation) 18.5xEnterprise value (year-end 2019) € 107.67Net cash per share (year-end 2019) € 9.06Warranted share price (year-end 2019) € 116.73Annualized return 17%

Warranted share price (year-end 2019) € 116.73WACC 11.3%Warranted share price (twelve-months) € 89.23Twelve-month return 34%

Source: Credit Suisse.

RESEARCH ANALYSTSPhilip Winslow, CFA212 325 [email protected]

Charles Brennan CFA44 20 7883 [email protected]

Sitikantha Panigrahi212 325 [email protected]

Michael Baresich212 [email protected]

Joanna Kamien212 325 [email protected]

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-U.S ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

IDEAS ENGINE SERIES

IDEAS ENGINE 2SAP AG (SAPG.F)

SAP (SAPG.F)Price (27-Jun-16,€) 65.3Market Cap (€mn) 80233.6

Previous Value Current valueRating OUTPERFORMTarget Price (€) 85.00 90.00Year 12/15A 12/16E 12/17E 12/18EEPS (CS Adj.) (€) 3.76 4.01 4.42 4.85EPS Prev (€) 3.94 4.26 4.75EPS (Qtr 1) (€) 0.58 0.64 0.70 0.82EPS (Qtr 2) (€) 0.80 0.88 0.99 1.09EPS (Qtr 3) (€) 0.98 1.01 1.12 1.23EPS (Qtr 4) (€) 1.40 1.48 1.61 1.70

D EUT SCH E BO RSE D A X IN D EX SA PG.F

1 - Ju l - 1 5 1 - O ct - 1 5 1 - Jan - 1 6 1 - A p r - 1 6 1 - Ju l - 1 68 ,5 0 09 ,5 0 0

1 0 ,5 0 01 1 ,5 0 01 2 ,5 0 0

5 56 06 57 07 5

Source: Credit Suisse Estimates, IBES

Income Statement 2015FYA 2016FYE 2017FYE 2018FYESales revenue 20,809 22,049 23,505 24,919EBITDA 5,541 6,544 7,140 7,842Depr. & amort. -1,289 -1,288 -1,338 -1,384EBIT (€) 4,252 5,257 5,802 6,458Net interest exp -260 -49 112 186Other adj. 2,093 1,335 1,323 1,323PBT (€) 6,085 6,543 7,237 7,967Income taxes -929 -1,325 -1,525 -1,714Profit after tax 5,156 5,218 5,712 6,253Associates & other -650 -406 -392 -398Net profit (€) 4,506 4,812 5,319 5,856Other NPAT adjustments -1,443 -928 -930 -925Reported net income 3,063 3,883 4,389 4,930Cash Flow 2015FYA 2016FYE 2017FYE 2018FYEEBIT 4,252 5,257 5,802 6,458Net interest -260 -49 112 186Change in working capital -197 219 105 339Other cash & non-cash items -153 -200 -261 -409Cash flow from operations 3,642 5,227 5,758 6,574CAPEX -637 -777 -789 -851Free cashflow to the firm 3,005 4,451 4,969 5,724Cash flow from investments -332 -741 -789 -851Cashflow from financing -3,356 -1,315 -1,916 -5,332Changes in Net Cash/Debt 2,098 3,121 3,554 4,142Net debt at start 6,514 4,416 1,295 -2,259Change in net debt -2,098 -3,121 -3,554 -4,142Net debt at end 4,416 1,295 -2,259 -6,401Balance Sheet 2015FYA 2016FYE 2017FYE 2018FYETotal current assets 9,751 13,005 16,479 17,144Total fixed assets 2,195 2,362 2,538 2,730Total liabilities 18,118 18,376 18,429 15,313Shareholder equity 23,273 24,785 27,685 30,954Total liabilities and equity 41,391 43,160 46,113 46,267Net debt 4,416 1,295 -2,259 -6,401

Per Share 2015FYA 2016FYE 2017FYE 2018FYEEquiv. FPO (period Avg.) (mn) 1,198 1,200 1,204 1,208EPS (CS Adj.) (€) 3.8 4.0 4.4 4.8Prev. EPS (€) 3.8 3.9 4.3 4.7DPS (€) 1.1 1.1 1.2 1.4Dividend yield (%) 1.7 1.8 1.9 2.1Dividend Payout (%) 29.3 28.6 27.9 28.2Earnings 2015FYA 2016FYE 2017FYE 2018FYESales growth (%) 18.4 6.0 6.6 6.0EBIT growth (%) -2.3 23.6 10.4 11.3Net income growth (%) 7.8 6.8 10.5 10.1EPS growth (%) 7.8 6.5 10.2 9.8EBITDA margin (%) 26.6 29.7 30.4 31.5EBIT margin (%) 20.4 23.8 24.7 25.9Pretax profit margin (%) 29.2 29.7 30.8 32.0Net income margin (%) 21.7 21.8 22.6 23.5Valuation 2015FYA 2016FYE 2017FYE 2018FYEEV/Sales (x) 4.1 3.7 3.3 3.0EV/EBITDA (x) 15.3 12.5 10.9 9.4EV/EBIT (x) 19.9 15.5 13.4 11.4P/E (x) 17.4 16.3 14.8 13.5Price to book (x) 3.4 3.2 2.8 2.5Asset turnover 0.5 0.5 0.5 0.5Returns 2015FYA 2016FYE 2017FYE 2018FYEROE 14.3 16.2 16.7 16.8ROGIC (%) 0.1 0.2 0.2 0.2Interest burden 1.4 1.2 1.2 1.2Tax burden 0.2 0.3 0.3 0.3Financial leverage 1.8 1.7 1.7 1.5Gearing 2015FYA 2016FYE 2017FYE 2018FYENet debt/equity (%) 19.0 5.2 -8.2 -20.7Net Debt to EBITDA (x) 0.8 0.2 Net Cash Net CashInterest coverage ratio (X) 16.4 107.7 -51.6 -34.7

Source: Company data, Credit Suisse Estimates


The Download…What's the Call? ■ Based on our proprietary survey and detailed analysis of market sizing,

we believe SAP's current share price or valuation do not properly reflect the sell-through opportunity of the HANA technology platform and the importance of the S/4 HANA application suite.

What's Consensus Missing? ■ When combining our survey-driven sizing of the revenue opportunity of SAP HANA running (1) underneath SAP's installed base of applications and tied to new application deployments with our estimates of the forward revenue growth potential of SAP HANA (2) for SAP NetWeaver Business Warehouse and (3) as a technology platform, we calculated that SAP could recognize €1.0 billion and €5.9 billion in software license revenue in 2016 and over the next five years in aggregate, respectively, from SAP HANA. (See Figure 8.)

What's the Stock Thesis? ■ As highlighted in The Apps Revolution Manifesto—Volume 1: The Technologies and The Apps Revolution Manifesto—Volume 2: The Markets, we believe that upgrade and expansion cycles are underway across multiple enterprise applications segments. Within this backdrop, we continue to believe SAP can sustain attractive revenue growth and meet or exceed the company's 2020 revenue and operating profit guidance—through (1) new cloud initiatives, (2) continued growth in SAP HANA, and (3) a stable core business driven by the release of S/4 HANA (see Simple Is A Big, Suite Deal).

What's the Impact to the Model? ■ Our bottom-up, survey-driven sizing of the revenue opportunity for SAP HANA and S/4 HANA boosts our confidence in our long-term estimates for SAP, which are near the high-end of SAP's 2020 guidance range (as adjusted for foreign currency translation).

■ If SAP (1) recognizes €5.9 billion in software license revenue from HANA in aggregate over the next five years and (2) achieves management's constant currency cloud subscriptions and support revenue guidance of €7.5-8 billion in 2020, we estimate that the mid-to-low end of management's revenue guidance range for 2020 implies a compounded annual decline in "core" software license revenue (i.e., excluding SAP HANA) of 6-11% from 2017 to 2020—whereas the mid-to-high end of SAP's 2020 guidance suggests annualized decline of 1-6% during this same timeframe, which we view as more reflective of SAP's underlying medium- to long-term license-based business trends, on-premise business trends, and customer dynamics. (See Figure 10.)

What's the Next Catalyst/Data Point? ■ SAP will report Q2 earnings result on July 20, 2016 before the market's open. Given the timing of the United Kingdom's decision to leave the European Union, we believe downside risks exist to Q2 estimates.

What's the Valuation? ■ Applying a next-twelve-months enterprise value to earnings (NTM EV/E) multiple of 18.5, which is consistent with SAP's historical 5-year averages of 16.8 plus one standard deviation (see Figure 13 and Figure 14), to our EPS estimate of €5.82 in 2020 would drive a warranted enterprise value for SAP at year-end 2019 of €107.67 per share. Adding in our estimate of SAP's net cash position exiting 2019 of €9.06 per share would then result in a warranted share price of €116.73, translating into an annualized return of 17% for SAP's stock through the end of 2019 from current levels. (See Figure 15.)


Executive Summary"I like to think of SAP a little bit like the Grateful Dead in the sense that we are

the only ones that do what we do the way we do it."— Bill McDermott, CEO of SAP

"Don't call it a comeback, I've been here for years, rockin' my peers and puttin' suckas in fear… I'm gonna take this itty bitty world by storm, and I'm

just getting' warm."— LL Cool J, Mama Said Knock You Out

We believe (1) the SAP HANA database and (2) the SAP S/4 HANA application suite are vitally important to maintaining SAP's leadership position in the enterprise software market and revenue growth for the next decade. Since its general availability on June 21, 2011, we have viewed SAP HANA as the most disruptive product to database market share since SQL Server’s emergence in the 1990s. Reinforcing this thesis, SAP executives have not only called HANA the fastest-growing product in the history of SAP, but CEO Bill McDermott even described HANA as "the fastest growing software product in the history of the world." In addition to the dramatic change occurring in the database industry (partially driven by in-memory technologies such as SAP HANA), the enterprise applications industry is also clearly undergoing the most significant revolution in architectures in 20 years (referred to now, generally, as the "mobile/cloud" era)—resulting in a multi-year wave of (1) upgrades and replacements of legacy applications, (2) increased penetration of applications modules, and (3) the introduction of a new generation of killer enterprise software apps. Within this backdrop, we view SAP S/4 HANA as a critical milestone for the company—similar to how SAP evolved from the mainframe-based R/2 system with the release of R/3 in 1992 (emerging as the largest enterprise applications vendor of the client/server era).

Although SAP's stock has performed well since the launch of HANA (see Figure 1), we believe current valuation and consensus estimates for SAP underappreciate (1) the sell-through opportunity of the HANA database and (2) the importance of the S/4 HANA application suite. To determine the potential revenue recognized from SAP HANA as the database underneath SAP Business Suite, SAP Business One, and S/4 HANA, we surveyed 102 large enterprise or upper midsized business customers of SAP.

Figure 3: SAP Stock Performance, Since General Availability of SAP HANA

0.00

0.20

0.40

0.60

0.80

1.00

1.20

1.40

1.60

1.80

2.00

Jun-11 Nov-11 Apr-12 Sep-12 Feb-13 Jul-13 Dec-13 May-14 Oct-14 Mar-15 Aug-15 Jan-16 Jun-16

SAPG.F S&P 500 DAX

Source: Thomson Reuters, Credit Suisse.

SAP prices SAP HANA for S/4 HANA at 15% of SAP Application Value (SAV), which is the discounted software license price of any given application from SAP. Based on this licensing model, in order to determine the potential revenue opportunity for SAP HANA offered by the installed base of SAP Business Suite and SAP Business One customers and customers migrating to S/4 HANA, we


calculated an active SAP Application Value installed base of more than €36 billion. Then, to determine the database price, we applied 15% to the $36-billion SAV installed base, which translated into an estimated the market opportunity of upselling SAP HANA to existing application customers to equal €5.4 billion.

Based on our aforementioned survey, only 9.5% of customers' deployments of SAP applications (e.g., SAP Business Suite, SAP Business One, and S/4 HANA) are currently on SAP HANA, and customers expect to have migrated 17.1%, 26.9%, and 37.0% of their deployments to SAP HANA by the end of 2016, end of 2017, and end of 2020, respectively. (See Figure 4.) Furthermore, customers expect to deploy SAP HANA underneath 20.7%, 28.1%, and 51.3% of new deployments of SAP applications (e.g., SAP Business Suite and SAP Business One) in 2016, 2017, and 2020, respectively. (See Figure 5.)

Figure 4: Credit Suisse Survey – "What percentage of your existing installed base of SAP applications do you intend to migrate onto SAP HANA?"

Figure 5: Credit Suisse Survey – "Of the new applications that you plan to purchase from SAP during each the following years, what percentage will run on top of SAP HANA?"

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

Currently End of 2016 End of 2017 … End of 20200.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

2015 2016 2017 2018 2019 2020

Source: Credit Suisse. Source: Credit Suisse.

When applying this data (which is effectively ~80% large enterprises and ~20% upper midsized to midsized businesses, which is relatively consistent with contribution of these customer segments to SAP's software license revenue) to our aforementioned market sizing estimates, we calculated that SAP could recognize €0.5 billion and €2.2 billion in software license revenue in 2016 and over the next five years in aggregate, respectively, from SAP HANA running underneath SAP's installed base of applications. (See Figure 8.)

Furthermore, although we expect S/4 HANA to continue to be the fastest-growing use case of SAP HANA going forward, we believe platform and other revenue, which we estimate accounted for more than half of HANA license revenue in 2015 (see Figure 6 and Figure 7), will continue to grow. Furthermore, SAP's long-term data warehousing strategy suggests that BW-on-HANA will form an important, but optional, part of the SAP HANA Data Warehouse (DW).1 As a result, we believe the upsell of HANA into the SAP NetWeaver Business Warehouse (BW) installed base will remain a smaller (but ongoing) revenue contributor as compared with S/4 HANA and HANA as a technology platform.


Figure 6: SAP HANA Revenue by Use Case€ in millions, unless otherwise stated

Figure 7: SAP HANA Revenue by Use Case as a Percentage

€ 0

€ 200

€ 400

€ 600

€ 800

€ 1,000

€ 1,200

2011 2012 2013 2014 2015

SAP S/4 HANA, SAP Business Suite, and SAP Business One

SAP NetWeaver Business Warehouse

SAP HANA Platform and Other

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

2011 2012 2013 2014 2015

SAP S/4 HANA, SAP Business Suite, and SAP Business One

SAP NetWeaver Business Warehouse

SAP HANA Platform and Other

Source: Company data, Credit Suisse. Source: Company data, Credit Suisse.

When combining our survey-driven sizing of the revenue opportunity of SAP HANA running (1) underneath SAP's installed base of applications and tied to new application deployments with our estimates of the forward revenue growth potential of SAP HANA, (2) for SAP NetWeaver Business Warehouse, and (3) as a technology platform, we calculated that SAP could recognize €1.2 billion and €5.9 billion in software license revenue in 2016 and over the next five years in aggregate, respectively, from SAP HANA. (See Figure 8.) In order to incorporate his/her own assumptions to quantify the market opportunity and recognized revenue for SAP HANA as the database underneath SAP S/4 HANA, SAP Business Suite, SAP Business One, and SAP NetWeaver Business Warehouse (BW) and as a technology platform, clients of Credit Suisse can obtain a working version of the SAP HANA Licensing Worksheet by contacting the Credit Suisse Software Team, the Research & Analytics Website, or his/her sales person.

Figure 8: Estimated Software License Revenue Contribution based on Credit Suisse Survey Data and Estimates by Use Case€ in millions, unless otherwise stated

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2016-20SAP S/4 HANA, SAP Business Suite, and SAP Business One 0 0 69 201 391 496 649 473 346 253 2,217-- % growth y-o-y NM NM NM 191.2% 94.9% 26.9% 30.8% -27.1% -26.8% -27.0%-- % of SAP HANA software revenue 0.0% 0.0% 10.9% 25.5% 37.3% 42.3% 48.1% 39.0% 31.2% 25.0%SAP NetWeaver Business Warehouse 0 152 39 48 63 54 51 58 52 15 230-- % growth y-o-y NM NM -74.1% 22.2% 31.8% -14.7% -5.4% 13.1% -11.0% -70.6%-- % of SAP HANA software revenue 0.0% 38.7% 6.2% 6.1% 6.0% 4.6% 3.8% 4.8% 4.6% 1.5%

SAP S/4 HANA, BS, BO, BW 0 152 108 249 454 550 700 531 398 268 2,447-- % growth y-o-y NM NM -28.7% 129.7% 82.7% 21.1% 27.3% -24.2% -25.1% -32.6%-- % of SAP HANA software revenue 0.0% 38.7% 17.1% 31.6% 43.3% 46.9% 51.8% 43.8% 35.8% 26.4%SAP HANA Platform and Other 160 240 525 539 595 622 651 681 712 745 3,410-- % growth y-o-y NM 50.1% 118.5% 2.6% 10.4% 4.6% 4.6% 4.6% 4.6% 4.6%-- % of SAP HANA software revenue 100.0% 61.3% 82.9% 68.4% 56.7% 53.1% 48.2% 56.2% 64.2% 73.6%

Software revenue 160 392 633 787 1,049 1,172 1,351 1,211 1,109 1,012 5,857-- % growth y-o-y NM 145.0% 61.5% 24.4% 33.2% 11.8% 15.2% -10.3% -8.4% -8.7%-- % of SAP HANA revenue 97.1% 87.8% 80.9% 73.1% 68.2% 62.3% 58.8% 50.3% 44.0% 38.8%

Source: Company data, Credit Suisse estimates.

Although SAP continues to transition its business to the cloud and to the fourth-generation mobile/cloud platform, which depresses near-term revenue growth and operating margins, we believe this analysis reinforces essential pillars of our overall thesis that SAP can sustain attractive revenue growth through (1) new cloud initiatives, (2) continued growth in SAP HANA, and (3) a stable "core" business driven by the release of S/4 HANA. In fact, we believe both long-term consensus estimates for SAP and the mid-to-low end of management's 2020 guidance are likely to prove too conservative. (See Figure 9.)


Figure 9: Credit Suisse vs. Guidance, 2020€ in millions, unless otherwise statedEstimates vs. Guidance Variance Analysis

Guidance *Cumm. FX Impact Guidance (FX adj.) CS2020E 2015-2020E 2020E 2020E

Software 4,430Support 10,700-13,000 2.2% 10,940-13,291 12,628Cloud subscriptions and support 7,500-8,000 7.9% 8,089-8,628 8,358

Cloud and software 25,416Professional services and other 3,284

Revenue €26,000-28,000 2.5% €26,650-28,700 € 28,700Cost of goods sold 8,132Gross profit 20,568

Gross margin 71.7%

Operating expenses 11,361Operating income 8,000-9,000 2.3% 8,184-9,207 9,207

Operating margin 30.8%-32.1% 30.7%-32.1% 32.1%

Interest and other, net 413Pro forma pretax income 9,620

Effective tax rate 26.5%Net income 7,070

EPS € 5.82FD shares outstanding 1,215

OCF 8,105Deferred Revenue 5,528Capital spending 976

Source: Company data, Credit Suisse estimates.* Assumes a 2.5% foreign currency benefit to revenue relative to January 2015 foreign exchange rates and impact to revenue segments and operating income proportional to 2015.

In January 2015, SAP provided preliminary 2020 targets of total revenue of €26-28 billion, cloud subscriptions and support revenue of €7.5-8 billion, and operating profit of €8-9 billion, and SAP reiterated its 2020 outlook at the company's Capital Markets Day on February 4th, 2016. This guidance was based on foreign currency exchange (FX) rates at the beginning of 2015, and we have therefore adjusted this guidance for our estimate of the net positive impact of foreign currency translation since the beginning of 2015 and have assumed that current exchange rates remain stable through 2020.

If SAP (1) recognizes €5.9 billion in software license revenue from HANA in aggregate over the next five years and (2) achieves management's constant currency cloud subscriptions and support revenue guidance of €7.5-8 billion in 2020, we estimate that the mid-to-low end of management's revenue guidance range for 2020 implies a compounded annual decline in "core" software license revenue (i.e., excluding SAP HANA) of approximately 6-11% from 2017 to 2020. (See Figure 10.) In comparison, we believe the mid-to-high end of management's guidance implies a compounded annual decline of approximately 1-6% during this same timeframe. Based on this analysis, we believe the upsell of SAP HANA (as customers migrate existing Business Suite applications to S/4 HANA and purchase net new S/4 HANA applications) will play a meaningful role in SAP's ability to attain management's stated long-term financial targets.

Figure 10: Implied 2017-2020 Compounded Annual Decline in "Core" Software License Revenue based on (1) Credit Suisse SAP HANA Estimates and (2) 2020 Management Guidance for Revenue vs. Cloud Subscription and Support Revenue€ in millions, unless otherwise stated

Cloud Subscription and Support Revenue € 8,089 € 8,224 € 8,358 € 8,493 € 8,628

€ 26,650 -9% -9% -10% -10% -11%€ 27,163 -7% -7% -8% -8% -9%€ 27,675 -5% -5% -6% -6% -7%€ 28,188 -3% -4% -4% -4% -5%€ 28,700 -1% -2% -2% -3% -3%

Rev

enue

Source: Company data, Credit Suisse estimates.


Although SAP continues to transition its business to the cloud, we view a long-term 6-11% compounded annual decline in "core" software license revenue as overly conservative, and we believe a 1-6% rate of decline is more reflective of SAP's underlying medium- to long-term license-based business trends. Specifically, ERP and Operations and Manufacturing applications accounted for 42% of SAP's on-premise software revenue and 66% of SAP's on-premise applications revenue in 2015. (See Figure 11.) Furthermore, discrete manufacturing, financial services, and energy and natural resources accounted for 50% of SAP's revenue in 2015.2 (See Figure 12.) Therefore, we believe much of SAP's installed base—particularly customers in the discrete manufacturing, financial services, and energy and natural resources sector—is unlikely to migrate core ERP systems and Operations and Manufacturing applications exclusively to a multi-tenant cloud in the near- to medium-term. In fact, we estimate that SAP's "core" license revenue declined approximately 1% at constancy currencies in 2015 and will be relatively flat in 2016.

Figure 11: SAP On-Premise Revenue by Software Type, 2015

Figure 12: SAP Revenue by Industry Vertical, 2015

ERP Applications

36%

Operations and Manufacturing Applications

6%

SCM Applications

7%

CRM Applications

13%

Data Access, Analysis, and

Delivery Software

12%

Structured Data Management

Software18%

Application Platforms

3%Other5%

Services16%

Energy and Natural

23%

Financial Services

9%

Discrete Manufacturing

18%

Consumer24%

Public Services10%

Source: IDC, Credit Suisse estimates. Source: Company data, Credit Suisse.

Ultimately, our bottom-up, survey-driven sizing of the revenue opportunity for SAP HANA and S/4 HANA boosts our confidence in our long-term estimates for SAP, which are near the high-end of SAP's 2020 guidance range (as adjusted for foreign currency translation). However, we do not believe the stock's current price or valuation is reflective of how (1) the sell-through opportunity of the HANA database, (2) the release of the S/4 HANA application suite, and (3) SAP's cloud initiatives (e.g., HANA Enterprise Cloud and HANA Cloud Platform) and business networks (e.g., Ariba, Concur, and Fieldglass) can drive attractive long-term revenue and operating profit growth at SAP and enable the company to meet or exceed the mid-point of management's 2020 revenue and operating profit targets.

Applying a next-twelve-months enterprise value to earnings (NTM EV/E) multiple of 18.5, which is consistent with SAP's historical 5-year average of 16.8 plus one standard deviation (see Figure 13), to our EPS estimate of €5.82 in 2020 would drive a warranted enterprise value for SAP at year-end 2019 of €107.67 per share. We believe adding one standard deviation to SAP's historical valuation range is appropriate, given that we have forecasted SAP's EPS to grow approximately 10% in 2020 (2016-2020 EPS CAGR of approximately 10%), which is near the higher end of SAP's recent EPS growth over the past four years and relatively consistent with one standard deviation above SAP's 5-year historical NTM EPS growth rate at 12.2%.


Figure 13: SAP NTM EV/E Multiple, NTM EPS Growth Rate, and Share Price, 5-Year Trend€ in millions, unless otherwise stated

Figure 14: SAP NTM EV/E Multiple, NTM EPS Growth Rate, and Share Price, 10-Year Trend€ in millions, unless otherwise stated

2012 2013 2014 2015 2016

0.0x

5.0x

10.0x

15.0x

20.0x

EV /

NTM

Net

Inco

me

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

NTM

EPS

Gro

wth

€0

€20

€40

€60

Pric

e

Average: 16.8x

Standard Deviation: 15.1x


Average: 8.4%

Standard Deviation: 4.4%


2007 2009 2011 2013 2015

0.0x

10.0x

20.0x

EV

/ N

TM N

et In

com

e

-10.0%

0.0%

10.0%

20.0%

30.0%

40.0%

NTM

EP

S G

row

th

€0

€20

€40

€60P

rice

Average: 17.9x



Average: 11.0%

Standard Deviation: -1.5%


Source: Thomson Reuters, Credit Suisse. Source: Thomson Reuters, Credit Suisse.

Adding our estimate of SAP's net cash position exiting 2019 of €9.06 per share would then result in a warranted share price of €116.73, translating into an annualized return of 17% for SAP's stock through the end of 2019 from current levels. (See Figure 15.) Furthermore, applying a discount rate of 11.3% to our calculated warranted share price of €116.73 at year-end 2019 would result in a 12-month warranted share price of €89.23 per share, equating to 34% upside from SAP's current share price. We view these rates of return as attractive relative to other mega-cap technology stocks under coverage and relevant broader market averages as well.

Figure 15: Annualized Share Price Return through Year-End 2019 and Twelve-Month Share Price Return€, unless otherwise stated

EPS (2020) € 5.82NTM EV/E multiple (5-year historical average + 1 standard deviation) 18.5xEnterprise value (year-end 2019) € 107.67Net cash per share (year-end 2019) € 9.06Warranted share price (year-end 2019) € 116.73Current share price € 66.40Annualized return 17%

Warranted share price (year-end 2019) € 116.73WACC 11.3%Warranted share price (twelve-months) € 89.23Current share price € 66.40Twelve-month return 34%

Source: Credit Suisse estimates.

From a downside risk perspective, SAP's stock has bottomed over the past 10 years at a last-twelve-months enterprise value to recurring revenue multiple of approximately 6.3. (See Figure 16.) Applying this multiple to SAP's last-twelve-months recurring revenue of €12.7 billion would equal a warranted value of €65.38 per share.


Figure 16: SAP LTM EV/Recurring Revenue Multiple, 10-Year Trend€, unless otherwise stated

2007 2009 2011 2013 2015

0.0x

2.0x

4.0x

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LegendEV / LTM Recurring Revenue

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Source: Thomson Reuters, Credit Suisse.

Based on an attractive risk-reward profile, we reiterate our Outperform rating on SAP and increase our twelve-month target price from €85 to €90.


Companies Mentioned (Price as of 27-Jun-2016)Dassault Systemes (DAST.PA, €64.78)International Business Machines Corp. (IBM.N, $143.5)Microsoft Corporation (MSFT.OQ, $48.43)Oracle Corporation (ORCL.N, $38.48)SAP (SAPG.F, €65.31, OUTPERFORM, TP €90.0)

Disclosure Appendix

Important Global Disclosures Philip Winslow, CFA, and Charles Brennan CFA each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Dassault Systemes (DAST.PA)

DAST.PA Closing Price Target Price Date (€) (€) Rating 30-Jul-13 49.24 49.00 N 15-Oct-13 41.50 42.50 06-Jan-14 44.99 45.00 06-Feb-14 40.36 42.00 23-Jul-14 47.02 53.00 O 24-Jul-14 49.46 56.00 08-Jan-15 50.04 63.00 12-Feb-15 58.06 65.00 23-Apr-15 69.07 75.00 08-Jan-16 69.41 85.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price DAST.PA

1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 1640

50

60

70

80

90

N EU T RA LO U T PERFO RM

3-Year Price and Rating History for International Business Machines Corp. (IBM.N)

IBM.N Closing Price Target Price Date (US$) (US$) Rating 18-Jul-13 197.99 200.00 N 06-Aug-13 190.99 175.00 U 17-Oct-13 174.83 160.00 21-Oct-14 163.23 125.00 20-Jan-16 121.86 110.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price IBM.N

1- Jul- 13 1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 16110

130

150

170

190

210

N EU T RA LU N D ERPERFO RM

3-Year Price and Rating History for Microsoft Corporation (MSFT.OQ)

MSFT.OQ Closing Price Target Price Date (US$) (US$) Rating 19-Jul-13 31.40 38.00 O 25-Oct-13 35.73 40.00 24-Jan-14 36.81 42.50 25-Apr-14 39.91 47.50 23-Jul-14 44.87 50.00 24-Oct-14 46.13 55.00 23-Oct-15 52.87 60.00 29-Jan-16 55.09 62.50 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price MSFT.OQ


40

50

60

70

O U T PERFO RM


3-Year Price and Rating History for Oracle Corporation (ORCL.N)

ORCL.N Closing Price Target Price Date (US$) (US$) Rating 18-Sep-13 33.87 40.00 O 17-Apr-14 40.08 45.00 17-Dec-14 41.16 47.50 17-Mar-15 42.87 50.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price ORCL.N

1- Jan- 14 1- Jul- 14 1- Jan- 15 1- Jul- 15 1- Jan- 16 1- Jul- 1630

35

40

45

50

O U T PERFO RM

3-Year Price and Rating History for SAP (SAPG.F)

SAPG.F Closing Price Target Price Date (€) (€) Rating 18-Jul-13 56.51 70.00 O 21-Jan-14 59.86 67.50 22-Apr-15 69.38 85.00 * Asterisk signifies initiation or assumption of coverage.

Target Price Closing Price SAPG.F


60

70

80

90

O U T PERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months.Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not overlap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cover multiple sectors.


Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)Outperform/Buy* 56% (39% banking clients)Neutral/Hold* 34% (18% banking clients)Underperform/Sell* 10% (40% banking clients)Restricted 0%*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Target Price and RatingValuation Methodology and Risks: (12 months) for SAP (SAPG.F)

Method: Our Eu90.00 target price represents a 22.1x multiple on our NTM EPS estimate of Eu4.07, which we view as appropriate given our expectations for SAP's future growth. The upside implied by our target price supports our Outperform rating.

Risk: The risks to our target price of Eu90.00 and Outperform rating on SAP are 1) Share loss to competitors such as Oracle, 2) lower-than-expected adoption of the Enterprise Support service contracts due to higher attrition rates 3) slower adoption of HANA than expected, and 4) acquisition integration risks with the newly acquired cloud businesses.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names The subject company (SAPG.F, DAST.PA, MSFT.OQ, IBM.N, ORCL.N) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.Credit Suisse provided investment banking services to the subject company (MSFT.OQ, IBM.N, ORCL.N) within the past 12 months.Credit Suisse provided non-investment banking services to the subject company (IBM.N) within the past 12 monthsCredit Suisse has received investment banking related compensation from the subject company (MSFT.OQ, IBM.N, ORCL.N) within the past 12 monthsCredit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SAPG.F, DAST.PA, MSFT.OQ, IBM.N, ORCL.N) within the next 3 months.Credit Suisse has received compensation for products and services other than investment banking services from the subject company (IBM.N) within the past 12 monthsAs of the date of this report, Credit Suisse makes a market in the following subject companies (MSFT.OQ, IBM.N, ORCL.N).As of the date of this report, an analyst involved in the preparation of this report has the following material conflict of interest with the subject company (ORCL.N). As of the date of this report, an analyst involved in the preparation of this report, Sitikantha Panigrahi, has following material conflicts of interest with the subject company. The analyst or a member of the analyst's household has a long position in call options of Oracle Corporation (ORCL.N).

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit https://www.credit-suisse.com/sites/disclaimers-ib/en/canada-research-policy.html.The following disclosed European company/ies have estimates that comply with IFRS: (SAPG.F, DAST.PA).


Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (IBM.N, ORCL.N) within the past 3 years.As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.Principal is not guaranteed in the case of equities because equity prices are variable.Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.Credit Suisse International......................................................................................................................................................Charles Brennan CFA

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.


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SAP AG (SAPG.F)

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