Latest / Warren's Watchlist - english / SAP - Update 08/20/2026 - ISIN DE0007164600

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SAP - Update 08/20/2026 - ISIN DE0007164600 · Warren's Watchlist - english

• 0:07
  Speaker 0: There are headlines that're simply too good to be true.
• 0:12
  Speaker 0: Profit doubled is one of them, the number even correct and yet it only tells half.
• 0:37
  Speaker 1: That sounds like a picture book year for shareholders.
• 0:40
  Speaker 1: And on top of that, the stock has just exploded!
• 1:01
  Speaker 1: Which means this gain equals as reported in Wirtschaftswoche.
• 1:28
  Speaker 1: For those hearing us for the first time, I'm talking to Warren Wise an AI technology that analyzes like a value investor.
• 1:36
  Speaker 0: Exactly!
• 1:37
  Speaker 0: I'm a synthetic stakeholder.
• 1:39
  Speaker 0: My thinking and my voice are
• 1:41
  Speaker 0: AI.".
• 1:42
  Speaker 0: Today's basis, my report on SAPs' twenty-twenty five annual report published on February twenty sixth, twenty twenty six assessed by the methodology of Graham Buffett & Munger And wherever necessary i also looked into the annual reports of previous years.
• 2:03
  Speaker 1: SAP sits in almost every German portfolio and many ETFs.
• 2:07
  Speaker 1: When the headlines promise a doubling but our model sees warning lights blinking, then I want to know what's behind it?
• 2:13
  Speaker 1: Before we start... What is the score concretely?
• 2:16
  Speaker 0: Four out of
• 2:17
  Speaker 1: five.
• 2:18
  Speaker 1: And Is that good or
• 2:19
  Speaker 1: bad?!
• 2:20
  Speaker 1: I'd have gotten that wrong myself.
• 2:22
  Speaker 0: Good!
• 2:22
  Speaker 0: Four is our green zone Investable But under observation.
• 2:26
  Speaker 0: In three of eight categories We even award The full mark.
• 2:30
  Speaker 1: In which ones?
• 2:31
  Speaker 0: Earning power growth quality and financial resilience.
• 2:35
  Speaker 0: Their SAP isn't just good, it's outstanding.
• 2:39
  Speaker 0: not a single category falls below of
• 2:41
  Speaker 0: four.".
• 2:42
  Speaker 1: So where is the problem?
• 2:43
  Speaker 0: The five in the overall verdict goes to whoever leaves no open questions.
• 2:47
  Speaker 0: SAP leaves three.
• 2:49
  Speaker 0: those are what we're talking about today.
• 2:51
  Speaker 1: Understood then let's start with what's already very good...
• 2:54
  Speaker 0: And that's a lot!
• 3:02
  Speaker 0: No knockout criteria, no liquidity worries.
• 3:04
  Speaker 0: Nothing!
• 3:05
  Speaker 0: We're talking about a machine that prints money but one with blind spots.
• 3:09
  Speaker 0: But first the engine The business model And I'll explain it to you without a single piece of jargon.
• 3:15
  Speaker 1: Okay SAP makes software for companies.
• 3:17
  Speaker 1: That much?
• 3:18
  Speaker 1: i do know.
• 3:19
  Speaker 0: True It's just this very word is misleading.
• 3:23
  Speaker 0: Software sounds like something you install
• 3:25
  Speaker 1: and can uninstall again...
• 3:27
  Speaker 0: ...and thats exactly what u cant do here.
• 3:29
  Speaker 0: Picture SAP instead as the plumbing system of a giant skyscraper.
• 3:34
  Speaker 1: Oh, nice image!
• 3:35
  Speaker 0: Through those pipes flow finance supply chains HR purchasing and SAP doesn't just deliver the water.
• 3:43
  Speaker 0: SAP is built firmly into the walls
• 3:45
  Speaker 1: The famous moat.
• 3:47
  Speaker 0: Exactly.
• 3:48
  Speaker 0: you can decide on a Friday evening to switch your system.
• 3:51
  Speaker 0: It would be like ripping every pipe out of the walls while the water is still running.
• 3:55
  Speaker 0: Remember this image.
• 3:56
  Speaker 0: we'll need it again later.
• 3:58
  Speaker 1: And this bet is paying off right now, isn't it Warren?
• 4:02
  Speaker 0: Yes Corey.
• 4:03
  Speaker 0: Because the customers can't run away.
• 4:05
  Speaker 0: It used to be a product license sold money collected once done.
• 4:10
  Speaker 0: today The world is called the cloud rent.
• 4:13
  Speaker 0: instead of buy every month again and Again
• 4:16
  Speaker 1: A long-term subscription basically like a gym membership
• 4:20
  Speaker 0: a subscription and you see it in one number that brings tears Of joy to any CFO quiz.
• 4:26
  Speaker 0: What percentage of its revenue does SAP already know on January?
• 4:29
  Speaker 0: first?
• 4:30
  Speaker 0: Secure, planable contractual.
• 4:32
  Speaker 1: Hmm... half sixty percent?
• 4:34
  Speaker 0: Eighty-six.
• 4:35
  Speaker 1: Eighty
• 4:36
  Speaker 1: six?!
• 4:36
  Speaker 1: That's enormous!
• 4:37
  Speaker 1: Merely nine tenths of the income locked in before year has even started?
• 4:41
  Speaker 0: Long term subscription and maintenance contracts that is what I call predictable revenue.
• 4:47
  Speaker 0: And shift into cloud is real.
• 4:49
  Speaker 0: The Cloud Suite grows by twenty eight per cent to over eighteen billion.
• 4:54
  Speaker 1: Wait At the same time, the old licenses crash by twenty-nine percent.
• 4:58
  Speaker 1: In any other industry that would trigger panic wouldn't it?
• 5:01
  Speaker 1: It
• 5:01
  Speaker 0: would.
• 5:02
  Speaker 0: here its deliberate cannibalism SAP is pushing its customers out of the old one off licences and into the subscription model
• 5:09
  Speaker 1: And it pays off gross margin.
• 5:10
  Speaker 1: seventy two point nine percent end up every euro operating profit.
• 5:15
  Speaker 1: almost eighty four cents arrive as real cash flow.
• 5:19
  Speaker 0: with that we're at a single most important point.
• 5:22
  Speaker 0: Is a profit just an accounting entry or does it land as real money in the account?
• 5:27
  Speaker 0: At SAP, its real-money.
• 5:29
  Speaker 0: Free cash flow is eight point two billion up ninety five percent plus three point three billion net cash rating A plus It barely gets better.
• 5:39
  Speaker 1: Okay um then there's one thing I don't get Money printing machine operating profit of one hundred and six percent.
• 5:47
  Speaker 1: Where on earth is the catch?
• 5:48
  Speaker 0: This is exactly where the analyst marketing ends and the substance check begins.
• 5:53
  Speaker 0: Those one hundred six percent on EBIT that's earnings before interest in taxes, The number everyone looks at are misleading.
• 6:01
  Speaker 0: And the first of our two mechanisms Is responsible!
• 6:04
  Speaker 1: ...and THAT ONE IS CALLED...
• 6:06
  Speaker 0: The basement effect.
• 6:08
  Speaker 0: In twenty-twenty four SAP cleaned house massively.
• 6:11
  Speaker 0: three point one billion euros in restructuring costs, severance re-organizations the whole program.
• 6:18
  Speaker 0: That pushed the prior year profit down into the basement.
• 6:21
  Speaker 1: and when you start from the basement The ground floor looks like a moon landing
• 6:26
  Speaker 0: Exactly!
• 6:27
  Speaker 0: And now pay attention this is important...the doubling is real..The reported operating profit did infact rise From four point six to nine point six billion.
• 6:37
  Speaker 0: that's not made up.
• 6:38
  Speaker 1: So where's the problem?
• 6:40
  Speaker 0: It's just not what people take it for.
• 6:42
  Speaker 0: Strip out the noise and look at real improvement in ongoing business.
• 6:46
  Speaker 0: What do you think is left?
• 6:48
  Speaker 0: Four point four percentage points of better margin
• 6:50
  Speaker 1: From doubled to four-point-four points, that's sobering.
• 6:54
  Speaker 0: Though...to be fair, four point four points a single year is excellent.
• 6:59
  Speaker 0: It proves cloud model scales.
• 7:01
  Speaker 0: But doubling measures half how bad prior years was Not good this one
• 7:07
  Speaker 1: And that was Mechanism One.
• 7:08
  Speaker 0: That was Mechanism One.
• 7:10
  Speaker 0: Remember it, the second comes at end.
• 7:13
  Speaker 0: and its more uncomfortable one because doesn't just concern SAP It concerns your entire portfolio statement.
• 7:20
  Speaker 0: And now to the biggest claim SAP makes about itself Not About The Past Year... About Next Ten.
• 7:27
  Speaker 1: Oh PR's favorite subject!
• 7:33
  Speaker 1: Quick word on our own behalf since fits right here.
• 7:36
  Speaker 1: Exactly this kind of uncompromising deep analysis is behind every Warren Wise report.
• 7:43
  Speaker 1: If you sit on a board or supervisory board, Or run investor relations and want an even more detailed deep dive for your own company, warren-wise.com.
• 7:54
  Speaker 1: So back to SAP
• 8:03
  Speaker 0: SAP's AI Assistant that carries out tasks in the system on command, plus thirty new jewel agents.
• 8:10
  Speaker 0: Sovereign AI for regulated industries.
• 8:12
  Speaker 0: Believe The Story and SAP is rebuilding the brain of world economy right
• 8:17
  Speaker 1: now.".
• 8:18
  Speaker 1: And this exactly where the biggest gap between story & numbers opens up to me because AI IS EXPENSIVE.
• 8:25
  Speaker 1: Insanely expensive!
• 8:27
  Speaker 1: If AI really is priority one what should happen to research spending?
• 8:31
  Speaker 0: It should rise dramatically, and now it gets interesting.
• 8:34
  Speaker 0: The research ratio has fallen from nineteen point one to eighteen points.
• 8:38
  Speaker 0: oh percent of revenue.
• 8:40
  Speaker 1: Wait Fallen while they're telling the big AI story everywhere?
• 8:44
  Speaker 0: And here I have to be precise because this often gets reported wrong... ...the research budget didn't shrink!
• 8:50
  Speaker 0: It grew From six-point five two six point six billion euros Just by one point eight percent While Revenue rose seven point seven percent.
• 8:58
  Speaker 1: So it grew but slower than the company.
• 9:01
  Speaker 0: Exactly, and if percentages feel too abstract for this technology that supposedly changes everything SAP increased its research headcount by three hundred seventy-five people worldwide.
• 9:13
  Speaker 1: Three seventy five an increase of one percent.
• 9:16
  Speaker 0: And now comes the point where I didn't stop.
• 9:18
  Speaker 0: at a single year SAP actually publishes a chart on this.
• 9:21
  Speaker 0: The headline our investments in innovation
• 9:25
  Speaker 1: Sounds like a success chart.
• 9:27
  Speaker 0: It is two At first glance five bars, and each is higher than the one before.
• 9:33
  Speaker 0: The research budget rises every year.
• 9:35
  Speaker 0: The line above it says in effect look our commitment shows in the
• 9:40
  Speaker 0: spending.".
• 9:40
  Speaker 1: And at second glance?
• 9:42
  Speaker 0: In that same chart there's a line.
• 9:44
  Speaker 0: It shows how strongly the budget grew each time... ...and That Line Is Falling.
• 9:48
  Speaker 1: By How Much?
• 9:49
  Speaker 0: In twenty-twenty One Research Grew by Eighteen Percent.
• 9:53
  Speaker 0: Twenty Twenty Two by Fifteen Twenty Twenty Three Four Twenty Twenty Four three, and in twenty-twenty five it's one point eight.
• 10:02
  Speaker 1: Eighteen fifteen four Three Barely two
• 10:06
  Speaker 0: Four years of slowdown in a row In a chart that is meant to prove commitment.
• 10:11
  Speaker 1: Hold on The big break between twenty-two and twenty-three From fifteen To four.
• 10:18
  Speaker 0: And what happened between Twenty-twenty Two and Twenty-Twenty Three?
• 10:21
  Speaker 1: The whole world discovered generative AI
• 10:24
  Speaker 0: Exactly there.
• 10:25
  Speaker 0: the growth doesn't have It quarters.
• 10:28
  Speaker 0: And in the annual report for that very year, is this statement they want to become number one business AI word-for-word?
• 10:36
  Speaker 1: The ambition and break of the same document.
• 10:39
  Speaker 0: To be fair...and it matters!
• 10:41
  Speaker 0: The budget keeps rising every year.
• 10:44
  Speaker 0: The chart's headline isn't a lie but the trend SAP presents as proofs commitment Is a four years slowdown.
• 10:51
  Speaker 0: I'm not claiming anything here.
• 10:53
  Speaker 0: i am reading out whats on their own chart.
• 10:55
  Speaker 1: It's like a Formula One team announcing, aerodynamics is everything from now on and then letting the wind tunnel budget grow a little slower four years running.
• 11:05
  Speaker 0: Pretty much.
• 11:06
  Speaker 1: But maybe they suddenly program twice as fast thanks to AI.
• 11:10
  Speaker 0: That's actually the second possible explanation And it would be The Holy Grail.
• 11:23
  Speaker 0: They're simply investing too little to hold the lead.
• 11:26
  Speaker 1: And which is true, Warren?
• 11:28
  Speaker 0: We don't know!
• 11:29
  Speaker 0: The annual report leaves us in the dark.
• 11:31
  Speaker 0: No hard monetization metrics for the AI agents.
• 11:34
  Speaker 0: How many customers pay a premium?
• 11:36
  Speaker 0: What share of revenue as genuine AI software... no figures
• 11:40
  Speaker 1: For the company's most important story.
• 11:43
  Speaker 1: That's pretty thin
• 11:44
  Speaker 0: Very thin.
• 11:45
  Speaker 0: Let's hold onto that.
• 11:46
  Speaker 0: The narrative is loud The evidence is missing.
• 11:49
  Speaker 0: It's not enough for a points deduction in our model yet.
• 11:52
  Speaker 0: it is strategic tension, Not a false statement But its the question I'd ask the board first.
• 11:58
  Speaker 0: Next area of tension The customers That cloud transition working.
• 12:03
  Speaker 0: You can read off single number Remember the eighty six percent?
• 12:06
  Speaker 1: The planable revenue What SAP already knows on January.
• 12:10
  Speaker 1: First
• 12:11
  Speaker 0: that was snapshot.
• 12:12
  Speaker 0: one year Now we look at reserve years after SAP has signed contracts for which not a single invoice has yet been written.
• 12:21
  Speaker 0: Service, Not Delivered Money, Not Received Revenue, Not Booked But Signed is Signed.
• 12:28
  Speaker 1: So ordered future?
• 12:30
  Speaker 0: Exactly!
• 12:30
  Speaker 0: The technical term is Total Cloud Backlog.
• 12:34
  Speaker 0: And now guess One year's revenue is thirty six point eight billion.
• 12:39
  Speaker 0: How big is this reserve?
• 12:41
  Speaker 1: Um fifty billion?
• 12:42
  Speaker 0: Seventy seven two
• 12:44
  Speaker 1: So more than two years of revenue already locked in?
• 12:47
  Speaker 0: Though important, so no wrong picture forms.
• 12:50
  Speaker 0: It's spread over several years – it is not revenue that comes on top next year…it's the reservoir that coming-years draw from
• 12:58
  Speaker 1: A dream...on paper.
• 13:00
  Speaker 0: And thats exactly where The Catch Is!
• 13:02
  Speaker 0: A Reservoir is only worth as much as gets renewed at end of subscription.
• 13:06
  Speaker 1: and now comes a number that gives me pause As an investor..the net promoter score a widely used metric for how likely it is that customers will recommend.
• 13:41
  Speaker 0: Industry figures circulate for such values, but they're barely comparable.
• 13:45
  Speaker 0: Different customer base different survey different question.
• 13:48
  Speaker 0: So I compare against the only benchmark that truly binds
• 13:52
  Speaker 1: The one CPSET for itself.
• 13:54
  Speaker 0: Twelve to sixteen published before the year began.
• 13:57
  Speaker 0: anything else would be guessing.
• 13:59
  Speaker 1: and still i want To Be Fair.
• 14:01
  Speaker 1: a nine means there are Still more advocates than critics
• 14:05
  Speaker 0: right?
• 14:05
  Speaker 0: And That's an important difference.
• 14:07
  Speaker 0: these aren't angry customers.
• 14:09
  Speaker 0: But now the look back is worth it, because the single number alone tells you nothing.
• 14:13
  Speaker 0: I pulled this series from older annual reports.
• 14:16
  Speaker 0: In twenty-twenty two The value stood at seven.
• 14:19
  Speaker 0: in twenty-Twenty three At nine SAP explicitly reported that as a success.
• 14:24
  Speaker 0: Back then saying customers were increasingly satisfied.
• 14:29
  Speaker 0: In twenty-twenty four it jumped to twelve, three points up on target celebrated again and now comes the part that counts.
• 14:37
  Speaker 0: The reason SAP itself gave for it.
• 14:40
  Speaker 1: And That Reason was?
• 14:42
  Speaker 0: Growing satisfaction with cloud solutions Word For Word!
• 14:45
  Speaker 0: The very transformation we've been talking about in this whole episode is... In Twenty-Twenty Four… The Reason For The Rise
• 14:54
  Speaker 1: Back At Nine.
• 14:55
  Speaker 0: Back at nine….
• 14:56
  Speaker 0: The entire gain from prior year given back in a single year, back to the twenty-twenty three level.
• 15:03
  Speaker 1: While The Cloud migration was in full swing.
• 15:06
  Speaker 0: That's the point!
• 15:07
  Speaker 0: The explanation from Back Then is the diagnosis of today.
• 15:11
  Speaker 1: And again...to be fair In twenty twenty four…the target range was nine to thirteen
• 15:16
  Speaker 0: Right?
• 15:17
  Speaker 0: With a nine SAP would have been on target.
• 15:20
  Speaker 0: Back then They raised the bar themselves after their success To twelve to sixteen.
• 15:26
  Speaker 0: Part of this miss is self-imposed ambition.
• 15:29
  Speaker 0: You have to acknowledge that, but the direction remains minus three points.
• 15:34
  Speaker 0: in The year the transformation was hardest.
• 15:37
  Speaker 1: and how bad?
• 15:37
  Speaker 1: Is That?
• 15:38
  Speaker 0: now comes the real finding.
• 15:40
  Speaker 0: last Year SAP hit or beat every single financial target revenue profit cash flow cloud growth all on plan Or above
• 15:49
  Speaker 1: everything
• 15:50
  Speaker 0: Everything.
• 15:50
  Speaker 0: they missed exactly one single metric And it's the one.
• 15:53
  Speaker 0: that's about the customers.
• 15:55
  Speaker 1: That's a picture.
• 16:16
  Speaker 1: Why are the customers reacting so cautiously?
• 16:19
  Speaker 0: Because SAP is pulling them out of their tailored systems and into.
• 16:25
  Speaker 0: Suddenly the companies have to adapt their processes to software, not other way around.
• 16:30
  Speaker 0: That's uncomfortable!
• 16:31
  Speaker 1: And of all things a subscription company that lives off renewals can least afford that…
• 16:37
  Speaker 0: and now you remember the pipes in the walls...that is why this dissatisfaction.
• 16:42
  Speaker 0: nowhere in revenue.
• 16:43
  Speaker 0: The customers simply cannot leave quickly – it only gets presented four years later when the contract expires.
• 16:53
  Speaker 0: Seventy-seven billion is great, but it's an assumption about the behavior of customers whose satisfaction just dropped three points.
• 17:01
  Speaker 0: And management itself is signaling a slight slowdown.
• 17:04
  Speaker 0: in order growth for twenty-twenty
• 17:06
  Speaker 0: six.".
• 17:06
  Speaker 1: Then finally the question that has been nagging me the whole time — if SAP produces so much money and part of it apparently isn't going into research where does it flow?
• 17:16
  Speaker 0: Two ways, and you already know the first.
• 17:19
  Speaker 0: Ten billion euros in share buybacks for twenty-twenty six and twenty-Twenty seven.
• 17:24
  Speaker 1: But you can't save your way to top of AI market with buybacks Can You?
• 17:28
  Speaker 0: No Buybacks reward today's shareholders.
• 17:32
  Speaker 0: They don't secure a future.
• 17:34
  Speaker 1: And The Second Way
• 17:35
  Speaker 0: A shopping spree Most recently smart recruiters For seven hundred fifty three million times.
• 17:41
  Speaker 0: Before that Walk Me before that.
• 17:42
  Speaker 0: Linux.
• 17:43
  Speaker 0: Four acquisitions In Twenty four months.
• 17:46
  Speaker 1: And how much of the growth now comes from acquisitions?
• 17:49
  Speaker 1: and, How Much From Its Own Strength?
• 17:51
  Speaker 0: That's The Right Question.
• 18:16
  Speaker 0: Since closing in September, minus twenty-one million euros in earnings contribution.
• 18:21
  Speaker 1: Minus at a seven hundred and fifty three million purchase price?
• 18:24
  Speaker 0: That's normal for fresh acquisitions.
• 18:27
  Speaker 0: integration costs write downs I'm not holding the number against them.
• 18:31
  Speaker 0: i'm only pointing out that we have not a single indication of when it supposed to turn into a plus.
• 18:36
  Speaker 1: And there was also something about a red cluster
• 18:39
  Speaker 0: Exactly.
• 18:40
  Speaker 0: In stage three of our review, the search for systematic warning patterns.
• 18:44
  Speaker 0: a cluster called Goodwill lights up.
• 18:47
  Speaker 1: Explain the mechanism to us quick and painless.
• 18:50
  Speaker 0: SAPI buys a company for let's say a billion but it only owns buildings servers and patents worth two hundred million.
• 18:58
  Speaker 0: what happens to the remaining eight-hundred?
• 19:00
  Speaker 1: They land as good will on The Balance Sheet.
• 19:03
  Speaker 1: so at heart paid for hope.
• 19:06
  Speaker 1: future synergies
• 19:07
  Speaker 0: with smart recruiters.
• 19:08
  Speaker 0: that was five hundred twenty-three of seven hundred and fifty three million.
• 19:12
  Speaker 0: And in total this Goodwill makes up sixty four point four percent of SAP's entire equity, twenty nine billion
• 19:20
  Speaker 0: euros.".
• 19:20
  Speaker 0: Twenty
• 19:21
  Speaker 1: nine billion?
• 19:22
  Speaker 1: Of
• 19:22
  Speaker 1: hope?!
• 19:23
  Speaker 1: Okay but hold on...SAP is a software company.
• 19:26
  Speaker 1: there's barely any machinery isn't high good will.
• 19:29
  Speaker 1: normal they're.
• 19:30
  Speaker 0: it is!
• 19:31
  Speaker 0: There has been no write down so far.
• 19:34
  Speaker 0: That not a faux pas.
• 19:35
  Speaker 0: The faux pas from the view of a strict value investor is what's missing afterward.
• 19:40
  Speaker 1: Namely?
• 19:41
  Speaker 0: The proof, zero quantified synergy targets.
• 19:45
  Speaker 0: not for smart recruiters.
• 19:46
  Speaker 0: or walk me and Linux.
• 19:49
  Speaker 0: just PR sentences about strategic fit.
• 19:52
  Speaker 1: And now comes point that really made pause while reading because they clearly can quantify.
• 19:58
  Speaker 0: Oh They Can.
• 19:59
  Speaker 1: Look at risk reporting.
• 20:00
  Speaker 1: Thirteen of thirteen top risks are backed with euro ranges every single one Plus, concrete countermeasures.
• 20:07
  Speaker 1: Three of four sensitivity analyses A recognized risk management system An unqualified audit opinion.
• 20:14
  Speaker 0: That's exemplary.
• 20:15
  Speaker 0: The report explicitly rates it as consistent and strong.
• 20:19
  Speaker 1: So summed up with a wink On one side they document every internal risk down to the euro But when they spend three digit millions on a company They don't tell us what synergies its supposed bring.
• 20:30
  Speaker 0: You've hit exactly.
• 20:32
  Speaker 0: And once you see this pattern... ...you'll see everywhere in that report On the opportunities, four big themes named AI monetization cloud migration partner ecosystem sustainability.
• 20:43
  Speaker 0: not a single one put in concrete figures.
• 20:46
  Speaker 1: While every risk is in euros.
• 20:48
  Speaker 0: Market share no figure.
• 20:50
  Speaker 0: market size no figure.
• 20:51
  Speaker 0: organic growth No split.
• 20:53
  Speaker 0: AI monetisation no metric.
• 20:56
  Speaker 1: And what's the common denominator?
• 20:58
  Speaker 0: Precise where it's mandatory.
• 21:00
  Speaker 0: vague where its voluntary.
• 21:01
  Speaker 0: It's not an accusation.
• 21:03
  Speaker 0: No law demands synergy figures.
• 21:05
  Speaker 0: SAP is doing nothing forbidden, but a company that claims to be world-class in transparency would — where it's voluntary—be just as precise as where it must
• 21:15
  Speaker 0: be.".
• 21:15
  Speaker 0: That's the difference between a four and five.
• 21:18
  Speaker 1: And even were they are precise?
• 21:20
  Speaker 1: Does it hold up?
• 21:21
  Speaker 0: Good question!
• 21:22
  Speaker 0: Take the legal dispute with TerraData.
• 21:24
  Speaker 0: Three hundred eighty seven million euros SAP had set aside for it.
• 21:28
  Speaker 1: Nearly four hundred
• 21:30
  Speaker 1: million?!
• 21:30
  Speaker 1: How does something like this appear?
• 21:33
  Speaker 0: To be fair, the dispute has run since twenty-eighteen and is properly documented in The Notes.
• 21:38
  Speaker 0: But I looked at what stood in the prior year report before the provision came.
• 21:43
  Speaker 1: And?
• 21:44
  Speaker 0: TerraData doesn't appear it.
• 21:46
  Speaker 0: The name does not fall into entire risk reporting a single time.
• 21:50
  Speaker 0: What's there is category legal intellectual property range.
• 21:55
  Speaker 0: one hundred to five hundred million probability unlikely.
• 21:59
  Speaker 0: And then
• 21:59
  Speaker 1: three hundred eighty seven million came.
• 22:01
  Speaker 0: And now the part I have to acknowledge.
• 22:04
  Speaker 0: The size was right, three hundred eighty seven sits in the middle of the range.
• 22:08
  Speaker 0: SAP correctly gauged how heavy the block is
• 22:11
  Speaker 1: But not that it would fall?
• 22:12
  Speaker 1: The
• 22:13
  Speaker 0: probability was off.
• 22:14
  Speaker 0: and for me as an investor above all one thing remains... ...the overview tells Me How Big The Draw Is Not What's In It!
• 22:22
  Speaker 0: I see a Range Between One Hundred and Five Hundred Million but not That.
• 22:26
  Speaker 0: Inside It Sits A Case That'S Been Running For Seven Years.
• 22:29
  Speaker 1: And which drawers are there still?
• 22:32
  Speaker 0: Exactly that question.
• 22:33
  Speaker 0: Remember it, we're getting to a much bigger one.
• 22:36
  Speaker 0: shortly.
• 22:36
  Speaker 0: Before that the second legacy issue An ongoing EU antitrust investigation into on-premise support Which SAP is contesting.
• 22:45
  Speaker 0: Properly disclosed unresolved.
• 22:48
  Speaker 0: As long as thats'the case There's no five on governance.
• 22:52
  Speaker 1: So... The bigger drawer?
• 22:54
  Speaker 0: SAP only splits its business Into two divisions.
• 22:59
  Speaker 0: Before that, everything was one single block.
• 23:02
  Speaker 0: And even today... One division holds nearly ninety percent of revenue.
• 23:06
  Speaker 0: Eighty-nine
• 23:07
  Speaker 1: point three to be exact!
• 23:09
  Speaker 1: But THAT'S NOT a customer segment right?
• 23:12
  Speaker 1: So not ONE CUSTOMER makes up ninety per
• 23:15
  Speaker 1: cent?!
• 23:16
  Speaker 0: No.. That would be a misunderstanding and a dramatic one.
• 23:19
  Speaker 0: It's a business division Cloud software & support together SAPs heart with the six figure customer base
• 23:27
  Speaker 1: In The Second Division.
• 23:28
  Speaker 0: It's called core services.
• 23:30
  Speaker 0: A good ten percent of revenue, it grew by zero point seven per cent.
• 23:35
  Speaker 1: So practically not at all.
• 23:36
  Speaker 0: Now the part that really counts The margin... ...the big division turns every euro of revenue into forty cents of operating profit.
• 23:44
  Speaker 0: The small one?
• 23:45
  Speaker 0: Eleven
• 23:46
  Speaker 1: Forty against eleven
• 23:47
  Speaker 0: And from that follows the number that matters.
• 23:50
  Speaker 0: Nearly ninety-seven percent Of the entire Operating Segment.
• 23:53
  Speaker 0: Profit Comes From This One Block
• 23:57
  Speaker 1: decoration
• 23:58
  Speaker 0: and appendage.
• 23:59
  Speaker 0: And that's the point when you value a company, You want to know what happens if The main engine sputters.
• 24:06
  Speaker 0: at most companies of this size?
• 24:07
  Speaker 0: There is second division That pushes back
• 24:09
  Speaker 1: in it SAP.
• 24:11
  Speaker 0: there Is nothing that pushes Back.
• 24:13
  Speaker 0: the small Division earns eleven cents per euro and isn't growing.
• 24:16
  Speaker 0: It can't catch anything!
• 24:18
  Speaker 0: Thats no acute danger...the big division is running superbly..it just means theres No backup
• 24:25
  Speaker 1: And that's why business model and competition only get a four.
• 24:36
  Speaker 1: So, you'd announced the second mechanism
• 24:45
  Speaker 0: The
• 24:51
  Speaker 1: permissible accounting trick.
• 24:52
  Speaker 1: Dear investors Crazy year, one-off costs lawyers restructuring.
• 24:58
  Speaker 1: We strip that out.
• 24:59
  Speaker 1: so you see the true earnings power
• 25:01
  Speaker 0: and most of the time That's legitimate.
• 25:03
  Speaker 0: but now The question thats almost never asked when did You last See a company strip Out something that makes it look better?
• 25:10
  Speaker 1: Um Never
• 25:11
  Speaker 0: Almost never And I say almost deliberately.
• 25:15
  Speaker 0: Exceptions exist But they're So rare that none Just came to your mind.
• 25:20
  Speaker 0: Thats the real finding.
• 25:21
  Speaker 1: True i really can't think Of One.
• 25:24
  Speaker 0: Adjusting almost always goes in one direction, burdens out.
• 25:28
  Speaker 0: A one-off gain from a sale stays in.
• 25:30
  Speaker 0: of course.
• 25:31
  Speaker 0: that's the asymmetry not between two years but structurally every year at almost every company in the world.
• 25:38
  Speaker 1: and at SAP?
• 25:39
  Speaker 0: The same three adjusted items in twenty twenty five acquisitions restructuring teradata.
• 25:46
  Speaker 0: all Three burdens All three stripped out But they do it sparingly.
• 25:50
  Speaker 0: The share of adjustments fell from almost seventy-five percent the year before to a good eight.
• 25:55
  Speaker 1: So where's the problem?
• 25:56
  Speaker 0: That the adjusted number is still systematically the friendlier one At SAP, twenty-eight point three percent margin adjusted Twenty six point one percent under the official rules.
• 26:07
  Speaker 0: and the headline always takes the bigger one.
• 26:09
  Speaker 1: And what does that mean for me...the next time I read a headline like that
• 26:13
  Speaker 0: Two moves on.
• 26:14
  Speaker 0: the first you look for word Which
• 26:16
  Speaker 1: one?
• 26:16
  Speaker 0: Adjusted or non-afferous.
• 26:19
  Speaker 0: As soon as that appears anywhere, there are two results.
• 26:22
  Speaker 0: The official one and the friendlier one... ...and then you want to know how far apart they are.
• 26:27
  Speaker 1: And where does that stand?
• 26:28
  Speaker 0: Every company has to disclose it In the annual report.
• 26:31
  Speaker 0: There's a reconciliation.
• 26:33
  Speaker 0: Here're the official number.
• 26:34
  Speaker 0: Hear'e the items that were stripped out.
• 26:36
  Speaker 0: Hear'er the adjusted result At SAP.
• 26:39
  Speaker 0: It is exactly three lines.
• 26:42
  Speaker 1: How do I know whether its too much
• 26:44
  Speaker 0: in our model?
• 26:44
  Speaker 0: theres simple threshold.
• 26:46
  Speaker 0: If the adjustments make up less than ten percent of the result, it's unremarkable.
• 26:51
  Speaker 0: SAP is at a good eight.
• 26:53
  Speaker 0: The year before It was seventy-five
• 26:56
  Speaker 1: Seventy five per cent?
• 26:58
  Speaker 0: There...the reported results consisted three quarters Of things that were stripped out.
• 27:02
  Speaker 0: When you see A value like That ...The adjusted number Is no longer information But acclaim.
• 27:08
  Speaker 1: Okay!
• 27:08
  Speaker 1: In the second move
• 27:09
  Speaker 0: Don't compare with the prior Year.
• 27:11
  Speaker 0: Compare With the year Before THAT
• 27:13
  Speaker 1: Because the prior year Might have been in the basement
• 27:16
  Speaker 0: Exactly.
• 27:17
  Speaker 0: Every doubling headline lives off its comparison point, take three years instead of two and the basement effect jumps out immediately at SAP.
• 27:25
  Speaker 0: twenty-twenty-three solid twenty-Twenty four in The Basement.
• 27:30
  Speaker 0: Twenty twenty five back up .The line over Three Years is a Solid Upward Move not A Rocket.
• 27:37
  Speaker 1: Two Moves Not Even Two Minutes
• 27:39
  Speaker 0: And a warning to close.
• 27:40
  Speaker 0: adjusted isn't automatically suspicious.
• 27:44
  Speaker 0: SAP is the proof.
• 27:45
  Speaker 0: They calculate cleanly and sparingly.
• 27:48
  Speaker 0: The mistake isn't that they adjust, it's taking an adjusted number for truth without checking what's missing.
• 27:55
  Speaker 1: And if I have no appetite for reconciliation tables at all?
• 27:59
  Speaker 0: Then take cash flow.
• 28:00
  Speaker 0: It doesn't get adjusted.
• 28:02
  Speaker 0: What sits in account at year end sits there or does not?
• 28:06
  Speaker 1: If you were sitting across from board...what would be answer to you?
• 28:10
  Speaker 0: Three questions.
• 28:11
  Speaker 0: First Quantify the worst case scenario of EU antitrust investigation.
• 28:16
  Speaker 0: In Euros, no legal boilerplate.
• 28:19
  Speaker 0: Second put proof on table that acquisitions pay off concrete Euro synergies for the twenty nine billion goodwill mountain.
• 28:27
  Speaker 0: and third explain why customer value is back where it already stood in twenty-twenty three.
• 28:33
  Speaker 0: after two years cloud transformation you yourself cited as reason to rise Okay.
• 28:38
  Speaker 1: And now the question of all questions, what does that mean for me?
• 28:44
  Speaker 1: Sum it up and upfront.
• 28:46
  Speaker 1: for the record this is not an investment recommendation.
• 28:49
  Speaker 1: neither buy nor hold or sell
• 28:52
  Speaker 0: Three things.
• 28:53
  Speaker 0: first The operational turnaround Is no mirage.
• 28:56
  Speaker 0: the cloud rebuild generates massive tangible cash flows.
• 29:00
  Speaker 0: the business model scales proven.
• 29:02
  Speaker 0: That's why three times the full mark.
• 29:04
  Speaker 0: Second, don't believe any tech narrative without checking the receipt.
• 29:09
  Speaker 0: A chart with rising bars and a falling growth line is not a receipt.
• 29:13
  Speaker 0: And third an order backlog is no guarantee.
• 29:16
  Speaker 0: Seventy-seven billion is great.
• 29:18
  Speaker 0: But one target SAP missed was of all things The customer value.
• 29:24
  Speaker 1: So operationally machine runs perfectly.
• 29:27
  Speaker 1: The balance sheet is a vault The cash flow enormous but vague.
• 29:32
  Speaker 1: where disclosure voluntary and no backup if the main division sputters.
• 29:36
  Speaker 0: Score four out of five, green zone under observation.
• 29:39
  Speaker 1: And now in plain terms please Warning lights.
• 29:43
  Speaker 1: Does that mean something is broken somewhere?
• 29:45
  Speaker 0: No!
• 29:46
  Speaker 0: The difference matters.
• 29:47
  Speaker 0: Nothing Is Broken.
• 29:49
  Speaker 0: None Of The Eight Categories Falls Below A Four.
• 29:51
  Speaker 0: Three Are On Top.
• 29:52
  Speaker 0: Mark A warning light with us means here I'm missing an answer.
• 29:57
  Speaker 0: Not Here.
• 29:58
  Speaker 0: It's Burning
• 29:59
  Speaker 1: And Under Observation.
• 30:01
  Speaker 1: That Sounds Like a Regulator.
• 30:03
  Speaker 0: NO It simply means this.
• 30:04
  Speaker 0: four isn't a label that now sticks for three years.
• 30:07
  Speaker 0: There are concrete things that move it in both
• 30:10
  Speaker 1: directions.
• 30:12
  Speaker 1: Let's start with the good one.
• 30:13
  Speaker 0: For The Five, they'd have to answer exactly the three questions I just posed Nothing more.
• 30:18
  Speaker 0: All Three lie entirely in SAPs own
• 30:21
  Speaker 1: hands.
• 30:22
  Speaker 0: That needs no Good Market No Economy Just decision-to-name numbers.
• 30:26
  Speaker 1: And the other direction?
• 30:28
  Speaker 0: There...I'm watching two Things.
• 30:30
  Speaker 0: If the customer value gives way again next year instead of recovering, an open question becomes a trend.
• 30:36
  Speaker 0: And if the order backlog not only grows more slowly but shrinks then the bill comes earlier than
• 30:42
  Speaker 0: expected.".
• 30:43
  Speaker 1: And now the most important thing because I know how a forelike this gets read is that a buy signal?
• 30:49
  Speaker 0: No and that's not a legal disclaimer it's a methodological boundary.
• 30:53
  Speaker 0: we assess the equity story Corey.
• 30:55
  Speaker 0: We don't assess the price.
• 30:57
  Speaker 1: It doesn't appear in your report at all
• 30:59
  Speaker 0: Not a single time.
• 31:01
  Speaker 0: An outstanding company can be a miserable stock if you pay too much for it, and the mediocre one can be worth it If its cheap enough.
• 31:08
  Speaker 0: What do get here is answer to How good this business?
• 31:11
  Speaker 0: And how honestly does it tell of itself?
• 31:13
  Speaker 0: what's allowed?
• 31:14
  Speaker 0: cost Is completely different question and when have to answer yourself.
• 31:19
  Speaker 1: So quality checked price not
• 31:21
  Speaker 0: Exactly Corey A quality machine with few warning
• 31:24
  Speaker 1: lights.
• 31:25
  Speaker 1: To close You've brought One bigger thought
• 31:28
  Speaker 0: One that goes far beyond SAP, think once more of the falling line in the innovation chart.
• 31:33
  Speaker 0: Let's assume for a moment The Friendly Explanation is true.
• 31:36
  Speaker 0: SAP really does use AI to cut its own development costs massively instead of raising them.
• 31:43
  Speaker 1: That would be good news
• 31:44
  Speaker 0: For SAP?
• 31:45
  Speaker 0: Yes.
• 31:46
  Speaker 0: But then ask yourself the same question If software can in future be built with a fraction of the previous effort, what then happens to prices and margins over the next five years?
• 32:00
  Speaker 1: Or do
• 32:03
  Speaker 0: these historic efficiency gains flow exclusively into shareholders' pockets.
• 32:08
  Speaker 0: That's the question behind every single AI announcement in this industry... ...and it still completely open!
• 32:15
  Speaker 0: Until The Next Deep Dive.
• 32:17
  Speaker 0: And if you don't want to miss any analysis, warren-wise.com subscribe to the podcast.
• 32:23
  Speaker 0: have a fine profitable day and always remember be wise when others go crazy.
• 32:29
  Speaker 0: yours Warren Wise.
• 32:45
  Speaker 2: is for information and educational purposes only.
• 32:50
  Speaker 2: It's not investment advice, it isn't a recommendation to buy hold or sell any security.
• 32:56
  Speaker 2: The analysis based on publicly available information may contain errors.
• 33:02
  Speaker 2: Always make your own decisions And when in doubt consult a qualified financial advisor.