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SAP AG (NYSE:SAP)

Citi 2013 Global Technology Conference Call

September 3, 2013 8:15 AM ET

Executives

Werner Brandt – Chief Financial Officer, Human Resources and Labor Relations Director

Analysts

Walter H. Pritchard – Citigroup Global Markets Inc.

Operator

Walter H. Pritchard – Citigroup Global Markets Inc.

Thank you. Thank you, everybody for joining us at the Citi Tech Conference here. I guess I’ll welcome you since there isn’t an official welcome. I’m the software analyst, Walter Pritchard here. We’re going to have most of the – all the keynotes excuse me are in this room here, and then a number of the smaller sessions, the more breakout sessions are up on the – down on the second floor of the hotel.

[Music]

To ask the questions from the audience, we’ll have some microphones going around, and if anybody has a question, just please raise your hand, and they’ll bring a microphone over to you.

So I just wanted to first read Safe Harbor on behalf of SAP upfront. Please note that matters discussed today contain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the Company’s future financial results are discussed more fully in the Company’s most recent filings with the SEC.

So with that, Werner may be you could just talk about – there’s a lot going on in the technology industry right now, there is – I guess one would say a significant transformation going on, and SAP has participated in some of those areas, could you talk about how SAP is navigating the shift in the could, in memory technologies and mobile?

Werner Brandt

Good morning, Walter. Good morning, everybody. I think now it’s (inaudible) if you take them. And if I listen to you talking about SAP navigating with this new trends, I would like to look back into 2010 where we announced our strategy around the three pillars of innovation, which was the cloud, mobile and in-memory technology.

So I wouldn’t argue that we navigated. I think we were setting the trend at that point in time, and since then we execute. And I think our results, double-digit growth over 13 quarters now demonstrates that we executed well.

Now looking into the different pillars, if you look, in-memory technology, I think we have brought into the market, HANA which is the fastest growing product of SAP in our fleet, and we are targeting to see $650 million to $700 million in revenue in 2013.

And HANA is a database that has evolved into a modern technology platform, which actually combines OLTP with OLAP, and I’m bringing both together resulting not only in unbelievable feat of analyzing data, but also providing additional value because under this roof, if you will of the platform, you will find plenty predicted libraries, data services. You will find text analysis, security, everything together, and this platform can handle massive amount of data gigabytes, terabytes, and petabytes.

Looking to the other area, cloud where we started to develop solutions on our own. You all know the story about ByDesign, I do not need to repeat this. SAP also made bold moves to position ourselves as a becoming leader in the cloud with now 30 million subscribers, and we have a decent run rate now, towards the end of the year, we will exceed €1 billion in cloud subscription or total cloud revenue.

And I think if you look through the competitive environment, our new and up sell billing growth is very strong. And if you compare this to our competition, we are like Salesforce, we are better than Oracle, but they have a smaller base, but I’m sure overtime we will take up this broad offering we have and this is around the public cloud line of business solutions with (inaudible) then it’s around – we will talk about this, I’m sure later, the HANA, enterprise cloud, the offering we have there going forward, and finally we have Ariba, and the Ariba network, which is nicely growing for us, and become an important part of this enterprise business network.

Then thirdly the mobile, mobile I think we have come up with a very decent mobile security platform, a secure platform with SAP Afaria following the notion of video on-device; so everybody in the company brings its own device, and this has to be managed somehow, and this mobile platform is able to handle this.

And on top, we have mobile applications, which run for specific industries, which run for specific scenarios, and all of this is now supported by SAP CoE the new interface, easy to use, easy to consume, intuitive, used for 25 markets, co-developed with 250 of our customers on a worldwide basis in the area of sales procurement, then heath services for managers and for employees, and this finds a lot traction in the market really promoting our mobile device.

So put everything together, we of course have not only reached those areas, we have a very stable cause with the analytical application, and if you combine everything, I think that, the thought goes into future for SAP.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. Maybe focusing a bit on the core business and everybody does their math around the core versus the new piece, and I think what we’ve noticed over the last couple of quarters is, you’ve had some declaration in the core, and I see some declines as we calculated in the core business. Can you walk us through some of the factors driving that, and then I think you’ve given a goal for €20 billion in revenue in 2015. Do we have to see the core business return to growth, to just about $20 billion goal that you have out there?

Werner Brandt

That’s one of the things we have to look – if you look to SAP, and what we offer to our customers, we have to look to it from a software and cloud perspective holistically including HANA. Because we offer our customers choice, and we do this by purpose, because we want the customers to choose the respective solution they want, and be ensured that they confirm it over cloud that it gets a seamless calibration between these different solutions to the benefit of user. And at the end of the day, the objective must be that every employee in an organization work with an SAP solution, but he doesn’t need to care whether it’s an authentic solution or a cloud solution that we integrated in the most professional way for the end user.

So first of all, you have to combine both, and then we see a growth clearly also over the last quarters in the first half, it was difficult, we’re in difficult environment, I do not want to just use this at all.

But if you look to the core business with the applications and with analytics, it’s also very clear with the businesses now running on HANA, this is a very compelling offering for our customers, and I’m sure that this will revitalize the core business, because we then will be able as all business processes to run on HANA to embed, for example predictive analytics into the business processes, which is sensible and risk the businesses, and all the application associated with the businesses. Then the user interface will become much more easier, mobile accessibility for every solution we have is planted so from that end, I assume, and I’m very confident that our core business deal comes back.

And of course, let’s not forget by purpose, we are positioning the cloud, clouds – it’s all we have. But its compelling offering with business is running on HANA and by the way we at SAP Direct went live in August with our entire ERP installation as SAP for the entire world had brought this on HANA in a very short period of time with now almost 60 thousand users.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. Can you talk about what when you brought up HANA with the business, we saw some very good demand early on with HANA with business warehouse analytics, can you compare what sort of demand you are seeing with the business suite on HANA and how that maybe similar or different from what you thought early on with BW on HANA.

Werner Brandt

Yeah, I think lets not forget we brought the business piece on HANA a general available inmates along with Sahaj and it take something to position it to take cycle, maybe its shorter, but in general they are the same, as you can see the good traction for the business coming, I have doubt.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. Can you talk about sales cycles and deal sizes and how investors should expect to see that business suites demand on HANA materialize, it takes longer for percentage actions to come because of the mission critical software versus an analytic solution and can you talk about with respect to the appraises to be there versus what you have seen on the traditional HANA business.

Werner Brandt

One I said earlier, I do not anticipate that the sales cycle would be longer, they will be a bit shorter, but its also we have a tremendous value proposition associated with the business and this is the thing I mentioned before. So from that end, I do not see a change and to talk about average deal sizes at this point in time.

Walter H. Pritchard – Citigroup Global Markets Inc.

Okay, got it. And then you mentioned the cloud and cloud-first. Can you talk about what you’re doing in your sales force to drive that cloud-first mentality and how you expect that that will evolve as you go through this fiscal year into next fiscal year?

Werner Brandt

Normally when you do such a transformation, then you start to establish compensation for your sales force. And this might end up in double compensation for a period of time. but at the end of the day, it’s all about education, and the positioning of our solutions to the sales force. We traditionally even have somebody who really is able to explain the cloud solution, and then really offering the customer an end-to-end solution, which covers this business, and not talking about IT and on-premise solution, and I have in cloud solution.

this is not the case, so we need to provide a holistic offering to the customer to meet his needs. And is your main sort of the broader SAP sales force at this point. how far at the speed are they in terms of selling the cloud solutions. I know many times, it’s a different sale, you’re selling a smaller deal upfront with recurring revenue versus very large sort of more of a one-time sale that they’ve traditionally been used to. can you talk about how that’s going?

Werner Brandt

It’s going according to plan. but if you look to 2014, we will have integrated it.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it, okay. And then moving onto mobile, you stopped disclosing that business separately as a different business. It’s been more integrated into the core. Can you talk about the most common scenarios; you’ve seen customers use the mobility technologies in terms of revitalizing or driving purchases in the core business?

Werner Brandt

Yes. First of all, what I mentioned before is the platform, the two-way platform or the development platform. I didn’t mention before our opportunity called Sybase Unwired Platform. so the development platform for any mobile application, which is very effective for our partners, then I think we have more than 250 mobile that’s available as that developed by SAP or by partners and this shows that we have a lot of questions there.

And at the end of the day, we don’t disclose any longer, because it’s becomes mainframe. Everybody who buys analytical solutions, buy the core solutions from SAP at the same time buys mobile, it’s part of the equation and then we have a specific mobile solutions for asset management, remember we cypress position we did and this performs very, very well.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. And then just shifting gears a bit, talking about the emerging markets, it sounds like you are on your way down to Mexico after this. And the emerging markets we’ve seen since the 2008 and 2009 downturns have been clearly volatile with demand either various periods or by geography. Could you give us an update on the various markets for SAP and do you except that emerging markets will continue to grow well ahead of the developed world in terms of getting to your 2015 goals?

Werner Brandt

Yes, definitely. And if I look to the BRIC countries first, I think we had growth, we suffered a bit in China for well known reasons and China also impacted the buying behavior of our customers in Asia Pacific, especially in the first half of this year, but if I look at Brazil double-digit growth, even doubling software revenue, if I look to India performing very well. And then next base of emerging markets if you look to Turkey, Indonesia and Africa is coming I think we have huge, huge opportunities there. And by the way, what the offer of course is then what you call normally the CoE, because in the emerging markets the CoE for this company is very attractive with on the HANA platform and then be in which by analytical applications.

Walter H. Pritchard – Citigroup Global Markets Inc.

And if you look at your 2015 plan, which of the emerging market is it still the BRIC countries that are most important in terms of driving the growth, to talk about 2015 trend, are there other countries that you expect to see come under the list as well?

Werner Brandt

We expect growth coming from every region at the end of the day. But we expect other professional growth coming from the BRIC countries, and the additional emerging countries, as I define.

Walter H. Pritchard – Citigroup Global Markets Inc.

And you mentioned you’re seeing demand for the core business there. Are you seeing – are you trying at this point to sell the cloud applications into those markets or are they markets that aren’t quite ready for could at this point?

Werner Brandt

They are ready for cloud, not at this point in time, but from a time (inaudible) perhaps since a year. We are investing in a large book for cloud business in China, and we have cloud business in Brazil, but it’s on the smaller scale. First we positioned there of course the traditional core applications combined with analytics and mobile, and then for PCs in the cloud space.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it, got it. Can you talk about just from a broader sales and marketing perspective, the company has been hiring sales people quite aggressively at the point during fiscal 2012 that’s slowed down a bit. Can you talk about the pace at which you’re hiring sales people, and what sort of indicators you’re looking at in your business in terms of deciding whether or not they’re leaned heavily on hiring sales or to continue to measure it?

Werner Brandt

In terms of what you saw in 2013 hires, and a decent number of sales reps around the world and did we continue to do so, of course in more focused on the emerging markets than in this easy traditional markets.

Walter H. Pritchard – Citigroup Global Markets Inc.

And in terms – in terms of the developed markets, are you hiring sales people aggressively at this point, and what do you think are the rate limiting steps in terms of your growth in some of the developing markets, is it sales capacity, is it products?

Werner Brandt

I think as I look to the emerging markets, we hired a lot in 2012, and we have to see that they become productive, and that’s the main objective for the time being.

Walter H. Pritchard – Citigroup Global Markets Inc.

Okay, got it. You’ve been in the past, you’ve been pretty successful with signing new Global Enterprise agreement, where customers sort of comes in and almost buy the right to all of your technology, your substantial portion of your technology, it’s understanding some of those are coming whom we know here, this year and into the future. Can you talk about the plan with those types of agreements and how you maintain or grow your relationship with those customers?

Werner Brandt

I think that the concept is well perceived by a lot of our customers back in 2007, 2008 and 2009. Some of them who then decided then to buy again our product license, but some stick with the DA concept. There will be, maybe new ones who want to go under this concept. And we have to reopen them and leave it up to the customer to decide which model he wants to choose. Though we continue to offer this, we do not promote it proactively, but it is one element of the SAP offering.

Walter H. Pritchard – Citigroup Global Markets Inc.

Great. Can you talk about, I think it was 2012 as well, you had a number of very large deals during the year and it does seem like with a fairly uneven economic environment that we have right now the larger deals are harder to come by. Can you talk about the larger deal pipeline? What drove that in fiscal 2012, and what is that you should be looking at as indicators of whether or not the large deal environment can improve from here?

Werner Brandt

I think if I look back maybe three to four years, we always have a similar state, 13%, 14% up to 30% of our software revenues coming through large deals. And that we are seeing over time, and large deals play an important role for SAP and it continues to play an important role for SAP. And I am confident that it will come back over time.

Walter H. Pritchard – Citigroup Global Markets Inc.

Is it purely a macroeconomic factor…

Werner Brandt

Yes.

Walter H. Pritchard – Citigroup Global Markets Inc.

Is that the way you look at it?

Werner Brandt

Yes.

Walter H. Pritchard – Citigroup Global Markets Inc.

Okay.

Werner Brandt

And then I think from a currency perspective not to get into the detail but in the first half of the year, you saw a material impact on your business from currency and I think it was a three point impact on the SFRS and total revenue growth. Can you talk about just where we are today, your expectations for the currency for the remainder of the year or the full year as a total?

Werner Brandt

I can come back to the guidance we provided in June, if the currency exchange rates would remain on the level of June and then we would have an impact on our revenue of four percentage points for the growth and if I look to in margin the growth of 18 basis points. Thank you so much.

Walter H. Pritchard – Citigroup Global Markets Inc.

Just as we think about your go to market model, it has been very much a direct sale company, it is left on the ground, you have had a goal here to grow your revenue from indirect channels and I need to have a goal of indirect channels as 40% by 2015. Can you talk about what do you expect will drive that and how that will impact the business as you get to that goal of 40%?

Werner Brandt

If you look through the most recent publication of IDT and you see that they are convinced that the area of analytics and everything around this one that or a partner, this entire partner ecosystem net debt revenue of $220 billion associated with and we probably saw it coming and having trusted heavily in training consultants not only but also is our partner HANA and other areas around this technology and analytical applications, so that I’m confident that we will be able to renovate 30% of our revenue, our largest revenue via partner. They are very strong, they invest, and they invest into these new topics, and in general, with revenue out of it and then consequently, the percentage of revenue will increase, which is coming from partners. And we make progress that quarter-over-quarter, it’s not about that we except to address that it’s really very decent contribution to our business.

Walter H. Pritchard – Citigroup Global Markets Inc.

So it’s sounds like HANA was very important for that effort in terms of getting those partners to write applications and provide those around HANA. Is that the way we made about?

Werner Brandt

HANA is the future, first of all, our partner.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. Can you talk about the Systems Integrator type business that’s more of a traditional partner channel, I know many times they’re not actually reselling licenses for you, but they are global advocates for SAP. Can you talk about the health of that channel, the importance of that channel going forward, are those entities becoming more important or less important in terms of the way that your products are being sold in the future?

Werner Brandt

I would argue that every partner we have today is very important for SAP. We should think what we do in terms of let’s take one example registered planning solutions. The objectives behind it and make putting solutions together, which can be deployed in a very short cycle by our customers supported by partners, but it doesn’t mean any of system implementation effort in order to get this up and running. So software will change, there will be less, less need for company to hire partners to implement the solutions on the site and the cloud anyhow speaks again, the traditional System Integrator concept.

Walter H. Pritchard – Citigroup Global Markets Inc.

So at least it’s a lot less to the revenue. So with the goal of indirect revenue at 40%, is that a major driver in terms of your margin goal for 2015 or I’m just trying to get a sense of the mix of business. Does indirect business generally drive a higher margin than direct business, given you are not outdoing the selling and so forth yourself?

Werner Brandt

It’s the indirect business, and then, of course, the clear focus on technology. The technology plays an important part. HANA will play an important party, and then also important to mention that we put a lot of effort to really improve the efficiency in our own organization. We will continue to do so in all areas. I said in July that we brought together all of our development activities under Vishal’s leadership, and I think this was the right move. He is the right individual to lead the development safely going forward. And on the other side, the combination should deliver synergies, which we can then partly use in order to really foster innovation for the next base, but also then taking part of it and letting it running through the bottom line.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it, so obviously, I guess since you brought it up. I’ll ask that question just around the news in July with Jim Hagemann Snabe moving to the Supervisory Board pending approval by shareholders and Bill McDermott becoming full CEO. Can you talk about the impact on the management structure of the company? And I think you alluded to some of the efficiencies, are there any other impacts that we should know about as it relates to the business from that change?

Werner Brandt

First of all, I think we all have to respect the decision of Jim to reduce his workload, if you will, and then at the end of the day, I think, from my perspective, it was a brilliant idea from Hasso to ask him to join the Supervisory Board, and in May, provided that the Annual Shareholder Meeting is voting in favor of this and he can then bring his expertise into the Supervisory Board and we all will benefit from it.

So from that end, I think it was a very good outcome over this situation, – result of the situation, now if you look to the both direct we have now a situation where we have Vishal being responsible for developmental holistically, we have (inaudible) in-charge of the sales organization end-to-end and then we have Ged Oswald who is in-charge for Support Organization, who is also the one who is in-charge for cloud Italy including the HANA Enterprise Cloud which will play a major role for SAP going forward. And then you have the support functions which it’s our consignment and one leader Bill McDermott who is then the Co-COO as said in the announcement which went out in July.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it, got it. With your operating margin goal was 35%, can you talk about the impact that the cloud business has on that margin, is that a headwind that the company must overcome to get to the 35% or do you expect to have the cloud margin up towards that company wide margin in order to achieve your goals in fiscal 2015?

Werner Brandt

It depends on the timing of course, if you trust on all the cloud and you really tried to become a company which gets lots of this as implications, because the modern cloud only will achieve these levels if you get to a necessary scalability and this takes time.

Independent from what I just said will speak to the notion of the 35%. No doubt, we will do everything to achieve this.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it. You noticed you had raised your standard support maintenance fees from 18% to 19%, I think that sort of fact on July 15th of this year.

Werner Brandt

Yeah.

Walter H. Pritchard – Citigroup Global Markets Inc.

So it’s just a very recent development. Can you talk about the customer response to that move and how we should think about that having an impact on your business over the next 12 months or 24 months?

Werner Brandt

First of all if you look to our support business, we have decent offering. We have Standard Support, we have Enterprise Support, and we have MaxAttention and each one has different content and by having different content also have different price points. So the most – there is the highest way to the underlying software revenue as the MaxAttention was 25% roughly, then you have Enterprise Support with 22% and there were some big, big discussions when we introduced Enterprise Support.

And you all know that the adoption rate now of all of our new customers coming by software as a default to loosen our new software sales is 98% plus, more than 90% plus. This shows that delivered from offering customers once they get. Now for those who have from this support built for their application, they use we told them that they would creditably over yet come to also 22%, because we enriched the content, we do this according to scheduled year-over-year. Customers know more about it, and I think there is no surprise from the customer side.

It’s a positive impact on our support revenue, but there is no discussion with our customer base on this, because it’s very clear and transparent laid out to the entire customer base, and also of course through the all of user group who handle this for customers.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it, got it. On the use of the capital side, the company thus pay a small dividend and also has used capital cash to fund the acquisition strategy. Can you talk about the extent to which the acquisition strategy is potentially complete at this point in terms of you moved into the cloud. I think has been the most prominent use of that cash or there’s still significant moves to come here to round out your portfolio and product?

Werner Brandt

I would say that (inaudible) is never completely finished because it had to revitalized every time we have new ways coming up. And the same is in acquisition strategy. I think I never would say that an acquisition strategy completed we are open. If we see attractive targets and we’ll talk about any potential acquisition.

Walter H. Pritchard – Citigroup Global Markets Inc.

And can you talk about the profile of properties you’re looking at, not necessarily specific industries and so forth, but in terms of your financial profile. How quickly are you looking to make something? How the mutual impact on your numbers? How tolerant are of you a significant drag on margins and even potentially adjusting three year goal of 35%. It’s an acquisition that may have an impact on that?

Werner Brandt

I think it depends in which area you are looking, but at the end of the day we are open to consider what provides value to our shareholders, and we are seeing that our strong focus and onto the cloud. And we will continue to do so, and helped to bring up the valuation of SAP. And if we do the right things in this area I think it will offer to the benefit of our shareholders.

Walter H. Pritchard – Citigroup Global Markets Inc.

Got it.

Werner Brandt

I’m going to pause for a second and see if there’s any questions from the audience. There is a microphone – actually two microphones going around. Looks like we have a couple in the front here and then one in the back.

Question-and-Answer Session

Unidentified Analyst

Werner, good morning.

Werner Brandt

Good morning.

Unidentified Analyst

Thanks for taking my question. Two questions I think, one on product and then one on the cloud. On the product, could you explain a little bit more how that is sold? Is it a upfront fee whether it gets special license? Is it recurring sales that you have a follow on maintenance service stream? Just to those who are less familiar, how does the revenue laid of that sales compared to your base business. And then a follow-up?

Werner Brandt

The second question?

Unidentified Analyst

On the Cloud, I was just wondering how the management team do you judge the successes in Cloud and when you do consider bigger acquisitions what are the main reasons vis-à-vis that strategy and the success. What are the acquisitions bring relative to what you have today? Thank you.

Werner Brandt

Yes. Let me take the first question regarding HANA. If you look to the way how we position HANA today then you know this started with type of that scenarios which we project based on gigabyte end users and we came up with the business warehouse that is 8% of the underlying license volume of the business warehouse. And if I look to the business suite, it would be 50% of the underlying revenue of the business suite. That is the pricing mechanism for HANA standalone.

If you then look to our offering around the HANA, in terms of first Cloud. Then on the one side we have one model which has the bring your own license which will mean that the customer buys the HANA license and then he gets a solution all of the SAP application that are running on HANA managed by SAP. And managed service fee associated would then be shown in (inaudible) as subscription revenue.

It is when we come up with an alternative model where a customer can use the business suite running on HANA intermodal that would mean that he pays for the entire services including the underlying license on a rental basis where the rental fee would end up in the line of subscription revenue. That is the first question.

Unidentified Analyst

Good.

Werner Brandt

The second one with regard to the Cloud success in the Cloud during these days is around growth even after billing as far as the most important KPI then the annual revenue the run rate we can achieve, I mentioned before more than billion now going towards the end of 2013.

Hence finally if we have to become profitable in the Cloud we have seen our segment margin at the last two quarters. We were already profitable to exclude beyond the expenses but at the end of the day we have high expectations on the profitability of the Cloud on holistic basis. Thank you.

Unidentified Analyst

Okay.

Werner Brandt

(Inaudible) the largest deployment of HANA that is now (inaudible) Employee Central?

Werner Brandt

Is what?

Unidentified Analyst

Employee Central was part of the SuccessFactors when you acquired them?

Walter H. Pritchard – Citigroup Global Markets Inc.

I think he wanted you to describe the largest HANA deployment…

Werner Brandt

Yeah.

Walter H. Pritchard – Citigroup Global Markets Inc.

Which is the first that should be? And then the second question is he wanted to know about success of Employee Central and SuccessFactors that came through that acquisition.

Werner Brandt

Well, let’s look to HANA. I think the biggest installation we have today is in running in the HANA Enterprise Cloud that Florida Crystal, who run the entire operation on the business suite powered by SAP HANA and this is provided in the enterprise cloud. That’s the biggest single installation we have today. We have a lot in the pipeline platform, but from today’s perspective, that’s the biggest one. If I look to Employee Central, Stephen, can you help me out here, what’s the biggest implementation of Employee Central as we have today?

Unidentified Company Representative

Yeah, I would like to answer for the (inaudible) Employee Central, first, the question about how this (inaudible) in the entire portfolio of SAP?

Unidentified Analyst

(Inaudible) update on how Employee Central was doing?

Walter H. Pritchard – Citigroup Global Markets Inc.

General update on how Employee Central is doing I think is the question more than what is the larger deployment.

Werner Brandt

I would like to put up, but I don’t have the customer name here, but really a typical part of our SAP offering, we take it to the next level. Secondly, we have SuccessFactors that we obviously acquired for the market leading travel management solution and this helped us to roll out the broadest portfolio of SAP applications to a very broad FYE space and to take that to more users out there.

Walter H. Pritchard – Citigroup Global Markets Inc.

Okay. There is another question over here on – all right.

Unidentified Analyst

Thank you Phil from (inaudible). So you talked about the clouds, can you now simplify how customer will take on the application and what will it do to your service business, and how will it change your relationship with the partners?

Werner Brandt

Can you repeat the first part? It’s very hard to hear.

Walter H. Pritchard – Citigroup Global Markets Inc.

So I think he wants to know how it was – the second part was…

Unidentified Analyst

So as the cloud simplifies our customers can take on new applications, how will it impact your service business.

Walter H. Pritchard – Citigroup Global Markets Inc.

So how will the cloud update or impact your services business, you are talking…

Werner Brandt

Across the cloud service?

Walter H. Pritchard – Citigroup Global Markets Inc.

Yeah, yeah.

Werner Brandt

I now understand. Of course first of all the cloud business also has a service component associated with it and of course this is part of configuration, we have to do for OEM service business, but I think more important for the service business of our partners. This all is part of the entire transition plan into the cloud.

Unidentified Analyst

(Inaudible) can you provide more detail about how you guys tend to see your partners for that ecosystem?

Walter H. Pritchard – Citigroup Global Markets Inc.

How you are going to translate your partner – how you are going to help your partners moving to this new ecosystem or world where cloud is a bigger part of the business.

Werner Brandt

That’s very easy, because they can then jump onto the technology topic we have whether it’s related to HANA, whether it’s related to mobile, whether it’s related to the analytics. There is a lot of opportunities for partner and I think they are flexible and agile enough to take this opportunity for them and then confirm their own business along with the transformation of SAP’s business.

Walter H. Pritchard – Citigroup Global Markets Inc.

Another question down in the front here.

Unidentified Analyst

Hi. Why they are making a lot of noise to market. are you hearing from your customers, is there any delay in upgrade, and just confusion about what they message?

Walter H. Pritchard – Citigroup Global Markets Inc.

So he was asking about why they are making a lot of noise in the market. Are you hearing that distracting or confusing your customers in terms of your core HCM business, I’d…

Werner Brandt

No, not at all, I think we have decent competition we worked there, but we also have a good win rate in competitive situation and the growth we provide with the HCM solution shows that we have a lot to offer to our customers.

Walter H. Pritchard – Citigroup Global Markets Inc.

Any other question in the audience? I’ve got a couple more myself, we can wrap up then.

Werner Brandt

Sure.

Walter H. Pritchard – Citigroup Global Markets Inc.

Let me ask mine and then if there’s some questions out there – so on the capital use, we talked about acquisition, your dividend I think is a 1.5% dividend yield. As you look at what the market – tech companies we’ve seen into another, pay much larger dividend. how is the overall demand for investors per income impacting, you’re thinking around is the size of your dividend?

Werner Brandt

We normally look to the payout ratio and discuss it openly with our investors. and if I always I would have a payout ratio of 30% to 35%, most of the investors seem to be satisfied with this level of payout. but always, we are open to get any feedback on the higher payout ratios and then consider this and make a respective proposal to the annual sale meeting.

Walter H. Pritchard – Citigroup Global Markets Inc.

You picked the last question right back here.

Unidentified Analyst

Thank you, Mark Cooperman with (inaudible). With respect HANA Enterprise Cloud, do you like to make any additional data center investments et cetera to support your customers in the case as your host the application?

Walter H. Pritchard – Citigroup Global Markets Inc.

So the question was on Enterprise Cloud do you expect to make additional data center investments to support the business there?

Werner Brandt

Yes we do. We do, but don’t forget that we have major data centers up in running who can handle this and then if the business goes very well, we will invest in additional data center in specific regions whether it’s in Europe, whether it’s in Russia, whether it’s in China.

Walter H. Pritchard – Citigroup Global Markets Inc.

Great. Well with that Werner, thank you very much for coming particularly, also phoning in so everybody in the audience have – thanks for coming, have a great conference.

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