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SAP AG (NYSE:SAP)

Q4 2013 Earnings Call

January 21, 2014 8:00 am ET

Executives

Stefan Gruber - Vice President of Investor Relations

Werner Brandt - Chief Financial Officer, Human Resources & Labor Relations Director, Member of Executive Board and Member of Global Managing Board

Jim Hagemann Snabe - Co-Chief Executive Officer, Head of Development for the SAP Business Suite, General Manager of Industry Solutions, Corporate Officer, Member of Executive Board and Member of Global Managing Board

William R. McDermott - Co-Chief Executive Officer, Member of the Executive Board, Member of Global Managing Board, Chief Executive Officer of Global Field Operations and President of Global Field Operations

Luka Mucic - Head of Global Finance and Member of Global Managing Board

Vishal Sikka - Chief Technology Officer, Member of Executive Board and Member of Global Managing Board

Analysts

Kash G. Rangan - BofA Merrill Lynch, Research Division

Gerardus Vos - Barclays Capital, Research Division

Kai Korschelt - Deutsche Bank AG, Research Division

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

Stefan Gruber

Well, good afternoon or good morning, this is Stefan Gruber, Head of Investor Relations at SAP. Thank you for joining us to discuss our Q4 and full year 2013 financial results. Here in Walldorf I'm joined on stage by our Co-CEOs, Bill McDermott and Jim Hagemann Snabe; our CFO, Werner Brandt; as well as our future CFO, Luka Mucic. And Vishal Sikka, member of the Executive Board, is joining us from Palo Alto.

So Werner will begin the call with a few remarks on the financial figures 2013, Jim will talk about the key achievements in the last year and Bill will provide an update on our growth strategy. And finally, Luka will discuss our outlook for 2014 and then we have enough time for Q&A.

After the prepared remarks, we'll take your questions, both by phone and by email. [Operator Instructions] And before we start, I want to say a few words about forward-looking statements. Please note that except for certain information, matters discussed in today's conference may 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 Securities and Exchange Commission.

And I would like to hand it over to Werner.

Werner Brandt

Yes, thank you very much, Stefan. Welcome to everybody. 2013 demonstrates that SAP is the technology company who successfully managed the transformation into the cloud by outperforming the market and expanding the operating margin at the same time.

You see the results here, where we show our guidance for 2013 and the actual performance during the year, where we achieved our guidance on the cloud subscription and support revenue site with EUR 787 million. We exceeded our software and software-related service revenue growth on a non-IFRS basis at constant currency with 11% growth, and we delivered on our operating margin, also non-IFRS at constant currency, in the mid of our guidance range with EUR 5.9 billion.

Additional information related to the performance of 2013. First of all, our HANA software revenue, we achieved EUR 633 million, that's slightly below the guidance range we provided, beginning of the year is EUR 650 million to EUR 700 million. This number is impacted by currency exchange rates impact. And if you exclude those, the actual achievement is EUR 664 million. So within the guidance range. If you look to the effective tax rate, both IFRS and non-IFRS, where we are also in the range or better than the guidance range.

Finally, one comment to the currency headwind I mentioned before. This was extreme throughout 2013. On the SSRS side, again non-IFRS, the impact was EUR 625 million, accounting for 5 percentage points. On the operating profit, the impact was EUR 389 million, 7 percentage points impact. And on the margin side, it was approximately 90 basis points.

We talked a lot about the successful shift into the cloud, while at the same time growing the core. And you see here, if I only may guide you through this one briefly, that we achieved a 2% increase on the software side year-over-year at constant currency. And I think with all the discussion about the core business, this tells us that the core business is there and I'm personally convinced that the core business will be a healthy business for SAP also going forward.

At the same time, very strong increase in cloud subscription and support. Of course, this 130% here is impacted by acquisitions. And if you eliminate the impact from acquisitions, we have a growth rate there on a like-for-like basis of 32%.

You see professional service, a slight decline of 3%, in line with our expectations. And here, the fact that we bring Rapid Deployment solutions to the market is key for this line of business.

Now switching over to the fast-growing cloud business. And I think the metrics we provide here shows that we are right on track with our ambitions in the cloud. First of all, I would like to highlight that if you look to the segment reporting that we converted a segment loss of EUR 51 million for the cloud division in 2012 into EUR 140 million profit in 2013 for the cloud division.

But more important, because this shows the future of this cloud business for SAP, our cloud subscription and support backlog was up 50% -- more than 50% and stands now at EUR 1.2 billion. The deferred cloud subscription and support revenue increased by 25%, what you see on our balance sheet, to EUR 447 million. And the calculated cloud subscription and support billings, we adjusted for Ariba, is higher than 50%. And I think this is a strong performance as this is our backlog.

Number of users increased to 35 million, and this gives us a lot of confidence that we can increase also the profitability and margins in the cloud business, because the only scalable KPI here or the only KPI which demonstrates scalability is the number of users.

Two comments to the Ariba segment. The trailing 12-month network spend volume is $0.5 trillion, and we have 1.4 million companies connected through the Ariba network, which is the largest web-based business trading community in the world. And I think we have a lot of potential to leverage this network and provide growth out of this network for SAP in the future.

If you look to what we'd see today as recurring revenue, then this slide demonstrates that we came from a share of recurring revenue of lower than 40% in 2007 and are now at 57%. That's a tremendous achievement and Luka, when he talks about the guidance, we'll pick this up to show you how we see this evolving in the context of our midterm strategy.

Going forward, we are simplifying the structure of our P&L to be in line with the 2 business models we have. So going forward, we will report cloud subscription support revenue as the first line in our P&L. That's one business model. The other business model on premise is around software and support revenue, and we will combine it into one line called software and support, but provide to you individual numbers related to software and support also going forward. This is not a change in content. It's only a change how we present it on the surface of the P&L, in line with the 2 business models we support going forward.

If you look to the IFRS EPS, which increased by 18% to EUR 2.79. And if you look to IFRS, you see that on the operating profit side, we increased by 10%, along with the margin increase of 160 basis points. And one of the reasons being that we had significantly lower stock-based compensation expenses incurred in 2013 over 2012. And the favorable tax rate also results in a basic earnings per share increase of 18% to this aforementioned EUR 2.79.

From an operations perspective, our non-IFRS operating margin increased by 150 basis points, driven by operational excellence, despite the acquisition in cloud momentum. And if you look to the operating margin at constant currency of 33.5%, we should realize that this margin is already impacted negatively by 50 basis points coming from the acquisitions we did in 2013.

The balance sheet is clean. We have an increase in cash and cash equivalents, we have a decrease in financial liabilities due to our repayment of debt. We have a slight increase in goodwill due to the hybris acquisition.

If you look to our net liquidity at the end of the year, it's minus EUR 1.5 billion coming from EUR 2.8 billion beginning of the year. And you see that we generated a strong operating cash flow of roughly EUR 3.2 billion (sic)[3.8 billion]. We acquired companies for an amount of roughly EUR 1.1 billion, we had dividend payout of EUR 1 billion and then you end up with a group liquidity of EUR 2.8 billion with the financial liability of, in total, EUR 4.3 billion.

And cash flow, stable in the year-over-year comparison. This is mainly due to the fact that we paid taxes and we had an increase in our DSO. But that's not related to bad cash collection, it's really reflecting the business environment where we have to grant higher payment terms to our customers throughout the year. One final word on the equity ratio with 58%, this shows and demonstrates our financial strength of SAP.

And with this, I would like to hand it over to Jim.

Jim Hagemann Snabe

Thank you very much, Werner. And before I go into the strategic review of our performance in '13 and the last 4 years, let me just take a moment to thank Werner for his outstanding contribution to SAP over 13 years.

Werner has reported 52 successful quarters for SAP, a pretty remarkable and very successful effort. And has been instrumental in ensuring, not only transparency, but also a profitable growth and transformation of SAP. Thank you, Werner. Thank you.

Bill and I and the Executive Board began this chapter of the SAP journey in 2010, as you will recall, where we decided to reinvent SAP again and become a growth company. We decided to strengthen our market-leading position in the applications space and the analytical space. And in parallel, make bold moves and invest in 3 new categories: mobile for business, in-memory computing with HANA and, of course, cloud computing.

Today, almost exactly 4 years later, we are celebrating the fourth consecutive year of double-digit growth and a successful reinvention of SAP. Over the last 4 years, we have extended our market leadership in our core business, outgrowing competition by at least a factor 1.5. In parallel, we had become #1, all the fastest-growing companies in every one of the 3 new innovation categories.

And most importantly, we have proven that it is possible to add a significant cloud business while at the same time growing our core and expanding our margin, I believe a unique combination in the industry so far.

This tremendous success was driven by increasing the speed of innovation at SAP, combined with very successful acquisitions, all growing faster as part of the SAP family.

2013 marks the fourth consecutive year of double-digit growth, as I mentioned, since 2010. And with that, we continue to gain market share. In Q4, alone, we grew 6x faster than our nearest competitor. In the last 12 months, we have consistently outperformed our competition, everywhere in the world. And we have proven that innovative software is the growth driver in the industry, not hardware and not services.

Our growth is based on 2 important facts. First of all, we are the most global company in the industry. This allows us to serve our global clients better and as a result, we are winning in every single geography. America has delivered a strong double-digit growth of software and cloud in 2013 of 15% by -- delivered through a strong growth in cloud in North America and a very strong core business in Latin America.

In EMEA, we continue to take market share with strong 9% growth both in Q4 and the full year, and had an outstanding double-digit growth performance in our home market, Germany, growing at least 3x faster than our nearest competitor in EMEA, in general. And I'm happy to report that we are back to growth in APJ, achieving double-digit growth in software and cloud of 10% in Q4, while our nearest competitor had a declining revenue.

We are growing in high-double digits in emerging markets, China growing faster than 40% in software and cloud and Middle East, Africa, Russia and Brazil all growing at very strong double-digit growth. These results showcase our ability to execute and expand globally like no other IT company.

Secondly, our growth is driven by SAP delivering more innovations and faster than anyone else in the industry, thanks to Vishal and his team. Our investments in cloud innovation is, of course, accelerating our growth. Our cloud business run rate is now over EUR 1 billion. In line of business -- in HR, sales, procurement or finance, we are growing faster than pure play cloud players, like Salesforce and NetSuite, and growing around 1.5x the traditional software players like Oracle.

We are on top of that, scaling the largest business network in the world with 1.4 million companies connected in real time, trading more than USD 0.5 trillion. Customers like Denon [ph], Deutsche Telekom, ExxonMobil and Verizon chose SAP for the cloud because they wanted innovation that was easy to consume and, at the same time, integrated out of the box with the strong SAP solutions they already have running on premise.

Now the innovation cycle, of course, was also very much driven by HANA. Our performance in 2013 confirms the unique nature of the HANA opportunity. And is the fastest-growing product in the history of enterprise software. It has evolved to more than just a category. It is now the real time platform of choice for customers and partners. We have seen competition trying to catch up, and we estimate that we are 2 to 3 years ahead of competition and expanding our lead through the use of HANA in every product we have on premise and in the cloud.

Our record momentum of HANA continued in Q4. We reached almost EUR 300 million of dedicated HANA revenue, which means we have achieved close to EUR 1.2 billion of HANA revenue since the launch of HANA only 3 years ago. This growth performance is unmatched in the industry.

HANA is becoming the platform of choice for small companies, more than 1,100 startups are building their business on HANA. And large technology giants like Accenture and SaaS are betting their solutions on HANA because it makes their software faster and the infrastructure cheaper.

Our customers are embracing the opportunity to move their landscapes to HANA for real time-ness and reduction of IT costs, like we saw at SAP. This is also verified by customers like Levi Strauss, Burberry, Bosch Siemens appliances who are all moving to our flagship product Suite on HANA.

The Suite on HANA offers a unique combination of a better-performing application at a lower TCO. More than 750 customers chose Suite on HANA since its general availability in May 2013. This is almost twice as much as we had anticipated, and shows the unique power of the combination of our core business on HANA. We are ready to reinvent the infrastructure of all of our installed base customers with HANA and the Suite on HANA.

So in summary, looking at our growth momentum during the last 4 years, it is clear, SAP is leading the transformation of the industry. We are winning market share in all regions, we have reinvented the database and created the next-generation real time platform, and we are managing the transition to the cloud very successfully, while growing our core and expanding our operating margin. With our remarkable progress since 2010, SAP is, today, more relevant than ever before and we are ready to accelerate the transition to the cloud.

And with that challenge in mind, I'd love to hand over to my good friend and partner, Bill McDermott.

William R. McDermott

Thank you very much. I'd to, first of all, welcome everybody and thank you for your continued interest, support and passion for this company called SAP. And I know Jim has already recognized Werner, but I would be remiss if I were not to do the same. I started my career going on 13 years ago, and one of the first board members I had the pleasure of meeting was Werner and I've had the privilege of working with him, and I consider him to be as good as it ever gets. What a great CFO, what a great friend, and it's been an honor to work with you, Werner, so thank you for everything. An honor.

And for those of you that don't know him, you really need to get to know Luka Mucic, because one of the great distinctions of a leader is they always choose a great successor. And this guy has been a winner at everything he's ever done in his life, from his school, to how he's entered into SAP and risen to the top. He is as good as it gets. So please, I just like to introduce Luka Mucic as a really great successor to an unbelievable CFO. So Luka, an honor to work with you as well.

Luka Mucic

Thank you. Same here, Bill.

William R. McDermott

And Jim was very kind and certainly appropriate in recognizing Werner, and he's got a guy that takes credit easily. Because when it comes to humility, nobody's quite like him. But I just wanted to say thank you to him, not only for the more than 20 years of service to SAP in his capacity and operating roles, now he moves on to the Supervisory Board, which is a great privilege for me, personally, because to have a man of this distinction in the board room helping us navigate our business model and our business plan forward is really a privilege. But I would like to thank him as a friend.

For those of you that don't know, both in front of the camera and behind the scenes, we have been amazing friends and that friendship is only built with time. And I'm so proud that we're able to put together the strategy in 2010 and then, today, take it up a notch by accelerating a bold move to the cloud. But as it relates to leaders hall of fame status, I would just like to say, to my friend and colleague and Co-CEO partner, Jim Hagemann Snabe, thank you my man for everything. Nobody like you. Nobody like you.

Jim Hagemann Snabe

Thank you.

William R. McDermott

Thank you. Well, ladies and gentlemen, I'm going to just get into a little bit here by also recognizing Vishal that he's out in Palo Alto today at a very early moment in the morning. I guess it's around 5:30 by you now, Vishal. He's going to join us for Q&A, and thank you so much not only for what you've done for HANA and how you've reinvented the core of the company on HANA, but also for getting up so early to be on the call. So we look forward to your commentary in Q&A, Vishal, welcome.

As Jim said, this is the fourth year in a row of double-digit growth on a year-over-year basis for SAP and that's across all regions in the world. So we're proud of our track record. But more importantly, I think we're significantly excited by the courage it takes to change when you're strong and to really go for something that you believe in. And that's where we're at now. We are going to lead the industry transition to the cloud. And Werner brought up a very important statistic, I hope you noticed it, that our billings in Q4 were up 50% on a year-over-year basis. And I think that's a leading indicator of things to come in the cloud.

We think it's time to take our strategy to the next level. I know many of you talk to C-level executives all the time. And clearly, for CEOs, the most intractable business problem they have is complexity. And it's limiting the consumption of innovation everywhere. And we know that cloud can drive consumption and it can enable HANA to really scale as the platform of this generation. So for us, it's all about customer, it's all about adoption, it's all about scale and we think cloud is clearly the way forward.

So at SAP, we want to simplify everything so we can do anything. The SAP cloud, powered by HANA, is a brand nomenclature we'd like you to get very familiar with. HANA is the greatest simplifier because it radically simplifies the IT stack. We're moving our core business to the cloud with the HANA cloud platform, and SAP will take full ownership to take -- to help the customers simplify their landscape and execute their business plans.

So I've laid out a few goals here that have already been presented to our global leadership team and our field organization all over the world. So let's share them with you.

We are a growth company, and we intend to grow our users, our revenue and our bookings. And obviously, we're simplifying everything through the SAP cloud. Now keep in mind, we're totally open to the ecosystem adopting HANA and running that in their cloud as well.

We want to elevate SAP to the trusted innovator of business outcomes. No company can do it better than us, and we really want to focus on that customer and their customer and the business results they're looking to drive. We are, therefore, renewing our focus on industry and line of business solutions, retail, public sector, health care, financial services, to name a view. And when you think about the line of business executive in sales, human capital management, procurement, just to name a few in the cloud, believe me, we're going to be there with everything we got.

SAP HANA is the business platform for our industry. We believe it's the renewal of our industry and we'll do everything on HANA and we'll report that in the open ecosystem as the ideal platform to grow real time enterprises. We clearly believe in an intuitive user experience in every interaction. Vishal will undoubtedly make some comments about Fiori and how we've really reinvented the user experience for our customers.

And on that subject, we want to be extremely humble at the time we feel like we're strongest and making the courageous move to transition the company to the cloud by focusing on the customer more now than ever, by motivating and engaging our workforce and by focusing all of our people on the customers' customer. And we are leveraging our open and vibrant ecosystem. It's nice to work for a company that has 67,000 inspired employees. It's even nicer to know that we have 2.1 million non-payroll jobs out there that are supporting the SAP franchise.

So bottom line, we simplify the business model, we move the core to the cloud. We win in the line of business, public cloud. We drive core subscription pricing to make it easier for customers to consume our innovation. And cloud and the suite in the cloud will be the winner.

One of the things we learned from best of breed in the '90s, there may have been best at a certain point solution, but they sure didn't breed. So we'll be able to run entire companies in the cloud and we'll have full integration with all the line of business solutions to radically simplify the enterprise for the customer.

We're simplifying our products on one HANA platform, all SAP products will be run on HANA. And we'll take a mobile first user experience approach to everything we build. We're simplifying the customer engagement. We will have one face to the customer and we'll combine the on-premise and cloud go-to-market motions. So you'll have the account executive that's the generalist, you'll have the specialist in the cloud that has the domain expertise in each of the line of businesses. Of course, we'll also apply the industry focus to each and every account as well.

We're focused on growth. I think Jim said it very well. We have to increase our share of wallet, and cloud and HANA does collapse the stack. We're tired of seeing $0.90 on a $1 go to hardware and commodity services, and only $0.10 on a $1 go to innovation. By collapsing the stack, we, overall, lower the customers' cost, free up more money for innovation and, of course, we'll enable them to invest in SAP innovation so they can grow their business. The shift is clearly on for software out there, I think in the investor community and clearly on the minds of C-level executives as well.

And we're investing in innovations, Big Data, the HANA platform, business-to-business to consumer leveraging hybris and the omni-channel, e-commerce concept and, of course, the strategic industries that I've already mentioned.

So bottom line, let's transition to the cloud but we're still giving the customer choice. We have a very robust and healthy core business, as Werner said. So management has its hand firmly on the wheel, knowing how to grow the core and keep it ever strong, while at the same time, transitioning to the cloud.

We are absolutely committed to the 2015 top line guidance that we gave you of EUR 20 billion, and also, of EUR 2 billion in the cloud. But the more interesting conversation now is 2017, because we want to provide you with a midterm guidance so you know where our bold moves are headed financially.

We are going to accelerate the cloud to be a EUR 3 billion to EUR 3.5 billion business by 2017. We are also committing a EUR 22 billion plus top line for the company.

And we're going to continue to expand our margins but we're moving the 35% target that we had set for 2015 to 2017. Many people have asked, "Is this a cost issue by overinvesting in the cloud?" And the answer is, it's much more a consequence of ratable revenue recognition, which as you know, when you recognize the revenue ratably, it flattens the margin out for the first couple of years, and we have modeled this in a kicks back in the 2017 time frame. So we invest in the cloud, we keep the core strong, we drive operating income and profitability but we simply move the 35% target down the road 2 years so we get the market share we deserve.

We intend to be the cloud company powered by HANA. So not only will we run your enterprise, but we are going after the line of business point solution providers with everything we have. So with that market share gain in mind and the way they play it, we don't want to take anything off the accelerator. We're going full speed ahead.

That is essentially the story, a successful core business with very predictable, high-margin revenue streams being ever strong and still growing, a bold transition to the cloud and acceleration to the cloud and a company that's absolutely focused on the customer, the ease of consumption and the drive for innovation that our customers have.

With that, I'll now turn it over to my colleague, Luka Mucic, who will take you through the 2014 guidance for the company. Luka?

Luka Mucic

Yes, thank you very much, Bill. As you may know this is, today, my first earnings event. And as Jim has said, for Werner, it's his 52nd earnings event with SAP. But you can be sure that we both share the same excitement about the great transformation that SAP sees itself in, as Bill has alluded to.

And as we have heard during today's call already, SAP is clearly setting the benchmark of profitable growth in the IT industry because we have both: We have a very strong growing cloud business and we have a very highly profitable, stable and equally growing core business. That is a unique combination. And our guidance for 2014 is reflective of these core strengths.

So coming first to the cloud business. We expect, in 2014, to see a continued strong growth in the cloud subscription revenues that we are driving. On a non-IFRS constant currency basis, we expect to reach between EUR 950 million and EUR 1 billion in revenue in 2014, that's up from EUR 758 million as reported in 2013.

And to give you 2 points of reference with regard to this guidance, the upper end of this range represents a growth rate of exactly 32%, which is basically the same as the respective 2013 growth rate after normalizing for the acquisitions that we did.

And with this projected cloud subscription revenue growth, we also expect to reach, at the end of 2014, a total cloud revenue run rate of between EUR 1.3 billion and EUR 1.4 billion, that's compared to EUR 1.06 billion that we had at the end of 2013. So you can clearly see that we are well on the trajectory that will lift us to the revenue growth that Bill has outlined in the midterm guidance.

So now let’s look at the core and how this is coupled then with the strong cloud subscription revenue growth. If you look to our classic on-premise business, we are also looking at a very solid performance in 2014 and, clearly, we target to, again, prove that we can outpace the competition in the core. As a combination of both of these factors, we expect our software and software-related service revenues at constant currency on a non-IFRS basis to increase in the range of plus 6% to 8% from a 2013 base of just above EUR 14 billion.

And here, I would also like to briefly mention what Werner already alluded to in his presentation, the expansion of our software and software-related service revenues will also, in the midterm, drive a sustainable improvement of our recurring revenue share as a general proportion of our total revenues. In fact, by 2017, we aim to already approach 2/3 of our total revenues to be in the recurring revenue bucket.

And last, but not least, while we are transforming SAP to become the cloud company powered by HANA, we also stay true to what SAP has always made strong, and that is our commitment to sustainable profit expansion. In fact, in 2014, we are looking at an increase of our operating profit at constant currency on a non-IFRS basis from between EUR 5.8 billion to EUR 6 billion, that's up from EUR 5.51 billion in 2013.

So in addition to this guidance, as in the past years you have been knowing the service from SAP, we also would like to provide ranges for our IFRS and non-IFRS tax rates and our non-IFRS adjustments for the full year 2014, which you will find useful for your financial modeling. Now this is a pretty busy slide with many numbers and it's probably -- you can all digest in due time. I do not want to go through all of the numbers. But just mention here that we expect in our tax rates, both IFRS and non-IFRS, a slight uptick. That's due to the fact, in 2013, we were benefiting from substantial onetime effects.

And I would also like to mention in the non-IFRS adjustments that we expect to see a significant decrease of our deferred revenue write-down figures from EUR 82 million in 2013 to less than EUR 20 million in 2014, as the write-down effect from our acquisitions and business combinations is reducing.

On the other hand side, we expect an increase in our share-based compensation expenses to the range of EUR 470 million to EUR 510 million. All the other measures are pretty much in the same range as we have seen them in 2013.

So what should we take away from the guidance? I would keep it very simple and say, SAP is poised for continued strong growth in the cloud, while preserving a very solid and stable Fort Knox type of business in the core and, at the same time, expanding the bottom line of the company. That's a unique combination, Jim alluded to it, and one that we are actually all, as a management team, proud of.

And with that, back to Stefan.

Stefan Gruber

Well, thank you, Luka. Now we have time to take some questions, both by phone but also by email. I want to remind you, you can send us questions by email to investor@sap.com. I would like to hand quickly back to the operator for some instructions on how you can ask question by phone. Operator, please?

Question-and-Answer Session

Operator

[Operator Instructions]

Stefan Gruber

So I would say, we'll take the first question by phone, and I see we already have one question by email. So operator, please go ahead.

Operator

The first question is from Kash Rangan from Merrill Lynch.

Kash G. Rangan - BofA Merrill Lynch, Research Division

My question is, first, can you give us some idea of what percentage of the core business is moving to the cloud? And my second question is, when I look at your growth targets in 2014, although you had a lot of headwinds in 2013 with respect to emerging markets, it feels like you're modeling about the same kind of growth rates for software and cloud-related subscription revenue. I just wanted to understand the level of conservatism, because I would assume that you have a lot of tailwinds going into 2014.

Stefan Gruber

Bill, you want to start?

William R. McDermott

Well, let me first start by thanking you, Kash. I had an opportunity to read your report today. And I think the association with SAP as the fastest-growing mega-cap company in the industry and the fast-growing mega-cap company in the cloud was certainly noteworthy of recognition because we agree. And one of the things that I would say about this forecast that we put in front of you on a larger base of business going into 2014, we've maintained our growth rates. And at the same time, we've accelerated our prospects in the cloud. As I look at the various markets around the world, the U.S. is the early adopter of the cloud and the market seems to be improving there steadily. I was in Barcelona yesterday with our team, you should know that Europe was the #1 region in the company for SAP. They had 13% year-on-year growth, they did a fantastic job, and they feel especially strong about their business. Also, Southern Europe, Middle East and Africa, for sure. Brazil remains a stronghold of SAPs. And I'm really excited about Mexico and that continues to perform beautifully. A lot of people haven't recognized that Mexico will be the biggest exporter to the United States by 2020, it's pretty impressive. And we love what's going on in China and Asia. And thanks to Jim Hagemann Snabe for bringing us back to double-digit growth in Asia in Q4. We made a leadership change there and he's gotten things straightened out and we'll ultimately choose a new leader to run our region. So the good news is all the theaters are in really good shape. We're focused on the right industries where we think we can get more, and we're on the right side of the customer with the move to the cloud. And I want to finalize by saying, HANA is now a serious brand that we're not having to push as hard as we used to. We're getting a lot of pull and including in the ecosystem. So you have a SAP cloud powered by HANA but you also have the partner clouds, like HP and others that are building on HANA and provisioning our applications to the market. So the guidance is what it is, but I've never felt better about the business and I've never felt better about our strategy.

Stefan Gruber

Well, thank you very much. I'd like to take one question we received by email before we move -- continue with the phone questions. It's a question from Munich-based analyst, Knut Woller from Baader Bank. How do you see the HANA Enterprise Cloud transforming the crowded cloud vendor landscape? I believe we have Vishal on the call as well. Vishal, I think that's a question for you.

Vishal Sikka

Yes, absolutely, Stefan. The HANA Enterprise Cloud is based, obviously, on HANA and the product opportunity that we see, Bill referred to this earlier, is a dramatic simplification of the ideal landscape. The power of [indiscernible] database is that the ability to do just-in-time calculations means that tons of complexity that are built in to the IT stack over the years and decades can be wiped out. The latency between product systems and analytical systems, as well as the inherent complexity of financial systems itself. As we have re-factored the business Suite on HANA just in financials, we have seen a tremendous simplification, a financial -- the financial system at our -- in our own landscape, and Luka and his team have run SAP cloud internally, every system on HANA has been operating at roughly 7 to 10x smaller size than it used to be before. And as we look at the future, we see that the data transfer between the ERP System and CRM through data warehouses and data banks[ph] has a tremendous amount of redundancy that can be completely wiped out and replaced by just-in-time real time calculations and computing. And that has 2 simultaneous value-introducing effects. One is the dramatic simplification and lowering of the cost of the landscape is going to be brought into the more value-adding innovative areas. But the other is, it makes the system real time and dynamic. This combination of a dramatic simplification and a real timing and dynamism of the landscape can only be achieved by HANA running on modern analytics hardware, and that is the essential promise of the HANA Enterprise Cloud. Together with the enterprise-grade security, data privacy, data sovereignty and the other enterprise qualities that SAP is famous for, we believe that the HANA Enterprise Cloud can be a tremendous leading effort going forward as we look to enterprise computing for the future. And as Bill said, the HANA Enterprise Cloud is not only delivered by SAP but by our entire ecosystem of partners who embrace the HANA, HANA cloud cell and the HANA Enterprise Cloud notions[ph] to deliver these or value these benefits from their infrastructure.

Stefan Gruber

Okay. Very good. Thank you very much, Vishal. The next question I'd like to take again from the phone. Operator, please?

Operator

The next question is from Gerardus Vos of Barclays.

Gerardus Vos - Barclays Capital, Research Division

Just a couple, if I may. First of all, on the kind of platform, I know it's early days, but could you just perhaps give us some kind of feeling about the success on the HANA Enterprise Cloud and the HANA Cloud platform? Then secondly, just a definition of points. On the guidance for 2017, the EUR 3 billion to EUR 3.5 billion, is that cloud plus subscription, or is it cloud plus subscription plus service kind of revenue, which clearly have some ramifications of the organic growth? And then related to this, do you need to make any substantial acquisitions to hit that EUR 3 billion until EUR 3.5 billion target?

William R. McDermott

Well, I think -- I would say, Vishal, if you start with the platform question. Later on, we'll...

Vishal Sikka

I'll take the first one, Stefan. Perhaps I can address the first one in the HANA Enterprise Cloud and the HANA Cloud Platform. I already mentioned the HANA Enterprise Cloud. We have already customers, major customers, dozens of customers running productively big systems, CRM systems, data warehouses on the HANA Enterprise Cloud in mission-critical environments. The HANA Cloud Platform goes beyond the underlying infrastructure and manage the [indiscernible] of the HANA Enterprise Cloud. And also, delivers the platform-as-a-service for us and for our partners to deliver extensions of the package applications. Whether it's extensions to our business suite, ERP, CRM, propriety and management kind of applications, or it is extensions to our SuccessFactors, Ariba, hybris cloud solutions, companies like Accenture and Renown[ph] and SaaS and others have already built applications using the HANA Cloud Platform and deployed those, delivered those in their cloud. So the combination of these 2 is something that enables us to simultaneously evolve and renew our existing application landscape and give ourselves and our partners opportunities to bring amazing new applications and completely new business areas.

Luka Mucic

About the question on the cloud-related midterm guidance for 2017. So these EUR 3 billion to EUR 3.5 billion are total cloud revenue. So that's, on the one hand side, the cloud subscription and support revenue, and the associated professional services revenue that we generate in conjunction with the cloud-related solutions.

Stefan Gruber

Okay, very good. We've got another question from the web. It's actually from Brad Zelnick, Macquarie. And he -- actually the question is for Bill. Bill, in your comments, you touched on some changes to the go-to-market in 2014 where the account management function is now more centralized with product industry overlays versus being distributed in the past. Can you talk about how the new model drives growth in market share? And what the expected impact is on productivity and margins?

William R. McDermott

Yes. Number one, we did not and we will not decrease feet-on-the-street -- or actually increasing feet-on-the-street consistent with a growth company. And yet at the same time, we're at the position now where we are the cloud company powered by HANA. And therefore, we have integrated the cloud businesses of SuccessFactors, Ariba and our own customer-on-demand product into the mainline go-to-market strategy, because we want every customer to get the benefits of the public multi-tenant cloud at the line-of-business level, as well as the SAP cloud powered by HANA for the Enterprise. And we want the sales force leading with the cloud. I bet that'll come as a real surprise to the California companies, they can't wait until they get a hold of that one. As it relates to sales productivity, I think the beauty of the cloud for a company like SAP, who is not expected to come in with the cloud story, is we have found in almost every instance, it helps us grow the core. So I expect that you're going to see sales productivity go up both in the cloud and the core because it's really a virtuous cycle when you do what's in the best interest of the customer. I think we got away from the power of SAP, which is the integrated enterprise a little bit. When we had to go out with the line of business cloud as a separate motion. Now by bringing that back in, we have a very unique value proposition, as my dear colleagues have said here today, where we're the only company that can do what we do the way we do it. You can run the entire company, you can run pieces of the company, you can have a consistent infrastructure and platform, and by the way, it's also extensible to a robust and ever-growing ecosystem that has to improve sales productivity. We haven't been outlandish with our assumptions, but we certainly expect it to be up. And then finally, on the market share, I mean, bottom line, when you say you're going to be the cloud company powered by HANA that means you're going to be the cloud company powered by HANA. So we're going to gain share in the cloud business, for sure. HANA will consistently be a runaway growth story. And our core, as Luka said beautifully, is ever consistent, ever strong, in fact, it is Fort Knox. That's pretty much our business model.

Stefan Gruber

Thank you very much, Bill. Just one follow-up clarification to the audio question we had on the call about the 2017 cloud target, what is the organic and inorganic proportion. I know, Bill, you commented already this morning in the press conference.

William R. McDermott

Yes, I would like to touch on that. When we set the EUR 2 billion target for 2015, we didn't say precisely how we would get there. We knew that it would be a combination of robust, primarily, organic growth, but certainly tuck-ins would be a part of our road map, as they remain a part of our road map now. So you should think about it primarily being organic, but we have been opportunistic where we see we can move the company forward with a solution that would be better bought than built, and I don't think our philosophy has changed on that.

Stefan Gruber

Okay. Thank you very much. Back to the operator for the next question.

Operator

And the next question is from Kai Korschelt of Deutsche Bank.

Kai Korschelt - Deutsche Bank AG, Research Division

I had a couple, please. Firstly, congrats and welcome, Luka. I just had a question on the SSRS growth guidance. So if I take your midpoint for this year, 7%, and I think to get to EUR 20 billion in 2015 revenues, it does imply a sort of mid-teens acceleration in SSRS growth. So I'm just wondering, how should we think about what drives this? Is there implicitly some M&A contribution in there? Or if you could maybe share your thoughts on how you intend to achieve the EUR 20 billion. And the second question was really on this EUR 2 billion cloud revenue targets, again, for next year. I think that target had been around for a while. Some I'm just wondering, we see acceleration to the cloud, is there a reason why you haven't actually raised this guidance?

Luka Mucic

Yes, let me first talk about the SSRS guidance. So first of all, of course, if we give a guidance, we have our best ambitions to not only reach it, but get as good at it as we can. The guidance range that we have given is actually pretty much reflective of a combination of continued strong growth on the cloud side, as well as a strong growth -- or solid growth in our traditional business. And it fits well with our trajectory to reach the ambitions that we have set for ourselves. So -- otherwise, we would not have confirmed this part of the 2015 guidance. So I am very confident, as is the rest of the team, that these targets can be achieved. And again, the growth rates that are underlying the range, especially at the top, would clearly support the ambition. On the cloud side, I think it is important to understand that if we look at 2013 growth rates, they're, of course, subject to acquisition effects. We had 130% growth on the cloud subscription side in 2013. If you take the like-for-like, as we have said, it's a 32% growth rate and our range is extending to there. Again, do we have the opportunity to possibly do more? SAP is always aiming at not only reaching its guidance but if we can exceed it. I think it's a prudent guidance from where we stand at the moment. And the business transformation that we are in over the next years, I think, will hold a lot of opportunities to further increase it as we move along into 2017. Bill, anything to add from your side?

William R. McDermott

No, I think you handled it very well. Thank you, Luka.

Luka Mucic

Thank you.

Stefan Gruber

Thank you, Luka. The call was scheduled for roughly 1 hour, so I think we have time for one final question. Of course, we take much more question on February 4, when we have our Investor Symposium in New York City. If you haven't received an invitation, please reach out to my colleagues in the IR team. So back to the operator, please the final question.

Operator

This question comes from Rick Sherlund of Nomura.

Richard G. Sherlund - Nomura Securities Co. Ltd., Research Division

On the 750 Business Suite on HANA, I wanted to get -- just clarify for us, how much of this is cloud versus on-premise? And if you can give us an idea of how revenue is to be recognized on that, is it upfront or is that over time?

Jim Hagemann Snabe

Rick, Jim here. The 750 is largely on-premise because the cloud version of that came very late in the year last year. And only now we're offering the customer choice as well on the subscription-based model for that. So think of it -- most of it on-premise, half of it installed base customers moving to HANA, because of the simplification and speed that it offers, and a half of them new customers who, of course, default Suite on HANA because it performs better and is cheaper from an infrastructure point of view.

Stefan Gruber

Well, thank you very much. This concludes our financial analyst call for today. Thank you, all, for joining. Thanks for all your questions, and I look forward to seeing you in New York City on the 4th of February. Thank you very much. Bye-bye.

William R. McDermott

Thank you.

Thank you.

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