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SAP AG (NYSE:SAP)

Q1 2014 Earnings Conference Call

April 17, 2014 8:00 AM ET

Executives

Stefan Gruber – Head-Investor Relations

Bill McDermott – Co-CEO

Luka Mucic – Head-Global Finance

Jim Hagemann Snabe – Co-CEO

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

Vishal Sikka – Executive Board Member

Robert Enslin – Global Managing Board Member

Analysts

Gerardus Vos – Barclays Capital Securities Ltd.

Chandramouli Sriraman – MainFirst Bank AG

Brad Zelnick – Macquarie Capital, Inc.

Adam D. Wood – Morgan Stanley & Co. International Plc

Ross Stuart Macmillan – Jefferies LLC

Rick G. Sherlund – Nomura Securities International, Inc.

John P. King – Bank of America Merrill Lynch

Philip A. Winslow – Credit Suisse Securities LLC

Operator

Ladies and gentlemen, thank you for standing by. This is the Chorus Call operator. Welcome to the SAP 2014 First Quarter Earnings Results Conference Call. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. (Operator Instructions)

I’ll hand it now over to Stefan Gruber. Please go ahead, sir.

Stefan Gruber

Yes, thank you very much. good morning or good afternoon, this is Stefan Gruber, SAP Investor Relations. Thank you for joining us to discuss SAP’s results for the first quarter 2014. I’m joined by Co-CEO, Bill McDermott and Luka Mucic, Head of Finance and incoming CFO. We both make opening remarks on the call today. Also Co-CEO, Jim Hagemann Snabe; CFO, Werner Brandt; Executive Board Member, Vishal Sikka and the Global Managing Board Member, Rob Enslin are on the call and they’ll join us for the Q&A.

Before they get started, I want to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements, and all forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that could affect SAP’s future financial results are discussed more fully in SAP’s filings with the U.S. Securities and Exchange Commission, the SEC, including SAP’s Annual Report on Form 20-F for 2013, filed with the SEC on March 21, 2014. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

Please keep in mind that unless otherwise noted, all numbers referred to on this conference call are non-IFRS and growth rates are non-IFRS on a constant currency basis.

And finally, before we start, I would like to point out they will be holding SAPPHIRE NOW from June 3 to June 5 in Orlando, Florida, the financial analyst program and an evening reception on Tuesday, June 3. we look forward to seeing you there.

And now, I’d like to turn the call over to Bill McDermott.

Bill McDermott

Thank you, Stefan and thanks to everyone on the call for your time today. In January, recognizing complexity as the intractable CEO challenge of our time, we outlined our strategy to be the cloud company powered by HANA and to simplify everything for our customers.

I’m pleased to report; we have made tremendous progress in execution of this strategy, while delivering on our commitment to solid growth through 2014. Software and software-related services revenue increased 9%, exceeding our annual guidance range of 6% to 8% SSRS growth.

We saw a strong growth in cloud subscription revenue of 38%, which is also tracking above our annual guidance range, and our cloud run rate is now approaching €1.1 billion or for those of you, calculating U.S. dollars that would be $1.5 billion. We’re not only growing cloud 1.5 times faster than our closest competitor, but faster than most of the SAS peer group and we remain the fastest growing mega-cap IT company in the cloud.

We’re also leading the industry transition to in-memory computing with the broad adoption of HANA, as the real-time business platform. We now have more than 3,200 HANA customers since market launch in 2011, and we have close to 1,000 customers for SAP Business Suite on HANA, which was launched just one year ago. We are the only large enterprise software company that is innovating in the core, while transitioning to the cloud and doing both profitably. We’re bringing the simplicity of the cloud to our customers by offering the broadest cloud portfolio in the market.

Today, we have over 36 million users in the cloud, easily the most successful enterprise cloud company in the world from the user adoption perspective. Unlike our cloud competition, we offer the breath and depth of functionality that allows companies to run their entire business. We’re running industry-specific mission critical processes in the cloud, which our competitors just don’t do.

For example, we help retailers with omni-channel, we help banks with corporate-to-bank connectivity, we help insurance companies with international regulatory compliance, we help professional services companies manage business process outsourcing and we do all of this in the cloud, which our cloud competitors simply cannot do. And significantly, we are the first to do all of this in real-time in the SAP HANA cloud. In Q1, approximately 60 customers including Nestlé have made the strategic decision to run core business processes on the HANA cloud platform. Our new HANA cloud subscription allows companies to do all of this without any upfront CapEx.

Today, SAP provides the most comprehensive end-to-end HR Cloud solution. For example, our payroll solutions run globally, while our main pure-play cloud competitor only provides payroll for two countries. Customers recognize this advantage, with companies like RS Components, choosing SAP HR Cloud solutions over Workday as an example. In addition, our global services companies specializing in certification selected SuccessFactors solution over Workday to address HR synergies for over 60,000 employees in 140 countries.

With SuccessFactors, they will streamline and align talent and core HR processes, in order to increase focus on strategic objectives to support their company’s growth. With the successful closing of Fieldglass, a very important acquisition, we will also lead the fast-growing market for flexible workforce management.

Today, more companies need to manage a diverse workforce, including contractors, part time and temporary workers. Fieldglass will significantly enhance our business network strategy and enable our customers to collaboratively manage all of their business needs, permanent employees, flexible workforce and goods and services, all in the SAP Cloud.

Let me comment on the future of Customer Relationship Management. CRM is no longer just about sales force automation, that’s commodity. It is about managing your customers and their customers across every single touch point or omni-channel. We call this next generation customer engagement.

Our hybris omni-channel e-commerce platform in combination with cloud for sales is seeing triple-digit growth, as companies unlock cross-sell and upsell opportunities in real-time in fact, like never before. Companies, as diverse as Max Mara Fashion and Boeing are turning to hybris to deliver state-of-the-art B2B Commerce and maximizing conversion and revenue rates.

Boeing, the world’s largest aerospace company will use hybris to provide the flexibility to accommodate a complex buying process. With hybris, Boeing expects to develop the future commercial and military commerce platform that will potentially drive revenue, lift across all of their lines of business and companies like Hallmark Cards, the largest manufacturer of greeting cards in the U.S. are turning to SAP Cloud for sales. Hallmark plans to shift its retail solution to the cloud. They expect to provide 1,500 supervisors with the ability to manage territories with more dynamic enhancement management and support, while realizing cloud-based savings.

We continue to scale the world’s largest business network. We now have 1.5 million connected companies, an approximate 40% year-on-year increase and more than $0.5 trillion transacting in spend on this network takes place. SAP is proud of that.

Last week, Accenture announced that they will use the network to power their procurement business process outsourcing practice forward. This will significantly drive connected companies, and transaction volume and further establish SAP as the de facto e-commerce standard in the market.

We’re also bringing together Ariba and HANA. Ariba Spend Visibility solution is now running on HANA and a switch over perform for 5 million users instantaneously with zero downtime. Companies on the network can now analyze vast amounts of spend data in fractions of a second.

SAP not only offers customers the choice of Public Cloud or Enterprise Cloud, but also the choice of where their data resides. As you know, data localization is becoming more and more relevant for all customers. They want to know where their data is located, and they expect to higher security standards for data management in the cloud and we can accommodate their needs on a global basis.

We are expanding our worldwide HANA Enterprise Cloud data center footprint from 14 to 20 locations by year-end. These include China, Australia, Russia, Canada, Mexico, India and Brazil. and because we are committed to helping the world run better, we are powering our data centers with 100% renewable energy.

Let me talk about how HANA is changing business. As already mentioned, we’re seeing broad adoption of HANA as the real-time business platform. We have achieved significant success in moving our product portfolio to the HANA platform. Both hybris and our Cloud for Customer solutions now run on HANA.

With HANA, customers can radically simplify the IT stack and reduce their TCO. The HANA platform enables customers to benefit from the value of integration, being in an Enterprise Cloud, in the Public Cloud, or On-Premise. HANA is also fundamentally changing our industry solutions, enabling customers to run complex, mission critical processes in real-time. HANA adoption is especially strong in telco, utilities, financial services and in particular, retail and CPG with customers like L’Oréal USA and Mercedes-AMG.

Turning to SAP HANA innovation, another great example is the large food retailer in Germany. They chose SAP Business Suite on HANA and hybris in order to capture new growth opportunities in the highly competitive European retail market. They aim to streamline their business and increase service and quality in all customer channels.

Another way we’re driving pervasive adoption of HANA and Cloud is through our vibrant ecosystem. HANA is creating a fast-growing development ecosystem. today, more than 1,200 startups from 57 countries are building applications on HANA. In fact, more than 60 startups have commercially available products on the market already. And we’re creating an entirely new ecosystem strategy for the Cloud with different partner types, such as VAR and OEM play a critical role.

In fact, we already have over 900 partners in our Cloud Ecosystem. in addition to Accenture’s commitment to run Ariba, we have also formed the Accenture and SAP Business Solutions Group. this includes dedicated experts from both companies to jointly develop integrated, industry-specific solutions powered by HANA and delivered via the Cloud.

Another truly groundbreaking example is the combination of Adobe Marketing Cloud with the SAP Hybris Commerce Suite and the SAP HANA platform. We will deliver real-time customer engagement with relevant, contextual experiences across all marketing channels and customer touch points. This will redefine customer engagement and retention in the fast-changing and highly competitive consumer world.

As I mentioned, Cloud and HANA are driving simplification for SAP customers. we’re also making strong progress in offering users an intuitive user interface. we continue to expand our mobile first development strategy with SAP Fiori. This brings a consumer grade user experience to customers without disruption.

Customers, as diverse as Colgate, Norfolk Southern, Saudi Arabian Airlines and Kenya Power have turned to our more than 230 SAP applications that now run on the Fiori user interface. And our ambition is to run all SAP applications with this new intuitive and beautiful UI, with 150 additional apps scheduled to be released this year.

Okay. I’d like to talk now about our regional performance. In EMEA, 39% growth in cloud subscription revenue and a robust core business drove the solid regional performance. This was despite uncertainties in CIS due to the Crimea crisis. Southern Europe is rebounding strongly, and Iberia and Africa posted a record quarter.

In Americas, we saw a continued fast transition to the cloud with 37% growth in cloud subscription. Canadian software revenue also came in real strong. We continue to see strong demand in Latin America with tremendous growth opportunities going forward.

APJ was mixed, while Japan was below expectations. our overall APJ cloud subscription performance was 43%, year-on-year growth was excellent and China was a particular highlight, which obviously is different than other big companies that have reported.

Our long-term commitment and growth strategy in China are paying off, as shown by its strong double-digit growth rate in software. We’re clearly outperforming the competition as SAP is the trusted partner in China. Customers like China Grand Auto, China’s biggest auto dealer and the world’s second largest auto dealer selected SAP solutions of Oracle to support its growing business. With SAP, China Grand Auto expects to promote business innovation, which could lead to €100 billion of annual operational revenue for the customer.

In summary, I continue to believe that the far the back you look, the far the forward you will see. In the Y2K era, customers dealt with widespread integration challenges, standing from best-of-breed point solution providers. The dynamic then has become the opportunity now. They have the best-of-breed at the line of business level, integrated into a common process and data model is the way.

With the SAP Business Suite and the SAP Cloud powered by HANA, I’ve never felt more confident in our future, as CEOs look to simplify their IT landscape to focus on scaling new business models in the network’s global economy. None of this success however would be possible without the 66,750 SAP employees who will go above and beyond to achieve this success.

I would like to thank them wholeheartedly. I would also like to invite you all to SAPPHIRE NOW, which will take place, June 3 through June 5 in Orlando, Florida. As always, we are excited about the opportunity to share our latest innovations and connect with our customers and analysts at this event. with the broadest cloud portfolio and technology like real-time HANA business platform, and by the way, a strong pipeline, we stand firmly behind our 2014 outlook. We are confident that our momentum will continue each quarter this year and we are very well positioned to achieve our 2017 ambitions.

I’d like to thank you and turn the call over to Luka Mucic. Luka, over to you.

Luka Mucic

Yes, thank you very much, Bill, and welcome from my side as well to this call. Bill gave you an overview of a very strong first quarter, which demonstrates our successful transition to the cloud, while managing a growing profitable cloud business.

Before getting deeper into the Q1 results, let me address a couple of technical topics upfront. First, we saw a significant currency effect in the first quarter. Our SSRS and operating profit growth rates, as reported were negatively impacted by a 5 percentage points each. Secondly, we have now fully integrated our On-Premise and Cloud go-to-market support and R&D organizations.

As a result, we only have one operating segment. We will however, continue with our transparency in the cloud by providing cloud subscriptions and support revenue, the total cloud revenue run rate and the calculated cloud billings. In addition to that, we will now provide cost of cloud subscriptions and support revenue to give some more insight into the cloud subscriptions and support gross margins. Also, we will report our cloud related professional services and other service revenues separately. For more details on these cloud related KPIs, please see our quarterly report, which was published earlier today.

Now back to the results for the first quarter. Bill already talked about our SSRS and cloud subscriptions and support results for the quarter. I’ll now go into some more detail on our results for the quarter. We saw solid growth in our core business, with software and support revenue growing by 7%. This was led by our consistent high single-digit growing support business, which renews in the high 90% range.

We have particularly the strong growth rates in both enterprise support and premium support offerings. Our enterprise support offering had again, an adoption rate of 96% with new customers and thus continues to be a de facto standard.

In the first quarter, we saw a very fast rapid growth in the cloud, with cloud subscriptions and support revenue up 38% year-over-year. Calculated cloud billings increased 36% year-over-year. Deferred cloud subscriptions and support revenue was €454 million as of March 31, the year-over-year increase of 29%.

Now one final remark on our cloud revenue and support revenue results. the combination of support revenue, and cloud subscriptions and support revenue, as a share of SAP’s total revenue increased by 3 percentage points year-over-year to 66% in the first quarter 2014.

Now let me come to some comments on our gross margins for the quarter. Our SSRS margin was down by 130 basis points to 81.5%. This decrease was primarily driven by the strong investment into cloud delivery and our investment in additional capacity to meet the increasing customer demand for our premium support offerings that I’ve been just talking about.

Our cloud subscriptions and support margin was down 200 basis points to 70.5%. This decrease was primarily due to the ramp up of cloud infrastructure delivery capacities to reflect our increasing customer demand. As Bill had previously mentioned, these investments include expanding our HANA Enterprise Cloud data center footprint from 14 to 20 locations by year-end.

Professional services margin decreased by 5.3 percentage points year-over-year to 12%. There is a significant structural change in the demand for consulting services that we are experiencing. We have been and will continue to be adapting to this changing market environment. We expect this transformation to take some time and as such, expect the services profitability to be negatively impacted throughout the rest of the year. As a result, the overall gross margin was 69.4%, a decrease of 70 basis points year-over-year.

Looking at the expense side of the P&L, you can see the total operating expenses in the first quarter increased by 6% year-over-year. Operating profit consequently was up 7%. IFRS operating profit was up 12%, as reported. This is obviously a higher increase than non-IFRS operating profit, as reported and at constant currencies, which is due mainly to a lower impact from acquisition related expenses such as deferred revenue write-downs and acquisition-related charges compared to 2013.

Our operating margin in the quarter increased slightly, while we were accelerating our Cloud business. Additionally, we had a negative effect from acquisitions of approximately 20 basis points, so our organic margin expansion was 30 basis points.

The IFRS tax rate in the first quarter of 2014 was 24.1%, which was up 7.8 percentage points year-on-year. The non-IFRS tax rate in the first quarter of 2014 was 25.9%, which was up 4.5 percentage points year-over-year. The comparably higher effective tax rate for the first quarter 2014 mainly resulted from changes in the regional allocation of income and an increase of taxes for prior years. As you may recall, the first quarter of 2013 was extraordinarily low in this respect. We are maintaining our effective tax rate outlook for the full-year.

Now to cash flow and liquidity. operating cash flow for the first three months was strong at €2.35 billion, which means an increase by 9% year-over-year. This strong cash flow result enabled us to return to positive liquidity in a very short period of time after having done some major acquisitions. Actually, net liquidity at the end of the quarter improved to €750 million positive from a negative €1.47 billion just three months ago. As Bill had already commented, we are maintaining our full-year guidance for 2014.

In summary, we expect full-year 2014 non-IFRS software and software-related service revenue to increase by a 6% to 8% at constant currencies. Non-IFRS cloud subscriptions and support revenue to be in a range of between €950 and €1 billion at constant currencies and our non-IFRS operating profit to be in a range of between €5.8 billion and €6 billion at constant currencies.

Before I finish, let me come back to where I started and make a few further comments about currency, which would help you to more accurately model SAP for the reminder of the year. If exchange rates remained at the end of March 2014 level for the rest of the year, the company expects non-IFRS software and software-related service revenue and non-IFRS operating profit growth rates at actual currency to experience a negative currency impact of approximately 6 percentage points and 8 percentage points respectively, the latter being for operating income for the second quarter of 2014 and of approximately 4 percentage points and 5 percentage points respectively for the full year of 2014.

With this, I would like to thank you. and we will now be happy to take your questions. I’ll let to you, Stefan.

Stefan Gruber

Thank you, Luka. I would like to hand it back to the operator. Please start the Q&A session.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, at this time, we will begin the question-and-answer session. (Operator Instructions) And the first question comes from the line of Gerardus Vos of Barclays. Please go ahead.

Gerardus Vos – Barclays Capital Securities Ltd.

Hi, thanks for taking my question. Two if I may, just first of all on the Fieldglass acquisition, I calculate that they should roughly generate around kind of €300 million in revenues by 2017, if you just extrapolate the kind of current growth rates. I think in the past, management indicated that if a deal would have been done over €1 billion; there would be an update to the guidance for 2017. and I was wondering, given that we’ve seen our one of the deals perhaps a little bit below €1 billion, would the next deal trigger that kind of update through the guidance? And secondly, just on Asia and Japan, it looks like that there was a bit of misexecution, we’ve seen it also particularly from a license perspective in the first half of 2013, perhaps you could elaborate a bit on that, what exactly is happening and how you guys are dealing with that? Thank you.

Luka Mucic

Yes, Gerardus. Let me cover the first one, because that will be a quick one. The Fieldglass acquisition will hopefully be closed in Q2. so let’s come to that bridge and get to the bridge and over that bridge when we really close the acquisition.

Bill McDermott

Excellent. And Rob, if you would like to make any comments on Japan, you’re most welcome to do so, Rob Enslin who runs our worldwide sales force.

Robert Enslin

Yes. Thank you, Bill. I think that two topics in Japan, clearly we’ve seen some changes to the Japanese economy, which has had some impact to the business. we have to see significant shift in some of the Japanese business moving to more cloud type oriented software. We’ve reacted by positioning data centers in both Osaka and in Tokyo and continued to build our cloud business in Japan, and I think towards the last – towards the latter half of the year, you’ll see a strong rebound in the Japanese business.

Gerardus Vos – Barclays Capital Securities Ltd.

Okay. Thank you.

Stefan Gruber

Thank you very much. Let’s take the next question, please.

Operator

The next question is from the line of Chandra Srinivasan of MainFirst Bank.

Chandramouli Sriraman – MainFirst Bank AG

Hi, guys. This is Chandra Sriraman from MainFirst Bank. Just a quick question on the gross margins of your services business, I was just wondering as it got to do with the adoption of HANA Enterprise Cloud, given that it’s a private cloud with a lot of customizations. So I was just thinking or wondering if this impact is related to this. and also as a follow-up, should – should we expect more restructuring allocated to your services division or is it already incorporated into your current guidance?

Bill McDermott

Yes. So first of – I mean I can cover both questions. First of all, on the margin performance, no, I mean, we are seeing a shift in the consumption model of software, that’s why we are growing strongly on the cloud. And with this shift in consumption is the need to change also the paradigm and change the portfolio of services within our services organization, and we are busy doing this in a cloud-based consumption model, you need to work and fasten shift on-boarding services, you can work on process consulting. but of course, the – let’s say usual bread and butter, huge ERP implementation services are a concept of the past. And we need to adapt both of the composition of the workforce as well as the size of the organization to really be re-shifted towards those areas that we can really further grow on that innovative services around big data management, HANA, mobility and the cloud, but this takes a while. And that’s what’s driving the short-term impact. It has nothing to do with the private cloud offerings.

And then secondly, of course, we – as we are reiterating the guidance for the full-year, and you can expect that what we have seen in Q1 as part of our plan, actually, we’ve – we are very satisfied overall with our business performance in Q1 and are well on track to achieve our full-year targets.

Chandramouli Sriraman – MainFirst Bank AG

Thank you very much.

Stefan Gruber

Let’s move to next question, please.

Operator

And the next question is from the line of Brad Zelnick from – of Macquarie. Please go ahead.

Brad Zelnick – Macquarie Capital, Inc.

Thanks very much. My question is about HANA, I think, at this point, we appreciate what it means to leverage the HANA mix, and as an enabling cloud platform. But I’m trying to understand how much of the opportunity is in doing things you’ve always done best or cheaper, or best, even after themselves to be able to leverage real-time data and how much of this is certifying Business Suite on HANA and then rating the portfolio versus evolving application functionality to be more data aware. And if you just think about the base of HANA customers today, what does that mix look like and where is it going to?

Bill McDermott

So Vishal Sikka who heads up the SAP Development will be happy to answer that. Vishal?

Vishal Sikka

So the benefit of HANA is a two-fold. One is the – a dramatic simplification and improvement in the Business Suite, and our traditional applications and our cloud applications. And the other one is an enabling completely new kind of applications that were not possible before.

So if we look at the simplification that we can enable in mission critical applications. We are after that already running. For example, within SAP itself, our Business Suite on HANA, our ERP System on HANA, 7x to 8x smaller than it used to be on a traditional RDBMS. And with the further simplification that we are doing by getting rid of our defects of inefficiencies from the past like aggregates and industries inside the applications.

We can in fact, achieve a dramatic, not only simplification in the landscape of these systems, but a completely dynamic and flexible behavior in the application. So we nearly bring a benefit of a disruptive technology to these mission critical applications and to complement that disruptive innovation within enabled completely new kinds of user experiences with the Fiori program and that combination then we deliver non-disruptively to the business, because the business processes can continue to be as they were while bringing dramatic benefits of simplification and dynamic behavior and real-time reporting across the board.

So we think that there is an opportunity for us to completely renew our entire installed base and our entire portfolio of existing applications towards this. And this applies not only to the Business Suite, but also to the cloud applications. As Bill said, we just launched the first wave of customers of Ariba on HANA and we see 100x performance improvement in operational reporting. As a result of that, we see a 5x to 10x increase in the usage of these systems. And actually, we also saw 12x better compression compared to Oracle.

And the other dimension of that that we see is in a complete enabling of new kinds of applications in all kinds of industries. Applications that were not possible before like predictive maintenance on massive machinery, like new kinds of healthcare solutions, geostatistical and seismic data analysis in oil and gas industry, new ways of doing risk calculations in banks, areas where software and real-time software is making its way for the very first time. We believe that both of these dimensions of opportunities are massive and that is why the HANA platform is the underpinning of everything that we are doing.

Brad Zelnick – Macquarie Capital, Inc.

That’s very helpful. Thanks, Vishal, because we too were hearing it much more than just a Big Data analytics platform, but it is just driving a wave of business transformation for customers both of SAP and few customers as well. Thank you very much.

Vishal Sikka

Exactly.

Stefan Gruber

Well, thank you very much. Let’s move to the next question, please.

Operator

Next question is from the line of Adam Wood of Morgan Stanley. Please go ahead.

Adam D. Wood – Morgan Stanley & Co. International Plc

Hi, thanks very much for taking the question. And just two quick ones if I could, just first of all, coming back to the services gross margins, when we think about changes in the services business about how come we’re kind of head count related and could we understand it other restructuring charges in that this year, which is what’s impacting the margins through this year, that kind of fall out next year, or are there other expenses in that that are impacting the margins? And then secondly, just thinking about the cloud growth opportunity, they have a very strong course of that, maybe you could just give us a little bit more detail on that that the conversations we have to just SuccessFactors is growing extremely quickly and maybe Ariba coming into SAP a few quarters later is maybe a couple of quarters behind SuccessFactors’ acceleration. Is that a kind of right way to think about it? And maybe as we look to Europe, it’s a big greenfield opportunity for Ariba, you could talk a little bit of what you’re doing with sales capacity of that to push that opportunity? Thank you.

Bill McDermott

Absolutely, let me take the first part and maybe my colleagues can handle the go-to-market part. So I mean, we are not planning restructuring charges on a single line of business level that we have certain expectations that we have laid out in our non-IFRS measures. And as you have seen from today’s update, we continue to think they are appropriate. In a business as large as ours, you will have constant lead during the year, shifts and priorities, organizational changes. They may result in the need to think for restructuring charges. We think the range that we have outlined is appropriate for this year and would include anything that would apply to the services business. Colleagues take over.

Vishal Sikka

Maybe, I’ll just start out and then give Rob a chance if he wants to add anything by all means to do so. But in terms of the cloud growth, SuccessFactors and Ariba are both performing exceptionally well. So it’s not SuccessFactors that’s really going good and Ariba is sort of catching up. On the contrary, Ariba is right there with SuccessFactors and what’s interesting about Ariba, especially with the move that we made with Fieldglass, you see the business network playing a more critical role. You also now see Ariba cornering the indirect materials conversation.

And now that you have the contingent labor force and you can mange that both in the network, you see the design of our strategy come into life with both SuccessFactors and Ariba and some of the moves that we made around them to make sure that we are the de facto standard in HCM in the cloud. Because now you’ve got the whole integrated HCM cloud, plus you’ve got the contingent workforce, plus you’ve got the network working for you. There’s really no reason to go anywhere else.

I would also like to comment on Sales On Demand. We have totally underpublicized this. Our Sales On Demand business is rocking and it’s on a small base. so I’m not going to impress you with four-digit numbers. I’m just going to tell you it’s growing really fast. And when you combine that with hybris omni-channel commerce, and you tell them next-generation CRM story to a retail customer, you see their eyes would light up. So we’re about to disrupt the CRM business. And why not, I mean the ones that are in the cloud now haven’t made any money at it. so I think we can do both make money and be the leader in the cloud.

And then finally, you should know in every GO, our cloud business is growing very fast. Everyone and it’s almost at the same percentage. so the adoption of the cloud is really universal. And we are going to cloud by industry. I think this Accenture move might have missed your radar a little bit. but Accenture is lining up all their industry expertise with SAP to go-to-market with an industry cloud, which obviously only SAP can do, because we’ve been out there for 42 years. But it’s nice to know that the leading consulting firm out there thinks that’s the way to go for their future. Now Rob, anything you’d like to add?

Robert Enslin

Yes. I would like to just add, I think the network is gem and we continue to add network nodes every quarter and we see really good growth as we expanded as you said, Fieldglass is just going to take that over the top. I think a big play that’s also missed on this call is we added Mike Ettling to run our people business globally who comes as the ex-CEO of NorthgateArinso. And we believe that we continue to make a tremendous progress in the HR space. So we are growing our Cloud business pretty much everywhere and we see that to continue.

Adam D. Wood – Morgan Stanley & Co. International Plc

Right thank you very much.

Bill McDermott

Thank you Rob.

Stefan Gruber

Thanks very much. So let’s move to the next question, please.

Operator

Next question is from the line of Ross Macmillan of Jefferies. Please go ahead.

Ross Stuart Macmillan – Jefferies LLC

Thanks a lot. and two questions from me. Luka, just a comment on the operating margins, I think if I look at your SSRS constant currency growth rate for the year, it’s about 7% at the midpoint, your non-IFRS operating income growth also 7% at the midpoint. So it implies about a flat margin. As we think about this year, should we expect it to be flattish if you will year-over-year as we progress through the year, or I guess how much variability could we see there? And then my second question maybe for Bill, you made some positive comments on the SAP HANA Cloud, you talked about 60 customers. I’m trying to gauge whether you think on a go-forward basis, that’s going to be the route that more customers choose. And therefore, are we going to see basically acceleration of that contributing to Cloud and conversely HANA being less of incremental contributor to license growth? Thanks.

Luka Mucic

Yes. let me address the first one. so first of all in Q1, as I said, we had a margin expansion of 10 basis points organically 30 basis points. You also know that Q1 obviously from a revenue performance perspective is our smallest quarter. So the impact of some of the investments that we have made to front load our capacity in order to be able to deliver on the growth that we are able to drive in the cloud, but also in premium support, of course should level out through the year. we have given you a guidance range for operating profit, behind which we clearly stand very firmly. And this is also then intrinsically covering the expansion potential that we see on the operating margin side. so clearly, we would also for this year, not look at keeping our margin flat, but at growing it.

Bill McDermott

Yes. Thank you. And what I’d like to add, first let’s start off with HANA. HANA is SAP; HANA is the bedrock of our brand, of our soul. So it’s built into everything we do in the cloud, everything we do on-premise and yes, it will also stand on its own and the database market and we like our chances against anybody. if we get our story out there, we win. So that HANA and the essence of SAP is a tremendous growth trajectory for HANA and it will continue to come through as the year goes on.

In the SAP HANA Cloud and the idea of this adoption factor, we now have 1,000 Suite on HANA customers. and if you think about the benefit of that and the proof case that the Suite on HANA is so relevant, I for the lift of me, can’t understand why many hundreds and hundreds, if not thousands of customers wouldn’t want to move to the cloud company powered by HANA. so put the all Suite on HANA in the SAP Cloud.

And I think it’s a great way for the users to adopt the technology to get faster time to value, to deal with this consulting business model transformation that’s going on and most importantly, we have made a bold move. We went to the marketplace and we told them if you tied on CapEx and you want to rent the software, you can rent the Suite on HANA in the SAP Cloud, and that’s something that we’ve recently announced. So as the market digests that opportunity, I expect that hockey stick to build as the year goes on.

Luka Mucic

Thank you, Ross.

Ross Stuart Macmillan – Jefferies LLC

Thank you.

Stefan Gruber

We have time for two more questions please.

Operator

And the question is from the line of Rick Sherlund of Nomura. Please go ahead.

Rick G. Sherlund – Nomura Securities International, Inc.

Yes. Thanks for taking my question. I’d like to just focus a little more if I could on the HANA Enterprise Cloud. So I understand that’s not the portion that is your [SAS] (ph) business, but with the Business Suite on HANA for example hosted. So if you've got 1,000 customers Business Suite on HANA, how many of them are using SAP to host in the cloud? And if you can kind of give us a sense, are these customers that are buying Business Suite on HANA, are they existing customers, or is it new customers? And to the degree that design wins come first and then the revenues generate, will the simplified financials and other simplified apps reduce some of the friction in this market? And just one more. The platform-as-a-service, it sounds like you’ve got a lot of companies building apps on top of the platform, and no doubt that takes time to see any revenue benefit. But should we think of this as a bigger opportunity as you get more and more apps written on HANA that you’re going to host in the Enterprise – in the HANA Enterprise Cloud?

Vishal Sikka

So, Rick the – this is Vishal. As we see, we have several dozen systems on the HANA Enterprise Cloud or SAP Cloud powered by HANA, already productive as our mission critical systems from major companies in the world like McLaren and Florida Crystals and other. as we see the evolution of that as Bill said, more and more customers will adopt SAP Business Suite running on the HANA Enterprise Cloud. so we expect that that will continue to grow significantly, but obviously there are many customers who still continue to run the Business Suite on HANA on – in their own data centers. In terms of the split, Rob can answer this better.

We are seeing roughly equal amount of new, as well as existing customers embracing Suite on HANA. The applications, the further simplification that we are enabling with HANA. this is a massive opportunity for us, but especially for our customers. Simplified financials is the first example of this. the opportunity to dramatically simplify the footprint of a mission critical ERP system, by getting rid of aggregate.

I mean in financial, for example, there are aggregates for everything for daily totals, weekly totals, monthly totals. we can do all of these on the fly and that has two effect, that means that you can simplify the application. But at the same time, you make it completely dynamic, because you can aggregate on anything in any dimension in anyway that you can imagine and that opportunity to dramatically simplify the application lower the footprint, lower the complexity and at the same time, make it completely dynamic. Changes not only, I mean, for example the statutory and legal reporting and compliance aspects of the applications, but also the management and the way you manage businesses, this can be completely dynamic and frankly limited by only our imagination.

So we see this benefit, first coming in simplified financials as an incremental improvement onto the Business Suite and obviously for customers who run this on the cloud, this year dramatic benefit of that with the ease of delivery, the ease of consumption and integration that the cloud enables. So we see that coming into financials into logistics, into CRM, into every aspect of the Business Suite over time and bringing the benefits of that also to other parts of our product.

And to the last part of your question about new kinds of applications, we are incredibly excited about it. Our traditional partners like Adobe and others as well as Cap Gemini, Accenture, Deloitte are all building amazing new applications on HANA. With Accenture, we have announced work in major industries like oil and gas and marketing, of course, marketing with Adobe with Cap Gemini and retail and banking and others.

As well as a completely new category of companies that are building really unprecedented applications, 1,300 startup companies who are completely betting on HANA to deliver completely new kinds of applications in healthcare, and manufacturing and marketing and basically all walks of life, that gives us an opportunity to grow a new dimension of a new kind of an ecosystem and that makes the platform opportunity that much more exciting.

Luka Mucic

Rick, finally, this is Luka. just wanted to come back also on the revenue model for HANA Enterprise Cloud as I heard a statement that this is a Suite on HANA revenue and just wanted to make sure that we don’t have any misunderstanding here. If you look at our HANA Enterprise Cloud model, it falls into different components. on the one hand side, you have clearly the managed services and hosting component and the fees for that are booked under cloud subscription revenues.

Then, on the licenses for the Suite on HANA in the HANA database, they have two different options. on the one hand side you have in deed to bring your own license model and this of course, would then result in software license revenue. But we also offer since this quarter, the subscription options. so a customer can also get a rental license basically for a certain time period, typically for years for and the same product. And those revenues would also be shown under cloud subscription and support revenue. Just that we are clear also for modeling purposes.

Vishal Sikka

Yes. And Rick just on a go-to-market side, what you see there is that the customer basis that split 50/50 between new customers and existing customers that are bringing BW existing suite applications onto the HANA Enterprise Cloud. And you see a significant amount of customers starting the adoption of HANA based on project based HANA Enterprise Cloud where they can actually convert at a latest stage into production. And as we see, as opened up data centers around the world, you automatically see an expansion of the pipeline in those marketplaces and that’s what we seeing with the HANA Enterprise Cloud.

Rick G. Sherlund – Nomura Securities International, Inc.

Thank you.

Stefan Gruber

Thank you very much. So, we’ll have a one final question please.

Operator

And the question comes from John King of Bank of America. Please go ahead.

John P. King – Bank of America Merrill Lynch

Great, thanks for taking the questions. I’ve got two as well. Just lastly, on the M&A policy after your Fieldglass deal, just as it relates to your medium-term targets, you’ve got there a €20 billion target out there for 2015. The consensus is still a little bit below that number. And I guess I’m wondering how strictly do you need to adhere to that target. Do you feel the need to be doing an acquisition to get there, or is the €20 billion a deliberately round number? And the second one would perhaps be for Rob on the sales reorganization that you talked about in February, merging the On-Premise and the Cloud sales teams. Could you just talk about any early impact that’s had; whether you’re seeing more of the On-Premise sales people selling the Cloud products? And any data points you had around that would be great? Thank you.

Bill McDermott

John, maybe I’ll start. This is Bill. We had updated the €20 billion by 2015 to €22 billion by 2017. Keep in mind, when Jim and I as Co-CEOs announced €20 billion by 2015 in 2010, we would – we were obviously on a course that needed to be renewed by the time we got to 2014. So, we did that in early 2014 in New York City. So it’s €22 billion by 2017, that’s the number you should be working with and we also said €3 billion to €3.5 billion in the Cloud and the 35% operating margin by then. So, that was the statement that we made early – earlier in this year. Now Rob?

Robert Enslin

Yes. I would just say, I think the transition of SAP is a complete cloud company powered by HANA, as aligned with our go-to-market field, I think everybody at SAP now is driving cloud sales across the HANA Enterprise Cloud across the Public Cloud with the people, Ariba, the network and what you’re staring to see is the up-tick in leveraging the scale and size of the SAP sales organizations. The geographical coverage we have and the strength we have across the regions whether it’s emerging markets or in the mature markets.

And as we build and drive more data centers either our own or our [co-los] (ph) with our partners, you will continue to see the benefits of having an integrated go-to-market and development organization around all of our cloud products. So I think we’ve made the transition, it’s been extremely strong. It’s a – as a result of the Q1 results, you can see that and we continue to see that strength evolving through the rest of the year.

Bill McDermott

And John, just to make sure that Rob and his sales force and for that matter, almost 67,000 employees around the world have clarity of purpose. We have made it clear that we are the cloud company powered by HANA, there are no debates. And secondly, we also agreed as a company to simplify everything we do around that imperative. so we’re going to put our assets and our alignment throughout the company on a global level around that customer centricity to ensure we achieve that objective. So more and more you’ll see us moving one formation in that direction. So there won’t be any confusion, not in the company, not in the financial community and definitely, not on the minds and in the hearts of our competitors.

Robert Enslin

Thank you.

John P. King – Bank of America Merrill Lynch

Very clear. thank you.

Stefan Gruber

Thank you very much. So I realize we have still three minutes to go for the full hour and there are still questions in the queue. We take one additional question before we close. Operator?

Operator

The question comes from Phil Winslow of Credit Suisse. Please go ahead.

Philip A. Winslow – Credit Suisse Securities LLC

Thanks guys for taking my questions. Bill, just got a quick question for you. Obviously, you made some comments upon Japan, but we’ve seen varying growth rates across the geographies for the past few quarters. I was just wondering if you could give us more detail about what you’re seeing in these geographies and just as you guys think about your full-year guidance, sort of how you think about sort of the geographic representation there?

Bill McDermott

Thank you, Phil. First of all, on Japan, the good news is, Rob has had a lot of experience and actually lived and ran Japan as the president of Japan. So I don’t worry too much about the leadership and the insurance that the pipeline and the numbers will come through, even when you have an off quarter, he’s got a way of fixing those things. Now the good thing is it was more than offset by the unbelievable success that we continue to have in China, which really has become our second home and I think China regards SAP as truly the trusted innovator there.

We believe strongly in markets like Brazil and Mexico, and obviously India, the Middle East continues to be exciting, Africa is just having an unbelievable run. We’d like very much to see a de-escalation scenario with what’s going on in Ukraine, take place as quickly as possible. that’s a serious market for us. we have 1,000 employees there, 1,700 customers and we naturally want to see a win-win scenario reached by the political power, because it’s important for our people, our customers and also the global economy not that SAP can’t withstand a slowdown there, we obviously just did. Our quarter would have been a lot stronger, even though it was a good quarter, if we hadn’t slowed down there, because we expect a lot out of that.

Europe looks really, really strong, and you saw that in Q1. it’s not just the cloud, but also the core and Americas is showing some real power in the cloud now. And the core is absolutely performing as evidenced by 10% SSRS growth overall. so we really feel very good about our company. we did an extremely deep dive in every territory, in every industry, in every market segment with every manager in the company post the quarter to understand, hey, based on the facts, where are we here? And with HANA in real-time, we can see it on the iPad, but there’s nothing like managing people by looking them in the eye. We walked away from that very confident.

Philip A. Winslow – Credit Suisse Securities LLC

Okay. Thanks guys.

Stefan Gruber

Thank you very much. This concludes to financial analyst earnings call for today. And thank you all for joining and good-bye.

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