SAP AG's (SAP) Management Discusses Q2 2014 Results - Earnings Call Transcript

Jul.17.14 | About: SAP AG (SAP)

SAP AG (NYSE:SAP)

Q2 2014 Results Earnings Conference Call

July 17, 2014, 08:00 AM ET

Executives

Stefan Gruber – Head-Investor Relations

Bill McDermott – Co-CEO

Luka Mucic – CFO

Robert Enslin – Global Managing Board Member

Bernd Leukert -

Analysts

Walter Pritchard – Citi

Adam Wood – Morgan Stanley

Michael Briest – UBS

John King - Bank of America

Stacy Pollard – JPMorgan

Rick Sherlund – Nomura

Knut Woller – Baader Bank

Philip Winslow - Credit Suisse Securities

Operator

Ladies and gentlemen, thank you for standing by. This is your Chorus Call operator. Welcome to SAP 2014 Second 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 over to Stefan Gruber. Please go ahead, sir.

Stefan Gruber

Yes, thank you. Good morning or good afternoon. This is Stefan Gruber, SAP Investor Relations. Thank you all for joining us to discuss SAP’s results for the second quarter 2014.

I’m joined here in Walldorf by Co-CEO, Bill McDermott and Luka Mucic, our CFO, who will both make opening remarks on the call today. Also Executive Board Member, Rob Enslin, who leads Global Customer Operations and Bernd Leukert who leads development and delivery of all products across SAP's product portfolio are on the call today and will 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. 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.

With that, 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. I really appreciate it.

Before I begin, I would like to congratulate SAP and Oliver Bierhoff and the German National Football Team on their thrilling march to the 2014 World Cup. I am proud this is not only a winning team, but they co-innovated with SAP and they served as a showcase for match insights powered by SAP HANA.

But instead of giving you my take, I thought it would be better to give you Oliver's own words and before the tournament, Oliver was quoted a few times, once was in the media in Brazil where he said, imagine this, in just 10 minutes, 10 players with three balls can produce over seven million data points.

With SAP HANA, our team can analyze this huge amount of data to customize training and prepare for the next match. Bierhoff went on to tell ESPN this week, the same techniques were used to study opponents.

Jérôme Boateng, has to look at the way Cristiano Ronaldo moves in the box to use another example and before the game against France, we saw that the French were very concentrated in the middle, but left spaces on the flanks because their fullbacks didn’t push up properly. So we targeted those areas.

When you think about what they accomplish with their smart use of big data, it amounts to making a complex game look simple. And now we know that simple helps win the World Cup. I would like to offer congratulations again to the Deutscher Fussball-Bund.

Earlier in this year, we launched a new strategy to become the could company powered by SAP HANA and the focus of this strategy is to make our customers Run simple. This means providing our customers with simple and easy to consume solutions so that they can run every aspect of their business well, simple.

Our cloud solutions and all of our applications combined with the unifying real time power of HANA, enable simple. That's why we launched Simple Finance at Sapphire, which makes complex finance processes easy.

In the spirit of keeping the complex simple, I'll keep today's remarks as brief as possible so we can get to your questions. After Q1, we reported that SAP was successfully transitioning into the could company powered by SAP HANA. Today I am pleased that our Q2 performance furthers that success.

We're winning in the market because we're more focused than ever on helping our customers succeed and grow. With the unique combination of the SAP could powered by HANA, the largest business network and our omni-channel eCommerce platform, our customers across 25 distinctly different industries and over 180 countries can defeat complexity and do highly sophisticated things well, simple.

In Q2 we saw the Run simple strategy resonating with customers. We delivered very strong growth of 39% in cloud subscription and support revenue with calculated billings increasing 37%.

At the same time, we saw solid performance in the core with second quarter software and software-related services increasing 8% at the upper end of our annual guidance range and we continue to successfully navigate our broad shift to the cloud, while improving our operating profit.

I would like to touch briefly on each of the key driers of this growth story. First, let's take a closer look at the cloud. We have the most enterprise cloud users in the world now, more than 38 million and our cloud run rate is approaching €1.2 billion or in U.S. dollar terms, $1.6 billion.

We are growing our cloud one and a half times faster than our closest competitor and faster than most all of the SAS peer group and we are the fastest growing enterprise cloud company at scale. We have the breadth and depth of functionality that allows companies to run their entire business in the cloud and no other competitor can do this.

For example, with the addition of Fieldglass, we are the only company that offers total workforce management in the cloud, enabling our customers to manage their permanent employees and flexible workforce employees in one place.

Because of our depth and global reach, companies are selecting SAP cloud over pure play cloud vendors. Telefónica a leading international telecommunications company, with more than a 120,000 employees selected the SAP SuccessFactors Enterprise suite including Employee Central over Workday.

Bombardier Recreational Products, a global leader in the power sports vehicles and propulsion system selected SAP SuccessFactors including Employee Central over Workday to optimize their HR solutions and delivery. And Weir Minerals, a mining machinery manufacture and division of Weir Group, chose SAP cloud for sales over Salesforce.com.

At Sapphire we announced that we're bringing our over 40 years of unrivaled expertise across 25 industries to the cloud. We are running industry-specific mission-critical processes in the cloud, which other cloud vendors simply can't do.

Companies like eBay and BSH Bosch und Siemens are choosing our industry solutions. BSH, the largest manufacture of home appliances in Europe, purchased and went live within industry solutions powered by SAP HANA on the HANA enterprise cloud.

The migration to SAP HANA provides the foundation for extremely fast calculations, real time reporting and breakthrough innovations. We also recognize the increasing opportunity for small and medium businesses to Run simple in the cloud. I am very pleased to report to you today that we have named Dean Mansfield, a strong leader and former President at NetSuite, to lead SAP's SMB Solutions Group.

This division will focus solely on the needs of small and medium sized businesses, an area in which we foresee considerable long term growth for SAP. So whether it's our existing global infrastructure or next generation industry cloud solutions, it's clear that customers of all sizes are accelerating their moves to Run simple in the SAP cloud powered by SAP HANA.

Another piece of the Run simple growth strategy is redefining enterprise value chain collaboration. The next big opportunity in enterprise applications is the enormous potential of the network economy.

Driven by the connectivity of people, machines and business processes, the network will drive unparallel collaboration, both inside the company and between companies. Companies will transact real time, frictionless commerce and nurture new trading relationships to drive sustainable growth.

SAP is at the core of this network economy. We have the world's largest business network connecting approximately 1.5 million businesses and driving an annualized transaction volume of $540 billion. This is two times the size of Amazon and eBay combined. If it were a country on to itself, the Aruba Network would be in the top 25 by measure of GPD.

General Electric, an existing SAP SuccessFactors and Fieldglass customer, selected the Aruba Network to replace manual time consuming error-prone processes. With Aruba, GE water and process division expects to streamline its business interactions with suppliers and simplify the Boeing processes for its customers.

The addition of Fieldglass further expands our network capabilities and increases our addressable market to cover materials, services and flexible workforce. The network is a highly attractive business model for SAP due to the network effects. Every additional customer has the potential to bring in hundreds of trading partners and the related commerce to the network.

This means that we can scale revenues at a lower cost compared to a traditional cloud application model. And speaking of customers the essence of Run simple is delivering true customer engagement that goes beyond the sales force automation nature of traditional commodity CRM.

The future of customer engagement shapes the customer journey in real time from customer insight to targeted marketing, to sales promotion to commerce and service, all with focus on simplifying the customer experience.

With our hybris omni-channel eCommerce platform and SAP cloud for sales, we are redefining customer engagement and creating a new category of software, which is seeing explosive triple digit growth. For example Samsung Electronics is rolling out hybris. So when you make a purchase on Samsung's eStore in the future, you are using SAP.

Each and every one of these growth drivers revolves around a single platform. HANA is at the core of Run simple and integrates all SAP solutions on one business platform in the cloud. Customers are broadly adopting the HANA platform to give them real time insight and simplification they need to gain an edge.

We now have over 1200 customers on SAP business suite powered by SAP HANA exceeding our internal expectations for a product launched just over one year ago. Shell, a longstanding SAP customer is accelerating its transition to SAP HANA and the cloud. Shell recognizes the value and co-innovation with suppliers to help them maintain competitive advantage and specific to SAP to leverage technologies like HANA and cloud.

HANA also embraces an open and vibrant ecosystem. 1500 start-ups are now building on HANA and in Q2 we added new strategic partnerships around HANA with HP and VMware.

Let me share a few details with you about our regional performance in Q2 starting with a strong performance in EMEA. Despite continuous uncertainty due to the Ukraine crises, we achieved 51% growth in cloud subscription and support revenue in the EMEA region as well as strong double-digit software license growth in countries like the U.K. and France to name a few.

Customers like Carlsberg and E-Plus have chosen SAP this past quarter. Giorgio Armani, the Italian high fashion house went live with SAP Is Retail, powered by SAP HANA replacing Oracle and now plans to roll out SAP Fashion Management Solutions globally.

Co-innovating with SAP, Armani aims at increasing speed and flexibility in the ultra competitive retail space with a unique solution for its vertically integrated fashion processes from product to store front. Americas continue to fast transition to the cloud with strong double-digit growth in cloud subscription and support revenue.

Canadian software license revenue was particularly strong. We continue to expand and deepen our large customer base in North America with [indiscernible] US Army, New York Life to name a few and we continue to see strong demand with tremendous growth opportunities in Latin America with customers like Central Bank of Costa Rica and Antofagasta Minerals and others.

APJ also saw solid performance with 48% growth in cloud subscription and support revenue. Australia and Malaysia were highlights with triple digit software license growth. China continued to perform strongly with double-digit software and software related services growth. Customers like Singapore Health, Cathay Pacific and Tatung chose SAP innovations this quarter.

So to summarize it all, we are delivering on our Run simple strategy with strong growth in cloud, HANA and the network. As we head into the second half of the year, we are really confident in our overall 2014 outlook for software and software related services revenue and profitability and as Luka will detail in a moment, we are raising the outlook for cloud revenue for the year.

As the cloud company powered by SAP HANA, we strongly believe our momentum will continue and we are on the right path to achieve our 2017 midterm ambitions.

As always, I would like to thank our 67,600 women and men of SAP for the hard work they put in to achieving this success. None of this would have been possible without their diligence, hard work, creativity and commitment to this company.

I would like to thank you all and now I'll turn it over to our CFO Luka Mucic, also my good friend. Luka, over to you.

Luka Mucic

Thank you, very much Bill. As you just heard Bill talk about our strong second quarter results with excellent growth in the cloud and a very solid performance in our cloud business, before I get into further details on those, let me address a couple of technical topics upfront.

First on currency. We saw again a strong currency affect on the topline in the second quarter. Our Cloud subscriptions and support revenue was negatively impacted by seven percentage points and our SSRS revenue was negatively impacted by four percentage point.

Then we recognized the provision of €289 million for the Versata Litigation in Q2. To ensure that our non-IFRS numbers are comparable over time to change the definition of our non-IFSR numbers to exclude the effects from the Versata Litigation.

Before I go into the quarter's results, on a semi-personal note I wanted to say a few words about SAP's implementation of simple finance that Bill mentioned before. SAP deployed this revolutionary solution powered by SAP HANA in just 10 weeks from February to end of April without any disruption to our business.

We cut more than 420 hours from our financial close processes and we reduced the date footprint from seven terabytes before HANA to under two terabytes. SAP now has one common platform for both regulatory and managerial accounting, with further real time processing and most importantly unlimited reporting capabilities across all dimensions and a significant potential to optimize our processes.

What I am particularly proud of is that simple finance was developed in close cooperation between our Stella development organization and our internal finance organization. So in a nutshell its simple finance, from finance, for finance.

It reflects our un-simple approach. Our close process was optimized. We are among the fastest tax companies to publish our quarterly results. Now to the results for the second quarter.

We continue to have a stable and growing quorum, with solid single digit growth in software and support revenue. 9% growth in support revenue was certainly again a highlight as it has been for a number of quarters now. Our support contracts renewal rate is consistently in the high 90% range. Growth in enterprise support and premium support again was especially strong. Once again our enterprise support offering had an adoption rate in the mid 90 percentage range and continues to be the de facto standard.

As a consequence the combination of support revenue and cloud subscriptions as a share of total revenue increased again by three percentage points year-over-year in Q2 to 61%, improving our overall predictability of our business performance for the future.

In the second quarter, we saw fast growth in the Cloud with Cloud subscriptions and support revenue up 39% year-over-year as Bill mentioned. Calculated cloud billings increase 37% year-over-year. Deferred cloud subscriptions and support revenue was €448 million as of June 30, 2014, a year-over-year increase of 29%.

As you know transitioning to the cloud profitability is a top priority for SAP, Bill has alluded to that. And indeed in the second quarter, our operating margin increased 60 bases points to 29.5% on the back of an operating income growth of 7%.

Looking to IFRS now. The IFRS operating margin was done 7.5 percentage points to 16.8%. This was due to a one time effect that resided in a significant provision recognized for the Versata litigation.

Our SSRS margin was done by 100 bases points to 82.4%. This decrease was primarily driven by the strong investment into cloud delivery and our efforts to meet increasing customer demand for our premium support offerings.

Our cloud subscriptions and support margin was down 8.8 percentage points to 63.9%. As expected and as we shared during our Q1 call, our cost of cloud subscription and support increased significantly year-over-year in the second quarter as we continue to ramp up our cloud Infrastructure delivery and expand our HANA enterprise cloud data send our footprint.

Okay. Excuse me. We we're cut out for a moment. So I think I left it at talking about the cloud subscription and support margin. As expected our cost of cloud subscription and support increased significantly year-over-year in the second quarter as we continue to ramp our cloud infrastructure delivery and expand our HANA enterprise cloud data center footprint from 14 to 20 locations by year end. We expect this margin to improve in the second half of the year compared to the first half.

The professional services margin decreased by 4.3 percentage point year-over-year to 17%. As mentioned in the previous quarter there is an ongoing structural change in the demand for consulting services. We have been and will continue to adapt to this changing market environment.

We still expect this transformation to take some time and as such, still expect the services profitability to be negatively impacted throughout the rest of the year. As a result our overall growth margin was 71.8%, a decrease of 30 basis points year-over-year.

The IFRS text rate in the second quarter was 22.6% down to 2.2 percentage points year on year. The non-IFRS text rate in the second quarter was 25.4% down 1.4 percentage points year over year. We are maintaining our effective tax rate outlook for the full year. In the second quarter our non-IFRS EPS was $0.79 up from $0.71 per share compared to the prior year resulting in 10% growth.

Now let's cover our cash flow and liquidity. Operating cash flow for the first six months of the year was €2.58 billion. This is an increase of 4% year-over-year. Net liquidity at the end of the quarter was a net debt of €1.06 billion an improvement of more than €400 million compared to the end of 2013. This is a strong result given the dividend payout that we had in Q2 and cash payouts for acquisitions of around €730 million.

As Bill has said, we are updating our full year guidance for cloud subscription and support revenue. But we now expect to be in a range of between €1 billion to €1.05 billion at constant currencies. Previously this range was indicated between €950 million to €1 billion at constant currencies.

We continue to expect non-IFRS software and software related service revenue to increase by 6% to 8% at constant currencies as well as non-IFRS operating profit to be in the range of between €5.8 billion to €6 billion at constant currencies.

Before I finish let me make a few ending comments about currency, which should help you to more accurately model SAP for the remainder of the year. If exchange rates remained at the June 2014 level for the rest of the year, we would expect 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 two percentage points and two percentage points respectively for the third quarter of 2014 and of approximately two percentage points and two percentage points likewise for the full year 2014.

Thank you and Bill and I as well as my colleagues on the Broad will now be happy to take your questions.

Bill McDermott

Thank you, Luka. I want to hand it back to the operator. We can now 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) First question is from the line of Walter Pritchard of Citi. Please go ahead.

Walter Pritchard – Citi

Thanks. You talked about simplified financial on the call here in your prepared remarks and I am wondering if could you give us an update on early customer traction there and what you see in the terms of sales cycles on that product?

It does sound like SAP itself got some significant benefits. Is that something customers are seeing pretty quickly or is that something that you envision that this sale cycle to be fairly long given at the core of customer's operations.

Robert Enslin

Walter, this is Rob Enslin. No I think what will see was simple finances that the sales cycles will be shorter and generally for net new customers clearly a quick win and for existing customers you will see them take advantages as Luka said. So you will see smaller and shorter sale cycles.

Stefan Gruber

Thank you very much. Let's move to the next question.

Operator

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

Adam Wood – Morgan Stanley

Hi. Thanks very much for taking the question. Just to if I could, just first of all on the SMB that sounds like a pretty good move and obviously a big opportunity for you. Could you maybe just help us on the product side of things and there is obviously, there was a cloud initiative with business by design that's been deemphasized, what will be the main product focus on that SMB opportunity in terms of go-to-market?

And then secondly on the investments around HANA price and cloud, I think there is a lot of debate in the market on multi tenant SaaS [first hosted SaaS] (ph) and obviously some of the deals that will be more hosted than multi tenant. Could you may be just on two things, to your clients do you think care about the difference on that? And secondly, from your cost point of view, does it make a big difference to you and can you be profitable delivering that service as you are going to? Thank you.

Bill McDermott

Hi, this is Bill McDermott. Adam, how are you? With regard to the Dean Mansfield we wanted to approve an operator to go into that space, a guy that knows it well. By design it's still part of our product portfolio and we now have by design on SAP HANA, which is absolutely a game changer because everything is faster and better on HANA as you know.

We also believe strongly that B1 has been going through an indirect channel now and has proven itself to be very successful, high growth, double-digit business with good margin. So we will continue that. But we also put B1 up on HANA in the Cloud and we go global and we think that can be a very serious category killer.

Once it get into the market place and people see what it can do on HANA and we will continue innovate in that space now with a defined agenda underneath Dean Mansfield. So it's a combination of things we are going to go after the market with.

Related to the HANA enterprise Cloud and the multi tenant debate, the bottom line is the HANA Enterprise Cloud and each customer wants their solutions. They want it beautiful. They want them to work and yes, we can make money on it because HANA is the great simplifier.

When you radically simplify the IT stack I mean SAP used to run on eight terabytes of data. Now it's like closer to 1.5. You dramatically lower your cost of operation and improve the speed of everything in the operation. So it's perfect for Run simple. It doesn’t matter whether it's single or multi tenant. What matters is the customer gets what they want at the price point in the performance and the user experience they’re looking for and that's precisely what we intend to give them.

Incidentally, the one thing I would tell you on the SMB market when we looked at it we sized this for the SME customer that's in the 300K size. So we are going after a smaller customer and lots of names because we think we can really scale out that part of the pyramid that we haven’t spent a lot of time in. And even not spending time there we're doing pretty well. Can you imagine, we put our mind to it?

Adam Wood – Morgan Stanley

Thant’s great. Thanks so much, Bill.

Bill McDermott

Thank you very much, Adam.

Stefan Gruber

Okay. Thank you very much. Let's go to the next questions please.

Operator

Next question is from the line of Michael Briest of UBS. Please go ahead.

Michael Briest – UBS

Great, thank you, good afternoon. We hope we heard a lot of detail there and I appreciate the discloser you gave around the Cloud business, but could you may be give us some more numbers around the active use of data you have on products like Employee Central, Clouds For Customer.

One of your competitors is now giving a lot more granularity on that so would be helpful. And then secondly, in terms of the simplification strategy I think it has a lot of resonance. Can you may be talk about pricing for the on-premise suite and to what extent you will be willing to offer subscription for an on-premise product just to break down some of the complexities of the other price list? Thank you.

Bill McDermott

Yeah. So first thing first, Michael, how are you? We can tell you that we have 38 million users in the Cloud. We can tell you that we’re operating all the things around integrated human capital management for Employee Central in the Cloud and 28 distinctly different countries with payroll included etcetera where work days in two.

We can tell you that we’ve grown Employee Central from 30 to 390 customers and it’s kind of on a roll. And we can also tell you that we’ve beaten the pants of the competition with Cloud for Customer, because as Gartner said, it’s a visionary product with a much more beautiful user experience and when you combined it with omni-channel eCommerce, it really does get you beyond the commodity nature of salesforce.com and gets you into a totally different conversation. So let me tell you all those things.

And as it relates to pricing on the software on-premise we’d most happy to rent it. Actually, we already do and in fact the interesting thing that we’ve learned is our customers want to buy it, even though we’ve gone out of our way to keep reminding them that we’re only too glad to rent it, because we understand the NPV of that model as good as the other guy and we think it’s a great model.

But they view SAP as a strategic asset and they for now at least have behaved in a way that indicates purchases their preferred option, but the rentals on the table and we look forward to more and more customers renting our software.

Luka Mucic

John, maybe just one more comment nevertheless we took significant steps this year to simplify our pricing even in the non structures. We are now bundling more solutions to value-added packages that really address the different buying senders in a cohesive need and by that, we've significantly reduced the number of SKUs in our price.

Bill McDermott

And what’s interesting to Luka's point in terms of Run simple, we have actually reduced our price list by 70%, 70. So the whole company SAP is not only marketing run simple, because we know with the great simplify HANA and the Cloud we can, but we’re also behaving very differentially within the company and the clock speed has radically picked up especially in the last 60 days.

Michael Briest – UBS

Thank you very much.

Bill McDermott

Thank you, Michael.

Stefan Gruber

Thank you. Let’s move to the next question please.

Operator

Next question is from the line of John King of Bank of America. Please go ahead.

John King - Bank of America

Great. Thanks very much for taking the questions. I just had two if that’s okay. First of all, on the deal sizes I felt one of the notable things in the quarter was that you saw a big pickup in deals of over €5 million, which seem to be up about 50%, that's the first time in some time, is that a function do you think of just an easing comparison year-on-year or would it be fair to link some of that to the maturity of the suite on HANA and that’s reaching above the level of maturity and allowing you to sign bigger deals?

And the second one was just for Luka, on the tax guidance, you’ve not changed the guidance obviously, but you’ve beaten I think again the expectations a couple of times, could you just comment as to what you expect for the second half and whether there’s any one-off, which would mean you would be in the middle of the range or whether towards the end of the tax guidance would be more likely? Thanks.

Bill McDermott

Hey, John, I start off on the deal side. This is Bill, just to give you a flavor for it. It is true that the €5 million and above deals increased by about seven percentage points on a year-over-year basis, which is really encouraging and yes, the suite on HANA now is hitting scale.

As you know we have about 1,200 customers now purchasing the suite on HANA to complement the 3,600 customers that have made an investment in HANA and the 1,500 startups that run their whole future on HANA.

So HANA is becoming a standard and I am telling you since Sapphire there is real tailwind going on here. The Run simple concept, the vision of it has hit home. I think approaching the Cloud from the business network and the lines of business as well as the Suite on HANA and the Cloud has given the customer great confidence that we have the platform, we have the Cloud Solutions and we even have the network and that complements the On-Premise very nicely.

So, you tend to when the strategy in the right place for the customer increase the building materials because the customer wants more of a single vendor approach to their enterprise and we are seeing more of that. And it will also tell you that their larger deals going up because we’re going into areas we didn’t use to be.

The omni-channel, e-commerce business is up 158% year-over-year. Cloud for customers is up even high higher than that. These are businesses that weren’t ringing the cash register and now they are in a major, major way. So, I feel fantastic about coming at a Sapphire and what’s happened to the over pipeline including large deals.

Luka Mucic

John, maybe to cover your question on the tax rates, you’re absolutely correct in the first half year we clearly state below our stated guidance but SKU made mainly to two effects on the one hand. We had some special effects from prior year taxes that we’re rolling into this first half year favorably.

And the second point is that the distribution of our revenues develops more favorably than our base plan so to say as far as tax rate effects are concerned. So are these all effects that we can bank on for the second half year not necessarily, but it’s true we are on a good way.

You also know that in the second half SAP and tax rates always tend to trade a little bit higher and of course we have a huge second half still ahead where the revenue distribution can make a difference. But so far we on a good track and let’s see where we stand after Q3 and then I will be in a better position to give you a more definitive view on where we will land within or below the guidance.

John King – Bank of America

Perfect. Thanks very much.

Stefan Gruber

Thank you. Next question please.

Operator

Next question is from the line of Stacy Pollard of JPMorgan.

Stacy Pollard - JPMorgan

Hi, just a quick question on HANA. Now you said it was ahead of schedule and the number of customers, you’ve talked about that. Would you say the same about revenue generation and I know it's hard to separate, but if there’s any sort of gut feel and then also just when you think about the maintenance revenues, can you talk about what portion is price increases and then what portion is kind of maintenance contracts or separated out a new maintenance contracts, sorry.

Bill McDermott

Stacy, thanks for the question. I’ll start it off and I know Luka will comment on the maintenance piece of it. We also have Rob Enslin, our Head of Global Customer Operations and Bernd Leukert, the Head of Innovation, who is doing a fantastic job. Both these guys are unbelievable.

But in terms of HANA, the fascinating thing is HANA is growing very swiftly. We are in a company that has everything attached to HANA. If it’s a Cloud Solution and its 38 million users, that means we’ll soon have 38 million users running HANA. Can you imagine the opportunity for that hockey stick?

So, everything is HANA. There was no point in breaking it out other than the account -- the number of accounts, the suite on HANA and what we’re doing with startups etcetera. Having said that, you should feel very confident that HANA is embedding itself as a standard in the marketplace.

Yesterday I was with one of the largest chemical companies in the world. On the fly we were inventing new business models for transportation, logistics and the things that actually get stored in the containers so they can be viewed in the control center in real time. They couldn’t believe that all you have to do is feed data into HANA and then you have new business models.

A large manufacturer met with me yesterday in Germany. We’re doing machine-to-machine and preventative maintenance and they’re reinventing their services business model. So what you see here is the ultimate simplification of IT with HANA, but also brand new business models being stimulated on the fly where companies can see a whole new way to run their business.

So HANA has now taken hold. We don’t have to prove that it works. Everyone knows it works and now in the stage of how do I do it? And it’s really taking off very nicely, and yes, it’s ahead of our internal goals.

Luka Mucic

Now, few words on the maintenance, the strong performance in maintenance is a function of two primary drivers. The one being that we have virtual nurtured in maintenance. We have renewal rates that are between the 97%, 98% ranges.

With every new license that we sell, we add typical 22% and that price support on top of that, so it just is a self enforcing mechanism there. The second one is that our offerings are performing extremely strongly in terms of adoption. Premium support has very, very nice double-digit growth rates, so max attention active embedded offerings, they are extremely strong.

And secondly among the established standard support models end up price support is more and more dominating as de facto standard. Price increases have really only a very minor role to play, because we said that for enterprise support we keep the prices at 22% until 2016 for any new licenses sold and for existing license increases and for standard support and enterprise support are kept at CPI indexes and in many countries these actually don’t result in an increase only a minor tiny increase because typical the consumer price indexes remained relatively stable.

So it’s really a function of virtually non-existent churn as well as growth in premium support and high adoption rates for enterprise support.

Stefan Gruber

Okay. Thank you very much. Let’s move to the next question, please.

Operator

Next question is from Rick Sherlund of Nomura. Please go ahead.

Rick Sherlund - Nomura

Yeah. Thank you. I wonder if I can get some clarification on simple seems ironic, I’m confused by simple, but we’ve got Run simple, which I presume is right now mostly running the business suite on HANA but then you got Simple Financials to be followed by simple HCM, simple ERP.

So I’m kind of excited about the opportunity for the simple suite of products, because its simpler, it's got a nice interface, its hosted by you guys on HANA. But I’m not hearing much about that. I’m hearing more about Run simple, which I think is more business suite on HANA. Is there kind of reluctance to talk too much about it until it’s fully out because it could disrupt the current business suite on HANA, and maybe some clarification how you should be thinking about this?

Bill McDermott

Yeah, Rick, first of all, it’s Bill. That’s excellent question. Let me clarify it. First of all, Run simple is an absolute movement within our company to simplify our company. It also happens to be the new identity for the SAP brand. And therefore when I speak of run simple, I’m speaking as the architect of run simple for a corporation to abide by in every single way whether it’s our brand and how it impacts our customer or how we run our company and streamline everything so we can do anything for our customers.

So, that is a movement. It’s an identity. And there’ll be lots of things that you’ll be seeing on that in the days and weeks ahead. In terms of simple financials and other products that might take on the simple [monitor] (ph) they’re doing so on the basis of brand and that is a building block and there’ll be more of them. So that’s pretty much in nutshell. Bernd did you want add anything?

Bernd Leukert

Yes. Maybe test from the product side, while it's still outlined, it’s a strategy for the company. It has significant impact on how we develop, what is the architect of product and then that resonates how we can deliver innovations to the market.

Of course, the fact that we deliver the innovations to the cloud first is significantly accelerating adoption of the value by our customers and that is great to see that’s resonates us well in the financial numbers.

Number two, it addresses as well a need from our customers to consolidate a very fragment that hit our channels landscape into a homogenous landscape where the platform is the key enabler and that is coming back to our previous question before that behind this success is a strong platform with capabilities not just as addition relational databases, these capabilities that outperform any competitive offering in any dimension.

Stefan Gruber

Very good, thanks a lot. Let’s move to the next question please.

Operator

Next question is from the line of Knut Woller of Baader Bank. Please go ahead.

Knut Woller - Baader Bank

Yes. Thank you for taking my questions, it’s basically two. First one on the margin expansion, we have seen the 10 basis point margin expansion in the first quarter at constant currency and on acceleration to 60 basis points in the second quarter.

So when we look at your full year targets, should we think about an ongoing margin expansion at the same extent as we have seen in the second quarter or will that moderate somehow?

And then simply on Fieldglass, we have seen historical growth rates. As far as I remember you mentioned 30% to 40%, now it’s in the group you got a much broader scale of sales force, how should we think about the growth of Fieldglass going forward after you’ve integrated, will growth rate slightly accelerate or compared to historical rates or what’s you expectation here? Thank you.

Luka Mucic

Yeah. So first of all on the margin, as I said after the Q1 results of course it is always our ambition to increase our margin, but you should not extrapolate from an acceleration from 10 to 60 basis points that after Q3 it will be at 110 basis points and after Q4 at 160 basis points. I think we have the guidance out there to land between $5.8 billion to $6 billion operating income corridor and that’s what we are still committed to and what will then drive whatever we’ll achieve on the margin side.

And in terms of the Fieldglass acceleration and please colleagues chime in there, we have a guidance out there and we have just increased it and the acceleration of Fieldglass as part of the SAP group for 2014 is in that guidance and any further acceleration will be in next year’s guidance.

Knut Woller - Baader Bank

Perfect.

Bill McDermott

Thank you. The one think I would tell you about Fieldglass is the focus that we have on the business network and the ability of SAP to scale things on an international and global level is not trivial. So we didn’t buy it to maintain its existing growth rate.

Whenever we buy an asset it’s the best in the business and we do something special with it to accelerate growth and we expect that to happen with Fieldglass.

Knut Woller - Baader Bank

That’s very clear. Thank you.

Stefan Gruber

Thank you. We have time for one final question, please.

Operator

And the next question is from the line of Philip Winslow. Please go ahead.

Philip Winslow - Credit Suisse Securities

Hi. Thanks guys for taking my questions and congrats on a good quarter. Bill, question to you, just getting through the numbers here and just looking across the geographies and it looks like you guys had a solid pickup in EMEA and also APJ, I wonder if you give some color on just sort of what you’re seeing across region, sort of what trends you’re seeing and as you kind of look into this second half, just what you’re thoughts based on sort of the first half and then the pipeline for the second half? Thanks.

Bill McDermott

Sure. Well, thank you very much for the question, Phil. We’re really proud of what’s going on in EMEA. I think the team is doing a fantastic job under the leadership of Rob Enslin and the same is also true for APJ, whether you look at mature market like Australia just doing unbelievable things or you look at markets like China which we’ve declared the second home taken off, we’re just solid.

In the Americas the transition to the cloud particularly in the United States accelerates and that’s the number one focus for the United States is really to bare down with everything we’ve got on the cloud. In Latin America, we think there’s a lot of opportunity for all lines of business especially in places like Brazil, Mexico, Columbia and others.

So we see a new tailwind here, Phil. I think that it would be safe to say that we’re starting to see SAP cylinders rare under fire on multiple dimensions now as opposed to a six cylinder car hitting on three. We’re now raving it up and we can see all of the cylinders starting to move in the right direction and that bodes well for our second half and full year confidence not to mention on mid-term 2017 and beyond strategy.

Philip Winslow - Credit Suisse Securities

Thank you very much. Got it. Thanks guys.

Stefan Gruber

Thank you. This was the last question. Thank you. This concludes our Financial Analyst Call for today. Thank you all for joining and good bye.

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