SAP Q1'16 Earnings Conference Call: Full Transcript

Operator:

Welcome and thank you for joining the SAP First Quarter Results 2016 Conference Call. Throughout today's recorded presentation, all participants are in a listen-only mode. The presentation will be followed by a question-and-answer session. If you'd like to ask a question you may press star, followed by one. If any participant require operator assistance during the conference, please press star followed by zero for Operator assistance. I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.

Stefan Gruber: Investor Relations

Thank you very much. Good morning and good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the first quarter 2016. I’m joined by CEO, Bill McDermott; and Luka Mucic, our CFO. They will both make opening remarks on the call today. Also joining us for Q&A are Board Members, Rob Enslin, who runs Global Customer Operations; Bernd Leukert, who leads Product Innovation; and Steve Singh, Head of SAP Business Networks and Applications.

As usual, before we get started, I would like 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 US 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 2015 filed with the SEC on March 29, 2016. Participants on this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates.

I'd also like to find out that beginning this quarter we have published a quarterly statement. This statement replaces the earnings press release and the interim report and contains all relevant information in one document. Going forward, we will issue a quarterly statement for each of the four fiscal quarters. Additionally we will issue, as before, a half year report and a full year integrated report. Please keep in mind that unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and gross rates are non-IFRS as reported unless otherwise noted. Also we would like to invite you to our Investors Symposium which will be held on May 18 as part of our user conference SAPPHIRE NOW in Orlando, Florida. SAPPHIRE is a great opportunity to learn more about our strategy and product portfolio and please see our IR website for further information. And now I would like to turn the call over to our CEO, Bill McDermott.

Bill McDermott: Chief Executive Officer:

Thank you, Stefan, and hello everyone. Following an outstanding finish to 2015, SAP had a solid performance in Q1, our seasonally smallest quarter. The results show that even as the world economy is changing fast, SAP represents the innovation, strength and stability of a market leader. Last week I visited with numerous SAP customers. Here's what they told me. They are looking for SAP leadership in three main areas; first S/4HANA to be the 21st century suite of best-in-call business application, second; they want SAP line of business cloud and business network applications to remain best-of-breed, third; they believe strongly in the idea of OLTP and OLAP in one database, a data base yes that can do both transactions and analytics. HANA will be their database platform of choice. It is time for new architecture.

On each count, it's clear to me that SAP's fundamental growth drivers are rock solid. Let me share some Q1 highlights. We saw continued fast growth in cloud at 33% tracking to the high end of guidance. Non-IFRS cloud and software revenue was up 6% at constant currencies within our guidance range. We again saw a record share of more predictable revenue perfectly consistent with our well known strategy. IFRS earnings per share were up 38%, non-IFRS EPS was up 9%. Please note, I think it's interesting that this performance significantly exceeds our peer group benchmark.

Now let me add some commentary on our growth drivers for the company. SAP added more than 500 S/4HANA customers in the quarter of which approximately 30% of those are net new. This mean that SAP is successfully migrating customers from our own R3 system and from competitive ERP systems as well. We continue to see widespread interest in S/4HANA migration as customers seek to reduce complexity, reduce hardware costs, improve their user experience, and increase growth opportunities through business model innovation.

When I speak to CEOs and CFOs around the world, they all want a digital board room capability so that they can engage with live data in powerful new ways. They want to expand into new industries, they want the agility to adapt to consumer behavior and changes in the macro environment on the fly. S/4HANA powers all of these business outcomes and more.

The S/4HANA innovation cycle is also catalyzing broad customer adoption of our entire innovation portfolio and contributing significantly to SAP's global pipeline. Put simply, SAP is transforming how business works and we are at the start of an unprecedented multi-year opportunity. Customers like Munich Re, Duracell, Gas Naturale and Beneton are turning to S/4HANA to reinvent their business for the digital world. Norton Rose full bright a preeminent business law firm has chosen S/4HANA to simplify their processes in global operation and drive competitive differentiations across their industry. It's not just large companies in developed markets that are adopting S/4, Swiss Property, a fast growing company, when live with S/4 in less than two months. S/4HANA is the best-of-breed ERP system in the world. It can be consumed however a customer wishes to consume it and we will deliver a roadmap to...

Let's talk about our best-of-breed applications in the cloud. SA is the only company, that delivers total workforce management solutions across permanent and contained labor with success factors and Fielglass as solutions are localized for 75 countries, in 41 languages, all while our main cloud competitor has limited into national capability. We have more than 1100 employees central customers and companies are choosing success factors and they are terrific brands, they include Philip Mars, and Patheon Pharmaceuticals in the U.S. where yes we beat workday again.

We also know that modern HCM is all about connecting companies to staffing firms, consultancies, independent contractors, and other service providers. That's why customer traction for Fielglass solutions is soaring with companies like NRG Energy Inc. and Brooks Brothers turning to Fieldglass.

Now let's move on to customer engagement and commerce. SAP solutions go beyond traditional CRM. That's old school. Customers can build a personalized relationship with their consumers which is rich, contextual, and unified across all channels. SAP also fulfills e-commerce faster connecting the front office to the back office. In contrast, our main cloud competitor offers CRM in a silo decoupled from the rest of the value chain. We recently launched typress-as-a-service for customers and partners to build new customer engagement applications. This gives our ecosystem total flexibility in the cloud to build new applications that drive better customer engagement and commerce.

We had numerous wins against Salesforce and others, including great brands like Swarovski. With our business network companies, SAP is building new ecosystems across all major spend categories; materials, services, contingent labor, and travel. Our cloud applications are easy to consume and deliver an intuitive user experience. Each of SAP's business network businesses are leaders in their respective markets. Concur helps approximately 40 million end users effortlessly process travel and expenses, AirAsia Global shared services and France TV have turned to Concur. Ariba continues to scale as the world's largest procurement network with 2.1 million companies like Jaguar and CNA transacting over $800 billion annually on this network. Amazing. Activity is accelerating with new services like Aribapay that delivers a true procure-to-pay for customers. In a few short months - listen to this - Aribapay has exceeded $50 billion in payment transactions.

Finally, let's talk about our platform. HANA has become the industry standard in memory, data platform, and is the key enabler for our entire innovation portfolio. For example our new cloud for analytic solution built natively on HANA cloud platform is a single integrated platform. This means one source of the troop that delivers end-to-end BI, planning, and the digital boardroom and unlike legacy databases, we are not restricted to structured business data. With recently launched HANA Vora, we enable our customers to query massive terabyte scale unstructured data in Hadoop, all with unprecedented speed. With the HANA cloud platform, thousands of customers are extending the standard SAP applications to meet their specific needs. Many more are developing new innovative applications to address everything from IOT, to health data, to engaging consumers in new ways.

HCP or the HANA Cloud Platform is also emerging as the de facto platform for hybrid cloud to on-premise integration across SAP applications. Companies like Camposol, one of the largest agricultural producers in the world, are choosing HCP as an innovation platform. The HANA Enterprise Cloud is increasingly attracting customers to migrate their mission-critical processes to the cloud. The HANA enterprise cloud offer secure and fast access to our new innovation and it's simplifying the path to S/4HANA adoption. Companies are running their supply chain, manufacturing, asset management, sales and distribution, that all operate on a 24 by 7 basis on the SAP HANA Enterprise Cloud. The triple digit growth in this business is a validation of SAP cloud innovation and we are only getting started.

In closing, it's clear that SAP is the cloud company powered by SAP HANA. We set a winning strategy for our company based solely on where our customers need us to go. We are strong, we are profitable, and we are confidently reiterating our guidance for the full year. I'd like to personally invite you all to attend our flagship annual event as Stefan said, SAPPHIRE NOW 2016, May 17 through 19, in Orlando, Florida. It's going to be really exciting. SAP's 78,000 plus employees are more motivated than ever and as always I'd like to recognize their continuing commitment and dedication to our customers.

Now I'm happy to turn the call over our Chief Financial Officer, Luka Mucic. Luka, over to you.

Luka Mucic: Chief Financial Officer and Chief Operating Officer:

Thank you very much Bill, and hello everybody from my side as well. As Bill mentioned, the first quarter was solid coming off an exceptional finish to 2015. I go into more detail on the financials shortly but I would like to share one highlight and proof point that our business transformation has been successful upfront. Only a few years ago we would definitely not have been able to balance out the impact of a lower than expected license performance and still post the strong bottom line results. I have talked a lot about managing effectiveness and efficiency in the last few quarters. But this quarter certainly highlights our success there.

Let me start with the top-line. Our cloud results this quarter leave no doubt that this business continues on its fast growth path. Cloud revenue Bill has said came in at 33% growth this quarter which marks the 12th quarter in a row with 30% plus growth rate excluding acquisitions. This is at the high end of our implied guidance range and ticking well ahead of our CAGR through 2020. New cloud bookings saw robust growth up 23% or up 26% at constant currencies.

With our strong cloud backlog and our strong bookings performance in 2015, we are well on track to deliver on our mid-term growth ambitions in the cloud. Asset support revenue which was solid again, up 5% in line with our plan. We continue to see very high renewal rates signaling a healthy growth rate going forward. In the first quarter, 99.5% of SAP's net new customers selected enterprise support. As a result, our more predictable revenue share was 69% of our total revenue in the first quarter. That means our business has become more stable which is key especially in times when certain markets are becoming more volatile. Overall, our cloud and software business was likewise solid in the first quarter especially coming of a strong Q4. We grew by 6% in constant currencies which is within our guidance range for the full year. We do recognize some volatility in certain markets but our strong pipeline gives us full confidence to reiterate our outlook for the full year.

Let me spend a few words on the regions. We had a solid performance in the EMEA region with an 8% increase in non-IFRS cloud and software revenue. Non-IFRS cloud subscriptions and support revenue grew 49% in EMEA. We likewise had solid growth in software licenses in this region.

In the Americas' regions, we grew non-IFRS cloud and software revenue by 4% and non-IFRS cloud subscriptions and support revenue by 29%. North America coming off a very strong fourth quarter in 2015, had a slower than anticipated start for the year. In Latin America and particular in Brazil, the continuing political and macroeconomic instability weighed on our first quarter performance.

In the Asia-Pacific region, non-IFRS cloud and software revenue was up 1% with non-IFRS cloud subscriptions and support revenue growing by 26%. Our software revenue performance in the region was in-line with our expectations given a tough prior year comparison. China was a particular highlight with double-digit software revenue growth.

Now to the bottom line where we were able to manage an exceptional result in light of the slower than anticipated start of our software business. Let me first discuss our gross margin development for the quarter.

The cloud gross margin improved nicely to 66.3% which was an increase of 120 basis points year-over-year. We achieved this result even as we continue to invest heavily in cloud delivery and personnel in our fast growth business. Most notably, we further improved the efficiency of our private cloud business as one can see from the 4.5 percentage point increase of our application technology and services segment cloud gross margins.

The software and support gross margin was 85.9%, up 80 basis points from the prior year and against an already a very strong comparison. This positive result was due to the solid performance in the core, the combination of software and support revenue and a positive impact from our company wide transformation program. Our cloud and software gross margin was 82.4% slightly up year-over-year. This is yet another strong proof point of our steady improvement in efficiency within our different business models, since our share of cloud revenue increased by 3.7 percentage points to 17.6%.

Our services gross margin in contrast was down by 4.8 percentage points year-over-year to 4.1%. But our services revenues improved nicely driven by our premium engagement business and stronger than expected project consulting business, our cost of services impacted our services margin. This is mainly due to higher than anticipated third-party costs as demand increased on the customer side. Our overall gross margin result was therefore 67.9%, down 70 basis points year-over-year. The development of our services margin was the primary driver behind this decrease.

Non-IFRS operating profit was EUR1.1 billion for the quarter, an increase of 5%. This operating profit result as I said before was a real bright spot in this quarter, was largely due to the positive impact from the company wide transformation in 2015 where we are now managing our costs much more effectively and investing in a targeted manner only in areas in which we see fast growth. For example our headcount grew by 1,245 employees in the first quarter, and roughly 80% of these incremental hires were in the sales, cloud and R&D organization.

The IFRS tax rate in the first quarter was 23.3% up from 13.6% in the prior year period and non-IFRS tax rate in the first quarter was 26.2%, up from 22.3% in the prior year period. IFRS earnings per share grew by 38% to EUR0.48 per share and non-IFRS earnings per share grew by 9% to EUR0.64 per share. Operating cash flow for the first three months was EUR2.5 billion up by 5% year-over-year and very important for me from a financial steering perspective since the end of 2014, we were able to reduce our financial debt by EUR2 billion down to EUR9.1 billion a very strong commitment to a fast pace deleveraging.

Due to our strong free cash flow in the first quarter of the year, we were even able to improve our net liquidity by EUR4.5 billion in the same period from minus EUR7.7 billion to minus EUR3.2 billion.

Let me come to the outlook. As a result of our strong pipeline, Bill has said it before, we are firmly reiterating our outlook for the full year. For the rest of the year, we now expect the currency benefit and have updated our expectations for the impact on reported growth rates in 2016. For details on the reiterated outlook in the currency benefits please refer to our earnings release published earlier today.

So in closing, let me say that this was a solid quarter and there is a lot we can take away from it. We proved that our business transformation is successful. We had strong growth and operating profit despite the fact that our license performance was slower than anticipated. We again expanded our cloud margin while we continue to grow cloud revenue by more than 30%. Our fundamental growth drivers are rock solid. HANA has become the industry standard in memory data platform and is the key enabler of our entire innovation portfolio. This puts us on a strong path for the future and the best is definitely yet to come.

Thank you and we will now be happy to take your questions.

Stefan Gruber:

Thank you very much I handed back to the operator. Could you please start the Q&A session?

Question & Answer

Operator:

Ladies and gentlemen at this time we will begin the question-and-answer session. Anyone who wishes to a ask question may press star followed by one if you wish to move yourself from the question queue you may press star followed by two. If you are speaker equipment today please lift the handset before making your selections. Anyone who have a question may press start followed by one at this time and one moment for the first question please.

First question comes from the line of Stacy Plot of JPMorgan. Please go ahead.

Stacy Plot: JPMorgan:

Hi. Thank you, just to dig in a little bit on margins, services gross margins were weak in the first quarter. Can you talk about why that was, and I know you mentioned third-party cost to maybe dig in a little more and then how you expect to progress through the rest of the year and what your midterm target would be, and then while on the margin maybe just to touch on the business networks gross margins improved but the operating margin declined maybe just talk about that, and finally touch on that sort of 2018 pivot point if you can, and what kind of expectations or how we can measure your progress towards that.

Bill McDermott:

Yes, so I will take the first one and last one and then maybe Steve if you want to chime in and comment on the business network performance. So in terms of services margins what you have seen is an interesting development in Q1 on the one hand we have actually return to growth in our services business seen the 6% constant currency growth there, which consisted of a continued very positive double-digit growth in premium engagements and the return to single-digit increases in our classical project consulting business. So that was the positive side, however we had a lot of projects where we needed and expanded amount of third-party resources to fill in due to that demand that was building up that something that we've really expect as part of our resource management process to be picked up and move closer towards the usage of own consultants as we move forward.

But in Q1 this resulted in a quite significant exceedance of the third-party budget in this services line of business. We also need to see that generally there is a shift in the pattern of the consumption of services because we are moving to a cloud world, we clearly see there is a trend to smaller nimbler quicker or faster projects which of course have at their center to make sure that customers can start to consume the software as a service solution or the business network solution as quickly as possible, so we have an exponential increase in these cloud type of services versus classical bigger monolithic on premise implementation services.

Those tends to come with a lower margin portal and it's not be intent to harvest particularly margins in this area but to make sure that the customer can deploy and can use the cloud solution as quickly as possible. So what that this translate to, as we progress further for the year, of course we are expecting the services margin declined up again that's already effect of seasonality that we are very well aware of, you've seen the same effects through the course of 2015 the margin was increasing. There is no in particular mid-term targets that we are setting of course we have budget assumptions and we are looking out for a better result in the next few quarters through better managing the third-party exposure. However the trends to cloud based services or cloud focused services will increase overtime and therefore we cannot expect that the services business will return back to margins as we have seen them maybe in the old world so to say of an only in premise business.

In terms of the 2018 inflection point, how we calculating your measure our progress well on the way to what's 2018 you can measure the progress through the ongoing development of cloud gross margins, I shared with you on that we fully expect to see stable to slightly increasing gross margin development through the course of 2016, despite the investments that we are doing partially also an anticipation of mid-term substantial savings for example the investments that we are doing into converge cloud infrastructure we will save ongoing cost in a significant way once we are done with that consolidation project and singular investments that will have very positive mid-term effects on SAP. The second proof point will be whether we are able to deliver the exponential operating profit increase in the years out from 2018 you have seen in our mid-term guidance that CAGR operating profit expansion is much higher in the later years from 2017 to 2020 as appose to the years to 2015 to 2017. Our theses is at that point in time the cloud will have reach the scale that will clear the way for exponential contribution to the operating profit and that's what we clearly see is starting to happen as well with the improved efficiency that we could demonstrate allover through 2015 and now also going into 2016.

On the business networks Steve maybe you want to comment on gross margins versus net margins.

Steve Singh:

Yes of course. So, Stacy, couple of things to think about; number one, is obviously we are pleased with gross margin as it is for the business network group, expected to continue to trend up overtime, I don't see any reason why the gross margin in that business can't be as strong as obviously best-in-class cloud businesses and frankly overtime being even with the stronger net.

On the operating margin side, a couple of things to think about. First and foremost typically we started investing in the early part of the year for sales ramps in headcount as well as marketing spend and so really it's just beginning in the year investments that push the margin down a little bit. One other thing I would ask you please think about is that, if you think about where Concur, Ariba, Fielglass which are the three primary components of the business network group where they focus, we think there is a tremendous opportunity as we ramp that sales organization to also leverage other products and services at SAP to drive sales of our ERP solutions for the small medium size market, and so we'll ramping investments across the business network group in anticipation of driving additional a cloud business across all market segments.

Stefan Gruber:

Okay thank you very much. Let's go to next question please.

Operator:

Next question comes from the line of John King of Bank of America please go ahead.

John King: Bank of America:

Great thanks for taking the questions. I got two if I can. So firstly on the license side obviously it seems like you had a bit of slippage at the end of Q1, there was some commentary in the statement that you started Q2 as strongly can you say how much as I still see have already been closed and just I guess more generally how license you should face through the year obviously you got a pretty tough comp in Q4. So just give us some of your thoughts around to how we should think about licenses in the next few quarters.

Then the next one was a follow up on the gross margin side, Luka, for the on premise gross margin obviously a good progression there the restructuring and it sounds like it's helping, the other side to this is the third-party data basis that again should be historically been selling as you transition away more towards HANA is your primary data base is that having at this points positive impact from the margin, how would you see that going forward and perhaps just first of all maybe where are you in terms of selling in a proportion of ERP licenses that so with HANA versus a third-party database today? Thanks.

Bill McDermott:

Thank you. Luke you want to go through the margin question first.

Luka Mucic:

Yes absolutely. So first of all, the progression on software and support gross margins is indeed due to I would say two effects two main effects, one is clearly the success that we had with our company wide transformation program, virtually all of the gains that we had through reducing capacity and functions that are contributing only to slow an old growth or our overhead functions are in this phase in the cloud space all of our cloud gross margin expansion had virtually nothing to do with the transformation program but was only efficiencies and so this has a huge positive effect for us and we'll continue to have a positive effect through the remainder of the year.

We as I said last year we have a mid-triple digit million Euro annualized run rate savings that we will generate in 2016 from optimize, not all of these of course will be flowing directly to the margin and to the operating profit because we are re investing in areas where we can have strong growth as we've seen also in Q1 and in Q4 but definitely it has helped a lot and you're absolutely right our third-party database royalty share goes down quarter-over-quarter and year-over-year that has been the case for quite a few years now and by now of course the sale of S/4HANA including HANA database as oppose to additional seats on classical ERP applications with then additional third-party database is far bigger far bigger to the advantage of S/4HANA, and that of course has a positive margin impact as well, and this will continue as well, although it's not at an as high pace anymore as in the last one to two years because quite frankly there isn’t hardly anything left rather than a few edges that we can sell off pace and all its database legacy products.

Bill McDermott:

Thank you, Luka and I will just comment this is Bill. On the deals and kind of the picture and the pipeline and so forth. So I think everybody here is experienced in the software industry, so you know when you have an extraordinarily strong Q4 and full year as we did in 2015. When you go into Q1 and that's your smallest quarter of the year kick off meetings and all the other things that happen in software companies.

You can often run into the timing of especially on premise or perpetual license deals and we did see some of that and that was reflected in our on-premise license. Of course the cloud and the predictable revenues are much easier to manage with the point to point timing cycles in software that's why it's a nice business to be in.

Having said that, yes we did signed many of the deals that were supposed to be signed in the last week of March already, and I have inspected the pipeline quite rigorously whether it's the core or the cloud where the business network, the companies pipeline is very, very strong. So we are in good shape and we are executing on all cylinders and typically in SAP we have seen acceleration of our momentum continue as the year progresses this is a normal trend at SAP if you look at the history of the Company. I really I am excited about this management team, everybody is very well aligned the Company is quite inspired and then we also have our leader of global customer operations underlying if you like to make a call a comment or something. Rob would you like to add anything to what I said.

Robert Enslin:

Not too much Bill, as you said Q1 was a little slower than we would have like but when we look at the pipeline and we look at S4, we look at the cloud line of business, our pipeline has continue to trend very, very strongly and I feel very confident that we will deliver on these numbers. That's why as I said the slippage deals all but in we off to a really fast starting Q2 and I would expect continue to acceleration with SAPPHIRE taking place in May.

John King:

Thank you Rob.

Bill McDermott:

Thank you very much. Let's go to next question please.

Operator:

The next question comes from the line of Gerardus Vos of Barclays. Please go ahead sir.

Gerardus Vos: Barclays:

Hi good day and thanks for taking my question. Just a follow-up on John's question on the licenses. The deal volume for on-premise deal stayed very strong I think it was up 7% year-on-year suggesting that some of the larger deals particularly in the U.S. kind of slipped during the quarter.

So I just wondering if that's correct assessment of the quarter and then secondly on the Opex the Opex was up just below 4% year-on-year for the kind of quarter. Is that the kind of runway we should anticipate for the year and then finally just finishing up on S4, could you give us any update with the amount of go lives and the amount of live customer you have year-to-date? Thanks.

Luka Mucic:

Yes, so I think what you look at the deal volume the deal volume all starting to trend upwards we're starting see more volume in deals quarter-over-quarter comparisons with large deals. There were pretty much the same we had a couple of more significantly size deals in Q1 of 2015. But we don't see that we see that trend going in the reverse direction. When it comes to edge we had a 500 new customers in the quarter more than 30% of them are completely new to SAP, our live projects at a 146 trending upwards and we have 539 projects that are ongoing right now but on the finance and on the logistics piece of the solution.

So that's actually trending up extremely positive more and more customers taking the solutions live.

Bill McDermott:

Yes and then maybe I'll cover the OpEx question. Yes I am actually a bit proud that cost containment was certainly one of the virtues of this quarter and we believe that we will continue to focus on the right investments and those we will certainly not hold back, we know where the areas are that we want to strengthen that's very clear it's innovation around as far around our best-of-breed line of business solutions around the business network around the platform and this is where we continue to invest we will also continue to invest in strengthening our capabilities around our on cloud delivery operations. But all in all, we expect as we have guided as well that we will deliver operating profit progression and of cost this requires us to also maintain good discipline on OpEx spending and this will be aided all the way through the year by the success of our transformation program you've seen already in Q1 the big discrepancy between our IFRS net profit and the non-IFRS where you see clearly the impact of the cost of the transformation program that anticipated that effect of cost will rather even further amplify as we progress through the year as the impact from restructuring has been most in Q2 and Q3 and then of course also the run rate benefits will tend to rather further increase as we finalize so to say the annualization of these savings through the last people exiting the organization.

Bill McDermott:

Okay. Thank you, the next question please.

Operator:

Next question comes from the line of Alex Tout of Deutsche Bank. Please go ahead, sir.

Alex Tout: Deutsche Bank:

Hi, guys thanks for taking the question. Just obviously with the Timpson license declined I guess this question is more generally in the market around what the macro picture looks like. So I appreciate if you could give us a description of pockets of strength, pockets of weakness we've seen high level indicators like PMI and industrial production being a bit weak in the US does that impacted some of your traditional manufacturing clients perhaps, and then I don't know if you mentioned this already but did you say how many of the S/4HANA customers are currently live at this stage and can you give us an idea of the proportion running on-premise versus in HANA and support cloud? Thanks.

SAP:

Maybe Bill do you want to start?

Bill McDermott:

Yes, I will start don't forget we also have our Bernd Leukert who leads our development efforts in addition to rather () so I am sure that like to give you a perspective. First of all there is no limitation to SAPs growth based up on the global economy, let's just take that right off the table. When you look at China, China is still a dream and have a growth of 6.5% it prints the Switzerland this year. So don't worry about China I would just say India looks great and yes there are some rough spots in Latin America like Brazil and yes we do have issues like everybody else about and so forth and the United States is basically a slow growth situation but a more normal situation than it had been in the past few years.

So the global economy is in no way share perform working against SAP, in fact the beauty of SAP is if you need to get your cost under control you need systems like SAP and especially with HANA and S/4HANA if you need to grow and think about new industries and new routes to market and new ways to create channel coverage with omni-channel e-commerce and the enablers you need SAP. So we are in demand, the key that SAP is making sure the recurring revenue streams continue to come in strong with heavily satisfied customers and loyal customers also continuing to expand in the cloud and the LOB cloud to business network in the HANA enterprise cloud come quickly to mind and yes on the on-premise kinds of things, because companies have to have very clear roadmaps very clear time to value and return on invested capital scenarios and they really need to be coached on what to do first those businesses will be more lumpy not because of a global economic scenario because these companies are trying to digitize and they need to know how they digitize, teach me how teach me how quickly you can get me there and show me mathematically the difference that can make in my business model so there is a serious conversations therefore I think the best way to pursue this is to continue to leverage the things that are recurring that are quicker in the cloud and then do the more transformational things with the highly educated very capable workforce and in ecosystem that also complements what we do in each geography in every industry and do this is by used case so the customer has crystal clear insight on what it is we are asking them to do why they should do it and what the outcomes will be when they do do it and that's a timing issue that I think you saw in the first quarter with the on-premise so as you factor your models I think we will do better than other people with an on-premise business model we'll continue to be robust in the cloud and on the profitability side and we got a really successful strategy that's what we are doing.

On the S/4 HANA customers license and versus on-premise maybe Bernd you want to comment.

Bernd Leukert:

Just the reconfirmation on the number which Rob shared with you 146 close to a 150 S/4 HANA live customers and as well the related question towards versus on-premise versus the public cloud offering, I think it's was an extremely smart move from us. That we also the HANA enterprise cloud as a transition step for customs to go from the exiting on-premise landscape into a public cloud offering, so we are really proud that the HANA enterprise cloud is our fastest growing cloud offering. We have significant acceleration in terms of time to adoption and I think in additional data point I want to share with you while we have been close to a 100 customer at the end of Q4. Now we are close to a 150 customers shows that the number of customers who go live has been significantly accelerated especially during the course of Q1 and just looking at the more than 500 project that as they're running I see that trends will continue so we will see a heavy adoption curve not just in sales specifically in live customers and what we are extremely proud of that more than 30% of these live customers are referenceable customers.

I think this is a real testimonial that the business of S/4HANA is rock solid is providing the value, is providing the benefits to our customers and this is I think something we have hardly achieved in any new product which we launched to the market and just to remember S/4HANA is on the market since February 2015. We as well see now adoption of the S4 public cloud which is starting as customers asked us let's say to get with customize system and transition into a public cloud clean offering which helps them to massively adopt new innovations as they come out quarter-by-quarter and we just to answer the final point while the start of S4 was I would say on-premise only now especially the cloud business is adopting in a right way.

Bill McDermott:

Okay. Thanks very much. Let's -- the next question please.

Operator:

Next question comes from line of Ross MacMillan of RBC. Please go ahead.

Ross S. MacMillan: Royal Bank of Canada:

Thanks a lot. Bill I just had question on vertical industry spend I was curious as to whether there was any particular industry that was weaker this quarter and thinking energy in particular and then for Luka you know, you laid a framework for margins in the cloud going from public business network at the top down to private cloud at the bottom and I am just curious with the improvement you are seeing with -- and the private cloud business in general any changes to your view on that sort of 40% gross margin target or even taste to the 40% gross margin target? Thanks.

Bill McDermott:

So Ross thank you very much for the question. The industries as you know it's good to have 25 of them because at any given time you are going to have some that are worse than others in our case we saw softness in basically three of them compared to the other 22 the softer once would have been energy, I think it's well know, you know the cost per barrel being what it is they need about another $15 a barrel to so been the business model with the feel comfortable in making large investments in, so I think you know that. Public services, little softer than I had anticipated if you look at across the globe, so I am definitely going to reorganize that and then as it relates to discrete manufacturing probably some of those were lumpier in terms of the decision making cycle. So on the energy side the pipe is there I think when the price per barrel gets a little bit better so will the money.

Public sector it's just a that's a structural issue and an execution issue we have to digitize government right. So if India is digitizing we are the one that needs to digitize India. And then discrete manufacturing I think you have a situation where everybody knows they have to move out and they have to make change but we have to be so crystal clear and so prescriptive on how they do it, how it gets consumed and how they derive the value from it, that you cannot leave a single question unanswered and that's the environment that you're in when you're dealing with tighter industries that really are working with tight budgets and significant constraints. The cloud is one way to deal with that so too is the HANA enterprise cloud or the open ecosystem that we have, but you still have to answer the questions and have everything tight for a boardroom ready conversation.

So I reiterate those are interesting learnings not global economics it's all about execution and how swift you are executing as a company. So our step has gotten an increased substantially in those scenarios as a result to what we learned.

Luka Mucic:

Yes, and maybe on the cloud gross margins by business model no the framework that I laid out absolutely still holds and as I've said at the beginning of my remarks on we are executing against them in the business network on long-term gross margin target is 80% we are continuing to make steady progress against that we went up 20 basis points to 75.3 in the first quarter and really expect additional expansion in-line discipline in terms of the public cloud gross margins the same applies and the more we scale our business around success factors the better we will get in that part of the business as well and finally on the private cloud we are making great strides, and I need to give a lot of credit to the team and there is Bernd Leukert who are really turning the we have professionalized the whole operations from on boarding to continue operations we are not only having strong growth in terms of the top-line and bookings we are also getting these customers live we are getting the revenue now in we are increasing the efficiency through the scale that we are getting.

So the 40% gross margin target is something that for me is readily achievable actually as I said when you take a look at our ATS segment the private cloud is booked you've seen that we have had an exponential improvement in the gross margin there, I always talked about switching the break-even point in our private cloud business sometime this year actually my full expectation is now based on this great results that we will be there by mid-year already and then from that point on there will be only one way and that is into the positive direction. And nothing so you are not seeing this but I just want to confirm this

Bill McDermott:

Thank you. The next question please.

Operator:

Next question comes from a line of Michael Briest of UBS. Thank you.

Michael J. Briest: UBS Limited:

Thanks and good afternoon. In terms of M&A Bill, I think even Luka were very clear last year that your tuck-in of the cash flow is very strong in Q1 and has been a quiet a lot of volatility in the market. I am wondering is that trying to willing to be more opportunistic perhaps larger deals will be something you consider this year and then secondly Bernd in terms of the development of S4 with press releases this year with Accenture and IBM on co-development activities.

Can you talk a bit about what they are doing with a level of R&D efforts there bringing to the party and why you've decided to work with them historically you've not done that.?

Bill McDermott:

Well Michael this is Bill. I'll start to a front on the M&A front. Our strategy hasn't change but we remain market leading company and if we do things it would be well thought out and it would be something that's now in the interest of the customer but also very much in the mathematical interest of the shareholder. So at this stage of the game, we're steady as you go, it's not to say that something couldn't happen, it's just that they are on a lot of assets on the market like there was in the old days that works really aggressively pursuing for example most of those on line of business cloud companies I mentioned earlier in my remarks.

We think for companies that have that kind of valuation they don't make any money it's a no go you know what I mean.? So that's it. But there might be other things that are more within a normal size range that consider that's how can for a company or size in scale that would be interesting.

But we're pretty conservative at this moment but also remain a market leader an aggressive growth company.

Bernd Leukert:

Yes, not a lot to add and I said this morning we are I mean SAP has always been acquiring in order to extended solution capabilities that something that you need to remember we are not in that business because I have read the commentary in order to buy revenues on market share we want to service the customer best and we want to make sure we have the most holistic solution portfolio in the industry and the right space is that we have to fill in this space power by definition getting smaller and smaller and therefore you should really think about M&A activity in terms of target.

Bill McDermott:

And Michael then I comment on partnering I think we are proud that we get a huge interest from the ecosystem as growth driver for S4 and Accenture and IBM and some others in the pipeline are extremely interested in getting a dip technical knowledge in order to extend our existing solution in a different way than they have done in the past. So what's the announcement refer to is a co-engineering activity where people from Accenture are sitting together with our engineers helping us to accelerate specifically industry verticals into the market.

But On the other side this is more important for us letting them know how to extend the SAP standard offering on the HANA cloud platform and to help our customers to transition from these both customize on-premise system into a real cloud offering and we have to agree with those companies that the best way to do it not to set up long education programs as lot of to incorporate them into our day-to-day activities they get the knowledge and the competencies by sitting together with our engineers and then able to apply that knowledge at the customer side and as I said before they have a ton of opportunities and regret from the market so this is what makes us feel confident that we have rock solid robust core and the business that will grow very fast. Thank you

Michael J. Briest:

so can you give any sense of how many as working with you how many people of Accenture and IBM?

Bill McDermott:

I don't know the exact number but it's in the 100, so it's not a..

Robert Enslin:

Yes, Bernd I can give micro some color as well. Michael this Rob Enslin. There is over 15,000 individual HANA certifications that have taken place with our partners and they buy the 1,000s every quarter some more and more as scale we have in that space, I'm actually sitting in Africa and I can tell you now that the digital transformation of Africa is happening right here in South Africa and more and more partners are joining on so we will continue to even add more to that list as we move forward.

Michael J. Briest:

Thank you

Bill McDermott:

Thank you. The next question please.

Operator:

Next question comes from the line of Adam Woods of Morgan Stanley please go ahead sir.

Adam D. Wood: Morgan Stanley & Co. International Limited:

Hi thanks very much for taking the question. Just first of all on the engagement e-commerce I think making more noise around that there is obviously a large cloud there in that space maybe first of all could you give us some feel to the win rates in the SAP and still base around those solutions and maybe give us an example of you thanks a lot about using hybrid expanding that out just there as well that frontline integration, is there a tangible example you can give customer that benefits from that and what the benefits are that integration versus CIM being a point solution and then maybe just on the financials the cash-flow was very strong in Q1 as always but as we look in a little bit more detail that the SAs did move up the deferred revenue income balance was actually down year-on-year was there anything unusual that was that at quarter end that was make strange to move those two numbers? Thank you.

Bill McDermott:

Yes, maybe I start with the cash flow question and then the colleagues can handle the -- and win rates question. It's actually one simple reason so you've pointed to reduction and deferred income the reason is that we had in one region SAP in the Middle and Eastern European region on a practice in the past that we were pre billing maintenance invoices. So we would invoice the maintenance on the last day of the preceding quarter so today which was done residing the buildup of a high deferred in basis at the end of the quarter and which would then be reversed in the coming quarter so to say.

We have discounted this as of this quarter for various reasons operational challenges with the collection of POs and so on and so therefore we have further reduction in the PO in the deferred income to give you an idea I mean maintenance invoicing in Germany alone is having a value of front of EUR500 million on a per quarter basis so bit more actually even. So that's why this has a noticeable effect and reduces actually the deferred income balance as we have discontinued this practice. This also explains a good part of the movement in the DSO because we did this as a first time in fact this has an effect on the DSO calculation as well not necessarily so much on the cash flow because those two three days we will probably not move the needle tremendously in terms of when we were get the money from customers but in terms of DSO and the way how we calculated it actually hasn't impact some more effects on the DSO that in China we are having a kind of corporately landed restructuring so we have come from various entities or that we also inherited through acquisitions and we have now consolidated and into a much simplified structure that will save us close to going forward. But when you go through this corporate restructuring of course you have to change exchange bank accounts you have to issue customer notifications that they now have to pay another entity and that in China is typically used as a good reason to maybe not pay immediately but -- that also had a certain effect in Q1 as we are finalizing the or have finalized the legal entity regrouping now first of April we expect that this effect will dissipate through the course of the year.

Maybe do you want to take over on CEC together with Rob or wants to handle this.

Bernd Leukert:

I can start Rob you can comment I think Bill said it already we had numerous win against face loss and most importantly we have as well win backs from which really makes us even more proud was one name, there is a big brand in the UK well I personally go tomorrow morning and we will share immediately that news when the deal is signed. So we see this now every day and the answer is simple. We have a comprehensive offering that is helping our customers what Bill outlined already to completely change the way of interaction with their customers in a comprehensive way.

It is not just automation anymore which was it in the past, customers are looking for solutions that engagement with the customers into digital world spends across sales service marketing and commerce and don't forget behind this engagements there is billing and if you had a how billing works and you have to I would say engaged your entire IT department in making integration work then you rather go to the path in terms of innovating new business models having new innovative capabilities build on a past platform versus having your IT department busy with the integration and we hear this over and over again in many customers instances.

Bill McDermott:

And maybe I could just give you this is Bill one real time story happened yesterday a Chairman CEO founder of a very successful retailer what was his goal now his goal is to deal with his board and when his board meets him they want talk about growth, so how you're going to grow you're going to open up more stores and retail yes and probably you are if you doing well.

But also you have to open up e-commerce and you have to figure out a way to get the direct to consumer channel really growing not just in theaters that you participating today but in theaters that you have yet to confirm especially in Asia because that's where the rising middle class and the growth is going to be in future. So the conversation that's going on in the board room isn't about pipelines and outlooks, it's about channels and it's about combining the social media profile with the enterprise profile and how you can leverage that utilizing omni-channel e-commerce what Bernd said is really extending the S/4HANA ERP what I'm saying is the omni-channel e-commerce when you put those two forces together now I can manage my supply chain the way I make my products the way I shift and then keep the promise to the customers every time in any channel and any theater and I conduct e-commerce transaction rings and repeat that cycle without any friction with my consumer. That's how you grow companies.

Adam D. Wood:

That's pretty helpful. Thank you

Bill McDermott:

Thank you very much.

Operator:

As a reminder if you would like to ask a question please press star followed by one. And we are waiting for further questions.

The first question is from -- of Bloomberg. Please go ahead.

Analyst:

Okay. Thank you. My question is being largely answered but I do wonder if you guys could put anymore precision on what happened to new license in the United States and was any softness in the US was that only attributable to how transitions to be reference to sign on just premise deals or was that more of competitive situation anything else you can say about US?

Bill McDermott:

Hey Aaron it's Bill. Yes I give you a quick deep brief. First of all you should know that the cloud business in the US remains particularly robust even against competitive benchmarks SAP in the US grows faster than the other cloud companies. So, our cloud business and the cloud market in the US is very robust but it's also quite interesting to know that it is the first mover in cloud in the United States.

Cloud is the most accepted form of enterprise computing in the United States. So I think you're going to continue to see an acceleration of cloud in the United States, having said that beyond premise business in particular was lumpy in the United States which I said and the only one I can tell you is the pipeline especially on the S/4HANA side looks particularly robust in the on-premise and the private cloud world in the United States. So structurally we look great in the cloud the on-premise looks a lot better than competition and the pipe and the execution I expect to steadily improve as the year progresses. So there is no macro issue about SAP's market position in the Unites States quite on the contrary.

The United States is a beautiful market for us and I expect this do very well.

Analyst:

And quick follow-up Bill on that. As these older R3 implementations maybe in the near that useful live for or the end of the time at which customers might want to continue running them to what extent to those up for grabs I mean is that for issuing or you competing for those deals.

Bill McDermott:

Great question let me be completely clear by giving you a firm example. I recently met with the Chairman and CEO one of the world's largest and most respective global companies. He has ECC or an R3 version that's 20 years old, the meeting starts okay Bill I love my system great seeing you it runs my supply chain all of my billing and financials it connects to me my customers and I am really happy with it, so thanks a lot for stuff and buying next time let's get some dinner, I said well thank you, but I didn't want to let you know a lot of things have happened in the last 20 years I like to give you an update. So there is two things you should take away from that; one is the loyalty and happiness of our customers with their existing R3 implementation is of the charge impressive, so SAP makes some great software and that's why our loyalty ratings on our existing support revenue is near 100% for customers that is still in business.

Now the challenge that we have is to make sure we educate C level executives on the power of S/4HANA what we have done with the line of business cloud what we have done with the business network and how we can shape them into the conversation of growth what are you doing to grow what are some of the new business model innovations that you bringing about how are you combining an enterprise and a social profile what channels are you going to market in how you explored the power of e-commerce to complement your normal sales trajectory et cetera, then we end up in a very clear roadmap in conversation and you heard me say that a few times today people need a color by numbers education with big crayon to how to go from the old world to the new world, giant crayon and it's only fair that SAP become the one that educates them on how to digitize their enterprise how to take care of their customers and how to drive to shareholder value and that is a process that does take time but it's not in response to a competitive threat it's an opportunity of course for us if we don't get there and do the right education because they'll just be happy on the old system that's not all bad but I've rather than be happy on the new system and grow their company's faster and improve the GDP of the world.

Analyst:

Thanks a lot. Appreciate it.

Bill McDermott:

Thank you

Stefan Gruber:

Thank you. We have one final question

Operator:

Thank you and this is from please go ahead.

Analyst:

Hi good afternoon. Just one question about the Britain and how are you looking at that discussions going on over there by the potential exit from the European union how big is Britain in your EMEA region in terms of revenues

Bill McDermott:

First of all, Britain is a very significant market for us and we are very familiar with the Brexit issue and we have met with the leaders of government, the leaders of business and while is an incredibly important decision and one as a people. Great Britain well ultimately decide upon we do not see that impacting our particular business model because either way the technologies that SAP makes will have to be administered to manage the company.

So, it's fascinating issue. Yesterday in fact I had a conversation with somebody who is very world traveled and writes about these things and it is an intellectually an interesting exercise. I don't think that SAP is going to be impacted by, but the good news is when you think about digital UK we are in the center and the epic center of that strategy and therefore we thought through plan A,B,C, and D and I think you'll see SAP technology do just fine it remains a very important market and a growth market for us.

Analyst:

Okay. Thank you.

Bill McDermott:

Okay. Thank you.

Stefan Gruber:

Thanks a lot. This concludes the Q1 2016 earnings call. Thank you very much for your participation and good bye.

Operator:

Ladies and gentlemen. This concludes the SAP conference call. Thank you for joining. You may now disconnect.