SAP SE (SAP) 2011 Q2 法說會逐字稿

Welcome to the SAP Q2 earnings financial analyst conference call.

(Operator instructions.)

At this time, I would like to turn the conference over to Mr.

Stefan Gruber.

Please go ahead, sir.

(Technical difficulty.) 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 US SEC, including SAP's annual report on Form 20-F for 2010 filed with the SEC on March 18, 2011.

Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

And with that, I would like to turn the call over to Werner.

Yes.

Thank you, Stefan.

We are pleased to report a very successful quarter, with double-digit top line growth and strong margin expansion.

But before I provide some more details about our non-IFRS results, which are the figures used to internally look at our operating performance and which are the basis for our guidance, I want to make a few comments.

First, in the second quarter we recorded non-IFRS adjustments related to support revenue and operating expenses in the amount of EUR8 million and EUR154 million respectively.

Of the EUR154 million, EUR112 million is related to acquisition-related charges and restructuring charges, EUR32 million to share-based compensation, and EUR10 million to discontinued activity.

Second, share-based compensation expenses were significantly impacted by our share matching plan for 2011, where employees can buy shares at a discount.

This discount is expensed when employees buy the share.

In 2010, the expense occurred in the third quarter upon inception of the plan.

This year, the option to purchase shares at a discount was offered in the second quarter, therefore the expense incurred in the second quarter.

We expect these expenses to incur in the second quarter for each year, going forward.

Third, the second quarter numbers include the revenue, profit, and cash flow from Sybase, while the comparative prior numbers do not include Sybase.

Non-IFRS software and software-related service revenue for the second quarter of 2011 was EUR2.59 billion, which represented a year-over-year increase of 20% at constant currency.

It was driven by a strong increase of 35% in software revenue at constant currency, and the good results in the support business, in which support revenue increased year-over-year by 15% at constant currency.

Speaking of support revenue, the vast majority of net new customers chose our enterprise support offering, above 85%.

Subscription revenue increased, as expected, to EUR96 million in the second quarter, up from EUR89 million in the first quarter of 2011 and relatively unchanged year-over-year.

As a result of the strong top line performance, the software and software-related service revenue growth margin increased by 10 basis points year-over-year to 83.5%.

The profit (inaudible) of service margin increased by 1.9 percentage points year-over-year to 24.1%.

As a result, the overall growth margin increased by 70 basis points to 70.6% year-over-year.

Looking at the expense side of the P&L, you can see that total operating expenses increased by 17% at constant currency year-over-year.

The increase in cost is mainly a result of the acquisition of Sybase.

The top line growth has, with continued focus on operational excellence, resulted in strong margin expansion.

The non-IFRS operating margin in the second quarter of this year increased 1.5 percentage points at constant currencies to 31% year-over-year.

As a result, we continue to expect that 2011 non-operating profit to be in a range of EUR4.45 billion to EUR4.65 billion, but at the high end of the range, resulting in margin expansion of 50 to 100 basis points.

While we increase the operating margin by 1.2 percentage points at constant currency in the first half of this year, we do expect further investment in go-to-market activities in the second half of the year in order to capture the growth opportunity we see, going forward.

Headcount at the end of the second quarter of 2011 stood at 54,043 FTEs, which is up 171 FTEs sequentially.

Headcount for the half-year increased by 6,022.

Excluding Sybase, it was 1,700.

The IFRS tax rate in the second quarter was 26.9%, which is a decrease of 50 basis points year-over-year.

The non-IFRS effective tax rate in the second quarter was 27.2%, which is an increase of 50 basis points year-over-year.

Free cash flow in the first half of the year increased by 75% year-over-year and amounts to EUR2 billion.

The strong increase is mainly due to our better overall operating performance, the addition of Sybase, as well as better working capital management.

This can also be seen by a significant reduction in day sales outstanding, which came down to (inaudible) days in the second quarter of 2011 compared to 73 days in the prior year's quarter.

During the second quarter, we did not buy back any shares.

For the remainder of 2011, we are not planning to do strategic share buybacks.

We have changed our outlook for the full year of 2011 for non-IFRS software and software-related service revenue at constant currency and non-IFRS operating profit at constant currency.

We reaffirmed that we expect full year 2011 non-IFRS software and software-related service revenue growth -- revenue to increase in a range of 10% to 14% at constant currency, but we now expect to reach the high end of the range.

We reaffirm that we expect full year 2011 non-IFRS operating profit to be in a range of EUR4.45 billion to EUR4.65 billion at constant currency, but we now expect to reach the high end of the range, resulting in a 2011 non-IFRS operating margin increasing in a range of 50 to 100 basis points at constant currency.

We reaffirm for the full year 2011 that we project an IFRS effective tax rate of 27% to 28% and a non-IFRS effective tax rate of 27.5% to 28.5%.

Before I finish, let me make two comments about seasonality and currency.

As for seasonality in the second half, we continue to expect double-digit growth in software revenue for Q3, although a sequential decline compared to the second quarter of this year.

We then expect Q4 of this year's software revenue to increase sequentially from the third quarter of 2011.

Now to currency.

While we had a positive impact on our results in Q1 due to currency, we faced a significant negative impact in Q2.

Overall, during the six months, our non-IFRS numbers and extra currencies experienced a negative currency impact compared to what they would have been if translated at the average -- at the exchange rate of last year.

Software and software-related service revenue EUR56 million, or minus 1.3%, total revenue EUR84 million, or minus 1.3%, impacting the SSRS growth rate by two percentage points and the total revenue growth rate by 1 percentage point respectively.

The operating margin was negatively impacted by 10 basis points.

If exchange rate remains unchanged at June 2011 levels for the remainder of the year, our 2011 total year non-IFRS SSRS revenues at extra currencies as well as our non-IFRS total revenues at extra currency would both be approximately 2% lower than the respective constant currency numbers, representing a negative impact of approximately 2.5 percentage points to the SSRS and total revenue growth rate.

Non-IFRS operating margin at extra currencies would be approximately 20 basis points lower than the expected constant currency margins.

I hope this helps with the modeling.

I would now like to pass the call over to Bill.

Thank you, Werner, and thank you, everybody, for taking the time to join the call.

We're pleased to report our sixth consecutive quarter of double-digit growth in software and software-related service revenue as we continue to successfully execute on our growth strategy.

As the leader in the business software industry, we have a consistent core platform tailored to 24 distinctly different industries that enables small, medium and large businesses alike to run better.

Our customers are now using this capability to put their ever-expanding data in memory with SAP HANA to enable the real-time enterprise.

At the same time, the explosive growth rate in mobility has made the Sybase unwired platform the technology of choice to securely connect the supply chain to the boardroom and to the front-line workers serving customers.

Our results and our growing pipeline clearly validate our winning strategy.

All regions grew software license at 35% at constant currency.

Software license is our greatest predictor of future demand.

Not only did all regions grow in Q2, we also had a strong result in our entire portfolio.

SAP HANA and our mobility portfolio see rapidly growing pipelines and are already contributing to our top line results.

They also create pull-through demand for our entire portfolio.

SAP is more strategic to our customers than ever before and the better choice for customers to innovate and grow their business.

From a solutions perspective, we grew double-digit in our consistent core and all of our strategic industries, as well as in business analytics and in our solutions for the line of business executive, such as CRM, HCM, and SEM.

With our balanced portfolio and growth in our ecosystem, we are striking a better balance between large and small deals to help grow our business.

The number of deals increased 34% year-over-year.

As for the regions, we had stellar double-digit growth performance in all of them.

Let me provide some color.

In EMEA, despite the macroeconomic challenges in parts of the region, we had a very strong quarter, with 16% growth in software and software-related service revenue at constant currency.

Software revenue alone grew 36%.

This is four times the growth rate of our number two competitor.

We saw strong execution in the CIS countries, as well as in northern and central Europe.

Germany also had an outstanding quarter, driven by some larger deals and continued growth in core products, with all industries performing well.

Key wins in EMEA included Mercatone Uno, ENRC, Standard Bank of South Africa Ltd., and Deutsche Post AG.

The Americas growth story continued in Q2, with 35% growth in software and 24% growth in software and software-related services revenue.

In the US, there was a good contribution from some large deals as customers continued to focus on top line growth.

The strong growth trend in Latin America continued, with Mexico and Central America putting up very good results.

Key wins in the Americas included the United States Army, Caterpillar, Team Mobile USA, and IRB Brasil Resseguros.

We had the best second quarter ever in APJ.

Software license grew 35% and software and software-related services revenue grew 23%.

China and India grew in high double digits, with tremendous opportunities in both countries, especially around mobility.

Our core products are also in high demand as these countries continue to globalize.

In Japan, we had great execution despite the crisis and its lingering effects.

We owe the strong results in Japan to our market leadership position and our customers who are looking to SAP to help them get back on their feet.

Key wins in APJ included Reliance Communications Ltd., ACR Capital Holdings, PTE Ltd., Yeochun NCC Company Ltd., and Mitsubishi Motors Corporation.

Our ever-expanding ecosystem and multi-channel go-to-market is core to our growth strategy.

In Q2, growth from the partner business accelerated to 60% year-over-year.

We are successfully expanding our partner channel to augment sales in existing markets and expand into new markets across all segments.

The success in our partner business and with our customers comes from our clear preference for openness and choice.

This approach is working.

In the small and mid-size enterprise segment, we had triple-digit growth in our business all-in-one solutions, and we passed the 30,000-customer milestone in Business One.

We also saw further success in SAP Business by Design, which Jim will talk more about in a few moments.

It is quite clear that SAP is not just about big companies.

We're the market leader in the small and mid-size enterprise segment, as well.

Some key wins in SME were Nanyang Technological University in Singapore, [Diadoc] Electronics Company, a high-tech company in South Korea, Loyalty Management, a professional services firm in the Netherlands, SKS Group, an industrial machinery company in Finland, United Press, a media company in Russia, and Lupo SA, a consumer products company in Brazil.

For the second half of the year, we see strong pipeline across all solutions and regions.

Our employees and partners are energized by the opportunity ahead of us, and they have the passion to execute our strategy, and yes, reshape the IT industry as well.

Jim, over to you.

Thank you, Bill, and thanks, everyone, for joining.

As you can see from our results this quarter, demand for IT, and in particular for business software, remains high.

We are witnessing a structural change in the IT market.

Customers are shifting more of their investments towards software as software continues to become a larger and more important component of the overall technology stack.

As traditional hardware moved to the cloud, and in-memory-based servers are re-defining high-speed computing, customers are shifting investments from traditional legacy infrastructure to innovative software solutions that drive efficiency and differentiation.

We defined our innovation strategy at the right time to accelerate this trend and benefit from these fundamental changes in our industry.

Due to our focus on innovation instead of consolidation, we are now reshaping the industry with our innovations in mobility, in-memory computing, and cloud computing combined with our consistent core applications.

Innovation is driving growth again at SAP.

We're delivering more value to our customers and increase our share of IT spend.

More than ever, software matters.

Let's look at the innovations we delivered during the last six months and start from our core products, SAP Business Suite.

In May this year, we released the most comprehensive enhancement pack to SAP Business Suite to date, one month ahead of schedule.

We're seeing fast adoption of this enhancement package at our customers, as it offers significant innovations without disruption for 24 different industries.

Through our rapid deployment solutions approach, we are prepackaging best practices for fast and low-cost implementations at customers of all sizes and all industries.

As a result, SAP was recently ranked number one in the industry strategy and solutions by Gartner Group.

Take our customer, Panalpina, for example.

Panalpina is the fourth largest logistics company in the world.

In 2010, Panalpina shipped nearly 900,000 tons of air freight and more than 600,000 containers of ocean freight alone.

They are currently implementing our latest transportation management solution, allowing them to harmonize and globalize all of their worldwide shipping activities and get one unified view of all of their import and export activities.

And most importantly, all logistics activities are seamlessly integrated with our business suite to achieve maximum efficiency, transparency, and flexibility.

Panalpina is expecting significant savings and efficiency gains with SAP's new transportation management solution.

This is just one example how innovations in our core business is being embraced by our customers, leading to another quarter of high growth in the core.

Our clear market leadership in the suite is not only a great competitive differentiator.

It also helps drive growth in our other newer products.

Our large installed base of customers know that they can build their business with us non-disruptively around this stable core.

Business analytics is a great example of where the seamless integration into the business suite is giving us advantages, but at the same time not compromising our ability to run in heterogeneous non-SAP environments.

This has led to incredible growth and the top competitive position as we extend our market leadership in business intelligence.

Gartner and IDC recently recognized SAP as number one in business intelligence market share, nearly one and a half times the number two competitor.

We continue to see strong demand for Business Intelligence 4.0 and rising momentum in the latest release of Enterprise Performance Management and in governance, risk, and compliance.

We are winning many deals, especially against Hyperion, where we are now the de facto choice for CFOs, with a more modern and complete CFO set of solutions.

UK-based Lloyds Banking Group PLC was just one example where we replaced Hyperion this quarter.

For SAP Business by Design, our suite solution for the cloud, we continue to see strong demand with a further increase in the number of customers.

In fact, by the end of Q2, we were more than halfway towards our 2011 goal of 1,000 customers, with 550 signed customers.

We're also seeing great traction in the Business by Design partner channel, with 180 partners actually selling Business by Design.

Nearly 50% of the By Design business in Q2 came through the partner channel, up from one-third in Q1, and the average number of users is increasing, which helped us scale By Design and drive profitability.

Finally, SAP Business by Design 3.0 became generally available mid-July, with new integration scenarios for subsidiaries, increased functionality, and extended flexibility for core innovation from partners.

The new release is also available now in Mexico and Australia, and includes Spanish language support.

Our largest SAP By Design deal in Q2 was with R3D, with hundreds of users.

R3D is a Montreal-based rapidly growing global IT services firm.

The company is replacing several IT systems and standardizing processes across all of their locations.

The scope of the deal is a full professional services deployment.

In our market-leading mobility solutions, we continue to see excellent results in both execution and innovation.

On the execution sides, sales of mobility-based solution increased high double digit year-over-year, and the pipeline continues to grow rapidly.

As for innovation, we launched the newest version of the Sybase unwired platform, with a software development kit and a connection to the business suite through our project gateway.

We now have 21 mobile applications delivered, and we are on target for a total of 50 SAP and partner-developed applications by year-end.

Our mobility category is growing rapidly with a very strong pipeline, comparable, in fact, to our HANA pipeline.

Speaking of HANA, our in-memory computing solution is truly changing the game in enterprise IT.

HANA became generally available in June this year, by the way a very fast innovation cycle, from SAP from concept to general availability within 13 months.

In Q2, we already began seeing a contribution to our top line results, as mentioned by Bill.

The demand is strong worldwide.

It's coming from a broad range of industries, including retail, utilities, healthcare, banking, and oil and gas, among others.

HANA has the fastest growing pipeline in SAP's history.

At the end of Q2, the global pretax pipeline exceeded EUR400 million.

We also had our first repeat deal with the same customer in Q2 with HANA.

HANA is the only pure in-memory appliance in the market today.

It is not just in hybrid solution.

Moreover, as the leader in business software, we have a strong competitive advantage because we're delivering highly value-adding applications built specifically for HANA on top of HANA.

Strategic workforce management, dynamic cash and liquidity management, sales and operations planning, merchandise assortment planning, and smart metering and analysis are just some examples of applications available now or in the very near future.

We believe that HANA is transforming the industry similar to what R3 did in the early '90s with client server technology.

We're not just changing the game.

We're changing the entire field it is played on.

In closing, SAP declared a strong innovation strategy six quarters ago, focusing on our customers.

We are now delivering innovations in six to nine-month cycles and even shorter timeframes for mobile applications.

We are seeing innovation-oriented companies reporting strong quarterly results, and we're driving and benefiting from a shift away from the traditional technology stack.

This is indeed an exciting time at SAP, a time for great innovation, growth, and new opportunities.

Thank you, and we'll now be happy to take your questions.

(Operator instructions.)

Marc Geall from Deutsche Bank.

Hi, good afternoon, everyone, and congratulations on the results.

A couple of questions, if I may.

Firstly, on rapid deployment, I just wanted to understand the impact you have in terms of reducing maybe the attachment rate with services.

I mean, what's the real benefit to customers in terms of the absolute cost of implementing the business suite now using rapid deployment, would be the first question.

Secondly, on productivity, there are obviously a number of factors that are driving growth at the moment.

Some of the internal sales changes you've made, the move to the partner [EK] system, as well as obviously new products.

Are you able to quantify how growth splits between those three different drivers?

Thank you.

Well, maybe I go on -- Jim here -- on the rapid deployment solutions first.

In the traditional approach, we have seen the software and services revenue 124 up to 127, which means EUR1 invested in software is comparable to a service investment of EUR5 to EUR7.

With the rapid deployment solution, our goal is to have a one-to-one relationship.

And we're seeing that's possible.

We have examples of CRM implementations on premise where we, with the rapid deployment solution, are able to implement a CRM in nine weeks instead of nine months, with the impact on costs and, in fact, compete against market-leading on-demand solutions on [TCO].

So the rapid deployment approach is absolutely the right approach to make the comprehensive business suite very easy to consume and rapidly installable.

Yes.

And the second question, Mark, related to the productivity gain, which is expressed in the margin extended for the quarter and the half-year.

We cannot nail it down to the different components you said.

I think we are looking for increase in efficiency across all the different processes we have in the Company, and this cannot be assigned except the numbers I explained in my part [designed] to any specific of the topics you mentioned.

Okay, thank you.

Let's go to the next question, please.

Ross MacMillan from Jefferies.

Thanks a lot.

Congratulations from me, as well.

I had two questions.

First, I'd love to get your comment just on the core business suite and whether this quarter in particular saw any change in sort of trajectory of growth for the core.

And then the second question on HANA, now that you've mentioned the EUR400 million pipeline and you talked about triple-digit license target on that product this year, is that EUR400 million pipeline potentially closeable all in this year, or is that ambitious?

I'm just trying to get a handle around what triple-digit license might actually mean.

Thanks.

Thank you very much for the question, Ross.

I really like your style on the aggressive nature.

We need that thinking out in the field.

I hope the sales department could close all EUR400 million, but the fact is it's going to be substantially less than that.

We have guided you in the past on what we built into the operating plan for HANA, and those projections stand, but it's nice to know that we have excellent coverage on our operating plan based on the strong pipeline and that it's building at about EUR10 million per week.

So we feel very good about the business both in the short- and the long-term.

On the core business suite, it was a particularly strong quarter for the core business suite, growing in the 26% range on a year-over-year basis.

And what's interesting about this, and I think Jim and I have underscored this, the mobile and the real-time enterprise is pulling through the consistent core, and sometimes the consistent core is offering customers the great advantage of building innovation on top with the real-time and the mobile.

This end-to-end enterprise from the supply chain to the customer relationship is SAP's competitive advantage, and we are leveraging that to the hilt.

Okay, thank you.

Let's take next question, please.

Jonathan Tseng from Merrill Lynch.

Hey, guys.

Just two questions, one the obvious one about the H2 outlook.

Bill, you talked about competition in the pipeline.

That's in contrast to what we've seen kind of generally in the market.

Give us some comfort on what macro assumptions you're building into the H2 outlook, and is there anything in terms of the pipeline coverage or length of sales cycles that makes you more upbeat?

Second question just on HANA.

I've seen a lot of definitional shifts on this product.

It's been an architecture, an appliance, a solution, a database.

[In] your point of view, what has it become?

Is HANA a database or data management product?

Does it ultimately become a platform?

And does that affect kind of how you build an ecosystem around it?

Thanks very much.

For the guidance, I think the guidance is based on the visibility we have into the second half of the year, and that's very important.

It is not overlaid by any macroeconomic developments you might see, or not see, in the marketplace today.

It's based on our guidance, on our visibility into the pipeline.

Bill?

Yes.

I was going to simply add a couple of things.

Werner's absolutely correct.

There's two dynamics that are noteworthy of mention.

One is Jim, in his remarks, explained the structural shift that we see in the IT industry, that more and more customers are resisting refresh cycles on hardware, and too many consultants are ringing up the bill on services.

Instead, they're looking for innovation because they have to grow their businesses.

So instead of EUR0.85 on the dollar going to hardware and services, we now believe that'll be more like EUR0.60, and they'll free up EUR0.40 for innovation in the software layer.

And that's where we're strongest.

And that's also what the CEO cares about.

So we see that structural shift taking place, and that gives us a lot of visibility and a lot of confidence in our pipe.

The other piece that you have to remember is we run SAP on SAP software, and we run SAP in real-time.

So our front-line, client-facing workers have the tablets that they need.

They use customer relationship management software, and the executive board has pure visibility into that pipe on a real-time basis.

And it really helps you assess the condition of the business, which right now is strong, which is why we refined the guidance, as Werner stated.

Jim?

Yes, let me add an answer on the HANA question, is this an appliance or a database.

HANA is an application, and it's very important that we underscore the value of our application.

We don't just sell technology and ask the customer to figure out what to use it for.

We actually have core industry experience in 24 different industries and can help solve problems with HANA.

So we're seeing in three scenarios of HANA being deployed.

One is speeding up analytics, which is very important for companies on a secure world.

Knowing what's going on in my businesses in real-time and not just at the month close is key.

But on top of that, we're seeing some optimization opportunities with new apps, like I mentioned in my speech, that really drive a significant opportunity for value creation at the customer.

And finally, we're even solving unsolvable problems that used to be unsolvable.

Now we can solve them.

I think the smart metering that we did with Centrica not only helps Centrica manage the energy production according to the needs of the consumers, but actually helps manage energy for a whole country.

And we see tremendous opportunities for solving these unsolvable problems.

In those two last categories, the application value is, of course, the highest value.

It's not just the technology.

And that's why we're able to have a good monetization of the innovation of HANA, which [it] wouldn't have been if it was a pure technology play.

Okay, thank you.

Let's take the next question, please.

Raimo Lenschow from Barclays Capital.

Thanks for taking my question.

Jim, can I just follow on there, and then a question for Bill?

If you look how the customer is consuming HANA at the moment, and looking out slightly longer-term into the next few years, I mean, there's obviously new releases, or you don't do releases anymore, but kind of new versions coming up where we potentially sit under the business warehouse from SAP.

Where do you see, in terms of commercial impact, the biggest opportunity for HANA in that light for the next few years?

And then, Bill, just for you quickly, I'm just trying to double-check my understanding of the software industry.

Historically we talked about [three times] pipeline coverage to make a dollar of license revenue.

Now we have EUR400 million in the pipeline.

Can you maybe talk a little bit about the speed of conversion that you kind of see at HANA versus historic products from SAP?

Thanks.

Yes, so let me talk a little bit about the value of HANA.

I think the immediate value is obviously the real-time analytics, and the companies are really demanding that.

The analytical category, as such, is growing very rapidly, has been doing so over the last couple of years.

And with HANA, we are accelerating that.

We also believe that, once we can start replacing complex data warehouse structures, we have significant growth opportunity again.

And then, finally, we will see the in-memory computing speeding up the transactional systems, as well.

We already have Business One running in memory.

We have all-in-one in the lab running in memory.

And as you know, By Design is also running in memory.

So those are the three areas, and of course the size of the opportunity increases at every stage.

But alone, the analytics, the first stage is a significant opportunity for us.

And Raimo, regarding the pipeline and the speed of conversion on HANA specifically, you are correct, 3X pipeline is still the standard by which we manage the business.

And you are also correct that HANA has a bigger than 3X pipeline.

But what you have to remember is we factored in an aggressive operating plan for HANA because we knew it was a game-changer.

And we not only need to ensure we sell HANA, but we also want to make each one of these clients very successful and ensure the quality's at the highest standard so it's very referenceable and scalable.

So I think we have the metric right to have about 4X or 5X coverage on something that's new to the market.

It is a game changer, and it has so much future potential for us that we want to handle it with great care.

Very clear.

Thanks.

Thank you.

The next question, please?

Phil Winslow from Credit Suisse.

Hi, thanks.

Great quarter, guys.

Just two questions, one for Bill and one for Jim.

Bill, if you look at the sales and marketing line in terms of headcount, it's been relatively flattish over the past few quarters here, even as your license revenue has been rebounding.

How do you feel in terms of just sales force efficiency, and sort of how much further do we have to go to improving -- especially with a lot of new products, unwired platform, HANA, et cetera, coming out in the second half?

And then, Jim, I wonder if you could just speak to just the early reception from customers about the line of business on-demand applications and just how you see those fitting in with the core ERP products.

Thanks.

So, I'll start off, Phil.

Thank you for the question.

As you noticed, we guided on the upper end on SSRS, and we guided on the upper end of operating income, and we stayed true to our 50 to 100 basis points on the margin, because the executive board understands that we're building a great company here, and great companies think beyond just quarters.

And we do need to invest in our coverage strategy.

We are leveraging our indirect capacity, as you saw the 60% growth, and we do want to get more and more from the indirect.

So we'll have to finance some of that, and we'll also have to invest in some coverage as you see us doing very well in the BRIC and some of the other growth markets, and also fast-moving solution areas like HANA and mobility.

You want to cover this so you can capture the full market potential.

So we will make investments, and it's the right thing for the shareholder.

Jim?

Yes.

You asked, on the line of business on-demand solutions.

As you know, we launched the sales on demand at the Sapphire, and we recently went generally available with this product.

We are interacting very closely with the first customers who are working with this product, and the feedback so far has been tremendous.

Particularly, they are impressed with our user experience and the collaborative elements of this application.

It's very different from the transactional CRM systems in the market today.

We've also done the first iterations of the prototype for career on demand, our next chapter in the line of business on-demand solutions.

Again, there in close cooperation with customers, a very positive feedback from the market.

So I think that our biggest challenge now is to explain to the market that we are not just a player that's trying to catch up.

We're redefining the line of business on demand with these solutions.

Okay.

Thanks, guys.

Okay, thank you.

Let's take the next question.

Michael Briest from UBS.

Good afternoon, and congratulations on the execution.

You talked about making some investments in the go-to-market in the second half.

You've obviously raised the guidance to the high end.

You're confident in the future, but I'm wondering why you haven't removed the low end of the guidance.

It seems to paint a pretty bleak picture of the second half if it were to materialize.

And then, secondly, on the Sybase numbers, I appreciate it's not like-for-like with last year's, but it seems to be about flat quarter on quarter.

How does that square with the positive momentum in the mobile piece?

Thanks.

Maybe I could take the Sybase piece, and then I'll give Werner the commentary on the guidance.

First on the Sybase, keep in mind there are components of Sybase, including the BRIC and the federal business, where we have integrated the two companies, and therefore it's not a perfect year-over-year comparison.

Furthermore, in the second quarter of last year, Sybase had a large deal in there for [$18 million], which skewed the prior year actual in terms of the comparison.

The mobile business in both the Sybase, as well as the SAP channel, is going fantastic, and we have a selling motion that's integrated between the two companies on mobile sales and mobile coverage, where we cover the Sybase 70,000 customer channel as well as the SAP 112,000 customer channel.

So we're real pleased with where that's headed now.

I'll get Werner to make the commentary on the guidance, which we refined to the upper end.

Werner?

Yes.

I think maybe that's a good question you raised here.

But at the end of the day, we started with a range into the year to provide the guidance, or we base the guidance on, and we stick to the way how we guide.

And that's the only reason why we now said at the higher end of the ranges rather than saying close to 14%.

You can take both of them, but that's essentially what we did to do in this reaffirmation of the guidance.

The one thing that may be noteworthy to mention, Michael, is this will be the biggest software year in the history of SAP based on the guidance that we refine to the upper end, just so you know.

Thank you.

Okay, thank you.

Next question, please.

Mohammed Moawalla from Goldman Sachs.

Yes, thank you.

Perhaps can you comment a little bit on the EMEA region?

That's been a bit inconsistent, but clearly things seem to be picking up in 2Q.

and I appreciate it's a diverse region, so perhaps what are you factoring with regards to the second half, particularly in terms of the potential upside triggers?

Yes, I think we've obviously factored the momentum of Europe into our revised guidance at the upper end.

You're absolutely right, the execution and the business in Europe is very healthy.

And some of the observations I would give you is Germany is performing very, very well.

When you take Germany at 30% year-over-year growth, it really helps the entire region out quite a bit, and the momentum there is rock-solid.

And if you look at CIS, we were just, as an executive board, in St.

Petersburg, Russia, and meeting customers in Moscow.

I mean, we're clearly the standard, and the mobile and the in-memory is really resonating.

And across Europe in markets that are moving fast, we're just doing great.

And the markets where there have been some tough economic headwinds in Europe, they're smaller than the big ones for SAP.

And as you know, our brand in Europe is just very prestigious and well thought of, more so than any other IT company I know.

So we really feel good about our business in Europe, and you should, too.

It's a solid double-digit growth business for us for the balance of the year and beyond.

All right.

Thank you.

Thank you.

We have time for two more questions, please.

Knut Woller from UniCredit.

Yes, hello, thanks for taking my questions.

Basically two brief ones.

You were mentioning that some large deal activity returned.

We had a relatively low contribution of large deals to order entry in Q1, so can you give us, please, an update here about large deals as of order entry in Q2?

And then, secondly, while I understand that, given that HANA is a new product, that you see four to five times conversion rate rather than the three times, when do you think that the historical coverage (inaudible) plan will also be enough for HANA?

Is it something like a next year thing, or rather something where you say, "Guys, be cautious, it's rather [213]?" Thanks.

Yes, no, a couple things.

First of all, in Q2, we like to see the large deals come in at around 20%, as it was around 13%, as I recall in Q1.

That's a healthy balance for SAP.

So keep that in mind.

It could have been 15%, 16%, but generally around 20% coming from the larger deals in terms of how it translates into revenue.

The second piece that I would mention is, on HANA, hey, look, this is a huge market opportunity.

And what we want to do is create a tremendous pipeline, a rapid deployment cycle with the customers where we get them up and running, successful, and referenceable.

And to the extent that there are no historical norms to compare to, I think, as the plot unfolds, we'll be able to give you the algorithm of the pipe and the closure rate.

I would expect, however, 2012 to be more the case than 2013, based on the early signs that we see in terms of more towards the normal 3.5, 4 pipeline versus 5X or 6X.

Right.

Thank you very much.

Thank you.

Thank you, and now the last question, please.

Neil Steer from Redburn.

Morning, and once again, congratulations.

I just had a couple of very quick questions.

The first of them was I think, Werner, when you were talking and giving some guidance, I suppose, you mentioned I think that you would expect the software growth rate in Q3 to be down on Q2, but then in Q4 to be up on Q3.

And I was just wondering if that's what you said, how and why you get that precise visibility going into Q3 and Q4 on software.

That's an easy one.

If you look to our historic seasonality, you always see that we have a slight decline if you compare Q3 with Q2.

And then, of course, Q4 is always the biggest quarter and out-passes Q3 every year.

So from that end, it's really based on what we see as the historical seasonality.

But those comments you made were about year-over-year growth rates, or just the absolute size of deals?

No, no, it was based on the sequential growth within the quarter, and that's also seasonality.

That's what we refer to with seasonality, how is it split between the quarters in a given year.

Okay.

And so the next question was just on the currencies.

You suggested, I think, an overall -- if we were to stop the clock and use the rates today and extrapolate forward for the rest of the year, am I right in thinking that your guidance of 10% to 14% would become 8% to 12%?

Is that effectively what you were suggesting?

No, no.

This 10% to 14% is at constant currency, yes?

Okay, so in which case could you just recap what you said related to currencies, if we were to assume today's rates going forward into the second half of the year?

Then we would have two percentage points lower SSRS growth and total revenue growth.

Okay, thank you.

Okay, thank you very much.

This closes our Q2 earnings call for today.

Thank you all for joining, and we look forward to seeing you soon.

Thank you, and good-bye.

Bye-bye.