SAP SE (SAP) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the SAP 2013 second quarter earnings conference call.

Throughout today's recorded presentation, all participants will be in a listen-only mode.

The presentation will be followed by a question and answer session.

(Operator Instructions).

I would now like to turn the conference over to Mr. Stefan Gruber.

Please go ahead, sir.

Thank you very much.

Good morning or good afternoon.

This is Stefan Gruber, SAP Investor Relations.

Thank you for joining us to discuss SAP's results for the second quarter 2013.

I am joined by Co-CEOs, Bill McDermott and Jim Hagemann Snabe; and our CFO, Werner Brandt.

Bill and Jim will begin the call with remarks on this quarter's performance, and then Werner will review the financial highlights.

Then we have time for Q&A.

Before they get started, I want to say a few words about forward-looking statements.

Any statements made during this call that are not historical facts are forward-looking statements as defined in the 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 statement.

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 Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2012 filed with the SEC on March 22, 2013.

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

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

Regional Software and Cloud subscription numbers represent the combination of software revenue based on location of negotiations and Cloud subscription support revenue based on customer locations.

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

Thank you, Stefan; and thanks, everyone, for joining us on the call today.

The world is clearly being transformed by the rapid adoption of Cloud and in-memory technologies, and we have reached an inflection point in the business of technology.

More than technology, this is a business inflection point, where companies are shifting their investments to the Cloud, and radically simplifying their IT landscape on in-memory technology.

In 2010, as you know, SAP embarked on a strategy of innovation in Cloud, in-memory and mobile, all on a stable and consistent core of applications and analytics.

With this strategy, we doubled our addressable market to $220 billion marketplace, and we placed our bet on software as the innovation layer in the IT stack instead of consolidating the stack with hardware.

This is proving to be the winning strategy.

We have consistently out-performed our primary competition over the last 18 months, and we're driving the innovation agenda across the software industry.

In the second quarter, we continued our double-digit growth momentum in a challenging market environment and against tough year-on-year comparisons.

SAP had another solid quarter, with 10% growth in Software and Software-related services revenue to EUR3.35 billion at constant currencies.

That's three straight years of double-digit SSRS growth.

Software and Cloud subscription revenue in Q2 reached EUR1.17 billion, representing 7% growth.

And total revenue was over EUR4 billion, the first time total revenue exceeded EUR4 billion in a second quarter.

How about the Cloud?

Our growth in the second quarter is driven by our Cloud innovations.

Cloud is a top strategic priority for SAP, and we are seeing the IT industry is moving to the Cloud.

This quarter marked a significant milestone for SAP in our ambition to lead in the Cloud.

On a sequential quarterly growth basis, SAP's Cloud growth accelerated once again, and we are growing faster than Oracle, salesforce.com and NetSuite, making us one of the fastest growing companies in the Cloud.

Our rapid growth is impacting competitors like Workday as well, who have seen deceleration in their bookings growth from triple-digit growth over a year back to around 30% in their latest quarter.

We now have reached an annual Cloud revenue run rate of over EUR930 million, and with approximately 30 million users in the Cloud, SAP has the largest subscriber base in the Cloud market.

And we're winning because we have the right Cloud strategy.

SAP is the only company with a consistent portfolio offering true simplicity in the Cloud.

In response, the competition is teaming up with multiple Cloud partnerships and creating patchwork solutions which result in increased complexity for customers.

For example, our most notable competitor has chosen to outsource their Cloud innovation.

In contrast, SAP decided to innovate in the Cloud and offer our customers maximum choice and security in the Cloud.

Customers can choose SAP public Cloud for a line of business solutions, or a secure private Cloud for core enterprise solutions.

And even more importantly, customers can seamlessly integrate any SAP Cloud solution with their existing On Premise IT landscape.

We call this innovation without disruption in the Cloud.

Our strong focus in the public Cloud with our line of business offering is paying off as we see excellent growth across all key line of business areas, HCM, procurement and CRM as well.

In human capital management, we're winning more deals with our SuccessFactors HR solution against work day than ever before.

For example, the Weather Channel, the most popular source of weather news and information in the US, has chosen SAP SuccessFactors Enterprise bundle and employee central over Workday, supporting the transformation of human resources to significantly reduce day to day administration of employees, and becoming a strategic partner in the Company to management.

Our Cloud CRM solution has gained significant traction in the latest quarter.

We accelerated our Cloud development in CRM, and we now have a full portfolio of CRM solutions, including sales, service and marketing, that can be consumed either in the public or the private Cloud.

Our CRM momentum has been validated by multiple competitive wins against salesforce.com, including CLAAS, T-Mobile and Nespresso.

And we made a bold move to run our entire application portfolio on the private Cloud with the announcement of the HANA Enterprise Cloud.

This is a unique combination of the transformative power of HANA with the simplicity of the Cloud.

Customers using HANA Enterprise Cloud, they don't have to worry about the infrastructure for their HANA system, and we expect this offer to dramatically increase time to value, as well as reduce risk and IT costs for our customers.

Our customers are clearly seeing the business value of the HANA Enterprise Cloud.

For example, Florida Crystals, a leading sugar producer in North America, was one of the first customers to use HANA Enterprise Cloud to run the SAP Business Suite.

With this, Florida Crystals is able to analyze their business in real time with increased insight into their business as it happens, from the supply chain to the customers.

At the same time, the simplicity of HANA Enterprise Cloud allows Florida Crystals to implement HANA quickly without worrying about infrastructure tasks.

In procurement and business network, our Ariba business continues to expand.

We're transacting nearly $465 billion of commerce over the Ariba business network.

This represents an increase of 27% year over year, and over 1.1 million companies are now connected on the Ariba network, many of which see this network as a front-end CRM system to drive business growth and new opportunities across the global market place.

Companies are also harvesting deep business insights from network-derived intelligence, critical for today's real-time networked enterprise, and a key differentiator against competing software vendors.

A global pharmaceutical company selected the full Ariba Suite for global deployment.

With Ariba, this customer expects to realize tremendous savings from integrated procurement and accounts payable platforms that will be managing a significant amount of spend and invoices through the Ariba network.

Now for HANA.

The second big pillar of our innovation strategy is HANA and big data.

The world is also moving to in-memory as businesses look to game-changing technologies to give them a significant competitive edge.

SAP HANA today is the new frontier of enterprise software.

We reached EUR102 million in HANA software revenue in Q2, representing 21% growth.

This growth was in line with our expectation as we introduced Suite on HANA general availability and HANA Enterprise Cloud only this quarter, and we estimate the HANA growth to be backend loaded in 2013.

So we continued the HANA momentum with a triple-digit number of deals.

We signed them this quarter and we expect to yield incremental revenues as these customers consume more HANA going forward.

And we have a very strong pipeline, in fact the strongest ever, and we are confident that we will reach our EUR650 million to EUR700 million guidance in HANA for the full year.

We also saw a stronger than expected adoption of SAP Business Suite on HANA with a triple-digit number of deals which, candidly, exceeded our own expectations.

This momentum is beyond question, given that we announced general availability only in May.

The Suite on HANA is the most modern ERP suite in the marketplace today and we expect this to be a multi-year revenue opportunity and a key driver for HANA revenue going forward.

More importantly, this is transforming and simplifying our customers' IT landscapes and business processes.

For example, Royal Swaziland Sugar Corporation, a leading sugar producer in Africa, has chosen to adopt SAP Business Suite on HANA.

The customer selected SAP over both Oracle and Microsoft.

The rapid deployment of SAP Business Suite on HANA will allow the Company to quickly benefit from the consolidation of 58 systems into just a few.

Finally, we're seeing enormous traction with startups that are developing new applications on the HANA platform.

As of today, we have over 500 startups running on HANA as part of our HANA Start-Up program, and with HANA, we are driving the next generation of innovative software companies.

Recent competitive announcements around in-memory have validated our strategy and SAP's visionary leadership.

We believe we have an 18 to 24-month lead over competitors.

While our competition is just announcing new in-memory databases that are based on future promises, we have a full business suite running on HANA today.

Our customers need to win today.

And mobile, we continue to lead mobile innovation for the enterprise.

IDC recently ranked SAP market share leader based on revenue in the Mobile Enterprise Management Enterprise Software market.

SAP has been recognized as the market share leader in software revenue for the 12th consecutive year in IDC's worldwide Mobile Enterprise Management Software 2013 to 2017 forecast, and that's pretty impressive.

We have seen continued momentum in mobile applications.

For example, Unilever, a multinational consumer goods Company, has partnered with us to develop the SAP Retail Execution Mobile application on the SAP mobile platform.

With SAP, Unilever expects to empower 17,000 sales people, merchandisers and shopping assistants in 190 countries to accelerate cross and up sell opportunities at the point of sale.

We also launched an exciting set of Mobile and desktop applications, SAP Fiori.

Fiori brings delightful new HTML5 user experience to workflow and productivity use cases of ERP, HR, and other business processes.

We also continue to see strong momentum with cyclomobile apps such as field services and mobile enterprise asset management.

Now let's talk about the core business applications.

We believe that there are solid growth opportunities in core business applications as we bring innovative technologies with simplified consumption to our existing installed base, as well as net new customers.

We see these growth opportunities in a number of areas, in new geographies and fast emerging markets, like the BRIC; and others that continue to globalize and require a strong core business software platform.

In industries that require differentiated solutions, and where SAP has the deepest industry expertise, customers and high-volume businesses such as retail, financial services, public sector, telecom, energy and healthcare, require sustainable solutions customized to their industry-specific needs.

All of this will drive growth in the core.

These industries are expected to adopt in-memory and mobile for real-time business innovations that will cater to the billions of consumers in their industries.

In our end-to-end CRM solutions that link the back office with the front office and offer a next-generation customer experience, we're really optimistic.

Further, with the planned acquisition of Hybris, we expect to enhance our portfolio and to deliver an omni-channel, eCommerce platform, tightly integrated to the next-generation customer experience.

Through SAP's continued expansion of our partner in ecosystem which now comprises more than 13,000 partners, we're driving the adoption of our core that is delivered On Premise or as hosted solution.

For example, SAP Business One, a small enterprise ERP solution sold only through partners, delivered really strong double-digit growth.

So as you can see, SAP as the Cloud Company driven by HANA, has never enjoyed a stronger business strategy, nor a bigger market opportunity.

I've always believed that SAP knows more, cares more, and can do more for the customer than any other company in our space.

This is the very essence of design thinking; the ability to imagine the future and to capture it in pursuit of a better world.

With that, I'd like to turn it over to my partner and friend, Co-CEO, Jim Hagemann Snabe, who will provide you with an overview and additional insight on how this fundamental industry transformation is impacting our market leadership and global business development.

Jim, over to you.

Thank you very much, Bill.

In 2010, we started a remarkable journey to transform the industry, based on innovations in in-memory, as in Cloud and on the mobile.

We anticipated then that data would move off disc into main memory, that data centers would move off premise into a secure Cloud, and that users would be on the move with mobile devices.

Today we lead in all these innovation areas, and give our customers not just a competitive edge, but a strategic advantage, and we're driving the transition of our industry.

As a result, we are consistently outperforming the market, also this quarter, and winning against the competition, both traditional, and now also in the Cloud.

Why are we winning in such a challenging market?

Well, if you look at where we are today, we're the only company in our industry to have our entire portfolio now in the Cloud and running on next-generation in-memory database technology.

Our solutions are designed mobile first with a beautiful user experience.

And we offer choice to customers and continue to innovate faster than competition.

As Bill mentioned, unlike our competition, we do not outsource innovation.

We disrupted the traditional software architecture by developing our own breakthrough in-memory technology.

We complemented this with the right strategic acquisitions to lead in the Cloud, and to drive enterprise mobility.

And without the burden of heavyweight hardware assets, we are radically simplifying the IT stack of our customers.

We focus on software, which is the innovation and growth layer, rather than hardware or services.

That's why we're more relevant to our customers today than ever before, and that's why we grow faster than anyone else.

The transformation of the industry happens at a different pace depending on the region.

The move to the Cloud in the US is happening faster and much more broadly than any other geography, and we are benefiting from this acceleration.

If you look at our quarter numbers in Americas, we delivered a strong 18% growth in software and Cloud subscription revenue this quarter, which means we grew more than 4 times faster than our nearest competitor.

We're driving the transition of the Cloud in North America with Cloud contributing more than 25% of our overall software and Cloud subscription revenue this quarter.

We are seeing some of the highest Cloud revenue growth rates in the US, and winning against established Cloud players, like Bill outlined.

For example, American Sugar Refining, ASR, the largest sugar refiner in the world, selected SAP Jam and SAP Cloud for customer over salesforce.com to increase customer insight and personalize engagement.

With SAP Cloud, ASR expects anywhere, anytime access to relevant data to make business decisions and identify sell and up-sell opportunities in real time.

We achieved excellent growth in Latin America, both in Software and in Cloud.

While many tech companies saw a slowdown in Brazil, we saw a stellar performance in this market with triple-digit software revenue growth.

Clearly, customers are choosing SAP innovations to drive their growth agenda.

EMEA delivered a solid performance, with 3% growth in Software and Cloud subscription revenue, impressive in the light of the continued market uncertainty in Europe, and a very tough year-over-year comparison.

We saw continued strong growth in our home market Germany, with high single-digit software revenue growth.

This means our growth opportunity is everywhere, including in our most mature markets like Germany.

We are growing in strong double digits in emerging economies in Africa and in the Middle East.

In Europe, our growth was driven by increased success against our competition.

For example, in Sweden, SJ, a government-owned passenger train operator selected SAP HANA and SAP Business Objects solutions over Oracle to increase customer satisfaction and profitability.

With SAP, SJ expects to better analyze travel information and react faster to time schedule delays.

Our performance in APJ was below our expectations, mainly due to continued macroeconomic challenges.

This trend is also consistent with that of our competitors and companies in other industries that are seeing similar trends in Asia.

In China, the GDP slowdown has impacted state-owned enterprise IT spending; and our revenues from China were below expectations this quarter.

Additionally, we were impacted by the IT purchasing slowdown in Australia and Japan, two of our largest markets in APJ.

On a positive note on the other side, our leadership changes in India and South East Asia had a very strong positive impact, with strong Software revenue growth in these regions.

Even in the challenging market, in APJ we continued to drive our innovation growth agenda, and are winning against competition.

For example, China Resource Enterprise, CRE, a large producer of consumer goods in China, selected SAP 360 Customer and SAP Trade Promotion Management over Oracle.

With SAP 360, CRE expects to receive the speed and flexibility to execute its strategy from any device, any time, anywhere.

And let me be clear, Asia Pacific Japan remains a big growth opportunity for SAP.

Finally, let's talk -- take a look at our guidance for the full year.

Today, we are reaffirming our full-year 2013 non-IFRS operating profit outlook to be in the range of EUR5.85 billion to EUR5.95 billion at constant currencies, consistent with the prior guidance.

While the difficult macroeconomic environment, in particular in Asia Pacific Japan, and the rapid transition to the Cloud has resulted in lower software revenue expectations, SAP remains committed to be a double-digit growth company with at least 10% growth in non-IFRS Software and Software-related service revenue at constant currencies in full-year 2013.

In addition, SAP reaffirms its outlook for its fast-growing innovation categories in Cloud and in-memory.

The Company continues to expect full-year 2013 non-IFRS Cloud subscription and support revenue of around EUR750 million at constant currencies; and full-year 2013 SAP HANA software revenue in the range of EUR650 million to EUR700 million.

And we remain committed to achieve our 2015 ambition to be a more than EUR20 billion company with a 35% operating margin.

In summary, we believe the market has fundamentally changed, with the transition to the Cloud and in-memory technology, and we are best positioned to help our customers with their transition.

Despite a difficult macroeconomic environment, we are reiterating our commitment to be a double-digit growth company and meet our operating profit goals for the full year, extending our distance to competition.

And with that, I would like to hand over to Werner.

Thank you, Jim.

Both Bill and Jim gave you an overview of the solid second quarter.

As mentioned, we have seen three years of double-digit SSRS growth.

I would like to give you more insight on our Q2 results.

But before I do that, let me talk a little bit about the currency effect in the second quarter.

To the top line, our software revenue was negatively impacted by 4 percentage points.

Non-IFRS SSRS revenue was negatively impacted by 3 percentage points, and our non-IFRS total revenue was negatively impacted by 4 percentage points.

To the bottom line, our non-IFRS operating profit was negatively impacted by 6 percentage points, which resulted in an 80 basis point negative impact on our non-IFRS operating margin.

Now to Q2.

You already heard about our single-digit growth performance on the Software and Cloud subscription revenue side, which was mainly due to the slowdown in our On Premise Software revenue which was caused by the shift to the Cloud and the challenging market environment in Asia Pacific.

Let me talk about recurring revenue.

Non-IFRS support revenue increased at constant currencies by strong 11% year over year, in line with our expectations.

Once again, we saw strong adoption of the Enterprise support offering at 98%.

Non-IFRS Cloud subscription and support revenue increased to EUR183 million in the second quarter, up 171% year over year at constant currency.

We continue to see an increase in sales synergies between SAP SuccessFactors and Ariba.

Non-IFRS deferred Cloud subscription support revenue was EUR361 million at the end of Q2, which is an increase of 68% year over year.

Before I talk about gross margins, I want to make a few comments on our Cloud division profitability.

With the EUR23 million segment profit in the second quarter compared to minus EUR19 million in the prior year, our Cloud division was profitable for the third quarter in a row.

Now some comments on our gross margin for the quarter.

Our Non-IFRS SSRS margin was flat year over year at 84.4%.

The Professional Service margin increased 10 basis points to year over year 21.3%.

The result shows that by leveraging our acquisitions and improving efficiency, we can improve our margin in Professional Services.

The overall gross margin was 72.9%, an increase of 100 basis points year over year.

Looking at the expense side of the P&L, you can see that Non-IFRS total operating expenses in the second quarter increased by 7% year over year at constant currency.

From this, an increase of 3 percentage points came from the inclusion of Ariba.

In addition, our workforce grew by almost 4,000 FTEs year over year, therefore approximately 3,000 from acquisitions.

Non-IFRS and marketing costs increased by 11% impacting our operating expenses as we continued to see investments in our go-to-market activity.

We added an additional 800 FTEs in the second quarter.

This led to sales and marketing ratio of 24.8%, or an increase of 1.4 percentage points compared to prior year, but was actually down sequentially by 60 basis points.

This shows the result of our efforts to take advantage of the investments we made in sales and marketing last year, where our headcount increased by approximately 3,100 FTEs, and who are now fully reflected in our numbers.

In Q2, we saw a solid increase in our non-IFRS operating margin at constant currency.

Overall, our non-IFRS operating margin at constant currency in Q2 increased by 60 basis points to 30.6%, despite the impact from Ariba, which accounts for 40 basis points.

This demonstrates that the efficiency in our core business has further improved, and our Cloud business is on its way to being profitable.

The non-IFRS tax rate in the second quarter was 26.8%, which is up 1.2 percentage points year on year.

The year-on-year increase mainly results from tax effect on changes in foreign currency exchange rate, and from valuation allowances on deferred tax assets, which were partly compensated by tax effects relating to changes in the regional allocation of income.

I also wanted to point out that we changed our effective tax rate guidance, which on the IFRS side now is expected to be between 24% and 25%, and on the non-IFRS side, expected to be in the range between 25.5% and 26.5%.

Now to cash flow and liquidity.

Operating cash flow for the first six months increased 3% year over year to EUR2.48 billion, mainly reflecting our continuous strong cash flow.

This led to a EUR1 billion improvement in our net liquidity compared to the end of last year.

Before I finish, let me make a few comments about currency.

Overall, during the first six months, our non-IFRS number at actual currencies experienced a negative currency impact compared to what there would have been if translated at exchange rates used last year.

Non-IFRS SSRS and total revenue rates were negatively impacted by 3 percentage points each.

The operating margin, as said, was negatively impacted by 60 basis points.

If you look at the full year 2013, we expect an even bigger negative impact from currency.

If exchange rates remain unchanged at the June level of this year for the remainder of the year, our 2012 full-year non-IFRS SSRS in total revenue at actual currencies would both be approximately 4% lower than the respective constant currency numbers, representing a negative impact of approximately 4 percentage points to the non-IFRS SSRS and total revenue growth rate.

The non-IFRS operating profit growth rate would be impacted by 6 percentage points.

On the non-IFRS operating margin at actual currencies, would be approximately 80 basis points lower than the respective constant currency.

Having said that, I hand it over to Stefan.

Thank you very much.

We'll now start the Q&A session.

I hand it back to the operator.

Thank you.

Ladies and gentlemen, at this time, we will begin the question and answer session for the financial analyst community.

(Operator Instructions).

Rick Sherlund, SAP.

The first question is on Oracle, and they're alluding now to an in-memory product coming out, 12.1c, at the end of the year.

And we've seen both IBM and Microsoft announce hybrid products that ship next year as well.

I'm just curious if we can -- if you can give us a bit of a tutorial on in-memory HANA versus the traditional products that seem to be adopting more in-memory capabilities, how that might affect the market.

And second, on this transition to the Cloud, I'm sure we're all concerned about the impact on On Premise; at the same time, we're excited about the move to the Cloud.

And is there something special about SAP's book of business because you can integrate with the system a record that your Cloud business should grow a lot faster than everybody else's business?

In other words, you could actually cannibalize your On Premise business.

I hate to say cross-selling, but is that a fertile market?

And while we're going to feel badly about that business going away faster, but could the Cloud business grow a lot faster than maybe we're thinking because of the facilitation that's enabled with your existing customer base and integration with your existing systems?

Thanks, Rick.

Jim here.

I'll try and give you the download on the in-memory.

It's a very interesting development.

Three years ago, we argued the world must move to an in-memory based database, and the competitive reaction was a hint that we must be visiting pharmacies and be on drugs.

Now they are all announcing it.

And I'd like to make two points on what really describes HANA, because calling it in-memory is probably too simple.

It is the fact that we have an architecture where all data you use for business is in memory all the time, and not a hybrid model where you swap data between other media and memory.

This is important because then you get a massive simplicity as a consequence, and the TCO goes down and not up.

And secondly, we always argued that maybe the real beauty of HANA is the column store idea.

That is important, because that is a technology that takes full advantage of parallel processing, and with that, we have the opportunity of constantly increase the speed of HANA with the technology updates in hardware without any overhead [entailed].

This is key, and that describes HANA.

Now we have seen competitors come out with arguments.

Now I was asked a couple of years ago how far ahead do you think you are on in-memory based technology column store, and I said at that time I think we are at least two years ahead.

With the recent announcements, we now know that we are at least four years ahead.

So that's good.

And I think that we can extend that lead, because in the moment, we are adding -- we are moving all our stuff to run on HANA, which means the value of HANA goes up every single quarter.

So that's basically where we are.

We know this technology now since three years.

We have mission critical systems running on it.

And let's see where competition goes.

We would never announce a future functionality in the next, after next release, because it would completely invalidate the current and the next release.

So I wonder why they did that.

But that's another personal remark.

When it comes to the Cloud, I think you're seeing a very beautiful combination of the Cloud extending the core, which is why we don't see a lot of cannibalization happening.

And, yes, we could of course accelerate that if we wanted to, because the HANA Enterprise Cloud is now offered as a bring-your-own license model, and we could change that if we wanted to.

You can maybe guide us on how fast that transition is healthy, but we certainly love the business model of the Cloud.

Bill, do you want to add?

I would just build on what you were saying, Jim.

You have to remember the global reach and the multiple industry discipline that SAP has as a major competitive advantage.

Because if you look at the competitors in the line of business, multitenant and public Cloud, they've been largely harvesting in the US and to some extent Europe; to a lesser extent Latin America and Asia.

Our footprint, our global reach, our partner ecosystem, our industry domain is all set and ready to execute in all these markets, so I think we can accelerate the line of business Cloud.

And as Jim said, the Business Suite on HANA running in the HANA Enterprise Cloud is a game changer.

Whether that is SAP's HANA high performance Cloud, or it's the customers' private Cloud, or it's the HANA plus-1 strategy, where our partners have actually adopted HANA and the Enterprise Cloud concept and they're provisioning it to their customers, all of that's perfectly acceptable to us because we know that HANA is the new frontier, the leadership architecture, and the Business Suite is the most integrated business suite, and integrating also with the line of business solutions.

I met with a CEO of a very large bank yesterday.

He told me, he said my goal is to whittle down the number of vendors I do business with.

I have no interest in complexity.

With lots of different vendors I want to standardize on the few that matter and SAP is at the top of the list.

And I think our move to be the Cloud company led by HANA is the right move for the Company and we're going to accelerate that.

Thanks a lot.

Let's take the next question, please.

Brad Zelnick, Macquarie.

I appreciate SAP's Cloud offerings extend the core and are driving lifetime value for customers; and it seems in Q2 more customers than you expected chose Cloud solutions over perpetual license solutions.

What's your expectation for how that take rate progresses?

And what's embedded in your guidance as it relates to that choice?

Maybe I can just give a color.

I did go through the regional setup, and you see a very different regional characteristic on the move to the Cloud.

US, 25% of the revenue in Software and Cloud is now Cloud.

The move there is very rapid.

It is also growing fast in Europe but not at the same pace.

And I think Asia will remain an On Premise mainly market for a while, but we'll be the first to bring the Cloud there.

So as you look at that, you'll understand that when we don't have so strong Software revenue, it's partly because of this, but mainly because the biggest On Premise market with growth is Asia, and the performance in Asia was below expectations due to the macroeconomic environment.

If you look at Germany with a high single-digit growth, this also comes from growth in the core; and so there is growth in the core in all markets still, even though we move rapidly to the Cloud.

Okay.

If I could ask a quick follow-up.

Go ahead, Brad.

Just on deferred Cloud revenue on a non-IFRS basis, the metric is down sequentially.

And I recognize this is relative to a very strong Cloud bookings quarter in Q1, but are there any other explanations for this, such as billings' frequency, or any deeper insight that you can give us into the Cloud business from a bookings or billings perspective?

Thank you.

Definitely currency plays a role, and it's one of the reasons for the sequential dip you referred to; and the rest is seasonality.

While the Cloud revenue shows steady growth, there is some seasonality to billings and, therefore, to deferred Cloud subscription revenue.

Normally Q2 is not a big Cloud billing quarter, as for example Q4, which is the biggest billing quarter for SAP and all other Cloud applications; and Q1 and Q4 are the biggest network billing quarters for that, and it's not untypical what you see here.

Thanks, Werner, and thank you again for taking my questions.

Mark Moerdler, Sanford Bernstein.

How much --?

If we look at the Cloud revenue, how much of this is SuccessFactors versus how much are we starting to see from the new modules built out of Business ByDesign?

So in a rough term, you could say that the majority of our Cloud revenue is SuccessFactors and Ariba, roughly same sizes.

And there is a portion in there which is the ByDesign end suite.

And the reason is very simple that the customers in the suite are typically much fewer users.

And therefore we always predicted that that market will be there in the future, but the big market is line of business, and that's why we went for the strategic acquisitions.

And if you look to the SAP Cloud revenue we referred to, from a half-year perspective we also have double-digit growth rate, but lower than those we see for the SuccessFactors and Ariba Cloud subscription revenues.

One other quick question.

Should we expect going forward to see this accelerated move to the Cloud and continuing some level of weakness in the core?

I would just say, Mark, that the reality is we are innovating and pushing the Cloud message as fast and as hard as we can.

In the future, I think, you're going to see a HANA Enterprise Cloud business that becomes a major part of the story, but that will be back-end loaded since we just announced it at SAPPHIRE, and you'll see the line of business continue to grow.

And we want to innovate and take the customer where the customer wants to go.

And if the customer can put it in the Cloud, and it's more efficient, and it's better for their employees and their customers and their shareholders, then that's what they're going to do.

I do think you should note the core will be in the Cloud.

So if you take our core Business Suite on HANA and the HANA Enterprise Cloud, the core will be there, and there will be the necessary financial models to recognize that revenue.

So it didn't go away.

It's going to go to a different place and we will have the necessary models on the OpEx and the CapEx side to give the senior decision maker in business is what they need from SAP.

And I would put one argument on top.

I think I would never talk about the weakness in the core.

Remember, we have [reasoned] that the core is very important, and Jim referred to this.

In Asia Pacific, it's the core which is important for our customers across the board.

We have the same in Latin America.

So you have parts in the world, emerging markets where the core is absolutely the driver for growth.

And on top, we have some industries where the core is the driver of growth.

Think of retail, think of financial services.

and so on.

So from that, and I would not support this comment you made earlier in your question.

And also, Werner, you're absolutely right.

Think about the move we made with Hybris and the eCommerce platform with the next generation omni-channel CRM.

There is not a CEO in the world that in their boardroom are not talking about the business-to-business-to-consumer problem that has to be solved.

If they can know their consumer better than their competitor, they win the game.

And that's going to happen on SAP's core CRM end-to-end platform.

And incidentally, that can also be provisioned in the Cloud.

And it's running on HANA at the end of the day.

Exactly.

And that's a big advantage for all of our customers.

Perfect.

Thanks a lot.

Let's take the next question, please.

Ross MacMillan, Jefferies.

Bill, you alluded to HANA and the notion that you're going to see proof of concepts convert to, I think, production and more revenue from existing customers as we move through the back end of the year.

I was just curious as to whether this was -- your conviction on the HANA number is based on go-lives at existing customers that are expanding, or whether it's really more tied to more customers adopting Business Suite on HANA.

Yes, it's a mixture, Ross.

So right now, the HANA pipeline, so the first measurement stick that we use at SAP, because we actually run the Company on our own software, is the pipeline.

And the pipeline is bigger for HANA as an absolute number and as a multiple than in the history of the HANA story, which is really encouraging.

There are several proof of concepts with great use cases out there in customer establishments right now that are mind-boggling in terms of the value that HANA delivers to the customer.

And then there's also this HANA Enterprise Cloud where we take the Suite on HANA and we run it in the HANA Enterprise Cloud.

We think that is a major kicker for our business going forward.

Because we just announced it at SAPPHIRE, we think that will be a back-end loaded part of our story to this year.

So that's it in a nutshell, and it's a combination of a lot of good things.

Keep in mind with regard to HANA, it's an amazing number.

Right now, we have 2,500 HANA customers when you count the smallest ones as well as the HANA customers themselves.

So we have developers in small accounts out there in the Amazon cloud pulling at HANA as well as 1,800 significant customers.

And incidentally, in all of those 1,800 significant customers, HANA is the hand that keeps on giving, because as they expand their use cases of HANA, so too do our revenues and our profits expand with the customer value.

If I can add just one comment to understand the dynamics here.

The first phase of HANA we went for value, which means big transactions where companies really wanted the power of HANA to change their business.

With the run time license opportunity to run the Suite on HANA, we have a much, much lower price point where companies can see the value of HANA in a very simple way and then they can expand.

We've seen an enormous uptake in terms of volume, so many customers who bought the smaller license, the run-time license, and I think this gives us a pipeline for the full license of HANA later on.

Thanks a lot.

Let's go to the next question, please.

Stacy Pollard, JPMorgan.

Just two really on HANA.

First of all, Oracle says they don't see you in the market.

Can you explain why that would be?

And then excluding HANA, can you discuss growth rates in the On Premise business, how much is business intelligence?

How much is ERP, etc?

Just a broad idea.

And then second question.

How exactly do you incentivize your sales force to sell Cloud product versus On Premise?

Presumably, the commission is different, or just how does that work?

Yes.

Maybe I could just take a start at it, why Oracle might not see us in the marketplace.

They may be spending too much time in internal meetings because we're out there.

And I can tell you that their customers know we're there, and our customers certainly know we're there.

In fact, one of the really well known companies in our industry has a CEO that said something to me day before yesterday that I felt was quite striking.

He said that HANA without question will be the de facto standard platform for in-memory computing and business analytics in the world.

So I think most people know we're around.

And as it relates to the various growth rates, and so on, I'll let Werner comment on that and Jim.

Yes, let me make one comment here, because we also of course heard that there's a comment made in the conference call from Oracle, and I quote here.

Some of SAP's largest customers, German industrial companies, bought Exadata and not HANA, like Siemens.

And I talked to Siemens personally and this statement is simply incorrect.

I talked to my counterpart at Siemens, Joe Kaeser, and he gave me the permission to say that Siemens had invested significantly in SAP HANA and is using our database.

And he stated that there obviously was an error on Oracle's side that Siemens does not use HANA.

And if you want to talk to Siemens, call their communication department, because he wanted to give this also back to them so that they can answer any question which might still be open, left open.

And on the sales force, one of the things that we wanted to do is equalize sales compensation between Cloud and the On Premise business because we never want the customer to get caught in the middle of what's right, with a sales professional not giving them every option that they could possibly hope for from SAP; so they get paid the same on Cloud as they do the On Premise perpetual, and we completely equalize that in the Company.

Just the core without HANA, so you saw the HANA growth was 21% this quarter.

We have focused on the volume and so we have a very strong pipeline for the value for the rest of the year and beyond.

That's why we are very firm on our guidance.

And if you look at the applications and the analytics split, you will see a growth in analytics, so that means there is a reduction in applications, and very much due to the situation in Asia Pacific.

Again, you're looking at Germany where it can have growth in the core in Germany, so it's possible, and we believe it will come back.

Just a quick -- sorry, is it possible to just --?

Because you mentioned Asia.

That Asian weakness that you've been talking about, does the pipeline suggest that it will continue into H2, the weakness will continue into H2?

I had an opportunity personally to review the Asia business with every leader across the Asia Pacific/Japan region this week.

It is clear that the pipeline continues to grow in Asia, and the pent-up demand is evident in the metrics.

How quickly that flows through remains to be seen now in the execution, but the health of the business and the inspiration of the management team couldn't possibly be better.

And if you look to it on the macroeconomic perspective, I think we all know that some of the trading partners in South East Asia off China, including Japan, are suffering from the situation in China.

And if you look for example to Australia, they are faced with the lowest GDP growth over the last 10 years.

So from my perspective, we will not see a change for the -- during the rest of the year, but going into 2014, I think there are positive signs.

And that's one of the reasons why we haven't cut down our investment into this market because we are convinced that this market will come back, but not in the second half of this year, more into 2014/'15.

Thank you.

Thank you very much.

We have time for two more questions, please.

Adam Wood, Morgan Stanley.

I've got two, if I could, just first of all on the margins.

When we look at the full-year guidance, you've obviously increased quite a bit the margin expansion that you look for this year versus previously.

And that ties in with SAP in the past where maybe the macro's impacted and the license growth has slowed, you've used the margins to protect the EPS growth.

Is that the right way to read the move in the guidance for this year?

And could you maybe give us a little bit of a feel for how much more room you've got to play with that if, for example, the macro remains weak and broadens a little bit through the second half of the year?

And then just secondly on HANA, you've highlighted a lot of the confidence on the pipeline.

Just in terms of what happens through the second quarter and third quarter, is it possible that with so many product announcements that customers have sat back a little bit to consider where they prioritize the investments, whether it's the business warehouse, whether it's suite, and that's caused a little bit a hiatus in growth and that comes back in the fourth quarter as you educate and those customers start to make decisions.

Thank you.

Yes.

Maybe I take the question related to the margin.

You know that we reiterated our guidance on the non-IFRS operating income, not the margin itself, and we are committed to deliver this income.

Of course, this has implications on the margin.

And you saw in the second quarter that even under -- in a very tough environment, we are able to extend our margin in the organic -- on the organic side to 100 basis points, and that's, I think, a continuation you will see into the second half of the year, and we will do everything in order to protect this operating income number we want to achieve.

In terms of HANA and the customers perhaps taking a pause, which is what you implied in your question, it is a fair question because we did just recently announce the Business Suite on HANA.

So now you only need one database, it's called HANA.

That's a big shift in the marketplace.

Also at SAPPHIRE in May, we announced the HANA Enterprise Cloud, where a customer can run the entire Business Suite on HANA in a Cloud environment.

That's another big transformational idea.

So it's possible that customers are absolutely thinking about how they can move the core into the Cloud and do that on HANA in a way that transforms the business model, because those are the kinds of conversations we are in.

We feel that we've fairly compensated for that in our guidance and the update that you're getting today, but I can tell you the HANA business is beautiful, it's gorgeous.

And when you look at the pipeline, you can only be proud to be an SAP employee when you look at the HANA pipeline.

Adam, the way I put it was we're becoming very strategic with our customers.

We're sitting with the CEO at the table, and that's a very good position to be in.

It may have dragged some decisions, but clearly, it's an opportunity.

Right.

Thank you very much.

Thanks a lot.

The last question, please.

Phil Winslow, Credit Suisse.

Bill, you've already commented on your expectations for the second half in APAC, but what I wonder if you could give us some comment just what you're hearing from customers in the US and Europe and South America too.

There's a lot of just mixed data points between yourselves, IBM and Oracle about what's happening in these geographies.

So if you could give us an update on your thoughts, that would be great.

And then one for Jim too.

Obviously, we've spent a lot of time on this call talking about HANA, which I think we all love too, but I wonder if you could give us an update on the mobile side.

I think you guys talked about 76% [year-over-year] license growth last quarter.

I wonder if you could give us just a broad update there.

Thanks, guys.

Maybe I'll just start on the geographies, Phil.

The US, obviously, I think Jim covered it earlier.

There's a strong acceleration to the Cloud.

We know the multitenant line of business has been well known for some time now.

We think taking the suite or the core, moving it into non-enterprise Cloud, whether it's ours, our partners, or a private Cloud environment for our customers, is a major way to get things really going.

Not fight the Cloud, let's feed the Cloud, let's lead the Cloud, and let's demonstrate innovation in the Cloud.

And that's what really SAP is doing as the Cloud Company powered by HANA.

On the subject of South America, it's very good for us.

Brazil is very, very strong.

I think we've become the de facto standard there recently.

Someone told me more than 70% of the GDP in Brazil now is running on SAP.

And Mexico's become a major story now in our execution.

More free trade agreements in any -- than any place else in the world out of Mexico.

So we understand that and the customers there respect SAP as the global Company that can help them expand beyond their borders.

So that's going really well.

And even in Europe, if you look at other IT companies, it's not robust growth in Europe.

We know that.

But a lot of IT companies are struggling just for negative results.

We at least are growing in Europe, and there are bright spots within Europe as well.

When you look at a core market like Germany growing at high single digits, when you look at the Middle East and North Africa, you look at Southern Europe actually turning a corner.

And when you look at our results, underneath that European number is Southern Europe and some of the Portugal, Italy, Greece and Spain numbers actually going into double-digit territory now.

So we think we've got the premium brand in Europe, and when Europe does turn, we think we're best positioned to capture that in faster growth rates on a go-forward basis.

So that's it on the regions you asked about.

Maybe, Phil, let's talk a little bit about mobile.

The reason we haven't spelled it out so much is that mobile is becoming the default.

It's becoming less of a separate category.

All of our applications are now consumed to the mobile, and some of that revenue will be in the apps world rather than a separate category for mobile.

If you look at the first half, we have a strong double-digit growth in mobile as a category, but it's becoming less and less relevant to look at it standalone.

Got it.

Thanks, guys.

Thank you very much.

And this concludes the financial analyst earnings call for today.

Thank you all for joining and goodbye.

Ladies and gentlemen, this concludes the SAP 2013 second quarter earnings conference call.

Thank you for your participation.

You may now disconnect.