SAP SE (SAP) 2014 Q4 法說會逐字稿

Good morning or good afternoon. This is Stefan Gruber, SAP Investor Relations. Thank you for joining us to discuss our results for the fourth quarter and full year 2014.

I am joined here in Walldorf by CEO Bill McDermott and Luka Mucic, our CFO, who will make statements and opening remarks on the call today. Also Executive Board member Bernd Leukert, who leads Product Innovation, is on the call and will join us for Q&A.

Before they get started I would like to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, and will, and similar expressions as they relate to SAP, are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the US Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2013 filed with the SEC on March 21, 2014.

Participants on 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 as reported.

Bill and Luka will be referring to presentations slides during their prepared remarks. These slides are available on our website for download, www.SAP.com/investor. I would also like to remind everyone there will be a capital markets day in New York City on February 3 and invitations for this will be circulated shortly.

And now I would like to turn the call over to Bill.

Thank you very much, Stefan, and thanks to everyone for your time today. I really appreciate it.

We have come a long way in the last five years. You might remember we were in 2010 the world's leading business software company in applications and analytics. And at that time we embarked upon a new strategy, one in which we would address the mobile device marketplace, one that would address the Internet of Things and the fact that data was doubling every 12 months.

Of course, HANA was the lead story there and we wanted to make the Company relevant in the cloud and we made some bold moves on the M&A and on the organic side to do that. And, of course, we are very strong on the fact that commerce doesn't only happen within the walls of a company, it has happened between companies. And, therefore, we embarked upon our journey in the business network with contingent labor, indirect materials, and traveled expense now with Concur.

So over the past five years, we've been putting together a very powerful set of assets to truly define ourselves as the cloud company powered by HANA so we could help our customers run simple. As we carry ourselves into 2015, SAP has never been in a stronger position. Today SAP is the fastest-growing cloud company at scale in the world with 70 million users, and when you take a look at our 2014 performance, we have a strong year to report. Cloud revenue grew 72% in Q4 and it grew 45% for 2014.

All the lead indicators point to strong future cloud growth. For example, cloud calculated billings grew 104% in Q4, cloud deferred revenue grew 56%, cloud backlog grew 94% to EUR2.3 billion, and in 2014 increased cloud deferred revenue and backlog increased by EUR1.4 billion to more than EUR3 billion. Obviously, all of this comes into the revenue stream.

SAP's cloud run rate now exceeds EUR1.7 billion or more than $2 billion. Our software and software-related services grew 7% and that was in line with our full-year outlook. And, of course, our operating income profit increased to EUR5.64 billion, again consistent with what we told you.

When you think about our cloud and how we are leading the transition, look at the world through the eyes of our customer. Our customer today has many challenges that they are facing. That is why with SuccessFactors and Fieldglass we help the customer manage the total workforce, both permanent and flexible, and with Employee Central it is actually up 90% year-over-year. We now have 560 customers that are running core HR in the cloud, that is up from under 300 a year ago, and many wins against the competition.

When you look at customer engagement commerce, you all know that CEOs want to engage their customer on any device in any channel. In fact, I'm the executive sponsor for an apparel company who is highly innovative and what they want to do is essentially connect with their consumer -- direct, wholesale, retail, and in community -- to make all the athletes more productive and, in fact, make them healthier.

And that's why I think we are the only one that can do all that. We grew our business triple digits in 2014 in customer engagement commerce and also had many competitive knockouts with cloud for customer, where we are replacing well-known competitors in the enterprise.

On the HANA Enterprise Cloud, we are obviously scaling this, not just with SAP but also with partners, to meet customer demand around the world. An example would be the deal we did with IBM where they accepted SAP's reference architecture on HANA in the soft layer cloud globally.

If you look at the industry cloud, we are building on 43 years of expertise across all industry domains and, therefore, the cloud company owes it to our customers to give them choice. Whether it's public, private, industry, line of business, or the entire business globally, only SAP has the bandwidth and the offering of all components.

Now for SAP HANA. I often call SAP HANA the great simplifier because I know the world needs to be more simple. Industry analysts have recently said that SAP is changing the equation. Forrester, for example, sees 30% to 50% TCO savings with HANA. Forrester and Gartner recently published key reports that SAP is ahead of the pack on vision and execution, and maybe that's why we now have 1,850 suite on HANA customers, which is up from 800 a year ago.

Just to put that in perspective, 1,850 suite on HANA customers is double the number of customers that Workday has globally. Customers are choosing HANA over Oracle. In fact, Bloomberg is now streamlining all of their accounting and financial processes on HANA.

And the HANA Cloud Platform is probably the best-kept secret in SAP. We now have 1,200 customers already on the HANA Cloud Platform.

And then there is the world's business network. It is a business network, literally, that reinvests commerce between companies in all spend categories. As I said, indirect materials, contingent labor, and travel. This market has a $10 trillion size associated with it and we already have 1.7 million companies that are transacting more than $700 billion in our business network. And, for reference purposes, that is bigger than Amazon, eBay, and Alibaba combined, and we are just getting started.

So the Concur acquisition kind of completes SAP in the sense that it puts the S in simple. It is already evident in the pipeline and the deal closure path in Q4, with key wins at Lockheed Martin, Adidas, MetLife, Johnson & Johnson, Kellogg, and others.

When we look at our network goal, it's bold. We plan to capture [$]2 trillion in spend by 2020 on the SAP business network, because it's the world's network. And these transactions will capture not just value for SAP, but more importantly, for all of the network participants. And Steve Singh will be there to present the details of our business network strategy on February 3 in New York City.

Give you some regional headlines now. In EMEA cloud subscription and support grew 85% in Q4, taking the full year to 58% year-on-year growth. Software and software-related services increased 7% for the full year and we had very strong growth, to call out one geo, in the UK.

Americas, the cloud performance was up 63% in Q4, which took the full year to 39% year-on-year growth, and software and software-related services increased 7% for the full year. We did see some weak macroeconomics in Latin America, particularly Brazil and Mexico at a GDP level, and also, as you know, commodity prices have been very difficult there. But that is all expected to go on a better path as we look ahead.

APJ, the cloud business nearly doubled in Q4 and full-year it's up 59%. Software and software-related services there also increased 7% and we had very strong performance in India.

So in summary, it is a pretty balanced scorecard for the regional performance and that leads me into the outlook. Only SAP can deliver the promise of the perfect enterprise. That is an integrated, real-time, HANA-enabled enterprise and that is why we really believe we are on to something big with S4HANA -- S for simple, 4 for fourth generation, and the suite running on HANA.

We see the network enterprise enabled with our business network and we see the importance of companies running in real-time, running networked, and of course, running simple. We are proud of our strong 2014 performance. We know we have the winning strategy and we also know we have assembled the best assets to help our customers win, so we are, therefore, very confident in our future.

I would like to give you a little color on outlook and midterm targets, and Luka will shortly explain this in more detail, but let me give you a high level here. We expect to grow cloud business 7x from EUR1.1 billion in 2014 to EUR7.5 billion to EUR8 billion in 2020.

And, yes, I did say 7x. You can call it sevenfold, 7 times. It's a lot. And we see this organic growth rate that is implied in this projection as being totally unmatched for a company our size and scale in the industry.

We are also adding close to EUR10 billion in total revenue by 2020. And by 2020 we expect to add approximately EUR3 billion of additional operating profit. We expect to approach 75% predictable revenues in all revenue streams by 2020 for the Company.

So, in summary, this is my 50th quarter at SAP; I have never been more confident in the Company. Our vision is strong. Our strategy is ever-sound and our roadmap to the future could not be clearer.

I would like to thank our more than 74,000 SAP employees for their passion each and every day, and I would like to thank you for your time and attention. I will now turn it over to Luka. Luka, over to you.

Thank you very much. Thank you very much, Bill. So let me start off by saying as well that 2014 was a year in which we have certainly, especially in the second half-year, maneuvered a more and more volatile business environment. But we have fared extremely well based on our strategy that was founded in innovation and really growing in all of the key innovation fields of our industry.

When you take a look at the scorecard at the end of the year -- Bill has covered some of this already -- we had bold targets for our cloud subscription business. We originally guided for a range between EUR950 million to EUR1 billion. We increased this target twice throughout the year and we ended up at the end of the day at close to EUR1.1 billion.

So that beat, even without considering the acquisitions that we did during the year, the original guidance range, which already had an organic growth target of 32% at the top, which is a very strong result.

Together with an ever-resilient core business, which we grew softer in support by 5% through the course of the year, this has also enabled us to meet our guidance range that we had indicated at the beginning of the year for software and software-related services revenues, where we posted a 7% increase at year-end.

In terms of operating profit, we achieved and landed in our adjusted guidance range that we had guided for at the end of Q3 with a total operating profit of EUR5.63 billion, a 3% increase, while at the same time we were maneuvering a difficult macro environment in some of the emerging markets. And we are seeing tremendous hypergrowth in our cloud business.

Overall, we had given out an effective tax rate for IFRS and non-IFRS purposes that we have actually achieved, or actually we stayed below, with 24.8% IFRS tax rate and 26.2% for non-IFRS, which at the same time has allowed us to increase earnings per share on a non-IFRS basis by 4% at the end of the year.

Now let me talk a little bit further about the components of this success, because we continue to stand on two strong legs. There is, of course, the fast-growing cloud business with the 45% increase in 2014, as Bill has alluded to before. And with all of the even more promising forward-looking indicators, such as the combination of deferred revenue and the backlog, for example, which has reached more than EUR3 billion, which of course is then a very, very strong indicator of committed business that will flow into revenue in the future and will continue to safeguard a strong growth trajectory that we are also guiding for for the mid and longer term.

We have increased calculated cloud subscriptions and support billings by 104% year over year. Even when you adjust this for Fieldglass and Concur, this still resulted in an impressive organic contribution of more than 30%. Note, though, that this number is lower than the number that we had in our preliminary prerelease because of final classification activities that we conducted as part of our final closing. But, again, the contribution here is really strong and guides exactly in line with the growth trajectory that I will also talk about for our 2015 guidance.

The progress that we are making, that is very important as well in terms of the overall business transformation. It's also best depicted by the relative size of our order entry for new business in the cloud relative to our software revenue. In 2014 already we achieved roughly one-third the size of our software revenue for the full year in terms of order entry for new business in the cloud, so this is clearly another indicator reflecting the health and the tremendous growth trajectory of our cloud business.

Now over to the core business, because this is important as well.

We have and continue to have, and we will have in the future, a solid and stable growing core business. In 2014 we grew 5% at constant currency in the combination of software and support. As Bill said before, the macroeconomic environment clearly weighed on our results in some of our emerging markets, like Russia for obviously reasons; like Latin America for similar reasons, especially when it comes to commodity prices like the oil price. As a result, software license revenue declined by 3%.

But you immediately then see already the resilient balancing nature of our support revenues that comes into play, which grew 8% at constant currency in 2014 despite the fact that we posted a decline in the growth rates for software licenses. Why is that?

First of all, we continue to have an extremely strong renewal rate in our support business. 2014 was roundabout 97%. That has been very consistent since a number of years and I know that some of you have raised in the past concerns about a possible cannibalization of our cloud growth on support revenues over time. Now we have been in this transformation for a number of years now and you see virtually no change in this area, and we continue to believe that our support offerings will drive a very high stickiness.

Once again, on top of this, the very high acceptance rate of our enterprise support revenue -- enterprise support offering was a real plus. Just to give you a perspective here, in Q4 we had a 99% selection rate among net new customers for enterprise support. In fact, we had roundabout 535 net new customers in Q4.

Five of them did not select for enterprise support. So this is now not anymore the defect standard, it's the only standard for new customers, and we expect this to continue. This will be the basis for ever-increasing health in our support business also in the future.

So, in summary, as we are standing on those strong two legs we were able to meet our SSRS guidance. And in fact, and I will come to this point in a minute, the ever-increasing share of our cloud business as well as the support business as a relative share of this overall cloud and support business, will make these results even more predictable in the future as we progress.

But before I get there I wanted to talk a little bit further about our cloud offerings, because this is very important for everyone to understand that we run three very distinct cloud offerings with a different profile in terms of how they are generating revenue. And I will also share in our February 3 capital markets day how the progression towards increasing profit and profitability of those cloud business models will unfold.

The first to the left we have, of course, a classical subscription SaaS model in place for cloud, public cloud applications. This is the model that you know from SuccessFactors, HR solutions, from Cloud for Sales, and other similar solutions with a very similar profile in terms of gross margin, in terms of the way -- how we generate deferred balances and how we on-board customers then and get them into the revenue as you know it from most comparable pure-cloud vendors that we know as our competitors.

In the middle, we are now adding a tremendously-increasing weight on our business network assets. We acquired in 2012, as you know, with Ariba, the leading business network for indirect material procurement. We added in 2014 Fieldglass, which is the leading platform for the procurement of temporary workforce labor. And recently in December obviously through the closure of the Concur acquisition, the by-far leading vendor in terms of travel management platforms and travel management networks.

Now this is a different business model in the sense that it is based on the ongoing billing of transaction volume-based revenues. It is a very predictable revenue stream with a very stable growth trajectory as the customers move on to a more and more embracing platforms that I have bought into. And it is an offering that has a very high stickiness and, therefore, drives high renewal rates as well.

And last but not least, we have a private cloud business known under the HANA Enterprise Cloud term. Now this offers to our customers an easy entry route to cloud-based consumption, even for differentiated industry-specific processes. And of course, it is a premier tool for them to speed up the adoption of HANA as the underlying technology platform for those industry-specific applications.

This is a more complex business in the sense that it takes longer for customers and for SAP to onboard and migrate these differentiated solutions onto our cloud landscape. It also results in more substantial upfront investments that we have to build for data center coverage, for data security. We now have, as you may know, 40 data centers worldwide and we are adding further capacity through our partners, as Bill has alluded to.

And the time to revenue in this offering is longer than in our simpler public cloud applications. Typically here you take five to six months to get live with a customer and be able to recognize revenue, where in the public cloud it's often a matter of only a few days to weeks. So that is important to be kept in mind when you read also then in the future about our deferred revenue evolution. And we will provide further guidance also on how we see the trajectory on bottom-line development in those different offerings.

Another factor that is important to be kept in mind when we talk about the progression of cloud is the fact how actually it makes our business more predictable. In 2014 again, and as predicted, we have increased the relative share of very predictable support and cloud subscription revenues from 56% in 2013 to 60% in 2014. And as you will see in the mid-term to longer-term guidance, we are strongly convinced that this trend is going to continue and give us a much, much more predictable overall revenue profile going into 2017 and into 2020.

So a few words around margins, because that has been a subject of close scrutiny throughout the year 2014. Let me start with the SSRS gross margin, which has seen a 1 percentage point decline to 82.9% in 2014.

Two points have been driving this decline. First, the growth in premium support revenues that in 2014 were part of our SSRS revenue. This offering around MaxAttention, ActiveEmbedded is enjoying a lot of interest from customers. We increased revenues again in 2014 by 21%.

This is a high-margin business, make no mistake, but it comes at a slightly lower margin as compared to our regular recurring enterprise support and other support offerings. That's why the stronger growth in premium support has negatively affected margins there.

The second element is obviously our high investments infrastructure to scale our cloud delivery that you can also see in the line below in the development of our cloud delivery margins. These investments were enabling us to really scale our delivery outside of the US, where you have seen that in EMEA and APJ we have seen tremendous growth in cloud. And, therefore, they are wise investments that we have taken to sustain this growth in these regions, also in the future.

The good news is that we have seen, as I predicted in the Q3 earnings conference, a bottoming out of the cloud margin erosion as we basically made the investments and put them into practice and have seen revenues coming in. We see a sequential recovery here in Q4 from 60.4% to 63.7%, and obviously we will drive for further improvements now as we gain the efficiencies and scale from the usage of the investments that we have made in 2014.

A last word on the professional services margin. As you know throughout 2014 this has tended to be under pressure as well for very obvious reasons. The cloud transformation results in lesser, big brick-and-mortar classical implementation projects.

We have also seen that in regions like Latin America, where typically on-premise business is still growing and, therefore, also the potential for our classical implementation business would be stronger. The macro environment was not particularly helpful, so we have seen that revenue is coming down here through the year Q1 to Q3. We had declines of between minus 5%, minus 6%, and that has led to a sequential profit margin erosion in professional services.

However, we have likewise indicated in Q3 that we saw the revenue decline reducing in scale and speed as well in Q4, and that is actually what happened when the revenue decline was reduced to 2% in Q4. And now with the combination that I will talk about of professional services with our premium support business to deliver really one holistic one-service engagement to our customers, we see a clear case that the services revenue overall will come back to growth in 2015.

So all-in-all, this resulted in a 40 basis points drop in our total gross margin to 72.7% sequentially. Obviously from Q3 to Q4, as you would expect, you see a growth there. While that is, to a certain extent, based on seasonality, it was also a factor of our improvements in cloud delivery margins as well as professional services revenue performance.

So if we look now a final glance at our operating profit, as we have said before, for the full year we achieved EUR5.63 billion at constant currency, which is an increase of 3%. Our operating margin on an as-reported basis was down 40 basis points as well as on a constant currency basis by 70 basis points.

Still we are commanding an extremely healthy margin and are able to progress on the operating income in absolute terms while at the same time we dramatically scale our cloud business, we take into account macro difficulties in certain markets and generally continue to invest in our future growth drivers on an organic basis on top. This is an achievement that actually I am very confident that we can build on for the future.

All right, if you -- then I'll talk next about our liquidity position as well as the use of cash. You see a waterfall that provides two insights.

First of all, our operating cash flow declined in 2014 by 7% to EUR3.57 billion. However, that is really due to a special effect, i.e., a payout for litigations for TomorrowNow and Versata in the aggregate amount of EUR555 million. Without these one-time payments, cash flow actually would have increased by 8%, which is a very solid results.

Net liquidity declined sequentially by EUR6.7 billion to a net debt of minus EUR7.7 billion. That is obviously due to the debt-financed acquisition of Concur.

But at this time let me also quickly refer to how our acquisition strategy is unfolding. We have always in the past and will continue in the future to only consider acquisitions in lieu of our otherwise dominant organic growth strategy. If we have the opportunity to close a critical gap in our existing solution portfolio or can acquire complementary assets to round up our portfolio to really bring a holistic set of solutions to our customers to drive end-to-end transformation and process excellence for them.

This now has been accomplished and achieved with the latest edition of Concur. We command the, by far, broadest portfolio of both cloud and on-premise assets for industry-specific as well as LOB generic capabilities, so we do not expect to make in the foreseeable future any major acquisitions.

Right now, we are really focusing on delivering on our strong commitment to the rating agencies who have given us, as you know, a stable A rating to make sure that we bring down our leverage pay back in the next three to four years. Our debt pay, of course, attractive dividends to our shareholders. And then, based on our strong operating cash flow, there would still be room for some smaller tuck-in acquisitions to round up our solution portfolio, but none of those in the next years would be of noteworthy size.

The last word before I come to the guidance, and I mentioned this briefly already. We are, as we have indicated already, during the year 2014 now combining our professional services and our active global support organizations to one holistic services organization.

Why are we doing this? The customer demand is clearly for one integrated and holistic and simple service portfolio for SAP. They want to really get SAP engaged in driving outcomes in the usage of our solutions in a more and more hybrid world where we are crossing the bridges between cloud-based services and on premise-based services, where integration gets ever more important.

We will deliver this with the one service paradigm where customers will get one contract with one set of rates, with one service catalog behind it. The effect of that is that we are, going forward, not able to differentiate anymore in the nature of our services between premium support and other professional services. Therefore, we are moving forward to combine the revenues out of these engagements under one common line that will be services revenues and move the share of support revenues that was attributed to premium support services to the services line.

When you take a look at what this means for the interpretation of our full-year 2014 numbers, this means that a revenue number of roundabout EUR540 million will now be reclassified into services and the baseline for the growth, therefore, of cloud and software services as part of our guidance is EUR14.334 billion. Obviously at the total revenue line nothing changes here and the same holds for cloud subscriptions and support.

We have renamed the pretty clumsy term software and software-related services revenue to a simpler term cloud and software; therefore -- which will consist out of cloud subscriptions, software licenses, and software support. That is kind of the framework under which the guidance for 2015 should be read.

And if you then take a look at our actual guidance, we have again set ourselves ambitious targets for further growth in the cloud, EUR1.95 billion to EUR2.05 billion in revenues. That is at the upper end, an 86% growth rate, obviously influenced by the Concur acquisition, but even on an organic basis we are continuing on the growth trajectory with this guidance that we have successfully built in 2014.

Cloud and software revenues are expected to grow by 8% to 10%, and we expect to again also increase our operating profit in absolute terms in the range from EUR5.6 billion to EUR5.9 billion. The effective tax rate, both on IFRS and non-IFRS you find on the slide here. It's considered to become an [edge] higher than what we've seen in the actuals in 2014.

And let me also be clear about how currencies play into this guidance. This is a constant currency guidance and, as we know, towards the end of the year a number of important currencies have appreciated against the euro. In some cases, like in the US dollar case, quite significantly.

So if exchange rates remained at the December 2014 level for the rest of the year 2015, we would assume that our cloud and software revenue would experience a currency benefit of approximately 2 percentage points and non-IFRS operating profit of approximately 1 percentage point.

Last, but not least, let me close with a few words on the midterm guidance that Bill has already laid out as well. As you can see from the slides without me going at all of the details on the actual numbers, but three things really stand out here.

First, we believe that through 2020 will be able to sustain, and that is an organic growth ambition, the current growth trajectory of roundabout 30% growth, which will end us -- see us ending with an up to EUR8 billion cloud subtraction revenue line in 2020. So that is very, very significant growth that we are targeting here.

At the same time, we believe that we will dramatically increase our share of highly predictable support in cloud subscription revenues, because again support is expected to grow very steadily throughout the same time. We expect to be in the year 2017 at a relative rate of 65% to 70% of predictable revenues as part of our overall revenue share, and 70% to 75% in 2020.

Last, but not least, yes, we will achieve all this growth in the cloud while at the same time year after year increasing absolute operating profit for the Company. Actually, when you make the CAGR comparison, you will see that in the later years that CAGR on the operating profit side will increase. That is due to the fact that we will see in 2017/2018 the tipping point of our business model transformation.

Our cloud subscription revenues are expected by 2018 to surpass our software license revenues. With that, we will have reached a scale in our cloud business and a relative proportion of highly profitable, ongoing renewal revenues as opposed to net new customer acquisitions that will allow us to exponentially scale the operating profit in the cloud business, which will lead to this further expansion.

So you will have in the coming years a growing company, a company that is becoming increasingly relevant and sticky with its customers, that drives total customer engagement across all lines of business, all industry capabilities. And at the end of the day, reaches customer success as what we have rightfully claimed all the time, the world market-leading enterprise applications company on this planet. Thank you.

Very good. Thank you, Luka. Now we have some time to take questions. And I would like to hand quickly back to the operator to give some instructions how everyone can ask questions. Operator, please.

(Operator Instructions) Gerardus Vos, Barclays Capital.

Good afternoon, Bill and Luka. Just a couple of questions, if I may. First of all, a question I often get from investors is regarding the kind of margin of the core and if that is able to kind of expand till 2020, so I was wondering if you could give us some clarity on that.

Also, in relation to the kind of -- the whole value around the core, investors are increasingly talking around capital discipline and if SAP is willing to increase the shareholders' return to investors, so I wonder how you are looking at that.

And then, finally, just perhaps for Bill here, could you characterize the kind of competitive environment at the moment? Clearly, the growth rate you stipulated of 30% organic in the cloud is higher, particularly towards the outer end, than the competition. How do you see the market gains developing, and particularly maybe hint on the large competitors you see there in the space? Thank you.

Gerardus, let me try to answer the first two questions and then I will leave the third one to Bill.

First of all, on margin expansion in the core, yes, certainly we continue to have opportunities to leverage further efficiencies in our core business. There will be a technical component obviously to the progression of margins in our core business as the relative weight of support revenues gets bigger and bigger and they come obviously with a higher margin than the sale of software licenses that naturally will increase the margins in our core business.

But we see this as a steady progression, whereas the progression on operating income and profitability in the cloud will be slower at the beginning but then in the last years of our longer-term guidance will be more pronounced. And, therefore, you see a slightly different trajectory here where on the call it will be more steady.

On the return to shareholders, you are absolutely right. As we have said, A) we don't plan any major acquisitions for the foreseeable future, B) we continue to have a very strong operating cash flow, that brings us C) to our priorities for the use of cash. Priority number one is to be able to pay back our debt quickly, as we have always said we want to retain a conservative approach to leverage. Priority B is to fund ongoing organic innovations in the Company and then three we definitely will be focused on providing attractive returns to our shareholders by steadily increasing dividends.

I have received this morning from the press already some questions on the dividend for 2014. Please understand that on this we have governance requirements to accomplish and that means to first present the proposal to our Supervisory Board for appropriate resolution. But, clearly, our intention is to continue to provide attractive and increasing dividends to our shareholders.

And on the competitive environment, I would like to just remind everybody it wasn't that long ago when it was 2010 and we didn't have any cloud revenue and we didn't have any users. Today we're number two, as measured by revenue and market share in the cloud, and we have more users than anyone with 70 million. So we've made a lot of progress and I think we have the credibility in the cloud and that is why we are so confident in the pipeline and the backlog that we see in the cloud.

I will just highlight a few areas that I think you might find pretty interesting. One is the line of business. If you think about the line of business, cloud and network in HR with SuccessFactors, we are making amazing progress. It is getting tougher and tougher for the best-of-breed that is well known in this area against SAP and it's only going to get worse for them.

On Ariba, I mean Ariba and a whole indirect materials space in the network, we are the standard. And on Concur in the travel and entertainment space, we are the standard. So we have very high hopes for those businesses to continue to grow very strongly.

One that is a sleeper that I don't think has gotten much attention at all is Cloud for Customer. This is not the customer engagement commerce in the omnichannel play which I talked about earlier, which we are the standard in and you can also get that in the cloud. But Cloud for Customer, the good old-fashioned how do you manage your salesforce, your pipeline, your forecast, put the analytics on that, put the real-time on that with HANA, and how we are absolutely winning logos all over the world in that domain. So please add that to your watchlist as it relates to SAP.

Luka talked about the investments that we made this year in the cloud. We did make investments, especially in the HANA Enterprise Cloud globally. And when you look at this business it's relatively small today in terms of how much you measure the revenue, but it's doubling every quarter and we see a very nice trajectory there in the HANA Enterprise Cloud.

Keep in mind with S4HANA, which you are going to hear a lot more about on investor day on the third, we think we've got S for simple, 4 for the fourth-generation ERP suite, and all of it factored on HANA. It's going to be a runaway success and you can run it obviously in the cloud, but I always point out anything you can run in the cloud you can also bring back in an on-premise world. So I think that could also be a wellspring of growth for the core.

Then the HANA CloudPlatform, again it's small but it's growing extraordinarily fast. So all of these assets coming together at once is giving me a great deal of confidence that whether we go against Workday in the HCM space, Salesforce in the CRM space, and we one-up them with omnichannel e-commerce, or we go against more traditional competitors that you know well, I don't think there is a better-positioned company in the business software industry.

And I want to make a point here on rate and margin. We have talked a lot around this whole margin rate discussion. Let's just put it on the table.

There once was a time in the core business where you were harvesting the margin because you could, and there wasn't only SAP but there wasn't too many other core competitors and they were running t higher-margin rates than us and we set the target at 35. In a cloud world where you can get enormous market share and you have growth trajectory like we presented to you today, it wouldn't be prudent to just focus on the margin rate.

We could hit the rate today if we wanted to slow down the cloud and slow down the growth. I can give you the margin rate of 35 today if you wanted it. But I think what we've got now is we got a situation where let's take it off the table, we go for absolute operating income.

We have a massively fast-growing cloud business, an ever-steady and consistent core which we have now refactored with S4 on HANA, and I think you're going to be very impressed when you come to the shareholder meeting. You put all this together and you go into the enterprise at the C level and you are dangerous not only at the line of business but at the CEO level, which is SAP's strong suit.

I love our competitive positioning and I can tell you outright it's getting harder for them to win. Their deal sizes are going to be under pressure. Their prices are going to be under pressure. We will continue to use design thinking and innovation and business outcome, and the science we put behind that as a solutions and an end-to-end process company, and we take on all comers.

Thank you, Bill. Let's take the next question, please.

Adam Wood, Morgan Stanley.

Thank you very much for taking the question. I wonder if I could just follow up, first of all, on -- I apologize for coming back to the margins -- the operating leverage. You've talked about the core business margins still having room to grow. The gross margins on the cloud business are still lower than competitors and Concur comes into the business investing quite heavily.

I think investors can kind of see in 2015 and 2016 you don't want to disturb that momentum, but as we look forward should we not be thinking about a little bit of operating leverage? With that in mind, are the targets more conservative than you've traditionally set them? Where do cloud margins end up at the end of that guidance range? Is there some room for upside?

Secondly, just on S4HANA, obviously great success there getting customers on board. Could you maybe give us a little feel for the roadmap there? How quickly will the rest of the suite be forced on to HANA? And when you talk to the big customers is this something that could be an upgrade cycle in the second half of this year, or is it more something that we should look for for 2016?

Then just finally a clarification on the cloud growth. Could you just confirm that the targets you have given there are organic or whether the tuck-ins could contribute to that cloud growth? Thanks very much.

Thank you very much for the question. Let me first say this, what you have in this guidance is a bar that has been set for achievement. I wouldn't say it is in any way sandbagging, but I would also say that we tried to give you guardrails that you can hold onto with confidence.

And, therefore, we feel very good that we have not only given you an annual guidance but a midterm guidance and a 2020 guidance that is based upon our clear depiction of reality and a bar that we think we can handle, maintaining all the attributes of our culture, all the attributes of our growth aspirations in the cloud, and obviously consistently growing our ever-established core business. So I think it is a really nice, nice plan.

And, yes, the bar is set. And with the advent of S4HANA and the traction in the business network and further traction in the cloud, could we over achieve it? I certainly will tell you that when we get in front of our employees this afternoon and we talk about the earnings call, we never talk about hitting targets. We talk about blowing them out of the water, so that's the attitude we have for managing the Company, which is little bit different than guidance.

Also wanted to just talk about cloud in the organic sense. The numbers we put on the table today are organic growth numbers. Frankly, one of the things I try to do before I handed it over to Luka is let you know we have done some pretty big moves in an M&A sense. We had to in the cloud where we had huge gaps.

We identified the business network in our strategy as a massive opportunity that no other company in the business software industry has actually caught on to. And we think having a network working for you while you are sleeping and driving tremendous transaction volume and profitability based on more usage of the network is an unbelievable channel. With 1.7 million customers in it now, EUR700 billion running through it, and a global economy with a EUR10 trillion addressable market, just how big can that be?

I think we were relatively conservative in the sense that we said EUR2 trillion. Who knows? Maybe it could be more running through it.

So all these factors have come into play and, yes, I think when you look at the midterm, the 2017/2018 when the cloud supersedes the on-premise business in terms of license, you have a great core business with great loyalty rates. We are running the services business with more discipline. A lot of the investments on the HANA Enterprise Cloud globally will have well been behind us. All the lessons would have been learned.

Is there leverage underneath all of this? I expect that there is leverage underneath all this.

There is hardly anything that I can add other than to confirm that indeed we are planning as part of our overall guidance that we are giving here, of course, also for annual increasing leverage on the gross margin both for on-premise as well as for our cloud business. And we can talk about this in further detail at the capital markets day as well, where I can dissect this a little bit further for you also with the different constituents of our cloud business.

We had still the question on S4HANA. To what extent you want to comment today or --?

Let me just make the comment today and just give you a feel for this. So think about HANA as the platform and the only platform that an enterprise needs to run. It's transactions, it's unstructured, it's social data. It is the platform. It is the de facto standard in memory architecture for this generation.

Think about the suite on HANA in a highly simplified fashion. We've already shown you some signals of that with Simple Finance, where we have immense, immense momentum and logistics, and it will extend to all other aspects of this suite.

You will also have a user experience that is nothing short of gorgeous, because we are Fiori-izing the entire suite. So as you look at the application on a mobile device and you can consume it from a cloud, you are looking at the most modern application of its kind in the world. And on February 3 I think we will knock your socks off with the product and with some testimonials of customers that believe that this is not only the future, it's something they have to have today.

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

Chandra Sriraman, MainFirst.

Thanks a lot for taking my question. I have a couple on the near term. I was just wondering do you -- given your 2015 guidance, it seems that licenses would be declining for this year. I was just wondering is it still LatAm and Russia which is affecting growth, or do you see any areas where there could be prolonged weakness? That's one.

And also on the on-boarding costs from HANA Enterprise Cloud, are we done with that? Should we see some more this year? Is that affecting your operating profit guidance? That's one.

And on the long term maybe a quick one. I'm just trying to see the kind of flex you have in your guidance. Obviously, we had some changes in the long-term guidance, given the changes in the market and the acquisitions. Would you say it's conservative enough for you to see some kind of further acceleration in the cloud if at all there is any? Thanks.

In terms of the markets, you are absolutely right. One of the things to consider here, Chandra, is that had Russia behaved normally and it wasn't down precipitously under the terms of not doing too much business with euros and dollars, we would have had substantially more growth and we would have actually had positive growth in the core perpetual upfront license business just for the record. And the same could be said of Brazil/Mexico.

You take those off the table and you've got a perpetual upfront core growing, period. I'm just not just talking SSRS, I'm talking license. Now those situations are being managed very actively.

I already see some uptick in the Latin America side of the equation. We see Russia as being more difficult, Russia and Ukraine, but we have a fantastic team there and, therefore, when things do loosen up a bit, we feel that our chances are better than anybody. You have to remember that was the third-largest market in the world for SAP, so we're not talking small market here.

In terms of the on-boarding, we poured a lot into it in 2014 and we made a lot of investments in the HANA Enterprise Cloud. And that, as you will remember, was our adjustment thesis when we talked to you in Q3 so let's just put it on the table.

We also have a one services philosophy now where we have our best Global Managing Board members focused on what they are best-in-class at. So one is focused on the whole on-boarding process relentlessly. Another is focused on reshaping the services business to give the customer one contract, one price, one rate, one experience no matter what service they offer, and make this on-boarding procedure for the customer much easier.

Keep in mind one thing that is another sleeper, the HANA Enterprise Cloud and the private cloud business that we did, because it not only is a ratable business but because it is a private cloud business, you can't start recognizing the revenue until they are live. So it is not like a multitenant SaaS with a line of business application. This is a private cloud.

We have simplified that on-boarding process. Is all the work done? All the heavy lifting is done on investing in the data centers. We will still get better on the precision of the on-boarding, but now we have real focus and executive attention on it and, therefore, I feel like we are in much better shape in that line of business that we were last year.

Then, finally, just on the last part of your question, you cut out a little bit. You mind restating it? What the -- you talked about the guidance in the cloud or something.

I was just looking at your 2020 guidance; it's a long way from here. Obviously the markets are quite jumpy and overall trends are obviously swinging significantly. So I was just wondering what sort of flex do you have in terms of your 2020 guidance. Are you conservative enough or do you think you might have to tweak it as things go by?

Look, I don't think anybody has a crystal ball, including SAP, but we feel very confident in the 2017 and the 2020 guidance. One of the operating principles the Luka and I had, along with the Global Managing Board when we put together this guidance, is a high respect for the capital markets and the conversations that we have had with you all that you wanted the guardrails, you wanted some clarity around what's going on in the cloud, what's going on in the core, how does that impact the margin/or the operating income.

And I think we were very careful in putting together numbers that we didn't have to revisit. That's one of the reasons we stopped kicking the can down the road on margin rates and went to operating income, so we don't have to have that conversation anymore. We can have a real serious conversation about operating income and make that the leverage point.

And you understand there's different ways of deriving operating income. Right now it's very much a top-line story and we like being a growth company.

Thank you. Given the time we have, we take two more questions. Operator, please.

Knut Woller, Baader Bank.

Thank you for taking my questions, actually a couple. Regarding the operating profit development in 2016 and 2017, is it pretty fair to assume that it should be pretty evenly spread between 2016 and 2017? Or do you assume that there will be an acceleration and in 2017 how should we think about that?

Then I know this has been touched a couple of times, but still want to get back to it. You mentioned in your press release that by 2018 you believe that your cloud business is such a scale that will clear the way for accelerated operating profit growth.

If I look at the 15% to 17% CAGR at the midpoint of your operating profit target and then at the 17% to 20% CAGR, also at the midpoint, I come from 7.5% CAGR to 8.5%. So here I am trying to get a better feeling what you would imply with scale for accelerated operating profit growth and after 2018. That's it, thank you.

Thanks, Knut, let me answer those two. First of all, on the operating profit curve in the years 2016 and 2017, we generally assume that we will see a steady increase of the pace of operating profit expansion as we gain further leverage and we improve the overall margin profile and profitability contribution of our cloud businesses. Again, we will talk about those because they are distinct in how they will drive operating profit contribution at different stages of their maturity between the three models that I've outlined on the slide.

Generally speaking, you clearly see an acceleration in the expansion there in our modeling and that is also true then for the years 2018 and going forward. At that point in time we will have reached a cloud business size that will be around about EUR4.5 billion, and that means that we have by then built up such a high proportion of renewal businesses as opposed to the net new additional contracts that we are adding that we clearly see then an accelerated pace in the operating profit contribution.

So as I said before, we have a pretty steady acceleration and progression that we see in our established on-premise business. But in the cloud really in those later years, especially in 2018 and going forward, we see in exponential acceleration, which then of course you can also extrapolate if you wanted for even further years out. That is the beauty of the cloud model and that is why at the moment we are all in to accelerate as far as we can, because we can't wait for this moment to happen and then for the returns to follow suit.

Thank you. As I said, there is now one final question.

Walter Pritchard, Citi.

Thanks. I'm wondering if you could talk -- Bill, you mentioned not to forget about the customer cloud or the front-end side of your cloud business. I'm wondering if you could talk about there how large you think that business will be as you look out to your 2020 cloud guidance.

I think that is probably the business where there's more investor skepticism; just trying to get some better understanding of your confidence and the ability to grow that and the scale that you think that might be in terms of the portion of your cloud business out to your long-term targets.

Thank you very much for the question, Walter. We have conservatively modeled that as a EUR500 million business. Based upon the progress that we see so far with both cloud for customer and customer engagement commerce, I would tend to think that that would be more on the conservative side, but that is the number that we have plugged in.

When I look at the logos and the amount of wins that we have around the world, I am actually pretty stunned. And the application is gorgeous, so it could be better, but that is what is in the model.

Good, thank you very much. This concludes our financial analyst call on the Q4 2014 earnings. Thank you all for participating and thanks for all your questions. We hope to see you in New York on February 3.

Thanks very much and goodbye.