SAP SE (SAP) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by. I'm Mia Bay, your Chorus Call operator. Welcome and thank you for joining the SAP 2015 Second Quarter Earnings Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session (Operator Instructions). I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead.

Thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the second quarter 2015. I'm joined by our CEO, Bill McDermott and Luka Mucic, our CFO will both make opening remarks on the call today. Also, joining us on the call for Q&A are Board Members Rob Enslin, who runs Global Customer Operations; Bernd Leukert, who leads Product and Innovation; and Steve Singh, Head of SAP Business Network.

Before we get started, I would like to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the US Securities and Exchange Commission, the SEC, including SAP's Annual Report on Form 20-F for 2014 filed with the SEC on March 20, 2015. 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.

And now I'd like to turn the call over to Bill McDermott.

Thank you, Stefan. Good afternoon and good morning to everyone. Thank you very much for joining us on the call today.

I'm really proud that SAP reported a strong second quarter and has once again reaffirmed our leadership position in this industry. We showed beyond any doubt that our platforms, applications and networks are the winning combination of assets for the digital economy.

Allow me to share a few brief, personal observations with you to kind of net it out on the way I see this quarter. First, it's clear that CEOs are inventing new business models and making the move to digital businesses. I hear this firsthand from leaders across industries and geographies around the world. These companies are looking for a modern technology innovator to help them imagine a bold vision for the future of their companies. SAP is committed to making their transition to digital businesses simple.

With our strong second quarter results, especially, the triple-digit growth in our cloud business and our Business Network business, and the triple-digit success of S/4HANA, it's clear that the customers are responding very well to our strategy. Second, as you'll hear shortly from Luka, the major growth drivers for SAP are exactly what we knew they would be. Number one, soaring adoption of the HANA platform with double the number of customers year-over-year and clear acceleration of our new digital business suite S/4HANA.

Two; strong, strong momentum with our Customer Engagement and Commerce and Human Capital Management applications in the cloud. Super, robust wins against Salesforce and Workday and Oracle. And three, business networks with Concur, Ariba, and Fieldglass redefining how businesses manage travel, resources and supply chains in the global economy. Our strategy in these growth areas remains consistent and I'm thrilled that our customers are accelerating their innovation roadmaps with SAP.

Finally, SAP is a strong and balanced growth Company across all geographic market units. In the second quarter, we again saw strong performances in APJ and Europe as well as a very strong performance in the United States. It is precisely this ability to scale our growth strategy globally and adjust to market conditions that has us well positioned to deliver on our guidance for the full year. As always, I'd like to personally acknowledge SAP's mere 75,000 employees who have given everything they have to deliver these strong results for our Company. I'll look forward to taking your questions. But for now, I'd like to turn it over to our CFO, Luka Mucic to take you through the detailed update. Luka, over to you.

Yes. Thank you very much, Bill, for your opening remarks. Let me start with some Q2 highlights. In Q2, cloud revenue, as Bill said, again saw triple-digit growth at 129%. We ended the quarter with about 82 million cloud users, the most in enterprise application software. We are and remain the second largest enterprise cloud company measured by latest quarter cloud subscription and support revenue. Our key indicator of future growth in the cloud, cloud new and upsell bookings grew a stunning 162%. Cloud and software revenue grew 21% and as Bill said, this puts us right on track to deliver on our guidance for the full year.

So let's talk a bit more about how SAP is meeting the needs of customers in the digital economy as the foundation of delivering these financial results. First, customers want to run real-time. Increasingly, it is becoming a commercial imperative for businesses across all industries to run real-time. This is why customers continue to select SAP HANA over Oracle. We now have more than 7,200 total HANA customers, doubling the number from only a year ago.

Our next generation suite SAP S/4HANA continue to gain robust early traction with over 900 use to-date, after just a few months on the market. We are seeing very strong S/4HANA adoption across all regions with brand names like HP, Bayer, ArcelorMittal, Beijing Shunxin and Nomura Research Institute among others choosing S/4HANA. And customers already going live for example, Florida Crystals and Geberit have already gone live with the SAP Simple Finance module.

In fact. Geberit has chosen to migrate its entire SAP software landscape from Oracle to the SAP HANA platform. Geberit now benefits from lower operating costs, tremendous performance improvements across financials and an enhanced user experience.

And for those business processes that are truly differentiated, we have the HANA Cloud Platform, which enables you to build extensions and industry specific applications on a consistent data model that connect seamlessly into the nucleus of S/4HANA. Partners, including Genband and Siemens, are building new and innovative applications on the HANA cloud platform. But it's not just about enterprise applications. The HANA Cloud Platform allows you to leverage that data model and build light, function-specific applications that can run on any device, from Android down to the Apple Watch.

Second, customers want to run networked, so let's talk about the network. While S/4HANA digitizes processes across your business, the SAP Business Network then allows you to extend those processes beyond the four walls of your business. It connects people, devices, businesses and their ecosystems in a single digital value chain, driving a completely new era of inter-enterprise collaboration and commerce.

1.9 million companies now conduct more than $800 billion in transactions annually across the Business Network. The network enables simpler, frictionless commerce across every category of business spending. Goods and services with Ariba, flexible labor with Fieldglass and travel with Concur, obviously. And we will add other network ecosystems, overtime.

Total revenue in our Business Network segment grew to EUR400 million. That's a growth rate of 194%. Participation in the Ariba Business Network continues to increase, as new customers such as Virgin Australia and Takeda, the largest pharmaceutical company in Japan joined. In partnership with Accenture Procurement BPO, Ariba also renewed Deutsche Bank for another five years.

Fieldglass continues to lead the flexible labor procurement and management space adding new customers like AMD. And Concur is already seeing the benefits of operating at a global scale with the support of the SAP field. New large multinational customers included Merck and customers are combining these capabilities with our line of business cloud applications to run simple.

With SuccessFactors and Fieldglass, SAP is the only company that can manage the total workforce both permanent and flexible workers and do that globally. The number of SuccessFactors Employee Central customers has risen to more than 730 customers from around 390 a year ago. This is an 87% growth rate in customers in just 12 months. Employees Central is also localized for 71 countries with payroll localized for 30 countries, in contrast to our main cloud competitor who offers solutions primarily in the US and Canada.

In Q2, top organizations such as Heineken, Affinion Group, [Entrust Inc.] selected SuccessFactors HCM solutions over our key competitors. Once again, we saw a high double-digit number of competitive HCM cloud wins, that is deals where we went head-to-head with Workday and Oracle.

Run simple also means real-time customer engagement on any device and any channel. Only SAP can help businesses track and engage customers in real time across all channels and at the same time seamlessly execute and fulfill ecommerce in one end-to-end value chain. Our Customer Engagement and Commerce cloud new bookings grew over 240%. We had numerous wins over Salesforce in Q2 and in some cases, our customers are replacing their Salesforce implementations with our solutions. Customers choosing SAP in this field included Medtronic and

in Germany, to name a few.

We are also expanding the SAP ecosystem to help our customers engage communities of their customers. For example, our recently announced Facebook partnership gives brands the ability to take their existing data in SAP systems and use it to connect with their customers on Facebook. Run simple also means running our customer's mission-critical business applications in the cloud, so they can focus on what they know best that is growing their business.

With the HANA Enterprise Cloud, SAP is moving customer's mission-critical processes at an accelerated pace. Whether through SAP or our main partners IBM and HP, customer's clearly see this as a low risk path to access our new innovation, giving them fast time to value. We will continue to leverage our partners to deliver our HEC solutions, thereby increasing our global reach while managing SAP's own datacenter investment needs.

Finally, run simple means inventing new business models to growing the digital economy. With a perfect combination of assets, SAP is leading the Internet of Things revolution or Industrie 4.0. Customers such as Siemens and The Hamburg Port Authority have selected the SAP IoT big data platform. SAP is also helping retail giants, like ALDI, Liverpool in Mexico and Lidl reinvent their business models and catalyze growth by targeting the right markets and servicing customers with relevant merchandise across all channels.

For example, Lidl with SAP HANA platform as the cornerstone of their strategy, who systematically analyze data across 10,000 stores and 130 distribution centers in 26 countries to better understand and react to customer behavior in real time.

Now to the detailed financials. As I mentioned previously, we saw a fast growth in the cloud. Our new cloud bookings were up 162% year-over-year, showing that growth further accelerated in Q2. Cloud subscription and support revenue was up 129% year-over-year.

After adjusting for Concur and Fieldglass, our cloud revenue growth accelerated sequentially and is clearly above our long-term growth aspirations we communicated at the start of the year. But not only are we ramping up our cloud business, we also continue to have a stable and growing core with 13% growth in software and support revenue. This growth rate remained strong due to the continued high 90% adoption rate of our enterprise support offering, in Q2 it was again at 99%, as well as our consistently high 90% support contract renewal rate.

The strong growth in software support and cloud revenue also resulted in an increase of the total of support revenue in cloud subscription and support revenue, which we consider the more predictable revenue types as a share of total revenue by four percentage points year-over-year to 62% in the second quarter.

Now onto the regions, Starting with EMEA. We had a solid performance in the EMEA region with a 10% increase in cloud and software revenue. Our cloud revenue grew by 94% with triple-digit growth in new cloud bookings. In the Middle East, we had a tremendous quarter in both cloud and software revenue, while Germany, France and the UK all put up solid numbers.

In the Americas region, we saw strong double-digit growth in cloud and software revenue with an increase of 36%. We were also pleased with the great quarter in our cloud revenue which grew by 141% with new cloud bookings nearly tripling, driven by a very strong performance in North America. The United States was a highlight with a strong performance across cloud and software.

In Latin America, it was a different picture, where the regional macroeconomic issues weighed on our results. In APJ, cloud and software revenue grew by 19% with both cloud revenue and new cloud bookings growing in the triple-digits. Japan continued its recovery with another strong quarter across cloud and software.

Now moving to the bottom line. The overall gross margin for the Company was 70.6%. That is a sequential increase of 200 basis points from the previous quarter. Our cloud and software gross margin was 83.4%, a sequential increase of 100 basis points compared to the previous quarter. Our services gross margin increased sequentially by four percentage points as services revenue returned to growth in Q2. This result was driven by first early positive impact of the transformation of our traditional service business as well as our strong premium support offerings.

We are also making good progress in our cloud gross margin which increased sequentially to 66.3%, but more importantly, it increased by 240 basis points from the previous year. Due to these strong results of gross margins and first early positive impact from our companywide transformation program, we were able to expand our operating profit by 13% in the second quarter as we continue to see a currency tailwind.

The IFRS tax rate in the second quarter was 26.4%, up from 22.6% in the prior year period. The non-IFRS tax rate in the second quarter was 27.8%, up from 25.4% in the prior year period. We maintain our tax outlook for 2015 and still expect the full year 2015 IFRS effective tax rate of 25% to 26% and a non-IFRS effective tax rate of 26.5% to 27.5%. Operating cash flow for the first six months was EUR2.8 billion, up by 8% year-over-year. Free cash flow at EUR2.5 billion increased by 10% year-over-year.

As Bill have said, we are reiterating our outlook for the full year. Based on the strong momentum in our cloud business, we expect full year 2015 non-IFRS cloud subscription and support revenue to be in a range of between EUR1.95 billion to EUR2.05 billion at constant currencies. We continue to expect full year 2015 non-IFRS cloud and software revenue to increase by between 8% and 10% at constant currencies and we continue to expect full year 2015 non-IFRS operating profit to be in a range of between EUR5.6 billion and EUR5.9 billion at constant currencies.

We expect to see a currency benefit through the rest of the year and have updated our expectations for the impact on reported growth rates in 2015. If exchange rates stay at the June 2015 average level for the rest of the year, the Company would expect approximately a five percentage points to eight percentage points currency benefit on cloud and software growth and on operating profit growth for the third quarter of 2015 respectively, as well as six percentage points to nine percentage points on cloud and software growth and seven percentage points to ten percentage points on operating income respectively for the full year 2015.

So let me summarize, very high growth rates in the cloud with a stable and growing core, while optimizing efficiency as seen in our gross margins and increased operating income this quarter. The digital economy is upon us and we are leading the way to empower businesses to run real time, run networked and run simple. SAP cloud, powered by HANA is the only real time digital data offering and S/4HANA the one platform to run the enterprise as its foundation. This makes us confident that we will deliver on our growth commitments. Thank you. And we will now be happy to take your questions.

Thank you very much. I would like to hand it back to the operator and we would like to start the Q&A session now.

Ladies and gentlemen, at this time we will begin the question-and-answer session. (Operator Instructions) Michael Briest, UBS.

Maybe firstly, Steve, could you give us an update on where you are on bringing together all the assets in the business network, any changes in the go-to-market, product integration, how you feel progress is and when that is really going to hit its stride.

And then secondly, Luka just for you, on the restructuring, there was a quite a lot -- a higher charge this quarter and the guidance for the year has been raised by a couple of hundred million. I'm just wondering what caused that increase and why perhaps is not going to lead to better profits if you like, as it flows through into the benefits in the second half? Thanks.

So first of all, I'm very happy with the progress of the Business Network group. We've obviously now got Concur, Ariba and Fieldglass integrated together. The first priority for that group though is to focus on making sure we are literally the best in class in our respective markets in travel, procurement and continued labor. We've obviously got a rich, like you see here and we're coming from a great position of strength. So what we're seeing in the first few quarters of being under one structure, one group is that the bookings growth in all three businesses continues [to climb].

As you heard from Luka's comments, you saw great revenue growth, but that's equally followed by fantastic bookings growth, which we think is a great proxy for next year's revenue growth. The second priority is really then to focus on how do we integrate not just the Concur, Ariba and Fieldglass networks, which we're in the process of doing, but also to make those core services of integration available to any network in the world, whether it's an SAP network or an external network to integrate across all SAP networks and frankly, across the SAP business suite and S/4HANA.

Okay then, maybe I'll take the question on restructuring. Michael, you're absolutely correct. We had a substantially higher restructuring expense in Q2 than we had originally anticipated. We now have, at the half-year point, EUR480 million in restructuring expenses and we have raised our expectations for the full year to somewhere between EUR470 million and EUR530 million.

So what is the background for that? It's very simple and it's actually a positive news. We have progressed far faster and with a greater acceptance by our employee base with our transformation efforts. As you remember, we have created voluntary and early retirement programs, especially here in Europe, which were hard to predict in terms of their acceptance by the employees. Hence, we took a conservative stance based on last year's progress in terms of our restructuring guidance.

However, in actual fact, many more employees have registered for the program than we would have expected initially. This is very positive because we really could accept virtually everybody that registered because they were coming from areas that we truly wanted to transform in order to have more capacity in order to reinvest it into growth areas. And hence, we also see now a clear path to completing our whole structural transformation for SAP.

I do not expect that for next year, based on this much faster success in the transformation program, we will need to come up with another company-wide broad restructuring program. We should see, for next year, maximum very targeted efforts in some selected areas which will certainly be much smaller in size, also from a restructuring expense perspective.

And in terms of the positive impact on the ongoing operating side of the business, we expect a mid-triple digit million euro annualized run rate savings effect of the program. Of course, this will fully materialize only as of next year, but we have seen already some early impacts of that in Q2 and we'll now see more and more of these benefits flowing into the results in the second half year as well, which is, again, adding to our confidence as far as meeting our full-year outlook is concerned. I hope that answers the question, Michael.

Walter Pritchard, Citi.

Thanks. Luka, I'm wondering if you could talk about the -- you're closing in on a 1,000 S/4 customers and I think you expected most of those to use the Bring Your Own License type of a model. I'm wondering if you could update us on what you're seeing in the composition of those customers as you're closing in on that goal or that metric.

Yes, happy to do so. So first of all, the customers that we have acquired to-date are really customers for our on-premise version of S/4HANA for the lion's share of the customers. As you know, we have announced our cloud addition at Sapphire in Orlando and we're making good progress to build out our cloud capabilities there. We are piloting this now with first customers. But what you see in terms of the customer uptake at this point is really and primarily on-premise customers and hence it's a license business in the traditional sense for us.

And then does the growth you saw in the customer and commerce business impact at all the kind of numbers you're looking in 2020 out of that business? It sounded like, based on two quarters ago when you gave the original guidance, the expectations there were pretty low. I'm just wondering how you're thinking about kind of long-term growth prospects in customer and commerce cloud.

Well, I can start and then maybe Rob, you may want to add some color here. I think we always had a very strong growth prospects that we saw for customer engagement and commerce in the cloud. We are coming from a situation where we have a lot of room for improvement, but in the last, actually two years, we have seen tremendous growth already and these triple-digit growth rates have been a steady theme that we could report on.

The good thing is that by now, due to this growth in the past, of course, the numbers are getting more sizable and that's an advantage. But this is clearly part of our mid-term planning and we are looking for further growth down the road. Rob, anything to add from your side?

Yes, I would say, for customer engagement and commerce, we see actually dynamic growth in this space. As companies move more away from sales force automation and look at the full picture of what a commercial platform is, you see growth in the sales force or the opportunity area, marketing, services and omnichannel and clearly, we have the number one omnichannel e-commerce solution in the marketplace and tremendous traction as companies look at the full picture in that space.

Stacy Pollard, JP Morgan.

Hi, thank you. So, more than 7,000 HANA customers, that's an impressive number. What percentage of SAP applications and customers would you say are running on HANA today? Or perhaps more prudently, what percentage of new license deals are running on HANA and I ask about license because I just assume that SAP Cloud always runs on HANA?

Yes. So first of all, I mean, all of our solutions are of course running on HANA from a technical perspective and we are increasingly making this, of course, the de facto choice of customers as the differentiating value of what we can drive if our solutions are running on HANA is just that much higher.

When you take a look at just the relative share of customers and compare it, so we have round about 41,000 installations of SAP ERP with round about thirty-something-thousand customers. Right now, we have 900 customers on board for S/4HANA in a matter of 1.5 quarters. Of course, there is still a lot of room to convert customers and to make them jump on the S/4HANA bandwagon.

The good news is that the pipeline for S/4HANA is one of the fastest growing things that I've seen in my time here at SAP. We see very, very strong prospects here and the pipeline now is growing basically on a daily basis. So this gives me a lot of confidence that we will convert many more of these traditional ERP customers to HANA band. Anything to add from a development perspective here.

Yes, I think just to build on Luka what you said, it's not surprising that our flagship product was S/4 but as well BW are the main drivers when we talk about upfront license revenue. And this has started last year and is continuing the momentum as well in the first two quarters. But as well, not to forget that as well in the SME segment, if you specifically ask for on-premise and upfront, Stacy business won, is significantly gaining traction here as well. We see here a clear shift going away from Microsoft SQL Server towards HANA as well.

John King, Bank of America.

I just had two on the license and S/4 side and then one follow-up after that. So on licenses, obviously I guess a bit weaker in Q2, down 7% ex-FX. And I think, you were talking in the past about small single-digit declines ex-FX for every year. Is that still a thinking? Obviously, you've had some issues in Lat-Am this quarter, but is that still where you're expecting to be, given what you see in the pipeline. That's the first one, I've got a couple more.

Thank you, John. Bill, you want to comment on this? You want to take the first question, please?

Yes, I'd be happy to. I think it's a good observation. If you put Latin America in any kind of a normal run rate, you would absolutely be in the range that we all expected to be in with our core license business. So our core is still ever robust and solid and you shouldn't worry about it. And at the same time, you'll have the robust growth in the cloud and the network. So all these things will come into full form. I also remind you, based upon the strong actions we took in the first half, we expect the operating leverage in the second half. So I see this coming together very nicely and in perfect sync with our planning process.

Great. And then just a follow-up on S/4, could you give us a sense to how much of the customers you'd got there 900, how much of those are coming with the free upgrade that you've provided versus customers who are actually paying for their license? Just to get a sense of how meaningful that 900 number is.

And then this last one, which is a follow-up for Luka probably on the restructuring. Could you just clarify what you said in terms of the savings, the annualized savings. I think you said mid triple-digit millions annualized, so should we read that to be EUR500 million and if so kind of early source, I suppose, about the 2016 margin progression. Thank you.

Thank you. I think the first question on the S/4HANA customer composition, maybe, Rob, you can handle and then we move over to Luka.

Yes, I mean out of the 900 plus new customers in S/4 the customers converting their databases on to S/4HANA and then the applications is probably 60%, 65% and 35% net new companies on S/4.

Okay, and on the question around the annualized impact, I think you should plan for slightly less than EUR500 million, but in the neighborhood.

Okay. And in this, is there any big offset there we should be thinking about into next year obviously, given if we're trying to think about that margin progression through to 2016?

Yes. As you know, we have midterm planning out there into which we are factoring this results that we are seeing so far as well as the impact on the annualized savings. We need to continue to invest and we will invest wisely in those areas that we grow, where we see innovation potential, where we see accelerated adoption potential and growth potential for the Company, which will then transform also in greater operating profit for the Group.

And we see ourselves right on the trajectory that we wanted to see going into the 2017 results as well as then later on 2020 and the strong traction that we have gained on the transformation so far, will be helpful in this respect and therefore will of course also be helpful to overall operating profit, but we'll talk about operating profit guidance for 2016 when we have closed out the year.

Knut Woller, Baader Bank.

I think if I understood correctly, you said that the majority of the S/4HANA customers that you won were predominantly on-premise and I understand also the weakness in Lat-Am. However, I was still surprised, given the magnitude of the S/4HANA customers won already early in the cycle that the license number was down. I understand HANA is a multiyear opportunity but [give spend] is it fair to assume that some of the revenues could not have been fully recognized in the quarter and therefore that you have a greater visibility looking in the second half, which also Bill's comments suggested that you expect some positive impact from the initiatives you took in H2. Is that the right way to look at it. Thank you.

Yes. So first of all, of course, the 900 customers that we have licensed they are re-licensed customers with corresponding revenue attached to it, let there be no doubt. On top of that, of course, we have a high number of trials out there where customers are testing the software. This is a pretty decent four-digit number of customers and of course we expect many of them to be excited about what they see and then come back to purchase.

As I've said, our pipeline is strongly and quickly building up. We have definitely in the second half year, a number of very significant transactions across all of the regions around S/4 HANA. So we are very confident in the pick up here. But it's not only S/4 HANA, if I may add that, in isolation. S/4HANA truly for us is the transformational core that is really, completely rejuvenated for the digital age, on which customers can then extend very easily and seamlessly into value-adding solutions, especially in the cloud.

That's how all of our acquired assets also come together. If you think about it, with S/4HANA you are optimizing and completely flexiblizing your core business processes. And then you extend easily with SuccessFactors into managing your workforce more effectively, into your supplier base with the Business Network assets, into your customers with omnichannel e-commerce, into machine-to-machine communication with our big data solutions, the HANA cloud platform and HANA as a platform and that is really creating the complete end-to-end vision that we can propagate for our customers and it drives a lot of growth even outside of the core of S/4HANA and in that respect, SAP is unique in its capabilities.

Gerardus Vos, Barclays.

Good afternoon. Thanks for taking my question. Two if I may, just want to come back on the kind of license in S/4. I was looking at the kind of volume and the volume of on-premise deals has kind of ticked up in the first and second quarter for the first time in 10 quarters. And I was wondering if this is the case that you see S/4 initially coming through in volumes, but not yet in revenues because it's relatively highly discounted. Just wondering, if this is a fair way of looking at it.

And then secondly, on the clouds, great set of numbers there and I calculate an 80% organic increase in net new cloud bookings, how do you expect this to kind of flow through in the coming quarters or so? Thank you.

Maybe first of all, Rob, do you want to comment on the pricing and discounting?

Yes, I've got a couple of comments. So I think S/4 has been in the market five months and it's beaten all our expectations to get close to 1,000 net new customers. I think it's in its infancy though. When you look at S/4 and what we're doing in the marketplace with S/4 you can definitely see an acceleration in the back half of the year and Luka mentioned, the pipelines are exceptionally strong and you're going to see that.

Regarding the pricing, the pricing was largely a promotion until the end of September and we're finalizing that. But as Luka said, if you look at our numbers, the strength that we have in Europe, North America, APJ on the on-premise side is always a big part of that and we see that happening in the second half as well.

Yes, absolutely and it's definitely not a factor of discounting because the price is set as part of the promotion and HANA as such has obviously a stable pricing and is not subject to discounting, so that's not a factor here. And then on the cloud bookings, you're absolutely right. We had very strong growth there also from an organic perspective. And the nice thing is it is really very, very well balanced. We had strong growth across basically all of our cloud assets and of course the speed at which these bookings will then translate to revenues is different by business model.

You will see in some parts, especially on SuccessFactors where we had a very strong quarter that this will flow into revenues relatively quickly in line with the usual patterns that we see in that business, whereas HANA Enterprise Cloud bookings, which were also strong but of course only represent a small proportion of the total bookings will take a bit longer to come into revenue because it simply takes longer to set the customers up for productive usage with these more differentiated solutions. But definitely, one thing is clear, as you mentioned, our bookings trajectory is far exceeding the long-term growth CAGR assumptions that we are setting for our cloud business. So we are basically leaning forward now and with this strong performance as well as the similar good performance that we've seen at the beginning of the year, we are absolutely well positioned to meet those assumptions of at least a 30% CAGR. I think we have a good opportunity to go past this.

Adam Wood, Morgan Stanley.

Just a few follow-ups, if I could. Just first of all on S/4HANA and I'm sorry for coming back here. As we've gone through the last few months, obviously very good adoption and very good pipeline. Could you tell us anything more about the pace of migration you see on this through the installed base and maybe help us, if there is any milestones or barriers in terms of product roadmap that would drive that adoption as the logistics module is coming through at the end of the year that will really drive bigger and more widespread adoption.

Secondly, to come back to that minus 7% on the licenses. Can we just -- is there any way you can help us understand how much of that is cannibalization of customers going to cloud versus maybe just a very weak specific geography and whether that cloud growth actually is more new customer, new product driven versus cannibalization driven?

And then finally, coming back on the margins, you flagged a very strong cloud gross margins. It looks as if we've turned the corner on those and either they're improving or rates of decline is slowing. Is it really that that we've hit the scale we need to drive profitability and we should assume the cloud gross margins continue to move upwards from here? Thank you.

Adam, I think for the first question Bernd will handle, then the question on license cannibalization and margins, handled by Luka.

Yes. So happy to take that question regarding pace of migration for S/4. It's definitely right that the major driver in the last two quarters have been all our investments and benefits we have given to customers in the area of financials and controlling. We have launched Simple Finance in Q2 last year at Sapphire, build pipeline, momentum and we saw a significant number of large customers already in the first two quarters on S/4.

But not just from a module perspective, we have invested a lot here as well from a technical migration. I just can report to you that the migration from an existing business suite customers to an S/4 is now possible in hours while an upgrade into traditional suite sometimes took a day or even a weekend. So, the simplification in architecture pays off here as well in terms of effort, but as well duration of migrating an existing SAP solution towards S/4. And you are right as well with your assumption that when we deliver as well the logistics modules in the fourth quarter into our on-premise world, we expect a significant boost as well and we are soon having the 1000th customer of S/4 as every day we get new ones that we expect even an accelerated growth in the fourth quarter of this year.

And then, maybe on the cannibalization question which is really a term that I strongly dislike because I think it's strongly misleading as well. Here is the fact, we did best in the cloud, where we did well in on-premise licenses in Q2 and vice versa. You take a look at our most mature markets where the propensity to buy cloud solutions is certainly most advanced globally. We had very balanced and good results in terms of positive license growth as well as strong and explosive cloud growth.

That holds true for the US, positive software licenses, very strong cloud growth; it holds true for Germany, same; it holds true for the UK, very strong growth in both elements; holds true for Japan and for other markets. Where in turn we had weaknesses in licenses like in Latin America, while we still saw growth in the cloud, we saw that it was also likewise dampened. So it's not a story about direct cannibalization. Of course, there are some elements of our portfolio, where we clearly recommend to the customers to go with the cloud solution because it simply makes sense to do that in HR for example, or in customer relationship management.

But in terms of our overall business prospects, as I said before, where we can lead with that vision of an integrated perfect enterprise, a data driven enterprise based on a truly revolutionary core of S/4HANA and then extending it with cloud, we win on both sides of the house, on-premise as well as cloud.

In terms of the gross margins, you are right. We are seeing now the third quarter in terms of sequential growth in cloud gross margins and definitely our ambition is to continue that increase. Now, as you know, we have set a specific gross margin targets for each of the business models that we run in the cloud, for the private clouds, for the public traditional SaaS cloud as well as for the Business Network group and we are working towards that trajectory for each and every one of the models understanding that the private cloud, the HANA Enterprise Cloud is still running at a negative margin, and therefore, we are still to see the breakeven point and then positive gross margins.

This may wane in the short term, dependent on the business growth, on the overall gross margins a bit, but that's for me, lesser important than really seeing in all of those three distinct models, a continued and steady progression towards higher gross margins and I'm very confident that we will achieve this and see this for all of the three different models.

So just to be clear Luka and I apologize for the cannibalization comment, but it's really the weak markets, weak macro that's causing that license issue. It's not people moving to cloud. As you said, you've got strong cloud and strong licenses where the macro and the markets are good.

That's exactly the case. So, in markets like the US, like Germany, like Japan, we had very strong growth across both. Actually, one of my favorite markets, because I'm serving there as a Board sponsor, the Middle East is a perfect example. It's considered a classic on-premise license market, yet for the last three quarters they showed very strong double-digit software license growth coupled with triple-digit cloud growth. And I think that's the best proof point that you can indeed have both.

Brad Zelnick, Jefferies.

Most of my questions have been answered, but hoping maybe you can tell us a bit more about what's going on in the HCM market. High double-digit number of competitive wins against the other key players and we've been seeing increasing momentum with Employee Central for several quarters now. But Rob, can you may be shed some additional light on what's changing by competitor in each of the various theaters where you're playing?

Yes. I think a couple of things on HCM. First of all, I would say to Bernd and his team, we have a world-class Employee Central solution now that covers multiple payroll in multiple countries. It's pretty much the only global -- globalized solution in the marketplace. And I think what you see with HCM is execution across the board in pretty much every market, every theatre, very, very strong performance in the United States.

And in Europe, as Luka mentioned, we have now 730 new customers in that space and we see that trajectory continuing. Some marquee name that we've acquired with Employee Central. Yes, so some marquee names across the world, I'll give you just some color. These are wins against Workday and Oracle with Cathay Pacific, Whirlpool, Kellogg, REWE, Singapore Telecom, Telefonica, National Bank of Canada, Moody's. So, you see a list of -- a quick list. Globally, we are executing in HCM SuccessFactors on all cylinders and we're the only fully globalized solution in the marketplace where there is fully public cloud available today.

Appreciate the color, and If I can just follow up with one for Luka. Luka, I appreciate the different gross margin profiles of the various deployment models, but particularly this quarter we've see upside from cloud, from the Business Network and was hoping you can just help us, not just from a cost of goods perspective, but when you think about incremental OpEx, particularly acquisition costs for the business network, I would expect that the incremental margin there, from an operating perspective is extremely high and also for cloud, as you're renewing customers overtime as opposed to acquiring new ones, can you just maybe give us a bit more color into the power of how that compounds? Thank you.

Yes. So maybe on the Business Network and the potential there, it would be even better for Steve to handle that. If you want, Steve?

Yes of course. So, first and foremost, on the gross margin side for the Business Network, you're absolutely right, it's really frankly at the best-in-class levels, but I think there is room for improvement here. The improvement you will see over time were not overly focused on moving the gross margin up at each quarter, we're much more focused on driving new customer growth and making sure we can support that growth through implementation and also, frankly, through support.

I think as growth rate slow, which we actually don't expect for any time in near future. As growth rate slow, you'll see that incremental gross margin move up even further. Today, on every new dollar of revenue that comes in, in the Business Network group, the incremental margin is in 85% plus ranges. So this is consistent with every other public cloud offering that's available in the marketplace.

Having said that, the rates of growth that we're seeing in this business are in excess of anything we saw as a standalone business, whether you're talking about Ariba, Fieldglass or Concur. So the rate of growth in new bookings is just phenomenal. And it's really being driven now only by continued expansion within the Business Network group distribution organization, but through the collaboration that we have with the GCO organization, Rob's group and the ability to penetrate the very, very large install base of SAP customers.

And I would say quite frankly, with that, you have already answered the second part of the question as a lot of what you say for the Business Network group definitely holds true for the rest of our portfolio as well. Maybe we'll take the next question.

Philip Winslow, Credit Suisse.

Just one question for Bill and then a follow up for both Bill and Steve. Bill, obviously you've talked about your good build in S/4HANA customers and obviously you have a lot of strength in cloud and the Business Networks. Wondering, now that has been multiple months since you laid out the S/4HANA vision and obviously multiple quarters now since you purchased Concur. What is the feedback from customer has been as far as just towards the four roadmap for SAP and how is that changing conversations on both sort of the core and also these new areas. And then the question for both Bill and Steve, now that we've had Concur under your belts for a couple of quarters now. Bill, what has surprised you so far versus your pre-acquisition expectations? And then Steve, similar question for you.

Okay, great. Well, I'll start off Phil. Thank you for the question. I think the big idea with S/4 and S/4HANA is the notion of value creation in the digital economy. If you think about these companies that we're working with today, they're all trying to digitize their businesses and create new business models. S/4 and S/4HANA enables them to do that. So now they'll have a platform. They'll have the application (technical difficulty) strategy to actually execute their plan.

(Technical difficulty) strength of S/4 and S/4 HANA. In terms of the acquisitions, I would simply say one bright spot that even been more upside than I could have imagined, Steve Singh's leadership and the commitment of his entire Concur Company to the SAP mission. What they've done in the Business Network is stunning and it shows in the growth numbers.

I also think it speaks well to what we've done with Ariba, putting a well seasoned veteran of SAP in charge of Ariba and that business is growing beautifully with a new user experience and some excitement in Europe and other parts of the world where I think we're surprising people with the growth rates.

And obviously SuccessFactors, if you think about the acquisition of SuccessFactors, the earliest one we did and the impact that had in the Human Capital Management space. Everything we bought has worked. Everything we bought has worked in conjunction with or better than anything we expected, in the boardroom business case. And I think we really took a lot of people by surprise with the concept of the Business Network and then demonstrating that the network with nearly a trillion running through it in US dollars and the way it transforms global business, combining that with S/4HANA as the platform running the applications, running the networks, the immense business value that can be rung out of these solutions is just unbelievable.

So again, I tie it back to value creation in the digital economy and we are an adapt or die economy. And the center of everything will be a modern technology innovator, a platform like SAP is to take these customers to entirely new level in every industry and every geography around the world. But I want to especially thank my Board colleagues for the way they've embraced the acquired companies and I especially want to thank, Steve for coming on to the Board and doing such a fabulous job with the network and fitting in so beautifully with the SAP culture and our robust growth ambitions for the future.

Yes, the only few comments I would add to this is, look, anytime companies are acquired, you have to approach it with a, at least a level of pragmatism and say, look things are going to be different and there could be challenges. I would tell you, while there is always challenges in acquisitions, the amount of upside that we've seen has so far exceeded my expectations that I look at this and say, look this is wonderful for our customers, this is wonderful for the share -- our new shareholders, obviously the shareholders of SAP and that's showing up obviously in things like bookings growth rate and also the revenue growth rate.

But just as much in the second area, which is, there is a definite transformation that is really just starting to come about where customers are looking at the offerings much more holistically. They're looking at -- look it's not just these line of business applications or the business network applications that are important to me, which is obviously the new growth area for [highlight the] cloud computing.

But it's how they integrate into the core and what innovation [are we using] in the core. One of the things that I find really fascinating is the number of meetings that I'm now in where the buyers looking at this from the point of view of the entire solution set from what they run their business on to all line of business applications that plug into that core. And I think that when you see that at the biggest companies in the world that's a prelude to what you're going to see in every other company in the world with time. So this digital transformation that Bill is talking about, this is -- you're seeing the forefront of that right now.

Thank you very much. And this concludes the financial analyst call for today and thank you all for joining and goodbye.