Good day, welcome to the SAP fourth quarter and full year 2017 results teleconference. Today's conference is being recorded, at this time, I'd like to turn the conference over to Stefan Gruber. Please go ahead, sir.
Yeah, 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 fourth quarter and full year 2017. I'm joined by our CEO, Bill McDermott, Luka Mucic, our CFO, will both make opening remarks on the call today. Also joining us for Q&A are board members Rob Enslin, who runs Cloud Business Group, Bernd Leukert , who leads Product and Innovation. Before we get started, as usual, I want to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.
Words such as anticipate, believe, estimate, expect, forecast, intent, may, plan, project, predict, should, outlook, 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 U.S. Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2016, filed with the SEC on February 28, 2017. Participants are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates.
In addition, on our Investor Relations website, you can find our quarterly statement the financial summary slide deck, which are intended to supplement our prepared remarks today and include a reconciliation from our non-IFRS numbers to IFRS numbers. There you can also find an educational video explaining the impact of IFRS 15 on our 2018 outlook. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS, growth rates are non-IFRS constant currency. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Before I hand over to our CEO, Bill McDermott, let me state that we are excited to welcome you back to our annual Capital Markets Day to be held at our Hudson Yards office in New York City on March 6th.
A few more details about the innovation growth drivers behind our 2020 ambitions. With that, I'd like to turn things over to Bill.
Thank you very much, Stefan. Hello, everyone. I appreciate you joining us today, which incidentally marks the anniversary of my ninth year as CEO of SAP. Therefore, I could not be prouder to share some comments about our past, our present, and of course, our exciting future. Back in 2010, we set bold ambitions for SAP. We focused on our customers to be a truly global business software market leader. We set out to reinvent the database industry. Forrester has now defined the new market for analytical data platforms. Of course, they ranked SAP HANA as the clear number 1. We led the market with intelligent ERP built on an in-memory architecture. Today, we have 7,900 SAP S/4HANA customers representing 46% year-on-year growth. We acquired the best assets to help customers innovate at scale.
SAP SuccessFactors, SAP Ariba, SAP Fieldglass, SAP Hybris, and SAP Concur are all thriving with soaring customer adoption. The proof is clear. SAP converts acquisitions into fast organic growth stories on a global basis. We know how to do this well. Therefore, there's a clear prognosis for CallidusCloud, which we'll discuss shortly. Overall, we focused on a purposeful vision, winning strategy, customer success, and profitable growth. Since 2009, SAP has doubled or tripled our customers, revenues, profits, and market value. We've consistently met all guidance metrics, even after multiple raises, such was the case in 2017. We made big promises. Those promises have been kept. This company is firing on all cylinders. Our 2017 results were the latest in this record run. True to my word, new cloud bookings surged 31% in Q4 and 30% for the full year.
Cloud subscriptions and support backlog soared 38%, hitting EUR 7.5 billion. We have a EUR 4 billion-plus cloud business growing faster than most so-called best-of-breed standalone cloud companies. New cloud and software license order entry was up 17%. Even though we don't guide on it's important to note that software licenses grew 2% for the full year, which also exceeded expectations while competitors consistently decline, most of the time in double digits. SAP is still the only company in the business software industry at scale to deliver both fast cloud growth and license growth. With EPS up strongly, plus 14%, this was a stellar profitable growth performance. It also, once again, represents a trifecta of cloud, software, and operating income growth. On top of an outstanding 2017, we're moving forward with great confidence.
We now target approximately EUR 25 billion in total revenue in 2018, including continued fast growth of around 30% in the cloud, even at larger scale. 2018 will also mark two key milestones for SAP. Cloud revenue is expected to overtake license revenue for the first time. We expect margins to commence on an upward path, and Luka will explain the 2018 guidance in full detail shortly. Looking further into the future, we confidently reiterate our 2020 ambitions, even in the face of currency headwinds. We expect cloud to grow at, again, 30% compounded annual growth rate and more than double by 2020. We also expect operating profit expansion to accelerate throughout all the way through 2020 and beyond. SAP has strong growth drivers powering this momentum. Remember, it's not those individual pieces that make SAP unique in the industry.
In the proudest tradition of our business suite, it is the completeness of SAP innovation that makes us a global powerhouse. For example, the Emirates Group selected SAP in a competitive evaluation to support their complete digital transformation. SAP will provide an integrated multi-cloud ERP solution for finance with SAP S/4HANA, extended by SAP's SAP Cloud Platform. We'll enable a modern HR approach with SAP SuccessFactors. We'll help transform procurement with SAP Ariba. We will simplify the lives of employees with their travel and expense using SAP Concur. This is the power of SAP. Vital. The suite is in. Major brands around the world are validating this complete cloud innovation strategy. Standard Chartered, a British multinational bank and financial services company, also chose multiple SAP solutions. Unilever, Puma, and Phillips 66 are some of the many companies selecting S/4HANA, which again grew new cloud bookings in triple digits in Q4.
Robert Bosch, Deutsche Telekom, they're both transforming their front office with SAP Hybris solutions. Beiersdorf, Foxconn, AkzoNobel are the latest to choose SAP SuccessFactors, with 47% year-on growth in customers for employee central. This business now has major momentum. Ford Motor and Coca-Cola chose SAP Ariba to make procurement awesome. UBS chose SAP Fieldglass to address its multi-channel workforce. Vodafone and Barclays selected Concur in Q4 to give their employees the perfect trip. End-to-end, demand chain to supply chain, back office to front office, SAP is delivering the most complete cloud in the enterprise. That's where we're at now. What's the future looking like? Even as we win today's markets, SAP is always looking around corners to future growth. Data centricity, intelligent computing, digital commerce, business networks. These are the market-making opportunities ahead for SAP.
The SAP HANA Data Management Suite will continue to reshape the architecture of enterprise computing. Even as customers move to the cloud, many are unable to maximize the value of data coming from endless sources. With full use, SAP HANA, SAP Vora, SAP Data Hub, we will give customers the tools to truly monetize enterprise data. SAP Leonardo is leading the invention of business next practices. When you consider the influence of technological breakthroughs, it will not be a single technology that changes how business is run. AI, machine learning, Internet of Things, blockchain, all of these technologies will work together as businesses go digital. Only SAP offers this holistic approach, from design thinking to industry domain expertise, all in a global footprint. A customer who wants to build a prototype, show proof of concept, and rapidly scale innovation, we offer SAP Leonardo together with the SAP Cloud Platform.
For example, the San Francisco 49ers in the United States will use Leonardo machine learning and SAP analytics together. This will deliver season ticket renewal pattern insights to improve the fan experience. A world-leading food company will use SAP Leonardo to detect off-brand counterfeit baby formula in China's marketplace. This food company wants to build an intelligent solution that can scale fast with less risk. That's why they turn to SAP. With new additions like Gigya and CallidusCloud, SAP has taken decisive action to reinvent the front office. Under the leadership of Carsten Thoma, SAP Hybris remains the market leader in omni-channel e-commerce. I congratulate him for his many contributions to SAP. Now, one of our very best, Alex Atzberger, who did a great job running Ariba, will do an amazing job as his successor.
The acquisition of Gigya in the age of data privacy means that SAP will own the digital consumer record, the epicenter of the customer experience. Now, with the planned acquisition of CallidusCloud, which we announced earlier today, we will own the lead to cash conversation in the market. SAP will fuse our commerce solutions and S/4HANA fulfillment engine with CallidusCloud's market-leading sales solutions. Together, we will deliver the most complete end-to-end cloud-based offering in the market. CallidusCloud is already a very fast-growing company. But together with SAP's global scale, like its predecessors, CallidusCloud will grow even faster. Count on it. Business networks is another breakout opportunity that is only just beginning. Today, SAP owns the spend management categories in the enterprise, direct, indirect materials, contingent labor, travel, and expenses.
In the near future, SAP will build transformational new business models on top of the EUR 1 trillion in commerce that runs through these networks. We choose to think of this not only as SAP's network. We intend to make this the network of networks, the business world's marketplace. The uniqueness of SAP's global innovation agenda has not gone unnoticed. Just in the past few days, Presidents Macron and Trump, Prime Ministers Modi, Trudeau, and Netanyahu, have all re-emphasized their trust in SAP. In these countries, we're investing to shape a new generation of digital entrepreneurs. We will use our digital boardroom technology to give leaders a real-time dashboard to measure outcomes from policy decisions, and their citizens will have full visibility. We aspire to use SAP HANA to look beneath the surface of the world's healthcare systems to the individual genome for personalized medicine.
Bottom line, only SAP can help governments perform like best-run businesses. We're also focused on solving the world's most significant challenges because SAP is a purpose-driven innovator. Yes, this is in fact a major factor in our inspired global workforce. We have soaring employee engagement scores, and we won 300 awards last year for employee satisfaction. It is also a business imperative for the SAP ecosystem. Organizations driven by purpose outperform the market 15 to 1. The days of measuring success purely on financial basis alone are over. SAP will stay the market leader because we help the world run better and improve people's lives. In closing, we believe this is not a time for measured ambitions. In a world filled with anxiety about automation, SAP will lead a new economy where intelligent machines enable augmented humanity.
SAP will bridge universities, business, and governments to initiate a new workforce with the digital skills to win. SAP will come to the table on the global stage to help restore trust, which, of course, is the ultimate human currency. We will do this with the nearly 90,000 of the finest professionals in the history of the IT industry. I thank them for their enormous dedication to SAP, for focusing on keeping our customers for life. Through their passion, we're a humble company that stands united to fight like an underdog. We also stand on the shoulders of giants, which is why we put nothing above our core values, integrity, curiosity, diversity, and purpose-driven innovation.
I'd like to thank all the stakeholders that are on the call today for believing in our company. I can assure you here today, the best is unquestionably yet to come because now, as ever, the best run SAP. I'd like to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.
Yeah, thank you very much, Bill. Hello, everybody. From my side, looking at our results, it's clear that we again delivered on our financial targets. We now have consistently either met or exceeded our financial targets ever since we announced our midterm ambition three years ago. In fact, we have hit all guidance metrics, even where in some cases those metrics were raised multiple times during the year. SAP once again showed impressive resilience and global breadth to successfully navigate the evolving economic and political environment. I wanted to start by talking about some financial and non-financial highlights for the year. First, for 2017, our overall strong business performance led to an even more predictable business, now at 63% share of revenue, on track towards a 70%-75% share in 2020. We had another strong year in terms of EPS and operating cash flow.
EPS grew by double digits and cash flow exceeded EUR 5 billion for the first time ever. Our employees are clearly excited to work for SAP. Our employee engagement score remained extremely high at 85%. By investing in professional development, our overall retention rate improved to 94.6%. Also, in 2017, we reduced greenhouse gas emissions to 325 kilotons, already achieving the goal we set for 2020 to reduce our emissions to our 2000 level three years ahead of schedule. Our total revenue hit the high end of the guidance range, even though we raised it twice throughout 2017. As Bill mentioned, we kept our promise. New cloud bookings, our key metric for new business in the cloud, exceeded 30% growth in Q4. Our cloud backlog surged, as also said already by Bill, up 38% to EUR 7.5 billion.
These are really impressive results on top of very strong prior year growth for both of these metrics. Cloud revenue was up 28% in 2017, achieving our target. Even with fast growth in the cloud, our software revenue grew again. This now marks the third straight year of beating our own software revenue expectations, reflecting the strength of the underlying S/4HANA generational upgrade cycle. In total, SAP's core, our software and support business combined, is rock solid, growing mid-single digits in 2017, significantly outperforming the competition, as Bill already mentioned. This unique combination of fast-growing cloud and solid momentum in the core powered cloud and software revenue to 8% growth, delivering on our raised outlook for the full year. SAP is clearly growing at superior rates and without any contribution of large acquisitions in 2017.
The future looks even more promising as our combined cloud and software order entry grew even higher, up 17%. Let me spend a few words on the regional results for the full year. We had a solid performance in the EMEA region, with cloud and software revenue increasing 7%. Cloud revenue was strong and grew by 48%, with an especially strong year in Germany, Russia and Spain. In addition, we had strong double-digit software revenue growth in the Netherlands and Russia. Germany also had solid growth in software revenue. We had solid growth in the Americas region as well. Cloud and software revenue grew by 6%. Cloud revenue increased by 18%. In cloud revenue, Brazil and the U.S. had solid performances, while Argentina and Canada grew double digits in software revenue. The U.S., important to note, also had solid growth in software revenue.
In the APJ region, we had a truly strong performance in both cloud and software revenue and cloud revenue. Cloud and software revenue was up 12%. Cloud revenue grew by 47%. Japan and Australia had strong cloud revenue growth and solid double-digit growth in software revenue. Greater China was also a highlight with double-digit growth. Now to profitability. Given the material currency headwinds, I will talk to constant currency gross margins and operating margins. Our fast-growing cloud business, the revenue mix shift obviously impacted our year-over-year cloud and software margin, that is by 70 basis points in Q4. However, we were able to limit the overall decline to only 50 basis points. Our business network margin and our private cloud margin increased both year-over-year and sequentially. Our business network margin was up two percentage points year-over-year to 77.3%.
Our private cloud margin was up eight percentage points year-over-year to 8.2%. For our public cloud, or our SaaS PaaS business, we continue to harmonize our data landscape towards a highly standardized converged cloud platform, as we have discussed on previous calls. These investments, however, began to stabilize in 2017. We are confident this trend will continue in 2018, especially since almost half of our SuccessFactors customers have already migrated to HANA, and by the end of the second quarter, we expect 80% of our SuccessFactors customers to be migrated to HANA. As you can see from the sequential development of our public cloud margin in 2017, the year-over-year decline steadily improved. While we saw a decline of four percentage points for the full year, in Q4, the margin was only down two percentage points year-over-year. The same can be said about our overall cloud margin.
While we saw a decline of two percentage points for the full year, in Q4, the margin was only down one percentage point year-over-year. We actually improved our cloud margin sequentially from Q3 to Q4. This helped initiate the operating margin turnaround in Q4 as well, setting us up for expansion in 2018. Now let me switch to our services margin, where we grew by five percentage points year-over-year. This was driven by the continued efficiency gains from our One Service initiative, as well as the solid top-line performance and the reduction of core investment projects, basically the same forces that you saw all the way through the year. Moving to our operating profit, where we grew 4% to EUR 6.92 billion at constant currencies, achieving our raised outlook. In the fourth quarter, our growth rate actually accelerated further. It was up 6% year-over-year.
Throughout 2017, we have steadily improved our operating margin trajectory, as promised. Our non-IFRS operating margin at constant currencies declined 1.4 percentage points year-over-year in the first half of 2017, improving to a drop of 90 basis points in the third quarter. As I mentioned before, the fourth quarter signaled the beginning of a turnaround with an operating margin of 35.2%, a year-over-year decline of only 10 basis points. This all now sets us up and paves the way for the strong growth and margin expansion that we expect in 2018 and beyond. In the fourth quarter, we also had substantial one-time tax benefits from an intragroup transfer of IP rights within the group, as well as the U.S. tax reform. For the full year 2017, our IFRS effective tax rate in consequence was 19.3%, down six percentage points, while our non-IFRS rate was 22.6%, down 4.2 percentage points.
For 2018, we expect an IFRS and non-IFRS effective tax rate of 27%-28%. EPS in the fourth quarter was strong as anticipated, driven primarily by our strong operating performance and another successful quarter for our venture capital fund, Sapphire Ventures. Obviously, EPS also benefited from the one-time tax benefits. Our full-year non-IFRS EPS was €4.44 per share, up 14%. A few words on cash flow and liquidity. A nice piece of our results that I'm glad to share. Operating cash flow grew 9% in 2017, continuing a positive three-year trend. We shared our success with shareholders by returning €2 billion in 2017 through the share buyback and the dividend. Our net debt was €1.5 billion at the end of 2017. We improved net liquidity by €1.7 billion.
Actually, if you go back three years, our net liquidity has improved in total by more than €6 billion, thanks to our consistently strong operating cash flow, paired with our continued commitment to fast deleveraging. Before going into our outlook, I wanted to mention that we expect for 2018 a net positive impact on operating profit of approximately €0.2 billion from IFRS 15, mainly from cost benefits. For more details about the impact of IFRS 15 on our 2018 financials, please refer to the quarterly statement and an educational video by our Chief Accounting Officer, Dr. Christoph Hütten, on our investor relations website. Moving on to our outlook for the full year 2018. We expect non-IFRS cloud revenue to be in a range of €4.8 billion-€5 billion at constant currencies. That is up 27%-33%.
Non-IFRS cloud and software revenue is expected to be in a range of €20.7 billion-€21.1 billion at constant currencies, up 6%-8%. Non-IFRS total revenue is expected to be in a range of €24.6 billion-€25.1 billion at constant currencies, up 5%-7%. We expect non-IFRS operating profit to be in a range of €7.3 billion-€7.5 billion at constant currencies, up 8%-11%. We have also updated our currency expectations for the impact on reported growth rates in 2018. You can find more details in our quarterly statement. This outlook, to be clear again, does not include any contributions from Callidus. We will update our outlook once the acquisition is closed. We have confirmed our 2020 ambition for consistent fast growth in cloud, robust overall top-line momentum, and profitability growth despite all the currency headwinds that we were facing in 2017.
To summarize, we delivered strong top-line growth and continued to expand our operating profit. On top of that, our cash generation and EPS growth remained strong. Our performance, our portfolio, and our pipeline make us confident that we will deliver on our midterm ambitions. Thank you, and we will now be happy to take your questions.
Thank you. Operator, we can now start the Q&A session.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, please press star one to ask a question. We can take our first question from John King from Bank of America. Please go ahead. Your line is open.
Yeah. Thank you. Good afternoon. I've got three quick questions for Luka and probably one for Bill. Luka, first of all, on the margin, can you share some plans around your planned increasing headcount for 2018, just so we can get a sense of the mix between the overhead growth and the gross margin improvement that you're expecting? Secondly, along the same lines, looking at the stock comp guide at the back of the presentation, looks to be down around 15% at the midpoint. Can you just talk about whether there's any one-offs driving that or if that's a sustainable level as we look forward? I know that's somewhat influenced by the stock price, but be interested in your thoughts there. Perhaps a few comments on the seasonality.
If I look at Q1, you've got a pretty challenging comp on the margin, as well as I think on license and bookings. Just maybe some thoughts about how you expect, particularly the margins, to evolve through the course of the year. If I could just squeeze in one for Bill, some comments on S/4HANA public cloud and how meaningful a driver you think that could be for the bookings. Thank you.
Let me start and go ahead with your first questions. First of all, on the headcount I think you should expect if everything goes as planned and we continue to drive our business momentum in the same way with the same strong growth on the top line as we did in 2017, that we would likely hire to approximately the same levels as what you have seen in 2017. With certainly, again, a certain bias in the first half year because we want to have people productive as we go into the very important and volume-driven second half of the year. In terms of the share-based compensation, you're right.
We see an upper end of the share-based compensation from today's perspective at approximately the levels that we have had in 2017, that is really only a function of the development of the share price in the last few weeks, which we need to take as a basis from a volume perspective in terms of grants that we are giving out to our employees. This is expected to broadly follow the growth in our employee population. In terms of the seasonality, that is a little bit hard to predict. If I was only talking about the underlying margin progression outside of the IFRS 15 effect, then I would clearly say that we should expect, given the tougher comps, as you said, in Q1, a stronger progress as of the second quarter.
That gets a little bit tough to estimate because some of the top-line related IFRS 15 effects are dependent on when customers will exercise material rights that they have been granted in previous years. That might change the picture a bit. Everything else being equal, I would say as of Q2 is where we clearly should see a pickup in margins.
On the S/4HANA Cloud, John, that's the lead story in the company. If you think about global customer operations and all geographies and industries around the world, this is the biggest focus, and it also has the highest ceiling of any product in the portfolio. I would be very bullish on S/4HANA Cloud.
Okay. Thank you. Let's take the next question, please.
Thank you. We will now take our next question from Michael Briest from UBS. Please go ahead.
Thanks. Good morning. Good afternoon. Just in terms of the gross margin in the cloud, Luka, pleasing to see that stabilization quarter-on-quarter. I'm curious about the 2020 mix. At the last capital markets day, you envisaged roughly 40%-45% coming equally from business networks and the SaaS/PaaS business. The growth rates to get there seem to be quite different from what we're seeing today. We're seeing 16% or so in business network and well over 30% in SaaS/PaaS. Are you still expecting that broad mix to be the same? Coming back to the SaaS/PaaS margin, I appreciate there's some one-offs, but by my math, your Q4 cost base is nearly EUR 800 million when it's annualized, and that's the same number you need in 2020 to get to an 80% gross margin. Then I just had a follow-up on CapEx.
Okay, do you want to give me that one that I can answer everything on the same time?
Yeah, sure. I'm curious where CapEx will come out this year, and as you start to work with Microsoft and Google more, as I think Bill mentioned on this morning's call, should that bring down that ratio? It seems to be quite high if a lot more of the underlying infrastructure is running on third party. Thanks.
Yeah. Thanks, Michael. These are both very good questions. Happy to answer them. First of all, on the gross margin, we actually continue to believe that in 2020 we will drive an overarching cloud margin mix in the low 70s as previously shared. Indeed, we now believe that there will be a different mix to that. We believe, first of all, that our assumptions to business networks and their contribution are broadly unchanged, but they're definitely going to have the potential to go above their 80% 2020 target because of the progress that we have made so far. I think there is an opportunity for an outperformance there. In terms of the private cloud, I think it is from a gross margin perspective, definitely where we want it to be, and we will see further progress towards the 40% target that we have set for 2020.
However, we believe that the mix of the HANA Enterprise Cloud will be slightly reduced from previous assumptions because we are seeing already now that the growth in SaaS PaaS in particular is picking up and is actually starting to overtake again the growth that we have in new business order entry for HANA Enterprise Cloud. That means that we would expect that we would not be substantially above a 10% share for the infrastructure as a service piece, and the rest would be filled up with SaaS PaaS, which will definitely climb up in terms of gross margin contribution as of next year as the migration of third-party databases will be completed, as we have discussed on previous occasions.
Having said that, you are right that we have taken longer from an investment perspective for this, therefore we don't fully expect that the SaaS PaaS margin in 2020 will be meeting the 80% threshold. This will still come, but it will take us a year maximum two longer to get there. Having said that, the changed mix will do the job for us to bring us in at the low 70s overarching gross margin contribution, and I think that gives you also a hint on the mix. We definitely believe with S/4 Cloud, with the SAP Cloud Platform picking up so strongly that SaaS PaaS growth rates will substantially outperform the ones of the other two elements. On CapEx, just quickly, you're absolutely right. We expect that our CapEx growth rates will come down. They actually have already come down in 2017 to a certain extent.
When you take a look, our CapEx growth in 2016 was tremendous, more than 50%. Now in 2017, we were down to just shy of 30% CapEx growth, approximately the same growth rate as our cloud revenues. In 2018, we should expect that CapEx growth starts to trail again the revenue progression in the cloud. We should definitely land at lower than €1.6 billion. As of 2019, when we have made our core products available in a holistic sense on hyperscale cloud infrastructures from Google, from Microsoft, definitely, we should see that the further expansion and growth will be much more muted than even that already reduced level. There is definitely leverage from our collaboration with partners in this space.
Thank you. Can I just ask a clarification on the S/4 Cloud? For a while you've talked about licenses declining, and it hasn't happened because the adoption's been on premise. With S/4 Cloud, do you now firmly believe that licenses should show a modest decline going forward?
Yes. Quite frankly, this is, as always, very difficult to predict. That's why we choose to take a prudent implied growth assumption, which, if you do the math, would point to low to mid single-digit declines in licenses. As we have always shared, this was always part of the underlying midterm ambition that we had in place. That ambition or that implied expectation has not come true so far in the last three years. Let's see what happens, but we are prepared for everything by giving you a very prudent guidance.
Thanks, Luka.
Thank you. Let's take next question, please.
Thank you. We can take our next question from Kirk Materne from Evercore ISI. Please go ahead.
Thanks very much, and thanks for taking my question. Bill, maybe just a question for you. Obviously, your cloud guidance when you look out through 2020 implies you guys can maintain sort of a 30% growth rate. What are you seeing in the pipeline right now that gives you confidence that's realistic? Obviously, it's harder to continue to grow at that rate off a higher base. Then maybe just a second question around Callidus. A lot of players in the lead-to-cash market. Why did that asset make the most sense for SAP? Thanks very much.
Okay, sure. Thank you, Kirk. First of all, enormous confidence in S/4HANA Cloud. When I think about SAP's position right now, I am reminded by the many conversations in Davos, CEOs are ready to run simple. They want a company that is essentially a virtual suite. They get the benefits of the industry best ERP in the cloud, they get the modularity at the line of business level with the SuccessFactors, our CRM solutions, our business network solutions, obviously, from an intelligent enterprise perspective, all we are doing with Leonardo to give them an end-to-end company. The beauty of this is it's all available in the cloud, you can go in a modular fashion with SAP. In the end, you know you've got an integrated, connected company. That, to me, is saying really good things about all the cloud assets.
All the pipelines in our company look very, very good, whether it's the core ERP S/4HANA, the line of business SuccessFactors is really on a momentum run right now with an enormous amount of wins. When we face off with some of the well-known industry names, like what might have been a flip of a coin is no longer a flip of a coin. If we're in there competing, we're winning most of the time. I really like what we did with Callidus on the CRM side. You have to remember a couple things here. One, we run Callidus to run SAP. We had the best engineers in the software industry study this extremely carefully. About 80% of their revenue comes from the U.S. market now. Can you imagine when we light up the global switch for growth? Yes, it will scale, it will scale globally.
We know it scales extremely well. The other piece is on CRM. When you think about the whole value chain, this is a customer-driven growth revolution right now. The customer is on the move. They're social. They're in all channels. They're doing a lot of e-commerce. When you think about wholesale, retail, direct, tying everything together in a very simple supply chain manufacturing product delivery format, as long as we are as good, we win. Now I think we have a real chance. What happened here with Callidus, because they are the market leader, is now we got into the psyche of the sales professional. We're now in the sales professional's pipeline. We're in the way they configure, price, and quote a deal, whether it's a product or a service, and we're actually in their compensation headset.
When you get into the headset of a sales rep's compensation, that's a piece of the DNA we hadn't covered before. It would have taken us a little too long to build it with our S/4HANA ambition. We snap it in there, we integrate it back into S/4HANA, we feel very comfortable that we'll handle the market participants. We'll definitely handle them. We're coming out very aggressive in CRM. Think of it as this. The core is rock solid. The line of business is there. We own spend management in the business network. Leonardo is just incredible, and Callidus really strengthens us in the area where we need it at most. We go get the CRM space. It's too big a market to leave alone, and some of the participants have had it a little easy lately. We're going to change that.
Okay, thank you.
Thanks a lot.
Let's take the next question. Next question, please.
Thank you. We can take our next question from Mohammed Moawalla from Goldman Sachs. Please go ahead.
Great. Thank you. One for Luka and one for Bill. Luka, can you just reconfirm the trajectory of the margin improvement, both on a constant currency and a reported basis? I think on the Q3 call, you sort of alluded to a sort of flattish trajectory into H1, then on a constant currency basis, then improving into the back half. Obviously, while gross margin is a key driver this year, talk a bit about over the midterm where you see the levers as operating profit growth accelerates. I know you'd alluded to some optimization in the sales and marketing spend and sales organization. If you could confirm that for us, that'd be great. Secondly, Bill, on Callidus, the acquisition. How quickly do you think you can start to unlock some of these revenue synergies? Obviously, we saw it with SuccessFactors and Ariba.
Given those were your initial acquisitions, it took some time. I'm just curious from the point of closing, how quickly should we start to see those revenue synergies unlocking in install base?
Mo, on the margin side, I will really focus on the progression comments on a constant currency basis because I don't have a crystal ball, quite frankly, that can tell me the currency movements during the year. I wish I would have it, then I would not be in this spot any longer, probably. From a constant currency basis, as I said, I would expect that in Q1, we would rather still have a relatively muted progression from a margin perspective, then the trajectory should start to build as of Q2 2018.
Secondly, as we build up a stronger share of renewal revenues in the cloud, we have seen that especially the relative sales and marketing spend has been increasing in 2017. That's definitely a trend that should now come down, and we should start to see a slight deceleration in this space. Then we have still various efficiency gains that we are hunting after internally.
We have, for example, I shared this during the press conference as well, just gone live in Q4 with certain artificial intelligence capabilities in our shared service centers around cash application and invoice matching. We will proliferate our automation capabilities with further use cases that we will implement. That should definitely limit any expansion on non-productive sales and marketing and R&D resources, which should help us in 2018 as well. From that perspective, especially for the last three quarters of the year, I'm extremely confident that we will deliver on our margin improvement aspirations.
Mohammed, I would like to thank you very much for the question. First of all, this is salespeople selling a product they use every day. A product that they're hooked on. That's what I mean about getting into the psyche. We've never had a product like this where the salespeople are selling something they love to use right out of the gates. Now, Leslie, the CEO of the company, also immediately saw the virtue in full integration with SAP. This isn't one that we're going to be running over in a corner somewhere. This is right back into the core of the company. We will hit the ground running on this, and day one, we will start accelerating the growth rates of CallidusCloud globally.
Just to back me up on that, I've got Mr. Rob Enslin, the cloud business group leader, as well as Alex Atzberger here, who's taken over the CRM business for SAP. These guys are semi-lifting the table up with excitement. I'll give them a chance to give you a few remarks.
Yeah, Mohammed, I think it's the best asset in the industry because we actually know it's the best asset in the industry. We work with this management team really close. I think day one, we will accelerate the growth of the CRM space. I believe it provides us with a unique opportunity in the sales side to do what no other company has done in the sales side, which is connect the end-to-end digital supply chain. I think there's no better reference than 25,000 sales professionals in 190 countries around the world utilizing that every day. Are we pumped? Absolutely, we are pumped. I think the show's on the road.
Maybe just as one comment from my side. Bill said before that with the solutions of Callidus, especially around sales performance management, we're in the salesperson's head. I would argue with sales compensation management, we're probably in their heart and beyond that.
Alex, you want to say something?
Mohammed, I can just add to this that our customers are shifting from being product companies to service-driven businesses. This requires a new sales force. We are that new sales force. When you look at getting into that heart of the salesperson, that's right where we at. We're very excited.
Great. Thank you, everyone.
Let's take the next question, please.
Thank you. We can take our next question from Walter Pritchard from Citi. Please go ahead.
Hi, thanks. Just to follow up on the prior question around S/4. Can you help us understand how fast that's progressing in the mix, the S/4 public cloud in the mix, and are we starting to see larger customers there in Q4 or what you're expecting for 2018 that would've bought license and now they're buying cloud there? Is that a material factor both in the fourth quarter as well as what you're expecting in 2018, Luka?
Maybe I'll let Bernd answer this because he's the business leader responsible for that business, if you don't mind.
Yeah. Hello, Walter. Happy to-
Sure. I have one follow-up. Yep. Thanks.
First of all, you're absolutely right. We see the traction with S/4HANA Cloud in all segments of the customers, especially big names. Some of them, we are just working on building a reference story. What I can share with you, the customers in Germany like Fraport, as well prominent names like Cirque du Soleil, have selected S/4HANA Cloud. There are bigger names on our customer list already, as I mentioned. In terms of growth, just to add to the positive statement Bill made before. Over the course of 2017, every quarter in bookings was more than the aggregation of all the quarters we had before in the history of S/4HANA Cloud. This shows a clear indication of a hockey stick, and that's why we are so optimistic that S/4HANA Cloud is a major contributor to the bookings for 2018.
Thanks. Just a follow-up on the M&A. On the M&A front, Callidus was at the, I'd say, the higher end of the size of deals you've been talking about with smaller deals. Can you talk about if you're at a point and you would see the M&A activity potentially pick up from here?
Yeah, Walter. Thank you. You are not going to have an SAP on a shopping spree. This is a tuck-in, probably the higher end of a tuck-in size. I understand that, this is not a trend. We decided a string-of-pearls strategy for CRM. We executed on that strategy. If we do things, it'll be small. Unless something were to be very unusual as an opportunity in the market, we are certainly not anticipating. Don't think we're in the M&A market aggressively. We're not.
Okay. Thank you.
Thanks, Bill. Thank you.
Let's take the next question, please.
Thank you. We can take our next question from Adam Wood from Morgan Stanley. Please go ahead.
Hi. Good afternoon, everybody, and thanks for taking the question. I just wanted some help in thinking about the cloud growth over the next few years and the building blocks towards that. Maybe first as a housekeeping, does tuck-in mean that when you integrate Callidus, you won't be changing the 2020 guides for that? Just to clarify there. As we move on to the growth expectations, you're guiding actually for that cloud business accelerating as we look into 2019 and 2020. When we look at business networks, that slowed a little bit in 2017. Could you help us what drives that acceleration in the growth? Is it more SAP S/4HANA public cloud? Is it more the CRM areas that accelerate that growth?
To follow up on Michael's question, to the extent it is SAP S/4HANA, does that then mean that licenses come in weaker in 2019 and 2020 because you're bringing them in on a subscription business? Thank you.
Yeah. Maybe I'll take those questions and try to answer them. First of all, in terms of the Callidus contribution, we made it clear that our stated outlook does not include Callidus. We fully expect after we've closed the transaction to update our 2018 outlook. We also expect to update our 2020 ambition. We will likely do that at the beginning of 2019 when we also have a better view on the further movement of currency rates. As you know, we have confirmed our guidance based on the current rate assumptions, even though we had significant headwinds. Dependent on where the currencies go throughout the year, we will then make an informed update about this. In terms of the growth trajectory, you're absolutely right. There, of course, are different dynamics across our portfolio that are at work.
I already shared one of them, namely the fact that after a period from a very low base of very strong hypergrowth, the growth rates of our HANA Enterprise Cloud business can be expected to come down to a more normalized level where they don't exceed any longer the growth rates of our SaaS, PaaS, and Networks business combined, which is good news for combined margins, obviously. The big growth drivers will be our SaaS, PaaS portfolio. Those will be assets like the SAP Cloud Platform, which will definitely tremendously benefit from the uptake of Leonardo, of all of the new capabilities around AI, machine learning, IoT, blockchain, smart analytics, and so on and so forth, which we'll drive via the platform. It will certainly come from S/4 Cloud, no doubt about this. There is a very strong growth trajectory underway.
The solution is getting rounded out more and more so we can master more and more sophisticated workloads through the solution, and therefore, the breadth of the market opportunity will definitely expand. This will not change any of our underlying assumptions on the implied software development. As we had always shared, through 2020, we believe that low to mid single-digit declines are a prudent and balanced assumption, and that is remaining unchanged. Of course, we have the assets around analytics. Analytics is another business that is starting to shift fast to the cloud, and we have a very strong offering around that with Analytics Cloud, which is receiving great attention. We have the offerings around IoT and digital supply chain.
IBP in particular is a solution which I personally see a lot of potential in, and it has already had very strong growth in 2017, and that will, from a much higher base now, continue at a similar growth rate and hence be very positive for our growth. Last but not least, it's the CEC portfolio, which has already, without Callidus, performed extraordinarily well in the cloud. Now, of course, with all of the cross-selling opportunities driven through Callidus and the bigger depth of the end-to-end process coverage that we can achieve, there are certainly upsell opportunities, not only for Callidus itself, but also for the rest of the portfolio.
Excellent. Thanks very much.
Thank you.
Thank you. We can take our next question from Phil Winslow from Wells Fargo. Please go ahead.
Hi. Thanks, guys, for taking my question. Just a question for Bill. Obviously, earlier this month, SAP made several announcements in terms of just its SAP, sorry, its HCM strategy, with upgrades to Success and then a sidecar HCM solution for S/4HANA that I think you're going to extend support through for, I think it's 2030. I wonder if you'd just give us just an update on just the HCM strategy, sort of what these moves meant and how they factor into that.
Sure, Phil. Nice to talk to you, Phil. I've got Rob Enslin here, who oversees that. I'll have him give you a debrief.
Phil, when you look at the HCM strategy, we're actually pretty excited with the changes we made from a leadership perspective with Amy Wilson, James Harvey, and Greg Tomb taking over that business about nine months ago. We've made some strategic innovations on the platform, running SAP SuccessFactors truly on an Apple iOS device now, which makes it really easy to consume. It's been hugely successful in the market. When it comes to the HCM sidecar platform strategy, that was to support our public sector clients who need a little bit longer with the on-premise implementations around that solution. Focused on the customers in SAP SuccessFactors. I think what you see is a tremendous uptick in the amount of Employee Central customers we have now. We are pretty excited with where we're headed with SAP SuccessFactors.
Great. I guess just a follow-up for Bill, just on the sales force right now. Obviously, you guys highlighted, as Luka did, some of the strength of the on-premise, but the continued growth in the cloud. When you look at the sales force right now and just the structure of it and the incentive programs, how do you feel just going into 2018 as you also kind of think about the 2020 guide, just sort of how it's structured and how it's compensated, any changes you might be thinking of?
I think it's a great question, Phil. Thank you. Also, I think the prior question with Adam touched a little bit on, what does this mean, this momentum to the cloud, to the core? Is it going to cannibalize the core? A couple things. One, the SAP S/4HANA platform is going to go in the cloud, and it'll go in the cloud in different formations. Some customers will want the crown jewels of their company in a private cloud. I think you know that. Many of the customers will choose to capitalize those licenses because they don't make an ERP decision, and essentially plan on switching it out easily in a couple of years. These are core investments to the strategy of companies.
I feel very strong about S/4HANA and very strong about our core business, I wouldn't worry too much about the way we've guided for possibly single-digits negative, because we've been guiding that way for the last three years, and we keep growing it. That's the way our customers want it, and the pipelines are extremely exciting. As it relates to the cloud and how I think you could really think about the incentives to the sales force, we've created an environment where it really matters that those go lives and that customer success is the most important priority. That's also now reflected heavily in the compensation for the sales rep, as well as the whole management value chain. Customer for life is much more a focus on the sales department side.
We didn't take anything away from them, we made it very clear that we're really interested in dynamite go lives where customers are raving references. Furthermore, we don't in any way try to sway the customer from what's right for them based upon comp. We want to make sure the sales force is fairly compensated no matter which way the customer would like to go in terms of their cloud decision, or whether it's an operating lease or it's a capitalized lease, it doesn't really matter. What matters is they get the product they need in the form they need it, and we haven't let sales compensation dictate anything unnaturally, nor will we. Right now, I'm particularly happy that the core is steady. All the cloud assets are growing really well. Luka gave you lots of growth engines there.
S/4HANA is the de facto standard in-memory ERP system in the world, and it's the best system in the world, and it's going to continue to grow a lot. The line of business and business network solutions are going to continue to go extremely well. I think we've done a nice job of keeping the focus on the customer and now really thinking through this virtual suite concept so the customer gets what they need at every line of business, at every boardroom table. The CEO is going to be happy with this strategy, and the management team around the CEO is going to be happy because we're focused on the customer's customer. By doing that well, our growth will never stand in doubt. We're going into 2018 better than ever.
Thank you. We have time for two.
Thank you.
We have time for four questions.
Thank you. We can take our next question from Ross MacMillan from Royal Bank of Canada Capital Markets. Please go ahead.
Thanks so much. Maybe one for Luka. I think by my math, we're just over 20% of the core ERP base on S/4HANA. I just wondered if you could maybe remind us where you'd expect us to be in terms of conversion of base as we look out to our 2020 target. Then, a follow-up, I don't know if this is for Bill or Bernd, but your comments on S/4 Cloud are obviously bullish. I was just curious whether you think existing customers that use SAP core ERP on-prem, whether S/4 Cloud could actually start to address those use cases yet, or whether this is mostly still for subsidiary level or maybe geographically dispersed operations. Just trying to understand how those dovetails with the core S/4HANA strategy. Thanks.
Yeah. Just very quickly, I would definitely expect that by 2020, we should be done with half of the customer base and having it converted. Let's not forget that with our current S/4 customer count, we also have net new customers on top, not only installed base conversions. That implies that I expect to see now an acceleration of the migration curve as customers have waited in some cases for the full round out of functional capabilities of SAP S/4HANA. As that work is now complete, they are starting their programs. That would be my indication. We would do something wrong if by 2020 we have not already migrated at least half of our installed base.
Yeah. Ross, an additional comment before I go to the second question. Don't forget that with the existing customers, it is not just conversions from the installed base. We are proud that with SAP S/4HANA, we have never seen such a huge percentage of net new names in our customer base. This is healthy as well for the future growth. Do not just take into account the existing SAP installed base and make your math coming to the 20%. My number is that it's significantly below 20%, and this is good for our business. To come to your second question, really on the existing customers, whether we can address their use cases. Absolutely. With the release in Q4 in 2017, we have covered the complete core ERP functionality. Now we are going into industry verticals. The history is repeating.
This is how we built the ERP business. We started with the core. The core is complete now we are going into industry verticals, we are in permanent interaction with the customers, with the user groups to define priorities, therefore, consider a very strong industry focus in 2018.
Okay. Thank you.
Thanks a lot. I think we have time.
Maybe I just add one thing, and I also think there's a great opportunity to take the product down market. It's been way too easy in the mid-market for some other folks. We're going to tighten that up. It's not just for the large enterprise customers or the subsidiaries. We're going to take this product down into the mid-market and mix it up a little bit down there, see how it goes. I think we can handle ourselves pretty well down there.
Thank you.
Thanks.
We'll take the final question, please.
Thank you. We will take our final question from Gerardus Vos from Barclays. Please go ahead.
Hi. Thanks for taking my question. Two for me. Just on the go lives, where were we in kind of Q4, and how do you expect that to trend in 2018? Secondly, a question on the kind of, let's call it the old business, the licenses down 1% on the quarter was actually very good kind of volume, 5%. Could you talk a bit about kind of the regional mix and if you seen some kind of slippage, which has been suggested by the kind of volume versus license growth number? Thank you.
Okay, let me cover both questions, actually. Go lives saw a very significant uptick in Q4. We are now at around about 1,500 go lives up from 1,000 that we had just reached in Q3. This is very positive. As we have a couple of thousand ongoing implementation projects, I definitely expect this number to grow materially further up in 2018. We're adding more and more references to that, and that will create a virtuous cycle that will also convince the rest of the market to move and make the migration. In terms of the licenses impact, we saw positive growth in the Americas, believe it or not, and we saw it in Asia. Which in Asia's case, I think is less surprising maybe to some than in the Americas.
In U.S. had positive license growth, which is showing the clearly transformational strength of our license portfolio, especially S/4. In Europe, we had slightly negative growth in licenses. Let's not forget, Europe had an extraordinary stellar Q4 from a year-over-year perspective. They had a very tough compare. When you take a look at the full year performance and licenses, that was actually absolutely fine in line with our projections. In Q4, they were down a bit, and that also explains the slightly lower cloud and software growth rate for EMEA, as opposed to the other regions. Maybe I could also build on what Luka is saying. It's pretty steady all over the place. Asia had an unbelievable quarter. We have Jen Morgan now and Adaire Fox-Martin that are the co-presidents leading global customer operations.
A question sticking with me earlier, how's Q1 and the comparisons looking, and how's it shaking out there in the geographies? May we give Adaire a chance to say hi to you all, too. Adaire?
Thanks, Bill. We're going into Q1 off the momentum of Q4. We're feeling very positive about our position in Q1. We have an incredible set of products delivered to us by the best development team on the planet, and a strategy that resonates with every customer that you talk to, whether they're a multinational or a general business organization. Jen and I look forward to a strong Q1 and a strong year.
Hear, hear.
Hear, hear.
Thank you very much. This concludes the SAP Q4 earnings call. We look forward to seeing you on March 6th in New York City at our Hudson Yards office at Capital Markets Day. Thanks so much for participating. Goodbye.
Thank you for your interest in SAP, everybody.
Thanks a lot.
See you in New York.
Bye-bye.
Thank you. This concludes today's call. Thank you for your participation, ladies and gentlemen. You may now disconnect.