Good day, and welcome to the SAP Q3 Earnings Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Stephan Gruber. Please go ahead.
Thank Good morning and good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the Q3 2017. I'm joined My CEO, Bill McGurnott and Dukan Mutesch, our CFO, will both make opening remarks on the call today. Also joining us for Q and A are Board members, Rob Enslin, who runs Cloud Business Group and Bernd Leucharsch, 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 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 statements. Our 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 U. S. Securities and Exchange Commission, including SAP's annual report on Form 20 F for 2016 filed with the SEC on February 28, 2017.
Participants of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of their dates. On our Investor Relations website, you can find our quality statement and financial summary slide deck, which are both intended to supplement our prepared remarks today and include a reconciliation from our non IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this call. And with that, I'd like to turn things over to our CEO, Bill McDermott.
Thank you very much, Stefan, and hi, everyone. I appreciate you joining us today to discuss another strong quarter for SAP, Another increase in SAP's full year guidance and a clear path to the future for the world's business software market leader. Let's begin with Q3 results. Today, SAP reaffirmed its position as a profitable growth company, steady as we go. We delivered strong growth across the whole product portfolio.
We once again delivered a trifecta of software, cloud and operating income growth. Cloud was up 27% in Q3 and is up nearly 30% year to date. Astellas software license performance up 3% in Q3 and up an impressive 5% year to date. Cloud and software was up 8% in Q3 and also up 8% year to date. We expanded in every region led by a strong growth performance in China.
It's clear that treating China as our second home is really paying off. Overall, we saw continued business momentum despite Significant currency headwinds. Once again, our results continued SAP's tradition of profitable growth. EPS was up double digits. Operating profit was up 4%.
And this is continued expansion of absolute operating income even as we executed a successful business transformation to the cloud for SAP stakeholders. As discussed in July, first half hiring is now complete. You are now seeing the benefit of a fully engaged inspired SAP workforce. As we drive further profitability improvements to deliver on our 2020 ambition, We have appointed a new Board member. His name is Christian Klein.
As COO of the company, Christian will accelerate monetization of core business processes consistent with SAP's cloud and platform strategy. Welcome to the team, Christian. Let me now turn to our growth drivers for SAP, the most innovative cloud company powered by SAP HANA. License sales growth grew 3%, exceeding expectations. S4HANA adoption grew to more than 6,900 customers, up 70% year over year.
600 additional customers signed up, of which 40% were net new. S4HANA continues to be adopted by the most forward thinking global companies NVIDIA, China International Marine Containers and Deutsche AG are some of many that selected S4HANA in Q3. Many other leading companies went live on Sfour in Q3, including Tom Taylor and Daimler. S4HANA again grew new cloud bookings triple digits in Q3. Even as some in the industry have decided to go low, I'll say hi.
The reality is that we have added more cloud ERP customers in 7 months than some competitors have added in 7 years. If you count procurement, we have many thousands of cloud ERP customers. The only measure that matters for SAP is customer success and loyalty. Customers are going live with S4 in as little as 6 weeks. Sfour is proving very attractive to large enterprises for 2 tier ERP.
Sfour HANA is built On a consistent data model regardless of its deployment method, the S4HANA generational upgrade cycle is still in the very early stages and it represents a massive multiyear growth opportunity. SAP's ERP leadership is customer driven at the core. Shell has chosen SAP S4HANA and will enable future innovations across their company. The SAP ERP Cloud Platform will help Shell to simplify complex business processes. Fixed Leasing, a German provider of fleet and leasing management, As selected S4HANA, ERP Cloud, SAP SuccessFactors and the whole suite of their applications, SAP Cloud Platform and Analytics Cloud to digitize their processes and analytics capabilities for further growth.
In other words, everything in the cloud. Overall, new cloud bookings grew 19% in Q3 and 30% year to date. Now as you may recall, from Q3 2016, we experienced Some seasonality in our cloud business on a smaller base. When you think about SAP's cloud growth, We increasingly see customers pursuing more large scale transformations, which have a tendency to close in Q4. This is another factor in our confidence to deliver a strong full year growth performance of at least, at least double quotes 30% year over year cloud bookings growth And you can expect a dynamite Q4 and very consistent with our year to date growth rate in revenues.
So don't worry about the bookings, relax. It's going to be terrific in Q4. One example of the huge up Sell cross sell opportunity is our reinvigorated analytics portfolio led by SAP's digital boardroom. We posted strong double digit new cloud bookings for growth in Q3. SAP Hybris, our customer engagement solutions, again Achieved strong double digit new cloud bookings growth as well as double digit growth in software revenue.
Harbin Pharmaceutical chose SAP Hybris in Q3. We also announced the acquisition of GIGEA, the market leader in customer identity and access management. This will further enhance SAP's commerce solutions By allowing companies to better manage customers' profile, preference, opt in and consent setting with customers maintaining control of their data at all times. This It's especially timely given the March deadline to comply with GDPR in 2018. We're pretty excited about our unique position to capitalize on that market opportunity.
SAP SuccessFactors So another big quarter with new customer additions. SuccessFactors Employee Central now has over 2 1,000 customers worldwide, up 49% year over year. SAP SuccessFactors was named a leader in Forrester's Research Wave, La Liga, the Spanish Football League and Banco Colombia, the largest commercial bank in Colombia selected SAP's workforce management solutions in the 3rd quarter to deliver unified high quality employee experiences. SAP Ariba now has 3,000,000 companies in 180 countries trading more than $1,000,000,000,000 in goods and services annually on the Ariba network. Whirlpool and Ferrero chose Ariba this quarter.
With SAP Fieldglass, customers manage 4,000,000 Contingent workers in more than 180 countries. Concur helps now nearly 15,000,000 end users effortlessly process travel and expenses. We are proud that Concur's travel management solution helped usher emergency workers to points of dire need in Texas and Florida. FEMA chose to implement a Concur feature called Surge Blanket Travel to deploy 11,000 Federal employees from across the United States in record time. The unifying vision of SAP is to help the world run better and improve people's lives.
Driven by this high purpose, SAP is gaining share everywhere. You can see this clearly in combined order entry, cloud TCV Plus Software. Combine those two numbers, we are up a stellar 15% this year. In contrast to our main competitors report out, SAP is an organic innovation story. We have no benefit from acquisitions in our numbers And we haven't for the last 2 plus years.
SAP is the only company in the business software industry at scale to deliver both SaaS, cloud growth and license growth. SAP's integrated solutions portfolio is really paying off for our customers. Line of business applications and the digital core are seamlessly linked in a true end to end offering across industries for our customers. SAP's innovation agenda also ensures a clear path for future growth. At the epicenter of the digital revolution is SAP Leonardo.
Leonardo gives SAP customers the tools to adopt Breakthrough Innovation for Intelligent Processes and New Business Models. It combines SAP's deep process and industry domain expertise with cutting edge technologies such as IoT, Big Data, Machine Learning, Analytics and Blockchain. You're already seeing LianAuto breakthroughs embedded in SAP solutions from S4HANA to SAP SuccessFactors and SAP Hybris. For example, IoT in tandem with digital supply chain was a standout in Q3, Growing new cloud bookings in high triple digits. Citrosuco in Brazil, which supplies about 25% of the global orange juice market turn to SAP Leonardo together with SAP S4HANA and SAP Supply Chain.
The combination of SAP solutions will connect farms to manufacturing sites and optimize transportation logistics worldwide. Many others, including CITCO Technology Management, Hannon Systems, Al Futame adopted SAP Land Auto Solutions in the 3rd quarter because they want to become intelligent enterprises. With our API Hub and open SAP Cloud Platform, our ecosystem is also incubating new innovations. We're excited that new partnerships will proliferate the SAP platform across the hyperscale public cloud providers. Our successful strategy and execution has cultivated a business model that has never been stronger.
Our more predictable support and cloud subscription revenue is on target to reach 70% to 75% of our total revenues by 2020, right on track. Our desire for more predictable revenue provides strategic flexibility for capital allocation to deliver ever increasing shareholder value. One example, Luca will update you shortly on the progress of our €500,000,000 share buyback plan. Another example is our consistent dividend payout, which remains the best in the industry. SAP's broad global footprint, diversification An ever larger recurring base provide resilience in an uncertain world.
In conclusion, ladies and gentlemen, SAP is evolving from the business system of record to the platform for the digital revolution. Led by SAP S4HANA, we are delivering intelligent business applications built on the most data rich architecture ever created. We go to market with a tightly integrated core with distinctly different industry expertise in each of our 25 industries and we adapt our solutions to every geographic market. Customers are voting with their wallets. This is fueling growth in every corner of the business, which is why we are once again raising guidance for the full year.
I'd like to acknowledge our over 87,000 women and men worldwide for their immense dedication to our customers and our shareholders. Another strong quarter, another guidance raise, A clear path to sustained growth with and I underscore with margin expansion on the horizon in Q4 and beyond, margin expansion on the horizon in Q4 and beyond. For SAP, the best is unquestionably yet to come. Thanks for your interest and all your support. I'll now turn the call over to our Chief Financial Officer, Luka Muchic.
Luka, over to you.
Yes. Thanks very much, Bill, and hello, everybody, from my side. Bill already shared some of our results on yet another strong quarter in our rock solid core business and our fast growing child business. In addition to our overall strong business performance, we continuously have a more predictable business now, now at a 66% share of total revenue for the 1st 9 months of the year. We clearly demonstrated that we are a profitable growth company despite severe currency headwinds.
To get a better understanding of the key factors that made up for this growth, let me go into more detail now. The key metric that demonstrates our performance in new business for the quarter is the strong year over year growth in new cloud and software license order entry, which was up 15%. This growth is indeed a strong achievement, especially when considering SAP's large scale. Specifically to our cloud business, Our new cloud bookings grew by 19% and our cloud revenue growth came in at 27%. We do have visibility into a very robust cloud pipeline and are extremely confident of continued fast growth for the remainder of this year and through 2020.
This quarter, however, we didn't see the linearity we hoped for. As Bill already mentioned, with new cloud bookings in the quarter, we noticed that some customers are attaching line of business cloud decisions to larger S4HANA transformational deals. Because of this, we do expect a much better Q4. And also please remember that new high potential cloud solutions like S4HANA public cloud, SAP Cloud Platform, SAP Analytics Cloud and SAP Leonardo will have more impact on growth as they scale to be a bigger part of the mix. On a year to date basis, we are on track with cloud revenue growth of 28% and new cloud bookings growth at 30%.
Before I continue with software revenue and our regional performance, I want to briefly mention a change in our disclosures. Over the last years, we have been disclosing a number for deferred cloud revenue. That is for the cloud portion of our total deferred income. As you certainly know, we will adopt new revenue recognition rules for January 1, 2018, commonly known as IFRS 15 with ASC 606 Being the U. S.
GAAP equivalent. There is no deferred revenue item anymore under IFRS 15. The new rules instead look at contract assets and contract liabilities, which are not determined on the level of the individual deliverables, but on the level of the entire contract. Whether a contract is in a liability position, an asset position or neither does not depend on when the customer is billed. At SAP, we are now in the final home stretch of migrating our processes and our customer contracts to IFRS 15.
At this point of our migration, we have no reliable way to report deferred cloud revenue any longer. The best way to measure our new cloud business volume as we have repeatedly stated on past quarters is with new cloud bookings, which we of course continue to disclose. In the coming months, we will provide further details around our new disclosures under IFRS 15. Now from a software perspective, As Bill has stated already, we had great success and we grew by 3%. There were 2 main growth drivers.
First, the continuous momentum of S4HANA and the other driver continues to be our customer engagement and commerce solutions, which again shows strong double digit growth. All of this results in strong cloud and software growth at 8% in both the quarter and year to date. Now let me spend a few words on the Q3 regional results. Starting with Europe, we had a really strong performance in the EMEA region with cloud and software revenue increasing by 9%. Cloud revenue grew by 46% with an especially strong quarter in Germany and Spain.
In addition, we had strong double digit software revenue growth in Germany, Russia and the Middle East and North Africa region. We had solid growth in the Americas region despite the natural disasters in both the United States and Mexico. Cloud and software revenue in this region grew by 7%. Cloud revenue increased by 19%. In cloud revenue, Brazil was a highlight, while the United States had a very strong quarter in software revenue.
In the APJ region, we had a strong performance in both cloud and software revenue as well as cloud revenue. Cloud and software revenue was up 9%. Cloud revenue grew by 37%. Japan and Australia were very strong In cloud revenue, for software revenue, Australia had triple digit growth and China had strong double digit growth. Now on to profitability and gross margins.
As you know, we continue to have a revenue mix shift effect between our cloud and on premise business, which negatively impacts our cloud and software margin. Our cloud and software gross margin decreased by 1.3 percentage points year over year. The mix shift impacted this margin by 17 basis points. Our cloud gross margin decreased by 3.3 percentage points, which was lower than we expected. The impact was due to our continued investment in a highly standardized converged HANA based cloud platform and expenses incurred for the ramp up of new technologies such as our S4HANA public cloud.
These investments in In particular impacted our public cloud margin, but to a lower extent, they also impacted our network margin. The public cloud margin declined by 4 3 percentage points and the network cloud margin decreased by 80 basis points. For the private cloud, we also saw a decrease, This was mainly due to an industry wide short term increase in the cost of RAM, which resulted in a year over year increase in infrastructure costs. It's also important to remember that while our private cloud is a lower margin business compared to other cloud models, it is a strong enabler of S4HANA software deals. Thus, with every deal, it also drives high margin software and support business.
And let me be very clear, Our dedicated cloud investments are laying the groundwork for gradually increasing profitability on the way to achieving our 2020 ambition. A highlight in this quarter again was our services performance. Our services gross margin continued its upward trend as expected and was up 5.2 percentage points year over year. This was driven by the continued reduction of co investment projects and a solid top line increase. This strong service result helped us keep our cloud our overall group gross margin stable year over year.
We achieved this result despite the currency headwinds and investments into cloud as mentioned before. Overall, we were very pleased that our operating profit continues to expand with mid single digit growth this quarter. The IFRS earnings per share increased strongly by 35% due to lower share based compensation, on acquisition related charges and restructuring costs. Non IFRS earnings per share increased by 10%, driven primarily by a very strong finance income as our Sapphire Ventures organization had again a very successful quarter. The IFRS tax rate in the Q3 increased slightly to 28.6% year over year, while the non IFRS tax rate in the Q3 was 29 2%, which is down 50 basis points from the prior year period.
We now expect our full year IFRS and non IFRS effective tax rate to be below our previous outlook, which so far was 26% to 27% for IFRS and 27% to 28% for non IFRS. The expected decrease is due to a positive one time tax effect relating to an intra group transfer of intellectual property rights anticipated to be executed in Q4. During the course of the Q4, we will update our of tax rate guidance as soon as we exactly know the effect from the IP transfer. We now overall expect a very strong non IFRS earnings for share performance for the entire year. As promised last quarter, we initiated our plan to buyback Up to €500,000,000 in shares for the second half of the year, Bill briefly alluded to that.
As of quarter end, we have already bought back more than half of that, To be exact and precise €288,000,000 the rest to follow during the course of Q4. And on top of that, we continue our strong cash generation with operating cash flow of more than €4,000,000,000 year to date or an increase of 14% year over year. From a liquidity perspective, our net debt was down to €1,700,000,000 which is an improvement of €2,000,000,000 year over year. Finally, as a result of our strong adoption of S4HANA and our digital business platform, we are raising our outlook for the full year. And we have also updated our currency expectations for the impact on reported growth rates in 2017.
For more details, please refer to our quarterly statement published earlier today. I would also like to talk about a few of our key non financial indicators because they are equally important to us as a management to steer the company. This quarter, we increased the number of women in management even further to 25.2% as our efforts to promote diversity and equality continue. In line with our goal to become carbon neutral by 2025, We reduced our Q3 CO2 emissions by 6% compared to the prior year. And finally, our employees continue to embrace our strategy and higher purpose.
Our employee retention was at a very high 94.2%. So to summarize, we delivered solid top line growth and continue to expand our operating profit. For the Q2 in a row, we have raised our guidance. On top of that, our cash generation and EPS growth remains strong. Our performance, our portfolio and our pipeline make us confident and make me confident that we will deliver on our midterm ambitions.
Thank you very much and we will now be happy to take your questions. Thank you. Operator, could you please start the Q and A session?
Thank We'll now take our first question from Walter Pritchard from Citi. Please go ahead. Your line is now open.
Hi, thank you. Luca, I'm wondering if you could put a little bit more detail around the commentary around margins in Q4 and then directionally for next year. I think the gross margins did come down more than we expected in Q3, but it sounds like you still have the confidence The progress there is on track. And I'm wondering what do you expect to have cloud gross margins in the Q4? And then do you expect that you could get back to or above the levels that you've For the year in 2017 when you get into 2018 with most of the migrations and so forth behind you at that point.
Yes. Walter, thanks for the question. It's indeed an important one. And let me start by saying that I actually have I've been very pleased with the discipline that I've been seeing across the organization in Q3 to absolutely make sure that we bring down the gap Between revenue and expense growth that we have seen in the first half year, that's exactly in line with what we had committed to you. And you see that in the results that our operating margin decline in Q3 has decelerated to only 90 basis points from A year to date performance of 1.2 percentage points, that sets us up for a situation in which I believe that with continued strong expense Discipline, as well as the expected strong business performance that also Bill alluded to, we have now a very decent shot At managing towards a flat margin on a constant currency basis for Q4.
And for 2018, absolutely, the commitment stands That we will start to see improvements in margin, especially in the years 2019 2020. They will be more accentuated. But already in 2018, we should definitely see an improvement here. In terms of the cloud gross margin, you are correct. We as I've shared as well during my comments, we have seen a decline to an extent that It was not part of our original planning.
The reasons are very simple. We see 1 to 2 percentage Points in less revenues from the lower linearity on bookings that we had alluded to. So on the revenue, there is a small shortfall against Our original expectations and on the investment side, we actually have decided to accelerate investments into the converged cloud platform As well as into some geographical expansions where we saw opportunities to make sure that we are at the market earlier than our competitors In such geographies that are opening up to the cloud quickly now in order to seize those opportunities, That has resided in a situation that cloud gross margins in 2017 are a bit lower than expected. But the fundamental Thesis that all of those investments are setting us up to exponential gross margin increases when the investments have been made It's absolutely fundamentally intact. That's why we remain with our midterm aspirations for the cloud gross margin increases across all of the business models.
And that's why Together with the continued operational discipline on, for example, resource additions for the remainder of the year, I believe, we will be set up with the right cost base to deliver the margin expansion in 2018 and you will see this shining through already in Q4. Thank you. Let's take the next question please. Thank
you. We'll now take the next question from Gerardus Voss from Barclays.
Hi, thanks for taking my question. 2, if I may. First of all, Bill, could you talk a bit about what gives you the kind of confidence that cloud bookings will rebound So strongly in Q4. And is there a risk if this line is starting to follow more in line with what we've seen in the past with licenses That Q1 could be more in line with what we've seen in kind of Q3, so we see that same kind of licensees now that you're coming back into that. My second question is for Luka.
Hiring was around the 7 50 employees sequentially. Is this something we should forecast going forward, kind of cost level increase. Thank you.
Well, thank you
very much, Gerardus. I'll start off. First of all, Let me be so crystal clear. I have total unequivocal, unwavering confidence in the cloud bookings for Q4. Let me give you the reason why.
I had an off-site at my home in Heidelberg with all the executive board members And the lowest number we could come up with based on the pipeline that comes out of the digital boardroom, as you know, we run the whole company on S4HANA, The lowest number we could come up with is a number that's in the 30s, okay. We couldn't come up with a low one, we tried. So there's your Q4 confidence With an exclamation point, and I intend to reinforce that at the all hands meeting once we wrap up with you guys and get the whole company fired up to make it happen. So it's going to be a really, really strong Q4 bookings number. Count on it, write it down in big crayon in the bank.
On Q1, I'm especially inspired by S4HANA and the public cloud. We're winning deals everywhere. We have the perfect alignment between the innovation and the field execution now. The brands like Shell coming on board. There's 2 other brands that we'll be announcing in the near future that are global brands of massive significance.
And this is what we were waiting for. We were waiting for the big brands to say, okay, you guys got it. And now for all their subsidiaries, they're buying in on it and we're going to take off like A rocket with S4HANA in the public cloud. Now that was the key thing. Now as it relates to some of the things you worried about in the past with SuccessFactors execution, We really did need to change leaders.
We made that happen. We have a fantastic guy running SuccessFactors now who is a veteran of SAP, And the only soft spot we had there was in the United States. So given the fact that that soft spot is hardening real fast in the United States And we're winning everywhere else. In fact, in Latin America, they can't even get their first deal. I expect the growth trajectory In the line of business cloud, certainly the business network and also the S4HANA cloud to be extraordinarily strong going into Q1.
So we're managing a pipeline on a rolling 4 quarter basis. If you look at these cloud pipelines and you were the CEO of SAP, you'd be sleeping very good tonight.
Yes. And just briefly on your question around the hiring. So yes, you can absolutely expect That also in Q4, our hiring performance will mix at the figures that you have seen here for Q3. We have very, very selective hiring procedures in place and they are exclusively geared towards those areas where we get an immediate Value add. So clearly, in our cloud businesses, in R and D, as well as in sales and marketing, there is absolutely no hiring taking place In any back office functions as well as in the supporting functions outside of the administrative organization.
And hence, this should give you a lot of comfort that we have OpEx under the control as we look for the leverage from the strong top line that we Going into 2018, of course, you have seen in 2017 that we have significant optionality. We will plan for our resource additions in line with the business environment that we see and with the business pickup. But it's clear that we have made our, let's say, timeframe of significant investments in the last 2 years, And you should definitely not expect similar levels of investment as we move into 2018. Okay. Thank you.
Let's take next question please.
We'll now take the next question from Philip Winslow from Wells Fargo. Please go ahead.
Hi. Thanks, Ezra, for taking my question. A question for you, Bill, and maybe Raba and Flynn can chime in too. But you mentioned obviously a greater tie between the cloud aspects of your portfolio and the Sper HANA migrations. And obviously, those were still strong this quarter at Sper HANA and just HANA in general.
Are there any parts of the portfolio in particular that are attaching better than others or that are surprising you? Maybe just some more color in sort of what you're seeing there would be great.
Well, Phil, thank you for the question. Let me give you a real time example. Met with a CEO of a major conglomerate worldwide. This CEO is now switching from competitive products to S4HANA and they in particular informed me that the pricing That they're getting from the best of breed in CRM is up 60% year over year. It's obvious that it's a pricing Strategy, so they have a limited number of accounts and because their portfolio is limited to one slice of the enterprise pie, The best way to increase revenues is to charge more.
So what you're seeing right now is S4HANA asserting its will in the enterprise And customers attaching CRM. So the Hybris CRM story is extremely strong. We own omnichannelecommerce. If you look at Anyone that's looking to go to direct consumer that's running $1,000,000,000 or more in revenue to go on Ibrance. And now what you're seeing with us for Ohana As you're seeing, sales, marketing and omni channel e commerce in particular attaching to the S4HANA story.
So I think we have a really, Really impactful position now. And I think the best of breed, just like Phil, you'll remember in the early 2000s when the big ones got good enough, The pricing pressure on the small ones increased because the customers weren't going to pay these exorbitant increases and then we start to gain share. Also, Aside from CRM, you're seeing this in HCM. Under leadership of Rob Enslin, he can comment more on it. He put Greg Tom in the HCM job.
We have an enormously innovative leadership team in SuccessFactors now as we reinvented the user experience, Especially using our partnership with Apple and the beautiful design on the mobile, we have made it so simple for the knowledge worker to do their job and so beautiful. And then finally, on the attach rates on Leonardo, you're seeing digital supply chain growing in triple digits. So it's one thing to have a single view of the consumer and make a promise where you know her in every channel and every device, But it's another thing to fulfill in the content supply chain where you're getting the sourcing down right, you're building the product the right way And you're provisioning against the promise in real time. And only HANA and S4HANA and our cloud assets completely synchronized and integrated Can do this for customers in 25 distinctly different industries. So I really feel like we're just warming up.
Thank you. Next question please.
We'll now take the next question from Chandra Sheeraman from MainFirst.
Hi, good afternoon. Thanks for taking my question. Just a couple, if I may. First question is, I mean, I do understand your thoughts on the volatility in the bookings number. So how do we see this for 2018?
Should we expect something closer to 30% growth for the year? Is that something that you internally model? And my second question is on the Private Cloud business. The gross margins dipped obviously and you mentioned it's due to the prices of DRAM. So how do you see this in the medium term?
Will the margins of this business still be at the mercy of The hardware prices, how should we look at it over the next 3 years? Thanks.
Well, Chandra, thank you very much for your question. Allow me please to start on the cloud growth and then Luca will take the second part of the question in the private cloud. So when we built our vision for 2020, We built a solid plan that had the 30% plus growth rate in the cloud built into it. We are not changing or moving off of that number. That is our number.
And again, with the assets I spoke of earlier really Ramping up quickly, that is the number you can use in your models as well. We're very, very confident. Luca?
Yes, I can certainly confirm that knowing my spreadsheet. This is what we put in here. But and of course, we're not using spreadsheets. My Esperanza is, excuse me. But in general, on the gross margin, first of all, Yes, this is a short term impact.
We believe there has been a short term contraction of available capacity And that has resulted in this cost spike. And we definitely plan for this to dissipate until the end of the year and that we enter 2018 with more normal cost projections again, which again have us for our Infrastructure as a Service business with Essential expectation for further gross margin increases as we have demonstrated it over the course of the last 2, 3 years. Bernd Leuchat, who is with us on the call And his team, Dilip, who's running the AGC business, are extremely focused on this. Actually, the Cost of operating systems has come down tremendously through the course of 2017, and this Setting a great basis of operational excellence together with our optionality against the usage of hyperscale cloud providers as part of our offering to deliver further gross margin expansion. Bernd, any further insights you wish to provide?
But I'm very bullish around HANA Enterprise Cloud and the as margin increases. Now Luca, I just can confirm what you said.
I mean, the growth in the private cloud Continuous as planned. It's a fast growing business. We are even according to our internal The cost of operations ahead of our plan year to date. Yes, we had this one time dip with some Extra automated prices for hardware, which we had to pay, but we got signals from our suppliers that this was a onetime effect. So In that aspect, there should be no concerns at all.
We will drive that growth, and we will drive it to even bigger profitability towards 2018.
Thank you.
Great. Thanks. We'll
now take the next question from Adam Wood from Morgan Stanley.
Hi, Bill. Hi, Luca. Thanks for taking the question. I've also got 2, please. And just first of all, coming back to the cloud growth and that sustainable growth out to 2020.
Could you maybe just dig in a little bit on the main drivers of that? Is it that you think that this is going to be products like Ariba and Conquer selling better into the SAP installed base as we have the converged platform on HANA We got a better integration of them. Or is it more going to be some of the smaller products today, S4HANA, public cloud, hybrids, etcetera, Scale up, any building blocks you can give to justify that 30% would be really helpful on the product side. And then maybe just coming on to the margins on the cloud, And this is probably a little bit more for Luca. Is there any way you could help us on the scale of the costs that you're bearing this year in terms of running dual infrastructure and so on and how those fall away because clearly there's a big gap for you below 60% on the gross margins versus peers up at 80.
As those fall away, can we expect those to ramp up quite quickly as we get the benefits of the investment and the leverage? Thank you.
So maybe I'll go Adam, it's Robert here, just on the confidence we have in our cloud business. The first thing I would tell you is that what we see with S4 public cloud and the combination of our communication around the digital core Is that customers are really looking for a company to answer where they want to go with digital. And they are clearly looking to SAP to provide that. And what we've done with the integration, the integration between the lines of business, we see a unique opportunity to elevate that. When you add the machine learning capability with Leonardo on All of a sudden you start to see some tremendous value that they have not been able to see before.
And I believe we've answered the complex question of How do we analyze data that doesn't exist inside SAP's organization and bringing it in? So having said that, overall from a digital point of view, I think we have by far the best story in the market. The Only one that actually will deliver the value that these customers are expecting. We're seeing that with transformation deals coming into the pipeline. And then secondly, when I look at where we are with SuccessFactors, the new UI, the 41 countries with EC Payroll, The team we have in place right now, I see a huge upside on success factors.
Fieldglass and Concur is simply just growth everywhere. It's a matter of actually articulating that growth and going after that growth. And then the combination of what we're doing with Ariba Fieldglass and Concurrent Spend Management, You will see we will change the game around in terms of how people look at SAP. Lastly, hybrids and I came just came from the hybrids conference in Barcelona And there's no doubt in my mind now together with the acquisition of Giga that we will own the golden customer record, which means we will control the front office. And with that, we will give the end to end digital supply chain that these customers want for transformation stories.
So I think we have never Ever been in a situation we can honestly deliver on the full digital piece that customers want. And the last piece is SAP Cloud Platform It's really changing the game when it comes to platform as a service and connecting the dots in this cloud services world and we've seen tremendous uptick In that as well. So I think we're in the best shape we've ever been in the cloud. I think the SAP employees understand it. I think our customers get it now.
And I think 2018 is going to be a crazy good year for SAP.
Yes. And maybe in terms of building the staircase So of the different expense impacts then to the gross margin improvement potential in the cloud, LM. First of all, The pure duplicate infrastructure costs that we currently have are somewhere in the mid double digit €1,000,000 range on a per annum basis. On top of that, you have then once you have the converged infrastructure in place, a much better ability to automate Certain tasks and put them under harmonized procedures, which will help you especially on the personnel expense side of the house in terms of At the moment, close to 2 thirds actually of our expenses in cloud delivery are human costs. And once you have the converged infrastructure, you can put this into much more efficient shared service models than running it for every one of our LOP separately.
So this is probably another similar level of impact. And the further effect upside of those, let's say, Low triple digits that you get through those measures are then the scale benefits as we further increase the size of our cloud business And then benefit from a better leverage of customer additions to our infrastructure. That's kind of high level the improvement potentials that we have Short term with the duplication, which will be running its course next year and then with the ancillary automation as well as the Scale benefits that we can benefit from especially in the years 2019 2020.
I appreciate that granularity. Thank you very much.
Thank you. The next question please.
The next question comes from Michael Briest from UBS.
Thank you. Good afternoon. Bernd, it's maybe one for you in terms of the migration of SuccessFactors to HANA. Can you say what proportion of the SuccessFactors customers today are running on the new platform? I think it was available from October 2016.
And then when do you expect that migration to be completed? I think it was initially expected to be the end of this year, but it's now sometime In 2018. And then, Luka, one of the targets on the journey to 2020 was that in 2018, licenses would be smaller than cloud. Currencies have bounced around. And I think, frankly, for most of us, you've done a better job on licenses than Maybe we expected in 2015.
Are you still happy with that target? Do you still think that licenses should start to decline? Or do you now have a more positive view? Thanks.
Yes. So this is go ahead. This is the first question.
So the SuccessFactors, Michael, We are 1 third of the way through the SuccessFactors conversion. All new customers go on to the HANA platform. They get all of the latest crazy good You are with what we've been able to do there. And we will be complete with that movement by September of 2018.
Yes.
And on the question around license being overtaken by cloud, you're absolutely correct. We have been doing very well in licenses. Of course, we will give you an exact guidance outlay When we enter the earnings for Q4 and then give out the guidance for 2018, but the thesis that Cloud will actually surpass licenses in 2018. It's still intact, so you can expect this to happen next year.
Thank
you. Thank you. Next question please.
The next question comes from Alex Thal from Deutsche Bank. Please go ahead.
Yes. Hi. Thanks for taking the questions, guys. So maybe one for Luca. Based on what was just said about the state of the migration of SuccessFactors.
It doesn't sound like we'll be off the out of the dual running scenario until something like the Q3 of next year. So I mean, are we unlikely to see much recovery in the cloud margin Before that point and therefore, not much overall operating margin expansion Until that point. And then just on the revenue growth side within the cloud, we had 38% Cloud bookings growth in the first half. Cloud bookings growth was also strong in the second half of last year, But we've seen revenue growth decelerating in the cloud business. Can you just talk about that disconnect between bookings and revenue growth?
And Yes, why and when that should normalize? Thanks.
Yes. Let me maybe cover that because it's a more technical question on the revenue side as well. The main reason is that you need to remember that our new cloud bookings don't include everything that drives the cloud revenue growth. They don't encompass the network transactional based, volume based billings that are purely pay as you go. And while this is a very, very healthy business at very high margins, it indeed has not only this year, but also last year, Slightly trailed on the growth on the new cloud bookings as well as the user base subscription revenues that we are driving.
And that's the key reason why you see this gap, so to say, between the new cloud bookings growth and the revenue growth. On 2018 and the plans there. Look, it was clear for us from quite some time that parts of our portfolio, especially Ariba would take until the end of 2018 to be transformed. And in terms of the overarching assumption for 2018, We have also been clear that the progression both on cloud gross margins as well as on the total operating margin side We'll be there, we'll be visible, but it will be further and more accentuated in 2019 2020 when those migrations have Completely taking place. So you should not, when you build the staircase from 2017 to 2020, assume a linear progression.
You should assume that we are coming close to or hitting the constant currency margin Flat line in Q4, then you should expect to see a moderate expansion in 2018 and then a much more pronounced Expansion in 'nineteen and 'twenty. And as you said rightfully, the key lever for that is the increased cloud efficiency that we will have Got it once the 2018 migrations have completely taken place.
Thanks. Thank
you. Let's take the next question, please.
The next question comes from John King from Bank of America Merrill Lynch. Please go ahead.
Yes, thank you. Actually, it was a follow-up on something just mentioned actually, Luca. But maybe more fundamentally about the book to bill period that you are Seeing in the cloud, I appreciate there's also the fact that Ariba isn't in the bookings number. But if you think about the deals, I guess, overall getting larger, Maybe more Q4 weighted, more platform based. Does that potentially also lead you to Seeing a greater book to bill period in those bookings, perhaps just talk about how that might look and how the deployments are actually running for some of those larger cloud wins that you've had.
And then the second one perhaps for Rob. The Infrastructure as a Service revenue, I think was A little bit it didn't really grow quarter on quarter, which I think is, I suppose, surprising given how strong the licenses have been. So perhaps just talk about whether there's any one off issues there or why the infrastructure to service wasn't growing a lot quarter on quarter? Thanks.
Yes, maybe on the first question, you cannot really infer a big change here, because First of all, the business models are, while they are vastly different, they actually also have a much different profile in terms of how you Build up the billing like on the user based business models around SuccessFactors, you typically And have an annual upfront billing that happens more or less right after you sign up the customer, whereas in businesses like in Ariba Or also in FIBELA, we have a much more constant billing cycle that is going on. So if you have changes, so to say, between those different business lines, The same will be true for SAP Cloud Platform, for example, where we're also going to volume based billing based on metering. You will have a Much more velocity in the billing cycles on smaller volumes basically. And that will, to the same extent, build up a higher volume machine As we add more high volume deals, so to say, as part of these attached plays, so I don't think that this will change fundamentally The behavior in terms of the book to bill performance, but of course, all of this is really highly dependent on those different solution performances, which can vary from a quarter to a quarter.
So, I wouldn't feel comfortable making here an exact prediction at this Rob, question on infrastructure service. Rob?
Yes, sure. I mean, I think infrastructure, as I said, is Pretty easy to answer. The linearity was a little off. I mean, you're going to see it with some of these big transformation deals. We will have a big Q4 When it comes to infrastructure as a service, so a little lumpy in Q3, big Q4 and still remains an amazingly strong business as Customers want to run the full SAP S4 portfolio.
Okay. Thank you.
Two more questions, please.
We'll now take the next question from Pat Walravens from JMP Securities.
Great. Thank you. Bill, I would love to drill down a little more on your thoughts about cloud consolidation. You mentioned consolidation in the enterprise due in part to price and we've been hearing that too. But does that mean that The best of breed cloud companies get acquired.
And on that same note, you mentioned a bunch of companies I used to cover, PeopleSoft i2, JDA, Manugistics. And they all got thought, but it took a long time. It took like 8 or 10 years. So just Love to hear if we see M and A and how long you think it takes.
Yes, Pat, thank you for the question. And as you rightfully point out, It took a long time, but it was a painful ride down for all those companies, wasn't it? If you look at the high end of our market cap, The spiral down was quite long and quite painful, and the purchase price of those companies was Probably about 90% less than their high points on the market cap after they took a beating in the marketplace. So What I think is going to happen is nobody in their right mind would buy these companies at their current market cap. So it's going to be a hand to hand combat for a while.
And as their price points start to decline and S4HANA asserts its will in the enterprise and these attached deals become more and more The future for CEOs. Like I met with the CEOs and they tell me why we're even having this debate. Why would we go with a different HCM system? Why would we go with a different CRM system? If you guys can actually do it and you can help me run simple and take a lot of cost out of the equation, what am I missing here?
And I said, well, what you're missing here is you have independent sales processes going on across lines of business in the company. And that's why you have so many systems and so much complexity. And if you want to pull one string today to take like 15% cost out of the equation, Just pulled the spend management and we'll wheel in Ariba, Concur and Fieldglass. And by the way, I could attach Fieldglass to your HCM And now you're managing the total workforce because your workforce is 40% third party temporary labor. You think you should keep control over that or just let it run wild?
So once you have the more complete conversation at the top of the house, it's quite clear that this will be the prevailing strategy. And since we operate well at high altitudes here and we now have a well trained, well led Cloud and network force, including S4HANA in the cloud, which I think is going to be the ultimate force in the enterprise. I just don't see the future for those companies as bright as their past. Now and I also underscore that with I don't see anybody Rolling in there with the bankers and a big check because what are you buying? You're buying the problems I just gave you And you're buying at an extraordinary high valuation.
So we won't be showing up for those meetings, believe me.
Okay. Thank you for that.
Thank you. So let's take the last question, please.
We'll now take the last question from Ross MacMillan from RBC Capital Markets.
Thanks so much. Actually, Bill, I wanted to touch on S4HANA public cloud. You've Clearly showing your enthusiasm on that product. You highlighted Shell and other big brands to come. So I guess I'm just curious, you've had A strategy this year of ensuring customer success, which I think has meant you've had a somewhat Let it go to market action.
Can you just talk about when you sort of fully unleash that product in the market more aggressively and How we should think about the potential for that business to grow over the next 2 or 3 years? Thanks.
Ross, you read the situation perfectly. We had a very controlled environment for the product. We wanted to make sure that we had Net Promoter Scores that were like off the charts that the customers were all happy that every single one of them was referenceable. And since we've now achieved that goal and went into triple digit customers in the public multi tenant cloud and the functionality and the capability is there, And you guys have given us permission to basically run the company to be The ultimate cloud company powered by HANA. What I mean by that is, there's no artificial reason inside of SAP where anyone is just going for an on premise sale.
If the customer wants to rent something in the public multi tenant cloud and that's in their interest, You guys know how the math works. You wait a little longer for your money, but it's much more recurring and predictable, and we both love that business model. So we're going forward with everything we have. So when will you see major scale? 2018, because we'll be in a new operating cycle.
We'll tie everything into the guidance story. But in terms of the product, it's got the capabilities it needs. It has the referenceable customers. The big ones now are falling right into place, and I believe that's going to be a runaway growth story. And I also believe strongly That's a line of business cloud with HCM and CRM and the business network story that we've been telling now and getting very good at With the leadership of Mr.
Robert Enslin and the field that we're putting in front of our customers is going to really start multiplying in full force. And that's what's going on. I'm very confident in the S4HANA public multi tenant cloud offering. And when I look at the competitive Brands out there, just look at how old those architectures are. Just look at how old those ideas are.
Just look at the sales force that's selling them and the cultural conflict that you have between the bigger side of those companies and the smaller side of those companies. So I love where we're at right now.
Thanks, sir.
Thank you very much. This concludes Thank you all for joining and goodbye. Thanks everybody. Thank you.