Good day, ladies and gentlemen, and welcome to the SAP Q2 Earnings Conference Call. For your information, this conference is being recorded. At this time, I would like to turn the conference over to Stefan Gruber. Please go ahead, sir.
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 Q2 2017. I'm joined by our CEO, Bill McDermott and Luca Lutisch, our CFO, who 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 Dan Bloikot, 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, intend, may, plan, Project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward looking statements. SAP undertakes no obligation to publicly update or revise any forward looking statements. All forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully In our filings with the U. S.
Securities and Exchange Commission, including SAP's Annual Report on Form 20 F or 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 the date. On our Investor Relations website, you can find our quality statement, the half year report and the financial summary slide deck, which are intended to supplement our prepared remarks today and include a reconciliation of our non IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non IFRS And growth rates are non IFRS as reported. The non IFRS financial measures we provide should not be considered as a substitute for Also, Peer 2, the financial the measures of financial performance prepared in accordance with IFRS.
With that, I'd like to turn things over to our CEO, Bill McDermott.
Thank you very much, Stefan. Hello, everyone. Our strong Q2 is the latest in SAP's 8 year run of profitable growth. We're ever consistent in our strategy to be the most innovative cloud company powered by SAP HANA. This strategy is validated by fast adoption of S4HANA and our full portfolio of cloud solutions.
Allow me to share some highlights on Q2. We continue to lead the business software industry with a consistent trifecta of strong software sales, fast growth in the cloud and operating income expansion. Our total revenue grew double digits in the quarter. And please note, this is all organic As we had no material acquisition in the last 12 months, in fact, we haven't had a material acquisition in more than 2 years. We're not aware of any other mega cap software company that's growing as fast as SAP.
We expanded in every region of the world with businesses of all sizes. Operating profit was up 4% on top of exceptional profits in the prior year. Our IFRS operating profit reflects the continued success of SAP share price. Every €1,000,000 in share price growth translates to €20,000,000 in impact On our operating income, it's kind of a happy investment though to have inspired people, especially in a global economy with such a war for talent. Based on our sustained strong growth and cash generation, We are pleased to share SAP's success with our shareholders by initiating a share buyback.
We have confidently raised our guidance for the full year as well. Let me give you some color on our strategic growth drivers. Driven by S4HANA, licenses sales grew 5% beating a record Q2 20 team and exceeding every expectation. S4HANA adoption grew to more than 6,300 customers, up over 70% year over year. Global companies like Duke Energy, Carrefour Belgium And Mercadona selected S4HANA in Q2.
Google and its parent company, Alphabet, Have chosen to work with SAP to drive operational excellence in treasury and IT management by implementing these functions on SAP S4HANA running on Google Cloud. Google expects improved efficiency and finance operations and greater transparency through real time insights. We also announced at SAPPHIRE that we have expanded our co innovation partnership with Google Cloud to deliver integrated cloud solutions for our customers. Many other leading companies also went live on Sfour in Q2, including ENGIE and Bloomberg. S4HANA is the number one and fastest growing cloud ERP solution in the market hard stop.
We're growing new cloud bookings triple digits and we see an enormous pipeline going forward. Customers are going live with Sfour Cloud in as little as 6 weeks. Deloitte selected Sfour Cloud in Q2 among many other Signature Companies. Centrica, a multinational utility company, is using S4 Cloud As the digital core along with an IoT solution running on SAP Leonardo, this is SAP integration at its finest. Overall, new cloud bookings grew 33%, while cloud revenue was up 29% in Q2 and 31% in the first half.
Led by SAP Digital Boardroom, our reinvigorated analytics Portfolio posted triple digit new cloud bookings growth in Q2. SAP Hybris, Our customer engagement solutions again achieved strong double digit new cloud bookings growth as well as double digit growth in software revenue sales. KaiserCompsorin, Price Right Stores and the NHL All chose SAP Hybris in Q2. SAP SuccessFactors, we saw another big quarter with new customer additions. SuccessFactors Employee Central now has over 1800 customers worldwide and that was up 48% year on year.
Analysts recently gave SAP the highest rankings in cloud HCM for core HR For any global organization that has more than 5,000 workers, there's a lot of them. Vitra AG selected SuccessFactors Workforce management solutions in Q2. E and J Gallo Winery is among many choosing SAP Fieldglass Flexible Labor Solutions to address the total workforce. SAP Ariba now has over 2,800,000 companies In 180 countries trading nearly US1 $1,000,000,000,000 in goods and services annually on the Ariba network. IBM, Hong Kong Electric and Swiss Post all chose Ariba this quarter.
Saudi Aramco also selected SAP Ariba and will connect thousands of suppliers in Saudi Arabia. Concur helps more than 49,000,000 end users effortlessly process travel and expenses. Big brands like Embraer chose Concur last quarter. Let me be intensely clear. The Internet of everything requires hyper connectivity on a global basis.
SAP's business networks lead the industry, connecting not only our customers, but also our competitors' customers. It is the world's network. The results make it perfectly clear. SAP is gaining share against our competition. Cloud and software Powered to 9% growth in the quarter, significantly outpacing our main competitor even as acquisitions benefit their results.
We believe SAP is the only company in the business software industry at scale to deliver both fast growth in the cloud and core license growth. This is because SAP takes a much more customer centric approach to the transition in the cloud, protecting legacy investments while offering the most complete vision for the cloud. The breadth and depth of SAP's end to end portfolio is the clear differentiator. SAP's innovation agenda ensures a clear path to future growth. With our API Hub and open SAP Cloud Platform, Our ecosystem is actively incubating new innovations.
We're excited that new partnerships will proliferate The SAP platform across the hyperscale public cloud providers. At the epicenter of the digital revolution It's SAP Leonardo. Why? Because Leonardo integrates breakthrough technologies such as AI, Machine Learning, Big Data, Analytics, IoT and Blockchain. Customer interest in SAP Lianado is really high.
As you know, there was well over 20,000 SAPPHIRE attendees this year from 4,600 companies And they all experienced in some form the potential of Leonardo. Nearly 1,000 customers in 48 countries Breakthrough innovation going beyond the proliferation of prototypes in the enterprise. That's why leading companies such as Google, Deloitte, Aldo and Centrica are all collaborating with SAP to build new capabilities, reimagine business models and accelerate digital transformation with SAP Leonardo. SBB, AG Enroge adopted SAP Leonardo IoT Solutions in the 2nd quarter. Zim, a leader in global container shipping is embracing SAP Land Auto to reimagine their business and create the Airbnb for the container space.
The autonomous province of Bolanzo, Italy is partnering with SAP to develop personal ID document authentication with SAP Blockchain Solutions. All of this is being delivered to our customers through the design thinking and innovation approach that SAP has scaled globally. 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 total revenue by 2020. Our sustained growth and cash generation provides strategic flexibility for capital allocation to deliver shareholder value. One example is the share buyback we just announced.
Another example is our consistent and attractive dividend payout. It's clear that SAP remains a strong, reliable investment in an uncertain world economy. In conclusion, everything about SAP's business is best in class. It's integrated and focused and it's delivering on the shareholder value promise. We're building great products, telling a great story, Delivering a great service and most importantly building a great team.
We also are just getting started. With more than 80% of our ERP customer base still in the S4HANA pipeline, the upside is amazing. Our company has never been stronger, more engaged and more inclusive. In fact, we have reached our goal of having More than 25% women in management positions across SAP. It's an important milestone, But we will not stop.
We are pushing on to attract and promote the best talent in the IT industry. Today, we announced a new goal of achieving at least 30% women in management by 2022, a goal that I expect us to surpass handily. With a strong start to 2017, the momentum is with SAP. Therefore, we are confidently raising our guidance for the full year. With our first half hiring complete, We will recognize the productivity of that hiring throughout the second half of this year and we will benefit from a nice, Stable, well trained employee base, that's leverage.
Overall, we've never been better positioned. But I also remind our company as I do all of you, we are never complacent. We understand that the customer is our true north and always will be. So therefore, I'd like to acknowledge, recognize and thank The 87,000 women and men of SAP Worldwide for their immense dedication to our customers and our shareholders. For SAP, the best is yet to come, a sustainable growth company for the ages.
Now, I'll turn the call over to our CFO, Luka Muchic. Luka, over to you.
Thanks a lot, Bill. Bill already shared some of our results on yet another Excellent quarter in our core and cloud business as our profitable growth story continues. In fact, our cloud and software revenue Growth rate in the first half of the year was at the upper end of our full year guidance range with 8% at constant currency. Fueled by our overall strong business performance, we continuously strive for a more predictable business, now at 66% for the first half of the year. In addition, our total revenue grew by double digits.
So to now get a better understanding of the key factors that made up for this exceptional growth, Let me go into some more detail. Firstly, our committed future cloud revenue, our new cloud bookings has grown by 33% And our cloud revenue growth came in at 29%, marking the 17th consecutive quarter with consistent rapid growth in the cloud. Our strong and complete cloud offering is the source of this dynamic growth. We have the power to scale each of our cloud components. And the nice thing about this is that all of these are seamlessly linked to our digital core, providing a real end to end offering to our customers.
And they highly value this offering as reflected in our great results. Secondly, I would like to call out 2 highlights from our outstanding software performance. 1 is obviously the continuous momentum of our Whether we look at our suite, HANA as a database or our industry and line of business solutions, All of these are big growth drivers. The other highlight is customer engagement and commerce, which again showed double digit growth, essentially driven by our success with SAP Hybris combined with SAP S4HANA. All of this led to continued software growth.
And on top of a strong previous year quarter, software increased 5% and support revenue continues to be strong likewise, also growing by 5%. So to summarize, our core continues to be rock solid. Another indicator for our outstanding performance in our cloud and software business from our software license business plus the total contract value from our cloud business. This exceptional growth is a strong achievement, especially considering SAP's large scale, underpinning our success in the market with our unique portfolio. Our fast growing cloud business, in fact, now already makes up almost 50% of our total order entry.
Let me come to the Q2 regional results now, starting with EMEA, where we had a strong performance with cloud and software revenue increasing 9%. Cloud subscriptions and support revenue grew 48% with an especially strong quarter in Germany and Russia. We also had double digit software revenue growth in Germany and the Middle East and triple digit software revenue growth in Russia. We had solid growth in the Americas region with cloud and software revenue growing by 8% and cloud subscriptions and support revenue increasing by around 20%. In North America, Canada had double digit growth in software revenue.
In Latin America, Mexico and Chile where highlights with double digit software revenue growth. In the APJ region, we had truly an exceptional performance in both cloud and software revenue as well as cloud subscriptions and support revenue. Cloud and software revenue was up 13% with cloud subscriptions and support revenue growing by 52%. China was very strong in cloud subscriptions and support revenue, while Japan and Australia both had strong double digit growth in software revenue. Let me come to the bottom line.
Let me first be very clear. From a profitability standpoint,
We
have been all the way through the year very clear on what our priorities are for this year and how this will impact the overall gross margin. We continue with conscious investment decisions in 2017, and we will still see mix shift effects. I would like to provide more details about the most important effects this quarter. First, our cloud gross margin decreased by 2 point 4 percentage points to 60 2.4% and was the primary reason for the overall gross margin decline. Remember, the majority of our investments are in our public cloud business.
Our decision to invest in a new data center in the Middle East is yet another perfect example of how we are getting ready for future growth. This, of course, put additional pressure on the public cloud margin, which was 57.6% in Q2 if you back out our highly profitable Business Networks business. As we strive for running each and every business more effectively and efficiently, we continue to see improvement in the margin of our Private Cloud In addition, cloud revenue has a higher share of our total business, which finally weighs on our overall gross margin. Consequently, our cloud and software gross margin was 81.8%, a decrease of 1.8 percentage points year over year. The revenue mix shift effect between our cloud and on premise business negatively impacted this margin by 70 basis points.
All these gross margin effects continue to weigh in our overall operating margin for this year. But finally, let me reiterate that our dedicated cloud investments in this year set us up for margin expansion for 2018 and beyond. Elsewhere, our services gross margin continued its very nice upward trend as expected and was 23.5% for the quarter, which is a 5.6 percentage point year over year increase. This was driven by the completion of previous investment projects and a strong top line increase. Our operating profit continues to expand.
With mid single digit growth this quarter, we were pleased with the solid performance. Our continued bottom line success here comes even as we invest heavily in our cloud operations in certain areas as well as geographies And as we have higher personnel expenses from adding over 7,000 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es or a 9% increase compared to the prior year period. We continue to have success in hiring highly educated young talents in our past growth areas and locations. But as Bill has outlined before, That hiring has run its course for 2017 now, and we will take full effect of the resulting leverage that we'll get in the second half year. Let me now talk about our IFRS operating profit.
As explained last quarter, we started a restructuring program in our services organization. In addition, due to the strong increase of our share price, the share based compensation increased as well. Both factors are the reason for the marked line of our IFRS operating profit in the 2nd quarter. The same factors impacted IFRS earnings per share, which decreased by 18%, Whereas non IFRS earnings per share increased nicely by 14%, driven primarily by a favorable development of our effective tax rate. The IFRS tax rate in the 2nd quarter was 26.6%, which is a decrease of 2.3 percentage points year over year.
The non IFRS tax rate in the 2nd quarter was 27.8%, down from 29.6% in the prior year period. Now finally to 2 very positive developments. Let me first start with cash flow and liquidity. Phil has said this already. Based on our very strong growth and cash Generation, we are pleased to share SAP's success with our shareholders by initiating a share buyback of up to €500,000,000 in the second half.
This is on top of our dividend payment of €1,500,000,000 this year, which already represented a strong payout ratio of 41%, in line with our attractive dividend policy. Operating cash flow was €3,500,000,000 an increase of 20% year over year. Free cash flow increased 15% year over year to €2,900,000,000 At quarter end, net debt was €1,800,000,000 an improvement of €2,500,000,000 year over year. 2nd, as a result of our strong overall position Pipeline, we are raising our outlook for the full year. 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. So what should you all take away from this call? To put it in short terms, SAP is the best positioned company to shape the digital enterprise. Our cloud growth is fueled by the breadth and completeness of our cloud offerings. All our products are linked to our S4HANA digital core, providing a real end to end offering to our customers.
Before closing, I would like to talk about our non financial indicators where we have seen a very strong performance as well. Bill already mentioned achieving our goal of increasing the number of women in management and obviously our efforts to promote diversity and equality continue. In line with our goal to become carbon neutral by 2025, we reduced our 2nd quarter CO2 emissions by over 40% compared to the prior year. And finally, but very importantly, our employees continue to embrace our strategy and higher purpose. Our already high employee retention rate Rose again to 94.3%.
That's less than 6% fluctuation rate, definitely leading factor in our industry. So to summarize, we delivered a strong Q2 and first half, showing strong growth and great execution. Our continuous expansion of our profit and our strong cash flow generation help us drive both customer value and shareholder value. We are extremely well positioned for success through 2020 and far beyond. Thank you, and we will now be happy to take your questions.
Thank you. Operator, we can now start the Q and A session, please.
Thank you, sir. We will now take the first question from Kirk Materne from Evercore ISI. Please go ahead.
Yes. Thanks very much and congratulations on the strong start to the first half of the year. Bill, I was curious, you guys Obviously, you have
a very broad view of the world.
And when you look at your pipeline, do you think the pace of technology disintermediation we're seeing in industries like Retail is accelerating enterprise decisions around digital transformation projects. And I'm just wondering if the scope of those projects It's getting bigger. I realize it's
a little bit of a
higher level question, but it just seems to me that bigger companies are having to make bigger decisions around digital transformation and you all would
And also for the question, it's a really important question. Every single company we do business with is in the midst of a digital transformation. Every single business needs to get control of their data. They want to have a single view of their consumer. And obviously they need not only to know what's going on in the transactional world, but they also have to know what's going on in the social world.
In retail in particular, this is really big because it's a fight for survival. The digital competition knows no boundaries. So the digital world can move across geographies Very quickly, so the core companies in retail now are, yes, redesigning their processes, Rethinking their data models and they are partnering with companies like SAP to help them Compete and in some cases even survive. So one of the interesting conversations I had yesterday I was with Gartner, one of my favorite analysts that I worked with when I was the President of the Gartner, and we talked about the concept of having your head In the business of digital transformation, but even more your heart. And by having your heart In the game, you have to make change really quick and you have to overinvest in the cloud and overinvest in Again, this digital consumer, because if you don't and you hold on to the legacy business model, you may not be around too long.
We will now take the next question from Charles Brennan from Credit Suisse.
I've got One question on the cloud and then just a clarification. If I look at the cloud revenue growth sequentially, it looks like it slowed down marginally in the second quarter. I guess it's quite a small change in momentum, but it does come at a time of Management Change. So I guess the questions are, firstly, are you confident that you can sustain the 30% growth rate as that business scales? Secondly, are you confident that with the departure of Steve Singh, the management position of the cloud is still robust?
And thirdly, can you just give us some metrics around the bookings duration? Obviously, the year on year growth is strong, Can you talk about duration? And just as a clarification on a separate issue, Luca, you talked about Confidence in margin expansion for 2018. Can you just clarify whether you're talking about cloud gross margin specifically there? Or is that a group wide comment?
Thank you.
Thank you so much for the question, Charles. I'll start it off and then hand it over to Luca. So, 1st and foremost, on the cloud, the bookings and the revenue don't even spend a moment on it. Basically, when you book the software, Obviously, you're booking the contract and that will go into revenue to be recognized. The revenue that's actually recognized has something to do with Timing and timing in the quarter for sales and so on.
And some of these sales happen to have been a little bit more back ended than usual. The pipeline for the cloud is fantastic. The 30 plus percent cloud growth and the pipeline to support that is ever intact. The business looks really, really strong. Now as it relates to change in the quarter, Obviously, we appointed 2 new executive board members to run our global customer operation.
I can tell you that they have settled into the job Amazingly well. As you know, they're well regarded leaders, have been with us for a long time and they're doing fantastic. Rob Enslin, Who ran our global customer operation was the executive that backfilled Steve Singh and as you know Rob has spent His career with SAP. So the stability, the consistency is really perfect. And just to show you The class of SAP, I next week along with the Executive Board will be flying out to Seattle to have a going away party for our great friend, Steve Singh.
So this hotel when you check into SAP, you don't check out, like we're friends for life. And that's the kind of company we are. Now as it relates to the bookings and some of the technicalities, Luc will handle it.
Yes. Okay. Here's First of all, on the bookings duration, what we have in our new cloud bookings Is the figure for our so called average annualized contract value in the cloud? So our actual growth In what we call total contract value has actually been substantially bigger than that. Why is that?
Because also our average duration of contracts has been going up. And that you see on the new cloud bookings, so that should give you also a lot of confidence that our cloud business, not only for the short term but also for the years to come, And in terms of the margin expansion, I meant that in both dimensions.
So what
you should I think for the year 2018 and going forward is, of course, continued progression on our HANA Enterprise Cloud Infrastructure as a Service gross margins. You should expect that the business networks area will continue its very steady march Towards the 80% gross margin target that we have set for this business for 2020 and where they are anyway already in striking distance of that. And then in our Software as a Service and parts business outside of the Business Networks Group, there should be a very pronounced rebound of the margins as our investments to converge cloud infrastructures into replatforming our flagship solution success factors on our HANA technology And our data center consolidation are going to be largely finished by the end of this year. So here, you should see absolutely a strong increase. And that will also in our projection flow through to the operating margin level.
So it's really on both levels. All right.
Thank you.
Let's take
the next question please.
We will now take the next question from Philip Winslow from Wells Fargo. Please go ahead.
Bill, we can't hear you.
Okay. Can you hear me now?
Now we can hear you. Perfect. Go ahead please.
Okay, great. I was just saying congratulations on another great quarter. Bill and Luca, both you all touched on the fact that the cloud business is growing. And Luca, you said a rock solid core, but I'd actually say that that core is still growing Considering the fact your license was up 8% year over year through the first half here, a question for Bill and maybe Luca, if you could touch on this too. Mean, obviously, we've seen the S4HANA customer count number go up 70% this year, but and I'm assuming that's a big part of what's driving That license growth, how do you think where are we, I guess?
What inning are we in with S4HANA? Because the customer count It might be high, but our checks still say that penetration still is a way to go even with inside those. So how do you think about where we are And the cycle and I guess the sustainability of some of these 6 consecutive quarters of growth on license.
Thank you
very much, Phil. First of all, for your kind remarks. We are in the really early days of the S4HANA momentum. First of all, if you apply the eightytwenty logic, you'd be a lot close to the 15% or 20% than you would be to 80 In terms of the penetration and all the opportunities that are out there. And that's the traditional base we're talking about.
We're making a bold move into customers that haven't seen SAP and may not even be thinking of SAP in the mid market and the upper mid market. So as we assert our will in different marketplaces and different industries, I would call this the earliest possible days of S4HANA in terms of the rotation and the real catalyst for continued growth in the company.
Yes. It's hard to add anything to that. I think adoption always in our industry is kind of an S shape. And we are clearly Basically, it's still in the early adopter phase. As you pointed out, some of the early adopters have a long way to go to really roll it out across the entire end states.
Now we see the first emergencies of fast followers kicking in. So we have lots of room to grow. And more importantly, even S4HANA is invigorating growth in other elements of our portfolio as well. CEC was very strong. I highlighted this.
Analytics Strong in the quarter. That goes along nicely with the digital boardroom concept that S4HANA really brings to life. So we will be having a lot of fun with this So, baby, which is just barely becoming a toddler by now.
And Phil, one CEO said something interesting to me yesterday. He So the RunSimple was actually ahead of its time. And I think he's 100% right, because the most intractable Challenge of our era is complexity. And when you think about the idea of a digital boardroom simplifying the management process for executives around the world. And you think about taking cost out and improving productivity With HANA and S4HANA and aligning all the management team with the line of business cloud and the network, you're talking about just a story that doesn't end Because there's so much room for all these companies to radically simplify and grow if they can apply the right digital technology.
So it's really early days and it's an exciting era for us, Phil.
Okay. Thank you.
Great. Thanks guys. Keep up the great work.
Thank you. Thank you.
Thank you. Let's take the next question, please.
We will now take the next question from Gerard DeFos from Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my questions. 2, if I may. Just first of all, on the kind of the cost base, We've seen a very good kind of revenue kind of beat in the kind of first half, but pretty much all of that and perhaps a bit more has been absorbed by OpEx increase. Look, I hear what you were saying on 2018 and your confidence on margin leverage.
But do we see this from Q1 onwards? Because given the kind of current run rate, it looks that it's more kind of going to be second half weighted. And then secondly, perhaps for kind of Bill, It's now been a couple of quarters that the NetSuite deal has been closed. What do you see from a competitive perspective from that kind of combination? Perhaps also give us an update on Workday.
Thanks.
Yes. Let me cover the first part of the question. Actually, you should I foresee it already starting from the second half year, to be quite honest, because we have made our main investments in the first half year. You have seen that we have added about 3,000 incremental headcount, and that, of course, came on top of Already a very strong second half year of 2016. So we now have a situation In which we believe that we have for the moment everything that we need to drive and scale this business, and that should help us in the second half year.
Also, the comparison from Operating income perspective is relatively easier in the second half than in the first half, where we still benefited last year from the rundown of Our restructuring program that we had in 2015, so I'm very confident in both our projections for the full year As well as then, of course, also going into 2018. But you're right, that effect should fortify itself the more we move into Later parts of 2018, but then even more so as we move into 2019 2020, where we are still in line with our midterm projection
going to 2020, as you
know, are projecting for a much Going to 2020, as you know, are projecting for a much higher CAGR on operating income expansion.
And Juradis, I'll offer you an answer to your question on NetSuite. Oracle strategy seems to be Just a relatively large enterprise with Fusion, but to have a 2 tier strategy with ERP and take NetSuite down market and that's understandable. The platform has been around for 20 years. So it will probably do better in the lower markets. We see them, we compete with them.
S4HANA is just going to be a runaway story in that place, Upper mid market, even lower mid market. Workday, obviously Workday can hold their own if Especially if you're in the United States and you're dealing directly with the Human Capital Management Executive, It gets a little bit more interesting for us when it's a more comprehensive decision for companies than just the HR Director. For example, they don't really have a platform. So the SAP cloud platform and the extensibility of that, if you think about S Ohana and the nucleus of the 21st Century Enterprise and all line of business executives evolving their use of their individual line of business with the center of gravity, the data and the process of the company. That's game set match for SAP.
And when you talk total workforce management, we're the only one with the network around contingent labor and therefore total workforce management. And that's Why Gartner and others say, if you have more than 5,000 employees, it's all about SAP, because what you've seen with Workday against SAP It's a good fight with the LOB HR Director in the United States, but when you get beyond the United States and you start to get into more complex industries and companies, We do extremely well. And I can only tell you that based upon the way they've been reporting themselves in the market With letters, with fake news to customers and things like that, we're bringing our A game.
That's very clear.
Thank you and congrats on the great revenue quarter.
Thank you.
Thank you.
Let's take
the next question please.
Our next question comes from John King from Merrill Lynch. Please go ahead.
Yes, great. Thanks very much for taking the questions. I've got 3, if that's all right. The first one was just a clarification or follow-up on Charlie's question around the cloud. Can you say something about what we
We should be thinking about
in terms of the guidance for second half, I guess, implies at the low end at least something similar in terms of cloud revenue growth rate, where the high end would imply a pretty material acceleration in that same metric. So maybe just any commentary perhaps for Luca around How likely it is that you can get to that high end? Or should we be more thinking about the low end at this stage? And then 2 probably related questions maybe for Bill. Firstly, on the 2020 guidance, Obviously, you're trying to do the best you can against all of the metrics that you're guiding there.
But I wonder if you could just give us a sense about your priorities there. Put it another way, If you're in a scenario there where the margins were running ahead of your plan, would you be looking to reinvest those to, let's say, invest in the sales force to drive even more growth? Or are you equally happy to, let's say, outperform on margin versus growth? Just trying to understand how you're balancing those two things. And then the third one was another clarification on the M and A.
If you look at the I think in the outlook statement, You've said, I think, in the full report that that's on the assumption of no large M and A this and next year. Can you just clarify, is that a statement to say that you don't think a large deal next year is likely or simply that if there were to be one, you would revisit the guidance?
Thanks. I'll start off. First of all, thank you very much for the question. On the 2020 guidance, We're a big company and it's good for big companies to think like a startup. There's no reason why we will not drive both the top line, especially the cloud growth and the margin.
What you have to do on the front end of leadership is make the investments, make the bold moves, so you have the platform to leverage on a go forward basis. You should think of us as a company that intends to get the revenue and the margin And flow it through on the operating income side. It's not an either or, it's a both end. That's how we're running the company. And I think you're going to start to see evidence of that, especially in Q3 and Q4 as we have reinforced today quite consistently.
We made our investments early this year, so we could reap the benefits in the back end of the year for our shareholders, but also for 87,000 women and men that work for the company. The second thing on the M
and A side, look, we haven't done
a big deal in a while because we have what we need And there aren't really big deals out there with companies that we think would be worth the price or would add that much value to our customer story. So at this stage, we're watching it. We're always keeping an eye on things, but our strategy is very consistent with what you've heard in the past. But if something were to change, naturally, you'll be the first to know. Yes.
And in that sense, this is, of course, a Statement that our outlook is based on organic developments and maybe small tuck in acquisitions. And if we had something more significant, which is not Inside, then of course, the outlook would be subject to change and upgrade as well. So let me cover the last question On the cloud guidance, look, we try to be honest and sincere people. You have seen that we have updated our top line and cloud and software guidance So for the full year because the lower end just did not make sense anymore. And we have also upgraded the upper end of those guidances because it's a real possibility That we might even do better than the previous high end of it.
And that's how you need to look also at the cloud guidance. So we are also equally serious about this. So it's still a possibility that we end up anywhere in those in the spectrum. And of course, the key factors that help us to climb up is the very good bookings performance. And now everyone's focus must be across organization to make sure that we onboard our customers as quickly as possible.
And the good thing that you will have noted is the very decent performance of our services business, In particular, also in the cloud, so you can see that there is a lot of activities going on currently to implement for our customers and onboard them. The more successful we are in that, the better it will be for our cloud performance. Bill has alluded to the fact that we were a little bit back end loaded in the cloud actually in the last two quarters. And so we are working on making up for this now through speedy implementations. And where we will ultimately end up will be largely determined by this fact because bookings that we now drive in the second half year We'll not really have a material impact on revenue for 2017 anymore.
That's the story. So everything's still possible But very firm in upholding the guidance range that we had done at the beginning of the year.
Thank you.
Thank you. The next question, please.
Our next question comes from Michael Briest from UBS. Please go ahead.
Thank you, and good afternoon. Another question on cloud margins, I'm afraid. Just in terms of the SaaS As business, Luka, 58% gross margin in Q2. I think at the start of the year, you were talking about the overall cloud business being roughly stable margins. Do you still think you can get to the stable margin for the year?
And have we now seen the worst or the trough, if you like, in cloud profitability? And then one for if Rob's on or Bill. The Americas cloud growth of 16% in the quarter There was a bit of a deceleration from other periods. And obviously, Europe and Asia were very strong. But can you talk about that, whether it's competitive or something to do Steve Singh leaving, etcetera.
And then just finally, can we get an update on the number of live S4 customers? Thanks.
Yes. Okay. So on the cloud margins, look, I mean, we have 2 pieces of our cloud business, the HANA Enterprise Cloud and the Business Networks, Which are marching towards their targets, and they are exactly in line with our expectations. In SaaS path, you're right that The cloud margin has come down quite a bit, and I have to admit, slightly above my expectations. To be honest, we are working intensely on finalizing the infrastructure convergence investments and the replatforming.
And we want to make sure that we will be done in time so that the results in 2018 are not affected by this anymore. That's why we are doubling down on the investments right now. And therefore, for this year, I still expect that the SaaS Pass margins will be under But therefore, I equally expect that as of next year, the progression should be much more pronounced than what we are seeing right now. Because if it was not for that SaaS pass drop due to the onetime investments, We would see already now a progression in the margin in all the three businesses. That's for me the most important piece, not so much The mix shift effect that we see, but we need to see progress in all three business models.
And for sure, we will see that Progress also in SaaS Pass in 2018.
And Michael, in terms of the cloud growth In the America or continent, so a little bit on that. You're over 20% through the first half and you did have some timing effect on large Transformational cloud deals that move to the right. So I think what you're going to see in Q3 and Q4 It is substantially accelerated growth. There is no issue with the business in the cloud in the United States as an example. So stay tuned for even more growth in that region in Q3 and Q4.
We have very good visibility. It's in really good shape. And as I said, when you have S4HANA, a lot of times you're talking about larger transformations within these enterprises and they attach Those line of business cloud decisions to those larger decisions and you see some timing effect of that in particular in the U. S. I think that we had
the question on HANA life customers. Maybe Rob, you can handle this.
Yes, sure. I think Bernd's done as well, but we have over 850 live customers now, just over 2,500 projects Ongoing, so it continues to be very successful. And as Paul said, these customers are also investing in the cloud products. So This is really a tremendous success story for SAP. And the more they go live, the more expansion we will see.
Great. Thank you very much.
Okay. Thank you. Next question, please.
We will now take the next question from Mr. Ross MacMillan from RBC Capital Markets. Please go ahead.
Thanks a lot.
This is another really strong license revenue quarter. And for the last two and a half years, you've I just was curious for only 20% of the way through the S4 based conversion. What would stop the company continuing to have positive license revenue growth? And is that the way that we should start to think about that line item for the foreseeable future? Thanks.
Yes, this is Bill Ross. You should think about S4HANA as a growth story. We shouldn't spend all of our time on how much of that growth story and what percentage of that will be recognized one way or the other. I think what you should think about it is the 21st century digital platform for a successful company because it's the best run SAP and S4HANA is central to that. Do I believe that the theme is there for continued growth On a positive basis, even on the upfront license recognition for S4HANA?
Absolutely. Do I think that the cloud And the full rental model for S4HANA in the high end as well as upper mid market and mid has only scratched the surface So far, absolutely. That's why I say it's such an early moment in the evolution of this growth story. You should just feel really great about it.
I think just a follow-up, if I could. Thank you, Bill. Just on Leonardo, I'm curious, Have you set any internal revenue targets specifically for Leonardo? Or does that just get rolled up into component technology in the portfolio.
Yes. May I take this? This is Bernd. Yes. Of course, we have revenue targets.
But more important, we have value targets. And the revenue targets are across the businesses We have under the Leonardo brand, which is definitely our cloud platform, which is IoT, Which is blockchain, which is analytics. And what I can share with you that across all these businesses, we have seen in the first half of twenty seventeen, couldn't stick with growth. And we are very confident that while we Today, a lot about HANA. We talk a lot about S4HANA.
When we talk again in 1 or 2 years, Leonardo will be equally important To our financial success, then what we talked today about with S4 and HANA. So this should give you some Inspiration
was possible. Okay. Thank you.
Great. Thank you. Congrats. Thank you.
Thank you. Let's take the next question, please.
Our next question comes from Adam Wood from Morgan Stanley.
Congratulations from me on the first half growth performance.
Maybe can
I just ask, first of all, a clarification question on the margin side? On the second half, are you suggesting that margins actually start to rise? Or are you just suggesting that the rate of decline moderates Before we see the increase in 'eighteen. So just help us on the phasing of margins, that would be really helpful. Then on the cloud side, just to try to head off The final issue on this, could you maybe have basis on renewal rates there?
Is there any issue on that in terms of how customers are renewing? Or actually, are you starting to see any improvements there? And then maybe a final question on Leonardo. You've obviously highlighted how strong the interest is there. Could you help us out on sales Cycles there, how long should we be thinking about as that interest starts to turn into actual revenues?
Thanks very much.
Yes. I will defer to Bernd maybe on the sales cycles and more importantly, the innovation cycles as Bernd has alluded to before. On your first two questions, cloud renewals, no change of Performance very consistent in the first half year from what we have seen in prior years. In terms of The progression of the margin, we will see an increase of the operating income contribution in the second half Yes. That's the commitment that we have.
On the margin side, I think it would be a little bit too early to call For the turnaround already in the second half year, this will be a subject for 2018.
Okay. Hello, Adam. This is Bernd. Just to comment on your question on the sales cycle, it's indeed a very relevant question because With Leonardo, we have defined a new go to market approach, which is different from Selling predefined packaged software. As we will share Resources in coengineering and co innovating the new digital business solutions together with our customers.
And what Bill announced at SAPPHIRE that we have an accelerator approach where we use our tremendous industry experience across all 25 industries combined with our technology leadership, and we are able now to demonstrate valuable proof points within 3 months to our customers. And then when it comes to revenue recognition, yes, it's not just a new go to market. It's as well a new commercial approach As many of these customers are eager to share investment risks but as well benefits with us and this pay per use The model is something we will push forward going into the future. And the beautiful thing is that this is a very sticky business. Once you have implemented this business and imagine there is a dedicated Percentage dependent on the customer and dependent on the industry, each dollar or euro the customer earns, there is a dedicated percentage going into our P and L.
I think I'm looking forward to have this adopted across our installed base, but more importantly, about the net new names, which we will conquer Every day.
This is very much about value based pricing for the customers then.
Indeed. And I think the beautiful thing is when you talk about value based pricing, it's about if our customers are successful, then we are successful. And if you look back the last 45 years, that's what we are up for. And that's our strategy being the technology adviser and partner and not the future competitor of our
It's very helpful. Thank you.
We have time for 2 more questions, please.
We will now take the next question, from Mohammad Mowala from Goldman Sachs. Please go ahead.
Great. Thank you and well done on the quarter from my side as well. Bill, perhaps you could isolate, obviously, the strong product cycle momentum that you're seeing with S4HANA and the cloud products, but also maybe some of the macro and Considerations on what you're seeing and to what extent is this changing things like the uptick in deal sizes, sales cycles, etcetera. And I noticed that the emerging markets also had a particularly strong performance this quarter. So as you look at So the different growth levers aside from the product cycle, where do you sort of stand in terms of the different levers as you manage the business?
And secondly, perhaps as we think about the kind of additional kind of investment opportunities, Obviously, you've invested and front loaded some of the spending in H1 this year. Are you inclined to Invest further upside away in the near term or would you be inclined to let that drop to the bottom line?
Well, thank you very much for the question, Mohammad, and thank you for your kind remarks. Right now, the macro environment is good. I mean, there's not bad out there at all. On the European roundtable, as you know, and the top industrialist CEOs at the European roundtable Are always talking about how do they compete and how do they digitize their business in the 4th Industrial Revolution. If you go to the United States, they call it a digital revolution and digital business, but in every industry, there is this Unbelievable passion for change in digitization, which gives us such an advantage.
And if I was just to summarize it for you in 5 simple HANA, S4HANA, the line of business cloud, the business network and Leonardo. And in 5 fingers, You can tell the entire SAP story. And what's so compelling about the SAP story is in all areas we have the greatest So that is why in any given quarter, we could have one industry that's particularly strong, another one that might be softer and we're able to balance that. Now in geographic terms, When you look at Japan, Japan was on a roll this quarter and remains on a roll. Asia Pacific Japan as a region had a standout fantastic quarter and we continue to be The ultimate brand in software in China, not to mention India of course.
The U. S. Is the more competitive of all the markets, We have some of the more signature brands behind us in the United States. I was really pleased with Google going SAP. I think it says a lot.
They know a little bit about technology over there and not only around using SAP, but purporting SAP in their cloud story. That's powerful, powerful stuff. And IBM moving forward with Ariba and really thinking through a service around These are really signature moments. Europe, think about it, our most mature region continues to grow almost the fastest in the cloud of all regions and has the highest core revenue growth. The Middle East, You're looking at triple digit growth rates in the Middle East.
We're becoming the standard. So we have a really diverse Well positioned company and I think it's because we're helping businesses run simple. They all need to do that And we have a lead on the technology and the people side. And as long as we keep it going, we'll be fine. Now in terms of giving you the profit flow through, the answer is yes.
I'm going to have Luka give you the details, but I want to spend a minute on this. So we're talking openly with each other here. We had a Board meeting in Germany and off-site at my house in Germany. We have an executive management team that's completely aligned. We've rolled out plans across the entire company.
We're having an all hands call as soon as this is over, and we're going to The story of look at this revenue growth like no other company in the space. Now we wanted to come through on the margin and flow through on the operating income line, So our shareholders as well as our stakeholders can get the leverage in the back end of the year. Let's have some fun around here. That's the message.
Yes, absolutely. Thanks, Bill. And just to get into the details here. On the OpEx side, we clearly have made our investments, So we would not reinvest upside that we generate in Q3, for example, in Q4. We are done with our investment for 2017.
2nd, on the CapEx side, we will continue to invest into our data center And into the completion of the projects that we have been covering now for a while, this will take the 2nd half and hence, you can expect us to invest at roughly the same levels as in Q1 and Q2 also in the second half. But on the OpEx side, absolutely, you will see full flow through of any results that we post on the top line.
That's great. Thank you very much.
Thank you. Now let's take the final question, please.
We will now take our final question from Stacy Pollard from JPMorgan. Please go ahead, madam.
Hi, thank you very much. Since I'm last, I might throw a few in there. First of all, can you explain why the license and support gross margin declined? Could Rob perhaps elaborate on Sfour in the cloud and maybe talk about what percentage of bookings, for example? A quick one on where did the services outperformance come from and what you're expecting in H2?
And finally, how should we think about maintenance growth declining in the next few years?
I'm not sure whether I could get all of these questions so quickly. Can you be a little bit slower
so that
I've got them. Let me give you a quick thing here. So the whole thing is Rob, how is the Sfour cloud looking? And Luca, on services, there's an upturn. We obviously continue to do well with the best Retention rate of our installed maintenance base in the industry, how is that what's the prospects of that going forward?
Those are really the main things.
Okay. Good. Then let me answer the support question. I think As you have seen, there had been some concerns around support revenues at the beginning of the year after Q1. I told you already There's always seasonality in our Q1 results.
And then through the year, you have win backs and the growth Rates tend to increase. This is what happened here as well and expected to continue. I think in general, of course, We will see over time small declines of the support growth rates, but support and license and support in total will continue to be A positive contributor to our revenue growth definitely until 2020 because we continue to have very, very robust retention rates In software support, and we have a high value realization by our customers. On the services side, similarly, We are moving more and more from short term project engagements to longer term engagements. Premium support is absolutely showing very, very nice growth rates.
And in the hybrid world in which we are operating at the moment with many of our customers, this is really essential for our customers to get the optimum value Out of their deployments, hence, I'm also very confident about the future progress in our Services business. I think we have seen the turnaround now, and I think it's materializing clearly in margin improvements. On the license and support side, there is no not Really anything dramatic to mention here. We have had in certain parts of our portfolio Slightly higher license and sales commission costs on 3rd party products that we are operating with. So this is products that we resell.
It has nothing to do with databases. We are clearly S4HANA. And HANA, therefore, is the absolute That's the main contributing factor, while support profitability has actually continued to climb up and continues to be a positive
And Rob, you want to talk about S4 Cloud? Yes.
So on S4 Cloud side, I'd put it like this, exceptionally strong demand for S4 Cloud with companies like Deloitte actually signing on and Chemours. What we She has tremendous success with the customers and has signed on going live in relatively short period of time And high amount of customers that actually live with this product. So I would see together an acceleration into the 2nd half, based on the demand, but also I think that what we're going to see is the leverage with the GCOs at a market organization as they get to understand this. H4 Cloud is definitely going to be a super success inside SAP and with our customer base.
Thank you.
Great. Thank you. Thank
you very much. This concludes our second quarter earnings call for today. Thank you all for joining and goodbye. Talk to you soon. Thanks everybody.
Ladies and gentlemen, this will conclude the SAP Q2 Earnings Conference Call. Thank you all for your participation today. You may now disconnect.