Ladies and gentlemen, thank you for standing by. My name is Yasmeen, your Chorus Call operator. Welcome and thank you for joining SAP First Quarter Results 2017 Earnings Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer I would now like to turn the conference over to Mr.
Stephan Gruber. Please go ahead.
Thank you. Good morning or good afternoon. This is Stephan Gruber, Head of Investor Relations. You all for joining us to discuss our results for the Q1 2017. I'm joined by our CEO, Bill McDermott and our CFO, Luka Mucic, We'll both make opening remarks on the call today.
Also joining us for Q and A are Board members, Rob Enslin, who runs Global Customer Operations and Bernd Leuchardt, Who leads Product 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 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, And 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 recent filings with the U. S. Securities and Exchange Commission, the SEC, Including SAP's Annual Report on Form 20 F for 2016, filed with the SEC on February 28, 2017. Participants 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 quarterly statement 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 to Substitute 4 or superior to the measures of financial performance prepared in accordance with IFRS. And finally, we would like to invite you to our customer conference, SAPPHIRE NOW in Orlando, Florida, which runs from May 16 to May 18. SAPPHIRE is a great opportunity to learn more about SAP's strategy and our product portfolio.
We'll offer a special program for investors and financial analysts. Please see the SAP website and contact the SAP Investor Relations team for further information. And with that, I would like to turn things over to our CEO, Bill McDermott.
Thank you very much, Stefan, and hi, everyone. Thanks for joining us today. Like our results, the mood here at SAP could not be better. SAP's outstanding first quarter results are a decisive follow on to our record setting 2016. They once again validate SAP as a profitable, fast growth company.
The facts show That we are executing our winning strategy at scale. Our customers are endorsing the unique breadth and depth Of SAP Core, Cloud, Networks and all come with soaring adoption for our new innovation on a global basis. We believe SAP is the only company in the business software industry to deliver soaring cloud growth and Double digit license growth. Driven by S4HANA, our core innovations are growing really fast With software licenses up 13%, we now have more than 5,800 S4HANA customers With global companies like Energy SE choosing S4 in the Q1, big brands like Citrix Systems Selected S4 Cloud Edition, the leading intelligent cloud ERP solution in the market by far. Algier Enterprise Services implemented S4HANA Cloud in just 10 weeks.
In the private cloud, The HANA Enterprise Cloud also continues to be a fast growth business for SAP. Led by SAP Digital Boardroom, Our reinvigorated analytics portfolio grew in strong double digits across cloud And software in Q1. SAP's track record of strong M and A is also validated with our amazing cloud growth. We had one rule, only buy the best companies in the business. Now, these best in class assets have been Fully integrated for many, many years and all of our growth in the cloud is totally organic.
That's something very new to our industry. Our new cloud bookings surged to 49% growth in Q1. Our cloud revenue grew by 34%. SAP Hybris, our customer engagement solutions, Saw a triple digit new cloud bookings growth in the Q1. Top industry analysts named SAP Hybris A leader for both business to consumer and business to business digital commerce and multi channel marketing campaign management.
SAP SuccessFactors, another successful quarter. SuccessFactors, Employee Central now has nearly 1700 customers worldwide, by far the leader. Analysts gave SAP the highest rankings in cloud HCM For core HR, for global organizations with more than 5,000 workers, Gartner is rarely wrong. Dolce and Cabana Selected SAP Human Capital Management Solutions in Q1, while retail and telecommunications companies are among many Choosing SAP Fieldglass temporary labor solutions. Only SAP can manage the complete workforce.
SAP was way ahead of the industry with business networks. Today, SAP Ariba has 2,700,000 companies In over 180 countries, trading nearly US1 $1,000,000,000,000 in goods and services annually on the Ariba network. Companies like Ford Motor and New Balance selected Ariba in the 1st quarter. Concur helps more than 47,000,000 end users effortlessly process travel and expenses. Big brands like Penske, Premier Truck Group chose Concur.
The results make it perfectly clear. SAP is gaining Mass market share against our competition. Cloud and software powered to 12% growth in the quarter, Significantly outpacing our main competitor. Our cloud portfolio is now a nearly €4,000,000,000 business, Growing north of 30%, faster than most best of breed standalone cloud companies, who by the way don't make much money. We're expanding in every region of the world in 25 distinctly different industries with businesses of all sizes.
In fact, our SME business added over 1,000 net new customers in the quarter. There is momentum in every corner of SAP. Even as we gain, we are never complacent. SAP's innovation agenda will ensure our future is even brighter. With our API hub and open SAP cloud platform is actively incubating new innovations.
We're also excited that the new partnership initiatives we have built will proliferate the SAP platform Across the hyperscale public cloud providers. Our Internet of Things business is already the leader With Goldwind Science and Technologies and Energywasa burn selecting SAP in the Q1, We are accelerating Internet of Things innovation, including predictive maintenance, logistics, autonomous payments, Quality assurance, anti counterfeiting and industrial security. We're also focused on machine learning, which we believe Takes the work out of workflow. Our first wave of machine learning enabled applications is already commercially available today. Examples include invoice and payment matching, predictive recruiting, intelligent sales forecasting, Sales discount approvals and data driven renewal management to name a few.
Blockchain is also a major focus. SAP recently joined Hyperledger, the leading open source collaborative platform to advance blockchain we intend to lead. The strategy I have described has enabled a business model that has never been stronger. Cash generation was strong With IFRS operating cash flow up 16% year over year, we recommended a dividend for 2016 Of €1.25 9 percent more than last year. Nearly 65% of SAP employees are participating In our most recent employee stock program, a role model figure for the IT industry, we're out in front again.
With the company's positive share price development, employee stock based compensation costs rose in Q1. We believe a happy company is a worthwhile investment. With our recently announced executive board changes, We put in place a leadership model to continue scaling our growth agenda. Rob Enslin, Well known to all of you, we'll head the Cloud Business Group to drive unprecedented growth in Business Networks, Human Capital Management, Customer Engagement and Small and Medium Sized Businesses. We also strengthened Bernleukert's organization To include analytics and a new Chief Technology Officer, Robin Bernd will strengthen their end to end collaboration to drive customer driven innovation and value at its very best in the industry.
Our existing cloud line of business end to end leaders will continue to have a dual solid reporting line into Rob for go to market And Byrne for product and innovation. Accordingly, all development resources of the end to end units belong to Byrne's organization And all go to market resources of the end to end units belong to Rob's organization. This is only different for the business network where all resources Belong to Rob's Cloud Business Group. Finally, and I'm really excited to report that Adaire Fox Martin And Jen Morgan will oversee the global sales organization to bring our products to the customer and strengthen the customer relationships. I proudly welcome Adaire and Jen to the Executive Board of SAP.
What an accomplishment. In closing, everything about SAP's business is best in class, sustainable and focused on delivering shareholder value. This company, SAP, is a winner. From Fortune Magazine to Glassdoor and Edge Certification, We have never received more accolades as an employer of choice. Best of all, we're just getting started on this once in a generation growth story.
Near half of S4HANA transactions in Q1 were net new business. More than 80% Of our ERP customer base remains in the S4HANA pipeline, which is swelling by the moment. We're growing double digits in every region of the world. Our organic SAP Cloud innovation is now the biggest part of our growth story. With the 22nd most valuable brand in the world, SAPPHIRE NOW 2017 will be the biggest in SAP history.
For all these reasons, we are firmly reiterating our guidance for the full year. SAP is a profitable, Fast growth company, ever humble and hungry. I'd like to acknowledge our 86,000 SAP colleagues worldwide For their immense dedication to our customers and shareholders. Now, I'll turn the call over to our CFO and my good friend, Luka Muchic. Luka, over to you.
Yes. Thank you very much, Bill. Hello, everybody, from my side as well. And indeed, I mean, I'm as happy as you are, Bill, to announce a really great Start to the year where we continued a rapid expansion in our top line with accelerating cloud growth and an excellent software performance. This performance clearly demonstrates the entire breadth and resilience of our unique portfolio, the combination of cloud and on premise.
This outstanding start to the year is also fully in line with what we communicated at our Capital Markets Day in February earlier this year And further validates our investment decisions to drive future growth and operating profit. Now Bill has already shared with you a few of the impressive Growth metrics this quarter. I would just like to add to this that we had our best year over year growth ever in new cloud and software license order entry, Which was up by more than 30%. This KPI represents the order entry from our software license business plus the total contract value From our cloud business, this exceptional growth in order entry is a strong achievement, especially when you look at the absolute size and scale of our business. It really underpins how successful we are in the market with our unique portfolio.
At the same time, we continue to strive for a more predictable business model. While we had a strong performance in software revenue in Q1, our predictable revenue base remained stable at almost 70% year over year. Compared to 5 years ago, our predictable revenue share is now 18 percentage points higher. Now let me go into some more detail on the top line performance. Cloud grew 34% or 30% in constant currency.
So either way you look at it, we have now had growth in cloud of at least 30% for 5 straight years in a row. This consistent and fast growth is fueled by our future committed cloud revenue or new cloud bookings. This actually has accelerated even more compared to the last quarter, growing by 49%, which is a sequential expansion of almost 10 percentage points. This constant growth in cloud revenue for nearly half a decade is clear evidence that we made the right acquisitions at the right time. Billele has alluded to this already.
From success factors to concur, we have all successfully scaled and integrated these acquired businesses. Let me also highlight the continued momentum of our industry leading on premise business. Software and support Increased by 8% driven by 13% software license growth. Finally, our cloud and software revenue grew 12% or 9% in constant currency, Which again is above the high end of our full year outlook range. Now some words on the Q1 regional results.
We had a solid performance in EMEA with an increase in cloud and software revenue of 10%. Cloud subscriptions and support revenue grew 43% In the Americas region, we had a strong performance with cloud and software revenue growing by 12%. Cloud subscriptions End support revenue was up 27%, driven by a strong performance in Canada and Mexico with high double digit growth. In North America, In the APJ region, we had a truly exceptional performance in both cloud subscription and software revenue. Cloud and software revenue was up 21% with cloud subscriptions and support revenue growing by 65%.
Japan and India were highlights in the quarter with strong results in both cloud subscriptions and software revenue. We also had strong double digit software revenue growth in Greater China and South Korea. Now let me come to the bottom line. And before About operating profit, I would like to provide you some more details about the gross margin development for the quarter. As promised, We have increased the transparency in our segment reporting even further so that you can see how we perform in our public and private cloud As well as in our business networks on a quarterly basis.
Our overall gross margin increased by 30 basis points to 69.9%, Which is a solid result given the significant mix shift effect and our ongoing investments. Our cloud gross margin decreased by 1.2 percentage points to 64.6 percent year over year, but increased sequentially by 1.9 percentage points. The year over year result was driven by revenue mix shift effects between different cloud models and the already announced continued investments in converged cloud efforts As well as consolidation and improvement of our data center efficiency. These investments will negatively affect our 2017 public cloud If you look at our private cloud business, it continues its rapid growth driving the private cloud gross margin up was up by 1.5 percentage points year over year to 76.9%. Our cloud and Before, as well as the revenue mix shift effects between our cloud and on premise revenue lines.
Our services gross margin Really a bright spot in the quarter was up by 6.8 percentage points year over year to 20.7%. In 2016, as you know, invested heavily in co innovation projects with customers in some strategic industries to focus on customer outcome. Since these investments are phasing out this year as already shared before, as well as consulting utilization increased, Our service margin in consequence improved in Q1 as expected. We are now doubling down on adjusting our services organization For the new reality of digital enterprises to further capitalize on the momentum that we have gained. In terms of the operating profit, we had a solid performance in the quarter, up 8%.
And let me remind you that we achieved this result even though We continue to invest in future growth as we said we would, even though we had higher personnel expenses as we added over 7,500 FT
feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet
feet feet feet feet feet feet feet feet Es Or a 10% increase compared to the prior year period and we continue to hire highly educated young talents in our fast growth areas and locations, Even though we continue to experience a significant mix shift effect as I outlined earlier and all of this in our smallest top line quarter of the year. All these effects continue to weigh in our overall operating margin, but with our strong top line growth and the fact That the converged cloud investment should be largely finished in 2017. We continue to be very confident that we will grow our Profitability in 2018 and beyond as we discussed at our Capital Markets Day. The IFRS tax rate in the Q1 was 20.6%, a decrease of 2.7 percentage points compared to the prior year period. The non IFRS tax rate in the Q1 was 25.7 percent, also down from 26.2% in the prior year period.
Non IFRS earnings per share increased by 15%, driven both by a lower effective tax rate and the strong finance income contribution Due to another exceptional performance of our venture capital activities around our market leading venture capital firm, Sapphire Ventures. IFRS earnings per share decreased by 9% and was mainly impacted by our share based compensation expenses, Which increased due to the strong development of our share price and the increased participation of our employees. Now a few words on cash flow and liquidity. In the Q1, we reported a record €2,900,000,000 in operating cash flow, increasing by 16% year over year. This also led to a strong free cash flow for the 1st 3 months.
This figure is growing by 12% to €2,600,000,000 As of the end of the Q1, We improved our net liquidity by €2,800,000,000 year over year to a net debt of €460,000,000 Looking to the rest of the year, we have now already paid back a further €1,000,000,000 in April And intend to pay back approximately €1,400,000,000 in total in financial debt this year. We expect for the next quarter's cash related outflows due to share based compensation programs and the transformation of our services organization As well as the debt repayments. Based on the strong start of the year, we are nevertheless confident that our operating cash flow development will remain positive for As a result of our strong overall position pipeline, as Bill has said, we are firmly reiterating our outlook for the full year. We also now expect the currency benefit and have updated our expectations for the effect on reported growth rates in 2017. For more details, please refer to our quarterly statement published earlier today.
Finally, as I conclude my remarks, I would like to talk about our higher purpose. As our customers face increasing global challenges such as demographic change, more disparate income distribution, Political volatility and digitalization. We have a responsibility to think about how technology can contribute to solving these problems. Many prominent companies are working to have achieved the 70 UN data development goals. And IT is the foundation for at least half of these goals.
We as SAP can work towards these goals by delivering software that helps solve these pressing issues. For example, solutions that power smart cities All those that can help contribute to better health care therapies. In this spirit, we also strive to act as an exemplar of responsibility. In February, we issued our 5th integrated report where we announced a decrease in our greenhouse gas emissions for the 3rd year in a row. In fact, we are now taking the next step, Announcing that SAP aims to be carbon neutral completely by 2025.
We also have a responsibility to our employees. For 2016, we saw record employee engagement of 85%, a very high level that we will strive to maintain over the coming years. We are consistently improving employee retention, which increased to 94.1% in Q1, up 2.1 percentage points year over year. Trust in our leaders as measured by our Leadership Trust Net Promoter Score also increased to 57%, up 5% year over year. And as Bill mentioned, our employees are also investors with nearly 65% participating in our most recent stock program.
We all remain focused on diversity. We have already almost achieved our goal of 25% of women in management by the end of 2017. These efforts are being recognized externally with SAP being named employer of choice, most recently being ranked 1 of the top It's best international workplace in Asia. And Erkom, an independent rating agency for sustainable investments Recognized us as a leader in SoftBank IT Services in their corporate responsibility review. So to summarize, We released very strong Q1 results today, showing continued momentum and strong execution.
We continue to make strategic investments in 2017 And expanded our profit even in our smallest top line quarter of the year. SAP is the clear leader in business and enterprise software And has never been in a stronger position. If you think about S4HANA and the digital core, there is no doubt that SAP is winning And that we are continuing to take substantial market share. As we continue our acceleration to the cloud, we increased not only the predictability of our revenues, But we will also improve gross margins and profitability. This is what the entire executive board of SAP is committed to.
Our strong free cash flow generation while investing for the future provides significant optionality around strategic decisions aimed at driving customer And shareholder value. SAP is extremely well positioned for success through 2020 and far beyond. Thank you very much. And we will now be happy to take your questions. Thank you.
I hand it back
to the operator. We can now start the Q and A session, please.
Ladies and gentlemen, at this time, we'll begin the question and answer session. The first question comes from the line of Stacy Pollard of JPMorgan. Please go ahead.
Hi, thank you. I have a couple of questions around margins really. In the press release, you say that you were confident that you'll give your profitability, That you will grow your profitability in 2018 and beyond. Are you also confident that your profit margin can increase? And more specifically, if I look in the quarter, can you say why sales and marketing cost as a percentage of revenues was up in the quarter?
Do we expect the same pattern through the year? And then can you talk about the cloud margins? I think a little bit disappointing Q1, can you talk about which of the investment areas finish in 2017? I know you mentioned converged cloud, but what about distribution, data center delivery, those areas? Do they also finish in 2017 and can we expect that to move up in 2018?
Yes, absolutely. I'll try to handle them all better, Stacy. So first of all, on the profitability increase in 2018 and beyond, yes, I mean, I've made it very clear that we believe And that 2017 will see the trough in company margins. We have at the moment A relatively high level of investments into those areas that's cited in them of third party database platforms and on to HANA Convergent the cloud infrastructure and data center consolidations, these programs will have largely run their course at the end of 2017. We are seeing already the improvement in the services margin and we believe that this will continue.
And then with the increased We absolutely believe that in 2018, our company margins will start to move up again. In terms of the sales and marketing expense, remember 2 things when you compare ratios year over year. First of all, we have made high investments into additional distribution capacity, especially in the second half 2016, when you take a look at our total run rate of employees that we have year over year, On a company level, we have 7,500 additional employees on board and we have invested ahead of time, of course, In the sales capacity, our hiring in Q1 was not so much focused on sales anymore, but rather in areas like cloud delivery as well as R and D. But of course, this increased investment on the sales capacity side is now meeting the smallest quarter in the year. Also in early 2016, we still took some advantage of the rundown of the transformation program in 2015, which was not There in 2017, obviously.
So that's part of the reasons. Of course, beyond that, Also, 2017, the Q1 was much more successful than the Q1 of 2016. And hence, our accruals bonuses in the field, of course, have been higher than in 2016 as well. But for the remainder of the year, when the revenue basis, of course, starts to increase, This should not give you too many headaches. No worries.
And in terms of the cloud margins, you will have seen that actually we were not only up From a cloud gross margin perspective sequentially, but also across 2 of our business models in the cloud, in the private cloud, HANA Enterprise Cloud, For the first time, we have actually reached double digit gross margins, more than 30% increase year over year. And in this business, I have no doubt in my mind that we will soon reach the target long term margin level of 40% in line with our internal planning. Similar for Business Networks, continued steady March to almost 77% now. So we are here already in striking distance to our long term target. In the public cloud software as a service space, this is where we have the converged cloud investments.
But as I said, they are largely As of 2018 and hence, our belief that we will see the cloud contributing exponentially more to absolute operating profit, but also To margin improvement as of next year is absolutely intact and we are actually working just in line with our internal planning in this regard.
Thank you very much. Let's take the next question, please.
Next question comes from the line of John King of Merrill Lynch. Please go ahead.
Yeah. Hi, everyone, and thanks for taking the questions. I've got 3, if that's right. So first of all, on the restructuring plan, Luca, on the During plan, Luca, around the services organization, can you just give us an idea of the return on investment of that in terms of the impact that might have on the Services gross margin in the outer years, obviously thinking about where the margins could go to as you double down there. The second one is, obviously, there's a cash outflow there.
So does that have any impact at all on your thoughts around the buyback? I think You've been thinking about a buyback into Q3. Is that changed at all by this plan? And the third one, I think actually Apologize probably also for Luca as well. On the maintenance side, I think it was a little bit weaker, About a 3% growth in the support revenue, slightly slower than we'd seen in the last 2 or 3 quarters.
So any one offs there? Or is that just a little bit of The cloud the effect of the cloud is somewhat taking away some of the support contracts. Thanks.
Yes, let me answer the later two questions first because that's very quickly on the restructuring related Expectations on our total liquidity and cash flow basis that we had before. On the maintenance side, No. You might have seen in the past also that maintenance occasionally is slow when we start the year. This year, we had a very healthy inflow of cloud extension deals. You've seen that you see that also in the very Strong performance on the new cloud bookings side.
However, we have a number of maintenance related win backs As well as releases of sales allowances lined up for the Q2 and beyond. So that seasonality should definitely turn into our favor as Progress further during the year. On the restructuring in the services business, let's be clear, I think this is all meant to Actually, a company, the past growth in our services business that we are clearly seeing now. We have done heavy lifting over the course of The last 2, 3 years to right size the services business, now utilization is very strong. And you have seen as well on the revenue side that we are back to Quite solid growth, 6% constant currency growth or 9% at nominal rates.
We believe we have an opportunity To really double down on our services business and create new and distinctive capabilities to accompany our customers Through the digital transformation journey there, Darren. And these kind of digital consulting capabilities are something that we really want to build a bit high This should also be a very high value services with a very high stickiness for our customer That should indeed improve the overall margin profile of our services business further. When this will be the case is a little bit a timing question. And we, as you know, are generally anyway projecting an increased service Profitability for the coming years. We are now for the Q3 in a row above the 20% mark.
We should definitely also, after these restructuring efforts, not fall down below this effort, below this margin level any longer. To what extent we can achieve increases there is something that we will see. But generally speaking, I think the path that we are taking now is setting us up for continued solid growth in our services business. So we believe this will not be a declining business for SAP any longer. That's the most important thing As Services is truly instrumental in helping our customers chart a path towards embracing entirely our innovation portfolio.
Thank you.
Thank you. Let's take next question please.
Next question comes from the line of Ross MacMillan of RBC. Please go ahead.
Thanks a lot. I had a question for Bill. Bill, you said the organic cloud innovation is now the Biggest part of your cloud growth story. I guess that means both innovation in some of the acquired businesses, but also The new S4HANA public cloud edition, and I wondered if you could focus maybe on that for a minute. Any metrics you could share on S4HANA public cloud, I guess, specifically around customer count, customer wins, etcetera.
Thanks.
Yes, of course, Russ. Thank you very much for the question. First of all, It kind of takes a moment to remind ourselves that it was several years ago When we acquired SuccessFactors, ANA REPA and Concur and Fieldglass, these companies Have been in our organic run rate now for some time. And one of the messages I wanted to convey today If you take SAP's core license business growing this quarter in double digits and the cloud Growing at 34% with bookings growing at 49%. When you add the core, the cloud together, you have an amazing And all of it's organic.
We haven't bought anything in a long time. If you compare that to any other large scale company in our space, If you add their steeply declining core to their acquired cloud revenue, you still have a declining business. And that is the market share point that hopefully you all have ascertained from these numbers where SAP is really on a tear. And every one of our cloud entities, the line of business, the business network are growing faster than the original business case assumptions We made when we acquired the companies. The other thing I think you want to know is our HANA Enterprise Cloud, our SAP Cloud It's not only growing steeply, it's actually growing faster than all of our other cloud businesses.
And as Luca said, it's now in double digit margins And improving ever steadily and that used to be the heavy lift, right, because that was a startup business not too long ago. So, now you have all these cloud businesses in the company firing on all cylinders. As it relates to the S4 Cloud story. I'll let Bernd make some comments on that because we have both both Bernd and Rob with us today. But I do want to underscore, we're running that as an end to end business.
We're going
Ladies and gentlemen, we apologize for the pause in the presentation. Please remain on line. You'll be hearing music during the presentation. Q and A session resumes.
Sorry for the short interruption. We are ready now to take the next question, please.
So Ross MacMillan was in the Q and A line?
Exactly.
Your line is open, Ross MacMill.
I think the question from Ross was already addressed. We would like to take the next question, please.
Yes, yes, yes, yes,
yes, yes, yes. The next question comes from the line of Michael Briess of UBS. Please go ahead.
Thanks. Good afternoon. Luca, coming back to the cloud margins, I appreciate this sort of legacy architecture that you're still having to pay for. If I look at 2016, your costs were about €460,000,000 in the SaaS business and revenues were €1,200,000,000 To get to your 2020 targets, you've got to add €2,000,000,000 plus of revenues and about €300,000,000 of costs. So I'm just wondering how much of that cost That's in there today, it's going to disappear and whether you think this year margins in the SaaSPaaS business We'll be flat or indeed if the overall cloud business will generate flat gross margins or even perhaps improve them.
And then just Bill, On the S4 uptake, I mean, could you give some data points? I think Ross asked around maybe the number of public cloud customers that you now have on S4 And whether also the 400 overall S4 additions in the quarter was as you expected? Would you think that maybe It will accelerate as we go through the year and 2017 will see more adds than 2016. Thank you.
Yeah, Michael, maybe let me first address the question around the cloud gross margins. For this year, we expect a roughly stable overall cloud gross margin. You have seen in Q1 that we are slightly better in the Q1 cloud gross margins compared to the full year 2016. But I think assuming a stable cloud gross margin is a fair assumption here. In terms of the March to the 2020 targets, Yes, we absolutely believe that the SaaS PaaS business will the biggest net Accelerator on cloud gross margins as we exit 2017.
They have a huge catch up to do. But if you think about the fact that at the moment, we are Essentially operating duplicate infrastructures across the main ones of our SaaSPaaS assets, especially SuccessFactors, That, of course, is a massive cost burden that will basically go entirely away once all of the customers are migrated by the end of this year. Hence, we are still confident that we will achieve the gross margin progression, marching towards the roundabout 80% that we have in mind for SaaSPaaS By 2020, admittedly, it's a big jump, but all of the investments that we are putting in right now are setting us up For exponential efficiency increases later on. Then maybe over to you, Bill, or to Rob on the
The second part of the question, Luca, what was it? It didn't come through here.
Yes. Michael, can you repeat
the second part of your question?
On S4, do you think mean, you did 400 or so in the quarter. It was 500 in Q1 last year. I know it's a small quarter, but were you disappointed by that? Do you think you'll do more This year than last year and just an update on public cloud within that.
Michael, great question. I think we'll continue to Accelerate is for the HANA business. It still looks pretty strong. Our pipeline stood strong. What we're seeing that value stories are now coming out consistently across all the customer base.
And it is truly the digital story for And our customers and I think you'll continue to see that. Well, we have here disappointed with 400. I think the bigger topic is we have a 5,800. We have a snowballing Now on the go live customers and we have more and more projects ongoing that are more complete than just finance logistics. So it's really a very, very good story for all of SAP.
And the one thing that you have to keep in mind on S4HANA and the answer is definitively you'll have more this year than last year by a lot When you're the CEO of a company, just think about that as your digital core. And then you have all the attach rates Of the line of business, the business network, machine learning, AI, the Internet of Things. I was recently meeting with the CEO of an energy company who chose us To rip and replace the competition and it's a net new customer to SAP. It was the strength of S4 As the core platform, but it was also the attach rates of all the other entities within the company that aligned their board And coalesced SAP is the ultimate winner. And that would be a more difficult decision to make than status quo.
So the innovation is there, Michael. We're going to win every place. It's going to be an unbelievable year.
Yes. And maybe just finally take a look at the average share Revenues that we drive from orders bigger than €5,000,000 as for Hana, we're certainly the major contributor to this.
Okay. Thank you very much.
Thank you. Let's take the next question, please.
Next question comes from the line of Philip Winslow of Wells Fargo Securities. Please go ahead.
Hey, thanks guys and congrats on just a really great quarter. A question for you, Bill. You've talked a lot in the past about The innovation that you all have done on the edge reinvigorating the core. And I know you and Luke always say don't read too much into Q1. But If I read into the string of quarters that you all have reported here, it does seem that you have enough data points to say that the core is reinvigorated, is improving.
When you think about, I guess, two questions here. First, in terms of just the go forward, just demand here, how are you what are you seeing between sort of the And how are you thinking about that? And then in terms of just the go to market strategy, with and reinvigorated core and continued strong growth in the edge, How are you balancing that from just a sales go to market perspective?
Well, thank you very much, Phil. And I'll, of course, let Rob and All the colleagues on the board make any comments they want to. But I want to, first of all say, this idea of the edge to the core and the core to the edge really started When SAP made the bold move into the cloud some 7 years ago and we recognized at that time, We became more relevant in our core ERP conversation because we had made a move into the line of business cloud and the business network. Now, since we reinvented our core ERP system on S4HANA, we're the only company in the world that can tell A C level decision maker, you can run your transactional systems and your analytics all on one database, One common S4HANA platform for all of your ERP activities. And why this is so powerful Every single CEO you talk to wants to align the soft stuff, meaning the management team and the people, motives of a company, Along with the hard stuff, which is the transactions and the financials of a company.
Only SAP unifies this in one Real time in memory suite and there's the S4HANA cell. Now what's interesting on the go to market side that I have seen As we underplayed industry at SAP, we're in 25 industries and the more you can customize and tailor this conversation To the unique subtleties of industry, the more you walk away with market share. The second thing is we're seeing an extreme rise in new business sales. I gave one example a few moments ago, but you have to remember 50% of our names in Q1 were net new. And at the same time, you're seeing now the cloud entities at the line of business, the core ERP as well as the network grow really fast, Especially when you look at the bookings metric of 49%.
So here's my hypothesis on the industry. Why is SAP the de facto standard business software company in the world? I'll tell you why. Because even if we don't win every sale and Somebody at a point solution level takes something. They still have to live with us in the other 80% of the enterprise.
And frankly, when you're thinking like CEOs think, they want things to be simple. So if you're at least good enough And all the other areas and you own the core, you'll own the edge, you'll own the network, you'll own IoT and I think that's represented in our numbers. And I kindly ask you all to take the back of the envelope approach, add up the revenues that others are getting from M and A, Add up their core declines, 1 plus 1 equals negative 2. And when you add up SAP's numbers, 1 +1equals3+.
Thank you. Let's take the next question, please.
Next question comes from the line of Adam Wood of Morgan Stanley. Please go ahead.
Hi, thanks for taking the question and congratulations for me for a strong start to the year as well. Maybe just coming back to the cloud business, you've obviously seen an acceleration in the bookings there. Could you maybe give us a little bit more color on what's driving that? Is it new customers versus the installed base? Is it the S4 public cloud or rather Traditional customers may be buying subscriptions on S4 rather than coming in with licenses.
And then secondly, just thinking about the net new build that you alluded to I think we will think about that maybe by value being less than it is by volume because it potentially is smaller customers. Could maybe help us understand how big that opportunity could be if you are starting to win some larger net new names there? And is that a significant opportunity for SAP over the next few years? Thank you.
Yes, I'll just give you a big picture, Adam. So first of all, I would like to say that SAP Has been a very, very successful company without putting all the wood behind the arrow in SME. And one of the detractors to really growing and taking over the SME market had been the limitations of an on premise business model. It's just not fast enough to scale as fast as a company like ours would like to. Well, that now has been taken off the table.
You have B1 on HANA, you have by design growing very fast, but now we have S4 Cloud Edition that without a doubt Market down with Giant Crayon will be the leader in not only smallmedium size, but even Upper mid market for cloud computing in the ERP world. So that business is on a pair. And I think that's a big, Big bogey of growth that is upside as we think about our future. Bernd, I'll let you make some comments on that and Rob, But also, we ran through the Fortune 1,000 and 2,000 a little while ago with 350,000 plus customers. But when you think about the SME market, there's literally millions of them out there that could be in the SAP portfolio and we're going after it with everything we have.
So I think You're now seeing us completely unified on S4 Cloud Edition being something that can take over the market.
Maybe, Adam, hello, this is Dan. Just to add an additional flavor to your question. If I'm looking back on the business of ERP Over the last decade, it was very hard and tough for us to win net new names. Now with Sfour and specifically with Sfour HANA Cloud, If we take the overall triple digit growth and then look at the customer list, it's in the range of between 35% 45 percent of net new names. And this gives us a tremendous opportunity not just To convert an installed base from an on prem world into the cloud as well to conquer complete new markets.
And this is The path we are going forward and looking at the numbers, we are confident that this path is really resonating very well. Rob, any additional comments from your side? Yes.
I think people forget that S4HANA ERP, there is nothing else like it in the market at all. When you look what it does and how it changes businesses and how it connects digital supply chain, it is by far the next generation ERP and everyone else is a Far way behind. And then when you connect what we're doing in machine learning and IoT and the analytics space, we are the only company On the distribution side and on the product side, they have a true supply chain end to end for the digital world. And I think that's the major difference. There is nobody else out there that can actually talk about what it looks like in the digital world to connect to an ERP system and actually We'll look at next generation of applications and I think you'll see us change it as more and more AI and artificial intelligence becomes relevant for S4HANA.
So I think the opportunity is huge. I think the S4 Cloud opportunity is going to be incredible. Some of the companies that signed up like Chemours, It's a pretty significant company in the chemical business. They've just committed to SAP and I think you'll see us Doing really well
in the space. And keep in mind, just in closing on this topic, Adam, if you take Latin America, take a market like Latin America, This was an on premise market up to about 18 months ago. Today, we get more revenue Out of the cloud in Latin America than anything on premise. So this is an interesting dynamic. There's another region that's now crossing over to more Cloud revenue than the on premise world.
And we've been in business for a little while. And in 2018, the cloud eclipses the on premise revenues of SAP. So the more we fulfill the initial vision to be the cloud company powered by HANA, the more we can mass scale Our enterprise in small, medium, large, 25 industries in 193 countries. That's the game plan.
Thank you very much.
Thank you. Let's take the next question, please.
Next question comes from the line of Gerardus Vos of Barclays. Please go ahead.
Hi, thanks for taking my questions. I just have 2 on S4, probably Focal kind of role for kind of build. Just first Regarding the kind of adoption and what you see in the pipeline, the last kind of year and a half, there was a lot of kind of smaller deals that kind of divisional level. Do you start to see in the pipe now large enterprise wide adoption for kind of S4? Then secondly, how many go live did you have in the quarter?
And then finally, a question for Luca on the kind of gross margin. The drop in the core business in software and kind of support during the kind of quarter It was a bit of unusual given the kind of good improvement we've seen over the last kind of 4 quarters. Was this an aberration? And should we That gross margin ticks up for the other 3 quarters? Or is there a structural reason why it's coming down now?
Thank you.
So when it comes to the go lives for S4HANA, we have now over 700 Go live, so it's up significantly more than as I said early on, more than 2,700 projects ongoing. Almost all of those projects are 1610 version, so significant logistics. And when we look at the large enterprises, I would Pretty much say that there's almost every single one of our large customers that have a plan or obviously implementing S4 At some point, we've seen it with my advisory board to the group, every single one of them has a project or they or some of them are already live with significant parts of their business. Luca? Yes.
On the gross margin, I think the key on the software and support margin side again is mix shift effects because We had, as was discussed before, a slightly slower start on the maintenance side. Hence, the mix of software versus support was A little bit more unfavorable as it was last year, and that basically drove the slight deterioration there. In total, What we said at the Capital Markets Day absolutely still holds that we believe that there will be a continuous slight upward trend Just because the relative weight of support will increase as well as the exposure to third party license sales commissions and royalties We'll decrease over time as we further scale our S4HANA business. So that's our expectation more from a full year basis And also looking into next year. Okay.
Thank you.
Thank you.
Let's take the next question, please.
The next question comes from the line of Alex Twos of Deutsche Bank. Please go ahead.
Yes. Hi, guys. Thanks for taking the question. I think a lot of the SAP specific ones have been asked, but maybe if you could Comment on the macro environment a little bit. How do you see IT budgets?
Are they healthy at this point? I think when we We've seen some numbers from some of the IT services ecosystem that have been that kind of indicated a bit of a slow start to the year. I mean, is there anything to be concerned about as far as you're concerned? Pockets of strength and weakness that you may be seeing across sectors? How does energy look, for example, at the moment.
And anything to be concerned about with the European elections, some of the politics out there as we go through the year?
Well, thank you very much for the question. First of all, I would like to say I'm very pleased that I had an outstanding Meeting in 2014 with Emmanuel Macron, when I went to visit Francois Hollande, and It's nice to see excellent people like him compete for the biggest offices in the world, because he viewed technology in his role on the economy then As a major driver to innovation and a force multiplier for the economy. And I think more and more in the public sector, We're seeing really smart people know that they have to utilize technology and innovation as a lever To deliver results and this is more and more becoming the case around the world whether it's Brazil, it's the EU countries, the United States And Asia, and that's very exciting. As it relates to energy specifically, it was one of our top energy industries in Q1. And it's one that I personally have been participating in as an executive sponsor with some of the most critical energy companies in the world.
All of them are looking to change and do big things With SAP, I can tell you that the macro environment looks very good. The pipelines around the world look very good. And I think what's unique about this moment in time is we see good numbers in the BRIC and all the major geographies around the world have strong pipelines And they're all performing for us at least in double digits, steep double digits in the cloud and in some cases depending on the business, Even triple digits as the case with S4 Cloud Edition. So we're very bullish right now. We think some of the world's biggest problems Can only be solved by innovative technologies and we're really proud to be a leader.
And I think we're also getting more humble by the minute Because even as we taste success, we resist the temptation to get intoxicated by it. We instead are redoubling our efforts And focusing on that customer and inspiring our people like never before to get the job done because our customers' customers need our customers.
Thank you very much. I think we have time for one final question now.
Next question comes from the line of Walter Pritchard of Citi. Please go ahead.
Thank you. I guess question on the sales and marketing spend for Luca. As we see the year unfold, at this level of growth in terms of Cloud and license, do you expect to see your target achieved for the year? Or do you expect that you would Spend more as it relates to this higher because it seems like you're tracking a bit above on the top line. Just trying to understand if you'll The incremental leverage on this higher top line or if that incremental top line would require more spending on the specifically sales and marketing?
No, I mean, as you have seen, we have confirmed all of our outlook metrics for the full year. Let's Remember, the Q1 is our seasonally smallest quarter that holds both for the top line as well as then consequently For the impact of our sales and marketing investments on and against that top line as we further progress through the year, We believe that with the investment levels that we have planned for, we are well equipped to fund all of our core business operations. We don't see a need to further increase the investment levels. And we believe that ultimately, We are very comfortably positioned to meet our full year targets, not only with regard to the top line, but also with regard to the bottom line.
Very good. Thank you very much. This was the last question we
had on our call today. Thank you
very much for joining. This concludes the SAP Q1 2017 earnings call, And we hope to see you in Orlando at SAPPHIRE. Please check the SAP website for further information. Thank you very much for joining, and goodbye.
Ladies and gentlemen, this concludes the SAP 3rd quarter 2016 earnings results conference call. Thank you for participating. You may now disconnect.