Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining the SAP fourth quarter and full year results 2016 conference call. Throughout today's recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question and answer session. If you would like to ask a question, you may press star followed by one. Please press star followed by zero for operator assistance. I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.
Thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you all for joining us to discuss our results for the fourth quarter and full year 2016. I am joined by our CEO, Bill McDermott, and Luka Mucic, CFO, who will both make opening remarks on the call today. Also joining us for Q&A are board members Rob Enslin, who runs Global Customer Operations, Bernd Leukert, who leads Products & Innovation, and Steve Singh, Head of SAP Business Networks and Applications. Before we get started, as usual, I would like 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 SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2015, filed with the SEC on March 29th, 2016. 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 earnings press release, also known as the quarterly statement, and financial summary slides deck, which are intended to supplement or prepare remarks today and include a reconciliation from 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 at constant currency. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. Finally, I'd like to note that we would like to welcome you back to our annual Capital Markets Day again in New York City on February 9th, 2017. We will give you more detail about the innovation growth drivers behind our 2020 ambitions. With that, I hand the call over to our CEO, Bill McDermott.
Thank you very much, Stefan, hello everyone. Thank you very much for joining us today. Looking back in 2010, we set a clear strategy to increase our lead in the business software industry. We fundamentally reinvented the database with SAP HANA, which has now become the de facto in-memory platform for the enterprise. We created the future of ERP with S/4HANA, a generational upgrade cycle that has only just begun. We conducted the smartest M&A in the industry, adding best-in-class cloud companies to the SAP portfolio and extracted enormous value from those assets. In 2016, we once again validated the SAP strategy by reaching all of our raised guidance metrics. We again delivered strong software sales, fast cloud growth, and operating income expansion. Cloud revenue powered to 31% growth. This is on par or better than best-of-breed standalone cloud companies.
Cloud and software grew 8%, significantly outpacing our main competitor. IFRS operating profit was up 20%, while non-IFRS operating profit expanded to a record EUR 6.6 billion. New cloud bookings surged nearly 40% in Q4 and 31% in the full year. It's now a EUR 3 billion cloud business growing more than 30% that we have here at SAP. Our cloud backlog soared 47% to EUR 5.4 billion, greatly enhancing the predictability of our future cloud revenue. The facts clearly demonstrate that our strategy has delivered for the shareholders of SAP. Since 2009, we have more than doubled the revenue, operating income, and the market cap of SAP. We're proud to be the most valuable DAX company. We're only getting started. We're growing in every region of the world with a pipeline that has never been stronger. We're focused on profitable revenue growth, laser focused.
As part of our 2020 profit acceleration, SAP plans to achieve world-class margins such as 80% software as a service, 40% infrastructure as a service, and 80% in our business networks group. No other company can report growing software sales, fast growth cloud businesses, and expanding operating income. The SAP trifecta still stands alone today. This is proof positive that SAP's bold innovation agenda is coming through for our customers. In the end, after all, the customer is the only boss. These strong business results lead us now to confidently raise our 2020 ambition. We are now targeting more than 2.6x Growth in the cloud revenue to reach EUR 8 billion-EUR 8.5 billion in the cloud, and EUR 28 billion-EUR 29 billion total revenue in 2020. On February 9th, as Stefan said, we'll focus on SAP's bright future during our annual Capital Markets Day at the New York Stock Exchange.
Please do join us. We'd love to have you. When you think about SAP solutions, think about how our Digital Boardroom changes the game for business leaders. In one beautiful, intuitive user experience, a CEO can bring together live data from every corner of her business, from finance and logistics to customer and workforce engagement. This is the ultimate example of SAP's fully integrated portfolio. S/4HANA delivers the modern digital core system to connect the supply chain to the demand chain. As a result, Apple has once again extended their long-term partnership with SAP to further leverage SAP innovations such as HANA and S/4HANA. Very exciting, Apple. Thank you. With the S/4HANA platform, Nike will run a live business and plans to transform how they bring merchandise to market worldwide. Coca-Cola, Tyson Foods, and Ameco Beijing selected S/4HANA in the fourth quarter.
In 2017, we'll continue the acceleration of S/4HANA in every single deployment model, public cloud, private cloud, or a customer's own data center. Please keep in mind, 5,400 S/4HANA customers means more than 85% of our install base are in the pipeline still to be migrated. Not to mention the thousands and thousands of customers around the world that will switch from their current provider. This, ladies and gentlemen, is a once in a generation business opportunity, and we intend to seize it. SAP Hybris and our customer engagement solutions deliver a one-to-one customer relationship in any channel on any device. We can give our customers a single view of their consumer, from social to retail to e-commerce, to deliver a personalized experience to each individual at scale. This is mass customization at its best. SAP customer engagement solutions once again achieved strong double-digit bookings and cloud revenue growth.
Hitachi and Thermo Fisher were among the many brands that selected SAP Hybris. Only SAP SuccessFactors and SAP Fieldglass can engage the total workforce. We now have nearly 1,600 Employee Central customers. Mercedes-AMG selected SAP's workforce management solutions in the fourth quarter. Another Workday replacement, Mohawk Industries, is now live, and our solutions are localized in 81 countries, in 42 languages, which is why top industry analysts named SAP SuccessFactors the leader for global companies. Demand for Fieldglass' best-in-class flexible labor solutions is also rapidly increasing. Think about this. In the past 12 months, over 3 million workers were placed in 135 countries using SAP Fieldglass. SAP business network companies like Ariba and Concur are redefining how businesses are managing spend. Ariba continues to scale as the world's largest procurement network with two and a half million companies transacting nearly $1 trillion annually.
Leading global companies like Molson Coors Brewing Company selected Ariba in the fourth quarter. Concur helps more than 45 million end users effortlessly process travel and expenses daily. Big brands like L'Oréal recently chose Concur. To predict and simulate new business models on the fly, SAP is already the leader in the Internet of Things. By connecting the core of the business to where data is actually created, SAP enables insight and action from millions of connected devices. Our IoT solutions are now branded SAP Leonardo, and they include everything from connected products to connected people. We will continue to expand our portfolio with smart tuck-in acquisitions like Fedem Technology and PLAT.ONE to complement our outstanding development team. The completeness of SAP's vision is broad. For example, SAP developers are on the cutting edge of machine learning capabilities.
From invoice matching to predictive recruiting to intelligent sales forecasting, SAP machine learning applications will drive significant value for our customers. We're also using machine learning to root out bias in the hiring process and to build a more inclusive workforce. With all of this potential, we recently unveiled a new identity for machine learning as well. This is now called SAP Clea. On our flagship SAP Cloud Platform, customers can extend their SAP applications like S/4HANA and build new applications. Our SAP HANA Enterprise Cloud gives customers the ability to run their entire company in a secure private cloud. With our SAP API Business Hub, we now enable a more open SAP platform to incubate new innovations. We're scaling the HANA world with smart tuck-ins like Altiscale to bring Hadoop and Apache Spark big data together with SAP HANA Vora.
Only SAP can unify a customer's business transactions together with predictive analytics on a single platform. Game change. From IoT to blockchain and beyond, there is simply no stopping SAP. In summary, I'd like to close up by saying, we've never been more confident about our future than we are right now. We're innovating in the cloud, and we're alone in leading the business networks. We're delivering a beautiful Fiori user experience to simplify the steps in the business process and make users happy. Every business we're in is a customer-driven, fast growth, and high margin business. We're one of the top places to work in the world, and the first global IT company to receive EDGE certification for gender equality. We're the most sustainable software company in the Dow Jones Sustainability Index. Our employee engagement scores have never, ever been higher than they are right now.
Our global brand value has also never been higher. From manufacturing to healthcare, our 84,000 colleagues are ever inspired by our vision to help the world run better and improve people's lives. Ladies and gentlemen, with our accelerated 2020 ambition, SAP is firmly committed to remaining the growth story of the business software industry. I am very happy to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.
Thank you very much, Bill. Welcome from my side as well. Looking at our strong results, I'm really proud to say that we delivered as we promised we would. In fact, we met all guidance metrics for the full year 2016, as refined in October. SAP once again showed impressive resilience in uncertain times. For example, even in light of Brexit, the U.K. had excellent results. China performed tremendously amidst continued macroeconomic uncertainty, and we overcame political volatility in Mexico with strong results. Mexico had double-digit software revenue growth. I'm also happy to announce that our cash flow increased significantly by EUR 1 billion in 2016, based on a stellar Q4 with more than 150% growth, even outpacing a strong Q3. At the same time, we are successfully progressing towards a more predictable business model based on a very strong cloud and growing core business.
Our share of more predictable revenue is now 61% for the full year, up 2 percentage points. This gives us more stability in a volatile, fast-moving market. Let's take a look at the top-line performance and start with our cloud business, where we have grown by more than 30% for four years in a row now. This continued fast growth is fueled by our future committed cloud revenue or new cloud bookings. We grew by 31% in fiscal year 2016. This resulted in EUR 301 billion in cloud revenue at constant currency, achieving our refined guidance range of EUR 300 billion-EUR 305 billion. With this continued strong growth in cloud, we have now increased its share of total revenue by another three percentage points in 2016 to 14%. For the full year, our new cloud bookings were also strong, with growth of 31% to EUR 1.15 billion.
As expected, in Q4, we saw an acceleration of new cloud bookings to 40%. If you look at the full scale of our cloud business, we also need to look at our cloud backlog, which climbed by 47% to EUR 5.4 billion. This reflects the unbilled committed future cloud subscriptions and support revenue that will drive strong cloud growth in 2017 and beyond. Thinking about our future growth, it is equally important to highlight the stability of our industry-leading core business and its continued growth. This is unprecedented in our industry, as reflected by the 4% increase of our software and support revenue in 2016, driven by another year of software license growth, and let's not forget on the back of a very strong 2015, as well as continued very high support renewal rates.
To summarize, the strong performance in our cloud and core business resulted in growth of 8% in cloud and software revenue for the full year. This was above the midpoint of our raised guidance while continuing to substantially outpace the market. Let me come to the fourth quarter regional results now. Starting with EMEA. We had a very strong performance in EMEA, where we saw an increase in cloud and software revenue of 10%. Cloud subscriptions and support revenue grew 37%. In EMEA, we had double-digit software revenue growth in Germany and the U.K. In the Americas region, we grew cloud and software revenue by 2%, and cloud subscriptions and support revenue by 24%. In Latin America, SAP had strong double-digit software revenue growth in Mexico. Finally, in the APJ region, cloud and software revenue was up 5%, with cloud subscriptions and support revenue growing by 48%.
In APJ, we had double-digit software revenue growth in our key markets in China, India, as well as Japan. Let me come to the bottom line. Here, before talking about operating profit, I would like to provide some more details about the gross margin development for the quarter on a reported basis. Our overall gross margin was 75.6% and flat year-over-year, despite a significant negative mix shift effect within the cloud margin. For the fourth quarter, we saw an increase in the cloud margin of 10 basis points year-over-year, resulting in a cloud margin of 63.1%. We achieved this increase despite a significant shift in revenue mix, as I said. If you look into more detail, you can see that our business network cloud segment margin had an impressive expansion of three percentage points year-over-year to 75.3%.
The applications, technology and services, or ATS cloud segment margin in turn declined by 150 basis points to 49.2% year-over-year. As expected, the accelerated growth and consequently higher share of our private cloud business led to this decline in the ATS segment, while its margin broke even for the second quarter in a row. If we would have had the same revenue share between businesses that we had last year, the overall cloud gross margin would have increased even further by approximately 2.8 percentage points for the full year. Finally, remember that we continue to invest heavily in our entire cloud operations to provide massive benefits for customers. Our cloud and software gross margin was 84.8%, flat year-over-year. While we continue to see a higher share of cloud business, the strength of our software and support business fully compensated the changed revenue mix.
In the fourth quarter, our services gross margin was down by 3.9 percentage points year-over-year to 20.3%, but was almost flat quarter-over-quarter. We have made good progress in 2016, particularly in the last 9 months. Coming off a sharp decline in the first quarter, we have improved by 6.4 percentage points since then. This development should be also seen in light of significant investments, such as our co-innovation projects with strategic industry customers to focus more and more on customer outcomes, which results in higher adoption and renewals. We are on track with our operational performance in the services business as underlying, which is growing 3% for the full year 2016. Let me come to our operating profit development. We saw continued operating profit expansion in the fourth quarter, despite our continued investment in innovation and high growth areas.
These investments are even more important for our future growth, we are already seeing them pay off now. We again had a strong quarter in terms of operating profit performance, which grew by 2%. In looking at our group operating margin, it is clear that the revenue mix shift effect, as well as the decrease in the services margin, weighs on our group profitability in the near term. This resulted in a decrease of 90 basis points to 35% in Q4. For the full year, we significantly outpaced our main competitor, not only in cloud and software revenue growth, but also in terms of the bottom line expansion. Our operating profit was EUR 6.6 billion, or the midpoint of our raised guidance range, representing a growth rate of 4%.
We achieved this result even though we saw significant growth in the previous year, and we continued to make investments for our transformation during the course of 2016. For example, we hired almost 7,200 FTEs, which were primarily highly educated young talents in our fast growth areas and locations. The IFRS tax rate in the fourth quarter was 22.5% and almost stable compared to the prior year period, while the non-IFRS tax rate in the fourth quarter was 23.7%, down from 25.1% in the prior year period. For the full year, our tax rate increased, but to a much lower extent than expected. Hence, we came in below the lower end of the guidance range that was updated in Q2.
As a consequence, IFRS earnings per share increased by 18% to EUR 1.26 per share for the quarter, and increased by the same amount for the full year to EUR 3.03 per share. Non-IFRS earnings per share increased by 9% to EUR 1.52 per share for the quarter, and increased by 3% to EUR 3.89 per share for the full year. Let's come to a particularly bright spot, our cash flow and liquidity development. In the fourth quarter, we reported a record EUR 1 billion in operating cash flow, increasing by triple digits year-over-year. This led to strong operating cash flow for the year, growing by 27% to EUR 4.6 billion. This result was primarily due to our strong top-line performance, with an increase in total revenue of 7% and higher profitability, as well as the absence of restructuring-related cash outflows.
At the end of the year, we improved our net liquidity by almost EUR 2.5 billion compared to the end of 2015, which is an improvement of 44%. At the end of the year, we had a net debt of EUR 3.2 billion. Looking to 2017, we intend to pay back approximately EUR 1.4 billion of further financial debt. Our A rating continues to be underpinned by the major rating agencies such as Standard & Poor's, with a positive outlook. With outlook, I can move on to our own outlook. We are providing the following outlook for 2017, which replaces our previous 2017 ambition. Based on our continued strong momentum in our cloud business, we expect full year 2017 non-IFRS cloud revenue to be in a range of EUR 3.8 billion-EUR 4 billion at constant currencies, in line with our previous 2017 ambition.
We expect full year 2017 non-IFRS cloud and software revenue to increase by 6%-8% at constant currencies. We expect full year 2017 non-IFRS total revenue in a range of between EUR 23.2 billion-EUR 23.6 billion at constant currencies. This is above our previous 2017 ambition. Finally, we expect full year 2017 non-IFRS operating profit to be in a range of between EUR 6.8 billion-EUR 7 billion at constant currencies. This is also above our previous 2017 ambition. Looking beyond 2017, we have increased our 2020 ambition to reflect our consistent fast growth in the cloud, solid software momentum and operating profit expansion, as well as the exchange rate development. I am looking forward to discussing the key drivers behind the long-term growth aspirations further at our Capital Markets Day in New York.
Finally, as SAP sport sponsor for sustainability, I want to also emphasize our long-standing commitment to address the biggest economic, environmental, and societal issues around the world. We believe we fulfill this by using our vision as a guiding principle for everything we do. Our holistic approach is fundamental to achieving our goals and realizing our vision, which is reflected in our integrated report. We will publish this at the end of February, which is a month earlier than in previous years. The intensive use of SAP software supports us in completing and issuing this comprehensive detail, and as you will find, once again, very innovative report less than two months after year-end. Our employees and the innovations they create are the heart and soul of our company. We are proud to report that the employee engagement index at SAP is at an all-time high.
We were able to increase this already high number as our transformation is paying off. We have expanded our learning culture, we are hiring the right people, we have the right vision. Turning to the environment, we were able to further decrease carbon emissions despite growing our cloud business strongly, in part because of our green cloud policy, but also because of operational innovations, such as our ambitious goals around electric cars. Yes, I drive one too. We are also progressing nicely in the area of diversity. We now have 24.5% of women in management, an improvement of approximately one percentage point year-over-year, and very close now to our target of 25% by 2017. To close, we released strong fourth quarter and full-year results today, showing continued momentum and strong execution.
Even though we made strategic investments during the course of 2016, we managed to expand our profit, again, fully in line with our stated 2016 guidance and midterm ambitions. Paired with our robust pipeline, this positions us for yet another year of profitable growth in 2017 and allows us to confidently raise our high-level 2020 ambition. I am looking forward to another excellent 2017 and beyond as we continue to help the world run better and improve people's lives. Thank you, and we will now be happy to take your questions.
Thank you, Luka. I hand it back to the operator. Please start the Q&A session now.
Ladies and gentlemen, at this time, we begin the question and answer session. Anyone who wishes to ask a question may press star followed by one. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question comes from line of Adam Wood of Morgan Stanley. Please go ahead.
Hi. Good afternoon, Bill, Luka. Thanks very much for taking the question. A couple, if I could. Just first of all, on the operating profit outlook, on the margin outlook. Clearly the company is investing for growth at the moment, and that's paying off on the top line. I wonder if you could help us whether there were any kind of one-off spending in Q4 that pushed the expenses up. As we look into 2018, what are the investments that are going into '17 in terms of the HANA move on the cloud, in terms of how you expect the move to subscription payments to happen that depresses '17, but then turns around in '18 to give you the confidence that we see the operating leverage coming through in the later part of the guidance.
Then maybe just very quickly on the technology side, I think, Bill, this is the first time you've talked in a little bit more detail about machine learning. We've seen other companies focus on the vertical side as well as horizontal. Could you give us a little bit of a feel of what's going on with SAP and how much of that can be organic versus M&A driven? Thank you.
Sure. Yeah. Should I start maybe with the questions on the investment side? I wouldn't say that there were any, let's say, truly extraordinary, new types of investments that we made in Q4, but we continue to invest in the key areas in which we said that we would focus on. Clearly also in Q4, we continue to invest in the build-out of our Concur cloud infrastructure into our program to migrate our acquired cloud assets onto our SAP HANA in-memory database. We continue to invest in data center consolidation. This will continue also in 2017. As we always have said, 2017 is then the year where these, let's say, extraordinary investments in our cloud delivery business will come to an end.
As of 2018, we expect to see the leverage from these efficiency-based investments in a much higher progression of the cloud gross margins and consequently also the operating income contribution of our cloud business. In terms of the headcount growth, we continue to invest also in Q4. However, from a profile perspective, slightly different. We hired a bit over 1,700 FTEs in Q4. In Q3, we had a very strong focus in hiring on the sales and marketing side because you want to bring these people on board and train them so that they can get fully productive as quickly as possible in the new year. Therefore, in Q4, while we still did some additional hiring in sales and marketing, this was not the leading category.
Most of the hiring that we did in Q4 was in the R&D and in the cloud delivery operations, where obviously you're trying to build up a more even basis of your headcount distribution as you progress through the year. In terms of the profile of investments in total, you're absolutely correct. 2017 will be another year of investment, whereas in the years 2018 and going forward, we expect that most of the cost ratios, except for sales and marketing, where we will continue to invest in line with our growth potentials, will come down as a relative share of revenues. We expect that then cloud delivery operations will be a more, let's say, steady progression with growing leverage from the top line in the cloud.
We also believe that in R&D, after heavy investments into the build-out of S/4 and our innovation categories, the R&D ratio will start to slightly decline. Hence, we expect to see a bigger CAGR in operating income in the years 2018 and moving forward. Far from my side on the investment and operating income side.
Thank you, Luka. Adam, I'll just touch on the machine learning. First of all, we're working on largely horizontal-focused applications, core applications, we're making our own. Think of it as focused on the digital core and making the line of business smarter. S/4HANA, our cloud and network assets, it will be mainly organic. If we do anything on the M&A side, it'll be tuck-in, nothing to get concerned with on the financial model. Maybe I could just give you a little feel for this. We need to start turning up the advertising and the marketing on what we're already doing for machine learning, whether it is recruiting, employee approvals, payment processing, sales discounting approval, or call center management up to and including effectively using bots. We already have our machine learning solutions in place, and we're rolling them out across industry.
It'll be a huge source of growth and probably not factored in your models. In terms of blockchain, it's another area that I'll just touch on because I know we talked a lot about IoT, but not so much ML and blockchain. If you think about banking, identity, compliance, security, trade settlement, insurance, smart claims, manufacturing, track and trace, all these industries have a blockchain case. Remember, more than three-quarters of the world transactions are running through an SAP system. Our financials will actually form a very unique blockchain business network. I kindly ask you to keep that in mind. Then finally on IoT, because it is real-time information, logistics, autonomous payments, quality assurance, anti-counterfeiting, industrial and military cybersecurity. We're in all of these areas at the application layer, and we have it now.
It's not like a fantasy or a dream where we give you a toolbox and you build it. Our great development team is already building it or has built it and is rolling out in customer establishments. Maybe Stefan at the Investor Day, we can give you a complete overview, including all the logos who are in flight already.
That's very helpful.
Thank you.
Thank you very much.
Thank you, Adam.
Let's take next question, please.
Next question comes from the line of Chandramouli Sriraman of MainFirst Bank. Please go ahead.
Hi. Thanks for taking my question, and congrats on a good 2016. Just a couple from my side. You've raised at the midpoint your guidance by about EUR 1.4 billion in revenues, out of which EUR 0.5 billion comes from the cloud. Given that services is not a big mover in terms of the overall top line, I was just wondering, is it reasonable to assume that a big chunk of this guidance comes from licenses, given that maintenance is predictable? Is it fair to sort of back calculate the impact licenses? If you could help us go through the various moving parts, that would be helpful.
Yeah.
My second question is, Rob usually gives the number of live S/4HANA customers. I was just wondering if you could have that number. Also any comment on your S/4HANA public cloud plans would be very helpful. Thanks.
Let me start maybe on the 2020 ambition. I will pass on to Rob for the other questions also on S/4HANA Cloud. On the 2020 ambition raise on the top line, you're right. Of course, when we devised the 2020 ambition, we were at the very beginning of introducing S/4HANA to the market. We had an aspiration for our core business that was still expecting declines and extending up to 2020 to more significant single-digit declines. We see that in the last two years, we have been doing substantially better than that due to introduction of S/4HANA, which has brought licenses back into positive growth territory in both 2015 and 2016. We don't expect anymore that there will be a substantial downturn in our core business, but that it rather can sustain the approximate levels that we are seeing right now.
That, of course, then leads to our total revenue aspiration to also be higher than originally expected.
Absolutely. The question on S/4HANA in the public multitenant cloud, we at Investor Day on February 9th will feature this business prominently. We have a leader named Darren Roos, who's running it for us on an end-to-end basis. Think of it as a division going to market with S/4HANA, public cloud, multitenant, and we're going for the fences here. We've got an unbelievable solution. We had a big Q4, and it's obviously subscription revenue. Bernd, maybe you want to add a little bit of color.
I think what we observe in the market that while the beginning of the cloud was clearly driven by individual line of business solutions, we now see that it's the time where ERP moves to the cloud. It's great that we have anticipated that move early, while we can play both choices. If the customer wants to move the entire, I'm talking the entire ERP as a SaaS solution with a multitenancy capability, we have this now in our portfolio. As Bill said, we will talk big about that at the Capital Markets Day. What I can refer to that we saw that uptake for the first time in history already starting very strong in Q4. I can reference one customer who went live after the first conversation after seven weeks, which is the beauty of the cloud.
This ease of consumption with the entire ERP is paying off, and we have ambitious goals for 2017.
Okay. Thank you.
I would just add 560 customers productive on S/4HANA.
Thank you, Rob. Let's move to the next question, please.
Your next question comes from line of John King of Bank of America Merrill Lynch. Please go ahead.
Very good afternoon. Thank you for taking the questions. I think three, probably mainly for Luka. Firstly on the following up on the S/4 cloud side of things, obviously you're just starting, I guess, to push there, particularly around the core ERP. Are you factoring any significant amount of the core ERP deal shifting from license to subscription in 2017, or is it still quite a small number? Just help us out with how we should be thinking about. Therefore the license trajectory through the course of the year. A couple of follow-ups around the margin. Could you help us quantify what the cloud migration projects at the moment are costing you on the margin side. Also maybe the customer co-innovation projects, how much of a drag that's creating? Finally, on the cash flow side, obviously very good progress in 2016.
How does that look for 2017? Is there any priorities around CapEx that you might need to invest in, related to the cloud projects which might hold that back? Thanks.
Let me start. First of all, on the S/4 cloud, you're right. We will start to broadly penetrate the right segment of the market with S/4 public cloud. This is a solution that is primarily geared towards the upper mid-market and lower LE space, where I think it will be quite attractive and will help us as well to spur further growth in the cloud. The expectation for shifts from license to subscription from that end are really moderate, and as by any means are anyway factored into the overarching guidance that we have provided. The second point on consulting and the scope of co-innovation projects and their impact on the cloud margin, it's actually not insignificant. It's an impact of around about five percentage points towards the margins.
You will always have some level of these co-innovation projects because these are often necessary to continue to use best practices from customers and build them into our solution portfolio. However, the overall size of those engagements in 2016 has clearly been above the normal, I would say. We certainly expect that this will be one of the key factors to improve our service profitability in 2017 when these projects are running out as planned next year. On the 2017 CapEx and cash flow progression. We generally believe that our cash flow development will continue to follow our strong top-line progression that we are planning for. In 2016 on a year-over-year comparison, we had an extraordinary effect that we had huge restructuring-related cash outflows in 2015 in the second half of the year that we simply did not have in 2016.
That's where we have the huge growth from. We will certainly not see triple-digit growth in the cash flow in 2017. However, we believe that we'll continue to develop nicely and trend upwards following our progression in terms of our business scope and business size as a company. In terms of where it will go to, yes, we will continue to see expansion on the CapEx side. From a percentage perspective, not as steep as from 2015 to 2016. We will see already that the trend will start to flatten out. There will be still an increase, I would estimate by roughly 30% year-over-year, which then in 2018 will reverse. In terms of other uses of cash, I think nothing has really changed there.
We see quite a sufficient liquidity coverage based on our strong cash generation to fund all organic innovation investments that we need to fund. We will continue to fund smaller tuck-in acquisitions if they happen from our operating cash flow. We intend to pay an attractive dividend also for the full year 2016. As you have noted, earnings per share have come up in IFRS terms at the group level by 18%. I think the assumption is reasonable that you would see also a quite nice dividend based on that development. We will of course also pay back and continue to deleverage. We have EUR 1.4 billion in debt that are coming up for repayment in 2017.
Despite all of this, there might still be an excess liquidity situation that we might run into as of the second half of the year, assuming there is similar tuck-in activity as we have seen it in 2016. If that should start to build up, we would certainly consider to also engage in moderate share buyback activities. That's it.
Thank you.
Thank you. Let's take next question, please.
The next question comes from the line of Walter Pritchard of Citi. Please go ahead.
Thank you. Luka, I'm wondering if you could talk about in the guidance, you sort of alluded to stability in the core, and you've gotten through the last two years with stable license. I know you have S/4 Public Cloud that's going to ramp up here, but as you think about the factors that would still drive your license down, say, in the low single digits, mid-single digits as you've guided to over the next four years, what would be those factors, and how should we look at sort of their relative potential to swing that license number?
I think it would primarily be continued progression in the transformation of our line of business solutions to the cloud. We still have a moderate level of license sales of additional seats in, for example, on-premise HR, in on-premise procurement, in on-premise customer relationship management over time. These customers will certainly migrate with us to our respective cloud solutions. That will continue to have a certain dragging effect on licenses. On the flip side, of course, our flagship solution, S/4HANA, but also, quite frankly, elements of our on-premise portfolio around omni-channel e-commerce, Hybris, for example, will continue to grow. To what extent this will level out against each other is, of course, very hard to predict. I think, over the course of the last two years, we gave a prudent and reasonable guidance around that, and so far we're always able to meet it.
We're very confident that for the next few years, we also have the risk and reward and opportunity profile directionally right in this regard.
Walter, the one thing I would say, adding to Luka's comments, is with S/4HANA, this is a generational market opportunity, and thousands of customers will come from competitive platforms to S/4HANA. There will be a substantial number of them that could easily backfill some of the solutions that will migrate to the cloud versus running on-premise. We have a good feeling about what S/4HANA can do in all dimensions, especially when you consider in the last quarter, I think it was about half net new names. If I hear that half the net new names are coming in to the SAP portfolio with immense loyalty rates in the install base, the cloud, and the network clicking on all cylinders, it kind of makes me feel like the whole thing is tying together into one heck of a growth story.
Thank you.
Great. Thank you.
Thank you.
Let's move to the next question, please.
The next question comes from the line of Philip Winslow of Wells Fargo Securities. Please go ahead.
Hey, thanks, guys, and congrats on a great end to what was obviously a very strong year, and it's also good to be back covering you guys. Just two questions. First one for you, Bill. Luka did a good job walking through the R&D investments and then obviously the investments on the COGS line in terms of just the forward guidance. When you think about the go-to-market side, and maybe Rob could also buzz in here, too, you obviously have multiple drivers going right now. You've got license growing with S/4HANA. You've got the cloud business hitting some pretty key milestones. You surpassed Workday in terms of customer count for Employee Central Q3, and so forth. How are you sort of balancing that in the go-to-market? How do you feel about just sort of the headcount, the quotas?
Anything that you're kind of changing, I guess, or how you're thinking about it next year and over the next couple of years would be great. Then I just have one quick follow-up for Luka.
Yeah, sure. I'll start and then hand it off to Rob. I think one of the things we are laser focused on is bringing people into the company that can code software or sell software. Creating immense learning and training opportunities for these people so we can get them young at a university and build them in our own culture and our own image. It's kind of dull spending your time recruiting from other software companies and then having to reinvent people. We'd rather start fresh and do it right. The other thing that I think is worth mentioning is we have actually built quite a competency in the go-to-market under the leadership of Rob Enslin and also Steve Singh on the business network and the cloud side.
I really think we have immense maturity and leadership also with the cooperation of Bernd Leukert in the development side, where we have some beautiful end-to-end businesses. We have this wonderful match of regional coverage models to deal with 193 countries and 25 distinctly different industries. The way we're going to market and crossing over on very significant cloud network and end-to-end businesses such as S/4HANA Cloud, which I mentioned a few minutes ago, I think really differentiates SAP. Most cultures can't handle it because they don't have a symphony in their culture. They have a war zone. With regard to Rob, I'd like to turn it over to him because he's doing a great job, and he told me as early as this morning how strong the pipe is. Rob, over to you.
Thank you, Bill. First of all, I think it starts with stable leadership, and we've had stable leadership in the go-to-market organization between Steve and myself for the last couple of years, and that's really paying dividends. Second piece is we continue to hire graduates out of college, send them through one year of training, bring them into the field, and they're having a tremendous impact, and we're talking significant numbers there. That links into our culture. Third piece is our end-to-end model when it comes to analytics, database, SuccessFactors, customer engagement, and commerce and Hybris, Ariba, et cetera. That's really working now together with the regional model. When you look at that model, it's really singing right now, and people really understand how to engage with customers and actually upsell customers.
When you look at our significant customer base, what you see is an S/4 environment then connected with many SAP applications, Concur, Ariba, Fieldglass, et cetera. Lastly, I'd say, we obviously investing in the go-to-market significantly under Darren's leadership, and we'll share that at the Capital Markets Day. We see that as a significant opportunity, and Q4 was actually very good for us in public cloud, under S/4. What I will tell you is significant growth opportunity as well in investing in the go-to-market in our Eastern European marketplace, our APJ marketplace, and our Latin American marketplace, and using our global scale, you'll see significant leverage as well there. Probably lastly, our productivity has increased in the go-to-market side for the last four years, and we continue to see that happening.
Great. Thanks, guys. Just a quick call for Luka. Luka, you obviously gave guidance for 2017 in constant currency, there was clearly a lot of swings in currency very late in the year. Wondering if you'll provide just some more color on if currencies remain stable with where they are right now, just what you'd expect the effect on the as-reported numbers to be, or maybe you'll be touching on that at Analyst Day.
That's a very good question, I'm happy to answer it right away. It's also an important one, we covered it also during the press conference earlier this morning. You're absolutely right. It's a constant currency guidance, as we know, currencies have moved not insubstantially through the course of 2016. Actually, the currency environment has been improved for SAP through the course of the year. Hence, if you were to assume that the currency exchange rates from the beginning of the year, so January 2nd, would prevail, then we would expect to see a positive tailwind impact on cloud and software revenue of 3%-3.5%, and on the operating profit from 3.5%-4%.
If we take the exchange rates from yesterday, that effect would actually be approximately 2 percentage points of tailwind for the cloud and software revenue and about 2.5 percentage points for operating profit. Clearly, so far, we're in the tailwind category. That's also something that applies when you take a look at how we have converted the previous midterm ambition from 2017 to a constant currency outlook right now. If you reflect back on the change of the exchange rate environment from average 2015 rates, which obviously were underlying the previous ambition update in the beginning of 2016 to the average 2016 rates, you can actually see that there is even a slight headwind that we have been facing between then and now on the currency side.
I think also in light of this, one should see the ambition update and the raise as a very positive sign of confidence of SAP.
Awesome. Thanks, guys.
Thank you. Let's take the next question, please.
The next question comes from the line of Gerardus Vos of Barclays. Please go ahead.
Hi, good afternoon, Bill and Luka, and congratulations on the strong Q4. A couple of questions, if I may. First of all, on the 2020 guidance. It's a very encouraging upgrade. I'm just struggling to kind of bring the pieces together, because if I listen that we're now expecting a flat license number, and if I look at the kind of FX changes since 2015, it looks that there's an implied downgrade to the outlook unless my FX assumptions are wrong. It would be great if you could help us a little bit around your kind of assumptions on FX and on the underlying thought for the kind of business. Secondly, the tax rate ended up quite a lot lower than where it was guided at the second quarter. Could you just provide us an update where you would expect it for 2017?
Finally, a question for Bill on the industry. Oracle has had quite a bit of success driving NetSuite into the mid-market, and I guess that's where S/4HANA in the cloud is going to be pitched as well. Could you let us know when is this product go live and what you expect from the kind of ramp in year 1, year 2? Thank you.
Gerard, thanks for the questions. I will answer the first two. First of all, on the 2020 ambition. Let's be clear on a few things. We are not necessarily assuming on an implied basis that licenses will remain stable all the way through 2020. However, we have become more positive around the overall scope of the license business. Where originally in the implied guidance, you would have had a high single-digit decline in licenses. That's what we don't expect anymore. There is still an expectation of low to mid-single-digit declines until 2020. Why are we guiding in that way, implied? Because when you put out an ambition that goes until 2020, which I think is something that is unprecedented in our industry that you won't find by any other player.
Despite all of the confidence, you want to be safe and you want to be rock solid with this ambition. The same applies, of course, also to the other metrics like the operating income as well as the cloud revenue growth. Hence, you may characterize it as conservatism, but it's a guidance that we believe is readily achievable. That has been, I would say, a common theme that you have seen from SAP in the recent years, that we are hitting what we are promising to the market, and the same will be true for these targets. On the FX, actually, what I said before, and with regard to the 2017 outlook, is true for 2020, obviously, as well, that the ambition update in 2016, where we left the 2020 targets unchanged, has, of course, now run its course in an exchange rate environment in 2016.
That was a mild headwind for SAP. The fact that we are now upgrading it and on the revenue side quite substantially, is actually and should be taken as a very positive thing. On the tax rates side, you're right. We came in ultimately, quite a bit lower than originally expected in Q4. What was the main reason? The main reason was a different income allocation, in terms of our regional sources of income that we saw in Q4 versus our original planning expectations. So we had a substantial bigger share of our revenue coming in from the European markets, where we generally are facing a lower tax environment, hence, this had a positive effect.
In terms of the IFRS earnings per share progression and general earnings per share progression, that we have seen in Q4, this is, other than the tax effect, also due to the fact that we had very nice returns from exits of our Sapphire Ventures investment fund in Q4. There was a private sale of one investment company that occurred, we had further sales of listed equity. On the other hand, we had slightly better interest income in Q4 based on a slightly higher interest rate and higher cash that we had available due to the strong cash flow generation, while, of course, we continued to deleverage and therefore also had less interest expenses. That's the basic reason why we have below the line progressed so nicely in Q4.
Gerard, what I'd like to also just give you an update on is the S/4 cloud. It's here now, we've been selling it's going extraordinarily well. I'll let Bernd and Rob take turns giving you some color on that. Also, I think it would be helpful for Steve Singh to just give you an update on Business ByDesign as well. You mentioned that others are doing well. It's probably important that you have the whole story. Bernd?
Yeah. Maybe to start first, what I was explaining before already is the tremendous acceleration and speed of adoption of the cloud is paying off now by the entire ERP. We had seen that the first time with significant impact in Q4, thanks to Darren Roos leadership. In addition to that, we are heavily investing, that is probably of key interest for you, to bring down the cost of operation by further automating our data center. It will be fully software driven, which is essential going forward as well for our margin. I hand over to Rob. Maybe Rob, you can give a small outlook on our targets for sales.
Yeah. Look, we saw across the significant in Q4 number of customers signing up for S/4 public cloud multi-tenant. We see a significant amount of those customers going live. Very productive, actually very satisfied, high quality system. We plan to broadcast that lively at the Capital Markets Day. We're going to showcase those customers. I think what you're going to find with those customers that have signed up for S/4 public cloud is that they are really cool. They do some innovative things, and we're doing really innovative things with them. The time it took us to go big with S/4 cloud was really well handled by SAP, because now what you see is the satisfaction on the solution is at an all-time high and will allow us to elevate our game and get scale really rapidly in 2017.
Maybe closing comments.
I just have a couple of things.
Rob, maybe a closing comment on one of the deals we have won. If you compare the modern S/4 public cloud solution with NetSuite, I think many people forget that NetSuite is on the market for more than a decade. If somebody thinks this is a modern ERP in the cloud, this was probably more than a decade ago. In these days, a decade in the IT industry feels like a century. We have observed that, especially last quarter, in many head-to-head competitions. The user experience is superior in S/4. The response time with our leading platform of HANA outpaces every transaction in NetSuite. As well, the end-to-end processes we can support in our dedicated scope is more comprehensive than any other competitive product. From that perspective, you will hear more positive news going forward.
Steve?
I'll add one thing to it real quick. I think if you look at SMB, obviously broad definition of it, but underneath 1,500 employee companies, we have an exceptional distribution agent market leader , which is the Concur distribution into that segment, where a very large portion of the Concur growth in any given quarter comes out of SMB. We think that with ByD having been revamped over the past year, that the opportunity to continue to drive ByD into that segment is very, very strong. We've seen results to that extent over the course of the past couple of quarters, and we're continuing to invest aggressively against that opportunity.
By the way, just when you think about ByD, and we'll speak more to this at the Capital Markets Day, think of it as not only a refresh in the technology stack, but being opened up and integrating into Concur, Ariba, Fieldglass, SuccessFactors, and other cloud products. We can deliver a full suite of services into our SMB customers that helps them run their entire business.
Thank you, guys. That was very complete. Thanks.
Thank you. I think given the time, we have time for one brief final question.
Final question comes from the line of Keith Bachman of BMO. Please go ahead.
Hi. Many thanks for taking the question. I wanted to just ask about S/4HANA adoption. I think the number was said for what it was Q4, I didn't quite pick it up. In addition, as you think about the 5,400 customers, what are you thinking about the conversion rate of those customers in calendar year 2017 that supports the license growth? It sounds more like flattish. How are you thinking about that adoption trend, if you had to parse it between cloud and on-premise? Thank you.
Rob, did you want to talk about the actual S/4HANA adoption numbers you've previously quoted?
Yeah, sure. We have 5,400 plus customers that are explored to S/4. Today, it is over 550 that are productive and live across not only financials, but logistics, the 1610 release. It's an extremely stable version of the solution. The expectation is that that number is going to grow significantly with the amount of projects we've got ongoing, which is probably closer to 2,500 projects right now that are ongoing around S/4. When it comes to looking at S/4 and on-premise or S/4 software and S/4 public cloud, I think Luka gave it in the numbers. We continue to see not only strong uptake on S/4 in general across the board, but also in HANA as a standalone big data platform with Vora and Altiscale.
As we see some diminishing returns as certain LOBs move to the cloud, we see very, very strong growth in S/4 and in HANA. As Bill said early on, I feel really good about the pipelines moving into 2017.
Very good. Thank you very much. This concludes the financial analyst call for today, and we look forward to seeing you all in New York City on February ninth at our Capital Markets Day.
On ice.
On ice, of course. Capital Markets Day on ice. That's the new brand I just announced. Thank you very much for joining, and bye-bye.
Thanks, everybody.
Thank you. Bye-bye.
Ladies and gentlemen, this concludes the SAP fourth quarter and full year results 2016. Thank you for participating. You may now disconnect.