Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the SAP First Quarter Results 2016 conference call. Throughout today's recorded presentation, all participants are in a listen-only mode. The presentation will be followed by a question and answer session. If you'd like to ask a question, you may press star followed by one. If any participant has difficulty hearing the conference, 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.
Yeah, thank you very much. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the first quarter 2016. I am joined by CEO Bill McDermott and Luka Mucic, our 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, President of Business Networks and Applications. As usual, before we get started, I would like to say a few words about forward-looking statements. 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, the SEC, including SAP's annual report on Form 20-F for 2015, filed with the SEC on March 29, 2016. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. I would also like to point out that beginning this quarter, we have published a quarterly statement.
This statement replaces the earnings press release and the interim report and contains all relevant information in one document. Going forward, we will issue a quarterly statement for each of the four fiscal quarters. Additionally, we will issue as before a half year report and a full year integrated report. Please keep in mind that unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS, and growth rates are non-IFRS as reported unless otherwise noted. Also, we would like to invite you to our investor symposium, which will be held on May 18th as part of our user conference, Sapphire Now, in Orlando, Florida. Sapphire is a great opportunity to learn more about our strategy and product portfolio. Please see our IR website for further information. Now I would like to turn the call over to our CEO, Bill McDermott.
Thank you, Stefan, and hello, everyone. Following an outstanding finish to 2015, SAP had a solid performance in Q1, our seasonally smallest quarter. The results show that even as the world economy is changing fast, SAP represents the innovation, strength, and stability of a market leader.
Last week, I visited with numerous SAP customers. Here's what they told me. They are looking for SAP leadership in three main areas. First, S/4HANA to be the 21st-century suite of best-in-class business applications. Second, they want SAP line of business cloud and business network applications to remain best of breed. Third, they believe strongly in the idea of OLTP and OLAP in one database. A database, yes, that can do both transactions and analytics. HANA will be their database platform of choice. It is time for a new architecture. On each count, it is clear to me that SAP's fundamental growth drivers are rock solid.
Let me share some Q1 highlights. We saw continued fast growth in cloud at 33%, tracking to the high end of guidance. Non-IFRS cloud and software revenue was up 6% at constant currencies within our guidance range. We again saw a record share of more predictable revenue, perfectly consistent with our well-known strategy. IFRS earnings per share were up 38%. Non-IFRS EPS was up 9%. Please note, I think it is interesting that this performance significantly exceeds our peer group benchmark. Let me add some commentary on our growth drivers for the company. SAP added more than 500 S/4HANA customers in the quarter, of which approximately 30% of those are net new. This means that SAP is successfully migrating customers from our own R/3 system and from competitive ERP systems as well.
We continue to see widespread interest in S/4HANA migration as customers seek to reduce complexity, reduce hardware costs, improve their user experience, and increase growth opportunities through business model innovation. When I speak to CEOs and CFOs around the world, they all want a digital boardroom capability so that they can engage with live data in powerful new ways. They want to expand into new industries. They want the agility to adapt to consumer behavior and changes in the macro environment on the fly. S/4HANA powers all of these business outcomes and more. The S/4HANA innovation cycle is also catalyzing broad customer adoption of our entire innovation portfolio and contributing significantly to SAP's global pipeline. Put simply, SAP is transforming how business works, and we are at the start of an unprecedented multi-year opportunity.
Customers like Munich Re, Duracell, Gas Natural, and Benetton are turning to S/4HANA to reinvent their business for the digital world. Norton Rose Fulbright, a preeminent business law firm, has chosen S/4HANA to simplify their processes in global operations and drive competitive differentiation across their industry. It is not just large companies in developed markets that are adopting S4. SWISS PROPERTY, a fast-growing company, went live with S/4 in less than two months. S/4HANA is the best-of-breed ERP system in the world. It can be consumed however a customer wishes to consume it, and we will deliver every customer and prospect a clear migration roadmap to achieve their goals. This will come through heavily at Sapphire. Let us talk about our best-of-breed applications in the cloud. SAP is the only company that delivers total workforce management solutions across permanent and contingent labor with SuccessFactors and Fieldglass.
Our solutions are localized for 75 countries in 41 languages, all while our main cloud competitor has limited international capability. We have more than 1,100 Employee Central customers, and companies are choosing SuccessFactors, and they're terrific brands. They include Philip Morris and Patheon Pharmaceuticals in the U.S., where, yes, we beat Workday again. We also know that modern HCM is all about connecting companies to staffing firms, consultancies, independent contractors, and other service providers. That's why customer traction for Fieldglass solutions is soaring, with companies like NRG Energy Inc. and Brooks Brothers turning to Fieldglass. Let's move on to customer engagement and commerce. SAP solutions go beyond traditional CRM. That's old school. Customers can build a personalized relationship with their consumers, which is rich, contextual, and unified across all channels. SAP also fulfills e-commerce faster, connecting the front office to the back office.
In contrast, our main cloud competitor offers CRM in a silo, decoupled from the rest of the value chain. We recently launched Hybris as a service for customers and partners to build new customer engagement applications. This gives our ecosystem total flexibility in the cloud to build new applications that drive better customer engagement and commerce. We had numerous wins against Salesforce and others, including great brands like Swarovski. With our business network companies, SAP is building new ecosystems across all major spend categories: materials, services, contingent labor, and travel. Our cloud applications are easy to consume and deliver an intuitive user experience. Each of SAP's business network businesses are leaders in their respective markets. Concur helps approximately 40 million end users effortlessly process travel and expenses. AirAsia Global Shared Services and France Télévisions have turned to Concur.
Ariba continues to scale as the world's largest procurement network, with 2.1 million companies like Jaguar and C&A transacting over $800 billion annually on this network. Amazing. Activity is accelerating with new services like Ariba Pay that delivers a true procure-to-pay for customers. In a few short months, listen to this, Ariba Pay has exceeded $50, five zero, billion in payment transactions. Let's talk about our platform. HANA has become the industry standard in-memory data platform and is the key enabler for our entire innovation portfolio. For example, our new Cloud for Analytics solution, built natively on the HANA Cloud Platform, is a single integrated platform. This means one source of the truth that delivers end-to-end BI planning and the digital boardroom. Unlike legacy databases, we are not restricted to structured business data.
With recently launched HANA Vora, we enable our customers to query massive petabyte scale unstructured data in Hadoop, all with unprecedented speed. With the HANA Cloud Platform, thousands of customers are extending their standard SAP applications to meet their specific needs. Many more are developing new innovative applications to address everything from IoT to health data, to engaging consumers in new ways. HCP, or the HANA Cloud Platform, is also emerging as the de facto platform for hybrid cloud to on-premise integration across SAP applications. Companies like Camposol, one of the largest agricultural producers in the world, are choosing HCP as an innovation platform. The HANA Enterprise Cloud is increasingly attracting customers to migrate their mission-critical processes to the cloud. The HANA Enterprise Cloud offers secure and fast access to our new innovation and is simplifying the path to S/4HANA adoption.
Companies are running their supply chain, manufacturing, asset management, sales and distribution, that all operate on a 24 by seven basis on the SAP HANA Enterprise Cloud. The triple-digit growth in this business is a validation of SAP cloud innovation, and we are only getting started. In closing, it's clear that SAP is the cloud company powered by SAP HANA. We set a winning strategy for our company based solely on where our customers need us to go. We are strong, we are profitable, and we are confidently reiterating our guidance for the full year. I'd like to personally invite you all to attend our flagship annual event, as Stefan said, Sapphire Now 2016, May 17th through 19th in Orlando, Florida. It's going to be really exciting.
SAP's 78,000+ employees are more motivated than ever. As always, I'd like to recognize their continuing commitment and dedication to our customers. Now I'm happy to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.
Thank you very much, Bill. Hello everybody from my side as well. Well, as Bill mentioned, the first quarter was solid, coming off an exceptional finish to 2015. I'll go into more detail on the financials shortly, but I would like to share one highlight and proof point that our business transformation has been successful up front. Only a few years ago, we would definitely not have been able to balance out the impact of a lower than expected license performance and still post a strong bottom-line result. I've talked a lot about managing effectiveness and efficiency in the last few quarters, but this quarter certainly highlights our success there. Let me start with the top line. Our cloud results this quarter leave no doubt that this business continues on its fast growth path.
Cloud revenue, Bill has said it, came in at 33% growth this quarter, which marks the 12th quarter in a row with 30%+ growth rate excluding acquisitions. This is at the high end of our implied guidance range and ticking well ahead of our CAGR through 2020. New cloud bookings saw robust growth up 23% or up 26% at constant currencies. With our strong cloud backlog and our strong bookings performance in 2015, we are well on track to deliver on our midterm growth ambitions in the cloud. Now to support revenue, which was solid again, up 5% in line with our plan. We continue to see very high renewal rates, signaling a healthy growth rate going forward. In the first quarter, 99.5% of SAP's net new customers selected enterprise support. As a result, our more predictable revenue share was 69% of our total revenue in the first quarter.
That means our business has become more stable, which is key, especially in times when certain markets are becoming more volatile. Overall, our cloud and software business was likewise solid in the first quarter, especially coming off a strong Q4. We grew by 6% at constant currencies, which is within our guidance range for the full year. We do recognize some volatility in certain markets, but our strong pipeline gives us full confidence to reiterate our outlook for the full year. Let me spend a few words on the regions. We had a solid performance in the EMEA region with an 8% increase in non-IFRS cloud and software revenue. Non-IFRS cloud subscriptions and support revenue grew 49% in EMEA. We likewise had solid growth in software licenses in this region.
In the Americas region, we grew non-IFRS cloud and software revenue by 4%, and non-IFRS cloud subscriptions and support revenue by 29%. North America, coming off a very strong fourth quarter in 2015, had a slower than anticipated start to the year. In Latin America, in particular in Brazil, the continuing political and macroeconomic instability weighed on our first quarter performance. In the Asia Pacific region, non-IFRS cloud and software revenue was up 1%, with non-IFRS cloud subscriptions and support revenue growing by 26%. Our software revenue performance in the region was in line with our expectations, given a tough prior year comparison. China was a particular highlight with double-digit software revenue growth. Now to the bottom line, where we were able to manage an exceptional result in light of the slower than anticipated start of our software business. Let me first discuss our gross margin development for the quarter.
The cloud gross margin improved nicely to 66.3%, which is an increase of 120 basis points year-over-year. We achieved this result even as we continue to invest heavily in cloud delivery and personnel in our fast growth business. Most notably, we further improved the efficiency of our private cloud business, as one can see from the 4.5 percentage point increase of our application technology and services segment cloud gross margins. The software and support gross margin was 85.9%, up 80 basis points from the prior year, and against an already very strong comparison. This positive result was due to the solid performance in the core, the combination of software and support revenue, and a positive impact from our company-wide transformation program. Our cloud and software gross margin was 82.4%, slightly up year-over-year.
This is yet another strong proof point of our steady improvement in efficiency within our different business models, since our share of cloud revenue increased by 3.7 percentage points to 17.6%. Our services gross margin, in contrast, was down by 4.8 percentage points year-over-year to 4.1%. While our services revenues improved nicely, driven by our premium engagement business and stronger than expected project consulting business, our cost of services impacted our services margin. This is mainly due to higher than anticipated third-party costs as demand increased on the customer side. Our overall gross margin result was therefore 67.9%, down 70 basis points year-over-year. The development of our services margin was the primary driver behind this decrease. Non-IFRS operating profit was EUR 1.1 billion for the quarter, an increase of 5%.
This operating profit result, as I said before, was a real bright spot in this quarter, was largely due to the positive impact from the company-wide transformation in 2015, where we are now managing our costs much more effectively and investing in a targeted manner only in areas in which we see fast growth. For example, our headcount grew by 1,245 employees in the first quarter, and roughly 80% of these incremental hires were in the sales, cloud, and R&D organization. The IFRS tax rate in the first quarter was 23.3%, up from 13.6% in the prior year period. The non-IFRS tax rate in the first quarter was 26.2%, up from 22.3% in the prior year period. IFRS earnings per share grew by 38% to EUR 0.48 per share, and non-IFRS earnings per share grew by 9% to EUR 0.64 per share.
Operating cash flow for the first three months was EUR 2.5 billion, up by 5% year-over-year. Very important for me from a financial steering perspective, since the end of 2014, we were able to reduce our financial debt by EUR 2 billion down to EUR 9.1 billion, a very strong commitment to a fast-paced deleveraging. Due to our strong free cash flow in the first quarter of the year, we were even able to improve our net liquidity by EUR 4.5 billion in the same period, from minus EUR 7.7 billion to minus EUR 3.2 billion. Let me come to the outlook. As a result of our strong pipeline, Bill has said it before, we are firmly reiterating our outlook for the full year. For the rest of the year, we now expect a currency benefit and have updated our expectations for the impact on reported growth rates in 2016.
For details on the reiterated outlook and the currency benefits, please refer to our earnings release published earlier today. In closing, let me say that this was a solid quarter, and there is a lot we can take away from it. We proved that our business transformation is successful. We had strong growth in operating profit despite the fact that our license performance was slower than anticipated. We again expanded our cloud margin while we continued to grow our cloud revenue by more than 30%. Our fundamental growth drivers are rock solid. HANA has become the industry standard in-memory data platform and is the key enabler of our entire innovation portfolio. This puts us on a strong path for the future, and the best is definitely yet to come. Thank you, and we will now be happy to take your questions.
Thank you very much. I hand it back to the operator. Could you please start the Q&A session?
Ladies and gentlemen, at this time, we will 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 are 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. First question comes from the line of Stacy Pollard of JPM organ. Please go ahead.
Hi. Thank you. Just to dig in a little on margins. Services gross margins were weak in the first quarter. Can you talk about why that was? I know you mentioned third-party costs, but maybe dig in a little more. How you expect to progress through the rest of the year and what your midterm target would be. While we're on the margin, maybe just to touch on the business networks gross margins improved. The operating margins declined. Maybe just talk about that. Finally, touch on that sort of 2018 pivot point, if you can, and what kind of expectations or how we can measure your progress towards that.
Yeah. I'll take the first one and last one. Maybe, Steve, you want to chime in and comment on the business network performance. In terms of services margins, what you have seen is an interesting development in Q1. On the one hand, we have actually returned to growth in our services business. You have seen the 6% constant currency growth there, which consisted of a continued very positive double-digit growth in premium engagements and a return to single-digit increases in our classical project consulting business. That was the positive side. However, we had a lot of projects where we needed an expanded amount of third-party resources to fill in due to that demand that was building up.
That's something that we fully expect as part of our resource management process to be picked up and moved closer towards the usage of own consultants as we move forward. In Q1, this resulted in a quite significant exceedance of the third-party budget in the services line of business. We also need to see that generally, there is a shift in the pattern of the consumption of services. Because we are moving to a cloud world, we clearly see that there is a trend to smaller, nimbler, quicker, faster projects, which, of course, have at their center to make sure that customers can start to consume the software-as-a-service solution or the business network solution as quickly as possible. We have an exponential increase in these cloud type of services versus classical, bigger, monolithic on-premise implementation services.
Those tend to come with a lower margin profile, it's not the intent to harvest particularly margins in this area, but to make sure that the customer can deploy and can use the cloud solution as quickly as possible. What does this translate to as we progress further through the year? Of course, we are expecting the services margin to climb up again. That's already a factor of seasonality that we are very well aware of. You have seen the same effect that through the course of 2015, the margin was increasing. There is no particular midterm target that we are setting. Of course, we have budget assumptions, we are looking out for a better result in the next few quarters through better managing the third-party exposure.
However, the trend to cloud-based services or cloud-focused services will increase over time, therefore, we cannot expect that the services business will return back to margins as we have seen them maybe in the old world, so to say, of an only on-premise business. In terms of the 2018 inflection point, how can you measure progress? On the way towards 2018, you can measure the progress through the ongoing development of cloud gross margins. I shared with you that we fully expect to see a stable to slightly increasing gross margin development through the course of 2016, despite the investments that we are doing partially also in anticipation of midterm substantial savings.
For example, the investments that we are doing into converged cloud infrastructures will save ongoing costs in a significant way once we are done with that consolidation project singular investments that will have very positive midterm effects on SAP. The second proof point will be whether we are able to deliver the exponential operating profit increase in the years out from 2018. You have seen in our midterm guidance that the CAGR of operating profit expansion is much higher in the later years from 2017 to 2020, as opposed to the years from 2015 to 2017.
Our thesis is that at that point in time, the cloud will have reached a scale that will clear the way for exponential contribution to the operating profit, that's what we clearly see is starting to happen as well with the improved efficiency that we could demonstrate all the way through 2015 and now also going into 2016. On the business network, Steve, maybe you want to comment on gross margins versus net margins.
Yeah, of course. Stacy, a couple things to think about. Number one is obviously we're pleased with where the gross margin sits for the business network group, expected to continue to trend up over time. Don't see any reason why the gross margin in that business can't be as strong as, obviously, best in class cloud businesses, and frankly, over time, be even a little bit stronger than that. On the operating margin side, a couple things to think about. First and foremost, typically, we start investing in the early part of the year for sales ramps in headcount, as well as marketing spend. Really, it's just beginning of the year investments that push the margin down a little bit.
The one other thing I would ask you to please think about is that if you think about where Concur, Ariba, Fieldglass, which are the three primary components of the business network group, where they focus, we think there's a tremendous opportunity as we ramp that sales organization to also leverage other products and services at SAP. To go drive sales of our ERP solutions for the small and medium-sized market. We're ramping investments across the business network group in anticipation of driving additional business or cloud business across all market segments.
Okay. Thank you very much. Let's go to the next question, please.
Next question comes to the line of John King of Bank of America. Please go ahead.
Great. Thanks for taking the questions. I've got two if I can. Firstly, on the license side, obviously, it seems like you had a bit of slippage at the end of Q1. There was some commentary in the statement that you'd started Q2 strongly. Can you say how much of those deals that might have slipped have already been closed? Just, I guess more generally, how licenses should face through the year? Obviously, you've got a pretty tough comp in Q4, just give us some of your thoughts around how we should think about licenses in the next few quarters. The next one was a follow-up on the gross margin side, Luka Mucic. For the on-premise gross margin, obviously a good progression there. The restructuring, it sounds like it's helping. The other side to this is the third-party databases that I guess you've historically been selling.
As you transition away more towards selling HANA as your primary database, is that having, at this point, a positive impact on the margin? How would you see that going forward? Perhaps just first of all, maybe where are you in terms of selling a proportion of ERP licenses that are sold with HANA versus a third-party database today? Thanks.
Thank you. Luka, you want to go through the margin question first?
Yeah, absolutely. First of all, the progression on software and support gross margins is indeed due to, I would say, two main effects. One is clearly the success that we had with our company-wide transformation program. Virtually all of the gains that we had through reducing capacity in functions that are contributing only to slow or no growth or our overhead functions are in this space, in the cloud space. All of our cloud gross margin expansion had virtually nothing to do with the transformation program, but was own efficiencies. This has a huge positive effect for us and will continue to have a positive effect through the remainder of the year. As I shared last year, we have a mid-triple digit million EUR annualized run rate savings that we will generate in 2016 from Optimize.
Not all of this, of course, will be flowing directly to the margin and to the operating profit, because we are reinvesting in areas where we can have strong growth, as we have seen also in Q1 and in Q4. Definitely it has helped a lot. You're absolutely right, our third-party database royalty share goes down quarter-over-quarter, year-over-year. That has been the case for quite a few years now. By now, of course, the sale of S/4HANA, including HANA database, as opposed to additional seats on classical ERP applications with then additional third-party databases is far bigger to the advantage of S/4HANA. That, of course, has a positive margin impact as well, and this will continue as well, albeit not at an as high a pace anymore as in the last one to two years.
Quite frankly, there isn't hardly anything left, rather than a few edges that we can still sell off based on old database legacy products.
Thank you, Luka. I'll just comment, this is Bill, on the deals and kind of the picture on the pipeline and so forth. I think everybody here is experienced in the software industry. You know when you have an extraordinarily strong Q4 and full year, as we did in 2015, when you go into Q1 and it's your smallest quarter of the year, kickoff meetings and all the other things that happen in software companies, you can often run into the timing of especially on-premise or perpetual license deals. We did see some of that, and that was reflected in our on-premise license. Of course, the cloud and the predictable revenues are much easier to manage with the point-to-point timing cycles in software. That's why it's a nice business to be in.
Having said that, yes, we did sign many of the deals that were supposed to be signed in the last week of March already. I've inspected the pipeline quite rigorously. Whether it's the core or the cloud or the business network, the company's pipeline is very strong. We're in good shape, and we're executing on all cylinders. Typically in SAP, we have seen acceleration of our momentum continue as the year progresses. This is a normal trend at SAP, if you look at the history of the company. I really am excited about this management team. Everybody is very well aligned. The company is quite inspired, and we also have our leader of global customer operations on the line if he'd like to make a comment or something. Rob, would you like to add anything to what I said?
Not too much, Bill. As you said, Q1 was a little slower than we would have liked. When we look at the pipeline and we look at S/4, we look at the cloud line of business, our pipelines continue to trend very strongly, and I feel very confident that we will deliver on these numbers. As you said, the slippage deals are all but in. We're off to a really fast start in Q2, and I would expect continued acceleration with Sapphire taking place in May.
Okay. Thank you, Rob.
Thank you very much. Let's go to the next question, please.
Your next question comes from the line of Gerardus Vos of Barclays. Please go ahead, sir.
Hi, good day. Thanks for taking my question. Just to follow up on John's question on the licenses. The deal volume for on-premise deals stayed very strong, I think it was up 7% year-on-year, suggesting that Some of the larger deals, particularly in the U.S., kind of slipped during the quarter. Just wondering if that's a correct assessment of the quarter. Secondly, on the OpEx. The OpEx was up just below 4% year-on-year for the kind of quarter. Is that the kind of run weight we should anticipate for the year? Finally, just finishing up on S/4. Could you give us an update with the amount of go lives and the amount of live customers share you have year-to-date? Thanks.
Let me-
Do you want to start on the I'll say maybe Rob, go ahead.
Go ahead with the deal volumes, yeah.
Yes. I think, if you look at the deal volumes, the deal volumes are starting to trend upwards. We're starting to see more volume in deals. Quarter-over-quarter comparisons with large deals, they were pretty much the same. We had a couple of more significantly sized deals in Q1 of 2015, we see that trend going in the reverse direction. When it comes to S/4, we added 500 new customers in the quarter. More than 30% of them are completely new to SAP. Our live projects are at 146, trending upwards, and we have 539 projects that are ongoing right now, both on the finance and on the logistics piece of the solution. That's actually trending up extremely positive. More and more customers taking the solutions live.
Yeah. Maybe I'll cover the OpEx question. Yes, I'm actually a bit proud that cost containment was certainly one of the virtues of this quarter. We believe that we will continue to focus on the right investments and those we will certainly not hold back. We know where the areas are that we want to strengthen. It's very clear. It's innovation around S/4, around our best-of-breed line of business solutions, around the Business Network, around the platform. This is where we continue to invest. We will also continue to invest in strengthening our capabilities around our cloud delivery operations. All in all, we expect, as we have guided as well, that we will deliver operating profit progression. Of course, this requires us to also maintain good discipline on OpEx spending.
This will be aided all the way through the year by the success of our transformation program. You have seen already in Q1 the big discrepancy between our IFRS net profit and the non-IFRS, where you see clearly the impact of the cost of the transformation program that has dissipated. That effect, of course, will rather even further amplify as we progress through the year, as the impact from restructuring has been most felt in Q2 and Q3. Of course, also, the run rate benefits will tend to rather further increase as we finalize, so to say, the annualization of these savings through the last people exiting the organization.
Okay. Thank you. The next question, please.
Next question comes from line of Alex Tout of Deutsche Bank. Please go ahead, sir.
Hi, guys. Thanks for taking the question. Obviously with the 10% license decline, I guess there's questions more generally in the market around what the macro picture looks like. I'd appreciate it if you could give us a description of pockets of strength, pockets of weakness. We've seen high-level indicators like PMI and industrial production being a bit weak in the U.S. Has that impacted some of your traditional manufacturing clients, perhaps? I don't know if you mentioned this already, but did you say how many of the S/4HANA customers are currently live at this stage? Can you give us an idea of the proportion running on-premise versus in HANA Enterprise Cloud? Thanks.
Maybe, Bill, you want to start?
I'll start. Don't forget, we also have Bernd Leukert, who leads our development efforts in addition to Rob Enslin. I'm sure they'd both like to give you a perspective. First of all, there is no limitation to SAP's growth based upon the global economy. Let's just take that right off the table. When you look at China is still a dream, if it grows at 6.5%, it prints to Switzerland this year. Don't worry about China. I was just there. India looks great. Yes, there are some rough spots in Latin America, like Brazil. Yes, we do have issues like everybody else about Brexit and so forth. The United States is basically a slow growth situation, but a more normal situation than it had been in the past few years.
The global economy is in no way, shape, or form working against SAP. In fact, the beauty of SAP is if you need to get your costs under control, you need systems like SAP. Especially with HANA and S/4HANA, if you need to grow and think about new industries and new routes to market and new ways to create channel coverage with omni-channel e-commerce and other enablers, you need SAP. We are in demand. The key to SAP is making sure the recurring revenue streams continue to come in strong with heavily satisfied customers and loyal customers. Also continuing to expand in the cloud and the LoB Cloud, the Business Network, and the HANA Enterprise Cloud come quickly to mind.
Yes, on the on-premise kinds of things, because companies have to have very clear roadmaps, very clear time to value, and return on invested capital scenarios, and they really need to be coached on what to do first. Those businesses will be more lumpy, not because of a global economic scenario, because these companies are trying to digitize, and they need to know how to digitize. Teach me how. Teach me how quickly you can get me there and show me mathematically the difference it can make in my business model. Those are serious conversations.
Therefore, I think the best way to pursue this is to continue to leverage the things that are recurring, that are quicker in the cloud, and then do the more transformational things with a highly educated, very capable workforce and an ecosystem that also complements what we do in each geography, in every industry, and do this by use case, so the customer has crystal clear insight on what it is we're asking them to do, why they should do it, and what the outcomes will be when they do it. That's a timing issue that I think you saw in the first quarter with the on-premise. As you factor your models, I think we'll do better than other people with an on-premise business model. We'll continue to be robust in the cloud and on the profitability side, and we've got a really successful strategy.
That's what we're doing.
On the S/4HANA customers live and HEC versus on-premise, maybe Bernd, you want to comment?
Just a recall information on the number, which Rob shared with you with 146 close to 150 S/4HANA live customers. As well, the related question towards HEC versus on-premise versus the public cloud offering. I think it was an extremely smart move from us that we offer the HANA Enterprise Cloud as a transition step for customers to go from their existing on-premise landscape into a public cloud offering. We are really proud that the HANA Enterprise Cloud is our fastest-growing cloud offering. We have as well a significant acceleration in terms of time to adoption. I think an additional data point I want to share with you, while we have been close to 100 customer at the end of Q4, now we are close to 150 customers, shows that the number of customers who go live has been significantly accelerated, especially during the course of Q1.
Just looking at the more than 500 projects that are still running, I see that trend will continue. We will see a heavy adoption curve, not just in sales, specifically as well in live customers. What we are extremely proud of that more than 30% of these live customers are referenceable customers. I think this is a real testimonial that the business of S/4HANA is rock solid, is providing the value, is providing the benefits to our customers. This is, I think, something we have hardly achieved in any new product which we launched to the market. Just remember, S/4HANA is on the market since February 2015.
We as well see now adoption of the S/4 public cloud, which is starting as customers ask us, let's say, to get rid of their old customized system and transition into a public cloud clean offering, which helps them to massively adopt new innovations as they come out quarter by quarter. Just to answer the final point, while the start of S/4 was, I would say, on-premise only, now especially the cloud business is adopting in a rapid way.
Okay. Thank you very much. Let's take the next question, please.
Next question comes from the line of Ross MacMillan of RBC. Please go ahead.
Thanks a lot. Bill, I just had a question on vertical industry spend. I was curious as to whether there was any particular industry that was weaker this quarter. I'm thinking energy in particular. For Luka, you laid out a framework for margins in the cloud going from business network at the top down to private cloud at the bottom. I'm just curious with the improvement you're seeing with tech and the private cloud business in general, any changes to your view on that sort of 40% gross margin target or even pace to the 40% gross margin target? Thanks.
Ross, thank you very much for the question. The industries, as you know, it's good to have 25 of them because at any given time, you're going to have some that are worse off than others. In our case, we saw softness in basically three of them compared to the other 22. The softer ones would have been energy. I think it's well known. The cost per barrel being what it is, they need about another EUR 15 a barrel to sort of be in a business model that they feel comfortable making large investments in. I think you know that. Public services, a little softer than I had anticipated if you look at it across the globe. I'm definitely going to reorganize that. As it relates to discrete manufacturing, probably some of those were lumpier in terms of the decision-making cycle.
On the energy side, the pipe is there. I think when the price per barrel gets a little bit better, so will the money. Public sector, it's a structural issue and an execution issue. We have to digitize government, right? If India is digitizing, we're the one that needs to digitize India. Discrete manufacturing, I think you have a situation where everybody knows they have to move out, and they have to make change. We have to be so crystal clear and so prescriptive on how they do it, how it gets consumed, and how they derive the value from it that you cannot leave a single question unanswered. That's the environment that you're in when you're dealing with tighter industries that really are working with tight budgets and significant constraints.
The cloud's one way to deal with that, so too is the HANA Enterprise Cloud or the open ecosystem that we have. You still have to answer the questions and have everything tight for boardroom-ready conversation. I reiterate, there's interesting learnings, not global economics. It's all about execution and how swift you are executing as a company. Our step has gotten increased substantially in those scenarios as a result of what we learned.
Maybe on the cloud gross margins by business model. The framework that I laid out absolutely still holds. As I've said at the beginning of my remarks, we are executing against them. In the Business Network, our long-term gross margin target is 80%. We're continuing to make steady progress against that. We went up 20 basis points to 75.3% in the first quarter, and I fully expect additional expansion in line with the plan. In terms of the public cloud gross margins, the same applies, and the more we scale our business around SuccessFactors, the better we will get in that part of the business as well. Finally, on the private cloud, we are making great strides. I need to give a lot of credit to the team underneath Bernd Leukert, who are really turning the corner now.
We have professionalized the whole operations from onboarding to continuous operations. We are not only having strong growth in terms of the top line and bookings, we are also getting these customers live. We're getting the revenue now in. We are increasing the efficiency through the scale that we are getting. The 40% gross margin target is something that, for me, is readily achievable. Actually, as I said, when you take a look at our ATS segment where the private cloud is booked, you've seen that we have had an exponential improvement in the gross margin there. I've always talked about us reaching the break-even point in our private cloud business sometime this year. Actually, my full expectation is now based on these great results, that we will be there by mid-year already.
Then from that point on, there will be only one way, and that is into the positive direction.
Okay.
Bernd is nodding. You are not seeing this, but I just want to confirm this verbatim.
Yes. Nothing but good confirmation.
Thank you.
Thank you.
The next question, please.
Next question comes from the line of Michael Briest of UBS. Thank you.
Thanks. Good afternoon. In terms of M&A, Bill, I think you and Luka were very clear last year that you were a tuck-in play. Obviously, cash flow is very strong in Q1, there has been quite a lot of volatility in the stock market. I'm wondering if that makes you willing to be more opportunistic, perhaps larger deals will be something you consider this year. Secondly, Bernd, in terms of the development of S/4, there were two interesting press releases this year with Accenture and IBM on co-development activities. Can you talk a bit about what they're doing, what level of R&D effort they're bringing to the party, and why you've decided to work with them, historically you've not done that?
Well, Michael, this is Bill. I'll start off on the M&A front. Our strategy hasn't changed. We remain a market-leading company, and if we do things, it'll be well thought out, and it'll be something that's not only in the interest of the customer, but also very much in the mathematical interest of the shareholder. At this stage of the game, we're steady as you go. It's not to say that something couldn't happen. It's just that there aren't a lot of assets on the market like there was in the old days that are worth really aggressively pursuing. For example, most of those line of business cloud companies I mentioned earlier in my remarks, we think for companies that have that kind of valuation that don't make any money, it's a no-go. You know what I mean? That's it.
There might be other things that are more within a normal size range that are considered a tuck-in for a company our size and scale, that would be interesting. We're pretty conservative at this moment, but also remain a market leader and aggressive growth company.
Thanks.
Yeah. Not a lot to add. I said this this morning on TV. SAP has always been acquiring in order to extend its solution capabilities. That's something that you need to remember. We're not in that business because I've read a commentary in order to buy revenues or market share. We want to service the customer best, and we want to make sure we have the most holistic solution portfolio in the industry. The white spaces that we have to fill in this space are by definition getting smaller and smaller. Therefore, you should really think about M&A activity in terms of tuck-in.
Yeah. Michael, let me comment on partnering. I think we are proud that we get a huge interest from the ecosystem as a growth driver for S/4. Accenture and IBM and some others in the pipeline are extremely interested in getting a deep technical knowledge in order to extend our existing solution in a different way than they have done it in the past. What the announcement referred to is a co-engineering activity where people from Accenture are sitting together with our engineers, helping us to accelerate specifically industry verticals into the market. On the other side, this is more important for us, letting them know how to extend the SAP standard offering on the HANA Cloud Platform, and to help our customers to transition from bespoke, customized on-premise systems into a real cloud offering.
We have agreed with those companies that the best way to do it, not to set up long education programs, but rather to incorporate them into our day-to-day activities. They get the knowledge and the competencies by sitting together with our engineers, then are able to apply that knowledge at the customer side. As I said before, they have a ton of opportunities and requests from the market. This is what makes us feel confident that we have a rock solid, robust core in a business that will grow very fast.
Can you give any sense-
Okay, thank you.
Sorry, can you give any sense on how many partners are working with you, or how many people at Accenture and IBM?
I don't know the exact number, but it's in the hundreds, so it's not a few.
Yeah, Bernd, I can give Michael some color as well. Michael, this is Rob Enslin. There's over 15,000 individual HANA certifications that have taken place with our partners to date, and they buy the thousands every quarter. More and more scale we have in that space. I'm actually sitting here in Africa, and I can tell you now that the digital transformation of Africa is happening right here in South Africa and more and more partners are joining on. We will continue to even add more to that list as we move forward.
Thank you.
Okay, thank you. The next question, please.
Next question comes from the line of Adam Wood of Morgan Stanley. Please go ahead, sir.
Hi, thanks very much for taking the question. First of all, on the customer engagement and commerce, are you making more noise around that? There's obviously a large cloud peer in that space. Maybe first of all, could you give us some feel for the win rates in the SAP install base around those solutions? Maybe give us an example out of, you talk about using Hybris, extending that out. There's HANA in there as well. There's the front end integration. Is there a tangible example you can give of a customer that benefits from that and what the benefits are of that integration versus CRM being a point solution? Then maybe just on the financials, the cash flow was very strong in Q1 as always.
Actually, if we look in a little bit more detail, the DSOs did move up, and the deferred revenue income balance was actually down year-on-year. Was there anything unusual there? Was that quarter end FX or something strange that moved those two numbers? Thank you.
Yeah. Maybe I start with the cash flow question, then the colleagues can handle the CEC and win rates question. It's actually one simple reason. You have pointed to a reduction in deferred income. The reason is that we had in one region of SAP, the Middle and Eastern European region, a practice in the past that we were pre-billing maintenance invoices. We would invoice the maintenance on the last day of the preceding quarter, so to say, which would then result in the buildup of a higher deferred basis at the end of the quarter, and which would then be reversed in the coming quarter, so to say. We have discontinued this as of this quarter for various reasons, operational challenges with the collection of [POs] and so on. Therefore, we have further reduction of [PO] in the deferred income.
To give you an idea, I mean, maintenance invoicing in Germany alone is having a volume of around 500 million EUR on a per quarter basis, a bit more actually even. That's why this has a noticeable effect, and reduces actually the deferred income balance as we have discontinued this practice. This also explains a good part of the movement in the DSO. Because we did this as a first time impact, this has an effect on the DSO calculation as well. Not necessarily so much on the cash flow, because those two or three days will probably not move the needle tremendously in terms of when we will get the money from customers. But in terms of DSO and the way how we calculate it actually has an impact.
Some more effects on the DSO were that in China, we are having a kind of corporate legal entity restructuring. We have come from various entities that we also inherited through acquisitions, and we have now consolidated them into a much simplified structure that will save us costs going forward. When you go through this corporate restructuring, of course, you have to exchange bank accounts. You have to issue customer notifications that they now have to pay another entity, and that in China is typically used as a good reason to maybe not pay immediately but inquire and so on. That also had a certain effect in Q1 as we are finalizing, or have finalized the legal entity regrouping now the 1st of April. We expect that this effect will dissipate through the course of the year.
Maybe do you want to take over on CEC together with Rob, or who wants to handle this?
I can start, Rob. You can comment. I think Bill shared it already with you. We had numerous wins against Salesforce, and most importantly, we have as well win backs from Salesforce, which makes us even more proud. Swarovski was one name. There is a big brand in the U.K. where I personally go tomorrow morning, and we will share immediately that news when the deal is signed. We see this now every day, and the answer is simple. We have a comprehensive offering that is helping our customers, what Bill outlined already, to completely change the way of interaction with their customers in a comprehensive way. It is not just Salesforce automation anymore, which was it in the past. Customers are looking for solutions that engagement with the customers in the digital world spans across sales, service, marketing, and commerce.
Don't forget, behind these engagements, there is billing. If you have a headache how billing works, and you have to, I would say, engage your entire IT department in making integration work, then you rather go the path in terms of innovating new business models, having new innovative capabilities built on a SaaS platform, versus having your IT department busy with the integration. We hear this over and over again in many customer instances.
Maybe I could just give you this, Bill, one real-time story happened yesterday. A chairman, CEO, founder of a very successful retailer. What was his goal? Now his goal is to deal with his board. When his board meets him, they want to talk about growth. How are you going to grow? You going to open up more stores in retail? Yes, and probably you are, if you're doing well. Also you have to open up e-commerce, and you have to figure out a way to get the direct-to-consumer channel really growing, not just in theaters that you participate in today, but in theaters that you've yet to confront, especially in Asia, because that's where the rising middle class and the growth is going to be in the future. The conversation that's going on in the boardroom isn't about pipelines and outlooks.
It's about channels, and it's about combining the social media profile with the enterprise profile and how you can leverage that utilizing omni-channel e-commerce. What Bernd said is really extending the S/4HANA ERP. What I'm saying is the omni-channel e-commerce. When you put those two forces together, now I can manage my supply chain, the way I make my products, the way I ship them, and keep the promise to the customer every time in any channel, in any theater, and I conduct e-commerce transaction, rinse and repeat that cycle without any friction with my consumer. That's how you grow companies.
That's really helpful. Thank you.
Thank you very much. This concludes the SAP first quarter 2016 earnings call for today. Thank you for joining, and goodbye.
This concludes the SAP first quarter earnings call for today.