Ladies and gentlemen, thank you for standing by. I'm Emma, your Chorus Call operator. Welcome, and thank you for joining the SAP 2015 Full Year Results 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.
SAP. 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 for joining us to discuss our results for the Q4 2015. I'm joined on the phone by our CEO, Bill McDermott and here in Waldorf by our CFO, Luca Mucic.
Both Bill and Luca will make opening remarks on the call today. Also joining us in Valneur for Q and A are Board members Rob Enslin, who runs Global Customer Operations Bernd Leuchart, who leads Product and Innovation and Steve Singh, Head of SAP Business Network. 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, intent, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward looking statements. SAP undertakes no obligation to publicly update or revise any forward looking statements. While 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 2014 filed with the SEC on March 20, 2015. 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 invite you to our Capital Markets Day, which will be held on February 4 in New York City. In addition, there will be other IR events in 2016 at CBIIT in Hanover, Germany on March 15 and the Formos' traditional OIR program at SAPPHIRE Orlando on May 18.
Furthermore, please keep in mind that Unless otherwise noted, all numbers referred to on this conference call are non IFRS and growth rates are non IFRS as reported. And finally, as you know, Bill McDermott is joining us from Davos, so he's able to join the first 40 minutes of the call. And with that, I would like to turn the call over to Bill.
Thank you, Stefan. Hi, everyone. I'm joining you today, as Stephane said, from the 2016 World Economic Forum in Davos, Switzerland. Leaders have gathered here to address issues like expanding economic opportunity and winning the fight against cancer. This is a very fitting backdrop for our discussion about how SAP has extended our leadership in the business software industry, while also remaining ever driven to help the world run better and improved people's lives.
As you'll recall, over the past 6 years, we set some audacious goals to nearly double our revenue to €20,000,000,000 plus by 2015 to reach €2,000,000,000 revenue in the cloud, to become the cloud company powered by HANA And help customers run simple. So let's take a look at where we're at today. Total revenue close to €21,000,000,000 EUR 2,300,000,000 in cloud subscription revenue, operating profit of nearly 60% since 2010 and shareholder value doubled in 6 years. More than 95,000,000 cloud users, we have the most cloud users in the business software industry. A customer base that has nearly tripled, now we're over 300,000 customers in 100 in 90 countries around the world.
We achieved these results by focusing on our customers, then setting the right strategy for SAP. Through organic innovation and strategic M and A, we have successfully executed on our strategy. Today, we see soaring adoption of S4HANA and our completeness of vision in the cloud is driving significant market share gains against both core and narrowly focused cloud competitors. Let me give you just a couple of headlines. Record cloud and software revenue up 20%, decisively beating our full year guidance.
We are one of the few companies that is growing both in the cloud and on premise license revenues. Operating profit was up 13%, which also beat the top end of our guidance. All lead indicators point to tremendous momentum in the cloud. New cloud bookings were up 103% in the full year. In 2015, cloud deferred revenue and backlog Increased by €1,600,000,000 to more than €4,600,000,000 Which greatly enhances the predictability of our future cloud revenue.
The percentage of more predictable revenue It's steadily increasing year over year. The simple truth is that we're growing really fast And our competition isn't. Just for comparison, SAP's cloud and software revenue grew 18% year on year in Q4. Oracle decreased 4% in their latest quarter. The spread is only getting larger.
Unlike others in our industry, every business we're in is customer driven, fast growth and solid margin. Our portfolio is rock solid. We're not in any bad businesses. These Q4 and full year results represent one of SAP's strongest performances ever. We solidified our leadership in all geographies and industries, and we delivered a disciplined, We are very, very proud of this performance.
Let's talk about SAP's world class innovations. No company does more to help customers seize the massive opportunities of this new economy than SAP, and it all starts with the digital core. SAP S4HANA is the next generation business suite that brings to reality the bold vision of live business. It is the nucleus around which businesses can operate all processes in real time to seamlessly integrate their enterprise. Customer adoption of S4HANA continues to accelerate sharply with more than 2,700 customers across all regions and industries, more than doubling quarter over quarter.
S4HANA is also catalyzing broad customer adoption of our entire innovation portfolio. Customers like ENGIE in France and Swisscom have recognized the advantages of S4HANA. Merck, a leading life science and technology company, is turning to S4HANA for 1st data access, enhanced user experience and simplified business processes. To them, it's all about speed. We also just announced today that a large division of Airbus has gone live with S4HANA.
And it's not just large companies. Fitbit, a fast growing connected health and fitness company selected S4HANA and other products to position itself for future growth and streamline its IT infrastructure. The transformation of core business applications is a significant movement. SAP is only in the early phase of what we expect will be an unprecedented multiyear opportunity. Ultimately, we believe that S4HANA will succeed on a magnitude even greater than its predecessor, R3.
Around this core system of innovation, SAP has a cloud applications portfolio to address the major business opportunities of the digital era. Let's start with Human Capital Management. SAP is the only company that delivers total workforce management solutions across permanent and contingent labor with SuccessFactors and Fieldglass. We now surpassed 1,000 employee central customers. Companies choosing success factors include American Airlines, Nestle, Outsaya Group and Lufthansa.
At American Airlines, which is the world's largest airline, I might add, we beat both Workday and Oracle. Moving to customer engagement and commerce, SAP solutions go way beyond traditional CRM. They helped our customers manage a new kind of relationship with their digital consumers, engaging them with personalized information across all channels. When customers hit the Buy button, no other vendor can connect the front office and the back office in real time like SAP. Competitors that do not integrate digital marketing, buying and fulfillment across all channels are losing relevancy in this rapidly evolving market.
For example, we won 13 major German companies against Salesforce. Customers are choosing SAP's customer engagement commerce solutions, including L'Oreal and DSH Bosch Siemens. Digital transformation doesn't stop at the 4 walls of the business. In a hyper connected world, SAP is also leading the charge contingent labor and travel all in the cloud. Under the leadership of Steve Singh, the SAP Business Network Group includes Ariba, Fieldglass And Concur.
Each business is a runaway leader in their respective markets. Concur, the largest of our networks, actually helps over 32,000,000 end users, effortly process travel and expenses. The Philadelphia visitors bureau and leading consumer brands like Johnsonville have turned to concur. Ariba continues to scale as the world's largest procurement network with 2,000,000 companies transacting over US740,000,000,000 U. S.
Dollars annually across the Ariba network. Companies like Lenovo, Jaguar, Land Rover and Goodyear are all using the Ariba network. Fieldglass, which is our best in class flexible labor solution, Have provided employment opportunities now to more than 1,900,000 contingent workers in 130 countries Over the past 12 months alone, companies like CenturyLink and TiVo are turning to Fieldglass. As ever, the key enabler of our entire innovation portfolio is SAP HANA. HANA continues to be the real time data platform of choice.
With HANA VORA, we can now deliver a true big data solution for petabyte scale scenarios. With HANA Cloud Platform, customers can extend standard business software to meet the needs of their specific business or to build new applications. HANA Cloud Platform is also emerging as the platform of choice For customers, for their cloud to on premise integration. Moving to SAP HANA Enterprise Cloud, We have the best in class option for customers seeking to migrate their mission critical processes to the cloud. The HANA Enterprise Cloud combined secure access to our new innovation in the cloud with very fast time to value.
We also leverage our partners to deliver our HANA Enterprise Cloud solutions, thereby extending our global reach. This, by the way, is unique to SAP in the industry. Our HANA Enterprise Cloud offering continues to grow now in triple digits and it's getting more efficient all the time. Our analytics business continues to be robust. In Q4, we launched our cloud for analytics solution built natively on the HANA Cloud platform.
This is a single integrated platform that delivers end to end business intelligence planning and a digital boardroom for our customers' solution. Hana is also the catalyst behind some amazing partnerships in the analytics space. For example, SAP and Google are now teaming up to extend powerful analytics capabilities to our customers. Daimler Trucks North America uses SAP Cloud Analytics solutions to identify And track potential sales for dealers. The NFL, it is Super Bowl time, is using Big Data Analytics from SAP to drive a smarter fantasy football experience for its millions of fans worldwide.
So as you can see, SAP truly is the cloud company powered by SAP HANA. In closing, I just returned from Singapore and China, 2 of the most significant growth markets in the world, and SAP's completeness of vision is resonating there Like everywhere else, from the digital core to the Internet of Things, the SAP story is one of innovation, momentum and growth. Here in Davos, the United States Vice President, Joe Biden, invited me to share what SAP and the American Society of Clinical Oncology Our doing with HANA in the fight against cancer. Healthcare is only the latest field where SAP is unleashing Our 4 plus decades of proven industry specific innovation. And as we look to the future, We've never been more confident in our business.
We have issued strong guidance for this year. We have raised our 2017 ambitions And we have reiterated our 2020 goals. With this guidance, we have also retained the agility to invest in mega opportunities That SAP is uniquely positioned to capture. And finally, with our employee engagement scores now At the highest in 10 years, more than 81%, SAP and our nearly 77,000 employees are more motivated than ever to get the job done. And as always, I'd like to recognize their commitment and dedication to our customers.
They have shown me beyond any doubt that SAP is ready to rise to even greater heights, and I'm really, really proud of this company. I'm happy now to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.
Thank you very much, Bill. And indeed, we had a tremendous year and an even stronger Q4 in 2015. These results truly validate that our strategy is resonating very successfully across markets and industries with our unique combination of a growing core and at the same time a rapidly expanding cloud business.
If you
take a look at our performance versus outlook, we set ambitious targets for the full year 2015, and we over delivered With a record 2015 cloud and software revenue growing by 12% in constant currencies and clearly beating our guidance. We also continued our fast growth in the cloud and achieved guidance was €2,000,000,000 in cloud subscriptions and support revenue at constant currencies. For operating profit, we exceeded the guidance range €5,930,000,000 at constant currencies. Briefly to our effective tax rates for the full year, in both our IFRS and non IFRS effective tax rates. We came in actually better than expected in our guidance.
We ended the year with an IFRS effective tax rate of 23.3% At a non IFRS effective tax rate of 26 percentage points. Now let me talk about some of our key financial metrics in detail. First, the cloud. Cloud subscriptions and support revenue continued its fast growth in the 4th quarter with an increase of 76% to 6 €33,000,000 For the full year, we grew by 109% to €2,300,000,000 Even without the concurrent P plus contributions, We saw strong organic growth outpacing most of our cloud competitors. Our new cloud bookings were up 75% to €344,000,000 in the 4th quarter and 103 percent to €883,000,000 year over year.
Call. It's important to note, Bill has said that, that new cloud bookings only shows a portion of our future cloud revenue. Beyond new cloud bookings, you can clearly see the scale of our cloud business By now, when looking at the combination of our cloud subscriptions and support backlog, which increased by 45% year over year to €3,700,000,000 and deferred cloud subscriptions and support revenue, which increased by 36% year over year to €1,000,000,000 The combination of these key metrics climbed to a record €4,600,000,000 This reflects the unbilled and billed committed future cloud subscriptions and support revenue. This already committed business will drive strong cloud growth in 2016 and also beyond. Now to the core business.
In 2015, our solid and growing core business was obviously exceptionally strong. This outstanding success is mainly driven by the most advanced business suite available today providing companies with a true digital core SAP S4HANA. Growth accelerated once more with the launch substantially expanded November release of S4HANA. Adoption surged across all regions with now more than 2,700 customers, more than doubling the number of customers in Q4 alone from the end of Q3. S4HANA is catalyzing broad adoption of our entire innovation portfolio.
In the Q4 alone, we closed more than 60 deals above €5,000,000 Software license grew by 10% to €4,800,000,000 for the full year and by 15% to €2,100,000,000 in the 4th quarter. Even excluding the currency impact, we achieved a better than expected software revenue growth and grew by 4% for the full year 2015. Now to support revenue, which reached €10,100,000,000 and grew by 14% for the full year and by 11% to €2,600,000,000 in the 4th quarter. These results were both slightly above our internal expectations and the implied performance from our full year 2015 outlook. The high predictability and the stability of our support revenues continues to be driven by our high support contract renewal rate of approximately 97% and high 90% enterprise support adoption rate from net new customers.
So in summary, these fantastic 2015 results led to us outpacing the market and the record cloud and software revenue of €17,200,000,000 that grew by 20%. The tremendous progress we are making with our business model transformation It's also reflected in the strong growth of our software license and cloud subscription order entry. In Q4, this was EUR 3,200,000,000 an increase of 25% year over year at constant currency. In the full year, it was EUR 7,200,000,000 or a year over year increase of 18% in constant currency. Equally important, more than 1 third of our software license and cloud subscription order entry was already generated from our cloud business in 2015.
Now let me provide some more color on our regional performance. For the full year 2015, we had strong growth across all regions. In the Americas, we grew cloud by 120% and cloud and software by 31%. In EMEA, our cloud growth was 83% 12% for cloud and software. For APJ, we grew by 99% in the cloud and 20% for cloud and software.
Now let me expand on some 4th quarter regional highlights team that helped drive these strong results for the full year 2015. The Americas region had strong double digit growth With cloud and software revenue rising 27%. The U. S. Had a very strong software performance.
And even with an unstable macro backdrop, Brazil rebounded with a double digit software performance. Cloud revenues in the Americas outstanding performance with an 11% increase in sales and software revenue. Germany and Russia both helped drive this result with strong double digit software growth. Cloud subscriptions and support revenue in EMEA grew by 53%. The region also had very strong double digit growth in new cloud bookings.
APJ region in Q4 was back to solid double digit growth, where cloud and software grew by 18% and had a strong double digit software contribution from Australia and EDI in particular. Cloud subscriptions and support revenue grew by 55% and the region showed exceptional momentum in new cloud bookings Our share of more predictable revenue, which comprises our fast growing cloud revenue and our steadily growing support revenue as a share of total revenue consequently increased by 3 percentage points year over year to 60% in 2015. Now let me come to gross margins, where we are making good progress in our software and support and cloud gross margins year over year. Team. In the full year 2015, we saw a 30 basis point increase in our software and support gross margin from 86.3% to 86.6%, mainly driven by our strong license revenue in the 4th quarter.
At the same time, our cloud gross margin improved year over year by 1 point Spring HANA Enterprise Cloud. Bill has briefly already alluded to that. In 2014, we made a lot of upfront investments in our private cloud While recognizing only limited initial revenue, with the higher revenue in 2015 and benefiting from the upfront investments made in the previous We were able to improve our private cloud gross margin in 2015 substantially as costs stabilized. In parallel, Our new cloud bookings accelerated significantly in the Q4 and were very strong all through the year. As a We once again raised our investments in cloud delivery.
For instance, we are working on harmonizing our cloud data center infrastructure across all our data centers. Finally, you can see the impact of our successful business shift with an increased share of cloud subscription revenue. This revenue mix shift mainly weighs on our cloud and software gross margin. This declined year over year by 70 basis points from 84.6% to 83.8% in 2015. Our services business returned to growth in 2015 driven by our 1 service initiative.
The services gross margin though was still impacted by our business transformation and several strategic projects we invested in. With the current setup, we have already a high utilization rate and we expect continued benefit from the efficiency gains from our OneService organization. Our services business at the same time plays a strategic role for the accelerated adoption of our innovative solutions portfolio, both on premise and in the cloud. Overall gross margin was 71.5%, a drop of 1.2 percentage points. This is mainly due to the revenue mix shift to our fast growth cloud business and the decline in our services gross margin year over year.
Although this impacted our overall gross margin year over year, We saw improvement during the course of
the year.
Now moving to the bottom line, where efficiency improvements in both our core and our cloud business drove absolute operating profit growth. The bigger cloud revenue share combined with the lower margin level of a fast growing cloud business Put our operating margin under pressure, this is the typical revenue mix shift effect. Thus, bottom line performance has to be measured against operating profit, where all businesses have to contribute to operating profit expansion, thereby running each of our businesses more efficiently and effectively. The surge in operating profit in full year 2015 reflects our business transformation's continued success and a strong top line growth. 2015, we had a positive impact from our company wide transformation program in the triple digit €1,000,000 range.
On the other hand, To show our commitment to growth, we had a net increase of more than 2,500 employees in 2015 as we continue to invest in innovation and growth markets. The strong top line performance in the 4th quarter also resulted in some catch up in sales commission and bonuses. And even though we had these effects, we generated the highest operating profit in SAP's history. Now to EPS, which for the full year 2015 was €0.37 so €3.77 up 8% year over year. On cash flow and liquidity, operating cash flow for the full year was SEK 3,600,000,000 and free cash flow was SEK 3,000,000,000 up 9% year over year.
In 2015, we improved our net liquidity position by €2,100,000,000 year over year as we paid back debt of €3,800,000,000 At the end of the year, we had a net debt of €5,600,000,000 Hi, Liam. Let me come to the outlook. We are providing the following full year 2016 outlook. We expect full year 2016 non IFRS cloud subscriptions and support revenue to be in a range
of between
€2,950,000,000 to €3,050,000,000 at constant currencies, non IFRS cloud and software revenue to increase by 6 to 8 percentage points at constant currencies and non IFRS operating profit to be in a range of between €6,400,000,000 €6,700,000,000 in constant currencies. For 2017, Bill has said it as well, we are raising our ambition due to the current exchange rate environment and our excellent business momentum. Team. Assuming a stable exchange rate environment going forward, we now expect non IFRS cloud subscriptions and support revenue to be in a range of between €3,800,000,000 up to €4,000,000,000 where the upper end of this range represents a CAGR of 32%. We also now expect non IFRS total revenue to be in a range of between €23,000,000,000 and €23,500,000,000 and non IFRS operating profit to be in a range of €6,700,000,000 to €7,000,000,000 So to summarize, our tremendous 2015 results further validate our strategy of innovating across the core, the cloud and Business Networks to help our customers become true digital enterprises.
We have transformed our company and made it leaner by shifting investments from non core activities to strategic growth areas, enabling us to capture the tremendous growth opportunities in the market. We have a powerful and unique combination of a fast growing cloud business and the growing call. We are supporting customers in their journey to run simple, go digital and stay ahead of their competition. We are extremely confident that we will deliver on our commitment to growth. This puts us on a strong path for the future reflected in the increase of our 2017 ambition that we announced today.
Thank you very much and we will now be happy to take your questions.
Yes. Thank you, Luca. Just as a reminder, As you know, Bill McDermott is joining us from Davos, so he's able to join the first 40 minutes of this call. And I'd like to ask you to keep this in mind Then you ask your questions. And now I hand it back to our operator.
Emma, you can start the Q and A session, please.
Ladies and gentlemen, at this time, we will begin the question and answer session. If you are using speaker equipment today, please lift the handset before making your selections. The first question comes from the line of Phil Winslow of Credit Suisse. Please go ahead.
Thank you and congrats guys for really a great end of the year. A question for Bill, actually two questions. Wanted to Focusing on Esper Hana because obviously you guys had a great sequential increase in customer count, more than doubling quarter to quarter. The question here is, do you think we've hit the inflection point, particularly with the release of 1511 in November? I mean, that seems like a pretty team.
Significant just milestone event for you guys. And then when you think of sort of S4HANA going forward, I mean, you talked about 300,000 customers and yes, Doubling the number of HANA customers quarter to quarter is a big deal. But if I look at that, let's call it, 2,700 versus 300,000, It feels like we're in the early days here. Just want to get your take and then just have one quick follow-up to that.
Absolutely. Thank you very much, Phil. I appreciate it. Team. We are in the early phases of an amazing cyclical innovation cycle on Esawhana.
If you talk to any CEO today, they want to have one version of the truth with their data. They want to run A live system strategy so they can access that data, and they want to have full visibility in the way they're running their company. We call this the digital boardroom. To bring that to life where you're managing an end to end business from your supply chain, the way you make products, the way you build people, the way you take care of your people, your customers, Your extended business network, it's only possible to do this on S4HANA. So this is the leadership product, leadership platform in the entire industry, bar none, hard stop.
And I believe when you look at the pipelines and the activity we have in the company right now, We're in the early stages, but an exciting, exciting phase. We'd like to think that the great R3 and the amazing work that Hassel Platin and the founders did Can actually be superseded by the innovation on S4HANA and that would be the biggest compliment we can pay to the heritage of SAP and we intend to do that. Team. I just got back from Singapore and China. If you look at China, they're very strategic, 1 Belt, 1 Road.
And as they think about the Internet of Things and digitizing businesses and making smart cities and making smart factories, clearly, a product set like S4HANA and What we've done in the cloud will be front and center in transforming the way China thinks about growth in the global economy. In fact, I'm always quick to point out this is a $12,000,000,000,000 economy in China, the 2nd largest market in the world. And if it grows 6.5% this year, as some people might feel that's a little down, I remind them since I'm in Switzerland, The GDP that they'll increase in China is another Switzerland in a year. So it's still doing pretty well. And every conversation we had around S4HANA Was really inspiring with the SOEs or even private sector enterprises, very exciting.
Great.
And then Bill, just one more follow-up on the idea of hitting the inflection point. Obviously, you guys are running a promotion around S4 HANA that you guys extended from the end of Q3 to end of Q4. One of the questions I'm getting from investors in terms of what drove that Q4 inflection point, how much of it was that 15 or 11 release in the enterprise management suite Versus the end of that promotion and specific to that promotion, how should we think about just pricing going forward?
Yes. Thank you very much, Phil. So first of all, a promotion isn't going to sell the central nervous system of a company strategy. And I think we did some reasonably good marketing to entice people to look more carefully at S4HANA and create a sense of urgency around a promotion. But the heuristics of that promotion have been embodied In the pricing strategy that we took forward.
It's not a promotion, but we were very thoughtful about what motivates customers To make the move and make the start on S4HANA. In every case with that promotion incidentally, you obviously initiated a HANA license. You got 15% of the software value of the overall transaction. And of course, you get the recurring revenues on top of that, not to mention The upsell and the cross sell. And what was interesting, we now are over 1,000 employee central customers with success factors.
And when I started to talk to CEOs and Rob and all of our executives out in the field and the Board, it was quite interesting because Why would you go with a proprietary database on a narrowly focused HCM application on a competitive alternative where you can get a better system Uniquely integrated back into Sfour and HANA and you can run your people strategy and then extend it into a business network and do all that in real time. So what's fascinating is the S4HANA launch combined with some intelligent pricing and some good dialogue with the customer Actually initiated a lot of up sell and cross sell, and therefore, it's only begun. So don't worry, dear shareholders, we have taken the heuristics from that pricing strategy, Embodied it into the standard template of our pricing direction for 2016 and we don't intend to slow down.
Thanks, Bill and congrats. Thank you very much, Bill.
Thanks. Let's take the next question please.
Next question comes from the line of Adam Wood of Morgan Stanley. Please go ahead, sir.
Hi, great. Thanks very much for taking the question, and congratulations to me as well on the Q4 and the year. I also wanted to dig in a little bit on S4HANA. You obviously have the logistics release, as Phil mentioned, in November. I wonder if you could give us a little bit of a feel for the road map as we look into 2016.
What are the key milestones we should Thinking about in terms of releases and what are the key use cases you'll be delivering? And then maybe just a little bit longer term, Bill, you alluded to this being bigger than R3 in terms of scale. When we think about the available market or market opportunity for the product, whether this comes in, in licenses or subscriptions, how should we think about this? Is this something that could be bigger And our 3 in absolute value. And what's the timeframe do
you think for adoption of that? Thank you. So maybe I'll start off the answer and then of course we have the Pleasure of having Bernd and Rob with us as well. So Bernd can touch on the product roadmap and Rob can give you some insight in terms of the customer receptivity and industries and geographies and how the progress is going with the pipeline. But let me begin by saying, this question comes up a lot and S4HANA It's not one of those narrowly focused cloud solutions that you can get out in Northern California, okay.
This is like I am running a real time enterprise here. And I want to run a best for Rhine business. So this is one of those longer term initiatives when customers make that decision. And a lot of times they're going to want to own that asset and capitalize it over a number of years. And we expect that is very consistent With the way R3 played out in the market as well.
So I don't think you should anticipate a reduction And the revenue that you'll recognize from this in the short run, but I also do think the S4 Cloud Edition team. As we hit the accelerator on that into 2016 and beyond, it's going to create a very nice upper mid market And large enterprise, particularly non customer penetration where we can really get some market share and really grow fast in that regard in the cloud. So that's another engine of growth you haven't even seen turned on yet. So That's kind of the picture on S4HANA. And yes, in absolute terms, if you think about an install base of over 300,000 customers, You have a lot of enterprises that will make the conversion.
But don't forget, we have many net new customers on S4HANA. More than a third of our customers are brand new, net new and many of them are competitive replacements of legacy competitors that you guys like to compare us to a lot.
Dan, do you want to build this one? Yes. Thanks, Bill. And maybe just to add a little bit to the roadmap. Of course, the Q4 shipment 2015 was an inflection point in terms of completeness of the core product.
However, just remember that we are market leader across 25 industries. And We have a tremendous portfolio, which we will add to our S4HANA core With industry specific capabilities. And in addition to that, just reflecting the headline of Davos with Fourth Industrial Revolution. The talks the last couple of weeks and the last couple of days indicate that even in traditional areas like manufacturing, the impact of digital information We'll require a massive amount of innovation opportunities in order to have a digital core that is absolutely flexibly reacting to these new business models to new processes and just the number of co innovation projects team. We have already running and where we generated already follow-up discussions the last couple of days shows that I do not see an end of a story of innovation with a digital call.
It is rather the beginning of an amazing journey.
Thank you very much. And then let's move to the next question, please.
Next question comes from the line of Walter Pritchard of Citigroup. Please go ahead, sir.
Hi, thanks. A question for Luca. Just on the fiscal 'seventeen ambition, just in terms of The change in composition versus where you were a year ago, I think recurring revenue down a bit and implying license mix better. And your implied margins are a bit lower. And I guess we're used to seeing that when the license business is actually better, the margins are stronger.
And I'm just wondering if you could help talk us through The mix shift drivers there and the implications on the operating profit margins.
Yes. So first of all, you are Absolutely right that we have obviously seen in 2015 a strong performance in our classical core business. And We are confident overall for our core business. Nevertheless, we have modeled our guidance In a way that we feel very confident and safe, so to say, in the sense of a prudent guidance in both directions. I think team.
In terms of our revenue mix, clearly, we will see that cloud revenues are continuing to increase Strongly, we have a CAGR ambition, as you said, at the high end, which is exceeding 30%. Team. And we continue to believe that it's absolutely feasible, especially given the strong deferred and backlog that we have built over time. What that does is, of course, it makes margin expansion difficult while we continue to work on the efficiency of all of our business models in line with their individual capabilities. When you come to the correlation between the top line and our operating profit ambition.
Let's be clear. Team. SAP, I think, is one of the very few, if not the only, software technology companies that at the moment there is to give a confident and precise outlook for anything that is longer than just this business here. We are doing this With a very strong growth momentum, and we do it with a continued commitment to return value to our shareholders by increasing our operating profit. What we need to do nevertheless is cater for the needed flexibility and capability to invest In order to make sure that the tremendous growth that we have been seeing in the cloud is actually delivered to and hopefully exceeding customer expectations.
That means team. We need to build out the cloud infrastructure capabilities in order to service these customers as they are now onboarded. It means that we need to make sure that our ongoing operations are precise and are complete. Team. And it means as well that we will continue to invest in strong innovation in order to further build out our competitive strengths.
And we have a lot of solution areas where team. We clearly see a strategic opportunity to expand our market share, and so we are focusing on them as well. In the short term, this means that while we grow in operating profit, margin expansion is Not really the primary focus, but of course, increasing the efficiency in the different business models in the core, In the private cloud, in the public cloud and in networks will continue to be a priority as we have always said it. What you can also see from our guidance and our midterm ambition is that we believe that we will reach an inflection point After 2017, when cloud finally overtakes the size of our classical software license business, team. At that point in time, we strongly believe that cloud will be an exponential contributor to our operating profit.
Team. That's also why you see then a much higher CAGR in terms of the operating profit. So in short, it's really a time of reaping the growth opportunities in both cloud and in the core. For that, we will make the right investments and we will make the right strategic bets also in new fields in which we can play because we have the corresponding technology and where we can open up completely new market opportunities. And through that, we will return long term Greater operating profits that we could do otherwise.
That's kind of the strategy and what we have in mind. But we will always do that in a way that we
can, with absolute confidence, deliver on the targets that we have set. That you
can be Deliver on the targets that we have set that you can be assured of.
Thank you.
Let's take the next question, please.
Next question comes from the line of Stacy Pollard of JPMorgan. Please go ahead. Hi, thank you. Just a cash flow question, actually. Can you explain a small thing, can you explain the large decrease in trade receivables?
And then for total free cash flow, what kind of number should we be looking for into 2016? And is there anything exceptional we should consider as we model that year?
Yes, absolutely. So first of all, for 2016, I think what you can expect in terms of free cash flow is team. That one of the biggest contributors against free cash flow will be gone in 2016, and that's basically team. The monetary outflow that we had from our restructuring program that was going on, we had to pay a lot of severances in 2015. Team.
As you will have seen and noted from our non IFRS adjustments guidance, we expect that in 2016, as we had announced before, There will be no company wide restructuring effort. Therefore, our restructuring obligations will be less than 0.10 at maximum of What we saw in 2015, and that, of course, will result in, let's say, a better free cash flow position. Team. I also expect that on the other non IFRS adjustments and share based payments, you have In the guidance, it is in the slightly lower range than what we had seen in 2015. There might be a small effect there.
But the big effect will be on restructuring. So I expect that cash flow in 2016 will trend upwards with the overall positive uptake of our business. In terms of the trade receivables, there is actually not really one particular thing that you can point to. Team. Of course, we had normal movements of sales allowances and bad debt, which slightly trended up.
But other than that, it's a normal seasonal movement that you have that towards the end of the year, you actually connect team. A lot, especially in emerging markets in terms of maintenance, invoices and so on, which have been overdue for some time. And that's what you typically see happening. And so there is not a specific effect that I should point to.
Thank you. Let's move to the next question please.
Next question comes from the line of Gerardus Vos of Barclays. Please go ahead, sir.
Hi, good afternoon. Thanks for taking my questions. Just firstly on the license. Now given the kind of strong uptick and momentum you've seen there, is there a reason to believe that you can't see Some kind of mini revival of licenses with a bit of growth for the coming years. It looks that the implied team.
The level of guidance on the licenses is around flat, so that's 5% better than the soft guidance you gave a year or so ago. So I'm interested in your thoughts there. And then secondly, despite this better outlook for the core and for the licenses, the margin for 2017 It's a reduction on 2016. So I was wondering if you could help me a little bit about the investments that you plan 2 years out. Thank you.
Maybe, Rob, you
want to start on the assumptions
for the license performance? Yes, sure.
So on the license performance, I think the way we look at the core business is that we're going to see an attractive core business, but we also got to take The measures of the cloud and the movement to the cloud into effect. And so I think you see a reasonable guidance with strong opportunity in S4 And a continued acceleration of the cloud business that we saw this year.
And then the second question on the investments and the implied margin for 2017.
Yes, investments, a couple of things I mentioned already. Continued investments in cloud infrastructure that we will make. We want to make sure that we have a converged cloud structure across all of our data centers, which will be increasing the efficiency of our cloud operations after we have completed that work. So it's definitely investment into a more profitable and better margin future. Secondly, we are in process of Migrating our cloud solutions away from 3rd party databases to SAP's HANA platform.
This is a work that will take a little while up to 2 years. But then And at the end of the day, of course, we'll also increase our efficiency in operations. We have our strategic priorities set. Team. We are clear.
As for Hana, we'll see a lot of investment in the future to complete the road map that Bernd has talked about before. We will invest in HCM. Team. We will invest in customer engagement and commerce solutions. We will invest in the further build out of our HANA cloud platform, So the usual suspects that you would assume.
I think we did a good job over the past years to Actually scale the effectiveness of our sales operations, the collaboration between the Business Network Group and our GCO organization is working very well. You might have Taken away from our Q4 results in 2015, a significant increase in sales and marketing expenses, but that was really due to a catch up in bonuses, as I said before, as a lot of AEs due to the stellar Q4 performance hit their accelerators. If you back that out, actually we have seen a very good constant currency progression of sales and marketing In line with the revenues, we will continue to invest in the further build out of our sales force, that's for sure. But we really want to focus on innovation, creating the right solutions for the future as well as making sure that we succeed in the cloud. That's the primary investment areas that we have.
Team. Thank you.
Thank you. Let's move to the next question please.
Your next question comes from the line of Michael Briest of UBS. Please go ahead.
Great. Thanks. I guess sort of continuing on that theme. When you gave your 2020 vision a year ago, it sort of implied 1% to 5% annual decline in licenses. Obviously, 2015 was better than that.
The 2016 guidance, as Gerardo says, probably has growth on licenses at the high end. I'm just wondering, are you perhaps surprised by the appetite for on premise? Obviously, S4 is helping, but it does imply If we look out to 2020, 2018, 2019, 2020 have quite a sharp decline in licenses. Is that the way we should be thinking about things?
Yes. I think if you think about the guidance mechanics, that's obviously the conclusion to which you would come mathematically. Now when you set the guidance, you don't set it in line with hopes, but you set it in line with needs with things that you really feel very confident about. I have to say, we believed when we launched S4HANA that it could be a reinvigorator of growth in the core. Team.
And we have seen that the interest is tremendous. It was in line or even exceeding our hopes. But of course, it was not something that we could guarantee. I think for 2016 2017, we have now a better feeling about that. We clearly see that We have started a product cycle that is meeting a lot of interest in the market.
On the other hand, we have at the moment uncertainties in the macro environment. We clearly have areas of our portfolio that continue to migrate quickly towards the cloud and this will continue to be the case. And we're actually actively driving this like HR, like customer engagement and commerce, Like, obviously, our business network solutions and other areas. So I think it makes sense to be prudent, especially when you're thinking about such a long time frame out until 2020. And then let's see, but we're definitely confident about S4HANA.
Team. That's a story that I think is coming across loud and clear. And therefore, also in the fact that even on the 2020 targets, team. There is really a degree of certainty that has rather increased through the good results in 2015
team. Thank you. And could I just follow-up on the cloud gross margins? You've explained pretty well on Q4, I think. Just looking at this year, business.
Obviously, there are the investments to be made, but we were seeing sequential improvements through the 1st 3 quarters last year. How would you expect margins to develop in the cloud this year? Thanks.
Yes, definitely. I think it's a good question. I think The investments that we are making, as I said, they are necessary because we had strong growth in bookings. This should definitely level out. Team.
So I do not expect a gross margin erosion in 2016. I think you should plan for stability or a slight increase. Team. I've said after Q3 that you cannot expect to have such a big jump in gross margins as we have seeded in Q3 now to continue. But we are fully committed to our 80% gross margin long term targets for the network as well as for public cloud and the 40% for the Private Cloud.
That's a good news that you can also expect for 2016. We're very confident that HANA Enterprise Cloud will turn to positive gross margins in 2016 as we had predicted before and will improve steadily afterwards, which will of course also help despite the fact that the scale of the business is increasing. So I think stability to a slight increase In gross margins is what you can expect.
Thanks, Litte.
Thanks very much.
Now we
have time for 2 more questions.
Next question comes from the line of Knut Waller of Baader Bank. Please go ahead, sir.
Yes. Thank you. Just getting back on S4HANA and with S4HANA Enterprise Management, maybe a question for Bernd. In terms of functionality with S4HANA Enterprise Management, how would you describe are you in terms of functionality if we label everything as 100% Now after the release of S4HANA Enterprise Management and then with the new on prem release expected to be released in Q4 this year, Where should we be then at the end of this year with the new on premise release for S4HANA? And then in terms of live customers on S4HANA, Can you just provide us an update here where we were at the end of the year?
Thanks.
Yes. Stepping to Russo, maybe we start with The live customers first, Stephanie. That's the easier question. We had the ambitious goal of reaching close to 100 customers. And we reached that goal, and we are pretty happy about that product, which was just launched In February, now having passed 100 live customers is a testimonial that it's not just a success in sales.
It's a testimonial that The product is robust. It's mature. And as well, we are pretty happy as this is not in a dedicated segment. It's distributed across the whole globe, across almost every industry. And this shows viability and maturity is there.
And this is then basically a good introduction to your second question. Where are we in terms of Percentage of completion, and you asked about 100%. Just to make it clear, there is a hell of a lot of functionality team in our previous product in ERP, which in the meantime is outdated or which we thought We have not gotten the adoption, which we expected a decade ago when we developed it. And we do not have the ambition and therefore it's not an official successor to offer each feature and function. Rather, what I said before, we want to extend the digital core and make it ready for the requirements of the future, Which are, in many cases, different than what we had in the past.
So do not consider S4HANA It's just a technical modernization of something which we developed 2 decades ago. And Bill mentioned before cloud for analytics, mentioned the digital boardroom. So this is just one flavor where operational analytics and insights in the business will be incorporated in the product. Another flavor is that we want transfer system of record into a real decision making system where many decisions automated as applications become more and more smart. Do not forget that we do not just have a traditional outdated database underneath S4.
We have a platform that has machine learning algorithms, that has I have a lot of libraries, which enable our applications to be significantly smarter. And therefore, there is not a feature by feature comparison, and I can't give you a percentage. But what I can promise you is that especially in industries, what I said before, we have a road map, which we have published as well on our website. But as well here, there are features which we will definitely deliver. And there are other features which even nobody is asking for these days.
So hopefully, this gives a little bit more clarity. But as a summary, S4 will be a significantly smarter product, much more decision support, reflecting the automation capabilities modern software must have. And I have I've not talked about at the moment about the speech and voice recognition and capabilities which we of course will incorporate into the product.
Thank you.
Okay. Thank you very much. We have time for one final question, please.
Final question comes from the line of John King of Bank of America Merrill Lynch.
I just team. I thought I'd follow-up on the balance sheet side of things. So can you just update your comments around Any potential M and A targets that you might see out there of significant scale or whether you're sticking with primarily the organic strategy here? And I guess the kind of follow-up to that is, If that's the case, obviously, to some extent, what is the Board's decision around the dividend? But what would be the management view in terms of potentially raising payout ratio in order to up the shareholder returns a little bit given the strong cash flow.
Thanks.
Yes. Thank you very much for that question. So first of all, on M and A, our strategy is really unchanged. Team. I mean, we have stated that previously, we don't foresee a need nor suitable targets for A bigger acquisition for the foreseeable future.
Definitely in the next 2 years in 2016 'seventeen, our focus We'll be, as we had said before, on the repayment of debt. We have already progressed nicely in 2015. We aim in 2016 'seventeen to pay back roundabout €1,600,000,000 each in bonds, but also in the full repayment of the remaining concur finance loan that we are still outstanding. And then, of course, we will focus on organic innovation. And yes, So we will also focus on making sure that shareholder returns are provided.
SAP has a long history to pay a dividend. It has an established dividend policy, which formally states that more than 35% of net profit should be paid out to shareholders. Now we also know that in the last year in 2015, team. So the 2014 dividend was higher than that. It was at 40% of net profits.
And indeed, you say it correctly, The right governance body to decide on the dividend proposal to the shareholders is our Supervisory Board meeting, Which will take place in March and we'll finally resolve this. But obviously, we had a great result in 2015. We outperformed virtually all of our guidance parameters, including the bottom line on the non IFRS side. Yes, of course, in IFRS results, this looks a little bit differently. But you can certainly be sure that we will propose something which Also rewards the shareholders appropriately.
That's about the maximum what I can state at this point, but don't worry.
Got it. Thank you. Team.
Thank you very much. This concludes our Q4 2015 financial analyst call. I will say thank you very much for joining and we look forward We'll be seeing you in New York on the 4th February at our Capital Markets Day. Thank you very much and goodbye.
Thank you.
Ladies and gentlemen, this concludes the SAP 3rd quarter earnings call for today. Thank you for joining, and goodbye.