Thank you.
An answer session. If you would like to ask a question, you may press star followed by one on your touch-tone telephone. If any participant has difficulty hearing the conference, please press the star key followed by zero on your telephone for operator assistance. I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead.
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 second quarter 2015. I am joined by our CEO, Bill McDermott, and Luka Mucic, our CFO, who will both make opening remarks on the call today. Also joining us on the call for Q&A are our board members, Rob Enslin, who runs Global Customer Operations, Bernd Leukert, 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, 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 2014, filed with the SEC on March 20th, 2015. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.
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. Now I would like to turn the call over to Bill McDermott.
Thank you, Stefan. Good afternoon and good morning to everyone. Thank you very much for joining us on the call today. I'm really proud that SAP reported a strong second quarter and has once again reaffirmed our leadership position in this industry. We showed beyond any doubt that our platforms, applications, and networks are the winning combination of assets for the digital economy. Allow me to share a few brief personal observations with you to kind of net it out on the way I see this quarter. First, it's clear that CEOs are inventing new business models and making the move to digital businesses. I hear this firsthand from leaders across industries and geographies around the world. These companies are looking for a modern technology innovator to help them imagine a bold vision for the future of their companies. SAP is committed to making their transition to digital businesses simple.
With our strong second quarter results, especially the triple-digit growth in our cloud business and our Business Network business, and the triple-digit success of S/4HANA, it's clear that the customers are responding very well to our strategy. Second, as you'll hear shortly from Luka, the major growth drivers for SAP are exactly what we knew they would be. Number one, soaring adoption of the HANA platform with double the number of customers year-over-year and clear acceleration of our new digital Business Suite, S/4HANA. Two, strong momentum with our customer engagement and commerce and human capital management applications in the cloud. Super robust wins against Salesforce, Workday, and Oracle. Three, business networks with Concur, Ariba, and Fieldglass redefining how businesses manage travel, resources, and supply chains in the global economy.
Our strategy in these growth areas remains consistent. I'm thrilled that our customers are accelerating their innovation roadmaps with SAP. Finally, SAP is a strong and balanced growth company across all geographic market units. In the second quarter, we again saw strong performances in APJ and Europe, as well as a very strong performance in the United States. It is precisely this ability to scale our growth strategy globally and adjust to market conditions that has us well positioned to deliver on our guidance for the full year. As always, I'd like to personally acknowledge SAP's near 75,000 employees who have given everything they have to deliver these strong results for our company. I'll look forward to taking your questions. For now, I'd like to turn it over to our CFO, Luka Mucic.
Cloud revenue, as Bill said, again, saw triple-digit growth at 129%. We ended the quarter with about 82 million cloud users, the most in enterprise application software.
We are and remain the second-largest enterprise cloud company measured by latest quarter cloud subscription and support revenue. Our key indicator of future growth in the cloud new and upsell bookings, grew a stunning 162%. Cloud and software revenue grew 21%, as Bill said, this puts us right on track to deliver on our guidance for the full year. Let's talk a bit more about how SAP is meeting the needs of customers in the digital economy as the foundation of delivering these financial results. First, customer want to run real-time. Increasingly, it is becoming a commercial imperative for businesses across all industries to run real-time. This is why customers continue to select SAP HANA over Oracle. We now have more than 7,200 total HANA customers, doubling the number from only a year ago.
Our next generation suite, SAP S/4HANA, continued to gain robust early traction with over 900 deals to date, after just a few months on the market. We are seeing very strong S/4HANA adoption across all regions, with brand names like HP, Bayer, ArcelorMittal, Beijing Shunxin, and Nomura Research Institute, among others, choosing S/4HANA. Customers are already going live. For example, Florida Crystals and Geberit have already gone live with the SAP Simple Finance module. In fact, Geberit has chosen to migrate its entire SAP software landscape from Oracle to the SAP HANA platform. Geberit now benefits from lower operating costs, tremendous performance improvements across financials, and an enhanced user experience. For those business processes that are truly differentiated, we have the HANA Cloud Platform, which enables you to build extensions and industry-specific applications on a consistent data model that connects seamlessly to the nucleus of S/4HANA.
Partners, including Genband and Siemens, are building new and innovative applications on the HANA Cloud Platform. It's not just about enterprise applications. The HANA Cloud Platform allows you to leverage that data model and build light, function-specific applications that can run on any device, from Android down to the Apple Watch. Second, customers want to run networked. Let's talk about the network. While S/4HANA digitizes processes across your business, the SAP Business Network then allows you to extend those processes beyond the four walls of your business. It connects people, devices, businesses, and their ecosystems in a single digital value chain, driving a completely new era of inter-enterprise collaboration and commerce. 1.9 million companies now conduct more than $800 billion in transactions annually across the Business Network. The network enables simpler, frictionless commerce across every category of business spending.
Goods and services with Ariba, flexible labor with Fieldglass, and travel with Concur, obviously. We will add other network ecosystems over time. Total revenue in our Business Network segment grew to EUR 400 million. That's a growth rate of 194%. Participation in the Ariba Business Network continued to increase as new customers, such as Virgin Australia and Takeda, the largest pharmaceutical company in Japan, joined. In partnership with Accenture Procurement BPO, Ariba also renewed Deutsche Bank for another five years. Fieldglass continues to lead the flexible labor procurement and management space, adding new customers like AMD. Concur is already seeing the benefits of operating at a global scale with the support of the SAP field. New large multinational customers included Merck. Customers are combining these capabilities with our line of business cloud applications to run simple.
With SuccessFactors and Fieldglass, SAP is the only company that can manage the total workforce, both permanent and flexible workers, and do that globally. The number of SuccessFactors Employee Central customers has risen to more than 730 customers from around 390 a year ago. This is an 87% growth rate in customers in just 12 months. Employee Central is also localized for 71 countries, with payroll localized for 30 countries, in contrast to our main cloud competitor, who offers solutions primarily in the U.S. and Canada. In Q2, top organizations such as Heineken, Affinion Group, and ThyssenKrupp selected SuccessFactors HCM solutions over our key competitors. Once again, we saw a high double-digit number of competitive HCM cloud wins. That is deals where we went head-to-head with Workday and Oracle.
Back on speaker.
Run simple also means real-time customer engagement on any device in any channel. Only SAP can help businesses track and engage customers in real time across all channels, and at the same time seamlessly execute and fulfill e-commerce in one end-to-end value chain. Our customer engagement and commerce cloud new bookings grew over 240%. We had numerous wins over Salesforce in Q2, and in some cases, our customers are replacing their Salesforce implementations with our solutions. Customers choosing SAP in this field included Medtronic and Franke AG in Germany, to name a few. We are also expanding the SAP ecosystem to help our customers engage communities of their customers. For example, our recently announced Facebook partnership gives brands the ability to take their existing data in SAP systems and use it to connect with their customers on Facebook.
Run simple also means running our customers' mission-critical business applications in the cloud so they can focus on what they know best, that is growing their business. With the SAP HANA Enterprise Cloud, SAP is moving customers' mission-critical processes at an accelerated pace. Whether through SAP or our main partners, IBM and HP, customers clearly see this as a low-risk path to access our new innovation, giving them fast time to value. We will continue to leverage our partners to deliver our HEC solutions, thereby increasing our global reach while managing SAP's own data center investment needs. Finally, run simple means inventing new business models to grow in the digital economy. With the perfect combination of assets, SAP is leading the Internet of Things revolution or Industry 4.0. Customers such as Siemens and the Hamburg Port Authority have selected the SAP IoT big data platform.
SAP is also helping retail giants like Aldi, Liverpool in Mexico, and Lidl reinvent their business models and catalyze growth by targeting the right markets and servicing customers with relevant merchandise across all channels. For example, Lidl, with the SAP HANA platform as the cornerstone of their strategy, will systematically analyze data across 10,000 stores and 130 distribution centers in 26 countries to better understand and react to customer behavior in real time. Now to the detailed financials. As I mentioned previously, we saw fast growth in the cloud. Our new cloud bookings were up 162% year-over-year, showing that growth further accelerated in Q2. Cloud subscription and support revenue was up 129% year-over-year. After adjusting for Concur and Fieldglass, our cloud revenue growth accelerated sequentially and is clearly above our long-term growth aspirations we communicated at the start of the year.
Not only are we ramping up our cloud business, but we also continue to have a stable and growing core, with 13% growth in software and support revenue. This growth rate remains strong due to the continued high 90% adoption rate of our enterprise support offering. In Q2, it was again at 99%, as well as our consistently high 90% support contract renewal rate. The strong growth in software support and cloud revenue also resulted in an increase of the total of support revenue and cloud subscription and support revenue, which we consider the more predictable revenue types as a share of total revenue by four percentage points year-over-year to 62% in the second quarter. Now on to the regions, starting with EMEA. We had a solid performance in the EMEA region with a 10% increase in cloud and software revenue.
Our cloud revenue grew by 94%, with triple-digit growth in new cloud bookings. In the Middle East, we had a tremendous quarter in both cloud and software revenue, while Germany, France, and the U.K. all put up solid numbers. In the Americas region, we saw strong double-digit growth in cloud and software revenue with an increase of 36%. We were also pleased with a great quarter in our cloud revenue, which grew by 141%, with new cloud bookings nearly tripling, driven by a very strong performance in North America. The United States was a highlight, with a strong performance across cloud and software. In Latin America, it was a different picture, where the regional macroeconomic issues weighed on our results. In APJ, cloud and software revenue grew by 19%, with both cloud revenue and new cloud bookings growing in the triple digits.
Japan continued its recovery with another strong quarter across cloud and software. Moving to the bottom line. The overall gross margin for the company was 70.6%. That is a sequential increase of 200 basis points from the previous quarter. Our cloud and software gross margin was 83.4%, a sequential increase of 100 basis points compared to the previous quarter. Our services gross margin increased sequentially by four percentage points as services revenue returned to growth in Q2. This result was driven by first early positive impact of the transformation of our traditional service business, as well as our strong premium support offerings. We are also making good progress in our cloud gross margin, which increased sequentially to 66.3%, but more importantly, it increased by 240 basis points from the previous year.
Due to these strong results on gross margins and first early positive impact from our company-wide transformation program, we were able to expand our operating profit by 13% in the second quarter as we continue to see a currency tailwind. The IFRS tax rate in the second quarter was 26.4%, up from 22.6% in the prior year period. The non-IFRS tax rate in the second quarter was 27.8%, up from 25.4% in the prior year period. We maintain our tax outlook for 2015 and still expect a full year 2015 IFRS effective tax rate of 25%-26% and a non-IFRS effective tax rate of 26.5%-27.5%. Operating cash flow for the first six months was EUR 2.8 billion, up by 8% year-over-year. Free cash flow at EUR 2.5 billion increased by 10% year-over-year. As Bill has said, we are reiterating our outlook for the full year.
Based on the strong momentum in our cloud business, we expect full year 2015 non-IFRS cloud subscriptions and support revenue to be in a range of between EUR 1.95 billion-EUR 2.05 billion at constant currencies. We continue to expect full year 2015 non-IFRS cloud and software revenue to increase by between 8%-10% at constant currencies, and we continue to expect full year 2015 non-IFRS operating profit to be in a range of between EUR 5.6 billion-EUR 5.9 billion at constant currencies. We expect to see a currency benefit through the rest of the year and have updated our expectations for the impact on reported growth rates in 2015.
If exchange rates stay at the June 2015 average level for the rest of the year, the company would expect approximately a 5-8 percentage points currency benefit on cloud and software growth, and on operating profit growth for the third quarter of 2015 respectively. As well as 6-9 percentage points on cloud and software growth and 7-10 percentage points on operating income, respectively, for the full year 2015. Let me summarize. Very high growth rates in the cloud with a stable and growing core, while optimizing efficiency as seen in our gross margins and increased operating income this quarter. The digital economy is upon us, and we are leading the way to empower businesses to run real-time, run networked, and run simple. The SAP Cloud powered by HANA is the only real-time digital data offering.
S/4HANA, the one platform to run the enterprise, is its foundation. This makes us confident that we will deliver on our growth commitments. Thank you, and we will now be happy to take your questions.
Thank you very much. I would like to hand it back to the operator, and we would like to start the Q&A session now.
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 on a touch-tone telephone. If you wish to remove yourself from the question queue, you may press star followed by two. If you're using speaker equipment today, please lift the handset before making your selections. Anyone who has a question may press star followed by one at this time. One moment for the first question, please. The first question is from the line of Michael Briest of UBS. Please go ahead.
Great. Thank you. Good morning, good afternoon. Maybe firstly, Steve, could you give us an update on where you are on bringing together all the assets in the Business Network, any changes in the go-to market, product integration, how you feel progress is, and when that is really going to hit its stride? Then secondly, Luka, just for you. On the restructuring, there was quite a lot higher charge this quarter, and the guidance for the year has been raised by a couple of hundred EUR million. I'm just wondering what caused that increase and why perhaps it's not going to lead to better profits, if you like, as it flows through into the benefits in the second half? Thanks.
Luka, if you want to answer first, and then we hand over to Luka.
Okay, sure. First of all, I'm very happy with the progress of the Business Network group. We've obviously now got Concur, Ariba, and Fieldglass integrated together. The first priority for that group, though, is to focus on making sure we are literally the best in class in our respective markets in travel, procurement, and contingent labor. We've got a rich legacy here, and we're coming from a great position of strength. What we're seeing in the first few quarters of being under one structure, one group, is that the bookings growth in all three businesses continues to climb. As you heard from Luka's comments, you saw great revenue growth, but that's equally followed by fantastic bookings growth, which we think is a great proxy for next year's revenue growth.
The second priority is really to focus on how do we integrate not just the Concur and Ariba and Fieldglass networks, which we're in the process of doing, but also to make those core services of integration available to any network in the world, whether that's an SAP network or an external network, to integrate across all SAP networks and frankly, across the SAP Business Suite and S/4HANA.
Okay, I maybe take the question on restructuring. Michael, you're absolutely correct. We had a substantially higher restructuring expense in Q2 than we had originally anticipated. We now have at the half year point, EUR 418 million in restructuring expenses, and we have raised our expectations for the full year to somewhere between EUR 470 and EUR 530 million. What is the background for that? It's very simple, and it's actually a positive news. We have progressed far faster and with a greater acceptance by our employee base with our transformation efforts. As you maybe remember, we have created voluntary and early retirement programs, especially here in Europe, which were hard to predict in terms of their acceptance by the employees. Hence, we took a conservative stance based on last year's progress in terms of our restructuring guidance.
However, in actual fact, many more employees have registered for the program than we would have expected initially. This is very positive because we really could accept virtually everybody that registered because they were coming from areas that we truly wanted to transform in order to have more capacity in order to reinvest it into growth areas. Hence, we also see now a clear path to completing our whole structural transformation for SAP. I do not expect that for next year, based on this much faster success in the transformation program, we will need to come up with another company-wide broad restructuring program. We should see for next year at maximum, very targeted efforts in some selected areas, which will certainly be much smaller in size also from a restructuring expense perspective.
In terms of the positive impact on the ongoing operating side of the business, we expect a mid triple-digit million EUR annualized run rate savings effect of the program. Of course, this will fully materialize only as of next year. We have seen already some early impacts of that in Q2, and we'll now see more and more of these benefits flowing into the results in the second half-year as well, which is again, adding to our confidence as far as meeting our full-year outlook is concerned. I hope that answers the question, Michael.
Yes, thank you.
Thank you very much. Let's move to the second question, please.
The next question is from the line of Walter Pritchard of Citi. Please go ahead.
Thanks. Luka, I'm wondering if you could talk about you're closing in on 1,000 S/4 customers, and I think you expected most of those to use the bring your own license type of a model. I'm wondering if you could update us on what you're seeing in the composition of those customers as you're closing in on that goal or that metric.
Yeah. Happy to do so. First of all, the customers that we have acquired to date are really customers for our on-premise version of S/4HANA for the lion's share of the customers. As you know, we have announced our cloud edition at Sapphire in Orlando. We're making good progress to build out our cloud capabilities there. We are piloting this now with first customers, what you see in terms of the customer uptake at this point is really primarily on-premise customers and hence it's licensed business in the traditional sense for us.
Does the growth you saw in the customer and commerce business impact at all the kind of numbers you're looking in 2020 out of that business? It sounded like based on two quarters ago when you gave the original guidance, the expectations there were pretty low. I'm just wondering how you're thinking about kind of long-term growth prospects in Customer Commerce Cloud.
Well, I can start and then maybe, Rob, you may want to add some color here. I think we always had very strong growth prospects that we saw for our customer engagement and commerce in the cloud. We are coming from a situation where we have a lot of room for improvement. In the last actually two years, we have seen tremendous growth already. These triple digit growth rates have been a steady theme that we could report on. The good thing is that by now, due to this growth in the past, of course, the numbers are getting more sizable, and that's an advantage. This is clearly part of our midterm planning, and we are looking for further growth down the road. Rob, anything to add from your side?
Yeah, I would say, for customer engagement and commerce, we see actually dynamic growth in this space. As companies move more away from Salesforce automation and look at the full picture of what a commercial platform is, you see growth in the Salesforce or the opportunity area, marketing service, and omni-channel. Clearly we have the number one omni-channel e-commerce solution in the marketplace and tremendous traction as companies look at the full picture in that space.
Okay. Thank you very much. Let's move to the next question, please.
Next question is from the line of Stacy Pollard of JP Morgan. Please go ahead.
Hi. Thank you. More than 7,000 HANA customers, that's an impressive number. What percentage of SAP applications at customers would you say are running on HANA today? Or perhaps more pertinently, what percentage of new license deals are running on HANA? I ask about license because I just assume that SAP Cloud always runs on HANA.
Yeah. First of all of our solutions are of course, running on HANA, from a technical perspective. We are increasingly making this, of course, the de facto choice of customers as the differentiating value of what we can drive if our solutions are running on HANA is just that much higher. When you take a look at just the relative share of customers, and compare it, so we have round about 41,000 installations of SAP ERP with round about, I don't know, 30 something thousand customers. Right now we have 900 customers on board for S/4HANA in a matter of one and a half quarters. Of course, there is still a lot of room to convert customers and to make them jump on the S/4HANA bandwagon.
The good news is that the pipeline for S/4HANA is one of the fastest-growing things that I've seen in my time here at SAP. We see very strong prospects here, and the pipeline now is growing basically on a daily basis. This gives me a lot of confidence that we will convert many more of these traditional ERP customers onto HANA. Bernd, anything to add from a development perspective here?
Yeah, I think just to build on, Luka, what you said, it's not surprising that our flagship products with S4, but as well, BW are the main drivers when we talk about upfront license revenue. This has started last year and is continuing the momentum as well in the first two quarters. As well not to forget that as well in the SME segment If you specifically ask for on-premise and upfront, SAP Business One is significantly gaining traction here as well. We see here a clear shift going away from Microsoft SQL Server towards HANA as well.
Okay. Thank you very much. Let's move on to the next question.
Next question is on the line of John King of Bank of America. Please go ahead.
Great. Thanks very much for taking the questions. I just had two on the license and S/4 side, then one follow-up after that. On licenses, obviously, I guess a bit weaker in Q2, down 7% ex FX. I think you were talking in the past about small single-digit declines ex FX for the year. Is that still a thinking? Obviously, you've had some issues in LatAm this quarter, is that still where you're expecting to be given what you see in the pipeline? That's the first one. I've got a couple more.
Thank you, John. Bill, do you want to comment on this? You want to take the first question, please?
I'd be happy to. I think it's a good observation. If you put Latin America in any kind of a normal run rate, you would absolutely be in the range that we all expect it to be in with our core license business. Our core is still ever robust and solid, and you shouldn't worry about it. At the same time, you'll have the robust growth in the cloud and the network. All these things will come into full form. I also remind you, based upon the strong actions we took in the first half, we expect the operating leverage in the second half. I see this coming together very nicely and in perfect sync with our planning process.
Great. Just on follow-up on S/4, could you give us a sense for how much of the customers you've got there, 900, how much of those are coming with the free upgrade that you've provided versus customers who are actually paying for the license, just to get a sense of how meaningful that 900 number is? The last one was just a follow-up for Luka, probably, on the restructuring. Could you just clarify what you said in terms of the annualized savings? I think you said triple digit EUR millions annualized. Should we read that to be EUR 500 million? If so, early thoughts, I suppose, about the 2016 margin progression. Thank you.
Thank you. I think the first question on the S/4HANA customer composition, maybe Rob, you can handle this, we move over to Luka.
Yeah. Out of the 900-plus new customers in S/4, the customers converting their databases onto S/4HANA, their application is probably 60%-65%, and 35% net new companies on S/4.
Okay.
Okay. On the question around the annualized impact, I think you should plan for slightly less than EUR 500 million, but in the neighborhood.
Okay. Is there any big offset there we should be thinking about into next year, obviously, given if we're trying to think about our margin progression through to 2016?
Yeah. As you know, we have midterm planning out there into which we are factoring this result that we are seeing so far, as well as the impact on the annualized savings. We need to continue to invest, and we will invest wisely in those areas that we grow, where we see innovation potential, where we see accelerated adoption potential and growth potential for the company, which will then transform also in greater operating profit for the group. We see ourselves right on the trajectory that we wanted to see going into the 2017 results, as well as then later on 2020. The strong traction that we have gained on the transformation so far will be helpful in this respect, and therefore will, of course, also be helpful to overall operating profit. We'll talk about operating profit guidance for 2016 when we have closed out the year.
Got it. Very clear. Thank you.
Thank you very much. Let's move to the next question, please.
Next question is from the line of Knut Woller of Baader Bank. Please go ahead.
Thank you. I think if I understood correctly, you said that the majority of the S/4HANA customers that you won were predominantly on-premise, and I understand also the weakness in LatAm. However, I was still surprised given the magnitude of the S/4HANA customers won already that early in the cycle, that the license number was down. I understand HANA is a multi-year opportunity, but is it fair to assume that some of the revenues could not have been fully recognized in the quarter, and therefore, that you have a greater visibility looking in the second half, which also Bill's comment suggested that you expect some positive impact from the initiatives you took in H2? Is that the right way to look at it? Thank you.
Yeah. First of all, of course, the 900 customers that we have licensed, they are real licensed customers with corresponding revenue attached to it. Let there be no doubt. On top of that, of course, we have a high number of trials out there where customers are testing the software. This is a pretty decent four-digit number of customers. Of course, we expect many of them to be excited about what they see and then come back to purchase. As I said, our pipeline is strongly and quickly building up. We have definitely in the second half year, a number of very significant transactions across all of the regions around S/4HANA. We are very confident in the pickup here. It's not only S/4HANA, if I may add that, in isolation.
S/4HANA truly for us is the transformational core that is really completely rejuvenated for the digital age, on which customers can then extend very easily and seamlessly into value-adding solutions, especially in the cloud. That's how all of our acquired assets also come together. If you think about it, with S/4HANA, you are optimizing and completely flexibilizing your core business processes. Then you extend easily with SuccessFactors into managing your workforce more effectively, into your supplier base with the Business Network assets, into your customers with omni-channel e-commerce, into machine-to-machine communication with our big data solutions, the HANA Cloud Platform and HANA as a platform. That is really creating the complete end-to-end vision that we can propagate for our customers. It drives a lot of growth even outside of the core of S/4HANA. In that respect, SAP is unique in its capabilities.
Thank you.
Thank you very much. We now take the next question, please.
Next question is from the line of Gerardus Vos of Barclays. Please go ahead.
Good afternoon. Thanks for taking my question. Two if I may. Just want to come back on the kind of license and S/4. I was looking at the kind of volume, the volume of on-premise deals has kind of ticked up in the first and second quarter for the first time in 10 quarters. I was wondering if this is the case that you see S/4 initially coming through in volumes, but not yet in revenues because it's relatively highly discounted. I was wondering if this is a fair way of looking at it. Secondly, on the cloud, great set of numbers there. I calculate an 80% organic increase in net new cloud bookings. How do you expect this to kind of flow through in the coming quarters or so? Thank you.
Maybe first of all, Rob, do you want to comment on the pricing and discounting for S/4HANA?
Yeah, I have a couple of comments. I think S/4 has been in the market five months, it's beaten all of our expectations to get close to 1,000 net new customers. I think it's in its infancy, though. When you look at S/4 and what we're doing in the marketplace with S/4, you can definitely see an acceleration in the back half of the year. Luka mentioned the pipelines are exceptionally strong, you're going to see that. Regarding the pricing, the pricing was largely a promotion until the end of September, we're finalizing that. As Luka said, if you look at our numbers, the strength that we have in Europe, North America, APJ on the on-premise side, S/4 is a big part of that, we see that happening in the second half as well.
Yeah, absolutely. It's definitely not a factor of discounting because the price is set as part of the promotion, HANA as such has obviously a stable pricing and is not subject to discounting. That's not a factor here. On the cloud bookings, you're absolutely right. We had very strong growth there, also from an organic perspective. The nice thing is it is really very well-balanced. We had strong growth across basically all of our cloud assets. Of course, the speed at which these bookings will then translate to revenues is different by business model. You will see in some parts, especially on SuccessFactors, where we had a very strong quarter, that this will flow into revenues relatively quickly in line with the usual patterns that we see in that business.
HANA Enterprise Cloud bookings, which were also strong, but of course only represent a small proportion of the total bookings, will take a bit longer to come into revenue because it simply takes longer to set the customers up for productive usage with these more differentiated solutions. Definitely one thing is clear, as you mentioned, our bookings trajectory is far exceeding the long-term growth CAGR assumptions that we are setting for our cloud business. We are basically leaning forward now. With this strong performance as well as the similar good performance that we've seen at the beginning of the year, we are absolutely well-positioned to meet those assumptions of at least a 30% CAGR. I think we have a good opportunity to go past this.
Okay. Very clear. Thank you.
Thank you very much. The next question, please.
Next question is from the line of Adam Wood of Morgan Stanley. Please go ahead.
Hi. Great. Thanks very much for taking the question. A few follow-ups if I could. First of all on S/4HANA, I'm sorry for coming back here. As we've gone through the last few months, obviously very good adoption and very good pipeline. Could you tell us anything more about the pace of migration you see on this through the install base? Maybe help us if there's any milestones or barriers in terms of product roadmap that will drive that adoption. Is the logistics modules coming through at the end of the year that will really drive bigger and more widespread adoption? Secondly, to come back to that -7% on the licenses.
Is there any way you can help us understand how much of that is cannibalization of customers going to cloud versus maybe just a very weak specific geography, and whether that cloud growth actually is more new customer, new product driven versus cannibalization driven? Finally, coming back on the margins, Luka, you flagged the very strong cloud gross margins. It looks as if we've turned a corner on those, and either they're improving or the rate of decline is slowing. Is it really there that we've hit the scale we need to drive profitability, and we should assume that cloud gross margins continue to move upwards from here? Thank you.
Thank you, Adam Wood. I think for the first question, Bernd Leukert will handle, then the question on license cannibalization and margins handled by Luka Mucic.
Yeah. Happy to take that question regarding pace of migration for S/4. It's definitely right that the major driver in the last two quarters has been all our investments and benefits we have given to customers in the area of financials and controlling. We have launched Simple Finance in Q2 last year at SAPPHIRE NOW, built pipeline momentum, we saw a significant number of live customers already in the first two quarters on S/4.
Not just from a module perspective, we have invested a lot here as well from a technical migration. I just can report to you that the migration from an existing Business Suite customers towards S/4 is now possible in hours, while an upgrade in the traditional suite sometimes took a day or even a weekend. The simplification in architecture pays off here as well, in terms of effort, but as well duration of migrating an existing SAP solution towards S/4. You are right as well with your assumption that when we deliver as well the logistics modules in the fourth quarter into our on-premise world, we expect a significant boost as well, and we are soon having the thousandth customer of S/4. As every day we get new ones, we expect even an accelerated growth in the fourth quarter of this year.
Maybe on the cannibalization question, which is really a term that I strongly dislike because I think it's strongly misleading as well. Here's a fact. We did best in the cloud where we did well in on-premise licenses in Q2, and vice versa. If you take a look at our most mature markets, where the propensity to buy cloud solutions is certainly most advanced globally, we had very balanced and good results in terms of positive license growth as well as strong and explosive cloud growth. That holds true for the U.S. Positive software licenses, very strong cloud growth, holds true for Germany, same. Holds true for the U.K., very strong growth, in both elements. Holds true for Japan and for other markets.
Where in turn, we had weaknesses in licenses, like in Latin America, while we still saw growth in the cloud, we saw that it was also likewise dampened. It's not a story about direct cannibalization. Of course, there are some elements of our portfolio where we clearly recommend to the customers to go with the cloud solution because it simply makes sense to do that in HR, for example, or in customer relationship management. In terms of our overall business prospects, as I said before, where we can lead with that vision of an integrated perfect enterprise, a data-driven enterprise based on a truly revolutionary core of S/4HANA, and then extending it with cloud, we win on both sides of the house, on-premise as well as cloud.
In terms of the gross margins, you're right, we are seeing now the third quarter in terms of sequential growth in cloud gross margins. Definitely our ambition is to continue that increase. Now, as you know, we have set specific gross margin targets for each of the business models that we run in the cloud, for the private cloud, for the public traditional SaaS cloud, as well as for the Business Network group. We are working towards that trajectory for each and every one of the models, understanding that the private cloud, the HANA Enterprise Cloud, is still running at a negative margin. Therefore, we are still to see the break-even point and then positive gross margins.
This may weigh in the short term, dependent on the business growth, on the overall gross margins a bit. That's for me, less important than really seeing in all of those three distinct models a continued and steady progression towards higher gross margins. I'm very confident that we will achieve this and see this for all of the three different models.
Just to be clear, Luka, I apologize for the cannibalization comment, but it's really the weak markets, weak macro that's causing that license issue. It's not people moving to cloud. As you said, you've got strong cloud and strong licenses where the macro and the markets are good.
That's exactly the case. In markets like the U.S., like Germany, like Japan, we had very strong growth across both. Actually, one of my favorite markets, because I'm serving there as a board sponsor, the Middle East is a perfect example. It's considered a classic on-premise license market. Yet for the last three quarters, they showed very strong double-digit software license growth coupled with triple-digit cloud growth. I think that's the best proof point that you can indeed have both.
Very helpful. Thank you.
Thank you. The next question, please.
The next question is from Brad Zelnick of Jefferies. Please go ahead.
Great. Thanks so much for taking my question. Most of my questions have been answered, but hoping maybe you can tell us a bit more about what's going on in the HCM market. High double-digit number of competitive wins against the other key players. We've been seeing increasing momentum with Employee Central for several quarters now. Rob, can you maybe shed some additional light on what's changing by competitor in each of the various theaters where you're playing?
Yeah, I think a couple of things on HCM. First of all, I would say to Bernd and his team, we have a world-class Employee Central solution now, that covers multiple payroll in multiple countries. It's pretty much the only globalized solution in the marketplace. I think what you see with HCM is execution across the board in pretty much every market, every theater. Very strong performance in the U.S. In Europe, as Luka mentioned, we have now 730 new customers in that space, and we see that trajectory continuing. Some marquee names that we've acquired with Employee Central. Where are they? There they are. Yeah. Some marquee names across the world. I'll give you just some color. These are wins against Workday and Oracle with Cathay Pacific, Whirlpool, Kellogg, REWE, Singapore Telecom, Telefonica, National Bank of Canada, Moody's.
You see a quick list globally. We are executing an HCM SuccessFactors on all cylinders, and we are the only fully globalized solution in the marketplace that is fully public cloud available today.
Appreciate the color. If I could just follow up with one for Luka. Luka, I appreciate the different gross margin profiles of the various deployment models. Particularly this quarter, we've seen upside from cloud, from the Business Network, and was hoping you can just help us, not just from a cost of goods perspective, but when we think about incremental OpEx, particularly acquisition costs for the Business Network. I would expect that the incremental margin there from an operating perspective is extremely high. Also for cloud, as you're renewing customers over time as opposed to acquiring new ones, can you just maybe give us a bit more color into the power of how that compounds? Thank you.
Yeah. Maybe on the Business Network, and the potential there, it would be even better for Steve to handle that if you want. Steve?
Yeah, of course. First and foremost, on the gross margin side for the Business Network, you're absolutely right. It's really, frankly, the best in cloud travel, but I think there's room for improvement here. The improvement you'll see over time, we're not overly focused on moving the gross margin up each quarter. We're much more focused on driving new customer growth and making sure we can support that growth through implementation and also, frankly, through support. I think as growth rates slow, which we actually don't expect for any time in the near future, as growth rates slow, you'll see that incremental gross margin move up even further. Today, on every new dollar of revenue that comes in in the Business Network group, the incremental margin is in the 85%-plus range. This is consistent with every other public cloud offering that's available in the marketplace.
Having said that, look, the rates of growth that we're seeing in this business are in excess of anything we saw as a standalone business, whether you're talking about Ariba, Fieldglass or Concur. The rate of growth in new bookings is just phenomenal. It's really being driven not only by continued expansion within the Business Network group distribution organization, but obviously the collaboration that we have with the GCO organization, Rob's group, and the ability to penetrate the very large install base of SAP customers.
Yeah. I would say, quite frankly, with that, you have already answered the second part of the question, as a lot of what you say for the Business Network group definitely holds true for the rest of our portfolio as well. Maybe we take a next question.
Yes. The next question, please.
Thank you.
Next question is from the line of Philip Winslow of Credit Suisse. Please go ahead.
Hi. Thanks, guys. Congrats on a great quarter in the cloud. Just one question for Bill. A follow-up for both Bill and Steve. Bill, obviously you talked about your good build in S/4HANA customers and obviously a lot of strength in the cloud and the business networks. I'm wondering, now that it's been sort of multiple months since you laid out the S/4HANA vision and obviously multiple quarters now since you purchased Concur, what is the feedback from customers been as far as just sort of the forward roadmap for SAP and how is that changing conversations on both sort of the core and also these new areas? The question for both Bill and Steve, now that we've had Concur under your belts for a couple of quarters now, Bill, sort of what has surprised you so far versus your pre-acquisition expectations?
Steve, a similar question for you.
Okay, great. Well, I'll start it off, Phil. Thank you for the question. I think the big idea with S/4 and S/4HANA is the notion of value creation in the digital economy. If you think about these companies that we're working with today, they're all trying to digitize their businesses and create new business models. S/4 and S/4HANA enables them to do that. Now they'll have a platform, they'll have the application strategy to actually execute their plan. Incidentally, if you're not talking, you should put your phone on mute because there's quite an echo.
Yep, I'm mute.
That's the strength of S/4 and S/4HANA. In terms of the acquisitions, I would simply say one bright spot that's even been more upside than I could have imagined, Steve Singh leadership and the commitment of his entire Concur company to the SAP mission. What they've done in the SAP Business Network is stunning, and it shows in the growth numbers. I also think it speaks well to what we've done with Ariba, putting a well-seasoned veteran of SAP in charge of Ariba, and that business is growing beautifully with a new user experience and some excitement in Europe and other parts of the world where I think we're surprising people with the growth rates. Obviously, SuccessFactors. If you think about the acquisition of SuccessFactors, the earliest one we did, and the impact that's had in the human capital management space, everything we bought has worked.
Everything we bought has worked in conjunction with or better than anything we expected in the boardroom business case. I think we really took a lot of people by surprise with the concept of the SAP Business Network and then demonstrating that the network with nearly a trillion running through it in U.S. dollars and the way it transforms global business, combining that with S/4HANA as the platform, running the applications, running the networks, the immense business value that can be wrung out of these solutions is just unbelievable. Again, I tie it back to value creation in the digital economy, we are an adapt-or-die economy. The center of everything will be a modern technology innovator, a platform like SAP's that takes these customers to an entirely new level in every industry and every geography around the world.
I want to especially thank my board colleagues for the way they've embraced the acquired companies, and I especially want to thank Steve for coming onto the board and doing such a fabulous job with the SAP Business Network and fitting in so beautifully with the SAP culture and our robust growth ambitions for the future.
Steve, you want to add?
Yeah, the only 2 comments I would add to this is, look, anytime companies are acquired, you have to approach it with at least a level of pragmatism that says, "Look, things are going to be different, and there could be challenges." I would tell you while there's always challenges in acquisitions, the amount of upside that we've seen has so far exceeded my expectations that I look at this and say, "Look, this is wonderful for our customers. It's wonderful for our new shareholders, obviously the shareholders of SAP." That's showing up obviously in things like the bookings growth rate and also the revenue growth rate. Just as much in the second area, which is there's a definite transformation that is really just starting to come about where customers are looking at the offerings much more holistically.
They're looking and saying, "Look, it's not just these line of business applications or the Business Network applications that are important to me," which is obviously the new growth area that's highlighted through cloud computing. It's how they integrate into the core and what innovation are we actually seeing in the core. One of the things that I find really fascinating is the number of meetings that I'm now in where the buyer is looking at this from the point of view of the entire solution set, from what they run their business on to all the line of business applications that plug into that core. I think that when you see that at the biggest companies in the world, that's a prelude to what you're going to see in every other company in the world with time.
This digital transformation that Bill's talking about, you're seeing the forefront of that right now.
Well, thank you very much. This concludes the financial analyst call for today, and thank you all for joining, and goodbye.