Good afternoon and welcome to our Capital Markets Day 2015. Thanks for joining us here in New York City, the 2nd Capital Market Day in 2 years. And We are in the meantime used to this special Capital Markets Day weather. Monday, heavy snowfalls Tuesday, sunshine. And a colleague of mine said yesterday, we should actually rebrand the event and call it Capital Markets Day on ice in the future, but that's probably more for the cocktail hour later on.
What I'd like to do at the beginning share with you the agenda today. And we'll kick it off with a presentation of our CEO, Bill McDermott, on SAP's strategy and division, how we expand the addressable market, how we reinvent the core, our leadership in the cloud and in the network. Then we move on to a financial presentation. As you know on January 20, we updated our midterm financial targets. And I know there is a huge amount of interest to understand the underlying business model and financial model.
And Luca Muchich, our CFO will talk about how both business models within SAP, the core and the cloud will contribute to the operating profit expansion of SAP in the next years through 2020. Then we move to the innovation side of the house. Innovation is at the heart of the company. You probably saw the press release this morning on S4HANA, one of the most important announcements we have made in our history. And Bernd Leugert, The Board Member in charge of R and D will walk you through the announcement from this morning and will explain how our applications increasingly leverage the value of HANA.
And then I think a classical element in the Capital Markets Day is The customer presentation. I know from all your feedback that you found the Konarkar presentation last year extremely valuable. And we are very fortunate having 2 very important customers today here on stage. Hans Ulrich Engel, the CFO of BASF BASF, the largest chemical company in the world and Alan Metula, the CIO of Shell. And both of them will talk about their long term strategic relationship with SAP.
And then we move to the business network and we have Steve Singh on stage, The let's say the newest member of the Global Managing Board. And I know from all the discussion with the investors, the business network opportunities are one of the underappreciated elements in our story and Steve will share with you his vision for this particular element in our strategy. And at the end, we have all executive board members on stage for a final Q and A. And after the event, we would like to invite you for A cocktail hour. This is about Capital Markets Day on ICE.
And we hope that we can continue the discussions then. I have a couple of housekeeping items before I hand over to Bill. The event is webcast on our Investor Relations website. Later on for the Q and A, please also send us questions by e mail to investorsap.com. And we'll make sure that all the slides of the presentations today will be available on our website for download after the event at 4:15 p.
M. Approximately. And finally and after so many years, I still have to read this because I haven't learned it by heart. It's a safe harbor statement and I read the short version. Please note Except for certain information, matters discussed in today's conference may contain forward looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.
The factors that could affect the company's most The future financial results are discussed more fully in the company's most recent filings with Securities and Exchange Commission. So that was my brief intro. And with that, I hand it over to our CEO, Bill McDermott. Thank you.
Well, thank you very much, Stephan. I don't know about you, but I just don't think anybody reads that Safe Harbor statement with quite the same passion as Stephan. That was moving, inspiring. Thank you, Stephan. I'd like to welcome you all here to New York Stock Exchange.
Today has been an amazing day. We launched as you may know Very important product today. We'll talk about that a little bit later. But it's almost to the day my 5th year anniversary as either co or sole CEO of SAP. So I must say I'm incredibly honored to be with you and also to be in this vital and enduring financial institution at the New York Stock Exchange.
I think This will go down in history as a really important moment for SAP and a leap forward for the enterprise software industry. I really believe that. Let's talk a little bit about the addressable market. It was 2010. I remember Putting this strategy together in the boardroom of SAP and I remember the conversation like it was yesterday.
We basically said we have a great core business. We're the market leading ERP company. We lead in applications and analytics. It was US110 $1,000,000,000 addressable market And we were a really solid company. But at the same time, we didn't want to just take the core for granted.
We knew that we had to actually triple our addressable market to be a growth company that we had to establish a compelling vision to help the world run better and improve people's lives to inspire our employees. And because we saw the rise of the middle class And we saw the millennial generation only using the mobile device because that's what they were born into. We made a bold move at that time to buy Sybase and really go after mobility. At the same time, We knew HTML5 was the way to go and we believed in securing those devices and running really pretty applications on the mobile. So that became an operating principle in the strategy.
The second piece was this idea of data doubling in the world every 12 to 18 months. The Internet of Things, all these devices coming into the enterprise creating massive complexity and huge data issues. In fact, as you know, 98% of that data was completely unanalyzed. It was dark data sitting in old school disk based database vaults. So we had to do something about that.
That's why we invented SAP HANA. And at the same time, we continue to invest in business objects coming forward with Lumera to radically change and beautify the user experience. Most importantly, SAP became a platform company. And I think that was key because not only now were we number 1 in analytics, but we also became the fastest growing database company in the world, very important. And as you look at this and the moves that we made in the cloud, you'll notice that The cloud not only became the pervasive computing theme in the world, but it also became the growth strategy for SAP.
We made a bold move when we bought SuccessFactors. Incidentally SuccessFactors is and will remain the number one human capital management application in the cloud. We deal with employees from recruit to retire. You'll notice that the Ariba transaction also worked out quite well. Now you've got companies all over the global economy dealing with digitizing The procure to pay process in an automated supply chain crushing POs and checks And the financial transaction being closed out by an efficient network, we take care of all that.
I also think the Hybris move was quite interesting. I tell you today, companies that are in the hygiene business for sales force automation in the cloud are going to feel the heat, because customer engagement commerce is the big idea. How do we connect with that consumer on the device, Any device in any channel could be Internet, could be call center, wholesale, retail or community. And how do we know what they like? How do we predict what they want?
How do we close e commerce transaction? How do we fulfill in an automated supply chain. So if you're in SFA and you're in the cloud, you just woke up today to a whole new world with customer engagement commerce. Good luck. And as we made these cloud moves with SuccessFactors and Ariba, We also went after the most important growth market in labor in the world to shore up our position and drive the network with Fieldglass.
Today, the fastest growing labor force in the world is contingent or temporary labor. It's growing at 40% a year whether it's the United States or even Europe. And the question is how do I recruit these people? How do I make sure they're secure? How do I know the cost associated with them inside and out?
How do I build project teams and take advantage of global talent? How do I disband these teams and make sure that I can run the profitability analysis on my people in real time? So whether you're looking at it from a people perspective, whether you're looking at it from a procure to pay an efficient indirect materials perspective or perhaps most importantly a concur perspective where travel and expense is now automated from ground air hotel food and entertainment all on a common platform. SAP is the number 1 in every single category. And what's interesting about being the number 1 in every single category is all these categories now Now blend together in one business network concept led by Steve Singh for the whole company.
And why is that important? Because all these topics are hot in the boardroom and now we bring a suite of business network assets to the customer. Today, 75% of the world's Fortune 2000 run on Ariba. We have more than US700 $1,000,000,000 running through the business network. And to put that in context, if you take Alibaba, Amazon and eBay combine all 3 of them, SAP is 2 times larger than all three.
So as I think about it from your point of view, In this 5 year innovation journey that SAP has been on, we have assembled through organic Or M and A means $50,000,000,000 in innovation. Now we have all the parts we need. We have an unbelievable core, which I'll talk about in a minute as it's been reinvented on HANA, S4HANA. We have the line of business cloud. We have the business network.
And when you think about all these assets coming together, you're Finally in a position to help customers radically simplify, change the way they run and grow again. And SAP has all the assets we need now to get the job done. Last year, we talked about our strategy essentially to run simple and beat back complexity. Complexity is the enemy of our time. We just took Simplicity to the next lever.
We are running the entire business suite on HANA. The business suite has now been reinvented and natively built on HANA. The name of this product is S for HANA. S stands for simple. 4 stands for 4th generation.
And HANA speaks for itself. It's the world's standard in memory data platform for this generation, not the last 1. Why is it so substantial? Because beyond TCO reduction, which is dramatic, It's also about creating business value for the customer. Imagine your forecast and the accuracy around that Essentially segmenting the markets, the deals, the flow, so you have a greater outcome with More precise planning.
Imagine if you could close your books 72 hours earlier just to pick a number. It could be a lot better than that. And imagine the power to reinvent and simulate new business models completely on the fly and create the boardroom of the future, where the management team sit at a common area looking at all the operations of the company with real time data giving them feedback loops that they can make real decisions on game changer. Also on S4, we created a simple and beautiful user experience. It is all Fiori based on HTML5.
We know that the user experience was not the strong suit of SAP, but we also have a massive install base. And anytime you change the user experience, you have to be quite thoughtful about that. We think now we have the best user experience on the market because it's built with the most modern technology. We built it with our customers. They co innovated with us.
And what we have designed now is quite gorgeous to use. We now have reduced the number of clicks in the user experience by 70%, seven-zero percent And we have over 5,000 customers actively using Fiori since June 2014. And all this is driving HANA adoption. Over 1700 New Hana customers were added in Q4 alone. We now have more than 5,800 Hana customers in the company, so we are at scale.
There's over 400 new Suite on HANA customers that were added in Q4 and the total of Suite on HANA customers is more than 1850. So we already know It all works. And in terms of Simple Finance, it's catching on very rapidly. Right after it became generally available, We had 40 customers sign up for Simple Finance. And by the way, the things that we do in finance, while others are working with accounting, We're doing things that are radically more interesting and I can't wait for you to see some demonstration of that today.
We have 6 different cloud engines that are going to help us grow the cloud business 7x, 7 times sevenfold, it's a lot between now 2020. First of all, HR and success factors. Employee Central is growing 100% year on year. We now have 600 Employee Central customers And we are beating companies like Oracle, which you would expect, but also companies like Workday quite handily, Companies like Whirlpool, Kellogg, Singapore Telecom and many others have chosen SAP. In finance, S4HANA, we offer sophisticated functionality in the cloud.
Think about this treasury, fixed asset management, risk management all on the fly. And then there's customer engagement commerce redefining CRM and leapfrogging incumbent players. Cloud for customer is growing 100% Year over year or more for the 8th consecutive quarter in a row, we are beating sales force. We had 100 wins over Salesforce in the back end of 2014 Deutsche Telekom, Chewy, Samsung, Carlsberg and Espresso to name a few and we're only getting started. So if you want just cloud for customer And we want to do the SFA thing and automate the internal hygiene and pipelines and forecasts and those kinds of things.
We got that on a standalone cloud basis. And if you want to couple that with customer engagement commerce and completely change the way you run Your customer relationship from the consumer in, we got that and we can put it together in one end to end value chain. One thing you may find interesting, when we do M and A, we keep the assets the leaders, the leaders of development and we fold SAP into those companies not the other way around. So we buy the most prestigious asset, the best technology and then we keep the people and the innovation. Everybody we bought on the innovation side has stayed with the company, because they're entrepreneurs and they like the environment we create.
Let's talk about procurement and travel. Ariba indirect application procure to pay with Ariba Pay is now at scale. I am excited about this because if you ask the customer how much redundancy comes out of the process, They are excited. If you take Concur and this company I want to be really clear on this company. I'm going to show you a demo in a minute And all you need to see is this demo to understand exactly why this is going to be one of the best moves SAP ever did.
Does anybody in here like their expense management process? How are you doing filling out expense reports? Aren't they fun? Well, now you got the ground, the air, the hotel, the food, the entertainment all on one common platform. Concur puts the S in simple for SAP.
They have 25,000,000 users in the cloud. You're dealing with a company that started 23 years ago going at a 30% CAGR with 1 of the great CEOs in the industry's history Who's actually excited to run a huge business at SAP and Steve Singh partner, partner, partner And we got huge plans for what we're going to do together. So I would like you to see the Head of Development for Concur. I just was all over the Middle East last week and everybody that saw this demo wanted 1.
Hi, everyone. My name is Barry Padgett. I'm the Executive Vice President for Product at Concur. And today, we're going to take a virtual journey together. I'm going to show you just how easy and how painless travel and expense can be with Concur.
Now our virtual journey today only lasts couple of days, it goes from Seattle to San Francisco. And I don't yet know the airline tickets that I want to book, but I know I need to book a hotel. So we're going to book a hotel, 2 hotels, 1 for each night, so I can show you a few different options. I've connected my IHG and my Concur accounts. And what you're looking at here is the IHG site.
Now a concur profile has been created automatically and that profile data is what's being sent to IHG. So my negotiated rates are going to show up on the IHG site. What you see now is I've gotten my search results back. The data is going to come back into Concur and be integrated into a single itinerary. So I've now booked that first hotel for just one of my 2 nights.
What I'm going to do now is switch from my iPad to my iPhone running Concur Mobile. Now I need to book my air ticket. We're leveraging a combination of my own travel history and big data.
The fact
that we have tens of thousands of companies and tens of millions of users sitting up in our T and E cloud, we can be really smart about finding a recommendation for you. Actually going to use my voice to search for the flights and tell Concur what I want to do. Flights from Seattle to San Francisco departing June 9 Concur has already noticed that I booked only one night at my hotel stay, but there's still another night that's left open. I'm automatically sent to a hotel search results page to Find my second hotel. There's my pricing.
I'll hit slide to reserve and just like that my booking is done. So what I have now on my screen is a single integrated itinerary. Let's get our virtual journey started. The taxis just picked me up and let me off at the airport. And the driver gave me a good old fashioned handwritten taxi receipt.
I'm going to take a picture of that tax receipt and not only are we going to upload that image to Concur, we're actually going to lift the data on that receipt, the handwritten data and translate it automatically into an expense report. Now it's time to go back to the airport and head home. And here's a great example of how our partner platform and our ecosystem really come together. I'd like to grab a quick bite and a coffee when I get to the airport. I'm going to go to Starbucks.
Going to go ahead and launch the Starbucks app. I'm going to hit the Pay button. I'm going to automatically go to the card that I've designated as my business expense card. Well, our virtual journey is almost complete. And here's the best part of the story.
Our Accenture port is completely filled in. Here we are back at the iPad. And as you can see, every expense that I need to take care of from this trip's already been created and it's sitting there. From my airfare to both of those hotels, to even that paper There you go. With Concur, we've made the travel and expense process painless, seamless and best of all,
Thank you, Steve. Obviously, thank you for a great company that you've built. But almost importantly, thank you for your friendship and your ongoing commitment That's 18 what we can create together. We had a dinner together that started all this off in trust a few years ago. We had another one Just before we agreed to do this and we did it in trust and friendship and I really believe we're onto something massive here.
This is going to be a big part of the enterprise, the core, the cloud, the network, the extended ecosystem, huge money. Let's talk about the industry cloud and the Internet of Things. What makes SAP, SAP As we cut our teeth in industry, we know 26 of them inside and out and to be able to offer The industry cloud with that domain expertise, the rich install base and the alliances and the ecosystem is unbelievable. For example, when we made a decision to go into the sports and media vertical, right away The owners of franchises could see the power of the fan experience. But then there was the league commissioners that saw the power of connecting with the fan on their website with all their data.
And then there was the apparel companies who wanted to use smart apparel connected apparel to connect to the device and the athlete to completely change the game. And then there were the trainers that basically said my job is to make athletes better. So how do I watch their performance? How do I study their moves? How do I protect them from injury?
How do I help them train better? And then by the way, there were the league Medical staffs that got involved and how do we save athletes from getting concussions and study those things in real time, so we don't rely just on human wisdom. All this is happening. It manifested itself in the German national Football team winning the World Cup when Oliver Beerhoft who is the general manager of the team said we had a 12th man in the pitch and that was Hana. So we're going to completely change industry, completely make it real time.
We're going to do it in the cloud and we're only getting started. The next big opportunity as we identify it in Industry 4.0 and the Internet of Things is US140 1,000,000,000 U. S. Dollar addressable market. We're set up for it.
We have the core and we want it. Somebody said to me, Bill help me understand like An industrial company trying to captivate this idea of Industry 4.0 and take advantage of the Internet of Things. Well, I said I'm the executive sponsor for a company that makes very significant engines. And what's quite interesting is They make very little margin on the original sale of the engine. But on the post sale maintenance, they make most all of their profit.
So if they could focus on post sale maintenance and really do that well, they would radically change the profit profile of their company. So now with SAP HANA in their specific industry, when that machine has a problem, It knows how to predict the fault line and simulate the service call. It puts a call out onto the business network, which is Ariba. It orders a part most likely from China at 20% cheaper than they're buying it now. It's shipped to the quality standards of the consumer.
It's delivered ahead of time. So the technician that has that unique skill for that unique part on that unique machine is there in advance of the go down and now preventative maintenance takes hold. The machine is fixed at a much higher margin profile, but more importantly the customer never had any downtime. So it drives immense loyalty and after sale because the customer is super happy. All that's being done on a business network leveraging the Internet of Things on SAP HANA.
Game change. Finally, As I think about the private cloud and I think about it from your point of view, you know SAP has got its own private cloud and we invested heavily and that's behind us. So customers could have choice and they could have that private cloud in the geography they wanted. But also We have very important partners that have agreed to the SAP HANA, S4HANA reference architecture And they love to run our system in their cloud. One example is IBM and SoftLayer and there are others.
So That's the way to expand the core software at a higher margin with a bigger partner ecosystem and it's all good for the customer. And then there comes this idea of integration through the HANA Cloud Platform, the most advanced real time platform as a service. There's now 1200 customers on the HANA Cloud Platform and we literally just got started, right Steve? Customers like Pepsi and OEM partners like Burst and GTS are building tremendous faith in it and it's going to expand quite rapidly because now we're actually focused on it. The value of the platform is to You'll all remember the best of breed fiasco after the year 2000 how they may have been best, But they sure didn't breed.
And we've now hit a new plateau in the cloud where the similar thing has taken place only this time in the cloud. And Ahana Cloud Platform will change everything, because you'll have the core. You'll have the integrated line of business cloud. You'll be connected to the business network And ultimately to the Internet of Things and the consumer wow. And I think about wow because in every industry in every market segment in every corner of the earth this resonates.
And that's why when we took you through our growth ambition to grow our cloud revenue 7x between 2014 2020, we had great confidence in telling you that. That's why when we said we'll reach 3.5 to €3,600,000,000 in the cloud by 2017, we had great confidence with that. And that's why we said When we'll reach €7,500,000,000 to €8,000,000,000 in the cloud by 2020, we have great confidence in that. So As I think about it in summary, new growth engines, cloud for customer, industry cloud applications, the Internet of Things, The HANA Enterprise Cloud put that together with all the SAP assets and we feel very comfortable giving you a 30% CAGR on our cloud business on an organic basis between now 2020. We're ready for prime time.
Now, as I think about the 1990s and the idea of SAP Networked the enterprise as a theme, the HR department was connected to finance. Now the inter enterprise with the business network takes the conversation to a whole new level. There are huge, Huge fragmentations in the global supply chains in the world today. This is a US10 1,000,000,000,000 Marketplace. And that's if you just take the Global 2,000 Companies.
So we want that and we want it now. The SAP Network vision is to connect enterprises, people and devices. And our network strategy is to deliver a network of networks, Ariba for B2B Commerce Fieldglass For workforce and concur for travel. As I think about the perfect enterprise, I think about a company that's on the move, the fastest growing apparel, sports apparel performance brand in the world. And I think about their dream, which is essentially to run real time.
How do I run my business in real time? Well, now you can With S4 HANA, they want to run networked. How do I take advantage of the cloud and the commerce between companies in a network? And they want to run simple. The radical simplification of the SAP Suite, the complete crushing that it will put on the IT stack of the 20th century architecture and the value that it brings back to the business is why RunSimple was our vision.
And I'd like to give you a perfect example of RunSimple in motion.
Hi, Bill, and thanks so much for having me. And hello to everyone at the SAP Capital Markets Day. And I'm really sorry that I'm not able to be there with my good friend and more importantly, incredible partner in SAP. We've got our own earnings tomorrow, so we're Back here in Baltimore is still preparing. What SAP has done for us over the last 9 coming up on 10 year process we've had of building this company that's allowed us to go from $280,000,000 business that we implemented to more than $3,000,000,000 as our current outlook has Heading today.
Meeting Bill just prior to my IPO in 2005, he was the first person that said to me, Kevin, did you know that your business It was the first time that made me think about how truly large our organization could be, but more importantly, how Keeping up with that scale is something that no company can prepare for or plan These are the kind of things you find out and say, wow, we need a better solution that can grow and that can scale and that we can stop thinking about having to reimplement something else. That is probably the greatest advantage that SAP has given us is this ability for unencumbered growth. Following on that implementing a product like TAMA, which allows us to get data and information real time and just as importantly to anticipate where the ball is going to be, not where it is. That is what running real time means for an organization like Under Armour. This is a company that began as a stretchy T shirt for football players on field.
And very quickly, we realized that baseball players, lacrosse players and soccer Players and field hockey players and players of all sports wanted it. And so we continue to evolve to meet the needs of our consumer. Well, that Evolution is nothing that's going to stop anytime soon. As we move into categories like footwear, as we move into things like the digital space, most recently bike ride or for a run that in just the last 12 months has nearly grown by 60%, now eclipsing 32,000,000 registered users. And how we take that data of 32,000,000 e mails, activity levels and the understanding of that consumer and how do we evolve that to help our core business, one thing that is written on the wall in my office, don't forget to sell shirts and shoes.
Helping us sell shirts and shoes is where we ring the register. It is our core pie. Most companies take a long time to figure out exactly what their shirts and shoes are. We know exactly what they are, and we're going to sell a lot more of them because of the run scale systems that we have from a partner like SAP. So we like to say at Thunder Armour, the only thing that will get you fired in this company is someone who says that's the way we've always done it.
The fact of the matter is in a growth organization, change is constant. And those that win are those that are in constant evolution of the company that we're going to be. So the one thing you find in growth is the complexity that happens as you begin to hit scale. And the biggest question that I have, do I have a team 1st and foremost that can scale and can my systems and This is scale as well. That's where the implementation of an organization, just as importantly as a computer system, help us.
For us, when it came to the system side And what we wanted to do with our business, there was no not bigger, but better partner than SAP. When we first brought in SAP, It wasn't us sitting here and saying, tell us how our practices, our best practices are something that's going to influence what we want you to do with your system. We sat here as an organization that said, we're the piece of clay. You tell us how best run businesses are meant to be doing it. And that's what we want to follow.
And so we basically Built a model that evolved to fit SAP and counting on that to be part of the best practice. And frankly, 9 years public and 30% growth, We're incredibly proud of what that's delivered for us. Under Armour is a growth company, having just reported our 4th consecutive quarter of 30 plus percent top line growth, our 18th consecutive quarter of 20 plus percent top and bottom line growth. We just celebrated our 9th year as a public company last November. This company is one that is a machine that is relentless in our need for growth because that's the opportunity that our company has given us.
And having Systems that can scale with the growth and more importantly, the opportunity of our business is not a matter of if, it's not a matter of how we going to do it? It's a matter of we need people that can actually implement and execute. And this is nothing that goes with personal favor or friendship. This is something that says at the end of the day, we can love one another, but we need you to perform. In fact, that's where SAP has stepped up for Undrummer over and over I have one message for all of you at SAP's Capital Markets Day.
It's How fast business is moving real time. Look, living in this fishbowl world that we do of what's happening with our companies is that we built these models, Understanding what the core is and always bringing everything back to the core, but evolving with the message that's happening out on the world real time. This world is going digital. This world is getting connected. The Internet of Things is an incredible reality that we're transforming all of our businesses and moving into what the speed Keeping up with that is and more importantly, staying in front of it.
Thank you very much for your time today, and I wish you all the very best. Congratulations to Bill and the entire executive team.
So As I wrap it up, I think that Under Armour is an example of the perfect enterprise. They run-in real time. They believe in HANA And the integration power of S4HANA. They're a company that runs networked And they believe in commerce exchanging hands in a globally efficient supply chain in the categories I outlined Whether it's people, indirect materials or travel and expense. And they are clearly a company that wants to run simple and radically reduce complexity, so they can serve the needs of their consumer on that device in any channel, In any community in real time and that is who SAP is.
We are the company that can bring the perfect enterprise to life. We've got the vision and the strategy and we now assembled all the parts over this 5 years to execute. Our people are happier than they've ever been. We just celebrated our employee satisfaction survey. And in spite of all the change and transition In this industry, they love our strategy and where we're going.
We've never been more brutally focused on customer satisfaction and business outcome than we are right now whether it's in the industry, whether it's in the geography Or whether it's in development connecting with sales, connecting with customer, connecting with delivery. The transparency that we gave you And the forecast and also the guidance giving you visibility into future out years underscores the confidence of this management team. This business now is ready to fly. And I think S4HANA did a very important thing today. It basically reinvented the core.
And when you have a new core, you have about 300,000 new conversations with customers that are going to take place all over the world. And in all those conversations, There's money to be made not just for SAP, but more importantly for the customer. And I think we've priced this right. We have a beautiful go to market in every geography around the world and we're built to last. So I'd like to thank you ladies and gentlemen For your attention, I'd also like to reinforce with the ultimate confidence possible that RunSimple will change the world And you saw it today here in New York.
I'm excited and we're ready to go. I'll now turn it over to our Chief Financial Officer, my colleague and friend, Luka Muchic. Luka, come on up. Go again. Go again.
All right. Thank you very much, Bill. Good afternoon. What a significant day for SAP it is. And As I was thinking about the theme of my presentation driving effectiveness and efficiency of our business models, I was thinking actually My presentation has almost been held already.
Because if I know one thing in this industry that I've been working for now close to 19 years And it actually is that in this industry without amazing innovation and without customer centricity, We will not go anywhere. Growth as well as efficiency will be a consequence of those two factors. And we have seen amazing innovation this morning with S4HANA with the launch, the most significant innovation that we Probably made since decades. And you have seen now in the Under Armour example, what SAP is able to pull off for our customers In terms of customer centricity, you will hear some more excellent examples a little bit further down the road. Nevertheless, let me spend a few words On what the customer centricity and the innovation of SAP will be able to drive in terms of financial outcomes.
I hope So Bill has said it, SAP in the next 6 years has committed itself to be an exponential super growth company in the cloud, growing our cloud business sevenfold From the scale that we have reached already today being the number 2 cloud company by measures of revenue is a significant statement that we are making. At the same time, we have said as well that our core, our software and support Business will continue to contribute through 2020 to overall revenue growth at SAP. We want to grow our total revenue by close to €10,000,000,000 in the next 6 years, While increasing the efficiency of all of our business models, our different ones in the cloud as well as on premise and adding €3,000,000,000 roundabout €3,000,000,000 in operating profit in those same 6 years. While at the same time, we are continuously and significantly Investing into innovation, Bill has alluded to it in his speech as well. And while we steadily increase the predictability of our overall business, Because the range of predictable revenues and the relative ratio and share will increase over time to up to 75% by 2020.
Wow. I thought about this a bit and maybe you are thinking about this as well. How many companies operating at the scale of SAP can claim that in those four dimensions of predictability, growth, operating profit expansion and commitment to long term transparency can say that they are in the same league. Actually, I believe we are creating a new market segment, which I would like to call the RSSG Companies in which SAP is playing That's a rock solid super growth company. Now, Obviously, when we announced this guidance, we have been faced with some concerns from the financial analyst community, for many of you, from investors alike.
And let me tackle them head on and discuss a little bit with you how they should be read. So concern number 1, SAP, you have given up your overall operating margin target for the company. Is that true? Yes and no. What you see in SAP's overall revenue profile a tremendous mix shift towards the cloud business.
By 2020, if you take our ambition, we should be at almost 30% relative contribution of our cloud subscription business over anything else in the company. That means because while this business definitely will return positive operating income to the company across all of the cloud business models that we are driving. I'll come to that a little bit later and result in significant operating income contribution. Nevertheless, in this high scale, high growth phase, the operating margin of this business will stay at a lower level than our traditional on premise business. There will be a short to mid term negative weight on overall company margins.
Should we therefore optimize our business for the past or the present and refrain from hitting the gas pedal as far hard as we can And reaping the benefits of all of the cloud based innovation assets that we have at our disposal and growing this business knowing that this will be an even better basis higher long term returns. We would be foolish if we are doing this. This management team is not ready to do this. But let there be no doubt, we have a clear ambition to increase the efficiency and the bottom line returns of all of our business models at SAP and I will show you that ambition In a minute. So we're not backing off margin targets for our cloud businesses and for the on premise business, But it makes no sense to steer the business overall vis a vis an absolute operating margin target, not in this period of transformation.
The second concern is the core business going to go away for SAP. That's an interesting one. We are actually in our guidance modeling a conservative outlook for software license revenues. Why? Because we are assuming unchanged conditions.
And we know that in 2014, the emerging markets had a difficult environment. And in many of them, which are important for SAP like in Russia, like in Latin America, actually we saw negative growth due to macroeconomic conditions. At the same time, of course, there are opportunities in our classical software business like S4HANA that you have seen now in the on premise deployment option. It is clearly an opportunity that we have to reinvigorate growth there. But we wanted to have a cautious The important point that you need to understand here is that even with assumption of negative software license growth, we would be growing our overall core business.
And why is that? Because of the resilience and the great strength and stability of our software support business. If you Think about it. We have renewal rates in our software support business of roundabout 97% to 98%. We had them consistently now for many years Despite the fact that we have been driving a strong cloud transformation since at least 3 years, enterprise support today is our Absolute de facto standard.
In Q4, 99% of our net new customers have adopted enterprise support, which comes at 22 percent of support rate. And It means that a customer for every new license that he's buying even though it may be less licenses on a year after year basis. It still pays more support and that's in fact what is happening. Here's an artificial example of 1 individual customer that acquires year after year 5% of software licenses less. And still due to the fact that these licenses generate additional support revenue, you see the total revenue Going up, of course, this is a simplified example as it does not consider churn through migration credits and also not of course this Individual customers maybe not going bankrupt and therefore you don't have any churn there.
But still it gives you the notion Last but not least, here's the 3rd myth. In the cloud, you cannot make any money. And clearly, this is not true. In our plan, We consider that we will have an exponential growth of our cloud subscriptions and support gross profit over the next 6 years with around about 40% CAGR. And we also expect that during the same time frame, we will expand our overall cloud margin by roughly 9%.
I will come to the different constituents of this overall result because our business models in the cloud are quite different depending on when you are talking about the network, the public cloud or our private cloud options. At the same time, we also are clearly seeing the potential to further expand the profit In our software and support business, we actually believe software and support gross profit will grow with around about 3% CAGR from 2014 to 2020 with around about 2 percentage points improvement in the software and support margin by then. So all together With the rest of our total cost base that we have that we will continue to optimize for efficiency, we have run simple campaigns going on. We will use our applications as for HANA of course to drive simplicity across all of our operations. I'll come to that at the end.
This will drive a 6% to 8% CAGR on total operating profit through 2020. And the cloud, Especially in the later years, we'll be an exponential contributor to the same. So absolutely are we committed that we will make money in the cloud and we will make money across all of our business models in the cloud. So let me come to those and lay them out a little bit to you because It's important to understand the differences here. We are operating 3 distinct business models in the cloud that differentiates ourselves from all of the main competitors that we are looking at.
We have a traditional public cloud business mainly around success Our own developed cloud assets like Cloud for Sales and the other solutions that we have organically developed. This is a classical subscription SaaS model, basically with typically a 3 term And with annual billings, you also generate pretty high deferred revenue balances, Very comparable with, let's say, a sales force or a Workday. And here, clearly, we see the potential to go to at least around about 80% gross margin in this business. We have the business networks, which is a completely different business model, where we have by far the market leading position as Bill has outlined with Ariba, with Fieldglass and with Concur, a very, very predictable sticky revenue stream based on transaction revenues That once you onboard the customers typically expand and expand and expand over time primarily pay as you go based, but very stable With the consequence that we have a more frequent transaction based billing, which leads to lower deferred revenues, but with a very high gross margin as well at least in the same range as our public cloud business. And then we have our private cloud business, which probably if you take a look at it in isolation And we just look at the infrastructure as a service component of us hosting mission critical applications Sounds not extremely compelling from a gross margin perspective.
Here we see a potential to get to roundabout 40%. But you cannot see this business in isolation. We are driving it to really support our large customers' transition To both HANA as well as cloud environments, it is a means for us to lift and accelerate The adoption of S4HANA as well as HANA as a technology platform underneath it. And you see a lot of cross revenue synergies therefore in other lines of RP and L and in the cloud subscription line I. E.
In software revenues as most of the customers today and probably also on the short term future still prefer to consume the underlying licenses and traditional model for those applications. This will change slowly over time that they will also go to a subscription model for this element, which will then of course also change the commercials and the overall profitability of this business model. But for the time being suffice it to say that also this business At these gross margins, we return to positive operating income contribution for SAP. It's a fast growing business. We have invested a lot, especially in 2014.
Now we scale this business also via partners and we definitely will look for further standardization. With In this model, do not make it a 1 on 1 implementation paradigm, but really make it a more and more efficient model for onboarding our customers to the private cloud. This business similar to the business networks also does not generate huge deferred revenue balances because there you have a pretty short monthly billing cycle as well. We currently model our forward looking business value and volume generation. We are considering to give you in addition to the disclosures around deferred revenue balances that we are using today to generate calculated billings metrics.
Also More oriented metrics that are similar to what we are using internally, a more order entry type of billings disclosure allows you across those business models to more accurately visualize what SAP is growing in those different business models. Last but not least, when it comes to overall profitability in the cloud and I've talked about the fact that the cloud will exponentially contribute to our operating profit contribution, while in the growth stage, it will not yet reach the operating margins of our traditional on premise business. Let it be very clear, there is a lot of concerns about the cloud never reaching these models. But this absolutely neglects the fact that in the cloud the key components and the key Arithmetics of how profitability is building up is completely different. It's actually completely the opposite of what we see in the traditional on premise We are coming from a stage today in 2014 where we had roundabout a 60%, forty percent share of new and upsell cloud bookings, so net new business as opposed to the revenue impact of renewal business.
This will change until, let's say, a mature state is reached towards the end of the decade into more direction of an eightytwenty contribution of renewal business as opposed to net new and upsell business. What does this mean? It's an exponential impact of the profitability within the model because The whole issue of sales and marketing expenses, which come upfront basically and then are negatively affecting the 1st year margins renewal business where you have close to non additional costs than just the cost of operation of the cloud infrastructure. And this is a factor that of course will in later years when you reach an even more mature state and when then growth rates come down However, would we artificially reduce our growth in the cloud to get to this stage more quickly? No, absolutely not, Because we are making excellent money in the cloud even as we speak and this will get even bigger the more we scale and then the effect at the far end will of course even higher.
So that's the good news about the cloud business model that makes me very confident from a financial perspective as well That we will have a lot of fun with this business model in the future. Last but not least, I could not end this presentation without spending a few words on upsides, because we have talked about a guidance in which Bill has already confirmed that we are absolutely confident in as a management team. This is our guidance that we have devised as the current top executive team of SAP. But of course, we see opportunities to do even more and do even better. On the top line, S4HANA is really an opportunity that I think we are only starting to understand now from the initial customer conversations that we are having from the joint ideas that we are bringing up with customers how they could use this paradigm shift in how architectures of applications are looking like in order to transform their businesses.
This can spur growth in both the cloud as well as the on premise business model, extremely important. On customer engagement and commerce, Bill has I think we are only scratching the surface of getting really painful to Salesforce and the other guys in this patch of the market. We have proven in the last one and a half years that we can scale the business from hybrids exponentially, But of course, there's still a lot of room to grow even further. And the topic of industries, the industry cloud notion, strategic industries, especially our relative share wallet is still relatively low as compared to some of the traditional industries that SAP has been servicing for a long time holds a lot of growth potential as well. RunSimple, I've talked about it, is something that we are only now after we have gone as our whole company on S4HANA can now start to recognize.
We did this transformation last year. We went
live mid We did this transformation last year. We went live mid of April on Simple Finance after just 2 months of implementation. Options that are really repatriated into the transactional system landscape. As a consequence, we will dramatically reduce overhead in the organization that is today focused on providing analytics and reporting for business managers and business experts as a service because that service is there right in the system and can be automatically adopted. And there are many other advantages that we can drive from automation with these innovative solutions.
Last but not least, we have Applied a very rigorous end to end TCO focus for all of our cloud solutions now. This is a joint effort And that Bernd Leukert from the R and D side is running with Helen Arnold from the IT and Cloud Operation side together with services, which is also extremely important. We have a completely new opportunity lingering around in my conviction for services in the world that we are moving into. We need to repurpose services obviously which we are doing with our 1 service initiative to really be focused around services that matter for getting our customers quickly into the cloud, quickly to business value They can read from it, but there will be high margin services that we can drive, which clearly have an upside. So all of those, I think, are Excellent news for investors.
We have a lot of opportunities to further grow our business in line with our guidance. And if we are doing it done well with all of the assets that we have in place right now potentially even beyond it, we now need to focus on execution. But again, the most important ingredients are we need to be focused on customer centricity and we need to be focused on continuing to drive innovation. And we have proven with S4HANA to you that our organic innovation engine at SAP is alive and kicking and actually accelerating. With that, we will win in the market.
With that, over to the innovation master of SAP, Dan Leuchat.
Thank you, Luca, and good afternoon as well from my side. It was July 6, 1992 when it was a comparable moment, a comparable date. That was when I roughly joined SAP. And I was one of the first Developers at that point in time who got the PC all the others had terminals. And it was the switch From the mainframe technology to client server and it was SAP who launched on that July 6 R3.
It was a revolution, which now 23 years later, built one of the biggest IT companies in the world. And it's SAP, which is a company that is always betting on the future technology. We do not want to be a trusted adviser of our customers. Supporting them with technology of yesterday by convincing them that they can build with yesterday's technology, the business model and as well the business of the future. It is exactly these days where we again know that a column based In memory database will be the future and it would be wrong not to give a clear signal to the market Today to the financial community, but as well to our customers and to our partners that we cannot just Gradually, we invent businesses.
We have to use the latest and the most modern technology. And we ourselves We have reinvented our products, but I would go beyond. We have reinvented We prepared ourselves to be ready for the cloud for the new business model with the greatest technology, which is HANA as an in memory platform. It is a new paradigm. It is a moment where we will fundamentally change the IT architecture, but as well the possibilities For our customers in any industry, it's a new technology for a different time.
When you think about it, today's world become incredibly interconnected. It is the data, the content itself That is the driving force for the next business. It's the digital service that are replacing across industries physical products. And it's an innovation challenge. It's an innovation challenge for every company.
And it's a matter of corporate survival for companies to manage These new connections, these opportunities with digital services. And we have incorporated the skills, The knowledge, the insights across many companies into our products, into our transactions, in every process, in any decision. And every company has to consider software as the driving force for innovation. And as Bill just said it nicely in the morning, Of course, these technological innovations could drive complexity and we have added that complexity in the past as well to our overall portfolio. But this time, we have made it different.
We have built a platform that gives us the ability to innovate Or I would better say to co innovate together with our customers solutions which build the future. And we will do this that in a way that we will reinvent businesses in 3 fundamental killers. Number 1, it is the platform itself, a platform that has to be open in order to be powerful, A platform that has to unleash the capabilities of our complete solution offering as well to our customers as well to our partners. It's the innovative applications itself that enable the most modern business processes, Which customers run today with data insight, but as well go beyond that, innovate in edges like e commerce. There is almost No industry, no company where e commerce is not a topic, even in very traditional companies like steel.
There is The connectivity where the buzzword of Internet of Things is on the market that will drive simplification of delivering of services to our customers. And it is always only successful if these companies as well can reinvent the core. And as Luca said it, we ourselves have done it already in order to drive efficiency. And beyond that, the 3rd pillar is the connected network and Steve will talk about that later, which is a natural extension of any application. So let me shortly go through these 3 main pillars.
HANA remains the center of anything we do, of anything we dream, of Anything we build going forward. It is the enabler. When we talk about simplification, you need a platform. The automotive industry has shown that. The platform concept, we would repeat the story as we have done with new dimensions in the past, where we had a stable core with ERP, But where we added innovations in the edges with different middleware technologies, with different platforms supporting these innovations, which ultimately ended up in a complex landscape that added run costs.
This time, we have a platform that allows our customers to massively scale to use the processing power to incorporate insights, analytical insights and reporting in the transactional business for any kind of data, whether this is structured or whether this is unstructured. So on top of HANA, we have announced the HANA Cloud Platform as an open platform, An open platform, which acts for ourselves as an extensibility concept for any application, whether this application runs in the cloud or whether this application runs on premise and it comes with an integration layer, but as well an open platform for our customers, for our partners to extend the standard offering which we have. And very important, when we talk about software as a service, It has to come with the business capability to integrate these innovations with the technical capabilities to have low cost of integration. So that most open and modern platform where we think platform as a service is defined by content and not by infrastructure allows everybody to build extensions much more efficient than on any other platform that exists in the market today. And the integration layer itself acts for us to deliver content for our but as well enables our partners to build content for their extensions.
And we can build a marketplace, So they can leverage that marketplace to distribute that content and to monetize that content 100 times. Altogether, It's an extensibility concept. The user groups, the customers, the partners have been asking SAP for a long time. And in addition to that, We have heard from Bill that mobile is anywhere. So it would be stupid if we would not add mobile as a service to that platform as well.
If we would not add Fiori as a service to that platform as well and we just launched at the beginning of the year Analytics as a service and planning as a service, a dimension no other competitor can offer. Yes, there are players on the market, which offer solutions for analytics. There are other players on the market, which offer solutions for planning, but there is nobody else who offer analytics and planning as a service out of an integrated platform. And we are just at the beginning of that endeavor as we see that Analytics will not stay on premise. Analytics will become real time.
And in many cases with the connectivity, you need to drive that analytics out of the cloud. So our complete application portfolio will gain more and more value out of the HANA platform as we speak, but we will continue to stand for the perfect integrated enterprise. As applications that process transactions, applications at the same time have to put any insight that is possible into the context of these applications. So the applications have to become, of course, more consumable, more beautiful, But they have to be consumable on any device wherever you are. You need responsive design and you will see later that responsive design means it's the same content, it's The same algorithm, it's the same software that can run on devices like smartwatches, like smartphones, Like tablets, like laptops, like PCs supported by the same technology.
And these applications of the future will be data driven, not just consuming data by input from programs or end users. When I mean that applications become data driven, I mean that these applications have to be really a decision support system in real time for any end user, leveraging geospatial data, leveraging unstructured data, leveraging data from social networks. And these applications will drive innovation across many industries. But always, we stick to our well established paradigms That made SAP strong in the past. We honor, we appreciate and we leverage the investments of our customers Into SAP.
So that means when we launch new products like S4 HANA that does not mean that we make the path From ERP to S4, a miracle that we make a PhD out of it. Now it will be an easy move. It will be easier, let me say it in that way, to migrate from an existing Business Suite towards F4 compared to upgrade an existing business we'd release to the next version. So the nucleus is kept stable. We just eliminated the surrounding and what was, I would say, physical, what was materialized data structures in the past has just been converted into easy to digest code giving flexibility to the end user.
The integration across applications will stay one of our key competitive advantages and we will deliver All these innovations with full choice, of course, with a cloud first mindset. Therefore, S4HANA Is announced is launched today as a software as a service and you can only deliver it to the on prem world when you build a release or an enhancement package. But that does not mean that we will stop eliminating customers who want to stay on premise from that innovation. So let's talk about that innovation as for HANA as it is really the next big thing for SAP A few minutes. It's a major advancement.
It is a milestone comparable to July 6, 1992. We have and a lot of you have asked me that in the breaks already. We have redesigned, we have recoded the business suite For F4 on HANA, it is the start for us for the 3rd wave of IT transformation. You know the first wave was the introduction of IT systems to support any business process in the company. The second wave for me was the introduction of the Internet.
And now the 3rd wave puts the data at the main stage where the data is the value, the value of the product, the value of the service, of competitive advantage for our customers. And S4 is built has incorporated That intelligence of the data that insight that you only get if you have predictive libraries in the platform that insight that A beautiful user experience means we are not just taking an individual screen and making it nicer. It means that we put the individual, the role, the persona into the center of rebuilding the user experience in order to make him the job run simple. This is a true next generation. And based on the success of Business Sweden Hana, Where we have in the meantime more than 2,000 customers, just want to say that word.
There are companies out in the market We are proud of having 700 customers. Let's say for example, we have just launched Business Suite on HANA A little bit more than 18 months ago, we have more than 2 70 customers running on HANA their mission critical processes. So it's a rock solid platform. And it was the moment where we said based on that rock solid platform, it's the moment where we can launch The logical successor of Business Sweden Hana, which is S4. So after R2, R3, we have now S4 and Bill explained it very nicely what this abbreviation means.
We make the main the core the main thing again. That means S4 is the new default offering, which is categorized based on 3 things. Hasso explained this morning in detail all the characteristics. But if you want to understand and take 3 messages with you, It has a fundamentally simplified data model. And you see the factors of data footprint reduction here on the slide.
It comes in the waves we have built Business Suite on HANA, where we ported. We had the compression factor, where we optimized for HANA. And now with the simplification with S, we have reduced the data model to the pure nucleus. Number 2, It has a full Fiori web based user interface. And number 3, it has a system guided configuration and implementation.
There are wizards in the system that helps you to implement business processes for roles like a project manager, like a purchasing why this massive simplification is possible and why a significantly lower data footprint At economies of scale and makes HANA a platform of choice for the cloud by eliminating indices, By eliminating aggregates, which have been necessary in the past, otherwise no end user would have expected We could achieve that the system itself get a Massive more flexibility. In the past, with all these aggregates, with all these indices, the system was performing as well. But at the price of complexity and I would say even worse at the price of inflexibility. Whenever you want to do a change, mergers and acquisition, internal reorganization, changing market demand. It was a massive effort for a company to adopt to these changes.
Now and just with the example of a financial document, instead of touching, updating or inserting 15 tables in the systems, It is 4. And the same applies to purchasing, the same applies to sales, to warehouse management and so on. And as we do not update all these tables anymore, the throughput is massively increased. And the only question that remains From my perspective, if customers should go there now is what are the risks? What are the concerns?
And if you understand the massive simplification of the data model That it is easier to integrate in that solution, but it's as well easier to migrate from an existing business suite. I think there is no choice for customers to then to seriously think about to go to that next version as soon as possible. As it as well adds with the user experience across 43 core roads, which we support in the business suite, a huge step forward for all the users. And with the system guided configuration, it is not just a massive reduction in installation time. It is as well a massive reduction in any change the system asks you to due to market dynamics.
So that all together comes with packages that embed as well our public cloud solutions. We will have a package for human capital management where of course Our SuccessFactors solution is embedded and integrated. We will have a package for e commerce where hybrid is integrated. We will have A package, of course, for procurement where we leverage Ariba. And all these packages are not price list items.
These packages include software and predefined integration content, all delivered as rapid deployment solutions. And S4 will be the new clues for all of these packages. So to summarize, it's a new data model, a new user experience and a new configuration, which means A complete overhaul of the system from the top to the bottom. And the benefits are huge. Reduced data footprint has massive impact on cost of operations.
Data throughput Has massive impact on number of instances and number of systems. I just talked to a big German automotive customer Who was in process of establishing another ERP instance. Now since we shared with him the insights of S4, He will not establish that instance, but rather consolidate existing ERP instances and reduce cost of operations. And thirdly, I think the massive opportunity to be permanently flexible is a value in itself. If we think about top line benefits, faster business processes always have an advantage.
But it is as well important that you understand that faster as well often means smarter that you can run You have analytics embedded. You have a single source of truth. All enables better decisions and faster execution. As well on the bottom line, this massive reduction, this massive simplification enables you To run your existing systems with the existing hardware with a higher throughput or we can say it in different ways, You can grow your business without investing in hardware. So ultimately, let me summarize.
It is as well an opportunity for you to consolidate system landscape complexity, which was introduced in the past and get rid of that landscape complexity which you have these days. So where are we today? We have launched last summer already Simple Finance as a front runner for us as a testimonial if it works. And we have more than 100 customers We are using that software already. Some of them are already live and in production.
Others will follow as we speak. We ourselves have been the front runner to show the world that it is easy to use a weekend to go from the business suite to the simplified version. And now we have added these simplified capabilities not just in financial and controlling. We have done it in procurement, inventory management, Sales delivery, customer engagement, warehouse management, all the modules which you know. Fully Fiori enabled, we will have an industry roadmap.
Each industry will follow. 1st, you will hear from the first couple of industries next quarter and quarter by quarter, we will have that industry roadmap completed. So at the end, I think it's just time. I would like to ask then Sam on stage just to prepare before I close and say all of that will be enhanced By network capabilities, my friend and partner Steve will join us later who will in detail explain the huge benefits of the network, which is a natural extension of any applications. As in the past, We have optimized processes within the company.
We have optimized point to point connectivities, but we have not leveraged the network In the various dimensions Bill have outlined and the digital content that all these participants of the network can add to the value of an application itself. I've talked a lot. Maybe Steve you show us what F4 as a nucleus combined This network and as well as mobile devices can deliver to us today.
Good afternoon. My name is Sam Yen, the Chief Design Officer for SAP. So we talk a lot about simple, but just because we do simple doesn't mean we can't do really complex things. So in this demo, I'm actually going to show a scenario that not only features a simple to use user experience, but also highlights the power of the HANA platform in an Internet of Things type of scenario that goes way beyond core ERP. So in this scenario, I'm playing a pipeline maintenance engineer.
And As you can see from the screen, this is a water distribution network. So if I click on pipeline status, I see that the pipes are actually constantly relaying information the health of the pipes through the geospatial data that's consumed by Hana. We could also see the health of the infrastructure, which is about the pipes of valves. But finally, let's take a look at the actual production overlay, which not only monitors the current production, but also takes a look at the demand forecasts It automatically predicts using the HANA prediction engine that there might be an issue. So we could drill down into this alert.
I could see that the system has predicted based on both the demand forecast, but also historical data that there may be a pump failure in the near future and that this will impact production and potentially affect some nearby schools and hospitals. So I can drill down even further And the system provides more context into suggested actions, whether to repair or to replace. We see that the system has both leveraged The Fieldglass network to go through all of your contingent labor to figure out who is the best person to actually service the solution And also it leverages the power of the Ariba network to take a look at all your suppliers and find the optimized supplier for this particular situation. I could if I wanted to drill down and do even more analysis and take a look at the embedded analytics because all of this information is not only the real time Internet of Things, but also is connected back into your enterprise systems and makes that connection for you so you could do that analysis. Okay.
So finally, what I could do after this is I could review the details of what I've done and I could go ahead and complete the order. So for this last part
of the demo, I'm going
to switch over. And now I am going to if I could have the Elmo, please. Let's say If we could switch over to the OMA. We are now I'm wearing this nice smartwatch. So the alert has been sent by the ERP system.
And as a service technician on the road, I can go ahead and take a look at my inbox But also on your wearable devices as well. Look at my business workflow. Take a look at this hydraulic pump failure device that just came up. And here again you see the outlay of the part and some of the information about it and I could go ahead and quickly approve and complete this transaction. So again, the power of an Internet of Things type of example that shows not only the simple to use interface, but also the power behind the system.
So that's the first demo I wanted to show. Okay. So moving on. Bill asked the question, how do we connect with our end consumer? So I wanted to show an example of how we not only bring next generation user experiences not just for the business, but also particularly directly to your end consumer.
So let me ask a question. How many people have tried to build something from IKEA? Nobody in this room? A couple of people in this room. How many people were left with some Imagine the next time you're going and buying a grill that you want to put together, we just have the Super Bowl, downloading this SAP application called Built from the App Store And looking at typing in grill and finding the product that you have just purchased now you have to assemble at home.
What we've done is we've taken that same 3 d visualization technology that you saw that blew up the pipe in the previous demo And we've created a consumer based experience that allows you to have a step by step instruction manual That tells you exactly what to do to put together this grill. So if you go ahead step by step, it'll tell you The tools have been
Head screwdriver and a small adjustable wrench to complete the attach 2 axle bolts to the rear leg set using Note, ensure the wheels are installed with the protruding part of the inner hub facing the cart legs.
So SAP has always done product life cycle management, But this is PLM from the perspective of the end consumer. What happens to the part when it the purchase when it gets into the hands of the end The warranty information and the support information. So this is a consumer grade experience for end consumers as well. Built is available on the App Store. So happy building and thank you everybody.
Thank you very much. Thanks,
So thank you very much, Bill, Luca and Bernd for your presentations. And I want to go back to a theme in Luca's presentation. He said the ingredients success. It's about innovation. You heard SAP's innovation agenda from Bernd.
But then he also mentioned customer centricity. And we are very pleased that we are joined today by 2 very important customers for SAP. 1st of all BASF represented by Doctor. Hans Ulrich Engel, the CFO of BASF and then Alan Mathieulla, the CIO of And I would like to invite Rob Ensler on stage. Rob is the Executive Board Member in charge of Global Customer Operations for the host of this session.
Thank you so much. I was going to do the custom answer. Okay. So those slides are not correct. So first of all, I am excited to be here today For a number of reasons, but I get a beautiful job to sell these innovations.
And Bernd, thank you, Because you are making my job a lot easier and it's pretty exciting to be at SAP with this opportunity. At SAP, we don't get to Do this without one important factor, the most important factor for SAP and it's the journey that our customers have been on With SAP for 40 odd years. We reignited a journey when I first started R3 And we're doing it again today. And as I said, we don't get to do that innovation journey with our customers. So it's a distinct honor to have Two customers here today that are not just any customers.
They have committed to SAP for many years. They've invested in SAP and are innovating with SAP. And without these customers, we would not be the kind of company we are. So with that, I'd like to invite Doctor. Hans Ulrich Engel, who is a member of the Executive Board of Directors for BASF SE I think you're going to need that.
Thank you. Sure.
So good afternoon. This is a first For me, I have to say, I tend to address our investors and our analysts on a regular basis, But not those of our customers or our suppliers. So thank you very much for inviting me. What I'll try to do is give you a brief overview on who BASF actually is and then talk a little bit about our cooperation with SAP, because frankly I think we wouldn't be where we are today Without the help and support of SAP. So talking about BASF, I first of all let you read for the next 5 minutes through this very important statement.
We'll get to BASF in a nutshell. BASF obviously a chemical company headquartered roughly 20 miles north of the headquarters of SAP In Germany, we are the world's largest chemical company. Unfortunately, not a household name in the U. S. Put things in perspective, you think about the Dow Chemical Company and DuPont combined that's the sales of BASF roughly €75,000,000,000 in sales, 20% of what we do, 20% of our sales, 20% of profit, 20% of assets, percent of employees in North America.
I provide you with a little bit more data here, which you can read much faster than I can talk about it, Which then allows me to quickly go to one of our key concepts in the BASF Group For which we came up with a nice German word of Verbund. Now what does Verbund mean? Verbund means integration. What we run at BASF is an integrated chemical model. Now I see the one or the other of you in this room nodding when I talk about an integrated chemical model.
I'll show you 2 more slides in order to fully confuse you when it comes to integration and the benefits of integration. Roughly 200 countries, which means basically all the countries in this world is where we have our with respect to SAP and our license payments to SAP as you will see a little later and we have about 11,000 people in research and development. Now what is this Verbund thing about? What I'm showing here is our Our site in Ludwigshafen, Germany, which is the biggest chemical site in the world, roughly 10 square kilometers. Now what does that equate to?
This is covering an area from about where we are right here up to Times Square. So that's the size of The plant that we have in Ludwigshafen, I call it the mother of Verbund. Now why is that? Because what happens at the site is The key raw materials come in on the northern part of the site and then they flow through our value chains to the southern part of the site. And one product or one plant feeds off the other plant.
Waste streams that we generate in certain parts of the site are used by other plants and then turned into valuable products. So a lot of data that you see on here. Now to confuse you fully, this is the type of chemicals that we produce in the first, let's say, Roughly half mile of the site that you saw. So this is the upstream part of Bund only. Could come up with 4 more of these slides to show you the entire chemical side and the entire chemical value streams.
Now why is this important and what does it have to do with SAP? It's pretty simple. When you run something like this and as I said we have a total of 6 of these big fabond sites and we have another 370 smaller chemical sites. We run them in one integrated model. We run them in a way that we want to fully understand what's the input in plant A, What's the output in plant, let's say, x, y, z?
That's the only way you can run this in an efficient and effective way and you can run it in a way to generate the profits that we generate. So what we need for that is pretty obvious. We need data. We need information. Now there is one plant One part of information that comes directly from the data information system on which these plans are run.
But they then are basically consolidated in the SAP system, which help people like me, not a chemist by training unfortunately, to better understand what's really happening out there And how we can generate the results with our products that we do. I hope that sets the scene. Now what I'm showing here in one short slide has actually taken us roughly 35 years to get to. We run the BASF Group on one SAP system, on one SAP common platform you may say, On one SAP ERP, 56,000 users. I hope, Luca, this is in line with The license fees that we pay, I checked it.
So I
hope we both have
the same numbers. 56,000 users, roughly 3.50 legal entities that we have on this. And as I said, it took us quite a while to get there. You see here the brief history. Over roughly 35 years, we invested in the first part of SAP, Which was financial systems a relatively small financial system primarily run at headquarters at BASF SE.
You then see the various steps that we have taken in order to get now to a world where we have one SAP system. That provides me as the CFO of BASF with an awful lot of helpful data. Finally, my data world is consolidated. Finally, I know that the P and L numbers that I get from Ludwigshafen, the P and L numbers that I get let's say from BASF Corporation In the U. S.
All the P and L numbers that I can get from BASF in India or in China are comparable. No more stories about well, this is slightly different because no more that one system, one world, Clear transparency, clear data on the financial side. So that's that part. Now 2014, we changed the game a little bit in a way that SAP and S agreed on what's called a New strategic partnership. So as the CFO, you look at something like that and you ask yourself the question, We have a big strong supplier here.
Do you want to enter into an even closer relationship with such a supplier or don't you? Well, the answer was pretty clear. We wanted to because we think that we can profit from A closer relationship with SAP significantly. Why? Because I think it will help us to drive our total cost of ownership down, which is absolutely critical in the environment that we're operating.
Now there's also something else. Entering in these type of strategic partnerships is what BASF does with its customers. And you can either run The game or the business in a way where you have the classical discussions between the supplier and the procurement department and they are predominantly about price and quality. Or you can get to the point where you ask yourself the question, how can we generate more value for both businesses together? We've done that As an example with the automotive industry where we have our technicians working in the production lines in the automotive industry.
You see this here on one slide. That's actually a paint plant where all people are working side by side with the people of our automotive customer. And this is what we're now doing together with SAP. We have SAP employees working side by side with BASF employees, Improving the way we use the products of SAP. We entered into that agreement, Luca, if I recall correctly, some I mean, I believe September or October, put our teams together, put our people together and the outcome of that is Frankly, very, very encouraging.
Now something else that we do in our business and we're now doing together with SAP is what we call co innovation. We put people together that sit and work on certain solutions. An area where we do that co develop, co create, co innovate is, for example, transportation management. Our needs in transportation management As a chemical company may be different from the needs that, let's say, an automotive company has or a steel company has or a cargo of this world has. Working on the specific situations that help us as BASF run our business in a better way, That's exactly what happens in these co development and co creation, co innovation teams that we now have put in place.
And with that, I close my brief presentation. Hope I gave you a small overview 1 on BASF and 2 on the type of cooperation that we have with SAP. Thank you very much. Now we're going to sit.
Never mind. I had the one question on Follow-up question on what's the incentive for both BASF and SAP, but I think you answered that question for me and I don't have to ask That question again.
Do I get my answer then also on the screen?
No. We'll work on that one. That's part of what Luke is busy working on. Hans, what about these buzzwords in the industry and when I see The pictures of the car and the data shoes, it reminds me how much you interact with consumers like myself. But today it is big with big data Industry 4.0.
And how do you see the potential with this for BASF?
I think there is a lot of potential. We have actually started last year also under that title Industry 4.0 what something that we call senior product at BASF. Now our production processes are already highly automized as you can imagine. I showed the site. I showed how our values value chains work.
There is an awful lot more there. I like the example very much that your Chief Design Officer showed earlier. Why? Because that's exactly the type of things that we work on at BASF, which is I call that preventive maintenance. Our big plants, our upstream plants crackers, give you an example.
A cracker is a €1,000,000,000 plus investment. You want to run them 3 65 days, 24 hours per day that's continuous improvement continuous production that you need to have. You need to run them full out. The way to do this is to think ahead to understand fully at what point in time do I have to exchange a valve or a vessel. Having this type of preventive maintenance information understanding what needs to happen at what point in time, So that I don't need to shut down the big machine is would be key advantages.
Now we have that in part, But by far not as developed as I think big data or Industry 4.0 can get us to Big data, I also give you an idea there. We work as an example with we have an agricultural solutions business fungicides, insecticides, herbicides. We work with companies like John Deere, hook up with the satellites of John Deere, Pull the information from the satellites, share them with the farmers who then on that basis can make decisions on how to treat their crops, what kind of fungicides, what kind of insecticides, what kind of herbicides to use. So I think there is a lot of potential in the areas of what I would call smart manufacturing, Smart supply chains, but also closer cooperation with our customers. If I think what you and I are used to, you buy at Amazon, you know exactly where the product is, when it will be delivered.
We're not always in business to business in our industry at that point that our customers have detailed information On where the product is, what the temperature of the product is, which for chemicals can be rather very important. So there is a lot of room there. Great.
Thank you. Can I ask the audience, are there any questions in the audience? There's one on the left hand side towards the back, Gentlemen with the rates
high.
Thank you. So in terms of S-four, now you're mentioning I guess better integration with your plant and with suppliers People use supply. Could you give us any other thoughts on what you're looking forward to in this release? What why you're excited about it?
Yeah. I think what it will help us and we are actually in the phase of evaluating what to do at what point in time. But I think what it will what it should do is help us as I mentioned earlier to reduce our total cost of ownership. It should help us also to allow our people to exploit what is in the respective systems Better than what we do today through that overall become faster. So I think there should be a number of advantages.
But as I said and that's pretty typical for BASF always and maybe very German takes us a time to evaluate to assess. Then we make our decisions. Then we implement and execute accordingly. And we're currently in the process of assessing and
evaluating. Great. Thank you, Doctor. Engel. Appreciate it.
Pleasure. Great to see you for innovating and partnering with SAP. Thank you very much. Now it's my distinct pleasure to welcome friends of SAP and a friend Mine, the Chief Information Officer for Royal Dutch Shell, Mr. Alan Matula.
Alan? Alan, thanks for coming all over from The Netherlands, Holland to join us. Everyone knows Shell. Everyone uses hopefully everyone uses Shell. Can you provide some insight into the scope of your business and the impact and how it relates to the technology landscape that you have in place today?
Yes. I mean very similar the conversation before me, very good big company. Obviously, we are we operate truly Global. SAP has helped us get to that point, right, where we can operate our company on a global dimension that we Haven't been able to do before. We've got operations in well over 70 countries.
We've got about 100 and 50,000 people on SAP and that includes Shell and contractors, 43,000 retail stations, 30 plus chemical plants refining locations. So a real world class company that operates at scale.
Yes.
Shell has been a customer of SAP for a very long time, right from the start of the oil and gas solution, Has innovated with SAP through the 90s and done many things with SAP. I have in the past 18 months, we had an opportunity to redefine that partnership from a I guess from a blank sheet of paper because there is nothing done in our industry or at least I or you had not done something like that previously. And we had to throw out all the rules that SAP had and we redefined the relationship that we have with Shell. Can you expand upon that?
Yeah, you're right. I mean, we go back
2 plus decades with SAP.
We're very proud of the partnership, but it's changed over time. In the early days, it was all about integration on some of the old platforms. I think R3 presented opportunities to actually drive our global business model. Now we look at the landscape, Rob, and we look at the disruptive technology and HANA is a big part of that. And we think about What do we need to do together going forward?
And the traditional model of sales into our organization just didn't work for us. And so what we needed was better collaboration. And very similar to the prior speaker, We put together a model built on an A Team concept where there's 1 SAP person and 1 Shell person in a given business area and they're driving innovation. They're driving adoption of technology. And hopefully, All of that learning and experience is being siphoned back into your engineering groups.
And so this is a true collaborative model Built in a collaborative way and we did it as a byproduct of putting together the renewal agreement.
One of the things that when we did the renewal agreement, which I was fascinated, had the concept the A Team doesn't stand for the A Team, the concept that most people understand the A Team. It stands for adoption. And you had this concept that you wanted your users to consume more SAP. Can you elaborate on that whole consumption based model? Yes.
I mean, the world is so complex these days That you have to actually get in the business suite and understand how to leverage the technology. The traditional model of just Getting the software product and trying to roll it out through normal integration that takes you only so far. But it actually suboptimizes the technology you're trying to put in place. More importantly on top of that when you take HANA and you take some of the cloud activity and you take what's going on In terms of vertical services being introduced, the kind of dialogues that you have, have come up a significant level, yes? So where our CFO might or might not have been interested in the configuration of SAP, Under the Hang Up paradigm, they're very interested because it actually changes their business model.
It will change the way our CFO Looks at what he does in his finance organization. It's going to change what an asset manager does. It's going to change how our subsurface folks think about SAP and their technology. So you need you not only need the collaboration, but you've got to raise the collaboration up a level in the company that's unprecedented.
So when we look at the way that we've actually kind of managed the relationship over the last 18 months, so it's actually a year now. One is we talk about running it better. We talk about using it better. And we also have this innovation bucket. I have been so impressed with your team how they took design thinking.
They went to the house of blood to institute. And I think you took it to a different level. And I hate to say that in front of Bill McDermott, but I think you guys have really taken it to a level where The amount of projects and opportunities that you're working on in your business to redefine things has really impressed me tremendously. It's interesting because we're very excited about what you're going
to do for HANA with the suite. But actually A lot of the early innovation has come from just raw ideas taking a hard look at the HANA platform and thinking about What are some of the things that we have never been able to do? So HANA is being introduced into subsurface technology, Never before an SAP position. It's being introduced into our cash management, to treasury. It's being introduced into our trading organization.
And when we agreed to spend the first amount of money on HANA, We were worried about adoption. Yes. We were worried about adoption. I now have about 70 projects in flight. Yeah.
And very few of them actually have to do with the Suite conversion, because actually it's using the power of the new platform to about business problems we couldn't solve before. And so when we started Rob, we started with well, let's talk about replacing what we do. And soon the business actually has changed their language to, I've never been able to do this and now can in memory technology and can the HANA platform Allow me to do something I've never been able to do.
And I'd say I saw that firsthand with Haso on TP and it was pretty amazing to see what you've done. When you think about Shell's vision for the future, how does it align with SAP's innovation path?
We're very aligned, Todd. So we actually talk about 3 themes for us in technology. We talk about Mobile first and anywhere, which is very consistent. We talk about cloud and I'll come back to a belief around cloud. And we talk about big data, which is actually part of the HANA platform.
We truly believe that as you guys think about the reconfiguration of the suite That actually there's a huge opportunity to actually own vertical clouds or vertical service spaces. And we think that the HANA platform actually positions both SAP and Shell to actually think about redesigning their core business, Not making an incremental change, but what we're after is a step change, a step change on based on the introduction of new technology. Just like Client server created a step change. We believe HANA and in memory will create that same step change. But we have to do it together.
Yes. We have to bring the domain experience. You need to bring the engineers and the architects to bear. And I think that's where this collaborative model is actually pretty key. Absolutely.
Stefan, do we have any questions? I can ask now. Stefan, do you have time?
We have
time. Okay. Are there any questions? Yeah, we have a question here in the front.
So as investors, a lot of we hear that some of the pushback on HANA is around the price. It's Very expensive in memory, specifically.
Yeah.
And maybe you can frame how since you got over that hurdle, Maybe put some numbers around it, maybe put some how did you get over that?
I think very early in
the cycle and now I'm probably going back, Rob, probably a year or more, very early in the cycle, I would probably agree with you. And where it was dedicated equipment, We had dedicated appliances. The barriers to entry were actually quite high because you're spinning up your own environments. And we worked with Rob and Bill to actually work with a couple of partners to drive them to A cloud based pay by the drink infrastructure. Now I think that has grown.
I think that was a turning point for the HANA group that says It was a breakthrough for SAP that says we've got to get this to lower price points and we've got to drive the Moore's Law curve. Yes. So I think what they're doing to put HANA in the cloud and actually make it incredibly cheap and then drive their partners To better and better unit price performance is key to this journey. If they don't continue that drive either themselves Or through the partners in the marketplace, whether that's T Systems or IBM with Softlayer or HP, it has got to be a very competitive race To lower and lower price points that allow us to adopt the technology. It's not too dissimilar to where client server was Back in the 90s when the first implementations of client server were very, very expensive.
The rumor. And then the industry through competition actually drove the price points down. I think you're going to find the exact same thing here at least I hope so.
Good. I think Luca elaborated on that as well as part of his discussion. Another question? We have one right next to you on the right hand side.
You mentioned in terms of Adopting apps or building apps on top of HANA. Yeah.
One of
the things I'd be interested in hearing from you because you mentioned the sort of vertical cloud opportunity is, Do you want to see an app ecosystem evolve on top of HANA? Or do you feel like the most advantage you're getting is actually Developing those apps in house and if you're developing them in house, I guess how easy is that to enable I guess how easy is that to do you all given that you're not necessarily a software.
Yes. We think about it in kind of 3 pillars of value. The first one which is just table stakes is TCO. When I go through a big transformation like this for TCO, that's interesting, but it's not enough. Before they progress the HANA for the suite, actually most of our innovation is being done on top of HANA With I would say 50% of the data nothing to do with SAP, yes?
So actually greenfields. I think it's a combination of in house development as well as working with some other partners. So I'll give you a great example. We have always in Shell wanted to have access to the performance of every well around the world, yes, 20,000 wells. Well, to get performance of a well in my industry, you actually have to get to the process control systems, which are which we run something called OSI.
So what we worked with SAP and OSI is to create an interface where we can suck out all this real time information and provide our engineers with transparency around well performance. There's an example of innovation at work. There's an example of we built something together. Actually SAP built the interface, OSI enabled it And then we wrote the user app on top of it. So it's actually almost a combination of the 3.
But I wouldn't underestimate The power of the platform on top of the transition of the suite. So it's TCO. We are going to reinvent the suite and that's where I'd like to see A thicker stack in terms of vertical services, but then we'll innovate on top of that. And I think it's a great platform for ISVs as well. And I think they're right on the perfect point, which is to keep it open and to get an ecosystem of ISVs out there.
Great. Alan, fantastic. Thank you so much. All right. You're a true partner.
Thank you. Thank you.
Thank you very much, Alan, Mr. Engel, Rob. You're welcome. And now we have a 10 minute break. We have some coffee trains outside.
We'd like to continue with the program at 3:15. Thank you very much. So we'd like to move to the final part of our Capital Markets Day. And I would like to ask Steve Singh, the CEO of Concur and the newest member of the SAP Global Managing Board to come to the stage and talk about our vision for the network business. Steve, the floor is yours.
Thank you, sir.
Thank you.
Good picker around here. Hi, everybody. Come on now, start talking. Hi. So look, I know you're tired and I know you've had a lot of information thrown at you.
There's a lot to digest. I'm going to ask for 10 minutes of your time. And in that 10 minutes, I'm going to talk to you about a multi $1,000,000,000,000 opportunity, all right? So Look, first of all, I couldn't begin to tell you how excited I am to be here, how excited I am to be a part of the SAP family. And by the way, I speak for all 4,500 Concur folks I say that.
This is an amazing company. It's got incredible potential, incredible opportunity ahead of it and we're excited to be a part of that opportunity. Look, when you think about whether you think about in terms of revenue or you think about in terms of customer growth or for that matter market share, When it comes to core business processes that run your business, SAP has always led, Has always been the champion of driving automation, driving benefit within your business. And with innovations such as HANA, S4HANA And market leading solutions like Fieldglass and Ariba and SuccessFactors and Hybris and also now Concur, we're laying the foundation not just For how do you drive business value, how do you run your organization, but we're also laying the foundation for how businesses will communicate with one another and They'll operate together. That's the opportunity that we're pursuing.
So I want to just highlight some basics around that, then we'll drill down into details. When you think about a business network transaction, there's really two sides of that transaction. There's you and I as individuals and the companies that we work for and then there's suppliers Who also clearly want to serve us. And when you think about it from the point of view of the business traveler or the business employee or The companies that they work for, there's an expectation that these transactions are intelligent, that they understand the context within which they're being originated, They understand, hey, you know what, here's everything I need to know about Bill McDermott. Here's everything I need to know about what he wants in this particular transaction, It's a minimal requirement that it does that.
But there's also another side of the equation for the supplier, Right? Every supplier in the world wants to do an incredible job at serving you as a customer. And it wants to make sure that it does such an amazing job in serving That you would never ever think to work with anybody else. The idea of the business network is to marry these concepts together And deliver in a way that absolutely drives a delightful experience. So the business network group at SAP, That's the foundation.
That's the opportunity that we're actually pursuing. So if you're going to pursue that opportunity, it's really important to think about how the world should work and not how it works today, but how should it work. And I happen to be a big fan of Jobs' quote. It's not very often quoted, but it's a great quote. And that is the world that you see around you was created by those that came before you, But I'm a bigger fan of a Gandhi quote, who I'm going to loosely translate this and that is create the world that you want to see.
And that's what we have an opportunity to do, not just within the Business Network Group, but also obviously as a part of SAP. To do that requires a couple of It requires a deep love and passion for innovation and the ability to go drive innovation within our own company, but it requires more than that. By the way, on that side, we're fantastic. We have an amazing company, very product driven organization that drives innovation, right? Not just the acquired assets, but everywhere around SAP.
But it also requires one more thing. It requires an embrace of the ingenuity of other people. It requires us saying, you know what, let's bring them into the equation. Let's make sure that we can take the incredible innovations that happening in every corner of the world and bring them into our business process. Does that make sense, that part?
Am I losing you already? All right. So look, if we can do that across an open platform, you've got an opportunity to go drive incredible innovation An incredible set of interactions that are intelligent. In fact, the way I might ask you to think about that is that the innovation of singular companies, Right, is oftentimes incredible, beautiful, but it's nothing compared to the innovation of communities. Think about the iPhone that we all carry around.
It's an amazing product. It's a beautiful product, But it's the apps and it's the ecosystem around it that makes it magical. And that's the opportunity that we have to pursue around the business network. How do we bring the innovation of others into our ecosystem? So When you think about that network opportunity, right, let's start with an area that we all understand and that we all know and that's consumer Innovation.
Think about how we used to all buy movies and music and the like 10 years ago. And then Apple and Netflix and various other Hulu came together and said, let's create a platform or a set of services Where content providers can serve up information, where developers can add incredible experiences and applications and where we as individuals can consume Those services in a model that was delightful. Think about how we used to shop for things 10 years ago. Then Amazon and eBay came together and said together, but they came along and said, what if we created a platform around which you can actually not only buy services from me, All the partners that want to be a part of the Amazon platform or the eBay platform, right? The common theme that you're going to see across all this is that these new These companies took new technologies and said, not only do I want to make a better experience, I want to radically change the experience.
I want to make it radically better, I want to take every part of the process and I want to improve it all the way through the value chain. So In doing this, one of the things you're going to realize is that there's no single company, there's no single application, there's no single organization anywhere in the world that can pull all that off. You have to take an approach that says we are an open platform. Yes, all SAP apps will run on top of this platform. All SAP apps will deliver incredible value on top of The soul is this platform open for everybody else, whether you're building for your own business, whether you're building for Oracle, whatever it might be, you can build on top of our And you can add value for the business traveler, for the consumer of business services, for contingent labor, wherever you want to add value, you can add value, That wonderful experience, it requires frankly a collective effort, right, to deliver that network experience or that network ecosystem.
Now, the experiences that we're seeing in the consumer world are also starting to emerge in the business world. Now you might say that business networks have existed for a long period of time and you'd be right to some extent, right? ATMs have existed for a long time, multiple decades and they deliver a great service. But compare that to your banking app on your phone And think about the range of services that are available to you at the in the palm of your hand, the touch of a finger, right? Think about well, let's look at travel for just a second.
Picking up the phone, calling your travel agent is certainly a viable way of booking travel. And watching your travel agent enter archaic codes into a green screen is a network ecosystem. It's just not the network that you're looking for. It's not the network environment that really adds value for you as an individual or for you as a company or for that matter you as a supplier. You saw Barry's demo just a couple of minutes ago, right?
It's in where we are today with travel, with that travel ecosystem
It's a
far cry from the old model. It's better than anything else that's out there in the world, but it's a Tiny step in the right direction of where we're trying to go. What would be ideal, right? What would be ideal is if transactions Completed themselves, automatically figured out this is what needs to happen. They drive through the completion automated, boom, you're done.
That would be ideal without any human interaction. That's where we're trying to go with the business network, right? So if that's the context, What should a business network focus on? What are the priorities for a business network? There are 3 in my mind.
First of all, it has to be personalized. It has to be contextually aware of you, everything around you. 2nd, it needs to be actionable, Right. Based upon either your spend patterns or upon data, it ought to be able to take actions on your behalf, whether those actions are explicit or implicit. And finally, it needs to be totally transparent.
What I mean by this is not just transparent choice, Be transparent about what's happening in the ecosystem or what's happening in the supply chain. You ought to be able to know that, hey, look, there are disruptions in the supply chain and that's going to impact What your particular request is going to be at this particular moment in time, right? That has a massive impact on how that transaction will actually occur. Does that part make sense? Let me give you 2 quick examples that might highlight that.
And I'm going to start with travel. Here's how travel should work. When I get on my plane, if it's delayed, my connecting flight ought to be rebooked for me automatically, Right. Concur knows everything about you, everything about your preferences and your corporate policy. We should be able to post an alert right on your phone and say, hey, you know what, here's 3 options for you, which one would you like.
They're all within your corporate policy, all within your personal preference. You click on it, it automatically re books, automatically updates your itinerary. But more importantly, why can't it connect to the rest of the supply chain? Why can't it actually tell the driver who's going to pick you up, hey, you know what, Steve is going to be 25 minutes later than anticipated. By the way, when we land, when the plane lands, Concur knows that the flight has landed.
What we ought to be able to do at that point is say, guess what, we can check you into the hotel you reserved in. In fact, not only do that, we can actually deliver a key right to your mobile device. In fact, last night, my flight was delayed. I got in around 1:30 in the morning. And guess what?
The thing I want to do right there and then is go wait in line behind 16 people to check-in. What I'd love to do is have that device that key delivered to my phone, I go straight to my room. That's what a connected network transaction is. But let's look at this in the context of an airline company that happens to be a customer of ours, This is an amazing organization that has been working to put sensor technology across all of its infrastructure of airplanes. And that sensor technology is integrated into our business network.
It alerts the network that you know what, this part It's due for repair. This part is actually due to be replaced and that order can be done automatically for you. But more importantly, a great network we actually integrate across other business networks. So in this case, the Pure Glass network. Wouldn't it be fantastic, in fact, this case, it actually does exactly that.
Wouldn't it be fantastic if it actually told the Fieldglass network that this part is scheduled to be replaced on the 22nd? These types of individuals are required to be on-site for that maintenance and for that upgrade on 22nd. That's what a business network does. It drives incredible value through the supply chain Automatically without you ever asking it to do anything. That's where our future is and that's where the opportunity is.
I apologize, I've jumped ahead here a little bit. So look, where does if that's the division of our business network, where do we sit today? Well, SAP is in the incredibly fortunate position of leading in this new category of software, in this new opportunity around enterprise software, We have the number one players in every core market, whether you're talking about travel and expense, or you're talking about procurement, or you're talking about contingent We are literally the number one player in every single one of those spaces. Now this is fundamentally different. When you think about on premise software of the past, Well, you had to you delivered a solution entirely internally and you had a suite of products, some of which were best in class, some of which were really good products.
But the beauty of cloud computing, the beauty of where SAP sits is we have literally the best products in every single space and we're driving a level of cooperation and And integration that drives real value for our customers and real value for supplier partners who want to work with our customers. I want to spend just a couple of seconds. I've got a few minutes left here. I want to spend a couple of seconds To outline the opportunity around the business network. Now there's really 2 parts to this that are very, very important.
The very first part though is I'm going to go backwards here for one second. I guess not. If you look at that blue line across, Right. It's very easy to think about a network and say, look, there's an opportunity to drive a transactional fee for connecting a transaction. I would tell you that's interesting, but that's not what we're going after, right?
What we're going after is how do you add value across every element of The transaction. If all you do is say, I'm going to connect the transactions, guess what happens? I think about the stock market, right, how you trade shares. Well, many, many years ago, it used to cost quite a lot to go buy and sell shares. Today, it's pennies to do that.
In fact, it's less than pennies per transactions. What needs to happen is you need to be able to drive value through every element of the transaction. And if you can do that, there's 2 components of revenue opportunity that exist. The very first happens to be a massive market in and of itself and that's the application side of the equation, right? Don't think about business networks as just the network side of the opportunity.
Think about it as the network side and the application side, right? Think about a company like Uber. Is it an application or is it a network? It's actually both. That's what Concur is, that's what Ariba is, that's what Fieldglass is and that's what every member of the Business Network family will be.
There's a $75,000,000,000 opportunity just on the application side of this equation. Today, I want to give you some sense Today, Ariba is just modestly penetrated against this opportunity. Concur is less than 5% penetrated against its market opportunity. We have 23,000 In a universe of companies that should be measured in the millions. Fieldglass, an amazing company, It's even earlier stage in market penetration, right?
So if you look at just the application side of this, where we've got real value for our customers, where we drive costs down for our customers, There's a $75,000,000,000 opportunity just on the application side of it. It's bigger frankly than where ERP is today. This is a huge scale opportunity. But there's also an opportunity around the network side of it. And that opportunity is going to be monetized in multiple different It depends on the transaction.
It depends on where you're adding value in the transaction. And it depends on the sustainability of that value that you can add, Right. So at Concur, we not only are able to drive value in allowing an airline partner or a hotelier To optimize their content for a particular individual, but we also allow folks to advertise in a very Targeted model, right? So there's multiple different revenue streams and you're going to see that apply to every single business network opportunity that exists. Does that part make sense?
All right. So guys, look, this is our vision for the business network. It's a compelling vision, but it's compelling for a couple of different reasons. Not only is there a massive scale opportunity, we're also sitting in an amazing position today, Right. As I said before, we are the number one player in every single one of these markets.
We are in aggregate, the business network component Of SAP is a $1,000,000,000 plus revenue stream. It's a massive revenue stream. It's at scale with any other cloud computing provider. And more importantly, it's growing At compelling rates, in fact, at equally compelling rates as any other cloud service provider in the world. But here's the beauty of where we are.
We have 8,000 people, More than 8,000 actually wake up every single morning. And you know what they focus on? They focus on Concur, Ariba, Fieldglass and driving massive innovation, Both at the customer side and the supplier side for the Business Network Group. The things that you're going to see, the things that how these transactions are to work We'll become so seamless and so automated that you're going to see this and say, look, why didn't this work this way in the past? There's an example I tend to use and that is go back to the payroll market.
1947, when payroll market was first established, payroll checks were cut by hand, Okay. Today, do you even think about how your payroll is actually deposited? It's automatically done for you. It's sitting in your bank account. This is where expense reporting is going.
This is where procurement is This is where continued labor is going. It will be done for you automatically. And we're in an incredible position to make that a reality. The other thing I'd just like to ask you to think about and I know that a few folks brought this up in the breakout sessions. And that is the idea that cloud computing Well, that this cloud computing services whether your business network or cloud apps can't be as profitable as license applications.
I would ask you to think about this totally differently, right? Here's what's different. Cloud computing apps are focused on business verticals That couldn't even be automated in an on premise model. And there's a greater number of companies because the cost structure of cloud computing is such You can automate this for a 1 person company or a 300,000 person company. There's a greater number of companies actually can benefit from cloud computing.
And so the opportunity is larger, so we spend more in the short term to go after those opportunities. In fact, Concur before we decided to start investing more in our sales organization was actually sitting at 24% operating margin. There's a massive opportunity in driving operating margin, but at the right time, okay? This is an incredible business. It's an opportunity that we're very excited to pursue.
And that I hope gives you some basic idea of what the business network is and the opportunity Thank you so much. I'm going to I guess whoops, and I
get back to Steve. I'd like to invite Bill, Luca, Bernd and Rob to join Steve here on stage for the final Q and A. We still need you, Steve. And also a quick reminder for everyone who is still awake in Europe and watching this Over the web, we take questions by e mail. Please send your questions to investorsap.com.
I would say, We will start with some questions here in the room in New York. And I realize a lot of questions here already. We start here with one question from Kirk Materne, Evercore Partners.
Thanks very much for your time today. Kirk Materne with Evercore ISI. Maybe Bill I'll start with you on S4. You just talk a little bit about the go to market? How you're thinking about that in the near term?
And also maybe just a follow-up on Steve's last comment about does Sfour actually maybe broaden the opportunity? Meaning now that you have the you guys are obviously known for running very, very big businesses and You've had some folks on Business One and some smaller businesses. But does S4 actually open up some opportunities for you guys in the SMB market that Potentially you weren't going after before, but the first question would just be a go to market and sort of the monetization around it over the next say 12 to 18
Thanks, sir. Maybe I could just start off with the SME question. 4 out of 5 customers will run their SME enterprise in the cloud by 2020. So I definitely think S4HANA and B1 on HANA In a cloud environment, we'll squeeze the competition from both sides. I count I would count on that if I was you, because that's what we intend to do.
On S4HANA, Rob has an amazing rollout plan. In fact, I think you're leaving for Tokyo.
Right now.
Right after this. And all over the world, we are launching S4HANA in Every corner of the earth with SAP people, our customers and our ecosystem to make this What it deserves to be the biggest launch that we've had in 23 years. And we're going into the installed base with a very nice story and we're also going into net new customers with a very nice story. I just spent a week After Davos in the Middle East, it was fascinating to see how many companies in the Middle East that are not only existing companies, but non SAP customers that told me, wow, I only wish I could have gone SAP in the beginning, but you guys hadn't had a footprint in the Middle East. You went through a partner.
But now that I've gotten the whole download of the HANA story, I not only really like it, but I would be willing to run it including in a cloud if you could put the data center in a location in the Middle East, which is why we decided to open 1 up in Riyadh in April and we already made that decision. We already accounted for that decision. So I think you got a great chance here to upgrade the existing installed base and we have made the pricing very pleasant For the customer, very fair for the customer, very in keeping with the HANA structure. So it's not complicated. It's real simple.
And then for the uninitiated, I think they're going to get to see a whole different way of consuming SAP in the cloud. And therefore, I expect a nice tailwind of growth out of this. And Rob, you may want to
Yes. Just comment. We've actually trained I feel kickoffs took place 2 weeks ago globally around the world in Beijing, Singapore, Barcelona, Mexico and in North America, 6,500 well, 12,000 SAP employees Completely trained end to end, 3,500 partners, 450 partner companies have been trained in the products. We've got legal packaging pricing contracts completed. We have a landing page, sfphana.
Where all the assets are there, the value propositions are in place, the articulation, we have the tools in place for that. We launch in New York City today, which Done. I think tremendous applause in the market. Certainly, my Twitter account is on fire right now and mostly positive. Thank you.
And Simon Paris in Mexico City tomorrow. I'm in Tokyo Friday in Beijing on Monday Launching and we will have touched 20 major cities around the world. Jennifer Morgan's over here. She's got North America going through February. We will touch Every customer in SAP in the Q1 with the vision and the story and all of the existing sales force that we have had for many years get the story, Understand how to position it in front of their customers.
And I really believe now have not only the TCO picture, but they have the business value discussion as well and that the business value discussion has been led by no one else than our CFO, Luka Muchik, It's actually very prominent in all the videos on how you receive that value.
Thank you. We'll take our next question here. I see Rick Sheldon and then We have Brent Deltnick.
Thank you. Rich Ferrell from Nomura. Bernd, I wonder if we could get some deliverables from you, the timing. So the financials, Simple financials first. When is exactly is that and kind of which regions it gives us a sense of scope and scale for that?
And then maybe a road map for and timeframe for what's going to follow. And particularly, I'd be curious on the HR side, you've got 2 HR products. And what do you do for the cloud, for the public cloud?
Yes. Thanks, Rick for the question.
I think we In order to come with roadmap and deliverables, we have to differentiate the consumption model. When we talk about public cloud, It's not just financials. We will have the core ERP modules available Now starting February for public cloud SaaS consumption. Of course, when we talk about public cloud, I hope this What's clear during today, we will leverage as well all our assets, which we have In the SaaS environment in HR, SuccessFactor with Employee Central, with the talent management, with the recruiting, the Performance Management will play a vital role. And then there is the 2nd category of a managed cloud.
When we Talk about installed base customers who are in process of changing their business, focusing on their key competency and let the systems be operated by a cloud provider. Then you will the current plan is that we will launched a full fledged ERP enabled for S4 at sapphire this year. This is the current plan. So this goes significantly beyond the core 43 rows, which we just have launched today. There will be then following quarters where when we talk about system guided configuration As well complete Fiori enablement.
When we talk about 25 industries, there is an industry roadmap, which we will share soon with You will you can expect that there is a series of industries already at Saphyr this year and we will complete them as we go, but you heard it several times during the course of the day. In the old days, we would have made a road map, articulated it, presented it and executed against it. This time, we make it customer driven. We heard it from Alan today from Kjell. We heard it from BASF from Doctor.
Engel. We go customer first. So those companies who engage with us first For the brand new product, they will get priority. And depending on in which they are, we will execute in development We have completely changed the agility in development. It's not a 1 year or 1.5 year planning anymore.
We will deliver every quarter, which gives us the flexibility to adjust. And then the 3rd category, which is on premise, nothing has changed there. We will, as I said today, provide all these innovations as well to customer who consume as for in the on prem nothing wrong with that. The only difference is that in the on prem world, you need a physical shipment. You need a release.
You need an enhancement pack. Current plan is in alignment with ROTH that we do it towards the end of Q3, beginning of Q4. It is not possible in the on prem world to go into a permanent delivery cycle. And when I talk about quarterly shipment in the cloud world, this is major functionality. When we talk about Fiori, When we talk about new UIs, we can do this on a weekly basis.
This is the big difference between providing value in terms of innovation in the cloud And in the on prem world. In the on prem world, we could technically do it, but customers would not be able to consume This massive amount of innovation in weeks or in months as they are possible in as it is possible in the cloud.
Just to add to this because you started your question with Simple Finance. I mean this is out there. It's It's already available. We have sold it plenty of times in Q4. We are using it ourselves live the on premise solution is already an SKU that we are quite busy selling.
So now Brad Zelnick from Jefferies. Then we take Ivo Lenschow from Barclays.
Great. Thank you. Brad Zelnick with Jefferies. My question is for Bill. Bill seeing a leading company transition from selling largely products to now selling services and solutions isn't really something new.
In fact, if you look to your career Back in your days at Xerox, I think the company went through a similar transition. Can you maybe share with us a little bit What you bring to bear from that experience and how this might be a little bit different or what the similarities might be?
Thank you, Brad. This is very interesting correlation actually. Back then in the middle to late '90s, the world had decided It had no interest in hardware. And essentially buying boxes from a customer standpoint was about as uninteresting as it got. So what we tried to do is create a services business, Very similar to what you see today called the cloud, where you would provide the hardware, The necessary software and service and infrastructure to provide that value to the customer as a service.
In fact, it was a ratable service very similar to the way you consume innovation from the cloud. The big learning is never go against the market. When the customer wants it a certain way, don't fight the tide, go with it, Accelerate it, hit the gas. So I guess the first thing fundamentally is SAP made a bold move going for the cloud, Going for the network and accelerating the push because it's in favor of where the customer wants to go, Even though it meant the business mix in the short term changed and therefore we changed the way we look at the business from a rate to an absolute operating income knowing full well in the long run, we'll create a great company that will sustain the decades not the quarters. So that's the first thing I think is really super important.
The other piece just in terms of innovation itself, I believe strongly that over the last 5 years, we made the necessary decisions To get out on the edge of innovation, whether we were building it or whether we bought it. And it was really important to assemble those pieces, So we could hit a climax moment with S4HANA, the cloud and the network assets around it. And we overcame our Achilles' heel, which was the user experience by doing everything mobile first. So I actually think because we went through The transition zone, we're now ready to come out and start accelerating with this innovation to really change fundamentally the way companies run. And finally, I can underscore that in the Under Armour video today with Kevin Plank.
If you think about a fast growth company, They have to have a consistent core as for HANA in this case where all the data is. Why is that data so important in that core system? Because that core system is crossing all the channels from direct to consumer, call center, wholesalers, retailers, You got to have one system of record where all that data and all that content resides. At the same time, you've got to extend the business model to the consumer who oh, by the way is not just shopping in channels, they're living in communities. They're participating in different communities that are very focused on athletics of all different kinds.
And knowing that consumer, their likes and their social behaviors is another aspect of HANA That strengthens the S4HANA argument. So I think back then my business went from $700,000,000 to $4,500,000,000 in a few years. And the company should have always fed the growth. I think we see the growth in the cloud and the network, but I also think there's one difference. SAP's core is still highly innovative.
And with S4HANA, I do think you're going to see some growth in the core. And I do think it's entirely possible to see some tailwind in the core. And I'll tell you why. If you talk to the customers in Europe, If you talk to the customers in the Middle East and you talk to customers in different parts of the world, they want to own those crown jewels And a lot of them want it in their own data center depending on the industry or the geography. There's still plenty left to go in the core here.
Thank you. We take the next question from Raimo Lenschow and then we will have Mark Moerdler from Bernstein Research. Brian Melenchy from Barclays. I wanted to stay on that subject with you, Bill, but also kind of bring it over to Luca a little bit. So If you think about the private cloud, obviously, investors all think everything goes to the cloud, but a lot of guys want to still run it in house, especially the complex systems.
How do you think about the setup then for your private cloud offering? On the one hand, we saw the gross margins that Luca pointed out and 40% and it's kind of because it's probably more an outsourcing business. How do we have to think as investors in terms of how successful that will be? Because the more successful You have people kind of transitioning over to you, the more gross margin pressure you get as a company. On the other hand, you're very comfortable about Your margin that you gave out to us, does that mean it's kind of it's more for some, but actually the majority of the customers will stay on premise on these large big ERP deployments?
Thank you.
Yes. I'll start and then Luca can build on it. I think first of all, we have a healthy ecosystem And there's no reason why if the SAP S4HANA architecture is being followed meticulously That you wouldn't allow Softlayer in the case of IBM and potentially others to run that in their cloud If they were providing that as a very good service to our mutual customers. The advantage there is it improves the overarching margin of the company because you're not getting into the infrastructure and a lower margin profile business. And I think it's a lower cost, easy to deploy, it's helpful to our business model because we chose to stay a business software company.
We didn't get into the hardware business. And we use the cloud as an advocate for the customers. So I think that makes sense. The other thing is, look, we invested a lot to get these clouds all over the world because our customers expected us to do that. And I also think with the recent well publicized Security concerns.
Many customers want their cloud domicile in a geography where they operate their businesses. And that's just the way it is. So I think providing that choice is important to selling our software and making the customer happy. But finally, I think perhaps the best part about SAP and you rightfully point this out. I mean, I have a lot of customers tell me, are you crazy?
My ERP system is the heart and soul of my business. That's my crown jewels right there and it's not going anywhere. And I put that infrastructure in my own data center and I to keep it there, but I want a hybrid world also, so I can consume your innovation in the line of business. I can consume your innovation perhaps in the HANA Cloud Platform. I can consume your business network innovation.
And now I've got What I believe to be my rendition of a run simple organization where I have the crown jewels and I get the best of all worlds and the things I choose not to do myself. I think that puts SAP in a unique position. And the other thing is, I'll tell you right now, there's a lot of companies out there Now 2 years ago, they might have been more inclined to gamble. I think now they're going for trust and security And well proven business models like SAPs have been around 4.5 times.
Yes. And maybe just on that on the Topic around gross margins. As I tried to outline as well during my presentation, I think it would be too superficial to take a at the infrastructure in order to be able to move quickly onboard themselves towards our innovation roadmap. But typically in most Those cases, they still prefer to own the license assets that are operated in the HANA Enterprise card. That means We drive incremental license revenues from that as well as ongoing support revenues for HANA especially, but also the applications But this is not an attractive business for SAP overall.
Thank you. We take the next question to wake up.
Mark Midler. And then
we continue here with Ross MacMillan from Royal Bank of Canada. Mark? The microphone is coming.
Thank you. Mark Murdler, Sanford Bernstein. Two part question. How should we think given the historically that the SAP ERP solution Had a long adoption curve. How should we think of that adoption curve changing with S4?
And then as a follow-up to it, How should we think about for existing business suite customers currently under maintenance, what the monetization is if they move to S4 for
Why don't you start off, Bernd,
and then Rob will pick it up. Go ahead.
1st of all, With the option of offering that system as well in the cloud, we have the opportunity to unleash and Show the value of the solution immediately to the customer. And when I look at what many customers do these days, they start in our cloud not necessarily to run then their complete Existing ERP and now their S4 system in the cloud, but they do it for the project itself to experience with having the ability to have access to the latest innovation instantly. That might lead still to the decision that prior to go live, They take all that work and run it in their own data centers on premise, which means Then to come back to your question, with that ability to offer that instant access, we expect that the where they engaged with implementation partners, rolled folders of blueprints, of booklets until they really Get the value from the software. Number 2, in line of businesses and In the integration of what we have in the public cloud and now enhanced with financials and the core logistics, We clearly see that this is an opportunity for decomposing the existing business suite and give access to the customers in areas where they have a need, which means it is not that they take the whole system, but they take areas where they have the demand for innovation, where they clearly see the business case and adopt this instantly.
And with both of these aspects, we expect that the adoption curve of the innovation is Significantly steeper than we have seen it in the past with our 3 year ERP.
And the one thing I would say on the customer front, All the models protect the core asset of our financial well-being, which is the customer support revenue. And then to migrate To ask for HANA, we're very fair with the customer on a loyalty level, where they get the credit for their existing system and pay a modest uplift similar to the way we license HANA in the first place. Why do I like that so much? Because it takes complicated questions off the table. It demonstrates a unique eye on the customer and their happiness And it gives us a chance to mass scale S4 and HANA across the world quickly.
And therefore, It's a virtuous cycle because once they have that and the innovation that comes and the extensions that come from it, everybody is part of the innovation and the growth machine and most importantly the customers getting the value out of the system. So we really thought long and hard about how we did it this time And it's simple. Like everything else we're doing, it's simple. Like if it sounds complicated, we shut it down before we even go another step. If it's complicated, just stop talking.
Just go away, leave us alone. It's got to be so simple that everybody gets it in the first blush. That's how we're doing everything in SAP now.
Thank you. Thank you. Now we take the question from Ross and then we have Michael Briest from UBS.
Thanks a lot. A few questions, 1 on product 1 and then one on financial 1. Burnt, just on The public cloud flavor, if you will, is that exclusively going to be positioned for a net new customer to SAP Or is there some reason as to why an existing customer would not go down that path? That's the first question. And then the second question is for Luca.
It's a financial question. Very helpful to give us the gross margin, your view on gross margin progression for both cloud and for software and support over the next few years. Just on that, it sounds like it's going to be very back end loaded for the cloud gross margin expansion or it's going to be more back end loaded. What's your thought process around operating expense in the business as we move let's say past 2017 and onward? And will operating expense growth change materially relative to revenue growth at that point?
Thanks.
Yes. Maybe I'll start with the product. No, it's not exclusively positioned for net new customers, while nevertheless the sweet spot is for new customers and we see huge potential with that solution to capture market share, which might not have been in the sweet spot today, If we did not have that offering and we will aggressively go into that area as we see in the market that others capture Some of these opportunities and we did not play in that league so far. So clearly, the sweet spot is net new customers. That on the other side does not mean that the public cloud offering with software as a service With cloud, it is more than just a deployment option.
It is a commitment of the customers to consume best practices. And if customers are open to that commitment, and I hear this more and more, they even tell me in one to one conversation They even regret that they have done it in the past. So for customers who have that kind of thinking, That is a great opportunity to get rid of complexity they have in their landscape today and run their enabling processes in With best practices in the most simple way, as a best practice in a simple way does not mean it's less efficient, does not mean it's less mature. It is rather the opposite. It's more robust.
It's more stable, and it's scalable and proven across industries.
And maybe on the gross profit and gross margin, I think it's all the time very important to understand That at least at SAP not all clouds are created equal. And therefore, when you have the impression that Overall, our expansion on gross profit or gross margin is kind of back end loaded. That looks very different model by model. We models in the public cloud and the business network where we are already operating at scale and where we have a pretty steady progression of the incremental investments, which of course still need to take place if we are on boarding thousands and thousands of additional customers. There is some incremental And for example, in the private cloud, where we have been heavily investing in 2014, there is still investment occurring as we speak.
And there we will see basically a breakeven to positive gross margins in the future, yes, and then of course reaching this long term profile. So it depends really a little bit on looking at each model by itself And each one has a different profile there that in sum, so to say, then determines how we will progress on the cloud side. In the on premise world, we are also still seeing the potential, as I've shown, to improve not only on the gross profit and gross margin, But also overall, I think we have a couple of important levers across the organization that I think will bring down the relative weight of operating expenses As a percentage of revenue in total across all of the business models, one is that notion of RunSimple that we are expanding upon. We want to steadily service reporting. The same occurs in other overhead functions that we are really optimizing this, simplifying processes to load off more Productive capacity to sales and marketing to research and development core tasks, which will certainly help In the cloud, there is on top the effect that I just highlighted that as Increase on the curve of renewal business as opposed to net new business, especially in the public SaaS Cloud Solutions, You naturally get an increase of the operating margin through the reduction of sales and marketing expenses as a percentage of the overall revenue.
So these are all factors that need to be taken into account. And then, of course, it's a question when will this growth curve start Slow down. I hope only in many, many years. In the future, Steve will work his part off definitely to make sure that this is not happening anytime soon, as well as in the other public cloud solutions. But as soon as this happens, of course, you can expect, as Steve has also said, to see an
Thank you. Now let's take the question for Michael Breese, UBS. And then we go to Phil Winslow from Credit Suisse.
Thank you, Stefan. In terms of the cloud business in 2020, can from Business Network? And then secondly, Bill, I think you were asked on the Q4 call about the use of cash. Obviously, we've got some P and L targets out to 2020. Once you've paid down the debt, what sort of uses of cash do you think you have?
Is it possible that you'll do have a large acquisition between now and 2020?
Yes. Jim, you start?
Yes.
So I think if you think about the opportunity around the business network, which is obviously just a component of the overall client opportunity in SAP, I think you're going to see that the growth rate around the business network section will be as compelling as the overall cloud opportunity. In fact, even if You know some of these businesses from prior to being a part of SAP, the growth rates that existed as standalone businesses, not only at the very minimum continue at that level, but actually So I think as I think about what do I expect out of the Business Network Group, I expect it to at least maintain the growth rates we're at for years to come, which when you think about the scale opportunity, that's a fantastic position to be in.
And then just On the cash, just to put the cards on the table, we have a history of paying down debt quickly. We'll do that with regard to Concur. And we have the assets that we need right now. So you shouldn't expect any large scale M and A activity from SAP. We accumulated what we had to win.
S4HANA Is the jewel in the crown and with the surrounding assets, we got the arsenal we need to beat anybody any day of the week in any industry in any corner of the earth. Now having said that, is it possible that we could do tuck ins and small stuff? I think that's pretty much a matter of course for a company of size and scale, but I wouldn't anticipate anything big at this time.
Yes. And maybe to complement this, what I see is our primary use of cash for the next, let's say, 3 to 4 years. Clearly, priority 1, bring down the debt level. Out of the previous Eurobond tranches that we have done, the private placements that we will pay down as we go. The second one Obviously, is to fund organic innovation.
This will be the absolute priority for SAP for the next years. We have The assets that we need to really as closely as possible integrate S4HANA will be the nucleus as Bernd has said to really rally all of our cloud and on premise assets around a common platform and that's what we will focus on. And then clearly, we have every progress year after year as well as possibly then share buybacks in the future for the time being and in the short term. Clearly, the top priorities are bringing back the depth and being able to fund the organic innovations. That's basically what you should expect for
the next 3 years. Thank you. Now we move to Phil Winslow from Credit Suisse.
Great. Thank you. Just two questions maybe, Biren, starting with you. And just building on Rick's question about just this whole replatform process in the rolling release. Getting questions about sort of comparing and contrast this re platforming cycle of maybe R2 to R3.
What's similar? What's different? And then also maybe comparing and contrast with Oracle, it had Fusion, that obviously took multiple, multiple years. Haso talked about how you shrink the amount of code in those 400,000,000 lines because Like getting rid of the aggregates and developing just for HANA, it sounded like maybe using some of the code from R3ERP in S4, just how do you how should we sort through the thought of that rewriting that €400,000,000 obviously, which doesn't sound like that's happening?
Yes, good question. I think what's similar is the massive opportunity with the technology change. At that point in time, it was from mainframe to client server. This time, it is not just a change From a traditional row oriented disk based database to a column based in memory store As well with a persistency layer, but as well having a platform which have a massive amount of libraries, Which I showed you today, predictive libraries is a key asset, planning library, simulation capabilities, But as well fundamental things which seems to be boring like currency conversion, unit of measure conversion, they are all existing functions within the platform itself, which makes the platform tremendously rich and which is building on What Alan was reporting from Shell that with that open platform, it gives an opportunity to innovate. Now what's different when we say looking back R2, R3 now going from the business lead towards As for on HANA, the difference is that we have took our lessons learned.
We have massively Simplified the data model itself. And with that massive simplification, the order of magnitude Business value is significantly higher. I mean, remember at that point in time, why did companies choose to go for R3? It was that they have chosen us with a main purpose to drive efficiency within the company to to set de facto standards, which have been introduced across countries, across regions, across line of business. This time, it's not About efficiency, it is rather about growth.
It's about introducing new business models. It's a tremendous push Across industries from business leaders to reinvent the companies they are in, even if we talk with market leaders. And that is the difference. So the question for us is what did we keep and what did we change. We on purposely decided that the move from the existing suite towards S4 is staying with that nucleus of the data model consistent.
So when we have financial documents, when we have sales orders, when we have purchase orders, They reside in the same data structure. There is no migration, nothing. It just stays where it is. We just eliminated complexity around it and that makes it attractive. This was different when we moved from R2 to R3.
That was as well another product. It was as well another technology, but we did not keep the data model stable. So from that angle, lessons learned from the past. And then if we look forward, We assume that with that attractiveness in driving down cost of operation, in having the possibility to consolidate instances, which have been grown like mushrooms in some of our customers. It is as well an opportunity to make a case for the bottom line.
So top line and bottom line are addressed versus at that point in time R2 to R3 was mainly the efficiency driver.
Got it. And then just a follow-up question for Bill. If I think about SAP's sort of stated strategy over well, really until May of last year was a timeless software, kind of Not a lot of change in the core innovation around the edges. Back in May here today, we're talking about innovation back at the core and obviously with what Steve is doing innovation on the edges driving back into the core. How has Simple Finance and even just your conversations today with customers around S4 changed sort of the sales picture or what the value that people perceive of the core versus the add ons.
And how do you think that affects the growth rates of the 2? Does it lead to more stability in the core? Does it lead to increased adoption of HANA, the database licenses? Or how just does this change Actually replatforming the core?
Yes. I think this puts the core as the main thing again. And the main thing This constant messaging around the core is fine. Just leave it alone. Could have put us into a little bit of a state of complacency on the core because at the time we were going for HANA As a platform, we were going for the line of business cloud.
We made a move into the business network and that was really the main emphasis around M and A from the core, but it's the edge innovation that people were very consumed with in the conversation. With S4HANA now, It gives us a whole new chance to talk about the core has been reinvented because of the consistent data model. You can transition to S4HANA without disruption, but make no mistake, S4HANA is a new product. The Fascinating capabilities of the applications natively built on HANA can do things in these industries for these business models to change the way companies run fundamentally. And now you're into what can I do in your industry For your line of business, what is the business outcome you're trying to achieve and how can we get you there?
We're into growth mode. So I do think we're in a different conversation. Rob Enslin wasn't flying to Tokyo to do focus on the core meetings and that wasn't happening all over the world until S4HANA. So we're in a different place now. We really are Phil.
Thank you. I think we have time for 2 more questions. And I see in the back, Walter, Pritchard, Citi. And then I would have John King from Bank of America Merrill Lynch.
Hi, thanks. Just had actually 2 short questions. One for Bernd. I think we heard with Simple Financials that there was a little bit of issue around the general ledger and there's a new general ledger that customers had to get to, to get to simple financials. I'm wondering if you could kind of update us On that as a hurdle and are there any other hurdles like that in S4 generally that require a customer to kind of go through some work that they previously didn't want to?
And then just a quick one for Luca on the I think the only thing I hear from investors on the guidance for 2020 that may cause some questions as
to whether or not
you can hit is the CAGR of 30% on the cloud. And I think one thing that could get you there relatively easily is if there is a larger conversion of the core base to cloud, understanding right now customers are doing the bring your own. But as you get out in the out years, they may do more subscription on the core. And I'm wondering if you could help put that 30% or help us out with getting to the 30% around any impact from core subscription?
Giving me the opportunity to share with you that with the new product, we have as well an opportunity to get rid of redundant functionality that resides in the suite today as we have built it over more than 2 decades. And what you mentioned with the classic general ledger and the new general ledger, by the way, which have been introduced into the product 2005 or 2006, We can debate how new it is. It is just one example of massive redundant functionality within our products. And with a new product, talking to customers, talking to user groups, They all advised us we should take leadership. If we talk about simplicity, if we talk about We should enable customers to run their business in the most efficient, effective, but as well simplest version.
We need to advise them, and that was a mistake we did in the past. The new general ledger introduced 2,006 Have significant advantages. Therefore, going forward, we will take this as the go to solution. And in S4, This is the only ledger solution, and we have plenty of examples in our system that contribute to that massive simplification that contribute to clarity and that as well contribute to ease of use and ease of consumption. We as well take ownership in providing preconfigured systems as in many cases we know What should have been done, we just did not deliver the configuration content and relied on an army of consultants doing it for us.
So why not taking leadership and then giving customers still the choice, as I have shown very shortly in the morning that it is an option still to change the configuration, but you can start instantly. So then, Luca, hand over to you.
Yes, certainly. So on the CAGR question, I mean, if you think about it, What does this require us? Overall, from a macro perspective, more or less to keep the pace that we have been going with for the last 2 years. And we were actually pretty successful. We had similar questions.
I remember very well in January 2014, we gave out our guidance for the year. And we had a guidance that was at the top end at 32% growth That I was facing questions of how realistic is that to get to that. And from an organic perspective, we actually even went a notch higher than those 32%. So we have proven in the past that we can successfully scale already what we have. And we continue to believe that in the assets around SuccessFactors, Ariba, Fieldglass, there is clearly a lot of organic growth potential as well as we believe that we will continue to be able to add additional incremental growth for Concur, which is part of our business case clearly and that with the combination of the SAP global reach So this is some incremental growth that will come with that.
Then of course, there is the S4HANA opportunity and this comes with 2 flavors. 1, there is a completely incremental net new opportunity that is from my perspective Not at all connected with shifting traditional on premise revenue streams to a cloud subscription model. That's the public cloud option of As for HANA, with this, we are able to address completely new net new customer segments for very easy onboarding, which is an incremental opportunity. Then of course, in our, let's say, more differentiated as an option, absolutely true. But these growth rates do not by any order of magnitude depend on these shifts alone, but it's really a combination of continued strong growth of the assets that we have, The additional net new opportunity of driving Concur incrementally, having the S4HANA public cloud option
support, recurring revenues and the fact as Luca said earlier, there's a lot of customers that view SAP as a capital or a strategic asset that they wish to own. And when they look at the net present value of a perpetual license of a strategic asset versus a rental or a subscription license for something that they might view more transactional. They're going to still weigh in the balance what's in their self interest. And there are many customers and I am in conversations with them all the time Where we have no issue if they want to subscribe for the software because on a net present value we make more money. And I have feeling they must have gone to MBA school because they figured out pretty quick.
So there's always going to be this balance and I can only reinforce to you That the core is more stable and consistent than some people have given the share price of SAP credit for. As a very important thing to mention and with S4HANA, Phil, your question and the focus on the core, Let's see. There's a lot that I think we're going to learn, but I can tell you one thing. The conversations with the customers right now are more rich. They're more innovation oriented and they're more pleasing than they've been in my 13 years at SAP and that's a good thing.
And maybe just as a last data point, since roundabout 1.5 years a little bit more, we have a so called extension policy program in place It allows customers to easily convert, if they wish to do so from existing on premise deployments to the cloud, It's very interesting what happens with this program and we have now, let's say, 6 quarters of data about that. So first of all, there is a constant volume of such engagements. Secondly, it's not really A tremendous flood. It's roundaboutamidoubledigit €1,000,000 amount of maintenance that is converted to subscription. The conversion factor is actually above 2x.
So we are adding double more Double the amount of subscription that we are losing on the maintenance side. And why is that? Because on the really core parts, the stickiness, as Bill has said, of the solution is given. The customers use those options at the peripherals, so to say. And in doing so, we extend the reach of the applications in the cloud that we are then substituting the on premise deployments with.
That's very much back to a point that was made earlier A cloud based deployment model allows you to scale, allows a customer to scale also the usage of the applications much quicker than in a traditional on premise deployment. And so actually for SAP, even in those scenarios, we don't lose anything, Not even only on the revenue side, but even on the operating income side, because in such scenarios, we actually broaden the reach of the usage of the applications and are able to drive higher subscription amounts than we were previously able to do on the maintenance side.
Thank you. The final question from John Cain, Bank of America Merrill Lynch.
Great. Thank you. I've got a couple of questions, if that's right. Just One first, Luca, on the cost base side of things, you've talked a lot about the gross margins. But again, if I could just cost savings and could you just talk to that perhaps a bit more widely?
Do you think there's an opportunity over the longer term again to perhaps grow the cost, The operating cost a bit slower than the revenue. If you could just give your thoughts on that that would be great.
Yes, certainly. I mean this must be at end of the day, this must be the intention in the long run to grow your revenues faster than the expenses. Again, in the cloud business model, the mechanics work a little bit differently, as we all know. But in the end state, of course, you should return to this idea. How can S4HANA help in this regard?
And we have now A lot of early experiences with this through, as I've said, simplification opportunities. Therefore, increased self-service opportunities that exist. Think about the topic of analytics and reporting, outside of the core process responsibilities and this will help us in reducing overhead, but also further automation opportunities. If you have a system that allows you at the highest level of granularity of a single posting note to assign as we are doing it now with Simple for example, all different types of attributes on which you either want to trigger flexible reporting or on which you want to trigger transactional follow on processes, it allows you to increase the potential for automation in the processes tremendously. When I think about a Closing process, for example, think about the opportunity to have when I post the software license contract to trigger automatically because I have all the underlying correlation data and I actually assign all of these attributes at the granularity level of a posting note When I can at the same time trigger the maintenance accrual process, for example, when I can at the same time trigger even the commission accrual for the salesperson that So it's this contract if I can at the same time because I have the license rate trigger the 3rd party license sales commission for any third party software that is part of this bill of material, I can massively shrink not only the time that it takes me to do the closing, actually also the capacity that I need to have on this process.
So these are just a few examples where, of course, on top of all of the IT driven simplification and therefore lower cost of ownership of the IT landscape, we can drive additional opportunity for improvement It's on the business level, the increase of operational efficiency through higher automation as well as, let's say, the ability to consolidate tasks that previously had to be worked around the system and repatriate them really into the system and letting the system do the job. And then on top of that, and that's even more important, is the ability to really innovate at the business process level for greater collaboration and therefore the reduction of interface losses, so to say that you have Good example is the collection process where we have now an integrated application scenario that connects the information that we have And that we do from a collection perspective in finance with the front office roles that we have with the account executives that can then use the same information in a very quick to grasp and a very easy fashion in order to work with their customers to get collectible items into the house. And that's something that helps not only on the top line, but also on the bottom line.
And you had one follow-up, I guess.
Just one more. Actually, I was going to switch gears to the Business Network side. You gave a good presentation, Steve, as to how those businesses can really drive into value individually. But what's the synergy that we should be looking for here? Why are you bringing these assets together?
And what's the kind of end goal to bring those 3, I suppose, fairly distinct businesses together over the course of the next 5 years?
So let's start with this. The number one focus right now within the business network group is to make sure we're best in class on a sustainable basis in every single one of the components the business network group, Concur, Ariba and Fieldglass. The opportunity for synergy though is very, very substantive. One of the things that's a huge value in the acquisition of Concur We have one of the largest sales forces in cloud computing, right? I mean, outside of salesforce.com, we're one of the largest organizations when to distribution.
And we think that in year 1, the focus is going to be right now just for that sales organization to focus on Concur. But if we think about what happens in 2016, 2017 and beyond, there's a tremendous suite of applications and services that are available in the cloud, Starting with the business network applications and services that can be delivered through that channel. So there's massive opportunity for synergies And on top of that, I think there's a really interesting opportunity to drive synergies across core services that are common to all business network opportunities, things like identity management, things like analytics, everything that's required to identify who you are as an individual. So distribution synergies, Product synergies that exist here. Well, thank you
very much for all your questions. This was quite a long Capital Markets Day. The Q and A portion is now concluded, but we would like that some of you at least join us for the social hour and the drinks outside. Thanks all for joining us here today, and have a good day. Thank you.
Bye bye.
Thank you, everyone. Thank you.