Ladies and gentlemen, thank you for standing by. This is your Chorus Call operator. Welcome to SAP 2014 Third Quarter Earnings Results Conference Call. Throughout today's recorded presentation, all participants will be in a listen only mode. The presentation will be followed by a question and answer session.
We are now going live to the presentation room
Good morning or good afternoon. This is Stefan Gruber, SAP Investor Relations. Thank you for joining us to discuss our results for the Q3 2014. I'm joined by CEO, Bill McDermott and Luka Mucic, CFO, who will both make opening remarks on the call today. Also Executive Board members Rob Enslin, who leads Global Customer Operations And Bernd Leuchard, who leads Product and Innovation, are on the call and will join us for Q and A.
Before they get started, I would like to say a few words about forward looking statements. Any statement made during this call that are not historical facts are forward looking statements as defined in the U. S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intent, May, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward looking statements.
SAP undertakes no obligation to publicly update or revise any forward looking statements. All forward looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results I'll discuss more fully in SAP's filings with the SEC, including SAP's Annual Report on Form 20 F for 2013 filed with the SEC on March 21, 2014. Participants of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of their dates. Please keep in mind that unless otherwise noted, all numbers referred to on this conference call are non IFRS And growth rates are non IFRS as reported.
With that, I would like to turn the call over to Bill McDermott.
Thank you, Stefan, and thanks to everyone on the call for your time today. Over the past three quarters, we have accelerated SAP's aggressive strategy to help customers run simple. This has been made possible by a unique combination of the broadest cloud portfolio in the industry, the world's largest business network and especially the great simplifier SAP HANA. In the Q3, the momentum continued as we delivered very strong growth of 41% in cloud revenue. Our cloud revenue run rate has ramped up to US1.7 billion dollars The order entry of new cloud business signed in Q3 exceeded 1 third of license revenue.
Let's be clear, If you're only looking at traditional license revenue, you're missing this transformation. Once the planned acquisition of Concur is completed later this year, We expect the share of cloud business will be even higher. Meanwhile, our total predictable revenue Including maintenance was 62% in Q3, up from 53% 3 years ago, when we started this transition, this clearly indicates that we are rapidly shifting to high growth and more predictable revenue. I would like to emphasize this significant message to everyone on this call today. While less upfront revenue pressures margin in the short term, we expect higher profitability in the long term due to the greater efficiency and the more recurring nature of the cloud model.
Despite the accelerated shift to ratable revenues, we saw 3rd quarter software And software related service revenue come in solidly within our annual guidance range increasing 7% in Q3 With year to date growth of 8% at constant currencies, when you consider additional overall performance indicators Such as Interbrand's recent ranking of SAP as the 25th most valuable brand in the world, Ahead of consumer brands like Facebook and IKEA, it's clear that with our ever consistent strategy And our HITRUST global brand reputation, SAP has never been in a stronger position to continue driving the transformation of the Business Software Industry. Now I'd like to provide some color on the key growth drivers. The industry's transformation to the cloud is no longer news. Today, the news is that the SAP Cloud powered by HANA is the standard for depth, breadth and the largest business network in the world. SAP is the only company with the portfolio to manage all key resources on one cloud platform, Permanent employees, flexible workers, goods, services and with the planned acquisition of Concur, Travel and expenses, no competitor can do this.
SAP is leading next generation customer engagement and serving the customer on any device in any channel with the Hybris omnichannelecommerce platform In combination with cloud for sales, this business contributed yet another quarter of triple digit growth. In fact, Gartner rates SAP Hybris as a Magic Quadrant Leader in Digital Commerce ahead of both IBM and Oracle for the first time. And customers recognize this value. TUI Travel, a leading international travel group chose SAP Cloud for customer solutions over salesforce.com to engage more effectively with its customers and increase customer service across all channels. In combination With SAP HANA Enterprise Cloud, TUI Travel can manage a wealth of structured and unstructured customer data and has an unprecedented view of every customer in the future.
Sony Computer Entertainment, Maker of the number one selling video game console in the world will use hybrid software to simplify the way 7,000 video game developers manage Content for Sony's product catalog. Polo Ralph Lauren, one of the world's most successful fashion brands Has chosen Hybris and Ariba to improve the consumer shopping experience through better omnichannel capabilities and improve cost and quality through the global procurement network. SAP's 43 years of leadership And mission critical systems is well known. Now with Hybris, SAP also has a real time customer engagement and commerce platform, driving incremental sales and growth for our customers. You can't do effective customer engagement Without an end to end order to cash process that connects predicting of customer needs to commerce and fulfillment.
No CEO I speak with is interested in Salesforce Automation Solutions to solve yesterday's Administrative challenges. They're hungry for growth in an increasingly global and competitive environment and only SAP solutions for customer engagement and commerce can deliver. The other big CEO agenda is the ability to manage their This is not just about managing full time employees, but also the contingent workforce and crowd sourced labor. The combination of SuccessFactors and Fieldglass provides a unique solution that cannot be matched by Workday. Our SuccessFactors product is now rated as a leader in core HR management in the latest Forrester Wave outperforming Oracle Fusion HR.
We are seeing strong growth for SuccessFactors in APJ and EMEA that shows the international strength of our SuccessFactors business. Fieldglass wins have accelerated since the acquisition and we have become the de facto standard for managing contingent labor workforces. We are moving our mission critical ERP customers to the HANA Enterprise Cloud Faster than ever. In Q3, we saw a significant ramp up over the prior quarter, showing that our customers are increasingly comfortable and moving their ERP and BW environments to the cloud. SAP is also leveraging its deep industry experience By building the deepest and broadest industry cloud portfolio, I would note that our industry DNA was a crucial value proposition in our long term growth performance.
We believe this will remain our competitive advantage as companies look for domain expertise in their specific industry in the cloud. So what does all this mean for our customers? It means they can run their entire business, including mission critical processes in the SAP cloud, every line of business, every industry, every cloud delivery model, public, Private, hybrid, everywhere in the world. Our cloud competitors run point solutions. We run entire companies in the cloud.
Let me give you some examples of customers moving their business to the SAP Cloud. Singapore Telecommunications Limited, a telco company with 500 plus 1,000,000 subscribers And an existing SAP customer selected SuccessFactors' human capital management suite including employee central Along with SAP Jam and SAP Cloud for travel to help them simplify their IT infrastructure and drive their people transformation agenda. Because of this integrated portfolio of applications, we are winning against the competition with customers like Opus Capital, Delaware Consulting and Smurfit Kappa choosing SAP Cloud Solutions over Workday. Coming back to our core theme of RunSimple, it's clear that customers recognize the fast time to value advantages of consuming solutions in the cloud. This leads me to the other central aspect of our growth strategy, SAP HANA.
HANA is the great simplifier and customers are realizing massive business benefits with fast real time processing and analytics, all while simplifying their infrastructure stack and shrinking their data footprint. Forrester estimates that customers see 30 to 50% TCO savings with the HANA platform. We continue to see strong growth and widespread adoption with more than 1450 Suite on HANA customers, up from 450 just a year ago. To put this in perspective, we now have more Suite on HANA customers than Workday's total number of customers. This also shows that while Suite on HANA is already an explosive growth story, we are yet in the early stages of this multiyear growth opportunity.
Our longer term ambition is to have tens of thousands of customers running on HANA as the de facto standard business platform for the enterprise. With our wins over the competition, it's clear this ambition is in full swing. For example, NTUC FairPrice, the largest supermarket chain in Singapore, will simplify their overall architecture, Reduce TCO and accelerate the performance of their SAP system by replacing Oracle with HANA's in memory database, Suite on HANA will deliver a platform of growth and innovation while lowering costs for NTUC FairPrice. We're also optimizing all applications on HANA in the cloud. Simple Finance was the first such application.
Latrobe University, a multi campus university in Australia with over 34,000 students has chosen the SAP Simple Finance solution Powered by SAP HANA to support its future ready strategic plan. SAP Simple Finance in the cloud will provide instant insight across financial and operational processes to help the university drive value through planning, analysis, prediction and simulation. Now, 6 months ago at SAPPHIRE, we announced a new platform as a service offering, the HANA Cloud Platform. It enables organizations to extend and customize SAP applications at a low cost in the cloud. This new offering from SAP Is building significant momentum and already has over 50,000 active free trials.
At SAP's upcoming TechEd event in Las Vegas, we plan on sharing some exciting news about the SAP HANA Cloud Platform and we are looking forward to seeing you there. We're also expanding the vibrant HANA ecosystem. IBM and SAP Have entered into a bold partnership to help customers run business critical applications in the cloud. Customers will now be able to benefit from the HANA Enterprise Cloud in additional markets on IBM's highly scalable, open and secure cloud data centers across the world. In addition, over 1600 startups worldwide are building on HANA and many of these applications are commercially available today.
Overall customer interest in Hana is increasing fast. According to Google Trends, the interest for Hana has grown 71%. Despite a lot of noise coming out of some recent tech trade shows, Oracle Exadata only grew 3% by the same measure. So it's clear that the momentum and the credibility are with SAP HANA. Turning to another central component of our growth strategy, we continue to define the network economy, delivering real time frictionless commerce for more than 1,600,000 connected companies.
For businesses Being networked in real time is fast becoming the difference between winning and losing. If the SAP business network were a country, It would be ranked 21st by measure of GDP. Companies can't ignore a marketplace of that size And increasingly, they are using the SAP network as a primary sales channel. SAP's business Network is transacting close to US600 $1,000,000,000 annually. That's more than Amazon, eBay and Alibaba combined.
Konica Minolta Business Solutions, a leader in advanced document management selected SAP Ariba Solutions to address both its Direct and indirect spend requirements. This will enhance collaboration and reduce transaction costs for buyers and sellers, while improving spend compliance and order visibility. Concur will provide another very significant network opportunity. This is about much more than having the market leading travel and expense solution. Concur is about adding to the $1,200,000,000,000 corporate travel market An ecosystem to the business network, accelerating the network effect.
Each new customer brings many more trading partners and related commerce to the network, enabling SAP to scale revenues at lower cost compared to a traditional cloud business. With the unique combination of Ariba, Fieldglass, Concur and HANA at the core, SAP will also be able to deliver 360 degree business intelligence and predictive insights across all transactions across all major categories of spend all in real time. So to summarize, we believe the future of business will run-in the cloud on the SAP HANA platform And over the business network, SAP Cloud plus HANA plus Network equals simple. On this platform, SAP and its ecosystem partners are building intuitive, context aware applications for any device. Further, we are connecting people, services and production in the Internet of Things economy to transform business processes and reinvent business models.
And last but not least, we are delivering beautiful consumer grade user experience to the enterprise across our entire portfolio with SAP Fiori. Before I hand it over to Luca, allow me to present a few details on the regions Starting with EMEA. SAP had yet another solid performance in EMEA despite uncertainties in the Ukraine and the Middle East. In EMEA, cloud transaction and traction was exceptional, beating the competition With cloud subscriptions and support revenue growing close to 60%, software and software related service revenue The Americas region saw a mixed performance in Latin America, similar to other companies in the industry. SAP is seeing a more difficult macro environment in Latin America, in particular in Brazil and Argentina, combined with some execution issues.
Report revenue grew by 34%. The company had a very strong performance in APJ. Software and software related service revenue grew by 10%. Cloud subscriptions and support revenue grew by 57% and SAP achieved a turnaround in its business in Japan with solid double digit growth. As Luca will shortly explain in more detail, with the powerful Shift to the cloud and stronger than expected organic cloud performance, we are once again raising the cloud outlook, while adjusting the operating income range to reflect less upfront and more subscription revenue.
To summarize, we are delivering on our RunSimple strategy with faster growth in cloud, HANA and the business network, and we strongly believe our momentum will continue. Finally, I'd like to thank our more than 68,000 Thank you. Now I'd like to turn the call over to Luca. Luca?
Yes. Thank you very much, Bill. As you heard from Bill, we had again a very So let me now provide some additional color on our financials. I will start with the cloud business. We saw fast growth in the cloud Deferred cloud subscriptions and support revenue was €498,000,000 as of September 30, a year over year increase of 30%.
We also saw new cloud business ramp up significantly relative to license revenue. As Bill mentioned, Our total order entry for the new business in the cloud was more than 1 third of the software license revenue in the Q3 2014. That's up significantly from a year ago. Not only are we ramping up our cloud business, But we continue to have a stable and growing core with solid single digit growth in software and support revenue. 8% growth in support revenue was certainly again a highlight and it has been growing strongly like that for a number of quarters now.
Our support contract renewal rate is consistently in the high 90% range. Growth in enterprise support and premium support was especially strong. And once again, our enterprise support offering had an adoption rate in the high to 90% range and continues to be the de facto standard. As a consequence, we continue to lift the share of highly predictable cloud and support revenue. As Bill has mentioned before, The total of support revenue as well as cloud subscriptions and support revenue as a share of total revenue increased by 3 percentage points year over year to 62% in the Q3 2014.
So as Bill already highlighted, we are seeing a very powerful mix shift Cloud business at an accelerated pace. Upfront cloud sales and delivery costs increase as we sign more cloud deals, but revenue comes later. Longer term though, we see higher cloud profitability as we gain higher economies of scale with our cloud offerings. Consequently, our SSRS gross margin was down 100 basis points to 82.8%. The professional services margin decreased by 4.7 percentage points year over year to 13%.
As mentioned in the previous quarter, The shift to cloud also means there is an ongoing structural change in the demand for traditional consulting services. We have been and we will continue to adapt to this changing market environment. We still expect this transformation to take some time and as such Still expect the services profitability to be negatively impacted throughout the rest of the year. As a result, our overall gross margin was 70 2.1%, a decrease of 40 basis points year over year. Despite the transformation of our business Toward less upfront and more ratable revenue though, we were able to expand our operating profit by 5% in Q3, while our total operating margin was down only Slightly.
So let me emphasize this. We are managing this transformation with a stable core business And very high growth rates in the cloud, while staying fiscally responsible and expanding our operating profit. SAP is unique in being able to drive a combination of extremely strong cloud top line growth and expanding profit all at the same time. Our non IFRS earnings per share was $0.84 up from $0.78 per share in the Q3 of 2013, resulting in 8% growth. This was also driven by the tax rate, which was slightly lower than we expected.
The IFRS tax rate in the 3rd quarter was 26.5 percent almost flat year on year, while the non IFRS tax rate in 3rd quarter was 27.7 percent, up 10 basis points year over year. As we see this trend solidifying, although we are maintaining our effective tax rate outlook range for the full year, We now actually expect to be at the lower end of that range. And now to cash flow and liquidity. Operating cash flow for the 1st 9 months was €3,080,000,000 up by 1% year over year, Which was a strong result considering that we were making a settlement payment for the Versata litigation. Our net debt position was at €1,000,000,000 An improvement of more than €450,000,000 compared to the end of 2013.
As you've seen from the earnings release, We are updating our outlook for the full year. Based on the strong momentum in our cloud business, we are raising our cloud outlook again for the 2nd time this year And now expect full year non IFRS cloud subscriptions and support revenue to be in a range of between €1,040,000,000 to €1,070,000,000 at constant currencies. We continue to expect full year non IFRS software and software related services Revenue to increase by 6% to 8% at constant currencies. With the customer driven mix shift from upfront to cloud subscription revenue, We now expect full year non IFRS operating profit to be in a range of between €5,600,000,000 to €5,800,000,000 at constant currencies. We expect the fast growing cloud business along with growth in support revenue will drive a higher proportion of more predictable revenue in the future.
And finally on currencies. SAP experienced negative effects from currency translation in the first half of the year, Which dissipated in the Q3 and are now expected to turn positive in the Q4 of 2014. We'll keep model this. If exchange rates remained at the September 2014 level for the rest of the year, We would expect non IFRS software and software related service revenue and non IFRS operating profit growth rates at actual currency To both experience a positive currency impact of approximately 3 percentage points for the Q4 of 2014, There would still be a negative currency effect of approximately 1 percentage points and a neutral impact respectively from both items for the full year 2014. So to summarize this again, we are confident this powerful shift will continue to drive solid top line growth, At the same time, higher predictability and in the future higher profit for our shareholders.
Thank you very much. And Bill and I will now be happy to take your questions as well as the rest of the colleagues here around the table.
Thank you. Operator, you can now start the Q and A session, please.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer And our first question today comes from the line of Adam Wood of Morgan Stanley. Please go ahead.
Great. Thanks very much for taking the question. Just first of all on the cloud side, obviously, seeing a good acceleration raising the guidance there. Could you give us a little bit of a feel for which products are driving Growth in the mix, is it now HANA Enterprise Cloud that's taking up the growth path on there? And then secondly, as we think about the profitability, obviously, there's A reduction this year because of that accelerated cloud transformation.
As we think out to 2017 and the phasing of this, if that Strength in cloud continues. Should we maybe expect the pace of margin expansion to be weighted more towards the end of that period rather than the beginning? Thank you.
Yes. So I can take these questions and then Bill feel free to add further flavor. So first of all, I think we saw decent growth Across all of the main elements of our cloud business portfolio in Q3, I think we mentioned already that The area of multichannelecommerce, especially our cloud for sales solution continues to grow tremendously in the triple digits, But we also saw a strong growth performance across our public cloud assets like Ariba and SuccessFactors. Clearly, HANA Enterprise Cloud is now picking up. And from a revenue perspective, due to the lagging effect of cloud revenue recognition, You don't see this so tremendously in those revenue figures.
So there it's clearly mostly still coming from our public cloud solution portfolio. But in terms of our bookings performance, HANA Enterprise Cloud is already a strong contributor, although you Don't see it in deferred revenue as quickly as on the public cloud, because the setup timing on HANA Enterprise Cloud is longer. And therefore, our time to billing is also slightly longer than in our public cloud portfolio. In terms of the contribution of our The contribution of our cloud business to margins and the impact of 2017 targets bear with us. We will want to end the year, hopefully, on a strong note.
Then we'll see how the cloud Fully on a strong note, then we'll see how the cloud acceleration will continue and then we will basically guide you Also including the impact of a material acquisition of Conquer that we hopefully have closed by then on the implications on our midterm guidance.
Adam, I would simply build on what Luca is saying by adding just a couple of thoughts. One is the integrated enterprise is now Coming through in the cloud, you'll remember the Y2K transition when the best of breed were best at something, but they didn't breed And it didn't work long term. We're back there again, only now the battle is in the cloud. So the core is moving to the cloud. The line of business already is in the cloud and companies that have Ahana in memory platform, a beautiful user experience with Fiori and can integrate these assets across the enterprise will win and SAP will be a winner.
So think about the core to the cloud and the integrated enterprise as a major theme. We recently read a report that one of the competitors out in Northern California mentioned or certainly touted a 30 Improvement in the pipe in the cloud, that's interesting, but our 80% is even more interesting. So that's why as we guide going forward, We think very strongly about being the fastest growing mega cap IT company in the world in the cloud, having the de facto standard In memory platform with SAP HANA and looking at absolute operating income and the expansion thereof, which is exactly what we're doing with our strategy.
Thank you.
Thank you. Let's move to the next question please.
And our next question comes from the line of Gerardus Foss of Barclays. Please go ahead.
Hi, good afternoon. Thanks for taking my question. Just first
of all, just maybe if you could give some color around kind of Macro weakness, have you seen anything coming through in any kind of regions? Then secondly, just coming back on the prior And regarding the kind of profit reduction, if you just give us a little bit more kind of granularity, how much is really driven by kind of the mix? How much is impacted by perhaps a different kind of revenue stream coming through in the cloud with the enterprise cloud, which clearly Requires a bit more setup and also data centers. And then finally, how much is perhaps driven by A mismatch in kind of OpEx whereby you upgrading one side the faster growing area, but you're not yet or you have not yet kind of restructured or lowered the kind of And then just one final question. On Latin America, clearly, Q2 was already very tough for that kind of region.
It looks that Q3 had a further step down Despite the impact from the World Cup dropping out, what is happening there? And you mentioned execution. What are you
guys doing there? Thank you.
Well, thank you very much for the question. I'll start it and of course, Luca, as he wishes, can jump in as well. I think the Ukraine matter and the Middle East unrest has been well publicized. And I think Brazil and Argentina Are not just SAP issues, we've seen this somewhat consistent across other significant IT companies as well. Having said that, I do want to point out that we had execution issues in Latin America and we dealt with them decisively, firmly.
We're going to put Rodolfo Cardenuto back in charge of Latin America in addition to the alliance organization to provide the appropriate level of leadership there. We generally take action when action is required. The other piece is in terms of the profit, I think it's important to recognize Had we taken that upfront revenue instead of putting into ratable continued increase in our cloud guidance, You wouldn't have a 5.6 to 5.8 story. You'd have a 5.8 to 6 story. We recognize it and stretch it out over a little longer time horizon.
But again, there's nothing happening here mathematically that isn't consistent with the high growth cloud company, because if we chose to drop it to the bottom line On an upfront perpetual basis, we wouldn't have even done an adjustment. But then again, we might not have gained all that market share and been the de facto standard in memory cloud winner when you look at the company 5 years from now and we're building the company for the ages. So I think you should start thinking about the company in terms of growth in the cloud, solid in the core SRS and then operating income Expansion in absolute terms. One of the things I did want to mention also is the HANA Enterprise Cloud investments have been made in a large extent, But also we recognize the importance of spreading our footprint with great partnerships like the one we announced with IBM. And if you think about a reference architecture on HANA using someone else's infrastructure as a service, It's a very nice way to expand our presence in the software industry, solve the customers' problems and do so in a more profitable way for SAP.
So we're looking at all these cylinders and we're firing ahead on all these cylinders for growth.
Yes. I mean there is not a lot to be added here. It's very clear that when you take a look at our overall margin profile, we continue to act Very fiscally responsible on G and A expenses. Also on the sales and marketing side, we more or less have a situation without a big change on the margin profile. So the main change comes from SSRS margin.
And here it's clearly a combination Of the delay in revenue recognition for more cloud revenues than we have thought about as a relative share to upfront licenses As well as then especially in the HANA Enterprise Cloud, the additional setup costs, as Piel has alluded to, we believe that in the future through partnerships Like the one with IBM, we will be able to utilize the infrastructure as a service offerings from IBM and concentrate really on the Application management layer on top and driving our SAAS revenues in that combination, which is good for both partners And will help us with CapEx investments going into next year.
Okay. Thank you.
Thank you.
The next question please.
And our next question comes from the line of Mohammed Mawala of Goldman Sachs. Please go ahead.
Thank you very much. Luca, I wonder if you can just explain the kind of relationships between the billings and the subscription growth in the P and L. We saw a bit of a disconnect this quarter. Is this a one off effect? Or should we see a more normal progression going forward?
Thank you very much.
Yes, it's a good question actually. And I think I answered it already halfway through. But as you know, I mean, cloud calculating billings are quite interesting and pretty complex metric. We showed 51% as reported growth there, While we had only 27% on a constant currency basis, that's a much bigger spread than we are seeing it on other figures that we're So let me maybe go into this a little bit further in detail. 1st, this is a combined metric of a P and L metric and a balance sheet metric because we're adding the revenue of the current quarter To the change in deferred revenues, which is obviously a balance sheet item.
And while we basically measure the constant currency figure On the revenue, using the average exchange rates basically as a comparison on the balance sheet item of deferred revenues, We're taking a look at the difference between the closing and the opening balance of the current quarter as well as the ending balance of the previous year's A quarter based on the currency exchange rate that existed at the starting point of the preceding quarter. So then you can get into a perfect storm if you have a situation like the one we had this time where in Q3 last year, we had a substantial, substantial appreciation of the euro Versus the U. S. Dollar. And remember, most of the deferred revenue balances that we have in there are from the U.
S. And are denominated in And this year, we had exactly the opposite effect of a substantial, substantial strengthening of the U. S. Dollar. So put in a different way, you could also see it positive that most of the realization of these deferred revenues and actual revenues as they are The U.
S. Dollars assuming that the currencies will stay where they are today will actually result in greater revenues that we see then in the P and L. So that's maybe an explanation on why the discrepancy between actual and constant currencies is so huge on this figure. Now The other important element is, as I said, the HANA Enterprise Cloud. Meanwhile, while we don't see yet a substantial revenue contribution of the HANA Enterprise Cloud due to the That these go lives have in many cases just taken place a few months ago or are still in process of taking place.
It is a huge part of our order entry that we have. So it's already noticeable there. However, in the HANA Enterprise cloud due to the fact We are migrating more complex industry specific mission critical scenarios to our infrastructure. It simply takes longer there than in the public cloud For our customers to go live. And remember, only when we are live, we can start to bill and therefore also recognize the deferred revenue on the balance sheet.
So that's The main reason for the disconnect there and as the HANA Enterprise Cloud, I think, gets a bigger portion of our business initially, You may see a similar effect. However, this should level out then as the HANA Enterprise Cloud becomes a pervasive part of our ongoing business both from an order entry as well as revenue recognition perspective. I hope that's clear, but it's a complex topic. I apologize.
Right. So we should see this as more of an anomaly this particular quarter?
Yes. In the combination definitely because the Constant currency calculation was really extreme this time due to the big apprehension of the euro last year and then of the U. S. Dollar this year.
Great. Thank you very much.
Okay. Thank you. Let's take the next question please.
And our next question comes from the line of Mark Mehrler of Sanford Bernstein. Please go ahead.
Thank you. Can you hear me?
Yes, we can hear you. Please go ahead, Mark.
Excellent. So I got 2 cloud questions on follow ups on it. The first is, I'd like to clarify on the deferred cloud subscription and support growth. The reason just want to confirm. The reason it's growing 30% in deferred while cloud is growing 41% is the fact that procurement network Is usage build not build significantly in advance?
Is that correct?
Yes, definitely. I mean, this holds True for both the business network as well as for field class.
Okay. So then thus we won't see the deferred grow as fast as revenue Because of procurement.
Yes.
The second question is in terms of how you're expensing all the cloud costs, All of the delivery costs and some of the sales and marketing, etcetera, You're expensing those as you incur them, not capitalizing them on the cloud side, correct?
That's correct for the delivery cost and it's correct also for a good portion of the sales and marketing expenses. There are certain bonus plans in some parts of the world, which allow to capitalize them, but it's not the case, for example, for our bonus
Okay. So we're seeing much more of the expenses upfront on the cloud and they're not going to be visible, But they'll get better basically as that revenue continues for the clients that are implemented.
Exactly. So we have 1st year impact there, but already as of the 2nd year, our cloud contracts are actually showing a very decent profitability. So the more we add renewal business, the higher the profitability will get. But of course, this does not prevent us to go for as much new business as we can, because that then in the long run allows us to even better capitalize on the investments that we have made in cloud delivery and load our Back end infrastructure with as many users as we can.
Perfect. Excellent. I really appreciate. Thank you.
You're welcome. Thank you. Let's take next question please.
And our next question comes from the line of John King of Merrill Lynch. Please go ahead.
Great. Thanks very much for taking the questions. Bill, you said in the opening remarks, the license to cloud shifted accelerating and that's obviously in evidence. That's an accretive shift for the long term. But the shorter term, as you look out into 2015, 2016, The more you shift to cloud, the more the EPS is obviously going to be dragged down a little bit.
So in order for us to understand that and model the business in the Could you just comment on how quickly you think that might progress? And maybe you can give us some flavor as to of the €4,000,000,000 or so of licenses, How much of that is coming from the edge applications, which we'd all imagine would go to the cloud fairly quickly versus the more core ERP type licenses where obviously the transition is a lot more slower paced? Thanks.
Sure. John, thank you very much. So the license to the cloud move, I think you're going to see a pretty consistent drumbeat From what we're getting used to right now, this seems to be the rhythm that the customer wants us to operate in. There's still a very viable on premise business. You'll see that in the SRS numbers as we guide forward.
There's an outstanding cloud business. And on the edge side of it, it's probably about 25% of the revenues. It will be bigger on the core as you We'll start thinking about moving the core to the cloud, which is I think a real big competitive advantage for SAP. And then obviously when Luca and I do guidance In January, we'll have a lot to say about our growth, but I think what you'll hear from us is very strong growth in the cloud, The continued march forward is the cloud company powered by HANA. You'll hear very solid SRS software related services And you'll hear very solid operating income and the expansion thereof.
It's clear to us that there's a lot of market share to be won in the cloud. It's Clear to us that we have the solutions that the customer wants. And it's clear to us as we have very high renewable revenue And we have very low cost to sale on the cloud. The operating income expansion can follow that as well. And that's kind of the way we're guiding the company.
We're going for growth.
Very clear. Thank you.
Thank you. Let's move to the next question please.
And our next question comes from the line of Phil Winslow of Credit Suisse. Please go ahead.
Hey, thanks guys for taking my question. And Thanks for the commentary and just the color you guys gave about just the geographies in Q3. I was hoping you could expand on that in terms of your Q4 guidance. Obviously, there's been a lot of in the press about potential macroeconomic weakness in Europe and Germany, as well as some of the economies in Asia. So wondering if you could just Incorporated that into conversion rates, the pipeline, etcetera, those assumptions that you're making.
Thanks.
Yes. Thank you very much, Bill, for the question. As you know, And we covered earlier the global macroeconomic scenario is pretty well known by all. Keep in mind, we have a very special brand in EMEA. And in spite of the turbulence, we performed extremely well and we anticipate that to continue.
If you look at Latin America, I mentioned the Brazil and the Argentina situation and also execution. With better execution, I expect Some tailwind coming back into Latin America, no doubt in my mind. Asia Pacific, Japan, Japan turned around. We're very strong in Asia, very good leadership, very steady beat, double digit growth and significant Our growth in the cloud is going to continue there. And in America, I'm really feeling good about the pipeline.
I'm really feeling good about our cloud business. And I'm really feeling like we have a stable consistent core on the SRS side. So in spite of the global Turbulence and the things that you're hearing, I feel that SAP is extremely well positioned to execute in any environment, but even in this environment. And what I like the best about where we've got the company right now is I believe that the vision, the strategy for the company is the right one With HANA as the in memory, beautiful user experience with Fiori, the cloud assets across the enterprise integrated Of course, on HANA and then the business network kicking into high gear, because that's what the customer wants. And if the customer wants to rent it They want it on a ratable deal.
I think that's to the advantage of the shareholder. And if the customer wants to put it on premise and they want to own the asset because They look at it as a capital asset of their business. They want to keep for long term. They should have the right to do that. So I really feel like this is a very nice rhythm and a very nice balance And I feel very confident in the pipeline.
I also want to go on record as saying a couple of things. We had some media reports About some notification on expenses, if you'll notice, Luca and I have been saying every quarter, we're actually increasing the number of jobs in the company. And we now have 68,800 colleagues. We started the year more close to 65,000. So we're Cooling the expenses because we already did all the hiring we needed to do.
So that was a misinterpretation. And in terms of the pipeline, I stated the pipeline in the cloud and in the core and they're both very robust and strong. And the thing that I really like the most What happened to field day with salesforce.com with omnichannelecommerceandcloud for customer, an absolute field day. So I'm not surprised that their sales director Would want to talk about us. And on Workday, I think it's fascinating how SuccessFactors is now so highly rated in the Guys of Gartner and Forrester and with Fieldglass bolted on for the contingent workforce, which is fastest growing, I think we have a great story to tell against Workday.
And needless to say, we continue to win with HANA against Oracle, even though we're completely open to all partners. So I really like the fact that the company is going for growth with a clear vision and a clear strategy and I think it works in every environment.
Great. Thanks guys and best of luck to encourage Q4.
Thank you. Thank you. Next question please.
And our next question comes from the line of Rick Charlott of Nomura. Please go ahead.
Yes. Thank you. For Bill and Bernd, I wonder if you Talk for a moment about the simple suite and maybe help us understand the positioning of this. So where does it stand now And going out to next year versus the business suite on Hana, how do you think the market reception of Simple What's the positioning and how excited should we be about the potential for Simple Suite next year?
Rick, thank you very much for the question. First I really appreciate it. Today, we're launching RunSimple, the campaign for the company. And I just want to Set it at a high level and then Bernd will take you through the technology roadmap, which we're going to get more and more bold on as you've pointed out. So first on RunSimple, complexity is the most intractable CEO issue of our generation.
We have all the stats and facts to prove that more than 10% The 15% of operating profits of every company we talk to is being destroyed by their very complexity. So that's why I think our move with HANA, With Fiori, with the cloud and the business network is all about run simple. We are putting our money where our mouth is. And the other thing is we never said that we're simple enough. We're not simple enough either.
But we're roadmapping a beautiful story for Simple And it's at the heart of your question. It started with Simple Finance and now Bernd is going to tell you how we're refactoring the entire suite on HANA to change the world. Bernd?
Yes. Thanks, Bill, and thanks, Rick, for the question. So first of all, just to repeat that our functionality is the richest and the best in class of all Business suites that are available on the market. And this functionality has undergone a significant transformation already leveraging the power of HANA as we speak today. And the business suite, but as well all industry applications Now as we move forward having HANA multi tenancy enabled, We do not believe that providing these core applications in the cloud can only be provided.
By rewriting every single line of code and disrupt the business as some other friends do, it would be even naive to simply We write everything and ask our customers to write off all the investments they have done into SAP and convince them to go with disruptive path forward. Therefore, we have chosen a much smarter strategy in close alignment and collaboration with our customers and user groups over the last couple Of years already. And the strategy is the following, which we will offer going forward. 1st of all, we continue to offer the business suite on any DB even if this is yesterday's technology. But in addition to that, we will offer as well to all our Customers on prem, the business suite on HANA and we even extended the maintenance window until 2025 just last week.
Why did we do that? As Bill outlined already, there is a clear tendency that the business will go into the cloud and we will offer customers on top of that to run their complete business suite on the HANA Enterprise Cloud as we speak already today, even including all their mission critical processes, All their enhancements and all their innovations. Now going forward, we will go beyond that. We are now optimizing all applications and maximize the advantage of HANA to the maximum extent. Simple Finance is the first of these applications, which we have launched to the market.
This will be followed by a series of additional line of business applications like material management, inventory management and so on. Ultimately, all the core processes which are available today in ERP will then be available in a simple version. And then again, just to repeat that, an easy path to go from the current solution in a non disruptive way to the future. In addition, we have built a complete new role based user experience, which is changing the way People use to work with applications under philosophy of Fiori. So with the combination of core apps Already in the managed cloud and the line of business public cloud, we have already delivered a unified cloud to our customers.
And we will not give up the huge advantage of integration. As we are decomposing ERP in line of We will deliver on our HANA Cloud platform predefined SAP Integration content That allows our customers to decide on their own to move from the existing on prem world into the cloud. So it's not a single milestone where we ask our customers in a disruptive way to move from today's world into the future By decomposing the complete ERP into simple innovations with predefined delivered integration content, it's up to the customers
Thank you. I think we now have time for 2 more questions. Operator, please go ahead.
And our next question comes from the line of Ross MacMillan of RBC Capital Markets. Please go ahead.
Thanks very much. Two questions if I could. First just on the new cloud business order entry, which you said was more than a third of new software license revenue. That's an impressive number. Can you just Explain how you calculate that that would be helpful.
And then second on the cloud gross margin, obviously, there's a lot of investment here including around HANA Enterprise Cloud. Luca, I was just curious as to when you think we might See that plateau and sort of trough if you will now that we're at 60% gross margins on cloud, are we close to that troughing? Thanks.
Yes. I'll take both questions, if I may. So first of all, on the total order entry, this is what You would call total contract value or TCV. So basically, if you have we have typically 3 year contracts So in the cloud, then you would take this free value and that total contract value for all of the new Into cloud delivery and infrastructure, I'm fully with you. I think guided at the in July at our earnings call That we would see our half year 2 cloud margins improving again over half year 1.
Now SAP already in the cloud is quite a big truck so to say. So when you start To pull in the brakes, it still goes for a while and that's what we have seen in Q3. And now with the IBM partnership in place with The, let's say, clear reminders that Bill and I have given to the organization in terms of the limitation of further Expense increases, I think we are seeing this plateau and I do not expect Q4 cloud delivery margins to further drop.
Okay. Thank you. Let's take the last question please.
And our next question comes from the line of Knut Woller of Baader Bank. Please go ahead.
Yes. Thank you. Just a quick one maybe for Luka as a follow-up. You were mentioning on the service Gross margins this year impacted and you expect it to continue to be under pressure due to the shift to the cloud and the change of the business model. Do you expect to see a margin recovery then for that business line in 2015?
That's it. Thank you.
Yes. Thank you, Klut. I mean, as we said, we are undergoing a complete business combination between our Consulting organization and our active global support organization that will take effect as of January next year. We will act then with 1 combined service catalog across all of our service teams. We will also cross fertilize the 2 different departments and groups.
We will focus our service catalog on those services that are driving a high software to service ratio, A higher degree of standardized productized services as AGS for many years has successfully driven and delivered for our customers as You can also see on the high growth rate that we are posting on our premium support engagements. And with that, I think we will optimize The contribution of our services business across the board, combining the classical consulting business With our SSRS business and that for sure will have positive effects for SAP going into 2015.
Great. Thank you.
Thank you
very much. So this concludes our Q3 earnings call for Good morning and goodbye.
Ladies and gentlemen, thank you. This concludes the SAP 2014 3rd quarter earnings conference call. Thank you for joining. You may now disconnect.