Ladies and gentlemen, thank you for standing by. Welcome to the SAP 2013 first quarter earnings 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. If any participant has difficulty hearing the conference, please press the star key, followed by zero on your telephone for operator assistance. I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.
Thank you. Good morning or good afternoon. This is Stefan Gruber, SAP Investor Relations. Thank you for joining us to discuss SAP's results for the first quarter 2013. I am joined by Co-CEOs Bill McDermott and Jim Hagemann Snabe, our CFO, Werner Brandt, as well as Lars Dalgaard, Executive Board Member and CEO of SuccessFactors. Bill and Jim will begin the call with remarks on this quarter's performance. Werner will review the financial highlights. We will then have time for Q&A. Before they get started, I want to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.
Words such as anticipated, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, will, and similar expressions as they relate to SAP, are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2012, filed with the SEC on March 22nd, 2013. 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 on a constant currency basis. Before I turn the call over to Bill and Jim, I have a few brief announcements. Starting with the reporting for the first quarter 2013, SAP will report deferred Cloud Subscription Support Revenue to provide even greater clarity into the quarterly performance of our cloud business. Additionally, report the Cloud Subscription and Support Backlog Number. Werner will discuss this in more detail shortly. Finally, I would like to mention that we will be hosting a financial analyst meeting at Sapphire Orlando on Wednesday, May 15th. With that, I would like to turn the call over to Bill.
Thank you, Stefan, and thanks everyone for joining us on the call today. SAP had a solid start to 2013, with 25% growth in our software and cloud subscription revenue. We achieved €824 million, which is equivalent to about $1 billion in software and cloud subscription revenue, which makes this our best first quarter ever. Our solid growth was primarily driven by stronger than expected growth in HANA and cloud revenues. With 14% software and software-related services growth this quarter also represents our 13th consecutive quarter of double-digit growth in software and software-related services. Our operating profit grew by 11%, and we did expand our operating margins as well. We gained significant market share from our primary competitor, especially in the areas of cloud and database.
Our 25% software and cloud subscription growth is in stark contrast to our primary competitor, who did not grow at all in their latest quarter. It is clear that many application categories are increasingly transitioning to the cloud, and SAP is in the forefront of this transition. We see continued very strong growth in the cloud with a 385% year-over-year increase in cloud subscription and support revenue, and a 95% increase in deferred cloud subscription and support revenue. Let me talk a little bit about the regional performances out there. Let's start with the Americas. The Americas delivered a strong Q1 with 51% software and cloud subscription growth. This was driven by excellent software revenue performance in Latin America and strong cloud subscription and support growth in North America. Brazil and Mexico continue to be growth drivers. They both delivered stellar software revenue performance for the company.
We're clearly gaining market share from our primary competitor in this region, which saw year-over-year declines in their business in the latest quarter. These market share gains are reflected in our customer wins. For example, Petrobras, Brazil's largest energy company, will migrate to SAP Business Planning and Consolidation. Petrobras expects this migration to improve their forecast accuracy and to drive real-time financial planning based on latest oil prices and currency fluctuations in real-time. We're also seeing increasing adoption of HANA in the Americas. For example, Levi Strauss, an iconic clothing brand, chose to run its analytics platform through Business Warehouse on HANA. With this, Levi Strauss expects to consolidate financial reporting globally, getting real-time into product performance and helping stock the right product in the right store at the right time, again, in real-time.
We're winning in the highly competitive cloud market in the Americas, where we grew fourfold year-over-year in cloud subscription revenue. We had a number of signature wins in Q1 over the pure play cloud competitors. For example, Conagra, a U.S. consumer company, selected SAP HANA-based analytics for more accurate decision-making and real-time margin visibility. Additionally, Conagra selected SuccessFactors Talent Management solution for better management of its 26,000 employees. Our software license revenue grew by 8% in the Americas. This was a bit lower than our internal expectations, and we believe this was primarily due to the delayed budgetary cycles in the U.S. caused by the federal budget uncertainty. We expect spending environment to normalize in the next three quarters as companies start allocating their capital budgets to priority growth initiatives. Turning to EMEA. We saw excellent performance in EMEA.
Despite continued market uncertainty, we achieved 15% software and cloud subscription revenue growth. Our growth was strong across both on-premise and cloud. Emerging markets in EMEA, such as the Middle East, Africa, and Russia, are performing especially well with 20-plus % software growth. These markets are benefiting from our continued investments from our fast growth markets initiative. Enerjisa Enerji, a leading utilities company in Turkey, chose SAP Utilities and Mobile Solutions over Oracle to better serve its customers. Enerjisa Enerji expects to leverage SAP to provide a stable platform that will enable it to triple its volume and streamline its consume-to-cash process. Our growth in EMEA was not just restricted to emerging markets. U.K., Sweden, and Switzerland all grew over 50%. We're clearly taking market share from our primary competitor in this market as well, as evidenced by our software and cloud subscription growth rates compared to theirs.
We grew 15% versus their 1%. A great competitive win in EMEA this quarter was BSH Bosch und Siemens Hausgeräte, Europe's largest home appliance manufacturer. They will migrate to SAP Business Suite powered by SAP HANA. With SAP, BSH expects to turn exponential data growth into accelerated business analytics and innovation. Finally, APJ. In APJ, we missed our own expectations with software and cloud revenue declining by 7%. Several markets started more slowly in 2013 after a record fourth quarter in 2012 and new leadership in some markets. In China, for example, we saw a slower than expected demand for IT investments in the beginning of the year from state-owned enterprises due to the recent change in government. We expect China to return to solid growth. However, even amidst this difficult spending environment in China, customers see the value SAP has to offer.
Tangshan Jidong Cement Company, a large Chinese cement manufacturing company, selected SAP ERP and HCM Solutions to standardize its end-to-end processes. With these solutions, Tangshan expects to improve lean operations, drive data standardization, and transform people management processes by leveraging global best practices provided by SAP. We are confident that we will be back on track in APJ in the second quarter. We see a healthy pipeline across all key markets in this region. In fact, very healthy. In summary, our regional results demonstrate the strength of SAP's portfolio of innovative solutions. Our success is being driven by a very strong go-to-market approach, which combines our innovations in cloud, mobile, and on-premise. Giving customers choice is what we're all about. One of our biggest value propositions is our ability to leverage technology innovation and deep industry expertise to create compelling solutions for the end consumer.
An area where we are creating new consumer experience is in sports and entertainment, which we recently announced as our 25th industry vertical. Key customers like the San Francisco 49ers, the NBA, National Basketball Association, and the German Football Association, are all adopting SAP breakthrough innovations such as SAP Cloud, HANA, and CRM ticketing. The NBA is really exciting. They're launching nba.com/Stats powered by SAP HANA. With the new HANA-powered analytics, NBA can dramatically improve the fan experience by providing real-time analytics on over 50 years of historical play-by-play data on players, teams, and match-ups. Very exciting. Our ecosystem remains a key differentiator, and we saw excellent ecosystem performance this past quarter as SAP partner revenue grew double digits. Today, partner-driven revenue comprises more than 38% of SAP's license revenue, and we are on track to reach our 40% target by 2015.
In summary, SAP had a solid start to the year. To put Q1 performance in perspective, historically, Q1 has been the smallest quarter for us. Our pipeline for Q2 and the remainder of the year is very strong. We have the right portfolio of solutions to take advantage of the market dynamics, and we are confident that we will achieve our outlook for 2013. We will now provide more color on our innovation performance. I'll transition over to Jim. Jim, over to you.
Thank you very much, Bill. Our double-digit growth for now 13 consecutive quarters is a clear indicator that our strategy is right for our customers. As Bill said, that we're winning in the market. Our results in this quarter clearly show that the gap to competition is widening. In other words, we are leading the transformation of the industry, moving data off slow disks into fast main memory, simplifying data centers to the cloud, and reaching people on the move with mobile technology. Let's take a look at how our innovations are fueling this transformation. First, let's talk about HANA. HANA is a home run. SAP HANA is the biggest breakthrough in the industry since R/3 and continues to be a major growth engine for SAP, evidenced by EUR 86 million in HANA software revenue this quarter.
Last year, we were very proud to more than double our revenue on HANA. This quarter, we tripled our HANA revenue compared to Q1 last year. We continue to be the fastest-growing database vendor in the market, and HANA is rapidly now becoming the preferred innovation platform for companies who want to speed up the entire enterprise and reduce costs in IT at the same time. Since Q1 last year, HANA went from being the real-time analytics platform for big data and data warehouses to now becoming the innovation platform of choice for analytical and transactional data, for structured and unstructured data, for internal and external data, and for SAP and non-SAP applications. In Q1, we saw customers standardize their entire platform on SAP HANA. For example, Kingfisher, Europe's leading home improvement retailer, has chosen to extend its partnership with SAP by implementing SAP HANA across its entire organization.
Kingfisher's adoption of unlimited SAP HANA usage is proof of the value we're delivering and a proof that customers who try HANA recognize its great potential across their entire enterprise. With the power of SAP HANA in its toolbox, Kingfisher will deliver a better, faster, newer, and more innovative customer experience. We therefore remain confident to achieve our EUR 650 million-EUR 700 million of HANA software revenue for 2013. Let's talk about cloud. We continue to see strong momentum in the cloud. In only 12 months, we have become a major player in the cloud. With the most comprehensive portfolio of cloud applications, over 24 million cloud users, over 1 million companies connected in the Ariba Business Network, and almost EUR 900 million revenue run rate today, and growing very fast.
We saw strong growth across every single cloud category, whether it is managing talents and human resources, managing customer relationships, managing financials, or managing suppliers and business networks. With these innovative cloud offerings integrated to our core solutions, we are winning against pure-play vendors in the cloud every day. Advanced Personnel Management, APM, an Australian workplace service provider, selected SAP Financials OnDemand over NetSuite. With SAP, APM expects to extend a flexible solution that provides dynamic and ad hoc reporting capabilities, and at the same time, better cost controls. Ariba is making a strong contribution to our cloud business. The gravitational pull of the world's largest trading community, combined with SAP's huge customer base, is attracting businesses of all sizes across the globe to connect and transact on the Ariba Network. Ariba Network spend volume grew on a trailing 12-month basis to EUR 460 billion.
We are beginning to see the results of the joint go-to-market with Ariba, with several joint customer wins in the SAP install base, and we expect these synergies to accelerate over the next nine months. For example, Computer Sciences Corporation, or CSC, a multinational IT service provider and partner, plans to implement Ariba Procurement and business network solutions. CSC expects to integrate with its current SAP portfolio to create a best-in-class procurement process, which will drive efficiencies, lower costs, and maximize the value of its investments. With the broadest portfolio of innovation and innovative cloud solutions, we are well on track to reach our goal of a profitable EUR 2 billion cloud business by 2015. The third pillar of our growth momentum is mobile. We continue to expand our market leadership with strong double-digit software growth in mobile.
We are the only vendor that can deliver a secure enterprise mobile platform and offer more than 200 mobile business applications to our customers, and more on the way. All of our applications now have mobile capabilities. With this comprehensive mobile offering, we are attracting leading industry technology players like CA Technologies to embed our mobile technology solutions in their platform. AOK, Germany's largest health insurance company, selected SAP Mobile Platform to mobilize customers and employees. With SAP Mobile Solutions, AOK expects to improve health and wellness for over 24 million customers, as well as improve productivity for almost 60,000 employees. That covers our three new innovation areas, but besides the three new categories, SAP remain the undisputed market leader in our core applications and analytics, and continues to gain market share.
As Bill mentioned, the core was impacted by the lower than expected sales in APJ, but the pipeline remains very strong. With the availability of the Business Suite on HANA and Business One on HANA, we are reinventing the core, and we have the most modern business suites in the industry for any size company. Combined with analytics, we enable our customers to innovate their business, drive speed in the enterprise, and reduce cost and complexity of IT at the same time. Since the launch of the Suite on HANA in February, we already have achieved a double-digit number of customers in ramp-up. The feedback so far, I'm happy to report, is very positive. We remain confident that we will reach general availability mid-year. We expect this to be a multi-year revenue renewal opportunity starting end of this year.
We believe Suite on HANA will not just drive HANA revenue, but invigorate the core, both at the install base and at new customers. For example, Kaeser Kompressoren SE, a global leader in compressed air system technology, chose SAP Business Suite on HANA and SAP Sybase ASE to replace their legacy Oracle database. With this solution, Kaeser will achieve a lower TCO for IT, effective cash management, improved on-time delivery, reduced inventory, more efficient customer service, and innovative service offerings. In each category, we are innovating faster than competition, and we're winning market share. However, our biggest differentiator is not the single innovations in each of our categories, but how we can combine our innovations to create leading industry solutions for customers in 25 different industries. By adding HANA, mobile, and cloud to our core applications, we are helping our customers reinvent themselves for the real-time digital age.
This is happening in all industries, whether it's in manufacturing, services, or even public sector and healthcare. We continue to see very strong growth in financial services, where we saw over 30% software revenue growth driven by HANA, mobile, and our core banking platform. We continue to invest in financial services with recent acquisition of Camilion in the insurance space. We are also continuing to see double-digit growth in other consumer-facing industries like consumer products and telecommunications, where we are providing real-time business value that has a direct impact on the consumer relationships. Naturally, we at SAP are at the forefront of this change ourselves by leveraging our own solutions to increase efficiencies at SAP. Our sales organization, under the leadership of Rob Enslin, is now running CRM on HANA on mobile devices and in the cloud.
We internally deployed this solution in only eight weeks to 10,000 SAP employees worldwide. Let me conclude. Our innovation strategy is working. With our innovations, we have become the answer to companies who want to increase their business velocity in an unpredictable global economy. The quarter clearly shows that our industry is at a fundamental transformation point, driven by HANA, cloud, and mobile. SAP's 25% growth this quarter and the strong results of HANA and cloud shows that we are leading this change, and we are increasing the gap to competition. We have a healthy pipeline heading into Q2 and the rest of 2013, and as Bill mentioned, we are confident that we'll reach our full year guidance for this year.
We are on track to achieve our 2015 ambition to become a more than EUR 20 billion revenue business with an operating margin of 35%, a EUR 2 billion profitable cloud business, reaching 1 billion people with our innovative solutions. With that, I want to turn the call over to Werner for additional financial highlights of the quarter. Werner?
Thank you, Jim. Before I do that, I want to address a few topics. First, given the increased focus on the cloud business, we are now reporting deferred cloud subscription and support revenue. This is a subset of total deferred revenue and represents the amount of revenue that we expect to recognize as cloud subscription and support revenue in future quarters. We also disclosed cloud subscription and support backlog at year-end 2012. This number represents expected future cloud subscription and support revenue that is contracted but not yet invoiced, and thus not recorded in deferred revenue. Secondly, you probably noticed that we are reporting our quarterly results earlier now. This is a result of our own internal adoption of SAP HANA. This quarter-end close was SAP's first close with SAP Business Warehouse running entirely on HANA. Some additional information related to Q1 results.
Non-IFRS support revenue increased at constant currencies by 10% year-over-year in line with expectations. We also, once again, had the strong adoption of our enterprise support offering at roughly 96%. Non-IFRS cloud subscription and support revenue increased to EUR 167 million in this first quarter, up 385% year-over-year at constant currency. We continue to see increasing sales synergies between SuccessFactors and Ariba. Non-IFRS deferred cloud subscription and support revenue was EUR 377 million at the end of Q1, which is an increase of 95% year-over-year. Cloud subscription and support backlog was EUR 800 million as of December 31st of 2012. We'll provide this backlog metrics again at the end of 2013. Before I talk gross margin, I want to make a few comments on our cloud division profitability.
With the EUR 28 million profit in Q1 of this year compared to minus of EUR 25 million in the prior year first quarter, our cloud division was profitable for the second quarter in a row. Even in the cloud application segment, we are now profitable at EUR 1 million compared to minus of EUR 19 million in the prior year. Some comments on the gross margin for the quarter. Our non-IFRS SSRS gross margin increased by 50 basis points to 82.7%. The professional service gross margin decreased by 140 basis points year-over-year to 17.3%, as customers adopt a cautious buying behavior towards large services projects, while the inclusion of the professional service business from acquisitions had a dilutive impact. The overall gross margin was 70.2%, an increase of 180 basis points year-over-year.
Looking at the expense side of the P&L, you can see that the non-IFRS operating expenses in this first quarter increased by 10% year-over-year at constant currency. From this increase, five percentage points came from the inclusion of SuccessFactors and Ariba. In total, our workforce grew by almost 5,200 FTEs year-over-year, thereof approximately 2,900 from acquisitions. Non-IFRS sales and marketing costs increased by 19%, impacting our operating expenses. This led to a sales and marketing ratio of 25.4% on increase of 2.3 percentage points compared to prior-year. This increase was mainly driven by organic headcount growth in sales and marketing of around 2,000 FTEs year-over-year. In Q1, we saw a strong increase in our non-IFRS operating margin on an organic basis. This demonstrates that the efficiency in our core business has further improved.
Our margin was negatively impacted by SuccessFactors and Ariba by approximately 80 basis points. Overall, our non-IFRS operating margin at constant currencies in Q1 increased slightly to 25.1%, up 30 basis points year-over-year. The non-IFRS tax rate in the first three months of 2013 was 21.4%, which is down 6.7 percentage points year-on-year, mainly as a result of the regional allocation of income from taxes for prior years and from tax effects on changes in foreign currency exchange rates. We are still maintaining our effective tax rate outlook for the full year. Our first quarter non-IFRS EPS was up EUR 0.09 year-over-year to EUR 0.58. The EPS was positively impacted by the sharp decrease in income taxes in Q1, as I just mentioned. Now to cash flow and liquidity.
Operating cash flow for the three months increased by 4% year-over-year to EUR 2.16 billion, mainly reflecting continuous good management of working capital focusing on receivables, which on January 1st, 2013 were 12% higher than in the previous year. This led to a EUR 2.1 billion improvement in our net liquidity compared to the prior quarter. We are maintaining our full year guidance for 2013. In summary, we still expect the full year 2013 non-IFRS software and cloud subscription revenue to increase in the range of 14%-20% at constant currency. The full year non-IFRS cloud subscription revenue contributing to this growth is expected to be around EUR 750 million, and again, this is a constant currency number. The company also expects full year 2013 non-IFRS Software and software-related service revenue to increase in a range of 11%-13% at constant currency.
Finally, we expect the full year non-IFRS operating profit to be in a range of EUR 5.085 billion-EUR 5.095 billion at constant currencies. Before I finish, let me make a few comments about currency. Overall, during the first three months, our non-IFRS numbers at actual currencies experienced a negative currency impact compared to what they would have been if translated at the exchange rate from last year. SSRS revenue was impacted by EUR 56 million, or -1.9%. Total revenue was impacted by EUR 67 million or -1.8%, impacting the SSRS and total revenue growth rate by two percentage points each. The operating margin was negatively impacted by 30 basis points.
If exchange rate remains unchanged at March 2013 level for the remainder of the year, our 2013 full-year non-IFRS SSRS number and non-IFRS total revenue at actual currencies would both be approximately 2% lower than the respective constant currency numbers, representing a negative impact of approximately two-three percentage points to the SSRS and total revenue growth rate. Our non-IFRS operating margin at actual currencies would be approximately 40-50 basis points lower than the respective constant currency margin. Thank you, and we will now be happy to take your questions.
Thank you. Ladies and gentlemen, at this time, we will begin the question and answer session for the financial analyst community. Anyone who wishes to ask a question may press star and one on their touch tone telephone. If you wish to remove yourself from the question queue, you may press star and two. Your questions will be answered in the order they are received. If you're using speaker equipment today, please lift the handset before making your selections. I repeat, if you would like to ask a question, please press star followed by one on your telephone. The first question comes from Rick Sherlund from Nomura. Please go ahead. Mr. Sherlund? I'm sorry, we cannot hear you. Can you please unmute your phone? Rick Sherlund from Nomura, we cannot hear you. Unfortunately, we cannot hear the line of Mr. Sherlund, so we go on with the next question.
Next question is from Stacy Pollard from J.P. Morgan.
Hi, can you hear me? Hello?
Yes. Very good.
Yes, we can hear you.
Okay. Could you please discuss how and why you're very confident in the APJ returning to double-digit growth, in Q2, maybe talk about which countries are recovering, et cetera. Could you be more specific on mobile? You said double-digit, is that sort of 10%, teens, twenties, I think this is mostly platform, is that right? What traction are you seeing around revenues from applications as well as developer partners, et cetera?
Bill McDermott here, Stacy. Mobile, 76%. Let's talk about Asia Pacific. They had a good Q4. We came into the year with expectations that were higher than their actuals. If you look at our license business, basically, the entire miss was in Asia. The reason why we're very confident that they're coming back is there was a lot of timing issues. They made three leadership changes, one in Southeast Asia, one in India, and one in China. That's a lot of change for one quarter, and it resulted in some of these deals slipping into the second quarter. We have reviewed that pipeline, as you can imagine, quite extensively. Everybody understands what's expected of them. They have committed the quarter to deliver it strongly and be on track through the first half year to date.
Considering the track record of 12 consecutive quarters of double-digit growth on the part of that leader. The fact that they have doubled the size of Asia Pacific Japan in the last three years, we have tremendous confidence in the leader. Everybody has a bad quarter. He had a bad quarter, he's going to fix it.
Okay. Sorry, a quick follow-up just on cloud margins. Can you say how many years it would take to get cloud to group margins? That might be a question for Werner.
Well, Jim here, maybe I can take that. We always said that margin in the cloud is about scale. If you look at the last four quarters on the segment report, you'll see how every single quarter we've gone from negative to now positive in our gross margin. We're making EUR 28 million on the gross margin in the cloud now. I think that exactly proves the point. It's about scale. We're having the scale, and we have the right cost structure for that scale. It's a matter of how fast can you scale the business. It is a subscription revenue model, so it's not massive jumps. It's going to be hard work. We're off to an extremely, very strong start here with 385% growth in the quarter.
I can't tell you when exactly that comes to the level of the rest of the business. We're not projecting that right now, we feel very good about our projection to be the first really profitable cloud company.
Thank you.
Okay. Thank you.
Let's take the next question, please.
Next question is from Adam Wood from Morgan Stanley. Please go ahead.
Hi. Thanks very much for taking the question. I've got two, if I could. Just first of all, coming back to HANA and particularly the business suite on HANA launch, could you maybe give us a little bit of an indication about the customer response outside of the ramp-up clients, how open those customers are to changing database on the transactional side? Maybe did you feel that that caused any disruption in the first quarter, either to the ERP business or to the HANA business, as you kind of explained the new case, and moved away from simply talking about business warehouse. Also as pricing, which I think has been clarified a bit, has that helped with customers and how do they think about that? Then just secondly, coming back to the margin question.
Appreciate it was a little bit below where consensus was looking for in Q1, with the headwinds you had, it looked as if margins were up at least 100 basis points on an underlying basis, and the hiring rate was actually quite a bit down in Q1. Is that what we should be expect going forward, that the leverage we get from the benefits of hiring last year, that continues through this year? Thank you.
I'll, Jim, I'll take the suite on HANA question. I think it's a very, very important question. Clearly that milestone, from an innovation point of view, meant that HANA is now not just an add-on to the existing landscape. It becomes the innovation platform of the future. We have not seen major impacts in this first quarter because we're still in ramp-up, and it's very early. Clearly the interest from our customers is very, very high. In particular, when they realize that this is not just about running their business in real time, but that HANA as a database actually reduces complexity and cost in significant ways in the infrastructure. We've been a good example ourselves. We put our CRM on HANA, and the implications in terms of reduced cost of hardware are tremendous, beyond what anyone had expected.
We will see this product go in general availability mid-year, which means the effect of this will be back-end loaded in the year. I think it's a multi-year way of accelerating the core and renewing it in a big way.
With regard to the margin, what you had in mind for Q1 is actually what we are shooting for the full year, and you cannot drill it down to one quarter, especially not to the first quarter only. Remember, there are two things which has to happen. First of all, we have to stay very disciplined on the cost side, and on the other side, we also need the respective revenue growth. Here, software revenue growth is very essential in order to bring up the margin. You will see an expansion going forward.
Great.
Thank you.
Thank you very much.
Let's take the next question, please.
Next question is from Philip Winslow from Credit Suisse.
Hi, guys. Good morning. Just one question for Bill, then a follow-on for Jim. Bill, you talked about some deal slippages in the U.S. driven by the budgetary concerns. What are your customers telling you about sort of timing of these projects? A, are they still the sort of same size projects that they were six, nine months ago? What are the focuses, when do you think you'll start to see these come back in and close? For Jim, on the cloud side too, I know we've talked about in the past the idea of just these hybrid architectures between the cloud and the on-premise SAP. Just where do we stand in that? Has that even started to kick in terms of just integration between SuccessFactors, Ariba, and SAP? Thanks.
Phil, thank you very much for the question. First, the investment areas that you see continuing to be the large ones, the theme of growth remain HANA, because big data and real-time predictive analytics is the way to the consumer. Mobile, because you have to connect to that consumer in real time and make the ease of business obvious and competitive. Of course, the cloud. If you look at the cloud and the U.S. adoption of the cloud, it's a first mover, it's an early adopter, and you're going to see more and more growth in the United States go to the cloud. This can be the public cloud. This can also be the private cloud, which touches on the second part of your question. I'll allow Jim to take that since you directed it his way.
I would also say in terms of a lot of the larger projects, as we look at Sapphire, a lot of our customers look to us for thought leadership and our point of view. Sapphire is a very important milestone in the buying cycle of SAP. It's no coincidence, in my opinion, that Q1 tends to be the slowest quarter for SAP, not just because it's historic and it's year-over-year and that's the way things are, but because customers wait for our point of view. I think they're very interested in the suite on HANA. That's a big move for us as a company, and exactly how we can give them different consumption models around that so they can consume that innovation and have a faster cycle time to value. We have plans for them in that regard.
I think you're going to see the trend continue towards the cloud, public and private. What I love about SAP's positioning is we're giving the customer choice. Depending on the size of the customer, the complexity of their environment, they will choose to deploy however they want to, and we're ready to have that conversation in the customer's language.
Thank you, Bill. Let me talk a little bit about the cloud. Bill already addressed the public cloud. We've always said, and we continue to believe that if you want to be successful in public cloud, you need applications and architecture that was designed for that. Lars Dalgaard and his team at SuccessFactors, as well as Bob Calderoni at Ariba, have shown us what that means. You see that in our numbers this quarter. The fact that we are now margin positive on gross margin is a recognition of architectures designed for cloud. Bill mentioned also the private cloud, and that's where the hybrid comes in. It is clear that we have an increasing amount of customers who is asking for ways to simplify their own infrastructures. We have the biggest, most strategic interest there is in this market to do exactly that.
We will make efforts to accelerate the simplification of landscapes also for customers in a private cloud kind of environment.
Thank you. The next question, please.
Next question is from Gerard du Toit of Barclays.
Hi. Thanks for taking my question. A few, if I may. First of all, during the quarter, if you look at the kind of core KPIs, we've seen the macro kind of deteriorating. We haven't really spoken about it, did you see some kind of tougher environment towards the end of the quarter and impacted at the closing of the quarter? Secondly, on the kind of sales productivity, which has been quite weak for the last five quarters. You did a lot of hiring last year. When should we expect that the incremental sales is becoming productive? Finally, just on the core, clearly that was weak. I define core licenses minus mobile and minus kind of SAP HANA, was very weak in Q1. Do we expect that to grow for the full year? Thank you.
Yeah. First of all, this is Bill, on the environment. The environment in the public sector category has been very choppy and slow on a global basis for the most part. Whether it's China and making leadership changes and state-owned enterprises changing their buying behavior, it's the U.S. with sequestration and various fiscal policy issues. It has definitely slowed down that segment of the market. The good part is there's a lot of pent-up demand. If you've got high-value solutions and pent-up demand, it generally rationalizes itself at some point. Which quarter that'll happen, we're not waiting on our heels for. We're going after other industries that are buying, there are industries that are buying. For example, financial services has become the fastest growth vertical in the world for SAP. SAP HANA is solving problems in the healthcare industry that heretofore were impossible to solve.
If you look at retailers, they've got to get much more in touch with their consumer and behave in real time. Where there's a business case and there's a customer, companies and industries need it to grow, we're there. Those are decisions that are being made and investments that are being made. I do think there's more caution in terms of some of the large-scale companies that tend to wait for fiscal clarity and policy clarity. I believe this is mostly going to affect companies in the commodity space, especially hardware companies, you see that in the negative double-digit year-over-year declines. We're growing, they're not, because we're on the value side, the innovation side, and the growth side of the customer's agenda. Even in a down environment, that's the best side to be on.
Yeah, there was a question on the core. The way we look at it is, in fact, that with SAP HANA now being the platform for the core, we're kind of redefining the core. You'll see how companies will buy as default the SAP Business Suite on HANA or the SAP Business Warehouse on HANA, or both of them. Which means that SAP HANA becomes part of the core as well, at least the part that's the one-time license for SAP HANA. I think the beauty of the strategy is that the core gets pulled by some of the new innovations. The mobile makes the core easier to consume, with that, we get more users. SAP HANA makes the core significantly more competitive, again, we'll have a pull in the core. We actually believe in growth opportunities in the long run in the core.
We'll see that playing out for us in the quarters to come.
On the sales productivity side, you did ask a question on sales productivity. Please know that the hiring investment that we had made in the past, we intend to fully leverage in the present. There isn't large-scale plans to increase headcount. We're running a tight ship here. We believe that we have the assets we need to leverage our revenue growth in a highly profitable way. Jim touched on it and I touched on it. When you have the suite on HANA in a private cloud, you could do a lot of things for ease of consumption for large-scale customers, and we'll be right there. We're not sitting on our heels waiting for the market to come to us. We got plans to go get the market. We're aggressive and ready to roll.
Thank you.
Thank you. Let's take the next question, please.
Next question is from Michael Briest from UBS.
Thank you. On these calls, we normally get an update on the number of customers and live customers on HANA. I was wondering if you could give that, and maybe also how important BW was to the HANA contribution in the quarter. Secondly, Bill, maybe one for you. You've obviously added a lot to sales headcount in the last 12, 18 months. You've delivered good license growth despite the volume of deals being signed falling now for four quarters in a row. You seem to be getting more dependent and more successful, to be fair, on large deals when a lot of your competitors and peers are struggling. Is that deliberate? Is it something we should expect to change, where the volume of deals will now pick up going through the rest of the year? Thanks.
Yeah. Thank you very much, Michael. On the volume of deals, when you see the size of the deal increase, especially with large strategic global companies, it underscores the leverage and the relevance that SAP has as a strategic partner. Yesterday, in speaking with Conagra, I was like, "Why did you go with us in the cloud? Why did you make the investment in HANA?" To which they replied, "We choose to compete and disrupt our own competitors on our own terms, and HANA is the real-time platform by which we can do that. The reason we chose you in the cloud over the best-of-breed coming out of Silicon Valley is because we want a partner.
When we think about the enterprise and we think about the best partner, we think about SAP." I feel very good about large-scale customers still investing with SAP on an enterprise level because of all the innovation that we have. In terms of the volume of the deals, we have some really good progress with the ecosystem. You see a constant climb in the amount of our revenue coming from indirect channels, and that's really powerful. We can do even better. As we take our solutions and put them in the cloud, we can make the ease of consumption in places like Brazil or China or even the United States so much easier for the small and mid-size ones, and that's what we want to do.
That's where you can radically see a hockey stick come in small and mid-size businesses by fully leveraging the power of the cloud, and that's where SAP will really roll on the number of transactions that we do. That's the best way to get scale. That's what we're gearing up to deliver on throughout the 2013 and beyond cycle.
You asked about HANA as well. We have more than 1,300 customers who chose HANA. We have many implementation projects now ongoing. You see them in 3 categories. The accelerators, which will accelerate existing functionality that they already have installed. The infrastructure for analytics, which is typically the 2nd step, where we went big last year. Now we begin to see the first enterprise-oriented decisions and implementations where HANA becomes the future platform. That's also why we tripled the revenue in the quarter. It's because we saw the impact on the enterprise-type deals. We see that as a trend. When companies have tried it and seen the magic of HANA, they go on and increase the scope very rapidly.
Finally, Michael, on the sequential growth in the number of customers quarter-over-quarter, in case you're tracking that, it was more than 30% in the number of customers.
Thanks. Do you think the harmonization of the pricing between BW and the suite-based version of HANA is something that's helping momentum? Is that driving adoption?
Yes, it is. I think it's very clear now customers can enter with BW at a very low price. Then they go to the full suite, which is a normal database price in spite of the fact that the database is superior to anything else in the market. Then they go to the enterprise license, and there's a great logic between the 3 levels.
Thank you.
Okay. Thank you. Let's take the next question, please.
Next question is from Rick Sherlund from Nomura. Please go ahead.
Can you hear me now?
Yes, we can hear you.
We can hear you.
Great. Thanks. Jim, first on the Business Suite on HANA. Would you anticipate that it would be a popular solution that SAP and your partners would host this for customers to allow them to adopt Business Suite on HANA a lot more easily? If you could also address the robustness of the capabilities of HANA per production environment. At the middle of the year, when it's a GA, will you deliver, I think it's NUMA you were working on and real-time clustering and high availability, high reliability, the things we think about when we think of a production environment. Is that something that'll still be a work in progress, or you'd expect to have that in place?
Lastly, if we could just ask Lars for an update on ByDesign in terms of his work on making that more modular and on HANA and where we stand on that.
Great. Let me talk about Business Suite on HANA, thanks for all the questions. This is really an important part. You ask, could you consider SAP and others hosting it? It's very clear that the moment you run the Business Suite on HANA, you have a massive simplification of landscapes as a consequence. We've seen that at SAP. As a consequence, customers would be looking for opportunities to accelerate their pace to that future, and hosting could be one. Clearly, there will be a demand for this. In terms of robustness, listen, we are now running our Business Warehouse. We closed our quarter on HANA, and we're now running one of the most important transactional systems, namely our CRM, on HANA. We wouldn't do that if we felt the system wasn't robust.
Yes, all these tools that you mentioned will, of course, be there for a robust enterprise-ready infrastructure, which is what we have been delivering for 41 years.
Thank you. The question to Lars?
Rick, the success we're having in unbundling SAP Business ByDesign architecture has been extremely strong recently. We just had some really big wins in the line of business focus in SAP Sales OnDemand. We're seeing that this line of business initiative, which actually was started by SAP before I got there, but I've just been able to put a lot more tonnage behind the strategy. It is clear that people buy cloud in business units and a line of business, and that's the way that it's bought. We've had real success in splitting that out. Particularly, what we're seeing from the ByD code is the financials is what's very popular. About 70% of the decisions is on the financials area, and we had some nice wins against NetSuite and others in this quarter for that.
Finally, obviously we have been able to achieve very strong growth in those areas. I don't think we split out specifically what the growth is. But as you know, we've also been able to have significant wins on the SuccessFactors side because of the resources we're able to take from SAP and invest 100% into the cloud positioning and product. That's exactly what we're doing in the SAP CRM side, and it's what we're doing in the marketing side, and of course, on the supplier side. Really, all of us feeling, Bob and myself, that we're getting this big push onto the trajectory. If we maybe had a linear trajectory or sort of moving more towards a geometric trajectory going forward. That's pretty exciting.
Thank you. We have time for one final question, please.
The question is from Josep Bori from Exane BNP Paribas.
Hi, good afternoon. Thank you for taking my question. Just a couple of quick ones. The first one, just following up on the HANA numbers. I just wanted to know, how should we think about the product seasonality compared to the rest of the group? If we use the group license seasonality pattern, about 13%-15% for Q1, those EUR 86 million imply about €573 million-€661 million of HANA revenues for the full year, which is a bit below your target. How we should think about that? The second question is, when you were talking about the midterm target, the 2015 targets of the €20 billion revenues and €2 billion of profitable cloud revenues, you did not mention the 35% operating margin.
Is that still on the table or as a result of the comments you made about the unpredictability of when cloud revenues are going to be at the level of the group, that's a little bit more elusive? Thank you.
One of the things I wanted to just refresh everybody's mind on, not just on HANA, but in general, our Q1 represents about 14% of the total annual license revenue for our company or software revenue. You shouldn't take the EUR 86 million that we did in HANA in Q1 and kind of forecast that out as our new normal for the rest of the year. We guided on EUR 650 million-EUR 700 million, and we stand by the guidance for HANA. Incidentally, if you put that in US dollar terms, I think it's the fastest software product to ever hit $1 billion in the history of enterprise software. Secondly, on the €20 billion in revenue, that's euros in revenue by 2015 that Jim mentioned in his opening remarks.
We also stand by the 35% operating margins, yes, we stand by the 35% operating margins, even though we'll have more of our revenues coming from cloud. We intend to do it all.
Just so there's no confusion, I did say that as well in my opening remarks. The 35% margin was in there.
Okay. Thank you very much.
Well, thanks much. This was the last question. This concludes the financial analyst call for today. Thank you for joining us, and goodbye.