Ladies and gentlemen, thank you for standing by. Welcome to the SAP 2012 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. 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 Ries. Please go ahead, sir.
Thank you. Good morning or good afternoon. This is Stefan Ries, SAP Investor Relations. Thank you for joining us to discuss SAP's results for the third quarter 2012. I am joined by Co-CEOs Bill McDermott and Jim Hagemann Snabe, and our CFO, Werner Brandt. Bill and Jim will begin the call with remarks on this quarter's performance, and then 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, statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, and will, and similar expressions as they relate to SAP, are intended to identify such forward-looking statements.
SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2011, filed with the SEC on March 23rd, 2012. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date. Please keep in mind that unless otherwise noted, all numbers and growth rates referred to on this conference call are non-IFRS on an as reported basis. In addition, starting with the third quarter 2012, SAP will report a separate cloud segment to provide greater transparency into our cloud business.
Werner will discuss this in more detail shortly. With that, I would like to turn the call over to Bill.
Thank you, Stefan, and thanks everyone for joining the call today. SAP's momentum continues at full speed. Q3 was our best ever third quarter. We once again set new records. We exceeded EUR 1 billion in software revenue for the first time in the third quarter. We delivered triple-digit growth across all of our new innovation categories, including the cloud, HANA, and mobile. We beat market expectations for revenue growth, and we achieved strong 17% year-over-year organic growth in software licenses, 12% at constant currency, and 19% in software and software-related services revenue, 13% at constant currency. This was our 11th consecutive quarter of double-digit software and software-related services growth. Our more than 61,000 employees worldwide continue a sweet devotion to co-innovating with our customers. The success of our strategy is also evidenced by the 8% year-over-year increase in SAP's brand value, as determined in a recent study by Interbrand.
We feel like we're in pretty good company between American Express and Nike. SAP solutions, a combination of our core applications, analytics, and key innovations are winning. We are growing twice as fast as our closest competitor. We are taking market share in a continued uncertain environment because customers are looking for more efficiency and innovative ways to drive growth. These results make it clear that there is a nexus of forces transforming the market, and our strategy is at the center of this cycle. SAP solutions give our customers the tools to win by combining our market-leading applications core and analytics with our innovations that address big data, mobile, and the cloud. Let me give you some more details on our regional performance. First, the Americas. The Americas delivered an outstanding Q3 with 37% software growth, 29% at constant currency.
Among the highlights is a great new partnership for us in the U.S. with the National Football League. The NFL chose SAP's cloud-based collaboration and analytical solutions to transform its fantasy football platform. Starting with the 2013 season, SAP will deliver an even better experience to the four million people who participate in fantasy football each season. No other company in the world is able to deliver the scale and social power that the NFL needs, and we're thrilled to partner with them on this very important initiative. Latin America also delivered an exceptional quarter. Mexico and Brazil were instrumental in driving this growth with really strong performances. One of Brazil's largest companies, Votorantim Industrial, turned to SAP to support their plan for expansion into new businesses and into international markets. They will run supply chain management, transportation management, sustainability solutions, and credit management.
They expect big cost reductions, improved sustainability, and much more intimate relations with their clients. EMEA. EMEA was flattish year-over-year, negative 1%, negative 2% at constant currency, which was a solid performance when you consider the tremendous Q3 we had in EMEA last year, where we grew over 20%. It also stands in contrast to the lackluster European results you've seen from some of our competitors. Emerging geographies such as the Middle East and Africa performed especially well. It was also encouraging to see solid growth in some of the largest mature markets. Here, I'd like to once again congratulate Germany for delivering double-digit growth. In EMEA, we continue to see great customers put their trust in SAP. For example, in the German banking industry, Deutsche Bank once again turned to SAP innovations. Another great win is Ivoclar Vivadent, a leading innovator in the dental industry.
They selected SAP HANA to dramatically improve the speed of data processing and reporting. SAP HANA powers multiple simulations in record time, so better and faster decisions can be made to drive higher customer satisfaction. Asia-Pacific Japan delivered another impressive quarter, growing software revenue 18% overall and 11% at constant currency. This was driven by our two largest economies in this region, Japan and China. Our investments in China are clearly paying off. We're outperforming our competition and becoming ever more relevant to our Chinese customers. We grew in China by more than 40%, and this market is now our sixth-largest market by revenue in the world. A strong driver of this growth in China is our industry solutions. Chongqing Yagong Furay Special Equipment, a China-based company that specializes in metal pressure vessels, selected SAP as its platform to support growth acceleration.
SAP's industrial machinery component solution is expected to reduce manufacturing lead times, lower material costs, and improve overall company profitability. Overall, our regional results show the unparalleled global power and balance of SAP. No other software company is able to serve customers across such a global and diverse footprint. We develop and sell everywhere, as opposed to developing only in one country and then exporting. We are closer to our customers. We provide them choice, openness, and innovative solutions for more efficiency and growth. We understand their business needs in good and bad times. In industries, we're also excited. Our deep expertise across 24 different verticals continues to be a reason customers are turning to SAP. We had outstanding performance across a broad range of industries, including retail, health sciences, manufacturing, and energy, to name a few.
Financial services represents the largest single vertical in the SAP pipeline, and our success in this key industry has not gone unnoticed. SAP was recently positioned as a leader in Gartner's international retail core banking Magic Quadrant, and ranked number 1 in ability to execute. This shows what you can achieve when you have the right plan and approach. Another example of a customer turning to SAP for our industry expertise is Israel Electric Corporation, a large local government utility organization in Israel. They will implement several utility industrial solutions and some of our most advanced innovations, such as SAP HANA and Mobile. These solutions will be the foundation for an intelligent power grid and smart metering. Powered by SAP solutions, IEC customers can better manage and budget their electricity consumption. Ecosystem, we have an update for you.
A key differentiator for SAP is our open ecosystem approach, which promotes choice for our customers and drives co-innovation. We saw a strong growth in partner revenue at over 30%, and today, partner-driven revenue comprises approximately one-third of SAP's license revenue, and we are on track to reach our target of 40% by 2015. For the outlook. In summary, SAP continues to deliver high-value solutions powered by breakthrough innovations. Customers realize this, and they are more and more turning to SAP as the only viable option. Our pipeline for Q4 is strong, and we are confident in our updated 2012 outlook. I'd like to now turn it over to my partner and co-CEO, Jim Hagemann Snabe. Jim?
Thank you, Bill. In 2010, we laid out an innovation-based strategy for SAP. We decided to accelerate our innovations in our core business and to expand into three new innovation areas, mobile, cloud, and in-memory computing. In a market where most IT companies are now reporting negative growth, we today reported, as Bill mentioned, the 11th consecutive quarter of double-digit growth. What I in particular like about the quarter is the clarity. We clearly chose the right strategy, and the trust from our customers is very high. That's why we're winning market share in all areas. Bill reported our top-line performance in the quarter. I'd like to briefly comment on our innovations in our five market categories, so you better understand our competitive strength in terms of innovation. This time, let's start with the new innovation categories, cloud, mobile, and database. Let's first talk about the cloud.
SAP has become a major player in the cloud. If we include Ariba, the SAP cloud business is an 800 million EUR revenue run rate business today. That's more than EUR 1 billion. Over 12 months, new and upsell cloud billings increased 14 times. On an apples-to-apples basis, including SuccessFactors in our 2011 numbers, billings grew 116%. SuccessFactors standalone billings grew 92%, which shows an acceleration of their extreme growth rate as part of the SAP family. We now have more than 17 million users in the cloud. That's four times more than number 2. We're big in the cloud, and we're growing very fast. The engineering team under Lars Dalgaard have delivered some amazing new versions of all of our four line of business cloud categories, My People, My Money, My Customers, and My Suppliers.
With these new innovations, SAP is competing head-to-head with the incumbent cloud vendors, and we are winning because of our integration to the core application and because we have redefined what beautiful, intuitive, and easy-to-consume software looks like. For example, The Timken Company, a U.S.-based producer of friction management and mechanical power transmission, will update its on-premise HR system with SuccessFactors cloud-based BizX talent management suite that combines mobile and social capabilities. SAP will enable The Timken Company to better align its workforce of 21,000 employees in 22 countries to its business strategy. We had our best quarter ever for SAP Business ByDesign, our fifth category in the cloud, the suite in the cloud.
Bilfinger SE, a leader in the global construction industry, chose to extend its relationship with SAP by selecting SAP Business ByDesign for its small subsidiaries, and they will deploy SAP Business ByDesign in more than 30 countries while continuing to run the SAP Business Suite in the main geography and in the headquarter. With our cloud performance and innovations, we are on track to become a profitable 2 billion EUR cloud business by 2015. We're also very pleased to officially welcome Ariba's over 2,700 employees to the SAP family, and Bob Calderoni to the global managing board of SAP. We are truly excited about what we can offer our customers through the Ariba Network, the largest business network in the world. Let's talk about mobile. SAP's mobile solutions are changing the game for our customers and for SAP.
With 119% year-over-year increase in revenue to EUR 48 million, SAP continues to establish itself as the leader in enterprise mobility. We also saw a very strong performance from our Syclo Mobile applications business. With a combination of Sybase, Syclo, and SAP, we have innovated a unique combination of mobile products that help companies manage, build, and run mobile business applications on any mobile device in a secure way. With this, we enable customers to empower their employees and reach consumers in new and exciting ways. A large retailer of greeting cards and gifts selected SAP's mobile solutions as the new platform for their field merchandisers and retail execution application. SAP's mobile application will be used by over 15,000 field merchandisers across 3,800 locations to manage the 49,000 products that are available at any given point in time.
We are on a good track to double our mobile revenue to EUR 220 million this year. Let's talk about database and technology, and in particular, let's talk about HANA. In database and technology, HANA, our flagship in-memory data platform, posted very strong results with EUR 83 million of revenue and triple-digit growth in Q3. HANA's momentum shows that customers recognize the power of a true 100% in-memory based technology in one consistent platform. At TechEd last week, Vishal Sikka presented the first petabyte of data stored in a HANA database. This is the equivalent of 10 years of transactions in a company doing 330 million sales transactions per day. 10 years. HANA is real. It's ready for big data in a big way. Let me be clear, HANA is for all data, structured and unstructured, SAP and non-SAP data.
We're currently replacing hundreds of disk-based databases and business warehouses with HANA, and we are seeing very innovative uses of HANA. For example, an oil and gas customer is using HANA to do cutting-edge analytics on seismic data to increase the likelihood of finding new oil fields. Heading into Q4, we have a significant HANA pipeline, and as said before, we continue to expect to achieve at least EUR 320 million in HANA revenue for the full year. Our Sybase ASE database business is also seeing very strong double-digit growth. Customers are turning to ASE as the database of choice for our Business Suite and other applications. With these breakthrough innovations, SAP remains the fastest-growing database provider in the market. We are clearly transforming the database industry. Let's finally talk about our traditional core business, the applications and analytics.
Our roots are in the applications business that run processes in 24 different industries, and this area remains strong for us. Our innovations in the core applications supported a strong single-digit growth in applications. Companies are consolidating their applications on SAP, which is why we saw many large deals in the quarter. The reason is very simple. We have the most consistent portfolio in the market, and consistency means lower cost of ownership, which is a very important selection criterion in the current economical environment. The same is true in analytics, where our business intelligence software showed strong growth in Q3, the strongest performance the last two years. Our new business intelligence products, Visual Intelligence, and Predictive Analysis, have been extremely well received by the market.
For example, a large U.S.-based retail chain will use SAP BusinessObjects to generate insights that will alter its customer loyalty program in creating customized promotions for its more than 6 million customers and better engage and motivate its 247,000 employees. As you can see, our engineering teams are innovating at high speed in all categories, and we are outpacing competition in every category. However, it's often not just our capabilities in one category that makes us win in the market. Customers are increasingly adopting multiple products across our 5 categories to help them innovate for productivity and growth. They select SAP because our products are designed to fit together, and they deliver real business outcomes. Safran, a world leader in aerospace, defense, and security, selected SAP to help them innovate for growth. They will combine cloud and core application products into solutions throughout all lines of business.
They will motivate talents with SuccessFactors in the cloud, extend reach through mobility, develop enhanced services to customers with the SAP Business Suite, and provide real-time insight to decision-making with HANA and analytics. Let me conclude. Our strong performance in a market where competitors are reporting negative growth shows that SAP has the best strategy and that we're driving a major transformation in the industry. Applications are moving from data centers to the cloud. Data is moving from slow disks to main memory, and users are on the move using mobile devices. We identified exactly these three trends 11 quarters ago and decided to invest in innovation in these areas to drive value for our customers and growth for SAP. We have strong momentum heading into the final quarter of the year and beyond.
We are confident we'll reach the upper end of our full-year revenue guidance, and we are on track to achieve our 2015 ambitions to become a more than EUR 20 billion company in revenue with a 35% operating margin and reach 1 billion people with our innovations. I'd love to now turn over to Werner for additional financial highlights from the quarter.
Thank you, Jim. Both Bill and Jim gave you an overview of a solid third quarter coming off a very tough comparison from last year, especially on the margin. Q3 marked our 11th consecutive quarter of double-digit growth in Software and software-related service revenue. I would like to give you more insight on these results. Before I do that, I want to give you a few details on three topics. Effects from the TomorrowNow provision, non-IFRS adjustments, and changes made to our internal management reporting, which also affects our external segment reporting. Regarding TomorrowNow, I wanted to remind you that our IFRS profit and margin were impacted by the reduction in the provision for the TomorrowNow litigation in the third quarter of 2011. This positively influenced our IFRS results in the third quarter of 2011 by EUR 723 million.
For the nine months ended September 30th, 2011, our IFRS results were positively influenced by 711 million EUR. For this reason, the 2012 and 2011 IFRS results are not fully comparable. In the third quarter of this year, we recorded non-IFRS adjustments of 318 million EUR, largely driven by 152 million EUR for share-based compensation. The share-based compensation expense increased primarily because of the higher share price in the third quarter. Please also note that we have increased our estimates for the non-IFRS adjustments for the full year 2012 compared to the estimates we gave earlier this year. Last quarter, we told you that due to the increased focus on the cloud business, we would establish a separate cloud division. We have now adjusted our internal management reporting to reflect this change.
As our external segment reporting is derived from our internal management reporting, we have the following changes in our segment reporting. As of the third quarter, we now have two divisions, which are further broken down into operating segments. We have created an On-premise division and a Cloud division. The On-premise division will consist of two operating segments called On-premise Products and On-premise Services. The Cloud division will consist of Cloud Applications, and after the integration of Ariba, we intend to create a second Cloud Segment around the acquired Ariba business. These changes in our external segment reporting result in more transparency into our cloud business. Now I want to go into more detail on our recurring revenue streams. Non-IFRS support revenue increased by 10% at constant currency. This steady growing base is driven by the continued trust from our customers.
They show their trust by continuing to adopt our world-class enterprise support offering, which now has an adoption rate of 95%. Non-IFRS cloud subscription and support revenue increased to 80 million EUR in the third quarter, up from 69 million EUR in the second quarter. We continue to see increasing sales synergies between SAP and SuccessFactors. You heard Jim talking about our momentum in billings, which is an important measure for the success of our cloud business. Now some comments on our gross margin for the quarter. Our non-IFRS SSRS gross margin decreased by 10 basis points to 83.4%. The professional service gross margin decreased by 1.6% year over year to 24%, but increased sequentially by 2.8 percentage points from the second quarter. It's important to know that our professional service business is a very important part of our growth strategy, especially with regards to growth in new innovation areas.
We are investing heavily now in those areas to accelerate further growth. The overall gross margin decreased by 80 basis points to 72.1% year over year. Looking at the expense side of the P&L, you can see that non-IFRS total operating expense in the third quarter increased by 20% year over year. From this increase, six percentage points were due to currency and four percentage points came from the addition of SuccessFactors. In addition, our workforce grew by almost 6,800 FTEs year over year, thereof almost 2,300 from acquisitions. The sales and marketing cost increased by 31%, impacting our operating expenses. This led to a sales and marketing ratio of 23.1%, or an increase of 2.5 percentage points compared to prior year.
This increase is mainly driven by organic headcount growth in sales and marketing of around 2,100 FTEs year-over-year, primarily in the cloud and on-premise sales organization to capture further growth opportunities. We already see these additional FTEs contributing to our top line, and we expect to see this trend continue into the fourth quarter. Our non-IFRS operating margin at constant currencies in the third quarter decreased by 2.1 percentage points at constant currencies to 31.1% year-over-year. First of all, it's important to mention we have a very tough comparison from the prior year, where our margin grew by 300 basis points. There were also three main effects which impacted our operating margin in the third quarter.
First, our investment in the cloud business, namely the acquisition of SuccessFactors, which, as you all know, operates at a different margin profile compared to SAP, and this accounted for approximately 100 basis points. Secondly, a year-on-year increase in headcount, which grew organically by 8% compared to the same period in the prior year. This growth was primarily in our sales organization, as mentioned before. Lastly, the continued investment made in our service organization, especially in our new innovation areas, as also mentioned before. The non-IFRS tax rate for the first nine months of 2012 was 26.7%, which was flat year-over-year. Although this is slightly below our guidance range, we are still maintaining our effective tax rate outlook for the year. We had an unusual impact on the earnings per share in the third quarter.
Our third quarter non-IFRS earnings per share was down EUR 0.02 year-over-year. The EPS was negatively impacted by EUR 0.05 per share from a non-operating expense related to the currency hedging of the purchase price for the recently closed Ariba acquisition. Now to cash flow. Operating cash flow for the first nine months crossed the EUR 3 billion mark for the first time, increasing by 3% year-over-year to EUR 3.1 billion. As a result, our free cash flow in the first nine months of 2012 increased to EUR 2.7 billion, or by 2%. The improvement in free cash flow was due to better management of working capital, focusing on receivables Which on January 1st, 2012, was 13% higher than in the previous year. Our DSO is now down to 60 days. We were able to make another two days off the results from previous year.
To finish up, let me say, we have refined our non-IFRS SSRS guidance and have also included the expected contribution from Ariba. We now expect full year 2012 non-IFRS software and software-related service revenue to increase in a range of 10.5%-12.5% at constant currency. Assuming that the macroeconomic environment does not deteriorate, we expect to reach the upper end of this range. Even after including Ariba, we still expect the full year 2012 non-IFRS operating profit to be in a range of EUR 5.05 billion-EUR 5.25 billion at constant currency. Thank you. Now we are happy to take your questions.
Thank you. Operator, please start the Q&A session now.
Hello? Operator?
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 the touchtone 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're received. If you're using speaker equipment today, please lift your handset before making your selections. I repeat, if you would like to ask a question, please press the star followed by one on your telephones. The first question is from Adam Wood, from Morgan Stanley.
Obviously, a very strong quarter in a tough environment. Just wanted to come back on the cloud. Jim, you flagged how SuccessFactors has very clearly accelerated both in revenues and in the billings since you've taken charge of it. As we look to Ariba, you've had a little bit more time to look around that, is there any reason, as you look in that business, that we shouldn't expect a similar acceleration with Ariba? Could you maybe talk a little bit about the opportunities you see there, maybe particularly around the Ariba Network as you start pushing that into your install base? Then secondly, just on the operating leverage in the business. I know you've talked about the rate of hiring, and obviously the dilution from SuccessFactors. Could you give us maybe a little bit of a feel for how you see this going forward?
Does the hiring calm down as we go into 2013? When do we get the benefits of that sales hiring? Maybe just with Q4 specifically, should we expect the operating margins, is it possible for them to be up year-on-year in 4Q this year? Thank you.
Hey. Adam, thanks a lot for your questions. I'll let Jim here start with your cloud question. Clearly, our acquisition strategy has been one of accelerating innovation and top line as the synergy case for the acquisition, the same will be true for Ariba. It is only 20 days ago that we finalized the acquisition. Right now the teams are working in full motion to be ready for SAP Sapphire with all roadmap decisions that we're making. The biggest opportunity that we see is the effect of the network, as you mentioned. We have the largest or most relevant install base in the industry. We believe they touch 62% of all world transactions. You combine that with the largest network in the world, you have something that potentially can accelerate really, really well.
We will see the same effect, hopefully with Ariba, that their growth rate, which was impressive before the acquisition, will accelerate as part of SAP.
Yeah. Adam, your question regarding the hiring. I think we made it clear in the first half that we accelerated hiring across all functions in SAP with a clear focus on revenue-generating FTEs. Now in the third quarter, you have seen that we brought it down to roughly 350. Still mainly in the area of sales and marketing. You can be sure that going forward, we will do the same, also looking for adding resources where we need them on new topics. If we hire externally, then it's very limited with a clear focus on those areas where we serve our customers best. This can be sales and marketing, but this also could be in the area of HANA, where we have a huge traction for our product going forward. From that end, you cannot anticipate that we go with the same hiring pace into 2013.
Thank you. Can I take the next question, please?
Next question is from Philip Winslow from Credit Suisse.
Hi. Congrats, guys, on another great quarter. Just two questions. Starting first with Bill. Obviously, you guys put up another great HANA number, essentially flat quarter-to-quarter. That's pretty impressive considering it tripled quarter-to-quarter Q1 to Q2. What are you seeing in HANA here? What's the feedback from customers, in particular regarding BW on HANA, just sort of what traction you're seeing there. Jim, I really appreciate the fact that you guys are breaking out the profitability of the cloud business. You talked about in 2015 having a profitable cloud business. What are you going to help us think about how this business model should evolve there? Thanks.
Thank you very much, Philip. This is Bill. About half of our HANA business is coming from the BW on HANA, which is very encouraging. The acceptance rate is high. I can only tell you the combination of HANA and the mobile, as well as the cloud, is such unbelievable value to our customers.
One such example was in Milan yesterday, where the owner and founder of a very well-known retail company, high-end, was just citing the fact that under any economic circumstance, his question to me was not whether he could afford it's how quickly we could execute to make it viable in his business model so he could begin captivating his customers and also his employees on the digital promise of the device powered by HANA. There would be no latency between a transaction and the information back to the company, but also that there'd be perfect execution between the retailer and his consumer. It's examples like this that make HANA such a clear choice to our customers. We feel great about the HANA business, whether it's BW to 4HANA or just net new examples of innovation.
One thing I would underscore is we're applying this design thinking and innovation concept to these customer relationships, where you'll actually see SAP go into design thinking exercise, business transformational consultants, and value engineering. The customer understands how we can impact the process and drive the business outcome. A lot of the value coming from HANA is the ability to connect at that solutions level with the customer.
Philip, thanks for the question on the cloud side, very important. We do appreciate you noticing the transparency we're creating here. It's not everyone in the market who is willing to create that kind of transparency. We think it's important because we want to drive a profitable business in the cloud, and we've stated that we will be the first to do that. Here's the logic. There are basically two factors. First of all, no one is profitable in the cloud today. We know that there's been recent IPOs, and all of these companies are losing money. There are two factors that get the opportunity to create profits and is making you lose money at the beginning.
The first one is you need to invest upfront in building an application and the infrastructure for all customers. You will have no customers before you're done. Then it's all about getting more customers on. That cost base will grow with minor small steps as you add more customers. Your revenue will be exponentially growing. You just need volume of customers once you've done the investment to get profitable. Secondly, you need a sales force. What we're seeing in the players who are pure play cloud, that they don't have a sales force when they begin. Whenever they get close to a profitability, they need to invest all the money in marketing and sales. This is where SAP is different. We do have a sales force. We already have the customers.
We are seeing that the customers appreciate having both the cloud and the on-premise solution from one vendor pre-integrated out of the box. That's why we believe we can be faster profitable in the cloud. Maybe a last comment. If you don't build for cloud, but you move stuff that was never built for cloud into the cloud, my prediction is you'll never be profitable in the cloud because you don't have the simplicity of your infrastructure that you need to have the cost structure to be profitable, ever. That's why all the assets we have in the cloud were built for the cloud from the beginning, including, of course, SuccessFactors who grew up in the cloud.
Okay, thank you. Let's take the next question, please.
The next question from Walter Pritchard from Citigroup.
Hi, it's Walter Pritchard from Citi. I'm wondering just on the SuccessFactors side, you had impressive growth there. I'm wondering if you could talk about the install base growth versus SuccessFactors standalone and where you saw the source of that growth acceleration. Also related to the cloud, you've had a EUR 2 billio n goal, pre-Ariba. I'm wondering if there's any care to update that number, given that you did buy a significant player in the cloud that does add to revenue.
Thanks for the question, Walter. We actually see most of the growth and the acceleration of SuccessFactors coming from the install base, and that's, I think, the good news. It shows that the strategy of combining a cloud player with a pure cloud model into the SAP install base was the right choice. We believe that will continue. We have accelerated the innovation pace in the cloud, and we now have a complete HR solution, a finance solution, a CRM solution, and a supplier solution with Ariba, which means we also have the most complete portfolio in the cloud, and this will drive now the acceleration of our growth in the cloud going forward. You mentioned the EUR 2 billion. We have a run rate today of EUR 800 million, if you take the last quarter, including Ariba.
Actually, the EUR 2 billion included the acquisition of Ariba as well. We will see how this thing is evolving, but clearly, we are a major player today, and we're the fastest growing.
Okay. Thank you very much. Next question, please.
Next question is from Ross MacMillan from Jefferies.
The first is just, we see a really strong growth in the dollar value of deals, and I was just curious if you could touch on that again and help us understand what's driving that. Is it a function of the macro environment, i.e. larger customers are spending more, or is there something else there? Second of all, I was really curious, as I look at the ex-HANA, ex-mobility license growth on a constant currency basis, you're still actually growing that core business at a reasonably good rate. Looking forward, as you think about porting the suite onto HANA, what's your thoughts around the potential for the core to accelerate as we move beyond 2012? Thanks a lot.
Sure. Thank you very much, Ross. A couple of things. In terms of the deal size, particularly in the greater than 5 million category, there were more larger deals in the quarter in that category of our business, that segment. What you're seeing is when you innovate and you have the install base that SAP has, customers tend to not just focus on any one thing. They look at the bill of materials across the enterprise in a more broad way. I can say that prices are holding ever steady. It's not any sales technique. It's simply customers looking at the enterprise value of an SAP relationship in all aspects of the 5 market category and that strategy.
We had some very signature wins, some of them that we've told you about and some of them that we didn't get the release from the customer to tell you about. They are really stunningly interesting. HANA and mobility, you're absolutely right. About half the growth rate is made up of that just means that half the growth rate is left in the core, that's still growing ever steady. The one thing I can tell you, I'm sure Jim would like to add his comments as well, looking forward to the suite on HANA, there's several different ways to monetize that. One is the suite on HANA itself. One is HANA as a solution within, say, an industry or a specific buying center. One is just simply putting HANA in component parts of things we're already doing.
There's basically three different angles that we're looking at to keep it simple for the customer, make it bite-sized enough where it has to be industry specific enough where it should be. Also, if customers want to commit the whole suite and the whole enterprise to HANA, they should be able to do that too. SAP will be able to execute on those three angles for the customer.
If I can comment on the suite on HANA just briefly. We always had the intent that eventually transactional systems would run on HANA. We today have SAP Business One running on HANA, and we are working in the lab on the suite on HANA. We've not released this product. I want to just make sure you understand that. Why is this so important? Because the moment the transactional system runs on HANA, we can drive the next wave of simplification of infrastructure. At that moment, there's no reason to have separate Business Warehouses that have separate storages. They can just read the data directly from HANA. With that, you can get rid of a lot of the complexity, reduce, again, hardware costs in the company, and free up money for innovative software.
That's really the strategic intent behind this, and you'll see us moving ahead at high speed on that topic.
Okay, thank you. The next question, please?
Next question from Laura Lederman from William Blair.
Thanks for taking my question. Can you talk a little bit about ratability in the quarter in U.S. and Europe? Some other vendors have said that they've seen some issues with deterioration in the U.S. Obviously, you've had a good quarter in U.S., but I wanted to understand ratability and the same thing in Europe, and then I have a follow-up question. Thank you.
Like the linearity, is that what it is? Yeah. Laura, the quarter was not inconsistent with other third quarters in terms of the linearity that was in the quarter. When we looked at the history, it came in typically for a third quarter. You're talking about the percentage out of the regions? Is that what I'm hearing? Or linearity?
Also climate in Europe and linearity-
Oh
in the quarter.
Let's just talk about the linearity first. The linearity was consistent with other third quarters. They're pretty back-end loaded with holiday in Europe and so on. That wasn't anything awe-inspiring. The growth rates, you're familiar with. What is it about your question? Like, what percentage of the revenue came out of each region? I'm not quite sure what you're-
No, no, no. Just linearity. In other words-
Yeah
Was it a normal C in terms of linearity in Europe and in U.S., and was there any weakening at the end of the quarter in the U.S. like other vendors have seen?
Right. That's what I thought you were asking. Yeah. It was consistent with other quarters in Q3, which were back-end loaded, and no, it did not decelerate. When we-
Okay
We finished up the quarter where we basically had expected to finish up the quarter. What was interesting about this Q3, as you know, it finished on a weekend. Those are never peaceful weekends. This one was no exception, but it wasn't anything unexpected. It's consistent with other Q3s. We looked at the linearity and compared it to other years. It's okay.
The pipeline right now in Q4 is commensurate with our reiterating the guidance at the upper end. We got a good handle on the overall business.
The second question.
Please go ahead, Laura.
I'm sorry?
Please go ahead, Laura.
The second question. Yeah. The second question is on HANA. How much of the HANA buys are second or third buys, and how much of it still in proof of concept? I'm trying to get a sense of existing customers of HANA buying more and more and using them for different use cases, and how often you see that.
What we saw at the beginning of the HANA era was the company's excitement about the technology going for proof of concepts or smaller projects. Clearly, we're seeing now two things happening. Those companies were very, very excited. I think we exceeded their expectations on what HANA can do. They are now going ahead. We're seeing the first enterprise kind of decisions for HANA, which means they're betting on HANA to be their future infrastructure base. Then, of course, we're getting the volume through now, that much more companies are going for HANA.
Because it's a proven technology, that creates now another base for upsells and second phases.
Yeah, indeed. The other thing is, just to build on what Jim is saying, we are in a lot of conversations now which are non-SAP environments on HANA, which is particularly encouraging. I would also say seeing companies like P&G make a move to the ASE is further evidence that we're a power player in the database industry, which includes HANA but is not limited to HANA in certain instances. Non-SAP, big install customers now looking at SAP as a database leader. Of course, the part that has us very excited is where we're in non-SAP environments, and HANA is clearly the Trojan horse into these accounts.
Okay. Thank you.
Great. Thanks.
Let's take next question, please.
Next question is from Michael Briest from UBS.
Great. Thank you. I guess following up on Ross's question, the large deal count was significant this quarter and last quarter. Typically these large deals don't all get recognized in the quarter. It strikes me that you're building up a good degree of backlog and visibility, and I just wonder if you can talk about, as you go into Q4, how your visibility on phased deals is this year compared to, say, last year. Secondly, just in terms of acquisitions, I think, Bill, you were quoted in the press a few weeks ago as saying that there's no further need to do large cloud deals. Some cloud companies are very highly valued despite not having much in the way of revenues.
Can you sort of clarify what you might consider to be a large deal, indeed decide whether you're going to do any more or not? Thanks.
Go ahead, Werner.
First of all, regarding the large deal contribution, in the third quarter, roughly 80% of the software revenue came from deals larger than EUR 5 million. Normally, we have a range of 20%-35%. This shows that we had a very clear focus on large deals in the third quarter. We see this continuing going into the fourth quarter.
On the acquisitions, Michael, the fact is we had identified these five market categories as we've repeatedly stated as the strategy for the company. When we made the move on SuccessFactors, it was the DNA, it was also the leader. With Bob, we got a beautiful business network here with Ariba, Bob Calderoni, and his management team. Right now there is just no impending event for such a large acquisition. We feel like we have the assets we need to execute on our strategy and deliver for our shareholders.
Right. Thank you.
Thank you. We have time for one final question, please.
The question comes from Rick Sherlund from Nomura.
Thanks. First on competition, I wonder if you could just talk for a moment about Workday, what you're seeing, what your thoughts are there going forward on the competitive side. Also on the competition side, if you'd touch, Jim, maybe on what we heard from Oracle recently in terms of their multi-tenant database versus multi-tenancy on the application side. Share with us your thoughts as they try to promote the idea of running through a multi-tenant database and in-house, sort of behind-the-firewall hosted private cloud application.
Right. Jim here, let's talk a little bit about competition in the cloud. Clearly, we see the pure play cloud players as the biggest competitors in the cloud. Most of the traditional players don't really understand cloud, in my opinion, and it took us a while as well. We are seeing, at customers now, significant win rates against the pure play players. I believe that there are two main reasons for that. First of all, our cloud solution is very competitive in all of the categories that we're in, and it's pre-integrated with the stuff that SAP customers already have, but open to any back end. I think this gives customers a significant reduction of effort when they choose point solutions for the cloud.
As you see us evolve the user experience, we believe will play a major role, and I really encourage you to take a look at the user experience that we've been delivering in the latest versions. It's second to none. We will win because of user experience. That is one very important part. The other one is actually to the profitability. Customers are concerned that their choice of vendor, if they keep making losses, might not be around. There, of course, we have a huge benefit of being SAP and having the cash flow that we have. That's the competitive situation.
Maybe a last comment on that, we now cover all the four dimensions of a business from a line of business, My People, My Money, My Customers, My Suppliers, which means you can have one company doing all, and that is, of course, a competitive advantage. On the multi-tenant database side, I don't believe that the technology discussion is what makes the cloud successful. What you need to be in the cloud is you need a system that is designed for the cloud, which makes it easy to consume for the customer and have low TCO for you as a supplier. We believe that requires multi-tenancy, not just on the database. All our solutions have that today.
At the end of the day, we can have a lot of tech talk, but you measure it on how many customers are consuming it and what is your cost of supporting them, and that's where we believe will be the most profitable business and the first profitable business in the cloud.
Rick, one of the examples that I would give you to support what Jim had said about SAP and the strong loyalty of our customers and the install base. You take a company like Timken in Ohio, which was one of the examples cited today. They saw all the alternatives, all of the alternatives. In fact, were not prepared to even go with SAP. When they saw SuccessFactors understood the integration of that solution with what they had already invested in with SAP, and the relationship plan going forward and our roadmap, that's what won the day. That is why the win rate that SuccessFactors and SAP Cloud is now enjoying is much, much higher. As time goes on, it keeps getting better and better. Keep an eye out for that.
Can you update us on the success you're having with the integration with SuccessFactors? Is that completed? I know Lars was enthusiastic about uncoupling financials and HR from ByDesign and selling them as line of business. Has that been accomplished, and is that gaining traction in the market now?
Rick, the answer to both question is yes. Before we started the segment reporting, we have worked out all of the ingredients for the cloud business. We have now a cloud business, which includes SuccessFactors and the SAP side managed by Lars and his team, fully functional, fully integrated, if you will. Then on the product side, Jim referred to this one, we have made a big step forward with the four categories, My Money, My Suppliers, My Customers, and My People, with the basis being the HCM solution from SuccessFactors. On top, we have Business ByDesign, and all is integrated with on-premise. From a customer perspective, what do you want more?
The one thing that you guys got to keep in mind too, is Business One on HANA. This is a category killer. If you think about some fast-moving markets, whether it's Brazil or it's China, as an example, once the light bulb goes on that SAP can provision Business One in the cloud on HANA and make these small enterprises real-time, easy to implement, low cost, it is totally a game changer. We are localizing Business One on HANA in Brazil, as an example. It'll be a big hit in China, too. Keep an eye on Business One on HANA in the cloud.
Well, thank you very much. This concludes the financial analyst earnings call for today. Thank you all for joining, and goodbye.