Ladies and gentlemen, thank you for standing by. Welcome to the SAP 20 12 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. I would now like to turn the conference over to Mr.
Stefan Grober. 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 Q3 2012. I'm joined by Co CEOs, Bill McDermott and Jim Hagemann Snade 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'll then have time for Q and 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 20F for 2011 filed with the SEC on March 23, 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 Q3 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 Q3. We once again set new records. We exceeded €1,000,000,000 in software revenue for the first time in the 3rd 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 United States 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 4,000,000 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.
1 of Brazil's largest companies, Votura Team 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 2 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 6th largest market by revenue in the world. A strong driver of this growth in China is our industry solutions.
Changchi Yagong Fure 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. And 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 1 third of SAP's license revenue and we are on track to reach our target of 40% by 2015. So 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 3 new innovation areas: mobile, cloud and in memory compute. 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 5 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 €800,000,000 revenue run rate business today. That's more than US1 $1,000,000,000 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%.
And SuccessFactors stand alone billings grew 92%, which shows an acceleration of their extreme growth rate as part of the SAP family. We now have more than 17,000,000 users in the cloud. That's 4 times more than number 2. So we are big in the cloud and we are growing very fast. The engineering team on the Last Algarve have delivered some amazing new versions of all of our 4 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, Timken, a U. S.-based producer of friction management and mechanical powered 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 Timken to better align its workforce of 21,000 employees in 22 countries to its business strategy. And we had our best quarter ever for SAP Business by Design, our 5th category in the cloud, the Suite in the cloud.
Filthy AG, a leader in the global construction industry, chose to extend its relationship with SAP by selecting Business by Design for its small subsidiaries and they will deploy Business by Design 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 €2,000,000,000 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 supplier 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 €48,000,000 SAP continues to establish itself as the leader in the enterprise mobility. We also saw a very strong performance from our cyclo mobile applications business. With the combination of Sybase, cyclo and SAP, we have innovated a unique combination of mobile products that help companies manage, build and run mobile business applications, 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 19 49,000, sorry, products that are available at any given point in time. We are on a good track to double our mobile revenue to EUR 220,000,000 this year. Now 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 €83,000,000 of revenue and triple digit growth in Q3.
Hane'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 1st petabyte of data stored in a HANA database. This is the equivalent of 10 years of transactions in a company doing 330 1,000,000 sales transactions per day, 10 years. So HANA is real. It's ready for big data in a big way.
And let me be clear, HANA is for all data structured and unstructured, SAP and non SAP data. We are currently replacing hundreds of disk based databases in 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 likelihood of finding new oilfields. Heading into Q4, we have a significant HANA pipeline. And as said before, we continue to expect to achieve at least €320,000,000 in HANA revenue for the full year.
Our Sybase AZ database business is also seeing very strong double digit growth. Customers are turning to AZ 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 and we are clearly transforming the database industry. Now 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. And 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 criteria in the current economic environment.
The same is true in analytics where our business intelligence software showed strong growth in Q3, the strongest performance the last 2 years. Our new Business Intelligence products Visual Intelligence and Predictive Analytics have been extremely well received by the market. For example, a large U. S.-based retail chain will use SAP BusinessObject generate insights that will alter its customer loyalty program to in creating customized promotions for its more than 6,000,000 customers and better engage and motivate its 247,000 employees. So as you can see, our engineering teams are innovating at high speed in all categories and we're 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 success factors 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 are 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 €20,000,000 company in revenue with a 35% operating margin and reach 1,000,000,000 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 Q3 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 insights on these results. Before I do that, I want to give you a few details on 3 topics: effects from the Tomorrow Now provision, non IFRS adjustments and changes made to our internal management reporting, which also affects our external segment reporting.
Regarding tomorrow now, I wanted to remind you that our IFRS profit and margin were impacted by the reduction in the provision for the Tomorrow Now litigation in the Q3 of 2011. This positively influenced our IFRS results in the Q3 of 2011 by 723 €1,000,000 For the 9 months ended September 30, 2011, our IFRS results were positively influenced by €711,000,000 For this reason, the 2012 2011 IFRS results are not fully comparable. In the Q3 of this year, we recorded non IFRS adjustments of €318,000,000 largely driven by €152,000,000 for share based compensation. The share based compensation expense increased primarily because of the higher share price in the 3rd 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 Q3, we now have 2 divisions, which are further broken down into operating segments. We have created an on premise division and a cloud division.
On the on premise division, we will consist of 2 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 strength. 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 IFS cloud subscription and support revenue increased to €80,000,000 in the 3rd quarter, up from $69,000,000 in the 2nd quarter. We continue to see increasing sales synergies between SAP and SuccessFactors. You had 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 IFS SSIS gross margin increased by 10 decreased by 10 basis points to 83.4%. The professional service gross margin decreased by 1.6 percentage points year over year to 24%, but increased sequentially by 2.8 percentage points from the 2nd 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 percent year over year. Looking at the expense side of the P and L, you can see that non IFS total operating expense in the Q3 increased by 20% year over year. From this increase, 6 percentage points were due to currency and 4 percentage points came from the addition of success factors. In addition, our workforce grew by almost 6,800 FT feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet feet Es 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 percent 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 We already see these additional FTEs contributing to our top line and we expect to see this trend continue into the Q4. Our non IFRS operating margin at constant currencies in the 3rd 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 high we have a very tough comparison prior to from the prior year where our margin grew by 300 basis points. There were also 3 main effects, which impacted our operating margin in the 3rd quarter.
First, our investment in the cloud business, namely the acquisition of Secdes, which as you all know operates at a different margin profile compared to SAP and this accounted for approximately 100 basis points. 2nd ly, 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. And 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 1st 9 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 Q3. Our Q3 non IFRS earnings per share was down 0 point 0 $2 year over year. The EPS was negatively impacted by 0 point 0 $5 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 1st 9 months crossed the EUR 3,000,000,000 mark for the first time, increasing by 3% year over year to EUR 3,100,000,000. As a result, our free cash flow in the 1st 9 months of 2012 increased to €2,700,000,000 or by 2%. The improvement in free cash flow was due to better management of working capital focusing on receivables, which on January 1, 2012 was 13% higher than in the previous year. Our DSO is now down to 60 days. We were able to make another 2 days off the results from previous year.
To finish up, let me say, we have refined our non IFRS SSIS guidance and have also included the expected contribution from MARIBOR. We now expect full year 2012 non IFRS software and software related service revenue to increase in a range of 10.5% to 12.5 percent at constant currencies. 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 5 €500,000,000 to €5,250,000,000 at constant currency. Thank you.
Now we are happy to take your questions.
Thank you. Operator, please start the Q and 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. And the first question is from Adam Wood from Morgan Stanley.
And obviously a very strong quarter in a tough environment. Just wanted to come back on the cloud. Jim, you flagged how SuccessFactors is very clearly accelerated both in revenues and in the billings since you've taken charge of it. As we look to Ariba and 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 within Areeva? Could you maybe talk a little bit about the opportunities you see there, maybe particularly around the network as you start pushing that into your installed base?
And then secondly, just on the operating leverage in the business. Vinnie, 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're seeing this going forward? Does the hiring calm down as we go into 2013? When do we get the benefits of that sales hiring?
And 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? So 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 and the same will be true for Ariba. It is only 20 days ago that we finalized the acquisition.
And so right now the teams are working in full motion to be ready for Sapphire with all road map decisions that we are making. And the biggest opportunities that we see is the effect of the network as you mentioned. We have the largest or most relevant installed base in the industry. We believe they touch 62% of all world transactions. You combine that with the light that would be cool.
You
have something that potentially can accelerate really, really well. And so we will see the same effect hopefully with Ariba that the growth rate which was impressive before the acquisition will accelerate as part of SAP.
Yes. And 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 Q3, you have seen that we brought it down to roughly 350,000,000 still mainly in the area of sales and marketing. And you can be sure that going forward, we will do the same.
Also looking for adding resources where we need them on new topics. And if we hire externally, then it's very limited with a clear focus on those areas where we serve our customers back. This can be in sales and marketing, but this also could be in the area of HANA where we have a huge, huge traction for our products going forward. So 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, and congrats guys on another great quarter. Just two questions and starting first with Bill. Obviously, you guys put up another great HANA number, essentially flat quarter to quarter and that's pretty impressive considering it tripled quarter to quarter Q1 to Q2. What are you seeing in HANA here? And what's the feedback from customers in particular regarding Business Warehouse on top of HANA?
Just sort of what traction you're seeing there? And then Jim, I really appreciate the fact that you guys are breaking out the profitability of the cloud business. You talked about in 2015 hitting a profitable having a profitable cloud business. Wonder if you could help us think about how this business model should evolve there? Thanks.
Well, thank
you very much, Philip. This is Bill. About half of our HANA business is coming from the BW to HANA, which is very encouraging. So the acceptance rate is high. And 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. 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, so 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. So we feel great about the HANA business, whether it's BW to HANA 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, so 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.
And Philip, thanks for the question on the cloud side, very important. And 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 1st to do that. And here's the logic.
There are basically two factors. So 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 make you 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, but you will have no customers before you're done. And then it's all about getting more customers on. So that cost base will grow with marginal small steps as you add more customers, but your revenue will be exponentially growing. And so you just need volume of customers once you've done the investment to get profitable. Secondly, you need a sales force.
And so what we're seeing in the players who are pure play cloud that they don't have a sales force when they begin. And whenever they get close to a profitability, they need to invest all the money in marketing and sales. And this is where SAP is different. We do have a sales force. We already have the customers.
And we are seeing that the customers appreciate having both the cloud and the on premise solution from 1 vendor pre integrated out of the box. That's why we believe we can be faster profitable in the cloud. And 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.
And the next question is from Walter Pritchard from Citigroup. Maybe you have a question.
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 installed base growth versus SuccessFactors standalone and where you saw the source of that pre your rebound. 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?
So thanks for the question, Walter. We actually see most of the growth and the acceleration of SuccessFactors coming from the installed base. And that's I think the good news. That shows that the strategy of combining a cloud player with a pure cloud model into the SAP installed base was the right choice. And we believe that will continue.
And 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 Aripa, 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 €2,000,000,000 So we have a run rate today of €800,000,000 if you take the last quarter including Ariba. And actually the SEK 2,000,000,000 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.
Thanks a lot. Two questions if I could. So 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? And then 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. But looking forward, as you think about porting the suite on to HANA, what's your thoughts around the potential for the core to accelerate as we look 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 $5,000,000 category, there were more larger deals in the quarter in that category of our business, that segment. And what you're seeing is when you innovate and you have the installed 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.
And I can say that prices are holding ever steady. So 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, but they are really stunningly interesting. And then HANA and Mobility, you're absolutely right, about half the growth rate is made up of that, but that just means that half the growth rate is left in the core and that's still growing ever steady.
The one thing I can tell you and then 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. 1 is the Suite on HANA itself. 1 is HANA as a solution within say an industry or a specific buying center. And then one is just simply putting Hana in component parts of things we're already doing. There's basically 3 different angles that we're looking at to keep it simple for the customer, make it bite size enough where it has to be industry specific enough where it should be.
And then 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.
And I can comment on the sweetheart, Hahn, just briefly. We always had the intent that eventually transactional systems will run on HANA. And we today have Business 1 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.
And 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. So 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 is from Laura Lederman from William Blair.
Yes. Thanks for taking my question. Can you talk a little bit about rate of billing in the quarter in U. S. And Europe?
Some other vendors have said that there's seen some issues with deterioration in the U. S. Obviously, you had a good quarter in U. S, but I wanted to understand ratability and same thing in Europe. And then I have a follow-up question.
Thank you.
Like the linearity, is that more of it? Yes. So Laura, the quarter was not inconsistent with other 3rd quarters in terms of the linearity that was in the quarter. And when we looked at the history, it came in typically for a third quarter. You're not asking you're talking about the percentage
out of the regions?
Is that what I'm hearing or linear?
Also climate in Europe and linearity in the quarter.
Okay. So let's just talk about the linearity first. So the linearity was consistent with other 3rd quarters. They're pretty back end loaded with holiday in Europe and so on. So that wasn't anything awe inspiring.
And then the growth rates you're familiar with. So 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 seeing.
No, no, no, no. Just linearity. In other words, was it a normal in terms of linearity in Europe and in U. S. And was there any weakening at the end of this quarter in the U.
S. Like other vendors have seen?
Right. That's what I thought you were asking. Yes. So it was consistent with other quarters in Q3, which were back end loaded. And no, it did not decelerate.
So when we finished up the quarter, 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. And those are never peaceful weekends. And 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. And the pipeline right now in Q4 is commensurate with our reiterating the guidance at the upper end. So we got a good handle on the overall business.
The second question is on HANA. How much of the HANA buys are second or third buys? And how much is still in proof of concept? I'm trying to get a sense of the proof of customers of how to buy more and more and use them for different use cases and how often do you see that?
What we saw at the beginning of the HANA era was the company is excited about the technology going for proof of concepts or smaller projects. And clearly, we're seeing now 2 things happening. Those companies were very, very excited. I think we exceeded the expectations on what HANA can do. And they are now going ahead.
We're seeing the 1st enterprise kind of decisions for HANA, which means they're betting on HANA to be their future infrastructure base. Technology. And that creates now another base for upsells and second phases.
Indeed. And 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. And I would also say seeing companies like P and G make move to the ASC 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. So non SAP, big install customers now looking at SAP as a database leader. And then 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.
Thanks, Linda.
Next question
is from Michael Briest from UBS.
Great. Thank you. I guess following up on Ross' question, the large deal count was significant this quarter and last quarter. And typically these large deals don't all get recognized in the quarter. So 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? And then secondly, just in terms of acquisitions, I think Bill you were quoted in the press a few weeks ago 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 and 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 Q3, roughly 80% of the software revenue came from deals larger than €5,000,000 Normally, we have a range of 20% to 35%. This shows that we had a very clear focus on large deals in the 3rd quarter and we see this continuing going into the Q4.
And then on the acquisitions, Michael, the fact is we had identified these 5 market categories as we've repeatedly stated as the strategy for the company. And when we made the move on SuccessFactors, it was the DNA, it was also the leader. And with Bob, we got a beautiful business network here with Ariba, Bob Calderoni and his management team. And 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.
And the question comes from Rick Cherilyn from Nomura.
Thanks. First on the 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? And 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 and 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. So, 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. And most of the traditional players don't really understand cloud in my opinion and it took us a while as well.
We are seeing ad customers now significant win rates against the pure play players. And I believe that there are 2 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.
And as you see us involved 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. So 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. And there, of course, we have a huge benefit of being SAP and having the cash flow that we have. So 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 supplier. And we believe that that requires multi tenancy, not just on the database. And all our solutions have that today.
And 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 1st profitable business in the cloud.
And 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 installed 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, we're not prepared to even go with SAP. But 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 in our roadmap, that's what won the day. And 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. So keep an eye out for that.
And can you update
us on the success you're having and what the integration with SuccessFactors? Is that completed? And I know Lars was enthusiastic about uncoupling financials and HR from by design 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 questions is yes. We have before we started the segment reporting, we have worked out all of the ingredients for the cloud business. So 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. And then on the product side, Jim referred to this one, we have made a big step forward with the 4 categories: my money, my supplier, my customer and my people with the basis being the HCM solution from SuccessFactors. But on top, we have business by design and all is integrated with on premise.
So from a customer perspective, what do you want more?
The one thing that you guys got to keep in mind too is business 1 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. And we are localizing Business One on HANA in Brazil as an example. It will be a big hit in China too.
Keep an eye on Business 1 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.