Good afternoon ladies and gentlemen and welcome to today's SAP conference call. Following the opening comments an interactive Q&A session will be available. I would now like to hand the call over to Stefan Gruber, Head of Investor Relations. Please go ahead sir.
Thank you, g ood morning or good afternoon, t his is Stefan Gruber. Thank you all for joining us to discuss SAP's preliminary results for the first quarter 2012. I'm joined by Co-CEOs Bill McDermott and Jim Snabe, and by CFO Werner Brandt. Bill and Jim will begin the call with remarks on the quarter's performance. We'll then have time for Q&A. Before they get started I want to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as 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, the SEC, including SAP's annual report on Form 20-F 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 statement which speak only as of their date. Before I turn it over to Bill and Jim, I want to inform you that we'll be keeping the conference call today to about 20 minutes and that we will not be able to provide the normal in-depth discussion of our quarterly results a nd our Q&A will be limited to those numbers we have given.
The full discussion will be reserved for full first quarter results which will be released on April 25. Therefore please keep this in mind when you ask your questions later on. With that I would like to turn the call over to Bill.
Thank you very much, Stefan, and thank you all for joining our call today. We appreciate your time. Earlier we reported preliminary results for the first quarter of 2012. Software and software-related service revenue in the first quarter of 2012 is expected to be approximately €2.6 billion. This represents a 12% increase year over year and a 10% increase at constant currencies within the range of our annual guidance. We expect first quarter software revenue to be approximately €637 million, which represents a 4% increase from the previous year's first quarter and a 1% increase at constant currency. Given our robust pipeline, we are confident for both Q2 and the full year of 2012. Therefore, we are confirming our full-year revenue and profit guidance.
Specifically, we expect second quarter 2012 software revenue to increase in a range of 15% to 20% at constant currencies and second quarter software and software-related service revenue to increase in a range of 14% to 16% at constant currencies. SAP does not plan to introduce quarterly guidance on a regular basis, but we want to give you full transparency and a clear indication of where we stand today. Let me provide you with some additional color on our regional performance. Following a record 2011, our strong momentum continued in many markets around the world. We achieved another record quarter in Asia-Pacific Japan. We also had strong performance in key growth markets such as Latin America and Germany. The company had sales execution issues in North America which impacted our first quarter performance.
Rest assured, these issues have swiftly been resolved and the necessary steps have been taken to ensure that North America is back on track. After a record fourth quarter 2011, some European markets started a little bit more slowly but they are well on track. We've evaluated all these operations. Customers continue to see SAP as the trusted innovator in the business applications marketplace. They embrace our customer-focused innovation strategy and our leadership and our workforce are more highly motivated than ever and we are very confident that we will deliver a strong and robust 2012. Over to you Jim.
Thank you very much Bill a nd thanks everyone for joining. As you may recall w e launched our innovation-based strategy back in 2010, focusing on doubling our addressable markets through customer-driven innovation in our core business a s well as by adding three new areas of innovation: cloud, mobile, and in-memory computing. In 2011, we demonstrated solid execution on this strategy, resulting in the strongest financial performance of SAP in our history. We said 2012 will be all about accelerating that innovation strategy. As Bill just mentioned, we are committed to our 2012 ambitions. We will extend our leadership in applications, analytics, and mobile markets, as well as strive towards leadership in the cloud and the database markets. Our deep industry and line of business expertise across these markets remains the unique value proposition that SAP brings to its customers.
The execution issues that impacted our results in the first quarter were local. They are at rest and have nothing to do with change in customer demand in general. Demand for our innovative business software remains high. In fact w e continue to see strong execution in our innovation, accelerating the pace of new products to the market. Let me give you a couple of examples. Our cloud business is gaining momentum with a strong positive impact from SuccessFactors. We are now a leading cloud player and the combined cloud portfolio showed very strong double-digit growth in billings year over year. For our latest version of B1, for small and medium-sized companies, we were able to announce general availability two months ahead of the original schedule. We also extended our leadership in enterprise mobility with the announcement of the acquisition of Cyclo, a leading provider of mobile applications.
Earlier this week, and also well ahead of schedule, we announced the general availability of SAP Business Warehouse powered by SAP HANA, which will allow us to offer our real-time in-memory analytics to more than 13,000 SAP Business Warehouse customers. We therefore feel confident in reaffirming our outlook for 2012 and expect full-year 2012 non-IFRS software and software-related services revenue to increase in a range of 10% to 12% at constant currencies. This includes a contribution of up to two percentage points from SuccessFactors business. We also reiterate the expectation of a full-year 2012 non-IFRS operating profit to be in a range of €5.05 billion to €5.25 billion at constant currencies. In closing let me say we will continue to focus on our customers and on our innovations to drive growth. We remain well-positioned to capitalize on the major technology trends in the market, including big data, mobility and cloud.
We will continue to accelerate our pace of innovation, and we are still on track to achieve our 2015 ambition to become a €20 billion company with a profitability of 35%. With that I thank you and we will now be happy to take your questions. I'll hand over to the operator. Thank you.
Thank you sir. If you'd like to ask a question at this time, please press the star or asterisk key followed by the digit one on your telephone keypad. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find your question has already been answered y ou may remove yourself from the queue by pressing star two. Once again, please press star one to ask a question. We'll now pause for just a moment to assemble the queue. We'll now move to our first question today from Adam Dennis Wood of Morgan Stanley. Please go ahead.
Hi t hanks very much for taking the question. I really just wanted to focus in on the guidance you've given for the second quarter. It's very helpful to have a view on Q but this is the first time in a long time SAP's been willing to give sequential quarterly guidance. Could you just maybe help us out a little bit in what gives you the confidence to give that two-Q guide, whether it's some metrics around the pipeline close rates, maybe it's some metrics around the deals that have closed, maybe at the start of the second quarter that slipped out the first, just to reassure us why you're so confident on that second quarter outlook? Thank you.
Hi Adam t his is Bill McDermott. That's actually why we did it, because we wanted to give you that full transparency into the business. The pipeline worldwide is very strong, s ome of the deals that didn't happen in the first quarter have already happened and we adjusted the leadership team where we needed to, such as North America, to get the focus back on the coverage model and the execution that we believe in. We wanted to let you know that the business looks really strong. We've reviewed all the operations worldwide. Everybody got a chance to put their plan in front of us and they got some clear direction on what we expect and we like the way the business looks everywhere around the world and North America also will be back on track in Q2. You now know what we know.
To add to this, Adam, I think we did this by purpose, based on what Bill said, to avoid unnecessary concerns and I would say wrong conclusions on our strategy around customer-centric innovation. That was very important for us. Based on what Bill said, we saw that we have a very strong momentum in Q2, and that's what we wanted to share with you.
Is there any way you could put any numbers around that in terms of coverage ratios now versus where you were or just some numbers around that just to help us get the visibility on that confidence?
On the pipeline, you mean? Bill, do you mean the pipeline, Adam?
Whether it's coverage ratios or the size of the pipeline versus where it was at the start of the quarter, just something, some numbers just to give us that same confidence that you feel.
Yeah, I think the best way to tell the story is we measure the business in real time. We use SAP HANA and our CRM system, and we all have our iPads with clear dashboards. If you look at the rolling four-quarter pipe and the way it looks in Q2, the coverage rates that we have in our pipeline compared to our forecast is commensurate with where it should be based on history. We also have evaluated every deal that's moving in the company, and that's how we derived our number, and we gave you a preliminary look at the guidance because we wanted you to know that the business looks really good.
Okay, thank you very much.
Thank you. Let's take the next question, please.
Certainly thank you. Our next question now comes from Ross MacMillan from Jefferies. Please go ahead, sir.
Thanks a lot. Bill I know you guys have made some changes to the sales coverage model and I'm wondering, A, if you think that had any impact here, and, B, do you think that those changes get bedded down quickly enough so that by the time we're in this current quarter Q2, we're past that potential disruption? Thanks.
Yeah, Ross, just to absolutely answer that question with total clarity, the coverage model was implemented appropriately all over the world. We go after the five market categories. What happened in North America was a slight deviation from that by combining industry with geo which doesn't work. We have swiftly reversed that back to having clear focus on industry which is distinctly different than the focus on geo. You get an expansion of the business not a contraction. That's why we on Sunday morning, made all the moves necessary to restore our coverage model to the one that's worked for 10 years.
Great, thank you.
Thank you.
Thank you. Let's take the next question, please.
Certainly we'll now move to our next question from Philip Winslow from Credit Suisse. Please go ahead.
Thanks guys. I think you just addressed some of the issues in North America. Maybe you could provide just a little more detail just sort of what you did see. You mentioned a couple of geographies a little bit better, a couple of geographies a little worse, just sort of what trends you're expecting. Also, a question I've been getting is just sort of the contribution from SuccessFactors and potentially SAP HANA this quarter. If you have that, that'd be great. Otherwise, we'll get in a couple of weeks. Thanks.
This is Bill. Maybe I could just start with what we saw in Europe. Obviously, Germany was just superb with like 30% year-over-year growth in software revenue. The UK and France were a little slow in starting up. Frankly, where we saw slowness we made some leadership changes there too. We got some real strong actors going into these jobs. We want to give you a clear picture, Philip. We want a high-performance culture and we expect performance all the time. What I believe you have in front of you now is some leadership adjustments that were the right ones to make at the right time and I personally evaluated the European business in a review that went for almost an entire day. I'm very bullish actually on EMEA in general. I really like the business, t hey had a great Q4.
They got off to a little bit of a slow start in some of the larger geographies with the exception of Germany which got off to a blistering start. The business really does look like it's in very, very good shape overall and w e expect robust growth in EMEA across the board in Q2.
Maybe I can give you some visibility in your other questions around SuccessFactors and HANA. We've seen a very successful close of the SuccessFactors deal and a very, very fast leverage of the combined force. We have gone from being a kind of a no-player in the cloud to become one of the major players and w hat we're seeing is that the installed base has a huge interest for combining the SAP software they already have and extending that into the cloud in particular in human resource management with the SuccessFactors portfolio. We actually have a pretty solid or very solid and high growth situation. We have stated that we will come with our full-blown cloud strategy at Sapphire which happens in a month from now. On HANA, we went general available, which I think is the key.
So far, as you know we talked about last year HANA was a value play. We had the unique problem solved to show the power of HANA. With the b usiness warehouse powered by HANA, we could go into volume. We actually went a couple of weeks ahead of our original schedule of general available with HANA for business warehouse. That means that we can now accelerate the pace for business warehouses on HANA. We will be more explicit on that topic when we get back to the earnings call end of this month to talk about our expectations given that general availability of the product. Very, very high interest in the entire globe all regions. Thank you. Let's take the next question, please.
Certainly. Our next question now comes from Marc Rolfe from Deutsche Bank. Please go ahead.
Hi good afternoon e veryone. Thanks for taking the question. For software companies there's often sort of times of change either through acquisition or when there are major new product launches that there's sometimes a forgetting of the core that occurs within the sales force. I just wanted to understand a little bit more in terms of whether it was this sort of the new products coming to market the acquisition of SuccessFactors that maybe led to some of the sales execution issues through a lack of focus or whether it really was just sales hygiene and a change of strategy that didn't maybe work out as planned.
Yeah Marc this is Bill. It's a very good question by the way because our ambition is to leverage all markets including the core. What we've learned as you know over time as you introduce innovations like mobile, like HANA, like all the analytics that we brought to the marketplace and the cloud, it actually invigorates the core. It doesn't slow the core down. That was certainly not the issue. The issue is related more to the North American execution and the coverage model, which has been swiftly reversed. We have great coverage on the core and all the specialized areas. The other thing you should know is everybody carries the quota, w e don't have caddies. I've made it clear to the coverage model and the sales department that we don't have people that are carrying other people's bags, t hey carry their own quota, t hey carry their own accountability.
Therefore, you should not expect anything less than excellent execution going forward.
Thank you very much. We have time for two more questions, please.
Certainly, thank you. Our next question now comes from Chris Bryant from the Financial Times. Please go ahead.
Just a couple of questions. Perhaps without using the phrase coverage model I wondered if you might explain perhaps just for the people who invested who don't necessarily understand straight away what you mean what exactly went wrong in the United States who didn't do what, why, and when. Also, how frustrated are you? Previously, you sort of said we've had eight quarters of consecutive double-digit software revenue growth. Clearly, that didn't happen this quarter. Are you frustrated that you lost this record? You're entirely confident you've put everything right. Just lastly on Europe you sort of half answered this already. You said previously you were seeing absolutely no effect from the sovereign debt crisis at all. Clearly, you've said here that some markets did start a bit slowly. Are you still maintaining that you see no impact from the European crisis?
Yeah Chris, this is Bill. First of all on North America, let me be perfectly clear and specific. We had a coverage model shift whereby the leader made a move to combine different industries with different geographies. For example; in the eastern region, it was combined with financial services. In the central region, it was combined with utilities. In the western region, it was combined with retail. We have no interest in that coverage model. It's inconsistent with what we've won with for 10 years. Now the strategic industries have their own specific leader and their own focus. The regions do as well. We've learned in this game what you focus on in life expands. When you give people too much to focus on i t contracts. We swiftly reversed that on Sunday morning at the end of the quarter. We're back on track.
That was the execution issue in North America. No I don't believe we lost our double-digit record. Actually nine consecutive quarters now are double-digit because we've always said the guidance is based on software and software-related services. This quarter, in constant currency, we were at 10%. In nominal currency, we were at 12% and finally on Europe, I remain extremely confident in Europe. I like our leadership team there, I like the focus on execution, t he pipeline looks really good and again a fter a full-day review with those guys, I walked away saying, hey, this team knows what they're doing, t hey're focused on the right issues and I don't see the sovereign debt crisis being a risk to our European business. On the contrary, SAP has a great brand, probably the strongest information technology brand in the world in Europe. Therefore, I'm confident we can lead the way.
Don't forget, our software makes companies run better in downtimes, not just uptimes. That's the beauty of SAP.
I think, Bill, that was very accurate. Maybe one comment of observations from customer interactions. I felt actually the debt situation in Europe was much worse in Q4, and it was all over the newspaper. Right now, it's not a big topic being discussed. We weren't hit in Q4 and certainly also not in Q1 from that topic. Okay, thank you. We have time for one final question, please.
Certainly. Our final question now comes from Philip Gronski from Dow Jones. Please go ahead.
Hello. The only journalist having a question obviously. Just one quick math question. Some people today actually implied that you upped your guidance for the full year. Is that true? Did you imply with your second quarter outlook that you will reach the upper end of your full-year forecast, or was that some misunderstanding?
Hey Philip you are terrific. I always enjoy your commentary and color. It's really good. Thank you for that. We did not up the guidance, but I appreciate the compliment on the strong forecast for Q2. We just wanted to give you the indication that the business is totally on track and we expect what we stated we'd do in Q2. The full-year guidance remains unchanged but you should know we're extremely confident in it and committed to getting it done.
Okay. Thank you very much. This concludes our call on the preliminary numbers for the first quarter of 2012, and we look forward to speaking to you on April 25 with the full report. Thank you very much for joining and goodbye.
Thank you. That will conclude today's conference call. Thanks for your participation ladies and gentlemen. You may now disconnect.