Good day, ladies and gentlemen, and welcome to the SAP Quarter 3 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stephan Gruber, Head of Investor Relations. Please go ahead, sir.
Thank you. Good morning, good afternoon. This is Stefan Gruber, Head of Investor Relations. Thanks for joining us to discuss our results for the Q3 2019. I'm joined by our new Co CEOs, Jennifer Morgan and Christian Klein as well as Luka Mutic, our CFO, who will make opening remarks on the call today.
Also joining us for Q and A is Executive Board member, Adaire Fox Martin, President of our Global Customer Operations and Ryan Smith, CEO of Qualtrics. Before we get started, I would like to say a few words about forward looking statements and our use of non IFRS financial measures. 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, intent, may, plan, project, predict, should, outlook and will 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 our recent filings with the U. S.
Securities and Exchange Commission, including SAP's Annual Report on Form 20 F for 2018 filed with the SEC on February 28, 2019. Participants of this call are cautioned not to place undue reliance on these forward looking statements, which speak only as of their date. On our Investor Relations website, you can find our quarterly statement and a financial summary slide deck. Both documents are intended to supplement our prepared remarks today and include a reconciliation from our non IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non IFRS and growth rates and percentage point changes are non IFRS as reported year over year.
The non IFS financial measures we provide should not be considered as a substitute for or superior to the measures of financial performance prepared in accordance with IFRS. And finally, just a reminder, today's call is focused on our Q3 earnings results. In 3 weeks, on November 12, we will hold our special Capital Markets Day in New York City, where we'll provide more color on our growth strategy and midterm revenue and margin ambitions. And with that, I'd like to turn things over to our Co CEO, Jennifer Morgan.
Thank you, Stefan. Good morning, and thanks to everyone for joining today's call. First, I'd like to thank Hosta Plattner and the Supervisory Board for their trust in the honor of leading this company forward together with Christian Klein, CEO. It's an honor to help write SAP's next chapter and follow Bill. Before I begin, I want to start with the news we learned about on Friday regarding the passing of Mark Hertz.
Mark has had a profound impact on our industry and on behalf of all of SAP, I want to extend our deepest sympathies to the entire Oracle community and most especially to Mark's family and friends. You are in our thoughts and prayers during this difficult time. Now, let me dive into our Q3 performance. Today, we reported strong Q3 and year to date results, which Luca will detail shortly. Clearly, our experienced management vision powered by Qualtrics is resonating with customers and is a key differentiator across all aspects of the intelligent enterprise.
With top line accelerating and operational excellence initiatives in full swing, we're on track to reach our full year and mid term ambitions. Let me spend a minute on the macro. Our strong Q3 performance was achieved despite headlines about a slowing global economy, trade wars and political uncertainty. We had some impact due to macro challenges, for example, in Asia and the German auto and manufacturing sector, but even in times of uncertainty, technology investment remains a focus for every company and our business is resilient due to the breadth of our global coverage. Companies continue to turn to SAP to transform, to accelerate their growth organically and through faster M and A to drive efficiencies, competitiveness and successfully navigate a changing macro and regulatory environment.
Our global pipeline is robust as we head into our seasonally strong Q4. SAP's resilience is further underpinned by more predictable revenue approaching 70% of the mix. Let me now highlight our strategic growth drivers in the cloud. We made a bold move with the acquisition of Qualtrics and customers are excited about the holistic experience management platform Qualtrics provides in addition to what the combination of X and O data can do. We're very pleased with Qualtrics growth and we are starting to see the scale of SAP helping drive and close pipeline, especially in the enterprise segment.
Qualtrics had some impressive wins in Q3. DISH Networks, Slack Technologies, Akamai, U Haul, Sharper Image, Stanley Black and Decker, Garmin International and many other selected Qualtrics in Q3 to move beyond systems of record to new systems of action and achieve breakthrough results. We continue to beat our competition in both the enterprise and volume parts of our business. Qualtrics volume engine is helping SAP to expand its footprint into new accounts and is helping us open doors for other SAP cloud solutions. We're also seeing an acceleration of our win rates against Medallia as customers are choosing Qualtrics for its technology and analytics capability and the breadth of XM solutions across customer experience, employee experience, product experience and brand experience.
With the addition of Qualtrics to SuccessFactors, we've redefined the traditional human capital category to human experience management or HXM. Every company needs to understand the factors that impact employee experience to attract and retain their talent. And since integrating Qualtrics with the SuccessFactors suite, we've seen a tremendous demand in SuccessFactors customer base for Qualtrics. Since May, we've acquired over 300 customers for the Qualtrics platform. SAP's evolution towards human experience management is proving to be an accelerant for employee central, which added more than 150 customers in the quarter and has now more than 3,500 customers globally.
Competitive wins included British Telecom and Hugo Boss. And our joint sales motions are paying dividends. Qualtrics had its largest employee experience deal in history this quarter as a direct result of our joint go to market motion. Some proof points for success factors. We just eclipsed 1,000 success factors customers in APJ.
And when you add China, that's another 400 customers. In Latin America, we're approaching 800. Even in mature markets like Europe, we see significant growth to over 2,800 customers. UK and Ireland saw triple digit new bookings growth in Q3. We're also making great progress lighting Qualtrics on fire in our partner ecosystem.
We announced the partnership with Ernst and Young with delivering excellent practices and solutions to its clients through its people advisory services and its workforce of the future solutions. Will also become the 1st Qualtrics partner network member to adopt Qualtrics experience employee experience across their organization of 2,600,000, 260,000 employees. And this will combine X Data and O Data from SuccessFactors. In addition to accelerating SuccessFactors business in HCM, our CS business continues to benefit with the infusion of Qualtrics across our C4HANA portfolio. We introduced the connector between Qualtrics to C4HANA that developers and partners can use to build new integration scenarios.
We're starting to see organizations combining customer feedback and operational data to listen, understand and act. E. ON and Brazilian retailer Swift also chose SAP C4HANA Solutions in Q3 over our competition based on SAP's unique and compelling vision, while Tetra Pak and Parkhoof Marie Douglas went live on C4. We're continuing to invest in our customer experience portfolio. We've announced that Bob Stutz, a leader who continue to redefine the CX arena as both Microsoft and most recently Salesforce has rejoined SAP as President of Engineering in our CX business.
Bob's experience and foresight will take us to new places in the future. Our intelligent spend solutions provide collaborative commerce with SAP Ariba, effortless travel and expense processing with SAP Concur and flexible workforce management with SAP Fieldglass. Together, they represent the largest commerce platform in the world with more than $3,400,000,000,000 in global commerce annually transacted in more than 180 countries. This is nearly 8 times the size of Coupa. We are making strong progress on delivering integrated spend scenarios starting with services procurement across Fieldglass and Ariba.
BT, Sony Music, Prada and many others turned to SAP's intelligent spend solutions in Q3. Specifically, Concur is starting to gain traction, especially in China, with Xiaomi as one of its marquee customers. Another incredibly exciting announcement and key strategic driver of future growth is our expanded relationship embrace. We've listened to our customers. We've asked to help them define and accelerate their journey to SAP S4HANA in the public cloud.
Many of our enterprise customers have chosen Azure. In response, SAP and Microsoft has established a partnership to move on premise SAP ERP and S4HANA customers to the cloud through industry specific best practices, our joint reference architecture and SAP cloud delivered services on Azure. This partnership will both accelerate and simplify customized migration to S4HANA on Azure. Microsoft will bundle SAP's cloud platform services into a bundle we call Embrace and they'll sell these directly through their field organization to their customers who will run SAP in the Azure cloud. By putting the customer first, we've combined SAP innovation with Azure to create the optimized environment for SAP S4HANA to enable the integration, orchestration and extension of SAP systems in the Azure cloud.
As always, choice will prevail as we recognize that many of our customers also run SAP on AWS and GCP, for example. In this case, our customers will still have the benefit of the best run SAP and their public cloud of choice. So to summarize, SAP is delivering on its winning strategy and its promises as validated by our strong Q3 and year to date results. The fundamentals and future of SAP could not be stronger. Now I'd like to hand over to my partner and co CEO, Christian Klein.
We share similar vision and with highly complementary skill sets and experiences, we will write the next chapter of SAP success together. Thank you again. Christian, over to you.
Thanks, Jen, and thanks to everyone for joining us today. Let me begin with a personal remark. On Friday, we were saddened by the news about the passing of Mike Hurd. Words are never adequate in moments like these. The whole IT industry lost a visionary leader and a brilliant mind.
And my thoughts are with his family, his friends and everyone at Oracle. Being a CEO is a hallmark with responsibility and an honor to hold. I want to express my heartfelt thanks to Hapo Plattner and the SAP Supervisory Board for the trust they put into channel and myself. Starting off with a quarter like this certainly helped. This is where I also want to thank Bill, not only for his amazing quarter, but also for the unique journey during the past decade.
This is an outstanding quarter across all key parameters: cloud and on premise order entry, revenue, cloud gross margin, operating margins and cash flow. Luca will walk us through those in a minute. Let me add some color from the core applications perspective. SAP's ERP flagship solution, S4HANA, continues its success story. It's the broader suite in the market, serving over 25 industries and 160 country versions.
We are continuing to invest into artificial intelligence to further increase the business value and help our customers to grow and drive automation in the digital age. Until the end of this year, we will have 200 use cases and more than 1800 features, representing a 60% increase in scope. S4 is further gaining market share, and we see positive software license growth and high double digit cloud revenue growth. 80% of the DUCs companies and 65% of the Forbes Global 2 1000 companies already rely on SAP S4HANA. We are now at more than 12,000 license customers representing a 25% year over year quote.
We're also very happy with regards to adoption, especially as 4 is more than just a technical migration. It allows our customers a complete redesign of their business model and business processes. We see 60% of customers live or implementing and the others preparing their projects. To name just a few, this quarter, Dow Jones and Colorway Golf in the U. S.
And Brightling in Switzerland went live on S4HANA as did Evong Pharma in South Korea. In context of that, we are making rapid progress in cloud ERP. As for HANA Cloud, including supply chain management, we are now at cloud revenue run rate of more than €500,000,000 and close to 2,000 customers. We have a coverage of 17 industries already in the cloud, and we are investing heavily in the user experience. This quarter, we saw subsidiaries of McDonald's, Hangxing Yang, Gaming Mining in China go live on S4HANA Cloud.
I also like to provide you with an update on our platform business, including our in memory database SAP HANA with more than 31,000 customers as of today. One important use case is S4HANA and other LOB applications such as SuccessFactors running on top of SAP HANA. But over the last 2 years, HANA has rapidly expanded beyond SAP applications to 3rd party applications. This is reflected in the share of full use licenses. We are at more than 60% already and it continues to expand.
We are evolving SAP Cloud Platform as a business technology platform with focus on business services and integrating our LoB application. SAP Cloud Platform is also key when we talk about integration, including our master data integration content and core kernel services like security and identity. There is no doubt that cloud is becoming mainstream in the enterprise software market. And so we are happy to report increasing cloud cost margins across all business models. We are looking hard on further increasing the efficiency of our internal cloud delivery.
You can see that in the margin trend, and I will provide additional color at the Capital Markets Day. At the same time, we understand some industries with high process complexity like manufacturing and automotive, where ERP customization is needed, will keep major parts of their core on premise for the foreseeable future. The same is true for companies and countries with high with political instability, limited infrastructure or increased data security concerns. Hence, a lot of landscapes will remain hybrid for many years. SAP allows companies to combine cloud and on premise in a landscape tailored to their needs, taking into consideration their business requirements and strategic vendor relationship.
It's all about customer choice. This is also reflected in our multi cloud strategy, allowing both our customers and us to leverage the hyperscalers' highly elastic and globally available infrastructure to deliver SAP Cloud Solutions. Jen discussed earlier the Microsoft partnership and how excited we are about that. Still, rest assured that customer choice in this context remains unchanged. Before I hand it over to Luca, I'd like to point out 3 focus areas that I believe will be critical for our success in the next chapter of SAP.
1, customer success. SAP has always been best when we listen to our customers. Customers have been vocal about their feedback, which we greatly appreciate and proactively seek. We are listening and taking action, Integration, solution adoption, renewals and upselling, these are key and directly related to customer success. 2, innovation.
SAP is not a software distributor. SAP is a software engineering powerhouse. Our continued growth through innovation is based on our ability to leverage R and D resources effectively and efficiently. We are reviewing processes, removing overlap, focusing resources and accelerating innovation cycle, so we get the most out of our R and D investments, which are critical to our future success. Also, we will further strengthen co innovation with our customers to realize true business value with the help of new technology.
3, our employees. It is our colleagues that drive innovation, provide value to our customers and consistently promote our growth and profitability. We are proud that SAP has been recognized on numerous employee awards worldwide. We are the only company to rank on all 5 classes of best places to work, can't we list. Our employee engagement index is near record high, but we don't stop here.
In addition to further simplifying our internal processes, we are currently conducting our annual employee survey. This year with our own SAP Qualtrics technology, which gives us detailed insight into the good, the bad and the ugly. Happy employees are productive and innovative and therefore critical to our success. With that, I would like to hand it over to Luca. Luca, are you happy with the numbers?
Yes. Thanks, Christian. As you know, usually, it's hard to get me satisfied. But this time, I'm indeed absolutely happy with the results this quarter. And I would also like to take the opportunity to congratulate both you and Jen on being named Co CEOs.
Look, in April, we promised a stronger focus on profits, and we are clearly delivering. I'm very pleased to say that our operational excellence measures allowed us to achieve double digit operating profit growth and a substantial operating margin expansion. And just as important, we achieved this result with continued strong top line momentum. Let me now provide you with some background on the key drivers of the Q3. Both cloud and software revenue as well as total revenue grew 13% this quarter.
Cloud revenue was again a big driver of this growing 37%. New cloud bookings were up 39% and up 51% excluding our infrastructure as a service business. This is a good trend for SAP, a net positive for the margin profile of our cloud business. As mentioned by Jen, we also signed a large partner contract with Microsoft. This contributed 18 percentage points to new cloud bookings growth this quarter.
In addition, as Christian said, we saw significant growth in our S4HANA cloud offering. Software license and support revenue grew at a solid 4% in the quarter. Software licenses revenue declined by 1%. And with this, our software license revenue was actually slightly better than expected despite macro uncertainties. This was primarily driven by continued growth in our S4HANA flagship solution and our digital supply chain offering.
In Q3, the share of more predictable revenue increased to 69%, up 2 percentage points year over year. Now quickly to the regions where we had a very solid performance in the EMEA region with cloud and software revenue increasing 10%. Cloud revenue increased 48% with Germany and the U. K. Being highlights.
France and the U. K. Had exceptional quarters in software license revenue. We had a strong performance in the Americas region. Cloud and software revenue increased 16%.
Cloud revenue increased 32%, with Canada, Brazil and Mexico being highlights. In addition, the United States and Brazil both had strong quarters in software license revenue. In the APJ region, we had a solid quarter amidst the challenging market environment. Cloud and software revenue was up 9%. Cloud revenue increased 40% with Japan and Australia being highlights.
Japan had an exceptional quarter in software license revenue as well. Let's now look at profitability and gross margins in the Q3. Our cloud gross margin rose sharply year over year and increased by 5 percentage points to 69%. As Christian already mentioned, we continue to make progress on efficiency gains in our cloud delivery. This marks the 3rd straight quarter in a row that we have increased our cloud gross margin sequentially.
In our most profitable cloud segment, the Intelligent Spend Group, gross margin remained steady year over year at 78%. The gross margin of our other SaaS PaaS businesses expanded massively by 10 percentage points year over year and reached 70%, which is an acceleration compared to last quarter. Similarly, as in Q2, we benefited from primarily 4 effects. 1st, SuccessFactors now running solely on our converged cloud platform based on the HANA database, the extended lifetime of hardware, continued high gross margin from Qualtrics and also benefits from restructuring. For our infrastructure as a service offering, the cloud gross margin improved by 9 percentage points year over year to 25%.
We see Infrastructure as a Service becoming a smaller share of the cloud mix going forward as hyperscalers continue to expand their capabilities to operate SAP workloads in their data centers. Our cloud and software gross margin increased by 1 percentage point to 82% year over year with a very positive contribution from the cloud margin. Our services gross margin was up 5 percentage points to 27%. The increase of the services margin mainly results from a strong revenue performance paired with the successful execution of operational excellence measures and restructuring benefits. Overall, operating profit was up 20% year over year, driven by a combination of strong top line and further acceleration of our operational excellence and restructuring benefits.
This led to a stellar operating margin, which expanded 170 basis points. Year to date, we expanded our operating margin by 70 basis points. Turning quickly to IFRS operating profit. This was up 36%, benefiting from lower share based compensation expenses. For the 1st 9 months though, IFRS operating profit was down 28%.
Let me just give you a brief recap and update on the effects that led to this result. Compared to the 1st 9 months of 2018, we had close to €100,000,000 higher acquisition related charges and revenue adjustments, mainly from the acquisition of Qualtrics, close to €500,000,000 higher share based compensation expenses and approximately €1,100,000,000 higher restructuring expenses. As mentioned last quarter, these effects are obviously much higher than usual this year. We still expect IFRS operating profit to be up significantly next year since we don't expect any meaningful restructuring expenses and acquisition related charges should likewise decline. Therefore, our IFRS operating profit growth rate in 2020 will be much higher than on a non IFRS basis.
Moving on to EPS and taxes, where for IFRS EPS, we saw a strong increase of 28% year over year, while non IFRS EPS was up 14%. In the 3rd quarter, our IFRS and non IFRS effective tax rate each increased close to 2 percentage points year over year. However, our tax rate guidance for 2019 remains unchanged. In Q3, our operating cash flow was up 28%. Free cash flow rose sharply and was up 116% due to strong operating cash flow and a reduction of our CapEx spend by 50%.
For the 1st 9 months, our operating cash flow was €3,300,000,000 down 5% year over year. Compared to the prior year, operating cash flow was impacted by the following effects: First, the benefit of roughly €290,000,000 from the application of IFRS 16, but then higher restructuring and higher tax payouts of €419,000,000 and higher tax payouts of €490,000,000 For the full year 2019, we therefore still expect operating cash flow to be slightly lower than in 2018. Similar to IFRS operating profit, we expect a steep increase in operating cash flow in 2020 as restructuring and tax payouts will decrease sharply. Free cash flow stabilized for the 1st 9 months and was flat at €2,300,000,000 This reflects our disciplined CapEx spend, which was €703,000,000 443,000,000 lower than the previous year. For the full year 2019, we now expect our CapEx to stay below the €1,000,000,000 mark.
Before I conclude, I would like to give you an update on our non financial performance and sustainability highlights. We are proud to be recognized as the number one software company in the Dow Jones Sustainability Index for the 13th year in a row. Developments in the world are leading to increased demand for SAP to enable customers to implement sustainable business models connecting economic, social and environmental objectives. We want to help ensure that smart integration of impact measurement and valuation will ultimately become standard practice. To this end, SAP is a founding member of the Value Balancing Alliance, a nonprofit organization that helps businesses measure their overall societal impact and dependencies.
We aim to lead by example, continuing to steer sustainability holistically in our own operations. Employee retention was down slightly to 93.3% in Q3 year over year. We have made great progress in women and management, which is now at 26.3%, up from 25.9% year over year. And obviously, with Jen, SAP has named the 1st female co CEO of a company. In Q3, our carbon emissions were 65 kilotons, which is slightly higher than we anticipated.
Despite this, we expect that our emissions in 2019 will stay stable at a minimum. We remain committed to our goal of becoming carbon neutral by 2025. So to summarize, we delivered an exceptional quarter across revenue, profit and cash flow. We achieved double digit growth in cloud revenue, double digit growth in cloud and software revenue, double digit growth in total revenue, double digit growth in operating profit, substantial operating margin expansion, double digit growth in earnings per share and triple digit growth in free cash flow. We reiterate our 2019 outlook with great confidence, and we are on track to reach our midterm ambitions.
With that, thank you very much, and we will now be happy to take your questions.
Thank you, sir. Thank you. Operator, we can now start the Q and A session.
Thank you so much.
Our first question
comes from John King from Bank of America. Please go ahead. Your line is open.
Yes. Hi and good afternoon everybody. A couple of questions for me. Firstly, just on the mechanics of the Microsoft deal, I think you're implying it's about a €74,000,000 €75 1,000,000 run rate of revenue. Can you just explain to us how quickly we will see that kind of revenue run rate in the numbers, please, perhaps for Luca, I guess?
And then just coming back to the cloud bookings, the second question. I guess you could look at this in a number of ways. Depending on the mechanics of that Microsoft deal, I guess the implied cloud organic cloud bookings growth was still, I would say, maybe a little bit below what you're expecting in terms of cloud revenue growth over the next few years. And I guess the question is, would you agree with that? And if so, what steps are you looking to take in order to try and improve the run rate on the cloud booking side?
Thank you. Yes. Perhaps I'll take both of those and then please Jen, Christian, add your color if you want. So on the Microsoft side, it's very simple. Revenue recognition will begin in Q4 and then basically we will have roughly the figures that you're citing on an annualized basis over the course of the next 3 years basically.
On the new cloud bookings side, look, I mean, first of all, I think nobody should argue with a 39% new cloud bookings growth and 51% without Infrastructure as a Service being a good result. Of course, it was influenced by the Microsoft transaction. But this is representative with the strategic choices that we are making. We are doubling down on the partnerships with our hyperscalers. We drive healthy and highly profitable cloud platform and S4HANA business as a result of those partnerships.
And we focus our HANA Enterprise Cloud Infrastructure as a Service business on high value opportunities. This is exactly the direction that we want our business to take. When it comes to the growth rates in new cloud bookings that we need in order to hit our midterm objectives. I think I've been talking about this already on a number of calls previously. It's important to note that first of all, the new cloud bookings are not the only source of our revenues and of our growth.
Of course, renewal performance plays a role, The ramp in TCV contracts plays a role and we have quite a few of them that actually have a higher number of users or other capacity metrics that are kicking in later years of a multiyear contract. And on the other hand, obviously, the pay as you go revenues that we had primarily in our Intelligent Spend Group are also not captured in new cloud bookings. When you take a look at our performance across the different cloud segments, you will actually find that we run basically only healthy businesses that are growing exactly the way they should in the Intelligent Spend Group. We have been very consistent around the 20% constant currency growth mark now for a number of quarters. And with the stability of our transactional revenues, we expect that this will continuing.
And in the high growth customer and experience management segment, we have been growing close to 100% in ATS. Actually, many of the cloud assets that are now reaching scale like S4HANA, Analytics Cloud have actually had a very, very strong performance. And as they become a bigger piece of the pie, they will, of course, also influence the revenue performance in a much bigger way. Cloud ERP is an almost untapped opportunity still for us. Christian has mentioned the run rate that we have achieved by now.
The opportunity in the market is huge. So you shouldn't be concerned at all about our momentum in the cloud. Please.
Yes. I'll just punctuate a couple of different areas of focus for cloud growth. The Microsoft deal is important because it goes beyond our traditional partnership. They've put pretty big skin in the game and their sales teams across the world are now selling SAP solutions. That's going to help us do 2 things, accelerate the movement of S4HANA to the cloud and accelerate the sales of SAP's cloud platform services and cloud revenue.
So the stickiness of that partnership, we believe, will continue to pay broader dividends. I'd say 2 other points. Qualtrics is another area where we see huge potential from a platform perspective, as well as just giving us an opportunity to have new conversations, especially in places like Asia. This is where we can hit the ground running and really drive growth faster. And then finally, we've heard you, we know that you want to see more organic innovation in the cloud from SAP.
It will be something we talk a little bit more on at our Capital Markets Day. But as Luca mentioned, whether it be analytics or the customer facing solutions or supply chain, this is an engine that we need to get humming even more.
Okay.
Thank you. Let's take the next question, please.
Certainly. Our next question comes from Walter Pritchard from Citi. Please go ahead.
Hi, thanks. I'm wondering between some of
the things you talked about
on the call with S4 public ERP ramping up with it looked like the percentage of your Sfour customers that were new actually came down implying that the installed base might be moving faster as well as what you talked about with Microsoft in the Azure relationship. Do you expect that you start to see a little bit more of a pickup here in the installed base migration around S4? And I'm just curious, I know investors get a little nervous around cloud versus on prem, but how do you expect that will influence those 2 revenue streams if there's any change that you're highlighting here? Thanks.
Yes. Thank you, Walter, for the question. So I start and then handing over to Adaire. So in Q3, so we have seen actually a really strong quarter for S4. I mean, as I mentioned, we have seen positive growth in software on premise S4.
And we also have seen high double digit growth for S4HANA cloud revenue. And actually, we see both. I mean, we see many industries like automotive or in the public industry, we see a lot of movement also now customers migrating to Sfour on premise. We see also now that we are increasing the business value of Sfour with serving new business models, putting more and more AI into the product, driving more automation, driving higher intelligence in the processes. We see now that also the move is really picking up.
And then on the cloud side, especially in the finance area, we have seen major wins now in Q3. And as I said, being now close to 2,000 customers, this is now a major business for SAP. Even more important that in the cloud, we see that the adoption is even kicking in faster. So we see go lives within 20 days, which is really strong. And this also shows that not only in the cloud we are growing fast, but also customers are adopting really fast.
Us.
Yes. Maybe I'll just add a little bit to that, Walter. Thanks to our colleagues in development who are increasing exponentially the functionality that's embedded in S4. It means that as our customers look at the value case for the move, there is a very strong value proposition now around the S-four environment. We are putting a whole range of different components around facilitating an easy and cost effective move for our customer base.
We can see very significant focus from the SI community on the S4 installed base. We have a strong value assurance program and the implementation partners are doubling down on this. In the general business space, we now have 27 conversion factories from various different partners supporting our customers in that segment. And with our colleagues in ZBS, our model company approach, it means that we are simplifying with preconfigured solutions and content the implementation of S4 in a customer's environment. And so we're working to automate as much as we can of that process to ensure that we can facilitate a cost effective and high value transformation for our customers.
Good. Thank you.
Let's take the next question please.
Certainly. We will now take our question from Michael Reiss from UBS. Please go ahead. Your line is open.
Great. Thank you. Good afternoon and congratulations, Jen and Christian, on your promotions. Just following up on the topic of the Private Cloud. I mean, you're obviously repeating the ambition for 2023 Cloud revenues €15,000,000,000 But looking at this Microsoft relationship, in part that could be cannibalistic to the growth in HEC.
Do you see any change in the mix in 2023? Are you expecting the SaaSPaaS business perhaps to be bigger than previously as a result of this? And then related to that, Luca, on the CapEx side, I think you said you're expecting less than EUR 1,000,000,000 this year. 6 months ago, it was going to be EUR 1,500,000,000. I'm wondering how much that relates to this change in hyperscaler relationships and how much maybe to your you have some quite large capital projects like building offices in Munich and such like.
Is that contributing to the reduction in CapEx?
So maybe I can take the first part of the question. We don't see this cannibalizing, our revenue because we see that customers want choice, right? And so many of our customers absolutely want SAP to manage, S4 in the cloud, whether it be the public cloud or whether it be HANA Enterprise Cloud. But we see many of our customers are making broader public cloud enterprise decisions. And for us, we wanted to make sure that we didn't limit our conversation to customers only specific to one cloud offering.
And so what we found is that the customer has so many voices around their table right now, whether it be movements at public cloud or S4 or other innovations. We just found that by coming together and giving them prescriptive options depending on what's important to them, what their industry is, etcetera, then we can make sure regardless we're getting a piece of pie and we can influence that decision. So we'll continue to see both of those revenue streams grow, but now we're going to be in far more conversations and impacting the direction. Luca?
Yes. And first, just the last sentence on this one. I think we have been talking for a while now about the fact that we expect indeed Infrastructure as a Service due to our focus on high value engagements will not further increase as a percentage of cloud revenues. Actually, we believe that there is now an acceleration in SaaS part, but that is very positive for the overall margin and of course, also for the gross margins in the cloud. When it comes to CapEx, it's correct.
I mean, we have made great progress this year in our CapEx efficiency. Main contributing factors are, 1st of all, the progress that we have been making with the hyperscalers and our partnerships in this respect. They are now really powering a lot of the infrastructure support that we need for our applications and that is, of course, helping us a lot. But it's also due to the fact that Gary Slater and Christian's organization and the cloud infrastructure team have done a terrific job to rationalize the demand for our own data center hardware and consolidating the procurement centrally. They have also successfully renegotiated the maintenance contracts for our hardware and our data centers in a way that makes it now highly economic to extend the lifetime of the hardware from 4 to 5 years.
And that helps, of course, also in the CapEx intensity. And we believe that this will continue to be the case. Yes, of course, we also have general CapEx needs through facilities and other CapEx areas, but they are largely And we believe that this will continue. So also for
the next couple of years, we expect no significant increases from the level that we have reached right now. And maybe, Michael, just to give you one concrete example also how our HANA Enterprise Cloud offering plays together with our hyperscaler strategy. I mean, one of our main competitors talked about some SAP ERP replacements, and I had a I actually have no evidence. I didn't find any SAP customer moving over to the competition. But what we are just currently doing, there's 1 large ERP customer from the competition.
They are now saying we want to move to F4HANA. They have not the skills yet to 1 HANA and to 1 S4HANA. So they said put S4HANA on Azure and we go to the HANA Enterprise Cloud. So you help us to first replace the database, second the ERP and then SAP helps with the migration and this is done with the HANA enterprise cloud offering plus Azure infrastructure. So you also can see that both offerings are also play really well together and helps us also to win market share
going forward. Okay. Thank you.
Let's take the next question please.
Certainly. Our next question is from Kirk Materne from Evercore ISI. Please go ahead. Your line is open.
Yes. Thanks very much. And I'll add my congrats to Jennifer and Christian on your new appointments. I guess the question is probably for Jennifer just on Qualtrics. At Sapphire, you all mentioned that the business has been accelerating versus the pre IPO growth rates.
And I was just kind of curious, where are you in terms of being able to leverage the global distribution capabilities of SAP with Qualtrics? And then, I guess secondly, what kind of halo effect is maybe Qualtrics having on some of the other SaaS properties? I think you mentioned sort of the change in terminology around success factors. So I was just wondering you give us sort of a broader update there on sort of the ability to leverage the Qualtrics brand across all of SAP? Thanks.
Sure. Thanks for the question, Chris. I'll start and Ryan Smith is actually on the call and I'll hand it to him to give a little bit more color. So I look at it from a couple of angles. One is that when you look at SuccessFactors or HR, right, and you look at the traditional category of HR, it very much an event driven kind of after the fact solution to track different events that happens in an employee's life cycle.
When you look at what's happening in the workforce today, the war for talent, the employee experience, Qualtrics has really allowed us to really redefine how we're having these conversations, right? So it's not just about understanding why things are happening or why do I have attrition. It's understanding how to go further upstream and understanding who's going to a trip, what are my issues going to be. And so being able to have those kind of conversations and take action much further upstream in the business key. So that's given us a huge kick in success factors because it really changes the nature of the conversation and it makes it a C suite discussion because now we're talking to people about how experience actually shows up in the income statement, how it can actually lower your SG and A or it's going to allow you to be more productive in getting your employees retail on the floor and more productive and selling more is one example.
So success factors is 1. The other one clearly is around customer experience. When you look at our commerce solution, we see a really strong correlation between bringing together Commerce and Qualtrics. But Qualtrics is also allowing us to start conversations in places maybe we wouldn't traditionally go. So it's allowing us to be whether you're in customer service or other parts of the enterprise, it's getting us broader conversations and broader audiences, which has been fantastic.
From a geographic perspective, you look at a region like APJ. The companies and the brands over in APJ are foundationally based on this concept of experience. You look at the airlines in Asia and compare them to any other airlines in the world, these companies already understand experience. Now they very quickly can understand how technology can help them scale that in new and different ways. Ryan and I were in Korea and Japan launching this over the summer, and we had incredible growth in our APJ regions around Qualtrics.
We're able to hit the ground much quicker. Our employees are super excited about this solution because they're able to have these conversations and we're really starting to have this enterprise conversation. Ryan, I'll hand it to you to add any additional color.
Yes. I think you said a great, Jen. I think the only thing
I would add would be, if
you look back a year ago, we were on the road at this time, kind of starting our IPO roadshow, getting ready to go public. And if you would have told me that here we are almost a year later, we've seen a massive increase in our growth rate from what was already out there. We're also seeing anytime we go in with SAP, our deal size increases 30% plus. We've already seen massive adoption on the EX product with combination of success factors. We've always been known as a company with the best technology in the space by far.
I think the question was always out there is, hey, can we go from 7 figure deals to high 7 figure deals to 8 figure deals? And with the combination of SAP with a partnership network, we just launched massive partnership with Ernst and Young, We launched our Qualtrics development platform where last week we had 300 partners in Utah. We're starting to answer all of those questions. So like I said, if you would have told me last year at this time that this is where we would be after the announcement with SAP with the accelerated growth rate on an already fast growing company, I would have said, hey, that looks like success to us. So with this combination, we've done everything we said we were going to do plus some, so I couldn't be happier.
Okay. Thank you. Let's take next question, please.
Certainly. The next question is from Adam Wood from Morgan Stanley. Please go ahead.
Hi, good afternoon and thanks for taking the question. And also congratulations from my side both to Jen and to Christian on the new roles. I've got 2 questions if I could. I just wanted to come back to Microsoft and partnership there to start off with and just to understand a little bit better technically exactly what's happening. Has Microsoft bought a volume of software from you that then they can resell on to their customers bundled on Azure, so that in effect, they're acting as a reseller for that and there's a volume of business that you get directly upfront from Microsoft that otherwise you may or may not have got but would have come through over time with customers directly?
And could you maybe help us understand whether there's upside or downside to those numbers? And then also whether you would envisage doing similar deals with other hyperscalers in future or whether there's other products you could also see that type of deal happening for. So just a little bit more detail around the actual technical details of that Microsoft partnership would be really helpful. And then secondly, probably for Luca on the margins. You had a big benefit on Tucumacloud gross margin side from the changes you've made around SuccessFactors and integration of the landscapes there.
Could you
maybe just help us around that and the restructuring? Should we expect a slightly slower pace of margin expansion over the next few quarters because we've got that kind of one big benefit? Are there still benefits from restructuring, particularly to come through? Thank you.
So I'll start. So as it relates to Microsoft, really what this was about is making sure we were being very prescriptive with our customers around what are the cloud services from SAP and what are the different services from Microsoft that customers should be thinking about when they're combining our solution, right? Today, they are kind of I'll use this from Microsoft, this from SAP. We've come together and been very, very clear on the business platform around SAP as it relates to the integration of SAP systems, as it relates to extensions of SAP or orchestration of SAP systems. We have a set of SAP cloud platform services that do this.
We bundle those together and embrace. Microsoft made a commitment to those and can resell those to customers. There's no downside to those numbers, only upside. The way that we really went about estimating kind of our initial start of this market was really in a few key areas of the world. And we put a very a lot of scrutiny around the pipeline, the business, where we saw told us where they plan to move.
So we see this as a start. We also want to make sure we're very clear here that we provide our customers choice. So let's say, for example, we have lots of customers who may be run on AWS. They've already chosen to run SAP on AWS. Those cloud platform services that I just mentioned around the integration orchestration and extension, those customers can buy those directly from SAP, right?
So they can still get SAP's reference architecture on AWS or on GCP from SAP. The difference here is Microsoft put the skin in the game. They are really teaming with us. They're doubling down on the innovation and engineering with us and they're going to have their salespeople out selling this as well.
Yes. And perhaps just quickly on the margins front. No, we have not yet lost our firepower. We have additional benefits to gain from the platform convergence. I think I've been talking a lot in the past years about this being an opportunity alone in the low triple digit €1,000,000 figure.
Year to date, we have had a benefit of just above €50,000,000 from the replatforming. That means that at least the same amount is still to come. I believe actually we will do slightly more than this because the benefits are really significant and now we have paved the way for further efficiency increases for automation and other areas. And secondly, this is only SuccessFactors. We have still to fully complete the job on the Ariba business network.
The application side at Ariba is already done. The business network side will be finished as well come Q1 next year. And with that, you will see also the additional benefits in our Intelligent Spend Group Business Network Cloud Margins, which certainly will then help us to further increase the cloud margin also strongly in 2020. By the way, in the SaaSPaaS business, we are now at 70.4% margin. This is what we had predicted only for next year.
So we are clearly ahead of our plans and you can continue to expect us to do very well on the cloud margin. Thank you.
Thank you.
Let's take the next question please.
Certainly. The next question is from Phil Winslow from Wells Fargo. Please go ahead.
Hi. Thanks for taking my question and congrats again on a great Q3 and congrats to you, Jennifer and Christian. Looking forward to working with you closely going forward. Thanks. Just wanted to focus on the manufacturing vertical because I think everybody on this call knows that the manufacturing industry really runs AP.
And on the Q2 call, obviously, you flagged some issues with China and then you called out Germany, but you actually continue to put up good results overall. What are you hearing from these manufacturing customers in terms of just their spending intentions? Because as you mentioned last call, changes in supply chain might need to drive more spending with you all, but there's obviously some macro issues. Just if you could just double click on that vertical, that'd be great.
Yes. So I thought and then handing over to Athaire for some specifics about China. I mean, on the manufacturing side, we are doing extremely well. I mean, we have both now a very competitive offering for on prem as well as on the cloud. We won the solution on different hyperscalers, so we offer choice.
And also in China now, S4 will also go live now on Arli Cloud in Q4. So also there we will also have S4HANA running on Chinese infrastructure starting in Q4 now actually this quarter. Adrienne?
Yes. Maybe just on the German side, a little bit of color on that. We had a very strong performance from SAP in Germany in Q2. And we did enter Q3 with an exceptionally strong pipeline for Germany despite what we saw as an over performance on their numbers in Q2. But we definitely saw during the course of Q3 some slowdown in execution particularly for the customers in the discrete manufacturing session segment.
I would say it was really around business cautious in terms of recession. We enter now Q4 with a very strong pipeline, not just from the seasonal perspective, but also because there's an element of some backlog for some of those deals that slowed down a little bit. And we're using and have used the opening weeks of this quarter to really build out those value cases and the validation of those cases and the validation of those plans with our customers in this segment. So I remain quite optimistic about our business in MEE, particularly because as I look forward at the Q4 pipeline, it is much broader than the discrete sanction segment. And in China, we had the privilege of serving businesses in China for over 27 years now and have a very strong footprint in China with about 70% of the Fortune 2000 being SAP customers in China.
Nevertheless, I will tell you that we are seeing a slowdown. We are seeing customers who are adopting a wait and see strategy, specifically focused not so much on the software itself, but on the challenges of business continuity in the event of increasing tensions as it relates to some of the macro, political and economic scenarios we have seen. There's also a very strong focus from the Chinese government on what they term indigenous innovation. This is the ability of companies in China in order to have Chinese components, etcetera, in their supply chain. Nevertheless, I will say to you that as a result of some of the work that we have been doing around our work with Ali Cloud and the ability to land our products on environments in China for China, I'm confident that we will be able to address those business continuity issues that were raised and move forward continuing to grow our business in China at the rate that we've been growing in over the last decade.
And perhaps just one sentence. On a global level, believe it or not, our 2 best performing verticals were actually services and discrete manufacturing. Thank you.
All right, great. Thanks guys and best
of luck in Q4. Thanks.
Thank you, Phil.
Thanks a lot. Let's take the next question please.
Certainly. The next question is from Stefan Slowinski from Exane BNP. Please go ahead. Your line is open.
Yes. Hi. Thanks for taking my question. I was just following up on a previous question. I apologize if you've answered this already.
But on the Microsoft deal, I was just wondering if you think you could be able to put similar partnerships in place with some of the other hyperscaler partners you've mentioned. I mean, obviously, you've just talked about Alibaba and Ali Cloud in China. I mean, is this something that you could potentially see Alibaba doing in terms of helping you sell direct in China? Thank you.
Yes. So I think that we're open to the future. Obviously, we have a very specific and relationship that we've defined and motion that we've defined with Microsoft that will be very specific and preferred by the 2 of us. So in looking at other partnerships, first of all, we already have pretty strong partnerships with both GCP and AWS. We're users of that technology.
We will continue to be. And so there's always possibilities for the future. But today, it's really just about Microsoft.
Maybe I can comment the Ali side because I think it's slightly different. Thank you. No, you're very welcome. In China, as I'm sure everybody is aware, there's a unique set of licensing laws around software as a service and platform as a service as well as a unique set of cybersecurity laws. So therefore, with Ali, we have physically landed cloud platform onto the Ali infrastructure in China.
And we will physically land the S4 onto the Ali infrastructure in China. And that means then we have the opportunity with the Ali Cloud team to take those 2 solutions directly to the market of a very large scale market of small medium enterprises in China. Thanks, Darr.
Thank you. Let's take the next question, please.
Thank you.
The next question is from Charles Brennan from Credit Suisse. Please go ahead. The line is open.
Thanks very much. Thanks for taking my question. Can I just ask one about the competitive landscape? In your prepared remarks, you made reference to both Medallia and Cooper. Can you talk about your win rates against some of the larger more conventional competitors in Workday and Salesforce?
And I guess the driving force behind the question is the recent comments from Workday that they're now penetrated in 40% of the Fortune 500. That sounds like they're making some reasonable progress. Thank you.
Thank you. I can add on to the comments that I made before. I think one of the things that I wanted to stress in my remarks is just the size and the scale from an Ariba perspective of the network that we do have, right, and the work that we've done. And we've had several wins over our competition in the enterprise space last quarter. So we feel very good about our win rates and what's happening there.
As it relates to success factors, we had our large SuccessFactors customer events in Q3. And again, the conversations that we're having, they're moving beyond just talking about HR, the traditional HR processes. So we've actually seen some really great wins using Qualtrics within North America. But I think more importantly, the advantage that we have is just the ability to scale broadly outside of the United States. And we're not a German company.
We're not an American company. We're a global company. And we've got feet on the street everywhere. So when you look over in Asia, when you look over in Latin America and you look at some of the customers that we're adding, we have a head start. Now when you bring in Qualtrics and you start to differentiate solutions like SuccessFactors, that allows us to accelerate even further.
So we feel really good about where we are right now with the wins. The thing I like about Qualtrics, if you think about Qualtrics, right, Qualtrics is not about surveys. It's not just about surveys and sentiment. When you think about what SAP did with ERP, back decades ago, we saw silo systems, supply chain manufacturing, financial running the operations of a company. We saw an opportunity to bring those interdependent functions together, have better insights to the business and be more efficient.
That was back when the data was in the 4 walls of the company and that became the operational data platform. Qualtrics takes a very similar analogy to that. Most data about your consumers and even your employees is not just inside the company, but outside the company. Businesses are gathering sentiment and engaging with customers' employees across multiple functions of a company, outside the company, etcetera. Lots of companies do surveys, lots of functions within companies take employee sentiment or customer sentiment.
The differentiator with Qualtrics is they figured out how all that's interdependent and they created a platform. So this platform approach technology that Ryan talked about earlier, this is what differentiates SAP. This is what our sales force knows how to talk about and this is where we're really starting to see the uptick in getting those big deals that Ryan mentioned earlier. It's an enterprise discussion. It's on the agenda of every CEO today.
So those are just a couple of things I've seen.
Thanks a lot. And we have time for one final question, please.
Certainly. And this question is from Mohammed Mualwala from Goldman Sachs. Please go ahead.
Great. Thank you very much. And Jennifer and Christian, my congratulations as well on your new roles. I had a couple. Firstly, Luca, you obviously have some pretty strong gross margin tailwinds continuing into next year, but also some of the big OpEx benefits kicking in.
You've also talked about sort of reinvestments back in the business. Can you talk about sort of the flexibility you have around delivering the margin and perhaps the shape of the margin expansion over the next couple of years in the event that the top line potentially faces risk, be they macro or anything else?
Yes, sure. I can do so. So first of all, obviously, the benefits from the restructuring program this year have not been significant because it takes a while for the program to take effect. So the bigger impact will come next year. And what you see this year in terms of progress on the gross margin side is really around the replatforming and increased operational efficiency through consolidation of data center operations and infrastructure operations.
And therefore, I'm very, very confident that we can continue to scale this business with increasing gross margin contributions also next year and even beyond next year. We have always said that in 2019 against our target of an on average 1 percentage point of margin increase, the market should not expect a full percentage point already this year because we have the dilutive impact from our acquisitions that we have to digest. And given that this is a 40 basis points dilutive headwind, I think you can see how the underlying is already performing against the average 1% that we have in mind. That in turn means that we will plan to do slightly more than that 1% next year to catch up because next year we have the full run rate benefit from the restructuring. But it's clear, the restructuring is not a cost cutting exercise.
And I want to be very, very clear about that. We have done the restructuring in order to tailor our investments and our capacity to those areas where we have the biggest growth opportunities. And we're putting actually our actions to where our plans were. We are seeing tremendous investment in Qualtrics. We're seeing a tremendous investment in our different cloud constituents.
We are adding additional capacity only in the productive areas in research and development in sales and in services. And that will continue to be the case to propel our growth. In terms of optionality, our business model has become way more resilient. We have now close to 70% of our revenues in highly predictable revenue sources, contrast that to only 1 third when we hit the financial crisis in 2,008 and that gives you a good perspective on how resilient our business model has become. And therefore, if we have to optimize our level of investments against only 30% variability in the top line that would be much easier than in the past.
So you should take a lot of confidence out of this that we can and will hit our midterm ambitions as we have announced them.
Thank you. And Moe, did you have a follow-up or that's not the case? Well, this concludes our Q3 earnings call for today. Thank you so much for joining and we look forward to speaking to you again at our CMD on November 12 in New York City. Thank you very much and good morning.
Thank you. Ladies and gentlemen, that now concludes today's conference call. Thank you for your participation. You may now disconnect.