Executives: Stefan Gruber - Head of IR Bill McDermott - CEO Luka Mucic - CFO Rob Enslin - Global Customer Operations Bernd Leukert - Product Innovation Steve Singh - Head of SAP Business

Network
Analysts: Michael Briest - UBS Walter Pritchard - Citi Stacy Pollard - JPMorgan John King - Bank of America Knut Woller - Baader Bank Gerardus Vos - Barclays Adam Wood - Morgan Stanley Philip Winslow - Credit

Suisse
Operator: [Operator Instructions] I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead.

Stefan Gruber: Thank you. Good morning or good afternoon.

This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the second quarter 2015. I'm joined by our CEO, Bill McDermott and Luka Mucic, our CFO, who will both make opening remarks on the call today. Also, joining us on the call for Q&A, our Board Members Rob Enslin, who runs Global Customer Operations, Bernd Leukert who leads Product and Innovation, and Steve Singh, Head of SAP Business Network. Before we get started, I would like 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 2014, filed with the SEC on March 20, 2015. Participants of this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates. Please keep in mind that unless otherwise noted, all numbers referred to on this conference call are non-IFRS and growth rates are non-IFRS as reported. And now, I would like to turn the call over to Bill McDermott.

Bill McDermott: Thank you, Stefan, good afternoon and good morning to everyone. Thank you very much for joining us on the call today. I'm really proud that SAP reported a strong second quarter and has once again reaffirmed our leadership position in this industry. We showed beyond any doubt that our platforms, applications, and networks are the winning combination of assets for the digital economy. Allow me to share a few brief personal observations with you to kind of net it out on the way I see this quarter.

First, it's clear that CEOs are inventing new business models and making the move to digital businesses. I hear this firsthand from leaders across industries and geographies around the world. These companies are looking for a modern technology innovator to help them imagine a bold vision for the future of their companies. SAP is committed to making their transition to digital businesses simple. With our strong second quarter results especially the triple digit growth in our cloud business and our business network business, and the triple digit success of S/4HANA, it's clear that the customer are responding very well to our strategy.

Second, as you will hear shortly from Luka, the major growth drivers for SAP are exactly what we knew they would be. Number one, soaring adoption of the HANA platform would double the number of customers year-over-year and clear acceleration of our new digital Business Suite S/4HANA. Two, strong- strong momentum with our customer engagement and commerce, and human capital management applications in the cloud, super robust wins against Salesforce and Oracle. And three, business networks. With Concur, Ariba and Fieldglass redefining how business is managed travel, resources and supply chains in the global economy.

Our strategy in these growth areas remains consistent and I am thrilled that our customers are accelerating their innovation roadmaps with SAP. Finally, SAP is a strong and balanced growth company across all geographic market units. In the second quarter, we again saw strong performances in APJ and Europe, as well and a very strong performance in the United States. It is precisely visibility to scale our growth strategy globally and adjust to market conditions, that has us well positioned to deliver on our guidance for the full year. As always, I'd like to personally acknowledge SAP mere 75,000 employees, who have given everything they have to deliver the strong results for our company.

I will look forward to taking your questions but for now I'd like to turn it over to our CFO, Luka Mucic.

Luka Mucic: Cloud revenue as Bill said again saw triple digit growth at 129%. We ended the quarter with about 82 million cloud users the most in enterprise application software. We are and remain the second largest enterprise cloud company measured by latest quarter cloud subscription and support revenue. Our key indicator of future growth in the cloud, cloud new and upsize bookings grew astounding 162%.

Cloud and software revenue grew 21%, and as Bill said this puts us right on track to deliver on our guidance for the full year. So let's talk a bit more about how SAP is meeting the needs of customers in the digital economy as the foundation of delivering these financial results. First, customer want to run real-time. Increasingly it is becoming commercial imperative for businesses across all industries to run real-time. This is why customers continue to select SAP HANA over Oracle.

We now have more than 7200 total HANA customers doubling the number from only a year ago. Our next generation Suite SAP S/4HANA continue to gain robust early traction with over 900 users to-date after just a few months on the market. We are seeing very strong S/4HANA adoption across all regions with brand names like HP, Bayer, [indiscernible], Beijing Shunxin, at Nomura Research Institute among others choosing S/4HANA. And customers already going live, for example Florida Crystals and Geberit have already gone live with the SAP simply finance module. In fact, Geberit has chosen to migrate its entire SAP software landscape from Oracle to the SAP HANA platform.

Geberit now benefits from lower operating costs, tremendous performance improvements across financials and unannounced user experience. And for those business processes that are truly differentiated, we have the HANA cloud platform, which enables you to build extensions and industry specific applications on a consistent data model that connect seamlessly to the nucleus of S/4HANA. The network enables simpler, frictionless commerce across every category of business spending. Goods and services with Ariba, flexible labor with Fieldglass and travel with Concur obviously. And we will add other network ecosystems overtime.

Total revenue in our business network segment grew to €400 million, that’s a growth rate of 194%. Anticipation in the Ariba business network continue to increase as new customers such as Virgin Australia and Takeda the largest pharmaceutical company in Japan joined. In partnership with Accenture procurement BPO, Ariba also renewed Deutsche Bank for another five years. Fieldglass continues to lead the flexible labor procurement and management space adding new customers like AMV. And Concur is already seeing the benefits of operating at a global scale with the support of the SAP field.

New large multinational customers included Merck. End customers are combining these capabilities with a line of business cloud applications to Run Simple with SuccessFactors and Fieldglass, SAP is the only company that can manage the total workforce both permanent and flexible workers and do that globally. A number of SuccessFactors Employee Central customers has risen to more than 730 customers from around 390 a year ago. This is an 87% growth rate in customers in just 12 months. Employee Central is also localized for 71 countries with payroll localized for 30 countries in contrast to our main cloud competitor who offers solutions primarily in the U.S.

and Canada. In Q2, top organization such as Heineken, Affinion Group and [indiscernible] selected SuccessFactors HCM Solutions over our key competitors. Once again we saw a high-double digit number competitive HCM cloud wins that is where we went head-to-head with Work Day and Oracle. Run Simple also means real-time customer engagement on any device and any channel. Only SAP can have businesses track and engage customers in real-time across all channels and at the same time seamlessly executed fulfilled ecommerce in one end to end value chain.

Our customer engagement and commerce cloud new bookings grew over 240%. We had numerous wins over salesforce in Q2, and in some cases our customers are replacing the salesforce implementations with our solutions. Customers choosing SAP in this field included Medtronic and [Fluka AG] [ph] in Germany to name a few. We are also expanding the SAP ecosystem to help our customers engage communities of their customers. For example, our recently announcement Facebook partnership gives brands the ability to take their existing data in SAP systems and use it to connect with their customers on Facebook.

Run Simple also means running our customers mission critical business applications in the cloud so they can focus on what they know best that is growing their business. With the HANA enterprise cloud, SAP is moving customers mission critical processes at an accelerated pace but as with SAP or our main partners IBM and HP, customers clearly see this as a low risk pass to access our new innovation giving them fast time to value. We will continue to leverage our partners to deliver our HEC solutions, thereby increasing our global reach, while managing SAP’s own datacenter investment needs. Finally, Run Simple means inventing new business models to grow in the digital economy. With a perfect combination of assets, SAP is leading the-internet-of-things revolution or industry 4.0.

Customers such as Siemens, and Hamburg Port Authority have selected the SAP IOT Big Data platform. SAP is also helping retail giants like AL de, Liverpool, and Mexico and Leader reinvent their business models and catalyze growth by targeting the right markets and servicing customers with relevant merchandise across all channels. For example, Leader with the SAP HANA platform as the cornerstone of their strategy who systematically analyze data across 10,000 stores and 130 distribution centers in 26 countries better understand and react to customer behavior in real-time. Now to the detailed financials. As I mentioned previously, we saw a fast growth in the cloud.

Our new cloud bookings were up 162% year-over-year showing that growth further accelerated in Q2. Cloud subscriptions and support revenue was up 129% year-over-year. After adjusting for Concur and Fieldglass, our cloud revenue growth accelerated sequentially and is clearly above our long-term growth aspirations we communicated at the start of the year. But not only are we renting up our cloud business, but we also continue to have a stable and growing curve with 13% growth in software and support revenue. This growth rate remains strong due to the continued high 90% adoption rate of our enterprise support offering in Q2 it was again at 99%, as well as our consistently high 90% support contract renewal rate.

The strong growth in software support and cloud revenue also resulted in an increase of the total of support revenue in cloud subscription and support revenue, which we consider the more predictable revenue types as a share of total revenue by four percentage points year-over-year to 62% in the second quarter. Now onto the regions starting with EMEA. We had a solid performance in the EMEA region with a 10% increase in cloud and software revenue. Our cloud revenue grew by 94% with triple-digit growth in new cloud bookings. In the Middle East we had a tremendous quarter in both cloud and software revenue, while Germany, France and the U.K.

all put up solid numbers. In the Americas region we saw a strong double-digit growth in cloud and software revenue with an increase of 36%. We were also pleased with the great quarter in our cloud revenue, which grew by 141% with new cloud bookings nearly tripling driven by a very strong performance in North America. The United States was a highlight with the strong performance across cloud and software. In Latin America it was a different picture where the regional microeconomic issues wait on our results.

In APJ, cloud and software revenue grew by 19% with both cloud revenue and new cloud bookings growing in the triple digits. Japan continued its recovery with another strong quarter across cloud and software. Now moving to the bottom-line. The overall gross margin for the company was 70.6% that is a sequential increase of 200 basis points from the previous quarter. Our cloud and software gross margin was 83.4%, a sequential increase of 100 basis points compared to the previous quarter.

Our Services gross margin increased sequentially by four percentage points as services revenue returned to growth in Q2. This result was driven by first early positive impact of the transformation of our traditional service business, as well as our strong premium support offerings. We’re also making good progress in our cloud gross margin which increase sequentially to 66.3% but more importantly it increased by 240 basis points from the previous year. Due to the strong results of gross margins and first early positive impact from our company wide transformation program, we were able to expand our operating profit by 13% in the second quarter as we continue to see a currency tailwind. The IFRS tax rate in the second quarter was 26.4% up from 22.6% in the prior year period.

The non-IFRS tax rate in the second quarter was 27.8% up from 25.4% in the prior year period. We maintained our tax outlook for 2015 and still expect the full year 2015 IFRS effect of tax rate of 25% to 26% and a non-IFRS effect of tax rate of 26.5% to 27.5%. Operating cash flow for the first six months was €2.8 billion up by 8% year-over-year. Free cash flow at €2.5 billion increased by 10% year-over-year. As Bill has said, we are reiterating our outlook for the full year, based on the strong momentum in our cloud business we expect full year 2015 non-IFRS cloud subscriptions and support revenue to be in a range of between €1.95 billion to €2.05 billion at constant currencies.

We continue to expect full year 2015, non-IFRS cloud and software revenue to increase by between 8% and 10% at constant currencies and we continue to expect full year 2015 non-IFRS operating profit to be in a range of between €5.6 billion and €5.9 billion at constant currencies. We expect to see a currency benefit through the rest of the year and have updated our expectations for the impact on reported growth rates in 2015. If exchange rates stay at the June 2015 average level for the rest of the year, the company would expect approximately a 5 to 8 percentage points currency benefit on cloud and software growth and on operating profit growth for the third quarter of 2015 respectively, as well as 6 to 9 percentage points on cloud and software growth and 7 to 10 percentage points on operating income respectively for the full year 2015. So let me summarize, very high growth rates in the cloud with the stable and growing for, while optimizing efficiency as seen in our gross margins and increased operating income this quarter. The digital economy is upon us, and we are leading the way to improve our business has to run real-time, run networked, and Run Simple.

SAP Cloud powered by HANA is the only real-time digital data offering and S/4HANA the one platform to run the enterprise is its foundation. This makes us confident that we will deliver on our growth commitments. Thank you. And we will now be happy to take your questions.

Stefan Gruber: Thank you very much.

I would like to hand it back to the operator and we would like to start the Q&A session now.

Operator: [Operator Instructions] And the first question is from the line of Michael Briest of UBS. Please go ahead.

Michael Briest: Great, thank you. Good morning, good afternoon.

Maybe firstly, Steve could you give us an update on where you are on bringing together all the assets in the business network, any changes in the go-to-market, product integration. How you feel progress is and when that is really going to hit its stride. And then secondly Luka just for you, on the restructuring there was quite a lot higher charge this quarter and the guidance for the year has been raised by couple of hundred million. I’m just wondering, what caused that increase and why perhaps it is not going to lead to better profits if you like as it flows through into the benefits in the second half. Thanks.

Bill McDermott : Maybe you're going to answer first and then will hand over to Luka.

Steve Singh: Okay sure. So first of all I am very happy with the progress of the business networking. We've obviously now got Concur, Ariba and Fieldglass integrated together. The first priority for that group though is to focus on making sure we are really the best-in-class in our respective markets in travel, procurement and continued labor.

We obviously - would get – and we have come from a great position of strength, so what we are seeing in first few quarters being under one structure, one group is that the bookings growth in all three businesses continue to decline. As you heard from Lukas comments you saw great revenue growth but that's equally followed by fantastic bookings growth which we think is a great proxy for the next year's revenue growth. The second priority is really then to focus on how do we integrate not just the Concur, Ariba and Fieldglass networks which we are in the process of doing but also to make those core services of integration available to any network in the world whether that’s an SAP network or an external network to integrate across all SAP networks and frankly across the SAP business suite and S/4HANA.

Luka Mucic: Okay. Then maybe I will take the question on restructuring.

Michael you’re absolutely correct, we had a substantially higher restructuring expense in Q2 then we had originally anticipated. We now have the half year point €418 million in restructuring expenses and we have raised our expectations for the full year to somewhere between €470 million and €530 million. So what is the background for that it's very simple and it’s actually a positive news. We have progressed far faster and with a greater acceptance by our employee base with our transformation efforts. As you may be remember, we have created voluntary and early retirement programs especially here in Europe which were hard to predict in terms of their acceptance by the employees.

Hence we took a conservative stands based on last year’s progress in terms of our restructuring guidance. However, in actual affect many more employees have registered for the program then we would have expected initially. This is very positive because we really could accept virtually everybody registered because they were coming from areas that we truly wanted to transform in order to have more capacity in order to reinvest it into growth areas. And hence we also seen our clear path to completing our whole structural transformation for SAP. I do not expect that for next year based on this much faster success in the transformation program, that we will need to come up with another company wide broad restructuring program, we should see for next year maximum very targeted efforts in some selected areas which will certainly be much smaller in size also from a restructuring expense perspective.

And in terms of the positive impact on the ongoing operating side of the business, we expect a mid triple digit million euro annualized run rate saving effect of the program. Of course this will fully materialize only as of next year but we have seen already some early impacts of that in Q2 and will now see more and more of these benefits flowing into the results in the second half here as well which is again adding to our confidence as far as meeting our full year outlook is concerned. I hope that answers the question, Michael.

Michael Briest: Yes, thank you.

Stefan Gruber: Thank you very much.

Let's move to the second question please.

Operator: And the next question is from the line of Walter Pritchard of Citi. Please go ahead.

Walter Pritchard: Thanks, Luka. I'm wondering if you could talk about - your closing in on the thousand S/4 customers and I think you expected most of those to use to bring your own license type of the model.

I'm wondering if you could update us on what you're seeing in the composition of those customers as you're closing in on that goal for that metric?

Luka Mucic: Yes, happy to do so. So, first of all the customers that we have acquired to date are really customers for our on premise version of S/4HANA, for the line share of the customers. As you know, we have announced our cloud edition at SAPPHIRE in Orlando, and we're making good progress to build out our cloud capabilities there. We are piloting this now with first customers, but what you see in terms of the customer uptick at this point is really on primarily on premise customers and hence it's license business in the traditional sense.

Walter Pritchard: And then does your - does the growth you saw in the customer and commerce business impacted all the kind of numbers you're looking in 2020, out of that business it sounded like based on two quarters ago, when you gave the original guidance, the expectations that were pretty low, I'm just wondering how you're thinking about kind of long term growth prospects in customer commerce cloud?

Luka Mucic: Well, I can start and then maybe Rob, you may want to add some color here.

I think we always had very strong growth prospects that we saw for customer engagement and commerce in the cloud. We are coming from a situation where we have lot of room for improvement but in the last - actually two years we have seen tremendous growth already, and these triple digit growth rates have been steady - seem that we could report on. The good thing is that by now due to this growth in the past across to numbers are getting more sizeable and that's an advantage, but this is clearly part of our mid-term planning and we are looking for further growth down the road. Rob, anything to add from your side?

Rob Enslin: Yes, I would say, for customer engagement and commerce, we see actually dynamic growth in the space. As companies move away from sales force automation and look at the full picture of what the commercial platform, A, you see growth in the sales force, so other opportunity area, marketing service and omni-channel and clearly we have the number one omni-channel e-commerce solution in the marketplace and tremendous traction as companies look at the full picture in that space.

Stefan Gruber: Okay. Thank you very much. Let's move to the next question, please.

Operator: Next question is from the line of Stacy Pollard of JPMorgan. Please go ahead.

Stacy Pollard: Hi, thank you. So, more than 7,000 HANA customers, that's an impressive number. What percentage of SAP applications customers would you say are running on HANA today? Or, perhaps more prudently, what percentage of new license deals are running on HANA, and I ask about license because I just assume that SAP cloud always run on HANA.

Luka Mucic: Yes, first of all - all of our solutions are of course running on HANA from a technical perspective and we are increasingly making this of course the factor choice of customers as the differentiating value of what we can drive, if our solutions are running on HANA, is just that much higher. When you take a look at just the relative share of customers and compare it, so we have round about 41,000 installations of SAP, ERP with round about 30,000 something thousand customers.

Right now we have 900 customers onboard for S/4HANA in the matter of one and half quarters, of course, there is still a lot of room to convert customers and to make them jump on the S/4HANA band wagon. The good news is that, the pipeline for S/4HANA is one the fastest growing things that I have seen in my time here SAP. We see very, very strong prospects here, and the pipeline now is growing basically on a daily basis. So, this gives me a lot of confidence that we will convert many more of these traditional ERP customers to HANA. Bernd, anything to add from a development prospective here?

Bernd Leukert: I think, just to build on Luka, what you said it's not surprising that our flagship products with S/4, but BW are the main drivers when we talk about upfront license revenue.

And this has started last year and is continuing the momentum as well in the first two quarter. But as well not to forget that as well in the SME segment, if you specifically ask for on premise and upfront, Stacy business one is significantly gaining traction here as well. We see here a clear shift going away from Microsoft SQL server towards HANA as well.

Stefan Gruber: Okay. Thank you very much.

Let's move on to the next question.

Operator: Next question is from the line of John King of Bank of America. Please go ahead.

John King: Great, thanks very much for taking the questions. I just had two on the license and S/4 side and then one follow up after that.

So, on licenses obviously I guess a bit weaker in Q2, down 7% X effects and I think you were talking in the past about small single digit declines, X effects for the year, is that still a thinking obviously you had some issues last time this quarter, but is that still what you’re expecting to be given what you see in the pipeline. That's the first one, I’ve got a couple more.

Luka Mucic: Thank you, John. Bill, you want to comment on this. You want to take the first question, please.

Bill McDermott: Yes, I'd be happy to. I think it’s a good observation. If you put Latin America in any kind of a normal run rate, you would absolutely be in the range that we all expect it to be in with our core license business. So, our core is still ever robust and solid and you shouldn’t worry about it. And at the same time you’ll have the robust growth in the cloud and the network.

So, all these things will come into full form. I also remind you based upon the strong actions we took in the first half, we expect the operating leverage in the second half. So, I see this coming together very nicely and in perfect sync with our planning process.

John King: Great. And then just follow up on S/4, could you give us a sense for how much of the customers you'd got there 900, how much of those are coming with free upgrade that you've provided versus customers who are actually paying for the license, just to get a sense of how many for that 900 number is? And then there's last one which is a follow up for Luka, probably on the restructuring.

Could you just clarify what you said in terms of the savings, the annualized savings, I think you said triple digit millions annualized - should we read that to be 500 million, and if so, early thoughts, I suppose about 2016 margin progression. Thank you.

Bill McDermott: Okay. I think the first question on the S/4HANA customer compositor, maybe Rob, you can handle this, and then we move over to Luka.

Rob Enslin: Yes.

I mean out of the 900 plus, new customer in S/4, the customers converting the databases onto S/4HANA and then the application is probably 60%, 65%, and 35% net new companies on S/4.

Luka Mucic: Okay. And on the question around the annualized impact, I think you should plan for slightly less than €500 million, but in the neighborhood.

John King: Okay. And is there any big offset there, we should be thinking about into next year obviously given if we’re trying to think about HANA margin progression through 2016.

Luka Mucic: As you know, we have mid-term planning out there into which we are factoring this results that we are seeing so far as well as the impact on the annualized savings. We need to continue to invest and we will invest wisely in those areas that we grow, that we see innovation potential, where we see accelerated adoption potential and growth potential for the company which will then transform also in greater operating profit for the group. And we see ourselves right on the trajectory that we wanted to see going into the 2017 results, as well as then later on 2020, and the strong traction that we have gained on the transformation so far will be helpful in this respect and therefore will of course also be helpful to overall operating profit but we'll talk about operating profit guidance for 2016 when we have closed out the year.

John King: Got it. Very clear.

Thank you.

Stefan Gruber: Thank you very much. Let's move to the next question, please.

Operator: Next question is from the line of Knut Woller of Baader Bank. Please go ahead.

Knut Woller: Thank you. I think if I understood correctly, you said that majority of the S/4HANA customers that you won predominantly on premise and I understand also the weakness in LATAM, however I was still surprised given the magnitude of the S/4HANA customers one already that early in the cycle that the license number was down. I understand HANA is a multi-year opportunity but [indiscernible] is it fair to assume that some of the revenues could not have been fully recognized in the quarter and therefore that you have a greater visibility looking in the second half which also builds comments suggested that you expect some positive impact from the initiatives you took in H2 is that the right way to look at it. Thank you

Bill McDermott: Yes, so first of all, of course the 900 customers that we have licensed their relicensed customers with corresponding revenue attached to it that we have no doubt. On top of that of course we have a high number of trials out there where customers are testing the software.

This is a pretty decent four digit number of customers and of course we expect many of them to be excited about what they see and then come back to purchase. As I said, our pipeline is strongly and quickly building up. We have definitely in the second half year number very significant transactions across all of the regions around S/4HANA and so we are very confident in the pickup here but it’s not only as S/4HANA if I may add that in isolation. S/4HANA truly for us is the transformational core that is really completely rejuvenated for the digital age on which customers can then extent very easily and seamlessly into value adding solutions especially in the cloud. That’s how all of our acquired assets also come together.

If you think about it with S/4HANA you are optimizing and completely flexibilizing your core business processes and then you extend easily with SuccessFactors into managing your workforce more effectively Into your supplier base with the business network assets, into your customers with omni-channel ecommerce, into machine-to-machine communication with our big data solutions, the HANA cloud platform and HANA is the platform and that is really creating the complete end-to-end vision that we can propagate for our customers and it drives a lot of growth even outsize of the core of S/4HANA and in that respect SAP is unique in its capabilities.

Knut Woller: Thank you.

Stefan Gruber: Thank you very much. We now take the next question

please
Operator: Next question is from the line of Gerardus Vos of Barclays. Please go ahead.

Gerardus Vos: Good afternoon. Thanks for taking my question. Two if I may, just want to come back on the kind of license in S/4, I was looking at the kind of volume and the volume of own premise deals which kind of take top in the first and second quarter for the first time in ten quarters. And I was wondering if this the case that you see S/4 initially coming to in volumes but not yet in revenues because its relatively highly discounted. So just wondering if this is a fair way of looking at it.

And then secondly on the cloud, great set of numbers there that calculates an 80% organic increase in net new cloud bookings, how do you expect this to kind of flow through in the coming quarters or so? Thank you.

Bill McDermott: Maybe first of all, Rob do you want to comment on the pricing and discounting for S/4HANA?

Rob Enslin: Yes, I have couple of comments, I think S/4 has been in the market five months and it has been all of our expectations to get close to 1000 net new customers. I think it is in infancy though, when you look at S/4 and what we are doing in a marketplace with S/4, you can definitely see an acceleration in the back half of the year and Luka mentioned the pipelines are exceptionally strong and you are going to see that. Regarding the pricing, the pricing was largely a promotion until the end of September and we are finalizing that. But as Luka said, if you look at our numbers the strength that we have in Europe, in North America, APJ and on premise side, S/4 is a big part of it and we see that happening in the second half as well.

Bill McDermott: Yes absolutely and it is definitely not a factor of discounting because the price is set as part of the promotion and HANA as much has obviously a stable pricing and is not subject to discounting so that's not a factor here. And then on the Cloud bookings, you are absolutely right, we had very strong growth there also from an organic perspective and the nice thing is it is really very, very well balanced. We had strong growth across basically all of our Cloud assets and of course the speed at which these bookings will then translate to revenues is different by business model, you will see in some parts especially on SuccessFactors where we had a very strong quarter, but this will flow into revenues relatively quickly in line with the usual patterns that we see in that business, whereas HANA Enterprise Cloud bookings which were also strong but of course only represent a small proportion of the total bookings will take a bit longer to come into revenue because it simply takes longer to set the customers up for productive usage with these more differentiator solutions. But definitely one thing is clear as you mentioned, bookings trajectory is far exceeding the long-term growth CAGR assumptions that we are setting for our Cloud business. So we are basically leading forward now and with this strong performance, as well as the similar good performance that we’ve seen in the beginning of the year, we are absolutely well positioned to meet those assumptions of at least 30% CAGR, I think we have a good opportunity to go past this.

Gerardus Vos: Okay. Very clear. Thank you.

Stefan Gruber: Thanks you very much. The next question please.

Operator: Next question is from the line of Adam Wood of Morgan Stanley. Please go ahead.

Adam Wood: Hi, great. Thanks very much for taking the question. Just a few follow-ups if I could, just first of all on S/4HANA and I’m sorry for coming back here.

As we have gone through the last few months obviously very good adoption of very good pipeline, could you tell us anything more about the pace of migration do you see on the installed base and maybe help us if there is any milestones or barriers in terms of product roadmap that would drive that adoption, is the logistic modules coming through at the end of the year that would really drive bigger and more wide spread adoption. Secondly to come back to that minus 7% on the licenses, can we just - is there any way you can help us understand how much of that is cannibalization of customers going to Cloud versus maybe just a very weak specific geography on whether that Cloud growth actually is more new customer and need product driven versus cannibalization driven. And then finally coming back on the margins, you reflect a very strong Cloud gross margins, it looks as if we have turned the corner on those and either they are improving or the rate of decline is slowing. Is it really that that we hit the scale we need to drive profitability and we should see assume the Cloud gross margins continue to move upwards from here. Thank you.

Bill McDermott: Adam I think for the first quarter Bernd will handle, then the question on license cannibalization and margins handled by Luka.

Bernd Leukert: Yes, so happy to take that question regarding pace of migration for S/4. It definitely right that the major driver in the last two quarters has been all our investments and benefits we have given to customers in the area of financials and controlling. We have launched simple finance in Q2 last year at SAPPHIRE, build pipeline momentum and we saw a significant number of live customers already in the first two quarters on S/4/ But not from multiple perspective we have invested a lot here as well from a technical migration. I just can report to you that the migration from an existing business suite customers towards S/4 is now possible in hours while an upgrade in the traditional suite sometimes took a day or even a weekend.

So the simplification in architecture pace of here as well in terms of effort but as well duration of migrating an existing SAP solution towards S/4. And you are right as well the assumption that when we deliver as well the logistics modules in the first quarter into our on premise world, we expect significant boost as well and soon having the 1000 customer of S/4 as everyday w get new ones that we expect even an accelerated growth in the fourth quarter of this year.

Luka Mucic: And maybe on the cannibalization question which is really a term that I strongly dislike because I think it is strongly misleading as well. Here is the fact, we did best in the Cloud where we did well in on premise licenses in Q2 and vice versa. If you take a look at our most mature markets where the propensity to buy Cloud and solutions certainly most advanced globally, we had very balanced and good results in terms of positive license growth as well as strong and explosive cloud growth.

That holds true for the U.S. Positive software licenses very strong Cloud growth holds true for Germany, same holds true for the U.K., very strong growth in both elements, holds true for Japan and for other markets. Where in turn we had weakness in licenses like in Latin America while we still saw a growth in the Cloud. We saw that it was also likewise dampens. So it is not a story about direct cannibalization of course there are some elements of our portfolio where we clearly recommend to the customers to go with the Cloud solution because it simply makes sense to do that in HR for example or in customer relationship management.

But in terms of our overall business prospect, as I said before, where we can lead with that vision of an integrated perfect enterprise, data driven enterprise based on a truly revolutionary of S/4HANA and then extending it with Cloud we win on both sides of the house on premise as well as Cloud. In terms of the growth margins you are right, we are seeing now the third quarter in terms of sequential growth in cloud gross margins and definitely our ambition is to continue that increase. Now as you know, we have set a specific gross margin targets for each of the business models that we run in the cloud for the private cloud, for the public prediction cloud, as well as the business network group and we are working towards that trajectory for each and everyone of the modest, understanding that the private cloud HANA, enterprise cloud is still running at a negative margin and therefore we are still to see the breakeven point and then positive gross margins. This may wave in the short term depending on the business growth on the overall gross margins a bit, but that’s for me less important than really seeing in all of those three distinct models continued and steady progression towards higher gross margins. And I’m very confident that we will achieve this and see this for all of the three different models.

Adam Wood: So just to be clear, I apologize for the cannibalization comment, but it is really the weak market, weak macro that’s causing that license issue is not people moving to cloud as you said, you got strong cloud and strong licenses where the macro in the markets are good.

Bernd Leukert: That’s exactly the case. So in markets like the U.S., like Germany, like Japan we had very strong growth across both. Actually one of my favorite markets because I am serving there as [indiscernible] of the Middle East is a perfect example. Consider the classic on premise license market, yet for the last three quarters they showed very strong double digit software license growth coupled with triple digit cloud growth, and I think that’s the best proof point that you can indeed have both.

Adam Wood: Very helpful. Thank you.

Stefan Gruber: Thank you. The next question please.

Operator: The next question is from [indiscernible] of Jefferies.

Please go ahead.

Unidentified Analyst: Great. Thanks so much for taking my question. Most of my questions have been answered but hoping maybe you can tell us a bit more about what's going in the HCM market? High double digit number of competitive wins against the other key players, and we've been seeing increasing momentum with Employee Central for several quarters now, but Rob, can you maybe shed some additional light on what's changing by competitor in each of the various theatres where you're playing?

Rob Enslin: Yes, I think a couple of things on HCM. First of all, I would say to Bernd and his team we have a world class Employee Central solution now, that covers multiple pay-roll in multiple countries, it’s pretty much the only globalized solution in the marketplace.

And I think what you see with HCM is execution across the board and pretty much every market, every theatre, very, very strong performance in the United States. And in Europe as Luka mentioned, we have now 730 new customers in that space, and we see that trajectory continuing. Some more key names that we have acquired in with Employee Central, so some more key names across the world, I’ll give you just some color. These are wins against with Oracle, with Cathay Pacific, [World Kellogg] [ph], RE, WE Singapore Telecom, Telephonic, National Bank of Canada Moody's, so you see a list of – a quick list. Globally we are executing in HCM’s SuccessFactors in all cylinders and we are the only fully globalized solution in the marketplace that is fully public cloud available today.

Unidentified Analyst: Appreciate the color, and if I can just follow up with one for Luka. Luka, I appreciate the different gross margin profiles of the various deployment models. But particularly this quarter, we've seen upside from cloud from the business network, and I was hoping you can just help us not just from a cost to good perspective but when you think about incremental OpEx, particularly acquisition costs for the business network, I would expect that the incremental margin there from an operating perspective is extremely high. And also for cloud as you’re renewing customers over time as opposed to acquiring new ones, can you just maybe give us a bit more color into the power of how that compounds? Thank you.

Luka Mucic: Yes, so maybe on the business network and the potential there, it would be even better for Steve to handle that, if you want, Steve.

Steve Singh: Yes, of course. So, first and foremost, on the gross margin side of the business network you're absolutely right. It's really frankly the best in Cloud levels but I think there is room for improvement here. The improvement you will see over time, we’re not overly focused on moving the gross margin up each quarter, we’re much more focused on driving new customer growth and making sure we can support that growth through limitation and also frankly through support. I think as growth rates slow which we actually don’t expect for any time in near future, as growth rates slow you will see that the incremental gross margin move up even further.

Today on every new dollar of revenue that comes in, in the business network group, the incremental margin is 85% plus rate, so this is consistent with every other public Cloud offering that's available on the marketplace. Having said that look the rates of growth that we are seeing in this business are in excess of anything we saw in the standalone business whether you are talking about Ariba, Fieldglass or Concur. So the rate of growth in new bookings is just phenomenal and it is really being driven now by continued expansion within business network group, distributional organization but through the collaboration that we have with the GCO organization, Rob's group and the ability to penetrate the very, very large installed base of SAP customers.

Luka Mucic: And I would say quite frankly with that already answered on the second part of the question is a lot of what you say for the business network group definitely holds true for the rest of our portfolio as well maybe we take the next question.

Stefan Gruber: Yes, the next question please?

Unidentified Analyst: Thank you.

Operator: Next question is from the line of Philip Winslow of Credit Suisse. Please go ahead.

Philip Winslow: Thanks guys. Congrats on the great quarter in the Cloud, just one question for Bill and then a follow-up for both Bill and Steve. Bill, obviously you talked your good build in S/4HANA customers and obviously lot of strength in the cloud and business networks, I’m wondering now there has been sort of multiple months since you laid out the S/4HANA vision and obviously in multiple quarters now since you purchased Concur.

What is the feedback from customers as been as far just for the forward roadmap for SAP and how is that changing conversations on both sort of the core and also these new areas. And then the question for both Bill and Steve now that you had Concur under your belts for a couple of quarters now, Bill sort of what surprised you so far versus your pre-acquisition expectations and then Steve similar question for you.

Bill McDermott: Okay, great. Well, I will start it off Phil, thank you for the question. I think the big idea with the S/4HANA is the notion of value creation in the digital economy.

If you think about these companies that we're working with today, they are all trying to digitize their businesses and create new business models. S/4 and S/4HANA enables them to do that so now we have a platform, they will have the application – strategy to actually execute their plan. And [Stanley] [ph] if you’re not talking you should put your phone on mute because there is quite an echo. The strength of S4 and S/4HANA, in terms of the acquisitions I would simply say one bright part that’s even been more upside then I could have imagine Steve Singh's leadership and the commitment of his entire Concur company to the SAP mission, what they've done in the business network is stunning and it shows in the growth numbers. I also think it speaks well to what we have done with the Ariba putting a well seasoned alternative SAP in charge of Ariba and that business is growing beautifully with the new user experience and some excitement in Europe and other parts of the world where I think we're surprising people with the growth rates.

And then obviously SuccessFactors, if you think about the acquisition of SuccessFactors the earliest one we did and the impact that’s had in the human capital management space, everything we bought has worked, everything we bought has worked in conjunction with or better than anything we expected in the boardroom business case. And I think we really took a lot of people by surprise with the concept of the business network and then demonstrating that the network with nearly a trillion running through it in U.S. dollars, and the way it transforms global business combining that with S/4HANA as the platform, running the applications running the networks, the imminence business value that can be run out of the solutions is just unbelievable. So again I tie it back to our value creation digital economy and we are in adapt or dire economy and the center of everything will be a modern technology innovator of platform like SAP as it takes these customers to an entirely new level in every industry and every geography around the world. But I want to especially thank my Board colleagues for the way they've embraced the acquired companies, and I especially want to thank Steve, for coming on to the Board and doing such a fabulous job with the network and fitting in so beautifully with the SAP culture and our robust growth ambitions for the future.

Steve Singh: The only two comments I would add to this is, look, any time companies are acquired, we have to approach it with at least a level of pragmatism, so look things are going to be different and there could be challenges. I will tell you while there's always challenges in acquisitions, the amount of upside that we’ve seen has so far exceeded my expectations, that I look at this and say, look, this is wonderful for our customers, it's wonderful for our new shareholders, obviously the shareholders of SAP. That's showing up obviously in things like bookings growth rate and also the revenue growth rate, but just as much in the secondary which is, there's a definite transformation that it's really just starting to come about, where customers are looking at the offerings much more holistically. They're looking at – it's not just this line of business applications or the business network applications that are important to me, which is obviously the new growth area for – that highlighted the cloud computing. But it's how they integrate into the core and what innovation we are seeing in the core.

One of the things that I find nearly fascinating is the number of meetings that are now in, where the buyer is looking at this from the point of view of the entire solution set, from what they run their business on, to all the line of business applications they plug into that core. And I think that we see that at the biggest companies in the world, that's fairly to what you're going to see in every other company in the world with time. So this digital transformation that Bill is talking about, this is -- you see the forefront of that right now.

Philip Winslow: Thank you very much.

Stefan Gruber: And this concludes the financial analyst call for today.

And thank you all for joining and good bye.