Executives: Stefan Gruber - Head of IR Robert Enslin - President of the New Cloud Business Group & Member of Executive Board William McDermott - CEO & Member of Executive Board Luka Mucic - CFO & Member of Executive Board Scott Smith - Director, IR Bernd Leukert - Head of Products & Innovation & Member of Executive

Board
Analysts: Walter Pritchard - Citigroup Gerardus Vos - Barclays PLC Philip Winslow - Wells Fargo Securities Chandramouli Sriraman - MainFirst Bank Adam Wood - Morgan Stanley Michael Briest - UBS Investment Bank Alexander Tout - Deutsche Bank John King - Bank of America Merrill Lynch Patrick Walravens - JMP Securities Ross MacMillan - RBC Capital

Markets
Operator: Good day, and welcome to the SAP Q3 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Stefan Gruber. Please go ahead.

Stefan Gruber: Thank you.

Good morning and good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the third quarter 2017. I'm joined by CEO, Bill McDermott and Luka Mucic, our CFO, will both make opening remarks on the call today. Also joining us for Q&A, our board members, Rob Enslin, who runs Cloud Business Group; and Bernd Leukert, who leads Product and Innovation.

Before we get started, as usual, I want 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, intend, may, plan, project, predict, should, outlook and will and similar expressions as they will relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements.

Our 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 SEC filings with the U.S. Securities and Exchange Commission, including SAP's Annual Report on Form 20-F for 2016 filed with SEC on February 28, 2017. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. On our Investor Relations you can find quality statement and financial settlement summaries like deck, which are both and it did 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 are non-IFRS at constant currencies. The non-IFRS 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 with that, I like to turn things over to our CEO, Bill McDermott.

William McDermott: Thank you very much, Stefan, and hi, everyone. I appreciate you joining us today to discuss another strong quarter for SAP, another increase in SAP's full year guidance, and a clear path to the future for the world business software market leader.

Let's begin with Q3 results. Today, SAP reaffirmed its position as a profitable growth company, steady as we go. We delivered strong growth across a whole product portfolio. We once again delivered a tri-factor of software, cloud and operating income growth. Cloud was up 27% in Q3 and is up nearly 30% year-to-date.

Astellas software license performance up 3% in Q3, and up an impressive 5% year-to-date. Cloud and software was up 8% in Q3 and also up 8% year-to-date. We expanded in every region led by a strong growth performance in China. It's clear the trading China as our second home is really paying off. Overall, we saw a continued business momentum, despite significant currency headwinds.

Once again our results continued SAP's tradition of profitable growth. EPS was up double-digits. Operating profit was up for 4%. And this is continued expansion of absolute operating income even as we executed a successful business transformation to the cloud for SAP stakeholders. As discussed in July, first half hiring is now complete.

You're not seeing the benefit of a fully engaged inspired SAP workforce. As we drive further profitability improvements to deliver on our 2020 ambition, we have appointed a new board member. His name is Christian Klein. As COO of the company, Christian will accelerate monetization of core business processes, consistent with SAP's cloud and platform strategy. Welcome to the team, Christian.

Let me now turn to our growth drivers for SAP, the most innovative cloud company powered by SAP HANA. Licensed sales growth grew 3%, exceeding expectations S/4HANA adoption grew to more than 6,900 customers, up 70% year-over-year. 600 additional customers signed up, of which, 40% were net new. S/4HANA continues to be adopted by the most forward thinking global companies, Nvidia, China International Containers and Dodge AG, are some of many that selected S/4HANA in Q3. Many other leading companies went live on S/4 in Q3, including Tom Taylor and S/4 HANA again grew new cloud bookings triple-digit in Q3.

Even as some of the industry have decided to go low, I'll stay high. The reality is we've added more cloud ERP customers in 7 months than some competitors have added in 7 years. If you count procurement, we have many thousands of cloud ERP customers. The only measure that matters for SAP is customer success and loyalty. Customers are going live with S/4 in as little as 6 weeks.

S/4 is proving very attractive to large enterprises for 2 Tire ERP. S/4 HANA is built on a consistent data model, regardless of its deployment method. The S/4HANA generational upgrade cycle is still in a very early stages, and it represents a massive multiyear growth opportunity. SAP's ERP leadership is customer-driven at the core. Shell has chosen SAP S/4 HANA ERP cloud as their strategic platform for the next generation of cloud-based ERPs, and will enable future innovations across their company.

The SAP ERP cloud platform will help Shell to simplify complex business processes. Fixed Leasing, a German provider of leasing management, has selected S/4HANA ERP cloud, SAP SuccessFactors and the whole sweep of their application, SAP Cloud Platform and analytics cloud could digitize their processes and analytics capabilities to further growth, another word, everything in the cloud. Overall, new cloud bookings grew 19% in Q3 and 30% year-to-date. Now, as you may recall from Q3 2016, we experienced some seasonality in our cloud business on a smaller base. When you think about SAP's cloud growth, we increasingly see customers pursuing more large-scale transformations, which have a tendency to close in Q4.

This is another factor in our confidence to deliver a strong full year performance of at least -- "at least" 30% year-over-year cloud bookings growth. And you can expect a dynamite Q4, and very consistent with our year-to-date growth rate in revenues So, don't worry about the bookings, relax. It's going to be terrific in Q4. One example of a huge upsell cross-sell opportunity is our reinvigorated analytics portfolio, led by SAP's Digital Boardroom. Be posted strong double-digit new cloud bookings for growth in Q3.

SAP Hybris, our customer engagement solution, again, achieved strong double-digit new cloud bookings growth as well as double-digit growth and software revenue. Pharmaceutical chose SAP Hybris in Q3. We also announced the acquisition of Gigya, the market leader in customer identity and access management. This will further enhance SAP's commerce solutions by allowing companies to better manage customer's profile, preference, up and consent setting with customers maintaining control of their data at all times. This is especially timely, given the March deadline to comply with GDPR in 2018.

We're pretty excited about our unique position to capitalize on that market opportunity. SAP SuccessFactors saw another big quarter with new customer addition. SuccessFactors Employee Central now has over 2,000 customers worldwide, up 49% year-over-year. SAP SuccessFactors was named a leader in Forrester's research wave, the Spanish football league; and Bancorp Columbia, the largest commercial bank in Columbia, selected SAP's workforce management solution in the third quarter to deliver unified high-quality employee experiences. SAP Arriba now has 3 million companies in 180 countries trading more than USD 1 trillion in goods and services annually on the Arriba network and choose Arriba this quarter.

With SAP Fieldglass customers manage 4 million contingent workers in more than a 180 countries. Concur, helps now nearly 50 million end users effortlessly process travel and expenses. We're proud that Concur's travel management solution help emergency workers to points of or need in Texas and Florida. chose to implement a Concur feature called serge blanket travel to deploy 11,000 federal employees from across The United States in record time. The unifying vision of SAP is to help the world run better and improve people's life.

Driven by this high purpose, SAP is gaining share everywhere. You can see this clearly in combined order entry, cloud TCV plus software. Combine those 2 numbers, we're up a stellar 15% this year. In contrast to our main competitors report out, SAP is an organic inhibition story. We have no benefit from acquisitions in our numbers and we haven't for the last 2-plus years.

SAP is the only company in the business software industry scale to deliver both fast, cloud growth and license growth. SAP's integrated solutions portfolio is really paying off for our customers. Line of business application and the Digital Core are seamlessly linked in a true end-to-end offering across industries for our customers. SAP's innovation agenda also ensures the ClearPath of future growth. At the epicenter of the digital revolution is a SAP Leonardo.

Leonardo gives SAP customers the tools to adopt breakthrough innovation for intelligence processes and new business models. It combines SAP's deep process and industry-domain expertise with cutting-edge technology, such as IoT, Big Data, machine learning analytics and blockchain. You're already seeing Leonardo breakthroughs embedded in SAP solution from S/4HANA to SAP SuccessFactors and SAP Hybris. For example, IoT in tandem with digital supply chain was a stand out in Q3, growing new cloud bookings in high-triple digits. in Brazil, which supplies about 25% of the global orange juice market, turns to SAP Leonardo together with SAP S/4HANA and SAP supply-chain.

The combination of SAP solutions will connect farms to manufacturing sites, and optimize transportation logistics worldwide. Many others, including Cisco technology management, system, adopted SAP Leonardo solutions in the third quarter because they want to become intelligent enterprises. With our API hub, an open SAP Cloud Platform, our echo system is also incubating new innovations. We're excited that new partnerships will proliferate the SAP platform across the hyper scale public cloud providers. Our successful strategy and execution has cultivated the business model that has never been stronger.

Our more predictable support and cloud subscription revenue is on target to reach 70% to 75% of our total revenues by 2020, right on track. Our desire for a more predictable revenue provides strategic flexibility for capital allocation, to deliver ever-increasing shareholder value. One example, Luka will update you shortly, on the progress of our €500 million share buyback plan. Another example, is our consistent dividend payout, which remains the best in the industry. SAP's broad global footprint, diversification and ever larger flickering base provide resilience in an uncertain world.

In conclusion, ladies and gentlemen, SAP is evolving from the business system of record to the platform for the digital revolution. Led by SAP S/4HANA, we are delivering intelligent business applications, built on the most data-rich architecture ever created. We go-to-market with a tightly integrated core, with distinctly different industry expertise in each of our 25 industries, and we adapt our solution to every geographic market. Customers are voting with their This is feeling growth in every corner of the business, which is why we're once again raising guidance for the full year. I'd like to acknowledge our over 87,000 women and men worldwide for their immense dedication to our customers and our shareholders.

Another strong quarter, another guidance raise, a ClearPath to sustained growth which with -- and underscore with, margin expansion on the horizon in Q4 and beyond. Margin expansion, on the horizon in Q4 and beyond. For SAP, the best is unquestionably yet to come. Thanks for your interest and yours all support. I'll now turn the call over to our Chief Financial Officer, Luka Mucic.

Luka, over to you.

Luka Mucic: Yes. Thanks very much, Bill. And hello, everybody, from my side. Bill already shared some of our results and yet another strong quarter in our rocksolid core business and our fast growing cloud business.

In addition to our overall strong business performance, we continuously have a more predictable business now. Now it is 66% share of total revenue for the first 9 months of the year. We clearly demonstrated that we are profitable growth company, despite severe currency headwinds. To get a better understanding of the key factors that made up for this growth, let me go into more details now. The key metric that demonstrates our performance in new business for the quarter is the strong year-over-year growth in new cloud and software license order entry, which was up 15%.

This growth is indeed a strong achievement, especially when considering SAP's large-scale. Specifically, to our cloud business, our new cloud bookings grew by 19%, and our cloud revenue growth came in at 27%. We do have visibility into our robust cloud pipeline, and are extremely confident of continued fast growth for the remainder of this year and through 2020. This quarter, however, we didn't see the linearity we hoped for. As Bill already mentioned, with new cloud bookings in the quarter, we noticed that some customers are attaching line of business cloud decisions to larger S/4HANA transformational deals.

Because of this, we do expect a much better Q4. And also please remember that new high potential cloud solutions, like S/4HANA public cloud, SAP cloud platform, SAP analytics cloud and SAP Leonardo will have more impact on growth, at lease scale to be a bigger part of the mix. On a year-to-date basis, we're on track with cloud revenue growth of 28%, and new cloud bookings growth at 30%. Before I continue with software revenue, and our regional performance, I want to briefly mention of change in our disclosures. Over the last years, we have been disclosing a number for deferred cloud revenue, that is for the cloud portion of our total deferred income.

As you certainly know, we will adopt new revenue recognition rules for January 1, 2018, commonly known as IFRS 15 of ASC 606 being the U.S. GAAP equivalent. There is no deferred revenue item anymore under IFRS 15. The new rules instead look at contract assets and contract liabilities, which are not determined on the level of the individual deliverables, but on the level of the entire contract. But our contract is a net liability position and asset position on either, does not depend on when the customer is billed.

At SAP, we are now in the final home stretch of migrating our processes and our customer contracts to IFRS 15. At this point of our migration, we have no reliable way to report deferred cloud revenue any longer. The best way to measure our new business volume as we have repeatedly stated on past quarters, this with new cloud bookings, which we have cost continue to disclose. In the coming months, we will provide further details around our new disclosures on the IFRS 15. Now, from a software perspective, as Bill has stated already, we had great success and we grew by 3%.

There were two main growth drivers. First, the continues momentum of S/4HANA; and the other driver continues to be our customer engagement e-commerce solution, which again shows strong double-digit growth. All of this resides in strong cloud and software growth at 8% in both the quarter and year-to-date. Now let me spend a few words on the third quarter regional results. Starting with Europe, we had a really strong performance in the EMEA region with cloud and software revenue increasing by 9%.

Cloud revenue grew by 46% with an especially strong quarter in Germany and Spain. In addition, we had strong double-digit software revenue growth in Germany, Russia, and the Middle East and North Africa regions. We have solid growth in the Americas region despite the natural disasters, in both The United States and Mexico. Cloud and software revenue in this region grew by 7%. Cloud revenue increased by 19%.

In cloud revenue, Brazil was a highlight, while The United States had a very strong quarter in the software revenue. In region, we had a strong performance in both cloud and software revenue as well as cloud revenue. Cloud and software revenue was up 9%. Cloud revenue grew by 37%. Japan and Australia were very strong in cloud revenue.

For software revenue, Australia had triple-digit growth, and China had strong double-digit growth. Now onto profitability and gross margins. As you know, we continue to have revenue mix-shift effect between our cloud and on premise business, which negatively impacts our cloud and software margin. Our cloud and software gross margin decreased by 1.3 percentage points year-over-year. The mix shift impacted this margin by 17 basis points.

Our cloud gross margin decreased by 3.3 percentage points, which was lower than we expected. The impact was due to our continued investment in a highly standardized converged HANA-based cloud platform and expenses incurred for the ramp-up of new technologies, such as our S/4HANA public cloud. These investments, in particular, impacted our public cloud margin, but to a lower extent, they also impacted our network margin. The public cloud margin declined by 4.3 percentage points, and the network cloud margin increased by 80 basis points. For the private cloud, we also saw a decrease, but this was mainly due to an industrywide short-term increase in the cost of -- which resulted in a year-over-year increase in infrastructure costs.

It's also important to remember that while our private cloud is a lower-margin business compared to other cloud models, it is a strong enabler of S/4HANA software deals. Thus, with every deal, it also drives higher-margin software and support business. And let me be very clear, our dedicated cloud investments are laying the groundwork for gradually increasing profitability on the way to achieving our 2020 ambition. A highlight in this quarter, again, was our services performance. Our services gross margin continued its upward trend, as expected, and was up 5.2 percentage points year-over-year.

This was driven by the continued reduction of coinvestment projects and a solid top line increase. This strong service result helped us keep our cloud -- our overall group gross margin stable year-over-year. We achieved this result despite the currency headwinds and investments into cloud, as mentioned before. Overall, we were very pleased that our operating profit continues to expand with mid-single-digit growth this quarter. The IFRS earnings per share increased strongly by 35%, due to lower share-based compensation, acquisition-related charges and restructuring costs.

Non-IFRS earnings per share increased by 10%, driven primarily by a very strong finance income as our ventures organization, had again a very successful quarter. The IFRS tax rate in the third quarter increased slightly to 28.6% year-over-year, while the non-IFRS tax rate in the third quarter was 29.2%, which is down 50 basis points from the prior year period. We now expect our full year IFRS and non-IFRS effective tax rate to be below our previous outlook, which so far was 26% to 27% for IFRS, and 27% to 28% for non-IFRS. The expected decrease is due to a positive onetime tax effect relating to an intragroup transfer intellectual property rights anticipated to be executed in Q4. During the course of the fourth quarter, we will update our effective tax rate guidance as soon as we exactly known the effect from the IT transfer.

We now overall expect a very strong non-IFRS earnings per share performance for the entire year. As promised, last quarter, we initiated our plan to buyback up to €500 million in shares for the second half of the year. We will briefly alluded to that. As of quarter end, we have already brought back more than half of that, to be exact and precise, €288 million. The rest to follow during the course of Q4.

And on top of that, we continue our strong cash generation. Operating cash flow of more than €4 billion, year-to-date, or an increase of 14% year-over-year. From a liquidity perspective, our net debt was down to €1.7 billion, which is an improvement of €2 billion year-over-year. Now finally, as a result of our strong adoption of S/4HANA and our digital business platform, we are raising our outlook for the full year. And we have also updated our currency expectations for the impact on reported growth rates in 2017.

For more details, please refer to our quarterly statement published earlier today. I would also like to talk about a few of our key nonfinancial indicators because there are equally important to us as a management -- company. This quarter, we increased the number of women in management even further to 25.2% as our efforts to promote diversity and the equality continue. In line with our goal to become carbon-neutral by 2025, we reduced our third quarter CO2 emissions by 6% compared to the prior year. And finally, our employees continue to embrace our strategy and higher purpose.

Our employee retention was at a very high 94.2%. So to summarize, we delivered strong solid top line growth and continue to expand our operating profit. For the second quarter in a row, we've raised our guidance. On top of that, our cash generation and EPS growth remains strong. Our performance, our portfolio and our pipeline, make us confident and make me confident that we will deliver on our midterm ambitions.

Thank you very much. And we will now be happy to take your questions. Thank you, operator. Could you please start the Q&A session.

Operator: [Operator Instructions].

We'll take our first question from Walter Pritchard from Citi.

Walter Pritchard: Luka, I wonder if you can put a little more detail around the commentary around margins in Q4, and then directionally for next year? I think the gross margin did come down more than we expected in Q3, but it sounds like you still have the confidence that in the progress sales on track? I'm wondering what do you expect to have cloud gross margins in the fourth quarter? And then, do you expect you could get back to or above the levels that you've seen for the year in 2017 when we get into 2018 with most migration and so forth behind you at that point?

Luka Mucic: Yes, Walter, thanks for the question. It's indeed an important one. And let me start by saying that I have actually have been very pleased with the discipline that I've been seeing across the organization in Q3, to absolutely make sure that we bring down the gap between revenue and expense growth that we have seen in the first half year. That's exactly in line with what we have committed to.

And you see that in the that our operating margin declined in Q3 as decelerated to only 90 basis points from a year-to-date performance of 1.2 percentage points. And that sets us up for a situation, which I believe that we've continued from expense discipline, as well as the expected strong business performance that also Bill alluded to, we have now a very decent chart at managing towards a flat margin on a constant currency basis for Q4. And for 2018, absolutely, the commitment stands that we will start to see improvements in margin. Especially, in the years 2019 and 2020, they will be more accentuated, but already in 2018, we should definitely see an improvement, yes. In terms of the cloud gross margin, you are correct.

We -- as I shared as well during my comments, we have seen a declined to an extent that was not part of our original planning. The reasons are very simple. We see 1 percentage points to 2 percentage points in less revenues from the low linearity on bookings that we are alluded to. So on the revenue is -- there's a smaller shortfall against our original expectations. And on the investment side, we actually have decided to accelerate investments into the converged cloud platform, as well as into some geographical expansions where we saw opportunities to make sure that we are at the market earlier than our competitors in such huge geographies that are opening up to cloud quickly now in order to see those opportunities.

That has resided in a situation that cloud gross margins in 2017 are bit lower than expected. But the fundamental theses that all of those investments are setting us up to exponential gross margin increases, when the investments have been made, is absolutely fundamental impact us why we remain with our midterm aspirations for the cloud gross margin increases across all of the business models. And that's why together with the continued operational discipline on, for example, a addition for the remainder of the year. I believe, we will be set up with the right cost base to deliver the margin expansion in 2018. And you will see this to already in Q4.

Stefan Gruber: Thank you. Let's take the next question,

Operator: We'll take our next question from chair Gerardus Vos from Barclays.

Gerardus Vos: Two, if I may. First of all, Bill, could you talk a bit about what gives you the kind of confidence that the cloud bookings will rebound strongly in Q4? And is there a risk if this line is starting to follow more in line with what you've seen in the past with licenses, that Q1 could be more in line with what you've seen in kind of Q3? So we see that same kind of licenses now we go back in [indiscernible]? My second question is for Luka. Hiring was around the 750 employees sequentially.

Is this something we should forecast going forward, kind of cost level increase?

Luka Mucic: Well, thank you, very much, Gerardus. I'll start off. First of all, let me be crystal clear. I have total unequivocal unwavering confidence in the cloud bookings for Q4. Let me give you the reason why.

I had an offside my home in Heidelberg with all the Executive Board members. And the lowest number we could come up with based on the pipeline that comes at the Digital Boardroom, as you know we run the whole company on S/4HANA. The lowest number we could come up with is a number that in the 30s. We couldn't come up in the low one, we tried. And so there's a Q4 confidence with an exclamation point.

And I intend to reinforce that, all hands meeting once we wrap up with you guys and get the whole company fired up to make it happen. So it's going to be a really strong Q4 bookings number. I'll count on it. Right again a bit Crayon. It's in the bank.

On Q1, especially, inspired by S/4HANA in the public cloud. We're winning deals everywhere. We have the perfect alignment between the innovation and the field execution now. The brands like Shell coming on board. There are 2 other brands that will be announcing in the near future, that a global brand of massive significance.

And this is what we're awaiting for. We're waiting for the big brands to say, Okay. You guys got it. And now, for all the subsidiaries, they are buying in on it. And we're going to take off like a rocket with S/4HANA in the public cloud, now that was the key thing.

Now as it relates to some of the things you worried about in the past with SuccessFactors execution, we really did need the change leaders. We made that happen. We have of fantastic guy, running SuccessFactors now, who is a veteran of SAP. And the only soft spot we had there was in the United States. So given the fact that soft spot hardening real fast in The United States, and we were winning everywhere else, in fact, in Latin America, they can't get their first deal.

I expect the growth trajectory in the line of business cloud, certainly the Business Network and also the S/4 HANA cloud to be extraordinarily strong going into Q1. So we're managing a pipeline on rolling a 4 quarter basis. If you look at these cloud pipelines, and you are the CEO of SAP, you will be sleeping very good tonight.

Luka Mucic: And just briefly on your question around the hiring. So -- yes, you can absolutely expect that also in Q4, our hiring performance will max as the figures that you have seen in the -- Q3.

We're very, very selective hiring procedures in place. And they are exclusively geared towards those areas where we get an immediate value add. So clearly, in our cloud businesses, in R&D, as well as in sales and marketing, there is absolutely no hiring taking place in any back-office functions, as well as in the supporting functions outside of the administrative organization. And hence, this should give you a lot of comfort that we have OpEx another control as we look forward from the leverage strong top line we expect in Q4. Going into 2018, of course, you have seen in 2017, that we have significant optionality.

We will plan for our resource additions in line with the business environment that we've seen and with the business pick up, but it's clear that we have made our -- let's say, time frame of the significant investments in the last 2 years. And you should definitely not expect similar levels of investment as we move into 2018.

Operator: We'll now take next question from Philip Winslow from Wells Fargo.

Philip Winslow: My question for you, Bill, may be Rob, if you can chime in too but you mentioned, obviously, a greater tie between the cloud aspects of your portfolio and S/4HANA migrations. And obviously, those were still strong this quarter.

S/4HANA and just HANA, in general. Are there any partial the portfolio, in particular, that are attaching better than others so that are suppressing you? Maybe more color in sort of what you're seeing there, that will be great?

William McDermott: Well, Phil, thank you for the question quarter. Let me give you a real-time example. That was the CEO of major worldwide. The CEO is now switching from competitive products to S/4HANA.

And they, in particular, informed me that the pricing that they're getting from the best of in CRM is up 60% year-over-year. That is obvious that the surprising strategy, so they have a limited number of accounts. And because their portfolio is limited to 1 slice of the enterprise pie, the best way to increase revenues to charge more. So what you are saying right now is S/4HANA asserting into well the enterprise and customers attaching CRM. So the Hybris CRM story is extremely strong.

We own omni-channel e-commerce. If you look at anyone that's looking to goal into direct consumer, that's running a billion or more in revenue, they're going Hybris. And now, what you're seeing with S/4HANA is you're seeing sales, marketing and omni-channel e-commerce, in particular, attaching for the S/4HANA story. So I think we have a really, really impactful position now. And I think the best of breeds just like, Phil, you remember, in the early 2000s, when the big ones got good enough, the pricing pressure on the small ones increased because the customers weren’t going to pay these exorbitant increases, and then we start to gain share.

Also aside from CRM, you are seeing this at HCM, on the leadership of [indiscernible] he can comment more on it. He put great time in the HCM job. We have an enormously innovative leadership team and SuccessFactors now. As we reinvented the user experience, especially, using our partnership with Apple and the beautiful design on the mobile, we've made it so simple for the knowledge worker to do their job, and so beautiful. And then finally, on the attach rates on Leonardo, and you're seeing digital supply chain growing in triple digits.

So it's one thing to have a single view of the consumer, and make a promise where you know here in every channel, on every device. But it's is another thing to fulfill in the content supply chain where you're getting the sourcing down right, you're building the product the right way, and you're provisioning against the promise in real-time. And only HANA and S/4HANA and our cloud assets completely synchronized in integrated can do this for customers in 25 distantly different industries. So I really feel we're just warming up.

Operator: We now take the next question from Chandra Sriraman from MainFirst.

Chandramouli Sriraman: Just a couple, if I may. First question is -- I mean, I do understand your thoughts on the volatility in the bookings number. So how do we see this for 2018? Should we expect something closer to 30% growth for the year? Is that something that you internally model? And my second question is on the private cloud business. The gross margins dipped obviously, and you mentioned it's due to the prices of So how do you see this in the medium term? Will the margin of this business still be at the of the hardware prices? How should we look at it over the next 3 years?

William McDermott: Chandra, thank you very much for your question. Allow me please to start on the cloud growth, and then Luka will take the second part of the question on the private cloud.

So when we build our vision for 2020, we build a solid plan that had the 30% plus growth rate in the cloud built into it. We are not changing or moving off of that number, that is our number. And again, with the assets I spoke of early, really ramping up quickly. That is the number you can use in your models as well. We're very, very confident.

Luka?

Luka Mucic: Yes, I can certainly confirm that, blowing my spreadsheets. And, of course, we're not using spreadsheets. My S/4HANA, excuse me, but, in general, on the gross margin, first of all, yes, this is the short-term impact. We believe, there has been the short-term contract -- contraction of available capacity. And that has resided in this cost spike.

And we definitely plan for this to anticipate until the end of the year, and we enter 2018 with more normal cost projections, again have us for our Infrastructure-as-a-Service business with the substantial expectation for further gross margin increases, as we have demonstrated it over the course of last 2, 3 years. [Indiscernible] with us on the call, and his team -- who is running the agency business, are extremely focused on this. Actually the cost of operating system has come down tremendously through the cost of 2017. And this is a setting a great basis of operational excellence together with our optionality against the usage of hyper scale cloud providers as part of our offering to deliver further gross margin expansions. Bernd, any further insites you wish to provide, but I am very bullish around HANA enterprise cloud and the -- as margin increases.

Bernd Leukert: No, Luka, I just can confirm what you said. I mean the growth in the private cloud continues, as planted. It's a fast-growing business. We are even calling to our internal cost of operations ahead of our plan year-to-date. Yes, we had this onetime -- with some extraordinary prices for half year which we had to pay.

But we got signals from our suppliers, this was a onetime effect. So -- in that aspect, there should be no concerns at all. We will drive that growth, and we will drive it to even bigger profitability towards 2018.

Operator: We'll take the next question from Adam Wood from Morgan Stanley.

Adam Wood: I've also got two, please.

Just, first of all, coming back to the cloud growth on that sustainable growth out to 2020. Could you maybe just dig in a little bit on the main drivers of that? Is it that you think this is going to be products like -- and selling best SAP install base, has we have the converged platform on HANA, and we've got a better integration of them? Or you can dig more going to be some of the smaller products today, S/4HANA public cloud, Hybris, et cetera. That's scale -- building blocks you can give to justify that 30% will be really helpful on the product side? And then maybe just coming onto the margins on the cloud, this is pretty little bit more for Luka. Is there any way you can help us on the scale of the costs that you are this year in terms of running dual infrastructure and so on? And how those fall away? Clearly there is a big gap for you, like 60% on the gross margins versus peers about 80%. How those fall awake? Can we expect those to ramp up quite quickly as we get the benefits of the investment in the leverage?

William McDermott: So maybe I'll go, Adam here just on the confidence we have in our cloud business.

The first thing I will tell you is what we see with S/4 public cloud and the combination of our communication around the Digital Core, is that customers are really looking for a company -- the way they want to go with digital. And they are clearly looking to SAP to provide that. And what we've done with the integration, the integration between the lines of business, we see a unique opportunity to elevate that. When you add the machine learning capability with Leonhard, on top of that, all of a sudden you start to see some tremendous value that they have not been able to seen before. And I believe we've answered the complex question of how do we analyze data that doesn't exist in side SAP's organization and bringing it in.

So having said that, overall from a Digital point of view, I think, we have by far the best story in the market. The only one that actually will deliver the value that discuss expecting, we're seeing that with transformation deals, coming into the pipeline. And then secondly, when I look where we are with the test factors the new UI, the 41 countries with EC payroll, the team we have in place right now, I see a huge upside on the sales factors. Fieldglass and Concur is something just growth everywhere. It's a matter of actually our articulating that growing and going off -- growth.

And then the combination of what we're doing with field less and Concur and spend management, you will see we will change the game around in terms how people look at SAP. Lastly, Hybris -- I just came from the Hybris conference in Barcelona, and there is no doubt in my mind now together with the acquisition of Gigya that we will own the golden customer record, which means we will control the front office. And with that, we will give end-to-end digital supply chain that these customers want for transformation. I think we have never ever been in a situation. We can honestly deliver on the full digital piece that customers want.

In the last piece is SAP Cloud Platform is really changing the game when it comes to platform as a service in connecting the dots in this cloud services will. And we've seen tremendous uptick in that as well. So I think we're in the best shape we've ever been in a cloud. I think the cloud -- the SAP employees understand it. I think our customers get it now.

And I think 2018 is going to be a crazy good year for SAP.

Luka Mucic: And may be in terms of building the staircase of the different expense impacts into gross margin improvement potential in the cloud - first of all, the pure duplicate infrastructure cost that we currently have, are somewhere in the mid-double-digit million euro range on per basis. On top of that, you have then -- once you have the converged infrastructure in place, they much better ability to automate certain task and put them under harmonized procedures, which will help you especially on the personal expense side of the house, in terms of cloud delivery operations, at the moment close to 2/3, actually, of our expenses in cloud delivery are human costs. And once you have the converged infrastructure, you can put this into much more efficient shared service model than running it for everyone of our LOPs separately. So this is probably another similar level of impact.

And the further effect are -- side of those, lets say, low triple digits that you get for those measures, are then the scale benefits as we further increase the size of our cloud business, and then benefit from a better leverage of customer additions to our infrastructure. That's kind of high-level improvement potentials that we have short-term. With the duplication, which will be running its course next year. And then with the ancillary automation as well as the scale benefits that we can benefit from especially in the years 2019 and 2020.

Operator: The next question comes from Michael Briest from UBS.

Michael Briest: Bernd, maybe one for you, in terms of the migration of the gross factors to HANA. Can you say what proportion of the SuccessFactors customers today are running on the new platform? I think it was available from October 2016? And then when you expect that migration to be completed? I think it was initially expected to be end of this year, but it's now sometime in 2018. And then Luka, one of the targets on the journey to 2020 was the -- in 2018 licenses would be smaller than cloud. Currencies of bounced around. And I think, frankly, the most of us -- you've done a better job on licenses and maybe they expect in 2015.

Are you still happy to that target? Do you still think that the licenses should start to decline? Or do now have a more positive view?

Scott Smith: I'll do it. So the SuccessFactors, Michael, we are 1/3 of the way through the SuccessFactors conversion. All new customers go on to the HANA platform. They get all of the latest crazy good -- with what we've been able to do there. And we will be complete with that by that -- that moment by September of 2018.

William McDermott: Yes, on the question around license being overtaken by cloud, you're absolutely correct. We've been doing very well in licenses. Of course, we will give you an exact guidance outlay when we enter the earnings for Q4. And then give out the guidance for 2018, but the that cloud will actually surpass licenses in 2018 is still intact. So you can expect this to happen next year.

Operator: The next question comes from Alex Tout from Deutsche Bank.

Alexander Tout: So maybe one for Luka. Based on what was just said about despite of the migration of SuccessFactors. It doesn't sound like will be after -- out of the dual running scenario until something like the third quarter of next year. So -- I mean, we unlikely to see much recovery in the cloud margin before that point.

And therefore, not much overall operating margin expansion until that point. And then just on the revenue growth side. Within the cloud, we have 38% cloud bookings growth in the first half. Cloud bookings growth is also strong in the second half of last year. But it seemed revenue growth decelerating in the cloud business.

Can you just talk about that disconnect between bookings and revenue growth? And why and when that should normalize?

Luka Mucic: Yes. Let me may be cover that because it's a more technical question on the revenue side as well. The main reason is that you need to remember that our new cloud bookings don't include everything that drives the cloud revenue growth. They don't encompass the network transactional base volume base billings. That are purely pays as you go.

And while this is a very, very healthy business at very high margins, it indeed has no only this year, but also last year, slightly on the growth on the new cloud bookings, as well as the user-based subscription revenues that we're driving. And that's the key reason why you'll see this gap, so to say, between the new cloud bookings growth and the revenue growth. On 2018 and the plans there, look, it was clear for us for quite some time that parts of our portfolio, especially our -- will take until the end of 2018 to be transformed. And in terms of the overarching assumption for 2018, we've also been clear that the progression, both on cloud gross margin, as well us on the total operating margin side, will be there, will be visible. But it will be further and more accentuated until 2019 and 2020, when those migrations have completely taken place.

So you should not, when you build the staircase from 2017 to 2020, assume a linear progression. You should assume that we are coming close to or hitting the constant currency margin flatlined in Q4. Then you should expect to see a moderate expansion in 2018. And then a much more pronounced expansion in '19 and '20. And as you said, rightfully, the key lever for that is to increase cloud efficiency that we will have gotten once the 2018 migrations have completely taken place.

Operator: Next question comes from John King from Bank of America Merrill Lynch.

John King: Actually, it was a follow-up on something just mentioned, Luka Maybe more fundamentally about the book-to-bill period that you are seeing in the cloud, I appreciate. There's also the factors of in the bookings number. But if you think about the deals, I guess, overall, getting larger, maybe more Q4 weighted, more platform based, to that potentially also lead you to seeing a greater book-to-bill period in those bookings, but just talk about how will look? And how the deployments are actually running for some of those larger cloud -- cloud wins that you've had? And then the second one perhaps for Rob, the Infrastructure-as-a-Service revenue, I think, was a little bit -- didn't really grow quarter-on-quarter, which I think is -- as far as the pricing given now stronger the licensing have been, perhaps just talk about whether there's any one-off issues there? Or why the Infrastructure-as-a-Service wasn't growing a lot quarter-on-quarter?

Luka Mucic: May be on the first question, you cannot really in a big change here because -- first of all, the business models are -- while they are vastly different, they actually also have a much different profile in terms of how you build up the billing like on the user-based business models around SuccessFactors. You typically have an annual upfront billing that happens more or less right after you sign up the customer.

Whereas, in businesses like in Areva, or also in -- you have the much more constant billing cycle that is going on. If you have changed so to say between those different business lines, the same will be true for SAP cloud platform, for example, where will also be going to volume-based billing-based, metering, you have much more velocity in the billing cycles on smaller volumes, basically. And that will to the same extent buildup a higher volume machine as we add more high-volume deals, so to say, as part of this at place. So I don't think that this will change fundamentally behavior in terms of the book-to-bill performance. But, of course, all of this is really highly dependent on those different solution performances, which can vary from a quarter to a quarter.

So I wouldn't feel comfortable making here an exact prediction at this point in time. Rob, question on infrastructure service -- and -- Rob?

Robert Enslin: Yes, sure. I'm -- I mean, infrastructure-as-a-service is pretty easy to answer. The linearity was a little -- I mean, you're going to see it with some of these big transformation deals. We will have a big Q4 when it comes to Infrastructure-as-a-Service.

So a little lumpy in Q3, big Q4, and story remains an amazingly strong businesses, customers run the load floor -- SAP S/4 portfolio.

Operator: We'll take the next question from Pat Walravens from JMP Securities.

Patrick Walravens: And, Bill, I would love to drill down a little more on your thoughts about cloud consolidation. You mention consolidation in the enterprise do impart to price and we've been hearing that too. But does that mean that the best breed of cloud companies get acquired? And on that same note, you mentioned the companies I used to cover, [indiscernible] and they all got but it took a long time, it took like 8 or 10 years.

So just love to hear -- do you see M&A? And how long you think it takes?

William McDermott: Yes, Pat, thank you for the question. And as you rightfully point out, it took a long time, but it was a painful writedown for all those companies, wasn't it? If you look at the market at the down was quite long and quite painful, and the purchase price of those companies was probably about 90% less than their high point on the market cap, after they took a beating in the market place. So what I think is going to happen is, nobody in their right mind would buy these companies if their current market cap. So it's going to be a hand-to-hand combat for a while. And as their price points start to decline, and S/4HANA asserts its will on the enterprise, and these attached deals become more and more the future for CEOs, like I met with the CEOs, and they tell me why we even having this debate? Why would we go with the different HCM system? Why would we go with a different CRM system? If you guys can actually do it, and you can help me run simple and take a lot of cost out of the equation, why -- what am I missing here? And I saw -- what you are missing here is you have independent sales processes going on across lines of businesses in the company, and that's why you have so many systems and so much complexity.

And if you want to pull one string today, it takes like 15% cost out of the equation, just pull the spend management, and we in -- Concur and Fieldglass. And by the way, I could attach Fieldglass to your HCM. And now you're managing the total workforce because your workforce is 40% third-party temporary labor. You think you should keep control over that? I just let the wild. So once you have the more complete conversation at the top of the house, it's quite clear that this will be the prevailing strategy.

And since we operate well at high altitudes here, and we now have a well-trained, well-led, cloud and network force, including S/4HANA in the cloud, which I think is going to be the ultimate force in the enterprise. I just don't see the future for those companies as bright as their past. Now and I also underscore that with, I don't see anybody rolling in there with the bankers and the big check because what you're buying? You're buying the problems I just gave you, and you're buying at an extraordinary high valuation. So we won't be showing up for those meetings, believe me.

Operator: We'll take the last question from Ross MacMillan from RBC Capital Markets.

Ross MacMillan: Actually, Bill, I wanted to touch on S/4HANA public cloud. Do you -- you clearly showing your enthusiasm on that product. You highlighted Shell and other big brands to come. So I guess I'm just curious, you had a strategy this year of customer success, which I think has -- you've had a somewhat limited go-to-market action. Can you just talk about when you sort of fully unleash that product in the market more aggressively? And How we should think about potential for that business to grow over the next 2 or 3 years?

William McDermott: Ross, you've read the situation perfectly.

We had a very controlled environment for the product. We wanted to make sure that we had Net Promoter Score that would like off the charts that the customers were all happy that every single one of them was referenceable. And since we've now achieved that goal and we're into triple-digit customers in the public multitenant cloud, and the functionality and the capabilities there, and you guys have given us permission, to basically run the company, to be the ultimate cloud company powered by HANA. What I mean by that is, there's no artificial reason inside of SAP or anyone is just going for on-premise sale. If the customer wants to rent something in the public multitenant cloud, and that's in their interest, you guys know how the math works.

You wait a little longer for your money, but it's much more recurring and predictable. And we both love that business model. So we're going for what everything we have. So when we see scale, 2018 because we'll be in the new operating cycle. We'll tie everything into the guidance story.

But in terms of the product, it's got the capabilities it needs, it has the referenceable customers. The big ones now are falling right into place. And I believe that's going to be a runaway growth story. And I also believe strongly that the line of business clout with HCM and CRM, and the Business Network story that we've been telling now and getting very good at, with the leadership of Mr. Robert Enslin and the field that we're putting in front of the customers is going to really start multiplying in full force.

And that's what's going on. I'm very confident in the S/4HANA public multitenant cloud offering. And when I look at the competitive brands out there, just look at how old those architectures are. Just look at how old those ideas are. Just look at the sales force that selling them, and the cultural conflict that you have between the bigger side of those companies and the smaller side of those companies.

So I love what we're at right now.

Stefan Gruber: Thank you very much. This concludes the SAP Q3 earnings call for today. Thank you all for joining, and goodbye.

William McDermott: Thanks, everybody.

Luka Mucic: Thank you.