Executives: Stefan Gruber - Head of Investor Relations William McDermott - Chief Executive Officer Luka Mucic - Chief Financial Officer Robert Enslin - President of New Cloud Business Group Bernd Leukert - Head of Products and Innovation Jennifer Morgan - Global Customer Organization Adaire Fox-Martin - Global Customer

Operations
Analysts: John King - Merrill Lynch Michael Briest - UBS Walter Pritchard - Citi Stefan Slowinski - Exane Paribas Phil Winslow - Wells Fargo Adam Wood - Morgan Stanley Mohammed Moawalla - Goldman Sachs Charles Brennan - Credit Suisse Stacy Pollard - JPMorgan Alex Tout - Deutsche Bank Neil Steer - Redburn Ross MacMillan -

RBC
Operator: Good day, ladies and gentlemen. Welcome to the SAP Third Quarter 2018 Results Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber, Head of Investor Relations.

Please go ahead, sir.

Stefan Gruber: Thank you. Good morning or afternoon. This is Stefan Gruber. Thank you for joining us to discuss our results for the third quarter 2018.

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 for Q&A are our Board members, Rob Enslin, who runs Cloud Business Group; Bernd Leukert, who leads Product and Innovation, as well as Jennifer Morgan and Adaire Fox-Martin, who together run Global Customer Organisation. Before we get started as usual, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995.

Words such as anticipate, believe, estimate, expect, forecast, 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. Security and Exchange Commission, the SEC, including SAP's Annual Report on Form 20-F for 2017 filed with the SEC on February 28, 2018.

Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. In addition, on our Investor Relations website, you can find our quarterly statement, and the financial summary slide deck, which are intended to supplement our prepared remarks today, and include a reconciliation from our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS, and growth rates are percentage point changes are non-IFRS, constant currency year-over-year. 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 finally, a save date announcement on February 7, 2019 we once again hold our Capital Markets Day at the New York Stock Exchange.

More information will follow as the date close and we are looking forward to seeing you again in New York City. With that, I'd turn things over to our CEO, Bill McDermott.

William McDermott: Thank you very much Stefan. Nobody does that Safe Harbor statement like you. Hello everyone and thank you for joining today’s call.

I’ll make a few short comments before I turn it over to Luka and he will take you through our very strong Q3 results. Here is the big picture. Since we launched our growth strategy and groundbreaking HANA architecture nearly a decade ago, we have dramatically expanded our customer base, market share, profitability, brand value, employee engagement and sustainability. This track record set the stage for our latest growth horizon. SAP powering the intelligent enterprise, so our customers can better serve their customers.

Today, our Q3 results and raised 2018 outlook put SAP on track once again to exceed the full year ambitions we announced at the start of the year. With 41% cloud revenue growth in Q3, SAP has the fastest cloud growth of any peer at scale in the enterprise applications software industry. We said that C/4 HANA and S/4 HANA would be major cloud growth drivers, both grew triple digits in Q3. We said a bold integrated SAP would strengthen our individual best of breed offerings. Today, the strong achievements of SAP Ariba, SAP Fieldglass, SAP Concur and SAP SuccessFactors have proven us right.

These are strong, well lead customer driven businesses for SAP. Three years ago we said that cloud revenue would overtake license revenue in 2018. Today, the fast adoption of our cloud solutions and business networks has accelerated this positive development. We now have more than 170 million cloud users. Cloud revenue has now superseded on premise license revenue.

What's so powerful about SAP’s market position? The resilience of our license business remains ever steady even as we grow the cloud beyond expectations. I can only remind everyone that the accelerating shift to the cloud is exactly where we want SAP to be. Cloud has a higher lifetime value, drive faster consumption of innovation and has higher predictability going forward. We plan for this transition. We guided for it and we are delivering it.

Now looking at the overall health of the business, combined cloud and software revenue growth grew a stellar 10% in the quarter. Even with a higher mix of cloud and services revenue, operating profits surged a 11%, while at the same time we expanded the absolute operating margin rate. Future profitability looks even better, as we reap the benefits of our Converged Cloud platform investments. From our analytics cloud and digital supply chain offerings to our digital business services, SAP is delivering top line and bottom line success. All this is why we are ever resolute today and that's why we are raising the full year outlook in cloud, total revenue and operating profit.

I’ll spend just a few moments on the macro picture. Before I hand it over to Luka. CEO’s in every industry tell me their major challenge is meeting consumer expectations. In this experience economy trust is the ultimate human currency. Every business needs to protect that trust by serving their consumers on a highly personalized basis.

They need a true single view of the customer, all while protecting personal data and security. This is a much bigger imperative than the sales department alone can handle. This is about connecting every person inside a company to each of the 7.5 billion potential consumers outside the company. This is about building faster, more agile customer centric businesses in 25 distinctly different industries. So every demand signal drives every behaviour.

To solve key business challenges like order to cash conversion, total workforce management and spend management, the SAP intelligence suite integrates best of breed functionality into a seamless consumer grade user experience. C/4 HANA, S/4 HANA and business networks have evolved the applications conversation way beyond the conventional categories of well known legacy vendors. To boost productivity in these applications, SAP Leonardo predictive analytics, machine learning, IoT and Blockchain are infused into our end-to-end experience. To extend these solutions and integrate with hyperscale infrastructure providers, the SAP cloud platform is the de facto business platform for the intelligent enterprise. Powered by HANA, only SAP has the capacity to deliver this strategy in 190 countries around the world.

To build on the momentum, we also launched the Open Data Initiative with Microsoft and Adobe last month. This effort gives customers more choice by standardizing the data model for customer experience. When you move beyond the commercial sector, CEOs are also focused on trade wars, political instability and market volatility. Again, this is playing to the strengths of SAP. Our long track record is helping management teams navigate global uncertainty as best run businesses.

And China as one example, SAP and our engineering heritage has given us a substantial advantage over our competitors. We just announced and expanded our partnership with Alibaba to help customers in China transition to the cloud. In my meetings with prime ministers and other world leaders, the conversation is about improving people's lives, amid the shift to artificial intelligence, SAP has never been more relevant in all of these discussions, as a trusted innovator. We are elevating data and decision making from factory floors and sports arenas to digital boardrooms and cabinet rooms on the frontlines of public services. The company's higher purpose to help the world run better and improve people's lives is the core of what drives us.

It's why our employees rate us higher than any other company on websites by Glassdoor. It's why we were the first to receive EDGE Certification for gender diversity and inclusion. It's why we created a culture that prizes all diversity, gender, race, ethnicity and neurodiversity with Autism at Work. The industry is about getting the best people, keeping them and inspiring them to do great work. The soft stuff is the real stuff and that's another reason why our story only gets bigger from here.

In closing, the headlines for SAP, its innovations and growth. We have a complete solutions portfolio, HANA data management, end-to-end cloud applications, business networks, SAP cloud platform, SAP Leonardo manifested in this great enterprise story. We're growing faster than our peers and we are now selected by marquee brands, like Giorgio Armani, Bombardier and McDonald's. We're gaining share in the cloud with more wins against new and legacy competitors with great new order entry rates. We're expanding profitability and increasing shareholder value.

The resulting trajectory for SAP amounts to a structural incline, long-term sustainable profitable growth. I credit the 95,000 women and men of SAP for their tireless dedication. We are focused on helping our customers unleash a new wave of growth, as intelligent enterprises. Moments of fluid change call for institutions of timeless commitment. 46 years ago now and always the best run SAP is the enduring ethos for the world's business software market leader.

Thank you for your time and interest in SAP. I look forward to your questions and assure you the best is yet to come. Luka over to you.

Luka Mucic: Yeah. Thanks a lot Bill.

And as to my part, as you can also read from my quote in today's quarterly statement, I absolutely share Bill’s enthusiasm and I'm extremely proud of SAPs excellent business momentum in the cloud and strong operating profit performance. Our intelligent enterprise strategy is resonating broadly and propelling strong adoption of our suite in the cloud. Because of the strong cloud and overall business momentum, we have just raised the 2018 outlook for the third time this year. Our business is getting more recurring in nature. Now more than two thirds comes from predictable revenue streams, 3 percentage points compared to just one year ago.

We continue to see a healthy cloud gross margin development and we have had double-digit operating profit growth all three quarters this year. Now let me come to the highlights of the quarter. First, new cloud bookings were up 37%, a significant sequential acceleration of growth. This was a strong result. Cloud revenue surged 41% driven by high growth, high potential cloud solutions, like S/4 HANA cloud and C/4 HANA.

We also saw strong performance in our pay-as-you-go businesses, within our Rebar, Concur and Fieldglass, as well as our digital platform, which all added an extra boost to cloud revenue. Now to software. While we had strong software revenue in APJ and Greater China, customers in the Americas and parts of EMEA were moving faster than expected to cloud and hybrid models. We are capitalizing on this market trend, with our expanded intelligence suite in the cloud and our unique hybrid capabilities. In this context let me reiterate and expand on what Bill said.

We will trade a software dollar for a cloud dollar anytime simply because of the higher long-term value of that address] and we will not artificially slow cloud growth just to optimize our P&L for the short term. Cloud is where the long-term value is and that's what we are managing for. We are also proud to report double-digit cloud and software revenue growth for the second quarter straight ahead of our guidance at the start of the year. In addition, the combined order entry of our new cloud and software license business was up 12% growing ahead of total revenue, which clearly illustrates our powerful overall business momentum. Support revenue was very resilient growing 6%.

This was the result of continued strong renewals, which underscore the high stickiness of our support services with our customers. Now to the third quarter regional results. Starting with EMSA, where we had a solid performance with clout and soft revenue increasing 5%. Cloud subscriptions and support revenue grew by 40% with Germany and Russia being highlights. In addition, we had strong software revenue growth in Russia, Italy and the Netherlands.

We had a strong performance in the Americas region, where cloud and software revenue increased by 13%, cloud subscriptions and support revenue increased by 38% with a solid quarter in particular in the United States. Canada also had an especially strong quarter in software revenue. In the APJ region, cloud and software revenue grew by a stellar 17%. Cloud subscriptions and support revenue was truly exceptional and grew by 58% with Greater China and Japan being highlights. For softer revenue, again, Greater China, Japan, as well as India and South Korea all had impressive quarters.

Now briefly on the IFRS 15 impact, which as you know we adopted on January 1st this year. Our reported operating profit in the quarter was positively impacted by €74 million through this accounting change. With that, let me come to profitability and gross margins. Gross margins in cloud overall and in each of our three individual cloud business models were all up significantly year-over-year. The strong topline performance across our cloud portfolio allows us to realize economies of scale, while we also continue to drive operational efficiency.

Specifically, our cloud margin again expanded by 3 percentage points to 64%. The SaaS, PaaS gross margin increased by 4 percentage points to 60%. As we see investment into our Converged Cloud Infrastructure, as well as the migration of our cloud solutions from third party databases to HANA taper off, we are poised to see further significant expansions over the course of 2019, as we have discussed in the past. The Business Network gross margin again showed consistent acceleration in Q3, adding another 3 percentage points to achieve a stellar 78%. Our infrastructure as a service business also saw a significant gross margin improvement to 17%, which is an increase by 18 percentage points.

This shows that the increase scale and expanding renewal base in our HANA Enterprise Cloud business is really starting to pay off nicely. Now let me move on to Cloud and Software profitability. As you all know the rapidly growing share of cloud has an adverse impact in the short term. In Q3 the adverse mix effect was 1.5 percentage points. In contrast, our Cloud and Software margin only declined by 90 basis points to 80.9%.

Finally our services gross margin was down by 2.5 percentage points this quarter to 21.9%. We have increased our services workforce by 14%, partly through acquisitions, but also organically to deliver on our very healthy backlog which we expect to expand even faster in our seasonally strong Q4. With year-to-date revenue up 9% and the gross margin expansion of 50 basis points, our services business continues to thrive. The combination of strong top line, strong cloud gross margin improvement and operational discipline led again to significant operating profit growth of 11% in the quarter. We achieved all of this while continuing to invest in our people and our portfolio adding around 1100 employees in the quarter.

As a result, our operating margin increased by 10 basis points in Q3 despite headwinds from the Callidus acquisition, a significant acceleration of our cloud business and the strong services revenue performance. Year-to-date, our operating margin increased 50 basis points. On an IFRS basis, our operating profit decline of 6% was primarily driven by an increase in share based compensation expenses mainly caused by the higher share price in Q3. In addition, IFRS operating profit in Q3 of last year was impacted by a favorable restructuring charge development. Let me turn to Texas and EPS.

The IFRS effective tax rate decreased by 4.8 percentage points to 23.8% in Q3. The non-IFRS tax rate decreased by even 5.4 points to 23.7%. The decreases in the effective tax rates mainly resulted from changes in the regional allocation of income and the application of hyperinflation accounting in Venezuela. We now expect a full year 2018 non-IFRS effective tax rate of 26.5 to 27.5%, so slightly down from the previous 27% to 28% range, while we confirm our outlook for the IFRS effective tax rate of 27% to 28% where we expect to reach the upper end of this range. IFRS earnings per share decreased by 1% $0.82, non-IFRS earnings per share increased by 13% to €0.01 and €0.14 [ph] Similar to IFRS operating profit, our IFRS earnings per share was impacted by a higher share based compensation expenses and a favorable restructuring charge development in Q3 of last year.

Now to cash flow and capital expenditures. For the first nine months our operating cash flow decreased to €3.5 billion. This decline was mainly due to higher share based compensation payments, as well as higher tax and insurance payments. Please also keep in mind that our cash flow is affected by the currency headwinds that we have faced year-to-date. These effects offset SAPs positive business development and our lower day sales outstanding which went down by four days to 68.

Free cash flow for the first nine months declined as well due to the previously announced additional CapEx for 2018. We continue to expect 2018 CapEx lower than €1.6 billion and the flattening CapEx development beyond. Finally, as discussed before, we are raising our 2018 outlook due to the strong cloud business and overall business momentum. At the same time, we have updated our currency expectations for the impact on reported growth rates. For more details please refer to our quarterly statement published earlier today.

And before closing, I would like to talk also about a few of our key non-financial metrics. First, in a global war for talent, more important than ever, as Bill has alluded to, our employees continue to embrace our strategy and higher purpose. We are continually ranked among best places to work in numerous geographies. Our employee retention is best-in-class in our industry at 94.1%. Second, we are taking leadership in the tough questions on the responsible use of technology by founding the AI ethics advisory panel.

And finally, with the Intergovernmental Panel on Climate Change issuing a dire report, SAP is doing its part to contribute to a decrease in CO2 emissions by reducing its Q3 greenhouse gas emissions from 80 to 65 kilotons year-over-year. We currently run our cloud and all facilities on renewable energy only and aim to be carbon neutral by 2025. So in summary, our accelerating cloud growth shows our strategic priorities are exactly on track, as we continue to take significant market share and grow revenue faster than our competitors. We have the broadest portfolio and are the most geographically diversified business in our industry. The cloud top line acceleration together with continued operational efficiency gains are driving cloud gross margins up and our business model at the same time is becoming much more predictable in nature just as we set out to do.

All of this makes me extremely confident that we will deliver on our race 2018 outlook and on our 2020 ambition. Thank you very much, everybody. And we will now be happy to take your questions.

Stefan Gruber: Thank you. Operator, we can now start the Q&A session.

Operator: Thank you. [Operator Instructions] We'll take our first question from John King with Merrill Lynch.

John King: Yeah. Hello, everyone. Thanks for taking the questions.

I’ve got two please. The first one was really on the - you commented already around the mix shift more towards cloud and clients electing to take deals that might have been in licensing cloud today. I imagine that's going a little bit product-by- product, so could you give us maybe call out one or two [ph] products that are now cloud discussion that maybe a year ago would have been a license discussion. Are there any metrics you can give us around, lets say win rates that you see as you make that transition, so that you can give us some comfort that win rates are stable or improving, as you - as those products go through [ph] a cloud discussion? The second one was on the perhaps on the margin for Q4 does seem as though if I back out the numbers the midpoint of the guidance you're implying quite a good year-on-year margin improvement in Q4, whereas it feels as though the implied license is still relatively or similar to Q3 down year-on-year. So perhaps you could explain any of the moving parts that might support the margin or perhaps whether there's any conservatism in the revenue guidance for example? Thank you.

William McDermott: Thank you, John. I'll start off and then pass it over to Luka. If you look at S/4 HANA, our digital supply chain analytics, analytics is all moving to the cloud. These are examples of solutions that customers are more and more preferring to consume from the cloud. Consumer grade user experience, ease of consumption, continuous innovation cycle, less support required, all good attributes of customers adoption of cloud and we are leaning into that because we're building a company of the generations, not the next three months.

And as it relates to the core business, I do want to be clear, the core license business and the thesis in the original forecast that Luke and I gave for the full year is completely intact. So on a full year basis what we said we would do at the beginning of the year, including the underlying software and software related services assumptions in that number is intact and the cloud is just accelerating in a rate, again higher than any other applications software company on the planet. Luke, will give you a little bit of a feel for the margins going forward, Luka?

Luka Mucic: John, just to compliment also what Bill has said before, when you take a look at areas where core licenses are still growing, it's exactly an S/4 HANA where we have triple digit growth in the cloud, but still quite sizable growth and on premise and it's in the adjacent area digital supply chain management. All the other categories of our portfolio go full steam ahead to the cloud as they should and which is good for SAP because there we win against competition and actually our win rates across all of the portfolio elements over the course of the past two - two quarters actually have been increasing. In terms of the margin development, look, it's important to note that we give our guidance on the bottom line on absolute operating profit.

And I can tell you two things that I'm extremely confident about. First of all that we will at a minimum this current guidance that we have adopted upwards for three times now as well, which is for - between 9.5% and 11% growth. Secondly, that we will do so while continuing to expand margin for the company. Now, by how much this will occur, this is fully a question of the mix and that mix as we have said is not entirely predictable. So you can take our commitment on the absolute operating profit development.

And on the margin rate, we will have to see how the composition between software cloud unfolds. But suffice it to say that I think Bill and I have been in this role for CEO and CFOs now for more than four years. And I think we have always been hitting over delivering on the guidance metrics that we have set.

William McDermott: And in my case - in my case nine years and counting, and what's interesting on this move to the cloud I remember then we didn't have a CRM product in the cloud and now we have CRM solution called C/4 HANA that's growing in triple digits and winning accounts all over the map and this is part of the graph - the growth that you're going to see in the cloud, you're going to see C/4 HANA in the front office, S/4 HANA as the core and everything in between move to the cloud, while at the same time there's plenty of hybrid cloud opportunities out there that will hold the core business ever solid and the support is like 99% retention and the software and related services is growing in double-digits. So I wouldn't at all be concerned with any structural change to the core license business.

I would be celebrating with champagne everywhere out there that the cloud is soaring. And wouldn't you be disappointed if the cloud was flat and the core was rock solid, you probably would be worried about the future, right. This is the perfect scenario.

John King: Thank you.

Stefan Gruber: Let's take the next question please.

Operator: Okay. We'll take a question from Michael Briest with UBS.

Michael Briest: Thank you. Good afternoon. Just one on S/4 in terms of the growth in customers there it's been fairly steady outside of the fourth quarter, at least about 500, 600 a quarter.

Can you talk about that and whether you expect an acceleration. I think Luke the target was to get 50% of customers by 2020. And also if I look at the number of live customers, I think one of your representatives at the site [ph] yesterday said that there were 2100, I just had a quick look back at my SAP [ph] when you launched that, I think after two and a half years they were at 4000 live customers and you're now three and a half years about 2000, so maybe comment on that. And then just secondly, Luke on the hiring, I think you said at the start of the year the number of headcounts that you would add would be roughly similar to last year. If I take out Callidus, you've already added four and a half thousand.

Should we assume that there'll be very little hiring in Q4? Thank you.

Bernd Leukert: Okay. Hello. Michael this is Bernd, happy to answer your questions on S/4. First of all I want to repeat the big message that S/4 HANA is a big growth driver was in the past and was specifically as well in Q3 with triple digit growth in the cloud, and as well still significant growth in on-prem world.

I expect that we can soon launch to the public market that we have customer number 10,000. So just to give you an order of magnitude that product is selling, is rocking and is a massive growth driver. Now to your question on specifically life customers, we have been always reporting customers who are live or who have a project which are in process of going live where we have a precise go live state. I can report back now today that we have passed a number of 5000 already. While you were referring to 4000, so we have more than 5000 customers who are live or who have a project plan with our service organization or one of our partners with an active know go live state.

The number which is DSAG was reporting to was a number that they have evaluated in a survey and we were confirming it that globally in mid of 2018 we have 2100 and something live customers but they have not been counting the customers who are in process of going live. And the number is increasing every day. I hope this helps to clarify the picture and that - as well S/4 HANA is stellar gross driver.

William McDermott: Yeah. And maybe to expand on the question on headcount.

The statement from the beginning of the year that we will hire roughly the same amount of people is generally true with one exception and that one exception is our services organization. You have seen that we have seen a constant acceleration of our business performance in services and we have seen that also the bookings performance in 2018 has been truly remarkable and has been up - dependent on the quarter high single digits or even double-digits. So we have to make room for that. And that's why we have hired in services for more people and what was originally been contemplated including in Q3 where for example we have added roughly 500 people for our services business alone. So in that if you back that out and that will probably be a number in the higher triple digit numbers of people that we will add in services more than originally expected in the rest of the organization, the hiring numbers would closely resemble what we have done in the previous year.

Michael Briest: Thank you.

Stefan Gruber: Okay. Thank you. Let’s take the next question please.

Operator: We’ll take our next question from Walter Pritchard with Citi.

Walter Pritchard: Hi. Thank you. A question for Bill, question for Luka. Question for Bill, on the macro environment, you know, it looks like U.S. business was very strong in the quarter, Europe not quite as strong, you highlighted a few geographies.

Could you help us understand what you're seeing and I think there's quite a few things you've got the tax cuts in the U.S. that have driven demand this year. I think there's some concern about how that plays into next year and then - and then some mix macro signals in Europe. And then Luka, on the license performance, I'm wondering if you're still comfortable given that trajectory that you can you can keep the support revenue growing at the rate it's been growing here recently? Thank you.

William McDermott: Walter, thank you very much for the question.

I want to be clear every single market out there from the Asian market, or if you look at the Asian [ph] region, what's happening in places like Vietnam it's unbelievable. China, China is growing faster SAP’s than any of the other software companies out there. The United States is rock solid and of course, you know, keep in mind the United States has our biggest cloud revenue base with many and back most of our cloud assets domiciled in the United States. It's doing extremely well. And Europe you know, you'll have some sportiness in countries from one quarter to the other.

But overall as Luka said it gave you the numbers very solid, middle east very solid. So overall, the global scenario of growth that SAP is very well dispersed across the geographies and across the industries. So the health of the businesses very, very solid. And I'm not in any way concerned about any theater in SAP living up to our high expectations.

Luka Mucic: And maybe just to quickly comment on the support performance.

Look, we see all of the drivers that are behind our mid-term ambitions still in force. We have planned as you know for a couple of years now for a low to mid single digit decline in licenses. In the past three years we have been doing better than that. Our thesis as Bill has said for this year remains unchanged. So there is no reason to assume a different impact for support revenues going forward.

But we have always said that the market needs to accept - needs to expect a gentle decline in growth rates of support revenues. That's just the natural outcome of the slowing growth in licenses. But you can safely still assume positive support revenue growth all the way to the end of our mid term ambition, as always predicted.

William McDermott: And also one of the things that I would just also like to underscore with this global scenario, I basically have talked a lot about Asia and the fact that the Asia Pacific region is soaring for SAP, including China. You have to look at the hyperscale as well.

Look at Alibaba, we are the partner of choice. Look at in the United States Google, Cloud platform, Amazon, AWS and of course, our great partner for more than four decades Microsoft and Azure. Every one of them is standardizing on S/4 HANA as the core system for these cloud. And when you think about C/4 HANA, we are making incredible inroads for having that adopted in these clouds as well. In fact Microsoft, Azure just announced not just as S/4 HANA but also Concur and Azure.

So we are having a very good multi-dimensional cloud strategy where SAP can do it all for you. We can work with hyperscalers to collaborate on integrated solutions for a given customer. And this is giving us extreme tailwind because the SIs are also railing around this now as they have to have new and innovative solutions in the cloud to keep their practices growing. So the force multiplier here is that SAP strategies is the best one.

Walter Pritchard: Thank you.

Stefan Gruber: So let’s take the next question please.

Operator: Our next question comes from Stefan Slowinski with Exane Paribas.

Stefan Slowinski: Yes, hi. Thanks for taking my question. Actually, just to follow up on Bill's comments there regarding the relationships with AWS and Azure and GCP, Ali cloud.

Was that partially what helped drive the improvement in profitability of your infrastructure as a service business? And you know, more generally I guess how are those relationships developing and how are customers evaluating how they move to S/4 HANA. Are they you know, is there maybe a pause actually in the near term as they think about moving onto those platforms and that decisions is a bit more complex than going on premise or even an HEC. So any additional color you can provide about how those partnerships are potentially helping your margins now and in the future and how customers are evaluating those offerings versus more traditional upgrade processes? Thank you.

William McDermott: So let me quickly comment on those and then everybody please feel free to give additional commentary. So first of all the growth in our infrastructure as a service margins was just result of improved operational efficiency in our HANA Enterprise Cloud business and the larger scale that we have reached by now, the larger revenue base and the larger renewal base.

What helps us in the collaboration with the hyperscale is that we don't have to expand so dramatically on CapEx going forward. That's where the advantage comes from and it hurts us therefore in the free cash flow side going forward with flattening CapEx need, but on the profitability it was really our own developed efficiency gains and effectiveness gains. And in terms of the growth trajectory on S/4 HANA, actually the collaboration with hyperscale has accelerates our capabilities in order to help our customers to migrate to S/4 because they have access to a very efficient compute infrastructure. They have access to a scalable infrastructure in particular and therefore it is actually an accelerator of our migration move rather than a reason to pause or rethink anything.

Stefan Slowinski: Thank you.

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

Operator: And we'll take our next question from Phil Winslow with Wells Fargo.

Phil Winslow: Hi, guys. Thanks for taking my question.

A question here to Bill, it's been a few months now since you guys launched C/4 HANA and obviously the open data initiative is only about month old, but curious just the feedback that you're getting from customers on the vision that you laid out. I wonder if you could comment just about how you're thinking about the other products set right now with C/4 HANA, especially sort of in the context of that partnership with Microsoft and Adobe?

William McDermott: Thank you very much, Phil. You know it's really great friendships that developed some of these market making moves. So it was a phone call to Shantanu I woke him up at 430 in the morning in Australia and then that was just after I had a great conversation with Satya wherever he was in the world and we basically said look you know, we have the C/4 HANA machine going at full speed. The most important thing to the customer is connecting the demand and the supply signal to give a seamless experience to seven and a half billion consumers worldwide.

More than ever, CEOs of companies are very concerned about meeting the high standards of like the British Standards Institute and making sure you protect the privacy and the data of each of those consumers. And that is a really serious issue and it's one where we were the first company certified in the world because as you know Europe was way ahead of all the other regions of the world in dealing with privacy and security. So we just talked about you know, really building a partnership around an open data initiative where we jointly could collaborate with customers and let the customer know that it was their data and that we would work in harmony across the value chain, our three companies to take the high ground and set the tempo for the tech industry. We announced this at a night in Orlando and the very recent past as you know, Phil, and it was extremely well received. And what you see now is the trust building.

Obviously, with our brand we have Gigya with a couple of billion records of consumers out there that customers are serving. We're number one in e-commerce. We're number one in the customer data cloud. We’re number one in incentive commission management and configure price and quote an we're number one in the integrated suite with ERP and supply chain. So these assets were extremely attractive in Azure and we were very happy to work with Satya and Shantanu, really to put together a beautiful partnership because we have joined customers that participate with all of our technologies and our solutions.

And we're very willing to put those solutions in Microsoft, Azure and put it in a hyperscale cloud environment or run it in the SAP cloud, if that's what the customer wants. but I really do think the Open Data Initiative and this trust that we're building with customers is an essential element of the 21st century relationship.

Phil Winslow: Thank you.

Stefan Gruber: Next move to the next question pleas.

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

Adam Wood: Hi. Good afternoon and thanks for taking my question. Maybe first of all as we look at next year Luke, you’ve been very adamant that we should see margins inflecting in 2019 with this accelerating move towards cloud and potentially move back towards high single digit license declines and stronger growth, are you still as confident that that can be achieved or should we think about the operation profit growth being more driven by the top line rather than the margin expansion. Maybe just secondly to help us dig in a little bit on the license mix and how that shift happens. Could you give us any more granularity around which part of the license portfolio and areas like the analytics CRM and HCM where we would expect a more rapid cloud move and how much is more S/4 HANA supply chain where we'd expect sales on premise and license driven future? Thank you.

William McDermott: Yeah, let me take that. First of all I've never said that margins should inflects in 2019, I said that they should inflect in 2018 and that's what they have done so far with 50 basis points improvement. So we continue to expect an increase in margins for 2018 already. And for 2019 our ambition stays intact to go for as we have said in the past continuous and consistent margin expansion. So you should not expect that there was a huge hockey stick that is building up here that we will have a nice and gentle progression and continued progress on the margin front, because again that mix shift effect is just extent already baked into our projections.

And in terms of the licenses, as I've said I mean, the two areas in license that are growing and that are for becoming a growing proportion of the license mix is - S/4 HANA is a digital core and digital supply chain management. Those two solution areas in aggregate already and today account for almost half of our license revenue and therefore the rest is basically a little bit more than half of it, but is basically migrating to the cloud.

Adam Wood: Okay. Thank you very much.

William McDermott: If I may, just to make one point, Adam.

I think it's really important that we learn the lessons from companies that didn't change and didn't lean in to new market opportunities and chose stock buybacks and cutting costs and laying people off as their chief innovation strategy. That's not ASAP. Our chief innovation strategy is growth. We're a growth company and we're going to grow in the cloud and we're going to be the number one enterprise application software company in the cloud for decades to come. So that's a very important imperative.

At the same time we're going to intelligently manage the expense base in the company and we have plenty of flexibility with our workforce, a highly competent young dynamic workforce to be agile and where we put people and how we maximize the revenue per employee and we're going to do a lot of that. So that's a very important thing. So that's a very important thing where we can work with the absolute operating margin rate. So you'll see us sell more. We'll spend our money wisely.

But we're going to grow in the cloud. And your comment about absolute operating income is well taken by me personally. There once was a time where we actually had management here shoot for a particular margin rate and left the innovation story at the doorstep. You won't see that happen under this leadership team.

Adam Wood: Okay.

Thank you.

Stefan Gruber: The next question please.

Operator: We’ll take our question please from Mohammed Moawalla with Goldman Sachs.

Mohammed Moawalla: Great. Thank you very much.

I was wondering, Luka, if you can comment around the for the flexibility you have on the different levers of the margin, especially given the possibility of a much more volatile license as you kind of hit the tail end under the transition. Obviously gross margin is has been a big lever right now and is expected to continue. But how much flexibility do you have on the sort of OpEx discipline particularly given you know, Bill, your comment that you're still very focused on growth. And the second question I had was on the cloud portfolio, obviously the cloud growth is very impressive. Can you just give us maybe a bit more detail on sort of the broader product portfolio to show different growth rates and kind of how sustainable this is and perhaps you know where you see the kind of biggest opportunities in and outside sort of the installed base? Thank you.

Luka Mucic: I'll handle the flexibility question and then on the growth topic please, maybe also Rob can weigh in because a lot of the cloud assets in bent are in their respective camps. So in terms of the flexibility look, from a gross margin perspective the good news is that we have a growing predictability of our overall revenue, so as cloud and as support [ph] becomes a larger share of our total revenues our planning base is becoming better and better, and therefore while our stickiness in our business grows and therefore also short term volatility is reduced, we have a very good planning basis for our operating expenditures. When you take a look at that, you will see already that in 2018 we are making great progress on the sales and marketing cost ratio, that's due to a strong focus on the one hand on operational simplification and harmonization, but to the other extent as well it's already a starting point of a positive feature of the cloud business that as the more our renewal base in cloud improves the actually the lower the extra effort from a sales and marketing perspective that we need to spend for every extra dollar of cloud revenue. So this is a very positive feature which already gives us quite a nice leverage. And all the rest, of course, we have a great deal of optionality when we had the last big downturn in the economy in 2008 and ‘09 in a situation in which we were much more dependent on license revenues then today we were able to react very quickly and accommodate a lower cost base.

You can assume safely that this capability is still with us, but at the same time our resilience from a top line perspective has materially increased. So I'm not worried in this respect at all. But as long as the demand signals all very positive as Bill said, we will continue to do what is right for the company to develop a sustainable long-term growth engine, which SAP become in the last few years now.

William McDermott: And I want to build on Luka's thoughtful commentary and also thank you for such a qualified question. It's really nice to hear the way you're thinking about the business, so we're thinking about it.

Just to give you some color, analytics triple digit in the cloud. C/4 HANA steep triple digit in the cloud. Leonardo we have obviously Leonardo imbedded into all of our applications with machine learning and AI, IoT and Blockchain. When you think about machine learning with SAP conversational AI, just one example, we have the fastest easiest and most accurate enterprise great - enterprise grade BOT [ph] platform on the market and with intelligent robotic process automation our customers will be able to achieve the higher automation level necessary to become intelligent enterprise. So Leonardo [ph] is soaring in the value proposition.

S/4 HANA [ph] covered that growing fantastically and what I love about S/4 HANA for everybody that wants to make sure that core is ever steady. That's the heartland of the core because many of the big companies who continue to run S/4 HANA in our cloud or hyperscale cloud and in many cases that will be recognized as license revenue in the traditional. sense with a maintenance contract that supports it, so we'll be able to recognize that revenue net, kind of solution will hold the core business steady and you won't see too much rockiness and that even as we soar in the cloud, triple digit growth in the SAP cloud platform and other matters. I want to make one comment on the business network because it's fair that you Concur, Ariba, Fieldglass, all these businesses get a lot of credit. Fieldglass is growing in triple digits.

It's a runaway success story. Ariba added size and scale. You usually have a 30% growth rate thereabouts in each of the quarters. Similar story with Concur. All the M&A that we made with Hybris, as an example or Gigya or Callidus, all growing beautifully.

So what's really nice about the M&A moves that SAP is has done we bought the best assets and after we bought those assets we invested in them and grew them organically and they became a centerpiece of our culture. So we know how to do that and that has really been a wellspring of opportunity for our cloud business as well. So that's a little bit of a color on the cloud and we'll have you know we'll maintain the core ever steady ever solid. We'll spend the money wisely on headcount and other things to make sure that the rates are in good shape, but we're going to continue to grow the company in the cloud and make all the investors very proud of the management team and our foresight on what's ahead of us. We want to lead.

We want to win. We want to be the best.

Mohammed Moawalla: Thank you.

Stefan Gruber: Lets take the next question please.

Operator: Our next question comes from Charles Brennan with Credit Suisse.

Charles.Brennan: Great. Thanks very much for taking my question. It's just a clarification on C/4 actually, you've given the metric in the statements of 50% growth that’s obviously very impressive, but do we assume that that includes Callidus such that the organic growth is only 20%. And if that's the right calculation it's growing below the overall average for the clouds. How should we view that metric?
William McDermott : Maybe I can clarify this, what you seem to be referring to is the total segment revenue in our customer experience segment.

You need to note that this includes legacy on premise revenues which are in decline in this business area to take a look at purely the C/4 HANA cloud subscription revenue then that's up more than 200%. That hopefully clarifies
Charles.Brennan: All right, hank you.

Stefan Gruber: Okay, thank you. Let’s take the next question please .

Operator: Our next question comes from Stacy Pollard with JPMorgan.

Stacy Pollard: Hi, thank you. Well just quickly on the deal mix for S/4, you had 50% net new, that was kind of high. Does your pipeline suggest that trend to continue or would it shift back to kind of a two thirds mix of the installed base. And then how do you expect the installed base penetration to trend. I know just following up on Michael Briest question he mentioned the - do you expect 50% by 2020? And then just quick second question a logistics one, can you please give us the like for like margin year-to-date excluding calendar Callidus [ph] excuse me and excluding IFRS 15?\

Luka Mucic: So first of all on the – S/4 questions the penetration of net new versus installed base, I think in general as S/4 HANA in the cloud is taking off we can assume that there will be a growing proportion of net new customers.

However, in Q4 I would personally bet a little bit against that because in Q4 we always have a large share of transformational deals that are lining up and those tend to be installed base conversions. So I would not be astonished if the share in Q4 would be slightly different and more weighted towards installed base than that. But in general I think we can assume that net new will become a growing proportion which is very, very positive. And we continue to expect that you know we have roughly 30,000 customers on classic ECC out there and we continue to expect that roughly half of them should have bought in S/4 HANA by the year 2020. And in terms of the - of the like for like margin with puts and takes in everything considered, I think that would point to a slight decline of roughly 60 basis points….

Stacy Pollard: What about year-to-date? No it was for Q3. I thought you were asking for Q3, if you're talking about year-to-date, it's very slightly negative.

Stacy Pollard: Thanks.

Bernd Leukert: And maybe Stacy, as just to comment, what Luka, which underpins the SEC [ph] coming from customers, and as well the statement from Bill that the core is ever steady. There was a survey published by the German speaking user [ph] group about relevance of products in our portfolio.

And as for court the highest relevance it was 78% of the survey respondents that there was a very high degree of relevance when it comes to digital transformation. So maybe this is linked as well to the question of customers who are in process of going live and customers which we have sold the product to because digital transformation means it is not just adopting new technology and new software, it means reinventing the business processes that customers has implemented sometimes for one or two decades. And I think this underlying fact is important to understand and this is what the value driver is behind the success.

Stefan Gruber: Very good. Thank you.

Let's move to the next question please.

Operator: Our next question comes from Alex Tout with Deutsche Bank.

Alex Tout: Yeah. Hi, guys. Thanks for squeezing me in.

The cloud bookings growth rate was very strong, and also I'd note that typically your bookings are a little bit below the corresponding revenue rate just given the dynamic with the business network. So does this give you quite a lot of confidence going into 2019 that 30% organic growth rate in cloud is looking pretty safe? And then just on the maintenance retention rates that have improved, I think Bill mentioned 99% retention, would you read anything into this in terms of you know may be in store based customers readying themselves for rest for getting current on maintenance where in some cases maybe they weren't. Is it would that be an interim interpretation that you would give or something else? Thanks.

William McDermott: Yeah. So first of all on the new cloud booking growth rates we are excited about it and it absolutely puts us perfectly in line with not only our 2019 targets but actually also our 2020 ambition because that's the nice thing about the cloud business model with what we win today, we already have not only for next year, but even for in two years a very good level of visibility.

So absolutely we are excited about our current momentum in new cloud bookings. And secondly, in terms of the retention rates, I think I would simply read into this that customers get great value from our support offerings that we work very closely with our customers to help them understand the value from innovation that they get be it on the classic systems, as well as on the opportunity to upgrade to S/4 HANA. So I see this to a certain extent decoupled from any consideration around upgrade cycles, but simply a reflection that we care about our customers and that the support services that we offer are absolutely best in class in the industry and that has driven increased customer satisfaction which you can also read from the very low level of sales allowances that we had to book this year which is at an all time low, which reflects the same kind of phenomenon?

Stefan Gruber: Okay. The next question please.

Operator: The next question comes from Neil Steer with Redburn.

Neil Steer: Thank you very much for taking the question. Luke when you were speaking during your prepared remarks you seemed to suggest that the benefits from the Converged Cloud Infrastructure migration, some of the fast solutions mover to that, that was not really seen in the third quarter, but yet that was to come. Was that to come in the fourth quarter this year or was that really something that now competes in the early part of next year and if you could put some quantification around that that would be much appreciated. I think in the past you've talked about north of 100 million of cost savings from doing that. Was there anything in Q3 and how much do we see in Q4 and early next year?

Luka Mucic: What we see in 2018 is that we can already heavily de-emphasize incremental investment into our legacy cloud infrastructure where we had duplicate infrastructures in the past.

We still had to rejuvenate some of the hardware on the legacy platform while starting to migrate customers over to the new cloud platform based on HANA as a database. And those investments are starting to taper off. But that has really not had a significant effect yet, most of its efficiency gains that we have seen so far have come from general scale increases. What we will see next year is the first half of those that say gains from the technology platform convergence and converge cloud, which I had quantified as a mid double-digit million euro effect for the full effect, we need to utilize the harmonization of the infrastructure to do then move to increased automation, as well as centralization of some of our cloud delivery support and that will kick in beginning with the second half of 2019. And then with full scale going into 2020 that's why we expect a step change of cloud delivery margins in 2019 and then a continued progress going into 2020 and beyond.

I hope this clarifies broadly.

Neil Steer: Thanks very much. Thank you.

Stefan Gruber: Thank you, And let’s the final question on today's call.

Operator: Our final question comes from Ross MacMillan with RBC.

Ross MacMillan: Thanks so much. And that was actually one of my questions, so I'll ask them the last one really for Bill. Just on the ODI, congratulations on that. It seemed to really play into the thesis of digital end-to-end process sort of re-imagination. And I just wondered what are the milestones that you would have as look for as we see that play out in the partnership.

And I'm just curious do you have a vision that this could actually further accelerate the rate of cloud adoption from SAP? Thanks.

William McDermott: Ross, thank you very much. First of all for your very nice comments. It really is a special opportunity. Companies out there today they want a digital end to end view of their relationship with their consumer.

So our job is to help our customers, help their customers. And that begins with the demand signal that's being sent. That begins with understanding the data and how it's being utilized across all channels. Many of the companies we work with for example are selling their products through wholesalers or retailers or online where it's a direct to consumer model. You have to be highly thoughtful about the data because that consumer expects their data to be protected.

They expect their privacy rights to be honored. They'll only abide by some of the offers that you make if they opt in as an example and that data then needs to be followed through the entire cycle of the customer relationship. Ultimately the companies we work with want to have serious knowledge on the consumer. That knowledge is in the SAP system. The data is in the SAP system we know the history that that customers had.

We know if they pay their bills if they don't pay their bills, we know what products they did or didn't buy. We know through predictive analytics and the algorithms with Leonardo, what they are likely to want based upon their prior history and behaviors all this data then coalesces into an offer and then a transaction is determined once that transactions determined, you got to get the right product at the right price to the right place in the right form factor that the customer wants and more and more that customer is on the move. So geospatial capabilities of HANA has become more and more important to SAP of course but also to our customers and our partners. And if you look at it from Microsoft's point of view, there came to have SAP in the Azure cloud because it makes their offering enterprise grade. It really takes them from the knowledge worker space into the enterprise business space with Azure.

If you look at it from Adobe's perspective instead of competing with SAP and having that be their mission in life well maybe there might just be marketing opportunities that the customer sees Adobe fitting very nicely even while they see the virtue of C/4 HANA and the end to end value chain of SAP. So we basically as three CEOs said let's just do the right thing for the customer, let's let them have their data. let's let them see their consumers across the value chain and let's work together in good faith. So far there's been many new customers that have entered into the pipelines of all three companies. So it's a virtuous cycle for all three companies.

Ultimately the customer has to win. And I think you know in the case of Shantanu, Satya and myself, you have three CEOs that believe that the customer has to win. So we'll have more. So we'll have more data. It's a young initiative, but we're already looking at top 25 customers who are actually working on things as CEOs in a highly collaborative way.

We have relationship plans that we're sharing with our teams in the field. So I'm very excited about what's going on with Microsoft and Adobe and I really believe this is an initiative that will set the tempo for the rest of the IT industry to have to deal with.

Stefan Gruber: Thanks a lot. This concludes our Q3 earnings call for today. Thank you all for joining.

We hope to see you in New York on February 7th next year. Thanks a lot and goodbye.

Operator: Once again ladies and gentlemen that concludes today's conference. We appreciate your participation today.