Operator: Good day, ladies and gentlemen, and welcome to the SAP Quarter Three 2019 Earnings 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 good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you for joining us to discuss our results for the third quarter 2019. I'm joined by our new Co-CEOs, Jennifer Morgan and Christian Klein; as well as Luka Mucic, our CFO who will make opening remarks on the call today.

Also joining us for Q&A is Executive Board Member, Adaire Fox-Martin, President of our Global Customer Operation; and Ryan Smith, CEO of Qualtrics. Before we get started, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, 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 our recent filings with the U.S. Securities and Exchange Commission, including SEC's annual report on Form 20-F for 2018 filed with the SEC on February 28, 2019. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

On our Investor Relations website you can find our quarterly statement and a financial summary slide deck, both documents are intended to supplement our prepared remarks today and include a reconciliation from our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates and percentage point changes are non-IFRS as reported year-over-year. The non-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, just a reminder, today's call is focused in our Q3 earnings results. In three weeks, on November 12th, we will hold our special Capital Markets Day in New York City.

There we’ll provide more color on our growth strategy and mid-term revenue and margin ambitions. And with that, I'd like to turn things over to our Co-CEO, Jennifer Morgan.

Jennifer Morgan: Thank you, Stefan. Good morning, and thanks to everyone for joining today's call. First, I'd like to thank Hasso Plattner and the Supervisory Board for their trust and honor of leading this company forward together with Christian Klein as CEO.

It's an honor to help write SAP's next chapter on followed builds. Before I begin, I want to start with the news we learned about on Friday regarding the passing of Mark Hurd. Mark has had a profound impact on our industry. And on behalf of all of SAP, I want to extend our deepest sympathies to the entire Oracle community, and especially to Mark’s family and friends. You are on our thoughts and prayers during this difficult time.

Now, let me dive into our Q3 performance. Today, we reported strong Q3 and year-to-date results, which Luka will detail shortly. Clearly our experience management vision powered by Qualtrics is resonating with customers in is a key differentiator across all aspects of Intelligent Enterprise. With top-line accelerating and operational excellence initiatives in full strength, we're on track to reach our full year and mid-term ambitions. So let me spend a minute on the macro.

Our strong Q3 performance was achieved despite headlines about a slowly global economy, trade wars and political uncertainty. We had some impact due to macro challenges. For example, in Asia and the German auto and manufacturing sector. But even in times of uncertainty, technology investments remained a focus for every company, and our business is resilient due to the breadth of our global coverage. Companies continue to turn to SAP to transform, to accelerate their growth organically and through faster M&A to drive efficiencies, competitiveness, and successfully navigate the changing macro and regulatory environment.

Our global pipeline is robust as we head into our seasonally strong Q4. SAP's resilience is further underpinned by more predictable revenue approaching 70% of the mix. Let me now highlight our strategic growth drivers in the cloud. We made a bold move with the acquisition of Qualtrics and customers are excited about the holistic experience management platform Qualtrics provides in addition to what the combination of X and O-data can do. We're very pleased with Qualtrics’ growth and we are starting to see the scale of SAP helping drive and close pipelines, especially in the enterprise segment.

Qualtrics had some impressive wins in Q3, Dish Networks, Slack Technologies, Akamai, U-Haul, Sharper Image, Stanley Black & Decker, Garmin International, and many others selected Qualtrics in Q3 to move beyond systems of record to new systems of action and achieve breakthrough results. We continue to beat our competition in both the enterprise and volume parts of our business. Qualtrics’ volume engine is helping SAP to expand its footprint in the new accounts and it's helping us to open doors for other SAP cloud solutions. We're also seeing an acceleration of our win rates against Medallia as customers are choosing Qualtrics for its technology and analytics capability and the breath of XM solutions across customer experience, employee experience, product experience and brand experience. With the addition of Qualtrics to SuccessFactors, we’ve redefined the traditional human capital category to Human Experience Management or HSM.

Every company needs to understand the factors that impact employee experience to attract and retain their talent. And since integrating Qualtrics to the SuccessFactors suite, we’ve seen a tremendous demand in SuccessFactors’ customer base for Qualtrics. Since May, we've acquired over 300 customers for the Qualtrics platform. And I think these evolution towards human experience management is proving to be an accelerant for Employee Central, which added more than 150 customers in the quarter and has now more than 3,500 customers globally. Competitive wins included British Telecom and Hugo Boss.

And our joint sales motions are paying dividends. Qualtrics had its largest employee experience here on history this quarter as a direct result of our joint go-to-market motion. Some proof points for SuccessFactors, we just eclipsed 1,000 SuccessFactors customers in APJ. And when you add China, that's another 400 customers. In Latin America, we're approaching 800.

Even in mature markets like Europe, we’ve seen significant growth to over 2,800 customers. UK and Ireland are triple digits new bookings growth in Q3. We're also making great progress lighting Qualtrics on fire in our partner ecosystem. We announced the partnership with Ernst & Young with EY delivering excellent practices and solutions to its clients through its People Advisory Services, and its Workforce of the Future solutions. EY will also become the first Qualtrics’ partner network member to adopt Qualtrics experience, employee experience across the organization of 26,00,000 -- 260,000 employees.

And this will combine X-Data and O-Data from SuccessFactors. In addition to accelerating SuccessFactors’ business in HCM, our CX business continues to benefit with the infusion of Qualtrics across our C/4HANA portfolio. We introduced the connector between Qualtrics to C/4HANA that developers and partners can use to build new integration scenarios. We're starting to see organizations combining customer feedback and operational data to listen, understand and act. E.ON and a Brazilian retailer swift also chose SAP’s C/4HANA solutions in Q3 over our competition based on SAP's unique and compelling vision, while Petrofac and Perfumery Douglas went live on C/4.

We're continuing to invest in our customer experience portfolio. We've announced that Bob Stutz, a leader who continued to redefine the CX arena at both Microsoft and most recently Salesforce, has rejoined SAP as President of Engineering in our CX business. Bob’s experience and foresight will take us to new places in the future. Our Intelligence Spend solution provides collaborative commerce with SAP Ariba, effortless travel and expense processing with SAP Concur and flexible workforce management with SAP Fieldglass. Together, they represent the largest commerce platform in the world, with more than 3.4 trillion in global commerce annually transacted in more than 180 countries.

This is nearly 8 times the size of Coupa. We are making strong progress on delivering integrated spend scenarios starting with services procurement across Fieldglass and Ariba. BT, Sony Music product and many others turned to SAP's Intelligence Spend solutions in Q3. Specifically, Concur is starting to gain traction, especially in China with Xiaomi as one of its marquee customer. Another incredibly exciting announcement and key strategic driver of future growth is our expanded relationship with Microsoft, which we call Embrace.

We listen to our customers who ask to help them define and accelerate their journey to SAP S/4HANA in the public cloud. Many of our enterprise customers have chosen Azure. In response, SAP and Microsoft have established a partnership to move on premise SAP ERP and S/4HANA customers to the cloud through industry specific best practices, or joint reference architecture, and SAP cloud delivered services on Azure. This partnership will both accelerate and simplify customer migration to S/4HANA on Azure. Microsoft will bundle SAP's cloud platform services into a bundle we call Embrace.

And they'll sell these directly through their field organization to their customers who will run SAP in the Azure cloud. By putting the customer first we’ve combined SAP innovation with Azure to create the optimized environment for SAP S/4HANA to enable the integration, orchestration and extension of SAP’s systems in the Azure cloud. As always, choice will prevail as we recognize that many of our customers also run SAP on AWS and GCP for example. In this case, our customers will still have the benefit of the best run SAP in their public cloud of choice. So to summarize, SAP is delivering on its winning strategy and its promises as validated by our strong Q3 and year-to-date results.

The fundamentals and future of SAP could not be stronger. Now I'd like to hand over to my partner and Co-CEO Christian Klein, we share similar vision and with highly complementary skill sets and experiences, we will write the next chapter of SAP success together. Thank you again. Christian, over to you.

Christian Klein: Thanks, Jenn.

Thanks to everyone for joining us today. Let me begin with the personal remarks. On Friday we were threatened by the news about the passing of Mark Hurd. Words are never adequate in moments like these. The whole IT industry lost a visionary leader and a brilliant mind.

And my thoughts are with his family, his friends and everyone at Oracle. Being a CEO with hallmark is responsibility and honor to hold. I want to express my heartfelt thanks to Hasso Plattner and the SAP’s Supervisory Board for the trust they’ve put into Jenn and myself. Starting off with a quarter like this certainly helps. This is where I also want to thank Bill not only for his amazing quarter, but also for the unique journey during the past decade.

This is an outstanding quarter across all key parameters. Cloud and on premise order entry, revenue, cloud gross margins, operating margins and cash flow. Luka will walk us through those in a minute. Let me add some color from the co-applications perspective. SAP's ERP flagship solution S/4HANA continues its success story.

It's the broadest suite in the market, serving over 25 industries and 160 country versions. We are continuing to invest into artificial intelligence to further increase the business value and help our customers to grow and drive automation in the digital age. Until the end of this year, we will have 200 used cases and more than 1,800 features. We're presenting a 60% increase in scope. For product gaining market share, and we see positive software license growth and high double-digit cloud revenue growth.

80% of the DAT companies and 65% of the Forbes Global 2000 companies already rely on SAP S/4HANA. We are now at more than 12,000 licensed customers representing a 25% year-over-year growth. We’re also very happy with regard to adoption, especially S/4 with more than software technical migration. It allows our customers a complete redesign of their business model and business purposes. We see 60% of customers live or implementing and the others preparing their approaching.

To name just a few, this quarter Dow Jones and Callaway Golf in the U.S. and Breitling in Switzerland went live on S/4HANA, as did Daewoong Pharma in South Korea. In context of that, we are making rapid progress in cloud ERP. S/4HANA cloud including supply chain management, we are now at cloud revenue run rate of more than €0.5 billion and close to 2,000 customers. That’s a coverage of 17 industries already in the cloud and we are investing heavily in the user experience.

This quarter, we saw subsidiaries of McDonald's and Xinjiang Daming Mining in China go live on S/4HANA cloud. I also like to provide you with an update on our platform business, including our memory database SAP HANA with more than 31,000 customers as of today. One important use case is S/4HANA in other LOP applications, such as SuccessFactors running on top of SAP HANA. But over the last two years HANA has rapidly expanded beyond SAP application to third-party applications. This is reflected in the share of full use licenses.

We have more than 60% already, and it continues to expand. We are evolving SAP cloud platform as a business technology platform with focus on different services, and integrating our LOP application. SAP cloud platform is also key when we talk about integration, including our master data integration content, and Co-Kernel services like security and identity. There's no doubt that cloud is becoming mainstream in the enterprise software market. And so we are happy to report increasing cloud gross margins across all business models.

We are looking hard on further increasing the efficiency of our internal cloud delivery. You can see that in the margin trend and I will provide additional color at the Capital Markets Day. At the same time, we understand some industries with high quality and complexity light manufacturing and automotive, where ERP customization is needed, we keep major plots of their core on-premise for the foreseeable future. The same is true for companies and companies with high -- with political instability, limited infrastructure, or increased data security concerns. And a lot of landscape will remain hybrid for many years.

SAP allows companies to combine cloud and on-premise in the landscape tailored to their needs, taking into consideration their business requirements and strategic vendor relationships. It's all about customer choice. This is also reflected in our multi-cloud strategy, allowing both our customers and us to leverage the hyperscale of highly elastic and globally available infrastructure to deliver SAP cloud solutions. Jenn discussed earlier the Microsoft partnership and how excited we are about that. Bill rest assured that customer choice in this context remains unchanged.

Before I hand it over to Luka, I'd like to point out three focus areas that I believe will be critical for our success in the next chapter of SAP. One, customer success. SAP has always been best when we listen to our customers. Customers have been vocal about their feedback which we greatly appreciate and proactively seek. We are listening and taking action, integration, solution adoption, and use and upselling.

These are keys directly related to customer success. Two, innovation. SAP is not a software distributer. SAP is a software engineering powerhouse. Our continued growth through innovation is based on our ability to leverage R&D resources effectively and efficiently.

We are reviewing processes and removing overlaps, focusing resources and accelerating innovation cycle, so we get the most out of our R&D investments, which are critical to our future success. Also, we will further strengthen co-innovation with our customers to realize true business value with the help of new technology. Three, our enroute. It is our colleagues that drive innovation, provide value to our customers and consistently promote our quality and profitability. We are proud that SAP has been recognized from numerous employee awards worldwide.

We are the only company to rank on all five classes of best places to work with it. Our employee engagement index is near record high, but we don't stop here. In addition to further simplifying our internal processes, we are currently conducting our annual employee survey, this year with our own SAP Qualtrics technology, which gives us detailed insight into the good, the best and active. Every employee is productive and innovative and therefore critical to our success. With that, I would like to hand it over to Luka.

Luka, are you happy with the numbers?

Luka Mucic: Yes, thanks, Christian. As you know, usually it's hard to get me satisfied but this time I'm indeed absolutely happy with the results this quarter. And I would also like to take the opportunity to congratulate both you and Jenn on being named Co-CEOs. Look in April, we promised a stronger focus on profits and we are clearly delivering. I'm very pleased to say that our operational excellence measures allowed us to achieve double-digit operating profit growth and a substantial operating margin expansion.

And just as important, we achieved these results with continued strong top-line momentum. Let me now provide you with some background on the key drivers of the third quarter. Both cloud and software revenues as well as total revenue grew 13% this quarter. Cloud revenue was again a big driver of this, growing 37%. New cloud bookings were up 39% and up 51% excluding our infrastructure as a service business.

This is a good trend for SAP and that’s positive for the margin profile of our cloud business. As mentioned by Jenn, we also signed a large partner contract with Microsoft. This contributed 18 percentage points to new cloud bookings growth this quarter. In addition, as Christian said, we saw a significant growth in our S/4HANA cloud offering. Software license and support revenue grew at a solid 4% in the quarter.

Software licenses revenue declined by 1%. And with this, our software license revenue was actually slightly better than expected despite macro uncertainties. This was primarily driven by continued growth in our S/4HANA flagship solution, and our digital supply chain offering. In Q3, the share of more predictable revenue increased to 69%, up 2 percentage year-over-year. Now quickly to the regions, where we had a very solid performance in the EMEA region, the cloud and software revenue increasing 10%, cloud revenue increased 48% with Germany and the UK being highlights, France and the UK had exceptional quarter in software license revenue.

We had a strong performance in the Americas region. Cloud and software revenue increased 16%, cloud revenue increased 32%, with Canada, Brazil and Mexico being highlights. In addition, the United States and Brazil both had strong quarter in the software license revenue. In the APJ region, we had a solid quarter amidst a challenging market environment. Cloud and software revenue was up 9%, cloud revenue increased 40% with Japan and Australia being highlights.

Japan had an exceptional quarter in software license revenue as well. Let's now look at profitability and gross margins in the third quarter. Our cloud gross margin rose sharply year-over-year and increased by 5 percentage points to 69%. As Christian already mentioned, we continue to make progress on efficiency gains in our cloud delivery. This marks the third straight quarter in a row that we have increased our cloud gross margin sequentially.

In our most profitable cloud segments, the Intelligent Spend Group gross margin remained steady year-over-year at 78%.The gross margin of our other SaaS/PaaS businesses expanded massively by 10 percentage points year-over-year and reached 70%, which is an acceleration compared to last quarter. Similarly, as in Q2, we benefited from primarily four effects. First, SuccessFactors is now running solely on our converged cloud platform based on the HANA database; the extended lifetime of hardware; continued high gross margin from Qualtrics and also benefits from restructuring. For our infrastructure-as-a-service offering, the cloud gross margin improved by 9 percentage points year-over-year to 25%. We see infrastructure-as-a-service becoming a smaller scale for cloud mix going forward as hyperscalers continue to expand their capabilities to operate SAP workloads in their datacenters.

Our cloud and software gross margin increased by 1 percentage point to 82% year-over-year with a very positive contribution from the cloud margin. Our services gross margin was up 5 percentage points to 27%. The increase of the services margin mainly results from a strong revenue performance, paired with the successful execution of operational excellence measures and restructuring benefits. Overall, operating profit was up 20% year-over-year, driven by a combination of strong top-line and further acceleration of our operational excellence and restructuring benefits. This led to a stellar operating margin, which expanded 170 basis points.

Year-to-date, we expanded our operating margin by 70 basis points. Turning quickly to IFRS operating profit. This was up 36% benefiting from lower share-based compensation expenses. For the first nine months though, IFRS operating profit was down 28%. Let me just give you a brief recap and update on the effects that led to these results.

Compared to the first nine months of 2018 we had close to €100 million higher acquisition related charges and revenue adjustments, mainly from the acquisition of Qualtrics, close to €500 million higher share-based compensation expenses, and approximately €1.1 billion higher restructuring expenses. As mentioned last quarter, these effects are obviously much higher than usual this year. We still expect IFRS operating profit to be up significantly next year since we don't expect any meaningful restructuring expenses and acquisition related charges to likewise decline. Therefore, our IFRS operating profit growth rate in 2020 will be much higher than on a non-IFRS basis. Moving on to EPS and taxes.

Wherefore IFRS EPS we saw a strong increase of 28% year-over-year while non-IFRS EPS was up 14%. In the third quarter our IFRS and non-IFRS effective tax rate each increased close to 2 percentage points year-over-year. However, our tax rate guidance for 2019 remains unchanged. In Q3, our operating cash flow was up 28%, free cash flow rose sharply and was up 116% due to strong operating cash flow and the reduction of our CapEx spend by 50%. For the first nine months, our operating cash flow was €3.3 billion, down 5% year-over-year.

Compared to the prior year, operating cash flow was impacted by the following effects. First, the benefit of roughly €290 million from the application of IFRS 16, then higher restructuring payouts of around €240 million, higher share based compensation payouts of close to €210 million and higher tax payouts of €490 million. For the full year 2019, we therefore still expect operating cash flow to be slightly lower than in 2018. Similar to IFRS operating profit, we expect a steep increase in operating cash flow in 2020 as restructuring and tax payouts will decrease sharply. Free cash flow stabilized for the first nine months and was flat at €2.3 billion.

This reflects our disciplined CapEx spend, which was €703 million, €443 million lower than the previous year. For the full year 2019, we now expect our CapEx to stay below the €1 billion mark. Before I conclude, I would like to give you an update on our non-financial performance and sustainability highlights. We are proud to be recognized as the number one software company in the Dow Jones Sustainability Index for the 13th year in a row. Developments in the world are leading to increased demand for SAP to enable customers to implement sustainable business models connecting economic, social and environmental objectives.

We want to help ensure the smart integration of impact measurement and valuation will ultimately becomes standard practice. To this end, SAP is a founding member of the Value Balancing Alliance, a non-profit organization that helps businesses measure their overall societal impacts and dependencies. We aim to lead by example, continuing to steer sustainability holistically in our own operations. Employee retention was down slightly to 93.3% in Q3 year-over-year. We have made great progress in women in management, which is now at 26.3%, up from 25.9% year-over-year.

Hence obviously with Jenn, SAP has named the first female Co-CEO of a [Dutch] company. In Q3, our carbon emissions were 65 kilo tons, just slightly higher than we anticipated. Despite this, we expected our emissions in 2019 will stay stable at a minimum. We remain committed to our goal of becoming carbon neutral by 2025. So to summarize, we delivered an exceptional quarter across revenue, profit and cash flow.

We achieved double-digit growth in cloud revenue, double-digit growth in cloud and software revenue, double-digit growth in total revenue, double-digit growth in operating profit, substantial operating margin expansion, double-digit growth in earnings per share and triple-digit growth in free cash flow. We reiterate our 2019 outlook with great confidence and we are on track to reach our mid-term ambitions. With that, thank you very much. And we will now be happy to take your questions.

Operator: Thank you, sir.

Stefan Gruber: Thank you. Operator, we can now start the question-and-answer session.

Operator: Thank you so much. [Operator Instructions]. Our first question comes from John King from Bank of America.

John King: A couple of questions from me. Firstly, just from the mechanics of the Microsoft deal. I think you're implying it's about a €74 million, €75 million run rate of revenue. Can you just explain to us how quickly we will see that kind of revenue run rate in the numbers, please, perhaps for Luka I guess? And then just coming back to the cloud bookings, the second question. I guess you could look at this in a number of ways.

But depending on the mechanics for that Microsoft deal, I guess the implied cloud’s -- organic cloud bookings growth was still, I would say, maybe a little bit below what you're expecting in terms of cloud revenue growth over the next few years. And I guess the question is, would you agree with that? And if so, what are the steps that you are looking to take in order to try and improve the run rate on the cloud bookings side?

Luka Mucic: Yes. First I'll take both of those. And then please turn -- Christian add few color if you want. So on the Microsoft side, it’s very simple, the revenue recognition will begin in Q4.

And then basically, we will have roughly the figures that you're citing on an annualized basis over the course of the next three years, basically. On the new cloud bookings side, look, I mean, first of all, I think nobody should argue with a 39% new cloud bookings growth and 51% without infrastructure-as-a-service being a good result. Of course it was influenced by the Microsoft transaction, but this is representative with the strategic choices that we are making. We're doubling down on the partnerships with our hyperscalers. We’ll drive healthy and highly profitable cloud platform and S/4HANA business as a result of those partnerships.

And we focus our HANA Enterprise Cloud infrastructure-as-a-service business on high value opportunities. This is exactly the direction that we want our business to take. When it comes to the growth rates in new cloud bookings that we need in order to hit our mid-term objectives, I think I've been talking about this already on a number of calls, previously. It's important to note that first of all, the new cloud bookings are not the only source of our revenues and of our growth. And of course, renewal performance plays a role, the ramp in TCV contracts plays a role and we have quite a few of them that actually have a higher number of users or other capacity metrics that are kicking in later years of a multi-year contract.

And on the other hand, obviously, the pay-as-you-go revenues that we have primarily in our Intelligent Spend Group, are also not captured in new cloud bookings. When you take a look at our performance across the different cloud segments, you will actually find that we run basically only healthy businesses that are growing exactly the way they should. In the Intelligent Spend Group, we have been very consistent around a 20% constant currency growth mark now for a number of quarters and with the stability of our transactional revenues, so we expect that this will be continuing. And in the high growth and experience management segments we have been growing close to 100%. In ATS actually, many of the cloud assets that are now reaching scale like S/4HANA, analytics cloud, have actually had a very, very strong performance.

And as they become a bigger piece of the pie, they will of course also influence the revenue performance in a much bigger way. Cloud ERP is an almost untapped opportunity still for us. Christian has mentioned the run rate that we have achieved by now. The opportunity in the market is huge. So you shouldn't be concerned at all about our momentum in the cloud.

Please?

Jennifer Morgan: Yes, I will just punctuate a couple of different areas of focus for cloud growth. The Microsoft deal is important because it goes beyond our traditional partnerships. They've put pretty big skin in the game. And their sales teams across the world are now selling SAP solutions that can help us do two things; accelerate the movement of S/4HANA to the cloud; and accelerate the sales of SAP’s cloud platform services and cloud revenue. So the stickiness of that partnership we believe will continue to pay broader dividends.

So to say few other points, Qualtrics is another area where we see huge potential from a platform perspective, as well as it's giving us an opportunity to have new conversations, especially in places like Asia. This is where we can hit the ground running and really drive growth faster. And then finally, we’ve heard you, we know that you want to see more organic innovation in the cloud from SAP. It'll be something we’ll talk a little bit more on at our Capital Markets Day. But as Luka mentioned, whether it be analytics or the customer facing solutions or supply chain, this is an engine that we need to get humming even more.

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

Operator: Certainly. Our next question comes from Walter Pritchard from Citi. Please go ahead.

Walter Pritchard: Hi, thanks. I'm wondering between some of the things you talked about on the call with S4 public ERP ramping up with -- it looked like the percentage of your S/4 customers that were new actually came down implying that the installed base might be moving faster, as well as what you talked about with Microsoft in the Azure relationship, do you expect that you’ll start to see a little bit more of a pickup here in the installed base migration around S/4? And I'm just curious, I know, investors be a little nervous around cloud versus on prem. But how do you expect that will influence those two revenue streams. If there is any change that you're highlighting here? Thanks.

Christian Klein: Yes.

Thank you Walter for the question. So, I will start and then handing over to Adaire. So in Q3, so, we have seen actually really strong quarter for S/4. I mean as I mentioned, we have seen positive growth in software on premise S/4. And we also have seen high-double digit growth for S/4HANA cloud revenue.

And actually we see both. I mean we see many industries like automotive or in the public industry we see a lot of movement also now customers migrating to S/4 on premise. We see also now that we are increasing the business value of S/4 with serving new business models putting more and more AI into the product, driving more automation to have a higher intelligence in the processes. We see now that also the move is really picking up. And then on the cloud side, especially in the finance area, we have seen major wins now in Q3 and as I said being now close to 2,000 customers.

This is now a major business for SAP. Even more important that in the cloud we see that AI adoption is even kicking in faster. So we see go lives within 20 days, which is really strong. And this also shows that not only in the cloud we are growing fast but also customers adopting really fast.

Jennifer Morgan: Maybe I’d just add a little bit Walter.

Talking to our colleagues in development who are increasing exponentially the functionality that’s embedded in S/4, it means that as our customers look at the value case for the moves, there is a very strong value proposition now around the S/4 environment. We are putting a whole range of different components around facilitating an easy and cost effective move for our customer base. We can see very significant focus from the S/4 community on the S/4 installed base. We have a strong value assurance program and the implementation partners are doubling down on this. In the general business space, we now have 27 conversion factories from various different partners supporting our customers in that segment.

And with our colleagues and DBS, our model company approach means that we are simplifying with pre-configured solutions and content, the implementation of S/4 in a customer's environment. And so we're working to automate as much as we can is our process to ensure that we can facilitate a cost effective and high value transformation for our customers. Stefan Gruber : We will take the next question, please.

Operator: Certainly. We will now take our question from Michael Briest from UBS.

Please go ahead. Your line is open.

Michael Briest: Good afternoon and congratulations Jenn and Christian on your promotions. Just following up on the topic of the private cloud, I mean, you're obviously repeating the ambition for 2023 cloud revenues of 15 billion. But looking at this Microsoft relationship, in part that would be cannibalistic to the growth in HEC.

Do you see any change in the mix in 2023? You’re expecting in the SaaS/PaaS business, perhaps be bigger than previously as a result of this? And then related to that Luka on the CapEx side, I think you said, you're expecting less than 1 billion this year. Six months ago, it was going to be 1.5 billion. I'm wondering how much that’s related to this change in hyperscaler relationships and how much maybe to your -- you have some quite large capital purchase, building offices in Munich and such like, is that contributing to the reduction in CapEx?

Jennifer Morgan: So maybe I can take the first part of the question. We don't see this cannibalizing our revenue, because we see that customer has one choice, right? And so many of our customers absolutely want SAP to manage S4 in the cloud, whether it be the public cloud or whether it be on HANA Enterprise Cloud. So we see many of our customers are making broader public cloud enterprise decisions.

And for us, we wanted to make sure that we didn't limit our conversations to customers only specific to one cloud offering. And so what we found is that the customer has so many voices around their table right now, whether it be movement at public cloud or S4 or other innovation. We just found that by coming together and giving them prescriptive options, depending on what's important to them, what their industry is, et cetera, then we can make sure regardless, we're getting a piece of the pie and we can influence that decision. So we'll continue to see both of those revenue streams grow, but now we're going to be in far more conversations and impacting the directions. Luka?

Luka Mucic: Yes.

And just the last -- on this one. I think we have been talking for a while now about the fact that we expect indeed infrastructure as a service due to our focus on high value engagements will not further increase as a percentage of cloud revenues. Actually, we believe that there is now an acceleration in SaaS/PaaS, but that is very positive for the overall margin. And of course, also on a gross margins in the cloud. When it comes to CapEx, it's correct.

I mean, we have made great progress this year in our CapEx efficiencies. Main contributing factors are; first of all, the progress that we have been making with the hyperscalers and our partnerships in this respect. They are now really powering a lot of the infrastructure support that we need for our applications. And that is, of course, helping us a lot. But it's also due to the fact that carries later in Christian's organization and the cloud infrastructure team has done a terrific job to rationalize the demand for our own data center hardware and consolidating the procurement centrally, and therefore, so successfully renegotiated the maintenance contracts for our hardware in our data centers in a way that makes it now highly economic to extend the lifetime of the hardware from four to five years.

And that helps, of course, also in the CapEx intensity. And we believe that this will continue to be the case. Yes, of course, we also have general CapEx needs through facilities and other CapEx areas but they are largely planned for and they have not been subject to major changes. So it's really mainly the infrastructure efficiency in IT, and in our data centers. And we believe that this will continue.

Also for the next couple of years we expect no significant increases from the level that we have reached right now.

Christian Klein: And maybe Michael just to give you one concrete example of how our HANA Enterprise Cloud offerings plays together with our hyperscalers strategy. I mean, one of our main competitors talked about some SAP ERP and I had -- I actually have no evidence. I didn't find any SAP customer moving over to the competition. But what we are just currently doing, there is one large ERP customer from the competition, they are now saying we want to move to S/4HANA, they have not the skill to get to one HANA and to one S/4HANA.

So they said put S/4HANA on [SI] and we go to the HANA Enterprise Cloud, so you help us to first replace the database, second the ERP and then SAP helps with the migration and this is done with the HANA Enterprise Cloud offering plus [SI] infrastructure. So you also can see that both offerings also play really well together and helps us also to win market share going forward.

Stefan Gruber: Next question please.

Operator: Certainly. Our next question is from Kirk Materne from Evercore ISI.

Please go ahead. Your line is open.

Kirk Materne: Yes, thanks very much and I will add my congrats to Jennifer and Christian on your new appointments. I guess the question is for Jennifer just on Qualtrics. At Sapphire, you all mentioned that the business had been accelerating versus the pre-IPO growth rates.

And I was just kind of curious, where are you in terms of being able to leverage the global distribution capabilities of SAP with Qualtrics? And then, I guess secondly, what kind of halo effects is maybe Qualtrics having on some of the other SaaS properties? I think you mentioned sort of the change in terminology around SuccessFactors? So I was just wondering, if you can give us sort of a broader update there on sort of the ability to leverage the Qualtrics brand across all of SAP? Thanks.

Jennifer Morgan: I'll start and Ryan Smith is actually on the call. And I'll hand it to him to give you a little bit more color. So I look at it from a couple of angles. One is that when you look at SuccessFactors or HR, right, and you look at the traditional category of HR is very much an event driven, kind of after the fact, solution that tracks -- track different events that happens in an employee’s lifecycle.

When you look at what's happening in the workforce today, the work for talent, employee experience, Qualtrics has really allowed us to really redefine how we're having these conversations, right? So it's not just about understanding why things are happening, or why do I have attrition? It's understanding how to go further upstream and understanding who's going to address? What are my issues going to be? And so being able to have those kind of conversations and take action much further upstream and in the business is key. So that's given us a huge shift in SuccessFactors, because it really changes the nature of the conversation and it makes it a C-suite discussion because now we're talking to people about how experience actually shows up in the income statement, how it can actually lower your SG&A or it's going to allow you to be more productive and getting your employees in retail on the floor and more productive and selling more is one example. So SuccessFactors is one. The other one clearly is around customer experience. When you look at our commerce solutions, we see a really strong correlation between bringing together commerce and Qualtrics.

Qualtrics is also allowing us to start conversations in places maybe we wouldn't traditionally go. So it's allowing us to be -- whether you're in customer service or other parts of the enterprise, it’s getting us broader conversations and broader audiences, which has been fantastic. From a geographic perspective, you look at a region like APJ, the companies and the brands that are in APJ are foundationally based on this concept of experience. If you look at the airlines in Asia and compare them to any other airlines in the world, these companies already understand experience. Now, they very quickly can understand how technology can help them scale that in new and different ways.

Ryan and I were in Korea and Japan launching this over the summer. And we had incredible growth in our APJ regions around Qualtrics. So we're able to hit the ground much, much quicker. Our employees are super excited about the solution because they're able to have these conversations. And we're really starting to have this enterprise conversations.

Ryan, I'll hand it to you to add any additional color.

Ryan Smith: Yes, I think you said it great Jenn. I think the only thing I would add would be, if you look back a year ago, we were on the road at this time kind of starting our IPO roadshow getting ready to go public, and if would have told me that, here we are, almost a year later we've seen a massive increase in our growth rate from what was already out there. We're also seeing anytime they go in with SAP or deal size and see sort of 30% plus. We've already seen massive adoption on the [EX] product with combination of SuccessFactors.

We've always been known as a company with the best technology in the space by far. I think the question was always out there is hey, can we go from seven figure deals to high seven figure deals to eight figure deals? And with a combination of SAP with the partnership network, we’ve just launched a massive partnership with Ernst &Young, launched our Qualtrics development platform where last week we had 300 partners in Utah. We're starting to answer all of those questions. So like I said, if you would have told me last year at this time that this is where we would be after the announcement with SAP, with the accelerated growth rate on an already fast growing company, I would have said, hey, that looks like success to us. So with this combination, we've done everything we said we were going to do, plus some.

So I couldn't be happier.

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

Operator: Certainly. The next question is from Adam Wood from Morgan Stanley.

Please go ahead.

Adam Wood: Hi good afternoon. And thanks for taking the question. And also congratulations, from my side both to Jenn and Christian on your new roles. I have got two questions if I could.

I just wanted to come back to Microsoft and the partnership there to start off with and just to understand a little bit better technically exactly what's happening. And as Microsoft total volume of software from you, then they can resell on to their customers bundled on Azure, so in effect, they're acting as a reseller for that? And there's a volume of business that you get directly upfront from Microsoft, that otherwise you may or may not have got but would have come through over time with customers directly? Because maybe help us understand whether there's upside or downside to those numbers? And then also whether you would envisage doing similar deals with other hyperscalers in future or whether there's other products you could also see that type of deal happening? So just a little bit more detail around the actual technical details of that Microsoft partnership will be really helpful. And then secondly, probably for Luka on the margins. You had a big benefit on kicking the cloud gross margin side from the changes you've made around SuccessFactors and integration of the landscapes there. Could you maybe just help us around that and the restructuring, should be expect slightly a slower pace of margin expansion over the next few quarters, because we've got that kind of one big benefit, are there other still benefits from restructuring, particularly to come through? Thank you.

Jennifer Morgan: So I'll start. So as it relates to Microsoft, really what this was about is making sure we were being very prescriptive with our customers around what are the cloud services from SAP? And what are the different services from Microsoft, the customers should be thinking about when they're combining our solutions, right? Today, they're kind of, I'll use this from Microsoft, this from SAP. We’ve come together and been very, very clear on, so this is platform around SAP, as it relates to the integration of SAP system, as it relates to extensions of SAP or orchestration of SAP system. We have a set of SAP cloud platform services that do this. We’ve bundled those together in Embrace, Microsoft made a commitment to those and can resell it to customers.

There's no downside to those numbers, only upside. The way that we really went about estimating kind of our initial start of this market was really in a few key areas of the world. And we’ve put a very -- a lot of scrutiny around the pipeline, the business, where we saw the customer is moving, those which hold us, where they plan to move. So we see this as a start. We also want to make sure we're very clear here that we provide our customers choice.

So let's say for example, we have lots of customers, who may be run on AWS, they've already chosen to run SAP on AWS. Those cloud platform services that I just mentioned around the integration, orchestration and extensions, those customers can buy those directly from SAP, right? So they can still get SAP’s reference architecture on AWS or on GCP from SAP. The difference here is Microsoft put the skin in the game. They are really teaming with us, they're doubling down the innovation and engineering with us, and they're going to have their sales people out selling this as well.

Luka Mucic: Just quickly on the margins front.

No, we have not yet. A lot of firepower, we have additional benefits to gain from the platform convergence. I think, I've been talking a lot in the past years about this being an opportunity alone in the low triple-digit million euro figure. Year-to-date, we have had a benefit of just about 50 million from the replatforming. That means that at least the same amount is still to come.

I believe actually, we will do slightly more than this, because the benefits are really significant. And now we have paved the way for further efficiency increases for automation in other areas. And secondly, this is only SuccessFactors, we have still to fully complete the job on the Ariba business network, the application side of Ariba is already done. The business network side will be finished as well from Q1 next year. And with that, we will see also additional benefits in our Intelligent Spend Group business network cloud margins, which certainly will then help us to further increase the cloud margin also strongly in 2020.

By the way in the SaaS/PaaS business, we are now at 70.4% margin. This is what we had predicted only for next year. So we are clearly ahead of our plans and you can continue to expect us to do very well on the cloud margin.

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

Operator: Certainly.

The next question is from Phil Winslow from Wells Fargo. Please go ahead.

Phil Winslow: Congrats again on a great Q3 and congratulates to you Jennifer and Christian. Looking forward to working with you closely going forward. Just wanted to focus on the manufacturing vertical because I think everybody on this call knows that the manufacturing industry really run -- and on the Q2 call obviously you flagged some issues with China, you called out Germany but you actually continue to put up good results overall.

What are you hearing from these manufacturing customers in terms of just their spending intentions because as you mentioned last call change in supply chain might need to drive more spending with you all but there's obviously some macro issues? Just if you could just double click on that vertical that would be great.

Christian Klein: So I will start and then hand it over to Adaire for specific about China. I mean, on the manufacturing side, we are doing extremely well. I mean, we have both, very competitive offering for on prem as well as on the cloud. We run the solution on different hyperscaler so we offer choice.

And also in China now S/4 will also go live now on AliCloud in Q4. Also there, we will also have S/4HANA running on Chinese infrastructure starting in Q4 now actually this quarter. Adaire?
Adaire Fox-Martin: Yes. Maybe just on the German side, a little bit of color on that. We had a very strong performance from SAP in Germany in Q2.

And we did enter Q3 with an exceptionally strong pipeline for Germany despite what we saw is an over performance on their numbers in Q2. But we definitely saw during the course of Q3 some slowdown in execution particularly for the customers in the discrete manufacturing session -- section -- segment I would say, it was really around business caution from here of a recession. And we enter now Q4 with a very strong pipeline, not just from a seasonal perspective, but also because of an outlook of some backlog of some those deal cash flow down a little bit and we're using and have used the opening weeks of this quarter to really those -- add those value cases and the validation of those cases, and the validation of those funds with our customers in this end segment. So I remain quite optimistic about our business in [MAE] particularly because as I look forward at the Q4 pipeline it is much broader than the discrete segment. In China, we have -- I have privilege of serving businesses in China for over 27 years now, and have a very strong footprint in China.

We've got 70% of the Fortune 2000 being SAP customers in China. Nevertheless, I will tell you that we are seeing a slowdown. We are seeing customers who are adopting a wait and see strategy, specifically focus not so much on the software itself, but on the challenges of business continuity in the event of a increasing tension as it relates to some of the macro, political and economical scenarios we have seen, and there is also a very strong focus from the Chinese governmental website will take time indigenous innovation, that is the ability of companies in China, in order to have Chinese components etc. in their supply chain. Nevertheless, I would say to you that as a result of some of the work that we have been doing around, work without cloud and the ability to land our product on environment in China, for China, I'm confident that we will be able to address those business continuity issues that were raised and of course continuing to grow our business in China at the rate that we've been growing it over the last decade

Christian Klein: And perhaps just one sentence on a global level, believe it is not our two best performing verticals, actually services and discrete manufacturing.

Stefan Gruber: Thanks a lot. Let's take next question, please.

Operator: Certainly. The next question is from Stefan Slowinski from Exane BNP. Please go ahead.

Your line is open.

Stefan Slowinski: Hi, thanks for taking my question. Just following up on a previous question. I apologize if you've answered this already. But on the Microsoft deal, I was just wondering if you think you could be able to put similar partnerships in place with some of the other hyperscaler partners.

You've mentioned, I mean, obviously, you just talked about Alibaba and Alicloud in China. I mean, is it something that you could potentially see Alibaba doing in terms of helping you sell direct in China? Thank you.

Jennifer Morgan: Yes. So, I think that we're open to the future. Obviously, we have a very specific relationship that we've defined in motion that we defined with Microsoft, that will be very specific and preferred by the two of us.

So, in looking at other partnerships result we already have pretty strong partnership with both GCP and AWS, we're users of that technology, we will continue to be. And so there's always possibilities for the future, but today is going to start with Microsoft. Adaire Fox-Martin : Maybe I can comment on the Ali side... Jennifer Morgan : Thank you. Adaire Fox-Martin : Providing to the market restructuring -- you are very welcome.

In China, as I am sure everybody is aware, there's a unique set of licensing laws around software as a service and platform as a service as well as a unique set of cyber security laws. So therefore Ali, we have physically landed current platform onto the Ali infrastructure in China. And we will physically land S/4 on to the Ali infrastructure in China. And that means, then we have the opportunity with the AliCloud team to take those two solutions directly to the market, a very large scale market of small medium enterprises in China. Stefan Gruber : Thank you.

Let's take the next question please.

Operator: The next question is from Charles Brennan from Credit Suisse. Please go ahead. The line is open. Charles Brennan : Thanks very much.

Thanks for taking my question. Can I just ask one about the competitive landscape in your prepared remarks, you made reference to both Medallia and Cooper. But can you talk about your win rates against some of the larger, more conventional competitors in Workday and Salesforce? And I guess the driving force behind the question is the recent comments from Workday that they’re now penetrated in 40% of the Fortune 500s. That sounds like they're making some reasonable progress. Thank you.

Jennifer Morgan : Thank you. I can add on to the comments that I made before. I think one of the things that I wanted to stress in my remarks is just, the seismic scale from an Ariba perspective of the network that we do have, right, and the work that we've done and we've had several wins over our competition in the enterprise space last quarter. So we feel very good about our win rates and what's happening there. As it relates to SuccessFactors, we have large SuccessFactors customer events in Q3.

And again the conversations that we're having and moving beyond just talking about HR, the traditional HR processes. So, we've actually seen some really great wins using Qualtrics within North America. But I think more importantly, the advantage that we have is just the ability to scale broadly outside the United States and we're not a German company. We're not an American company, we're global company and we've got feet on the street everywhere. So when you look over in Asia, when you look over in Latin America and you look at some of the customers that we're adding, we have a head start.

Now when you're bringing Qualtrics and you start to differentiate solutions like SuccessFactors that allow us to accelerate even further. So we feel really good about where we are right now with the win. The thing I like about Qualtrics, if you think about Qualtrics, right? Qualtrics is not about surveys. It's not just about surveys and sentiment. When you think about what SAP did with ERP back decades ago, we saw silo systems, supply chain manufacturing financial running the operations of a company.

We saw an opportunity to bring those interdependent functions together, have better insight to the business and be more efficient. That was back when the data within the four walls of the company and that became the operational data platform. Qualtrics takes a very similar analogy to that. Most data about your consumers, even your point is not just inside the company but outside the company. Businesses are gathering sentiment and engaging with customers, employees across multiple functions of a company, outside the company, et cetera.

Lots of companies do surveys, lots of functions within companies take employee sentiment or customer sentiment. The differentiated with Qualtrics is they figure out how all that's interdependent and has created a platform. So, this platform approach and technology that Ryan talked about earlier, this is what differentiates SAP. This is what our Salesforce and those have talked about, and this is where we're really starting to see the uptick and getting those big deals that Ryan mentioned earlier. It's an enterprise discussion, it’s on the agenda at every CEO today.

So those are just a couple of things of stands. Stefan Gruber : Thanks a lot and we have time for one final question, please.

Operator: Certainly. And this question is from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Mohammed Moawalla : Great, thank you very much. And Jennifer and Christian, my congratulations as well on your new roles. I had a couple. Firstly, Luka, you obviously have some pretty strong gross margin tailwinds continuing into next year, but also some of the big OpEx benefits kicking in. You've also talked about sort of reinvestments back in the business.

Can you talk about sort of the flexibility you have around delivering the margin and perhaps the shape of the margin expansion over the next couple of years in the event that the top-line potentially faces risks with a macro or anything else?
Luka Mucic : Yes, sure. Thank you. So, first of all, obviously the benefits from the restructuring program this year has not been significant, because it takes a while for the program to take effect, so the bigger impact will come next year. What you see this year in terms of progress on the gross margin side is really around the replatforming and increased operational efficiency through consolidation of data center operations and infrastructure operations. And therefore, I'm very, very confident that we can continue to scale this business with increasing gross margin contributions also next year and even beyond next year.

We have always said that in 2019 against our target of -- and on average 1 percentage point of margin increase, the market should not expect a full percentage point already this year because we have the dilutive impact from our acquisitions that we have to digest. And given that this is a 40 basis points dilutive headwind, I think you can see how the underlying is already performing against the average 1% that we have in mind. That in turn means that we will plan to do slightly more than that 1% next year to catch up, because next year, we have the full run rate benefit from the restructuring. But it's clear the restructuring is not a cost cutting exercise. And I want to be very, very clear about that.

We have done the restructuring in order to tailor our investments and our capacity to those areas where we have the biggest growth opportunities and we are putting actually our actions to where our plans work, we are seeing tremendous investment in Qualtrics. We're seeing a tremendous investment in our different cloud constituents. We are adding additional capacities only in the productive areas in research and development, in sales and in services and that will continue to be the case to propel our growth. In terms of optionality, our business model has become way more resilient. We have now close to 70% of our revenues and highly predictable revenue sources contrast that to only one-third when we hit the financial crisis in 2008 and that gives you a good perspective on how resilient our business model has become.

And therefore, if we have to optimize our level of investment against only 30% variability in the top-line, that would be a much easier than in the past. So you should take a lot of confidence out of this that we can and we'll hit our mid-term ambitions as we have announced then. Stefan Gruber : Thank you. And Mohammed, did you have a follow-up or? That's not the case. Well, this concludes our Q3 earnings call for today.

Thank you so much for joining and we look forward to speaking to you again at our CMD on November 12th in New York City. Thank you very much, and goodbye.

Operator: Thank you. Ladies and gentlemen that now concludes today's conference call. Thank you for your participation.

You may now disconnect.