Executives: Stefan Gruber - Head of Investor Relations William McDermott - Chief Executive Officer and Member of Executive Board Luka Mucic - Chief Financial Officer and Member of Executive Board Robert Enslin - President of the New Cloud Business Group & Member of Executive Board Bernd Leukert - Head of Products & Innovation & Member of Executive Board Alex Atzberger - President of SAP Hybris Adaire Fox-Martin - Global Customer

Operations
Analysts: John King - Bank of America Merrill Lynch Michael Briest - UBS Limited Stewart Materne - Evercore ISI Mohammed Moawalla - Goldman Sachs Group Inc., Walter Pritchard - Citi Investment Research Adam Wood - Morgan Stanley Philipp Winslow - Wells Fargo Securities, LLC Ross MacMillan - Royal Bank of Canada Gerardus Vos - Barclays Capital

Securities
Operator: Good day, and welcome to the SAP Fourth Quarter and Full-Year 2017 Results Teleconference. Today's conference is being recorded. And at this time, I’d like to turn the conference over to Stefan Gruber. 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 fourth quarter and full-year 2017. I am 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, our Board members, Rob Enslin, who runs Cloud Business Group; and Bernd Leukert, who leads Product and Innovation.

Before we get started, as usual, I want to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements, as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they will relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements.

Our forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP’s filings with the U.S. Securities and Exchange Commission, the SEC, including SAP's Annual Report on Form 20-F for 2016 filed with SEC on February 28, 2017. Participants 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 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.

There can also find an educational video explaining the impact of IFRS 15 on our 2018 outlook. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS, and growth rates are non-IFRS constant currency. 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. Before I hand over to our CEO, Bill McDermott, let me state that we are excited to welcome you back to our Annual Capital Markets Day to be held at our Hudson Yards Office in New York City on March 6. A few more detail about the innovation growth drivers behind our 2020 ambitions.

With that, I'd like to turn things over to Bill.

William McDermott: Thank you very much Stefan, and hello, everyone. I appreciate you joining us today, which incidentally marks the anniversary of my ninth-year as CEO of SAP, and therefore, I cannot be prouder to share some comments about our past, our present, and of course, our exciting future. Back in 2010, we set bold ambitions for SAP. We focused on our customers to be a truly global business software market leader.

We set out to reinvent the database industry. Forrester has now defined the new market for translitical data platforms, and of course, they ranked SAP HANA as the clear number one. We led the market with intelligent ERP, built on an in-memory architecture. Today, we have 7,900 SAP S/4HANA customers representing 46% year-on-year growth. We acquired the best assets to help customers innovative scale, SAP SuccessFactors, SAP Ariba, SAP Fieldglass, SAP Hybris, and SAP Concur are all thriving with soaring customer adoption.

The proof is clear; SAP converts acquisitions into fast organic growth stories on a global basis. We know how to do this well. So therefore, there is a clear prognosis for CallidusCloud which we will discuss shortly. Overall, we focused on a purposeful vision, winning strategy, customer success, and profitable growth. Since 2009, SAP has doubled or tripled our customers, revenues, profits, and market value.

We’ve consistently met all guidance metrics even after multiple raises such was the case in 2017. We made big promises and those promises have been kept. This Company is firing on all cylinders. Our 2017 results were the latest in its record run. True to my word, new cloud bookings surged 31% in Q4 and 30% for the full-year.

Cloud subscriptions and support backlog soared 38%, hitting €7.5 billion. We have a €4 billion plus cloud business growing faster than most so-called best-of-breed standalone cloud companies. New cloud and software license order entry was up 17%. And even though we don't guide on it, it's important to note that software licenses grew 2% for the full-year, which also exceeded expectations while competitors consistently decline most of the time in double-digits. SAP is still the only company in the business software industry at scale to deliver both fast cloud growth and license growth.

With EPS up strongly plus 14%, this was a stellar profitable growth performance. It also once again represents a trifecta of cloud, software, and operating income growth. On top of an outstanding 2017, we are moving forward with great confidence. We now target approximately €25 billion in total revenue in 2018 including continued fast growth of around 30% in the cloud even at larger scale. 2018 will also mark two key milestones for SAP.

Cloud revenue is expected to overtake license revenue for the first time. We expect margins to commence on an upward path and Luka will explain the 2018 guidance in full detail shortly. Looking further into the future, we confidently reiterate our 2020 ambitions even in the face of currency headwinds. We expect cloud to grow at again 30% compounded annual growth rate and more than double by 2020. We also expect operating profit expansion to accelerate throughout all the way through 2020 and beyond.

SAP had strong growth drivers powering this momentum. And remember, it's not those individual pieces that make SAP unique in the industry. In the proudest tradition of our business suite, it is the completeness of SAP innovation that makes us a global powerhouse. For example, the Emirates Group selected SAP in a competitive evaluation to support their complete digital transformation. SAP will provide an integrated multi-cloud ERP solution for finance with SAP S/4HANA extended by SAP’s cloud platform will enable a modern HR approach with SAP SuccessFactors.

We’ll help transform procurement with SAP Ariba, and we’ll simplify the lives of employees with their travel and expense using SAP Concur. This is the power of SAP Vital, the suite is in. Major brands around the world are validating this complete cloud innovation strategy. Standard Chartered, a British Multinational Bank and Financial Services company also chose multiple SAP solutions, Unilever, Puma, and Philips66 and some of the many company selecting S/4HANA, which again grew new cloud bookings in triple-digits in Q4. Robert Bosch, Deutsche Telekom, they’re both transforming their front office with SAP Hybris solutions.

Beiersdorf, Foxconn, Akzo Nobel are the latest to choose SAP SuccessFactors with 47% year on growth in customers for Employee Central. This business now has major momentum. Ford Motor and Coca-Cola chose SAP Ariba to make procurement awesome. UBS chose SAP Fieldglass to address its multi-channel workforce. Vodafone and Barclays selected Concur in Q4 to give their employees the perfect trip.

End-to-end, demand chain to supply chain, back office to front office, SAP is delivering the most complete cloud in the enterprise. That's where we are at now. What's the future looking like? Even as we win today’s market, SAP is always looking around corners to future growth. The data centricity, intelligent computing, digital commerce, business networks, these are the market making opportunities ahead for SAP. The SAP HANA data management suite will continue to reshape the architecture of enterprise computing.

Even as customers move to the cloud, many are unable to maximize the value of data coming from endless sources. With full use, SAP HANA, SAP HANA Vora, SAP Data Hub, we will give customers the tools to truly monetize enterprise data. SAP Leonardo is leading the invention of business next practices. When you consider the influence of technological breakthroughs, it will not be a single technology that changes how businesses run. AI, Machine Learning, Internet of Things, Blockchain, all of these technologies will work together as businesses go digital, and only SAP offers this holistic approach from design thinking to industry domain expertise all in a global footprint.

A customer who wants to build a prototype show proof-of-concept and rapidly scale innovation, we offer SAP Leonardo together with the SAP Cloud Platform. For example, the San Francisco 49ers in the United States will use Leonardo Machine Learning and SAP Analytics together. This will deliver season ticket renewal pattern insights to improve the fan experience. A world leading food company will use SAP Leonardo to detect hot brand counterfeit baby formula in China's marketplace. This food company wants to build an intelligent solution that can scale fast with less risk.

That's why they turned to SAP. With new additions like Gigya, and CallidusCloud, SAP has taken decisive action to reinvent the front office. Under the leadership of Carsten Thoma, SAP Hybris remains the market leader in omni-channel e-commerce. I congratulate him for his many contributions to SAP. Now of one of our very best, Alex Atzberger, who did a great job running Ariba will do an amazing job as his successor.

The acquisition of Gigya and the age of data privacy mean that SAP will own the digital consumer record, the epicenter of the customer experience. Now with the planned acquisition of CallidusCloud which we announced earlier today, we will own the lead to cash conversation in the market. SAP will fuse our commerce solutions and S/4HANA fulfillment engine with CallidusCloud’s market leading sales solutions. Together, we will deliver the most complete end-to-end cloud-based offering in the market. CallidusCloud is already a very fast growing company, but together with SAP’s global scale like its predecessors CallidusCloud will grow even faster count on it.

Business Networks is another breakout opportunity. That is only just beginning. Today, SAP owns the spend management categories in the enterprise, direct, in-direct materials, contingent labor, travel and expenses. In the near future, SAP will build transformational new business models on top of the US$1 trillion in commerce that runs through these networks. We choose to think of this not only as SAP’s network.

We intend to make this the network of networks, the business world’s marketplace. The uniqueness of SAP's global innovation agenda has not gone unnoticed. Just in the past few days, Presidents Macron and Trump; Prime Ministers Modi, Trudeau and Netanyahu have always reemphasized their trust in SAP. In these countries we are investing the shape and new generation of digital entrepreneurs. We will use our Digital Boardroom technology to give leaders a real-time dashboard to measure outcomes from policy decisions and their citizens will have full visibility.

We aspire to use SAP HANA to look beneath the surface of the world healthcare systems to the individual genome for personalized medicine. Bottom line, only SAP can help governments perform like best run businesses. We are also focused on solving the world’s most significant challenges because SAP is a purpose driven innovator. Yes, this is in fact a major factor in our inspired global workforce. We have soaring employee engagement scores and we won 300 awards last year for employee satisfaction.

It is also a business imperative for the SAP ecosystem. Organization is driven by purpose, outperform the market 15 to 1. The days of measuring success purely on financial basis alone are over. SAP will stay the market leader because we help the world run better and improve people's lives. In closing, we believe this is not a time for measured ambitions.

In a world filled with anxiety about automation, SAP will lead a new economy where intelligent machines enable augmented humanity. SAP will bridge universities, business, and governments to initiate a new workforce with the digital skills to win. SAP will come to the table on the global stage to help restore trust which of course is the ultimate human currency. We will do this with the nearly 90,000 of the finest professionals in history of the IT industry. I thank them for their enormous dedication to SAP for focusing on keeping our customers for life.

Through their passion, we are a humble company that stands united to fight like an underdog. We also stand on the shoulders of giants which is why we put nothing above our core values, integrity, curiosity, diversity, and purpose driven innovation. I would like to thank all the stakeholders that are on the call today for believing in our Company, and I can assure you here today the best is unquestionably yet to come because now as ever the best run SAP. I'd like to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.

Luka Mucic: Yes. Thank you very much, Bill. Hello everybody. From my side, looking at our results, it's clear that we again delivered on our financial targets and we now have consistently either met or exceeded our financial targets ever since we announced our mid-term ambition three years ago. In fact, we have hit all guidance metrics even where in some cases those metrics were raised multiple times during the year.

SAP once again showed impressive resilience and global breath to successfully navigate the evolving economic and political environment. I wanted to start by talking about some financial and non-financial highlights for the year. First, for 2017, our overall strong business performance led to an even more predictable business now at 63% share of revenue and track towards 70% to 75% share in 2020. We had another strong year in terms of EPS and operating cash flow. EPS grew by double-digits, and cash flow exceeded €5 billion for the first time ever.

Our employees are clearly excited to work for SAP. Our employee engagement score remained extremely high at 85%. By investing in professional development, our overall retention rate improved to 94.6%. Also in 2017, we reduce greenhouse gas emissions to 325 kilotons, already achieving the goal we set for 2020 to reduce our emissions to our 2,000 level three years ahead of schedule. Our total revenue hit the high-end of the guidance range, even though we raised it twice throughout 2017.

As Bill mentioned, we kept our promise. New cloud bookings are key metric for new business in the cloud exceeded 30% growth in Q4. Our cloud backlog search is also said already by Bill, up 38% to €7.5 billion. These are really impressive results and top of very strong prior year growth for both of these metrics. Cloud revenue was up 28% in 2017 achieving our target.

Even with fast growth in the cloud, our software revenue grew again. This now marks the third straight year of beating our own softer revenue expectations were reflecting the strengths of the underlying S/4HANA generational upgrade cycle. In total, SAP’s core our software and support business combined is rock solid, growing mid single-digits in 2017 significantly outperforming the competition as Bill already mentioned. This unique combination of fast growing cloud and solid momentum in the core, power cloud and software revenue to 8% growth, delivering on our raised outlook for the full-year, SAP is clearly growing at superior rates and without any contribution of large acquisitions in 2017. And the future of looks even more promising as our combined cloud and software order entry grew even higher up 17%.

So let me spend a few words on the regional results for the full-year. We had a solid performance in the EMEA region with cloud and software revenue increasing 7%. Cloud revenue was strong and grew by 48% within especially strong year in Germany, Russia and Spain. In addition, we had strong double-digit software revenue growth in the Netherlands and Russia. Germany also had solid growth in software revenue.

We had solid growth in the Americas region as well. Cloud and software revenue grew by 6%, cloud revenue increased by 18%. In cloud revenue Brazil and the U.S. had solid performances, while Argentina and Canada grew double-digits in software revenue. The U.S.

important to note also had solid growth in software revenue. In the APJ region, we had a truly strong performance in both cloud and software revenue and cloud revenue. Cloud and software revenue was up 12%. Cloud revenue grew by 47%. Japan and Australia had strong cloud revenue growth and solid double-digit growth in software revenue.

Greater China was also highlight with double-digit growth. Now to profitability and given the material currency headwinds, I will talk to constant currency gross margins and operating margins. Our fast growing cloud business, the revenue mix shift obviously impacted our year-over-year cloud and software margin that is by 70 basis points in Q4. However, we were able to limit the overall decline to only 50 basis points. Our Business Network margin and our private cloud margin increased both year-over-year and sequentially.

Our Business Network margin was up 2 percentage point’s year-over-year to 77.3%. Our private cloud margin was up 8 percentage point’s year-over-year to 8.2%. For our public cloud or SaaS/PaaS business, we continue to harmonize our data landscape towards a highly standardized converged cloud platform as we have discussed the previous calls. These investments however began to stabilize in 2017. We’re confident this trend will continue in 2018, especially since almost half of our SuccessFactors customers have already migrated to HANA and by the end of the second quarter, we expect 80% of our SuccessFactors customers to be migrated to HANA.

Therefore, as you can see from the sequential development of our public cloud margin in 2017, the year-over-year decline steadily improved. While we saw a decline of 4 percentage points for the full-year in Q4 of the margin was only down 2 percentage point’s year-over-year. The same can be said about our overall cloud margin. While we saw a decline of 2 percentage points for the full-year in Q4 the margin was only down 1 percentage point year-over-year. We actually improved our cloud margins sequentially from Q3 to Q4.

This helped initiate the operating margin turnaround in Q4 as well setting us up for expansion in 2018. Now let me switch to our services margin, where we grew by 5 percentage point’s year-over-year. This was driven by the continued efficiency gains from our one service initiative as well as the solid topline performance and the reduction of core investment projects, basically the same process that you saw all the way through the year. Moving to our operating profit, where we grew 4% to €6.92 billion at constant currencies, achieving our raised outlook. In the fourth quarter, our growth rate actually accelerated further, it was up 6% year-over-year.

Throughout 2017, we have steadily improved our operating margin trajectory as promised. Our non-IFRS operating margin at constant currencies declined 1.4 percentage points year-over-year in the first half of 2017 improving to a drop of 90 basis points in the third quarter. And as I mentioned before, the fourth quarter signaled the beginning of a turnaround with an operating margin of 35.2%, a year-over-year decline of only 10 basis points. This all now sets us up and paves the way for the strong growth in margin expansion that we expect in 2018 and beyond. In the fourth quarter, we also had substantial one-time tax benefits from an intragroup transfer of IP rights within the group, as well as the U.S.

tax reform. For the full-year 2017, our IFRS effective tax rate in consequence was 19.3%, down 6 percentage points, while our non-IFRS rate was 22.6%, down 4.2 percentage points. For 2018, we expect an IFRS and non-IFRS effective tax rate of 27% to 28%. EPS in the fourth quarter was strong as anticipated driven primarily by our strong operating performance and another successful quarter for our venture capital fund, Sapphire Ventures. But obviously, EPS also benefited from the one-time tax benefits.

Our full-year, non-IFRS EPS was €4.44 per share, up 14%. Now, a few words on cash flow and liquidity. A nice piece of our results that I am glad to share. Operating cash flow grew 9% in 2017, continuing a positive three-year trend. We shared our success with shareholders by returning €2 billion in 2017 to the share buyback and the dividend.

Our net debt was €1.5 billion at the end of 2017. We improved net liquidity by €1.7 billion. Actually, if you go back three years, our net liquidity has improved in total by more than €6 billion. Thanks to our consistently strong operating cash flow paired with our continued commitment to fast deleveraging. Now before going into our outlook, I wanted to mention that we expect for 2018 a net positive impact on operating profit of approximately €0.2 billion from IFRS 15 mainly from cost benefits.

For more details about the impact of IFRS 15 on our 2018 financials, please refer to the quarterly statement and an educational video by our Chief Accounting Officer, Dr. Christoph Huetten on our Investor Relations website. Now moving on to our outlook for the full-year 2018. We expect non-IFRS cloud revenue to be in the range of €4.8 billion to €5 billion at constant currencies that is up 27% to 33%. Non-IFRS cloud and software revenue is expected to be in a range of €20.7 billion to €21.1 billion at constant currencies, up 6% to 8%.

Non-IFRS total revenues is expected to be in a range of €24.6 billion to €25.1 billion at constant currencies, up 5% to 7%, and we expect non-IFRS operating profit to be in a range of €7.3 billion to €7.5 billion at constant currencies, up 8% to 11%. We have also updated our currency expectations for the impact on reported growth rates in 2018. You can find more details in our quarterly statement. This outlook to be clear again does not include any contributions from Callidus. We will update our outlook once the acquisition is closed.

We have confirmed our 2020 ambition for consistent fast growth in cloud, robust overall topline momentum, and profitability growth despite all the currency headwinds that we were facing in 2017. So to summarize, we delivered strong topline growth and continue to expand our operating profit. On top of that, our cash generation and EPS growth remain strong. Our performance, our portfolio, and our pipeline make us confident that we will deliver on our mid-term ambitions. Thank you, 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] And we can take our first question from John King from Bank of America. Please go ahead.

Your line is open.

John King: Yes. Thank you. Good afternoon. I've got three quick questions for Luka and probably one for Bill.

Luka, first of all on the margin, can you share some plans around your planned increase in headcount for 2018? Just so we can get a sense as the mix between the overhead growths in the gross margin improvement that you are expecting? Secondly, along the same lines, looking at the stock comp guide at the back of the presentation looks to be down around 15% at the midpoint? Can you just talk about whether there's any one-offs driving that or a sustainable level as we look forward? And is that somewhat influenced by the stock price that be interested in your thoughts there? And then perhaps a few comments on the seasonality, if I look at Q1, you've got a pretty challenging comp on the margin as well as I think on license and bookings, so just maybe some thoughts about how you expect particularly the margins to evolve through the course of the year? And then if I can just get squeeze in one for Bill, some comments on S/4HANA public cloud and how meaningful a driver you think that could be for the bookings? Thank you.

Luka Mucic: Okay. Let me start and go ahead with your first question. So first of all on the headcount, I think you should expect if everything goes as planned and we continue to drive our business momentum in the same way with the same strong growth on the topline as we did in 2017 that we would likely higher to approximately the same levels as what you have seen in 2017 was certainly again a certain bias in the first half year because we want to have people productive as we go into the very important and volume driven second half of the year. In terms of the share-based compensation, you're right, we see an upper end of the share-based compensation from today's perspective at approximately the levels that we’ve had in 2017.

And that is really only a function of the development of the share price in the last few weeks which we need to take as a basis from a volume perspective in terms of grants that we are giving out to our employees. This is expected to broadly follow the growth in our employee population. And in terms of the seasonality. That is a little bit hard to predict. If I was only talking about the underlying margin progression outside of the IFRS 15 effect, then I would clearly say that we should expect given the tougher comps as you said in Q1, a stronger progress as of the second quarter.

Now that gets a little bit tough to estimate because some of the topline related IFRS 15 effects are dependent on when customers will exercise material rights that they have been granted in previous years. That might change the picture a bit, but everything as being equal, I would say as of Q2 is where we clearly should see a pickup in margins.

William McDermott: And on the S/4HANA cloud, John that’s the lead story in the company. And if you think about global customer operations and all geographies and industries around the world, this is the biggest focus, and it also has the highest ceiling of any product in the portfolio. I would be very bullish on S/4HANA cloud.

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

Operator: Thank you. We will now take our next question from Michael Briest from UBS.

Please go ahead.

Michael Briest: Thanks. Good morning, good afternoon. Just in terms of the gross margin in the cloud Luka, pleasing to see that stabilization quarter-on-quarter. I'm curious about the 2020 mix.

At the last Capital Markets Day, you envisaged roughly sort of 40%, 45% coming equally from Business Network and the SaaS/PaaS business. The growth rates to get there seem to be quite different from what we're seeing today. So we are seeing sort of 16% or so in Business Network and well over 30% in Saas/PaaS. Are you still expecting that broad mix to be the same, and coming back to the SaaS/PaaS margin, I appreciate there is some one-offs, but by my math your Q4 cost base is nearly €800 million when it's annualized, and that’s the same number you need in 2020 to get to an 80% gross margin? And then I just had a follow-up on CapEx.

Luka Mucic: Okay.

Do you want to give me that one that I can answer everything on the same…

Michael Briest: Yes. So I'm curious where CapEx will come out this year and as you start to work with Microsoft or Google more as I think Bill mentioned on this morning school. Should that bring down that ratio, I mean it's seems to be quite high if a lot more of the underlying infrastructure is running on third-party? Thanks.

Luka Mucic: Yes. Thanks Michael.

These are both very good questions. Happy to answer them. So first of all on the gross margin, we actually continue to believe that in 2020 we will drive an overarching cloud margin mix in the low-70's as previously shared, but indeed we now believe that there will be a different mix to that. So we believe, first of all that our assumptions to business networks and their contribution are broadly unchanged, but they are definitely going to have the potential to go above their 80% 2020 target because of the progress that we have made so far. So I think there's an opportunity for an outperformance there.

In terms of the private cloud, I think it is from a gross margin perspective definitely where we wanted to be and we will see further progress towards the 40% target and that we have set for 2020. However, we believe that the mix of the HANA and our price cloud will be slightly reduced from previous assumptions because we are seeing already now that the growth in SaaS/PaaS in particular is picking up and is actually starting to overtake again the growth that we have a new business order entry for HANA and our price cloud. And that means that we would expect that we would not be substantially above the 10% share for the infrastructure-as-a-service piece and the rest would be filled up with SaaS, PaaS which will definitely climb up in terms of gross margin contribution as of next year as the migration of third-party databases will be completed as we have discussed in previous occasions. Having said that, you are right that we are – we have taken long haul from an investment perspective for this, and therefore, we don't fully expect that the SaaS/PaaS margin in 2020 will be meeting the 80% threshold. This will still come, but it will take us a year or maximum too longer to get there.

Having said that, the changed mix will do the job for us to bring us in the low-70s overarching gross margin contribution, and I think that will gives you also a hint on the mix. We definitely believe with S/4 cloud with the SAP cloud platform picking up, so strongly that SaaS/PaaS growth rates will substantially outperform the ones of the other two elements. Then on CapEx, and just quickly, you're absolutely right. We expect that our CapEx growth rate will come down. They actually have already come down in 2017 to a certain extent.

When you take a look at our CapEx growth in 2016 was tremendous, more than 50%, now in 2017 we were down to just shy of 30% on CapEx growth, so approximately the same growth rate as our cloud revenues. In 2018, we should expect that CapEx growth starts to trail again the revenue progression in the cloud, so we should definitely land at lower than €1.6 billion. And as of 2019, when we have made our core products available in holistic sense on hyper scale cloud infrastructures from Google, from Microsoft, then definitely we should see that the further expansion and growth will be much more muted than even that already reduced level, so there is definitely leverage from our collaboration with partners in this space.

Michael Briest: Thank you. Can I just ask a clarification on the S/4 cloud? I mean for a while you’ve talked about licenses declining and it hasn’t happened because the adoption is being on-premise, but with S/4 cloud, do you now firmly believe that licenses should show a modest decline going forward?

Luka Mucic: Yes, quite frankly, this is as always very difficult to predict.

That's why we choose to take a prudent implied growth assumption which if you do the math, I would point to low to mid single-digit decline in license as we have always shared. This was always part of the underlying mid-term ambition that we had in place. Now that ambition or that implied expectation has not come true so far in the last few years. Let's see what happens, but we are prepared for everything by giving you a very prudent guidance.

Michael Briest: Thanks Luka.

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

Operator: Thank you. We can take our next question from Kirk Materne from Evercore ISI. Please go ahead.

Stewart Materne: Yes. Thanks very much, and thanks for taking my question. Bill maybe just a question for you, obviously, your cloud guidance when you look out for 2020 implies, you guys can maintain sort of 30% growth rate. What are you seeing in the pipeline right now that that gives you confidence? That's realistic, obviously it's harder to continue to grow at that rate of a higher base. And then maybe just a second question around Callidus, a lot of players in the lead to cash market, why did that asset make the most sense for SAP? Thanks very much.

William McDermott: Okay. Sure. Thank you, Kirk. First of all enormous confidence in S/4HANA cloud and when I think about SAP's position right now and I am reminded by the many conversations in Davos, CEO's are ready to run simple. They want a company that is essentially a virtual suite.

So they get the benefits of the industry best European the cloud and they get the modularity at the line of business level with the success factors, our CRM Solutions, our Business Network Solutions and obviously from an intelligent enterprise perspective, all we are doing with Leonardo to give them an end-to-end company. But the beauty of this it is all available in the cloud and you can go in a modular fashion with SAP, but in the end you know you've got an integrated connected company. And that to me is saying really good things about all the cloud assets, all the pipelines in our company look very, very good whether it's the core ERP S/4HANA the line of business SuccessFactors is really on a momentum run right now with the enormous amount of wins and when we face off with some of the well known industry names like what might have been a flip of a coin is no longer a flip of a coin. If we're in there competing or when in most of the time. I really like what we did with Callidus on the CRM side.

You have to remember a couple things here. One, we run Callidus to run SAP, so we had to best the engineers in the software industry studied as extremely carefully about 80% of their revenue comes from the U.S. market now. Can you imagine when we light up the global switch for growth? And yes, it will scale and it will scale globally. We know it scales extremely well.

The other pieces on CRM, when you think about the whole value chain, this is a customer driven growth revolution right now. The customers on the move to social, they're in all channels, they're doing a lot of e-commerce, but when you think about wholesale, retail, direct and then tying everything together and a very simple supply chain manufacturing product delivery format as long as we are as good we win and now I think we have a real chance, but what happened here with Callidus because they are the market leader is now we got into the psyche of the sales professional. We’re now in the sales professionals’ pipeline. We're in a way they can figure pricing quote a deal whether it's a product or service and we're actually in their compensation headset. And when you get into the headset of a sales reps compensation that's a piece of the DNA we hadn't covered before.

And would have taken a little too long to build it with our S/4HANA ambition, we snap it in there, we integrate it back into S/4HANA and we feel very comfortable that we'll handle the market participants will definitely handle. So we're coming out very aggressive in CRM. So think of it as this the core is rock solid, the line of business is there. We own spend management in the Business Network. Leonardo is just incredible and Callidus is really strengthens us in the area where we needed it most.

So we go get the CRM space it's too big a market to leave alone and some of the participants have had a little easy lately, we're going to change that.

Stewart Materne: Thanks a lot.

Stefan Gruber: Thank you. We are taking next question. Next question please.

Operator: Thank you. We can take our next question from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Mohammed Moawalla: Great, thank you. One for Luka, and one for Bill.

Luka, can you just reconfirm the kind of trajectory of the margin improvement both on my constant currency and a reported basis? I think on the Q3 call, you sort of alluded to us or flattish trajectory into H1 and then on a constant currency basis and then improving into the back half and obviously while gross margin is a key driver this year? Talk a bit about over the mid-term where you see the levers as operating profit growth accelerates and you alluded to some optimization in the sales and marketing spend and sales organization? So you did confirm that first that would be great? And secondly, Bill on Callidus the acquisition, how quickly do you think you can start to unlock some of these revenue synergies? Obviously, we saw with SuccessFactors and Ariba that given those were your initial acquisitions it took some time. So I'm just curious on the point of closing, how quickly should we start to see those revenue synergies unlocking the installed base?

Luka Mucic: Yes, so more on the margin side, I will really focus on the progression comments on a constant currency basis, because I don't have a crystal ball quite frankly that can tell me the currency movements during this year. I wish I would have it, and I would not be in this spot any longer probably. So from a constant currency basis, as I said, I would expect that in Q1, we would rather still have a relatively muted progression from a margin perspective and then the trajectory should start a bit as of Q2, 2018. In terms of the key drivers for improvement, of course, it's first of all as we continue to move away and migrate away customers from the legacy infrastructures to the ones that HANA enable that gives us room and space to retire elements, of course, that we so far still have in our cost base.

Then secondly, as we build up a stronger share of renewal revenues in the cloud, we have seen that especially the relative sales and marketing spend has been increasing in 2017. That's definitely a trend that should now come down and we should start to see a slight deceleration in this space. And then we have still various efficiency gains that we are hunting after internally. We have for example – I shared this during the press conference as well, just on live in Q4 with certain artificial intelligence capabilities in our shared service centers around cash application and invoice matching. We will proliferate our automation capabilities with further use cases that we will implement, but that should definitely limit any expansion on non-productive sales and marketing and R&D resources, which should help us in 2018 as well.

So from that perspective, especially for the last three quarters of the year, I’m extremely confident that we will deliver on our margin improvement aspirations.

William McDermott: And Mohammed, I would like to thank you very much for the question. First of all, this is salespeople selling a product they use everyday, a product that they're hooked on. That's what I mean about getting into the psyche. We've never had a product like this, where the salespeople are selling something they love to use right out of the gates.

Now Leslie, the CEO of the company also immediately saw the virtue in full integration with SAP. So this isn't one that we're going to be running over in a corner somewhere. This is right back into the core of the Company. So we will hit the ground running on this, and day one, we will start accelerating the growth rates of CallidusCloud globally. And just to back me up on that, I've got Mr.

Robert Enslin, the Cloud Business Group leader as well as Alex Atzberger here, who's taken over the CRM business for SAP. These guys are like semi lifting the table up with excitement. So I'll give them a chance to give you a few remarks.

Luka Mucic: Yes, Mohammed, I think it's the best asset in the industry because we actually know it's the best asset in the industry. We work with this management team really close.

I think day-one, we will accelerate the growth of the CRM space, and I believe it provides us with the unique opportunity in the sales side to do what no other company has done in the sales side, which is connect, end-to-end digital supply chain. I think there's no better reference than 25,000 sales professionals in 190 countries around the world, utilizing that everyday. So we pumped – absolutely, we are pumped and I think the shows on the road.

Bernd Leukert: And maybe just one comment from my side, Bill said before on that with the solutions of Callidus, especially around sales performance management. We're in the salesperson set.

I would argue with sales compensation management. We are probably in their hearts and beyond the…

William McDermott: Alex, do you want to say something?

Alex Atzberger: Mohammed I can just add to this that our customers are shifting product companies to service driven businesses and this requires a new sales force. And we had that new sales force and when you look at getting into that heart of the sales person and that's right where we’re at, so we're very, very excited.

Mohammed Moawalla: Great. Thank you, everyone.

Luka Mucic: Thank you.

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

Operator: Thank you. We can take our next question from Walter Pritchard from Citi. Please go ahead.

Walter Pritchard: Hi, thanks. Just a follow-up on the prior question around S/4, can you help us understand how fast that’s progressing in the mix, the S/4 public cloud in the mix and are we starting to see larger customers there that in Q4 what you're expecting for 2018 that would have bought license and now they're buying cloud there? Is that a material factor both in the fourth quarter as well as what you're expecting in 2018, Luka?

Luka Mucic: Maybe I’ll let Bernd answer this, because he's the business leader responsible for that business if you don't mind.

Walter Pritchard: Sure. And then I have one follow-up. Thanks.

Bernd Leukert: First of all, you're absolutely right. We see the traction with S/4HANA cloud. In all segments of the customers, especially big names, some of them we’re just looking on building a reference stories. But what I can share with you that customers in Germany like Frankfurt as well, prominent names like Cirque du Soleil have selected S/4HANA cloud. And there are bigger names on our customer list already as I mentioned and in terms of growth, just to add to the positive statement, Bill made before.

Over the course of 2017, every quarter in bookings was more than aggregation of all the quarters we hit before in the history of S/4HANA cloud. And this shows a clear indication of the hockey stick and that's why we are so optimistic that S/4HANA cloud is a major contributor to the bookings for 2018.

Walter Pritchard: Thanks. And then just a follow-up on the M&A? Yes. On the M&A front, Callidus was at the, I’d say the higher end of the size of deals you’ve talking about with smaller deals.

Can you talk about it if you're at a point and you would see the M&A activity could potentially pick up from here?

William McDermott: Yes. Walter, thank you. You are not going to have an SAP on a shopping spree. This is a tuck-in, probably the higher end of a tuck-in size, I understand that, but this is not a trend. We decided a string of pearls strategy with CRM.

We executed on that strategy. So if we do things, it will be small unless something more to be very unusual as an opportunity in the market we're certainly not anticipating. So don't think we're in the M&A market, aggressively, we're not.

Walter Pritchard: Thanks Bill.

William McDermott: Thank you.

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

Operator: Thank you. We can take our next question from Adam Wood from Morgan Stanley. Please go ahead.

Adam Wood: Hi.

Good afternoon, everybody, and thanks for taking the question. I just wanted some help in thinking about the cloud growth over the next few years in the building blocks towards that. Maybe first is a housekeeping, does tuck-in mean that when you integrate Callidus, you wouldn’t be changing the 2020 guide for that just to clarify that? And then as we move on to the growth expectations, you're guiding actually to the cloud business accelerating as you look into 2019 and 2020, but when we look at business networks outside a little bit in 2017, could you help us what drives the acceleration in the growth? Is it more a sign of public cloud? Is it more the CRM areas that accelerate that growth? And then to follow-up on Michael’s question, to the extent it is S/4HANA, does that mean the license is coming weaker in 2019 and 2020 because you're bringing that analyst subscription business? Thank you.

Luka Mucic: Yes. Maybe I'll take those questions and try to answer them.

So first of all in terms of the Callidus contribution, we made it clear that our stated outlook does not include Callidus, so if you fully expect after we have closed the transaction to update our 2018 outlook. We also expect to update our 2020 ambition, but we will likely do that at the beginning of 2019 when we also have a better view on the further movement of currency rates. As you know we have confirmed our guidance based on the current rate assumptions, even though we had significant headwinds, but dependent on where the currencies go throughout the year, we will then make an informed update about this. In terms of the growth trajectory, you're absolutely right, there of course are different dynamics across our portfolio. I already shared one of them, namely the fact that after a period from a very low base of very strong hyper growth, the growth rates for HANA enterprise cloud business can be expected to come down to a more normalized level where they don't exceed any longer the growth rates of our SaaS/PaaS, and networks business combined, which is good news for topline margins obviously.

So the big growth drivers will be our SaaS/PaaS portfolio and those will be assets like the SAP cloud platform, which will definitely tremendously benefit from the uptake of Leonardo of all of the new capabilities around AI, machine learning, in order to, blockchain, smart analytics and so on and so forth which will drive by other platform. Then it will certainly come from S/4 Cloud, no doubt about this. There is a very strong growth trajectory underway. The solution is getting rounded out more and more, so we can mask more and more sophisticated workloads through the solution and therefore the breadth of the market opportunity with definitely expand. This will not change any of our underlying assumptions on the implied software development as we had always shared through 2020 we believe that low-to-mid single-digit declines are a prudent and balanced assumption and that is remaining unchanged.

Then of course we have the assets around analytics, analytics is another business that is starting to shift fast to the cloud and we have a very strong offering around that’s with analytics cloud, which is receiving a great attention. Then we have the offerings around IoT and digital supply chain. IBP in particular as a solution, which I personally see a lot of potential in and that's already had very strong growth in 2017 and with from a much higher base now continue at a similar growth rate and hence be very, very positive low growth and last, but not least at the CEC portfolio, which has already without Callidus’ performed extraordinarily well in the cloud. And now of course with all of the cross-selling opportunities driven through Callidus and the bigger depths of the end to end process coverage that we can achieve there are certainly upsell opportunities, not only for Callidus itself, but also for the rest of the portfolio.

Adam Wood: Excellent, thanks very much.

William McDermott: Thank you.

Operator: We can't take our next question from Phil Winslow from Wells Fargo. Please go ahead.

Philipp Winslow: Hi, thanks guys for taking my question. Just a question for Bill, obviously earlier this month SAP made several announcements in terms of just it’s SAP I am sorry it’s HCM strategy with greater success and then a side-car HCM solution for S/4HANA, that I think you're going to extent through for I think it's 2030.

Wondering if you just give us just an update on is the HCM strategies sort of what these moves meant and how they may factor into that.

William McDermott: Yes, sure. Phil, nice talk if I've got Rob Enslin here, who oversees that I'll have him give you deeper.

Robert Enslin: Yes, so when you look at HCM strategy, we actually pretty excited with the changes we made from the leadership perspective with Amy Wilson, James Harvey and Greg Tomb taking over that business about nine months ago. We've made some strategic innovations on the platform running a SuccessFactors studio and Apple iOS device now, which makes it really easy for to consume.

It's been usually successful in the markets. And then I want to come to the HCM psyche platform strategy that was to support our public sector clients we need a little bit longer with the on-premise implementations around that solution. So in a focus on the customers in that that in SuccessFactors and I think what you see is a tremendous uptick in the amount employee central customers we have now. So we are pretty excited with where we're headed with SuccessFactors.

Philipp Winslow: Great and then I guess is follow-up for Bill just on the sales force right now.

Obviously you guys highlighted as Luka did some of the strength on-premise, but the continued growth on cloud? When you look at the sales force right now and just the structure of it and incentive programs? And how do you feel this going into 2018 as you also kind of think about the 2020 guys just sort of how it's structured and how it's compensated any changes you might be thinking of?

William McDermott: I think it's a great question. Phil, thank you and also I think the prior question with Adam touched a little bit on what does this mean this momentum to the cloud to the core is going to cannibalize the core. A couple things one, S/4HANA platform is going to go in the cloud and all go in the cloud in different formations, some customers will want the crown jewel for their company in a private cloud, I think you know that. And many of the customers will choose to capitalize those licenses because they don't make in ERP decision and essentially plan on switching it out easily in a couple years. So these are core investments to the strategy of companies.

So I feel very strong about S/4HANA and very strong about our core business and I wouldn't worry too much about the way we've guided for possibly single-digits negative because we've been guiding that way for the last three years and we keep growing it. That's why our customers want it and the pipelines are extremely exciting. As it relates to the cloud and how I think you could really think about the incentives to the sales force, we've created an environment where it really matters that those go-lives and that customer success is the most important priority and that's also now reflected heavily in the compensation for the sales rep as well as the whole management value chain. So customer for life is much more a focus on the sales department side. We didn't take anything away from them, but we made it very clear that we're really interested and dynamite go lives of our customers are raving references.

Furthermore, we don't in anyway try to sway the customer from what's right for them based upon comp. We want to make sure the sales force is fairly compensated, no matter which way the customer would like to go in terms of their cloud decision or whether it's an operating lease or it's a capitalized – it doesn't really matter. What matters is, they get the product they need in the form they need it and we haven’t let sales compensation dictate anything on naturally nor will we. So right now particularly happy that the core is steady, all the cloud assets are growing really well. Luka gave you lots of growth engines there.

But S/4HANA is the de facto standard in memory ERP system in the world, and it's the best system in the world, and it's going to continue to grow a lot. And these lines of Business and Business Network solutions are going to continue to grow extremely well. I think we've done a nice job of keeping the focus on the customer and now really thinking through this virtual suite concept. So the customer gets what they need at every line of business, at every boardroom table, the CEO is going to be happy with the strategy and the management team around the CEO is going to be happy because we're focused on the customers’ customer, and by doing that well our growth will never stand and that we're going into 2018 better than ever.

Stefan Gruber: Thank you.

It’s time for two more questions.

Operator: Thank you. We can take our next question from Ross MacMillan from Royal Bank of Canada Capital Markets. Please go ahead.

Ross MacMillan: Thank so much.

Maybe one for Luka, I think by my math, we're just over 20% of the core ERP base on S/4HANA and I just wondered if you could maybe remind us, where do you expect as to be in terms of conversion of base as we look out to our 2020 target? And then a follow-up and I don't know if this is for Bill or Bernd, but your comments on S/4 cloud are obviously bullish. And I'm just curious whether you think existing customers that use SAP, core ERP on-prem, whether S/4 cloud could actually start to address those use cases yet or whether this is mostly still for know subsidiary level or maybe up geographically dispersed operations. Just trying to understand how that ducktails with the core S/4HANA strategy? Thanks.

Luka Mucic: Yes. Then just very quickly, I would definitely expect that by 2020, we should be done with half of the customer base and having it converted let's not forget that with our current S/4 customer count.

We also have net new customers on top, not only installed base conversions. So that implies that I expect to see now an acceleration of the migration curve as customers have waited in some cases for the full round out of functional capabilities of S/4HANA as that work is now complete. They are starting their programs. So that will be my indication. We would do something wrong as by 2020.

We have not already migrated at least half of our installed base.

Bernd Leukert: Yes, Ross, an additional comment before I go to the second question. Don't forget that the existing customers it is not just conversions from the install base. I mean we are proud that with S/4HANA, we have never seen such a huge percentage of net new names in our customer base and this is healthiest so far for the future growth so do not take into account the existing SAP installed base and make your mark coming through to the 20%. My number is that significantly below 20% and this is good for our business.

And then to come to your second question, really on the existing customers that are we cannot rest the use cases absolutely with the release in Q4 in 2017. We have covered the complete core ERP functionality and now we are going into industry verticals. I mean that the history is repeating. This is how we built the ERP business, we started with a core. The core is complete now and now we are going into industry verticals and we are in permanent interaction with the customers with the user groups to define priorities and therefore consider very strong industry focus in 2018.

Ross MacMillan: Thank you.

William McDermott: Thanks a lot. I think we have a time…

Bernd Leukert: And maybe I just add one thing, and I also think there's a great opportunity to take the product down market. It's been way too easy in the mid-markets to some other folks. We're going to tighten that up.

So it's not just for the large enterprise customers or the subsidiaries. We're going to take this product down into the mid-market and mix it up a little bit down there and see how it goes. I think we can handle ourselves pretty well down there.

Ross MacMillan: Thank you.

Stefan Gruber: And we’ll take the final question please.

Operator: Thank you. We will take our final question from Gerardus Vos from Barclays. Please go ahead.

Gerardus Vos: Hi. Thanks for taking my question.

Two if I may. Just on the go-lives, where were we in kind of Q4 and how do you expect that to trend in 2018? And then secondly, a question on the kind of [indiscernible] business, the licenses down 1% in the quarter was actually very good kind of volume 5%. Could you talk a bit about kind of the regional mix and if you kind of seen some kind of slippage, which have been suggested by the kind of volume verses license growth number? Thank you.

Luka Mucic: Okay. Then let me cover both questions, actually go-lives.

So a very significant uptick in Q4, so we are now at around about 1,500 go-lives up from 1,000 that we have just reached in Q3. So this is very positive and as we have a couple of thousand ongoing implementation projects, I definitely expect this number to go materially further up in 2018. So we're adding more and more references to that and that will create a virtuous cycle that will also convince the rest of the market to move and make the migration. And in terms of the licenses impact, so we saw a positive growth in the Americas believe it or not, and we saw it in Asia, which in Asia’s case, I think it’s less surprising maybe that that’s some in the Americas, in the U.S. had positive license growth, which is showing the clearly transformational strength of our license portfolio especially as for.

In Europe, we had slightly negative growth in licenses, but let's not forget, I mean Europe had an extraordinary stellar Q4 from a year-over-year perspective. They had a very tough compare, and then you take a look at the full-year performance in licenses that was actually absolutely fine in line with our projections. But in Q4, they were down a bit and that also explains the slightly lower cloud and software growth rate for EMEA as opposed to the other regions.

William McDermott: And maybe I could also build on what Luka is saying, it’s pretty steady all over the place. Asia had an unbelievable quarter.

We have Jen Morgan now and Adaire Fox-Martin that are the Co-Presidents, leading Global Customer Operations, and a question sticking with me earlier. How is Q1 and the comparisons looking and has it shaking out there in the geographies, maybe we give Adaire a chance to say hi to you all too. Adaire?
Adaire Fox-Martin: Thanks Bill. And looking now we're going into Q1 also the momentum of Q4, where we’re feeling very positive about our position in Q1. We have an incredible set of products to leverage to us by the best developments team on the planet and a strategy that resonates with every customer that I talk to whether they're a multinational or a general business organization.

But Jen and I look forward to a strong Q1 and a strong year. End of Q&A

Stefan Gruber: Thank you very much. This concludes the SAP Q4 earnings call and we look forward to see you on March 6 in New York City, at our Hudson Yards office at Capital Markets Day. Thanks so much for participating and goodbye.

William McDermott: Thank you for your interest in SAP everybody.

See you in New York.

Stefan Gruber: Bye-bye.