Good day, and welcome to the SAP Q4 and FY 2014 Financial Analyst Call. Today’s conference is being recorded. At this time, I’d like to turn the conference over to our moderator, Stefan Gruber. Please go ahead, sir.

Good morning and good afternoon. This is Stefan Gruber, SAP Investor Relations. Thank you for joining us to discuss our results for the fourth quarter and full year 2014. I’m joined here by CEO, Bill McDermott and Luka Mucic, our CFO, who will make statements and opening remarks on the call today. Also Executive Board Member Bernd Leukert who leads production innovation is on the call and will join us for Q&A. Before they get started, I would like to say a few words about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially 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, including SAP’s Annual Report on Form 20-F for 2013, filed with the SEC on March 21, 2014. Participants on this call are cautioned not to place undue reliance on these forward-looking statements which speak only as of their dates. Please keep in mind that unless otherwise noted, all numbers referred to on this conference call are non-IFRS and growth rates are non-IFRS as reported. Bill and Luka will be referring to presentation slides during their prepared remarks. These slides are available on our Web site for download. It’s www.sap.com/investor. I would also like to remind everyone there will be a Capital Market Day in New York City on February 3 and invitations for this will be circulated shortly. Now, I would like to turn the call over to Bill.

Thank you very much, Stefan, and thanks to everyone for your time today. I really appreciate it. We’ve come a long way. In the last five years, you might remember we were in 2010 the world’s leading business software company in applications and analytics and at that time, we embarked upon a new strategy one in which we would address the mobile device marketplace one that would address the Internet of Things and the fact that data was doubling every 12 months. Of course, HANA was the lead story there and we wanted to make the company relevant in the cloud and we made some bold moves on the M&A and on the organic side to do that. And of course we’re very strong on the fact that commerce doesn’t only happen within the walls of a company, it has to happen between companies and therefore we embarked upon our journey in the business network with contingent labor, in-direct materials and travel and expense now with Concur. So over the past five years we’ve been putting together a very powerful set of assets to truly define ourselves as the cloud company powered by HANA so we could help our customers run simple. As we carry ourselves into 2015, SAP has never been in a stronger position. Today, SAP is the fastest growing cloud company at scale in the world with 70 million users. When you take a look at our 2014 performance, we have a strong year to report. Cloud revenue grew 72% in Q4 and it grew 45% for 2014. All the lead indicators point to strong future cloud growth. For example, cloud calculated billings grew 104% in Q4. Cloud deferred revenue grew 56%. Cloud backlog grew 94% to €2.3 billion. And in 2014, increased cloud deferred revenue and…

Thank you very much, Bill. So let me start off by saying as well that 2014 was a year in which we have certainly especially in the second half here maneuvered a more and more volatile business environment but we have fared extremely well based on our strategy that was founded on innovation and really growing in all of the key innovation fields of our industry. When you take a look at the scorecard at the end of the year, Bill have covered some of this already, we had bold targets for our cloud subscription business. We originally guided for a range between 950 million to 1 billion. We increased this target twice throughout the year and we ended up at the end of the day at close to 1.1 billion, so that beat even without considering the acquisitions that we did during the year, the original guidance range which already had an organic growth target of 32% at the top, which is a very strong result. Together with an ever resilient core business which we grew software and support by 5% through the course of the year. This has also enabled us to meet our guidance range that we had indicated at the beginning of the year for software and software related services revenues where we posted a 7% increase at year end. In terms of operating profit, we achieved and landed in our adjusted guidance range that we had guided for at the end of Q3 with a total operating profit of 5.63 billion, a 3% increase while at the same time we were maneuvering a difficult macro environment in some of the emerging markets and were seeing a tremendous hyper growth in our cloud business. Overall, we had given out an effective tax rate for IFRS and…

Very good. Thank you, Luka. Now we have some time to take questions and I would like to hand it quickly back to the operator to give some instructions how everyone can ask questions. Operator, please.

Thank you very much, sir. [Operator Instructions]. We can now take our first question. It comes from Gerardus Vos of Barclays. Your line is open. Please go ahead.

Hi. Good afternoon, Bill and Luka. Just a couple of questions, if I may. First of all, a question I often get from investors is regarding the kind of margin of the core and if that is able to kind of expand until 2020. So I was wondering if you could give us some clarity on that. Also in relation to the kind of – the whole value around the core, investors are increasingly talking around kind of capital discipline and if SAP is willing to increase the shareholders’ return to investors, so I wonder how you’re looking at that? And then finally, just perhaps for Bill here, could you just characterize the kind of competitive environment at the moment? Clearly, the growth rate you stipulated of 30% organic in the cloud is higher particularly towards the outer end than the competition. How do you see the market gains developing and particularly maybe hint on the kind of large competitors you see there in this space? Thank you.

Thank you, Gerardus. Let me try to answer the first two questions and then I’ll leave the third one to Bill. So first of all on margin expansion in the core, yes certainly I mean we continue to have opportunities to leverage further efficiencies in our core business. I mean there will be a technical component obviously to the progression of margins in our core business as the relative weight of support revenues gets bigger and bigger and they come obviously with a higher margin than the sale of software licenses. That naturally will increase the margins in our core business. But we see this as a steady progression whereas the progression on operating income and profitability in the cloud will be slower at the beginning but then in the last years of our longer term guidance will be more pronounced and therefore you see a slightly different trajectory here where on the core it will be more steady. On the return to shareholders, you’re absolutely right. As we have said, a) we don’t plan any major acquisitions for the foreseeable future. b) We continue to have a very strong operating cash flow that brings us c) to our priorities for the use of cash. Priority number one is to be able to payback our debt quickly as we have always said. We want to retain a conservative approach to leverage. Priority b is to fund ongoing organic innovations in the company and then, three, we definitely will be focused on providing attractive returns to our shareholders by steadily increasing dividends. I have received this morning from the press already some questions on the dividend for 2014. Please understand that on this we have governance requirements to accomplish and that means to first present the proposal to our supervisory board for appropriate resolution. But clearly our intention is to continue to provide attractive and increasing dividends to our shareholders.

And on the competitive environment, I’d like to just remind everybody it wasn’t that long ago when it was 2010, we didn’t have any cloud revenue and we didn’t have any users and today we’re number two as measured by revenue and market share in the cloud and we have more users than anyone with 70 million. So we’ve made a lot of progress and I think we have the creditability in the cloud and that’s why we’re so confident in the pipeline and the backlog that we see in the cloud. And I’ll just highlight a few areas that I think you might find pretty interesting. One is the line of business. If you think about the line of business, cloud and network in HR with SuccessFactors, we are making amazing progress and it’s getting tougher and tougher for the best-of-breed that’s well known in this area against SAP and it’s only going to get worse for them. On Ariba and the whole indirect materials space in the network, we’re the standard. And on Concur and travel and entertainment space, we’re the standard. So we have very high hopes for those businesses to continue to grow very strongly. One that is a sleeper that I don’t think has gotten much attention at all is cloud for customer. And this is not the customer engagement commerce and the omnichannel play which I talked about earlier which we’re the standard in and you can also get that in the cloud, but cloud for customer, the good old fashion how do you manage your sales force, your pipeline, your forecast? Put the analytics on that, put the real time on that with HANA and how we’re absolutely winning logos all over the world in that domain. So please add that to your…

Thank you.

Let’s take the next question please.

Thank you, sir. We can now take our next question, which comes from Adam Wood of Morgan Stanley. Your line is open, sir. Please go ahead.

Great. Thank you very much for taking the question. I wonder if I could just follow up first of all on – and I apologize for coming back to the margins, the operating leverage. You’ve talked about the core business margins still having room to grow. The gross margins on the cloud business are still lower than competitors and Concur comes into the business investing quite heavily. I think investors can kind of see in 2015 and 2016 you don’t want to disturb that momentum but as we look forward, should we not be thinking about a little bit of operating leverage? With that in mind, are the targets more conservative than you’ve traditionally set them? Where could cloud margins end up at the end of that guidance range? Is there some room for upside? Secondly, just on S4HANA, obviously great success there getting customers on board. Could you maybe give us a little feel for the roadmap there? How quickly will the rest of the suite be ported [ph] onto HANA? And when you talk to the big customers, is this something that could be an upgrade cycle in the second half of this year or is it more something that we should look for, for 2016? And then just finally a clarification on the cloud growth. Could you just confirm that the targets you have given there are organic or whether the tuck-ins could contribute to that cloud growth? Thanks very much.

Thank you very much for the question. Let me first say this. What you have in this guidance is a bar that has been set for achievement. I wouldn’t say it is in any way sandbagging but I would say that we tried to give you guardrails that you can hold on to with confidence. And therefore we feel very good that we’ve not only given you an annual guidance but a mid-term guidance and a 2020 guidance that is based upon our clear depiction of reality and a bar that we think we can handle maintaining all the attributes of our culture, all the attributes of our growth aspirations in the cloud and obviously consistently growing our ever-established core business. So I think it’s a really nice plan and yes, the bar is set and with the advent of S4HANA and the traction in the business network and further traction in the cloud, could we overachieve it? I certainly will tell you that when we get in front of our employees this afternoon, we talk about the earnings call, we never talk about hitting targets. We talk about blowing them out of the water. So that’s the attitude we have for managing the company, which is a little bit different than guidance. I also wanted to just talk about cloud in the organic sense. The numbers we put on the table today are organic growth numbers and frankly one of the things I try to do before I hand it over to Luka is let you know we’ve done some pretty big moves in an M&A sense. We had to in the cloud where we had huge gaps. We identified the business network in our strategy as a massive opportunity that no other company in the business software industry has actually caught on to, and we think having a network working for you while you’re sleeping and driving tremendous transaction volume and profitability based on more usage of the network is an unbelievable channel and with 1.7 million customers in it now, 700 billion running through it and a global economy with a 10 trillion addressable markets, just how big can that be. I think we were relatively conservative in the sense that we said 2 trillion, who knows maybe it can more running through it. So all these factors have come into play and yes, I think when you look at the mid-term, the 2017, 2018 when the cloud supersedes the on-premise business in terms of license, you have a great core business with great loyalty rates. We’re running the services business with more discipline. A lot of investments on the HANA Enterprise Cloud globally will have well been behind us although lessons would have been learned. Is there leverage underneath all this? I expect that there is leverage underneath all this.

This is hardly anything that I can add other than to confirm that indeed we are planning as part of our overall guidance that we are giving here of course also for annual increasing leverage on the gross margin both for on-premise as well as for our cloud business and we can talk about this in further detail at the Capital Markets Day as well where I dissect this a little bit further for you also with the different constituents of our cloud business.

Great. Thank you very much.

The question then on S4HANA, to what extent do you want to comment today or--

Let me just make the comment today and just give you a feel for this. So think about HANA as the platform and the only platform that an enterprise needs to run its transactions, its unstructured, its social data. It is the platform, it is the de facto standard in memory architecture for this generation. Think about the Suite on HANA in a highly simplified fashion. We’ve already shown you some signals to that with simple finance where we have immense momentum and logistics and it will extend to all other aspects of the suite. You will also have a user experience that is nothing short of gorgeous because we are fioriz-ing [ph] the entire suite. So as you look at the application on a mobile device and you can consume it from a cloud, you’re looking at the most modern application of its kind in the world. And on February 3, I think we’ll knock your socks off with the product and with some testimonials of customers that believe that this is not only the future, it’s something they have to have today.

Thank you very much. Let’s move to the next question please.

Thank you. We can now take our next question. It comes from Chandra Sriraman of Mainfirst.

Thanks a lot for taking my question. Hi, guys. Can you hear me?

Yes, we can.

Thanks a lot for taking my question. I have a couple on the near term. I mean I was just wondering do you – given your 2015 guidance, it seems that licenses would be declining for this year. I was just wondering is it still Lat-Am and Russia which is affecting growth or do you see any areas where there could be prolonged weakness? That’s one. And also on the on-boarding costs from HANA Enterprise Cloud, are we done with it? Should we see some more this year? Is that affecting your operating profit guidance? That’s one. And on the long term, maybe a quick one. I’m just trying to see the kind of flex you have in your guidance. Obviously, we had some changes in the long-term guidance given the changes in the market and the acquisitions. Would you say it’s conservative enough for you to see some kind of further acceleration in the cloud if at all there is any? Thanks.

In terms of the markets, you’re absolutely right. One of the things to consider here, Chandra, is that had Russia behaved normally, okay, and it wasn’t down precipitously under the terms of not doing too much business with euros and dollars, we would have had substantially more growth than we would have actually had positive growth in the core perpetual upfront license business just for the record. And the same could be said of Brazil/Mexico. You take those off the table and you got a perpetual upfront core growing period. I’m not just talking SSRS, I’m talking license. Now those situations are being managed reactively. I already see some uptick in the Latin America side of the equation. We see Russia as being more difficult, Russia and Ukraine, but we have a fantastic team there and therefore when things do loosen up a bit, we feel that our chances are better than anybody. And you have to remember that was the third largest market in the world for SAP. So we’re not talking small market here. In terms of the on-boarding, we poured a lot into it in 2014 and we made a lot of investments in the HANA Enterprise Cloud and that as you’ll remember was our adjustment thesis when we talked to you in Q3. So let’s just put it on the table. We also have a one services philosophy now where we have our best global managing board members focused on what they’re best-in-class at. So one is focused on the whole on-boarding process relentlessly, another is focused on reshaping the services business to give the customer one contract, one price, one rate, one experience no matter what service they offer and make this on-boarding procedure for the customer much easier. Keep in mind one thing that’s another sleeper. The HANA Enterprise Cloud and the private cloud business that we did, because it not only is a ratable business but because it’s a private cloud business, you can’t start recognizing the revenue until they’re live. So it’s not like a multitenant SaaS with a line of business application. This is a private cloud. So we have simplified that on-boarding process. Is all the work done? All the heavy lifting is done on investing in the data centers. We’ll still get better on the precision of the on-boarding but now we have real focus and executive attention on it and therefore I feel like we’re in much better shape in that line of business than we were last year. And then finally just on the last part of your question, you cut out a little bit. You mind restating it. You talked about the guidance in the cloud or something.

I was just looking at your 2020 guidance. It’s a long way from here. Obviously, the markets are quite jumpy and overall trends are obviously swinging significantly. So I was just wondering what sort of flex do you have in terms of your 2020 guidance. Are you conservative enough or do you think you might have to tweak it as things go by?

Look, I don’t think anybody has a crystal ball including SAP, but we feel very confident in 2017 and the 2020 guidance. And one of the operating principals that Luka and I had along with the global managing board when we put together this guidance is a high respect for the capital markets and the conversations that we’ve had with you all that you wanted the guardrails, you wanted some clarity around what’s going on in the cloud, what’s going on in the core, how does that impact the margin/or the operating income and I think we were very careful in putting together numbers that we didn’t have to revisit. And that’s one of the reasons we stopped kicking the can down the road on margin rates and went to operating income, so we don’t have to have that conversation anymore. We can have a real serious conversation about operating income and make that the leverage point. And you understand there’s different ways to deriving operating income. Right now it’s very much a top line story and we like being a growth company.

Thank you.

Given the time, we will take two more questions. Operator, please.

Thank you, sir. We will now take our next question. It comes from Knut Woller of Baader Bank. Your line is open, sir. Please go ahead.

Hello. Thank you for taking my questions; actually a couple. Regarding the operating profit development in 2016 and '17, is it pretty fair to assume that it should be pretty evenly spread between '16 and '17 or do you assume that there will be an acceleration and in '17 how should we think about that? And then I know this has been touched a couple of times but still want to get back to it. You mentioned in your press release that by '18 you believe that your cloud business is such a scale that it will clear the way for accelerated operating profit growth. If I look at the 15 to 17 CAGR at the midpoint of your operating profit target and then at the 17 to 20 CAGR also at the midpoint, I come from 7.5% CAGR to 8.5%. So here I am trying to get a better feeling what you would imply with scale for accelerated operating profit growth and after '18? That’s it. Thank you.

Thanks, Knut. Let me answer those two. So first of all on the operating profit curve in the years '16 and '17, we generally assume that we will see a steady increase of the pace of operating profit expansion as we gain further leverage and we improve the overall margin profit and profitability contribution of our cloud businesses. Again, we will talk about those because they are distinct in how they will drive operating profit contribution at different stages of their maturity between the three models that I’ve outlined on the slide. But generally speaking you clearly see an acceleration in the expansion there in our modeling. And that’s also true then for the years 2018 and going forward. At that point in time, we will have reached a cloud business size that will round about €4.5 billion and that means that we have by then build up such a high proportion of renewal businesses as opposed to the net new additional contracts that we’re adding that we clearly see then an accelerated pace in the operating profit contribution. So as I said before, we have a pretty steady acceleration and progression that we see in our established on-premise business but in the cloud really in those later years, especially in 2018 and going forward, we see an exponential acceleration which then of course you can also extrapolate if you wanted for even further years out. That’s the beauty of the cloud model and that’s why at the moment we are all-in to accelerate as far as we can, because we can’t wait for this moment to happen and then for the returns to follow suite.

Thank you.

As I said, there is one final question.

Yes. We can take our final question today. It comes from Walter Pritchard of Citi. Your line is open, sir. Please go ahead.

Hi. Thanks. I’m wondering if you talked – Bill, you mentioned not to forget about the customer cloud or the frontend side of your cloud business. I’m wondering if you talk about there how large you think that business will be as you look out to your 2020 cloud guidance? And I think that is probably the business where there’s more investor skepticism just trying to get some better understanding of your confidence and the ability to grow that and the scale that you think that might be in terms of the proportion of your cloud business out to your long-term targets.

Thank you very much for the question, Walter. We have conservatively modeled that as a 500 million business. Based upon the progress that we see so far with both cloud for customer and customer engagement commerce, I would tend to think that that would be more on the conservative side but that is the number that we have plugged in. When I look at the logos and the amount of wins that we have around the world, I’m actually pretty stunned and the application is gorgeous, so it could be better but that’s what’s in the model.

Great. Thank you

Thank you very much. This concludes our financial analyst call on the Q4 2014 earnings. Thank you all for participating and thanks for all your questions. We hope to see you in New York on February 3. Thanks very much and goodbye.

That does conclude today’s conference call. Thank you for your participation, ladies and gentlemen. You may now disconnect.