Stefan Gruber - IR Bill McDermott - CEO Luka Mucic - CFO Rob Enslin - President, Global Customer Operations Bernd Leukert - Head, Products & Innovation Steve Singh - Head, Business Networks and Applications

Adam Wood - Morgan Stanley Chandramouli Sriraman - MainFirst Bank John King - Bank of America Merrill Lynch Walter Pritchard - Citi Philipp Winslow - Wells Fargo Securities Gerardus Vos - Barclays Keith Bachman - BMO

Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome and thank you for joining SAP Fourth Quarter and Full Year Results 2016 Conference Call. Throughout today’s recorded presentation, all participants will be in a listen-only mode. The presentation will be followed by a question-and-answer session. [Operator Instructions] I would now like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.

Yes, thank you. Good morning or good afternoon. This is Stefan Gruber, Head of Investor Relations. Thank you all for joining us to discuss our results for the fourth quarter and full year 2016. I’m joined by our CEO, Bill McDermott; and Luka Mucic, our CFO, who will both make opening remarks on the call today. Also joining us for Q&A are board members Rob Enslin, who runs Global Customer Operations; Bernd Leukert, who leads Products & Innovation; and Steve Singh, Head of SAP Business Networks and Applications. Before we get started, as usual, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will, and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP’s future financial results are discussed more fully in SEC’s filings with the U.S. Securities and Exchange Commission, including SAP’s Annual Report on Form 20-F for 2015 filed with the SEC on March 29, 2016. 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 earnings press release also known as the quarterly statement and financial summary slides deck which are intended to supplement our prepared remarks today and include reconciliation from our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS and growth rates are non-IFRS at constant currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the matters of financial performance prepared in accordance with IFRS. And finally, I’d like to note that we would like to welcome you back to our Annual Capital Markets Day again in New York City on February 9, 2017. We will give you more detail about the innovation growth drivers behind our 2020 ambitions. With that, I hand the call over to our CEO, Bill McDermott.

Thank you very much, Stefan, and hello everyone. Thank you very much for joining us today. Looking back in 2010, we set a clear strategy to increase our lead in the business software industry. We fundamentally reinvented the database with SAP HANA which has now become the de facto in memory platform for the enterprise. We created the future of ERP with S/4HANA, a generational upgrade cycle that has only just begun. We conducted the smartest M&A in the industry, adding best-in-class cloud companies to the SAP portfolio and extracted enormous value from those assets. In 2016, we once again validated the SAP strategy by reaching all of our raised guidance metrics. We again delivered strong software sales, fast cloud growth, and operating income expansion. Cloud revenue powered to 31% growth and this is on par or better than best of breed standalone cloud companies. Cloud and software grew 8%, significantly outpacing our main competitor. IFRS operating profit was up 20%, while non-IFRS operating profit expanded to a record €6.6 billion. New cloud bookings surged nearly 40% in Q4 and 31% in the full year. It’s now a €3 billion cloud business, growing more than 30% that we have here at SAP. Our cloud backlog surged 47% to €5.4 billion, greatly enhancing the predictability of our future cloud revenue. The facts clearly demonstrate that our strategy has delivered for the shareholders of SAP. Since 2009, we have more than doubled the revenue, operating income, and the market cap of SAP. We are proud to be the most valuable backs [ph] company, and we’re only getting started. We are growing in every region of the world with the pipeline that has never been stronger. We are focused on profitable revenue growth, laser focused. As part of our 2020 profit acceleration, SAP plans to achieve world-class margins, such as 80% software-as-a-service, 40% infrastructure-as-a-service, and 80% in our Business Networks group. No other company can report growing software sales, fast growth cloud businesses and expanding operating income. The SAP trifecta still stands alone today. This is proved positive that SAP’s bold innovation agenda is coming through for our customers and in the end after all, the customer is the only boss. These strong business results lead us now to confidently raise our 2020 ambition. We are now targeting more than 2.6X growth in the cloud revenue to reach €8 billion to €8.5 billion in the cloud, and €28 billion to €29 billion total revenue in 2020. On February 9th, as Stefan said, we’ll focus on SAP’s bright future during our annual capital markets event at the New York Exchange. Please do join us. We’d love to have you. When you think about SAP Solutions, think about how our Digital Boardroom changes the game for business leaders. In one beautiful intuitive user experience, a CEO can bring together live data from every corner of her business from finance and logistics to customer and workforce engagement. This is the ultimate example of SAP’s fully integrated portfolio. S/4HANA delivers the modern, digital core system to connect the supply chain to the demand chain. And as a result, Apple has once again extended their long-term partnership with SAP to further leverage SAP innovations such as HANA and S/4HANA, very exciting Apple. Thank you. With the S/4HANA platform, Nike will run a live business, and plans to transform how they bring merchandise to market, worldwide. Coca-Cola, ThyssenKrupp AG and Ameco Beijing selected S/4HANA in the fourth quarter. And 2017 will continue to be acceleration of S/4HANA in every single deployment model, public cloud, private cloud or a customer’s own data center. Please keep in mind, 5,400 S/4HANA customers means more than 85% of our install base are in the pipeline still to be migrated. Not to mention, the thousands and thousands of customers around the world that will switch from their current provider. This, ladies and gentlemen, is a once in a generation business opportunity, and we intend to seize it. SAP Hybris and our customer engagement solutions deliver a one-to-one customer relationship in any channel on any device. We can give our customers a single view of their consumer from social to retail to ecommerce to deliver a personalized experience to each individual at scale. This is mass customization at its best. SAP customer engagement solutions once again achieved strong double-digit bookings and cloud revenue growth. Hitachi and Thermo Fisher were among the many brands that selected SAP Hybris. Only SAP SuccessFactors and SAP Fieldglass can engage the total workforce. We now have nearly 1,600 Employee Central customers. Mercedes AMG selected SAP’s workforce management solutions in the fourth quarter. Another Workday replacement, Mohawk Industries is now live. And our solutions are localized in 81 countries, in 42 languages, which is why top industry analysts named SAP SuccessFactors, the leader for global companies. Demand for Fieldglass’ best-in-class flexible labor solutions is also rapidly increasing. Think about this, in the past 12 months, over 3 million workers were placed in a 135 countries using SAP Fieldglass. SAP business network companies like Ariba and Concur redefine our businesses on managing spend. Ariba continues to scale as the world’s largest procurement network with 2.5 million companies transacting nearly US$1 trillion annually. Leading global companies like Molson Coors Brewing Company selected Ariba in the fourth quarter. Concur helps more than 45 million end users effortlessly process travel and expense, daily. Big brands like L’Oréal recently chose Concur. To predict and simulate new business models on the fly, SAP is already the leader in the Internet of Things. By connecting the core of the business to where data is actually created, SAP enables insight and action from millions of connected devices. Our IoT solutions are branded SAP Leonardo and they include everything from connected products to connected people. We will continue to expand our portfolio with smart tuck-in acquisitions like Fedem and PLAT.ONE to complement our outstanding development team. The completeness of SAP’s vision is broad. For example, SAP developers are on the cutting edge of Machine Learning capabilities. From invoice matching to predictive recruiting, to intelligent sales forecasting, SAP Machine Learning applications will drive significant value for our customers. We’re also using machine learning to root out bias in the hiring process and to build a more inclusive workforce. With all of this potential, we recently unveiled a new identity for machine learning as well; this is now called SAP Clea. On our flagship SAP cloud platform, customers can extend their SAP applications like S/4HANA and build new applications. Our HANA enterprise cloud gives customers the ability to run their entire company in a secure private cloud. With our API Hub, we now enable a more open SAP platform to incubate new innovations. We’re scaling the HANA world with smart tuck-ins like Altiscale to bring Hadoop and Spark big data together with SAP HANA Vora. Only SAP can unify a customer’s business transactions together with predictive analytics on a single platform, game change. From IoT to blockchain and beyond, there is simply no stopping SAP. So, in summary, I’d like to close out by saying, we’ve never been more confident about our future than we are right now. We are innovating in the cloud and we are alone in leading the business networks. We are delivering a beautiful future [ph] user experience to simplify the steps in the business process and make users happy. Every business we are in is a customer-driven, fast growth, and high margin business. We are one of the top places to work in the world and the first global IT Company to receive EDGE certification for gender equality. We’re the most sustainable software company in the Dow Jones sustainability index. Our employee engagement scores have never ever been higher than they are right now. Our global brand value has also never been higher. From manufacturing to healthcare, our 84,000 colleagues are ever inspired by our vision to help the world run better and improve people’s lives. Ladies and gentlemen, with our accelerated 2020 ambition, SAP is firmly committed to remaining the growth story of the business software industry. Now, I’m very happy to turn the call over to our Chief Financial Officer, Luka Mucic. Luka, over to you.

Thank you very much, Bill and welcome from my side as well. Now, looking at our strong results, I’m really proud to say that we delivered as we promised we would. In fact, we met all guidance metrics for the full year 2016 as refined in October. SAP once again showed impressive resilience in uncertain times. For example, even in light of Brexit, the UK had excellent results; China performed tremendously amidst continued macroeconomic uncertainty; and we overcame political volatility in Mexico with strong results, Mexico had double-digit software revenue growth. I’m also happy to announce that our cash flow increased significantly by €1 billion in 2016, based on a stellar Q4 with more than 150% growth, even outpacing a strong Q3. At the same time, we are successfully progressing towards a more predictable business model, based on a very strong cloud and growing core business. Our share of more predictable revenue is now 61% for the full year, up 2 percentage points. This gives us more stability in the volatile fast moving market. So, let’s take a look at the top line performance and start with our cloud business where we have grown by more than 30% for four years in a row now. This continued fast growth is fueled by our future committed cloud revenue or new cloud bookings. We grew by 31% in fiscal year 2016. This resulted in €3.01 billion in cloud revenue at constant currency, achieving a refined guidance range of €3 billion to €3.05 billion. With this continued strong growth in cloud, we have now increased the share of total revenue by another 3 percentage points in 2016 to 14%. For the full year, our new cloud bookings were also strong with growth of 31% to €1.15 billion. And as expected, in Q4, we saw an acceleration of new cloud bookings to 40%. If you look at the full scale of our cloud business, we also need to look at our cloud backlog, which climbed by 47% to €5.4 billion. This reflects the unbilled committed future cloud subscriptions and support revenue that will drive strong cloud growth in 2017 and beyond. Now, thinking about our future growth, it is equally important to highlight the stability of our industry-leading core business and its continued growth. This is unprecedented in our industry, as reflected by the 4% increase of our software and support revenue in 2016, driven by another year of software license growth and let’s not forget, on the back of a very strong 2015, as well as continued very-high support renewal rates. So, to summarize, the strong performance in our cloud and core business resulted in growth of 8% in cloud and software revenue for the full year. This was above the midpoint of our raised guidance while continuing to substantially outpace the market. Let me come to the fourth quarter regional results now, starting with EMEA. We had a very strong performance in EMEA where we saw an increase in cloud and software revenue of 10%. Cloud subscriptions and support revenue grew 37%. In EMEA, we had double-digit software revenue growth in Germany and the UK. In the Americas region, we grew cloud and software revenue by 2%, cloud subscription and support revenue by 24%. In Latin America, SAP had strong double-digit software revenue growth in Mexico. And finally, in the APJ region, cloud and software revenue was up 5% with cloud subscriptions and support revenue growing by 48%. In APJ, we had double-digit software revenue growth in our key markets in China, India as well as Japan. Now, let me come to the bottom line. And here, before talking about operating profit, I would like to provide some more detail about the gross margin development for the quarter on a reported basis. Our overall gross margin was 75.6% and flat year-over-year, despite a significant negative mix shift effect within the cloud margin. For the fourth quarter, we saw an increase in the cloud margin of 10 basis points year-over-year, resulting in a cloud margin of 63.1%. We achieved this increase despite a significant shift in revenue mix, as I said. If you look into more detail, you can see that our business network cloud segment margin had an impressive expansion of 3 percentage points year-over-year to 75.3%. The applications technology and services or ATS cloud segment margin in turn declined by 150 basis points to 49.2% year-over-year. As expected, the accelerated growth and consequently higher share of our private cloud business led to this decline in the ATS segment while its margin broke even for the second quarter in a row. If we would have had the same revenue share between businesses that we had last year, the overall cloud gross margin would have increased even further by approximately 2.8 percentage points for the full year. Finally, remember that we continue to invest heavily in our entire cloud operations to provide massive benefits for customers. Cloud and software gross margin was 84.8%, flat year-over-year. While we continue to see a higher share of cloud business, the strength of our software and support business fully compensated the changed revenue mix. In the fourth quarter, our services gross margin was down by 3.9 percentage points year-over-year to 20.3% but was almost flat quarter-over-quarter. We have made good progress in 2016, particularly in the last nine months. Coming off the sharp decline in the first quarter, we have improved by 6.4 percentage points since then. The development should be also seen in light of significant investments such as our core innovation projects with strategic industry customers to focus more and more on customer outcome, which results in higher adoption and renewals. We are on track with our operational performance in the services business as underlying just growing 3% for the full year 2016. Now, let me come to our operating profit development. We saw continued operating profit expansion in the fourth quarter, despite our continued investments in innovation and high growth areas. While these investments are even more important for our future growth, we are already seeing them pay off now. We again had a strong quarter in terms of operating profit performance improve by 2%. And looking at our group operating margin, it’s clear that the revenue mix shift effect as well as the decrease in the services margin, weighs on our group profitability in the near term. This resulted in a decrease of 90 basis points to 35% in Q4. For the full year, we significantly outpaced our main competitor not only in cloud and software revenue growth, but also in terms of the bottom line expansion. Our operating profit was €6.6 billion or the midpoint of our raised guidance range, representing a growth rate of 4%. We achieved this result even though we saw a significant growth in the previous year and we continued to make investments for our transformation during the course of 2016. For example, we hired almost 7,200 FTEs, which were primarily highly educated young talents in our fast growth areas and locations. The IFRS tax rate in the fourth quarter was 22.5% and almost stable compared to the prior year period, while the non-IFRS tax rate in the fourth quarter was 23.7%, down from 25.1% in the prior year period. For the full year, our tax rate increased but to a much lower extent than expected. Hence, we came in below the lower end of the guidance range that was updated in Q2. As a consequence, IFRS earnings per share increased by 18% to €1.26 per share for the quarter and increased by the same amount for the full year to €3.03 per share. Non-IFRS earnings per share increased by 9% to €1.52 per share for the quarter and increased by 3% to €3.89 per share for the full year. Now, let’s come to a particularly bright spot, our cash flow and liquidity development. In the fourth quarter, we reported a record €1 billion in operating cash flow, increasing by triple-digit year-over-year; this led to strong operating cash flow for the year, growing by 27% to €4.6 billion. This result was primarily due to our strong top line performance with an increase in total revenue of 7% and higher profitability, as well as the absence of restructuring related cash outflows. At the end of the year, we improved our net liquidity by almost €2.5 billion compared to the end 2015, which is an improvement of 44%. At the end of the year, we had a net debt of €3.2 billion. Looking to 2017, we intend to pay back approximately €1.4 billion of further financial debt. Our A rating continues to be underpinned by the major rating agencies such as Standard & Poor’s with the positive outlook. And with outlook, I can move on to our own outlook. We are providing the following outlook for 2017 which replaces our previous 2017 ambition. Based on our continued strong momentum in our cloud business, we expect full year 2017 non-IFRS cloud revenue to be in a range of €3.8 billion to €4 billion at constant currencies, in line with our previous 2017 ambition. We expect full year 2017 non-IFRS cloud and software revenue to increase by 6% to 8% at constant currencies. We expect full year 2017 non-IFRS total revenue in the range of between €23.2 billion to €23.6 billion at constant currencies; this is above our previous 2017 ambition. And finally, we expect full year 2017 non-IFRS operating profit to be in a range of between €6.8 to €7 billion at constant currencies; this is also above our previous 2017 ambition. Looking beyond 2017, we increased our 2020 ambition to reflect our consistent fast growth in the cloud, solid software momentum, and operating profit expansion as well as the exchange rate development. I am looking forward to discussing the key drivers behind the long-term growth aspirations further at our Capital Markets Day in New York. Finally, as SAP’s proud sponsor for sustainability, I want to also emphasize our longstanding commitment to address the biggest economic, environmental and societal issues around the world. We believe we fulfill this by using our vision as a guiding principle for everything we do. Our holistic approach is fundamental to achieving our goals and realizing our vision, which is reflected in our integrated report. We will publish this at the end of February, which is a month earlier than in previous years. The intensive use of SAP software supports us in completing and issuing this comprehensive detail and as you will find, once again, very innovative report, less than two months after year-end. Our employees and the innovations they create are the heart and soul of our Company. We are proud to report that the employee engagement index at SAP is at an all-time high. We were able to increase this already high number as our transformation is paying off. We have expanded our learning culture, we are hiring the right people, we have the right vision. Turning to the environment, we were able to further decrease carbon emissions despite growing our cloud business strongly, in part because of our green cloud policy, but also because of operational innovations such as our ambitious goals around electric cars; and yes, I drive one too. We are also progressing nicely in the area of diversity. We now have 24.5% of women in management, an improvement of approximately 1 percentage point year-on-year and very close to our target of 25% by 2017. So, to close, we released strong fourth quarter and full year results today, showing continued momentum and strong execution. Even though we made strategic investments during the course of 2016, we managed to expand our profit again fully in line with our stated 2016 guidance and mid-term ambitions. Helped with our robust pipeline, this positions us for yet another year of profitable growth in 2017 and allows us to confidently raise our high level 2020 ambition. I am looking forward to another excellent 2017 and beyond as we continue to have the world run and improve people’s lives. Thank you. And we will now be happy to take your questions.

Thank you, Luka. I hand it back to the operator. Please start the Q&A session now.

[Operator Instructions] The first question comes from the line of Adam Wood of Morgan Stanley. Please go ahead.

Hi. Good afternoon, Bill, Luka, thanks very much for taking the questions. Couple, if I could. First of all, on the operating profit outlook and the margin outlook. Clearly the Company is investing for growth at the moment, and that’s paying off on the topline. I wonder if you could help us whether there were any kind of one-off spending in Q4 that pushed the expenses up? And as we look into 2018, what are the investments that are going into 2017 in terms of the HANA move on the cloud, in terms of how you expect to move to subscription payments to happen that depresses 2017 but then turns around in 2018 to give you the confidence that we see the operating leverage coming through in the later of the guidance? And then, maybe just very quickly on the technology side. I think, Bill, this is the first time you’ve talked in a little bit more detail about machine learning. We’ve seen other companies focus on the vertical side as well as horizontal. Could you give us a little bit of feel of what’s going on with SAP and how much of that can be organic versus M&A driven? Thank you.

Should I start maybe with questions on the investment side? So, I wouldn’t say that there were any -- let’s say truly extraordinary new types of investments that we made in Q4, but we continued to invest in the key areas in which we said that we would focus on. So, clearly, also in Q4, we continued to invest in the build out of our convert [ph] cloud infrastructure, into our program to migrate our acquired cloud assets on to our HANA in-memory database, we continued to invest data center consolidation. This will continue also in 2017. But as we always have said 2017 is the year where these, let’s say, extraordinary investment in our cloud delivery business will come to an end. And then as of 2018, we expect to see the leverage from these efficiency-based investments in a much higher progression of the cloud gross margins and consequently also the operating income contribution of our cloud business. In terms of the headcount growth, we continued to invest also in Q4. However, from a profile perspective, slightly different; we hired a bit over 1,700 FTEs in Q4. In Q3, we had a very strong focus in hiring on the sales and marketing side, because you want to bring these people on board and train them so that they can get fully productive as quickly as possible in the New Year. Therefore, in Q4, while we still did some additional hiring in sales and marketing, this was not the leading category; most of the hiring that we did in Q4 was in the R&D and the new cloud delivery operations where obviously you’re trying to build up a more even basis of your headcount distribution as you progress through the year. In terms of the profile of investments in total, you’re absolutely correct. 2017 will be another year of investment whereas in the years 2018 and going forward, we expect that most of the cost ratios, except for sales and marketing where we will continue to invest in line with our growth potentials, will come down as a relative share of revenues. So, we expect that then cloud delivery operations will be more, let’s say, steady progression with growing leverage from the top line in the cloud, we also believe that in R&D after heavy investments into the build out of S/4 and our innovation categories, the R&D ratio will start to slightly decline. And hence, we expect to see a bigger CAGR in operating income in the years 2018 and moving forward, so far from my side on the investment and operating income side.

Thank you, Luka. And Adam, I’ll just touch on the machine learning. First of all, we are working on largely horizontal focused applications, core applications, and we are making our own. So, think of it as focused on the digital core and making the line of business smarter, so S/4HANA, our cloud and network assets, and it will be mainly organic. And if we do anything on the M&A side, it will be tuck-in, nothing to get concerned with -- on the financial model. And maybe, I could just give you a little feel for this. We need to start turning up the advertising and the marketing on what we’re already doing for machine learning, whether it is recruiting, employee approvals, payment processing, sales discounting approval or call center management up to an including effectively using box. We already have our machine learning solutions in place and we’re rolling them out across industry. It will be a huge source of growth and probably not factored in your models. In terms of blockchain, it’s another area that I’ll just touch on because I know we talked a lot about IoT, but not so much ML and blockchain. If you think about banking, identity, compliance security, trade settlement, insurance, smart claims, manufacturing, track and trace, all these industries have a blockchain case. And remember, more than three quarters of the world transactions are running through an SAP system. So, our financials will actually form a very unique blockchain business network. I kindly ask you to keep that in mind. And then, finally, on IoT because it is real time information, logistics, autonomous payments, quality assurance, and the counterfeiting industrial and military cyber security, we’re in all of these areas at the application layer, and we have it now. So, it’s not like a fantasy or dream or we give you a tool box and you build it. Our great development team is already building it or has built it and is rolling out in customer establishment and maybe step on at the investor day, we can give you a complete overview including all the logos; we’re in flight already.

Next question comes from the line of Chandramouli Sriraman of MainFirst Bank. Please go ahead.

Hi. Thanks for taking my question and congrats on a good 2016. Just a couple from my side. So, you raised the midpoint of your guidance by about €1.4 billion in revenues out of which 0.5 comes from the cloud. Given that services is not a big mover in terms of overall topline, I was just wondering is this reasonable to assume that a big chunk of this guidance comes from licenses given that maintenance is predictable. Is it fair to sort of back calculate the impact licenses? Could help us go through the various moving parts that will helpful. And my second question is Rob usually gives the number of live S/4HANA customer. I was just wondering if you could have that number. And also any comment on your S/4HANA public cloud plans would be very helpful. Thanks.

Yes. Let me start maybe on the 2020 ambition and then I’ll pass on to Rob for the other questions also on S/4HANA cloud. On the 2020 ambition raise on the topline, you are right. Of course, when we devised the 2020 ambition, we were at the very beginning of introducing S/4HANA to the market. And hence, we had an aspiration for our core business that we’re still expecting declines and extending up to 2020 to more significant single-digit declines. Now, we see that in last two years, we have been doing substantially better than that due to introduction of S/4HANA which has brought licenses back into positive growth territory in both 2015 and 2016. And so, we don’t expect anymore that there would be a substantial downturn in our core business, but that it rather can sustain the approximate levels that we are seeing right now and that of course then leads to our total revenue aspiration to also be higher than originally expected.

Absolutely. And the question on S/4HANA in the public multitenant cloud, we at Investor Day on February 9th will feature this business prominently. We have a leader named Darren Roos, who is running this for us on an end-to-end basis. We have -- think of it as a division going to market with S/4HANA public cloud multitenant and we’ll go on for fence this year. We’ve got an unbelievable solution. We had a big Q4, and it’s obviously subscription revenue. And Bernd, maybe, you want to add a little bit of color.

I think what we observe in the market that while the beginning of the cloud was clearly driven by individual line of business solutions, we now see that it’s a time where ERP moves to the cloud. And it’s great that we have anticipated that move early, while we can play both choices. If the customer wants to move the entire -- I’m talking the entire ERP as a SaaS solution with multi-tenancy capability, we have in our portfolio. And as Bill said, we will talk big about that at the Capital Markets Day. But I can refer to that we saw that uptake for the first time in history already starting very strong in Q4. I can reference one customer who went live after the first conversation after seven weeks, which is the beauty of the cloud. So, this ease of consumption with the entire ERP is paying off, and we have ambitious goals for 2017.

Okay. Thank you. Let’s move to next…

[Multiple Speakers] customers productive on S/4HANA.

Thank you, Rob. Let’s move to next question, please.

Your next question comes from the line of John King of Bank of America Merrill Lynch. Please go ahead.

Good afternoon and thank you for taking the questions. I think three, probably mainly for Luka. But firstly, following up on the S/4 cloud side of things; obviously you’re just starting I guess to push particularly around the core ERP. Are you factoring any significant amounts of the core ERP deals shifting from license to subscription in 2017 or is it still quite a small number? Just help us out with how we should be thinking about the license trajectory through the course of the year. And a couple of follow-ups around the margin. Could you help us quantify what the cloud migration projects at the moment are costing you on the margin side and also maybe the customer co-innovation projects, how much of a drag that’s creating? And finally, on the cash flow side, obviously very good progress in 2016. How does that look for 2017; is there any priorities around CapEx that you might need to invest in related to the cloud projects which might hold that back?

Yes. So, let me start. First of all on the S/4 cloud, you’re right; we will start to broadly penetrate the right segment of the market with S/4 public cloud. This is a solution that is primarily geared towards the upper mid market and lower LE space where I think it will be quite attractive and will help as well to spur further growth in the cloud. But the expectation for shift from license subscription from that end are really moderate and by any means or any way factored into the overarching guidance that we have provided. The second point on consulting and the scope of core innovation projects and their impact on the cloud margin, it’s actually not insignificant; it’s an impact of roundabout 5 percentage points towards the margins. Now, you will always have some level of these core innovation projects because these are of necessary to continue and to use best practices from customers and build them into our solution portfolio. However, the overall size of those engagements in 2016 has clearly been above the normal I would say. So, we certainly expect that this will be one of the key factors to improve our service profitability in 2017 when these projects are running out as planned next year. Then on the 2017 CapEx and cash flow progression, we generally believe that our cash flow development will continue to follow our strong top line progression that we are planning for. Of course in 2016 and the year-over-year comparison, we had an extraordinary effect that we had huge restructuring related cash outflows in 2015 in the second half of the year that we simply did not have in 2016, that’s why we have the huge growth. So we will certainly to see triple digit growth in the cash flow in 2017. However, we believe that we’ll continue to develop nicely and trend upwards following our progression in terms of our business scope and business size as a Company. In terms of where it will go to, yes, we will continue to see expansion on the CapEx side; from a percentage perspective, not as steep as from 2015 to 2016. So, we will see already that the trend will start to flatten out but there will be still an increase, I would estimate by roughly 30% year-over-year which then in 2018 will reverse. And in terms of other uses of cash, I think nothing has really changed there. We see quite a sufficient liquidity coverage based on our strong cash generation to fund all organic innovation investments that we need to fund; we will continue to fund smaller tuck-in acquisitions if they happen from operating cash flow. We intend to pay an attractive dividend also for full year 2016. As you have noted, earnings per share has come in IFRS terms at the group level by 18%. So, I think the assumption is reasonable that you would see also a quite nice dividend based on that development. And we will of course also pay back and continue to deleverage. We have €1.4 billion in debt that are coming up for repayment in 2017. Despite all of this, there might still be an excess liquidity situation that we might run into as of the second half of the year, assuming there is similar tuck-in activity as we have seen it in 2016. And if that should start to build up, then we would certainly consider to also engage in moderate share buyback activities. That’s it.

The next question comes from the line of Walter Pritchard of Citi. Please go ahead.

Thank you. Luka, I am wondering if you could talk about in the guidance, you sort of alluded to stability in the quarter and you’ve gotten through the last two years with stable license. And I know you have S/4 public cloud that’s going to ramp up here. But if you think about the factors that would still drive your license down say in the low single digits, mid single digits as you’ve guided to over the next four years, what would be those factors and how should we look at sort of their relative potential to swing that license number?

Yes. I think it would primarily be continued progression in the transformation of our line of business solutions to the cloud. So, we still have a moderate level of license sales of additional seats in for example on-premise HR, in on-premise procurement, in on-premise customer relationship management over time. These customers will certainly migrate with us to our respective cloud solutions and that will continue to have a certain dragging effect on licenses. On the flip side, of course, our flagship solution S/4HANA, but also quite frankly elements of our on-premise portfolio around omni-channel ecommerce, Hybris for example, will continue to grow. And to what extent this will level out against each other is of course very hard to predict. I think over the course of the last two years, we gave a prudent and reasonable guidance around that. And so far, we are always able to meet it. So, we are very confident that for the next few years, we also have the risk and reward, and opportunity profile directionally right in this regard.

And Walter, the one thing I would say adding to Luka’s comments is with S/4HANA, this is a generational market opportunity and thousands of customers will come from competitive platforms to S/4HANA and there will be a substantial number of them that could easily backfill some of the solutions that will migrate to the cloud versus running on-premise. So, we have a good feeling about what S/4HANA can do in all dimensions especially when you consider in the last quarter, I think it was about half net new names. And if I hear that half a net new names are coming in to the SAP portfolio with immense loyalty rates in the installed base, the cloud and the network clicking on all cylinders, it kind of makes me feel like the whole thing is tying together into one heck of a growth story.

The next question comes from the line of Philipp Winslow of Wells Fargo Securities. Please go ahead.

Hi. Thanks, guys and congrats on a great end to what was obviously a very strong year, and it’s also good to be back covering you guys. Just two questions. First one for you Bill; Luka did a good job walking through the R&D investments and then obviously the investments on the COGS line in terms of just the forward guidance. But when you think about the go-to-market side and maybe Rob could also buzz in here too. You obviously have multiple drivers going right now; you’ve got license growing with S/4HANA; you’ve got the cloud business hitting some pretty key milestones; you surpassed work in terms of customer count from Employee Central Q3 and so forth. So, how are you sort of balancing that in the go-to-market, how do you feel about the headcount, the quotas, anything that you’re kind of changing I guess or how you’re thinking about it next year and over the next over the next couple of years would be great? And I just have one quick follow-up for Luka.

Sure. I’ll start and then hand it over to Rob. I think one of the things we are laser focused on is bringing people into the Company that can code software or sale software and creating immense learning and training opportunities for these people, so we can get them young at a university and build them in our own culture and our own image. It’s kind of dull, spending your time recruiting from other software companies and then having to reinvent people. We’d rather start fresh and do it right. The other thing I think is worth mentioning is we have actually built quite a competency in the go-to-market under leadership of Rob Enslin and also Steve Singh on the business network and the cloud side. And I really think we have immense maturity and leadership also with the cooperation of Bernd Leukert in the development side where we have some beautiful end-to-end businesses. So, we have this wonderful match, our regional coverage models to deal with the 193 countries in 25 distinctly different industries. But the way we’re going to market and crossing over on very significant cloud, network and end-to-businesses such as S/4HANA cloud which I mentioned a few minutes ago, I think really differentiates SAP. Most cultures can’t handle it because they don’t have a symphony in their culture, they have a war zone. So with regard to Rob, I’d like to turn it over to him because he is doing a great job and he told me as early as this morning how strong the pipe is. So, Rob, over to you.

Thank you, Bill. First of all, I think it starts with stable leadership, and we’ve had stable leadership in the go-to-market organization between Steve and myself for the last couple of years and that’s really paying dividends. Second piece is we continue to hire graduates out colleges and into one year of training, bring them into the field and then having a tremendous impact, and we’re talking significant numbers, that links into our culture. Third piece is our end-to-end model when it comes to analytics, database, SuccessFactors, customer engagement and commerce and Hybris, Ariba et cetera; that’s really working now together with the regional model. So, when you look at that model, it’s really seen right now and people really understand how to engage with customers and actually up sell customers. So, when you look at our significant customer base, what you see is an S/4 environment then connected with many, many SAP applications, Concur, Ariba Fieldglass et cetera. And then, lastly, I would say, we’re obviously investing in the go-to-market significantly under Darren’s leadership and we’ll share that at the Capital Markets Day. We see that as a significant opportunity and Q4 was actually very, very good for us in public cloud and the S/4. And then what I will tell you is significant growth opportunity as well in investing in the go-to-market in our eastern European marketplace, our APJ marketplace and our Latin American marketplace and using our global scale, we’ll see significant leverage as well there. And probably lastly, our productivity has increased in the go-to-market side for the last four years and we continue to see that happen.

Great, thanks guys. And then there is a quick follow-up for Luka. Luka, you obviously gave guidance for 2017 in constant currency. There is clearly a lot of swings in currency very late in the year. So, I wonder if you can provide just more color on -- if currencies remain stable with where they are right now, just what you would expect the effect on the as reported numbers to be or maybe you’ll touch on that at Analyst Day?

No, that’s a very good question, and I am happy to answer it right away; it’s also an important one and we covered it also during the press conference earlier this morning. You are absolutely right. It’s a constant currency guidance. And as we know, currencies have moved not insubstantially through the course of 2016, actually the currency environment has been improved for SAP through the course of the year. And hence, if you were to assume that the currency exchange rates from the beginning of the year, so January 2nd would prevail, then, we would expect to see a positive tailwind impact on cloud and software revenue of 3% to 3.5% and on the operating profit from 3.5% to 4%. If we take the exchange rates from yesterday, then that effect would actually be approximately 2 percentage points of tailwind and for the cloud and software revenue, and about 2.5 percentage points for operating profit. So clearly, so far, we are in tailwind category. And that’s also something that applies when you take a look at how we have converted the previous midterm ambition from 2017 to a constant currency outlook right now. And if you reflect that on the change of the exchange rate environment from average 2015 rates, which obviously were underlying the previous ambition update in the beginning of 2016 to the average 2016 rate, we can actually see that there is even a slight headwind that we have been facing between then and now on the currency side. And so, I think also in light of this, one should see the ambition update and the raise as a very positive sign of confidence of SAP.

The next question comes from the line of Gerardus Vos of Barclays. Please go ahead.

Hi, good afternoon, Bill and Luka, and congratulations on the strong Q4. Just a couple of questions, if I may, just first of all on the 2020 guidance, very encouraging upgrades; I’m just struggling to kind of bring the pieces together. Because if I listen that, we now expecting a flat license number. And if I look at the FX changes since 2015, it looks that there is an implied downgrade to the outlook unless my FX assumptions are wrong. So, it would be great, if you kind could help us a little bit around your kind of assumptions on FX and on the underlying thought for the kind of business. And then secondly, the tax rate ended up quite a lot low than where it was guided at the second quarter. Could you just provide us an update what you would expect for 2017? And then, finally, question for Bill on the industry, Oracle [ph] has had quite a bit of success driving that suite into the kind of mid-market and I guess that’s for S/4 and cloud is going to be pitched as well. Just could you let us when does this product go live and what would you expect from the kind of ramp in year one and year two? Thank you.

So, Gerardus, thanks for the questions. I’ll answer the first two. First of all on the 2020 ambition, let’s, just quickly on a few things. We are not necessarily assuming on an implied basis that licenses will remain stable all the way through 2020. However, we have become more positive around the overall scope of the license business. And so, where originally in the implied guidance we would have had a high single-digit decline in licenses, that’s what we don’t expect anymore. There is still an expectation of low to mid single-digit declines until 2020. And why are we guiding in that way implied, because when you put out an ambition that goes until 2020, which I think is something that is unprecedented in our industry that you won’t find by any other player, despite all of the confidence, you want to be safe and you want to be rock solid with this ambition and the same applies of course also to the other metrics like the operating income as well as the cloud revenue growth. Hence, you may characterize it as conservatism but it’s a guidance that we believe is readily achievable and that has been I would say a common theme that you have seen from SAP in the recent years that we are hitting, what we are promising to the market and the same will be true for these targets. And on the FX, actually what I said before and with regard to the 2017 outlook is true for 2020 obviously as well that the ambition update in 2016 where we left the 2020 targets unchanged has of course now run its course in an exchange rate environment in 2016 that was a mild headwind for SAP. So, the fact that we are now upgrading it and on the revenue side quite substantially is actually -- and should be taking as a very positive thing. On the tax rate side, you’re right; we came in ultimately quite a bit lower than originally expected in Q4. What was the main reason? The main reason was the different income allocation in terms of our regional sources of income that we saw in Q4 versus our original planning expectation. So, we had a substantial bigger share of our revenue coming in from the European markets where we generally are facing a lower tax environment and hence just had a positive effect in terms of the IFRS earnings per share progression and general earnings per share progression and that we have seen in Q4. This is other than the tax effect also due to the fact that we had very nice returns from exits of our Sapphire Ventures investment fund in Q4. There was a private sale of one investment company that occurred and we had further sales of listed equity. And on the other hand we had slightly better interest income in Q4 based on a slightly higher interest rate and higher cash that we had available due to the strong cash flow generation while of course we continued to deleverage and therefore also had less interest expenses. That’s the basic reason why we have below the line progress nicely in Q4.

And Gerardus, what I’d like to also just give you an update on is the S/4 cloud; it’s here now and we’ve been selling it and it’s going extraordinarily well. So, I’ll Bernd and Rob take turns, giving you some color on that, but also I think it will be helpful for Steve Singh to just give you an update on business by design as well because you mentioned that others are doing well. It’s probably important that you have the whole story. Bernd?

Yes. Maybe to start first what I was explaining before already is the acceleration and speed of adoption of the cloud is paying off now by the entire ERP. And we had seen that the first time the significant impact in Q4 thanks to Darren Roos leadership. In addition to that, we are heavily investing and that is probably of key interest for you, to bring down the cost operation by further automating our data center. So, it will be fully software driven, which is essentially going forward as well for our margin. And I hand over to Rob. Maybe, Rob, you can give more outlook on our target for sales.

Yes. Look, we saw it across a significant Q4 number of customers signing up for S/4 public cloud, multi-tenant, we see a significant amount of those customers going live, very productive, actually very, very satisfied high quality system. And we plan to broadcast live at the Capital Markets Day, we’re going to showcase those customers. I think what you’re going to find with those customers that have signed up for S/4 public cloud is that they are really cool; they do some innovative things and we’re doing really innovative things with them. And the time it took us to go big with S/4 cloud was I think really well handled by SAP because now what you see is the satisfaction on the solution is at an all time high and will allow us to elevate our gain and get scale really rapidly in 2017.

Rob, maybe a closing comment on one of the deals we have won. If you compare the modern S/4 public cloud solution with NetSuite, I think many people forget that NetSuite is on the market for more than a decade. So, if somebody seems this as a modern ERP in the cloud, this is already -- was probably more than a decade ago and these days, a decade in the IT industry feels like a century. And we have observed that especially last quarter in many head-to-head competitions. So, the user experience is superior in S/4; the response time with our leading platform of HANA outpaces every transaction in NetSuite and as well the end-to-end processes we can support in our dedicated scope is more comprehensive than any other competitive product. So from that perspective, you’ll hear more positive news going forward.

Steve?

Yes, I’ll add one thing to it real quick. I think if you look at SMB, obviously broad definition of it, but 1,500 [ph] employee companies. We have an exceptional distribution engine, which [indiscernible] distribution into that segment where a very large portion of the Concur growth in any given quarter comes out of SMB. We think [BYD] hasn’t been revamped over the past year but the opportunity to continue to drive BYD [ph] in that segment is very, very strong. We’ve seen results to that extent over the course of the past couple of quarters and we continue to run aggressively that opportunity. And by the way, when you think about the BYD, [ph] we’ll speak more to this at the Capital Markets Day. Think of it as not only a refresh in the technology stack but being opened up and integrated into Concur, Ariba Fieldglass, SuccessFactors and other products. We can deliver a full suite of services to our SMB customers that helps emerge [ph] our business.

Thank you. I think given the time we have time for one final question.

Final question comes from the line of Keith Bachman at BMO. Please go ahead.

Hi. Many thanks for taking the question. I wanted to just ask about S/4HANA adoption. I think the number was set for what it was Q4, but I didn’t quite pick it up. But in addition, as you think about the 5,400 customers, what are you thinking about the conversion rate of those customers in 2017 that supports the license growth? It sounds more like flattish. And how are you thinking about that adoption trend, if you had to parse it between cloud and on-premise? Thank you.

Rob, do you want to talk about the actual S/4HANA adoption numbers you’ve previously quoted.

Yes, sure. So, we have 5,400 plus customers that are exclusive today. Today, there is over 550 that are productive in line across not only financials but logistics, generally it’s an extremely stable version of the solution. And expectation is that that number is going to grow significantly with the amount of projects that are ongoing which is probably closer to 2,500 projects right now that are ongoing around S/4. When it comes to looking at S/4 and on-premise or S/4 software and S/4 public cloud, I think Luka gave it in the numbers. We continue to see not only strong uptick on S/4 in general across the board but also in HANA as a standalone big data platform with Vora and Altiscale. So, as we see some diminishing returns as certain of these move to the cloud, we see very, very strong growth in S/4 and in HANA. And as Bill said earlier on, I feel really good about the pipeline moving into 2017.

Very good, thank you very much. This concludes the financial analyst call for today. And we look forward to seeing you all in New York City on February 9th at our Capital Markets Day…

On IS. [Ph]

Capital Markets Day on IS. [Ph] That’s the new brand I just announced. Thank you everybody for joining. And bye, bye.

Thanks everybody.

Ladies and gentlemen, this concludes the SAP fourth quarter and full year results 2016. Thank you for participating. You may now disconnect.