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

Mohammed Moawalla - Goldman Sachs Walter Pritchard - Citi Jerry Flasz - Barclays Adam Wood - Morgan Stanley Alex Tout - Deutsche Bank Michael Briest - UBS Kirk Materne - Evercore Philipp Winslow - Wells Fargo John King - Merrill Lynch Ross MacMillan - RBC Capital Market

Good day, and welcome to the SAP Q2 and Half Year 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.

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 second quarter 2018. I’m joined by our CEO, Bill McDermott and Luka Mucic, our CFO, who will both make opening remarks on the call today. Also joining us for Q&A are our Board members, Rob Enslin, who runs Cloud Business Group; Bernd Leukert, who leads Product and Innovation, as well as Jennifer Morgan and Adaire Fox-Martin, who together run Global Customer Operations. Before we get started, I would like to say a few words about forward-looking statements and our use of non-IFRS financial measures. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in our filings with the U.S. SEC, including SAP's Annual Report on Form 20-F for 2017 filed with the SEC on February 28, 2018. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. In addition, on our Investor Relations website, you can find our quarterly statement, our half year report and the financial summary slide deck, which are all intended to supplement our prepared remarks today, and include a reconciliation from our non-IFRS numbers to IFRS numbers. Unless otherwise noted, all financial numbers referred to on this conference call are non-IFRS, and growth rates are non-IFRS at 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. And with that, I'd like to turn things over to our CEO, Bill McDermott.

Thank you, Stefan. Hello everyone and thank you for joining us today. I will be brief in my remarks so we can get to your questions. We are now in the ninth consecutive year of consistent growth for SAP. During this time we established a new HANA world to replace the disk-based database. We engineered the fourth generation of ERP with S/4 HANA. We extended the enterprise into the business networks. We assembled the most cloud users in the enterprise application software industry. In every quarter along this journey our results have proven this to be the winning strategy for SAP. SAP’s [tri-factor] of strong software and support sales, fast cloud growth and operating income expansion is now the gold standard in the industry. Our market share gains continued in Q2 as cloud revenues soared 40% year-on-year in constant currencies. For those keeping score that is a [5%]. And one sign of our thriving cloud business, cloud bookings grew 29%. In another, pay-as-you-go revenue in Fieldglass Ariba, Concur, SAP cloud platform and HANA enterprise cloud is ramping really fast. You'll get more detail on that in a little bit. In this global war of talent SAP’s success factors, employee is central. New customers increased 42% year-on-year. I'm sure that is quite concerning to our competitors. Driven by fast adoption of SAP S/4 HANA, cloud and software revenue grew by a stellar 10%. Now keep in mind the software only, the software licensed on a standalone basis compared against our toughest quarter in 2017. So don't get too worked up on it. New cloud and software order entry grew even faster at 12%. And even with a higher mix of cloud and services revenue, operating profit surged 12% while we expanded margin. Just to be clear, if you take into account the [effect] and the cloud mix with the cloud B you would be at a 1% margin improvement on a year-over-year basis. So feel really good about the margins. We are on a roll. Some of the most prestigious brands in the world shows SAP's solutions in Q2 including Chevron, Thomson Reuters, McDonald’s China, Whirlpool and the US Navy to name a few. [ANL] is now live and they are the biggest SAP S/4 HANA installation in the world. As you will hear from Luka in a few moments, Q2 showed decisively that SAP is a balanced, sustainable, profitable growth company. There is one topic I will cover in some depth before I hand it over to Luka. One month ago at SAPPHIRE we launched SAP C/4 HANA as the new standard for fourth generation CRM. Here is the big picture. CEOs understand that serving their customers must be the unifying business priority. They know this can't be done when the sales department doesn't work with the finance department, or when the marketing department doesn't share data with their supply chain, or when the human resources team doesn't know how to engage the fast growing contract workforce. Unfortunately we have seen too many business revert to the silo practices of failed enterprises. So it is no coincidence that many were actually disrupted by innovative competitors. Those disrupters built the entire company as a single integrated machine to serve that customer from demand chain to supply chain. Keep in mind SAP was founded 46 years ago to solve a CEO business problem, integrating a fractured enterprise. Today we are rising yet again to deliver a revolutionary end-to-end customer experience. Every asset in our portfolio has been carefully assembled to deliver the intelligent enterprise. SAP HANA data management suite including Data Hub, the data control tower to power the customer experience without ever moving the data. SAP C/4 HANA to handle the customer data, marketing, commerce, sales and service as an integrated modern front office. SAP's success factors bringing the total workforce together in service to the customer relationship. SAP S/4 HANA, cloud ERP built with industry next practices as the ultimate fulfilment engine. SAP digital supply chain to innovate the manufacturing process with groundbreaking new technologies, never more important with global trade issues that we see in the market today. SAP business networks extending the supply chain beyond the walls of the enterprise to drive a network effect. SAP [LAN auto] and analytics cloud, intelligence embedded into every SAP solution to drive mass personalization and predictability. SAP cloud platform, integrating the intelligent enterprise around a single view of the customer. SAP HANA enterprise cloud, to help businesses run in whichever environment best serves their customers. So ladies and gentlemen there is only one company in the industry that can help businesses revolutionize how they serve their customers. The C/4 HANA front office suite is playing in a different league than sales force automation. When you combine all of our assets together this is the real power of integration to serve the customer with real solutions. For any who may doubt SAP's ambition in this area, please consider in Q2 C/4 HANA is already growing at steep triple digits. Our organic growth is more than 5 times our primary competitor in this segment. Our pipeline for the remainder of the year has accelerated dramatically. And as a signal of our confidence, SAP will highlight C/4 HANA momentum on a quarterly basis so you have visibility. I expect that you will see similarly strong growth in the quarters to come; that is right, triple digit, customer to core, front office to fulfilment, C/4 HANA to S/4 HANA. Great moments are born from great opportunity. Ours is to redefine the CRM industry. We have the strategy. We have the solutions. We have the ambition. As you gather from my remarks we are bullish about SAP's prospects to unleash yet another new wave of growth. SAP has made a clear argument; our customers are already validating our strategy in Q2. And as a signal of our confidence, today we are raising not only our 2018 full-year guidance, we are also raising our 2020 cloud ambition. This company is fired up and ready to go. Our 94,000 colleagues believe in the work we do everyday, and they could not be more passionate to help this world run better and improve people's lives. I'm really looking forward to your questions today. So for now it is my pleasure to hand it over to our CFO, Luka Mucic. Luka, over to you.

Thanks a lot Bill. Yes, as you can tell from the financial results shared by Bill, our strong momentum continued. Our business is getting more and more recurring in nature with two thirds now coming from more predictable revenue streams in the quarter. We continue to grow profitably even with serious currency headwinds in Q2. Now to the highlights of the quarter. First, as Bill said, our cloud revenue grew by 40%. This is a stellar result if you consider that even excluding the contribution from Callidus; we are tracking very nicely above the cloud CAGR implied in our 2020 ambition. New cloud bookings grew by 29% on top of a strong performance in Q2 last year. Note that new cloud bookings is only one component of future cloud revenue. As Bill mentioned, we are seeing accelerating pay-as-you-go revenue in our cloud business and none of this is even included in the new cloud bookings metric. And remember that new high growth cloud solutions, like S/4 HANA cloud, and C/4 HANA would have more impact on growth as they scale to be a bigger part of the mix. Now to software, which even with the tough comparison from last year was still fully in line with our implied 2018 and 2020 mid-term aspiration. The continuous momentum our S/4 HANA, [HANA], our Digital Supply Chain solution, as well as our global risk and compliance solutions contributed to the resilience of our software business in the quarter. Total new business, which is best demonstrated by the combination of cloud total contract value and software license order entry, was again up double-digits at 12%. And to underscore the scale that our cloud business has reached by now, the share of cloud in this metric is now close to 60%. Support revenue came in very, very strong up 7%. This was the result of our strong license performance in 2017, continued very strong renewals and lower sales allowances indicating the strong stickiness of our support services with our customers. All of this drove double-digit cloud and software growth. This is a fantastic performance. We are clearly outpacing the market even at the large scales that we have already reached. Now a few words on the second quarter regional results. We had a very strong performance in the EMEA region with Cloud and software revenue increasing 12%. Cloud revenue grew by 46% with Germany and the UK being highlights. In addition, we had strong double-digit software revenue growth in the UK and the Middle East and Germany had another strong quarter with solid single-digit software license growth. We also had a solid performance in the Americas region, despite a significant currency headwind. Cloud and software revenue grew by 8%. Cloud revenue increased by 35% led in particular by a very strong performance in Brazil. In the APJ region, we had a robust performance, Cloud and software revenue was up 11%, cloud revenue grew by 52% with China and Japan being highlights. For software revenue, Australia, China and India had impressive quarters and grew each by double-digits. Briefly now onto the IFRS 15 impact, which as you know we adopted on January 1st this year. Our operating profit in the quarter was positively impacted by €54 million through this accounting change. With that let me now come to profitability and gross margins. Gross margins in cloud, software and support and services were a clear highlight. They were all up year-over-year. We continue to have a significant revenue mix shift effect between our cloud and on-premise business, which meant our cloud and software gross margin, was slightly down year-over-year to 81.2% despite all of the individual business models improving their gross margin performance. Our cloud margin again expanded sequentially to 63.6% and was also up 1.2% percentage point’s year-over-year. This great result in Q2 shows that our turnaround starting in Q1 continues to gain momentum. This is mainly visible in the strong improvement of our [SaaS powered] public cloud gross margin, which increased by 4 percentage points year-over-year to 60.4% driven by strong top line growth as well as the tapering off of upfront costs for the converged cloud platform. The business network margin continued its path to exceed 80% in 2020. It is now already at 77.4%, an increase of close to 50 basis points year-over-year. The private cloud margin likewise accelerated upwards by 5 percentage point’s year-over-year. As a function of the increased scale and expanding renewal base in our HANA enterprise cloud business. Our services gross margin was again up by 3 percentage points to 26.5% year-over-year. This strong result shows the first class organization we have become with our successful transformation. Our margin is now much higher than what we usually see in the services industry. A combination of strong top line, strong cloud gross margin improvement and operating expense discipline led again to strong operating profit growth of 12% in the quarter. We achieved this by continuing to invest in our people and our portfolio, adding approximately 6700 employees year-over-year. As indicated in Q1, our organic hiring in the quarter slow to just 700 additional heads. As a result, our operating margin increased by 40 basis points despite the headwinds from the recently closed Callidus acquisition and the significant revenue mix shift effect. Now, let me turn quickly to taxes and EPS. The IFRS effective tax rate increased by 3.4% points to 30%. This came primarily from effects as a result of intercompany financing and changes in foreign currency exchange rates in Venezuela. The non-IFRS tax rate was virtually unchanged at 27.8%. The IFRS earnings per share increased by 8% to $0.60 for the quarter, non-IFRS EPS increased by 5% to $0.98. Now, to cash flow. Q2 operating cash flow decreased mainly due to the timing of stock based compensation payments, currency headwinds as well as higher tax and insurance payments. These effects offsets SAP’s positive business development and lowers TSO which went down year-over-year by four days to 68 days. Free cash flow for the half year was also lower due to the previously announced additional CapEx for 2018. Finally, as been alluded to idea, we are raising our 2018 outlook due to the strong cloud business. At the same time, we have updated our currency expectations for the impact and reported growth rates. We are also raising our cloud revenue ambition for 2020 to reflect our strong cloud momentum and the acquisition of Callidus. The 2020 ambition now also takes into account a severe currency headwinds we have seen. For more details, please refer to our quarterly statement published earlier today. Before closing, I would also like to talk about a few of our key non-financial matrix. They are equally important to us in steering a sustainable business. This quarter, we again increased the number of woman in management to 25.8% as our efforts to promote diversity and equality continue. Our integrated report was ranked the leader in the non-financials ranking of the ducks 30 companies by reporting expert. SAP was also featured among the top 25 of the 2400 companies ranked in the report corporate sourcing of renewables industry and market index by the carbon disclosure project and the international renewable energy agency. So, to summarize, this quarter’s results perfectly reflect our core strategy. To rapidly transform the company to the cloud while substantially growing profits end margins. We are taking market share and we are indisputably growing faster in the clouds than our competitors. We have the broadest portfolio and we are the most geographically diversified cloud business in the industry. I am very confident this momentum will continue. That’s why we raised both our 2018 outlook and our 2020 ambition. Thank you. And we will now be happy to take your questions.

Thank you. Operator, we can now start the Q&A session, please.

Thank you. [Operator Instructions] We will take our first question from Mohammed Moawalla from Goldman Sachs. Please go ahead.

Great, thank you very much. I have two questions. The first one is just on the license, software license progression. We have now seen through three consecutive quarters or declines and I appreciate there’s a sort of tougher comparison versus a year ago but are you seeing a significant change in the way there sort of customers are now deploying things I guess for HANA, more sort of in the sort of hybrid model and exploring alternative deployment models and is just likely to mean that you know you’re more likely to be kind of in the kind of lower band of that 02 to minus 5 license growth. And related to that, given this is obviously a higher margin business and I know over time just will obviously shrink in the mix. How do you sort of manage that on the bottom line and the margin? And then second question was just on the cloud obviously very strong growth in the quarter. What are the sort of some of the key products and the levers that you see to kind of continue this momentum, specifically you called out the kind of pay as you go aside? Could you give us a bit more colour and what gives you the visibility there. And then, lastly on sort of S/4HANA, maybe some colour and metrics are on the pipeline and where you see the kind of the big opportunities or the inside or outside install base? Thank you.

Mohammed, thank you very much for your question. First of all on licensed revenue. It is true that is a hybrid cloud deployment model out there. It is also true that we’re still able to sell the licenses and you shouldn’t walk away from Q2 with any theory that we won’t hit out 2018 expectations because we will and that will flow through to the bottom line and give you the leverage you’re looking for. And we are obviously leaning into the cloud because that’s where the growth is and I think if we would have tell you today that we exceeded our expectations in the license line and missed in the cloud, you’d be very worried about our future. So, we have our hand on the that too, we’re going to manage both of those objectives to get you the core license revenue with the rich margin set and the leverage on the profit flow through and you’ll also see continued momentum in the cloud. I’ll let Luka give you some colour on the products but we’re really in great shape. You also have to keep in mind we had a big Sapphire. And in this big Sapphire well, we announced C/4HANA where you store the message to have demand and supply on an interactive integrated platform between C/4HANA and S/4HANA, some of the larger transactions were a little bit late. Because of that, especially in the United States which is not unusual, we’ve seen this before and at the same time their cloud performance in the United States is an example was extraordinary. So, all good, everything holding ever steady in the business model and our pipeline and forecast are right where we wanted them and especially in Q3 and Q4. Luka?

Yes, thanks a lot Bill and just to add on the margin side. Look, at the half year point, we are currently showing a 70 basis points increase at constant currencies. And that is actually for the half year what we wanted to reach and what we have reached. The composition between Q1 and Q2 was a little bit different. We had been facing our strongest and toughest compare in Q1 and health have grown very nicely there. That was the reason why in Q1 the margin was up quite above expectations that we had originally. And now basically, at the mid-year point we are at where we believed we would be at the software license, I’d given the top up comparison. And at the mix between Q1 and Q2, as shifts at the margin is slightly lower. Just to help you compare that on the revenue mix shift effect alone between our expectations Q1 versus Q2 and how we ended up, that’s a 40 basis points swing. And if you continue to include the Callidus cloud effect of 30 basis points, actually the margin progression is quite comparable between Q1 and Q2. And in the second half year, we definitely have visibility into our book of business and we have the easier comparison. So, you should not be worried at all, so far everything is going as predicted and we have every reason to believe that we will end strong, otherwise we would not have raised our guidance for the full year.

And Mohammed, just to finish on the question on products because I’m sure this is interesting to everybody. The top five cloud products driving the growth are C/4HANA and S/4HANA supply chain cloud, analytics cloud database. Obviously HANA has also now moved to the cloud and that’s an interesting cloud based model in the SAP cloud platform. This really forms the intelligent sweep in the cloud. And as it relates to the pay as you go, I was referring to the both of Fieldglass and Concur. This was now formed a spend management category by a lot. These are the market leading companies in the spend management category. So, therefore you’re seeing a very nice wedged chart of to the determined revenue that’s signed up for. And once it’s consumed, the revenue starts hitting the cash register. That business is looking real good.

Okay, thank you.

Let’s take the next question please?

We will take our next question from Walter Pritchard from Citi. Go ahead.

Thank you. Question for Luka on the 2020 ambition. You did raise the cloud but you also raised total revenue if I looked at on the constant currency basis. And I’m wondering if you’ll give us a little bit more detail in the what drove the raise in the total 2020 revenue in addition to cloud and then I had one follow up.

Yes. So, in terms of the total revenue ambition, it is obvious that we are running a portfolio of winners across all of our business models. The cloud business obviously is winning as you have seen but we have done the tough work to redirect our services business towards optimized setups for today’s digital reality. We have seen that in 10% service revenue growth as well as the materially expanded margin. Our utilization is running at a very high level. The order intake is very strong in services, so definitely that business is on a very positive path as well. And then in the core, in software and support in combination, we see actually that the resilience in particular in our support business is actually rather regaining strength and that is the testament to the strong collaborative work that has been happening all across TCO which was our field tracing organization together with our services organization to really make sure that we understand customer needs that we provide value as part of our service offering. So, we feel very strongly likewise about the resilience of our core business. So, if you have only winning businesses in your portfolio, then it’s rather simple and to have a positive view also in the total revenue side.

You got a follow-up, Walter?

Yes. And just if I, yes sort of rather and from all right Bill can take the phone. But on the HCM side, I know you made some leadership changes in that area in the last year. And I’d love to hear an update on progress there, growth rates success and if you give some matrix around the core but just general update on the HCM category?

Yes. Walter, so we’ve made the changes actually now I guess nine months to a year and what we’ve seen as amazing innovation in the product; what we’re doing with Google and with Apple and our customers are consuming the phase factors is making a significant difference. We’ve also build rates on numbers in the beginning how we’ve expanded the sales factors globally and we continue to see I think was 40% customer growth in such sales factors across the board. So, this is becoming one of the engines for SAP.

Great, thank you.

Okay, thank you. That’s it, next question please?

From Barclays, we have Jerry Flasz.

Hi, thanks for taking my questions. Just a couple of them for me. First of all on the cloud bookings. If you include a kind of pay as you go referencing kind of bookings you get which you’re not captured the amount in bookings. What growth would you have had in the kind of quarter? And then secondly, this going back on the licenses, I note that the last two quarters actually the volume growth has been maintained but we’ve seen a bit of a dip in the large deals, this combined with the comments you made on the U.S. slippage. You know, have these deals now being closed and then what was the reason for the slippage. And then finally on the margin, I think the second half or sorry the guidance applies that the second half should see a 40 basis points on the lining improvement in the margin for the second half. We expect this to be coming linear in the two quarters or should we see quite a strong Q4 ramp. Thank you.

Oh sorry, go ahead.

Oh no, I just want to thank you for the question because it really gives us a chance to talk about this. Again, C/4HANA was a major launch. That launch took place in Orlando in the United States. The attendees at Sapphire, about 80% from the United States. Many customers are now rationalizing how they think about this demand and supply chain real-time Company they want to run. And in a couple of cases where there were substantial large ones, they moved into the next quarter and yes they’re closed. And the important thing to put in front of you on this is I’m really happy because the deal volume outside the largest deals actually went up and the only place we saw any delta was in the large deals and we know exactly which ones they were. So, we have a very good license revenue business unlike anyone else in our industry. And in Q3 and Q4, you will see a levelling, it’s not going to be pushed to Q4, you’ll see Q3 deliver as expected and back on what I would say is the year-over-year growth track you’re referring to or you’re looking for. So, no worries there whatsoever.

Yes. And then let me compliment this statements with two additional questions that you had. First-of-all, on margin progression, no we don’t estimate the progression will be heavily or overly skew towards Q4. Why is that? Because last year we had already in Q4 as you might recall, a quite significant margin progression to almost flat margins. And that’s why we believe this will be more equally distributed. But of course our compare on the license side in Q4 is probably the easiest when you compare the different quarters and that might give us towards the end an opportunity to outperform if everything goes well. In terms of the cloud bookings, look I mean I think it’s prudent for us to only put out there as a new cloud bookings number as a hard number what is really committed and therefore it’s guaranteed for consumption. However, we see of course a pet on that the uncommitted pieces that we contract in terms of pay as you go revenues has actually a very good predictability to come in as well. And what I can give you as a directional figure here is that when you take a look at the performance of our new cloud bookings which was at 29% constant currency growth and you take a look at our business networks business and they a booking success including uncommitted booking. You would actually look at roughly 15% uplift to that based on the new cloud bookings performance. So, it is actually a very strong business component that over time will find its way into the P&L. there are different adoption patterns here obviously as well it would. But it gives you an idea how strong the underlying or the entry take up in our business network business was in Q2; it was truly a highlight of our overall business portfolio.

Yes. I mean, and just like one fun point of it all. If you just take something like I don’t know let’s go with Fieldglass, let’s have some fun, you’d be in triple digits. Alright, triple digit growth. So, just think about that concept as you take a tremendous asset, you think about total workforce management with full time and contracted or LABOR and you see that network growing in triple digits on the year-over-year basis. It’s like a big “Wow.” And you know when I think about the intelligent enterprise and I think about the CEO’s out there and the notion of how you put an intelligent suite together with C/4 S/4 a supply chain that deals with tariffs and other tax matters that are going on globally. I think total workforce management, total stand management, everything in an integrated solution, a suite tailored for an industry. I mean, to me this is a home run. This is where the market is, this is where we are and when we meet the market with the better idea, it always wins and growth follows. So, I think you should feel really good about the cloud, I don’t think you should be at all concerned with mix. And as Luka said back out the Callidus effect and the mix effect and you got your margin profile that you’re looking for, not to mention the double digit operating income expansion. So, the whole story is there.

Very clear, thank you.

Thank you. Let’s take the next question, please?

Our next question comes from Adam Wood from Morgan Stanley.

Hi, thanks very much for taking the question. If I can ask two as well. Maybe just first of all on the C/4 to take in a little bit further. When we look at the install base, could you give us any statistics around how loyal that base has been to you versus the main competitor? So, what I’m really trying to get at is this a replacement so that you’re going to have to make with the base or is it an upsell and where is this upsell. When you look at the portfolio today, how much bigger is that, how much more can you set into that base is a multiple versus how it made two or three years. Just to give us some feel for what the opportunity could be in a base of C/4 and how difficult it’s going to be to execute. And then, maybe coming back to S/4HANA, obviously very successful ramp-up with customers. When we speak of HANA is obviously any of the reimplementation is difficult and there’s been some debate around the go life’s versus sales. Could you might be give us a little bit of a feel for where you are with that today and what you’re doing to help automate that process and make it easier. And is there any risk of that becoming an impediment to further adoption that the reimplementation of the RP is a challenge. Thank you.

Let me go with the C/4HANA. Adam, great question, actually. I wouldn’t call it cross sell, up sell, I would call it new sale. We are changing the market with CRM. We are completely redefining, our customers all going to proceed what they want to do with the customers and how they want to link the supply chain to the customers. So, we see the opportunity is massive growth, massive addressable market and delighted with acquisition. The integration with Callidus is probably the fastest we’ve ever had in SAP. It will be on HANA when in the next couple of months we’ll have a complete suite in nine months and the pipeline is exceptionally strong. So, I would say coming out of Sapphire, we’re hitting on also lenders. Clearly our customers love the story and they love where we’re going and it’s going to be a significant opportunity for SAP. Yes, please?

And incidentally, just to put our money where our mouth is, triple digit growth in the back end of the year, big cry on market down.

So, on the question around the migration of our customers and to S/4 or perhaps just make a few comments on the program that we’re running and the opportunity that we see not just and for our customers but also very importantly for the SAP ecosystem. Many of our ecosystem partners have recognized this opportunity and are actually building significant practices in order to address it. We recognize that in SAP, there are a series of tools and techniques that we need to provide to our customers in order to support their journey. Many of our customers today have customizations in their current environment and we need to address those customizations. In order to do that, we have a three prong approach working all with our colleagues and development working with our colleagues in services and also of course with our ecosystem. We have a series of assessment tools that allow our customer to understand where they are today and the path for them specifically to move to S/4. Each customer will be given a clear migration path supported by a set of automation tools. For each customer, we will develop a very clear business type that justify the why for that customer in terms of the move. And as far as implementation is concerned, we are looking to manage the implementation costs along the concept of a model company where by industry we will implement on an industry-by-industry basis a template that reduces the cost and the time to move to S/4HANA.

Yes.

And maybe just to round this up and complemented with numbers, I mean we have made good progress in this respect.

Yes, in that.

We are close to 2000 life customers on S/4HANA by now already. And we have another close to 3000 ongoing implementation project. So, which means given that the implementation timeframe for S/4HANA is greatly reduced versus let’s say traditional ECC implementations of the past decade. We will soon have 5000 reference customers to speak for us.

And Adam, this is done maybe to add just the flavour of difference I mean between on premise and cloud. We saw especially in the last quarter an outstanding performance of the entire S/4 business. We have high triple digit growth in the cloud and the number of new names in the cloud in total was more than the number of new names over the entire fiscal year 2017. And of course in the cloud, when you talk to implementation time in go life’s, we speak in weeks, while you’re right, the methodology Adaire was explaining was fully focusing on our install base on premise business. But here, we have massively according to the methodology but as well as the tools we have provided to the service organization of SAP but as well to the partner.

Okay, thank you.

That’s very helpful, thank you.

One thing that’s really interesting. One thing, maybe a couple of things that are really interesting, you know the ecosystem is truly massive at SAP and with the cloud accelerating growth like this. We have a smart ecosystem, they know when to jump on-board. And for example, the intelligence in the application in the business process itself driving our intelligent enterprise strategy is something that has been broadly adopted by the partners. And in fact, if you listen to the IBM earnings, IBM said that they are seeing HANA and S/4HANA driving workloads and driving growth in their business. So, I think IBM since they just reported is a very good example for this phenomenon.

Thank you.

Let’s take the next question, please?

Alex Tout from Deutsche Bank has the next question.

Yes. Hi guys, thanks for taking the questions. Just a few quick follow-on. So, especially on maintenance 7% constant currency growth in the quarter very strong. Could you just give us a bit of colour on why that should have been and whether that normalizes somewhat in the second half of ’18? Secondly, I wonder on the cash flow side of things, whether you can quantify the impact from the IFRS 15 changes there. And then, just finally an update on the progress of moving off the dual running of infrastructure for the cloud business. I think you last said that was due to be completed by the end of the year. Just the question is whether that’s still your expectation, thank you.

Yes. Definitely, all good questions. So, first of all on the maintenance, the reasons are relatively simple. We have a very low churn, actually lower than what we have seen historically in the last 24 months and so there has been great work done by the field as well as our service organization in embracing a specific customer loyalty program which we are working really very strongly with customers where we have to signal and that we have to double down in terms of value creation in order to preserve maintenance. This has been extremely successful. At the same time, as I have said during my prepared remarks, there is also an extremely low level of sales allowances. So, we are hardly losing support revenues due to customer, the sections and at the same time I think we managed the process of extensions towards the cloud in a very professional way and those are all very value creative and are not really cannibalistic for our support revenues. And that growth drove us a strong growth. In terms of the time frame very quickly, on the move of the third party database in our cloud business; that’s on track. That will conclude by the end of the year. We are even now including within that scope Callidus as Rob has so and said and we are working as well with our priority to move them off during the similar timeframe. So, that is going very well and as of next year should give us then the substantial savings that we will get from the convergence on our own technology. Yes, in terms of the cash flow situation, I know that it looks at the phase quite negative with a 15% decline in half year one. There are various effects here. First of all, there is a timing change and a phasing change on the payment of share based compensation expenses. In the past, they were done in the latter half of the year, now with our new move program they are happening in the first half. And that’s alone an impact to the range of €180 million. Next to that, we had extraordinary tax payments. You see that a little bit also in the increasing effect of tax rate but clearly in the end of last year we had some IP migrations which gave us some very positive one-time benefits as you might recall. Now, of course, we have to pay the excess taxation for those migrations in the respective countries and that has resulted in a cash out. That was also in the low triple digit million euro range. You’re absolutely right, that we have of course with the capitalized sales commissions a major positively influencing P&L effect that has a non-cash item. We have this closed in our figures the amount that we have been saving on the expense site due to the capitalization of sales commissions. So, for the first half year, this was around about €80 million on top and that of course has an impact as well in terms of a non-cash flow but positive item for operating profit. So, that’s the main impact. There is an additional one as well from our restructuring program for last year which you might recall was geared towards our services business. We now have an additional cash flow impact from making insurance payments increased insurance payments to safeguard the time credits of our people that have taken advantage of the early retirement program last year and that was the cash item that became affective in 2018. Having said this, due to the timing change that I alluded to before, we believe that the progression in Q2 in the second half year should be more positive in a year-over-year comparison. So, also from a cash flow perspective, no reason to worry the second half will see an improvement.

Thank you.

Okay, thank you. Let’s move to the next question, please?

Our next question comes from Michael Briest from UBS. Please go ahead.

Thank you, good afternoon. Just going back to S/4, I think at the start of the year there was an ambition to double the level of migrations. I think in the full year last year was about a 25000 all in new end and migration customers. Do you think you’re still on track for that and to get 50% of the ERP customers on to S/4 by 2020? And then just secondly in terms of the 2020 guidance uplift, can you talk a bit about the mix of cloud in 2020. Now, is all of the uplift related to SaaS and PaaS and did it change your margin expectations. And more broadly, I mean it looks like you’ve raised your margin targets at constant currency in 2020 despite the higher cloud mix. And I’m just curious as to what’s giving you the confidence on that? Thank you.

Yes. Maybe Michael, I’ll start with the first part of the question related again to S/4 and the migration and the question is are we on track. We are absolutely on track. Luka or will share with you that we have past 1900 customers who are actually life. We are having 2900 who are in the process of going life and we reported at the beginning of the year that we target 3000 to be life end of the year. If you add the two numbers, we will end up close to 5000. And we know that if especially towards end of the year, that there is a dedicated season when customers have a high peak of adoption and using the window of holiday breaks to go life. So, we are extremely confident that we are not just on track, we will outperform this. And the rationale behind it is that we have moved the conversation from do I move towards S/4 how fast do I move. And that goes in line with consolidation of the systems but as well massive benefits in terms of reducing cost of operations at our customers and a massive value they get out of the business we engineer in. And there is I would say not a single customer meeting where this is not one of the top three agenda items day-in and day-out.

And maybe to complement this, first with the question on the cloud mix for 2020. As you know when we originally stated our 2020 ambition, we had kind of an implied expectation that our infrastructure-as-a-service business would be somewhere around 15% 16% and the rest would be basically shared between business networks and our SaaS PaaS business. Today we see that growth in terms of in particular our SaaS PaaS business is starting to outperform the growth of the smaller infrastructure-as-a-service business again which is good from a margin perspective for the cloud. And so, we believe that in 2020, the share of infrastructure-as-a-service will actually be rather around to 10% or 11% mark, then 15% or 16%. And indeed SaaS PaaS will basically fill-up for the difference which is positive for margin. That’s one of the reasons why we are continue to be very confident around the operating income ambition which we have as you said retained in unchanged format. But of course we are also closer now to that target. We have seen the operational progress that we have made in 2018. We are seeing that the turnaround is starting to happen and that the organization is following through with other required focus on the growth drivers and the emphasizing of legacy areas that are not able to grow anymore. The services business is another strong component because it has progressed very well not only from a top line perspective but has become actually a very positive contributor through steady margin increases and all of that is giving us the confidence to uphold these figures even despite the very severe currency headwind that you have rightfully noted.

Michael, one point that should be added to all of this is the ecosystem. If you think about the growth in S/4HANA to LOY, Accenture, Capgemini, IBM. IBM talked about the mass adoption of HANA driving their workloads. They’re adopting HANA in mass to run S/4HANA on. So, the partners are going where the money is and that’s S/4HANA is the in memory core ERP in the 21st century. And now, the next big wave will be the C/4HANA combination with S/4HANA and I’m excited because when the partners are as motivated as they are right now, that generally leads to upside surprises at SAP.

Okay, thank you. Let’s move to the next question, please?

Our next question comes from Kirk Materne from Evercore.

Yes. Thanks, very much. Just two questions from me. I guess, first for Luka, just to put a fine point on this. If we looked at order entry for the cloud business and the aggregate and sort of on an organic basis as Callidus. I assume that sounds like it was a very good quarter. I just want to make sure that’s the case because I think some people might take some of the Callidus revenue back it out from bookings and make the case that sort of bookings that accelerate the cloud. And I think you guys are making an opposite front. And then secondly, just one question I make for Bernd on Block Chain. I know you guys are running a lot of proof-of-concepts around Block Chain for certain industry. I was wondering if you just sort of update us on how that’s going and maybe the opportunity to monetize that as we start looking out maybe 12 to 18 months. Thanks.

Yes. Thanks very much, Kirk. Very good question on the order entry and let’s set the right record straight here. The contribution of Callidus to our bookings growth is smaller than the contribution on the revenue line. So, our growth on the booking side at constant currency backing out Callidus would have been in the mid-20’s 25% basically. And when you then put on top the much higher performance. When you include the uncommitted to more pay as you go bookings which as we know are going to transfer in the revenues. That’s a very strong performance. That is giving us all the fuel that we need in order to further accelerate on the cloud line.

And then, maybe a note on Block Chain. I think the hype and the excitement around Block Chain is accelerating every day. Especially, in the last couple of weeks, we have signed many co-innovation agreements around the Block Chain technology where their companies intent to partner with us where we contribute our technology experience, they contribute that to main expertise. We even have traded a consortium at Sapphire in Orlando. We were expecting that launch date of the Block Chain consortium that roughly 20 customer will join. I’m proud to report that on day one we had more than 50 customers joining the Block Chain consortium and in the meantime we have passed the threshold of 70. In terms of where are we, we are in the process of discussing aligning the value of the technology and expose that in the application. So, I expect especially in the next couple of weeks to get real proof points and then I’m 100% sure that the commercial aspects and the impact on the P&L. We’ll follow why this is too early to report this now at the end of Q2.

And Kirk, you know how it’s works, right? It’s all about the industry specific nature of these solutions. So, for example, a couple of cases I’ve personally been involved and one is pharma. So, if you think about track and trace and removing counterfeit from the pharma industry and the coal chain where you can track the temperature of these very sensitive pharma products that are really about keeping people safe and healthy; pretty amazing. On then food, there isn’t a single food company out there that isn’t talking about form the table and quality safety and then also really keeping track of the suppliers to make sure they’re authenticated. We had one company in particular was in the coffee industry, they had literally 1000s and 1000s of suppliers that work on coffee beans. But they have a great brand and they serve a great product and they want to make sure that the quality is safety all the way from the farm into the cup is rock solid. So, these are applications that we’re actually working on right now that have tremendous implications or growth in industries. This could be a very nice business.

Okay, thank you. The next question, please?

Our next question comes from Philipp Winslow from Wells Fargo. Please go ahead.

Yes. Thanks guys for taking my question. First one for Bill in the sales team that’s on the colour here. One of the questions I get a lot from investors is about the manufacturing vertical because obviously SAP accounts they are the largest manufacturing industry. They process companies in the world as customers. And you’ve got kind of two sort of near term opposing forces, you get the need for digital transformation and you obviously have sort of the noise of the political side where you trade or et cetera. When you target the customers, you look at the business this quarter in the pipeline for the second half. Have you seen these sort of impact of the noise or is the digital transformation just demand the offset. That’s in other words kind of what you’re looking for as or when that pipeline coming on that business and then just one quick follow-up.

Thank you very much, Phil. First of all as you know, we took a digital supply chain and manufacturing industry business unit approach to this very topic. And let me begin with in the SAP digital board room, we now have customers that are working with us to augment their supply chains and their manufacturing processes, in real-time on S/4HANA to accommodate the various trade matters that are well publicized in the Wall Street Journal. So, as they think about the best way to manufacture, the best way to work with their supply chain to optimise shareholder value, they’re working with SAP in the digital boardroom. So, this too is lending itself to that demand and supply chain in real-time that I’ve been talking about and it manifests itself in the digital boardroom. So, we have the industry business units set up globally with an excellent leader; one of our top leaders in the company. It’s growing really fast and again I think that this is a major topic, keep in mind there is no company as more global in the business software industry or more industry diverse which is lending itself to these end-to-end demand in supply chain conversation. So, it’s happening because that’s where our customers want us to go. Integrate, give me a solution, give me the agility to change on the fly so I can make more money.

And Phil, you had a certain follow-up?

Got it. Yes, so just a follow-up, you know obviously and Billy just mentioned the IBM their earnings focusing on how that were, thanks we’d heard those but HANA was the fastest growing workload on Google’s GCP platform. I’m sure we’ll probably hear about that at the next conference next week. When you think about all these partnerships, you have particularly sort of in the AI platform your world. How do you think about SAP monetising this, is it more that how you’re going to make your applications stick here and then therefore the renewal rates stay the same or maybe improve or is this something through your Leonardo, and maybe is the question for Bernd where we have new applications and new opportunities is not just a not just obviously called the maintenance renewal strategy?

Well, maybe I’ll start it off Phil and then by all means I’ll hand it over to Bernd. So, first of all, you think about end-to-end planning in a company. We have design partnerships. For example, a one that wasn’t announced this quarter was with Amphis. We announced that at Sapphire. Think about a 3D simulation in the design process. When you think about the impact to that with manufacturing in the digital twin in IoT and real-time supply chain on HANA. You go right to SAP Leonardo and you focus on deep machine learning and embedding that intelligence into the application itself. So, I think these partnerships help us grow in terms of making our core even more relevant and we get feet on the street that we’re not paying for. But in some cases there’s also license sharing opportunities where we can make money on what they sell not just what we sell.

And Phil, maybe to complement on your question on Leonardo. I think we have great traction of our cloud platform. And via the cloud platform we expose all our technology services, we expose our Leonardo services. And the unique offering which have said, of course this platform with the Leonardo technologies runs in our datacentre. But up to my knowledge, we are the only one who is providing this platform as well as a service on top of the known hyper scalers which is Microsoft, Google and Amazon. And that creates a lot of traction. And your specific question of cost, HANA as a service is a key element of that but what Bill said before, we have expanded HANA through the HANA data management suite which allows companies, which allows partners to build and to innovate with a complete new set of application. In many cases, this is their domain expertise but as well here not just a support of the hyper scale up as well, to have an offering for data management which consist of the most modern most sophisticated platform HANA enhanced with Data Lake is something I have not seen in the industries and if you combine this with the hyperscaler capabilities, this is a unique offering in this grading traction with our service but especially as well as with the partner organization. And I would be glad to hear it at any technology conference, not just at Google next week.

Yes. So, think about it this way so, as Bernd said you have a platform, right, with the data hub, now you have the demand and the supply all on the same platform. So, it’s a data gain and obviously that leads companies to the conclusion that they can create net new business models on the fly and basically go to market in new ways. And when you are with the partner and you come up with a go-to market story, it basically delivers about a 25% pricing productivity gain for SAP. So, you see good partnership and we’re doing something special with the partner as generally a 25% uplift on the pricing based on value.

Okay, thank you. Just time for two more questions.

From Merrill Lynch, we will take our next question from John King.

Yes. Thank you very much for taking the questions. I’ve got two as well. So, probably both what Luka was saying, so firstly on the margin front and the 2020 guidance looks for somewhere in the region of a 100 basis points maybe 90 basis points of that left relative to I think what you’re guiding to for this year. Most of that should come I guess from the cloud gross margin and over and above that I think you’re driving some efficiency in sales and marketing organization in part of the back office. So, I guess what are the negatives that may offset that, are you expecting to have some kind of rise in depreciation or something else to is the balancing item. And then, I guess another long-time picture would be you’ve obviously seen as the past sustainably the licenses and relative to cloud revenue. When do you think we get to that point where cloud surpasses maintenance soon and support revenues? Thank you.

Yes. It’s a very good question on the second one, I would recommend to hang in until we have our Capital Markets Day 2019. Because there we want to lay out our vision for the SAP in the next decade beyond 2020 and then you’ll get I think nice and pleasing answer also to this question. So, that’s kind of a commercials for next year’s Capital Market’s Day. In terms of the margin growth projection, for that going into 2020’s and the downsides. Well, the downside and the headwind is very obvious. It’s the effect that as of next year we will begin to amortize the sales commission that we have capitalized in the beginning of this year. So, this means that IFRS 15 which for this year was a tailwind for us. We’ll start to turn into a headwind and that headwind will get larger somewhere in small increments year-after-year. That means that our expectation is that the underlying organic margin progression will actually increase year-after-year to offset that and continue to deliver the concise margin expansion that I’ve been talking about. And where is this coming from, you cited all of the right levers. So, first of all they jump in gross margin efficiency that we expect from our cloud business once we have the platform convergence and the third party database programs completed. And secondly, also the ongoing efficiency increase, it’s not only actually and say the marketing we are also looking for continued efficiency gains in general and admin functions we start to implement our own AI solutions in finance for example. So, I think there is a lot that we can do to automate things even further without adding incremental capacity from headcount perspective in those functions. And that will ultimately in the mix get us towards the targets that we have set out.

Okay, thank you. Now, let’s take the final question of today’s call.

The final question comes from Ross MacMillan from RBC Capital Market.

Thanks so much and thanks for squeezing me in. maybe just two questions from me, just on cloud. As you talk about the pay as you go mix moving higher, have you made specific changes around invoicing term policy, are you agnostic whether customers pay monthly, quarterly, annual. And then, maybe you could also talk about what’s changed to other products in the cloud portfolio that you’re not agnostic on invoicing terms relative to maybe how you would have asked sales people to close this deals last year? Thanks.

Yes Ross, I don’t want to make this too complicated, okay? The licensing model for SAP in the cloud has not changed. We have certain attributes within the business network itself. Sometimes you make money when suppliers activate in a network. You know, recognize that when you do the sales contract. Sometimes, we have business models like Fieldglass where we recognize the revenue upon consumption. So, for example, if you’re 200% of your Fieldglass plan in a given quarter, you don’t recognize that in that quarter for the revenue that the customer signed up on. You’ll recognize that in the future quarters when they go live with those licenses. So, that’s primarily Fieldglass a business model and for the others there are attributes around the network where we can make money beyond just a rental contract for the software in a cloud. We haven’t changed the business model; there’s no big legal review necessary; there’s no contract review necessary; it’s just that simple. What we’ve amazed by is the genius behind the business network move that we made in our M&A strategy when we set out to create this network in 2010 that is becoming even more widely adopted than we thought. And then when we put this Fieldglass as an example in the SAP channel and the reason why our employee central is growing so much faster than the competition is because the customer has recognized finally that the fastest growing workforce in the world is temporary workers not your full-time equivalence. So, they’re signing for the SaaS contract and employee central with success factors and the signing up of Fieldglass in the network and we don’t recognize the network or our revenue that we sign at the point-of-sale we recognize that when it’s actually consumed by the customer. So, you have this sign on wedge chart in the background in the cloud that is what I would call a very nice insurance policy for all of you just knowing that SAP has things going on in the cloud that you’re not necessarily seeing in the current quarter. That’s all you need to know everything is really good. And I do want to make a point here, especially since Stefan said it’s the last question and I’m very honoured Rose said it goes to you. I want you guys to think about this. We have an if you look at the full-year scenario with SAP, you know okay, we are a US$30 billion software company. We have a cloud that’s beating expectations by 5%, growing at 40%. Be clear, look at what you would commonly call the best of breed cloud companies out there. Big question, are we growing faster than them or slower than them? Answer; we are growing faster than them. Let’s look at the core business; software and software related services which is their license and support model that you watched for 30 years. Are we growing fast in the competition or slower than them? We’re the only one growing in double digits. So, we’re growing faster than them. Operating income? We’re the only one growing in double digits on a year-over-year basis as we have transformed the business model to the cloud which is a rateably recognized revenue model over time. This quarter, some people got a little bit worked up about the margin inflection underneath the operating income and wanted a little bit more. We said two things. 1) There is a Callidus acquisition in fact that leaned on it a little bit. 2) The business mix was a little more favoured towards the cloud because we had a 5% peak. If you back out that, you got your one point improvement on the margin on a year-over-year basis not to mention double digit on the operating income. What is it about this story you don’t like? So, this is a global juggernaut, a growth story on the loose and we can’t wait to show you quarter-in and quarter-out C/4HANA plus S/4HANA and the motivated workforce of 94000 women and men that want to change the world. Thank you.

Thank you very much, Will. This concludes our Q2 earnings call for today. Thank you all for joining and good bye.

That concludes today’s conference. Thank you for your participation and have a good day.