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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, will both make opening remarks on the call today. Also joining us for Q&A are 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. And 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, our Investor Relations website, you can find our quarterly statement, our half year report and the financial summary slides 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 currencies. The non-IFRS financial measures we provide should not be considered as a substitute for or superior to the measure 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'll be brief in my remarks, so we can get to your questions.We're 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/4HANA. 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's a 5% beat. And one sign of our thriving cloud business, cloud bookings grew 29%. And 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 for talent, SAP SuccessFactors, Employee Central, new customers increased 42% year-on-year. I'm sure that's quite concerning to our competitors. Driven by fast adoption of SAP S/4HANA, cloud and software revenue grew by a stellar 10%. Now keep in mind, the software only, the software license on a stand-alone 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. And just to be clear, if you take into account the Callidus effect and the cloud mix with the cloud beat, you'd be at a 1% -- 1 point margin improvement on a year-over-year basis. So feel really good about the margins; we're on a roll. Some of the most prestigious brands in the world shows SAP solutions in Q2, including Chevron, Thomson Reuters, McDonald's China, Whirlpool and the U.S. Navy to name a few. NL is now live and they are the biggest SAP S/4HANA installation in the world. As you'll hear from Luka in a few moments, Q2 showed decisively that SAP is a balanced, sustainable, profitable growth company. There's one topic I will cover in some depth before I hand it over to Luka. One month ago, at SAPPHIRE, we launched SAP C/4HANA 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 the 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 businesses revert to the siloed practices of failed enterprises. So it's no coincidence that many were actually disrupted by innovative competitors. Those disruptors 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/4HANA to handle the customer data, marketing, commerce, sales and service as an integrated modern front office. SAP SuccessFactors bringing the total workforce together in service to the customer relationship. SAP S/4HANA cloud ERP built with industry next practices as the ultimate fulfillment engine. SAP Digital Supply Chain to innovate the manufacturing process with groundbreaking new technologies, nevermore 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's only one company in the industry that can help businesses revolutionize how they serve their customers. The C/4HANA 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/4HANA is already growing at steep triple digits. Our organic growth is more than 5x 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/4HANA momentum on a quarterly basis, so you have visibility. I expect that you will see similarly strong growth in the quarters to come. That's right, triple digit. Customer to core, front office to fulfillment, C/4HANA to S/4HANA, 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 every day, 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's 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 continues. Our business is getting more and more recurring in nature, with 2/3 now coming from more predictable revenue streams in the quarter. We continue to grow profitably, even with severe 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 the 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/4HANA Cloud and C/4HANA will 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 midterm aspirations. The continuous momentum of S/4HANA, HANA full use, 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 U.K. being highlights. In addition, we had strong double-digit software revenue growth in the U.K., 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 on to the IFRS 15 impact, which as you know, we adopted on January 1 this year. Our operating profit in the quarter was positively impacted by EUR 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 continued 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 points 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, PaaS 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 and is now already at 77.4%, an increase of close to 50 basis points year-over-year. The private cloud margin likewise accelerated upward by 5 percentage points 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. The 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 while continuing to invest in our people and our portfolio, adding approximately 6,700 employees year-over-year. As indicated in Q1, our organic hiring in the quarter slowed to just 700 additional hires. 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 percentage points to 30%. This came primarily from FX 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 EUR 0.60 for the quarter, non-IFRS EPS increased by 5% to EUR 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 offset SAP's positive business development and lower DSOs, which went down year-over-year by 4 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 Bill alluded to already, 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 on 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 the 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 nonfinancial metrics; they're equally important to us in steering a sustainable business. This quarter, we again increased the number of Women in Management to 25.8%, as our efforts to promote diversity and equality continue. Our integrated report was ranked the leader in the nonfinancials ranking of the DAX 30 companies by reporting expert. SAP was also featured among the top 25 of the 2,400 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 and margins. We are taking market share, and we are undisputably growing faster in the cloud 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.
[Operator Instructions] We will take our first question from Mohammed Moawalla from Goldman Sachs.
I have 2 questions. The first one is just on the license -- software license progression. We've now seen sort of 3 consecutive quarters of declines, and I appreciate there is a sort of tougher comparison versus a year ago. But are you seeing a significant change in the way that sort of customers are now deploying things like S/4HANA more sort of in the -- sort of hybrid model and exploring alternative deployment models? And is this likely to mean that you are more likely to be kind of in the kind of lower band of that 0 to minus 5 license growth? And related to that, given this is obviously a higher-margin business, and I know over time this 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 levers that you see to kind of continue this momentum? Specifically you called out the kind of pay-as-you-go side. Could you give us a bit more color and what gives you the visibility there? And then lastly, on sort of C/4HANA, may be some color and metrics around the pipeline and where you see the kind of the big opportunities? Are they inside or outside the installed base?
Mohammed, thank you very much for your question. First of all, on license revenue, it is true that it's 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 our 2018 expectations, because we will, and that will flow through to the bottom line and give you the leverage you're looking for. We are obviously leaning into the cloud because that's where the growth is. And I think, if we were to 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 till. 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 color on the products, but we're really in great shape. You also have to keep in mind that we had a big SAPPHIRE, and in this big SAPPHIRE, where we announced C/4HANA where you saw 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, as an example, was extraordinary. So all good, everything holding ever steady in the business model, and our pipeline and forecasts are right where we wanted them, especially in Q3 and Q4. Luka?
Thanks a lot, Bill. And just to add on the margin side. Look, at the half year point, we're 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 had 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 side, given the tougher comparisons. And as the mix between Q1 and Q2 has shifted, the margin is slightly lower. Just to help you compare that on a revenue mix-shift effect alone between our expectations Q1 versus Q2 and how we ended up, that's a 40 basis point swing. And if you continue to include the CallidusCloud 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 5 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 and the SAP Cloud Platform. This really forms the intelligent suite in the cloud. And as it relates to the pay-as-you-go, I was referring to Ariba, Fieldglass and Concur. This has 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 wedge chart of to-be-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.
We'll take our next question from Walter Pritchard from Citi.
Question for Luka on the 2020 ambition. You did raise the cloud, but you also raised total revenue, if I look at it on a constant-currency basis. And I'm wondering if you'd give us a little bit more detail into 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. You 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 and 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 a testament to the strong collaborative work that has been happening all across GCO, which is 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 offerings. 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 to have a positive view also on the total revenue side.
I think you had a follow-up, Walter?
Great and then just if -- yes, sure if Rob Enslin's on or maybe Bill can take this one. But on the HCM side, I know you've made some leadership changes in that area in the last year. Maybe would love to hear an update on progress there, growth rates, success and you gave some metrics around the core, but just general update on the HCM category?
Yes, Walter, so we have made the changes actually now, I guess, 9 months to a year. And what we've seen is an amazing innovation in the product, what we are doing with Google and with Apple, and how customers are consuming. SuccessFactors is making a significant difference. We also -- Bill gave some numbers in the beginning how we've expanded SuccessFactors globally, and we continued to see, I think, it was 40% customer growth in SuccessFactors across the board. So this is becoming one of the engines for SAP.
From Barclays, we have Gerardus Vos.
Just a couple, if I may. Just first of all on the cloud bookings, if you include the kind of pay-as-you-go reference kind of bookings, you get what you have not captured at the moment in bookings, what growth would you have had in the kind of quarter? And then, secondly, just going back on the licenses. I noted that the last 2 quarters actually, the volume growth has been maintained, but we've seen bit of a dip in the large deals. This, combined with the comments you made on the U.S. slippage, have these deals now been 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 [ line ] of the second half should see a 40 basis points on the [ lining ] improvement in the margin for the second half. Do you expect this to becoming linear in the 2 quarters? Or should we see quite a strong Q4 ramp?
Well, I will refer -- go ahead.
Well, 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 where you saw any delta was in the large deals, and we know exactly which ones they were. So we have a very, very good license revenue business unlike anyone else in our industry. And in Q3 and Q4, you will see a leveling, 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 complement Bill's statements with the 2 additional questions that you had. First of all, on margin progression, no, we don't estimate that the progression will be heavily or overly skewed 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. 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 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 is guaranteed for consumption. However, we see of course, the pattern that the uncommitted pieces that we contract in terms of pay-as-you-go revenues have 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 their bookings success, including uncommitted bookings, you would actually look at a 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 at work, but it gives you an idea how strong the underlying order entry takeup in our Business Network business was in Q2. It was truly a highlight of our overall business portfolio.
Yes. I mean, 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, all right, 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 for labor, and you see that network growing in triple digits on a year-over-year basis. It's like a big wow. And when I think about the intelligent enterprise and I think about the CEOs 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 spend 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've got your margin profile that you're looking for, not to mention a double-digit operating income expansion. So the whole story's there.
Our next question comes from Adam Wood from Morgan Stanley.
If I could ask two as well. Maybe just first of all on the C/4 to dig in a little bit further. When we look at the installed 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 sell that you're going to have to make with the base or is it an upsell? And where it is upsell, when you look at the portfolio today, how much bigger is it? How much more can you sell into that base as a multiple versus, I don't know, 2 or 3 years ago? Just to give us some feel for what the opportunity could be on the base of C4 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 to partners, obviously, an ERP reimplementation is difficult and there has been some debate around the go-lives versus sales. Could you maybe give us a little bit of a feel for where you are with that today and what you are going to help automate that process and make it easier? And is there any risk of that becoming an impediment to further adoption, that a reimplementation of ERP is a challenge?
So let me go with the C/4HANA. Adam, great question, actually. I wouldn't call it cross-sell, upsell. I would call it new sell. We are changing the market with CRM. We are completely redefining how our customers are going to proceed, what they want to do with their customers and how they want to link their supply chains to their customers. So we see the opportunity as massive growth, massive addressable markets, are delighted with acquisitions. The integration with Callidus is one of the fastest we've ever had in [ NSAP ]. It'll be on HANA within the next couple of months. We'll have a complete suite in 9 months, and the pipeline is exceptionally strong. So I would say, coming out of SAPPHIRE, we're hitting on all cylinders. Clearly, our customers love the story, and they love where we're going. And it's going to be a significant opportunity for SAP.
[indiscernible]
Yes, please.
And incidentally just to put our money where our mouth is, triple-digit growth in the back end of the year. Take a crayon, mark it down.
So on the question around the migration of our customers to S/4, I'll perhaps just make a few comments on the program that we're running and the opportunity that we see, not just for our customers, but also very importantly for the SOP -- 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 3-prong approach, working all with our colleagues in development, working with our colleagues in services and also, of course, with our ecosystem. We have a series of assessment tools that will allow a 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 case that justifies 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, whereby industry, we will implement on a industry-by-industry basis, a template that reduces the cost and the time to move to S/4HANA.
And maybe just to round this up and complement it with numbers. I mean, we have made good progress in this respect. We have close to 2,000 live customers on S/4HANA by now already. And we have another close to 3,000 ongoing implementation project. So which means, given that the implementation time frame for S/4HANA is greatly reduced versus, let's say, traditional ECC implementations of the past decade, we will soon have 5,000 referenced customers to speak for us.
And Adam, this is Bernd. Maybe to add just a flavor of different shading 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 and go-lives, we speak in weeks, while, you are right, the methodology Adaire was explaining was fully focusing on our installed base on-premise business. But here, we have massively reduced according to the methodology, but as well as the tools we have provided to the service organization of SAP, but as well to the partners.
One thing that's really interesting. One thing -- and maybe a couple of things are really interesting. 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.
Alex Tout from Deutsche Bank has our next question.
Just a few quick-fire ones. Firstly, on maintenance. 7% constant currency growth in the quarter, very strong. Could you just give us a bit of color 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, that was due to be completed by the end of the year. Just the question is whether that's still your expectation?
Yes, definitely all good questions. So first of all, on the maintenance, the reasons are relatively simple. We have a very, 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 with which we are working really very strongly with customers, where we have the signal 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 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 defections, and at the same time, I think we managed the process of extensions towards the cloud in a very professional way. Those are all very value-creative and are not really cannibalistic for our support revenues. And that growth drove the strong growth. In terms of the time frame, just very quickly on the move off of 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 said, and we are working as well with a high priority to move them off during a similar time frame. So that is going very well. And as of next year, should give us then the substantial savings that we will get from the conversions on our own technology. Yes, in terms of the cash flow situation, I know that it looks at the face quite negative with a 15% decline in half year 1. 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 later half of the year. Now with our new move program, they are happening in the first half, and that's alone a -- an impact to the range of EUR 180 million. Next to that, we had extraordinary tax payments. You see that a little bit also in the increasing effective tax rate. But clearly, at the end of last year, we had some IP migrations, which gave us some very positive onetime benefits as you might recall. Now of course, we have to pay the extra taxation for those migrations in their respective countries, and that has resulted in a cash out that was also in a 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 effects, that is a noncash item. We have disclosed in our figures the amount that we have been saving on the expense side due to the capitalization of sales commissions. So for the first half year, this was round about EUR 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 a cash item that became effective 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. In the second half, we'll see an improvement.
Our next question comes from Michael Briest from UBS.
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, it was about 2,500 all-in [ event ] 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 does it change your margin expectations? More broadly, I mean, it looks like you've raised your margin targets at constant currency in 2020 despite a higher cloud mix. I'm just curious as to what's giving you the confidence on that?
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 already shared with you that we have passed 1,900 customers who are actually live. We are having 2,900 who are in the process of going live, and we reported at the beginning of the year that we target 3,000 to be live end of the year. If you add the 2 numbers, we will end up close to 5,000. And we know that 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 break to go live. 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 process reengineering. And there is, I would say, not a single customer meeting where this is not one of the top 3 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 at around 10% or 11% mark than 15% or 16%. And indeed SaaS, PaaS will basically fill up for the difference which is positive for margins. 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 the required focus on the growth drivers and deemphasizing 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, very severe currency headwinds that you have rightfully noted.
Michael, one point that should be added to all of this and it is the ecosystem. If you think about the growth in S/4HANA, Deloitte, 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 it. So the partners are going where the money is and that S/4HANA is the in-memory core ERP of 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.
Our next question comes from Kirk Materne from Evercore.
Just two questions for me. I guess, first for Luka. Just to put a fine point on this. If we looked at order entry for the cloud business in aggregate and sort of on an organic basis, ex Callidus, I assume it sounds like it was a very good quarter. I just wanted 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 decelerated in cloud. And I think you guys are making an opposite point on that front. And then secondly, just on -- the question may be for Bernd on blockchain. I know you guys are running a lot of proof-of-concepts around blockchain for certain industries. I was wondering if you can 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 very much, Kirk. Very good question on order entry, and let's set the 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-20s, 25% basically. And when you then put on top the much higher performance, when you include the uncommitted pay-as-you-go bookings, which as we know, are going to transfer into 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 blockchain. I think the hype and the excitement around blockchain is accelerating every day. Especially in the last couple of weeks, we have signed many co-innovation agreements around the blockchain technology where companies intend to partner with us, where we contribute our technology experience, they contribute their domain expertise. We even have created a consortium at SAPPHIRE in Orlando. We were expecting that launch date of a blockchain consortium that roughly 20 customer will join. I'm proud to report that on day 1, we had more than 50 customers joining the blockchain 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 aspect and the impact on the P&L will follow while this is too early to report this now at the end of Q2.
And Kirk, you know how it 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 in, one is pharma. So if you think about track and trace and removing counterfeit from the pharma industry and the cold chain where you can track the temperature of these very sensitive pharma products that are really all about keeping people safe and healthy; pretty amazing. And then food, there isn't a single food company out there that isn't talking about farm-to-table and quality safety, and then also really keeping track of their suppliers to make sure they are authenticated. We had one company, in particular, was in the coffee industry. They have literally thousands and thousands 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 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 for growth in industry. This could be a very nice business.
Our next question comes from Philip Winslow from Wells Fargo.
First one for Bill, and the sales team that's on the call here. One of the questions I get a lot from investors is about the manufacturing vertical because obviously SAP accounts -- you have the largest manufacturing industry or process companies in the world as customers. And you've got the kind of 2 sort of near term opposing forces. You've got the need for digital transformation, and then you obviously have sort of the noise of the political side with trade wars, et cetera. When you're talking to customers and you look at this quarter and the pipeline for the second half, have you seen any sort of impact of the noise? Or is the digital transformation demand offset that? So in other words, kind of what are you looking in for sort of in that pipeline coming out of that business? And then just one quick follow-up.
Thank you very much, Bill. 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 Boardroom, 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 optimize 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 have 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's no company that is more global in the business software industry or more industry-diverse, which is lending itself to these end-to-end demand and supply chain conversations. 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 follow-up?
Got it. Yes, and just a follow-up. Obviously, Bill, you just mentioned IBM and their earnings, focusing on HANA and one of the things we heard was that 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 world, how do you think about SAP monetizing this? Is it more that, hey, you're going to make your application stickier and then therefore, the renewal rates stay the same or maybe improve? Or is this something through Leonardo, and maybe it's a question for Bernd, where we have new applications and new opportunities, it's just not a sort of, call it, maintenance renewal strategy?
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, one that was then announced this quarter was with ANSYS. We announced that at SAPPHIRE. Think about a 3D simulation in the design process. When you think about the impact of that with manufacturing and the digital twin in IoT and real-time supply chain on HANA, and then 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 we have that of course, this platform, with Leonardo technologies, runs in our data centers. 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 hyperscalers 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 to 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 as a part of the hyperscalers as well to have an offering for data management, which consist of the most modern, most sophisticated platform HANA enhanced, [ which stayed alike ], is something I have not seen in the industry. And if you combine this with hyperscaler capabilities, this is a unique offering and is creating traction with our service, but especially as well 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, Phil. 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 game. 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're with a 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 a good partnership, and we're doing something special with a partner, it's generally a 25% uplift on the pricing based on value.
Okay. Thank you. We have time for 2 more questions.
From Merrill Lynch, we will take our next question from John King.
I've got two as well. So probably both for Luka I think. So firstly, on the margin front. The 2020 guidance looks for somewhere in the region of 100 basis points, maybe 90 basis points of uplift relative to, I think, what you are 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 the sales and marketing organization and parts 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 that is the balancing item? And then, I guess, another long-term picture would be, you've obviously announced to pass sustainably the licenses relative to cloud revenue. When do you think we get to that point where cloud surpasses maintenance and support revenues?
Yes. It's a very good question. On the second one, I would recommend to hang in until we have our Capital Markets Day in 2019, because there we want to lay out our vision for the SAP in the next decade, beyond 2020. And then you'll get a, I think, nice and pleasing answer also to this question, so that's kind of a commercial for next year's Capital Markets Day. In terms of the margin growth projection going into 2020 and the downside. Well, the downside and the headwind is very obvious. It's the fact that as of next year, we will begin to amortize the sales commission that we have capitalized at the beginning of this year. So that means that IFRS 15, which for this year was a tailwind for us, will start to turn into a headwind and that headwind will get larger 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 consistent margin expansion that I have been talking about. And where is this coming from? You cited all of the right levers. So first of all, the jump in gross margin efficiency that we expect from our cloud business once we have the platform convergence and third-party database programs completed. And secondly, also, the ongoing efficiency increases, not only actually in sales and 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.
Now let's take the final question of today's call.
The final question comes from Ross MacMillan from RBC Capital Markets.
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? So are there products in the cloud portfolio that you're now agnostic on invoicing terms relative to maybe how you would have asked sales people to close those deals last year?
Yes, Ross, I don't want to make this too complicated, okay. The licensing model for SAP and 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 don't recognize that when you do the SaaS contract. Sometimes, we have business models like Fieldglass, where we recognize the revenue upon consumption. So for example, if you had 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 as a business model. And for the others, there are attributes around the network where we can make money beyond just the rental contract for the software in the cloud. We haven't changed the business model. There is no big legal review necessary. There is no contract review necessary. It's just that simple. What we've been 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 has grown 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 equivalents. So they're signing up for the SaaS contract in Employee Central with SuccessFactors and they're signing up for Fieldglass in the network, and we don't recognize the network -- 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 silent 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 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 honored, Ross, that it goes to you. I want you guys to think about this. We have a -- if you look at the full year scenario at SAP, okay, we have a USD 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 that license and support model that you watched for 30 years. Are we growing faster than 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 ratably 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 2 things. One, there is a Callidus acquisition effect that leaned on it a little bit. And two, the business mix was a little more favored towards the cloud because we had a 5% beat. If you back out that, you got your 1-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, okay, 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 a motivated workforce of 94,000 women and men that want to change the world. Thank you.
Thank you very much, Bill. This concludes our Q2 earnings call for today. Thank you all for joining, and goodbye.
That will conclude today's conference. Thank you for your participation, and have a good day.