SAP - Earnings Call - Q2 2011

Transcript

Speaker 4

Welcome to the SAP Q2 earnings financial analyst conference call. Please note that for the duration of the presentation, all participants will be in listen-only mode, and the conference is being recorded. After the presentation, there will be an opportunity to ask questions. Should you need assistance during the conference call, please signal an operator by pressing the star and zero on your telephone. At this time, I would like to turn the conference over to Mr. Stefan Gruber. Please go ahead, sir.

Speaker 3

Thank you for joining us to discuss.

Speaker 4

Thank you. 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 SAP's filings with the U.S. SEC, including SAP's annual report on Form 20-F for 2010 filed to the SEC on March 18, 2011. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. With that, I would like to turn the call over to Werner.

Speaker 1

Yeah, thank you, Stefan. We are pleased to report a very successful quarter with double-digit top-line growth and strong margin expansion. Before I provide some more details about our non-IFRS results, which are the figures used to internally look at our operating performance and which are the basis for our guidance, I want to make a few comments. First, in the second quarter, we recorded non-IFRS adjustments related to support revenue and operating expenses in the amount of €8 million and €154 million, respectively. Of the €154 million, €112 million is related to acquisition-related charges and restructuring charges, €32 million to share-based compensation, and €10 million to discontinued activities. Second, share-based compensation expenses were significantly impacted by our share matching plan for 2011, where employees can buy shares at a discount. This discount is expensed when employees buy the shares.

In 2010, the expense occurred in the third quarter upon inception of the plan. This year, the option to purchase shares at a discount was offered in the second quarter, therefore, the expense incurred in the second quarter. We expect these expenses to incur in the second quarter for each year going forward. Third, the second quarter numbers include the revenue, profit, and cash flow from Fargate, while the comparative prior-year numbers do not include Fargate. Non-IFRS software and software-related service revenue for the second quarter of 2011 was €2.59 billion, which represented a year-over-year increase of 20% at constant currency. It was driven by a strong increase of 35% in software revenue at constant currency and a good result in the support business, in which support revenue increased year over year by 15% at constant currency.

Speaking of support revenue, the vast majority of net new customers choose our enterprise support offering, above 85%. Subscription revenue increased as expected to €96 million in the second quarter, up from €89 million in the first quarter of 2011, and relatively unchanged year over year. As a result of the strong top-line performance, the software and software-related service revenue gross margin increased by 10 basis points year over year to 83.5%. The profit and service margin increased by 1.9 percentage points year over year to 24.1%. As a result, the overall gross margin increased by 70 basis points to 70.6% year over year. Looking at the expense side of the P&L, you can see that total operating expenses increased by 70% at constant currency year over year. The increase in cost is mainly a result of the acquisition of Fargate.

The top-line growth paired with continued focus on operational excellence resulted in strong margin expansion. The non-IFRS operating margin in the second quarter of this year increased 1.5 percentage points at constant currency to 31% year over year. As a result, we continue to expect the 2011 non-operating profit to be in a range of €4.45 billion to €4.65 billion, at the high end of the range, resulting in margin expansion of 50 to 100 basis points. While we increased the operating margin by 1.2 percentage points at constant currency in the first half of the year, we do expect further investments in go-to-market activities in the second half of the year in order to capture the growth opportunity we see going forward. Headcount at the end of the second quarter of 2011 stood at 54,043 FTEs, which is up 171 FTEs sequentially.

Headcount for the half-year increased by 6,022 excluding Fargate. It was 1,700. The IFRS tax rate in the second quarter was 26.9%, which is a decrease of 50 basis points year over year. The non-IFRS effective tax rate in the second quarter was 27.2%, which is an increase of 50 basis points year over year. The cash flow in the first half of the year increased by 75% year over year and amounts to €2 billion. The strong increase is mainly due to our better overall operating performance, the addition of Fargate as well as better working capital management. This can also be seen by a significant reduction in day sales outstanding, which came down to 63 days in the second quarter of 2011 compared to 73 days in the prior year's quarter. During the second quarter, we did not buy back any shares.

For the remainder of 2011, we are not planning to do strategic share buybacks. We have changed our outlook for the full year of 2011 for non-IFRS software and software-related service revenue at constant currency and non-IFRS operating profit at constant currency. We reaffirmed that we expect full year 2011 non-IFRS software and software-related service revenue to increase in a range of 10% to 14% at constant currency. We now expect to reach the high end of this range. We reaffirmed that we expect full year 2011 non-IFRS operating profit to be in a range of €4.45 billion to €4.65 billion at constant currency, but we now expect to reach the high end of the range, resulting in a 2011 non-IFRS operating margin increasing in a range of 50 to 100 basis points at constant currency.

We reaffirmed for the full year 2011 that we project an IFRS effective tax rate of 27% to 28% and a non-IFRS effective tax rate of 27.5% to 28.5%. Before I finish, let me make two comments about seasonality and currency. As for seasonality in the second half, we continue to expect double-digit growth in software revenue for Q3, although a subsequential decline compared to the second quarter of this year. We then expect Q4 of this year software revenue to increase sequentially from the third quarter of 2011. Now to currency. While we had a positive impact on our result in Q1 due to currency, we faced a significant negative impact in Q2. Overall, during the six months, our non-IFRS numbers at actual currency experienced a negative currency impact compared to what they would have been if translated at the average at the exchange rate of last year.

Software and software-related service revenue €66 million or minus 1.3%, total revenue €84 million or minus 1.3%, impacting the SFRS growth rate by 2 percentage points and the total revenue growth rate by 1 percentage point, respectively. The operating margin was negatively impacted by 10 basis points. If exchange rate remained unchanged at June 2011 level for the remainder of the year, our 2011 total year non-IFRS SFRS revenues at actual currencies as well as our non-IFRS total revenues at actual currencies would both be approximately 2% lower than the respective constant currency numbers, representing a negative impact of approximately 2.5 percentage points to the SFRS and total revenue growth rate. Non-IFRS operating margin at actual currency would be approximately 20 basis points lower than the expected constant currency margin. I hope this helps with the modeling. I would now like to pass the call over to Bill.

Speaker 2

Thank you, Werner, and thank you, everybody, for taking the time to join the call. We're pleased to report our sixth consecutive quarter of double-digit growth in software and software-related service revenue as we continue to successfully execute on our growth strategy. As the leader in the business software industry, we have a consistent core platform tailored to 24 distinctly different industries that enable small, medium, and large businesses alike to run better. Our customers are now using this capability to put their ever-expanding data in memory with SAP HANA to enable the real-time enterprise. At the same time, the explosive growth rate in mobility has made the Sybase Unwired Platform the technology of choice to securely connect the supply chain to the boardroom and to the frontline workers serving customers. Our results and our growing pipeline clearly validate our winning strategy.

All regions grew software license at 35% at current constant currency. Software license is our greatest predictor of future demand. Not only did all regions grow in Q2, we also had a strong result in our entire portfolio. SAP HANA and our mobility portfolio see rapidly growing pipelines and are already contributing to our top-line results. They also create pull-through demand for our entire portfolio. SAP is more strategic to our customers than ever before and a better choice for customers to innovate and grow their business. From a solutions perspective, we grew double-digit in our consistent core and all of our strategic industries, as well as in business analytics and in our solutions for the line of business executive, such as CRM, HCM, and SCM.

With our balanced portfolio and growth in our ecosystem, we are striking a better balance between large and small deals to help grow our business. The number of deals increased 34% year over year. As for the regions, we had stellar double-digit growth performance in all of them. Let me provide some color. In EMEA, despite the macroeconomic challenges in parts of the region, we had a very strong quarter with 16% growth in software and software-related service revenue at constant currency. Software revenue alone grew 36%. This is four times the growth rate of our number two competitor. We saw a strong execution in the CIS countries, as well as in Northern and Central Europe. Germany also had an outstanding quarter driven by some larger deals and continued growth in core products, with all industries performing well.

Key wins in EMEA included Mercotone Uno, ENRC, Standard Bank of South Africa Limited, and Deutsche Post AG. The Americas growth story continued in Q2 with 35% growth in software and 24% growth in software and software-related services revenue. In the U.S., there was a good contribution from some large deals as customers continued to focus on top-line growth. The strong growth trend in Latin America continued with Mexico and Central America putting up very good results. Key wins in the Americas included the United States Army, Caterpillar, T-Mobile USA, and IRB Brasil Resseguros. We had the best second quarter ever in APJ. Software license grew 35% and software and software-related services revenue grew 23%. China and India grew in high double digits with tremendous opportunities in both countries, especially around mobility. Our core products are also in high demand as these countries continue to globalize.

In Japan, we had great execution despite the crisis and its lingering effects. We owe the strong results in Japan to our market leadership position and our customers who are looking to SAP to help them get back on their feet. Key wins in APJ included Reliance Communications Limited, ACR Capital Holdings PTE Limited, Yeochun NCC Company Limited, and Mitsubishi Motors Corporation. Our ever-expanding ecosystem and multi-channel go-to-market is core to our growth strategy. In Q2, growth from the partner business accelerated to 60% year over year. We are successfully expanding our partner channel to augment sales in existing markets and expand into new markets across all segments. The success in our partner business and with our customers comes from our clear preference for openness and choice. This approach is working.

In the small and mid-size enterprise segment, we had triple-digit growth in our business all-in-one solutions, and we passed the 30,000 customer milestone in Business One. We also saw further success in SAP Business ByDesign, which Jim will talk more about in a few moments. It is quite clear that SAP is not just about big companies. We're the market leader in the small and mid-size enterprise segment as well. Some key wins in SME were Nanyang Technological University in Singapore, Die Duck Electronics Company, a high-tech company in South Korea, Loyalty Management, a professional services firm in the Netherlands, SKS Group, an industrial machinery company in Finland, United Press, a media company in Russia, and Lupo SA, a consumer products company in Brazil. For the second half of the year, we see strong pipeline across all solutions and regions.

Our employees and partners are energized by the opportunity ahead of us, and they have the passion to execute our strategy and, yes, reshape the IT industry as well. Jim, over to you.

Speaker 1

Thank you, Bill, and thanks everyone for joining. As you can see from our results this quarter, demand for IT, and in particular for business software, remains high. We are witnessing a structural change in the IT market. Customers are shifting more of their investments towards software as software continues to become a larger and more important component of the overall technology stack. As traditional hardware moves to the cloud and in-memory-based servers are redefining high-speed computing, customers are shifting investments from traditional legacy infrastructure to innovative software solutions that drive efficiency and differentiation. We defined our innovation strategy at the right time to accelerate this trend and benefit from these fundamental changes in our industry. Due to our focus on innovation instead of consolidation, we are now reshaping the industry with our innovations in mobility, in-memory computing, and cloud computing combined with our consistent core applications.

Innovation is driving growth again at SAP. We're delivering more value to our customers and increase our share of IT spend. More than ever, software matters. Let's look at the innovations we delivered during the last six months and start from our core products, SAP Business Suite. In May this year, we released the most comprehensive enhancement pack to SAP Business Suite to date, one month ahead of schedule. We're seeing fast adoption of this enhancement package at our customers as it offers significant innovations without disruption for 24 different industries. Through our rapid deployment solutions approach, we are prepackaging best practices for fast and low-cost implementations at customers of all sizes in all industries. As a result, SAP was recently ranked number one in the industry strategy and solutions by Gartner Group. Take our customer Panalpina, for example. Panalpina is the fourth largest logistics company in the world.

In 2010, Panalpina shipped nearly 900,000 tons of air freight and more than 600,000 containers of ocean freight alone. They are currently implementing our latest transportation management solution, allowing them to harmonize and globalize all of their worldwide shipping activities and get one unified view of all of their import and export activities. Most importantly, all logistics activities are seamlessly integrated with our business suite to achieve maximum efficiency, transparency, and flexibility. Panalpina is expecting significant savings and efficiency gains with SAP's new transportation management solution. This is just one example of how innovations in our core business are being embraced by our customers, leading to another quarter of high growth in the core. Our clear market leadership in the suite is not only a great competitive differentiator, it also helps drive growth in our other newer products.

Our large installed base of customers know that they can build their business with us non-disruptively around this stable core. Business analytics is a great example of where the seamless integration into the business suite is giving us advantages, but at the same time, not compromising our ability to run in heterogeneous non-SAP environments. This has led to incredible growth and the top competitive position as we extend our market leadership in business intelligence. Gartner and IDC recently recognized SAP as number one in business intelligence market share, nearly one and a half times the number two competitor. We continue to see strong demand for business intelligence 4.0 and rising momentum in the latest release of enterprise performance management and in governance, risk, and compliance.

We are winning many deals, especially against Hyperion, where we are now the de facto choice for CFOs with a more modern and complete CFO set of solutions. UK-based large banking group PLC was just one example where we replaced Hyperion this quarter. For SAP Business ByDesign, our suite solution for the cloud, we continue to see strong demand with a further increase in the number of customers. In fact, by the end of 2011 Q2, we were more than halfway towards our 2011 goal of 1,000 customers with 550 signed customers. We're also seeing great traction in the Business ByDesign partner channel with 180 partners actively selling Business ByDesign. Nearly 50% of the ByDesign business in Q2 came through the partner channel, up from one-third in Q1. The average number of users is increasing, which helps us scale ByDesign and drive profitability.

Finally, SAP Business ByDesign 3.0 became generally available mid-July with new integration scenarios for subsidiaries, increased functionality, and extended flexibility for co-innovation from partners. The new release is also available now in Mexico and Australia and includes Spanish language support. Our largest SAP ByDesign deal in Q2 was with R3D with hundreds of users. R3D is a Montreal-based, rapidly growing global IT services firm. The company is replacing several IT systems and standardizing processes across all of their locations. The scope of the deal is a full professional services deployment. In our market-leading mobility solutions, we continue to see excellent results in both execution and innovation. On the execution side, sales of mobility-based solutions increased high double-digit year over year, and the pipeline continues to grow rapidly.

As for innovation, we launched the newest version of the Sybase Unwired Platform with a software development kit and a connection to the SAP Business Suite through our project gateway. We now have 21 mobile applications delivered, and we are on target for a total of 50 SAP and partner-developed applications by year-end. Our mobility category is growing rapidly with a very strong pipeline, comparable, in fact, to our SAP HANA pipeline. Speaking of SAP HANA, our in-memory computing solution is truly changing the game in enterprise IT. SAP HANA became generally available in June this year, by the way, a very fast innovation cycle from SAP, from concept to general availability within 13 months. In Q2, we already began seeing a contribution to our top-line results, as mentioned by Bill. The demand is strong worldwide.

It's coming from a broad range of industries, including retail, utilities, healthcare, banking, and oil and gas, among others. SAP HANA has the fastest growing pipeline in SAP's history. At the end of Q2, the global pipeline exceeded €400 million. We also had our first repeat deal with the same customer in Q2 with SAP HANA. SAP HANA is the only pure in-memory appliance in the market today. It is not just a hybrid solution. Moreover, as the leader in business software, we have a strong competitive advantage because we're delivering highly value-adding applications built specifically for SAP HANA on top of SAP HANA. Strategic workforce management, dynamic cash and liquidity management, sales and operations planning, merchandise assortment planning, and smart metering and analysis are just some examples of applications available now or in the very near future.

We believe that SAP HANA is transforming the industry, similar to what R/3 did in the early 1990s with client-server technology. We're not just changing the game; we're changing the entire field it is played on. In closing, SAP declared a strong innovation strategy six quarters ago, focusing on our customers. We are now delivering innovations in six to nine-month cycles and even shorter timeframes for mobile applications. We are seeing innovation-oriented companies reporting strong quarterly results, and we're driving and benefiting from a shift away from the traditional technology stack. This is indeed an exciting time at SAP, a time for great innovation, growth, and new opportunities. Thank you, and we'll now be happy to take your questions.

Speaker 3

We will now begin the question and answer session. Anyone who wishes to ask a question may press star and one on their touch-tone telephone. If you wish to delete yourself from the question queue, you may press star and two. Our participants are requested to use only handsets while asking a question. Anyone who has a question may press star and one at this time. The first question comes from Mark Gill from Deutsche Bank. Please go ahead, sir.

Speaker 0

Hi, good afternoon, everyone, and congratulations on the results. A couple of questions, if I may. Firstly, on rapid deployment, I just wanted to understand the impact you have in terms of reducing maybe the attachment rate with services. I mean, what's the real benefit to customers in terms of the absolute cost of implementing the SAP Business Suite now using rapid deployment would be the first question. Secondly, on productivity, there are obviously a number of factors that are driving growth at the moment. Some of the internal sales changes you've made, the move to the partner ecosystem, as well as obviously new products. Are you able to quantify how growth splits between those three different drivers? Thank you.

Speaker 6

Maybe I go on, Jim, here on the rapid deployment solutions first. In the traditional approach, we have seen the software and services revenue one to four, up to one to seven, which means one euro invested in software is comparable to a service investment of five to seven euros. With the rapid deployment solution, our goal is to have a one-to-one relationship. We're seeing that's possible. We have examples of CRM implementations on-premise where we, with a rapid deployment solution, are able to implement a CRM in nine weeks instead of nine months with the impact on costs and, in fact, compete against market-leading on-demand solutions on TCO. The rapid deployment approach is absolutely the right approach to make the comprehensive business suite very easy to consume and rapidly installable.

Speaker 1

Yeah, the second question, Mark, related to the productivity gain, which is expressed in the margin expansion for the quarter and the half year. We cannot nail it down to the different components, Yuhsan. I think we are looking for increase in efficiency across all the different processes we have in the company, and this cannot be assigned except the numbers I explained in my part defined to any specific of the topics you mentioned.

Speaker 3

Okay, thank you. Let's go to the next question, please. The next question comes from Ross MacMillan from Jefferies. Please go ahead, sir.

Speaker 5

Thanks a lot. Congratulations from me as well. I had two questions. First, I'd love to get your comment just on the core SAP Business Suite and whether this quarter in particular saw any change in sort of trajectory of growth for the core. The second question on SAP HANA, now that you've mentioned a €400 million pipeline and you've talked about triple-digit license target on that product this year, is that €400 million pipeline, you know, potentially closable all in this year, or is that ambitious? I'm just trying to get a handle around what triple-digit license might actually mean. Thanks.

Speaker 2

Thank you very much for the question, Ross. I really like your style, the aggressive nature. We need that thinking out in the field. I hope the sales department could close all €400 million, but the fact is it's going to be substantially less than that. We have guided you in the past on what we built into the operating plan for SAP HANA, and those projections stand. It is nice to know that we have excellent coverage on our operating plan based on the strong pipeline and that it's building at about €10 million per week. We feel very good about the business both in the short and the long term. On the core SAP Business Suite, it was a particularly strong quarter for the core business suite, growing in the 26% range on a year-over-year basis.

What's interesting about this, and I think Jim and I have underscored this, the mobile and the real-time enterprise is pulling through the consistent core, and sometimes the consistent core is offering customers the great advantage of building innovation on top with the real-time and the mobile. This end-to-end enterprise from the supply chain to the customer relationship is SAP's competitive advantage, and we are leveraging that to the hilt.

Speaker 3

Okay, thank you. Let's take the next question, please. The next question comes from Jonathan Zhang from Merrill Lynch. Please go ahead, sir.

Speaker 0

Hey guys, just two questions. One, the obvious one about the H2 outlook. Bill, you talked about, you know, confidence of the pipeline. That's a contrast to what we've seen kind of generally in the market. Give us some comfort on what macro assumptions you're building into the H2 outlook, and is there anything in terms of the pipeline coverage or length of sales cycles that makes you more upbeat? Second question just on SAP HANA. I've seen a lot of definitional shifts on this product. It's been an architecture and appliance, a solution, a database. From your point of view, what has it become? Is SAP HANA a database or data management product? Does it ultimately become a platform, and does that affect kind of how you build an ecosystem around it? Thanks very much.

Speaker 6

Maybe I'll...

Speaker 3

Why don't I... Bill, go ahead.

Speaker 1

One more time, let me...

Speaker 3

Go for it.

Speaker 1

For the guidance, I think the guidance is based on the visibility we have into the second half of the year, and that's very important. It is not overlaid by any macroeconomic developments you might see or not see in the marketplace today. It's based on our guidance, on our visibility into the pipeline. Bill?

Speaker 2

Yeah, I was going to simply add a couple of things. Werner is absolutely correct. There are two dynamics that are noteworthy of mention. One is Jim, in his remarks, explained the structural shift that we see in the IT industry, that more and more customers are resisting refresh cycles on hardware, and too many consultants are ringing up the bill on services. Instead, they're looking for innovation because they have to grow their businesses. Instead of $0.85 on a dollar going to hardware and services, we now believe that'll be more like $0.60, and they'll free up $0.40 for innovation in the software layer, and that's where we're strongest. That's also what the CEO cares about. We see that structural shift taking place, and that gives us a lot of visibility and a lot of confidence in our pipe.

The other piece that you have to remember is we run SAP on SAP software, and we run SAP in real time. Our frontline client-facing workers have the tablets that they need. They use customer relationship management software, and the Executive Board has pure visibility into that pipe on a real-time basis, and it really helps you assess the condition of the business, which right now is strong, which is why we refine the guidance, as Werner stated. Jim?

Speaker 6

Yeah, let me add an answer on the HANA question. Is this an appliance or a database? HANA is an application, and it's very important that we underscore the value of our application. We don't just sell technology and ask the customer to figure out what to use it for. We actually have core industry experience in 24 different industries and can help solve problems with HANA. We're seeing three scenarios of HANA being deployed. One is speeding up analytics, which is very important for companies in an unsecure world. Knowing what's going on in my business in real time and not just at the month's close is key. We are seeing some optimization opportunities with new apps, like I mentioned in my speech, that really drive a significant opportunity for value creation at the customer. Finally, we're even solving unsolvable problems that used to be unsolvable.

Now we can solve them. I think the smart metering that we did with Centrica not only helps Centrica manage the energy production according to the needs of the consumers, but actually helps manage energy for a whole country. We see tremendous opportunities for solving these unsolvable problems. In those two last categories, the application value is, of course, the highest value. It's not just the technology, and that's why we're able to have a good monetization of the innovation of HANA, which it wouldn't have been if it was the pure technology play.

Speaker 3

Okay, thank you. Let's take the next question, please. Next question comes from Raimo Lenschoff from Barclays Capital. Please go ahead, sir.

Speaker 5

Thanks for taking my question. Jim, can I just follow on there and then the question for Bill? If you look at how the customer is consuming SAP HANA at the moment and looking out slightly longer term into the next few years, there's obviously new releases or you don't do releases anymore, but kind of new versions coming up where we potentially sit under the business warehouse from SAP. Where do you see, in terms of commercial impact, the biggest opportunity for SAP HANA in that light for the next few years? Bill, just for you quickly, I'm just trying to double-check my understanding of the software industry. Historically, we talked about three times pipeline coverage to make a dollar of license revenue. Now we have $400 million in the pipeline.

Can you maybe talk a little bit about the speed of conversion that you kind of see at SAP HANA versus historic products from SAP? Thanks.

Speaker 6

Yeah, let me talk a little bit about the value of SAP HANA. I think the immediate value is obviously the real-time analytics, and companies are really demanding that. The analytical category as such is growing very rapidly, has been doing so over the last couple of years, and with SAP HANA, we are accelerating that. We also believe that once we can start replacing complex data warehouse structures, we have significant growth opportunity again. Finally, we will see the in-memory computing speeding up the transactional systems as well. We already have Business One running in memory. We have All-in-One in the lab running in memory, and as you know, SAP Business ByDesign is also running in memory. Those are the three areas, and of course, the size of the opportunity increases at every stage, but alone the analytics, the first stage, is a significant opportunity for SAP.

Speaker 2

Raimo, regarding the pipeline and the speed of conversion on SAP HANA specifically, you are correct, 3X pipeline is still the standard by which we manage the business. You are also correct that SAP HANA has a bigger than 3X pipeline. What you have to remember is we factored in an aggressive operating plan for SAP HANA because we knew it was a game changer. We not only need to ensure we sell SAP HANA, but we also want to make each one of these clients very successful and ensure the quality is at the highest standard so it's very referenceable and scalable. I think we have the metric right to have about 4X or 5X coverage on something that's new to the market. It is a game changer, and it has so much future potential for us that we want to handle it with great care.

Speaker 5

Very clear. Thanks.

Speaker 3

Thank you. Next question, please. The next question comes from Phil Winslow from Credit Suisse. Please go ahead, sir.

Speaker 5

All right, thanks. Great quarter, guys. Just two questions, one for Bill and one for Jim. Bill, if you look at the sales and marketing line in terms of headcount, it's been relatively flattish over the past few quarters here, even as your license revenue has been rebounding. How do you feel in terms of just salesforce efficiency and sort of how much further do we have to go into improving on that, especially with a lot of new products, Sybase Unwired Platform, SAP HANA, et cetera, coming out in the second half? Jim, I wonder if you could just speak to just the early reception from customers about the line of business on-demand applications and just how you see those fitting in with the core ERP products. Thanks.

Speaker 2

Thank you for the question, Phil. As you noticed, we guided on the upper end on assets RS, and we guided on the upper end of operating income, and we stayed true to our 50 to 100 basis points on the margin because the Executive Board understands that we're building a great company here, and great companies think beyond just quarters. We do need to invest in our coverage strategy. We are leveraging our indirect capacity, as you saw, the 60% growth, and we do want to get more and more from the indirect. We'll have to finance some of that, and we'll also have to invest in some coverage. As you see us doing very well in the BRIC and some of the other growth markets and also fast-moving solution areas like SAP HANA and mobility, you want to cover this so you can capture the full market potential.

We will make investments, and it's the right thing for the shareholder. Jim?

Speaker 6

Yeah, you asked on the line of business on-demand solutions. As you know, we launched the sales on-demand at the Sapphire, and we recently went generally available with this product. We are interacting very closely with the first customers who are working with this product, and the feedback so far has been tremendous. Particularly, they are impressed with our user experience and the collaborative elements of this application. It's very different from the transactional CRM systems in the market today. We've also done the first iterations of the prototype for Korea on-demand, our next chapter in the line of business on-demand solutions. Again, they're in close cooperation with customers, a very positive feedback from the market. I think that our biggest challenge now is to explain to the market that we are not just a player that's trying to catch up.

We're redefining the line of business on-demand with these solutions.

Speaker 3

Okay, thank you. Let's take the next question. The next question comes from Michael Briest from UBS. Please go ahead, sir.

Speaker 0

Good afternoon, and congratulations on the execution. You talked about making some investments in the go-to-market in the second half. You've obviously raised the guidance to the high end. You're confident in the future, but I'm wondering why you haven't removed the low end of the guidance. It seems to paint a pretty bleak picture of the second half if it were to materialize. Secondly, on the Sybase numbers, I appreciate it's not like for like with last year's, but it seems to be about flat quarter on quarter. How does that square with the positive momentum in the mobile piece? Thanks.

Speaker 2

Maybe I could take the Sybase piece, and then I'll give Werner the commentary on the guidance. First, on the Sybase, keep in mind there are components of Sybase, including the brick and the federal business where we have integrated the two companies, and therefore it's not a perfect year-over-year comparison. Furthermore, in the second quarter of last year, Sybase had a large deal in there for $18 million, which skewed the prior year actual in terms of the comparison. The mobile business in both the Sybase as well as the SAP channel is going fantastic. We have a selling motion that's integrated between the two companies on mobile sales and mobile coverage where we cover the Sybase 70,000 customer channel as well as the SAP 112,000 customer channel. We're real pleased with where that's headed now.

I'll get Werner to make the commentary on the guidance, which we refine to the upper end. Werner?

Speaker 1

Yeah, I think maybe that's a good question you raised here, but at the end of the day, we started with the range into the year to provide the guidance or we base the guidance on, and we stick to the way how we guide, and that's the only reason why we now set at the higher end of the ranges rather than saying close to 14%. You can take both of them, but that's essentially what we intend to do in this reaffirmation of the guidance.

Speaker 2

The one thing that may be noteworthy to mention, Michael, is this will be the biggest software year in the history of SAP based on the guidance that we refine to the upper end, just so you know.

Speaker 0

Thank you.

Speaker 3

Okay, thank you. Next question, please. The next question comes from Mohammed Essaji Moawalla from Goldman Sachs. Please go ahead, sir.

Speaker 0

Yes, thank you. Perhaps, can you comment a little bit on the EMEA region? That's been a bit inconsistent, but clearly things seem to be picking up in Q2, and I appreciate it's a diverse region. Perhaps, what are you factoring with regards to the second half, particularly in terms of the potential upside triggers?

Speaker 2

Yeah, I think we've obviously factored the momentum of Europe into our revised guidance at the upper end. You're absolutely right. The execution and the business in Europe is very healthy. Some of the observations I would give you is Germany is performing very, very well. When you take Germany at 30% year-over-year growth, you know it really helps the entire region out quite a bit. The momentum there is rock solid. If you look at CIS, we were just as an Executive Board in St. Petersburg, Russia, and meeting customers in Moscow. We're clearly the standard, and the mobile and the in-memory is really resonating. Across Europe and markets that are moving fast, we're just doing great. The markets where there have been some tough economic headwinds in Europe, they're smaller than the big ones for SAP.

As you know, our brand in Europe is just very prestigious and well thought of, more so than any other IT company I know. We really feel good about our business in Europe, and you should too. It's a solid double-digit growth business for us for the balance of the year and beyond.

Speaker 3

Great, thank you. Thank you. We have time for two more questions, please. The next question comes from Knut Waller from UniCredit. Please go ahead, sir.

Speaker 5

Yeah, hello. Thanks for taking my questions. Basically, two brief ones. You were mentioning that some large deal activity returned. We had a relatively low contribution of large deals to order entry in Q1. Can you give us please an update here about large deals of order entry in Q2? Secondly, while I understand that given that SAP HANA is a new product that you see four to five times conversion rate rather than the three times, when do you think that the historical coverage pipeline will also be enough for SAP HANA? Is it something like a next year thing or rather something where you say, guys, be cautious, it's rather 2013? Thanks.

Speaker 2

Yeah, no, a couple of things. First of all, in Q2, we like to see the large deals come in at around 20%, as it was around 13%, as I recall, in Q1. That's a healthy balance for SAP. Keep that in mind. It could have been 15-16%, but generally around 20% coming from the larger deals in terms of how it translates into revenue. The second piece that I would mention is on SAP HANA. Hey, look, this is a huge market opportunity. What we want to do is create a tremendous pipeline, a rapid deployment cycle with the customers where we get them up and running, successful, and referenceable. To the extent that there are no historical norms to compare to, I think as the plot unfolds, we'll be able to give you the algorithm of the pipe and the closure rate.

I would expect, however, 2012 to be more the case than 2013 based on the early signs that we see in terms of more towards the normal three and a half, four pipeline versus five or six X.

Speaker 3

Great, thank you very much.

Speaker 2

Thank you.

Speaker 3

Thank you. Now the last question, please. The next question comes from Neil Steer from Redburn. Please go ahead, sir.

Speaker 0

Morning, and once again, congratulations. I just had a couple of very quick questions. The first of them was, I think, Werner, when you were talking and giving some guidance, I suppose, you mentioned, I think, that you would expect the software growth rate in Q3 to be down on Q2, but in Q4 to be up on Q3. I was just wondering if that's what you said, how and why you get that precise visibility going into Q3 and Q4 on software sales.

Speaker 1

That's a new one. If you look to our historic seasonality, you always see that we have a slight decline if you compare Q3 with Q2. Of course, Q4 is always the biggest quarter, and the outpass is Q3 every year. From that end, it's really based on what we see as historical seasonality.

Speaker 0

Were those comments you made about year-on-year growth rates or just the absolute size of deals?

Speaker 1

No, it was based on the sequential growth within a quarter, and that's also seasonality.

Speaker 0

Sorry.

Speaker 1

That's what we refer to with seasonality. How is it split between the quarters in a given year?

Speaker 0

Okay, sorry, the next question was just on the currencies. You suggested, I think, an overall, if we were to stop the clock and use the rates today and extrapolate forward to the rest of the year, am I right in thinking that your guidance at 10% to 14% will become 8% to 12%? Is that effectively what you were suggesting?