Sap AG ADR Earnings Call Insights: Asia Policy and Business Suite on HANA

Sap AG  (NYSE:SAP) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Asia Policy

Stacy Pollard – JPMorgan: Could you please discuss how you are, sort of how and why you’re very confident in the APJ returning to double-digit growth in Q2? And maybe talk about which countries are recovering, et cetera. And also, could you be more specific on mobile? You said, double-digit, is up sort of 10%, teens, 20s, and I think this is mostly platform. Is that right? And then what traction are you seeing around revenues from applications as well as developer partners, et cetera?

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Bill McDermott – Co-CEO: It’s Bill McDermott here, Stacy. Mobile, 76%. Let’s talk about Asia Pacific, they had a good Q4. We came into the year with expectations that were higher than their actuals. If you look at our license business basically, the entire miss was in Asia. The reason why we’re very confident that they’re coming back is there was a lot of timing issues. They made three leadership changes; one in Southeast Asia, one in India, and one in China. That’s a lot of change for one quarter, and it resulted in some of these deals slipping into the second quarter. We have reviewed that pipeline, as you can imagine, quite extensively, and everybody understands what’s expected of them, and they have committed in the quarter to deliver strongly and be on track through the first half year-to-date. Considering the track record of 12 consecutive quarters of double-digit growth on the part of that leader and the fact that they have doubled the size of Asia-Pacific Japan in the last three years, we have tremendous confidence in the leader. Everybody has a bad quarter. He had a bad quarter and he’s going to fix it.

Stacy Pollard – JPMorgan: A quick follow-up just on cloud margins. Can you say how many years it would take to get cloud to group margins? That might be a question for Werner.

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Jim Hagemann Snabe – Co-CEO: Jim here. Maybe I can take that. We always said that margin in the cloud is about scale, and if you look at the last four quarters on the segment report, you’ll see how every single quarter we’ve gone from negative to now positive in our gross margins. We’re making EUR28 million on the gross margins in the cloud now. And I think that exactly proves the point; it’s about scale. We’re having the scale and we have the right cost structure for that scale. So, now it’s a matter of how fast can you scale the business. Now it is a subscription revenue model, so it’s not massive jump. It’s going to be hard work, but we are off to an extremely very strong start here with 385% growth in the quarter. I can’t tell you when exactly that comes to the level of the rest of the business. We are not projecting that right now, but we feel very good about our projection to be the first really profitable cloud company.

Business Suite on HANA

Adam Wood – Morgan Stanley & Co.: I’ve got two, if I could. Just, first of all, coming back to HANA, particularly the Business Suite on HANA launch. Could you maybe give us a little bit of an indication about the customer response outside of the ramp-up clients, how open those customers are to changing database on the transactional side? And maybe, did you feel that caused any disruption in the first quarter, either to the ERP business or to the HANA business as you kind of explained the new case and moved away from simply talking about Business Warehouse? And also, is pricing, which I think has been clarified a bit, has that helped with customers and how do they think about that? And then just secondly, coming back to the margin question. Appreciate it was a little bit below where consensus was looking for in Q1, but with the headwinds you had, it looks as if margins were up at least 100 basis points on an underlying basis, and the hiring rate was actually quite a bit down in Q1. Is that what we should expect going forward that leverage we get from the benefits of hiring last year that continues through this year?

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Jim Hagemann Snabe – Co-CEO: Well, Jim here. I’ll take the Suite on HANA question. I think it’s a very, very important question. Clearly, that milestone, from an innovation point of view, meant that HANA is now not just an add-on to the existing landscape, it becomes the innovation platform of the future. And we have not seen major impacts in this first quarter, because we’re still in ramp-up, and it’s very early. But clearly, the interest from our customers is very, very high, in particular when they realize that this is not just about running their business in real time, but that HANA as a database actually reduces complexity and costs in significant ways in the infrastructure. And we’ve been a good example ourselves, we’ve put our CRM on HANA, and the implications in terms of reduced cost of hardware are tremendous, beyond what anyone had expected. And so, we will see this product go in general availability mid-year, which means the effect of this will be back-end loaded in the year. And I think it’s a, mostly the way of accelerating the core and renewing it in a big way.

Werner Brandt – CFO: And with regard to the margin, what you had in mind for Q1 is actually what we are shooting for, for the full-year as you cannot really down to one quarter, especially not to the first quarter only. And remember, there are two things which have to happen. First of all, we have to stay very disciplined on the cost side. And on the other side, we also need the respective revenue growth, and the software revenue growth is very essential in order to bring up the margin. So you will see an expansion going forward.

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