SAP SE (SAP) 2002 Q1 法說會逐字稿

Good day everyone and welcome to today's SAP first quarter results conference call. This call is being recorded. Today's call will be hosted by Henning Kagermann and Hasso Plattner. Gentlemen, you may now begin.

yeah good morning, good day everybody. Here's Gundolf Moritz. Thank you for joining us to discuss SAP first quarter 2002 results. With me are here Hasso Plattner, Henning Kagermann, Werner Brandt, and joining us from the U.S. is [_______________]. Before we begin the call, I will make a few remarks about forward-looking statements. Werner will then go through the financials, and Henning will talk about operational developments in the quarter. After that, we will open the call for your questions. Before we begin our discussions of the results, please note that except for certain information, matters discussed during today's call may contain forward-looking statements, which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the company's future financial results are discussed more fully in the company's most recent filings with Securities and Exchange Commission. Now we will turn it on to Werner.

Thank you Gundolf, and good morning or good afternoon to everybody. It was a very mixed quarter. We proved our market positioning and continue to gain marketshare in a difficult economic atmosphere, so we are largely pleased with what we have accomplished. In the first quarter, we expanded our capacity of technology closeness, focused on the promising small to medium sized markets, and continued to build the kind of customer relationship that have driven our success so far. Looking now at the first quarter numbers, sales in the first quarter were EUR 1.66 billion, which represents an increase of 9% over the first quarter of 2001. Operating income excluding stock-based compensation and top-tier acquisition related charges improved by 2% up to EUR 237 million. License revenue was down 12% in the first quarter to EUR 402 million. Maintenance revenue grew by 23% up to EUR 597 million. Consulting revenues as you see continue to provide strong results growing by 18% to EUR 539 million, and training revenue stayed stable over the same period of last year at EUR 110 million. Europe, the Middle East, and Africa continued to be a strong region for us, increased sales by 11% to EUR 886 million. Germany remains a good market for us; it's where everything in SAP begins after all, and this quarter sales in Germany was EUR 376 million. Outside of Europe, sales in America contributed EUR 587 million to total revenues while sales in the Asia-Pacific region contributed EUR 185 million. Henning will comment on these regional numbers in a moment. As I have said on previous calls, I and the entire board are focused on improving Sap's margin. We made good progress in this respect over 2001, and we are looking to make further improvements over this year. We expect the progress to become more evident in the second half of fiscal year 2002. The first quarter margin excluding stock-based compensation and top-tier acquisition related charges was 40% reflecting the difficult market environment in which we operate. Looking at all the technology companies around the globe and seeing the difficulties they are having, I am happy with these numbers for now. Sap's year is more weighted towards the end of the fiscal year, so a 40% margin and our first quarter is largely satisfactory when I look at our financial goal for the entire year. We will improve over the year to reach our goal of increasing margins by at least 1 percentage point over the 20% achieved in 2001. Going forward, we will still spend on research and development, technology, and other revenue driving initiatives but will continue to streamline the business and become more efficient over the entire year. At the end of the quarter, headcount at SAP reached 29,156 employees worldwide of which 7,707 were in our R&D Department. R&D is strategically significant to improve Sap's technological openness and these resources adequately reflect our commitment to R&D at SAP.

SUC we have already made progress in 2002. Henning will talk about the operational and technical aspect of such momentum, but from my standpoint it appears SAP is and remains in good financial health. So why is SAP is working hard, I want to reiterate something I have been saying for past month. 2002 will be a tough year. The first half will be tougher than the second but is not going to be easy. In any event we are looking to deliver on our stated targets for the end of 2002 and a lot of this progress will come at the end of the year from the solid base we establish now. I look forward to updating you 3 months from now on our progress as a half-year. With that said I'd like to turn over to Henning.

Thank you Werner, hello everyone. Well as Werner just said, the first quarter of 2002 was difficult. And we have been consistent all along in saying that we expected the first half of the year to be weak, so a challenging first quarter was no surprise for us. Looking at the whole software market you will see evidence of this SAP pushed through the first quarter and I think globe is [_______________]. Lets look first at Asia, a region that has been difficult for software companies. We are not immune to the kinds of challenges every software company has been finding in Asia and we had a very tough time in Japan in particular. When you look at Japan, keep in mind that for most Japanese businesses the first quarter just closed and we suspect that many companies decided to spend conservatively as they ended their year. So sales in were 185 million euro and included deals with China Ocean Shipping, Singapore Civil Services, Shionogi, and Crystal Group. In 2001 we have refocused our operations in Asia targeting the fastest growing software markets besides Japan and Australia and we are now looking for that effort to yield improving results over the coming years. The Americas was a challenging area for SAP. No surprise there to any of you. We feel the company simply hasn't returned to inking deals as fast as they did in the past. We won our share of the business and didn't lose deals to the competition but we did see companies in no hurry to spend annual IT budget in the first quarter. The number of contracts we signed was vastly the same as the first quarter last year but the average order value went down significantly.

As we get back to business as usual, and performances for the year become more visible, we expect comparative pressure to compare companies to further invest into software. Deals in the first quarter in Americas include companies such as Fleet Capital, Lord Corporation, and Watson Pharmaceuticals. Turning to Europe, we were very happy with our performance in that region in this very tough quarter. Europe continues to be a major strength for us. Some of the oldest SAP customers are located in Europe and as an effect they keep coming to us for more and more, demonstrates the important role that we play in their business. Germany leads the region once again, but SAP signed deals with companies across the continent, companies like Barclays Bank, [_______________], Itellium, Porsche, and Rolls Royce. We are winning the same high percentage of deals we have always won in Europe and expect this to continue throughout 2002. Looking at your solutions sales the initiatives we took over 2001 are really starting to bear fruit. CEOs are looking to SAP not only because of our standalone quality with applications but because we are willing to connect into their existing software infrastructure to make systems at improved company wide efficiencies. Now lets look at our individual solutions where we allocate revenue by customer usage. Performance in these component areas largely reflects the customer and comparative strength we have already touched on. In Supply Chain Management sales were 79 million. We lead in Supply Chain Management market share by a long way. The marketplace, portal market has also gotten tougher in the post dot com area and we sold 44 million.

CRM was up by 10% for the quarter to 74 million, and we gained marketshare here. All ERP financials and HR also grew to 172 million as company spent on prudent solutions which give immediate returns. We first broke out component sales in the first quarter of 2001. Given the limited history of component sales, I don't believe that year on year composition have represented of long-term trends. Looking at things from a different angle, 73% of our software business measured by order entry in the first quarter came from our installed base and 27% from new customers. This is in line with what we have experienced over the last years. While these numbers demonstrate the fate of our installed base as in our solutions and our services, they also reflect more and more new companies looking to SAP. So this is where we are after a tough quarter in the challenging market. It was a slow start, but we made some progress. We see no reason to change our expectations, but we are carefully watching the market environment, which is hesitant. We still anticipate revenue for the full year to grow by around 15%, and for the whole of 2002, we also expect an operating margin excluding stock-based compensation and top-tier acquisition related charges to improve at least 1 percentage point over the 20% achieved in 2001. While the first half of 2002 will be tough, we at SAP lead the business software markets now over 30 years, we have experience in this space, and we continue to make strategic moves that will strengthen our leading market position. So operator, please now open up the line for questions and answers.

Thank you. Today's question and answer session will be conducted electronically. If you wish to post a question at this time, you may do so by pressing the "*" key followed by the digit "1" on your touch-tone phone. Once again that was "*1" to post a question. We will pause for only a moment to assemble our roster. We will take our first question from John Segrich with Goldman Sachs.

Hi guys! If may be we could focus a little bit on the shortfall which looks like it came out of the U.S. or the America geography, could you give us a little sense on may be the magnitude of the shortfall there and if you could also dig a little bit into the customer behavior?

Yeah thank you. I would say with the license figure we gave you see that we are still continuing to gain market share, I think that is important to recognize. And if I look to our expectation at the beginning of the year where we said Europe is in line. In Asia we could see that there will be lets say stronger second quarter than the first quarter indicated this. Japan, we missed a few big deals but that was not a surprise because we expect more flow for the second quarter. If I look to North America, I have to say the surprise was a little bit at the end of the quarter. We expected a slight EBITDA conversion rate from horseback deals, but we have not lost deals to competition, and it's still there outside with the customers are shopping around, they are looking, they have the money, but they have also time especially our installed base has good software from SAP and they see that they get the best for their money. Sometimes they start with small implementation so therefore our average order value dropped so down, no larger deals any longer, especially not in the U.S. but overall I have to say we are quite okay with this result because it backs up our full year guidance.

Two additional remarks, this is [_______________] there is a general concern about the United States. We are still facing the aftermath of the new economy and the face of creative accounting is not over. You can read this everyday and this affects specifically our industry, this affects everybody. On top of this we have a little home made problem in the United States in the first quarter since we merged the portals and markets in the first quarter and then decided to merge both of them, the new company back into SAP AG. This didn't help to close all the deals which were on the table in the market and in the portal space. We have no indication that we lost the deals but we didn't move them in and sent out the invoices so that we can acknowledge them as revenues and third point is we announced that we would have a new product in supplier relationship management which only was shipped in the second quarter so again we could not book these revenues and since we have a very tight situation as you all know in the US, even dollar amounts in the 10-20 million range have a significant impact on the complete result.

If you just take on that one second would you say that most of the deals that slipped were newer customer deals or do you think that customers may be taking a pause in the migration cycle, and may be we migrated some of the easier customers now its going to get more difficult from here now, or is this really economic?

No it's really economic I think it's across the customer base. It has to do with new customers, its existing customers, some of them continue to migrate, and others are completing their outfield work. So that has not changed. This is an overall attitude amongst install- based customers.

Okay. Thank you.

We will take our next question from Robert Schwartz with Thomas Weisel Partners.

Thank you very much. Just a couple of questions. US GAP now requires in the consulting revenue that you include T&E expenses as revenue and I am wondering if that has been included in this quarters numbers.

Which revenue sorry? Would you repeat it again?

So Robert probably we will come back to this very specific question.

Let me follow on, it looks that margin on a product was a hair lower than it was last year and I am wondering if anything is happening there given that your guidance to improve ball operating margins.

No its very easy. If we sell a few more millions then the margin looks better.

On products...okay so its ..

Just because the fixed cost is still there and so that that is completely related to the relative number in software sales.

Right and last question if I may, comment on the strength that you are seeing from your system integrator partner has there been any fundamental change in North America, in the business coming from them?

No I think we have no signs, I think the month ago was the last contract, was the last of the big 5 integrators but all of them have an alliance contract with us. In this contract we have defined, I cannot disclose this here, but we have defined the areas where we work together, how many [_______________] especially in new areas, supply chain management, customer relationship management. There is a focus on regions especially North America but also Europe so that now many of the partners are already trained in the new areas and its now business as usual. So there are no changes that are invoiced, you look to our services business which was very good showing you a lot of projects are underway and all our system integrators take their share and that's the traditional SAP share they see here.

If I may just take in one more question. Could you comment on your visibility into Q2 and how it compares to say visibility historically at this point in the quarter?

It's the same visibility we have said at the beginning of the year to Q1. I think we have a good pipeline, we know what we are doing and we hope that the economy will lets say in the third quarter then start picking up so therefore all our expectation is, as we said, first half will be tougher and the second half will be better and that is not new, that is still there we said at the beginning of the year and that's okay as a guidance.

Thank you very much.

Yeah coming back to the question related to the consulting revenue, consulting business it's Werner Brandt. At SAP we have no change in revenue recognition related to consulting revenue and as in the past we recorded the expenses as revenue if they are billable and chargeable to customers, and we applied this rule since ever and no change in the first quarter.

Thank you very much.

Okay thank you next question please.

We'll go next to Kevin Ashton with Deutsche Bank.

Good afternoon gentlemen. Just back to the issue of potential delays, etc., I mean we heard some figures overnight about some other competitors talking of very big push backs into Q2, and I was just wondering if you could in any way quantify the sort of numbers, or the number of deals or whatever that might have pushed over?

No I think we don't want to quantify because you know once we have the deal in the pipeline, it doesn't mean later on that you sign it in the same size that's one of the issues, but it's not only one or two deals but several of those deals and this shows you that this attitude what I said that the customers are really waiting to the last moment especially at the beginning of the year is still there, so that is strong, and we expect this also for the second quarter and as I said but we don't expect it for the second half of the year.

But are you see as well just to stick with pipeline for a minute, are you seeing an increase in the pipeline that we are hearing from some quarters, can you detect that?

Yeah but that's knowledge that is not something new, so if you get more visibility over the years, the pipeline is improving and it has to improve there, so that we are seeing but I cannot say that the pipeline looks fundamentally lets say different than in the past.

Thanks, I guess one last question if I may, you've mentioned that Europe is strong, and obviously Germany is doing well, I mean from where you all are standing how is that looking as we go forward for the rest of the year? In the past you have mentioned you are relying a lot on Asia-Pacific and the Americas to pick up the growth pattern and obviously they are at the moment, so I mean how do you see the geographic areas developing for the rest of the year?

Europe lets say, we confirm what you said, it's strong. We don't see a major risk that Europe will drop down and some people refer to Germany, but our installed base is so strong that I don't see risk even if the economy slows down a little bit in Europe. I referred to America and Asia because lets say over time these are the growth areas for SAP and what we see is that the potential is there and that we are immersed in most of the deals so customers lets say are looking for SAP software. So what I said beginning of the year is still valid stable, good healthy business in Europe, and over the years picking up in Asia and America.

Thank you very much gentlemen.

Thank you, next question please.

We'll go next to Rick Sherlund with Goldman Sachs.

Thanks. I am wondering if you could comment on any changes you are seeing in the competitive dynamics in the markets. Oracle, PeopleSoft, Siebel, etc., any changes on the margin in competitive dynamics?

There are few observations but they are spotted Rick. I cannot generalize them. We have in the U.S. two large companies brand names who totally walk away from our competitor and concentrate on SAP alone and that was a competition for the last five years. That is a good indication that finally Microsoft is winning against 11i. We have another top 50 brand name in the U.S. continuing with supply chain product only from SAP after another four years of [_______________]. These companies will come forward but we have to wait till they make the announcement. Now this is spotted but it gives me some inspiration that we are on the right track with the products and we have slight disadvantage in that is homemade in our information rollout you might read to your colleagues reports on our competition and I take this opportunity to throw this in. There is the general opinion that mySAP can only run on multiple databases and Oracle is using that as a negative in the competition that they run in all their applications in one single database. Unfortunately, it didn't cross the Atlantic that we announced in 2001 at [________________] that all my subcomponents were run in one single database, and since November 2001, we physically shipped this. We will make this clear to our sales force in America next week and we will give Oracle a little hint that they don't use that any more in competitive situations because otherwise they will look like fools.

This is the issue of having a common data model under all the applications?

Yeah, we had this, we still have this, and we can run all of mySAP applications in one single database instant.

Right, okay.

And that is what our colleagues from Oracle towed up as their great advantage and when we combined all the new dimension applications and all the 3 type applications, the back office application in mySAP, then for the first 2 years, we run all these 5 or 6 components as components with their own database with one central integration software piece in the middle. So it doesn't change for the user anyway, but I heard now that several people for cost of ownership believe that one single database is cheaper, yes, and we ship the whole system, I repeat this, in one single database.

So could you also comment on what you are seeing in the market in terms customer preferences, it seems that in surveys integration and ERP is showing up much higher in the priority spinning, priority list, can you interpret that?

Again, it is spotted but I visited 6 customers last week in the San Jose area and the number one reason is integration as far as you can see. So that clearly puts the vendors who have the largest footprint of applications in favor. The next sentence is yes, I want to have everything from one vendor and it has to be integrated as long as you are as good as the other ones in functionality. So we have to do both, we have to be in functionality as good as the so called best of breed players or the players who do not cover the whole area of the enterprise hence we have to maintain the integral integration between all the components. If we do this, then customers favor that.

Right, in the ERP, why is ERP showing a pyre on the list, is it people upgrading to mySAP.com, is it the other modules, or are you seeing a renewed interest that you saw in the 90s in back office systems implementations?

________________] it's Rick. I think it's all of that. It's partially upgrade, yes, because viewing the upgrade there is always normally finding some [________________]. It's to some extend a shift in the industry if I look at especially in Europe we are much stronger in financial services for example than in North America because this is a focused area. These companies start to finance with HR normally as a first step, and as more you enter they will services industry the more you feel ERP is the hot topic which is not contributing so much in the first quarter, but in general term, and then it's Japan. So ERP in Japan is the topic.

I just want to add this also. Again observation from 6 customers I spoke to last week there is one generic theme which also lead to our decision to follow the end markets and portals into a SAP AG. There is only one view of the IT people and the CEO in a company they want to use e-business and front office and back office system in applications in one system. This is not separate anymore so that means companies are not shooting with all what they have for new e-business solutions, they are shooting for integrated solutions from the web page through CRM, into manufacturing, through delivery and then everything has to be visualized and made real in accounting and in cost accounting.

Right. Thank you.

That proportionally, that brings the ERP components back on stage. Two years ago people said we don't need this stuff any more. This is bad. This is a false statement.

All right.

Next question please.

We will go next to Jason [_______________] with Robertson Stephens.

I would like you to please comment on some specifics as to why you believe that second half is going to be stronger? And in fact its only about 2 months away before we are going to be there and could you give us what are some of may be the macroeconomic factors or the behavior of the companies that you are going to be focusing on that are going to give you confidence that this turn in the second half is actually coming to path.

May I first, it's a basic scenario and we see, as this says no I would say it is the other way round. No indication on evidence that it will not happen, I think it's a better way to answer it and there is a second reason. If you look to the customer behavior was shopping around, signing smaller deals, but heavy at the end, the pressure to do something and installing software. I believe we will again lets say see what we have seen in the last years, all the times, that if it comes to an end of a fiscal year that the customer at the end has pleasure to decide.

Just a quick follow up I mean are we expecting to see this materialize in Q3 or this largely going to be for lack of nothing else, just a traditional Q4 spending search that you are expecting to turn around?

No. Up to now we expect these to pick up in Q3 and Q4.

Thank you.

Thank you next question please.

We will go next to Charles Phillips with Morgan Stanley. Mr. Phillips your line is open please go ahead. Mr. Phillips your line is open please go ahead. We will go next to Ross McMillan with Morgan Stanley.

Yes thanks. Can you hear me?

Yes continue.

Right. I had a couple of questions. Just on that full year confidence again, is there anything specifically there, may be, phase to deal commitments that are being committed for the second half that's giving you any particular above average visibility than you would normally have at this point in the year?

No Ross that's not the case. There is no particular evidence, its likely look to our, to the environment or pipeline like last year and lets say the same type of visibility would be applied. I think that is fair, last year was a tough year. This year starts to be a tough year so we apply the same rules here.

Great thanks. Just another follow on. Do you think 3 enterprise and the introduction of that in the second quarter will have any impact and particularly do you think there might be any risk of customers posing before there is a full ship release of that?

I don't think that customers, lets say, will delay decisions because of that. We are giving our customers a very compelling offering. They can stay on the newest release of SAP [_______________], for at least the next 4 years. They can decide to go for SAP at the end of this as a more risk adverse and say okay we are doing smaller steps to migration to mySAP.com and they can go for mySAP.com. So nearly all customer visits [_______________] collection comes up and at the end [_______________] easy. It depends what is the best for the customer? There is no reason to delay or to wait. Its up to his, lets say, situation [_______________] lead to highest and so I don't see any delay but also not a huge push, lets say, into the second half because of SAP at end of what is just normal business....

Yeah I just want to take up on that. Because we differentiate ourselves here from the competition and I have indication through CIO meetings in the United States that our more convenient approach here to allow our customers to decide when they want to move from one release to another and take the advantage of the latest and more modern systems that they really appreciate this and that any kind of push now and strong arming them in a critical situation will not be welcome in the future.

And may be one last one then folding the marketplace in ports of subsidiaries together and then into AG is there any way you can try to quantify the G&A savings that you might get from that and also the timing?

Yeah the G&A savings are minor. There will be savings that's obvious, but we take them as one of our cost reduction measures. What is much more important to see is we had a major shift in the last six to nine months in the industry, in the market. E-business became standard business, e-business is part of business, and the e-business division in companies is being folded into the normal IT department. That means we have to talk to one CIO and his team. Therefore it doesn't make sense to come with two sales force to the same person. There is a high probability that we can confuse ourselves, and we can confuse the customers. The customers told us that and we found out inside our sales organizations that we confuse each other so therefore we made the decision, it was a tough decision to fold the two sales forces back together, and we see much more synergy here coming that we are better synchronized and fulfill the requirements of our customer base.

Great, thank you very much.

We'll go next to Jim Mendelson with Soundview.

Yes, could you comment and little bit more color on the linearity of license revenue this year versus last year and perhaps give a little bit better sense of scale as to what extent business was deferred in March?

I can give you one indication but you have to be careful [_______________], if you look say for example to order, and if you are just a little bit, order entry was roughly in line with the last year, so that gives you an indication that that business is out there and that might be that they are from the deferred side, will be a little higher but no significantly.

Okay, thank you.

We'll go next to [_______________] with [_______________].

Yes hello, good afternoon. I have got a couple of questions actually. First one would be business intelligence revenues, you mentioned earlier that you had some problems that got emerged at SAP portals in the markets and the revenue which fell short of at least my expectations was that mostly in the marketplace area or also in the normal as it were of business intelligence area?

It's probably more in markets. I have only the combined numbers in the pipeline, and you will see a discrepancy that we did not close as much of the pipeline as we should have closed, and if you down from the CEO and stop the sales people and the top product architects that they spend the time on it relatively big merger we were merging here two companies with 850 people and then once we have the merger done that was mid March, we told them now the train is leaving the station again and going somewhere else; this doesn't help. This doesn't help in sales. I cannot say we would have closed all the things, which were marked in the pipeline, but everybody who is in sales knows that a shift in strategy and bringing things together doesn't help. You can look just at the biggest merger of the history of IT business; it's not helping that.

Yes. I also have some statistical question, how many clients do you have at the end of Q1 and how many new clients did you win in Q1?

I think we should go to the next question; we will look through the data and give it later. The next question please.

We'll go next to Brendan Barnicle with Pacific Crest.

Hi guys! Can you comment when you are looking out, you mentioned integration and ERP as strengths for the second half or areas where you might see the makeup. How about some [_______________] on the other, any areas you think particularly well positioned for the second half?

In general, our supply chain position is strengthening every single day, and I just mentioned before in a four-year contest, where we had parallel installations, we won against our next best competitor here, and the company will continue with SAP. So we have a very good position here, the combination of supply chain, the product we will ship next month, supply or relationship management, and the opportunity we have to build private exchanges and public exchanges makes SAP particularly strong in this area we see also a growing strength in the other combinations of portals and CRM, but we can build on the huge field of CRM with the help of portal technology, so called a collaborated applications of all kind of types, which are applications which accelerate communities, how we work together, etc. So we feel that we are very well positioned there and that will strengthen our position overtime and so that's the product situation. We probably should mention that we introduced [________________] a low-end product, which can be used in large companies as the local system abroad. Many companies have central systems and serve their major affiliates with mySAP or free type systems, but probably they did not go into the sales offices with the system. We have no answer for that, and we also are slimming our mySAP version down with a single database approach and very low cost of ownership so that we cover now the full range from probably 50 employees in the site to 50,000 or more.

________________] I'd just try to answer this question with the customer it's always difficult to talk about customer's fault, you have customer hierarchy, mergers, acquisitions sometimes you lose customers if 2 companies merge. Roughly speaking, we have about 18,000 customers. I am giving you a feeling for the number of new customers I gave you the size of contract with new clients, it's about 250-260. That's gives you a feeling of how many new clients we get a quarter.

Great, just as another follow-up. In terms of vertical market exposure, are you seeing any vertical markets that are showing any faster recovery than in the other areas or anything that's still particularly weak?

That's difficult to answer. I don't believe from the customers we are seeing that we can immediately conclude on the sector as a whole. I think we should be careful here [________________] as a company. Yes, we know which sectors are still let's say weaker like if you look at Telecom etc., but I would not say that we have significant recovery so if I look to all our very new in the first quarter [________________] for example services industry where we have more in financial services, but I would not make the conclusion that this is expected to end. It might be just by coincident what we saw in the [________________].

Right, thank you.

Next question please.

We'll go next to Coleen Kaiser with Lehman Brothers.

Hi. I was just wondering if I could get your opinion on just the amount of software inventory that's left in the US market because the hardware vendors in the system integrated they are still talking about a lot of inventory left in the US and just judging from some of your competitors maintenance revenue growth or lack of maintenance revenue growth, how much longer is it going to take in your opinion to get to this inventory?

You know, it's like there is some inventory left, but I believe what we see is that this is going down significantly so there are a few customers we know we checked some inventory, but most customers and that a positive side especially in the US, are burning this inventory, they are implementing users, and therefore we have these different and especially if you look to North America and in consulting and in new licenses because it shows, yes, there is inventory but it's used now and I think that's a very good indication.

Okay, great. Thank you.

We'll go next to [_______________] with WR [________________].

Hi. Can you just give me a little bit more detail on what makes you so confident that the second half will improve? Do you see anything specifically?

Hi it's Henning again. I think I have answered exactly this question already in [_______________] answer. This was already asked. Especially in this way. We said no particular indication. Last year was tough; beginning of this year is tough. We apply the same rules, lets say, to how we direct all our pipelines and in parallel we see no evidence that the economy should not pick up in the second half.

Okay. Fair enough. Thank you.

We will go next to David Clayton with Credit Suisse First Boston.

Thank you. I want to ask just a couple of questions, quite specific ones. First one was the G&A cost looked high to me. I have been used to that sequentially folding compared to the fourth quarter and I just wondered is there something going on there that I don't fully understand? The second one was could you talk a little bit about hiring plans for the year particularly with respect to services and the consulting group because I guess with the introduction of SAP enterprise that could be quite good for the services business and I wondered whether you have plans to increase demands of in house service results there? And really the third question, just to do with the tax rate, the first quarter underlying tax rate I think looks at around 33% and I am wondering whether there are those system warm up effects there or what we should be modeling in for the rest of the year?

I can start answering the question of hiring.......

Can you turn off your microphone we have echo. Thank you.

Okay. Second try was perfect. We will hire carefully. Given the tough market, I think we should really be careful here but we hire in selected areas given the consulting market, our strategy is more to relocate and to retrain some of the resources that we have for new areas. You know that in the traditional areas there is, lets say, especially if you look to the complete eco system outside enough capacity is there in the market. But there is some shortage if it comes to new product, if it comes to experienced consultants in Supply Chain Management etcetera. So what we at SAP are doing is we focus on our complete consulting force independent to whom they report. It could be the global consulting force, could be the local one, sectors, SAP SI, consultants important as markets and we maximize the utilization and if we find that they are underutilized in some areas we use these consultants and we train them in other areas. Therefore I believe it's not necessary to have a massive hiring of consultants. It would be more that we train early enough some of the consultants to meet the demand, which can come through SAP 3 enterprise.

With regard to G&A? You are right, we see an increase here, but this has structural reasons. If you compare quarter over quarter we have acquired as you know TopTier after the first quarter of 2001 and created the sub corpus organization which of course edit cost in the G&A area. We have some acquisitions especially smaller ones in Germany, which edit cost, and of course we have established new legal entities in new countries, that's one side. The other side is that we also shift some responsibilities out of the region into corporate resulting in the fact that the increase by the shift our G&A cost in our external reporting. With regard to the tax expenses if you look to it we have a tax expense of 60 million euro and before tax rate adjusted by [_______________] one of 179 million gives you a 33.5%. If we would use our normalized tax rate and we for this year have in mind range of 35% to 37%, so if I would work with 36% then I would come up with 4 million more in tax expenses. And this is mainly, this additional reduction we see here is mainly, driven by tax credit for prior periods in some of our countries. So that's the tax explanation of this relatively low tax rate adjusted for the [_______________] impact.

That's very helpful. Thank you very much. _______________] just to clarify Henning's answer. I'm [_______________] to what you're basically saying is that for no headcount increase you can move some employees into being revenue generators.

Exactly. There will be some hiring but very carefully, but it's more as you said moving them into revenue generating areas, exactly.

And how far this piles up by area here gone up. I jump in the G&A again because we had this question before, we would definitely have an improvement of the ratio with our remerger of portal to market, and actually we would do similar things in areas where we have multiple legal entities as lapse and we will pull those together.

Thank you very much.

Next question please.

We'll go next to [_______________].

Hello. Can you hear me?

Yes we can.

Okay, couple of questions. This is [_______________] from [_______________]. The first question is can you comment a bit on your deferred revenue line, and the second is can you give us your vision on your relationship with Commerce One now from this point onwards even after the company continues to roll its cost reserves and what this impact will be on your P&L moving forward.

Let me start with Commerce One. We just received the latest version of Commerce One technology for market places and we're preparing together with Commerce One an information release because they will be very positive effects for the customer base. It is a fact that we live in a time where computer based applications seem to have very short peaks. Market places were extremely popular 2 years ago and everybody was running for market places. Now, we live under the impression they're not with the money anymore. The truth is if you smoothen that out, they are very helpful tool. We have very successful market place implementations and I'm confident that this type of application will grow in popularity significantly in the next 18 months, but the fact is that Commerce One has their own set of problems and since we're 20% owner, we automatically participate in those, but as far as the product they have developed, we will talk about this pretty soon and that looks promising.

Yeah with regards to the deferred revenue, the increase deferred revenue is compared to December 31st by 826 million euro and this is exactly the amount we increased our periodic maintenance accrues due to the fact that we once in a year bill the entire maintenance for the year in January and we have to set it up and deferred.

Okay, thank you. Next question.

Thank you.

Thank you. I have a question on the total stock based compensation. It was 45 million euros. Really the question is why was it so high, much higher than I thought it would be and do you have any estimate for where it may be going forward through Q2 to Q4.

Yeah, I think what we have here is the following. This 45 million you referred to come out of this part of our LTI program which is related to the Goldman Sachs index and these options are in the money and depending on the share price, you have an impact in our P&L, and to predict it, its very difficult because we would have to predict and now tell you what we expect the share price to be, and this is something I would not like to do at the moment.

Thank you.

What is the final question please?

We'll go next to [_______________] with Banc of America.

Hi, it's [_______________] here with Banc of America. Just a couple of very brief questions. First of all, you mentioned integration as one of your key strengths. Now I think there are a couple of your competitors trying to replicate that for instance the universal application network from Siebel which is trying to kind of mimic a similar kind of ideology. Do you think that you will have some kind of effect from such competition? And the second question is on your operating costs. You mentioned that you will continue to invest in R&D. I presume mySAP technology will take in some R&D as well, so where would we expect to see the cost ratio reductions?

I think that it is gratifying to see that our competition is following us and since this is a very tough subject I wish them all luck to become successful there for the sake of their customers. So, I don't see any impact with regards to our customers and the integration job we have to do. Actually, the reality is that the various integration initiatives, there are others in the market as well, they all have to come together and work like telephone systems and then the more successful ones will be very likely to become visible and we feel since we have, now, really a 30-year experience in real time integration and integration between complex applications, cementing integrations as [_______________] that we are in a very, very good position here. _______________] seems to want to say something. It seems to be a hot topic.

I want to add something rather [_______________] can then try. I just have a question I would ask this companies as far as in integrated sale you could use one application?

Yes there is one. One of the key points on Seibel's announcement is that they are addressing a very small part of the integration problem, both on the horizontal part of how many object models they are really aware of when they are really targeting CRM as their only object model and we know today that in order to address integration it is not enough to produce technology, you need to really understand the applications in the business models that you are addressing, and they are aware of one out of six business models and object models in the business. The other one is that they have a very partial integration technology, in the sense; just targeting the first part of it, which is message, based integration, missing the business intelligence knowledge management and portal part of that integration stack. So we are welcoming to the field but its pretty much where we have been in 1998 or 1999.

Okay. Coming to the cost associated with mySAP technology of cost all the efforts on the development side are included in our R&D expenses and if your question is directed towards increase in profitability where R&D come from, one is increasing our product gross margin and hereby bringing down our support expenses, then of course increasing the profitability of the service business, and thirdly controlling partly our SG&A expenses as just described.

What about sales and marketing? Anything within there?

Sorry?

Any reduction in the sales and marketing cost ratio?

A general comment here. Our drills in marketing we repeat this every quarter, now it has started to work better and better but that we have a harmonized roll out of information and if I think with the systems we have in place today that we are well equipped here but it is a lifelong struggle to reduce cost of sales in marketing.

Okay. Thank you.

So on with that I think thanks to all of you for joining us in this quarter. See you in a quarter from now. Okay. Bye.

Once again Ladies and Gentlemen that does conclude today's SAP conference call. Thank you for your participation. You may now disconnect at this time.