SAP SE (SAP) 2002 Q2 法說會逐字稿

I do have a mic. So again a very warm welcome here to SAP's second quarter analysts conference here in New York as our marketing officers [INAUDIBLE].

We are quite pleased to see so many of you in the middle of the earnings season. Of course, we are aware of all the conference calls you need to join today and you have joined, of course, last days.

So since we have already had our first session with the press this morning I will keep the introduction very brief.

Of course, I need to remind you on the Safe Harbor Statement and encourage you to read it carefully.

I also would like to say that -- and to welcome those of you listening via the internet as well as via the phone conference.

Later on, if you want to raise your questions, please use the microphone we will have handy for you in order that everybody can listen to the questions. If you, at the internet following of it and want us to address questions during the conference, please direct them to Stefan Gruber. It is Stefan.Gruber@SAP.com.

With this now I would like to hand over to Hasso Plattner but not forget to introduce the management of SAP.

Of course, we will have Hasso Plattner Co-Chairman CEO of SAP, AG and Co-Founder of the company.

We will have then later, presentation by Werner Brandt, CFO of SAP, AG followed by a presentation by Henning Kagermann, Co-Chairman and COO, SAP. And we will have Leo [INAUDIBLE] the President of Global Field Operations and currently the acting [INAUDIBLE] of SAP [INAUDIBLE] who will take your questions on our business.

With this I would like to hand it over to Hasso. Thank you.

Thank you. Welcome, everybody.

Good morning, good afternoon, ladies and gentlemen.

Much of the news was already discussed in our conference call, again I apologize for our earnings performance, we are probably most disappointed, because still a few days to go in the quarter, we believe we can make -- we could make decent numbers.

The [INAUDIBLE] in uncertainty and confusion to use soft terms, about certain reporting practice, accounting practices of major corporations, prospects and customers of SAP really de-railed us. Other companies who were ready to sign deals who gave up their word that they sign a deal within two days, thus we have to sit there and watch.

I will talk about our relative position in the market later, but before we go there I feel compelled to talk a little bit about our view, how to run the company, and some of the business fundamentals, we have basically followed for 30 years.

Number one is conservative accounting.

All what we do is on the conservative side.

And over the years, we have benefited from that approach.

What we did in this quarter is we wrote down all our investments to the market value to the end of June, all our investments in software companies.

But I will talk about this in detail.

Most of the investment was obviously in commerce 1 but we also wrote down all the other software investments we have, whether they are strategic software investments or venture investments to the market venue of June 30th.

We have now, potential for capital gain there and you can monitor that and can see what happens but the last three quarters, this market was down so much we had to make the adjustment.

It is the first time in the history of SAP that we had to report a quarterly loss.

Good news is it was a quarterly loss only, because of the write-down of financial investments and it had nothing to do with our operating profits.

With regards to business fundamentals, there are a few remarks to be made.

We believe in SAP, our focus - management has to be on business, not on our share price. We believe that managing the business correctly and appropriately in a fair market and over time the market has -- provides some fairness, our share price will reflect good management.

Stock options have never been granted to company founders, totally different than what is the -- what is custom in our competitors' businesses.

We have never given stock options to Founders, whether they be CEO's, Executive Board Members, or Supervisory Board Members, so I have -- no stock options ever since we went public.

Software has never been traded for stock options.

There is a ruling now by the SEC this is not allowed anymore but that was common practice in the late 1990s till the early 2000s, and we never touched that area.

Most importantly, SAP pays dividends.

We pay dividends to our shareholders.

It looks old-fashioned, but it is -- we believe that the success of a company has to be shared with the shareholders and that can not be only the share price going up especially in times when the share price is going in the reverse direction, we pay dividends.

SAP's principles of corporate governance were published earlier this year, there is a comprehensive set of principles, and we are one of the first German companies to create and ratify such set of principals, and in full alignment of the so-called --[Kroner] code, which is a code for corporate governments in - governance in Europe.

And with regards to the discussion which is currently going on, we strongly support that the principles of having stock options reported through the P&L for comparison and transparency reasons is supported by SAP, and as soon as this happens, we would follow here instantly. There is a long discussion and controversy between European accounting gurus and accounting in the United States.

Since the United States is such a large portion of the market and we live in this global market, it is dominated by U.S. accounting rules, and most of the European business processes have supported the alternative accounting for many years, and actually we have fought in SAP basically against our own better belief to have U.S.-type stock options.

What we have to a certain extent now in SAP with our long-term vendors - but a worldwide change here in accounting rules will be welcomed by SAP.

With regards to our numbers, I want to answer -- to try to answer a few of the right questions being asked.

How can we reach our unchanged margin targets?

What will be the cost cutting measures look like? Why do we still remain cautiously optimistic?

Keeping the margin up to 21%, while revenue expectations have been reduced to 5 to 10% growth window means drastic cost reductions.

But instead of just announcing that we reduced the overall work force by so and so many percent, we want to follow a more sophisticated approach.

Yes, we have a hiring freeze, yes, we do not replace people who leave SAP through normal attrition, and we will have local adjustment of work force according to the business outlook in areas, geographical areas and in product areas.

What we have significant reallocation of resources, but will take the people out of project and areas which are less promising short and medium term to areas -- to areas where we think we have good business opportunities.

We will re-train people and prepare them to be ready to earn money in these areas.

We will reduce redundancies in our strong growth development growth in the last five years, we have developed some redundancies and we are busy to find those redundancies and eliminate them and again bring the available resources to the areas where we need them most.

We will prioritize projects, that is the basis for all these reallocations and reduction of redundancies.

We will have not only a policy, but an applied policy with regards to travel.

We will travel now like Bill Gates traveled most of his life, by coach.

And probably this will lead to a reduction in travel and we will use the electronic media much more efficiently.

They are all in place. We will reduce travel costs significantly and all travel-associated costs and we will control this now.

And everybody in the company understands that and, therefore, we are optimistic that we will execute on that.

The biggest chunk of cost reduction will come from -- we will cut seriously the third-party consulting costs.

And this is in all areas, mainly where we use third parties in development, we will replace third party in development by our own folks, and we believe that if we do this, quickly, and decisively that we not only can cut costs but we also can continue to develop within our own goals with regards to functionality and time lines.

We have 29,000 people, mostly highly skilled, and we believe that we need these people for the business which is about to come.

To give you a feeling, we will not cut now in research, which is an area -- actually research is relatively small in SAP but it is an area where we are making great progress, probably we can demo and announce a solution that our product can be totally voice activated in Lisbon in two months from now which would be a huge step forward.

We don't cut in these areas.

We also don't cut in the areas where we are making great progress, like SEM and -- we have become market leaders in -- we are a market leader, we are more than twice as successful as our next two competitors, [Manofistics] and I2.

Where is Herber by the way? Herbert is responsible for the background slides.

And in this last quarter, we have come closer than ever to Siebel, so when you ask us where does the business come from?

We have to seriously look into our neighbor's properties and that means we thrive on the decrease of market share of I2, Siebel, and probably Oracle in the future, but the main focus is and was for the last two years make inroads in CRM and take over SCM and actually we have proof of concept now, and as soon as business picks up again, SAP is in a pole position and then we need the people.

We have learned in recent years that our customers believe in SAP as a trusted adviser.

But what they want to have from us is not only software, they want to have the people who are necessary to run their strategic projects, to develop additional software, to develop a system which is giving them a business advantage, and that means this is not just a software sales where we sell software and then some magic dust on top of it and there is a solution.

The solution is much more work.

It is probably not fully recognizable as software revenues instantly, though we look at our internally at our order book and the order is software, software we can recognize future, in the future, and this is services around this, this is software, this is services, revenues from development contracts as well.

And this is -- this is interesting, because probably I was against that, or not in favor of that for so many years, because I wanted to be as much "Microsofty" as possible with the software so software off the shelf, 25,000 installations, 40,000 installations, shooting for a hundred thousand installations, we still do this.

We still have to continue to bring cost of ownership down there as much as possible.

These are all the initiatives like mySAP all in one, the business one, to cover that segment of the market.

But we cannot achieve our numbers without having the revenues from large clients and that is not only the Fortune 50, this is a large number of clients, but they ask us now for real solutions.

The days of the miracle software are over.

You put a little software piece in and all of a sudden the company takes 5 percentage points better. This is gone.

It is hard work and we are engaged in a lot of these projects.

The more we get of those, the more SAP becomes the main provider for platform business platform for a company.

And we have good examples of that.

And following this track, is actually giving us the -- or supporting the optimism we have with regards to the future, that this is the right direction.

There is no easy way, there is hard work, and that means we have to accept that to -- if we want to become the solution provider for critical business processes in insurance, in banking, in automotive industry, in other industries, we have to do what we did in the past for the oil and gas industry.

We developed the specific software in the oil and gas industry, we went the long way, and now we have probably 80% market share and even the only large oil company which refrained from using SAP is now coming back to SAP and that gives us the confidence that we have to do this in the other industries as well, and we are well on our way there.

Our long-term goal to become number one in SCM and CRM is now, there is some visibility to that, we have achieved it in SCM, and Henning was confident to ask the question in the session with the journalist that we have some visibility of Siebel now and probably we can pass them next year.

We continue to evolve our solutions, we invest in new solutions, we have built a comprehensive technology that we can do something we couldn't do before for our customers, not only provide good solutions for reduction of the auto cycle time, auto fulfillment time or we have a planning engine for supply chain, we also have now the technical ability that we can build large systems, including non-SAP software.

This has two effects.

We are a competitor in offering large solutions for a company, and we take away the pain, or the fear that we are a monopolistic partner, you have to take everything from SAP or nothing.

And that hindered some companies to invest more in SAP, and the more we can demonstrate this openness not only as lip service, or on power points or in announcements, but physically in projects, companies feel more confident to deal with SAP in critical business processes.

So we have proof of this concept, and this is the strategy for us.

This doesn't mean that we deviate from mass shipment of product in the small and medium-sized market.

So we do both, total cost of ownership reduction is number one priority, in our development, so that we can reduce the cost of deployment and the cost of running SAP systems.

With our technology development in the recent years, and the announcement we made in L.A. last year with regards to web application server, with our exchange and integration infrastructure, the XI system, and the portal, we have now the technology in our hands we need to build new applications, especially applications which sit on top of other applications, we call them X apps, something we could never do before.

Applications which do not own data.

They use services provided by other applications, and build now applications on top of these services.

Some of those are resource management, employee relationship management, going into all these other applications and other applications built by the companies themselves or coming from Microsoft or other software providers or from the internet, we can build applications of a different type.

And they are much closer to the business needs of a company.

They the not the standard out of the box offerings we have to highly customize, to achieve the specific goals of a company.

There are probably company's specific developments, we but -- but we will learn more about what is possible and what we can bring to certain people in the company, and we will be much closer to the real operation of a company and not just providing software to the services components of a company.

Which we did for most of our past.

So it is not only that we move from back office to front office, we go directly into the core.

What we do here, for example, resource and program management is with three pharmaceutical companies, how to design, develop and launch a drug, and what can SAP help you?

Where others are, what we do in prototypes with media companies, how to launch a movie.

This is something we never considered as a topic for our software.

And that is interesting, that we have now the ability to think about new areas and we believe this is a whole new world for software we can develop there.

And this gives us the confidence that we are well-positioned with our existing offering and that we have potential to enter new market segments.

With the strategy to have next to mySAP, specific working of mySAP, mySAP all in one, where we tried to lower cost of ownership dramatically by using only one database, by having only one monitoring system for all components of the system, and at the price that we ship everything together, like we did in our business for so many years and which obviously is appreciated by many companies, especially companies in a small and medium-sized business.

We did this, and this will have an impact on sales and rapid implementation of systems, and then SAP business one, the -- won the acquisition and we have the investment we currently do to make this software available in as many countries as many languages as quickly as possible.

And it was very well accepted in Orlando Sapphire, and we are busy building the channel, and engaging with the large companies to use that as the system, small and large, so sales offices, remodeled locations where the implementation of the mySAP system is an overkill, too expensive, or the remote use of a central system is not the way the company wants to set it up.

We will have more of these solution news in Lisbon. That gives us the confidence that we will continue to take away of the probably shrinking market, this is what AMR and IDC predict that the total I.T. spending is still shrinking, that we take away market share from our competitors, mainly I2 and Siebel and we will gain market share in large development projects so that SAP can stick -- or believes in the goals we just have communicated.

The critical success factors for our position today, we have this large customer base, but when you look at the numbers that 30% of the revenues of Q2 came from new customers, and this is not one quarter, this is now the third consecutive quarter where we show this number, continue to show this number.

We have to get it out of our veins that SAP is only for the -- or the success of SAP is totally based on the large customer base, and our success to sell into this customer base.

30% of the revenues came from new customers.

Unfortunately, we wanted to announce a new customer here, we never had one of the Fortune 50 companies which escaped us completely.

But there was optimistic that we can do this soon.

We can't do it today, we have no clearance, but we will get -- we will get new customers and not only in the small and medium business, but also in the large, in the large customer space.

We have an advantage that we have concentrated on integration for so long.

The aspect of suites is back, because even with the technology, we have today, integration of heterogenous systems, of so called [INAUDIBLE] systems is difficult.

It is probably more difficult because these systems, each of the systems are complex systems, and one of the top companies in the world has spend so much energy and money in integrating and bringing them together only to see how difficult it is.

And we believe that our greater industry expertise now, our customer base now, again, and our expertise in integration, helps us tremendously to do both.

To provide an integrated suite, and this is new for SAP, after four years of development that we can declare and the systems are not only pre-integrated but they are also open to accommodate other systems and work together with other systems so we give our customers, as I said, the flexibility.

We have the most comprehensive suite and if we do a few things right, we did not do so perfectly, this is significantly upgrade our demo systems, unfortunately I had to find out that our demo systems are not as good as our systems are, and we are busy to do this, and Marty and his team here in New York is involved in that, so we will have a much better demo - demo presence within a few weeks from now.

We are confident that we could be one of the winners of this downturn.

We had several periods in the history of SAP where a general downturn in the industry was very helpful for SAP, and this could be a time where some of our competitors don't have the momentum to sustain the bad weather we currently experience, and that gives us room for extra growth, despite the overall growth is limited.

So that is why we feel cautiously optimistic, and when you look at the numbers, the numbers were not good, and we believe that we could do better.

Let us assume SAP is a U.S. company, because all the competitors are U.S.-based companies, main competitors, as much as we Europeans feel good about that the euro is now par with the dollar, the impact on SAP looking for -- on to SAP from a U.S. perspective is negative.

Taking the -- converting everything back into U.S. dollars and then comparing the quarters, instead of having a drop in software by -- of 23%, and total revenues of 4%, which are official euro dollar, euro numbers, they will be accounted in U.S. dollars, only 16% in software, and plus 2% in revenues, and if you compare this, with our major competitors, Oracle, Siebel, I2 and PeopleSoft, then SAP looks -- is -- it will appear in a completely different light.

And that is where we take the confidence from that we relatively do so significantly better than our main competitors.

Thank you very much. Werner will give you now the details and -- to prepare you for even more questioning and then Henning will talk about how he sees his experience directly in the market dealing with customers, thank you.

Thank you, Hasso. Welcome to everybody also on the internet.

Let's start with the second quarter. Some details and timelines here.

First of all, asHasso already mentioned, our license revenue in the second quarter was down 23%, to 496 million euro.

If you exclude the currency impact due to the strengthening euro, then we have a decrease of 19% only.

Due to the strong maintenance revenue growth of 16% and the consulting revenue growth of 3%, we end up the second quarter with 1.778 billion euro, which represents, on an actual basis, a decrease of 4%, but if you exclude the currency changes, then it is flat growth compared to the second quarter of 2001.

Operating income consequently 320 million, with a margin of 18%.

Now, due to the fact that we have a huge finance income negative with 455 million, our income before income taxes is negative with 107 million.

Finance income is negative due to non-cash charges from impairment tests of minorities, and this is mainly Commerce 1 with 350 million euro, and other minorities, we have in our books, with 94 million, so this adds up to 409 million.

By the way, the net book value we have now in our balance sheet of all our minority interest is less than a hundred million.

I think exactly it is 93.6 million.

This includes Commerce 1 with 22 million.

One final word to Commerce 1, we had to write it down due to the weakness in the economy, and stock market and we could not longer anticipate C1 share price which recovers very soon to justify our, our value we had in the books.

This has nothing to do with our partnership with Commerce 1.

Let's continue with the EBITDA.

EBITDA is 320 --377 million, which represents a margin of 21%, and you know, we calculated taking our operating income and add back that depreciation and amortization and declared for the quarter 57 million euro.

Our operating income excluding stock-based compensation expenses and top tier acquisition costs for the second quarter were 324 million, so you see, on the impact coming from top tier was 7 million, and we have a positive trend on the stock-based compensation expenses of 3 million.

So the total impact is only 4 million on our operating income excluding stock-based compensation expenses and top tier acquisitions. The costs on this is where we want to achieve our profitability target for the full year with 21%.

With the negative income before income taxes it doesn't make sense to provide an effective tax rate.

If you exclude the top tier adjustment acquisition-related expenses, the Commerce 1 and the other impairment cost of minority interest, then we have an adjusted tax rate in the quarter of 43%.

And this is higher than our guidance on the tax line for the full year, this is between 6 --36% and 38%, and the reason why we are higher in the quarter is simply that we have some text cost associated with the reintegration of the sub [INAUDIBLE] and markets, organizations into SAP.

We have announced this beginning of the quarter, and I think we can be proud that by the end of the second quaarter, we were able to reintegrate, unwind the entire structure and bring it back to AG as per the end of June including all the trend sales and lievys from these organizations back into AG.

If you look to our net income adjusted, we provided with our information, it is 175 million euro, and I will provide you some support now briefly, how you can bridge this with the net income we reported.

We had 232 million net income, then we add back, because it is not tax deductible, the full amount, the full charge related to Commerce 1, and the cost associated with the original top tier acquisition, this is 315 plus 4, so you come down to 87 million, then you have the additional write-down in other minority interest, we had due to the impairment, and this is a 94 million, but some of these are tax deductible, so this is 6 million, so at the end of the day you come from 87 plus 97 minus 6 is 175 million euro.

Coming to our group sales for the second quarter, you know the numbers from the press release and the tables attached.

The only point I want to make is that the relation between product and service revenue did not change and we, as always, have a range in mind, 60% to 70% product revenue and 30% to 40% service revenue.

Now, the profitability in the second quarter on the product side, it went down by 3 percentage points.

Of course lower revenue is the driver here.

In addition, we had higher costs for third party licenses.

If you really compare quarter, over quarter, and then looking to the service revenue, we also decreased the margin by 2 percentage points.

That's mainly a result of the lower profitability in the training area, where we have less classroom trainings and classroom trainings have a high profitability and other types of training with a bit of lower profitability.

If you look to the service business, as the whole, we have 27% now, we had in the -- for the full year last year 24%, and I think we see a trend upwards with our profitability and we see this ending up being higher in 2002, being higher than -- than in 2001, more than 24%.

The costs [INAUDIBLE] this year, I think very important is that we increase R&D relative to our total sales, total revenues of 1.8 billion, this clearly demonstrates we do not jeopardize our future and we do not save at the wrong end.

Sales and marketing expenses are down 1 percentage point.

We are flat in percentage of sales with general and admin, but here we have to see that we have included in our number for the second quarter of 2002 some million related also related to the reintegration of sub [INAUDIBLE] and markets.

If you would exclude these expenses, then you would come a bit lower than the 5% mentioned here. And our total cost base for the second quarter, of course, was impacted with one percentage point of coming from the stock-based compensation expenses.

We had included them last year.

If you come to the half-year financial results, I think the -- we realize the strong growth in maintenance plus 19%, good growth on the consulting line with 10%, and this gives us 2% growth on the total revenue, and adjusted this would be even be 4% growth and I think if you compare this to our competitive landscape, this is a relative good performance.

And clearly, as Hasso already mentioned, for us personally, it is disappointing but we also have to see this in a relative perspective.

Operating income was 506 million, have then to consider the financial income negative with 514 million, I went through the details already related to the second quarter, so at the end of the day our net income for the first half of the year is negative 167 million.

EBITDA due to 111 million depreciation and amortization is 618 million, our operating income excluding stock-based compensation expenses and top tier acquisition costs is 561 million.

This includes now for the first half 42 million stock-based compensation expenses, and 13 million related to the top tier acquisition, and this is simply the amortization depreciation on the software we acquired when we purchased top tier.

Our effective tax rate again doesn't make sense due to the negative net income but adjusted for top tier in Commerce 1 and other impairment impacts, our adjusted tax rate is 39%, it is the same level as in the first half of 2001.

%But again, for the full year, we estimate to have an effective tax rate of 36 to 38%.

The balance sheet, strong, solid balance sheet.

The operation of cash flow we provided from continuing operations in the first half is 718 million - euro.

If you go through the asset side, I think we have included in our liquid assets 467 million cash, this is an increase of roughly 60 million compared to the beginning of the year.

We brought down our receivables by 5% and this is more than one-day improvement and one-day improvement in receivables means for us 21 million additional cash flow so that reduction of the DSO continues to be a focus for us.

Fixed assets of course also went down due to the reduction in the financial assets for more than 700 million to a bit above 200 million, and as I mentioned already, this includes the remaining -- of our investments including Commerce 1.

If you look to the [INAUDIBLE] equity and liability side, there of course, we have included our deferred income, which was low by the end of December, mainly due to the low payroll maintenance deferral we have which built up at the beginning of the year, then brought into the P&L during the year, and for the half year we have 635 million period deferred income on the maintenance side.

Now, shareholder equity, as a consequence of our situation, decreased by nearly 700 million, and I will give you some more detail here.

One important element, of course, is our negative net income, the other factor is the dividend we paid with 182 million, the third one is that in the second quarter we took advantage of our approval we received from the annual shareholder meeting and made to buy back shares and we bought back shares worth 150 million and from an accounting perspective this has to be treated as [INAUDIBLE] stocks of [INAUDIBLE] of equity and one big chunk we have included in our equity is the so-called CTA, the cumulative concentration adjustment under FAS 52 and this adds up for the time being to 250 million due to the changes in the currency.

Coming now to the end I want to take the opportunity to repeat our guidance for 2002, as you heard, we will be target for revenue total revenue growth of 5% to 10% in 2002, and we target for profitability of 21%.

This original target does not change -- has not changed and I want to guide you through one example, if you take 5% revenue growth, this would mean that year-over-year we would come up with total revenue of 7.7 million euro.

This is a plus of 5%.

If you then look what we have to do in the second half, in order to achieve this, this would be revenue of 4.2, total revenue of 4.2 million euro, and if you compare this to the second half of 2001, this represents an increase of 8%, and if you compare this 4.2 million with the total revenue of -- with the total revenue of the first half of the year, then this represents an increase of 24%.

And with this 5% revenue growth, regarding the profitability of 21%, our cost base in the first half of the year was 2.87 billion, the second half of the year, in order to achieve 21%, could be 3.2 billion, which represents a growth, first half, the second half of 2002, of 12% and if you compare this with our expense level in the second half of 2001, this represents an increase of 2%.

So this is one example how you could work out the guidance.

As mentioned in previous calls, we would not break this guidance down from a total revenue perspective into the lines of business, so I hope that you understand this.

We only can give you the guidance on total revenue.

That's all for my side and I will like it to hand it over to Henning.

Thank you, Werner.

Ladies and gentlemen, this was another tough quarter in a still tough environment.

The good news is that our customers continue to spend, we have seen this.

But we see some changes in spending, I think you have seen this as well when you talk to clients directly, they are more careful, I think they have to live in the same environment and to survive there with their margins.

So, therefore, it is more incremental.

It can make them sometimes to split up a big project into smaller pieces and to implement a piece first and get the return immediately in order to fund part of the rest of the project, so these are reasons bringing customers to more incremental buying.

Quick return is a must. Nobody would buy these days without having a clear business plan, and quick return of investment.

We believe this will remain for some time.

This has some impact on the conversion rate at the end of the quarter.

Because it can happen more than ever that customers at the very end are not willing to commit to the I.T. expenditure because they feel it is too risky, or because they have bad news for their own quarter.

Nevertheless, we were able to close some significant deals and I will give you some names on the slide.

Before I go into this names, just for your information, megadeals are out, there is no megadeal in any longer, and not letting you dream, a megadeal is not something that is 100 million, a megadeal now in our terms, it is something above 25 million.

Our large deals, larger deals, about 5 million euro, and some of them are close to these customers, in other cases, we mentioned the customer because it is of strategic importance in this industry.

In the Americas I would like to mention Wrigley, Textron, Proctor & Gamble [INAUDIBLE].

City of San Antonio is important for us, because this is one of the public sector deals which is close, not only for ERP but also for complete government projects.

There is [INAUDIBLE] Rent-a-Car, there's Texas Instruments, Burger King, and in Europe, we see some major deals in the financial services industry, banking, this is again not ERP, this is core banking.

We talked several times that SAP is committed to go in to new industries in the core business, this is one example.

This is again not -- a financial product that is the heart of the business, that is a module to report the call re-insurance business.

We have Continental, Shell, a major deal, including portals, with 85,000 seaters, one of the largest portal deals we made.

Nodiya is again a bank, and in this case our software enabled this bank to continue with the aggressive acquisition strategy with Swedish Post. [INAUDIBLE] quite strong.

In KPMG, in this case we support KPMG who accelerate their contact-to-cash cycle.

In Asia Pacific, you will see touch information systems.

This is more a traditional implementation, we did in the past, we made them productive globally with FI and you see that immediately this customer is going for the next deal, because that went very well.

So he is looking more for the other offering with SAP.

Toshita] electric is improving supply chain visibility where [INAUDIBLE COMPANY NAME] optical we have China Resources and DHP.

I want to mention two milestones, we have made more or less the last key step in completing our organization in our last year and that was announcing [INAUDIBLE], to the right-hand side here, as being President of Global Field Operations, and the first -- one of the first things Leo did was hosting the Sapphire Orlando, which was a big success with as many participants as we have had last year.

Not many people could say this, because we know people try to save travel and for us, this Sapphire was a milestone because more and more customers want to share officially their success with SAP software with the other clients, so we had more than 60 clients giving talks, and we said two years ago we announced mySAP.com a year ago, we delivered solutions, and this year in Orlando, we deliver proof of concept, proof points for return of investment for our clients.

Now, if we look to the license revenue and to the regional -- you see that the Americas went down by 34%, U.S. by 32%, which is a good result because if you look to the soft environment and the competition, not many people are seeing -- expected this and most important for us, the Americas delivered the forecast they gave us over the last months.

It shows us the business is stable here, and reliable in the Americas.

In Asia Pacific, it is a little more unpredictable because we, for the first time, got some surprises in Japan was minus 44%.

The same buying pattern as we see it in other areas of the world, pop up here, also Japan is an economy where SAP is selling larger deals.

Definitely that has stopped in the second quarter, so we closed our deals, but on a much lower deal size.

The same more or less is happening in Korea.

In the other Asian countries, I think we did according to expectations.

In Europe we were down 13%, many of the countries performed as we expected, a few exceptions, U.K., France, and Switzerland again, these are countries exposed to larger deals, and if the deal side goes down, we see it it more in these countries.

Germany extremely strong, with plus 5%.

That is the result of our very, very good customer relationship we have there, but also that because this is the market we come from, it is a kind of a test market for SAP, all new products especially in the new industries are launched first very early in Germany, so in Germany, our penetration of nearly all industries is very, very high.

So, therefore, I think there is a high portfolio of opportunities and if one industry suffers-ok- we can sell into the other one quite easily.

The total sales is a similar picture minus 12% for the Americas, only minus 9% for the U.S. a surprising plus 5 for Japan, so it tells you our service business is improving here.

We gave the guidance to our management last year, to improve consulting because we found out consulting is a bottleneck.

We've advised consultants to accelerate making customers productive, and free up money for additional sale later on.

We have plus 1 in Europe, with a plus 3 in Germany, so a healthy business in Europe as well.

Now, what about the different products?

If you look to this chart you will see that the demand for ERP is still high, we have 40%, plus 2%, of our business coming from the core ERP financials in human resource.

You will see a very strong ERM business, it was mentioned already, that brings us to being the number one in Europe now, with 20% of our sales, plus 4 against the previous quarter.

And you see PLM stable, a little decline in the e-commerce area but we all know it will take some time for these products to catch up, because customers are a little bit hesitating to invest into new technologies like exchanges.

Portal business is doing well on the other side.

On the industries' point of view, we have, in discreet industry, 24%, it is a little decline but that is not significant, just to give you a feeling what we are doing here, we are extremely strong now again in high-tech, because we deliver new business innovations to customers who want to improve the customer facing processes.

If you, let's say, transform the way how you do business with customers very often, let's say you need a different functionality in customer relationship management, for example, to configure, an offering online for a customer which includes not only products, but services, and financing as well, or leasing capabilities as well, this is the type of things we are doing here in automotive.

We are developing similar business innovations like configuring online a car, and giving you a clear answer in which time and -- or if in which time these from new configured car can be delivered and those type of things.

The process industry a little decline.

It is for me not of importance, because this is -- SAP is a very, very strong footprint so therefore the maturity in markets is given we have heard 80% in the oil business, so therefore we have those fluctuations.

Service industry more or less stable, plus 2%, 23%, here I want to mention a very healthy business in utilities.

We have now more products, specific products for Perfection Service Provider.

Financial services, I have mentioned, a big increase plus 6% due to the fact that we now can launch more often to the market our new products like Co-Banking and Bank Analyzer, and also specific things for the insurance industry.

Public sector, minus 2%, this is very, very difficult to predict, we have more than one - several a large opportunities in the pipeline, but it is tough to sell this in the public sector, because even if you have sold it, then you have budget restrictions, you have to sell it again, et cetera.

And very strong last but not least consumer industries, that's a traditional strength of SAP, in the consumer packaged goods.

Another reason, our solution for fashion industry is picking up again.

I missed one slide, but I want to comment on it, mySAP.com definitely picking up.

We had 77% mySAP.com in Q1, now 81%, we will reach the 85% we predicted beginning of the year, 30% new clients were mentioned already.

If you look to mySAP.com only, 34% that tells you that more or less all new clients are going for the new suite.

And very important, we closed as many deals in Q2 2002 as we closed in Q2 2001.

The same number of deals, but we explained already, significant decrease in the size and therefore we had declined in license revenue.

I want to close with a remark on the industry. I have seen some comments especially from you, from the financial analysts, believing that the times of growth for the software industry is over.

I am definitely not -- do not follow this argumentation, because of two reasons -- the first is we have to look to the seasonality. You know that our industry had the luxury that we had over several periods of time the more artificial creation of demand.

Think about the Y2K and please think about the early days of the internet boom.

These were days where software investments were made, very often without any detailed justifications and business plan.

We had very quick decisions and we had very large deals.

Now, you compare these years with the period where we adjust on the other extreme. As always in life, the pendulum goes to the other extreme. So customers are buying more careful than ever, more careful than ever, they try to reduce seats they have on inventory, as much as possible, therefore you see these large [underwriting] revenues, which are not following exactly the pattern of license revenue, because there are seats in the market, customers are productive and customers are a little bit risk averse because they have diminished their margins for the next quarters as well.

So, therefore, we compare a little bit not [INAUDIBLE] we have to take this into consideration.

It is not very long that customers can continue with this behavior, because they need software in order to be more productive and more competitive.

And they will continue even in this pendulum to buy software.

So if you then, after this transformation, compare the growth rates in the software industry, we will come back to growth rates we know from earlier years.

We from SAP have decided not to wait, because it is tough to decide today when will this happen? We will adjust our infrastructure, our cost infrastructure as you have heard, that it is -- follows these assumption of having smaller but steadier flow of deals.

If they are larger deals, and there will be larger deals, then it is more -- and additional opportunities opportunity for us, but it is not something which we need to make our quarter.

And I want to make a second remark, and that is, as Hasso said, in these days, customers are buying software especially from SAP, not because they just want to replace a legacy system, financial system.

They are doing this, because they cannot continue the old way to do business, they have to innovate the business.

This means a look for software, drive the heart of the business.

Sometimes these softwares are available for example from us.

Sometimes we have only 80%, 90% and we have to engage and we engage with key clients in all industries into projects to become -- to get leading-edge software to the markets.

It's obvious that these projects have higher risk, but you know if you have higher risks you get much higher returns, that is the equation and these customers get higher returns, and many customers are sitting there and watching and waiting, because they want to have the proof first.

We will give them the proof and these are some proof points.

But on the other side, I think customers will be aware when these earlier [INAUDIBLE] are successful they have to hurry up because they have a competitive disadvantage. The others will be much more competitive. These are the reasons why we will see in the future normal software growth as we have seen it years ago.

For SAP, I think this is good.

We have the products and the relationships to these type of clients, we have the people to engage in those projects.

We have the expertise in nearly all verticals, we have started already last year to adding services to even engage completely with our clients, in consulting, in quality assurance, even in hosting and we keep our level of research and development to hold our products out.

Thank you very much.

We are now ready for taking your questions. Before we will do this, please be reminded that we would like to ask you to use the microphone and please state your name and company's name so that also those of us following the conference by the web knows who is talking to whom.

For those on the web, please direct your questions again to Stefan.Gruber at SAP.com. It's stefan.gruber@SAP.com

So please, first question goes here to?

I'm Jay Cooper, Lowell Partners and Company.

Hasso, you mentioned something that was interesting, suites are back, you said.

And I wondered if you could elaborate on that a little bit, because it kind of clashed a bit with the concept that I have developed or am hearing about integration, and application management as opposed supposed to enabling everything to play together.

Could you say where that is going a little bit and why you mentioned that particular theme?

Yes, it is interesting.

It is both.

It is that on one side, we open up and we integrate and we actually build provisions for integrating with other software.

And then while we do this, we have gained confidence in some of the front office areas, as you see in the CM and CRM, and on top of them some technology like portals, which enables us to sell now complete suites, or as much as possible, of the mySAP suite to one single company because they trust us that we are not totally dominating their shop and even if we dominate, they have the opportunity to bail out and take advantage of alternatives.

It is a myth that [INAUDIBLE] is better than software from suite manufacturers. It's a myth. There's a lot of hope that the small ones are more agile, run faster, there is a lot of hope in the financial market.

The result of this hope is probably that is not totally true.

The constant pace of the larger companies dealing with a solid market backing, if they do it right, if they don't mess it up, they have not only the chance to be as good, they have a chance to be better, because we do it as well as the best of them and we do it integrated with the other components so that the cost of ownership are probably significantly lower.

Therefore we have 8,000 developers and others have a little bit less.

We could have better numbers for you, not doing this job, but this is how we think we secure the next five to ten years of the future of SAP and this is how we do the best job for our customers.

And the customers are coming back.

We lost so many -- we didn't lose the customers, but the wallet was so open for some other projects in the last three years that they did not have enough money for SAP.

We had good numbers, but we did not fully participate in the boom.

And now all of a sudden, the wallets are closed completely and the interesting thing now is relatively we do much better than our highly touted competitors.

So that gives us the overall confidence that this is actually not the numbers in comparison to the other ones, are not real bad numbers, they are actually good numbers, absolutely, they are lousy.

Thank you, we will take the next question from the internet.

A question raised by John Segrich, Goldman Sachs.

Question is, "Looking at the average deal size coming down there appears to be significant pricing pressure in the market. Can you discuss how you believe pricing pressure will look in the future and can you do something against this rising pressure? "

In fact ,what we should look at is before we even talk about pricing pressure, is to hold prospective of the customer.

The customer looks at IP projects from a total cost of ownership and return on investment perspective.

And in debt environment of the software projects are being sliced into smaller chunks, it is actually a trend that helps us resist some of the pricing pressure, because smaller projects usually require smaller discounts and therefore helps us to maintain a pricing level.

That does not mean, of course, that for this or the other flagship name that you want to compete against, some competitor, that this is the other occasional discount or extraordinary discount will not occur.

But as we are more and more moving towards a turn in the investment type of reasoning and total cost of ownership approaches, the pressure on this client actually changes to us delivering the value to the customer and therefore protects us in a certain way on pricing pressure.

The next question, please?

Thanks, Jerry Freedman, Fulcrum Global Partners.

Werner, could you elaborate on the assumptions that may be behind your revised guidance for the year either with regard to the overall economy or specifically the manufacturing economy and maybe in terms of currencies? And also, as a second part, if you could describe how those assumptions changed relative to the prior guidance? Thanks.

I can answer this.

When we gave our first guidance, the beginning of the year, we gave also some conditions under which we can achieve this.

We wanted to avoid that you believe we know exactly what the economy will look like, because that is not our profession.

Therefor, we said clearly SAP believes there will be a pickup in the economy in the second half and we said also after the experience of thefirst quarter, for the first time, we have seen that the closing rates is not as we know it from the past, because we experienced already at the end of the first quarter that we missed actually some larger deals. And we added in this -- if this continues in the second quarter, there will be a trend and it might be we have to change our guidance, but we cannot say it now, we have to see if this really happens.

So now we are at the end of the second quarter, if you look back what we said we have to revise first these assumptions.

We have seen that the conversion rate in the second quarter was even worse than in the first one.

The volatility in the -- let's say the volatility is high, forecasting is difficult.

On the other side, they are not real indications of an improvement of the economy in the third quarter, as we believed. As a maximum, as the best it can pick up at the end of the year.

Taking this into consideration, we had to revise our guidance and we said, look, according this, we can make 5 to 10%.

If there is no pickup in the economy, we will be closer to the 5.

If at the end of the year, indeed, economy will pick up a little bit, not in the end of the year, we can come closer to the 10.

Whatever happens, as long as SAP is in this range, we will maintain our margin guidance that is what it is. It is fair, and it reflects the environment we are working in.

Thank you.

Next question.

Well-worded.

Thank you, John McPeek, Prudential Securities.

If you look at the pie chart you have for the group sales by region, you show the Americas down 12%, and the U.S. Is down 9%.

That would imply that non-U.S. Americas was down 24%, and I am just wondering if there is some special impacts in the quarter that caused that?

Yeah, at the end look to Latin America was really weak.

That is not a surprise.

First of all, people pointed on Argentina and now we have seen that these let's say takes over to Brazil.

So therefor, Latin America was weak, there is good news about Latin America, we should be fair to our colleagues, they were able to manage their costs in this tough environment.

The Latin American people were looking -- they used to live in such an environment and cost containment was done, so therefore in terms of profitability, they achieved the targets, but as you said in terms of gross, not.

We will take the next question from the internet.

A question, very often raised recently from Mark at Citigroup, the question is, "To be clear, can you please explain why maintenance revenues were down?" sequentially?

Yes, I can answer this question.

The first quarter we had maintenance revenue of 597 million euro in the second quarter it was 595 million.

If you do a simple calculation, and take the maintenance revenue of the first quarter, and calculate on the software license revenue of the first quarter, 402 million, 17% maintenance, divided by 4, then you have the maintenance revenue for one quarter.

This would be 17 million one seven on top of the 597.

Unfortunately the strong euro resulted in a decrease on the maintenance revenue side of 10 to 11 million, and we have some minor impacts of in the aggregate of 6 to 7 million, so mainly, the reductions sequentially is a result of the strengthening of the euro compared to the dollar.

The next question?

You said consulting revenues are less geared to license revenues than training. Can you maybe elaborate on this a little bit also looking at utilization rates and pricing going forward?

Yes, thank you.

The target for consulting for us is first profitability, second customer satisfaction.

Not gross.

So they hire carefully and we have the higher utilization than we have ever had in SAP.

Which is not in line to our industry, by the way, if you look to the consulting industry, utilization goes down, even in our subsidiary, SAP SI, that is the case.

For SAP AG, we are using consulting as a tool to engage closer with the clients and faster implement the seats.

Therefore, we created this Global Professional Services organization last year, which is I think a big success, because we are now much faster in sourcing around the world, key project from our clients.

The profitability in consulting, if you go really to the details, and I did this, then you see that sequentially Q1 to Q2 profitability is in consulting went up a little bit.

So it tells you utilization is improving.

From the pricing point of view, yes, there is pressure on consulting rates, because in the market there is some overcapacity, or some excess capacity in some areas, not in all.

There is demand for [INAUDIBLE] management consultants still, but in the normal areas, ERP is at excess capacity.

But because our consultants have special expertise of the product, because it is combined with the quality of SAP with a brand name of SAP, we are still able to sell to our rates.

We will take the next question again from the internet.

The question raised by David Clayton, CFSC.

Actually, David has two questions, the first one is, "Will the move to smaller deals [INAUDIBLE] deliver the same revenue base?" The second question is, "Given that there will be some maintenance cannibalization as a takeup of mySAP.com continues, should we assume that maintenance growth will lack license revenue growth?"

Let me answer the first question if I may.

The answer is definitely not. What we are doing is we are re-deploying the sales force worldwide, realigning sales forces towards various customer segments and what we are also doing is, we are building up our indirect channel.

I don't believe that we will need to come to a larger number of quarter occurrences.

Maybe I can answer the second question. I believe there is a misunderstanding behind the second question.

If we migrate our fees to mySAP.com, we get additional license revenue, because mySAP.com is more expensive, first reason.

Second, very often the customer buys a different seat.

Yes, then our fee is gone.

But it is substituted by higher license and therefore by higher maintenance. So I would say the faster, the faster we convert to mySAP.com, the higher maintenance will be, and therefore we speed this up.

That is the reason behind it.

Thank you.

Next question.

Simon Andrews from Lehman Brothers.

To follow-up on that last question. Can you give us an update on the percentage of R3 customers now upgraded to mySAP and the average deal size? The amount of money they are spending on that implementation and over how many quarters now of customers are purchasing that so far?

I can answer the first question, the second -- Werner has the data.

Roughly 30% is converted.

Repeat the second question.

The average deal size.

Normally we do not disclose the deal size, but the let me make some comments on this one.

Principally it did not change. It is around -- can we say it Henning?

Around what?

No deal size.

My boss said no deal size, so no chance.

But there is one interesting factor, that the deal size for new customers is a bit lower in general than the average deal size.

One thing can help you, it is interesting and that fits to our observation that the new customer buying mySAP.com, these deals are really lower. So it tells you the customers we have already that are buying in addition have more confidence definitely because they know our software, they know the success they have had to have, the experience in turn is faster.

In this environment, the new clients are buying in smaller deals.

That is surprising.

That was not the case two years ago.

I do something I am probably not allowed to do legally.

But I believe that the average field size over 5 five years for the customer will go up.

Because we have less discounts per set, because we don't oversell a lot at a high discount and then we start implementing and for some time we have a lot of users on the shelves, because we cannot cope with the implementation.

And so even if we take the maintenance into account, I believe that -- and that shows the countries where we have this philosophy for many years, that they are doing much better in the recent years.

If we sell software in stamps, the customer gets the confidence, the customer will do on average more with SAP than jumping into SAP with both feet -- both feet ahead.

I think legally it is a fair comment.

Was that allowed?

Yes.

It is Robert Maynor with CIBC World Markets Corp..

Can we put parameters around two elements of a cost cutting strategy you outlined for us?

They are related to attrition and the costs of the third party consultants.

Maybe if you can quantify the cost savings from decreasing your reliance on outside consultants and if you could tell us the attrition rate you expect in the second half of the year?

You can do the math, so we give the guidance for the revenues and Werner elaborated what margin we want to maintain. So that gives you a little exo-spread sheet where the costs have to be, and I said all the elements where we want to save costs.

There is -- the biggest chunk will be that we cut significant - external consulting, and that is general consulting that is not that much, but mainly consulting where they help us to develop products or define future products, we will start this as quickly as possible with our own people.

So, this is basically the total development for us of SAP will be reduced and especially on the high side where we have external consultants.

We have developed so much knowledge in the recent -- in the recent years that we can cover those, and the other cost savings will come from, we do not replace people who leave SAP, there is an attrition rate, an historic attrition rate, we cannot predict the future, exactly, but we have an idea, where this will be, and we will retrain people to move from one department and one project to other projects and in certain areas, we will also re-adjust our work force.

But what we don't do is that we give you -- that we give you a number of -- we will cut overall work force and we do this, then, as a worldwide program so we do this in a more sophisticated way.

May I say one point so it is not misinterpreted?

If you talk about reduction, external consultants, then we are focused on areas which are not revenue generated.

Back to a comment you made earlier about the growth rate for the software industry, or the software industry as a whole declining in terms of growth could you give us color on what you guys expect for your long-term growth rate for the next five years in terms of total revenue?

I give you my guess of -- in which growth we will come with the software industry if it is normal and I think we will come back to growth, like 15, 20% for the industry.

Okay, thank you. Next question we -- take from the web.

It is a question raised by Doug Kahn, Merrill Lynch.

The question is, "Dietmar talked about only 3% of the deals where they see SAP, would you agree with this?"

Who will take this question?

I think everybody can comment on this.

I would like to start, because I studied mathamatics and I want to apply this. It took me 20 years to apply this.

We made 60% of the revenue in CRM. I have to say we see Siebel at least in every second deal, which would mean in 30% of the deals instead of 3 might be that it was a mistake, we see them, if they see us only in three that might be the reason why we are catching up so fast.

I think he has to adjust his rear mirror a little bit.

And it is amazing how somebody who is so intelligent and so successful like Tom Siebel has such a blurred vision.

I have only an anecdotal observation, I am personally involved in three deals in the Bay area in walking distance of Palo Alto research labs and I know that Tom Siebel personally has been in all these three deals to avoid the SAP when the deals involve talking to anybody from the CEO down to the owners of the company, so if he only takes these three deals, then he has a much better perspective what is going on.

Since we launched or presented our new version of our CRM system, 3.1, in Orlando, all of a sudden, from SAP is probably not what our sales people want, because it does not look as good as Siebel, it doesn't feel as good as Siebel, and we don't want to have this full-blown integration anyway.

All of a sudden we are on every single shortlist and for many companies, we are now the product of choice, because we provide the same functionality, we look as good, and on top of that we bring the integration and we bring the momentum.

You know, that software is also a momentum place.

It was difficult for SAP to catch up with I2, and other ones, especially Tom Siebel, because they have a lot of momentum going on.

Now, we have the momentum and we come from behind, this is like in car racing when you are in the wind shadow and you accelerate from behind you have extra momentum going into the first turn, and this is what we see.

He knows exactly what is going on and I cannot understand why he is not asking his own brain to come forward with some more reasonable numbers.

Okay, next question.

I know him well enough that -- out of the protocol, but he knows much better.

Okay, next question, please.

Alex Cutler with Agnus Group.

A couple of questions, one for Leo. Any more changes in your sales organization, or are you pretty much done with what you've planned to do so far?

Secondly for Henning, are you seeing or expecting more large deals in the second half? Is that part of your plan?

And thirdly for Hasso, what do you think is the next catalyst for the software industry to pick up again?

Let me start with the most arcane of the questions.

Most prophetic, I should say.

No, the changes are not completed. That is still work in progress, I suppose that the question was on the global scale.

On the global scale we are still working on it.

We are making progress, we are moving in the right direction, but some adjustments and some fine-tuning and some rearrangements still on the way.

With regards to large deals and where we and where we see, what we pick up, I think that we have reached now and can present this in our prospects.

The prospects are confident SAP can do more than back office, that SAP can do best of these front office applications and on top of that, we can provide the means to build company-specific additions on top of that to really achieve a competitive advantage.

Which you can't do with just off the shelf.

This has been -- this is the discussion, we always answered yes, off the shelf software you can customize, how you use it is the competitive advantage.

On top of that, we help companies to develop software for competitive advantage.

This is in large projects.

This is what we only started recently, probably three years ago, four years ago, and this is coming into fruition now.

We get -- we will get large software deals around large development projects, not just customization and implementation. Development projects for customers, whether this is built to order in the automotive industry, whether it is a worldwide spare parts management, et cetera, et cetera.

In these deals, we have extreme success that we then place our standard software components in these projects and over time will be very successful with standard software sales.

But you won't see this as the big splash, because we - these deals will come as staggered deals, and this -- we like this.

We -- we want to get overtime out of this high fluctuation in the quarters, we want a more stable business, and therefore we have to have a huge auto pool from which we then can take the -- the revenue recognition.

The dark horse we have is what we call the X apps that we can build technically applications now on top of other application. Everybody is talking about the web services, and actually we are doing projects now where we can exploit this type of technology to sit on top of other applications, and we will have huge focus in that in our Lisbon Sapphire.

I think there are two further questions from the internet.

Since we are running late, Mr. Hunstetter, I would like to close with these two questions.

The first question comes from Colleen Kaiser, Lehman Brothers.

"There is currently a lot of pessimism on the normal Q4 budget flash. What is SAP seeing for seasonality this year from a geographic standpoint?"

The second question is from Ross MacMillan, Morgan Stanley.

"Why is [INAUDIBLE] revenue down year-to-year? Due to cancellations of maintenance in Latin America?

The first question, I would say, it's the normal seasonality.

So Colleen should apply the seasonality she sees from it.

I take the second question from Ross.

It is true that the deferred revenue balance went down, if you compare end of June 2001 with end of June 2002, but this is simply due to the fact that we have less non-standard maintenance in the range of nearly 50 million.

So the normal periodic maintenance accrual went up, is quite stable, and the reduction is coming from the reduction in non-standard maintenance.

Okay, with this I would like now to close the seond quarter, SAP's second quarter analysts conference. And thank you all for joining us today.

We are looking forward to have the next conference call and also the Sapphire where we can continue the dialogue.

For those of you staying in the room we have prepared some boxed lunches here at the left-hand corner from my side and we would of course be happy if you will stay for some further discussion.

Thank you.