SAP SE (SAP) 2002 Q3 法說會逐字稿

Welcome to SAP's 2002 third quarter results conference call. All lines will be on listen only until the question-and-answer session of today's call. This call is being recorded.

Today's call will be hosted by Hasso Plattner, Henning Kagermann, Werner Brandt, Leo Apotheker and Gundolf Moritz. I would now like to turn the call over to Gundolf Moritz. Gentlemen, you may begin.

Yeah, thank you. Good morning and good afternoon, everyone. This is Gundolf Moritz, head of investor relations for SAP.

Thank you for joining us to discuss SAP's third quarter 2002 results. With me here on the call are Hasso Plattner, Henning Kagermann, Werner Brandt and Leo Apotheker.

Before we begin the call, I will make a few remarks about forward-looking statements. Werner will then discuss financials and new organization improvements and Henning will provide some details on the market. Hasso will then give an update on our product suite and the competitive picture. We will then open up the call for questions for Werner, Henning, Hasso and Leo.

Before we begin our discussion of the results, please note that any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as ``believe,'' ``estimate,'' ``intend,'' ``may,'' ``will,'' ``expect,'' and ``project,'' and similar expressions as they relate to the company are intended to identify such forward-looking statements.

The company undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the company's future financial results are discussed more fully in the company's filings with the U.S. Securities Exchange Commission, including the company's Annual Report on Form 20-F, filed with the SEC on March 28, 2002. Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

Now we'll turn it over Werner.

Thank you, Gundolf, for this introduction. Hello, everyone, and thank you for joining us today.

It is very much a changed landscape in the software business and we have been very focused improving our effectiveness, our organization and our competitive ability. Companies are requiring faster returns on their software investments, lower costs-- lower total cost of ownership and more comprehensive solutions than ever before.

Staying ahead of our customers' expectations has been tough, but we are committed and I'm happy with the work we have done over the quarter. We continue to efficiently position ourselves, both financially and strategically, for the long term.

I have stated in the past that profitability is the key driver for our company. Our operating-- operating margin improvement demonstrates our commitment in this regard. Operating income for the first-- for the third quarter of 2002 was 336 million compared to 159 million for the third quarter of 2001. This represents an increase of 111 percent. Operating income for the 2002 nine month period was 842 million compared to 733 million for the 2001 nine month period, which represents an increase of 14 percent.

Operating income for the third quarter of 2002, before charges for stock-based compensation programs and acquisition-related costs, increased to 360 million euro from 201 million euro for the third quarter of 2001. For the 2002 nine month period, operating income before charges for stock-based compensation programs and acquisition-related costs increased to 877 million euro, compared to 858 million for last year's nine month period.

The third quarter 2002 operating margin, before stock-based compensation and acquisition-related charges, was 19 percent compared to 12 percent for the third quarter of 2001, a significant increase of 7 percentage points in a very tough environment. This operational performance demonstrates our ability to efficiently manage our infrastructure costs and to adapt these costs to the current environment.

For the 2002 nine month period, the operating margin, before stock-based compensation and acquisition-related charges, was 17 percent, which is in line with last year.

Income before income taxes for the third quarter of 2002 was 298 million euro compared to 109 million euro for the third quarter of 2001, representing an unbelievable increase of 173 percent.

For the 2002 nine month period, income before income taxes was 380 million compared to income before income taxes of 559 million for the same period last year. The reason for this decrease is the write-down of our 20 percent investment in Commerce One and other minority investments, which are included in [unintelligible] income totaling to 507 million euro year to date. As we have communicated in the past, the majority of these write-downs are not tax deductible, therefore our adjusted tax rate for the nine month period is 36 percent instead of the reported 90 percent if you exclude these special items. We expect this 36 percent adjusted tax rate to be consistent for the full year of 2002.

Now let's have a look to our earnings per share. EPS for the third quarter was 65 euro cents, which was an increase from 12 euro cents reported for the third quarter of 2001. For the nine month period, EPS was 11 cents compared to 83 cents for the first nine months of 2001. If you now exclude the following special impacts from net income in 2002, which are: number one, the write-down of our investment in Commerce One; number two, other impairment costs of minority interests; and to be very precise, number three, extraordinary gains; and number four, acquisition-related expenses; our clean EPS was 73 euro cents for the third quarter compared to 27 euro cents for the third quarter of 2001 and, if you look to the first three quarters of this year you have 1-- 1 euro and 71 cents compared to 1 euro and 39 cents for EPS.

As you look at margins and EPS, it is important for everyone to focus on the fact that becoming a better-managed organization is more than just cost cutting. The elimination of many third-party costs and changes in staffing levels and staffing focus, as well as structural changes are all permanent features of a leaner, smarter SAP.

We've altered the way SAP spends its resources to more evenly match the longer-term approach of software sales and the partnerships we engage in with our customers. The drive to be a more efficient organization will continue and we believe that our current run rate of operating expenses is at a level which is supported for further margin improvements.

Total revenues for the third quarter were 1.7 billion. However, on a currency-adjusted basis, revenues grew 10 percent versus 3 percent reported. This shows that the volume of business continues to grow more than what is actually reported.

License revenue was 435 million euro, maintenance revenues were 603 million euro and consulting was 545 million euro. Approximately 75 percent of this quarter's revenue came from the installed base, which is almost on par with other quarters. We are pleased with our license revenues, considering the rapidly changing market environment we are currently in and the fact that we have in the past and continue to gain back market share.

Let's look at things regionally. Americas -- an important region for us and one which has been tough over the past few quarters -- is showing an encouraging performance. We are committed to rechart our sales strategy in the U.S. by focusing on solidifying longer-term customer relationships.

Revenues in the Americas region were 586 million euro for the third quarter compared to 613 million for the same period last year. This represents a decrease of approximately 4 percent. However, at constant exchange rates, the revenues in this region would have grown by 11 percent.

Third quarter sales in the Asia-Pacific region were slightly up to 203 million euro when compared to the third quarter of last year and we believe there continues to be significant opportunity for both ERP and suite sales, especially in Japan. On a currency-adjusted basis, revenues in Japan grew 32 percent in the third quarter of 2002, however the situation is still fluctuating.

Third quarter revenues for Europe, the Middle East and Africa were 930 million euro, representing an increase of 9 percent over last year's third quarter. Despite the overall economic softness in Europe, Europe is a particularly strong region for us and I believe this trend will continue.

Henning will take more in detail about how our regional results demonstrate our fundamental strength.

Our cash flow from operating-- operations for the nine month period ended September 30 was more than 1 billion euro. Capital expenditures for the same period was roughly 200 million euro, leaving free cash flow of 800 million euro.

Part of our cash flow was used to buy back shares in 2002. We currently intend to purchase an additional 100 million euro of stock over the next few months under our buy-back program approved by the shareholders meeting in May 2002. So far the company has bought back stock for 250 million euro in 2002.

As in the past, the company will conduct all of its share repurchase in accordance with applicable laws and regulations, especially in a manner that should not materially impact the share price as stated under German law. At the end of the third quarter of 2002, treasury stock stood at 3.1 million shares.

I'd like now to turn the call over to Henning.

Thank you, Werner. While our financial performance isn't as good as we would like it to be, our third quarter results are impressive when you look across the entire industry. Moreover we continue to gain market share and this is crucial in times like these and we have clearly demonstrated our ability to take market share in a tough environment.

We now have approximately 50 percent of the business application space. That is an estimate of third quarter results of our next five largest competitors: Oracle, PeopleSoft, Siebel, i2 and Manugistics. This data represents what we believe to be a rather large increase of market share of about 5 percentage points over just one quarter's time. We also gained market share in each region -- the Americas, Europe and Asia-Pacific -- and we are especially pleased by our performance in the U.S., since this is our competitors' home market.

Breaking down our third quarter 2002 revenues by solution, revenues from my SAP CRM (Customer Relationship Management) increased to roughly 93 million euro, up 19 percent when compared to the third quarter of 2001. This growth is important for us as you know that CRM is a focus area of ours.

We are currently number two in this market, but we are gaining solid ground and we are not far from taking over the number one position. Our 2002 third quarter CRM software revenue as a percentage of our main competitor's estimated third quarter revenues increased to approximately 63 percent compared to 37 percent for the same period last year. Our share also increased sequentially from last quarter.

For mySAP SCM (Supply Chain Management) revenues were 95 million euro for the third quarter, down 3 percent when compared to the third quarter of 2001. While our revenues were slightly lower, we strengthened our number one position in this market. In fact, our supply chain management revenues are more than twice as high as the combined revenues of the number two and number three vendors, i2 and Manugistics.

Our core ERP -- this is HR and financials -- sales for the quarter were 167 million euro and continue to be a strong area for SAP.

Our business fundamentals are strong and we are seeing positive trends. While license revenues were down slightly in the third quarter, they were 4 percent higher on a currency-adjusted basis. This represents a large shift from the second quarter when the currency-adjusted license revenues were 19 percent lower compared to the second quarter of 2001.

In addition, our order entry is 26 percent higher than license revenues in the third quarter, mainly because deals larger than 10 million euro account for 23 percent of order entry, but they account only for 10 percent of recognized license revenues.

Eighty-six percent of our new order entries are from mySAP.com, with 74 percent coming from the historic base and 26 percent coming from new customers. This is positive for SAP since each migration to mySAP.com adds incremental revenues from new products and users. To give you a feeling, for each euro a customer spends by migrated to mySAP.com, we have received approximately one additional euro as customers extend the deployment of mySAP.com for additional users or products.

As I already mentioned, we are gaining market share in each of our regions. Moreover, software revenue trends are positive. While software revenues in the Americas were down 1 percent, at constant currency rates software revenues for the Americas were up 15 percent.

Even more important, especially considering the current market environment, our sales in the U.S. were up 4 percent. At a constant currency rate, sales in the U.S. were 12 percent higher. Our results in the U.S. were better than expected and demonstrate that the U.S. market is beginning to stabilize. We also witnessed larger deal sizes in the U.S. this past quarter.

For the Asia-Pacific region, software sales were down 13 percent, but at constant currency rates they were only 6 percent lower. As in the U.S., we experienced larger deal sizes in the Asia-Pacific region this last quarter.

Software revenues for Europe were down 1 percent. At constant currency rates, software revenue in Europe were flat, however we are seeing smaller deal sizes in Europe as a result of the soft economic environment.

Despite the economic weakness in Europe, we continue to see decent results from this region. More importantly, we are performing much better in our home market than our U.S. competitors are performing in their home market and this is despite the fact that we believe the U.S. economy has stabilized while Europe is now one to two quarters behind the U.S.

A good example of our strong showing in Europe is Germany. While Germany is the weakest market in Europe, SAP software revenues in Germany were 9 percent higher for the third quarter and 3 percent higher for the nine month period. This is a consequence of our leading position in all vertical industries, our market leadership in the SMB space, the success of our well-established service business and our trust-based relationships with our customers.

Let me now tell you a bit about what we are seeing in the market, what our customers are telling us they want and what SAP is doing to place even more distance between us and other software providers.

First, the market. POs are demanding more from their software providers now that budgets are tighter. They need results so they are being smarter about their spending. We don't mind because this is exactly the type of environment SAP thrives in and this is proven by the large increase in market share that we have taken from our competitors.

Companies are demanding greater return from investment and lower total cost of ownership. As a result, companies are implementing smaller, lower-risk projects, continuing the trend of smaller deals. However, during the third quarter, unlike the past few quarters, we have witnessed customers making bigger commitments. At the same time, deals are being phased in over time.

Examples of these types of contracts are for [unintelligible] Kyushu, which is a utility company in Japan, Daimler-Chrysler and Siemens. In general, we think these phased deals are now part of the permanent feature of the market and we have conducted SAP accordingly.

What we continue to see is that we are one of the few companies with whom customers feel confident in making really large software commitments. Customers are looking for a long-term trusted partner with whom they can share the risk. We attribute our success to our superior products and technologies, our domain expertise in key industries, our ability to provide top-quality solutions and, most importantly, customers' willingness to make us not only their vendor of choice but also their trusted business partner because we can offer them what we believe no other company can -- a track record of delivering on our promise, our ability to engage the customer across the entire IT value chain and because we give them choice, we don't lock them in.

I would like now to address our full-year revenue and margin targets. The company has been committed to reducing costs and to allocating resources to match the longer-term IT spending pattern of its customers. Thus far we have met with success in our cost reduction and efficiency improvement program. Additionally, the sales pipeline remains strong and we expect that we will continue to gain market share.

On the other hand, the overall political and economic environment is currently unpredictable and it's difficult to forecast revenues. As a result, we are removing the previous revenue guidance for 2002 and we are not providing additional revenue guidance at this time. However, SAP expects operating margins, excluding stock-based compensation and acquisition-related charges, to improve at least 1 percentage point over the 20 percent achieved in 2001, even if 2002 revenues remain relatively flat compared to 2001 revenue.

Now, Hasso, it's yours.

Thanks, Henning. Hello, everyone.

Probably a first point, a remark with regard to my comment regarding analysts. My, my statement was, "analysts have been wrong in the past and will be wrong in the future and actually they join some CEOs who have been wrong in the past and will probably be wrong in the future." And what the press made out of that you heard, but I'm very grateful to hear on television today that most of you guys did not take this very seriously. So thank you for that.

As you all know, the market is tough and in these times it's more important than ever for companies to effectively execute on their strategies. SAP is specifically doing this in three areas -- delivering on our promise, increasing market acceptance and adoption of our overall technology strategy and continuing to set the pace in business software.

Let me comment on each of those. We have introduced a number of solutions that demonstrate to customers that we are in tune with what they want and that we are committed to working together on strategic solutions.

Henning has already stressed out our success in SCM and CRM and I just want to briefly mention that the enhancements to mySAP SCM now provide customers with the first and only solution that delivers complete supply chain visibility. The visibility that our supply chain solutions bring to a company supplier base allows our customers like Adidas-Salomon, for example, to strictly monitor inventory levels, a crucial functionality.

Other innovative solutions that we introduced this quarter is a new version of CRM solution. This is the fully portal-based CRM solution which enables our customers to complement our CRM functionality through the open portal with any kind of Internet-based offering or other third-party software which we can include, then, through the portal.

We began shipping this solution at the end of September and the feedback we have so far received from our customers in the new CRM deals, for example, including Adobe, ArticCat, Eli Lilly and Johnson & Johnson, indicates that we are well on our well to achieving our long-term goal to become the number one CRM vendor.

Additionally, we have made remarkable progress from the SMB front releasing our solution for advanced SMBs, SAP Business One, to seven countries in Europe. One of the first companies to fully adopt this solution was Osram Light Consulting, who initiated the use of Business One solution to link its operations to its parent company. The competitive advantage of our SMB solution is that-- that we have relationships with-- while they have relationships with many large companies who need to maximize efficiencies through all levels, including their sales subsidiaries. We also announced our partnership with H-P and have currently 15 channel partners for Business One.

In July we began to roll out R/3 Enterprise release with 70 customers involved in the first phase. The first customers who have gone live, [unintelligible] and [AB Enzymes], have reported very quick and smooth implementations. The most attractive feature of the R/3 Enterprise release is that unlike with previous system upgrades, R/3 Enterprise provides customers with unmatched flexibility. This is because it's built using the latest technologies, including Java, ABAP, exchange infrastructure and web services -- all open technologies that provide customers more options for their upgrade strategies. R/3 Enterprise will enable SAP to protect its market position while creating opportunities for future growth.

This past quarter has been proof-- positive proof that our technology strategy is paying off. SAP's superior technology offering including portals, business intelligence and our exchange infrastructure has been the catalyst to many of the strategic customer engagements signed in this quarter. The return on technology-driven investments should be viewed from a different perspective than purely financial investments.

We have made significant strides with our cutting-edge enterprise portal solutions. Companies like Shell are implementing mySAP enterprise portal in order to integrate diverse information systems, both SAP and non-SAP, into one integrated entry portal. We also announced a deal with Siemens, which will be using our portal for all its employees worldwide, as well as its global partners, customers and suppliers, a total of more than 440,000 seats.

This product enables customers to master heterogeneous information systems and allows for company-wide cost reductions. SAP is the only provider able to offer this comprehensive enterprise-wide solution.

With these technologies, SAP is clearly the leader in the end-to-end online integration of business processes. The remaining boundary to overcome is the integration of the online and offline worlds, the paper and the non-paper worlds. The paperless office never really materialized and our partnership with Adobe will enable SAP to bridge this gap and make our solutions even easier to use at every level throughout the organization.

Delivering on our technology strategy has enabled SAP to win new customers like Wrigley, Shell, as well as expand our relationships with long-term customers like Daimler-Chrysler and Siemens.

In today's market customers are only spending money on solutions that are absolutely mission-critical to run their business. The solutions that SAP brings to the table are just that. We anticipate our customers' needs and we are able to supply solutions to fit their needs better than any of our competitors.

We do not just sell software, we sell complete business solutions. We introduced xApps at SAPPHIRE Orlando in June and have seen a great interest in the capabilities of this feature. This strategy has been well received by the industry analysts and our customer base.

At SAPPHIRE Lisbon we announced the expansion of the xApps portfolio. We have a number of deals in the works and currently some new products in development that we're excited about.

As these new products are rolled out over the next few quarters, we think you will be pleased, as well. We continue to invest in our research and development efforts to increase the usability of our solutions, especially lower the total cost of ownership for our customers and expand the reach of our offerings. R&D is essential for SAP to remain as the market leader, maintain competitive advantage and for the long-term success of the company.

I talked a lot about products and innovation and would like to briefly touch now some transparency issues. The debate about accounting for stock options continues to rage on. Historically, SAP has developed and implemented several stock-based compensation plans for its employees. Some components of these plans are expensed directly in the annual income statement and from an economic point of view SAP is in favor of expensing the real costs associated with stock option programs. But there must be a level playing field for all concerned. Clear rules must be set which will look beyond the current accounting models to develop fair standards applicable on a global basis. Only when we have uniform standards, consistently applied, will we have fair and truly transparent accounting for stock options.

In the meantime, we appreciate the services of the financial analyst community that create more visibility into the impact of stock options on overall revenues. We encourage these firms to include SAP in their analysis and reports moving forward.

In an effort to create more transparency, I would like to refer to the Merrill Lynch report of July 22, 2002, entitled ``Enterprise Software Scrutinizing Options.'' SAP is not included in the study, but we have applied the same methodology and our figures show that the impact on SAP's net income and earnings per share will be 16 percent for 2001. We will make this report-- our part of this report available on our web site and we have to talk to Merrill Lynch not to infringe some copyright by Merrill Lynch whether we can get their report data on our web site as well. For the time being, I kindly ask you to refer to their web site and compare this with the data on our web site. In the report you will see that there is a huge range of the impact on the companies listed, especially our peers and I'm pleased to report that SAP is at the lowest end of this range.

I would also like to add that since the technology bubble burst and the subsequent-- the subsequently declining market, discussions regarding dividends are beginning to heat up. Unlike our competitors, SAP pays dividends and will continue to do so and we expect creating value for our shareholders even in today's declining market.

Thank you very much and we take now the questions.

Thank you. At this time we are ready to begin the question-and-answer session. If you would like to ask a question you may press star-one on your touch-tone phone. Again, if you have a question, press star-one.

Our first question comes from [John Segrich]. You may ask your question and please state your company name.

Hi. It's [John Segrich], Goldman Sachs. Congratulations, guys, on a great quarter in a really tough environment.

Two questions. One, you did a great job of cost cutting or cost control in the quarter. Maybe could you walk us through some of the specifics that you've done so far? What other areas do you think you have going forward? Were there any reversals to accruals that you got you there and was there any restructuring charge, particularly in the other expenses, in the quarter?

And secondly, can you just give us the number of deals this quarter versus the number of deals last year in the same quarter to be consistent with the numbers from last quarter?

OK, John, Werner here. Let me take the first part regarding the reduction of costs.

If you look to our cost base, let me start with total expenses. I think what we did is that we really focused on the hiring freeze we have in place now for some time and if you look to the quarter itself, we have reduced our head count by 455 heads while in the same quarter of last year we increased it by 1100. And if you look to the full year, so far we have added 500 heads to our base. Last year it was 3700.

And if you look to the composition here, we have reduced in the field and general and administration areas roughly in the quarter 630 heads. At the same time, however, we increased our employees in the R&D area by shifting from other areas into R&D. Certainly we took advantage, of course, of our attrition rate and our turnover rate increased from 6.6 to 7.3, quarter-over-quarter.

The second expense category relates to travel. Here we made huge, huge steps forward and reduced our travel expenses in the quarter, if you compare to third quarter of last year, by 25 million.

And we also addressed other areas of variable expenses where we achieved a reduction.

If you refer to accruals, we have not-- not released any accruals and if you look to our balance sheet then you see that the level of reversed and accrued liabilities at the end of September is nearly the same as at the end of June and if you compare to the beginning of the year you see that the two provisions where we released accruals is taxes, current and deferred, and employee-related obligations. And this is quite natural that you build it up toward the end of the year due to all the expenses for the full year if you look to 2001.

If you talk about restructuring, in fact we have 37 million restructuring in our expense base for the first nine months and there are 26 in the third quarter.

I hope that this answers the question.

Yeah. It does, thank you.

Here is Hasso with two comments. We have also some structural improvements. We are busy to remove any kind of competing development and save costs here and reallocate the developers so that we actually improve our development power by having a better focus and we have other improvements in processes like demonstration systems. We've found out that we lost a little bit control there and we had by far too many demo systems in the world. We are concentrating them, which will only improve our demonstration capability by saving significant cost.

And so we have several other internal processes where we simply improved the process and, therefore, save costs.

Great. And the number of deals?

It's roughly like last year. It's a little down. It's about 1070-1080 deals.

Thank you. Next question, please.

Thank you. Our next question comes from [David Clayton]. You may ask your question and please state your company name.

Hello. It's David Clayton at Credit Suisse First Boston. I just really wanted to concentrate a little bit on the gross margins in services. I'd be interested to know a little bit more about how that was achieved. Was that just improved productivity or have we also seen some redistribution of resources in that area? Secondly, I'd be interested to know on an annual basis what you think is achievable in terms of gross margin for your services business?

Yeah, it's Henning, Dave. First, let's look to the efficiencies and then to the growth.

I would like to start with consulting. In consulting, if you look to more details -- you don't have the details, but we have them -- you see less head count in consulting in the third quarter. You see more holiday days but the same level of revenues, exactly the same revenues than in Q2. So that's all about higher efficiency. It's very important. We're very lucky and very happy that in consulting we could improve the profitability and which is very tough in the third quarter.

Training is different. Training is tougher. In training, what we see is-- you have seen the decline in revenue in training, that the utilization in classroom is going down. So customers are not really coming to the classroom training and you know that this cannot be compensated completely because there is a lot of fixed cost. So we have reduced the head count in education by 4 percent, but that's not enough. So we will take some actions here.

If you look to support, I'm very happy because the quality has significantly improved. We have about 10 percent more active installations, 10 percent more active installations, but we have 2 percent less incoming messages. So, therefore, based on the structural improvements I think we need less people and we will continue.

Coming to growth, we believe this is the wrong question for it. You know that our strategy is always to have as much services to keep our customers happy and to boost our software sales. We are a software company. So, therefore, the target for our service executives is customer satisfaction and profitability first and we stay with these targets.

I must admit, I didn't think I asked a question about growth. I was just interested in the gross margin of this services business. I'm just interested to know whether you target a particular number. It was 23 percent last year.

Put it this way. There was a long debate in the past if SAP, let's say, could foil its target of reaching 25 percent profitability when having more services. Our target, clearly, is independent how much services we have. It can easily reach 25 percent. This gives you an answer.

Is it reasonable to believe that you can do a 30 percent gross margin in the services business?

That's-- that's high. I would say it's possible something between 25 and 30.

OK. Thank you. Thanks.

Thank you. Our next question comes from [John McPeak]. You may ask your question and please state your company name.

Sure. It's [John McPeak] from Prudential Securities. Thank you and I'd also like to say good execution in a tough environment.

The question I have is about the order entry for the larger transactions. Can you give me some sense as to whether the revenue that was not recognized from those deals in the quarter was put on the balance sheet or that's coming on the balance sheet and the income statement going forward? And I was just wondering if you could comment a little bit in terms of the visibility thereof as the deal sizes have picked up somewhat into the-- the all-important fourth quarter as we come into the strong seasonality in the December quarter?

Before we talk about balance sheet or not -- here is Hasso -- it's probably too early, but we monitor order entry on a quarterly base and there is-- for large deals.

Yeah.

And that's separated by deal size. And large deals, there is a tendency over the last quarter that this is not going down but this is going up again. And what we believe is it is-- it is based on our technology offering and our ability now to complement or expand the product offering by customer-individual projects so that we can build complete solutions.

So the tendency we see is in large deals customers want to have a complete solution and we adapt ourselves to that and just to answer the question which is related to that, without sacrificing our margins.

Yeah and it's Henning. I think I can add. Look, you will not see the difference initiatives the balance sheet because in most cases, as we said, it's phased contracts and phased contracts are off balance. It's in the order book.

What you are referring to are deals we had since the beginning of mySAP.com like Nestle, et cetera, where we had to make deferrals. We have changed our policy. We don't want to book -- and we said this clearly to our account executives -- we don't want to book large deals immediately. So they are negotiating and closing, normally, phased contracts, sometimes two years, sometimes three years, even four years. Then we can, let's say, book every deal more or less at the face.

OK. And then just the final part of the question was does that policy and the comments you made give you incrementally more comfort about the seasonality in the fourth quarter, which is pretty strong for you guys?

Today I think we have no-- no reason to believe that the traditional seasonality of the year will change significantly.

Thank you very much.

Thank you. Our next question comes from [Charles Phillips]. You may ask your question and please state your company name.

Thanks. I just wanted to ask you a little bit further out, going into '03, as you're probably getting some feedback from your customers while they're doing their budgeting and planning projects, are you getting a sense that they are beginning new projects at a faster rate for next year than they did this year?

I would say, Leo, if you are on the call, if you can answer the question? I think you have met recently most of the clients.

Yes. Thank you, Henning. This is Leo. Good afternoon or good morning. It is-- it's reasonably dangerous to make any real strong views past Q4 because visibility isn't that great, but it's clear that we hear about continued commitment from-- to spend on software from our customers, but taking a more longer-term, longer horizon kind of approach.

I actually believe that what we see happening in the market and that's probably true for all of the regions, with some-- with some differences, maybe, on the shading of the color, is that people are continuing to look at making serious software commitment. I think there are projects out there. I think the spending pattern is what we have seen over the last quarter or so. They will probably be done a little bit more stretched out in time, with one single-minded focus, which is very quick return on investment and the lowest possible cost of ownership.

Great. Thank you.

Thank you. Our next question comes from [Colleen Kaiser]. You may ask your question.

Hi. [Colleen Kaiser] from Lehman Brothers. First, I was just wondering if you could give a rough target head count for the end of the year?

And then secondly, just looking at the U.S. revenues, I mean it's a huge turn around, which is great, and I'm just looking at the license revenues going up 4 percent on unadjusted currency basis and the total revenues being done. Can you just talk us through what's happening on the maintenance and the services side of the business in the U.S.?

I can start with the head count, Colleen, and then Werner can look to more details of the lines of business.

You have seen that for the first time we have decreased head count. It was at the beginning 700 plus. It was then 100 plus in the second quarter and minus 400 or 450 in the third quarter. We-- we will-- we will make everything we can do to continue with this trend. So there will be a minus in the fourth quarter. It has nothing to do that we want to lay off people. It just means that we are not hiring, even if people leave the company.

So, therefore, I would expect a few hundred or more or less the same levels than last year. It might be one-two hundred more. OK?

Um-hmm [affirmative].

Thank you. Our next question comes from [Cach Rankin]. You may ask your question--

I'm sorry.

--and please state your company name.

Her question needs to be answered. Sorry.

We didn't try to answer the second part of the question. If you look to the growth in the Americas, especially in the U.S., if you look to the U.S., we have on the software revenue side 4 percent growth and currency adjusted it's 12 percent and the external revenue is minus 1 percent and currency adjusted it's a plus of 9 percent.

Thank you. Next question.

Thank you. Our next question comes from [Cach Rankin]. You may ask your question. Please state your company name.

Thank you very much. [Cach Rankin] from Wachovia Securities. Congratulations on the quarter. A quick couple of questions. One is if Q3 worked out to be better than you expected, I'm just wondering what the thought process was for not giving guidance on Q4, especially with a reasonably good quarter wrapped up in this tough environment and I was just wondering what the thought process was?

A simple answer: Watch CNN.

Yeah, but it's all relative, isn't it? I mean, you guys did a lot better than the market was fearing and arguably better than the competition, as you indicated in your market share gains.

Werner Brandt: But look-- look what's happening is that giving the guidance on top line what we mix estimations about our-- our performance, our company performance with performance of the market. And as Hasso indicated, all of us have been wrong in the last quarters in making estimations about the economy, about the currency and et cetera. So we feel it's better if we focus on goals we can achieve ourselves and these are two goals we can achieve ourselves. The first is profitability we can work on and the second is gaining market share against competitors.

So these are the two primary goals for SAP and, therefore, we will give guidance on that. Please understand because it's so volatile, the environment, that it makes no sense to give an explicit revenue guidance.

Sure. And a question for you, Werner, with regards to the expenses being down-- the operating expenses being down 14 percent sequentially, how much of this is variable versus fixed? I know you talked about the hiring freeze, the travel and the third item being variable. If you could just quantify how much of that operating expense reduction came from each of those categories and how sustainable do you think will that be in Q4?

I think most of this reduction comes out of the variable part, clearly, and if you take the third quarter expense level this will not be 100 percent our run rate going forward, but I think this is the level we want to achieve, also, for the following quarter.

As I mentioned before, the structural changes are very healthy for the company, anyway, and this is the time to push them through and to change in a very quick period of time.

And I can ask a last thing because we were surprised all the time that some of our competitors laid off people immediately, especially in research development, which we feel is the wrong strategy and what you can do, if you look to the expense level in research development, you can, without laying off people, reduce it significantly. We did it by 14 percent this quarter.

Great. And then if you look at Q4 do you see this as a sustainable cost structure or do you think you might have some variable expenses to account for seasonality in Q4?

I think the latter is a point that you have, of course, all the employee-related expenses associated with the Q4 performance on top of it, but in general we want to have this as a run rate going forward.

Got it. And finally, what do you think is the predictability or the visibility into Q4, just given that your order entry was up 26 percent, although you don't have a backlog number on the balance sheet. Is that level of visibility as a percentage of your license targets better going into Q4 than Q3 or just about flat?

I think we didn't-- didn't want to provide any guidance on the top line. And in terms of--

[unintelligible]

Yeah and in terms of visibility, I think Q4 is a large quarter for us and I would say the visibility is roughly the same like we went into Q3.

OK, great. Thank you and congrats.

Thank you. Our next question comes from [Derek Brown]. Please state your company name.

Hi. [Derek Brown] from S.G. Cowen. Could you comment on your small medium business software category and maybe give a bit more color to this, how it's progressing? And do you see yourselves having to make any acquisitions in this area, maybe, to build your channel?

Leo, if you can answer this?

Yes, with pleasure. Thank you for the question. We have made some progress in our SMB strategy moving forward. Also in this quarter Hasso has already indicated some of the customers we signed up. We released in this quarter our Business One product for about seven European-- for about seven European countries and we hope that we will release the U.S. version for 2003.

Our ambition moving forward and that's -- we have never made a secret out of that -- is to in the medium to long term to make about 15 to 20 percent of our license revenue with SMB-- with our product line for SMBs compared to the 6-7 we do today and our longer-term goal is, indeed, to make our SMB offering into one of our key growth engines here.

We are building the channel. You know that we have signed up 15 SMB B-One partners in this quarter. H-P is now, as well, a distribution partner for B-One and we are continuing, therefore, to push very hard to build the channel.

And any acquisitions a possibility here?

We usually do not comment on this.

Next question, please.

Thank you. Our next question comes from [Robert Schwartz]. Please state your company name.

Thomas Weisel Partners. Could you give us some metrics around adoption of mySAP, how many people are live and what it was like in the quarter in terms of uptake?

Yeah. As I said, the adoption is very high. I mentioned already 86 percent. So it's so high that from next year on we will not refer to R/3 any longer, we will talk about mySAP.com only.

What's important might be this, if I can go into a little more detail. When we started in launching mySAP.com at the very beginning people bought it more or less because they wanted to migrate but it was important for them to go to the next level of technology towards our e-business suite. In the meantime, you have seen the economy has changed. It's tougher. They are looking for immediate returns. On the other side, our competitive position has changed dramatically. We are nearly the number one in all of the solution.

So what we see now is a shift in the buying pattern. We're seeing more and more customers, if they go from mySAP.com that this is driven not because of migrating existing users but it's more to extend the usage of SAP. So they are mostly going for the customer relationship management [unintelligible] or for some of the new products. And this you can see if you split up the percentage, let's say, of mySAP.com sales which came from pure migration in relation to that coming from additional users. It's more and more coming from additional sale and that's a very important.

Maybe-- That's very helpful. Maybe-- I know you're not giving guidance. Maybe you could talk about the trends in the economies and what you're seeing in the field and North America and Europe and Asia. Do you think the U.S. is getting stronger incrementally? Is Europe getting weaker incrementally or is it-- is Europe stabilizing, just later than the U.S.?

I think we have answered it partially. Because the economy, we believe, is stronger in the U.S. than in Europe and there is no doubt about it. On the other side, some analysts believe that SAP is exposed to the European market and, therefore, a weakening in the European market will affect us more than competition. This is wrong. I made the statement very clearly that we are doing in a weaker European market much better than our U.S. competitors in the stronger U.S. market, which is their home market.

And this is because we are in Europe for 20 years and have this really very good relationship to our clients and the huge installed base. So, therefore, you should be careful if you, let's say, come from the direction how the market will go to what this affects SAP. You cannot just, let's say, make the conclusion out of this.

Thank you.

Next question, please.

Our next question comes from [Kevin Ashton]. Please state your company name.

Hi, yeah. This is [Kevin Ashton] with Deutsche Bank. I-- there was some talk a while ago of a cost saving program of about 600 million euros. I wondered if you could clarify if there is, actually, a number out there that you're looking at and to what extent you're through that program, where we stand at the moment? Also, just on the head count, if you have 7.3 percent attrition I guess there comes a point when you-- when you have to start hiring again or stop the head count freeze. I mean, would you anticipate the freeze being able to continue for another quarter or two if the environment stays tough next year?

Let me take the first part of the question, Kevin. The 600 million, which were communicated, I think, are based on a misunderstanding. When we talked about 600 million here internally, we compared different scenarios. We compared our scenario according to an old guidance versus a scenario based on the new, revised guidance. There the 600 million are coming from. This is not purely cost reduction, this is also cost avoidance compared to original planning.

And is it possible to say, without-- not necessarily naming a number, but where you are through the process of saving costs for whatever you have identified?

I think we made a big step forward but we are not yet through.

Would that mean that you're more than halfway through or--

Half is always good.

OK. And if I may ask-- Actually, yeah, there's the head count question, as well.

Yeah. I think in head count you are right, there will be a point in time where we start hiring again but at this time we agreed to take into consideration, also, the cost structure of the different locations in the world. So, therefore, SAP at this time will not just start hiring, we will do it more strategically and I think in terms of additional hiring we have chances in relocating resources from very expensive locations to more cheaper ones so even with hiring we expect in the future, let's say, some decrease in the personnel expenses.

OK and if I really may ask a very quick last question, if I understood correctly, you said the order intake was up 26 year-on-year. Was that right?

This-- I said-- I compared the order compared to the revenue.

OK, so that's-- Yeah.

Just to give you a feeling that the order book is much stronger.

I get it. And is there a year-on-year progression you could talk about?

No, we decided that we don't want to introduce a new figure we compare and have another early-warning system. So it was an exception that we wanted to mention that we have a surplus on the order book because there is a change of the behavior of our customers to go into phased deals but larger deals.

OK. Thanks very much, gentlemen.

Thank you. Next question, please.

Thank you. Our next question from [Warren Howlett]. You may ask your question and please state your company name.

Hi, guys. A couple of questions. Firstly, could you talk a bit more about the other key markets in Europe and what you saw there during the quarter? And secondly, could you make some comments on the U.S. restructuring? Obviously you recently recruited the CEO.

Leo?

Yes. Let me try to give you some visibility on those questions. You can deduce from what we reported-- all of EMEA reported and as we report Germany separately you can have a sense of the rest of the-- of the European market.

In a nutshell, what is happening is that the conditions are reasonably tough in the U.K. and in France. We are doing good business in the southern part of Europe and we are continuing to increase our stronghold in the eastern part of Europe and in Switzerland. A region that we have managed to turn around over the last couple of years are the northern countries, who are now performing reasonably well.

So that's for Europe. Sorry, I forgot the BeNeLux where we're basically maintaining our-- our Q2 performance.

In the U.S., yes we have basically done a significant step forward in the reshaping of the sales force and in the refocusing of the sales force. I believe that Q3 is the first indicator of the fruits that we are getting from this reshaping and right at the commencement of this quarter we-- we announced the arrival of Bill McDermott, who is a very seasoned executive and who brings quite a lot of knowledge and experience to this game.

Thank you.

Thank you. Next question, please.

Our next question is from [Cameron Steele]. Please state your company name.

RBC and thank you very much. I'm just curious. You showed good strength in both the CRM and supply chain businesses. I just wonder if you could correlate the contribution in those businesses to-- from existing and new customers. Was it closely correlated to the 75/25 figure you announced earlier? Was there stronger contribution from the installed base?

I think it's roughly correlated to this distribution. One thing which I know which was very impressive, by the way, is that if you look to the regional pattern, especially in Americas, CRM and portals are very, very strong. So I was surprised. Much, much stronger than in the rest of the world. It's typical that new technology is picking up first in the Americas.

Great. Thank you very much.

Thank you. Our next question is from [Don Cahn]. You may ask your question and please state your company name.

Yes. It's Merrill Lynch. Just a couple of questions, actually. One on the-- on the cost reductions. For the head count reductions, does that-- will that fall through into Q4 and how much will that cost reduction be? And the second question is regarding maintenance contracts. We've been hearing kind of around the globe that there's increasing pressure on pricing for maintenance contracts. Are you seeing that at all in any particular region?

I can start with maintenance and then Werner can look to the head count. No, if you look to the maintenance, what you see is basically the currency impact. So if you take the currency impact out, you can see that maintenance increases according to what we expected to see, roughly 4 percent of the last quarter's software revenue.

Yes, there's always some pressure on maintenance. That's not new. We have this since more than a year now, but I think we are able in nearly all cases to manage it and to keep our maintenance level.

Yeah, regarding the implication from the head count reduction. We, of course, have a higher implication on Q4, but it's very tough now to really put it in the number, but definitely we'll have a higher benefit from this head count reduction in Q4 than we have in Q3.

Good. Thank you. Can we have the final question, please?

Our final question comes from [Ross McMillan]. You may ask your question and please state your company name.

Yeah, it's Morgan Stanley and thanks for getting me on at the end here. A question -- you said something on maintenance there, but I had something related to deferred income. Deferred income's done some funny movements over the last three quarters. It was above last year, year-over-year, in Q1. It's below year-over-year in Q2 and now it's back up above, year-over-year, on 3Q. Could you maybe explain what's happening within the deferred line and whether it relates to any of these new phased or additional phased contract deals you might have and where you might be taking some additional revenue into the deferred line from those?

No. In general, no. If you compare the deferred revenue, deferred income, I compare now September over September, we have an increase from 546 million to 608 million. This represents an 11 percent increase and I think this is in line with the overall increase in our maintenance revenue. If you-- if you look to the same period.

The [unintelligible] do not play a significant role.

OK. Thank you. Before we end this session, I would like to point as a housekeeping note that we are going to move our Q4 earnings announcement, currently scheduled for January 23rd, to a new date of January 30th due to schedule conflicts. We look forward to see you either in Frankfurt at the press and analysts conference or online and thank you for joining us, [unintelligible] and Leo in Paris, today.

Thank you.