SAP SE (SAP) 2002 Q4 法說會逐字稿

Welcome to SAP's 2002 Year-End Results conference call.

This call is being recorded.

Today's presentation will be hosted Henning Kagermann, Werner Brandt and Leo Apotheker.

Please note that this call is linked to a live presentation in Frankfurt.

Questions following the presentation will be taken by email only, and should be addressed to investor@sap.com.

Again, send questions to investor@sap.com.

We will be going live to Frankfurt momentarily.

Please stand by.

Ladies and gentlemen, thanks for coming and joining us.

Before we start officially, I just wanted to say 'thank you' to Bruno Durant(ph.) on his last day with us.

He has been with SAP Net Telemations(ph.) for a long time, as you know. [indiscernible], thank you very much.

I hope it was fun for you, starting with a small company; now it's a larger one.

Bruno(ph.) decided to change and go to one of our clients.

I have to say that I regret it a little bit that he is leaving us.

But on the other side, it shows our strength that we are not only giving good products to our clients, but also good people.

Thank you, Bruno, again.

We decided to hand it over to Stefan Gruber.

Stefan has been with us for a long time.

You all know him.

He has been with SAP for five years, and now two years in New York.

Hopefully, this will be for you a smooth transition.

Stefan, please ...

Thank you very much, Henning.

Good afternoon, ladies and gentlemen.

Welcome to SAP's fourth quarter and full-year outlook conference here in Frankfurt.

I will keep my speech a little bit shorter, but you make the most important comments.

I would also like to welcome those who are following this event on the internet.

For those who are not in Frankfurt with us today, you can us questions to investor@sap.com.

I repeat it: investor@sap.com.

It used to be my personal and last name, but the spelling was too complicated, so we made it a little bit simpler.

I will keep my intro very short.

Let me briefly give you an overview on today's program.

First of all is Werner Brandt, Chief Financial Officer and Member of the Executive Board of SAP AG.

He will walk you through the numbers, then will comment on the outlook of the company.

Next, Leo Apotheker, President of Global Field Operations and Member of the Executive Board, will provide you with an update of our regional performance, as well as an update on our Go To Market strategy.

Last, Henning Kagermann, Co-Chairman and CEO of SAP will spoke on SAP's success in the market, as well as comment on our latest technology announcement and our opportunities in 2003.

Now, the next sentence is the favourite sentence of every investor relations officer.

It's part of the language.

I haven't learned it by heart, so I'll read it from the piece of paper in front me.

Please note that, except for certain information matters discussed in today's conference, may contain forward-looking statements which are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that could affect the company's future financial results are discussed more fully in the company's most recent filings with the Securities and Exchange Commission.

With that, I'll hand it over to Werner.

Thank you, Stefan, for this safe habor statement.

I step into my presentation right away, after having welcomed everybody to this update on 2002.

Let me start with the fourth quarter, moving over to the full year, and then having [indiscernible] out in front of us.

If you look to the fourth quarter, you see that we have a decrease in License revenue of 7%, down to EUR958m in the fourth quarter.

But on the other side, if you adjust it for currency and only look to the volume, then you see that we are flat to the fourth quarter of 2001.

I think in the overall economic conditions, this is a very big achievement for SAP.

Considering the increase in Maintenance revenue by 10%, and the increase in Consulting revenue by 1%, total revenue amounted to EUR2.275b, which means, in fact, a decrease of 2% on an actual-to-actual basis.

But if you eliminate the currency impact, then we have growth of 5% on total revenue in the fourth quarter.

Operating income was heavily impacted by a decrease in our operating expenses, if you compare to the fourth quarter of 2001, with EUR1.74b in Q4 2002 with below EUR1.5b.

Then, we achieved an increase in operating income of 37%, and an extra amount of EUR784m.

Income before income tax was EUR790m, and earnings per share at the end of the day were EUR1.52, which means, on an ex-reported basis, an increase of 49%.

The key figures for the entire, EBITDA increase by 28%, with EUR840m, which represents a margin of 37%.

Operating income, excluding stock-based compensation expenses and [material] acquisition costs, [indecipherable] performance measurements, here we increased by 32%, up to EUR809m, with a margin of 36% for the fourth quarter this year.

I think [indecipherable] more than in an already very successful fourth quarter of 2001.

The tax rate, as shown here, is 40%.

Our income taxes for the fourth quarter amounted to EUR340m.

We understand that will have a normalized tax rate of 37%.

If you deduct from the income before income tax the non-tax-deductible C1 write-down, [accrued] loss we took in the quarter, if you consider the dividend distribution tax in German, we call it [indiscernible] in German, on dividends we receive from our subsidiaries.

Then you end up with 37% for the fourth quarter.

EPS on a pro forma basis, excluding property acquisition costs, Commerce One impact and other impairment costs of other minorities, was EUR1.58, an increase of 21% on an adjusted basis.

If you look to Group sales in the fourth quarter, you see that, on the product side, we have a slight decrease of 1%.

This is only actual-to-actual and is not Currency adjusted.

You see a slight decrease on the Service side.

If you look to the Training business, we will come to this in a minute when we talk about profitability.

Even though we have a decrease in our Training revenue, with a high margin, our overall profitability in the Service sector goes up.

We will see this in a minute.

One final comment to this chart, we've always said that we would have an allocation of revenue between Products and Service of 70% to 30%, in this range, between Products and Services.

This is the case in 2002, as it was the case in 2001.

I think this demonstrates that we are a product company, and are not moving into being a service company.

Gross margin analysis for the quarter, we have had a lot of discussion about our gross margin on the Products side.

You will see that we really gained four percentage points in our Products gross margin in the fourth quarter 2002, compared to the fourth quarter of 2001.

There are actually tow reasons behind this.

First, we are more and more focused on proactive support to our customers, by also involving our developers in this support activity.

Number 1 and number 2, and this is the more important-- We have field product now of third-party license costs, mainly related to databases.

There are several reasons behind this.

It has to do with the sales mix.

It has to do with the mix of databases.

And, of course, what we have achieved is lowering the prices for the databases we sell to our customers.

So, from a purchasing perspective, we have accomplished something which really helped us to drive up the product margin.

On the Services side, I think key to this increase of 3 percentage points to 26% in the quarter is the reduction of third-party consulting expenses.

So, we much more efficiently use our own consultants, rather than involving third-party consultants.

This really led to a better utilization of our own consulting force, with this positive effect on the gross margin.

On the costs side, if you [indiscernible], we have 12% in percent of sales.

This is the same as we had for the full year, a slight increase compared to the fourth quarter of 2001.

The increase overall in [indiscernible] quarter-over-quarter is due to the fact of the increased headcount in this area.

This is the basis for innovation.

This increase is specifically due to the acquisition of a majority of Koba and the acquisition of Incuma and the first consolidation of these entities within our Group.

Sales and Marketing, I think we see here a fantastic jump in becoming more efficient on the sales side.

We had a margin in 2001 of 22%; it went down to 18% for the quarter.

We had the same performance improvement if you at it on a year-to-year basis, where we have 24.5% in 2001 and 22% in 2002.

The main reasons here behind the improvement in sales efficiency, of course, it has to do with the reintegration of SAP Partners in markets back into SAP, what we decided at the beginning of last year and implemented within a very short timeframe of five to six months.

Nevertheless, it stayed rather flat, this 5% to total sales.

We are very cautious in increasing the [indiscernible] and really strive to keep it on the same level as in 2001.

'Other income' looks a bit strange.

We had income in 2001 in the fourth quarter.

Now we have it extended.

What is the reason behind it?

Simply, with other restructuring costs, we had in 2002 in the fourth quarter, amounting to EUR46m, whereas we had only EUR40m in the fourth quarter of 2001.

The majority of these restructuring expenses relate to the US operations, with EUR27m.

You know that [indiscernible] in almost all areas in the sales organization, associated with the layoff of people.

Now, let's come to the full year of 2002.

Let's again take it top-down.

If you look to our P&L as reported, you'll see that we had a decrease in license revenue year-over-year of 11%.

Currency-adjusted, it was a decrease of 6%.

If you take the overall economic environment, and compare this to our competition's, I think you only can come to the conclusion that SAP had a very good year in 2002, although we did not meet the targets we put in front of us at the beginning of year, with regard to top-line growth.

Total revenue increased by 1%, mainly due to a strong increase in maintenance revenue, by 14%.

Now, we have a level of maintenance revenue of EUR2.4b.

A 6% increase in Consulting revenue; we have EUR2.2b.

And a slight decrease in Training expenses; this is EUR440m.

So, overall, 1% growth on the total revenue side, and currency-adjusted it's 6% growth.

Operating expenses for the full year saw a decrease by more than EUR200m, in the range of nearly EUR250m.

This resulted in an increase of our operating income by 24%, and margin of 22% on an unadjusted basis.

Operating income before income tax is EUR1.1b for the full year, net income EUR509m. [indiscernible] will refer to later.

And EPS EUR1.63, a decrease of 12%.

But as you see in the next slide, the decrease is mainly driven by extraordinary items.

Let me start now [indiscernible] starting again with EBITDA, we had depreciation amortization during the year of roughly EUR220m, so our EBITDA margin is 25%, with an EBITDA of EUR1.8b.

This already indicates that we have a very strong cash flow in the year 2002.

I will come to this later.

On the operating income, excluding stock-based compensation expenses and [total] acquisition costs, nearly EUR1.7b and a margin of 23%.

So, we really over-achieved our own targets where we set, at least, one percentage point above 2001.

[Indiscernible] expenses for the year were EUR599m, and the tax rate, as we see here, is 54%.

If you adjust this by non-tax-deductible items -- and I will name two which really cover the majority -- the impact from Commerce One being EUR390m and the impact from other impairments of minority interests being roughly EUR100m, which is not tax-deductible.

If you exclude these two items, you come to a tax rate of 37%.

Let me spend a minute on Commerce One here.

The composition of these EUR390m is, including EUR300m impairment charge, and EUR90m coming from [indiscernible] according to the equity accounting.

Our net book value, as per the end of the year, is zero.

So, there's nothing to count going forward.

If you look to the entire financial engagement with Commerce One, and head up all the losses we [indiscernible] and all the gains, you realize that we had over the time, from 2000 to 2003 a gain of EUR338m, as a consequence of the fact that we sold in 2002, and a total loss of EUR570m.

So, the total net effect, only from a financial perspective, is EUR232m.

Considering what these partners have brought to SAP, I think this is not a material amount.

We've come to the last line year.

EPS, excluding extraordinary gains, Top-T(ph.) acquisition costs, the Commerce One impact and other impairments out of minority investments, we increased the EPS by 22% on this pro forma line to EUR3.29.

Now, how did we do on the operating expense side?

What you see here is the expense level of 2000, compared to 2001.

You see that we have a decrease of EUR143m.

This is lower than the EUR250m I just mentioned before.

The reason is, you see it on the asterix, this amount does not include stock-based compensation expenses and Top-T(pjh.) related acquisition costs.

If you take the operating expenses as reported, you have a decrease of EUR250m.

If you exclude stock-based compensation expenses, then we have in 2001, EUR100m more.

So, if you include this effect, you come into the range of real costs reductions of EUR140m to EUR150m.

What were the challenges in the year 2002?

It was really to manage the transition from a 15% growth scenario -- we started with this one -- to a flat growth scenario, with a strong commitment to profitability.

But, in different ways than most of our competitors did.

We avoided massive layoffs.

Despite this fact, we decreased our operational expenses.

How did we do it?

I think we have four elements here.

The first one is a consequent higher increase in the organization in all areas, and only very, very selective layoffs.

Number 2, the reallocation of staff from external [indiscernible] office to SAP employees.

So, we had a lot of staff that were delegated to third-party resourced, which worked in our organization, some time already since a long time.

We shifted these staff to employees out of our organization, and by doing so improved our profitability.

Then the realization of efficiency improvements, in all areas, through organizational alignment, the renegotiation of contracts.

I mentioned one in the area of database and changes [indiscernible].

Finally, what we started in the second half is the rationalization of global infrastructure.

This covers both IT and facilities.

Let me make on thing very clear: This is the starting point of becoming a more profitable organization.

All of these things are not one-time items or events.

This is something we will continue going forward.

Let's move to the balance sheet.

You have it in front of you.

I only want to make four comments to four items on the balance sheet.

The first one, you see that we have increased our liquid assets from EUR964m to more than EUR1.2b.

I think this also indicates that we generated a lot of cash in 2002.

The fixed assets decreased dramatically from EUR2.2b to EUR1.6m.

The main reason is that we decreased our financial assets from roughly EUR700m to roughly EUR160m.

The reason is simply the write-off of Commerce One, including losses form Commerce One, and the write-down of other investments we had, so that we have an increase in the balance sheet position.

Then 'Other Liabilities', the decrease here is non-[indiscernible] set of accruals.

It's simply that we reduced our bank loans dramatically by EUR435m.

I think at the end of the year, what we had as bank loans in our balance sheet is roughly EUR20m to EUR25m.

Fourth comment, it's deferred income, the famous deferred income related to standard maintenance.

We saw no change here, which demonstrates that it's really an ordinary cost of the business.

Now, from balance sheet and cash flow items, the [deals] are improved by seven days, down to 87 days on a global level.

They contributed to this improvement, where the region the [indiscernible] and the region Asia Pacific.

So, as you see, I haven't mentioned two other regions.

We have still room for improvement, and I think we can continue to improve the situation.

Of course, the consequence of this deduction, though, is a reduction in working capital, which contributed to an increase in cash flow.

Let's have a look to the operating cash flow.

It's EUR1.7b for the 12 months.

We invested in capital expenditure EUR285m, whereas at the end of the day, we generated nearly EUR1.4b in free cash flow.

This is 19% of revenue.

I think it's not only a strong increase, but is also a strong performance.

What we will do with this money, perhaps we will give it back to shareholders via a dividend.

This year it's EUR182m.

I asked to get the information from Investor Relations.

They put together the total amount of dividends paid over the last 10 years, and it's nearly EUR1.2b what we gave back to our shareholders.

And also what we will return to the shareholders, via a share buy-back, we purchased 3m shares in 2000, amounting to EUR278m.

I think the average price for the purchase was a bit more than EUR90.

Now, headcount, you see we have an increase of 387.

You see that we were very cautious with hiring, starting in the second quarter when we got the first indications, and really also had a decrease in headcount in the third and fourth quarters.

Let's come to the last point, the guidance.

I will read it, so that there's no room for speculation.

Despite the continuing unpredictable political and economic environment, the Company expects that it will continue to gain market share and increase profitability in 2003.

Based on modest revenue growth, continued cost containment and customer buying patterns in line with normal business seasonality, the Company expects to increase its 2003 operating margin, excluding charges for stock-based compensation programs and acquisition-related charges, by around 1 percentage point, compared to 2002.

Earnings per share for 2003, excluding charges for stock-based compensation programs, acquisition-related charges and impairment-related charges are expected to be in the range of EUR3.45 per share to EUR3.60 per share.

You realize that this is the first time that SAP has given guidance on the EPS loads.

Now, we know that it's sometimes hard to calculate EPS because you don't know what to include and what to exclude.

We want to provide the framework based on which we gave our guidance, in terms of operating income and in terms of EPS.

This is also something we will consider going forward, as a consequence of the requirements coming from the US regulatory [authorities].

Let me really [indiscernible] as reported down to pro forma.

We have on the operating income -- and this the way we will show it going forward -- as reported under US GAAP, we adjusted for the two items here, and then we have pro forma operating income.

The same on the EPS level, as recorded and then adjusted for the three items I just mentioned here.

The last slide is the basis for the growth calculation.

This is 2002 operating income on a pro forma basis, as we will report it in 2003.

You see, we had EUR1.26b operating income as per our US GAAP P&L statement.

We [indiscernible] two items, and then it's EUR1.689m.

Now, on the EPS side, you see the EPS as reported.

That's the impact coming from stock-based compensation programs, additional related charges and impairment-related charges.

So, the basis for growth calculation on the EPS line, from our perspective, will be EUR3.08.

Let's go from my perspective, and I hand over to Leo.

Good afternoon, ladies and gentlemen.

Thank you, Werner, for the introduction.

I also [indiscernible].

I would just like to give you a little bit of color on the performance in Q4 and the total year. [indiscernible] visibility of what we did in the various regions and the various markets.

And then maybe point out some interesting things that are necessarily part of the financial package per se.

In Q4, as already mentioned by Werner earlier on, our license sales decreased by 7% in euro terms.

Actually, in real terms -- and I think it's a very important measure in [indiscernible] terms -- we were flat compared to last year for Q4.

And just for historical purposes, Q4 of 2001 was our best quarter ever.

So, in real terms, we actually matched last year's quarter.

It's an important point to make because we had some regions and some areas that performed extraordinarily well in Q4, and I'd like to mention just a few here.

One is the Pacific region, in particular Japan.

It grew in euro terms by respectively 13% and 29%, in real terms adjusted for currency, Japan grew by 16% in Euro terms and by 29% in real terms, which makes Japan now into our third-largest country in our ranking, and that's an important thing mind going forward.

Also here and in the UK region, we had a very good Q4.

We grew by 4% in euro terms, 5% in currency-adjusted terms, quarter-to-quarter.

Again, Q4 last year in Europe was also a banner quarter.

Germany grew by 27% in the quarter, which is a staggering performance, given the market share that we have here in Germany.

I'll come back on top of the regions a little bit later.

Also in the same quarter, countries such as France, and regions such as Southern Europe had a very good performance in terms of license sales.

The picture gets even more positive when you look at total sales for the quarter.

While we had in euro terms a decrease of 2% quarter-to-quarter, we had in currency-adjusted terms growth of 5%, 1% and therefore flat for the US, and Q4 2001 in America was an excellent quarter, so we have matched that as well.

In the US, we have basically a flat situation in dollar terms.

Same phenomena as already discussed on the licenses in [indiscernible] and Japan, and of course also in Europe.

If we now make the same analysis on a total year basis, as well as already indicated, it's -6% in currency-adjusted terms, and we're very happy about that.

What has been mentioned in some newspapers [indiscernible] for SAP, we have held our ground.

We are basically flat year-over-year.

In Germany, which is again showing extraordinary performance, we grew by 11% over the year.

All together, if you look at these results, the net of the whole is a few remarkable events for SAP.

First and foremost, we are back to being number 1 in the applications software business in the US.

We have regained the number 1 position, which used to be ours, and it is again ours.

That's a very important statement to make.

We have solidified our position in Europe, which is very, very important.

We've gained market share.

And even more importantly, we have gained market share on a world-wide basis against our competition, and we believe that we have gained something like 9% to 10% market share world-wide against the other package software vendors that compete against us.

Maybe some additional color on the fourth quarter, so we'll go to contracts.

There have been some important deals.

I'd like to mention a few in the Americas, because they have basically one characteristic that people believed that we were not able to achieve in the US before.

Indeed, [indiscernible] in Canada, International Paper in the US, Scot Company and also Unilever in America are all companies that had made commitments to SAP before and have renewed an even bigger and much stronger commitment to SAP, based on a trusted [indiscernible] relationship that we have built with these companies.

Some of these customers have engaged with us on a multi-year commitment, which is even more important.

EMEA, again in the picture, companies such Aventis, L'Oreal and also Eon have renewed a very strong strategic commitment to SAP.

We also have some new names here, such as L'Oreal and what is also very interesting to see is that, even in sectors that are struggling and usually don't spend money, such as telecoms, Telefonica did make a commitment to SAP as well.

In Asia Pacific, very important for us.

We actually had good deal flow, and signed contracts in every country, larger ones and smaller ones, not only in Japan, but also Australia, New Zealand, the Indian countries, Korea, all came in and therefore very satisfactory.

So, to summarize maybe some of the highlights of Q4, you know that we had a quite comprehensive management reorganization in the United States, in North America.

I am very pleased to say that with Bob McDermitt(ph.) we have a seasoned, strong executive in one of those regions.

We saw some extraordinary performance, in particular, here in Germany, with the 27% [indiscernible] growth.

And also all together, EMEA was 5%.

We're not only depending only on Germany here in Europe.

Thank god we also have France.

We have Southern Europe, the UK, and naturally also I want to mention that we have good news from Eastern Europe and Russia as well.

We are reasonably broad-based here in Europe.

And Japan, with 29% increase in license revenue, is contributing significantly to our results.

Maybe a few spotlights on the year, and maybe this will give me the opportunity to explain the success of German, in particular.

We had strong performance in basically all of our regions and countries in Europe, despite adverse economic conditions that have hit the various European countries [indiscernible].

We started in the north and the UK and then it hit continental Europe.

Despite all of this, we achieved results, with increasing profitability.

I believe the German model [indiscernible] for all of the execution, and now for the world-wide execution.

It is based on extremely strong, forward long-term customer relationships.

It is a trust relationship that we have built.

And we have built that trust relationship because we have systematically delivered to the expectations of these customers, and we will continue to do so.

So, we have been successful in German and in the other European countries, also because we have been addressing all of the segments, not only large customers, and not only a particular size of customer.

And we have been successful in all of the industrial sectors, or economic sectors in Europe, from the public sector to the retail business.

We are trying to cover all of these areas.

In 2003, just to give you a [preview] of that, we want to increase our market share, which is already significant, even more in all of the EMEA countries.

We will have a very specific drive on local accounts and on SMDs, and Russia, which is a country that we never left, not even during the strong and deep crisis during the mid-1990s.

It's becoming a very promising growth area for us, and we continue to expand that area.

In America, I think that, given the turmoil of the American market, given the fact that for two quarters, basically, nothing happened in the Unites States of America in the enterprise applications business, we had a good year.

Our total revenues actually increased at constant currency rates by 2%, which is quite an achievement.

I don't need to -- certainly not to you professionals -- mention the results of our US-based competitors.

So, I think we have out-performed the US competitors, which has given us the opportunity to reclaim the number 1 position in the US.

And with the new management in place, I think we can look with some clear confidence into the future.

We have reorganized the sales force in the US.

That's done.

We have hit the ground running, I should say, over there.

We had a very, very high-energy kick-off a couple of weeks ago in New Orleans.

And we are now organized in the US, taking into account two dimensions.

That's [indiscernible], so it's on a regional basis, but in each region, we are also organized by industry. [indiscernible] of bringing industry knowledge and proximity to our customers.

More focus in the US on the public sector, more focus on financial services.

This doesn't mean we don't want to go after the other opportunities, but these are special focus areas.

And we will also go to market with [indiscernible] solutions for each market customers.

In Asia-Pacific, you saw the results of Japan, but also some emerging markets, such as China, had a very good performance in 2002, and we will continue to invest in order to turn China into a growth engine and growth locomotive of the software business going forward.

We will focus on the high-growth markets, we will focus on achieving profitable growth, and we will start extending our S&D offering into the Asian markets as well.

You know that we have been putting quite some stress on achieving our supply chain leadership position in the past, and we're maintaining that.

If you measure us against the two typical sectors, [indiscernible] and vendors, [indiscernible] and [logistics], you will see that 2002 was again a strong performance, as compared to 2001.

And at the end of Q4, we had achieved three to four times the sales and supply chain management applied to [logistics].

It is a clear indication that when you provide a very good, very deep solution within [indiscernible], you are basically unbeatable.

It would give me even more pleasure actually to show you the next slide, because that's about COM.

In COM, in Q4 of 2002, for the first time we have surpassed the self-proclaimed market leader, and we actually sold 137% of CRM in licenses, compared to 100% of Siebel CRM licenses.

This was not a one-quarter fluke.

As you can see, systematically, if you compare the quarters year after year, 2001 and 2002, we have systematically, each quarter, closed the gap.

We had hoped to be able to close the quarter in Q4.

We have achieved this.

I'm anticipating a possible question, and the answer is: just extrapolate the trends, and I'm sure you can figure out when the curves will actually cross.

Let me take a quick look at the market.

We have already discussed this several times before.

It is clear the customer purchasing behaviour is dramatically changing.

The good news is there are IT budgets, and never mind that they're growing or not growing.

There are IT budgets, and it's up to us to get our fair share from those.

And the IT budgets spent, provided that they generate a [return] and generate real value, and that they address key points and cost drivers.

It's as simple as that.

And companies are more than happy to use innovative technologies to address this, provided it really does address these issues.

Companies still want standard IT solutions, and people do want to use standard methodologies because all of these elements together represent reduced cost of ownership.

There is a commitment of SAP to work on a permanent basis every year to push cost of ownership down.

Therefore, if a customer, as a buying organization wants to achieve his strategic objectives, it has to have a strong partnership with a reduced number of vendors.

Only then can it really reduce its operating costs.

And we are happy to be that strategic vendor.

We try to answer, with our approach, all of the core customer requirements.

We are pushing cost of ownership down.

We are optimizing the level of investments of our customers, also by providing and allowing for heterogeneity.

The growth of [indiscernible], and we do this also by providing pre-packaged solutions for pre-addressed and pre-articulated business needs.

And we act as a trusted advisor, thereby strengthening the customer relationship and, therefore, providing the appropriate solution at the appropriate time.

The fact that there are fewer vendors in the market is a trend that will probably go forward.

Therefore, that type of value delivery to our customers is even more important.

Being relatively close to our customers, the field is now organized into six regions.

We have three regions here in EMEA.

We have Japan as an independent region and the rest of Asia.

And we have divided America last year, from a certain point, into North and South.

We do this for a very simple reason: We want to be in close touch with our customers, be they large or small.

This is, in our opinion, the way to win all our quotas.

In 2003, our go to market will be basically focused on execution.

At the end of the day, strategy is great, but the real key is to execute and to execute and to execute as soon as we have [indiscernible].

We have committed to do that.

What's guiding us is what I have coined one day, a term called 'Glocal'.

We want to leverage our global capabilities.

We want to leverage our global strengths.

We want to have a certain number of global programs, but they have to be executed locally, because at the end of the day, the customers remains local.

We will continue to drive for very strong strategic relationships with our key accounts, with our global alliance accounts.

But we also have a world-wide initiative now to direct our presence in local accounts deeper.

And of course, we will continue the initiative we started last year on the SMD side.

We have a comprehensive product portfolio that allow us to achieve all of these objectives.

But I think Henning will mention a little bit about this;

I won't steal it from him.

Last but not least, we do want to act as a trusted partner for all of our customers, be they large, be them medium-sized, or be they small.

Because at the end of the day, what really counts is to deliver on customer expectations.

Thank you very much.

I'd like to hand over to Henning.

Thank you, Leo.

Thank you, Werner.

We said once that we have tough times and good times at SAP.

It seems to be that this is true.

I would like to [more] easy times, but it seems that we do better in tough times, so okay.

Leo said Q4 last year, 2001, was a record year in sales.

He's right.

It was the largest quarter ever.

And Q4 2002 was the largest quarter ever in earnings, which I think is important.

We have never earned so much money in this quarter.

That was our goal, to focus completely on profitability.

Now, you might ask why we have over-achieved our targets.

Well, it's wasn't easy.

It was at least one percentage point.

So, I can really assure you that it wasn't easy.

We had two positive effects.

Werner mentioned one.

We didn't believe that we could align to companies that fast if it came to cost containment.

It was the first time in our history.

It wasn't easy.

I said really [indiscernible] thank you to our people.

They got the message.

You know, whenever our people focus, they're quite successful. [indiscernible] So, that's was really very good, and we will leverage that.

I also want to mention sales.

Sales did an outstanding job, because most of you had doubted that we could sell double of Q3.

And we did this.

We executed two times the number of contracts than in Q3, which I think is not easy in these times.

So, that brings me to seasonality, another nice topic we've had over the last year.

It is a typical seasonality, something which is typical for SAP.

It is something typical for the market.

I think we have now proved that this typical to SAP.

We have again the same seasonality we have had over, I would say, 10 years or more.

Our situation is independent from the environment, independent if we have [indiscernible] to pay, whatever.

Therefore, we believe we will continue with this seasonality.

That's what we have.

So, we start with a smaller Q1, then we have a stronger Q2.

We have hopefully -- [indiscernible] thank you -- strong Q3, and normally a very, very strong Q4.

Why is this the case?

If you look and make an analysis between our installed base and new customers, you see a significant difference.

We have got more new customers in Q4 than the others, but not twice as many.

So, we have roughly 25% of the new contracts that are coming from new customers, [indiscernible] are new customers.

The deal size from new customers is significantly lower in Q4 than the deal size of the installed base.

That's important if you compare the volume of 17% from new customers.

On the other side, if you look to our installed base, as Leo mentioned, we can convert more and more of our installed base into strategic partnerships.

He mentioned [indiscernible] and others.

That means that you're more or less sitting together, and you plan the next two or three years.

So, it's more or less a repurchase program.

It's not, "We have to start this project in two months".

And you know how [indiscernible] in negotiations.

If you have a lead purchase program for the next year up to you, if you decide how much to put users on inventory and when you close.

And if you try to [sqeeze us] a little bit, we close a little bit more to the end.

I think that, at the end-- and we have, because we have such a strong installed base.

Now, what about [indiscernible]?

It was mentioned.

We are very proud that we have gained market share from quarter to quarter.

It was not just Q4.

So, this is a slide where we have shown you the trend over the last four rolling four quarters.

So, that's comparable.

And we end it now up with 50%, compared to the next five competitors.

You see we have here taken [indiscernible] in because they are larger than [indiscernible].

So, if we compare ourselves against the next five, we are as large as they are.

I think that is the situation, our position, as if we never had.

We were always proud to be larger than the next four.

But to be as large as the next five is a very, very unique position.

We gained market share in Products.

You have seen this.

We gained market share in regions.

Again, I would like to stress the US, because I know everybody of you is looking to the US.

You might argue, "Why was there a decline again?".

I would look differently.

It is in these times when you compete only against US-based companies that you get the number 1 position in license sale-back, meaning that we did very well, I believe.

That was our first goal.

We are now, in terms of licenses, the number 1 in the US.

We were asked this morning if we earn money in the US.

If you go to the operating income, [indiscernible] don't care about financial income and other, we improved operating income in the US by roughly 45% , just to take speculation out.

But that's not all.

I think we have still, in terms of profitability, far behind Europe [indiscernible].

Then we have a slide where we compared ourselves against the market.

You know the market-- You do this very often, if you compare it against the [indiscernible] and other.

I would like to do the same against the index.

The market is never in dollars, because all of our competitors are there.

I think-- Forgive me that I did the same, because a strong euro helps us here.

But I think, why should you always [indiscernible] from a strong euro.

Here we hear about [indiscernible].

You see that we clearly out-performed the market.

So, that is also something that we have to have in mind.

So, if you look to the market, [indiscernible] and 13% in total revenue growth, a strong euro that hurt us.

Now, what about the other index, which gives you a feeling if the position of SAP is strong or not.

Customer satisfaction now, for two years in a row, has increased in all regions, not significantly, but--.

This is a scale from 0 to 10.

I can say that once you have reached 7, it's very tough to do better.

We always say that at 9 you get religious, so we try to manage between 7 and 8.

That's good for business as well, otherwise, you spend too much money on customer [indiscernible].

But these are financial analysts; that's okay.

The next point is innovation.

I just want to reiterate what [volumes] we shipped in the year.

Just to keep in mind that there's this company out of [indiscernible], and they have one product called [indiscernible] Suite.

If I end up with a list, you will see that we are really a multi-product company.

In 2002, we launched our Smart Business Solutions, [indiscernible] all-in-one.

At the enterprise, middle of the year, the success of [indiscernible] Suite, very successful, high-quality.

I would say the highest ever we shipped.

The general availability in January, after five months.

We remained MySAP.com into MySAP Business Suite.

Now MySAP Business Suite has eight important products, from CRM to SRM.

We shipped for all of them new solutions.

Many of them, of the new technology, MySAP technology.

What was new in technology?

For the first time, with a leased SAP exchange infrastructure inside. [indiscernible] And we launched a new version of the Web Application Server, which will feature in [Cobalt and Java].

And we launched Corcepts(ph.), a new potential for generating revenue outside of MySAP Business Solutions.

And last but not least, for half of the industry, three new components for the other upgraded R/3 Enterprise.

Just to give you a feeling what happened.

Werner mentioned the increase in productivity, I would like to name two.

In Consulting, we could keep the consulting rate and keep the [indiscernible].

So, that went two percentage points.

The other is Support.

We have 8% percentage more installations we have to support, but we kept the same number of [indiscernible], so quality is getting better.

So, therefore, we can improve efficiency in Support as well.

And Research & Development, you see more people.

So, we made our strategic hires, but we replaced the [indiscernible] external people there.

This is the efficiency gain in R&D.

Having said this, where are we, if you look to 2003?

I believe we did our homework.

So, the organization is in a position, which means that we can more or less adjust very quickly to all possible scenarios.

I'll come later to our favourite scenarios, but it's important that you understand that we can play the pure profitability game, if necessary, but we are also prepared to play again a growth scenario immediately.

The question is, "What about the economy?".

I think all of you have seen-- Nobody believes that there will be a quick up-tick, if we are lucky, at the end of the year, but not earlier.

I don't think.

But if you look in Davos at the World Economy Forum, it's just the same what you get.

IT budgets are still very tight, but I agree with Leo.

IT budgets [indiscernible], from hardware to software.

I think the question is, "Why shouldn't we get more out of this?".

We can influence.

And I believe what companies need these days is software like what we provide.

What are the indicators?

Why do I believe in the demand for software?

There are three indicators.

One is, we can find last year's.

We can still find last year's [indiscernible], 80% of [indiscernible] will come from 20%.

If you look to the deals, we have many large deals from companies which are struggling, which are reshaping, which are trying to get efficient again [indiscernible].

These are companies are signing larger deals with us.

This for me proves that SAP's software can help them to gain efficiencies.

We can turn deals into strategic deals. [indiscernible], long-term customers, but never a discussion, can we have a strategic relationship.

And again, that materializes, again, in our [indiscernible].

We are not booking all of these deals immediately.

We said this several times.

Our [indiscernible] are safe deals. [indiscernible].

And last point, independent how the economy is, look to Germany and Japan.

These were the keys.

So, to say of 2002.

Germany because we have a perfect organization here.

There's nothing wrong.

It's perfect.

That's okay.

And in Japan, I was surprised because the Japanese reacted like anybody else. [indiscernible] You know, at the end of January, they had less economic figures and [indiscernible] in 2002. [indiscernible] Our software sales went down 40% or 50% from headaches, [indiscernible].

The second quarter was no better.

But the second half was unbelievable performance, so that over the year, we are very balanced with that.

Tell me, yes, people are careful, holding back.

That can have an effect on seasonality, but not over the year, because if you think about it, they have to invest into something.

We believe we are strong enough as a market leader in our segment that we can decouple to some extent from the economic conditions.

That's our strategic goal.

We cannot always point to the environment.

I think that's too simple.

We know how the environment looks like.

We cannot just sit and wait.

We know what our customers want: fewer expenses.

And we made two strategic moves in order, as I said, to react to every scenario.

The first is from a product point of view.

We announced at the beginning of the year to be prepared for the year, two important things.

Our commitment to our Enterprise Services architecture, which is an extension of our commitment made two years ago to open integration.

It's based on the concept of [web] services.

You know [web] services.

We decompose the business process in top.

We make them independent.

We make interfaces which hide the complexity of implementation, and set them via the web, that the web service.

Once we have that architecture in place, and the SAP system is prepared for this -- it was completely done, but [indiscernible] -- you have significant benefits for the client.

The client can now leverage the installed software.

The climb can adjust to customer needs because you can track the [indiscernible].

The client gets independent from the vendor, yes, which I think is good for SAP, because we have reached a [indiscernible] clients a percentage of the [indiscernible] which makes clients ask if they get dependent of SAP.

With this architecture, we can counter this.

And it drives costs down; it drives the cost of ownership down.

Now, what is the SAP product that is enabling the Services architecture [indiscernible]?

It's more or less, again, the next version of MySAP technology.

Is everything new in MySAP?

No, and that's good.

Otherwise, it would take us years to ship and earn money.

Most of the components are available and we start selling it today.

There's only one component which is new, which will be shipped in September.

So, for the go-to-market strategy I think you have heard enough from Leo.

I want to add point.

We drive the organization in the direction that we say we are not selling products.

We solve business issues.

It's very important.

And I believe we are ready now to repackage our offering very quickly.

We feel in the market we have a specific need, let's say for a business issue like collecting money, or for a business issue like improving channel performance, or whatever it is, then we can easily repackage our offering into the solution that exactly addresses those needs and roll it out very quickly.

This is another way, I think, to speed up demand, not coming with a full suite, but exactly solving the customer's issues.

Last point, our partners.

Again, we are in a better position than ever with our partners.

Partners were very successful for SAP's sales success, and they will be in the future.

We contacted all of them.

I think we have very, very close relationships taking place.

Even those who for a while went with competitors.

I think we also [indiscernible].

Industries [indiscernible] bank, retail, public.

Is this because they have a lot of money?

That's not so easy?

We have a long-term strategy.

We made a deep analysis last year on the market.

We identified those industries where we focus on [indiscernible] where there is good market potential, but a low penetration from SAP.

That's the only reason.

It might make more sense, for example, to focus on pharmaceuticals or oil, where we have 70% to 80% market share.

In these three, our market share is low, but the potential is high.

That's the reason.

And [indiscernible] with our products.

So, to summarize, a few comments to the guidance.

We worked hard to decouple our business from the uncertainty of the market.

We are not completely decoupled, but I think much better off than a year ago.

We gave you guidance on objectives we can influence.

I think you can understand this.

We gave you guidance for the year.

If you want to look to quarters, take the seasonality.

We are doing the same.

So, more of less, we apply our position of seasonality.

We gave you a mid-term profitability goal for 2005; we wanted to reached 25%.

You can change this to 2004.

We expect for 2003 modest growth; that's our scenario.

We expect the growth coming from the Products side, not from Services.

Why?

Because we will not invest in Services before we have the Product growth.

We are [indiscernible] product company.

Otherwise, we cannot drive our profitability.

But we are prepared to drive a little later Services up according to the up-take in Products.

We will continue improving profitability.

And very importantly, we will not sacrifice future opportunities just for profitability.

That means, very clearly, if we have a chance to go for growth, we will do it [and sacrifice roughly] 1% profitability.

But we will not [do it] for 2%, 3% or 4%.

Then growth is more important.

That's our scenario.

So, it will not be easy, but that's fun.

I think we are ambitious enough to get more market share, 50% sounds good, but 55% or whatever sounds even better.

Therefore, okay, we look ahead for a good year.

See you next time.

Thank you.

Thank you, Henning.

Before we go into the Q&A session, I would like to remind everybody to use one of the roaming microphones, because we have people on the phone and on the web, so everybody can hear the entire dialogue.

Also, for those who are on the phone or on the internet, you can send us questions by email to investor@sap.

I repeat: investor@sap.com.

At this position, I think the first question goes to [indiscernible].

A couple of questions.

Let's start with a housekeeping question.

Mr Brandt, can you please explain to us the difference between the EUR3.08 and the EUR3.29 pro forma earnings.

There are two different pro forma earnings, and I can't see the difference in the adjustment, for 2002.

The difference is that, under the guidance for 2003, we only exclude impairment-related charges.

This means that we do not exclude charges coming from investments as a consequence of the equity accounting.

Understood?

Let's take an example from [indiscernible].

We had EUR390m in 2002, EUR300m related to a real impairment charge, and EUR90m related to a loss absorption according equity accounting.

Yes?

That's the difference.

My other question is on the tax rate, another housekeeping question.

What should be the tax rate looking forward?

Because of all the adjustments, there was a different kind of tax rate.

Will it be 38%?

Our normal tax rate is 37%.

We will go into 2003 also with 37%.

Another question, looking a little bit forward.

We heard [indiscernible] currency development, quarter by quarter, the effect would be much more pronounced in the first two quarters.

Therefore, could we expect more impact on the currency and, therefore, a bit more seasonality maybe compared to the [indiscernible] currency effects [indiscernible]?

If you look to the currency we use when we make up our budget, the guidance is based on this, then we used for the value conversion model 5.

From a cash flow perspective, we are going to hatch the license income we receive from our subsidiaries. [indiscernible].

In fact, you cannot do anything against it.

So, we have to live with it.

But please keep in mind, if you look to the impact, for example, from the US dollar, knowing that, in the US, we do not only have a [indiscernible] region, but we also have deep activities.

We have global markets in the US.

If you, for example, take a 5% change in currency, then this would have an impact on our operating income of around 1% only.

Yes?

And now a question to Mr Apotheker, sorry to have to ask again, but I'm not 100% happy with all the explanation as to why Germany has been so strong.

Have there been any extraordinary effects, maybe, we have to understand the 27% has been possible.

And the second, again, nevertheless you have done better than your competition, but you have been really disappointing compared to Q3.

I think, maybe a little bit disappointing compared to the development in Q3.

What can we expect from you perhaps in the coming year, in 2003?

Because this is the second time that we expected an increase in market share in the US.

It didn't tell us how much.

Maybe a new state organization.

Maybe it could try to close again in the US. [indiscernible] and the competition.

Yes, well let me try to answer both questions.

I'm sorry to disappoint you, but there is nothing extraordinary in Germany, except extraordinary good performance.

And I can just reiterate what Henning said as well, there is an as perfect as we can make organization.

So, they have a very, very good result.

There was no trick in the hat.

There was no miracle thing that happened, not something that materialized out of the blue.

It was just plain good work.

As to the US, I can't share your disappointment.

I think Q4 was already a good quarter in the US.

We have to take this into the relative circumstances of the US.

We -- and this applies to the US as well as to any other region -- we are not in this business not go grow.

The name of the game is not to say to save ourselves with cost savings into paradise.

We want to have a growing business.

For that, there are some circumstances that are required, but the organization is poised to grow.

So, I would expect -- I'm sticking my neck out here -- but I would expect in 2003 and in 2004 the US organization to take off growth again.

Thank you.

The next question goes to Matthew Evans.

Thank you.

Could you talk a little about the level of third-party resource in the Service Division, both in terms of headcount and as a percentage of revenues?

What would you consider the optimal level for the Service division?

Following on from that, can you talk a little bit about the pricing of NetWeaver, and how you priced it?

What is the average price of a stand-alone sale at this point?

I'll start with the price because it's something that we will decide tomorrow.

So, no answer so far.

We have some ideas and we will conclude tomorrow.

So, if you can in the next week, you will get that, okay?

Third-party.

What I have in mind, I believe we have not lowered third-party so much in Services.

In Training, yes, but not in Consulting so much.

That's what I have in mind.

If you look to third-party expenses in the Consulting area, it is roughly the same amount that we had in 2002, compared to 2001.

It's a bit above $500m.

Thank you.

Before we move on, we have one question from the web.

In terms of vertical market exposure, are you seeing any [parts of] the market that are showing any faster recovery than in the other areas, or anything that's still particularly weak?

It depends a little bit on the region, but in total we could say, from an SAP point of view, our consumer product was an extremely good year for us, driven by the US.

Interesting from [indiscernible], for example, in Germany, the number 1 industry was financial services.

Therefore, it's difficult to give you, let's say, a global answer.

It depends also on the maturity of the market, etc.

Even in industries -- and I made the point where some people believe that [indiscernible] telecom and telecom equipment -- I think you wanted to see how the sectors are doing -- it appear not a good [question] to ask because [indiscernible], which are not doing very well, as I said, by finding deals with us.

So, don't use our figures and come to any conclusion about the performance of the sector.

So, in vertical, it's slight.

Go down in the manufacturing sector.

Consumer did better.

Financial sector, slightly going up.

Public stayed at 9%.

And the Services sector, -1%.

So, more or less, not [indiscernible].

Thank you.

The next question goes to Kevin Ashton.

Kevin Ashton, Deutsche Bank.

I'm back on Germany again.

Is it the case that, in Germany, people are upgrading faster?

Or is there some explanation there?

Which products are they actually buying?

Do you get the sense, with the number like you just produced, that you are exhausting the pipeline in Germany?

Let me start by the last point.

First, we are [indiscernible] new.

We are not exhausting the pipeline.

And to try to give you a little bit of a feeling on the situation, we made our numbers in Germany basically by going after all segments, in terms of size.

So, we do business in a significant way with many companies, with a size of 500 to 1,000 employees.

We went after each sector, in each industry.

We do business in Germany in each possible sector, over all of our countries.

This is the country where we have [indiscernible] distribution across sectors.

Last but not least, I believe that we are advantaged in having a large installed base.

Because if you deliver in a consistent way, you can increase your footprint, and you just add users.

So, we also have a large installed base that continues to commit to SAP.

Did the entire installed base makes its complete ultimate commitment to SAP?

The answer is 'no'.

I would like to add something because of the pipeline.

We just signed the largest in Germany that shows you that the pipeline is not empty.

Bust just to bring your expectations out of the stratosphere.

With that said, I can also say that Germany has not exhausted the pipeline.

We negotiated in December.

We couldn't close it then.

It is now closed in January.

The next question goes to Mark Morgan.

Three quick items.

One, I was wondering if I could temp you to elaborate on what in your minds modest growth would mean.

Second item was whether you could be able to quantify the license from BusinessOne and SAP All-In-One?

And I'm not quite sure if it's appropriate to talk about fiscal 2002, maybe just part of it, when it was actually live?

And the third item is, when you renewed your maintenance contracts with your clients, whether you had any increased price pressure, or whether you actually had to allow for discounts there?

Thanks.

I might start with the maintenance contracts.

Leo, I think you know best BusinessOne.

I wonder if you can prepare for that.

There is sometimes pressure from customers, if it comes to maintenance contracts, no doubt, especially [shelf ware].

We are lucky that we have only a few of those cases because we worked very hard in the past to get rid of [shelf ware].

Therefore, maintenance is stable.

The only reason I know where we had to give in was Latin America, in some countries.

It's important to understand that you look to the situation, in Argentina or whatever, this can happen.

Then I think we have not chance than to renegotiate with the client.

But principally, overall, I would say that to 98% or 99% we have no pressure on maintenance.

I think [indiscernible].

And your other question concerning our two SND products, they represent about 6% of license revenue.

[indiscernible].

Before we move on, there's another question from the web.

In Q2 and Q3, the company commented the number of contracts expected to close, where SAP had won the recommendation, agreed the contract, agreed the price.

The contracts had delays due to economic uncertainty.

Will SAP see this effect again in Q4, or will the closing behaviour be more typical of a stable economic environment?

Maybe I'll try to give a short answer.

I don't know if Q4 was typical to a stable economic environment.

It would be presumptuous for me to make a statement on that.

What I can tell you is that Q4 -- and you can see this in the numbers -- had the typical seasonality of any other Q4 we had in the past.

Therefore, I don't know what conclusion you can draw out of this, other than to state that the chance of a stable or unstable economic environment.

What I can also maybe tell you, but it's more of an anecdote, is that indeed some of these contracts mentioned in Q2 and Q3 did close in Q4.

Henning just mentioned one.

That's a sign that the deals indeed do happen.

At the end of the day, this confirms Henning's statement that we're trying to get as independent as we can from the economic environment and focus on our business.

Thank you.

Next question, Rich Leggat.

Thanks.

I'm trying to remember what a stable economic environment feels like.

Just one question, you mentioned shelfware.

Maybe just give us a sense, because that was a big concern over the past 18 months.

Where are customers in terms of shelfware?

Is this going to continue to be an issue throughout 2003, or are we largely through that and customers are now focused on whether [indiscernible] product becomes outdated or they're thinking about rolling out new functionality?

It's not an issue anymore?

Thanks?

I think fundamentally we are [indiscernible] because customers will not invest into large portions of shelfware.

Therefore, you see a big decline in the order size from new customers, which exactly [indiscernible].

They start small.

They look at how well we are doing.

If we are doing a good job, there's all the chance to get more, which makes a lot of sense.

And we can live with that.

So, was there [indiscernible] on legacy from previous years that was different?

What I can say, this is gone now.

It took us a good year. [indiscernible] one our two areas.

I could say [indiscernible] is an area where we have some shelfware because the Japanese are still an economy where they also close larger deals.

If it's new customers, I'll have a look to other economies, we'd say we are over.

So, it's not completely done, but 80% to 90% it is behind us.

I don't believe it will come back, definitely not.

We were not ripe for it, by the way.

So, Leo is very much driving for safe contracts.

Thank you.

Next question, Michael Short.

Congratulations on the quarter.

Your former long-term margin goal was 25% in 2005.

You said that 25% will probably be achieved in 2004 already.

Werner, you said that cost cutting has just started.

So, is there any new long-term margin growth for you?

No.

We stick to what we-- Remember what Henning said, that we are prepared to invest if we see that the economy is recovering.

And we would not give sole priority to the level of profitability that we have.

The future is more important than the profitability of the given quarter or given year.

And if you look for EPS both within the profitability and growth.

Thank you.

The next question goes to Mr Hausmann.

Three questions.

One is, can you give us the guidance for the headcount for 2003, whether we will see more layoffs?

What will be the net number at the end of the quarter and year?

Secondly, a question on the share of [indiscernible] that's come in the fourth, if you could give that number.

And then can you give us a split of the gross margin between Consulting and Training?

I'll start with the first one, then Werner can do the gross margin.

Headcount, we don't know.

We're very careful.

We hired very, very carefully in the first quarter.

We will continue to hire carefully, dependent on how growth is coming back.

If we the opportunities are there, we will hire.

If not, we will not hire ... very easy.

There's no plan, no [indiscernible].

It's completely stupid.

It's not [based on paper].

There are also no layoffs we're planning.

I think we are well-off with our strategy, that we keep people and give them a second chance.

We got our profitability increases without laying off a lot of people, some yes.

If we have to streamline the organization, [indiscernible] we have to do it.

But we should not just say, "Okay, we lay off 2,000 or 3,000 people in Germany", and then profitability is going up.

That's not very good because mainly of them are developers and it's very expensive to replace them.

Therefore, here we are really adapting our plans every day according to what's needed to manage the business and to manage our profit centers.

And it's possible because the labor market is down and you can hire immediately good people.

It's a different position than we had two or three years ago.

And I agree with you, then we should have a plan and [indiscernible].

That's not the case, and by not using this, yeah?

Because immediately [indiscernible] good developers.

And [indiscernible] is close to 90%.

If you look to the margin of the Service business, if you look at it from an overall yearly perspective, 26%.

Training is roughly 29%.

And Consulting is about the average Service margin.

Again, a reminder for those on the web or on the phone, I don't see any further questions, if you want to send us questions, please do so to investor@sap.com and we'll try to bring them into the conference.

So, I'll take another question here from Frank O'Sullivan.

Thanks.

Two questions.

One, just going back to something that we [sauced] earlier, could you give us the total purchased Service number for the year, which you think will be disclosed [indiscernible].

I don't know if you can give that number now.

The other one is on gross margin on Product.

Now that you renegotiated some of those deals with third-party product vendors, and I assume you're getting more focus on some of the R&D that you've put into that line, should we expect the gross margin on product to basically look better through 2003 to get back to where it was a couple of years ago?

On the Product side, I would say you should expect some improvement-- [indiscernible] whether we would have reached the [indiscernible], but yes.

I explained that we gained efficiency last year.

And if I look to the quality and the improvement we made with the reorganization, so we took some people out of development and focused them completely on support, which helped a lot because these people have not been developing new functionality, not just solving issues.

I think both things will help us to improve gross margin.

And it's also one of our key targets.

We look to it every year [indiscernible].

If you look to total third-party Services, we have in 2002 EUR950m.

This is the same level as in 2001.

Thank you.

Next question, please?

I was wondering if you could comment a little bit on the growth trends you expect by geography.

I was just looking at my numbers. 2002 was the first year that Europe as a percentage of the overall market was bigger than the Americas.

Is that sustainable?

What do you expect to see?

If we look forward, what we would like to achieve is-- For the sake of this discussion, I would just consider the Americas as one, EMEA as a second region, and Asia-Pacific as a third one.

We would [indiscernible] toward a situation where we have something like 40%-45% of [indiscernible] the Atlantic Ocean, and the remainder in [indiscernible].

That's our objective on a long-term basis.

Thank you.

Next question, please.

Thank you.

A couple of questions.

First of all, if you could quantify how many deals you've had in the quarter, and how many customers you have for each product group?

The second one would be, what do you expect from Training this year? [indiscernible] as compared to 2001.

Finally, just to clarify, did you say that Q3 2003 is going to be stronger than Q2?

Did I look at it correctly?

Hopefully, the normally the normal seasonality is slightly lower.

And how many deals, roughly 2,000.

And in Q4, in customers, global I know it, but overall we are close to 20,000 customers.

Concerning Training, we do not expect Training revenues to grow in 2003.

Thank you.

Next question, please.

Can you maybe just tell us from your cost savings that you made in Q4, or actually in 2002, how much of that was variable costs, and how much of that was fixed costs?

Oh, no.

We do not look to the business in terms of variable and fixed costs.

Okay.

Our next question comes from the second row.

Henning, you were talking getting a larger portion of the IT budget.

It seems that this year IT budgets are flat, and it probably seems like next year there's a good chance they will be flat as well.

I'm just wondering how you work your strategy around that?

Because especially this, obviously, Microsoft and IBM are trying to improve their portion of the budget as well.

With the big XP upgrade and the hardware associated with that, a lot of corporations have to put a big portion of their IT budget towards that this year.

So, how do you strategize around that going forward, getting SAP a larger portion of the budget?

[indiscernible] At the end of the day, I think clients are smart enough to know that an upgrade on a technical level doesn't help them if they are not investing in data and business software.

That doesn't improve any cost of ownership and any return.

So, therefore, our strategy is that we will completely focus in the future, if it comes [from a reference client], if it comes to our service, on completely on return and cost of ownership.

We did it partially in the past, but it is necessary to do it in all cases.

So, our strategy is to bring cost of ownership down [indiscernible].

We can even -- just to give you a feeling -- we have today customers that are giving us cost items.

A few customers just tell me what the cost of ownership should be.

And they're not going to IBM or Microsoft; they go to us.

At the end of the day, it's our application that defines the cost of ownership.

So, if we are a good, trusted advisor, I think we can get our fair share out of it.

Because if you look to our share, it's small, and the customer is wondering why our share is so small.

Because the value comes from our piece.

These are the kinds of things that we're doing.

And we try to educate clients and get more out of it.

That's the only way -- education.

I think another point, we can talk about it, is that if we come into those situations, that we also sit down with our partners and see if it makes sense that we together create such a high running cost.

So, that's why I mentioned also our partnerships.

I think it's time now that we do this, that we analyse together Consulting, with Hardware and other partners who are creating [indiscernible].

We are not doing this together, and most of the other partners agree.

I think then the IT industry will be tougher for the IT industry to recover.

Thank you.

Three questions, coming back to your forecasts.

When I was reading your guidance, at the beginning, I thought it was quite reasonable.

It was normal for what we expected, being where we [indiscernible].

But then in the last sentence, you were very precise on EPS.

This is why I started to wonder why are so vague on the top line and on EPS so precise?

Is this to show that you can handle the P&L pretty well?

Or is it-- I mean, [indiscernible]?

So, you must have more substance for the top line if you can give such a precise EPS line.

The guidance we gave you gives us some flexibility in the scenarios we can drive.

That was the reason why we pointed out the scenarios.

You can achieve both [indiscernible] with what our scenario and budget is, with growth and profitability.

The EPS gives us some flexibility here.

It's a little easier to handle because we can compensate, let's say, profitability and growth, or the other way around.

And we felt we needed this type of flexibility because it's better to handle it internally.

We saw this in 2002 and we just don't want to make the same mistake again to give guidance on figures we [cannot influence].

On the other side, we felt it's a good to your customers to ask, and you are looking to EPS, so we wanted to give you something that helps you more than other things.

Because at the end of the day, you boil it down to EPS hopefully.

I don't know, but that's what I think.

And if you look around the industry, I think everybody is providing EPS guidance.

If we wouldn't have provided it, maybe you would have asked for it [indiscernible], than only the operating margin target.

Thank you.

Next question.

One in the back here.

How many companies actually use R3 with maintenance who end this year?

What's the revenue impact of these companies in this year?

Second question, sales and marketing made up 18% of Q4 revenues.

Is that number sustainable?

I will start with the first one.

Then Werner can do the second.

We have no contracts that are ending.

What's happening is that some of the [indiscernible] are maintenance, which doesn't mean that the maintenance contracts [indiscernible].

They just hope that they get the same level of service from us for the same amount of money.

What we did, and hopefully we can convince most of the customers, might be not all, that we said, 'yes' we can enlarge the maintenance sphere, but you pay more.

Because in reality, it doesn't help if you end up with the maintenance [indiscernible], on average the client takes another two years.

You have no chance.

Otherwise, you have to cancel the contracts of about 1,000 clients.

But I think, therefore, that it's smart that we say, 'Okay, fine'.

That's the reality.

If you want to extend on the maintenance, which is normally leased between four and five years, you pay 2% more for the maintenance.

That market approach we have so far.

There are no contracts that are cancelled or ending or whatever.

The second part of the question.

Sales and marketing expense for the full year represented 22% of our total sales.

We want to keep this level, but we should not forget that both components, sales and marketing, include a portion which can be considered as investment.

I think, coming back to what Hemming said, maybe it would be wise to increase the spending here in order to build up and be prepared for the next growth scenario.

But in principle, this is the level we want to keep.

Thank you.

Keeping in mind that we've already discussed almost two hours, I think there is time for one or two final questions.

Good afternoon.

Just a follow-up question on the SMB , please.

You said that 6% of license revenues were from SMB .

That's from a full year, I take it, or for the quarter?

Could you say how much in terms of numbers of contracts this percentage would be?

Could you give us a feeling how the sales effort is moving toward smaller contracts?

I don't think I have that number with me.

But maybe to give you a little bit more color on that question.

Our strategy with SMD was to A) to make sure that we had an SMD offering, B) then to localize [indiscernible].

But first we have completely started to do [indiscernible] in September.

Then, still focusing on BusinessOne, then also going for a very stringent test phase to make sure that our solution is what SMD customers would expect, and channel partners.

The good news is that on the BusinessOne side here in Germany, we finished this process in January, and the feedback has been very positive.

To be totally frank with you, I don't even think that the number of customers would be any meaningful on the SMD side because we deal with indirect channels.

I can give you just one example, just to show you how immaterial that number would be.

We announced BusinessOne in Poland in November.

I believe in these two months, we did about 60 customers, but that doesn't mean anything.

Thank you.

Now the final question.

Last row.

You mentioned that you strike deals with struggling customers.

Can you explain how these deals are structured.

What is a practical example?

They are not happy to invest at the moment.

They have to save some cash flow investment, and so on.

So, are you giving them a longer time period to pay?

What do these deals look like?

In very general terms, we do it in a way that we are not losing money.

I would add that we actually like to make some money.

We keep the risk very low, if that is what you're asking.

Okay.

Thank you very much for your time and all your questions.

We look forward to seeing you again.

It looks like this should be in New York in July.

Thank you very much.

This does conclude today's SAP 2002 Year End results conference call.

Again, should you have any questions, please address them to investor@sap.com.

We thank you for your participation.

You may disconnect at this time.