SAP SE (SAP) 2003 Q2 法說會逐字稿

Ladies and gentlemen welcome to the SAP Q2 Analyst Conference, here in New York.

I would also like to welcome those who join this event on the internet, and for those who are not in New York today, you can send us questions by email, later on and the email address is investor@sap.com.

I will keep my intro relatively short.

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

First of all Werner Brandt, Chief Financial Officer and Member of the Executive Board of SAP will provide you with an update on our regional performance. [indiscernible] will also comment on our latest Sapphire announcement and our opportunities for 2003.

I would also like to welcome at this time, Bill McDermott (ph) the CEO and President of SAP America;

I think he should be in the audience. [inaudible - break in web cast]

[inaudible] information matters discussed during today's conference may contain forward-looking statements, which are [inaudible - break in web cast].

Thank you Stefan.

Welcome [inaudible - break in web cast].

Compared to the second quarter of 2002, if you adjust it for currency, the decrease is 5% only.

Total revenue, due to the fact that we have a strong increase in maintenance revenue, of 6% up to €633m.

Revenues are €1.6b, if you compare this €1.6b with the €1.7b we realized in the second quarter of 2002, you will see a difference of €[indiscernible].

I want to go into a bit of detail with regard to this difference, where it's coming from.

We had two different aspects here, the first one is that our volume increased and this demonstrates a 2% increase in total revenue on a currency-adjusted basis.

This is roughly €30m, on the other side we have a negative impact coming from the currency, and this negative impact in euros is €170m.

So at the end of the day we had a decrease of €140m on the total revenue line, solely driven by the change in currency, mainly the US dollar.

Operating income is €340m representing a 21% margin.

You can see the income, before income tax, of €347m, it's hard to compare with the second quarter of 2002 because in this second quarter of 2002 we had this write down of our investment in Commerce One.

So there we had negative income before income taxes and even net income, as this extraordinary write down was not tax deductible.

We closed the quarter with earnings per share, deposit earnings per share of €0.71.

Now if you look to our pro-forma measurement, EBITDA is up to €392m, it's the operating income plus depreciation, and amortization.

In the quarter this amounts to €52m and the EBITDA margin is 24%.

Our pro-forma operating income excludes stock based compensation expenses and acquisition related charges at €388m.

This represents a margin of 24%, which at the end of the day, is an increase of 6 percentage points over the second quarter 2002.

But there is one other interesting effect, the €388m are impacted by currency [indiscernible] of €56m, so under normal circumstances eliminating the currency, our operating income would be 14% higher. €56m is a huge number.

I mentioned stock based compensation expenses, here we have a P&L hit of €42m in the quarter.

Acquisition related charges were €6m.

The €42m is the consequence of our share price of performance of the Goldman Sachs index and the to the view related charge in our P&L according to APB 25.

If you look to our tax rate, it's exactly 37%, the income tax, as you can see it there, it's about €127m.

The pro-forma EPS, based on the pro-forma net income of €251m, is €0.81.

Let's come to the Group sales in the second quarter.

You see there's a split between product revenue and service revenue.

If you look to the total revenue then you can see we have currency adjusted, as I mentioned, 2% increase.

We had a relatively good performance, at least compared to the first quarter of 2002 in EMEA, it was only a minus of 2%.

In Americas we have currency adjusted a plus of 6% and in Asia Pacific a plus of 5%.

I will not go into more details this will be handled by Leo in the next presentation.

Here we have maintenance revenue, we had a big [discussion] in Q1 regarding our maintenance revenue.

We reported in the first quarter €608m, we explained that we had currency impact of €15m in the first quarter, now you can see, as we mentioned clearly stated, clearly we will see an increase in maintenance revenue going forward.

Here you can see the increase as we said.

As reported they are now at €633m and this includes accounting impact of €11m, so the adjusted number would be €644m, comparable to the €623m we have here on this chart, for the first quarter.

Now, in order to provide you a transition of the maintenance revenue on a sequential basis, again we had €608m in the first quarter.

With all the one-time effects we laid out in detail, in the conference call regarding the first quarter.

This would have [indiscernible] maintenance revenue you would expect it for the first quarter, you would have your range [indiscernible] more than €640m, then you add [indiscernible], maintenance on the Software, we recognize in the first quarter, this is the normal calculation you would do.

Then you can come to a normalized maintenance for the second quarter, but then again, you have the currency impact.

Then you have additional sales allowance set up in order to reflect US GAAP in the figures at the end of the day, and other effects, so that we come up with the number of €633m we've reported.

Sales allowance is simply, we bill the customer and then we go through the receivables and check collect ability.

In some cases, we say okay there might be a risk, and according to US GAAP we then deduct it from the maintenance revenue.

Gross margin analysis for the quarter compared to the second quarter 2002, on the product side the margin increased by 1%, we had a currency impact and one additional improvement coming from less purchased licenses.

On the service side it seems that we have 1% less from the [indiscernible] perspective this is the effect, but if you exclude stock base compensation expenses, then we have a service margin of 27%.

So this is mainly a result of the stock based compensation expenses in the second quarter of 2003 compared to 2002.

On the service side, of course currency has helped to improve the overall situation and we had less third party expenses in this area.

If we go to the [indiscernible] for the second quarter, you can see on D, an increase year-over-year by 4%.

If you exclude the stock based compensation expenses the increase is 2%.

If you go further down into the analysis you will see [inaudible - break in the web cast].

Later on there'd be quarter-over-quarter higher to additional 619 FDEs in the R&D area.

This did not result in a heavy increase overall, and the expenses, because we have consequently reduced, as we always said, our third party expenses, which compensated this interest in personal expenses, due to the higher number of FDEs we had compared to the second quarter of 2002.

Sales and marketing, there we have a slightly decrease of 18% quarter-over-quarter.

This is mainly a consequence of the reintegration of SAP [indiscernible] markets into SAP AG, meaning that we did not have to keep 2 separate sales forces.

We integrated into 1 in AG, resulting in a reduction of work force and consequently in a reduction of sales and marketing expenses.

Admin we see a year-over-year increase of 3%.

If you exclude stock based compensation expenses, it's a decrease of 12%.

This decrease is also driven by the reintegration of SAP Products and Markets into SAP AG.

If you look to our overall cost operating expenses, I would like to focus here for a moment on these operating expenses, excluding stock based compensation expenses.

There you can see, if you compare the second quarter of 2002 and the second 2003, a reduction of €204m.

If you analyze this reduction you will see that 55% is coming from [indiscernible] and 45% is coming from the volume, so it will lower expenses.

The percentages we've provided here clearly indicate we have year-over-year reduction of 14%, but if you do the comparison based on constant currency, we have actual expense savings of 6% year-over-year.

Sequentially that we've increased our expenses by 3% if you compare first quarter and second quarter of 2003.

I've mentioned already some part of this slide this is the worldwide head count on [FTE] basis.

As you can see, we had a decrease in overall head count in the first quarter of 143 and we increased in the second by 307 and you can see, where the increase has come, this is mainly in the area of R&D and this reflects our willingness to invest in R&D, to continuously invest in R&D.

Now I'll come to the half-year figures.

Let me start again with our P&L, if you look to the half-year license revenue on a constant currency adjusted basis it's down 5%.

Total revenue is up 1% for the half-year.

If you look at operating income, with €620 [€638m] we generated an increase of 26% compared to the first half of 2002.

Considering the FX exchange we realized in the first half and the finance income, we decreased [indiscernible] our income before income taxes dramatically to €658m, although I must admit that this conversion doesn't make a lot of sense.

The absolute number, I think, is already a very good indication.

Net income is €405m with a margin of 13%, as you can see the [indiscernible] reported earnings [indiscernible] pro-forma measurement with EBITDA increasing by 20% and [indiscernible] increased by 5% to 23%.

Then we have our pro-forma operating income €692m, this is a decrease of 23% and the margin also increased by 6%.

Effective tax rate, what you see here is 38%.

We always say that our full-year effective tax rate would be 37%.

We stick with this statement; the exception here in the first part is that in the first quarter we had a write down of minority investments, which were not tax deductible in the range of €10m.

If you exclude this you come to an adjusted effective tax rate of 37%.

Now the pro-forma EPS based on net income of €451m is €1.45.

The balance sheet looks pretty strong.

We have liquid assets of roughly €1.8b.

We have demonstrated that we continually manage our [indiscernible] down, consequently the receivables went down.

Then if you look at the shareholders equity and liabilities, I think there is nothing that is unusual.

If you have a closer look at shareholders equity you will see that we've [indiscernible] from 31 December 2002 to end of June 2003 in the way that we have €405m net income generated.

Then we paid dividend of €186m in May following the Annual Shareholder Meeting.

Then we bought back shares at an amount of €71m and this then gives you the shareholder equity as per the end of June of €3.0b.

The share buy back, we did not do anything in the second quarter.

We bought back roughly €900,000 shares, in the first half of the year.

The average price was €79 something euro.

We have in our treasurer's pot now 4.4m shares with aggregate share price, pre-purchase share price of a bit less than €101.

Cash flow [indiscernible] we found in the DSO is the reduction of 7 days, and keep in mind one day is €21m additional free-cash flow.

So we are going to continue to focus on the DSO and bring it further down.

If you look to our operating cash flow, then again you start with net income of €405m depreciation, amortization was €130m in the first half.

Change in working capital positive €265m, this brings us to an operating cash flow of €807m.

If you deduct capital expenditure you achieve or reach a free cash flow of €717m, which gives a return on the revenue of 23%.

If you go into a deeper analysis of the cash flow for the quarter, you will realize that the cash flow in Q2 was only €14m.

The reason for this is that we had a significant increase in net working capital in the quarter, by roughly €270m.

This is a result of a tax statement we made during this quarter, taxes for 2001 we paid at the last day possible and the cash out flow [indiscernible] in the second quarter the amount, but is roughly €230m.

So there's nothing, which is really unusual.

Now we have our guidance and I'll read it, at least the first page, only to make sure that those who are listening on the web do not interpret what I've just said.

SAP continues to expect pro-forma per share for 2003 excluding stock based compensation, acquisitions related charges, and impairment related charges, to be in the range of €3.45 per share to €3.60 per share.

The Company has slightly increased its target for pro-forma operating margin, excluding stock based compensation and acquisition related targets.

Previously the Company expected its 2003 pro-forma operating margin to increase by around 1% compared to 2002.

The Company now expects its 2003 pro-forma operating margin to be between 1.0% and 1.5% higher than the level achieved in 2002.

While the Company continues to not provide revenue expectations, it expects to achieve its pro-forma operating margin and pro-forma earnings per share target, through continued market share gain, and cost containment.

In it's current business environment, the business is [indiscernible] in line with historical [indiscernible].

That's all now from a pure number perspective, we will give you now a bit more flavor to it.

Good afternoon [indiscernible] as well.

I hope you're enjoying this.

Let me try to give you some color on the numbers from a geographical and then from an industry perspective.

As Werner has already indicated our license revenues for the quarter were about €431m, that's a 13% decline in euros, but only a 5% decline in constant currency.

If you look at the various geographies, in the Americas we achieved €112m, that is a 9% increase in constant currency.

In the US, part of the Americas, €86m, that's a 6% growth in constant currency and 14% in euros.

In the Americas we had very strong performance in Latin America, where despite a difficult environment we have been able to significantly grow the business.

I'll come back in detail to the US in a few minutes.

At this point in time I just want to point out that we are continuing to grow in the US quarter-after-quarter, this quarter as well, and we are gaining market share.

I'll give you some detailed information about that in a few minutes.

In Asia Pacific we achieved about €58m, which is flat in euro terms but 16% growth in constant currency.

In fact, in Asia we had a certain number of countries, about 7, that have been growing significantly with softer revenue.

Most important of all, China, where as you know China is one of our growth countries, we have managed to achieve a triple digit growth in Q2.

The Japanese numbers are a little bit misleading because over the half-year Japan grew by 22% in euro terms and 38% in local currency.

So please don't read too much into this quarter, its basically some [indiscernible] shifted from quarter-to-quarter.

The long-term or even the medium-term trends in Japan are extremely favorable as well.

As what's indicated by the success of our Sapphire Conference there and the Japanese [indiscernible].

In Europe, as you can see, we had about €261m of licensed sales.

In Europe we have been helped significantly by the dropping size of deals.

We have been able to compensate those partially by increasing volume, but as you can see no enough.

But don't again; this is a number that needs to be looked at in relative terms.

Germany, a very important part of EMEA achieved €97m, which is only a 4% drop.

In Germany I think our business is stabilizing with a perspective for improving trading conditions.

Other parts of Europe, such as Southern Europe have been growing.

The same is true for Eastern Europe.

In the UK we see a stabilizing situation, and in the rest of Europe, indeed we are facing adverse trading conditions and we're trying to remedy this.

Sapphire in the US was a big success, as you know.

It was a clear demonstration, not only of what we can show to our customers, but also of the commitment that customers have towards SAP.

If we look at total revenues, in constant currencies we grew by 2% over the quarter with significant growth here in the US, 5% in constant currency to €397m.

Total Americas €506m up 6%.

Asia Pacific also grew in constant currency to €190m.

EMEA managed to be more or less flat, minus 2% or minus 3% in euros but [indiscernible].

With Germany stabilizing at plus/minus zero, minus 1% with €392m.

It is important to note that we continue to gain market share and I'll go through a bit more detail into that on the Global perspective.

We continue to gain market share in the Americas and Asia Pacific and we [indiscernible] our market share in [indiscernible] that's very important.

If I look at some important wins in the quarter.

Colgate Palmolive is a very loyal customer to SAP continues to do additional projects with us.

Fender was an important competitive win.

Sony Pictures, and the University of Cincinnati ensure that we continue our drive into the public communication sector. [indiscernible] Chicago, which was another very important competitive deal.

In EMEA we were proud to be able to add the Allied Irish Bank, the European Central Bank is also a customer.

The last [indiscernible] company in Europe, which wasn't a bit SAP user, is now a very large one, Ferrero.

We continue to work with our [indiscernible] Europe, Swisscom a very old traditional SAP customer, Telecom Italia and Vattenfall a big utility company.

In Asia Pacific it's important to note [indiscernible].

You know that we wanted to grow our business again in Australia and one of the key possibilities is the public sector, and we have achieved that.

The rest of the customers are in Japan and in China.

Since the quarter closed we have also a very important additional announcement to make in terms of customers and that's Coca-Cola Enterprises.

Coca-Cola Enterprise is engaging with SAP on a very strategic project to be [indiscernible] fully integrated [indiscernible] store delivery solution that we will do together with them, which, as you know, is one of the key strategies of Coca-Cola Enterprise and we are very proud to be associated with them in this project.

It's a multi-year project, you will understand that I cannot disclose the deal size, but it is a significant number.

So to sum up the highlights for the quarter, we continued our license growth in the US [indiscernible] terms.

We had strong results in Asia Pacific in particular in China, but also strong growth in Latin America and in some parts of Europe.

Sapphire Orlando was a clear demonstration of leadership; mySAP CRM [indiscernible] was a big success there.

SAP NetWeaver, our technical foundation and SAP [indiscernible] our next best practices.

We also had good momentum on the S&D side in particular here in the US where we launched Business One in partnership with American Express, among others.

Since we launched this project with this product at the end of Q1 we had significant growth in this business.

We have had good [traction] and we look forward to continuous good [traction] in this area.

What are the market conditions in the quarter?

Clearly we are still continuing to struggle in a tough market.

The market is still a very tough one.

As is clearly indicated for us is the increasing average deal size.

I think in particular in Europe but also in the other [indiscernible].

We compensated this partially by a higher volume of deals, this quarter we grew again by 5% the number of deals.

We managed to execute in the best possible fashion towards the higher volume by exploiting all of the opportunities that are out there.

We actually managed to have a much lower transaction cost, as you have seen from Werner's presentation.

The shifting competitive environment, the saga creates some uncertainty in the market place, it doesn't help.

Of course it also creates increasing price pressure.

Some of our competitors are willing to do unnatural things, in particular in Q2, that trend will probably continue going forwards.

Let's now take a closer look at the US.

I think it's important to maybe take a look at it in perspective.

If you look over the last year, we grew our market share significantly 8 points that are a significant number.

We have reclaimed our number one ranking in the US, we were kind of number two about a year ago.

We are now the clear market leader.

We have 31% compared to 20% of people [indiscernible] and that is attributable to our organization, because depending on the analyst, either the market is flat or either declining.

We have gained market share in such positions that shows that we are able to execute in a much better way than our competition as [indiscernible] in the organization [indiscernible].

Significant other important [indiscernible] here from the US is also our performance in terms of margins.

We have improved our margins in the US significantly by a very big number.

The US is now contributing to the fact that our overall operational margin has improved as well.

The pipeline and the analysis of the US shows that we will be able to continue working very hard, to keep these trends going.

Looking now at some of the [indiscernible], I don't believe I need to go into lots of detail on the supply chain side.

That is simply a continuation of the trend, which we have already had over the last quarters.

[indiscernible] we have achieved 96% of Siebel's revenue in Q2.

You can see the trend over the last quarters.

I believe we can continue this trend and therefore become the number one CRM supplier in the global market place in 2003, that's a commitment we made at the beginning of the year.

The reason for this is rather simple, I think it shows the global supply chain side and certainly on the CRM side [indiscernible] the area of [indiscernible] has come to an end.

It is much more a question of what [indiscernible]; it's actually not even so much [indiscernible] industry.

People are looking at industry solutions, are looking at business [indiscernible] support, enhancements, and creativity through our industry and are not looking any more at [indiscernible] other functional feature.

You can see a remedy from somewhere.

We are continuing to drive our industry expertise and all of our [offering] [indiscernible] market will be based on industry solutions.

The effective solution will be a complete [indiscernible] for a given industry.

As we have seen in the example of our new [indiscernible] revenue, where we go to market with about 280 end-to-end industry specific processes, we will do the same for our entire offering.

We will drive our go to market towards these industries with key pin points, which industry do you [indiscernible] to [indiscernible] or IS for the banking industry.

Maintenance repair and overhaul for the aerospace industry.

IFADs for the CPG and [indiscernible] industry etc.

Clearly that is paying off, our customers are demanding this.

Our customers are not interested in knowing which feature of CRM, [indiscernible] but they're looking for a complete solution to address definite issues.

Our revenue analyzers for the industry show us that we continue to do a good job in the various industries we are in.

There isn't much change from the last quarters.

Don't read too much into process industries, that are basically clear phenomena where we have very high market share and that's just [indiscernible] deals that swing from one quarter to another.

Basically we face reasonably stable distribution of our revenues to industry.

It is important to note that we continue to gain the share in the financial services.

That being said, I'd like to hand it over to Henning for his analysis.

Now ladies and gentlemen a few final remarks only.

Just how we view the environment is always a question, what about the spending environment [indiscernible].

It's challenging and will remain challenging.

We believe that we benefit because we gain market and will gain market share, but it's not easy.

The point of the deal size, that is continuing to decline and it is a fundamental shift that we fear, so we don't believe it's coming back to the old days.

Customers prefer smaller deals [indiscernible].

This is the kind of piece-meal approach we have seen in the 90s and we see also those clients that later on, they end up with isolated solutions that are not [indiscernible].

The other side, we have the answer and we sell this answer.

Because we have an [indiscernible] integration platform, if people do this piece-meal approach, let's say, based on buying in piece-meal from one [indiscernible] like SAP, there is a guaranteed integration later on.

Another point of these industry consolidations that we have mentioned, two comments, it's not helping short-term because it was, I think not helping in the trust levels of customers to our industry.

Because normally you should come from a customer, not coming from a company and their products should think about what's [indiscernible] for the customer.

We have heard about the discounting, this is also not helping short-term.

Mid-term we believe that all the [indiscernible] from outside this will help [indiscernible] of SAP.

What about the operation and efficiency?

This is a key topic still for every CEO.

This is one of the explanations why we have it still as a key topic.

So everybody expect EFT sales going down, it's not the case, it's stable over the time.

Especially in Europe and Asia Pacific.

If I look here at the US it's slightly different it's more [indiscernible] but in the other markets it's EFT.

We have therefore announced [indiscernible] and the response that for you, we have special new Sapphire Orlando to educate our clients and especially the user group.

That means with the success of our [indiscernible] it's clear that [indiscernible] was another release from [indiscernible] and that with [RT Enterprise] the position two which will come this year, we have more or less reached the end of development of [RT].

There will be a long period of maintenance and clients are starting now to think about the migration to the mySAP [EFT].

[indiscernible] as you obviously know we use [PCO] it [indiscernible] so we've seen more consolidation of [indiscernible] since the occasion we mentioned about this as an example, it seems to have been that it took several years for clients to understand whether this was a better approach.

At least [indiscernible] now we are there, and it seems to me that there is a business case behind, so this was a sale, which was only possible on a business case and means with [indiscernible] over time we are [indiscernible] vendors.

There are strategic projects out there.

They all mention CTs, which have attracted a lot of [indiscernible] recently, but we've debated them for a long time.

They tell you that clients are also looking to look for packages of software in the areas where in the past they haven't done this.

These direct store deliveries are a key customer facing process.

It's the heart of the business.

There is no [indiscernible] this is trust to design the products of the future together.

Clients are doing it because they believe in the capabilities of good suppliers like SAP and later on [indiscernible] slower because we maintain it.

But it helps us to improve our capabilities in leadership, especially in industry solutions.

Therefore it's so important [indiscernible].

Now I have to job [indiscernible] to show you how we try to align the [indiscernible] of CEOs and CAOs to see the quote from the CEO from Detroit from the Annual Report where he clearly points out how simple the actual implementation was, to help change the company adapt to the new environment.

Shifting and getting a lot of improvement on the operations side, so to me it's about change and about keeping the [indiscernible].

Where on the other side, if you look at the CAO quarter, this is where it's more or less value for money.

The [indiscernible] cheaper, better so I take this.

Okay, we can deliver on both.

The strategy hasn't changed, it would be a surprise.

The production environment, we feel it's better to have the right one, we continue to execute.

So firstly we improve our productivity, we improve our market share and we adopt step-by-step [indiscernible] environment.

Because we believe it will not come back to the old days.

Therefore, a few remarks from my side.

I believe that this operating income, excluding stock based compensation, increase of about 20% is very good, a very strong performance of SAP.

If you look to the 8% revenue decline, you can see that we continue to employ mainly in research and development, half in [indiscernible] but half in the other areas.

We do this because we said at the beginning of the year that SAP would not focus on; let's say cost cutting only.

We have to look to the future and we have to invest to what we deliver to the market in the next years.

Especially our integration platform support is a very important part of SAP strategy.

Most of these people go into [indiscernible], not all, but most.

We're growing market share.

Overall just for the deal side, just to get a feeling of how fast the market is changing.

I took the structure from Q2 2002, and if you look in 2002 42% of our revenue came from deals above €3m.

If you now look a year later, it's only 27%.

On the other side, 33% came from smaller deals of less than €1m and now it's 44%.

So the [indiscernible] challenging, how fast things happen within a year.

Many analysts ask about, okay, where is the next growth coming from?

It's obvious, we are in such a transition that the deal size is going down, that's not for ever.

So we know roughly where the bottom is.

If you look to the [indiscernible] to the lowest deal size, we are not there, [indiscernible] really happens, but on the other side, Leo and his team are catching up and closing more deals every quarter.

It's very important that we get some more volume and once we have a stable deal size, then you'll see where the growth is coming from.

If you look to the [indiscernible] side, let's me just reiterate that our strategy is not to move top line for services.

Our service strategy is to help ramping up through products, to close new business and to ensure quality, and last, but not least, to keep a high level of profitability as we have seen.

This is key, because we need our partners, we have seen just in the last quarter, the application of SAP within the partner community, really going up significantly.

Also, this is the picture from market share.

I think it's continuing to see 1% again; we measure the whole in four quarters to get the seasonality out.

If I look to another important key indicator for us, which is the customer service section, you will see the same trend.

So we believe it is important to have a long-term relationship.

Therefore this is key for our Company, very good especially for you [indiscernible] as well.

Now, finally, what is the strategy of SAP in terms of products?

This is just what we outlined in Sapphire Orlando.

This is our 2-3 year plan.

It's not a plan for 3 months.

We will bring the complete product offering into services based architecture.

This is an architecture, which combines the benefits of integration and the benefits of agility.

In order to do so, we need an integration and this is [indiscernible] so important strategic [indiscernible].

All products will, over time, be [indiscernible].

We have started some important [indiscernible] so CRM, SCM run under our [indiscernible].

We use the exchange infrastructure to integrate our components.

We have a component-based architecture.

So we use all this integration technology to integrate as a complete component internally but also to extend our offering to the external side, that's a key.

We have now achieved at our [indiscernible] really the best of [indiscernible] all products being the best in the market.

CRM 4.0 and SCM 4.0 were very central to this.

We have shown the first demo of our master data management, a unique feature of SAP NetWeaver and a unique selling point.

We have given an idea how in the future companies can save a huge amount of cost in utilizing the [indiscernible] infrastructure much better.

So that we can really say we can get more out of their IT budget.

This can only be done with the [indiscernible] in the market, so we have discussed in parallel with key companies.

We have a shared quality commitment, for the first time, from IBM [indiscernible], others will follow.

So that the implementation is really engaged between partner, SAP and customers [indiscernible] some quality goals.

We are doing joint business together, not to mention again, the announcement IBM [indiscernible] market worldwide or for DELL for Business One in Europe.

We have more than 100 partners for SAP NetWeaver and we now engage them to join TCO reduction programs with [indiscernible].

Looking ahead, as I've said the environment remains challenging until the end.

All that we get from feed back from partners and customers we feel that in the US there is a high likelihood that it will improve.

We don't think so for Europe.

I talked about the confusion in the market, which is not helping us short-term but helping us mid-term.

You have seen we have confirmed our guidance; it's the pro-forma earnings per share.

So I think it's not what many people are doing because earnings is what matters.

We have slightly increased our guidance in operating margin, so we feel comfortable that we'll reach this target.

We also feel comfortable that we have the right answer to what we have been saying; we have the right product portfolio, the right technology in place.

This will help us to get more market share [indiscernible] base.

Now where we have more or less reached our goals in being dominant in [window] product areas, we will shift our focus again to industry.

So we will see in the future more announcements around SAP's focus around industry.

Also the [indiscernible], many of you were asking, what is the revenue potential of [indiscernible], I think about 60%-70% in the future of industry, add-ons will be [indiscernible] composite applications.

Therefore, if you look to our market share in the industry worldwide at the end of 2002 based on IDC figures, you'll see we have a market share of 75%.

Now 90% if you look to the half-year.

There is a lot we can improve in the [indiscernible] manufacturing, surprising to some of you, but as I look to High Tech and others, I see we have more to do.

Leo commented on profit.

There is a reason why profit is fluctuating so much; we have a high market share here.

The reason that financial services are so high is because this is only reflecting packaging solutions not what all these guys are doing in house.

It's like in Japan, if you look to the overall potential I think financial services is much higher now and market share is lower.

So this is our focus, in gaining more market share.

I told you at the end that you see the market is not saturated, there is a lot to do and it makes a lot of sense for SAP to refocus on where we are going and gain market share and improve our productivity.

Thank you.

Thank you Henning.

Before Q and A I'd like to remind everybody please use one of the roaming microphones and also if you could please state your name and your Company name.

As a reminder, the Conference today is being web cast on the investor relations web site and for those who listen to this event on the internet or by phone your can send us questions by email to investor@sap.com.

So I'm just looking in the audience for the first question, Rick?

Thanks, Rick Sherman (ph), Goldman Sachs.

The business in the US, did you see the pricing pressure more in the US?

I gather it's from PeopleSoft you're referring to the industry conditions you're seeing that.

I'm curious to your perspective on the US, did you do as well in the US as you thought you would?

Last on the US, the margins that you referred to in the US are getting better.

Is there any way that you could size that for us, maybe give us an idea of how that might compare in a relative sense to other geographies and how much more improvement I might be able to see.

Okay I will try to answer your question and [indiscernible] feel free to jump in.

I believe that in this quarter there was pricing pressure in the US.

I think we have defended well against it.

We have managed to keep our terms and conditions intact.

Your question, the environment, these conditions [indiscernible] from competitors did create significant pressure on us to try to respond.

What you see actually is more pressure for additional safety of customers, I'm looking for. [indiscernible] as cheap as possible deal.

It goes without saying that if you look at the total implementation costs for software items it's not [indiscernible] the largest part.

So with a little bit of skill and education you can get this message across.

I would rather phrase it slightly differently Rick, I believe that in this quarter, because of the uncertainty a certain number of deals at the end that we were hoping for, slipped into this quarter.

Mainly because people were looking for the higher sense of security, or in stronger terms, an even higher sense of security.

So this is [indiscernible] we are hopeful that we will [indiscernible] the vast majority of them this quarter and then some of them in the next quarter.

But it shows that the environment that has been created by the industry conditions is not conducted to [indiscernible].

As to margins, we have improved the margins in the US significantly.

From memory, I believe we have increased them by about 80%.

They have still some way to go and I'm sure we will keep on working to make that happen.

Thank you.

We have one question from the web, but before we do that I would like to take another question from the audience. [indiscernible]

Hi, Charlie Devon (ph) with Sanford Bernstein.

I had a question on the last slide in Henning's presentation with the under penetrated market.

Could you give a little color on the gray area, the other?

How much of that is middle-market under penetration and, in that context, can you give us some color on your progress in penetrating the middle market, how those initiatives are going?

Overall if you look to the markets and roughly 60% of the market is what we [indiscernible] as sales.

Roughly 60% is what you would call mid-market, where we have an indirect sales force.

If you look to this 50% and half-half.

Half is what we [indiscernible] which was a sophisticated mid-market.

So companies [indiscernible] but with a little less cost, you know.

The other half are really small companies where you have to go in with a different product, a small product and this is Business One.

This gives you roughly the feeling.

I don't know exactly what it is for the industry but it will be similar.

So therefore, even if you will take for a moment in the scenario, the mid-market out, you could put the line at the middle and can see what we can do with flat [indiscernible] sales.

It comes to the success in the mid-market, we follow this carefully, and I have to say this works well.

We get more and more deals but in terms of revenue it will take some time [indiscernible].

So I'm personally not waiting for big revenue boosts, I'm looking more for having new names, which we get through the mid-market.

As Leo pointed out in the last session quarter growth, the key to convince partners is [channel] partners.

So [indiscernible] especially these deals we've made with IBM, with DELL and others, these are important because these are channels, which are broad channels.

In addition, they have a lot of other partners, but with the big channels is our key.

So I expect over time, when [indiscernible] we see an acceleration in the [indiscernible].

Thank you.

I think now we'll take a question from the web.

The question is, why was cash flow from operations only €14m this quarter compared to one with €93m last year and one that is €12m in 2001?

This is what I [indiscernible].

We had a significant payment of taxes in the second quarter of 2003 and this resulted in a higher cash out flow in that our net working capital actually decreased, resulting in a decrease in operating cash flow.

Okay, thank you.

Another question [indiscernible].

Neil Herman, Lehman Brothers.

A couple of questions.

Particularly given all the acquisition activity there seems to be out there these days, or attempted thereof.

First obviously you've been talking about moving into, or more deeply into various industry verticals.

What is your view and strategy with respect to perhaps acquiring software companies that may have some very specific functionality or uniqueness or market share with respect to one particular vertical that SAP doesn't already offer?

Then as a separate question but an adjunct.

Could you talk about the technical feasibility hypothetically of acquiring install basis and over time being able to establish upgrades and providing conversion utilities to be able to convert customers to a future product?

As opposed to those customers you have to re-implement.

Is that a technical feasibility when you're talking about broad based ERP packages?

Thank you.

The vertical answer is yes.

We reiterated and confirmed several times that if we look for acquisitions we wouldn't do it to buy market share but more to complement our product portfolio, which could be either on the technology side or for [indiscernible].

So this is an option yes.

We will not exclude it.

We will look to the three options - acquire, do it ourselves or do it with a partner.

So that is why I cannot say what we are doing.

Sometimes we join forces with a partner with some money outsource or we share some revenue over time.

That is better than acquiring.

This depends.

But we have shown we can do all those things.

So the second, perceivabilities.

Here you have to really to look to the details of our - we are leaders in the market.

Technically speaking all the (indiscernible) below (indiscernible).

We are leaders and I believe in new installed.

It is much better (indiscernible).

We will not go into the details.

But there is a lot of plug-ins, which makes it easier to integrate (indiscernible) the product so this was (indiscernible) for the change.

The challenge to move old customers to (indiscernible) to (indiscernible) but what we will do is to see together with some of our partners will make a package which business to these clients.

The business case you cannot do from SAP alone, it has to be including the hard sale response has to be included in the implementation.

We have spoken to a few of our last partners and they are open to do this, so we will address this in the next quarter because (indiscernible) so the idea is to come with a complete package which makes this business case even for the very old SAP customers.

After this, we also have some other ideas for the next two quarters.

With respect to a potential acquisition of PeopleSoft that they would be able to put into place future versions or various conversion utilities to enable PeopleSoft customers to be able to move to Oracle's products, I was wondering if you had a view on the feasibility of something like that.

That depends.

You have to go into the second (indiscernible).

I would say you should be very careful about those things.

Converting (indiscernible) and you install it is not that easy and (indiscernible).

To take the structure changes is (indiscernible) is better sometimes for clients and new install instead of just upgrading. (indiscernible) because of the state between the product sections would be so fast.

Thank you.

That would happen once a year, but in reality sometimes more (indiscernible).

Thanks.

George Godfrey, Columbia Management Group.

Net hires this quarter were up for the first time in the last four.

Do you expect in Q3 net hires will be up sequentially?

Secondly, maintenance revenue Werner highlighted these one-time or other effects, but you didn't go into exactly what they were and the maintenance revenue in Europe looked like that region was particularly weak.

Could you highlight that for us?

With headcount up to now, there is a plan to slightly increase headcount also in the second half.

Nevertheless we look very carefully because we have given guidance where we can do a ticket count, but therefore we have no headcount (indiscernible), I was asked by the press whether we have a headcount distinction.

The added headcount is more located if it comes to research development in low-cost areas so we are not (indiscernible) headcount in Germany.

Regarding the maintenance budget, I think what we clearly address is the currency impact in this quarter and the last quarter but we do not want to go into more detail regarding the sales allowance and the other components, especially not on the regional levels.

The only thing I can tell you is that this is equally spread around the region, so there is not one focus region.

Thank you.

Next question Kevin Merrett.

Thanks.

Kevin Merrett from (indiscernible).

Leo I was wondering if you could talk about per (indiscernible) pricing.

You talked about average deal sizes and if you could give any color on the various segments of the product portfolio?

Then Werner, in terms of capital structure and use of cash.

We have had a lot of changes with summer coming.

What are your thoughts - the dividend is flat at the moment.

You have been slowing down the buyback and what are your thoughts on the stock based (indiscernible)?

Thanks.

On the (indiscernible)pricing issue there is structurally no change in the (indiscernible)price.

That continues as it used to be.

We have not seen any significant structural change there.

In fact the dynamics are always the same.

You have to work with a certain number of parameters with the volume of the deal, timing of the deal, detail of the deal and compare deal for deal.

Indeed in this kind of environment the (indiscernible) price is basically not very much different this quarter from previous quarters.

When we talk about average deal sizes it is really the number of (indiscernible) much more than the (indiscernible) price.

That is something you have to bear in mind.

In terms of the various segments there is nothing really I can comment on because it really behaves across the same variables I just indicated across all the segments.

Regarding the use of our cash, I think we demonstrated in 2002 that the (indiscernible) back to our shareholders is payment of dividend.

We are (indiscernible) of share buyback.

We have an authorization of our shareholders to continue to buy back shares.

We have taken the (indiscernible) buyback shares in the second quarter (indiscernible) did not see the opportunity to do because we buy back if the price is too fast for the buyback of the shares.

So this doesn't mean that we do not continue to buy back shares, but not at a large scale.

Thank you.

Next question Jamie Friedman (ph.).

Thank you Stefan.

It is Jamie Friedman of (indiscernible).

I can't make eye contact;

I am caught behind a column here.

With regard to the Coca Cola deal, I was wondering.

Did I hear you right that it closed after the close of the quarter?

I know you don't want to say the size of the deal, but maybe in terms of magnitude, I remember you had a large phase deal that I think Nestle last year said got bigger than a bread basket.

How does it compare to that one?

I couldn't hear you on that last one.

Was Coke bigger than Nestle?

No.

It closed after the first quarter. (indiscernible).

There is another question here, in the second row?

David Garrity of the American Technology Research.

Leo, just trying to take the pricing question a little bit further and to put this question more in the context of what some of the Enterprise hardware vendors have been talking about in terms of selling on demand-type computing services.

As you look forward, do you think on demand, as it is envisioned by some of these strategic partners might have an impact with respect to pricing of software licenses or do you see it as being specifically with respect to the hardware and services elements of their offerings?

The second question would have to do with just a follow-up (indiscernible) the CEO of IBM I talked to yesterday more about trying to expand the relationship with applications' software providers, SAP among them.

Is there anything in that that would indicate qualitatively or quantitatively have changed the relationship between the two companies?

Well, let me just try to answer your first question, which is actually a very good one.

Not very easy to give you a clear answer since it is more (indiscernible).

On demand computing depends to whom you talk, but if you really take the (indiscernible)and one of the (indiscernible)from our partners, we are talking about capabilities you can get from each.

Now when you implement software you have to take a slightly different perspective on this and you can't implement software just to take care of the other (indiscernible) amount.

You might want to do this for very specific rich applications, but when you talk about this (indiscernible) it doesn't really work in that context.

So I don't really believe that it is going to have structural impact in our pricing.

In fact, when we talk to our customers, who are a great source of information, we get from our customers a very a conservative attitude towards pricing and so forth.

Customers want to continue to see previews of [indiscernible] pricing.

They want to see some [core engine] pricing as well.

They do not want to see any different methods for pricing, because a little bit like democracy, it's the worse system, the current one, with the exception of all the other ones.

Therefore, I don't expect that on-demand computing per se will necessarily change the pricing dynamics.

What it might have an impact on, and again this is pure speculation at this point in time, it may be the way the deal gets structured, in terms of its terms and conditions.

But also there, there are various ways and means to cope with that.

So, I don't expect -- maybe my colleagues here have a different view -- but I personally do not expect that on-demand computing, whatever that appears to be in the future, to have significant impact on our prices.

Johan, maybe you want to say something.

We have clear indications that IBM is continuing with their [indiscernible].

I have not expected different things because [indiscernible] the market are not important enough to change [indiscernible], why for the change of IBM [indiscernible] being that much larger.

IBM made it very clear more than a year ago why they had [indiscernible] a few years ago and that they would continue.

So, all the indications we get from [indiscernible] and other board members of IBM are that they conclude, and therefore the relationship, I believe, between IBM and SAP will be better in the future.

Because we are by far the largest partner for IBM, and IBM is the largest partner for SAP.

Therefore, they are in close contact, and a there are a lot of opportunities we can do in the future.

Just one word to on-demand.

People think that most people start thinking about electricity concept, which looks like pricing, like you pay for electricity, let's say for whatever you use it.

This is one picture.

This is computing power on-demand.

This is our business together.

This is how it doesn't change us.

If you look to the other strategy of IBM on-demand, it's close to what we say would [adopt] this business.

So, it's [indiscernible] new changing environment.

And this comes back to having an architecture and applications which allows these to [indiscernible], implementation and the [indiscernible] architecture, which allows something to the slave, the service provided by a software component, more or less on-the-fly by another one.

This is, for me, on-demand.

Here IBM and SAP have a slightly different view of the future.

I think IBM looks more on on-demand on this [business core results], [concentrating out], etc.

We believe that, in the core business of companies' [social] service architecture is more important, and then you are not going for BTO.

You are replacing [indiscernible] cost of the services, which is smarter and more flexible.

And in order to be there, it will take a few years.

So, that's our view.

Therefore, the conclusion, what Leo said, is true.

It will not affect us significantly for some years yet, but not significantly.

Thank you.

And we take another question from the floor.

ASPs have been falling for those software companies.

What catalyst will stop this fall?

Well, I can maybe answer. [indiscernible]...

My god, that was just on the technical side.

You never know.

From my side, I believe there is more a less a size of the deal where if it's low it makes no sense from both sides to enter into long negotiations, etc.

Therefore, I will not say that this is the end, but if you look to markets, like Latin America, to Asia, excluding Japan, etc., where we have, let's say, smaller companies, we see that the deal size is lower than in the US and other economies.

Even if the deal size would go down, I think that something [indiscernible] would stop.

But it makes no sense to believe that in the US, Germany and other economies, the deal size will be less than in Colombia, in Slovenia, in -- I don't know -- Bulgaria.

Therefore, we know what we [indiscernible].

And I think that's the answer.

Therefore, we will see. [indiscernible].

Another question here in the audience.

You guys have done a great job with margins in the first half.

The second quarter, I think there was a good amount of upside, compared to what people were looking for.

Yet, you're maintaining your prior guidance.

Is that just reflective of even a more cautious stance on the full year?

First of all, we have maintained our guidance on the earnings per share side, and [retrieved] our guidance on the pro forma operating margin.

And if you do the calculations, I think you will come to the conclusion that [they don't fit] together.

I have a follow-up question.

This is more of a product question.

Master data management, can we see activity in the second half?

You had alluded to maybe some demo work.

It's scheduled for the fourth quarter.

So, we'll see more activity [indiscernible] for people, but really to let's say have a more significant input, I would look for next year. [indiscernible] in the fourth quarter.

Thank you.

Another question from the back.

Can you address the slowdown in consulting?

Is it pricing, or project work related?

What trend should we expect going forward?

I had hoped I'd addressed this already.

Consulting, problem is [indiscernible].

I said in consulting we adjust our consulting activities to our product sales.

So, the slowdown in consulting is more or less less volume. [indiscernible], but so far our consulting could more or less keep [together] the prices.

If this is not possible in the future, we will adjust our cost of delivery, where we have something that we could do.

Therefore, it's just that we adjust our volume.

You have seen, for example, that we have [indiscernible], which was always a significant part of [partners] [indiscernible].

And we [indiscernible] because the sub-contracted people have less profitability than our own people.

If we have to go for margin, then it makes more sense, let's say, to [indiscernible].

Another question here.

I have two questions.

The first and easy one, number of [indiscernible], if you could give us information.

You can go to the difficult one, and then [indiscernible].

In June, after all this acquisition activity in the US, you started a program for people for customers that addresses confidentiality concerns of uncertainty.

Have you seen any response, any feedback from that campaign, and whether there has been any change in response after people were effectively allowed to [indiscernible]?

Let me give you the easy one. 1,317 [joint ventures] worldwide.

As to the campaign that you are alluding to, we said already during the Sapphire User Conference which started this campaign, we did not expect, we cannot expect any significant results coming out in such short a timeframe. [indiscernible] And it's not because we have this [indiscernible] that the sales cycle will suddenly shorten from nine months to nine weeks, unfortunately, or fortunately, that's the way it is.

However, what it did do is give us the opportunity to enter into a constructive dialogue with a number of people, so [indiscernible] new customers.

We're starting to look at alternatives because [indiscernible].

So, we have a certain number of contacts already going.

I think we're talking about something like 40 to 50 [indiscernible] here in the US.

And actually the campaign is a worldwide campaign; it's not just in the US, except that the share, the market share of [indiscernible] was outside the US significantly smaller and, therefore, a number of [indiscernible], for this division also [indiscernible].

We will continue engaging in this dialogue, and we'll see what happens on that front.

Thank you.

Another question from the back.

Can you entrust the contribution of license revenue from [Ethernet] leader and SMD, and how do you see that developing for the second half?

I will comment on that.

We have to understand that we sell [indiscernible] nearly exclusively combination with applications.

It doesn't mean that if the customer wants [indiscernible] alone without an application we are not selling.

But honestly, our applications are so good that I have not seen a customer who only goes for an [NetRiva] without any application.

Because that would mean that he wants to [indiscernible] as a development platform, and then it makes a lot of sense to take some of the applications, and then build something around it.

Therefore, the license revenue from the [NetRiva] is indirectly in our applications.

It helps the market, we might see next year we can see.

But at the end, all MySAP deals have [NetRiva] included, so then you can look to the percentage of revenue from MySAP, and then it's up to you to find out how much revenue you account for [NetRiva], yeah.

That's at the end what we are doing.

In Q2, net debt, after the share we gave to the [indiscernible], it represented 5.7% in Q2.

Thank you.

I don't see any further questions from the web.

Are there any additional questions here in the audience?

Another word from Kevin.

If you could talk just a little bit more about Europe and what you think is going on there.

Clearly, the economy is at a different point than it is here.

But license [indiscernible] was quite weak year-to-date.

Do you think you can see a turnaround toward the end of the year?

Or are you really counting on it being down 10% to 15% for the full year?

And if you could be as specific as possible.

Thanks.

Well, it's a good question, but I have to answer with some caution because the conditions are such that only caution has to guide us.

If you think more [indiscernible] a little bit more into detail.

Then you know that we have a very high market chain, with significant business in Germany.

And if you compare Q1 and Q2 in the German market, you can see actually improvement.

And that doesn't mean that the trading conditions in Germany are any easier.

I think we are still seeing very, very tough and difficult economic conditions in Germany.

But in our business, things have started to stabilize.

So, I think you can expect Germany to stay where it is.

I think we won't see deterioration for our German.

And given the share that German has [indiscernible], already reasonably [indiscernible].

In other parts of Europe, we're a little bit smaller than in Germany, but still, like in southern Europe and Eastern Europe, we are actually doing reasonably well.

And there's no reason to assume at this moment in time that this situation will change.

We have other parts of Europe where we are, indeed, looking at extremely tough situations.

France is a good example.

And where we cannot really go forward by saying that we expect the French market to change significantly in the second half.

Again, I also don't expect the French market to deteriorate further.

And we are taking some measures to outperform the market there as well.

So, if you combine all of this, and you know there are various [indiscernible] in each country, if you add the situation in the UK where we also see it stabilizing situation, I think what you can see in Europe is not necessarily a dramatic recovery, I don't believe that.

But I don't believe that the situation in the second half will be much worse than the first half.

Okay.

So I don't see any further questions.

I would like to thank you for your participation.

If you have the time, enjoy some of the drinks and food.

Thank you.