SAP SE (SAP) 2003 Q3 法說會逐字稿

Good day everyone and welcome to SAP's 2003 Q3 Results Conference Call.

This call is being recorded.

Today's call will be hosted by Henning Kagermann and Werner Brandt.

I will now turn the call over to Stefan Gruber.

Please go ahead sir.

Good morning or good afternoon, this is Stefan Gruber, Head of IR of SAP.

Thank you for joining us to discuss SAP's Q3 2003 Results.

In Walldorf I am joined by Henning Kagermann and Werner Brandt, Leo Apotheker is participating by phone.

Before we begin the call I will make a few remarks about forward-looking statements.

Werner will discuss the Q3 Financials in detail and our full-year 2003 guidance.

Henning will give an update of our operational and products developments.

Please note that any statements made to you in this call that are not historical facts, are forward-looking statements, as defined in the US Private Securities Litigation Reform Act of 1995.

Words such as believe, estimate, intent, may, will, expect, project, and similar expressions as they relate to the Company are intended to identify such forward-looking statements.

The Company undertakes no obligation to publicly update or revise any forward-looking statements.

All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

Factors that could affect the Company's future financial results are discussed more fully in the Company's filings with the US Securities and Exchange Commission, including the Company's Annual Report and Form 20F for 2002, filed with the SEC.

Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

I would now like to turn the call over to Werner.

Thank you Stefan.

SAP today reported an accounting set of results that are proof of our commitment to grow our business, while also focusing on improving the operating margin, through increased efficiencies.

We are pleased with our performance versus our peers during this quarter.

We succeeded in taking additional market share globally and in the US, beating our competitors in the home market.

For the first quarter Software revenues were _433m, which was relatively flat year-over-year.

At constant currencies Software revenues were up 7%.

Considering the current environment, we believe this was a very good performance and even better when mirroring it against our peers.

The Software revenue performance was a result of a good closure rate in the United States and some deals that had been expected to close in Q2, but were signed in Q3 instead.

Total revenues for Q3 were _1.7b, which is down 3% compared to last year.

At constant currency rates total revenues were up 3%.

For the 9-month period, total revenues were _4.8b compared to _5.1b last year.

Maintenance revenues of _655m in Q3 were in line with expectations, when compared to Q2.

For Q3 we were only slightly positive impact due to currency and reversal of sales allowances.

Consulting revenues were _479m representing a decrease of 12% compared to Q3 last year.

The decline in consulting revenue is a result of, firstly a currency effect due to the strong euro, compared to the euro exchange rate last year, typically [indiscernible] 13% deviation.

Secondly, less third party consulting arrangements.

Thirdly, a decrease of approximately 200 in consulting head count.

Overall we achieved another quarter of increased profitability as our efforts to improve efficiencies are succeeding.

For Q3 2003 operating income increased 23% to _413m.

Pro forma operating income, which excludes stock based compensation expenses and acquisition related charges, increased 33% up to _423m.

Effectively _104m increase in pro forma operating income with a negative currency effect of _106m on revenues, and positive currency effect of _63m of expenses.

Resulting in a 10% net negative currency [indiscernible] of _43m.

The operating margin for Q3 of 2003 was up 5 percentage points to 25% and the pro forma operating margin, which excludes stock-based compensation and acquisition related charges, was up 7 percentage points to 26%.

Once again the entire organization worked extremely hard throughout the quarter to achieve these margins, by systematically controlling costs and improving the efficiencies.

We continued to focus on intelligently improving efficiency in sales and marketing and general administrative functions.

Although we had a positive currency effect and lowered expenses by approximately _63m, which I mentioned earlier, nevertheless we were able to reduce our expenses by real savings of _91m.

Real savings resulted from a decrease in third party services, controlled spending on marketing and a reduction in extra commissions and royalties.

All of which were partially offset by an increase in personnel expenses from additional head count.

Something that has always been ahead of the cost curve on product innovations and customizing solutions to fit our customers' needs, this will not change, as evidenced by the increase in R&D spending for the quarter.

Net income for Q3 rose 25% to _252m.

Pro forma net income, which excludes stock-based compensation and acquisition related charges and impairment related charges, increased 26% to _260m.

The reported earnings per share of _0.81 compared to _0.65 last year and pro forma EPS, which excludes stock-based compensation, acquisition related charges and impairment related charges was _0.84 compared to _0.66 last year.

The efficiency gains continued to flow to the bottom line, as evidenced by our strong net income and EPS results.

Our effective tax rate for the quarter was 40% up from 37% in Q2.

Our tax rate for the quarter was impacted by the following, first taxes related to [indiscernible], second the limitation of foreign tax credit on withholding taxes and third, non-tax deductible write-off of investments.

Adjusted by these items, our tax rate for Q3 was approximately 38%.

For the full-year we have projected an expected tax rate of 37% as already indicated.

Looking at the business from a geographic perspective.

The Americas were - results [indiscernible] for the highlight of the quarter, with total revenues of _572m down 2%, but more importantly up 11% on a constant currency basis.

The US also reported an increase of 11% in total revenues on a constant currency basis.

The strong performance in the US was helped by a big increase in Software revenues and good closure rates.

The changes we began making in the US organization in 2002 are now paying off, as evidenced by the stronger results we have been reporting from that country over the past year.

In the Europe, Middle East and Africa regions, we continued to see a very tough economic environment.

Total revenues were down 4% compared to last year.

Given our strong market position with the euro and the improved environment, we are in the best position to recap the benefits.

Asia Pacific performed relatively well, with total revenues flat year-over-year.

However, on a constant currency basis total revenues were up 9%.

SAP continues to build momentum in this region, particularly in China, where we are experiencing a healthy demand for our three applications.

Cash flow from operations for the nine-month period was approximately _1b.

Capital expenditure was _142m leaving a free cash flow of _899m.

At the end of Q3 we had liquid assets totaling _1.8b.

[Day sales] outstanding stood at 78.8 at the end of Q3, which was an improvement by 2 additional days compared to Q2 2002.

Compared to Q3 2002, DSO increased by 15 days.

The strong improvement in DSO is a result of continuous focus on cash collections.

At the end of Q3 head count was 29,165, which is an increase of 204 employees since the end of last quarter.

Most of the head count increase was in R&D.

With our restricted hiring process still in place, we have always stressed that we will add additional head count to strategic areas within the Company and R&D is one of those areas.

We expect additional head count in Q4 as well.

Let me now reiterate our outlook for 2003.

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

Previously the Company expected its 2003 pro forma operating margin to be between 1 and 1.5 percentage points higher than the level achieved in 2002.

The Company now expects its 2003 pro forma operating margin to increase by approximately 2 percentage points compared to 2002.

As a result of the expected improvement in the pro forma operating margin, SAP expects pro forma earnings per share for 2003, excluding stock-based compensation, expenses, acquisition-related charges and impairment-related charges, to be at the higher end of the range of its previously issued outlook of _3.45 per share to _3.60 per share.

I would now like to pass the call over to Henning, who will elaborate on the market environment, our competitive situation and our product innovations.

Henning?

Thank you Werner.

As Werner has already said in his opening remarks, Q3 was a very good one for SAP.

Although the market environment remains tough, we closed some important deals, including some key competitive replacements.

We further extended our lead in the market place, by gaining additional market share.

At the same time we continued to improve our profitability.

Having said this, we are not resting, nor are we assuming that the economic challenges of the past are behind us.

On the contrary, the environment is still difficult and it is still too early to call this a turnaround.

However, we have seen some renewed interest from customers, but I don't think this will be the [indiscernible] dramatic change in spending attitudes, at least not yet.

SAP will therefore continue to focus on efficiency and product innovation.

We will carefully start to invest in sales and consulting for next year.

The aggressive pricing environment persisted in Q3, and we saw some really extraordinary pricing approaches from some of our peers.

Of course this impacted SAP's pricing schemes, but we remained committed, only competing on price where it makes financial sense.

Sometimes we need to be flexible on price, we evaluate each deal to find out at which level the finances no longer benefit our business.

SAP continues to defy the market environment however, by successfully executing on our clear strategy.

We are gaining significant market share, we are improving efficiencies and perhaps most importantly, improving our market readiness.

By our calculations SAP's market share, compared to our four largest competitors was 57% up from 55% at the end of Q2 2003.

In the US, home to our closest competitors, our market share increased by 4 percentage points to 35%.

Divisionally we reported a 7% increase in Software revenues at constant currency rates. 31% of order increase came from new customers.

We also matched our largest CRM competitor in terms of market share.

With our CRM initiatives in place, we accomplished this task in a relatively short-time period.

We closed some large strategic deals during the quarter and also benefited from closing deals that were pushed out of Q2.

Despite a few large deals, however, we did not believe that there has been a change in customer buying [indiscernible].

Our average deal size was down again significantly.

As the number of deals increased 16% over the same period last year, due to the strength of the indirect channel, as well as excellent sales efficiency and good execution.

Customers are still generally buying increments, but only implement solutions if they see a clear case of ROI.

While we do not expect overall deal matrix to change, we are witnessing some more strategic deals and an increase in the number of replacement deals.

This is because companies are looking to consolidate more towards one vendor and SAP is benefiting from this behavioral shift in customer buying.

These strategic deals in the quarter included [indiscernible], Portugal Telecom Group and a large Nordic company, which stopped implementing its current project with one of our competitors, in favor of moving to SAP.

The key competitive replacements included Medtronics, in which the customer decided to go with SAP due to the uncertainty of the future of its previous vendor.

Let's now take a closer look at the regions and expand upon what Werner has already told you.

We performed very well during the quarter in the Americas, achieving _176m in licensed revenues, a 42% increase over last year in constant currency terms.

This was mainly the result of an outstanding performance in the US, where we had good execution from the sales force.

US Software sales were _140m representing an increase of 54% at constant currency rates.

We signed several key contracts in the quarter, including Brookshire Grocery Company, The Washington Post and [indiscernible].

Our strong performance in the US allowed us to significantly increase our market share, and we did so at the expense of our US based competitors.

In the EMEA region Software sales were _201m representing an increase of 17%.

Software sales in Germany were _93m, which was flat.

The EMEA region remains challenging, with an economic recovery appearing to lag that of the US.

We believe it will continue to lag by at least six months.

Germany, our home market, also continues to experience tough economic conditions, but as usual we performed relatively well there.

The deals in the EMEA included Linde Gas, [indiscernible] American Tobacco.

Software sales in the Asia Pacific region were _56m, representing an increase of 15% at constant currency rates.

In Japan Software sales were _28m, which was a big [indiscernible] of 17% at constant currency rates.

However, Japan has performed well over the nine-month period up 4% but 16% at constant currency rates.

We continue to see good opportunities there.

We put Asia Pacific just behind the US in terms of the potential recovery.

In Asia Pacific we signed deals with IDT Technology, Olympus Korea and the Hyundai Motor Company.

As I mentioned earlier, our operating efficiencies continue to improve [indiscernible] involves the operating income and EPS results.

Our pro forma operating income increased 33% and pro forma EPS rose 26% in Q3.

We continue to drive more efficiency in all areas of the Company, while rationalizing our infrastructure plans because we have continued to see a shift away from [indiscernible] training to more on-site training.

For the Consulting business margins remained relatively flat amid a tougher consulting environment.

R&D spend was up 14% on an absolute based and based on total revenues it was up 2 percentage points to 13%.

R&D is an investment in the future of SAP providing innovative solutions that set us apart from our competitors.

Examples are SAP NetWeaver and SAP xApps, two innovative solutions that are guiding the shift away from the client further to an enterprise oriented architecture.

We continue to see increasing momentum with SAP NetWeaver.

Just last month at TechEd, where we had over 7,000 developers, we announced our Power by SAP NetWeaver initiatives were leading independent software vendors and SAP Partners who participate in new programs to leverage the SAP NetWeaver technology platform through, education development.

More than 200 partners are already participating in the SAP NetWeaver Partner program.

With its open architecture, SAP NetWeaver provides integration across a [inaudible] and helps increase the value of existing IT investments.

This drives [indiscernible].

It is through products like NetWeaver and xApps that SAP is able to deliver exactly what our customers are asking for.

Fast and easy integration, an integrated platform for WAP services and 75 prophesies.

In short, we are making it easier to run the businesses in an efficient and effective manner.

Therefore, we are committed to making NetWeaver the primary application and integration platform within our install base.

Also last month we announced the release of SAP Master Data Management.

Master Data Management is a part of NetWeaver and enables companies to manage master data and [indiscernible] its environment across business units and extended enterprises.

Let me now turn to our industry strategy.

More and more customers are demanding industry specific functions [indiscernible] the need to facilitate their business profitably and to lessen the need for costly customer vision.

With more than 30 years of industry experience, we are delivering to our customers, 23 industry specific solutions as part of our portfolio product.

We believe banking is one industry where we will see tremendous opportunities for SAP and we further enhanced our position in this industry with our recently announced Partner [indiscernible] venture.

Accenture SAP will develop and sell a comprehensive portfolio of solutions and services for the banking and insurance industry.

Initially the portfolio will consist of SAP select ventures, existing banking and insurance solutions, which support a broad range of business functions.

Including insurance claims management, insurance policy administration, core banking operations and risk management.

Accenture SAP will also work together to integrate their respective software solutions [indiscernible].

In banking we recently went live with our core banking solutions at UBS and Post Bank.

Other key industry successes include [indiscernible] Aerospace in Aerospace in Britain.

Frankfurt Airport going live with mobile asset management and also using RFID technology.

Shell Oil using our [indiscernible] SAP All-in-One solutions for its EMEA distribution subsidiary. [indiscernible] Corporation in consumer products, first energy and utilities and [indiscernible].

We will continue to allocate resources to further develop and expand our industry solutions.

We believe our experience and our ability to deliver industry specific functionality is yet another strong competitive differentiation for SAP.

We continue to see success with our small and mid-sized business, through All in One and Business One.

We have brought on new partners and gained additional customers this past quarter.

Worldwide we currently have more than 280 All-in-One partners and more than 240 Business One partners.

These numbers are up [inaudible] June.

All-in-One customers currently exceed 4,200 and we now have more than 1,600 Business One customers.

We announced last month the rollout of the Business One Chinese version to small and mid-sized businesses in that country.

I also want to briefly mention our [indiscernible] realignment of our development organization that we announced in July.

We created three new business solutions, [indiscernible] be achieved that combines existing development organizations responsible for industry specific solutions and generic business solutions.

Each of these three include solution management and application development teams.

An executive board member, or extended management board member has [indiscernible] and has full business responsibility and specific revenue, market share and customer satisfaction targets.

They will be achieved [indiscernible] through the ability of SAP's development organization to improve [indiscernible].

From the customers' perspective all that SAP has to offer is represented by the single BSG.

This reduces the number of different organizations involved in projects between the customer and SAP, enabling SAP to more effectively meet the evolving and demanding customer needs.

We expect to see savings on this reorganization in 2004.

Looking ahead to Q4, as I mentioned, we do not expect to see much of a change in the current economic and competitive environment.

Pricing pressure continues to exist, due to confusion in the market core, by the ongoing consolidation targets among our competitors.

However, we are winning despite these short-term setbacks.

If our [indiscernible] continues to improve then we expect to continue to benefit whether consolidation takes place or not.

Taking this into account, we expect to seasonality in line with historical patterns going into Q4 and measured against the first nine-months of the year.

We have the best technology and products in the industry and the most comprehensive offering across the entire value chain.

Our unique set of products and services is what has differentiated us amongst our competitors and allows us to succeed regardless of economic and competitive environments.

With that I will now open the call for questions.

Today's question and answer session will be conducted electronically.

To ask a question please press the '*' key followed by the digit '1' on your touchtone telephone.

If you are on a speakerphone please make sure that your mute function is turned off to allow your signal to reach our equipment.

Once again that's '*1' to ask a question.

We will go first to Charlie Devon with Sanford Bernstein.

Thank you very much.

I was wondering if you could give us an idea on penetration of My CRM in particular in the financial services category.

I know you discussed that a little bit.

At the end of the last quarter that was a focus of where you were going to push the product.

If I look to the financial services sector, we feel we are still building our [indiscernible] opportunities the market had.

This is by the way one of the reasons why we have partnered with Accenture, because they have a big fundamental buying shift now in financial services, where banks and insurance companies are looking for more [indiscernible] software, but don't have the funds to implement completely standard software.

So they will go in increments, which means we have to offer a combination of standard modules, which SAP will do, then to custom those components, which will come from Accenture.

That is strategic for us, and that is why I want to highlight it.

We agreed to do this integration between legacy, between custom built components and standard components on our integration application platform, SAP NetWeaver.

This is very important because it shows the impact that [Step One] has already in the market.

So we are looking forward to enhance our sales into the sector significantly, in the future because we expect through this alliance that we will get more access to banks and insurance companies, especially in regions where we are today still weak, which is North America, and partially Asia.

Following up on that.

NetWeaver - could you give us some idea of how penetrated into your customer base, the implementations of NetWeaver are?

I imagine it is on anyone My SAP or My SAP Share MR?

We have to be careful here how we measure this.

You know that we announced NetWeaver will be shipped as one platform at the beginning of next year.

So what I can do is give you some ideas of how and what the penetration is in terms of components of NetWeaver.

As you know the components are being penetrated most at our business warehouse, which I think is nearly 25% of our installations.

Next is the portal and web application server.

As far as I know that application server are a few thousand installations, and portal is about 2,000 I would guess roughly.

Then we have just shipped MDM, as a component I think that is very low.

So you can see, if you took only one component I would guess today that every third of our clients has one of those components already.

The challenge and the opportunities next year, that it comes as a bundle, as one platform, is where we believe we will see another uptake in that option of My SAP Business Solutions.

Thank you very much.

We will go next to Michael Briest with UBS.

Going back to the Q3 seasonality.

You mentioned that there were a number of deals, which closed, which had slipped from Q2.

Could you maybe try and quantify those, and also indicate whether you saw normal slippage patterns, if you like, at the end of Q3 or were you still having a very good close rate?

Therefore maybe what the underlying license number would have been for Q3.

On the margin side also, you have mentioned in the past I think 25% of the target for 2004.

The new guidance suggests that we are almost there at the end of '03.

Is there any update on guidance for '04 or medium-term margin targets?

Thank you.

I will start answering the last thing first.

No we have not changed anything in guidance for the future.

I think it is better to do this at the beginning of next year when we have our budget figures.

We don't want to disclose the size of the deals again into Q3.

What I can say to you, and I think that might be more important, is that not all of the deals that slipped from Q2 were closed in Q3; some of them are still deals that could be closed in Q4 and by the beginning of next year.

It is still really what we said in New York.

Once we have achieved 25%, the next goal would be 27% to 28% that's operating pro forma, operating margin.

Okay, thank you.

Maybe you could also comment then on the competitive win rate.

You said that you did see some displacement activity.

What is the People Soft Oracle situation doing to customer buying patterns at the moment?

Are you seeing more interest now?

Is it yet in the pipeline, the deals that are going to close in Q3 or Q4, or is it going into next year still?

I think Leo you can answer this best.

Good evening this is Leo speaking.

We had indeed a certain number of wins against People Soft and JD Edwards as we did against Oracle in Q3.

I think, as Henning indicated already in his opening comments, there is quite some uncertainty on the market, that is caused by the activity around the consolidation, or the attempted consolidation of the competition.

We are considered increasingly by many of these customers as a safe haven.

We had some very important win backs from both People Soft, JD Edwards and Oracle in Q3 and we hope that we can continue that trend in Q4 as well.

We will go next to Richard Leggett with Goldman Sachs.

Richard Leggett , Goldman Sachs.

I think Richard Sherlund is also on, so I will just ask a question or two.

I know in the industry, this is probably for Werner;

I know in the industry there is a lot going on competitively in terms of creative pricing.

I think Henning eluded that, specifically around maintenance revenues, restructuring of maintenance contracts.

I was just wondering if you could help us understand what is happening there.

When I look at your deferred revenues, they were down year-on-year this quarter, even when you ex out the effects from [indiscernible].

So can you maybe discuss that in the backdrop of what is going on with the maintenance?

Let's start first with the income on the maintenance side.

I think the decrease you have referred to is solely due to the currency.

I gave you a number, it is far above _20m impact we have seen.

This means normally we should see an increase, this is what you have anticipated, but currency is working against it.

So yes clearly we do not see what you assume is that we have a strong renegotiation of maintenance contracts initiated by our customers.

Maybe Leo can add something here - how do you see it?

Well there is of course continuous pressure from the customer side to see what can be done on the maintenance.

But we have an excellent value composition on maintenance.

You probably also know that we already have the lowest maintenance rate in the industry.

At the end of the day all of our customers, with no exceptions whatsoever, have decided to accept our maintenance policy and are happy to pay the maintenance.

There might be occasional restructuring because the customer might be in serious financial difficulties, but up to now we have been able to safeguard our maintenance stream, and I hope that we can continue to do so.

My second question is about Japan.

When I think about it, it seems like the trends are in the right direction in Japan in terms of an economic recovery, the fact that is largely a manufacturing based economy.

It is the second largest economy in the world, and the systems there are old and in many cases home grown.

So it strikes me that this can be a pretty significant opportunity.

I was wondering if you could maybe help us get our arms around how you think about the opportunity and the potential over the next 12/18/24 months?

We see Japan as a strategic country.

We have had some very good growth numbers in Japan over the last quarters.

I would not read too much into not either Q3 or even Q2.

I think Japan is a country where you do business in the long-term.

You have to look at the long-term trend, which for us is very positive.

I believe that the opportunities in Japan are indeed there.

I think the buying patterns in Japan are what they are, not necessarily the fastest, but we have managed to build an immense trust base amongst our customers in Japan.

We are the market leader in Japan and I hope that we can indeed benefit from the trends that you indicated.

By the way, I would not just focus on the manufacturing industry.

We will go to Kevin Ashton with Deutsche Bank.

Good afternoon.

Looking at your guidance, the guidance for the year that you have given, it strikes me if I back out from a net Q4 figure, I got to the P&L, that I get indeed a top line relatively regular seasonality, but I get margins significantly lower than last year.

In fact if I try and back it out, I don't know if the math's are correct, I'm getting margins of about 28% for Q4, when you did obviously over 35% last year.

I am just trying to wonder if I have done that correctly, or whether there is a tremendous amount of conservatism in these numbers?

[indiscernible] If you look to Q4, let's just summarize the facts.

First we go into Q4 with a very good and healthy pipeline.

Another point is that we expect the same seasonality, if we compare the first nine-months to the year. [indiscernible] you were definitely expecting again a strong Q4, a very strong one, which is a typical SAP phenomenon.

On the other side, if you compare Q4 last year to Q4 this year.

You have to bear in mind last year we exceeded by far expectations.

We had a huge Q4 and we were operating under different conditions.

Q4 last year we were in complete cost cutting mode.

Because we couldn't see any recovery for the beginning of this year, which was right.

This year we are operating under completely other conditions.

We believe the market will recover, we see our opportunities and we feel it is not right to make major cost cutting, but continue with the efficiencies, but in a different start.

To invest in marketing, in sales, we will start now hiring sales people to be ready for the beginning of next year.

Also to invest into some [indiscernible].

Therefore I think the conditions are different.

The last point I want to mention is, we also think about, that over the last three quarters, our deal size went down from quarter to quarter.

And perhaps [indiscernible] last but not least, think about what Leo mentioned with the price pressure outside.

So therefore just to give you the indication of what is going on in the market, I have said this on purpose a few weeks ago, everybody is waiting when the industry will bring back let's say low double-digit growth rate.

I would guess that in the third quarter if we would have had normal pricing conditions, we would have been back already to double digit growth.

This tells you where we are if you compare last year to this year.

Because there was also no consolidation target in the market.

These are the conditions that we are operating under.

I don't know if Werner wants to add something.

No I think there is no need to add, because Henning mentioned all the areas that we want to invest in, in the fourth quarter.

Can I just add one follow-up?

You added 200 employees in the quarter, does that mean that you intend to add significantly more than that, say double or something in the fourth quarter?

I don't think so Kevin.

I think we will add people, it might be on the same side, we will see.

But that is up to decision, so we leave the budget for the [indiscernible].

It is less than double what you indicated.

We will go next to Simon Andrews with Lehman Brothers.

I have a couple of questions.

Firstly, relating to the deal size.

You mentioned I think that the deal sizes were coming down.

Can you tell us if there were any very large deals in the quarter and how many?

Secondly, on the services side - I'm not sure if you have already answered this, but we have seen from most of the consulting companies charge-out rates coming down.

Are you seeing the same pressure and is that expected to go on into next year, particularly on the consulting side?

With the deals, yes we have had some large deals.

We have had less large deals than Q3 last year.

In services we have price pressure.

We are still able, I would say, to sell our services with opinion.

But you are right, there is price pressure, we try to keep our profitability, what you can see we more or less achieved, which is good.

We expect at least trends will continue next year.

We will do what all others are doing; we will start lowering our cost of delivery.

Just on the large deals.

Were there any over _10m this quarter?

Yes.

We will go next to Richard Sherlund with Goldman Sachs.

Thanks and congratulations to Bill McDermott.

I'd like to focus a little bit on the US.

First are you seeing any benefit of your marketing program targeting People Soft and JD Edwards?

If you could just drill a little behind the success you have seen in the US.

It is still surprising you have done as well as you have in the US, yet you say the environment hasn't really begun to improve.

I am curious to what is behind the numbers, were there some particularly large deals that skewed that?

Because it sounds like you are a little reluctant to extrapolate the strengths you saw in the US into Q4.

Leo you can later on talk about, let's say how our markets [indiscernible] to the impact.

From my side Rick there was a healthy mix in there.

We had [indiscernible] which was good, but we had to alter some strategic larger deals back.

Why has that happened more in the US than in Europe?

I think that has to do, as you know, with the [indiscernible] of CEOs.

Both are seeing the same future, but I think the US CEOs are early getting, let's say impatient, and saying we have to do something, we cannot cut costs all of the time, let's now get involved.

So therefore, what I feel is going on is the US recognizes we have to do something, IT is strategic, and they start thinking in terms of strategic deals as well.

We see it more and more.

Nevertheless, if I look to the deal size, even in the US, it was slightly going down, but only a few percentage points, whereas in Europe it [indiscernible].

So therefore you can see the Europeans are fighting back very tough with volume.

But still today I think the decrease in deal size in Europe is too much to compensate for volume.

I think that will change.

As always Europe is behind, I don't think more than two quarters.

By two quarters I think we should have in mind is what if we look at how Europe is behind you.

It might be that you will get some insight as to what is happening with our competitors and the marketing campaign.

I just want to add maybe one word.

What is happening in the US at the end of today is the fruit of now almost two years of very hard labor we have put into the US.

We have changed the go-to market.

We have changed a lot of the sales force.

Bill has joined us just over a year ago.

We have a very motivated and very competent leadership team.

I think the first credit goes to these guys for what they have done.

As Henning has already indicated, the mix was healthy.

From a competitive standpoint, we are basically winning many more deals against the competition [indiscernible] our win ratio in the US has increased dramatically.

I do not believe it is just a consequence of the marketing campaign.

I think the marketing campaign basically has stated something very obvious, that the consolidation that is happening in the market has little benefit, if any that is being polite for the customers.

Some of them are indeed questioning their long-term IT strategy and are turning to a safe haven.

I think that a few of these have switched from either Oracle or People Soft and JD Edwards to SAP.

More importantly, we have been able to win significant new business in competitive deals.

Because I think we have executed well, we have a great value offering and we are the vendor of choice in a certain percent.

Leo could you give us a sense for the pricing environment.

I know it is intense, but how are you dealing with that?

Are there things you are doing to negotiate a lower price, but deliver maybe more product to avoid the extent to which you have to cut price?

Can you give us a flavor for what the dynamics are like in those negotiations?

It depends.

I don't think there is one answer to that question.

I think you have to bear in mind we closed - our volume has increased again by a significant percentage point.

So you have to extract from this discussion a whole bunch of deals, that are basically happening because we have done a very good sales job, and we just generate the volume.

The discussions usually happen in the larger transactions, where we are facing indeed, as Henning indicated earlier on, extremely "creative" prices from the competition.

We are still able to obtain a premium for our software.

In fact if I compare our prices to what the competition has been offering to the same deals, we have [indiscernible] significantly higher still.

It does not mean that we don't have to be creative.

We are a little bit more flexible; we try to structure the deals in such a way that they fit our way of the customers more.

We work with safe deals, so that the customers can fit into these programs.

The one thing that we do not do, just to make that point very clear - is we do not give any discount on maintenance.

We will go next to Brent Thill with Prudential.

Just a quick clarification on the pricing.

Henning made some comments ahead of the quarter on pricing pressure.

Would you consider pricing worse in this quarter than six months ago?

Yes, much worse.

Therefore I made the comment.

How would you quantify much worse?

I don't want to quantify, but if you listen to what I said before, you will get a slight feeling of how much it is.

As a quick follow-up, in some of the larger strategic deals, can you give us a sense of what the end demand is for some custom development in the services group, bringing them in as well.

It is not so much if we speak about strategic deals, that we have a lot of custom development, or strategic development together.

This is more and more becoming the exception.

I would call it more deals where the companies are, let's say focusing on the completeness of our offering.

You know that I mentioned industry specific add-ons, which we invested now over 10 years.

That pays back, so companies which really [indiscernible] I would say their operation on SAP not just [indiscernible] or manufacturing, it is more the complete value chain.

That is what I call strategic.

They expect from us, not the next level of automation but competitive advantage against the competitor in bringing SAP in, this I would call strategic.

Really for them they see a competitive advantage in the next deals and them who move first get it first.

We will go next to Ross MacMillan with Morgan Stanley.

Just a quick recap on the guidance again.

I had a question on really what you are talking about from a cost perspective as you go into Q4.

Were there any changes this year in how compensation for sales reps might work?

Has it become more structured?

Is there any reason why you have maybe a higher confidence on how that cost structure will work this year?

So if you do a big license number, effectively that is going to keep a cap on the margin expansion?

It is structured and it is the same as in previous years.

No change there.

Okay, maybe a follow-up just on the environment, more in Europe than the US.

I guess ex-German Europe still looks quite weak.

Maybe you could give some color around some of the countries.

Is France still one of the weaker countries in Europe?

Maybe you could point to where you are seeing slightly better demand and slightly weaker demand?

Leo a few comments?

Yes certainly.

You are right; the situation in Europe is still reasonably tough.

But I would like to point out some facts here.

First of all the Europeans have, as Henning has already indicated earlier on, increased their volume again, and it is a staggering number.

It is not that we are not performing well, but what is happening though is the average deal size in Europe is dropping significantly.

That is a situation that is in particular through in countries such as France, Belgium and to a lesser degree in the UK.

We have taken a certain number of measures to adjust to that.

One of them is to try to increase even more volume.

But from my perspective I do believe the situation won't get worse.

In the year going forward, I think we have now stabilized the business and I believe that at the slightest uptake we can grab significant opportunities again.

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

I guess I want to follow-on from that theme and talk a little bit about sales productivity.

Because I think what is striking about this quarter's performance is that you have achieved this exceptional result in North America with no increase in head count, in fact a small reduction.

Really I am trying to get a handle on the leverage that you think now might reside in the business, into an improved demand environment in Europe.

Is it reasonable to think that you could see growing licenses again in Europe without significant increases in operating costs as a result of the improved sales efficiency you've had to drive out?

I think Leo did a really good job here in terms of sales efficiency.

Because if I look to Europe with this low average deal size, and an efficiency still high up than in North America, with the higher average deal size.

The thing that tells you what potential we have if we come to normal deal size in Europe.

Therefore I have to say, with all the credit we give to North America and I give it, in parallel if I look to Europe our [indiscernible] are really working hard, let's say putting volume over volume, from quarter to quarter on top and not decreasing too much the efficiency.

I think that is a big potential for us and this usually [indiscernible] picking up in Europe.

Thank you, that's very helpful.

We will go next to Kenov Waller with HVB.

One short question.

You mentioned the number of customers for a small mix sector;

I just want to know which percentage of license revenues is that now corresponding to?

We had something like 7% in recent quarters;

I just want to get a flavor for this, all the progress that is running there.

6% as in Q2.

We will go to Mark Gayle with Smith Barney.

Just to follow-on the persistent theme on pricing and deal size.

I am slightly confused in so far as - volumes are obviously up 16% in constant currency terms, licenses are up essentially 7%.

That means that the deal size only fell by 8%.

Given that that is driven by a mixture of pricing mix, i.e. mid-market versus high end and we know that the mid-market is doing well in the UK, Germany and some other regions, and the third factor being smaller projects.

I just wonder whether you can start to split out the relative impact of pricing versus mix changes versus smaller project sizes?

Because I think maybe a lot is being made over pricing when it doesn't need to be.

Mark maybe we should add something we are normally not doing, when we calculate the average deal size.

We ignore the very low end, because that would distort it.

Therefore we have not taken into consideration, just because of our SMB initiatives, let's say we get a lot of very low deals, with a few users only.

We have taken this out, so [indiscernible] it is not a changed mix, because we have the growth there.

I think it is a good indication, next time we will slip these - we might try to report deal size for [indiscernible] might be more transparent for you.

Just to follow-up if I may?

Obviously the supply chain product looks as if it has been quite successful in Q3.

Is that a reflection of new product releases earlier in the year?

If that was the case would we expect to see similar things on the CRM side of the business, given that there was a new product released in Q3?

I don't think that it is really a result of the new release.

It picked up in all regions, it was [indiscernible].

I think it might have more to do with seasonality.

I felt it was unusually weak at the beginning of the year, so if you look to the nine months, I think you come to more normal [indiscernible].

We will go next to Kash Rangan with Wachovia Securities.

Thank you very much, nice quarter guys.

My first question, it looks like this year, even though you were headed for a down year in licenses, but you were still able to improve operating margins.

What does that mean for the potential for operating margins if you look out in the next 1-2 years?

Would you be able to still increase your operating margins, even though overall industry continues to be relatively flat to down?

I think that is what we said some minutes.

Our mix targets - once we achieve 25%, it is 27% to 28%.

Do you think Werner that happens in the near-term, that is in the next 1-2 years, or it is more of a longer-term goal?

What we said in New York, [indiscernible] in a speedier time frame.

My next question is, it looks like the US business is rebounding very nicely.

I am wondering if you could quantify the positive impact you are getting from the uncertainty of the market.

In other words, how much of your pipeline increase in the US would you attribute to just competitive replacements, due to the uncertainty versus seeing a natural increase in your pipeline from your customers due to strategic projects?

Leo have you an idea?

Well that is a very difficult question to answer.

Actually I think it is impossible to answer.

What I can tell is, and that's a sure fact.

Fact number 1 is, [indiscernible].

So almost everything is competitive with one competitor [indiscernible], so already that distinction is difficult to make.

I think the second factor I can mention here, and I'll repeat this.

Is that we have had a certain number of strategic win backs against these competitors.

The reason has been given, but I have no additional facts on that.

Finally the number of deals in the quarter and ASB for the licensed revenue transaction, can you quantify that?

Excuse me?

The number of deals and ASB in the quarter?

That is what we normally do not do.

We will go to Johanus Reece with DIT.

A couple of questions.

The first regarding the deal size in the US, has it [indiscernible] come down?

Because you mentioned that Europe has been especially weak.

Were you able to stabilize the deal size in the US already?

Yes, the deal size in the US came down, but only a few percentage points, whereas in Europe it is [indiscernible].

And it is a higher level.

Then follow-on to the US.

You mentioned in the last conference call that your profitability in the US has moved up strongly.

Can we imagine because you had a strong increase in license [indiscernible]?

And a large part of the improvement that the margins might have come from the US?

I think you can't say, because let's say the other countries are also working on margins, so whenever the business gets weaker, the people are professional enough in skill to keep the margin and the contribution high.

Therefore if you look to some countries where we believe lost license revenue and other things, or even that was flat like in the Europe center levels, it surprises us that they are still able either to keep their margin, or in some cases even to improve.

So that is [indiscernible] mix, [indiscernible] the geography, I think people are very professional in managing the margins.

Another short question for margins.

As you mentioned the average deal size - the smaller average deal size has even a positive impact on margins, because in large deals you like to give a mention, in this call you have to give more discount and maybe you will have to be more flexible on pricing.

Therefore is that still the case or would you say even that is a smaller deal size sort of situation [indiscernible] changed.

No this is still in effect.

Last point on my side.

You mentioned that the success of the cost side has come from especially reducing external sources and external services.

Would this trend further go on in Q4, therefore will we see additional cost savings from this side?

This will continue.

I think we will increase our efficiency in this area, but not necessarily in Q4, because we always have to see that it is partly product related and partly customer related.

We will see an increase on the customer related side in Q4.

Thank you.

That was the last question.

I thank you for participating in today's conference call, and we look forward to seeing you next week at our Analysts [indiscernible] in London on October 21.

This concludes today's conference call.

We thank you for your participation.

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