SAP SE (SAP) 2004 Q2 法說會逐字稿

Hello, good morning.

Welcome to everybody.

Welcome to SAP's second quarter 2004 and the first half-year conference here in SAP's New York office.

I would like to welcome those who follow this event on the internet, we have a small group here in New York but I think the majority of people follow this event on the web and through the phone line.

Let me give you a quick overview on the agenda of today's conference.

First of all Werner Brandt, the CFO of SAP AG will walk you through the numbers, then we Leo Apotheker, our President of Operations and member of the Executive Board will provide you with an update of our regional performance and will also introduce the new reporting on mid market businesses, and finally Henning Kagerman, Co-chairman and CEO SAP.

Henning Kagerman will speak on SAP's performance and on our peer group and the overall business environment.

We do present new figures more than once.

But this time I would also like to introduce my colleagues from the SAP New York office, Marti Colling and Jorg Young are also in the room and are available later on for questions.

The conference today is being webcast on the SAP Investor Relations website and therefore later on for the Q&A session, I would like to remind everybody to use the microphones and introduce yourself so the people on the phone and on the web can listen to the entire dialogue.

And finally, the Safe Harbor statement.

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

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

With that, I would like to turn things over to Werner.

Good morning.

The second quarter and half year of 2003, sorry, of 2004.

Numbers, which one, this one?

Yes, we start with the second quarter and the first half at a glance, so summary.

You see here that we report 15% growth in software revenue, currency adjusted it is 17%, if you look to it on a constant basis then we had €503m in profit, then if you convert this back again into US dollars, then we saw more than $600m worth of profit in the second quarter of 2004.

If you look to our performance over the last quarter you will see that this is fourth quarter in a row that the report grows in profit revenue and I think giving the industry then a very, very good performance.

Total revenue increased by 9% adjusted for currency, 11% growth and the currency impact on total revenue was €27m and we had a strong maintenance revenue growth of 10%, up to €698m.

Service revenue increased by 2%, up to €535m.

Operating expenses increased 8% with the currency impact of roughly €20m for, at the end of the day, our operating income increased by 15% to €391m.

Income before income taxes is €391m, which represents a margin of 22% and net income for the quarter was €249m, which represents a margin of 14%.

You see an increase in earnings per share of 14%.

EBITDA as one of our key figures increased by 30% to €442m, which represents a margin of 25%, and this is an increase of one percentage point, year over year.

Depreciation and amortization was €51m for the quarter.

Our proforma operating margin, excluding stock based compensation expenses and acquisition related charges, was flat compared to the second quarter of 2003, with 24%, otherwise the number is €428m and this is an increase of 10%.

The currency impact on our proforma operating income was €7m.

We have an effective tax rate of 36% in the quarter, this is an improvement of one percentage point and the proforma EPS increased by 8% to €0.87.

The half year, I will quickly guide you through this one without saying anything.

You see the performance for the half year also on the key figures for the first half.

Only one remark is you can see that our effective tax rate improved by two percentage points and if you normalize the half year effective tax rate, you will see nearly 37% because in the first half of the year we had a disposal of indefinite and minorities and had a tax free gain, which of course effects positively the effective tax rate.

We come to the revenue analysis.

We see strong 14% currency adjusted on the product side.

As I already mentioned, the software revenue increases 17%, maintenance increase currency adjusted by 12% and if you look to the service business also currency adjusted an increase by 4%, and we are very pleased with our performance on the trading side.

I think we are back on track here with a growth of 6% and that's I think a good achievement of the entire line of business.

If you look to the overall composition of the product and services, you see that this is quite stable compared to the second quarter of 2003.

Relatively stable and also for the full year of 2003.

Now the software distribution by region and I want to start with a statement that we are very pleased and satisfied with this regional performance as it clearly reflects what we have said about the growth expectations in the different regions the beginning of the year that we would see the US leading, APA would fall in and then in the second half of the year India would also, very, very anticipate stronger growth in the industry.

And you see here clearly and currency adjusted growth in the United States of 17%, and if you look to this entire picture of the revenue allocation here, then you see that EMEA still has 53% and the Americas 33% and Asia Pacific 14%, and this distribution is comparable to what we had in the first quarter of 2004, and the only region really gaining here is the United States.

If you compare to the full year of 2003, now the US with 28% of our total revenue, this is an increase over the full year of 2003 of 5 percentage points.

Here you have the same for the total revenue in the very strong year, 56% America, 32% EMEA, and Asia Pacific 12%, and you see all the growth rate and Leo will go into detail later in his part of the presentation.

Software revenue by solutions, I think the good thing here is clearly that the CRM catched up.

We had in first quarter 19%, now we have turned it 2% with the focal thing regarding CRM and of course the leading solution is ERP 41%.

If you look to this from the regional perspective, it's very interesting.

Always in all regions here ERP which is leading, but that is a different combination in the United States and Americas, it is ERP plus CRM, and in the other two regions it ERP plus SCM, where we have the second largest share in the solutions.

Software revenue by industry and I think you see the distribution here, and we have good growth in financial service, public service definitely with 22%, also consumer industries is 28%, also good performance here on the revenue by industry.

Now, let's have a look to the operating expense and how it relates to our performance.

We already start with the proforma analysis on the margin side, in the product side we see and increase of 1 percentage point.

I think the reason being that we have lower license expenses, but on the other side we have relatively stable expenses for development support and reasonable increase of the margin by 1 percentage point.

On the other side, the service revenue is seeing clearly an increase of our margins from 27% to 24%, if you compare with the second quarter of 2003 with the second quarter of 2004.

If you compare it with the first quarter of this year, we are stable with 22%, but there is a decrease quarter over quarter, year over year is due to the fact that we edit and we service roughly 500 [SEs].

We have now more than 9,600 and I think the second reason being that we have more third parties with more money involved because the new SEs do not catch up immediately, and we need to support it by adding third party reasserted to our base.

Now the proforma operating costs analysis, you see R&D here increasing by 10%, the percentage of total revenue remains unchanged quarter over quarter, and the reason for the increase is twofold.

Number one, we had added roughly 900 SEs in development and up to 9200.

On the other side, personnel extended stayed relatively flat compared to the second quarter of 2003.

The main reason being that 50% of these new hands in research and development were employed in low cost areas and mainly in India with 360, in China with 50 and more than 30 in Bulgaria, so this eats up 50% of the total hirings in this 12 months period.

As you can imagine if you hire in our league, you need some time to ramp up these new employees and to cover this we employed more third party and this increased our cost base if you compare quarter over quarter.

In sales and marketing, I think we increased by 30%, mainly due to the fact that, as we said, we invested in sales and marketing, we added more than 130 people in sales and marketing, and spent more for marketing advertising which was an investment in our sales core and marketing activities.

In general and administrative, that stays relatively flat.

Here we have an analysis about the currency impact on our total operating expenses and you will see the volume increased by €123m.

The currency helped, as I mentioned, €20m, so we ended up with €1.353b in expenses and as you see, the majority coming from additional hirings in this last 12 month period.

We added nearly 2000 and released to our base and consequently our personnel expenses increased.

We invested in marketing, we had higher travel expenses due to higher, increasing business activity, and also our R&D is up depending on the cost mix.

Now to look to the balance sheet, we think deferred income, I think the development is very reasonable in June of last year, we had an amount here of €843m, now we have €857m.

I would just like to go in a bit more detail in a minute.

Net income increased by €478m, we paid a dividend of roughly €250m, this led to the increase of our shareholder equities, DSO improved so consequently inventory, accounts receivable decreased, and we had a strong free cash flow in the first half of the year, so our liquid assets increased accordingly.

Here I have the explanation for the deferred income.

I think we have a periodic maintenance increase, that is normal due to the ongoing business that we have.

What is good is that our non-standard maintenance decreased, so we offer less standard maintenance terms.

We have a slightly increased in future functionality and all the rest of the decrease, so there is a reasonable performance here on the deferred income side.

If you look to the cash flow and related KPIs, the DSO went down by two days.

One day is roughly €22m in cash flow, the equity ratio decreased by 2 percentage points, that's on the center of the course we have already the highest income in the four quarters.

Then the operational cash flow was nearly €1.2b, we subtract our capital expenditure and had a free cash flow of €1.1b, nearly €1.1b, this represents 33% of total revenue.

If you look at what we did with the cash flow, we paid a dividend of roughly €250m.

We repurchased shares, worth €43m and if you look to what we have been talking about now, we had nearly 1.10m shares in service, with an average share price of, I think it's around €103.

The next slide give you an indication of our worldwide headcount development and as you see, we have added in the second quarter of 2004 779 heads, on our FTEs so if you add both together you get 1335 for the first half.

We said at the beginning of the year that we would increase our base by 5%.

It would have been 1500 and we can say today that we will continue to invest in R&D and sales and marketing, and Henning will refer to this later on and I think we will end up with an increase in our employee base by roughly 2500 at the end of December.

To come to the outlook.

The outlook is completely unchanged, therefore I have the same slide as the beginning of the year.

Software revenues are expected to increase by 10%, the pro forma operating margin expected to increase one percentage point and pro forma EPS expect to be in the range of 420 to 430, you see the assumptions for the year, with an budget rate of 125.

Our clear commitment to investment in R&D and sales and marketing, and we see a normalized tax rate of 37% and you also see our comments regarding the economic rebound in the second half of 2004, especially related to our regional performance.

That's all from my side and I will hand over to Leo Apotheker.

Thank you very much.

Good morning ladies and gentlemen.

It's a pleasure to be here today and to be able to comment on our results for Q2 and our first half year.

We had a successful quarter, a successful first half year, as represented by our strong growth in particular in [indiscernible] licenses.

For the first half year we had an 11% [indiscernible] revenue growth, which is about 14% in constant currency, and for the second quarter we had 16%, so we have been able to accelerate in Q2 as compared to Q1. 15% revenue growth, which about 17% in constant currency.

Given that our channels performed well.

I would like to point out that the separate view of our channel businesses particularly well, we felt our license revenues significantly faster and we are on track to continue to grow this business and as a result of a very good performance of all of our channels and all of the regions, we have been able to gain additional market share in the market as well, and our market share compared to the peer group stands at about 55% worldwide, but Henning will go into a little bit more detail on this later on.

The quarter was also characterized by a certain number of very important announcements.

Just to refresh your memory we had a major announcement together with Microsoft and Sapphire in the US, concerning NetWeaver technology.

At the same moment we announced a strong partnership, a strategic partnership with IBM in the retail industry and a little bit later we will be able to announce also the strategic relationship with [indiscernible] consulting on food and beverage.

The Sapphire attainment around the world exceeded our expectations, which is a very good sign, it shows that we are in demand when it comes to customers.

Customers did want to engage with us, where we can find out the latest things that we are doing in terms of development, things like NetWeaver and also various solutions and as you can see we are [attaining] etc. in order that you can see we have exceeded our expectations in the US.

We had about 8000 people in 8 [indiscernible] a little bit more than 2000, and a Sapphire total we had more than 10,000 people.

As you know we always report our performance and figures compared to our competitors, our peer group and I'm happy to display that we have gained again significant market share in CRM, compared to the peer group, we represent about 44%.

Year over year, that's a 4% increase, which basically is the total decline of the former market leader in this business and this has been driven mainly in the US very strongly in CRM, but also in other theatres and just to illustrate this, in EMEA we represent about 180% of the number two CRM provider in that market and we will continue to do our grow in this segment as well.

If I take a quick look at the various regions, Werner already mentioned that we had an outstanding growth in the US.

The success we had in the first quarter was actually even enhanced and strengthened in Q2, and you saw the numbers, I'll come back to that in a minute.

In Latin America we had a solid quarter and I am very pleased to see that some of the major countries, in particular in Brazil, demonstrate significant strength in the local market, also when it comes to competitive performance.

Germany had yet another quarter of very strong performance and it must be about quarter under 50, where Germany had a very strong quarter and it remains the backbone of our EMEA operations.

But the good news is that despite a very slow recovery and a subdued market in EMEA, we were finally able to stabilize the performance of our EMEA operations and actually we can see that the trend has now come to a good point and there is a positive turned upwards.

APA had a very good quarter, with excellent results, and our road engines in China and India, which are performances that are very good, in line with our expectations, in line with the past and there is a big, big promise towards the future there as well.

In Japan, as you know, the overall economy in Japan did improve and our second quarter results indicate that we have a stabilization of our business and we are looking forward to seeing a full recovery for the second half of the year.

We continue to win important customers.

Building a strong base to renew the confidence in SAP but also we are able to win new names.

A company like [Adkins Professional] here in the US, not only with only people fit, I also believe that SAP can remain a very fit company.

We had a very important strategic win in the beverage industry, with PepsiCo, [indiscernible] industry, with Pepsi Co, and if you look at Europe, we continue to engage in our long term relationships with many of our customers and a number of these that you see on the slide they have renewed their trust in SAP, Thyssen Krupp, Yves Rocher and BMW.

In Asia Pacific we continue our march forward, gaining new customers in market share and we do this across the region even though India and China are the growth locomotives we do have quite some success in other parts of APA as well.

If I look at the performance of the software in the various regions, Werner already mentioned it, it grew in the US in currency terms about 70%, 62% in Euros.

APA grew by 17% in constant currency or 19% in Euros.

Steady growth as I said earlier and we will continue to do so.

That, as I said earlier, we see the forecast of organization in Japan, in Japan we managed to stop the declining trend and we were actually able to produce a small growth in the second quarter.

Very important, you know we have made a significant number of changes in Japan and they are starting to produce the first early signs of results.

In EMEA, Germany grew by 10%, which is a phenomenal performance given the market share that we have in Germany and the rest of EMEA managed to have a very small growth, just 2%, which is very important also here.

We start to see the first results of all of the effort we have done to adjust our businesses to new market conditions.

Total revenue is therefore in line with our software revenues, Americas grew by 21% in constant currency, the US same number 24%.

It also shows that we have good times in our service business, with consulting and education.

APA is in line with this as well, we had a 9% growth in constant currency and total revenues there as well.

In Japan, also good signs of stabilization there and we have had not only the third organization in Japan, but also the consulting organization and our growth in market has been strengthened by doing that.

In EMEA, it is continuing to grow, 7% Germany total, EMEA 5%, so you can see that as I indicated earlier, we do see the stabilization, we do see the result of the effort we have made, to adjust our business model in EMEA completely.

Our market share in India remains constant, we have about 68% market share compared to our peers, slide [what you can do] in one year 58% but we do hope that over time we can add a few percentage points as we move along, and we expect to do this by deepening even further our relationship with our customers and through the channel business.

In the US we had significant growth in market share as you can see on the slide.

Over the year about 8% and it is important to note that for the first time for many, many, many years, if ever, we are now larger than our next two competitors, [Papersoft] and Oracle, by 1 percentage point, and that is quite an achievement and we have every intention to widen that gap moving forward.

In APA our market share is exactly similar to the one that we had in the EMEA and it shows that we have now a very strong position in APA as well. 68% continuous growth there.

I actually expect that we can grow our market share in APA faster and to increase our lead.

That will happen in China, that will happen in India, but it will also continue to happen in Australia and New Zealand, Korea and the South Asian market.

This being said, I would like to introduce new profit, second reporting but before I share some numbers with you, let me try to explain to you how we view the various approaches to this market.

And the third is an attempt to summarize it and also to bring you all to the same page when it comes to reporting.

There are two ways to go to market.

The independent, if you want, theoretically independent of size, direct and indirect, and we go direct to the market and we go indirect to the market from our channel, so that's €1 for market.

Internally in SAP we have a very granular customer segmentation, when you try to summarize, it's much more granular than the one that you see, but essentially we go and identify the market as follows.

We have large accounts, which are sophisticated, high transaction volume businesses, easily global accounts, big companies, generally good in our global accounts or global alliance accounts.

Then you have local accounts, these are companies that are usually a little bigger than the $1b or €1b, these are complete, high transaction volume businesses as well, but smaller than the large accounts and these companies are usually looking for complete solutions.

We can then supplement that with companies when we enter core processes only, then you have what we call the mid-market, companies that are smaller than $1b, also needing end to end core processes and then below that you can start to segment more on this market companies when you use micro vertical [indiscernible] solutions then you have the small companies, anything below €50m.

This is our internal view a little complex to report on that, and also what we do when we go to market as we have relative adjustments in the sizes.

A typical example when you are looking at the Eastern European market, and €0.5b companies is a pretty large company over there, so it wouldn't make sense for our segmentation in this market to have a worldwide unique specification.

In order to report to you, we have decided to adopt industry accepted, industry norms, that is defined by people such as Gartner, and we will start to report as from this quarter our segment reporting, where we classify our business in two, enterprise, which are companies that have more than 2500 employees, or they have more than $1b in revenues.

That's small and mid-sized businesses logically less than 2500 employees or $1b in revenue.

The results for this quarter are, based on the rolling four quarter analyzers is that in the enterprise stage, companies started with 2500 employees.

In Q4 03, we had 72% of our order entry, Q1 73% and Q2 72%, so you see a very stable situation, but and it's maybe a surprise to some of you because we're always identified as only large companies, we bid in Q2 for 28% of our order entry was [SND] and as you can see it's a good stable situation looking backwards, 27% in Q1 and 28% as well in Q4 also.

So you can see that we are also a world carrier in the small and mid-sized business and in order to give you comparative numbers, we will go to Henning.

Thank you very much for your attention.

Henning, please.

Thank you.

Good morning.

Just a few remarks to the environment we are working in.

I think all of you speculate about the customers, are they buying?

Are they not buying?

Is demand going up?

From our point of view demand is definitely going up.

You have seen that especially North America has widened us, that's not a surprise to stabilize in parts of Europe and followed by Asia, last but not least Europe.

With that, Europe is stabilizing and I think we are on track with our forecast that Europe will come better at the end of the year.

Also not new that our customers are always thinking tremendous strategy.

They are doing this since many quarters now, this is a trend, this is continuing.

We see there now that decisions are based on business cases, on business strengths, not for much technology hype.

They know that with the strength of SAP that is one of the reasons why we continue to outperform our competitors, and customers definitely realize this stake on reliable partner because more and more support is necessary for the core business positively run in that sector, and they look to the future and then they stand up close, you can bring those to the table with reliability and innovation.

So that is not surprising that strong [indiscernible] we are amongst them in there for the consolidation in an industry, is I think is the consequence of this trend, it's not the opposite.

You will see more consolidation, there is a [indiscernible] that we see here, that we see the markets, listen to people, the few very strong overall players, many small innovative ones, and then we see overall the big room for the mid-sized companies in this market.

As a result, competitors are fighting aggressively on pricing, so it's clear the cost market comes to pricing.

It stabilizes slightly and it's not based on loss.

So there again, we outperformed the market.

You have seen the result in Euro, in constant currency if you translate then in US dollar, the key with SAP is far larger in cost to revenue growth and than the rest of the market was 23%, it went up 8%.

This is where we focus on, by dealing with total revenue also from the market was 16%, against 12%, despite the sectors who are not focusing on top line growth for services, that is not our strategy and I will come to this in a minute.

If you look to the peers, Leo mentioned we have now 55% percentage points, it went from about four, including Microsoft and [indiscernible], I think the more important is momentum.

If you look to the last six quarters you can see that now.

In four quarters we show positive growth in cost to revenue, and the last two have double digit growth, which is something we expect from the future.

We still focus on CRM, so we are happy to see that this market share is increasing as well, and I think the important message for our peers is thanks the outstanding performance of the management here in the US, that we are now [lighter] in the US than the next two competitors together, so whatever the outcome of the pending trial, it will not change our position.

Leo talked about a mid-market.

We know now where we stand, so if we compare ourselves against the key players in this market, we make some assumptions because we don't know exactly what these sectors are doing.

In the segments you can do it yourself, you can see on your left hand side, 28%, which is 90% for Microsoft, but you can take 100%, it doesn't matter.

It is the stage, it is 50 from Oracle and 50 from [Papersoft] and even if you play a little bit I think it's obvious that even in this segment SAP is a market leader and I am very confident because this is a growth segment, that we will continue to have this position.

So if I summarize the second quarter, I am very pleased that we continued to focus on the volume business, that is our core strategy.

You see again that the numbers here were up 10% in regard the channel, a very good performance.

Even stronger in the indirect channel, that's not surprising, we are doing the channel for some while now.

The average deal size stabilized, that was an exception at the end of the first quarter.

We will [Indiscernible] now on this later.

It happened at the end of the second quarter.

New to help [with the help] mix now between volume deals and the cause and volume here and some large deals, based on our entry now, 72% approximately service products, larger than €5m and business with new customers was 24% for new entry.

I would say this is the quarterly result.

I do expect over the year that we will come back to the [original] main figures of 28%, we had more than 30% in the first quarter.

We will accelerate our investments for growth.

We hired more people than originally we thought that this shows you our confidence in our growth strategy.

We did in it the areas of sales and marketing, research and development, no surprise for you, and we enhanced our efficiency so that margin improved.

So therefore we redirected our full year outlook a little.

Let me add this for us.

The key focus is a transition back into growth strategy.

We had for one or two years a strategy not focused, our operational efficiency, we clearly stated at the beginning of the year now it's tine to turn this again into growth strategies.

That is what our key focus is, so our key focus is in software license growth, which we predicted to be about 10% in Euros in 2004, and we will continue to invest in order to keep this.

Finally a few remarks to SAP's overall strategy.

We, in the last five years were adopting the same thing, we were adopting the next five years, we grow from the core.

If you look what we did in the last five years, the core was small it was RP.

It was more or less ERP.

And we added over five years capabilities to open up and to cover the complete course of enterprise applications, including supplies management, customer relationship management etc.

We also added a lot of functionality for the [indiscernible], so SAP is now competing in more vertical and last but not least, we prepared ourselves to having dedicated products for the mid to small market.

So therefore, the enterprise application stage is more or less covered.

So what's, let's say the stage we want to grow into in the next five year?

We see two trends, one is that we believe the conditional slip between transactions, applications and analytical or collaborative applications [indiscernible] so this is a conditional outdated split for the time, there is no need to separated applications here.

The second point is that we believe the traditional split between applications between [indiscernible] will not be any longer.

From a customer point of view, the question is now about more customization.

So what customers want to have in the right mix between the benefits, but extend that back and forth according to the table and here the extension in order to differentiate.

The answer is an enterprise full of architecture and in order to give this, we need to have an enabler.

In SAP, this is SAP NetWeaver, which is our enterprise services platform, and this is the next area of growth from our core of enterprise applications.

This is not only helping us as an enabler to respond to the shifting demand of clients, but also an opportunity for additional growth.

It opens up also new opportunities for inconsistence, because now we can partner not only around services, but around our technology, we can also partner more than ever around development of software.

So you will see more and more partners, [heading], complementary, software, [running], NetWeaver or being developed on NetWeaver, complimenting our industry's solutions.

That means we also have to transform our services business, which we will start now and it will take at least, I would say, one or two years, and we will talk in a minute what it means.

We will not and never enter the area of IT services etc.

So that is where we start in this [indiscernible], you will see our market share 18%, you know that our ambition is to come to 25% here, so there is a lot of space to improve.

This is what I spoke about these customizations for companies who want to level it, what they did in the past that meant [indiscernible] to high competitor applications based on that service of architecture and this is our service direction.

We will continue to partner, so most of the business goes to our ecosystem, very important also for the merchant market.

We will have a new focus on what's necessary to drive the business base on a business platform, so focus on solution design, integration, quality assurance, project management, and we will more focus on the impact of our new products.

The second priority is we more and more product types, content and more value services, driving implementation costs down and delivering more pre-configured contents around reporting, printing etc.

So therefore, we made a few significant steps in the third quarter in this direction.

We announced I think the first vendor to complete both maps, to achieve this and enterprise services [net].

We committed to be ready in 2007, with what we receive from customers and analysts as you have seen, we shipped a definite leader 2004 in time, it was for the first time that the company shipped an integrated platform for all these components.

The reduction is very good, we want to take 1000 preference clients at the end of the year.

We have already 1000 preference clients, about 400 partners, the developer community is growing from some significant [means].

For me personally most important, we have also shown proof of our platform effective as leader because we shipped the most, I would say, important product in the world and we [appeased] product based on the new platform.

We shipped on time and on scope at the end of June, mySAP year 2004, this was the services architecture based successor of our three, we produced on time, as I said, on budget, we are in the ramp up, with 355 [views] and are on plan so far.

So that's our summary, we are prepared for growth.

We know our key [differences], our unmatched work for the portfolio, our global reach, our financial strength, our reliability, our capabilities to invest into innovations €1b R&D.

We are able to attract new clients.

We can expand into emerging markets.

So we will continue to focus on getting more market share in the SMB market.

We will continue to focus on selected verticals, and we will continue to grow faster than on average in the emerging markets, and mainly focus here is China and India thank you very much.

Well at this time we would like to start the Q&A session.

I would like to remind everybody to use the roaming microphones and please introduce yourself, with your name and your affiliation.

For the folks who listen to this event on the phone or through the Internet, you can send us questions by email.

The email address is investor@sap.com.

And I think, as a courtesy to those who made it to the [indiscernible] this morning, we take a question from the room first of all.

Thanks.

Dr. Kagerman, the -- maybe to start if you could offer a perspective.

We have seen a lot of pre-announcements in the software sector this quarter.

Your business up 70% in the US - looks like you did obviously very well.

Did you see anything in the macro environment that would explain why somebody of your -- since maybe other software companies had difficulty?

And then on Europe, you say expect a better environment in the second half.

It does not look like the economies are going to make it - to show much improvement by the second half.

So is your optimism more a function of your bottoms-up sales pipeline analysis or a more top down macro perspective?

Yes, since -- let us start with Europe.

It is more a bottom-up perspective.

We have a healthy pipeline - I think we know our market.

You know top down is too risky - you can just read the newspapers and look what the indicators are, the economic ones.

So it is based on bottom up confidence.

Worldwide - you are right, we have seen weaknesses of some of our competitors.

I would more argue that this is nothing to do with the market, it is might be more the strength of SAP.

And some of the uncertainty we have in the market - you know this uncertainty better than we know it, and I think clients will ask themselves what is going on.

And if the next two in public declare that they are not strong enough to do it themselves, I think that is not a lot of confidence in the strength of their products.

I think that has an impact as well.

So we will see what the outcome is and then we will see a completely different environment.

Thank you.

Charlie DeBona at Stanford Bernstein.

Just wandering if you could, one of the three of you, update us on the R3 upgrade cycle?

And, in particular, sort of on an operational side or a sales side, how important is the sort of the NetWeaver product in helping make that architectural sale of R3 to mySAP - as opposed to sort of more of a features and functions sale?

And maybe one data point, if you have it, is how many of those thousand reference clients you have were R3 upgrades at the same time as they became NetWeaver reference accounts?

I will start from a product and Leo from sales what it means.

Look, we defined NetWeaver references in a way that we said it is only a reference.

If companies use at least two capabilities of NetWeaver, not just using it as a platform for running some of our applications, I think that is too easy.

So therefore I am really happy that what I could report.

These are companies using the inbuilt integration capabilities, let us say also outside of our functionality.

)From a product point of view, what we do now is we will take our normal ramp-up time to ramp mySAP 2004.

We have to think about this is really the successor.

What is good for the market is that we extended our maintenance, so therefore the message is to the clients - we are not forcing the upgrade.

We want at the end successful and happy clients, and for our business it is not necessary to force.

We want sustainable growth so, therefore, I think we expect a continuous upgrade here.

Another good piece is that the clients can start small with mySAP ERP because they can implement and many of the large clients will do it, and can still run our suite.

So what you will see is clients who have 30,000, 40,000, 50,000 implementations-- users.

We might be start with a 500, 1,000, 2,000 mySAP ERP and then over time convert R3.

So this will be, I would say, different to what has happened 10 years ago with R2/R3.

So we will see over some time co-existence here.

Yes, and from a sales perspective, you have to take it maybe from a-- start from a customer's point of view, which is the most important one anyway.

Henning already mentioned that during his presentation.

The borderline between platform and application between so-called middleware and appreciation is becoming more and more blurred.

And, therefore, customers review the fact that we are able to deliver a platform such as NetWeaver to be a key differentiator.

So I believe that we have not seen a single sales engagement over the last 6-8 months where NetWeaver was not a topic, so it is always a very important issue.

And the fact that we are able to deliver such a platform which is interoperable as the-- as well packaged as NetWeaver, gives us a significant leg-up when it comes to a competitive environment.

25% of the business is done with net new names.

So these people make, in fact, a strategic decision - also welcomes to platform, that is a very important thing.

But equally important, 75% of the business is done with the installed base, and for them the fact that there is a platform for NetWeaver, ensures a long-term continuum in their engagement with SAP.

So, anyway you want to look upon this issue, it is a very important differentiator.

Okay, I think we take our next question from the room again.

For those on the web, please send us questions to investor@sap.com.

So I see one question here in the back.

Jim?

Jim [Amwilson], Schwab SoundView.

Could you talk a little bit about your thoughts on consolidation?

Obviously the industry is at the cusp of a major wave of consolidation.

What is SAP's view relative to participating from an acquisition perspective, or is it solely an organic growth strategy?

I think it is not totally organic but we are not looking for playing the role in buying market share in order to consolidate.

Here we feel we are strong enough to do this ourselves.

So, therefore, our strategy is more to do minor acquisitions where it fits into our product portfolio and strategy, and helps to accelerate organic growth.

You have seen that we did a very small one.

It is normally not worth to mentioning in the second quarter, [A2I],.but it is important for us strategically because it will accelerate the market entry of a key functionality of NetWeaver - master data management.

This is the type of acquisitions we are after.

So combine the acquisition strengths with our strengths, accelerating growth I think makes a lot of sense basically.

Thank you.

Our next question is a question from the web.

We actually got that question from multiple analysts.

The question is - could you please clarify your hiring target of 2,500 FTEs, full-time equivalents, this year?

Does this effect your profitability or do you need to get cost savings in other areas?

I think I can take this question.

Regarding this guidance, we said that we will increase our profitability by 1 percentage points, although we now increase our base by 2,500 instead of 1,500.

You have to keep in mind if we increase now the hiring to 2,500, those FTEs will come on board in the third-- in the fourth quarter and they will not have a full year impact on our personnel expenses.

So this impact should be rather limited and, again, this is included in our guidance and covered by our guidance.

Thank you.

So we take another question here from the room.

I think Ross in the last row?

Ross MacMillan, Morgan Stanley.

Could you-- If you think about-- Maybe you could help us understand qualitatively how much of the business that you are getting in at the moment is customers coming to you and saying 'We bought software in the late 1990s from a plethora of vendors, we are actually going through a material phase of consolidating out, if you will, and consolidating on to you guys'?

And as you think about that, what is the timeframe in which that can continue if you will?

It seems to me that it has become a bigger thing for customers in the last year.

How much time have we still got ahead of us, as you think about what customers are doing, that could still continue to play out?

I would start with my experience and then might Leo can step in because he has seen a lot of clients.

Most of the clients I see have a, as you said, consolidation strategy internally.

On the other side, they have to balance the benefits of consolidation against the risk of becoming dependent of one vendor.

That is more or less the normal discussion you are in.

We know this.

We know that if it comes to consolidation the number one choice is SAP - nearly all cases.

What limits us sometimes is this fear of becoming dependent.

This is one of the reasons why we have pushed so fast on an open strategy, and on a services-based architecture.

This-- With this we can prove to our clients that they get the flexibility if needed, and if wanted from them, to switch off in a few years from now, or in a year from now - even some functionality of SAP if we are not performing well.

So this strategy is important to get the fear away from a client, that when they consolidate they get dependent of one large vendor.

This is one of the reasons behind.

The better we execute - and this is really part of our strategy - I think the more unlimited the opportunities are to consolidate with the large clients, I feel.

Yes, maybe a few additional comments.

In the framework that Henning just described, if you take it a little bit more granular.

You will need probably anything that you can imagine from customers who have a [indiscernible] landscape - the classical, best from breed environment, where people have tried basically everything there is on a software catalog - to people who already in the past started to have a little bit more of a structured approach.

And you also have to remember that there is always something that is out there that is not just on anyone's maps - that is legacy and you simply cannot assume that legacy is not there.

So that is another important factor.

The fact that we now have a solid platform which is NetWeaver, which enables a whole bunch of things that we could not really do before.

Enables customers to take a new view of this entire landscape and start to strategize.

Now beyond, or besides the classical equation between efficiency, uniformity, standardization, consolidation and the risk factor of depending on one vendor.

You also have to take into account that a transition is not something that you do lightly because it has an operational impact on the business of a customer.

So that has a timing impact.

So, what you see is more and more customers start to have a long-term strategy to consolidate on one or may be two platforms.

And then the operational execution of those is then a function of the complexity of the environment, and what it would mean to switch.

And I know many customers who are in this phase and who have to be careful because, given the dependency today on information systems - downtime for example or disruption in the business - is not something you want to do lightly.

But the trend is clearly there, the demand is accelerating.

Competitive replacements are occurring more than they did in the past, in fact [indiscernible] in the US - where our market share was a bit smaller, therefore more competitive replacements.

But you will see this happening steadily and the easier we can make it for our customers - hence NetWeaver, hence a corrective service strategy - I think the better we can help them manage this transition.

Thank you.

We take another question from the web.

It is a question we have been asked from multiple analysts.

Can you please provide more color on the regions?

Why was Germany so strong?

What is the growth run rate for the US, and do you need growth in [IMIA] to achieve your guidance?

And along that, also what seasonality should be we expect for the rest of the year?

Okay, maybe I will take the first part.

Why was Germany so strong?

That is a question I get, we get, every quarter and I have to be boring here and give you same answer back - because they execute very well and they are an extremely good organization.

We have a very strong presence in Germany and we do a very good job.

So there is no magic here - it is just lots of hard work and very good people.

And you can write this down because I give you the same answer next quarter as well, I hope.

The growth run rate for the US.

Right now we are running at a very high growth rate.

I do not think we will run for ever at such a high growth rate obviously but it is clear that the US this year will continue to outperform the growth, the average growth of SAP.

It is the growth locomotive right now - I hope it will be so for a large number of quarters, right Bill?

And we are outperforming our competition here in the market.

We are aiming for significant more market share in the US.

So you should look forward to see the US perform very well for a good number of quarters going forward.

As to IMIA, you saw what we achieved in the second quarter in IMIA.

I do not expect any magic firework in IMIA in the second half of the year, where we will continue to steadily turn the business around.

And Werner already indicated the guidance is the guidance, so the guidance remains the guidance.

As for seasonality, I believe that our seasonality this year will be based on historical patterns, the same-- I mean it will not be the same historical pattern or the same pattern as our history has always indicated in the past.

Thank you.

We will take the next question again here from the room.

I think in the first row, Jamie?

Thanks Stefan, it is Jamie Freeman of Fulcrum.

One of your partners also had a very strong quarter, and that was Accenture.

And in fact, on their call they mentioned their interdependence with SAP.

I think they put some developers on to NetWeaver.

I was wondering though if you could give us status from your perspective of the Accenture partnership?

In particular in light of the fact that the Accenture CFO just recently joined Oracle.

Thanks.

You are right, we have a good and healthy partnership, a strong one.

It is not the only we have but we are not the only partner of Accenture.

We started to strengthen the partnership again a year ago, more than a year ago, identified several areas of potential co-operation.

One materialized in these, let us say, joint co-operation around financial services where we are really close together but this was not the only one.

So they will build capacities around AVIVA, as you indicated.

They will also do more and more with us around CRM, etcetera.

So why the CFO went to where he went I do not know.

Might be, might be, that this is-- well, what I think what has happened is that he had, I do not know, some links or he has some fun about what could happen in this environment.

Thank you.

The next question we take here in the second row.

Hi, Heather [Bellini].

I was wondering if you could comment a little bit on the pricing environment.

You said that it actually got a little bit less this quarter.

I was wondering if you could talk about that by region - is that occurring across regions or are you seeing pricing in the US worse?

And then secondly, just to follow up on NetWeaver, if you could give us an idea of who you are competing with primarily in NetWeaver engagements, and ultimately why they are choosing SAP?

Thank you.

Yes, in fact what is happening, there is still a lot of pricing pressure in the market.

We still see some extraordinary pricing proposals made by some of our competitors in this business.

We have never done this.

We are also not do this in the future.

The good news is because our market position has been strengthened over the last year or so, we are now able to explain much better than ever before the value that we bring to our customers.

And, therefore, obtain also a fairer price for our products and services.

So, indeed the average deal value has stabilized in the quarter - that is across all of the regions.

In the US that has increased a little bit more because the patterns of the deals, or the distribution of the deals by sizes changed a little bit upwards.

That does not mean that there is not significant pressure but we are able to resist a little bit better in Q1 and in Q2 than in 2003 out of pricing pressure.

But it is across the board.

We are competing against nearly everything.

Most of the customers, as you know, have bought over the past a bunch of tools - non-compatible tools, non-integrated tools - in order to solve the integration challenge.

These are definitely customers which likes the idea of having one integrated platform.

And then we compete against the platform providers which is dot.net and [Levsion].

Thank you.

I see a question here.

Kevin?

Hi, Kevin [Marriott[ with [Fiduciary] Trust.

First off, congratulations, outstanding quarter.

Just looking forward, obviously you are on track to hit your targets for the year.

If you look out a little bit further, say into 2005, could you maybe give us a sense of what we should be thinking about for the financial model?

How quickly can you grow the top line?

What is a good intermediate margin goal?

Any kind of trends we should be paying attention to?

Thanks.

First of all, you know that we have never given the guidance beyond 2004, we will not do it.

Nevertheless, I think we can share some ideas but not the guidance.

Let me reiterate what we have said in the past, and that is still true.

We want to have double digit software license growth and we to come to 30% profitability over the years.

Thank you.

Next question.

Richard Cooper at [Lobe] Partners.

I wonder if you could comment one bit further on what you said about Germany?

Execution is great but what do you sense, if anything, about the mood in Germany?

This is quite surprising to see 10%.

Thank you.

You know the mood is one thing or at least the mood that you read in the newspapers is one thing, and what corporations and companies do in their day-to-day business is maybe something else.

And you should be careful when you talk about mood and things like that because newspapers not necessarily reflect really the collective business mood in a given environment.

Now it is-- it goes without saying the environment is tough.

There is-- We live in a very constrained growth environment.

One more reason, if you want, for many businesses to take steps in order to become as competitive as they can, despite the environment.

Many, many German companies - actually it is true everywhere but if you want to focus on Germany for a second - any even mid-sized companies are globalizing their businesses.

You cannot globalize a business in particular in a real-time world as we live in today, without a very strong and a very reactive and a very predicative information system which helps.

We have excellent customer relationships in Germany that we have build over the last 30 years.

We have many customers who are now basically using SAP in its fourth or fifth integrational generation.

We are really the trusted partner and adviser to hundreds and hundreds of German corporation, if not thousands of Germany corporations.

And that is really a position of strength that enables us to continue to drive the business in Germany.

Thank you.

We have another question from the web, again asked by multiple analysts.

What was driving the services growth?

Was it SAP NetWeaver or are you taking share from your partners?

Is there a change in third party usage and what will this do to your service margin the next quarters?

And finally - there is a whole list of questions - how long does it take to get consultants productive?

What is driving service growth I would say is our strategy.

We focus on services round new products and we service-- we focus on, let us say, services which are not the-- which cause the low value services - just implementing things instead of us.

So this shift helps because it makes you more independent from the economy.

Are we taking share from our partners?

No.

Whenever I look to the business from our partners it grows faster than ours, at least in services, which it should be.

Therefore, they are our partners.

And is there a change in third party usage?

Yes, it was a little bit more third party usage.

It was one of the reasons why the profitability was not exactly what it was a year ago.

Why have we done this?

We have done it because we did not want to ramp up a lot of consultants at the beginning of the year, in a time where the competitive pressure in consulting is extremely high.

So that gives us at least some flexibility.

Will we take consultants on board?

Yes, we will over time.

I talked about our consultancy strategy, so we need some, let us say, reskilling of some of our people here, which has also to do with bringing sometimes new expertise in.

Will this effect our margins?

I would say so far there is no indication.

We want to do this continuously without a big bang.

Thank you.

Any further questions here from the room?

I see Rick.

Yes, I have two questions.

First, just back on the headcount and the decision to add additional heads.

Can you give us an idea of where those are going?

Is it the same areas that you were before?

Does it effect your hiring plans next year or are you basically getting an earlier start on next year?

And also, just on the consolidation, we talked about the convergence and apps and infrastructure.

It was disclosed during the quarter that you had had discussions with Microsoft.

And I guess it would be curious if you had discussions with IBM as well because both would seem to have the same interests in SAP.

And perhaps why those discussions with Microsoft did not come to fruition?

We have, as you know, discussions with all of our partners but on different topics.

So the topic you mentioned, we discussed a few times only with Microsoft, and it was initiated from them, as you know.

It was also stopped from them - what the reasons are I would say it is best just to ask them themselves.

On the other side, you have seen that we achieved at least a part of the initial goals as being still independent.

We signed an agreement to co-operate, to make the both platforms more interoperable.

Over time more co-operation in the link between Microsoft Office and our business applications, which I think is beneficial for the clients.

So that is the story.

)From a headcount point of view, yes, Werner said it - in the areas where we need it which is revenue generating and R&D.

So if we have to add something in R&D should not be a surprise if you look to the ambitions we have.

It is [enablement], it is not just architecture.

We would not do it if it would be just architecture.

We talked about the customer and the consolidation opportunities from go to market.

But on the other side it will-- it is a platform for us or the foundation for us to be more efficient in R&D, and to bring more faster and additional products to market.

That is the [end] idea and I think that is what you expect from us.

Thank you.

I do not see any further questions here in the room, so this concludes today's analyst conference.

Thank you for all your questions and the next event is the Q3 announcement on October 21, followed by an SAP investor day in London on November 10.

Thank you.