SAP SE (SAP) 2004 Q3 法說會逐字稿

Welcome to SAP's 2004 third-quarter results conference call.

This call is being recorded.

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

I will now turn the call over to Mr. Stefan Gruber.

Please go ahead, sir.

Good morning or good afternoon.

This is Stefan Gruber.

Thank you for joining us to discuss SAP's third-quarter 2004 results.

I am joined by Henning Kagermann, CEO;

Werner Brandt, CFO; and Leo Apotheker, President of Global (indiscernible) Operations.

Werner will discuss the Q3 financials; then Henning will provide some further in-depth commentary in the quarterly performance and products successes.

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

Please note that any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S.

Private Securities Litigation Reform Act of 1995.

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

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

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

The factors that could affect the Company's future results are discussed more fully in the Company's filings with the U.S.

SEC, including the Company's annual report on Form 20-F 2003, filed with the SEC.

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

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

Thank you, Stefan, and welcome to everybody.

The third quarter of 2004 was a very strong one for SAP.

We increased our market share and (indiscernible) profits increasing, efficiencies and productivity within the organization, while continuing to invest in the business.

Software revenue for the third quarter 2004 increased 13 percent, 491 million, compared to 433 million for the third quarter of 2003.

On a constant currency basis, software revenues were up 17 percent year-over-year.

Software revenues for the nine-month period were EUR1.4 billion.

While we had some larger deals, overall performance was largely paced by a stream of mid-sized and smaller deals.

In total, we closed 1500 deals, which represents a 20 percent increase compared to the third quarter of last year.

Total revenues for the third quarter were EUR1.8 billion compared to EUR1.7 billion reported in the third quarter of 2003, which is an increase at 8 percent.

On a constant currency basis, total revenues were up 11 percent year-over-year.

Maintenance revenues for the quarter were EUR720 million, which represents a 10 percent increase.

Currency adjusted, it is even a 13 percent increase compared to the third quarter of 2003.

And if you look to it from quarter to quarter, an increase of 22 million compared to the second quarter of 2004.

This demonstrates continued high maintenance renewal rates as our customers recognize the value of our maintenance offering.

Consulting revenues were 482 million compared to 497 million in last year's third quarter.

If you adjust the performance by the currency, then on the consulting side we had an increase of 4 percent quarter-over-quarter, year-over-year.

The service margin was 2 percentage points lower due to increased utilization of our consultants in internal projects, and Henning will provide further details in a minute.

Reported expenses were EUR76 million higher year-over-year, which represents an increase of 6 percent.

Excluding the currency impact, expenses increased EUR112 million, or 9 percent compared to 2003.

On a pro forma basis, which excludes stock-based compensation and acquisition-related charges, and excluding the currency impact, expenses increased 107 million, or 9 percent compared to 2003.

The higher expenses were the result of first, additional personnel.

The number of full-time equivalents increased by more than 2400 net since the third quarter of 2003.

Second, increased third-party usage.

Third, higher marketing costs, especially in the area of lead generation.

And fourth, an increase in travel-related expenses resulting from greater business activities.

Headcount for the third quarter increased by 637 net full-time equivalents and by 1972 net for the nine-month period.

This includes 240 employees which were added through acquisitions.

On the aforementioned 637 FTEs added in the third quarter, more than 200 were in research and development, of which 60 percent were hired in offshore locations like China, India and Bulgaria.

While we are still on target to increase headcount by a total of 2500 in 2004, if we see opportunities to hire additional headcount, we could go beyond that number.

Operating income increased 12 percent to 461 million for the third quarter.

Pro forma operating income, which excludes stock-based compensation expenses and acquisition-related charges, decreased 12 percent to EUR475 million compared to EUR423 million in last year's third quarter.

The operating margin for the third quarter was up 1 percentage point to 26 percent, and the pro forma operating margin, which excludes stock-based compensation expenses and acquisition-related charges, was also up 1 percentage point to 27 percent.

We continued to successfully increase our operating margin despite the increased investment into our business.

This is mainly a result of higher product revenue.

Let me now turn to net income, which rose 15 (ph) percent to EUR291 million in the third quarter.

Pro forma net income, which excludes stock-based compensation expenses, acquisition-related charges and impairment-related charges increased 16 percent to EUR302 million.

Earnings per share for the third quarter were EUR94 cents compared to EUR81 cents reported for the third quarter of 2003.

Pro forma earnings per share, which exclude stock-based compensation, acquisitions and related charges and impairment-related charges, was 97 cents compared to 84 cents last year.

Our effective tax rate for the quarter was 37 percent.

For the full year, we project a normalized tax rate of 37 percent.

Cash flow from continued operations for the first nine months was EUR1.3 billion.

Capital expenditure was EUR170 (ph) million, leaving free cash flow of EUR1.2 billion.

At the end of Q3, we had liquid assets totaling EUR2.8 billion, and our goal is to increase our liquid assets to EUR4 billion by the end of 2005.

We bought back shares in the third quarter totaling EUR93 million.

For the first nine months of 2004, we bought back a total of 1.1 million shares, and we currently have 5.4 million shares in (indiscernible) stock.

Days sales outstanding stood at 73 days at the end of the third quarter, which is down one day compared to the second quarter of this year and five days compared to the third quarter of last year.

It is important for us to remain committed in improving our DSO, since one day improvement equates to one additional 20 million in free cash flow.

With that, I would now like to pass over to Henning.

Thank you, Werner.

As Werner has summarized, the third-quarter results signal that SAP continues to get stronger on top of already good results reported throughout the year, achieving increased revenues, greater profitability and higher market share.

At the same time, we believe our product strength is unmatched in this industry, as we see ourselves far ahead of our competitors with regards to our product and technology offerings.

Werner already summarized our software revenue results.

But let me add one more metric.

As you know, we are negatively impacted by the currency headwind, since the euro is much stronger than the U.S. dollar.

That said, if you were reporting our revenues in dollars, our software revenues would have been $609 million, an increase of 21 percent year-over-year.

Our strong results helped us to once again improve our share against our peer group.

On a global basis against our next four largest competitors, PeopleSoft, Oracle, Siebel and Microsoft, our share in business application software revenues was 56 percent at the end of the third quarter of 2004 on a rolling four-quarter basis, which was an increase of 1 percentage point compared to the second quarter of 2004 and 3 percentage points compared to the third quarter of 2003.

Buying activity is coming from both new and existing customers alike.

This quarter, new customers accounted for 21 percent of order entry, with existing customers comprising 79 percent of order entry.

This is a bit of a shift, as we usually tend to see a higher percentage of order increases coming from new customers.

The reason for the change is that new customers tend to be more cautious buyers; therefore, purchasing in smaller increments.

On the other hand, existing customers are willing to make larger purchases.

Moreover, we are continuing to see a greater number of deals from new customers coming from the midmarket, which by nature constitutes smaller deal sizes.

Therefore, an additional way to analyze new versus existing customer business is to look at the actual number of contracts signed.

Based on number of contracts, business from new customers was 35 percent versus 65 percent from existing customers.

Looking regionally, we witnessed a more balanced contribution from all regions.

We expect this to continue into the future.

The results in EMEA were better than we expected, but it should also be noted that the comparison to the third quarter of 2003 was somewhat easy, and I would not extrapolate the size of the third-quarter performance as a developing trend.

EMEA is still in the stage of stabilization.

Third-quarter software revenues in EMEA were EUR249 million, representing an increase of 24 percent of both euro and constant currencies.

Germany performed well, reporting an increase of 9 percent in software revenues for the quarter, but the environment in Germany remains challenging.

Key wins in the EMEA region included Luxaire, InBev, formerly Interbrew, and Innovia, former UCB (indiscernible).

Asia-Pacific, excluding Japan, was the best performance this quarter, with emerging market countries like China and India delivering strong results.

As the economy develops and business becomes more sophisticated, it appears in a prime position to reap the benefits.

Software revenues for Asia-Pacific increased 23 percent, and 30 percent in constant currencies.

Japan was disappointing, reporting a decrease in software revenues of 25 percent, or 22 percent at constant currencies.

We continue to realign our sales force in Japan and the turnaround posit continues, but we do not expect to see any results from this realignment this year.

Key wins in the Asia region included Adventech, Indian Oil and Sinopec.

As we continue to refine our offering to the segment, we see a lot more potential in Asia-Pacific and are therefore dedicating the necessary resources to keep driving sustainable growth.

As evidence of this commitment, we opened an SAP Global Support Center in Dalian, China.

The center will provide proactive and reactive support for customers China, Korea, Japan and through the Asia-Pacific region.

The Americas continue to be a solid growth market for SAP, with the U.S. leading the way.

Some of our biggest wins this quarter were in the U.S.

Key wins included Bose, Cutter and Buck, Hewlett-Packard and (indiscernible) Home Entertainment.

U.S. software revenues increased 6 percent over last year and 15 percent in constant currencies.

The growth is impressive given the U.S. business grew more than 50 percent at constant currencies in the third quarter of 2003.

We expect to see continued growth in the U.S., but with a tough comparison going forward, we anticipate seeing a more balanced contribution from all regions.

In the U.S., our share in business application software revenue against the same four competitors mentioned earlier was 38 percent at the end of the third quarter of this year on a rolling four-quarter basis, which was an increase of 1 percentage compared to the second quarter of 2004 and 6 percentage points compared to the third quarter of 2003.

We saw a number of relatively large deals this quarter across multiple regions, but I do not believe this marks any fundamental shift in buying behaviors.

Much like the last few quarters, revenues continue to be driven by a high volume of midsize and smaller deals, and I expect this trend to continue going forward.

In the third quarter, volumes from the indirect channel grew 32 percent year-over-year.

The number of deals closed by the direct sales force increased 16 percent compared to the third quarter of last year.

Deals greater than EUR5 million accounted for 31 percent of order entry in the third quarter of 2004 compared to 37 percent in last year's third quarter.

Deals less than EUR1 million accounted for 38 percent of order entry compared to 34 percent in the third quarter of last year.

As you might expect, we are continuing to experience a certain amount of pricing pressure and discounting activity from our peers, but it has stabilized.

We believe our ability to avoid much of the pricing pressure and win new business is because of our unrivaled commitment to develop (indiscernible) and innovative business products and to partner with our customers to deliver optimal solutions.

This can be demonstrated by another quarter of increasing customer satisfaction, which is at the highest level it has ever been over the past four years.

In the third quarter customer satisfaction rose in all areas, including products and (indiscernible).

Let me just speak briefly about our pro forma service margins, which were down from 25 percent in the third quarter of 2003 to 23 percent in the third quarter of 2004.

The reason for the decline is that we utilized more of our consultants for internal projects due to (indiscernible) of new products, solutions management and the adoption of our enterprise services architecture into our software solutions.

We expect to more carefully manage our internal usage of consultants going forward and we do not expect in the future to see the large amount of ramp-up activity that we have seen this year.

There also continues to be some pricing pressure in consulting, but consulting rates have stabilized.

While uncertainty among customers still exists in what we see as a continued challenging market and economic environment, we are still on track to increase software revenues by around 10 percent for the full year.

Accordingly, we expect fourth-quarter software revenues to increase in a range of 7 percent to 8 percent.

The outlook is based on an assumed U.S. dollar to euro exchange rate of $1.22 to EUR1.

At constant currencies, we expect to increase full--year 2004 software revenues by around 12 percent.

We expect pro forma operating margins to improve by 1 percentage point, and pro forma EPS is expected to be in the range of EUR4.20 to EUR4.30.

I would now like to speak about our product offerings.

At the beginning of the year, we told you that one of our 2004 focus areas is software for specific industry groups to capture additional demand.

We continue to focus on four main verticals, where we feel there's room for expansion -- retail, public sector, financial services and high-tech.

CRM revenues for the quarter were EUR104 million, or 21 percent of software revenues.

We have now increased our rolling four-quarter share to 124 percent of Siebel's CRM software revenue, further strengthening our position as the number one CRM vendor worldwide.

Supply chain management revenues for the period totaled EUR96 million, or 20 percent of software revenues.

Beyond the growth in these solutions, NetWeaver continues to be a basis for much of our potential growth.

We currently have approximately 1300 NetWeaver global (indiscernible) customers, which has already surpassed our goal of 1000 (indiscernible) in 2004.

But it's not only quantity we are looking for, but also quality.

Nike is the first customer to have developed a cost component business scenario using SAP NetWeaver 2004 and our enterprise services architecture.

Earlier this year, SAP launched the "Powered by NetWeaver" partner initiative, which empowers SAP partners and independent software vendors with the SAP NetWeaver technology platform to build new business applications, providing independent software vendors more value from SAP NetWeaver and augmenting the position of SAP as a strategic, trusted innovator for our customers.

The Tech (ph) (indiscernible) in San Diego, four additional companies announced that they had joined SAP ecosystem (ph) by becoming certified in the "Powered by NetWeaver" partner initiative.

The ramp-up process for mySAP ERP continues to move along successfully, with some extremely positive customer feedback received so far and a high satisfaction rating.

The third quarter of 2004, which was a first quarter after shipment, we signed approximately 300 mySAP ERP customer contracts.

General Mills, for example, has implemented the strategic enterprise management and Business Intelligence functionality available in the 2004 edition of mySAP ERP.

The new sales strategy for my SAP ERP, based on the package (indiscernible) approach, is also beginning to pay off.

Finally, I want to address the SMB market.

We broke out of our percentage of order entries from the SMB segment for the first time in the second quarter of this year.

We defined SMB as companies with less than 2500 employees and less than EUR1 billion in revenue.

At the end of the third quarter of this year, SMB represented 30 percent of order entry versus 28 percent at the end of the second quarter of this year and 27 percent at the end of the first quarter of this year, on a rolling four-quarter basis.

We believe that are SMB business is much larger than the SMB revenues of our competitors.

In fact, we believe that our SMB business alone is larger than the total comparable applications license revenues of each of our peer companies.

We sell our mySAP solutions to the higher end of the SMB through the direct channel, and our specific SMB solutions of All-in-One and Business One to the lower end of the SMB market, specifically through the indirect channel.

At the end of the third quarter, we had 5,600 and 4,200 All-in-One and Business One customers, respectively, which represents significant year-over-year growth, as well as a sequential quarterly increase.

We also continue to grow the partner channel.

At the end of the third quarter, we had 475 and 725 All-in-One and Business One partners, respectively.

SAP Business One and All-in-One aim at providing SMBs with a single, integrated software package for visibility and control over the entire company, eliminating the headaches of multiple interfaces and disparate solutions.

We are focused on innovation and that will remain our priority in the periods ahead.

Improving technology, quality and functionality of our products is also crucial to enable us to serve the ever-changing demand from our customers.

We believe our teams have (indiscernible) know how to succeed, no matter what the external circumstances are, and we are seeing this in customer response in our quarterly results.

And with that, I would like to turn it over to questions.

(OPERATOR INSTRUCTIONS) Charlie DiBona (ph) with Sanford Bernstein Investments.

A couple quick questions on guidance, and then sort of a more strategic question.

You fiscal year '04 guidance is unchanged despite very strong Q3 and despite a currency expectation that appears to be somewhat improved for next quarter.

Can you talk a little bit about your expectations for Q4 and then into next year in general, the spending environment, and why this might be seen as some weakness in Q4 relative to the Q3 performance?

Thank you.

Let's look back to the beginning of the year.

You remember that we gave this 10 percent guidance, which was viewed as extremely optimistic.

And I think it will be a big achievement to come to this guidance, which we are confident we will, in particular if you look at what our competitors are doing in the market.

On the other side, please be aware that the seasonality last year was somehow different to the seasonality we have seen previous years before.

So what we see this year is we coming back to more normal seasonality.

And we said, and I can reiterate this, with these stepped to 10 percent, we feel we reached an important milestone to prove that we, SAP, and hopefully our industry comes back to double-digit growth.

Therefore, you should not look, I would say, to the quarters to extract a kind of a trend.

Look to the year, because you know we are giving the yearly guidance, and expect SAP that we will continue to grow double-digit in the next years to come.

Sort of a bigger picture question, with the NetWeaver accounts.

You've got 1300 reference customers.

To what extent are those -- have you started to see reference customers coming up who are not core SAP mySAP customers, who are really buying NetWeaver independent of your install base?

Yes, we have seen some customers buying NetWeaver stand-alone.

The most famous one is VISA.

We had a press release with them.

I think VISA is a shop that (indiscernible) using some of our competitors product.

We hope we can change, but I'm not sure.

But we are happy that NetWeaver helps them to integrate the legacy with the product of our competitors.

One final thing.

As you have started to get more and more experience in the SMB market, are you seeing any differences in the margin structure and investment needs as you sort of flesh out that channel?

No, we don't see this.

I think what we are doing, as you see, is that we try very hard to build the channel.

And if we look to the deal size, if we look to the average performance of the partners, I think that's all about scale.

So if we ramp up partners significantly, we will ramp up our business accordingly.

Thank you very much.

John Segrich (ph) with JPMorgan.

Great quarter.

Two things, if I could.

Number one, Henning, could you maybe dig a little bit into the European performance X Germany.

Obviously, it was quite good, and yes, we don't want to extrapolate from it.

But is it a broad-based improvement in terms of spending?

Were there a couple of large deals that maybe skew the number to some extent?

And then secondly, if you look at the U.S., was there any change in the customer behavior that you guys have noticed maybe in the last few weeks and how do you think about some of the issues that are on the minds of customers maybe over the coming quarter?

I hand this over to Leo.

Leo?

Thank you, Henning.

Let me maybe first address the European question.

We actually had good performance across the board in all of the countries and all of the sub-regions.

And as Henning indicated in his opening remarks, we have to be a little bit careful because we are comparing this Q3 with a relatively weak Q3 last year.

So this has to be put into proportion.

But nevertheless, across the board, all of the European countries, including Germany, but also in some of the more challenging markets, we were able to pull off a significantly better performance.

There is nothing particular about that.

It was normal (indiscernible) flow.

We had across the board in all of the geographies a few larger deals.

But again, please do not read into this any special trends or changes in customer behavior.

I think it was more exceptional than a recurring event.

As to the U.S. customer behavior, I'm not so sure I understand what you are trying to reach here, but we didn't see any abnormal customer behavior.

I think people are still looking at the business from a very rational point of view.

People still consider software investments like any other capital goods investment, and therefore cautious and look for return, and are looking for a long-term solid partner who can deliver technology for the years to come and not just for the recent quarters to come.

Rich Sherland with Goldman Sachs.

I guess just to follow up on John's question on Europe.

It's not clear to me what you are saying.

It sounds like you are reluctant to conclude that you've seen any real improvements in the overall business environment; it was relatively easier compares.

But you sound a little more optimistic about Europe going forward.

Am I reading you correctly?

What I'm trying to say is I don't want anyone to start to extrapolate the growth rate Q3/Q3 just (indiscernible) going forward.

We had indicated in the earlier calls that the second in Europe would be better than the first half;

I think it is materializing.

You know that we have taken a number of steps to address our issues in the European market;

I think it is starting to bear fruit.

We are still operating however in an externally very challenging environment.

So you need to read performance in light of the challenging external environment as well.

Have you seen, Leo, any change in closure rates?

We are hearing from some of your U.S. competitors that they had experienced a number of deals slipping in June.

You guys didn't seem to have that problem.

But they suggest that there is not as much deal slippage in Q3, although the environment still seems very anemic.

Have you noticed any change in willingness of customers to close deals between Q2 and Q3?

No, we had no slippage of any remarkable proportion, I think, Q2 into Q3.

Maybe people should need to address their operational issues.

Ramo Lincha (ph) with Merrill Lynch.

Maybe two questions on Asia.

You have been working hard in Japan throughout the course of this year, and after Q2, we were hoping that the worst was over.

Has anything changed dramatically in Q3 that you kind of slipped down into a decline year-over-year again?

And then maybe you can talk about the opportunity in China and India.

Was that already a main driver for the outperformance in Asia-Pac X Japan, and what can we expect going forward there?

The business in China and India is growing very fast.

We are dealing with an environment of customers in the market that are significantly in demand of our type of software, and we have been fortunate enough to be very strong in these markets since a number of years, and I think we are benefiting from a combination of very strong technology, good product offering and the fact that we are part of the local economies, if I may say so (ph).

We see a strong deal flow in India and China, and there is no reason to believe that that trend will change in the coming quarters.

There is a significant effort and (indiscernible) in making sure that we can get our share in what this market is promising.

As to Japan, I would like to point out that we had said also in the earlier calls that we are working in realigning our sales force in Japan to adjust to this new environment.

We also said, by the way, that it would take us the entire year to make that happen.

And so we are still working on that.

As Henning indicated in his remarks, as well, you should not expect any significant turnaround in Japan until the end of the year.

And then we will see about next year.

Thank you.

Ross MacMillan with Morgan Stanley.

Thank you.

Question on headcount.

You've added 2000, thereabouts, for the year.

And totally, you look to be hiring 2500, maybe a little bit more, so you look to be on track for that.

Just in terms of as you look beyond this year, what is your thought process on headcount growth?

Is it still so long as your revenues are growing, you're planning to continue to add to heads?

Or should we think about this year as being maybe a more aggressive hire year than you might have to do next year -- in other words, you are basically building that capacity this year more than you might have to do next year?

You can expect us -- what you said applies to the field.

I think definitely in the field, if we grow revenue I think we need more people and Leo we will hire them.

So that is one point.

If you look to the product side, to the development side, there's a fairly unique opportunity.

We are leading the market in perception in terms of being very innovative and the frontrunner in terms of service-oriented architectures.

And in (indiscernible) we have seen (ph) literally for a long time labor as being extremely reliable and (indiscernible).

We want to continue with that, and that means you will hear more from SAP, more news in the next year or two in the area of product portfolio, which means if that is the case and we see the opportunities, we will continue to invest in that.

It's too early to make announcement here, but you should not believe that SAP's ideas in terms of how to expand our product is at the end.

Maybe just one follow-up, just on your comments on seasonality in the business.

I guess the way I looked at it was average sequential license growth, I think over about seven years or so has been about 130 percent from Q3 to Q4.

And it looks implicitly like you are saying it's going to be nearer 100 or 105.

Is this part of the structural change where you got customers buying more as they deploy, rather than taking large chunks up front?

So do you think that structurally you're basically moving to a slightly less seasonal model on a go-forward basis?

No, Ross, I think slightly yes, but not significantly.

If you look to last year, you see that in particular the fourth quarter was very strong.

The years before, it was a little weaker.

I think we come back to the (indiscernible) two years before.

That was all.

I just wanted to indicate last year's first-quarter performance was extremely strong.

Werner?

And we are talking about very small percentages here.

If you look to the fourth quarter in 2003, of our total software, we made 43 percent, and in 2002 it was 42 percent.

I think 2004 would follow 2002.

Thank you.

Fulcrum Global Partners, James Friedman.

Thank you, guys.

A couple of questions.

Occasionally, you will give some metrics on where you are in the R3 and mySAP upgrade cycle.

If you could at least speak to that in qualitative terms, that would be the first question.

I think there are no changes; therefore, we are not giving additional information.

As we indicated in previous calls, the mix is third coming from migration and two-thirds coming from new customers and additional reusers with more or less stable ones.

This is now stable for several quarters, and it's the same in the third quarter.

That is the reason why we are not referring to it.

So if you look to our revenue, a third is related to migrating our three clients to mySAP, and two-thirds is additional (indiscernible) volume -- user engines, etc.

And that is good, because it means we have some years to go to participate from this nice, let's say, migration revenue stream coming, and that's not over after a few years only.

Thanks, Leo.

That's helpful.

With regard to the comments that you made about -- maybe using the wrong word -- outsourcing your offshore personnel and the headcount, could you speak to regionally to where those are?

Are you still using Eastern Europe and Bulgaria or is that largely in India and China now?

The largest operation is India.

It's followed by Bulgaria.

China is more for support.

We have also a few hundred people in Israel, so this is not really flowing (ph), but nevertheless I think the (indiscernible) cost us half Germany, so you would at least call it missed cost (ph) locations.

The last question, there were quite a few press releases this morning, not all attributed to SAP.

This confusion sometimes happens across borders.

But what were your comments with regard to 2005, if you could just reiterate what you might have said so far and I'll close there.

Thank you.

It could be that I gave a few TV interviews this morning and I was asked about the future.

I indicated clearly that we are not in the position to give a guidance because we are in the midst of a budget process and we give a guidance beginning next year.

Nevertheless, I reiterated the kind of ambition SAT articulated a few months ago and I said, look, we said very clearly at the beginning of the year this is a turn back to investment with a 10 percent SAP, let's say, is on the way as the first milestone to come back to double-digit growth, and our ambition is that we will continue double-digit growth in the future. (indiscernible) I think that was something people picked.

Thank you.

UBS, Michael Briest.

Thank you very much.

A question on the European performance, perhaps.

Do you sense that any of Q4's business might have been pulled forward into Q3, and that's perhaps part of your caution for the guidance in Q4?

And then a question for Werner.

On the product cost side of things, there was actually a sequential decline Q3 on Q2.

I know you are doing a lot of things in terms of putting support into offshore locations.

Is that a trend we should expect to continue?

Thanks.

Let me maybe try to answer your question on the European performance.

It is standard operating procedure to close (ph) the business at the earliest possible opportunity, which we do every quarter; also this quarter.

So I can't really say that we pulled anything forward.

We just try to operate as diligently as we can.

Michael, with regard to the product gross margin, the improvement is due to the fact that we increased efficiency in the support organization, resulting in lower support costs, despite the fact that we -- if you look to it year-over-year, compare third quarter to third quarter, that we added 360 people in the support organization.

So it's clearly a mix of process improvements and offshoring of activities.

So as a trend, we should expect it to continue?

In principle, yes.

Thanks.

If I could just come back with one last one.

I think, Werner, you mentioned in headcount additions 240 from acquisitions.

Is that correct?

Correct.

Could you maybe elaborate on what you bought?

That is A2i.

And you know that our subsidiary, SAP Systems Integration, acquired a company beginning of the year.

Thank you very much.

Brent Phil (ph) from Prudential.

Henning, you spoke about the small and mid-size business segment percentage of order volumes trending up to roughly 30 percent.

Where would you like to see that number as we look out a year?

Is that going to be 40, 50 percent?

And if you could also comment on the changing complexity of the competitors now, with Microsoft obviously moving upstream and your move downstream, what you are seeing from a competitive perspective?

50 percent is high, but 40 percent is something over the years I think we should achieve.

That doesn't mean in the next year, but over the years, because it gives us a healthy mix.

From a competitive point of view, yes, we see Microsoft in particular in Europe as a strong competitor, but not really, I would say, gaining share against us.

So if Microsoft is increasing their business, we are increasing as well; so I would call it more today not a head-to-head because we have a larger business, but in terms of a growth (ph) way to add to that.

So therefore, we are in a good position so far.

We believe there is enough data behind it that we, as I said, lead the market and that is something we want to do for the next years.

Many vendors have had trouble finding profitability.

I think Charlie asked a question about the profitability in the segment.

What gives us confidence that this is going to be a segment that's going to be as profitable as the high end of the market?

This is a large segment, and at the higher end, we have (indiscernible) over the last years that SAP can sell directly very profitably.

If you look for example to Europe or to other countries, some countries have operating only in this midmarket, and they have significant profitability, so therefore, this is proven from our business model.

At the lower end, we do (indiscernible) partners, and this gives us high profitability because we get the licensees through the partner and therefore the cost of sales remains at the partner's site.

And this makes it easier to come up with the high profitability.

Great.

Thank you.

Matthew Hammond with Credit Suisse First Boston.

Good afternoon.

I have two quick questions.

First of all -- and this really relates to a conversation I think I was having with Stefan earlier today.

I'm interested in what the capacity of the business is, especially given the smaller deal sizes, in order to close contracts.

I mean frankly put, there are only a certain amount of people in the business who can actually close contracts and then process them.

Given you're dealing with much more of a volume-based business now, what do you reckon the capacity of the business is today and at what point do you have to start expanding the capacity?

And my second question is, I'm afraid, a product question.

Where are you going with your Business Intelligence product and what are your plans for that area in the next 18 months?

I can take the second one, and Leo can take the first one, with capacity.

There were some comments from my colleague quite recently where he indicated that analytics will be more a focus of SAP in the future, which is definitely true.

This is not, I would say, a secret -- we indicated several times in discussions with analysts and with investors.

Because if you look to the move we made to enabling all of our product (indiscernible) integration, application platform, NetWeaver, then I think embedded analytics is state-of-the-art for future solutions.

There is no longer a need for stand-alone analytics versus (indiscernible) systems.

Yes, over some years there will be some coexistence.

But the design of implications (ph) of the future is embedded analytics.

And just to give you a feeling, NetWeaver will bring functionality in the future which will speed up the response time and that is significantly more than a factor of 10, so this also, let's say, will show declines by next-generation EFP (ph), like mySAP ERP.

This is something that cannot compare to our (indiscernible).

It's something which is really next-generation.

So that's the reason why we continue to invest more into analytics -- it's just the natural evolution, let's say, of our architecture.

As to capacity that we maybe address at this point from three angles.

What we do in terms of capacity is that we grow our sales capability, our delivery capabilities accordingly.

So we have been adding resources to the field in a coherent manner.

When we expect more growth, we ramp up our resources accordingly.

And we do the same thing for the indirect channel, by adding every quarter additional channel partners.

So from that perspective, from a delivery capability, I think we can cope with increasing amount.

And after the physical delivery of the quarter (indiscernible) demands, we are using a very efficient system.

I know -- the vendor is SAP, and that software enabled us to handle almost infinite capacity.

Mark Gale (ph) with Citigroup.

Good afternoon, everyone.

Just a simple question, if I may.

You talk about the 20 percent volume growth in the business in the third quarter, which is clearly an acceleration from the first half.

I wondered if you could sort of comment on the 3 percent decline when you look at volume versus pricing and how that compares in terms of declining price or declining average deal size?

And then follow up in terms of how that would compare across the high end business and the SMB business, just to get a feel for the trends across both areas.

No, I think you have all of us (indiscernible).

The deal size, as far as I know, has not declined.

The average deal size has stabilized, that's okay.

So from the pricing point of view, as far as I know, also we have stabilized.

It's more the opposite, that there was a very, very tiny improvement in pricing as well.

Something we must have got wrong or are your calculation -- might be we can follow up later.

I think we follow up later.

Is that possible?

Yes, Absolutely.

Is there a second question from you, Mark?

Just in terms of is there any noticeable difference across the midmarket versus the core offering?

No, there is no difference.

I think we haven't changed our offering (indiscernible); the buying behavior is the same.

The only thing what's happening is that more and more local versions of Business One come to the market.

I think that's expanding a little bit the business, and might be one of the reasons why the volume in the midmarket is growing faster than through the direct channel, but that is (indiscernible) also the channel size and the product offering is capture more regions in the world.

Kash Rangan with Wachovia Securities.

Thank you very much.

A couple questions.

Can you give us the metric on the percentage of the customer base that has upgraded to mySAP in the Americas and Europe, please?

I have a follow-up question too.

I think we have never provided such information.

What I can do for you is I can reiterate what I said.

Again, the third of our revenue is coming from migration; two-thirds is coming from new customers and new products or new seats (ph).

I think, Henning, in the past you indicated that close to a third of the overall worldwide customer base is migrated mySAP.

Do you have an update at least on the worldwide figure, if not geographically separated ?

No, it is difficult because what we have said is not customers.

We said number of contracts, because that is what we can follow.

And we saw the last discussions that the people are confused, that they mixed up customers with number of contracts.

That is the reason why we have not continued to give this figure.

Also, the SMB quantified 30 percent of orders.

What is that in terms of percentage of license revenues.

It would be much smaller than that -- if you can quantify that, that will be terrific.

We indicated order entry, but I think in license revenues it must be (indiscernible).

I think in the medium term it should be more or less the same, the SMB numbers referred to the order entry number; not to license revenue.

But this must be plus/minus a few percentage points.

So ASPs and the SMB are pretty comparable to overall ASPs, is I guess the implication.

Is that right?

That is not the implication at all.

That is just a proportion when it comes to compare order entry in the SMB channel compared to total and corresponding licenses.

Okay.

I am missing something there, because the order entry and the license revenue -- 30 percent is both the number of orders represented and also it's a percentage of license revenues and perhaps ASPs are pretty similar, right?

We will never report on order entries, so we never disclose the volume because we didn't do this.

On the other side, if you look for (indiscernible) additional information what we do here, then we go (indiscernible), but it gives you a better feeling what's going on in the market.

So if we go back to percentage points, we go back to the closest possible figure which gives you as an analyst and an investor a feeling for the market.

Final question, Henning, and the rest of the team, if you look at 2005 and you're looking at growth, if you were to rank order what really is driving 2005 growth in terms of new verticals, continued mySAP upgrades and the small to medium business, how would those three rank in terms of where you are expecting most of the growth to come from for 2005.

Thanks.

That's it.

From the verticals, we expect those verticals which we highlighted as being focus verticals will also in the future contribute more than average to our growth.

We have verticals which are very mature -- for example, in manufacturing.

We have others more in the service industry, which normally should grow more than ever, but that is one area.

But you cannot say vertical or suite.

I think the suite will drive more or less most of the revenue because it's part of all of our vertical solutions.

If you look to the midmarket (indiscernible), we will continue to see about average growth from the midmarket no doubt.

But growth should come more or less from all segments, with midmarket and some verticals growing faster than the rest.

Thanks a lot.

Congratulations.

We have time for one final question, please.

Pacific Crest with Brendan Barnicle.

Thank you.

There have been some comments that were reported about two or three weeks ago that you'd seen a lengthening in the sales cycle.

I never followed up on those comments, but was there any change, as they were indicating in those comments -- I don't think a name was ever attributed; it was just the COO that was attributed.

I don't know if that was you, Leo, or not.

Is there any anything to that and if there is, is there any sector or product where you're seeing this lengthening more than others?

No, we did not see any lengthening of the sales cycle.

There is no real change that is really material.

It's the same pattern, the same behavior in the previous quarters.

And actually, I don't know who reported it, but the numbers or the behavior of what we see in the field doesn't affect that.

I think it was not SAP saying this.

Just an update on the CRM product.

I know 4.0 is set to release or has released.

Any update on the marketing or go-to-market strategy around that, some of the advantages it may have relative to Siebel and some of your other competitors there?

In CRM, from a product point of view, you know that we released this year content release and then the next one next year.

Content release means that focus was mostly not on a lot of functionality but more on usability, analytics, etc.

That shipped -- I think it will definitely improve our competitiveness and (indiscernible) the market will see.

But we have seen a lot of good response from CRM.

But that's normal business (indiscernible) that we ship every year.

And when did that ship?

That shipped this year, we call it a content release, which means not a huge release.

It's focusing, as I said, on (indiscernible), etc.

And then we have next year the 5.0.

And what are you looking to include in 5.0?

Can you repeat this question?

What would you be looking to add into 5.0?

It's a lot of things, mainly, let's say, verticals.

You know that there is some demand from the market to add vertical functionality for some selected industries and this is definitely a focus area.

Another one is enterprise service enablement, so using the functionality and the capabilities of NetWeaver.

These are the two main areas.

Have you been increasing the sales force or marketing efforts around CRM in anticipation of some of these changes?

No, that is not necessary.

I think in the meantime we are that strong in CRM and we are known that it sells more or less together with the other products.

Thank you very much.

Operator?

That does include the question-and-answer session for today.

At this time, Mr. Stefan Gruber, I'd like to turn the conference back over to you for any additional or closing remarks.

I would like to thank everybody for joining us on today's call.

And we look forward to seeing you at the SAP Investor Conference in London on the 10th of November.

Thank you.

Good bye.

That does conclude today's conference call.

We thank you very much for your participation and have a good day.

At this time, everyone may disconnect.