SAP SE (SAP) 2005 Q1 法說會逐字稿

Welcome to SAP's first-quarter results conference call. This call is being recorded. Today's call will be hosted by Henning Kagermann and Werner Brandt. I will now turn the call over to Stefan Gruber. Please go ahead, sir.

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's first-quarter 2005 results. I am joined here in Walldorf by Henning Kagermann and Werner Brandt. Leo Apotheker joins us today by phone.

Before I begin the call I will make a few remarks about forward-looking statements. Werner will discuss the Q1 financials in detail, and Henning will then provide some further in-depth commentary on the quarters' performance and SAP's product successes. 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 anticipates, believe, estimate, expect, forecast, intend, may, plan, project, predict, should and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP 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 SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on form 20-F for 2004 filed with the SEC on March 22, 2005. Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of that date.

Before we begin I would just like to remind everybody of our two upcoming SAPPHIRE events. The first is SAPPHIRE Copenhagen which runs from April 26 to April 28. Our analyst symposium is planned for April 27th. Second is SAPPHIRE Boston, which runs from May 17 through May 19th and our analyst symposium is scheduled for May 18th. With that I would like to turn the call over to Werner.

Thank you, Stephen. And welcome to everybody. We are pleased to announce the most robust set of results for the first quarter of 2005. The strong results are primarily driven by outstanding execution from our sales force. Software revenues were very strong and we continued to make investments in R&D and sales and marketing during the quarter. Software revenues for the first-quarter of 2005 were 434 million, an increase of 17% compared to EUR317 million reported for the first quarter of 2004. At constant currencies software revenues increased 20% year-over-year. Our team did an excellent job of getting deals done with solid performance across all regions. We once again closed a high volume of deals and also saw more larger deals.

In total we signed 1470 contracts, representing an increase of 21% compared to the first quarter of 2004. Much of our success over the past few years and what we believe has been a competitive differentiator has been our ability to successfully increase the volume of deals we closed every quarter. Maintenance revenues for the first quarter of 2005 came in as expected at EUR739 million, an 11% increase compared to the first quarter of 2004. Sequentially maintenance revenues were flat compared to the fourth quarter of 2004, similar to what we saw in the first quarter of 2003 and 2004.

First of all, we had some positive affect in the fourth quarter of 2004 similar to the positive affect in the fourth quarter of the previous year. In addition, as in 2003 and 2004 we carefully reviewed our accounts receivables in regards to collectibility and we have set up allowances for probable concessions and credit to customers.

Our product margin was 83% in the first quarter of 2005 up 1 percentage point compared to the first quarter of 2004, mainly due to lower proportional increase in our support cost. Consulting revenues were up 7% to EUR475 million for the first quarter of 2005 compared to EUR442 million in the first quarter of last year.

Service margins were 19% compared to 22% in the first quarter of 2004. The primary reason for the lower service margin was an increase in third party related cost and a lower margin in the first quarter of 2005 compared to the first quarter of 2004. We expect to get the service margin back to last year's level.

Total revenues for the first quarter were EUR1.7 billion compared to EUR1.6 billion reported in the first quarter of 2004. This was an increase of 11%. At constant currencies total revenues were up 13% year-over-year. Reported operating expenses were 132 million higher year-over-year which represents an increase of 11%. Excluding the currency impact expenses increased by EUR149 million or 12% compared to 2004. On a pro forma basis which excludes stock based compensation and acquisition related charges and excluding the currency impact expenses increased by 12% to EUR141 million compared to 2004. The high expenses were the result of first additional personnel, the number of full-time equivalents increased by more than 3,000 net since the first quarter of 2004; two increase a part usage, and three increase in travel related expenses resulting from greater business activity.

The increase in operating expenses is on target with our previously mentioned commitment to increasing resources in research and development and sales and marketing to fulfill our promise of investing for long-term growth and success. Compared to December 31, 2004 total headcount is up by more than 1000 FTE which is within our expectation of achieving our target of hiring 3000 new employees by the end of the year. Of the total 1000 net added in the first quarter nearly half were hired in research and development and approximately 60% of the R&D headcount increase can from low cost locations.

Operating income was EUR374 million in the first quarter, an increase of 12%. Pro forma operating income, which excludes stock based compensation expenses and acquisition related charges increased 15% to EUR381 million compared to EUR332 million in the last year's first quarter. At constant currencies pro forma operating income increased even more by 18% to EUR391 million. The operating margin for the first quarter increased slightly from 21.4 to 21.6%. The pro forma operating margin which excludes stock based compensation expenses and acquisition related charges was up by around 1 percentage point to 22% in the first quarter.

There are a few onetime items in other nonoperating income and finance income that I would like to mention. In other nonoperating income for the first quarter of 2005, which was EUR15 million we have a onetime effect of plus $25 million or approximately EUR19 million relating to the termination fee that we received from the dissolution of the merger agreement with Retek. This EUR19 million increased that offset by approximately 5 million of direct costs relating to the proposed Retake acquisition.

Finance income for the first quarter of 2004 was unusually high because it is reported on top of interest income again from the sale of marketable securities of 30 (ph) million. In the first quarter of 2005 we generated net interest income of EUR21 million, which was offset by an unrealized gain from the star (ph) hedge and a small amount of write-downs and financial assets. Therefore finance income was only 8 million for the quarter.

Net income rose 11% to EUR254 million for the quarter. Pro forma net income, which again excludes stock based compensation expenses, acquisition related charges and impairment related charges increased 13% to 259 million. EPS for the first quarter was EUR 0.82 compared to EUR 0.74 reported for the first quarter of 2004. Pro forma EPTS which again excludes stock based compensation expenses, acquisition related charges and impairment related charges were EUR 0.84 compared to EUR 0.74 in last year's first quarter.

Our effective tax rate for the quarter was 36%, down from 37% in the first quarter of 2004. For the full year we are still projecting a tax rate of less than 36%. Cash flow from continuing operations for the first quarter was EUR875 million. Capital expenditure were 43 million, leaving free cash flow of 832 million by the end of March.

At the end of the first quarter we had liquid assets totaling EUR4 billion. We plan to use cash for further share buybacks, dividend payments and fill in acquisitions. In the first quarter we bought back 1.2 million shares for a total of EUR149 million. The average price paid per share was EUR120 and EUR 0.53. SAP stock stood at 6 million shares at the end of March 2005. SAP plans to continue to evaluate opportunities to buyback shares in the future. As in the past the Company will conduct all of its share repurchase in the context of applicable laws and regulations especially in a manner that would not materially impact the share price as required under German laws.

Finally, as you are aware, the SEC has extended the deadline to 2006 for adopting rule SFAS 123R for accounting for stock based compensation. As a result we plan to implement SFAS 123R beginning January 1, 2006. We had previously planned to adopt the new rule beginning in the third quarter of 2005. Due to the adoption of SFAS 123R in 2006 there will be no additional compensation expense in the Company's consolidated financial statements for this fiscal year 2005.

Therefore the previously indicated additional expense of approximately 70 million for fiscal year 2005 will not occur. I would now like to pass the call over to Henning.

Thank you, Werner. Ladies and gentlemen, there has been a lot of noise in the software sector recently but we are going to let our results speak for themselves. As Werner indicated SAP had a very strong start to 2005 as a result of excellent execution. Volumes are growing and the pipeline remains healthy. For many quarters now we have continued to distance ourselves from our competitors and the first quarter of 2005 was no different. While many other software companies reported negative growth and softer revenues for the first quarter, SAP reported a strong increase. It is not the first time this has occurred in the past year.

If you look at our first quarter software revenues on a U.S. dollar basis we were up 24% year-over-year while the rest of the market was down 9%. For total revenues on a U.S. dollar basis we were up 18% while the rest of the market was up only 1%. This represents a significant divergence of performance between SAP and the rest of the group. Now let's take a look at peer group share measured in software revenues on a rolling four quarter basis against our next three largest competitors, Oracle, Microsoft and Siebel.

On a worldwide basis we grew our peer group share by 3 percentage points in the first quarter of 2005 compared to the fourth quarter of 2004. Our peer group shares stood at 58% while the next largest competitor was at 22%. In the U.S. we also grew our share substantially against the same three competitors, and we are by far the number one provider of business applications in the U.S. Our share against our peer group was 41% at the end of the first quarter. This represents an increase of 3 percentage points compared to the fourth quarter of 2004.

The next largest competitor in the U.S. had a share of only 32%. In CRM we gained 3 percentage points of share against our competitors. Our peer group share was 49% compared to the second largest competitor at 28%. We are winning in business applications, and we have been doing so for many quarters now. Some of the things we believe we are doing successfully. We are growing deal volume every quarter. This has been the key to our success. The good percentage of the large deals that are in the market are coming to SAP because customers that are investing strategically in software want a software partner with a clear vision and one that will continue to innovate to help customers grow their business.

SAP is continuing to invest for the future while others have reduced investments. We are also investing wisely spending money on less expensive and more efficient organic growth and through smart and smaller acquisitions. We have a clear and defined roadmap for the future of our software investments while others face a long and complex task of fusing together (indiscernible) to standard code bases. We continue to build and arm (ph) an extended functionality and technology of our product portfolio through internal development, co-innovation with partners and by making smart acquisitions. We continue to deliver best in class solutions that include the broadest and deepest industry vertical expertise, and the broadest integrated product portfolio that comprises an integrated aptly structured platform. Nobody else in the business applications space is delivering such robust product and technology portfolio. Customers are spending with SAP because customers want to spend intelligently with software vendors that can deliver the right solutions and lead them into the next decade.

We continue to see a healthy mix of business from new and existing customers. For the first quarter business with new customers was 25% of order entry compared to 33% in the first quarter 2004. However, as we are continuing to see a greater number of deals from new customers coming from the mid market which by nature constitutes smaller deal sizes, it is more beneficial to look at new customers from the perspective of the number of contracts signed rather than order entry. With this in mind the percentage of new customers based on the number of contracts signed were 36% in the first quarter of 2005 compared to 32% in the first quarter of 2004. As Werner mentioned earlier, we did see a few more larger deals this past quarter, but there was no single large deal that stood out.

Moreover, we do not expect to see a continued increase in large deals over the remainder of the year. Deals greater than EUR5 million accounted for 24% of order entry, compared to 19% last year. Deals less than EUR1 million accounted for 40% of order entry compared to 48% in the first quarter of last year. While this is a great beginning we remain realistic about IT spending and economic softness for the rest of the year. And the pricing environment remains difficult. As a result we would not look at the strong first quarter as an indication for software revenues and operating margins to grow more than what we had already guided for and generate. Therefore we are maintaining our outlook for 2005. To reiterate, we expect to achieve an increase in software revenues in a range of 10% to 12% compared to 2004, and to improve pro forma operating margins in the range of zero to 1/2 percentage point. Pro forma earnings per share for 2005 will be in the range of euro 4.70 to euro 4.80 per share. This outlook is based on an assumed U.S. dollar to euro exchange rate of $1.30 per euro.

We did very well regionally in the first quarter as all regions reported strong growth. Softer revenues in EMEA went up 9% with solid growth coming from the UK. Softer revenues in Germany were down 2%, but this is not unusual for Germany in the first quarter. Germany usually begins the year slowly and then performs better as the year progresses. For 2005 we continue to expect to outpace the market in Europe. Key contact wins in the EMEA region included Carlsberg Danmark, the National Office of Electricity in France and the Land and Agricultural Bank in South Africa.

In the Americas region the U.S. turned in another strong performance growing 35% at constant currencies. This is impressive considering that it was a tough competition against the first quarter of 2004 where the U.S. grew 65% at constant currencies. U.S. will continue to be the growth driver for SAP in 2005. Key contract wins in the Americas region included Briggs and Stratton Corporation, Samsonite Corporation and the Timken Company.

The Asia-Pacific region performed strongly with softer revenues increasing 45% at constant currencies. We saw very good performances from Australia, New Zealand, Singapore, China and India. SCM (ph) was also strong in this region as we added over 200 new names in the first quarter. My SAP (indiscernible) also sold well. Softer revenues in Japan grew 9% at constant currency and we continued to perform much better in Japan than our competitors. However, Japan remains a very tough market with a very difficult selling environment, and we expect Japan's results to be somewhat volatile through the remainder of the year. Key contract wins in this region included Department of Defense in Australia, Kirin Beverage Corporation and Tokyo Metro Corporation.

From a solutions perspective CRM, ERP and SCM continue to see strong growth. We reported EUR86 million in CRM revenues for the first quarter, which was an increase of 21% compared to the first quarter of last year. ERP revenues grew 12% year-over-year and represented 40% of software revenues. SCM revenues were EUR88 million, which was an increase of 9% compared to the first quarter of last year.

For SAP NetWeaver, 2004 was a year of putting together a strong that list of reference customers, and we succeeded with 1500. 2005 will be the year that we begin seeing an increase in NetWeaver revenues. In the first quarter of 2005 software revenues related to SAP NetWeaver and other related products were EUR26 million. NetWeaver is not only an enabler of business application revenues, but also a revenue contributor as more and more customers adopt NetWeaver as the integration and application platform for the entire (inaudible).

One of the important developments of the past quarter was the acquisition of TomorrowNow, an experienced third party provider of enterprise maintenance and support for customers of PeopleSoft and J.D. Edwards. We instituted the safe passage program for customers that want SAP along with PeopleSoft and PDE solutions and then extended the program to also include customers not running SAP solutions. This program demonstrates our commitment to doing what is best for the customer, providing them with a secure long-term partner and one with a clear and defined roadmap for the future of their software investments. We have already signed contracts with customers as a result of this program, and are in dialogue with many others. Samsonite is one example of a safe passage program customer that we signed in the first quarter.

Our SMB segment has also continued its outstanding performance. Our goal for 2005 is to build on the success by continuing to grow the partner channel and increasing the number of SMB deals. At the end of the first quarter and on a rolling four quarter basis SMB represented 30% of order entry. We believe that our SMB business is much larger than the SMB business of our competitors. Let me provide you some first-quarter statistics on SMB customers and partners. About 6000 CRM all in one and about 6000 business one customers, about 550 all-in-one and about 850 business one partners. These numbers represent significant year-over-year growth. SAP continues to lead the industry in developing innovative products that not only meet, but anticipate the future needs of our customers. As we announced last month at CBIT (ph)the latest version of mySAP ERP was shipped to customers worldwide a full month ahead of schedule. This new version takes full advantage of the net (indiscernible) platform. Adoption is extremely strong, coming from existing customers as well as new and mid market companies.

In the first quarter we signed more than 300 mySAP ERP contracts, and we have received positive feedback from such customers as T-Mobile. Customer needs are changing and needs have evolved from efficiency requirements to business improvements. In large measure, SAP built the "applistructure" and we are excited about leading it into the next phase. With SAP NetWeaver evolving into our business process platform we are leading the future of IT. Our platform makes companies more competitive, adoptable, responsive and innovative, and at the same time lowers development costs and integrates disparate systems. Our platform is the most open platform in the industry. In fact, SAP NetWeaver is the only platform that supports Java and (indiscernible) and offers interoperability with net (indiscernible) and (indiscernible) net while running on multiple databases. In this way customers' investments are protected while providing a choice to customers and partners.

With mySAP NetWeaver generally available our next step for 2005 is the completion of our roadmap for an enterprise services architecture. It's (indiscernible) that all industry solutions and the entire business suite is running on NetWeaver. We will evolve NetWeaver from a composition platform to a business process platform, and we will make it available to selected ISVs (ph) in 2005. In 2006 we will make the business process platform generally available to ISVs and our all-in-one solution will be the first of our products available on this platform.

Finally in 2007 the entire business suite and all industry solutions will be on the business process platform and the enterprise services architecture old (ph) net will be completed. We believe we are the only company with a very defined roadmap to a services oriented event driven architecture and this provides us with a strong competitive advantage. So we are off to a great start for the year, and we are very focused on innovating and on customer satisfaction. We are investing and we are partnering with customers to get the most out of their software investments. And with that we will be happy to take your questions.

(OPERATOR INSTRUCTIONS) John Searick (ph) of J.P. Morgan.

Henning, if you could for a second, you talked a little bit about the shift towards the "applistructure" platform. I was wondering if you can help us understand as you present this vision to customers and clearly it is having an impact on the market, but maybe just help us understand how they view this offering relative to the competition and how much of an affect that you think it is having now versus maybe 6 to 12 months down the road.

And then maybe secondly I don't know if Leo is on the line, but could you maybe talk a little bit about Europe? I know the results were good there, but help us understand what is happening in the market. There has been a lot of concern about Europe and clearly the business came looked very well. A lot of other companies are struggling. Is there something particular to what you are doing that is really resounding in the customers? Do you think there is at all any issue in the market or maybe is it just attributable to a lot of share shift?

Well, I will start with the SAP structure. The feedback from customers but in particular also from partners is extremely positive. You will see a lot of positive announcements around our next two SAPPHIREs. Indeed, both SAPPHIREs are more or less completely around our enterprise services architecture, and we will again use this opportunity to make very clear to the audience that implementing an SE "applistructure" which we called business process platform is the only way to go. I have seen in talks more and more customers and also more partners being convinced that this is indeed the right definition. I strongly believe that in the future if you want to bring net services to the enterprise, not only about defining services. It's about guaranteeing that you can execute those services under clear performance and stability conditions.

And therefore you have to bring something like an "applistructure" to the market which is providing executable services. I think this is an argument nearly everybody can follow and what I also have seen with people like SAP's approach to being open to the underlying technology layers so that we can run the different data basis, different rating systems and giving customers choice here to get the best out of this infrastructure. I would agree with you it will take definitely also some time that the idea is completely within our customer base and I see even more impact later. And with that Leo, maybe you can go through Europe.

Maybe a few additional points on Europe. I think it is a combination of many things. Some of them that Bear Stearns requests some time ago, for example the shift towards much more volume businesses and we anticipated very well. That we would see a much higher volume of smaller deals, and therefore we needed to realign ourselves. And as you know we have taken a number of steps in the organizations in Europe to adjust to this. SMB business in Europe has been steadily picking up as well. And I guess it is also of course the offering that we provide to customers. We have a very strong installed base in Europe, and we have a strong reputation in which to move towards getting people to understand what the "applistructure" actually can do for them. I think that all of these factors have combined together with good execution to start to deliver some growth. You will remember that we actually said in the beginning of the year that we believed that we would start to see some of this, some of the growth again in Europe in the beginning of the quarter and the market did not disappoint us.

Having already mentioned a few things about UK, we saw good growth there. Fortunately we also saw good growth in many other of the larger European markets, and we are now gradually adjusting the final part of our organization among them in France now where we have made a management change so that we have fixed the business. We can take it to the next level of growth. So altogether I think we are in reasonably good shape in Europe. I do want to caution everyone though the environment is very tough in Europe and the economic situation is what it is. And there isn't any material way of light for the next months or quarters in Europe but I think we will continue to execute better than the market also going forward.

Did you think at the end of the quarter was there anything that would indicate things have gotten worse? I know you said they haven't gotten better but a lot of companies would imply that things have gotten worse. Is that your experience?

We did not in experience (indiscernible) for others. We have a very strong management of our pipeline. We have a good control of our business. And we didn't notice any of these phenomena that others have talked about.

Great. Thanks a lot.

Charlie DiBona of Sanford Bernstein.

Thank you. I wanted to drill down a little bit on NetWeaver and Werner especially now that you are breaking out the revenues for NetWeaver, can you give us an idea of how much of that revenue is NetWeaver stand-alone versus an allocation from a mySAP implementation? And maybe some idea in it a sort of generic mySAP implementation what the attribution to NetWeaver versus the application is? And then Henning if you could also follow-up with the same question I think everyone always asks about the progress on the development of the NetWeaver platform areas that now that you are really rolling up your sleeves and getting in there, where you see a need or where you have been happy with the progress or what the focus is for the next 6 to 12 months of development.

Maybe I can also answer the first one. It is no allocation, I think what we reported its definitely the standalone NetWeaver revenue and we promised last year to do so. It makes no sense to let's say apply an artificial allocation to our application. You can do it yourself if you feel it is worth 20%, 25 or 50 it is up to you to calculate what it really is. But this is pure standalone. From a development side we are on track, and I am happy how it is going. It is very predictable, very stable. You know that we are developing the business process platform with two teams. We continue with the NetWeaver team to have no disruptions there, and we are developing the enterprise services so the application (indiscernible) provides the enterprise services in a separate team relying on the highly experienced developer we have here in SAP. I think that is key for our success that in particular definition and the design and the implementation of the enterprise services is done from people who have broad experience did it already once in their life otherwise you can make a lot of mistakes.

Therefore this is a (indiscernible) team out of many hundreds of (inaudible) people of SAP. So therefore both teams make good progress and putting both together at the end is not an issue. If you look to our new organization it is just made for this once the application platform is (indiscernible) it is becoming a product, it is then combined in the business process platform under (indiscernible). And as you know, let's say in 2005 now we bring all our suite solutions on NetWeaver that shows you also how confident we are about stability and the next release of NetWeaver is then already the business process platform. This is 2007. So therefore after shipping in 2006 as a standalone product we can then 2007 ship the complete suite and all industry solutions on this platform. So here I would say we are well on the way and also I have to add I am pleased with the progress we are making with (inaudible) with our two partner products for Microsoft and IBM.

Ross MacMillan of Morgan Stanley.

Henning, just one for you. You mentioned that there were some large deals in the first quarter but you didn't expect the number of large deals to increase. Does that reflect the pipeline that you see from a large deal perspective, or does it reflect a more kind of cautionary tone on large deals? And if they did get closed that could potentially be an upside. I am trying to understand if the comments related to pipeline or whether it is related to the way that you are thinking about setting the guidance for the year.

That was based on statistics. Every quarter you look to your figures, and indeed for the last half, nearly 6 quarters average deal size is more or less stable not improving, plus minus 3, 4 percentage points, very stable. So whenever we saw a few more larger deals might be a few less larger deals; this has not really had an impact on the average deal size and this is more or less what we want to bring across -- it seems to be that it is not getting worse. The deal size is stabilized. You know that at the beginning of 2004 we had a different situation, but because as Leo indicated, the environment is tough particularly the pricing environment. What you see SAP's growth is volume and stable, (indiscernible) deal size. So because this is know for six quarters I think we should not be overoptimistic and believe now all of a sudden the average deal size goes up. So our prediction and our assumption is we have a stable average deal size, what we have seen in the last year and that we make our growth through volume.

One comment, to add if we make a statement about contracts and deal sizes based on order entry and their revenue recognition is completely different, we often have cases, we have large deals in a given quarter but this does not turn out, turns into a recognizable revenue in the same quarter. So this has then to be stretched over several quarters.

Great. Thank you, maybe just one follow-up just on pricing. I think Henning you had been suggesting that things were stabilizing; in other words, not getting any worse over the last few quarters. Is there anything out there that would suggest some deterioration again of the margin or do you think that we are still in the status quo?

No, I think it is a kind of status quo, but might be Leo is a better person to answer this because he is the day to day (inaudible).

Thank you. Actually what the numbers show is that status quo has a tendency to worsen, I would say. It is very tough out there; some less successful software companies are trying to do some desperate things on the pricing side that has some effects on our levels. You know that we have a reasonably tough policy on this but we do have to act intelligently as well. So it is stable, but I would like to caution everyone it's probably has a tendency to worsen a little bit.

Thank you.

Rick Sherlund, Goldman Sachs.

I guess I am trying to reconcile the really terrific first quarter performance with the kind of cautious comments about the environment and going forward. And it is always probably wise to be cautious and give cautious guidance than stuck trying to reconcile how did you do so well in Q1? Environment is soft, pricing still kind of awkward out there. Is it just that you did really well, executed really well but don't count on it going forward? I am trying to struggle to reconcile how you could do so well but still be kind of fairly cautious going forward.

Maybe I can talk about Q1 and I am sure Henning will give you a better visibility going forward. Q1 we really executed extremely well, and we executed extremely well across the entire operation. So we executed well in all of the regions and all of the segments at the SMB channel for example is a very good indicator for that. And we did all of this in face of quite some turmoil in the market so that is a very positive thing. I think from an operational point of view we have our situation well under control if you compare that to what others have announced at the end of the quarter, we did not see these phenomena's. On the other hand we are not completely insulated from the general economic environment either. So that is maybe a little bit of an indication for Q1. I'm sure Henning can give you much more insight into the future.

Rick, I think if you look from outside what you see is the performance of SAP compared to the market, and indeed it is very, very strong. If you look from inside I have to say that the quarter more or less was in line with our expectations, and we see a strong momentum we have in particular around enterprise service architecture in NetWeaver. But as I said, the environment is tough and its according to expectations that is just the reason why we have not taken these now as an indication let's say to change our guidance.

I guess to be specific is there any change in how the pipeline looks, any degradation in whether it is deal flow or pipeline?

Still very healthy, but we had at least debates about deal size etc. and I think as long as the deal size stays where it is you know it is really a strong performance (indiscernible) to bring in every quarter that many new deals, what they did in the last year and with us I think we will do this year as well.

And just lastly, any comment you can make on PeopleSoft customers, your attraction in terms of either converting or attracting them over to the safe passage program.

You know that these customers don't want to be named therefore we couldn't give you only one name but we have more deals we signed with this program, but which is more important than particular (indiscernible) team is that there are many, many discussions going on. Also in particular with clients which are longer-term clients with SAP so what we expect is more a mix to long-term program, it was intended from the beginning like this. But up to now I think that at least what we are seeing is getting traction and it was definitely the right thing to do.

Thank you.

Ariel (indiscernible) ABN Amro.

Good afternoon, two questions really, the first one is I was wondering what type of metrics you would be looking at in order to get slightly more positive about a future. Is it mainly deal size that is used as a key metrics or is it you know, client behavior or the success of your new products? And then secondly, I was thinking if the environment was to improve slightly compared to your expectations would you have room to accelerate to and further (indiscernible) in the future?

If something changes that was your question in the metrics, we are playing around with in particular is the pricing environment would be more stable. If deal size would go up etc. I agree with you this is an upside, SAP has all the time on top of what we are always delivering. On the other side please have in mind if you look to the rest of the market what the market is producing then there is a bigger gap already between our (indiscernible) and that of the market. And seeing this I think it is wise as a Company not to believe the environment is already a nice and a cozy one. Otherwise I think the rest of the market would perform better. But if this market gets better and the others show growth as well as SAP has a lot of upside potential.

And relating to the new products are you planning to speak to the product roadmap or do you have any flexibility there?

No, from the product roadmap we are on track SMBs and it is clear that if you announce new products you have to first of all bring them to market, and you have to look to the ramp up and let's say you get additional revenue. You know our long-term ambition and we said it recently that we expect in five years from now in 2010 that 50% and more of our software revenue comes from the new product. I think this is very ambitious and tells you why SAP is investing into the product and that we are really innovating. And I think it is the right way to invest here instead of giving millions for investments for other companies (indiscernible) to do it in organization owned product. But you have seen the roadmap, as I said we are on track and this is more or less our ambition behind it.

Mark Gale of Citigroup.

Henning, you sort of touched on the fact that as you moved to the SAP and ultimately the business prices platform the development capabilities become enhanced. Can you talk a little bit about how you would look at that R&D function in terms of what level of improvement in productivity would you expect to get from your developers, or would you look at a change in the level of R&D that you would want to commit going forward?

That is a good question, and in midterm we expect that we need less developed parts for the same output. That is one of the reasons why we are investing into this infrastructure. So our plans are, as we indicated we will ramp up developments this year. We have to because of our roadmap and our opportunities and momentum. You will see that we will add less development next year, and I think we have enough developers here that we can now leverage the efficiency gains we get because once the business process platform is there and this is more or less the tipping point is next year, then we get efficiency improvements also internally within SAP, and this is let's say to point in time where we in our three year plans could not ramp up R&D any longer. So as we indicated beginning of the year market is as I would say one year to 18 months affect and then you could see leverage from R&D.

Is there any way to quantify at this stage the level of leverage, is it 10% productivity improvement, 20% productivity improvement?

From a productivity improvement that will depend then on our product portfolio. So what I can say now is that we can let's say get more out with less. What I can say today is what will SAP develop? So now we have a product roadmap but on the other side if you look to the traction we get from partners who (indiscernible) that wants to use then the business process platform to do something themselves, it could be a real net exclusive that we get more opportunities than let's say if SAP decide if we take this opportunity. So please don't just start automatically to reduce R&D year-over-year. So we will get efficiency gains but on the other side we have to look if there are more opportunities which would mean that we would invest in even more newer products. But this is something we will guide you early enough. But as I said, I expect that the 10% efficiency gain is easily possible.

Thank you.

Brent Thill of Prudential.

Henning, last year you outlined a number of verticals (indiscernible) that you were focused on that you felt were underpenetrated. Maybe you can give us an update for this year in terms of where you think the most greenfield opportunity is and from the vertical side.

It is still the same, that has not changed. We highlighted these public sector and financial services. They had a not too strong start into the year but that has nothing to do with performance. I think in industries you always have to look to the full year because you know how it is in public sector you start at the beginning of the year, if we are lucky you get to (indiscernible) at the end. Retek was one, and retail what is very good and I was very pleased that in particular retail was extremely strong without Retek. So this was from the focus vertical the strongest one. So that tells us that we are here having the right strategy and we have the right traction in the market but we have not added new ones. These are the four ones we want to focus, they have the biggest potential and we keep focus.

Leo had commented about some of your competitors acting desperate on pricing. It would seem considering your success that some of those competitors may get even more desperate as you're trying to attack their installed base. Maybe just give us a sense of how you will react to that if it would come out over the next six months?

I guess we will react in the same way that we have reacted up until now. We will continue to focus on delivering customer value, and that is our primary focus. I think that is the key to our success. And we believe that if we demonstrate to our customers and our prospects that we have value then we can also offer reasonable price point. That doesn't mean that we won't have to do here or there a strategic concession of this or the other kind in order to win that business but we won't be dragged into an absurd situation where prices become totally meaningless.

Matthew Hammond of Credit Suisse First Boston.

Thank you I have two very quick questions. First the service gross margin you made some brief comments that said you expected it to return to more normal level. Can you just give us a feeling as to how quickly that is going to come about and what is going to drive that? And secondly, on your hiring plans for this year you talked about 3000 heads. Is that still the target, or given how strong the first quarter is might you accelerate and maybe look to increase that target?

With regard to the service margin I think we want to come back first to the level of last year it was 22%, and then we see, I mentioned at the beginning of the year that our ultimate target is to bring it back to 25% but not necessarily this year.

Let me comment on the hiring. First, let's look back to last year. I think last year we had a, if you remember, fundamentally different situation when we started going into 2004. It was about shifting the Company from growth and profitability to profitable growth. And made this announcement and guidance of 10% and some people believe this is extremely optimistic. But finally we delivered on it. But because that was just at the turning point from, as I said from looking to the margin only to coming back to growth again, it was obvious that the support of SAP had to get some confidence in this strategy. So we did see investments more back end loaded, what you have seen last year. I would say this year is a completely different situation. We have proven last year that this is the right strategy. We talked about the momentum we have around applistructure, and we have a clear three-year vision of what we want to bring to our clients. And if you look to the marketshare wins, you will see this is a winning strategy so it would be wrong this year to apply the same strategy. And therefore we indicated to you at the beginning of the year that we want to invest, and we did it. And it was 1000 in the first quarter. So it was not exactly 3000 divided by 4, which tells you that 3000 is a rough figure and it doesn't mean that the Board is looking to this figure as being set in stone. We will see how the year evolves, but 1000 was as I said according to plan like the rest of the quarter.

We have time for one final question please.

Kenneth Willer of HVB Group. (ph)

Just coming back to the Analytix development you indicated earlier this year that you see a convergence of transaction analytical and collaborated apps, can you give us an update where you are in this processing and what we should expect from you still going forward in '05? Thanks.

Yes, you can expect some announcement, I would say significant announcement throughout these top (indiscernible) SAPPHIRE. So we're working on it, and we will make announcement at SAPPHIRE.

Thanks. That keeps me curious.

Thank you, that closes today's SAP Q1 conference call. We look forward to seeing all of you at the upcoming SAPPHIRE conferences in Copenhagen and Boston. Thank you, and goodbye.