SAP SE (SAP) 2005 Q3 法說會逐字稿

Welcome to today's SAP third-quarter results conference call. Please note that 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 Stefan Gruber. Please go ahead, sir.

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us today to discuss SAP's third-quarter 2005 results. I'm joined here in Walldorf by Henning Kagermann and Werner Brandt. Leo Apotheker joins us by phone. Werner will discuss the Q3 financials in detail and then Henning will provide some further in-depth commentary on the quarter's performance and SAP's product successes.

Before we start with the call, I would like to remind everybody about our upcoming investor symposium that will be held on the 9th of November at our America's headquarters in the Newtown Square, Pennsylvania just outside of Philadelphia. We will be sending out invitations for this event later this week.

In addition, I will make a few remarks about forward-looking statements. 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 anticipate, 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 SEC, 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 their data.

And now I would like to turn the call over to Werner:

Thank you, Stefan and welcome to everybody. We posted strong third-quarter software revenues mainly driven by the talent and drive of our global sales team under the leadership of Leo. During the quarter, our focus remained on driving technological innovation to further investment in R&D as well as accelerating our ability to deliver value to customers through added on-ground resources. Software revenues for the third quarter of 2005 were EUR590 million, an increase of 20% compared to 491 million for the third quarter of 2004.

On a constant currency basis, software revenues were up 19% year-over-year. Our focus remained on closing a greater number of deals and we continued to succeed in that regard. Since the third quarter of 2003 when we began our initiative to significantly increase deal volume, we have succeeded in growing the number of deals on a year-over-year basis in most quarters by more than 20%. For the third quarter, it was no different with the number of deals signed increasing by 29% compared to the third quarter of last year.

Maintenance revenues of EUR802 million, which was an increase of 11% compared to the third quarter of 2004, were in line with our expectations. Consulting revenues were EUR519 million for the third quarter of 2005 compared to 482 million in the third quarter last year. Service margins were 23% this past quarter compared to 22% in the third quarter of 2004. As we have always stated, our main goal in services is not top-line growth but rather driving efficiency to keep the margin as high as possible. After a drop in the service margins in the first quarter of this year, we have been able to maintain about 23% service margins over the past two quarters. However, our service margins are still below our expectations but more on that later. Our goal is to get service margins back to the 25% range and maintain that level.

Total revenue for the third quarter were EUR2 billion compared to 1.8 billion reported for the third quarter of 2004. This was an increase of 13%. At constant currencies, total revenue increased 13% year-over-year. Reported operating expenses were 182 million higher year-over-year, which represents an increase of 14%. Excluding the accounts impact, expenses increased 169 million or 13% compared to 2004. On a pro forma basis, which excludes stock-based compensation expenses and acquisition-related charges and excluding the currency impact, expenses increased 181 million or 14% compared to 2004.

The reasons behind the higher operating expenses include additional personnel. We had over 3400 FTEs since the third quarter of last year, increased third-party usage, which reflectively levered on a short-term basis, an increase in travel expenses resulting from greater business activity and higher sales and marketing expenses. So taking the last three points together, you can see that the increase is mainly on the variable side.

Operating income was EUR570 million in the third quarter representing an increase of 12% compared to the same period last year. Pro forma operating income, which excludes stock-based compensation expenses and acquisition-related charges, was 520 million, an increase of 9% compared to last year's third quarter. The operating margin for the third quarter was down by 30 basis points to 25.7%. The pro forma operating margin, which again excludes stock-based compensation expenses and acquisition-related charges, was down 90 basis points to 25.8% for the third quarter.

The decrease in the third-quarter pro forma operating margin is the result of the following factors. First, accelerated investment in R&D to build the business process platform. Second, increased investment in marketing, sales and general building. Henning will elaborate more on these two items later. One of the reasons behind the decrease in the third-quarter pro forma operating margin was due to consulting margins coming in below our expectations. This was mainly due to a lower than anticipated utilization, which we will address without impacting our partners. We continue to monitor the situation and will take the necessary steps to improve the service margin.

Additionally, due to higher than normal 2004 fourth-quarter consulting revenues, we would not expect much of a year-over-year change in consulting revenues for the fourth quarter of this year. Net income rose 15% to EUR334 million in Q3. Pro forma net income, which excludes again stock-based compensation expenses, acquisition-related charges and impairment-related charges, increased 12% to EUR337 million. Earnings per share for the third quarter was EUR1.08 compared to EUR0.94, in the third quarter of 2004. In pro forma EPS, which excludes stock-based compensation expenses, acquisition-related charges and impairment-related charges, was EUR1.09 compared to EUR0.97 in Q3 of 2004.

Our effective tax rate for the quarter was 35% compared to 37% in the third quarter of last year. For the full year, we continue to project a tax rate of roughly 35.5%. Cash flow from continuing operations for the nine-month period was EUR1 billion. Capital expenditure was 183 million leading free cash flow of EUR832 million for the first nine months of 2005. This compares to free cash flow of EUR1.2 billion for the first nine months of 2004. The year-over-year decrease in free cash flow is the result of year-over-year change in working capital in the first six months of 2005 that was mentioned last quarter.

The free cash flow generated was used in the following way. First, returned to shareholders with dividends and through share buybacks in the amount of 687 million. Second, investment in debt securities included in financial assets amounting to EUR420 million. Consequently, we had liquid assets totaling 3.1 billion at the end of the third quarter of 2005 compared to EUR3.2 billion at the end of 2004. We continue to plan to use cash for further share buybacks, dividend payments and fill-in acquisitions.

At the end of the third quarter, total headcount stood at 35,022 full-time equivalents. Year-to-date, headcount has increased by 2817 FTEs. We are still targeting to hire 4500 FTEs net for 2005. (technical difficulty) 927 FTEs hired in the third quarter. Just over 50% were in R&D and of the total R&D, just over 60% were hired in low-cost areas. For the first nine months, we bought back 2.8 million shares for a total of EUR374 million. The average share price per share was EUR127.07. Treasury stocks stood at 6.7 million shares at the end of September. SAP plans to continue to evaluate opportunities to buybacs shares in the future. As in the past, the company will conduct all of its share repurchases in accordance with applicable laws and regulations especially in a manner that should not materially impact the share price as required under German law.

Days sales outstanding stood at 68 days at the end of Q3 of 2005, which was a decrease of five days compared to Q3 '04. One DSO reduction equates to approximately 20 million to 25 million in free cash flow and provides us the opportunity to continually improve cash collections quarter-over-quarter.

Let me now finish up with our outlook for 2005. We changed our guidance for software revenue growth and we now expect software revenues to increase in the range of 12 to 14% for 2005. This is up from our previous guidance of 10 to 12% growth for 2005. As indicated, at the half year, we continued to see slightly less seasonality. We have not changed our guidance for the pro forma operating margin but we have increased our guidance for pro forma (technical difficulty) earnings per share. The pro forma operating margin is still expected to be in the range of zero to a half of a percentage point (technical difficulty) and pro forma earnings per share for 2005 is now expected to be in the range of EUR4.85 to EURO4.95.

Previously we had expected pro forma earnings per share to be in the range of EUR4.70 to EUR4.80. We also changed our assumptions for the 2005 U.S. dollar to euro exchange rate to $1.25 per EUR1. Previously we assumed an exchange rate of $1.30 to EUR1. I would now like to pass it over to Henning.

Thank you, Werner and good morning or good afternoon, everyone and thanks for joining us today. It was a great quarter for SAP as we have had the best Q3 on record for software revenues. On a U.S. dollar basis, we outperformed the rest of the software market as we grew software revenues at 17% while the rest of the market was down 3%. In the meantime, we continue to extend our share with our peer group, which we consider to be Oracle, Microsoft Business Solutions and Siebel. In U.S. dollars on a rolling four-quarter basis, our share was 60% at the end of the third quarter. This represents an increase of two percentage points since the second quarter of 2005 and five percentage points year-over-year.

Our next largest competitor has just 20% peer group share. Against this same competitor, on a U.S. dollar basis, our third-quarter license revenues were larger than their total license revenues in the past quarter. In the U.S., which as you know, it is a very important market for SAP. Our share against our peer group was 44% at the end of the third quarter of 2005. This represents a gain of three percentage points compared to the second quarter of 2005 and eight percentage points year-over-year.

Our next largest competitor has just 30% peer group share in the US. Our application license revenues in the US alone were nearly twice the amount of this same competitor's worldwide application license revenue in the past quarter. The strong reason that we have continued to report in the manner in which we have distanced ourselves against our peers in terms of marketshare gains and customer mind share are certainly not a coincidence. There are reasons why we are winning and I would like to touch on some of them.

SAP accelerated its investments to create opportunities for the future. But unlike others, we are investing wisely, spending money on less expensive and more efficient organic growth and through core innovation and smart acquisitions. Our strategic investments will help us (technical difficulty) our addressable market, which we see growing to EUR70 billion by 2010. We continue to deliver best in class solutions that includes the broadest and deepest industry vertical expertise and the broadest integrated product portfolio built on a services-oriented architecture.

Furthermore, we are actively engaging with partners to forego (ph) innovation and have already made significant announcements around the buildup of our enterprise service architecture ecosystem. Global technology items like LHT, Network Appliance, Dolby, Cisco, EMC, Intel and Microsoft, amongst others, will license SAP's enterprise service architecture. Nobody else in the business application space has made such advancements around application platform or their partner ecosystem. This provides us strong first mover advantage.

We have a clear and defined roadmap for the future of our software investments while others (indiscernible) a long and complex part of fusing together several disparate code phases. Customers are willing to spend but they want to spend intelligently with reliable software vendors that can deliver the right solutions and lead them into the next decade with the least amount of risk. SAP seems to be that chosen vendor.

With that in mind, let me now touch on some metrics for the quarter. The share of new customers based on order entry was 24% for the third quarter. As we continue to further penetrate the midmarket, smaller deal sizes are a natural outcome and therefore it is also important to look at the number of contracts with new customers, which was 35 (technical difficulty). Not unexpectedly, the average deal size declined in the third quarter of 2005 compared to the same quarter last year as we're seeing smaller deals resulting from our midmarket focus and customers continuing to buy in smaller increments as software has become more modular. This is in line with what we saw in the second quarter.

Deals greater than EUR5 million accounted for 24% of order entry in the third quarter, down from 31% in the third quarter last year. While deals less than EUR1 million accounted for 42% of order entry, up from 38% in the third quarter last year. We were one of the first to recognize this fundamental shift in deal sizes many quarters ago and we have successfully countered this by increasing the number of deals we close each quarter.

As Werner mentioned earlier, the number of deals signed were up 29% in the third quarter compared to last year. Let me now expand a little on the 2005 outlook that Werner discussed. What we have seen is that the market environment has definitely changed. As a result, we saw a need to accelerate investment in R&D for our business process platform and in sales and marketing.

First, the platform. The additional investment has allowed us to successfully rule out entire mySAP business suite and all of our (technical difficulty) solutions on SAP NetWeaver as planned. But in addition, the suite and industry solutions are also services-enabled with more than 500 enterprise services. We are the first in the industry to deliver such a robust services-enabled business suite of applications and industry solutions that are ready to be leveraged by more than 500 ISVs that are already certified to begin composing solutions on our platform. These are extraordinary accomplishments that are unmatched in our industry plus we remain on track to complete our enterprise service architecture (indiscernible) in 2007.

Second, we increased sales, marketing and channel investments to drive new business and expand our reach among our current installed base, which results in a slight contraction of our operating margin. It is important for us to keep enough resources in place so that we can continue to win customers. It is so critical that we have accelerated investment. This gives us significant first mover advantage for our product, allows us to continue to win customers and more importantly, continue to gain marketshare to fuel our growth that we expect will ultimately pay off in the future in both top and bottom line performance.

We are convinced that our organic growth strategy is the right approach. Looking at the last nine months, we achieved a five percentage point increase in marketshare by investing an additional $50 million U.S. in R&D. Compare this to a strategy of buying marketshare. Buying 1% foreign marketshare costs approximately $1 billion U.S. Furthermore, we do not have the enormous cost flexibility and risk of stitching together many disparate code phases.

Let me now cover our (technical difficulty) performance. Once again we reported (technical difficulty) in our regions. (technical difficulty) news in EMEA (technical difficulty) constant currencies but the environment remains tough. While we have seen good growth in emerging markets as well as some of our stronger countries within EMEA like the U.K., still other countries are not performing nearly as well. As we expected, software revenues in Germany were back on track in the third quarter increasing by 12%.

Key contract wins in this region included Allianz, Ministry of Defense in the Netherlands (technical difficulty) Lloyd (ph), ESB (ph) Bank and Southern (indiscernible) Services. The Americas region reported (technical difficulty) revenue growth of 40% at constant currencies for the third quarter. Once again, U.S. was a growth driver for SAP as software revenues increased by (technical difficulty). Key contract wins in the Americas region included applied (technical difficulty) the North Carolina office, the state controller and (indiscernible).

Software revenues in the Asia-Pacific region increased 15% at constant currencies with Japan growing 19% in the quarter. We saw good performance from Australia, Korea and India and we continue to sound (indiscernible) in Japan. Key contract wins in the Asia-Pacific region included Aruba (ph), Sumitomo Corporation, Taiwan Cement and SKM in Taiwan as well as (indiscernible) Financial Group. (technical difficulty) successful integration of (indiscernible) now and the continued success of the Safe Passage Program for customers demonstrates our commitment to our customers.

To date, we have 31 (ph) Safe Passage customers. This is up 21 that we announced in the second quarter. Some recent Safe Passage wins includes Barber (ph), Telecom (ph) Malaysia, Timken and (indiscernible). The sage (ph) (indiscernible) it remains (indiscernible).

Let me now give you a quick update on our SMB business. At the end of the first quarter, on a rolling four-quarter basis, SMB represented 30% of order entry. We believe that we are number one in SMB revenues amongst our SMB peer group, which we view as Oracle, Microsoft Business Solutions and (indiscernible).

Let me just finish by saying that we continue to expand our leadership in all businesses (ph), including CRM in which we gained an additional two percentage points here against our (technical difficulty) SAP net (indiscernible) continues to gain traction exceeding EUR100 million in software revenues for the first nine months of this year.

Our enterprise architecture roadmap continues to move forward, as I mentioned earlier. Finally, our ecosystem continues to expand with small partners, both large and small, aligning around enterprise service architecture endorsing our blueprint for business driven approach to a service-oriented architecture. So thank you and we are now happy to take your questions.

(OPERATOR INSTRUCTIONS). Rick Sherlund, Goldman Sachs.

The guidance that you have offered for the year for licensed revenue, just doing the math implies Q4 license growth of 4 to 9% and I am just curious -- last year, you offered what seemed to be kind of cautious guidance for Q4 as well but it turned out to be more accurate. I am just curious if this, like last year, you are seeing a change in the seasonality of the business or is this reflecting anything more on a macro basis that you see changing?

It's Henning. No, you are right. It has nothing to do with the macro economic outlook. I think we are confident about our business but it has to do a little bit with seasonality. Like last year, it is a little less pronounced like in the past, which I think it's not surprising if you look to the mix of our business with more and more volume coming in. Look in the third quarter, we closed 30% more contracts. That tells you that the business is a little more linear and let's say we all are happy about this because if you remember in the past, some of you were a little disappointed that the third quarter was always weak, which is not the case any longer.

If you look at the revenues by geography, Germany up 12%. It may just be lumpy business and good deal closings. I'm curious whether you think that operation has -- the growth is kind of back and similarly, Japan, after struggling for awhile, is that just (indiscernible) organizational change starting to gain traction there?

Leo, can you answer this?

Sure. Hi, Rick. How are you? You will remember that we said at the end of the second quarter when we announced our earnings that we shouldn't read too much into what happened in Q2 in Germany and Q3 is a good proof of that now. We still expect the second half year in Germany to be better than the first half year. You should note on the other hand extrapolates Q3 to Q4 for Germany either. So we will have an okay year for Germany like we indicated in Q2 and for Japan, a little bit of the same story. We already said at the beginning of the year confirmed that in Q1 and Q2 that we had taken the necessary steps in Japan and I think Q3 is the first proof point of that and we look forward to see continuous improvement in Japan moving forward.

Charles DiBona, Sanford Bernstein.

I was wondering if you could give us some product updates on -- partly on NetWeaver, which obviously the revenue growth is quite substantial but could you give us some more color on deployments and how you're seeing it deployed? And then also some products that you've rolled out at SAPPHIRE, at least announced at SAPPHIRE, particularly in business intelligence and the Mendocino products? Could you give us a little update on what is going on with those?

Yes, thank you. I am happy to do so. Let's start with the announced product, Mendocino analytics. Mendocino is on track. We'll start shipping in December and the general availability is in spring. (technical difficulty) belongs to SAPPHIRE. So that is very good. Similar for analytics is on track. It will be a major holdout next year. If you look to the deployment of NetWeaver, I think what we see is that customers actually expected (technical difficulty) many customers in the past have started in the past through business intelligence, which is not the only way any longer.

We see more and more customers interconnecting monitoring systems to SAP using XI. So this is moving up (indiscernible). The Portal (ph) is another driver for NetWeaver revenues here. Customers are also starting in building composites. We have said earlier that we have now more and more partners coming with composite applications built onto platforms. That gives us traction because the partners get the money for the application. But on the other side, the customer has to buy NetWeaver usage, which I think flows into our stand-alone NetWeaver.

I believe this is a very good traction if you take into consideration that we are by far the largest application vendor and there are no set many cases where somebody is using a stand-alone result application. If you would just take out some of our application players, I think a portion for NetWeaver, you come to a much more (indiscernible) percentage.

Is it too early to see penetration of NetWeaver outside of the applications installed base or even sales that our lead with NetWeaver as opposed to lead with the application?

There are sales led by NetWeaver. That is good. (indiscernible) The customers who, in the past, were a little concerned about -- it's too close, too tightly integrated SAP approach like you've seen it with our suite and now very happy that we have a very modular open architecture based on global standards and that helps us to convince many clients who mate their own architecture and now are convinced that their architecture and SAP's architecture fit. And that because of the fit of architecture, they have the chance now to pick in SAP's product portfolio and put the products in sequence into place that meet their needs and not just let's say a big tightly integrated suite. That helps a lot. And I would say that a lot of let's say our success is based on this traction that NetWeaver has in the market now.

Michael Briest, UBS.

A question on the accelerated investment that you're talking about at the moment. Should we expect to see a payback of that in 2006 or is it more likely to be 2007? Specifically, you talked about a 30% margin being achieved in 2007. Is there any hope that that will come earlier? And then secondly, could you just give us an update on how many channel partners you have now? It was 1600 at the end of June. And also the mix of the volume growth you achieved, how much of that was through the direct sales and how much indirect?

I can start with the first one and Leo, if you can comment later a little bit on the channel environment as well. First of all, we should stay within our guidance that we want to achieve, the 30% in 2007. I said accelerated investment just to bring some of the announced products earlier to market but I think once the products are there you know we have to continue on the level of R&D. We have (indiscernible) accelerate but we have to continue on the same level. I personally believe that it is important because now is the time to get marketshare and that's the reason why we put as much as possible to bring I think new products out.

From the sales and marketing and channel build, this has to do partially with the environment we today live on and Leo will give you a little flavor about how many the salespeople or competition has bought now. So that is something we have to take into consideration. Might be the changes in the near future but that is an effect now. And we also want to continue I think to gain marketshare in the SME space, which by the way we are doing as we compare the last quarter's how we do in SME in small and midsize market, we get traction here as well. It is not only that we have 30% of SAP's business. If you compare to the others, we gain marketshare there. I think therefore it is wise in spending also in channel build because it pays off ready. And Leo, if you might maybe answer the other two questions.

Sure. I will be happy to. Let me maybe put this into a little bit of perspective. We are continuing to add some capabilities to our direct sales force to service companies in the high end of the midsize enterprise segment. But at the same time, we also are building our partner network to expand our coverage across the entire SME segment. We are building what we call a hybrid model of direct and indirect sales, which we believe afford us to the most effective coverage of this important market segment. So we are deepening our go-to-market approach and at the same time broadening our coverage together with our partners.

Our partners are a key component of this strategy and I can maybe give you some information on that. The network of channel partners serving SME is currently about 730. MySAP, only partner and about 1060 to 1100 business one partners and that is about a 50% increase year-over-year. Let me just make sure you understand that we are not just interested in quantity. That is actually not the most important metric. What is much more important to us is the quality and the effectiveness of our partners, which is why we have put in place a very effective and highly successful partner -- edge channel partner solution network, which helps us to drive this in the most efficient way possible.

John Segrich, JP Morgan.

If I could just drill a little bit into the volume growth. It has clearly been very impressive and also been accelerating over the course of the year. As you continue to hire both on the sales and marketing front, also investing and in the channel, what sort of volume growth should we be expecting for the remainder of the year and maybe even kind of what is the right number for next year because the comps start to get a little tougher? And then maybe one more for Werner, if I could. Just on the sales and marketing line, I understand some of the things that are going on there but are there any investments that were made in the quarter that maybe weren't tied as much to headcount? I'm thinking of things like accelerating some advertising spending and things like that on a more discretionary front that we should be aware of?

John, it's Henning. I would try to answer the first question if I could. I think honestly we are not basing our budget on those type of KPIs you were just asking for. We normally go for (indiscernible). And yes, we try to let's say grow our volume as much as possible and we have to because also in the third quarter we saw again a decline in average deal size. So therefore, we have to overcompensate this and we are more than confident that we will do also the same in the future. But I think it would not be now really to budget or to plan volume growth.

What you can expect to some extent is there is a trend that the growth in volume will be higher than the increase in software license. I personally don't expect and Leo told me the same that the average deal size will go up soon. So we have to expect that the average deal size is low so we do whatever we can to drive volume.

And regarding the sales and marketing expenses, for the quarter, in the presentation, you see an increase of 77 million quarter-over-quarter. Roughly 50% is (indiscernible) expense-related but the rest is really variable. It is marketing, it is travel due to more business activities and it is partly third party. So the portion is -- 50% is really related to other than personal expenses.

Ross MacMillan, Morgan Stanley.

Clearly the top-line growth is enabling you guys to continue to invest aggressively. So I just look at that 4500 target for our headcount this year, it implies about 1700 in the fourth quarter. And you have been hiring I guess about half or so within R&D. Is there going to be a change in the mix of those hires? Are you going to start to hire more aggressively on sales and marketing as a proportion of the mix? And then related to that, is there any impact on, if you will, the average cost per head? So is there kind of additional element to this, which is the inflation, if you will, in the wage built because your hiring more local or domestic sales and marketing folks and so could we actually see that also impact the cost run rate on a go-forward basis. Probably for Werner. Thanks.

I think we haven't -- the metrics haven't changed. We said we target for 4200 FTEs for the full year of 2005. Whether we can achieve this I don't know. It depends on whether we find the right talent on a worldwide basis. If you look to the hiring, it is still 50% R&D, 50% sales and marketing and a portion in G&A and if you look to the field then it is clear it's more a domestic but if you look to R&D than we target roughly one-third high-cost but two-thirds at our low-cost location-related hirings. So this metric hasn't changed.

And it won't change on a go-forward basis?

Steve Meharry (ph), Banc of America Securities.

My first question would be related to enterprise services architecture and whether some of the announcements that were made at SAPPHIRE are making a difference with customers as it relates to implementation costs related to complexity. The second question would be on the pricing environment, historically you had mentioned on some of the larger deals there have been other competitors who have been a little bit irrational at times. I'm wondering if the pricing environment is a little more rational now?

Leo, you take the second one later please.

Yes.

On enterprise services architecture, as I said earlier, it allows customers to implement in smaller projects, which I think is very important because it's what customers want and that is what enterprise services architecture supports is to look for the quick win first. So to have smaller projects to start the turn of investment, what they can do now because it gives them then the return they need to invest into the next project. So what we outlined at SAPPHIRE this kind of roadmap for the enterprise service architecture starting small with quick wins, then going for the next larger project and finally, finally make a decision for this architecture, a final decision for this architecture, which means you have also then to invest into the entire infrastructure you have is still valid, is very well-received by the customers and I think that is the reason why we smoothly (ph) that is what we want to achieve this time. Bring customers to this transition from client/server into enterprise service architecture.

Therefore you are not seeing big bang enterprise service architecture projects. You see smaller projects but more or less everywhere in all of our installed base. I think that is very important because it is this evolutionary approach, which we promised and what clients want to happen now. no. And Leo, if you might talk about pricing.

Sure. Why don't we try to give you some color on the pricing situation out there. I'd like to say first of all, there is still significant price pressure out in the markets. The situation hasn't improved compared to previous quarters and we actually don't expect pricing to improve for awhile. Let's maybe try to understand why this is happening. We believe that our solutions are perceived to be superior and our numbers actually substantiate that given our win rates that we have against the competition and therefore, there is heavy discounting occurring by the competition in the markets. And that is something we will live with.

I don't expect pricing pressure to go away in the near future. It might actually never go away because of the market dynamics and we just will continue to do our good job and continue to perform in that environment.

Great. The last part of the question would be relative to expectation for maintenance in the fourth quarter. Should we expect a similar kind of uptake in 4Q relative to the outperformance and faster growth of maintenance relative to software license?

I think it follows the normal pattern, normal calculation. If you use this, you'll come up with a number which fits.

Ramo Lampshow (ph), Merrill Lynch.

Two questions if I may. First one question for Henning on the business process platform. Henning, at the moment, you kind of published some of the services already that the ISVs can work with. I mean if you look at the amount that you've published now, can you kind of help us to understand how much of the total proportion that you will eventually kind of offer to the partners and the customers does this represent? Is 500 out of 5000, out of 10,000 or where do you see the final numbers so we can get a feeling of how far we are already at that road.

The second one is for Werner. If I look at the G&A expenses, I know you have worked on shared service centers, but my impression was that they are there to bring the cost down but the costs are actually seem to be growing still year-over-year. Maybe you can help me to understand what is driving that.

Thank you. I thought the same by the way now I will give you a good explanation. Coming to the business process platform, it will never be 10,000, just to say this. I also would question if we come up to such a number like 5000, to give you a perspective. But it will be a few thousand. Why can't I say exactly today? Look, if you service-enabled the suite, which is in the market, you follow a different way and procedure like building an application platform more or less by design service-enabled, which we do in Pella (ph) as you know. We announced at the beginning of the year just to put into perspective what all we are doing.

What I announced here is that we service-enabled the existing suite because that is where our partners will start with and where most of our customers and partners are interested in because this is a huge installed base and that comes first and I think the service by design comes second. So therefore, it is a fine balance between demand and supply here. So we will over time -- we have ideas where we need services, but over time, we will also get demand from the customers who want to add custom, developed solutions and we will get some demand from ISVs who believe they have a fantastic idea and then it is up to us and we have a governance process in place to balance this so that we are not overdoing, which I think is too expensive and could destabilize the software. But on the other side, doing enough to attract them.

So therefore forgive me that I have not an exact figure but I hope that helped you a little bit from this side.

Perfect.

And regarding the G&A, it is true. It is partly related to the buildup of shared service center for EMEA in Prague and I think when you start such an endeavor you have to build up the shared service center first, train the people in the shared service center, hire and train them and then you start to migrate country by country. We started to migrate the first country in the first quarter of this year. And the migration requires a work sharing in the countries and then a stabilization phase. After this stabilization phase then you can start to reduce the number of people in finance and (technical difficulty) and cover both out of the shared service center. And then you will see the benefit.

We have this project was a timeline of roughly three years and we are just in the first year and just started the first migration. So we expect the reduction in expenses coming in when we finalize everything in 2008 with a maximum amount of real savings.

Brent Thill, Prudential.

The last time SAP drew a license revenue of 20% year-over-year was roughly more than four years ago. Can you just help us separate -- is this a better overall macro environment or how much of it is related to the uncertainty with your other competitors in the channel?

Might be I can give the first answer. If you look to the figures I provided at the beginning of my speech where I said this 20% in euro correspond to 17% in U.S. dollars and the entire market went down by 3%, which tells you that we are in a market, which is growing but growing by SAP success. So therefore I would say it is a combination that we are not in a bad environment because overall, it is growing but if you see that so far SAP is pushing the growth. I think shows you also the very good position we have in the market.

Thank you.

Michael Shocked (ph), Chevreaux (ph).

Thank you. I have two questions if I may. First one, touching the leverage of the existing business model, you mentioned that the number of deals has increased from a gross of around 20% during the last quarter to now 29% in the third quarter. Maybe can you say something -- what do you believe the current sales force could handle maybe like 10% more deals, 20% more deals or do you plan every year to raise the number of salespeople that you have to increase the number of deals?

Secondly, touching the cash flow, should we expect that the CapEx will decline from 2005 to 2006 on an absolute base and how far could you go regarding the days sales outstanding to be reduced further?

Leo, will you do this question, please?

Absolutely. I think you're asking a very good question and it depends -- it really depends what metric you use. We tried to drive it in such a way that we optimize our coverage models and we try to optimize the leverage on the model. By the way, you should view what we said earlier on the SME strategy and the hybrid model as one example and how to extend the coverage and the leverage of the model without necessarily just adding a linear number of salespeople to the force.

On the other hand, you also need to take into consideration some shorter-term tactical moves we have to make. Just to give you as an example, our largest competitor in this business through acquisitions has acquired roughly between 400 to 500 salespeople very recently and therefore has a formidable number of people covering the market, which means that we have to scale-up a little bit in order to remain in our competitive position.

We have one very large advantage in this approach. We have much more value to provide. So besides the fact that there is a certain number of volumes that you can produce, you can also try through the significant value advantage that we have. You can also try to increase the value that goes through the existing sales force and therefore leverage at the end of today the capability that you have in dollars per person working in sales.

The second question regarding CapEx, the majority of what we spent this year is related to new buildings and op (ph) infrastructure. New buildings definitely will continue next year here in Walldorf and (indiscernible). So I would assume that we would see a comparable level of capital expenditure in 2006.

With regard to DSO, let me only say that you should never give up on your expectation to further reduce the DSO because if you start to do so it will go up immediately and I would say as long as we are not at 60 days we should not stop pushing the organization to reduce the DSO.

We have time for one final question please.

Matthew Hammond, CSFB.

Thank you very much. I would like to -- and I am afraid to beat down on this point a little bit more, talk about sales capacity. By the end of this year, you are going to have, at worst, 14 to 15% more capacity in the business than you had this time last year. Should we expect you to be able to leverage that capacity in 2006 or I guess to ask the question another way, we're already seeing revenue (indiscernible) actually see a small rise. Is it reasonable to assume that 2006 license (ph) is driven by at least the same level as capacity?

Leo, will you take it?

Yes. I will be happy to. First of all, let me just maybe make one point clear. I'm sure Werner will jump in otherwise. I don't think we're ready at this moment in time to give any guidance on 2006. So let's just leave that outside the discussion for a moment. But what you always want to do when you drive a sales force is you want drive as much efficiency and as much leverage as you just can. I just need to make make absolutely sure that you understand that it is not just one model. It is very important, in particular medium-term, that we continue to expand our hybrid capabilities, our channel partners because that will give us a significant leverage capability as we move forward.

There is actually an additional benefit to that. It's that we can start specialized sales forces on various precise segments of the market and therefore continue what we have been doing very successfully in the past, which is to drive value -- maximize the value that goes through the channel. And channel in this case being either direct or indirect.

Thank you very much. I think this closes the conference call today. Thank you for joining us and we look forward to seeing you on the 9th of November at our investor symposium in Philadelphia. Thank you and goodbye.

Ladies and gentlemen, that will conclude today's conference call. Thank you for your participation. You may now disconnect.