SAP SE (SAP) 2006 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 2006 results. I am joined here in Walldorf by Henning Kagermann and Werner Brandt, and Leo Apotheker joins us by phone from Paris. Werner will discuss the Q1 financials in detail and Henning will then provide some further commentary on the quarter's performance and SAP's product successes.

Before we start with the call, I would like to remind everybody about the upcoming SAPPHIRE conferences in Orlando and Paris in May. We will be holding investor briefings in Orlando on Wednesday, May 17, and in Paris on Tuesday, May 30.

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 U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2005, filed with the SEC on March 22, 2006. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date. Now I would like to turn the call over to Werner.

Thank you, Stefan. Ladies and gentlemen, welcome also from my side. It was another solid quarter for SAP, as our investment in products and market continued to pay dividends.

Total revenues for the first quarter of 2006 were EUR528 million, which is an increase of 22% compared to EUR434 million reported for the same quarter last year. On a constant currency basis, software revenues were up 14% year-over-year.

Maintenance revenues were EUR860 million, which is an increase of 16% compared to the first quarter of 2005. Sequentially, maintenance revenues were relatively flat compared to the fourth quarter of 2005, similar to what we saw in the first quarters of 2003, 4, and 5. First of all, we had some positive effects in the fourth quarter of 2005 similar to the positive effects in the fourth quarters of the previous years. This positive effect is mainly due to reversals of sales allowances and concessions. In addition, as in 2003, 2004, and 2005, we carefully reviewed our accounts receivables in regards to collectibility, and we have set up sales allowance for probable concessions and credits to customers.

Product revenues, which consist of software revenues plus maintenance revenues, were EUR1.4 billion in the first quarter compared to EUR1.2 billion in the same period last year. This represents a year-over-year increase of 18%.

Consulting revenues were EUR557 million for the first quarter of 2006, compared to EUR475 in the first quarter last year, which represents an increase of 17%. Consequently, total revenues for the first quarter were EUR2 billion compared to EUR1.7 billion reported for the same period last year. This was an increase of 18%. At constant currencies, total revenues increased 13% year-over-year.

Operating expenses increased by EUR277 million, or 20% year-over-year. The higher operating expenses were the result of additional personnel. We hired over 3400 FTEs since the first quarter of last year and increased the third party usage and travel-related costs due to higher business activities.

For the first quarter of 2006, we had EUR34 million and EUR40 million of stock-based compensation expenses and acquisition-related charges, respectively. This compares to 0 euros for stock-based compensation expenses and EUR7 million of acquisition-related charges, respectively, for the first quarter of 2005.

On a pro forma basis, which excludes these stock- based compensation and acquisition-related charges, first-quarter expenses increased EUR236 million, or 17.5%, compared to the first quarter of 2005. Excluding the currency impact, operating expenses increased EUR175 million, or 13%, compared to the first quarter of 2005.

The pro forma product margin was 81% for the first quarter of 2006, which is slightly lower than the 82% product margin reported in the first quarter of 2005. The decrease in 2006 is the result of a higher amount of purchase licenses, the onetime effect from litigation-related expenses, and a currency impact. The pro forma service margins were 22% this past quarter compared to 20% in the first quarter of 2005, as we saw higher billable utilization.

We are pleased to see an improvement in year-over-year service margin, as we continue to drive towards our goal of 25% service margin. Consequently, our 2006 first-quarter pro forma gross margin improved by 1 percentage point to 63% compared to the first quarter of 2005.

Pro forma R&D expenses as a percentage of total revenue were flat year-over-year. The 19% increase in R&D expenses on an absolute basis were the result of additional R&D personnel hires since the first quarter of last year. Pro forma sales and marketing expenses as a percentage of total revenues were also flat year-over-year. The 21% increase in sales and marketing expenses on an absolute basis was mainly due to further investments in the mid-market business in both the channel and our direct sales force to support our hybrid model.

Pro forma G&A expenses as a percentage of total revenue were also flat year-over-year. On an absolute basis, we saw an increase of 7% to EUR101 million.

Operating income was EUR409 million for the first quarter of 2006, representing an increase of 9% compared to the first quarter of the previous year. Our pro forma operating income, which excludes again stock-based compensation expenses and acquisition-related charges, was EUR457 million, an increase of 20% compared to last year's first quarter.

The operating margin for the first quarter was 20%, which was down 1.6 percentage points from the 21.6 operating margin reported in the first quarter of 2005. The pro forma operating margin, which excludes stock-based compensation expenses and acquisition-related charges, increased by 40 basis points to 22.4% in the first quarter of 2006, compared to 22% in the same period last year. As we stated in January, we do not expect the 2006 pro forma operating margin improvement to be linear throughout the year.

Finance income increased EUR28 million in the first quarter of 2006, compared to the first quarter of last year. The increase was primarily the result of an increase in interest income due to higher liquidity and higher interest rates.

For the first quarter of 2006, net income rose 11% to EUR282 million. Pro forma net income, which again excludes stock-based compensation expenses and acquisition-related charges and impairment-related charges, rose 22%, up to EUR315 million.

Earnings per share for the first quarter of 2006 were $0.91, compared to EUR0.82 in the same period last year. And pro forma EPS, which excludes stock-based compensation, acquisition-related charges and impairment-related charges, was EUR1.02, compared to EUR0.84 in the first quarter of 2005.

Our effective tax rate for the first quarter was 34% compared to 36% in the first quarter of last year. For the full year, we continue to project a tax rate of 34.5%.

For the period ended March 31, 2006, cash flow from continuing operations was EUR856 million. Capital expenditures were EUR63 million, leaving free cash flow of EUR793 million for the first three months of 2006. This compares to free cash flow of EUR858 million for the first three months of 2005. The year-over-year decrease in free cash flow is a result of an increase in working capital, mostly driven by a decrease in reserves and liabilities and higher investments made in capital expenditures.

For 2006, we expect cash flow to be close to EUR2 billion. The free cash flow generated was used in the following ways. First, return to shareholders through share buybacks in an amount of EUR428 million in the first quarter, and acquisitions in the amount of roughly EUR150, million which was driven mainly by the Khimetrics transaction, which actually closed in January.

Consequently, we had liquid assets of EUR3.8 billion plus another roughly EUR409 million in U.S. bonds at the end of the March quarter, compared to EUR3.4 billion in liquid assets plus an additional EUR421 million in U.S. bonds at the end of 2005. We continue to plan to use cash for further share buybacks, dividend payments, and fill-in acquisitions.

Beginning of the first quarter of 2006, we modified headcount reporting. Through December 31, 2005, SAP had previously grouped headcount data by business areas. However, we modified for reporting in an effort to better align headcount with the expense line items of the Company's consolidated income statement and to improve transparency.

This change did not affect the total headcount numbers, but only the headcount data within the reported headcount line items. Headcount is now reported in the following line items -- product, mainly comprising support and custom development; services -- this includes consulting, training, and hosting; research and development; sales and marketing; general and administration; and finally, infrastructure, which includes IT and [billing].

Year-over-year headcount increased by 3438 FTEs and by 774 FTEs sequentially from the period ended December 2005. At the end of the first quarter, total headcount stood at 36,647 full-time equivalent. We are still targeting to hire 3500 FTEs net for 2006.

Of the 774 FTEs hired in the first quarter, 56% were in R&D; and out of the total R&D, 34 were hired in low-cost areas. In the press release, we have provided tables showing our new and previous headcount reporting structure for the quarters ended December 1, 2004 through March 31, 2006.

For the first quarter, we bought back 2.53 million shares for a total of EUR423 million. The average share price paid was EUR167. At March 31, 2006, treasury stocks stood at 8.34 million shares, which included the release of 867,000 shares from treasury during the first quarter. Given the Company's strong free cash flow generation, we plan to further evaluate opportunities to buy back shares in the future in order to increase our buyback activities in 2006.

Days Sales Outstanding stood at 69 days at the end of the first quarter of 2005, which compares to 71 days at the end of the same period last year. One day reduction creates approximately EUR20 million to EUR25 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 2006. As described in our January 26, 2006 fourth-quarter result press release, we continue to provide the following outlook for the full year 2006. The Company expects full-year 2006 product revenue to increase in a range of 13 to 15% compared to 2005. This growth rate is based on the Company's expectations for full-year 2006 software revenue growth in a range of 15 to 17% compared to 2005.

The Company expects the full-year 2006 pro forma operating margin, which excludes stock-based compensation and acquisition-related charges, to increase in a range of 50 to 100 basis points compared to 2005.

The Company expects full-year 2006 pro forma earnings per share, which excludes stock-based compensation, acquisition-related charges, and impairment related charges, to be in a range of EUR5.80 to EUR6.00 per share. The outlook is based on an assumed U.S. dollar to euro exchange rate of $1.23 per EUR1.

I would now like to pass over to Henning.

Thank you, Werner. And good morning or good afternoon, everyone, and thanks also from my side for joining us today.

It was another strong quarter for SAP, as we reported solid growth in license and product revenues. Also, the pro forma operating margin of 22.4%, which was an improvement of 40 basis points year-over-year, came in as expected. Therefore, based on these results for the first quarter, we can reiterate our 2006 full-year outlook.

Meanwhile, the software environment remains unchanged, with continued but stable pricing pressure and customers continuing to spend cautiously. We have adjusted quite successfully to this pricing environment and continue to do well as a result. And while customer buying remains cautious, customers are willing to spend, but they want to spend intelligently, with software they know that can deliver the right solutions and lead them into the next decade. SAP seems to be their chosen vendor, as reflected in our strong performance for the past many quarters.

Customers' willingness to spend with SAP is a result of the strong portfolio of products, our ability to deliver the next generation of software solutions, a clear and concise road map for their IT investments, and trust, which is extremely important in this business. I will get back to that in a moment.

As I mentioned in January, we will no longer be providing peer group shares based on our previous definition of the peer group. We believe that after the large amount of market consolidation that we have seen among the larger companies in the software industry, the peer group has become too small to provide an adequate metric for the purpose of measuring share of the market.

Therefore, based on the larger $16 billion software market, our share in terms of license revenues on a rolling four-quarter basis stood at 21.4% at the end of the first quarter of 2006, which is slightly higher than the fourth quarter of 2005. This compares to Oracle at 8.8% and Microsoft Business Solutions at 4.6%. At 21.4%, we are nearly 2.5 times larger than our next largest competitor in terms of software revenues on a rolling four-quarter basis.

We have been quite successful in building the largest customer base in business applications over the past 33 years. Most significantly, our success came through mostly organic growth. We believe organic growth is the right strategy because it is less expensive and more efficient for SAP and we have much better control over the quality of application development and it provides a better return to our shareholders. In addition, it is more predictable and less risky for our customers.

We augment our organic growth traditionally through co-innovation and small, strategic acquisitions. Examples of success in this area include partnering with the more than 1000 ISVs that are either powered or certified on NetWeaver, partnering with Siemens in healthcare, co-innovating with Microsoft on Mendocino, and acquiring companies such as Triversity, Khimetrics, [Litamer], and most recently Virsa.

The Virsa acquisition stands out because it proves our concept that partnering with and potentially acquiring ISVs is both beneficial and low-risk for SAP and our customers. The benefits of this acquisition are inherent because Virsa was a partner with a complementary solution that already runs on SAP’s technology, their product was being sold by our sales force, and the acquisition helped reduce complexity for our customers. The acquisition also provides a boost to our ecosystem, further motivating ISVs to partner with SAP and develop software on our platform. It was a winning acquisition for SAP, Virsa, our customers, and our partners.

Let me now get back to the topic of customer trust, which has been a crucial ingredient to building the largest customer base in our business. Building trust with our customers continues to be a top priority for our Company, and as a result, customer satisfaction, as measured by an independent third party, remains at an all-time high at SAP. While our customers have shown a lot of confidence in SAP over the past 30 plus years, it's just as important to continue to deliver and remain the trusted business partner to our customers.

What we are delivering are real, tangible, next-generation products that our customers are presently implementing. It is not just idle talk. We are delivering on our vision and promises with ether-based products already being shipped to the market. A good example is the delivery of the first Enterprise Service Architecture enabled business suite, on which we are already receiving positive feedback from our customers in ramp-up phase.

Let me now share with you some additional metrics for the first quarter. Order entry was strong. Total contracts signed increased by 26% compared to the first quarter of 2005, as we continue to successfully grow our volume business. Deals greater than (technical difficulty) were up slightly from 24% in the first quarter last year, while deals less the EUR1 million accounted for 42% of order entries, up from 40% in first quarter of last year.

The share of new customers based on order entry was 22% for the first quarter, compared to 25% in the same period last year. The decrease is not unexpected, as we continue to see more new customers come from the mid-markets. Therefore, it is also important to talk about the number of contracts signed by new customers, which was 34% for the first quarter.

The average deal size in the direct channel increased slightly in the first quarter compared to the same period last year, while the average deal size through the indirect channel decreased. But this was compensated for by different volumes within direct channel.

Let me now cover our regional performance, for which we reported growth in all regions. Software revenues in EMEA were up 7%, or 6% constant currency. France was strong, with good results also coming from Russia. Germany did well for the first quarter, with software sales increasing by 8%. Key contract wins in the EMEA region included E.On, City of Munich, Endesa and the African Development Bank.

The Americas region was again a strong performer with 47% growth in software revenues, or 30% at constant currencies. Good execution in the U.S. drove an increase of 25% of software revenues, or 15% at constant currencies. Latin America turned in strong performance as a result of the unique large transaction from that region. Canada also performed well. Key contract wins in the Americas region included the government of Manitoba, Honeywell, Jefferson County, Panasonic, and the Dow Chemical Company.

Software revenues in the Asia-Pacific region increased 12%, or 7% at constant currencies. While Japan did not perform well in the first quarter, as indicated by an 18% decline in software revenues, or 17% at constant currencies, the decrease was only EUR4 million on an absolute basis. Therefore, we would not view Japan's performance as any indication of a long-term issue. We expect Japan to do better as we move ahead into the remainder of the year. Key contract wins in the Asia-Pacific region included Matsushita Electric Industrial, Sojitz Corporation, NCS, and Torrent Pharmaceuticals.

Our Safe Passage program continues to be a top priority for SAP. Year-to-date, we have signed a [definitive] 40 customers under the Safe Passage initiative. Some recent Safe Passage wins include three Australia and Korea Water in the Asia-Pacific region, and [Haddich] Management Services in EMEA.

Let me now move to the midmarket, where we continue to invest in our hybrid model approach to help grow revenues in this market. The hybrid model incorporates selling both indirectly through channel partners and directly through our internal sales force.

At the end of the first quarter, the small and mid-sized business segment represented 30% of order entry on a rolling four-quarter basis. Among our midmarket peer group, our share of the small- and mid-sized business segments stood at 36% at the end of Q1 compared to Oracle at (technical difficulty) and Microsoft at 17%.

As for the indirect channel, we continue to successfully grow the number of channel partners as well as customers. The number of channel partners and the number of SME channel customers grew by 40% and 45%, respectively, year-over-year.

Before I close, I would like to give a quick update on solution reporting at NetWeaver and briefly discuss CRM On-Demand, which we announced in the first quarter. As we stated back in January, we are no longer providing software revenues by solution, since customers are buying more and more industry scenarios in which each industry solution incorporates specific modules for many of the various point solutions; and moreover, we have moved to industry-solution-based pricing structure.

However, as SAP NetWeaver will continue to play a very important role for SAP, we will continue to break out NetWeaver sales. Therefore, for the first quarter, we reported NetWeaver sales of EUR107 million, of which 21% came from stand-alone NetWeaver sales.

As you know, we have delivered ahead of expectations a road map to the completion of our Enterprise Services Architecture. For 2006, here are some additional steps along the road map that you should expect. There will be hundreds of additional enterprise services for mySAP business suite. We will have EISA connectors to extend our Enterprise Service Architecture implementations to SAPR suite.

We will deliver mySAP All-in-One for industries on SAP NetWeaver. SAP NetWeaver will evolve to the end of the year into a business process platform. We will deliver the first hosted solution, All-in-One-S, on the business process platform, and there will be a broad access for ISVs to the business process platform.

With CRM On-Demand, we created a unique solution because it provides for an easy-to-deploy on-demand solution, but at the same time, provides for a quick and easy migration to an on-premise solution when the customer wants to migrate. Also, whether off premise or on premise, our solution easily integrates with our customers' existing enterprise systems. Therefore, our CRM solution goes well beyond the limitations of today's narrowly-focused on-demand pure plays. Key contracts include American Standard, DuPont, and Capital Insurance Services in the UK.

Our goals for 2006 include continued growth as defined by our financial guidance, successful new products releases, marking 2006 as one of the biggest years of new product releases in quite some time, and continued development of our business process platform as defined by our product road map.

Key investment areas for 2006 include Mendocino, analytics, All-in-One, our on-demand offerings in midmarket, and further development of the business (technical difficulty) platform. These investments will help us further penetrate the business users' enterprise in general and help us achieve our long-term goals of significantly expanding our addressable market by 2010.

So thank you, and we are now happy to take your questions.

(OPERATOR INSTRUCTIONS) John Segrich, JPMorgan.

Just two quick questions if I can. First off, Werner, the EUR2 billion cash flow target, was that operating cash flow or free cash flow?

Operating cash flow.

Operating, fine. And then if you look at the product gross margins, over the last couple years you have been able to deliver quite a strong improvement in the gross margin, going from 80% to 82.7% to 84.8%. How much further do you think you can drive that gross margin? Obviously, as the mix change continues, it should keep expanding, but what do you think the right progression is over the next couple of years?

Let me first address this quarter's performance on the product margin. I mentioned we saw a decrease and the decrease was really driven by additional expenses related to litigations -- lawyer fees were included here -- and we had a strong currency impact. So if you compare and eliminate this and compared with the first quarter of 2005, you would see the same margin as in 2005.

Going forward, I would argue that we anticipate the product margin at the same range as we had it in 2005, so from our perspective of today, no further increase of the product margin.

Okay, thanks.

Marc Geall, Citigroup.

Could you just run through a little bit the strategy on the professional services side? In the past, Werner, you have sort of commented that as you did internal work, utilization rates were low and so you had to hire a third-party content as a consequence. It seems that that resource has been freed up, but it looks as if you've kept the third party resource in place as well. What should we be looking for going forward?

I think first of all, maybe Leo can answer this. We have increased our billable utilization quite amazingly, if you compare it to the first quarter of 2005. But I am sure that Leo wants to add something here.

Thank you very much, Werner. As you have seen in the results, we have managed to improve the profitability of our professional services consistently across the board, which we had committed to do. Also in line with the guidance that Werner provided at the beginning of the year for professional services.

What you will see moving forward is that we will stabilize, as we move ahead in the coming quarters, the revenues that we derive from professional services. So you should not extrapolate the kind of growth rate that we had in Q1 in professional services for the entire year. That would be a gross overstatement.

Thank you.

Mark Bryan, Deutsche Bank.

I just wondered if you could expand a bit more on the U.S. market specifically. Obviously, on the growth it is still very respectable, but it's down somewhat on the trend from last year. Should we expect any lumpiness going forward in this revenue stream, or is that now, if you like, setting the threshold for the rest of 2006?

Let me try to answer that. It's Leo here. We had another good quarter in the U.S. It's the 14th quarter in a row of double-digit growth, and we have every intention of keeping growing in the U.S. There are still quite a lot of opportunities for us in that marketplace.

Obviously, as we are comparing more challenging quarters as we move forward, you should not expect 40 or 50% every quarter; that would be a little bit too optimistic. But with the new product that we're bringing instream, with the effects that we hope to get from the business suite now enabled on EISA, and with the opportunities still available in the U.S. market, you should count on the U.S. to continue to be one of the growth engines of SAP also in 2006.

Thank you.

Adam Shepherd, Dresdner.

Just a quick question on the ecosystem you are building up. The feedback from many of your customers that we get is that one of the major attractions of NetWeaver is the potential that the third party extensions that are being built out bring to your platform.

The question I have is how you monetize this more directly. I think it is clear indirectly how this helps you expand your penetration within accounts. But I wondered if you are also intending to monetize this directly. Will you act as an intermediary, for example, in some of the transactions between your larger customers and some of the smaller IC solutions that are out there?

It's Henning. There are two ways to monetize and we will go for both. One is clearly that we will get revenue stream because nearly all of the solutions the ecosystem partners are building today need as a minimum NetWeaver as a technological base to run on it and develop it.

But in the future more and more, it will be solutions, so-called composites, which will be used as the ready-to-run services we offer with the business process platform. And then the revenue stream, let's say, we get will be higher because today we have, let's say, a certain price point if somebody is using development license fees from NetWeaver or if we use NetWeaver as a one-time environment.

But once they also use the enterprise services coming from the application components bundled into NetWeaver, next year, once it becomes a business process platform, you can imagine that we can charge more. Customers know this. Customers are willing, let's say, to get charged for this. And from that point of view, I think the revenue stream will be larger.

And as I pointed out at the beginning of the year in particular of higher margin because that is not additional sales we have to do, because once these products are sold, more or less, the customers have to call you and ask for the extra fees to the business process platform.

Just to follow up, some of your partners are suggesting that you act as a broker to these transactions as well. Will you see a direct revenue contribution as a result of that (multiple speakers)?

I think here we should be a little bit careful. I think the field (indiscernible) organization will be very careful in selecting a few of the partners' products and resell them directly. That makes a lot of sense, and that was the reason why I referred so much to the Virsa transaction. In this case is it's clear that we get fees because we are more or less a reselling arm.

But a broker, I think that is too far ahead, and we should not focus on these types of revenues first. Let's focus on the others to reselling and, more important, getting a revenue stream from using our underlying software environment. I think that is what we are mostly after.

Okay, thanks very much.

Rick Sherlund, Goldman Sachs.

First I wonder if I could get you to expand a little bit on this hosted product. I thought I heard you say, Henning, All-in-One by the end of the year.

And also, if I could get any more on this unique deal in Latin America -- if there's any way to size that or any comment on that.

Yes, I think from Latin America, I think Leo will take this over. Just let me comment on the first one.

You know that with CRM On-Demand we made a step into let's say a different business model. You asked me onstage some time ago if this could be applicable to other products outside of CRM, for example to an ERP system, and I said why not. I think for the midmarket it makes a lot of sense to start with that, and therefore we always said that in particular mySAP All-in-One will be the product we will start with. Therefore, we pointed out a hosted version for mySAP All-in-One first, because I wanted to exclude that you were expecting immediately that we host the entire suite here.

I'm sorry -- are you hosting the entire All-in-One suite by the end of the year?

We will at the end of the year make a decision, but we intend to send really -- not, let's say, to host just a few functions but looking for the suite.

Rick, let me maybe pick up on the Latin America thing. We had a single very large transaction that happened in Southern America related to raw materials, which of course, because it is such a large transaction, distorts the picture a little bit.

Thanks.

Gary Rollo, Morgan Stanley.

Just want to ask the couple of questions. Maybe if I could drill down a little further on what we can expect from U.S. market, and maybe follow up with a question on potential buybacks. The U.S. market first. I think Leo commented that we should expect growth to continue. Should we expect the U.S. business to pick up to an above-average growth rate for the rest of the year? I mean, it's been the growth engine for the group, as Leo pointed out, for the last 14 quarters. Just trying to get a feel for how we should expect that to come through maybe in the next couple quarters?

Let me just reiterate what we have said all along. We have tremendous opportunities still open for us in the U.S. We are by now the market leader in the U.S., even after the recent spate of acquisitions, and we have every intention of continuing that leadership. So we see opportunities.

And as we have said in the beginning of the year and we can confirm this also after this quarter, the U.S. will be one of the growth engines for the Company in the year to come. Therefore, you should expect that the U.S. will achieve higher growth rates than the average growth rate of the Company.

Gary, your question with regard to buyback.

You have done quite a lot of what you thought you would do for the full year already in the quarter. Kind of thinking that you're going to have a lot of room from your free cash flow generation still to do more. I'm wondering if you care to give us an idea of what the appetite to do more this year might be.

We will do more, and I gave you an indication during the earnings release of Q4 when I said that our guidance for 2006 is based on 307 million shares outstanding. So as of today, as you see, weighted average we are at 308.9 million, so that is at least what we want to buy back on top of what we did in the first quarter.

Thank you very much.

Charles DiBona, Sanford Bernstein.

Henning, I wonder if you could help characterize these stand-alone NetWeaver sales. We've seen, I think, a fairly big upsurge of that. Can you give us some color on whether those are existing customers sort of expanding their NetWeaver usage or are they new customers buying into this as a stand-alone platform? And then maybe a little bit of color on sort of how they are using the product as a stand-alone product.

Thanks. It is mostly existing clients that are using the integration capabilities of NetWeaver to integrate non-SAP products. I think that is what we also expected. You know that there are a few cases where non-SAP customers use the technical integration capabilities of NetWeaver to integrate their legacy systems, but this is more the exception. The rule is integrating non-SAP systems to SAP.

I think it is not unexpected, if you know this, that a lot of traction is coming through XI. Because people start integrating first the processes, there is a lot of uptick in particular in XI usage. Then next is a portal. And finally, I think there are also customers starting to develop, let's say, their own solution based on NetWeaver, and then it depends and it's more or less the entire platform. But let's make the priorities, I would say today you could say most customers start using XI.

Thank you.

(indiscernible), Merrill Lynch.

Two quick questions for Werner. First of all, on the financial income, Werner, you obviously mentioned that you achieved a lot more from interest income, but the cash position is pretty much similar to the quarters beforehand. Have you negotiated some special deals there and what can we expect going forward?

The second thing is on the stock-based expenses that we see in the various cost lines, it seems that R&D and the product side are seeing a lot more stock-based expenses than the other lines. Can you just explain, are they kind of more linked to options payments or what is the driver for that?

The second part, it of course depends how we allocate the stock-based -- the options within the organization. And it's for sure the majority goes into sales and marketing and on the product or the development side.

Related to finance income, I think it is a combination of both, as I mentioned, higher liquidity, and keep in mind that we have roughly 400 million included in financial assets, corporate bonds we hold with a very attractive interest rate for us.

If you look down the road, I would argue that from a finance income perspective for the full year, we will achieve roughly EUR100 million.

Okay, perfect. Thank you.

Michael Briest, UBS.

Thank you. Could we get an update on the premium maintenance offering, what the interest level from customers has been, whether we should expect to see any impact on the maintenance revenues this year?

Then secondly, the press stories around the unionization of the work force on the Employee Council, could you give us an idea of the essential impact on SAP and your view of that? Thanks.

I will try to take both. It's Henning. And it might be at the end, Leo can add something to the maintenance.

The premium maintenance came out at the end of January, beginning of February, so I would say a half -- nearly one-third of the quarter was gone. It is a little too early to comment on this from my point of view. I think what we can comment is more the maintenance, just makes attention maintenance, which is out there for some time, and where we see a lot of it, particular large customers taking that.

So that tells us that if there's right service behind, customers are willing to pay the additional amount. You know that next attention is (technical difficulty) 25%. I would say ask us next quarter for the premium one. It is a little too early now.

For the Work Council, it is very important to know that having a Work Council has nothing to do to get unionized. If you look to SAP, you know that we are the only large company left in Germany that has no Work Council, so it was a question of time when a few people were asking for it. We have now 36,000 employees and they have been -- and I don't know -- 12, 13,000 in Germany, and three are enough, just to put this into perspective.

I expect that we will get a Work Council in June when the elections are, with a very, very high representation of people that want to preserve SAP's culture and see attachment to the management like it was very successful in the past. I cannot exclude, because we will get 37 members in the Work Council that there is one or might be two from the unions, because that would mean that 2 or 3% of our employee base, German employee base, would vote for this list.

But this is by far the minority, so you expect the culture in SAP, the efficiency and the way we work continue like we did it in the past.

Okay, thank you.

Matthew Hammond, Credit Suisse.

Two quick questions. First of all, can you just give us a feeling of how many extra heads you think you're going to add in services this year? You have given the sort of overall figure, but if you can give us some sort of feeling what you think you're going to add in terms of -- especially given the very significant uptick in Q1.

And secondly, can you give us a feeling for Japan? It seems to be a perennially difficult business for you to forecast, not only for us, but I guess for you guys too.

Maybe I can take Japan and give Leo and Werner time to think about the head thing. As I've pointed out, we are not concerned about Japan. You know we are in a transition there. Leo has since bought a new [MD], which has all, let's say, our trust behind to make the necessary transition into more volume business. That is one point of the metal and that takes a little time.

The second is we are confident that now having NetWeaver, we can address better than in the past these, I would say, special interests of the Japanese customers in home-grown software. In the past, it was tough for SAP to expand the market. You know our market share in Japan is as high for packaged software as we have it in Germany, but Japan has more potential, so it is up to us. It's the Asian market (technical difficulty).

We think now with this platform and NetWeaver this is a good opportunity. So we are looking forward that Japan will grow this year and you will see it at the end of the year. It is a similar situation like last year. With (indiscernible) you were a little bit concerned at the beginning and at the end (indiscernible) the same will happen with Japan.

Yes, maybe I can answer the second part of the question as well. You should not call it necessarily your expectations and consulting or in services with headcount. What we do is -- the first thing we attempted to do and we were very successful in 2005, and now particularly in Q1 2006, is we increased the billing rate of our available capabilities and capacities, which we have done rather well in Q1, which has on the one hand boosted revenues, but significantly also the margin in consulting. We are going to try to keep that policy moving forward, so you should not expect huge amounts of additional headcount. And as I said earlier, it is not our intention to keep growing consulting or our services at the rate that you are seeing today.

We are moving in the mix of revenues and consulting more and more towards high value-added premium services which, therefore, can be delivered without necessarily growing so much the workforce, but by adding significant added value to the existing workforce and, therefore, being able to either achieve higher billable rates or even higher rates.

As to Japan, just to complement what Henning has said, you should bear in mind that the little dip that we had in Q1 is nothing more than EUR4 million. And given the structure of the Japanese market, this is usually one or two large deals that have either flipped or have been postponed by a customer. It is not indicative of any trend.

Matthew, if you look to the presentation we provide, there is one chart included worldwide headcount, and there you will see that in the service line we even had a decrease in headcount if you compare the March 31st number with the December 31st number.

Thank you very much.

Michael Schacht, Cheuvreux.

Yes, thank you and good afternoon everybody. I've got two questions if I may. First one is maybe a follow-up on the service side. You mentioned that you are going to increasingly focus on industry solutions. Does that not incorporate higher service revenues as a percentage of the business model?

And secondly, Latin America. You mentioned a very large deal in the quarter. And in the past, these deals have always been split over several quarters. So should we model a similar impact also over the next quarters from this large deal?

Might I take the first one and then Leo can come to Latin America. We stress so much industry solutions for the following reason. If you look to our price list, then you know that a few years ago, we sold components like CRM, SCM, etc. Over time, we added components -- (indiscernible) came and we added engines, because the businesses kept getting more and more automated, which means our price list got more complex.

We wanted to simplify our price list and we really made a lot of in-depth analysis with our customers. And the result was that the best is having industry-specific price list, and going away from ERP, CRM etc., having more or less an ERP as a backbone, but then on top not so much supply chain management CRM, but end-to-end business processes.

And that is very much appreciated from the market, and therefore we changed our prices accordingly. So we are not falling so much the categories of CRM, SCM, etc. But it has nothing to do -- just to finish this with a change in our strategy and services, etc. -- is just to show to the market that these are artificial views of looking to enterprise applications. That is something which came up 5, 6 years ago when we had the era of best of breed, which is now gone and customers looking (technical difficulty).

Yes, and as to your specific question on Latin America, it was indeed a significant transaction. We always do the same thing. We book a contract according to deployment and the speed of adoption of the customer, so that not to distort reality here. We have done the same thing on that particular deal as well.

It so happens that it is a deal that has occurred with an existing customer, so part of it can be adopted rather quickly. Another part of it will be adopted over time, and that is how we will, of course, recognize the flow of revenues that will be generated from this contract.

Thank you.

Alla Gorelova, Sal Oppenheim.

I have two clarification questions. First of all, on Germany, if you could give us some indication what exactly happened in Q1 that you were able to report such strong revenue increase, if it is any particular sector or any particular reason specific for the German market.

The second question is on the progress with Mendocino. Where you standing now? What is the pricing? If you could a little bit give some more information.

It's Henning. On Mendocino, not (technical difficulty)-- it's on track. It is going according to plan, so I think we said we want to ship in June. That is still the case, and we will show something at SAPPHIRE. So therefore, Mendocino is normally on track.

In Germany, I have to say, that's why I answer this question that the team did a very good job. So it's was a good sales execution, we have to say it here. And therefore, they are also confident for the rest of the year in Germany. But let me add, being a German, one final remark. I also think that the German economy, in particular the companies, our customers did a good job in the past earning money and are ready to invest.

Is it possibly an indication of an upgrade cycle turning now in your favor in Germany?

That is too early to say, but I just wanted to indicate that we have a large installed base and this large installed base is (technical difficulty) continued to see solid business (technical difficulty).

All right, thank you.

I think this concludes today's conference call. Thank you all for joining us and we look forward to seeing you at the upcoming SAPPHIRE in May.

Thank you and bye bye.

Ladies and gentlemen, that will conclude today's conference. We thank you very much for your participation. You may now disconnect.