SAP SE (SAP) 2006 Q2 法說會逐字稿

Hello, everyone, and welcome to SAP's second-quarter earnings conference here in New York City.

My name is Stefan Gruber;

I'm head of Investor Relations at SAP.

I would like to give you a quick overview on the agenda for today.

First, Werner Brandt, the CFO of SAP, will walk you through the numbers and the outlook.

He will also comment a little bit on the issue which was discussed last week of the call order entry versus recognized software revenues.

Next, Leo Apotheker, President of Customer Solutions and Operations and Member of the Executive Board of SAP, will provide you with an update on our regional performance and our success in the midmarket.

Finally, Henning Kagermann, CEO of SAP, will comment on the business environment and our enterprise SOA roadmap.

I would like to give a quick technical comment.

This conference today is being webcast on our Investor Relations web page.

So later on for the Q&A, please use some of the roaming microphones here in the room.

And finally, before I get started, we have the Safe Harbor statement, the (indiscernible) this year.

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

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

Now, I would like to hand things over to Werner Brandt.

Thank you, Stefan, and good morning.

Here is a snapshot of what we present to date.

First of all, Q2 financial figures at a glance.

The software in product revenues increased by 10% year-over-year at constant currency.

We had a very strong order entry performance and we are on track for the first half of the year.

Total operating expenses increased by 7%, which gave us a leverage in the second quarter, and pro forma earnings per share increased by 38% to EUR1.41, and benefited from a reduced effective tax rate of 25% in the second quarter.

Some important deal metrics as for the quarter, number of deals increased by 18%; indirect sales increased by 20% year-over-year.

This is based on the number of deals in direct sales increased by 17%, adding up to 18% quarter-over-quarter.

Business with new customers is 24% of order entry.

You see the number for 2005 here, and you see some metrics with regard to the number of -- increase of number of deals with the size of more than $5 million and below $1 million.

This seems to be very stable if you compare the quarter over quarter.

If you look to the half-year figures, you see first of all we have 1870 new hires on a FTE basis in the first half of 2006, with investment focus as always set in R&D and sales and marketing.

Of course, this number is also impacted by acquisitions we did.

I remember Virsa, Frictionless Commerce, Praxis Software, and Khimetrics.

It's I think important to mention that 42% of our new hires were hired in low-cost locations in the first half, and for the full year we still target to hire 305,000 employees in 2006.

Further, efficiency improvement, I think you saw a very strong pro forma margin increase by 80 basis points quarter-over-quarter, and this is driven also by a very strong pro forma service gross margin increased by 100 basis points or 1 percentage points to 26%, due to better utilization rates, and here it's important to talk about billable utilization.

Now, if you look to the key figures for the quarter as we always do, you see software revenue as indicated 8%, 10% on a constant currency basis.

With 10% growth on the maintenance side to $856 million, and the service revenue increasing by 9% to $686 million, we see total revenue increasing by 9%, and this on an actual and on a constant basis.

With the leverage on operating expenses increasing by 7%, we come to an operating income margin of 24.2%, and this is not pro forma.

That's a real operating income margin, and the operating income itself increased by 15%.

And you see all of the other metrics this year; net income before income taxes increased by 26%, and I will talk about later a bit about financing (indiscernible) too.

Net income increased by 43%.

I mentioned before the effective tax rate, and earnings per share increased to EUR1.35 by 43%.

Now if you look to the pro forma numbers, we always start with EBITDA.

You see EBITDA increasing by 14%, with on a quarterly basis if you look to the depreciation and amortization, it is roughly $100 million, and the margin is 26.7%.

The pro forma operating margin, excluding stock-based compensation expenses and acquisition-related charges, increased by 13% as the margin itself achieved 25.4%.

The effective tax rate is down to 25.1%.

This is due, and let me state this very clearly, this is due from a settlement with fiscal authorities on one specific topic, the impact worth 30 million -- and this represents $0.10 per share.

And we said last week, and I would like to repeat this here, if you look to the tax rate for the full year, we will see a rate around 30% or below 32.5% instead of 34.5%.

The revenue analysis, let me stay here for a second.

First of all, I think it is important to mention besides all of the growth rates we see two things.

The first one is that we saw a decline in the maintenance revenue on a sequential basis by $4 million.

This is disappointing and we have two reasons for this reduction here of $4 million.

Number one, of course, the currency; we mentioned this already in the call last week.

But this is roughly 50, 55% of the story, and the rest is -- and we have to admit this -- reduced maintenance for some customers across all regions, but mainly in the United States.

The second point I would like to highlight is the growth rate on the consulting side.

You see here 9%.

On a half-year basis, it is 30%.

I want to make clear that we do not anticipate this kind of growth for the full year of 2006.

If you go down to the operating expense analysis, we always start with the pro forma gross margin analysis for the second quarter here.

You see, first of all, that we have a stable pro forma product gross margin.

This is driven by an increase of all of the expense elements within cost of product.

You know we have [purchase] license here, which increased by 10%, but also the support cost increase in this range.

So we have an overall increase of pro forma cost of product by 10%.

Let's keep in mind that we have included in this pro forma cost of product also one-time hits coming from litigations, and only in the quarter this was around EUR10 million.

The service side improved as mentioned before on a quarterly basis, here by 1 percentage points to 100 basis points.

First of all, if you look to the headcount, you will see later, the headcount in the service side is [split].

But we are seeing strong margin improvements on the consulting side as I mentioned before, 100 basis points improvement, but also on the trading side we see 17% improvement here on a margin side.

That portion included in cost of service which showed a decrease in margin is the hosting business, but as we indicated beginning of the year, we are investing in this hosting business in order to be positioned for new business models going forward.

For consulting again, it is billable utilization and also bits of utilization which helps us to bring up the margin.

And the key driver for this margin extension came out of the U.S.

So if you look to the product and service gross margin, it's 64% constant quarter-over-quarter, 2006 versus 2005.

If you look to the half-year, I think the picture is quite similar, for this is only for your reference.

And let's come now to the pro forma cost analysis in the second quarter.

I would like to start again with R&D where we have one clear focus in investment, and you see this increase here of 11% is solely driven by an increase of personnel expenses, and this is based on an increase of headcount in R&D by roughly 1800 if you compared June 2005 versus June 2006.

Sales and marketing as a percentage of total revenue declined by a percentage point.

This is more a rounding effect.

This is really not 100 basis points reduction here.

And sales and marketing, if you split it, we had $290 million in sales increased by 6%, and marketing expenses increased by 3%, up to $177 million.

And both were driven by additional hirings in the quarter on the sales side.

Roughly 560 FTEs added thereof 65% in our region of growth; that is the U.S. market.

And also if you look to the marketing, more than 200 new heads in marketing, and 50% of this is around the global marketing we have here in New York.

Again, if you look to it from a half-year perspective, not a real change.

This is in line with the quarter.

Now, our pro forma operating expenses, if you look to this one, you see personnel is a key driver of the increase in pro forma operating cost, and I think there is no need for further explanation.

Let's come to the consolidated balance sheet for June 30.

I think the balance sheet structure is healthy.

I would like to highlight one piece here; that is a reduction in liquid assets.

We see this on the next slide.

We provide here bridging between the liquid assets by the end of December 2005, with more than $3.4 billion, and we end up with $2.5 billion.

And the main levers here are, besides increasing operational cash flow, which increases our cash and liquid assets, you see dividends of $447 million.

You see spending for acquisitions, and this is on a cash-flow basis here, $486 million.

You see that we purchased -- repurchased stock owned shares at an amount of $938 million, and this is equivalent to 5.66 million shares at an average price of EUR165 per share.

But if you look to what we had in treasury stock as a whole, it is now 11.3 million shares, and the average share price is roughly 139 in our treasury stock.

And keep in mind, we want to use this partly for options, which I exercise for our employees.

And if you take the number of options outstanding, we have roughly 15 million outstanding, so we still have room under this regime to increase our buyback activities.

DSO, I think, we saw an increase of one day.

I'm sure that this will, with all of the focus from the countries, will improve again.

This quarter we have -- this first half we have an increase of one day.

That is at the end of the day not acceptable, and we will do a lot in order to show improvement.

Again, you see our equity ratio and our operational cash flow here.

This is in line with what I set for the full year in terms of our ability to generate free cash flow in 2006.

If you look to the headcount on a worldwide basis, you see if you compare to March, 5% increase in product.

Remember, this is the service and support organization, including custom development, increased by 234, thereof 30% in low-cost.

And the other area where we saw increase is R&D, was 580 in the quarter, and thereof 52% in low-cost locations.

This number, as I said, is impacted by acquisitions in the quarter.

The number is 316 FTEs coming from acquisition, I said before, for the half-year, versus roughly 450.

Here is one part I would like to spend some minutes on.

That is software order entry versus recognized software revenue.

And you see for us, order entry is a key indicator for future software revenue.

Order entry was strong over the last quarter, especially strong now in Q2 2006, and here you see the general rule, software quarter entry increases when a contract is signed by the customer and SAP and the contract is posted.

Posted means in our system, is entered into our system.

And software revenue generally increases when a contract is signed by the customer and SAP, and the delivery has occurred, and the fee is fixed and determinable and collectibility is -- probably you know all of these criteria which must be fulfilled under the respective accounting guideline SOP 97.

Here I have some typical examples for differences, and if I only look to the top deals, top four deals in order entry, in the second quarter we had order entry of 100 million, and the realized revenue behind this was roughly 30 to $35 million.

You see a dip here, and this will come over time.

There are several reasons behind it which we have listed here, and we will see one example from where I will articulate later on, which illustrates it.

For example, if you take phase contracts with committed phases, software entry all phases upon signature, posting of the contract.

That is clear.

We have an umbrella agreement over four years, but at the end of the day, the customer commits to buy in phases over the four years one-fourth of the entire software order entry.

So each phase upon agreed-upon date, and we can recognize the revenue.

In one case, order entry was 28 million and revenue recognized was $50 million.

Future functionality and undelivered functionality, of course, order entry when we sign the contract, but software revenue recognition according to the rules, only possible when all functionalities are delivered.

We had one instance here, 20 million order entry, $50 million revenue recognized.

Custom development projects, I think the multi-element agreement with custom development elements upon signature posting of the contract, total contracted software amount.

But if you look to the revenue recognition, it's software revenue ratably over the term of the development of the customer development project.

So it's percentage of completion, and here we had one case with 60 million in order entry, but 0 revenue recognized.

This will come over the next quarters and years as we make progress with this development project.

You have BPO and rental deals as I mentioned here, and subscription deals, especially global enterprise agreements, but that is a topic I would like to leave up for Leo who can explain some real-life examples in a minute.

The outlook, the outlook has not changed.

The Company continues to provide the following outlook for the full year 2006 as described in its April 20 first-quarter results press release.

Let me read this so that it is really communicated to everybody, also everybody not being present in this room.

The Company expects full-year 2006 product revenue to increase in the range of 13% to 15% compared to 2005.

This growth rate is based on the Company's expectation for full-year 2006 software revenue growth in the 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 the range of 50 to 100 percentage -- 0.5 to 1.0 percentage points compared to 2005.

The Company expects full-year 2006 pro forma earnings per share, which excludes stock-based compensation and acquisition- related charges and impairment related-charges to be in the range 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 1 euro.

That is very important.

The expected increase in headcount is 3500 FTEs, and as I mentioned before, tax rate below 32.5%.

That is all from my perspective, and now I would like to hand over to Leo Apotheker.

Good morning, everyone.

Thank you, Werner.

I would like to give you a little bit more color on what happens not only in the quarter, but also in the half-year.

And then I will try to give you some visibility and some information on some of our performances across the board.

If I look at the half-year, we grew our software revenues by 14%, and in fact, Q2 2006 marks the tenth consecutive quarter of double-digit software revenue growth.

That is important to remember.

We came in in 2006 slightly below street expectations, but a few things people should keep in mind.

First of all, our order entry as Werner has already mentioned grew much faster than recognized software revenue in Q2.

Some deals were closed that will be recognized over a number of years.

Werner already gave you some of the reasons why that happens.

And indeed, some transactions that we had hoped to close in the first half or actually end of June will now close in the second half of the year.

The good news is none of these deals were lost, and we expect to close all of them.

We had a continued high win rate against our main competitor, and that is a good sign.

Despite many of the attempts that have been made to change that, we continue to have a very high win rate and we have every intention of keeping it that way.

And we are on track to achieve full- year growth targets.

Now, let me maybe give you some color about a particular transaction that we do that is very important for us, for our customers, and also for you to understand.

It is global enterprise agreements.

We're talking about a strategic partnership with a selected number of customers, and in fact, what we're doing is thanks to our ESA roadmap that is now available and the visibility that this has given our customers, we can now engage into a conversation with key customers who want to commit for a long period of time on the strategy for SAP, and we can thereby underpin the relationship for a long period of time, usually five years.

We signed two global enterprise agreements like this in the first half year.

That's probably one of the things you have heard what you call nicely your sources of information, and these are high double-digit deals, sometimes even low triple-digit deals.

And as I said, they commit the customer and SAP on a five-year relationship.

We started this initiative about a year ago, given the strategic nature of these things, the negotiations and the discussions and the conversations alone.

Because it is not just about a deal, it is about true relationship, the implementation of the software, what will be included, what won't be included, because this is not a "as much as you can get" deal.

It is usually with limited scope.

We don't put everything in there.

Because of the nature of the deal, we recognize revenues quarterly on a pro rata basis over the term of the agreement.

So if I take a global enterprise agreement of 100 and it's over five years, that is 20 quarters and, therefore, the mathematics are pretty simple, and that is as it is described on the graph.

So when you hear that we win last year's, it is absolutely true.

We do win last year's.

We actually win the vast majority of them.

Some of them, and we are working on that, like in this example, are structured in the way I have just described, which explains also the large difference between order entry and our recognized software revenue.

Our volume business continues to do really well.

We added another 3500 customers globally.

Our indirect channel and our customer base continues to expand.

We have now about 8300 all-in-one customers.

That is a growth of 24%.

We have 1807 partners, all-in-one.

That is an increase of 24%.

And in Business One, we have passed the 10,000 customer mark.

It is now 10,800.

That is a 54% year-over-year growth, and we have about 1300 partners selling Business One; that is a 38% growth.

As you can see, the channel is expanding and is gaining traction.

We had strong revenue and good number of contracts growth from the indirect channel in the first half of 2006.

We grew the number of contracts by 26%, and that gives us a little bit of a better balanced deal size contribution between the last years that are sometimes a little bit binary and denies flow of deals that come into the volume business.

We have deployed the SAP PartnerEdge program, which is recognized by many of the industry pundits as the best partner program in the industry.

And when I look at our various efforts in verticals and industries, we have balance and strong growth in both our traditional industries, life science, chemicals, oil and gas, telcos and utilities, and also our new focus industries.

And in particular, I would like to point out high-tech, retail which is absolutely booming, and public sector.

We maintain our leadership in the small and midsize business segments.

We report this every quarter.

You know how we do this.

I don't go into the mechanics again, but as you can see, we do a good 30% of our $3.5 billion business rolling four quarters in the SME segments, and that by itself is almost as much as the number two of the industry does in all of the segments globally in the entire business.

To give you some information on Safe Passage, that continues to do really well.

We have now 310 customers that have selected SAP as their trusted vendor as part of the Safe Passage initiative.

We added in the first half year another 110 customers.

A few key names that I can share with you today in Q2, we closed Brainlab, Dubai Aluminium, Empresas Municipales de Sevilla, La Caixa, (indiscernible), Saint Gobain Systems d'Information, TBC Corporation, and Telefonica.

We have extended the program in order to offer it as well to Siebel customers, and we have opened a TomorrowNow office in Austria, and now we have a global network of TomorrowNow capabilities, which is gaining significant traction because of that.

Some selected customer wins in the second quarter.

In the Americas, Americas, Beall's, Deloitte Consulting, ExxonMobil -- I don't need to tell you what they do -- Invensys, Jabil Circuit, Johns Manville Corporation, S.C. Johnson.

And the Home Depot has reconfirmed its commitment to SAP, and that is something we are very grateful for and we really appreciate that.

In EMEA, Commerzbank, Dematic, Givaudan, Ilim Pulp Enterprise -- that's a large Russian company -- the Ukrainian Ministry of Defense, Oce-Technologies, a highly-competitive bid against the number two of this industry;

Saint Gobain Systems d'Information -- that's a Safe Passage deal -- and of course, Telefonica.

In Asia-Pacific, Anshan Iron & Steel, China MinMetals, also a very competitive deal;

Malayan Banking Berhad, Noritsu Koki Company in Japan, Reliance Communication in India, and the Water Corporation in India as well.

If I look at the software revenues by region for the half-year, the Americas did really well and grew 31% or 25% in constant currency, of which the U.S. contributed 20% growth and 17% in currency adjusted figures.

APA, 5%, but if I exclude Japan from APA, that's actually 13 and 10.

Japan had a small decline, but Q2 showed some good news.

EMEA 4%, and Germany despite the World Cup -- or maybe because of the World Cup -- grew by 8%.

Let's maybe take a deeper dive into the regions.

The Americas in the first-half year, let me just maybe put things back into perspective for everyone.

The U.S. has now delivered 12 consecutive quarters of double-digit growth.

That is quite an achievement.

In fact, if I look at the average growth rate over the last 12 quarters, the U.S. had a 34% average growth rate over these 12 quarters, which I think is quite an achievement.

The Americas region continues to be a key growth driver for us, and the growth rate of the region was 31%, 25% at constant currencies.

We are the clear market leader in North America, but also in the U.S.

And I am very happy also to see that our midmarket performance in the U.S. is picking up real steam and is going strongly forward.

In Europe, highly heterogeneous region as you all know.

We had actually solid performance, and just to put things into perspective here as well, we generate in Europe about 3.5 times more software license revenues than the number two.

And that is on a rolling four-quarter basis.

We had very strong performance in Russia, very strong performance in France, good results in Germany, good results in Switzerland, good performance in Nordic in the half-year, good performance in the Benelux.

And we had some challenges that you have heard from other companies as well in some other parts in Europe.

The UK was slightly below the average, so was Italy and so was Iberia.

Asia-Pacific, we continue to do a great job in penetrating the growth markets in Asia-Pacific, particular China and India.

We usually don't disclose the exact numbers there, but just to give you an indication, in countries such as India and China our growth rates either big double-digits in certain -- and in one of the two cases actually triple digits.

In Japan, the situation is still a bit of a challenge, but we have some good news.

Q2 actually showed a stabilization, if not a rebound, with 4% growth in constant currency, and we feel confident that that trend will continue like this in that very important country.

We have made quite some changes there and we feel a lot better about Japan than we did before.

Maybe just to conclude and to remind you what our priorities are for the remainder of the year, we want to extend our leadership both in the core enterprise application markets but also in our focused industries, the ones I have mentioned earlier on.

We will continue to push very hard on this small and midsize enterprise segments, expanding the channel, giving us better go-to-market capabilities.

We are continuing to boost and to strengthen our partner ecosystem, which we feel is very important for our short and medium-term performance.

We will expand our leadership in the platform markets, and we will continue to focus on the business user, thanks to SAP Analytix, our xApps, our Duet offering, and CRM on-demand.

And we actually feel that we have a very good global enterprise offering going forward.

We have probably the best balanced regional distribution of all companies, and our high-growth markets are gaining greater and greater prominence in our country mix.

This being said, I would like to turn it over to Henning.

Thank you very much.

Good morning, ladies and gentlemen.

I was asked several times these days if the business environment has changed.

So I didn't feel so from my talks; but we checked with the Leo and regional presidents and I can confirm again -- it hasn't changed.

[Deeper] questions this morning in the TV about some of the results of European vendors, particularly business objects and others.

But again I think Europe is as it was before.

So you should not expect any macroeconomic environment changes here.

On the other side, if you look to our customers, I think how they make their decisions is also the same.

You know that every customer these days wants to avoid risk; so from that point of view, switching vendors isn't that easy.

Therefore I am pretty happy to see that our Safe Passage program is taking off, adding another 70 cases in the second quarter.

It's accelerating in pace.

They make their decisions based on business cases.

That is the reason why our win rate is still very high.

We win in 70% of the cases where we compete head to head to our competition.

Yes.

And they look for long-term strategic relationships, and that is the reason why Leo and his team had now since some time engaged in this type of negotiations he explained.

I think this type of deals can only be made with the key customers that have a large footprint of SAP and that trust a vendor for a long time.

What about price pressure?

Yes, it is the same.

I think you know, we are in a highly competitive environment, so price is one of the weapons competition is taking.

We have to adjust to this, but it is not getting really worse.

It is what we know and [won't] affect us in our guidance.

Last but not least, there are sometimes questions about our enterprise SOA roadmap.

Will SAP deliver on time?

What about the speed?

I can just confirm we are on track here as well.

Just two highlights.

We have at the SAPPHIRE announced the general availability of the first services enabled ERP suite in the world, I think earlier than some people expected.

The response was extremely positive, and I have reconfirmed that we will evolve NetWeaver at the end of the year into a true business process platform.

Now, what about the guidance from my side?

Let me reiterate that there are good reasons why SAP is always giving an annual outlook.

I think we were pressured several times to change it to quarterly ones, but you know our seasonality.

I think if you look and know our past, it is good to give a yearly one, and we stick to this.

On the other side, I think we are giving ranges.

We are giving you [several] guidance.

We are giving ranges; and please understand that this is the flexibility we need.

So you should not expect at the end of the day all figures to be at the same area of the range.

Some can be at the higher end, some can be at the lower end.

That is the type of flexibility.

If you take this into consideration, I think you can adjust your models.

You will see that our guidance is consistent.

So where are we today?

We are today at this 13% product revenue growth.

Our operating margin went up 60 basis points.

EPS grew by 30%.

That was a base where we said, okay, overall we are within our targeted range; and we could reiterate our full-year outlook.

That is the base.

You know that we made two assumptions at the beginning of the year.

We said, okay, this is based on the assumption of a certain software revenue growth.

I also want to highlight that we made a change at the beginning of the year, that we said we guide on [product] first for good reasons.

You have seen one of the explanations from Leo.

Nevertheless, we feel comfortable in software as well.

I think we are a little bit below expectations.

But on the other side, if you look to the order entry then you see that we have not lost deals; and I think we can catch up here as well.

Finally, we want to exclude currency fluctuations.

I think that is something we can't manage.

Therefore we have given you a base on which our guidance is based.

Beginning of the year, this 123, adjust for your information what we had in the first, second quarter.

You will see currency was in favor in the first, was against that in the second.

But overall for the half-year, I [will not] claim it was more or less in line with what we expected.

If that continues, it's okay.

If it changes dramatically, please have in mind that this is part of our guidance.

Now, is there a switch in priorities, because SAP did so well on the margin in the second quarter?

Do we not invest any longer?

The answer is no; we continue to invest, as I said, otherwise we could not deliver on the Enterprise Services architecture roadmap.

We added 1,800 people, many, many of them in research and development.

Again you will see the areas of investment.

You also see that most of them are now in the market, so we can deliver on time.

I explained already that some of those will be shipped at the end of the year.

There is no delay.

There is no indication for a delay.

We will ship according to plans.

ERP and in particular NetWeaver are well received in the market.

In particular, that we have such a strong acceptance of ERP is one of the, for me, proof points of SAP NetWeaver, because it is a successor of R/3.

You know how conservative clients are, and they would not expect NetWeaver or ERP if they would not trust NetWeaver.

Last but not least, customer satisfaction, all-time high.

Hasn't changed.

On the highest level ever, even in the second quarter, not only in the first one.

All in all, this is the market share.

You can see two things.

We have continued to gain market share, but you see that our competition has gained more in the second quarter.

So we lost some peer group share, as you could calculate yourself.

But overall, if I look to the picture and if I take into consideration that we have not spent $20 billion, I feel pretty comfortable with this picture.

I think if we look again some time from now, you will see that our strategy is superior one.

With that, I would like to guide you guide you through our strategy again.

It is not something new, but I think it's important that I confirm that we have not changed our direction.

First of all, you know this is our strategy.

This strategy is different to that of our competition.

It is based on organic growth, on co-innovation.

I just want to give you only a few highlights what we have done in the first half-year in order to work on this strategy and make it happen.

Let's start with our product roadmap.

This is a slide I have shown at SAPPHIRE.

I just want to reconfirm -- no changes.

We have said 2006, a cornerstone year for the completion of the roadmap.

This availability of ERP2005 was a very important milestone for us.

It is more than people originally thought, which is -- in an ERP2005 it is really entirely services enabled.

It is ready to run with all the new product in combination.

It is a lot of functional enhancements.

And the upgrade is proven and easy.

I will not go through the rest.

It is exactly the same slide I have shown; no changes here.

A few data points around it.

If you want to measure -- how is the acceptance in the market of this new architecture?

Everybody is interested in -- is this taking off, or takes it long, or whatever?

I think I personally measure it in these four categories.

The first is -- how are we doing with NetWeaver?

I have given you the software revenue in the first-half.

Roughly 20% is stand-alone; the rest is application related.

You see that we have more than 30,000 installations on components.

We have roughly -- if you ask, how many times is NetWeaver installed as a platform -- between 8,000 and 9,000 times.

ERP, on track with the conversion.

So we will again convert this year between 800 and 1,000 contracts.

We have today 4,600 mySAP ERP customers.

That is ERP2004 and ERP2005 together.

What about the service enablement? 500 enterprise services are available in Q3.

We believe we can deliver 1,000 at the end of the year.

So you will see that every quarter some of them will be added; and 1,000 is already at the higher end of what we want to achieve.

xApps is the last one, the composites.

How many xApps are there?

This is just SAP.

SAP xAPPs, we have now 800 customers, 100 references, and at the end of the year we will end up with 150.

So that gives you a feeling where we are.

Now, what about this co-innovation?

Where are we?

Again, two sides of the coin.

One, we promised to work together with key companies in order to deliver products based on enterprise service architecture.

Just going through them, you know that we delivered Duet, the joint product with Microsoft, on time.

It is in ramp up.

I expect in the third quarter that it will be generally available.

There was Adobe interactive forms; this Project Muse.

We have shown the accelerator for business intelligence, I think something which is extremely important.

If you can achieve effect of 100 faster response time on queries, in cooperation with Intel, HP, IBM.

Then CIO Dashboard with EMC.

And we're working with Cisco on these application-oriented networks.

If you look to the ISVs, I've taken this type of pyramid to show you from the bottom to the top what we're doing.

Yes, there are developers working with NetWeaver.

The developer network has now 500,000 participants.

On top is those that work with NetWeaver.

This is the lowest way they integrate some of the products with NetWeaver; it is now 1,200 partners.

Then I think the stronger relationships -- those who work on NetWeaver.

So they produce products that run on NetWeaver, depend on NetWeaver, 450.

Then we have 35 xApps.

This is not just a composite; this is a composite that are using already the services we are releasing.

Some people could not start [on] that early.

I think now it is about between I think 11 or 12; but I think we will make 50 at the end of the year.

Last but not least, the highest way of cooperation is that we invite our key clients in selected industries with key partners in selected industries, and jointly find out, okay, what are white spots we have to fill?

Some of these are high-tech consumer packaged goods and public sector.

Five are done already; more will come.

It shows you a little bit where we are and the type of partnerships we are after.

Now, yes, we're doing acquisitions as well.

But we're not doing acquisitions in order to buy customers.

It is more to accelerate the completion of our product portfolio.

Just a few of them we did in the past;

I don't what to go into the details.

The last one was Praxis, a very small one, but it helped us to add to our Business One product, which has now more than 10,000 clients, e-commerce functionalities.

What you can see here is that in nearly all cases, with two exceptions, it is entirely complementary.

In two cases, we have 10% overlap.

So more or less, we are, if we acquire, acquiring complementary products and technology.

Finally, platform strategy.

Again, no changes.

You know we are after one -- one central Enterprise Services repository, one language, one set of Enterprise Services.

For small companies, the implementation is on Business One.

Business One is on NetWeaver -- not on NetWeaver, but is using the same language in order to integrate more companies.

For a medium one it will be a different implementation, as we said.

Therefore, you have seen on our roadmap that we will bring at the end of the year mySAP all in one on NetWeaver.

Last but not least, if you look to large ones, I have shown already that ERP2005 is the base on which we will evolve into this platform.

So therefore, if you would ask, what is available today?

This is a picture we show to our clients.

We show here is the integration on the three layers of people who process data, who process with this NetWeaver composition platform.

People [you] see the different user experiences SAP is adding, let's say, on the same layer of intelligence, on the same rules, business rules.

We have added just recently this Project Muse.

I would say it is an alternative to the SAP GUI.

It is very appreciated by our clients.

But they are more -- and that could be the browser which is a portal, etc.

We could access through Office with Duet.

Last but not least, also something is happening on the data layer.

I will remind you again that in particular, if it comes to query, to decision-making, this BI Accelerator is a very important thing.

It is an in-memory database.

So finally, again, no changes at the end of the year.

NetWeaver, which is a composition platform today, will evolves into a business process platform.

We will add selected, reusable process components to this technology platform; and we will continue to evolve the technical capabilities.

So that is -- and finally it is a business process platform.

It is a base for us for the next generation of business applications.

In my SAPPHIRE speech I highlighted a little bit to which full potential we can go with that.

That brings me to reiterating the slide I have shown at the beginning of the year.

This is our ambition 2010.

I have explained why 2006 is important for us.

I will again reiterate; we will complete our roadmap next year, no changes.

But we have to look ahead, what is beyond.

Therefore, we have told you that our goal is to expand the addressable market in these three areas to 2010, to $70 billion.

We expect that 50% of our revenues at the time, of our software revenues, will come from these new products.

We are targeting for more than 100,000 customers.

This is not too ambitious if you look to the acceleration of Business One.

I think more than 50% will be Business One out of these.

Those could also be more than 100,000; and therefore 40% to 45% of our revenue will come from what we call the midmarket.

Thank you very much.

Thank you very much.

At this time, we would like to start the Q&A session.

I have to mention for those of you who follow this conference through the Internet, who are not in the room here in New York, you can send questions by e-mail to investor@SAP.com.

We also try to take a couple of questions we get by e-mail; but I think we start here in the room first.

I see one here on the right-hand side, Charlie Di Bona.

Charlie Di Bona with Sanford Bernstein.

Werner, as your business model is sort of moving towards more roadmap type of deals, where you have more of these stage deals and the order entry becomes increasingly important, can you give us some idea of the size of the orders that are entered but not yet pushed onto the balance sheet?

Sort of what Microsoft calls booked but not billed balances.

Will you be giving us some idea of the trend lines that you see in that?

Because it seems to be very important in terms of modeling the Company going forward.

Yes, I think, if you look back the last 12 quarters, you always see that we have slightly higher order entry than we have recognized revenue.

We have some quarters where this has a size which is exceptionally high, as we had in the second quarter.

We do not see an accelerating trend now starting; but that is something we have to keep in mind.

We decided to highlight this, especially this quarter, because it had an impact on our financial performance on the license side.

Can you give us an idea of the size of the balance that is currently not on the balance sheet and not pushed yet through recognized revenue?

Is this a multibillion dollar balance?

No, not at all.

It is -- if you go back to the example I made for the second quarter, it is a EUR100 million entry and 30 million revenue recognized.

That is the amount we are carrying forward and not more.

We normally close deals where we have a chance to recognize revenue.

But there are some where we have order entry first then the revenue is lagging behind it.

Henning?

Yes, maybe I can add something.

What you're referring to is what we had seen with (indiscernible) where we had this subscription deal, and then we had deferred income; and you saw this in the balance sheet.

That is not what we are pointing to.

At the end of the day, you have the order book filled, but you cannot recognize and you don't have it in the balance sheet.

Why have we let's say highlighted it this quarter?

It was interesting.

We're not talking about it; we will not show you.

What is interesting, if you look to the deals of Q2 last year and this year, and you look to all the large deals, and (indiscernible) very surprised as a CEO [how less] is booked on the larger ones.

That was different, I think in previous sections.

So the point of view, it is getting more of those.

In the past, we had it.

But we had, I would say, one deal in the year; and the next year another one.

Now you see more of them, several in the quarter.

So that is the point of view.

We gave you an indication if we compare order entry to order entry, not order entry to software, 2Q-2Q, then you would see us in the range you expect for software.

Do you expect that pattern to continue? that these become a bigger part of your order flow?

I personally expect it a little bit.

Because first of all, Leo is doing this as part of this business model; and he explained to you why he did it.

The second point is, honestly, I am -- from the top of the Company, was always behind, not, let's say to take the future of the Company to today's [resides].

On that point of view, I am always behind.

If a larger deal is -- I think our regional presidents are facing them.

So I am not pushing them in the opposite.

Okay, your next question also from the right-hand side, Kash Rangan.

Kash Rangan from Merrill Lynch.

Just curious what seems to be a little bit of an uptick in the trend towards these larger deals being broken up into smaller pieces.

Would this now be an opportunity to reset guidance for the year?

Lower this profile on this [topic]?

Just curious what your thoughts are there on that front.

Secondly, it looks like, if we look at the operating expenses, you maybe slowed down hiring or you are starting to get productivity from the previous investments.

How should we think about operating expenses going forward, especially as a lot of the work with BPP is behind us?

Thank you.

I think the first comment, that is too early I think.

There is no indication for us to do it now.

Second question, we will not change in the way that we would compromise on investments, just boosting the operating margin.

I tried to say it in my talk.

It looks like this; it's not.

I think it was more a shift between the quarters.

As we pointed out in our call, we had a little bit of front-loaded investments this year.

If you look to the half-year, it is exactly what we wanted to achieve, but a little bit more at the beginning in the second.

So you saw this, for you, disappointing margin at the beginning; and the better one in the second.

Therefore I said look a little bit more, not quarter-to-quarter.

We manage [the year].

But the clear answer, we will not compromise on, let's say, our products, on to go-to-market, and what we have to do just in order to please the margin.

I said this last year.

If we would see that we could gain market share by accelerating our investment, we would come and we would discuss this with you; or would announce it; whatever.

We would not surprise anybody.

But I just wanted to say from the tendency, let's say, investing in the (indiscernible) is still priority number one.

And this hasn't changed from last year?

Yes; has not changed.

Rick Sherlund.

A couple questions.

First just to follow up on Charlie's question on just how unusual was this in Q2 in terms of the order entry versus recognized revenue.

It sounds like this is something we're going to see more of in the future.

Should we anticipate this in Q3 and Q4?

Or just give us some perspective of how unusual perhaps this might have been in Q2.

Let me try to answer that question, Rick.

What you see happening is very interesting evolution of the business.

You see on the one hand that our volume business continues to perform really well, which gives us a stronger and stronger underpinning, if you want, of a nice flow of income and revenues that come from a pure volume side of the business.

When you look at larger deals, because of there is a roadmap delivery where we stand right now, we have an opportunity to structure the relationship with a number of very large customers who want to actually plan their own future, if you want, ahead of time as well, in a reasonably innovative and smart way that is beneficial for them and for us.

Now I don't think we should talk about trends yet, because I don't think that two or three deals are a trend.

You have our commitment that should this become a trend, we will most certainly notify the market and yourselves.

At this moment in time, I think it is a little bit too early to do that.

But what I think you should expect is that these one or two that we have seen in the first half will continue.

We believe that there is a potential for these deals.

It's extremely difficult to predict if they will close in Q3, Q4, or whatever because it is a long-term negotiation, a long-term discussion.

It requires very careful planning.

You have to really draw the roadmap for the customer.

This is not just some general PowerPoints that you draw out of your drawer.

But it is a huge mark of confidence of our customers into our strategy.

It helps us to deliver the value over time, therefore it is something that we should and that we will pursue.

But I don't think we should go into big discussions about trends because it is too early to talk about that.

The magnitude in the quarter, then, in revenues was anomalous?

The magnitude, the size of them was a bit abnormal in Q2.

Let me clarify one thing.

It is good to have a strong order entry.

It does not mean that we do not stick to the guidance on the product or software license side.

That is I think important to mention.

I have also one thing to add.

I think it is also important to understand why we can't book those deals.

You might let's say question why some competition can book those deals.

In our case, you have to understand what we want to do; we want to help our customers strategically to go to the next level.

So what we do is we engaged and say, look, join us on the roadmap to Enterprise Services architecture.

That makes you more competitive.

If you do this, it is an entirely different sale than saying, okay, I confirm that I maintain you for the next years.

In our case, you sell a little bit the future; in the other case, you sell a little bit yesterday's products you have?

And we don't want that.

So from that point of view, we're taking risks that we have a to some extent valuable deal which you can not book according to U.S.

GAAP and not a fixed one, because it is in the interest of our clients at least.

This is this case.

At the end for SAP clients, this is now the step to the next level.

This I think strategically is a key to engage with the clients.

Because they will say, okay, we trust you; but is this really the one?

It is a longer roadmap, and do you help me, and can I get everything you invent in the next years as well, or whatever?

This is the most strategic relationship, [I will call it].

It is not a just confirming and protecting relationship.

In fact, just to add [a term here], we are not selling software.

We are selling a holistic IT strategy and holistic IT solution, a holistic IT implementation.

We are actually selling or we are partnering with the customer to implement our joint vision of how their business will look like over the next five years.

Second, could we just go back and revisit the maintenance decline?

If we could expand a little bit on that issue.

Then finally on the EPS number, if we have the benefit of the tax rate, why isn't that added to the full-year number?

Maybe I will take the maintenance and Werner the EPS.

I also look to the maintenance.

It is clear, I think if you see it -- and Werner said there are two (technical difficulty) you want to see what is behind.

So first of all, the good news is we are not losing customers.

We're not losing customers.

That was my first belief.

That is not the case.

It is a mix of several things.

In some cases, it is mergers, acquisitions, so it is just a two-party merger.

You lose some maintenance.

In some cases it can happen that a customer has bought something where he felt he bought too much.

He comes back and says, okay, will I ever use this?

Then you engage and say, okay, fine; give it away.

Then the maintenance lowers.

Those type of things.

Sometimes a customer is into financial trouble and you help him a little bit.

This is the main reasons.

All of them are not critical.

What I really can confirm -- this is not because we lose customers.

Not.

The growth of maintenance for the full year is also in line with our product related guidance.

If I look to the guidance on the EPS side, and I think this was your question, Rick, I think when we provided the guidance we provided a range of $0.20, 580 to 6.

I think the onetime effect we saw in the second quarter, it is roughly 30 million in the second.

This is $0.10.

From my prospective, this is within the range we provided at the beginning of the year.

Okay, thank you.

There was in the meantime a question from the Web, again on the maintenance. (multiple speakers) already.

Again if you want to send us questions by e-mail, continue to do so, to investor@SAP.com.

In the meantime, we'll take a question here from the room.

I think the first row.

Thank you. (indiscernible) Germany.

I have a question, actually two, about the Enterprise Services oriented architecture.

If one of you can explain a little bit how this concept and this strategy is linked to the facts and figures.

In other words, how much software revenue already can you link to this strategy, to this new concept?

How will this percentage be in the future, let's say for the rest of the year, or for next year?

The second question.

Your strategy is looking more for the small and medium-sized market.

How does this fit for the Enterprise Services architecture?

To me it looks more as a solution for the big ones and not for the small ones.

That is a very good question.

Indeed, it depends on the definition.

I will be more conservative, then I would say today it is not much of our revenue because we are on the roadmap.

I could be bullish and say everything which is NetWeaver and ERP is already in.

But if I am very strict on my definition, I would say only those where have really service enablement, which would mean for today, for SAP today, it's the mySAP ERP2005 sales I would put into this bucket.

We have not done it so far.

We have looked for [ERPCM] etc.

But it is a good indication.

I can promise that beginning next year, we will give you guidance on this, because it is in our interest as well.

And it's important, because next year we can then give you also an indication who is taking this faster, the larger enterprises or the midmarket.

Because we address both with different products.

I would say, during this year or next year, we will have these products available; so therefore it makes sense to show it.

Now to your question, is this only something for the high-end?

The answer is no for two reasons.

If you look to large enterprises, it helps to master heterogeneity and the speed of change.

We all understand this.

It is a complex environment.

You want to replace pieces without changing the rest.

You want to adopt fast.

All those stories fit nicely.

Now the question is, what about the midmarket?

In the midmarket you could argue, first of all, they change fast as well, so that fits.

But on the other side, the midmarket is not that complex.

They want a solution more or less out of the box.

Here, this strategy helps us to go to market with mass customization.

So with I would say nearly 1,000 of preconfigured solutions which would lower the price for implementation on [TCO] significantly for the midmarket, but still having the same functionality of benefit as the high-end.

Yes?

So, I would say for them, it is more an indirect use.

The last one I would mention, it helps them also to integrate very quickly into the business of large ones.

All midsized ones have as customers normally large enterprises.

Now it's a question, okay, how fast are you to integrate into your business?

The faster and more seamless, the more business you make in the future.

These are the benefits we say to midmarket.

Thank you.

Before we take another question here from the room, there is a question from the Web, actually on the accelerated share buybacks in the first half.

The question is, what do you expect in terms of share buybacks in the second half of 2006?

I think we will continue to buy back shares but not accelerated as we did in the first half of the year.

Remember, when we were provided our EPS guidance beginning of the year, we said it is based on roughly 307 million shares outstanding.

We have -- are now on an average basis at this amount; but this does that mean that we do not continue.

So we will continue to buy back shares in the second half, but not at the same pace as we saw in the first half of the year.

Great, thank you.

Now we take a question from the room, John McPeake.

John McPeake at Prudential.

When I look at the GEAs and also your -- at least this June quarter the increased bookings versus recognition, should I think about the ratio of license to maintenance changing on a recognized amount of dollar deal?

Per dollar deal?

I don't think you should.

The maintenance is, as you know, a percentage of the license.

Therefore, there is a correlation; when you book the license you book the maintenance.

But these ratios are what they are, and it is percentage driven, so there should not be any change.

Okay, it just says that existing maintenance payments become part of the GEA when you sign them.

So I was --?

In the case of a GEA, the situation is slightly different.

You sign an overall agreement for 100; as you book it going forward, in those 100 you have the entire transaction.

So you also have [to follow]; you also have maintenance included in there.

So for $100 of deal size you are still going to have the same ratio?

There won't be any [combing] going (multiple speakers)?

Yes.

Okay, thank you.

Thank you, another question here, Peter Kuper.

Peter Kuper with Morgan Stanley.

Earlier this week your friends at Oracle were saying that Fusion has tremendous advantages over let's say NetWeaver on an [SMA] type strategy.

If you could share with us maybe just general comments on that.

But also what customers that are believing in your vision see as advantageous over Oracle Fusion, please?

Yes, thank you.

I have not seen this presentation.

I would love; but you can send it to me and then maybe we can give more detailed answers.

At the end of the day, I think, my first answer is always that people or customers in SAP can touch what we're doing.

So we're not only talking about it.

We have not only shipped NetWeaver but we have also shipped products on it.

So if you look for example to the ERP2005, it is a services enabled ERP; so we would argue where is the, let's say, the same from our competitors?

And how does this work?

What does this mean?

How does this work?

What I have seen sometimes is that they claim SAP is not following standards;

SAP is using old technology; and those type of things.

The answer is, first of all, we are using standards.

We are pretty open.

Otherwise, how could we cooperate that nicely with Microsoft and IBM's platforms?

The other point is always about what is a standard?

My answer is always, for me, it is more about giving choice to clients than declaring something I like as a standard and try to persuade others that this is a standard.

So from that point of view, we are giving choice.

If a client, for example, wants to extend in JAVA, he can do it; he will not see other things we have in our environment.

If a large client of SAP likes [UPUP], he can still use us; we will not take it away from the market.

If clients like the Microsoft environment, they can use us.

Otherwise, we could not (indiscernible) that.

So you see more our approach.

We would not be religious on standards.

We're looking what our key clients want and we give them choice.

From that point of view, I feel pretty comfortable.

There is another point I would highlight.

This is, if you look to the concepts of the Business Process Platform as a combination of reusable applications of technology, and the concepts behind model driven, not only services enabled, but also event driven, etc., then I think you find all the modern concepts people are highlighting today.

I don't know one which is missing.

But we can debate it in detail.

I would like to maybe add one very pragmatic point to what Henning has just said.

When I look at what is happening in the markets with customers, then let's eliminate from the discussion for a second SAP-centric customers or Oracle-centric customers.

Because they have kind of predetermined choices.

Let's look at situations where both of us are present and the company needs to make a decision about the future.

So therefore, these people have to make a wise choice between two strategies to approach [us], two technologies.

And architecture is a very important part of it.

Without revealing names, because I can't, I can assure you that there have been a number of these situations over the last three or four months all of which have been won by SAP after a thorough investigation of the customer of Fusion versus our strategy, versus NetWeaver.

As Henning said, they could touch NetWeaver; it is hard to touch PowerPoint.

They looked at the ESA roadmap, they looked at what we're able to deliver, and the conclusion was fairly straightforward.

Thank you, there is another question from the Web.

Do you see a shift in seasonality for the remaining quarters in the second half?