SAP SE (SAP) 2006 Q3 法說會逐字稿

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

This call is being recorded.

Today's call will be hosted by Henning Kagermann, Leo Apotheker, 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 third-quarter 2006 results.

I am joined by Henning Kagermann, Leo Apotheker, and Werner Brandt.

Werner will discuss the Q3 financials in detail.

Leo will comment on the current business environment and our regional performance.

Henning will then provide some further in-depth commentary on the quarter and SAP's product successes.

Before we start with the call, I would like to remind everybody about the SAP investor conference on December 4 in Las Vegas.

This conference will be held together with SAP's industry analysts' summit.

Invitations for this event will be circulated shortly.

In addition, I will make a few remarks about forward-looking statements.

Any statements made during this call that are non-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 specifically 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.

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, the SEC, 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 their date.

With that, I would like to hand things over to Werner.

Thank you, Stefan.

Good morning, good afternoon to everybody on the call.

We reported a strong third quarter, with software revenues increasing 17% to EUR691 million.

On a constant currency basis, software revenue grew 20% year-over-year.

Maintenance revenues were EUR884 million, which was an increase of 10% compared to the third quarter of 2005.

Sequentially, from the second quarter of this year, maintenance revenues increased by EUR28 million, which was in line with our expectations.

Third-quarter product revenues, which consists of software revenues plus maintenance revenues, increased 13% year-over-year to EUR1.6 billion.

On a constant currency basis, product revenues grew 16%.

Third-quarter service revenues were EUR653 million, which represents a year-over-year increase of 8%, or 11% at constant currency.

Total revenues for the third quarter were over EUR2.2 billion compared to EUR2 billion reported for the same period last year.

This was an increase of 11%, or at constant currencies 14%.

Operating expenses increased by EUR165 million to EUR1.7 billion or 11% year-over-year.

The higher operating expenses was a result of additional personnel.

We hired 3,446 FTEs since the third quarter of last year and increased third-party usage.

For the third quarter of 2006, we had EUR14 million and EUR9 million of stock-based compensation and acquisition-related charges, respectively.

This compares to [minus] EUR6 million stock-based compensation expenses and EUR9 million of acquisition-related charges, respectively, for the third quarter of 2005.

On a pro forma basis, which excludes these stock-based compensation and acquisition-related charges, third-quarter expenses increased EUR145 million or 10% compared to the third quarter of 2005.

Operating income was EUR583 million for the third quarter, representing an increase of 13% compared to the third quarter of 2005.

Pro forma operating income, which excludes stock-based compensation expenses and acquisition-related charges, were EUR606 million, an increase of 17% compared to last year's third quarter.

The operating margin for the third quarter was 26%, which was up 30 basis points from 25.7% operating margin we reported in the third quarter of 2005.

The pro forma operating margin, which excludes stock-based compensation expenses and acquisition-related charges, increased by 1.2 percentage points to 27% in the third quarter of 2006, compared to 25.8% in the same period last year.

The main drivers for this strong margin improvement can be summarized as follows.

The pro forma product margin was 84% for the third quarter of 2006, which was an increase of 40 basis points compared to the third quarter of last year.

In the third quarter, we saw an increase in purchased licenses and litigation-related expenses, while support costs remained relatively flat.

The pro forma service margin was 24% for the third quarter, which was up 80 basis points compared to the same quarter last year.

The improvement was the result of higher consulting margins due to higher billable utilization rates in the U.S. and, to a lesser degree, in EMEA.

This was somewhat offset by a negative impact from an increase in hosting-related expenses.

As a result of the pro forma margin improvement in both product and services, our 2006 third-quarter pro forma gross margin increased by 1 percentage point to 66%, compared to 65% for the third quarter of last year.

Pro forma research and development expenses increased 27% for the third quarter and represented 15% of total revenues, compared with 13% of total revenues for the third quarter of last year.

The increase in R&D on an absolute basis was the result of our further investment in R&D.

We hired additional 1,847 FTEs compared to last year's third quarter.

Thereof, roughly 500 came through acquisitions to SAP.

Pro forma sales and marketing expenses increased 4% for the third quarter and represented 20% of total revenues, compared to 21% of total revenues in the last year's third quarter.

The absolute increase in sales and marketing expenses was mainly due to additional sales headcount, roughly 550 FTEs, partly offset by positive impact from lower marketing costs year-over-year.

Pro forma G&A expenses for the quarter were EUR107 million, slightly below last year's third quarter; represented 4.8% of total revenues versus 5.4% last year.

Third-quarter 2006 net income rose 16% to EUR388 million.

Pro forma net income, which excludes stock- based compensation expenses, acquisition-related charges, and impairment-related charges, rose 20% to EUR405 million.

Earnings per share for the 2006 third quarter was EUR1.27 compared to EUR1.08 in the same period last year.

Our pro forma EPS, which excludes stock-based compensation, acquisition-related charges, and impairment-related charges, was EUR1.32 compared to EUR1.09 in the third quarter of 2005.

Our effective tax rate for the third quarter was 35%, compared to 35.2% in the third quarter of last year.

For the full year, we expect (inaudible) 32.5%.

The expected full year tax rate was impacted by a one-time tax benefit amounting to EUR30 million we had in the second quarter of this year, mainly due to the settlement with the fiscal authorities on one specific item.

For the nine months ended September 30, 2006, cash flow from continuing operations was nearly EUR1.3 billion.

Capital expenditure were EUR233 million, leaving free cash flow of more than EUR1 billion.

This compares to free cash flow of EUR901 million for the nine-month period of this year.

Finally, use of cash flow for the first nine months of this year was approximately EUR500 million in acquisitions, [to mention the] Frictionless Commerce and Virsa;

EUR400 million paid in dividends to our shareholders; and roughly EUR970 million for share buybacks.

As a result, we had liquid assets including short-term marketable securities of EUR2.8 billion at the end of the September quarter, compared to EUR3.4 billion in liquid assets including short-term marketable securities at the end of 2005.

We continue to plan to use cash for further dividend payments, fill-in acquisitions, and share buybacks.

For the first nine months, we bought back 5.8 million shares for a total of roughly EUR970 million.

At September 30, 2006, treasury stocks stood at 11.35 million shares, which included the release of 1.1 million shares for treasury during the nine-month period.

Given the Company's strong free cash flow generation, we will further evaluate opportunities to buy back shares in the future.

Year-over-year headcount increased, as I mentioned before, by nearly 3,500 FTEs and by 725 FTEs sequentially from the period ended June 30, 2006.

At the end of the third quarter, total headcount stood at 38,468 full-time equivalents.

We are still targeting to hire 3,500 FTEs, besides the ones we get onboard via acquisitions for 2006.

On the 725 FTEs hired in the third quarter, 59% were in R&D; and of the total R&D, 75 were hired in low-cost areas.

Through acquisitions for the year-to-date, roughly 450 FTEs came to SAP through acquisitions.

Let me now finish up with an update on our outlook for 2006.

The Company increased its expected full-year 2006 pro forma earnings per share, which excludes stock-based compensation, acquisition-related charges, and impairment-related charges.

The Company now expects pro forma earnings per share to be slightly above the previously communicated range of EUR5.80 to EUR6.00 per share.

The Company reaffirmed that it expects full-year 2006 product revenues 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 a range of 15 to 17% compared to 2005.

From today's perspective, it appears less likely that product or software revenue growth will reach the upper end of the aforementioned ranges.

The Company reaffirms that it expects the full-year 2006 pro forma operating margin, which excludes stock-based compensation and acquisition-related charges, to increase in the range of 0.5 to 1.0 percentage points compared to 2005.

From today's perspective, it appears less likely that the pro forma operating margin increase will be at the upper end of the aforementioned range.

The outlook continues to be based on an assumed U.S. dollar to euro exchange rate of US$1.23 per EUR1.00.

I would now like to pass it over to Henning.

Yes, thank you, Werner.

I am pleased you can all join us today on this call.

I want to make a short comment on the business environment and quickly turn it over to Leo for an update on the competitive environment, deal metrics, and our regional performance.

The business environment has remained stable with no adverse economic conditions geographically to really affect our business.

To no surprise, however, pricing is still tough, but it is stable.

I would not expect any near-term change in pricing.

In addition, we closed most of the deals that slipped from the second quarter.

Now, let's continue with Leo.

Thank you, Henning, and good afternoon or good morning to everybody.

From a competitive standpoint, we continue to win; and that comes down to the simple fact that SAP is the strategic choice for customers of all sizes.

We have an intense customer and product focus that has allowed us to build the largest customer base in the industry.

We did it organically, meaning that our customers made the decisions themselves to partner with SAP.

Our customer satisfaction remains at the highest levels that we have seen ever at our Company.

Our already high win rate against our next-largest competitor increased even more in the third quarter, as we won 805% of the competitive deals.

Speaking of competitive data, I recall that our next-largest competitor recently claimed 88 wins against us.

We checked the claim and, in truth, the actual number is less than 5% of that, only four wins against SAP.

This takes me to our Safe Passage initiative, which as you know helps J.D.

Edwards, PeopleSoft, Siebel and retail customers migrate away from the uncertainties created by the Oracle acquisitions to SAP's market-leading solutions, which provide the same customers with a clear path forward and long-term IT investment security.

To date, around 400 of these customers have opted for the Safe Passage initiative. 200 of those customers came in the first nine months of this year, and 90 in this quarter alone.

Some key Safe Passage wins in the third quarter include Oncology Therapeutics Networks, and Philadelphia Media Holdings in the U.S.;

IndiaBulls Financial Services and Multimedia Development Corporation in Asia-Pacific.

Let me now provide you with some additional customer metrics for the third quarter.

In the third quarter, order entry in the pipeline remained strong and the number of new contracts signed increased 18% year-over-year.

The share of new customers based on order entry was 19%.

But as we continue to sign more deals with midmarket customers, it is also important to talk about the share of new customers based on number of contracts, which was 32%.

Deals greater than EUR5 million accounted for 35% of order entry in the third quarter, up from 24% in the third quarter last year; while deals less than EUR1 million accounted for 36% of order entry, down from 42% in the third quarter of last year.

Over the past 34 years we have built the largest customer base in the industry and have also gained the greatest industry experience and develop the deepest vertical expertise, not only in our traditional [discrete and process] industries, but also in services, financial services, and consumer products, to name a few.

We have continued to succeed in growing our business in our focus industries of retail, public services, financial services and high-tech.

Retail is a great example of where we have shown tremendous progress, as it was the fastest-growing vertical in 2005 and continues to be one of the fastest-growing verticals in the first nine months of this year.

Key retail wins in the third quarter include Lifetime Brands in the U.S.;

De Rigo SpA in Europe; and [Field] Corporation in Japan.

All three were also Safe Passage deals. (indiscernible) The strong industry performance year-to-date includes consumer products, utilities, and telecommunications.

Let's now take a look at the regional performance.

For the first time since the third quarter of 2000, we reported double-digit growth in all regions.

Moreover, in all key strategic growth markets -- of which there are nine -- we performed extremely well, with double-digit and in some case even triple-digit growth rates.

Software revenues in EMEA were up 14%, or 15% at constant currencies.

We had very good performance from the UK and a superb performance in Russia.

Germany was within our expectations, with software revenues increasing 3%.

Key contracts won in the EMEA region included one of the largest European Telco providers, which will make it to an announcement about this deal in the very new fear future, and which was a large Oracle customer.

Another key competitive win included Fujitsu Siemens, which was a large Siebel customer.

Other wins in Europe included ABN AMRO, BMW, City of Nuremberg, Banco de Portugal, and Tommy Hilfiger Europe.

The Americas region continued to performed extremely well, with a 19% increase in software revenues for the third quarter.

At constant currencies, the growth rate was 23%.

Software revenues in the U.S. grew 15%; and at constant currencies the growth rate was 20% for the third quarter.

Latin America also continued to perform well.

Key contract wins in the Americas region included State of Michigan and Commercial Metals in the U.S.; and Banco Bradesco in Brazil.

Software revenues in the Asia-Pacific Region increased 22%, or 28% at constant currencies.

Japan rebounded in the third quarter and is on target for a better second half, in line with what we stated earlier in the year.

Software revenues in Japan increased 51%, or 65% at constant currencies.

Key competitive contract wins in the Asia-Pacific region in retail were Wumart in China and Reliance Industries in India.

Other wins in the region included China National Offshore Oil Corporation, Kyocera Mita Corporation, and Multimedia Development Corporation.

I would now like to pass it back over to Henning.

Thank you, Leo.

We are all pleased to report another strong quarter, which marked the 11th consecutive quarter of double-digit growth at constant currencies.

Software revenues and product revenues at constant currencies grew at 20% and 16%, respectively.

Looking at the nine-months results, we are right on track to achieve our full-year outlook.

Looking back at the second-quarter results, the strength of our business over the first nine months reinforces a point I have always made -- that you should measure our business based on the long term, not one quarter's result.

Our 17% reported software revenue growth outperformed the market.

We continued to gain share, as measured against the $16 billion core enterprise application software market.

Based on this market, our share in terms of license revenues on a rolling four-quarter basis stood at 22.6% at the end of the third quarter of 2006, which was up by 90 basis points since the last quarter.

This compares to Oracle at 9.9% and Microsoft business solutions at 4.9%.

At 22.6%, we are more than 2 times larger than our next-largest competitor in terms of software revenues on a rolling four-quarter basis.

Our continued strong results and share gains have been driven by our strategy to grow our Company organically, instead of through massive acquisitions.

It has been key to our success in delivering on our visions and promises, delivering new and innovative products, and bringing these products to market on time, and being the first to deliver an enterprise services oriented architecture.

In a nutshell, our organic growth strategy has allowed us to win.

I want to reiterate that our growth strategy has not changed.

We will continue to look primarily to organic growth, augmenting with smaller technology and product acquisitions, and through co-innovation with partners.

Some of the new innovative products that we have brought to market recently includes CRM on-demand, BI accelerator, and Duet.

We have announced the third wave of our CRM on-demand solutions, which now includes customer service capabilities, successfully meeting our quarterly product roadmap laid out in February of this year.

The BI accelerator has received excellent feedback from customers and is in high demand.

We already demonstrated the remarkable capabilities of this product -- 1 billion records analyzed in 3 seconds, using affordable, off-the-shelf hardware with the convenience and easy implementation of an appliance set up and build on SAP NetWeaver.

Duet is another product that is in high demand from customers and partners.

Duet is a great example where co-innovation with partners can bring tremendous value to customers.

We continue to make excellent progress in the midmarket, as evidenced by the continued growth in the number of channel partners and midmarket customers.

The channel business from which we will derive volume growth will be key to achieving our 2010 aspirations of generating 40 to 45% of our order entry from the midmarket.

That said, the number of channel partners grew 22% year-over-year while the number of channel customers increased 36%.

We will continue to expand our midmarket presence with more aggressive go-to-market strategies heading into 2007 and more focus on the volume business model.

I would like to conclude by talking about our enterprise SOA roadmap.

Since SAPPHIRE 2004, when we first exhibited our roadmap to our external audiences, including customers, partners, press, and analysts, we have either delivered on or ahead of schedule with only minor modifications.

I'm pleased to say that as we are nearing the end of our published roadmap in 2007, we continue to remain on schedule for our deliverables and, importantly, well ahead our next-largest competitor.

SAP NetWeaver, which has been a key deliverable of our roadmap, continues to perform well.

For the first nine months we reported NetWeaver sales of EUR470 million, of which 21% came from stand-alone NetWeaver sales.

Another successful deliverable I would like to mention is mySAP ERP 2005, which evolved into the market's first business process platform.

It allows customers an evolutionary and smooth transition to enterprise SOA and provides continued innovation, without upgrade, with add-on composite applications and enhancement packages that leverage the flexibility of enterprise SOA.

Enhancement Packages deliver business value through additional enterprise services and composite applications, as well as technical and functional enhancements without disruption to customer deployments. mySAP ERP is the first services enabled ERP suite in the industry that provides flexibility and innovation for customers and the entire ecosystem of partners and ISVs.

Our Ecosystem continues to grow.

We now have 1,500 solutions, either powered by or certified by NetWeaver; and the SAP Development Network has expanded to 0.5 million registered developers.

In addition, we have a growing set of industry value networks, enterprise services community, a newly-formed Business Process Expert Community, to help drive further innovation on our platform.

At the end of 2006, we will enter the first pilot customer testing of our enhanced midmarket solution portfolio, The next SAP All-in-One version, based on the business process platform, delivered with the standard mySAP ERP 2005, as well as a new midmarket product featuring alternative deployment models.

That keeps us right on track, (technical difficulty) the transition of our product portfolio into one cohesive enterprise service oriented architecture blueprint.

The flexibility this architecture provides helps our customers to more effectively compete in a world of accelerated change.

With new and innovative products, an impressive win rate, and a strong push into the midmarket to help drive revenues, we believe we are in an excellent position from a product, market, and competitive standpoint.

This will help us reach our 2010 growth ambitions.

I thank you, and we will now be happy to take your questions.

(OPERATOR INSTRUCTIONS) Charlie Di Bona.

Sanford Bernstein.

Leo, could we talk a little bit about the book entry, which was obviously a big issue in last quarter?

It seems like some of the shorter-term deals have passed through the pipeline now and through the income statement.

But one of the things you mentioned last quarter was the longer-term deals.

It is sort of hard to see that showing up on the deferred revenue, but your larger deals seem to be gaining share as a percentage of the total mix.

Can you talk about the pattern you are seeing with longer-term deals?

Is this a trend?

Was Q2 more of an anomaly?

Can you just sort of discuss the pattern of buying of these larger deals?

As we said in Q2 already, we have a rather comprehensive portfolio of approaches to the market.

One of them is our global enterprise agreement deals, of which we have a total of four by now.

So there is nothing really new there.

In fact, what happens -- and it is a bit driven by seasonality and the nature of a given deal; sometimes a deal just closes a little bit faster than another one.

That is the nature of the game.

What happened in this quarter is that we saw a slight increase of a few larger deals, but I would warmly recommend not to read anything into that.

It is certainly not a trend.

It just happened to be this case in this quarter.

The buying behavior, for that matter, is as it was.

Henning already indicated that the pricing remains; often that is the case.

But our competitive position is strong and we continue to win, as I said, in this quarter about 85% of the situations.

I hope this will continue in the future.

Thank you.

Marc Geall.

Citigroup.

A quick question to Werner, really.

You sort of highlighted the fact that you have done about EUR500 million of acquisitions so far this year.

Can you sort of talk a little bit about when you feel the acquired revenues will become meaningful?

And at what sort of threshold you would be willing to sort of split those out?

Yes, I can give you some indications here.

If we talk about the acquisitions in the retail sector, including Lighthammer, the manufacturing side, the revenue we generated via these acquisitions is roughly 1%.

Now Virsa is a different type of an acquisition, because we sold the Virsa product, so it did not add to our revenue per se.

Because it was already included either in our actuals or in our projections for the future.

That's it.

So it is very minimal.

If the financial community likes to get this reported, we definitely can do it.

But you see that this is something which is not material for us.

We buy more from a technology perspective and not revenue.

Werner, could you sort of clarify then?

Let's say you have got an ISV partner that you have signed a global distribution agreement with, which you tend to do before you acquire that business.

On that basis, when you recognize the revenues from the deal, would you be recognizing, let's say, your 50% share of that?

So then if you then acquired that business, the difference, the delta, would be going from the 50% to 100% consolidation?

Yes, that is the case.

Okay.

Just a very quick follow-up.

Is it worth reminding us what the impact of currency -- not necessarily just dollar, but maybe also sort of euro versus sterling; obviously, UK had a very strong quarter -- maybe also the Asian currencies have on the business both from a top-line perspective and from a margin standpoint?

If you look to the top line, I think first of all, it is important to realize that less than 40% of our software revenue comes from euro regions.

That is very important.

Therefore, the translation (inaudible) only results from the U.S. dollar-euro exchange rate, but includes all the other major currencies.

I think, it is up to you to simply calculate this impact, if we would end up with a different exchange rate.

We gave US$1.23 as in a basis for our guidance, and that is it.

We are not in the currency business, so we can calculate it back and forth.

Let's see where we will stand at the end of the year.

Okay, thank you.

Johannes Ries.

Cominvest in Frankfurt.

Maybe a short question regarding Europe.

From my understanding, the closing of the deals which have been pushed out have widely happened in Europe.

Otherwise, can you give us maybe a short up date on the business climate in Europe?

Has it overall improved?

Can we so far expect maybe some acceleration in Europe going forward?

Or has the double-digit growth you have seen in Europe since a longtime was more based on this catch-up effect?

Secondly, you talked in the past about guidance of above 30% operating margin in 2007.

Is it still valid?

Because you mentioned you're on track with your roadmap; therefore I think maybe you need now additional maybe push in R&D for next year, therefore.

Could we believe that you speak to this?

Yes, let me try to maybe give you a quick overview on the business in Europe.

As you saw, we had a good quarter in Europe, in particular in the UK and Russia, but also in some other parts of Europe.

It was good performance across the board.

It wasn't necessarily driven by this or the other catch-up deal.

It was just simply very good execution.

Now over the medium-term, one should be realistic about Europe.

We have a reasonably high market share.

As we are driving into the midmarket here in Europe as well we do expect some growth.

But I would see the future that our growth locomotives will remain the Americas and Asia-Pacific.

But we do expect solid contribution from Europe.

In terms of next year, our ambition is unchanged, that we want to improve margin, no doubt.

We will finally give a guidance, as always, at the beginning of next year.

The point is here that we, let's say, have accelerated on the [right].

We indicated once we [excuse] the roadmap that we don't need this acceleration any longer, which is true and which we want to confirm.

The only point I want to make is we will bring at the end of the year newer products to the market, as you have heard.

The only thing we don't want is to miss growth opportunities.

From that point of view, we will see next year what growth opportunities are around these products and then come up with a mix guidance margin and growth.

Thanks.

Maybe a final question regarding the growth in the different cost areas.

The high growth in R&D, and compared to this very, very low growth in sales and marketing and G&A, how much is this sustainable?

Especially the low growth in sales, marketing, and SG&A.

Maybe I can answer.

In sales and marketing, these teams are very efficient.

But on the other side, as I just said, when we see more growth opportunities beyond what we have today, I think we will start accelerating hiring in the sales area as well.

This is one of the opportunities I just mentioned.

I think if our sales force is continuing doing that well, it could make a lot of sense to put more feet on the street just to multiply this.

So from that point of view, give us this chance to figure this out at the end of the year.

But I agree, this is one of the options, to hire more salespeople, yes.

From a G&A perspective, I think if you look to the progress we made on the shared service side in Europe, it is going very well.

We still have a lot of migrations to accomplish in 2007.

But then beyond 2007 we will see the full benefits.

So then it is also sustainable.

Okay, thanks a lot.

Rick Sherlund.

Goldman Sachs.

Just a follow-up.

The new products that will help drive that revenue growth next year, that you may or may not decide you need to accelerate spending on for sales force.

The midmarket, I think I heard you mention with a new offering, which I presume you're talking about hosted or on-demand solution.

We have BPP, Duet.

Can you help us identify what other things will be new for next year that you can drive stronger top-line growth from, that may require investment as well?

If you remember what I said at the end, I think as we indicated beginning of the year, at the end of 2006 we enter the first customer testing of two things, an expanded midmarket portfolio.

I said there is one product, which is based on a new implementation of the enterprise services.

Because it's focused, as you said, mainly on new deployment options, on [mean] deployment, on a different way how we go to market.

That is the reason why we needed this different implementation.

You can imagine, in those things there is some innovation embedded.

That gives on the other side, the uncertainty for us today, where and how much we have to invest in order to get growth opportunities or not.

But we will figure this out in this quarter and let you know at the beginning of the next year.

Okay.

Can I follow-up with Leo on the large deal activity?

Last quarter, we heard about enterprise deals.

I am curious that we have heard about a number of large deals in the quarter.

How should we think about how much revenue recognition you are getting from these large deals, and how extensive is the enterprise business becoming?

Well, as I said, we have in our portfolio, Rick, right now, four of these enterprise deals, which have a particular way of being recognized (inaudible) the agreement.

Some of the larger deals that were closed this quarter are not enterprise agreements and therefore have been recognized in a more traditional way.

The portfolio of these enterprise agreements will therefore come into the revenue, into the recognized revenue stream as we move forward.

I can't give you at this moment in time any indication of the number of enterprise deals that we expect to sign in the future.

But as we already said in Q2, we don't expect this to be more than a handful or two handfuls of deals.

Can you give us a sense of how much revenue is recognizable on those deals that are not enterprise?

Do you have kind of an average number for us?

Rick, I can give you indication here.

If you look to the deals above EUR5 million -- and I think the similar metrics are provided in the second quarter.

We have order entry in the range of roughly EUR110 million.

Thereof, EUR65 million, roughly, could be recognized in this given quarter, the third quarter of this year.

This gives you somehow the magnitude, the size, of all of these kinds of deals, not limited to the enterprise deals.

Okay, thank you.

Raimo Lenschow.

Merrill Lynch.

Henning, just to go back to Rick's question in terms of the impact that we see from the new products for next year, can you maybe talk us through which are the ones that we think should contribute to next year already?

If I know a normal product launch, you usually would start up, obviously, with ramp-up customers.

As a lot of the stuff is very innovative, I think you would expect a slightly longer ramp-up phase.

Are there any of the ones that you mentioned that we should really factor into our model already in 2007?

Or is it more kind of an '08 story here?

Thanks.

Thank you for clarification.

I think today it would be better, let's say, to factor it more in 2008.

You mentioned that here we will not have a normal ramp up.

That is the reason why I mentioned (inaudible) alternative deployment models.

I think if it is just on premise and it is a normal ramp up, which is not the case, and there is some embedded IP service in; so from that point of view it will be a different type of, I would say, launching into the market.

Put it this way.

We will do it at the beginning carefully in order, let's say, to do everything right, and then report accordingly where we stand.

Henning, at the moment, I know you are very early stage, which means that you don't really talk in great detail.

But for us that talk with the investors, it probably would be helpful to get some sort of detail.

What sort of time frame can we expect?

Is that the 4th of December at the analysts' day already?

Or are we waiting till the beginning of next year to get more clarity?

I think we will continue to give you more clarity.

The next date is exactly, let's say, in December at the analysts' day; and then beginning of next year.

Okay, thank you.

John McPeake.

Prudential.

Good quarter.

I just have a question.

First one is more short-term and the second one is more long-term.

I realize you guys do not forecast currencies, and you have a pretty diverse basket of currencies that you translate each quarter.

But when you gave your 15 to 17% guidance, it was a different currency level certainly than it is now.

So reiterating that number is different now than it was in January.

I'm just wondering, first off, if your inability or your lack of confidence in hitting the high end of that number has something to do with the currency basket.

Then I just have a follow-up.

No, this has nothing to do with the currency basket.

Let me reiterate what we did at the beginning of the year.

We gave the US$1.23 exchange rate, dollar to euro, as the basis for our guidance.

You will remember that US$1.23 exactly reflected the average exchange rate of 2005.

But at the end of the day, we had a situation where we talked about, if you talk about growth rate, about constant currency growth rates.

Now, if the exchange rate is different, of course, this will have an impact on our reported numbers.

That was not the reason for the clarification on the guidance.

The clarification on the guidance is based on the currency assumptions as I mentioned before of US$1.23 per EUR1.00.

Okay.

Then secondly, over the longer term, what type of growth rate in licenses are you guys comfortable with?

What would you be happy delivering over the next three to five years?

We have not given an indication.

But whenever we speak to people, it is clear that what we are doing with all these products and all this R&D, that our ambition is, let's say, to be at our higher growth rates for software revenues. (inaudible) That point of view, if you [look] what we have done in the last three years as an average, I think we want to be above this, clearly.

All right, thank you.

Michael Briest.

UBS.

Henning, in terms of the U.S. business, we have now had a couple of quarters at 20% growth.

That is still very impressive, but it is down from where it has been.

Do you think we are now seeing some deceleration in that business, as anticipated, and that is the sort of growth rate we should assume going forward?

Then I have got another question.

Well, let me try to answer your question, just to put things into perspective.

In the U.S., we had 16, one-six, quarters of double-digit growth, which is in itself a record performance that should be applauded.

The fact that we start to see slightly declining sequential growth rate is only normal, given the 16 quarters of sequential growth that we had.

As you said yourself, the 20% is still a very high number.

We do expect to see the U.S. also in the future to be one of our world's engines and to help us continue to drive the growth of the Company.

Thank you.

Then in terms of the volume growth you saw in the quarter, you normally give us a growth in number of deals signed.

Could you give that for direct and indirect deals?

As far as I know, we have given you an indication that we have signed 18% more deals in terms of volume.

So you see that in the third quarter, we have again a lot of volume in deals.

But we have also, as Leo indicated, at least for the direct sales in the large enterprises, a higher average deal size.

Yes, okay.

Thank you.

Matthew Hammond.

Credit Suisse.

Two quick questions.

First of all, can you give us a feeling of what you anticipate your online products, both your online CRM and any other online products you are planning, contributing to revenues over the next couple of years?

The second question, and I guess this is the one that everyone is itching to ask but everyone is probably too polite, is -- could you just give us some sort of feeling of the difference between what Oracle is saying in terms of the amount of deals they have won against you, and the way that you are looking at it?

Because there is clearly quite some discrepancy.

Thank you.

From an online product, we have not, let's say, given indication.

Because today I think there is still flexibility in the way how we model it, the revenues and the associated costs.

You know it has to do with the contracts and how you do the on-demand contracts, how long are some periods on hostings and et cetera.

I would say, give us a little time for next year, because as I indicated we will not stay on CRM only.

So therefore, I think these decisions and these questions are key for the future and also for the flow of revenue and from the mix of revenue to expense.

So we are working on that and give you more indications, I would say, next year.

From our friends, I think Leo has a lot of data.

I can just say I was asked today several times about the market share gains.

I think some of you have made this calculation and the mathematics.

I think there is nobody more reliable than independent analysts.

So therefore, I can only say -- take the same figures.

What we do is we take our sales figures; we compare it to the Oracle-Siebel entity last year compared to the combined entity this year.

Then you know that SAP has really gained market share again.

What Leo is doing is, if we have the names, we look into our books and records; and look if this is really a win or if it is just a name.

I think Leo's team did this very carefully this time.

True, Leo?

Yes, Henning.

Thank you for giving me this opportunity.

So we looked at the claim.

As you know, Oracle claimed 88 head-to-head wins against SAP.

They only identified 13 names of those, which we of course proceeded to analyze in detail.

Let me give you the detail of that analysis.

We chose not to compete on one of these deals.

Six were not competitive situations, and all occurred before Q1 '07 of Oracle's first quarter.

12 of them we have no record on; so I can't comment because we did not compete.

We were not in the game.

Seven were not a win against us; so they must have counted some other wins.

Four were indeed losses for us; so they did win four against us.

Just to put things into perspective, in this quarter, we had 247 competitive head-to-heads against Oracle, of which we won 209.

That is an 85% win rate.

Thank you.

Could I just add one follow-up question?

I guess people have been pushing on this already.

But the 30% margin for next year, there seems to be, I think, a little bit of nervousness out there that you guys might seem to be ducking that sort of medium-term target that you had set a long time ago.

Am I right in reading this, that if you don't do the 30% margin it is only because you're going after higher license growth?

Is that the correct way to look at it?

It is exactly the way to look to it.

I think what we said is, because we have some opportunities through the products, I think we have to be extremely clear at the end of the year what mix of KPIs we are given.

You know that that is something I reiterate all the time.

We want to go for higher margin; but if we see, let's say, growth opportunities, I believe it is better for us to take the growth opportunities and then go for the efficiency.

But that is too early to say.

I just want to caution you in a way that, if we see an opportunity, I think it would be wrong that, just because, let's say, we gave here one figure, that we are boxed into this one figure and have no chance to do the best for the Company and our shareholders.

Gary Rollo.

Morgan Stanley.

I think the big message from the product side this quarter was the launch of ERP '05.

I am wondering how the reception to that product has been from customers; and kind of what you are learning as you go out and talk to them and explain that the ERP '05 platform is the one to go to.

Maybe give me some feedback on how you think the adoption there will turn out.

Yes, I will do this.

Thank you.

In this case, we have very good feedback because we had the chance.

First of all, I was keynote speaker at the German (inaudible) group just recently; and we had the American user group here in Walldorf (inaudible) in the short term.

I was personally able to speak with two user groups representing more than 50% of our customers.

I can just tell you both of them like very much and appreciate what SAP is doing.

What was, I think, key at the end was that we combined with the announcement that ERP 2005 is a steppingstone to enterprise SOA.

The following announcement that because it [furthers] enabled, it is so flexible, that now we can give accelerated innovations through Enhancement Packages, which have Enterprise Services, composites, and others.

This is what the customers really like, because they get functional, continuous innovation, without the pain of a heavy upgrade.

Giving this message in addition, I think, has brought a lot of confidence to the market.

That is why we did this.

Is there any correlation we can think about between [the need] to go out and reinforcement that message with customers, and the way that sales and marketing costs are tracking?

Because normally when you go out with a strong message about product, it is pretty heavily backed with marketing costs.

But we are not seeing that (multiple speakers).

No, in this case it is not necessary, because this is a well-known and accepted product in the market.

It is more the question of our clients -- is ERP 2005 the right thing to move, because everybody is ready to move?

Or will there be an ERP 2006 or '07 which is another heavy uplift?

Now where we can confirm that is not necessary, they get the innovation they want, but there is not another heavy uplift, it is [a right there] in the near future.

I think that we are comfortable.

You know that we have a good reliability amongst our customer base, so I think there is some trust.

I believe we don't need marketing.

It was just the combination of these messages, and now our customer base will start moving.

Thanks a lot for that.

We have time for one final question.

Adam Shepherd.

DK (indiscernible).

I just wanted to, I guess, just come back to this year.

Just noticed there was some hesitancy in your outlook despite the fact you seem to have closed a lot of your slipped deals, despite the fact there is no change, you say, in the environment.

I wonder why then you took the time to actually point us towards the mid to low end of the range, despite giving obviously a degree of guidance at the second quarter?

I think what we did it is now, coming to the end of the year, is as always we wanted to be as precise as possible.

As we said, we have reaffirmed our guidance, because everything is possible.

But on the other side, as you know how it is in all the meetings.

You will ask us and all your colleagues will ask us about how we feel about where it could be and not could be.

I think it is fair to give this, I would say, sentiment we have today publicly.

So we reaffirmed the guidance.

But let's say, it is less likely that we achieve the upper end.

Just a follow-up on that, some of your partners were talking to two things actually in the UK.

One a reorganization that you had in the second quarter; also some central government deals and some slippage there.

I wondered if that has given you a degree of hesitancy, particularly the deal slippage in Q4.

Is there a chance that some of these deals will actually get pushed out into 2007?

Let me just clarify two things.

First of all, we did not have a reorganization in Q2.

That is a misinformation.

We actually had a global European reorganization in the very beginning of Q1.

So there is no correlation between that and the results in the UK in this or the other quarter.

Actually, the UK has a very good Q3.

You know that we depend less on public sector deals in the UK than some of our competition, even though we are gaining traction.

There is absolutely no reason to believe that this or the other deal that is scheduled for Q4 is slipping into Q1.

There is not even speculation.

Okay, thank you.

Then just finally on, again, [some] SAP ERP 2005.

Just to clarify, are you expecting to see more of the uptake come through into 2008 now?

Or do you think that's actually going to have a positive impact into 2007 as well?

No, I think if you talk about ERP 2005 and that evolving into business process platforms, that has an impact beginning of next year.

I was earlier asked about another product.

Okay, thanks very much.

Thank you very much.

This concludes the SAP Q3 earnings call today.

Thank you all for joining us.

Goodbye.

Okay, bye-bye.

Bye-bye.

Good-bye.

Ladies and gentlemen, that does conclude our conference for today.

We do thank you for your participation.

You may now disconnect.