SAP SE (SAP) 2006 Q4 法說會逐字稿

Welcome to SAP's fourth-quarter results conference here in Frankfurt.

My name is Stefan Gruber;

I am head of Investor Relations at SAP.

Let me briefly give you an overview on the agenda for today.

At these kind of events, we almost follow the standard format.

First of all, Werner Brandt, the CFO of SAP, will walk you through the numbers for 2006 and the outlook.

Then Leo Apotheker, President of Customer Solutions and Operations and a member of the executive board of SAP, will explore the color on our recent successes, as well as the success we have with our industry solutions.

The presentations will be closed by a presentation by Henning Kagermann, who will lay out how SAP prepares itself for the future growth opportunity and he will comment on accelerated investments into the new midmarket segment we announced this morning.

After the presentations, we will have enough time for Q&A.

I would imagine that we have more people following this event through the Web than people here in Frankfurt.

So those who are on the Web, please send us questions by e-mail to the normal e-mail address, which is investor@SAP.com and therefore, I also like to ask you later on for the discussion to use one of the roaming microphones here in the room in Frankfurt so everybody on the Internet can hear the entire dialogue of this conference.

And finally, we have the Safe Harbor statement.

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.

And with that, I would like to hand things over to Werner Brandt.

Thank you, Stefan, and good afternoon and good morning to everybody who listens. 2006 was a tough year for SAP and I would like to start off with a brief snapshot of the Q4 results and then going through with the presentation as laid out here.

If you look to the year, I think one important piece to be kept in mind is that we had a lot of headwinds from the currency.

The euro was strengthening throughout the year.

I think we had a very heavy impact on the Q4 results, especially on the top line and if you see here, the exchange rate illustrates how tough it was.

In Q4 of 2005, we had $1.19 per euro, and one year later in the fourth quarter, we had $1.31 per euro.

This is a strengthening of the euro, a deterioration of the U.S. dollar by 10%.

You also see the other currencies.

So really we had headwinds from the currency development around the world.

Here for fourth quarter, let me start with product revenue.

Our PPI for this year on the top line, it grew constant currency 12%.

Underlying software revenue increased by 12% and total revenue also increased on a constant currency basis by 12%, supported by service revenue growth of 9%.

Operating income increased by 10% and the margin increased by 1 percentage point in the fourth quarter and also impacted by a good finance income, EUR31 million in the fourth quarter.

We could increase the income before income taxes by 16% to more than EUR1.1 billion.

The tax rate, the effective tax rate decreased 7 percentage points over 2005 in the fourth quarter and this is mainly due to an additional one-time benefits being gained from the conclusion of several tax audits in several countries and some other matters, but I will come back to this in a minute.

Net income consequently increased by nearly 30% to nearly EUR800 million and you see also an increase here in the same range of the earnings per share.

Also full year was impacted of course by the strengthening of the euro against most of the important currencies we have and you see the impact here on the full year.

If you look to total revenue, the impact is EUR88 million.

On an expense level, it is EUR29 million and consequently, our operating income was impacted by nearly EUR60 million from these currency fluctuations.

Before I go into detail, I would like to spend a minute on the fact that we had to adjust the accounting for one modification of a customer contract in the United States and we detected this during our -- the need to adjust here during our year-end closing procedures.

And simply what happened, we accommodated a U.S. customer with a modification of contract signed between ourselves and this customer in the year prior to 2006, actually in the years from 1997 to 2005.

This customer is undergoing a serious restructuring and approached us and asked for help and we helped him by this accommodation we signed by the end of September.

Now what actually happened is the following.

This customer gave back to us licenses he purchased in these years between 1997 and 2005, and at the same time, we provided him a voucher to buy back these licenses in the following years.

From an accounting perspective, we analyzed this contract, the U.S. finance team, and came to the conclusion that this has no accounting implications because number one, 2006 was not impacted at all because we had no revenue with this customer; and number two, if he takes then the option we granted him and asks for additional licenses in the years to come, then at that point in time, we would not record any revenue and at the same time, would not record any expenses because he simply gets the licenses shipped and that's it.

And consequently, our first judgment was no impact on 2006.

Now in the year-end procedures, we reviewed this contract and realized together with our auditors that the original accounting treatment in Q3 was not correct and the transparency we value very high in our organization then forced us to say, okay, then let's correct Q3 2006 and changed the accounting for this contract.

Meaning that in 2006, the third quarter, we had a reduction of our software revenue realized at that point in time in the United States.

Important to (indiscernible), the first one is the value of licenses we sold in the U.S. in the third quarter of 2006 and in the full year 2006 was not impacted because this was simply an accounting entry we had to do, number one.

Number two, we did not give any money back to this customer in the course of this negotiation.

So the software he purchased in the years prior to 2006 were paid and we kept the money.

That is an important part because from this perspective, we had no impact on our cash flow.

Finally, looking ahead, we expect to reinstate the EUR30 million of software revenue with this U.S. customer over the coming year and I can tell you that the majority, more than 50%, of this amount will come back to SAP in the first quarter of 2007, as this customer now asks for licenses worth roughly 50% of this amount already in the first quarter of 2007.

This illustrates that this is clearly accounting techniques we had to deal with and driven by the willingness of SAP to be as transparent as possible to the capital market.

And Leo can maybe later refer to the underlying relationship with this customer.

It's very strong and very good and there is no reason to think that we have here a customer with a deteriorated relationship.

That is all from my perspective to this.

A one-time effect, which is, from my perspective, purely technical-driven, but transparency forced us to really openly disclose this point.

Now if you look to the full-year performance now, including this one-time effect, you see that, at the bottom of this page, we see adjusted earnings.

Now our adjusted earnings per share are EUR1.60, originally communicated in our guidance EUR1.45 to EUR1.50.

You'll see what we said in the third quarter here, also marked as a quote.

Then the adjusted operating margin increased now by 50 basis points.

Releasing our preannouncement, we said it would be between 60% and 70%.

But this adjustment I just talked about of course also impacted our operating margin.

And on the product revenue side, we must admit we achieved the 12% on a constant currency basis.

Originally, we said we had 13% and would be then within our guidance, at the low end of the guidance.

This is not the case now.

We have on a constant currency basis, 12% and the underlying software revenue growth is now 12%.

When we did our preannouncement and you eliminate this one-time effect, then it is 13.5%, and we talked about this already that by this 1.5% gap to the 15%, we missed our guidance by EUR40 million of additional software revenue in the year 2006.

So some parts we fulfilled, some parts we missed and we can elaborate on this also later.

Other KPIs here.

Operating cash flow, I think as strong as we indicated beginning of last year where we said that the operating income -- sorry -- the operating cash flow would come in at the same level as we had in 2004 after the decrease we saw in 2005 and that actually happened with more than EUR1.8 billion in operating cash flow.

We spent a little bit more in 2006 for capital expenditure, roughly EUR370 million, mainly driven by building activities around our headquarters and going forward, I think we also will see strong cash flow.

The DSO is stable, equity ratio is stable and headcount increased.

I will elaborate on this also in a minute a bit more in detail.

Now if you come to the full year now, we took out these one-time effects from the accounting adjustment, product revenue grew on a constant currency basis 12%, the underlying software revenue also 12%, and total revenue for the year now 11%.

If you look to the operating margin, we see a slight decrease of 10 basis points here.

If you look to the U.S.

GAAP margin, as I mentioned before, we see an increase of 50 basis points.

The final income increased, which resulted in a 15% increase year-over-year in income before income taxes with a margin of 28.4%, and the effective tax rate for the year now being 30% impacted by one-time effects in Q2 where we came to a settlement agreement and understanding with the German tax authority on one specific matter; and the one-time effect in the fourth quarter resulting from some settlements with regard to fiscal audits we had in different countries and this addressed different topics.

Now if we look to the extraordinary impact on the year itself, it was roughly EUR85 million and this accounts for roughly EUR0.07 per share.

And having said that, the earnings per share increased by 25% here on a GAAP basis and would have been roughly EUR1.60 on an adjusted basis as I indicated before.

If you look to the group sales by revenue type, I think the growth we talked about.

The split between product and service is healthy, 70 to 30.

That's what we want to achieve long term.

And finally, if you look to maintenance, the good thing is that we see sequential growth here.

What is not on the slide but between the third and the fourth quarter, the maintenance revenue increased by EUR50 million.

Thereof, portion majority is related to the regular increase and of course in the fourth quarter, we always have some one-time impacts, which increased our maintenance revenue in the fourth quarter.

As we look to the margin we realized in 2006, you see that on the product side, a slight increase in the margin.

We had a very good year from a cost of support perspective.

On the other hand, we spent more than last year on purchase licenses.

So overall, a 10% decrease.

Very positive as indicated at the beginning of the year, the situation on the service side.

This time, I think consulting, training plus hosting, contributed to an increase in margin of these 120 basis points resulting in an improvement of our adjusted gross margin by 60 basis points.

If we look to the other operating expenses, R&D, R&D increased by 20%.

Also the margin of R&D, or the ratio of R&D expenses to total sales increased by 1 percentage point and this is mainly driven by an increase in personal expenses.

In the development area, we hired roughly 1600 people year-over-year and this contributed to this increase in overall spending for R&D.

On the sales and marketing side, also personal expenses were really the driver for the increase in spending here and here, I think we added roughly 660 people in the organization, resulting in this increase and you see the margin of sales and marketing expenses to total sales is stable year-over-year.

Cost of G&A increased by 4%.

I think this is the right way for us.

We get some benefit from the investments we did, and I think we will continue to push on G&A going forward to decrease G&A ratio.

Now if you look to the next slide, here you see the adjusted operating expenses year-over-year.

I think total operating expenses an increase here from EUR6.1 billion to EUR6., nearly EUR7 billion.

The main reasons being personal expenses, third-party usage and increase in travel expenses due to an increase in business activity.

Now you have seen that other operating income increased quite significantly year-over-year from EUR6 million to EUR56 million.

The reason is that we had some one-time effects within our operating expenses, which more or less balanced out.

And I only would like to mention two.

One being that we, in the fourth quarter, saw a reduction of our bad debt reserve, general bad debt reserve and on the other hand, we saw throughout the year huge one-time effects coming from the settlement of IP claims we were faced with.

If you want to make and put some numbers behind it, the one-time effect from the reduction of bad debt expenses is roughly EUR40 million and this one-time settlement costs were more than EUR25 million throughout the year.

We also have some other minor one-time effects.

So at the end of the day, more or less, it's balancing out.

The balance sheet, I think it continues to be a strong balance sheet.

If you look to current assets, I think cash and cash equivalents plus short-term investments accounts for roughly EUR3.3 billion, accounts receivable EUR2.5 billion.

If you look to the noncurrent assets, we saw an increase of goodwill here from EUR660 to roughly EUR990 million due to the acquisitions we did.

Remember, we acquired Virsa.

We acquired Cimetrix and Frictionless and the goodwill portion makes up the EUR300 million you see here.

And then PPE, other property, plant and equipment, with more than EUR1.2 billion.

On the shareholders' equity and liability side, structurally, I think there's no change, except that our shareholder equity increased.

And if you look to the ratios, DSO and equity ratio, both stable year-over-year.

Operating cash flow I talked about already.

You see the level of capital expenditure here and the strong increase year-over-year.

We will see still an increase beginning of 2007, but then at the end of the day, it should come back to the normal level as soon as we have completed all the new buildings we have under construction either in Germany, around our headquarters or mainly in India.

Cash flow.

What did we do with the cash flow and we have bridged here that the total group liability from beginning of the year to the end of the year and first of all, the generation of cash flow increases the group liquidity and then we have the CapEx spending I mentioned before.

Then we paid a dividend to our shareholder.

Remember, we increased the payout ratio to 30% resulting in EUR447 million cash outflow for the dividend.

We spent money for acquisitions and that is now the net cash spending we had for Virsa, Cimetrix and Frictionless.

Then we acquired shares back -- purchased shares back and I have a slide in a minute, which comes to the liquidity level we have today.

The share buyback, nearly 28 million shares at the average share price of EUR40.97, a total amount of more than EUR1.1 million.

If you look to our treasury stock, we nearly have 50 million shares in our treasury stock, and the average price we purchase it is EUR35.37.

Going forward, I think we have clear plans to continue the buyback activities also in 2007.

The next topic is headcount, how headcount develops.

We added 3482 heads to the organization always on a full-time equivalent basis.

There are467 coming from acquisitions and you see where we invested on the product side, so service and support and on the R&D side.

The consulting business, training business did not increase in terms of headcount.

Sales and marketing, more moderate increase by 10%, G&A 9% and infrastructure 3%.

If you look to where we hired, I think it is interesting to see that we have quite a balanced situation in the U.S.

Keep in mind, nearly 1300 net hires include 400 coming through acquisitions.

EMEA with 600 new hires and APA.

You see the number here and you realize it is solely in India and in China what we added next to our base and then by function, you see that in R&D, we had more than 50% in offshore locations.

On the product side, we nearly had 40% in off-site locations.

If you go through the organization, you will find in Germany, we have roughly 14,200 employees, U.S 7000, 3250 in India and 1250 in China.

So these locations, countries are growing significantly.

To prepare the guidance, I would like to spend a minute here on the new P&L structure.

Why did we do this?

I think it is a valid question and I think first of all, I would like to start to recall that beginning of last year, we already talked in this round about a new line item to be introduced and saying that we will do this in due time.

And at the same time, we focused our guidance away from solely software revenue and brought it to product revenue.

That is very important in the U.S. to link this new structure with our KPI also going forward.

Now why did we do this?

First of all, we want to increase transparency.

Going forward, we will see more revenue streams coming from new business models and we want to be as transparent as possible also in our top-line reporting here.

That is the reason why we come up with a new revenue line for subscription and other software-related services.

That is the first change.

We will then rename what we call product revenue into software and software-related services.

You will see in a minute the components behind this one and finally this line, software and software-related services, will become the most relevant KPI for us.

What is now included in this new line item?

First of all, we find there subscription revenue besides rental revenue and besides other software-related services.

Let me start with subscription revenue coming from contracts that include both software and maintenance revenues.

These are the typical global enterprise agreements we enter into and Leo we will talk about this.

We entered into four new ones this year and in the past, we always were splitting the entire value into software and into maintenance.

And I think it's a point in time when we should discontinue to do this and put it into one line item here under subscription revenue.

Under this model, customers have access to all current and unspecified future products.

That's very important.

That is the reason why it's subscription and not up-front license, and Leo will explain then why we do this, especially for our big customers and generally fixed monthly fee over a given period of time.

Usually these GEAs are concluded over a period of five years.

Then we have in this line item rental revenue.

And you see here rental revenue normally runs into subscriptions going forward and other software-related services.

Now it is number one -- on-demand.

On-demand, we show today on the consulting revenue, we will bring this up into the old category of product revenue, and all CRM on-demand in the future also may be SM on-demand.

So all on-demand products will be shown under this subscription line.

In addition, we will also disclose and report here hosting revenue where the customer has no easy way to exit this contract because it is a typical on-demand model, and we will also bring this from consulting into this new line item called subscription and other software-related services.

And especially these on-demand and mandatory hosting shows you why we have under subscription and other software-related service this line, other software-related services.

If you look to it from a P&L perspective, it is simple and I have some numbers on the next slide.

We take pieces out of the software revenue we have today, pieces out of the maintenance revenue we have today and you take a bit out of the consulting business we have today and put it into this new line item, which then will come under software revenue when we have this new line item.

And then we have support revenue, formerly known as maintenance revenue.

And here are the numbers.

We do the [bridging] for you.

Now don't be surprised that we have the same number here for software and software-related service revenue under the new structure as we had under the old structure.

That is a coincidence.

In fact, it could be different.

Now let me briefly guide you through this one.

You see that under subscriptions, other software-related service revenues, you see now EUR129 million and this is partly taken out of software revenue, partly taken out of maintenance support revenue and builds up this new line item.

This is now below 2% of our total revenue.

You see then it change here on the consulting side.

We take pieces out and put it into other service revenues, and other service revenues includes a nonmandatory hosting piece, which should not be mixed up with the normal classical consulting business.

We include the application management services and referral fee.

So it is a much more transparent structure of our top-line P&L as we had in the past because we show it in the line item where it belongs to, and I think again coming back again, it is only for purposes of transparency.

Now our outlook for the year.

I think let me read it because this is a habit we use now over several years so there is clearly no misunderstanding.

Beginning in the first quarter of 2007 and also provided for the full-year 2006 for comparative purposes, the Company will realign its income statement to provide additional transparency for reporting potential new product revenue streams.

Although currently not material, the Company added a new revenue line item called subscription and other software-related service revenue as the basis of the realignment in addition to changing the name of the line item, product revenues to software and software-related service revenue.

To be honest, it's a pity that we now have such a long line item, but we cannot change it.

Therefore, software and software-related service revenue equals the total of software revenue, plus support revenue, formerly called maintenance revenue, plus subscription and other software-related service revenue.

The total software and software-related service revenue in 2006 was EUR6.6 billion as I showed you before.

SAP's outlook is based on this alignment and in addition, the operating margin outlook for 2007 is based on U.S.

GAAP numbers.

Now as I come to the outlook, the Company expects full-year 2007 software and software-related services to increase in the range of 12% to 14% and now this should be [bought].

It's at constant currency.

Constant currency increased 12% to 14% compared to 2006.

In 2006, we had a growth here, comparable growth of 12%.

In order to address additional growth opportunities in new untapped segments in the midmarket, the Company will invest an additional EUR300 million to EUR400 million over eight quarters to build up a new business.

Depending on the exact timing of these accelerated investments, this is equivalent to the Company reinvesting approximately 1 to 2 percentage points of margin in 2007 into additional future growth opportunities.

Therefore, the Company expects the full-year 2007 operating margin to be in the range of 26% to 27% compared to the 2006 operating margin of 27.3%.

The Company is projecting an effective tax rate of 32.5% to 33% for 2007 and we expect to increase our employee base by roughly 3500 full-time equivalents.

If you compare the guidance format year-over-year, the old guidance again focusing on product revenue indicating an assumption for software revenue growth, we will now go for growth of software and software-related services and in both years, nothing changed.

It is at constant currency.

Operating margin, you see here we had an adjusted operating margin target.

Now we go to the U.S.

GAAP margin.

Let me spend a minute here.

Why do we do this?

I think beginning of last year when we explained in this forum during the analyst meeting that we would now adopt FAS 123(R) and expense all of our stock options and virtual programs like the STAR program.

At that point in time, someone of you questioned why do you then continue with your pro forma reporting.

I said it is the right time to change it because now all of our -- all companies have the same basis, all companies have to expense their stock-based compensation expenses.

We do no longer have any disadvantage due to the structure of our programs as we had in the past and, therefore, it is the right time to change.

But I wanted to keep the possibility to compare our 2006 performance with our 2005 performance without calculating every quarter what is in and what is out.

Now it's the right time. 2006, we have all the stock-based compensation expenses in our P&L and now it is an easy comparison to 2007 that we will also have all of our stock-based compensation expenses in our P&L.

We will not provide a guidance for earnings per share due to the fact that we have these investments in front of us and we do not know exactly how much will be spent of this investment in 2007 versus 2008.

That is still something we have to figure out and to be honest, we wanted to keep a bit of flexibility here for ourselves.

Having said that, I would like to hand over to Leo.

Good afternoon, ladies and gentlemen, or good morning if you are on the Internet.

I would like to give you some perspective on the performance of the business from an operational point of view.

I will use constant currency to do so because I believe that is the true reflection of what really happened materially in the market and a true reflection on our performance.

If one might be disappointed that we didn't reach our product revenue growth guidance; however, we did have a strong year and I illustrate this with good regional performance.

We had double-digit products and software revenue growth and we had continued marketshare.

All of these points we will try to point out to you later.

For the full year 2006, our product revenue performance grew by 12% and if you would exclude the one-time accounting adjustment that Werner referred to in the beginning, it would have been 13% of constant currency.

It was driven by strong maintenance growth, which grew by 12% in 2006 to EUR3.534 million.

Our license revenue grew by 12% in constant currency, EUR3.071 billion and again excluding this one-time adjustment, it would have grown by 13.5% in constant currency.

We did launch global enterprise agreements.

We talked about this already at the midyear earnings announcement.

Let me try to give you a little bit more information on this.

Indeed, we signed in 2006 six of those agreements.

These enterprise agreements are strategic bondings between us and key strategic customers, which is something that you should actually expect given the depth of usage that SAP has achieved within these companies and given the deep reliance that these companies now have on their worldwide global business on running our systems.

It is only to be expected that these companies want from us a much deeper and much longer term, a much more profound relationship, which we are more than happy to engage into because it is, in fact, a materialization of our aspiration to be a very customer-centric company.

Who are these enterprises?

We closed an agreement with Exxon, with Unilever, with BMW and with E.ON.

There was one that we closed at the end of last year as well in 2005.

And just to give you an illustration of the metrics that we are talking about, and I will only do this one time just to give you a color of this, this volume of these agreements is about EUR400 million altogether, and it is a substantial amount, which SAP will recognize over the coming years.

Our Q4 in terms of software was also good.

We grew our software revenue by 12%, even though a small number of larger transactions couldn't be closed at the very end of the year for various reasons.

For example, the public sector, that was a purely procedural question.

I am happy to report that some of these contracts have already been closed in January of this year and I'm also happy to report that none of these deals is lost.

And last but not least, we had a very successful mySAP ERP customer adoption.

Henning will provide you with some more color of this, but it is very important to point out how rapidly our customers are actually jumping on the BPP bandwagon.

Our market position is stronger than ever.

Our marketshare in our market today is 24%.

That is a growth of 2.8% compared to last year and our peer group share has reached 63%.

That is plus 1 percentage point compared to last year.

Our peer group lead over our next closest competitor is larger than ever before in the history.

It's now 39 percentage points.

And just to explain a little bit of color here.

In Q4 2006 alone, we closed more software license revenues than any one of our close competitors did in a full year.

When people talk about the competitive situation, I like to bear the absolute numbers in mind as well.

We continue at a very high run rate against our main competitor.

In fact, it's up by 4 percentage points compared to last year and in Q4, our run rate was the highest ever we had.

If I look at sequential data, it is 83%.

It is up by 7 percentage points.

Our customer satisfaction is at an all-time high, and I am very pleased about that because it is in fact a materialization of what we have always been trying to achieve, which is to have a very strong, a very close, a very deep, and in certain case, strategic relationship with our customers.

And last but not least, our new customer business is going very well.

Our new customers account for 31% of order entry this year.

We continue to focus efforts on our volume business and we have continued success there.

Q4 2006 in fact marks the best quarter we ever had in the revenue generation from our indirect channel, and we count today approximately 38,000 customers worldwide and we hope that we have created the dynamics to continue on our objective to reach 100,000 customers by 2010.

You will see later on how we want to achieve that.

We added in 2006 another 6000 customers and we had strong increase in our volumes; 15% coming from the direct channel and more than 20% from our indirect channel.

In fact, if I look at our midmarket business, All-in-One is now serving about 9500 customers.

That is a growth of 23%.

We have 940 partners servicing these customers.

That is a growth of 29%.

And on Business One, we have close to 13,000 customers.

That is a 41% increase.

And 1300 partners, that is about a 22% increase.

We are therefore the leader in the small and midsize business segment.

We give you this view every quarter when we report our earnings and, in fact, we have increased our marketshare here and we are larger than anyone else in this market segment and we have every intention of actually growing that gap.

Also very important is the industry focus.

I am happy to report that we are the clear market leader in 20 out of 24 industries.

The reason is very simple.

We have been focusing since many, many years on deep vertical knowledge.

We provide industry best practices.

We have networks of customers with whom we work very deeply together to create in this industry best practices.

We bring together also from partners and that gives us a continued advance and competitive advantage when we talk about industries.

In fact, 2006 was driven by a very healthy mix between the strong performance of our traditional industries, chemicals, oil and gas, IM&C, also utilities, but also a very nice addition from industries that we focused on more recently, such as retail, telcoand also high-tech.

Going forward, we will continue to focus very much on retail where we are extremely successful, on financial services public sector and also the high-tech.

And just to give you a few names on important wins in the year 2006 -- ABN Amro, Banco Bradesco, R&V Insurance.

These are financial service companies.

Ace Hardware, Jo-Ann stores, Lifetime Brand, Reliance Industries, Wumart, these are retail customers.

While we had great success in the U.S. with Jo-Ann Stores, Ace Hardware and Lifetime Brand, I would like to point out Reliance and Wumart, because these are emerging retail markets into emerging countries, India on the one hand and China on the other.

And by the way, all of these accounts were won in very competitive situations.

Bundeswehr, City of Dallas, Finance Ministry in France, public sector deals are very important ones.

Chemcentral, China National Offshore Oil, Exxon, oil companies of course;

Fujitsu, Siemens, Kyocera, high-tech and then Vodafone telco.

Maybe a few words on Vodafone just to illustrate the competitive strength of SAP.

Some of you might know that Vodafone was running two vendors, let's put it this way, SAP and another one.

Actually it was the other one's largest application customer in Europe.

Vodafone decided that they needed one platform to drive their programs forward and after long examinations, they decided that SAP would be their strategic single platform going forward.

Services support our business in a very meaningful way and we believe that services plays an integral part in our go-to-market approach, and I am happy to report that our consulting revenues increased by 10%.

Our trading revenues increased by 12% and we have achieved through good management of that business record levels of profitability up by about a percentage point.

Actually, more than a percentage point compared to last year.

In fact, if you compare our service business to other service companies, I believe that the margins we generate here are significantly above the average of the industry.

Our services will continue to play a very vital role in our go-to-market offering because thanks to that and together with our partners, we are now very much able to offer complete solutions to our customers and avoid for them the hassle of trying to construct everything through their own means.

A few words on Safe Passage.

You know about this initiative.

We report on this every quarter as well.

By now end of 2006, we have 485 customers who have selected SAP as part of our Safe Passage initiative.

A comparable number last year was 292 and just as a side remark, you know that a competitor has a similar program called [FSAP] for whatever reason and that program up to now has not had any success whatsoever, at least not to our knowledge.

Customers who chose Safe Passage in 2006 for the full year -- Allianz, BASF, Cyclon Hellas, Durr Systems, Empresas Municipales de Sevilla, Group 4 Securicor, ICI, La Caixa, Morellato, NextiraOne, Oncology Therapeutics Networks, Philadelphia Media Holdings, Saint Gobain Systemes d'Information.

We have extended that program to also include Siebel in it.

And I am happy to report that (indiscernible) has now an expanded footprint and is able to serve customers globally.

We opened up offices in Australia and the Netherlands and Singapore and in U.K., in addition to the capabilities we have in the U.S.A.

Let's take a quick look at Q4 and at some selected customer wins.

I already mentioned Ace Hardware, a big retailer in the U.S.

Anheuser-Busch companies, very important.

Also CEMEX in Mexico.

You probably heard about the CEMEX Way, which is a very innovative way that CEMEX has found to address the needs of their customers in what could be considered a conventional commodity business for cement.

CEMEX has actually found very smart ways to change the equations there and in order to drive that business model in the future has selected SAP as the underpinning.

DeLuca Homes, Neoenergia S/A and Warner Music Group.

Here in EMEA, ABB is now going to standardize its entire European environment on SAP.

Bundesant fur InformationsManagement, La Caixa, a big savings bank in Catalunya.

Allgemeine Versicherung, well-known to many of you here in this room.

Unilever, one of our GAA customers, is now completely going to standardize on SAP as well.

It's important to notice this because five years ago, we really needed to rebuild our relationship with Unilever and the GAA agreement is in a certain sense the culmination of this effort.

And last, but certainly not least, Vodafone; we just talked about that.

In Asia-Pacific, Kawai Musical Instruments, Kyocera, Matsushita Electrical, Shanghai Pudong Development Bank and other banks in China where we are very successful in the banking industry.

Sharp and Shiseido in Japan.

Our software revenue breakout per region.

Werner already mentioned the total number.

In the Americas, we had 15% growth in constant currency.

Actually without the one-time accounting adjustment in the U.S.A., we would have another 2 percentage points.

In the U.S., we grew 13%.

In Asia-Pacific, we had 12%.

We will talk about Japan in a minute.

And in EMEA, very important.

Again, we are able to report double-digit.

And Germany, out of this a very proud 7% growth.

Let's take a quick look at the Americas and maybe to pick up on what Werner mentioned earlier on, on this one customer.

In fact, what we did with this customer when we helped this customer in a period of difficulty has not only maintained our customer relationship with this customer.

I actually believe it has strengthened our customer relationship.

In certain hard times, you have to stand by your customers.

That is part of our tradition.

It is part of our ethics, and the vast majority of our customers appreciate that and maintain a very strong, long-term relationship with us.

And I am delighted to say that this culture is now also prevailing in the United States as well.

We are the clear market leader in North America and we are the clear market leader in the U.S. as well.

We have continued to gain share during 2006 and in fact, our marketshare in that market grew by 1.2 percentage points to 12.6%.

Q4 2006 marks the 16th consecutive quarter of double-digit product revenue growth in the Americas and we have since for this effort achieved the highest we've ever over our next closest competitor.

When you want to really understand what happened in the Americas, I think it is important to take a bit of a historical perspective here.

If you look back over the last three years, SAP Americas more than doubled software revenues, which is quite an achievement.

Maybe a quick word also on Latin America, which had a remarkably good year and I would like to point out Brazil here, which grew by 52%.

And as we are speaking about Brazil, it gives me the opportunity to say also that our BRIC countries, which are gaining in importance for SAP significantly, grew in 2006 by more than 50%.

That's very important to notice.

In Europe, EMEA returned to double-digit growth, which is a very important piece of news for us.

That's plus 10%.

And it thereby contributes to a much more balanced regional performance.

We are less and less depending on the performance or the extraordinary performance of [this or] the other part of the world.

We have managed to construct the business in such a way that we are now firing on all engines and all parts of the world can contribute.

In fact, when I look at our strategic countries, our nonstrategic countries, all of them as well have good and strong performance, and all of them also underpins the underlying performance of the Company.

In EMEA what also is very important to point out is a strong performance in these very heterogeneous regions where we have very high marketshare, certainly the region with the highest marketshare in the group.

It is also a region where we excel in particular in the small and midsize business segments.

And from a country perspective, we had very strong performances in Russia, in the U.K., in Italy and in the Benelux, and we had strong, solid, good performance in Germany and France and in Eastern Europe.

Last but not least, in Asia where we had a balanced performance across the entire region, of course, very important.

We had good strong results from our key growth markets, India and China, but also Australia and Korea performed well.

Asia-Pacific is and will be a growth engine for the group based on two very important criteria.

One is it has generic domestic, in a certain sense, growth, but it also contributes to international growth as many, many European or American companies expand in Asia and in China in particular.

Last, but certainly not least, I am very happy to report that as predicted, Japan turned around in the second half of the year and finished very strongly with a growth of 17% constant currency software revenue growth for the full year 2006.

We are now confident to see Japan becoming a contributor to the overall performance of the Company.

So to conclude, our short-term operation on priorities in 2007.

First of all, every effort will be made to expand our leadership, first of all, of course, in the core enterprise application market, the market that we are most comfortable in, strongest in, that we will expand.

We'll do this by focusing on some industries in particular.

I already mentioned which they are.

We will continue to build and strengthen our small and midsize enterprise segments for the addressable part of the business, and we will do this by boosting and enhancing through [partnerage] our very strong partner ecosystem.

We also want to expand our leadership in the platform market, which is now gaining significant traction.

You will see some numbers.

NetWeaver is becoming a key driver for us and we also will be growing much more aggressively after the business information user thanks to our Analytics, our xApps, Duet, (indiscernible) on demand.

We feel that we are the strongest global enterprise software company currently in the market and we will continue our effort to ensure that we have a balanced regional contribution going forward so that we take some risk out of the business and can ensure long-term good and solid growth.

We will continue to drive for growth markets where we feel that we can fuel some of the growth for the Company in the future.

Now I'd like to turn it over to Henning.

Thank you.

Ladies and gentlemen, I want to continue where I stopped last year.

If you remember, we had a slide where I tried to outline the ambition of SAP for 2010.

There are roughly two goals we want to achieve.

One is to expand the rest of the market.

No doubt this is possible.

If you add additional product, if you add additional strategic product, and therefore we started in 2006 in launching a number of strategic products to the market.

We believe we can get roughly 50% of these new products through our end of year 2010.

That is where we are doing it, but you need a kind of door opener and the door opener is our enterprise SOA architecture, so therefore it is very careful to watch how many of our customers have adopted these new architectures.

I will come to some of the figures later on.

I expect from today's figures that roughly two-thirds of our installed base will be an enterprise SOA in 2010.

Second point, we want more customers so we really wanted to triple our customer base.

We have now 38,000 as you have heard and it is obvious if you want more customers you have to enter the midmarket.

Because we have already a significant number of customers in larger enterprises.

That is the reason why we expect in 2010 that 40% to 45% of our entry is coming from the midmarket.

If I look back what we have we done -- what have we done in 2006, then I can say yes, we are on track to achieve these targets.

I am measuring it normally in three ways.

The first is were we able to ship the product?

Are the products sellable?

Is that is the case.

Now here is a list of products we have shipped in 2006.

All of them are in the market and are already contributing to our revenues.

From that point of view, there is no doubt we will in this year complete our enterprise services roadmap as announced.

Second point, what about the adoption?

Three figures I am looking to, the first is how much revenue are we doing with our platform, with NetWeaver?

It was an increase of about 55% to last year, so it is EUR750 million roughly.

That is a good number.

Second, KPI is how many customers do we have on ERP because ERP is based on NetWeaver.

You'll see that we have more than 7000 and in particular we have more than 4000 now productive lives.

And if you look to the adoption rate, it took us one year, 2005, to get the first 1000 and you can see that it took us three months the last quarter of 2006, to add another 1000.

So it gives you an idea how the dynamic is in the market.

Finally the question comes up how fast can we convert the contracts?

And I indicated to you roughly 800 to 1000, so achieved this goal as well.

We converted more than 800 R/3 contracts into the mySAP suite, so with this speed I guess we will end up in 2010 with a few percentage of the R/3 contracts less like we expected.

The final point was made from Werner and from Leo.

I just wanted highlight it.

If I look to growth, if I look to market share, yes, we couldn't finally achieve our guidance on software revenues.

That is a pity, but if I look to the underlying business, SAP strengthened its market leader position.

Whatever figure you take here in both cases we increased our market share significantly and also our peer group share.

Now let's come to the future.

The action of the market was pretty obvious since the direction of the market was we want growth.

We believe we are a growth company.

We said several times that this was priority number one for SAP and it is even more important since short-term optimization of the margin.

Because this is what we do today.

This is about market share, there are not many players left and it is key that we win the market share today.

(indiscernible) on the other side whatever we do if we have opportunities to accelerate growth that we have to look for high-end margin growth no doubt, so we will not invest into [consulting].

We are willing to invest into revenue streams which add to product revenues because that is where the margin is.

The last point is we try to build those revenue streams which are more predictable to get less volatility.

You have heard from Leo and from Werner that we have different demand in the market, so customers are buying in different ways from SAP.

In particular, the large enterprises, this global enterprise agreements are good for SAP.

We worked hard over many years to get there and for me it is more important to get the five-year subscription based deal from the large clients because it gives me a five-year mix of software and maintenance and not only one year.

But according to the accounting rules, we have to put it into a separate line item, which is called subscription.

Therefore you see how important these revenue and this line item is for SAP.

Another point is the midmarket.

We have very good portfolio to attack the midmarket.

We are the market leader, but if you dig deeper into the midmarket, this is a large opportunity of around 30 billion, the same size like large enterprises.

If you see what is the value proposition clients want from us, you find more or less two camps of clients.

One are the clients which we can serve today with our portfolio, but the other clients were more or less looking for okay, quick value, cheap return, low-cost, no risk, functionality is not that important.

And what we believe we can do and want to do is that we offer a new business model not only a new product, a new business model exactly for this dedicated midmarket.

And you see from this point of view that the reason why we believe that product revenue are now software and software related services that it's more or less the same is getting more important for SAP and why we are guiding you on growth and product revenue.

A second point, we have debated several times is it better to grow organically or to do acquisitions?

We have stated several times yes, we will make some minor acquisitions, but fundamentally we want to grow organically because we believe this is the let's say most sustainable way for profitable growth.

Another point is how can we grow organically?

We want to grow through innovation.

That is where we are good in.

We want to drive our growth through products.

We are the market leader.

We are the thought leader in this market of enterprise applications, so we think we cannot buy this innovation.

They are not available in the market.

So therefore we have to invent them and drive them ourselves and that is what we want to do.

We want to do and accelerate this investment into new innovation, but I understand that if we do an acquisitions you'll feel it is very transparent for you because part of that is in the balance sheet and the other part is in adjusted P&L figures.

So we can do the same for organic growth and do some investments, show them separately and make it transparent to our shareholders what is the return of this investment is because we believe the return is higher than of any acquisition I can make these days.

So therefore you'll see that we will go forward with our established business which has good growth opportunities.

Our established business can grow in the future double digits on product revenue, no doubt.

I think we can continue with our established business to improve our margin.

This is what more or less the community expects.

And in parallel, we want to build a new business line which will focus on a new dedicated segment of the midmarket, a segment we call today the nonbiased because these are customers who do not consider today to buy software of the type SAP and competitors are delivering to the market and not waiting until somebody is coming as a startup and disrupting us there.

We will show these as a separate line item.

We will run it as a separate line in SAP therefore Leo has appointed Hans-Peter Klaey to run this department.

So what about our established business?

Enterprise SOA is a concept which is now delivered from SAP in the market.

This is a slide I'm using all the time and for me it delivers.

This is the sales slide for Enterprise SOA.

Important SAP has delivered this new architecture by evolution.

It is very important.

We have the largest installed base in the market and guess what this installed base tells us?

Guy, we want to transform our business, but we don't want to be forced by technology.

So please do it in a way that has no disruption for us.

This is exactly what we are delivering on the enterprise SOA by evolution.

We do it for large enterprises and for half of the segment of the midmarket.

With large enterprises we have delivered our ERP on the business process platform and therefore it is obvious what we are doing in 2007.

We will bring our entire suite as announced to this business process platform and we will bring to the market all the innovation we have invented for ERP via the suite.

We will drive rapid adoption of ERP because this is a door opener for additional sales.

We will add another more than 1000 new enterprise services, more composites, and the first industry specific platform for banking.

So this is not a surprise.

What about the midmarket?

Now we have announced beginning of this year, that is not a surprise to you that there will be a new version of the proven mySAP all-in-one which in the past was based on our suite, now on our business process platform ERP.

But we have this midmarket a proven enterprise SOA by evolution product available for all countries, for all industries.

We can leverage some of our investments running on NetWeaver.

We can leverage ERP.

We will bundle in some CRM which we have.

We can leverage the best practice and we can leverage our partner program.

So that is all fine.

So that was enough growth opportunities for this established business and if you look to the high-end, you'll see this is not saturated.

I think we can go for both, for share of wallet, because it is now platform based and therefore we have new opportunities to use the capabilities of the platform and these are revenue streams as I indicated a year ago and we go here for new clients as well in particular as Leo mentioned in the BRIC countries, with more than 50% growth, and some of the strategic industries.

The same is true for the midmarket, the segment of the current buyers of products like that of SAP.

Now we know that we go there with two products.

We have now the new version of all-in-one which is also SOA based which will be -- or it is launched now in January.

What are the let's say differentiators to this product?

It is more function.

We will enhance our best practice.

The user experience will make it easier to implement.

If you see how many customers we can add with this product today, you have seen us roughly come close to the 2000.

So it is a good business, 2000 clients a year.

If you looked to the low end where we have business one, we have added something like 4000 clients now in a year, so we are also ramping up quickly here.

So with these two products, we go what we call established business, no changes here.

The question is why are you investing into something new?

And I made the point if you look to the midmarket, there is a big potential of customers who need a different value proposition today and we will address this with an entirely new product we have developed in the last years and we have sometimes mentioned here under the code name A1S.

So the market is large enough.

I think it's roughly half of this EUR30 billion.

We have developed what we believe is a game changing product.

It takes some time until you find out if it is really game changing because there's a lot of breaks through innovations in it and you have to take your time to see if you can build it this way because it is the first time we build a product this way.

Nobody else has done it so far.

We came to the conclusion last year in particular in December when we showed it also to analysts, to business analysts, and the feedback was very positive that we should take the opportunity this time and make no compromises and not only come with a new game changing product to market with the old business model, the old way how to sell software, the old way how to maintain software, the old way how to implement software but to change the entire model how software is sold, distributed, consumed, and maintained the entire lifecycle because that would help us to bring finally down the overall cost of ownership by a factor of 10 and really addressing this market.

Therefore we have to add to the product what we call an innovative business model.

That is very important to understand.

Therefore we have to build the infrastructure to support it and not just the product.

We made this decision recently because we believe it is a unique opportunity for SAP.

We could not do the same with it with R/3 where we tried to touch a certain market and then we were overwhelmed from requests from other buyers that at the end of the day let's say we copied more or less (inaudible).

Now it is not necessary.

We have an entire suite, an entire portfolio for this demand.

So therefore we believe time is key, time to market is key.

We could do all of this in many, many years and give up of our competitive advantage or we accelerate investment.

We believe as a management it makes sense to accelerate investment if you have a good idea and to build up this business.

I would like to show to you what the difference is and what the potential is.

You have seen the investment and you want to see what could be the return.

The investments is EUR300 million to EUR400 million over eight quarters.

From a product side, first of all it is not only game changing how its architecture, it is a suite.

It is the suite in a box.

It is not CRM or it is not an ERP.

It is a suite.

It can cover the entire business of a midmarket company.

We will eliminate the risk of the buyer completely.

There will be to our systems so the customer can configure and to try the software very easily, so it is not the traditional sales thing.

We guess there is extremely faster time to value.

It will be extremely faster.

The training of the users is in fact cheaper and easier.

And finally it is more flexible than the other software is, so therefore if somebody has it running and the growth with the business and that takes it to your needs, it is pretty simple.

So this is a value proposition from the product.

The question is what is changing from a business model?

You have just to compare all it can do.

Today in our established business we have more or less perpetual licensing models.

Now we will have alternative ones.

The customer has a choice.

It could be entirely subscription.

It doesn't matter.

It could be financing.

If he likes, he can buy it.

It's up to him depending on his needs and of the phase where he is in, the most flexible way.

The established business we configure to needs.

We know we need (indiscernible) who are looking for this table, configuring the solution, and finally the customer is happy.

But it takes money and time and convergence.

These will be consumption ready.

The configuration will be very simple, driven by business related questions and answers.

They are more as I said, we give free trial systems.

We have classical account management model on the established business, it will much more drive this business because it is volume business through Internet sales and telesales; the same is true for implementation.

They are embedded services so we have to design from the beginning for easy maintainability so we can do application management remotely independent where the system is.

It can do the upgrade automatically.

We will put application management as part of maintenance.

That brings the cost significantly down.

From the opportunity for SAP as I said, establish business; we will continue that we have double-digit product growth and this business is healthy and I think we can show that for this business we can increase our margin, as requested.

On the other side, what is the opportunity of some new business?

We guess that in 2010 we can have a business where we can add roughly 10,000 customers a year going upwards.

If we would do it the traditional way, it might be 2000.

I think the business can emphasize of $1 billion at that time.

Very important we have seen it from the new business model.

It is all about scale, economies of scale that we have to ramp up quickly and have to be very careful.

And if we do it right, you can create a predictable business of higher margins than we have today.

So therefore to summarize, we believe we are well positioned for growth.

We are doing this in order to accelerate the growth of our established business.

As you know, we have started many years ago.

It was finally 2003 where we started for the first time in let's say really putting money into our product innovation.

We did a lot.

We have now in 2007 established enterprise as a way for our core business and now we feel it is time to go for the next phase and to build these additional business in a transparent way so that investors can see the risks but investors can also see the returns.

Thank you.

Thank you, Henning.

We'll now start the Q&A session.

Again, a reminder for those of you here in Frankfurt, please use one of the roaming microphones when asking your question.

We have a lot of people who follow this conference through the Internet.

Please do send us questions to investors at SAP.com and I think we will probably start with a question in the room in Frankfurt.

It is almost a tradition that (indiscernible) gets the first question and so we take one from the left-hand side.

Thank you, or would maybe I'd like further look at this new product offering to be [contracting] a lot of questions regarding this.

Maybe you can give us more details on the investments you have to meet, EUR350 million to EUR400 seems a very high number therefore you can maybe give us a little more ideas of where they are, how much is in the delivery, how much in the support?

Maybe the sales infrastructure you need and so therefore maybe this will be more in '07 or '08?

If you have any idea, you said you want to have some flexibility but maybe an idea?

And when will you see the first payback?

You mentioned in the press conference this morning you expect really no revenues in '07.

Therefore could we expect '08 already there's a meaningful number from this new channel?

And will maybe in '08 therefore the margin for the whole company return to increase because it is a onetime impact and maybe the additional revenues we will call -- already seen in '08 and the improvement of some margins in the established business maybe at all leads to increasing margins again?

It is difficult to give too much detail now because it would mean that this has been done before from somebody and it has not.

And on the other side, we want to launch it officially in March.

So forgive me if I give you some and over time we give you more details.

It is important to know that this investment is not exclusively R&D.

It is only a little bit accelerated R&D.

We are funding already the majority of our R&D to our established business.

It is normally in SAP and we did this in the past and we don't want to change this, very important.

But this is the first time that we bring you product entirely different to the market.

We have to set up a lot of infrastructure and we have let's say you would call it from a revenue point of view back-end loaded business and not a front-end loaded business, so we take some of the risks from the client away and at the beginning, the risk is at SAP side.

Therefore we believe we get higher margin at the end.

That is how the model works.

So therefore this is also part of the investment.

It is onetime investment and it is a ramping up with a different business model than the traditional one.

These two things come together.

In '07, yes, I would not expect revenues here because it is more important that we get it volume ready and in '07 we will only do it under subscription because we want to get our hands around it.

In '08 we will start giving customers more choice.

Now it is the question -- it is an interesting one -- what will be the mix of pure subscription and those who want it on premise?

There will be a mix and it depends a little bit on this mix honestly how the model works out over time.

So you get some money anyhow but it is a timing question.

So we need a little more detail yet.

The second important parameter in this model is what is the average user number per deal?

This determines the margin very, very much, so therefore what I believe what is best for you, what we will do is we will start now educating.

We will over time share with you more and more our models.

We will share on a quarterly base what we have we invested and what has been the return, what have we achieved and I think that is the best way.

Because what can happen, it can happen that something works better then we will accelerate investment.

If we see it takes more time, we will not spend the money.

So we will from a timing point of view soon suspending with the progress we make also, let's say on the product side.

That is very important.

Here we need a little bit flexibility because a lot of things are new.

From a margin point of view, the final one, we invest eight quarters, so therefore you cannot expect that in the second year this business has already the same margin like the existing one.

So therefore I believe what you will see is that if you look to the established business we will year-over-year show you margin improvement and this business I think we will show as an investment case and according to our models we have today after four years -- this is not a too aggressive model -- we can end up with a margin which is above what we get our established business has at that time.

Maybe as a follow-up, because we've got a lot of questions on the accelerated investments from a web, there was one additional aspect.

Is the additional investment a reaction to tougher than expected midmarket competition?

Maybe if you could address this.

This was a question on whether the investment is a reaction to tougher than expected midmarket competition.

This question came up from Oppenheim, ABN Amro, CSFB.

No, because what we deliver to the market is something I have not seen so far, therefore we are confident that what we're doing is leading-edge here and it is just to create and a different volume business.

So we want in addition to our established business what we call value, which works well and where we are the market leader create a second volume business where we can leverage our experience in the market, in particular the deep expertise in how to design, how to develop enterprise software and the deep expertise from industries and countries.

That is something which we can reuse.

Maybe to add just word to what Henning has said, in fact this new offering that we're talking about, this whole new approach is for us completely untapped opportunity.

It goes after a market that considers today SAP as too expensive, too complicated, too complex, too difficult to implement, all of the toos you can imagine.

With the approach we're talking about and the product we're talking about, we will actually break the [declaration] and turn it around.

Coming back to the new product, one thing that I don't understand is how can you say this is an expense we have (indiscernible) quarters?

Usually when you invest in personnel, I guess you won't fire those guys after two years, you are going to keep them still on your P&L.

How is it something that will expire after two years?

Question one.

Question two, on SMB and your success in '06, I have a hard time understanding why you feel so comfortable.

If I look at the 30% for your revenue coming from SMB that was flat compared to '05.

If I look at new customers, not install base, but new customers in those all-in-one and business one, that is flat too.

There's no growth coming those from two products.

So I just wonder, isn't that in reaction to what -- that you have actually not seen the success in the SMB market with the initiative you took so far?

And then lastly a question on the overall outlook.

Maybe just give us a little bit of an idea about how you see the economic environment, growth drivers for '07.

In the past you obviously said its first U.S. and then secondly Asia-Pac.

Will that remain the same?

Or should we expect any major changes here?

Leo, you take this with the growth here.

But let's start first on the investment side.

In principle you are right.

There is a point in time where the expense we have for the business is more than covered by the revenue, no doubt.

Then we are not talking about any longer an investment case.

It is normal business because you change the business model I think there is a timing question and therefore I try to outline that this investment is one off and it is also the ramping up so to say where revenue and cost [does not match].

That is just the point.

If you switch from business model 1 to A, you have this period which was we're doing for this new business.

I would not say it is not a reaction.

I think we are successful in the midmarket.

I think Leo has shown us his growth in the midmarket.

From that point of view, it is more an additional opportunity.

It is -- the existing as I said products are focusing on clients who like the richness and functionality of SAP.

They look to the large clients and say we want the same.

We are pretty successful with that.

(Inaudible question - microphone inaccessible) 100,000 customers by the year 2010, that is not a new target.

Now you're saying that this new business case you're actually aiming at 10,000 customers a year.

No, don't -- (indiscernible).

First of all we have said that last year in 2010 we want to have in total 100,000 plus customers.

If you look to our established business and if you look to the growth rate, you will see that we can achieve this without a new product.

Without a new product.

On the other side it makes no sense to come with a new product and have the same vision like for all-in-one where we said okay, after four years ramping up we can reach 1000 or 2000, which is not bad.

But we said with this product we want to go into volume and therefore I gave you an indication what volume means for us.

At that point in time, 10,000.

That will not be the end.

But the question is okay where can you be after four years?

That was the indication.

Every year, every year and then going up because you have to have a feeling what does he intend?

I could have said 1000 and then the question is why?

What is different?

Let me maybe (technical difficulty) give you some additional information on your question on the growth or nongrowth in the midmarket.

If you take it as a percentage of sales pure dollars or euros you are absolutely right.

Percentages have not really changed or not enough for you to make a big case out of it.

If I look at the volumes however, there we have more growth in the midmarket than our regular business and if I look at the share of our indirect business compared to our direct sales, that is going up as well.

I think we can take one question from the web.

It is again looking back to Q4.

The reach and performance in Q4, the person asked us to comment on the issues in the Americas ex U.S. and Asia-Pacific ex Japan.

He thinks these were the areas where the weakness was.

Maybe, Leo, you can address.

I would be happy to answer that question.

When I started with Latin America or the Americas ex U.S., it is a very tough comparison because Q4 2005 in Latin America saw one very large transaction actually when we commented on the results made it very clear that it was one very large transaction that had occurred in Brazil in this case which was going to distort the numbers going forward.

That is exactly what happened.

We still had very good performance in Latin America over the entire year and that is very important to remember.

So you should not read anything into that particular Q4 and actually the same thing happened in Asia Pacific excluding Japan.

There was a significant transaction in this case in Greater China in Q4 of last year which was not going to repeat itself every year.

But once again the overperformance of Asia-Pacific including and excluding Japan over 2006 was a very solid one.

Raimo Lenschow, Merrill Lynch.

A few questions.

First of all, sorry going back to the new product.

If I understand you correctly, you're targeting a new area in the midmarket which is probably slightly lower than [A1 M] is coming in.

It is probably is based for a Microsoft at this point in time, it's very much in there.

When Microsoft entered the market in 2001 they had the same hope of there's is a big untapped market and if you look at the growth rate from them, it's about a 15, 20% growth rate, which is what you could probably achieve in the enterprise market as well with the SOA story.

So I'm kind of wondering why is it different this time?

The biggest problem that Microsoft had was the customer just doesn't move there as quickly as people hoped.

Then on the accounting, maybe slightly more accounting, if you have more GEA deals and more subscription type, should we not have seen the deferred income move up?

If I look at deferred income on the longer-term, a feature that is actually down on the balance sheet and it is only slightly up in the short term.

Maybe you have an indication, Werner, that could help us on the gross margin side for the new subscription type model.

Is that kind of a similar level as the maintenance or does that change to gross margin and creation?

I have to go back, Leo, to Latin America because if I seem to remember correctly you had the very last year in Q1 '06, not in Q4 (indiscernible) got two deals.

Of course you will have that distortion again in Q1 in Asia.

You had now three quarters of relatively modest growth.

Is there something we should be kind of concerned about or is there something else that changed next year?

First question -- this is new here -- the answer is pretty simple.

I think Microsoft did it with the traditional product they acquired.

That is the big difference.

If you would ask me today, Henning, can you let's say get 10,000 customers a year with mySAP, all in one the version mode, my answer would be no.

That is the point.

The second part of the question was on deferred income, if there was any change to --?

If you have GEA or global enterprise agreement under subscription, the [recount] on the yearly basis or monthly basis, whatever we agreed upon with the customer, the license fee we get out of this entire deal, we do not defer this revenue.

We simply book it as incurred into our P&L.

Maybe I can take the chance to make two additional comments here.

The first one relates to what Mr. (indiscernible) said with regard to fledge compared to the midmarket.

Our success in the midmarket what we provide you where we measure what we sell into midmarket customers in terms of software and related order entry and this is 30% of our entire order entry on the software side.

This is stable over the last three years.

This does not mean of course that it does not grow, because we grow software revenue, so you can assume that what we sell into the midmarket grows at the same path as the stuff we sell into large enterprises, so that is number one.

Number two, you (indiscernible) asked for the overall margin for the entire company.

If you look to the guidance we provided today, saying that we have not -- guidance for the operating margin between 26% and 27%.

If you look to our plans going forward into 2008, of course we then see an extension of this margin.

That is basically, yes, what we see today.

The last one on the regions?

To give you the full answer to the Latin America and A-P question, let me just complement what I said earlier on by saying the following.

First of all, one of the things we have been trying to do in Latin America significantly over last year compared to the previous years was to try to flatten out a little bit of hockey stick phenomenon of Q4, which we used in Latin America significantly before, which we have achieved.

You saw good growth over Q1, Q2, and Q3 in Latin America and in America outside U.S., because we don't report Latin America as such, and we will continue to do so.

So I hope that you will not have any overly interesting questions in Q1 when we report Q1 on the Americas.

And as to Asia-Pacific, I should have added one additional comment.

Asia-Pacific performs well because what you also need to consider is the indirect contribution of Asia-Pacific to the overall business of the company.

When an American company will invest in you or a German company decides to expand typically in China and buys additional users, these are recorded in our way of accounting for it in America or in Germany but in fact it has being pulled by the dynamics in Asia.

So from that perspective, for us the underlying organic local performance, we should do pretty well in Asia.

I think before we go to Michael's question we take one question from the web.

It is Matthew Hammond from Credit Suisse and he asked about the confidence levels for 2006.

According to his calculations, the guidance would imply license and subscription growth of 13% to 16%.

Now we have not provided guidance on that, but what makes SAP so confident for 2007 relative to 2006?

It is pretty simple.

If you look to the last year, then you see if you take this technical adjustment I will have Werner explain and just look to the underlying business that we more or less reached the lower level of our product revenue guidance, if you remember, what we (indiscernible) software.

Because there is volatility normally from software to maintenance, from software to subscription.

What makes me more confident is that we give users time, guidance and product, very simple, that we can take this volatility out.

Michael Schacht, Cheuvreux.

Three questions, if I may.

First a follow-up on the growth drivers by region.

You mentioned in the presentation that you now see a more balanced performance from all regions.

Should we now expect that the U.S. market is more or less slowing down and we should expect a stronger growth coming from Europe?

Second question is on the U.S. in terms of contracts.

You mentioned that there was one Q3 contract that has to be taken off because of accounting.

Are there other contracts that might be at risk because of some accounting changes?

Last question, sorry, to come back to the margin for 2008, your former target was to be above 30%.

Now you have set a new, let's say, level.

Would you still expect margin improvement of around 2 percentage points in 2008?

Maybe I will try to give you the first part of the answer, and Stefan will give you the second part.

When we said balanced performance, what we are really trying to drive to is to be in a situation where all parts of the world contribute to the overall performance of SAP.

Or to put it from a risk perspective, to derisk our business that we are not depending on extraordinary performance from that or the other part of the world.

The U.S. business is a healthy business.

It is performing well and will hopefully continue to perform well.

At least, that is our expectation.

The good news is that Europe is also performing well, and will by itself also continue to be a contribution to the overall performance of SAP.

So at the end of the day, it is not a question of either/or, it is more a question of both.

I take the part of the question related to the adjustment we made to the revenue reported in Q3 of 2006.

It is very important, and I would like to stress this again, we had not to take out any revenue from the numbers we reported in Q3 2006.

There was one settlement agreement which resulted in a reduction of software revenue.

It was not to take something out of what we sold in Q3.

So the value of the software we sold in Q3 in the United States stays the same.

That is very important.

We made an analysis of other contracts, and we have not found any of any material size which would fit under this umbrella, if you will.

Regarding the margin, I think it is very important to realize that the 30% margin target we provided previously is based on what we call pro forma margin.

Always if you look to the pro forma margin, we have realized in 2006, it is at 28.8%.

If you look to the real GAAP margin, it is 27.3%.

So you always have at least a 1.5% difference between the two margins, driven mainly by stock-based compensation expensing.

I must say if you look to the established business, what we have in the plan for 2007, we are not far away from achieving this 30% margin target.

Maybe with the help of rounding it would have worked, but at the same time we made a conscious decision to take -- we take this EUR300 million to EUR400 million over the next eight quarters and invest them, and this of course reduces the margin.

Now with the shift to the pure U.S.

GAAP operating margin, we came to a range of margin for 2007 of 26% to 27%.

On the guidance, there is another follow-up from [Mark Prime], Deutsche Bank.

Why have you stopped giving EPS guidance?

I think you might have addressed this in your presentation.

In the presentation.

Okay, then we go to (indiscernible).

Two things.

Maybe coming back on the group margin on a blended basis for '08.

If you look at the guidance or if we look at the guidance for '07, I think without the extra spend in investments you could call it you would have had maybe a like for like increase of 100 basis points give or take.

Is the right way of looking also at '08?

Just to get a sense for the magnitude especially when considering that the business which you are developing will be less negative to say the least in '08.

You get first revenues, costs of investment might be more equally split between '07 and '08.

Just to get a sense for that, because I think especially looking at what was announced today the margin was probably the single most disappointing aspect to some and more specifically on '07, the 3,500 FTEs that you are adding, how much in that is implicitly already included and thereby double counted somehow in the 300 to EUR400 million or half of that in '07?

Thank you.

Maybe I can start here.

I think I just mentioned that for the entire group in 2008 we will see an extension of the margin according to the plans we have today.

I would not like to go into further details because remember we have this range of 300 and 400 million.

It is definitely someone back-end loaded but we don't know exactly how we split between the two years and I do not want to provide now anything I have to revise again because we shift maybe the spending from one quarter to the other.

The question with regard to the 3,500, definitely there is no double counting.

A clarification really.

Maybe I should not have used the word double counting.

It probably just confused.

Anyway, how many of the 3,500 are for the purpose of building the midmarket extra product?

I think Henning mention before that most of the stuff on the R&D side is already done.

We have a small portion which is unrelated accelerated R&D but the majority is about to bring this product to the market to set up the support infrastructure and so on.

We cannot give you details now regarding the exact amount of additional headcount associated with this 300 and EUR400 million but what we will do -- Henning mentioned this before.

We view the part on a quarterly basis how we spend it and we will explain it to you.

Now we are not in a position to break this down for you.

We have a question in the room, Elizabeth, but first of all we go to another question from the web.

From (indiscernible) HypoVereinsbank.

Again a little bit about the topline expectation.

Do you expect accelerated revenue growth beyond 2007 due to your investments or do they only "help you to sustain the 12 to 14%?"

I mean my colleague could also show the question from Charlie DiBono which refers to the product.

Charlie wants to have clarification whether is it fair to characterize the new offering as a plan of posted environment and a client like [plate servers]?

Maybe we can answer the second first.

Roughly yes.

We have to sit down with [Simmons] and see what he means, but if I interpreted in the right way, I would intend to say yes, let's see.

The first one, it is a clear no.

We have said that we have a healthy double-digit product revenue growth from our established business in the size we guided today.

We want to make this additional investment to go beyond this.

This is not immediately in '08 because we do not know how much revenue will come up in '08, but beyond '08 I think yes, we are targeting higher growth rates.

So that is what we are doing.

I said at the beginning growth is the highest priority.

Elizabeth Buckley, Arete Research.

I was just looking at the migrations that you have done to the mySAP 2005 ERP, you mentioned 4000 customers actually going live.

Could you give us a sense of what percentage of those migrations have been more technical migrations without much material functionality additions and how you see the functionality additions ramping over this year, say the second half of this year and next year on these same customers?

And then I have a second question on share buybacks.

Is this something -- we have seen the pace in 2006.

Could we see you pick up this pace looking into this year?

Thanks.

It is a little bit difficult to give you a figure that would mean that you ask every individual consultant including our partners, but you are right.

There will be a significant number of clients who do a technical upgrade first.

It this bad or good?

I like the technical upgrade first because it brings the platform into the customer.

If they technically upgrade, it means they have NetWeaver there, they have the [XIs], they have (indiscernible), they have portal, etc.

And a part of the up selling opportunity comes from the technical environment, therefore the technical upgrade is key for us.

Maybe I can add just one word to what Henning has said and that is important for you to understand.

Even if you were to assume which is not the case but even you were to assume that everyone starts only with a technical upgrade, that is excellent news for an additional very important reason.

Once we have done the technical upgrade, our customers start to benefit from significant TCO cost reduction.

Those TCO cost reductions in turn usually turn for us into additional sales opportunities.

So any way you want to look upon this even if worst-case everyone will only start by doing a functional SOA, a technical upgrade, it is still very good news.

And thus far, do you expect to already see some functionality or feature additions this year?

Where do you see the gravity of the functionality additions coming on stream?

Is it more FY '08 or should we already see this in FY '07?

Well, it is actually pretty evident that what you see already this year -- so in 2006 and what you'll see in 2007 as we do quite a lot of our business with the installed base.

Once people have done the upgrade, the technical upgrade, and are in a position to really start exploiting the [BPP] in a much more significant fashion, then we start to upsell into these customers, be it either additional functionality or broadening the scope in terms of users.

For example when you talk about information users and Duet, Duet got a significant boost because we actually managed to get people to migrate to AP 2005.

The question on the share buy back?

The share buybacks, what I said we continue to buy back shares.

It is the same path as we had in 2006.

We have to see.

It depends on the opportunities for us.

At the moment we just are two buy backs.

We take one question from (indiscernible) Stefan here in the room, but before we do that, let's go to two questions from the web.

One is from Daud Khan from Cazenove.

He asks what is the unique selling proposition for A1S versus [multi-ten] solutions already available in the market?

And the second question on the case, Werner mentioned in his presentation, given the current case, do you expect more customers to come back to you now and ask for similar accommodations?

I'll take the first one.

I think it is not the point where we discuss unique selling propositions.

We have to look to the product, but first let me say my tendency is not the unique selling proposition.

Just one proposition but not the unique selling one.

Let me maybe address the other question.

That should be very specific here.

What happened with this one customer has nothing to do with shelfware.

What happened with this customer was a very particular situation of the customer's business and not his usage of SAP or not usage of SAP and being a customer centric and customer focused company, we reached out and helped that customer in his overall effort in getting his business metrics right.

Therefore there is no reason to expect similar situations.

We do not address shelfware and by the way our ratio software has not deteriorated at all.

We've been working very diligently to make sure that our customers implement the software they buy and as you can probably infer from your own check, with our partners, you know there is quite a lot of demand for projects, so that is not the issue.

Therefore you should not expect any others.

We have a question from Heinz Steffen; let me also make a quick logistical announcement.

I think Werner has to stop pretty soon because he needs to catch a plane.

So ask your financial questions now while he is still on stage.

If they are many more questions I think, Henning and Leo will still be around at least a little bit longer.

Heinz Stefan, Fairesearch.

Can you just explain the success story in Germany, the increase in license revenue of 8% in the fourth quarter?

Then in respect to the taxes, you mentioned that there was a total positive tax impact of around EUR85 million.

How much of this can be contributed to the special situation in Walldorf?

In respect to the new business, I have read your presentation, quite interesting but from my point of view it looks not as a new product because as I remember you already have CRM on-demand so there is nothing new.

It might be a new business case from my point of view and in respect to the pricing, do you have any idea how the pricing will change?

Is this the new business model, is this a starting point for a new pricing strategy for the larger enterprise?

Why don't I start by trying to give you an answer on the German performance.

It is actually a pleasure to do this almost every year coming from that part of the room.

I can only give you the same answer that I usually give you every year.

Our German organization is extremely professional, has very deep, very tight customer relationships, is a high-performance organization.

We enjoy the trust of many, many German customers who are open and willing to absorb the innovation we bring to them.

And as the German economy has also shown a little bit of a slight improvement over the year, we were able to benefit over proportionally from that.

The question regarding the tax benefits of EUR85 million, I must say that a reduction of the trade tax you referred to is there a question is not part of this EUR85 million because this is something we will get the benefit get on an ongoing basis because we are really able to negotiate the tax rate itself down.

The impact I would say I say I think if I read correctly around EUR12 million.

Yes, from the new business, I did a bad job.

I tried to explain that on-demand is just one might be out of 10 or 15 differentiators against established because on-demand in the CRM on-demand case is more or less a different way to deploy and to finance things.

Here we have much more in it and therefore I would not compare it that we can also offer this under subscription and in an on-demand business model.

This is only one piece, but it is not the same.

From a pricing point of view, we will see I think we have made up our minds and we will disclose it then at the end the quarter.

I think it will be competitive pricing, put it this way.

We have to look to the market and we will be competitive.

It will not be a new pricing for the larger enterprise as we have just adjusted our price list and our clients like it and they don't want change.

So therefore this is a highly different approach with a different pricing, but has no impact on the large enterprises.

Are there any further questions here in Walldorf -- sorry, in Frankfurt?

It almost feels like home.

If not, we have maybe one final question here from the web.

Because the midmarket discussion was so important today, John McFee from Prudential asks which measures should the financial community use to measure SAP's success in the midmarket going forward?

How can you think these measures may be evolving from what we report today?

Yes, today what we are doing is we are showing market share for the established business that we will continue to do.

For the new business we will do it differently.

I mentioned a few KPIs and one was the number of companies.

The second one was the number of users per company, etc., so once we start reporting on it we will I think pick two or three of these KPI's.

There are two or three of them have highest impact [and sensitivity] to the model and I think we will pick those.

Well, thank you very much.

This concludes today's discussion.

Thank you for all your questions and your attention.

Thanks.

Can you take the question from John?

Can we take another extra one?

John Segrich, JPMorgan, says you now are based on GAAP numbers for the operating margin, can you please provide an indication on the size of stock-based compensation and acquisition related charges as these items can be quite volatile?

We know that it is volatile but that is exactly what we have to manage going forward.

That is the reason why we do not provide any longer these stock-based compensation expenses or acquisition related charges.

There was one other question regarding onetime effects in 2007, if we know some already know, and I think so far we do not know any of these onetime effects in 2007.

Okay, thank you very much for the additional information.

Thanks to you for all your questions and our next event will be the Q1 earnings announcement on Friday, April 20.

And right the week after we will have SAPPHIRE Atlanta with a special program for investors.

Thank you very much.