SAP SE (SAP) 2007 Q1 法說會逐字稿

Today's call will be hosted by Henning Kagermann, Leo Apotheker, and Werner Brandt. I will now turn the call over to Stefan Gruber. Please go ahead, sir.

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's first-quarter 2007 results. I am joined here in Walldorf by Henning Kagermann, Leo Apotheker, and Werner Brandt. Werner will discuss the Q1 financials in detail. Leo will comment on the current business environment and our regional performance. Henning will then provide some further in-depth commentary on the quarter and SAP's product successes.

Before we start with the call, I would like to remind everybody about SAPPHIRE Atlanta, taking place next week. We will host an investor conference on Tuesday, and then SAPPHIRE will be announced, taking place May 14 and May 15. (inaudible) on product-related sessions only.

In addition, I will make a few remarks about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, and will, and similar expressions as they relate to SAP are intended to identify such forward-looking statements. SAP undertakes no obligation to publicly update or revise any forward-looking statements.

All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the US Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2006, filed with the SEC on April 3, 2007. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates. With that, I would like to turn the call over to Werner.

Thank you, Stefan. Let me begin by saying that we are pleased with our first-quarter results, which saw a solid increase in software and software-related service revenues. For the remainder of the year, you should expect seasonality in software and software-related service revenues to be consistent with the past few years.

From 2003 to 2006, we experienced the following seasonal patterns. Q1, 20% to 21%; Q2, 22% to 23%; Q3, 23% to 24%; and Q4, 33% to 34%. Before I begin to cover the highlights of our results, let me touch on a few things.

First, I want to mention again, as a reminder to everybody, our new income statement reporting structure, which we already disclosed to you in our fourth-quarter 2006 report, to provide additional transparency for new revenue streams.

Secondly, I want to talk about the year-over-year change in exchange rates. The euro strengthened significantly against most of the major currencies, causing a currency headwind for SAP. Here are some key metrics. US dollar to euro, plus 9%; so the euro strengthened from 120 to 131 from Q1 2006 to Q1 2007. Yen to euro, plus 11%. Canadian dollar to euro, plus 11%. Australian dollar to euro, plus 2%.

Currency had the following impacts on our P&L. A negative effect of EUR101 million on total revenues; a positive effect of EUR68 million to operating expenses; and a negative effect of EUR33 million on operating income as a consequence.

Thirdly, as you recall from the fourth quarter of 2006, we disclosed that SAP [announced] accommodated a US customer with a modification of contracts signed between ourselves and this customer prior to 2006; actually in the years from 1997 to 2005. In the first quarter of 2007, we reinstated in software revenue EUR19 million of the EUR31 million reduction from the third quarter of 2006. We do not expect to recover any further amount in software revenue.

Let me now continue with the quarter's results. Software and software-related service revenues for the first quarter of 2007 were EUR1.5 billion, which represented a year-over-year increase of 15% at constant currencies. The increase was the result of a year-over-year increase of 16% in software revenue at constant currency; a constant currency year-over-year increase of 12% in support revenues; and a constant currency year-over-year increase of 70% in subscription and other software-related service revenue. Of the latter we signed one subscription deal in the first quarter.

For the full year 2007, we expect subscription and other software-related service revenue to be in the range of approximately 2% to 4% of software revenue [or] software and software-related service revenues, as indicated already in January.

Support revenues are flat compared to the fourth quarter of 2006 Q2. Number one, some positive effect in the fourth quarter of 2006; this positive effect is mainly due to reversals of sales allowances and concessions. Number two, a negative currency impact due to changes in exchange rates. Number three, in addition, we again reviewed our accounts receivable from the 2007 annual maintenance invoices in regards to collectibility; and we had set up sales allowance for probable concessions and credits to our customers as always in the first quarter. This is a typical first-quarter maintenance revenue. We had, as I mentioned before, very similar patterns over the last several years.

First-quarter professional service and other service revenue was EUR640 million, representing a year-over-year decrease of 1%, but an increase of 3% at constant currencies. Consulting revenues were down 3% in the first quarter, but increased 1% at constant currencies. In the first quarter, we had lower billable utilization rates, the largest decrease coming from the Americas region.

Operating expenses increased by EUR101 million to EUR1.7 billion, or 6% year-over-year. The higher operating expenses are mainly the result of additional personnel. We hired 3,847 FTEs since the first quarter of last year.

R&D expenses increased 9% for the first quarter and represented 16% of total revenues compared to 15% of total revenues for the first quarter of last year. The increase in R&D was the result of additional personnel. We hired an additional 1,287 FTEs compared to last year's first quarter. Of that total, 699, so 50%, were hired in low-cost locations.

Sales and marketing expenses increased also by 9% for the first quarter and represented 22% of total revenues compared to 22% of total revenues in last year's first quarter. The increase in sales and marketing was again mainly due to additional headcount, especially in the sales arena.

At the beginning of the year, we spoke about accelerated investment for our new business centered around new midmarket solutions, code named A1S. We stated that we would keep you apprised of the spending specifics in this initiative. Therefore, operating expenses related to the new business for the first quarter totaled EUR23 million.

Operating income was EUR433 million for the first quarter, representing an increase of 6% compared to the first quarter of 2006. The operating margin for the first quarter was 20%, which was flat compared to the same period last year.

The flat operating margin can be summarized and detailed as follows. The software and software-related service margin was 81% for the first quarter of 2007, which is an increase of 30 basis points compared to the first quarter of last year. In the first quarter, there was an increase in purchase licenses along with a slight increase in support cost.

The professional service-related margin was 21% for the first quarter, which was down 70 basis points compared to the same quarter last year. The decrease was mainly the result of an increase in consulting personnel, in response to demand for new and existing projects, and lower billable utilization rates as it takes sometimes several months before new hires can be become productive. We expect the professional services and other services margins to come back to a normal level as the year progresses.

As a result of the mixed margin performance in products and services, our 2007 first-quarter gross margin increased by 130 basis points to 63.1%. For the first-quarter 2007, net income rose 10% to EUR310 million or EUR0.26 per share.

Our effective tax rate for the quarter was 33.5%, compared to 34.1% in the first quarter of last year. For the full year, we expect a tax rate of 32.5% to 33%, as already indicated in January.

For the first quarter, primary use of cash flow included approximately EUR339 million used for share buybacks, as well as additional funds used for investments in corporate bonds. We continue to plan to use cash for future dividend payments, further dividend payments, fill-in acquisitions, and share buybacks. For the first quarter, we bought back 9.6 million shares for a total of approximately, as mentioned before, EUR339 million.

At March 31, 2007, treasury stock stood at 58 million shares, which included the release of approximately 600,000 shares from treasury stock during the first. Given the Company's strong free cash flow generation, we will further evaluate opportunities to buy back shares in the future.

Year-over-year headcount increased by 3,847 FTEs; and by 1,139 FTEs in the first quarter of 2007. At the end of the first quarter, total headcount stood at 40,494 full-time equivalents. We're still targeting to hire 3,500 FTEs net for 2007. Of the 1,139 FTEs hired in the first quarter, 25% were hired in low-cost areas and roughly 38 employees came through acquisitions to SAP year-to-date.

Let me finish up by saying that we have not changed our outlook for 2007. Please refer to the press release issued today for the complete outlook. I would now like to pass it over to Leo.

Thank you, Werner. And I'm pleased (technical difficulty).

Let me begin by discussing the market environment. The environment remains unchanged, as pricing is still very competitive. As you can see by the results for the quarter, customers, however, are buying software, meaning that the demand is there; but buying decisions continue to be made prudently.

In the midst of all of this, we continue to win a large majority of the competitive deals. We won 78% percent in the first quarter, against our next-largest competitor. This demonstrates the superiority of our products, our technology, and our people and the strong acceptance of the transparent product roadmap and vision we continue to provide to our customers. Our customers are making a very clear choice on who they trust as their software solutions partner.

Another success (technical difficulty) continues to be our Safe Passage program. We have signed up a total of 544 customers to Safe Passage. This represents a 121% increase compared to the first quarter of last year. Some key Safe Passage wins in the first quarter include Alaska Milk Corporation, Bobst SA, and INFRA S.A.

Let me now provide you with some additional customer metrics for the first quarter. In the first quarter, order entry in the pipeline remained strong, and the number of new contracts signed increased 15% year-over-year. The share of new customers based on order entry was 24%. But as we continue to sign more deals with midmarket customers, it is also important to talk about the share of new customers based on number of contracts, which was 31%.

Deals greater than EUR5 million accounted for 19% of order entry in the first quarter, down from 33% in the first quarter last year; while deals less than EUR1 million accounted for 44% of order entry, up from 38% in the first quarter of last year.

The strength of our vertical solutions is one competitive advantage that really sets us apart. What is unique about vertical solutions is that it is quite difficult to buy your way into an industry. Rather, to succeed it demands years of knowledge and experience to understand the business processes of the many different industries, and then develop and enhance your vertical solutions to make your customers successful. Our nearly two decades of developing industry solutions -- of which we now have 28 -- is the reason we have become the clear leader in providing deep vertical expertise to our customers. In fact, of the 28 industry solutions for which we provide end-to-end business processes, we are number-one worldwide in almost all of them.

Based on software and software-related service revenues in the first quarter, we had strong performance from the consumer, discrete manufacturing, and financial services industries.

For the midmarket, which we define as companies with less than $1 billion in revenue or less than 2,500 employees, we reported that for the first quarter of 2007, on a rolling four-quarter basis, 31% of order entry came from this segment of our business.

Let's now take a look at the regional performance. We reported double-digit growth rates in each region based on software and software-related service revenues at constant currencies. The BRIC countries also performed extremely well, with strong double-digit growth rates in most of these countries.

Software and software-related service revenues in EMEA were up 10% at constant currencies. Germany reported growth of 4%, but the rest of EMEA was up 14% at constant currencies. Based on software revenues at constant currencies, EMEA was up 9%. Superior performances came from the UK and Switzerland. Key contract wins in the EMEA region were Service Birmingham Ltd., Deutsche Lufthansa AG, and Grundfos Management A/S in Denmark.

The Americas region bounced back quite significantly from the fourth quarter of 2006, reporting constant currency growth of 22% in software and software-related service revenues. In the US, the growth rate was 24% at constant currencies, while the rest of Americas grew 18% at constant currencies. Based on software revenues at constant currencies, Americas was up 22%. Key contract wins in the Americas region include the Commonwealth of Kentucky, the [Manitoba] Company Inc., and Diblo Corporativo S.A. in Mexico.

Software and software-related service revenues in the Asia Pacific Japan region increased 10% at constant currencies. Japan was up 6% at constant currencies, with the rest of Asia Pacific Japan region supporting 12% growth at constant currencies. Based on software revenues at constant currencies, Asia Pacific Japan was up 16%. Key contract wins in the Asia Pacific region were KOBE STEEL Ltd., Fittec Electronics Co., Ltd., and Hong Kong and China Gas.

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

Thank you. Leo. I'm pleased to say that we have reported another quarter of double-digit growth at constant currencies. The strength in software and software-related service revenues was supported by a continued strong performance in software revenues, which was up 16% at constant currencies in the first quarter, and strong growth in subscription and other software-related service revenues.

This continued growth leads to additional share gains for our Company. At the end of the first quarter our share, based on the $34.8 billion Core Enterprise Applications software market, was 25.1%, representing an increase of 0.6% when compared to the first quarter; and an increase of 2.4 percentage points compared to the first quarter of 2006.

Let me now take a brief moment to comment on the recent lawsuit filed by Oracle against SAP. SAP has a long legacy as a Company with an unparalleled reputation as a trusted advisor and highly-regarded partner with its ecosystem of customers, partners, shareholders, and employees. SAP believes in the importance of intellectual property rights. As we have stated before, we will aggressively defend against the claims made in this lawsuit.

SAP (inaudible) are actively engaged in legitimate competition by providing high-quality third-party enterprise software maintenance and support services for customers running J.D. Edwards (inaudible) PeopleSoft (inaudible) applications who have reached the end of standard maintenance under their contracts with Oracle. [Tomorrow knows] business success is all about customer choice. This lawsuit demonstrates that Oracle is trying to limit customer choices by trying to discredit their competition.

Now I would like to touch on a couple of important items -- our growing ecosystems of ISVs and partners; our established business, including three emerging product areas; and an update on our new business that incorporates our new midmarket solution code named A1S.

One area that sets us apart from the rest of our competitors is success with ecosystem. Our success with ecosystems that will help drive our Business Process Platform into the market. The ecosystem continues to grow. It will be self-reinforcing to help attract even more customers and partners to our platform.

Our success today has been driven by successful co-innovation with partners and ISVs, and our unique and distinctive Industry Value Networks, Enterprise Services Communities, and Business Process Expert Communities -- each community existing of customers and partners having diverse functions and goals to help bring continuous Enterprise SOA-based innovation to our Business Process Platform.

To date, we have seen strong growth in this suite of [distinguished] networks and communities. The number of Industry Value Networks currently stands at eight. The number of Business Process Expert Community members are currently at 100,000. The number of Enterprise Service Community members are at 170,000. And the number of members in the SAP Developer Network currently stands at 730,000, up 82% year-over-year.

Finally, let me discuss our established and new business. For established business we remain right on track to complete our roadmap, with the entire business suite expected to be on the Business Process Platform by the end of this year. Thus far, we have delivered over 1,000 enterprise services; and we will continue to deliver additional enterprise services throughout the year. Adoption is moving along well, with over 8,500 SAP ERP customers, of which over 4,800 are productive, up 122% compared to the first quarter of 2006.

NetWeaver sales were EUR156 million in the first quarter, representing an increase of over 40% year-over-year. Of the total, 30% represented stand-alone NetWeaver sales. This along with the strong growth in our software and subscription revenues demonstrates that the established business continues to prosper.

Two emerging products that I want to mention briefly are our Corporate Performance Management and Governance and Risk Compliance solutions. These two products, along with others like Duet, are geared to penetrate the business user, a large potential universe of new users for SAP inside and outside of our installed base. We have been quite successful to date with our Corporate Performance Management solutions and have augmented our functionality with the recent acquisition of Pilot Software.

Governance, risk, and compliance, or GRC, has also become a topic receiving a lot of attention. Our GRC suite has expanded well beyond our 2006 acquisition of Virsa and includes access controls, process controls, risk management, GTS, and emission management. Our growth in this area has been significant, triple-digit revenue growth year-over-year and over 2,000 customers today from both within and outside of our installed base.

We also continue to establish a groundbreaking relationship with Cisco around their services-oriented network architecture and SAP GRC, with more to come this year.

Let me now finish with our new business. Our A1S product launch is not a traditional one with a Big Bang introduction. Our new midmarket product comes with a complete new business model and a new go-to-market approach. Therefore, a phased product launch is required. We are currently seeking comprehensive customer and partner feedback that we will incorporate into our new midmarket solution. This includes feedback regarding service and support, on-demand functionality, consulting requirements, and embedded learning. We are on track for bringing this product to market and expect it volume ready at the beginning of 2008.

Thank you; and we will now take your questions.

(OPERATOR INSTRUCTIONS) Raimo Lenschow, Merrill Lynch.

Good afternoon. Two questions if I may. First of all, Werner, could you maybe talk a little bit about the share buyback program? Obviously your share price was quite depressed in Q1, but you still bought back less than in Q1 '06. What is the plan there, especially as the cash position is now at very high levels?

A question for Henning. You talked about the introduction of the A1S as a proper volume product in 2008. Will we see anything in terms of kind of having a, like, idea about the look and feel for the product at any earlier point? I think in the past you mentioned that the launch was in Q1 or maybe Q2 or in the first half of 2007? Thanks.

Maybe I can start, Raimo, with the first question. You know that we bought back 9.6 million shares in Q1 this year. We had 10.1 million in the first quarter of 2006, so there is not a big thing. I must admit that in the first quarter of 2006, we had a share price of more than EUR41; now we have a share price of EUR35 per share if you look to the average price we have bought it back.

To be honest, if I would have known in the first quarter of 2006 how the share price would have developed, we would have waited and would have now seen a much higher share buyback activity in this current quarter of 2007.

So looking forward, I think we stated that we will continue to buy back; I cannot give you detailed numbers now for the second quarter. But for the full year, I assume that we will see similar patterns as we saw in 2006.

Thanks.

For A1S, it is about volume readiness when I speak about beginning of 2008; and obviously, we will show the product much earlier to different groups of stakeholders. So if you are interested, please visit us at Atlanta, I think we have a financial analyst meeting there and at the end we will have a short demo of the product already.

Perfect. Looking forward to that. Thank you.

Charles Di Bona from Sanford Bernstein.

Henning, I am looking forward to seeing the product next week. But can you talk a little bit about the EUR300 million to EUR400 million of spending? Can you give us a little more color on directionally what areas we should look at, the timing of that, and maybe whether or not some of that started to show up in your Q1 results as well?

Yes, we had about EUR20 million in the first quarter; so you see it is more back-end loaded, as expected. I said that we will [use this] carefully. As you have seen, we have so far showed it to select groups of customers and partners, so that is not too much money you have to spend.

On the other side, you have also seen some marketing activities, etc. You will see more spending, I would say, during this year over the quarters, and definitely next year.

The EUR23 million is mainly related to marketing and the setup of the volume business infrastructure.

Thank you.

Johannes Ries from [Com Investment].

Yes, good afternoon. Maybe a couple of short questions. Maybe Werner, maybe you can give some additional [insight] with why the cash flow has not totally followed this [habit].

Secondly, maybe an implication why Germany, despite a definitely improving economy, has shown a comparable low quarter (inaudible). Last year, Germany had a strong start to the year; but nevertheless it is slightly disappointing. Therefore, maybe any indication for the outlook for the coming quarters?

On the US, we have heard from IBM negative comments about the spending at the corporate side, especially in March. Have you also seen some weakness there? Your figures speak another language. Therefore, maybe a comment on this side?

Finally, how has developed Business One? (inaudible) the addition of A1 on the new platform is available already at the beginning of the year? Is that in plan? Sorry, a couple of questions.

Yes, maybe I can start with the cash flow. I think the main reason is that we had an increase in working capital compared to the first quarter. A relative increase to the first quarter of 2006. We have a strong increase in deferred revenue, for example, and other items. So that is mainly the reason for the fact that we have not as strong an increase in cash flow provided by continuing operations.

Okay, thanks.

This is Leo. Let me just maybe try to answer your two questions on Germany and the US. Let me start with the US first. We didn't see any material change in the spending environment in the US. It was as expected; not better, not worse; steady as it goes. We have no reason to believe that that will change.

In Germany, yes, you are right. First quarter was what it was. But I would like to point you back to the discussion that we had in the beginning of the year when we talked about Germany. We indicated that Germany would be in the single digit growth rate in 2007, [like] last year; and we are still confident that we will make that number happen.

But -- so an improving economy doesn't show any positive impact on your business?

Well, you know, we have a very high market share in Germany, and we have already shown quite a lot of resilience in our German business. We are moving into new areas in the business in the midmarket, but we still have quite a lot of space. The average deal size there is a little bit lower.

So altogether, if you combine all of these factors. I think that a single digit growth rate, as we said in the beginning of the year, is a very good result for our very strong German organization.

Okay.

[It might be] a little bit to the products. Yes, Business One is on track. You know that we bring the new release this year. All-in-One was already announced, and we ship. With All-in-One, it is just following the suite, so to say. So it is now on ERP. It will be augmented by CRM during the year. And it will participate on the launch of a simplified and (technical difficulty) UI based on a rich client as we showed it, let's say, some months ago.

It incorporates already all innovations of ERP [has]. The switch framework, the enhancement package delivery etc. So I think it is I would say the most modern midmarket product today available in the market, which combines proven functionality and really breakthrough innovation. Available for all industries and all countries, it is important to note. This is more or less the product which is mainly bringing the revenue to the midmarket.

A1S, which we touched earlier, this is a product which starts -- which starts -- to bring some revenue in 2008, but not in '07.

Maybe a short add-on. Do you expect that the A1, maybe because it is now ready and available everywhere, therefore all verticals on the new structure, that it therefore could be a strong driver for the remainder of the year?

At least we expect that we grow faster than last year in the midmarket, and A1 is a driver. If both comes together, the new SOA-based ERP, the CRM, and the new look and feel, I think then it's a very, very competitive product.

Super. Thanks a lot.

Gary Rollo from Morgan Stanley.

Good afternoon, gents, I have a couple of questions if I may. The first one is understanding kind of the message you're giving us on the consulting business. You mentioned, I think, Werner, that you expect the profitability of that business to recover. You also mentioned, I think, you have put quite a few heads into the business.

Is that in anticipation of a return to normal growth rates in that business, consistent with what we have seen over the last couple of quarters? Or should we look at the performance on the revenue side of this quarter as indicative that that is the kind of run rate of that business that guys see? So first I will start with that.

Let me try to answer the question. What you will see in Q1 in the consulting is not what you should view as the normal performance. Because we had all of these quarters of double-digit growth, we needed to add more consulting capability into our service organization, to respond to increased customer demand.

You know how it is. We want to provide a very high level of customer service. So we put these people into boot camps and train them with a significant effort, in order to then turn them around and provide an adequate level to our customers. So over the next quarters, you will see a return to more normal growth rates in the consulting business as these people come back in stream and generate the revenues that you would expect.

In addition, an increase then in our margin from the consulting business.

Okay, thanks. A follow-up. In the past you have talked a little bit about how you see your pipeline from the point of view of trying to extend some confidence about full-year figures. Despite what is clearly outperformance versus expectations here today, would you be prepared to talk a little bit about your order entry, perhaps? Is it running faster than your revenue growth rate right now? Do you want to give us some color, a little bit of color on what you see in your pipeline?

The pipeline continues to develop according to the business. So we look forward to a pipeline that helps us to support our guidance. Our order entry goes in the same direction, so there is nothing special to report here. It moves along in the same speed as the business.

Okay, thanks for that, fellows.

Mohammed Moawalla from Goldman Sachs.

Yes, good morning. I just had a question regarding the Americas business. I know you don't break out the US licenses. But if I recall, Latin America had a very strong Q1 last year. Can you just give us a sense of perhaps the magnitude of the performance? Is there a sort of step change occurring there in that region in terms of the growth?

Latin America performs well. I don't know what you understand by step change, but the Latin American organization continues to perform well. One of the main contracts that I talked about earlier actually came from Latin America.

Okay. I just wanted to follow-up, Leo, on the US. Given the strength that you saw this quarter, to what extent was there a sort of a catch-up of some of the disappointment that you saw in Q4? Is this a more realistic rate of growth that you expect for this business going forward?

You know, Mohammed, how business is. Each quarter you always have a normal deal flow in one or the other that comes in or doesn't come in. So it is extremely difficult to really predict it down to the dot.

We were slightly disappointed in Q4, because a few public sector deals slipped. They came in. We had no slippages of any significance in this quarter. I would caution everyone to start extrapolating one number from one quarter into the future. I think if you look back at the trends over the past quarters, that is a good indicator of the business.

Thanks.

Marc Geall from Citigroup.

Good morning, everyone. Quick question to Werner. The CapEx rate seems to have sort of picked up a little bit this quarter versus last year. Does that have anything to do with investment in A1S or is that just a general pickup in CapEx for the core business?

That is a general pickup in CapEx for the core business. It is mainly related to building activities and investment in IT infrastructure. A portion of it might be related to the new business, but it is really minimal.

You also, I think, sort of commented in your first commentary that you had obviously seen EUR19 million of the EUR31 million sort of recovered, if you like, this quarter; and that there was not an expectation to see anymore. Was that what I should have been reading into your comments?

There is not more anticipated to come on the software side.

So does that mean that obviously the Delta to the EUR31 million is not going to be recovered, or it just won't be booked to software?

Yes.

Okay, thank you.

John McPeake from Prudential Group.

Thank you. Could you characterize and give us a rough impact of the one subscription deal that you mentioned in your prepared remarks?

It was one deal that happened here in Europe. It is not a global -- it is not a GA. It is a regular subscription deal with an old SAP customer who is probably [now] going to implement the third generation of SAP software that he is using.

How much of an impact did it have to revenues? Was it substantive? Or in terms of if it was recognized as license versus subscription?

No. It was recognized as subscription.

I was wondering how much -- what would have been the revenue impact if it was recognized as license?

We do not do this exercise. For us it is subscription revenue according to US GAAP.

Okay, thank you.

Michael Briest from UBS.

Good afternoon. A couple of questions. Leo, in the past you have given us the volume growth analyzed between the direct and the indirect (technical difficulty). I think you mentioned it was 15% in aggregate. Can you say what the direct and the indirect contribution was?

I can look it up, if you give me a few minutes.

Then a question for Henning, really, on the sales reorganization in light of Shai Agassi's departure. Can you talk about whether there was any disruption from that, or you anticipate any changes in execution as a result of it?

No, I don't expect (inaudible). We were building the team more or less on the fly. [With Tels Usette] it was obvious whom to pick because (technical difficulty) at driving these development departments since some time.

We have taken the opportunity to streamline the organization in some areas. For example, [product merits] as the business user all activities we have centered there. We have also streamlined, as you have seen, the activities in marketing under Leo and the partner organization under Leo. And a few other staff.

So we did all of this, I would say, within a few days, and people are just continuing to work, and there is no disruption.

Okay, and one final one for Werner. Can you give us a sense of what the stock-based compensation plan cost and intangibles amortization would have been this quarter or for the full year? Because I imagine you are also accruing for the 2010 incentive scheme. It might just help us understand a bit about the movement in underlying costs.

Yes, if you compare both years 2006 and 2007, both elements are lower than the P&L impact we saw in 2006. If you refer to the LTI 2010 plan, then what we do is normally [when] we look to the share price evolution and on a quarterly basis book an accrual.

If you look to the share price evolution compared between 2006 and 2007, you see that the expense level is significantly lower than we had it last year.

You do expect that for the full year, would you, as well?

It depends on the share price. So we cannot predict the share price now in order to provide you an indication where we would end up.

Just to give you the answer to your question from a pure order -- total order value point of view, direct sales channel decreased. The share of it decreased by 2%; and indirect channel therefore increased by 2%. It now represents about 11%.

Okay, thank you.

Rick Sherlund of Galleon Group.

Thanks. First, Leo, I wonder if you could just expand a little more. We are curious in the US if the slowing economy is having any impact on overall tech spending. It sounds like from your comments that you have not seen any indication of that.

Second, on A1S, if you could just talk a little more about what it is that you need to do to release the product, kind of where we stand with it, and if you have any additional update comments for us on what you think the potential is for that product. How fast do you think that might ramp up in '08 and beyond?

Okay, let me answer the US economy first and then Henning will give you some more color on A1S. You know, Rick, it hasn't really changed since the last time we met, six weeks ago or something, in Las Vegas. There is a healthy undercurrent of tech spending. It is not exuberant, and it doesn't really move that dramatically.

I think people have their plans. They do these things in a very prudent and calculated way. It is like any other major capital expense people do. They sense the opportunity to use Enterprise Services Oriented Architecture based software to really renovate -- and in certain cases innovate -- complete business models. These are things that are done in a serial fashion, and therefore that is why we actually benefit from good traction in the market and high win rates.

I haven't sensed yet an explosion in the pipeline that would substantiate a tendency I would say that the strong economy poses even [exponential] pipeline growth. On the other hand, we are looking at a good pipeline, that helps us to substantiate our focus for the remainder of the year.

Yes, on to the product, Rick. What you do in this case is you are not trying to launch an entirely complete product. First of all, you never do this. But in this case it is not only the product. We have to take feedback for the entire process -- how we position it, how we configure it, how we operate it, how we set it up, how we maintain it, how we train it, etc.

Because all of this will be done by SAP. So from that point of view, it is much, much more than just launching the product. People have to understand.

On the other side, we will not allow modification. That means we have to test now with clients, and we are doing it, what are the questions, the business questions, people are asking? Is our business configuration complete enough in order to set it up with a few questions? If not, we have to do something there.

First impression is the following. From a functionality point of view, it was interesting to see. We believe we need a second, let's say, package, to complete functionality. The feedback from clients was it's more -- too much functionality than too less. So this is not the thing.

I would say the entire setup including the right performance, including a perfect UI, which is -- you know if you --. What we try to do is that more or less if you can use one screen you can use all of them. So we have to see that this coherence in navigation is across all of them. Business configurations. That the mega-tenancy is fast enough; it takes too long still. And those type of things.

So less I would say on functionality; more on all this stuff around which is new to us.

Okay. Thank you. Let's take two final questions.

Mark Bryan of Deutsche Bank.

Thanks for taking the question. This sales and marketing headcount is obviously a relatively aggressive increase on recent quarters. I was just wondering if you could dig a bit deeper into that. Give us an indication perhaps regionally where; if there is any more focus in one region over another; and indeed by product line as well, if possible.

Also, can you remind me? What is your target for headcount growth for the full year?

The target for headcount growth for the full year, as mentioned at the beginning of January, is 3,500. If you look to the additional headcount employed in the sales and marketing arena between Q1 2006 and the end of March 2007, then the majority is in the sales arena.

If you look to the regional split, then the majority of this is again in the Americas where we get the highest growth rates from.

We do not hire for specific products. It is more on the [e-side] what we do here, and that drives the growth in this region.

Okay.

[Joachim Klosman] with BHS Bank.

I have a couple of questions. The first one is about A1S. Can you give us a little bit of an idea of how the ramp-up costs will then go, let's say in the next few quarters? I mean I guess (inaudible) at EUR23 million for the rest of the year. Maybe just to get more a little bit of a flavor how that is ramping up.

Then could you also provide us with some numbers for your SMB channel, where we actually stand if we talk in terms of Business One customers and A1 customers?

From ramp-up cost it is a little difficult to predict. I guess it will be more than in the first quarter, definitely. But as I said, it depends how we structure the ramp up. We have not to do everything sequentially. We can accelerate things etc. So it is difficult for me. I guess it is more in the second quarter than in the first, but that is all what I can say today.

Okay.

To give you a flavor of the current SMB portfolio, we currently have a total of [2,350] channel partners and about 23,400 customers, divided roughly 10,000 All-in-One and the remainder Business One.

(inaudible) 23,400?

23,400.

Okay, thank you.

Thank you very much. This concludes today's earnings call. Thank you for your questions and we look forward to seeing you next week in Atlanta. Thank you and goodbye.

Bye-bye.

Bye-bye.

Bye-bye.

Ladies and gentlemen, that concludes today's conference call. Thanks for participating. You may now disconnect.