SAP SE (SAP) 2007 Q3 法說會逐字稿

Welcome to SAP's third-quarter results conference call. This call is being recorded. Today's call will be hosted by Henning Kagermann, Werner Brandt and Leo Apotheker. I will now turn the call over to Stefan Gruber. Please go ahead, sir.

Thank you. Good afternoon morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's third-quarter 2007 results. I am joined here in Waldorf by Henning Kagermann, Leo Apotheker and Werner Brandt.

Warner will discuss the Q3 financials in detail; Leo will comment on the current business environment and our regional performance; and Henning will then provide some further in-depth commentary on the quarter and SAP's product successes.

As usual, I will now make a few remarks about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2006, filed with the SEC on April 3rd, 2007. Participants of the call are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

In addition, in this call, we will report certain financial measures, particularly free cash flow, constant currency period-over-period changes in revenues and operating expenses and approximations of revenue growth on a U.S. dollar basis that are not prepared in accordance with U.S. GAAP and are therefore considered non-GAAP measures.

We report these measures to provide additional information that may be useful to investors in breaking down and evaluating sales volume and income growth. Our non-GAAP measures may not correspond to non-GAAP measures that other companies report. The non-GAAP measures that we report should only be considered as additional to and not as substitute for or superior to the respective U.S. GAAP measures that we report.

Before we start, let me remind you that the focus of today's call is on SAP's Q3 results and our outlook for the full year of 2007. Also, I would like to remind you of our upcoming investor symposium, which will be held on Monday, November 12 at our headquarters in Waldorf, Germany. And invitations for this event will be sent shortly.

And now, I would like to turn the call over to Werner Brandt.

Thank you, Stefan, for this introduction, and welcome to everybody on the call. We are very pleased to report another strong quarter in which software and software-related service revenues grew 16% at constant currencies.

Let me take a moment to discuss the year-over-year change in exchange rates. The euro continued to strengthen significantly against most of the major currencies, causing a currency headwind for SAP. Here are some key currency metrics. If you look to the relation of the euro to the U.S. dollar, the euro strengthened by 8% quarter-over-quarter. The euro strengthened [versus] the yen 9% quarter-over-quarter. And the Canadian dollar strengthened -- weakened by 1% compared to the third quarter of 2006.

Currency had the following impact on the P&L in the third quarter. A negative effect of 3 percentage points on software and software-related service revenues; a negative effect of 4 percentage points on total revenues; positive effect of 3 percentage points on operating expenses; resulting in a negative impact on operating income by 5 percentage points. The operating margin was negatively impacted by 40 basis points in the third quarter.

Let me now continue with the quarter's results. Software and software-related service revenue for the third quarter of 2007 were over EUR1.7 billion, which represented a year-over-year increase of 16% at constant currencies. The increase was a result of the year-over-year constant currency increases of 15% in software revenues, 16% in support revenues and 31% in subscription and other software-related service revenues. Of the latter, we signed one subscription deal on GEA contract in the third quarter. As we mentioned previously, for the full year 2007, we expect subscription and other software-related service revenues to be in the range of approximately 2% to 4% of software and software-related service revenues.

Third-quarter support revenues of EUR978 million increased 16% at constant currencies year-over-year, and were subsequently in line with our expectations. Third-quarter Professional Services and other service revenues was EUR674 million, which was an increase of 6% at constant currency. Consulting revenues of EUR544 million increased 4% at constant currencies, and training revenues increased 15% at constant currencies.

The software and software-related service margin was 80.8% for the third quarter of 2007, which was a decrease of 180 basis points compared to the third quarter of last year. The decrease in the margin was the result of several factors -- an increase in purchase licenses, mainly driven by an increase in the amortization of acquired intellectual property and increasing costs of support due to additional headcount for our premium maintenance business, and an increase in costs related to the new business, which alone accounted for a decrease of 50 basis points.

The Professional Services margin was 25.5% for the third quarter, which is an increase of 180 basis points compared to the same quarter last year. As we had previously mentioned throughout the year, our goal was to improve the Professional Service margin to 25%, and we are on track to achieve this objective. The increase in the Professional Service margin was mainly the result of a higher consulting margin, particularly in the Americas and EMEA, and a significant increase in the training margin.

As a result of the mixed margin performance in product and services, our 2007 third-quarter gross margin increased by 30 basis points to 65.4%.

Operating expenses increased by 156 million to EUR1.8 billion, or 9% year-over-year. The higher operating expenses were mainly the result of additional personnel; we hired 4304 FTEs since the third quarter of last year. For information, stock-based compensation expenses and acquisition-related charges were 38 million and 18 million respectively for the third quarter of 2007.

R&D expenses increased 8% for the third quarter and represented 15% of total revenues compared to 15% of total revenues for the third quarter of last year. The increase in R&D was the result of additional personnel. We hired an additional 875 FTEs compared to last year's quarter. Of that total, 66% were hired in low-cost locations.

Sales and marketing expenses increased [14%] for the third quarter and represented 21% of total revenues compared to 20% of total revenue in the last year's third quarter. The increase in sales and marketing expenses was mainly due to additional sales headcount year-over-year, more than 1100.

General and administrative expenses increased 8% for the third quarter and represented 5% of total revenues, the same as the prior year third quarter. The increase in G&A is driven by a continued investment in our transactional shared service centers, growth in administrative functions due to acquisitions and additional resources needed to manage the volume increase in the regions. We expect a more positive effect in G&A ratio in the [mid-term].

Operating income was 601 million for the third quarter, representing an increase of 9% compared to the third quarter of 2006. The operating margin for the third quarter was 24.8%, which was flat compared to the same period last year.

At the beginning of the year, we spoke about accelerated investment for our new business centered around our new midmarket solution, SAP Business ByDesign. We stated that we would keep you posted on the specific spending to this initiative. Therefore, operating expenses related to the new business for the third quarter totaled approximately EUR35 million. To date, we have spent roughly EUR85 million, and excluding this investment, our operating margin would be 150 basis points higher in the third quarter and 120 basis points higher for the first nine months.

Third-quarter 2007 net income rose 10% to 408 million, and earnings per share increased 13% to EUR0.34. Our effective tax rate for the third quarter was 35.3% compared to 35% for the third quarter of last year. For the full year, we continue to expect a tax rate of 32.5% to 33%.

Free cash flow for the nine-month period of 2007 was EUR1.1 billion, which was flat year-over-year. For the third quarter of 2007, primary use of free cash flow was for share buybacks, acquisitions and investment in corporate bonds. For the third quarter, we bought back 6.2 million shares for a total of approximately EUR250 million.

At September 30, 2007, Treasury stocks stood at 42 million shares, which included the cancellation of 23 million shares from Treasury, [as announced], by SAP executive [bought] on September 7, 2007. So the 42 million is after the cancellation of this 23 million shares.

For the fourth quarter of 2007, we expect to spend roughly the same amount on share repurchases that we spent for the third quarter; so again, around roughly EUR250 million. For the year, that would come to a total of approximately EUR1 billion in share repurchases.

Headcount in the third quarter increased by 853 FTEs, of which 47% were hired in low-cost locations. At the end of the third quarter, total headcount stood at 42,772 full-time equivalent, which is an increase of 3417 year-to-date. This increase includes 353 FTEs coming from acquisitions. For the full year, we are now targeting 4000 additional FTEs, not including headcount coming via acquisitions.

We have refined our outlook for 2007. As you already have seen in our press release issued today, we indicated that we now expect growth in software and software-related service revenues to increase at the upper end of the range of 12% to 14%. With that in mind, you may be asking why we did not refine our margin outlook as well. Let me explain.

Number one, our operating margin guidance is not currently adjusted in contrast to the guidance for software and software-related service revenue. The currency impact to the operating margin for the first nine months was -40 basis points. Moreover, we would expect much larger currency impact on the operating margin in the fourth quarter, resulting from the greater mismatch between revenues and operating costs compared to the first nine months.

Number two, we need to keep some flexibility for spending on SAP's Business ByDesign as we have begun to enter operational mode for the new business and as we get closer to volume readiness in 2008. Besides the new business, we continue to invest in the future growth of our established business and this requires additional risk. As you see, we raised our expectation for headcount this year from 3500 to 4000, excluding acquisitions.

With that, I would now like to pass it over to Leo.

Thank you, Warner, and I'm pleased you can all join us today on this call. The market environment in the third quarter remained unchanged, as we report our 15th consecutive quarter of double-digit growth in software and software-related services.

We continue to see consistent demand for our products and services. This consistency comes from our ability to provide true value to the businesses of our customers. The key sources of this value are our superior product and technology, our industry-leading innovation, as well as the safety and reliability of our customer's investment in SAP products.

The strong financial results we have consistently purported are proof of our ability to provide superior value to our customers. Our leading solution portfolio, in combination with our value-driven go-to-market approach, enables us to maintain a high win rate against our competitors.

Let me now provide you with some customer metrics for the third quarter. In the third quarter, the number of contracts signed increased 22% year-over-year, the share of new customers based on order entry was 26%. 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 were 34%.

Deals greater than EUR5 million accounted for 20% of order entry in the third quarter, down from 33% in the third quarter last year, while deals less then EUR1 million accounted for 46% of order entry, up from 36% in third quarter of last year. The high percentage of deals greater than EUR5 million in the 2006 third quarter was the result of an unusual high number of deals in the EUR10 million to EUR20 million range. The 20% number we reported for the third quarter of this year is more typical for SAP if you compare it to the past couple of years.

I would like to highlight two very important customers that we won in the third quarter. I'm very pleased that we can announce today the successful signing of a Global Enterprise Agreement with Apple. SAP has already been a software partner for Apple in the past. However, with this GEA, we will bring the relationship to a completely new and strategic level.

I am also pleased to announce that in the third quarter we won Wal-Mart, the largest retail company in the world. This is a significant competitive win for SAP in the U.S. and in the retail sector, which clearly shows our leading position and superior value proposition in the strategic industry. A decisive factor in Wal-Mart decision's for SAP was not only our ability to prove that the SAP solution can best support their business today, but that it also provides unsurpassed adaptability and flexibility for future growth.

We continue to maintain our strength in market leadership with an unmatched portfolio of 26 end-to-end industry solutions. Our market-leading position in these industries is derived from many years of experience, in-depth industry expertise and strong, long-term customer relationships, the latter being something you can definitely not buy into.

Based on software and software-related services revenues, the top-performing verticals in the third quarter were oil & gas, automotive, consumer products, retail and financial services. Our success in banking is the result of the investment we made in the business process platform for banking, which allows us to grow organically and through [cooperation] with partners.

A couple of the announcements we made in the third quarter include a partnership with (inaudible) and Walters to offer an end-to-end core banking solution for midsize banks, and a partnership with Misys to create an integrated universal banking solution. Both partners will migrate their solutions over time onto our banking platform.

Let's now take a look at the regional performance. We once again reported double-digit growth rates in all regions based on software and software-related service revenues at constant currencies. Software and software-related service revenues in EMEA were up 15% at constant currencies. Germany's growth of 3% was within our expectation, driven predominately by SME, but the rest of EMEA maintained its second-quarter momentum by growing 22% at constant currencies.

EMEA software revenues at constant currencies were also up 15%. The performance in EMEA was well balanced across all the countries. The standouts that I would like to point to were once again Russia, as well as France and the UK. Also, SME was again a strong contributor and growth driver for EMEA in the quarter. Key contract wins in the EMEA region were [Abama] (inaudible), Thames Water Utilities Limited, Inscape Management, Louis Vuitton Moet Hennessy, and El Corte Englais in Spain.

The Americas region reported another strong quarter, with 15% growth in software and software-related service revenues at constant currencies. The U.S. grew 18% at constant currencies, while the rest of Americas was 6% higher. The performance in the rest of Americas was really better than the growth rate indicates. As you remember, we had an exceptional performance in Latin America in Q3 2006, making for a very tough comparison.

Based on software revenues at constant currencies, the Americas was up 11%. Key contract wins in the Americas region included Southwest Airlines, Goodyear Tire and Rubber Company, the Royal Bank of Canada, Miami Dade County Public Schools, (inaudible) Services Company and [Bank] Colombia S.A.

The strong growth in Asia-Pacific/Japan continued into the third quarter, with software and software-related service revenues increasing 24% at constant currencies. Japan was up 16% at constant currencies, and the rest of the Asia-Pacific/Japan region reported 30% growth at constant currencies. Based on software revenues at constant currencies, Asia-Pacific/Japan was up 28%.

The key growth markets in APG were India and Japan. A strong leadership team, solid execution and an unwavering commitment to customer value have been the driving forces in Japan's turnaround. Key contract wins in the Asia-Pacific region were Samsung SDS, [Charmant, Inc.], (Inaudible) Systems, [Cowell] Corporations, LIG Insurance and Myer PTY LTD in Australia.

Let me conclude by saying that our 2007 outlook for software and software-related service revenues implies that we closed as much business in the fourth quarter as our next largest competitor does in a whole year. Having said that, I would now like to pass it over to Henning.

Thank you, Leo. I am pleased to report another strong, well-balanced quarter in which we continued to gain share in the core enterprise application software markets. At the end of the third quarter, our share, based on this 35.9 billion U.S. dollar market, was 27%, representing an increase of a 1 percentage point compared to the second quarter of 2007, and an increase of 3.5 percentage points compared to the third quarter of 2006.

As you know, we do not report our numbers in U.S. dollars, and we have not made detailed calculations about how our performance would be if we were reporting in U.S. dollars. But based on an approximate calculation, we believe that our growth in the third quarter in software and software-related services revenues would be above 20% year-over-year on a U.S. dollar basis.

As you know, we have been working hard and have been quite successful to date in getting an increasing number of customers to transition to enterprise SOA by adopting the business process platform. We have the only ERP suite in the industry that is services-enabled, and we remain on track in our roadmap to have the entire business suite and all industry solutions and services enabled by the end of this year.

In the third quarter we continue to see strong adoption of SAP ERP and SAP NetWeaver, increasing NetWeaver sales, and continued contract migration from our suite. These critical metrics help us track the progress of our business process platform success. In the third quarter, we had 11,200 SAP ERP customers, of which 6,800 were productive.

We also saw an additional 142 R/3 contract migrations. The growth in contract migrations has declined somewhat, as expected, but it was more than compensated for by an increase in new additional purchases.

The number of NetWeaver customers increased to 14,400, with 9,800 of them being productive. NetWeaver sales for the nine-month period were EUR585 million, representing an increase of 42% compared to the same period of 2006. Of the total, 34% represented stand-alone NetWeaver sales.

Additional progress on the transition to enterprise SOA can be demonstrated by some of the recent announcements we made. We announced the newest version of SAP Discovery System. First launched in 2006, the system provides companies with the opportunity to experiment with enterprise SOA by prototyping service-enabled composite applications specific to their business without disrupting existing productive systems. More than 400 companies have taken advantage of the system in just 12 months.

We also announced the global release of SAP NetWeaver composition environment, an enterprise services [depository]. Our ecosystem, which is critical to the success of enterprise SOA, continued to be strengthened by the success of the SAP communities, which were featured at our recent TechEd event, where more than 6000 people attended.

Our industry (inaudible) networks, which help identify industrywide trends, has grown to 13. Our enterprise services community, which translates concepts into enterprise services, has increased to over 240 members. Our business process expert community, which helps close the gap between business and IT, has grown to over 200,000 members. And our SAP developer network, which helps optimize IT assets in the central community, has increased to over 900,000 members. All these numbers of SAP community members (technical difficulty) represent significant gains year-over-year.

On the product side for our established business, we continue to move forward with new innovations. For the SAP business suite, we recently released a second announcement package for SAP ERP which includes new enterprise service bundled improvement to the core applications within SAP ERP and specific industry-related innovations.

For the business user, GRC risk management [entered] went up in the third quarter. CFOs can use this application to develop a comprehensive risk profile for the organization, establish that corporate appetite for (technical difficulty), and outline response strategies for loss events.

For the small and midsize enterprise segment, the number of customers for SAP Business One increased 39% year-over-year to a total of 15,813. The number of channel partners for SAP Business One decreased slightly to 1,343. The decline is the result of a strict focus on our most active partners that are the most capable in helping us in our drive to meet volume targets. Therefore, it's only natural that growth in the SAP Business One partner channels slows.

For SAP All-in-One, the number of customers grew by 18% to 10,555, and the number of channel partners increased 23% to 1,107. As you know, we launched in September the branding of our new breakthrough innovation product, Business ByDesign. In a nutshell, SAP Business ByDesign is the right solution for midsize companies with 100 to 500 employees, who are focused on improving core business processes with a low-cost of entry and a low total cost of ownership, and who are interested in an on-demand solution.

The solution combines the benefits of integrated end-to-end business applications with a low risk and low total cost of ownership of an on-demand solution. It wasn't designed with traditional categories, such as enterprise resource planning, customer relationship management and others in mind. It was designed for business processes across the entire organization, whose user interface was tailored to people's [roads]. SAP Business ByDesign offers end-to-end processes for the workplace of the future.

Finally, let me reiterate our growth strategy. Our plan is to continue to grow faster than the market, and we expect the growth to come by expanding our addressable market and our coverage of that addressable market. Stable growth will come from our traditional business of horizontal and vertical applications and accelerated growth comes from leveraging the segments of the business process platform, the SME and the business user.

For the business process platform, we will see primarily organic growth. In SME, organic growth is also the key driver, but as you know, we did make an acquisition in the past; namely, top management brought us SAP Business One.

The business user segment is where acquisitions, along with organic growth, play a bigger role in our strategy, as you can see by the recent small acquisitions of OutlookSoft and Pilot Software and the recent large offer for Business Objects. And while the offer for Business Objects is for a much larger acquisition than we have done in the past, the concept behind this acquisition remains the same -- enabling our customers to benefit from an even richer portfolio of innovative products and solutions. It is not about acquiring customers, market share or maintenance. With the acquisition of Business Objects, we instantly become the market leader in the high growth area that we were not the leader in previously.

SAP's direction has always been clear -- delivering innovative and market leading products to our customers, and profitable growth to our shareholders. In the end, our 2010 ambitions will be reached primarily through organic growth, as organic growth remains the primary driver for growing our business. SAP has shown that we can outperform the market with significant organic growth, and we will continue to do so.

Thank you and we will now be happy to take your questions.

(OPERATOR INSTRUCTIONS) Raimo Lenschow at Merrill Lynch.

Good afternoon. I'm sorry -- I have to apologize before I ask the question -- but as I'm a bit of a number cruncher and nerd, could we maybe talk a little bit about the growth rate in the U.S. business. If I look at last year, we had very healthy (inaudible) growth and we had to adjust it down then with the accounting adjustment we announced in January.

If I then look at the organic, clean growth rate we achieved in the U.S. or in the Americas business, it looks like we had pretty much the second quarter of single-digit license growth in the U.S. Can we maybe talk a little bit about the reasons there? Is that market-driven, is that because you actually guided the sales force on kind of the slightly lower-based growth numbers, so they're actually quite happy with the double-digit they achieved? Maybe some more color on that. Thanks.

I'd just reiterate what we did. You are right -- we had a reduction in our license revenues for the third quarter by about EUR30 million. And this did impact the value of licenses sold in U.S. And we stated that we expect to restate a portion of that, which we did in the first quarter. It was about [19] million. I think we don't expect to recover any further amount of that. So that does affect behind.

And I think if we look to the U.S., I feel the business is still strong there, Leo.

Yes. Maybe I can add a few comments to that. If you look at the situation in the U.S., the environment is rather unchanged compared to the second quarter. We are performing well relative to the competition in the U.S., and we do continue to take market share. And if you really look at the metrics, then we continue to have nice double-digit growth in the U.S. moving forward. I don't expect the U.S. to be the number one growth engine for SAP for the entire year, but I do expect the U.S. to continue to grow double-digit.

Thank you.

Mark Geall from Citi.

Good afternoon, everyone. A couple of questions, if I may. Can you sort of go into a little bit more detail into sort of how the 85 million on Business ByDesign was spent, how that breaks down? Sort of more interested in from a sales and marketing standpoint and where you are.

Then a comment on -- you're sort of going up to ramp up and it's operational now. So just want to understand how that (inaudible) may be built out.

And then a second question just on the acquisition announced yesterday of YASU Technologies. How does that affect things like your relationship with IDS Scheer? How strategic would that be? And am I missing something in terms of -- in the BPM space, that's clearly important, I just really want to understand how that product would fit into the NetWeaver strategy.

Thank you, Mark. Let me start with YASU. It's an (inaudible) engine system which we need for NetWeaver. It is part of -- you are right -- our BPM strategy, our business process management strategy. We discussed this with IDS Scheer. You know that we have acquired some IP from them in order to complete the design part. So here, I think we are aligned; that is not a shift in strategy. We continue to upsell, so our sales force (inaudible) the entire ARIS Suite. So no changes here and no surprise.

From SAP Business ByDesign, I will try to answer where we are, and it might be Werner gives you some color on the breakdown. We have to launch this in different phases, as we all know. It was a very important milestone to having the first client, (inaudible), which we achieved in September. It was (inaudible) clients.

The next one is end of the year, we want now to come to the 100-plus clients. This is important, because in the fourth quarter there will also be an upgrade of the software, so we learn to do seamless upgrades on this line. Then we come to next year, first quarter, is to push the product that it can run, I would say, in the thousands in terms of performance. And we will over the year improve cost of ownership.

From the go-to-market side, it is clear that we then ramp up more and more our marketing, our telemarketing, our Internet sales. We measure very carefully how much cost is involved in making a customer productive, that goes down. We will see first upsell into existing clients; we expect them to move up with the users.

So, at the end of the day, it is still the same plan, that at the end of 2008, we expect that we have a business plan where we can make this business as profitable as we announced in the (technical difficulty).

You will remember that in New York we announced our next phase is to illustrate this as one example. We are now opening for business in two additional countries. Ramping up country after country. We are also ramping up a certain number of marketing and sales expenses to prepare for the launch of the product in these countries.

Some figures related to what you had before -- if you look to sales and marketing, including our own volume business readiness internally, then we are talking about roughly 44 million; R&D is 18 million; and the rest, a bit more than 20 million, is related for (inaudible) consulting and other support activities.

That 20 million, should we think of that as more CapEx related costs or is it still --?

No, no. This is -- nothing is CapEx related. It's CapEx based, but we are talking about extra cost here.

But if we take a look at CapEx that you have sort of taken through this year, would any of that also be associated with the Business ByDesign ramp-up?

Yes, it is -- on the hardware side.

Yes. Are you able to give any indication -- I'm just trying to get a feel for as we look at CapEx going into '08 --

Look to the CapEx spending -- it is roughly 240 million. And I would say hardware-related is roughly 80 for the first nine months. So that is not a huge investment we have done here. It is more really expense-related, what we are talking about.

Okay. Thank you.

Sarah Friar of Goldman Sachs.

Good afternoon, everyone. Henning, I think you've tried to be very explicit about your acquisition strategy, both on this call and on the call last week with Business Objects, and in particular where you are more focused on inorganic growth and where you prefer to grow organically.

I think of NetWeaver as an area that is much more organic growth. But does the Oracle bid for BEA change your thinking at all here? And in particular, does it force you to perhaps have to add more technology tuck-in acquisitions to speed time to market for that platform?

Thank you; that is a good question. Let me (inaudible) to it (inaudible). We are pretty happy with our business process platform, because it is, to some extent, unique in the market. You know, we are not going for a pure technology platform, but we bundle executable services and making it a more application type platform.

To give you some flavor, in addition to what I did already, we had -- at TechEd yesterday, I gave a keynote, and so we add per month now 900 productive NetWeaver systems per month. So that tells you there is a huge reduction weight. The system is well underway. You are right -- smaller tuck-in acquisitions will happen. Mark asked about it. YASU was such a one; Identity Management was another one. But these are not big ones.

And in no means, buying overlapping -- completely overlapping technology, we don't want to do this. So if there is a smaller area where we feel we have to rush, expect some tuck-in acquisitions, but not a large one. This is entirely different than what we did for Business Objects. I think I explained in length why this is a very strategic, important move for SAP.

Got it. And then just want to follow up on the macro environment. You did call out financial institutions as a vertical of strength, but obviously what we see going on here in the U.S. is definitely financials pushing out some deals third quarter into fourth quarter and some concern broadly about their spending. Could you give us any more color on what you saw particularly in the U.S. financials vertical?

Hello, Sarah. You know, we have been progressing steadily our financial services business, and again in Q3 we had good results in financial services. We are also doing business in North America with financial institutions, and we have not yet seen any impact of the turmoil in the financial industries in Q3. I guess that is because we don't have a confusing strategy.

Okay, great. Thanks a lot, Leo.

Charlie Di Bona, Sanford Bernstein.

Thank you very much for the milestones that you gave us on Business ByDesign. But could we maybe take a moment to map that back to the projected spending? You're almost halfway through the two-year cycle, the EUR300 million to EUR400 million. I was wondering if maybe you can refine that range.

And maybe to the extent that you are also with Business Objects acquiring a channel to the middle market, or at least a number of channel partners, as they are already developed, does that impact the spending? Does that impact the timing of the spending? Could you maybe comment on that a little bit?

Thank you. You are right. There is a leverage we can get from Business Objects; they have a very strong channel. Also, some of their products would fit nicely into the Business ByDesign offering.

You can understand that I don't want to speculate now we have just made an offer. We have not closed the deal. We cannot dig too deep into the technology for IP reasons. But you are right, this is an opportunity for, let's say, taking some of the investments out we planned on our side. Let's see next year when we, let's say, come closer here.

The investments so far are expected to be more back-end loaded. We said so several times. The reason is that now where we are in an operational mode, it is not just accelerated R&D, not just the, I would say, still too high sales and marketing costs, which will go down because at the beginning it has to build up its (inaudible) Telus Center, etc.

But now, we also come to operate these clients and we are not with our cost of ownership where we want to be, let's say, once we really earn the money we want to earn. I think that is not a surprise to you; we work on this next year. But therefore, it depends a little bit also on how many clients we get in which sequence and with how many users. And forgive me if I don't know this exactly. So that is all -- I cannot be more precise at this point in time.

Can I just interpret that then to be that you are -- certainly with the initial customers because of the cost ownership, you are going to be essentially subsidizing the purchases?

Not subsidizing, but at the end of the day if it is too low number of users at the beginning, you don't make money, you are right. Once we get the [ops] back to start making money, and the question is now we have to have two impacts. What is the time to get the upsell, and the second is how fast are we improving our (inaudible) here. We are working on both.

Thank you.

James Clark of Credit Suisse.

Good afternoon, gentlemen. I have a couple of questions. First, if I could ask about the R/3 migration, and again, thank you for giving some of the data points there. And you noted some deceleration in the number of customers moving up from R/3. But how many customers on your analysis remain on that platform that could potentially move on to your newer technologies?

Thank you. First, let me say I am happy about this low figure because there was sometime ago concerns in the analyst community that once the migration is gone, SAP cannot sustain with the growth. And the opposite is happening. I think what people have to have in mind with the defined guidance from [Valnar], we will end up this year with the highest growth in four years, just to remind you, and the migration is very low.

So that tells you that we successfully can substitute the migration we had three years ago by additional sales of new products and new customers. That was the reason why I am happy the number is not too high. I think we have left a few thousand as we contract. I expected that in 2009, we will have less than 1000, but let's say that is still the case.

Thank you very much. The other question is a technical one for Werner. Could you give us a breakdown of your costs by functional currency, so that we can perhaps model more accurately the currency impact on your cost base going forward?

James, the function -- the currency of SAP is the euro, and this across all top-line and all operating expense lines. I do not understand exactly what you are looking for.

Your functional cost, therefore, is euros, but in the company operations clearly there is a mismatch between your costs in local currency and your revenues in local currency which, as you highlighted, has cost you 40 basis points so far this year. You hinted that that would be significantly greater drag on margins in the fourth quarter.

Could you, A, quantify that without giving away your fourth-quarter margin ambition, but equally give us a sense of the percentage of your cost in dollars in yen and perhaps in other currencies that you feel you are sensitive to?

Yes, that is something we do not disclose. But the majority, if you look to it, is related to the U.S. dollar. That is something we can say.

And your fourth-quarter margin drag at current rates?

No, we do not disclose this.

But significantly higher than the 40 basis points so far this year?

It will be higher.

Thank you.

Patrick Standaert of Morgan Stanley.

It's James Dawson here for Morgan Stanley. Just a couple of questions. Just looking at some of the countries here, I wonder if you could talk a little bit more about Germany. It looked at little soft. I know you said it (inaudible) along with your expectations, but certainly versus Q2, it was lighter. Can you just talk about maybe some of the fundamentals we should expect in Germany in the next 18 months, say?

Perhaps if you could talk -- in Q2, you talked about the BRIC economies and they have a pretty bullish datapoint. I wonder if you could talk about what is going on in those markets in Q3.

And then maybe lastly, if you could just -- maybe if you could just give us a bit more on the Wal-Mart contract, which is reasonably interesting -- what exactly you're selling into them and what the longer-term opportunity could be. Thanks.

Let me start with Germany, so we get that out of the way. Germany has a year-to-date performance in mid single digits, which is as we expected. We always said that we expect Germany to be in the mid single digits. And the third quarter was again single digit. We see a mix change in the business we do in Germany. We do a little bit more SME, a little bit less large enterprise, which is to be expected given our very high marketshare here in Germany. So you should expect Germany to stay at single digits. We have always indicated that would be the case, and we expect that to continue to be the case.

As to the BRIC countries, they are performing extremely well. If I look at some of them, they are hovering near triple-digit growth, be it year-to-date, be it Q3. I like to point out extraordinarily good performance of Russia for several quarters in a row; India the same situation.

So we are very happy with the performance we have in the BRIC countries. They are true growth drivers for the Company. And we have no reason to believe that this trend will change in the near future. On the contrary, we see lots of things coming through some of the investments we have made in the past in these countries paying off very handsomely.

Last but not least, to Wal-Mart. You have to forgive me that I can't give you all of the details of the deal. It is, however, a very significant transaction. It was one head to head with a competitor; I will let you guess who that was. You know that Wal-Mart is a very challenging and demanding buyer. But it has ample opportunity to look at both architecture, functionality, capability to support and trust its relationship. I think we have won on all of these aspects.

And it covers a significantly important part of Wal-Mart. In essence, it covers all of the financial -- all of the financials. And it will be a global rollout, and we will keep you abreast on future events at Wal-Mart.

Thank you very much.

Ross MacMillan of Jefferies.

Thank you. Just on the guidance, so we've grown on a constant currency basis by 16% on software and software-related revenues for the first nine months of the year. You have raised the guidance to the high end of the range. That still implies a pretty significant deceleration in Q4, especially on license revenue.

Can you just outline maybe your thinking around that and whether you think this year is going to be even less seasonal than we've seen over recent years? Thanks.

You know that we always give a guidance for the year. I want to reiterate that this is important. We are not looking -- giving guidance for the quarters, and I think people should not look, let's say, to the environment from SAP's performance quarter-over-quarter.

Let me reiterate we feel Q4 is an extremely large one. With our refined guidance, again, we would grow more than the last three years; so it is really an ambitious target. And I think let's first make it and then let's discuss again about the year.

Michael Briest of UBS.

Thank you very much. In terms of the hiring target, you've now listed that for 4,000 for the year. Can you say where the extra 500 people will be going? And by implication, is this a sign of confidence on the 2008 outlook? Should we expect hiring to moderate in 2008 as a consequence?

It's Werner here. Michael, I think the accelerated hiring this year will be in the areas of certain marketing and R&D, as throughout the first nine months of the year. And with regard to 2008, that is something we will talk about when we provide our guidance for 2008 -- that's by the end of January next year.

Thank you, and if I could just have one more. In terms of your ability or willingness to do large deals, you've obviously flagged that in the business user category you would be willing to. But in terms of the timing, if Business Objects closed in Q1, would you feel happy to do one soon after that, or should we expect a lag before any further large deals?

It's an interesting question. I get it very often these days. Let me answer differently. Timing is important; you are right. We have indicated that SAP was not prepared, for example, two years ago because we first wanted to deliver on our business process platform and on SAP Business ByDesign. Therefore, you can understand that our appetite this year was larger because we delivered those successfully.

For me, it is a pure a strategic question. It's a question of opportunity, it's a question of strategic fit, and it's a question of if we really can create value and not destroy value in bringing the two entities together. That is at the end is what drives us. And now we are (inaudible) and focused on making this transaction happen and then making it successful.

So you are not ruling out doing another large deal soon after, if you felt it was the right thing to do?

I cannot rule this out. If -- coming back, if there is an opportunity which is a perfect strategic fit, it would be wrong to rule something out.

Okay, thank you very much.

[Canute Falla] of UniCredit.

If I can, just two quick ones -- hopefully not too long for a final one. Werner, you were indicating 56 million in pro forma adjustments on the operating margin due to acquisition-related and stock-based compensation. Did I get that correctly, implying an operating pro forma margin of 27.1%? And could you give us the details for Q1 and Q2? I think you did not disclose them there.

And a short question for Henning. On the NetWeaver target, I think you were looking for roughly 1 billion in NetWeaver license sales for the full year in '07. Is this still valid? Thanks.

I can answer this. I think that is something what you misunderstood. I've never said 1 billion NetWeaver in 2007. Our guidance was always the ambition 2010. And if I look to -- at the figures we have, I think we will come close. We will -- in euro, I'm not so sure; in dollar, it's significantly beyond.

So therefore, I would say let's see. If we continue in the fourth quarter -- put this way -- if we continue with the same pace we had in the third, which was absolutely fantastic in NetWeaver, we will get there. But let's see. But (inaudible) we can get close.

And I provide you the numbers here. If you -- again, stock-based compensation expenses in Q3 this year was 38; year-to-date was 87 million. And acquisition-related charges, Q3 this year, 18 million, and year-to-date 42 million. And if you add it together, you come to 56 in Q3 compared to 29 in Q3 last year. And year-to-date, it is 129 compared to [111].

Okay, thanks very much.

Thank you. This closes our conference call today, and we look forward to seeing you here in Waldorf at our analyst day on the 12th of November. Thank you very much.

Goodbye.

Goodbye.

Goodbye.

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