SAP SE (SAP) 2008 Q1 法說會逐字稿

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

This call is being recorded.

Today's call will be hosted by Henning Kagermann, Leo Apotheker, and Werner Brandt.

I will now turn the call over to Stefan Gruber.

Please go ahead, sir.

Good morning or good afternoon.

This is Stefan Gruber.

Thank you for joining us to discuss SAP's first-quarter 2008 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.

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, outlook, 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.

SEC including SAP's annual report on Form 20-F, filed with the SEC on April 2, 2008.

Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their date.

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 that 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 a substitute for or superior to the respective U.S.

GAAP measures that we will report.

Before we start, let me remind you of our upcoming investor conference to be held next week at our user conference, SAPPHIRE, in Orlando on May 6.

With that, I would like to turn things over to Werner Brandt.

Thank you, Stefan, for this introduction.

Before I begin, let me inform you up front that I will be speaking mostly about non-GAAP figures as it relates to the operational performance of our business as these non-GAAP measures are also the basis for our guidance.

The differences between the U.S.

GAAP and non-GAAP figures are the result of two effects.

Number one, the exclusions of a write-down of deferred software revenues in the amount of EUR47 million; and second, the exclusion of acquisition related charges in the amount of EUR83 million compared to EUR11 million in the first quarter of 2007 both adding up to EUR130 million for Q1.

With that, let me say that we are pleased to report another good quarter in which non-GAAP software and software-related services and I will call this going forward product revenues grew by 24% 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 currency causing a currency headwind for SAP.

Here are some of the key metrics, U.S.

dollar to euro plus 15%; British pound to euro plus 13%.

Currency overall had the following impact on the P&L in the first quarter.

A negative effect of 6 percentage points or EUR98 million on product revenue on a non-GAAP basis, and negative effect of 6 percentage points or EUR138 million on non-GAAP total revenue.

The positive effect of 5 percentage points or EUR92 million on operating expenses resulting in a negative impact on operating income by 11 percentage points or EUR46 million.

The non-GAAP operating margin was negatively impacted by 70 basis points in the first quarter, so compared 22% to 19.5%.

Let me now continue with the quarter's results, which include Business Objects consolidated as of January 21, 2008.

Non-GAAP product revenue for the first quarter of 2008 were over EUR1.78 billion which represented a year-over-year increase of 24% at constant currency.

This includes a 12-percentage point constant currency growth contribution from SAP's stand-alone business.

The growth in non-GAAP product revenue came from year-over-year constant currency increases of 18% in software revenues, 27% in non-GAAP support revenues, and 46% in subscriptions and other software-related services revenue.

Since we acquired Business Objects as of January 21, we did not consolidate U.S.

GAAP software and software-related service revenues in the amount of [45 million] for the first three weeks of January.

First-quarter professional service and other service revenues was EUR760 million, which was an increase of 18% at constant currencies.

Consulting revenues were EUR587 million increased 20% at constant currency and training revenues increased 17% at constant currencies.

The non-GAAP software and software-related service margin was 82.1% for the first quarter of 2008, which was an increase of 40 basis points compared to the first quarter of last year.

The higher margin was the result of decline in purchase licenses, offset somewhat by an increase in personnel expenses related to growth in headcount in the support area.

The professional service margin was 20.8% for the first quarter, which was a decrease of 30 basis points compared to the same quarter last year.

The decrease in the margin is mainly the result of the low Business Objects contribution in the consulting and training area.

As a result of the mixed margin performance in products and services, our 2008 first-quarter non-GAAP gross margin increased by 80 basis points to 64.5%.

Non-GAAP operating expenses increased by EUR303 million to EUR2 billion or 18% year-over-year.

Of this increase, two-thirds or approximately EUR200 million relates to the Business Objects acquisition and one-third or approximately EUR100 million is an organic increase in operating expenses.

The bulk of this expense increased as a result of higher personnel expenses.

Since the first quarter of 2007, we added a total of roughly 11,000 employees, of which 6224 came from the Business Objects acquisition in the first quarter of 2008.

The remaining 4700 was the result of organic personnel growth at SAP, of which 1189 were added in the first quarter of 2008 in addition to the increase in non-GAAP operating expenses included approximately EUR10 million related to the Business Objects integration efforts.

Non-GAAP R&D expenses increased 19% for the first quarter and represented 16% of total revenues compared to 16% of total revenues in the first quarter of last year.

The increase in non-GAAP R&D was the result of additional personnel.

We hired additional 1307 net FTEs since the first quarter of last year.

Of that total, 885 FTEs or 63% were hired in low-cost locations.

We also added roughly 1700 FTEs from the acquisition of Business Objects.

Non-GAAP sales and marketing expenses increased 21% for the first quarter and represented 23% of total revenues, compared to 22% of total revenues in the first quarter of '07.

The increase in non-GAAP sales and marketing expenses was mainly due to additional sales and marketing headcount year-over-year and we also added roughly 2100 FTEs from the acquisition of Business Objects.

Non-GAAP general and administrative expenses increased 28% or EUR33 million for the first quarter and represented 6% of total revenues, roughly the same as the prior year's first quarter.

The higher non-GAAP G&A costs were mainly the result of the acquisition of Business Objects, which represented approximately 70% of this increase along with expenses related to the Business Objects integration.

Operating expenses related to the new business around SAP Business ByDesign for the first quarter totaled approximately EUR40 million compared to EUR23 million in the first quarter of last year.

To date, we have spent roughly EUR165 million.

Overall, the Company's non-GAAP operating margin at constant currency was 20.2% for the first quarter, which represents a decrease of 50 basis points compared to the first quarter of 2007.

As you know, prior to the acquisition, Business Objects operated as a stand-alone company with significantly lower margins than SAP.

In fact, SAP's stand-alone business had an increase in operating margin for the first quarter, but it was negatively offset by the operational performance of Business Objects in the first quarter of 2008.

We have already begun the integration process, which will result in significant efficiency gains going forward to the benefit of SAP's overall margin.

Our U.S.

GAAP effective tax rate for the first quarter was 30.6%, compared to 33.5% for the first quarter of last year.

For the full year, we expect a tax rate as indicated in January of 31% to 31.5%.

Free cash flow for the first quarter was EUR1 billion, which is an increase of 31% compared to the first quarter of 2007.

This increase was the result of working capital improvements and our acquisitions.

For the first quarter of 2008, primary use of free cash flow was for acquisitions.

For the first quarter, we bought back 8 million shares for a total of approximately EUR258 million.

For the rest of the year, we expect to purchase an additional EUR250 million of shares.

Headcount in the first quarter increased by (inaudible) FTEs, of which as I mentioned before 600 -- 6200 came from the Business Objects acquisition and 1100, 1200, roughly 1200 from SAP organically.

As you have seen in our press release issued today, we have made one adjustment to our 2008 outlook.

We have increased the expected range of our non-GAAP operating margin by 100 basis points to a range of 28.5% to 29% at constant currency.

The reason behind the change is that we decided to reduce the accelerated investments by $100 million in our business around SAP Business ByDesign.

Henning will discuss more details on this later.

Also beginning in 2009, there will be no more accelerated investments for Business ByDesign.

All expenses will be funded out of the normal operations, which will have a much less negative impact on operating margins compared to the accelerated investments in 2007 and 2008.

Therefore the total accelerated investment around Business ByDesign for '08 is expected to be around EUR100 million, of which we already spent EUR40 million in the first quarter.

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

Thank you, Werner.

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

I am pleased to report our 17th consecutive quarter of double-digit growth in our established business.

This demonstrates the continued strength of our established business, while our SME business continues to grow rather well as well.

Migrations to the platform continued at a good pace providing additional revenues for upsell opportunities for many years to come.

Our performance reflects our leading position in the industry and our continued high win rate against our competition.

In the first quarter, our win rate against our next largest competitor remained at overt 80% and we once again were very successful at replacing the same compactor at a number of customers.

A key strength for SAP is that we continue to maintain our strong competitive position in all geographies regardless of market environment.

Speaking of the environment, in most of the regions we continue to see good [amounts].

The market environment remained sound.

The one exception was the U.S., in which the environment was a bit tougher than we expected coming into the quarter.

However, our global presence provided us a significant advantage since for the most part we are not dependent on a single region.

Let me take a few moments now to break down what we saw in the first quarter among the major regions.

In EMEA, the environment has not changed much since the fourth quarter.

It remains (inaudible) and intact and there is no indication of that changing.

In the EMEA, non-GAAP software and software-related service revenues, product revenues increased by 27% at constant currencies; West Germany increasing by 12%.

We reported a continued strong performance in the CIS countries with Russia again a standout.

Other regions of strength included the UK, Switzerland, the Netherlands, and Belgium.

Key contract wins in the EMEA region were (inaudible), [Local Phone], and Telecom Italia.

The Americans as a whole had a mixed performance.

Non-GAAP software and software-related services revenues were 16% higher at constant currencies in the first quarter, while the U.S.

reporting 20% growth at constant currencies.

Software revenues in the Americans were down 2% at constant currencies, coming off of tough comparison to the first quarter of 2007 in both the U.S.

and Latin America where we closed, as you will all remember, an exceptionally large deal in Q1 2007.

Canada turned in another good performance and in the first quarter in the U.S., we witnessed an environment where there was an increased scrutiny on deals which caused a delay in closing some of them.

Also the average deal size declined, which can be expected in this type of environment.

Importantly however, is to note that we continued to outperform our competitors and gain market share.

Key contract wins in the Americas region were BT Americas, New Balance Athletic Shoe, and Pacific Gas & Electric Company.

In the Asia-Pacific Japan region, the environment remained very good.

Non-GAAP product revenue grew 36% at constant currencies with very strong performances from China, India, and Japan.

Non-GAAP product revenues in Japan were up 42% at constant currencies and key contract wins in this region were Komatsu, China National Petroleum Corporation, and Corporate Express Australia.

Let me now briefly touch on some of our strategic industries, retail banking and the public sector.

Picking up where 2007 left off, retail remains strong, reporting over 60% growth in the first quarter.

Some key announcements on the retail front included 7-Eleven, which is the largest chain store in the United States, with close to 5500 franchise and company-operated stores, extending its agreement for the mild management solutions; Big Lots, with more than 1350 stores and nearly 40,000 associates selected SAP for retail solutions; and Grupo Pao de Acucar, the largest retailer in Brazil selling food and general merchandise with 64,000 employees and 573 stores have selected SAP solutions to consolidate its IT infrastructure.

Key retail contract wins in the first quarter included Burberry Ltd., LensCrafters, and Tawa Supermarkets.

Banking had another very solid quarter, growing close to 80%.

Financial services as a whole were up close to 70% with insurance also performing quite well.

Key banking contract wins in the first quarters included Barclays Bank PLC, Banc of America, and Nationwide Building Society.

In the public sector, we reported nearly 30% growth continuing the good performance that we saw in the first quarter of last year.

Key public sector contract wins in the first quarter included the Government of Zambia, Gauteng Provincial Government and National Health Insurance Corporation.

As you are probably well aware, we remain intensely focused on expanding and strengthening our partner ecosystem.

It has been and will be vital to our success, a key strength and a competitive advantage for SAP.

In the first quarter we made several announcements demonstrating the success we continue to have in growing, leveraging, and collaborating with our partners.

SAP and IBM announced plans to deliver our first joint software product code-named Atlantic that will integrate IBM Lotus Notes software with SAP's Business Suite.

We announced an expanded global services partnership with HDL Technologies and we announced an expansion of our partnership with long-term partner Intel to collaborate on offering preinstalled business solutions for midsized companies optimized for Quad-Core Intel Xeon processors.

We also announced a deepening of our relationship with Novell that will enable customers of all sizes to run, manage, and secure mission critical operations on Linux, demonstrating our commitment to the open source community.

Let me end by giving you an update on the Business Objects acquisition.

As you are aware, in mid-January we announced a successful all-cash tender offer for Business Objects and since then we have received very high marks on customer's prospects, partners, and industry analysts on the acquisition itself, the go-to-market approach, and the combined SAP and Business Objects platform components and applications.

We hit all product deliverables in the first quarter with the product roadmap and rollout on time and on target.

The initial product roadmap has already been communicated to customers and partners.

Despite the many challenges that companies face in integrating acquired companies and despite the more aggressive sales targets that we put in place prior to the start of the quarter, we are pleased to say that we hit our first quarter sales goals.

We saw success in selling performance optimization applications into Business Objects accounts and the business intelligence platform into the SAP accounts.

This is a testament to the complementary nature of the product of the two companies, which should bode well for future success.

With this, let me turn it over to Henning.

Yes, thank you, Leo.

We are pleased to report another good quarter.

It is our ninth consecutive quarter of share gains in the price application software market.

At the end of the first quarter, our share-based on a 37.4 billion U.S.-dollar market was 32.6%, representing an increase of almost 4.2 percentage points compared to the first quarter of 2007 of which approximately 1 percentage point represented organic growth and it is representing an increase of 7.6 percentage points compared to the first quarter of 2007, of which 4.3 percentage points represented organic growth.

These are impressive share gains demonstrating the benefit of being a truly global software company.

As Leo mentioned earlier, the established business remains a core area of strengths for SAP and it will continue to be a strong growth area for SAP for many years to come.

This is one pillar of our growth strategy.

The second pillar of our growth strategy lies in our push into the midmarket with our SME portfolio.

And the third pillar lies in the tremendous opportunities we see in our business user solutions which has been strengthened even more by the recent acquisition of Business Objects.

Let me start with the first pillar, the established business.

With the established business continuing to provide great opportunities of growth, we remain determined to continue to move our customers onto a business process platform, allowing for greater upsell opportunities.

That said, SAP at 6.0 adoption is well underway as we have now achieved more than 9900 customers in just the past two years; 6000 are already productive.

These numbers compare quite well to the more than 4100 customers and nearly 1800 productive customers in the first quarter of last year.

This very fast adoption rate has surpassed our expectations.

Continuing on the same subject, our unique technology of delivering innovation without disruption to customers through our enhancement packages for SAP ERP has been a huge success with customers.

The ability to implement these enhancement packages according to their own timeframe and specific needs for functionality is unmatched in our industry.

In fact, we recently released the third enhancement package, which contains more than 1400 new business functions including industry-specific solutions.

Furthermore, we completed our enterprise SOA roadmap in 2007 and therefore, we are able to begin delivering enhancement packages for the entire SAP Business Suite and SAP NetWeaver this year.

An important component of the business process platform is of course the SAP NetWeaver technology platform and the growth we saw in 2007 continued into the first quarter of 2008.

The number of productive system now stands at 38,700, representing a growth rate of 85% compared to the first quarter of last year.

On a rolling four-quarter basis, year-over-year SAP NetWeaver revenue increased 26% to approximately EUR1 billion, of which 37% was stand alone.

Stand-alone sales increased 67% year-over-year on a rolling four-quarter base.

We continue to engage in strategic partnerships with SAP NetWeaver to help drive innovation for our customers.

One I would like to mention is the expanded partnership with IdeaShare.

The other solution in our enterprise services repository will be integrated even tighter going forward.

This will enable users to access SAP's enterprise services and modeled process components directly from a business process analysis and modeling environment.

Let me touch on the another pillar of our growth strategy, the SME segment, where we continue to see strong results.

In the first quarter, the number of SAP Business All-in-One customers grew by 18% to 11,700.

The number of partners increased by 25% to 1064.

For SAP Business [One] the year-over-year number of customers increased by its 38% to 18,690 and the number of partners by 11% to 11 69.

Some recent announcements on our SME product portfolio included the introduction of our Fast Start program for SAP Business All-in-One and we have shown the prototype of the Business All-in-One appliance that we developed in close collaboration with Intel that Leo touch on earlier.

Let me now move to our new breakthrough innovative product, SAP Business ByDesign.

As you have probably already read in our press release this morning, we will modify the rollout strategy for this product.

Let me begin by saying that we remain entirely committed to this product.

You should not interpret this modification as anything to the contrary.

In fact, we have been quite successful to date with the SAP Business ByDesign.

Feedback from early customers and partners who have been working closely with to validate and fine-tune the product and overall business model has been very positive.

We reintroduced SAP Business ByDesign in a phased go to market approach not too different from other new products that we introduced to early customers and partners.

Since SAP Business ByDesign was a completely new deployment and business model for us, we took an even more conservative approach to the rollout.

It is very important to adapt our plan appropriately at every step of the way while ensuring highest quality and maximum profitability potential.

We think we can do even better than what we have achieved to date and therefore we have decided to take an even more controlled approach to the rollout of Business ByDesign.

Here are some of the steps we will take in modifying the rollout.

In 2008, we will concentrate our go-to-market efforts on six focused markets, Germany, U.S., France, UK, and China, where all our productive early customers are based and EMEA, where we will launch SAP Business ByDesign in a month.

These countries represents a large amount of the worldwide volume market opportunity.

Our successful early partner program of providing ongoing close collaboration will continue unchanged in the six focused markets.

Additional country rollouts will be executed in 2009.

The extended timeline enables us to take additional steps towards optimizing end-to-end process of delivering, selling, and supporting the solution.

It will provide customers with many benefits including even higher usability and performance by lowering total cost of ownership, by leveraging the next release of SAP NetWeaver.

From a financial perspective, Werner already mentioned the impact to the margin.

Let me touch on some other notable items.

As a result of our more controlled ramp-up process, it will take us a bit longer, around 12 to 18 months, to reach the EUR1 billion revenue potential and 10,000-customer ambition.

Also the Company expects to engage with significantly less than the previously mentioned 1000 customers in 2008.

We will use SAP Business ByDesign innovations and technologies for our existing solutions and we expect this to contribute significantly to the overall revenues of SAP in 2010.

We will also leverage all go-to-market innovations and investments including our successful midmarket brand extension, demand generation, telesales capabilities, and web supported buying cycles across the entire SME solution portfolio; further strengthen our continued SME growth strategy; remain fully confident in the product, the market opportunity, and the associated business model of SAP ByDesign; and we continue to move towards volume readiness in 2008.

We do not see any comparable solutions in the market and the validity of the product has already been proven by the commitment of our early customers and partners as well as the immense interest we have received from the market.

Let me now finish up by talking about the third pillar of our growth strategies, Business User.

We are making excellent progress in this fast-growing market for business user solutions with our performance optimization applications and our business intelligence platform, which has been greatly enhanced by the acquisition of Business Objects.

The new SAP Business Objects line of business will focus on capturing the lion's share of what IDC sees as a U.S.

-- as a US$15 billion market opportunity, growing at more than 10% per year.

The integration of Business Objects is going well and we are ensuring the protection of our customers' investments as we have already provided them with the product roadmap outlining the future evolution of our solution portfolio in the business intelligence and performance optimization applications area.

We also unveiled our first joint offerings and announced Business Objects room XI 3.0, the first enterprise [K] platform for business intelligence.

Not only does the release include a new version of all major products in the Business Objects solution portfolio, but also entirely new products based on joined Business Objects and SAP solutions such as the SAP NetWeaver business intelligence Excelerator.

I would like to end here.

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

(OPERATOR INSTRUCTIONS) Michael Briest, UBS.

Thank you very much, good afternoon.

Leo or Henning, maybe you could talk to the U.S.

or Americas situation.

When did you realize that the performance was not going to be as good as you expected?

Can you talk about how things have played out since then in April?

Also for the year, you're leaving your guidance unchanged.

You had talked about double-digit growth from the U.S.

Is that still a target you are expecting to achieve?

Thank you for the question.

Let me try to give you a little bit of color on the situation.

The environment was tough.

There was indeed a little bit tougher than what we have expected going into the quarter.

What did we see happening?

We saw that the volumes were still very good.

We have quite a lot of activity going on.

The good news is for example that we closed 50% of our business in the U.S.

comes from new customers, which is a very good number.

We have actually gained market share in the U.S.

market itself as well, which is another good indicator in this environment.

What did happen though is that the average deal size declined in the U.S.

That is something that we realized in the course of the quarter.

What we have done since is we have adjusted slightly our go-to-market model in the U.S.

We have accelerated a certain number of activities that were already happening anyway like for example having a stronger focus on particular buying centers within companies; that has now been executed.

The go-to-market model in the U.S.

has been adjusted to this.

And the pipeline as we look to the U.S.

business going forward and indeed to the global business going forward much more important than just the U.S.

business, is actually a very healthy pipeline.

And after scrutiny of the pipeline, we feel very confident that we are able to reaffirm our guidance when it comes to the topline, product revenue, SSRS, of 24% to 27% in constant currency.

Will the U.S.

achieve double-digit growth for the stand-alone SAP business, do you think?

What we said was that the U.S.

for the stand-alone SAP business, we talked about this in the beginning of the year, we talked about product revenue and we did not really give a clear indication.

What we said was that the U.S.

would not be one of our strong growth drivers but that it would be in the low double-digit area for product revenues.

Michael, if you look to the information we provided in the United States, we have for product revenue an increase at constant currency of 20%.

If you can take the overall metrics there of the half is coming from SAP and the other half is a contribution of Business Objects related products.

So therefore we are maintaining our expectations for the U.S.

It might be a little bit more, a little bit less.

That depends on the environment, but overall, we feel that we have a strong U.S.

business.

And if I could ask finally, has there been any restructuring of the U.S.

or cost reduction program which has affected headcount?

Thank you.

What we have done is we have adjusted our go-to-market model that impact also some changes in personnel which have been executed already.

Thank you.

Charlie DiBona, Sanford Bernstein.

Henning, I think we all understand what you're doing with Business ByDesign in the more cautious rollout.

But maybe you could delve a little bit more into color on why the delay, why the slower rollout?

What is driving the decision to alter the way you are taking this to market?

There has certainly been speculation about product issues and channel issues.

Maybe you could illuminate those a little bit.

Yes, thank you, Charlie.

No, I would call it many things come together.

You know, if we would -- if we had decided to treat ByDesign like a normal product and adopt the traditional go-to-market approach, I would say we had successfully launched this product.

We successfully have upgraded the first live clients to the next release and now it is business like normal.

You know that we don't want to do it.

We have high ambitions.

One is no modification paradigm.

And as I said, we want to do it in an on-demand mode.

That means there are many assumptions out there in our model and at the customer site which we have to verify.

Let's start with collecting now from all the clients.

What they really need to run their entire business without any modification, without any let's say additional software functionality on site, which we normally are doing.

We collect all those things and bring it back into the product.

The next one is how long is the upgrade taking?

Is this too long, not long enough?

I think here is also something where we can improve.

Then it is a question of cost of ownership.

We can measure it now.

We have exact figures and we felt it will not take us not too long to improve figures here significantly, so why should we spend the money and a lot of people if we can do it in an automated way?

We have learned something in how to integrate into the heterogeneous network of clients on site.

What does this mean?

We got feedback on how clients adapt this new software.

Will they start from CRM, will they start from human resources, etc., how many of the users will go live?

How many people do we need on site for (inaudible)?

You know all those things.

I made it a little bit long to give you a feeling that we have now pretty good understanding of all the assumptions we have to make to build really a profitable business.

And instead of rolling it out step-by-step, which could cause I would say little frustrations on the client side, we decided let's say to adjust everything which is needed to make it a volume business in the next release that will take us a little longer.

We will engage with the client in a slightly different way, more intense, and measure it again and I think then we will go forward.

Just one also follow-up.

You've been very careful to this point to keep Business ByDesign sort of segregated from the core business because you did not want to pollute the middle market strategy.

You're talking now about more about more cross pollinization.

Is this a change in the structure of Business ByDesign organizationally or is this just accelerating the technological cross pollinization?

It is the second one.

I think we have very carefully indicated at last SAPPHIRE that our intent is to reuse the investments made in the product development of ByDesign and bring new innovative edge processes and business innovations to our large installed base in a careful way.

Now we are ready to announce let's say the first of these examples at SAPPHIRE and I guess we can roll them out next year.

This will have no impact on the stability of the product and no impact on how we go to market or we develop the product for the midmarket.

Thank you.

Raimo Lenschow, Merrill Lynch.

Two questions, if I may.

First of all on Business Objects, if I just do the math it looks like about -15% license revenue number.

Can you maybe give us some detail how much of that is impacted by the three weeks that are missing so in other words the $45 million you commented earlier, Werner, how much is coming in there from that and how would the number have looked otherwise?

Also you haven't really talked about any update on the cost synergies of the EUR150 million.

What is the progress there that we have made in Q1?

Second question is on the maintaining of the outlook going forward, we have now seen Oracle disappoint on applications, we saw you guys missing the numbers by quite a bit.

What should kind of give us more confidence that actually that is coming back?

I know you've mentioned the pipeline before, but it seems a little bit that you are kind of out of sync with the economic reality.

Then the last question, maybe you can't answer that on the call, is anyone of the senior management taking a bet on the EUR1 billion by 2011?

I would offer a dinner, but maybe we can do that off the call.

Thanks.

Raimo, these are a lot of questions.

Let me address the first two ones with regards to Business Objects.

If I mentioned before that on the product revenue side, we have an impact of roughly EUR45 million due to the fact that we have consolidation since January 21.

I would say that half of it relates to software and the rest is the support revenue.

Secondly, if you look to the (inaudible) integration we mentioned before that the synergies we want to realize are embedded in our operating margin for the full year and as we have only adjusted our operating margin due to the fact that we decreased our accelerated spending for Business ByDesign, this indicates that we are at least on track with delivering the synergies from the Business Object integration.

If you look to this integration I think from a go-to-market perspective, Leo mentioned this before, everything is on track.

And also from a back-office integration, we are making good progress and we assume that in the first three quarters of this year everything is accomplished.

Then we will see for the full year the full benefit of all the synergies we expect out of the Business Objects integration.

It is Henning.

I would like to comment on the application market.

I feel it is a good market and we are performing very well.

Look to our product revenue with constant currency at 24%, 12% from SAP.

We have reiterated the guidance of 24% to 27%, and this after a hard look to our pipeline.

What I like is that this was one of the quarters where we have gained more market share than before, which I think is good.

It is strengthening our position and I don't know if many companies have proven that they can let's say grow both in parallel organically, where we gained 1 percentage point, and 3, which we did through acquisitions.

I felt that things are coming together and it was for me personally a good quarter.

Let me maybe add two more comments to that.

One should not have an insider view and view it only out of the U.S.

perspective, but one should take a global view.

If you look at the global numbers, they are very impressive any metric you would like to use.

And to the last comments regarding the bet, if I can choose the wine, you have a bet.

Thanks, okay.

I'll take that.

You can't afford it.

Sarah Friar, Goldman Sachs.

Good morning, everyone.

Thanks for taking the question.

The operating margin guidance, you are moving that up for the year.

Certainly signals a new focus on expensive and general, and I know that this is something that investors have been asking of you for quite a while.

I think broadly, Leo and Henning, both of you were quoted earlier in the quarter at taking down R&D expense generally.

Could you maybe give us some color on why this new focus on the cost line if you are so confident in the growth story and can we see both growth and margin improvement?

Yes indeed.

If you look to the figures, it was an adjustment.

We have let's say slowed down the investment into ByDesign and we saved some money.

I think that is what is the good news.

We continue to believe in the growth story, otherwise we would not have done it.

We can afford to do this because we are so confident in our core business and in the Business Objects integration that the impact of Business ByDesign to the topline is not that crucial for our business.

So I think balancing it out and looking for both makes a lot of sense in the moment.

Yes, and we gave that a lot of feedback during the recent roadshow (inaudible) and here is the answer to this one.

Generally I understand it is BBD investment that's been cut back, but will we see you also try to get more efficiency out of core SAP R&D investment and sales and marketing investment, or is that not the case?

Is it really just BBD that we're talking about?

What we indicated, Sarah, was -- this is Leo -- what we indicated was that as we see our business evolving in the future, we will reap the benefits of some of the investments we made in the past when it comes to platform and in particular when it comes to our enterprise.

So our approach gets-- that investment was meant not only to generate a stronger pipeline and a stronger topline but also create more effectiveness in our development.

Therefore, we feel that the development share in our revenues can start to come down slightly in the future.

That does not mean that we will be necessarily spending less money on R&D, but the share of R&D in our revenues should start to come down in the future.

And we are working on this.

If you look to our GAAP operating expenses for a moment, only for simplicity, we added 22% and thereof 12% is coming from the acquisition of Business Objects as it stands, 5% is coming from the acquisition related charges, so this is purely accounting-driven.

It has nothing to do with the operational performance and 5% is coming from SAP.

So you see that we have a strong focus here on expenses.

One final one for you, if you don't mind.

In Europe specifically thinking about linearity, was there any slowdown or any change in momentum in the last few weeks of March?

Because I know more broadly in Europe there's been some commentary from -- more consumer driven businesses that they began to see some slowing.

I know most enterprises haven't talked to it yet, but any color at all on those last few weeks?

Sarah, the business momentum in Europe was stable throughout the quarter.

Normal pattern, nothing really significant to signal.

There might have been a small change in one country was easily picked up by another one.

Overall in EMEA we are -- we see steady business conditions moving forward.

And that hasn't changed, the majority of the deals we closed are closed in the last month of the quarter.

Okay, thank you very much.

Ross MacMillan, Jefferies.

Thanks.

Werner, a question for you just on the margins.

I know you've guided obviously to cost of currency.

Can you just a recap on the currency impact to operating margin on a non-GAAP basis in Q1?

Can you just remind me again what you said at the beginning of the year with regard to the FX impact for the full year?

If you did make any comment?

Thanks.

Let me start with the guidance we provided.

In fact, we provided the guidance on the margin at constant currency, so we did not pronounce any currency predictions for 2008, for our 2008.

But I can give you more color, more details here on the currency impact.

If you look to this currency impact on total revenue, it was EUR138 million.

Thereof roughly EUR100 million is on the product side and EUR40 is on the service side.

Then on the cost side, of course we have this benefit that is up to EUR92 million.

And actually then the operating income is impacted by EUR46 million, which represents 11%.

So if we just made the assumption that currencies, currency rates prevailed at current rates as we have today, any -- how should we think about that as we go through the year?

Is there any insight you could provide to that?

No, I think it is not necessary.

As we guided at constant currency, and if you look to the difference between actual and at constant currency and take the rates we provide on the Internet for the second, third, and fourth quarter of 2007, I think it is an easy calculation you could do on your own.

I think it is important to -- to stay consistent with our guidance, KPI at constant currency and that's it.

Okay, and then maybe just a follow-up and it goes back to an earlier question.

Henning, can you just -- as you talk about taking the Business ByDesign technology and then leveraging that in core SAP, what specifics should we think about when you're doing that?

Where are we going to see that leverage?

What is being applied to where?

Thanks.

In principle everywhere on the go-to-market side.

Definitely I mentioned it.

There are telecenters, there's the web approach.

All the things we can leverage partially we have done it already in our all-in-one product.

So I think that we can do mostly across the SME portfolio.

From a services point of view, what all we are doing in order to automate upgrades the way how we run the software etc.

has also a positive impact on our suite because that will help our clients to bring their TCO down as well.

If you look specifically what we could do from a solution point of view, there are obviously two ways.

One, as I mentioned it earlier, is that we will build additional components which we will charge to our clients and we can reuse the platform we have used in Business ByDesign for that.

We will do so because this is completely services enabled.

The integration to our normal suite is more or less out of the box.

The second is clearly there is a big demand out, we will be careful because we don't want to spoil our midmarket business, but there is a big demand from every large client out there for a solution for the small subsidiaries.

And whenever we speak about ByDesign and the potential of low cost of ownership, they are more than interested.

But here we will only take these options.

One, we have let's say proven the volume readiness in the key countries first.

But these are two very good options.

Thank you.

James Dawson, Morgan Stanley.

Hi, guys.

Just a couple of questions from me.

In terms of Business Objects, Werner, you talked I think at the time of EUR160 million worth of cost synergies.

Can you just reconfirm that number and talk about the timing of the savings?

Maybe just give us some color as to how you're getting on with them so far, now you are four months in I guess?

Second question on the BBD launch costs, I'm kind of confused.

Are we saying that this is a delay or did you overestimate the cost of the launch originally?

Or was it something else?

I can start with the second one and then might be -- Werner takes the first one.

Look, we have not delayed it.

We were very precise in saying we don't need additional accelerated investments.

It is partially because we will use this delay to invest but out of the normal business from the normal R&D etc.

to bring the cost to run -- to operate the software down at the beginning.

So therefore, let's say we don't need that much accelerated investment.

It was not over calculated half a year or year ago because please understand when you embark on such a program, there is a lot of uncertainty around it.

We made our assumptions.

Now we are much smarter because we have some milestones behind us and based on this insight, we made a new calculation.

We felt the way we are rolling it out now is smarter for our shareholders.

I'll try to answer the first question with regard to the synergies on the Business Objects side.

If you acquire a company which has 1 billion on a euro basis -- now EUR1 billion in revenue -- and has an operating margin on a pro forma basis say by 16%, 17%, then you have a specific expense block which is more than 800 million -- on a euro basis again.

And I think what we do is we look into all different areas.

It starts with G&A, sales and marketing, R&D where we try to identify synergies and go for them.

If you look to it from a cost perspective, definitely it is personal expenses.

It is third-party expenses where we can use the combined purchasing power.

It is facility rationalization, legal entity rationalization going forward.

All these type of things are ongoing and are to be completed throughout this year in the major components.

So, Werner, that EUR160 million is a this year target, one-year target?

Yes, that is what we have embedded and we've said this beginning of January, embedded into our plans for 2008 and this is part of our operating margin guidance.

Right, could I just have one last clarification maybe?

In terms of the license growth, can you tell us what the standalone SAP license growth was and perhaps what it was for Business Objects?

We said 12% of the 20 (inaudible).

Product.

License only.

No, we do not break this out.

Around 4% for the SAP business?

We do not break it out.

Take it as it is.

By purpose beginning of last year, we started to report on software and software-related service revenue and I think that is our (inaudible) KPI.

Thank you.

Next question please.

I think we have time for actually one final question.

It is already 4:00 PM.

Knut Woller, UniCredit.

Just quick ones mainly for Werner.

Thanks for taking me.

Just in case your guidance should prove finally looking backwards at the end of the year to be too optimistic regarding growth rates, could you just indicate the flexibility on the cost side you see to level many -- might ongoing shortfalls on the license side or SSRS side off?

Then second and third if I may, just quick ones.

The gross margin on the service side, should we expect any improvements and -- in 2008 and if so to which level?

And the non-GAAP tax rate for the full year.

Thanks very much.

I think first of all, it is important to repeat that we do not see now a risk on the SSRS side, so software and software-related service side.

But if you talk about prudency at the end of the day, if we see something coming, if for example the situation in the U.S.

would spread into other regions, of course we would take actions.

And we discussed it several times that we have the flexibility in different categories to reduce variable expenses so that we can match this and keep our margin target now with 28.5% to 29% and we keep this for the full year and look back to a margin of -- in this range.

The first -- last part of your question?

It was regarding the gross margin on services, Werner, whether we should expect any improvements and if so to which level in '08, and the last one on the non-GAAP tax rate.

Thanks.

The service margin I think was impacted by Business Objects and as I said in the beginning.

And you always see that we have an increase in margins throughout the year quarter-by-quarter.

I cannot give you a clear KPI today for the margin where we will stand, but normally we should see a margin that is not lower than the one we provided last year if we get Business Objects to the -- closer to level we have at SAP.

The U.S.

tax rate, I think we stick with this 20 -- what this 31% to 31.5% for the rest of the year.

Non-GAAP?

That was U.S.

GAAP, right?

It was non-GAAP?

I would say there is no difference.

All right, thanks very much.

Thank you, this concludes the SAP Q1 earnings call.

Thank you all for joining and goodbye.

Ladies and gentlemen, that concludes today's conference call.

Thanks for participating and you may now disconnect.