SAP SE (SAP) 2008 Q2 法說會逐字稿

Welcome to the SAP second-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 today to discuss SAP's second-quarter 2008 results.

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

Werner will discuss the Q2 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.

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 US 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 US Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2007 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 dates.

In addition, in this call we will be reporting certain adjusted revenue numbers on a US dollar basis.

These numbers are non-GAAP measures because the reporting currency of SAP's US GAAP financial statements is not the US dollar but the euro and because the revenue numbers are adjusted for the deferred support revenue write down from the acquisition of Business Objects.

We pulled these measures to provide additional information that may be useful to investors in comparing SAP's revenue growth with the revenue growth of SAP's major competitors, who report in US dollars.

Our US dollar measures should only be considered as additional to and not as substitute for or superior to the respective euro-based US GAAP measures that we report.

I would now like to turn the call over to Werner.

Thank you, Stefan.

Before I begin, let me inform you that I will be speaking mostly about non-GAAP figures as it relates to the operational performance of the Company.

Also non-GAAP measures are the basis of our guidance.

The differences between US GAAP and non-GAAP figures are the result of two effects in the second quarter.

Number one, the exclusion of a write-down of deferred support revenues in the amount of EUR52 million and second, the exclusion of acquisition-related charges in the amount of EUR66 million compared to EUR13 million in the second quarter of 2007.

With that, let me say that we are pleased to report another very strong quarter.

Non-GAAP software and software related service revenues for the second quarter of 2008 were EUR2.1 billion, which represented a year-over-year increase of 32% at constant currency.

The contribution from SAP's stand-alone business was 16 percentage points at constant currencies.

The growth in non-GAAP software and software-related service revenues came from year-over-year constant currency increase of 34% in software revenues, 29% in non-GAAP support revenues, and 50% in subscription and other software-related service revenues.

The last part of the sequential increase in subscription and other software-related service revenues was the result of a global enterprise agreement we signed in May with Daimler AG, bringing the total number of GAs to 12.

Second-quarter professional services and other service revenues were EUR768 million, which was an increase of 19% at constant currencies.

Consulting revenues of EUR628 million increased 20% at constant currencies and trading revenues increased 16%, also at constant currencies.

Non-GAAP operating expenses increased by EUR372 million to EUR2.2 billion or 20% year-over-year.

Of this increase, 65% or approximately EUR241 million related to the Business Objects acquisition and 35% or approximately EUR131 million represented an organic increase in operating expenses of approximately 7%.

The bulk of this increase is the result of higher personnel expenses.

Over the last four quarters, we added a total of 9,711 employees, of which 6,224 came from the Business Objects acquisition in the second quarter of 2008.

Included in the non-GAAP operating expenses are EUR24 million of one-time expenses for the i2 settlement and EUR11 million for the Business Objects integrations which are not acquisition-related charges and therefore not eliminated.

Non-GAAP R&D expenses increased 19% for the second quarter and represented 14% of total revenues compared to 15% of total revenues for the second quarter of last year.

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

We hired an additional 1,121 net FTEs since the second quarter of last year.

Of that total, roughly 40% or 453 FTEs were hired in low-cost locations.

We also added 1,697 FTEs from the acquisition of Business Objects.

Non-GAAP sales and marketing expenses increased 24% for the second quarter and represented 23% of total revenues compared to 22% of total revenues in the last year's second quarter.

The increase in non-GAAP sales and marketing expenses was again mainly due to additional sales and marketing headcount year-over-year, which [proven] 797 FTEs.

We also added 2,132 FTEs from the acquisition of Business Objects.

Non-GAAP G&A expenses increased [EUR33 million or 33%] or EUR42 million for the second quarter and represented 5.8% of total revenues compared to 5.2% of total revenues in the same period of last year.

The majority of the EUR11 million we spent for the Business Objects integration are included in G&A.

Overall the Company's nonoperating -- non-GAAP operating margin at constant currencies was 25% for the second quarter, which represents an increase of 50 basis point year-over-year.

As you know, we settled a litigation with i2 Technologies in the second quarter of 2008.

The total amount of the settlement was $83 million or EUR53 million.

Of the EUR53 million, EUR24 million were expensed in the second quarter.

The remaining EUR29 million will be amortized on a straight line basis over a 12-year period.

Excluding the second quarter, EUR24 million effect from the settlement and the EUR11 million in costs related to the Business Objects integration, the non-GAAP operating margin at constant currency would have been higher by 120 basis points, 80 basis points from the settlement and 40 basis points from the cost of integration.

The increase in overall operating margins was also partly the result of the ongoing successful integration of Business Objects, which Henning and Leo will touch on later.

The non-GAAP software and software-related service margin was 82.3% for the second quarter of 2008, which is a decrease of 40 basis points year-over-year.

The decrease in the margin was mainly the result of the EUR24 million expense in the second quarter from the settlement of the i2 litigation.

The professional service margin was 24.3% for the second quarter, which was an increase of 50 basis points year-over-year.

The increase in the margin is mainly the result of a higher utilization rate of consultants.

As a result of the mixed margin performance in product and services, our 2008 second-quarter non-GAAP gross margin increased by 110 basis points to 66.9%.

Our non-GAAP effective tax rate for the second quarter was 30.7%, compared to 25.8% for the second quarter of last year.

The reduced second-quarter 2007 effective tax rate was the result of a large nonrecurring effect.

For the full year, we continue to expect a tax rate of 31% to 31.5%.

Free cash flow for the first half of 2008 was EUR1.2 billion, which was an increase of 45% year-over-year.

For the first half of 2008, the primary use of free cash flow was for our annual dividend, which was paid in June, acquisitions, and share buyback activities.

For the second quarter, we bought back 3.8 million shares for a total of approximately EUR124 million.

As we previously stated, we expect to spend an amount of around EUR500 million on share repurchase for the full year.

In the second quarter we added 173 FTEs, which brings the total headcount at the end of the second quarter to 51,447 full-time equivalent.

For the full year, we are targeting a total of 3,500 FTEs, compared to 2007 not including the headcount from acquisitions.

Let me finish up by saying that we have redefined our outlook for the full-year 2008.

Please refer to the press release issued today for the complete business outlook.

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

Thank you, Werner.

Welcome, everyone, to today's call.

I am pleased to provide you with some highlights on the current business environment we operate in and give you some insight into SAP's regional and sector-specific performance.

Our string of double-digit growth continued.

Q2 was our eighteenth consecutive quarter of reaching this achievement.

The strong performance in the second quarter both organic and including Business Objects was the result of solid execution in almost all areas of the business.

The established business continued to show strength.

The volume business in the middle market continued to grow.

And Business Objects was a key contributor to the overall growth for the quarter.

As demonstrated by our share of the core enterprise application markets, we expanded our leadership position and we remain the undisputed leader by a wide margin, in particular against our next largest competitor.

Our win rate against the same competitor was 80% for the second quarter.

Let me briefly discuss the market environment.

In all regions with varying degrees, the markets remained value-driven, as it has been for quite some time, meaning that customers demand a proven business case as part of their buying decision.

In our largest region, EMEA, the environment has not really changed compared to the first quarter.

Customer sentiment is cautious, but resolute, with demand for SAP products at the same sound level compared to previous quarters.

In the US, customer sentiment was better than what we saw in Q1 but I would also call it cautious with good amount for our solutions.

The deal slippage was not an issue for Q2 and we hope to keep it that way for the rest of the year.

We continue to see strength in the markets of Latin America and Canada and for APJ, the market environment remained healthy.

Let me now move on to provide you some color on the regional performance.

In EMEA, we had yet another solid quarter on top of a very good performance one year ago.

The midmarket continued to strengthen and Business Objects is helping to drive the pipeline and deal closings.

In EMEA, non-GAAP software and software-related service revenues increased by 27% at constant currencies with Germany increasing by 11%.

Regions of strength included the UK, the Nordics, and Italy.

Key contracts wins in the EMEA region were (inaudible) Holdings [GmbH], (inaudible) SPA and Dansk Supermarket AS.

The Americas performance was very strong in the second quarter with non-GAAP software and software-related service revenues increasing by 37% at constant currencies and the US in particular increasing better than 9% at constant currencies.

Execution in the US was very good, especially against our competitors as we continue to see more customers consolidating on SAP.

There was a good mix of deals with new and existing customers.

In addition, Business Objects had tremendous traction in the market.

The midmarket remains a solid growth area with good overall traction volume.

Results in Latin America were good on top of a very strong performance one year ago, with Brazil again stand out in the region in the second quarter.

Key contract wins in the Americas region were HJ Heinz Company, Hallmark Cards, and Smurfit-Stone Container Operation.

In the APJ region, non-GAAP software and software-related service revenues grew 40% at constant currencies with very strong performances from China and India, which reported high double-digit growth rates.

In Japan, non-GAAP software and software-related service revenues were up about 10% at constant currencies.

Japan was weaker than expected and it was more of an issue with execution rather than the market.

Measures have already been taken prior to [ST's] execution issues.

Key contracts wins in the APJ region were China Central Television, Mochida Pharmaceutical Company, and [SL Group].

Touching on industry performance, we performed quite well in discrete and process industries, with all subsegments of these industries supporting strong growth.

In automotive, we signed a global enterprise agreement with Daimler AG in the second quarter.

SAP has been Daimler's software partner since 1984 and became Daimler's top strategic software partner by entering a software development partnership in 2002.

Today Daimler has more than 65,000 SAP users, which will extend to more than 100,000 users under the new agreement, which includes software, maintenance, strategic software development, maximum attention support, and high-profile consulting services.

Other industries that performed well in the second quarter included consumer products, utilities, insurance, healthcare, and higher education.

Financial services remains a key growth area for SAP and we continue to make important announcements in this area.

On the banking side, we announced that the Commonwealth Bank Group would undertake a comprehensive program to modernize its existing banking legacies systems with SAP for banking solutions.

Another customer, Commerzbank, Germany's second-largest bank, has successfully implemented the SAP for banking solution portfolio in just nine months.

The system will process 1.2 million loans yearly.

Also Bank of Ireland has selected Business Objects as its business intelligence standard following an extensive review of available business intelligent solutions.

In insurance, we announced that both the AAA Auto Club Group and ICW Group will be implementing SAP's insurance solutions.

Second-quarter key contracts wins in financial services included (inaudible), Farm Credit Canada, Banco del Estado, [GPSA], and (inaudible) Grupo Financiero SPA.

Public services, which includes healthcare, public sector, and higher education is also a key strategic area for SAP.

In higher education, Miami-Dade Township public schools, the fourth largest school system in the US with 42,000 students, more than 50,000 employees across 850 work locations and an annual budget of over $6 billion will be implementing SAP ERP.

In the public sector, Mississauga, Canada's sixth largest city with 700,000 people and 7,500 employees is replacing its legacy Oracle PeopleSoft software with SAP ERP human capital management.

Second-quarter key contracts wins in public services included the City of Edmonton, State of Louisiana, and University of Mississippi.

For the second quarter, we maintained our unwavering commitment to expanding our partner Ecosystem, a key contributor to our growth and success.

Examples were the announcements that both Infosys Technologies and Satyam have become SAP global services partners.

We also announced an expansion of our partner Ecosystem by making available immediately our SAP partner hedge program previously available only to SAP channel partners to all SAP software solution partners and service partners including technology and service partners from Business Objects.

Let me wrap up by giving you an update on Business Objects.

While there are always some integration challenges associated with large acquisitions, we are very pleased with the performance of Business Objects after only two quarters of being an SAP company.

The strong momentum generated in the first quarter found its way into the second quarter as the Q2 results were even better than the results we reported in Q1.

In the first quarter, Business Objects represented 12 percentage points of the Company's growth rate and in the second quarter, it represented 16 percentage points signifying healthy organic growth rates at Business Objects.

This is something usually not seen so quickly for an acquired business in our industry.

We witnessed solid growth from almost all products the BI platform, the POA and GSC applications, despite maintaining aggressive sales processes.

We believe we have a very successful go-to-market strategy for Business Objects that will enable us to maintain our growth.

The four pillars of the strategy are first of all selling Business Objects products into the SAP-only customers; second, expanding the footprint of Business Objects in Business Objects-only customers; third, expanding Business Objects products into joint customers; and last but not least, selling Business Objects products into new customers.

Of course, we are leveraging our dual sales forces across the SAP into this four-pillared go-to-market strategy.

Thus far we have seen solid growth in all four pillars.

Let me turn it over to Henning.

Thank you, Leo.

We are pleased to report another strong quarter.

In my view this quarter underscores our ability to deliver strong results even in an arguably more difficult market environment.

In fact if we were a company reporting in US dollars, second-quarter growth would have been even higher.

Our non-GAAP software and software-related service revenues in US dollars would have increased 44% in the second quarter compared to the same period one year ago.

This compares to our euro-based non-GAAP growth rates of 32% at constant currencies.

We also once again achieved significant share gains in the core enterprise applications of the market.

At the end of the second quarter, our share based on a $38.1 billion market was 33.7%, representing an increase of 1.1 percentage point compared to the first quarter of 2008 and an increase of 7.7 percentage points compared to the second quarter of 2007 of which 4.5 percentage points represented organic growth.

These are very strong share gains and demonstrate our undisputed leadership in business applications.

Another example of our growing leadership position can be seen in the fact that for every $1 of application product revenue added by our closest competitor last year, we added around $2 of product revenue.

Let me now talk about the core areas of our business.

The established business continues to move along as planned.

We continue to see strong adoption of SAP ERP 6.0 as more customers realize the benefits of moving to our new platform.

In fact, we surpassed the 10,000 customer mark, reaching 11,500 ERP 6.0 customers at the end of the second quarter.

That is more than double the amount we had at this time last year.

7,200 of these are productive, which represents approximately 25% of our relevant customer base, therefore, we should see the momentum continue here for quite a while.

The adoption of NetWeaver within our customer base also continued to make excellent progress.

At the end of Q2, we had 42,800 productive systems, representing an increase of 67% year-over-year.

On a rolling four quarter base, SAP NetWeaver revenue increased to approximately EUR1.1 billion, of which 38% was standalone.

As you know, organic growth coupled with tuck-in acquisitions to help strengthen our technology and product portfolio is a primary growth strategy at SAP.

Let me touch on a tuck-in acquisition that we made recently.

The acquisition was a company called Visiprise.

It provided us a big step forward in realizing our perfect planned vision for discrete manufacturing.

Moreover like our acquisition of Versa, it is an excellent example of our SAP benefits of having in place an industry leading business process platform and a best-in-class ecosystem of independent software vendors building on that platform.

Visiprise first received an investment from the SAP NetWeaver fund in 2006.

Soon after that, its solution became an SAP-endorsed business solution powered by NetWeaver and we then also signed a reseller agreement with them.

Since there was significant demand for the solution and we received very positive customer feedback, we decided to acquire the company in order to tap the solution's full potential.

Such a process represents a win-win situation.

For SAP, it is an opportunity to rapidly bring to market cutting edge, highly innovative solutions with significant revenue potential at a low risk, while for companies like Visiprise, getting acquired by SAP represents a viable exit channel.

Best of all since these companies built their solutions based on SAP's open platform from the start, there is no overlap with existing SAP solutions and technology and architecture are consistent.

Our new CRM solution, CRM 2007, is off to a fast start.

Customers are excited about the new product, which includes a brand-new user interface and much broader functionality.

Kabel BW, one of Europe's fastest-growing providers of cable television and Internet and telephone services with more than 2.3 million subscribers, selected SAP CRM to build its foundation for future growth and to leverage the integration with its existing ERP application from SAP.

Finally SAP and RIM announced a significant co-innovation partnership in which mobile users will soon be able to work freely on SAP using RIM products.

The first output expected from this new partnership is a native Blackberry Smart Phone client that will merge SAP's CRM capabilities with core BlackBerry Smart Phone applications.

As you know, another core area of our business is the small and midsize enterprise market.

For SAP Business All-in-One, we continue to make excellent progress.

In the second quarter, the number of customers increased 18% year-over-year to over 12,100 while the number of partners increased 10% for the same period to over 1,000.

To further accelerate the good momentum, we have expanded our fast start program.

In addition to [India], we have also now partnered with IBM and HP.

This program is already up and running in 21 countries across all regions.

For Business One, the number of customers increased by 32% year-over-year to over 20,000 while the number of partners selling the products stood at 1,100 at the end of the second quarter.

For SAP Business ByDesign, we have continued to work on the product based on the feedback we have received from our customers.

We are continuing to execute on our adjusted go-to-market approach and as we outlined during our last quarter, our priority is ensuring that we deliver a top-quality product with high profitability by optimizing the end-to-end process of delivering, selling, and supporting the solution.

Let me touch on the third core area of our business, the business user.

As Leo mentioned, Business Objects is performing very well.

Driving the success at Business Objects as a product portfolio is a product well recognized in the markets.

The product roadmap was published early to provide security and investment protection for our customers.

We have seen that both IT and business are very enthusiastic about the products demonstrating strong endorsements from all types of users.

The integration of Business Objects will continue and the primary parts of the integration are expected to be completed by the end of this year, helping us to further reduce operating expenses and improve the operating margin.

I'm sure most of you have already read about our plans to move all of our customers to the enterprise support beginning in January 2009.

In the six months since its release, the offering has experienced positive market adoption with more than 350 new customers signed on.

Let me finish up by providing some detail and the rationale behind it.

There still is an enormous potential for efficiency increases in corresponding cost reductions when it comes to the management of entire application landscapes.

We have seen -- we have been working very hard to bring down these costs for our customers.

An example was the introduction of our unique enhancement pack technology which has dramatically reduced the cost of implementing new solutions.

We started to roll out the set of tools that greatly facilitate the management of not only SAP landscapes but multivendor landscapes including a growing number of composite applications and processes that link several companies and constantly adapting and transforming business networks.

So in a sense, enterprise support and supervision of the correspondent technologies and services represent the logical transfer of our business process platform strategy to our support operations.

We are convinced that enterprise support will ultimately lead to a net decrease of the total cost of ownership for the overwhelming majority of our customer base.

In closing, as our second quarter performance demonstrates, we remain focused on profitable growth and all of our core business areas, the established business, the midmarket, and business users solutions are contributing.

Our path to continued growth is primarily focused on organic with tuck-in acquisitions to augment our products and technology.

We continued to outperform the market with organic growth even during the integration of Business Objects, which has been very successful to date from both the financial and product perspective.

I would like to end here.

Thanks for listening and we will be happy to take your questions.

(Operator Instructions) Raimo Lenschow.

Good afternoon and well done on a great quarter.

Two questions, if I may.

First of all, I have been covering SAP now for quite awhile and one thing you learn is Q2 you want to stay conservative.

You don't want to raise guidance because Q3, Q4 are very large quarters for the company.

Now you surprised us all with the change of guidance.

Can you maybe talk us through your thinking there especially as we all assume that we are actually heading into tougher times, what gave you the extra confidence there?

The question maybe for Werner, can you maybe talk a little bit about the BOBJ integration on the cost synergy side?

What has been achieved so far in terms of IT, G&A overheads, and what is the impact then that we could assume for the second half?

Thank you.

Yes, it is Henning.

It is several things.

I think it starts with the excellent results in the first half, not just the second quarter.

I think we are standing now at 28% SSRS revenues and you know our range is 24% to 27%.

In parallel, we had as you can imagine a lot of debates internally with our regional heads about the outlook in particular to the third quarter.

And from the management team I think we feel that despite all the toughness in the market, demand for SAP products is there.

So if we put these together with an [LC] pipeline, we feel that it is right and prudent to not change the guidance but to refine the guidance that we expected coming in at the upper end of both ranges.

Werner, will you say something?

Yes, Henning referred to this.

We have accomplished a lot with regard to the integration of the infrastructure.

We started or we completed the migration to for example SAP ERP as of the first of July after three and a half months preparation.

We did other things that accomplished other things on the infrastructure side.

So this means that we in the first half actually had more in investment.

That is the reason for the integration expenses in the second quarter of EUR11 million.

If you look to it from a half-year perspective, it is even EUR20 million (inaudible) there and we will see the benefits coming in the second half of the year.

By then really capturing all of the synergies, you can capture by this harmonization of the infrastructure, so bringing Business Objects completely on the infrastructure of SAP in all areas.

Henning mentioned on top of it all the work done so far, the global procurement side on the facility sides.

All this will then lead to a reduction in operating expenses on the Business Objects side.

You know that this company on a stand-alone basis acted on a very low margin.

We will bring this up now in the second quarter quarter-by-quarter and still will then achieve next year's level we see also within SAP.

Perfect, thank you.

Charlie Di Bona.

Maybe this is most directed at Henning.

We saw, you know Business ByDesign, you didn't talk much about it in the press release.

You mentioned a little bit in the conference call here, but maybe you can give us a little more color on sort of the evolving plans there and how that is affecting both your sort of forward-looking guidance in terms of revenues but also in terms of operating margin as you sort of pare back your spending there?

Yes, thank you.

I think it is important to know that in all our outlooks, in all our planning in the near future, we were extremely conservative with regard to ByDesign.

I think it was the right decision at the end of the first quarter to say quality and in particular profitability for SAP is priority number one.

Because let's face it, we are well on the way with the other two products and gaining share in the midmarket and on the other side.

ByDesign is in its approach unique and we have time enough for that.

So our approach is the following.

We will shift our focus and we are now in the place of preparing the next release, let's say to key indicators, which is not primarily the number of customers or whatever.

It is much more how can we improve factors like TCO and others so that we really achieve these goals of extreme high quality and high profitability for SAP that we have shifted.

And that is the reason why I haven't touched it much today, because I wanted to wait until we have the next release in the market and I can more I would say based on facts, reports, and progress we have made.

Let me add that that doesn't mean we are not, let's say, bringing it to market, but we have refocused ourselves to six markets.

I think we have mentioned these six markets at the end of the first quarter and through these six markets.

Okay, thank you.

Sarah Friar.

Thanks for taking my question.

Congrats on a good quarter.

Two questions.

First, the impact from the maintenance raise, I think you have been a little bit more vocal recently talking about your intention to lift maintenance pricing.

How should we think about that, Werner, as we factor it into guidance through the next call at 12, 18 months?

Maybe before Werner answers, Sarah, just a small comment.

We did not increase our maintenance prices.

We have announced a whole new service, which is a totally different matter.

It is a holistic service offering and he described it briefly in his opening remarks.

There is an end-to-end solution that is there to provide a lot of support for our customers and therefore you can't qualify this as a price increase.

Just wanted to make sure that you have this clear understanding.

By the way, it will be announced to all of our customers in 2009.

In 2008, we proposed this service to our new customers and our new customers have actually adopted it with quite [some] enthusiasm.

350 customers approximately have signed up for it since the beginning of the year.

The second half of the year, we will propose it to all of our customers as an additional service free of charge, part of the normal maintenance service.

Yes, Sarah, this means that if you look to 2008, we are more in an investment mode because we ramped these additional service capabilities up.

And if you look down to 2009, what I originally stated is that we will see a margin increase of 100 to 200 basis points in 2009 and this is, one, related to increasing the efficiency in our organizations and secondly, also associated with this higher contribution coming from enterprise support revenue.

And as of today, we cannot specify what will come from what.

We will provide this in connection with our guidance we will be deliver for 2009 in January of next year.

Got it, but is the assumption that ultimately most customers will make the shift up to this higher end support contract?

Definitely.

Yes, that is our expectation.

Then if I may, just a quick follow-up.

You have come up with a great quarter.

Oracle's quarter was their fourth but was also strong, and even on your market share diagram, you show kind of your big three gaining.

Is that part of what is going on in the market here where the bigger guys are really winning out from a consolidation standpoint?

So that definitely part of your growth is coming at the expense of the smaller guys.

Because I think we struggle a little with hearing CIOs talking about maybe wanting to delay bigger deals and yet the big vendors are still doing phenomenally well.

It's Henning, Sarah.

I think if you follow our presentations over the last years, I think we have shown that two or three years ago that there is a huge untapped market which we call -- which is not tapped by the big three, which was at that time two-thirds.

We always pointed to it and said, okay, to the one extent we will definitely compete against each other.

That's one thing.

But on the other side, there is a large white space so to say of smaller vendors which, you are right, normally struggle a little bit if it becomes to a tough environment because what companies are buying is also I would say the future.

If they buy SAP, they are convinced that they can run on SAP for the next 10, 15, 20 years.

I think this reliability and long-term strength is key and therefore, I agree that such an environment is always in favor of strong large players.

Thank you very much.

Michael Briest.

Leo, or Henning, perhaps you could talk to the German performance in Q2.

Although it is sort of (technical difficulty) it did sort of seem a lot weaker than the rest of Europe.

Maybe also on Japan whether there's any major fixes you need to do there?

And then secondly, you have in the past given us some metrics on the size of deals and I am wondering was there any change in the shape of the business?

Were you dependant on seeing more large deals or smaller deals that came through to make the numbers?

Thanks.

I will try to give you the answers to your question.

Germany grew by about 11% in SSRS and it did a good job.

I just want to remind everyone that we have said at the beginning of the year that we expect Germany to grow in single digits and with 11%, they are actually above that target, I actually expect them to come in at high single digits.

So they are doing a good job and if you look at the absolute numbers that are being generated here in the German market; it is actually a phenomenal job.

As to Japan, you are right to point that out; that is not a market issue.

We had some operational issues in Japan in Q2, which we have already addressed by the way and we hope that we can consider Q2 as just a glitch and recover from that and have a normal performance in the Japanese market.

As to the geometrics, we -- deals less than EUR1 million were about 45% of order entry last quarter.

Q2 2007 it was about 43%, so no really big change and deals bigger than EUR5 million were 24% of order entry.

In Q2 2007, it was about 22% of order entry.

Again, not a revolutionary big change.

Thank you very much.

Werner, perhaps just a final one for you.

Could you give us an idea of what BDD costs were in the quarter and whether you are sticking with your earlier guidance for the year there?

Yes, remember we said that the spending in 2008 would be around EUR100 million and we will come to this EUR100 million in 2008.

We do not want to provide quarterly details now.

Okay, thank you.

James Dawson, Morgan Stanley.

I have a couple of questions.

Firstly, in terms of the headcount targets, Werner, you did not add too many people in the second quarter and your target is now 3,500.

So it looks like you are going to reaccelerate in the second half or is there a possibility that you might end up below your 3,500?

Second question is around just the emerging markets business.

You talked about China and India and in previous quarters you have kind of given us a growth rate for the BRICs just to give us an idea of how they are going on as group of countries.

Can we get that again?

Let me start with headcount growth for 2008.

It is true in the first half we had roughly 1,400 added to our base if you forget about all the acquisitions.

Now we reduce our original target of 4,000 to 3,500.

Maybe that is already the high end of the range we will achieve, but that is what we have as intentions so far.

But be aware and be sure that we only hire according to the progress of the business we make on a quarter-to-quarter basis.

Yes, and regarding BRIC, Jim, thank you for the question.

China had an extraordinary high-performance way above 50% actually.

India was in the same range.

Brazil also had a spectacular quarter on top of a very spectacular quarter in Q2.

That kind of gives you an indication of how the BRIC countries performed.

Is there --?

In terms of pipeline, Leo, do you see anything altering there?

Nothing to change this kind of pattern?

Not really, no.

We are still very optimistic about the overall business performance of the BRIC countries.

You might have one quarter here or there, but that is not really the issue.

The perspective that we have for the BRIC countries is a very healthy one.

Okay, thank you very much.

Ross MacMillan.

Just a question on the [four spot six CE] or installed base transition to ERP 6.0.

That seems to have kind of really accelerated and I just wondered if you could give us some perspective on whether you think that transition drives licensed revenue in its own right or whether you think it paves the way to more opportunity to sell licenses as we go forward?

So is it kind of benefiting you now or is it more that you will get the benefit to come?

Thanks.

Ross, it's Henning.

I think it is to some extent both.

It is key that our clients are seeing this momentum, because if you are in constant touch with our user groups, you can see that this momentum is to some extent fulfilling prophecy.

The others are just following because it seems to be easy and beneficial.

I think overall it's more benefiting us in the periods to come because once customers are there, I think the next -- hopefully the next step is to go from ERP to the suite.

As you know, as the entire product strategy around the suite is to make the suite a harmonized suite where it's not so much about these IT-related three-letter acronyms like CRM, ERP, etc.

but more end-to-end business processes which are addressing the lines of business in a company.

So I think if ERP as a front-runner goes well, I think there is a high likelihood that there is an impact, a positive impact on the other components of the suite.

Gerardus Vos.

Thanks for taking my question.

Just two questions, if I may.

First of all in the US, if I calculate the underlying organic growth rate there, there was a decline there in the first quarter and that bounced back very strongly in the second quarter.

Could you just give me a bit of a feeling how the sales cycles are there and what is really driving this strong growth in the second quarter?

And then secondly also on BOBJ, if you do the same kind of calculation, you get to the conclusion that BOBJ organically was growing around kind of around midteens for the second quarter, again very strong given the kind of integration.

Again, could you just give me a bit of feeling what is really driving that?

Is that driven by kind of an increase in standardization deals or is this also volume?

Thank you.

This is Leo.

I will try to give you the answer to the question.

What happened in the US in the first quarter was probably a bit of a over reaction to the overall market sentiment that people had.

So you basically had lots of hesitation in the market and people becoming very nervous and actually either freezing or making small transactions.

You will remember in Q1, we had actually a very large number of transactions in the US.

The average deal size was smaller.

In Q2, the situation has somewhat normalized from that perspective.

We are now facing with demand that is strictly value-driven where people demand high and very demanding business cases, and moreover, are checking out the capability of the particular vendor to deliver that value.

Value delivery is as important as value expression and that is an environment that (inaudible) to SAP extremely well.

We are ideally placed to both explain the value and then deliver the value, be it if it helps the US to achieve growth or efficiency or both, whatever the case might be.

That situation has happened in the US in Q2 and when we look at the pipeline in Q3 and in Q4, we actually see a similar situation for the future as well.

As to Business Objects, we see that the business is actually doing very well.

As already mentioned, what you see happening is that some companies in (technical difficulty) start to standardize now on a wall-to-wall basis on Business Objects, a little bit like they are doing around SAP as well.

But I am very pleased to see that also the volume side of Business Objects is growing fast and we are actually penetrating a large number of accounts with Business Objects products and thereby ceding, if you want, since the future opportunities there as well.

Thank you.

Knut Woller.

Knut Woller from UniCredit.

Thanks for taking my question.

In this year, you were reviving the margin story.

You were indicating that R&D costs as a percentage of revenue should decline from the current 14% peak.

If we look at your historical range, maintenance revenues should benefit from the measure you were announcing starting January '09.

And one important trigger I see at least is the contribution from the indirect channel.

Could you give us an idea where we are in this indirect channel and what your plans are?

If I remember correctly, it should be around 10% of your license revenues.

Where do you want to go from here in this direction to further utilize margin potential?

Yes, this is Leo.

You mentioned a certain number of aspects.

Let me just try to pick up your comments on the indirect channel.

The indirect channel had good performance in Q2 and actually continued to grow fast.

We are currently at a small double-digit number in channel contributions and if it continues like that, we feel comfortable that we will actually be in a situation where the indirect channel will contribute as we move forward the year 10% that we had earmarked to achieve.

Maybe, but that's a little bit speculative so I don't want to be taken too literally here, maybe even slightly more.

But we feel reasonably confident that the 10% channel contributions will be achieved.

The channel is performing well.

As you know, we have in fact a different channel strategies to many of our partners.

We don't look too much to volume.

We look to quality.

Therefore we have master channel partners for All-in-One and we have roughly 1,100, 1,200 partners each with Business Objects, for Business One and for All-in-One.

These are high quality partners and they are doing a very good job.

All right, thanks very much.

Mark Bryan.

Most of my questions have gone, but I will just ask a couple if I may.

Firstly on Japan, could you just explain a little bit more about the execution issues and how quickly you would expect to bounce back there?

Was it similar to the sort of issues you had in Q1 in North America?

Secondly perhaps one for Werner, on the gross margins in services they bounce quite strongly sequentially, should we consider that sort of level as sustainable as we head into the second half?

Thank you.

Mark, this is Leo.

Let me just give you some more color on Japan.

First of all, to put things into perspective, half year SSRS growth in Japan is 24%, so it is not exactly bad.

We had a few strictly purely operational issues, internally operational issues in that market in Q2.

It had nothing to do with behavior in -- like we had of the overall market like we saw that in the US in Q1.

Therefore it was easy to address, they have been addressed.

As I said early on, I hope it is not going to have any long-lasting repercussions on our business.

Okay, thank you.

With regard to the margin, I think it is a starting point Q2 with the expansion of 50 basis points, but in order to achieve our upper end of the range we provided for the margin, it is then close to 29%.

In 2008, we have to deliver an accelerated margin expansion quarter-over-quarter now.

Okay, thank you.

Jochen Klusmann.

I have two questions.

One is for Leo.

It's just a follow-up on what you said about the US.

I'm just trying to figure out when you said that the trend that we've seen in the recent quarters, that is kind of like what we should also see going forward.

Is it something you referred to the strong growth we had in the second quarter or would you more refer to the first half because we had some distortion from what I understood from Q1 into Q2.

Then the second question is for Henning.

You were cited this morning or quoted on CNBC by saying that the backlog is good.

Now, I remember in the past every time you mentioned backlog or pipeline usually you were more upbeat.

You said stuff like very robust or very strong backlog -- I mean good, doesn't seem very exciting.

Is it just a misquote or is it an overinterpretation?

Can you just comment on that?

Let me try to answer you with your last question first.

I was trying to illustrate the behavior of the buyers.

I wasn't trying to make the prediction of this is the other growth rate for the US.

I do hope that the behavior, and we actually feel reasonably confirmed about that, that the behavior of our prospective customers and customers in the US market will stay the way they acted in Q2.

And therefore, we believe that our pipeline, our forward-looking calculations for the US market have historically now (multiple speakers)

I think people who know me for a long time know that I'm not the guy who is making a lot of enthusiastic announcements.

So I think in such an environment with such good results and refining the guidance at the end, I think a good pipeline is really a good pipeline.

Okay, great.

Thanks.

Thank you very much.

This concludes today's earnings call of SAP.

Thank you all for joining us and goodbye.