SAP SE (SAP) 2008 Q3 法說會逐字稿

Welcome to SAP's Third Quarter Results Conference Call.

This call is being recorded.

Today's call will be hosted by Henning Kagermann, 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 third quarter 2008 results.

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

Werner will discuss the Q3 financials in detail.

Leo will comment on the current business environment and our regional performance and Henning will then provide some further in depth commentary on the quarter and SAP's product successes.

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, intent, 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 including SAP's Annual Report on Form 20-F for 2007 filed with the SEC on April 2nd, 2008.

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

And I would not like to turn the call over

Thank you, Stefan, and good afternoon; good morning.

Before I begin, let me say that I will be speaking mostly about non-GAAP figures as they relate to the operational performance of the Company.

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

The difference between US GAAP and non-GAAP figures are the result of two effects in the third quarter; first, the exclusion of the write down of deferred support revenues in the amount EUR41 million and second, the exclusion of acquisitional related charges in the amount of EUR76 million compared to EUR18 million in the third quarter of 2007.

With that, let me give you the highlights of the third quarter.

Non-GAAP software and software related service revenues for the third quarter of 2008 was EUR2 billion, which represented a year-over-year increase of 22% at constant currencies.

The contribution from SAP's standalone business was 7 percentage points at constant currencies.

The growth in non-GAAP software and software related service revenue came from year-over-year constant currency increase of 11% in software revenues, 29% in non-GAAP support revenues and 41% in subscription and other software related service revenues.

Third quarter professional services and other service revenues were EUR748 million, which was an increase of 16% at constant currency.

Consulting revenues of EUR617 million increased 19% at constant currencies and training revenue increased 7% at constant currencies.

Non-GAAP operating expenses increased by EUR276 million to EUR2.1 billion, off 15% year-over-year.

Two-thirds of this increase is due to the Business Objects acquisition and the related integration.

Included in the non-GAAP operating expenses are EUR14 million of Business Objects integration, EUR14 for the Business Objects integration, which are not acquisitional related charges.

This represents a negative impact of approximately 50 basis points to the non-GAAP operating margin at constant currency in the third quarter.

Non-GAAP R&D expenses increased 11% for the third quarter and represented 14% of total revenues compared to 15% of total revenues for the third quarter of last year.

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

We hired an additional 1,229 net FTEs since the third quarter of last year.

Of that total 493 FTEs, or 40%, 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 20% for the third quarter and represented 22% of total revenues compared to 21% of total revenues in the last year's third quarter.

The increase in non-GAAP sales and marketing expenses was mainly due to 713 additional sales and marketing FTEs year-over-year.

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

Non-GAAP G&A expenses increased 28%, or EUR34 million, for the third quarter and represented 5.5% of total revenues compared to 5% of total revenues in the same period last year.

The majority of the EUR14 million we spent for the Business Objects' integration are included in G&A.

Overall the Company's non-GAAP operating margin at constant currencies were 26.3% for the third quarter, which represents an increase of 50 basis points year-over-year.

And again, the Business Objects' integration expenses impacted our margin of 26.3% negatively by 50 basis points in Q3.

The increase in the overall operating margin from a run rate perspective was 100 basis points and was partly as a result of the ongoing successful integration of Business Objects.

Let me give you just a brief example what we have achieved in this quarter.

July 1st marked a key date in the Business Objects' integration process, since it was the cutover date for Business Objects employees for using SAP's system-- processes and systems.

During month of July the function [will be] supporting the areas of finance, sales, support, HR, marketing, partner operations, field services and maintenance renewal were successfully migrated.

All Business Objects employees are now working on SAP's standard software environment.

The non-GAAP software and software related service margin was 83.7% for the third quarter of 2008, which is an increase of 160 basis points year-over-year.

The increase in the margin was mainly the result of continued revenue growth along with the less proportionate increase in cost of support and the reduction in cost of purchase licenses.

The non-GAAP professional service margin was 22.1% for the third quarter, which is a decrease of 3.6 percentage points year-over-year.

The decrease in the margin is mainly the result of higher third party usage as well as consulting and training margins from Business Objects, which are below SAP's professional service margin.

As a result of the mixed margin performance in product and service, our 2008 third quarter non-GAAP gross margin increased by [18] basis points to 67.1%.

In the third quarter of 2008 the US GAAP effective tax rate of 31.9 is lower compared to 35% in the third quarter of 2007.

This is to a large extent due to the 2008 German tax reform, which included a reduction of the German corporate income tax rate from 25 to 15% along with some relief in trade taxes.

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

Free cash flow for the first nine months of 2008 was EUR1.7 billion, which is an increase of 65% year-over-year.

For the first nine months of 2008 the primary use of free cash flow was for our annual dividend, which was paid in June, acquisitions and shareholders.

For the third quarter we bought back 2.8 million shares for a total of approximately EUR104 million.

In the first nine months of 2008 we invested EUR487 million in share agreed purchase, this which is basically the amount we intended to spend for the full year.

In the third quarter we added 158 FTEs organically and 258 FTEs from acquisition, which brings the total headcount at the end of the third quarter to 51,863 full-time equivalent.

Since there's a hiring freeze in place, we do not expect this number to change significantly for the remainder of the year.

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

Please refer to the Press Release issued for details today.

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 an update on the business environment and give you some additional color on our regional performance.

As you know, we are in unprecedented challenging lower economic environment that began with the acceleration of the financial crisis in the second half of September.

Despite the difficult operating environment, however, we were able to maintain our double-digit growth rate in software and software related service revenues for the 19th consecutive quarter.

Moreover, we continue to report double-digit growth in each region and show strong attendance at our ticket events in both Las Vegas and Berlin with 6,000 attendees and 4,500 attendees respectively.

Importantly as well, our 80% run rate remains very high, including against our next largest competitor.

This demonstrates our ability to out perform even in a tough environment and we don't expect that to change regardless of the environment in which we operate.

When the financial crisis accelerated at the end of the third quarter it impacted our business in all regions with an unprecedented sharp downturn in business activity.

Customer reactions became unpredictable as the operating environment became more difficult.

Some customers extended or postponed decisions while waiting for clarity on the economic situation.

This was more apparent for the small businesses and mid-sized companies due to their constrained access to capital and credit, and resulted in a lower than usual SME contribution.

The third quarter became mostly a large enterprise driven quarter but large enterprises were also impacted by the liquidity concerns as well as some psychological effects of the economic situation.

While the pipeline remains strong relative to historical levels, closure rates have obviously become less predictable than in the past.

Some deals that slipped in Q3 have already closed in the fourth quarter but it is still too difficult to predict for other deals which ones will come back in the fourth quarter and which ones will get extended into 2009.

We are working intensively with our customers to focus on those business processes that matter the most to their businesses and together with our partners are actively identifying ways to get our customers faster implementations and even quicker ROI.

To help our customers endure the current economic cycle we have initiated specific programs that are offering quick implementations of compact ready-to-run software packages targeted at specific business processes to alleviate pain points caused by the challenging environment.

For instance, we are offering customer software packages for liquidity management, inventory and purchasing optimization and energy data management.

These are just some examples of products offered through this new program.

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

In EMEA third quarter non-GAAP and software related services revenues increased by 19% at constant currency with Germany increasing by 20.

While EMEA overall succumbed to the global financial issues that caused a slowdown in customer spending there were some pockets of strength, including Germany, some countries in Southern Europe and the Nordics.

Areas of weakness were the UK, Russia and France.

Our win rate remains very high in EMEA and we continue to see strength in sales of Business Objects' products.

Key contract wins in the EMEA region were the Bundesagentur fur Arbeit, [Impresco PV] and [Moscoskawa Obedinania].

In the Americas third quarter non-GAAP software and software related service revenues increased 26% at constant currencies and the US increased 23% at constant currencies.

While the financial crisis has a large impact on our ability to close deals at the end of the quarter in the US, some positive signs included a good amount of new customers, even including some large customers consolidating systems and replacing legacy systems and the continued strong win rate against our next largest competitor, including replacements.

Especially good was the strong acceptance we are seeing for products from Business Objects, which contributed strongly to the results in the US.

Results in Latin America were good as Brazil had another strong quarter and Canada also performed well.

Key contract wins in the Americas regions were Loblaw Companies Limited, Monsanto Company and Servisios Liverpool in Mexico.

In the Asia Pacific Japan region third quarter non-GAAP software and software related service revenues grew 24% at constant currencies.

APJ, which is a large SME market for us, saw a significant drop in growth rate in the SME business.

China and India bucked the trend, however, with strong performances in each country.

While customers are still spending, it is occurring more so from the large enterprise.

In Japan non-GAAP software and software related service revenues were up 11% at constant currencies.

Key contract wins in the APJ region with Samsung as the US company, Panasonic operation and Gansu Electric Power Corporation.

Touching on industry performance, we had good performances from consumer products, life science chemicals, public sector and banking.

In consumer products we signed our second global enterprise agreements this year.

This one was Proctor and Gamble.

The GEA with Proctor and Gamble extends our position as a leader in providing comprehensive enterprise software for the consumer product industry and in collaboration with P&G SAP will leverage its industry expertise and product offering to help create a standardized global IT landscape to further drive scale and innovation.

SAP will provide P&G broad access to licensed SAP solutions and technology accelerating the worldwide rollout of P&G's end-to-end business solutions.

In consumer products we also announced contracts with [Brownshoe and Craft].

Brownshoe will replace some of its multiple home grown and various third party applications with SAP Business Suite applications to provide tightly integrated solutions neutralizing the industry specific apparel and footwear applications to help manage its entire supply chain.

Craft has adopted the SAP NetWeaver technology platform deploying SAP Master Data Management to integrate and consolidate data both from SAP and non SAP legacy systems as the company has embarked upon a North American rollout of our flagship SAP ERP product.

In banking we announced that HSBC will create a leading edge bank line integration solution using the SAP NetWeaver technology platform to streamline and automate the bank's communications for the delivery of banking services to its corporate banking clients.

In public services we announced that Plexis, a not for profit healthcare support services provider in Canada, will implement SAP Business Suite applications and the SAP for healthcare solution portfolio to support supply chain, finance, payroll and human resources processes across its member healthcare organizations.

In another announcement, the State of Louisiana has selected SAP to run all of its financial and procurement business processes.

This was a win against our next largest competitor.

Some other notable wins in the third quarter from the aforementioned strong performing industries were [Campos sur Company], [Hanridge Hammacher] and Callaway Golf Company in consumer products, [Perigo Company] and [Zembenroom SPA] in life sciences chemicals, [Abutucantori] and [Monitsepud] in [Mendelin] in the public sector and ATB Financial Central Finance Company and Imperial Bank Limited in banking.

The relationships we forge with our partners are without a doubt a significant strength to SAP.

We look to continue to further strengthen our relationships each and every quarter and in the third quarter we extended our relationship with a new offering with one of our long-term partners, Accenture, around Trade Promotion Management.

The offering combines Accenture's industry expertise and business process knowledge with the innovative SAP Trade Promotion Management application, which Accenture helped to develop drawing on its proven system integration capability.

As part of its offering Accenture will leverage SAP Trade Promotion Management and applications available in the latest version of SAP Customer Relationship Management.

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

While we also saw an impact with the Business Objects business in the last two weeks of the quarter, Business Objects turned into one of the highest growth quarters we have seen in many years with strong growth in each region.

This is the second consecutive quarter of significant strength providing further evidence of the success we have had in integrating Business Objects into SAP.

The sales forces are working very well and Business Objects is getting a big boost from its association with the SAP sales force.

We are seeing tremendous acceptance from customers for Business Objects.

Much of our success has been our ability to sell Business Objects into SAP accounts as our customers are truly valuing the Business Objects offering.

It has allowed our customers to unify their reporting systems with the most complete business intelligence platform in the market today and then easily integrate the Business Objects supporting systems into SAP.

And let me now turn it over to Henning.

Thank you, Leo.

As Leo already mentioned, we entered a very difficult operating environment just as our quarter was coming to a close.

In my 26 years at SAP I have never witnessed such a sharp decline in customer spending in such a short period of time.

Making matters worse was the fact that the third quarter is typically more back end loaded than most other quarters due to the vacation season in July and August.

Regardless, we still closed a significant amount of business in the third quarter reporting strong growth in software and software related service revenues.

In fact, if we were a company reporting in US dollars third quarter growth would have been even higher outperforming the market.

Our non-GAAP software and software related service revenues in US dollars would have increased 26% in the third quarter.

We also continue to report strong year-over-year share gains and at the end of the third quarter our share based on a USD38.7 billion market was 33.4% representing an increase of 6.5 percentage points compared to the third quarter of 2007 of which 3.3 percentage points represented organic growth.

\ However, we are very mindful of the pervasiveness of the current economic situation, as you can see by our revised guidance, so we have taken the necessary steps to control costs.

Therefore, we expect to still deliver strong operating margins and earnings despite the tough economic climate while maintaining enough flexibility to take advantage of further growth opportunities when the market recovers.

As you know, we have been in business for more than 35 years and have weathered many economic cycles, the last one taking place early in the decade.

We succeeded during that down cycle not only financially with posting strong growth in operating margins and increasing market shares but also technologically by building the most innovative solutions in the industry that our customers are using today.

Therefore, it's important that we continue to innovate even during the current cycle to ensure that our customers are receiving and running the most advanced of the solutions in the industry to make their businesses run better.

As you know, for many years we have focused our R&D efforts on developing our software to be easy to implement and easy to run creating lower total cost of ownership and faster return for our customers.

Our solutions have allowed them to achieve high productivity gains and giving them the ability to act faster to changing market and industry environments when making their businesses more responsive.

This is exactly what they need in today's challenging environment.

Let me give three examples of our innovations, which will help our clients in these challenging times.

Our service oriented architecture enables SAP Business Suite built on SAP NetWeaver has achieved much success to date.

At the end of the third quarter we had 12,800 ERP customers, which was an increase of 78% compared to Q3 last year.

The total 8,200 are productive for the increase of 120% from the third quarter of last year and for NetWeaver we had 46,700 productive systems representing an increase of 56% year-over-year.

On a whole in four quarter base year-over-year SAP NetWeaver revenues increased 10% while NetWeaver direct revenues increased 26%.

The second example is our enhancement packages for SAP ERP, our unique technology of delivering innovation without disruption to customers that no other competitor can offer.

Our customers can implement these enhancement packages according to their own time frame and specific business needs.

We recently announced general availability of our third enhancement package for ERP.

It delivers 150 new business functions that include 400 new capabilities about 180 industry enhancements and 45 enterprise service partners that include about 560 enterprise services.

The third example is SAP NetWeaver BI Accelerator, which offers unprecedented performance for explorative search in large data volumes.

For example, a response time of less than one second for 1.2 billion records.

We have seen strong demand for this product in the current environment in combination with Business Objects and other things.

We continue to work towards building out the Business Objects' product lines.

The next major release of Business Objects XI solutions will include new innovations that address the needs of business users and will target enterprise with market volume and see OEM customer base.

It will also support embedded analytics for SAP Business Suite and performance optimization applications.

Business intelligence as a whole remains a top priority to foresee results so even if budgets get cut business intelligence remains at the top of the wish list.

Those can gain quick insight into their businesses with transparent analytics, that can assess risk compliance and new business opportunities.

Also, business intelligence products can be packaged in much smaller deals providing for quick implementations and faster returns.

With all of these innovations we are in a good position to weather the current environment.

These innovations also make it much easier for us to offer our customers smaller, more targeted software packages with lower TCO to help them through these challenging economic times.

And finally, there's our portfolio of solutions for small businesses and mid sized companies, which are very suitable for this type of environment offering quick implementation, ease of use and fast returns.

An example is our fast start program for SAP, Business All-In-One solutions.

In the third quarter the number of customers on SAP Business All-In-One increased 21% year-over-year to over 12,700 while the number of partners increased 13% for the same period to over 1,100.

For SAP Business One the number of customers increased by 33% to 21,000 while the number of partners selling the product increased to nearly 1,200.

For SAP Business ByDesign we shipped the latest release with significant improvements based on the feedback we have received from our customers.

In hindsight, we made the right decision for a more controlled rollout of products to focus more on its profitability.

In closing, let me say that selling the economic times are not new to us.

As we have done successfully in the past, we will strike the best possible balance between delivering innovation and bottom line growth.

Our solution delivers the best business practices that help our customers streamline costs, increase efficiencies, maintain compliance and drive long-term growth.

This is why we are better positioned than most others in times like these.

The opportunities that materialize from such economic situations and similar to past down cycles we are confident that we can emerge with stronger and even more efficient Company while maintaining a firm hold on our market leadership.

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

(Operator Instructions) Our first question comes from Ross MacMillan of Jefferies.

Just a question maybe for Werner first, the framework you've laid out to hit the 28% non-GAAP constant currency margin, it I think by my calculation implies about a 14%, one four percent, sequential increase in operating costs and that's actually in line with the last couple of years so given your hiring freeze and cost control I was just curious is that the right math and if so, is that just conservatism that you've built in there?

Thanks.

I think what we said is that if you look to the fourth quarter we will reduce our operating expenses for the quarter by roughly EUR200 million to achieve this 28% but let me reiterate one point.

We only can achieve this 28% with if we deliver at least 20% on growth on the SSI side.

You are right.

This EUR200 million roughly represents 10% of our cost base in the fourth quarter and to be honest we couldn't have delivered this or targeted this amount if we wouldn't have started early in the year to be very cautious with our spending.

You remember beginning of the year we said that we would increase our work force by 3,500 and we added as per the end of September roughly 1,500, as I mentioned previously, and we will not increase this significantly so you see our spending behavior in the first three quarters helped us now to target for this EUR200 million reduction in the fourth quarter.

And, Werner, just a follow-up the first nine months of the years and I adjust my operating margin for currency and for the Business Objects integration costs that are running through the P&L are not excluded, do you have that number what the operating margin has been impacted by?

If you look to the first-- to the third quarter only, we had integration cost for Business Objects of EUR14.2 million and this represents 50 basis points so if you start with the margin at constant currency it's 26.3 plus 50 basis points it's 26.8.

If you look to it from a nine month's perspective, the numbers are until we have Business Objects for the first nine months of EUR32.6 million and remember we had one other factor on the re-spending item in the second quarter.

This was the settlement with [I2].

This adds additional 24.4 and both add up to EUR57 million and this represents 60 basis points, so if you look to it again from an operating margin non-GAAP at constant currency it's 24% plus [60] basis points it's 24.6.

Michael Briest of UBS.

Leo or Henning, perhaps you could talk a bit about the portion of your customers that rely on financing and what you're planning to do or hoping will happen to help those customers close deals?

And then secondly, can you maybe give some color on the proportion of the deals that slipped at the end of September, which have closed already?

Thank you.

Actually the number of customers that rely on our financing, financing that is provided through the SAP channel, is actually very small, a few hundred so not a meaningful number.

I can't comment on the financing that these companies might actually obtain through other channels not known to us.

What we are doing in Q4 is we're trying to help these customers find easier financing so that financing should not be necessarily the most difficult thing for a customer who needs to do an IT project.

As to the Q3 deals that have slipped, a small number has already closed but it remains difficult to assess which one of those will actually close in Q4, which ones will close in 2009 or which ones might actually not close at all but that investigation is ongoing and we look at this almost every week.

Thank you and then perhaps you could give us an update on Enterprise Support and your negotiations with the customer user groups there and how confident you are on the take up of that next year.

Thank you.

I am happy to report that we have received our other feedback from our customers and from the user groups.

We are engaged in a very, very proactive and I have to say very positive dialogue with the user groups.

Enterprise Support has been slightly enhanced thanks to the feedback we have received.

We have been able to adjust our portfolio and I am very confident discussion is more or less behind us or we are about to put it behind us.

Many customers understand the value of Enterprise Support, actually the uptake in the market is significantly better than what seems to be transpiring in the press.

We have several thousand customers who have now signed up to it and I hope that we will be able to endorse the support of the user groups in helping customers understand the value of Enterprise Support.

James Dawson of Morgan Stanley.

Werner, just on the EUR200 million of costs that you're looking to take out of the business in fourth quarter, I wonder if you could talk about maybe just give us a little bit of color about where these are coming from?

What are the largest discretionary costs that you have at your disposal?

How much of the costs are variable that are going to come down in the quarter?

Also, perhaps if you could just-- I mean should we be thinking of that as a run rate for fiscal '09 for EUR200 million?

I can answer these questions.

First of all I would say let's look into three big buckets here.

The first one is around personal expenses and as a consequence that we do not hire, that we do not replace, we will see a reduction of personal expenses compared to what we originally had planned for the quarter.

Secondly, we should look to all the third party expenses we have and across the Company whether it's related to development, to G&A, to professional service where we look into reducing this dramatically in the given quarter and finally it's around travel expenses where we try to reduce travel expenses to a minimum and minimum means that we really focus on customer activity based traveling rather than traveling only for internal purposes.

These are the three areas we are looking in and we made it clear in our organization that this is not something only for the fourth quarter.

We want to see this also running in 2009 so our run rate going into 2009 should also be positively impacted by these measures.

Thanks.

Is there any way you can put some numbers to those three buckets that you've talked about there?

No.

What about in terms of the not replacing?

What's the kind of attrition rate at the moment in terms of people, the annual attrition rate?

I think-- I don't know, Stefan, whether we have ever published the attrition rate but be aware that we only look for those which is net employer related and have a good grab around these replacements or shortfall in replacements in our organization going forward.

One last one on the cost, what about the sales commissions, the variable elements of selling costs?

Can you give us any idea about what percentages you normally pay or any kind of steer there?

I think Leo will take this one.

The only comment I can make, James, is that commissions are variable.

You get that.

We get that only too well.

Thanks yes.

There is no difference within the finance industry and the software industry.

Got it.

Thanks, guys.

[Johannes Reese] of [Commonvest].

Maybe some follow-on questions first on can you give us average deal size.

Have average deal size decreased or increased?

You had a couple of large deals in the quarter.

And then on Business Objects we learned Business Objects had a good quarter so for how much maybe Business Objects in on the way to close to profitability gap between the old SAP group so for the target was that I can remember that at the end of next year Business Objects should be at the same level like SAP old.

And on the run rate of the close to EUR200 million we discussed before is that right to assume we should not calculate four times 200 or it's because Q4 is such a big quarter it's more a figure from ahead of 5 to EUR600 million you can spare next year or is it even more?

I would say so.

Until the fourth quarter from a spending perspective is the highest, the second highest is the second quarter and you cannot simply multiply it by 4 so from that perspective you are right, Johannes.

And I've regarding the deal sizes Leo will take this under.

I think what we cannot do is to compare deal sizes quarter-over-quarter now with the Business Objects and (inaudible) and integration we closed much more deals and obviously the deal size is much lower than compared to SAP's standalone, so it wouldn't make any sense to talk about this.

Fair point yes.

Profitability yes.

I think you all know that the profitability of Business Objects was much lower with them on SAP had now.

With all the integration effort this increases quarter-over-quarter but we still have room to improve and come to the same profitability as SAP has over the next I would say two to three quarters.

Given this maybe a follow-on, former statements have been that you're expecting for next year a 1 to 2 percentage margin increase partly based on Business Objects, partly based of maybe the changes on the maintenance side.

Now we have more uncertainty about the top line but do you still think given all the uncertainties we have it's achievable?

I think but what we have to do today is to not to talk about 2009.

We have a very difficult economic environment.

We only can talk about what we see today and that's related to the fourth quarter and with regard to 2009 we will come back in January and come up then with the guidance for the year.

More we cannot say today.

Charlie DiBona from Sanford Bernstein.

Henning or Leo, last-- at the end of the quarter when you did your pre announcement you characterized the weakness in Q3 as being predominantly or at least disproportionately small and medium enterprises and also sort of at that point having a hard time predicting whether these-- whether people were really dropping out of the pipeline or just delaying their purchase decisions.

I was wondering if you could maybe give us an update a couple weeks later here on how things look going into Q4 here on those two fronts?

You're absolutely right.

What happened in the second half of the quarter was indeed that the sudden drop in the small and medium size enterprise business was actually rather significant.

It's one of the reasons why we had this significant impact.

In the meantime we are continuing to talk to our SME prospects and partners.

We have come up with a series of offerings that are particularly geared towards the SME market.

We have found some partners out there that are willing to help also these companies with a more advantageous or more at least available financing because one of the reasons that caused these companies to stop was simple lack of financing.

But I think it is a little bit premature at this moment in time to make a prediction on what is going to happen in the SME space.

The good news is we have a very large volume of deals happening in that environment so there is a lot of demand and we are engaged through all of our channels in discussions with these people but, as I said early on, it's very hard to predict closure rates and I would rather prefer not to make a comment on that and let's see what happens.

And just a quick follow-up, when you say you're helping people look for financing, is there any opportunity for you to use your own balance sheet to that end and extend some financing or terms to customers?

Maybe I can take this one, Charlie.

I think what we have set up is partnership with Siemens Financial Services and they are with us approaching the customer and they ensure the financing of the transaction so it's not financed by SAP.

We are looking to get the financing from partners.

Raimo Lenschow from Merrill Lynch.

First of all thanks for the guidance.

I think it makes sense not to guide on a top line.

Second question, Leo, and you might not like that.

If I look around and the other software companies in Q3 you seem to be the only one with a dramatic miss.

How much of that is your position in the market and how much of that is sales execution as well that you took your eyes off the ball a little bit after a good start to the quarter in July?

And then on the-- there have been rumors on the market on Business ByDesign and the potential delayed volume impact.

Any comments maybe on that?

Thank you.

Okay well, I'll try to give you a transparent answer.

I've been in this business for quite some time.

I can't remember any quarter where the scrutiny was on the operational efficiency as good as it was in Q3 as by the way it is every quarter and actually every day.

So I do not believe that there was a significant impact on-- in the quarter that was caused by operational or sales ineffectiveness just to be absolutely clear.

I believe that they were actually well on tract and, by the way, if you look at the number and the growth that we have achieved in the quarter it indicated we were well on track.

You have to remember Q3 is a bit of a particular quarter.

We do have the full impact of the holiday period but I would dare to say that if the quietness that started in the middle of September would not have occurred I think we would have achieved a very normal, very respectable quarter but perfectly in line with our guidance.

I also want to point out that 22% as a service growth in constant currency in such a quarter actually indicates that the sales force actually knows how to perform.

Business ByDesign had no impact because it was not supposed to have any impact.

As you know, we have made a very clear decision to drive Business ByDesign very carefully and maintain it in such a way that we drive it for profitability and therefore we had no expectations from a sales point of view in Business ByDesign.

And just to preempt the last question maybe, Enterprise Support neither had no real impact on the sales figures.

Actually when you talk to customers it had-- there was no impact at all.

Just to give you one example, Germany had a very strong quarter and you would have-- you might have assumed if you would read the newspapers that Enterprise Support would have had an impact in Germany, which wasn't the case.

And sorry my question on Business ByDesign were more relating to some comments that the volume starts would not be at the beginning of '09 but in the Autumn fall of '09.

Any comments on that?

No.

I think we made it very clear already in previous earnings calls that we were going to drive Business ByDesign very carefully, that ramp up of Business ByDesign was going to be done in a very, very step by step, very controlled fashion and there was no indication anywhere whatsoever that By Design was supposed to be in any form or shape in volume in the third quarter and just to preempt not in the fourth quarter either.

No I know now.

Gerardus Vos from Citigroup.

I've got three questions if I may.

First of all, on the kind of current pipeline and kind of current conversion, if you take in consideration what you did see during September, has that really changed during the current month and what are you guys implying for the kind of 20 till 22% growth?

Do you expect a kind of continuation on the kind of difficult conversion rates or do you actually expect an improvement?

Then secondly, could you comment a bit more on kind of-- I know you discussed around a kind of BRIC.

What about a kind of broader emerging markets?

And finally, any kind of updates on buybacks given to where the share price is at the moment?

Are you using this kind of opportunity?

Thank you.

Well I will try to give you the first answers and I am sure Werner will want to comment on the buyback.

When we do the outlook for every quarter we assess the operations or the pipeline for any given quarter, we try to do this as conservatively and as prudently as we can.

You also use your normally historical patterns, which given the current environment doesn't make a lot of sense.

There is a bit of a disarray out there.

Trying to use the first couple of weeks in October as a pattern is probably not very indicative either because we're living in a very, very, very disarrayed environment where people just react in a pretty wild way.

I think you can segment the markets between companies and there are quite a number of those who are still going to proceed, actually who will proceed with a vengeance with very important investments in IT in order to really reshape the organizations, others who will stop completely.

In the third group of people who will change the mix, which is one of the reasons why we have come up with a series of packages that help people consume our software quicker in a faster ever way.

We have also incentivized the sales force in such a way as to be capable to invest at volume so the current pipeline takes that into consideration and the hypothesis that we have made in order to give the guidance on the margin takes that into account.

Now if tomorrow morning we have yet another very strange thing happening in the market and there's another wave of panic that is not figured into the numbers.

You can't.

That's just irrational behavior.

As to the emerging markets, if you look at the BRIC countries India and China had a very good quarter.

Brazil had a very good quarter.

The only BRIC country that had a rough quarter in Q3 was Russia.

The reasons for that are well known.

Just look at what they did to the Russian stock market and a few other things and we do not expect Russia to recover that quickly.

And I will take the one regarding the buyback.

I think it's a great time for buyback but we have to be realistic.

We also at a time and we all have to admit it, a time where we all have to say that cash is king.

Now seriously, we are just in a process to investigate our buyback activities throughout the next quarters and will come back with an answer to this one within the next weeks.

Neil Steer of Redburn Partners.

I just had two quick questions.

The first one, and I know that we sort of hovered around the points with regards to the margin guidance that you've given and the comments in relation to turnover, and I am just wondering the margin that you've stated as achievable, 28%, on the turnover growth that you've quoted is obviously very similar to the kind of organic turnover growth that has resulted in forecasts post the ad hoc announcements at the beginning of October and I just wondered whether you specifically chose to use that, if you like, as your benchmark for the margin guidance or whether, as you stand today given the dynamics in the business so far in Q4, you would tend to think about 20 to 22% growth as realistic given the current conditions that you've seen?

With all respect to the analyst community, of course, we look into all the models which are out but then we come up with our own guidance how we see the situation based on the pipeline based on everything we see at this point in time.

And an unrelated question, I'm sorry I think it was Henning-- I missed the data points you gave us so the number of ERP 6.0 customers and more importantly perhaps the number of active ERP 6.0 systems running at the moment.

I think it was 12,800 customers and productive 8,200.

8,200 thank you very much indeed.

Rajesh Balasubramanian from Credit Suisse.

Just one question, housekeeping, in terms of standalone SAP what was the SSR revenue growth in Q3 '08.

This is with the guidance of 12 to 14%, original guidance of 12 to 14% for the full year.

And second question, your guidance clearly suggested pipeline conversion not improved from the end of September.

There's definitely adequate amount of conservatism sitting inside that.

If you could [capital manage] it what would be the base case for license revenue decline to that we should be considering for Q4?

In other words, can license revenues decline by more than say 30% in Q4 on a year-on-year basis?

I will take the first one.

I think we indicated in the Press Release that of the 22% growth on the SSRS side 7% came from SAP so consequently 15 came from Business Objects but more importantly, if you look to this from a year-to-date perspective 12% came from SAP and 14 came from Business Objects products and this gets up the 26% growth.

Yes you need to take into consideration that we specifically talk about SSRS and not license revenue and there's a good reason for that.

If you analyze the numbers of SAP should you just look at Q3 support revenue and subscribers represent 62.5% of SSRS and that is a significant number.

You could probably make any wild guess on license revenues out there and they could range from anything to everything.

I don't think that's makes a lot of sense in particular because we have long standing relationships.

They are from long standing contracts.

I would rather not want to even try to speculate on what it could be and what it could not be.

What we have done is we have done a very serious job in trying to analyze where we are.

We monitor this almost daily.

We have very professional teams.

We look at it from any possible angle and that is where we stand and let's not speculate of what might happen tomorrow, what might not happen tomorrow.

We have time for one final question.

Our final question comes from Sarah Friar of Goldman Sachs.

Two questions if I may-- first, just as you talk about headcount hiring freezes, to what extent would you consider actual headcount reductions as we think about 2009?

I know that's always a very difficult question to ask a management team but would you be open to thinking about that to the extent that that would help protect margins in a tough spending environment?

Sarah, as we tried to indicate early on, I said we are in 2008 we further will want to finish 2008.

Let's see what that brings and then we will talk about the guidance in 2009.

Then we can talk about other issues as well.

Right now everyone as SAP is very much focused on delivering a good 2008.

That's a fair response and then just on the emerging market point you made the comment that Russia was the only BRIC country that really did not work well in the September quarter but clearly the financial crisis now has spilled over pretty dramatically to emerging markets.

As you've seen in the first few weeks of October are you seeing any downshifts in other emerging economies or as you talk to customers any kind of pull back in how they're thinking about spend there?

Well, what you see in the various markets, Sarah, is that people are of course a little bit more cautious but and yes of course the financial crisis is now global and not just localized here or there but still the effect of it is still differentiated in the various markets.

There is still a different attitude in India or in China as compared to the United States or France so we are monitoring this very carefully.

We are very fortunate that we have a very, very large pipeline for the last quarter and the unknown factor, of course, is closure rates but the pipeline at least is very large and gives us tremendous opportunities to go after business and now we'll see what-- how people will react.

Thank you.

This closes our Q3 earnings call for today.

Thank you all for listening and goodbye.

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

Thanks for participating.

You may now disconnect.