SAP SE (SAP) 2009 Q2 法說會逐字稿

Welcome to SAP's second quarter results conference call.

This call is being recorded.

Today's call will be hosted by Leo Apotheker, Werner Brandt, and Bill McDermott.

I will now turn the call over to Stefan Gruber.

Good morning or good afternoon.

This is Stefan Gruber.

Thank you for joining us to discuss SAP's second quarter 2009 results.

I am joined by Leo Apotheker, Werner Brandt, and Bill McDermott.

Werner will discuss the Q2 financials in details; Leo will comment on the current business environment, our strategy, and product successes; and Bill will provide some further color on our regional and industry performance and our go to market strategy.

Following the prepared remarks, we have time for Q&A.

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 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 2008, filed with the SEC on March 26, 2009.

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

Now I would 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 that are more in line with how we internally look at our operational performance.

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

The difference between US GAAP and non-GAAP in the second quarter of 2009 is the result of the exclusion of acquisition-related charges in the amount of EUR67 million compared to EUR66 million in the second quarter of 2008.

More detail on our non-GAAP measures, the reasons for the use, and reconciliations to the most comparable US GAAP measure are provided in our earnings press release.

Also let me remind you that all numbers that we have presented today are preliminary.

Our final numbers will be presented mid of August in our half year report.

Subsequent events that may occur until then are to be reflected in our Q2 2009 financial as far as they provide additional evidence with respect to conditions that listed at June 30th of 2009.

Please note that we incurred restructuring expenses of EUR160 million and EUR5 million in the first and second quarter of 2009 respectively, resulting from the previously announced reduction in positions.

Our non-GAAP measures are not adjusted for these restructuring expenses.

Therefore, both our US GAAP and non-GAAP numbers are negatively impacted by these charges.

With that, let me say that we are pleased to report extremely strong operating margins despite a challenging business environment.

Let me give you the highlights of the second quarter.

Non-GAAP software and software-related service revenues for the second quarter of 2009 were EUR1.95 billion, which represented a year-over-year decrease of 8%, or 10% of constant currency.

For the half year, non-GAAP software-related revenues decreased 5%, or 7% at constant currency.

Sequentially, Q1 of 2009 to Q2 2009 non-GAAP software and software-related service revenues increased by 11%.

The year-over-year decrease in the second quarter was the result of a decline in 40% in software revenues at constant currencies, an increase of 13% in non-GAAP support revenues at constant currencies, and an increase of 8% in subscription and other software-related service revenues in constant currencies.

In the second quarter of 2009, our recurring revenue stream accounted for 55% of our total revenue.

Second quarter professional services and other service revenues was EUR610 million, which was a decrease of 23% of constant currency.

Consulting revenues of EUR550 million decreased 20% at constant currency and training revenues decreased 39% at constant currencies.

The decrease in consulting and training revenues was not unexpected given the decline in software revenue over the past few quarters.

Consulting revenues usually lag software revenues by about nine to six months.

Non-GAAP operating expenses decreased to EUR1.86 billion or 18% of constant currencies, which represents a decrease of EUR391 million adjusted for currencies.

This number includes restructuring charges of EUR5 million related to the previously announced reduction of positions, which for the first half of 2009 totaled EUR165 million.

The number of positions reduced associated with the EUR165 million charge was approximately 2,800.

Roughly 2,050 of this employees have already left the company as of June 30th.

The rest will leave in the following month according to the labor laws in their respective countries.

For the full year 2009, we expect a total of around EUR200 million of restructuring charges relating to the reduction of positions.

Previously we had provided the range of EUR200 million to EUR300 million.

Non-GAAP R&D expenses decreased 11% to EUR375 million for the second quarter and represented 14.4% of total revenue, which was flat compared to the second quarter of last year.

The decline in revenues offset by significant cost saving measures resulted in a flat R&D ratio for the second quarter.

Non-GAAP sales and marketing expenses decreased 18% to EUR543 million for the second quarter and represented 21.1% of total revenues, a decrease of 1.6 percentage points compared to last year's second quarter.

The decrease in sales and marketing expenses was mainly as a result of lower personal expenses due to headcount reduction and tight cost control in all areas.

Non-GAAP general and administrative expenses decreased 25% to EUR126 million for the second quarter and represented 4.9% of total revenues compared to 5.8% of total revenues for the second quarter of last year.

This decrease in general and administrative expenses was a result of effective cost saving measures mostly in the area of noncustomer-related third-party expenses, travel expenses, and personnel expenses due to the headcount reduction.

In addition to this, the first half of 2008 was impacted by one-time expenses for G&A due to the acquisition of Business Objects in an amount of EUR11 million.

Overall, the company's non-GAAP operating margin at constant currency was 27.9% for the second quarter, which represents an increase of 3.5 percentage points compared to the second quarter of last year.

Also keep in mind that on top of the excellent performance, the second quarter 2009 non-GAAP operating margin was negatively impacted by around 20 basis points due to restructuring charges from the reduction of positions.

Let me now give you some details on the gross margin.

The non-GAAP software and software-related service margin was 89.9% for the second quarter of 2009, which was a decrease of 50 basis points compared to the second quarter of last year.

The low margin was a result of the decline in software and software-related service revenue due to the difficult environment which could not be fully offset by a 5% reduction in the cost of software and software service-related service.

The professional service margin was 23% for the second quarter of 2009, which was a decrease of 140 basis points compared to the same quarter of last year.

The decrease is mainly driven by a decline of 7 percentage points in the training margin, while the consulting margin was relatively flat year over year.

Because of the slight change in business mix, the second quarter non-GAAP growth margin increased 100 basis points to 67.9%.

Other nonoperating income and expenses were down EUR38 million year over year, which is mainly the result of currency losses from (inaudible) and currency losses from our subsidiary in Venezuela.

Our US GAAP effective tax rate for the second quarter was 29.3% compared to 31.4% for the second quarter of last year.

For the half year, our US GAAP effective tax rate was 30.3%.

For the full year, we continue to expect a tax rate of 29.5% to 30.5%.

Free cash flow for the first half of the year of 2009 was EUR1.7 billion, which was an increase of 44% compared to the first half year of 2008.

The increase in free cash flow was primarily the result of positive changes in working capital.

As of June 30th, total liquidity was EUR3.4 billion, including the net proceeds from the issuance of a private placement of a promissory note for (inaudible).

Bank liabilities were EUR3 billion, which included EUR2.3 billion for the financing of a syndicated loan related to the acquisition of Business Objects and EUR700 million from the private placement on (inaudible).

In addition, in the second quarter we paid EUR594 million in dividends.

Let me now give you an update on headcount.

As you know, in general we announced a reduction of positions to 48,500 FTEs by the end of this year.

At the end of the second quarter, headcount was 48,561 FTEs, which is a decrease of 2,975 FTEs compared to December of last year.

Let me finish up by saying that we have updated our outlook for 2009.

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

I would now like to pass the call 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 in our products and services.

Let me begin by discussing the market environment.

Things are still tough, but I think it is safe to say we are seeing some more stability in the environment.

The pipeline has steadily improved since the beginning of this year, but we need to bear in mind that closure [rates] are more volatile than they were in the past.

Therefore, as we see it now, 2009 will remain a difficult environment, but I am cautiously optimistic that the worst might be behind us and will hope for some improvement in 2010.

That brings me to what our customers are thinking and doing.

Our customers seem to be a bit less [systematic] in Q2 compared to Q1.

Their buying behavior has not changed.

We have sized something smaller as customers are more willing to buy smaller packages.

Let me touch on our results which Werner has already discussed.

I want to emphasize that while software and software-related services were down year over year, it should not be a surprise.

We have spoken on many occasions about the tough top line comparisons we expected in the first half of 2009 compared to 2008 due to a more difficult operating environment this year -- 2009 no longer including the positive effects from the acquisition of Business Options and a tough comparison to the strong results reported in the first half of 2008, which was prior to the economic crisis that disrupted the global markets in the third quarter of 2008.

In light of the difficult operating environment, we have been focusing on margin growth and we have delivered.

We owe our very strong margin performance over the past three quarters to the strengths and flexibility of our business model, one that can be defensive in times like these and one that can provide for top line growth when the economy rebounds.

On the defensive side, we can still deliver a relatively good revenue performance.

One reason is the high percentage of recurring revenues, 55% of the first half of this year.

Additionally, we generated strong positive cash flow, which was up 44% in the first half of 2009.

Moreover, despite the decline in revenues, we still reported very strong margin growth.

In fact, since the crisis in December 2008, we reported year over year margin growth of 460 basis points in the fourth quarter of 2008, 450 basis points in the first quarter of 2009 excluding negative impact of the software charges, and 350 basis points in the quarter just ended.

I think it is an impressive performance.

I want to note, however, that while we have delivered outstanding margin growth thus far and even raised our margin guidance for 2009, it is important to remember that the margin provisions in Q3 and Q4 will become tougher, especially in Q4 when you may remember in last year's Q4 we(inaudible) spending.

In other words it will be tough to maintain the customer reduction run rate in the second half of 2009 that we have achieved over the past three quarters.

As for top-line growth when the economy rebounds, we are geared up for profitable growth.

The strength of our business model allows us to continue to integrate during these tough times.

That innovation is the foundation for future growth as history demonstrates.

Two good examples of continued innovation are, one, SAP Business Objects Explorer, which we introduced at SAPPHIRE Orlando.

It is a very powerful, very easy to use, and extremely fast tool for data analyzers for all users in an organization.

Second, our development of (inaudible) applications, which I will speak about in a moment.

Furthermore, and just to set the record straight, we are the undisputed market leader in business applications, with the deepest and broadest [store] in the portfolio of software solutions in the industry.

We are the undisputed market leader in 20 out of 25 industries, with our more than 25 end to end industry [networks].

We are nearly twice the size of number two and our win rate is 80%.

Additionally, we are the clear leader in business intelligence, as evidenced by recent reports from leading market analysts.

And in the small and midsize market we also have the clear lead as shown by our leading market share.

Now let me turn it over to Bill to provide a brief update on the regions, industries, and I'll go to market strategy.

Thank you, Leo.

As mentioned, software and software-related services revenues in each of the regions was down year over year.

This was not unexpected considering the current environment and the fact that each of the regions reported very strong double-digit rates in comparative second quarter of 2008.

You'll remember at that time EMEA was up 27%, Americas up 37% and APJ was up 40%, a [cut] in constant currencies.

As Leo said earlier, the environment and customer buying behavior generally applies to each of the regions.

The operating environment remains difficult, in particular for large purchases.

Customers are cautious regarding their strategic investments and often require multiple levels of approval, including in many cases board of directors.

This does result in longer sales cycles.

The good news is that the pipeline in each of the regions is steadily improving and there is a high level of qualified customer participation in our SAPPHIRE and Global SAP World Tour events with more than 70,000 customers, prospects, and partners in attendance, validating the strategic relevance of SAP.

Additionally, we saw positive sequential growth in each of the regions and better sequential growth overall than we have seen in many years with the exception, of course, of 2008 which exhibited unusual seasonality due to the acquisition of Business Objects.

The Asia-Pacific Japan region, which reported the highest sequential growth among the regions, benefited from an improving liquidity situation in the region compared to the first quarter.

This resulted in a strong performance from small and midsized enterprises in particular.

Key contract wins in the EMEA region were Shell Information Technologies, Olympic Air, Warburtons Limited and [OMK Stall].

In the Americas, we signed Norfolk Southern, Sara Lee Corporation, and City of Ottawa.

And in APJ, key wins were China Petroleum and Chemical,Sterlite Industries, India Limited, and Singapore Power Limited.

As for our industry performance, while many industries are mired by the current economic environment, I'm pleased to report that we saw good rolling four quarter growth in consumer products, financial services, health care, public sector, and higher education.

As Leo stressed earlier, we are the clear leader in industries.

No other company has our domain expertise, install base, or referenceable customers.

And the good thing is we have adapted our go to market strategy to succeed in this new reality in three ways -- one, we drive volume sales through our broad product portfolio.

Clients are investing in business outcomes, in solutions that can be implemented quickly, providing fast return on investment, efficiency competitiveness, and clarity in their businesses.

We are addressing these customer priorities with products from our Best Run Now initiative, our new Business Suite 7, which as you know became generally available in May, and of course the Business Objects Solution Portfolio which continues to sell very well.

Two, we invest in our customer relationships.

We are building strategic partnerships with our 390 largest customers in particular, which we call our premiere customer network.

We do this by collaborating more closely with them on enabling their business strategy through a longer-term technology road map that aligns their software purchase and consumption with the value SAP delivers.

Moreover, we have taken more than 400 customers to our Value Academy, teaching them how to maximize the value from their investment in SAP.

Three, lastly, we have made the ongoing education of our sales force a top priority through an initiative we call Value University.

This is where we provide training to all of our customer facing professionals globally.

We do this to ensure the alignment with customers' priorities and purchasing behavior.

This will enable us to drive volume and value for SAP and our customers.

While we are focused on execution clearly, we are also strengthening our workforce and customer relationships in all markets and industries globally.

I will now turn it back over to Leo.

Thanks, Bill.

Let me now take a moment to speak about our undertaking and the development of fundamental applications.

Our on demand offering and [compared to the] portfolio solutions designated to different target groups -- large enterprise, business users, and the mid markets.

For the mid-market, there is Business By Design and I am pleased to say that Feature Pack 2 is ready for productive use.

It was released on time and according to plan.

2 includes many new features with a lot of additional functionality and end to end business analysis.

We also announced a new collaboration that we are allowing SAP Business By Design to be preconfigured to use nine complementary web services from Business Wire, [Talk '09], Google, and others.

We are broadening the control ability of Business By Design as part of our overall step by step [redesign].

For the business users, SAP Business Objects on demand offering, dedicated to business users small to large.

This includes Crystal Reports and SAP Business Objects [XI] on demand.

And then there is our on demand offering for large enterprises.

We have and are continuing to develop a portfolio of on demand solutions deployed at many of our customers.

These solutions include SAP customer relationship management, SAP resourcing, cap and trade acquired for the [prestandard] acquisition, and expense management software which is expected to be announced in mid 2010.

We are in the process of extending our on demand offering for large enterprise in our very large install base.

We have brought on a new senior leadership team to lead the efforts.

We know that large enterprises have very specific requirements for on demand applications and we believe that we have a unique and comparing strategy for success.

One important element is that we are going beyond basic integration with our on demand solutions.

There will be no integration issues created by (inaudible) software solutions.

Integration is extremely important because we are already seeing the so-called (inaudible) problem picking up again in the market due to companies using many different on demand applications from different vendors.

Let me finish up by saying that our three pillar growth strategy, via organic [termination] and acquisition, remains intact.

Once the economy rebounds, we expect to return to organic growth driven by our existing growth portfolio of products for large and small enterprises -- business user solutions, new innovations like on demand enterprises, solutions for the mid-market, and the most extensive industry solution portfolio in the business.

For co-innovation and partnering, there are many examples from this past quarter alone, including an expansion of our global services partnership and new go to markets agreements with Atos Origin, our reseller agreement with APOS Solutions to have customers with enhanced management, monitoring, and control of the deployment of SAP Business Objects XI Solutions and new agreement with (inaudible) to provide SAP Net Weaver Business Warehouse on the database as a global services partnership with [Commerzbank].

Finally, on the acquisition front, our strategy has not changed.

We continue to look for smart strategic deals that help improve our technology and followed portfolio in the past quarter we announced two acquisitions.

First, there was Highdeal, the leading provider of real time bidding solutions for telecommunication.

The acquisition will allow us to provide customers a packaged consumer to cash business process platform the support high volume billing and enable a reduction in cost of ownership.

Second, there was Clear Standards, an innovator of enterprise carbon management solutions.

With this acquisition, we expected to accelerate our ability to meet the carbon management requirement of organizations in this time of increasingly stringent government regulations and expectations for better transparency by the public.

With that, I want to thank you for listening and we will now be happy to take your questions.

(Operator Instructions).

Our first question is from Gerardus Vos from Citi.

Please go ahead.

Thank you for taking my questions.

I have a few, if I may.

First of all, how should I think about the OpEx base going into the second half?

The run rate is now roughly around EUR1 billion.

There are still around 800 people coming out into the second half according to your headcount plan, and then you have normal attrition.

And secondly, could you perhaps discuss how do you think the environment has changed in BI after IBM's acquisition of SPSS?

And then finally, you made a comment about if we're coming out of this recession and organic growth.

What do you think is sustainable organic growth for the cycle to come for SAP?

Thank you very much.

Let me address the first part of the question related to the operating expense base in second half -- rather the first half.

First of all, while we normally see that we have higher sales in the second half of the year compared to the first half, which results in higher variable expenses.

Then this also applies to the normal bonus we paid to all of our FTEs for the full year that you have in the second half and higher part of this expense is in the expense base.

Personal expense in Q3 and Q4 2008 was significantly positively impacted by reduced [bonus accrual] due to lower than planned sales in the second half of 2008.

We have to keep this in mind.

Then the stock based compensation expenses might increase.

We had in the first half only EUR20 million and the second half of 2008 only EUR11 million and according to the evolution of the share price, we might see higher stock based compensation expenses.

Severe expense reduction measures have been executed already in Q4.

Don't forget this.

Where we already spent them, they would not be 100% sustainable.

And finally, the positive impact of the reduction in positions for Germany will be only partly visible in 2009.

And if you look to the entire expense base, now -- take out the restructuring charges.

When we head into the first half of the year with a base of roughly EUR3.7 billion, and I think if you go into the second half, you always have to assume what I said before, an increase year over year.

You specifically address personal expenses.

That's something where we will also see the benefit from the reduction in positions as most of them occurred in the first half, June the first half and we will see the benefit of this, the full benefit in the second half.

So this speaks again for what I said before regarding the overall expense base.

If you look to personal expense itself, you will see a positive impact also from the reduction in position.

I hope this answered your question.

That's very complete.

Thank you.

Let me now try to be as complete when it comes to SPSS.

Just on SPSS, I don't expect SPSS acquisition by IBM to have an impact on our relationship with SPSS.

You should note that we are addressing the productive analytics department by -- this partnership is working very well.

On the other hand, IBM and SAP are successfully partnering with many areas.

So the fact that IBM might acquire SPSS could actually simplify our overall offering and therefore might be better news than what many people expect.

And last but not least regarding our long-term sustainable growth rates, I would suggest that we talk about that next year when we talk about our guidance.

Thank you.

Thank you.

The next question, please.

Our next question is from James Dawson from Morgan Stanley.

Please go ahead.

Thanks for taking my questions.

I had a couple.

Just in terms of the geographic performance, I wonder if you could talk a little bit about -- perhaps the US was a bit tougher here, obviously it's usually a little more exposed to big deals.

I wonder if you could talk about the pipeline comment that you made for the group in respect to the US and how we should expect that for the rest of the year?

And perhaps we could talk, maybe if you could give us some granularity around the European, EMEA -- was there some areas that were better than worse?

And then my second question was on cash.

You're doing pretty well there.

If we don't see acquisitions, should we expect to see a return to some buybacks from you guys next year as the cash numbers start to get too high versus your target?

Thanks.

This is Bill, James.

I'll answer first on the US.

You are right that the US does have a larger deal dependency than other geographies, that's fair.

And you should also know that the US has a very steadily improving pipeline as we look at the condition of the business going into the second half.

A lot of that is a springboard off of our SAPPHIRE event which I mentioned earlier, but there's also better execution in each of the regions that are the central, west, north, east, and southeast corridors of the US.

As it relates to EMEA, I think you should think of the performance as pretty steady across the geographies.

There were some that were slightly stronger than others, but it was not a big difference from one location to another.

But I would also mention in EMEA that there was again a very steadily improving pipeline as we look into the second half and we are pretty optimistic on EMEA right now.

Regarding cash and buybacks, if you have seen, we have EUR3.4 billion in cash in our hands.

This correlates with a debt related to the Business Objects acquisition of EUR2.3 billion and the newly issued commissioning note I mentioned earlier during my speech with EUR700 million.

So the net cash as of June 30th was roughly EUR440 million, and from our perspective we identified the cash position for SAP in the range of EUR1.5 million.

But as long as we haven't achieved this, we wouldn't start to buy back shares again.

And share buyback during these tough days is really dependent on the overall economic situation we will see in 2010.

So a clear let's see and wait perspective regarding share buyback as of today looking into 2010.

Thank you.

Next question, please.

Our next question is from Ross MacMillan from Jefferies.

Please go ahead.

Thanks.

Werner, historically, I think you've talked about outside of headcount reduction some other discretionary cost reduction that you didn't think you needed to dial back up in recovery.

Could you just recap on what you said in that regard and to what extent could some of that still be ahead of us rather than already in current operating expenses?

Thanks.

Ross, if I understand you correctly, the question is whether the head -- the cost reduction, operating expense reduction in other areas than personal expenses is sustainable.

Is this your question?

Yes.

And specifically has all that been done or is there anything more to do?

Thanks.

I think if I look to the nonpersonnel-related expenses, we first of all look into third-party expenses.

And then in all categories, whether it's customer related, whether it's not customer related or whether it's license sales commission related, we have significant decreases if you look to a half year perspective, half year over half year.

So from that perspective, I would say that we did a lot and the key is that we look to keep it at this level.

So it's more a question of sustainability at the end of the day that we are really keeping tight costs on control on third-party expenses.

The next one is travel and entertainment and here we also saw a significant decrease year over year or half year over half year, and I assume if business come back, we will see business travel again.

But overall our way how we address travel activities will not change.

We will not simply open it up again.

We will travel more, but at a lower level, at lower cost as we did in the first half of this year and also in the fourth quarter already.

Marketing is an area where we saw reductions half year over half year, and we have to see how this plays out when the economy comes back and we see software revenue coming in again whether we spend a bit more.

But, again, also here, we have to be very careful with accelerated spending also on the marketing side and the same applies for the infrastructure.

Is your question answered with this comment?

Yes, that's certainly very helpful.

And then just on headcount itself, obviously you're not talking about next year yet, but how were you thinking about even headcount as you go into the second half of this year?

You've obviously got the additional 800 to come out, but excluding that number, do you think you have to start to hire in anticipation of next year?

Or how were you thinking about when you may start to hire in anticipation of improving demand?

Thanks.

I would argue that from today's perspective it's too early to start to hire.

What we will do, of course is that we will replace, and we have some programs in place where we shift and lift between functions between regions within one function where we really adjust the headcount to where we actually need it, rather than having it somewhere where we don't need it.

So this program is ongoing.

We will replace but not actively coming back to hiring in the second half.

We have to see how the second half goes and then we decide on what we do in 2010.

Great.

Thank you.

Thank you.

Next question, please.

Our next question is from Sarah Friar from Goldman Sachs.

Please go ahead.

Good morning and good afternoon.

Thank you for taking my questions.

Two for you in terms of demand, maybe for Bill.

Bill, do you have any sense of pent-up demand as we head into the second half?

As you talk to customers, it sounds like we are hearing that they are definitely underspent budgets in the first half of the year, so maybe there's a bit more to spend as we get into the seasonally stronger part of the year.

And then secondarily, could you talk a little bit about volume selling?

You talked about last quarter more emphasis on more taxable smaller deals.

How is that coming along for you and are there any additional investments around volume selling that we should be thinking about?

Thank you very much for the question, Sarah.

First of all on the pent-up demand, as I said earlier, there is a steadily improving pipeline in all the regions of the world and in all industries, in fact.

So the pipeline clearly is getting more robust as we go into the second half.

You would expect that, because seasonally our business is normally stronger in the second half and therefore sequentially we expect the pipeline to rise.

As it relates to pent-up demand and customers making decisions, I think we will have to take an execution oriented focus on that in Q3 and Q4 and give you the answer as the deals are made and the decisions are actually granted.

On the subject of volume selling, clearly a major focus.

What we are doing is driving sales productivity in every region, every geography, every industry and we are driving more and more activity per rep.

As the deal sizes are smaller in this market environment, you have to do more deals.

So we are doing that with our sales force and we are also extending that to our ecosystem, to very good partners in the indirect channel, encouraging them to sell into this environment.

I explained to you our best run now packages, which are prepackaged, ready to run, installed quickly with fast ROI.

Business Suite 7 is also helpful and of course Business Objects Portfolio is hugely important in this environment.

So all in all, volume selling is clearly the answer.

Great.

Thank you for that color.

Next question, please.

Our next question is from Michael Briest from UBS.

Please go ahead.

Good afternoon.

Thank you very much.

To go to the large deal metrics, could you maybe tell us what proportion of orders in the quarter were for deals over EUR5 million?

Because that's been low for the last couple of quarters.

And on the same vein, you're beginning to offer now subscription type deals to the premiere customer network.

Can you talk about the level of interest you're seeing and how rapidly you think there will be adoption there?

Why don't I try to give you some information on that, Michael.

Our large deal metrics in Q2 deals above EUR5 million were about 12% and regarding (inaudible) and relationship that we are building with our close to 400 top customers, there is quite some interest for establishing long-term relationships.

And as we are engaging in these conversations, of course many forms of contractual relationships are being discussed, among them, of course, also subscription -- not exclusively, but it's one of the options people are looking at.

When do you think that will come through to sales or deals?

Some of them are happening already.

A few of them have closed very recently.

A few of them have been in a classical form of one time license deals.

Others have been more subscriptions, so we actually see both happening.

Thank you.

And just a final one for Werner.

I noticed there was another EUR10 million sales allowance in the quarter.

I thought you put a big charge-through in Q1 and thought that was enough for the year.

Can you maybe talk about where the increased caution is coming from and, again, if you think there will be any more in the second half?

Thanks.

Michael, we have to differentiate.

I think here between the sales allowances and bad debt provision.

And I must say without going into detail here that we have taken into account quite significant bad debt provision and also sales allowances.

And as a consequence, if what we have on the balance sheet and what we have in our P&L so far is -- can be considered as I wouldn't say risk-free, but that we have reserved everything we think we should reserve for.

Could you say what the bad debt provision was in Q2?

I think it had the same amount as in the first quarter.

EUR87 million?

No.

The first quarter, if you look to the individual bad debt provision, it was around EUR35 million and this quarter it's a bit below EUR40 million.

Okay.

Thank you very much.

Thank you.

Next question.

Our next question is from Raimo Lenschow from Merrill Lynch.

Please go ahead.

Thank you.

Thanks for taking my question.

I had two questions if I may.

First, Werner, following on from Ross's question on the cost base, as we -- if I look at the year, we probably end up with around EUR500 million in savings on OpEx, on operating expenses.

Can you just help us understand how much of that would be kind of one-off stuff in terms of travel and how much of that is a structural change?

So how much of that could we lift into 2010?

And then second question is on the Q1 call, you were asked about seasonality in the year.

And I know you've talked about better pipeline going into the second half, but how should we think about Q3, Q4 in terms of seasonality?

Also in light, some of your competitors have talked about that Q3 might be slightly tough because it's only actually to September to sign big deals, so be a bit careful there.

But maybe you can help me understand how I should think about growing pipeline and also seasonality between the quarters.

Thanks.

Let me take the first part here regarding the operating expenses.

If you exclude restructuring charges, we expect then year over year to reduce our operating expenses including stock based compensation expenses by roughly EUR650 million to EUR700 million.

So the base in 2008 to very precise at EUR8.4 billion and we reduce it by about this EUR650 million to EUR700 million.

The question what is sustainable going into 2010, I only can make two comments.

The first one is, if you look to the personnel expenses, we haven't seen then the full benefit on an annual basis regarding the personnel expenses from the reduction in position, number 1.

Number 2, of course we will have some expenses like travel I mentioned before, like marketing where we will also see an increase in spending, but I cannot quantify this for you at this point in time.

We haven't done any exercise regarding the budget for 2010 and it's too early to comment on our expense base in 2010.

But the majority I can say already now definitely will be sustainable.

Yes and let me maybe try to talk a little bit about seasonality.

Actually, we expect seasonality to be in line with previous years.

But we do have to keep in mind, this is very important for you as well, that we didn't have the usual seasonality in 2008 because we had a very strong first half followed by a weak second half, due to what's happened with the overall economy.

Therefore, I would assume that 2009 seasonality will be in line with the previous four to five years if you exclude 2008.

Perfect.

Thank you.

Okay.

Thank you.

Next question, please.

Our next question is from Mohammed Moawalla from Goldman Sachs.

Please go ahead.

Yes.

Good afternoon.

Can you comment a bit about the dynamics in the emerging markets?

You indicated that you certainly saw a recovery in the second quarter.

And specifically if you could drill in by some countries and just curious to know what the shape of the pipeline is looking like there?

Well, Mohammed, Bill and I will try to answer that.

Let me give you a bit of an overall picture here and Bill can certainly give you all of the details.

Emerging markets have been a very important focus topic for SAP since quite some time.

We have been in all of these markets present since the early days.

As far as we were concerned, they were not that emerging, they emerged quite some time ago.

And we are encouraged by what we see in many of them.

We see good things happening at least medium termwise in Brazil, India, China -- Russia is a bit of an exception because of the very particular economic situation there.

So overall, I think great countries and emerging markets in general will continue to be a very important or increasingly important part of the SAP revenue mix.

Bill, would you like to add something?

I think you said it very well.

I would add simply that we have built an infrastructure within the company to especially focus on the BRICK, Middle East, and Africa to enable these emerging markets and work forces that might be somewhat less mature than the larger markets to ramp up quickly and scale their business by leveraging the value dynamics that where we have proven successful in industry and geographies again in major markets around the world.

So that's becoming a craft at SAP that we are getting very good at.

Thank you, guys.

Thank you.

We have time for two more questions, please.

Our next question is from Phil Winslow from Credit Suisse.

Please go ahead.

Hi, guys.

Good quarter.

I had a question for Bill.

You commented that large deals were still difficult to close during the second quarter.

When you look at your pipeline for the second half, have you seen any return of at least large deals in the pipeline?

And then also both to Bill and Leo, when you think about the sales force's utilization rates and if you were actually to see a return to an increase year over year in licensed sales, how do you feel about just the idea of adding headcount in sales?

Do you feel like the utilization level is low enough right now where you wouldn't have to need -- to add incremental heads as licenses actually start improving maybe in 2010?

Thanks.

Well first of all, thank you for the question.

Like you, we all want large deals in the pipeline and candidly, there are large deals in the pipeline.

What we have to be mindful of, however, in this environment is just simply less predictable than they were in the past and oftentimes they will have to be phased or subscribed as opposed to recognized up front.

And we want to do business in the manner in which our customers want to do business with us, because it's all about long term here.

So they are there.

Now we need to see how the execution goes and how many we'll be able to recognize in the quarter and the back end of the year.

But customers clearly view SAP as their strategic business software partner.

There's no question about that.

Secondly, in terms of sales force, we have tremendously improved the volume and the participation rates in our sales force by driving the volume effect and not relying on big deals but simply selling to the customer the way they want us to.

Werner has mentioned lift and shift.

We plan on making an art form of lifting and shifting assets so we can put them in front of the customer where they could be most productive for our shareholders and we will have to see how it goes in 2010 to determine how many feet on the street we need based on the market demand.

Got it.

Thanks, guys.

Thank you.

It's time for I think one or two questions now.

Okay.

Our next question is from Marc Rode from MainFirst Bank.

Please go ahead.

Thank you.

Two quick ones.

One on services, and it's quite impressive you're showing a 23% margin despite also 23% decline in the second quarter.

Is that because you're very, very selective on the business you take, i.e.

very extreme price before volume strategy?

Or do you think your volume performance is in line with the overall markets SAP related services business?

That's point one.

And then the second point is you let yourself [call it], Leo, by saying visibility has improved a little bit and there were some comments already on pipeline.

I was wondering whether we could look at it sort of differently.

To what extent do you think the pipeline is reflecting a comeback of previously delayed deals for people having put in the work to evaluate what they want to do and then now coming back or to what extent is it new business or new interest?

Thank you.

First question regarding the margin, two answers to this question.

The first one is that of course we adjusted our consulting force to the demand today in the market right away when we saw the decline in the consulting arena.

And even more important is the fact that we really increased the profitability of the consulting business in the Business Objects arena, where you remember, in the first half of 2008 we had very, very low margins and we turned this completely around.

So both lead to the fact that we have this high margin despite the significant decrease in consulting revenue.

And as to the pipeline, Marc, let me maybe say the following.

This is a dynamic evolution of a situation that you need to put a little bit into perspective.

Let's remember that Q4 and Q1 were very, very, very tough and challenging quarters from a pipeline perspective with the meltdown of the global economy.

Q2 started to show that the pipeline was starting to fill again with what one could call more normal type of opportunities, things that had actually more sustainability to it from a budgetary point of view, from a [use] point of view, from a capability of the customer point of view to actually secure a particular deal.

How much of that in turn was coming from prior delayed business and whatever and what is really new accounts.

We had a black hole for a number of months so I think what is really important is we see a consistent gradual but very steady and very regular uptick pipeline that is more and more qualified.

And I think that is the most important piece of news from our perspective regarding the pipeline.

All right.

Thank you.

Thank you.

Can I just -- sorry.

There was one point on the services with regards to the volume.

Do you think that's that train you saw, the 23% organic, is that representative of the market or is that because you were specifically selective on price before volume perhaps?

I think if you look to other service providers, you see margins which are lower than 10%, so this is already a unique situation we are in.

That makes sense.

Thanks.

Thank you.

So we have time for one final question, please.

Our last question is from Neil Steer from Redburn Partners.

Please go ahead.

Thanks for taking my question.

In fact, just before I ask my question, can I just have a point of clarification?

Werner, I think when Michael Briest asked the question earlier on about the bad debt provisions in Q1, you said that the figure was EUR35 million.

I thought from the Q1 statements it was substantially larger than that.

No.

I referred only to the individual bad debt provision, with EUR35 million.

Okay.

Okay.

The questions that I have -- first of all, there's clearly been a focus as you've mentioned on a number of occasions on the top 400 customers.

Can you -- Max Attention, and obviously the enterprise board offering has become quite an interesting point of focus over the last six months or so.

Can you tell us me how many of those customers actually are on Max Attention now and whether, if they are on the underlying enterprise support, whether they have payment terms or contractual terms that are different from the enterprise support terms that were announced earlier on this year?

This is Bill.

First of all, on the Max Attention you probably have around 10% to 15% of that base that is on Max Attention.

On ES, enterprise support, that is our only services offering at this point.

So you will see the majority of the 400 on enterprise support.

What we are very focused on is software and related services and a combination of enterprise support, Max Attention providing critical focus on mission critical business processes, and a procedure we call safeguarding to ensure the quality controls of a well implemented project, are all areas where we focus on software and related services to drive that high margin software and related services line for the company.

So that's essentially the best 400 customers in the world to utilize all of these services.

Okay.

And just one very final question.

You've obviously -- there's been a fantastic focus on cost and we potentially could be at the point where the market is starting to at least recover.

In the last two cycles when we have actually seen this, there seems to have been a little bit of a push from SAP to win market share.

And that has meant to some degree the operational leverage of the business through the positive side of the cycle hasn't really driven the margins up to expected levels.

At SAPPHIRE this year, you've clearly mentioned that your medium term target to achieve a 35% operating margin.

It's clearly very early days going into 2010, but if you keep control on costs, you clearly anticipate if the cycle [allows a substantial] further increase in operating margin next year.

Is that fair?

Well, let me put it this way.

This is Leo, and I tried to indicate when I spoke earlier -- when the economy will pick up again, we are ideally positioned to drive a new cycle of profitable growth, and I wasn't just talking about growth.

I was specifically mentioning profitable growth.

We believe that we have everything we need to drive such a cycle forward.

We will continue to be a very disciplined company.

I think that one of the advantages that have happened over the last few quarters is that we have used the opportunity to become significantly more lean and agile company.

Therefore we are capable of driving more innovation at the lower per unit cost of innovation if I may say so.

So going forward once the economy starts to improve, once the top line starts to improve again, I think we will be able to achieve that with a much higher profitability, which will help us to achieve the 35% margin.

Thanks very much.

Thank you very much.

This concludes our earnings call for today.

Thank you all for joining and goodbye.

This will conclude today's conference call.

Thank you for your participation, ladies and gentlemen.

You may now disconnect.