SAP SE (SAP) 2009 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 Leo Apotheker, Werner Brandt and Bill McDermott. 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 2009 results. I'm joined by Leo Apotheker, Werner Brandt and Bill McDermott. Werner will discuss the Q3 financials in detail. Leo will comment on the current business environment, our strategy and product successes and Bill will provide some color on our regional and industry performance and our go-to-market strategy.

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

SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the US Securities and Exchange Commission, the SEC, including SAP's annual report on Form 20-F for 2008 filed with the SEC on March 26, 2009. Participants of this call are cautioned not to place undue reliance on these for forward-looking statements, which speak only as of their dates.

And with that, I'd like to turn the call over to Werner.

Thank you, Stefan. Welcome to everybody on the call. Before I begin let me inform you that I will be speaking mostly about non-GAAP figures, as they are more in line to 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 figures in the third quarter of 2009 is the result of the exclusion of acquisition related charges in the amount of EUR67 million. More detail on our non-GAAP measures, the reasons for their use and reconciliations to the most comparable US GAAP measures 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 in due course in our interim report. Subsequent events that may occur until then are to be reflected in our Q3, 2009 financials as far as they provide additional evidence with respect to conditions that existed at September 30th of 2009.

Please note that we incurred restructuring expenses of EUR160 million in the first quarter, EUR5 million in the second quarter and EUR21 million in the third quarter of 2009 resulting from the previously announced reduction in positions. Our non-GAAP measures are not adjusted for these restructuring expenses. Therefore, both US GAAP and non-GAAP numbers are negatively impacted by these charges.

Moving forward, let me say that we are pleased to report another quarter of increasing operating margins despite a challenging business environment. Let me give you the highlights of the third quarter.

Non-GAAP software and software related service revenue for the third quarter of 2009 were EUR1.94 billion, which represented a year-over-year decrease of 5% at constant currency. Sequentially, non-GAAP software and software related service revenue stayed relatively flat.

The year-over-year decrease in the third quarter was a result of a decline of 30% in software revenues at constant currency, an increase of 10% in non-GAAP support revenues at constant currency and an increase of 22% in subscription, other software related service revenues also at constant currency.

In the third quarter of 2009, our recurring revenue stream accounted for 56% of our total revenue and 55% for the nine-month period.

Let me take a moment to explain the development in support revenue. The slight sequential decline in support revenue was primarily caused by a strengthening Euro, especially against the US dollar and the transition of customers to the subscription model. These two affect negatively impacted support revenue by approximately EUR20 million. In addition, there was a positive one-off effect of roughly EUR10 million that increased Q2 support revenue.

Third quarter professional service and other service revenue were EUR564 million, which was a decrease of 25% at constant currency.

Consulting revenue of EUR484 million decreased 22% and training revenues decreased 23%. The decrease in consulting and training revenues was not unexpected, given the decline in software revenues over the past few quarters. Consulting revenues usually lag software revenues by around six to nine months.

Non-GAAP operating expenses decreased to EUR1.83 billion, or 12% at constant currency, which represents a decrease of [EUR243 million] adjusted for currency. This number includes restructuring charges of EUR21 million related to our previously announced reduction of positions, which for the nine months totaled EUR186 million.

The number of positions reduced associated with the EUR186 million charge was approximately 2,900. Roughly 2,600 of these employees have already left Company as of September 30. The rest will leave in the following months according to the labor laws in the respective Countries. For the full year 2009 we continue to expect a total of around EUR200 million of restructuring charges related to the reduction of positions.

For the first nine months a total non-GAAP operating expenses declined by EUR593 million or EUR779 million excluding restructuring charges. Non-GAAP R&D expenses decreased 12% to EUR380 million for the third quarter and represented 15.2% of total revenues, which is an increase of 1.1 percentage points compared to the third quarter of last year. The cost saving measures could not fully offset the decline in total revenues, which resulted in a higher R&D ratio for the third quarter.

For the nine-month period R&D as a percentage of total revenues remained flat year-over-year. Despite this percentage reduction in R&D, as part of our overall program to mange our cost structure, our ability to innovate has not been affected, as Leo will later talk more about the power of innovation, power to innovate.

Non-GAAP sales and marketing expenses decreased 19% to EUR497 million for the third quarter and represented 19.8% of total revenue, a decrease of 2 percentage points compared to last year's third quarter. The decrease in sales and marketing expenses was mainly the result of lower personal expenses due to headcount reduction and tight costs (inaudible) in all areas.

Non-GAAP general and administrative expenses decreased 40% to EUR134 million for the third quarter and represented 5.3% of the total revenues compared to 5.5% of total revenues for the third quarter of last year. The decrease in general and administrative expenses was the result of the effective cost saving measures, mostly in the area of non-customer related third-party expenses, [level] expenses and personal expenses due to the headcount reduction.

Overall the Company's non-GAAP margin, operating margin at constant currencies were 27.2% for the third quarter, which represents an increase of 1.1 percentage point compared to the third quarter of 2008. Also, keep in mind that the third quarter 2009 non-operating margin was negatively impacted by around 80 basis points due to restructuring charges associated with the reduction in positions.

For the nine-month period, the non-GAAP operating margin was 24.2% at constant currencies representing an increase of 70 basis points. Restructuring charges had a negative effect of 250 basis points for the nine-month period.

Let me now give you the details on the gross margin. The non-GAAP software and software related service margin was 81.1% for the third quarter of 2009, which was a decrease of 2.6 percentage points compared to the third quarter of last year. The lower margin was a result of the decline in software and software related service revenues by 5% mitigated by lower headcount and expense savings.

The professional service margins was [32.7%] for the third quarter of 2009, which was an increase of 60 basis points compared to the same quarter of last year. This increase was mainly driven by a higher consulting margin. Because of the slight business mix the third quarter non-GAAP gross margin increased by [80] basis points to 67.9% or 60 basis points to 66.9% for the nine-month period.

As the non-operating interest expenses were down by EUR48 million year-over-year, which was mainly a result of currency losses, the currency losses are mainly driven by one-time foreign exchange losses related to our operations in Venezuela. The US GAAP effective tax rate in the third quarter of 2009 was 21% compared to 31.9% for the third quarter of last year. It was affected by non-recurring acquisition related items, which positively impacted the Q3, 2009 tax rate by approximately 11.7 percentage points.

In the nine-month period 2009 our US GAAP effective tax rate was 26.7%. Because of this one-time asset on the Q3 tax rate, we lowered our effective tax rate for the full year of 2009 by to between 27% and 28%, which previously was 29.5% to 30.5%.

Free cash flow for the first nine months was -- of 2009 was EUR2.2 billion, which was an increase of 28% compared to the same period of last year.

Operating cash flow for the 2009 nine-month period was EUR2.4 billion, which was an increase of 21% year-over-year although underlying income from continuing operations increased only by 1%. The increase in operating cash flow is due to a positive change in working capital mainly driven by a decrease in accounts receivable. Conversely, our DSOs went up by one day compared to the end of second quarter and seven days since the beginning of the year.

As of September 30th total group liquidity was EUR3 billion including the net proceeds from the issuance of a private placement of a promissory note. Bank liabilities were EUR2.1 billion, which included EUR1.4 billion from the financing of the syndicated loan related to the acquisition of BusinessObjects and around EUR700 million from the private placement mentioned before. Therefore, net liquidity at the end of the third quarter was EUR920 million.

Let me give now an update on headcount. As you know, in January we announced the reduction of positions to 48,500 FTEs by the end of this year. At the end of the third quarter headcount stood at 47,804 FTEs, which is a decrease of 3,732 FTEs compared to the end of last year. We now expect headcount to be around 48,000 FTEs by the end of 2009, which is slightly lower than our original projection.

Let me finish 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 it over to Leo.

Thank you, Werner. Welcome everyone to day's call. I am pleased to provide you with an update on the business environment and our product successes. I mentioned last quarter that we were carefully and cautiously optimistic that the worst might be behind us. We hope for some improvement in 2010.

We continue to believe this to be true as we look forward to better year-over-year performance in the third quarter compared to the year-over-year performance in the second quarter. However, while the environment has stabilized we have stood up against some difficult challenges created by the global economic recession that hindered our results for the quarter. This was felt especially hard in Japan and in some of the emerging markets, which Bill will talk about later.

One challenge that we faced is the very emotional markets, where quick changes in sentiment good or bad can move the market in either direction rather quickly. Other challenges include customers remaining hesitant about making investments and the unpredictability we continue to see when it comes time to sign contract, as customers are still closely scrutinizing deals. Hence, the approval process is slow. As we head into Q4 I don't expect this to really change.

As we witnessed throughout most of the year, customers are continuing to buy SAP's software, but the customer wants to consume the software quickly and in increments over multiple periods. This has led to smaller deal sizes, which lower our returns, prices and more phase deals. Thus, for large up front deals we don't expect to see deals come back any time soon.

Some encouraging signs we have seen in the market, the pipeline continues to build and we see healthy pipelines in all the regions and in all the industries. Customers are beginning to think more positively about their own businesses, which we think bodes well for the future as we head into 2010 and we continue to see good progress in our move towards a higher volume model.

Finally, we are driving more multi-year agreements with a phased-in subscription deals. This model is good for both SAP and our customers. You should remember that the model of revenue recognition over many periods is not new to us. We perfected this model with our global enterprise agreement and what we have gained from the (inaudible) is the experience on how customers want to buy and consume software based on building a long-term strategic roadmap over several years.

We are now taking this concept with some adjustments to take into account different shades of market needs down to the next 580,000 customers. We expect this to open up tremendous opportunities for growth going forward.

We believe this model of buying and consuming software over multiple periods that we are driving is an important trend in our industry and we're already proven that we have [control], the knowledge and the experience to capitalize on these changing industry dynamics. Bill will talk about that later.

Helping us drive more volume in all segments and all markets and establishing these multi-year relationships with our customers, our products and (inaudible), which offer solutions that are quick to implement and provide fast ROI. Business Suite, which is highly (inaudible) design is around our customers for the who deploy the software at their own pace in a step-by-step process and business user solutions like analytics and (inaudible) compliant solutions that enable our customers to see their businesses more clearly.

As Werner already took you through our reported numbers for the third quarter, let me just briefly add some comments. Despite the economic crisis in the third quarter of 2008, we nevertheless reported 22% growth in non-GAAP software and software related service revenue at constant currencies in that quarter making this year's third quarter a soft (inaudible). Moreover, as I mentioned earlier, the environment remains challenging but, as I mentioned earlier, the sequential performance on the year-over-year basis from Q2 to Q3 improved as we expected.

On the expense side of the P&L we continue to successfully manage our cost structure, as demonstrated by a 1.1 percentage point improvement in our non-GAAP operating margin at constant currency. Excluding restructuring charges it is now the fourth quarter in a row since the economic crisis that we reported year-over-year margin growth. As you know, last quarter we discussed the current 2009 second half margin comparisons we expected due to the strict cost-cutting initiatives put in place immediately subsequent to the recent bankruptcy in last year's quarters. We expect the comparisons to remain difficult as before but we will continue effectively manage our operating costs.

Now, let me turn it over to Bill to provide a brief update on the regions, industry and our go-to-market strategy.

Thank you, Leo. In this challenging market environment we continue to adapt our go-to-market strategy to the dynamic needs of our customer, while also focusing on solid quarterly execution. We're innovating our go-to-market strategy in line with how our customers consume value. We are developing longer-term sustainable relationships with our customers aligning business strategy, IC road maps and value delivery.

Let us now look at the regional performance. The regions performed better sequentially but mixed in the Asia/Pacific region and emerging markets, which I'll talk about more in a moment. All the following information I'll share with you is in constant currency.

In EMEA non-GAAP software and software related services revenues declined 1%. Germany was down 13%, mostly due to a tough comparison from Q3 last year when software and software related services revenues grew by 20%. Excluding Germany, software and software related services revenue in the EMEA region actually grew by 6%, which resulted from strong performances in Southeast Europe, the Mid-East and Iberia, while revenues were somewhat sluggish in the CIS countries.

Across Europe it is worthwhile to note that we are seeing increased interest of customers to engage in multi-year strategic partnerships with SAP. In the Americas region non-GAAP software and software related services were down 7%, in the US down 9%. The US was impacted by longer decision cycles to small and mid-sized deals, which resulted in slightly lower closure rates. The good news is that there is increased predictability with large enterprise customers and more net new customers and the improved execution with these customers is reflected in the quarterly sequential software licenses growth for the Americas.

In the Asia/Pacific Japan region, non-GAAP software and software related services revenues were down 12%. Despite good performances in Korea and Australia and increasing volume, the overall performance in APJ was negatively impacted by Japan's 25% decline in software and software related services.

We and many other technology companies have been challenged by a perfect storm in Japan, a change in government resulting in investment policy reviews across the public and private sector, rising and falling exports and lower consumer and enterprise confidence. These market developments froze customer spending during the quarter. The good news is that these deals were not cancelled, simply deferred as reflected in our pipeline and the sentiment in our dialogue with customers.

The [BRICK] Countries with the exception of Brazil were more volatile in the third quarter. To address this market opportunity in the emerging markets we hired a seasoned executive to lead our fast growth market initiative and scale the important markets over time.

Key contract wins in the EMEA region were Telefonica, [Don's Supermarket], SeverStal and Affinity Pet Care. In the Americas we signed Dr. Pepper Snapple Group, Continental Resources, Bob's Discount Furniture and Banco Industrial. And in APJ key wins were Japan Post Holdings, Queensland Motorways and Petrochina Planning and Engineering.

Now let's take a look at our industry performance. We saw good results this past quarter in asset intensive industries like oil and gas, as well as in public sector and financial services. In fact, financial services as a whole has been the best performing industry year-to-date. One reason is that in this environment financial services companies are eager to lower cost and improve productivity. The other reason is that they can run a more efficient and profitable business with the depth and breath of functionality offered by SAP Solutions.

In one example the fastest growing bank in Columbia, Banco De Credito with 39 offices throughout the country and international operations in Venezuela, Panama and the US, went live with SAP at the start of 2009 and reached its goal of having a single platform with SAP in the quarter.

In another example, [Benize], one of the top retail banks in Brazil, has deactivated 15 legacy systems, some created as long as 20 years ago, after implementing SAP improved its efficiency and reduced its operating risks. The bank expects to achieve a strong return from its SAP project by substantially improving operating profits. We are moving the needle.

In conclusion, let me comment on Q4 and our go-to-market strategy. We're further segmenting and specializing our sales force to focus on specific market segments. Premier customer network, which I've talked about in the past, large enterprise, mid and small customers alike, we're tailoring our value proposition to longer-term relationships at the top and volume at the mid and low end while leveraging a multi-channel approach between partners, inside sales and direct sales across all segments.

We do this in 25 industries across the world to ensure that our customer can leverage the full breath of SAP products in our portfolio and do so in an industry context that they care about. We know that the product, industry thought leadership and the business content of our people is our competitive advantage. We therefore continue to create a learning culture where we train our people on our solutions and the end-to-end value delivery of those solutions so that customers choose SAP as their trusted advisor for business performance.

Most importantly, we're laser focused on Q4. We have a very tight execution plan aligned across all segments of SAP, all functions and all regions. And I'd like to point out that we're leveraging our own analytical tools from BusinessObjects to not only manage and track our largest opportunities but our entire pipeline and volume of deals. This level of clarity is changing the way we manage our business in real time. Our team is fully mobilized and committed to execution.

I'll now turn it back over to Leo.

Thank you, Bill. Let me provide a brief product update on a few key product areas. First, we are seeing a soft start with our new SAP BusinessObjects X4 Solution, which is an easy to use but powerful business intelligence tool that brings together search and navigation capabilities with the speed of in memory database technology. We already have very satisfied and actually enthusiastic live customers on the product. The pipeline is strong and we continue to receive positive feedback on its ease of use, its robust search and data analysis capabilities and its high performance and scalability.

Second, our strategy around SME continues to go well despite the tough environment as we remain the clear market leader in SME with a wide and growing market share lead. We owe our strong competitive performance in SME to our clearly defined market segment strategy to capture what we believe to be excellent growth opportunities with three defensive quarters in the highly segmented test market. (inaudible) products now, SAP business won for the lower end of the SME segment, SAP Business ByDesign, the middle tier of the SME segment and SAP All-In-One for the upper end of the SME segment.

As for SAP Business ByDesign, we remain on track with our rollout. We continue to add charter customers during the past quarter who are starting their projects on the current version feature pack 2.0, which was released for productive use according to plan in July. With feature pack 2.0 customers have access to [search five] enter and process (inaudible) and other enhancement of the feature pack 2.0 is to better decision making capabilities with integration to the SAP BusinessObjects portfolio including Crystal performance software and Best performance from Excel to your software. Our development team is already working on the next version of Business ByDesign, which will be focusing on multi tenancy, flexibility and extensibility. We will provide you with more details early next year.

And third, we are pleased at the progress we are making in extending our On-Demand Portfolio for large enterprises. As I mentioned last quarter, our On-Demand Portfolio includes SAP Business ByDesign for the mid markets, SAP BusinessObjects On-Demand Solutions for [close] to midmarket and large enterprise and SAP Customer Relationship Management, SAP eSourcing and SAP Cap and Trade for large enterprises. You will hear more about our On-Demand Solution for large enterprises also in 2010.

Over the past few weeks there have been many rumors circulating in the market regarding our support relationship with Siemens and, as you probably read, we have put those rumors to rest as we expanded our strategic relationship with Siemens to Siemens selection of SAP SRM for its e-procurement operations and we renewed our service relationship with Siemens to [grow] with maintenance support for all SAP Solutions including support for some of Siemens in-house developed solutions that connect to SAP Solutions. I think this demonstrates the value of our support offerings and the strong relationship we have with so many of our customers who rely on our software and support services.

Let me finish up by saying that we remain a growth Company and we are in an excellent position to achieve strong profitable growth when the economy rebounds. We have a robust, respectable business model that can provide us both top and bottom line growth. Importantly, despite the challenging times we have continued to focus on innovation and, as a result, our new product pipeline is very encouraging, which is critical for driving our business forward.

We are in a strong competitive position, twice the size as number two, allowing us to maintain our market leadership in large and small enterprises and in all regions of the world. There are great opportunities in new emerging markets and we have the broadest and deepest, fullest portfolio and industry solution set in enterprise applications. All of this combined I feel encouraged about our midterm prospects.

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

(Operator Instructions). We will take our first question from Michael Briest from UBS.

Leo, I was wondering could you talk about the guidance for the fourth quarter implicit in the guidance for the year? Maybe you can talk around the close rate assumptions you're assuming for both the high end and lower, low end of that, whether you think there's any uptick in close rates versus Q3, the same or whether it's getting worse and maybe whether maintenance will be maybe flattish sequentially because of the shift in the business model towards subscription. Thanks.

Okay Werner and I will answer the question together. I'll try to take the first part and Werner will give you some facts into the second part. We are in a bit of an interesting situation, Michael. What's happening is that on the one hand we see some encouraging signs. Pipeline is increasing. Actually it's been increasing for quite some time. We see that the trends and volumes are pointing to the right direction as well so from that perspective one could say things are looking better.

Now, on the other hand, we also know that the slightest change in mood has an impact on closure rates so we're trying to give everyone a very, very conservative view on how we believe the quarter will play out. This is a very peculiar year and we should not apply normal metrics to a very peculiar year, which is one of the reasons why we have decided to give you the view, the hypothesis and not the guidance on what we believe could happen in Q4.

Werner, maybe if you would on maintenance?

Yes if you look to the support for the fourth quarter we assume that we might see a very slight increase in support revenue quarter-over-quarter and I think it's clear with this I want to reiterate this. With this assumption on SSRS revenue in the range between 6% and 8% it's clear that we will see a decrease in software revenue. Michael, you wrote this in your comment already. I only wanted to reiterate that this is the matter of fact for the fourth quarter. However, this doesn't tell us anything about the future of SAP as a growth Company, as Leo stated before.

Thank you. If I could just ask one more, you've obviously talked about face deals increasing. Maybe you could put some context on in Q3 what value of deals you signed or what the licenses would have looked like if they'd been signed on the traditional up-front model. Thanks very much.

I think the only thing we can say, Michael, is that, of course, the numbers of larger transactions decreased dramatically we had some larger transactions. I think we mentioned Telefonica for example as one of the largest transactions in the quarter but even if you have large transactions from a pure revenue recognition perspective you cannot assume that the entire revenue can be realized in the quarter we signed the transaction. That's one of the implications and the other is that we see a strong increase in order increase for subscriptions but that's something we cannot and will not bring down to details on a deal-by-deal basis but, more importantly, it led the increase, order increase through subscriptions and this is healthy for our business model going forward.

Okay next question please.

Phil Winslow, Credit Suisse.

Just one more question back to pipelines, Leo, you mentioned that you were starting to see an improvement in pipelines over the past multiple months and I guess this is a question for both Bill and Leo is that when you think about just sort of pipelines improving, what is sort of the lead time when you actually think about those converting into license revenue and sort of to the degree how should we think about that as we trend to 2010?

And then also with your sort of implied Q4 guidance here, how shall we think about just those big deals? You've been pretty cautious on those closing. Have we to a large degree kind of flushed those out of guidance for Q4? Thanks.

Yes this is Leo. Let me try to reemphasize what Werner has been trying to say to Michael and (inaudible) what to do. What is happening and what we are actually trying to do is to move a little bit away from the big deal and one-time shot up front revenue kind of a situation and actually try to drive our business model towards a more balanced situation where we have some of those. There will always be some of those, but also where we will start to transform some of these are deferred, that [dilute] the year, be they subscription or be they [fixed]. So from that perspective the transformation of the pipeline is actually happening maybe a little bit slower than in normal years because we are living in a peculiar year.

But what you will not see is the, you know, the usual peaks and valleys in the [first] that are basically impacted by this or the other [real] transaction happening or not happening at a given date. What we are trying to do is to drive to a more sustainable and more long-term driven or medium-term driven business model where we actually take some of these transactions and actually try to enter into multi-year agreements with our customers.

The good news about that is that this business is very sustainable, very healthy business model, which is welcomed by our customers and actually it's welcome by SAP as well because as we are driving our business model towards this it will give us actually better business and intrinsically better margins over the medium and long-term. By the way, that's one of the reasons why we are trying to also transform our current situation so that we can actually go through this adjustment without having a hit on the margins.

Thank you. Next question please.

Ross MacMillan, Jefferies.

Werner, can you just go back on the third point you mentioned on the support and maintenance revenue in the quarter? You said something about a EUR10 million deferred. I didn't catch that. If you could just recap on that, that would be great.

Yes that's very easy, Ross. We had a one-time effect in Q2 of this year, which amounted to roughly EUR10 million and if you compare sequentially support revenue growth you have to eliminate this one-time effect in Q2, which actually was a catch up of the previous quarter.

Yes great that's what I thought. And then can you just recap on the sales allowance that you have at this juncture, at this point in the year, for maintenance revenues that have not renewed?

I think what we normally do is we set up sales allowance at the beginning of the year in order to neutralize the risk we see on the maintenance invoices we send out to our customers. This is higher than last year. We talked about this already two times during the course of this year and I think the level stabilizes now and we see what we have to do on top in 2010 but there are not any extraordinary movements we see and saw in the third quarter now.

Great and then maybe just one for Leo, as you think about Q4 it sounds like there's a fairly wide sort of scenario here, maybe EUR200 million on license sales. I think you also said earlier in a response to a question you were trying to take a very conservative stance. I just I guess the question is I mean if we saw more of a kind of flush and more large deal activity do you think that your high end of your range encapsulates all of that, the high end of the range that you've kind of laid out for 4Q? Thanks.

Well, I would suggest that we do not speculate on this and, as I said early on, Q4 is a -- is going to be, of course, our largest quarter. It's going to be a significant quarter. We're talking about a lot of money that needs to be sold. Bill and his people are busily doing that as we speak. We are trying to provide an -- a hypothesis and are trying to underpin our margin guidance and we are sticking to our margin guidance. We are very -- we confirmed that again and that's really the guidance we provide. The rest is basically a hypothesis. A lot of things can happen in this quarter. A lot of things are depending on the mood, on the environment but also, as I said early on, we do really want to drive a bit of a change in the way we go after these very large transactions.

What is also very important, as we had talked about I guess, is the growth that we see in volumes coming in the lower end of our business. There actually we saw a positive trend evolving in Q3 as well so all in all we have tried to give a management judgment on this and hence the hypothesis that we gave you and I would suggest we leave it at that and we'll see what the quarter [hits].

Sarah Friar, Goldman Sachs.

This is [Stephanie Withers] on for Sarah. So you emphasize that SAP remains a growth Company and that this is a peculiar year. What can we expect? What types of levels of organic growth can we expect longer term as we return to a more normalized environment and what would be kind of the key products or new delivery methods that you'd highlight in achieving that type of organic growth?

Stephanie, thank you for asking the question. It goes without saying that we'll provide a 2010 guidance in January, not now, and I am not going to try to be pinned down on this or the other number. But let me maybe pick up the second part of your question which I think is a very relevant one.

We will be driving a lot of innovation into the market as we speak starting with Business ByDesign, where we are getting more optimistic as we move along and where we start to see some really great things happening there, to what we're doing on the analytic side ranging all the way to sustainability where we have announced a complete sustainability solution set and things that we are doing on the technology side, which is in memory. I think that we are working on in memory and looking at opportunities to bring oSAP and all that together which in turn will drive a whole new way for [virtualization] again when it comes to production applications and I see the merge of analytics and [projectional] applications.

All of these solutions will be made available in network type of an environment, i.e. they will be providing the mass majority of our solutions in a hybrid fashion, be it in the cloud or be it on premise or in the (inaudible). I think as we'll put SAP in a very unique situation, we will continue to innovate on our product set. We will have partners or we have partners for innovating on top of our technology and looking out into the future I happen to believe that SAP not only has today the strongest solution set, but actually is going to strengthen that position significantly in a variety of industries.

Let me maybe give you one example when we talk about industry. We happen to be -- I don't think that that's well known so that's why I am mentioning it -- we happen to be the leader in platform for smart meter. There will be 1 billion smart meters in the world in five years time. There is a high likelihood that many of these smart meters will be running off an SAP platform. By the way, that's in the cloud so, as you can see, a lot of exciting things are happening, which motivates us to be rather optimistic for longer-term future. Thank you.

So as you think about the SAP portfolio in kind of achieving those goals, are there particular holes that you might like to fill through M&A?

You know, the wider your portfolio the more interesting opportunities you create. You could look at vertical opportunities. There may be some horizontal new opportunities. There could be some geographical opportunities. There could be some channel opportunities and it's not that we are not doing anything on M&A either.

We last quarter, for example, we made an interesting transaction with a company called [Highbill], which actually gets us into an even stronger position when it comes to advanced billing for a utility among others. And then we did a deal with a company called SAS, which is a leading company when it comes to algorithms and particulate optimization with retail space and no only now we are already the market leader in retail but with this acquisition we actually make another leap forward. So we are not sitting still on that side too.

Gerardus Vos, Citigroup.

Two if I may, first of who on the kind of cost base, from a sequential prospect OpEx came down by around EUR25 million. I note that there was a sequential increase in R&D and G&A while in both kind of areas the headcount actually came down and I was wondering if you clarify what was happening there?

And then secondly, on enterprise support what kind of milestones and when do you need to hit the kind of milestones to justify the increase going into 2010? Thank you.

Yes let me take the first question regarding the operating expenses. I think the EUR28 million is a reduction of operating expenses from Q2 to Q3. Actually from my point of view it's EUR28 million. Let's please keep in mind that this includes and is diluted by stock based compensation expenses of EUR40 million and the proctoring expenses of EUR21 million. So if you exclude this we have the sequential reductions of EUR67 million and this represents [2.5%] and I think this goes in the right direction, so if you dig a bit deeper you come to an answer to your question without raising the concern you raised with this question.

And yes the enterprise support, as you know, we have actually institutionalized something rather unique in the software industry. We are going to make public a series of KPIs that we want to have in order to justify the next increase in enterprise support. These KPIs are due for publication in the next weeks and then they will trigger application might be the next price increase for enterprise support.

James Dawson, Morgan Stanley.

Just a couple of questions if I may, in terms of the costs, I'd say the point on the stock based comp, but it does seem that you're talking about the costs, the comps very much harder from here but you do have your midterm 35% target. I am just wondering are you still pretty comfortable with that in terms of a midterm or three-year target let's say and what can we see? Is that mostly going to come from growth rather than cost cutting from here?

And then secondly, I see you changed that the management in the BRICKs. Is it fair to say was there an execution slip in some of the faster growing countries and that's why you've changed the management team or is it something different? And lastly, in terms of the cash piles building quite nicely, should we still expect buybacks if you don't do M&A if you get to say EUR1.5 billion of net cash? Is that a reasonable thing to think, Werner? Thanks.

Before I answer the first and the third part of the question, what was -- in terms of target you mention target. What do you refer to? I -- we didn't get this from the line. It was not clear enough.

In the past, you know, when you've got to EUR1.5 billion plus of net cash you tended to buyback some stock so--

And after this the first part of the question, which target did you refer to?

Was it medium-term margins?

Oh the -- yes sorry, your midterm you talked about trying to get to a 35% operating margin in the midterm but here I guess it looks like the costs, the cost work that you've done might be starting to be completed. Is it going to be just growth that gets us to this number or is there more that you can do on costs?

No it's -- yes thank you. Thank you for the questions. First of all, it's always a combination of financial discipline regarding our spending and, of course, growth. I think we shouldn't assume that we reached 35% only by cutting cost with no growth on the top line. I think if a company is in such a situation it can close the door sooner or later.

The second part I can answer is regarding the cash position and our strong cash flow. What we have done so far is you have seen we had EUR922 million in net liquidity. The first thing we did after a quarter in closing is that we paid back the loan for BusinessObjects of EUR1.4 billion. And your question regarding the share buyback, as it stands today, it's too early to talk about a share buyback. We will reevaluate this beginning of next year and come up with a clear position in our January earnings call where we also talk about the guidance for 2010.

(inaudible) we could take--

On the cost point, Werner, your R&D is up at what, about 15% of sales. Is it fair to say that there's still plenty of room though to take some efficiencies or do more with less in R&D?

Yes, yes and it is not limited to R&D. In R&D to get more out of R&D what we have today and if growth comes back we also see a decrease in the ratio on top of it and secondly, I would not leave out of the equation here G&A, where we also intend to bring this down to the range of 4% plus but significantly below 5%. Bill?

And this is Bill McDermott just to touch on the question regarding BRICK countries. First, I just want to remind everybody that we have added about 10,000 new customers this year, 4,000 in Q3, and many of them do come from the BRICK countries. As an example, APJ has been the growth engine of our business now for a few years and continues to do very, very well. With the exception of Brazil, which is continuing to be strong, I said the BRICK countries were a bit more volatile in Q3. That should not be interpreted as a trend by any means, so we are still focused on robust growth in those wonderful markets.

I do want to make a couple of points on what we did because it wasn't an execution issue when I mentioned we hired a new executive to focus on the BRICK and emerging markets. Instead, what we wanted to do is take the best business practices that we have built over many years now in our large markets and build those best practices into our fast growth markets to scale. We also wanted to establish a strategic planning discipline so there is a three- and five-year horizon to the way we think about these markets in addition to the quarterly execution, which our Regional Presidents and MDs do on a daily basis, so this is about plussing up those markets.

That's great. Thanks very much.

Raimo Lenschow, Banc of America.

Werner, just going back to one of your points that you made earlier, obviously you [recounted] of (inaudible) side of the crisis now and at some point we, as markets feel better, as your pipeline has grown we need to think about investing into the future again. How do you see the investment paying out for you guys, maybe starting on the sales line, how do you think about kind of adding sales people to kind of capture more of the volume and at what time do you think you -- at what point do you think you will be more comfortable in kind of adding more investment around the R&D line and maybe selective strategic investments further on in terms of getting Business ByDesign into the volume part? Thank you.

Yes, first of all, Raimo, I want to reiterate what we said several times now. We want to ensure that this financial discipline holds and that the savings we have generated so far are sustainable. If I go through the different areas, Bill can talk to and actual sales and marketing. We will definitely first go for a shift and lift exercise in all of the regions in order to be sure that we can extract more out of what we have available today in terms of people and then think about if growth comes and accelerated growth comes that we then reinvest a part of it into the business, meaning that we add additional people but before we go through this lift and shift exercise.

If you go to R&D first of all we have to see that we have a right organizational set up for R&D, which enables us to really get more out of R&D and if this is done then we can think about, along with accelerated growth, about adding people but that's not something for 2010. That's beyond 2010 because clearly the growth for 2010 from an industry perspective is somehow limited for the next year and the same would be true for G&A. Bill, anything to add from your end?

No I think you said it very well, Werner. First of all, the Board is a very cooperative and team oriented Board and the idea of lifting and shifting assets from one area of the Company to the other is working very well and what customers want is they want real product knowledge. They want industry domain expertise and they want SAP to help them deliver the value so they can gain the business outcome. The more smart people we can get closer to the customer at SAP the better and that would be not only in our core business but also in BusinessObjects. We also see an opportunity to galvanize inside sales and do even more there to increase the overall productivity of the sales force, so I think Werner said it very well and the Company is committed to this kind of cooperation around the customer relationships.

Thank you, Bill. Actually this was the last question we could take on this call. I would like to thank you all for joining and for discussion. Thank you very much and goodbye.

That will conclude today's conference call. Thank you for your participation, ladies and gentlemen.