SAP SE (SAP) 2011 Q3 法說會逐字稿

Welcome to the SAP Q3 Earnings Financial Analyst Conference Call.

Please note that, for the duration of the presentation, all participants will be in listen-only mode, and the conference is being recorded.

(Operator instructions.)

At this time, I would like to turn the conference over to Mr.

Stefan Gruber.

Please go ahead, sir.

Yes, thank you.

Good morning, or good afternoon.

This is Stefan Gruber, SAP IR.

Thank you for joining us to discuss SAP's third quarter 2011 results.

I'm joined by SAP co-CEOs, Bill McDermott and Jim Hageman Snabe, and by SAP's CFO, Werner Brandt.

Bill, Jim and Werner will begin the call with remarks on the quarter's performance.

We'll then have time for Q&A.

Before they get started, I want to say a few words about forward-looking statements.

Any statements made during this call that are not historical facts are forward-looking statements as defined in the US Private Securities Litigation Reform Act of 1995.

Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, and will, and similar expressions as they relate to SAP are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking statements.

All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations.

The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the US Securities and Exchange Commission, including SAP's annual report on Form 20-F for 2010 filed with the SEC on March 18, 2011.

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

So before I turn over to Werner, I would like to remind everyone that we have SAPPHIRE NOW events in Madrid, Spain and Beijing, China coming up in the second and third week of November.

You'll be able to get a firsthand impression of our products, and we'll have a special focus on mobility, cloud computing, and in memory technology.

Invitations to both events have gone out, and we are looking forward to seeing you there.

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

Thank you, Stefan.

Welcome to everybody on the call.

We are pleased to report a very successful quarter with an exceptionally strong top line growth and a very solid margin expansion.

But before I provide some more detail about our non-IFRS results, which are the figures which we use internally to look at our operating performance and as a basis for our guidance, I want to make a few comments.

First, in the third quarter, we recorded a non-IFRS adjustment of EUR111 million for acquisition related and restructuring charges.

This was compensated by the elimination of a positive effect of EUR17 million for stock-based compensation and the elimination of a positive effect of EUR723 million related to discontinued activities as a result of the re-measurement of the provision for our TomorrowNow litigation.

Second, the third-quarter 2011 number includes the revenue, profit and cash flow from Sybase while the comparative prior-year Sybase numbers are only included as of July 26, 2010.

Non-IFRS software and software-related service revenue for the third quarter of 2011 was EUR2.69 billion, which represented a year-over-year increase of 18% at constant currency.

It was driven by an exceptionally strong performance in software revenue, which grew 32% at constant currency.

Remember, Sybase was included for most of the comparable period, making this a very impressive organic result in the third quarter.

Support revenue increased by 13% year-over-year at constant currency.

Speaking of support revenue, 87% of new customers choose our enterprise support offering, which is up to 18 percentage points year-over-year.

Enterprise support accounts now for nearly 60% of our overall support revenue.

Subscription revenue decreased slightly to EUR93 million in the third quarter, down from EUR96 million in the second quarter of 2011, which is completely in line with our expectations.

Because of the strong top line performance, the SSRS gross margin increased by 90 basis points year-over-year to 83.5%.

The professional service margin increased by 1.3 percentage points year-over-year to 25.6%.

As a result, the overall non-IFRS gross margin increased by 190 basis points to 71.3% year-over-year.

Looking at the expense side of the P&L, you can see that total non-IFRS operating expenses increased 10% at constant currencies year-over-year.

This under-proportionate increase in cost is mainly due to the acquisition of Sybase and our continued investment in go-to-market activities where headcount in sales and marketing grew sequentially from the second quarter by approximately 400 FTEs.

We expect to continue such investments also in the fourth quarter.

A very strong top-line growth paired with our continued focus on operational excellence resulted in a strong margin expansion.

The non-IFRS operating margin in the third quarter of 2011 increased 3 percentage points at constant currencies to 33.1% year-over-year.

Headcount at the end of the third quarter stood at 54,598 FTEs, which is up 564 FTEs sequentially, including acquisitions.

The IFRS effective tax rate in the third quarter was 28.7%, which is an increase of 1.4 percentage points year-over-year.

The effective tax rate was significantly higher than expected due to the re-measurement of the provision of the TomorrowNow litigation.

Non-IFRS effective tax rate in the third quarter was 23.3%, which is a decrease of 5.2 percentage points year-over-year, and this doesn't consider the TomorrowNow tax effect.

Now to cash flow.

Free cash flow was, in the first nine months of 2011, increased by 42% year-over-year to EUR2.6 billion.

Operating cash flow in the third quarter 2011 decreased slightly compared to the third quarter of 2010.

The third quarter 2010 benefited significantly from the catch-up in our working capital management.

The third quarter 2011 was negatively impacted by payments made with regard to the TomorrowNow litigation and to purchase of hedging instruments or share-based payment plan.

By generating EUR3 billion in operating cash flow in only nine months, I'm pleased to say that we are well on pace to achieve a record year with regard to cash flow generation.

This strong result is mainly due to our better overall operating performance but also due to better working capital management, which can be seen in a further decrease in days sales outstanding.

Due to the exceptionally strong cash flow generated in the first nine months of 2011, we plan to further evaluate buying back shares in the future.

SAP's pipeline continues to remain very strong, and companies continue to invest in IT, in particular in innovative software solutions.

Due to the ongoing uncertain macroeconomic environment, our outlook for the full year 2011 remains unchanged from our previous guidance reported on July 26th.

We expect full year 2011 non-IFRS software and software-related service revenue to increase in a range of 10% to 14% at constant currency, but expect to reach the high end of the range.

We expect full-year 2011 non-IFRS operating profit to be in a range of EUR4.45 billion to EUR4.6 billion (Sic - see press release) at constant currency but expect to reach the high end of the range, resulting in 2011 non-IFRS operating margin increasing in a range of 50 to 100 basis points at constant currencies.

We project a full-year 2011 effective tax rate of 28.5% to 29.5% according to IFRS and a non-IFRS effective tax rate of 27.5% to 28.5%.

Before I finish, let me make a few comments about currency.

Although we had a slight positive impact from currency in Q1, we faced a negative impact in Q2 and Q3.

Therefore, in the first nine months of 2011, our non-IFRS numbers at actual currencies experienced a negative currency impact compared to what they would have been if translated at the exchange rate of last year.

Software and software related service revenue minus EUR140 million; total revenue minus EUR181 million, impacting both the SSRS and total growth rate by 2 percentage points each.

Total operating expenses were EUR124 million lower as reported at constant currencies, which resulted in an overall currency impact of 2 percentage points on operating profit.

There was no currency effect on the operating margin for the first nine months.

If exchange rates remained unchanged at the September 2011 level for the remainder of the year, our 2011 total year non-IFRS revenue in actual currencies, as well as our non-IFRS total revenue at actual currencies, would be both approximately 1 percentage point lower than the respective constant currency numbers.

Our non-IFRS operating margin at actual currencies would be on the same level as the respective constant currency margin.

As a result, the previously communicated rule of thumb, which stated that, historically, every 1% impact on total revenue resulting from foreign currency movement has resulted in a 10 to 15 basis point movement in our operating margin is no longer accurate, as currency exchange rates have shifted in different directions.

Lastly, I want to let you know that we have updated the estimate for our non-IFRS adjustment for the full year 2011.

For further details on these new estimates, please see our third quarter interim report.

Now I would like to pass it over to Bill.

Thank you very much, Werner, and thanks to everyone on the call for your time today.

We're exceptionally proud of the team's performance, delivering our best third quarter ever, with the strongest Q3 growth rate in a decade.

We saw our seventh consecutive quarter of double-digit growth in software and software-related service revenue, and license revenue growth above 30%.

We delivered outstanding organic growth, north of 25% across all regions, along with very strong margin expansion.

Despite the volatile macroeconomic environment, SAP is a growth company, executing on a powerful vision.

We're taking share and strengthening our market-leading position.

We are growing 10 percentage points faster than our nearest competitor, even with an application software business that is 2.5 times bigger.

Our strong results and our growing pipeline stem from the customer value SAP delivers and our solid execution.

Our strategy of innovation is the right one as investments shift from non-value-add hardware and services to business software.

With our new software solutions, like SAP HANA, Enterprise Mobility, analytics and cloud, customers can grow their business and solve the most pressing industry-specific challenges they face.

We are first movers in these markets and, simply put, we are firing on all cylinders.

We saw outstanding performance across our solutions portfolio, with significant market share gains, especially in SAP ERP and business suite.

Other high-growth areas are our line of business solutions, which doubled year-over-year.

In addition to the strong performance in our core, we are seeing outstanding momentum with our industry-leading innovations.

The customer response on SAP HANA and the business challenges customers can solve with SAP HANA is truly remarkable.

Jim will talk more about this later.

In enterprise mobility, we're seeing a massive shift and interest in how to manage mobile devices and extend enterprise applications to them.

This allows companies new ways to engage with their customers.

For example, SAP will help BMW to explore a number of concepts to drive higher value and loyalty to BMW drivers by offering better mobile services.

Initially, SAP applications will be used by BMW managers via the Company's iDrive integration.

Imagine that a plant manager can now check in real-time the key performance indicators to make the right decisions while being on the road.

SAP's mobile platform and secure mobile access through our Afaria solution, can be used for all BMW car fleets at any company who also uses SAP software.

Now, in terms of our regional performance, we saw our best third quarter in both traditional and emerging markets.

In EMEA, software revenue grew 26%, and we had a very strong quarter, with 13% growth in software and software-related services revenue, as well.

We are now more than four times the size of our number two competitor in this market.

We saw outstanding execution in the [DOC] region, particularly in our home market, Germany, where we had a great mix of large and medium size transactions and industry-specific wins.

THE UK, France, Netherlands and the Nordics also delivered outstanding performance.

Key customer wins in the region included Philip Morris International, Carlsberg Breweries, and Deutsche Post.

The Americas growth story continued in Q3, with 35% growth in software and 21% growth in software and software-related service revenue at constant currencies.

ERP deals, strong business analytics and HANA adoption made significant contributions in the US.

Line of business solutions like procurement had tremendous triple-digit growth.

Latin America saw another outstanding quarter, with triple-digit growth in Mexico and strong results in Brazil.

Key wins in the Americas included Banco de Brasil, Cementos Argos in Colombia, Bank of Hawaii, and GE Lighting.

Our significant momentum in the APJ region continues with our best-ever third quarter.

Our software license revenue grew a stunning 42%, and software and software-related services revenue grew at 24%, significantly outperforming the competition.

With triple-digit software license growth in the quarter in Japan, it's clear that customers are looking to SAP to globalize and transform their business.

Also, China and Korea delivered solid double-digit growth rates, with growth in public sector, manufacturing, and consumer product industries.

Key wins in Asia-Pacific Japan included Toto Limited in Japan, SR Steel and Wipro in India, Pacific Electric Wire and Cable Company in Taiwan, Pan-Pacific Company in South Korea, and Singapore Technologies Marine.

We continue to see tremendous momentum in emerging markets, with the combined BRIC countries growing more than 60% in Q3, again another record quarter.

In closing, our customer-driven innovation is driving strong pipeline across all solutions and regions.

Our SAPPHIRE NOW events in Madrid and Beijing will be amazing, and our leadership and workforce is highly motivated to win.

We have an optimistic view for our business for the remainder of this year, and reiterate our guidance at the high end of the range.

Our numbers for the quarter speak for themselves, and we're focused on delivering a strong close to 2011.

Now, over to you, Jim.

Thank you, Bill.

As you can see from our results this quarter, demand for innovative business software remains high.

Despite the volatile [macroeconomical] environment, companies in all regions remain strong and continue to make important strategic investments.

In particular, customers are investing in innovative software solutions that help them increase productivity and help them innovate their business.

The strong performance in the third quarter is a huge validation of SAP's innovation strategy, to focus on customer-driven innovation.

Instead of consolidating the past, we have decided to innovate the future by adding three new innovations - mobile computing, in-memory computing, and cloud computing - to our consistent business applications supporting businesses in 24 different industries.

Customers in all regions, in all industries and in all sizes, are voting for this strategy because it helps them increase productivity and accelerate innovation of their business at the same time.

Let's have a closer look at the different pillars of SAP's business, starting with the core.

Our expanding market leadership in the suite is not only a great competitive differentiator, it also helps drive growth in our other products.

Our customers know that they can build their businesses with us non-disruptively around this consistent core.

And just two weeks ago, we announced that we will deliver more innovations in the core with less disruption and reliable predictability for our business suite customers.

We will avoid unnecessary disruption by continuously delivering innovations for the core applications on a quarterly basis without the need for an upgrade.

As a result, we have extended regular maintenance for our core applications through 2020.

This long-term planning security is unprecedented in the software industry and demonstrates our commitment to our customers' success.

In parallel, we continue to enhance the core by acquiring complementary solutions and technology.

In this quarter, for instance, we acquired Crossgate and Right Hemisphere.

Crossgate optimizes inter-company business processes by offering integration as a service in the cloud.

It represents the next step in delivering our vision of business networks, optimizing business processes beyond the boundaries of a company.

From now on, SAP customers can link themselves into a wide and even-growing network of electronically connected trading partners and enjoy efficiency benefits from the seamless integration.

The technology of Right Hemisphere allows us to add three dimensional viewing capabilities to empower customers to visualize business processes, from design to manufacturing through sales, operations and service in 3D.

This acquisition is consistent with SAP's strategy to complement existing applications with innovative technologies while maintaining our successful track record of organic innovation and growth.

We're also leading in the mobility market, and we are on the right track to expand this number one position in mobile applications.

We are the leader in mobile device management with Afaria, where our market share is more than twice as high as the number two player in the market.

We have currently more than 30 mobile applications in the market, and, together with our partners, we will deliver several more by year-end.

Not only does SAP see this market opportunity, we have a rapidly expanding network of partners in the mobile space that continue to grow with us.

As an example, SAP's Sybase and Capgemini have announced a strategic relationship to deploy and develop enterprise mobility solutions and services based on the Sybase unwired platform and Sybase management mobility technologies.

The third area of innovation is in memory.

HANA, our in-memory computing solution, is truly changing the game in enterprise IT and is a big hit.

HANA became generally available in June by way of an exceptionally fast innovation cycle, from concept to general availability in only 13 months.

We've closed HANA deals in all regions in the world, and HANA contributed more than EUR60 million to our software revenue in the first nine months of 2011.

With this impressive performance, we feel very comfortable with our target to reach EUR100 million in revenue in 2011 with HANA.

Customer response to this product has been unparalleled.

We see very good use cases from a broad range of industries.

And as the pipeline continues to grow, we closed a good number of sizable HANA deals this quarter.

We're now very excited about the next evolution of HANA.

While SAP HANA is a very powerful technology in itself, the potential is even bigger when it is applied to specific applications and solutions.

We will soon release more details on our portfolio of HANA-based applications and how customers will be able to run SAP Business Warehouse on HANA without -- let me stress this -- without a relational database at all.

All data will be saved in main memory.

You can imagine the potential, given our large Business Warehouse customer base.

You will hear more about this at SAPPHIRE NOW in November in Madrid and Beijing.

Lastly, on cloud computing, where we have a growing portfolio for small, medium and large companies, first on business by design.

By the end of Q3, we had 650 customers and are tracking to deliver on our goal of around 1,000 customers by year-end.

We're also seeing good traction in the partner channel.

In fact, almost 80% of the By Design business came through the channel.

We've also seen increased interest from large customers, resulting in a higher number of average users, which helps us scale the product and clearly drives profitability for SAP.

Also, Forester has confirmed recently that Business By Design represents a viable software as a service offering worthy of considering by business process pros.

Even more, they stated that the wide range of functionality differentiates SAP from other SAAS mid-market ERP players, both best-of-breed vendors and suite providers.

Effectively, Business By Design functions as one-stop shop for a medium-sized organization looking to source the bulk of its business software from a single vendor.

Sales On-Demand is another cloud innovation typically for large enterprise customers who will benefit from the integration to the on-premise solutions.

We just announced wave two, which focuses on more easy-to-adopt, value-rich features, such as enhanced extensibility, sales collaboration, Outlook integration, analytics and mobility, a strong next-generation CRM on-demand solution.

And last week we announced the availability of Business Intelligence based on HANA in the cloud.

In closing, let me say that we will continue to expand our leadership position in the market supported by our clear and well defined innovation strategy, focus on the customer and the ability to be leaner and act faster to accelerate the pace of future innovations from SAP.

This will also help to double SAP's addressable market and make SAP a EUR20 billion revenue company with a 35% operating margin by the middle of the decade.

This is truly an exciting time to be at SAP.

We have the right energized people and partners.

We have the right products, lots of innovations, and, as you have seen, a lot of momentum.

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

(Operator instructions.)

Adam Wood from Morgan Stanley.

Hi, good morning, everybody.

If I could just maybe start off on the HANA side of things, obviously a very, very strong result in HANA licenses in the third quarter.

We're used to seeing Q4 come in maybe twice the rates of where Q3 is.

Could you maybe just update us on the pipeline and that side of things to see if there's any reason why that wouldn't be kind of normal seasonality for this product?

And then if there's any color you could give on the scenario buildout for HANA as we look into next year, and also the timing for that Data Warehouse release?

And then just secondly, on the linearity of the quarter in Q3, if we look at the FX, there wasn't a huge difference between the SSRS and the licenses.

And given that big move at the end of the quarter, we might have thought there would be.

Does that mean that the quarter wasn't so heavily weighted towards the end?

And give us a feel for what that means for the start of the fourth quarter.

Do we start off with a much better pipeline given maybe the third-quarter close wasn't as forced as usual?

Thank you very much.

Yes, well maybe I could start out with the answer on this one.

Thank you for the question, Adam.

First of all, on HANA, you should absolutely anticipate a doubling of HANA, or perhaps even more than a doubling of HANA, in Q4.

There's no reason why you shouldn't have that expectation.

Clearly we do.

Our HANA business is on fire, really exciting.

In terms of the Data Warehouse, or the Business Warehouse component, we are going to transition our customers and make an offer to our customers to move from BW to HANA.

We expect that to be an adrenaline shot for further growth in the HANA category for the Company.

So that's in great shape, and our customers are really responding very positively to it.

And finally, on the license and the SSRS growth in Q3, the license growth, as you know, was 32% year-on-year globally in constant currencies, and the SSRS was 18%, and clearly it was a very methodical, very linear quarter, and there certainly was no last minute nature to the quarter.

And therefore you should have confidence in the pipeline and the sustenance of our business going into Q4 and beyond.

That's great.

Thank you very much.

Thank you.

Next question, please?

Rick Sherlund from Nomura Securities.

Yes, thanks.

First, just to follow up on HANA, can you give us any sense of kind of how to triangulate on the ASPs for HANA, maybe number of customers that you've signed up thus far?

And also at SAPPHIRE in Orlando, [Hasso] had mentioned social enterprise, and you're working on that.

We've seen that demonstrated from some others.

I'm curious when we'll see that incorporated into your broader solutions.

Yes.

So the interest for HANA is extremely big, and we're actually expanding that interest with two efforts.

The one we talked about already is the BW replacement, where you significantly simplify the infrastructure and the cost around running a business warehouse, and that in itself is a strong validation of the value proposition for HANA.

This will go into a very large installed base of business warehouse customers.

You know we're the leader in analytics in the market.

And secondly, what we are also doing is we're packaging the HANA capability for existing suite customers to accelerate certain parts of the business suite that are very high data demanding.

And this will be also available and installable in volume at a much easier and cheap entry price.

So you will see us go from value to volume with HANA and, with that, expand the number of customers that are involved.

But I can say already now we have more than 1,000 customers debating with us on where HANA goes for them.

Your second question was around the social enterprise.

So I am -- understand your question is when will we see social network elements in our apps.

And when we launched at Orlando in May the Sales On-Demand, that application is, in fact, built on a whole new design principle.

We call it people-centric apps where the design point is what a salesperson needs to do to get the job done, which is a lot of social elements.

In fact, if you see that application, it looks a lot like feeds from Facebook.

It includes what a professional needs to do to be more productive in interacting with colleagues and partners to get the deal done.

So it's already incorporated in our applications, and you will see much more of that coming in the future.

We don't believe that this is a separate category.

We think it's something that needs to be integrated into the application.

Okay, thank you.

Next question, please?

Marc Geall from Deutsche Bank.

Hi, good afternoon, and thank you for taking my question.

I was hoping that either Jim or Bill could maybe sort of expand a little bit about the -- sort of the re-integration of the core.

Obviously there's a lot of excitement around HANA and the mobility solutions, but I really wanted to understand how this sort of impacts and potentially helps your longer-term sort of driver of increasing share of wallet and whether there are examples of either customer win-backs or customers that are migrating from your competitors' products to get examples or to get access to HANA and some of the mobility capabilities.

Yes, Marc.

Well, thank you very much for the question, first of all.

And maybe I could best describe it with an account like Carlsberg, for example.

Carlsberg, at the point of sale, wants to make sure that the shelf is always filled with their beer so their consumer always has their choice, which is Carlsberg.

That's the world they envision.

So at the point of sale, they want that connection, that sense and respond to the customer, to connect back into the supply chain so the shelf is always full with stock and their customer gets what they want.

The implication of that is a mobile solution, so you're moving a mobile application to the point of sale.

You're connecting the front end of the process with the customer all the way back to the supply chain, and this integrated enterprise is more and more what our customers are looking for.

I spent last week, for example, going across the entire Middle East, and it was a consistent theme - get me connected to my customer.

Get me connected to my data.

Make me more productive, and give me end-to-end integration so I can be more efficient, I can be more real-time, and I can be more mobile.

So this is now invigorating the core because there are core assets, such as supply chain or customer relationship management or new innovations around HR that the customer's also buying.

So they invigorate the core and they buy these new innovations as they need them, when they need them.

Jim?

Yes.

I would just add one dimension to that because you explained it beautifully.

That is the value of the consistency of that core.

I think it's very important.

We've said that all along, but now we really begin to see that.

If you have that front-end POS situation at Carlsberg, what they want is the impact on the planning and supply chain.

And our benefit is, of course, that we have one of those.

We have one business suite with a consistent data model and process model behind, which means there is one connection which makes it simple.

And not only simple and easy, it also -- significantly cheaper, because you don't have the [slew] of applications.

They're done inconsistent, which you mess up with middleware to try and make them act as if they were one.

They are really not.

So we get two benefits.

We certainly get the benefit of innovations on the edge that go much faster, and we can give the customer a significantly lower cost point in delivering that end-to-end solution.

Thank you.

Thank you.

Next question, please?

Michael Briest from UBS.

Good afternoon, and congratulations on the quarter.

Jim, one for you.

The R&D spend was roughly flat year-on-year.

You're obviously achieving a lot with that.

Can you talk a bit about the productivity that you're achieving as you've rolled out Lean and things, and maybe where that cost line item can go, going forwards?

And then one for Bill or Werner, I guess.

The Q4 guidance you left unchanged, or your full-year guidance is unchanged.

Quite understandable, the uncertainty out there.

But what are you actually seeing customers doing today?

Are you seeing any impact from, say, weaker credit conditions or particular customer segments in Europe, for instance, that are more vulnerable?

What is your assumption that's getting you to flat licenses in Q4, which is what's implied today?

Thanks.

Thanks, Michael.

Great questions.

And indeed, we've always said that we are on a track to a systematic improvement of the efficiency of SAP.

If you look at the margin expansion in this quarter, it was exceptionally high, and it comes from the fact that every single unit in SAP contributed to efficiency gains.

We're doing that by working smarter, and you mentioned the Lean efforts and the Agile development methodologies we're bringing into R&D as an example.

The R&D contribution to that efficiency gain is pretty significant, and it comes from a systematic approach that we've been now piloting and rolling out in every single unit, and I feel there's still efficiency gains to be made.

Today, with the same size of R&D organization, we are in 50% more innovation projects.

And that gives you a feel for the impact that we have.

This of course drives not only efficiency in R&D but also top-line growth opportunity.

Where could this go?

Well, I think we will definitely continue our efforts to systematically continuously improve.

I think we came a long way, and we are now on a base where we have a solid baseline to excel from.

We will continue to find growth areas to invest in.

My expectation is that the R&D ratio to revenue will be somewhere between 12 and 13.

Right now we're at 12.9.

And Michael, what I would say is, first of all, thanks for the question.

And I'll give you my take on it, and also this is reflected in the facts of our pipeline and our interactions with customers.

We're in a very globalized world, and the senior executives of companies are investing in innovation, and they're investing in growth because they know whether the environment is certain or not is no reflection of what their competitors somewhere else in the world might do.

So to stay strong and to come into uncertainty strong and leave it even stronger, you have to invest in information technology that's innovative and it helps you grow your company and make your company stronger.

This structural change that we're seeing in IT from hardware and services to business software is a trend that we expect to continue, and it's reflected in our ongoing pipeline.

And as it relates to Q4 itself, the pipeline is ever strong.

Our confidence is ever strong, and we didn't imply flat license in this.

We did imply single digit.

But that's because we had the best-ever Q4 in 2010, and given the uncertainty in the comparison, we thought that it was appropriate to hold the high end of our guidance.

But again, don't read that as any lack of confidence in Q4 or our business right now.

Let me -- Michael, two comments here, the first one related to the credit availability.

I think if you look to the customer segment [Lat] enterprise, you see around the world that corporates are really cash-rich.

They have the highest cash on the balance sheet since many, many years, so they will use this money to invest.

And number two, if you look to the mid market, we have options available from an SAP financing perspective, and the volume we have financed already globally in 2011 is more than EUR200 million.

So from that end, we have -- if there is a need to support financing in the mid-market for our customers, we have the financing available and arranged for these customers if they wouldn't get any credit from their house banks.

Thank you.

Thank you.

Next question, please?

Ross MacMillan from Jefferies.

Thanks a lot.

Very impressive numbers in the third quarter, so I guess two questions.

Bill, you've kind of touched on this, but I just wanted to make sure I understood.

It sounds like you don't believe there was any sort of pull-forward in business in Q3 from Q4, and that your guidance for Q4 is really just appropriately conservative, shall we say.

I just wanted to confirm that point and that there weren't any large deals that kind of came up and closed earlier than you expected.

And then a second question with relation to HANA, maybe one for Jim, as you start to move HANA either as the underlying data store for BW or into -- or as an engine, if you will, for existing applications, how much kind of re-licensing, or how much change on those underlying applications is going to happen?

And I'm trying to understand this from the standpoint of what a customer will actually have to think about in terms of change as they start to bring HANA into their environment.

Thank you.

So, Ross, thank you very much for the question.

Let me first begin by saying the strong Q3 results had nothing to do with pull-forward deals.

The quarter was very disciplined, very linear.

We saw both an increase in volume and an increase in deal size.

It was a healthy balance across all geographies, all industries, all market segments direct and indirect, just a really beautiful quarter.

We expect that Q4 guidance at the high end is in fact, as you stated, a reflection of high end of the guidance, ever-confident in our pipeline and our business model, but also respectful of the environment we operate in.

So that was the sensible thing to do with the tough compare year-over-year, nothing more than that.

Jim?

Yes.

On the HANA, let me try and explain.

The two scenarios that bring us the volume you rightfully articulated, is the BW replacement of the infrastructure below BW and the engines to accelerate existing applications.

Both of these we're able to install at customers with minimum disruption for the customer because we believe in this idea of innovation without disruption.

We're able to, in a very fast effort, to basically take the BW database out, move the data into HANA, and bring on the BW on top of that again, which means there's no immediate change for the user other than a significant speed improvement, and for the Company a significant cost reduction.

And therefore, there is an opportunity for us to monetize because we're adding value and reducing costs.

And when it comes to the packages for engines that are speed up in the suite, it's the same thing.

We have identified areas where companies have lots of data, where they want much more real-timeness in their analysis, and where HANA can bring factors like hundreds or thousand times faster response rates.

Things that used to take hours run at night are now taking a couple of seconds.

That we're able to install at customers with no disruption for the customer in a day, because we packaged that experience.

And let me finish, Ross, with one remark from my side.

Of course we are innovation-driven and customer focused, but at the same time, as Bill said, disciplined, and we are indeed conservative.

I think we have to consider all aspects, and especially the uncertainty in the macroeconomic environment must be taken into consideration.

Thank you.

Next question, please?

Philip Winslow from Credit Suisse.

Hi, guys, another great quarter.

Even if you strip out HANA from the results, the past two quarters you've had really phenomenal just core license growth.

Bill, what's the feedback been from customers of why we're seeing this type of growth, even with the macro uncertainty?

Are we talking about share wins, just enterprise applications just being strong?

Just what's the feedback?

And then also, Jim, you guys are starting to roll out the line of business on the [MAN] applications.

You've had the CRM module out there.

Just curious what the initial feedback has been and kind of how do you see that progressing over the next couple quarters?

Thanks.

Well, thank you very much, Philip.

I'll start off with the comment.

What we're seeing out there is a real move toward business outcome and business value.

And these customers know that they've got to innovate.

They know that they have to grow.

So with that as a baseline, what's interesting about our strategy is, as Werner and Jim and myself have repeatedly said, it's customer-driven innovation without disruption.

So if you're an existing customer, you get the innovation without disrupting the investments that you've already made.

If you're not an existing customer and you're dealing with this zoo of applications that Jim referenced, it's very nice to consolidate to this consistent core.

You don't have to do it all at once.

You can do it in pieces, but clearly you're doing it with an end-to-end vision in mind.

We meet countless customers on different continents of the world that simply state I'll start here in my home turf, but I know I need to extend globally on a consistent core so I can look at my business end-to-end in real-time, and I can have all my workers and my extended business network communicating with a common business process and a common data set so I'm a best-run business.

And only SAP can do that.

And what's fascinating is we see this core business, this business suite, waking up.

The sleeping giant has woken up because, with the edge applications of business analytics and technology, the new innovations of HANA placing such emphasis on real-time, extending business applications to mobile devices, you're now entering into the integrated enterprise conversation.

And whether that's run out of a cloud, on premise or simply on the device, customers see a holistic vision from SAP, and this is what they're investing in.

In fact, one of the things I would say is our win rate against the competition, although when we do face off with them, it's always been high.

It's never been higher.

And we're now seeing a lot of customers who are given a choice between upgrading to someone else's, quote-unquote, new and unproven platform or accept higher fees for support by saying, let me take a look at SAP.

When they look at us, we win.

And I think that's complemented well with the second question, the line of business on-demand solutions, where CRM obviously is a very important one.

The feedback we're getting is wow, and I say that not to try and sound marketing-ish.

The design point around people rather than process, the inclusion of mobility as the default desktop, and the inclusion of social networking capabilities in the design itself make companies go, wow, I didn't know you guys could do this.

In fact, I would argue that our biggest challenge in the market today is that most companies don't even know we have such a solution.

And when they see it, they get impressed, and some of them are considering to replace what they already have for CRM.

Thank you.

We have time for two more questions, please.

Gerardus Vos from Barclays Capital.

Hi, good afternoon.

Thanks for taking my question.

Just a couple, if I may.

First of all, you indicated that the BRIC region really was growing exceptionally fast.

I was just wondering how much is that, at the moment, of [the other] license revenues?

And secondly, just on HANA, perhaps you could update us on the pipe during the [guided] quarter and how that has been developing.

And secondly on HANA, could you give us a bit more kind of visibility on the kind of pricing?

I appreciate that, of course, it depends on the kind of configuration, but just -- could you just give us a bit of a feeling where pricing is going at the moment?

Thanks.

Maybe I start with the numbers.

If you look to software revenue in the third quarter, the BRIC countries overall grew by 66%, 66%.

And if you look to it on a nine-month basis, it's more than 30%.

It's 36% at constant currencies.

Bill?

Yes, and I will build on that by giving you a little feel for the HANA pipe.

Obviously we had an ambition to exceed EUR100 million in HANA sales this year.

I can assure you that that will happen.

We have tremendous momentum in this business.

The best run companies in the world are clamoring to HANA, and some of them obviously have already made their selection.

If you compare it to the alternative in the market that's been out there for a long time, heavily advertised, it's almost as big as the alternative in the market in its first generally available quarter, which I think is extremely encouraging.

And as I look into the pipeline, we have much more than a 3X coverage for Q4.

In fact, it's something more like 5X.

So it's really, really healthy.

And the pricing, as you probably know, you can enter into HANA, but we're not discounting HANA because HANA offers extreme business outcome and extreme business value.

So it's certainly not the low-cost product in the market.

It's just the best one.

Okay, thank you.

Thank you.

Let's take the final question, please.

Mark Moerdler from Sanford [Enstein].

Hello, two quick questions on it.

Like many of the other people questions, one is on HANA.

How much of the HANA revenue that you're seeing today is -- or how much and-or the pipeline is standalone database requests for people want to build on top of it versus how much is driven by the apps you've already developed?

And the second question is on CRM.

Are you seeing that the deals that have already closed are more existing clients moving over to the on-demand, white space, people who didn't have a solution, or are they conversions from major competitors?

Thanks.

Okay, so great questions.

On the HANA side, it is very clear to us that our value-add and biggest contribution is not a technology sell, it's an application sell.

And obviously we have experience of 24 different industries who know the most critical problems to be solved, how you can optimize the business in each one of these 24 industries.

And that's how we are value creating with HANA.

So it's not a technology.

I would say more than 90% of the business is business problems being solved either faster or business problems that you couldn't solve before are now being solved because you have the technology for it, so definitely an application play.

And on CRM on demand -- I assume that's your question -- the typical customer is a customer that has well functioning EIP in place, typically from SAP, and have some CRM but want to deploy much faster to many more people in a much more people-centric approach, where the value comes into the hands of the salespeople instead of just the sales management.

Those are the companies that are replacing traditional CRM approaches with CRM on demand, and yes, there are competitive replacements in those discussions.

Perfect.

Thank you very much.

Thank you very much.

This closes our earnings call for today.

Thank you all for joining, and we look forward to seeing you at the upcoming SAPPHIRE NOW event in Madrid and Beijing.

Thank you for joining, and good-bye.

Ladies and gentlemen, the conference is now concluded, and you may disconnect your telephone.