SAP SE
Q4 2005 Earnings Call Transcript

Published: 27 Jan 2006

[Stefan Gruber:]

Hello everyone and welcome to this SAP’s fourth quarter earnings meeting here in Frankfurt. My name is Stefan Gruber, I'm Head of Investor Relations with SAP. I’d like to quickly walk you through the agenda for this afternoon. We follow almost the standard procedure for these events. First of all Werner Brandt, the CFO of SAP, will walk through the preliminary numbers for 2005. Next Leo Apotheker, President of Customer Solutions and Operations, will provide you with an update on our regional performance and then Henning Kagermann, CEO of SAP, will speak on SAP’s performance from a strategic perspective. And especially how SAP sets the foundation to prepare itself for a much larger, addressable market in the future. I have also technical comment. As you know, this conference is being webcast on the SAP Investor Relations web page. That’s important later on for the Q&A, so make sure you use one of the microphones. And for those of you who are not in Frankfurt today, you can send us questions email. The email address is [e-mail], and we try to take as many questions as possible from the web. And finally, the Safe Harbor statement. Please note that except for certain information, matters discussed in today’s conference may contain forward-looking statement which are subject to various risk and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the Company’s future financial results are discussed more fully in the Company’s most recent filings with the Securities and Exchange Commission. And with that I hand things over to Werner Brandt. Thank you.

[Werner Brandt:]

Good afternoon and, Stefan thank you very much, especially for the Safe Harbor statement, so I can skip this right away. Five topics

[Leo Apotheker:]

Good afternoon ladies and gentlemen. It’s a pleasure to welcome you here today to Frankfurt, to talk to you about our outstanding results and our record year. Thank you Werner. So let me try to give you some additional information on top of what Werner has already provided you with. We had a very good year in 2005. The numbers speak for themselves. We grew our software license revenues by 18% in 2005 which, by the way, is the eighth consecutive quarter of double digit growth. So we are in a trend that we have been seeing in the past, and we have been benefiting from the dynamics that have occurred in all of the regions. And I will give you additional information on what happened in each of these regions. We had in the fourth quarter 2005 a record quarter when it comes to software license revenue. As Werner has already indicated, we grew our revenues by 18% to Euro 1.183 billion, that’s a 12% growth at constant currencies. And for the full year, as I already indicated, was a record year as well, Euro 2.783 billion. That’s a growth of 18% or 15% in constant currency. What is important for you to note maybe is that in Q3 and in Q4 we reported more software license revenues in applications alone, than our closest competitors did with database, middleware, applications and whatever else they sell together. All regions contributed to this success. I'm very pleased to be able to report that the Americas software license revenue exceeds for the first time Euro 1 billion, with a 32% growth. But also Asia Pacific had a record year and, therefore, record software license revenues of Euro 363 million, that’s an increase of 25%. And last but certainly not least, Europe came back and delivered strong software license revenue growth of 8% to Euro 1.393 billion. We successfully continued to implement our volume business model. And just to give you an idea of the total year the number of contracts that were achieved in the indirect channel over that period was 41% increase. While direct sales grew their number of contracts by 15%. We added roughly 500 additional channel partners, and we added roughly 6,000 customers through the indirect channel program. So, as you can see, we’re gaining significant traction. It’s under the cover of our SAP PartnerEdge Program, which we announced at SAPPHIRE. It’s also here a very strong and structured program, which helps us to attract all of these partners. And again, from, to give you some color from a comparative basis, we generate more business in the SME segment alone than any one of our closest competitors generates in their total business software license revenues. The average deal size continues to stabilize. You have two effects here. We have a slight decrease of the average order because of the high volume of deals that come from the indirect channel, and therefore from the lower parts of the mid-market. We compensate very effectively through the number of deals, and we have some large deals that help us balance this as well. However and in order not to mislead anyone, just to be absolutely clear, the price pressure is out there. It might be stable but it’s stable at a very high level, and we do not expect that price pressure to ease in the near future. Werner already mentioned that we had strong new customer business. We generate almost as much business from new customers, than the closest competitors generate with both new and existing customers. And if I look back at 2005, the new customers represented about 22% of order entry, but the number of contracts that we did with new customers increased 33%. We continue to focus on a certain number of priority industries. We have a continuity here, there the same as last year, and let me maybe focus in particular on retail for a second for obvious reasons. And I'm very pleased to be able to report that 2005 was a record year for us in retail. We had an outstanding growth rate in that industry of 63%. We are privileged to count 3,250 customers in the retail space globally who trust us. We did, as you know, some astute and smart fill-in acquisitions to complement our solution to that industry, and we have now probably the most comprehensive and complete offering for the retail industry compared to anyone else. And just to give you some examples of customers, we have Hugo Boss, Jones Apparel, Samsonite, The Home Depot, Zales and many, many others. We also pursued our efforts in the financial services. We had excellent results in insurance and we will continue our focus in banking, and we will continue to persist to convince banks to come, and become SAP customers. High tech industry has been a focus of ours for a number of years and again 2005 yielded good results. We had some outstanding new names that joined us in this industry

[Henning Kagermann:]

Well, ladies and gentlemen, three points from my side why I believe it’s a strong year. You have heard a lot of news, just wanted to pick three points, and number one is that we again were able to outperform the market. In particular in the software side by far. Number two is accelerated peer group share, because it was a year where we had to approve if an organic growth strategy is superior to an acquisition strategy. And the third one which we haven’t touched so far. You know that something’s going on in our market. Not from the industry, but that the next wave of new software is hitting the market. We announced this two years ago. It was enterprise service architecture which is a revolution for us. Not for our customers but for us. And the question is always what is the acceptance of the market? What are the customers saying? How fast is the adoption? And I want to touch this. I felt it was above my personal expectation in 2005. So number one, I have taken the market in euro, if you want you can put into US dollar but I've taken euro just because we report here in euro. You’ll see SAP’s 13% growth in total revenues, the rest of the market 5%. And if you look to the license revenue which is, I think, even more important for software companies, and the market is software companies, then you see SAP was 18% against the flat market1%. So very, very strong achievement in all regions and, as you have seen, for large enterprises as well for the mid-market. I would like to look to the peer group a little different. You see here our peer group 3.5 years ago, it was really a big peer group. It’s now a smaller one. But what I wanted to show was the distance we had 3.5 years ago. It was 30 percentage points to the number two. You saw that beginning of last year there was a big acquisition of PeopleSoft, Oracle acquired PeopleSoft, so moved up to 24 percentage points. At that time we had 55, so more or less the same distance we have had 3.5 year ago. You see what happened in one year. We gained 7 percentage points, they lost 8. I think we have a difference of distance now which is larger than ever. So we were able to accelerate our peer group share in all regions, in particular in US where we gained 10 percentage points. Third point, how can we measure if these new thing is adapted by the market been a success? Like you I'm measuring this mostly in terms of revenues, so therefore the first test was what type of revenue do we get from SAP NetWeaver? We all know that we made a lot of investment and a lot of achievement but what kind of revenue? We, If we carefully calculate the contribution come to RC1 Euro 0.5 billion and 30% is standalone revenue from NetWeaver. Also important, how many contracts can we, our three contracts which we still have, significant number converting to mySAP. A year ago I said we had roughly 6,000 desks. 900 to 1,000 a year brings us to a few hundred in 2010. This was also above expectation. We converted 1,150. So with these speeds, and I believe the speeds will go up over time, we have no issue to have the conversion done in 2009 or 2010, as we announced. We have more than 300 enterprise service architectural roadmaps with customers. That is different than our roadmap. So we sit together at the strategic roadmap where we share with customers our future development plans. They share their business plans, and we try to match both together. Because you know that promises more flexibility, more strategic impact, differentiation against the competitor, and you have to find out where. Also the partner ecosystem ramps up quickly. 150 xApps on SAP. So composite we are still on top. Three are not on partners which are built on, NetWeaver 1,035, their developer network is growing 260,000. We have now about 500 channel partners who can also help us to distribute these new ideas of composites, on top of the business platform in the future. What about the roadmap. It’s exactly what we announced in 2005, and so we delivered on promise. We will finish this roadmap in 2007, but I wanted to highlight here that we will deliver in 2006 more than we originally planned. We planned originally first hosted solution available on the Business Process Platform, with NetWeaver being planned for into Business Process Platform. This will happen. In addition, we will ship hundreds of enterprise services to the Business Suite, which is already in the market, connects us to our traditional products like our suite for the, in particular, to enterprises can easily connect us. NetWeaver also should connect us to other products which are available in the market. And we have decided to bring our mid-market product, mySAP All-in-One, to these composition for our platform NetWeaver this year, and extend the scope. So that’s not an ERP system only but more suite type of system. So then the platform strategy looks like this. I have highlighted this a year ago. I just wanted to give you a feeling or share with you where we are. No changes in tendency but much more details. There will be one enterprise service repository, which is key. This is the business language of the future, very important. We will come with more and more model-driven product in the future. It’s important that we can build composites on cross of all three implementations of the Business Process Platform. You will see we have three types of implementation. One for large, one for mid, one for small companies. That makes sense. So not one fits all type of implementations, but one enterprise service repository. The Business Suite is already out, left site. We will just continue to ship more services. I spoke about the adaptor, this is this custom. I spoke about the middle. I also highlighted that at the end of the year we merge our application platform into NetWeaver. It becomes the Business Process Platform, and the first hosted solution will be this mySAP All-in-One on the new Business Process Platform. It’s not the last one, but the first one. And finally there will be more on Business One as well, and we intend to convert also pieces of Business One into a leaner, smaller platform, to target the small industrial market. So you see it’s a very consistent and clearer picture of in which direction we go, but this one enterprise service repository is key for our clients. For small customer it means if they want to grow they can grow without disruption, and for large customer it means they can easily integrate their small subsidiary from a different solution. Now, what about beyond 2006, your first guidance? And I would like to share with you a little bit what our ambition is for the years later. And you might ask how important is 2006? It’s a cornerstone year. It’s a cornerstone year because in 2006 finally we launch an important set of strategic products to the market, which builds the foundation for our business and for our ambition in 2010. We have announced a lot. Mendocino, analytics, etc.. But in 2006 it hits the market, and we make all of them general available. That’s the difference. And that was the key year for us. You see here our ambition. I shared this with you a year ago. That today we have an addressable market of Euro 30 billion in product revenue. The question is what can we do? Where should we go from 20 to 30 to 40%? We don’t want to grow only. That’s one thing. We can expand our position. But in parallel I think it makes a lot of sense to expand our addressable market with a product, with a launch in, today and in the next years. We assume the market, which we can reach with our portfolio will more than double Euro 70 billion. You know we have targeted three areas. Leo mentioned them

[Stefan Gruber:]

Thank you very much. We will start with the Q&A session. Again, a technical comment, this conference is webcast. We have people who listened to this conference through the web and if you want to ask questions, please do so and send your e-mails to [e-mail]. We try to take as many questions as possible from the internet. But I think as a policy we’ll take the first question here from Frankfurt, maybe Bernard, please. It’s almost a tradition. I know I skipped it last year. But I want to go back to this SAP Solution.

[Analyst:]

Thanks a lot, maybe a question to this great picture of, Maybe is it likely the sore part and some more critical people think have grown so strong in the last two years, because of the weakness of your competitors, because you have put the things together. And, therefore, it was some low hanging fruits. It was easy to bring market shares to you. Therefore, if I look to the forecast you gave us, you expect maybe in the future by the new products, by enlarging your markets by getting stronger on the mid market. If I understand you right you at least expect to grow up to the year 2000, and compare the growth rate and double the size of the Company. Is that the wrong understanding? But if I put the pieces together maybe it’s a reading of your scene there.

[Henning Kagermann:]

Yes. To some extent you are right. It’s never a good strategy to rely on perceived weaknesses. I think you have to build up your own strengths, what we did and to follow your own strategy, what we are doing. And we wanted to highlight that there was a road map in 2007. That is not the end. I think it’s important that we deliver on this road map. It is a four year journey and we are far ahead of the competition. But I think it’s time now also for you and for us to look beyond. And I wanted to make clear that first of all we deliver on the road map. But this gives us a foundation for more products to come for, again, different revenue streams, different deployment methods, different ways to develop software, etc. So, the road map in 2007 is a very critical milestone for SAP. That we achieve this with improving the margin in parallel, and not spending tens of billions of dollars for acquisition, I think should be an indication that is the right strategy.

[Stefan Gruber:]

Okay. I think we take one question from the web. And the question, actually that is one topic which was sent to us by several participants. And this question’s from Mark Geall, Citigroup. He refers to the Investor Symposium in November last year. And his message was one of caution for pro forma operating margin for 2006. Exactly what has changed? Is it more the sustainability of the growth rate in the U.S., or better feedback on Mendocino, or just different costs increase assumptions?

[Leo Apotheker:]

I see I can do it, because I gave this presentation. Two points, Mark. One is we had to caution that the market is not believing there is a linear margin expand and that was in the market. And even with the guidance we have given it’s not exactly linear. So, I think it was good to caution the analysts. Let’s say, people would have expected one and above. And we didn’t want this because we couldn’t guide on this. And, therefore, I feel this is inline with our message in November. There is a second point. Yes, we came in very high on the top line and that helps also a little bit.

[Stefan Gruber:]

Thank you. You have one question here, so?

[Werner Brandt:]

Maybe I….

[Stefan Gruber:]

Sorry, yes.

[Werner Brandt:]

One on, with regard to the guidance for 2006. If you look to the margin expansion, 50 to 100 basis points, that’s primarily top line driven. And that’s also one of the reasons for this perceived discompensing.

[Stefan Gruber:]

Thank you. We’ll take one question here on the left hand side, Mr. Bruder.

[Bruder:]

Thank you. I would like to ask three quick questions on the growth outlook for ’06. If you take the 15 to 17% just on license sales, I think you’d look at a number of Euro 150 million give or take. Should this primarily come, or to what extent should it have to come from the new product launches, just to give a sense. Conveniently discontinued reporting on certain lines here, you never will be backed checked on this answer. Secondly, when you talk to companies like ABB, they are seeing great order intake from Asia, but also from other regions on automation systems. And I was wondering whether this you, would be for you also good leading indicators in more emerging markets, because your systems would obviously be one level up, so to speak? Or, whether you would even in some way cooperate with these companies in terms of sales approach? Thank you.

[Henning Kagermann:]

Maybe I can do the second one, and then we can come to the first. With this automation this is a trend coming up. And we also speak about it since one or two years, in particular here in Germany and Europe if it’s the discussion comes up. Can Europe come back to competitiveness? And the question is we have lost a lot of traction in the computer science and communication industry. And can we catch up again. Hardware is lost? And, therefore, we say okay software is an opportunity. The software is an opportunity, because of the convergence to telecommunication, where from a mobile point of view Europe is quite strong. And now I come to your point. Second is embedded systems, and so embedded system means that you see, or let’s see we believe we will see a kind of convergence between normal engineering and software. You’ll see it in all industries. That more and more software is replacing physical and electronic parts in complex systems. That is something where is Germany stronger. Europe is strong. So, it could be a future. You mention a European company, ABB. You could have mentioned Siemen Brothers. Is this an opportunity for SAP? I think so. I believe it will initiate another wave of automation in the entire industry driven by software. And because it will be, let’s say, a linking integration between the automation systems you mentioned and the enterprise systems we are delivering, I think partnership cooperation is important. We cooperate with some of the players. And we will continue to do more. But we also have acquired, if you remember, last year a small company Lighthammer, which has some adaptors into this automation system. So, therefore, you see that we are preparing ourselves. But we’ll do whatever we can to partner with our customers and not to compete. So, this is a big opportunity. It was a long answer sorry.

[Stefan Gruber:]

The first one, Leo, yes.

[Leo Apotheker:]

Yes, maybe let me try to reassure you that the reason we will, we are sure there would be a use for us to stop the solution opposing is exactly what Werner has told and not any other dizzier scheme here. The growth will come from many, many various parts. So, it’s difficult to give a pin pointed answer. From a regional perspective you know we don’t provide specific guidance, only for the other region on their performance. But what we can certainly say is that the U.S. will continue to be a growth driver for the Company. But Asia Pacific will also continue to grow. You saw that it had already a great record in the past. Mid market is another growth driver. Products that we brought to the market a year or two years ago are really kicking in. And the new products here give us time to get into the revenue stream. But they will have their contribution as well. So, you have a really diversified portfolio of opportunities to fuel the growth.

[Stefan Gruber:]

Thank you, so one question from the web again. There is a question from Mark Bryan, Deutsche Bank. He refers to G&A costs, which came in a little bit higher than expected. Are there any such reasons for it? And then more looking forward to 2007 is there a possibility to decrease G&A in absolute terms?

[Werner Brandt:]

Yes, maybe I take this question. The G&A expenses increased 17% year over year. And this is impacted by one time events in the range of Euro 12 million to Euro 15 million related to investment in our shared service centers, mainly in Europe based in Prague. And secondly, there’s some one time expenses related to some reorganizations in one region. And the second part of the question, whether we anticipate a decrease in G&A in absolute terms in 2007? Yes, and more so in 2008, because 2008 will be the year where the shared service center in Europe is fully operating with all countries being migrated into the shared service center.

[Stefan Gruber:]

Thank you. So, another question I think here now from the side, so Michael?

[Michael Schacht, Cheuvreux:]

Yes, thank you. Michael Schacht, Cheuvreux. Your strategic also 2010 is more than double SAP’s addressable market from Euro 30 billion to Euro 70 billion, and at least to keep your market share unchanged. In that respect you mentioned today, and also in the press conference this morning, that you are very confident with the road map for the business process platform. And then you might be, you could come out with releases earlier than expected. So, my questions would be like which releases could that be? And when could they come out? And secondly, what will be their business model for that? And I know what you said, Leo, that you would not like split the growth. But maybe you can say something about the business model? And then lastly, 21% market share in a Euro 70 billion market would translate into 20% average product growth over the next years. You indicate, I think, 12 to 15% for 2006. When do you expect it to show increasing momentum?

[Leo Apotheker:]

Let’s start with the business model. There are various options from a business model point of view, where you can try to get fees for the users of software, which is indirectly accessing the enterprise services and, therefore, the business process platform. That will definitely be one. Our other ones can be that you do it per service. Here we will have to see, let’s see how the market reacts, because that is the consumption based model. And then, so there are different models. And what we will do is we will prepare for all of these opportunities, because you have to test the market at the beginning and see how the market reacts. So, it will be not the business model, but three or four options. And then we will see what resonates best with the customer. That’s always smart. Yes, that’s on my side.

[Henning Kagermann:]

Mendocino is one of these examples. Look, Mendocino is a, to some extent a composite, jointly developed to, from Microsoft and SAP. And Mendocino is touching SAP software through services. There will be roughly 150 services we ship to the market others can touch as well, which do the link between Mendocino and the back end of the SAP software. That’s the typical example. So, therefore, we will see, I think at Mendocino it will be more a user type model, because they are users. But on the other side, I think we can test if somebody would, for example, extend Mendocino by certain composites, which are based on Mendocino and using these services if we do it with a different model that we can test it.

[Leo Apotheker:]

Maybe to add to your question and you pointed out yourself, it is positive revenue, not just software license revenue. And because of our expectations on the license side you also have an increase on the maintenance fees that have come into various streams here as well, which also gives me the opportunity to mention that we will launch a new maintenance service. And that is slightly more expensive than the current one and has, it contains significantly more services for our customers. That will also add additional revenues. And maybe back to that ABB question, it’s not that farfetched to believe that through business process platform there will be revenues that can be derived from machine to machine dialogues.

[Stefan Gruber:]

Thank you. So, first of all another question from the web, I think then we take a question from all of you in the room. The question from the web is the Kristian Pescher from JP Morgan. Was the recovery in Japan driven by customer demand for certain new product? Or is the recovery more attributable to a better sales execution. I think, Leo, if you handle it.

[Leo Apotheker:]

Yes, Kristian it’s never really totally black and white. But if I would have to wait a little bit, I would say it’s probably 70 to 80% better execution and the remainder on, attributable to slightly increased customer demand. If you look at Japan you, we have done quite a lot of things to restore our competitiveness and our effectiveness in the Japanese market. It’s been a painful process. It’s really starting to give us, our returns since the middle of the year. We are lucky in the sense that there are also seems to be the first signs of a general business recovery in Japan. Hopefully that will help as well. But right now the foundation has been simply better execution.

[Stefan Gruber:]

Thank you. Thanks. This is, shall we take a question from Bill Tusson, if that’s okay.

[Bill Tusson:]

Right, okay. Bill Tusson, BHS. A couple of questions maybe on the guidance first on the license sale revenue, I’m just trying to understand like where you’re coming from to get to the 15 to 17%. If I understand you right a large portion of it is probably due to new products that will shipped. How confident are you today, if you compare that to, let’s say, 12 months ago when you gave the guidance for 2005? Is there more risk in that guide, because there are products that are due to be shipped, sometime in the course of the year? Do you have an idea of how customers react to that early on? So, that is question one. Question two, on the headcount, maybe I was wrong in the past, but I understood you always that way that 2005 was the year of investment. And then we should expect to see quite a strong deceleration in the ramp up of headcount in the years to come. Whereas now 3,500 is pretty much the same as what you had in ’05. And lastly on Germany, if I go on non license revenue, the maintenance and service in Germany is for the last two quarters they have declining revenues there. And though I guess maintenance is still going up, so that assumes that service revenues in Germany are going down by close to 10%. And I just wonder, what’s the reason for that?

[Henning Kagermann:]

Let’s say we split these. There is not more risk in the guidance than last year. I think we always give a realistic guidance based on what we know what’s in the pipeline, etc. So, take it as a guidance as last year, a realistic one. Headcount, I think Werner knows better than me, and maybe Leo can talk about Germany.

[Werner Brandt:]

Yes, regarding the headcount, remember that we anticipated an increase of 4,500 in 2005. And we only employed roughly 3,500. So, we have something to catch up in 2006. And I think if you take this into a two year perspective, we exactly do what we said. And we should not forget that the high growth on the top line also requires some investment especially on the field side. Finally, I mentioned the interim increase in third party expenses going forward. Of course, this will be substituted by own employees. And then consequently third party expenses go down.

[Leo Apotheker:]

Yes, maybe the services business in Germany I need to explain to you that we don’t drive the service business in general and, in particular in Germany. From a top line perspective as well as much more from a contribution and margin perspective. And what has happened in Germany in 2005 was a shift towards a higher utilization and less reliance on third party. That mix changed. Therefore, there is a change on the total revenues. But it’s not something where we get particular about it. We’re really looking after, what we are looking for is contribution margin and, of course, to provide a good service to our customers.

[Stefan Gruber:]

Okay, thank you. Well, Ariel’s turn.

[Ariel Bauer:]

Yes, thank you. This is Ariel Bauer from ABN Amro. I’ve got two questions. The first one is on your 2010 outlook. I was wondering do you expect at any point a step change in the growth rate of SAP. I know there is a perception in the market that when the business process platform comes out, maybe suddenly growth rates will move to 20%. Or do you rather see this as a very gradual adoption over a five year view? It has very much to do with your view of the linearity of SAP, if you want. And then the second question is on Mendocino. You are inventor phase right now. And I was wondering if that is exceeding expectation as well, similar to the ESA. And in the longer term what percentage of mySAP ERP customer do you expect to move to Mendocino?

[Henning Kagermann:]

Indeed, we think there could be more step change in growth once the business process platform is out. It opens new opportunities. We have to prove that that is true. But these opportunities we don’t have today. And Mendocino it’s a little early. We have shipped it to 40 or 50 sites as a preview. We can say that we will ramp up in time. So, there’s no delay or whatever, it comes in time. And then let’s see. I think finally you get the real answer if you are in general availability if you ask me, because before we more or less managed the market in ramp up, because we select, we say how many. And the demand you can see once is generally available.

[Stefan Gruber:]

November.

[Leo Apotheker:]

The other side. And they are, we wanted to say how many users. That depends. You know that there is a significant number of users. Microsoft has an SAP account. It’s in the millions. And if you only get half of them, then we believe we can get several additional million users. Let’s see.

[Stefan Gruber:]

Here, a question from the right hand side, yes, the second row. We need to get the microphone, right here.

[Stefan:]

Hello, it’s Stefan, Fair Research. You mentioned that the number of new customers increased. The numbers of orders increased. And, but the view to us remains stable. So, is it fair to say or assume that the gap between the small deals and the large deals has widened? And can you quantify the gap? Second question is in respect to the revenues by industry, are you missing this chart in your presentation. Are there any material changes? And third question, in respect to pro forma earnings wouldn’t it be a good idea to change now to normal earnings, because now all the stock based compensation expenses are now in the P&L in the U.S. companies? Thank you.

[Werner Brandt:]

Sorry, I’m, I take the last part of the question with regard to pro forma earnings per share. There is, there’s good argument you provide. But you have to consider that we always compare to 2005. And here we have two years which are not treated in the same way from accounting perspective. So, if you go ahead to 2007 then you have a better comparison to 2006, yes?

[Henning Kagermann:]

Yes, your question regarding deal size and the comp provision. Yes, the volume is coming. The vast increase in deal sizes is coming from the lower end of the market or, in fact, it will be more of the size. And it’s coming from simply the fact that even large customers also buy in smaller increments. Now, it’s not because you’re a large company you by necessity have to pay the large order. So, it’s our capability to actually handle that volume that is enabling us to actually achieve the results that we are presenting. And in fact, yes, without going into all of the details, it is clear that because of this vast increase in the smaller deals, then the average deal size by definition goes down. Now, that doesn’t mean that there are no large transactions out there. Actually there are some which helps us to pull the average back up again. And I can assure that SAP get more than its fair share in these last years as well, wherever they occur. So, that’s well managed.

[Leo Apotheker:]

I can maybe comment on the industries. We have three sectors, as you know, and there are several industries in. There is always a plus/minus one percentage point, or whatever. The only larger one I have in mind, I have not all in mind, was we had a very strong end process industry. And, therefore, this creed is lower because manufacturing more or less a zero sum gain. And I don’t know what the reason is only it was a very good chemical. It was very good bad process. When I looked what came to my mind was stronger. That’s, but it can be different next year, because manufacturing was, on the other side, constant.

[Stefan Gruber:]

Okay, another question here on the left hand side, Mrs. Koeller Mueller.

[Koeller Mueller:]

Thank you, Koeller Mueller, Sal Oppenheim, a couple of questions. You’ve mentioned that you will have a new maintenance scheme for some customers. When will it be introduced? How much it will cost, if you can give a little bit more detail? Then also on your dividend policy, what shall we expect this year going forward?

[Henning Kagermann:]

Okay.

[Koeller Mueller:]

And the final question is what kind of technologies you will be focusing on if you are talking about this targeted continental acquisition in the future. Thank you.

[Henning Kagermann:]

Do you want to deal with that one, Leo?

[Leo Apotheker:]

Let me maybe answer the premium support offering question. So, that’s the name of the new offering. It’s called premium support. It targets our customers, all of our customer in fact with the intention of providing additional services, actively guiding them to achieve a continued, and that’s important, I’m stressing the term continued and effective business operation on an ongoing basis. It will be charged at 22%, which is still very competitive, and it will be made available as we speak. It is out there as we speak. It’s being launched. It should actually be promoted to our customers as from the end of the month, but it is now available. We launched it after an in depth study with our customers and we had an overwhelming response, a favorable response from our customers to provide such a service.

[Stefan Gruber:]

The question was on the dividend policy.

[Werner Brandt:]

Yes, dividend policy. I think we all know that the final decision will be made in the Annual Shareholder Meeting based on a proposal made by the Supervisory Board. We gave already some indications with regard to the dividend. Number one that we want to increase the dividend to a level that we achieve a payout ratio of 30% is, was something we said already in May of last year. 30% is the historical payout ratio of SAP. We want to come back to this one. Secondly, we, you can assume that the dividend will be based on earnings growth. So, it’s depending on the growth of our earnings.

[Henning Kagermann:]

Yes, and for make decisions nothing has changed it’s either technology or one of our key focus industries, or emerging markets. This is the portfolio roughly.

[Stefan Gruber:]

Thank you. Okay, I’ve got a question here from Raimo.

[Raimo Lenschow:]

Raimo Lenschow from Merrill Lynch. Henning, correct me if I’m wrong, but if I look how a new software release works it’s a ramp up phase, where you have only a few customers. You look if it works and then it goes into GA. Now, you said there’s new customers, new products coming on stream next year, which is going to help you to increase your revenue rate. Are we going back now to the 6,000 customers you are sitting on are free. That they are getting more comfortable that they are missing out and hence, you are very comfortable about the guidance and the accelerated growth next year, because you see that a lot more ERP customers are now in a situation that they see some acceleration of growth. The second question is, it’s more a housekeeping. You’re approaching now the Euro 10 billion mark and that’s a very important point for a software company. Should we try to book that into our diary in ’06 or ’07?

[Henning Kagermann:]

I think that depends on the currency fluctuations. So, therefore, I cannot give you an answer here. But coming back to the ramp up, to be precise we have not 6,000. I think we have now less 5,000 to 5,500 free contracts. We are not relying on, let’s say that we believe there is no rush of conversion. So, that the conversion part gets larger in the years to come. That’s not the point. If you look back, statistically you see that the conversion goes down, down, down from year to year. It’s more additional products and new customers, mostly additional products. That’s where we are after. Well, that’s not the idea. From ramp up and general availability that we understand, we have a mix this year. Some products were launched already in 2005, the Suite, for example, at the end. But ‘06 is key because in ‘06 the Suite in the second quarters will go general available. So, therefore, I have mentioned it. Some of the others, Mendocino you could argue have already started with the ramp up, but it get general available. But some of the other products go into ramp up. So, for example, business process platform more at the end of the year, etc. is indicated. So, we get a strong mix of products to go in general availability and new ones coming up into ramp up. So, that’s an important year in this point of time.

[Stefan Gruber:]

Okay, thank you. We’ll take another question here from Simon.

[Simon Andrews:]

Yes, Simon Andrews with Jefferies. You started out this year by guiding to accelerating license growth compared to last year. Can you talk about some of the investments that you need to make in order to reach that, say, number of heads on the direct side? And what investments you’re making on the indirect side to get there? And then secondly, coming back to the business user, you already have a collaboration with Microsoft and Mendocino. There’s a number of new business user functionality that’s coming out on Office 12 and Sequel 2005. Should we expect more collaboration with Microsoft on that side as well?

[Henning Kagermann:]

Well, I take the second one, then Leo can, might be, come to the first one. So far want to continue to focus on Mendocino and see what the success is. Then we will if we intend expand the Mendocino offering. That’s not a limited one. You can always have ideas and put more in. Or if the two partners were, offer something separately, or whatever, there are more options. So far focus is on Mendocino, because it has to work and there is the entire focus on.

[Leo Apotheker:]

Yes Simon, we indicated already last year that we are in a process of implementing all of the infrastructure that we need for channel. And you know that infrastructure isn’t built overnight. And we actually said that we would need 2006 and probably maybe even a little bit of 2007 to finish off the infrastructure for channel. That continues. That was baked in the plan and there is no additional effort required for the guidance. As to the revenue plans for 2006 on the tariff side, it goes without saying that as we saw some accelerated momentum at the end of last year, we had some acceleration in our capabilities to deliver that revenue. And we will continue to be smart about it, just as we move along and put the necessary feet on the street wherever we can actually generate additional income from that. But just to tie it back to the guidance, all of these things are baked back into the guidance. So, you have a balanced guidance, which tells you the entire story.

[Stefan Gruber:]

If we can take another question from the web. So, this time it refers to the services business, which we have touched already upon with regards to Germany. But here it’s more to order. The question is will you continue to increase capacity in the service business, if so by how much? And where can you get the cross margin to in this business? And then the German reference I can take out, because we have discussed this already. The last part of the question here is you hinted that Q4 service revenue should be flat year on year, but the performance was plus 10%. Can you tell us what’s brought this result and what we should expect for 2006?

[Henning Kagermann:]

Maybe I’ll try to give you part of the answer and Werner will certainly jump in on the remainder. When we look at the service business, as I said earlier on, we don’t drive it from a top line perspective. We drive it from a quality or service perspective to our customers and from a margin perspective. And so, what we’re doing is we’re adjusting and we’re looking at the portfolio of our service capabilities. And we have a number of initiatives on the way to balance our portfolio in such a way that we can aim for a long term growth margin in this business of about 25%. Now, we do this through premium services. We do this to high added value capabilities. We do this for globalization of our service rendering capabilities, as well as through some innovative things when it comes to providing service as a product. Some people want to provide product as a service. We actually showed you we try the other way round as well. And so that’s, when it comes to the capacity after the restructuring, we said that we would be looking at how we can manage our driven service business in the most optimal way. I already indicated early that we have been increasing our internal usage and decreasing the usage of third parties. But all of these steps have been taken, and that’s basically where we are.

[Stefan Gruber:]

Thank you. Are there any further questions here in the room in Frankfurt? I think we have time maybe for one last question here. Mr. Woller?

[Woller:]

Knot Woller from HVB. Just to summarize, you were indicating that you have some new products out with different business models in the past, like the ISVs charging for access to BPP, an increase in maintenance fee. Is it then correct to assume if all these products are successful as you might plan that the mid 30’s operating margins must not be the end of SAP’s margin potential in your view?

[Henning Kagermann:]

Good. Put it this way, there will be revenue streams with higher margins than today. And, therefore, if we are successful with the mix, it makes no sense today to say there is a limit in our business. But we have to prove it. And, therefore, because we prove first, because we talk a thing we should not speculate here. But you’re right. There will be revenue streams of higher margins than we have today.

[Stefan Gruber:]

Thank you very much for your attention and all your questions. And our next event is the Q1 earnings announcement on April 20. Thank you very much.

[Operator:]

Thank you for your participation ladies and gentlemen. That does end the conference. You may disconnect your line.