SAP SE
Q2 2006 Earnings Call Transcript

Published: 20 Jul 2006

[Stefan Gruber:]

Hello everyone, and welcome to SAP’s second quarter earnings conference here in New York City. My name is Stefan Gruber, Head of Investor Relations with SAP. I would like to give you a quick overview on the agenda for today. First, Werner Brandt, the CFO of SAP will walk you through the numbers and to the outlook. He will also comment a little bit on the issue which was discussed last week on the call, order entry versus recognized software revenues. Next, Leo Apotheker, President of Customer Solutions and Operations, and Member of the Executive Board of SAP will provide you with an update on our recent performance and our success in the mid-markets. Finally Henning Kagermann, CEO of SAP will comment on the business environment and our enterprise roadmap. I would like to give a quick comment. This conference today is being webcast on our Investor Relations web page. So later on, for the Q&A, please use some of the roaming microphones here in the room. Finally, before I get started, we have a Safe Harbor statement. Please note that except for certain information, matters discussed in today’s conference may contain forward-looking statements which are subject to various risks 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. Now I would like to hand things over to Werner.

[Werner Brandt:]

Thank you, Stefan. Good morning. Here is a snapshot of what we present today. First of all, Q2 financial figures at a glance. Both software and product revenues increased by 10% year-over-year at constant currency. We had a very strong order entry performance, and we are on track for the first half of the year. Total operating expenses increased by 7%, which gave us a leverage in the second quarter. Pro forma EPS increased by 38% to €1.41 and benefited from a reduced effective tax rate of 25% in the second quarter. Some important deal metrics for the quarter. Number of deals increased by 18%; indirect sales increased by 20% year-over-year. This is based on the number of deals. Direct sales increased by 17%, heading up to 18% quarter-over-quarter. Business with new customers is 24% of order entry. You see the number for 2005 here, and you see some metrics with regard to the increase of the number of deals with a size of more than €5 million and below €1 million. This seems to be very stable if you compare quarter over quarter. If you look to the half year figures, you see first of all we have 1,870 new hires on an FTE basis in the first half of 2006, with investment focused, as always, in R&D and sales and marketing. Of course, this number is also impacted by positions we did. Remember, [inaudible] commerce, [Pax] results and [Kimetrics]. I think it is important to mention that 42% of our new hires were hired in low-cost locations in the first half. For the full year, we still target to hire 3,500 employees in 2006. Further efficiency improvement, I think you saw a very strong pro forma margin increase by 80 basis points quarter over quarter, and this is driven also by a very strong pro forma service gross margin increase by 100 basis points, or 1% to 26% due to better utilization rates. It is important to talk about billable utilization. Now if you look to the key figures for the quarter, as we always do, you see software revenue as indicated, 8%, 10% on a constant currency basis. With 10% growth on the maintenance side to €856 million, and the service revenue increasing by 9% to €686 million. We see total revenue increasing by 9%, and this on an actual and on a constant basis. With the leverage on operating expenses increasing by 7%, we come to a operating income margin of 24.2%. This is not pro forma, that’s the real operating income margin. The operating income itself increase by 15% , You see all of the other metrics here. Net income before income taxes increased by 26%, and I will talk about later, a bit about finance income too. The net income increased by 43%. I mentioned before the effective tax rate and earning per share increased to €1.35 by 43%. Now if you look to the pro forma numbers, we always start with EBITA, you see EBITA increasing by 14% on a quarterly basis, if you look to the depreciation amortization it is roughly €100 million and the margin is 26.7%. The pro forma operating margin, excluding stock-based compensation expanses and acquisition-related charges, increased by 13% and the margin itself achieved 25.4%. The effective tax rate is down to 25.1% and this is due -- and let me say it very clearly -- this due from a settlement with fiscal authorities on one specific topic. The impact was €30 million and this represents €0.10 per share. We said last week and I would like to repeat this here, if you look to the tax rate for the full year, we will see a rate below 32.5% instead of 34.5%. The revenue analysis, let me stay here for a second. First of all, I think its important to mention besides all the growth rates we see two things

[Leo Apotheker:]

Good morning everyone. Thank you Werner. I’d like to give you little bit more color on what happens not only in the quarter but also in the half year; and then I’ll try to give you some visibility and some information on some of our performances across the board. So if I look at the half year, we grew our software revenues by 14%. In fact, Q2 2006 marks the 10th consecutive quarter of double-digit software revenue growth. That’s important to remember. We came in Q2 2006 exactly to The Street expectations, but a few things people should keep in mind. First of all, our order entry as Werner has already mentioned, moved much faster than recognized software revenue in Q2. Some deals were closed that will be recognized over a number of years. Werner already gave you some of the reasons why that happened. Indeed some transactions that we had hoped to close in the first half or at end of June were now closed in the second half of the year. The good news is none of these deals were and we expect to close all of them. We had a continued high win rate against our main competitor and that’s a good thing, despite many of the attempts that have been made, to change that, we continue to have a very high win rate. We have every intention of keeping it that way. We are on track to achieve full-year growth targets. Now let me give you some color about a particular transaction that we do, that is very important for us, for our customers, and also for you to understand. It’s global enterprise agreements. We are talking about a strategic partnership with a selected number of customers, and in fact what we are doing is, thanks to our ESA road map that is now available and the visibility that this has given our customers, we can now engage into a conversation with key customers who want to commit for a long period of time on the strategy for SAP. We can thereby underpin the relationship for a long period of time, usually five years. We signed two global enterprise agreements like this in the first half year, that is probably one of the things you have heard from, what you call nicely your sources of information. These are high double-digit deals; sometimes even low triple-digit deals. As I said, they commit the customer and SAP on a five-year relationship. We started this initiative about a year ago. Given the strategic nature of these things, the negotiations and the discussions and the conversations are long, because its not just about a deal it is about true relationships, the implementation of the software, what will be included, what won’t be included; because it is not a “as much as you can get” deal. It is usually with limited scope. We don’t put everything in there. Because of the nature of the deal, we recognize revenues quarterly on a pro rated basis over the term of the agreement. So if I take a global enterprise agreement of a 100 then it is over five years, that’s 20 quarters and therefore, the mathematics are pretty simple. That is as it is described on the graph. So when you hear that we win large deals that is absolutely true. We do win large deals. We actually win the vast majority of them. Some of them -- and we’re working on that, like in this example -- are structured in the way I’ve just described which explains also the large difference between order entry and our recognized software revenue. Our volume business continues to do really well. We added another 3,500 customers globally. Our indirect channel and our customer base continues to expand. We have now about 8,300 All-In-One customers; that’s a growth of 24%. We have 1,807 partners for All-In-One; that’s an increase of 24%. In Business One we have passed the 10,000 customer mark; its now 10,800. That’s 54% year-over-year growth, and we have about 1,300 partners selling Business One; that is 38% growth. As you can see, the channel is expanding and is gaining traction. We had strong revenue and a good number of contract growth from the indirect channel in the first half of 2006. We grew the number of contracts by 26%, and that gives us a little bit of a better balanced deal size contribution between the large deals that are something’s a little bit binary and denies flow of [inaudible] through the volume business. We had deployed the SAP partner program, which is recognize by many of the industry pundits as the best partner program in the industry. When I look at our various efforts in verticals in industries we have balanced our strong growth in both our traditional industries

[Henning Kagermann:]

Good morning ladies and gentlemen. I was asked several times these days if the business environment has changed and so I didn’t feel so from my thoughts, but we checked with Leo and the regional presidents and I can confirm again it hasn’t changed. People questioned this morning in the TV about some of the results of European vendors, particular business upticks and others but again, I think Europe is as it was before. So you should not expect any macro economic environment changes here. On the other side if you look to our customers I think how they make their decisions is also the same, you know that every customer these days want to avoid risk. So from that point of use switching vendors isn’t that easy and therefore I am pretty happy to see that our Safe Passage program is taking off, adding another 70 cases in the second quarter and accelerating in pace. They make their decisions based on business cases, that’s a reason why our win rate is still very high. We win in 70% of the cases where we compete head-to-head to our competition. They look for long-term strategic relationships and that’s the reason why Leo and this team have now for some time engaged in these type of negotiations he explained. I think this type of deals can only be made with key customers that have a large footprint of SAP as the trusted vendor for a long time What about price pressure? Yeah, it’s the same thing. You know we are in a highly competitive environment so price is one of the weapons competition is taking and we have to adjust to this, but it’s not getting really worse. It’s what we know and what affects us in our guidance. Last but not least sometimes questions about our enterprise SOA roadmap

[Stefan Gruber:]

Thank you very much. At this time we would like to start the Q&A session. I have to mention for those of you who follow this conference through the Internet who are not in the room here in New York, you can send questions by e-mail to [e-mail]. We will also try to take a couple of questions we get by e-mail, but I think we start here in the room first. Let’s see one here on the right hand side Charlie di Bona.

[Charlie di Bono:]

Thank you; Charlie di Bona with Sanford Bernstein. Werner, as your business model is sort of moving towards more roadmap type of deals where you have more of these stage deals, and the order entry becomes increasingly important; can you give us some idea of the size of the orders that are entered but not yet pushed on to the balance sheet? Sort of what Microsoft calls booked but not billed balances? Will you be giving us some idea of the trend lines that you see in that, because it seems to be very important in terms of modeling the company going forward?

[Werner Brandt:]

If you look back the last 12 quarters you will always see that we have slightly higher order entry then we have recognized revenue. We have some quarters where this has size which is exceptionally high as we had in the second quarter. We don’t see an extraordinary trend now starting, but that’s something we have to keep in mind. We decided to highlight this, especially this quarter, because it had an impact on our financial performance on the license side.

[Charlie di Bona:]

Can you give us an idea of the size, you have the size of the balance that’s currently not on the balance sheet and not pushed yet through recognized revenue. I mean is this a multibillion dollar balance, is it?

[Werner Brandt:]

No, not at all. If you go back to the example I made for the second quarter, you see 100 million in order entry and 30 million in revenue recognized; that’s the amount we are carrying forward and not more. We normally close deals where we have a chance to recognize revenue, but there are some where we have order entry first and then the revenue is lagging behind it. Henning?

[Henning Kagermann:]

I can add something. What you are referring to is what we had seen where we had this subscription deal and then we had deferred income and you saw this on our balance sheet. That’s not what we are pointing to. At the end of the day, you have the order book filled, but you cannot recognize because you don’t have it in the balance sheet. Why have we highlighted to this quarter? It was interesting, we are not talking about it, we will not show you, but it’s interesting -- if you look to the deals of Q2 last year and this year and you look to all the large deals and we were surprised to see less booked from the larger one, that was different I think in previous sections. So from that point of view it’s getting more of those. In the past we had it, but we had I would say one deal in a year and then the next year, another one. Now you see more, several in the quarter. That’s a point of view, and we gave you an indication if we compare order entry to order entry. Not order entry to software, Q2-Q2, then you would see us in the range you expect for software.

[Charlie di Bona:]

Do you expect that pattern to continue as these become a bigger part of your order flow?

[Henning Kagermann:]

I personally expect it a little bit because first of all Leo is doing this as part of his business model and he explained to you why he did it. The second point is honestly, from the top of the Company was always behind, not let’s say to take the future of the Company to today’s results. From that point of view I am always behind, if a larger deals I think our regional president are phasing them. So I am not pushing them in the opposite.

[Stefan Gruber:]

The next question is from the Kash Rangan.

[Kash Rangan:]

Thank you. Kash Rangan from Merrill Lynch. Just curious what seems to be a little bit of an uptick in the trend towards these larger deals being broken up into smaller pieces, would this not be an opportunity to reset guidance for the year and lower the risk profile on the stock? Just curious what your thoughts are there on that front? Secondly, it looks like we look at the operating expenses, you maybe slowed down hiring or you are starting to get productivity from the previous investments. How should we think about operating expenses going forward, especially as lot of the work with BPT is behind us? Thank you.

[Werner Brandt:]

Thank you. I think as a first comment, that it is too early. I think there is no indication for us to do it now. Second question, we will not change in the ways that we would compromise on investments just boosting the operating margin. I tried to say it in my talk. It looks like this. It’s not. I think it was more a shift between the quarters, as we pointed out in our call, we had a little bit of front-loaded investments this year, and if you look to the half year, it’s exactly what we waned to achieve, but a little bit more at the beginning of the second. So you saw this, for you, disappointing margin at the beginning and a better one in the second. Therefore, I said look a little bit more not quarter to quarter, we managed the year. But the clear answer, we will not compromise on let’s say our products, on the go to market and what we have to do just in order to please the margin. I said this last year and if we would see that we could gain market share by accelerating our investment, we would come and we would discusses with you or would announce with you whatever. We would not surprise anybody, but I just wanted to say from the tendency, let’s say investing into the future is still priority number one.

[Kash Rangan:]

This hasn’t changed?

[Werner Brandt:]

It has not changed.

[Stefan Gruber:]

A question here with Rick Sherlund.

[Rick Sherlund:]

Thank you. Couple of questions, first just to follow up on Charlie’s question on just how unusual was this in Q2 in terms of order entry versus recognized revenue? It sounds like this is something we’re going to see more over in the future. Should we anticipate this in Q3 and Q4 or just give us some perspective of how unusual perhaps this might have been in Q2?

[Henning Kagermann:]

Let me try to answer that question. What you see happening is a very interesting evolution of the business. You see on the one hand that our volume business continues to perform really well, which give us a stronger and stronger underpinning, if you want, of a nice flow of income and revenues that come from a pure volume side of the business. When you look at larger deals, because of the roadmap delivery were we stand right now we have an opportunity to structure the relationship with a number of very large customers who want to actually plan their own future, if you want, ahead of time as well in a reasonably innovative and smart way that is beneficial for them and for us. Now I don’t think we should talk about trends yet, because I don’t’ think that two or three deals are trends. You have our commitment that should this become a trend we’ll most certainly notify the market and yourselves. At this moment in time I think its little bit too early to do that, but what I think we you should expect is that these one or two that we have seen in the first half will continue. We believe that there is a potential for these deals. It’s extremely difficult to predict that they will close in Q3 or Q4 or whatever, because it is a long-term negotiation, a long-term discussion, it requires very careful branding, you have to really draw the roadmap for the customer and this is not just some general PowerPoint that you draw out of your drawer. But, it is a huge mark of confidence of our customers into our strategy. It helps us to deliver the value over time and therefore it’s something we should and that we will pursue. But, I don’t think we should go into big discussions about trends, because it’s too early to talk about.

[Rick Sherlund:]

The magnitude in the quarter then in revenues was enormous.

[Henning Kagermann:]

The magnitude, the size of them was a bit abnormal in Q2.

[Werner Brandt:]

Let me clarify one thing -- it is good to have a strong order entry, but it doesn’t mean that we do not stick to the guidance on the product or software license side, that’s I think important to mention.

[Leo Apotheker:]

I have also one thing. I think its also important to understand why we can't book those deals. You might let’s say question why some competition can book those deals. In our case we have to understand what we want to do, we want to help our customers strategically to go to the next level. So, what we do is we engage and say, look, join us on the roadmap to enterprise service architecture that makes you more competitive. If you do this it’s an entirely different thing than saying, okay I confirm that I maintain you for the next years. In our case you sell a little bit to future, in the other cases you sell a little bit yesterday’s products, and we don’t want this. So, from that point of view we are taking risks that we have, to some extent, valuable deal which you can't book according to your schedule because it’s in the interest of our clients at least. This case for SAP clients this is now the step to the next level and these I think strategic deals are key to engage with the clients. Because they will say, okay, we trust you, but is this really the one, it’s a longer roadmap, and do you help me? Can I get everything you invent in the next years as well? This is the most strategic issue. It’s not just confirming and protecting --

[Henning Kagermann:]

In fact just to add, we are not selling software. We’re selling a holistic IT strategy and holistic IT solution, a holistic IT implementation and we are actually selling or we’re partnering with the customer to implement our joint vision of how their business will look like over the next five years.

[Rick Sherlund:]

Could you just go back and revisit the maintenance decline and expand a little bit on that issue? Finally on the EPS number, we have the benefit of the tax rate. Why isn’t that additive to the full year number?

[Werner Brandt:]

Some maintenance amount in the EPS -- I also look to the maintenance. It’s a clear thing. If you see it in [inaudible] there are two implications you want to see what's behind. So first of all the good new is we are not losing customers, we are not losing customers. That was my first belief; that’s not the case. It’s a mix of several things. In some cases it’s mergers/acquisitions. So it’s just to merger, you lose some maintenance. In some cases it can happen that a customer has bought something where he felt he bought too much. He comes back and said okay will I ever use this? You engage and say okay fine give it away and then the maintenance lowers, those types of things. Sometimes a customer’s into financial trouble and you help him a little bit, that is the main reasons; all of them are not particular. What I really can confirm is this is not because we are losing customers. We are not. The growth of the maintenance for the full year is also in line with our product related guidance if I look to the guidance on the [inaudible] items, I think this was your question Rick. I think when we provided the guidance we provided a range of €0.20 and 580 to 6. I think the one-time effect we saw in the second quarter is roughly €30 million as I said; this is €0.10. From my perspective, this is within the range we provided at beginning of the year.

[Stefan Gruber:]

Thank you. There was in the mean time a question from the web again on the maintenance topic we have addressed already. Again if you want to send us questions by email continue to do so to [e-mail]. In the meantime we take a question here from the room, I think the first row.

[Art Weiss:]

Thank you. Art Weiss, Germany. I have a question – actually two about the enterprise service-oriented architecture. If one of you can explain a little bit how this concept and this strategy is linked to the facts and figures? In other words, how much software revenue already can you link to these strategies, to this new concept? How would this percentage be in the future let’s say for the rest of the year, for next year? The second question, your strategy is looking more toward the small and medium sized market, and how does this fit to the enterprise service-oriented architecture? To me it looks more as the solution for the big ones and not for the small ones.

[Henning Kagermann:]

That’s a very good question and indeed it depends on the definition. I will be more conservative. Then I would say, today it’s not much of our revenue, because we are on the roadmap. I could be bullish and say everything, which was NetWeaver and ERP is already in; but, if I am very strict on my definition, I would say only those where we have really service-enablement, which would mean for SAP today is mySAP ERP 2005 sales I would put into this pocket. We haven't done it so far. We have looked for ERP, CRM, et cetera, but its a good indication. I can promise that beginning next year we will give you guidance on this, because its in our interest as well. It’s important because next year we can then give you also an indication who is taking this faster? Is it larger enterprise or is it the mid-market? Because we address both with different products. I would say during this year or next year we will have these products available so therefore it makes sense to show it. Now to your question, is it only something for the high end? Answer is no for two reasons. If you look to large enterprises, it helps them to master heterogeneity and the speed of change. We all understand this. It is a complex environment you want to replace pieces without changing the rest, you want to adopt fast, all those stories fit nicely. Now, the question is what about the mid-market? In the mid-market you could argue, first of all they change fast as well, so that fits. But, on the other side the mid-market is not yet complex, they want the solution more or less out of the box. Here, this strategy helps us to go to market with mass customization. So, I would say nearly 1,000 of pre-configured solutions which would lower the price for implementation of TCO significantly for the mid-market, but still having the same functionality and benefit as the high-end. So I would say for them it’s more an indirect use and the last one I would mention it helps them also to integrate very quickly into the business of large ones or mid-sized ones, but our customer normally is large enterprises. Now is the question, okay how fast are you to integrate into your business? The faster and the more seamless, so more business you are make in the future, these are the benefits we sell to mid-market.

[Stefan Gruber:]

Thank you. Before we take another question here from the room there is a question from the web, obviously on the accelerated share buybacks in the first half. The question is what do you expect in terms of share buybacks in the second half of 2006?

[Henning Kagermann:]

I think we will continue to buyback share, but not accelerated as we did in the first half of the year. Remember, when we provided our EPS guidance at the beginning of the year, we said it is based on roughly 307 million shares outstanding. We are now on an average basis at this amount but this doesn’t mean that it will continue. So we will continue to buy back shares in the second half, but not at the same pace as you saw in the first half of the year.

[Stefan Gruber:]

Thank you and we take a question from the room; John McPeake.

[John McPeake:]

If I look at the GEA and also your -- at least this June quarter -- the increased booking versus recognition; should I think about the ratio of license to maintenance changing on a recognized amount per dollar deal?

[Werner Brandt:]

I don’t think you should. The maintenance is, as you know, a percentage of the license therefore there is a correlation when you book the license you book the maintenance. These ratios are what they are, and it is percentage driven so there shouldn’t be any change.

[John McPeake:]

Okay, it is just that existing maintenance payments become part of the GEA when you sign them.

[Werner Brandt:]

Yes, in the case of a GEA the situation is slightly different. You sign an overall agreement for 100; as your book is going forward in those hundreds you have the entire transaction. So you also have maintenance included in there.

[John McPeake:]

So per $100 of deal size you are still going to have the same ratio there won’t be coming and goings?

[Werner Brandt:]

Yes.

[Stefan Gruber:]

Thank you. And another question here I think in the back; Peter Kuper.

[Peter Kuper:]

Hi, thanks. Peter Kuper with Morgan Stanley. Earlier this week your friends at Oracle were saying that Fusion has tremendous advantages over let’s say NetWeaver on a [inaudible] type strategy. If you could share with us maybe just general comments on that; but also what customers that are believing in your vision see as advantageous over Oracle Fusion please?

[Henning Kagermann:]

Yes, thank you I have not seen this presentation, I would love to; but it can send it to me and then we can give more detailed answers. At the end of the day, I think my first answer is always that people or customers in SAP can touch what we are doing. So, we are not only talking about it, we have not only shipped NetWeaver, but we have also shipped products on it. So, if you look for example, to the year ERP 2005 it’s a services-enabled ERP. So, we would argue we are the same from our competitors and how does it work, what does it mean, how does it work. What I have seen some times is that they claim SAP is not following standards, SAP is using old technology and those types of things. The answer is first of all we are using standards, we are pretty open and otherwise how could we cooperate nicely with Microsoft and IBM platforms? The other point is always about what is the standard? My answer is always for me its more about giving choice to clients than declaring something I like as a standard and try to persuade others that these are the standard. So, from that point of view we are giving choice. If a client, for example, wants to extend in Java he can do it; he will not see other things we have in our environment. If a large client of SAP likes [inaudible] he can still use us; we will not take it away from the market. If clients likes the Microsoft environments they can use us; otherwise we couldn’t have built Duet. So you’ve seen our approach. We will not be religious on standards, we are looking at what our key clients want and we give them choice. From that point of view I feel pretty comfortable. There is another point I would highlight is, if you look to the concepts of the business process platform as a combination of reusable applications of technology and the concepts behind model-driven are not only services-enabled, but also event driven et cetera; I think you’ll find all to modern concepts people are highlighting today. I don’t know one which is missing, but we can debate it in detail.

[Leo Apotheker:]

I will add one very pragmatic point to what was just said. When I look at what’s happening in the markets with customers, than let’s eliminate from the discussion for a second SAP Fusion, or all Fusion customers, because they have predetermined choices. Let’s look at situations were both of us are present and a company needs to make decision about the future. So, therefore this people will have to make a wise choice between two strategies, two approaches, two technologies and architecture is very important part of it. And without revealing names, because I can’t, I can assure you that there have been a number of these situations over the last three or four months, all of which have been won SAP. After a solo investigation of the customer of Fusion versus our strategy, versus NetWeaver, and they could touch NetWeaver, -- it’s hard to touch PowerPoint -- and they looked at the ESA roadmap, they looked at what we are able to deliver and the conclusion was fairly straightforward.

[Stefan Gruber:]

Thank you. There is another question from that web. Do you see a shift in seasonality for the remaining quarters in second half?

[Henning Kagermann:]

What we see is -- and you find this out yourself -- if you look to the result of the first half and to the guidance that there will be a slight shift between first half and second half. It’s not fundamental, it might be a percentage or so, 1% or 2%, but I think within the quarter we have no ideas that there will be a shift.

[Stefan Gruber:]

Thank you. A question in the room, I think in the last row.

[Diana Hynd:]

Hi, Diana Hynd from Managing Automation Magazine. What percentage of the current ERP customers do you expect to be on the new platform by the end of the year? What will that customer base look like in terms of the current version and the new version?

[Henning Kagermann:]

Well, we already gave some guidance in the past about a number of contracts still outstanding and our aspiration to make sure that by 2010 all of these contracts would have been migrated to the latest versions of ERP. Having already indicated that we made ERP 2005 generally available this year, a few months ago, its having huge success so by definition all of the customers who are buying it now are using it. The upgrade is continuing smoothly. We have a program in place to help our customers upgrade to ERP 2005. There are a number of efforts underway. But on the other hand, we also have a very clear and transparent maintenance strategy. So if a customer has for whatever reason an internal reason why he needs to stay on a prior release for a year longer, we will of course maintain that customer as well. But its going as planned. Its actually doing really well and we have no reason to believe, actually we have every reason to believe that by 2010 our objective will be fully achieved, maybe even a little bit soon.

[Stefan Gruber:]

Thank you. Are there any further questions here in the room? Right here, there. Can we have a microphone here? Okay.

[Analyst:]

I just curious in the SOA strategy, what your plans for an Enterprise Service Bus are and how you are approaching that functionality? My other question is regarding, we talked a lot about the order entry, but there were two other reasons

[Henning Kagermann:]

Well, maybe start with the last question and first. If you create two buckets, the enterprise deals, the phased deals et cetera, versus the deals that slipped, it’s about two-thirds, one third; and the one-third of the deals that slipped, I won’t disclose to you all of the names, they happened all over the globe

[Leo Apotheker:]

You have seen that there will be an important next step in NetWeaver, which we call evolvement into a business process platform where more technology is coming and in particular more enterprise services, more composition things. If you look to this version, then the answers you will find that’s a kind of a [inaudible] for enterprise services in ESA; , not today because today we are just setting the enterprise services. So, therefore whenever you see that SAP, let’s say is talking then about NetWeaver evolving into business process platform, that is also meaning that this is a next version of NetWeaver; technically and from a content point of view. Then these pieces will be addressed. We have said that this will be done at the end of the year. So we will start with ramp up in next year and that’s the reason I expect that it’s next year, generally available. And if you look to the end of the roadmap, we said okay we take this version and put it also under the Suite; and then we said okay, we have completed the roadmap. Does this mean that we have done everything which was possible for enterprise services? No, it’s like the techniques are out, it is feasible, customers can take it; and then as always the market will come and ask for a lot of features and function extensions. But it’s important then you have I would say a complete package and product you can sell; if you bring ERP or CRM or whatever to the market. In the next years people ask for a different function that year.

[Stefan Gruber:]

Thank you, there is a question here on the right hand side.

[Analyst:]

Question, I think you mentioned that your win ratio is 70% I am right?

[Henning Kagermann:]

Yes.

[Analyst:]

In this case, what’s the numerator? Is it new greenfield where by you and maybe all of your competitors go after this account? Or is it a case whereby Brand X tries and displaces an existing account or you would try to displace Brand X in another account? And in some cases, is it just one product or a whole suite? I am not too clear exactly how you classified the win ratio.

[Leo Apotheker:]

Let me try to explain this. What we measure is all of the competitors situations, all of the situations where we are competing. Otherwise it would not be a win rate if we are not competing against anyone; you can only do it against yourself, which would be embarrassing. So win rates, so the only measure of the situation where we are having competition either against one or several competitors and that’s something we track, of course, in a very careful way. So all of the cases you mentioned are included in there, there can be other situations as well. It can be a public tender for example, where you might already have some software but someone else has some software as well. So as a greenfield it is not – you can’t really categorize it like that. But all possible situations are included and therefore it’s a very important indicator for us because it helps us track how we are doing competitively. We track it by the way not just globally, we track it of course in every country, every region, every industry, every market segment.

[Analyst:]

One last question, what impact will the World Cup have on your quarterly results?

[Henning Kagermann:]

What impact did Oracle have in our quarterly?

[Analyst:]

The World Cup.

[Henning Kagermann:]

If you look at our win rate, if the win rate stays stable then the impact doesn’t change.

[Analyst:]

No, what I am saying is that given that the global impact of the World Cup -- people were watching...

[Henning Kagermann:]

The World Cup?

[Analyst:]

Does it mean that it might have caused some customers to postpone their purchases?

[Henning Kagermann:]

You know, when you buy enterprise software, there is a pretty complex and strategic process. Even if you watch a game overnight, you can still function during the day.

[Analyst:]

Thank you.

[Stefan Gruber:]

Thank you. Are they any further questions? I see one here in the back rows.

[Analyst:]

Thanks. Just two questions on Safe Passage. It seems to be going well, but the run rate isn’t really picking up that quickly and I just was curious -- maybe I am wrong -- I am curious if you expect to see a tipping point at some point where you actually aggressively incent the sales force to go after those customers? Secondly, could you just talk about the scale of those customers you’re wining back? I mean are you actually wining back, real embedded Peoplesoft accounts or does it tend to be accounts that are still shared with SAP? Thanks.

[Henning Kagermann:]

Far for me to ever say that you are wrong, but your interpretation can be articulated differently. Safe Passage is actually gaining significant speed. The growth rates are picking up very nicely, not only the growth but also the pipeline. So, from that perspective we are very happy. We will fine tune Safe Passage and we hope that we will be able to announce Version 2 of Safe Passage in the month of September. We always want to make the program even better and we will work on that and we will release that. I don’t need to incent anyone on Safe Passage. Everyone is motivated to make it happen anyway. So, I have never met an AE in SAP who is not very, very keen to make sure that another Safe Passage deal happens. Last but not least, to the profile of the customers. You will understand that a certain number of customers do not choose to be named for good reasons, why they are transiting from an Oracle world to an SAP world. I can assure you that a certain number of customers who made the decision were very large -- I mean very large. Entrenched Oracle customers, some of them are Oracle, some of them are PeopleSoft, some of them are JDE, some of them are a combination of all of the above, who have decided to migrate to an SAP strategy. We are very happy about that. These are sophisticated situations, they require our best commitments, they require our best efforts and now we are actually implementing already a certainly number of those. A few of these deals happened in Q4, a few of them happened in Q1. Sooner or later I am sure that your sources will reveal who they are.

[Stefan Gruber:]

Thank you, another question right here.

[Analyst:]

I have two questions. First, are there any circumstances under which the order entry cannot be recognized into revenue? Can you give us the status on the premium maintenance product that you are introducing?

[Leo Apotheker:]

Normally it comes back as revenue and there is one caveat; it might not come back as software revenue, it could come back as consulting maintenance or other type of revenue. But in general I would say it comes back as revenue.

[Henning Kagermann:]

Premium maintenance is something that we launched in the beginning of the year. We are now actually offering this to an increasing number of customers. It is slowly picking up and I think we should give it the time to be accepted in the market and be rolled out. But I am sure that we will see this trend of premium maintenance increase quarter after quarter.

[Stefan Gruber:]

Okay, given the fact we have already discussed for now nearly 90 minutes, I think this closes today’s conference. Thank you very much for all your questions. Our next event is the Q3 earnings announcement on October 19. Thank you very much.