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SAP AG (NYSE:SAP)

Q3 FY08 Earnings Call

October 28, 2008, 10:00 AM ET

Executives

Stefan Gruber - Head of IR

Werner Brandt - CFO

Léo Apotheker - Co-CEO

Henning Kagermann - Co-CEO

Analysts

Ross MacMillan - Jefferies

Michael Briest - UBS Investment Bank

James Dawson - Morgan Stanley

Johannes Ries - cominvest

Charles Di Bona - Sanford Bernstein

Raimo Lenschow - Merrill Lynch

Gerardus Vos - Citigroup

Neil Steer - Redburn Partners

Rajesh Balasubramanian - Credit Suisse

Sarah Friar - Goldman Sachs

Operator

Welcome to SAP's Third Quarter Results Conference call. This call is being recorded. Today's call will be hosted by Henning Kagermann, Léo Apotheker and Werner Brandt.

I will now turn the call over to Stefan Gruber. Please go ahead sir.

Stefan Gruber - Head of Investor Relations

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's third quarter 2008 results.

I'm joined here in Walldorf by Henning Kagermann, Léo Apotheker and Werner Brandt. Werner will discuss the Q3 financials in detail, Léo will comment on the current business environment and our regional performance and Henning will then provide some further in-depth commentary on the quarter and SAP's product successes.

I will now make a few remarks about forward-looking statements. Any statements made during this call that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act 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 statement. 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 U.S. Securities and Exchange Commission including SAP's annual report of Form 20-F for 2007 filed with the SEC in April 2, 2008. Participants of this call are cautioned not to place undue reliance on these forward-looking statements, which speak only of their date.

And I would now like to turn the call over to Werner.

Werner Brandt - Chief Financial Officer

Thank you, Stefan, and good afternoon, good morning. Before I begin, let me say that I will be speaking mostly about non-GAAP figures as they relate to the operational performance of the company. Also, non-GAAP measures are the basis of our guidance.

The difference between U.S. GAAP and non-GAAP figures are the result of two effects in third quarter: First, the exclusion of write-down of deferred support revenues in the amount of €41 million and second, the exclusion of acquisition-related charges in the amount of €76 million compared to €18 million in the third quarter of 2007.

With that, let me give you the highlights of third quarter. Non-GAAP software and software-related service revenues for the third quarter of 2008 were €2 billion, which represented a year-over-year increase of 22% at constant currency. The contribution from SAP's standalone business was 7 percentage points at constant currencies. The growth in non-GAAP software and software-related service revenue came from year-over-year constant currency increase of 11% in software revenues, 29% in non-GAAP support revenues and 41% in subscription and other software-related service revenues.

Third quarter professional services and other service revenues were €748 million, which was an increase of 16% at constant currencies. Consulting revenues of €617 million increased 19% at constant currencies and training revenues increased 7% at constant currencies.

Non-GAAP operating expenses increased by €276 million to €2.1 billion or 15% year-over-year. Two-thirds of this increase is due to the Business Objects acquisition and the related integration. Included in the non-GAAP operating expenses are €14 million of Business Objects integration... €14 million for the Business Objects integration which are not acquisition-related charges. This represents a negative impact of approximately 50 basis points to the non-GAAP operating margin at constant currency in the third quarter.

Non-GAAP R&D expenses increased 11% for the third quarter and represented 14% of total revenues compared to 15% of total revenues for the third quarter of last year. The increase in non-GAAP R&D was a result of additional personnel expenses. We hired an additional 1229 net FTEs since the third quarter of last year. Of that total, 493 FTEs or 40% were hired in low-cost locations. We also added 1697 FTEs from the acquisition of Business Objects.

Non-GAAP sales and marketing expenses increased 20% for the third quarter and represented 22% of total revenues compared to 21% of total revenues in the last year's third quarter. The increase in non-GAAP sales and marketing expenses was mainly due to 713 additional sales and marketing FTEs year-over-year. We also added 2132 FTEs from the acquisition of Business Objects.

Non-GAAP G&A expenses increased 28% or €34 million for the third quarter and represented 5.5% of total revenues compared to 5% of total revenues in the same period last year. The majority of the €40 million we spent for the Business Objects integration are included in G&A.

Overall, the company's non-GAAP operating margin at constant currencies were 26.3% for the third quarter, which represents an increase of 50 basis points year-over-year. And again, the Business Objects integration expenses impacted our margin 26.3% negatively by 50 basis points in Q3. The increase in the overall operating margin from a run rate perspective was 100 basis points and was partly as a result of the ongoing successful integration of Business Objects.

Let me give you just a brief example what we have achieved in this quarter. July 1st marked a key date in the Business Objects integration process since it was the cutover day for Business Objects employee for using SAP system... processes and system. During month of July, the function that has been [ph] supporting the areas of finance, sales, support, HR, marketing, partner operations, field services and maintenance renewal were successfully migrated. All Business Objects employees are now working on SAP's standard software environment.

The non-GAAP software and software-related service margin was 83.7% for the third quarter of 2008, which is an increase of 160 basis points year-over-year. The increase in the margin was mainly the result of continued revenue growth along with the less proportionate increase in cost of support and the reductions in cost of purchase planning days [ph]. The non-GAAP professional service margin was 22.1% for the third quarter, which is a decrease of 3.6 percentage points year-over-year. The decrease in the margin is mainly the result of higher third party usage as well as consulting and training margins from Business Objects which are below SAP's professional service margin. As a result of the mixed margin performance in product and service, our 2008 third quarter non-GAAP gross margin increased by 80 basis point to 67.1%.

In the third quarter of 2008, the U.S. GAAP effective tax rate of 31.9 is lower compared to 35% in the third quarter of 2007. This is to a large extent due to the 2008 German tax reform which included a reduction of the German corporate income tax rate from 25 to 15% along with some relief in trade taxes. For the full year, we continue to expect a rate of 31% to 31.5%.

Free cash flow for the first nine months of 2008 was 1.7 billion, which is an increase of 65% year-over-year. For the first nine month of 2008, the primary use of free cash flow was for our annual dividend which was paid in June, acquisitions and share buybacks.

For the third quarter, we bought back 2.8 million shares for a total of approximately €104 million. In the first nine months of 2008, we invested €487 million in share repurchases, which is basically the amount we intended to spend for the full year.

In the third quarter, we added 158 FTEs organically and 258 FTEs from acquisition, which brings the total headcount at the end of the third quarter to 51,863 full-time equivalents. Since there is a hiring freeze in place, we do not expect this number to change significantly for the remainder of the year.

Let me finish up by saying that we have changed our outlook for the full year 2008. Please refer to the press release issued for details today.

With that, I would now like to pass it over to Léo.

Léo Apotheker - Co-Chief Executive Officer

Thank you, Werner. Welcome everyone to today's call. I'm pleased to provide you with an update on the business environment and give you some additional color on our regional performance.

As you know, we are in an unprecedented challenging global economic environment that began with the acceleration of the financial crisis in the second half of September. Despite a difficult operating environment, however, we were able to maintain our double-digit growth rate in software and software-related service revenues for the 19th consecutive quarter. Moreover, we continue to report double-digit growth in each region and show strong attendance at our TechEd events in both Las Vegas and Berlin with 6000 attendees and 4500 attendees respectively.

Importantly as well, our 80% run rate remains very high, including against our next largest competitor. This demonstrates our ability to outperform even in a tough environment and we don't expect that to change regardless of the environment in which we operate.

When the financial crisis accelerated at the end of the third quarter, it impacted our business in all regions with an unprecedented sharp downturn in business activity. Customer reactions became unpredictable as the operating environment became more difficult. Some customers extended or postponed decisions while waiting for clarity on the economic situation. This was more apparent for the small businesses and mid-sized companies due to their constrained access to capital and credit and resulted in lower than usual SME contribution.

The third quarter became mostly a large enterprise-driven quarter. But large enterprises were also impacted by liquidity concerns as well as some psychological effects of the economic situation.

While the pipeline remains strong relative to historical levels, closure rates have obviously become less predictable than in the past. Some deals that slipped in Q3 have already closed in the fourth quarter, but it is still too difficult to predict for other deals which ones will come back in the fourth quarter and which ones will get extended into 2009. We are working intensively with our customers to focus on those business processes that matter the most to their businesses and, together with our partners, are actively identifying ways to get our customers faster implementations and even quicker ROI.

To help our customers endure the current economic cycle, we have initiated specific programs that are offering quick implementations of compact ready-to-run software packages targeted at specific business processes to alleviate pinpoints caused by the challenging environment. For instance, we are offering customer software packages for liquidity management, inventory and purchasing optimization and energy data management. These are just some examples of products offered through this new program.

Let me now move on to provide some color on the regional performance. In EMEA, third quarter non-GAAP software and software-related service revenues increased by 19% at constant currencies with Germany increasing by 20. While EMEA overall succumbs to the global financial issues that caused a slowdown in customer spending, there were some pockets of strength including Germany, some countries in Southern Europe and the Nordics. Areas of weakness were the UK, Russia and France. Our win rate remains very high in EMEA and we continue to see strengthened sales of Business Objects' products. Key contract wins in the EMEA region were the Bundesagentur für Arbeit, Impresco PV [ph] and Moskovskaya obl [ph].

In the Americas, third quarter non-GAAP software and software-related service revenues increased 26% at constant currencies and U.S. increased 23% at constant currencies. While the financial crisis has a large impact on our ability to close deals at the end of the quarter in the U.S., some positive signs included a good amount of new customers even including some large customers consolidating systems and replacing legacy systems and the continued strong win rate against our next largest competitor, including replacements.

Especially good was the strong acceptance we are seeing for products from Business Objects which contributed strongly to the results in the U.S. Results in Latin America were good as Brazil had another strong quarter and Canada also performed well. Key contract wins in the Americas region where Loblaw Companies Limited, Monsanto Company and Servicios Liverpool in Mexico.

In the Asia Pacific Japan region, third quarter non-GAAP software and software-related service revenues grew 24% at constant currencies. APJ, which is a large SME market for us saw a significant drop in gross rates in the SME business. China and India bucked that trend, however, with strong performances in each country. While customers are still spending, it's occurring mostly from the large enterprise.

In Japan, non-GAAP software and software-related oriented service revenues were up 11% at constant currencies. Key contract wins in the APJ regions were Samsung SDS Company, Panasonic Corporation and Gansu Electric Power Corporation.

Touching on industry performance, we had good performances from consumer products, life science, chemicals, public sector and banking. In consumer products, we signed our second Global Enterprise Agreement this year; this one with Procter & Gamble. The GEA with Procter & Gamble extends our position as a leader in providing comprehensive enterprise software for the consumer product industry. In collaboration with P&G, SAP will leverage its industry expertise and product offering to help create a standardized global IT landscape to further drive scale and innovation. SAP will provide P&G broad access to license SAP solutions and technology, accelerating the worldwide roll out of P&G's end-to-end business solutions.

In consumer products, we also announced contracts with Brown Shoe and Kraft. Brown Shoe will replace some of its multiple home grown and various third party applications with SAP Business Suite applications to provide tightly integrated solutions, utilizing the industry specific apparel and footwear application to help manage its entire supply chain.

Kraft has adopted SAP NetWeaver technology platform, deploying SAP Master Data Management to integrate and consolidate data both from SAP and non-SAP legacy systems as the company have embarked upon a North American rollout of flagship SAP ERP products.

In banking, we announced that HSBC will create a leading-edge bank client integration solution using the SAP NetWeaver technology platform to streamline and automate the bank's communications for the delivery of banking services to its corporate banking clients.

In public services, we announced that Plexus a not for profit healthcare support services provider in Canada will implement SAP Business Suite applications and the SAP for Healthcare solution portfolio to support, supply chain, finance, payroll and human resources processes across its member healthcare organizations.

In another announcement, the State of Louisiana has selected SAP to run all of its financial and procurement business processes. This was a win against our next largest competitor.

Some other notable wins in the third quarter from the aforementioned strong performing industries were Camposol company, Henridge Henker [ph] and Callaway Golf Company in consumer products, Perrigo Company and Zamvongong SPA [ph] in life sciences chemicals, Montio Contori [ph] and Municipio de Medellin in the public sector and ATP Financial... central finance company and Imperial Bank Limited in banking.

The relationships we forge with our partners are without a doubt a significant strength to SAP. We look to continue to further strengthen our relationships each and every quarter and in the third quarter, we extended our relationship with a new offering with one of our long-term partners, Accenture, around trade promotion management. The offering combines Accenture's industry expertise and business process knowledge with the innovative SAP Trade Promotion Management application which Accenture helped to develop drawing on its proven system integration capability. As part of its offering, Accenture will leverage SAP Trade Promotion Management, an application available in the latest version of SAP Customer Relationship Management.

Let me wrap up by giving you an update on Business Objects. While we also saw an impact for the Business Objects business in their last two weeks of the quarter, Business Objects turned into one of the highest growth quarters we have seen in many years with strong growth in each region. This is the second consecutive quarter of significant strengths, providing further evidence of the success we have had in integrating Business Objects into SAP. The sale forces are working very well and Business Objects is getting a big boost from its association with the SAP sales force.

We are seeing tremendous acceptance from customers for Business Objects. Much of our success has been our ability to sell Business Objects into SAP accounts as our customers are truly valuing the Business Objects offering. It has allowed our customers to unify their reporting systems with the most complete business intelligence platform in the market today and then easily integrate Business Objects supporting systems into SAP.

And let me now turn it over to Henning.

Henning Kagermann - Co-Chief Executive Officer

Yes, thank you, Léo. As Léo already mentioned, we entered a very difficult operating environment just as our quarter was coming to a close. In my 26 years at SAP, I have never witnessed such a sharp decline in customer spending in such a short period of time. Making matters worse was the fact that the third quarter is typically more back-end loaded than most other quarters due to the vacation season in July and August.

Regardless, we still closed a significant amount of business in the third quarter, reporting strong growth in software and software-related service revenues. In fact, if we were a company reporting in U.S. dollars, third quarter growth would have been even higher outperforming the market. Our non-GAAP software and software-related service revenues in U.S. dollar would have increased 26% in the third quarter.

We also continue to report strong year-over-year share gains. At the end of the third quarter, our share based on a $38.7 billion market was 33.4%, representing an increase of 6.5 percentage points compared to the third quarter of 2007, of which 3.3 percentage points represented organic growth.

However, we are very mindful of the pervasiveness of the current economic situation as you can see by our revised guidance. So we have taken the necessary steps to control costs. Therefore, we expect to still deliver strong operating margins and earnings despite the tough economic climate while maintaining enough flexibility to take advantage of further growth opportunities when the market recovers.

As you know, we have been in business for more than 35 years and have weathered many economic cycles, the last one taking place early in the decade. We succeeded during that down cycle not only financially reporting strong growth in operating margins and increase in market shares, but also technologically by building the most innovative solutions in the industry that our customers are using today. Therefore, it's important that we continue to innovate even during the current cycle to ensure that our customers are receiving and running the most advanced software solutions in the industry to make their businesses run better.

As you know, for many years, we have focused our R&D efforts on developing our software to be easy to implement and easy to run, creating lower total cost of ownership and faster returns for out customers. Our solutions have allowed them to achieve high productivity gains and giving them the ability to act faster to changing market and industry environments by making their businesses more responsive. This is exactly what they need in today's challenging environment.

Let me give you three examples of our innovations which will help our clients in these challenging times. Our service-oriented architecture enabled SAP Business Suite, built on SAP NetWeaver, has achieved much success to date. At the end of the third quarter, we had 12,800 ERP [ph] customers, which was an increase of 78% compared to Q3 last year. The total 8200 our product [ph] is an increase of 120% from the third quarter of last year. And for NetWeaver, we had 46,700 productive systems, representing an increase of 56% year-over-year. On a rolling four quarter base, year-over-year, SAP NetWeaver revenues increased 10% while NetWeaver direct revenues increased 26%.

The second example is our enhancement packages for SAP ERP, our unique technology of delivering innovation without disruption to customers that no other competitor can offer. Our customers can implement these enhancement packages according to their own timeframe and specific business needs. We recently announced general availability of our certain enhancement package for ERP. It delivers 150 new business functions that includes 400 new capabilities, about 180 industry enhancements and 45 enterprise service bundles that include about 560 enterprise services.

The third example is SAP NetWeaver BI Accelerator, which offers unprecedented performance with explorative search in large data volumes; for example, a response time of less than one second for 1.2 billion records. We have seen strong demand for this product in the current environment in combination with Business Objects analytics.

We continue to work towards building out the Business Objects product line. The next major release of BusinessObjects XI solutions will include new innovation that address the needs of business users and to the target enterprise, meets market volume and the OEM customer base. It will also support embedded analytics for SAP Business Suite and performance optimization applications.

Business intelligence as a whole remains a top priority of these results [ph]. So even if budget gets cut, business intelligence remains at the top of the wish list. Those can gain quick insight into their businesses with transparent analytics that can assess with compliance and new business opportunities. Also, business intelligence products can be packaged in much smaller deals, providing for quick implementations and faster returns.

With all of these innovations, we are in a good position to weather the current environment. These innovations also make it much easier for us to offer our customers smaller, more targeted software packages with lower TCO to help them through these challenging economic times.

And finally, there is our portfolio of solutions for small businesses and mid-sized companies which are very suitable for this type of environment, offering quick implementation, ease of use and fast returns. An example is our Fast-Start Program for SAP Business All-in-One solutions. In the third quarter, the number of customers on SAP Business All-in-One increased 21% year-over-year to 12,700 while the number of partners increased 13% for the same period to over 1100.

For SAP Business One, the number of customers increased by 33% to 21,000 while the number of partners selling the product increased to nearly 1200. For SAP Business ByDesign, we shipped the latest release with significant improvements based on the feedback we have received from our customers. In hindsight, we made the right decision for a more controlled roll out of products to focus more on its profitability.

In closing, let me say that challenging economic times are not new to us. As we have done successfully in the past, we will strike the best possible balance between delivering innovation and bottom line growth. Our solution delivers the best business practices that help our customers streamline cost, increase efficiencies, maintain compliance and drive long-term growth. This is why we are better positioned than most others in times like these. There are opportunities that materialize from such economic situations and, similar to past selling down cycles, we are confident that we can emerge a stronger and even more efficient company while maintaining a firm hold on our market leadership.

So thank you for listening and we will now be happy to take your questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Our first question comes from Ross MacMillan of Jefferies. Please go ahead with your question.

Ross MacMillan - Jefferies

Thank you. Just a question maybe for Werner first. The framework you've laid out to hit the 28% non-GAAP constant currency margin, it I think by my calculation implies about a 14% sequential increase in operating cost. And that's actually in line with the last couple of years. So given your hiring freeze and cost control, I was just curious, is that the right math? And if so, is that just conservatism that you've built in there? Thanks.

Werner Brandt - Chief Financial Officer

I think what we said is that if you look to the fourth quarter, we will reduce our operating expenses for the quarter by roughly €200 million to achieve this 28%. But let me reiterate one point. We only can achieve this 28% if we deliver at least 20% growth on the SSI side.

You are right. This €200 million roughly represents 10% of our cost base in the fourth quarter. And to be honest, we couldn't have delivered this or target this amount if we wouldn't have started early in the year to be very cautious with our spending. You remember, beginning of the year, we said that we would increase our workforce by 3500, and we added as per the end of September, roughly 1500, as I mentioned previously and we will not increase it significantly. So you see, our spending behavior in the first three quarters helped us now to target for this €200 million reduction in the fourth quarter.

Ross MacMillan - Jefferies

And Werner, just to follow up. [indiscernible] the first nine months of the year, and I adjust my operating margin for currency and for the Business Objects integration costs that are running through the P&L and are not excluded, do you have that number, what the operating margin has been impacted by?

Werner Brandt - Chief Financial Officer

If you look to the first... to the third quarter only, we had integration costs for Business Objects of €14.2 million. And this represents 50 basis points. So if you start with the margin at constant currency, it's 26.3 plus 50 basis points, it's 26.8. If you look to it from a nine month perspective, the numbers are, and here we have Business Objects for the first nine months of €32.6 million. And remember, we had one other extraordinary spending item in the second quarter. This was the settlement with i2. This adds additional 24.4 and both adds up to €57 million, and this represents 60 basis points. So if you look to it, again, from a operating margin non-GAAP at constant currency, it's 24% plus 60 basis points, it's 24.6.

Ross MacMillan - Jefferies

Very good. Thank you.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question comes from Michael Briest of UBS. Please go ahead with your question.

Michael Briest - UBS Investment Bank

Thank you very much. Good afternoon. Léo or Henning, perhaps you could talk a bit about the proportion of your customers that rely on financing and what you're planning to do or hoping will happen to help those customers close deals. And then secondly, can you maybe give some color on the proportion of the deals that slipped at the end of September which have closed already? Thank you.

Léo Apotheker - Co-Chief Executive Officer

Hi Michael, it's Léo. Actually, the number of customers that rely on our financing, financing that is provided through the SAP channel is actually very small, a few hundred. So not a meaningful number. I can't comment on the financing that these companies might actually obtain through other channels not known to us. What we are doing in Q4 is we are trying to help these customer find easier financing so that financing should not be necessarily the most difficult thing for a customer who needs to do an IT project.

As to the Q3 deals that have slipped, a small number has already closed. But it remains difficult to assess which one of those will actually close in Q4, which ones will close in 2009 or which ones might actually not close at all. But that investigation is ongoing and we look at this almost every week.

Michael Briest - UBS Investment Bank

Thank you. And then perhaps you could give us an update on enterprise support and your negotiations with the customer user groups there and how confident you are on the take up of that next year. Thank you.

Léo Apotheker - Co-Chief Executive Officer

I am happy to report that we have received a lot of feedback from our customers and from the user groups. We are engaged in a very, very proactive and, I have to say, very positive dialogue with the user groups. And enterprise supports has been slightly enhanced thanks to feedback we have received. We have been able to adjust a portfolio. And I am very confident discussion is more or less behind us or we are about to put it behind us. Many customers understand the value of enterprise support. Actually, the uptake in the market is significantly better than what seems to be transpiring in the press. We have several thousand customers who have now signed up to it and I hope that we will be able to endorse the support of the user groups in helping customers understand the value of enterprise support.

Michael Briest - UBS Investment Bank

Thank you very much.

Stefan Gruber - Head of Investor Relations

Thank you next question please.

Operator

Thank you. Our next question comes from James Dawson of Morgan Stanley. Please go ahead.

James Dawson - Morgan Stanley

Yes, hi guys. Werner, just on the €200 million of costs that you're looking to take out of business in fourth quarter, I wonder if you could talk about, or maybe just give us a little bit of color about where these are coming from; i.e., what are the largest discretionary costs that you have at your disposal? How much of the costs are variable that are going to come down in the quarter? Also perhaps if you could just... I mean, should we be thinking of that as a run rate for fiscal '09, the €200 million?

Werner Brandt - Chief Financial Officer

I can answer these questions. First of all, I would say let's look into three big buckets here. The first one is around personnel expenses. And as a consequence that we do not hire, that we do not replace, we will see a reductions of personnel expenses compared to what we originally had planned for the quarter.

Secondly, we should look to all the third party expenses we have and across the company, whether it's related to development, to G&A, to professional service where we look into reducing this dramatically in the given quarter. And finally, it's around travel expenses where we try to reduce travel expenses to a minimum, and minimum means that we really focus on customer activity-based traveling rather than traveling only for internal purposes. These are the three areas we are looking in. And we made it clear in our organization that this is not something only for the fourth quarter; we want to see this also running in 2009. So our run rate going into 2009 should also be positively impacted by these measures.

James Dawson - Morgan Stanley

Thanks. Is there any way you can put some numbers to those three buckets that you have talked about there?

Werner Brandt - Chief Financial Officer

No.

James Dawson - Morgan Stanley

What about in terms of the not replacing? What's the kind of attrition rate at the moment in terms of people, the annual attrition rate?

Werner Brandt - Chief Financial Officer

I think... I don't know, Stefan, whether we have ever published the attrition rate. But be aware that we only look for those which is net employer related and has a good grab [ph] around these replacements or shortfall in replacements we have in our organization going forward.

James Dawson - Morgan Stanley

One last one on the cost. What about the sales commissions, the variable element of selling cost? Can you give us any idea about what percentages you normally pay or any kind of steer there?

Werner Brandt - Chief Financial Officer

I think Léo will take this one.

Léo Apotheker - Co-Chief Executive Officer

The only comment I can make, James, is that commissions are variable, let's say, unless you get this.

James Dawson - Morgan Stanley

We know that only too well. Thanks Léo.

Léo Apotheker - Co-Chief Executive Officer

So there is no difference between the finance industry and the software industry.

James Dawson - Morgan Stanley

Got it. Thanks guys.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question comes from Johannes Ries of cominvest. Please go ahead.

Johannes Ries - cominvest

Yes, good afternoon. Maybe some follow-on questions. First on, can give us average deal size? Has average deal size decreased or increased? You had a couple of large deals in the quarter. And then on Business Object, we learned Business Objects had a good quarter except [ph] for how much maybe Business Object is on the way to close the profitability gap between the old SAP group except [ph] for the target was. If I can remember that at the end of next year, BOBJ should be at the same level like SAP old. And on the run rate of across the €200 million we discussed before, is it right to assume we should not calculate four times 200, or it's because Q4 is such a big quarter, it's more of figure ahead [ph] of €500 million to €600 million you can spend next year or is it even more?

Werner Brandt - Chief Financial Officer

I would say so. Until the fourth quarter, from a spending perspective, it is the highest, the second highest is the second quarter, and you cannot simply multiply it by four. So from that perspective, you are right, Johannes.

Henning Kagermann - Co-Chief Executive Officer

And regarding the deal sizes, Léo will take this one. But I think what we cannot do is to compare deal sizes quarter-over-quarter now with the Business Objects acquisition and integration. We closed much more deals and obviously the deal size is much lower than compared to SAP standalone. So it wouldn't make any sense to talk about this.

Unidentified Company Representative

Fair point, yes. He asked profitability.

Henning Kagermann - Co-Chief Executive Officer

I think you all know that the profitability of Business Objects was much lower than one SAP had. Now with all the integration efforts, this increases quarter-over-quarter. But we still have room to improve and come to the same profitability as SAP has over the next, I would say, two to three quarters.

Johannes Ries - cominvest

Okay. Given this, maybe a follow on. Formal statement has been that you are expecting for next year a 1 to 2 percentage margin increase partly based on Business Objects, partly based of maybe the changes on the maintenance side. Now we have more uncertainty about the top line, but we are still seeing... given all the uncertainties we have, it's achievable.

Henning Kagermann - Co-Chief Executive Officer

I think what we have to do today is to not to talk about 2009. We have a very difficult economic environment. We only can talk about what we see today, and that's related to the fourth quarter. And with regard to 2009, we will come back in January and come up then with the guidance for the year. More we cannot say today.

Johannes Ries - cominvest

Okay, fair point. Thanks a lot.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question comes from Charlie Di Bona from Sanford Bernstein. Please go ahead with your question.

Charles Di Bona - Sanford Bernstein

Thank you. Henning or Léo, last, at the end of the quarter, when you did your preannouncement, you characterized the weakness in Q3 as being predominant or at least disproportionately small and medium enterprises and also sort of at that point having a hard time predicting whether these... whether people are really dropping out of the pipeline of just delaying their purchase decisions. I was wondering if you could maybe give us an update a couple of weeks later here on how things look going into Q4 here on those two fronts.

Léo Apotheker - Co-Chief Executive Officer

Yes, hi Charlie, it's Léo. You're absolutely right. What happened in the second half of the quarter was indeed that sudden drop in small and medium size enterprise business was actually rather either significant. It's one of the reasons why we had this significant impact. In the meantime, we are continuing to talk to our SME prospects and partners. We have come up with a series of offerings that are particularly geared towards the SME market. We have found some partners out there that are willing to help also these companies with more advantageous or more... or at least available financing which is just one of the reasons that caused these companies to stop was simple lack of financing. But I think it is a little bit premature at this moment in time to make a prediction of what is going to happen in the SME space.

The good news is we have a very large volume of deals happening in the environment. So there is a lot of demand and we are engaged through all of our channels in discussions with these people. But as I said earlier on, it's very hard to predict closure rates, and I would rather prefer not to make a comment on that and let's see what happens.

Charles Di Bona - Sanford Bernstein

And just a quick follow up. When you say you are helping people look for financing is there any opportunity for you to use your own balance sheet to that end and extend some financing or terms to customers?

Unidentified Company Representative

Maybe I can take this one, Charlie. I think what we had set up is a partnership with Siemens Financial Services and they are with us approaching the customer and they ensure the financing of the transaction. So it's not financed by SAP. We are looking to get the financing from partners.

Charles Di Bona - Sanford Bernstein

Thanks very much.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question from Raimo Lenschow from Merrill Lynch. Please go ahead with your question.

Raimo Lenschow - Merrill Lynch

Thank you. First of all thanks for the guidance I think it makes sense not to guide on the top line. Second question, Léo, and you might not like that, if I look around and the other software companies in Q3, you seem to be the only one with a dramatic miss. How much of that is your position in the market and how much of that is sales execution as well as that you took you're eyes off the ball a little bit after a good start to the quarter in July? And then on the... there have been rumors on the market on Business ByDesign and the potential delayed volumes impact. Any comments maybe on that? Thank you.

Léo Apotheker - Co-Chief Executive Officer

Okay, well I will give you a transparent answer. I've been in this business for quite some time. I can't remember any quarter where this couldn't be worst on the operational efficiency as good as it was in Q3, that's by the way it is every quarter, naturally every day. So I do not believe that there was a significant impact on... in the quarter and that was caused by operational or sales ineffectiveness, just to be absolutely clear. I believe that we were well on track. And by the way if you look at the number and the flows that we have achieved in the quarter, it indicated that we were on track. Let's remember, Q3 is a bit of a particular quarter. We do have the full impact of the holiday period. But I would dare to say that if the crisis that started in the middle of September would not have occurred, I think we would have achieved a very normal, very respectable quarter, perfectly in-line with our guidance.

I also want to point out that 22% SAS service growth in constant currency in such a quarter actually indicates that the sales force actually knows how to perform.

Business ByDesign had no impact because it was not supposed to have any impact. As you know, we have made a very clear decision to drive Business ByDesign very carefully and maintain it in such a way that we drive for profitability and therefore we have no expectations from the sales point in Business ByDesign and just to and the last question may be enterprise support neither had now real impact on the sales figures.

Actually when you talk to customers, that had... there was no impact at all. Just to give you one example, Germany had a very strong quarter, and you would have... you might have assumed if you would read newspapers that enterprise support all that had an impact in Germany which wasn't the case.

Raimo Lenschow - Merrill Lynch

Sorry, my question on Business ByDesign were more relating to some comments that the volume start would not be at the beginning of '09, but in autumn-fall of '09. Any comments on that?

Léo Apotheker - Co-Chief Executive Officer

No, I think we made it very clear already in previous earnings calls that we were going to drive Business ByDesign very carefully, that the ramp up of Business ByDesign was going to be done in a very, very step by step, very controlled fashion. There was no indication anywhere whatsoever that ByDesign was supposed to be in any form, shape, in volume in the third quarter, and just to preempt, not in the fourth quarter either.

Raimo Lenschow - Merrill Lynch

Yes, welcome. Thank you.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question comes from Gerardus Vos from Citigroup. Please go ahead with your question.

Gerardus Vos - Citigroup

Thanks for taking my questions. I have got three questions, if I may. First of all, on the kind of current pipeline and kind of current conversion, if you take in consideration what you did see during September, has that really changed during the current month and what are you guys implying for the kind of 20 to 22% growth that you expect, a kind of continuation or the kind of difficult conversion rates or do you actually expect an improvement? And then secondly, could you comment a bit more on kind of... I know you discussed around kind of BRIC. What about kind of broader emerging markets? And finally, any kind of updates on buybacks given to where the share price is at the moment? Are you using this kind of opportunity? Thank you.

Léo Apotheker - Co-Chief Executive Officer

Why don't I try to give you the first answers, and I'm sure I Werner will want to comment on the buyback. When we do the outlook for every quarter, we assess the operations or the pipeline for any given quarter. We try to do this as conservatively and prudently as we can. You also use normally historical patterns, which given the current environment, doesn't make a lot of sense. There is a bit of a disarray out there. Trying to use the first couple of weeks in the October as a pattern is probably not very indicative either because we're living in a very, very, very disarrayed environment were people just react in a pretty wild way.

I think you can segment the markets between companies, and there are quite a number of those who are still going to proceed. Actually, they will proceed with a vengeance with very important investments in IT in order to really reshape the organizations, others who have stopped completely. And the third group of people who will change the mix, which is one of the reasons why we have come up with a series of packages that help people consume our software quicker in a faster way. We have also incentivised the sales force in such a way as to capable to address that volume. So the current pipeline takes that into consideration. And hypothesis that we have made in order to give the guidance on the margin takes that into account.

Now if tomorrow morning if we have yet another very strange thing happening in the market and there is another wave of panic, that is figured into the numbers. You can't. That's just irrational behavior.

As to the emerging markets, if you look at the BRIC countries, India and China had a very good quarter.

Gerardus Vos - Citigroup

Yes.

Léo Apotheker - Co-Chief Executive Officer

Brazil had a very good quarter. The only BRIC country that had a rough in Q3 was Russia. The reasons for that were unknown and just look at what they did to the Russian stock market and a few other things. And we do not expect Russia to recover that quickly.

Werner Brandt - Chief Financial Officer

And I will take the one regarding the buyback. I think it's a great time for buyback. But we have to be realistic; it's also a time, and we all have admit it, a time where we all have to say that cash is king. Now seriously, we are just in a process to investigate our buyback activities throughout the next quarters and will come back with an answer to this one within the next week.

Gerardus Vos - Citigroup

Thank you.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you our next question comes from Neil Steer of Redburn Partners. Please go ahead with your question.

Neil Steer - Redburn Partners

Thanks very much for taking the question. I just had two quick questions. The first one, and I know that we have sort of hovered around the point with regards to the margin guidance that you've given and the comments in relation to turnover.

And I'm just wondering the margin that you stated is achievable 28% on the turnover growth that you have quoted is obviously very similar to the kind of organic turnover growth that has resulted in forecasts post the ad hoc announcement at the beginning of October. And I just wondered whether you specifically chose to use that if you like as your benchmark for the margin guidance or whether as you stand today, given the dynamics in the business so far in Q4, you would tend to think of that 20 to 22% growth as realistic, given the current conditions that you've seen?

Unidentified Company Representative

With all respect to the analyst community, of course, we look into all the models which are out, but then we come up with our own guidance how we see the situation based on the pipeline, based on everything we see at this point in time.

Neil Steer - Redburn Partners

Okay, thank you very much indeed to that. And an unrelated question, I am sorry, I think it was Henning. I missed the data points you gave us for the number of ERP 6.0 customers and more importantly perhaps the number of active ERP 6.0 systems running at the moment.

Unidentified Company Representative

I think it was 12,800 customers and product is 8200.

Neil Steer - Redburn Partners

8200. Thank you very much indeed.

Stefan Gruber - Head of Investor Relations

Thank you. Next question please.

Operator

Thank you. Our next question comes from Rajesh Balasubramanian from Credit Suisse. Please go ahead.

Rajesh Balasubramanian - Credit Suisse

Thanks for taking my question. One question, house keeping, in terms of standalone SAP, what was the SSRS revenue growth in Q3 '08? This is the guidance of 12 to 14%, the original guidance of 12 to 14% for full year. And second question, guidance clearly suggests pipeline conversion not improved from end of September. This is definitely adequate amount of conservatism sitting inside that. If you could care to venture, what would be base case for license on your declination that we should be considering for Q4. In other words can license revenues decline by more than 30% on year-on-year basis? Thank you.

Henning Kagermann - Co-Chief Executive Officer

I will take the first one. I think we indicated in the press release that of the 22% growth on the SSRS, 7% came from SAP. So consequently, 15 came from Business Objects. But more importantly, if you look to this from a year-to-date perspective, 12% came from SAP and 14% came from Business Objects product and this add up to the 26% growth.

Rajesh Balasubramanian - Credit Suisse

Thank you.

Léo Apotheker - Co-Chief Executive Officer

Yes, you need to take into consideration that we specifically talk about SSRS and not license revenue, and there is a good reason for that issue. If you analyze the numbers of SAP if you just look at Q3, support revenue and subscription represent 62.5% accessories and that is a significant number.

Look, you could probably make any wild guess on license revenues out there, and they could range from anything to everything. I don't think that makes a rather sense in particular because we have long standing relationship from long standing contract. I would rather not want to even try to speculate on where it could be and where it could not be. What we have done is we have done a very serious job in trying to analyze where we are. We monitor this almost maybe we have very professional teams. We go by any possible angle and that is where we stand and lets not speculate of what might happen to know, might not happen to know.

Rajesh Balasubramanian - Credit Suisse

Thank you very much.

Stefan Gruber - Head of Investor Relations

Okay, thank you. It's time for one final question.

Operator

Thank you our final question comes from Sarah Friar of Goldman Sachs. Please go ahead.

Sarah Friar - Goldman Sachs

Great, thanks very much for fitting me in guys, two questions that I may; first just as you talk about headcount hiring freezes. To what extent would you consider actual headcount reduction as we think about 2009 and I know that's a very difficult question to ask a management team. But would you be open to thinking about that to extent that that would help protect margins in a tough spending environment?

Léo Apotheker - Co-Chief Executive Officer

As we tried to indicate earlier, I said we are in 2008, we first of all want to finish 2008. Let's see what that brings and then we will talk about the guidance in 2009, then we can talk about other issues as well. But everyone at SAP is very focused on delivering a good 2008.

Sarah Friar - Goldman Sachs

All right, that's fair response. And then just on the emerging market point you made that comment that Russia was the only BRIC country that really did not work well in the September quarter. But clearly the financial crisis now as felt there were pretty dramatically to emerging markets as you've seen in the first few weeks of October are you seeing any down shift in other emerging economies or as you talk to customers any kind of pull back and how they're thinking about that spend there?

Léo Apotheker - Co-Chief Executive Officer

Well, what you see in the various markets, Sarah, is that people are of course a bit more cautious, but, and yes of course the financial crisis is now global and not just localized here or there. But still the effect of it is still differentiated in the various markets, there is still a different attitude in India or in China as compared to the United States or France. So we are monitoring this very carefully. We are very fortunate as we have a very-very large pipeline for the last quarter and the unknown factor of course is closure rates but the pipeline at least is very large and gives us tremendous opportunities to go after business and now we will see what... how people will react.

Sarah Friar - Goldman Sachs

Got it. Okay thank you very much.

Stefan Gruber - Head of Investor Relations

Thank you. This closes our Q3 earnings call for today. Thank you all for listening and good bye.

Operator

Ladies and gentlemen, that concludes today's conference call. Thank you for participating. You may now disconnect. .

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