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SAP (NYSE:SAP)

Q4 2005 Earnings Conference Call

January 25th 2006, 4:00 AM.

Executives:

Stefan Gruber, Director Investor Relations

Werner Brandt, Chief Financial Officer

Leo Apotheker, President of Customer Solutions & Operations

Henning Kagermann, Chief Executive Officer

Analysts:

Mr. Bruder, Analyst

Michael Schacht, Cheuvreux

Bill Tusson, BHS

Ariel Bauer, ABN Amro

Koeller Mueller, Sal Oppenheim

Raimo Lenschow, Merrill Lynch

Simon Andrews, Jefferies

Knot Woller, HVB

Stefan Gruber, Director, Investor Relations

Hello everyone and welcome to this SAP’s fourth quarter earnings meeting here in Frankfurt. My name is Stefan Gruber, I'm Head of Investor Relations with SAP. I’d like to quickly walk you through the agenda for this afternoon. We follow almost the standard procedure for these events. First of all Werner Brandt, the CFO of SAP, will walk through the preliminary numbers for 2005.

Next Leo Apotheker, President of Customer Solutions and Operations, will provide you with an update on our regional performance and then Henning Kagermann, CEO of SAP, will speak on SAP’s performance from a strategic perspective. And especially how SAP sets the foundation to prepare itself for a much larger, addressable market in the future.

I have also technical comment. As you know, this conference is being webcast on the SAP Investor Relations web page. That’s important later on for the Q&A, so make sure you use one of the microphones. And for those of you who are not in Frankfurt today, you can send us questions email. The email address is investor@sap.com, and we try to take as many questions as possible from the web.

And finally, the Safe Harbor statement. Please note that except for certain information, matters discussed in today’s conference may contain forward-looking statement which are subject to various risk and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect the Company’s future financial results are discussed more fully in the Company’s most recent filings with the Securities and Exchange Commission.

And with that I hand things over to Werner Brandt. Thank you.

Werner Brandt, Chief Financial Officer

Good afternoon and, Stefan thank you very much, especially for the Safe Harbor statement, so I can skip this right away. Five topics: a brief overview on our key figures, then some words on the margin and expense side of the business, balance sheet, cash flow is next, headcount and finally our outlook for 2006.

Key metrics. First of all software revenue growth. 18% for the full year. Currency adjusted 15%. And if you looked at it from a fourth quarter perspective, also in the fourth quarter we reported 18% on an actual basis and currency adjusted growth of 12%. If you look to the underlining number of deals, then you see we increase the number of deals by 22%, to more than 8,800 in 2005. Thereof roughly 3,500 were closed in Q4.

This is an increase now this 8,820 of, as I mentioned, 22%. And if you split this between direct and indirect direct, direct deals closed by, increased by 15% and indirect deals by 41%. More important the, a percentage of new customers related to these deals. 33% of the deals were closed with new customers and I think this is an important metrics for us. And this, by the way, is an increase of 1 percentage points over 2004.

The operating, pro forma operating margin with 28.3% exactly met our guidance, where we set an increase of 50 to, so of 0 to 50 basis points. And also Q4 contributed to this increase in our margin with a margin of 36.8%, which quarter-over-quarter, is an increase of 1.4 percentage points.

Pro forma EPS with Euro 5.01 is above our guidance, which were in a range of Euro 4.85 to Euro 4.95. Euro 0.06 above and here also the fourth quarter contributed with earnings per share by Euro 2.07.

DSO continued to decrease by three days and, by the way, one day is Euro 26 million in additional cash flow for the year. So good performance also on this side. The operating cash flow decreased due to a decrease, sorry, due to an increase in our working capital, and I will come back to this point later, to Euro 1.5 billion which is nearly the same level as we had in 2003.

Due to the strong net income, our equity ratio increased to 64%. That’s also good and healthy indication for good and healthy balance sheet. Headcount you see here an increase by 3,000, roughly 3,600 employees but I will talk about this later.

If you look to the key figures for the full year, first of all you see that software revenue, as indicated, grew 18% to 15%. Also maintenance revenue increased by 12% up to 3, roughly Euro 3.2 billion. Service revenue increased by 9% up to roughly Euro 2.5 billion. Consequently our total revenue increased 13% to more than Euro 8.5 billion. Operating expenses increased 12% to a range of roughly Euro 6.2 billion. Consequently our operating income increased by 16% to a bit more than Euro 2.3 billion.

Non-operating income and finance income influenced in comparison to 2004. Our income before income taxes, which ends up to be Euro 2.317 billion, that’s an increase of 12%. I will come back to this later. Income taxes itself only increased by 8%. Therefore our net income increased by 14% to nearly Euro 1.5 billion, and you see the earnings per share also with an increase of 14%.

Now if you go to the key figures we use to manage our business and you see first of all a good increase on the pro forma EBITDA side. Our depreciation and amortization for the year was Euro 204 million. On the pro forma operating income, you see that we achieved more than Euro 2.4 billion which represents a margin of 28.3%. As you know that we deduct from our operating income, or exclude from our operating income, stock-based compensation expenses. They were Euro 45 million in 2005 compared to Euro 38 million in 2004, and we deduct all the acquisition-related charges which amounted to Euro 34 million in 2005. And this is an increase of Euro 4 million compared to 2004.

Our tax rate improved by 2 percentage points. That’s exactly what we guided for to achieve 35%. There are two reasons. One reason being that we have in some of the countries where we are successful, reduction in the nominal tax rates. Additionally we, of course, if we invest our cash look for opportunities to do it in a way that we also have a tax benefit, and this is reflected in our effective tax rate. Pro forma EPS you see here with the aforementioned Euro 2.01.

From the Group sales perspective total revenue, you see all the numbers here, actual rates and constant currency. I do not want to go into detail, only one remark here. We have a product revenue accounting for 70% of our total revenue, and that’s exactly the range we want to be in this product revenue, as this, as SAP is a product company and this is reflected here in the composition of our total revenue.

Leo will elaborate on the original distribution of our software revenue later. I only want to highlight the regional performance here with Americas, with APA and EMEA. All regions strongly contributed to our growth. If you look to the software revenue by solution then you see that we have, as number one, in the same, at the same level as in 2004, ERP with 42%. You also see that the, and this is a remark that I want to make, that our share of SAP NetWeaver and other related components, increased from 3% in 2004 to 6% in 2005. This is the last time we provide you with the so-called solution reporting, because we discontinued to report our software revenue and allocated to the single solutions, due to the following reasons.

First of all, we introduced this solution reporting in 2001 to compare ourselves to best of breed. Best of breed market doesn’t exist any longer, so we from this perspective can discontinue this reporting. We are the clear leader in all solution segments, and it doesn’t make sense to highlight this again and again. Then a second reason being that our customer buying behavior changed over the last years. Customer now buy industry solutions covering end-to-end processes, and they do not simply buy CRM or SCM, that’s a second reason. And the third reasons is that our price list changed, our pricing model changed, and this does not reflect the traditional solution reporting adequately. So we do not need to continue to report here by solution. Margin and expense analysis, first of all the gross margin from the product and service side. First of all, you see that we show increase in both categories. We have an increase of 30 basis points on the product side and an increase of 40 basis points on the service side. And if you look deeper into product, you see an increase in cost of product of 13%. And this is mainly driven by additional purchase license payments we had to do, which the purchase licenses increased by 19% and support increased by 10%.

So this is mainly driven also by the top line growth here, the increase in our cost of product support is doing well. On the service side we have three reasons for the increase in the margin here. The first being that in the consulting business, the utilization could be increased, resulting in an increase of our consulting margin. Second, the training business increased with a very low, additional cost considering the size of cost of this business. What is going against it a bit is the hosting business, where we have invested in 2005 in order to prepare to get growth in the hosting environment going forward.

If you look to the operating expense by type of expense of R&D sales and marketing, and general and administration you first see that we are, or that our investment in R&D is also reflected here, because you see an increase of 1 percentage points regarding the research and development expenses in percentage of total sales. We increased our headcount in development of roughly 1,800 employees. 50% thereof employed in low cost locations. And, of course, this means a strong increase in our personnel expenses. But also a bit on third party expenses as we could not hire as much developers as we intended to do, and we will come back to this in a minute.

Sales and marketing, I think as a percentage of sales, fairly stable. If you look to sales the split here between sales and marketing, sales is roughly Euro 1.1 billion, increased by 15%. Marketing is roughly Euro 600 million, also increased by 15%, and it’s mainly driven by additional personnel expenses due to the hirings in this area. But also some third party expenses and travel expenses, and this fits to the entire year. Also if you look to this increase in total operating expenses, excluding stock-based compensation expenses and acquisition-related charges, you see that our volume increased by Euro 626 million and this represents an increase of 11.3%. And, of course, the currency also impacted our operating expenses by additional percentage points. So overall, the operating expenses increased by roughly 12.5%.

And the main reasons are personnel expenses due to the hiring levy of an increase of roughly Euro 380 million. Third party expenses increased on an interim basis, and here we can split it between product and customer, and I think in both areas we saw a comparable increase here. And finally travel activities due to the increased business activities, especially in the United States and Europe but we could argue in all regions.

Balance sheet and cash flow, first of all the balance sheet. I think we have an increase in total assets by 19% to more than Euro 9 billion. We have a very strong equity ratio with 84%. Equity now accounts for Euro 5.8 billion. You see that our DSO went down by three days here, also favorably impacting the accounts receivables side.

Looking into the cash flow, then you see that we start with a strong net income, a good increase here. Amortization and depreciation is quite stable compared to 2004. Where we got a hit this year is the change in working capital which was negative for the cash flow by Euro 236 million, simply because the working capital increased by this amount. And if you now compare two years, we have to take the difference between the two years, and this is roughly Euro 500 million. So what’s happened this year?

First of all we had some extraordinary items in 2004. Mainly on the receivable other asset side, simply because we got cash inflow from a settlement of a foreign exchange translation, which positively impacted in 2004 our cash flow. And secondly we, in 2005, had some payments for the tax payments for previous years, thank you, in a range of roughly Euro 250 million. And you see this is the explanation for the reduction in our operating cash flow.

If I look forward, then I anticipate that as we now have not seen any swings in our balance sheet positions between 2004 and 2005 that this will lead to an increase in our operating cash flow then in 2006 again. Capital expenditure was Euro 261 million which was more than we had in 2004. But the reason is that we are in progress to build additional buildings in Sanklienord and Walldorf mainly, but also around the world. And we have some investments on this side, so leaving a free cash flow in percentage of sales to 15% compared to 22% in 2004.

If you look to the usage of the free cash flow then the situation is as follows. We start again with this Euro 1.245 billion, then we look what did we with this cash flow. First of all, we gave back to shareholders in the form of a dividend, in the form of share buyback. You see the numbers here, Euro 340 million and Euro 470 million but we also released Treasury stock at the time employee exercised options. We used Treasury stock for this, and have a respective cash flow inflow from this in quota new shareholders, and at this at the end of the day it’s up to Euro 546 million.

Then we spend money for acquisitions. The Khimetrics acquisition is not include in here because this one was closed in January, and the cash outflow consequently also was only in January. Finally, we purchased some financial assets which give a good return on the cash we have. Here we invested in US bonds which, by the way, also has a favorable impact on our tax quarter. Then you see the other, others and the sum you find is the increase in liquid assets and marketable securities from year-to-year.

Additional information on the share buyback program. As you see here we bought back 3.2 million shares, amounting to Euro 470 million. Average price was Euro 129.77. You see what we have in Treasury stock, 668 million shares, and the average price being Euro 116.09. We released Treasury stock in connection with the exercise of options from our employees. You see that we still have Euro 30 million shares of these – amounts to buyback up to 30 million shares. And finally, we will continue to buy back shares in 2006 and we will invest at least Euro 500 million to do so in this fiscal year. Headcount increased by 3,668. You see the allocation here during the year, quarter-by-quarter. You also see the allocation to the functional areas we have, and this reflects what we intended to do to increase headcount in R&D and increase headcount in sales and marketing. By the way, thereof roughly 400 from acquisitions included in these numbers.

If you look to the picture on a worldwide basis where we added the headcount, and important here only to mention research and development 54% was employed in offshore location, being India and China. And if you look to our locations today, then you will see that Germany is number one with roughly 14,000 employees, US with different locations, of course, Germany also with different locations, number two. And number three’s India with nearly 3,000 employees we have in this country.

Finally, I want to come to the outlook for 2006 and I would like to read it so that there are no misunderstanding from those who are not in this room. To provide additional transparency, the Company’s providing for the first time an outlook for product revenue. The Company expects full year 2005, 2006 product revenue to increase in a range of 13 to 15% compared to 2005. This growth rate is based on the Company's expectation for full year 2006 software revenue growth, in a range of 15 to 17% compared to 2005.

The Company also expects the full year 2006 pro forma operating margin, which excludes stock-based compensation and acquisition-related charges, to increase in a range of 50 to 100 basis points compared to 2005. The Company expects full year 2006 pro forma earnings per share, which again excludes stock-based compensation, expenses, acquisition-related charges and impairment-related charges, to be in a range of Euro 5.80 to Euro 6.00 per share.

The outlook is based on an assumed US dollar to euro exchange rate of $1.23 per Euro 1.00. The expected headcount increase is roughly 3,500 FTEs, and two additional information. The tax rate is expected to be below 35% and for the time it’s 34.5%, so 50 basis points reduction. And the number of shares we anticipate for the end of the year at least will be 307m, and this compares to the 309.8 million we had by the end of 2005.

Now I hand over to Leo to continue.

Leo Apotheker, President of Customer Solutions & Operations

Good afternoon ladies and gentlemen. It’s a pleasure to welcome you here today to Frankfurt, to talk to you about our outstanding results and our record year. Thank you Werner. So let me try to give you some additional information on top of what Werner has already provided you with. We had a very good year in 2005. The numbers speak for themselves. We grew our software license revenues by 18% in 2005 which, by the way, is the eighth consecutive quarter of double digit growth. So we are in a trend that we have been seeing in the past, and we have been benefiting from the dynamics that have occurred in all of the regions. And I will give you additional information on what happened in each of these regions.

We had in the fourth quarter 2005 a record quarter when it comes to software license revenue. As Werner has already indicated, we grew our revenues by 18% to Euro 1.183 billion, that’s a 12% growth at constant currencies. And for the full year, as I already indicated, was a record year as well, Euro 2.783 billion. That’s a growth of 18% or 15% in constant currency. What is important for you to note maybe is that in Q3 and in Q4 we reported more software license revenues in applications alone, than our closest competitors did with database, middleware, applications and whatever else they sell together. All regions contributed to this success.

I'm very pleased to be able to report that the Americas software license revenue exceeds for the first time Euro 1 billion, with a 32% growth. But also Asia Pacific had a record year and, therefore, record software license revenues of Euro 363 million, that’s an increase of 25%. And last but certainly not least, Europe came back and delivered strong software license revenue growth of 8% to Euro 1.393 billion. We successfully continued to implement our volume business model. And just to give you an idea of the total year the number of contracts that were achieved in the indirect channel over that period was 41% increase. While direct sales grew their number of contracts by 15%. We added roughly 500 additional channel partners, and we added roughly 6,000 customers through the indirect channel program. So, as you can see, we’re gaining significant traction.

It’s under the cover of our SAP PartnerEdge Program, which we announced at SAPPHIRE. It’s also here a very strong and structured program, which helps us to attract all of these partners. And again, from, to give you some color from a comparative basis, we generate more business in the SME segment alone than any one of our closest competitors generates in their total business software license revenues. The average deal size continues to stabilize. You have two effects here. We have a slight decrease of the average order because of the high volume of deals that come from the indirect channel, and therefore from the lower parts of the mid-market. We compensate very effectively through the number of deals, and we have some large deals that help us balance this as well.

However and in order not to mislead anyone, just to be absolutely clear, the price pressure is out there. It might be stable but it’s stable at a very high level, and we do not expect that price pressure to ease in the near future. Werner already mentioned that we had strong new customer business. We generate almost as much business from new customers, than the closest competitors generate with both new and existing customers. And if I look back at 2005, the new customers represented about 22% of order entry, but the number of contracts that we did with new customers increased 33%. We continue to focus on a certain number of priority industries. We have a continuity here, there the same as last year, and let me maybe focus in particular on retail for a second for obvious reasons. And I'm very pleased to be able to report that 2005 was a record year for us in retail. We had an outstanding growth rate in that industry of 63%. We are privileged to count 3,250 customers in the retail space globally who trust us.

We did, as you know, some astute and smart fill-in acquisitions to complement our solution to that industry, and we have now probably the most comprehensive and complete offering for the retail industry compared to anyone else. And just to give you some examples of customers, we have Hugo Boss, Jones Apparel, Samsonite, The Home Depot, Zales and many, many others. We also pursued our efforts in the financial services. We had excellent results in insurance and we will continue our focus in banking, and we will continue to persist to convince banks to come, and become SAP customers.

High tech industry has been a focus of ours for a number of years and again 2005 yielded good results. We had some outstanding new names that joined us in this industry: Upright Materials among many others. And we want to continue to deepen our efforts in this industry. It has many benefits for us. Among others also the relationship when it comes to leading edge technologies on the hardware side. Last but certainly not least, the public sector. Also a very strong growth rate in 2005 globally and not only from a regional perspective, but also from a segment point of view. Be it defense, be it public services, be it health, be it higher education, we are a significant player in this industry and it looks encouraging also for the future.

We accelerated momentum in 2005. You have seen this through the quarters, and thereby we have an increase in our opportunities. We are the number one in all of the solutions, be it ERP, CRM, PLM, SCM or SRM. We are the number one in all market segments, be it large enterprise or SMEs. We are the number one in the vast majority of the industries we play in. We are the market leader in all of the regions we are, and we are global player: the US, EMEA, Asia Pacific. So for all of these good reasons I think it is time not only to stop the segment reporting, we will also stop giving you the peer group share. I think it’s becoming reasonably irrelevant. Instead we are going to focus and provide you with the data on addressable market in core enterprise applications. That market, from a super and pure software license perspective is roughly $16 billion and in that market we have about 21%. That’s three times more than Oracle, four times more than Microsoft, and six times more than Siebel.

We will focus on expanding our leadership in that market. We will look at the entire enterprise application market. Henning will talk about that in a minute. We will focus on platform business. We will focus on winning the business information user. We will continue to focus on expanding our presence in the mid-market without neglecting our large enterprise customers. And we will, of course, continue also our efforts in the priority industries, again without neglecting the efforts in the other industries.

Let me give you maybe some information on our Safe Passage initiative, which is basically still under the same auspices as the day we launched it. We want to provide customers value and we want to provide customers a trusted partnership. And I'm happy to be able to report that roughly 200 customers selected SAP as their adviser, as part of our Safe Passage initiative. And to give you a little bit more color on the competitive situation out there. If I just take the pure head-to-head competitive wins, so after all of the selection processes, pure head-to-head, we had 750, roughly 750 wins in 2005 against our closest competitor. And people select SAP for a number of reasons. We have a clear roadmap. We have deep and extensive industry knowledge. We have a superior solution offering, and we are able to enter into a long-term trusted relationship with each individual customer. And this foundation of our strategy will also be the cornerstone of what we will be doing in 2006.

Some selected customers in 2005, the fourth quarter. In the Americas AMD, Upright Materials, WestCAM, a customer that I personally have the pleasure of sponsoring and that is a delightful customer, it’s Harley Davidson. Lenovo, Merck selected SAP in the fourth quarter, and the New York Times. In EMEA the Danish Tax and Revenues. So here we go, another public sector. Wholesale: Hugo Boss, Norsk Hydro, Premier Foods and in France, PSA.

In Asia Pacific: China Mensheng Bank, ETSA, Metropolitan Electricity Authority, Petro China, and in Japan, Toyota Tsusho also entered into a relationship with SAP. A quick look at regions. Americas grew by 32%. 31% in the US. That’s the tenth consecutive quarter of double digit growth in the Americas. But also APA had a significant push in growth here, 25%. Japan, I’ll come back in a second. Let me just say a few words on EMEA before I zoom in on that. We had a good year in EMEA. I’d like to insist on that. We managed to recover from the second quarter in Germany by delivering a very good second half and other parts of EMEA, so actually very positive evolution of the business.

Let’s maybe zoom in. As I said, North America tenth consecutive quarter of double digit growth. We exceeded in the US for the fist time in 2005 $1 billion in software revenues and $3 billion in total revenue. I'm very happy also to see that Canada has kicked in with significant growth there as well. And we remain the clear market leader in the North American market, despite the acquisition, which has occurred. You probably know that we merged North and Latin America into one region beginning of the year. We’ll call it SAP Americas. Important to note that also Latin America had a very good year in 2005. Good performance across the region with very encouraging results, in particular, out of Mexico. So this is the last time we’ll show this slide for the Americas or for the US, excuse me, and you can see we have now a significant lead in the US market.

We are the clear market leader in the US and we will continue to focus on remaining and widening the gap in the US. If you look at the addressable markets, in the US we have about 11.4% share compared to Oracle’s 5.9%, Microsoft 4% and Siebel 2.9%. In Europe, as I said early on, we had solid software revenue growth despite a pretty significant market position that we have in these markets. We had an issue in Q2 in Germany caused by the early elections. That had an impact on our public sector deals in particular, but also in insurance and partially in banking. We managed, as we promised, to recover from that and I’d like, therefore, to use this opportunity to pay tribute to our German organization.

We also had a very strong result in Belgium and in Switzerland, countries where we had some issues in the past and we have put them back on track. But also the remainder of EMEA in EMEA news, we have good news to report there. We had a good performance in the UK, a strategic market for us. Like France, also strategic market, where we actually had a very strong recovery in a very good year. Nordic had good performance, and Russia and Eastern Europe as well. So all of Europe is actually becoming again a well contributor to the success of the Company. Here as well the last time we will show the peer group share. We have now a well-established and strong position here in Europe. The numbers speak for themselves. I don’t need to add on that. We will do every effort to stay at this level.

Asia Pacific, our high growth region together with Americas, again had a very good performance in 2005. They delivered a very strong software revenue growth with 25% increase. They achieved a record year. The good news is in Asia Pacific we achieved this performance across the region. There isn’t anyone really sticking out. We had good, solid performance across all of the countries in Asia Pacific, and them being very dynamic growth markets, we will continue to look for all of the significant growth opportunities that we can exploit in these markets.

Japan, we have been challenged, and you have challenged us rightfully so, to deliver growth again in Japan. So I'm very happy to be able to report that we executed on that, and we had an encouraging performance of 8% growth. We will continue to drive the turnaround. The market is still challenging but we do see the first signs of good results of all of the efforts we have produced. Again, last time for the peer group share but you can see here that our early commitment to Asia paid off significantly, and it’s actually giving us the highest peer group share of all of the regions where we are in.

Let’s quickly look at the mid-markets. You are familiar with this slide where we show you our performance in order entry overall in four quarters. And I'm delighted to be able to report that mid-market now represents about 31% of our order entry. And if you look at the absolute number, we are larger in SME than any of our competitors is in total application revenues. So we are a significant player in this industry. In fact we believe that we are the market leader, and if we compare ourselves to our peer group, we have actually managed to grow our peer group share by 4 points over the year. It’s a significant achievement, and I think that’s the result of all of the efforts that we have been producing in the mid-markets.

Now there is lots of talk about investments and what do we get in terms of results from the investments that we do, and I thought it might be useful to maybe just quickly look at some absolute numbers, and not just at percentages. We started to invest into the roadmap and into building out our R&D capabilities more significantly. We had a first payback of that in 2004 by adding Euro 468 million in product revenues, and continue to invest. We yielded significantly higher results thanks to that investment already in 2005. We added Euro 774 million in product revenue, thanks to that investment that we were able to accomplish in 2004 and in 2005. What are our 2006 priorities, just very quickly. We want to extend our leadership in the core enterprise application market. That’s clear, and we will report to you on a regular basis how that is progressing. We will do this by focusing, among others, on small and midsize enterprises without neglecting: and I can’t say this enough: our large enterprise customers.

We will continue to boost our strong partner ecosystem that is good not only for mid-market, but they will also help us in our platform business which is the next avenue for growth for us. And we will focus on winning the business information user. We have an exciting offering with Analytics, with Mendocino and now xApps. And last but not least, we have probably the best foundation for a healthy growth for the future that we have ever had. We have a very balanced, regional contribution that we can use move, to move ahead and, of course, when you do that in the higher growth markets, we’ll gain greater prominence in SAP in the, when we compare regional performance. That is a clear and that goes without saying that is by definition so.

So I thank you very much, and I’d like to hand it over to Henning.

Henning Kagermann, Chief Executive Officer

Well, ladies and gentlemen, three points from my side why I believe it’s a strong year. You have heard a lot of news, just wanted to pick three points, and number one is that we again were able to outperform the market. In particular in the software side by far. Number two is accelerated peer group share, because it was a year where we had to approve if an organic growth strategy is superior to an acquisition strategy. And the third one which we haven’t touched so far. You know that something’s going on in our market. Not from the industry, but that the next wave of new software is hitting the market. We announced this two years ago. It was enterprise service architecture which is a revolution for us. Not for our customers but for us. And the question is always what is the acceptance of the market? What are the customers saying? How fast is the adoption? And I want to touch this. I felt it was above my personal expectation in 2005.

So number one, I have taken the market in euro, if you want you can put into US dollar but I've taken euro just because we report here in euro. You’ll see SAP’s 13% growth in total revenues, the rest of the market 5%. And if you look to the license revenue which is, I think, even more important for software companies, and the market is software companies, then you see SAP was 18% against the flat market1%. So very, very strong achievement in all regions and, as you have seen, for large enterprises as well for the mid-market. I would like to look to the peer group a little different. You see here our peer group 3.5 years ago, it was really a big peer group. It’s now a smaller one. But what I wanted to show was the distance we had 3.5 years ago. It was 30 percentage points to the number two. You saw that beginning of last year there was a big acquisition of PeopleSoft, Oracle acquired PeopleSoft, so moved up to 24 percentage points. At that time we had 55, so more or less the same distance we have had 3.5 year ago. You see what happened in one year. We gained 7 percentage points, they lost 8. I think we have a difference of distance now which is larger than ever. So we were able to accelerate our peer group share in all regions, in particular in US where we gained 10 percentage points.

Third point, how can we measure if these new thing is adapted by the market been a success? Like you I'm measuring this mostly in terms of revenues, so therefore the first test was what type of revenue do we get from SAP NetWeaver? We all know that we made a lot of investment and a lot of achievement but what kind of revenue? We, If we carefully calculate the contribution come to RC1 Euro 0.5 billion and 30% is standalone revenue from NetWeaver. Also important, how many contracts can we, our three contracts which we still have, significant number converting to mySAP. A year ago I said we had roughly 6,000 desks. 900 to 1,000 a year brings us to a few hundred in 2010. This was also above expectation. We converted 1,150. So with these speeds, and I believe the speeds will go up over time, we have no issue to have the conversion done in 2009 or 2010, as we announced.

We have more than 300 enterprise service architectural roadmaps with customers. That is different than our roadmap. So we sit together at the strategic roadmap where we share with customers our future development plans. They share their business plans, and we try to match both together. Because you know that promises more flexibility, more strategic impact, differentiation against the competitor, and you have to find out where. Also the partner ecosystem ramps up quickly. 150 xApps on SAP. So composite we are still on top. Three are not on partners which are built on, NetWeaver 1,035, their developer network is growing 260,000. We have now about 500 channel partners who can also help us to distribute these new ideas of composites, on top of the business platform in the future.

What about the roadmap. It’s exactly what we announced in 2005, and so we delivered on promise. We will finish this roadmap in 2007, but I wanted to highlight here that we will deliver in 2006 more than we originally planned. We planned originally first hosted solution available on the Business Process Platform, with NetWeaver being planned for into Business Process Platform. This will happen. In addition, we will ship hundreds of enterprise services to the Business Suite, which is already in the market, connects us to our traditional products like our suite for the, in particular, to enterprises can easily connect us. NetWeaver also should connect us to other products which are available in the market. And we have decided to bring our mid-market product, mySAP All-in-One, to these composition for our platform NetWeaver this year, and extend the scope. So that’s not an ERP system only but more suite type of system.

So then the platform strategy looks like this. I have highlighted this a year ago. I just wanted to give you a feeling or share with you where we are. No changes in tendency but much more details. There will be one enterprise service repository, which is key. This is the business language of the future, very important. We will come with more and more model-driven product in the future. It’s important that we can build composites on cross of all three implementations of the Business Process Platform. You will see we have three types of implementation. One for large, one for mid, one for small companies. That makes sense. So not one fits all type of implementations, but one enterprise service repository. The Business Suite is already out, left site. We will just continue to ship more services. I spoke about the adaptor, this is this custom. I spoke about the middle.

I also highlighted that at the end of the year we merge our application platform into NetWeaver. It becomes the Business Process Platform, and the first hosted solution will be this mySAP All-in-One on the new Business Process Platform. It’s not the last one, but the first one. And finally there will be more on Business One as well, and we intend to convert also pieces of Business One into a leaner, smaller platform, to target the small industrial market. So you see it’s a very consistent and clearer picture of in which direction we go, but this one enterprise service repository is key for our clients. For small customer it means if they want to grow they can grow without disruption, and for large customer it means they can easily integrate their small subsidiary from a different solution.

Now, what about beyond 2006, your first guidance? And I would like to share with you a little bit what our ambition is for the years later. And you might ask how important is 2006? It’s a cornerstone year. It’s a cornerstone year because in 2006 finally we launch an important set of strategic products to the market, which builds the foundation for our business and for our ambition in 2010. We have announced a lot. Mendocino, analytics, etc.. But in 2006 it hits the market, and we make all of them general available. That’s the difference. And that was the key year for us.

You see here our ambition. I shared this with you a year ago. That today we have an addressable market of Euro 30 billion in product revenue. The question is what can we do? Where should we go from 20 to 30 to 40%? We don’t want to grow only. That’s one thing. We can expand our position. But in parallel I think it makes a lot of sense to expand our addressable market with a product, with a launch in, today and in the next years. We assume the market, which we can reach with our portfolio will more than double Euro 70 billion. You know we have targeted three areas. Leo mentioned them: mid market, the business solutions and the business process platform. These are the three areas where we want more market share and the different revenue streams. We will not change our growth strategy. I think that it’s a winning one to do it with organic growth. So, we will invest in talent and product. We’ll not change. We will invest into ecosystem, co innovation with partners and, yes, you will see some medium sized fill in acquisitions.

All the products that come to the market, either for the first time in WinPop or as a trend of the availability are mentioned here. So, it’s a significant number. And I have categorized them in the three brackets as what we really want to achieve in 2010. You will see what we are doing to deliver on this Enterprise Service Architecture road map. What are we doing in order to get the business user, the Mendocino with Microsoft? A balance of compositives from SAP targeting the needs of analytic decision making, and a bunch of exact targeting people productivity. Because with Mendocino it makes a lot of sense to go into this direction as well. And last but not least, next month we will announce in wide detail our plans for on demand for CRM on demand.

You see we do a lot for the mid market as well. I can just confirm what Leo said. I think our competitive position is stronger than ever. As our product pipeline, environment remains challenging, but I think SAP has a good chance to be accepted as a trusted innovator from our clients. We are seen as innovators. We are ahead with our road map. And our customer satisfaction is also on an all time high, in particular by the way in North America. So, if you put this together you understand hopefully our guidance. It fits to this long term strategy. We will continue to grow significantly faster than the market. I think the guidance here for it underpins this. We will continue to invest, because it’s an organic growth strategy in talent and in product. I mentioned a few. And we will continue to improve the margin in order to deliver in 2007. We announced above 30%.

To summarize, I felt it could make sense for you to have a broader picture and not just look to one or two quarters. We all do this seeing as that’s what our profession is. But I sometimes feel it’s good to look to the broader picture. And I want to share with you just looking back what has happened, and why, and what we intend to do.

Now, 2003 was an inflection point in our industry, as it was the year where software industry declined. We in SAP took this year in order to improve our margins significantly. You have seen it on a slide. We became number one in CRM. But most important, that was the year where we announced NetWeaver and our Enterprise Service Architecture, announced. 2004 we came back to double digit growth again. That was always, except the industry weakened to double digit growth. We did it in software 10%, became number one in U.S. and in the mid market. And very important, we bought at the end of the year to the market the success of our Suite, a next generation ERP based on the platform NetWeaver, which we shipped at the beginning of the year.

Now, what happened 2005? I would say we demonstrated that organic growth is the right strategy, 18% software revenue growth, seven percentage points peer group share. NetWeaver became this year a composition platform. It started as an integration platform. Now, it’s a composition platform, meaning you can build and partners can build additional composites on top. And, we have shipped the Next Generation Suite at the end of the year, not only is the entire Suite on NetWeaver.

Now, what about the future, 2006? As I have said it’s key for us because it’s the first wave of strategic products that come to market, which will help us to generate additional revenue streams of higher margins than today. Most of the business user, Mendocino’s system business model, it’s a business process platform with a business process platform in the market. We can generate a different extra fee to the platform from ISVs from SAP. This is a different business model. And you know in the mid market we will sell more indirectly, which is also a different revenue stream.

We will complete the road map in 2007. There are no doubts. I think we have enough fee technical know-how to do it. That means in ’07 we’ll, NetWeaver will convert into a business process platform. And the Suite and All in One will be on this business process platform. You will see a next wave of strategic product. So, that’s not the end in 2006. You will see Leo talking about more ways to market, intelligent ways to market. And so, over the time we will build up additional revenue streams from these products, so that we end up in 2010 with this addressable market of Euro 70 billion. It’s our ambition that then more than 50% of our software license comes from these new products. Our ambition is that we have 100,000 customers in our mid market business, which is today. 30% will go up to 40 to 45%.

So, in summary, we want to achieve four important points, strengthen our leadership position in the market, expand the market significantly, generate new higher margin revenue streams and finally, come to a more industrialized way to develop software. That means we will be able to bring more product to the market based on higher revenues and higher efficiency in R&D.

Thank you.

Stefan Gruber, Director, Investor Relations

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

Question-and-Answer Session

Q - Analyst

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

Thank you. You have one question here, so?

A - Werner Brandt

Maybe I….

Stefan Gruber, Director, Investor Relations

Sorry, yes.

A - Werner Brandt

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

Stefan Gruber, Director, Investor Relations

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

Q - Bruder

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

The first one, Leo, yes.

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

A - Werner Brandt

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

Stefan Gruber, Director, Investor Relations

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

Q - Michael Schacht, Cheuvreux

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

A - Leo Apotheker

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

A - Henning Kagermann

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

Q - Bill Tusson

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

A - Henning Kagermann

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

A - Werner Brandt

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

Okay, thank you. Well, Ariel’s turn.

Q - Ariel Bauer

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

November.

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

Q - Stefan

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

A - Werner Brandt

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

A - Henning Kagermann

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

Q - Koeller Mueller

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

A - Henning Kagermann

Okay.

Q - Koeller Mueller

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

A - Henning Kagermann

Do you want to deal with that one, Leo?

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

The question was on the dividend policy.

A - Werner Brandt

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

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

Q - Raimo Lenschow

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

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

Q - Simon Andrews

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

A - Henning Kagermann

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

A - Leo Apotheker

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

Stefan Gruber, Director, Investor Relations

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

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

Q - Woller

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

A - Henning Kagermann

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

Stefan Gruber, Director, Investor Relations

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

Operator

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

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Source: SAP Q4 2005 Earnings Conference Call Transcript (SAP)
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