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Executives

Stefan Gruber - IR

Werner Brandt - CFO

Léo Apotheker - Co-CEO

Henning Kagermann - Chairman and CEO

Analysts

Michael Briest - UBS

Charlie DiBona - Sanford Bernstein

Raimo Lenchow - Merrill Lynch

Sarah Friar - Goldman Sachs

Ross MacMillan - Jefferies & Co

James Dawson - Morgan Stanley

Knut Woller - UniCredit

SAP AG (SAP) Q1 FY08 Earnings Call April 30, 2008 9:00 AM ET

Operator

Welcome to SAP's First 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 - Investor Relations

Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's first quarter 2008 results. I am joined here in Waldorf by Henning Kagermann, Léo Apotheker and Werner Brandt. Warner will discuss the Q1 financials in detail; Leo 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 of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should and will and similar expressions as they relate to SAP are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking statements. All forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from expectations. The factors that could affect SAP's future financial results are discussed more fully in SAP's filings with the U.S. SEC, including SAP's annual report on Form 20-F, filed with the SEC on April 2nd, 2008. Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

In addition, in this call, we will report certain financial measures, particularly free cash flow, constant currency period-over-period changes in revenues and operating expenses and approximations of revenue growth on a U.S. dollar basis that are not prepared in accordance with U.S. GAAP and are therefore considered non-GAAP measures.

We report these measures to provide additional information that may be useful to investors in breaking down and evaluating sales volume and income growth. Our non-GAAP measures may not correspond to non-GAAP measures that other companies report. The non-GAAP measures that we report should only be considered as additional to and not as substitute for or superior to the respective U.S. GAAP measures that we report.

And before we start, let me remind you of our upcoming investor conference to be held next week at our user conference, SAPPHIRE, in Orlando on May 6th.

And with that, I would like to turn things to over to Werner Brandt.

Werner Brandt - Chief Financial Officer

Yes. Thank you, Stefan, for this introduction. Before I begin let me inform you upfront that I will speaking mostly about non-GAAP figures as it relates to the operational performance of our business. These non-GAAP measures are also the basis for our guidance. The differences between U.S. GAAP and non-GAAP figures are the results of two effects. Number one the exclusions of a write-down of deferred software revenues in the amount of €47 million. And second the exclusion of acquisition-related charges in the amount of €83 million compared to €11 million in the first quarter of 2007, both adding up to €130 million for Q1.

With that, let me say that we are pleased to report another good quarter in which non-GAAP software and software-related services, and I will call this going forward product revenues grew by 24% at constant currencies. Let me take a moment to discuss the year-over-year change in exchange rates. The euro continued to strengthen significantly against most of the major currency causing a currency headwind for SAP. Here are some of the key metrics; U.S. dollar to euro plus 15%, British pound to euro plus 13%.

Currency overall had the following impact on the P&L in the first quarter. A negative effect of 6 percentage points or €98 million on product revenue on non-GAAP basis, and negative effects of 6 percentage points or €138 million on non-GAAP total revenue, the positive effect of 5 percentage points or €92 million on operating expenses resulting in a negative impact on operating income by 11 percentage points or €46 million. The non-GAAP operating margin was negatively impacted by 70 basis points in the first quarter, so compared 22% to 19.5%.

Let me now continue with the quarter's results which include Business Objects consolidated as of January 21, 2008. Non-GAAP product revenues for the first quarter were over €1.78 billion which represented a year-over-year increase of 24% at constant currency. This includes a 12 percentage point constant currency gross contribution from SAP standalone business.

The growth in non-GAAP product revenue came from year-over-year constant currency increases of 18% in software revenues, 27% in non-GAAP support revenues, and 46% in subscription and other software-related service revenues. Since we acquired Business Objects as of January 21st, we did not consolidate U.S. GAAP software and software-related service revenues in the amount of €45 million for the first three weeks of January.

First quarter professional service and other services revenues were €760 million which was an increase 18% at constant currency. Consulting revenues were €587 million increased 20% at constant currency and training revenues increased 17% at constant currency.

The non-GAAP software and software-related service margin was 82.1% for the first quarter of 2008, which was an increase of 40 basis points compared to the first quarter of last year. The higher margin was the result of a decline in purchase licenses, offset somewhat by the increase in personnel expenses related to growth in headcount in the support area. The professional service margin was 20.8% for the first quarter, which was a decrease of 30 basis points compared to the same quarter last year. The decrease in the margin is mainly the result of the low Business Objects contribution in the consulting and training area.

As a result of the mixed margin performance in product and services, our 2008 first quarter noon-GAAP gross margin increased by 80 basis points to 64.5%. Non-GAAP operating expenses increased by €303 million to €2 billion or 18% year-over-year. Of this increase, two-third or approximately €200 million relates to the Business Objects acquisition and one-third or approximately €100 million is organic increase in operating expenses. The bulk of this expense increase is a result of higher personnel expenses.

Since the first quarter of 2007, we added a total of roughly 11,000 employees of which 6,224 came from the Business Objects acquisition in the first quarter of 2008. The remaining 4,700 was the result of organic personnel growth at SAP of which 1,189 were added in the first quarter of 2008.

In addition, the increase in non-GAAP operating expenses included approximately €10 million related to the Business Objects integration efforts. Non-GAAP R&D expenses increased 19% for the first quarter and represented 16% of total revenues compared to 16% of total revenues in the first quarter of last year. The increase in non-GAAP in R&D was the result of additional personnel. We hired additional 1,357 [ph] net FTEs since the first quarter of last year. Of that total, 885 FTEs or 63% were hired in low cost locations. We also added roughly 1,700 FTEs from the acquisition of Business Objects.

Non-GAAP sales and marketing expenses increased 21% for the first quarter and represented 23% of total revenues compared to 22% of total revenues in the first quarter of 07. The increase in non-GAAP sales and marketing expenses was mainly due to additional sales and marketing headcount year-over-year, and we also added 2,000... roughly 2,100 FTEs from the acquisition of Business Objects.

Non-GAAP general and administrative expenses increased 28% of €33 million for the first quarter, and represented 6% of total revenues, roughly the same as the prior year's first quarter. The higher non-GAAP G&A costs were mainly the result of the acquisition of Business Objects, which represented approximately 70% of this increase along with expenses related to the Business Objects integration.

Operating expenses related to the new business around SAP Business ByDesign for the first quarter totaled approximately €40 million, compared to €23 million in the first quarter of last year. To-date we have spent roughly €165 million.

Overall, the company's non-GAAP operating margin at constant currency was 20.2% for the first quarter, which represents a decrease of 50 basis points compared to the first quarter of 2007. As you know, prior to the acquisition, Business Object operated as a standalone company with significantly lower margins than SAP. In fact, SAP's standalone business had an increase in operating margin for the first quarter, but it was negatively offset by the operational performance of Business Objects in the first quarter of 2008. We have already begun the integration process, which will result in significant efficiency gains going forward to the benefit of SAP's overall margin.

Our U.S. GAAP effective tax rate for the first quarter was 30.6%, compared to 33.5% for the first quarter of last year. For the full year, we expect a tax rate as indicated in January of 31% to 31.5%. Free cash flow for the first quarter was €1 billion, which is an increase of 31% compared to the first quarter of 2007. This increase was the result of working capital improvements and our acquisitions. For the first quarter of 2008 primary use of the cash flow was for acquisitions.

For the first quarter we bought back 8 million shares for total of approximately €258 million. For the rest of the year, we expect to purchase an additional 250 million of shares. Headcount in the first quarter increased by 7,400 [ph] FTE's, of which, as I mentioned before 600... 6,200 came from the Business Objects acquisition and 1,100... roughly 1,200 from SAP organically.

As you've seen in our press release issued today, we have made one adjustment to our 2008 outlook. We have increased the expected range of our non-GAAP operating margin by 100 basis points to a range of 28.5% to 29%, it's constant currency. The reason behind the change is that we decided to reduce the accelerated investments by €100 million in our business round SAP Business ByDesign. Henning will discuss more details on this later.

Also beginning in 2009, there will be no more accelerated investment for SAP Business ByDesign. All expenses will be funded out of the normal operations, which will have a much less negative impact on operating margins compared to the accelerated investments in 2007 and 2008. Therefore the total accelerated investments around Business ByDesign for 08 is expected to be around €100 million, of which we already spent €40 million in the first quarter.

With that, I would like to pass it over to Leo.

Léo Apotheker - Co-Chief Executive Officer

Thank you, Werner, and I am glad, you can all join us today on this call. I'm pleased to report our 17th consecutive quarter of double-digit growth in our established business. This demonstrates the continued strength of our established business, while our SME business continues to grow rather well as well. Migrations to the platform continued at a good pace, providing additional revenues for up-sell opportunities for many years to come.

Our performance reflects our leading position in the industry and our continued high win rate against our competition. In the first quarter, our win rate against our next largest competitor remained at over 80%, and we once again were very successful at replacing the same competitor but in number of customers.

A key strength for SAP is that we continue to maintain our strong competitive position in all geographies, regardless of market environment. Speaking of the environment, in most of the regions, we continue to see good demand, the market environments remained sound. The once exception was the U.S. in which environment was a bit tougher than we expected coming into the quarter. However, our global presence provided us a significant advantage since for the most part we are not dependant on a single region.

Let me take a few moments now to break down what we saw in the first quarter among the major regions. In EMEA the environment has not changed much since the fourth quarter. It remains robust and intact, and there is no indication of that changing. In EMEA, non-GAAP software and software-related service revenues, product revenues, increased by 27% at constant currencies with Germany increasing by 12%.

We reported a continued strong performance in the CIS countries with Russia again a standout. Other regions of strength included a U.K., Switzerland, the Netherlands, and Belgium. Key contract wins in the EMEA region were REHAU AG & Co., LocalInfo [ph] and Telecom Italia.

The Americas as of whole had a mixed performance. Non-GAAP software and software-related services revenues were 16% at constant currencies in the fourth quarter while the U.S. reporting 20% growth at constant currencies. Software revenues in the Americas were down 2%of constant currencies coming out off of tough comparison to the first quarters of 2007 in both the U.S. and Latin America, where we closed as you will all remember an exceptionally large deal in Q1 2007.

Canada turned in another good performance, and in the first quarter in U.S. we witnessed an environment where there was an increased scrutiny on deals which caused a delay in closing some of them. Also the average deal size declined which can be expected in this type of environment.

Importantly however, is to note that we continue to outperform our competitors and gain market share. Key contract wins in the Americas region were BT Americas, New Balance Athletic Shoes, and Pacific Gas & Electric Company. In the Asia Pacific Japan region, the environment remained very good. Non-GAAP product revenue grew 36% at consequent currencies, with very strong performances from China, India and Japan. Non-GAAP product revenues in Japan were up 42% at constant currencies. And key contract wins in this region were Komatsu, China National Petroleum Corporation and Corporate Express, Australia.

Let me now briefly touch on some of our strategic industries; retail, banking and the public sector. Picking up where 2007 left off, retail remains strong, reporting over 60% growth in the first quarter. Some key announcements on the retail front included 7-Eleven which is the largest chain store in the Unites States, with close to 5,500 franchise and company operated stores, extending its agreement for the mild management solutions.

Big Lots was more than 1,750 stores, and nearly 40,000 associates selected SAP for retail solutions in Grupo Pao de Acucar, the largest retailer in Brazil setting food and general merchandise with 64,000 employees and 573 stores have selected SAP solutions to consolidate its IT infrastructure. Key retail contract wins in the first quarter, included Burberry Ltd., LensCrafters, and Tawa Supermarkets.

Banking had another very solid quarter, growing close to 80%. Financial services as a whole were up close to 70% with insurance also performing quite well. Key banking contract wins in the first quarter included Barclays Bank PLC, Banc of America, and Nationwide Building Society. In the public sector, we reported nearly 30% growth continuing the good performance that we saw in the fourth quarter of last year. Key public sector contract wins in the first quarter included the Government of Zambia, Gauteng Provincial Government and National Health Insurance Corporation.

As you are probably well aware, we remain intensely focused on expanding and strengthening our partner ecosystem. It has been and will be vital to our success a key strength and a competitive advantage for SAP. In the first quarter, we made several announcements, demonstrating the success we continued to have in growing leveraging and collaborating with our partners. SAP and IBM announced plans to deliver our first joint software product codenamed Atlanticthat will integrate IBM Lotus Notes software with SAP's business suite.

We announced an expanded global services partnership with HCL Technologies and we announced an expansion of our partnership with long-term partner Intel to collaborate on offering preinstalled business solutions for mid-sized companies, optimized for Quad-Core Intel Xeon processors. We also announced the deepening of our relationship with Novell that will enable customers of all sizes to run, manage and secure mission-critical operations on Linux, demonstrating our commitment to the open source community.

Let me end by giving you an update on the Business Objects acquisition. As you are aware in mid January we announced the successful all cash tender offer for Business Objects. And since then we have received very high marks on customer's prospects, partners and industry analysts on the acquisition itself to go-to-market approach, and the combined SAP end Business Objects platform components and applications. We hit all product deliverables in the first quarter with the product growth map and we're on time and on target.

The initial product growth map is already been communicated to customers and partners. Despite the many challenges that companies face integrating acquired companies and despite the more aggressive sales targets that you put in place prior to the start of the quarter we're pleased to say that we had our first quarter sales growth. We saw success in selling performance optimization applications in to Business Objects accounts and a business intelligence platform in to the SAP account. Derivative testaments through the complimentary nature of the product of the two companies which would bode well for future success and with this let met turn it over to Henning

Henning Kagermann - Chairman and Chief Executive Officer

Yes thank you Leo. We are pleased to recall another good quarter. It is our ninth consecutive quarter of sheer gains and the price implication software market. At the end of the first quarter our fear based on a $77.4 billion was 32.6% representing an increase of almost 4.2% influence compared to the first quarter of 2007, of which approximately 1% is point represented organic growth.

And it's representing an increase of 7.6 percentage points compared to the first quarter of 2007 of which 4.3 percentage points represented organic growth. These are impressive share gains demonstrating the benefit of being a truly global software company. As Leo mentioned earlier the established business remains a core area of strength for SAP and it continue to be a strong growth area for SAP for many years to come. This is one pillar of our gross strategy, the second pillar of our growth strategy lies in our push into the mid market with our SME portfolio and the third pillar lies in the tremendous opportunities we see in our businesses uses solutions, which have been strengthened even more by the recent acquisition of Business Objects.

Let me start with first pillar, the established business. With the established business continuing to provide great opportunities gross we remained determined to continue to move our customers onto a business process platform allowing for greater up sale opportunities. That said SAP at 6.0 adoptions is well underway as we have now achieved more than 9,900 customers in just the past two years. 6000 are already productive. This numbers compare quite well to the more than 4100 customers and nearly 1800 productive customers in the first quarter of last year.

This very fast adoption rate has surpassed our expectation. Continuing on the same subject our unique technology of delivering innovation without disruption to customers through our enhancement packages for SAP has been a huge success to customers. The ability to implement these enhancement packages according to their own time frame and specific needs for functionality is unmatched in our industry.

In fact we recently released a certain announcement package, which contained more than 1400 new business functions including industries specific solutions. Furthermore more, we completed our enterprise SOA outlet in 2007 and therefore we are able to begin delivering announcement packages for the entire SAP business suite and SAP leaders are here. And important component of the business process platform is of course the SAP net weaver technology platform and the gross we saw in 2007 continued into the first quarter of 2008.

The number of productive systems now stands at 38,700 representing a growth rate of 85% compared to the first quarter of last year. On rolling four quarter base year-over-year SAP NetWeaver revenue increased 26% to approximately €1 billion of which 37% was standalone. Standalone sales increased 67% year-over-year on a rolling four quarter base.

We continue to engage in strategic partnership with SAP NetWeaver to help drive innovations for our customers.

One I'd like to mention is the expanded partnership with IDS share. They are a solution and our enterprises services repository will be integrated even tighter going forward. This will enable users to access SAP's enterprise services and modeled process component directly from a business process analysis in modeling environment.

Let me touch on another pillar of our gross strategy SME segment where we continue to see strong results. The first quarter the number of SAP business all in one customers grew 18% to 11,700, the number of partners increased by 25% to 1064. For SAP business one the year-over-year number of customers increased by 38% to 18,690 and the number of partners by 11% to 1169. Some recent announcement on our SME product portfolio included the introduction of our fast start program for SAP business all in one. And we have a shown a prototype of a business all in one appliance that we developed in close collaborations with Intel that Leo touched on earlier

Let me now move to our new breakthrough innovative product, SAP Business ByDesign. As you have possibly already in our press release this morning, we modify the roll out strategy for this product. Let me begin by saying that we remain entirely committed to this product. You should not interpret this modification as anything to the contrary, in fact we have been quite success to date with SAP Business ByDesign, feedback from early customers and partners, who have been working closely with to validate and fine tune the product, and overall business model has been very positive.

We introduced SAP Business ByDesign in the face go to market approach, not too different from other new products that we introduced to early customers and partners. Since SAP Business ByDesign was a completely new deployment and business model for us, we took an even more conservative approach to the rollout. It's important to adopt our plan, appropriately at every step of the way while insuring highest quality maximum possibility potential.

We think we can do even better then what we have achieved to date, and there fore we have decided to take an even more controlled approach to the rollout of Business ByDesign. Here, some of the steps we will take in modifying the rollout. In 2008, we will concentrate our go to market efforts on six focused markets, Germany, U.S., France, U.K. and China where all our productive early customers are based, and India, where we will launch SAP Business ByDesign in the summer. These countries represent a large amount of the worldwide volume market opportunity. Our successful early partner program of providing ongoing close collaboration will continue unchanged in six focused markets. Additional country rollouts will be executed in 2009

The extended time line enables us to take different steps towards optimizing end to end process of delivering selling and supporting the solutions. It will provide customers with many benefits including even higher usability and performance by lowering total cost of ownership by leveraging the next release of Sap NetWeaver. From a financial perspective that Werner already mentioned the impact to the margin, let me touch on some other notable items. As a result of our more controlled ramp up process it will take us a bit longer around 12 to 18 months to reach to 1 billion revenue potential and to 10,000 customer ambition. Also the company expects to engage with significantly less than the previously mentioned 1000 customers in 2008.

We will use SAP Business ByDesign innovations and technologies for our existing solution and we expect to this to contribute significantly to the overall revenues SAP in 2010. We will also leverage all go to market innovations and investments including our successful mid market brand extension, demands innovation, tele sales capabilities and web supported buying cycles across the entire SME solution portfolio so is the strengthen our continued SME growth strategy. We remain fully confident in this product, the market opportunity and the associated business model of SAP by design and we continue to move towards volume readiness in 2008. We do not see any comparable solutions in the market and the solidity of the product has already been proven by the commitment of our early customers and partners as well as the immense interest we have perceived from the market.

Let me now finish up by talking about the third pillar of our growth strategies as a business user. We are making excellent progress in this fast growing market for business user solutions, with our performance optimization applications and our business intelligence platform which has been greatly enhanced by the acquisition of Business Objects. The new SAP Business Objects line of business will focus on capturing the lion's share of what ID sees as a U.S., as a USD $15 billion market opportunity, growing at more than 10% per year. The integration of Business Objects is going well, and we are ensuring the protection of our customers' investments, as we have already provided them with the product roadmap outlining, the future evolution of our solution portfolio and the business intelligence and performance optimization applications era.

We also unveiled our first joint offerings and announced BusinessObjects XI 3.0 the first enterprise-scale platform for business intelligence. Not only does the release includes the new version of all major products in to Business Object solution portfolio, but also entirely new products based on joint Business Objects and SAP solutions, such as the SAP NetWeaver Business Intelligence Excelerator.

I would like to end here. Thank you for listening, and we will now be happy to take your questions.

Question And Answer

Operator

Thank you. [Operator Instructions]. Thank you. Our first question comes from Mr. Michael Briest with UBS. Please go ahead.

Michael Briest - UBS

Thank you very much, good afternoon. Leo and Heinrich maybe you can talk to the U.S. or Americas situation when did you realize that the performance wasn't to be as good as you expected, can you talk about how things have played out since then in April and also to the year you are leaving your guys unchanged you had talked about double-digit growth from the U.S. is that still a target you are expecting to achieve?

Unidentified Company Representative

Well thank you for the question, let me try to give a little bit of color on the situation. The environment was tough it was indeed a little bit tougher than what we had expected going into the quarter. What we did see happening we saw that the volume was still very good, we have quite of other activity going on. The good news is for example that we closed to 50% of our business in the U.S comes from new customers which is a very good number. We have actually gained market share in the U.S. markets it's a as well what you say another good indicator in this environment, what did happened to is that the average steel size declined in U.S. that's something that we realized in the quarter-after-quarter what we have done since is we have adjusted SAP to our go-to-market model in the U.S. We have accelerated a certain number of activities that were already happening anyway like for example having a stronger focus on particular buying incentives was in companies that has now been executed here, go to market model in the U.S. has been adjusted to this and the pipeline as we look to the U.S. business going forward and indeed to the global business going forward much more important than just the U.S. business is actually a very healthy pipeline. And after scrutiny of the pipeline we feel confident that we are able to reaffirm our guidance and when it comes from the top line product revenue is a risk of 24 to 27% in constant currency.

Michael Briest - UBS

Well the U.S. achieved double digit growth of the standalone SAP, business, do you think?

Unidentified Company Representative

What we said was that the U.S. was extended on SAP business when we talked about this in the beginning of the year, we talked about product revenue and we didn't really give a clear indication, what we said was that the U.S. would not be one of our strong gross drivers, whether that it would be into low double digit area for product revenues.

Michael Briest - UBS

And Michel if you look to the information we provided in United States we have a product revenue and increase at constant currency of 20%. And if you take the overall metrics, they of, the half is coming from SAP's and they are the half its a contribution of Business Objects related products.

Unidentified Company Representative

So therefore we are maintaining our expectations for the U.S. might be a little bit more or a bit less that depends on the environment, but overall we feel that we have a strong U.S. business.

Michael Briest - UBS

Okay and if I had just ask finally has there been any restructuring of the U.S. or cost reduction program to the effected headcount? Thank you.

Unidentified Company Representative

What we have done is that we have adjusted our go-to-market model that implies also some changes in personnel, which have been executed already.

Michael Briest - UBS

Thank you.

Unidentified Company Representative

Next take the next question please.

Operator

Thank you our next question comes from Charlie DiBona of Sanford Bernstein. Please go ahead with your question.

Charlie DiBona - Sanford Bernstein

Henning I think we all understand what you are doing with Business ByDesign a more cautious roll out but may be you could tell a little bit more into color on why the delay, why the slower roll out. What is driving the decision to alter the way you are taking this to Market are there certainly been speculation about product issues and channel issues and may be you could, you could eliminate those little bit.

Unidentified Company Representative

Yes I think Charlie. No it's I'd call it many things come together. And you know if we would... if we had to decide it to treat by designs like the normal product adopt the traditional go-to-market approach, I'd say we have successfully launched this product. We successfully have upgraded the first live clients to the next release and now its business like normal. You know that we don't want to do it, we have high ambitions, one is no modification paradigm and as already said we want to do it on the amount mode. That means that they're many assumptions I'd say in our model and at the customers side which we have to verify. Let's start with collecting now from all the clients, what they really needs to run their entire businesses without any modification, without any lets say any additional software function that hit you on side which we normally are doing and we collect all those things and bring it back into the product.

The next one is how long is the upgrade taking is, is it too long? Not long enough, I think he has also something that we can improve. Then it's the question of cost of ownership we can measure it now. We have exact figures and we felt it will not take us not too long to improve figures here significantly so why should we spent the money and a lot people if we can do it in an automated way and we have learned something in how to integrate in to the heads of a genius network of clients on site what does this mean. We got feedback on how clients adopt this new software was a start from COM, was a start from human resource etc. how many of... of the users will go live, and how many people do we need on site for conduct [ph], you know all of those things. I made it a little bit long to give you a feeling that we have now pretty good understanding of all the assumptions we have to make, to build really a profitable business, and instead of rolling it out step by step, which could cause, I would say a little frustrations and on decline, we decided lets say to trust everything which is needed to make it to volume business, in the next release. As it will take us a little longer, we will engage with the client in a slightly different way, more intense and measure it again, and I think then we will go forward.

Charlie DiBona - Sanford Bernstein

Just one also follow-up, you've been very careful to this point to keep Business ByDesign sort of segregated from the core business because you didn't want to pollute the middle market strategy. You're talking now more about...more cross colonization is this a change in the structure of Business ByDesign organizationally or is this just accelerating the technological cross polarization?

Unidentified Company Representative

It's a second one, I think, we have very carefully indicated at last SAPPHIRE as that our intent is to reuse the investments made in the product development by design, and bring new innovative edge, processes and business innovations to our large installed base. In a careful way, now we are ready to announce the phase of first of the first of these examples SAPPHIRE, and I guess we can roll them out next year, this will have no impact on the stability of the product, and no impact in how we go to market or we develop the product for the mid market.

Charlie DiBona - Sanford Bernstein

Thank you.

Unidentified Company Representative

Great thank you. Next question please.

Operator

Thank you. Our next question comes from Raimo Lenchow of Merrill Lynch. Please go ahead.

Raimo Lenchow - Merrill Lynch

Hey two questions if I a may, first of all on Business Objects if I just do the math, it looks like about a -15% license revenue number can you may be give us some detail how much of that is impacted by the three weeks that are missing so a number what's the 45 million you comment on earlier than how much is coming in there from that and how would the number have looked otherwise. Also you haven't really talked about any update on the cost synergies up to 150 million, what's the progress that we have made in Q1. Second question is on... the maintaining of the outlook going forward we now see Oracle disappoint on applications we saw you guys missing the numbers quite a bit, what should kind of give us more confident an extra debts coming back I know you have mentioned the pipeline before but it seems little bit that you are kind of out of thing with the economic reality and the then the last question may be you cant answer that on the call is anyone of senior management taking a bet on €1 billion by 2011. I would offer a dinner but may be we can do that after call, thanks.

Unidentified Company Representative

Raimo these has a lot of questions let me address the first two answers with regard to Business Object. If I mentioned before that on the product revenue side we have an impact of roughly 40-45 million due to the fact that we have consolidation since 21st of January and I would say that half of it relates to software and the rest is just the support revenue. And secondly, if you looked at the Objects [ph] integration we mentioned before that the synergies we want to realize are embedded in our operating margin for the full year and as we have only adjusted our operating margin due to the fact that we decreased our accelerated spending for Business ByDesign. This indicates that we are at least on track with delivering the synergies from the Business Objects integration. If you look to this integration I think from a go-to-market perspective as Leo mentioned this before. Every thing is on track and also for back office integration we are making good progress and we assume that in the first three quarter of this year. Everything is accomplished, then we will see for the full year the full benefit of all the synergies we expect out of the Business Object integration.

Henning Kagermann - Chairman and Chief Executive Officer

Yes it's Henning, and I would like to comment on the application market, I feel it's a good market and we are performing very well. Look to product revenue was constant currency 24%; 12 from SAP. We have reiterated the guidance of 20 for 227 and this after a hard look to our pipeline, and what I like is that these was one of the quarters where we have gained more market shares in before, which was seeing is good its listening over position. And I don't know if many companies have proven that they can lets say grow both in parallel organically where we gained 1 percentage points which we did through acquisitions. So I felt that things are coming together and it was for me personally a good quarter.

Léo Apotheker - Co-Chief Executive Officer

Let me may be at add two more comments to that, one should not have an, instead of you and you would on the other U.S. perspectives, where once you take a global view of you and if look at the global number there are very impressive and any metric you would like to use, and to the last comments regarding the bid if I can choose then why don't you bet.

Raimo Lenchow - Merrill Lynch

Thanks okay I will take that.

Unidentified Company Representative

You can't afford it. We will take the next question please.

Operator

Thank you our next question comes from Sarah Friar of Goldman Sachs. Please go ahead with your question.

Sarah Friar - Goldman Sachs

Good morning everyone thanks for taking my question. The operating margin guidance you are moving that up for the year certainly signaled and you focused on expenses in general I mean I know that this is something that investors have been asking of you for quite a while and I think broadly Leo and Henning both of you were quoted earlier in the quarter taking that R&D expense generally. Could you may be give us some color on why this new focus on the cost line if still you are confident on the growth story and can we see both growth and margin improvement.

Unidentified Company Representative

Yes indeed if you look at the figure it wasn't adjustment. We have thought lets say slow down the investment into buy design and we save some money, I think that's what is the good news. We continue to believe in the growth story otherwise we wouldn't have done it, we kind of fought to do this because we are so confident in our core business and in the Business Objects integration that the impact of Business ByDesign it was a top line, is not that crucial for our business. So I think balancing it out no looking for both mix makes a lot sense in the moment. Yes and we give a lot of feedback during the roadshow period and here is the answer to this one.

Sarah Friar - Goldman Sachs

And just generally I understand that BBT investment have been cut back but what we see will also try to get more efficiency out of core SAP R&D investment and sell the marketing investment or is that not the case its really just BBT that we are talking about.

Unidentified Company Representative

But we indicated Sera versus the... what we indicated was that as we see our business evolving in the future. We will read the benefits of some of the investment we've made in the past when it comes to platform and in particular when it comes to our enterprise so approach. That investment was meant not only to generate a stronger pipeline and a stronger top-line. But also create more effectiveness in our development and therefore we feel that the development share in our revenues can start to come down slightly in the future. That doesn't mean that we'll be necessarily spending that money on R&D. But the share of R&D in our revenues should start to come down in the future.

Unidentified Company Representative

And we're working on this. If you look to our get operating expenses for a movement only for simplicity here, we added 22% and there of 12% is coming from the acquisition of Business Objects as it stands. 5% is coming from the acquisition related charges so that is purely accounting driven it has nothing to do with the operational performance and 5% is coming from SAP. So would you see that we have a strong focus here on expenses.

Sarah Friar - Goldman Sachs

And one final one for you if you don't mind, in Europe specifically thinking about linearity was there any slow down or any change of momentum in the last few weeks of March because I know more broadly in Europe there is been some commentary from more consumer, more consumer driven businesses. But they began to see some flowing and now most enterprises haven't talked to that yet. But any color at all on those last few weeks?

Unidentified Company Representative

Sara the business momentum in Europe was stable through out the quarter. Normal pattern, nothing really significant to signal, there might have been small change in one country was easily picked up business another one. Or in India we obviously steady business conditions going forward.

Unidentified Company Representative

And that hasn't changed. The majority of the deals we closed, are closed in the last month of the quarter.

Sarah Friar - Goldman Sachs

Okay. Thank you very much.

Unidentified Company Representative

Thank you. Next question please.

Operator

Thank you. Our next question comes from Ross MacMillan from Jefferies & Co. Please go ahead.

Ross MacMillan - Jefferies & Co

Thanks. Werner, a question for you just on the margins, I know you've guided obviously the cost of currency, can you just recap on the currency impact operating margin on a non GAAP basis in Q1, and can you just remind me again, what, what you said at the beginning of the year with regard to the FX impact for the full year, if you did make any comment, thanks.

Werner Brandt - Chief Financial Officer

Yes. Let me start with the guidance we've provided. In fact we've provided the guidance on the, on the margin at constant currency, so we didn't pronounce any currency predictions for, for 2008, for our 2008, but I can give you a more color, more details here on the currency impact. If you look to the currency impact on total revenue, it was €138 million. Thereof, roughly 100 million is on the product side, and €40 million is on the service side. Then on the cost side, of course we have this benefit that is up to €92 million, and actually then the operating income is impacted by €46 million, which represents 11%.

Ross MacMillan - Jefferies & Co

And so, if we just made the assumption that currencies, currency rates prevailed at current rates, as we, as we have today? Any how should we think about that as we go through the years, is there any insight you provide to that?

Werner Brandt - Chief Financial Officer

No, I think it's not necessary as we guided it at constant currency and if you look to the difference between actual and at constant currency and take the rates we provide on the internet for the second, third and fourth quarter of 2007 I think it's an easy calculation you could do on your own.

Unidentified Analyst

Okay aright thank you.

Unidentified Company Representative

Important to keep... to stay consistent with our guidance KPI at constant currency and that's it.

Unidentified Analyst

Okay and then may be just a follow up and it goes back to an earlier question but Henning can you just as you talk about taking the Business ByDesign technology and then leveraging that in core SAP, what specific should we think about when we are doing that where we are going to see that leverage, what's being applied to where thanks.

Henning Kagermann - Chairman and Chief Executive Officer

In principle everywhere on a go-to-market side definitely I mentioned it as our telecenters, there is the web approach. All these things we can level it partially we have done it already in our all in one products so I think that we can do mostly across as SME portfolio. From a services point of view what all we are doing in order to alternate upgrade the way how we run the software etcetera has also a positive impact on our suite because that will help our clients to bring their PCO down as well. If you look specifically what we could do from the solution point of view they are obviously to ways one is I mentioned earlier that we will built a additional components, which will be charged to our clients and they can reuse as a platform we have used, in business by deign for that. And we will do so, because this is completely services enabled the integration to our normal suite is more less out of the box. And the second is it clearly there is a big demand I would be very careful, we would be careful because we don't want to spoil our mid market business but there is a big demand from every large client out there for resolution for the small subsidiaries and when ever we speak about by design and the potential of flow cost of ownership there more than interested. But here we will only take this options one we have let's say proving the volume readiness in the key countries first. But these are two very good options.

Unidentified Company Representative

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

Hi, guys, just a couple of questions from me. In terms of Business Objects, where I think you talked I think at the time of a €160 million worth of cost of synergies. Can you just re confirm that number and talk about the timing of the savings, may be just to give us some color as to how you are getting on with them so far? And how your performance and I guess, second question on the BBD launch costs I am kind of confused. Are we saying that this is a delay or did you over estimate the costs of the loans originally, or was it something else?

Unidentified Company Representative

Hi Mike, I can start with the second one and then might be Werner takes the first one. Look, we have not delayed it we were very precise and saying we don't need additional accelerated investments. It's partially because we will use this delay to invest but out of the normal business, from our normal R&D instead to bring the... the cost to run, to operate, to solve it down at the beginning. So therefore, let's say we don't need that much accelerated investment, it was not over calculated, half the year or a year ago, because please understand, when you embark on such a programs, there's a lot of uncertainty around it, we made our assumptions. Now we are much smarter, because we, we have some milestones behind us, and based on this insight, we made a new calculation, we felt the way we are rolling it out now, it's smarter, therefore for our shareholders.

Werner Brandt - Chief Financial Officer

And I try to answer the first question with regard to the synergies on the Business Objects side. Imagine your prior company which has a billion on a euro basis, now a billion in revenue and has an operating margin on a product forma say by 16% to 17%, then you have a specific expense block which is more than 800 million on a euro basis again, and I think what we do is if we look into all different areas, it starts with G&A, sales and marketing, R&D, where we try to identify synergies and go for them. If you look to it from a cost price perspective, definitely, it's a personal expenses, a third party expenses that we can use to combined purchasing power it's specifically de-rationalization, legal entity or rationalization going forward. All these type of things are ongoing and to be completed throughout this year in the major components.

James Dawson - Morgan Stanley

So you have done about 160 million euros is a year target, one year target?

Unidentified Company Representative

Yes, that's what we have embedded and we said this beginning of January embedded into our plans for 2008 and this is part of our operating margin got.

James Dawson - Morgan Stanley

Right I just have one last clarification may be in terms of the license growth. Can you tell us what the standalone SAP license growth was and perhaps what it was to Business Objects.

Unidentified Company Representative

We said 12% of the 21 [ph].

James Dawson - Morgan Stanley

That's the license product.

Unidentified Company Representative

License only know, we don't break this out.

James Dawson - Morgan Stanley

Are they are around 4% for the SAP business?

Unidentified Company Representative

We do not break it out. Take it as it is. By purpose beginning of last year we started to report on software and software related service revenue and I think that is our scale KPI.

James Dawson - Morgan Stanley

Thank you.

Unidentified Company Representative

Thank you. The next question please. I think we have time for only one final question it's already 4:00 PM.

Operator

Thank you. We have a question from Knut Woller of UniCredit. Please go ahead.

Knut Woller - UniCredit

Yes hello just a quick one mainly for Werner. Thanks for taking me, just in case in your guidance will approve finally looking back towards at the end of the year to be too optimistic regarding growth rates could you just indicate the flexibility on the cost side you see to level many might ongoing shortfalls on the license side or SSRS side off. Second and third I may just quick one. The gross margin on the service side should we expect any improvements and it's in 2008 and if so to which level. And from the non-GAAP tax rate for the full year. Thanks very much.

Unidentified Company Representative

I think effect of all is important to repeat that we do not see now a risk on the SSRS side so software and software related service side. But if you talk about prudency at the end of the day if we see something coming if for example the situation in the U.S. would spread in to other regions off course we will take actions and we discussed it several times that we have the flexibility in different categories to reduce variable expenses so that we can match this and keep our margin target now this 28.5 to 29% and we keep this for the full year and look back to a margin of in this range. The first... last part of your question?

Knut Woller - UniCredit

It was some regarding the gross margin on services Werner and whether we should expect any improvements down and if so to which level in 08 and the last one on the non GAAP tax rate thanks.

Unidentified Company Representative

The service margin I think was impacted by Business Objects as I said in the beginning and you will always see that we have an increase in margins throughout the year quarter by quarter. I cannot give you a clear KPI today for the margin where it will stand but normally we should see the margin which is not lower than the one we provided last year if we get Business Objects to the closer to the level we have as SAP. The U.S. tax rate I think we speak this 20 with this 31 to 31.5% for the rest of the year.

Knut Woller - UniCredit

Non GAAP that was U.S. GAAP right? or towards non GAAP.

Unidentified Company Representative

I would say there is no difference.

Knut Woller - UniCredit

Alright thanks very much.

Stefan Gruber - Investor Relations

Thank you. This concludes the SAP Q1 earnings call thank you all for joining and good bye.

Unidentified Company Representative

Good bye.

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