Company Reports Another Quarter of Strong Growth in Revenues from Software and Software Related Services
Earnings Per Share Increased 13%
WALLDORF — SAP AG (NYSE: SAP) today announced its preliminary financial results for the third quarter and nine months ended September 30, 2007.
View the Detailed Results (PDF, 135 KB)
View the Detailed Spreadsheet (XLS, 151 KB)
HIGHLIGHTS – Third Quarter 2007
- Software and software related service revenues for the 2007 third quarter were €1.74 billion (2006: €1.54 billion1), which is an increase of 13% (16% at constant currencies2) compared to the third quarter of 2006.
- Software revenues for the third quarter of 2007 were €715 million (2006: €642 million1), representing an increase of 11% (15% at constant currencies2) compared to the third quarter of 2006.
- Total revenues were €2.42 billion for the 2007 third quarter (2006: €2.21 billion1), which represented an increase of 9% (13% at constant currencies2) compared to the same period of 2006.
- Operating income for the third quarter of 2007 was €601 million (2006: €549 million), which was an increase of 9% compared to the third quarter of 2006.
- The operating margin for the 2007 third quarter was 24.8%, which was flat compared to the same period last year. The 2007 third quarter operating margin was impacted by investments of approximately €35 million to build a business around the new SAP Business ByDesign solution to address new untapped segments in the midmarket.
- Net income for the 2007 third quarter was €408 million (2006: €370 million), representing an increase of 10% compared to the third quarter of 2006.
- Earnings per share for the third quarter of 2007 was €0.34 (2006: €0.30), which was an increase of 13% compared to the same period last year.
Core Enterprise Applications Vendor Share3
SAP continued to gain share in the third quarter of 2007, marking the seventh consecutive quarter of share gains. Based on software and software related service revenues on a rolling four quarter basis, SAP’s worldwide share of Core Enterprise Applications vendors2, which account for approximately $35.9 billion in software and software related service revenues as defined by the Company based on industry analyst research, increased to 27.0% for the four quarter period ended September 30, 2007 compared to 26.0% for the four quarter period ended June 30, 2007, and 23.5% for the four quarter period ended September 30, 2006, representing a year-over-year share gain of 3.5 percentage points.
“We are pleased to announce another strong quarter in which we continued to report double-digit growth in software and software related service revenues in each region and additional share gains among core enterprise application vendors,” said Henning Kagermann, CEO of SAP.
Mr. Kagermann continued, “The third quarter also showed excellent results on the product side. For our established business we demonstrated further progress on the business process platform with a continued increase in the number of customers adopting both SAP ERP and SAP NetWeaver. For our new business, we held the branding launch of our new breakthrough innovation solution SAP Business ByDesign, which has gone live with 20 customers. We look forward to the remainder of the year, as we continue to invest in our business for future growth.”
HIGHLIGHTS – Nine Months 2007
- Software and software related service revenues for the first nine months of 2007 were €4.97 billion (2006: €4.41 billion1), which is an increase of 13% (16% at constant currencies2) compared to the first nine months of 2006.
- Software revenues for the 2007 nine month period were €1.99 billion (2006: €1.76 billion1), representing an increase of 13% (17% at constant currencies2) compared to the 2006 nine month period.
- Total revenues were €7.01 billion for the first nine months of 2007 (2006: €6.45 billion1), which represented an increase of 9% (12% at constant currencies2) compared to the same period of 2006.
- Operating income for the 2007 nine month period was €1.61 billion (2006: €1.48 billion), which was an increase of 9% compared to the 2006 nine month period.
- The operating margin for the first nine months of 2007 was 23.0%, which was flat compared to the same period last year. The 2007 nine month operating margin was impacted by investments of approximately €85 million to build a business around the new SAP Business ByDesign solution to address new untapped segments in the midmarket.
- Net income for the 2007 nine month period was €1.17 billion (2006: €1.07 billion), representing an increase of 9% compared to the same period of 2006. Net income for the 2007 nine month period was positively impacted by a second quarter effective tax rate of 25.8%. As in the second quarter of 2006, the effective tax rate was partly influenced by non-recurring tax effects.
- Earnings per share for the 2007 nine month period was €0.96 (2006: €0.87), which was an increase of 10% compared to the same period last year. Earnings per share for the 2007 nine month period was positively impacted by a second quarter effective tax rate of 25.8%. As in the second quarter of 2006, the effective tax rate was partly influenced by non-recurring tax effects.
Operating cash flow for the first nine months of 2007 was €1.34 billion (2006: €1.29 billion). Free cash flow2 for the 2007 nine month period was €1.05 billion (2006: €1.05 billion), which was 15% of total revenues (2006: 16%). At September 30, 2007, the Company had €2.6 billion in cash and cash equivalents and short term investments (December 31, 2006: €3.3 billion).
In the third quarter of 2007, the Company bought back 6.2 million shares at an average price of €40.30 (total amount: €250 million). This compares to 600,000 shares (total amount: €22 million) bought back in the third quarter of 2006. Of the total shares purchased in the third quarter of 2007, approximately 3.0 million shares were used to serve exercises under SAP’s share based compensation programs. The number of shares bought back in the third quarter of 2007 represented 0.50% of the total shares outstanding. On September 7, 2007, the SAP Executive Board announced that it decided to decrease the treasury stock by cancelling 23,000,000 shares, representing approximately 1.81% of the capital stock before this corporate action. As of September 30, 2007, the Company held treasury stock in the amount of 42.2 million shares (approximately 3.4% of total shares outstanding) at an average price of €36.04. In the first nine months of 2007, the company invested €756 million buying back approximately 20.4 million shares at an average price of €37.05. Given the Company’s strong free cash flow generation, SAP plans to spend a similar amount for share buy-backs in the fourth quarter of 2007 as it did in the third quarter of 2007 under its current share buy-back authorization. All prior year share related numbers above have been adjusted to account for the capital share increase that took effect in December 2006 that effectively increased the number of shares outstanding four-fold.
The Company reiterated its outlook and refined it for software and software related service revenues for the full-year 2007.
- The Company reaffirmed its expectations for full-year 2007 software and software related service revenues to increase in a range of 12% to 14% at constant currencies2 compared to 2006 growth of 12% at constant currencies2, but refined its expectations by indicating that it now expects to reach the upper end of the range.
- In order to address additional growth opportunities in new, untapped segments in the midmarket, the Company will invest an additional €300 million to €400 million over eight quarters to build up a new business, of which approximately €85 million was already invested over the first three quarters of 2007.
Depending on the exact timing of these accelerated investments, this is equivalent to the Company reinvesting approximately one to two percentage points of margin in 2007 into additional future growth opportunities.
Therefore, the Company expects the full-year 2007 operating margin to be in the range of 26.0% to 27.0% compared to the 2006 operating margin of 27.3%. This remains unchanged from the previous outlook.
- The Company is projecting an effective tax rate of 32.5% to 33.0% for 2007. This remains unchanged from the previous outlook.
Regional Performance – Third Quarter 2007
Third Quarter 2007 Software and Software Related Service Revenues by Region (in € millions, unaudited)
|Software & SW Related|
|Software & SW Related|
|Asia Pacific Japan||237||196||+41||+21%||+24%|
Third Quarter 2007 Software Revenues by Region (in € millions, unaudited)
|Asia Pacific Japan||119||95||+41||+25%||+28%|
Third Quarter 2007 Total Revenues by Region (in € millions, unaudited)
|Asia Pacific Japan||318||273||+45||+16%||+20%|
Regional Performance – Nine Months 2007
Nine Months 2007 Software and Software Related Service Revenues by Region (in € millions, unaudited)
9 Mos 2007
9 Mos 2006
|Asia Pacific Japan||656||565||+91||+16%||+21%|
Nine Months 2007 Software Revenues by Region (in € millions, unaudited)
9 Mos 2007
9 Mos 2006
|Asia Pacific Japan||303||249||+54||+22%||+26%|
Nine Months 2007 Total Revenues by Region (in € millions, unaudited)
9 Mos 2007
9 Mos 2006
|Asia Pacific Japan||889||783||+106||+14%||+18%|
KEY EVENTS – Third Quarter 2007
- In the third quarter of 2007, SAP announced major contracts in several key regions: Belgian Ministry of Budget and Control, Thames Water Utilities Ltd, and El Corte Inglés, S.A. in EMEA; Southwest Airlines Co., Royal Bank of Canada, and Goodyear Tire & Rubber Company in the Americas; Samsung SDS Co., Ltd., Tang Shan Iron and Steel Company, Ltd., and Trouw Nutrition Indonesia in Asia Pacific Japan.
- A major milestone in the third quarter was the signature of a Global Enterprise Agreement with Apple, Inc. SAP has been a strategic software partner for Apple since 1995, and Apple has deployed almost the entire SAP Business Suite.
- Demonstrating ongoing leadership in providing innovative solutions to retailers worldwide, Wal-Mart Stores, Inc. will enhance its financial information systems using SAP. Wal-Mart chose SAP ERP Financials for its ability to support the retailer’s global expansion and its need to efficiently respond to changes in the business and regulatory landscape. Wal-Mart plans to implement SAP globally in phases, with the first phase expected to be completed in calendar year 2010.
- On September 27, 2007, SAP announced that Gartner Research, the renowned independent research firm, positioned SAP in the leader’s quadrant in the recent “Magic Quadrant for Horizontal Portal Products, 2007” report, based on completeness of vision and ability to execute. Gartner defines leaders in the Magic Quadrant as companies that “have a full range of capabilities to support all portal deployment scenarios, and have demonstrated consistent product delivery over a considerable period to meet customer needs, significant product innovation and continued success in selling to new customers.”
- On September 26, 2007, SAP announced that Gartner Research has recognized SAP as the worldwide 2006 market share leader for the enterprise resource planning (ERP), customer relationship management (CRM) and supply chain management (SCM) markets.
- On September 19, 2007, SAP unveiled SAP Business ByDesign, the most complete on-demand business software solution specifically addressing a new market of prospective, fast-growing midsize customers. Designed around four key principles—completeness, ease of use, adaptability and significantly cutting total cost of ownership (TCO)—SAP Business ByDesign delivers an on-demand software solution with built-in service and support.
- On September 18, 2007, SAP and Misys plc announced an agreement to deliver integrated solutions for the global banking industry. The integrated universal banking solution will integrate key SAP components of SAP for Banking into Misys BankFusion.
- On September 11, 2007, SAP and Callataÿ & Wouters announced a collaboration to offer an end-to-end core banking solution for midsize banks. The strategic collaboration will deploy Callataÿ & Wouters’ proven core banking product “Thaler” and SAP analytics capabilities on a business process platform for banks globally.
- On September 11, 2007, SAP announced the acquisition of the software license and maintenance business of SAP Arabia, its exclusive long-term partner in the region. Under the terms of the agreement, SAP will acquire selected existing assets, including all existing software license and maintenance customer contracts and trademarks from SAP Arabia. Aligned with SAP’s global go-to-market strategies, SAP will first establish subsidiaries in Dubai and Saudi Arabia to reinforce its ongoing commitment to deliver value and continuous innovation to customers in the region.
- On September 7, 2007, SAP announced that the Company reduced its capital stock from €1,269,040,112 to €1,246,040,112 by cancelling 23,000,000 treasury shares, representing 1.8% of the capital stock before this corporate action.
- On September 5, 2007, SAP announced the availability of a new SAP Best Practices offering in support of SAP GRC Access Control, a market-leading application for monitoring and enforcing user access and authorization controls.
- On August 28, 2007, SAP announced accelerated customer adoption and innovative new processes for SAP Real Estate Management, a full-featured application for managing all types of real estate. Companies in 40 countries across more than 20 industries use the application to gain better control and analysis of their real estate portfolios.
- On the occasion of the first-ever visit to India by the entire SAP Executive Board, SAP announced on August 28, 2007 an expansion of their existing partnership with the Global IT Services Division of Wipro Limited aimed at enhancing development and implementation of best-in-class solutions, especially around enterprise service-oriented architecture (Enterprise SOA). As part of the agreement, Wipro will become an SAP global services partner and will establish a solutions lab in Bangalore.
- During the SAP Executive Board visit to India, SAP also announced on August 28, 2007, that within the space of just one year, SAP has doubled the number of Indian customers to 2,000. SAP also reiterated its plans to invest $1 billion in the country by 2010. The main portion of SAP’s investment in India is planned for expanding the company’s global development and services and support hub in India. SAP Labs India in Bangalore and Gurgaon will also benefit from the investment.
- Furthering its commitment to deliver business value via innovation, SAP on August 8, 2007, unveiled its road map for the SAP Product Lifecycle Management (SAP PLM) application. Over the next three years, the extended application will build on existing SAP PLM capabilities to provide an end-to-end solution that helps companies accelerate and simplify the “business of products” as well as effectively collaborate with their business networks.
- As part of its ongoing commitment to deliver continuous innovation to customers, SAP announced on July 31, 2007, the availability of the second enhancement package for the SAP ERP application. Next to functional enhancements, the enhancement package includes sector specific innovations for the media, utilities, telecommunications, and trading industries.
- On July 30, 2007, SAP announced five new SAP Business All-in-One prepackaged industry solutions for small businesses in Germany.
Webcast/Supplementary Financial Information
SAP senior management will host a conference call today at 2:00 pm (CET) / 1:00 pm (GMT) / 8:00 am (Eastern) / 5:00 am (Pacific). The conference call will be Webcast live on the Company’s Web site at <http://www.sap.com/investor> and will be available for replay purposes as well. Supplementary financial information pertaining to the quarterly results can be found at http://www.sap.com/investor.
SAP is the world’s leading provider of business software*. More than 43,400 customers in more than 120 countries run SAP® applications—from distinct solutions addressing the needs of small and midsize enterprises to suite offerings for global organizations. Powered by the SAP NetWeaver® platform to drive innovation and enable business change, SAP software helps enterprises of all sizes around the world improve customer relationships, enhance partner collaboration and create efficiencies across their supply chains and business operations. SAP solution portfolios support the unique business processes of more than 25 industries, including high tech, retail, financial services, healthcare and the public sector. With subsidiaries in more than 50 countries, the company is listed on several exchanges, including the Frankfurt stock exchange and NYSE under the symbol “SAP.” (Additional information at <http://www.sap.com>)
(*) SAP defines business software as comprising enterprise resource planning and related applications such as supply chain management, customer relationship management, product life-cycle management and supplier relationship management.
Any statements contained in this document 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. Securities and Exchange Commission (“SEC”), including SAP’s most recent Annual Report on Form 20-F filed with the SEC. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.
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1) As stated in its January 24, 2007 press release, the Company disclosed that it accommodated a US customer with a modification of contracts signed between SAP and this customer prior to 2006 (1997 – 2005). This accommodation entered into by the end of September, 2006 resulted in a reduction of license revenues by €31 million for the third quarter of 2006, but it did not impact the value of licenses sold in the US in 2006. In January, the Company stated that it expected to reinstate a portion of the €31 million of software revenue with this US customer in the first quarter of 2007. In the first quarter of 2007, the Company reinstated in software revenue €19 million of the €31 million reduction from the third quarter of 2006. The Company does not expect to recover any further software revenue amounts.
2) Non-GAAP Measures
This press release discloses certain financial measures, such as free cash flow, and constant currency period-over-period changes in revenue and operating income, that are not prepared in accordance with U.S. GAAP and are therefore considered non-GAAP measures. Our non-GAAP measures may not correspond to non-GAAP measures that other companies report. The non-GAAP measures that we report should be considered as additional to, and not as substitutes for or superior to, revenue, operating income, cash flows, or other measures of financial performance prepared in accordance with U.S. GAAP. Our non-GAAP measures are reconciled to the nearest U.S. GAAP measure in this press release.
Free Cash Flow: We believe that free cash flow is a widely accepted supplemental measure of liquidity. Free cash flow mea¬sures a company’s cash flow remaining after all expenditures required to maintain or expand the business have been paid off. We calculate free cash flow as operating cash flow minus additions to long-lived assets excluding additions from acquisitions. Free cash flow should be considered in addition to, and not as a substitute for or superior to, cash flow or other measures of liquidity and financial performance prepared in accordance with U.S. GAAP.
Free cash flow reconciles to the nearest U.S. GAAP measure as follows:
CONSTANT CURRENCY PERIOD-OVER-PERIOD CHANGES
We believe it is important for investors to have information that provides insight into our sales growth. Revenue measures determined under U.S. GAAP provide information that is useful in this regard. However, both growth in sales volume and currency effects impact period-over-period changes in sales revenue. We do not sell standardized units of products and services, so we cannot provide relevant information on sales volume growth by providing data on the growth in product and service units sold. To provide additional information that may be useful to investors in breaking down and evaluating sales volume growth, we present information about our revenue growth and various values and components relating to operating income that are adjusted for foreign currency effects. We calculate constant currency year-over-year changes in revenue and operating income by translating foreign currencies using the average exchange rates from the previous (comparator) year instead of the report year.
Constant currency period-over-period changes should be considered in addition to, and not as a substitute for or superior to, changes in revenues, expenses, income, or other measures of financial performance prepared in accordance with U.S. GAAP.
We believe that data on constant currency period-over-period changes have limitations, particularly as the currency effects that are eliminated constitute a significant element of our revenues and expenses and may severely impact our performance. We therefore limit our use of constant currency period-over-period changes to the analysis of changes in volume as one element of the full change in a financial measure. We do not evaluate our growth and performance without considering both constant currency period-over-period changes on the one hand and changes in revenues, expenses, income, or other measures of financial performance prepared in accordance with U.S. GAAP on the other. We caution the readers of this press release to follow a similar approach by considering data on constant currency period-over-period changes only in addition to, and not as a substitute for or superior to, changes in revenues, expenses, income, or other measures of financial performance prepared in accordance with U.S. GAAP.
Constant currency year-over-year changes in revenue and operating income reconcile to the respective unadjusted year-over-year changes as follows:
3) Core Enterprise Applications Vendor Share
Beginning in the first quarter of 2007, the Company began using software and software related service revenues for defining Core Enterprise Application Vendor Share because the Company believes that this is the most important indicator for vendor share oriented analysis with the realignment of its income statement structure. Prior to the first quarter of 2007, the Company had been using software revenues for defining Core Enterprise Application Vendor Share.
The Company provides share data based on the vendors of Core Enterprise Applications solutions, which account for approximately $35.9 billion in software and software related service revenues as defined by the Company based on industry analyst research. For 2007, industry analysts project approximately 7% year-on-year growth for core Enterprise Applications vendors. For its quarterly share calculation, SAP assumes that this approximate 7% growth will not be linear throughout the year. Instead, quarterly adjustments are made based on the financial performance of a sub set (approximately 25) of Core Enterprise Application vendors.