SAP Announces 2006 Second Quarter and Six Months Results

July 20, 2006 by SAP News

WALLDORF

Disclaimer:
Certain information contained in this press release including software license revenue, operating income, income before income tax, net income and earnings per share in the third quarter 2006 as well as operating income, income before income tax and net income in the second quarter 2006 is incorrect and has been superseded by information contained in footnote 2 (on page 23) and footnote 4 (on pages 24-27) of SAP’s press release dated January 24, 2007 announcing SAP’s 2006 preliminary results. The January 24, 2007 press release was furnished to the US Securities and Exchange Commission under cover of Form 6-K on January 25, 2007 – a link is attached here for convenience http://www.sec.gov/Archives/edgar/data/1000184/000132693207000040/f01530exv99w1.htm. Please read those footnotes carefully before reviewing this press release and please disregard any information contained herein insofar as it relates to information that has been superseded (including figures derived from superseded information such as software and product revenue growth, operating margin and operating and net income growth).

SAP AG (NYSE: SAP) today announced its preliminary financial results for the second quarter and six months ended June 30, 2006.

View the Detailed Results (PDF, 234 KB)

Werner Brandt’s Presentation (PDF, 584 KB)

View the Detailed Spreadsheet (XLS, 147 KB)

View the Webcast and Presentations

HIGHLIGHTS – Second Quarter 2006

Revenues

  • Software revenues were €621 million for the second quarter of 2006 (2005: €576 million), representing an increase of 8% (10% at constant currencies1) compared to the same period in 2005.
  • Product revenues for the 2006 second quarter were €1.5 billion (2005: €1.4 billion), which is an increase of 9% (10% at constant currencies1) compared to the second quarter of 2005.
  • Total revenues were €2.2 billion for the second quarter of 2006 (2005: €2.0 billion), which represented an increase of 9% (9% at constant currencies1) compared to the same period in 2005.

Core Enterprise Applications Vendor Share2

  • Based on software revenues on a rolling four quarter basis, SAP’s worldwide share of Core Enterprise Applications vendors, which account for approximately $16 billion in software revenues as defined by the Company based on industry analyst research, continued to grow and was 21.7% at the end of the second quarter of 2006.

Regional Performance
The Americas region remained the growth driver for SAP, reporting an 18% increase in software revenues (21% at constant currencies1) to €239 million for the second quarter of 2006 compared to the same quarter last year. In the U.S., software revenues increased to €201 million, or 16% (20% at constant currencies1). Second quarter software revenues in the EMEA (Europe, Middle East and Africa) region climbed to €296 million, or 3% (3% at constant currencies1), with Germany reporting an 8% increase to €100 million for the second quarter of 2006. Software revenues in the APA (Asia/Pacific) region for the second quarter of 2006 were flat (4% increase at constant currencies1) at €86 million, with Japan reporting a 4% decline (4% increase at constant currencies1) in software revenues to €23 million.

Income

  • Operating income for the second quarter of 2006 was €531 million (2005: €460 million), which was an increase of 15% compared to the 2005 second quarter. Pro forma operating income3 was €558 million (2005: €496 million) for 2005, representing an increase of 13% compared to the second quarter of 2005.
  • The operating margin for the 2006 second quarter was 24.2%, which was an increase of 1.4 percentage points compared to the second quarter of 2005. The pro forma operating margin3 for the 2006 second quarter was 25.4%, which was an increase of 0.80 percentage points compared to the 2005 second quarter.
  • Net income for the second quarter of 2006 was €414 million (2005: €289 million), or €1.35 per share (2005: €0.93 per share), representing an increase of 43% compared to the second quarter of 2005. Second quarter 2006 pro forma net income3 was €432 million (2005: €314 million), or pro forma €1.41 earnings per share3 (2005: €1.01 per share), representing an increase of 38% compared to the second quarter of 2005. Second quarter 2006 net income, earnings per share, pro forma net income and pro forma earnings per share were positively impacted by approximately €30 million, or €0.10 per share, from a reduced effective tax rate of 25% mainly due to a settlement with the fiscal authorities on one specific item.

“SAP is on track for another successful year. Product revenue, pro forma operating margin and pro forma earnings per share all gained strongly in the first half and we succeeded in extending our global market share,” said Henning Kagermann, CEO of SAP. “Software revenues were slightly below our expected full-year growth range, primarily due to order phasing and delayed contracts, but order entry – a key indicator for future software revenues – and our win rate against competitors both remained strong. The customer spending environment is stable and customer satisfaction is high, which has been helped by our clear product roadmap and well-defined product deliverables.”

Mr. Kagermann continued, “At the beginning of the year, we stated that 2006 would be a cornerstone year for SAP distinguished by a series of new product launches. We successfully delivered in the first half with new product launches such as SAP CRM on-demand solutions, Duet software and our flagship mySAP ERP 2005, the first services-enabled ERP suite in the industry. Customer feedback has been very positive on these products, including strong interest from our user groups about migrating to mySAP ERP 2005. These new products and other products we have announced for 2006, along with our enterprise service-oriented architecture (enterprise SOA), will allow us to deliver to customers increased simplicity by innovating the user experience, greater flexibility in building business processes, and provide for easier adoption by refining the way companies deploy software.”

HIGHLIGHTS – Six Months 2006

Revenues

  • Software revenues increased 14% (12% at constant currencies1) to €1.1 billion (2005: €1.0 billion) for the first half of 2006 compared to the same period last year.
  • Product revenues increased to €2.9 billion (2005: €2.5 billion) for the first six months of 2006, representing an increase of 13% (11% at constant currencies1) compared to the first six months of 2005.
  • Total revenues were €4.2 billion (2005: €3.7 billion) for the 2006 first half, which was an increase of 13% (11% at constant currencies1) compared to the first half of 2005.

Income

  • Operating income for the first six months of 2006 was €940 million (2005: €834 million), which was an increase of 13% compared to the same period last year. Pro forma operating income3 for the 2006 six month period was €1.0 billion (2005: €877 million), representing an increase of 16% compared to the 2005 six month period.
  • The operating margin for the first half of 2006 was 22.2%, which went down by 0.1 percentage points compared to the first half of 2005. The pro forma operating margin3 was 24.0% for the first six months of 2006, which was an increase of 0.6 percentage points compared to the same period in 2005.
  • Net income for the first half of 2006 was €696 million (2005: €543 million), or €2.26 per share (2005: €1.75 per share), representing an increase of 28% compared to the first half of 2005. Pro forma net income3 for the 2006 six month period was €747 million (2004: €573 million), or pro forma €2.43 per share3 (2005: €1.85 per share), representing an increase of 30% compared to the same period in 2005. First half 2006 net income, earnings per share, pro forma net income and pro forma earnings per share were positively impacted by approximately €30 million, or €0.10 per share, from a second quarter reduced effective tax rate of 25% mainly due to a settlement with the fiscal authorities on one specific item.

Cash Flow

  • Operating cash flow for the first half of 2006 was €963 million (2005: €832 million). Free cash flow3,4 for the first half of 2006 was €832 million (2005: €720 million), which was 20% as a percentage of total revenues in 2006 (2005: 19%). At June 30, 2006, the Company had €2.5 billion in liquid assets (June 30, 2005: €3.5 billion). The year-over-year decrease in liquid assets is primarily the result of an increase in expenditures on acquisitions and share buybacks in 2006.

Share Buy-Back Program

  • In the first half of 2006, the Company bought back 5.66 million shares at an average price of €165.72 (total amount: €938 million). This compares to 2.24 million shares bought back in the first half of 2005. At June 30, 2006, treasury stock stood at 11.31 million shares at an average price of €139.79. SAP’s current share buy-back program allows the Company to purchase up to 30 million shares. Given the Company’s strong free cash flow3,4 generation, SAP plans to further evaluate opportunities to buy back shares in the future.

BUSINESS OUTLOOK

The Company also announced that it reaffirmed its outlook for the full-year 2006 and as a result it continues to provide the following outlook for the full-year 2006 as described in its April 20, 2006 first quarter results press release.

  • The Company expects full-year 2006 product revenues to increase in a range of 13% – 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% – 17% compared to 2005.
  • The Company expects the full-year 2006 pro forma operating margin3, which excludes stock-based compensation and acquisition-related charges, to increase in a range of 0.5 – 1.0 percentage points compared to 2005.
  • The Company expects full-year 2006 pro forma earnings per share3, which exclude stock-based compensation, acquisition-related charges and impairment-related charges, to be in a range of €5.80 to €6.00 per share.
  • The outlook is based on an assumed U.S. Dollar to Euro exchange rate of $1.23 per €1.00.

Regional Performance

Second Quarter 2006 Software Revenue by Region (in € millions, unaudited)

SAP Group





































Software
Revenue
2Q 2006
Software
Revenue
2Q 2005
Change % Change
Total 621 576 +45 +8%
– at constant currency rates +10%
EMEA 296 289 +7 +3%
– at constant currency rates +3%
Asia Pacific 86 85 +1 0%
– at constant currency rates +4%
Americas 239 202 +37 +18%
– at constant currency rates +21%

Second Quarter 2006 Total Revenue by Region (in € millions, unaudited)

SAP Group





































Revenue
2Q 2006
Revenue
2Q 2005
Change % Change
Total 2,195 2,016 +179 +9%
– at constant currency rates +9%
EMEA 1,136 1,086 +50 +5%
– at constant currency rates +5%
Asia Pacific 254 238 +16 +7%
– at constant currency rates +10%
Americas 805 692 +113 +16%
– at constant currency rates +16%

Six Months 2006 Software Revenue by Region (in € millions, unaudited)

SAP Group
























































Software
Revenue
6 Mos 2006
Software
Revenue
6 Mos 2005
Change % Change
Total 1,149 1,010 +139 +14%
– at constant currency rates +12%
EMEA 525 504 +21 +4%
– at constant currency rates +4%
Asia Pacific 159 150 +9 +5%
– at constant currency rates +5%
Americas 465 356 +109 +31%
– at constant currency rates +25%

Six Month 2006 Total Revenue by Region (in €millions, unaudited)

SAP Group
























































Revenue
6 Mos 2006
Revenue
6 Mos 2005
Change % Change
Total 4,236 3,745 +491 +13%
– at constant currency rates +11%
EMEA 2,141 2,012 +129 +6%
– at constant currency rates +6%
Asia Pacific 511 456 +55 +12%
– at constant currency rates +12%
Americas 1,584 1,277 +307 +24%
– at constant currency rates +18%

KEY EVENTS – Second Quarter 2006

  • In the second quarter of 2006, SAP demonstrated strong momentum, announcing major contracts in all key regions: Deloitte & Touche, FileNet, Jabil Circuit, TBC Corporation, The Home Depot in the Americas; Commerzbank AG, La Caixa, Ministry of Defense (Ukraine), Océ Technologies, Saint Gobain in EMEA; China MinMetals, Japan Tobacco, Kumho Tire Co and Water Corporation in Asia Pacific.
  • On June 14, 2006, SAP announced the worldwide 10,000th customer for SAP® Business One, its integrated business management solution for SMEs, which was introduced internationally in 2003.
  • SAP signed several agreements with Neusoft Group, one of China’s leading IT services and training companies. The agreements are the latest in a series of steps extending SAP’s operations in China and expanding its ability to serve Chinese customers and partners across the country. The announcement was made on May 23, 2006.
  • At SAPPHIRE ’06 in Paris, SAP’s annual international customer conference, the company’s executives detailed new tools, strategies and the industry’s first services-enabled ERP suite designed to simplify and expedite customers’ road maps to enterprise service-oriented architecture (enterprise SOA).
  • Speaking at SAPPHIRE ’06 in Paris, Henning Kagermann, Shai Agassi and Léo Apotheker announced plans for the industry’s first enterprise SOA appliance. They also unveiled plans for a composite application hub that will facilitate the exploration, distribution and deployment of hundreds of innovative composite applications built by system integrators (SIs), independent software vendors (ISVs), SAP and customers.
  • On May 17, 2006, SAP announced the launch of a $125 million global fund to accelerate the ecosystem of independent software vendors (ISVs) building next-generation composite applications on the SAP NetWeaver® platform.
  • On May 17, 2006, SAP announced the creation of a new business unit to empower customers with end-to-end solutions for governance, risk management and compliance (GRC). On April 4, 2006, SAP had already announced that it is acquiring Virsa Systems, Inc., a privately-held leading supplier of cross-enterprise compliance solutions.
  • At SAPPHIRE ’06 Orlando, SAP announced the global availability of mySAP™ ERP 2005, the latest version of its renowned enterprise resource planning application. The new version of mySAP ERP features more than 300 product enhancements to provide companies with better information access and decision support.
  • At SAPPHIRE ’06 Orlando, SAP and IBM announced the expansion of their relationship to serve the $500 billion small and midsize enterprise (SME) market, leveraging the IBM Business Partner channel. The companies have entered a new reseller, referral and solution relationship for mySAP™ All-in-One solutions to help U.S. clients in specific industries become more innovative and productive.
  • SAP announced the formation of four new “industry value networks” (IVNs) serving the consumer products, retail and technology industries and the public sector. These networks bring together customers, partners and SAP to co-innovate and quickly develop solutions to solve industry-specific customer challenges.
  • At SAPPHIRE ’06 Orlando, SAP launched the second wave of its SAP® CRM on-demand solutions. Delivering on SAP’s road map of quarterly software releases for its on-demand offerings, first announced in February 2006, the SAP® Marketing on-demand solution provides line-of-business managers with powerful search capabilities to help more effectively target new customers, and track and pursue promising leads.
  • On May 2, 2006, SAP and Microsoft Corp. announced that the two companies will ship their joint product Duet™ software for Microsoft Office and SAP on time in June 2006. Duet allows information workers to use their familiar Microsoft Office environment to access selected SAP business processes and data. Nearly 100 joint customers and partners have been exploring the software’s benefits in early release versions since late 2005.

Webcast/Supplementary Financial Information
SAP senior management will host a financial analyst and investor presentation in New York today at 2:00 PM (CET) / 1:00 PM (GMT) / 8:00 AM (Eastern) / 5:00 AM (Pacific). The conference will be web cast live on the Company’s website 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.

About SAP
SAP is the world’s leading provider of business software solutions*. Today, SAP has more than 34,000 customers in over 120 countries. SAP® software solutions address the needs of small and midsize enterprises to global organizations. Powered by the SAP NetWeaver® platform to drive innovation and enable business change, SAP solutions are helping enterprises around the world improve customer relationships, enhance partner collaboration and create efficiencies across their supply chains and business operations. SAP industry solutions support the unique business processes of more than 25 industry segments, including high tech, healthcare, retail, public sector and financial services. 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 solutions as consisting of Enterprise Resource Planning and related software solutions such as Supply Chain Management, Customer Relationship Management, Product Lifecycle Management, 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.

Copyright © 2006 SAP AG. All rights reserved.
SAP, R/3, mySAP, mySAP.com, xApps, xApp, SAP NetWeaver and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and in several other countries all over the world. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary.

For more information, press only:
Herbert Heitmann, +49 (6227) 7-61137, herbert.heitmann@sap.com, CET
Tony Roddam, +49 (6227) 7-49133, tony.roddam@sap.com, CET
Frank Hartmann, +49 (6227) 7-42548, f.hartmann@sap.com, CET
Steve Bauer +1 610 661-3951, steve.bauer@sap.com, EDT

For more information, financial community only:
Stefan Gruber, +49 (6227) 7-44872, investor@sap.com, CET
Martin Cohen, +1 (212) 653-9619, investor@sap.com, EDT

Footnotes
1) SAP calculates “constant-currency” year-on-year changes in revenue and operating income by translating foreign currencies using the average exchange rates from 2005 instead of 2006. SAP believes that such constant-currency measures provide supplemental meaningful information for investors as they show how the Company would have performed if it had not been affected by changes in exchange rates.

2) In previous quarters, worldwide peer group share was provided based on a peer group of Microsoft Corp. (business solutions segment only), Oracle Corp. (business applications only) and Siebel Systems, Inc. The Company believes that after the large amount of consolidation that has occurred among the larger companies in the software industry, the peer group has become too small to provide an adequate metric for the purpose of measuring growth of sales share. Therefore, the Company will now be providing share data based on the vendors of Core Enterprise Applications solutions, which account for approximately $16 billion in software revenues as defined by the Company based on industry analyst research. For 2006, industry analysts project approximately 4% year-on-year growth for core Enterprise Applications vendors. For its quarterly share calculation, SAP assumes that this approximate 4% growth will not be linear throughout the year. Instead, quarterly adjustments are made based on the financial performance of a sub set (approximately 30) of Core Enterprise Application vendors.

3) Non-GAAP Measures:
This press release discloses certain financial measures, such as pro-forma operating income, pro-forma operating margin, pro-forma expenses, pro-forma net income, pro-forma earnings per share (EPS), pro-forma EBITDA, and currency-adjusted year-on-year changes in revenue and operating income, which are not prepared in accordance with U.S. generally accepted accounting principles (U.S. GAAP) and are therefore considered non-GAAP measures. The non-GAAP measures included in this report are reconciled to the nearest U.S. GAAP measure. The non-GAAP measures that SAP reports may not correspond to non-GAAP measures that other companies report. The non-GAAP measures that SAP reports should be considered as additional to, and not as a substitute for or superior to, operating income, operating margin, cash flows, or other measures of financial performance prepared in accordance with U.S. GAAP.

SAP believes that pro-forma operating income, pro-forma operating margin, pro-forma net income, and pro-forma EPS, all based on pro-forma expenses, provide supplemental meaningful information that can help investors fully assess the financial performance of the Company’s core operations. The pro-forma measures disclosed are the same measures that SAP uses in its internal management reporting. Pro-forma operating income is one of the criteria, alongside the software revenue increase, for performance-related elements of management compensation.

The following expenses are eliminated from pro-forma expenses, pro-forma operating income, pro-forma net income, pro-forma operating margin, pro-forma EPS, and other pro-forma measures:

  • Stock-based compensation, including expenses for stock-based compensation as defined under U.S. GAAP as well as expenses related to the settlement of stock-based compensation plans in the context of mergers and acquisitions. SAP excludes stock-based compensation expenses because it has no direct influence over the actual expense of these awards once it has entered into stock-based compensation commitments.
  • Acquisition-related charges, including amortization of identifiable intangible assets acquired in acquisitions of businesses or intellectual property.
  • Impairment-related charges include other-than-temporary impairment charges on minority equity investments.

In addition, SAP gives guidance based on non-GAAP financial measures. It does not provide guidance on U.S. GAAP operating margin and earnings per share measures because those measures include expenses such as stock-based compensation, impairment-related charges, and acquisition-related charges. The Company views those expenses as less meaningful in its own assessment of the financial performance of its core operations, or they are factors outside SAP’s control, dependent on SAP’s share price, or dependent on the share price of companies it acquires or in which it invests.

4) Management believes that EBITDA and free cash flow are widely accepted supplemental measures of evaluating operating performance and liquidity among companies. However these measures should be considered in addition to, and not as a substitute, or superior to, operating income, cash flows, or other measures of financial performance prepared in accordance with generally accepted accounting principles.

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