SAP AG Q1 2010 Earnings Call Transcript

SAP AG Q1 2010 Earnings Call Transcript
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SAP AG (SAP)

Q1 2010 Earnings Call Transcript

April 28, 2010 9:00 am ET

Executives

Stefan Gruber – VP, IR

Werner Brandt – CFO

Bill McDermott – Co-CEO

Jim Hagemann Snabe – Co-CEO

Analysts

Philip Winslow – Credit Suisse

Gunnar Plagge – Nomura

Joseph Bori – Deutsche Bank

Gerardus Vos – Citigroup

Michael Briest – UBS

Ross MacMillan – Jefferies

Knut Woller – UniCredit

Sarah Friar – Goldman Sachs

Presentation

Operator

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Welcome to SAP’s financial analyst conference call. For your information, today’s conference is being recorded. Today’s call will be hosted by Jim Hagemann Snabe, Bill McDermott, and Werner Brandt. I will now hand the call over to Stefan Gruber. Please go ahead, sir.

Stefan Gruber

Yes, thank you. Good morning or good afternoon. This is Stefan Gruber. Thank you for joining us to discuss SAP's first quarter 2010 results. I'm joined by Bill McDermott, Jim Snabe, and Werner Brandt. Werner will discuss the Q1 financials; Bill will provide some color on our regional and industry performance and our go-to-market strategy; and Jim will comment on our product strategy. Following the prepared remarks, we will have time for Q&A.

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 US Private Securities Litigation Reform Act of 1995. Words such as anticipate, believe, estimate, expect, forecast, intend, may, plan, project, predict, should, outlook, and will, and similar expressions as they relate to SAP are intended to identify such forward-looking statements.

SAP undertakes no obligation to publicly update or revise any forward-looking 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 US Securities and Exchange Commission, including SAP’s Annual Report on Form 20-F for 2009 filed with the SEC on March 25, 2010. Participants are cautioned not to place undue reliance on these forward-looking statements, which speak only as of their dates.

Before I turn the call over to Werner, I would like to remind everyone that we have SAPPHIRE NOW, our customer and user conference coming up in May. It will be co-located in Frankfurt and Orlando. We will be able to get a firsthand impression of the new products and services we are bringing to the market, and we will have the special focus on a memory technology and, of course [ph], Business ByDesign. Our financial analyst symposium will take place in Orlando on Tuesday, May 18.

And with that, I would like to turn the call over to Werner.

Werner Brandt

Thank you, Stefan. Before I begin, let me remind you that we are no longer reporting in US GAAP. Therefore I will only refer to IFRS and non-IFRS numbers with the focus on our non-IFRS figures, as they are more in line with how we internally look in our operational performance. Also these non-IFRS measures are on the basis of our guidance.

We are pleased to report a strong top-line performance, in which software and software-related service revenues grew double-digit in addition to reporting further margin expansion. Let me give you the highlights of the first quarter. Non-IFRS software and software-related service revenues for the first quarter of 2010 were 1.95 billion euros, which represented a year-over-year increase of 10% in constant currency.

It was driven by an increase in software revenues across all regions and a very strong support business. In fact, support revenue increased sequentially by more than 2%, which demonstrates that we are well on track with the retention and adoption of enterprise support within our customer base and for new customers respectively. There were also positive effects from currency and lower sales allowances. As a result of the strong top line, the SSRS gross margin increased by 0.7 percentage points year-over-year to 81.6% resulting in an overall gross margin of 67.7%, which is up 3.3 percentage points year-over-year.

Looking at the expense side of the P&L, you can see the total operating expenses decrease 6% year-over-year. In contrast to the first quarter in 2009, the first quarter 2010 was not impacted by restructuring expenses, which were 160 million in the first quarter of 2009. However, re-organizations in the first quarter of 2010 resulted in severance expenses of 27 million and unused lease-based expenses of 9 million euro.

The first quarter 2010 re-organization expenses negatively impacted the R&D expense to total revenue ratio by 40 basis points, and the sales and marketing and general and administration expense to total revenue ratios by 50 basis points each. The strong top-line performance and the reduction in cost resulted in further margin expansion.

Non-IFRS operating margin in the first quarter of 2010 increased 8 percentage points to 24.4% year-over-year. Of the 8 percentage point increase, 6.6 percentage points came from the negative impact of restructuring charges in the first quarter of 2009, with the remaining 1.4 percentage points of 60 basis points as constant currencies, resulting from additional margin growth that we managed to deliver despite severance and unused lease-based expenses of 36 million in the first quarter of 2010.

This first quarter of 2010, 36 million expense negatively impacted the margin by 140 basis points in the first quarter of this year. We are striving to increase the operating margin in each and every quarter, which we already demonstrated in Q1 despite the negative impact resulting from these re-organization expenses.

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