Strategically positioned for 2004
SAP also believes that the economy bottomed out in 2003 and expects a gradual improvement in economic conditions and the investment climate in 2004. With over 30 years’ experience, a wide customer base, a powerful solution portfolio, and strong strategic positioning, SAP believes it is well equipped for this economic recovery.

• Although the market remained difficult in 2003, SAP further extended its position in the market, particularly in the United States. This is a good starting point for growing its market share in the future and, at the same time, increasing its operating margin.
• The expected consolidation in the enterprise software market is likely to reinforce the tendency of customers to opt for leading, financially strong vendors. This could be of great benefit to SAP, one of the most stable vendors.
• Market researchers at Gartner and SoundView predict high potential in IT expenditure of SMBs – that is expected to manifest itself as early as 2004, with spending increasing 7.6% in the United States, for example. With its portfolio of solutions for SMBs and the partner network for sales, SAP is well placed to capitalize on this trend.

Five strategic priorities for 2004
The Executive Board has set five strategic priorities for the Company in 2004.

• SAP will focus on Company growth and, in particular on growth in software sales. The aim is to make the most of the economic upturn and grow more than the market, as in previous years.
• SAP will focus in particular on SAP NetWeaver. The Company wants to establish this forward-looking solution in its customer base as the main integration and application platform. The aim is to gain as many SAP NetWeaver reference customers as possible in 2004.
• mySAP ERP will be another focus. SAP wants to make it clear to customers that mySAP ERP is a clear improvement on its predecessor SAP R/3.
• The success of mySAP CRM in previous years should continue. SAP wants to encourage strong sales of this solution and thus reinforce its leading position in the CRM segment.
• In the SMB segment, SAP wants to increase the number of customers and expand its partner network for indirect sales. In particular, SAP wants to grow its segment share in the EMEA and Americas regions and enlarge the partner network in the Asia-Pacific region.

Operational goals: increasing software revenue and profitability
Anticipating growth in the economy as a whole and in the IT industry in particular, and based on its strategic position, SAP has set itself the following operational goals for 2004.

SAP’s priority will be revenue growth – in particular software revenue – in 2004. SAP will work to increase software revenue 10% over the 2003 number. SAP expects above-average growth rates in the United States and the Asia-Pacific region, with an improvement in the EMEA region over the course of the year. The financial services and public services industries should see above-average growth. SAP also expects significant growth from business with SMB customers.

Although SAP is giving priority to growth in 2004, it wants to continue with stringent cost management measures and further increase profitability. SAP therefore predicts it will increase pro-forma operating margin based on operating income before stock-based compensation and acquisition-related charges by one percentage point on the 2003 value of 27%. SAP also expects the pro-forma earnings per share – that is, the earnings per share excluding stock-based compensation expenses, acquisition-related charges, and impairment charges associated with minority investments – to rise to between €4.20 and €4.30. This figure was €3.84 in 2003. SAP assumes the effective tax rate will be 37%.

To achieve this growth in revenue and earnings, SAP plans to invest more heavily in 2004 than in the previous year, especially in sales, marketing, research, and development. Total headcount is predicted to grow approximately 5%, with growth rates being higher in countries other than Germany. To further optimize its costs structure, SAP wants a significant proportion of the new jobs to be located in India and China without reducing headcount in other locations. The number of employees is also expected to increase in the United States.

These operational goals are based on the expected improvements in the economic situation as well as a number of other assumptions. These include the expectation that the buying behavior of customers will conform to the usual seasonal pattern, with revenue at its strongest in the fourth quarter. SAP also assumes that in 2004 customers will continue to invest in smaller projects with short implementation cycles rather than in large projects lasting several years. SAP does however expect average software contract order entry volumes to stabilize over the course of the year and thus not decrease as much as they did in 2003.

The targets for revenue and earnings take into account the likely development of the different currencies that affect SAP’s business. SAP is working on the basis of an average exchange rate of US$1.25 = €1.00. Eliminating exchange-rate fluctuations and assuming that the exchange rate from 2003 remains constant, SAP expects software revenue to grow around 15%, pro-forma operating margin to increase 1.5 percentage points, and pro-forma earnings per share to be between €4.30 and €4.40.