Income

New Income Statement Structure

With effect from the first quarter of 2007, we have restructured our income statement to show potential new revenue streams more transparently. We have renamed what was previously called maintenance revenue: This is now shown as support revenue. We have also renamed what was previously called software and maintenance revenue: This is now shown as software and software-related service revenue. We show revenue from subscriptions and other software-related services as an additional item that is an element of software and software-related service revenue. This new item includes revenue from subscriptions, software rentals, on-demand offerings, and from other software-related services. Subscription revenue flows from contracts that have both a software element and a maintenance element. Such a contract typically gives our customer the use of current software and unspecified future products. We take a fixed monthly fee for a definite term – as a rule, five years. Software rental revenue flows from software rental contracts, also with software and maintenance elements – but here the customer is entitled to the use of current products only. Revenue from our on-demand offerings includes, for example, the SAP CRM on-demand solution revenue, any future on-demand revenue from our new midmarket SAP Business ByDesign solution (to the extent we offer it to customers on an on-demand basis), and revenue from other hosting contracts that do not entitle the customer to readily exit the arrangement. Other software-related services revenue includes, among other things, revenue from software-related revenue-sharing arrangements, for example, our share of revenue from collaboratively developed products. Thus, software and software-related service revenue is the sum of our software revenue, service revenue, and revenue from subscription and other software-related services.

In addition, we have renamed what was previously called service revenue: This is now shown as professional services and other service revenue. We have added a new item for other service revenue, shown as an element of service revenue. This new item includes revenue from non-mandatory hosting services, application management services (AMS), and commission. Non-mandatory hosting services revenue is revenue from hosting contracts from which the customer can readily exit if it wishes to run the software on its own systems. AMS is a service we offer to optimize availability and performance of customers’ IT solutions after implementation. On occasion, we receive commission from partners for which we have identified customers. Thus, professional services and other service revenue corresponds to the sum of consulting revenue, training revenue, and other service revenue. 

We have restructured the expense items we report to align them with this new structure for reporting revenue. 

Revenue

Target for Software and Software-Related Service Revenue Surpassed

At the beginning of 2007, we announced ambitious guidance: We set a target of growing our annual software and software-related service revenue 12% to 14%, compared on a constant currency basis with 2006. We expected subscriptions and other software-related services to account for approximately 2% to 4% of total software and software-related service revenue. Later in the year, we also announced that we expected software and software-related service revenue growth to be at the top end of the target range that we had announced earlier. Our performance exceeded that guidance: On a constant currency basis, software and software-related service revenue grew 17% (13% without adjustment for foreign currency effects) to €7,427 million (2006: €6,596 million; 2005: €5,955 million). This was the fourth year in succession in which we achieved double-digit percentage growth in software and software-related service revenue on a constant currency basis. The proportion of subscriptions and other software-related services in the total software and software-related service revenue was 2.5%, which was within the range published in our guidance.

When discussing SAP’s position in the market, we define our segment share as our share of the worldwide total of organizations offering core enterprise applications. For 2006, we calculated our share based on software revenue. In view of the rearrangement of our income statement, beginning with the first quarter of 2007 we now base our calculations of segment share on software and software-related service revenue. We believe this measure is now the most significant indicator of share. With the help of industry analysts’ numbers, we estimate that the market for core enterprise applications is approximately US$36.7 billion. Our share of that segment worldwide grew four percentage points to 28.4% in 2007. In this improvement in our market position we see validation of our approach, which is to earn the confidence of customers with our clear, innovative product strategy, in-depth understanding of the industries our customers operate in, and a superior product offering – and on that confidence we aim to build long-term business relationships.

Our customer base continued to grow and, based on the number of contracts among orders received, 31% of our software revenue was attributable to contracts with new customers (2006: 31%; 2005: 33%). The number of new software license contracts valued at €10,000 or more increased 18% to 12,154 (2006: 10,288 contracts; 2005: 8,820 contracts). The total number of orders we received grew 10%, so the trend toward more but smaller contracts continued.

Software Revenue Grows 13%

Software revenue increased 13% to €3,407 million (2006: €3,003 million; 2005: €2,743 million). That corresponds to an 18% increase on a constant currency basis. It was our best constant-currency based software revenue growth since 2000.

Support Revenue Grows 11%; Consulting Revenue Declines 1%; Training Revenue Grows 7%

Support revenue increased 11% to €3,838 million (2006: €3,464 million; 2005: €3,170 million). That corresponds to an 15% increase on a constant currency basis. Continuing an initiative from the previous year, we concluded more global enterprise agreements (GEAs) with our customers in 2007. GEAs are subscription contracts that include both the license grant and maintenance provisions. In 2007, we concluded such agreements to a total value of about €820 million, which will be recognized as revenue over a period of years. The portion of our total revenue that was generated from software and software-related services was on target at 73% (2006: 70%). 

We again focused more on the profitability of our consulting business than on its growth. In the context of adverse exchange rate movements, our consulting revenue fell back 1% from €2,249 million to €2,221 million (2005: €2,071 million), but grew 2% on a constant currency basis. Our e-learning programs were much in demand, which contributed to a boost in our training revenue of 7% (11% on a constant currency basis) from €383 million to €410 million (2005: €342 million). It was the third year in succession in which we achieved double-digit constant-currency based growth in training revenue. Total professional services and other service revenue grew 1% (4% on a constant currency basis) to €2,744 million (2006: €2,728 million; 2005: €2,484 million).

Total Revenue Grows 9%

Buoyed by the dynamic growth of software and software-related service revenue, our total revenue for the year was €10,242 million (2006: €9,393 million; 2005: €8,509 million), an increase of 9% (or 13% on a constant currency basis). That made 2007 the third year in succession in which we achieved double-digit growth in total revenue on a constant currency basis – and the first in which our total revenue exceeded €10 billion. 

Revenue Grows in All Regions

On a constant currency basis, revenue growth percentages were in double-digits in all regions. In accordance with the guidance we had given, the Americas and Asia Pacific Japan regions once again led the field. In the Americas region, our software and software-related service revenue climbed 9% (17% on a constant currency basis) to €2,495 million (2006: €2,282 million; 2005: €2,021 million). Total revenue for the region rose 6% (14% on a constant currency basis) in 2007 to €3,577 million (2006: €3,385 million; 2005: €2,996 million). Our U.S. business contributed significantly to this growth. In the United States, our software and software-related service revenue grew 6% (16% on a constant currency basis) to €1,838 million (2006: €1,726 million; 2005: €1,553 million), and our total revenue rose 4% (13% on a constant currency basis) to €2,706 million (2006: €2,609 million; 2005: €2,340 million). Latin America also reported double-digit percentage increases in software and software-related service revenue and in total revenue. The growth levels in Mexico and Brazil were especially pleasing.

In 2007, Asia Pacific Japan region software and software-related service revenue increased 19% (24% on a constant currency basis) to €959 million (2006: €803 million; 2005: €740 million). The region’s total revenue rose 15% (20% on a constant currency basis) from €1,107 million in 2006 to €1,275 million in 2007 (2005: €994 million). The results from the emerging markets of China and India were especially welcome: They both reported software and software-related service and total sales growth well above the SAP average. In Japan, software and software-related service revenue climbed 10% (21% on a constant currency basis) to €340 million (2006: €308 million; 2005: €294 million). Total revenue rose 4% (14% on a constant currency basis) to €447 million in Japan (2006: €431 million; 2005: €406 million).

Despite our established position, we also recorded double-digit sales growth in the EMEA region market. At 13%, software and software-related service revenue growth was steeper than it had been in the previous year. Measured on a constant currency basis, the rise was 14%. The increase was particularly marked in Russia and France. Our 2007 software and software-related service revenue in the EMEA region was €3,973 million (2006: €3,511 million; 2005: €3,194 million). Our total EMEA region revenue rose 10% (11% on a constant currency basis) from €4,901 million in 2006 to €5,390 million in 2007 (2005: €4,519 million). In Germany, our software and software-related service revenue grew 7% to €1,432 million (2006: €1,342 million; 2005: €1,237 million). Our total revenue in Germany grew 5% to €2,004 million (2006: €1,907 million; 2005: €1,810 million).

Operating Margin on Target

At the beginning of the year, we announced in our outlook guidance that we planned to invest more in 2007 to build a new business around SAP Business ByDesign. In this context, we said we would invest about one to two operating margin percentage points in 2007 in addressing additional growth opportunities. The profitability goal in our guidance was an operating margin – that is, a ratio of operating income to total revenue, expressed as a percentage – of between 26.0% and 27.0%. We hit that target with an operating margin of 26.7% (2006: 27.4%; 2005: 27.5%). In line with our guidance, the additional investment we had announced, which amounted to €125 million, reduced our operating margin by 1.2 percentage points. We spent the money on enhancing IT infrastructure, building our sales and channel capability, and extending our marketing activity.

Operating expenses climbed to €7,510 million in 2007 from €6,815 million the previous year (2005: €6,172 million). This 10% year-over-year increase arose chiefly because of increases in expenses to meet personnel requirements (our headcount grew by 4,668 full-time equivalents or FTEs) and previously announced extra investment relating to SAP Business ByDesign. 

Accompanying the double-digit increase in revenue from software and software-related services was a 20% rise to €1,310 million (2006: €1,091 million; 2005: €983 million) in the software and software-related service expense to pay for additional third-party licenses and further reinforcement of our support resources. As a result, our margin on software and software-related services narrowed from the previous year’s 83.5% to 82.4% (2005: 83.5%). The impact on our software and software-related services margin caused by the extra investment for SAP Business ByDesign that we announced in 2007 was one-half of a percentage point. 

Hiring new employees in consulting raised the cost of providing professional services and other services 1% to €2,091 million (2006: €2,073 million; 2005: €1,925 million). Our margin on professional services and other services contracted from 24.0% to 23.8% (2005: 23.5%), reflecting decreased utilization of consulting resources that was a consequence of the acceleration of our hiring program: Initially, new hires are not fully utilizable. The impact on our professional services and other services margin caused by the extra investment that we announced in 2007 for SAP Business ByDesign was 0.5 of a percentage point.

Our research and development (R & D) expense rose 9% to €1,458 million (2006: €1,335 million; 2005: €1,089 million). The R & D quotient, which is the R & D expense expressed as a percentage of total revenue, was unchanged at 14.2%. Of the 14.2% R & D quotient, 0.3 of a percentage point related to the extra investment that we announced in 2007 for our new product, SAP Business ByDesign. 

A 13% rise in sales and marketing expense to €2,162 million (2006: €1,908 million; 2005: €1,746 million) was in line with the increase in revenue, despite the fact that extra expense was incurred to build sales channels and expand our sales force for the SAP Business ByDesign solution. The impact on our sales and marketing expense caused by the extra investment for SAP Business ByDesign that we announced in 2007 was 0.4 of a percentage point.

Our general and administration expense rose less steeply: 9% to €506 million (2006: €464 million; 2005: €435 million), the increase reflecting additional spending on shared service centers, which are expected to drive down costs in the future. The expense corresponded to 5% of total revenue, unchanged since the previous year. 

Operating Income Climbs 6%

Operating income growth of 6% to €2,732 million (2006: €2,578 million; 2005: €2,337 million) did not keep pace with the growth in total revenue. This was chiefly because of additional investments related to the SAP Business ByDesign solution.

Financial Income

Financial Income Rises

In 2007, our net interest income rose 13% to €135 million (2006: €120 million; 2005: €90 million), reflecting higher rates of interest. Impairment charges on minority investments had a negative effect on financial income. The effect of hedging stock appreciation rights (STARs) had no effect on financial income (2006: €7 million positive effect; 2005: €66 million negative impact). In the previous year, the fair value of instruments acquired to hedge anticipated STAR exposures increased, and the associated revaluation led to the unrealized gain. This did not occur again in 2007. As a result, our total financial income rose to €124 million (2006: €122 million; 2005: €11 million).

Pretax Income; Income Taxes; Net Income

Increases in Pretax and Net Income

Our pretax income rose 6%, exactly in line with the rise in operating income. Despite the positive effect of tax-free or low-tax investments and financial assets, our effective tax rate rose to 32.2% (2006: 29.9%; 2005: 35.2%). This is because nonrecurring effects from the conclusion of tax audits in several countries and agreements we reached with tax authorities on various matters had helped us reduce our effective tax rate to an exceptionally low level in the previous year. 

In connection with the TomorrowNow business unit, which we intend to sell, we incurred a loss from discontinued operations of €15 million after taxes (2006: €10 million; 2005: €6 million). Net income increased 3% to €1,919 million (2006: €1,871 million; 2005: €1,496 million).

Of special interest to investors is basic earnings per share (EPS), which is derived from net income. Our basic EPS was €1.59 (2006: €1.53; 2005: €1.21). Earnings per share from continuing operations was €1.60 (2006: €1.53; 2005: €1.21).

Dividend

Dividend Increase Recommended Again

We wish to continue our dividend policy of recent years and believe our shareholders should benefit appropriately from the Company’s success in achieving increased income targets for 2007. The Executive Board and Supervisory Board will recommend to the Annual General Meeting of Shareholders that the dividend be increased 8.7% to €0.50 per share (2006: €0.46; 2005: €0.3625). The dividend payout ratio (which here means total distributed dividend as a percentage of net income) would be slightly higher at 31% (2006: 30%; 2005: 30%).

If the shareholders approve this recommendation and treasury stock remains at the 2007 closing level, the provisional total amount distributed in dividends would be €599.1 million. The actual amount distributed is expected to be different from the provisional total because the number of repurchased shares held in treasury will probably change before the Annual General Meeting of Shareholders. Transactions related to share-based compensation could also change the amount of common stock. We distributed €556 million in dividends from our 2006 earnings (2005: €447 million). Aside from the distributed dividend, in 2007 we also returned €1,005 million to the shareholders by repurchasing SAP shares for treasury (2006: €1,149 million; 2005: €454 million).