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).
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