Non-U.S. GAAP Financial Measures
This review of our 2007 operations discusses certain adjusted financial measures, namely cash earnings according to DVFA/SG, free cash flow, and constant currency period-over-period changes in financial measures, that are not prepared in accordance with the accounting principles generally accepted in the United States (U.S. GAAP). In addition, the outlook guidance information for 2008 discusses further adjusted financial measures. These include non-U.S. GAAP revenue, non-U.S. GAAP operating income, and non-U.S. GAAP operating margin, as well as constant currency period-over-period changes in revenue. Adjusted financial measures that are not prepared in accordance with U.S. GAAP are considered non-U.S. GAAP financial measures. Our non-U.S. GAAP financial measures may not correspond to non-U.S. GAAP financial measures that other companies report. The non-U.S. GAAP financial measures that we report should be considered as additional to, and not as substitutes for or superior to, revenue, operating income, net income, cash flows, or other measures of financial performance prepared in accordance with U.S. GAAP. This report shows how our non-U.S. GAAP financial measures reconciled to the nearest U.S. GAAP financial measures for the report year and earlier years.
Non-U.S. GAAP Revenues, Non-U.S. GAAP Operating Income, and Non-U.S. GAAP Operating Margin
We believe that it is of interest to investors to receive certain supplemental historical and prospective financial information used by our management in running our business – in addition to financial data prepared in accordance with U.S. GAAP. The outlook we provide for 2008 is based on the same non-U.S. GAAP revenue, non-U.S. GAAP operating income, and non-U.S. GAAP operating margin measures we have been using for all purposes since the beginning of 2008 for our budgets, forecasts, reports, compensation, and communications.
Non-U.S. GAAP Revenue
Revenue in this report identified as “non-U.S. GAAP revenue” has been adjusted from the corresponding U.S. GAAP numbers by including the full amount of Business Objects S.A. (Business Objects) support revenue that Business Objects would have recognized had it remained a standalone entity but that we are not permitted to recognize as revenue under U.S. GAAP as a result of fair value accounting for the Business Objects support contracts we stepped into when we acquired Business Objects.
Under U.S. GAAP, we record at fair value the obligations assumed under Business Objects support contracts in effect at the time of the acquisition of Business Objects. Consequently, our U.S. GAAP support revenues, our U.S. GAAP software and software-related service revenues, and our U.S. GAAP total revenues for periods after the Business Objects acquisition do not reflect the full amount of support revenue that Business Objects would have recorded for these support contracts if SAP had not acquired Business Objects. Adjusting revenue numbers for this one-time revenue effect provides additional insight into our ongoing performance because the support contracts are typically one-year contracts, and renewals of these contracts are expected to result in revenues that are not affected by the business combination-related fair value accounting.
We believe that our non-U.S. GAAP revenue numbers have limitations, particularly as the eliminated amounts may be material to us. We therefore do not evaluate our growth and performance without considering both non-U.S. GAAP revenue and U.S. GAAP revenue. We caution the readers of this document to follow a similar approach by considering our non-U.S. GAAP revenues only in addition to, and not as a substitute for or superior to, revenue or other measures of our financial performance prepared in accordance with U.S. GAAP.
Non-U.S. GAAP Operating Income; Non-U.S. GAAP Operating Margin
Operating income and operating margin in this document identified as non-U.S. GAAP operating income or non-U.S. GAAP operating margin have been adjusted from the respective operating income and operating margin numbers as recorded under U.S. GAAP by including in our non-U.S. GAAP revenue the full amount of Business Objects support revenues excluded under U.S. GAAP fair value accounting, and by excluding acquisition-related charges. Acquisition-related charges in this context comprise:
- Amortization expense of intangibles acquired through business combinations and standalone acquisitions of intellectual property
- Expense from purchased in-process research and development
- Restructuring expenses as far as incurred in connection with a business combination and accounted for under SFAS 146 as exit activity
Although acquisition-related charges include recurring items from past acquisitions, such as amortization of acquired intangible assets, they also include an unknown component relating to current-year acquisitions. We cannot accurately assess or plan for that unknown component until we have finalized our purchase price allocation. Further more, acquisition-related charges may include onetime charges that do not adequately reflect our ongoing operating performance. Eliminating acquisition-related charges makes it easier to draw comparisons with our past operating performance and with the operating margins of peer companies in our industry that have a different history to our own in respect of acquisitions.
We believe that our non-U.S. GAAP financial measures described above have limitations, particularly as the eliminated amounts may be material to us. We therefore do not evaluate our growth and performance without considering both non-U.S. GAAP operating income and margin numbers and U.S. GAAP operating income and margin numbers. We caution the readers of this document to follow a similar approach by considering our non-GAAP operating income and margin numbers only in addition to, and not as a substitute for or superior to, revenues or other measures of our financial performance prepared in accordance with U.S. GAAP.
As comparators for our 2008 outlook guidance, we show our 2007 non-U.S. GAAP revenue, non-U.S. GAAP operating income, and non-U.S. GAAP operating margin. They reconcile to the nearest U.S. GAAP equivalents as follows:
| € millions, except operating margin |
U.S. GAAP Measure |
Business Objects Support Revenue Not Recorded Under U.S. GAAP |
Acquisition- Related Charges |
Non- U.S. GAAP Measure |
| Software and software-related service revenue |
7,427 | – | – | 7,427 |
| Total revenue | 10,242 | – | – | 10,242 |
| Total operating expenses | – 7,510 | – | 61 | – 7,449 |
| Operating income | 2,732 | – | 61 | 2,793 |
| Operating margin on continuing operations |
26.7% | – | 27.3% |
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