CORRESP 1 filename1.htm corresp
SAP AG
Dietmar-Hopp-Allee 16
69190 Walldorf
Germany
T +49/62 27/7-4 74 74
F +49/62 27/7-5 75 75
www.sap.com
(SAP LOGO)
     
SAP AG, Dietmar-Hopp-Allee 16, 69190 Walldorf

Kathleen Collins
Accounting Branch Chief
Securities and Exchange
Commission
Division of Corporation
Finance
100 F. Street, N.E.
Washington, DC 20549
 

January 23, 2008
Dr. Christoph Hütten
Chief Accounting Officer
Senior Vice President
Corporate Financial Reporting
T +49/62 27/7-63475
F +49/62 27/7-30535
E christoph.huetten@sap.com
Re:   SAP AG
Form 20-F for the Fiscal Year Ended December 31, 2007

Filed April 2, 2008
Form 6-K Filed November 14, 2008
File No. 001-14251
Dear Ms. Collins,
By letter dated November 18, 2008, the staff of the Division of Corporation Finance (the Staff) of the Securities and Exchange Commission (the Commission) provided a comment to SAP AG, (SAP or the Company) in response to SAP’s Form 20-F for the fiscal year ended December 31, 2007 filed April 2, 2008 and Form 6-K filed November 14, 2008. In addition, the Staff provided certain additional comments to the Company by telephone. For your convenience we have reproduced in italics below the Staff’s written comment followed by the Company’s response thereto.
Form 6-K Filed November 14, 2008
  1.   We note your response to prior comment 2 to the Staff’s letter dated September 26, 2008 where you indicate that the Company will remove any reference to non-GAAP financial information and the related U.S. GAAP to non-GAAP reconciliation from the face of your consolidated income statement. While we note that the Company included a consolidated income statement (exclusive of any non-GAAP information) in your November 14, 2008 Form 6-K as you previously indicated, we also note that you continue to include a reconciliation of U.S. GAAP and non-GAAP financial information in an income statement format. Please note that it is not appropriate to present an entire non-GAAP income statement in an attempt to reconcile non-GAAP measures to GAAP measures. This can result in the creation of many additional non-GAAP measures and give the impression that the non-GAAP presentation represents a comprehensive basis of accounting. As previously requested, please remove this reconciliation format in your future Forms 6-K and instead provide reconciliations for the individual non-GAAP measures you wish to present (i.e. operating income, operating margin, software and software-related service revenue and earnings per share) as discussed on page 5 of your Form 6-K.
SAP AG
Vorstand: Henning Kagermann (Sprecher), Léo Apotheker (Sprecher), Werner Brandt, Erwin Gunst, Claus Heinrich, Bill McDermott, Gerhard Oswald, John Schwarz, Jim Hagemann Snabe,
Vorsitzender des Aufsichtsrats: Hasso Plattner, Registergericht Mannheim HRB 350269
Deutsche Bank AG, Heidelberg (BLZ: 672 700 03) Konto: 0912030, SWIFT-BIC: DEUT DE SM 672, IBAN DE78 6727 0003 0091 2030 00

 


 

(SAP LOGO)
SAP hereby advises the Staff that it will not use the non-GAAP to U.S. GAAP reconciliation format referenced in the Staff’s comment 1 in future Forms 6-K. SAP intends to use the non-GAAP to U.S. GAAP reconciliation format attached hereto as Exhibit A in future Forms 6-K, subject to future changes in the Company’s non-GAAP measures and any changes required by law.
In response to the conversations that SAP has had with the Staff SAP advises the Staff that it intends to provide the enhanced disclosures regarding non-GAAP measures attached hereto as Exhibit B in future Forms 6-K and Forms 20-F.
If you have any questions about the foregoing, please do not hesitate to contact the undersigned at +49 6227 7-63475 or Peter Harwich at 212 610 6471.
         
  Very truly yours,
 
 
  /s/ Christoph Hütten    
  Dr. Christoph Hütten   
  Chief Accounting Officer
SAP AG 
 
 
Cc:   Dr. Werner Brandt, SAP AG
Michael Junge, SAP AG
Peter Harwich, Allen & Overy LLP

2


 

Exhibit A
(SAP LOGO)
Reconciliations from Non-GAAP Numbers to U.S. GAAP Numbers — Year to Date
Preliminary and unaudited
The following tables present reconciliations from our “Non-GAAP” numbers (including our “Non-GAAP at Constant Currency” numbers) to the respective most comparable U.S. GAAP numbers. Note: Our non-GAAP numbers are not prepared under a comprehensive set of accounting rules or principles. Please see the section “Explanation of Non-GAAP Measures” for more information on our non-GAAP numbers.
                                                                                                   
 
  millions, unless otherwise stated   Nine months ended September 30  
      2008   2007   % change  
        U.S. GAAP     Adj.*     Non-GAAP*     Currency
impact**
    Non-GAAP
constant
currency**
      U.S. GAAP     Adj.*     Non-GAAP*       U.S. GAAP     Non-GAAP*     Non-GAAP
constant
currency**
   
                                                       
                                                       
                       
 
 
 
                       
 
 
                                                                                               
 
Non-GAAP Revenue Numbers
                                                                                               
 
 
                                                                                               
 
Software revenue
      2,283       0       2,283       134       2,417         1,992       0       1,992         15       15       21    
 
Support revenue
      3,324       140       3,464       172       3,636         2,833       0       2,833         17       22       28    
 
Subscription and other software-related service revenue
      184       0       184       4       188         129       0       129         43       43       46    
 
Software and software-related service revenue
      5,791       140       5,931       310       6,241         4,954       0       4,954         17       20       26    
 
Consulting revenue
      1,832       0       1,832       99       1,931         1,618       0       1,618         13       13       19    
 
Training revenue
      323       0       323       17       340         300       0       300         8       8       13    
 
Other service revenue
      77       0       77       5       82         84       0       84         -8       -8       -2    
 
Professional services and other service revenue
      2,232       0       2,232       121       2,353         2,002       0       2,002         11       11       18    
 
Other revenue
      56       0       56       2       58         46       0       46         22       22       26    
 
Total revenue
      8,079       140       8,219       433       8,652         7,002       0       7,002         15       17       24    
                       
 
 
 
                       
 
Non-GAAP Operating Expense Numbers
                                                                                               
 
 
                                                                                               
 
Cost of software and software-related services
      -1,166       142       -1,024                         -919       37       -882         27       16            
 
Cost of professional services and other services
      -1,731       0       -1,731                         -1,531       1       -1,530         13       13            
 
Research and development
      -1,236       18       -1,218                         -1,049       1       -1,048         18       16            
 
Sales and marketing
      -1,912       64       -1,848                         -1,523       3       -1,520         26       22            
 
General and administration
      -477       1       -476                         -367       0       -367         30       30            
 
Other operating income/expense, net
      9       0       9                         10       0       10         -10       -10            
 
Total operating expenses
      -6,513       225       -6,288       -289       -6,577         -5,379       42       -5,337         21       18       23    
                       
 
 
 
                       
 
Non-GAAP Income Numbers
                                                                                               
 
 
                                                                                               
 
Operating income
      1,566       365       1,931       144       2,075         1,623       42       1,665         -4       16       25    
 
Other non-operating income/expense, net
      25       0       25                         -8       0       -8         -413       -413            
 
Financial income/expense, net
      -34       0       -34                         103       0       103         -133       -133            
 
Income from continuing operations before income taxes
      1,557       365       1,922                         1,718       42       1,760         -9       9            
 
Income taxes
      -489       -94       -583                         -536       -16       -552         -9       6            
 
Minority interests
      -1       0       -1                         -3       0       -3         -67       -67            
 
Income from continuing operations
      1,067       271       1,338                         1,179       26       1,205         -9       11            
 
 
                                                                                               
 
Loss from discontinued operations, net of tax
      -29       0       -29                         -12       0       -12         142       142            
 
Net income
      1,038       271       1,309                         1,167       26       1,193         -11       10            
                       
 
 
 
                       
 
Non-GAAP Key Ratios
                                                                                               
 
 
                                                                                               
 
Earnings per Share (EPS)
                                                                                               
 
EPS from continuing operations — basic in
      0.90               1.12                         0.98               1.00         -8       12            
 
EPS from continuing operations — diluted in
      0.89               1.12                         0.97               0.99         -8       13            
 
EPS from net income — basic in
      0.87               1.10                         0.97               0.99         -10       11            
 
EPS from net income — diluted in
      0.87               1.10                         0.96               0.98         -9       12            
 
 
                                                                                               
 
Weighted average number of shares***
      1,192               1,192                         1,209               1,209                              
 
 
                                                                                               
 
Operating margin
      19.4 %             23.5 %             24.0 %       23.2 %             23.8 %     -3.8pp   -0.3pp   0.2pp  
 
Effective tax rate from continuing operations
      31.4 %             30.3 %                       31.2 %             31.4 %                            
                       

*adjustments in the revenue line items are for the Business Objects support revenue that Business Objects would have recognized had it remained a stand-alone entity but that SAP is not permitted to recognize as revenue under U.S. GAAP as a result of business combination accounting rules. Adjustments in the operating expense line items are for acquisition-related charges. See the section “Explanation of Non-GAAP Measures” for details.
 
**constant currency revenue and operating income figures are calculated by translating revenue and operating income of the current period using the average exchange rates from the previous year’s respective period instead of the current period. Constant currency period-over-period changes are calculated by comparing the current year’s non-GAAP constant currency numbers with the non-GAAP number of the previous year’s respective period. See the section “Explanation of Non-GAAP Measures” for details.
 
***in millions, treasury stock excluded.
Exhibit A, Page 1


 

(SAP LOGO)
Exhibit B
Explanation of Non-GAAP Measures
This document discloses certain financial measures, such as non-GAAP revenues, non-GAAP expenses, non-GAAP operating income, non-GAAP operating margin, non-GAAP net income, non-GAAP earnings per share, free cash flow, constant currency revenue and operating income measures as well as U.S. dollar based revenue numbers that are not prepared in accordance with U.S. GAAP and are therefore considered non-GAAP financial measures. Our non-GAAP financial measures may not correspond to non-GAAP financial measures that other companies report. The non-GAAP financial measures that we report should be considered as additional to, and not as substitutes for or superior to, revenue, operating income, cash flows, or other measures of financial performance prepared in accordance with U.S. GAAP. Our non-GAAP financial measures included in this document are reconciled to the nearest U.S. GAAP measure in the tables on the pages F5 to F11 above.
We believe that it is of interest to investors to receive certain supplemental historical and prospective non-GAAP financial information used by our management in running our business and making financial, strategic and operational decisions — in addition to financial data prepared in accordance with U.S GAAP — to attain a more transparent understanding of our past performance and our future results. Beginning in 2008, we use these non-GAAP measures as defined below consistently in our planning, forecasting, reporting, compensation and external communication. Specifically,
  Our management uses these non-GAAP numbers rather than U.S. GAAP numbers as the basis for financial, strategic and operating decisions.
 
  The variable remuneration components of our board members and employees that are tied to our Company’s growth and operating performance are based on SAP’s achievement of its targets for non-GAAP operating income, non-GAAP software and software-related revenue growth at constant currencies, and non-GAAP operating margin at constant currencies.
 
  The annual budgeting process involving all management units is based on non-GAAP revenues and non-GAAP operating income numbers rather than U.S. GAAP numbers.
 
  All monthly forecast and performance reviews with all senior managers globally are based on these non-GAAP measures rather than U.S. GAAP numbers.
 
  Both, Company-internal target setting and guidance provided to the capital markets are based on non-GAAP revenues and non-GAAP income measures rather than U.S. GAAP numbers.
We believe that our non-GAAP measures are useful to investors for the following reasons:
  The non-GAAP measures provide investors with insight into management’s decision- making since management uses these non-GAAP measures to run our business and make financial, strategic and operating decisions.
 
  The non-GAAP measures provide investors with additional information that enables a comparison of year-over-year operating performance by eliminating certain direct effects resulting from the acquisition of Business Objects.
Our non-GAAP financial measures reflect adjustments based on the following items, as well as the related income tax effects:
Non-GAAP revenue:
Revenues in this document identified as “non-GAAP revenue” have been adjusted from the respective U.S. GAAP numbers by including the full amount of Business Objects support revenues that would have been reflected by Business Objects had it remained a stand-alone entity but which are not permitted to be reflected as revenues under U.S. GAAP as a result of fair value accounting for Business Objects support contracts in effect at the time of the Business Objects acquisition.
Under U.S. GAAP we record at fair value the 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 subsequent to the Business Objects acquisition do not reflect the full amount of support revenue that Business Objects would have recorded for these support contracts absent the acquisition by SAP. Adjusting revenue numbers for this one-time revenue impact provides additional insight into our ongoing performance because the support contracts are typically one-year contracts and any renewals of these contracts are expected to result in revenues that are not impacted by the business combination related fair value accounting. However, we cannot provide absolute assurance that these contracts will in fact be renewed.

Exhibit B, page I


 

(SAP LOGO)
Non-GAAP operating expense:
We exclude acquisition-related charges, which are defined as follows:
  Amortization expense of intangibles acquired in business combinations and certain standalone acquisitions of intellectual property;
 
  Expense from purchased in-process research and development; and
 
  Restructuring expenses as far as incurred in connection with a business combinations
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. Furthermore acquisition-related charges may include one-time charges that are not reflective of our ongoing operating performance.
Non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per share
Operating income, operating margin, net income and earnings per share in this document identified as “non-GAAP operating income”, “non-GAAP operating margin”, “non-GAAP net income and “non-GAAP earnings per share have been adjusted from the respective operating income, operating margin, net income and earnings per share numbers as recorded under U.S. GAAP by adjusting for the above mentioned non-GAAP revenues and expenses.
We include these non-GAAP revenues and exclude these non-GAAP expenses for the purpose of calculating non-GAAP operating income, non-GAAP operating margin, non-GAAP net income and non-GAAP earnings per share when evaluating the continuing operational performance of the Company because these expenses generally cannot be changed or influenced by management after the acquisition other than by disposing of the acquired assets. As management at levels below the Executive Board has no influence on these expenses we generally do not consider these expenses for purposes of evaluating the performance of management units. As we believe that our Company-wide performance measures need to be aligned with the measures generally applied by management at varying levels throughout the Company we exclude these expenses when making decisions to allocate resources, both, on a Company level and at lower levels of the organization. In addition, we use these non-GAAP measures to gain a better understanding of the Company’s comparative operating performance from period-to-period and as a basis for planning and forecasting future periods. Considering that management at all levels of the organization is heavily focused on our non-GAAP measures in our internal reporting and controlling, we believe that it is in the interest of our investors that they are provided with the same information.
We believe that our non-GAAP financial measures described above have limitations, which include but are not limited to the following:
  The eliminated amounts may be material to us.
 
  Without being analysed in conjunction with the corresponding U.S. GAAP measures the non-GAAP measures are not indicative of our present and future performance, foremost for the following reasons:
    The additional insight into our potential future financial performance that our non-GAAP revenue numbers are intended to provide assumes that Business Objects customers renew their maintenance contracts. Projections of our future revenues made based on these numbers would be overstated if such maintenance renewals do not occur.
 
    While our non-GAAP income numbers reflect the elimination of certain acquisition-related expenses, no eliminations are made for the additional revenues that result from the acquisitions.
 
    The acquisition-related one-time charges that we eliminate in deriving our non-GAAP income numbers are likely to recur should SAP enter into material business combinations in the future.

Exhibit B, page II


 

(SAP LOGO)
    The acquisition-related amortization expense that we eliminate in deriving our non-GAAP income numbers are recurring expenses that will impact our financial performance in future years.
 
    While our non-GAAP revenue numbers are adjusted for a one-time impact only, our non-GAAP expenses are adjusted for both one-time and recurring items. Additionally, the revenue adjustment for the fair value accounting for Business Objects support contracts and the expense adjustment for one-time and recurring acquisition-related charges do not arise from a common conceptual basis as the revenue adjustment aims at improving the comparability of the initial post-acquisition period with future post-acquisition periods while the expense adjustment aims at improving the comparability between post-acquisition periods and pre-acquisition periods. This should particularly be considered when evaluating our non-GAAP operating income and non-GAAP operating margin numbers as these combine our non-GAAP revenues and non-GAAP expenses despite the absence of a common conceptual basis.
We believe, however, that the presentation of the non-GAAP measures in conjunction with the corresponding GAAP measures provide useful information to management and investors regarding present and future business trends relating to our financial condition and results of operations. We therefore do not evaluate our growth and performance without considering both non-GAAP measures and U.S. GAAP measures. We caution the readers of this document to follow a similar approach by considering our non-GAAP measures 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.
NOTE: Starting here we would continue with our explanation of free cash flow and constant currency as before.

Exhibit B, page III