UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 20-F

Commission file number: 1-14251

 

SAP AG

(Exact name of Registrant as specified in its charter)

 

SAP CORPORATION
(Translation of Registrant’s name into English)

 

Federal Republic of Germany
(Jurisdiction of incorporation or organization)

 

 

 

 

Dietmar-Hopp-Allee 16
69190 Walldorf
Federal Republic of Germany
(Address of principal executive offices)

 

Wendy Boufford
c/o SAP Labs
3410 Hillview Avenue, Palo Alto, CA, 94304, United States of America
650-849-4000 (Tel)
604-974-4789 (Fax)
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

     Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

     Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report:

 

     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

     If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

     Note — Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

     Large accelerated filer þ     Accelerated filer o     Non-accelerated filer o

     Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

     U.S. GAAP þ     International Financial Reporting Standards as issued by the International Accounting Standards Board o     Other o

     If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

     If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

 * Not for trading, but only in connection with the registration of American Depositary Shares representing such ordinary shares.

 

** Including 38,456,734 treasury shares.

 

 

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TABLE OF CONTENTS

 

 

SAP AG is a German stock corporation (Aktiengesellschaft) and is referred to in this Annual Report on Form 20-F, together with its subsidiaries, as SAP, or as “the Company,” “we,” “our,” or “us.” Our consolidated financial statements included in “Item 18. Financial Statements” in this Annual Report on Form 20-F have been prepared in accordance with generally accepted accounting principles in the United States of America, referred to as U.S. GAAP.

 

In this Annual Report on Form 20-F: (i) references to “US$,” “$,” or “dollars” are to U.S. dollars; (ii) references to “€” or “euro” are to the euro. Our financial statements are denominated in euros, which is the currency of our home country, Germany. Certain amounts that appear in this Annual Report on Form 20-F may not add up because of rounding adjustments.

 

Unless otherwise specified herein, euro financial data have been converted into dollars at the noon buying rate in New York City for cable transfers in foreign currencies as certified for customs purposes by the Federal Reserve Bank of New York (the “Noon Buying Rate”) on December 31, 2008, which was US$1.3919 per €1.00. No representation is made that such euro amounts actually represent such dollar amounts or that such euro amounts could have been or could be converted into dollars at that or any other exchange rate on such date or on any other dates. The rate used for the convenience translations also differs from the currency exchange rates used for the preparation of the Consolidated Financial Statements. For information regarding recent rates of exchange between euro and dollars, see “Item 3. Key Information — Exchange Rates.” On March 9, 2009, the Noon Buying Rate for converting euro to dollars was US$1.2565 per €1.00.

 

Unless the context otherwise requires, references in this Annual Report on Form 20-F to ordinary shares are to SAP AG’s ordinary shares, without nominal value. References in this Annual Report on Form 20-F to “ADRs” are to SAP AG’s American Depositary Receipts, each representing one SAP ordinary share.

 

SAP, R/3, SAP NetWeaver, Duet, PartnerEdge, ByDesign, SAP Business ByDesign, and other SAP products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of SAP AG in Germany and other countries. Business Objects and the Business Objects logo, BusinessObjects, Crystal Reports, Crystal Decisions, Web Intelligence, Xcelsius, and other Business Objects products and services mentioned herein as well as their respective logos are trademarks or registered trademarks of Business Objects S.A. in the United States and in other countries. Business Objects is an SAP company. All other product and service names mentioned are the trademarks of their respective companies. Data contained in this document serves informational purposes only. National product specifications may vary.

 

Throughout this Annual Report on Form 20-F, whenever a reference is made to our website, such reference does not incorporate by reference into this Annual Report the information contained on our website.

This Annual Report on Form 20-F contains forward-looking statements and information based on the beliefs of, and assumptions made by, our management using information currently available to them. Any statements contained in this Annual Report on Form 20-F that are not historical facts are forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. We have based these forward-looking statements on our current expectations, assumptions and projections about future events. As a result, our forward-looking statements and information are subject to uncertainties and risks. A broad range of uncertainties and risks, many of which are beyond our control, could cause our actual results and performance to differ materially from any projections expressed in or implied by our forward looking statements. These uncertainties and risks include, but are not limited to:

 

We describe these and other risks and uncertainties in more detail under “Item 3 Key Information — Risk Factors.”

 

If one or more of these uncertainties or risks materializes, or if management’s underlying assumptions prove incorrect, our actual results may differ materially from those described in or inferred from our forward-looking statements and information.

 

The words “aim,” “anticipate,” “believe,” “continue,” “could,” “counting on,” “is confident,” “estimate,” “expect,” “forecast,” “intend,” “may,” “plan,” “project,” “predict,” “seek,” “should,” “strategy,” “want,” “will,” “would,” “guidance,” “outlook” and similar expressions as they relate to us are intended to identify such forward-looking statements. Such information includes, for example, the statements made in “Item 5. Operating and Financial Review and Prospects” and “Item 11. Quantitative and Qualitative Disclosures About Market Risk,” but also appears in other parts of this Annual Report on Form 20-F. The factors that could affect our future financial results are discussed more fully under “Item 3. Key Information — Risk Factors” as well as elsewhere in this Annual Report on Form 20-F and in our other filings with the U.S. Securities and Exchange Commission (“SEC”). Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 20-F. We undertake no obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise.

 

This Annual Report includes statistical data about the IT industry derived from information published by sources including: Gartner, Inc., or Gartner, a provider of market information and strategic information for the IT industry; International Data Group, or IDC, a provider of market information and advisory services for the information technology, telecommunications, and consumer technology markets; investment bank Goldman Sachs; financial services company UBS; and Forrester Research, a major market research company. This type of data represents only the estimates of Gartner, IDC, Goldman Sachs, UBS, Forrester Research and other sources of industry data. SAP does not adopt nor endorse any of the statistical information provided by sources such as Gartner, IDC, Goldman Sachs, UBS, Forrester Research or other similar sources that is contained in this Annual Report on Form 20-F. In addition, although we believe that data from these companies are generally reliable, this type of data is inherently imprecise. We caution you not to place undue reliance on this data.

This document discloses certain financial measures, such as non-GAAP revenues, non-GAAP expenses, non-GAAP operating income, non-GAAP operating margin and constant currency revenue and operating income measures 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 measures, except for projected 2009 figures for which we provide only a projected non-GAAP financial measure without reconciling to a corresponding projected U.S. GAAP measure because a reconciliation is not practicable due to the prospective nature of the information.

 

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 consistently as defined below in our planning, forecasting, reporting, compensation and external communication. Specifically,

 

 

We believe that our non-GAAP measures are useful to investors for the following reasons:

 

 

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 nonrecurring revenue impact provides additional insight into our ongoing performance: The support contracts are typically one-year contracts, and we expect customers will renew them, which would result in revenues from the support fees. However, we cannot provide absolute assurance that these contracts will be renewed.

 

Non-GAAP Operating Expense

 

We exclude acquisition-related charges, which are defined as follows:

 

Non-GAAP Operating Income and Non-GAAP Operating Margin

 

Operating income and operating margin in this document identified as “non-GAAP operating income” and “non-GAAP operating margin” have been adjusted from the respective operating income and operating margin 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 and non-GAAP operating margin 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:

 

 

We believe, however, that the presentation of the non-GAAP measures in conjunction with the corresponding U.S. GAAP measures provides 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.

 

Constant Currency Period-Over-Period Changes

 

We believe it is important for investors to have information that provides insight into our sales. Revenue measures determined under U.S. GAAP provide information that is useful in this regard. However, both growth in sales volume and currency effects impact period-over-period changes in sales revenue. We do not sell standardized units of products and services, so we cannot provide data expressed in such units to present changes in the volume of products and services sold. To provide information that may be useful to investors in breaking down and evaluating sales volume changes, we do present information adjusted for foreign currency effects about revenue changes and various values and components relating to operating income. We calculate constant currency year-over-year changes in revenue and operating income by translating foreign currencies using the average exchange rates from the previous (comparator) year instead of the report year.

 

We believe that data on constant currency period-over-period changes has limitations, particularly because the currency effects that are eliminated constitute a significant element of our revenues and expenses and may materially affect our performance. We therefore limit our use of constant currency period-over-period changes to the analysis of changes in volume as one element of the full change in a financial measure. We do not evaluate our growth and performance without considering both constant currency period-over-period changes on the one hand and changes in revenues, expenses, profit, or other measures of financial performance prepared in accordance with U.S. GAAP on the other. We caution the readers of this report to follow a similar approach by considering constant currency period-over-period changes in measures of financial performance only in addition to, and not as a substitute for or superior to, changes in revenues, expenses, income or other measures prepared in accordance with U.S. GAAP.

Not applicable.

Not applicable.

The following table presents selected consolidated financial information of SAP for the five most recent fiscal years. The selected consolidated financial information of SAP is a summary of, is derived from and is qualified by reference to, our consolidated financial statements, with the exception of the 2008 US$ amounts which are unaudited and are provided for the convenience of readers. The selected consolidated balance sheet data as of December 31, 2006, 2005 and 2004 and the selected consolidated income statement data for the years ended December 31, 2005 and 2004 are derived from our audited consolidated financial statements prepared under U.S. GAAP. However, we have not included our audited consolidated financial statements for those periods in this document. The € based selected consolidated balance sheet data as of December 31, 2008 and 2007 and the selected consolidated income statement data for the years ended December 31, 2008, 2007 and 2006 are derived from our audited consolidated financial statements, which are included in “Item 18. Financial Statements” and have been audited by KPMG AG Wirtschaftsprüfungsgesellschaft (“KPMG”), independent registered public accountants, whose report appears on page F-1 of this Annual Report on Form 20-F.

 

 

 

The prices for ordinary shares traded on German stock exchanges are denominated in euro. Fluctuations in the exchange rate between the euro and the dollar affects the dollar equivalent of the euro price of the ordinary shares traded on the German stock exchanges and, as a result, may affect the price of the ADRs in the United States. See “Item 9. The Offer and Listing” for a description of the ADRs. In addition, SAP AG pays cash dividends, if any, in euro. As a result, any exchange rate fluctuations will also affect the dollar amounts received by the holders of ADRs on the conversion into dollars of cash dividends paid in euro on the ordinary shares represented by the ADRs. The deposit agreement with respect to the ADRs requires the depositary to convert any dividend payments from euro into dollars as promptly as practicable upon receipt.

 

A significant portion of our revenue and expenses is denominated in currencies other than the euro. Therefore, fluctuations in the exchange rate between the euro and the respective currencies to which we are exposed may materially affect our consolidated financial position, results of operations and cash flows. See “Item 5. Operating and Financial Review and Prospects — Foreign Currency Exchange Rate Exposure.” For our foreign currency risk and hedging strategy see “Item 11. Quantitative and Qualitative Disclosure About Market Risk — Foreign Currency Exchange Rate Risk.”

The following table sets forth the average, high and low Noon Buying Rates for the euro expressed as U.S. dollars per €1.00.

 

 

 

 

 

The Noon Buying Rate on March 9, 2009 was US$1.2565 per €1.00.

Dividends are jointly proposed by SAP AG’s Supervisory Board (Aufsichtsrat) and Executive Board (Vorstand) based on SAP AG’s year-end stand-alone statutory financial statements, subject to approval by the shareholders and are officially declared for the prior year at SAP AG’s Annual General Meeting of Shareholders. Dividends paid to holders of the ADRs may be subject to German withholding tax. See “Item 8. Financial Information — Other Financial Information — Dividend Policy” and “Item 10. Additional Information — Taxation.”

 

The following table sets forth in euro the annual dividends paid or proposed to be paid per ordinary share in respect of each of the years indicated. The amounts shown in the table for 2005 and prior years are retrospectively adjusted for the effect of the fourfold increase in the number of shares resulting from the capital increase effective December 15, 2006 pursuant to German law. One SAP ADR currently represents one SAP AG ordinary share. Accordingly, the final dividend per ADR is equal to the dividend for one SAP AG common share and is dependent on the euro/U.S. dollar exchange rate. The table does not reflect tax credits that may be available to German taxpayers who receive dividend payments. If you own our ordinary shares or ADRs and if you are a U.S. resident, refer to “Item 10. Additional Information — Taxation,” for further information.

 

 

 

 

The amount of dividends paid on the ordinary shares depends on the amount of profits to be distributed by SAP AG, which depends in part upon our performance. The timing and amount of future dividend payments will depend upon our future earnings, capital needs and other relevant factors in each case as proposed by the Executive Board and the Supervisory Board of SAP AG and approved at the Annual General Meeting of Shareholders.

Economic, Political and Regulatory Risks

 

The current global economic crisis and general uncertainty in global economic conditions has caused, and may in the future cause, a reduction and deferral in demand for our products, negatively impacting our business, results of operations, financial condition and cash flows. Global economic conditions may worsen in the future, exacerbating this negative impact.

 

The purchase and implementation of SAP software products typically constitutes a significant portion of our customers’ overall corporate budgets. As a result, customer willingness to invest in acquiring and implementing SAP products generally varies with economic and other business conditions. Recently, economic conditions have deteriorated significantly in the regions in which we do business and in the industries in which our customers operate. Specifically, there has been a significant reduction in the availability of credit, increased rates of default and bankruptcy, decreased consumer spending and a substantial decline in most major equity markets. In addition, there has been nearly unprecedented volatility in global capital and banking markets as well as in currency markets in certain countries. As a result of deterioration in global economic conditions and

financial markets, we have experienced and expect to continue to experience for the foreseeable future a broad range of adverse effects, including but not limited to:

 

 

Continued deterioration of global economic conditions, including the severe recession in the United States and other countries and further disruptions in the credit and financial markets worldwide, will likely have a negative impact on our business, results of operations, financial condition and cash flows which could be significant. In particular, our profitability and cash flows might be significantly adversely affected by the current and any continuing deterioration of the economic conditions in Europe or the United States because we derive a substantial portion of our revenue from software licenses and services in those geographic regions. Additionally, an important feature of our long-term strategy for growth is to increase our offerings for the small and midsize enterprise segment. Consumer hesitancy or limited availability of finance may constrict the business operations of our customers and our channel, development, and implementation partners, and consequently impede our own operations. The consequences may include restrained or delayed investments, late payments, bad debts, and even insolvency among our customers and business partners. These have already had an effect on our revenue growth and incoming payments, and the impact may continue. In addition, our prices could come under more pressure due to more intense competition or deflation. If current economic conditions persist or worsen, we expect that our revenue growth and results of operations will continue to be negatively impacted. Finally, an extended period of further economic deterioration could exacerbate the other risks we describe in this Annual Report on Form 20-F.

 

See “Item 4. Information About SAP — Business by Region” for information on the regions in which we operate and “Item 4. Information About SAP — Revenue by Industry Sector” for information on the industries in which our customers operate.

 

Continued deterioration of global economic conditions could make it increasingly difficult for us to accurately forecast demand for our products and services, and could cause our revenue and operating results to fall short of expectations.

 

Our revenue and operating results can vary and have varied in the past, from quarter to quarter. Our revenue in general, and in particular our software revenue, is difficult to forecast for a number of reasons. See the risk factor below entitled “Our sales are subject to quarterly fluctuations and our sales forecast may not be accurate” for additional details. Current economic conditions make it even more difficult for us to accurately forecast demand for our products and services. As a result, future quarterly revenue and operating results could fall below our expectations, likely resulting in a decline in our stock price.

Our global business activities subject us to economic, regulatory and other risks which could harm our business, operating results and financial condition.

 

Our products and services are currently marketed in over 120 countries in the Europe, Middle East and Africa (“EMEA”), North America and Latin America (“Americas”) and Asia Pacific Japan (“APJ”) regions. Sales in these regions are subject to risks inherent in transacting business globally, including, in particular:

 

 

As we expand further into new regions and markets, these risks could intensify. One or more of these factors could adversely impact our operations globally or in one or more particular countries or regions. As a result, our business, operating results and financial condition could be harmed.

 

Social and political instabilities including those caused by terrorist attacks, the risk of war or international hostilities, pandemic disease outbreaks and natural disasters could adversely impact our business.

 

Terrorist attacks and other acts of violence or war as well as the risk of pandemic disease outbreaks and natural disasters could have a negative impact on the world economy, contribute further to the current climate of economic decline and economic and political uncertainty in many regions in which we do business and affect our and our customers’ revenue and investment decisions over an extended period of time. Furthermore, such occurrences could make business continuity and business travel more difficult. This social and political instability could interfere with customers’ decision making processes and our ability to sell products and provide services to them.

Market Risks

 

Our future revenue is dependent in part upon our installed customer base continuing to license additional products, renew maintenance agreements and purchase additional professional services; a decision not to renew contracts or not to purchase more of our products or services could adversely impact our business.

 

Our large installed customer base traditionally has generated a large portion of our revenue. We have increased our customer base by acquiring other companies and by extending our channel partner ecosystem. Our support strategies are under constant review and development to assist us in addressing our customers’ broad range of requirements. In 2008 we rolled out SAP Enterprise Support services, which we believe is more extensive than the support offerings of many of our competitors. Customers with current contracts pay support fees that increase stepwise. Success in achieving our business goals depends significantly on the success of our maintenance (support) models and on our ability to deliver high-quality services. It is possible that existing customers decide not to renew their maintenance contracts with us or not to purchase more of our products or services in the future. Such decisions by customers could have a material adverse effect on our business and results of operations.

 

Consolidation in the software industry may result in unstable and/or decreased demand for our software and stronger peer companies in the long term.

 

The entire IT sector, including the software industry, has in recent years experienced a period of consolidation through mergers and acquisitions. We expect this trend to continue for the foreseeable future. Although consolidations in the software industry may create market opportunities for remaining entities, any consolidation could create uncertainty among existing and potential customers regarding future IT investment plans. In turn, this could diminish customer demand for our products and services and could result in longer sales cycles as customers determine which company best addresses their needs. Also, consolidated companies may emerge as stronger competitors with more resources, a larger customer base and a wider variety of product offerings than our own.

 

Due to intense competition, our market share and financial performance could decline.

 

The software industry has been and continues to be intensely competitive. The market for our products continues to be intensely competitive, with technology continuing to evolve rapidly. As part of our business strategy, over the last few years we have focused our efforts in areas where demand is expected to grow more rapidly. In particular, we have focused on the completion of our service-oriented architecture (SOA) road map, customer relationship management solutions, solutions for small and midsize enterprises, as well as industry-tailored solutions for specific industries such as retail and financial services. Our expansion from traditional large enterprise resource planning (ERP) product offerings to our new product and services offerings exposes us to competitors varying in size, geographic location and specialty. Current and potential competitors have established and may continue to establish cooperative relationships among themselves or with third parties to increase the ability of their products to address customer needs better than we do. Competition, with respect to pricing, product quality and functionalities/features, and consulting and support services, could increase substantially and result in price reductions, cost increases or loss of market share.

 

The continuing trend towards outsourcing business processes to external providers (business process outsourcing, or “BPO”) and other software-based services could result in increased competition for us with systems integrators, consulting firms, telecommunications firms, computer hardware and software vendors and other IT service providers.

The software application delivery model often referred to as “SaaS,” or software as a service, is popular particularly in the mid-market due to its low initial cost requirements and Web-based operability. Our on-demand solutions are targeted at midsize enterprises and we face strong competition in this SaaS arena.

 

In response to competition, we have been required in the past, and may be required in the future, to furnish additional discounts or other concessions to customers or otherwise modify our pricing practices. These developments have impacted and may increasingly negatively impact our revenue, earnings and market share.

 

Business Strategy Risks

 

Demand for our newly introduced products such as SAP Business ByDesign may not develop as planned and our mid-market strategy may not be successful.

 

We are investing significant resources in developing and marketing new and enhanced products and services. Demand for and customer acceptance of recently introduced products and services are subject to a high level of uncertainty, especially due to the current global economic crisis and the resulting global economic uncertainty.

 

Targeting midsize companies with the aim of building a leading position in the mid market is a key part of our strategy. To that end, expanding our network of business partners and creating the infrastructure for volume business are of great importance. To tap potential business in the lower mid-market, we have spent approximately €242 million beginning in 2007 through 2008 in sales channels, processes, infrastructure, and human resources, all oriented toward new customer relationships and a larger, more diversified partner ecosystem.

 

Our newly architectured mid-market solutions are in contrast to our traditional software solution offerings due to their different approach to market and different product appeal to a large mass of midsize companies that traditionally have not considered purchasing an integrated business application to support their core business functions.

 

Despite our efforts, demand for these products and services may not develop, which could have a material adverse effect on our business, financial position and results of operations or cash flows.

 

Any failure to develop new relationships and enhance existing relationships with third-party distributors, software suppliers, system integrators and value-added resellers that help sell our products and services may adversely affect our revenues.

 

We have entered into agreements with a number of leading suppliers of computer software and hardware and other technology providers to enable compatibility of certain of the products produced by such suppliers with our software products. Also, we have supplemented our consulting and support services (in the areas of product implementation, training and maintenance) through alliance partnerships with third-party hardware and software suppliers, systems integrators, and consulting firms. Most of these agreements and alliances are of relatively short duration and are non-exclusive. In addition, we have established relationships relating to the resale of certain of our software products by third parties. These third parties include value-added resellers and, in the area of application hosting services, certain computer hardware vendors, systems integrators and telecommunications providers. Our growth strategy includes commencing and maintaining relationships with independent software vendors and value added resellers for our products targeted at small and midsize enterprises. Most of these third parties and business partners have similar arrangements with our competitors. In addition, some of these third parties also produce their own standard application or technology integration software in competition with SAP.

 

There can be no assurance that these third parties or business partners will continue to cooperate with us when our agreements or partnerships expire or are up for renewal. In addition, there can be no assurance that these third parties and partners will devote sufficient resources to promote, sell, support and integrate our

products to enable us to compete successfully with other software vendors. Finally, there can be no assurance that these third parties and partners will provide high-quality products or services, or that actions taken or omitted to be taken by these parties will not adversely affect us. The failure to obtain high-quality products or services that enable us to compete successfully or to renew such agreements or partnerships could adversely affect our ability to continue to develop product enhancements and new solutions that keep pace with anticipated changes in hardware and software technology and telecommunications. In addition, any of these failures could adversely affect our ability to penetrate target markets; consequently, demand for our software products and services could decline.

 

Human Capital Risks

 

If we were to lose the services of members of management and employees who possess specialized knowledge and technology skills, we may not be able to manage our operations effectively or develop new products and services.

 

If our highly skilled and specialized personnel leave the Company and qualified replacements or new resources are not available or if we decide to invest in additional resources in certain areas we may not be able to manage our operations effectively to achieve our targets. Especially as we embark on the introduction of new and innovative technology offerings, we are relying on being able to build up and maintain a specialized workforce with deep technological know-how to ensure an optimal implementation of such new technologies in accordance with our customers’ demands. Most of our current employees, with the exception of selected managers, are subject to employment agreements or conditions that do not contain post-employment noncompete provisions and, in the case of most of our existing employees outside of Germany, permit the employees to terminate their employment on relatively short or no notice. There can be no assurance that we will continue to be able to attract or retain the personnel we require to develop and market new and enhanced products and to market and service our existing products and conduct our operations successfully. Further, recruiting of personnel may expose us to claims from other companies seeking to prevent their employees from working for a competitor.

 

If we do not effectively manage headcount as well as our geographically dispersed employee base, our business may not operate efficiently, and this could have an adverse impact on our results of operations.

 

Changes in employees and infrastructure might lead to a mismatch between our costs and revenues in the future. In January 2009 we announced our intention to reduce the number of positions globally to 48,500 by the end of the year, and to take advantage of any attrition during this time to assist in meeting our year end goal. If we do not manage our intended reduction in number of positions as planned, or if we are unable to manage effectively our geographically dispersed workforce, our business may not operate efficiently and this could have an adverse impact on our results of operations.

 

Organizational and Governance-Related Risks

 

We are subject to significantly increased governance-related regulatory requirements both in Germany and the United States.

 

As a stock corporation domiciled in Germany and listed in Germany and the United States, SAP is subject to governance-related regulatory requirements under both jurisdictions. These standards are among the highest standards worldwide and have grown considerably in the past few years. In the United States, the Sarbanes-Oxley Act of 2002 requires the establishment, ongoing assessment and certification of an effective system of internal control over financial reporting accompanied by stringent documentation efforts for companies and their external auditors. Also in the United States, the Foreign Corrupt Practices Act requires not

only accurate books and records, but also sufficient controls, policies and processes to ensure business is conducted without the influence of bribery and corruption on an international scale. Since the German federal government issued the “10-point program to strengthen corporate integrity and investor protection” in the past years, various new legislation was passed to improve investor protection, transparency and shareholder democracy. Additionally, most of our subsidiaries face increasing local regulatory requirements many of which have been expanded in recent years. Given the high level of complexity of these laws there can be no assurance that we will not be held in breach of certain regulatory requirements, for example, through fraudulent or negligent behavior of individual employees, our failure to comply with certain formal documentation requirements or otherwise. Any corresponding accusation against us, whether merited or not, may have a material adverse impact on our reputation as well as the trading price of our ordinary shares and ADRs.

 

Principal shareholders may be able to exert control over our future direction and operations.

 

As of March 9, 2009, the beneficial holdings of SAP AG’s principal shareholders and the holdings of entities controlled by them constituted in the aggregate approximately 28% of the outstanding ordinary shares of SAP AG. If SAP AG’s principal shareholders and the holdings of entities controlled by them vote in the same manner, this could delay, prevent or facilitate a change in control of SAP or other significant changes to SAP AG or its capital structure. See “Item 7. Major Shareholders and Related-Party Transactions — Major Shareholders,” for further information.

 

Sales of ordinary shares by principal shareholders could adversely affect the price of our capital stock.

 

The sale of a large number of ordinary shares by any of the principal shareholders and related entities could have a negative effect on the trading price of our ADRs or our ordinary shares. We are not aware of any restrictions on the transferability of the shares owned by any of the principal shareholders or related entities.

 

U.S. judgments may be difficult or impossible to enforce against us or our Board members.

 

Currently, except for John Schwarz and Bill McDermott, all members of SAP AG’s Executive Board and all members of the Supervisory Board are non-residents of the United States. A substantial portion of the assets of SAP and our Board members are located outside the United States. As a result, it may not be possible to effect service of process within the United States upon non-U.S. resident persons or SAP or to enforce against non-U.S. resident persons judgments obtained in U.S. courts predicated upon the civil liability provisions of the securities laws of the United States. In addition, awards of punitive damages in actions brought in the United States or elsewhere may be unenforceable in Germany.

 

SAP’s Sustainability Strategy may be difficult to maintain, and a failure by us to meet customer or partner expectations or generally accepted sustainability standards could have an adverse impact on our results of operations, our business and our reputation.

 

For SAP, sustainability is a standard that guides our engagement in new business opportunities — holistically encompassing profitable growth, environmental value, and societal benefit. Therefore, we address sustainability risks, especially relating to climate change, corporate integrity, human resources management, the ethical behavior of suppliers, the accessibility, user-friendliness, and safety of our products, privacy and data protection in connection with the use of SAP products, and the digital divide — the belief that people’s access to digital and information technology is dependent on social factors. If our sustainability practices are not sufficient to meet the expectations of our customers and partners or generally accepted sustainability standards, this could have an adverse impact on our results of operations, our business and our reputation.

Communication and Information Risks

 

Our IT security measures may be breached or compromised and we may sustain unplanned IT system unavailability.

 

The Internet is a public network, and data is sent over this network from many sources. We rely on encryption, authentication technology and firewalls to provide security for confidential information transmitted to and from us over the Internet. Anyone who circumvents our security measures could misappropriate proprietary information or cause interruptions in our services or operations. In the past, computer viruses and software programs that disable or impair computers have been distributed and have rapidly spread over the Internet. Computer viruses could be introduced into our systems or those of our customers or suppliers, which could disrupt our network or make it inaccessible to customers or suppliers. Our security measures may be inadequate to prevent security breaches, and our business would be harmed if we do not prevent them. In addition, we may be required to expend significant capital and other resources to protect against the threat of security breaches and to alleviate problems caused by breaches as well as by any unplanned unavailability of our internal IT systems.

 

Wide acceptance of the use of Internet-based transactions may be hindered due to privacy concerns and privacy breaches.

 

Consumers have significant concerns about secure transmissions of confidential information, especially financial information, over public networks like the Internet. This remains a significant obstacle to general acceptance of e-commerce and certain aspects of our business, such as our on-demand business. Advances in computer capabilities, new discoveries in the field of cryptography or other events or developments could result in compromises or breaches of security such as those that have generated widespread media attention. Continued high-profile cases of inadvertent and unauthorized disclosure of personal information could have the effect of substantially reducing the use of the Web for commerce and communications and therefore could adversely impact our long-term strategy for growth.

 

We may not be able to prevent unauthorized or premature disclosure of our future strategies, technologies and products, resulting in competitive disadvantage.

 

We have established a range of IT security standards and organizational communication protocols to help ensure that internal, confidential communications and information about sensitive subjects such as our future strategies, technologies and products are not improperly or prematurely disclosed to the public. There is no guarantee that the established protective mechanisms will work in every case. SAP’s competitive position could be compromised considerably if confidential information about the future direction of our strategies, technologies or products becomes public knowledge.

 

Financial Risks

 

Our liquidity and the valuation of our financial assets may continue to be adversely impacted by the global economic downturn.

 

We use global centralized financial management to control liquid assets, interest, and currencies with the goal of maintaining Group liquidity at a level that is adequate to meet our obligations. Most SAP companies are included in our central cash management system. High levels of liquid assets and marketable securities provide a strategic reserve, helping keep SAP flexible, sound, and independent. We have a syndicated credit line, and other bilateral credit lines on which we can draw if necessary. Due to the current global economic conditions and the credit markets in particular, refinancing conditions have become markedly more difficult for the banks, which result in less advantageous borrowing terms for businesses. We cannot therefore exclude the possibility that the

risk of increased financing expense could materially affect our financial position, results of operations and cash flows.

 

SAP’s investment policy is set out in our internal treasury guideline document, which is a collection of rules that apply globally to all companies in the Group. Among its stipulations is a requirement that we invest only in assets from investment grade rated issuers. The weighted average rating of our financial assets is between “A” and “A+”. We pursue a policy of cautious investment characterized by wide portfolio diversification with a variety of counterparties, predominantly short-term investments, and standard investment instruments. We cannot, however, exclude the possibility that the current financial crisis could negatively affect our assets.

 

Because we conduct our operations throughout the world, our results of operations may be affected by currency fluctuations.

 

Although the euro has been our financial and reporting currency since January 1, 1999, a significant portion of our business is conducted in currencies other than the euro. Approximately 64% of our consolidated revenue in 2008 was attributable to operations in non-euro member states and translated into euro. As a consequence, period-to-period changes in the average exchange rate in a particular currency versus the euro can significantly affect reported revenue and operating results. In general, appreciation of the euro relative to another currency has a negative effect on reported results of operations, while depreciation of the euro has a positive effect, although such effects may be short term in nature. We continually monitor our exposure to currency risk and pursue a company-wide foreign exchange risk management policy. We have in the past and expect to continue in the future to at least partly hedge such risks with certain financial instruments. There can be no assurance that our hedging activities, if any, will be effective. See “Item 11. Quantitative and Qualitative Disclosures about Market Risk — Foreign Currency Exchange Rate Risk.”

 

Our sales are subject to quarterly fluctuations and our sales forecast may not be accurate.

 

Our revenue and operating results can vary and have varied in the past, sometimes substantially, from quarter to quarter. Our revenue in general, and in particular our software revenue, is difficult to forecast for a number of reasons, including:

 

 

As many of our customers make and plan their IT purchasing decisions at or near the end of calendar quarters, and with a significant percentage of those decisions being made during the fourth quarter, even a small delay in purchasing decisions could have a material adverse effect on our results of operations. While our dependence on single, large scale sales transactions has decreased in recent years due to a relative increase in the number of license transactions concluded by SAP, mainly attributable to SAP’s strengthened focus on the small and midsize enterprises (SME) segment, there can be no assurance that our results will not be adversely affected by the loss or delay of one or a few large sales, which continue to occur especially in the large enterprise segment.

 

We use a “pipeline” system to forecast sales and trends in our business. Our sales personnel monitor the status of proposals, including the date when they estimate that a customer will make a purchase decision and the potential revenue from the sale. While this pipeline analysis may provide us with some guidance in business

planning, budgeting and forecasting, these pipeline estimates may not consistently correlate to revenue in a particular quarter and could cause us to improperly plan, budget or forecast. Because our operating expenses are based upon anticipated revenue levels and because a high percentage of our expenses are relatively fixed in the near term, any shortfall in anticipated revenue or delay in recognition of revenue could result in significant variations in our results of operations from quarter to quarter or year to year. A continued deterioration in global economic conditions would make it increasingly difficult for us to accurately forecast demand for our products and services, and could cause our revenue, results of operations and cash flows to fall short of expectations. We have increased over recent years, and plan to continue to increase in the future, the following expenditures:

 

 

Such future increases in expenditures will depend, among other things, upon economic conditions, ongoing results and evolving business needs. To the extent such expenses precede or are not subsequently followed by increased revenue, our quarterly or annual operating results would be materially adversely affected and may vary significantly from preceding or subsequent periods.

 

The market price for our ADRs and ordinary shares may be volatile.

 

The trading prices of our ADRs and ordinary shares have experienced and may continue to experience significant volatility. The current trading prices of the ADRs and the ordinary shares reflect certain expectations about the future performance and growth of SAP, particularly on a quarterly basis. However, our revenue can vary and has varied, sometimes substantially, from quarter to quarter, causing significant variations in operating results and in growth rates compared to prior periods. Any shortfall in revenue or earnings from levels projected by us quarterly or from projections made by securities analysts has had and could have an immediate and significant adverse effect on the trading prices of the ADRs or the ordinary shares in any given period. Additionally, we may not be able to confirm our projections of any such shortfalls until late in the quarter or following the end of the quarter because license agreements are often executed late in a quarter. Finally, the stock prices for many companies in the software sector have experienced wide fluctuations, which have often not been directly related to an individual company’s operating performance. The trading prices of our ADRs and ordinary shares have in the past and could in the future fluctuate in response to various factors including, but not limited to:

 

Many of these factors are beyond our control. In the past, companies that have experienced volatility in the market price of their stock have been subject to shareholder lawsuits including securities class action litigation. Any such lawsuits against us, with or without merit, could result in substantial costs and the diversion of management’s attention and resources, resulting in a decline in our results of operations and our stock price.

 

Our revenue mix may vary and may negatively affect our profit margins.

 

We generally license our software products for an upfront license fee based on the number and types of users or other applicable metrics. Maintenance fees are typically established based on a specified percentage of the license fee. Variances or slowdowns in our licensing activity may negatively impact our current and future revenue from maintenance and services since such maintenance and services revenues typically follow and are dependent upon software sales. Historically, the profit margin from our services arrangements is lower than that of our software sales. Any decrease in the percentage of our total revenue derived from software licensing could have a material adverse effect on our business, financial position, results of operations or cash flows.

 

We have introduced new licensing models such as on-demand and subscription models which typically result in revenue being recognized over time. Although revenue from such new models is still relatively insignificant, we expect it to grow in the future. A significant portion of the related cost of developing, marketing and providing our solutions to customers under such new models could be incurred prior to the recognition of revenue, thus impacting our profit margin in the short term.

 

Management’s use of estimates may affect our results of operations and financial position.

 

Our financial statements are based upon the accounting policies as described in Note 3 to our consolidated financial statements in “Item 18. Financial Statements.” Such policies require management to make significant estimates, assumptions and judgments that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported amounts of revenues and expenses. Facts and circumstances used by management in making estimates and judgments may change from time to time and may result in significant variations, including adverse effects on our results of operations or financial position.

 

Revenue recognition accounting pronouncements and other financial reporting standards may adversely affect our reported financial information.

 

We regularly monitor our compliance with all of the financial reporting standards and any new pronouncements that are relevant to us. Findings of our monitoring activity or the pronouncement of new financial reporting standards may require us to change our revenue recognition or other financial reporting policies, to alter our operational policy to reflect new or amended financial reporting standards, or to restate our published financial reporting information. We cannot exclude the possibility that this may have a material impact on our financial position and results of operations. Our significant accounting policies are described in Note 3 to our consolidated financial statements in “Item 18. Financial Statements.”

 

The cost of derivative instruments for hedging of share-based compensation plans may exceed the benefits of those arrangements.

 

To reduce the volatility of the income statement impact of our share-based payment programs, we use derivative instruments to hedge risks resulting from future cash flows associated with STAR (stock appreciation rights) and SAP SOP (SAP stock option plan) plans. We cannot exclude the possibility that the expense of hedging the STAR and SOP plans will exceed the related benefits or that a decision not to hedge a particular cash flow stream will prove to be disadvantageous.

Project Risks

 

Customer implementation and installation of our products involves significant resources and is subject to significant risks.

 

Implementation of SAP software is a process that often involves a significant commitment of resources by our customers and is subject to a number of significant risks over which we may have little or no control. These risks include in particular:

 

 

Some of our customers have incurred significant third-party consulting costs and experienced protracted implementation times in connection with the purchase and installation of SAP software products. In addition, the success of new SAP software products introduced by us may be adversely impacted by the perceived or actual time and cost to implement the SAP software products. We cannot guarantee that we can reduce or eliminate protracted installation or significant third-party consulting costs, that shortages of our trained consultants will not occur, or that our costs to perform installation projects will not exceed the fees we receive when fixed fees are charged by us. Therefore, unsuccessful customer implementation projects could result in claims from customers, harm SAP’s reputation, and cause a loss of future revenues.

 

Product Risks

 

We depend on technology licensed to us by third parties, and the loss of this technology could delay implementation of our products or force us to pay higher license fees.

 

We license numerous third-party technologies that we incorporate into our existing products, on which, in the aggregate, we may be substantially dependent. There can be no assurance that the licenses for such third-party technologies will not be terminated, that the licenses will be available in the future on terms acceptable to us or that we will be able to license third-party software for future products. In addition, we may be unable to renegotiate acceptable third-party license terms to reflect changes in our pricing models. While we do not believe that one individual technology we license is material to our business, changes in or the loss of third-party licenses could lead to a material increase in the costs of licensing or to SAP software products becoming inoperable or their performance being materially reduced, with the result that we may need to incur additional development or licensing costs to ensure continued performance of our products. The risk increases if we acquire a company or a company’s intellectual property assets that have been subject to third-party technology licensing and product standards less rigorous than our own. We cannot exclude the possibility that adverse effects may result from a product of a business we acquire.

 

Undetected errors, shortcomings in our security features or delays in new products and product enhancements may result in increased costs to us and delayed demand for our products.

 

To achieve customer acceptance, our new products and product enhancements often require long development and testing periods. These development efforts are subject to multiple risks. For example,

scheduled market launches can be delayed and products may not completely satisfy our stringent quality standards or meet customer expectations, market needs, or comply with local standards and requirements. Generally, first releases are licensed to a controlled group of customers after a validation process. New products and product enhancements may contain a number of undetected errors, or bugs, or prove incapable of high volume data processing when they are released. There can be no assurance that all errors and requirements can be corrected to the customer’s satisfaction. As a result, we may be faced with customer claims for cash refunds, damages, replacement software or other concessions. The risk of errors and their adverse consequences may increase as we seek to introduce a variety of new software products simultaneously. Significant undetected errors or delays in introducing new products or product enhancements could affect market acceptance of SAP software products, and any such events could have a material adverse effect on SAP’s financial condition, cash flow, results of operations and reputation.

 

The use of SAP software products by customers in business-critical applications and processes and the relative complexity of some of our software products create the risk that customers or other third parties may pursue warranty, performance or other claims against us for actual or alleged failures of SAP software products, the provision of services or application hosting. We have in the past been, and may in the future continue to be, subject to such warranty, performance or other similar claims.

 

In addition, certain of our Internet browser-enabled products include security features that are intended to protect the privacy and integrity of customer data. Despite these security features, our products may be vulnerable to break-ins and similar problems caused by Internet users, such as hackers bypassing firewalls and misappropriating confidential information. Such break-ins or other disruptions could jeopardize the security of information stored in and transmitted through the computer systems of our customers. Addressing problems and claims associated with such actual or alleged failures could be costly and could have a material impact on our operations.

 

Although our agreements generally contain provisions designed to limit our exposure as a result of actual or alleged failures of SAP software products or the provision of services, such provisions may not cover every eventuality or be effective under applicable law. Any claim, regardless of its merits could entail substantial expense and require the devotion of significant time and attention by key management personnel. The accompanying publicity of any claim, regardless of its merits, could adversely affect the demand for our software and our reputation.

 

If we are unable to keep up with rapid technological changes, we may not be able to compete effectively.

 

Our future success depends in part upon our ability to:

 

 

There can be no assurance that we will be successful in anticipating and developing product enhancements or new solutions and services to adequately address changing technologies and customer requirements, that we will bring new solutions, solution enhancements or services to market in advance of our competitors or that we will be able to generate enough revenues to offset the significant research and development costs we incur in bringing these products and services to the market. We may fail to anticipate and develop technological improvements, to adapt our products to technological change, changing country-specific regulatory requirements, emerging industry standards and changing customer requirements or to produce high-quality products, enhancements and releases in a timely and cost-effective manner in order to compete with applications and other technologies offered by our competitors.

Our SAP NetWeaver platform strategy may not succeed or may make certain of our products less desirable.

 

Since the introduction of the SAP NetWeaver platform, we have been executing on our application platform vision. While we remain an enterprise application provider, the objectives of our platform strategy are to decrease the cost of integration, enable process flexibility and innovation, and help extend our partner ecosystem.

 

With solutions built on the SAP NetWeaver platform, we are targeting to enhance our position in the enterprise software industry by extending core applications.

 

To promote a broad adoption of the SAP NetWeaver platform, we are working with certified third-party independent software vendors (ISVs) that use SAP NetWeaver as a basis to develop and offer their own certified solutions. The continued success of the SAP NetWeaver technology platform depends critically on our maintaining a dynamic network of ISVs developing their own business applications for SAP NetWeaver. Any ISV-developed solutions with significant errors may reflect negatively on our reputation and thus indirectly impede our own business operations. In addition, as with any open platform design, the greater flexibility provided to customers to use data generated by non-SAP software may reduce customer demand for certain of our software products. The failure to receive acceptance from customers of the SAP NetWeaver platform, development by competitors of superior technology or significant errors in the solution could have a material adverse impact on our revenues, earnings and results of operations.

 

See Item 4. “Information about SAP — Description of the Business — Evolution of SAP Solutions,” for a more detailed description of SAP NetWeaver.

 

Other Operational Risks

 

We are subject to claims and lawsuits against us that may result in adverse outcomes.

 

We are subject to a variety of claims and lawsuits. Adverse outcomes in some or all of the claims pending against us might result in significant monetary damages or injunctive relief against us that could adversely affect our ability to conduct our business. While management currently believes that resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on our business, financial position, income or cash flows, litigation and other claims are by their nature subject to uncertainties, and management’s view of these matters may change in the future. Actual outcomes of litigation and other claims may differ from the judgments made by management in prior periods, which could result in a material adverse impact on our financial position and results of operations, as well as SAP’s reputation. See Note 24 to our consolidated financial statements in “Item 18. Financial Statements” for more information.

 

Third parties may claim we infringe their intellectual property rights, which could result in damages being assessed against us and our ability to use certain technologies being limited in the future.

 

Third parties have claimed and may claim in the future that we have infringed their intellectual property rights. Our software products have been, and we believe will increasingly be, subject to such claims as the number of products in our industry segment grows, as we expand our products into new industry segments and as the functionality of products overlap. Any claims, with or without merit, could preclude us from utilizing certain technologies in our products, be time-consuming, result in costly litigation, require us to pay damages to third parties, require us to enter into royalty and licensing arrangements on terms that are not favorable to us, cause product shipment delays, subject our products to an injunction, require a complete or partial re-design of the relevant product, result in delays by customers in making spending decisions, or damage our reputation.

Additionally, the use of open-source software has become more prevalent in the development of software solutions in the software industry. Accordingly, we are selectively embedding in our software certain third-party open-source software components, which include software code subject to their respective open-source licenses that may require that the code be freely transferable. There can be no assurance that, in the future, a third party will not assert that our products or the third-party software we deploy must be made publicly available under the terms of an open-source license, resulting in the loss of our proprietary advantage in the affected product.

 

If we acquire other companies, we may not be able to integrate their operations effectively and, if we enter into strategic alliances, we may not work successfully with our alliance partners.

 

To complement or expand our business, we have made and expect to continue to make acquisitions of additional businesses, products and technologies. In addition, we have entered into, and expect to continue to enter into, a variety of alliance arrangements. Our current strategy for growth includes, but is not limited to, the acquisition of companies and businesses with the aim of strengthening our geographic reach, broadening our offerings in particular industries, or complementing our technology portfolio. Management’s negotiation of potential acquisitions or alliances, and management’s integration of acquired businesses, products or technologies could divert its time, focus and resources. In addition, some transactions in which we may encounter risks include:

 

 

In addition, acquisitions of additional businesses may require an immediate charge to income for any in-process research and development costs of companies being acquired and amortization costs related to certain tangible and intangible assets that are acquired. Ultimately, certain acquired businesses may not perform as anticipated, resulting in charges for the impairment of goodwill and other intangible assets. Such write-offs and amortization charges may have a significant negative impact on operating margins and net income in the quarter in which the business combination is completed and subsequent periods. In addition, we have entered and expect to continue to enter into alliance arrangements for a variety of purposes including the development of new products and services. There can be no assurance that any such products or services will be successfully developed or that we will not incur significant unanticipated liabilities in connection with such arrangements.

We may not be successful in overcoming these risks or any other problems encountered in connection with any such transactions and may therefore not be able to receive the intended benefits of those acquisitions or alliances.

 

We may not be able to adequately obtain, license or enforce intellectual property rights.

 

We seek to protect our proprietary rights through a combination of applicable trade secret, copyright, patent and trademark laws, license and non-disclosure agreements and technical measures. All of these measures afford only limited protection and our proprietary rights could be challenged, invalidated, held unenforceable, or otherwise circumvented. Some proprietary rights may be vulnerable to disclosure or misappropriation by employees, partners, or other third parties. Despite our efforts, there can be no assurance that these protections will be adequate to prevent third parties from obtaining, using, or selling what we regard as our proprietary technology and information without authorization. There can also be no assurance that third parties will not independently develop technologies that are substantially equivalent or superior to our technology. Also, it may be possible for third parties to reverse engineer or otherwise obtain and use technology and information that we regard as proprietary. Accordingly, we might not be able to protect our proprietary rights against unauthorized third-party copying or utilization, which could adversely affect our competitive position and result in reduced sales. Any legal action we bring to enforce our proprietary rights could be costly, distract management from day-to-day operations, and lead to claims against us, which could adversely affect our operating results. In addition, such enforcement actions could involve a partner or vendor and adversely affect our ability, and our customers’ ability, to access that partner or vendor’s products. In addition, the laws and courts of certain countries may not offer effective means to enforce our intellectual property rights.

 

We may not be able to secure our business operations against disruption and to safeguard our assets.

 

We attach great importance, as a software company, to securing our business operations against disruption and to safeguarding our assets. We have a number of measures in place to ensure that our data and information technology, our physical assets, and our organization are secure against attack from without and within. There is nevertheless a risk that someone might misuse or steal property, plant, or equipment or gain unauthorized access to our facilities and to sensitive material, and might use such material to SAP’s detriment. Any such misuse, stealing or other security breach could negatively impact our assets, finances, or income.

 

Our insurance coverage may not be sufficient to avoid negative impacts on our financial position, results of operations and cash flows resulting from the settlement of claims.

 

We maintain adequate insurance coverage for protection against a diverse portfolio of risks. Our objective is to ensure that financial effects of risk occurrences are excluded or limited to the extent practicable at reasonable cost. Despite these measures, certain categories of risks are not currently insurable at reasonable cost. Even if we obtain insurance, our coverage may be subject to exclusions that limit or prevent our indemnification under those insurance policies. Further, we cannot guarantee the ability of the insurance companies to meet their claims liabilities. If this risk occurs, it may result in significant adverse impact on our financial position, results of operations and cash flows.

 

We may incur losses in connection with venture capital investments.

 

In the past we acquired and expect in the future to continue to acquire equity interests in technology-related companies. Many of these enterprises currently generate net losses and require additional capital outlay from their investors. Changes to planned business operations may possibly affect the performance of companies in which SAP holds investments, and that could negatively affect the value of our investments. Moreover, under German tax law, capital losses and impairments of equity securities are not tax-deductible, which may negatively affect our effective tax rate.

Our legal corporate name is SAP AG. SAP AG is translated in English to SAP Corporation. SAP AG, formerly known as SAP Aktiengesellschaft Systeme, Anwendungen, Produkte in der Datenverarbeitung, was incorporated under the laws of the Federal Republic of Germany in 1972. Where the context requires in the discussion below, SAP AG refers to our predecessors, Systemanalyse und Programmentwicklung GbR (1972-1976) and SAP Systeme, Anwendungen, Produkte in der Datenverarbeitung GmbH (1976-1988). SAP AG became a stock corporation (Aktiengesellschaft) in 1988. Our principal executive offices, headquarters and registered office are located at Dietmar-Hopp-Allee 16, 69190 Walldorf, Germany. Our telephone number is +49-6227-7-47474.

 

In 2008, we acquired Business Objects. With that acquisition, we expanded our core solutions to address the needs of the business user. In addition, as part of our legal entity rationalization activities, we have integrated certain Business Objects subsidiaries into the following significant SAP subsidiaries: SAP Deutschland AG &Co. KG, SAP (Schweiz) AG, SAP Nederland B.V., SAP Brasil Ltda and SAP Japan Co., Ltd.

 

For a discussion of our principal capital expenditures and divestitures, see “Item 4. Description of Property — Capital Expenditures.

 

We intend to make this Annual Report on Form 20-F and other periodic reports publicly available on our Web site (www.sap.com) without charge immediately following our filing with the SEC. We assume no obligation to update or revise any part of this Annual Report on Form 20-F, whether as a result of new information, future events or otherwise, unless we are required to do so by law.

Overview

 

SAP was founded in 1972. Our core business is selling licenses for software solutions and related support services. In addition, we offer consulting, training and other services for our software solutions. We develop and market our products and services in close cooperation with independent business partners.

 

As of December 31, 2008, we had more than 82,000 customers in over 120 countries and employed more than 51,500 individuals at locations in more than 50 countries in the EMEA, Americas, and Asia Pacific Japan regions. We are headquartered in Walldorf, Germany. As of December 31, 2008, SAP consisted of SAP AG and its network of 187 subsidiaries. We have three lines of business that constitute our reportable segments: product, consulting and training. We tailor our solutions to serve the needs of customers in 25 specific industries, for example banking, insurance, chemicals, healthcare, retail, consumer products, and the public sector. For a discussion of our geographic regions and industry sectors, see “Item 4. Information about SAP — Description of the Business — Revenue by Industry Sector,” and Note 28 to our consolidated financial statements in “Item 18. Financial Statements.”

 

The Company is listed on several exchanges, including the Frankfurt Stock Exchange and the New York Stock Exchange (NYSE) under the symbol “SAP.”

 

Evolution of SAP Solutions

 

With the vision to create standard application software for real-time business processing, we introduced the first generation of our software in 1973, initially consisting of a financial accounting application.

 

The SAP R/2 system, our second generation of application software, was then developed for mainframe, designed to handle different languages and currencies and to integrate many aspects of business, including distribution centers, field operations centers, corporate headquarters, and sales offices.

We recognized the demand for more decentralized business software solutions and designed the initial version of the SAP R/3 system, moving from mainframe computing to the three-tier architecture of database, application and user interface. Introduced in 1992, SAP R/3 quickly became the category leader in ERP systems. During the 1990s, we introduced several solutions built on SAP R/3 to provide capabilities tailored to specific industries.

 

In the early 2000s, we continued to expand our product offerings to include the SAP Business Suite family of business applications that help enterprises improve business operations ranging from supplier relationships, production and warehouse management to sales, administrative functions and customer relationships. We introduced the successor to SAP R/3 called the SAP ERP application, which is a component of SAP Business Suite.

 

We began in 2003 to adapt our portfolio of products to the new environment, mapping a route to a flexible new enterprise service-oriented architecture for software. A service-oriented architecture (SOA) is an industry term referring to a software architecture that supports the design, development, identification, and consumption of standardized services across the enterprise, thereby improving reusability of software components and creating agility in responding to change. The term “service” as used in “service-oriented architecture” means a Web service that is a self-contained functionality that can be accessed by applications across a network using mechanisms based on Web standards. An “enterprise service,” defined by us and our partners and customers, is a series of Web services combined with business logic that can be accessed and used repeatedly to support a particular business process. Aggregating Web services into business-level enterprise services provides more meaningful building blocks for composing applications to automate enterprise-scale business scenarios.

 

One key benefit of enterprise service-oriented architecture, or enterprise SOA, is the ability to rapidly map complex business processes with reusable enterprise services. Companies can use enterprise services to flexibly compose or alter applications as rapidly as their markets and business process needs change. Our platform for realizing enterprise SOA is the SAP NetWeaver technology platform. Together with the SAP NetWeaver technology platform and a repository of enterprise services, SAP ERP can serve as a business process platform, which is the unified environment that companies implement to perform their core business processes efficiently and to reorganize, extend, and create new business processes flexibly. In other words, SAP helps organizations establish their unique business process platform by delivering ready-to-execute software for business processes, reusable enterprise services that enable business process steps, and the technology to compose and deploy software that enables flexible business processes.

 

In 2007, SAP launched a new product, SAP Business ByDesign, a comprehensive, adaptable, on-demand business software solution for midsized companies. SAP Business ByDesign’s availability is restricted in a limited number of countries; we intend to introduce other deployment modes.

 

In recent years, SAP has built a portfolio of solutions addressing the needs of the business user. Business users comprise a segment of the global workforce that has historically remained outside of the enterprise software mainstream. In their roles as decision makers, business users are generally not directly involved in more structured business processes such as customer relationship management or supply chain management — although their roles often involve the supervision and analysis of these processes. In most cases, they operate in a less structured environment, drawing on information resources as diverse as spreadsheets and Internet sites. However, their efforts can be enhanced by tools and applications designed to help organize and manage information to optimize everyday business activities and improve the way employees work. To meet the needs of this group of users, SAP has delivered several enhancements to its core applications, such as embedded analytics in the SAP Business Suite. We have also developed new products to address the needs of such business users who wish to take advantage of enterprise information. Examples of such products include Duet. Introduced in 2006, Duet is the first product jointly developed and supported by SAP and Microsoft. Duet enables employees to interact quickly and easily with selected SAP business processes and data without leaving the familiar Microsoft Office environment. SAP also acquired Business Objects in early 2008. SAP and Business Objects quickly

embarked on a road map to transform their software for business users into the emerging market for business performance optimization — which helps organizations see and respond to business events in real time.

 

Mission and Strategy

 

Trends and Orientation

 

In the face of continuous, accelerated change in the business environment, executives must find ways to contend with shifting pressures to ensure sustained competitiveness and profitable growth. These rapid changes are driven by key transformational forces, such as global economic uncertainty, hypercompetition, a rising consumer power, and the quest for sustainability. Recently, the pervasive effect of these pressures on the global business environment has demonstrated that businesses have become more interconnected than ever before. Business models are evolving from linear value chains to collaborative networks with the customer at the center. Within the context of these business networks, each business focuses on what it does best while working closely with other companies to improve the overall customer experience. The business network is a new source of competitive advantage for companies because it increases and speeds innovation — not only between companies, but also with the end customer — and allows risks to be managed and shared with partners and suppliers.

 

The sharing of risks, knowledge, and processes is typical of collaborative relationships in a business network, and it benefits all of the collaborators. However, many companies are reluctant to adopt this approach because their strategic planning is isolated from their business operations. Technology solutions can help them close the gap between strategy and execution by linking decision-making systems to integrated, end-to-end processes that can be easily extended to business partners.

 

Mission

 

It is part of our mission to help customers resolve such difficulties and thereby enable them to achieve profitable, sustainable growth. To succeed, we wish to build from our established leading position in the business software market and accelerate business and IT innovation for firms and industries. In striving for this goal, we are also contributing to global economic development on a grand scale.

 

We offer solutions that help companies of all sizes close the gap between strategy and execution. They include the SAP Business Suite family of business applications, SAP NetWeaver, the SAP BusinessObjects portfolio, SAP’s offerings for small businesses and midsize companies, and solutions to help customers realize their sustainability goals. Our portfolio of SAP software and services can help customers attain the visibility, efficiency, and flexibility that enables them to respond to changes in the business environment with more agility and effect and capture the full benefits of business networks.

 

At the heart of our strategy stands customer value. We intend to widen the market we address with more attractive offerings for our customers including, for example, new data analysis and decision support solutions for business users, and software solutions scaled to small businesses and midsize companies.

 

Strategy for Growth

 

Our traditional core customer base includes many large global enterprises as well as midsize companies. Such global companies use the SAP Business Suite applications, SAP Business All-in-One solutions, or SAP Business One to automate their business transactions, enabling better management and governance. In our traditional core business, we seek to win a greater share of our customers’ wallet. We also aim to win new customers, for instance companies that have been using custom software.

Our portfolios of solutions for 25 industries are a crucial factor in our success. In 2008, we focused on strategic industries with exceptional growth potential, including, for example, banking, retail, communications, and the public sector.

 

Delivering solutions for business users — process owners and decision makers — is a central element of our strategy for growth. In 2008, we concluded the acquisition of Business Objects and expanded our core solutions to address what we identify as the three key needs of decision makers in business. First, they need to make decisions more effectively based on a broader array of structured and unstructured data from sources both inside and outside the enterprise. Second, business users need better tools and applications to support collaborative decision making. Third, business users seek to build competitive advantage by creating and managing business networks with partners, suppliers, and customers. Our products focus on these needs to help individuals, teams, and companies better collaborate through business networks.

 

The SAP Business ByDesign solution is designed to open up a new segment of the global market for us, smaller businesses with between 100 and 500 employees. They have distinctly different software needs: Getting their new IT solution running quickly, at minimum risk and predictable cost, is often more important for these customers than specific functional depth. Many such companies do not believe that their needs can be met by traditional software offerings or by the available on-demand solutions.

 

The following measures will help us realize our full growth potential:

 

We offer a portfolio of business software, technology, and related services and support to meet the long-term requirements and mission-critical needs of our customers. The main challenges facing our customers are the current global economic recession, hypercompetition, rapidly shifting consumer demand, the impact of international economic integration, the accelerating pace of innovation, and the quest for sustainability. To be equal to these challenges, companies and public administrations must link their strategic planning to their business operations, closing the gap between strategy and execution. This is where information technology solutions can help. They can link decision-making systems to integrated, end-to-end processes that can be easily extended to business partners.

 

Our portfolio of SAP software and services can help customers respond to changes in the business environment with more agility and effect, better capture the benefits of business networks, and thus grow profitably. The goal at the heart of our portfolio of software and services is therefore the best possible combination of efficiency, insight, and flexibility:

 

 

In addition, at the end of October we started our Best-Run Now initiative, with special solution offerings to help businesses of all sizes in difficult times of economic uncertainty. It draws together software and service products to offer solutions that can help companies rapidly make a difference in areas such as liquidity, business intelligence (BI), procurement, and people management. Flexible financing options and support for implementation make it easier for customers to invest speedily.

 

We offer the following products and services:

 

 

 

Solutions for Large Enterprises

 

SAP Business Suite

 

The flagship of our large-enterprise offerings is SAP Business Suite software. SAP Business Suite applications provide end-to-end business process support, reporting, and analytics. Its core applications, industry applications and supplementary applications are powered by the SAP NetWeaver technology platform. Companies use this platform to design, compose, or adapt processes to address the unique needs in their industry.

 

Core SAP Business Suite Applications

 

The cornerstone of SAP Business Suite is the SAP ERP application, an integrated enterprise resource planning application. SAP ERP addresses the core business software requirements of midsize businesses and large organizations around the world — in all industries and sectors. SAP ERP includes four individual solutions that support key functional areas: SAP ERP Financials, SAP ERP Human Capital Management, SAP ERP Operations, and SAP ERP Corporate Services.

 

The other components of SAP Business Suite are:

 

 

 

We first delivered enhancement packages providing regular updates for SAP ERP in 2007. This unique delivery model, which we introduced for the entire SAP Business Suite in 2008, makes it simpler and faster for customers running SAP Business Suite applications to adopt new product functions, industry-specific features, and enterprise services. It also shields customers from the complexity of multiple upgrades and offers them an opportunity to reduce information technology (IT) costs by consolidating their systems on a single platform and reducing the number of separate software instances that need to be maintained.

 

Our enhancement package model also gives customers planning security. The SAP Business Suite applications are, and will for the next several years remain, a stable platform on which customers can, if they wish, regularly update their system. The packages provide a reliable software enhancement process that alleviates disruption and minimizes costs.

Industry Solutions for Large Enterprises

 

SAP Business Suite delivers distinct solution portfolios for 25 different industries, including for example banking and insurance, chemicals, healthcare, retail, consumer products, and the public sector. Each industry solution portfolio delivers powerful, industry-specific functions along with best practices we have developed with our customers. Our industry solutions are designed to meet the needs of the major industry sectors listed below. We also offer solutions for numerous subsectors.

 

 

Solutions for Small Businesses and Midsize Companies

 

SAP offers three solutions for small businesses and midsize companies that are easy to implement and use. They are designed to best fit the needs of small businesses and midsize companies that need solutions to help them manage customer relationships, supplier relationships, financial operations, and supply chains.

 

SAP Business All-in-One

 

Midsize companies with industry-specific requirements can buy SAP Business All-in-One solutions from our channel partners. Customers can deploy SAP Business All-in-One on-premise or hosted by an SAP partner. If they choose hosting by an SAP partner, the software is operated, maintained, and monitored by experts in an external data center. The customer does not have any maintenance and update work — or any upfront capital investment. SAP Business All-in-One is a complete package built on SAP ERP and SAP CRM, including SAP Best Practices and preconfigured business scenarios specially packaged for industry-specific implementation and use by midsize companies. Approximately 1,100 partners also offer 660 qualified SAP Business All-in-One solutions with extra functions for specific microvertical markets and specific geographic regions. The SAP Business All-in-One fast-start program provides the complete package together with an online solution configurator and special tools for rapid live implementation. It is currently the choice of approximately 13,450 customers in 50 countries.

 

SAP Business ByDesign

 

SAP Business ByDesign is specially designed for businesses with 100 to 500 employees that wish to benefit from a powerful enterprise solution but do not wish to run an extensive IT infrastructure. It enables companies to manage different business processes in harmony on one system. They can choose which business processes to include, and add more as and when they are required. SAP Business ByDesign offers preconfigured best-practice process support for financials, CRM, people management, procurement, project management, and the supply

chain through a single, consistent user interface. This solution is hosted on the Internet by SAP and provided to customers in on-demand mode for a monthly fee. It is a completely new business model for SAP. Currently it is available in China, France, Germany, India, the United States, and the United Kingdom. We are controlling the ramp-up, carefully selecting new customers and working in close collaboration with them and with partners, and feeding their experience back into product development.

 

SAP Business One

 

The SAP Business One application is for small businesses, typically with fewer than 100 employees and 30 users, that are looking for an affordable, single system to cover core operations such as financials, sales, and customer support. Customers can deploy SAP Business One on-premise or hosted by a partner, typically in less than one month. The solution is sold and supported through a global network of approximately 1,200 certified partners. There are over 550 extensions available from independent software vendors (ISVs) and more than 40 country versions. By the end of 2008, SAP Business One had a base of approximately 22,600 customers.

 

SAP BusinessObjects Portfolio

 

Our solutions for business users help our customers toward broader insight, aligned strategy, and risk- and performance-optimized decisions. They close the gap between strategy and execution.

 

SAP BusinessObjects Solutions

 

 

Additional Solutions for Business Users

 

Originally announced in April 2005, Duet software provides seamless access to SAP business process software and data using Microsoft Office on the business user’s desktop. Duet is the result of collaboration between Microsoft and us, and is our first joint product. In 2008, SAP and Microsoft deepened the relationship and jointly enhanced Duet with additional business scenarios, platform capabilities, and development tools.

 

Alloy software, which we developed with IBM, enables business users to access SAP software and information from within the familiar IBM Lotus Notes environment.

Business Intelligence Solutions for Midsize Companies

 

The SAP BusinessObjects portfolio comprises BI solutions for small businesses and midsize companies. The solutions are specifically designed to address the needs of businesses in that segment.

 

The Crystal Reports family of offerings is specially designed for small business that need a stable, easy reporting solution for all areas in their organization — a solution that can draw on virtually any source of data. Customers can use proven functions for designing, managing, visualizing, delivering, and scheduling reports. We can deliver it in on-premise mode — either on a server or as a single desktop application — or in on-demand mode.

 

SAP BusinessObjects Edge BI software is powerful, integrated BI software for midsize companies. It delivers solutions for operational reports, ad-hoc reporting and analysis, and dashboards, with powerful data integration and quality. Customers can start with options to address their immediate BI requirements and build their solution as their needs grow — at a low investment cost.

 

The SAP NetWeaver Technology Platform

 

IT organizations can use SAP NetWeaver to run business software, such as SAP Business Suite applications and SAP-certified partner solutions, from a single, unified technology platform. As the technical foundation for a service-oriented architecture (SOA), SAP NetWeaver helps IT organizations evolve their existing IT infrastructure into a business process platform and enhance the performance of their business processes.

 

It unifies numerous middleware functions into a single software environment to reduce IT complexity and increase business agility. The platform supports open standards, so companies can use it to integrate heterogeneous systems and data from diverse SAP and non-SAP sources. It can help organizations make their business processes reliable, secure, and scalable. SAP NetWeaver is a technology platform for modular composition of applications and for the delivery of solutions.

 

Solutions for Sustainability

 

We aim to enable companies to execute their sustainability strategies using SAP software solutions, thereby making a contribution to growing their corporate value, protecting their brands, and mitigating compliance risks. We see sustainability as anchored in a holistic approach to risk and opportunity from social, environmental, and economic perspectives. With our SAP BusinessObjects GRC solutions, we help customers better manage risk and compliance, especially with regard to financial processes, environmental concerns, and securing the global supply chain. Additionally, SAP Business Suite software provides business process efficiency, flexibility and insight, representing a sound foundation for an organization’s sustainability endeavors.

 

These are solutions that are specifically oriented to sustainability:

 

 

Because SAP applications are integrated, they can efficiently support compliance. Integration with SAP and non-SAP software gives businesses increased visibility, supporting compliance functions across the enterprise and its network of business partners.

 

SAP Services Portfolio

 

The SAP Services organization provides a broad array of methodologies, tools, and certified partner offerings to meet our customers’ business needs. The SAP Services portfolio includes consulting, education, support, custom development, and managed services. The offerings are categorized into software-related services, and professional services and other services. Software-related services are support services provided by the SAP support units (SAP Active Global Support, SAP BusinessObjects — Customer Assurance, and SME Services) and custom development provided by the SAP Custom Development organization. Our professional services and other services are consulting, education, and managed services.

 

SAP Services has a local presence in more than 50 countries and runs 77 training centers, seven global support centers, and 10 custom development centers in Europe, Asia, and the Americas. The 20,000 SAP service experts provide 24x7 support for customer and partner SAP solution portfolios at a global level.

 

Software-Related Services

 

The SAP Custom Development organization develops custom solutions on the SAP platform that are tailored to meet customers’ unique business requirements. The service portfolio includes extending and enhancing existing SAP solutions and building new business solutions.

 

The SAP support units offer a range of services to support our customers before, during, and after implementation of our software solutions. We provide around-the-clock technical support. Moreover, the organization offers proactive, preventive support services to protect and enhance our customers’ current investments in SAP technology and applications. SAP Enterprise Support services are a key element in our offering, providing customers with holistic IT landscape support over the full life cycle of their application with the aim of optimizing the solution’s operation. This covers a wide range of software components: SAP products, custom developments (including developments released by SAP), and partner solutions. SAP Enterprise Support aims to reduce the total cost of operation for our customers by delivering accelerated innovation, protection of investment, and mission-critical support as a solution provider based on defined service level agreements. SAP Product Support, for our largest enterprise customers, provides the tools and methodologies to take charge of day-to-day support needs and to manage IT landscape holistically over the life cycle of SAP applications. From implementation to operation to change management, it helps to ensure that SAP solutions contribute to the business goals of our customers. The SAP Safeguarding support option helps our customers mitigate the technical risks of an implementation or upgrade and ensure smooth go-live and ongoing operations. The SAP MaxAttention support option delivers to our largest enterprise customers technical account management for their entire solution life cycle and implementation of end-to-end solution operations.

 

On-Demand Software Services

 

The market defines on-demand as a software delivery format in a one-to-many framework (one solution served to many customers) that can include different pricing options such as license fees with, optionally, service fees, or recurring subscription fees. It complements the traditional model by giving software vendors an

additional format in which to market software and create sustainable value for customers. Customers now have a choice of deployment modes (on premise and off premise) and of payment models (perpetual license with, optionally, recurring service fees or recurring subscription fees).

 

SAP on-demand software services focus on delivering the right solutions to meet customers’ needs. It is therefore crucial that our customers are able to choose between different deployment options to suit their different business needs. In the large enterprise space, we are currently seeing customers adopting on-demand models for business processes, such as for sales automation processes connected with on-premise ERP software functions, that are less mission-critical than, for example, core financial processes. As a result, we expect gradual adoption of on-demand solutions to be the norm, leading to hybrid landscapes with integration of on-demand and on-premise solutions. These adoption patterns are a key driver in our on-demand strategy — evidenced, for example, by our SAP CRM and SAP E-Sourcing on-demand solutions, and the SAP BusinessObjects Information OnDemand portal.

 

Professional Services and Other Services

 

The SAP Consulting organization offers planning, implementation, and optimization services for business solutions. We advise and support customers on designing business processes and IT infrastructure and help customers with project management and solution implementation and integration. We also help customers optimize solutions and IT landscapes for changing business needs.

 

The SAP Education organization provides the training, services, and tools required to assist SAP customers and partners in maximizing the value they can create with their SAP solutions. SAP Education offerings include training needs analysis, certification assessments, learning software and tools, and education in several delivery models, including classroom and e-learning.

 

The SAP Managed Services organization provides application management services and hosting services, running and managing SAP solutions on behalf of customers.

 

Newly Introduced Products and Product Versions

 

In 2008, we extended our solution portfolio, focusing primarily on increasing integration between the product lines to help our customers close the gap between strategy and execution. Working with our customers and partners, we created new solutions in all four core areas of our product portfolio: enterprise applications and industry solutions for large enterprises, the technology platform, solutions for small businesses and midsize companies, and applications for business users. We also made a number of strategic acquisitions to augment our portfolio of products.

 

Expanded Offerings for Enterprise Applications and Industry Solutions

 

SAP Business Suite applications and all SAP industry solutions were improved to adapt to the accelerating rate of change of the market and customer expectations:

 

 

 

SAP NetWeaver Technology Platform Enhanced

 

SAP NetWeaver helps companies standardize, consolidate, and optimize their IT landscape and develop innovative integrated business process solutions. With SAP NetWeaver, we enable IT departments to create a powerful business process platform based on the principles of SOA. Enhancements made to SAP NetWeaver in 2008 focus on helping our customers to simplify the way workers use IT, to accelerate the design and integration of applications for business processes, and to intelligently manage and access relevant data across the entire enterprise.

 

 

New Developments for Small Businesses and Midsize Companies

 

We delivered innovative developments for our customers in the small business and midsize company segment in 2008:

 

 

 

Broader Portfolio for Business Users

 

In 2008, we combined SAP applications for business users with Business Objects’ solutions to form a new SAP BusinessObjects portfolio of solutions. We expanded our applications and capabilities with innovative offerings to optimize enterprise performance management, promote good governance, risk management, and compliance, and improve enterprise-wide information flows.

 

 

 

Jointly developed with Microsoft, Duet software enables business users to use SAP-based data and business process software in the familiar Microsoft Office environment. In December 2008, we delivered a new Duet version for ramp-up, with extensions to all existing user processes and new capabilities for purchasing management, recruitment management, and workflow approvals. It comes with additional configuration tools for the system administrator and with more languages.

 

We developed the Alloy software in conjunction with IBM. It enables business users to access SAP software and information from within the familiar IBM Lotus Notes environment. Alloy is available from both companies from the first quarter of 2009.

As is common in the software industry, our business has historically experienced the highest revenue in the fourth quarter of each year, due primarily to year-end capital purchases by customers. Such factors have resulted in 2008, 2007, and 2006 first quarter revenue being lower than revenue in the prior year’s fourth quarter. We believe that this trend will continue in the future and that our revenue will continue to peak in the fourth quarter of each year and decline from that level in the first quarter of the following year.

We operate our business in three principal geographic regions, namely EMEA, which represents Europe, the Middle East and Africa, the Americas, which represents both North and South America, and Asia Pacific Japan (APJ), which represents Japan, Australia and other parts of Asia. We allocate revenue amounts to each region based on where the customer is located. See Note 28 to our consolidated financial statements in “Item 18. Financial Statements” for additional information with respect to operations by geographic region.

The following table sets forth, for the years indicated, the total revenue attributable to each of our three principal geographic regions:

 

 

EMEA. In 2008, 54% (2007: 53%) of our total revenues were derived from the EMEA region. Our total revenues in the EMEA region grew to €6,204 million or by 15% in 2008 (2007: 10%). The EMEA region revenue growth reflects a 17% (2007: 11%) increase from changes in volumes and prices and a 2% decrease from currency effects. Revenues in Germany, SAP’s home market, increased by 9% (2007: 5%) to €2,193 million in 2008 (2007: €2,004 million). Germany contributed 35% (2007: 37%) of EMEA’s total revenues, which is a slight decrease of 2 percentage points compared to 2007. The remainder of revenues for the EMEA region in 2008 originated mainly from the following countries: the United Kingdom, France, Switzerland, the Netherlands, Italy and Russia.

 

The number of our employees (full-time equivalents, or FTEs) in the EMEA region increased by 3,171 FTEs or 13%, from 23,654 as of December 31, 2007 to 26,825 as of December 31, 2008. This increase was mainly driven by the acquisition of Business Objects. In Germany, the number of FTEs increased by 6% to 15,582 as of December 31, 2008 compared to 14,749 as of December 31, 2007. See “Item 6. Directors, Senior Management and Employees — Employees.”

 

Americas. 33% (2007: 35%) of our 2008 total revenues were recognized in the Americas region. Revenues increased by 8% (2007: 6%) to €3,872 million in 2008. Revenues from the United States grew by 7% in 2008 (2007: 4%), which represents a growth of 14% (2007: 13%) from changes in volumes and prices and a 7% decrease from currency effects. The United States contributed 74% (2007: 76%) of our total revenues in the Americas region. The rest of the Americas region increased revenues by 14% (2007: 12%) to €990 million, which represents a growth of 20% (2007: 15%) from changes in volumes and prices and a 6% decrease from currency effects. These revenues were principally generated in Canada, Brazil and Mexico.

 

In the Americas region the FTEs increased by 27% from 10,629 as of December 31, 2007 to 13,457 at December 31, 2008. This increase was mainly driven by the acquisition of Business Objects.

 

APJ. In 2008, the Asia Pacific Japan region contributed 13% (2007: 12%) of our total revenues, with most of this revenue being derived mainly from the following major contributing countries: Japan, Australia, India, China and South Korea. In the Asia Pacific Japan region, revenues rose by 17% (2007: 15%) to €1,489 million in 2008. Japan increased by 15% (2007: 4%) to €515 million, which represents 35% (2007: 35%) of total revenues in the Asia Pacific Japan region. The Japan region revenue growth reflects a 6% (2007: 14%) increase from changes in volumes and prices and a 9% increase from currency effects. The rest of the Asia Pacific Japan region (Japan excluded) increased revenues by 18% (2007: 22%), which represents a growth of 26% (2007: 24%) from changes in volumes and prices and an 8% decrease from currency effects.

 

In the Asia Pacific Japan region, FTEs increased by 17% from 9,578 as of December 31, 2007 to 11,254 as of December 31, 2008. This increase was due principally to the acquisition of Business Objects.

We have identified six industry sectors to focus our product development efforts on the key industries of our existing and potential customers and to provide best business practices and specific integrated business solutions to those industries. We allocate our customers to an industry at the outset of an initial arrangement. All subsequent revenues from a particular customer are recorded under that industry sector. The following table sets forth the total revenues attributable to each of the six industry sectors for the years ended December 31, 2008, 2007, and 2006.

 

SAP AG primarily uses its worldwide network of subsidiaries to market and distribute SAP’s products and services locally. Those subsidiaries have entered into license agreements with SAP AG pursuant to which the subsidiary acquires the right to sublicense SAP AG’s products to customers within a specific territory. Under these agreements, the subsidiaries retain a certain percentage of the revenue generated by the sublicensing activity. We began operating in the United States in 1988 through SAP America, Inc., a wholly owned subsidiary of SAP AG. Since then, the United States has become one of our most important markets. In certain countries, we have established distribution agreements with independent resellers rather than with subsidiaries.

 

In addition to our subsidiaries’ sales forces, we have developed an independent sales and support force through value-added resellers unrelated to SAP who assume responsibility for the licensing, implementation and support of SAP solutions, particularly with regard to the SAP Business One application and qualified SAP Business All-in-One partner solutions. We have also entered into alliances with major system integration firms, telecommunication firms and computer hardware providers to offer certain SAP Business Suite applications.

 

We supplement certain of our consulting and support services through alliances with hardware and software suppliers, systems integrators and third-party consultants with the goal of providing customers with a wide selection of third-party competencies. The role of the alliance partner ranges from pre-sales consulting for business solutions to the implementation of our software products to project management and end-user training for customers and, in the case of certain hardware and software suppliers, to technology support.

 

Traditionally, our sales model has been to charge a one-time, up front license fee for a perpetual license to our software (without any rights to future products) which is typically installed at the customer site. We now offer our solutions in a variety of ways which include on-demand, hosted solutions, and subscription-based models. Although revenues from these new types of models currently are not material, we expect these revenues to increase in the future.

 

Our marketing efforts cover large, multinational groups of companies as well as small and midsize enterprises. We believe our broad portfolio of solutions and services enables us to meet the needs of customers of all sizes and across industries.

 

Capitalizing on the possibilities of the Internet, we actively make use of online marketing. Some of our solutions can be tested online via the Internet demonstration and evaluation system, which also offers special services to introduce customers and prospects to new solutions and services.

Partnerships and strategic alliances are a key element of our efforts to broaden the solutions and services offered to SAP customers and to extend the markets for our products and services. Our close collaboration with partners across the life cycle of a customer solution is a key element in enhancing customer satisfaction. We characterize our partnerships and strategic alliances into categories such as services, technology, software, hosting, content, education and support that together constitute what we refer to as the partner services network. Within most categories, our partners may achieve the status of a local or global partner. We expect our alliance partners to provide customers with joint strategic solutions. Our partners generally have a strong position in a particular line of business or cross-industry and complement the range of SAP solutions in these areas. Our partner network includes thousands of companies including independent software vendors (ISVs), systems integrators, and business process outsourcing (BPO) providers across all partner categories.

 

We have entered into agreements with a number of leading software, technology and services companies to cooperate and enable the software, technology and services offered by such suppliers to complement our software products and vice versa.

 

In May 2006, we announced the launch of a US$125 million global fund called the SAP NetWeaver Fund, which focuses on strategic investments in select companies that are committed to the SAP ecosystem and are building innovative solutions based on the SAP NetWeaver technology platform. To date, the fund has invested approximately one-fourth of the US$125 million in minority interests of six technology companies providing innovative solutions for various industries from manufacturing to life sciences. We account for these investments using the cost method unless we are able to significantly influence the operating and/or financial decisions of the investee, in which case we use the equity method of accounting.

 

SAP’s acquisition strategy is to acquire complementary application offerings and solutions through strategic and “fill-in” acquisitions. These acquisitions give SAP access to innovative technologies while enabling SAP to continue to focus on organic growth.

 

In 2008, we acquired the outstanding shares of two unrelated companies and the net assets of two other unrelated businesses that developed and/or distributed software that is complementary to our business. We have integrated the acquired businesses into the SAP operations and solution offerings. We have retained the majority of the employees from the businesses we acquired. The financial results of these acquired businesses have been included in our financial statements since the respective acquisition dates. The amount of in-process research and development we expensed in 2008 as a result of these acquisitions was immaterial.

 

In early 2008 we acquired Business Objects, a leading provider of business intelligence solutions. We have successfully integrated Business Objects with SAP. The acquisition cost, net of cash held by Business Objects, amounted to approximately €4.2 billion. The combination of Business Objects solutions with SAP technologies enables SAP to offer a unique portfolio of products that can give business users — process owners and decision makers in business — the transparency they need for effective decision making.

 

The acquisition of Visiprise, Inc. (Visiprise) in July 2008 exemplifies our fundamental acquisition strategy as mentioned above. Visiprise was a privately-owned software vendor that developed and distributed manufacturing execution systems. The acquisition of Visiprise was another step in our strategy of helping manufacturing organizations close the gap between operational planning and production execution.

 

Other than the Business Objects acquisition, the acquisitions made in 2008 were immaterial to us individually and in the aggregate. For further information, see Note 4 to our consolidated financial statements in “Item 18. Financial Statements.”

 

There were no public takeover offers by third parties with respect to our shares in 2008 or 2007.

We rely on a combination of the protections provided by applicable trade secret, copyright, patent, and trademark laws, license and non-disclosure agreements, and technical measures to establish and protect our proprietary rights in our products. For further details on risks related to SAP’s intellectual property rights, see “Item 3 Key Information — Risk Factors — Other Operational Risks.”

 

We may be dependent in the aggregate on technology that we license from third parties that is embedded into our products or that we resell to our customers. We have licensed and will continue to license numerous third-party software products that we incorporate into and/or distribute with our existing products. We endeavor to protect ourselves in the respective agreements by obtaining certain rights in case such agreements are terminated.

 

We are a party to certain patent cross-license agreements with certain third parties.

 

We are named as a defendant in various legal proceedings for alleged intellectual property infringements. See Note 24 to our consolidated financial statements in “Item 18. Financial Statements” for a more detailed discussion of these legal proceedings.

As of December 31, 2008, SAP AG was the holding company of 187 subsidiaries. Our subsidiaries perform various tasks such as the distribution of SAP’s products and providing SAP services on a local basis. Our primary research and development facilities, the overall group strategy and the corporate administration functions are concentrated at our headquarters in Walldorf, Germany.

 

The following table illustrates our most significant subsidiaries based on revenues as of December 31, 2008:

 

Our principal office is located in Walldorf, Germany, where we own and occupy approximately 420,000 square meters of office space including our facilities in neighboring St. Leon-Rot. We also own and lease office space in various other locations in Germany, totaling approximately 115,000 square meters, and in 59 other countries worldwide, totaling approximately 705,000 square meters. The space in most locations other than our principal office in Germany is leased. We own certain real properties in Newtown Square and Palo Alto, United States; Bangalore, India; and a few other locations in and outside of Germany.

 

The office space we occupy includes approximately 275,000 square meters in the EMEA region, excluding Germany, approximately 240,000 square meters in the USA, and approximately 190,000 square meters in the APJ Region.

 

The space is being utilized for various corporate functions including research and development, customer support, sales and marketing, consulting, training, and administration. Note 28 to our consolidated financial statements in “Item 18. Financial Statements” discusses property, plant, and equipment by geographic region. “Item 6. Directors, Senior Management and Employees” discusses the numbers of our employees by business area and by geographic region, which may be used to approximate the productive capacity of our workspace in each region.

 

We believe that our facilities are in good operating condition and adequate for our present usage. We do not have any significant encumbrances on our properties. We are currently undertaking construction activities in various locations to increase our capacity for future expansion of our business. Some of our significant construction activities are described below, under the heading “Capital Expenditures.”

 

Capital Expenditures

 

We commenced the construction of a new office building at our Newtown Square location in the second quarter of 2007, which will add 850 workspaces and will increase our workspace by approximately 20,000 square meters. We estimate the total cost to be about €79 million, of which we had incurred approximately €55 million as of December 31, 2008. The construction is expected to be completed in May of 2009. We are funding the construction with internally generated cash flows.

 

In Germany we closed down our branch in Saarbrücken and started the consolidation of facilities with the branch in St. Ingbert. We estimate the total cost of this project to be approximately €14 million, of which we had paid approximately €6 million as of December 31, 2008. We are funding the construction in St. Ingbert with internally generated cash flows. We expect to complete this project within the second half of 2010.

 

In 2008 we began construction of a guesthouse in our Walldorf location to save future travel costs on visiting SAP employees. We estimate the total cost of the construction to be approximately €17 million, of which we had paid approximately €8 million as of December 31, 2008. We are funding the construction with internally generated cash flows. The construction is expected to be completed by the end of 2009.

 

In Brazil, we commenced construction for the expansion of the São Leopoldo office in the fourth quarter of 2007, which will add 400 workspaces. We estimate the total costs to be about €13 million, of which we had incurred approximately €5 million as of December 31, 2008. We are funding this project with internally generated cash flows. The construction at this location is expected to be completed in mid 2009.

 

Our capital expenditures for property, plant, and equipment amounted to €344 million for 2008 (2007: €342 million; 2006: €316 million). Capital expenditures in 2008 for property, plant, and equipment remained constant compared to 2007. The increase from 2006 to 2007 was in large part due to the construction of new buildings in Walldorf that were completed in 2007. For a related discussion on property, plant, and equipment, see Note 17 to our consolidated financial statements in “Item 18. Financial Statements.”

Our capital expenditures for intangible assets such as software licenses, acquired technologies and customer contracts increased significantly to €1,044 million in 2008 from €238 million in 2007 (2006: €189 million). Goodwill also increased significantly to €3,547 million in 2008 from €520 million in 2007 (2006: €407 million). The increase from 2007 to 2008 was primarily attributable to the acquisition of Business Objects. The increase from 2006 to 2007 was primarily attributable to the acquisition of the shares or net assets of various unrelated companies in 2007. For further details on acquisitions and related capital expenditures, see Note 4 and Note 16 to our consolidated financial statements in “Item 18. Financial Statements.”

 

For further details regarding capital expenditures by geographic region, see Note 28 to our consolidated financial statements in “Item 18. Financial Statements.”

Not applicable.

Our principal sources of revenue are sales of software products and related services. Software revenue is primarily derived from software license fees that customers pay to use SAP products. We provide standard support for a fee based on a fixed percentage of the license fee paid by the customer and we also offer optional support services for additional coverage and scope. In 2008 SAP began offering Enterprise Support, which allows companies to take full advantage of the integration of SAP and non-SAP solutions, minimize risk, enable the acceleration of innovation and address solution lifecycle management. Our professional service revenue consists of consulting, training and other service revenue; consulting revenue is primarily derived from the services rendered with respect to implementation of our software products and training revenue from customer project teams and end-users, as well as training third-party consultants with respect to SAP software products. See “Item 4. Information about SAP — The SAP Portfolio” for a more detailed description of the products and services we offer.

 

Subscription revenues flow from contracts that have both a software element and a support element. Subscription contracts typically give our customers the use of current software and the right to unspecified future products. We charge a fixed monthly fee for a definite term, which is generally five years. Software rental revenue flows from software rental contracts, also with software and support elements — but here the customer receives the use of current products only. Our revenue from other software-related services includes revenue from our on-demand offerings, for example the SAP CRM on-demand solution, any future on-demand revenue from our new midmarket product SAP Business ByDesign, revenue from hosting contracts that do not entitle the customer to readily exit the arrangement, and revenue from software-related revenue-sharing arrangements, for example our share of revenue from collaboratively developed products.

 

We also report revenue from other services within professional services and other service revenue. This item includes revenue from non-mandatory hosting services, application management services (AMS), and sales commission received from third-parties. Non-mandatory hosting services revenue consists of revenue from hosting contracts from which the customer can readily exit if it wishes to run the software on its own systems.

 

In addition, we present in our Consolidated Statements of Income the results of discontinued operations. This presentation results from the wind-down of our TomorrowNow Group (“TN”), which consists of TomorrowNow, Inc. and its subsidiaries, and to cease providing third-party product-support services. TN is a subsidiary of SAP America, Inc., which is a wholly owned subsidiary of SAP AG. In our discussion in the following “Operating Results” section and the “Segment Discussions” section under this Item 5, revenue and expense figures are for our continuing operations, unless noted otherwise. The disposal of TN did not have a significant

impact on our results of operations. See Note 11 to our consolidated financial statements in “Item 18. Financial Statements” for more detail about discontinued operations.

 

The following discussion is provided to enable a better understanding of our operating results for the periods covered, including:

 

 

The preceding overview should be read in connection with the more detailed discussion and analysis of our financial condition and results of operations in this Item 5, “Item 3. Key Information — Risk Factors” and “Item 18. Financial Statements.”

 

KEY FACTORS

 

2008 Global Economic Trends

 

The international financial crisis pervaded developments in the global economy during 2008. Its impact on the entire financial sector and on the real economy was apparent in pressure on the prices of commodities and of many capital goods, a marked decline in the price of many securities, corrections — in some places very substantial — in real estate prices, a loss of confidence among market participants, and a noticeable decline in demand, which the automotive industry felt especially keenly. In consequence, the economic outlook has deteriorated significantly, and businesses and consumers have accordingly adjusted their expectations. Falling commodity prices at the end of 2008 did nothing to improve overall market sentiment.

 

In January 2008, the International Monetary Fund (IMF) projected that global output, which is the global total value of all goods and services, would grow 4.2% in 2008; In January 2009, it revised that projection downward to 3.4%. In an early forecast, the IMF expected world trade in goods and services to increase 5.6% in 2008; it now believes world trade grew only 4.1% in 2008.

 

The European Central Bank (ECB) reported worsening economic trends in the second half of 2008. It observed that global inflationary pressures relaxed toward the end of the year, but that the impact of the turmoil on the financial markets was spreading across the world. The emerging and developing economies, which in past years had made a strong contribution to global economic growth, appear also to have been affected by deteriorating economic conditions. In January 2009, the IMF estimated that their combined 2008 output growth had declined to 6.3%.

 

According to the ECB, the economies of the United States and western Europe became increasingly subdued over the year. In North America, the sharp downturn in growth was primarily the result of the steep decline in consumer spending, the continuing correction of the housing market, and faltering investment in business plant, equipment, and software. In the economies in the euro area, 2008 saw ever tighter lending standards for business and slower growth in lending to consumers, the ECB reported. The Deutsche Bundesbank reports that in the second half of 2008, Germany was also significantly affected by the ailing global economy. Consumer spending and investment behavior were disrupted, which was reflected in a marked rise in the savings ratio toward the end of 2008.

 

Similarly, the economic situation in Japan was made worse in the second half of 2008 by sluggish domestic demand and a continuing decline in export activity, according to the ECB. Credit conditions did not tighten as much as in other industrialized countries. Nonetheless, the ECB assumes the Japanese economy slowed further

in the final quarter of 2008, because the deteriorating employment situation kept consumer spending in check and because exports again decreased as a result of the falling demand overseas for Japanese products.

 

According to the ECB’s analysis, the pace of growth again slackened appreciably in the emerging and developing economies in Asia during the third quarter of 2008. Although the global economic downturn spread and deepened in the second half of 2008, exports from the emerging countries in Asia were generally not severely affected. Rather, it was declining domestic demand, held back by evaporating consumer and business confidence that slowed economic growth.

 

Year-Over-Year Output Growth

 

 

IT Market in 2008

 

In the assessment of International Data Corporation (IDC), a market research firm based in the United States, the effects of the international financial crisis on the real economy had a pronounced influence on global demand for IT — especially in the final quarter of 2008. Until as late as the summer, the global IT market had withstood relatively well the turmoil of the financial crisis and already receding economic growth — even though that market was beginning to show signs of reduced vigor. In the first half of the year, IDC also observed a flattening of the increase in demand for IT in the emerging economies, trending toward the lower levels of demand growth in the industrialized countries. While, in IDC’s analysis, demand in some industries, such as financial services, retail, and construction, remained weak, international IT spending growth was relatively constant into the third quarter of 2008. IDC attributes such robust growth in IT spending to the increasing complexity of the tasks that IT accomplishes for companies, and on the resultant efficiency gains.

 

However, as the credit crunch worsened, from mid-September companies showed much less willingness to invest in IT. Investment bank Goldman Sachs’s IT spending indicator suggested that IT capital expenditure growth was decelerating significantly, measured over the full year. By the end of 2008, the perception that economic growth was waning was already reflected in acutely reduced demand from companies for hardware and software, IDC observed.

 

Overall, in IDC’s analysis, 2008 was a relatively good year because the financial crisis did not affect the real economy until quite late. Year-over-year, worldwide spending on IT, excluding telecommunications, grew 6.9%. Breaking down 2008 spending growth by segment, IDC estimated that the biggest increase was achieved in packaged software (9.1%), while the weakest segment was hardware (4.9% growth). In its geographical breakdown, IDC estimated that spending grew most strongly in the AJP region (10.3%) and least strongly in the Americas region (3.9%).

IT Spending
Percentage Change Since Previous Year

 

SAP Performance Against our Outlook for 2008

 

We expressed our 2008 operating income-related internal management goals and published outlook in non-GAAP terms. For this reason, in the following section we discuss performance against our outlook exclusively and expressly in terms of non-GAAP numbers. The subsequent discussion in this “Item 5. Operating and Financial Review and Prospects — Operating Results” is in terms of U.S. GAAP measures, except where otherwise noted.

 

Outlook for 2008

 

At the beginning of 2008, we provided an outlook of increasing non-GAAP software and software-related service revenue (2007: €7,427 million) in a range between 24% and 27% on a constant currency basis. We defined the measure as excluding a nonrecurring deferred support revenue write-down of approximately €180 million from the acquisition of Business Objects. We expected SAP’s business, excluding the contribution from Business Objects, to contribute 12 to 14 percentage points to this growth. In July 2008, we also announced that in view of our successful first-half year operations, we expected non-GAAP software and software-related service revenue growth to reach the upper end of the range that we had announced earlier. In October 2008 as a result of the

deteriorating global economic conditions, we decided we could no longer specifically forecast our non-GAAP at constant currency software and software-related service revenue growth for 2008. See below for our outlook given in October 2008.

 

At the beginning of 2008, we also projected that our constant-currency non-GAAP operating margin, which excludes a nonrecurring deferred support revenue write-down from the acquisition of Business Objects and acquisition-related charges, would be in a range between 27.5% and 28.0%. Non-GAAP operating margin is the ratio, expressed as a percentage, of non-GAAP operating income at constant currency to non-GAAP total revenue at constant currency. The non-GAAP operating margin outlook that we announced at the beginning of 2008 included accelerated investments of €175 to €225 million (2007: €125 million) in building a business around the new SAP Business ByDesign solution to address new, untapped segments in the mid-market. In April of 2008, we modified the rollout strategy for the SAP Business ByDesign solution to enable a more focused and controlled ramp-up process. We announced that the accelerated investment in SAP Business ByDesign in 2008 would be reduced by approximately €100 million in view of the modified rollout strategy. We expected this would reinforce the non-GAAP operating margin improvement and lead to an operating margin in the range between 28.5% and 29.0%. In July 2008, we announced that we expected the full-year non-GAAP operating margin to be at the upper end of the range reinforced in April 2008. In October 2008 we modified our constant currency non-GAAP operating margin outlook further as the impact of the global economic crisis became more apparent. See below for our outlook given in October 2008.

 

In October, we adjusted our outlook for full-year 2008 non-GAAP software and software-related service revenues and non-GAAP operating margin. In light of the uncertain economic and business environment, in October 2008 we ceased providing an outlook for full-year 2008 non-GAAP software and software-related service revenues and modified our outlook for non-GAAP operating margin. At that time we gave the following outlook for full-year 2008:

 

 

 

A reconciliation from our Non-GAAP financial measures to our U.S. GAAP financial measures is provided below. These non-GAAP measures reconcile to the nearest U.S. GAAP equivalents as follows:

 

 

 

 

2008 Non-GAAP Software and Software-Related Service Revenue — Early 2008 Outlook Compared to Actual Performance

 

On a constant currency basis over the full year, our non-GAAP software and software-related service revenue grew 20% (16% without adjustment for currency effects) to €8,919 million (2007: €7,427 million), which was below the revenue outlook we set at the beginning of the year. We did not meet our early 2008 revenue outlook due to the global economic crisis that emerged in the second half of 2008, which caused the demand for our software products to decrease steeply, particularly in the fourth quarter of 2008, as many customers declined to make investment decisions. Although demand for original SAP products fell more severely than the products of Business Objects, SAP’s business without the Business Objects results contributed 6 percentage points to non-GAAP software and software-related service revenue growth on a constant currency basis due primarily to the successes in the first half of the year. For the fifth year in succession, including the results of Business Objects, we achieved double-digit percentage growth in full-year non-GAAP software and software-related service revenue on a constant currency basis.

 

2008 Non-GAAP Operating Margin — Outlook Compared to Actual Performance

 

We achieved a non-GAAP operating margin of 28.4% on a constant currency basis, meeting the outlook we provided at the beginning of the year (27.5% to 28%) and the outlook provided in October 2008 (28.0%), but failing to meet the outlook provided in April 2008 and as revised in July 2008. This represented a 1.1 percentage-point improvement over the previous year’s corresponding 27.3% non-GAAP operating margin, despite the difficult economic conditions. In addition, we met the non-GAAP at constant currency operating margin outlook of 28% we defined in October 2008, even though the 20% year-over-year growth in our non-GAAP software and software-related service revenue that we achieved on a constant currency basis was at the lower end of the assumed range. We realized this success by implementing comprehensive cost savings, which included a stop on all recruitment and a significant reduction of spending on external service providers, business travel and other variable costs. Compared to the original forecast, we saved more than €200 million in the final quarter of 2008 with these measures, which were an immediate response to the deteriorating economic conditions.

Total Revenue

 

 

As a result of our acquisition of Business Objects in January 2008, our numbers for 2008 and 2007 are not fully comparable.

 

2008 compared with 2007. Total revenue increased from €10,242 million in 2007 to €11,565 million in 2008, representing an increase of €1,323 million or 13%. The revenue growth reflects a 17% increase from changes in volumes and prices and a 4% decrease from currency effects. This increase is mainly related to the strong performance in software and software-related service revenue, which grew by €1,030 million or 14% compared to 2007. A significant portion of this growth was due the acquisition of Business Objects. In 2008, software and software-related service revenue represented 73% of our total revenue, which was flat compared to 2007. Professional services and other service revenue contributed €295 million to the overall growth in 2008. This represents an increase of 11% compared to 2007. Professional services and other service revenue accounted for 26% of our total revenue compared to 27% in 2007.

 

The average exchange rate for the U.S. dollar in 2008 was $1.47 per €1.00, compared to $1.38 per €1.00 in 2007. The rate evolved as follows for the period-end Noon Buying Rate expressed as dollars per €1.00.

 

 

Ultimately the strength of the euro over the year reduced the euro value of revenue generated in other currencies. Foreign currency translation effects from the strengthening value of the euro during the year negatively impacted our total revenue by 4% in 2008.

 

2007 compared with 2006. Total revenue increased from €9,393 million in 2006 to €10,242 million in 2007, representing an increase of €849 million or 9%. The revenue growth reflects a 13% increase from changes in volumes and prices and a 4% decrease from currency effects. This increase is mainly related to the strong increase in software and software-related service revenue, which grew by €831 million or 13% compared to 2006. The revenue growth reflects a 17% increase from changes in volumes and prices and a 4% decrease from currency effects. In 2007, software and software-related service revenue represented 73% of our total revenue, which is an increase of 3 percentage points compared to 2006, in line with our goals. Professional services and other service revenue contributed €16 million to the overall growth in 2007. This represents an increase of 4% compared to 2006 from changes in volumes and prices and 3% decrease from currency effects.

 

The average exchange rate for the U.S. dollar in 2007 was $1.38 per €1.00, compared to $1.27 per €1.00 in 2006. The rate evolved as follows for the period-end Noon Buying Rate expressed as dollars per €1.00.

 

Ultimately the strength of the euro over the year reduced the euro value of revenue generated in other currencies. Foreign currency translation effects from the strengthening value of the euro during the year negatively impacted our total consolidated revenue by 4% in 2007.

 

Software and software-related service revenue

 

 

Software revenue represents fees earned from the sale or license of software to customers. Support revenue represents fees earned from providing customers with technical support services and unspecified software upgrades, updates and enhancements. Subscription and other software-related service revenue represents fees earned from subscriptions, software rentals, and other types of software-related service contracts.

 

2008 compared with 2007. Software and software-related service revenue increased from €7,427 million in 2007 to €8,457 million in 2008, representing an increase of €1,030 million or 14%. A significant portion of this growth was due the acquisition of Business Objects. The revenue growth reflects an 18% increase from changes in volumes and prices and a 4% decrease from currency effects.

 

Software revenue rose from €3,407 million in 2007 to €3,606 million in 2008, accounting for an increase of €199 million, or 6%. The software revenue growth consists of a 10% increase from changes in volumes and prices and a 4% decrease from currency effects.

 

The strong performance in software and software-related service revenue for the full year 2008 is the result of well balanced growth in all regions. Compared to 2007 the EMEA region grew by 15%. This growth represents an 18% increase from changes in volumes and prices and a 3% decrease from currency effects. The Americas region grew by 9%, which represents a 16% increase from changes in volumes and prices and a 7% decrease from currency effects and the region Asia Pacific Japan region by grew 21%, which represents a 23% increase from changes in volumes and prices and a 2% decrease from currency effects.

 

The extension of our established product portfolio, SAP Business Suite and our platform-related products based on SAP NetWeaver, especially towards the business user solutions, led to an overall software revenue growth rate of 6%. The software revenue growth reflects a 10% increase from increased volumes and prices and a 4% decrease from currency effects. In 2008, we continued to derive software revenue from our strong customer base. Nevertheless, the number of software contracts coming from new customers remained stable at 31%. Based on the order entry value, the new customer share decreased from 21% in 2007 to 13% in 2008 influenced fundamentally by lower deal sizes in the extended business user area.

 

The SAP NetWeaver-related revenue decreased from €997 million in 2007 to €942 million in 2008, representing a decrease of €55 million or 6%. The portion relating specifically to the underlying SAP NetWeaver stand-alone revenue increased by €55 million or 17% to €384 million in 2008 compared to €329 million in 2007. The decrease was mainly due to the global economic crisis that emerged during the second half of 2008 since we recorded a 31% increase during the first half of 2008.

 

Our stable customer base and the continued sale of software to existing and new customers throughout 2008 resulted in an increase in support revenue from €3,838 million in 2007 to €4,593 million in 2008, representing an increase of €755 million or 20%. The support revenue growth reflects a 23% increase from changes in volumes and prices and a 3% decrease from currency effects. The largest contributor to the 2008

increase in support revenue based on volume was the Americas region where our support revenue increased by 27%.

 

Subscription and other software-related service revenue increased by €76 million or 42% to €258 million compared to €182 million in 2007. The growth in revenue reflects a 43% increase from volumes and prices and 1% decrease from currency effects. The increase was primarily due to the settlement of new major subscription contracts.

 

2007 compared with 2006. Software and software-related service revenue increased from €6,596 million in 2006 to €7,427 million in 2007, representing an increase of €831 million or 13% A significant portion of this growth was due the acquisition of Business Objects. This growth represents a 17% increase from changes in volumes and prices and a 4% decrease from currency effects.

 

Software revenue increased from €3,003 million in 2006 to €3,407 million in 2007, representing an increase of €404 million, or 13%. This growth represents a 18% increase from changes in volumes and prices and a 5% decrease from currency effects. The currency effects were impacted by the stronger value of the euro compared to other currencies. This strong performance is the result of well balanced growth in all regions. Compared to 2006 the EMEA region grew by 14%. This growth represents a 15% increase from changes in volumes and prices and a 1% decrease from currency effects. The Americas region grew by 8%, which represents a 16% increase from changes in volumes and prices and a 8% decrease from currency effects and the Asia Pacific Japan region grew by 28%, which represents a 32% increase from changes in volumes and prices and a 4% decrease from currency effects.

 

In addition to the further increased licensing of our software solution SAP Business Suite and the platform related products utilizing our SAP NetWeaver platform technology, the growth in software revenue was also driven by increased sales of our business user solutions. In 2007 we continued to derive software revenue from our existing customer base. In both 2007 and 2006, approximately 31% of the number of new contracts came from new customers, with the remaining 69% coming from our installed customer base. Based on the value of orders received, the new customer share increased from 19% in 2006 to 21% in 2007.

 

The SAP NetWeaver-related revenue increased from €754 million in 2006 to €997 million in 2007, representing an increase of €243 million or 32%. The underlying SAP NetWeaver stand-alone revenue increased by €160 million or 95% to €329 million in 2007 compared to €169 million in 2006.

 

Thanks to our stable installed customer base and the continued sale of software to existing and new customers throughout 2007, support revenue increased from €3,464 million in 2006 to €3,838 million in 2007, representing an increase of €374 million or 11%. The support revenue growth reflects a 15% increase from changes in volumes and prices and a 4% decrease from currency effects. The largest contributor to the 2007 increase in support revenue based on volume was again the EMEA region where the support revenue increased by €219 million or 11%.

 

Subscription and other software-related service revenue increased by €53 million or 41% to €182 million compared to €129 million in 2006.

 

Professional services and other service revenue

 

2008 compared with 2007. Professional services and other service revenue increased from €2,744 million in 2007 to €3,039 million in 2008, representing an increase of €295 million or 11%. This revenue growth reflects a 15% increase from changes in volumes and prices and a 4% decrease from currency effects.

 

Consulting revenue increased from €2,221 million in 2007 to €2,498 million in 2008, representing an increase of 12%. The consulting revenue growth reflects a 17% increase from changes in volumes and prices and a 5% decrease from currency effects. In 2008, consulting contributed strongly to the revenue growth in professional services and other service revenue representing a pay off for past headcount investments in the consulting area. Consulting revenue as a percentage of total revenue remained quite stable at 22% in 2008, contributing to SAP’s total revenue double-digit growth rate.

 

Training revenue increased from €410 million in 2007 to €434 million in 2008, representing an increase of 6%. The training revenue growth reflects a 10% increase from changes in volumes and prices and a 4% decrease from currency effects. Strong contribution to the growth in training revenue was achieved by higher demand for E-Learning and on-site customer training. The training business also benefited from growth in the certification area.

 

Other service revenue decreased from €113 million in 2007 to €107 million in 2008, representing a decrease of 5%. The other service revenue decline reflects a 2% decrease from changes in volumes and prices and a 3% decrease from currency effects. Other service revenue mainly consists of revenue generated by the SAP Managed Services organization, which operates, manages and maintains SAP solutions.

 

2007 compared with 2006. Professional services and other service revenue increased slightly from €2,728 million in 2006 to €2,744 million in 2007, representing an increase of €16 million or 1%. This revenue growth reflects a 4% increase from changes in volumes and prices and a 3% decrease from currency effects.

 

Consulting revenue decreased from €2,249 million in 2006 to €2,221 million in 2007, representing a decrease of 1%. The consulting revenue growth reflects a 2% increase from changes in volumes and prices and a 3% decrease from currency effects. In 2007, consulting headcount grew by 12%; however, it required time to ramp up these new resources to a fully productive status. This effect, coupled with negative currency effects, contributed to the slight decline in consulting revenue.

 

Consulting revenue as a percentage of total revenue decreased from 24% in 2006 to 22% in 2007, caused by the continued growth of software and software-related services revenue, and the slight decline of consulting revenue year over year.

 

Training revenue increased from €383 million in 2006 to €410 million in 2007 or 7%. The growth reflects an 11% increase from changes in volumes and prices and a 4% decrease from currency effects. While traditional classroom training only grew marginally, most of the growth in training revenue was achieved in the E-Learning area. The training business also benefited from growth in the certification area.

 

Other service revenue increased from €96 million in 2006 to €113 million in 2007 or 18%. The other service revenue growth reflects a 23% increase from changes in volumes and prices and a 5% decrease from currency effects. Other service revenue mainly consists of revenue generated by the SAP Managed Services organization, which operates, manages and maintains SAP solutions. Most of the growth of SAP Managed Services revenue came from the EMEA region.

Total Operating Expenses and Operating Income

 

 

As a result of our acquisition of Business Objects in January 2008, our numbers for 2008 and 2007 are not fully comparable.

 

2008 compared with 2007. Despite our response to the effects of the financial and economic crisis by introducing cost-saving measures, which resulted in a saving of more than €200 million in the final quarter of 2008, our total operating expenses for 2008 increased to €8,725 million compared to €7,510 million in 2007 representing an increase of €1,215 million or 16%. As described below the main driver for this increase was the acquisition of Business Objects.

 

For a more detailed analysis of the individual operating expense line items see the “Operating Expenses” section following this section. The increase in total operating expenses was mainly driven by the following:

 

 

Increased operating expenses in 2008 coupled with the lower than expected revenue result due to the deteriorating economic conditions in the second half 2008, resulted in a decrease in operating income from 6% in 2007 to 4% in 2008.

 

2007 compared with 2006. At the beginning of the 2007, we explained in our outlook that we intended to invest about €300 million to €400 million over a period of eight quarters starting in early 2007 to build up a business around SAP Business ByDesign. Depending on when we actually made these investments, in 2007 we expected to reinvest the equivalent of about one to two operating margin percentage points in preparing for additional future growth opportunities. Therefore, we assumed our 2007 operating margin to be in the range 26.0% to 27.0%. In line with our outlook, 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 accelerated investments in enhancing IT infrastructure, building our sales and channel capability, and extending our marketing activity.

 

Total operating expenses for 2007 were €7,510 million compared to €6,815 million representing an increase of €695 million or 10%.

The increase in total operating expenses was mainly driven by the following:

 

 

OPERATING EXPENSES

 

Cost of software and software-related services

 

 

Cost of software and software-related services consists primarily of:

 

 

 

 

2008 compared with 2007. The cost of software and software-related services increased from €1,310 million in 2007 to €1,646 million in 2008, or by 26%, which was mainly due the acquisition of Business Objects, but also due to the expansion of support resources, the €32 million effects of license disputes and increased expenses for third-party license fees. As a percentage of software and software-related service revenue, cost of software and software-related services increased from 18% in 2007 to 19% in 2008.

Overall, the workforce in this area increased from 5,831 FTEs in 2007 to 6,458 FTEs in 2008, representing an increase of 11%. The support organization has continued its efforts to improve the efficiency of our processes by moving into low-cost locations (Bulgaria, China and India). Approximately 24% of our global support resources were based in the low-cost locations at the end of 2008, which is an increase of 2 percentage points compared to 2007.

 

2007 compared with 2006. The cost of software and software-related services increased from €1,091 million in 2006 to €1,310 million in 2007, or by 20%, mainly due to the expansion of support resources and increased expenses for third-party license fees. As a percentage of software and software-related service revenue, cost of software and software-related services increased from 17% in 2006 to 18% in 2007. The decline of the software and software-related services margin was influenced in 2007 by 0.5 percentage points from our accelerated investments in SAP Business ByDesign.

 

Overall, the workforce in this area increased from 5,243 FTEs in 2006 to 5,831 FTEs in 2007, representing an increase of 11%. The support organization has continued its efforts to improve the efficiency of our processes by moving into low-cost locations (Bulgaria, China and India). Twenty-two percent of the support resources were based in the low-cost locations at the end of 2007, which is an increase of 2 percentage points compared to 2006.

 

Cost of professional services and other services

 

 

Cost of professional services and other services consists primarily of consulting and training personnel expenses as well as expenses for third-party consulting and training resources.

 

2008 compared with 2007. Cost of professional services and other services rose from €2,091 million in 2007 to €2,296 million in 2008, or 10%. As a percentage of professional services and other services revenue, cost of professional services and other service revenue remained steady at 76%. The lower cost increase compared to a slightly higher revenue growth led to a positive professional services and other services margin development in 2008, although that improvement was mainly offset by increased costs resulting from our focused efforts to rapidly integrate the Business Objects professional services activities into our service portfolio. These increased costs negatively influenced our professional services and other services margin by 1.4 percentage points.

 

The increase in cost of professional services and other services was also due to increased personnel expenses resulting from the integration of Business Objects employees.

 

2007 compared with 2006. Cost of services increased from €2,073 million in 2006 to €2,091 million in 2007, or 1%. As a percentage of service revenue, cost of services remained the same at 76% in both 2007 and 2006. The professional services and other services margin was influenced in 2007 by 0.5 percentage points from our accelerated investments in SAP Business ByDesign.

 

The slight increase in cost of professional services and other services was mainly driven by increased personnel expenses due to the hiring of new employees in consulting.

Research and Development

 

 

Our research and development (R&D) expenses consist primarily of:

 

 

2008 compared with 2007. R&D expenses in 2008 increased by 12% to €1,631 million compared to €1,458 million in 2007. As a percentage of total revenue, research and development expenses were 14% in 2008, which is consistent with 2007.

 

Our R&D expenses in 2008 increased mainly due to incremental headcount. The number of development employees increased by 2,596 FTE or 20% to 15,547 FTE as of December 31, 2008, primarily due to the Business Objects acquisition.

 

2007 compared with 2006. R&D expenses in 2007 increased by 9% to €1,458 million compared to €1,335 million in 2006. As a percentage of total revenue, R&D expenses were 14% in 2007, which is flat compared to 2006. Around 0.3 percentage points of the 14% increase were related to our accelerated investments in SAP Business ByDesign.

 

R&D expenses were mainly impacted by incremental headcount. The number of development employees increased by 1,150 FTE or 10% to 12,951 FTE as of December 31, 2007. The R&D organization has continued to build up development resources primarily in locations with modest salary levels, and 66% of the research and development headcount increase in 2007 was realized in India, China and Bulgaria. The share of development headcount based in these three locations increased in 2007 by 3 percentage points to 28%.

 

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