SAP AG (NYSE ADR: SAP)
March 28, 2006
Take the Money and Run
Initiating Coverage
Rating:
Underweight
Market Price (Common): €173.92
Market Price (US$ ADR): $52.66
Price Target:
$42.93

Investment Summary:
At an EV/EBITDA multiple of almost 20, SAP is massively
overvalued relative to the rest of the Enterprise Resource
Planning (ERP) market. Although SAP has strong short-term
growth prospects, the market is currently predicting double-digit
revenue and earnings growth for more than a decade. Based on a
discounted cash flow model and relative valuation multiples, we
are projecting a target stock price of $42.93 for SAP.

Strong Short-Term Growth Prospects Are On the Horizon
With the ERP market poised for strong growth during 2006 and
2007, SAP is in an enviable position and should continue to gain
short-term market share in the upper end of the space as Oracle
continues to struggle with the integration of PeopleSoft and
Siebel Systems. The recent launch of the Mendocino product – a
joint venture with Microsoft – also bodes well for SAP’s shortterm prospects. However, long-term growth is dependent on
SAP’s ability to dominate the middle market, and they have not
yet shown the capability to accomplish this goal.

These Growth Prospects Are Already Priced Into the Stock
At a forward P/E of 24 and an EV/EBITDA of almost 20, SAP is
expensive by almost any margin. Relative to its peers, SAP is
trading at a significant premium reflecting its current strong
positioning. However, the market has priced in double-digit
revenue and EPS growth for at least the next ten years. This is
dependent on SAP’s ability to drive volume sales in the middle
market, something the firm has not been able to fully
accomplish. In our view, the stock should be trading at multiples
only slightly higher than its peers given its market-leading
position in a differentiated oligopoly.

Long-Term Growth Not As Strong
SAP is betting their future on the ability to rule the high end of
the ERP market and expand their footprint significantly in the
middle market. Oracle has launched a new development effort –
Project Fusion – which may spoil SAP’s plans. Beginning in
2008, Oracle will be aggressively marketing a new product line
with the goal of unseating SAP from its perch atop the ERP
pyramid. At a minimum, this will impact SAP’s cost structure
and lead to a dilution in SAP’s market share. The market is not
accounting for Project Fusion in its assessment of SAP’s growth.
Market Data
52-Wk Range:
$36.60-$53.49
Enterprise Value:
$60.58B
Insider Ownership:
8.2%
Institutional Ownership:
6.9%
Number of Diluted Shares:
1.24B
Float:
832.66MM
Market Cap:
$64.67B
Avg. Daily Volume:
1,080,610
P/E (Trailing):
36.26
P/E (Forward):
24.28
PEG Ratio (5 YR):
2.13
P/Revenue (LTM):
6.30
P/Book (MRQ):
9.26
Financial Data
Book Value per share:
EV/Revenue:
EV/EBITDA:
Return on assets (TTM):
Return on equity (TTM):
Gross margin (MRQ):
Operating margin (MRQ):
Profit margin (MRQ):
Current Ratio (MRQ):
Quick Ratio (MRQ):
10-Year Earnings Growth:
Spencer T. Hill
(206) 947-5468
spencer.hill@yale.edu
Stefan M. Lewellen
(203) 535-6562
stefan.lewellen@yale.edu
$5.65
5.95
19.97
17.52%
28.83%
55.6%
27.38%
17.57%
4.90
4.89
8.60%
Please see the important disclaimer at the end of this report.
Executive Summary
We are initiating coverage of SAP Atkiengesellschaft (NYSE ADR: SAP) with an Underweight
recommendation. SAP is a leading provider of Enterprise Resource Planning (ERP) software to Fortune
1,000 companies as well as middle-market customers with less than 2,500 employees. According to
company estimates, SAP currently controls more than 60% of the high-end ERP market, with competitors
such as Oracle and Microsoft holding a combined market share of roughly 35%. SAP currently obtains
roughly 30% of its software license revenue from sales to middle-market firms; the company is
attempting to increase this percentage to roughly 40-45% by 2010. However, SAP will need to boost sales
volume significantly if it is to meet this target; simple economics tells us that with the noticeably smaller
deal sizes in the middle market, SAP will have to engage in more deals in order to maintain the levels of
revenue and profitability.
Although SAP’s growth prospects look strong in 2006 and 2007, the firm’s shares trade at a significant
premium to the industry and its peers. At a forward P/E of more than 24, SAP represents a 21% premium
over the application software industry (P/E of 20) and a 38% premium over competitors such as Oracle
(P/E of 15.15) and Microsoft (P/E of 17.65). Much of this premium is justified in the form of higher
expected short-term earnings growth; however, it is highly unlikely that SAP will live up to the market’s
expectations of double-digit annual earnings growth over a period exceeding ten years. The stock
appreciated more than 30% in 2005, further suggesting that SAP’s growth prospects are already priced
into the stock. As such, our recommendation is to underweight.
EPS is Strong, but Cash Flows are Weak
SAP delivered very strong revenue and earnings growth during 2005. Revenues were up 13% over 2004,
and operating earnings were up more than 16% despite higher-than-expected S,G&A expenditures.
Overall, net income was up 14% over 2004 to almost €1.5 billion ($1.86 billion), representing one of the
best years ever for the company. In the Q4 2005 earnings call, Management guided analysts to expect
revenue growth of 15-17% and earnings growth of roughly 15% for 2006. Although these are somewhat
aggressive targets, increased IT spending in the ERP marketplace could allow SAP to reach these goals.
Despite the strong 2005 numbers and high expectations for 2006, there are a few irregularities in
management’s assessment of future performance:
 Management admitted that S,G&A expenses were higher than expected during 2005. The company
claims that a variety of “one-time” expenditures such as higher travel-related costs needed to support
growth in EMEA and the U.S. were responsible for the unexpected increase. Management further
guided analysts to expect a 0.50-1.00% decrease in S,G&A expenses as a percentage of sales going
forward. In our view, management’s assessment is a bit myopic. Travel expenses are likely to stay
high as the business grows; in fact, given SAP’s enhanced reliance on middle-market deals, travel
expenditures will likely increase during future periods as sales executives visit more client sites.
 Management guidance indicates that operating expenses should rise in line with revenues, leaving
profit margins relatively unchanged. As such, an increase in product sales volume is required in order
for SAP to drive bottom-line growth. Given that SAP is focusing on middle-market deals (with lower
profit margins, smaller service agreements and lower maintenance costs), SAP must significantly
enhance its middle market sales volume in order to reach its growth estimates. It is not clear to us that


their current middle-market product capabilities will allow them to gain the market share they will
need to accomplish their revenue goals.
Despite the stellar growth of revenues and earnings per share, Management indicated that operating
cash flows decreased by 17.6% and free cash flow decreased by 24% during 2005. Their somewhat
surprising explanation is that working capital increased by more than €500 million due to one-time
gains related to receivables during 2004 and unforeseen tax reserves related to previous years which
amounted to more than €250 million during 2005 (both of which seem highly dubious). Our
assumption is that other such “one-time” items will not recur in future periods, but we have to wonder
whether “cookie-jar” accounting is at work in SAP’s reported 2005 earnings.
Management is not investing much free cash flow in growth opportunities. Of the €1.25 billion in free
cash flow generated during 2005, a total of €546 million was given back to shareholders in the form
of dividends and share repurchases, and €458 million were invested in U.S. government bonds,
leaving only €242 million to be invested in acquisitions aimed at helping to further the company’s
growth. This is somewhat troubling; however, the firm may simply be hoarding cash in order to fund
future R&D expenditures. Large-scale acquisitions are out of the question for anti-trust reasons, and
software development is not an asset-intensive business. As such, we are predicting relatively small
future outlays for capital expenditures and additions to working capital. In the absence of a plan to
distribute excess cash to shareholders, we chose to simply exclude cash from our valuation.
Company and Product Overview
Founded in 1972, SAP AG is a leading provider of enterprise and middle-market ERP products and
services based in Walldorf, Germany. The firm is the third-largest software company in the world, with
more than 35,000 customers and €8.5 billion in annual revenue. SAP has 35,873 employees in 50
countries as of December 31, 2005, up 11% from 2004. In addition to SAP’s core software businesses, it
also manages SAP Ventures and SAP Research, which invest in and develop cutting-edge software
technology for use by other units of the firm. See Exhibit 1 for more information on SAP’s management
team.
Software revenue accounted for 32.7% of SAP’s revenue in 2005. The majority of SAP’s software
revenues originate from the mySAP product line, which encompasses enterprise-level ERP, customer
relationship management (CRM), product development, and supply chain management (SCM) solutions.
The mySAP enterprise product line is targeted at Fortune Global 1000 companies. In recent years, SAP
has developed highly customizable analytics and manufacturing modules which have allowed the firm to
boost sales in the manufacturing and production industries. A number of specialized cross-functional
modules known as “Solution Extensions” which sit atop the enterprise SAP platform are also available for
purchase. The company has also launched a broad suite of software development interfaces based on the
SAP NetWeaver platform and a streamlined Enterprise Service Architecture framework, allowing
software developers to easily customize and expand upon SAP’s core product functionality.
The company is also counting on a new joint venture with Microsoft named Mendocino to drive revenue
growth during 2006 and 2007. Mendocino delivers the functionality of SAP’s enterprise platform through
the familiar interface of Microsoft Office applications such as Word, Excel, and Outlook. With
Mendocino, normal business users will be able to utilize the full range of SAP functionality without
having to undergo extensive training on SAP’s software platform. The service is expected to cost €75 per
user, per month, and is currently only available to a select range of joint SAP/Microsoft customers. SAP
plans to roll out the service across its existing customer base by the end of 2006. The company has
indicated that 100 users per enterprise will be required in order for the firm to break even on a Mendocino
installation. Given this rather high number, we suspect that the majority of Mendocino customers will be
Fortune 1000 companies. Furthermore, SAP will need exceptionally strong penetration of Mendocino
across its install base in order for Mendocino to significantly drive bottom line growth; by our estimates,
SAP will have to sign up 200 users at 5,500 different firms during 2006 in order for Mendocino to add
€250 million (matching the company’s guidance of 16.5%) to SAP’s bottom line. We believe this is an
aggressive target; the firm may need to derive substantial revenue growth from other new product sales in
order to reach their stated guidance of 15-17% earnings growth.
Maintenance agreements accounted for 37.3% of SAP’s revenues during 2005. As with other ERP
software vendors, SAP requires firms to pay annual maintenance charges on their SAP installations.
Maintenance charges are dependent upon a number of factors, but in general, larger firms will pay more
in annual maintenance charges than small and medium-sized businesses. This fact suggests that SAP will
have to significantly increase sales volume in the middle market if it hopes to expand its revenue from
maintenance and services. Given the rather large ongoing size of maintenance agreements relative to the
purchase price of SAP’s software, SAP also routinely discounts prices for annual maintenance contracts
in order to win business in competitive pricing situations.
Consulting and training services accounted for 30% of SAP’s revenue during 2005. Despite the
company’s insistence to the contrary, SAP’s products are not classified as plug-and-play solutions. Each
installation typically requires massive customization and additional software development work in order
for it to meet the requirements and goals of purchasers. The average customer installation during 2005
required more than €289,000 of consulting services, and although this number has declined in recent
years, it is still almost as expensive for consumers to install and implement the product as the cost of the
actual software itself. These metrics also do not include the cost of internal developers and IT
professionals at each company; corporations running SAP are typically forced to hire specialized IT staff
to manage and maintain an SAP installation.
Table 1: Deal sizes are declining across the board
Year
New Deals
Consulting
Rev (€)
2005
2004
2003
8,820
7,216
6,038
2.555B
2.330B
2.308B
Rev/Deal
€289,683
€322,894
€382,246
% Change
-10.29%
-15.53%
Software
Rev (€)
2.783B
2.361B
2.147B
Rev/Deal
€315,533
€327,190
€355,581
% Change
-3.56%
-7.98%
Table 1 examines trends related to the average size of SAP’s software and consulting engagements over
the last three years. Deal size has been steadily declining due to the company’s increased focus on
securing middle-market and small business consumers. It is interesting to note that the average size of
consulting and service engagements has fallen much more precipitously than the average size of new
software sales. In some ways this is good news for the company, as it shows that it is less expensive to
implement SAP’s middle-market solutions than its enterprise solutions. However, these numbers also
indicate that SAP will (again) have to sell a lot more software to middle-market consumers than it has in
the past in order to maintain current revenue levels. If we extrapolate1 the trends shown in Table 1, SAP
will need to sign up roughly 9,300 new customers in 2006 in order to maintain its current levels of
software and consulting revenues. Given the firm’s install base of 35,000 customers, this means that SAP
will have to grow its customer base by 27% in 2006 just to maintain current levels of revenue. Despite the
1
Specifically, we assume that consulting revenue per deal will decline by 5% in 2006, and software
revenue per deal will decline by 1.6% in 2006.
sharp increase in ERP spending expected during 2006 and 2007, this seems rather ambitious in our
opinion.
Historically, much of SAP’s growth has come from Europe, Africa and the Middle East (EMEA),
including a virtual monopoly in Germany. However, Asia Pacific (APAC) and the Americas accounted
for most of SAP’s sales growth in 2005 (25% and 31% growth, respectively), and the company expects
this trend to continue in the years to come. EMEA accounted for 51% of SAP’s revenue during 2005,
with the Americas accounting for 36% and APAC accounting for the remaining 13% of revenues. Two of
SAP’s main strategic goals during the period from 2006 to 2010 are to expand market share in the United
States and become a dominant presence in China, India and the rest of the Asia Pacific region. With the
firm’s current global install base and dominant market share across much of the world, SAP is in a strong
position to execute on this strategy in the years to come.
As previously stated, the firm also has an objective of increasing sales to medium-sized businesses from
30% of revenues in 2005 to 40-45% of revenues by 2010. In order to achieve this objective, SAP is
counting on the success of two very distinct product lines – mySAP All-in-One and SAP Business One –
to drive revenue growth. SAP Business One is targeted towards small businesses and firms in the lower
echelon of the middle market, and combines basic, no-frills finance, CRM, ERP, and SCM functionality
into a single program. Business One is the easiest SAP product to install, but is also the least flexible of
all of SAP’s product offerings and cannot be easily scaled up to meet the demands of a growing business.
It also lacks features such as multi-currency accounting and global logistics management solutions which
are contained in SAP’s other products. As such, Business One is not a viable option for companies with
international reach or companies in the upper end of the middle market. Nonetheless, Business One is a
solid offering which should, at the minimum, allow SAP to be competitive in the small business ERP
software arena. SAP released an updated version of Business One in October 2005, and is counting on
increased adoption and new sales to drive much of the expected middle-market growth.
mySAP All-in-One is a scaled down version of the mySAP Enterprise software platform customized for
medium-sized businesses. It combines most of the functionality of mySAP Enterprise with prepackaged
industry-specific modules for industries such as chemicals, asset management, and manufacturing. All-inOne is substantially more complex than Business One and is not suitable for small enterprises. Likewise,
operating expenses and the initial implementation and servicing expenditures for mySAP All-in-One are
significantly more expensive than comparable expenditures under Business One. Despite the prepackaged
solutions, the abstract operating platform also requires enhanced customization and additional IT staffing
requirements in comparison to Business One. For these reasons, mySAP All-in-One is primarily targeted
at global companies with complex operational characteristics occupying the upper end of the middle
market. Surprisingly, SAP does not directly offer mySAP All-in-One to its customers; rather, it sells the
product through an extensive network of partner firms in the Americas and EMEA such as iTelligence
and IBM Global Services. It does not appear that SAP possesses partners in the APAC region, calling into
question its ability to make inroads with mySAP All-in-One in the all-important Asian marketplace.
Competitive Landscape: Oracle Gearing up for Battle
Competition in the ERP space is extremely fierce. With the average ERP software purchase totaling more
than $1.2 million, each deal is crucially important in the battle for firms to meet revenue projections and
gain market share. SAP currently enjoys an extremely enviable position in the marketplace – according to
company estimates (see Figure 1), SAP currently possesses a share of more than 62% of the global ERP
market. As such, SAP is the primary leader in a differentiated oligopolistic marketplace, allowing it to
charge somewhat higher prices than competitors such as Oracle and Microsoft without losing market
share. To say the market is highly concentrated is an understatement; the market has a Herfindahl index of
4350 (the U.S. government definition of a highly concentrated market is 1800).
Figure 1: ERP Market Share
Source: SAP February 2006 Global Investor Roadshow Presentation; corroborated by Peerstone Research Group
Despite SAP’s strong position in the overall ERP marketplace, they are in a less-than-stellar position in
the middle market. A number of specialist providers such as Epicor, Lawson, and Sage are completely
focused on the middle market and have built very strong middle-market install bases (much larger than
SAP’s). Furthermore, these firms are selling truly plug-and-play systems which were designed
exclusively with the middle market in mind. In comparison, neither of SAP’s two offerings was
developed exclusively for the middle market – Business One was developed for small businesses, and
mySAP is simply a scaled-down version of SAP’s enterprise software solution. As such, entrenched firms
such as Lawson, Sage, and Epicor may prove very difficult for SAP to beat in competitive situations.
Oddly, SAP’s management does not seem to be paying much attention to the threat posed by these firms.
We urge SAP management to closely consider the challenges posed by firms such as Epicor, Sage, and
Lawson as it attempts to conquer the middle market.
In addition to specialist providers, SAP’s two largest competitors also possess strong positions in the
middle market. Oracle has a much larger share of the middle market than it does in the enterprise space,
and Microsoft obtains more than 90% of its ERP revenue from small and medium sized businesses
(mostly by virtue of the acquisition of Great Plains). Thus, SAP’s goal of conquering the middle market
will be very difficult to achieve – competition will be much more intense in the middle market than it will
in the enterprise space (see Figure 2).
Figure 2: ERP Market Share, Small- and Medium-Sized Businesses
Source: SAP February 2006 Global Investor Roadshow Presentation; corroborated by Peerstone Research Group
To make matters worse for SAP, Oracle is gearing up for a significant new product launch campaign in
2008 entitled “Project Fusion.” Project Fusion represents Oracle’s effort to reassert itself in the ERP
space after fumbling the acquisition of PeopleSoft and following the completion of Oracle’s acquisition of
Siebel Systems. Oracle is streamlining its jumbled product suite and creating unique solutions targeted
specifically at each segment of the market: enterprise consumers, mid-sized businesses, and small
businesses. Oracle has also stated publicly that they are committed to rebuilding the market share they’ve
lost since 2003, and we expect Oracle to put forth an aggressive pricing schedule and a substantial sales
effort, particularly in the enterprise space. We feel that, at a minimum, SAP will lose some of the market
share gains they’ve built up since the Oracle-PeopleSoft merger, and their cost base will increase as they
attempt to defend their turf against an all-out sales onslaught by Oracle.
Valuation
Based on a thorough analysis of three different valuation measures – discounted cash flow
analysis, relative valuation based upon public comparables, and relative valuation based upon
acquisition comparables, net of a historical merger premium – we calculated the target stock price
for SAP AG to be $42.93. This estimate comes directly from our discounted cash flow model.
Although we performed a relative valuation analysis, we felt that the data was too inconsistent to
utilize as anything other than a guide. However, based on the calculations detailed in Exhibit 2,
the value of SAP as calculated using relative multiples confirms the range of the valuation we
calculated using our discounted cash flow model. Note that we report all monetary increments in
US dollars unless otherwise indicated.
DCF Inputs
Resembling the overall prepackaged software industry’s capital structure of 99.95% equity and
0.05% debt, SAP AG’s capital structure is 0.08% debt, with only $48.24 million of long-term
debt and notes payable on its preliminary year-end 2005 balance sheet. A time series of SAP
AG’s debt to equity ratio reveals a more or less stable relationship, with debt levels remaining
below 1.1% for 16 years.
SAP AG Debt To Market Cap Ratio, Bloomberg Reported
0.012
0.01
0.008
0.006
0.004
0.002
0
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004
High issuance in the future is highly unlikely, due to increasing cash flows available to the firm
and, more importantly, the reality that further acquisitions themselves are unlikely. Because we
expect the debt-to-equity ratio to remain constant, we employ the Weighted Average Cost of
Capital approach to value the equity of SAP AG.
The cost of capital for the firm was calculated using the Capital Asset Pricing Model. The riskfree rate was derived using the current yield on a German Bund issue maturing in June, 2016,
3.775%, minus an assumed 1% premium demanded by purchasers of long-dated bonds.
(source: Lehman). This results in a risk free rate of 2.775%. As an international corporation, the
true cost of capital would reflect the prevailing interest rates in other countries as well, most
notably the United States, but in order to remain conservative in our valuation, we use the
German risk free rate, which is lower than that of the USA. We assume a market risk premium of
4% based on our future expectations of long-term stock market returns. We estimate the equity
Beta for SAP AG by regressing 15 years of monthly data using the following formula:
rp – rf = α + β(rm – rf) + ε.
We used a number of inputs for (rp – rf), and (rm – rf) in our calculations. For (rm – rf), we used the
CRSP value-weighted returns of the AMEX, NYSE, and NASDAQ indices minus a selfconstructed rf derived from the monthly yield on the risk-free 10-year U.S. Constant Maturity
Treasury Note. We calculated (rp – rf) using the monthly returns of SAP AG’s equity minus our
self-constructed risk-free rate.
We also compiled the Betas reported by Bloomberg as well as the raw and adjusted Beta’s
calculated by Bloomberg using the S&P Total Return Index. To contextualize our results, we
present the Betas estimated by these methods of SAP AG’s competitors, which in theory should
cluster around SAP AG’s Beta. Finally, we produce 5-year rolling Beta estimates of SAP AG
using the CRSP return described above.
CRSP Value-Weighted, w/ 10-yr
Constant Maturity as Rf
Lawson
1.95
IFS
2.06
Oracle
1.78
SAP AG
1.471
Epicor
2.06
SSAG***
N/A
***Only 5 data points available due to recent
IPO
Bloomberg
Bloomberg, S&P Total Return,
Reported
Raw
Lawson
1.1
1.74
IFS
1.6
2
QADI
1.39
2.01
Oracle
1.17
1.59
SAP AG
1.12
1.4
Epicor
1.61
1.75
SSAG***
N/A
1.46
***Only 5 data points available due to recent IPO
Bloomberg, S&P Total
Return, Adjusted
1.49
1.67
1.68
1.39
1.27
1.5
1.3
SAP AG 5-yr Rolling Beta Estimates, w/ 10-yr Constant Maturity as Rf
Period*
60-Observation Beta Estimate, using CRSP
1990-1994
0.3203377
1991-1995
0.3199933
1992-1996
0.6176501
1993-1997
0.7576755
1994-1998
0.721309
1995-1999
0.9387091
1996-2000
1.063247
1997-2001
1.404701
1998-2002
1.960666
1999-2003
2.360201
2000-2004
2.452321
20012005**
2.706345
Mean
1.301929642
* Data for each estimate begins in January and ends in December, inclusively
** CRSP estimate here is Jan/2001-Dec/2004
3
2.5
2
1.5
1
0.5
0
19
90
19 19
91 94
19 19
92 95
19 19
93 96
19 19
94 97
19 19
95 98
19 199
96 9
19 20
97 00
19 20
98 01
19 20
99 02
20 20
0 03
20 0-2
01 00
-2 4
00
5*
*
60-Observation Beta Estimate
SAP AG 5-yr Rolling Beta Estimates
Period
60-Observation Beta
Estimate, using CRSP
Given that the industry Beta we previously calculated was 1.86, that the CRSP estimates of the
Betas of comparable firms range from 1.47 to 2.06, and that the SAP AG Beta appears to be
increasing over time, a Beta of 1.47 would likely understate the cost of capital. We instead use
1.8, an average of the estimates using CRSP data and our industry Beta estimate. With inputs of rf
= 2.775%, β = 1.80, and (rm – rf) = 4%, we obtained a cost of equity of 9.975% for SAP AG.
We calculate the WACC using the following formula: WACC=D/(D+E)*(1-T)*rD +E/(D+E)*rE.
We use the YE2005 value of debt of $48.24M, current market value of equity of $64.67B, an
effective tax rate of 34.5% as suggested by management guidance, and a return on debt equal to
6.5%, which represents a cost of debt typical of the enterprise software industry. Note that SAP
AG is unrated by major debt-rating agencies and that its debt is not publicly traded. These values
yield a WACC of 9.971%.
Financial Statements and Forecast Assumptions
In this section, we discuss the assumptions on which the forecasted income statement, balance
sheet, and statement of cash flows are based.
Sales
To model sales, we first break down SAP AG’s revenue stream into sales to large-cap enterprises,
middle-market firms, and small-cap firms, respectively. Generally, the mySAP enterprise product
line targets large-cap enterprises, My SAP All-In-One is purchased in the middle-market, and
Business One is purchased by small-cap businesses, and we use these distinctions to separate the
income streams.
Within those three revenue streams, we then forecast the components --software fees,
maintenance fees, consulting fees, training fees, and other operating revenues--using historical
relationships of these revenues and considering the evidence for and against the extrapolation of
those relationships into the future.
Like other ERP vendors, nearly all of SAP AG’s non-software revenues are driven by past and
present software revenues, because SAP AG provides maintenance services, consulting services,
and hardware to clients who have purchased their products. Using historical data on SAP AG, we
found a stable relationship between each non-software revenue line item in a given year and the
software fees of that year. We therefore forecast maintenance fees, consulting fees, training fees,
and other revenues by continuing those linear relationships into the future, as functions of
software sales in a given market.
We forecast each of the three time series of SAP AG software revenues based on
 SAP AG’s historical software sales growth
 The competitive positioning of SAP AG
 The product cycles of MySAP, SAP All-In-One, Mendocino, and Business One
 The anticipated product releases of Oracle in 2008
 Management guidance
 The assumption that the industry growth rate for middle market and small-cap licensing
revenues will decline as the market for ERP software is penetrated, and
 The assumption that the large-cap market for ERP software is already largely penetrated
In the Q4 2005 conference call, SAP AG reveals that 31% of their software revenues originate in
the middle market, but because of poor disclosure policies, the exact percentage that has
historically originated in large-cap versus small-cap markets for ERP software is unreported.
Management prefers to break down their sales by geographic origin, probably to highlight for
analysts and investors the high ERP-growth expectations in America and the Asia Pacific region.
The reality, as stated earlier, is that most of the growth forecasted by management cannot
originate in the large-cap market; the revenue growth rates management therefore implies for the
middle market and the small-cap market for ERP software are unsustainably high.
Based on revenue breakdowns by type (e.g. ERP, CRM, etc.), and other available information
from corporate disclosures, we estimate the percentage of 2005 software sales from the small-cap
market at 15%. This leaves 54% of 2005 software revenues from the large-cap market. Finding
the precise proportions would increase the accuracy of the valuation, but would not radically
change the investment thesis, because the margins of these two income streams (revenues from
large-cap market and those from small-cap market) are very similar, though not identical.
We forecast the following growth rates of software sales for each market.
LargeCap
Dec06E
Dec07E
Dec08E
Dec09E
Dec10E
Dec11E
Middle-Mkt
SmallCap
10.00%
20.00%
15.00%
25.00%
20.00%
15.00%
5.00%
10.00%
10.00%
5.00%
5.00%
10.00%
10.00%
15.00%
10.00%
10.00%
12.00%
10.00%
LargeCap
Dec12E
Dec13E
Dec14E
Dec15E
Dec16E
MiddleMkt
SmallCap
6.66%
9.00%
10.00%
3.33%
6.00%
6.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
3.00%
While total sales have averaged 12% growth over the past 5 years, 2005 net sales grew a meager
3.56% in 2005. Management guidance predicts 15-17% revenue growth in 2006. As discussed
earlier, SAP’s AG strong competitive positioning and the poor product offerings, falling market
share, and acquisition difficulties at Oracle, arguably SAP’s primary competitor, suggest that
2006 guidance estimates may prove accurate or even conservative. However, it is unlikely that
the majority of this growth will originate in the large-cap market. As discussed above, SAP
currently controls more than 60% of the largely penetrated large-cap ERP market, while
competitors such as Oracle and Microsoft holding a combined market share of roughly 35%. As
such, most revenue gains in this market must come at the expense of SAP’s competitors.
For this reason, we concentrate the growth in middle-market and small-cap markets, and only
forecast 10% revenue growth from the large-cap market. Given our investment recommendation
of underweight, we generally pursue conservative forecasts that err on the side of overstatement
of margins and growth rates. For a maturing and penetrated market like large-cap ERP software,
10% revenue growth seems indeed generous, but Oracle’s weak positioning should allow
Microsoft and SAP both to increase market share in that regard next year, as discussed earlier in
the report. We forecast 20% revenue growth in the middle-market, the market expanding most
quickly and the market from which SAP hopes to derive 40-45% of revenues by 2010, up from
approximately 30% in 2005. Sales and marketing of mySAP All-in-One, which is too complex
for small enterprises, will assist this expansion in the near-term. In 2006, we forecast 15%
software revenue growth in the small-cap market, where SAP AG’s product offerings are
relatively less attractive and where industry level growth is not as rapid as that in the middlemarket.
These 2006 software revenue growth rates result in a net sales growth rate of 21.33%, which
includes also sales from maintenance, consulting, training and other revenues. Note that 2005 saw
especially low maintenance and consulting revenues relative to historical levels, according to
Bloomberg data, which explains how 2006 total sales growth is above all three respective 2006
software sales growth rates.
We forecast large-cap sales to grow a generous 25% in 2007, due to the year end 2006 general
release of Mendocino, which again delivers the functionality of SAP’s enterprise platform
through the Microsoft interface. This software release will allow SAP to steal further market
share from Oracle in 2007. We choose 25% because we believe it represents an upper bound of
potential growth in this year, given that SAP already controls more than 60% of the large-cap
ERP market. After 2007, however, we forecast large-cap software growth rates to fall markedly,
due to Oracle’s expected 2008 completion of “Project Fusion,” which again streamlines its
product suite to create unique solutions targeted specifically at each segment of the market.
As discussed earlier, SAP will begin to lose the market share it poached from Oracle between 2001 and
2005. We predict Oracle to gain market share in 2008, first in the large-cap market, and then in the middle
-market and small-cap market. To be conservative in our underweight valuation, we still predict 5%
growth in SAP’s 2008 and 2009 large-cap revenues. We anticipate a new stream of product releases in the
large-cap arena will roughly double SAP’s large-cap growth rates in 2010 and 2011, after which we
forecast linearly decreasing growth rates until reaching terminal growth in 2014.
We predict middle-market software revenue growth to sustain higher levels longer, due to the
lack of maturity of that market. We continue at 20% growth into 2007, and then halving in 2008
and again in 2009 and Oracle’s new product offerings penetrate the market, as discussed above.
Again, we predict a resurgence of middle-market growth (to 15%) in 2010 as SAP releases new
offerings and increases sales and marketing expense to combat Oracle’s renaissance in that
market. We then linearly decrease this growth until it reaches terminal growth in 2014. Given the
competitive strength in this market of firms like Epicor, and given that SAP’s products are not
classified as plug-and-play solutions, these figures are conservative in the context of our
underweight recommendation.
We forecast small-cap growth to be meager but respectable and, above all, sustainable into the
early 2010’s. Because Business One was developed specifically for small businesses, the firm
may indeed achieve of 10-15% for years to come, given it’s sales and marketing expenses in this
growing market. We forecast a decrease to 10% in 2008 with the resurgence of Oracle in this
market and then forecast this number to reach the terminal growth value.
Taken together, these sales assumptions result in increases from $10.6B in 2005 to $28.9B in
2016.
Cost of Goods Sold
We forecast the cost of goods sold based on historical gross margins provided by Bloomberg
Data and SAP’s 20-F filings and annual reports. Due to poor disclosure policies, SAP does not
provide data on the margins based on sales to different markets (e.g. large-cap), probably because
(as discussed above) of the lower margins it accrues in the markets in which it expects to grow
the most: the middle-market and the small-cap market. As such, our model assumes slightly lower
gross margins for these markets and slightly higher gross margins for the large-cap market,
relative to the historical average on a given line item (e.g. software sales). We maintain these
margins into the future.
Sales, General, & Administrative
As discussed above, management claims that S,G&A expenses were higher than expected during
2005 because “one-time” expenditures such as higher travel-related costs, and management
further guided analysts to expect a 0.50-1.00% decrease in S,G&A expenses as a percentage of
sales going forward. We grant them the assumption that such “one-time” items will not recur in
future periods, but we do not expect operating margins to rise about 2004 levels. Specifically, we
assume that R&D expense will remain at the historical level of 13.5% of sales in order to compete
with companies like Oracle and Epicor through and innovative and diversified product stream.
We also forecast Sales & Marketing expenses to increase relative to sales in 2008 and 2009 from
20% to 21% in order for SAP to hold market share against the advances of Oracle and its Project
Fusion. We then forecast Sales and Marketing costs to fall to 19% of sales, due to the maturing of
the ERP market. We forecast General & Administrative at its historical level of 5% of net sales.
Other Income Statement Items
We forecast depreciation and capital expenditures using a plug that allows net PP&E to grow
endogenously as a function of sales growth and parameters. We discuss those forecasts later on in
the report. Based on management guidance in the Q4 conference, we assume a 34.5% effective
tax rate going forward.
Balance Sheet and Statement of Cash Flows Assumptions
We forecast cash and cash equivalents increasing at the same rate as sales, in order to maintain
constant asset turnover. We estimate cash outlays to share holders using a historical a share
buyback ratio of 27.5%, based on 2006 guidance on share repurchases, and then we forecast
dividends as the remaining free cash flow available after the repurchases and increases in cash.
As per accounting regulations, Goodwill stays constant; it is not amortized. Again, large-scale
acquisitions are out of the question for anti-trust reasons, and software development is not an
asset-intensive business. As such, we predict relatively small future outlays for capital
expenditures and additions to working capital.
We scale net PP&E with sales, which assumes constant returns to scale for those production
inputs. We scale receivables, inventories, prepaid expenses, other current assets, other assets,
accounts payable, accrued expenses, and other current liabilities with sales growth.
Given the above assumptions, the Cash Flow Statement is easily constructed, and we generate allequity cash flows that increase from $2.221 billion in 2006 to $4.882 billion in 2016.
Margins, EVA, Ratios
Our model results in the following margins, ratios, EVA, and price multiples going forward:
2005
Sales Growth
2006
2007
2008
2009
2010
3.56%
21.33%
21.04%
7.43%
6.41%
11.06%
Gross Margin
Op. Margin, before
Depreciation
Op. Margin, after
Depreciation
65.73%
67.42%
67.22%
67.52%
67.72%
67.55%
27.24%
28.85%
28.65%
27.95%
28.15%
28.97%
24.85%
26.63%
26.43%
25.73%
25.93%
26.75%
Net Margin
14.78%
17.39%
17.26%
16.80%
16.93%
17.47%
-12.06%
42.75%
20.14%
4.57%
7.23%
14.61%
25.08%
31.06%
33.36%
30.96%
31.68%
34.82%
Economic Profit, &Millions
940.01
1,512.26
1,876.05
1,896.91
2,055.92
2,454.22
WACC
Economic Profit (ROEWACC)
9.97%
9.97%
9.97%
9.97%
9.97%
9.97%
15.11%
21.09%
23.39%
20.99%
21.71%
24.85%
2011
2012
2013
2014
2015
2016
Sales Growth
10.44%
8.14%
4.71%
3.00%
3.00%
3.00%
Gross Margin
Op. Margin, before
Depreciation
Op. Margin, after
Depreciation
67.48%
67.52%
67.53%
67.53%
67.53%
67.53%
29.90%
29.95%
29.96%
29.96%
29.96%
29.96%
27.68%
27.73%
27.74%
27.74%
27.74%
27.74%
Net Margin
18.08%
18.11%
18.11%
18.11%
18.11%
18.11%
Net Income Growth
14.28%
8.32%
4.74%
3.00%
3.00%
3.00%
Return on Equity
37.02%
37.37%
36.98%
36.81%
37.08%
37.36%
2,871.55
3,121.27
3,256.40
3,348.41
3,458.39
3,571.67
9.97%
9.97%
9.97%
9.97%
9.97%
9.97%
27.05%
27.40%
27.01%
26.84%
27.11%
27.39%
Net Income Growth
Return on Equity
Economic Profit, &Millions
WACC
Economic Profit (ROEWACC)
Our model predicts SAP AG to produce economic profit of 27.39% at the terminal date. Given
that SAP AG represents an oligopolist in a differentiated market with significant barriers to entry,
producing economic profits in the terminal date remains possible. Arguments that ROE should
converge to or approach cost of capital only support our investment thesis. Margins increase over
time, though not to the extent management would prefer (remember that margins were especially
low in 2005). Both sales growth and net income growth converge to the terminal rate.
Model Results & Valuation Summary
Using the Weighted Average Cost of Capital methodology discussed above, the formula
[PV=PV(All Equity Cash Flows) - Debt Outstanding + Cash] results in an equity value of $52.7
billion, or $42.93 per share of the ADR. This represents an 18.48% mispricings against the
market price of $52.66 per share of the ADR, and supports our conclusion that SAP AG’s equity
is overpriced. Exhibit 3 contains our full discounted cash flow analysis.
The following sensitivity analysis reveals the extent to which SAP AG is overvalued, even after
relaxing key assumptions:
Sensitivity Analysis
WACC
8.250%
8.500%
8.750%
9.000%
9.250%
9.500%
9.750%
9.971%
10.250%
Terminal Growth Rate
3.75%
3.50%
3.25%
3.00%
2.75%
$61.93
$59.90
$58.07
$56.42
$54.91
$58.79
$57.00
$55.39
$53.92
$52.58
$55.96
$54.39
$52.96
$51.65
$50.45
$53.41
$52.01
$50.74
$49.57
$48.50
$51.09
$49.85
$48.71
$47.66
$46.69
$48.97
$47.86
$46.84
$45.90
$45.02
$47.04
$46.04
$45.12
$44.27
$43.48
$45.46
$44.55
$43.71
$42.93
$42.20
$43.62
$42.81
$42.06
$41.36
$40.70
In fact, holding other assumptions constant, SAP would require 19% sales growth each year until 2010 to
justify its current market price. As discussed above, this possibility is highly unlikely given that SAP
already controls 62% of the ERP market, which is largely penetrated.
Exhibit 1: Management Biographies (Source: DataMonitor)
Henning Kagermann
Chief Executive Officer and Member, SAP Executive Board
Age: 57
Mr Kagermann is the chief executive officer of the company. He joined SAP in 1982.
He became a member of the executive board in 1991 and co-chief executive officer in
1998. In 2003, he became sole chief executive officer of the executive board.
Werner Brandt
Chief Financial Officer and Member, SAP Executive Board
Age: 51
Mr Brandt joined SAP in early 2001 as the chief financial officer and member of the
executive board. Prior to joining SAP, he was chief financial officer and member of the
executive board of Fresenius Medical Care since 1999. Before joining Fresenius
Medical Care, he headed the finance function of the European operations of Baxter
International.
Hasso Plattner
Chairman, Supervisory Board
Age: 60
Dr Plattner is the chairman of the company’s supervisory board. He is one of the
founders of SAP. He became vice chairman of the executive board in 1988 and cochairman
in 1997. He has overall responsibility for SAP’s strategy and business
development, product and technology strategy as well as for marketing and global
communications.
Shai Agassi
Global Head of Strategy and Member, SAP Executive Board
Age: 36
Mr Agassi joined SAP in 2001 as chief executive officer of SAP Portals and became a
member of the executive board in 2002. Prior to joining SAP, he founded a number of
software companies in Israel between 1990 and 1994, and served in various positions
in those companies. He moved one of these companies to California and renamed it
TopTier Software, where he served as chairperson, chief technology officer and
eventually chief executive officer.
Léo Apotheker
Global Head of Field Operations and Member, SAP Executive Board
Age: 51
Mr Apotheker is a business economist. He first joined SAP in 1988 and became a
member of the executive board in 2002. His responsibilities include global field
operations, global marketing, field marketing.
Claus E Heinrich
Global Head of Human Resources and Member, SAP Executive Board
Age: 49
Mr Heinrich joined SAP in 1987 and became a member of the executive board in
1996. His responsibilities include global human resources (including labor relations),
quality management, internal IT, development labs (SAP Labs).
Exhibit 2: SAP Relative Valuation Metrics
Assumptions:
SAP ADR Price (=1/4
common share):
$
Full Share Price:
$ 208.84
2006E EPS:
$
7.39
2006E EBIT:
$
11.32
52.21
2006E Sales (million EUR):
$ 12,695
2006E Shares:
307,000,000
2005 EBIT:
2005 Book Value (million
EUR):
$
2005 Assets (million EUR):
$10,916.99
8.54
$ 7,169.98
* 2005 data from company Q4 earnings release
Public Comparables:
Ticker
Name
P/E (forward)
SAP
SAP AG
LWSN
Lawson Software
ORCL
EV/Sales
28.26
19.616
5.92
9.36
6.36
6.07
20.13
12.524
1.6
2.56
2.34
1.99
3.94
Oracle Corp.
13.46
12.345
4.8
5.29
4.98
1.24
10.01
QADI
QAD Inc.
15.08
7.958
1
4.62
1.16
1.50
5.27
EPIC
Epicor Software
12.86
12.525
2.47
3.60
2.18
0.87
14.39
SSAG
SSA Global, Inc.
13.75
10.947
1.82
4.28
1.65
2.00
8.89
20.40
20.192
2.94
4.95
3.11
1.57
9.00
Industry
P/B
P/S
EPS
Growth:
EV/EBITDA
PEG
8.60
* SAP data from our projections; all other data from Yahoo Finance
Estimates:
$
150.76
Valuation:
$
139.50
Premium/Discount:
$ 181.05
$ 121.36
$ 115.65
$
128.67
EV/EBITDA
P/EBIT
P/B
P/S
-33.20%
Acquisition
Comparables:
Deal
Completion Date
P/E (forward)
P/Assets
Premium
Oracle/PeopleSoft
1/10/2005
47.6
23.51
33.44
4.13
4.36
2.91
69.60%
Peoplesoft/JD Edwards
8/29/2003
25.9
14.63
44.9
2.88
1.55
1.63
20.38%
Microsoft/Great Plains
4/5/2001
NM
30.73
NM
4.19
4.87
2.92
27.37%
Lawson/Intentia
4/30/2006
NM
NM
NM
3.6
1.03
1.22
42.71%
IBM/Micromuse
2/15/2006
NM
44.88
110.14
3.3
4.3
2.08
32.07%
36.75
28.44
62.83
3.62
3.22
$
133.23
2.15
38.43%
* All acquisitions data from Bloomberg
Averages:
Estimates:
$
271.58
Valuation:
$
161.77
Premium/Discount:
Valuation without merger premium:
Premium/Discount:
-22.54%
$
116.86
-44.04%
$ 242.95
NM
$
84.55
$ 76.53
Exhibit 3: SAP DCF Valuation
Terminal Growth=
Equity Premium=
WACC=
Cost of Equity=
3.00%
4.00%
9.971%
9.975%
Cost of Debt=
Risk Free Rate=
Beta=
Effective Tax Rate=
6.50%
2.78%
1.8
34.5%
Market Value of Equity=
Market Value of Debt=
Shares Outstanding=
64,670.00
48.24
307.00
TARGET PRICE of US
ADR:
Current Price:
42.93
52.66
$/share
$/share
Overpriced by:
18.48
%
rE=rF+ B(rM)
9.9750%
WACC= D/(D+E) * (1-T) rD + E/(D+E) * rE
WACC=
0.099707385
PV=PV(All Equity Cash Flows) - Debt Outstanding + Cash - Minority Interest
Value of Equity=
52,717.97
PV(FCF2006)=
PV(FCF2007)=
PV(FCF2008)=
PV(FCF2009)=
PV(FCF2010)=
PV(FCF2011)=
PV(FCF2012)=
PV(FCF2013)=
PV(FCF2014)=
PV(FCF2015)=
Terminal Value=
2,169.26
2,369.95
2,261.39
2,205.71
2,295.82
2,386.20
2,351.85
2,242.07
2,100.96
1,967.78
26,439.83
$million
FCFt
2,221.42
2,668.91
2,800.59
3,003.99
3,438.48
3,930.18
4,259.82
4,465.90
4,602.08
4,740.14
4,882.34
PV(All Equity Cash
Flows)=
Debt=
Cash=
Minority Interest=
48,790.82
48.24
3,984.83
9.44
$million
$million
$million
$million
Gross Discount Rate
1.024045575
1.126150482
1.238436003
1.361917218
1.497710424
1.647043214
1.811265587
1.991862143
2.190465509
2.408871098
2.649053337
$million
$million
$million
Bibliography
“Industry Surverys, Computers: Software”, Jonathan Rudy, Standard & Poor’s, October
2005.
“Software in the United States”, DataMonitor, December 2005
“SAP Atkiengesellschaft.”, DataMonitor, October 2005
Locke, Robert, Jim Shepherd and Wendy Davis; The Enterprise Resource Planning
Spending Report, 2005–2006, AMR Research, 11/17/2005
SAP AG February 2006 Investor Roadshow Presentation – London Financial Community
February 22, 2006
http://www.sap.com/company/investor/presentationfinancialcommunity.epx
SAP AG 2005 Fourth Quarter Earnings Call
January 25, 2006
http://www.sap.com/company/investor/q4_2005_pressconf.epx
Bloomberg Markets Information
Lehman Brothers, International Bond Market Yields
ING on SAP AG, 6/26/2006
Prudential report on SAP AG, 2/2/2006
Morgan Stanley report on SAP AG, 1/26/2006
Cross Asset Research report on SAP AG, 1/25/2006
Edwards report on SAP AG, 2/2/2006
Merrill Lynch report on SAP AG, 3/2/2006
Wharton Research Data Service
Accessed March 15 and March 26, 2006
wrds.wharton.upenn.edu
A.T. Kearney
“Summary Proceedings from 2005 Rome CPO Club Roundtable”
http://www.atkearney.com/shared_res/pdf/2005-Rome-CPO-Club-Proceedings.pdf
Peerstone Enterprise Software Report: “Can Anti-Trust Stop Oracle?”
June 27, 2003
http://www.peerstone.com/pdfs/Peerstone_Ent_Software_Wkly_June_27_03.pdf
Yahoo! Finance Information
Accessed March 26-27, 2006
finance.yahoo.com
Morningstar
Accessed March 26-27, 2006
www.morningstar.com
Appendix: Financial Statement Forecasts (USD)
Income Statement:
Sales (Net)
Software Revenue
Maintenance Revenue
Consulting Revenue
Training Revenue
Other Revenue
Dec-04
Dec-05A
Dec-06E
Dec-07E
Dec-08E
Dec-09E
Dec-10E
Dec-11E
Dec-12E
Dec-13E
Dec-14E
Dec-15E
Dec-16E
10193.31
3196.34
3822.03
2667.80
409.48
77.49
10556.41
3450.61
3937.80
2653.29
424.65
90.06
12807.85
4133.90
4094.98
2282.79
375.93
1920.26
15503.24
5033.40
4998.33
2797.52
460.57
2213.43
16654.53
5408.64
5349.56
2974.79
489.97
2431.57
17721.80
5716.72
5660.71
3153.65
519.36
2671.36
19682.12
6391.58
6297.95
3480.58
573.52
2938.50
21736.88
7078.20
6960.48
3833.95
631.90
3232.35
23506.50
7645.28
7505.77
4123.04
679.67
3552.73
24613.69
8006.67
7843.21
4292.56
707.80
3763.46
25352.10
8246.87
8078.51
4421.33
729.03
3876.36
26112.67
8494.27
8320.86
4553.98
750.91
3992.65
26896.05
8749.10
8570.49
4690.59
773.43
4112.43
6384.70
2049.66
2377.61
1639.73
266.46
51.24
3998.50
1283.63
1489.01
1026.90
166.87
32.09
1854.14
595.23
690.47
476.18
77.38
14.88
7980.87
2562.08
2972.01
2049.66
333.07
64.05
4798.20
1540.35
1786.81
1232.28
200.25
38.51
2132.26
684.51
794.04
547.61
88.99
17.11
8379.92
2690.18
3120.61
2152.15
349.72
67.25
5278.02
1694.39
1965.49
1355.51
220.27
42.36
2345.49
752.97
873.44
602.37
97.89
18.82
8798.91
2824.69
3276.64
2259.75
367.21
70.62
5541.92
1779.11
2063.76
1423.29
231.28
44.48
2580.04
828.26
960.78
662.61
107.67
20.71
9678.80
3107.16
3604.31
2485.73
403.93
77.68
6373.21
2045.97
2373.33
1636.78
265.98
51.15
2838.04
911.09
1056.86
728.87
118.44
22.78
10646.68
3417.88
3964.74
2734.30
444.32
85.45
7137.99
2291.49
2658.13
1833.19
297.89
57.29
3121.85
1002.20
1162.55
801.76
130.29
25.05
11355.75
3645.51
4228.79
2916.41
473.92
91.14
7780.41
2497.72
2897.36
1998.18
324.70
62.44
3434.03
1102.42
1278.80
881.93
143.31
27.56
11733.90
3766.90
4369.61
3013.52
489.70
94.17
8247.23
2647.59
3071.20
2118.07
344.19
66.19
3640.07
1168.56
1355.53
934.85
151.91
29.21
12085.92
3879.91
4500.69
3103.93
504.39
97.00
8494.65
2727.01
3163.34
2181.61
354.51
68.18
3749.28
1203.62
1396.20
962.90
156.47
30.09
12448.49
3996.31
4635.72
3197.04
519.52
99.91
8749.49
2808.83
3258.24
2247.06
365.15
70.22
3861.75
1239.73
1438.08
991.78
161.16
30.99
12821.95
4116.20
4774.79
3292.96
535.11
102.90
9011.98
2893.09
3355.98
2314.47
376.10
72.33
3977.61
1276.92
1481.23
1021.54
166.00
31.92
4172.94
647.35
750.93
2386.80
387.86
0.00
5081.91
788.16
914.27
2907.08
472.40
0.00
5408.86
798.87
981.92
3120.93
507.15
0.00
5720.25
845.02
1038.44
3300.46
536.33
0.00
6387.34
943.76
1159.82
3684.95
598.80
0.00
7069.80
1044.68
1283.87
4078.49
662.75
0.00
7634.35
1128.36
1386.55
4403.82
715.62
0.00
7991.86
1181.46
1451.68
4609.65
749.07
0.00
8231.62
1216.91
1495.23
4747.94
771.54
0.00
8478.56
1253.41
1540.09
4890.38
794.69
0.00
8732.92
1291.02
1586.29
5037.09
818.53
0.00
2138.00
327.95
380.42
1229.80
2672.50
409.93
475.52
1537.25
2779.23
403.53
499.30
1614.11
2918.19
423.70
524.26
1694.81
3210.01
466.07
576.69
1864.30
3531.01
512.68
634.36
2050.73
3766.17
546.83
676.61
2187.30
3891.59
565.04
699.14
2260.14
4008.33
581.99
720.11
2327.95
4128.58
599.45
741.71
2397.78
4252.44
617.43
763.97
2469.72
Sales, originating from Large-Cap
Enterprises
Software Revenue
Maintenance Revenue
Consulting Revenue
Training Revenue
Other Revenue
Sales, from Middle Market Enterprises
Software Revenue
Maintenance Revenue
Consulting Revenue
Training Revenue
Other Revenue
Sales, from Small Cap Enterprises
Software Revenue
Maintenance Revenue
Consulting Revenue
Training Revenue
Other Revenue
Cost of Goods Sold
Cost of Software Revenue
Cost of Maintenance Revenue
Cost of Consulting Revenue
Cost of Training Revenue
Cost of Other Revenue
COGS, from Large-Cap Enterprises
Cost of Software Revenue
Cost of Maintenance Revenue
Cost of Consulting Revenue
1863.33
1069.69
517.59
3187.17
3618.11
1231.59
2386.52
Cost of Training Revenue
Cost of Other Revenue
COGS, from Middle Market Enterprises
Cost of Software Revenue
Cost of Maintenance Revenue
Cost of Consulting Revenue
Cost of Training Revenue
Cost of Other Revenue
COGS, from Small Cap Enterprises
Cost of Software Revenue
Cost of Maintenance Revenue
Cost of Consulting Revenue
Cost of Training Revenue
Cost of Other Revenue
199.84
0.00
1384.58
218.22
253.13
249.80
0.00
1661.50
261.86
303.76
262.29
0.00
1810.71
271.10
334.13
275.41
0.00
1901.24
284.66
350.84
302.95
0.00
2186.43
327.36
403.47
333.24
0.00
2448.80
366.64
451.88
355.44
0.00
2669.19
399.64
492.55
367.27
0.00
2829.34
423.61
522.10
378.29
0.00
2914.22
436.32
537.77
389.64
0.00
3001.65
449.41
553.90
401.33
0.00
3091.70
462.89
570.52
785.58
127.66
0.00
650.35
101.19
117.38
371.42
60.36
0.00
942.70
153.19
0.00
747.90
116.37
134.99
427.14
69.41
0.00
1036.97
168.51
0.00
818.93
124.24
148.48
469.85
76.35
0.00
1088.81
176.93
0.00
900.82
136.66
163.33
516.84
83.99
0.00
1252.14
203.47
0.00
990.90
150.33
179.67
568.52
92.38
0.00
1402.39
227.89
0.00
1089.99
165.36
197.63
625.37
101.62
0.00
1528.61
248.40
0.00
1198.99
181.90
217.40
687.91
111.79
0.00
1620.32
263.30
0.00
1270.93
192.81
230.44
729.18
118.49
0.00
1668.93
271.20
0.00
1309.06
198.60
237.35
751.06
122.05
0.00
1719.00
279.34
0.00
1348.33
204.56
244.47
773.59
125.71
0.00
1770.57
287.72
0.00
1388.78
210.69
251.81
796.80
129.48
0.00
Gross Profit
7006.14
6938.30
8634.92
10421.34
11245.67
12001.55
13294.79
14667.08
15872.15
16621.83
17120.49
17634.10
18163.13
Selling, General, & Admin Expenses
Research and Development
Sales and Marketing
General and Administrative
Other Operating Expenses
3939.71
1380.90
2062.73
496.07
2.39
4062.50
1349.90
2165.31
539.62
7.66
4940.32
1729.06
2561.57
640.39
9.30
5980.00
2092.94
3100.65
775.16
11.25
6590.63
2248.36
3497.45
832.73
12.09
7012.98
2392.44
3721.58
886.09
12.86
7591.90
2657.09
3936.42
984.11
14.29
8167.11
2934.48
4130.01
1086.84
15.78
8832.00
3173.38
4466.24
1175.33
17.06
9248.00
3322.85
4676.60
1230.68
17.87
9525.44
3422.53
4816.90
1267.61
18.40
9811.21
3525.21
4961.41
1305.63
18.96
10105.54
3630.97
5110.25
1344.80
19.52
Operating Income Before Depreciation
Depreciation, Depletion, & Amortiz
3066.43
283.85
2875.80
252.96
3694.60
284.33
4441.34
344.17
4655.04
369.73
4988.58
393.42
5702.88
436.94
6499.97
482.56
7040.14
521.84
7373.83
546.42
7595.05
562.82
7822.90
579.70
8057.58
597.09
Operating Income After Depreciation
(EBIT)
Interest Expense
2782.58
11.00
2622.84
13.64
3410.26
3.14
4097.16
3.80
4285.31
4.60
4595.15
4.95
5265.94
5.26
6017.41
5.85
6518.30
6.46
6827.41
6.98
7032.23
7.31
7243.20
7.53
7460.49
7.76
84.45
-50.10
0.00
-31.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
0.07
0.00
0.00
Pretax Income
Income Taxes - Total
Effective Tax Rate
Minority Interest
2805.94
1025.19
0.37
6.57
2578.20
1014.32
0.39
3.72
3407.13
1175.46
0.35
4.51
4093.36
1412.21
0.35
5.46
4280.70
1476.84
0.35
5.87
4590.20
1583.62
0.35
6.25
5260.67
1814.93
0.35
6.94
6011.57
2073.99
0.35
7.66
6511.84
2246.59
0.35
8.28
6820.43
2353.05
0.35
8.67
7024.92
2423.60
0.35
8.93
7235.67
2496.30
0.35
9.20
7452.74
2571.19
0.35
9.48
Net Income (Loss)
1774.18
1560.16
2227.15
2675.69
2797.99
3000.34
3438.81
3929.92
4256.97
4458.70
4592.39
4730.16
4872.06
Effective Cost of Debt
Non-Operating Income/Expense
Special Items
Balance Sheet:
Dec-04
Dec-05A
Dec-06E
Dec-07E
Dec-08E
Dec-09E
Dec-10E
Dec-11E
Dec-12E
Dec-13E
Dec-14E
Dec-15E
Dec-16E
ASSETS
Cash & Equivalents
Receivables - Total (Net)
Inventories - Total
Current Assets - Other
4341.24
2682.23
15.83
352.88
3984.83
2791.27
24.03
788.09
4834.70
3386.58
29.16
702.84
5852.16
4099.29
35.29
850.75
6286.74
4403.70
37.91
913.93
6689.62
4685.90
40.34
972.50
7429.60
5204.24
44.80
1080.07
8205.23
5747.55
49.48
1192.83
8873.23
6215.46
53.51
1289.93
9291.17
6508.22
56.03
1350.69
9569.90
6703.47
57.71
1391.21
9857.00
6904.57
59.44
1432.95
10152.71
7111.71
61.22
1475.94
Current Assets - Total
7392.18
7588.22
8953.28
10837.49
11642.29
12388.36
13758.72
15195.09
16432.13
17206.11
17722.30
18253.97
18801.58
Plant, Property & Equip (Gross)
Accumulated Depreciation
Plant, Property & Equip (Net)
2520.71
1168.15
1352.56
2778.87
1421.11
1357.76
3352.78
1705.44
1647.34
4043.64
2049.62
1994.02
4561.44
2419.35
2142.10
5092.14
2812.77
2279.37
5781.22
3249.71
2531.50
6528.06
3732.27
2795.79
7277.51
4254.12
3023.39
7966.34
4800.54
3165.80
8624.13
5363.36
3260.77
9301.66
5943.06
3358.60
9999.51
6540.15
3459.36
2.16
133.74
710.60
95.27
582.72
0.00
259.86
950.14
98.66
662.35
0.00
315.28
1152.78
119.71
803.61
0.00
381.63
1395.39
144.90
972.73
0.00
409.97
1499.01
155.66
1044.97
0.00
436.25
1595.07
165.63
1111.93
0.00
484.50
1771.51
183.96
1234.93
0.00
535.08
1956.45
203.16
1363.86
0.00
578.64
2115.73
219.70
1474.89
0.00
605.90
2215.38
230.05
1544.36
0.00
624.08
2281.84
236.95
1590.69
0.00
642.80
2350.30
244.06
1638.41
0.00
662.08
2420.81
251.38
1687.56
10269.21
10916.99
12992.01
15726.16
16893.99
17976.61
19965.12
22049.42
23844.49
24967.60
25716.63
26488.13
27282.77
LIABILITIES
Accounts Payable
Accrued Expenses
Taxes Payable
Other Current Liabilities
Total Current Liabilities
460.91
1105.99
237.25
1004.30
2808.45
475.46
174.85
260.42
129.34
1040.07
576.86
212.14
315.96
156.93
1261.89
698.27
256.79
382.46
189.95
1527.46
750.12
275.86
410.86
204.06
1640.89
798.19
293.53
437.19
217.13
1746.04
886.48
326.00
485.55
241.15
1939.18
979.03
360.04
536.24
266.33
2141.63
1058.73
389.35
579.89
288.01
2315.98
1108.60
407.69
607.20
301.57
2425.06
1141.86
419.92
625.42
310.62
2497.82
1176.11
432.51
644.18
319.94
2572.75
1211.40
445.49
663.51
329.54
2649.93
Notes Payable
Long Term Debt
Long Term Debt & Notes Payable
Deferred Taxes (Balance Sheet)
Investment Tax Credit
Minority Interest
Liabilities - Other
35.00
9.85
44.85
22.53
0.00
29.74
1143.94
36.25
11.99
48.24
0.00
0.00
9.44
2649.27
43.98
14.55
58.52
0.00
0.00
11.46
3640.28
53.23
17.61
70.84
0.00
0.00
13.87
5076.69
57.19
18.92
76.10
0.00
0.00
14.90
5690.21
60.85
20.13
80.98
0.00
0.00
15.85
6258.98
67.58
22.36
89.94
0.00
0.00
17.61
7303.65
74.64
24.69
99.33
0.00
0.00
19.44
8398.65
80.71
26.70
107.41
0.00
0.00
21.03
9341.70
84.51
27.96
112.47
0.00
0.00
22.02
9931.73
87.05
28.79
115.84
0.00
0.00
22.68
10325.24
89.66
29.66
119.32
0.00
0.00
23.36
10730.55
92.35
30.55
122.90
0.00
0.00
24.06
11148.02
Non-Current Liabilities
1206.07
2706.95
3710.27
5161.39
5781.21
6355.81
7411.19
8517.42
9470.14
10066.22
10463.76
10873.23
11294.98
TOTAL LIABILITIES
4049.51
3747.02
4972.16
6688.85
7422.10
8101.85
9350.37
10659.04
11786.12
12491.28
12961.58
13445.98
13944.91
Shareholders' Equity
6219.70
7169.98
8019.85
9037.31
9471.89
9874.77
10614.75
11390.38
12058.37
12476.32
12755.05
13042.15
13337.86
Investments at Equity
Investments and Advances - Other
Intangibles & Goodwill
Deferred Charges
Assets - Other
TOTAL ASSETS
SHAREHOLDERS' EQUITY
Preferred Stock
Common Stock
Capital Surplus
Retained Earnings (Net Other)
Less: Treasury Stock
Accumulated Other Comprehensive Loss
0.00
427.81
436.82
6125.61
770.54
0.00
392.41
462.23
7422.87
961.39
-146.14
0.00
392.41
462.23
8887.74
1576.39
-146.14
0.00
392.41
462.23
10641.01
2312.21
-146.14
0.00
392.41
462.23
11845.05
3081.66
-146.14
0.00
392.41
462.23
13073.01
3906.75
-146.14
0.00
392.41
462.23
14758.67
4852.42
-146.14
0.00
392.41
462.23
16615.02
5933.15
-146.14
0.00
392.41
462.23
18453.69
7103.82
-146.14
0.00
392.41
462.23
20097.77
8329.96
-146.14
0.00
392.41
462.23
21639.42
9592.87
-146.14
0.00
392.41
462.23
23227.31
10893.66
-146.14
0.00
392.41
462.23
24862.83
12233.48
-146.14
TOTAL SHAREHOLDERS' EQUITY
6219.70
7169.98
8019.85
9037.31
9471.89
9874.77
10614.75
11390.38
12058.37
12476.32
12755.05
13042.15
13337.86
TOTAL SHAREHOLDERS' EQUITY
TOTAL LIABILITIES & EQUITY
6219.70
10269.21
7169.98
10916.99
8019.85
12992.01
9037.31
15726.16
9471.89
16893.99
9874.77
17976.61
10614.75
19965.12
11390.38
22049.42
12058.37
23844.49
12476.32
24967.60
12755.05
25716.63
13042.15
26488.13
13337.86
27282.77
0.00
0.99
0.00
0.97
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
0.00
0.99
Asset Check
Asset Turnover
Statement of Cash Flows:
Dec-04
Dec05A
Free Cash Flow to Debt and Equity
After-tax EBIT
- changes in WC
- changes in net pp&e
-changes in other assets
+ changes in other liabilities
ROIC
Total Net Cash Flow
INDIRECT OPERATING
ACTIVITIES
Income Before Extraordinary Items
Depreciation and Amortizations
Extraordinary Items and Disc.
Operations
Deferred Taxes
Dec06E
Dec07E
Dec08E
Dec09E
Dec10E
Dec11E
Dec12E
Dec13E
Dec14E
Dec15E
Dec16E
2221.42
2233.72
-293.37
-289.58
-420.37
991.02
2668.91
2683.64
-601.18
-346.68
-503.26
1436.40
2800.59
2806.88
-256.78
-148.08
-214.96
613.53
3003.99
3009.82
-238.05
-137.27
-199.27
568.76
3438.48
3449.19
-437.23
-252.14
-366.02
1044.67
3930.18
3941.40
-458.30
-264.28
-383.65
1095.00
4259.82
4269.49
-394.70
-227.61
-330.41
943.05
4465.90
4471.95
-246.95
-142.41
-206.73
590.03
4602.08
4606.11
-164.70
-94.97
-137.87
393.51
4740.14
4744.29
-169.64
-97.82
-142.01
405.31
4882.34
4886.62
-174.73
-100.76
-146.27
417.47
0.31
0.33
0.31
0.32
0.35
0.37
0.37
0.37
0.37
0.37
0.37
769.14
-313.70
552.63
661.60
282.59
261.97
481.17
504.35
434.37
271.77
181.25
186.68
192.29
1774.18
283.85
1560.16
252.96
2227.15
284.33
2675.69
344.17
2797.99
369.73
3000.34
393.42
3438.81
436.94
3929.92
482.56
4256.97
521.84
4458.70
546.42
4592.39
562.82
4730.16
579.70
4872.06
597.09
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Equity in Net Loss (Earnings)
Sale of PPEq and Investments - Loss
(Gain)
Funds from Operations - Other
Receivables - Decrease(Increase)
Inventory - Decrease (Increase)
Accounts/P and Accrued Liabs Inc(Dec)
Income Taxes - Accrued Increase(Decrease)
Other Assets and Liabilities - Net
Change
0.46
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
-18.26
20.61
C
C
0.00
0.00
-109.04
-8.20
0.00
0.00
-595.31
-5.13
0.00
0.00
-712.70
-6.14
0.00
0.00
-304.42
-2.62
0.00
0.00
-282.20
-2.43
0.00
0.00
-518.34
-4.46
0.00
0.00
-543.31
-4.68
0.00
0.00
-467.91
-4.03
0.00
0.00
-292.76
-2.52
0.00
0.00
-195.25
-1.68
0.00
0.00
-201.10
-1.73
0.00
0.00
-207.14
-1.78
C
-916.59
138.70
166.05
70.92
65.75
120.76
126.58
109.01
68.21
45.49
46.85
48.26
C
23.17
55.54
66.49
28.40
26.33
48.36
50.69
43.66
27.31
18.22
18.76
19.33
412.47
-60.38
443.67
531.16
226.87
210.32
386.30
404.91
348.72
218.18
145.51
149.88
154.37
2473.32
742.08
2548.96
3064.72
3186.88
3411.53
3908.37
4446.67
4808.27
5023.56
5167.49
5322.52
5482.19
57.87
0.00
123.96
0.00
55.42
0.00
66.35
0.00
28.34
0.00
26.27
0.00
48.26
0.00
50.58
0.00
43.56
0.00
27.25
0.00
18.18
0.00
18.72
0.00
19.28
0.00
Short term Investments - Change
Capital Expenditures
Sale of Property Plant and
Equipment
Acquisitions
Investing Activities - Other
-786.10
286.82
0.00
258.16
0.00
573.91
0.00
690.85
0.00
517.81
0.00
530.70
0.00
689.08
0.00
746.84
0.00
749.45
0.00
688.83
0.00
657.79
0.00
677.52
0.00
697.85
158.04
227.58
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
Investing Activities - Net Cash
Flow
1200.33
-382.12
-629.34
-757.20
-546.15
-556.97
-737.33
-797.42
-793.01
-716.09
-675.97
-696.25
-717.13
Operating Actiities - Net Cash
Flow
INVESTING ACTIVITIES
Investments - Increase
Sale of Investments
FINANCING ACTIVITIES
Sale of Common and Preferred
Stock
Purchase of Common and Preferred
Stock
Cash Dividends
Long Term Debt - Issuance
Long Term Debt - Reduction
Financing Activities - Other
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
0.00
145.58
336.71
31.25
0.67
-52.14
255.44
421.60
3.39
0.00
0.00
615.00
762.28
10.29
0.00
0.00
735.81
922.42
12.32
0.00
0.00
769.45
1593.96
5.26
0.00
0.00
825.09
1772.37
4.88
0.00
0.00
945.67
1753.15
8.96
0.00
0.00
1080.73
2073.56
9.39
0.00
0.00
1170.67
2418.31
8.09
0.00
0.00
1226.14
2814.62
5.06
0.00
0.00
1262.91
3050.75
3.37
0.00
0.00
1300.79
3142.27
3.48
0.00
0.00
1339.82
3236.54
3.58
0.00
0.00
Financing Activities - Net Cash
Flow
-503.85
-673.65
-1366.99
-1645.92
-2358.15
-2592.59
-2689.87
-3144.90
-3580.89
-4035.70
-4310.28
-4439.59
-4572.77
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