Sanjay Brahmawar, Software AG CEO, commented: “Another quarter of double-digit product revenue growth in our Digital Business shows our transformation towards higher-quality, more predictable revenue continues to take hold. Our investments in product innovation are helping us compete and win new business in growth areas like IoT, iPaaS, API management and process mining, and we’re increasing value through subscription migrations and renewals. Overall, we are well-set to reach our revised full-year guidance and I’m confident in our ability to continue growing over the long term.”

Dr. Matthias Heiden, Software AG CFO, commented: “The overall picture for Software AG is solid as we enter the fourth quarter of 2021. With the deals holding back our third-quarter Digital Business bookings now closed and a plan in place to increase the pace at which new opportunities move through our pipeline, we are on track for a good finish to the year. By investing prudently in areas like the DACH Mittelstand and in North America, we continue to deliver profitable growth while driving our ongoing transformation.”

Financial highlights

[Unless otherwise stated, all figures are IFRS. Increases at constant currency and rounded].

• Product revenue grew 10 percent in the Digital Business reflecting the continued impact of our subscription shift. Total product revenue grew 7 percent year-on-year in the third quarter.
• Lead transformation indicators continued to show strength, with 88 percent of third-quarter Digital Business bookings from subscription and Software as a Service (SaaS), annual recurring revenue (ARR) growing 9 percent year-on-year and recurring revenue reached 94 percent of our product revenue total. 
• Digital Business bookings grew 6 percent in the third quarter, affected by deal timing as new opportunities took longer to mature than expected. 
• Adabas & Natural (A&N) bookings grew 2 percent as customers continued to modernize their A&N landscapes using Software AG’s innovative A&N 2050+ program.
• Operating margin (EBITA, non-IFRS) of 16.8 percent for the quarter despite ongoing investment into Helix transformation. Operating EBITA (non-IRFS) declined 1 percent year-on-year in the third quarter.
• Full-year guidance updated: A&N bookings growth expected between -8 percent and -12 percent (previously: -30 to -20 percent). Digital Business bookings growth expected between 13 percent and 17 percent (previously: 15 to 25 percent). Product revenue growth expectation of 0 percent to 5 percent unchanged. Operating profit margin (EBITA, non-IFRS) expected to be between 17 percent and 19 percent (previously: 16 to 18 percent). The Group reiterates its commitment to its 2023 ambitions: €1 billion group revenue, 25 percent to 30 percent operating profit margin (EBITA, non-IFRS), 85 percent to 90 percent recurring product revenue and roughly 15 percent Digital Business CAGR as of 2023.

Strategic highlights

• Product innovation drives market impact: iPaaS, API management and IoT & analytics product areas all deliver year-to-date bookings growth in the high double-digits. Net promoter score (NPS) at +56 reflects high customer satisfaction, providing a solid basis for future customer referrals contract renewals.
• Analyst recognition reflects increasing competitiveness: Industrial IoT, API management and iPaaS products recognized for leadership in Gartner’s Magic Quadrants and Forrester’s Waves. New logo wins increased around 40 percent in the quarter bringing the year-to-date total to 206. 
• Sales and go-to-market investments delivering returns: 35 deals now closed through DACH Mittelstand campaign with 75 percent of pipeline coming from net new customers. Early success with 90 percent of 500 customers targeted by North American awareness campaign.
• Continued scaling through the Group’s partner ecosystem: Incremental Digital Business bookings from partners make up 13 percent of Digital Business total year-to-date, roughly doubling since the start of Helix.
• Cultural evolution putting people first: Diversity, equity and inclusion program and constant talent focus support cultural transformation across the Group. Commitment to global collaboration continues, with new hybrid working pilot and TechInterrupt grassroots innovation event scheduled for the fourth quarter.

Business environment
Software AG continues to operate in a global market accelerating towards digital transformation. Its Truly Connected Enterprise vision is responding to a €28 billion market opportunity, with the Group’s core integration and API and IoT and analytics target addressable markets growing at 10 percent and 26 percent compound annual growth rate (CAGR) respectively to 2024. Software AG’s Digital Business product revenue, which directly addresses these markets, has now grown double-digit in two consecutive periods as organizations in many of its most important industry verticals are accelerating their digital transformation programs. The COVID-19 pandemic has strengthened the imperative for businesses to drive towards the ideal of a Truly Connected Enterprise, particularly as they grapple with changes to the working locations, practices and needs of their employees. As a result, the Group's focused, cloud-enabled and subscription-ready product set continues to resonate strongly in its installed and potential customer base and is helping it regularly win new agreements in competitive situations.

Leading indicators for growth momentum and pace of subscription shift
The Group continues to track leading indicators which demonstrate the success of its transformation. These measures showcase elements of the Group’s performance which are not visible on the basis of its IFRS numbers alone. The Group’s ARR, an important confidence indicator of its future recurring revenue growth potential, was €555.0 million at the end of the third quarter, representing 9 percent growth year-on-year. ARR within the Group’s Digital Business grew 9 percent year-on-year to €392.9 million. Recurring revenue in the quarter was €151.9 million, up from €131.9 million in the third quarter of 2020. This represents 94 percent of the Group’s total product revenue, ahead of its 2023 ambition of 85 percent. The proportion of the bookings within the Group’s Digital Business which came from subscription and SaaS in the third quarter was 88 percent, up from 78 percent in the third quarter of 2020.

Third-quarter and nine-month 2021 business line bookings performance
Software AG’s Group bookings of €107.2 million in the third quarter and €322.6 million in the first nine months of this year represented 5 percent and 9 percent growth respectively (Q3 2020: €101.6 million; 9M 2020: €301.5 million). Digital Business bookings were impacted by delays in the closing of certain deals and stood at €87.8 million in the quarter. This represents 6 percent growth year-on-year (Q3 2020: €82.6 million) and brought the Digital Business’ nine-month bookings total to €241.2 million. This represents 11 percent growth year-on-year (9M 2020: €222.2 million).

The Group’s A&N business line delivered another strong performance primarily driven by the ongoing success of the A&N 2050+ program which is ensuring the product’s ongoing relevance to customers. While the long-term opportunity around A&N’s growth drivers is limited, recent innovations including zIIP offloading and containerization for cloud migration have enabled customers to modernize, reduce overall cost of ownership and increase capacity and speed. Bookings of €19.4 million during the third quarter and €81.4 million during the first nine months of the year represented growth of 2 percent and 7 percent respectively (Q3 2020: €19.0 million; 9M 2020: €79.2 million). Whilst A&N performance has been strong this year, its limited go-forward market opportunity means the Group does not expect a sustained acceleration in A&N performance over the long term.

Third-quarter and nine-month 2021 Group revenue and earnings performance
Software AG reported €198.0 million in total revenue for the third quarter and €599.3 million for the first nine months of the year (Q3 2020: €185.4 million; 9M 2020: €597.0 million). This represented constant currency growth of 6 percent in the third quarter and 3 percent over the nine-month period. This second consecutive quarter of revenue growth was driven by product revenue growth of 7 percent in the third quarter to €162.0 million, and 7 percent in the first nine months of the year to €489.4 million (Q3 2020: €150.2 million; 9M 2020: €470.1 million). The Group saw product revenue growth across all major product business lines in the third quarter, and in the Digital Business, growth of 10 percent to €113.6 million represented a second consecutive quarter of double-digit product revenue growth, the first time this has occurred since 2013 (Q3 2020: €103.1 million).

The contribution of subscription and SaaS revenue to the Group’s product revenue total was 43 percent in the third quarter and 40 percent in the first nine months of the year.

Within Professional Services, the third quarter saw revenue growth of 1 percent. Stated revenue was down 13 percent in the first nine months of the year, however when adjusted for the sale of the Spanish Professional Services business in the second quarter of 2020, revenue growth would have been 2 percent. Professional Services delivered profit growth of 7 percent to €5.5 million in the third quarter and of 45 percent to €19.4 million in the first nine months of the year (Q3 2020: €5.1 million; 9M 2020: €13.8 million).

The Company's EBIT of €24.5 million in the third quarter and of €89.9 million in the first nine months of the year was ahead of market expectations as the Group benefited from higher-than-expected product revenue. (Q3 2020: €24.9 million; 9M 2020: €85.6 million). The Group’s operating EBITA (non-IFRS) was at €33.3 million in the third quarter and €118.6 million in the first nine months of the year (Q3 2020: €33.4 million; 9M 2020: €114.6 million), giving Software AG an operating EBITA (non-IFRS) margin of 16.8 percent in the third quarter and 19.8 percent in the first nine months of the year (Q3 2020: 18.0 percent, 9M 2020: 19.2 percent).

The Group’s free cash flow in the third quarter was €15.4 million (Q3 2020: €4.1 million). This benefitted from strong cash collection in the quarter. In the first nine months of the year, the Group’s free cash flow was €73.7 million (9m 2020: €75.5 million). The Group is still seeing the technical impact of its transformation process on cash flow and expects to begin the exit from cash flow ‘trough’ from next year.

Employees
As of September 30, 2021, Software AG had 4,749 employees worldwide (full-time equivalents; September 30, 2020: 4,642). This represents growth in the Group’s employee base of 2 percent year-on-year.

Guidance
The Group’s third quarter and nine-month results have led it to update its guidance for the full-year 2021.

In A&N, performance through the year, driven by customers continuing to invest in modernizing their A&N landscapes, has led the Group to expect stronger performance than was previously the case.

In the Digital Business, the Group continues to expect strong bookings growth for the year. However, investments made in Digital Business demand generation at the start of the year are taking longer than expected to progress and mature than originally anticipated. For example, while investments like the North America Awareness Campaign and the Group’s Mittelstand focus have delivered encouraging early success, the maturity profile of the opportunities coming through leads the Group to expect most of their benefit in 2022.

The combination of stronger-than-expected bookings in A&N and solid growth in Digital Business recurring revenues means the Group is maintaining its guidance for product revenue growth and adjusting its guidance for non-IFRS EBITA margin.

For the full-year 2021, the Group now expects:

• Digital Business bookings: +13 percent to +17 percent
• A&N bookings: -8 percent to -12 percent
• Product revenue: 0 percent to +5 percent
• Operating profit margin (EBITA, non-IFRS): 17 percent to 19 percent

The Group confirms its mid-term ambitions: €1 billion Group revenue, 25 percent to 30 percent operating margin (EBITA, non-IFRS), 85 percent to 90 percent recurring product revenue in 2023 and roughly 15 percent Digital Business CAGR as of 2023.

Key Group Figures