Software AG announces product revenue and earnings increase in FY 2018
[Unless otherwise stated, all percentages are rounded at constant currency to reflect year-on-year comparisons.]
Software AG (Frankfurt MDAX: SOW) today released its financial results (IFRS, preliminary) for the fourth quarter and 2018 fiscal year, the outlook for 2019, and details of its new profitable growth strategy. Demand for the company’s solutions is especially high in the rapidly growing, global Internet of Things (IoT) market. The company’s new Cloud & IoT business continued its dynamic growth in FY 2018 with €30.3 million in total revenue, an increase of 106 percent. Fueled by high demand for independent, open and cloud-based platforms, annual recurring revenue (ARR) in the Cloud & IoT business increased by 118 percent. Moreover, total revenue from Software AG’s Digital Business Platform (incl. Cloud & IoT) rose by 5 percent to total €464.7 million. The Adabas & Natural (A&N) database business also continued on a positive course with total revenue in this business line rising 2 percent to €218.3 million in FY 2018. In addition to total product revenue growth of 4 percent, Software AG also increased its profitability. Earnings before interest and taxes (EBIT) improved by 4 percent to 231.6 million. Operating earnings (EBITA, non-IFRS) in FY 2018 reached €272.9 million, resulting in an operating margin (EBITA, non-IFRS) of 31.5 percent. At €165.2 million income after taxes also increased by 17 percent year-on-year.
Sanjay Brahmawar, CEO of Software AG, commented: “Software AG has strong products, great talent and a robust financial position. Our full year results underline these strengths. However, they also highlight that our performance does not reflect the growing market opportunities for our products. Going forward, we must focus on translating our strengths into results by combining our new IoT solutions with our leading core integration and API capabilities to give us a unique position in the global software market. This will drive profitable growth as we capitalize on the customer-led demand for SaaS and subscription.”
Software AG’s CFO Arnd Zinnhardt added: “With yet another year of industry-leading profitability, Software AG is in an optimum position to execute its new strategy swiftly and successfully. We have the financial strength to implement change from an accelerated M&A program to significantly raising levels of awareness of both Software AG and our acknowledged market-leading technology.”
FY 2018 Business Line Performance
Up 106 percent year-on-year, DBP Cloud & IoT revenue demonstrated dynamic growth to total €30.3 million (2017: €14.9 million). DBP (excl. Cloud & IoT) license revenue was €166.2 million (2017: €176.7 million), below expectations due to shortfalls in the US federal sector and in South Africa. Maintenance revenue was €268.2 million (2017: €264.7 million), which reflects 5 percent growth over the previous year. Accordingly, DBP (excl. Cloud & IoT) product revenue totaled €434.4 million (2017: €441.6 million), an increase of 1 percent at constant currency. The DBP business line including Cloud & IoT generated €464.7 million (2017: €456.5 million) in total revenue, reflecting 5 percent growth.
The Adabas & Natural (A&N) business line continued to perform strongly, above expectations. License revenue climbed 8 percent totaling €74.4 million (2017: €69.9 million). Maintenance revenue was €143.2 million (2017: €153.1 million). A&N product revenue grew 2 percent at constant currency to total €217.6 million (2017: €223.0 million). This underlines the stability of the A&N segment and the high degree of loyalty of its customer base.
Revenue in the Consulting business line was €182.6 million (2017: €198.8 million) with good segment profitability at 10.5 percent.
FY 2018 Total Revenue and Earnings Performance
Despite negative currency effects totaling €26.7 million, Software AG booked €865.7 million (2017: €879.0 million) in total revenue in the period under review, a rise of 2 percent at constant currency. Group license revenue increased 2 percent to €249.4 million (2017: €250.1 million). Group maintenance revenue totaled €415.4 million (2017: €420.2 million), that is 3 percent growth. SaaS climbed 97 percent to €17.6 million (2017: €9.1 million). Accordingly, Software AG’s total product revenue (licenses and maintenance) rose 4 percent to €682.3 million (2017: €679.4 million).
The company’s EBIT grew to €231.6 million (2017: €222.8 million). This reflects an EBIT margin of 26.8 percent (2017: 25.3 percent). Operating earnings (EBITA, non-IFRS) were €272.9 million (2017: €279.5 million) and the operating profit margin (non-IFRS) reached 31.5 percent (2017: 31.8 percent). At €165.2 million, net income also increased by 17 percent year-on-year.
As of December 31, 2018 Software AG had 4,763 (2017: 4,596) employees worldwide (full-time equivalents). Of that total, 1,901 (2017: 1,935) worked in Consulting and Services, 926 (2017: 862) in Sales and Marketing, 1,310 (2017: 1,176) in Research and Development and 626 (2017: 623) in Administration.
A Pathway to Sustainable, Profitable Growth
In addition to announcing Q4 and FY 2018 earnings and in order to drive top line growth, today Software AG also unveiled a first look at its new corporate strategy called project Helix. Building upon the core strengths and heritage of the company as it enters its fiftieth year, Helix is a multi-year transition program that aims to evolve Software AG into an industry leading software company, delivering sustainable profitable growth. Spearheaded by CEO Sanjay Brahmawar following his appointment on August 1, 2018, Helix has been formulated following an extensive consultation with the company’s employees, customers and partners.
The Helix transformation will build on the strengths highlighted above as well as providing greater focus on the growth markets, a new operating model to deliver better execution and developing a stronger team. Digital technologies increasingly challenge traditional business models; this transforms industries and opens up entirely new possibilities for business growth. Software AG’s core integration expertise sits at the heart of this exciting space where the powerful forces of digital transformation and real-time data intersect. The company will unify its efforts around its ability to integrate apps, clouds, IoT devices and data, positioning itself to act as a key agent and enabler for organizations seeking to navigate this transformational change. This represents a total addressable market growing to €24 billion by 2023.
Software AG has identified three areas that will drive growth:
1. Software AG will bring a more coherent feel to its product portfolio, removing the complexities that stop Software AG from translating market-leading products into meaningful revenue growth. The company aims to reconfigure DBP into three new go-to-market identities: Integration and API, IoT & Analytics and Business Transformation comprised of Software AG’s ARIS and Alfabet businesses. Each of these identities represents an attractive market opportunity – Integration and API has an addressable market of approximately €12 billion, IoT & Analytics sits at approximately €7.9 billion and Business Transformation is at approximately €2.4 billion.
To accelerate growth, R&D investments will be made in products with the greatest potential such as API, iPaaS and IoT. At the same time, the Group will look into alternative structures for selling and supporting its own products and capitalize on leveraging partners and their strength.
2. The Group will put priority on markets that deliver above-market growth and where it has a clear line of sight to materially increase its share. Spotlight will be put on North America, Germany, UK and France. In addition, investments will be made in APAC, particularly in Japan and China to accelerate Software AG’s potential there.
Organic growth will be augmented by disciplined, growth-focused M&A that will accelerate Software AG’s market success.
1. Software AG will implement a new matrix operating model, breaking down functional siloes and creating end-to-end accountability for geographic sales and product sales.
2. The Company will strengthen the go-to-market execution. Sales teams will get a clearer direction by moving from a generalist to a specialist model, and execution is to get sharper based on new internal and external incentives. In addition, a customer success function will be created to help customers meet their goals and also improve retention, deliver references and enable cross- and upsell.
The Group will also refocus the Global Consulting Services (GCS) team to be and act as a professional services organization, that supports transformational projects sold by the license sales team. In that context, GCS will also take a strong role in empowering and enabling partners.
3. The shift towards a subscription-based sales model will be accelerated, in step with increasing customer demand. Responding to these very customer preferences will go hand in hand with reduced quarterly fluctuations in earnings.
1. The Group has already assembled a strong leadership team with deep expertise and complementary skills to drive change; including the introduction of Dr. Stefan Sigg as CPO, John Schweitzer as CCO, Bernd Gross as CTO and Paz Macdonald as CMO. These experts join Sanjay Brahmawar and Arnd Zinnhardt in a team that is well equipped to make Helix a success.
2. Inside the organization, the Group will sharpen the employee value proposition to ensure that it retains the best talent, attracts the best new talent and creates a performance framework that equips and rewards its people for the growth plan ahead.
3. The Group will invest in its partner ecosystem, embracing coopetition and seeking to grow its partner revenues to a sizeable percentage of its overall mix by 2021.
These efforts will be supported by approximately €50 million of investments: roughly €20 million to €30 million of new investment capital, leveraging the strength of our free cash flow, and the rest sourced from re-allocating mainly R&D but also sales towards growth areas. Together, these levers and investment commitments aim to return Software AG to a sustainable, profitable growth path.
Commenting on the strategy, Sanjay Brahmawar said: “In our 50th year, Software AG is taking bold steps along a new path. We have everything it takes to be a truly industry-leading software company: best-in-class products, dynamic growth markets, excellent people. We are going to harness all of these strengths; bring focus, execution and the true power of our team to everything we do; and drive our business towards sustainable, profitable growth.”
“This change is customer led at a time when digital technologies are forcing organizations to rethink everything they do, we have the expertise to reimagine integration for this new era. We will be the go-to-partner for our customers: a team that helps organizations bring together apps, clouds, IoT devices and data to unlock the true power of their operations in an age where change is constant and adaptability is key,” Sanjay Brahmawar continued.
2019 Outlook and Medium Term Guidance
Software AG has released its outlook for fiscal 2019. For Fiscal Year 2019, Software AG expects its DBP business (excl. Cloud and IoT) to grow between 3 percent to 7 percent year-on-year. Growth in DBP including growth from IoT & Cloud is expected to be in the range of 75 percent to 125 percent year-on-year. In A&N, performance is expected in a range of -5 percent to 0 percent year-on-year. Non-IFRS EBITA margin is expected in the range of 28.0 percent to 30.0 percent.
The table below shows the full forecast for the 2019 fiscal year:
Over the medium term, Software AG aims to deliver the following:
To help communicate Software AG’s performance during its strategy transition, the following additional metrics will be provided:
A conference call for financial analysts and media representatives will take place on Thursday, January 31, 2019 at 9:30 a.m. CEST (8:30 a.m. BST). For dial-up information, visit the Company's website at www.SoftwareAG.com/investors.
Capital Market Day
A more detailed overview of the Helix findings and the company’s strategy will be presented at the Capital Market Day to be hosted in London on February 5, 2019. For more information, visit the Company's website at https://investors.softwareag.com/en/events/capital-markets-day.
Key Group Figures
About Software AG
Software AG (Frankfurt MDAX: SOW) helps companies with their digital transformation. With Software AG’s Digital Business Platform, companies can better interact with their customers and bring them on new ‘digital’ journeys, promote unique value propositions, and create new business opportunities. In the Internet of Things (IoT) market, Software AG enables enterprises to integrate, connect and manage IoT components as well as analyze data and predict future events based on Artificial Intelligence (AI). The Digital Business Platform is built on decades of uncompromising software development, IT experience and technological leadership. Software AG has more than 4,700 employees, is active in 70 countries and had revenues of €866 million in 2018.
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