Software AG bookings growth beats guidance; driven by accelerating subscription shift
- Bookings growth of 31 percent fourth quarter and 24 percent full year 2020 driven by transformation success -
- Group maintains commitment to stated mid-term 2023 ambitions -
Software AG (Frankfurt MDAX®: SOW) today announces financial results for the fourth quarter and full year 2020 and issues guidance for the 2021 financial year.
"Our strong fourth quarter results capped off an outstanding year delivered despite major challenges. Our transformation is forging ahead, with our focused product set and enhanced execution capability driving our subscription shift beyond our original plan and helping us win against competition. In 2021 we plan to accelerate our transformation and push for continued growth. I’m extremely proud of the team’s resilience in 2020 and our fast start to 2021 makes me confident we’ll see even more success in the coming year said Sanjay Brahmawar, CEO of Software AG.
"During 2020 we made excellent progress in our transformation, driving bookings growth and keeping to our profitability commitments. In 2021 we’ll look to accelerate, bringing forward planned investment to ensure we capitalize on the opportunity created by our success to-date. These efforts will mark the peak of our investment into Helix, after which we expect our margin to expand as we push our growth towards our mid-term ambitions, which we have also confirmed today" CFO Dr. Matthias Heiden said.
Four consecutive quarters of strong Group bookings growth
Digital Business Lines and Adabas & Natural bookings growth ahead of guidance
Recurring revenue meets 2023 mid-term ambition
Full year profit guidance met despite ongoing transformation
Pace of subscription shift moves Software AG into Helix acceleration phase
Double-digit bookings growth in key geographies
Focused product and sharper execution delivering market impact
Cultural transformation continues to drive success
Outlook 2021: accelerating our growth plans
2021 Guidance (at constant currency; except for margin):
Group confirms mid-term ambitions: €1 billion Group revenue, 25 percent to 30 percent operating margin, 85 percent to 90 percent recurring product revenue and roughly 15 percent Digital Business CAGR in 2023.
[Unless otherwise stated, all figures are IFRS. Increases at constant currency and rounded].
Software AG’s fourth-quarter results were delivered by a focused team executing with precision in global markets which continue to accelerate towards digital transformation. Updated Analysis by Gartner substantiates this view, indicating that the Group’s core Integration and API & IoT & Analytics markets are growing at 10 percent and 26 percent compound annual growth rate respectively to 2024, leading to a combined target addressable market for the Group’s key growth markets $23 billion by 2024. With the Group’s bookings growing at a faster rate than the addressable market overall, Software AG is taking market share in a period where organizations in many of its most important industry verticals, including banking & financial services, retail, supply chain & logistics, med-tech and manufacturing, are considering their digital transformation programs. The COVID-19 pandemic has strengthened the imperative for businesses to drive towards the ideal of a ‘Truly Connected Enterprise’, enabled by the Group’s technology which brings real business value its clients. The Group’s focused, cloud-enabled and subscription-ready product set continues to resonate strongly in its customer base and is helping it win new agreements in competitive situations. The Group’s exposure to those industries most negatively impacted by the pandemic remains low.
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 improving performance which are not visible on the basis of its statutory numbers alone. The Group’s ARR, an important indicator of its future recurring revenue growth potential, was €508.1 million at the end of 2020, representing 10 percent growth year-on-year, underpinned by the Group’s Digital Business where ARR grew double-digit for the sixth consecutive quarter or 11 percent year-on-year to €358.8 million. The Group also tracks the pace of its accelerating subscription shift by measuring the proportion of the bookings within its Digital Business which come from subscription and SaaS. The higher this proportion, the higher the proportion of predictable recurring revenue within the Group’s overall digital revenue stream. For the full year 2020 this proportion was 81 percent, up from 51 percent in 2019 and 27 percent prior to the start of the Helix transformation program in 2018.
Business line development
During 2020 Software AG’s overall Digital Business delivered strong growth, driven by product innovation and customer adoption of its hybrid integration and IoT & analytics products. Bookings growth in the Digital Business for the fourth quarter was 19.2 percent, contributing to bookings growth for the full year of 21.4 percent. Owing to the technical impact on revenue recognition of the Group’s accelerating shift to subscription, this performance flowed through to a revenue decline of 3.2 percent to €135.2 million in the fourth quarter (2019: €146.9 million), and a decline of 3.1 percent to €448.5 million for the full year (2019: €474.4 million). Within the overall Digital Business, DBP (excl. Cloud & IoT) bookings growth in the fourth quarter was 15.2 percent, while bookings growth for the full year was 12.9 percent, ahead of analyst expectations. It saw a revenue decline of 5.3 percent to €121.9 million for the fourth quarter (2019: €135.6 million) and a decline of 5.6 percent to €397.5 million for the full year (2019: €432.2 million).
The Group’s DBP Cloud & IoT business line saw the fourth quarter bookings growth of 40.8 percent, and full year bookings growth of 52.8 percent, also ahead of consensus. Business line revenue growth was 22.3 percent to €13.4 million for the fourth quarter (2019: €11.3 million), and 21.9 percent to €51.0 million for the full year (2019: €42.3 million).
The Group’s A&N business line performed extremely strongly in 2020, owing to a number of large deals including one with SITA, a business providing telecoms and IT services to the South African government. A&N also benefitted from certain customers electing to accelerate planned investment to modernize their IT infrastructure in light of the pandemic, as well as the timing of its natural customer renewal cycle. As a result of these dynamics, bookings growth in A&N was ahead of our expectations at 81.3 percent in the fourth quarter, and 33.0 percent for the full year. This resulted in revenue growth of 19.4 percent to €65.8 million for the fourth quarter (2019: €59.0 million) and growth of 1.5 percent to €222.6 million for the full year on a constant currency basis (2019: €228.2 million).
Fourth quarter & full year 2020 Group revenue and earnings performance
Software AG’s product revenue results continue to see the impact of the Group’s shift to subscription, where a greater share of the revenue won by the group is recorded in future periods rather than up front. For the fourth quarter, product revenue was €201.0 million, 3.3 percent lower than 2019 (2019: €205.9 million), while for the full year, product revenue was €671.1 million, which was 1.6 percent lower than 2019 (2019: €702.7 million). The Group’s total revenue, which was also impacted by the sale of its Spanish Professional Services business, was €237.8 million or 1.6 percent lower in the fourth quarter 2020 than in the prior year period (2019: €255.0 million), while for the twelve-month period, total revenue was 3.8 percent lower at €834.8 million (2019: €890.6 million). The Company’s EBIT in the fourth quarter 2020 was €50.8 million and operating profit (EBITA, non-IFRS) was €62.5 million. As a result, the Group’s operating profit margin (non-IFRS) was 26.3 percent in the fourth quarter. The Group’s operating profit margin for the twelve-month period was 21.2 percent, in-line with its guidance range. Net income (non-IFRS) was €50.0 million (2019: €61.6 million) or €0.68 per share (2019: €0.83) in the fourth quarter, while for the twelve-month period net income (non-IFRS) was €125.4 million or €1.69 per share. The Group’s free cash flow continues to be impacted by the technical effect of its transformation program on reported revenue, as well as investments which impact overall profitability. In the fourth quarter free cash flow was €12.1 million (2019: €42.9 million), while free cash flow for the year was €87.6 million (2019: €145.8 million).
Software AG continues to drive culture change as part of its Helix transformation program. During 2020 it paid close attention to supporting the physical and mental wellbeing of its people, particularly as they manage through the pandemic. The Group’s 2020 employee engagement score also saw an 8 percent increase to a record-high 3.9 out of 5. This reflects an increasingly committed and productive employee base, which is driving Software AG’s continued growth. As of December 31, 2020, Software AG had 4,700 employees worldwide (full-time equivalents) (2019: 4,948). The 2020 figure excludes 438 FTE no longer with the business following the sale of the Group’s Professional Services unit in Spain.
Updated reporting segmentation
Starting in the first quarter of 2021, Software AG will update its financial reporting segmentation and provide additional disclosure around its bookings and revenue development. The changes being implemented are designed to aid interpretation of the relationship between the Group’s bookings momentum and revenue results, provide more clarity on the Group’s revenue mix shift towards a greater share of subscription, and reduce complexity in the Group’s segmental reporting.
On a segmental level, the Group will consolidate its DBP (excl. Cloud & IoT) and DBP Cloud & IoT business lines into a single segment called Digital Business. In terms of new disclosure, it will also provide detail of the deployment models (SaaS, subscription, perpetual) associated with the Group’s bookings, ARR and product revenue results. It will also show the share of total bookings which come from renewals. The Group will provide pro-forma results for 2020 in the new structure at its Capital Markets Day on February 23, 2021.
Outlook 2021: Accelerating our growth plans
With progress in the Group’s subscription shift ahead of expectations, it can now accelerate its transformation and invest in realizing certain transformation benefits sooner than originally planned. To achieve this, in 2021 the Group will double down on its existing strategy by focusing on five priority areas, namely: continuing to develop its subscription growth engine, fostering product innovation, driving internal simplification to improve productivity, progressing the ongoing cultural transformation driving its success, and taking a more proactive stance towards Mergers & Acquisitions.
These efforts to capitalize on the success of Helix to-date, in particular the accelerated subscription shift and its resultant impact on the Group’s ability to maximize customer life-time value in future years, will be underpinned by the pull-forward of planned investment from later in the Group’s transformation program. The early introduction of these investments, particularly in go-to-market, customer success, operational technology as well as people and culture, is a key driver of the Group’s confidence in its ability to continue its growth momentum toward and beyond the mid-term.
During 2021 the Group will also bring forward investment in its technology infrastructure following the Malware attack it faced in Q3 of 2020. Together, these investments will amount to between €30 million and €40 million during 2021 and represent the investment peak of the Helix program. In 2022, the Group’s pace of investment will reduce, driving margin expansion as its subscription shift shows through more prominently in its reported revenues.
Guidance and guidance assumptions
Against this backdrop, with around 50 percent of the Group’s first quarter 2021 plan already closed, and with a solid pipeline underpinning its ambitions for the coming year, Software AG today issues its 2021 guidance. The Group’s overall outlook assumes a global COVID-19 recovery in the second half of the year and a gradual return to more normal trading conditions in 2H 2021.
For 2021, Software AG expects:
The Group also today re-confirms its mid-term ambitions. In 2023 it expects to deliver:
The Group’s confidence in its mid-term ambitions is backed by recent investments delivering sustained organic double-digit bookings growth in 2020 and the visibility the Group has into the benefits of the accelerated shift to subscription creating value in the upcoming years of the transformation.
A webcast for financial analysts and media representatives will take place on Wednesday, January 27, 2021 at 9:30 a.m. CET (8:30 a.m. GMT).
Please pre-register to receive dial-in details at www.SoftwareAG.com/investors.
About Software AG
We reimagine integration, spark business transformation and enable fast innovation on the Internet of Things so you can pioneer differentiating business models. We give you the freedom to connect and integrate any technology — from app to edge. We help you free data from silos so it’s shareable, usable and powerful — enabling you to make the best decisions and unlock entirely new possibilities for growth.
Otmar F. Winzig
Head of Investor Relations
Dr. Astrid Kasper
Head of Corporate Communications
Senior Manager Financial Communications