Profit leap for Software AG in the third quarter

Software AG (Frankfurt TecDAX: SOW) reported significant revenue growth in all business divisions in the third quarter of 2010. Total revenue rose 29% (22% at constant currency rates) year-on-year to EUR275.3 million (2009: EUR213.6 million).

In particular, the services business performed well, reporting higher revenue than the second quarter of 2010, contrary to normal seasonal development. The successful integration of IDS Scheer AG has resulted in this new corporate division reporting revenue growth for both products and consulting services. In addition, foreign currency rates had a positive impact on both revenue and earnings, particularly in the Americas.

Group operating earnings, net income, and earnings per share again reached record highs, returning two-digit growth rates. This performance is a result of the improved utilisation of consulting capacities, cost synergies achieved through the merger with IDS Scheer and the positive, third quarter exchange rate effects. Software AG expects this earnings trend to continue in the fourth quarter and has therefore raised its fiscal year 2010 outlook for profit growth from the previously announced 10% to 12% to between 18% and 20%.

The third quarter 2010 results again confirmed Software AG's growth strategy. The new business area, known as Business Process Excellence, encompassing innovative software products for the integration of enterprise applications and processes, continued to grow (product revenue webMethods/ARIS + 27% compared to the previous year) and delivered an increased earnings contribution. The objectives of the August 2009 merger with IDS Scheer, namely revenue and cost synergies, had a very positive impact on earnings for the first time in the quarter under review. The earnings contribution from the Enterprise Process Innovation (IDS Scheer) division more than tripled to EUR14.6 million (2009: EUR4.5 million).

“Now that the organisational integration is complete, we are reaping the benefits of a significantly larger company,” stated Karl-Heinz Streibich, CEO of Software AG. “Our product business with ARIS is entering new dimensions. And, opportunities for more profitable consulting projects have noticeably increased.”

The upturn in demand in the Americas, apparent in the first half of 2010, continued in the third quarter. Thanks to the large US and Brazilian markets, Software AG again achieved two-digit growth rates in the region. Business in Germany, Australia, and the Middle East appreciably outperformed the group average.

The Enterprise Transaction Systems (Adabas, Natural) business division has demonstrated a moderate rise in revenue during the course of the current fiscal year. Third-quarter revenue was EUR101.4 million - 5% above the previous quarter (Q2 2010: EUR96.3 million) and 2% above the same quarter in 2009 (EUR99.2 million). In the product business, licence and maintenance revenue was both around 6% higher year-on-year. License revenue totalled EUR36.6 million as compared to EUR28 million in the second quarter of 2010, a 31% increase notwithstanding the normal seasonal effects. This was on a par with the record results from 2009.

The webMethods division achieved EUR86.6 million in total revenue or 14% growth in the third quarter of 2010. This reflects the typical seasonal trend as compared to the second quarter of 2010. A number of large-scale projects with new customers confirm the company's strategy of positioning itself as an innovative market leader in the process automation growth market.

This strategy includes the acquisition of IDS Scheer AG, whose contribution to revenue from the Enterprise Process Innovation division totalled EUR87.3 million in the third quarter (2009: EUR38.6 million). Of that, EUR23.4 million (2009: EUR10.4 million) can be attributed to the product business and EUR63.9 million (2009: EUR28.2 million) to IDS Scheer Consulting. The increase over last year is partly a result of consolidation. The 10% rise over last quarter (Q2 2010), however, illustrates growth in the consulting business.

Operating earnings (EBIT) in the third quarter climbed 23% to EUR69.1 million (2009: EUR56.4 million) as a result of business expansion (primarily in the services unit), advantageous foreign currency rates and the realisation of synergies and scale economies from the merger with IDS Scheer. Net profit rose 20% to total EUR45.6 million (2009: EUR38.1 million). Earnings per share went up to EUR1.61 (2009: EUR1.35).

Net debt in the third quarter fell EUR42.5 million to EUR249.6 million. At the end of 2009, this figure was EUR320.1 million. Software AG's free cash flow amounted to EUR42.6 million (2009: EUR47 million) in the third quarter.

Software AG's total revenue in the first nine months of 2010 generated a record-breaking EUR792.9 million (2009: EUR555.3 million), a 43% rise year-on-year (37% at constant currency rates). Revenue in foreign currencies benefited from the weak Euro. In total, exchange rate effects accounted for EUR30.7 million in revenue growth. Product revenue went up 19% to EUR474.8 million as compared to the first nine months of 2009 (EUR399.4 million). Maintenance revenue climbed 21% to EUR275.1 million (2009: EUR228.2 million), and licence revenue grew by 17% from EUR171.2 million to EUR199.7 million.

The webMethods division reported 14% revenue growth to EUR257.3 million as compared to EUR226 million in the same nine-month period in 2009. The ETS division achieved EUR286.6 million in revenue, which was slightly below that of the previous year (EUR290.7 million). The new business division, Enterprise Process Innovation, representing IDS Scheer, contributed approximately one-third of revenue with EUR248.7 million. The previous year's revenue figure (EUR38.6 million) accounted only for the period of consolidation (20 August-30 September 2009).

Furthermore, the expanded company, including IDS Scheer, attained a new level of earnings. EBIT grew 26% to EUR174.6 (2009: EUR138.8 million). Net profit rose 20% to EUR111 million (2009: EUR92.7 million). Free cash flow in the nine-month period increased to EUR138.7 million (2009: EUR119.8 million), which is 16% higher year-on-year. As of 30 September 2010, debt was down at EUR351.2 million as compared to EUR514.5 million on the same date in 2009. The group equity ratio was 44% as compared to 37% on the same date in 2009.

Software AG had a total of 5 708 employees (full-time equivalents) as of 30 September 2010. Of those, 2 089 were employed in Germany. The figure from 2009 (6,086/2,196) was calculated prior to the operational integration of IDS Scheer AG.

Software AG confirms its current revenue forecast for fiscal year 2010, which remains significantly above one billion Euros. Compared to 2009, total revenue is estimated to grow between 25% and 30% and product revenue between 12% and 15%, at constant currency rates.

As a result of improved utilisation of service capacities, lower cost ratios, and cost synergies achieved through the merger with IDS Scheer, Software AG now expects (based on the results from the nine-month period) a considerably larger increase in net profit and earnings per share. The company's revised forecast for fiscal year 2010 foresees 18% to 20% (previously 10%-12%) earnings growth compared to the last fiscal year.