Software AG increases quarterly earnings, confirms growth forecast for 2011

Software AG (Frankfurt TecDAX: SOW) increased its net income by 3% to EUR38.7 million in the second quarter of 2011, compared to the same period in 2010. Total revenue remained steady at EUR257.1 million (at constant currency rates).

However, the company improved its EBIT margin to 22.9% (2010: 22%) and free cash flow climbed by 26% to EUR45.9 million. Software AG confirmed its 2011 annual forecast for revenue and income growth.

As announced on 13 July 2011, the significant year-on-year increase in the strength of the euro led to lower stated euro revenue figures. Combined, these currency effects reduced the reported total revenue by EUR10.6 million to EUR257.1 million (2010: EUR267.3 million).

Product revenue amounted to EUR151.2 million (2010: EUR161.9 million); of that, EUR57.7 million (2010: EUR68.8 million) came from licensing revenue. The licensing growth achieved in the first quarter did not continue because some licence contracts were not closed in the second quarter as planned. The increase in service revenue to EUR104.8 million (2010: EUR104.4 million) is due mainly to the growth (+11%) of innovative BPE projects. In contrast, service revenue for SAP products only reached EUR40.4 million and was 7% lower than in the same quarter of the previous year.

"We are technology leaders in integration and process software. In the second quarter of 2011, however, we did not fully utilise the potential of our project pipeline and therefore we have taken steps to improve that,” commented CEO Karl-Heinz Streibich, regarding the results for Q2 2011.

These steps also include some management changes. Darren Roos, an experienced and very successful manager within Software AG, has assumed responsibility for sales in the EMEA region (excluding the German-speaking countries). In addition, Global Consulting Services and IDS Scheer Consulting will be combined under Ivo Totev. Furthermore, Global Business Development was established as a new function on the Group Executive Board to increase sales efficiency. The goal is to combine the products of Software AG's extensive portfolio into specific industry solutions to address customer requirements more clearly and simplify the sales process.

Despite lower revenue growth compared to the first quarter of 2011, the EBIT margin was increased to 22.9% (Q1: 22%). Revenue-based remuneration had a dampening effect on costs, as did the fact that a substantial share of the company's costs is incurred in local currency. CFO Arnd Zinnhardt added: “We successfully increased efficiency in the first six months, particularly in administrative processes. We have also improved our financing structure over the past quarter in terms of costs and better aligned it with our strategic development.” Overall, Software AG reported second-quarter 2011 net income of EUR38.7 million and earnings per share of EUR0.45. Free cash flow development was even more positive. In comparison to the same quarter of the previous year it grew by 26% to EUR45.9 million (2010: EUR36.3 million).

Group revenue amounted to EUR529.7 million (2010: EUR517.6 million) during the first six months of the current fiscal year. That is an increase of 3% at constant currency. Product revenue for this period also grew by 3% at constant currency to EUR315.8 million. Revenue from the services business grew during the reporting period to EUR211.1 million (2010: EUR206.7 million).

EBIT (IFRS) jumped by 13% to EUR119.1 million (2010: EUR105.5 million) in the first half of 2011. During that same time period, the EBIT margin grew to 22.5% (2010: 20.4%). Further debt reduction and optimised debt financing lowered interest expenses. Combined with an improved tax rate, this led to higher net income of EUR78.7 million (a rise of 20%). In the process, liquid assets increased by EUR92.2 million to EUR194.6 million, and the equity ratio climbed to 49% (2010: 41%).

The Business Process Excellence business line (IT integration and process optimisation), which includes the product groups webMethods (IT integration) and ARIS (business process software), achieved total revenue of EUR245.6 million in the first half of 2011, an increase of 7% at constant currency. Product revenue for Business Process Excellence grew by 5% to EUR152.3 million (2010: EUR147.2 million), at constant currency, in comparison to the same period in 2010. Growth of 11%, again at constant currency, brought service revenue up to EUR93.3 million (2010: 84 million) in the first half of 2011.

The Enterprise Transaction Systems ETS (database software) business line held steady in the first half of 2011, with reported revenue of EUR186.5 million (2010: EUR185.4 million). Product revenue increased by 2% at constant currency to EUR152.3 million, primarily due to increased demand in Germany and the United States.

The IDS Scheer Consulting business line (principally SAP implementation) contributed EUR97.7 million (2010: EUR101 million) to Software AG's revenue in the first six months of this fiscal year. Of this amount, EUR86.5 million (2010: EUR90 million) came from the service and consulting business and EUR11.2 million (2010: EUR11 million) from third-party products.

As of 30 June 2011, Software AG had 5 478 (2010: 5 792) full-time employees, of which 845 (2010: 839) work in Research and Development (R&D). Employees in Germany numbered 1 946 (2010: 2 110).

The revenue pipeline for the second half of 2011 is good, based on expected licensing contracts and consulting projects. Therefore, licensing growth of well over 20% can be expected in the third quarter of 2011 for Business Process Excellence products. Software AG confirms its forecast for the full year 2011 and continues to expect revenue growth of 5% to 7% at constant currency, along with an increase in profit of 10% to 15% compared to the previous year.