Software AG reports continued revenue growth, margin expansion in third quarter 2005

Software AG today announced its results for the third quarter and first nine months ended 30 September 2005.

Operating income for the third quarter rose to EUR23.1 million, an increase of 10% over the EUR21 million for the year-ago period. The operating (EBIT) margin rose to 22.3% compared to 21.7% for the same period of 2004. The improvement in third quarter operating income was driven by sustained growth in revenues, which rose by 7.3% to EUR103.7 million for the period.

Further enhancements to the product mix and continued discipline in managing operating expenses contributed to the margin improvement. Net income for the third quarter rose by 20% to EUR15.2 million, reflecting a lower tax rate for the period. Earnings per share for the third quarter were EUR0.55, an increase of 17% from the year-ago period.

Total licensing revenue for the third quarter was EUR29.2 million, an increase of 16% over the EUR25.1 million for the year-ago period. The growth in licensing revenue was supported by continued positive developments in both the XML Business Integration and the Enterprise Transaction Systems (ETS) business lines, reflecting increasing demand from clients in connection with the modernisation of their mainframe systems and the integration of their IT infrastructure.

In the XML Integration business line, licensing revenue with the company's own products was EUR5.5 million, an increase of 22% over the year-ago period, while third-party sales declined to EUR0.5 million in keeping with the decision to phase-out this activity. For the ETS business line, licensing revenue rose to EUR19.7 million, up 9% (8% at constant currencies) over the year-ago period.

Maintenance revenues for the third quarter were EUR45.8 million, substantially unchanged from the year-ago period (EUR46 million). Revenues for professional services amounted to EUR28.5 million, an increase of 13% from the third quarter of 2004. "The increase in licensing revenues further validates our strategy of focusing on the growth opportunities in XML Business Integration while capitalising on the sustained potential of the established ETS business line," said CEO Karl-Heinz Streibich.

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The operating margin (EBIT as a percentage of total revenue) for the third quarter was 22.3%, an increase of just over one half percentage point from the 21.7% of the year-ago period. Total operating expenses for the third quarter were EUR47.4 million, up 5.3%, less than the rate of revenue growth. As a result, operating expenses as a percentage of revenue declined by 0.9% to 45.7% from the year-ago period. This was achieved in spite of continuing investments to introduce new products, enter new markets, expand the partnership network, and strengthen sales and marketing activities. In addition, the company acquired Casabac Technologies GmbH, a specialist for Web-enabled enterprise applications, during the third quarter.

The total number of employees at the end of the third quarter was 2 664, an increase of 219 or 9% from the year-ago period, reflecting the company's growth through selective hiring, mainly to enhance the sales force.

Net income for the third quarter was EUR15.2 million, up 20% from the EUR12.7 million of the year ago period. Net income rose more rapidly than EBIT as a result of an improvement in net interest income (EUR1.5 million for the third quarter of 2005 compared with EUR0.8 million in the year-ago period) and, more especially, because of a slightly lower effective tax rate. Earnings per share were EUR0.55 per share, an increase of 17% over the EUR0.47 per share for the year-ago period, reflecting an increase in the number of weighted averages shares outstanding.

Total shareholders' equity at 30 September 2005 was EUR370.5 million, an increase of 18% from the year-ago period. The equity to assets ratio was 65% in comparison with 61% a year ago. The continuing improvement in the balance sheet ratios results from the company's sustained net operating cash flow, which was EUR9.7 million for the third quarter, substantially over the EUR2.6 million for the year-ago period.

For the nine months, revenues rose by 5.3% (5.8% at constant currencies) to EUR314.5 million. Operating income for the nine months increased by 12% to EUR67.5 million, corresponding to an operating margin of 21.5%. Net income for the nine months was EUR43 million in comparison with EUR61.9 million for the nine months of 2004.

During the first nine months of 2004, the company realised a gain of EUR24 million from the sale of its shares in SAP Systems Integration AG. Excluding the effect of this gain, net income for the first nine months of 2005 increased substantially over the comparable period of 2004.

For the year 2005, the company confirms its expectation of total revenue growth in a corridor between 4% and 6%. Growth in licensing revenues for the year is anticipated to be at the upper end of the target corridor of 10% to 12% previously indicated. Maintenance revenues will remain substantially unchanged in comparison with 2004, while service revenues are projected to increase from 8% to 10% for the year as a whole, consistent with existing guidance.

"We believe that we have a very good chance of achieving an EBIT margin at the upper end of the target corridor of 20% to 22% that we set for the company at the end of last year," said Karl-Heinz Streibich.

"With respect to 2006, we have already announced our goal of achieving revenue growth of 10%, and we will stick to this ambitious target. We also expect to maintain an operating EBIT margin of 21% to 23% in 2006. A disciplined focus on implementing our long-term strategy will continue to be a hallmark of Software AG and the underpinning of our earnings growth."

Software AG, headquartered in Darmstadt, Germany, provides a full range of products and services to deliver a service-oriented architecture (SOA) IT infrastructure, based on over 35 years experience in high-performance databases, application development tools and integration technologies. Its technology offers process driven integration through legacy modernisation and real-time single views of strategic business information. Software AG helps its customers to achieve a competitive advantage through flexible and adaptive business processes based on fast and easy integration of existing IT assets.

It supports the mission-critical systems of over 3 000 customers globally. Software AG is represented in around 60 countries with more than 2 600 employees. It is listed on the Frankfurt Stock Exchange (TecDAX, ISIN DE 0003304002 / SOW). In 2004 Software AG posted EUR411 million in total revenue.

For more information please visit www.softwareag.com.