Despite operating in a depressed market in which many IT projects have been deferred to future dates, Software AG has improved its operational earnings in its third quarter for the 2002 financial year and expects to close the fourth quarter with a double-digit operational profit margin.
According to financial statements released in Germany on 30 September, Software AG's cost-cutting programme - which called for savings of more than 50 million euros with respect to the expense plan for the current fiscal year - had achieved its goal. Consequently, operational costs were not only below forecasts, but 16 million euros less than in the same quarter last year. As a result, the company's third quarter 2002 earnings before tax amounted to 7.9 million euros confirming that the corporation was consistently able to improve its cost structure and earnings during the course of a challenging fiscal year.
Full results can be obtained at www.softwareag.com/investor/engl/info/interim.htm.
Result commentary is more upbeat than several market analysts referred to in a Bloomberg report originating out of Germany and published in Business Day.
The commentary acknowledged that the recession plaguing all areas of the IT sector persisted in the third quarter of this fiscal year and that the decline of third-quarter revenue year on year could be blamed primarily on significantly lower licensing sales, but also on the considerable fluctuations between the euro and the dollar. This trend, however, did not jeopardise customer relationships.
An excellent measure of customer loyalty - particularly in difficult economic times - is the maintenance business. Here, Software AG's third-quarter maintenance revenue proved to be extremely stable, generating - as expected - the largest portion of total revenue with 48.4 (2001: 49.9) million euros. Taking into account the exchange rate effects of US dollar and euro, this figure represents a growth of 2% year on year.
Commentating on the results, general manager of Software AG's South Africa operation, Joe Curran, said that customers' reduced IT budgets have been primarily spent on the optimisation of existing systems. Rather small-scale projects promising fast successes are the priority, whereas large investments in cutting-edge technologies continue to be postponed.
Nevertheless, they were starting to show interest in new technologies again. For example, Software AG developed a system for DaimlerChrysler for cross-enterprise management of diagnostic data. The solution stores all types of testing and diagnostic data needed for electronic control devices in Mercedes-Benz automobiles. DaimlerChrysler is one of the first auto manufacturers to employ the XML (eXtensible Markup Language) standard for this purpose. Software AG is confident that this solution may serve as a standard for the entire car industry based on ISO specifications. The two companies signed a marketing agreement as part of the project.
"This year's market development - particularly in Europe where Software AG is the largest system software and services enabling enterprise data integration and management - has been extremely challenging and can be characterised by great reluctance of customers to invest, smaller-scale projects, long decision-making cycles, and by very volatile software licensing revenue.
"It is unclear if - and to what extent - the traditional year-end upturn in revenue will take place in such a difficult year for the IT sector. However, the vast majority of Software AG's income is secured through services projects and maintenance contracts and, based on the course of business thus far and the company's effective cost-cutting programme, Software AG's management expects to close the fourth quarter with a double-digit operational profit margin and increased earnings from the first nine months of the year," he said.
Curran also refuted outright the claim reported by Bloomberg that PeopleSoft may be looking to buy Software AG, saying that it didn't make sense.
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