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Software AG: Largest business line stays on growth track
- BPE: Q1 revenue up 11 percent
- ETS: Steady margin, performance in line with expectations
- Consulting: Sale of SAP service operations agreed
- Currency exchange rates burden total revenue
- Full-year forecast confirmed
Software AG (Frankfurt TecDAX: SOW) reported a continued positive performance in the first quarter of 2014 for its largest business line Business Process Excellence (BPE) with a growth of 11 percent (at constant currency). The company set its dynamic growth course through the targeted expansion of sales and placing new products in key future markets in 2013. Software AG expects further dynamic growth in BPE over the course of fiscal 2014 and has confirmed its outlook for the year.
Karl-Heinz Streibich, CEO of Software AG, states, "The two-digit BPE growth confirms the direction of our transformation strategy. More and more customers are investing in innovative software to fuel the digitization of their businesses with new process management and integration solutions."
Arnd Zinnhardt, CFO of Software AG, adds, "As a pure software product vendor, we can now focus on our own portfolio and achieve a higher margin than with third-party product consulting services. The sale of our SAP service activities was therefore a logical step."
Business line development
The Business Process Excellence (BPE) line achieved revenue growth of 11 percent at constant currency to total €95.3 million (2013: €90.3 million). Of that, license sales rose 10 percent to €43.7 million (2013: €41.9 million). Maintenance revenue grew by 11 percent to €51.6 million (2013: €48.4 million). In total, BPE revenue accounted for almost two-thirds (2013: 58 percent) of Group product revenue, which reflects a further improvement to Software AG's revenue mix in favor of this high-growth future-oriented business line. This development verifies the impact of the strategic growth measures which were taken last year-including the expansion of the sales force and the establishment of Software AG Government Solutions, a U.S. subsidiary, which focuses on public sector customers. Based on its current sales pipeline, Software AG is optimistic about the upcoming quarters and expects BPE license revenue to continue to rise over the course of the year.
In line with expectations, the traditional Enterprise Transaction Systems (ETS) database business generated €51.1 million (2013: €64.5 million) in revenue in the first quarter of 2014. Of that, ETS license sales were down to €13.3 million (2013: €21.1 million). As more ETS software licenses were sold already in the fourth quarter of 2013 than originally expected, fewer deals were closed in the first quarter of 2014. Software AG was however able to maintain the segment contribution's margin through effective cost management.
The Consulting business line posted first-quarter revenue of €62.5 million (2013: €70.1 million). The decline is primarily due to the consolidation of SAP-related consulting operations. As part of that, operations in North America and Eastern Europe were disposed in 2013. This was followed by the sale of SAP consulting in Germany, Austria and Switzerland (approx. 500 employees and €64 million in annual revenue) to the Scheer Group of Saarbrucken, Germany, in March 2014. The transaction successfully concluded the refocus of Software AG's consulting activities.
Software AG's global total revenue was €208.9 million (2013: €224.9 million). The negative effects of exchange rates totaled €9.7 million; and consolidation of the SAP consulting business decreased Consulting revenue by €7.6 million to €62.5 million (2013: €70.1 million). First-quarter product revenue (licenses + maintenance) for the core BPE and ETS business lines was €146.2 million and therefore at last year's level at constant currency. BPE growth fully offset the anticipated decline in ETS.
First-quarter operating earnings (non-IFRS) were €43.0 million (2013: €48.9 million); accordingly the operating profit margin (non-IFRS) was 21 percent (2013: 22 percent). EBIT totaled €30.5 million (2013: €41.6 million) as a result of investments. Net income after taxes totaled €18.6 million (2013: €27.2 million).
Software AG's equity ratio as of March 31, 2014 was still high at 47.4 percent of total assets, despite the successfully concluded share buyback program. The company acquired 4.1 million treasury shares for a total price of €110.0 million during the period from November 2013 to February 2014. Software AG currently holds 8.1 million treasury shares, which represents 9.3 percent of the company's share capital.
Software AG anticipates further positive performance and confirms its outlook. Accordingly, the company expects an increase in BPE revenue of between 12 and 18 percent (at constant currency) for fiscal year 2014. Revenue in the traditional ETS database business is likely to fall by 16 to 9 percent (at constant currency). Software AG expects an improved Group operating profit margin for fiscal 2014 as well as operating earnings (non-IFRS 2013: €260.7 million) growth between 2 and 7 percent.
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