IR News #12. December Dear Investors and Analysts,

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1 Dear Investors and Analysts, The European and German financial regulators have taken a new direction and do no longer require full financial reporting every quarter. There are obviously many companies with successful business models that simply do not fit quarterly assessments. Deutsche Börse, the Frankfurt stock exchange, has also withdrawn from the quarterly cycle as a requirement for the prime standard. We welcome this new approach, allowing the issuer and engaged shareholders the freedom to settle on efficient and sustainable communication. However fourth quarter reporting will never come into question. It is relevant for both the achievements of the current and the expectations for the next year. Our Chief Customer Officer Eric Duffaut reminded us of the transformation of the DBP business. Although a quarter is not a trend he has pointed out the improvements in the Go-to-Market approach laying the base for future success. Other elements driving growing confidence are the award winning business solutions based on Software AG s Digital Business Platform. Here we can highlight WIPRO as one of our most advanced partners with the potential to scale. Digitization is everywhere and our CEO Karl Heinz Streibich may rightly claim thought leadership for Software AG, for example when advising the German national IT summit on this topic as he has done for several years. IT investments are increasingly focusing on differentiating projects for successful business development in all industries and the middleware layer will be one, if not the, key driver. High scores from software rating companies help users to choose and we are proud to lead in relevant ratings. We just added another one for our portfolio analysis suite Alfabet. Please check on our website for more details. What can we expect for 2016? Whereas the financial outlook in terms of numbers will only come when we report at the start point of 2016 with the Q4 results (January 27, 2016), management has already given a couple of qualitative statements, all pointing to profitable growth. The current year has already shown improvements in our Go-to-Market model and the efficiency of the organization (not only sales), a better market position and pipeline, growing maintenance revenue and even more stability in the A&N business. Given the pace of longer sales cycles in our business model, these developments will most likely continue and gain momentum in the next year. We now go into the (very) quiet period and will enjoy a couple of seasonal holidays. Meanwhile I hope this newsletter will help you to see through short term volatility and maybe to come back with a fresh perspective on Software AG. Last not least we post here our holiday greetings and best wishes for a happy and prosperous new year. With my warmest regards Otmar F. Winzig IR News #12 December 2015 Page 1 9

2 TABLE OF CONTENTS 1. On Roadshow With CCO Eric Duffaut in Paris and London 3 2. Maintenance Growth 6 3. Third Share Buy-Back Program 2015 Completed 7 4. Outstanding Digital Customer Solution 8 5. German IT Summit: Software AG Presents Digital Government 9 6. Financial Calendar Disclaimer: This document includes forward-looking statements based on the beliefs of Software AG management. Such statements reflect current views of Software AG with respect to future events and results and are subject to risks and uncertainties. Actual results may vary materially from those projected here, due to factors including changes in general economic and business conditions, changes in currency exchange, the introduction of competing products, lack of market acceptance of new products, services or technologies and changes in business strategy. Software AG does not intend or assume any obligation to update these forward-looking statements. This document constitutes neither an offer nor recommendation to subscribe or buy in any other way securities of Software AG or any of the companies that are members of the Group at present or in the future, nor does it form part of such an offer and it should not be understood as such. This presentation does not constitute an offer of sale of securities in the United States of America. Securities may not be offered or sold in the United States of America without registration or exemption from registration in accordance with the U.S. Securities Act of 1933 in its currently valid form. Software AG Investor Relations Uhlandstrasse Darmstadt Germany phone: +49 (0) 6151 / fax: +49 (0) 6151 / investor.relations@softwareag.com Follow us on Page 2 9

3 1. ON ROADSHOW WITH CCO ERIC DUFFAUT IN PARIS AND LONDON Chief Customer Officer Eric Duffaut met with numerous investors in the first week of December. The main topics were the strategic business development, the future potential of the digitization trend and the transformation of our Go-to-Market model. The chart illustrates the progress the company has made from being almost entirely dependent on its mainframe-business to now generating higher revenues from DBP than from A&N even at its peak, with further growth still to come through our new customer-centric Go-to-Market model. Eric Duffaut identified relevance and scalability as the key success factors for any software vendor. In terms of relevance, two key drivers: Software AG s portfolio the digital business platform (DBP) with its technology leadership and complete set of products for enterprise users to manage the transformation to the digital age. The DBP is made of best of breed technologies, all well integrated and easy to use to build customized solutions. What is unique and makes Software AG stand out from competition is the growing number of best of breed solutions which make the DBP best of suite. The customers presenting their success solutions to the market (cf. page 8 of IR News) are best proof of the relevance the DBP has for real differentiating IT solutions. Software AG s new Go-to-Market (GTM): The GTM transformation started in spring 2015 with a strong focus on account management and sales efficiency we are striving for more revenue per account and account manager. We are focusing an increasingly industry specialized sales force on fewer key accounts to better manage relationships and true partnerships, driving further adoption of Page 3 9

4 our DBP and increasing share of wallet with our existing customers. The positioning of use cases and a value base selling approach, instead of pure features and functions, in a product led GTM, contributes to Software AG relevance at the C level. This focus is a condition for providing business value and winning larger strategic deals. The signs of success are already visible, like the increased number of large deals (> 1m). DBP sales productivity increased every single quarter in and was up 14% year-to-date. Furthermore the DBP license pipeline shows a double-digit increase vs The transformation process will take some time, given the need to re-skill both direct sales and partners and an average sales cycle of 12 to 15 months for true large game changing opportunities. In terms of scalability the new GTM strategy is preparing the ground for accelerated growth. Expanding Partner Ecosystem for scale The partner ecosystem is expanding with encouraging results. Building incremental service capacity via capable services partners is key to ensuring customers across the world and across all industries can find Software AG trained consultants to realize value with their Software AG Digital Business Platform. More than 500 consultants at partners have been trained on Software AG s products. Driving fully fledged solutions on top of Software AG digital business platform will contribute to faster market adoption. Since the beginning of the year, more than 30 solutions have been built by partners such as Cap Gemini, WIPRO, Sony and many more, and are featured on our Digital Market Place. Finally, by co-selling or reselling in markets not covered by Software AG s own sales force, partners maximize customer touch points and expand our market coverage. Page 4 9

5 Cloud opening new markets Our cloud-enabled solution portfolio opens new addressable markets. Our cloud revenue is now accelerating showing triple digit growth. Customer specific applications and solutions when cloud enabled can be hosted in private clouds which allow high security and ease of use at the same time. Outlook Eric Duffaut showed strong confidence that the transformation will show further improvement towards profitable growth in the coming periods. Growth visible in maintenance revenue will continue and license growth is expected to show this trend too, despite ongoing, possible volatility in single quarters. Page 5 9

6 2. MAINTENANCE GROWTH Growing maintenance revenue, even if license revenue is stable, seemed to surprise market participants repeatedly in Yet it is the enjoyable effect of the perpetual license scheme (different from SaaS model) which applies to Software AG s business model. Initially the maintenance payment is a percentage of the license bought. Whereas the license payment is a one-time payment (for perpetual use of the software), the maintenance is a repeated annual payment. Customers normally buy maintenance for as long as they use the software to get technical support and the new releases on a regular basis. When applied in a financial model the maintenance revenue is recurring at a high rate (renewal rates are around 95%). Therefore the new license sales of a given year would provide new maintenance revenue to be added to the existing stream going forward. This phenomenon is illustrated below for two different scenarios: 1) DBP license revenue development flat 2) DBP license revenue development with 10% CAGR The result for DBP maintenance is shown on the left hand side. The graphic to the right shows the result for group maintenance revenue including A&N. Model assumptions: DBP license / maintenance ratio: 18% net (i.e. 1m of licenses provides 180k of maintenance p.a.) DBP maintenance renewal rate % (improving with maturity of installations) A&N maintenance: straight decline of 4% p.a. Page 6 9

7 3. THIRD SHARE BUY-BACK PROGRAM 2015 COMPLETED Software AG s third share buy-back program, which was announced in September, reached the targeted purchase volume of 70 million. This equals 2.71 million shares and corresponds to an average purchase price of EUR per share on December 04, The program has exclusively been executed through the Xetra platform. As of December 04, 2015 Software AG holds altogether 2.77 million own shares (3.5 % of the share capital). Consequently, the free float of Software AG share capital decreased from 68 percent to 65 percent. Software AG s cash allocation strategy primarily focuses on dividend continuity, financing acquisitions and on share buy-back as a third pillar. The base for cash out is the average from net profit and free cash flow. About one quarter to one third of this amount is used for dividends which continuously grew and doubled in value, per share, over the last decade. The remaining free cash is either used for financing acquisitions (including the pay-back of M&A related debt) or available for share buy-back. As the AGM 2015 gave authorization to buy up to 10% of the share capital by May 12, 2020, there is leeway for further programs to follow at any time the environment looks attractive for the Management Board. Additional information on the program and its closing can be found on the IR Website. Page 7 9

8 4. OUTSTANDING DIGITAL CUSTOMER SOLUTION At this year s Innovation World in Las Vegas, the first customers were presenting their experiences with our new Digital Business Platform, showing its impact in different industrial sectors. Take a look at this year s winners of the SAG s Innovation Award Johnson & Johnson, Lexmark, WIPRO Technologies, Logrand Group and KIABI as well as the partners Cognizant and Fiserv. All these companies are standing out in the digital market. In the following we highlight a partner solution with WIPRO on Predictive Maintenance: The global information technology, consulting and outsourcing company WIPRO and Software AG announced joint development of Internet of Things solutions at the beginning of this year. Meanwhile WIPRO has developed and deployed Looking Glass - an Internet of Things solution for smart and connected products. Using Software AG s Digital Business Platform with products webmethods, Apama and Terracotta, WIPRO Technologies can integrate, capture, analyze and respond to data captured by embedded sensors in remote device at customer sites as the following picture shows: Source: wipro.com Industrial Internet platform: WIPRO Looking Glass combines integration, big data streaming analytics and in-memory data management and provides an industrial internet platform for IoT. Cloud enabled: it can be run both on-premise as well as hosted in a single cloud or multiple clouds simultaneously. Scalability: it can handle high data volume and velocity Security: it enables complex authorization schemes while managing security Operational intelligence: Enabled by real-time streaming analytics and complex data asset modeling Business value of predictive maintenance: 1) The enterprise understands and can act immediately to real-time maintenance data to proactively increase service levels, drive down costs, and maximize asset uptime, utilization and placement. 2) Predictive maintenance allows the transformation from hardware seller to a service provider. Page 8 9

9 5. GERMAN IT SUMMIT: SOFTWARE AG PRESENTS DIGITAL GOVERNMENT Software AG accompanies the transition to a digital society in a globalized world, which does not only focus on enterprises. The vision of digital government is also a focus; Software AG supports the definition of frameworks and conditions in order to become real. As evangelizing for digitization is a vital part of Software AG s Go-to-Market strategy, it is quite natural for Software AG to regularly take an active and leading position in the German national IT summit, the country s top IT event. The ninth National IT Summit 2015 took place under the patronage of Chancellor Angela Merkel and Minister of Economic Affairs Sigmar Gabriel in Berlin on November 19, Being co-chairman of the Digital Administration and Public Sector IT platform, Software AG s CEO Karl- Heinz Streibich provides thought leadership and plays an active digital government shaping role: The platform s objective is to analyze the potential of digitizing Germany s public administration for citizens and businesses and to draft specific guidelines. The results and recommendations of this think tank were presented to an audience including Angela Merkel. The summary of the results are also published in the IT Summit paper Government 4.0 Digital, Sovereign, Innovative, which can be found here. 6. FINANCIAL CALENDAR 2016 On February 10, 2016 Software AG invites investors, potential investors and financial analysts to attend the Capital Market Day 2016 at its Headquarters in Darmstadt. Please save the date for this event, where you have the opportunity to meet the Software AG management to get updates on strategy and financials. Customer use cases will broaden the understanding how we empower customers to innovate, differentiate and win in the digital world. January 27 Financial results Q and FY 2015 Analyst / Investor Conference Call February 10 Capital Market Day Software AG Headquarters Darmstadt, Germany April 26 Financial results Q Analyst / Investor Conference Call May 31 Annual Shareholders Meeting Darmstadt, Germany July 20 Financial results Q Analyst / Investor Conference Call October 25 Financial results Q Analyst / Investor Conference Call Page 9 9