Oct 24 ’17
Software AG’s Major Q3 Successes in the IoT Market Accelerate Transition to Cloud
Software AG has released its financial results (IFRS, preliminary) for the first nine months and third quarter of 2017. The company successfully entered a number of new strategic partnerships in the fields of the Internet of Things (IoT) and Industry 4.0. These include the newly founded ADAMOS joint venture with global market leading manufacturing companies such as DMG MORI, Dürr, ZEISS and ASM PT as well as other scalable IoT projects with major global enterprises. These successes and this high market demand reflect the growing relevance of Software AG’s leading technology and are accelerating its transition to the cloud.
The new IoT partnerships lay the foundation for a scalable and more predictable business with exponential and dynamic growth rates that increase with every additional connected machine, device or sensor. Therefore, Software AG will start reporting IoT cloud related revenue separately under a fourth business line as of January 2018. In addition to establishing a fast growing IoT business with recurring revenues, Software AG confirmed its 2017 outlook which had been raised in the last quarter. In Q3, the three business lines of the Group all reported growth of 2 percent while EBIT increased by 1 percent. The company’s operating profit margin (EBITA, non-IFRS) remained very high at 32.2 percent.
Software AG CEO Karl-Heinz Streibich said, “We have continuously expanded our technology leadership in the Internet of Things and Industry 4.0 markets. As a result, Software AG's relevance in the global IoT market has increased significantly. New strategic partnerships with global industrial enterprises highlight this positive trend. Establishing IoT as our fourth business line as of 2018 is an acknowledgment of this extraordinary market success.”
Software AG CFO Arnd Zinnhardt added, “IoT has become a strategic element of our customers’ new business models. To reflect this, we have established a licensing model based on the actual usage of our products significantly reducing IoT market entry barriers. This recurring, sustainable revenue stream gives us the opportunity to easily scale with the rapidly increasing numbers of connected machines and devices and to maximize our business potential to its full and true value.”
Business Line Performance
The Digital Business Platform (DBP) business line stayed on course for further growth. Maintenance revenue showed a 7 percent increase to total €201.6 million (2016: €188.8 million) in the first nine months of the year. License revenue was up 1 percent at €109.1 million (2016: €108.2 million) in the period. DBP product revenue (licenses and maintenance) thus grew 5 percent to €310.7 million (2016: €297.0 million), which is within the forecast range for the fiscal year. DBP revenue for the third quarter was €100.9 million (2016: €101.9 million), which reflects 2 percent growth at constant currency. Maintenance revenue posted 5 percent growth at €66.0 million (2016: €64.4 million). In regard to Software AG’s new IoT partnerships with major corporations, cloud has become the customer business model of choice. Consequently, the Group has taken the strategic decision to forgo a traditional licensing model with short-term income in favor of long-term revenue based on increased usage and market demand. Due to the increasing importance of Software AG’s scalable IoT business with recurring revenue, the company has decided to consolidate revenue from the IoT segment into a fourth business line as of January 2018.
Adabas & Natural (A&N) posted €48.8 million (2016: €49.1 million) in revenue in the third quarter, which reflects a 2 percent increase year-on-year at constant currency. Up 26 percent, A&N license revenue demonstrated above-average growth to total €11.3 million (2016: €9.3 million). Overall A&N revenue for the nine-month period was €149.2 million (2016: €165.1 million). Software AG anticipates an uptick in A&N contract renewals in the last quarter of the year and, therefore, expects revenue in the upper half of the market guidance corridor.
The Consulting business line continued its robust performance, fueled by the ever greater relevance of Software AG's product portfolio in the high-growth IoT and Industry 4.0 markets. Revenue in this line went up in the third quarter to €47.2 million (2016: €47.1 million), which reflects 2 percent growth at constant currency. In the nine-month period Consulting revenue grew 3 percent to reach €150.0 million (2016: €145.3 million).
Total Revenue and Earnings
Performance Software AG’s third-quarter total revenue rose 2 percent at constant currency to €197.3 million (2016: €198.3 million). Product revenue (licenses + maintenance) also grew 2 percent at constant currency totaling €149.6 million (2016: €150.9 million). License revenue improved with 2 percent growth at constant currency to €46.2 million (2016: €46.9 million). Maintenance revenue likewise rose 2 percent in the period under review to €103.3 million (2016: €104.0 million). At €50.4 million (2016: €50.1 million), Software AG's EBIT (IFRS) was up 1 percent in the third quarter of 2017. EBITA (non-IFRS) was €63.6 million (2016: €66.8 million). Software AG’s operating profit margin (EBITA, non-IFRS) remained very high in the third quarter at 32.2 percent (2016: 33.7 percent).
Based on current business development, Software AG confirms the raised forecast published with its results for the first half of the year. Software AG expects its operating profit margin (EBITA, non-IFRS) for fiscal 2017 to be between 31.0 and 32.0 percent. The forecast for product revenue growth in the Digital Business Platform (DBP) line remains unchanged at +5 to +10 percent at constant currency. Based on deals expected to close in the Adabas & Natural database business late in the year, Software AG anticipates a product revenue development between -2 and -6 percent at constant currency and year-on-year.