Software AG

1. Quarterly Report 2008



2. Financial Performance

Significant growth once again in Group revenues

Group revenue rose to €159.4 million in Q1 2008 (Q1 2007: €124.7 million). It therefore exceeded the previous year’s result by 28 percent, or 37 percent following currency adjustment. This increase can be attributed to the acquisition of webMethods, Inc. as well as a positive trend in our operational business. This quarter also gave no indications that the weakened economy has influenced demand for IT products and services.

Product revenues (licenses and maintenance) increased by 26 percent to €114.8 million (Q1 2007: €91.4 million). Growth totaled 36 percent following currency adjustment.

The licensing revenues included in product revenues rose 28 percent following currency adjustment, or 18 unadjusted, to €55.4 million (Q1 2007: €46.9 million). Maintenance revenues grew by 44 percent following currency adjustment (unadjusted: 33 percent) to €59.4 million (Q1 2007: €44.5 million).

The Professional Services area generated revenues of €43.9 million, 35 percent (currency-adjusted: 40 percent) more than in 2007 (€32.6 million).

Revenues by Division

webMethods particularly strong in USA
Our webMethods Division achieved revenue growth of 88 percent in Q1 2008, earning a total of €68.7 million. Revenues in Q1 2007 amounted to €36.4 million. The largest share of this growth resulted from the acquisition of webMethods, Inc., which was not yet consolidated in Q1 2007. New business in the USA also turned in a very positive performance, although new business in Europe was somewhat less than expected. In the coming weeks we will be focusing on strengthening sales structures and management in order to ensure that we reach our targets for the year. The webMethods Division contributed 43 percent to Group revenues.

ETS enjoys worldwide success

Revenues in the ETS Division were €90.7 million in the first quarter (Q1 2007: €88.3 million). This represents a slight growth of 2 percent, or 9 percent following currency adjustment. The maintenance business was particularly encouraging, with a significant rise of 7 percent following currency adjustment. The measures introduced in recent months contributed to this positive outcome. Overall, the ETS Division contributed 57 percent to total revenues.

REVENUES BY DIVISION

IFRS, unaudited
in € million

Q1|2008

Q1|2007

Change
in %

webMethods


Licenses

22.2 13.8 +61

Maintenance

21.0 6.2 +268

Service & other

25.4 16.4 +55
Total 68.6 36.4 +93
ETS


Licenses

33.2 33.1 +1

Maintenance

38.3 38.3 0

Service & other

19.2 16.9 +14
Total 90.7 88.3 +3

Revenues by type

Licensing
We were able to conclude a number of significant licensing agreements in the first quarter. Licensing revenues grew by 18 percent in Q1 2008, or 28 percent following currency adjustment, to €55.4 million (Q1 2007: €46.9 million).

Licensing revenues in the webMethods Division grew by 61 percent to €22.2 million (Q1 2007: €13.8 million). Licensing revenues in the ETS Division remained stable at €33.2 million (Q1 2007: €33.1 million).

Maintenance business makes high overall contribution
The maintenance business was particularly encouraging again in the first quarter: Revenues rose by 33 percent to €59.4 million (Q1 2007: €44.5 million). This shows that our increased focus on sales has had a sustained positive affect on the maintenance business.

In the webMethods Division, we were able to significantly increase maintenance revenues by 240 percent to €21.0 million (Q1 2007: €6.2 million). The ETS Division was able to build upon its results from the previous year with a currency-adjusted increase of 7 percent to €38.3 million.

Professional Services business makes solid earnings contribution
The Professional Services area exceeded its figures from the previous year by 35 percent. Revenues were €43.9 million, compared to €32.6 million in the previous year, and the margin also improved. Therefore Professional Services has once again made a strong contribution to the success of Software AG.

In the webMethods Division, Professional Services revenues increased by 57 percent to €25.0 million in Q1 2008, up from €15.9 million in Q1 2007. The ETS Division expanded its Professional Services business by 13 percent to €18.9 Million (Q1 2007: €16.7 Million).

EBIT benefits from synergy effects
In Q1 2008, the EBITA grew significantly by 60 percent to €40.1 million (Q1 2007: €25.0 million). The EBIT was €36.0 million, compared to €25.0 million in Q1 2007, representing an increase of 44 percent. This proves that process efficiency has once again risen according to plan, reinforced by the synergy effects and economies of scale produced by the acquisition of webMethods, Inc. The strong growth in EBIT during the first quarter is also a very good basis for achieving our target operating margin of 24 percent for the entire year. The EBIT margin for the first quarter was 22.6 percent, compared to 20.0 percent in Q1 2007.

At €18.9 million, research and development expenses in the first quarter exceeded expenses in Q1 2007 (€12.2 million) by 55 percent. This can be attributed to the consolidation of the R&D departments of Software AG and webMethods, Inc. Expenses for marketing and sales also saw an acquisition-related increase of 23 percent to €40.1 million (Q1 2007: €32.7 million). They account for approximately 25 percent of revenues, which is in line with the target margin.

KEY EARNIINGS INDICATORS

in € million

Q1|2008

Q1|2007

Change
in %

EBIT 36.0 25.0 44
EBITA 40.1 25.0 60
Financial income/expense, net –1.5 3.1
Earnings before taxes 34.6 28.2 23
Net income 22.5 17.8 26
Earnings per share in Euro (basic) 0.79 0.63 25


Segment earnings contributions

The webMethods Division made a segment earnings contribution of €19.9 million in the first quarter of 2008 (Q1 2007: €6,000). Cost of sales rose by 36 percent to €27.1 million (Q1 2007: €19.8 million). The acquisition also caused selling expenses to increase by 31 percent to €21.7 million, from €16.6 million in Q1 2007. These figures are evidence of the previously mentioned increase in process efficiency and the leveraged synergy effects.

The particularly high-margin business in the ETS Division has once again made an important contribution, although it declined slightly compared to Q1 2007 as a result of the selling expenses ahead of the market entry in Brazil. The segment contribution in the first quarter was €51.7 million (Q1 2007: €53.9 million). Because of the expansion of sales, cost of sales increased by 13 percent to €20.7 million (Q1 2007: €18.3 million). Selling expenses grew by 16.1 percent to €18.4 million (14 percent increase).

Net income and EPS set new records
Net income rose 27 percent year-on-year, to €22.5 million as of March 31, 2008 (March 31, 2007: €17.8 million). Earnings per share reached a new record of €0.79 (March 31, 2007: €0.63). As of March 31, 2008, there were 28.6 million shares in circulation (undiluted), an increase of some 300,000 shares year-on-year.