Software AG

2. Quarterly Report 2008



2. Financial performance

Continued significant growth in Group revenue

Software AG’s group revenue was €168.8 million in Q2 2008 (Q2 2007: €152.2 million), exceeding the previous year’s figure by 11 percent, or 18 percent following currency adjustment. The comparative values from the previous year only contain a part of the webMethods sales which were consolidated from May 25, 2007 onwards.

Product revenue (licenses and maintenance) increased by 13 percent to €123.2 million in Q2 2008 (Q2 2007: €108.7 million). Currency-adjusted growth totaled 22 percent.

The licensing revenue, included in product revenue, rose 15 percent following currency adjustment, or 7 unadjusted, to €61.4 million in Q2 2008 (Q2 2007: €57.3 million). Maintenance revenue grew by 30 percent following currency adjustment (unadjusted: 20 percent) to €61.8 million (Q2 2007: €51.4 million).

The Professional Services area generated revenue of €44.8 million in Q2 2008, thus increasing its result by 7 percent (currency-adjusted: 12 percent) compared to Q2 2007 (€41.7 million).

Revenues by division

webMethods within plan
The webMethods division increased its revenue significantly in Q2, 2008, by 25 percent (currency-adjusted: 34 percent) to €76.7 million. The prior-year figure of €61.6 million includes revenue by webMethods, Inc. up to May 25, 2007. webMethods licensing revenue improved slightly in the EMEA region in Q2 2008, and the US business continued to demonstrate robust growth. The webMethods division expects growth of approximately 40 to 45 percent for the year as a whole. webMethods contributed 45 percent to Group revenue in Q2.

ETS shows stable growth
Revenue in the ETS division grew by 2 percent to €92.1 million in Q2 (Q2 2007: €90.6 million). Following currency adjustment, this figure rose to 7 percent. Licensing revenue in this division was €34.7 million (Q2 2007: €32.8 million), a currency-adjusted increase of 11 percent. The ETS division saw particularly noteworthy growth in Brazil, where Software AG took over sole distribution at the beginning of the year. We signed 22 contracts in recent months with a total volume of more than €12 million, €6 million of which was booked in Q2 2008. We expect a significant expansion of business in the second half of the year. Based on the current situation, we project an overall 12 to 14 percent revenue increase following currency adjustment for ETS for the fiscal year as a whole. The ETS division contributed 55 percent to total revenue in Q2 2008.

REVENUES BY DIVISION

IFRS, unaudited
in € million
January 1 -
June 30, 2008
January 1 -
June 30, 2007
Change
in %

Q2|2008

Q2|2007

Change
in %

webMethods





Licenses

48.8 38.3 27 26.6 24.5 9

Maintenance

43.5 18.0 142 22.5 11.8 91

Service

52.5 39.9 32 27.5 24.1 14
Other 0.5 1.8 -72 0 1.2 100
Total 145.3 98.0 48 76.7 61.6 25
ETS





Licenses

68.0 65.9 3 34.7 32.8 6

Maintenance

77.6 77.9 0 39.3 39.6 -1

Service

36.2 34.4 5 17.3 17.7 -2
Other 1.1 0.7 57 0.8 0.5 60
Total 182.9 178.9 2 92.1 90.6 2

Revenues by type

Licensing business shows robust growth
Our licensing business is continuing its positive growth trend. Licensing revenue rose by 7 percent in Q2 2008 (currency adjusted: 15 percent) to €61.4 million (Q2 2007: €57.3 million).

Licensing revenue in the webMethods division was €26.6 million in Q2 2008, compared to €24.5 million in Q2 2007, corresponding to a 19 percent increase following currency adjustment. In the ETS division, licensing revenue rose by 11 percent following currency adjustment, to €34.7 million (Q2 2007: €32.8 million).

Maintenance business continues encouraging trend
The maintenance business once again made a high overall contribution in Q2 2008: Revenue grew by 20 percent (currency adjusted: 30 percent) to €61.8 million (Q2 2007: €51.4 million).

In the webMethods division, maintenance revenue improved both organically and through acquisitions to €22.5 million (Q2 2007: €11.8 million), which translates into a growth rate of almost 91 percent, or 108 percent following currency adjustment. The ongoing growth in the ETS division is a particular source of satisfaction. Growth in Q2 2008 was 6 percent (currency-adjusted), reaching €39.3 million in revenue (Q2 2007: €39.6 million).

Service business has room for improvement
Professional Services increased its revenue in Q2 2008 by 7 percent to €44.8 million, compared to €41.7 million in Q2 2007.

The service business in the webMethods division grew from €24.1 million to €27.6 million (+14 percent). The lower increase in revenue compared to the product business can be attributed primarily to lower licensing revenue in the previous quarters; these licensing revenues form the basis for subsequent service business. With revenue of €17.3 million, the ETS division maintained the high level of its service business (Q2 2007: €17.7 million).

EBIT once again at record levels
EBITA grew by 17 percent to €44.4 million in Q2 2008 (Q2 2007: €37.9 million). EBIT grew from €36.7 million in Q2 2007 to €40.9 million, an increase of 11 percent. The EBIT margin amounted to 24.3 percent, compared to 24.1 percent in Q2 2007.

At €18.5 million, research and development expenses in Q2 2008 significantly exceeded expenses of €14.8 million in Q2 2007. This 25-percent increase can be attributed primarily to the consolidation of the acquired company webMethods, Inc. Marketing and sales expenses increased slightly by 7 percent to €39.8 million (Q2 2007: €37.2 million) for the same reason.

KEY EARNIINGS INDICATORS

in € million

Q2|2008

Q2|2007

Change
in %

January 1 -
June 30, 2008
January 1 -
June 30, 2007
Change
in %
EBIT 40.9 36.7 11.4 77.0 61.7 24.8
EBITA 44.4 37.9 17.2 84.5 62.9 34.3
Financial income/expense, net -1.4 1.3
-2.9 4.4
Earnings before taxes 39.5 37.9 4.2 74.1 66.1 12.1
Net income 27.1 24.6 10.2 49.6 42.3 17.3
Earnings per share in Euro (basic) 0.95 0.86 10.5 1.74 1.49 16.8

Segment earnings contributions
The webMethods division contributed €23.4 million to earnings in Q2 2008 (Q2 2007: €13.4 million), representing an increase of almost 75 percent. Cost of sales increased by 20 percent to €28.9 million (Q2 2007: €24.0 million) due to revenue growth. Selling expenses increased slightly to €24.4 million (Q2 2007: €24.2 million). These figures underline the planned increase in process efficiency as well as the full realization of synergy effects.

Our ETS division even exceeded the high segment contribution it achieved in Q2 2007, rising by 2 percent, from €56.7 million to €57.8 million in Q2 2008. In the process, selling expenses increased faster than revenue, reaching €15.4 million, compared to €13.0 million in the previous year. This increase can be attributed primarily to the build-up of our business in Brazil. Cost of sales, on the other hand, decreased by 10 percent to €18.9 million in Q2 2008 (Q2 2007: €20.9 million).

Net income and earnings show positive growth
Net income grew from €24.6 million to €27.1 million in Q2 2008: an increase of 10 percent. Earnings per share rose to €0.95, compared to €0.86 in Q2 2007. As of June 30, 2008, there were 28.6 million shares (undiluted) issued and outstanding, approximately 130,000 more than on the previous year’s balance sheet date.

Half-year figures support ambitious forecasts for the fiscal year
Group revenue reached €328.2 million in the first half of 2008. It therefore grew by 19 percent compared to the figure of €276.9 million for the first half of 2007. Currency-adjusted revenue grew by 26 percent. Licensing revenue in this period rose by 12 percent (currency-adjusted: 21 percent) to €116.8 million (H1 2007: €104.2 million). Maintenance revenue grew by 36 percent following currency adjustment to €121.1 million (H1 2007: €95.8 million). Revenue from services totaled €88.7 million, compared to €74.3 million in the previous year.

Earnings before interest and taxes (EBIT) rose to €77.0 million in the first six months of 2008, up 25 percent (H1 2007: €61.7 million), leading to an increase in the EBIT margin from 22.3 to 23.5 percent. Operating cash flow achieved a particularly high value of €60.2 million, 75 percent higher than on June 30, 2007.