4. Financial performance
4.1 Revenue trends
Software AG’s group revenue increased by 16 percent to €720.6 million (2007: €621.3 million) in fiscal year 2008. This increase resulted from the acquisition of webMethods, Inc. and in the second half of the year, from the organic growth generated from the webMethods business division. In addition, our successful market entry in Brazil made a significant contribution to revenue. Currency adjusted, the increase was 21 percent. The Company was therefore able to grow dynamically, despite the financial and economic crisis.
The changing exchange rate relations to the euro over the fiscal year affected the reported revenues as follows:
| Effects of exchange rate variation on 2008 revenue in € million | Revenue share in foreign currency 2008 in % |
U.S. dollar (USD) | -14.6 | 29 |
Pound sterling (GBP) | -7.0 | 6 |
South African rand (ZAR) | -4.3 | 3 |
Canadian dollar (CAD) | -1.4 | 2 |
Japanese yen (JPY) | +1.9 | 4 |
Brazilian real (BRL) | -2.3 | 7 |
Sales by revenue type
Product revenue from licenses and maintenance increased by 19 percent to €539.1 million in 2008. In 2007 it was €454.2 million. Adjusted for currency effects, the growth rate amounted to 24 percent. License revenue included in product revenue increased from €241.3 million to €272.0 million, which corresponds to an improvement of 13 percent, or 18 percent after currency adjustment. As a result, license revenue exceeded maintenance revenue, as in the previous year. However, maintenance revenue grew more, at 25 percent, rising from €212.9 million in 2007 to €267.1 million in 2008. Overall, product revenue made up 75 percent of total Group revenue. This was the result of our successful direct market entry in Brazil and growth in the webMethods business division.
Our service revenue increased by 10 percent to €177.8 million (2007: €161.2 million). The Professional Services unit therefore contributed 25 percent to Group revenue. In fiscal year 2008, this unit focused on continued improvement to efficiency and profitability. In 2009, one main focus will be on further profitable growth in this business unit. The foundation for this has been laid with additional personnel and a separate Executive Board area.
Revenue by business division
With its high growth rates, the webMethods business division made a significant contribution to Software AG’s business expansion in fiscal year 2008. Revenue in the webMethods business division grew by 33 percent to €315.7 million (2007: €238.1 million). This is due to organic growth and the acquisition of webMethods, Inc., whose revenue was consolidated as of May 25, 2007. In 2008, the new webMethods business division contributed 44 percent to total revenue (2007: 38 percent). This is a confirmation of our corporate strategy of capturing the integration software (SOA/BPM) growth market with webMethods and building a second business division alongside ETS that enables corporate growth over the long term. In the fiscal year license revenue for webMethods rose by 31 percent from €88.3 million to €115.3 million. Maintenance revenue saw an even sharper increase of 63 percent from €57.2 million to €93.2 million. Service revenue rose from €88.2 million to €105.0 million – an increase of 19 percent. The segment contribution (EBIT before R&D and administrative expenses) of the webMethods division shows an above-average increase in earnings. It improved by 156 percent to €107.1 million (2007: €41.8 million).
The ETS business division achieved revenue of €404.9 million, corresponding to an increase of 6 percent over the previous year (€383.1 million). This is mainly the result of the direct market entry in Brazil. The ETS business division therefore contributed 56 percent to Group revenue of Software AG. In the fiscal year, license revenue for ETS rose by 2 percent (currency adjusted by 5 percent) to €156.8 million (2007: €153.0 million). Maintenance sales performed even better, rising 12 percent from €155.7 million to €173.8 million. At €72.8 million, service revenue remained on par with the previous year’s value. In the fiscal year the segment contribution from the ETS business division rose by 3 percent to €245.7 million (2007: €238.8 million).
Sales by revenue type
| 2008 as a whole in € million | 2008 | 2007 | Change in % | Change in %
currency-adjusted |
Product | 539.1 | 454.2 | + 19 | + 24 |
Licenses | 272.0 | 241.3 | + 13 | + 18 |
Maintenance | 267.1 | 212.9 | + 25 | + 31 |
Service | 177.8 | 161.2 | + 10 | + 13 |
Other | 3.7 | 5.9 | -37 | -33 |
Total | 720.6 | 621.3 | + 16 | + 21 |
4.2 Earnings performance
We were able to significantly increase our earnings again in 2008 and once more achieved a record value. The significant increase in net income is evidence of the consistent optimization of processes and demonstrates how successful the integration of webMethods, Inc. was. Our gross profit margin rose from 70.8 percent to 72.5 percent. As a result, gross profit rose even more than revenue, posting a value of €522.4 million, compared to €439.8 million in the previous year, an improvement of 19 percent.
EBITA increased by 36 percent to €195.0 million in the fiscal year (2007: €143.5 million). Factors contributing to this were increased revenues, higher process efficiency and exploited cost synergies following the acquisition of webMethods, Inc. Acquisition-related amortization amounted to €14.5 million (2007: €6.7 million) and thus produced EBIT for the year as a whole of €180.5 million, a 32 percent increase of the previous year’s figure of €136.8 million. The EBIT margin was therefore significantly improved: it rose from 22.0 percent to 25.1 percent and therefore performed better than we forecast.
Net income improved by 31 percent to €115.9 million (2007: €88.4 million). This is due primarily to a further reduction in the tax rate for the Company, which fell from 35.5 percent to 34.0 percent. For the future, we expect a tax rate of 35 percent for Software AG. Because of credit financing for acquisitions, net financial income fell from €0.3 million to -€5.1 million. Pre-tax earnings rose by 28 percent to €175.4 million (2007: €137.1 million).
Key earnings indicators
In € million | Q4
2008 | Q4
2007 | % | 2008 as a whole | 2007 as a whole | % |
EBIT | 54.9 | 42.8 | + 28 | 180.5 | 136.8 | + 32 |
EBITA | 58.2 | 45.2 | +29 | 195.0 | 143.5 | + 36 |
Net financial income/expense | -0.6 | - 2.2 | -5.1 | 0.3 | ||
Net income | 35.2 | 26.9 | + 31 | 115.9 | 88.4 | + 31 |
Earnings per share in € (basic) | 1.23 | 0.95 | + 29 | 4.05 | 3.11 | + 30 |
4.3 Cost structure
In € million | Q4
2008 | Q4
2007 | % | 2008 as a whole | 2007 as a whole | % |
Total revenue | 212.4 | 186.5 | + 14 | 720.6 | 621.3 | + 16 |
Cost of sales | - 56.3 | - 50.8 | + 11 | -198.2 | - 181.5 | + 9 |
Gross profit margin in % | 156.1 | 135.7 | + 15 | 522.4 | 439.8 | + 19 |
| 73.5 | 72.8 | 72.5 | 70.8 | ||
Research & Development | - 19.5 | - 20.6 | - 5 | -76.2 | - 65.9 | + 16 |
Sales & Marketing | - 47.4 | - 46.8 | + 1 | - 169.5 | - 159.2 | + 6 |
Management & Administration | - 17.3 | - 18.8 | - 8 | - 65.1 | - 59.3 | + 10 |
Other | -13.7 | - 4.3 | -16.6 | - 11.9 | + 39 | |
| EBIT | 54.9 | 42.8 | + 28 | 180.5 | 136.8 | + 32 |
Margin in % | 25.8 | 22.9 | 25.1 | 22.0 |
We continue to pursue the goal of a sustained increase in profit and therefore continue to implement our cost optimization measures. As a result, we use targeted cost management, which also equips us for the challenges presented by times of crisis. The main cost blocks increased at a lower rate than revenue in 2008.
In the year under review, the cost of sales rose by 9 percent, a far smaller rise than revenue (16 percent). The higher gross margin was achieved through cost efficiency in the Professional Services unit and consolidation in Support, as well as lower expenses for third-party products as a result of our own extended portfolio. At 13 percent, the rise in the cost of sales in the webMethods business segment was significantly lower than the growth in revenue of 33 percent. In the ETS business division, the cost of sales rose by 4 percent to €83.2 million (2007: €79.8 million), compared with sales growth of 6 percent.
In 2008, research and development expenses rose at the same rate as revenue, 16 percent, from €65.9 million to €76.2 million. We therefore adjusted expenses in this area as planned, following a rise of 47 percent in the previous year as a result of acquisitions. Measured by product revenue, the share of R&D expenses developed as planned, at 14.1 percent (2007: 14.5 percent). As R&D integration has now been completed, we expect a further improvement to the cost situation in 2009.
In fiscal 2008, expenses for sales and marketing saw a smaller rise of 6 percent to €169.5 million (2007: €159.2 million). The webMethods selling expenses even fell by one percent to €93.6 million (2007: €94.7 million), while in the ETS business segment they rose by 18 percent to €75.9 million (2007: €64.5 million). The share in the total revenue is now 23.5 percent, compared with 25.6 percent in the previous year, and is therefore clearly below the planned upper limit of 25 percent.
General administrative expenses rose by 10 percent from €59.3 million to €65.1 million. Consequently, the share in the total revenue is now at 9.0 percent, meeting our target of a value permanently below 10 percent (2007: 9.5 percent).
4.4 Net income and appropriation of profits
Net income
Software AG's net income increased by 31 percent to €115.9 million in fiscal 2008. In 2007, it was €88.4 million. This is due among other things to the considerable expansion of business and a lower tax rate.
In the fiscal year basic earnings per share rose from €3.11 to €4.05, an improvement of €0.94. The average number of shares outstanding amounted to 28,599,020 at the end of the fiscal year (2007: 28.439.959). The increase in the number of shares was due to the exercising of options by the Executive Board and managers.
Appropriation of profits
In the past fiscal year we were once again able to significantly improve profit and cash flow. Based on our ongoing dividend policy and payout ratio to date, an increase to the dividend would be logical. However, we are operating in uncertain economic times in which a reduction in dependency on bank loans is recommended. At the same time, we want to be able to take advantage of the acquisition opportunities on the software market. An increase in cash reserves is therefore necessary. The Executive Board and Supervisory Board of Software AG will propose to the Annual Shareholders’ Meeting a dividend of €1.10 per share (2007: €1.00). This results in total dividends of €31.5 million (2007: €28.5 million) and a payout ratio of 25 percent (2007: 33 percent). The payout ratio calculation is based on the average of earnings after tax and free cash flow.
4.5 Software AG financial statements
The financial statements of Software AG (parent company of the Group) were prepared in accordance with the German Commercial Code (HGB). Software AG’s revenue amounting to €203.6 million (2007: 188.6 million) resulted primarily from royalty income and management fees from subsidiaries. €25.9 million in income (2007: €12.4 million) was due to profit transfers and €38.2 million (2007: €24.7 million) to dividends from affiliated companies. Net income totaled €77.1 million (2007: €62.1 million).
