1. The Software AG Group
1.1 Business activities
Software AG is the world’s leading independent provider of infrastructure software for business processes. By modernizing, automating and optimizing their existing IT systems and processes, our customers are able to achieve their business targets more quickly, add tangible value and react flexibly to new business requirements. With solutions from Software AG, companies open up and control information, systems, applications, processes and services and achieve a high degree of automation and end-to-end transparency.
Our product portfolio contains market-leading solutions for data management, the creation and modernization of applications, service-oriented architectures and the optimization of business processes. We combine powerful technology with industry expertise and proven best practices, which help our customers to achieve their company targets more quickly. Software AG has 40 years of international IT experience and operates in 70 countries with around 3,500 employees. The Company is headquartered in Germany and is listed on the Frankfurt Stock Exchange. Software AG posted total revenue of €721 million in 2008.
Software AG generates its revenue from the licensing of enterprise software and from maintenance and services in the two business divisions, ETS and webMethods.
1.2 Organization
Software AG consists of two business divisions: Enterprise Transaction Systems (ETS) and webMethods. The associated consulting services are provided by the Professional Services (PS) business unit.
ETS and webMethods business divisions
With our ETS business division, we have a firm footing in the IT landscapes of companies and government agencies worldwide. Software AG is an ideal partner for mainframe software and the modernization of mainframe-based IT systems and therefore ensures the long-term protection of customers’ investments. Adabas offers our clients a high-performance database that is able to process 320,000 transactions per second. For decades, the Natural development environment has been the foundation of hundreds of thousands of software applications that make up the technical backbone of business-critical processes at large companies and government agencies. Today, customers modernize their business systems with our help by optimizing their performance and opening up these business-critical systems up to new environments such as Web and e-business. The ETS business division includes technologies such as database management, application development and application modernization.
The comprehensive product range in the webMethods business segment enables customers to develop automated, flexible and efficient business processes (business process management, BPM) by integrating existing systems and make these processes available to external business partners. This is achieved through Web-based programs that can be easily controlled and managed as Web services within a service-oriented architecture (SOA). The rapid creation of new processes through the reuse of programs or parts of programs in these Web services, the control of these services and the monitoring of all created services and applications in real time are also equally important. The IT therefore provides optimum support for business development. With the acquisition of webMethods, Inc. in 2007, Software AG has strengthened its product range with first-class products for integration and business process management. The technologies in the webMethods business segment include control software for service-oriented architectures (SOA governance), business process management (BPM), business activity monitoring (BAM) and enterprise service bus (ESB) and B2B integration technology.
Global Professional Services (PS) business unit
Since our reorganization in 2007, our two global business divisions, ETS and webMethods, have been supplemented by the globally positioned Professional Services business unit. This unit implements customized IT solutions based on our own products and thereby provides customers with further operational benefits for their business. Professional Services offers consulting for service-oriented architecture (SOA), business process management (BPM) and modernization as well as specific product-related solutions. As part of Software AG, our Professional Services team has the best product expertise on the market thanks to close cooperation with the development departments and its proximity to customers.
Realignment of the sales divisions
Following our acquisition of webMethods, Inc. in 2007, ETS and webMethods became two equally important divisions of Software AG’s business. Consequently, in the same year the Company structure was changed from an organization divided into subsidiaries to one based on business divisions.
In April 2008, the Executive Board also decided on a further organizational change: The sales organizations of the two business divisions were aligned under two Executive Board members, each with different regional responsibilities. The goal was to increase sales efficiency and in particular to push sales growth in the webMethods business, which was previously focused primarily on the USA. The Western region (North and South America, Western and Southern Europe) is therefore the responsibility of Executive Board member Mark Edwards as COO West. He was previously responsible for the ETS business segment. Executive Board member David Broadbent, previously CTO of the ETS business, was entrusted with sales in the Eastern region (Northern and Central Europe, Africa, Asia and Australia) as COO East.
The two sales units focus their market cultivation efforts on ETS and webMethods respectively, and are managed consistently at Executive Board level. This ensures that sales specialization for the different segments is retained, but at the same time enables Management to pursue a consistent and customer-oriented sales strategy. With this strategy, we aim to acquire large projects with new and existing customers in the software market for service-oriented architecture. As a result of our restructuring measures, the area of Research & Development is now the responsibility of Dr. Peter Kürpick, who was previously in charge of webMethods R&D. The merging of activities into a single R&D organization should result in a considerable increase in efficiency, particularly with regard to the development of add-on products (see Research & Development section).
Changes in the Executive Board
An important strategic decision was made with regard to the further expansion of our Professional Services business unit. To underline the importance of the newly aligned area, Holger Friedrich assumed his new role as Executive Board member with global responsibility for Software AG Professional Services on October 1, 2008. As a result, this area is under the global leadership of an expert with more than 15 years of experience. Our aim is to build on the implementation competence of our own software solutions and consulting services over the long term, in particular in the SOA and BPM markets.
The former president and CEO of webMethods, Inc., David Mitchell, who was Board member for sales of the webMethods division of Software AG following the acquisition, left the Company on April 30, 2008 for personal reasons. Further information on this can be found in the Corporate Governance section and the Remuneration Report.
Group structure
The corporate structure of Software AG comprises 75 subsidiaries in 42 countries (see the Notes to the Financial Statements for a detailed breakdown). The largest subsidiaries are located in the USA, Spain, Germany and the United Kingdom. Brazil is also becoming one of the most important sales markets for Software AG. The subsidiaries are responsible for all Software AG sales, marketing and service activities in the respective countries. In Germany, the two wholly-owned subsidiaries SAG Deutschland GmbH and SAG Consulting Services GmbH employ around 200 people and have seven offices.
Major locations
Software AG has more than 80 locations worldwide. Our most important locations include Darmstadt (Germany), Reston (USA), Madrid (Spain), Bracknell (UK), Sydney (Australia) and Sao Paulo (Brazil).
1.3 Market position
Software AG's goal is to become the global market leader in the future IT markets for SOA and BPM. In 2008 we further strengthened our market position as the leading independent provider of infrastructure software. We were able to draw on our 40 years of extensive experience in international IT markets here. Software AG’s particular strengths are our strong focus on the customer, a highly innovative product portfolio, the financial stability of the Group and our global presence.
Worldwide, Software AG is one of the 25 largest providers of enterprise software. In Europe, the Company has moved into fourth place on the list of the largest software companies, rising from fifth place the year before. This was corroborated by the “Truffle 100 Europe” report published in November 2008 by the European Commission in Brussels, which rated the 100 largest software companies in Europe. The rating was based on global software revenue generated in 2007. In Germany, Software AG is already the second-largest provider of enterprise software.
In the market segment for infrastructure software for business processes, Software AG is the largest independent provider and is one of the three largest providers worldwide. The Company is the only software provider that is technology leader in BPM (business process management) and SOA (service-oriented architecture) governance, the two pillars of infrastructure software, as confirmed by current studies by leading industry analysts. They have also classified Software AGs as a “leader" or in the “leader’s quadrant” in numerous studies.
1.4 Corporate strategy and objectives
Software AG would like to further expand its position as a top independent provider of infrastructure software to become the world’s market leader in the high-opportunity segments of SOA and BPM. To accomplish this, we are dedicated to implementing a sustainable business development strategy. Our goal of profitable growth consists of four components:
1. Organic growth through innovation
2. Geographic expansion
3. Growth through acquisitions
4. New customer groups through partnerships
The first two components were our focal points in 2008. We successfully integrated webMethods and broadened our product portfolio. Geographic expansion consisted primarily of our successful direct market entry in Brazil at the beginning of the year.
Organic growth through innovation
Software AG built a second key line of business with webMethods to complement our traditional data management (ETS) business division. It is a globally leading integration software portfolio in the high-opportunity service-oriented architecture (SOA) and business process management (BPM) markets. Our technologies have been recognized as leaders by Independent industry analysts. Integration software is useful to Software AG’s new and existing customers, which makes it particularly important from a strategic point of view. The webMethods business division enables us to modernize our customer base’s IT systems and to acquire new customers and thus achieve profitable growth.
Growth through geographic expansion
Our direct market entry in Brazil in January 2008 was very successful. In the first year alone, we signed new contracts with more than 45 of the approximately 150 Brazilian product users. During the year, revenue surpassed our forecast of €30 million, which had been raised several times throughout the year. By the year 2010 we want to achieve $75-100 million in revenue in Brazil. Our next phase of growth with regard to geographic expansion will concentrate on intensified market representation within the 70 countries in which Software AG currently operates.
Growth through acquisitions
In 2007 we acquired SPL Israel, webMethods Inc. and Jacada (effective January 1, 2008). In 2008 we successfully assimilated the three companies. In September 2008, CentraSite ActiveSOA, our first integrated product, went to market. Acquisitions continue to be a component of our growth strategy. Software AG is a consolidator in the highly fragmented infrastructure software market. Technology companies that complement our product portfolio and smaller systems firms that strengthen our local or industry-specific consulting and project capacities are of particular interest.
New customer groups through partnerships
In 2008 we also increased the number of customer projects in which partners were involved. Our access to our partners’ customer base through the Partner-Eco-System enables us to better penetrate the market with our webMethods products. As a technology leader, Software AG is attractive to new partners, which enables us to lay the groundwork for sustained growth.
Independence
One of our key success factors among customers is our independence from a particular IT environment or platform. Software AG modernizes vendor-neutral IT systems. This gives us the flexibility to put in place the best and most efficient IT solutions possible for our customers. This is one of our greatest unique selling points. Through our consistent customer orientation, technological leadership and efficient processes we aim to achieve annual organic growth of 10 percent, provided a normal economic environment. Our high-growth webMethods business division generated 44 percent of total revenue in 2008. In the medium term, webMethods will account for more than 50 percent of revenue and bolster growth of the corporation as a whole.
For our complete financial targets for 2009, please refer to the Forecast section.
1.5 Value-oriented control
Software AG’s goal is to achieve a sustained increase to its enterprise value. To this end we want to continue growing profitably and further increasing the Group’s financial strength. We use an information management system in order to control these aims. The key indicators we look at here are the revenue, operating result (EBIT), EBIT margin, earnings per share and cash flow on the basis of our IFRS reporting. Value-oriented financial indicators relating to employment of capital play a minor role for us, as our commitment of capital is low and personnel expenses make up the largest cost block. As in other companies in the software industry, EBIT is therefore the most important financial indicator for Software AG.
Ongoing revenue and earnings monitoring
We perform ongoing sales and cost monitoring as well as forecasting for the revenue areas of licenses, maintenance and services. License revenue is the key growth driver for maintenance and services revenue. For this reason, we continuously monitor the development of license revenues, in particular, from the initial customer contact to the signing of the license agreement, on all management levels.
We also continuously monitor the development of operating margin (EBIT margin) in a multidimensional matrix structure. This monitoring takes into account the breakdown by business divisions and revenue types and the regional structure within the business divisions.
In addition, we constantly observe the operating margins of our service business at project level from the time a quote is prepared through to project finalization. One of our most important aims is to further improve sales efficiency, which we achieve through more highly qualified personnel and larger projects. The newly established interregional sales and service structures offer significant additional potential with regard to sales efficiency (see Customers and Sales).
Optimized cost management
All cost items in the Group are subject to stringent budget control. A check is carried out monthly to determine whether the budgets were adhered to and to ascertain how forecast costs have developed. The basis of this is a dynamic budget model, ensuring that the cost budget remains flexible in relation to sales growth for all key components. We adjust the cost budget dynamically throughout the year in order to achieve or surpass our profit targets.
Dedicated R&D management
Our success as a product enterprise in the software industry is based on research and development (R&D). We continuously adapt our portfolio to meet the needs of our customers and take business concerns into account. To this end, we calculate the profit contribution of our products on an ongoing basis. We optimize our use of resources by combining purchases of technology and in-house development and achieving a balanced mix of high-wage and low-wage locations for the development of our products.
Improved cash flow management
Receivables management has a significant effect on cash flow. At Software AG, receivables management is performed locally and is subject to a variety of internal control processes based on strict rules relating to poor debt allowances. Software AG's cash management, on the other hand, is a centralized function, for which we use a globally standardized cash management system. This enables us to optimize our investment strategy and minimize investment risk.
Our key financial indicators performed as follows in the year under review:
In € million | 2008 | 2007 | Change in % |
Revenue | 720.6 | 621.3 | 16% |
Licensing revenue | 272.0 | 241.3 | 13% |
Maintenance revenue | 267.1 | 212.9 | 25% |
Service revenue | 177.8 | 161.2 | 10% |
EBIT | 180.5 | 136.8 | 32% |
EBIT margin | 25.1% | 22.0% | +310 pts. |
Earnings per share (diluted) | 4.04 | 3.09 | 31% |
Operating cash flow | 140.1 | 94.0 | 49% |
