Notes to the Consolidated Income Statement
[5] Total revenue
License and maintenance revenues can be broken down by business division as follows:
| ETS | webMethods | Total | ||||
| 2008 | 2007 | 2008 | 2007 | 2008 | 2007 | |
Licenses | 156,776 | 153,026 | 115,252 | 88,313 | 272,028 | 241,339 |
Maintenance | 173,805 | 155,735 | 93,254 | 57,203 | 267,059 | 212,938 |
Product sales | 330,581 | 308,761 | 208,506 | 145,516 | 539,087 | 454,277 |
Breakdown of license revenues by sector:
| 2008 | 2007 | |||
| - € thousands - | ||||
Public sector | 54,406 | 20% | 50,804 | 21% |
Banks and insurance companies | 70,727 | 26% | 60,098 | 25% |
Industry and other | 146,895 | 54% | 130,437 | 54% |
Total | 272,028 | 100% | 241,339 | 100% |
Revenues from Professional Services
Professional Service revenues include sales of €26,757 thousand (2007: €19,502 thousand), recognized in accordance with the percentage-of-completion method. The status of uncompleted projects recognized under the percentage-of-completion method as of December 31, 2008 was as follows:
| 2008 | 2007 |
| - € thousands - | |
Costs accumulated over the term of a (multi-year) project and not yet invoiced | 10,465 | 12,871 |
Recognized profit (+) / loss (-) | 3,414 | -1,869 |
Advance payments received | 1,331 | 3,826 |
Retentions | 0 | 5 |
As of December 31, 2008, the net amount due from customers for unfinished project work was €9,032 thousand, the net amount due to customers was €212 thousand.
[6] Cost of sales
The cost of sales amounted to €198,260 thousand (2007: €181,511 thousand) and primarily consisted of personnel expenses in customer support and Professional Services as well as purchased services in the Professional Services business.
[7] Research and development expenses
The research and development expenses of €76,224 thousand (2007: €65,900 thousand) mainly contain personnel expenses for product development and related IT expenses.
[8] Sales, marketing and distribution expenses
Sales, marketing and distribution expenses amounted to €169,495 thousand (2007: €159,208 thousand). In addition to personnel expenses relating to the sales division, these costs mainly include marketing expenses.
[9] General and administrative expenses
General and administrative expenses amounted to €65,083 thousand (2007: €59,299 thousand). They include administrative expenses which are attributable neither to cost of sales nor to sales activities.
[10] Other operating income
Other operating income includes the following items:
| 2008 | 2007 |
| - € thousands - | |
Foreign exchange gains | 40,461 | 14,938 |
Income from the reversal of provisions | 4,042 | 1,968 |
Other income | 6 | 4,597 |
| 44,509 | 21,503 |
[11] Other operating expenses
Other operating expenses consist of the following items:
| 2008 | 2007 |
| - € thousands - | |
Foreign exchange losses | 29,192 | 10,114 |
Bad debt allowances | 8,854 | 0 |
Legal fees | 4,788 | 0 |
Restructuring costs | 0 | 12,756 |
Other expenses | 18,192 | 10,514 |
| 61,026 | 33,384 |
Bad debt allowances reported under other operating expenses in the amount of €8,854 thousand result from portfolio-based valuation allowances recognized to hedge risks resulting from the financial market crisis. Further bad debt allowances in the amount of €6,015 thousand refer to specific valuation allowances, which are shown under the relevant functional costs.
[12] AMORTIZATION
This item includes the amortization of the customer base and the software identified as an asset in connection with the acquisition of the SPL Group (2008: €1,240 thousand; 2007: €417 thousand), the webMethods Group (2008: €11,834 thousand; 2007: €6,246 thousand) and the acquisition of the Jacada business (€1,409 thousand). The amortization on the amounts recognized as an asset in previous years from the acquisition of Casabac, Sabratec, and the APS Group continue to be shown as functional costs. Amortization in the current fiscal year amounted to €1,021 thousand (2007: €1,005 thousand).
[13] Net financial income/expense
The acquisition of webMethods Inc. resulted in a reduction of bank balances and an increase of liabilities to banks. As a result, the balance of financial income and financial expense declined by €5,416 thousand, broken down as follows:
| 2008 | 2007 |
| - € thousands - | |
Financial income | 5,527 | 9,678 |
Financial expense | -10,649 | -9,384 |
| -5,122 | 294 |
[14] Income taxes
Taxes on income can be broken down as follows:
| 2008 | 2007 |
| - € thousands - | |
Current domestic taxes | -22,398 | -10,125 |
Current foreign taxes | -48,007 | -20,425 |
| -70,405 | -30,550 |
|
|
|
Deferred domestic taxes | 4,713 | -9,712 |
Deferred foreign taxes | 10,911 | -5,460 |
| 15,624 | -15,172 |
|
|
|
| -54,781 | -45,722 |
In Germany, a uniform corporate income tax of 15 percent applies. Based on the average municipal trade tax collection rate and a solidarity surcharge of 5.5 percent on corporate tax, the income tax rate for domestic companies will be 30.7 percent starting in 2008 (2007: 39.9 percent). Tax rates abroad range between 15 and 42 percent (2007: between 15 and 43 percent).
The tax expense increased by 20 percent due to our improved financial performance in 2008 compared to the prior year.
The income tax expense of €54,781 thousand in fiscal year 2008 (2007: €45,722 thousand) is €2,394 thousand higher than the expected income tax expense of €52,387 thousand (2007: expense of €53,517 thousand) that would result from applying the domestic tax rate of 30.7 percent currently applicable (2007: 39.9 percent) at Group level. The difference between the expected and current tax expense can be attributed to the following:
| 2008 | 2007 |
| - € thousands - | |
|
|
|
Earnings before income tax | 170,641 | 134,129 |
|
|
|
Expected income tax (30.7%; 39.9%) | -52,387 | -53,517 |
Tax rate-related adjustments | -3,868 | 8,992 |
Tax refunds (+)/back tax payments (-) | -354 | 129 |
Tax decreases (+)/tax increases (-) due to tax-exempt income or non-tax deductible expenses | -4,102 | -959 |
Other adjustments | 5,930 | -367 |
|
|
|
Reported income tax expense | -54,781 | -45,722 |
Other adjustments primarily include changes due to remeasurement of deferred tax assets related to tax loss carryforwards in France (€2,189 thousand) and Spain (€3,302 thousand), which arose due to the improved financial performance of the Group entities.
[15] Other taxes
Other taxes mainly include property taxes, vehicle taxes, and other indirect taxes. Growth in business volume in Brazil alone led to an increase in other taxes of €1,889 thousand.
[16] Personnel expenses
Personnel expenses in fiscal years 2008 and 2007 were as follows:
| 2008 | 2007 |
| - € thousands - | |
|
|
|
Wages and salaries | 271,878 | 243,173 |
Social security contributions | 26,988 | 35,377 |
Pension expenses | 6,777 | 7,427 |
| 305,643 | 285,977 |
As of December 31, 2008, the effective number of employees (i.e., part-time employees are taken into account on a pro-rata basis only) by area of activity was as follows:
| Dec. 31, 2008 | Dec. 31, 2007 |
|
|
|
Maintenance and service | 1,634 | 1,545 |
Sales and marketing | 703 | 755 |
Research and development | 651 | 676 |
Administration | 538 | 503 |
| 3,526 | 3,479 |
In absolute terms (i.e., part-time employees are counted in full), the Group employed 3,606 people (2007: 3,578) as of the reporting date.
The average number of employees of the Software AG Group amounted to 3,563 in 2008 (2007: 3,450).
[17] Earnings per share
Earnings per share are calculated by dividing net income for the period attributable to Software AG’s shareholders by the weighted average number of shares issued during the period under review. Software AG has only issued common shares. In fiscal year 2008, the average weighted number of shares was 28,599,020 (2007: 28,439,959).
A total of 99,387 stock options were exercised in 2008 (2007: 426,740).
The number of shares increased correspondingly by 99,387. Another 72,217 stock options may be exercised from the second stock option plan in fiscal year 2009. Diluted earnings per share were therefore calculated for these potential shares using the treasury stock method for the period under review. Diluted earnings per share are computed by dividing net income for the period attributable to Software AG’s shareholders by the weighted average number of shares issued to date plus the weighted average number of exercisable stock options.
