Software AG’s internal control system is geared towards long-term increases in profitability and improving the Groups financial strength. The focal points are sales, operating results (EBIT), the EBIT margin, and cash flow.

Ongoing sales monitoring and forecasting as a basis for solid profitability growth

Our sales development management with respect to licensing, maintenance, and Professional Services provides the essential foundation for long-term profitability growth. License sales are the key growth drivers for maintenance and Professional Services revenues. License sales are therefore subject to continuous monitoring at all management levels, from the initial customer contact to conclusion of the licensing agreement.

Management of maintenance revenues focuses primarily on preserving customer relations over the long term by offering support services and regular software updates.

Management of Professional Services revenues covers the entire process from the acquisition phase and preparation of offers to project finalization. Professional Services revenues are consolidated and controlled based on region and business line.

EBIT margin as key indicator for operating success

The operating margin (EBIT margin) is the most significant indicator of the operating success of the Group. The operating margin is monitored on an ongoing basis in a multidimensional matrix structure. Margins are analyzed and optimized on the basis of our business structure. They take into account geographical segmentation by country and region, which previously was the only segmentation undertaken. Software AG now also reports segment information by business segment (ETS and Crossvision) and by revenue type (licenses, maintenance, and Professional Services).

In addition, we constantly monitor the operating ratios of our Professional Services business at the project level from the time of offer preparation to project finalization. Our focus lies especially on maximizing sales efficiency by improving the quality of our personnel and increasing project size, while at the same time reducing the duration of sales cycles.

Optimized cost management using a dynamic budget model

All cost items are subject to stringent budget control. Monitoring occurs on a monthly basis and involves reviewing historical adherence and forecasting cost development. A dynamic budget model is used for budget monitoring. This allows us to ensure that the cost budget remains flexible in relation to sales growth for all key components. The cost budget is adjusted in the course of the year to allow profit targets to be achieved or exceeded.

Focused research and development expenditures

IOur research and development activities reflect our strategic priorities. To this end, we calculate the profit contribution of our products on an ongoing basis. We optimize our use of resources by combining technological acquisitions with in-house development, primarily in Germany, though also in the U.S., the UK, Bulgaria and India.

Cash flow enhanced by receivables management and central cash management

Receivables management and central cash management contribute significantly to cash flow optimization. Local receivables management is subject to a variety of internal control processes based on strict rules concerning bad debt allowances. Cash management is based on a globally standardized cash pooling system. This supports an optimized investment strategy while at the same time limiting any investment risk.

Our key financial indicators performed as follows:

in € thousands	2006	2005	Change in %
Total revenue	483.0	438.0	10.3
Licensing revenue	165.7	131.6	25.9
Maintenance revenue	187.3	181.4	3.3
Professional services revenue	126.2	122.7	2.9
EBIT	111.2	96.4	15.4
EBIT margin	23 %	22 %	+ 1 Pp
Operating cash flow	61.4	55.7	10.2