Software AG

Annual Report 2007



Software AG Stock

In July 2007, the share price significantly surpassed the previous 5-year high, setting a new record of €77.20. But due to the weakness of the market in the second half of the year it was not possible to sustain this high price level. Therefore the market capitalization of Software AG rose slightly to €1.7 billion in 2007.

Blue chips lead the list of winners in 2007

A look at the international stock markets in 2007 reveals a divided situation: in the first half of the year the equity markets achieved new record levels. The most important drivers of this trend were dynamic global economic growth, high corporate profits, and an exceptionally active merger and acquisition environment. In the second half of the year the mortgage crisis in the USA and the growing confidence crisis in the financial sector dampened investors' appetite for risk.

Within Europe, the German stock market turned out to be the most resistant to the economic distortions associated with the U.S. mortgage crisis. The DAX benchmark index gained 22 percent in value since the beginning of 2007. Performance of secondary stocks and other European indexes varied. The MDAX posted an increase of 4.9 percent for the year. In 2006, this mid-cap index had achieved gains of 29 percent. The companies listed on the SDAX recorded an average decline of 6.8 percent in the course of the year. Conversely, the EuroStoxx50 picked up 6.9 percent in 2007.

The Dow Jones, which tracks 30 standard stocks, gained 6.0 percent -despite the fact that this index experienced its weakest fourth quarter in twenty years. The broader-based S&P 500 rose 4.2 percent. Both indexes had posted record highs in October.

Second-line technology stocks remained investor favorites in 2007. The technology-laden Nasdaq computer composite index rose 10.7 percent in 2007. The Nasdaq 100, which tracks the largest companies listed on the Nasdaq exchange, climbed by as much as 19.9 percent. The 30.2 percent increase of the TecDAX to 974 points surpassed the previous year's impressive 25.5 percent gain. As in prior years, the rally was primarily led by renewable energy stocks.

Wide price fluctuations for Software AG's share price

Software AG shares were not able to maintain pace with the performance of the TecDAX and Nasdaq 100 benchmark indices in 2007. The Xetra closing price on December 28, 2007 was €60.57. This means the stock gained 1.4 percent from the prior-year closing price of €59.74. Initially, strong financials and the acquisition of webMethods, Inc., as a confirmation of our growth trend, boosted the share price, particularly in the second quarter. On July 19, the share price reached its five-year high of €77.20. But as a consequence of the general weakness of the market it later declined significantly. Initially, competitors' profit warnings had an adverse effect on the share. The mortgage crisis in the USA and its repercussions on the financial sector led to fears that IT demand could plummet in the banking sector. Software AG generates roughly 15 percent of its revenues in this industry. Also, our strengthened, and highly competitive, position in the USA was considered as a critical issue in view of the persistent weakness of the dollar and mounting fears of recession. Dynamic growth companies with acquisition plans were increasingly discounted in the market.

Share Price Development (indexed)

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Due to the macroeconomic uncertainty, many investors also shifted their portfolios from smaller and medium-sized companies to large caps. In addition, more securities were sold in the capital markets where the investors could realize profits. All of these individual factors led to a decline in the share price in the second half of the year.

Another investment criterion is the liquidity of a share on the stock exchange. Software AG stock was able to assert its relatively strong position here: 45.7 million Software AG shares were traded in 2007 -nearly twice as many as in the year before (28.6 million shares). The average daily order book volume was more than €7 million. In the meantime, our share is one of the 100 most liquid market values and fulfills the highest liquidity criteria for electronic trading on the Xetra. This means that the costs for trading support provided by a bank (acting as a designated sponsor) have been eliminated.

In the past fiscal year, market capitalization rose slightly once again. After €1.68 billion in 2006, it is now approx. €1.73 billion. Because of the Company's increasing size, we are approaching new investor groups to expand our shareholder base.

Market capitalization at year-end

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Dividend for 2007

In 2007, our investors were able to participate in our Company's success with an attractive dividend payment. At the Annual Shareholders' Meeting on May 11, 2007 we decided to increase the dividend from €0.80 per share to €0.90 per share. In other words, a total of approx. €25.3 million were distributed to shareholders as dividends. Also in the future we plan to adhere to an earnings- and liquidity-dependent dividend policy. The Executive Board and Supervisory Board of Software AG therefore propose a dividend of €1.00 for each share entitled to dividends. Based on the share price at the end of 2007 (€60.57), this represents a dividend yield of 1.65 percent.

Our continuous corporate growth, our dividend yield, and our sustainable cash flow make the Software AG share attractive both for growth-oriented and value-oriented investors.

Total Dividend Payout

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Investor relations intensified

In fiscal year 2007, our contact with all members of the financial community was intensive, transparent, and continuous. It is one of our primary concerns to consistently expand our investor group and reduce the volatility of Software AG stock. Twenty-five national and international financial analysts regularly monitor Software AG. Most of them rated our stock as "buy" or "outperform" at year end and consider it to have sustainably high price potential.

With a relaunch of our IR website in 2007, we made our investor relations information more user-friendly than ever. To this end, we restructured the website, expanded and improved its content, and revamped its look. The standard for these improvements was based on the requirements of the private shareholders who are increasingly interested in Software AG due to our intensive media coverage.

In the year under review we were able to maintain first place on the TecDAX for state-of-the-art IR, securing both the "Best IR in Germany 2007" study conducted by Thomson Extel and first place in the survey carried out in connection with the 2007 Capital Investor Relations Award. This, too, is proof of our successful, transparent reporting in the capital market.

Investor communications enhanced

Intensive contact with existing and potential investors is one of our most important activities. The emphasis of our investor communications in the past fiscal year was on the USA, since we wanted to take advantage of the increased interest in our share following the acquisition of webMethods, Inc. We organized more than 30 road show events in Europe and the USA in order to introduce our corporate strategy and establish a trusting, personal relationship with investors and analysts. We also attended 20 investor conferences and had more than 300 one-on-one meetings.

Providing timely information to the capital market is another important quality criterion for us. According to Close Cycle Ranking 2007, a study on the publication of annual reports conducted by the IT consulting firms; ifb group and BPM International, Software AG is one of Germany's leading companies in this area. This testifies to the quality of our financial processes and systems. We also actively represent our investor relations quality standards in the German Investor Relations Association (DIRK).

Top 10 Investors in Software AG Stock

Investor name No. of shares held in %
Software AG - Stiftung 8,332,920 29.20
Deka Investment GmbH 1,745,100 6.11
DWS Investment GmbH 1,385,407 4.95
Allianz Global Investors Kapitalanlagegesellschaft 1,064,188 3.74
Alken Asset Management LLP 954,086 3.34
JPMorgan Asset Management U.K. Limited 868,511 2.98
Braun, von Wyss & Müller AG 745,066 2.61
Baring Asset Management Ltd. 470,491 2.46
Universal-Investment-Gesellschaft mbH 373,933 1.30
Cominvest Asset Management GmbH 335,157 1.18

Shareholder structure (percentage of free float)*

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* As of January 2008, Source: Thomson Financial

Shareholder structure

The Software AG foundation, with registered offices in Darmstadt still holds approx. 8.3 million shares (29.2 percent of the outstanding shares). In addition, Software AG has a diversified investor structure. Notable institutional investors each hold more than 3 percent of the Software AG's shares. In keeping with our objectives, the shares in the Company's capital held by North American investors increased from ap-prox. 3 percent of the free float in the previous year to 5.2 percent in 2007. In the medium-term we are seeking to achieve an increase to the double-digit percentage range. Private investors and unregistered investors hold approx. 24 percent of the free float.

Changes in share capital

Employees and managers of Software AG once again took advantage of the opportunity to exercise stock options in 2007. As a consequence, the number of outstanding shares increased by 426,740 shares to a total of 28,539,455 shares.

Indices:

Key share data


 2007
IFRS		 2006
IFRS
Closing price (Xetra) in €* 60.57 59.74
Year-high in €* 77.20 59.89
Year-low in €* 50.12 37.43
Total number of shares at year-end 28,539,455 28,112,715
Market capitalization at year-end in € 1,728.6 1,679.5
Free float in % 70.8 69.9
Average daily trading volume (Xetra) 181,485 112,635

* Xetra closing rate in €


Ticker symbol and basic data

ISIN DE 0003304002
WKN 330400
Symbol SOW
Reuters SOWGn.F
Bloomberg SOW GY
Stock exchange Borse Frankfurt
Marekt segment Prime Standard
Index TecDAX
IPO April 26, 1999
Offering price €30
Total number of shares outstanding 28,539,455