Software AG: Key Market Growth

Software AG (STWRY:OTC) is in a transition phase as it focuses on the four crucial growth areas: Big Data, Cloud, Mobile and Social Collaboration. While Q1 results slightly missed revenue expectations, the key Business Process Excellence (BPE) business (52% of revenue in FY12) produced 19% growth in licence sales at constant currency, and has its strongest ever pipeline. The recent acquisition of LongJump, a California-based Platform-as-a-Service (PaaS) provider, for €20-30m, reinforces the move to new technologies. Software AG expects to make further acquisitions in 2013.

Q1 slightly shy of revenue expectations
Revenue in Q113 was -10% on the previous year (5% below consensus estimates on a constant currency basis) although the BPE business grew licence sales by 19% at constant currency. Gross margin improved from 60.1% to 66.3% as a result of increased software licences and maintenance vs consultancy revenues. This improved mix resulted in EPS meeting expectations despite increased investment in sales. Against a backdrop of revenue misses from peers such as IBM, Oracle and Tibco in calendar Q1, we consider Software AG’s Q1 results to be solid.

Prospects hinge on converting BPE sales pipeline
Software AG’s prospects depend on its ability to convert its growing BPE pipeline, while managing the revenue and profitability of its traditional Enterprise Transaction Systems (ETS) database business and its consultancy activities. However, we think the positive messages around BPE outweigh the challenges of ETS and consultancy in the medium term.

Company confirms full-year guidance
The sales pipeline gives the company confidence that it will accelerate growth in BPE revenues through FY13, while it now expects its ETS database business to decline by nearer the bottom of the 4-9% range it guided towards in January 2013. Overall revenue is expected to be broadly flat in FY13 over the previous year.

Valuation: An undemanding rating
The company’s ADR has fallen by 12% since the start of the year, and it trades on an undemanding c 13x prospective P/E compared with c 17x for the S&P North American Technology Index.

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