- Product revenues remain constant
- Revenues from project services decline
- Restructuring program launched
- Restructuring costs lead to net loss in Q1
- Forecast for fiscal 2003: Positive operating income in line with 2002 figure
Darmstadt, April 24, 2003. Software AG posted total revenues of 100.2 million euros in the first quarter of 2003, compared with 116.4 million euros in 2002 (the Company fiscal year corresponds to the calendar year). The decline was largely a result of the weak dollar (currency translation effects totaling 9.0 million euros) and declining revenues from project services. Operating income before tax totaled 2.3 million euros (operating loss of 2.0 million euros in 2002). Net income after tax was affected by exceptional restructuring charges of 23.8 million euros, resulting in a net loss of 9.7 million euros (2.4 million euros in 2002).
As expected, revenues developed slowly in the first quarter of 2003. Uncertainty surrounding the conflict in Iraq further eroded IT investment, and there was an increase in excess capacity throughout the project services market. Moreover, the challenges faced by the Company were aggravated by the resurgence of the euro (around 53 percent of Software AG’s revenues are invoiced in other currencies).
Software AG’s first-quarter product revenues remained stable. Although revenues from licensing and maintenance contracts were down on the previous year’s figures (69.3 million euros over 76.1 million euros), this was largely a result of currency translation effects (totaling 7.9 million euros). Once again, maintenance accounted for the lion’s share of product-related revenues, contributing 47.4 million euros (51.5 million euros in 2002), compared with 21.9 million euros (24.6 million euros in 2002) from licensing.
Project services generated 30.6 million euros in the first quarter of 2003 (40.0 million euros in 2002). Excess market capacity put severe pressure on prices, reducing margins. Currency translation effects reduced reported revenues by 1.1 million euros in comparison to the same period of 2002.
The distribution of license revenues according to product group remained largely unchanged. However, it is important to note that just a limited number of major contracts can have a significant impact on revenues in any given quarter. The Company’s classic products, Adabas and Natural, remain its key sales drivers, together representing 56 percent of first-quarter license revenues (60 percent in first quarter 2002). Middleware product EntireX contributed 18 percent (15 percent in 2002), and XML server product Tamino 10 percent (11 percent in 2002), with 8 percent (10 percent in 2002) attributable to other products.
Sales of partner solutions have increased significantly. Their share of licensing revenues has doubled to 8 percent, lending support to the intended expansion of the portfolio to include standard solutions. The Company is currently exploring a number of options, and by the end of May expects to have reached a decision on which standard solutions to develop in the first step. The chosen solutions will also be distributed in collaboration with sales partners.
Considerable regional variation in business development
The business regions of Software AG were regrouped on February 1, 2003. Revenues in the first quarter varied considerably according to region. Northern Europe/Asia (16.9 million in comparison to 17.5 million euros in Q1 2002) and Southern and Western Europe (28.0 million over 29.3 million euros) remain relatively constant, with slightly increased licensing sales, and slightly lower revenues from services. The decline in revenues in America (33.1 million following 39.5 million euros in Q1 2002) is chiefly a result of the weak dollar. Business volume in Central and Eastern Europe was significantly lower, year on year. Revenues totaling 23.0 million euros were posted, approximately a quarter below the corresponding figure for the first quarter of 2002 (30.4 million euros). Low revenue and profitability in this region are chiefly attributable to the difficult business environment in Germany, where the fall in demand is more marked than in other countries.
Positive operating income
Software AG was largely able to fend off the impact of negative currency translation effects by the use of hedging instruments. In addition, the restructuring program implemented in fiscal 2002 has led to lower expenditure. Operating costs were approximately 14 million euros lower than in the corresponding period of 2002. As a result, Software AG succeeded in posting operating income before tax of 2.3 million euros (compared with an operating loss of 2.0 million euros in Q1 2002).
As already announced in March 2003, the Company has taken further action designed to improve profitability. The cost-savings program aims to achieve annual reductions in expenses of between 55 and 60 million euros. Approximately half this amount is expected to be realized in the current fiscal year. Restructuring focuses on three key areas:
1. Changes to organizational structures in the regions in line with market requirements, in particular with regard to project services at SAG Systemhaus GmbH, Germany
2. Alignment of research and development activities with the Company’s future technology and solution portfolio
3. A scaling-down of marketing and support functions performed by Company headquarters.
In Germany, restructuring will lead to a reduction in personnel capacity equivalent to approximately 240 full time staff positions. This measure is currently the subject of consultations with employee representatives (works council). Outside Germany, there will be a reduction of some 60 full-time personnel. These staff cuts have been largely implemented. The one-time charges associated with the restructuring program, estimated at 23.8 million euros, have been included in figures for the first quarter of 2003. This led to a net loss of 9.7 million euros (compared with a loss of 2.4 million euros in the same period of 2002).
Cash flow from operating activities amounted to 11.5 million euros (compared with 12.1 million euros in the first quarter of 2002). Cash and cash equivalents rose by 5.5 million to 80.9 million euros. Equity increased by 2.4 million to 216.9 million euros.
On March 31, 2003 Software AG had 2,976 employees, of whom 1,745 are based outside Germany.
Outlook
There are no signs of a tangible increase in demand for IT products and services in the current fiscal year. Product revenues (maintenance services and licensing, adjusted for currency translation effects) in the first quarter have proved resilient, confirming existing projections. Against this background, Software AG remains confident that 2003 business development will largely remain stable. Nevertheless, there are indications of slowing revenues from project services. Should slack demand persist into the coming quarters, this could reduce forecast total revenues for the year by a number of percentage points. Irrespective of this potential development, the Executive Board believes that operating income for fiscal 2003 will remain at approximately the 2002 level. Despite the restructuring charges associated with the cost-savings program currently being implemented, the Executive Board believes the Company will post positive net income in fiscal 2003.
Software AG's executive board will hold an analyst conference call today at 3:00 pm (CEST). To participate, please call: +49 (0) 69 50957 6443.
A ReBroadcast will be available until May 2, 2003 under the following number: +49 (0) 69 50957 9999 (Access-Code: 228000)
For more information: www.softwareag.com
For further information please contact:
Otmar F. Winzig
VP Corporate Communications
Software AG
Uhlandstraße 12
D-64297 Darmstadt
Tel.: +49-6151-92-1899
Fax: +49-6151-92-1933
Investor.relations@softwareag.com
www.softwareag.com