Software AG back in the black in second quarter of 2003

Darmstadt, July 30, 2003 – Software AG consolidated its position in the second quarter of 2003 (ended June 30). Operating income rose significantly to 10.6 million euros (5.7 million euros in Q2 2002), and as there were no exceptional items, the same figure was posted for income before tax. Income after tax totaled 2.3 million euros (14.1 million euros in Q2 2002, affected by the disposal of financial assets), equating to earnings of 0.08 euros per share.

Revenues stabilized at a reduced level in 2003. The company reported total revenues of 104.7 million euros in the second quarter of the year (123.4 million euros in Q2 2002), a fall of 15 percent on the previous year’s figure (7 percent when adjusted for currency effects). This is the same year-on-year percentage shortfall as in the first quarter. The strength of the euro was the sole reason for a decline in product sales (maintenance and licensing), with currency translation effects totaling 8.9 million euros. Project services suffered from low demand and price pressure.

Against this background, the Company has confirmed its full-year 2003 guidance. Product revenues are expected to remain stable, barring currency effects. The market for project services continues to be highly competitive. In order to achieve a return that compares well with the market average in each country, the Company took a conscious decision to accept a decline in revenues. In 2004, once the cost base has been improved, and programming work has been partially outsourced to India, the segment is expected to grow again. The first signs of improvement are already apparent.

At today’s press conference in Frankfurt, Software AG CEO Karl Heinz Achinger described the Company’s current situation: "The market environment did not change drastically in the second quarter. Nevertheless, we have clearly passed the worst, and there are initial indications of an upturn in customer interest and an increase in order intake."

Maintenance revenues remained unaffected by the poor economy in the second quarter of 2003, and were only down on the previous year due to the effects of the weak dollar, at 48.0 million euros (50.8 million euros in Q2 2002). Adjusted for currency translation effects, maintenance revenues, which are Software AG’s most important source of income, rose 6 percent.
At 24.0 million euros (30.7 million euros in Q2 2002), licensing revenues were down 22 percent on the previous year (12 percent when adjusted for currency effects). This is attributable to the continued strength of the euro, plus the fact that exceptional deals inflated the 2002 figure by approximately 3 million euros.

Revenues from project services in the second quarter of 2003 were approximately a quarter below the previous year’s figure, at 31.6 million euros (41.5 million euros in Q2 2002). However, a similar year-on-year shortfall can be observed in first-quarter figures, demonstrating that the situation has begun to stabilize. The Company is putting quality before quantity: in order to return to the level of profitability once common in the IT industry, it has restructured loss-making areas in the project services segment. During the second half of the year, the order intake is expected to increase on individual markets, especially the USA.

Sequential growth in Q2
In comparison to the first quarter of 2003, licensing revenues were up 10 percent to 24.0 million euros (21.9 million euros in Q1). Adjusted for currency effects, the increase was 15 percent, reflecting the seasonal upturn. Revenues from project services were also slightly higher than in the previous quarter, at 31.6 million euros (30.6 million euros in Q1). Maintenance revenues were stable at 48.0 million euros (47.4 million euros in Q1). At 104.7 million euros, total second-quarter revenues were up 4.5 million euros, or 4 percent, on the previous quarter.

Regional revenues affected by exchange rates
The decline in revenues across the Software AG regions, which were reorganized during the first quarter of the year, was largely linked to the effects of foreign exchange rates. The greatest impact was found in the Americas region, which accounts for one third (37 percent in Q2 2002) of all Company revenues. In spite of this, its income contribution rose by 15 percent, as cost-cutting measures implemented in 2002 and at the beginning of 2003 began to take effect.
The Southern and Western Europe region, which invoices exclusively in euros, saw its share of revenues increase to 29 percent (25 percent in Q2 2002) in the second quarter. In the Central and Eastern Europe region, the situation improved slightly compared with the first quarter, with its share reaching 22 percent (21 percent in Q2 2002). Income figures for this region were poor, mainly as a result of the weak market fundamentals in Germany. The Northern Europe and Asia/Pacific region provided 16 percent of total revenues, and once again generated the second largest income contribution.

Stable first-half business development
Adjusted for currency translation effects, product sales (comprising licensing and maintenance) of 141.2 million euros for the first half of fiscal 2003 were at 2002 levels. Project services revenues were down by a quarter over the same period in 2002, at 62.2 million euros. The breakdown of licensing revenues (45.8 million euros) was largely unchanged: 63 percent was generated by mainframe software Adabas/Natural; Tamino XML Server, new solutions and other products each contributed 7 percent; integration software EntireX increased its share to 16 percent (13 percent in 2002).
There was a significant improvement in Software AG’s operating income in the first half-year, tripling to 12.9 million euros before tax (3.7 million euros in H1 2002). This was largely a result of cost savings. As part of efforts to boost income, further restructuring took place this year, which will save the Company 55 million euros (compared with 2002) each year from 2004. This is already leading to cost savings this year, in the amount of 25 million euros. The main contributor is the loss of 300 full-time positions, effective June 30, 2003.
In spite of restructuring charges totaling 23.8 million euros, the first-half loss was limited to 7.4 million euros (compared with an 11.8 million euro profit in H1 2002).
At the close of the first half-year, stockholders’ equity had increased to 219.7 million euros, with a 48 percent equity-to-total-assets ratio. At the end of the second quarter, the Company’s liquidity remained strong, with no debt, and cash and cash equivalents of 75.1 million euros. Operating cash flow totaled 6.4 million euros.
As of June 30, 2003, Software AG employed a total workforce of 2,896 (3,141 in 2002), including 1,685 based outside Germany (1,866 in 2002). The Company payroll is on course to reach the target of approximately 2,700 at the beginning of 2004.

Outlook
A slight upturn in demand for IT products and services is expected during the second half of fiscal 2003. The market appears to have already passed the worst. Product revenues (maintenance and licensing, adjusted for currency effects) were stable in the first half-year, and this is expected to continue in the second half of the year. In project services, it will not, however, be possible to make up for the downturn in sales seen in the first half of the year. Nonetheless, the Executive Board is confident that Software AG’s 2003 operating income will be at 2002 levels (32 million euros), and that the Company will post a full-year profit, even after the one-off restructuring charges of the cost-cutting program.

For more information: http://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
press@softwareag.com
www.softwareag.com