- Operating income increases to 9.6 million euros
- (7.9 million euros in 2002)
- Cost-savings program bears fruit earlier than expected
- Maintenance revenues remain stable
- 9-month operating income doubles
- Full-year income forecasts optimistic
Darmstadt, October 23, 2003 – During the third quarter of 2003 (ended September 30), Software AG continued the positive trend set in previous periods, increasing income before tax to 9.6 million euros (7.9 million euros in Q3 2002). Net income totaled 3.9 million euros (5.6 million euros in 2002 due to lower tax expenses), or 0.14 euros per share.
Total third-quarter revenues were 13 percent below 2002 figures (8 percent when adjusted for currency translation effects), at 99.5 million euros (114.8 million euros in 2002). The decline in product-related revenues (maintenance services and licensing) was solely attributable to the buoyant euro. The currency translation effects on revenues from project services was far less significant. However, they were hit by sluggish demand and pressure on margins, particularly in the German market.
Against this background, the Company can confirm its full-year guidance for 2003 revenues. It expects to exceed forecasts for income.
At today’s press conference in Frankfurt, Karl-Heinz Streibich, Software AG’s CEO, summarized third-quarter development: "The upturn in demand widely forecast for the IT market did not materialize in Q3. However, the restructuring measures implemented in the first half of the year significantly improved our cost base, in turn boosting earnings."
During the third quarter, maintenance remained the main source of revenues, and the most stable one. Revenues from this segment totaled 48.3 million euros (48.4 million euros in 2002). Adjusted for currency translation effects, this represents a 7 percent rise, and is indicative of the customers’ continuing acceptance of Software AG products (enterprise transaction software).
Licensing revenues were down 13 percent on 2002 figures (7 percent when adjusted for currency translation effects), at 22.9 million euros (26.2 million euros in Q3 2002). The rate of decline has slowed in comparison with the first half of the year.
At 27.9 million euros, revenues from project services were 30 percent below the 39.8 million euros generated in the third quarter of 2002. This was largely due to the weak German economy. Further, as a result of Software AG’s decision to withdraw from low margin projects, the company expects to post full-year revenues from project services between 20 and 25 percent below the previous year’s levels.
Americas outstrips all other regions
The strength of the euro had the effect of diluting revenues invoiced in foreign currencies, especially for US dollars. Nevertheless, the Americas contributed 34 percent to group revenues, and more than 50 percent to income (EBITA), over the first nine months of the year. A slight increase in license sales, and a downtick in project services revenues were noted in Southern and Western Europe (28 percent share of revenues) as well as in Northern Europe and Asia (17 percent share of revenues). In Central and Eastern Europe (22 percent share of revenues), revenues and income climbed in individual markets; however, this was not enough to compensate for the extreme weakness of the German market.
Enterprise transaction products maintain high share of revenues
Accumulated product-related revenues (maintenance services and licensing) for the first nine months totaled 212.4 million euros. With the adjustment for currency translation, these revenues exceed 2002 figures by 1 percent. Project services revenues of 90.1 million euros were 26 percent below 2002 (23 percent when adjusted for currency translation effects). The breakdown of license sales (68.7 million euros) according to products only shifted slightly compared with the same period of 2002: core mainframe software (enterprise transaction products Adabas/Natural) again generated 63 percent of sales; Tamino XML server, solutions and other products together contributed 22 percent (24 percent in 2002). Integration platform EntireX increased its share from 13 percent in 2002 to 15 percent.
Operating income doubles over first nine months
Operating income (before tax and excluding exceptional items) nearly doubled over the first nine months of 2003, rising from 11.6 million euros in 2002 to 22.5 million euros. This upturn is primarily a consequence of successful restructuring. Proactive cost management brought forward the impact of the program, and this is expected to lead to savings of between 30 and 35 million euros in the current fiscal year alone.
The 23.8 million-euro restructuring charges posted in the first quarter have already been recovered: as of September 30, 2003, accumulated net income for the year to date was –3.5 million euros. During the fourth quarter, Software AG is set to return to profitability.
Over the course of the first nine months, shareholders’ equity increased to 223.8 million euros. On September 30, the equity-to-total-assets ratio was 52 percent, its highest level since the Software AG IPO in 1999. Cash and cash equivalents totaled 74.8 million euros. Despite the severance payments made as a result of the restructuring program, operating cash flow totaled 6.9 million euros for the first nine months.
As of September 30, 2003, Software AG employed a workforce of 2,801 (3,064 at the end of September 2002). This includes 1,661 based outside Germany (1,805 in 2002). As a result of the restructuring program, the number of full-time employees will reach the target of 2,700 in early 2004.
Outlook
The stable development of product-related revenues (maintenance services and licensing, adjusted for currency translation effects) has continued into the second half of fiscal 2003. However, the expected recovery of IT demand has not yet materialized. During the fourth quarter of the year, the decline in project services revenues will slow, and total revenues will be between 410 million euros and 415 million euros for the full year (475.0 million euros in 2002).
The Executive Board is confident that full-year operating income will exceed existing forecasts (32 million euros, as reported for 2002) by between 10 and 15 percent. Despite the exceptional restructuring charges associated with the cost-savings program implemented earlier in the year, it believes the Company will post positive net income (after tax) in fiscal 2003.
The Executive Board is cautiously optimistic regarding fiscal 2004. If exchange rates remain stable, the decline of revenues is expected to come to a halt. Earnings will continue to climb. The new, streamlined cost base will be effective for the whole year, and this will lead to an improvement in profits of at least 10 million euros. Moreover, Software AG plans to compile its financial statements according to different accounting standards, switching from the German Commercial Code (HGB) to International Financial Reporting Standards (IFRS, formerly IAS). This may obviate the need to periodically amortize goodwill, further bolstering income by 22 million euros.
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
Investor.relations@softwareag.com
www.softwareag.com