Software AG

Quarterly Report • Oct 20, 2016

Q3 / 9M 2016 QUARTERLY STATEMENT Software AG Confirms 2016 Outlook

Revenue

• Licenses: Revenue down 8 percent to €155.5 million
• Products: Revenue down 2 percent at €461.5 million
• Total revenue: On par with last year at €607.9 million (-1 percent)

Segments

• Adabas & Natural: €165.1 million in revenue and 70.2 percent segment margin
• Digital Business Platform: €297.0 million in revenue and 29.8 percent segment margin
• Consulting: €145.8 million in revenue and 10.0 percent segment margin

Earnings

• EBIT: Up 7 percent to €138.8 million
• Operating income: Up 9 percent to €181.8 million
• Operating profit margin (EBITA, non-IFRS): 29.9 percent, increase of 280 basis points

SEGMENT MARGIN

Management's Assessment of Nine-Month Results

The Internet of Things (IoT) and Industry 4.0 will be essential growth-drivers in the future for Software AG. New strategic partnerships and the current pipeline as well as the growing market relevance of Software AG's Digital Business Platform confirm this. We gained a great deal of momentum with this business in Germany and the USA during the first nine months of 2016. Our Digital Business Platform (DBP) is a longterm solution that helps customers strategically align their business model with the opportunities of the Digital Transformation and sustainable success.

Our market relevance is illustrated by our recently signed strategic partnerships with industry-leading corporations like Bosch. We are focusing on establishing long-term partnerships with large strategic customers. Preparation of these agreements takes place over a time span of several quarters. As part of this process we place greater weight on mutual agreement with our customers about the value Software AG products can deliver than on the timing of closing a deal.

We benefit from a very high degree of loyalty among our Adabas & Natural (A&N) customers. This was clearly reflected in the early renewal of contracts in the first half of the year—a direct result of our A&N 2050 plan announcement. Following an exceptionally strong first half of the year, A&N licenses showed curbed performance in the third quarter, as expected. All in all, results in the first nine months of the year were within the forecast range for fiscal 2016.

The Consulting segment performed well with 3 percent growth. Our Global Consulting Services (GCS) serve increasingly as a market enabler for our products in that they offer our customers groundbreaking strategic added value. Our focus in this business line continues to be on profitability.

Software AG's operating profit margin (EBITA, non-IFRS) for the first nine months of the year was 29.9 percent, which is an increase of 280 basis points year-on-year. Free cash flow for the first nine months of 2016 hit a new record at €145.4 million (2015: €128.8 million). These key performance indicators confirm our outlook and optimism for meeting our targets for fiscal 2016.

2016 Outlook

Based on current business development and projections for the fourth quarter, Software AG confirms its outlook, which was raised after the first half of 2016. Software AG expects its operating profit margin (EBITA, non-IFRS) for fiscal 2016 to be between 30.5 and 31.5 percent (29.9 percent as of Sept. 30). The forecast for product revenue growth in the Digital Business Platform (DBP) line for fiscal 2016 remains unchanged at 5 to 10 percent at constant currency (3 percent as of Sept. 30). Based on Adabas & Natural deals expected to close late in the year, Software AG foresees a decline in product revenue for the database business between 2 and 6 percent at constant currency and year-on-year (5 percent as of Sept. 30).

2016 Outlook	FY 2015 (in € millions)	FY 2016 Outlook confirmed (as of July 13, 2016)	9 Months 2016
Product revenue Digital Business Platform	431.5	+5% to +10%*	+3%*
Product revenue Adabas & Natural	247.3	-2% to -6%*	-5%*
Operating profit margin (EBITA, non-IFRS)**	29.7%	30.5% to 31.5%	29.9%

* At constant currency

** Before adjusting for non-operating factors (see non-IFRS results)

Key Figures as of September 30, 2016

(IFRS, unaudited)

in € millions (unless otherwise stated)	9 Months 2016	9 Months 2015	Δ as %
Revenue	607.9	615.6	-1%
By Type
Products	461.5	473.3	-2%
Services	145.3	141.7	3%
Other	1.1	0.6
By Revenue Line
Digital Business Platform	297.0	294.0	1%
Adabas & Natural	165.1	179.8	-8%
Consulting	145.8	141.8	3%
EBIT*	138.8	129.3	7%
as % of revenue	22.8%	21.0%
Net income	90.1	83.4	8%
as % of revenue	14.8%	13.5%
Earnings per share (€, basic)	1.18	1.06	12%
Earnings per share (€, diluted)	1.18	1.06	12%
Free cash flow	145.4	128.8	13%
Employees (Full-time equivalents)	4,435	4,384
of which in Germany	1,144	1,176
of which in R&D	1,076	992
Balance sheet	Sep. 30, 2016	Dec. 31, 2015
Total assets	1,800.2	1,814.8
Cash and cash equivalents	349.0	300.6
Net cash / (Net debt)	78.1	-25.7
Shareholders' equity	1,114.6	1,089.7
as % of total assets	61.9%	60.0%

*EBIT: Net income + income taxes + other taxes + financial expense, net

Key Developments in the Third Quarter

Digital Business Platform (DBP): The focus of Software AG's Digital Business Platform business line is on strategic partnerships and large deals valued over €1 million. Through these partnerships, Software AG guides its customers during the transformation of their business models into the new digital world to ensure sustainable success in their respective markets. We both prepared and entered multiple new strategic partnerships in the high-growth IoT business with big-name, market-leading companies in the third quarter. However, a number of these large-scale deals were not signed until just after September 30. A salesrelated focus on the third quarter, consisting of the period until October 11, is therefore more indicative of Software AG's most recent progress.

Taking into account the new successfully signed partnerships produces a positive overall picture:

	IFRS (unaudited)		Sales Performance (pro forma)
in € millions	Q3 2016	Q3 2015	July 1 until Oct. 11, 2016	July 1 until Oct. 11, 2015	∆ as %	∆ as % at constant currency
DBP Licenses	37.5	41.4	44.7	41.7	+7%	+8%

DBP License Revenue / Sales Performance

Adabas&Natural (A&N): Software AG's announcement of its A&N 2050 plan resulted in early contract renewals in the first half of the year. License revenue in the amount of €9.3 million (2015: €27.5 million) in the third quarter was modest as expected, particularly after the extremely strong first quarter (license revenue +79% at constant currency) and the good second quarter. Maintenance revenue was €39.6 million (2015: €39.2 million), illustrating very solid performance—a trend we have been observing for two years confirming customer loyalty.

Consulting: Revenue in the Consulting segment continued to grow, up 3 percent to €47.3 million (2015: €45.8 million). The segment's profit margin was excellent at 16.9 percent (2015: 15.5 percent) in the third quarter of 2016.

Margin: Operating expenses continued to fall in the third quarter. In particular, sales optimization measures taken in the third quarter of 2015 produced positive effects. A special one-time charge due to a lawsuit in the USA had a negative impact on IFRS earnings. A court of appeals reaffirmed the original court decision in favor of compensation of damages in the amount of \$15 million. Increasing the necessary provisions by €5.4 million to \$15 million reduced Software AG's third-quarter EBIT (IFRS). This special effect was eliminated as a special charge in the calculation of the operating profit margin (EBITA, non-IFRS).

Software AG posted an excellent operating profit margin for the third quarter at 33.7 percent (2015: 32.5 percent). The company's operating income for the first nine months of 2016 was thus €181.8 million, a 9 percent increase. Accordingly, the nine-month margin rose from 27.1 percent (2015) to 29.9 percent.

Free cash flow performed very well in the third quarter, increasing 38 percent to €31.1 million (2015: €22.6 million). This resulted in free cash flow growth of 13 percent for the nine-month reporting period, a record-breaking high.

Consolidated Income Statement for the 9 Months Ended September 30, 2016

in € thousands	9M 2016	9M 2015	Δ as %
Licenses	155,515	168,950	-8%
Maintenance	305,981	304,328	1%
Services	145,332	141,705	3%
Other	1,061	575	85%
Total revenue	607,889	615,558	-1%
Costs of sales	-157,522	-157,857	0%
Gross profit	450,367	457,701	-2%
Research and development expenses	-82,566	-79,350	4%
Sales, marketing and distribution expenses	-170,640	-197,529	-14%
General and administrative expenses	-56,442	-50,079	13%
Other taxes	-3,925	-4,449	-12%
Operating earnings	136,794	126,294	8%
Other income / expenses, net	-1,955	-1,408
Financing expenses, net	-2,523	-2,793	-10%
Earnings before income taxes	132,316	122,093	8%
Income taxes	-42,175	-38,657	9%
Net income	90,141	83,436	8%
Thereof attributable to shareholders of Software AG	89,992	83,269	8%
Thereof attributable to non-controlling interests	149	167
Earnings per share (EUR, basic)	1.18	1.06	12%
Earnings per share (EUR, diluted)	1.18	1.06	12%
Weighted average number of shares outstanding (basic)	76,231,631	78,816,237
Weighted average number of shares outstanding (diluted)	76,254,063	78,885,704

Consolidated Balance Sheet as of September 30, 2016

Assets (in € thousands)	Sep. 30, 2016	Dec. 31, 2015
Current assets	591,737	584,183
Cash and cash equivalents	348,951	300,567
Other financial assets	15,335	11,840
Trade and other receivables	189,287	232,576
Other non-financial assets	16,684	14,794
Income tax receivables	21,480	24,406
Non-current assets	1,208,499	1,230,586
Intangible assets	137,212	157,438
Goodwill	894,746	899,954
Property, plant and equipment	57,530	56,221
Other financial assets	42,128	24,547
Trade and other receivables	58,095	75,090
Other non-financial assets	289	82
Income tax receivables	6,315	6,215
Deferred tax receivables	12,184	11,039
Total Assets	1,800,236	1,814,769

Equity and Liabilities (in € thousands)	Sep. 30, 2016	Dec. 31, 2015
Current liabilities	409,608	439,542
Financial liabilities	70,782	113,033
Trade payables and other liabilities	31,915	33,016
Other non-financial liabilities	89,440	112,932
Other provisions	55,838	28,329
Income tax liabilities	26,148	28,626
Deferred income	135,485	123,606
Non-current liabilities	276,013	285,498
Financial liabilities	200,061	213,247
Trade payables and other liabilities	0	90
Other non-financial liabilities	1,580	1,719
Other provisions	22,515	17,897
Provisions for pensions and similar obligations	33,673	35,644
Deferred tax liabilities	9,002	16,723
Deferred income	9,182	178
Equity	1,114,615	1,089,729
Share capital	79,000	79,000
Capital reserves	23,682	40,504
Retained earnings	1,095,210	1,047,145
Other reserves	-12,179	-5,808
Treasury shares	-71,596	-71,596
Attributable to shareholders of Software AG	1,114,117	1,089,245
Non-controlling interests	498	484
Total Equity and Liabilities	1,800,236	1,814,769

Consolidated Statement of Cash Flows for the 9 Months Ended September 30, 2016

in € thousands	9M 2016	9M 2015
Net income	90,141	83,436
Income taxes	42,175	38,657
Net financial income/expense	2,523	2,793
Amortization/depreciation of non-current assets	30,014	37,957
Payments for the settlement of share based payment rights with a choice of settlement	-16,320	0
Other non-cash income/expense	-12,854	-8,890
Operating cash flow before changes in working capital	135,679	153,953
Changes in receivables and other assets	41,912	34,131
Changes in payables and other liabilities	34,128	2,012
Income taxes paid/received	-50,695	-45,901
Interest paid	-10,866	-10,195
Interest received	7,086	5,944
Net cash provided by operating activities	157,244	139,944
Proceeds from the sale of property, plant and equipment/intangible assets	336	2,388
Purchase of property, plant and equipment/intangible assets	-8,582	-9,174
Proceeds from the sale of non-current financial assets	1,425	144
Purchase of non-current financial assets	-5,042	-4,503
Proceeds from the sale of current financial assets	16,818	49,232
Purchase of current financial assets	-16,951	-3
Proceeds/payments from the sale of disposal groups	0	-1,000
Payment for acquisitions, net	-11,546	0
Net cash used in investing activities	-23,542	37,084
Repurchase of treasury shares (including option premiums paid)	0	-16,291
Use of treasury shares	0	466
Dividends paid	-42,105	-39,633
Additions to financial liabilities	78,624	6,170
Repayment of financial liabilities	-122,432	-106,201
Acquisition of non-controlling interest	-460	-500
Net cash provided by/used in financing activities	-86,373	-155,989
Change in cash and cash equivalents from cash-relevant transactions	47,329	21,039
Currency translation adjustment	1,055	-2,480
Net change in cash and cash equivalents	48,384	18,559
Cash and cash equivalents at the beginning of the period	300,567	318,396
Cash and cash equivalents at the end of the period	348,951	336,955
Free cash flow	145,381	128,799

Segment Report for the First 9 Months 2016

in € thousands		A&N		DBP		Consulting	Reconciliation		TOTAL
	9M 16	9M 15	9M 16	9M 15	9M 16	9M 15	9M 16	9M 15	9M 16	9M 15
Licenses	47,360	59,456	108,155	109,494	0	0			155,515	168,950
Maintenance	117,195	119,893	188,786	184,435	0	0			305,981	304,328
Product revenue	164,555	179,349	296,941	293,929	0	0			461,496	473,278
Services	0	0	0	2	145,332	141,703			145,332	141,705
Other	520	445	35	8	506	122			1,061	575
Total Revenue	165,075	179,794	296,976	293,939	145,838	141,825			607,889	615,558
Cost of sales	-8,570	-10,037	-22,067	-20,996	-118,477	-112,913	-8,408	-13,911	-157,522	-157,857
Gross profit	156,505	169,757	274,909	272,943	27,361	28,912	-8,408	-13,911	450,367	457,701
Sales, marketing and distribution expenses	-24,177	-24,981	-120,306	-144,630	-12,811	-14,215	-13,346	-13,703	-170,640	-197,529
Segment contribution	132,328	144,776	154,603	128,313	14,550	14,697	-21,754	-27,614	279,727	260,172
Research and development expenses	-16,393	-15,377	-66,173	-63,973	0	0	0	0	-82,566	-79,350
Segment result	115,935	129,399	88,430	64,340	14,550	14,697	-21,754	-27,614	197,161	180,822
General and administrative expenses									-56,442	-50,079
Other taxes									-3,925	-4,449
Operating earnings									136,794	126,294
Other operating income/expenses, net									-1,955	-1,408
Net financial income/expenses									-2,523	-2,793
Earnings before income taxes									132,316	122,093
Income taxes									-42,175	-38,657
Net income									90,141	83,436

Publication Credits

Publisher

Software AG Corporate Communications Uhlandstraße 12 64297 Darmstadt Germany

Tel. +49 6151-92-0 Fax +49 6151-1191 press@softwareag.com

Contact

Software AG Corporate Headquarters Uhlandstraße 12 64297 Darmstadt Germany

Tel. +49 6151-92-0 Fax +49 6151-1191 www.softwareag.com

ABOUT SOFTWARE AG

The digital transformation is changing enterprise IT landscapes from inflexible application silos to modern software platform-driven IT architectures which deliver the openness, speed and agility needed to enable the digital real-time enterprise. Software AG offers the first end-to-end Digital Business Platform, based on open standards, with integration, process management, in-memory data, adaptive application development, real-time analytics and enterprise architecture management as core building blocks. The modular platform allows users to develop the next generation of application systems to build their digital future, today. With over 45 years of customer-centric innovation, Software AG is ranked as a leader in many innovative and digital technology categories. Software AG has more than 4,300 employees, is active in 70 countries and had revenues of €873 million in 2015. Learn more at www.softwareag.com.