BUY Software AG - KALLIWODA AG_Kalliwoda_initiating_analysis... · ∎ Software AG is today a leading enterprise software developer in Germany. ... Performance 4 Weeks 0.0% 13 Weeks

∎ Software AG is today a leading enterprise software developer in Germany. In the past decade, the company has invested heavily in the research and development unit to create unique technology. The company focuses on offering end-to-end, integrated solution for process strategy, design, integration, monitoring and control, as well as improving business processes.

∎ Software AG announced its Q3 2012 results on 30 October which exceeded market expectations fornor revenue from new product sales in the Business Process Excellence (BPE) business line. Revenues achieved €257m, in line with consensus. The EBIT margin was 23.7 percent (Q3 2011: 26.2 percent), which reflects an increase over the course of the year (Q1 2012: 21.5 percent and Q2 2012: 22.1 percent).

∎ There are many upside opportunities for future company development; steadier top-line growth via the development of the BPE segment and growth of margins by handling the costs of the declining ETS business.

∎ The company is well positioned in case of a recession; software vendors are generally identified as "safe asset" relative to others IT companies, because of their large recurring maintenance revenue flow and excellent leverage on their expenses base to safeguard margins. What’s more, Software AG maintained its profitability of the business during the financial crisis in 2008 and 2009, achieving double digit result in terms of return of equity and outperforming many other companies in the software industry.

∎ The final estimate of implied market value based on our mixed valuation equals 3 085 mln euros. This implies 10.1% upside potential which translate into 12 months target price of EUR 35.82. We initiate a buy

recommendation.

Key Figures

EUR mio FY 2008 FY 2009 FY 2010 FY 2011 FY 2012e FY 2013e FY 2014e

Net Sales 721 847 1120 1098 1031 1062 1105

EBITDA 206 257 315 315 284 295 307

Net Income 116 141 176 177 159 168 175

RoE 21% 22% 23% 19% 15% 14% 13%

EBITDA Margin 29% 30% 28% 29% 28% 28% 28%

Net Margin 16% 17% 16% 16% 15% 16% 16%

Equity / Assets 52% 39% 48% 57% 60% 61% 66%

Current Ratio 1.07 1.01 0.84 1.51 1.59 1.78 1.91

Highly profitable business with growth potential

January 11, 2013 Europe | Germany | Software

Initial Coverage

BUY

Target price: € 35.82

Software AG

Overview Industry:

Software

Country:

Germany

Reuters:

SOWG.DE

WKN

330400

Website:

softwareag.de

Current Price:

32,30

High Low

Price 52W.: 33.50 21.80

Market Cap. (Mill. EUR) 2.809

No. of Shares (in Mill.) 86.83

Shareholders

Free Float

26.00%

Software AG F

29.00%

FMR LCC

5.10%

Deka Invst

4.70%

Alken Ass Mgm

4.20%

Performance

4 Weeks

0.0%

13 Weeks

-0.4%

26 Weeks

36.9%

52 Weeks

15.8%

YTD

13.9%

Dividend

EUR/Share yield %

2010 0,43 1.18%

2011 0,46 1.61%

2012e 0,47 1.63%

2013e 0,52 1.65%

Dr. Norbert Kalliwoda

[email protected]

Dr. Peter Arendarski

[email protected]

Phone: +49 69 97 20 58 53

www.kalliwoda.com

2 Software AG Initial Coverage | January 2013

Dr. Kalliwoda Research GmbH | Primary Research

Content

1 Company Profile .................................................................................................................................3

2 Investment Case ..................................................................................................................................6

3 Current Developments and Outlook ...........................................................................................7

4 Profit and Loss Statement ...............................................................................................................9

5 Balance Sheet .................................................................................................................................... 10

6 Cash Flow ........................................................................................................................................... 11

7 Financial Ratios ............................................................................................................................... 11

8 Valuation ............................................................................................................................................ 13



1 Companyprofile

Software AG is a Germany-based provider of business infrastructure software.

Founded in 1969 in Darmstadt, Germany, Software AG is the global leader in Business Process Excellence.

Our more than 40 years of innovation include the invention of the first high-performance transactional

database, Adabas; the first business process analysis platform, ARIS; and the first B2B server and SOA-based

integration platform, webMethods.

The Company offers end-to-end, integrated solution for process strategy, design, integration, monitoring

and control, as well as improving business processes.

As of September 30, 2012 Software AG had 5,436 (Q3 2011: 5,498) employees, of which 1,084 (Q3 2011:

1,031) worked in Sales and Marketing and 892 (Q3 2011: 855) in Research and Development (R&D). The

total number of employees in Germany was 1,783 (Q3 2011: 1,920)

The Software AG Group consists of three business divisions: Enterprise Transaction Systems (ETS),

Business Process Excellence, and IDS Scheer Consulting.

The company is a specialized software vendor. The following table presents the key products and its application.

ArisPlatform Achieve business transparency (business process management) webMethods Integrate data, apps & workflows (integration technology) Adabas/Natural Manage high volumes of data (high performance database) Terracotta Increase speed of data (in memory technology) Sources: Software AG.

The following tables present the decomposition of financials into the main segments and group of products.

ETS BPE IDSC Total

in € mln Q312 Q311 Q312 Q311 Q312 Q311 Q312 Q311

Licenses 30.2 31.6 50.0 41.7 304.0 1.4 80.5 74.7 Maintenance 47.4 47.5 46.7 42.5 3.7 4.2 97.8 94.2 Productrevenue 77.6 79.2 96.7 84.2 4.0 5.6 178.3 168.9

Consulting and Services 16.1 15.6 37.0 47.0 25.2 42.6 78.2 105.2 Other 0.184 0.284 0.695 0.0560 0.0022 0.154 0.901 0.494 Total revenue 93.8 95.1 134.3 131.2 29.3 48.4 257.4 274.6 Cost of sales -18.2 -15.6 -38.3 -47.1 -27.6 -37.4 -90.2 -106.4 Gross Profit 75.6 79.5 96.0 84.0 1.7 11.0 167.2 168.2 Sales, marketing -15.9 -16.8 -36.5 -31.6 -4.5 -7.0 -60.4 -58.5 Segmentcontribution 59.7 62.7 59.6 52.4 -2.7 4.0 106.8 109.8

Segment contribution Mgn % 63.62 65.9 44.3 39.9 -9.3 8.1 41.4 39.9 Research and development -6.3 -6.8 -18.9 -15.1 0.0 -81.0 -25.2 -22.0 Segment earnings 53.4 55.9 40.7 37.3 -2.7 3.9 81.6 87.8

Sources: Software AG.



The graph below presents revenue split by segment according to the most recent financial statement (9m

2012).


One of the key strength of the company is high level of recurring cash flows. Based on the recent statement,

the company 75% of product revenue is recurring, ca. 50% of total revenue is recurring and ca. 60% of

profit comes from the recurring sources.

As it was mentioned earlier, the company focuses now on developing BPE segment. The figure below

presents the evolution of the contribution of BPE and EPS division to the total contribution during 2006 –

2011.


The company is clearly changing the revenue structure and in 3Q 2012 we can observe that the segment

contributions between BPE and ETS are now balanced out. Moreover, contribution margin of BPE segment

is growing in spite of high sales and marketing costs. This can be an indicator of even higher contribution

margin in the future generated by BPE segment.



The company is a very active player in the acquisition market. Software AG constantly seeks growth via acquisitions and investments. Software AG acquires technologies and companies that complement and enhance our product portfolio and market position or enable us to enter new geographies or business areas.

In the last years, Software AG

acquired twelve companies with a total

transaction volume of over US$ 1,300

million and over 4.000 employees, i.a.

webMethods, Inc., a market leader in

integration technologies and BPM, and

IDS Scheer, the market leader in

process analysis and modeling.


The company presented in 2012 their mid-term business goals for the next 5 years. Software AG is clearly

focusing on strengthening BPE division and developing Terracotta product and continuing strategic

acquisitions. The list below summarizes the mid-term business goals.

BPE Business Division

• Product revenue: CAGR ca. 10-20%

• 50% contribution to group result

Terracotta*

• Product revenue: CAGR ca. 50-100%

• Expand BigData offering by Real Time BI platform

ETS Business Division

• Product revenue in gradual decline (single digit p.a.)

• Manage cost to maintain operating margin > 50%

The Group

• Increase revenue by around 50% (organic)

• Strategic acquisitions (cash-only; Cloud/BigData)

* Terracotta provides leading edge in-memory technology for high performance applications and cloud

services. Terracotta is the company behind some of the most widely used software for application

scalability and performance, including the caching standard for enterprise Java. The company’s software is

deployed in more than 500,000 enterprise installations, including by the majority of the Fortune 2000.



Market & Competition

The company operates in highly competitive environment in the BPE business. The charts below present the company’s shares in the main markets of the BPE activities: Process Management and Integration Technology.

Market Share in Main Markets: BPM and ESB


2 Investment Case

Software AG published its Q3 2012 results on 30 October. Revenues achieved 257m, in line with consensus

but 3% beneath our expectations. There are interesting conclusions regarding the results. Firstly, strong

license revenue development - 81m, +7.89% in spite of an unfavorable comparison basis, 19.3% over

consensus and 2.5% above our expectations. Moreover, a bigger than we anticipated decrease in Services

revenues (-16%, of which -30% for IDSC). EBIT is set to achieve 60-61m, 11% below our expectations but

6.8% above consensus. The development of the cost base, powered by investments into distribution of BPE

products in the US and Terracotta business, appears to be somewhere between our moderately optimistic

outlook and a very cautious consensus. What’s more we notice a decrease in the connection between BPE

license and BPE services revenues which is possible to proceed in the future. BPE maintenance revenues

arrived under our expected figures and finally IDS Scheer’s consulting margin is probably will not go back to

be positive before 2013.

Software AG attributes relatively good results to double-digit BPE license growth in all regions (BPE license

+20%), advantages from the North American transformation plan coming through - the company amplified

marketing investment and US entity founded to raise breadth of projects Software AG is now qualified to

compete in the region), and Terracotta “big data” products doing well, with sales up over 100% year to year.

Management has verified that the main goal is to working on developing the BPE segment. This may in the

beginning penalize margins, with margin growth obviously not being a main concern for 2013. We for that



reason continue to see the BPE division’s operating margin staying nearly steady. Furthermore,

management does not now wish to commit itself to enhancing the margin in 2013. A much better mix and

narrower losses atIDS Scheer Consulting (management expects it to break even in 2013) should allow the

operating margin to increase (at least by one percent) in 2013, although to a level that we feel will be

beneath the general opinion (24.1%e vs. consensus of 25.3%).

The company verified that it desires to carry on investments in sales & marketing, mainly for BPE and

Terracotta (big data) solutions. We forecast higher level of employment in Q4 12 in groundwork for 2013.

This intense policy clarifies why the group reduced its operating margin suggestions for 2012 (23%/24%

vs. 23%/24.5%). However this will probably be balanced out by a bettered products/services mix in the

BPE business. The 14.6% boost in the average size of agreements signed shows the group’s approach of

keeping away from small to medium sized contracts; it has been obtained by being far pickier while

tendering for offers. The sales initiative in North America that was kicked-off at the beginning of the year led to substantial

growth for the second consecutive quarter. Software AG USA Inc. helps companies and government agencies

optimize and modernize existing technology to achieve results faster. In the United States, the company

hired a new management. That movement increases the company’s distribution power in this region. The

North America organization benefited from the implementation of reorganizational measures and is back to

double digit BPE license growth. A further major contributor to the revenue growth was Software AG’s

subsidiary Terracotta, based in Silicon Valley, and its technology for the management of Big Data.

3 CurrentDevelopmentsandOutlook

Sector recommendation& catalysts.We anticipate companies to follow a more cautious view of their

prospects in the forthcoming reporting period, and consensus estimates are probably to drop. In previous

downturn, the sector share price has outperformed other sectors. In a recession, software vendors are

generally identified as "safe asset" relative to others IT companies, because of their large recurring

maintenance revenue flow and excellent leverage on their expenses base to safeguard margins. However,

European services providers, more than US participants, immediately endure a huge de-rating in a

downturn as investors are significantly less certain about their capability to secure margins. The table

below presents our forecasts on General IT Worldwide Spending.

Sources: Dr. Kalliwoda | Research © 2012

7,80%

1,80%

4,10% 4,10% 4,20% 4,00%

0,00%

2,00%

4,00%

6,00%

8,00%

10,00%

2011 2012 2013 2014 2015 2016

IT Worldwide Spending



Worldwide enterprise IT spending. Regarding Worldwide enterprise IT spending, we forecast total

$2.683 trillion in 2013, a 2.5 percent increase of projected 2012 spending of $2.623 trillion.

We are aware that the global economic outlook has deteriorated in 2012, leading to scant overall growth in

enterprise IT spending, However, most corporations have already significantly reduce discretionary IT

spending growth over the previous several years and, barring a global economic problem and substantial

shrinkage of operations, they have little space to decrease IT spending additionally over the long run. In the

short term, we expect growth in transportation and insurance It services (3,5% in 2013). IT spending in the

transportation sector is expected to total $129 billion in 2013, up from $121 billion in 2012. IT spending in

insurance will reach $189 billion in 2013, up from $179 billion in 2012. In 2012, government IT spending is

forecast to be the same as in 2013. In 2013, government IT spending is forecast to total $446 billion ($447

billion in 2012).

Company Outlook. The first nine months of the year exhibited a notable difference in growth between

product and consulting/service revenue. The profitable license/maintenance business, which fueled growth

and earnings, grew six percent to €178.3 million (2011: €168.9 million). The company license/maintenance

revenue for fiscal 2011 was around €676 million. We forecast for the fiscal 2012, the company is targeting to

reach a total of €715 to €730 million revenue from the license/maintenance business. In terms of BPE

business line, we expect an increase in product revenue of between 8 and 12 percent and 2 – 3 % for total

BPE revenue for the 2012 year. The ETS business line achieved €380 million in revenue in fiscal 2011. For the

current fiscal year, we expect a small drop in the revenue between 3 and 5 percent. The higher sales

investments are a trigger that will contribute decrease in EBIT margins for the company for 2012 year. We

forecast the EBIT margin between 23.0 and 24.0 percent. A stronger than we expected decline in services and

the evolution of the cost base allow us to narrow down our EPS estimates by 3.5% in 2012 and 2013, and

4.5% in 2014.

The summary below presents our pros and cons on company outlook in compact way.

We see the opportunities for future company development.

• More steady top-line growth via the development of the BPE segment

• Growth of margins by handling the costs of the declining ETS business

• Higher multiples as more steady results in advance are probably to bring back management’s

trustworthiness and its strategy

However, we also see the risks. A significant global slowdown could allow the company to rethink their

investment in IT budgets. There are two downside risks in our view:

• No control over the cost base, particularly sales and marketing expenses in the BPE segment;

• The degree of the investments the company is ready to make in order to speed up the pace of

topline expansion in its BPE division is not yet recognized

Cons:

• Weak performance of IDS • Subdued growth dynamics

Pros:

• Very good position of BPE division • New revenue opportunities with new

products • High proportion of recurring

maintenance revenues • Strong cash flow • Payoff of the investments in the US and

cost cutting at IDS Scheer



4 Profitandlossstatements

Profit&LossStatement-SOFTWAREAG

€mio FY2008 FY2009 FY2010 FY2011 FY2012e FY2013e FY2014e

Licenses 272.0 269.9 327.4 295.2 277.2 285.5 296.9 Maintenance 267.1 310.6 369.4 378.7 355.6 366.2 380.9 Consulting and Services 177.8 262.5 418.7 419.8 350.0 360.5 374.9 Other 3.8 4.5 4.1 4.6 4.4 4.5 4.7 Totalrevenue 720.6 847.4 1119.5 1098.3 1031.3 1062.2 1104.7

Costs of sales -198.3 -300.3 -442.1 -442.1 -448.8 -460.0 -471.5 Gross profit 522.4 547.1 677.5 656.2 582.5 602.2 633.2 Research and development expenses -76.2 -82.2 -92.0 -88.0 93.8 104.3 100.5 Sales. marketing and distribution expenses -169.5 -192.4 -238.9 -230.2 -218.7 -230.0 -232.3 General and administrative expenses -65.1 -70.7 -85.3 -75.1 -77.4 -73.0 -76.7 Operating result 211.5 201.8 261.3 262.8 235.0 249.3 267.1 Other operating income 44.5 78.7 43.8 30.9 26.0 27.6 29.5 Other operating expenses -61.0 -62.4 -36.5 -24.5 -24.0 -25.5 -27.3 EBITDA 206.1 257.1 315.0 315.5 284.0 295.4 307.2

Financial income/expense net -5.1 -8.9 -14.2 -9.9 -10.4 -10.9 -11.5 Earnings before taxes 175.4 209.3 254.4 259.3 231.1 240.6 250.2 Income taxes -54.8 -65.5 -72.7 -71.1 -72.4 72.2 75.0

Netincome 115.9 140.8 175.6 177.2 158.6 168.4 175.1

Profit&Loss(YearonYear)

Licenses -0.8% 21.3% -9.8% -6.1% 3.0% 4.0% Maintenance 16.3% 18.9% 2.5% -6.1% 3.0% 4.0% Consulting and Services 47.6% 59.5% 0.3% -16.6% 3.0% 4.0% Other 18.5% -8.8% 14.2% -6.1% 3.0% 4.0% Totalrevenue 17.6% 32.1% -1.9% -6.1% 3.0% 4.0%

Costs of sales 51.5% 47.2% 0.0% 1.5% 2.5% 2.5% Gross profit 4.7% 23.8% -3.1% -11.2% 3.4% 5.1% Research and development expenses 7.8% 12.0% -4.3% -206.6% 11.1% -3.6% Sales. marketing and distribution expenses 13.5% 24.2% -3.6% -5.0% 5.2% 1.0% General and administrative expenses 8.6% 20.6% -11.9% 3.0% -5.6% 5.0% Operating result -4.6% 29.5% 0.6% -10.6% 6.1% 7.1% Other operating income 76.9% -44.4% -29.5% -15.9% 6.1% 7.0% Other operating expenses 2.3% -41.5% -32.9% -2.1% 6.1% 7.1% EBITDA 24.8% 22.5% 0.2% -10.0% 4.0% 4.0%

Financial income/expense net 73.5% 60.3% -30.5% 5.0% 5.0% 5.0% Earnings before taxes 19.3% 21.5% 1.9% -10.9% 4.1% 4.0% Income taxes 19.6% 10.9% -2.1% 1.9% -199.7% 4.0% Netincome 21.5% 24.7% 0.9% -10.5% 6.2% 4.0%

Profit&Loss(%ofRevenues)

Licenses 37.7% 31.8% 29.2% 26.9% 26.9% 26.9% 26.9% Maintenance 37.1% 36.7% 33.0% 34.5% 34.5% 34.5% 34.5% Consulting and Services 24.7% 31.0% 37.4% 38.2% 33.9% 33.9% 33.9% Other 0.5% 0.5% 0.4% 0.4% 0.4% 0.4% 0.4% Totalrevenue 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Costs of sales -27.5% -35.4% -39.5% -40.3% -43.5% -43.3% -42.7% Gross profit 72.5% 64.6% 60.5% 59.7% 56.5% 56.7% 57.3% Research and development expenses -10.6% -9.7% -8.2% -8.0% 9.1% 9.8% 9.1% Sales. marketing and distribution expenses -23.5% -22.7% -21.3% -21.0% -21.2% -21.7% -21.0% General and administrative expenses -9.0% -8.3% -7.6% -6.8% -7.5% -6.9% -6.9% Operating result 29.4% 23.8% 23.3% 23.9% 22.8% 23.5% 24.2% Other operating income 6.2% 9.3% 3.9% 2.8% 2.5% 2.6% 2.7% Other operating expenses -8.5% -7.4% -3.3% -2.2% -2.3% -2.4% -2.5% EBITDA 28.6% 30.3% 28.1% 28.7% 27.5% 27.8% 27.8%

Financial income/expense net -0.7% -1.0% -1.3% -0.9% -1.0% -1.0% -1.0%

Earnings before taxes 24.3% 24.7% 22.7% 23.6% 22.4% 22.7% 22.6%

Income taxes -7.6% -7.7% -6.5% -6.5% -7.0% 6.8% 6.8%

Netincome 16.1% 16.6% 15.7% 16.1% 15.4% 15.9% 15.9%

Dr. Kalliwoda | Research © 2012, Software AG



5 Balancesheets



Currentassets 371.4 595.2 494.2 574.3 652.6 759.7 775.5

Cash and cash equivalents 96.9 218.1 102.5 216.5 280.4 317.5 353.3 Securities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Inventories 0.1 0.7 1.3 0.5 0.5 0.5 0.6 Trade receivables 247.3 328.5 337.8 304.7 316.9 376.3 337.0 Other receivables and other assets 21.2 38.2 43.0 43.9 45.7 56.0 74.9 Prepaid expenses 5.9 9.6 9.5 8.7 9.0 9.4 9.7 Non-currentassets 688.6 1059.7 1105.5 1106.4 1150.7 1196.7 1244.6

Intangible assets 150.9 236.6 232.6 248.2 258.1 268.5 279.2 Goodwill 442.7 686.1 717.3 752.2 782.3 813.6 846.1 Property. plant and equipment 47.0 67.1 66.4 65.4 68.0 70.7 73.5 Financial assets 6.5 5.7 5.3 3.4 3.6 3.7 3.9 Trade receivables 17.2 11.4 13.0 13.2 13.7 14.3 14.8 Other receivables and other assets 8.6 26.2 47.8 4.0 4.1 4.3 4.5 Prepaid expenses 0.0 0.8 1.6 1.3 1.3 1.4 1.4 Deferred taxes 15.7 25.9 21.5 18.7 19.5 20.3 21.1 ASSETS 1060.0 1654.9 1599.6 1680.7 1803.2 1956.4 2020.0

Currentliabilities 348.6 588.4 586.1 381.6 411.0 427.4 406.3

Financial liabilities 61.4 198.5 136.8 26.1 45.0 46.8 48.7 Trade payables 35.8 62.0 60.5 58.1 66.0 68.6 71.4 Other liabilities 45.2 73.1 68.1 88.7 89.0 92.6 72.0 Other provisions 69.0 92.4 139.7 83.3 81.0 84.2 87.6 Tax liabilities 36.7 45.1 53.1 20.2 20.0 20.8 21.6 Deferred income 100.5 117.3 127.9 105.3 110.0 114.4 105.0 Non-currentliabilities 162.3 419.3 244.2 347.6 314.8 327.4 282.7

Financial liabilities 105.8 291.4 132.9 251.3 229.0 238.2 210.0 Trade payables 0.1 0.3 0.1 0.5 0.5 0.5 0.5 Other liabilities 0.4 1.1 4.3 8.8 9.0 9.4 9.7 Provisions for pensions 16.7 29.6 41.9 38.2 36.6 38.1 28.0 Other provisions 14.0 27.5 15.7 11.5 8.0 8.3 8.7 Deferred taxes 22.7 66.7 47.4 36.7 31.0 32.2 25.0 Deferred income 2.6 2.8 2.0 0.7 0.7 0.7 0.8 Equity 549.1 647.2 769.3 951.5 1074.5 1201.6 1331.0

Share capital 85.9 86.1 86.1 86.8 90.3 93.9 97.7 Capital reserve 35.8 39.4 22.5 35.7 37.1 38.6 40.2 Retained earnings 474.7 584.2 727.1 867.1 989.8 1 113.4 1 239.2 Other reserves -47.3 -82.5 -44.7 -37.1 -38.6 -40.1 -41.7 Treasury shares 0.0 0.0 -22.3 -1.7 -1.7 -1.8 -1.9 Non-controlling interest 0.0 19.9 0.6 0.7 0.7 0.7 0.7 EQUITYANDLIABILITIES 1060.0 1654.9 1599.6 1680.7 1800.3 1956.4 2020.0




6 CashFlowStatement



Net income for the year 115.9 140.8 175.6 177.2 161.8 168.4 175.1 Income taxes 54.8 65.5 72.7 71.1 64.2 66.1 68.1 Net financial income/expense 5.1 8.9 14.2 9.9 4.0 4.2 4.3 Amortization/depreciation of non-current assets 25.5 38.9 46.4 46.3 47.0 48.9 50.8 Other non-cash income/expense 5.0 -29.1 7.1 6.5 1.0 1.0 1.1 Operating cash flow bf changes in work. cap 206.3 225.0 316.0 311.0 277.1 288.1 299.7 Changes in inventories, receivables -56.6 33.6 -23.4 80.1 6.2 6.5 6.7 Changes in payables and other liabilities 40.7 28.5 26.0 -63.7 -14.9 -15.5 -16.1 Income taxes paid -45.2 -76.7 -79.0 -120.3 -82.0 -85.3 -88.7 Interest paid -10.5 -17.3 -18.8 -15.7 -16.0 -16.7 -17.3 Interest received 5.4 7.4 6.7 7.3 7.7 8.0 8.3 Netcashprovidedbyoperatingactivities 140.1 200.5 227.4 198.6 178.0 185.2 192.6

Proceeds from the sale of property, p & e 2.6 0.9 1.7 2.0 0.6 0.7 0.7 Purchase of property, p & e -11.3 -13.9 -12.5 -14.4 -10.0 -10.4 -10.8 Proceeds from the sale of financial assets 3.1 3.7 6.9 2.9 0.2 0.2 0.2 Purchase of financial assets -1.0 -2.8 -5.8 -1.4 -1.0 -1.0 -1.1 Payment for acquisitions, net -38.9 -320.4 -53.9 -59.2 -22.5 -23.4 -24.4 Netcashusedininvestingactivities -45.5 -332.5 -63.6 -70.2 -33.2 -33.9 -35.3

Proceeds from issue of share capital 1.8 1.5 0.2 34.6 0.6 0.6 0.7 Purchase of treasury stock 0.0 0.0 -32.8 -19.9 0.0 0.0 0.0 Dividends paid -28.5 -31.5 -32.8 -37.2 -39.0 -44.9 -49.3 Proceeds from financial liabilities 0.0 330.6 0.3 200.0 13.3 10.0 10.4 Repayments of financial liabilities -46.2 -41.2 -222.4 -193.4 -120.0 -80.0 -83.2 Netcashprovidedby/usedinfinancingact. -76.3 259.4 -287.6 -15.9 -68.3 -114.2 -121.5

Change in cash and cash equivalents 18.3 127.4 -123.7 112.6 64.0 37.0 35.8 Cashandcasheqattheendoftheperiod 96.9 218.1 102.5 216.5 280.4 317.5 353.3


7 Financialratios

Ratios-SOFTWAREAG

FY2008 FY2009 FY2010 FY2011 FY2012e FY2013e FY2014e

EBITDA margin 29% 30% 28% 29% 28% 28% 28% Net margin 16% 17% 16% 16% 15% 16% 16% Return on equity (ROE) 21% 22% 23% 19% 15% 14% 13% Return on assets (ROA) 11% 9% 11% 11% 9% 9% 9% Return on capital employed (ROCE) 16% 13% 17% 14% 11% 11% 11% Equity ratio 52% 39% 48% 57% 60% 61% 66% Current ratio 1,07 1,01 0,84 1,51 1,59 1,78 1,91 Quick ratio 1,07 1,01 0,84 1,50 1,59 1,78 1,91 Capex/Sales 10% 8% 30% 4% 0% 12% 12% Working capital/Sales 52% 70% 44% 52% 63% 72% 70%




The tables below present graphical representation of the trend of the main financials:


Revenues Margin

EBITDA Margin



8 Valuation

The following table presents financial forecasts and DCF calculations.

(in million) Actual Forecast period

2008 2009 2010 2011 2012e 2013e 2014e 2015e 2016e

Sales 721 847 1 120 1 098 1 031 1 062 1 105 1 149 1 183 % growth 17.6% 32.1% -1.9% 0.4% 3.0% 4.0% 4.0% 3.0%

EBITDA 206 257 315 315 284 295 307 319 332

% margin 28.6% 30.3% 28.1% 28.7% 27.9% 27.9% 27.9% 27.9% 27.9%

Depreciation & Amortization: -26 -39 -46 -46 -43 -44 -46 -47 -49

% sales 3.5% 4.6% 4.1% 4.2% 4.1% 4.1% 4.1% 4.1% 4.1%

EBIT 181 218 269 269 241 252 262 272 283

Taxes -55 -66 -73 -71 -72 -75 -78 -82 -85 Capex -70 -64 -332 -45 -132 -136 -141 -147 -151

% sales 9.7% 7.5% 29.7% 4.1% 12.8% 12.8% 12.8% 12.8% 12.8%

Increase/Decrease in NWC -16 62 3 16 -9 -9 -9 -10 -10

Unlevered Free Cash Flow 65 190 -88 215 71 75 78 81 86

WACC 6.4% Discount Period 0.25 1.25 2.25 3.25 4.25 Discount Factor 0.98 0.93 0.87 0.82 0.77 Present value of free cash flow 70 70 68 66 66


WACC and Market Equity calculations

The discount rate was calculated by deriving the weighted cost of capital. We assume that the target capital

structure will not change in the subsequent business years. Adjustments for debt to current interest were

Enterprise value

Present value of Free Cash Flow 340

Terminal Value 3 710 Discount Factor 0.74 Present Value of Terminal Value 2 762

% of Enterprise Value 89%

Enterprise value 3 102

Less: Total debt 213

Plus: Cash and Cash Equi. 280

Net Debt -67

Implied Equity Value 3 169

Outstanding shares 87

Implied share price 36.50

Wacc Calculation

Target Capital Structure Debt to Total Capitalization 43.4% Equity to Total Capitalization 57%

Cost of Equity Risk-free rate 3.0%

Market risk Premium 5.5%

Levered Beta 0.83

Cost of Equity 7.6%

Cost of Debt Cost of Debt 7.0%

Taxes 30.0%

After Tax Cost of Debt 4.9%

WACC 6.409%



not made. Risk free profitability is based on the average profitability of the 30-year bond. Figuring a risk

prime follows the capital asset pricing model (CAPM) and covers in particular the systemic risks (market

risk prime esp. company specific risk). The beta value we used to identify the company specific risk is based

on the performance of the reference index DAX. The tables above present WACC and Market Equity using

DCF calculations.

Fair Value – Sensitivities

The modification of the action parameter in market value of equity using DCF model is shown below in the

sensitivity analysis. It shows variance in our derived fair value in variant scenarios.

Beta

WACC 3 169 0.73 0.83 1.03 1.23

3 169 5.4% 6.4% 7.4% 8.4%

5.4% 5 353 5 353 5 353 5 353

2.0% 2 423 1 887 1 557 1 327 6.4% 3 169 3 169 3 169 3 169

3.0% 3 287 2 340 1 834 1 511

7.4% 2 267 2 267 2 267 2 267

4.0% 5 386 3 169 2 273 1 778 8.4% 1 775 1 775 1 775 1 775

5.0% 17 983 5 174 3 079 2 203

WACC Perpetuity

Growth Rate


Summary of valuation

We use a blend of 2013e EV/EBIT (9.8x target; 10% weight), 2013e P/E (15.9x target; 10% weight), and a

DCF (6.409% WACC, 4% sales CAGR, 27.9% MT EBIT margin, 80% weight). The following table presents our

mixed valuation model.

Mixed Valuation Value Weights

2013e EV/EBIT - target 9.8x 2 465 0.1 2013e P/E - target 15.9x 3 036 0.1 DCF 3 169 0.8

Implied Value of Equity 3 085 Market Value of Equity 2 801 Potential Upside 10.1%

Current Price 32.52 12m Target Price 35.82


We used two valuation methods to estimate the Software AG’s market value of equity. The DCF model

incorporates the company outlook and our forecasts regarding future development of the company. The

“multiples method” is more aggregated way to view the market value. This reflects the whole industry

outlook. Both methods are useful to estimate the final market value of equity. The final estimate of market

value based on mixed valuation equals 3 085 mln euros. This implies 10.1% upside potential which

translate into 12 months target price of EUR 35.82



Primary Research │Fair Value Analysis │International Roadshows

Rüsterstraße 4a

60325 Frankfurt

Tel.: 069-97 20 58 53

www.kalliwoda.com

Head:

Dr. Norbert Kalliwoda

E-Mail: [email protected]

CEFA-Analyst; University of

Frankfurt/Main; PhD in Economics; Dipl.-

Kfm.

Sectors: IT, Sof ware, Electricals &

Electronics, Mechanical Engineering,

Logistics, Laser, Technology, Raw Materials

Dr. Peter Arendarski


Senior-Analyst, Msc & Ph.D in Finance

(Poznan Univers. of Economics),CFA Level

3 Candidate

Sectors: Technology,Raw Materials, Banks

& Insurances, Financial-Modelling (Quant.,

Buyside)

Patrick Bellmann


Junior-Analyst; WHU - Otto

Beisheim School of Management,

Vallendar (2012)

Sectors: Support Research and Quantitative

Approach

Andreas Braun


Junior-Analyst; University of

Frankfurt/Main (2012)

Sectors: Support Research and Quantitative

Approach

Michael John


Dipl.-Ing. (Aachen) Sectors: Chemicals, Chemical Engineering,

Basic Metals, Renewable Energies,

Laser/Physics

Adrian Kowollik


Dipl.-Kfm.; Humboldt-Universität zu

Berlin, CFA Candidate

Sectors: Media, Internet, Gaming,

Technology, Eastern European stocks

Maximilian F. Kaessens


Bachelor of Science in Business

Administration (Babson College

(05/2012), Babson Park, MA (US))

Sectors: Financials, Real Estate

Dr. Christoph Piechaczek


Dipl.-Biologist; Technical University

Darmstadt; Univ. Witten-Herdecke.

Sectors: Biotech & Healthcare; Medical

Technology Pharmaceutical

Hellmut Schaarschmidt;


Dipl.-Geophysicists; University of

Frankfurt/Main.

Sectors: Oil, Regenerative Energies,

Specialties Chemicals, Utilities

Dr. Erik Schneider


Dipl.-Biologist; Technical University

Darmstadt; Univ. Hamburg.

Sectors: Biotech & Healthcare; Medical

Technology Pharmaceutical

David Schreindorfer


MBA, Economic Investment Management;

Univ. Frankfurt/ Univ. Iowa (US).

Sectors: IT/Logistics; Quantitative

Modelling

Nele Rave


Lawyer; Native Speaker, German School

London,

Legal adviser

Also view Sales and Earnings Estimates: DR. KALLIWODA │ RESEARCH on Terminals of Bloomberg, Thomson Reuters, vwd and Factset

Analyst of this research:Dr. Norbert Kalliwoda, CEFA, Cefa-Analyst; CEO



Disclaimer

BUY: Based on our analysis, we expect the stock to appreciate and produce a total return of at least 10% over the next twelve months

ACCUMULATE: Based on our analysis, we expect the stock to appreciate and produce a total return between 5%- 10% over the next twelve months

HOLD: Based on our analysis, we expect the stock to produce a total return between -5% and +5% over the next twelve months

REDUCE: Based on our analysis, we expect the stock to cause a negative return between -5% and -10% over the next twelve months

SELL: Based on our analysis, we expect the stock to cause a negative return exceeding -10% over the next twelve months and should be sold

Additional Disclosure DR.KALLIWODA │RESEARCH GmbH made this analysis on the basis of publicly available sources deemed reliable. We work as reliable as possible. But we cannot take warranty of the balance, precision, accuracy and completeness of the information and opinions. This study does not replace personal advice. This study is not a solicitation to buy or sell any investment instruments discussed in this study. Therefore DR.KALLIWODA │ RESEARCH GmbH advises to consult your bank or financial advisor before any investment-disposition. In the UK this study is to be distributed only to persons who are described in Section 11 (3) of the Financial Services Act 1986 (Investment Advertisements) (Exemptions) Order 1996 (as amended). This study may not be distributed and forwarded directly or indirectly to any other class of persons. The distribution of this document in other international jurisdictions may be restricted by law and persons who possess this study should inform themselves of any existing restrictions and comply with them. DR.KALLIWODA │ RESEARCH GmbH and its employees may hold positions in any securities mentioned in this document or in related investments and may rise or sell these securities or related investments. Possible conflicts of interest Neither DR.KALLIWODA │ RESEARCH GmbH nor any company affiliated to DR.KALLIWODA │ RESEARCH GmbH a) holds securities that are the subject of this study, in a proportion of 1% or more of the share capital; b) was involved in issuing securities that are the subject of this study; c) holds a net selling position in the shares of the analyzed company of at least 1% of the share capital; d) have been in charge of the analysed securities on the stock exchange or the market based on a contract with the issuer. By accepting this document the reader / recipient agrees with the obligations mentioned in this disclaimer.The information and opinions in this analysis were prepared by DR. KALLIWODA | RESEARCH GmbH. The information herein is believed by DR. KALLIWODA | RESEARCH GmbH to be reliable and has been obtained from public sources believed to be reliable. With the exception of information about DR. KALLIWODA | RESEARCH GmbH, DR. KALLIWODA | RESEARCH GmbH makes no representation as to the accuracy or completeness of such information. Opinions, estimates and projections in this report constitute the current judgement of the author as of the date of this analysis. They do not necessarily reflect the opinions, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, except if research on the subject company is withdrawn. Prices and availability of financial instruments also are subject to change without notice. This report is provided for informational purposes only. It is not to be construed as an offer to buy or sell or a solicitation of an offer to buy or sell any financial instruments or to participate in any particular trading strategy in any jurisdiction. The financial instruments discussed in this report may not be suitable for all investors and investors must make their own investment decision using their own independent advisors as they believe necessary and based upon their specific financial situations and investment objectives. If a financial instrument is denominated in a currency other than



an investor´s currency, a change in exchange rates may adversely affect the price or value of, or the income derived from, the financial instrument, and such investor effectively assumes currency risk. In addition, income from an investment may fluctuate and the price or value of financial instruments described in this report, either directly or indirectly, may rise or fall. Furthermore, past performance is not necessarily indicative of future results. This report may not be reproduced, distributed or published by any person for any purpose without

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