We are increasingly seeing established software vendors produce surprisingly good financial results in the wake of the new 'abnormal' and today it was Software AG's turn to turn in results that marginally exceeded market expectations. That gave me the opportunity to speak with Sanjay Brahmawar, CEO of Software AG to ask about the factors contributing to that success. First the numbers from the press release:
Software AG reported €204.6 million (Q2 2019: €210 million) in total revenue for the second quarter of 2020, 0.9 percent above the company compiled analyst consensus at €202.8 million. The consensus is published on the Company’s website. Software AG's total Q2 product revenue (licenses + maintenance + SaaS) was €158.9 million (consensus: €158.1 million; Q2 2019: €163.1 million), reflecting foreign currency headwinds and a 1 percent decline in volume compared to Q2 2019.
The Company's EBIT of €31.9 million (consensus €31.0 million) was, as expected, below the previous year level, (Q2 2019: €47.7 million) as planned investments build momentum behind the Helix business transformation. Operating EBITA (non-IFRS) was at €41.4 million (consensus €39.8 million; Q2 2019: €56.1 million), showing an operating EBITA (non-IFRS) margin of 20.2 percent (Q2 2019: 26.7 percent).
The company maintains its guidance for the remainder of the year although there are wide levels of variance among the company's individual lines of business. Of particular note, the company saw accelerated demand for its Adabas and Natural line with two significant deals closing earlier than expected.
During my call with Brahmawar I noted that the company seems to be seeing the kind of 'flight to safety' that we have seen elsewhere. As examples, IFS, SAP and Oracle have all reported accelerated demand or, rather, accelerated implementation and go lives during the most recent stage of the COVID-19 pandemic. Brahmawar commented:
I have not yet come across a customer who said that they need to push back or slow down their digital transformation initiatives. I do see with customers that they definitely divide the decision making into two buckets: mission critical or nice to have. And they are definitely getting a lot more ruthless than about where they're going to invest their money. If your software and your products and your capabilities are going to fall into this mission critical bucket, then what you're hearing from some of our peers and from us is absolutely true.
This is important because it implies customers are de-risking their business software investments by ensuring that their implementations from established providers proceed as planned or accelerated rather than jumping on the latest shiny new toys. As such, it represents something of a resurgence for vendors that many call out as 'legacy' but which are undergoing their own transformations. This is particularly relevant for Software AG which is now 50 years 'old.'
I don't treat the 50 years as 50 years old, I treat it as battle scars and great experience. That makes a difference. But we're not standing still. Our customers are operating in hybrid environments and we've containerized for AWS and Azure. That brings tremendous amount of infrastructure savings for customers, but at the same time, they can keep all those applications that they develop, and still keep running, something that, when combined with a subscription model massively reduces cost, moves customer cost out of capex to opex and de-risks the decision process. Three year subscription with one year cancellation is welcomed by our customers.
In common with other vendors, Software AG is undergoing its own transformation, a process Brahmawar believes is a five year project that has to be purposefully led from the top.
As we built our strategy, one thing was clear. Business transformation cannot go and will not be successful and sustainable without cultural transformation. Last year, I brought on board a CHRO at the board level in the company, because I felt talent needs to be addressed at the same level as you address the finances of a company. We made quite a lot of changes; we brought some new talent in, we brought some new generation talent. And when I say new generation, I mean people who have been born on the cloud as part of developing a healthy balance that drives cultural transformation.
The above sentiment is one you can hear many times but I wondered what that means, especially given Software AG's renewed focus on growing the American market, one that has often proven to be a graveyard for European based vendors.
When I came to the company I knew that America is our largest single market, representing 35 percent of our business. I think one of the mistakes sometimes we do as European companies is to assume that we as Europeans know how the culture and the way of thinking of North Americans is, and that's not really true. We hired john Schweitzer, who is Silicon Valley based. He comes from SAP and Datastax, has an Oracle background. He has helped us understand North America and rebuild North America. The whole organization better understands North America today so I think we've made the right decision there.
Looking to the future, I asked Brahmawar how confident he is that the year end forecast will work out. He argues that because decision cycles have been shortened from 6-9 months to weeks and days that Software AG is in a good position to take advantage of opportunities at an accelerated rate. That might imply a better than expected performance but Brahmawar is right to be cautious:
None of us knows what happens next but we can all be better prepared, ourselves included. We are not forcing our people to return to the workplace, we are all getting comfortable with remote working and we all recognize that the business has to change so I'm encouraged that our people are productive and well motivated to succeed. And I think this is something we can take to the marketplace because digital really matters.
As we concluded our conversation, I was interested to know something about the smart social distancing solution announced today:
The solution uses smart badges to alert the wearer if they approach the limit of safe social distancing. The first intention is to change behaviour. If those employees spend more than 15 seconds inside of that virtual boundary, then an ‘incident’ is recorded. All wearers are anonymized, the solution registers proximity but not location, and only authorized personnel have access to the data – this all makes the solution compliant with GDPR and other worker privacy regulations.
This solution is currently on trial at a mid-sized German bakery. What makes this interesting is that Germany has some of the most stringent GDPR regulations in Europe but it also has the concept of 'workers councils' that sit alongside the boards of German companies as quasi advisers that also act as a form of trades union. I remarked that if you can prove both GDPR compliance and make it with workers councils then you can offer the solution anywhere.
Workers councils are obviously concerned with worker well being and health. This kind of application helps keep workers safe which is our concern too so yes, we discussed with those representatives and they are OK with this.
That's a big win.
Software AG is one of those vendors you don't hear a great deal about but which offers solutions its customers value. The fact that Adabas, its founding product, is alive and well speaks to that value. But equally, Brahmawar has a significant challenge. Prior to his appointment as CEO Software AG was not growing and needed to make big changed to remain relevant in the market. This latest set of results speaks to the progress the ocmpany has made in the last 18 months. One to follow.