Software AG Q3 keeps growth on track amidst management changes

Phil Wainewright Profile picture for user pwainewright October 28, 2022 Audio mode
Summary:
Software AG gets growth back on track in Q3 with a new CRO in place and a change of CFO coming next. We catch up with Sanjay Brahmawar, CEO.

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Software AG reported Q3 results yesterday, which saw revenue growth getting back on track at 12% year-over-year, after a lackluster 4% in Q2. Its ongoing shift to recurring revenue has now reached 92% of all product revenue, ahead of its goal for the year, even without the impact of its recent acquisition of StreamSets, a SaaS DataOps vendor. Current guidance remains unchanged to reach €1 billion total revenue in FY23 at 20-22% EBITDA margins on a non-IFRS basis.

I caught up with Sanjay Brahmawar, CEO, for a briefing on the Q3 results and accompanying news, including a major new professional services partnership in the US. Brahmawar's contract as CEO has just been renewed for a further three years, but elsewhere there are changes in the company's top management. Dr Matthias Heiden, CFO, will leave at the end of the year, to be replaced by Daniela Bünger, an experienced finance executive in roles at consultancies Atos and Accenture. Last quarter, Joshua Husk joined as its Chief Revenue Officer, while Dr Benno Quade was promoted internally to the role of Chief Operating Officer.

The change of CRO came on the heels of a disappointing sales performance in Q2, when a number of deals slipped past the quarter end as customer decision cycles lengthened in response to the uncertain economic climate. Husk has moved quickly to put new processes in place, as Brahmawar recounts:

We went through a very deep, very rigorous look into pipeline deal closure — how do we improve the linearity to make sure that everything is not so tailended towards the last two weeks of the quarter, and really step up the performance from each of the regions? ... Ninety days into the role, [Husk] has done a really good job in bringing that rigor and a better understanding of certain deals, where ... [they] are taking more time to close.

Partnering for US expansion

Husk is based in the US, where Software AG is eager to expand market share. Brahmawar says the opportunity there remains strong:

It is 50% of the total addressable market [worldwide], and it's a market that's growing in a very robust way. If you think about the current macro [environment], then I would say the US is still behaving as though there is no real hit. Companies and organizations are spending 10% more than they were spending last year. They're spending 35% more than the pandemic time. Maybe in six to nine months, it might change a bit. Nobody can predict this, we can only get prepared. But for now, we just see the robustness in that market.

A closer relationship in North America with Persistent, a global technology consultancy specializing in middleware, is designed to help accelerate that drive for growth. Software AG will now subcontract all digital business implementation work in the region to Persistent, which is also committed to building solutions of its own on the Software AG product set. While it's not an exclusive relationship, Brahmawar believes it's a wake-up call to other ecosystem partners to lift their own investment in Software AG. He comments:

We are very much invested in Persistent and Persistent has invested in our technology, which effectively means that they are training their people — thousands of their people are being trained on our technology. They're building solutions on top of our middleware, our API management, our Cumulocity IoT platform and StreamSets, and they're going to take the solutions to their installed base, they're going to take it to new customers.

So we expect Persistent to become a very strong new business driving force in the US. They have 2,000 sales people in the US. This definitely is more than just a partnership for them to do services for us. It's a deeper partnership to drive even further growth on software sales.

Customer wins

The growth engine for Software AG is its digital business line, which consists of three main product sets — webMethods integration and API management, Cumulocity IoT and analytics, and ARIS business process transformation. Yesterday's earnings call with financial analysts highlighted several significant customer wins and expansions. There was a notable win in the US for ARIS, which software giant Adobe has adopted to support its S/4 HANA migration. Other unnamed wins in the US marekt include some in the government sector, Brahmawar tells me.

A seven-figure contract win for Cumulocity is with wind turbine manufacturer Enercon, which will use the IoT technology to connect more than 30,000 turbines to manage operational efficiency and improve sustainability. Bekaert, a leading global producer of steel wire transformation and coatings, has signed up to use both Cumolocity and webMethods for a digital transformation project at five manufacturing sites, with potential expansion to a further fifty sites later on.

New commitments by existing customers include expanded use of webMethods at courier DHL to support cloud migration, and a migration initiative at telco Vodafone to better connect external suppliers and resellers into its business support infrastructure. Leading UK supermarket Tesco signed a multi-million, long-term renewal contract for its use of ARIS in support of business process transformation. There was also a first combined deal for StreamSets and webMethods, to support data and API integration across government agencies in Abu Dhabi.

StreamSets acquisition

The acquisition of StreamSets early this year was presaged when I last spoke to Brahmawar in the wake of a €344m investment in the company last December by private equity investor Silver Lake. He told me then that Software AG was looking at potential acquisitions in the realm of data integration, data ingestion and data management. StreamSets is a SaaS application that packages up much of the complexity of modern data engineering into a DataOps platform that can develop, deploy and manage resilient smart data pipelines at scale, across both cloud and on-premises resources.

At a time when many enterprises are looking to connect data across on-premises applications, data streams, SaaS applications, legacy data stores and cloud data platforms such as Amazon RedShift, Databricks and Snowflake, StreamSets adds an important data dimension alongside the current webMethods offerings. There's also a lot of potential among existing customers of Software AG's traditional mainframe tools, Adabas and Natural (A&N), as Brahmawar explains:

There's a lot of data and there's a lot of information that the clients want to access and to be able to use it with other sources of data. Now with StreamSets, with the combination of CONNX, which is another product that we have, we're able to pull that data out of A&N and mainframes and help the client bring that into a data lake like Snowflake, Databricks, and then leverage APIs to access the data. It's absolutely the right kind of thin-layer technologies that we have, that are allowing customers to create access to that data.

There may be other acquisitions to continue rounding out the vendor's data offerings, Brahmawar adds:

StreamSets is our start in that space. We continue to look at areas around data cloud cataloguing, data quality — things that are, in some ways, very complementary and synergistic to the area, to the buyer profile, to a combination of cross-sell/up-sell that we can do with the client. We're continuously building pipeline in that space to see where an M&A might make sense.

Growth and resilience

The ongoing need to invest in digital technology and the infrastructure to support it, despite increased caution among customers, means that demand for Software AG's products currently remains strong, says Brahmawar. At the same time, its ongoing business evolution gives it a resilient platform to support its growth. He sums up:

In spite of the macro uncertainty, if you unpack what's happening with digital, the acceleration to digital continues, and that, therefore, is more tilted towards mission-critical infrastructure type software rather than application and analytics type of software. That's one thing — demand doesn't seem to be really getting curtailed.

The second thing is, our model is much more resilient now, because of the ARR and the recurring portion of the revenue. We start getting a lot more into the more predictable. We still need to work to continue the shift that we're doing in the migration. And of course, the regions have to perform in a consistent way. So that's work in progress. But the model shows that there's resilience and in spite of uncertainties we're able to deliver.

My take

Software AG is approaching the final stages of a long transition from perpetual licensing to a recurring revenue model and the associated XaaS approach to customer engagement. No vendor finds this an easy journey and the sales challenges experienced in Q2, which showed up the flaws in the traditional rush to land deals by quarter-end, provide a case in point. But the company seems to have moved quickly to address this issue, even though accompanied by a reshuffle in the management team.

Meanwhile the move into the fast-expanding field of DataOps illustrates the additional challenges of ensuring product offerings keep pace with a market where the technology continues to evolve at speed. Brahmawar continues to steer the Software AG ship through these often treacherous waters. So far it seems to be on course to still achieve that €1 billion revenue target next year, in part aided by currency tailwinds, it must be said. We'll find out next quarter how much of a challenge remains to finally get there.

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