Software AG late last week reported big gains in its third quarter, the first full quarter reflecting its acquisition of webMethods, the Reston, Va.-based business integration software vendor.
In the period ended Sept. 30, the European software infrastructure provider's revenue climbed to €157.8 million, from €113.8 million in the 2006 third quarter. On a currency-adjusted basis, Software AG calculated its operating revenue gain to be 48%. Licensing revenue on an operating basis rose by 56%, to €57.8 million from €37 million, while earnings before taxes (EBIT) rose to €32.4 million from €25.6 million, for a 27% year-over-year increase. Net income increased to €19.2 million from €17.1 million in 2006.
In a prepared statement, CEO Karl-Heinz Streibich said, "In the third quarter, we closed over 250 deals, achieving an encouraging increase in our revenue. The acquisition of the U.S. company webMethods made a valuable contribution to this result."
In fact, webMethods generated 45% of total revenue, with Software AG's other business unit, Enterprise Transaction Systems (ETS), responsible for 55% of total revenue.
The only cloud in Software AG's sky during the third quarter was a dip in maintenance revenue in the ETS business, which was more than offset by webMethods' maintenance intake. In total, the company reported maintenance revenue of €57.7 million for the quarter, up from roughly €48 million the year before.
The company reported that the integration of the webMethods business, acquired in May, is on plan, with the merger of sales functions for the EMEA (Europe, Middle East, Africa) and Asian Pacific regions completed in the quarter. Professional services operations were also combined, and the R&D consolidation is under way, the company reported.
On a conference call with analysts Friday, Streibich pointed to a seven-figure euro licensing deal with Raiffeisen Group/Uniqa Group in the financial services and insurance sectors as evidence of the success of the Software AG-webMethods combination. Both companies had pursued this business individually, but were unable to close the deal. After the merger, they approached the customer again with their combined operations and portfolio — featuring the webMethods 7.1 SOA suite — and clinched the deal.
The company reiterated its 2007 guidance of a 30% to 35% increase in currency-adjusted operating revenue, with licensing revenue projected to rise 45% to 50%. Asked whether the credit squeeze affected the company during the quarter, Streibich said, "Not a single contract [was] postponed due to the subprime crisis in Q3" or in the current month.
For 2008, company guidance calls for an increase in operating revenue of 22% to 25% (net of currency effects).
Software AG expects 2008 revenue to benefit from the company's entrance into the Brazilian market via a distribution partner. "Brazil will be a big market for us. It is a growth market," Streibich told analysts during the question-and-answer session on Friday. He expects Brazil to be a larger market than Japan for the company.
Software AG reported that it closed a €1.7 million services-oriented architecture (SOA) deal with Japan-based Nissan during the third quarter. The company anticipates that the Japanese market will contribute €17 million to overall revenue in 2007.
Going forward, Software AG also has its eye on potential acquisitions; another purchase is likely within 12 to 18 months, though not on the scale of webMethods, which Software AG snapped up in an all-cash transaction worth roughly $546 million.
"You see the software business consolidating like hell," Streibich told analysts, pointing to SAP's recent deal to buy Business Objects, Oracle's unsolicited bid for BEA, and, of course, Software AG's own buyout of webMethods.
"The business infrastructure software will become bigger than or as big as the applications market that SAP is in," he predicted. "Mergers-and-acquisitions is a very important strategic element of our business, and we always have a pipeline of potential candidates." That said, Sreibich termed the webMethods acquisition "an outstanding one, with respect to both its potential but also its size. It's the exception, rather than the rule."