Software AG

Otmar Winzig - Head, Investor Relations Karl-Heinz Streibich - Chairman, Chief Executive Officer Arnd Zinnhardt - Chief Financial Officer Eric Duffaut - Chief Customer Officer

Knut Woller - Baader Bank Stacy Pollard - JP Morgan Adam Wood - Morgan Stanley Gregory Ramirez - Bryan Garnier

Ladies and gentlemen, welcome to Software AG's Analyst Telephone Conference and Webcast on Preliminary Fourth Quarter and Full Year Results 2016. My name is Otmar Winzig and I’m Head of IR at Software AG.

This morning as planned we have published full set of numbers with the presentation used in this call. Today's call will start with CEO Karl-Heinz Streibich, followed by CFO Arnd Zinnhardt, Chief Customer Officer Eric Duffaut.

The presentations will be followed by Q&A session which will be joined by our CTO Wolfram Jost. We will keep this call in the regular one hour timeframe.

Before we start there are some housekeeping remarks. This telephone conference will also be broadcast via web.

Access to the webcast is via our Investor Relations website. The webcast will display the PowerPoint presentation related to this call.

The same charts are on our website for download. After the presentations you may ask questions.

Please use only the dial in phone number for posing questions. The dial in numbers are also published on our website.

For technical reasons we cannot take any questions via email during the conference call. The call and the webcast will be recorded and available for replay later today.

With respect to capital market regulations I have to make the following Safe Harbor Statement. This presentation contains forward-looking statements based on beliefs of Software AG management.

Such statements reflect current views of Software AG with respect to future events and results and are subject to risks and uncertainties. Actual results may vary materially from those projected here due to factors including changes in general economic and business conditions; changes in currency exchange; the introduction of competing products; lack of market acceptance of new products, services or technologies and changes in business strategy.

Software AG does not intend or assume any obligation to update these forward-looking statements. Thank you for your patience.

Now let us start. I hand over to Karl-Heinz Streibich, the CEO of Software AG.

Thank you very much, Otmar. Ladies and gentlemen I want to welcome you to the Q4 and full year 2016 financial results presentation.

I’m happy to inform you that we have had a really good 2016 where we significantly improved in a number of KPIs also in respect of customer project, new customer wins, efficiencies, in the number of aspect that we will go into more details later. In fact the last 12 months have been a real record year for Software AG in many aspects.

A brief summary of highlights is as follows; the Digital Business Platform deals are getting continuously larger. As you will see in our average deal size development and this is not only key from a sales efficiency point of view, but it underlines the relevance our offering has for large companies, for global players and this is the key message out of that.

And as a result, sales efficiency improved as well. Eric will go in more details here.

And our innovation performance increased now also expanding our portfolio into the cloud integration area where we became the leader from the start, that was a real great performance thanks to our own R&D team and we achieved the highest digital license revenue ever in the quarter in Q4. And we achieved the highest digital maintenance revenue ever in the quarter in Q4 and it is also the highest Group maintenance revenue Q4 of any quarter before.

So our total recurring that means predictable revenue share is now at 47% of total revenue about 61% of our product revenue. This comes from both the loyalty of our customer base and our ability to achieve more revenue through customer value creation.

And to our closing strategic partnerships in the Internet of Things, IoT and industry for zero area. As a summary Software AG is continuously increasing its relevance as a global player also in the new area IoT, what is for the coming years the heart of the digital transformation and which gives up the opportunity that we extend our presence our share on the customer side from the administrative IT to the industrial IT side.

Our presence in highly industrialized Germany is and will be a global advantage for our IoT and industry for digital [ph] business and we are all very optimistic in the potential we see here. As you all know, business success in all industries is increasingly depending on the ability to develop data same like business models through software.

Hence, the new digital business models are written in software in any industry. Software will become the prime soul of innovation in every industry and we Software AG has a portfolio and the skills to help companies to innovate their product and service portfolio for the digital world and this is main reason why our deals are getting bigger.

And this is why industrial players increasingly seek strategic partnerships with us. Bosch has chosen Software AG to innovate on new digital services and solutions for their IoT and industry for digital [ph] platform.

Our objective in these industrial partnerships is to combine the industry expertise of the partner with our software knowhow into digital world, which relates to on-premise knowhow as well as in the cloud knowhow. And other example is Octo, an Italian high tech company which pioneer telematic for the car insurance industry and is revolutionizing the way car insurance can individualize their customer contract.

They just planned to expand it’s connect to car program from 4.6 million they have already today to 15 plus million devices in the future. And Software AG is the core technology product partner in their digitalization program.

Our leading digital portfolio, our huge customer base and our increasingly success go-to-market execution are continuously step-by-step increasing our market relevance including in the biggest market, the US where we have a stunning success in 2016 in Q4 as well. Eric will go in more details on the regional success and where we had one or the other challenge, so that you have a complete picture.

Software AG has established itself as a technology leader proven by our customers and partners and by various independent analysts such as Gartner, Forrester, Bloor. This relates to all relevant use case platforms we have for the digital world.

Our integration platform, our process application development platform, our business in IT management platform which consists of RS [ph] and alphabet and now our Internet of Things platform which as you probably know started five years ago already as big data platform we had. To further expedite our innovation power, we will extend our product of management as of April 1, Dr.

Stefan Sigg will join our company as Chief Research & Development Officer focusing on product innovations in key areas as IoT, real-time analytics, product management, API management, data integration and of course also the Adabas & Natural area. Dr.

Sigg is a well-known expert in the field of software development as his work at SAP clearly demonstrates. We are sure that he will further accelerate our technological leadership and with our Adabas & Natural 2050 program we have extended our value proposition to support our customers in their business critical applications by contributing significantly to their investment protection.

This initiative was very well received by our customers and as you can see the Adabas & Natural product revenue shows positive impact already. Also our consulting business shows that our product, our portfolio combined with our implementation expertise of faster time to value for our customers is developing very well and contribute to profitable growth as well.

Ladies and gentlemen today’s result show that our focus on first; efficiency in our go-to-market program. Second; our core innovation together with our industry partners and our Adabas & Natural 2050 customer value program.

That means our profitable growth focused in total creates great results for Software AG in 2017 we will stay on this strategic course of profitable growth and we expect to make further focus. We are on track on reaching our long-term 2020 company goal of 32% to 35% operating margin as well.

So let me close with the outlook for 2017. Our digital business platform revenue with planned growth of plus 5% to 10%.

Our existing pipeline, our growing relevance, the increasing partnerships we have make us very confident that we will achieve that in 2017. In Adabas & Natural revenue minus 2 to minus 6, the Adabas 2050 program will help us even more to further stabilize the maintenance to further innovate together with our Adabas & Natural customer as well which will also help on the digital side of our growth and the operating margin 30.5% to 31.5%.

Let me make a remark to the operative margin by the way which is an EBITDA non-IFRS. As I said, you can assume that we will continue our focus on operational efficiency and profitable growth which provided us during the last years a history of good margin performance being typically on the upper side of our guidance.

And we will adjust our guidance again at mid last year, where we increased our margin guidance and our Adabas & Natural guidance in case our performance justifies that. Having said that, I would like to hand over to my colleague Arnd Zinnhardt, CFO.

Who will give you a detailed insight into our financial results? Thank you very much.

Arnd your turn.

Karl-Heinz thank you very much and good morning, ladies and gentlemen. A warm welcome to our conference, also from my side.

Let me continue highlighting the major financial components especially cost structures and earnings we achieved during Q4 as well as fiscal 2016. Before digging into detailed number let me highlight a few aspects from a financial point of view.

On the quarter, a year ago I talked about the numbers of historic records we achieved among those were highest digital license ever, highest digital maintenance ever and thus highest digital product revenue ever. Ladies and gentlemen, this Q4 we beat every single record I mentioned on the digital business before.

Digital license is up, marking a new historic high. Digital maintenance grew by 5% it is new historic record and as a consequence new record on digital product business.

The new level of 144 equals to more than two-thirds of a company’s total product business. Besides these historic records there are numerous other KPI’s that are also worthwhile mentioning.

In the interest of time, I would like to point out just one. Adabas & Natural revenue is up and contributed roughly €70 million to our quarterly revenues.

Adabas & Natural 2050 strategy is paying off. Let me continue with total 2016.

Total company operating margin up by 150 basis points. Digital business becoming more and more profitable.

Respective result up by almost 20% margin expansion by 450 basis points to 33.5. Varies from margins in the other two segments.

Adabas & Natural close to 70 and consulting again double-digit. 10% growth on free cash flow, free cash flow revenue conversion at 21.4% which is on record level.

Last quarter we saw an FX tailwind; this is for the first time in 2016. This tailwind was predominantly created by a strong US dollar.

On the flipside Great Britain Pound created substantial headwind letting out major part of the benefits coming from the US Dollar conversion rate. Looking at total year, revenue still suffered in the amount of €11 million.

On the next slide you will see that we have a net currency tailwind on digital maintenance, this is a consequence resulting from a strong digital maintenance basis in the UK, in combination with Great Britain Pound development mentioned before. I said at the very beginning, we have seen growth in all digital business revenue lines despite the really tough Q4 comps especially on the license side.

Just to remind everybody last year in Q4, 2015 we grew digital license substantially from €60 million to €74 million. This means that digital license is 30% higher than two year ago.

Maintenance grew as expected by 5% year-on-year. Cost of sales is slightly up compared to last year.

One component for the development were royalty payments to Zementis prior to our acquisition of this company early December. You should view this as evidence for the relevance of Zementis technology in our IoT portfolio.

In sales and marketing, we saw some hiring’s supporting our new strategy focus on go-to-market and future license growth. Despite effect that we made some investments sales efficiency will remain one of our core KPI’s moving forward.

Eric will comment on this KPI’s later on. Another investment area clearly was digital R&D.

net of currency the expenses grew by 4% while R&D headcount increased by 16%. Compared to a year ago, we grew our staff based in a year by 25%.

Growing revenue and having cost under control by simultaneously investing into our future determines our strategy. For the year the segment result grew by 20%.

With this strong achievement we’ve continued our performance already seen in 2015. Analyzing again the two-year period in order to get a better mid-term view the result even increased by more than 40%.

You see, this is not a lucky shot but result out of an active management. The marginal well above 30% mark demonstrate our ability to run this business very profitably and thus decreasing our dependency on Adabas & Natural only.

The Adabas & Natural business showed it’s robustness throughout entire 2016. We started the year with the guidance of minus four to minus eight, we revised the current year upward to minus two to minus six and now achieved a revenue performance slightly above the midpoint of the improved outlook.

The customer loyalty can directly be derived from the stable maintenance development which shows 1% increase for the quarter as well as the year being a proof point for our Adabas & Natural strategy we’re executing against. The achievement makes us confident for the future and proof that you should model substantial contributions coming from this business lines also in future periods.

Also analyzing the expense slides you immediately identify that we have our efficiency and our internal processes very much under control. This is true for phase of marketing as well as R&D, where we are executing on the future-oriented, optimized, high cost, low cost, mix of our [ph] operations.

The transition from high to low cost is by the way one of the root causes for the slight blend increased of our de-cost compared to previous year. Just one additional technical comment, sales and marketing cost decreased in Q4 predominantly because we collected a receivable overdue and consequently released the corresponding bad debt.

As a consequence we again enjoyed a very rich expansion for the year. As mentioned in previous calls we believe the high marginal level will continue also in upcoming years.

The focus in the consulting business remains on profitability. Therefore we concentrate our activities on projects supporting our product business.

In addition, we continue to reducing our local exposure in countries where margins are slow and expand our activities in more promising markets. As a matter of fact, this strategic set up combined with an excellent consulting management team resulted in an outstanding performance.

The business contributed to the overall company’s growth. We continued with some optimization activities and we delivered double digit margin for the quarter and also for the year.

As mentioned at the very beginning fiscal 2016 showed stronger results with respect to bottom line performance. This is particular true as 2015 was boosted by the release of stock-based compensation accrual in the magnitude of €15.5 million.

This is by the way the reason for the increase of G&A expenses. In their respective timeframe G&A headcount decreased by 2% which shows that we will realize additional efficiencies.

In 2016 the share of product revenue compared to total revenue remained at 78%. Consequently and driven by the strong consolidating performance as mentioned before, the gross margin is unchanged at 76%.

R&D headcount increased by 12%. This investment supports predominantly our strategy for our digital portfolio.

However, R&D expenses just increased by 6% net of currency. The explanation is the following; we increased the percentage of R&D stuff in low cost from 52% to 57% in the recent 12 months.

In the quarter sales and marketing expenses were driven by sales commission. In fiscal 2016, sales and marketing improved by 7% thus resulting in a cost revenue margin improvement of 260 basis points.

Other income is at minus €6.7 million for the quarter and €8.6 million for total year, the number is impacted by accruals for late legal cases. In our budget, we planned [indiscernible] with zero.

The operating margin, the KPI will look at measuring our success on the bottom line. Besides the “regular” items the reconciliation is impacted by the followings.

In 2015, we had an extraordinary income of €50.5 million as I just mentioned in the line item share-based compensation resulting in a net income for the year of €3.1 million. In 2016, we see a normalized situation.

Whereas in the line restructuring legal cases was dominated by restructuring of our sales organization in 2015, the 2016 number mainly includes legal cost. Let me conclude on the chart, the following highlight.

As mentioned at the very beginning we finished the year with an operational margin of 31.2%, the result is above our guidance that we gave at the beginning of 2016 and clearly above the midpoint of our increased outlook, we gave in July. This operating EBITDA margin is the best company’s achievement since we established this KPI.

And by the way for the quarter the net income non-IFRS is €60 million and the EPS for the quarter on an non-IFRS level is €0.79 which is also closed to the number that we have seen in the previous year. So basically contributing to the overall non-IFRS EPS growth from €2.22 to €2.37.

This varies from financial and operational status. It makes me very confident for the upcoming years.

Ladies and gentlemen, let me continue my discussion on the results with a very positive note. Free cash flow grew in the year by 10% in relation to revenue we increased cash flow from 19.5% to 21.4%.

This number is by far the highest we observed in the current decade. The positive achievement is based on active working capital management and is obviously supported by a blue chip customer base.

Analyzing Q4 please also keep in mind that we reported about the legal claim in Q3, which from a cash flow perspective negatively impacted last quarter. Ladies and gentlemen, the balance sheet is as followed [ph] it as you’re used to.

Net cash position increased to €73 million, deferred income increased by 8% to €133 million and shareholder equity improved by €106 million to €1.2 billion which represents a ratio of 61% to total assets. With these KPIs representing our very strong financial positions.

Let me now hand over to Eric who will comment on go-to-market and sales successes achieved. Eric, over to you.

Thank you very much Arnd and ladies and gentlemen. I would also like to welcome you to today’s call.

Thank you for your continued interest in Software AG and if not too late, wish you all of course a Happy New Year. As you heard from Karl-Heinz and Arnd, Q4 2016 was simply the best ever single quarter in the history of the company for growth driver of the Digital Business Platform despite as mentioned many times already, this tough comparison as Q4 2015 was simply a superb quarter boosted also by the largest DBP license deal ever with Walgreens, you remember that made eight [ph] digital license deals.

So yes a tough quarter to beat and we have better our best in the DBP license and maintenance revenue in all major sales related KPI’s in customer satisfaction, in partner revenue contribution, in everything. And this outstanding performance looks even more impressive when you take as Arnd did and I want to repeat it.

A mid-term perspective and compare Q4, 2016 with Q4, 2014 to also reflect the positive development of our business since we started our go-to-market transformation. Ladies and gentlemen, our Q4 DBP license revenue grew by 30% over two years.

Our DBP maintenance revenue grew by 11% leading to a total DBP product revenue growth of 22% in just two years. But that’s not it, not only we have managed to significantly grow our top line but improved also our sales effectiveness and efficiency leading to an amazing growth of our DBP segment result of over 40%.

So knowing that Q4, 2015 was a tough comparison this two year perspective gives you a better view on the impact our customer-centric go-to-market had on Software AG’s development and also explain our confidence looking into the future. Having said that, let’s go back to Q4, 2016 and some of the amazing and game changing stories behind this performance.

In the software industry and you all know this industry very well. If you can make it in the USA, you can make it everywhere or anywhere.

It is world’s toughest market, the biggest early adoptive market, the most open to new technologies, also the most competitive in particular for German company in the home market for most of the software industry and certainly the best barometer to upcoming global technology trends that there is. Ladies and gentlemen, we made it big in North America.

Both in Q4 and in total year 2016, listen to this; our Digital Business Platform license growth was fundamental there, plus 27% net of currency in Q4 year-on-year comparison of course versus Q4, 2015 and plus 18% net of currency for the full year very likely grabbing market share. In North America, we have shown that we have the technology to transform anyone from Google, to CBS, to 3M and we also have the most advanced deployments of our new go-to-market approach and our game changing new customer engagement process.

Therefore you can expect the successes in North America to be replicated globally as digital transformation adoption will gradually increase in all markets and as the Phase 2 of go-to-market approach is successfully rolled out around the world, but the DBP Q4 license growth story does not stop in the US. Digital transformation is indeed a global phenomenon and we have spectacular DBP sales developments around the globe all figures I’m going to give you now our net of currency for Q4.

South Africa plus 15%, Nordics plus 16%, Iberia plus 55% and by the way total year plus 47%, Eastern Europe plus 76% in Q4, plus 30% for the year, Austria triple digit growth, Australia more than 200% growth, a complete recover in this country where we have some execution issues a year ago. Brazil which is upside down had also a very strong quarter on triple digit growth in Q4 and Middle East which is certainly one of the fastest growing market for us reaching an amazing 850% growth in Q4 and an amazing 65% for the total year.

If you look at total year another performance and being French I have to mention it. As France very close double-digit for the total year with 9% growth on the DBP side net of currency and overall APJ boosted by of course the performance in Australia showing a plus 30% growth for the total year.

So yes, widespread double-digit growth obviously not in every country but on every continent and of course we also had our challenges in few countries. One in particular that I want to mention here is in the UK, where we had of course a tough comparison with last year, this is where we did this mega deal Walgreens that I mentioned to you before, but still on top of that some execution issues that we are addressing as we speak.

So yes ladies and gentlemen, great successes but also supported by outstanding customer wins in Q4 and I would like to share a few like I always do with you quarter-by-quarter for you to understand the relevance of what Software AG does to help customer to transform their world and their future. For Abott [ph] Bosch I think you know this one, the future is the Internet of Things and the IoT cloud platform will be future proof by our Digital Business Platform to bring new digital smart services to their own customer base providing digital capabilities innovation or excellence.

Ramsay Generale De Sante, the France’s largest private hospital group is now powered by Software AG’s Digital Business Platform developing seamless real-time eHealth passion care. ING Bank is creating a different setting customer experience by simplifying and streamlining the organization and enhancing the performance culture within the company.

Wudu [ph] Bankers Bangkok, Software AG and the unique Business Digital Platform that we have. Swatch the Swiss watchmaker is now addressing cost reduction challenges in a timely manner with Software AG Digital Business Platform.

Duke Energy, a 7.4 million customers business. One of the largest electric and gas utilities in the United States, is now transforming the customer experience modernizing the power grid, generating cleaner energy and engaging employees more closely all of that powered by our Digital Business Platform.

CBS Corporation in the US again is simply revamping the entire organization to improve business competitiveness, increased visibility into current and client [indiscernible] architecture and driving innovation. Guess who, they have decided to partner with.

Santa Clara County, California the home of Silicon Valley and considered to be the most innovative place in the world. When they wanted to modernize their justice [ph] systems delivering real-time information to the right people at the right time and improving public safety for the citizen, the verdict was Software AG Digital Business Platform.

And finally the National Information Center Ministry of Interior, in Saudi Arabia will fully digitize citizen services leveraging all confidence of our DBP. I can go on and on, as we have so many amazing customer successes and these great wins demonstrates once again the breadth and scope of the digitalization of the world and our unique digital business platform is at the heart of this global transformation.

Yes, 2016 has been the year of transformation and as I’ve said before our transformation will further our relevance in scale to go higher and bigger and it did. Our average DBP license deal size was once again up this year, after an increase of 27% since we started our go-to-market transformation.

It’s game changing for the company. In the USA and I cannot emphasize enough how the transformational performance experiencing the USA is driven by the customer-centric go-to-market approach we introduced in 2015.

In this country, in this region the average deal size increased by 35% in Q4 and by 43% for the year. Overall, we are gaining more efficient and more effective.

The productivity of our DBP quota [indiscernible] careers went up by 21% in 2016 and if we take all supporting teams. It is still a productivity gain of 12% for the year.

Another foundation of scalability is our partner ecosystem. You asking questions on every call, well the contribution of our growing partner ecosystem where DBP license revenue was up 14% for the year and it says it all.

Regarding Adabas & Natural, the figures don’t tell even half of the successful 2016 A&N story. Our A&N 2050 program, our industry unprecedented commitment to the long-term success of our customers and the powerful combination with our DBP to digitally enable have had an immediate impact.

In fact, some customers that we’re considering moving from platform dropped all migration plan within weeks of the announcement and the engagement we have with them and this is clearly also reflected in our maintenance renewal rate that is also up. Our commitment to maintaining continue to innovate A&N beyond 2050 was fundamental, but a commitment is one thing, delivering on it is another.

When [Indiscernible] performance illustrate this. If you put today’s Adabas transactional performance of over 1.1 million comments per segment in perspective.

It is like it’s a [indiscernible] spectator at all 16 NFL games on the particular weekend, where to simultaneously ask one bank running one database to send their account statuses to their cell phones. You know what, they will all receive simultaneous sub-second replies that is of course if the network would handle the traffic, Adabas can.

What we have done is match this technology commitment with an enhanced services portfolio and a deeper integration of A&N with our DBP portfolio to offer a competing role to the future for our loyal customers. On the business consulting side or consulting business side GCS [ph] continued its transformation as Arnd mentioned from a project base approach to a strategic value creator and this continue clearly to drive profitable growth as value creating project more than doubled as well for the benefit of our customers.

Now that we have covered 2016, let me look at the New Year. I’m personally totally confident that the successes and the momentum we have gained in 2016 will simply bring us to new heights in 2017.

It is not just that we have proven that we have the relevance and the technology to transform any enterprise in any industry, but we also have a business style that fits with the demands of today’s software market. Our customer-centric, core innovation approach it’s so hard to replicate and will become an increasing differentiator for us in the years to come.

To paraphrase one of our net new customers of 2016. The very famous Google, it is not only the technology that does what is says, but it is the way Software AG does business that makes the difference.

One customer maybe but if you look at our Net Promoter Score in our 2016 customer survey, you will see a significantly up result versus last year very significant. So yes our customer-centric is enterprise wide and customers see, feel and hear these.

We know that their continued success is the only I mean, really the only guarantee of our continued success. We are writing our success story together with them that is what co-innovation is all about.

Our digital business pipeline for 2017 reflects this growing relevance, this transformation into a strategic business partner acting as a true architect of customer value creation. Let me give you facts, the 2017 and weighted pipeline is 20% greater than it was a year ago, we entered this year with 20% more in our pipe than we have again a year ago.

The number and value of opportunities over €1 million are boast up over 100%, the number and value of opportunities over €3 million for 2017 goes up by over 500%. Ladies and gentlemen in conclusion, our Q4 performance, our fantastic customer transformational projects and our 2017 pipeline development was top indicators of market relevance, increasing scalability for bigger, better and stronger Software AG.

Yes, we are bigger, we are better, we are stronger Software AG and we are ready for 2017. Thank you for your attention.

Thank you, Eric. Ladies and gentlemen.

It is now time to ask questions. So operator would you please repeat procedure.

It’s a couple of them. Looking at this year we’re running against very tough comps in EPS or Adabas & Natural in Q1.

I know that you’re not guiding for quarter, but can you just help us a bit how we should think about seasonality in Adabas & Natural in 2017, is it prudent to assume normalized seasonality this year? Then secondly on the balance sheet the long-term deferred income was up substantially and around €8 million in 2016, can you just help us what was behind this development and then lastly briefly on the buybacks, I think if I have your former comments rightly in my mind, you said if there is no larger acquisition you would consider buybacks we have seen a very solid free cash development in 2016.

We have only seen minor acquisitions and hence what is your view on the opportunity of buybacks. That’s it.

Thank you.

Knut, good morning. This is Eric.

I guess I’ll take the first question and Arnd will of course take the other two. You’re right I mean, super tough comparison with Q1 Adabas & Natural last year it was an amazing 79% growth and I calm you down, everybody was saying don’t think that this is the new trend, right.

I mean Adabas & Natural, Knut has a very different seasonality but per se than for instance our Digital Business Platform business we still have a rhythm of let’s say renewals when customers come to the end of their license agreement with us and that they want to continue with us and of course sometime even modernize on top. So the seasonality is very much aligned to this calendar, this is why also it makes Adabas & Natural a bit more predictable.

Certainly than the digital business let’s say that we have a Digital Business Platform business we have, so again Q1 will be certainly much more than what we have seen a year ago on A&N for the reason you mentioned the tough comparison, the fact that we this year don’t have let’s say any super major renewal coming this quarter. But what is important I think for this line of business is of course rather the trend.

We are really confident based on what we can see and also let’s say the feedback we got from customers and the successes we have in 2016 to be able to meet the guidance that we mentioned. Again in 2016 showing that customers continue to rely on this technology and this is business that many of you or some of you were thinking will be in decline is still very stabilized.

So Q1 will be tough comparison for sure, but very confident for the year on the guidance.

On the balance sheet I would like to mention three components. The first two are the reason for the increase and then we’ve got a counter effect to come to the total number.

The first one is, pension accrual customer regarding the interest rate coming more and more down despite the development and these related development in the US, so that is one component. The second one and that is a more important one are the hedges for our stock compensation program that those programs are cash settled and as we do not want to carry the income risk on that due to an outperformance of the share price as well as the liquidity risk, we are hedging them into the financial market and thus have to pay optimum premium for those, so that is second component in relationship to the latest stock compensation programs issued.

And then we’ve got a counter effect which is the long-term bank liabilities they have decreased the net effect is the number that you just mentioned. On the third question, you’re absolutely right they’re basically - it comes from the very positive cash development that we see basically every quarter, every year.

So therefore, is a question that you raised is absolutely spot on and we have three components for the use of cash. The first one is acquisitions.

Given the creditworthiness of Software AG in combination with the openness of the financial market getting money is certainly not a limiting factor as we speak, so therefore we can concentrate on the other two. The first one is dividend payment and you know that we have a well-established dividend policy and despite the fact that we haven’t discussed that with our supervisory board.

I’m pretty sure that the supervisory board will confirm that the policy also for this - for the current period and as you know dividend is something where you have more long-term view on that, so therefore buybacks is the incremental component where we can deal with the cash excess on a more, more fertile and characteristic basis. We have the permission of the AGM to maximum of 10% which is the maximum based on German law.

We will consider buybacks moving forward at any time when we see weaknesses in the share price so that it’s certainly a component that also is important for shareholders as it’s also is increasing the respective EPS.

Knut I would like to add one point to what our CFO said on that. When I finally read our press announcement for this quarter.

As it came to my mind, we forgot two points and this was exactly this therefore I’m very happy that you asked the question. Due to the excellent financial made to the high profitability, the high cash flow we have just as you know, what our state of mind is, what our spirit is, both the increase of the dividend and the share buyback is a subject which is on our table.

So we have not mentioned it in the press news, we probably should have. We have only this two positive aspect for our shareholders and therefore everything Arnd said in respect for the fact 100% right, but our spirit as a body, yes this is on top of our list and this is something that we will focus on also in 2017.

So we have said that now despite the fact that we have not mentioned it in the press article for this quarter.

Yes, thank you.

Can you remind of the sales person headcount and relative maturity level of the sales people, so maybe just get a sense of that in the balance of, I know you hired some new people as well but just a balance there. And then talk about pipelines by region, I guess you touched on that but the kind of maybe the granularity that you gave in [indiscernible] results was very detailed but if you can maybe give us a little color on pipeline by country or region as well.

And then last question would really be the target margins of 32% to 35%, that upside is mostly coming from consulting or DBP or some combination to that and can you tell us, what you think those margins can reach in those two divisions?

Good morning, Stacy. This is Eric.

Thanks for the question. So the headcounts I think it was in one of Arnd’s charts where you can see that we have now 842 people in sales and marketing I will say we did clearly a big number of that is of course in North America which remained our largest country, followed by Germany and then UK, France and so on and so forth.

When you talk about maturity I think it’s a good question you and I touched on that I believe in the past as well - look and this is what also gave me lot of confidence going forward. If you think about North America in particular where we have really reshaped completely our sales force in the last, well not the total sales force but a big chunk of it.

At least 30%, a good 30% in the last 12 months that gives you also a perspective on the success that we have in these market in 2016 and the potential for the future. So I think that we have made as I said all of changes as you know as well in the last two years.

We now start to have I would say a more stable more mature better enabled sales team that’s also is reflected in the pipeline that we have for 2017 and I’ll lean that to the second part of your question, where I mention and I insist again. It’s good to enter a year with 20% more pipeline than you had a year ago.

It doesn’t say everything because of course pipeline is not yet revenue, but still it’s an important sign. When you ask about how it is by country.

I mean we see again, a strong pipeline in particular when we talk about large transactions in some of our major markets. I will point two of them North America and Germany.

Germany certainly boosted also by on the pipeline side by the relevance that we have gained in the industry for [indiscernible] and IoT in particular where we are engaged now more and more with large industry leaders in manufacturing in particular and hopefully this will translate into revenue into full term. So I would say the pipeline is well stretched some gross market as well point again Middle East which had a tremendous year and I think a great future.

We are engaged at super high level with all the large companies they - so if they all [indiscernible] doesn’t play against us, we should also see some benefit in that in 2017. So that’s the answer, yes better and much more mature sales force entering 2017 than we had in 2016.

This transformation now comes to maturity if I could say, even if we are never done. So and good hope with the pipeline that we have spread around the world.

Yes, me Stacy, continue with third question on the mid-term margin outlook and in fact it’s a combination of individual aspects. So the first one is maintenance, you know that maintenance contributes highest margin for all software companies in their business model and we see that maintenance on the Adabas & Natural side is very robust on the one hand side digital is growing and the digital maintenance margin is roughly in the main same magnitude like the Adabas & Natural maintenance margin so that is one component.

On top of - I’m going to stay for a second on the maintenance, you know that we have start with our maintenance enterprise active support or Premier services a year ago, the respective margin on the license that we have started was close to 20. We are currently at 20.7 so we are already made the first inroads into the customer base with our portfolio and we are heading for even higher numbers, so that is the second component and with these additional services we basically achieve two components.

First is our attractiveness, our support on our portfolio for our customers thus increasing further customer loyalty and secondly also of course driving up the margin. Secondly, we need to look at Adabas.

I mean some of the market participants in previous periods we believe that Adabas will shrink very rapidly I think we have proven throughout the last years that is not going to happen, so therefore Adabas is going to support the overall margin, also and although we are always very conservative in saying well above 60 you see we are roundabout 70, so that is something that are suddenly shooting for, also moving forward and when I talked about the optimized relationship between high cost and low cost on the R&D’s said also for Adabas that is one of the operational activities in order to ensure that. And then the third component is digital and we grew the margin from 29 to 33.5.

and the question for years have been can you grow the margin to higher than 30, now we live up to the answer that is going to continue in combination and based on these go-to-market methodology, concepts and strategy Eric mentioned before.

I would like to add one point on the mid-term margin development. You know that as Arnd has mentioned Adabas & Natural is highly profitable.

One of the nature is of that is, it is closer to maintenance mode that we are stabilizing the customer base then to the growth model, if you know that means software portfolios, software product family have this lifecycle and for that reason our middleware, our methods, our integration sampling portfolio will become more and more profitable as it goes forward. That means in one or two decades, we don’t know exactly that will be similar profitability there, then we have today on the Adabas & Natural side, that means when you’re managing software company in a highly efficient way and you have the balanced investment going forward then you are able to have the profitability, no question about that.

Therefore this is a built in trademark of a software company and we are sure due to the discipline of the operational performance we have, that we will achieve that.

I have three questions. Firstly the long-term receivables went up by €27 million in the quarter.

Can you tell us which division this occurred in? Just a little bit more color on that.

Secondly was wondering on the size of the bad debt reversal in Q4 and finally you talked about execution issues in the UK, which I think historically has been one of your stronger sort of regions or countries. So just wondering was that BREXIT related, was public sector soft?

Can you talk a little bit more about the executions in the UK? Thanks.

[Indiscernible] first one. Given that we are in Q4 and always have the strongest quarter knowing that most of the deals are fund in December it’s pretty clear that receivables always go up in Q4, if we look total trade receivables and other receivables, we see a decline compared to the last year.

So we are on the right track. The long-term receivables basically belong to license revenue where we have granted two blue chip customers, longer payment terms also in the light of longer lasting projects.

If you talk about strategic partnership you’re not going to implement the software solution within three months, so therefore that is one component where you negotiate with the customers. Given our loss on receivables which is substantially, when I say substantially below 1% we do not have any kind of major credit risk in those receivables and I think we have proof that we are clearly in the path and just reiterate on the cash flow performance which was an extremely nice one.

With respect to bad debt reversal, you know that we have very prudent policy in place where we basically billed a bad debt accrual for all receivables which are more than 180 days overdue in those situations we accrue for 50% of the entire receivable if something is more than 100 days overdue than we accrue for the entire amount so very conservative and here we’ve got a situation of a customer in the EMEA region where we had to apply this policy and where at the end of day we receive the money, so we have been you might say over conservative in previous periods but I think it’s always good to be prudent in these areas.

Good morning, Eric. Your question about the UK, I would say I mean the BREXIT might not have held but this is not clearly the call of the problem we face in 2016.

Essentially and we had a recalled Q4, 2015 in the recall 2015 overall in the UK. We clean how much of the pipeline clearly to achieve record year last year and it took more time than expected longer than a year to build again and close this pipeline and then usually to couple that a bit eventually with some customers being a bit more risk adverse now, it made more difficult to accelerate disclosure in Q4 than expected, so that’s what I mean by execution is that we should have been faster, we could have been eventually faster to build pipeline in particular to recover to what the end of the year, it took longer than expected.

On positive side, is that we have now entering in 2017 much better pipeline than we had what we had in 2016. In fact to be precise on the UK, Taile [ph] we have 31% increase in our pipeline versus a year ago, so this is why I’m confident that when I say execution program, this is not something that would have last, maybe BREXIT had some limited effect here and there, I don’t consider that being an issue for us going forward.

Great, thank you.

In respect of time, we can take two more questions please, operator.

Just wanted to come back on margins in particular guidance for 2017, we’ve seen over the last three years obviously a good margin improvement each year from Software AG. The guidance appears is more for margins to be flattish, I wouldn’t - a little more detail without thinking behind that and then Eric you talked a lot about the growth opportunities and the pipelines and so on.

Normally in software where you want to accelerate growth that normally implies more investment could you again in the context of that guidance just help us understand how much room there is for investment and that trade-off between the growth and the top line and investing and potentially taking the market down. And then just secondly as a follow-up on that bad debts and first apologies if I missed that, could you give us an order of magnitude on size and just remind us where that would have been recognized back in on the P&L.

thank you.

Adam, I will take the first one and you’re absolutely right. To put this, the second question, Eric is going to answer into that discussion.

I don’t know how long we know each other it’s certainly a couple of years by now.

Indeed.

And you know that we always achieved on the guidance or even overachieved. And you also recognized our pattern last year when we started conservative with our guidance and increased the respective margin outlook throughout the year and I think that is also the way you should read that and you can take my personal commitment that we will certainly not have a margin which is lower than today’s margin unless there is major, major issue happening in 2017 which we do not see so far but certainly we also want to be in the guidance.

So you might term phrase as a little bit conservative like the topic on the third question that you raised. So please give us the time to go into the year and once we have seen the first deals happening going through the year, doing the investments and understanding how good the investment that we did in 2016 of paying off in 2017, we will certainly have a closer look to the guidance and give you some more insights on that.

On the bad debt, we’re just talking and I’m just referring - I just mentioned that Adam because if you look through the single quarter you might come up with question given the small base number that we are talking about, so we are just talking about €1 million to €2 million it also small number, you should see that [indiscernible] was something, that I think posted year or the year before pretty lump topic, we cleared out the situation with the customer, collected all the money that was outstanding and then simply if you’ve got the money in your bank there is no reason for keeping any kind accrual, I mean that goes without saying. So therefore that had a positive impact on sales and marketing and the initial posting was exactly against the same P&L line.

So it is a release of accrual is always on the same P&L like the building of accruals also was.

This is Eric on your question related to this famous balance of investing for growth and managing bottom line. So I mean the good news is that, yes we have and we will further do some selected targeted investments in sales.

In particular in the areas where we see potential for acceleration. I mean North America, we have hired people in 2016 we will continue to hire people in 2017 and you’re going to go and see a ramp up of additional resources against built on momentum that we have, this is true also in some other targeted market.

So we do very again - target investments to accelerate growth where we see the potential, well at the same time of course as Arnd mentioned keep a close eye to a bottom line and all this investments are clearly factoring to our guidance for 2017, so also in terms of bottom line. So yes we will certainly maintain this balance and be bold enough to make some investment where we believe that we can further accelerate growth we want to be, we are and we want to continue to be a profitable growth company.

That’s it. That’s very clear.

Thank you.

So we come to our last question, operator.

Two questions, if I may. The first one to go back on the DBP revenue performance for the full year and factoring it has been a bit short of [indiscernible] guidance plus 3% versus 5%.

Do we have to assume that it was only related to the execution insurance that you had in the UK, is there any something else maybe something which was related to more general issues regarding the sales cycle and this leads to my second question, then the revenue solutions approach. Can you update us on the success rate that you have on your solution selling approach that you are now, you have put in place for long time which is now leading the sales growth in the digital compared to the traditional by product sales approach?

Thank you.

Yes, I mean on the DBP performance for the total year being a bit shy of guidance where is the problem coming from. I mean clearly UK is or was the biggest challenge where we had a significant drop compared to last year as I mentioned for good and bad reasons, but this is a fact and when you have one of your top three markets in the world that has such decline like this has of course a significant impact on your global revenue and this is why I think that you should not be worried like I’m not worried, when you see that’s again the pipeline is stronger in the UK, this challenge will be behind us and when you see the momentum that we have gained in order big market or large market such again I insist at the USA or North America.

So you know I mean one problem is better than having 10 to be fixed and I think that again all the elements give us the confidence that we are on the year of acceleration in 2017. So we are confident to certainly learning the guidance for the total year as we speak today.

Now when you talk about the success of solution selling. I mean you and I have met many times I mean it’s not just solution selling.

It certainly is the way we are now positioning engage with our customers, being more used case centric than product-centric, being more platform-centric or multi-product-centric than feature in functions. I mean the good news Gregory is that, the vast majority of our let’s say significant transactions follow this trend.

Many of the large wins that I mentioned in my speech before are consequence of that. We are clearly engaging a complete different way and by the way, last comment on that.

And this lead to average deal size up, large deals up and so and so forth. Now and scale by definition because we have chosen to go higher and bigger.

The last point that I want to mention which is an interesting element and I don’t know if you understood that but we have launched and piloted in 2016 a complete new customer engagement process in the way we define jointly with our customer, there to be architecture to digitalize and or reinvent themselves for the future. This was piloted with great success in North America.

This will now be rollout everywhere in the world starting this month and next month. And I have again a lot of hope that this will be our next lever of acceleration in terms of effectiveness of sales and by definition better resource.

Gregory, this is Karl-Heinz. I would like to use your question to make one point clear and that is, what gives us the confidence on the digital business for 2017.

It is what Eric said that we increased our relevance, the deals are getting bigger, the sales efficiency is increasing, we have an increasing amount of strategic partnership with industry customers. But there is a second very important point and that is, the amount of countries and regions which are performing better than the average performance we have is significantly increasing or the other way around, the single countries where we have let’s say a negative impact because they’re underperforming is extremely small now.

You know what I mean, that group of countries which are performing very well on the digital business is increasing. And this is one dimension which we have not mentioned before that clear, but in the example of the UK take it as that, this is an additional dimension which increases our confidence that 2017 will be successful year.

Thank you very much.

Thank you Karl-Heinz, Eric and Wolfram for dedicating the full 30 minutes for Q&A anyway. Now we have to close this call now for other assignments and the IR team is always ready to handle the remaining question.

Please at this point let me remind you about our Capital Market Day which is scheduled for March 14. Just one week before [indiscernible] and we will be able to provide you with news on product, go-to-market and customer experience in more detail and depth during this full day at [indiscernible].

Thank you all for your participation today and we appreciate your interest in Software AG and for now goodbye.