Software AG

Eric Duffaut - Chief Customer Officer Karl-Heinz Streibich - Chairman & CEO Otmar Winzig - SVP, IR & Compliance Arnd Zinnhardt - CFO

Knut Woller - Baader-Helvea Equity Research Michael Briest - UBS Investment Bank Stacy Pollard - JPMorgan Chase & Co. Adam Wood - Morgan Stanley Charles Brennan - Crédit Suisse

Good morning, ladies and gentlemen. Welcome to Software AG's analyst telephone conference and webcast on preliminary second quarter and first 6 months results from 2017.

Last night, Software AG preannounced preliminary results for the reported quarter. This morning, we also have published a P&L presentation used in this call.

The full set of numbers with the balance sheet and cash flow statements will be published as planned on July 20, the regular reporting date. Today's call will start with CEO, Karl-Heinz Streibich; followed by CFO, Arnd Zinnhardt; and Chief Customer Officer, Eric Duffaut.

The presentations will be followed by a Q&A session. We will keep this call in the regular 1-hour time frame.

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

Access to the webcast is via our Investor Relations website. The webcast will display the PowerPoint presentation charts related to this call, the same charts are on our website for download.

After the presentation, 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 e-mail during the conference call.

The call on 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 the 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. Karl-Heinz?

Thank you very much, Otmar. Ladies and gentlemen welcome to Software AG's second quarter and half year financial results.

I am really delighted to be with you today to inform you on a great first half we have had. You read it, you got the information, so let us go into more detail.

The last month has been really very exciting for Software AG. We made our first successful appearance at the Hannover Messe Industrie in April, the world's most important industry fair.

Together with our innovation partners, we showcased our joint IoT solutions for Industry 4.0, solutions that can really change the entire industry sectors. And we launched it under the slogan, "Made in Digital Germany."

It has become very clear the demand for innovative industry solutions is growing fast, very fast. Digitalization has arrived in manufacturing, in production and construction sites globally and Germany is a hotspot of it.

Companies are no longer building their business models on the product itself but on the data around their smart products on which they can build new data-centric digital business models. It is in Industry 4.0 or the Industrial Internet, where the digital future lays, no question about that.

And the elements needed to be successful lie in our industrial engineering and manufacturing heritage in Germany. It's probably the first time in IT history that Germany is a hotspot of the world.

The watchword in all these cases is core innovation. Partnerships between industrial domain know-how and software companies.

Our customers know their business best, we know software digitalization best. Looking at Software AG with our new partners, I can point out many events over the last 6 months that show the convergence of IT and OT of software technology and industrial technology.

Software AG has announced major partnerships with companies like Bosch, with Dürr, with Dell, with Huawei, with Lexmark, with Octo and many others and there's more to come, much more. Maybe already in Q3, you will see.

The Internet of Things is a new digital reality upon which companies will have to build their business models. It offers endless possibilities, but also challenges which traditional companies have to overcome.

This is why it will be important to get ready for the digital age in order to remain competitive. And Software AG is a great partner for any classic company who wants to become a digital enterprise.

With our Digital Business Platform, we offer the most suitable tools for companies to take advantage of these changing patterns. The Digital Business Platform has proven to be a successful software infrastructure to transform classic businesses into digital enterprises.

In the first half year of 2017, industry analysts confirmed once again Software AG's technological leadership. And our customers realize that we're the most innovative specialists with our Digital Business Platform to help them become digital enterprises.

On-premise or in the cloud, we speak about a hybrid architecture or a distributed architecture, combining the cloud and the on-premise world. Companies like Johnson & Johnson in the U.S., DHL in Germany, 3M in the U.S., Google and many others build their digital future also on Software AG technology.

We will see increasing momentum through the decisions we have made. For example, in artificial intelligence, we bought the U.S.

company Zementis, an expert in the area of machine learning; and we bought Cumulocity, a leading IoT cloud platform provider. These key technologies have been integrated into the data management platform we have.

We're ready for the future, thanks to our Digital Business Platform. And we're going to shape the future strongly.

Our customers appreciate our products and services also because we're successfully executing our go-to-market strategy. Eric will later share a number of success stories which we have seen in the last month.

Furthermore, our strategic focus on profitable growth is paying off more and more. In our business line Adabas & Natural, we have seen significant improvements.

We continually experience stability and a high degree of customer loyalty with our Adabas & Natural 2050 Program. It still boosts confidence of our customers worldwide.

Looking at the upcoming month, there is much more to come. And last but not least, the Consulting business division is performing excellently with significant improvement.

This development also shows the successful transformation of Software AG into a true strategic partner for customers who want to transform to become a digital enterprise. Therefore, we confirm our target to grow by plus 5% to plus 10% in our digital business line, also driven through the area of Industrial Internet and Industry 4.0, as I believe the 8% you have seen in growth in the digital product line is ample -- is ample evidence of that.

And we also confirm our Adabas & Natural forecast with currently adjusted declined between 2% and 6%. And we're raising our outlook for the operating profit margin to a new record high level of 31% to 32% in 2017.

Closing with this good news, I am very happy that we have managed to grow our total revenue and at the same time successfully expanded efficiency and profitability again. This is the way to go for us, ladies and gentlemen.

I am handing over to my colleague, Arnd Zinnhardt, CFO, who will give you a detailed insight into our financial results. And after that, Eric will give you an update on our go-to-market activities.

Thank you very much for your attention. Arnd, your turn.

Thank you, Karl-Heinz. Good morning, ladies and gentlemen.

A warm welcome to our conference call also from my side. Let me continue making a couple of opening remarks regarding Q2 2017.

The quarter, as such, can be characterized as follows, Digital license revenue for the individual quarter slowed down a bit compared to a fantastic Q1; on the other side, we saw a significant uptake in our cloud business. Digital maintenance grew by 9%.

With more than €68 million, the Digital maintenance marked a new historic record level. The relevance of this development can be demonstrated best looking into the mid term growth over the last 5 years.

We observed a plus of more than 40%. Adabas & Natural showed the seasonality we expected with a growth of 14%.

We also expect a strong H2 in front of us. Whereas quarterly maintenance performance is distracted by cash accounting effects in 2016, H1 maintenance again showed its robustness.

As said before, we expect strong license numbers in Adabas & Natural throughout the next 6 months. And therefore, I'd like to confirm the respective outlook for the year.

Our operating non-IFRS EBIT margin was very strong again and even expanded compared to last year, for the quarter and also for H1. The strong H1 earnings performance in combination with a strong pipeline in combination with a healthy maintenance performance which will continue also in the next 6 months, in combination with a strong upcoming Adabas & Natural business, we decided to increase our margin guidance for the year.

Last quarter, we saw no FX impact on licenses as well as on consulting. On the other side, we recognized a limited tailwind on the maintenance revenue, resulting from U.S.

dollar and Brazilian real, with a partial offset coming from the Britain pound. Please note that going forward, we anticipate a headwind of 1% or 2% in case the U.S.

dollar would remain at the current level, so between $1.14 and $1.15 throughout the entire Q3. As already mentioned in my introduction, the digital business license recorded a Q2 slowdown for the quarter.

On the other side, our digital cloud order entry grew by more than 100% which will strengthen future revenues. Eric will go into more details.

As mentioned at the beginning, Maintenance continued its growth path with a plus of 8% to 9% and reached a new historic record level. The combination of license performance and the continued strength in Maintenance led to a digital product level which again exceeded the €100 million mark, showing a revenue development just shy of the guidance range for the quarter, but well in the corridor for our H1.

Looking at the cost side, sales and marketing are in line with revenue performance. However, please note that we increased our sales and marketing headcount by approximately 100 FTEs, predominantly in EMEA and in the North American region.

The PL effect of these hirings was mainly compensated due to cash receipts of receivables written-off in previous periods. Another area of investment was digital R&D.

The expenses grew by €3.3 million, while R&D headcount increased by 11%, mainly in India. Growing revenue, investing wisely into our future and, thus, expanding the returns determine our strategy.

Despite our investment into R&D as well as sales and marketing, our segment result improved percentage-wise and in absolute numbers for the quarter and H1. Regarding Adabas & Natural license, we started catching up and recorded a double-digit license growth.

This is not an unexpected result, as already mentioned in our last call. Looking into H1, the strength of our Adabas & Natural license business will continue.

Due to all the experience in the past, Adabas & Natural has a high degree of predictability as we sell into our existing longstanding customer base. So the robustness we all observed throughout the entirety of 2016 has been proven again by the maintenance performance.

Maintenance showed expected development for H1. One side remark, H1 2016 was heavily impacted by cash accounting effects in Brazil.

This is the reason for the growth of Adabas & Natural maintenance in Q1 and the decline in Q2. If you look into your historical files, you will remember my comments made a year ago.

Analyzing total H1, thus, level out these effects. All in all, there is no reason to deviate from our 2017 guidance we shared with you 6 months ago.

And also analyzing the expense lines, you immediately identify that we again have our efficiency in our internal processes very much under control. This is true for sales and marketing as well as R&D, where we continue to execute on our future-oriented, optimized high-cost, low-cost mix of our operation.

The focus in our Consulting business continues to remain on supporting our strategic license project and simultaneously closing -- closely monitoring profitability. As a matter of fact, this strategic setup, combined with an excellent consulting management team, resulted in an outstanding Q2 performance.

Revenue is flat against last year despite the fact that Q2 2017 had less working days than Q2 2016. This is due to Easter being in Q2 this year.

Once again, we delivered double-digit margins for the quarter. As discussed on the last 3 slides, our business developed in line with our expectation.

Digital shows, A, a product year-to-date growth of 6% to 8%; and B, a good pipeline for the months to come. Regarding Adabas & Natural license, the pendulum swung back with double-digit growth and we will see strong business moving forward.

In addition, the Consulting business remains successful. Eric will provide you with more details.

3 months ago, we discussed the topic of investing into our business to support future revenue growth. Compared to 12 months ago, we hired approximately 100 highly qualified colleagues supporting our efforts in sales and marketing, more than 100 in R&D as well as 15 experts for the Consulting division.

We will continue investing wisely to support growth without jeopardizing the profitability. Therefore, 2 KPIs remain key, sales efficiency; and increased maintenance volume.

Consequently, we grew our IFRS EBIT by 11% in the quarter. The operating margin, our prime earnings KPI, shows a positive development.

In the quarter, we achieved an operating margin of 29.5% plus 210 basis points compared to 2016 and plus 590 basis points compared to 2015. Consequently, also our H1 margin improved compared to 2016, plus 30 basis points and through 2015 plus 420 basis points.

The improved H1 margin in combination with very strong maintenance development and the licensing pipeline made us increase the margins guidance as I mentioned before. Ladies and gentlemen, let me continue with some general remarks to free cash flow and balance sheet which we will distribute on Thursday.

The free cash flow looks like a bit below last year. However, you must take the acquisition of property and land that I mentioned 3 months ago in the magnitude of €70 million, higher tax payment of €30 million and some one-off effects of €5.5 million into consideration.

Looking from an operating perspective, free cash flow increased by some 20%. The balance sheet is as solid as you are used to.

Net cash position amounts roughly to 0 despite the fact that we spent €133.9 million on dividends and share buybacks in H1 or more than €200 million additionally adding the purchase of the office building as well as the company that we acquired end of March. Receivables are as sustainable and reduced compared to year-end and 12 months ago, resulting in an improved DSO rate.

Deferred income increased by more than 20% compared to June 2016. This again underpins the very positive maintenance performance, not only year-to-date but also moving forward.

Ladies and gentlemen, like 12 months ago, we again are able to increase our margin outlook for the year. We remain confident in the revenue outlook.

Looking at the first 6 months, the digital product business proves to be in the guidance range, especially the recurring maintenance revenue again showed a healthy trend and even increased its growth momentum in the last 3 months. The revenue achieved in [indiscernible] as we order entry for cloud as well as the pipeline make us confident for closing the year in the range of plus 5% or to plus 10%.

After a slow start into the year, Adabas & Natural showed a double-digit growth in maintenance as expected. We believe that license will remain to be very strong.

Consequently, we confirm the outlook. Given the margin achieved in H1, the maintenance growth as well as the pipeline ahead of us, we decided to increase the margin range by 50 basis points to 31% to 32%.

While increasing the range, we will continue to invest into the business, predominantly into R&D and sales and marketing, in order to foster future revenue growth. With this message on the positive note, let me now hand over to Eric, who will comment on the go-to-market and the business development as well as the pipeline for the rest of the year.

Eric, over to you.

Thank you very much, Arnd. Ladies and gentlemen, I would like also to welcome you to today's call.

And of course, thank you for your continued interest in Software AG. So now that you have got the financial figures from Arnd, I would like to give you some color and insight into our business development and momentum.

I believe this will help you to again understand our business trends and hence better project our short and long term future. First and foremost, let me clearly state like my colleagues did that I am very confident of meeting our annual growth targets and driving this confidence is our accelerating business momentum, our increasing market relevance and adoption, our constantly improving sales force performance and our growing pipeline.

Based on the cyclicality and relative predictability of Adabas & Natural business and the sales cycle of our digital projects, I have consistently said that a lower or underperformance in a particular quarter in whatever business segment should not overly influence your perspective on how our business is developing. Indeed, the bigger picture gives the only true indication of our business momentum.

And therefore, I will focus on the business highlights of the first half of the year and what this promises for the full year. Simply put, ladies and gentlemen, at the halfway point of 2017, we're where we should be in regards to hitting our total year product revenue goals and guidance.

For the Digital Business Platform, as you've seen and heard, the total product revenue is up by 8%, bang on target. In addition to that and Arnd mentioned it, our DBP cloud order entry is up by almost 100% in the first half year.

So if you take cloud order entry into account, that gives you a truer indication of the momentum we're building and, of course, the revenue recognition is deferred. So adding our H1 DBP cloud order entry to our software license revenue, our growth for the first half is 10%, a higher rate and a better indicator of market penetration besides, of course, the strong maintenance revenue development.

If we look at our sales KPI development for Digital Business Platform like we do every quarter we do, as a proof of our ever-growing market relevance, the deals over €1 million went up over 23% in number and 6% in value in H1 2017. As you all know, I repeat it again and again, our plan is to go higher and bigger.

This is our way to scale. And indeed, since we started to transform our go-to-market in 2015, the value we get from these large deals is up nearly 40%.

And the total average deal size of our digital business went up by 26% in the last 2 years. The expected Adabas & Natural upswing from Q1 is getting momentum.

And we're very confident, I repeat, very confident in reaching our total year's guidance. Our A&N 2050 industry first long term commitment to our customers will positively impact both software business lines, meaning both Adabas & Natural and Digital Business lines as you shall see in our Q2 customer win highlights later on.

And our Consulting or Global Consulting Services line of business continues to profitably grow as we keep delivering high-value services for customers. You heard it, revenue up 5% and the segment margin over 12% for H1.

All these factors, ladies and gentlemen, show that our ever-growing market relevance in groundbreaking technologies such as IoT or the Industrial Internet, Artificial Intelligence and in real time data analytics and of course, our go-to-market model and customer-centric approach that has been responsible for consistent Digital Business Platform for revenue growth. In fact, 8 quarters of growth out of 9 consecutive quarters, ladies and gentlemen.

And, of course, responsible also for growing customer loyalty continue to increase our momentum. The combination of these factors can be seen in these Q2 customer wins seamlessly, integrating Adabas & Natural with the latest Digital Business Platform technologies.

So let's start with Adabas & Natural for a change. And this, ladies and gentlemen, is the ultimate in modernization.

The Vienna Insurance Group, one of the largest insurance groups in Central and Eastern Europe, is consolidating its market leadership in Austria and is looking to capture at least 10% of the Polish market through its digital transformation project. The project will cover the full digitalization spectrum from process automation, incorporating artificial intelligence and robotic technology to Internet of Things based insurance services integrated with their customers' digital lives.

In Software AG terms, seamlessly integrating the Digital Business Platform with the existing Adabas & Natural infrastructure, it's Adabas & Natural to robotics. And this is what I mean by the ultimate in modernization.

The Commonwealth Bank of Australia, another Adabas & Natural customer looking to make a huge impact through digitalization. CBA is currently involved in a major pilot project to uniformly map all of their high-impact business processes, both at these existing processes and to be with our Digital Business Platform and to fully instrument them for executive-level reporting.

This is just the first phase. We fully expect this to be another groundbreaking mainframe through true digitalization transformation journey in the quarters to come.

In France, Fnac and Darty, merged in 2016 to create the country's largest electronics retailer, with 2 totally different IT infrastructures. The Fnac has Adabas & Natural mainframe and Darty with non-Software AG on open systems.

Guess what, our Adabas & Natural 2050 Program convinced the new group to standardize on Adabas & Natural on open systems. This is another open door to a digital customer-centric future.

And again, we expect that this totally [indiscernible] significantly going forward. As I've said many times, we're and will always be fully committed to our customer base and they are in return loyal to us.

The following quote from a major U.S. power company at our international user group conference in Q2 sums it up.

They said, "Everyone here likes Software AG. It is rock solid.

It just runs and runs years and years, just running. It runs our business.

5 years and it hasn't gone down. Not 1 support call."

Now let's turn to our Digital Business Platform business, our key DBP successes in Q2, included DHL Express. As I mentioned, if you remember, Deutsche Post DHL Group in our Q1 call and now in Q2, we entered into an IoT agreement with DHL Express in Germany and by the way, also with Foxconn, the world's largest contract electronics manufacturer in Taiwan.

A1, the American International manufacturer and direct selling company in beauty products chose Software AG for strategic initiative for improving operational efficiency to fund their growth strategy. Yes, indeed digitalization is a journey, reducing cost to efficiency through its resources for innovation.

BUT, a French brand of retail stores, specializing in home goods and, ADEO, the leading French player in the international DIY market and the third-largest worldwide, have both adopted our Digital Business Platform to significantly improve business efficiency and accelerate digitalization of their business models. I would now like to share with you some regional development related to our Digital Business License.

Of particular note in H1, we have the following. North America, after a wonderful 2016, is still on the growth path on the license or digital license side with 6% performance at the end of H1.

Germany, our home market and the home where we're making strides in IoT and Industrial Internet, shows a 9% digital license growth at the end of H1. South Africa, triple-digit growth.

Italy, triple-digit growth. Switzerland, triple-digit growth.

The Nordics, 88% growth. And Asia, including China, 31% growth.

Of course, the sun is not shining the same way everywhere. And on the other hand, we clearly and I mentioned that last quarter, had execution issues in the U.K.

in the first half with a 48% DBP license decline versus H1 2016. These issues are being fixed as we speak.

And I truly believe that H2 will show a very different picture in the U.K. And as you might know or as I am sure you know, the political and economic environment in Brazil remains challenging, driving our business down by 6% versus H1 2016.

In conclusion, ladies and gentlemen, we're right on track. Our market adoption rate which includes our cloud revenue, is accelerating.

Looking forward, our pipeline remains very promising. We should have a strong Adabas & Natural second half, our modernization program is second to none in the breadth and scope of technologies and innovative possibilities that we open to all our customers.

Our digital pipeline is 17% bigger than at the beginning of Q3 2016. The number of deals over €1 million is 40% higher than the previous year.

And the value of these deals over €1 million is 33% higher than the previous year. Even if I go higher, the statistics talk by themselves.

The number of deals over €3 million is 50% higher. And the value of these deals above €3 million is 23% higher than the previous year.

And of course, as Arnd mentioned, our sales performance is quarter after quarter, continuing to improve. And interesting to note, we have, already after just 15 days, a super strong Q3 start on the DBP license side.

So this is why, ladies and gentlemen, I enter our second half with excitement and confidence. And I remain very optimistic that 2017 will be indeed a year of acceleration.

Thank you for your attention.

Thank you, Eric. Now, ladies and gentlemen, this is the time for posing your questions.

Operator, please repeat instructions so everybody can go through.

In terms of the cloud performance, I think the Q1 stage you were talking around 44% growth in bookings and today you're talking about nearly 100%. And I think Eric, you said something about 10% growth in DBP, if you treated the bookings as a license equivalent.

Can you maybe give us some greater insight into what the cloud business is? And when you look forward, if there is a sort of more rapid shift to the cloud, doesn't that make your targets on revenues more difficult to achieve?

And how are you sort of factoring that into your outlook? And then I have another one.

Okay, good morning, Michael. Thanks for the question.

Yes, indeed, I mean, real acceleration even in Q2 was stronger than in Q1, as we reach, as I said, almost 100% at the end of H1 for the first 6 months. Very promising, I would say.

When you say shift, I mean, we can always question, is that a shift and what would be the level of cannibalization of our, let's say, classic perpetual license on-premise business? Well, at the end of the day, I mean, the good news is that despite this cloud acceleration and yes, we, of course, offer customer choice which I believe is important in our customer-centric approach to market.

I mean, even if you take purely software, we're bang on target at the end of H1. So we're at the middle of the guidance and we have a cloud accelerating.

And I wanted to add the two together because, I mean, they tell you the truth in terms of real market adoption of our technology, right. That's the reason why I did this math and saying, "Hey, if you add the 2 together, this is a 10% improvement compared to a year ago and I think it's very encouraging."

So when you talk about a trend Michael, I think that we will see an acceleration in our cloud business for sure. And I think that what we see for the rest of the year is also promising.

But I don't believe that this will have a massive impact in terms of cannibalization of our classic business. And that's the good news.

So maybe one deal or another, of course, the customer can peak in a cloud route rather than a perpetual license route. But in general and again, if I look at a trend going forward, I am not worried about that kind of effect.

So I will rather consider that as an additional market that we address now with our portfolio that makes us more competitive in some aspects, rather than saying. "Wow, bad news."

I mean, we're going to get less on-premise software and more cloud. Again, H1 is a good example of that with our on-prem and classic business on target.

And our cloud on top giving us the acceleration.

Okay. And then just in terms of the overall guidance.

I have calculated the high-end of both targets implying maybe around a 20% license growth in DBP for the second half and over 50% in Adabas & Natural. I appreciate there's probably a little bit of rounding, but they are quite high at the high-end.

Do you still see the high end of your guidance this year is achievable? And I noticed you said that Q3, it started well.

Was there any slippage actually from June which meant that you were a bit disappointed in Q2? Or as you said, Eric, was it bang on track?

Yes, I mean, I will start with the second part of your question, Michael. I mean, the world has not changed, right?

I mean, we're indeed engaged in complex, game-changing digital projects. With some level of unpredictability, when we talk about number of days, let's say, at the end of a sales cycle in terms of decision process, where we're often at our customer's side, you need another approval or another presentation, et cetera.

Indeed, you can say, we had a strong start in Q3, it's after only 15 days, you can easily conclude that some of these deals could have landed in Q2 and make our H1 even stronger than it is. So yes, this is true.

But this is part of our business model, honestly. So I don't want to try to find any excuse here.

We have closed big deals already in the first 15 days. And we're happy to have a strong start in Q3.

Now regarding the guidance, you heard it. We all reconfirm our guidance for the year on the DBP side between 5% and 10%.

And A&N since the [indiscernible] I mean, we have really a strong pipeline for the rest of the year. So you have made your calculation of what is needed in H2, we're working on it, Michael.

And as we said, we had a good strong start into H2 which gives us the confidence, if we had also the other element like customer feedback pipeline, the sales motion and performance that we see here and there. So yes, at the moment, we feel good.

That's all I can say. Time will tell, but we feel really good.

A couple. Just briefly on the DBP side, the maintenance growth was fairly strong as you highlighted with 9%.

Is that something we should expect to last for the second half? And then also on the margin side, it was up 210 basis points in H1.

What room do you see for further margin improvements in DBP? I think partly we have seen variable costs or variable compensation, probably, coming down due to the weaker-than-expected license side.

However, what do you think as to margin leverage that we're still having in this segment? And then lastly, on the currency side.

If I remember correctly or if I understood you correctly, Arnd, you said up to around 2% headwind in Q3 if we're around about $1.14, I think, the average of the U.S. dollar to Euro was $1.12 in Q3.

Would it be -- I think, it would be a roundabout 6% headwind in the final quarter of the year, if we remain in the currency bend that you just highlighted. Is that a fair way to look at things?

I just want to comment a bit on the maintenance and then I will pass to Arnd. So good morning, Knut.

So the DBP maintenance, yes, superstrong. I mean, we can say the same also for Adabas and Maintenance business.

I think that we have this business under control now for several quarters in a row. We're breaking records, if I recall, I look at my colleague, Arnd, but almost every quarter since now more than 2 years, right?

So we have that very much under control. This is the result also of the way we engage with customers honestly.

And also, you might remember in particular notes for the DBP maintenance, it's true that we have launched now, a few quarters ago, our Enterprise Active Support. That is priced, of course, 10% higher than the standard support.

And we're seeing an uptick in terms of adoption of this level of support. I mean, honestly, the reason we call that Enterprise Active Support tells everything.

If customers engage with game-changing projects for them that are critical for their business, they deserve a different type of service. The service is by definition more proactive than reactive.

We fix the problem before it occurs, if you know what I mean. And is really enterprise-ready for business-critical applications.

So we're very happy to see that our average maintenance rate now on license moved from the past 18% to something like 21.4%, if I'm not mistaken now. This is more or less where we're as an average showing again the strong adoption.

And I think this adoption will continue. So, of course, we will not be able to grow maintenance probably by 10% every quarter going forward.

But I think that the maintenance will be superstrong for the rest of the year as well. So that's the positive, again, on a very successful approach that we have with customers.

Good morning, Knut. Just related to your second and third question based on the maintenance development, I believe that margin will continuously trend upwards.

You see the 230 basis -- 210 basis points in H1 '16 to '17. So that is something that is going to continue.

What you also should put into your equation is, what I mentioned during my speech that we have added 100 people to our sales and marketing organization which is basically a pre-investment into future license and business growth which will then, of course, also move the margin upwards. So I think, yes, margin goes upwards, north of 30% is something that you should expect.

With respect to the currency, my comment was regarding Q2. And if you look to the chart, you already see that there's a difference between the maintenance development and the license development which is mainly due to the effect that maintenance is recognized throughout the quarter, whereas, maintenance basically occurs at the very end of a given quarter.

And yes, you are right. If that is going to continue, then the effect on the currency would be even higher to the negative side in Q4, whether it's 6%, I'm not totally sure.

I would rather say 4% to 5%. But I know -- I mean, that is looking into a crystal ball, nobody knows where the U.S.

dollar will be basically in December.

Just a follow-up on the cloud, you mentioned, growth rates. Can you also quantify how much the cloud revenues are now?

And I think you mentioned, again, that order entry. Maybe you could also talk about the size of the order entry overall or the order book overall in a euros amount basis?

And then second question, can you talk about the typical sales cycle for digital deals? So how long is that?

The average deal size as well? And I think you said digital ASP was, maybe, up 26%, what is the euro amount on that?

And then, third question, you mentioned sales efficiency as an important KPI. Can you explain how you measure that?

And then perhaps share some statistical trends with us?

Good Morning, Stacy. Now you're shooting a number of questions.

So I will cover the first one before I will hand over to Eric. The cloud revenue for the quarter was around €2 million.

Order entry for the quarter was around €4 million to €5 million. And I mentioned around more than 100% that was a remark regarding the quarter, whereas, Eric was referring to H1.

So you see there was an increased momentum throughout the year. So it's going that direction.

Okay, Stacy. Good morning.

So I hope I got all the questions as well. You know, Arnd you took the first one.

So I heard the question, of course, around our sales cycle and on the DBP side. And you asked, what is the length of a sales cycle?

I would say, average, 9 to 12 months. I'm talking, of course, in this case of a large project.

We still have a bunch of smaller transactions that sometimes could be conducted in a much faster, let's say, sales cycle. But I would say the vast majority of our business and a significant part of it will be at an average of 9 to 12 months, with some projects being 6 and others being 18 months.

So you see, this is -- and you should not be misled by that. It is also because we co-innovate together with our customers.

We invent together with them what will be their next digitalization step. And this is something that, of course, needs a lot of consideration internally as it is strategic for companies very often to not save almost all the time now, including the board, in the decision cycle and the CEO more and more.

So that's the digital sales cycle. Average deal size continues to go up.

I mentioned, I believe that since we started, we had a 26% -- started our transformation, sorry, we had 26%. I am just to find with my notes here where we stand right now.

And I don't have that at my fingertips, I'm afraid. But, yes, I do.

I think we're now in the range of roughly, yes, above 450k on average -- as an average, right. Then you were talking about sales efficiency, I think, Stacy and you were asking how do we measure sales efficiency?

There are different ways of measuring it. I look at my colleague, Arnd, as well.

The first one for me is to look at the productivity per head, obviously which is something that is increasing quarter after quarter, for now more than 2.5 years. We had, again, a productivity increase in Q2 and, of course, certainly in H1.

The second thing we're tracking is, of course, our sales and marketing cost/revenue ratio which is also on a positive trend now for several quarters in a row. And on the productivity side, up to 25% increase in 2016 and another above 30% increase in 2015, Stacy, we stand at plus-4% in H1.

As Arnd mentioned, we're making some investments in sales and marketing in 2017 with the ambition, of course, to accelerate growth. This is why you will not see probably the same uptick in terms of our productivity.

But it's still encouraging to see that we still managed to improve despite, you know, the great performance we had in the last 2 years.

First of all, maybe just digging in a little bit on A&N. So that was -- the part of revenues there were down 17% year-to-date.

And if I try to average out for the difference in Brazil cash accounting, it looks as if for the first half, the maintenance business was minus 3%, where it had been up 1% in 2016. Could you just help us understand where the acceleration comes from in the second half on that business to get us back into your guidance range?

Is it more that the maintenance reaccelerates? Is it that you've got a very strong pipeline of larger deals on the license side to get us there?

So that's A&N. And also could you give us the M&A contribution on the DBP business on the licenses, please, in the second quarter?

And then maybe just 1 clarification, Arnd. You mentioned there were some receivables written off that you didn't have to write-off and that helped with some of the marketing expense.

Was that something that impacted the margin in the quarter? Or will the share -- or was that a purely a balance sheet move?

So on the Adabas & Natural, what gives us the confidence for H2 and, of course, the confidence to be -- also meet the total year guidance. Yes, indeed, we have a significant pipeline of large transactions, large license transactions in H2.

As I stated in my speech and as I've stated many times during these calls, this business is relatively predictable. We have a number of enterprise license agreements that have to be renewed that we can feel clearly lined up for the rest of the year.

And, of course, the work has started. Meaning that, I don't expect, let's say, really bad surprises.

It's not like we engage with a customer 3 weeks before it should happen. So we know exactly where we're.

We know exactly what is coming. And again, not a lot of volatility, lot of predictability.

Customers are more and more excited to stay with us long term, as I mentioned, due to our A&N 2050 Program. So this is where the confidence comes from, Adam, is mainly because of a very strong pipeline of large transactions or license transactions for the second half of the year.

I'll let Arnd...

The second is DBP from Adabas & Natural.

And, of course, you're right. The DBP -- as I said, we have now with this modernization a lot of DBP license that should also come from our Adabas & Natural, let's say, installed base in the deals that I mentioned for the second half of the year.

So now I'll let Arnd comment on the M&A and the other questions you have.

Yes, good morning, Adam. M&A revenue next to nothing for the quarter.

So substantially less than €1 million, so therefore next to nothing. Write-off that I mentioned, of course, has also impacted the P&L in previous periods.

And now, revealing the money, it positively impacts it. On the other side, you'll also need to note that we have pre-invested into sales and marketing individuals which always take some time before they come to become productive.

And that is certainly also one additional remark to Stacy when tracking the numbers. It typically takes 6 to 9 months before a sales rep becomes productive and generates for us revenue.

So, therefore, that is a burden for us in the quarter as well as in the first 6 months which will then positively impact the margin moving forward.

That was provision that you have taken in prior quarters that have...

Yes, yes, yes. So far -- the principal rule is that we write-off any receivable which is overdue more than 180 days by 50% and everything which is overdue for more than a year in principle is 100% written off.

That is a conservative way of looking to that, but rather be too conservative at the beginning and then collecting the money afterwards.

Could you give us an order of magnitude on that? Was that kind of €1 million, €5 million, €10 million of impact?

More than €1 million.

More than €1 million, less than €5 million, I guess?

Yes.

I've got two actually. Firstly, just a clarification.

The cash accounting on the maintenance side in Brazil has been mentioned a couple of times. I don't feel as though I fully understand that.

Can you just give me a brief explanation of what happened there? And then secondly, looking forwards, we've, obviously, got some extremely weak license comps in the third quarter of '16 that you should get a benefit of in greater terms this year.

It, obviously, makes forecasting a little bit more challenging for us. Can you help us with some kind of license growth range for the third quarter, just to try and put that comp in perspective?

I will take the first one with respect to cash accounting. We just discussed our conservative way of looking to numbers and to situations with respect to receivables.

That is also very true for the revenue recognition. So the ground rule is, whenever we're not 100% certain that the customer will be able to pay the maintenance to us, in cash, we'd rather not recognize the revenue in the respective period.

And as you know, we had some customers in Brazil, public customers, where we had doubts whether they are able to pay the money in due time. So therefore, we did not recognize the revenue based on the pro rata basis, but waited until we received the money.

So that is what is called cash accounting. By the way, as you know -- as I know, obviously, you're looking also to U.S.

GAAP, that is very much in line with U.S. GAAP and the way how you should treat that under those legislations as well.

So you leave me with the tough questions, right. Charles, good morning.

What can you expect for the first quarter on the license side? I think that -- I mean #1, I would tend to, again, answer with H2 in the same way that I am saying in all the quarters.

We never know, some strong start in Q3, et cetera, but I would say the double-digit growth for DBP is certainly something you should expect. As I said, we should consume -- and we're confident in our guidance for the full year.

Yes, you said, easy comps versus Q3 2016. And we all know why.

You all remember the story about a few deals slipping from Q3 to Q4. We had, nevertheless, a very strong quarter in North America in Q3, where the count will be super-tough in North America, clearly.

But overall, I would say, we should see certainly a double-digit growth on the DBP side and further acceleration on the A&N towards the end the year, Q4 being certainly the stronger quarter, we expect unless we have some anticipation on the customer side. So you say, it's hard to forecast.

It's not always easy, I agree. So -- but again, if you look ahead, I hope that we convey this confidence, Charles, that we have what it takes to meet our total year guidance, this is, to me, what is important.

Let's see how Q3 will go. We had a strong start.

We understand and we know the count. We know what we need to achieve in H2 to make the full year and we're determined to make it happen.

And just a clarification there on Adabas. You said that you're expecting Q4 to be better than Q3.

Was that right?

Correct. But again, Charles, you know we have proven that as part of this engagement we have with customers, sometimes some of them don't wait until, let's say, the end of their enterprise license agreement to renew their confidence in Software AG.

This might also happen in Q3. But if we purely look at our calendar of renewals, et cetera, yes, Q4 should be stronger than Q3.

But we never know. We might have some positive surprises.

Hard to say, again. I think, again, this is what I'm saying.

I look now and project my sales for the total year and to the second half rather than quarter-by quarter. I know it's important to you like it is to us.

But we might have some anticipation that is hard to predict. And if we don't, yes, definitely Q4 will be stronger.

And just very lastly, as a final question, we've been through a period of sales investments into DBP before that didn't deliver the desired license growth. Why do you think it's going to be different this time around?

So I don't think that -- I mean, I guess that you are talking about investment that occurred in 2013 or something like that.

Yes, I think -- I'll jump in there because this was a time when he was not here, when Eric was not here. In 2013, we had made a big investment, I think it was between 20% or 25% we invested into sales and marketing.

And we realized there that it took much, much longer than we anticipated to monetize that investment. What had been the reasons first, point by, I think we worked as a team there at that time.

So we did not have 1 guy who really full-time focused on the development of our sales performance. And second was that our DBP portfolio, obviously, was not that much as it is today.

And the third is, in 2013, no one spoke about IoT in this Industry 4.0 subject which I was tremendously to date, to renew customers to make a big deal. So it is a different world today.

That is the most correct answer to your question.

Yes, I agree. I mean, we're much more ready, Charles, than we were before, much more clearer when we execute and so on and so forth leveraging best practices, so I concur.

I just wanted to go back to Stacy's question because now I have the information. Stacy, I was not far from the truth, but a little bit shy from the truth.

You were asking for average deal size for digital business platform. For H1, we're now above 500k which is again a significant improvement, showing the trend and the type of business we're in, right.

So we're not a transactional business anymore, but clearly, a game-changing, strategic project going forward, even more.

Thank you, Eric. It sounds like a good closing remark.

Ladies and gentlemen, I am afraid we have to close this call now due to other assignments. It was a bit of a surprise call for everybody.

So -- also our schedule is a bit deranged. But nevertheless, we had this wonderful hour.

Please let me remind you that the full set of financial data, with balance sheet and cash flow statement will be available as originally planned on July 20. However, we will not host another call then because I think most of your questions have been fully answered at this point.

If there're any remaining questions, as always, the IR team is ready for taking those in a couple of minutes. Thank you for now and goodbye.