Software AG

Otmar Winzig - IR Karl-Heinz Streibich - CEO Arnd Zinnhardt - CFO Eric Duffaut - CCO

Stacy Pollard - JP Morgan Hannes Leitner - UBS Gautam Pillai - Goldman Sachs Martin Jungfleisch - Kepler Cheuvreux Gregory Ramirez - Bryan Garnier

Thank you and good morning, ladies and gentlemen. Welcome to Software AG's analyst telephone conference and webcast on preliminary first quarter 2018.

Last Friday evening, Software AG has preannounced preliminary results for the reported quarter. This morning, we also have published the P&L and balance sheet presentation used in this call.

The full set of numbers including the cash flow statement will be published as planned on April 19, 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 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 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 have been published on our website as well.

For technical reasons, we cannot take any questions via e-mail 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 statements. 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 to 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.

Hello. Good morning.

Welcome to our Q1 call 2018, which is based on the preannouncement we have made on Friday. I am happy to inform you about our activities and the movements we have seen in Q1 in our global market view.

Being present in all continents and in 70 countries with some 5000 employees for more than 10,000 customers gives us a good representative picture of the overall market trends in the digital market. In summary, we see three major trends.

First, IoT cloud is the biggest market the IT industry has ever seen. This digital software market with its top use case patterns in industry for the CRO and Internet of Things is so attractive that every technology company in the world is either driving adoption of its own offering or wants to become a digital IoT provider itself.

A shakeout is inevitable. Most of them are late start-ups.

They are standalone. They have only limited experience in software go to market and software product innovations.

The second major trend we see, it is a software platform market. Software AG's heritage of being a software company since decades and being a software platform provider with a focus on middleware and architecture innovations makes us very attractive and thus gives us a pool position in the race for digital and IoT business development.

And the third trend we see, ecosystems are the new giants in the digital world, not single players. It is ecosystems.

Therefore, building an ecosystem of partners and strategic customers is the single most relevant aspect for success in the multi-trillion digital IoT market of tomorrow. And we, Software AG, are in a leading position there as well compared to all other relevant players.

In summary, the IoT cloud market for us is huge. We, Software AG, is top position and we already have one of the most attractive partner ecosystem through ADAMOS, the world market leaders in machinery tooling, the telcos, a number of telcos of the world and a number of industrial giants who are also using our software, our expertise for their digital transformation.

We, Software AG, are first mover and innovator in the industrial IoT market. And these are the two most important success factors for us.

One is, our real time portfolio prepared during the last six years where we are the technology leader and our unified go to market approach innovating with our customers and partners in true core innovation partnerships during the sales process, puts us in a most relevant position in building the ecosystem. Or to put it in other words, we, Software AG, knows how to sell digital platforms.

All that help us to drive the core value development of any software company. Historically, it was merely only maintenance.

Now, we have a broader view. We say the recurring revenue which makes us so profitable.

So when it was only maintenance in the past, but now we add software-as-a-service, we add pay per used revenue streams in the cloud on the edge, which becomes extremely more important and on premise. And we see the great results, a stunning 80% growth of our annual recurring revenue in Q1.

We introduced the annual recurring revenue last year and our CFO, Arnd Zinnhardt, gave more details at the Capital Market Day in March at our headquarters in Darmstadt. We announced to show you the IoT cloud development in a separate reporting line and we have delivered.

And we announced that the annual recurring revenue will become the core performance driver that we will report soon as well. Here we are and we can show the stunning success already in Q1.

Arnd Zinnhardt will go in more detail on that. And the final statement to the acquisition you saw of MuleSoft by Salesforce.

This transaction, ladies and gentlemen, is evidence that integration of our core capability and market leadership presence is more relevant than ever. The digital projects on premise, on the edge, in cloud drive also diversity and complexity in the IT architecture, all that needs integration from B2B to the enterprise service parts to API management to cloud integration iPaaS and now IoT device connectivity.

You could also say IoT device integration is integration 5.0. By the way, the same applies to our office offering, which has its first life in establishing digital twins for processes, or Alfabet, which will also play a major role on the industrial side by managing industrial assets with the tools we know from corporate IT where Alfabet became a leader in managing IT assets.

Our future is bright. Software AG is in the center of actions regarding digitization, IoT and enterprise IT architecture management.

We are very much looking forward to harvest all the opportunities ahead. This is why we have raised our IoT cloud guidance from 25 million to 30 million, to 30 million to 35 million and we confirm our DBP guidance due to our strong pipeline.

Our great Adabas & Natural development will also confirm our guidance and we confirm our margin guidance for the year. This is it from my side for the time being.

I hand over to the CFO, Arnd Zinnhardt, for details on the financial performance. Thank you.

Arnd?

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

I would like to continue making some strategic opening remarks on aspects. Eric will also cover from his perspective.

We grew our digital business in Q1 regarding annual recurring revenue by 14%, a great achievement. In this group of experts, I do not need to talk about the multiples that are paid for annual recurring revenue and we are very pleased with the performance of our newly set up revenue line, IoT cloud, which not only generated revenue above expectation, but already an ARR of almost EUR20 million in Q1.

In total, on the digital business side, we saw a clear focus on cloud. Eric will talk about this in our sales production in more detail.

While maintenance performed very nicely, we saw a shift to cloud and longer sales cycles for perpetual license models. However, the pipeline in digital is good and therefore we are in good mood to deliver that part as well in 2018.

And finally, Adabas & Natural had a very positive start into the year, showing strong license growth, which contributed to an overall growth of our Adabas & Natural business line. Adabas & Natural will continue to have a very positive impact on our EBIT result due to a high customer loyalty imposed through the Adabas & Natural 2050 plus program.

After the opening remarks, I would like to guide you through the numbers. As expected and communicated, we saw strong FX impact on all revenue lines.

The headwind comes almost from all currencies, with US dollar down 15%, Brazilian real down 19%, Australian dollar down 11% and Great Britain Pound, down 3%. Currently, I do not see any change of this pattern for Q2.

Therefore, I expect currency headwind for Q2 in the same magnitude. So around 7%.

If the US dollar would remain on its current level, some relief can be expected throughout the second half of the year. As already mentioned in my introduction, we saw some movement from classic deployment models into the cloud.

While Eric will go into more details, I would like to highlight some aspects. Due to a strong Q4 and some deals realized earlier, the start in the license business was modest.

However, this was overcompensated by an extremely strong software as a service and usage based licensing, plus 113%, resulting in an ARR growth of 14%. Especially this ARR number that are explained during our Capital Market Day shows that we continued our dynamic growth path, also in the last three months.

Besides software as a service and usage based returns, maintenance was a great contributor to this strong development as well. Maintenance is up by 8%.

In general, I believe ARR is the most relevant number to look at for judging the performance as the value implied in our business. This is what we discussed in great detail during my session at the Capital Market Day.

Annual recurring revenue most accurately describes future cash flows generated by activities conducted in the past. Let me reemphasize.

The ARR as shown above reflects all future recurring revenue resulting from business signed until March 31, 2018 as well as future SaaS and usage based revenue from transactions closed until the end of Q1. Consequently, and as I said during my presentation at the Capital Markets Day, this number is going to be a KPI that we will use in our guidance, starting 2019.

Therefore, I would like to ask you to think about typical market multiples paid for this ARR of 277 million. Let me give you some market data.

Recently, we saw a transaction in our IT space, trading at substantially more than 20 times ARR. Another data point, typical IoT companies are traded at 12 times to 20 times ARR.

Or putting this in a different perspective, at the end of March 2018, the company increased its ARR year on year by almost 40 million net of currency. Times multiple, make your own calculation.

Throughout our Q3 call last year, we discussed the question of keeping or even expand the margin while shifting the business model into the future. Here and on the upcoming slide, we have the proof points.

The margin for the business line remains on 28%, a very good number indeed. Due to the relevance of cloud IoT for the future development of our company, I would like to spend a few more words on this part of the operation with the numbers being thereof quote unquote of the total digital business line.

In the last three months, we saw an enormous interest of customers and prospects. We most definitely - this most definitely can be derived from the numbers.

Every single KPI went up strongly. ARR plus 81%.

Licenses, plus 178%. Maintenance plus 100%.

And thus usage based, plus 111%. Also, we are in intense discussions with many companies and prospects around the globe.

As planned, we are ramping up our organization in this area. This is absolutely necessary to have the bandwidth to deal with all the opportunities we are working on.

Due to this early success in the market, we have decided after being three months into the year to increase our guidance. I know this is quite early in the year, however, it should give you confidence, comfort about our confidence.

Regarding Adabas & Natural, we continued on the strong H2 2017 performance and recorded a double digit license growth. This is not unexpected result as already mentioned in our last calls.

You all experienced in the past Adabas & Natural has a high degree of predictability as well as we sell into our existing long standing customer base. Currently, the Adabas & Natural specialists are working on additional business opportunities that will give us a chance to support our customers with neutral products in the Adabas & Natural space.

Also, this initiative is part of our Adabas & Natural 2050 plus program. Maintenance showed strong development for the quarter and segment results improved compared to last year to almost 70%.

I believe this number speaks for itself. The focus in the consulting business continues to remain on supporting our strategic license projects and simultaneously closely monitor the profitability.

Compared to last year, we enjoyed having Easter and the Pascha holidays in Q1. Consequently, we had fewer working days in Q1 2018.

Also as a consequences, margin was a bit below last year, but remains on the high level. As discussed on the last slides, our business progressed.

This is particularly true for, but not limited to the cloud IoT area. Our gross margin is basically unchanged to last year and our operating costs are well under control.

So it's just a consequence that our EBIT is of prior year's level with the margin even up by 2.4 basis points. While this is a positive message in it, allow me to empathize that the double digit growth in digital ARR only partially positively impacted this quarter, but will kick in in full and have its full positive effect on the profitability starting now.

One final remark, on Q1 EPS, as this KPI is also part of our annual guidance, EPS for the quarter amounts to EUR0.40, which is an increase of 11% compared to the first three months a year ago, a very pleasing start into the year. Let's turn to the operating margin.

In the quarter, we even topped the very successful Q1 2017 and shifted the margin slightly up to 27.4. Comparing this achievement to our annual guidance, we undoubtedly had a good quarter and a good start into the year.

Balance sheet is as solid as we are used to. Therefore, I only want to make four remarks.

Net cash position improved to 160 million due to a free cash flow that we experienced to be strong. Receivables are substantially reduced to three months ago.

Deferred income is at almost 180 million, also reflecting ARR growth as well as seasonality. The quota on shareholder equity increased already starting from a very high level to more than 68%.

Let's now come to the outlook for 2018. Karl-Heinz and myself informed you about the pleasing start into the year regarding cloud IoT.

I also talked about numerous opportunities we work on. Again, Eric will provide you with details.

Consequently, I'm pleased to inform you that we increase our respective outlook for 2018 from plus 70% to plus 100% to the new range of plus 100% to plus 135%. As most of you know us since years, you do understand that upgrading guidance so early in the year is quite unusual.

However, based on Q1 revenue, ARR as well as further business opportunities, we are so confident about the performance that we decided to make this step. All other KPIs for total 2018 guidance remain unchanged.

Before handing over to Eric, let me again remind you at the almost 40 million net of currency ARR increase and what this means for the future of Software AG and its valuation today. You often ask us to provide you with a better and less volatile KPI to judge our performance.

ARR is the answer. I'm looking forward to answer your question on this KPI and see analysts' valuation on recurring revenue rather than on single volatile license events only.

On this positive note, let me hand over to Eric.

Thank you very much, Arnd and ladies and gentlemen, I would like to also welcome to today's call and of course thank you for your continued interest in Software AG. So now that you've got the financial figures from Arnd, I'd like to offer my comments on our business development in Q1, but also look ahead to the coming quarters.

Q1 was clearly a breakthrough start to the year and a great foundation for future business development. You heard it, we went beyond our own high expectations for IoT cloud growth and based on the same performance, yes, we are already today raising our guidance for this dynamic and promising market.

This accelerating customer adoption of our IoT and cloud portfolio leads clearly to incredible revenue growth of 125% year-on-year. Order entry was even better with a phenomenal rise of 195%.

And as you heard it, our annual recurring revenue, the key performance indicator, a major value driver or software company today increased by 14%. Ladies and gentleman, these numbers showed a tremendous upside of our business and where our bright future lies.

Please let me emphasize that this is all recurring revenue and its share of total revenue increased from 71% to 78%, making as Arnd said, our total revenue more and more predictable. Contributing of course to this growing recurring revenue, the maintenance part of our on premise business is doing extremely well.

The stable quarter for Adabas & Natural confirming once again the stability of this business and a 7% growth in digital business platform maintenance. But let me come back to the accelerated Cumulocity IoT adoption.

This is clearly a global developments, highlighted by the following Q1 deals, which underline the increasing market demand for smart and flexible IoT software. In the USA, Cumulocity IoT will now provide Black & Decker that I'm sure you all know with the complete IoT platform that can handle everything from connecting millions of device and handheld tools to building applications, to analyzing invaluable operational data in real time.

Ultimately, this enables Black & Decker's consumers to recover misplaced tools, monitor their location with geo-sensing alerts, reducing theft and predict and improve management's requirements. In Austria, A1 Digital International GmbH, the national number one telco provider is developing an IoT tool box on top of our platform to offer industry specific cloud hosted IoT applications and dramatically reduce the time to market for customers.

The same is now happening in Qatar. Ooredoo, the leading communications company will now leverage Software AG's Cumulocity IoT platform to build solutions that will allow business consumers and customers to combine integrated real time data analytics visualization with scalable storage and device security to drive new digital business.

In Spain, Software AG and Telefonica have signed a partnership agreement to allow Telefonica to deliver powerful solutions for digital transformation and Internet of Things solutions in the B2B market. By using our cloud based Cumulocity IoT platforms, so deployments of its innovative IoT solutions, Telefonica can now connect and monitor millions of devices and sensors, ensuring that any app or device regardless in fact of the underlying technology or vendor source will operate seamlessly across Telefonica network.

In Saudi Arabia, the Saudi Telecom Company, STC, the most established landline and mobile operator in the country that is now building its smart CT solutions on top of our Cumulocity IoT platform. In addition, STC integration backbone is e-payments and technology governance are powered by Software AG digital business platform.

This is more than 24 million clients records that are in the Software AG big memory platform, supporting instance e-payments. In addition, both Cumulocity and our streaming analytics software, Apama, are now available pre-installed on their EMC's edge gateway series.

This is an appliance, ladies and gentlemen, for analytics on the edge to allow for faster operational decisions with maximum security, in fact, only sending aggregated data to the cloud or back to the data center. This is the nearest you can get to the Internet of Things out of the box of plug and play approach to launch IoT initiatives with much reduced entry barriers and there is now an important extension of our IoT ecosystem or partners we are building.

Clearly, another promising growth potential is IoT Edge, which means on-premise solutions close to the operated data. On premise will therefore also benefit from the new IoT solutions.

What we see is that more and more investments from our customers are used for those new digital projects, IoT solutions, comprising cloud, Edge as well as enhancements of the on premise architecture. Yes, we are early in the innovation cycle.

We are the technology leader and yes, projects take time to get started and realize, but our strong pipeline shows the annual recurring revenue potential we have. I mentioned cloud order entry and yes, our accelerating cloud growth is based also on a variety of products that was driven by major wins such as Vodafone, Nationwide Building Society and O2 in the UK, Everest in France, Siemens in Germany, Kaiser Hospitals in the US, SIMCom in Asia and many more.

Ladies and gentlemen, these major partnerships with leading enterprises around the world demonstrate that this is not by chance that we win, but demonstrate the tremendous strides Software AG has taken in establishing itself as a trusted partner for IoT and cloud. Another extremely gratifying development was of course the 23% license growth and stable product revenue in for approval you in Adabas & Natural.

Our commitment to ensuring that Adabas & Natural remains relevant beyond 2050 enabling our customers to build whatever type of application they want from analytics to robotics and this on the case of investment and business logic and data they have amassed is paying off every quarter. You know that since we announced our A&N 2050 plus program, the overwhelming customer decision is to stay on this platform.

We had last week our user conference, international user conference in Berlin with around 600 customers attending and the importance of this initiative was repeatedly highlighted. Let me quote some of our A&N customers.

They say this strategic initiative cements our commitment to the Adabas & Natural platform. Another one said it's rejuvenated and reenergized our use of Adabas & Natural, there is nothing we can't do from this platform, glowing statements indeed.

On the digital business license side, we have a relatively slow start. To some extent, as anticipated, as we closed some Q1 opportunities already in last Q4, which made remember one if not the best Q4 forever for Software AG and for digital product line.

On the digital product revenue standpoint, the Q1 seasonality at 20% of total year is in line with the average we had in previous years and we have a real good volume of opportunities ahead, so no worries at all, we stick to our total year guidance. In conclusion and looking forward, Q1 2018 is nothing else than a great start to our future with different revenue streams providing both stability and accelerated growth.

Our Adabas & Natural business has been stabilized. The trend is crystal clear and the outlook is solid.

Our Adabas & Natural revenue development should clearly stay positive going forward. Our annual recurring revenue growth of 14% in Q1 confirms the growing market adoption of our total digital portfolio.

And looking at our strong pipeline for our traditional DBP on premise license business, I am confident that we will see strong license growth in the quarters to come and already in Q2. So, I'm clearly pleased to confirm we are on track to fulfill our total DBP product revenue guidance this year.

And finally, the jewel of the crown will be the IoT and cloud. As I said many times, the cloud is a fundamental business model for Software AG going forward.

We can confirm this through the rising adoption we saw in Q1 and expect for the following quarters. Every new device, every new digital sensors, and there will be tens of billions of new devices, are potential new revenue drivers.

In the first - in the customer cases I mentioned, the word millions is recurring as the scale of this market because apparent. Our IoT cloud business is on fire and I mean that in every positive way.

Thank you very much for your attention. Looking forward to your questions.

Thank you, Eric. Ladies and gentlemen, you now may ask questions.

Operator, would you be so kind to repeat the procedure.

Yeah. Hi.

Thank you. Can you tell us a little more about the type of IoT revenues that you think will make up the 30 million to 35 million?

So for example, a similar split as in Q1 with regards to license maintenance versus SaaS usage? And then second question, what level of visibility do you feel you have around the core DBP license?

Obviously, you sounded pretty optimistic and confident. You also mentioned the ARR.

So I guess were you concerned at all about Q1, were there some deal slippages or something like that?

You take the first one and I will take the second one.

Yeah. Stacy, hi, good morning.

With respect to the IoT split, I believe over time and I'm not talking about particular Q2 or a quarter, we will move more and more into the maintenance and SaaS usage based model. Let me remind you, this SaaS and usage-based is meant to grow with the success of the customers and that is one of the beauties that we have.

Besides the fact that we have signed a contract, the more machines get connected, as Eric has mentioned and the more data is annualized on those machines or for those machines, the more SaaS and usage-based revenue will grow without any additional contract that needs to be signed. So therefore, more and more moving into the recurring business stream, which will then also support the ARR growth as such.

And this is also - Stacy, good morning. This is Eric.

This is also very much in line with our land and expand cloud strategy that's from a go to market standpoint. So, to the second question regarding the visibility on the DBP license, if I could call it pipeline and your question about Q1 and our level of confidence.

So, number one, yes, of course, but this is natural in this business. We know the volatility we have.

So while we were successful in closing some deals in Q4 earlier than expected, which made, as I said, the best Q4 ever we had, which of course to some extent, impact on our Q1 ability to close this deal, which is already done, we have also few slippages clearly in Q1. But again, I don't want to highlight that too much, because you know by now that this is also the nature of this business on the volatility, but we have a very good visibility for the pipeline, in particular of course for the next two quarters, I mean, Q4 still look far away and we know that this is an important quarter, but what we see and clearly for Q2, give us clearly the confidence that we should be able to show as I mentioned strong license or strong DBP license growth already in Q2, Stacy.

I have a question concerning also the slippage of the DBP business. What would you try to do to have more visibility and more stability in your forecasting of DBP?

And secondly then, you reported quite strong maintenance growth in DBP at 7%, is this sustainable going forward? And lastly regarding your IoT, did you win any new logos?

And if you did, can you express which components did you win? Was it Cumulocity, Apama or Terracotta?

Okay. So I'll take the first then.

This is Eric. I'll take the first and the last question.

I'm sure Arnd will comment on the maintenance side. So regarding the slippage on Q1 and what do we do to have a better stability of our forecast, I mean, Hannes, we are doing everything we can, but it is clear that as we move up the value chain, as we are giving more and more for strategic, let's say, digitalization project, we see that the sales cycle are getting a bit more complicated as some of these deals and many of these deals in fact drive high level of approval, sometime going up to the ceil.

And then you can miss a week or two and this is difficult to control. So, we are in the volatility, by definition, business where we have decided as you know to shoot higher and bigger so we have more big deals, more complex longer sales cycle.

We do our best of course to control that, but this is sometimes difficult, but this is not only in our hands, but also in the hands of our customers, which are sometime and we have seen that in Q1 changing their procurement process to additional compliance and of course decision cycles at high level or board level. Regarding the IoT new logos, which was your second question, where all the ones that I mentioned.

When you will go for us, Black & Decker in North America, no need to mention who they are, A1 in Austria, the national number one telco providers, Ooredoo in Qatar, Telefonica in Spain, STC or Saudi Telecom Company of course in Saudi. This big partnership with there, we have ProCom as well.

So all of them on new IoT or Cumulocity IoT customers and partners net new in Q1, Hannes.

And Hannes, I will take the second one that you asked regarding maintenance and I would like to broaden that a bit up to ARR. Why I am doing that, we both know that at the end of the day, the valuation is done by using a discount cash flow model.

So therefore, the question of ARR and the future cash flows is at the end of the day what drives your valuation or the valuation of the financial market and that also incorporates all the transactions being closed, independent from the deployment model because it deploys on prem and then you've got the respect of maintenance, following afterwards on the cloud, then you have got the cloud revenue as part of the ARR. So therefore, the answer is yes.

We expect ARR to grow double digit also moving forward, which is then also driving up company valuation, which is in our income to maintenance again, driven by certainly the license but not limited to one single quarter, but to the overall license trend of the last quarters. But also driven by the stability of our maintenance and our retention rate on our maintenance and support product, which is very high indeed and it's driven by the dynamic growth of the SaaS and usage based which you will see more than 100% and Stacy already asked the question what is the development and I confirmed that this development will drive the business and moving forward.

And if you make a calculation and then I pause for a second, how much of the ARR growth is already contributed by the IoT cloud part. You will find out that although we've just started, it already contributed 25%.

So as we expect that to accelerate, you can think about what is the impact of the ARR as such.

Yes. Thanks for taking my questions.

Firstly, one for Eric and just coming back on the core DBP business, how should we think about evolution of the pipeline in this segment and given you mentioned some pull forward of deals in Q4, doesn't mean that you started with a softer pipeline in the start of 2018 and also if you look at the last three years, overall DBP product revenue growth has been towards the lower end of your guidance. What are the key variables that will put you in the upper or lower end of your guidance in 2018?

That's my first question. Secondly, on the IoT business, can you please comment on the drivers behind the better than expected performance and also visibility you're seeing in the segment?

Is it driven by traction in ADAMOS or is it the partnerships with Siemens or the telco companies? Thank you.

Okay. Gautam, good morning.

I will start with your last question if you don't mind. What are the drivers that we see for the IoT adoption and what gives us also this confidence going forward?

So I would say the good news, the extreme good news is that Siemens has just released their last version of MindSphere which include as you know some of our assets and are planning to go to market with it in the months to come. So, there is no major Siemens revenue factored in to our Q1 IoT and cloud revenue or even order entry, which can tell you that we have still acceleration to come.

I think the drivers are simply some of the Natural, let's say, consuming licensees of our previous customers and the new ones that I mentioned previously answering Hannes question as well. So, natural normal business expansion or adoption and the rollout of the IoT, let's say, solutions that our previous customers are built, plus of course these new customers that I mentioned with the key ones, partners such as Siemens have not yet, let's say, contributed to this expansion in acceleration.

Regarding the evolution of the pipeline over the DBP, clearly, we still see integration being a key driver as well as ARIS and Alfabet. They are clearly the three products where we see a big market demand for, knowing that the rest such as Cumulocity IoT or Apama to mention two other key products of our portfolio are embedded into the result that we mentioned for Cumulocity IoT in general and IoT and cloud.

Yes. You're right.

I mean, Q4, as I mentioned, we successfully closed deals earlier. Then we studied Q1 with a pipeline that was a little bit shy and hence not the big surprise for us to land as we landed.

This plus of course some as I mentioned to Stacy some slippages for Q1, but nothing I would say abnormal or concerning. We see very strong traction in emerging markets, which are becoming more and more the growth engine of our traditional DBP business.

As of course, these companies and in this part of the world are adopting middleware for the next step of digitalization. So, it's very true in Asia Pacific and Japan.

You see that as well in Middle East, Latin America accelerating on that part. The visibility, as I said, is relatively good in particular for the next two quarters.

I would say very confident again that we should see this business growing again and I think Q1 should be seen as enough to Q4 and hence the performance that we show today, but no concern Gautam whatsoever.

And Gautam, I would like to add something, Karl-Heinz speaking. In the IoT field, all the deals we have, all the new logos we have won now in the industrial side as well as on the telco side and also by the way on the ADAMOS side come with world market leader in tooling systems and machineries for producing close.

It's a new partner and these are - we are still in the seeding phase of those customers as soon as they have adopted the digital platform as soon as they are in our ecosystem, we lay the ground, the foundation for the growth of the future. Therefore what Arnd said, the ARR is so key, so instrumental because it is the recurring revenue which you see step one in land and then the expand follows as they increase the adoption of the data centric use cases and apps for the business.

Three if I may. First one is on sales cycles.

You've mentioned that sales cycles have increased. Could you give a particular reason why that is?

Also you mentioned that there was a shift, correctly from DBP license to subscription cloud. If so, can you provide the magnitude of this and how much this represents the in license revenues?

And then secondly on your IoT and cloud revenues. I am not sure if this has been mentioned already also, but what has been driven the upgrade of the guidance versus mostly driven by usage based revenues or one-off license revenues and then lastly on capital allocation, given your solid cash position and recently weaker share price levels, would you consider share buyback in 2018 or what's your other plan on further smaller M&A tuck-ins.

Thank you.

This is Eric. I will take some of your questions.

Arnd will certainly complement as well. Yes.

I mentioned that the sales cycles are getting longer and sometime a bit more complicated for, in particular, for the on premise because I will comment later or on the IoT cloud. On the contrary, here, we enjoy relatively quick sales cycle based on our land and expand, but on the classic DBP again, nothing really new.

I mean, they are getting more complex because we are really on complex and strategic use cases and project for customers and hence not only a question of investment, but a question of agreements, both from business side and the IT side is required. We are not anymore in the plumbing or tools business, where you just need to reach an agreement with somebody in the IT department.

We are driving digitalizations of core processes and core businesses for customers and this alignment between IT and business and very often at top level, executive level, required a certain number of approvals, let's say, in the chain that sometime take longer than we usually expect or expected. So this is, I believe, the main reason is our move to more strategic IT and digitalization projects and the requirement to have business and IT to align.

You mentioned shift to the cloud, I don't think we mentioned the word shift to the cloud at all, Martin. I think that we see an acceleration of our adoption in the cloud IoT, which is to some extent complementary to our traditional DBP or digital business.

So while we see some of these deals going in the cloud rather than going on premise, the rest is truly incremental. So I will not call the shift as a major trend and certainly not an explanation for high performance on IoT cloud and let's say relatively slow start on the DBP license as mentioned.

Martin, and I take now question number three of four. So the reason why we increased the guidance can be validated in various, various aspects.

I start with the first one, which is if you take the overall market expectation, which we exceeded by 20% also, that gives you already an idea of why we say well we had a strong start into the year and if you take the outperformance against financial market expectation times four, you come up with a rise of around about that number that we increase the guidance. So in absolute terms, we are certainly more than 1.5 million, so something that 1.2 million times four is 4.8, so close to 5 million.

That is one element where you can see and check why we increase that. That's one element.

The other one is and I will give you three in total. The other one is the following.

If you look to the numbers, ARR plus on Q1, you will see that at the end of the second quarter, latest third quarter, we have already achieved our guidance and we clearly expect also business to be conducted in the strongest quarter of the year, which is Q4. And then - and that was the operational topic that we did.

We, of course, look to the current contracts and writing ARR, looking to the business opportunities that we are currently working on and making some prudent assumptions on the conversion rate on those opportunities into revenue, taking also the phasing into consideration. So there are various aspects that will basically let to the upgrade of the guidance.

And then your fourth question was the question of tradeoff between share buyback and doing acquisitions. I would not say share buyback or acquisitions, I would say share buyback and acquisitions and stress the and, knowing that the financial markets are extremely open, our credit worthiness is very interesting for banks.

So therefore, the financing opportunities that we see are enormous and as you actually experienced that in the past, we do share buyback when the shares are volatile and we support certainly with our share buybacks or we have supported with share buybacks the share price development and we will continue to do so.

A couple if I may. The first one, I would just like to come back on the DBP excluding IoT growth.

Because you mentioned that Q1 could represent something around 20% of the full year revenues. If I do the math, it will land at the low end of the guidance.

Could you confirm that or are you more optimistic than that? And the second question is regarding the consulting business.

So it's true that you have been impacted by the number of billable days. Could you maybe guide us a bit for future quarters on the number of billable days and how is the impact of these billable days in Q1 in terms of growth?

And last point on the Adabas & Natural profit, still very high. So, now the question is, do we have to extrapolate that for future quarters, because your sales and marketing was deeply down.

So it's just questioning the sustainability of that.

Let me start with the first one from a financial perspective and then Eric will talk about it from a pipeline perspective. If you look to the previous years, the first quarter always contributed between 20% to 22% of the annual development.

So therefore, we are very much in line with the development. One component which impacts the percentage contribution of a quarter also is the currency impact.

Knowing that currency was - showed big headwinds in Q1 and assuming that dollar remains the same for the second half of the year, then the headwind is lower - substantially lower than this year. So put that into your calculation in as well and you will see why Eric was so relaxed on his statement on the guidance.

And Gregory, good morning. I think Arnd said that I was going to say the previous years, it's between 20%, 21.5%, et cetera.

So we are I would say in an almost normal seasonality or normal seasonality of our business. And yes, it's 20% maybe of the low end of the guidance, but it's 21% of the mid guidance or sorry, it would require 21% to be at the middle of the guidance.

I mean we are really in the same range and this is why I think it's too early to say that we believe we're going to lend at the minimal the guidance rather the mid guidance or high range of the guidance Gregory. We have the pipeline for Q2.

I think we're going to see, as I mentioned, strong growth on the license side as well. Then, we will have an H1 position, pipeline for H2.

Then, it will be a bit easier for us to see how we see the total year, but we still at the moment feel as I said comfortable that we'll hit the guidance. And this pipeline growth is clearly ahead of us.

We see it, as I mentioned before, both from a geographic split level as well as product level. Arnd, do you want to comment on the GCS number of days and how it will impact the future?

I think it was really Q1 that was impacted?

It was Q1 impacted and as you know, Easter can come in in the second quarter or in the first one and it's not just the holidays, which is the Friday at least for Germany and then Monday is a Monday, it is of course also the question about the holidays people take throughout these days. So you might lose one week in a quarter and gain the respective time then in the next quarter.

So therefore, it's just a shift between one quarter or the other. Last time, it was in the second quarter.

This time, it was in the first quarter. And on your last question regarding Adabas & Natural profit, I mean that's evergreen Gregory, isn't it.

We always said we want to be north of 60%. We are close to 70% as the margin has even expanded over the last quarters and years.

I do not see a shift in the pattern, which is supported by the Adabas & Natural 2050 plus initiative, which has various components. Being close to customers one and giving customers the comfort level they need in order to stay on the product is another one.

We are currently selling new products into the Adabas customer base, which will drive license as well as maintenance in the future and of course we also take care of the knowledge from a long term perspective. We do know that we have at least in Germany people that might retire in the next five to ten years.

So therefore we already are ramping up the respective R&D center in Malaysia in order to have the knowledge shift towards younger and new colleagues and to be ready once the other retire simultaneously as you can. That gives us the better split between high cost and low cost, which then also pays in in on the profitability side.

Yes. And one additional remark to what Arnd just said, one is the shift to offshore, but we also attract young people on the Adabas & Natural side here in Germany, which is very positive.

They see the momentum, they see the spillover in the technology, as Eric mentioned, also for process mining, for analytics and all those new tools and front end capability on line enable the mainframe application is very attractive for young people. So yes, the generation changes is working here as well as offshore.

We are very confident that we will have a very, very nice development in the mid and long term on the Adabas & Natural side.

Thank you, Karl-Heinz. Thank you, Arnd and Eric.

Ladies and gentlemen, I'm afraid we have to close this call now due to other assignments. Please let me remind you that the full set of financial data with cash flow statements will be available as originally planned on April 19.

However, we will not host another call then. For those who want to take a closer look to our IoT solutions at work, please come to Hannover Fair on Tuesday April 24.

We'll offer you a guided tour to see our technology implemented with Siemens and other industrial partners. Thank you all for now for participating and showing the interest in Software AG.

Any further questions will be handled by the IR team. Thanks for now and goodbye.