UPDATED 13:24 EDT / JULY 21 2021

BIG DATA

Software AG says it has turned the corner in shift to a subscription business

Saying that a two-year campaign to transition its business from license to subscription revenue is bearing fruit, Darmstadt, Germany-based Software AG today said its second-quarter revenues grew 10%, to $257.4 million in constant currency, driven by a 17% jump in product revenue and 95% growth in the proportion of those sales powered by subscriptions.

Product revenue in the company’s new Digital Business segment — which encompasses hybrid integration/application program interface management, business process transformation and “internet of things” analytics — grew 10% in the quarter and 5% in the first half. Overall product revenue was helped by a 48% jump in bookings for the company’s legacy Adabas database management system and Natural fourth-generation language, but executives cautioned that that business is cyclical and that level of growth will not be repeated in the next quarter.

The company said 94% of second-quarter bookings came from subscription and software-as-a-service revenue, with annual recurring revenue growing 9%. It reiterated full-year guidance of revenue in the $1.5 billion range, with 85% to 90% of product revenue coming from recurring licenses.

Reinvention campaign

Software AG, which is the second-largest software vendor in Germany and the seventh-largest in Europe, has been on a reinvention campaign since Chief Executive Sanjay Brahmawar (pictured) joined the company in late 2018 following 15 years at IBM Corp.

The 52-year-old company prospered in the 1970s and 1980s with Adabas, a nonrelational, field-oriented database, and its related Natural programming language. The products are used by more than 10,000 customers in 70 countries.

That business wasn’t growing, though, so recently the company has been trying to diversify through the acquisition of middleware management tools, platform-as-a-service, data analytics and software for managing application programming interfaces. In concert with that, it has been encouraging customers to convert to subscription licensing in “an effort to shift away from an unpredictable and lumpy business to a predictable one,” Brahmawar said in a briefing with journalists.

Recent performance indicates that “we’ve strengthened the company so we can compete with those who a couple of years ago were eating our market share,” he said. Software AG said it booked 72 new customers in the second quarter and 140 in the first half.

In particular, the company is targeting growth in the Americas region, which constitutes about 35% of its business. “Half of our total addressable market is in North America,” Brahmawar said.

The shift has meant both changing the culture of the nearly 5,000-employee company and its investor base, the CEO said. With its stock trading in a narrow range between $10 and $15 per share over the last five years, he said, “a lot of our investment base was value investors.” However, about 60% of shareholders are now growth investors, enabling the company to sustain its market capitalization despite the short-term revenue declines that are typical in a transition to a subscription model.

For the full year, Software AG anticipates Digital Business bookings to grow between 15% and 25%, offset by a decline in Adabas and Natural bookings of 20% to 30%.

Photo: Sanjay Brahmawar/Twitter

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