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We have dropped our coverage of Software AG as the company has been acquired by Silver Lake. Our rating, target price and estimates are therefore no longer valid.
Software AG
Tender period ending on 14 June On 26 May, Software AG management and supervisory board (the two Silver Lake reps recused themselves and an independent takeover committee was established) recommended that shareholders accept the EUR32 (recently revised from EUR30) offer price from Silver Lake. The success of the offer is subject to a minimum acceptance threshold of 50% plus one share, with the tender period ending on 14 June. Silver Lake has already secured c. 30% of the shares with 25.1% coming from the Software AG foundation and Silver Lake having acquired c. 5% on the market. We also understood that Silver Lake could potentially convert its EUR344m (10%) convertible bond early (conversion price was initially EUR46.54), which would bring Silver Lake towards just over 36% of the shares. However, we note that Software AG shares currently trade above the offer price of EUR32, while private equity company Bain (via Rocket Software) has recently made a non-binding expression of interest at EUR34 (which Software AG did not see as a superior offer to Silver Lake''s) and owns 10% of the shares and could thus make it potentially unattractive for investors to tender into the EUR32 Silver Lake offer. Q2 results due on 27 July We also caught up with Software AG ahead of the start of the quiet period on 27 June. We expect no large surprises during Q2 and expect Software AG to reiterate its FY2023 guidance despite a difficult macro environment and prolonged sales cycles among customers. Lifting target price to EUR32 We lift our target price from EUR30 to EUR32 to reflect the revised EUR32 offer from Silver Lake and reiterate our Neutral rating. We also cut our non-IFRS EBITA slightly (-3% 2023/24E) with the deeper EPS cuts mainly stemming from higher restructuring charges (BNPPE: EUR20m in 2023E).
Silver Lake launches public tender offer at EUR30 per share On Friday night, Silver Lake has launched a public tender offer to Software AG shareholders at EUR30 per share, representing a 53% premium to the closing price on Friday. Silver Lake has already partnered with Software AG since November 2021 when the private equity group has invested into Software AG via a 5-year EUR344m (10%) convertible bond (2% coupon, conversion price EUR46.54). Since then, Silver Lake''s Christian Lucas and former Red Hat CEO Jim Whitehurst joined the supervisory board and the group announced the acquisition of StreamSets (EUR524m). The deal could make sense for both shareholders and Silver Lake The offer implies 19.2x/13.8x EV/EBIT and 24.5x/18.4 P/E (adj. 2023/24E) and values the stock at a significant premium to the 10-year historical average (11x EV/EBIT), which could also help valuations of other inexpensive European software stocks today (Monday). While shareholders could still realise losses (at EUR30, shares are still down 28% from 2018 level and c. 5% since 2020) we think the offer is attractive given the recently disappointing performance (adj. EBITA is -35% since 2018) although SOW noted an in-line Q1 performance and confirmed FY2023 guide (Q1 due on Thursday). In Silver Lake''s hands, SOW could be in a less-challenging position as we believe that SOW, despite its strong technology, was subscale to competitors and Silver Lake could continue to invest into SOW''s transformation without being under scrutiny by equity markets. Silver Lake could also extract synergies from SOW''s significant installed base of large global blue chip customers and technology while also pursuing other options (sale to competitor, split up of Digital and AandN). Deal likely to go through: Upgrade to Neutral SOW management has expressed support for the offer. The minimum acceptance ratio is 50% plus one share. The Software AG foundation, the largest shareholder (30.1% stake), has...
Still many questions after soft margin guidance While Software AG''s Q4-22 (6% revenue beat/5% EBITA miss) benefited from strong AandN business (72% revenue growth in Q4-22 on the back of a large deal), it was overshadowed by a soft margin outlook (16-18% EBITA margin), pointing towards the fifth consecutive year of margin declines. The initially expected margin uplift coming from scale effects (product revenue guidance points to 6-10% growth this year) following the bulk of the subscription shift (only EUR54.5m in perpetual licence revenue in 2022) is expected to be more than offset by cost increases as well as additional investments into cloud and partnerships and headwinds from an increased subscription/SaaS shift in AandN. Moreover, the underlying margin guidance is even softer when excluding the c. EUR30-35m benefit from a reduction of 200FTEs. This (restructuring charge) as well as other factors (including factoring reversals) are expected to lead to another year without any meaningful FCF. Uncertainty on future margin potential remains As outlined in our August 2022 note ''Expensive growth ambitions'', we see the risk that Software AG''s growth ambitions may remain expensive going forward, putting at risk any material margin recovery beyond 2023. We believe that SOW still remains overexposed to low-growth pockets of the market while competition (against IBM/Salesforce/Google etc.) in high-growth segments (such as API management, iPaaS) remains fierce despite its high-quality product portfolio. This may also limit pricing power, in our view. Reiterating Underperform, cutting target price to EUR20 Following Q4-22 results/FY2023 outlook we lower our estimates (adj. EBITA cut by 10% and 5%, respectively for 2023/24E) and cut our target price from EUR21 to EUR20 (based on 10x 2024E EBITA) and reiterate our Underperform rating. While SOW shares appear inexpensive on FY2024 multiples (e.g. 13x P/E 2024E), uncertainty on future margins remains. The...
Another complex set of results Software AG issued another complex set of results with both revenues and non-IFRS EBITA slightly missing expectations (-2/-4%) while the sale of a part of the consulting unit (FACT) impacted stated EBIT (impairment). FCF was also weak (-58% YOY). Separately, the announcement of the departure of CFO Dr. Matthias Heiden (second C level departure this year and fourth since 2020) in our view created further uncertainty (Daniela Bunger from Atos will take over as of January 2023). Parts of FY guidance remain challenging... After 9M-22, DBP Bookings growth (excl. StreamSets) stands at 11% (vs. guidance of 12-18%), AandN bookings are at -22% (vs. 0-5% guidance) and product revenue growth is at 0% (vs. 7-11% target) and thus requires a strong performance in Q4 to meet its targets, despite slightly easier comps. We now don''t expect SOW to meet its DBP bookings (BNPPE: 9.6%) and product revenue target (BNPPE: 5.2%), specifically with likely longer macro-related decision-making cycles at customers. However, management flagged a strong pipeline and upcoming renewals in AandN with a high bookings-to-revenue share in Q4. We expect this to lead to a solid Q4 for high-margin AandN (BNPPE: +1% bookings growth YOY vs. 0-5% guidance), which could also positively impact group margins in Q4 (we now expect FY2022 EBITA margins of 22.3% (vs. 21.7% previously). ... while FY2023 outlook provides for uncertainty Next to the challenges with the FY2022 targets, we remain cautious on FY2023. Management will provide its FY2023 outlook in January, replacing the 2023 ambitions (EUR1bn revenue, 25-30% non-IFRS EBITA margin). However, while the shares appear inexpensive (12x 2024 P/E), the start of the new CFO in January and longer decision-making times at customers generate uncertainty, while potentially further investments in growth could trigger downside to 2023 consensus EBITA (BNPPE: -4% vs. cons). We adjust our estimates, lower our target price...
º Results for Q3 2022 were slightly below expectations, but bookings were above Company guidance for 2022 reiterated; CFO Matthias Heiden to leave
We initiate coverage on Software AG - a leading German provider of integration and database management software - with Underperform. We like its strategy and concede it may appear inexpensive, but its path to growth could prove expensive, limiting future margin expansion. Moreover, visibility on both short- and mid-term targets remains low. The Helix strategy: gainful but painful In recent years, market share losses led to underperformance (0% revenue CAGR 2015-21; stock -25% since 2015), inspiring CEO Sanjay Brahmawar to initiate Project Helix in 2019. Since then, there have been some successes (increase in recurring revenue, partner deals, cloud products), but Software AG has not been able to fully harness a strong market (10%), posting weak top-line growth and issuing multiple profit warnings. The road ahead isn''t getting easier We see challenges ahead. While SOW''s product rankings are strong, we believe it remains subscale vs peers and overexposed to low-growth pockets of the market. And while we like the recent partnership with Silver Lake (convertible bond investment, supervisory board seats), it is too early to see any direct impact yet. Subscription transition almost complete, but mid-term ambitions look bold We expect revenue growth to accelerate and margins to expand in 2022/23E (12% EPS growth) as the impact from the subscription transition eases. However, achieving the 2023 ambitions (EUR1bn organic revenue, 25% non-IFRS EBITA margin) may prove difficult, with investment requirements (mainly in sales/marketing) likely to remain elevated for longer. Initiating with Underperform We initiate coverage on Software AG with Underperform. The shares appear inexpensive and growth could improve in 2023, but we remain cautious on FY2022 guidance/2023 targets, particularly for margins, in line with consensus views. Our EUR24 TP implies 12x 2023E EBITA.
SOFTWARE AG - BUY | EUR38 VS. EUR46 (+34%) Slower bookings in Digital are no headache We reiterate our Buy rating but adjust our DCF-derived target price to EUR38 from EUR46 incorporating an economic slowdown in the coming quarters. Software AG has reported Q2 2022 earnings ahead of expectations, confirmed revenue and operating margin guidance for 2022 and 2023, but reduced Digital Business bookings guidance amid longer sales cycles. However, the demand environment remains solid for integration software, the rationale behind the Helix programme launched in 2019 is still valid, and we consider management has made the right choices with the Silver Lake partnership and the StreamSets acquisition
Software AG reported Q1 figures that were above consensus and our expectations. The Digital Business again drove the revenue increase with another quarter of consecutive growth. The bookings growth within both the Digital Business and Adabas & Natural was in line with the company’s ambitions. The company also registered growth in ARR. Operating profit, too, was better than our estimates due to higher sales and lower costs. Following this release, the group confirmed its FY22 targets. Its FY23 targets also remain unchanged.
SOFTWARE AG BUY | EUR46 Better-than-expected Q1 2022 augurs well for the full-year º Q1 2022 results exceed expectations thanks to Adabas & Natural Guidance for 2022 and medium-term targets reiterated
SOFTWARE AG - BUY | EUR46 vs. EUR54 Towards a reset of medium-term ambitions Software AG has the means to boost organic revenue growth with StreamSets We estimate dilution to non-IFRS operating margin at 2.8ppt in 2025 Our new target price reflects the new financial structure and potential integration challenges
StreamSets will be paid at least for EUR524m StreamSets complements Software AG’s digital portfolio Operating margin will be negatively impacted from 2022
SOFTWARE AG - BUY | EUR54 Capital Markets Day: improving execution Ambitions remain intact for 2023, with focus on execution The sales model is now up and running, and the sales force incentivised for success The M&A roadmap is clear, yet some margin dilution may occur short-term
Software’s FY21 numbers were broadly in line with consensus on revenues but much higher on profitability. Bookings targets for A&N were met even though slippage caused DB’s bookings to be below guidance. Regardless, there was a good transition of bookings into revenues and DB did show some acceleration in the last quarter. The company’s guidance for FY22 is slightly above expectations and the confirmation of FY23 targets is a reassuring factor.
SOFTWARE AG - BUY | EUR54 VS. EUR52 (+64%) On the way to 25% operating margin… We reiterate our Buy rating and raise our target price to EUR54 Strategy execution is improving further Sales productivity surge will help for reaching 25%+ margin in 2023 Silver Lake will help Software AG accelerating its M&A strategy
SOFTWARE AG - BUY | EUR52(+75%) Reassuring results and guidance We reiterate our Buy rating FY21 results exceed expectations at the operating margin level The move to subscriptions and SaaS advances well FY22 guidance shows solid progress and FY23 targets are reiterated
SOFTWARE AG - BUY | EUR52(+34%) Strategic partnership with Silver Lake to accelerate growth We reiterate our Buy rating Silver Lake may hold a 10% stake and will participate in the governance Software AG intends to boost its M&A activity
SOFTWARE AG - BUY | EUR52 (+31%) The case for private equity as the exit We reiterate our Buy rating Interest from private equity is suggested, yet there is no stampede We still consider the scenario of a sale to a PE fund makes sense Temenos (Buy – Top Pick, TP CHF162) is the other potential PE case
SOFTWARE AG - BUY | EUR52 VS. EUR50 (+39%) Bookings in a quarter do not make nor break annual revenues We reiterate our Buy rating and have upped our TP to EUR52 from 50 We increase our lfl revenue growth and margin assumptions for 2021 Digital bookings suffered from local management changes in Q3
With its Q3 results, Software AG reported another consecutive quarter of total revenue growth. This was mainly driven by Digital Business. Bookings growth in Digital Business was affected by deal slippages. The shift to SaaS though, remained strong and annual recurring revenue also grew yoy. A&N bookings were better than expected. Operating margins were in line with expectations. The group, however, revised its bookings outlook for the year, which was a tad negative in our view.
SOFTWARE AG - BUY | EUR50 (+36%) Actual results for Q3 offset the mixed perception on bookings We reiterate our Buy rating Q3 2021 results significantly exceed expectations All segments performed well on revenues Updated FY21 guidance is confirmed
SOFTWARE AG - BUY | EUR50(+21%) Q3 bookings offer a mixed bag, while FY21 guidance is updated We reiterate our Buy rating but the share price reaction may be mixed Bookings exceeded expectations on A&N but disappointed on Digital Updated FY21 guidance does not fundamentally change our scenario
As opposed to Q1, Q2 was above expectations both in terms of financials and bookings. This quarter showed an increased shift to subscriptions which supported the strong product revenue growth. Margins, too, improved due to lower than expected costs. The group signed various new logos and saw growth across all deal types. However, the company kept its guidance unchanged which implies that the second half will see more investments as part of the Helix programme.
SOFTWARE AG - BUY | EUR50(+27%) Excellent preliminary Q2 2021 results We reiterate our Buy rating and our target price of EUR50 Product revenues exceeded expectations and opex were under control FY21 guidance is reiterated but appears conservative on margins
Software AG’s Q1 results were broadly in line with management’s guidance, where Q1 saw growth in bookings and profitability subsided as a result of increased investment related to the Helix programme. Recurring revenues also grew yoy. Management confirmed FY21 targets and reiterated FY23 ambitions. All in all, 2021 indeed looks set to be a year of transformation and would, hopefully, lead to the anticipated growth and profitability over the medium term.
SOFTWARE AG | BUY Top Picks | EUR50 Q1 results keep reflecting the business model transition We reiterate our Buy rating The transition to subscriptions continue to be successful We remain confident in the achievement of FY21 guidance Software AG remains the best example of software model transition
Software Q2 2021 Top Picks: Software AG A look back at Q1 2021 What we see for Q2 2021 Top Pick for Q2 2021: Software AG enters, Nemetschek exits No change to our Software ratings
SOFTWARE AG - BUY vs. SELL | EUR50 VS. EUR33 (+36%) Another successful business model transformation to subscriptions We raise our rating to Buy and our target price to EUR50 from EUR33 Two-digit sales growth and operating margin surge are planned for 2022 Sales transformation is following the right path Software AG is ready to acquire again, but with strict criteria
STMICROELECTRONICS - BUY | EUR37(+13%) The excellent guidance proves us right Beating the consensus on a lower-than-expected tax rate Solid momentum across the board, but especially for AMS The strong guidance proves us right
SOFTWARE AG - SELL | EUR33 VS. EUR35 (-2%) The challenge of boosting margins by 7-9ppt over two years We reiterate our Sell rating and lower our TP to EUR33 from EUR35 Admittedly, the switch to the subscription model is successful We are questioning the 25-30% operating margin goal for 2023 Acquisitions may resume
Software AG’s Q4 results beat our expectations in terms of bookings but were broadly in line with regards to other financial metrics. Q4 showed a brisk pace in subscription & SaaS bookings. Annual recurring revenue also increased qoq as well as yoy. The group also put forward its FY21 guidance and re-confirmed its FY23 ambitions mentioned in the previous quarter.
SOFTWARE AG - SELL | EUR35(+6%) Operating margin will continue to fall in 2021 We reiterate our Sell rating FY20 bookings and results exceeded expectations However, the margin will keep falling in 2021 due to more investment Profitability ambitions for 2023 are clearly challenged
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