Earnings Transcript for SOW.DE - Q1 Fiscal Year 2020

Otmar Winzig: Thank you. Good morning, ladies and gentlemen. Welcome to Software AG’s Telephone Conference and webcast preliminary first quarter results 2020. This morning, we have published a full set of numbers as well as the presentation slides used in this call. Today’s agenda will start with CEO, Sanjay Brahmawar giving an update on strategy, Helix progress and unexpected times, followed by our special guest, Arnd Zinnhardt with financial details on our first quarter 2020. Our Chief Revenue Officer, John Schweitzer with news on sales success especially in North America will join this telephone conference from the West Coast. This presentation will be followed by a Q&A session with all Board members. We will try to keep this call in the regular one-hour time frame and cover as many of your questions possible. Before we start, there are some housekeeping remarks. This telephone conference is 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 presentations, you may ask questions. Please use only the dial-in phone number for posting questions. The dial-in numbers are also published on our Web site. 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 would like to make the following safe harbor statements. Statements and presentations made in the course of this conference call and webcast include forward-looking statements based on the beliefs of Software AG management. Such statements reflect views of Software AG with respect to future events and results and are subject to those 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. Statements and presentations of this call and webcast constitute neither an offer nor a recommendation to subscribe or buy in any other way securities of Software AG and any of the companies that are members of the group at present or in future, nor does it form a part of such an offer and it should not be understood as such. Statements and presentations of this webcast do not constitute an offer of sale of securities in the United States of America. The securities may not be offered or sold in the United States of America without registration and exemption for registration in accordance with the U.S. Securities Act of 1933 in its currently valid form. Now thank you for your patience. Let us now start, I hand over to Sanjay Brahmawar, the CEO of Software AG. Sanjay?

Sanjay Brahmawar: Thank you, Otmar and hello everyone. It goes without saying that these are unprecedented times. I imagine many of you are joining our call from your kitchen table or a quiet room at home with your families close by. I hope that you and your families like mine are safe and well. This is our Q1 earnings call and I will come to Q1 details shortly. Our strategy is working and we continue to execute against it. We find ourselves and our products mission critical to many of our customers, their operations and their go-forward transformation plans. However COVID-19 and the immediate environment all of us are working through is the area I would like to address first. Over the past few weeks, we have put our people first. As you would expect, my number one priority has been to make sure that our global teams stay safe and well. We have also acted swiftly to support and stay close to our customers and to maintain our strategic momentum. Having a strong financial position and a robust operating platform has helped us to be agile and to take these important steps, but no amount of balance sheet strength can replace the herculean efforts of our people. I want to start by thanking them. I have spoken to you before about the power of our Software AG team. These past few weeks have seen that team at its most adaptable, energetic and collaborative best. The team work I’ve seen across borders and across time zones, the speed at which our product and customer teams have come together to help customers in critical need and the readiness of our people to give something back to their communities, as well as to their colleagues has been inspiring. We’ve seen a significant uplift in employee morale and motivation around moments where our people have been able to give back to social initiatives. Here in Germany, for example, our experts have contributed to the government’s efforts to manage through this crisis, developing apps on top of our products, which helps hospitals see where care beds are available for COVID-19 patients. It’s an important initiative and people will continue to give their time to it in the weeks ahead. This energy is everywhere. Software AG India and its employees have also joined hands in fighting this pandemic, providing a monetary contribution to the Prime Minister’s Relief Fund. It will help the government, hospitals and other actors provide for those in need. In Singapore, our people have donated unused laptops to less fortunate families to support homeschooling. In Malaysia, we donated tieback protection suits to frontline healthcare staff. And in Israel, our webMethods professional services team has helped to improve virtual connections between doctors, patients and hospitals. It’s this sort of spirit that makes me certain Software AG will emerge from this crisis, a stronger business even more resilient, even more agile, even closer to our customers. So thank you very much to the Software AG team. The management board has established the COVID-19 task force to work across our global footprint and help people adapt to the new reality, ensuring they have the tools to work effectively, remotely. We are a global firm. Many of our teams are used to working remotely and the infrastructure needed for this crisis is one we already had in place. This allowed us to absorb the initial shock with minimal friction. Of course, we’re not complacent and have taken the opportunity to test our business continuity plans for potential new scenarios or extensions of the current restrictions. But we feel resilient and surefooted. All of us on the management board are relieved that so far we have seen no major health related issues among our global workforce. Our people have continued to deliver and execute for our customers and service delivery across our organization is continuing unaffected. The majority of our customers have worked swiftly with us to provide remote access to the systems, which our Software AG team support, and in many cases, such as in our work with key customers like Schindler and Dubai Smart City. We are over investing in delivery to make sure we delight customers and prove our value. Our customers are managing the same challenges we are both business challenges and personal ones, too. We feel strongly that our most important role is to support them through this difficult period. We took a little time through March to really talk with them and listen to what they say their pressing needs are. Customers tell us that three things really matter. First, they need to make sure that businesses can continue to operate effectively. Second, they need to make sure all of the new remote operations they have put in place work robustly. And third, they want to ensure that when the tide turns, they’re able to accelerate the recovery and get back to pace. Having listened, we’ve responded in the best way we know through our products. On April 6, we launched a new initiative specifically to help our customers keep their businesses running, one with the name that fits the times very well, Business as Unusual. Through this initiative, we make two powerful products available to our customers for free. ARIS A4 to help with business continuity planning, and our remote IoT solution by Cumulocity IoT and Autosen which is IO key remote monitoring. We have also opened up free access to our digital basic training knowledge hub until June, so that our customers, innovation teams can understand all of the digital transformation tools available to them as they think about where their organizations platform needs to go next. The response and engagement we’ve seen has been very positive. Over 50 organizations have started to use ARIS A4 since the initiative started, including one of the largest hospitals in Estonia, where it has helped improve hospital logistics. Our IO-key remote monitoring offering has touched a nerve and we are seeing our first customers using it to assure critical services in Europe and our digital basic training has received over 760 registrations from professionals from almost 40 countries. Products should not be considered in isolation, however. At Software AG, we are also tailoring our programs and aiding our partners with their responses to specific problems. We’re refocusing the entry criteria of our fast startup program, which supports entrepreneurs with free access to our software and experts to initiatives which will have a material impact on communities and businesses today, our partners have been leveraging our products to do some amazing things, including tracking the supply of oxygen tanks to health services in Italy, assuring clean air supply to many hospitals around the world and implementing social distancing solutions into factories and warehouses to allow them to reopen rapidly and safely. It’s rewarding to know we’re making our own small contribution to helping customers get through this challenge. I want to be clear that we feel Software AG is well set to navigate the current environment. First, our financial position is robust. We have over €500 million in cash reserves and should we need it, we have access to around an additional €200 million of headroom within our existing credit facilities. Our business is also now generating annual recurring revenue approaching €500 million supported by the transformation progress we made in the shift to subscription, our balance sheet strength and our ability to continue to generate cash from our operations puts us on a firm footing. You’ll see that we have recently elected to recommend an increase to our dividend and we will deliver on this commitment. That is not to say, we’re immune to the current events. Towards the end of the quarter, we saw an initial low single digit percentage of projected revenue to be impacted by project cancellations. Nevertheless, over 90% of our forecasted maintenance revenue is already secured at this point of our financial year. We also have flexibility to lower our cost base through several means in the coming months if we need to. And we have been decisive in this area already. We’re phasing new hires across our business and we’re benefiting from reduced travel expense as a result of various restrictions in place globally. We have postponed non-critical corporate projects, realize savings from reduced attendance at marketing events and have limited our use of external resource and contracted labor. Alongside acting prudently to manage our costs, we have looked carefully at the investments we outlined at our Capital Markets Day in February. We’re prioritizing and phasing the investments that are likely to have the biggest impact soonest on our ability to win and drive commercial momentum. Second, if I look at where and how we do business, I draw further confidence in our ability to hold firm in both the short and the long-term. Our customer base is well diversified. Our exposure to sectors acutely affected by COVID-19, such as travel, tourism and hospitality is low, and our current projects are distributed across approximately 800 different customers with no particular reliance on one of those names. Being a global business, we’re well placed to capture the upturn in whichever region it emerges first, we are watching closely for those signals. Our product and positioning remains hugely relevant mission critical and we have plenty of delivery capacity at hand to support demand through the coming quarters. Now against that backdrop, our Q1 performance was strong, and I’m proud of the team’s execution and delivery. At a headline level, total group revenues stood at €207 million at the close of Q1, comfortably ahead of consensus estimates. Total product revenue stood at €160.9 million, 4% increase year-on-year ahead of consensus. We delivered a strong and ahead of consensus Group EBIT performance for Q1 of €28.7 million and our non-IFRS operating margin of 19.2% was also ahead of consensus. This of course tells a strong but backward looking story. The lead transformation indicators we’re tracking give an even clearer insight in how our strategy is progressing. Our bookings at the group level were up 28% year-on-year, our IoT bookings were up 65% year-on-year. Our bookings in Adabas & Natural were up 47%, another extremely strong performance. And while our DBP bookings excluding IoT were up only slightly at around 1%, this was largely the result of deals slipping as a result of COVID-19 which we expect to close in Q2. In Q1 2020, 69% of all bookings within our DBP including IoT segment were subscription or SaaS based. This time last year, that figure was 53% and at the end of Q1 2018, it was just 30%. We are making very strong progress in driving our revenue quality forward. In Q1, Subscription and SaaS bookings were 55% higher year-on-year. At the same time, our annual recurring revenue development trends continue to advance. Within our DBP business including IoT, our annual recurring revenue is 11% higher than this time last year, that helps to bring the ARR totaled for our overall business 8% higher year-on-year to approximately €488 million. This is very encouraging momentum and it results from solid execution against our strategy. So in Q1, we saw good strategic progress in a number of areas. For me, product innovation and differentiation is paramount. At our Capital Markets Day, we set out clear priorities in this area, launching our webMethods.io AppMesh to increase ease of use and reduce time to market for customers, our Cumulocity IoT solution accelerator and data hub to enable the most sophisticated analytics available and the improvements we wanted to make within TrendMiner, our self service analytics platform. I’m pleased to report that all these work streams are moving forward successfully and gaining traction with customers. As you know, these product innovations are targeted to ensure we can extend our leadership in our two most important focus markets. At our CMD, I called out a hybrid integration platform market set to reach €18 billion by 2022 and an IoT platform market set to reach €23.6 billion by 2023. During Q1, we have been winning in both of these areas with a total of 56 new customers and several wins with existing customers, we have been successful in starting new relationships and also expanding our footprint within our installed base. The speed and energy of our teams working in the public sector has seen several projects that were due to expire here be extended as customers work us through the current challenges. John will talk in more detail about customer success. But I want to call up two important names here. First, at the full-year, I told you about a landmark IoT agreement we signed with Schindler, the largest deal we won of this kind. I’m delighted to report that we have met our first major delivery milestone and are executing with precision against tough objectives despite the macro challenges faced in Q1. Our relationship with Schindler working together to deliver the most seamless connected customer experience across one million escalators and elevators is a sign of things to come for Software AG. Secondly, on the integration side, we had a fantastic competitive win over MuleSoft for an API management deal with BMC. Already a long-standing webMethods customer, BMC has now selected our webMethods API management solution to support its digital transformation journey, securing and managing data access and reducing time to market for its technology. This expansion also shows us successfully moving a perpetual customer to a subscription agreement, an example of the Helix strategy in action and a sign of things to come for our business. I also want to call out the continued strong performance we are seeing in Adabas & Natural. Our zIIP optimization and cloud container offering continues to support our customers, and it is a sign of Adabas & Natural’s continuing relevance and value that its products are now available on Microsoft Azure marketplace. In past crises, such as the economic shock of 2008 and 2009, Adabas & Natural proved its resilience and cash-generative qualities. We expect it to do so again now. I also just want to mention that the sale of our Spanish professional services business remains on track. That business continues to perform well at the top and bottom line against a tough backdrop in Spain. And I thank the team there for their hard work. At our CMD, I outlined five key areas of focus and investment sitting alongside continuous product improvement. These were sales, subscription, partnerships, culture and marketing. I’ve addressed subscription and John will address sales and partnerships, but I’d like to touch on culture and marketing here also. First, our culture, you’ve heard me say before that business transformation is underpinned by a cultural transformation. This work led by our CHRO, Dr. Elke Frank, is helping us to attract and retain the best talent in the market, drive behavior change in our organization and enable our leaders to push Software AG towards sustainable, profitable growth. On April 1, Alvin Zhou joined from Salesforce as the new leader of our Germany, Austria and Switzerland business. We also welcomed Suraj Kumar from Axway Inc. as our new General Manager for Integration and API Management Business unit. And in June, Dr. Michael Sonne will join from PlanetHome Group as our new CIO. We also continue to build an environment in which our whole team can flourish. We now have a new competence center within our HR function to focus on talent management, and we continue to invest in process and structures that foster cross-functional collaboration. We are rewiring our company for growth and ensuring our people can thrive as we drive our strategy forward. Finally, marketing, our growth marketing function is now fueling the growth engine of our business. We have seen a 43% year-on-year increase in marketing qualified leads through Q1 and over 20% more visitors to our website than the same quarter last year. The team is also rolling our plans to make our annual International User Group Conference fully virtual. Importantly, the ratings we received from the industry analyst group continue to beat our competitors. In Gartner’s Application Integration Platform category, our overall ratings of 4.4 beat Boomi’s 3.7 and MuleSoft’s 3.5 by a considerable margin. So Q1 is a strong indicator of our transformation in action, our new ways of working, of new places we are winning and an indication of what we have the potential to achieve. From here, let’s move to our outlook. At our Q4 earnings, we set our revised guidance KPIs for 2020. One of these, our non-IFRS EBITDA margins continues from prior years, helping to outline our profitability journey as we invest in transforming our business. The remaining metrics track bookings growth rates in our three main lines of business to help provide a clearer picture of our commercial momentum, particularly in the growth areas of our business. Following the onset of COVID-19 pandemic, which started to impact Software AG towards the end of Q1, we decided to take prudent steps to re-qualify our project pipeline and stress test our business model. That work has been done and the outcomes underpin our confidence in our ability to deliver a solid performance in the first half of the year. However, the current macroeconomic uncertainty does reduce our visibility into the second year – half of the year. Certain of our key geographic markets have begun to reopen. Others have indicated time frames for how they expect to reopen. And the timing of our deal closures now becomes more uncertain, particularly in DBP and IoT, which have a greater reliance on new customer acquisition. Be assured that we are maintaining a very close dialogue with our customers and partners as we all collectively navigate through this period. As a consequence of our assessment, we are now expecting slower-than-anticipated growth in 2020 for our two DBP revenue lines. We expect a growth range for DBP, excluding cloud and IoT product bookings, of 0% to 10%. We expect cloud and IoT product bookings to show a growth range of plus 20% to plus 40%. We are maintaining our outlook for our robust A&N business and for our non-IFRS EBITDA operating margin. I would also like to add that our 2023 medium-term ambitions remain unchanged, most notably, our ambitions is to reach €1 billion in revenue and expand our operating margin to a 25% to 30% range. Whilst we cannot forget that COVID-19 is, first and foremost, a human tragedy, none of us can ignore the real and tangible changes it has brought to how business and organizations operate day-to-day. Over the medium term, demand for digitization should intensify as a consequence of these changes and the likely lasting impact on organizations and their operating structures. With that, I’d now like to hand over to Arnd, who I’m delighted to say joins us once again today, one last time to cover Q1 financials. I can confirm that our new CFO, Matthias Heiden, will join us in July and he will be present at our virtual Annual General Meeting in June. So Arnd, thank you for the Q1 and once more, over to you.

Arnd Zinnhardt: Thank you very much, Sanjay. Good morning ladies and gentlemen. And a warm welcome to our conference call also from my side. I hope you are all doing fine, safely sitting in your home offices and coping well with these challenges times. You might be surprised to hear my voice again. The Supervisory Board and the Management Board of Software AG asked me to attend this call and to speak on behalf of Software AG and its board as my successor, mentioned that Dr. Matthias Heiden has not started yet. As you know, I left Software AG at the end of March. Consequently, I was part of the management team throughout the entire quarter but not involved in the process of quota closing or compiling the Q1 financials. I will not comment on any future-related topics in Q&A. Those will be for Sanjay and John. Having made this disclaimer, I would like to turn to the analysis of Q1 of 2020. First quarter of 2020 can be summarized as follows

John Schweitzer: Thank you, Arnd and hello everyone. It's great to speak with you again here today. I'm dialing in from my home office here in San Francisco, Bay area. I hope you and your families are healthy and happy. As you heard, despite the global crisis Q1 was a strong start to 2020 for Software AG. Group bookings were up 28% year-over-year and I'm proud to say the reasons to achieve the targets for the quarter. As Sanjay stated, this performance is evidence, we're starting to build the right kind of momentum, predictability and scale in our global business as our Helix transformation takes hold. From a sales and go-to market perspective, there were several highlights in Q1. For the first time in more than a year, America significantly exceeded Q1 targets and showed strong growth overall. As part of that, DBP grew more than 20% versus prior year. And so after a successful restructuring in 2019, we know our new go to market framework is now paying off. North America is clearly back on track. In terms of business lines, A&N and IoT, both significantly overachieved expectations, as you heard delivering year-over-year bookings growth of plus 47% and 65% respectively. At this point, I'd like to mention that DBP overall was behind where I had planned just a short six weeks ago. We saw an impact from the crisis on a few deals planned for closure in March and I expect those deals to close now in Q2 as our customers refocus on these critical projects with us again. During the Capital Markets Day in February, I told you our path to success in 2020 was threefold. First, delight our customers and second, develop a world class sales organization and third, deliver strong double-digit bookings growth. Despite the dramatic recent change in the business environment, I'm happy to announce that we've made great progress across all areas. Let me share a couple of the specifics with you now. We continue to make progress in establishing strong customer relationship. Our NPS rating is at an all-time high of 48%. We also launched the quarter two new metrics that measure our customer satisfaction, after every sales cycle and after every project go live. We continue to strengthen our team. Global sales leadership is now stronger than ever. As we brought in knowledge and talent from companies that have experienced similar go-to market scale and transformation, leaders from Salesforce, MuleSoft, Apigee, Tibco and Axway have all joined our team during the quarter. Our new business model is showing clear signs of success. Subscription mix as percent of total bookings as you've heard 69% up from 53% same quarter last year and ahead of plan, new pricing and packaging, new customer success themes and new incentive compensation plans are driving the outcomes we expect, happy customers and recurring revenue. The successful quarter was clearly grounded on some great customer wins in our customer base, but also with new customers. We added 56 new customers representing a 17% year-over-year increase, a great achievement. In hybrid integration, we beat MuleSoft, Apigee and IBM to win this new customer luxury brand Armani. They will deploy webMethods.io to optimize the purchasing experience of customers while integrating real time with inventory systems. And Golden Goose, an emerging luxury brand, lifestyle – luxury lifestyle brand also chose webMethods.io to rapidly respond to the growing customer and business needs by integrating applications on premise and in the cloud. We beat MuleSoft here again, the Quest Diagnostics, the world's leading provider of diagnostic information systems in testing and existing ARIS customer, has drove an alphabet to gain a single point of view on its enterprise architecture landscape and improve its ability to integrate with third-party solutions. We beat Mega to secure another great use case at Quest. Lastly a big vote of confidence to our Adabas & Natural 2050 strategy, we had a huge win in the U.S. government, the office of personnel management. We partner with them for more than 30 years now to deliver their benefits systems which serve millions of U.S. retirees by processing around US$4 billion every month. As I spoken at Capital Markets Day the growing relevance of our partner ecosystem, we continue to build relationships which build, which help us to scale and grow. I'm pleased to report great progress on this front too. Software AG Alliances and Channel business has grown a significant double digit year-over-year growth in the quarter. You’ve heard about the Schindler win earlier from Sanjay. This is a great example of our deep relationship and partnership with Microsoft. We will build on the success of this with Microsoft and create great go-to market momentum together. This is also a good segue into sharing some new alliances and momentum from the quarter. First, we recently announced PwC Germany has now joined the Adabas partnership. PwC will further develop use cases and help accelerate adoption for Adabas with a more powerful digital ecosystem. With this partnership I expect to expand the number of machinery companies leveraging this great community. Second, I'm delighted that today we are announcing a new partnership with Tech Mahindra. Together we will provide best in class IoT analytics and integration technologies as well as services and support to enable communication service providers and manufacturers to drive digital transformation. It's important to point out Tech Mahindra has chosen Software AG as their exclusive IoT software platform after a very competitive cycle versus PTC and others. Software AG will also invest in Tech Mahindra’s factory for the future program and make our technology available to the Tech Mahindra IoT labs. Lastly, Software AG is expanding its relationship with AWS. Together, we are expanding our strategic partnership to encompass joint sales and go-to market efforts. This will help drive new business and accelerate sales cycles for Software AG through a co-selling with AWS sales organization. Software AG and AWS sales teams will work together to promote and support Software AG’s products and services with joint customer engagements. Each of these relationships represents a show of trust in our ability and a symbol of our technology leadership and growing market presence. As these relationships sped down, we will see them make a significant impact in our results. And now looking forward to Q2 and the second half of 2020. Overall, I see continued uncertainty in the markets we serve and pressure on our pipeline too. Having said that I do expect a solid first half and a robust DBP performance in Q2, strong customer commitments. With regards to the rolling four quarter pipeline, my team and I had done a full requalification. As a result, seen the pipeline decrease slightly but approximately 10% to 15% from January to mid-April, it's important to point out most of this pipeline was pushed to 2021 not lost. Approximately 70% of our current pipeline is represented across four industries, government, communication services, banking and manufacturing, so there's very little to no exposure to those industries impacted by COVID-19, for example, transportation and hospitality. Our professional services business felt an early and swift impact for the crisis. To-date, we've seen 5% of our current projects impacted from project phasing, travel bans or in a few cases discontinued projects. Overall, the professional services business is strong and resilient. In fact, 81% of our revenue is covered by backlog or committed pipeline. There is limited exposure to sectors heavily impacted by COVID-19 here as well. Finally, while I don't think anyone can predict the exact impact of COVID-19 on businesses, I can tell you that we plan our business for various outcomes, prolonged impact, sluggish recovery or a sharp rebound. In each of these cases, we can respond quickly to control the EBIT situation, including tactics like continued reduction in travel and phasing of new hires. I am very proud of the team's execution in Q1 and early here in Q2. We are prepared and we'll stay prepared as this crisis unfolds. Please stay safe and now let me hand the floor back to Sanjay Brahmawar. Sanjay?

Sanjay Brahmawar: Thank you, John. Before I hand the call over to Q&A, I just want to come back to our opportunity. I hope what you all have heard has reassured you that we are capable of managing our business to this current challenge. Our revenue exposure to the most impacted areas is low. Our investments are targeted and we are actively managing our cost base. But while the crisis plays out, it's important to understand that our transformation hasn't stopped. It will not stop. And the long-term potential for our business is unchanged. We remain focused on the growth markets I mentioned earlier. We continue to lead in both of them and as you've seen today, we continue to beat competition. Furthermore, while we cannot forget the current crisis has a terrible human costs, one of the side effects has been to change the way so many organizations work. From this change, there is no going back and transformation markets we are targeting are not going to go away. As our customer at Smart City Dubai said to me recently, the COVID-19 outbreak has given many business leaders a real wake up call. As far as digital transformation is concerned, the imperative for companies to transform is stronger now than ever. So as we close Q1 and move into Q2, another quarter of solid execution against our strategy has delivered strong results. Our business continues to transform how itself, how it's positioned. We are winning competitively, driving subscriptions and growing our recurring revenue. Our customer engagement see us continue to deliver new use cases for our technology and become critical for our customers. We remained surefooted to keep making progress as the current environment evolves with the right products. We have amended our guidance ranges for product bookings in DBP, excluding Cloud & IoT and DBP Cloud & IoT, while maintaining our guidance ranges for A&N and non-IFRS EBITDA margin. And our midterm 2023 ambitions remain unchanged. With that, we will take your questions now. Otmar, please.

Otmar Winzig: Thank you. Operator, before we start questions please repeat the procedures so that they can align the right way.

Operator: [Operator Instructions] The first question comes from line of Alastair Nolan with Morgan Stanley. Please go ahead.

Alastair Nolan: Sorry. It was on mute, apologies. Morning everyone, just a couple of questions from me if you don't mind. The first is around the investments, Sanjay, you mentioned you're maintaining a close eye on these, but the intention appears to be to maintain the investments and stick with the original plan. Given the margin guidance hasn't changed. Could you just maybe comment on that and is it really the right environment to continue investing at the same rate, especially since I guess the bookings growth, you've cut the bookings growth guidance on DBP? Sort of whereas you're investing, we're getting less sort of a return on growth. So maybe you could just give us a little bit more detail on that. And then secondly, you've mentioned closing deals in the second quarter, I guess what gives you confidence on that and kind of aligned to that, what sort of a recovery you are baking in now with the updated full year guidance? If you could give us a little bit more color around that please.

Sanjay Brahmawar: Hey Alastair, thank you for the questions. So on the first one, look I said very clearly that we have looked at our investments and we are prioritizing the investments to be in line with where we see the maximum impact. So the bulk of the potential and we also see a significant amount of savings that are coming through with certain changes that are happening. So bulk of the potential savings to offset the impact from COVID-19 is related to savings from travel costs due to travel ban, expect to change your travel habits and of course in more realistic hiring assumptions and lower marketing expenses due to less on-premise events. So we expect an impact of roughly between 10 million to 15 million from these activities. So that is something that we will take away from the amount that we had talked about in terms of investments, but we don't see that any of the savings will disrupt the transformation and will jeopardize our midterm commitments or prevent us from being able to deliver on our margin commitment that we have. So it's your first part. The second one was really what gives us the confidence around the bookings. But I would say on Q2 as John mentioned, right, we have detailed analysis around our Q2. Also, we’ve had a lot of direct contact with customers around the Q2 deals and we know – these deals have been progressing with the customers for quite a long time. And post COVID, we’ve had conversations with the customers need to close these deals. These are mission critical. In fact, actually all the deal slippages that happened in Q1, we’ve already closed six to seven deals, which are in fact what we had planned in Q1 in any case to deliver the bookings growth. So that fast start in Q2 also leads us to believe in our plan. And then on Q3, Q4, I think it’s a bit more difficult here because we’re not very sure about the government lockdowns and how, even though more relaxations are starting now, but what is exactly the way it will pan out. And so here it’s only, a way to make an assumption and really think through after having requalified a pipeline, how we best see that developing. So hopefully that answers your question Alastair.

Alastair Nolan: Yes, thank you very much.

Operator: The next question comes from the line of Stacy Pollard with JPMorgan. Please go ahead.

Stacy Pollard: Hi. Sorry, I think I was on mute as well. Let me start. Following up on the cost question, can you just maybe say how much of your costs are variable versus fixed? And then second question, again, looking at that pipeline, and I know you said just postponed versus, is there any risk that a portion of that never gets done? Maybe you could, I’m not sure what your exposure is. I think it’s mostly to large enterprises, but maybe just confirm that percentage. And then third question, digital transformation, do you think it’s actually accelerated once we’re out of this COVID-19 crisis? I mean, how do you see that panning out?

Sanjay Brahmawar: Hi Stacy. Let me take question one and three and I’ll ask John to comment on the pipeline. So we think about, in terms of the costs, our costs are approximately 20% to 30% fixed and balance variable, sorry, I meant the other way. Sorry, 20% to 30% variable and the balance fixed. And as I said, again to Alastair, how we are re-prioritizing and managing the costs effectively to be able to secure the margin. So that’s kind of first thing. And on the third question, which is about digital transformation. Well, I’ve been almost speaking to one CEO or a customer every day. And I can tell you one thing that the thing on their mind very clearly is how to be to manage the business and allow the business to step out of this in the fastest possible way. And there the conversations really are how to allow their teams to operate, how to allow the teams to collaborate, how to make sure they can bring data and integrate across the different landscapes. So it plays very well to our portfolio of hybrid integration, API management and IoT. And you think about their need now to even adopt cloud and hybrid cloud faster. That really is something that we would see reaching out for the demand of hybrid integration, API management. On the IoT side, again, remote connectivity and managing of assets, being able to run operations more effectively also plays very tightly to the way companies need to operate right now.

Arnd Zinnhardt: Stacy, just one on the variable and fixed cost side, we have implemented one or two years ago, a principle where we say base case and investment case. The base case is what we have already on board with respect to people and committed marketing events. And the investment one is where decisions still need to be taken throughout the year, which are obviously in the budget, but not yet made. So when Sanjay is talking about the percentages, I think this is on top of what we have here and this is part of the normal structure of managing the profitability which was very much as expected throughout the years.

John Schweitzer: So maybe on our pipeline.

Stacy Pollard: Yes.

John Schweitzer: Hi Stacy. It’s John. Maybe I just comment on the pipeline question that you had there. So as I said earlier from January to April seen about a 10% to 15% decrease in the pipe. Some of that’s not completely unnatural but have been other impacts say due to spend increases that we’re aware of now, longer decision making cycles, et cetera. So we’re keeping an eye on those going forward. The current pipeline fill rate is actually pretty good. It’s still yet to be seen what happens over the course of the next couple of months. But I can tell you that the pipeline multiples for A&N, DBP and IoT are mostly in line with what I would expect for 2020. It’s just the uncertainty around things like pending bankruptcies, spending freezes, longer decision making cycles. I know there’s going to be an impact when people get back to their office and it will happen. Now for Q2, the pipeline for DBP supports a very good outlook for double digit growth. So that’s why we feel more bullish in the short term and somewhat cautious in the second half of the year.

Stacy Pollard: Yes. And John, just quick followup. Any risk on pricing or payment terms?

John Schweitzer: No. No – that was seen in Q1. We’ve seen – we’ve actually done some things with subscription. It gives us some flexibility. For example, we’ve added 90 days onto as some subscription customers over the anxiety of not being able to start projects that, that doesn’t really have an impact, at least the material impact. And that aligns us better with their current environments. But I don’t see any current pressure on say, discounting or things like that. I think we’ll be able to hold that as usual.

Stacy Pollard: Okay. Thank you very much.

John Schweitzer: You’re welcome.

Operator: The next question comes from the line of Michael Briest with UBS. Please go ahead.

Michael Briest: Thank you. Good morning. A couple from me as well. Just in terms of maintenance, the DBP business was flat in Q1 year-on-year, 5% growth in Q4. So a bit of a deceleration and I’m just curious what’s happening on renewal? Is this maybe provisioning around nonpayment that’s caused that? Or is it actually the renewals have dropped? And then, I’m not sure you answered Stacy’s question around SME, but what proportion of your revenues come from small businesses and then on Schindler, I think it was called out as being the largest deal you’d ever sign. So is all of the contribution from Schindler in Q1? Or will some of that fall into other quarters? Thank you.

Sanjay Brahmawar: Hey, Michael. Let me take the first and the third and then I’ll ask John to comment on these small and medium size businesses and proportion, right. So in terms of the maintenance, well, there was slightly – the cancellations in Q1 of existing maintenance related contracts there was only slightly increased compared to previous year. And our 2020 forecast projects a one percentage point increase versus previous year bringing the rate back to 2018 levels. So we feel pretty confident about the maintenance overall plan. The second thing is in terms of Schindler, well, Schindler is a booking that has basically been recognized now in the first quarter. And it is – it’s not something that will occur in the coming quarters for this – with this year. John, do you want to comment on the…

John Schweitzer: Sure. Hi, Michael. Just on small and medium-sized businesses, it is a mix – overall mix to the total. Our primary business today and the vast majority of our business comes from large enterprise. We do rely and partner with many resellers and what I would call the corporate segment or the small and medium sized business. But I don’t see any exposure, if that’s what your question revolve in around small and medium sizes. If anything, as our partner business grows, I see that as a bigger growing opportunity in the medium term for the company.

Michael Briest: Okay. Thank you. Sanjay, I just didn’t quite understand what you said on maintenance, you want it to be growing 1% this year or to improve the renewal rates back to 2018 levels?

John Schweitzer: It was basically increased to bring it back in line with the 2018 levels.

Michael Briest: Okay. With the renewal rate or the revenue?

John Schweitzer: Renewal rates, yes.

Michael Briest: Okay. Thanks.

Operator: The next question comes from the line Gautam Pillai with Goldman Sachs. Please go ahead.

Gautam Pillai: Yes. Thanks for taking the questions. So firstly, just following up on your comments that six to seven slippages in Q1 have closed already, can you give an indication of what DBP bookings growth would have looked like if these were completed in Q1 itself. Secondly, can you elaborate on your product portfolio? Specifically what are the products which are seeing traction with customers in the current environment? Or you kind of comment on of what percentage of your products are mission critical versus probably nice to have from a customer standpoint. And also can you comment on the customer behavior recently, especially in conversations related to move to a subscription model and renewed pricing mechanism. Thank you.

Sanjay Brahmawar: Hey, Gautam. Let me take one and two and then I’ll ask John to comment on the customer behavior, right. So the deals that we’re talking about, which is a fast start in Q2 effectively would lead to about a 12% to 13% growth on DBP excluding IoT. So that’s why we were very clear that actually had this COVID-19 issue not hit us. We would have hit our DBP plan and would have been able to demonstrate right between our range 10% to 15%. So number one, but also as John says, we are confident about the rest of the pipeline that we have in Q2 to be able to secure that first half. Now, in terms of the product portfolio, what is mission critical? Well, think about this, a big portion of our product portfolio is integration and API management Integration API – hybrid integration and API management is in the core of any company’s business performance whether they are moving data across the distributor landscape, whether they are interacting with their suppliers, partners or the customers. Hybrid integration is what is required to be able to move those events and those datas across. So without that they cannot operate. And that is absolutely mission critical. And then the second area of course is Adabas & Natural, which you know, is against sitting in the core, rooms and engines and operations of our customers, another area that they cannot touch even in spite of this kind of a situation. Then you come to the final part, which is a smaller part of our portfolio, which is ARIS & Alfabet. And here again, surprisingly we find that customers very much want to use ARIS for business continuity where they want to be able to share and communicate with their different parts of their organizations on business continuity measure, safety measures, social distancing measures, et cetera. So ARIS and A4 the lighter version that we’ve launched has already got 60 new tenants just by having launched it recently a week ago. So that’s kind of the part – the part that we might kind of see could be that of course there are some customers doing proof of concepts around IoT and if they haven’t really fundamentally adopted a model around deploying, connecting assets, collecting assets and expanding services that they might postpone this proof of concepts. But we’ve also looked at our IoT pipeline and of the opportunity that we have similar like and obviously not the same size as Schindler, but similar kind of type of deployments. They are pretty mission critical, so hopefully John, would you want to comment on the customer behavior?

John Schweitzer: Yes, hi, Gautam. Unfortunately, I lost sight of your question. Can you repeat it for me please?

Gautam Pillai: Sure. I just wanted to get your thoughts on, what are you seeing in front of recent conversations with customers especially related to move to a subscription model and probably kind of slight price hikes when you kind of had those conversations. How are customers reacting to this?

John Schweitzer: Yes, actually the feedback’s been quite good. It provides some pricing flexibility for them. It gets them then into more of an OpEx situation rather than a CapEx situation. So I think, it’s been long expected that we move to subscription from a deployment or a commercial contract standpoint. The interesting thing too in these new bundles, we’ve gone from 4,000 or 1000s of SKUs let’s just say down to about 40, and created some bundles that’s created opportunity for us as a way to commercially sort of cross and upsell our product. So I’ve gotten some great feedback not only from customers but partners in that. So far, so good, I think it’s – that pricing and packaging combined with our incentive compensation plan is driving this performance for Q1 right now and I expect it to continue.

Gautam Pillai: Okay, thanks. All the best for the remainder of the year.

John Schweitzer: Yes. Thank you.

Operator: The next question is from the line of Knut Woller with Baader Helvea. Please go ahead.

Knut Woller: Yes. Thank you for taking my questions. Actually, two remaining. The first one maybe on for John, and John, can you give us an update and how COVID-19 has changed your sales approach? How are you doing the remote sales approach and pitch compared to the previous one? I think your optimism overall suggests that there shouldn’t be any friction on the back of COVID-19 and then on the services margin if I understood incorrectly, you hired IoT experts who used external resources, which put pressure on the services margin. How long do you expect this process to continue and when should we see services margins turning around again? For example, by using internal resources rather than the external resources which are more costly of course? Thank you.

John Schweitzer: Knut, thanks for your question. So let’s see. On the customer side of things, forgive me here, it’s gone past 1

Sanjay Brahmawar: Yes, Knut. Hi, good morning. The service margin was impacted, as I mentioned, especially due to the IoT deals. And I think we have to look to two elements here. The first one is flexibility in these times. And this goes together with Stacy’s question on how much is flexible and how much is fixed cost. And I think in these times, with these uncertainties, it’s a wise decision in general to take freelances on board where the cost base is more flexible. And if the backdrop is that you pay higher prices, and it is the fact for the time being. So that is basically with mitigation. So that’s the first one. The second one, on the IoT side, I still believe that these kind of landmark deals like Schindler and others, are very important in order to foster the IoT business as such. So therefore, we should not look to the service side on an isolated basis but look across the individual business lines to make some judgment. And I must say I would congratulate the management team going forward if they could acquire so many strategic projects even on the backdrop of a smaller service margin.

Knut Woller: All right. Got it. So it’s more an opportunistic behavior that you’re trying to meet demand. And also, I think it’s fair to say that there is going to be expected a positive signaling effect from large deals if they are managed successfully, which benefits the business then also in the medium term. Is that the right way to look at things are?

Sanjay Brahmawar: All right. Yes, correct.

Knut Woller: Excellent. Thanks and all the best to you.

Sanjay Brahmawar: Thank you.

Operator: The next question is from the line of Mathew Yates of Credit Suisse. Please go ahead.

Mathew Yates: Hi guys, thanks for taking my question. It’s just a slight follow-up on the pipeline question, please. At the start of the year, you guys provided some pipeline coverage metrics. I just wanted to know sort of where we stand with them now and also whether you’re assuming a lower conversion of the pipeline in the updated guidance. Thanks.

Sanjay Brahmawar: Hey, John, would you take that one, please?

John Schweitzer: Sure. Sure, yes. Hi Mathew. So the pipeline ratios as I see today, the coverage – and this is coverage against our plan, right? So as usual, A&N coverage is about 1.5. DBP coverage is sitting at 2.8, down slightly; and IoT is at 4.5, also down slightly from the presentation we gave in February. The conversion rates are the variable part here that are really difficult to predict and forecast, so I’m just going to go back. We’ve seen some spending freezes. We’ve seen some obvious business interruptions. We’ve seen longer decision-making cycles. We’ve even seen approvers change. So it’s in some cases where the CFO wasn’t necessarily involved in the sale cycle. Now he or she is, where you should just sit with the business owner or even with the CIO. So that variability is hard to gauge things like compelling event. We don’t see budgets being pulled. It’s really the question; will the sales cycles lengthen to a point that gets very uncomfortable? But anyway, the deal conversion is why we’ve expanded our guidance ranges. The volume of the pipeline is down, as I said, 10% to 15%, but I do expect continued pressure on conversion rates in the short-term.

Mathew Yates: Okay, thanks.

John Schweitzer: Yes. You are welcome.

Operator: The next question comes from the line of Sven Merkt with Barclays. Please go ahead.

Sven Merkt: Hi, good morning. Thank you for taking my question. Previously, you have indicated flat product revenues for the year. Could you update us on your expectation considering the new guidance and how the deployment options have developed so far this year? And then secondly, I found it very interesting that you are speaking much more towards an aged impact. In contrast to the sector, we’re largely seeing the impact now and is expecting a gradual improvement in H2. Could you maybe elaborate a bit further on why this is and what drives this difference? Is H1 for you simply so strong because you started the year with a very strong pipeline? Or what really drives this? Thank you.

Sanjay Brahmawar: Hi, Sven. Thanks very much for the question. Let me just comment about the flat product revenue, which we said at the capital markets. You know that we have guided you on bookings, which we believe is a better indicator of our transformation since we’re doing the shift to subscription. And we have a combination of perpetual subscription and SaaS as we measure 2020. So based on our bookings guidance, we had estimated a sort of flat revenue development in 2020. And now with our change to bookings guidance, what we would think is roughly in about minus 2% versus prior year in terms of our product revenue. So that’s sort of how we can see it right now based on the ratios of how much is going to be perpetual versus how much subscription. And then within subscription, how much are going to be the three-year versus one-year kind of contracts. Hope that answers that. On the question around the customer engagement, I think, John, if you can make some comments please.

John Schweitzer: Sure. Yes. Again, just keep in mind, our sales cycles are six to nine months, right? So those sales cycles right now that are say seven, eight, nine months into it, our customer commitments are very, very strong. We saw it in Q1. And a couple of things shifted as they move to their home offices, but they’re very engaged right now. I think as I mentioned before, those sales cycles could elongate a little bit, thus that’s impacting later in Q3, first part of Q4, we’ll still have a chance to do some catch up, I believe, if this is sort of a quicker rebound, we could do some catch up later in Q4. But I’ve got to believe that based on the current signals from the regions, the markets, governments, – prospects are going back to work, that there’s going to be a lag in those sales cycles right now that are just let’s say, one, two, three months old, where we’re just starting the journey with that. Those are the ones that are going to push longer. Does that help?

Sven Merkt: Yes. Thank you very much. And good luck for the rest of the year.

Sanjay Brahmawar: Thank you, Sven. Next question please. Operator?

Operator: The next question is from the line of Martin Jungfleisch with Kepler Cheuvreux.

Martin Jungfleisch: Good morning. Thanks for taking my questions. I’ve two please. The first one is on Adabas & Natural. I want to understand a little bit why A&N is so strong and what is driving this? Is it still – is it enablement, is it the prolonged support or anything else? And how much visibility do you have to see these trends continue in the future beyond 2020, especially on your maintenance renewals? And also from the margin perspective, it seems like you you’re investing more into R&D and sales and also marketing. I think margins are now 65% from previously 70%. So would you expect these to come back to the 70% levels in the midterm? Or are continued investments needed? And I will pause here and then hop back in for the second question.

Sanjay Brahmawar: Hey Martin, thank you very much for the question. Let me just comment on Adabas & Natural. We continue to see strength of our relationships with our customers and their confidence in, obviously the product, but also Software AG as being able to continue supporting them for these mission-critical applications and mission-critical operations. So three things are really driving this. One is the 2050+ program that we launched, which was effectively taking away the concern and risk from our customers. They have this working well and they want to keep it going. Second one is zIIP. As you know, we launched that program that is not through it yet. We are continuing to see more and more uptake from customers on zIIP. There are still many customers to finish on zIIP, so we will continue to see that. And then the third thing, which is the most exciting one, is really our team have been working together with the hyperscalers, particularly Microsoft and AWS, and really looking at containerizing Adabas & Natural and being able to help customers shift and leverage the cloud. And this, as I said, we have already done some pilots and some – with some customers and is successful. So we see this as another area and a revenue stream that will continue to help and boost Adabas & Natural. Obviously, that drives also our confidence of keeping the range on Adabas & Natural. In terms of R&D, I definitely – we do believe that we will get our margins back to the original high levels. We don’t see this as continued issue. Of course, as I said, to get this competitive edge and to push this acceleration, we have overinvested right now. But these are onetime efforts that we’re putting in, and we don’t see them continuing. So margins, definitely, we are confident about returning back.

Martin Jungfleisch: Okay. Great. Thank you. And then the second question is more in general. Can you remind me of your exposure to the oil and gas industry, please? And then have some customers ask to extend payment terms? And do you see any risk of receivables written-off? And maybe you can also point to the amount of factoring used in Q1 to smooth the cash flow.

Sanjay Brahmawar: Yes. I would say on the oil and gas, we have very low exposure to the oil and gas industry. So I don’t see much of an impact. As John was explaining to you, we have government financial services, Telcos, manufacturing. These are the main areas where our customer segments are. So low exposure, first and foremost, to oil and gas. And then second thing on payment terms. Again, we are – most of our customers are blue-chip customers. So we haven’t really seen and ask from – specific ask from customers around reducing payment or sorry, increasing payment terms or asking for some special agreements. Of course, we keep open. And where and if we need to help a customer in a particular situation, we will do that based on the customer. But there is no generic kind of ask that has come across to us because they are primarily blue-chip customers. So we don’t really see a big receivables risk.

Martin Jungfleisch: Okay. Thank you. And then on the amount of factoring, please?

Sanjay Brahmawar: On prior year basis, it’s the same level that we are keeping the factoring exactly as prior year.

Martin Jungfleisch: Okay. Great. Very helpful. Thank you.

Sanjay Brahmawar: We have time for one last question. Now we’re already 90 minutes, almost 90 minutes in this call. As usual times we give some extra time, but this is the last question now. Goes to? Operator?

Operator: The last question is from the line of Holger Schmidt with Metzler. Please go ahead.

Holger Schmidt: Yes. Good morning. Thanks for taking my question. Your bookings growth in IoT and cloud was quite impressive in the first quarter. Could you give us an indication about bookings growth, excluding the Schindler deal? And then secondly, what proportion of the business in the first quarter has come from partnerships? And lastly, maybe you can elaborate a little bit more on your partnership with Tech Mahindra in the current year and over the midterm?

Sanjay Brahmawar: Yes. So roughly about – let me answer that first one, which is about Schindler, and then I will pass it on to John to answer your other two questions around Tech Mahindra and the partnerships. So booking growth, if we took Schindler out, as you know, Schindler is a big deal for us. If we took that out, bookings growth would have been about 20, 25 – 20% to 25%. And of course, Schindler was a big, big deal. Okay. And then on the partnerships and Tech Mahindra, John, can you comment?

John Schweitzer: Yes. What specifically are you looking for to that one? I mean, I can give you a little bit more. I’m happy to answer your question, a deeper question. But so we [indiscernible] Tech Mahindra had a particular strength in Telco, and they do. And that’s, what I think, widely known. So we competed in this IoT software platform to gain their partnerships. So looking forward, we’ll package use cases with their help to bring to the market. And I believe that, that’s one of the things that’s missing in this fairly fragmented and nascent market is repeatable use cases. So that’s the opportunity that I see here with their brand and their scale, and our solution and service. And is there more specific that I might be able to answer for you there?

Holger Schmidt: I mean, could you quantify an expected impact in the quarter?

John Schweitzer: Yes. Look, we’re – we’ve got half a dozen targets that we’re going after now. We need to win those initial lighthouse accounts. As you know, these things don’t happen overnight. So I would – we start generating revenue together in the second half of the year with scale coming in the midterm.

Sanjay Brahmawar: One thing I can add, Holger is that your question about partner contribution, I guess, partner DBP revenue was 19% up year-on-year. So as we start building and developing these partnerships the contributions start coming in – into driving the growth aspect.

Holger Schmidt: Okay. Great, thanks.

Otmar Winzig: Well, this is when it comes to a close. Sanjay, you want to have closing remarks to summarize shortly?

Sanjay Brahmawar: Yes. I just want to thank you very much. These are unprecedented times. So of course, but I think what is really important is we are well positioned to be able to deal with this pandemic. I believe that our strategy is strong. You combine that with our product portfolio, which is mission-critical and you combine that with the determination of our talent and our people, I think we will be able to weather this situation but also come out stronger as we exit from this pandemic. So with that, I wanted to thank you and wish you all being staying safe and well. Thank you.

Otmar Winzig: Thank you, everybody. Thank you also for the audience questions, which really help to put a lot of additional light and interest into our Q1 reporting and our changed outlook. So I will close this call now. And I see there are no remaining questions actually in the room, so that’s very good. We expect maybe some more later on, and the IR department will help you on that. Having said that, also Sanjay will appear in a couple of conferences, so if you just follow our website, whatever is there as a statement out of these conferences is also hoping you to see this coming through in the next months and quarters? Goodbye for now, and thank you again.