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Edited Transcript of SOW.DE earnings conference call or presentation 21-Apr-17 7:30am GMT

Thomson Reuters StreetEvents

Q1 2017 Software AG Earnings Call

Darmstadt Apr 24, 2017 (Thomson StreetEvents) -- Edited Transcript of Software AG earnings conference call or presentation Friday, April 21, 2017 at 7:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arnd Zinnhardt

Software Aktiengesellschaft - CFO and Member of the Management Board

* Eric Duffaut

Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board

* Karl-Heinz Streibich

Software Aktiengesellschaft - Chairman of the Management Board and CEO

* Otmar F. Winzig

Software Aktiengesellschaft - SVP of IR & Compliance

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Conference Call Participants

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* Gautam Pillai

Goldman Sachs Group Inc., Research Division - Research Analyst

* Gerardus Vos

Barclays PLC, Research Division - Senior Analyst

* Knut Woller

Baader-Helvea Equity Research - Analyst

* Martin Jungfleisch

Kepler Cheuvreux, Research Division - Junior Equity Research Analyst

* Michael Briest

UBS Investment Bank, Research Division - MD of Global Technology Research Group, Head of the European Technology Research and Senior European Software and IT Services Analyst

* Stacy Elizabeth Pollard

JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by. My name is Emma, your Chorus Call operator. Welcome, and thank you for joining the Software AG Release Q1 2017 Conference Call. (Operator Instructions) I would now like to turn the conference over to Otmar Winzig, Senior Vice President, Investor Relations. Please go ahead, sir.

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Otmar F. Winzig, Software Aktiengesellschaft - SVP of IR & Compliance [2]

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Thank you, and good morning, ladies and gentlemen. Welcome to Software AG's analyst telephone conference and webcast on preliminary first quarter results 2017. This morning, as planned, we have published a full set of numbers with the presentations viewed in this call. Today's call will start with CEO, Karl-Heinz Streibich; followed by CFO, Arnd Zinnhardt; and Chief Customer Officer, Eric Duffaut. The presentations will be followed by a Q&A session. We will keep this call in the regular 1-hour time frame.

Before we start, there are some housekeeping remarks. This telephone conference will also be broadcast via web. Access to the webcast is via our Investor Relations website. The webcast will display the PowerPoint presentation related to this call. The same charts are on our website for download.

After the presentation, you may ask questions. Please use only the dial-in phone number for posing questions. The dial-in numbers are also published on our website. For technical reasons, we cannot take any questions via e-mail during the conference call. Call on the webcast will be recorded and available for replay later today.

With respect to Capital Market regulations, I have to make the following safe harbor statement. This presentation contains forward-looking statements based on beliefs of Software AG management. Such statements reflect current views of Software AG with respect to future events and results and are subject to risks and uncertainties. Actual results may vary materially from those projected here due to factors including changes in general economic and business conditions; changes in currency exchange; the introduction of competing products; lack of market acceptance of new products, services or technologies; and changes in business strategy. Software AG does not intend or assume any obligation to update these forward-looking statements.

Now thank you for your patience. Let us start, and I hand over to Karl-Heinz Streibich, the CEO of Software AG. Karl-Heinz?

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Karl-Heinz Streibich, Software Aktiengesellschaft - Chairman of the Management Board and CEO [3]

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Thank you very much, Otmar. Ladies and gentlemen, welcome to Software AG's Q1 financial results presentation. I'm sure you are all aware that digital transformation is the #1 paranoia in every boardroom, in every company and industry worldwide. Digitalization projects are, therefore, emerging everywhere. And the Internet of Things, called the Industrial Internet in the U.S. or Industry 4.0 in Germany, in conjunction with artificial intelligence and machine learning, is the catalyst of these projects with use cases in every industry.

For example, insurance companies start digital project with us to personalize their insurance policies. Logistics companies deal with us to have realtime supply chain transparency. Manufacturers co-innovate with us to create a smart digital twin for any product they ship. On machinery, manufacturers collaborate with us to enter into predictive maintenance use cases. I could literally go on forever on digital use cases emerging in any industry.

This digital transformation storm creates the tailwind for us in our Digital Business Platform performance, combined with our leading IoT portfolio and excellence in execution.

Ladies and gentlemen, I'm more than happy to present to you today a fantastic start to the financial year 2017 with our digital business. We have delivered great results in the first quarter based on a strong performance in our digital business while keeping our profitability on a steady high level, 18% growth in our digital license revenue and digital product revenue up by 12%. These growth rates impressively demonstrate our continuously increasing relevance based on our digital leadership in the market. And this is just the start. The road ahead continues to be promising.

The ongoing process of digitalization represents probably the fastest and most comprehensive way of change any industry has ever seen. The Industrial Internet is becoming the economic engine for years to come. The Internet of Things is a new digital reality, upon which companies have to build their business models, data centric, not just whole based or just application centric, as it happened in the last years and decades with standard software.

Digital offers endless possibilities of creativity for new business model, but there are also challenges which traditional companies have to overcome. This is why it is so important for every enterprise to start its digital transformation today in order to remain competitive tomorrow, and we, Software AG, have the solution for it.

An increasing number of large industrial companies are looking to us and cooperate with us to try their digital transformation. This is what we can clearly see in today's quarterly results. We provide the best-in-class technological foundation for achieving excellent business results to our customers in the digital world based on our Digital Business Platform with its Internet of Things kernel. Software AG's taking a pioneering role into having digitalizations with strategic co-innovation partnerships. This includes world market leaders such as Bosch, Dürr, Dell, Huawei in China, Lexmark in the U.S. and others.

You can also say we are benefiting from both, having started 5 years ago, with our so-called big data management platform there based on Terracotta and Universal Messaging and analytics with Apama; and recently, through the acquisition of the artificial intelligent expert, Zementis, covering the area of machine learning; and the IoT cloud platform provider, Cumulocity, covering the increasing relevance of cloud-based IoT services and solutions.

By the way, at this year's Hannover Messe Industrie, the world's largest trade show for industrial technology, we will be present. It will start next Monday, and we will announce new IoT partnerships and showcase new IoT solutions for Industry 4.0 together with top industry players. And Germany is a global hub for Industry 4.0. This is, undoubtedly, a new market with great potential that we operate in.

And the success of the Digital Business Platform in Q1 validates our strategic focus on profitable growth as well. We are focusing in our digital projects on creating differentiating value for our customers on-premise or in the cloud. This is a win-win situation, and it also creates value for us, as you can see in our margin and results. Digital projects are not about buying one-size-fits-all standard applications but creating differentiating assets. The new norm on spending IT money is investing into digital differentiating business models. And this is good news for us since we always had been in the business of creating differentiating customer projects based on our leading middleware portfolio, where we come from.

Ladies and gentlemen, Software AG is in an excellent market position. Our heritage paid off in multiple areas, our data management heritage, where we are coming from, as well as our market-leading middleware portfolio, both are the foundation on which we build our realtime IoT layer based on Apama, Terracotta, Universal Messaging, artificial intelligence, now the Cumulocity-based cloud IoT services. However, the most valuable confirmation of that is the feedback of our customers. Eric will share with you more customer feedback and exciting projects, one including moddable nature, Internet of Things and Industry 4.0 customer project.

Our increasingly successful go-to-market activities in building strategic partnerships and, of course, our growing portfolio give us great confidence that we will continue this successful growth development.

In our business line Adabas & Natural, our maintenance base grew by stunning 8%. Yes, we experienced stability and a high degree of customer loyalty with our core portfolio, Adabas & Natural. This customer stability success with Adabas & Natural is also the result of our Adabas & Natural 2050+ customer program, which ensures innovation and support for those customers beyond 2050.

On the license side, we saw the expected change in the seasonal revenue split and the anticipated decrease in the first quarter, also due to the clustering of a number of Adabas & Natural license fees in Q1 2016, the quarter we are comparing to. However, due to the stability and the high predictability of the Adabas & Natural customer base and, consequently, the maintenance business, we remain confident in our outlook, of which our CFO, Arnd Zinnhardt, will go into more detail.

And last but not least, the Consulting business division also developed very well, improved by 9% and delivered double-digit segment margin. This development also shows the successful transformation of Software AG into a true strategic partner for customers, delivering high-value digital consulting services, which result, as I already mentioned, in a win-win situation.

Therefore, we confirm our target to grow by 5% to 10% in our digital business. Our confidence is based on increased strategic pipeline, Eric will cover that; also driven through IoT use case, as I mentioned; but also driven through further improvements in our go-to-market activities. We also confirm our Adabas & Natural forecast, currently just a decline of 2% to 6%, similar stable development compared to last year. And we expect to maintain our steady high level of proposed margin in the corridor, 30.5% to 31.5%.

Having said that, I am handing over to my colleague, Arnd Zinnhardt, CFO, who will give you detailed insights into our financial results. After that, Eric will give you an update on our go-to-market activities, of which I'm sure you are also very interested in.

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

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [4]

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Thank you, Karl-Heinz. Good morning, ladies and gentlemen. A warm welcome to our conference call also from my side.

Let me continue making a couple of opening remarks regarding Q1 2017. The quarter, as such, can be characterized as following. Digital license had a jumpstart into 2017. It's up well in the double digits. We were able to convert the strong pipeline we talked about in previous calls into business growth. Digital maintenance grew by 6%. With more than EUR 67 million, the digital maintenance marked a new historic record level.

Adabas & Natural license saw the seasonality we expected after an unprecedented license growth of 80% a year ago. Maintenance, however, saw the growth in Q1, giving evidence for the robustness and loyalty within this business line. We continue to expect strong license numbers in Adabas & Natural throughout the 9 -- next 9 months. Therefore, we confirm our respective outlook for the year.

Despite the Adabas & Natural license development, and including our investments into future sustainable growth, the operating non-IFRS EBIT margin was very strong again. This was supported by the positive maintenance development, as mentioned of us, a further positive development of our Consulting division as well as some efficiency gains in our G&A area after having finalized a digitalization project, which brings our internal company-wide reporting to a new level.

Last quarter, we saw a foreign exchange tailwind. This tailwind was created by basically all relevant currencies, with the exception of Britain pounds. Looking to those currencies that had the most relevant impact, we can note that U.S. dollar improved by mid-single digit against the euro, whereas Brazilian real and South African rand even strengthened by more than 10% on an annual basis.

On the next slide, you will see that the currency tailwind on Adabas & Natural maintenance was higher than on the digital side. This is a result from a strong digital maintenance base in the U.K., in combination with the Great Britain pound development mentioned before.

As already highlighted in my introduction, the digital business line saw strong performance last quarter. License grew by 15% net of currency and 18% stated. As mentioned at the beginning, maintenance continued its growth path also this quarter and reached a new historic record level. The combination of the strong license performance and the continued trend in maintenance led to a digital product level which exceeded the EUR 100 million mark for the first time in a given Q1. Consequently, we saw a very promising start into '17, with the digital product revenue growth of 9% net of currency and 12% stated. This, again, proves that we are at an inflection point for this business line.

Significant contributions to license growth were generated in North America as well as Germany, 2 territories that can be described by being highly competitive and the forefront of innovation and of IoT. Eric will give you more details.

Cost of sales are slightly down compared to last year, driven by technology acquisitions we did throughout the last 12 months, acquisitions of companies that had been partners before. You should view this as an evidence for the relevance of the acquired technology in our IoT portfolio.

In sales and marketing, this is up in line with the revenue performance. The increase of EUR 4.5 million in cost is a combination of incremental sales costs due to higher commissions, to some hirings we did in the last 12 months as well as additional marketing expenditure.

Another area of investment was digital R&D. The expenses grew by EUR 1.6 million, while R&D headcount increased by more than 10%. Compared to a year ago, we grew our staff base in India by more than 20%. Consequently, our low-cost, high-cost ratio improved from 54% to 58%.

Growing revenue, investing wisely into our future and, thus, expanding the returns determines our strategy. We achieved all levels of this strategy in the last 3 months. The revenue growth is at the upper end of our guidance corridor, and the margin improved to 28.4%.

Regarding Adabas & Natural license, we had a slow start in -- to the year. This is not an unexpected result as to one is closer to the normal seasonality observed in recent years than Q1 of '16. Don't forget, Adabas & Natural has a higher degree of predictability as we sell into our existing long-standing customer base. So robustness we all observed throughout entire 2016 has proven again by the maintenance performance. Maintenance even showed the 2% net of currency increase, which was boosted yet by currency tailwind to 8% in stated numbers. All in all, there is no reason to deviate from our 2017 guidance we shared with you 3 months ago.

Also, annualizing the expense lines, you immediately identify that we have our efficiency in our internal processes very much under control. This is true for sales and marketing as well as R&D, where we are expanding on our future-oriented optimized high-cost, low-cost mix of our operations. Acquiring CONNX 9 months ago as well as the transition from higher low cost is by way the reason for the slight planned increase of R&D costs compared to previous year. The focus in the Consulting business remains on supporting our strategic license projects and, simultaneously, closely monitoring profitability. Therefore, we concentrate our activities on projects supporting our product business. In addition, we continued reducing our local exposure in current countries where margins are slim and expand our activities in more promising markets. As a matter of fact, this strategic setup, combined with an excellent consulting management team, resulted in an outstanding performance. The business contributed to the overall company growth and to positive earnings. We continue to do some optimization activities. We, again, delivered double-digit margins for the quarter.

As discussed on the last 3 slides, almost all revenue lines showed growth, with digital growing double digit and reaching a new level in revenue terms. And let me make one additional comment at that point. As we acquired Cumulocity at the end of March, there is no impact of this acquisition in the Q1 numbers.

Adabas & Natural license pendulum swung back to a lever closer to normalized seasonality, as mentioned before. This start in 2017, with accelerated growth on the digital license and the robust Adabas & Natural maintenance, makes us confident for the next 9 months. Eric will provide you with more details. 3 months ago, we discussed the topic of investing into our business to support future revenue growth. Compared to 12 months ago, we hired 187 highly qualified colleagues, supporting our efforts in sales and marketing, consulting as well as R&D. We will continue investing wisely to support growth without jeopardizing the profitability. Therefore, 2 KPIs remain key: sales efficiency and increased maintenance volume.

In the quarter, sales and marketing expenses were driven by incremental marketing cost of approximately EUR 2 million. Compared to total revenue, the cost ratio remains approximately at 30%.

The operating margin is the KPI we look at measuring our success on the bottom line. This quarter, the reconciliation is pretty much straightforward. Total non-IFRS effect amount to approximately EUR 15 million, similar to what we had in previous quarters. Therefore, I would like to make only one comment. Amortization is up by EUR 500,000 due to the acquisitions of CONNX and Zementis. Cumulocity did not have any impact as it was closed just at the end of March, as I mentioned before. The margin of 27.3% fits very well into the seasonality development that will end up in the guided corridor. Also, despite the tough comps and all the investments made into sales and marketing as well as R&D, we achieved a non-IFRS EPS almost on prior year's level.

Ladies and gentlemen, let me continue my discussion on the results with a positive note. The operating cash flow is on prior year's level and equal to 30% of Q1 revenue. CapEx is influenced by a purchase of a building in Darmstadt in the amount of EUR 70 million. This building is already used by overall operations since more than 15 years. We took the opportunity at the end of 2016 to acquire the property. The impact on our P&L is positive starting day 1.

The balance sheet, ladies and gentlemen, is as solid as we are used to. A, net cash position increased by EUR 2 million to EUR 75 million despite the fact that we spent EUR 91.2 million on the purchase of the office building, own shares as well as the company we acquired at the end of March. Secondly, deferred income decreased by 12% compared to March 2016 and by 34% compared to last quarter. And third, shareholder's equity improved slightly to EUR 1.2 billion compared to year-end 2016 despite the current ongoing share buyback program. Compared to 12 months ago, the equity increased by 10%.

With these KPIs representing our very strong financial position, I would like to finalize the look at the Q1 numbers. And ladies and gentlemen, let me just make and share with you the outlook for the full year of 2017.

As just described, I had the pleasure, also in Q4 of 2016, to announce an outstanding digital license performance result. This has been proven to be sustainable this quarter to, one, give strong results to build confidence into our guidance for the full year of 2017 was digital, we expect to grow within the guided corridor of 5% to 10%. Adabas & Natural maintenance has proven to be strong also at the start of this year. The change of seasonality in Adabas & Natural license was expected and was already reflected in our outlook for the full year of 2017. The plant operating margin allows for dedicated investments in R&D and sales and marketing, driving top and bottom line.

Let me now hand over to Eric, who will comment on the go-to-market and the sales successes achieved in Q1. Eric?

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [5]

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Thank you very much, Arnd. Good morning, ladies and gentlemen. And of course, welcome also to today's call, and a big thank you for your continued interest in Software AG.

Yes, obviously, Q1 2017 was simply a sensational quarter for our Digital Business Platform, with this license growth of 18% and this product revenue up by 12%. And by the way, our digital cloud order entry is also up 44% year-on-year. So ladies and gentlemen, we have started 2017 with a bang, continuing the great momentum with which we finished 2016. And it is clear to me, and hopefully to you, that our go-to-market mobile and customer-centric approach, responsible for such incredible growth in the U.S. last year, continues to make a positive impact globally. We are firing on all cylinders. We have followed a super strong end to 2016 with a super strong start in 2017, and I am confident that this will be the year of acceleration. As you know, momentum is key, and we do have momentum.

And because this is not a one-timer when you look into it, it's now a long-term trend that is accelerating. The reality is that 7 out of the last 8 quarters showed DBP product revenue growth year-on-year. The only exception was Q3 2016, and you might remember, the simple reason, 2 major deal slippage, but just for a few working days. So that's not only a strong business development of our digital business, ladies and gentlemen, but an impressive proof point of long-term success and greater market relevance now boosted by our strides in the game-changing Internet of Things, in major deals in Germany as well as in major partnerships and, of course, in selected acquisitions, innovation driven, such as Cumulocity. And yes, Cumulocity was an extremely significant acquisition as we extended our leadership in device management but also in IoT, iPaaS or cloud platform.

Yes, in all areas, we are extending our leadership, technology, market reputation and market penetration. Looking outside the single IoT deals with individual enterprises, we now have strategic partnerships with Bosch, Dell, Huawei and Dürr, addressing global markets with Software AG's core IoT best-in-class software services as a major part of the offering. And there is more to come. Watch this space.

I would now like to share some regional development with you related to, of course, our digital business first. And as Karl-Heinz mentioned, we see clearly the digitalization of the industry continuing to gather momentum globally, with the Dürr Group average DBP license growth reported in many countries and regions.

Of particular note in Q1 were the following: Germany, our home market, where Industry 4.0 is getting traction, we grew our DBP license by 54%; South Africa, we grew our DBP license there by 92%; 94% growth in the Nordics; Benelux, triple-digit percentage growth, driven by an outstanding win with [ Akzo ]. And important to notice, continuous success, with 12% growth, in our most important market, North America, following, as you know, a super strong 2016. Yes, ladies and gentlemen, great successes supported by outstanding customer wins in Q1. Let me share a few with you, as I always do.

In EMEA, Dürr, a German leader in mechanical engineering, and Software AG entered a strategic partnership to develop new Internet of Things and Industry 4.0 services and solutions across all branches of the Dürr Group. Through its digital at Dürr program and the new Dürr IoT cloud framework, the company is now targeting growth through new digital services, therefore, extending and deepening its global market leadership and customer relevance.

Deutsche Post DHL Group, the world's leading mail and logistic company, with 1 million customer contacts per hour and revenue of more than EUR 57 billion, is now utilizing Software AG's Digital Business Platform on a global scale to further accelerate digitalization of its core and, of course, future processes.

Lidl, the top 3 European retailer, with major U.S. expansion plans, has decided to expand its use of our Digital Business Platform to further standardize, amortize and expand its international presence faster and better than ever.

Henkel, with world famous brands such as Persil, Pril, Somat, Schwarzkopf and Taft, has decided to leverage Alfabet in the cloud to improve transparency, control and active enterprise applications portfolio management, simultaneously reducing costs and preparing its enterprise architecture to be ready for the true digitalization.

In Asia, where we also had a great quarter helping major enterprises start or accelerate their digital transformation journeys. China (inaudible), with total service area of over 1 million square kilometers is now leveraging our Digital Business Platform to improve customer service to 248,000,000 people. AIA Hong Kong is the second largest life insurer in the world by market capitalization and the largest listed company on the Hong Kong Stock Exchange. They will leverage our Digital Business Platform to monitor people health and way of living to provide customized life insurance to consumers. The great use, ladies and gentlemen, of the Internet of Things, once again, powered by Software AG.

Singapore Telecommunications, the Asian-leading communications group with a continent-wide presence including Australia, is focused on improving customer service through streamline in dynamic processes with our software.

And in our key market, finally, in North America, tractor supply company using narrow DBP for store expansion and automating of vendor on boarding.

The United States Marine Corps modernizing and innovating with a web-based global procurement and funding systems for all suppliers and services using, here again, our DBP, combined and integrated with an Adabas & Natural accounting and logistics system. That's smart.

We'll now leverage our digital process design and improvement solution to drive efficiency across nearly 1,500 outlets. I could go on and on as we have so many amazing customer successes. And once again, these great wins demonstrate the breadth and the scope of the digitalization of the world, that our unique Digital Business Platform is more and more at the heart of this global transformation.

Finally, if we look at our sales KPI development for our digital business. As you all know, our plan is to accelerate growth by going higher and bigger. The deals over EUR 1 million were over 60% in number and 30% in value in Q1 2017 compared to '16. Indeed, we started to transform our go-to-market in 2017. And since then, the value we get from these large deals is up nearly 100%. In the U.S.A., and I cannot emphasize enough how transformational performance experience in the U.S.A. is driven by the customer-centric go-to-market approach we introduced in 2015. The revenue, ladies and gentlemen, we get from these deals over EUR 1 million has increased by 124% since we started to transform 2.5 years ago. Overall, we continue to get more efficient and more effective. The productivity of our Digital Business Platform quota carriers went up by 23% in 2016 and was up again by 15% in Q1 2017. And if we take all sales supporting teams and functions into account, the productivity gain was 14% for 2016 and a further 8% in Q1 '17.

Let's now turn to Adabas & Natural, and you've heard it before, but I want to make a note here. For the same reason, I told you that Q1 2016 was a non-event despite the 15% product revenue growth and an amazing 80% license growth. I tell you today that Q1 2017, with a 24% product revenue decline, is also a non-event. We delivered on the improved guidance in 2016. And regardless of our Q1 performance this year, as you've heard it, we are confident that we will deliver on our 2017 Adabas & Natural product revenue guidance.

In 2016, we launched our Adabas & Natural 2050 initiative, an industry's first commitment to maintaining and modernizing our customers' landscape and business-critical applications developed decades ago, giving our customers the long-term confidence and a tangible response to the modernization challenge and generational change facing high-performance maintenance systems a globally. And this was received, as we told you, with great enthusiasm by our customer base. And in Q4 2016, we really highlighted a number of 5- to 6-year enterprise license agreement renewals we signed early as a result of this A&N 2050 initiative and renewed commitment.

Ladies and gentlemen, I can tell you, by meeting customers every week all around the world, that the vast majority of our customers want to modernize and transform their Adabas & Natural end systems and not replace them. As Arnd mentioned, our 8% increase in maintenance revenue is a great indicator of business stability and greater customer loyalty.

In Q1 this year, talking about innovation, another confirmation of our commitment is the announcement of the launch of high-end predictive maintenance for the mainframe. And listen to this, integrating artificial intelligence, machine learning and predictive analytics directly into the IBM z Systems and as well as Adabas & Natural enterprise applications.

Yes, we are and we will always be fully committed to our customer base, and they are loyal to us. This loyalty makes A&N a more predictable business, cyclical base, in fact, on a relatively predictable calendar of enterprise license agreement renewal. And this is why I confirm we remain confident and committed to our full year guidance.

Our Global Consulting Services line of business continued to grow profitably as they keep delivering high-value services for our customers. You heard, revenue up 9% and a segment margin over 10%. And this year, it's an extremely important indicator that we are aiming higher and bigger and getting there, generating larger deals and delivering tangible business value that results in repeatable business and customers relying on Software AG for the entire digital transformation journey.

In conclusion and looking forward. We have strong momentum in our digital business, further boosted by a growing leadership in the Internet of Things. We have started the year with a pipeline 20% higher than at the beginning of 2016. Ladies and gentlemen, that 20%'s year-on-year growth is still there for the next 4 quarters. In fact, when you deep dive into our pipeline, you see the following: the number of opportunities and the value of opportunities over EUR 1 million are both up over 90%; and the number of opportunities over EUR 3 million and their respective value are both up by 300%. Yes, we will continue to go higher and bigger, and this is why I am cautiously optimistic that 2017 will be a year of acceleration.

The last 6 months, I've seen an unprecedented series of strategic Industrial Internet partnerships established, partnerships that will start to increasingly contribute over the next few quarters. I'm aware, of course, that we might encounter volatility in some markets. We will likely see the significance and the size of our deals increasing as customers realize the unbounded possibilities of the Internet of Things and digitalization overall. We might see some of these larger opportunities taking longer to close than may be initially anticipated. But let me tell you this, we will see the growth rate we are targeting for in 2017.

The loyalty of Adabas & Natural customers have never been so strong as we give them the road to the future without compromise. Our sales productivity is at an all-time high and still increasing. And finally, our Q1 performance, our fantastic customer transformational project and our 2017 pipeline development are stark indicators of market relevance and of an increasing scalability for bigger, better and stronger Software AG. Thank you for your attention.

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Otmar F. Winzig, Software Aktiengesellschaft - SVP of IR & Compliance [6]

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Thank you, Eric. Now it's time for your questions, ladies and gentlemen. Operator, please give instructions on how to proceed.

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Questions and Answers

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Operator [1]

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(Operator Instructions) The first question comes from the line of Michael Briest of UBS.

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group, Head of the European Technology Research and Senior European Software and IT Services Analyst [2]

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Eric, you gave a lot of details there about the pipeline. I'm just trying to square, an overall pipeline is up 20%, but the EUR 1 million and EUR 3 million deals were up to the 90% and 300%. It does suggest the smaller deals are shrinking, if you like, within that. Can you just comment on that and also whether within Q1 itself, there were any of these sizable deals that you called out last year, for example, with Bosch and Octo, which were in the high single-digit million euros? And then, Arnd, just in terms of the currency, it looks to me as though the margin benefited maybe by over 100 basis points because of currency. And I'm just curious as to -- well, given where the euro is, that's likely to be a pattern for the rest of the year. That doesn't make you more confident or margin upside, if you like? And also the U.S. business, given the dollar move, it was only 30% of revenue -- it was 33% in Q1 last year. Is that maybe Adabas & Natural because it sounded like DBP was good?

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [3]

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Okay, I'll start. This is Eric, and thank you for the question. The pipeline, up 20%, but yes, the proportion of the large deal being bigger, does it mean that the smaller deals are shrinking? The answer is yes. We have taken a bet, Michael, I keep saying, since now, I think, more than 2 years, so the good news is I'm consistent that we want to go higher and bigger because we believe that we head us to not only grow profitably but also scale. So it is clearly that when we started to reorganize our sales force and go to the top of the pyramid and focus on the larger customers and driving share of wallet, positioning the Digital Business Platform as best of suites rather than just having a bunch of product that's best of breed. We were looking for these large transactions. We were looking for what we call multiproduct deals, like we did with some of our -- the customers you mentioned, Bosch, for instance, I will come back to Q1 in the comparison. So yes, of course, I mean, we are going higher and bigger, and we do know that the sales effort that is required to close a large transaction is certainly not -- let's say, there's -- it's a little bit more than closing a small deal but certainly not linear, if you know what I mean. The next question was were there any sizable deals in Q1 or very sizable deals? We had 14 deals in Q1 over EUR 1 million, but there were no extraordinary deal like the Bosch, for instance, or like the 3M or like the Walgreens we had in the past, Michael. So we cannot say that the performance of Q1 was exceptionally boosted by an extraordinary, let's say, large transaction. This was more the trend going on now. We increase, of course, the number of transaction above EUR 1 million, but we cannot see, let's say, a big monster that is boosting the revenue overall. So as you might -- and I hope that I've responded to your question. And...

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Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group, Head of the European Technology Research and Senior European Software and IT Services Analyst [4]

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Yes, and could you say what proportion of the sales, if you like, were IoT related? I think in the Capital Markets Day, you talked about 7% to 10% of the last year's sales.

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [5]

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Yes, I think we are still towards the high end single digit, the 10%, something like that. I mean, we have, as I said, 2 major wins, and we have more smaller transaction here and there, where we start to land before we expand. But the 2 larger IoT deals that we had, Michael, in Q1 were Dürr in Germany and AIA in Hong Kong, as I mentioned before. So if you just take this one and forget the land and expand, where we build the foundation for the next IoT, we are certainly in the range of, yes, I would say, 10% of our revenue so far, but clearly accelerating. This is also reflected in the pipeline and reflected, of course, in our portfolio and acquisition, as we mentioned for Cumulocity and things like that. So the future should be bright on the IoT side, no doubt.

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [6]

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Okay, Michael, and then you asked 2 questions on the currency and one with respect to the U.S. You know that we've got natural hedges included in our business. So therefore, the effect on the currency side, which is positive and has been positive on the revenue side, is partially compensated by the cost base. But all in all, of course, a currency tailwind helps us also to more easily achieve the margin that we have guided. After 3 months, Michael, I think it's premature to talk about the revised guidance throughout the year. Let's see what happens in the next couple of months and whether the currency ratios remain the same, and then we can address this topic again. With respect to U.S. dollar, yes, you're absolutely right, we had a big, big transaction, Adabas & Natural, in Q1 2016. And when Eric, in his speech, was referring to the non-event in Q1 2016, that was predominantly driven by exceptional -- the exceptional deals in the U.S. And therefore, you're absolutely right, the development of the percentage of U.S. dollar transactions in the entire portfolio was affected by these exceptional deals in 2016. And therefore, the performance that Eric talked about in the U.S. or North America was positive in the combination of U.S. plus Canada. And you see that we also have a separate column in our pie chart for Canada because there was also contribution of the Canadian colleagues to our overall revenue.

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Operator [7]

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Next question comes from the line of Knut Woller of Baader bank.

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Knut Woller, Baader-Helvea Equity Research - Analyst [8]

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Actually, 2. First, on the A&N seasonality, to get a better feeling, I mean, it was quite clear, and following the strong start last year, that Q1 should be of a weaker note, as it finally was this year. Is it -- how then should we think about the remainder of the year in terms of A&N? Is it rather back-end-loaded H2 to expect than growth? Or is it fair to assume, also against the backdrop of the easier comps in the second quarter, that A&N should see some growth from renewals in the second quarter already? And then second question with regards to DBP. Eric, you elaborated a lot on the good growth in Germany and also North America. Can you give us some color on France, what the performance was here? And then also with regards to the U.K., which was basically a drag on the development of DBP in 2016, how are things shaping up here in the U.K. with regards to DBP?

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [9]

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Knut, thanks for the questions. I'll start, of course, to address your A&N questions and Adabas & Natural and the seasonality. Are we going to be back-end loaded? So as I said, first, I mean, just to put things in context, I repeat myself. But this business is relatively predictable because it is cyclically based on ELA, or what we call local Enterprise License Agreement, renewals. Of course, on top of that, we have some modernization effect. But overall, the volatility of this business is pretty limited. I mean, especially if we compare it with the Digital Business Platform, which is about new project, many of them complex and game changing, as we said, so you cannot compare the 2 lines of businesses. Will we be back-end loaded in light of this calendar? So I have a pretty precise view, in fact. I mean, of course, it's not always 100% great because you can have one starting -- coming earlier and another one coming a bit later than planned. But I would say, yes, H2 should be stronger for Adabas & Natural. But you're right, with the low comparison in Q2, we might see, I would say, a solid, stable performance of A&N in Q2, hopefully. But we are rather, I would say, back-end loaded. But I insist again, there is no sign right now that we will not be in a position to meet our guidance for the total year. Regarding digital performance in France and the U.K., France has had relatively a slow start, not a big deal, from my point of view, in the sense that they had a pretty strong finish in Q4, including really closing many of the deals that we had in pipeline, so we could not say that we had some deals slipping from a quarter to another. Relatively slow start, but I would say a good pipeline as well for the rest of the year, so we should see a reasonable year in France. Regarding the U.K., we are still struggling a bit, I have to say. And I know the next question will be, do you think Brexit blah, blah, blah. And Knut, let me be, frankly honest, or brutally honest, here. We still have execution issue in the U.K. And I think that in a global business where you presented more than 70 countries not having a problem somewhere is simply an illusion or a dream. So we do have still some execution issue there that we are addressing, of course. We know also that we are in a business where average deal size -- oh, sorry, the average time to close a deal is in the range of 9 to 12 months. We are building the pipeline. The pipeline is now encouraging, but I think it will take still maybe a few quarters before we see U.K. being back. The good news is that we have other strong engines, as I mentioned, all cylinders. You mentioned U.S. and Germany. So as a global business, we can compensate where we have a problem somewhere with a very strong performance somewhere else. So that's the brutally honest answer on where we are, with a slightly slow start in France and feel execution issue to tackle in the U.K.

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [10]

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Let me just add, Knut, one light on the U.K., and I'm referring to the Consulting side, which is extremely strong in the U.K. So therefore, we need to differentiate between the license performance that Eric has talked about and the Consulting performance in the U.K. So U.K., Consulting-wise, is certainly the lighthouse. Everybody is looking at it because of the relevance of the integration projects, the implementation projects that they are doing from a strategic point of view. And therefore, this business performance is extremely healthy on the Consulting side.

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Operator [11]

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Your next question comes from the line of Stacy Pollard of JPMorgan.

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Stacy Elizabeth Pollard, JP Morgan Chase & Co, Research Division - Head of Software and IT Equity Research [12]

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I just have a few quick logistics and then maybe one to elaborate on. First of all, how much contribution in Q2 should we expect from Cumulicity -- Cumulocity rather? And then where do you stand on share buybacks? Is the EUR 100 million target done now? And then thirdly, just looking at that DBP pipeline, now you've already given us 15% license growth. I'd say that sounds pretty sustainable, maybe even upside to that as you talked about a pipeline that was up 20%. Is that something we could expect as we go through the year?

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [13]

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Yes. Stacy, I just -- just taking my calculator to give you a more precise answer. So Cumulocity, you're absolutely right, has generated some revenue. But let me -- before I give you any number, let me highlight that Cumulocity was not a financial-driven acquisition, and Eric has talked about it in more detail during his speech. It's a forward-looking strategic technology acquisition that we did because this technology that the colleagues in Dusseldorf have is extremely helpful and extremely important for the IoT topic moving forward. The revenue for the quarter is, on a pro forma basis, less than EUR 1 million, less than EUR 1 million. And if we take the purchase price allocation aspect into the consideration, I do not see any kind of impact in Q2, which is relevant for any kind of number. Moving on, the overall revenue that the colleagues had was between EUR 3 million and EUR 4 million, and that is cloud-based recurring business, that the topic of the purchase price allocation is, of course, extremely important, but you see the number is pretty small. On your second question, Stacy, share buyback, by the end of March, we had a total volume of EUR 24.5 million as an investment into the share buyback program. We continue to have around about 50,000 to 60,000 shares per day, so therefore it's around about EUR 50 million as we speak, so 50% of that. We will continue doing that until the AGM and then stop 1 or 2 days prior to the AGM in order to manage all the legal requirements that we have to manage.

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [14]

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Okay, this is Eric. So your question about -- in light of the DBP pipeline, the 15% in Q1. Is this 15% sustainable, eventually, do we have upside? I admire, of course, your enthusiasm, Stacy. Thank you for that. I would say -- I mean, it's early to say, and I want -- and I mentioned it, I want to remain cautiously optimistic. We know what it takes to get there. We have, definitely, momentum. But saying and staying now, when setting the expectation that, yes, of course, every quarter will be 15% and so on and so forth will be probably unrealistic to say. Having said that, with such a strong start and with the pipeline we have and with the strides we are making on IoT, you are absolutely right, I mean, this is -- Cumulocity will give us a boost on the technology leadership standpoint, which will help us to be much stronger at converting the deals that we have in the pipeline and reinforcing our relevance. So with all of that combined, Stacy, I remain really confident that we can deliver on our guidance for the total year, but I'm not in a position certainly yet now, and I don't want to set the expectation that we're going to deliver 15% growth every quarter. I wish, and I will do my best to do so. That's all I can say.

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Operator [15]

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Next question comes from the line of Gautam Pillai of Goldman Sachs.

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Gautam Pillai, Goldman Sachs Group Inc., Research Division - Research Analyst [16]

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Just following up on the pipeline. Eric, can you talk about the seasonality of the pipeline? And you gave a good color on the [ last ] deals and megadeals in the pipe. But can you quantify what percentage of the pipeline currently is linked to large strategic deals for the remainder of the year? And second question for Arnd on -- you spoke about efficiency gains in G&A in Q1. Can you quantify the benefit to EBITDA for -- from these efficiency gains? And also, is there further to go in this aspect for the next few quarters? And finally, on the M&A pipeline, are there any immediate functional gaps in the Digital Business Platform you need to fill, and do you envisage any large transformation deals for this?

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [17]

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Okay. Gautam, thanks for the question. I'll start, of course, with your question related to the pipeline, you talk about seasonality, you talk about what is the share of the pipeline dependent on the large deals, et cetera. As Michael pointed in his first question, it is obvious that we see a bigger share of our pipeline value depending of large transaction. And again, the definition of large transactions for me are deals above EUR 1 million, yes? But even if we look into the EUR 3 million, as I said, the share is certainly increasing faster than anything else. Hence, my point in saying we'll see a shift, of course, from less small transactions to more, let's say, or to larger transactions. You can look at that into good and the bad news. I mean, the bad news, and say, larger transactions are (inaudible). But the good news is that larger transactions drive faster acceleration in terms of growth. So that's what we can see. In terms of seasonality, if I understand correctly, Gautam, when you talk about seasonality, I had quarters in mind. I mean, of course, H2 remains. But most important period for us in a year, in particular, Q4, when I say the pipeline, let me see for the next 4 quarters, is still 20% higher than a year ago. Then clearly, we see even more than 20% in H2 than we see, for instance, in Q2. So Q2 is a bit lower than that compared -- in terms of growth of pipeline versus a year ago. But clearly, H2 is on an acceleration side. And of course, obviously, the larger deals are rather Q4 related or Q4 -- let's say, steady in Q4 rather than in Q2. So that's what we see in terms of balance, and I hope that I gave you the color that you were expecting.

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [18]

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Okay. Then on the G&A side, straight forward answer, you should model this -- the current run rate into the model also moving forward. Let me just give you one additional component, which is not just related to G&A but to the building acquisition that I was talking about in my presentation. Here, we will have an impact -- positive impact on the total company's profitability of around about EUR 0.5 million this year and EUR 1 million the years after, which is then, of course, allocated to the individual business segments, such as sales and R&D and G&A, as we do have the allocation for those costs based on whom is using this individual space. So you will find that in the individual cost lines. But at the end of the day, it's -- efficiency is driven by the sum of individual projects which go into the right direction.

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Karl-Heinz Streibich, Software Aktiengesellschaft - Chairman of the Management Board and CEO [19]

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Okay. Gautam, I will cover the final question you have had, do we have any function gaps? Let me recap. We are betting on the suite, as Eric said, best of suite with our Digital Business Platform. We have an end-to-end platform, which enables our customers to transform into the digital enterprise. This end-to-end platform consists of major areas. One is the entire middleware presence we have because integration is the basis from the ERP applications in the back office found to the device integration for the Internet of Things. We have EPM, and we have the whole suite of process digitalization as well. And we have been building the IoT segment since 5 years, as I mentioned, with Terracotta, Apama, Universal Messaging, now Cumulocity portfolio. So that means we are much more complete than just being an IoT platform company. We have the overarching Digital Business Platform. Looking forward the next 3 years, and we should not look more forward because innovation is so fast, artificial intelligence, machine learning will be the core driver in this data-centric new digital world. That was the reason why we have made the investment into Zementis, this West Coast-based artificial intelligence company. We will AI enable our entire portfolio through the next 2 to 3 years. That means data-centric innovations, data-centric models in our existing product will be as normal as we have in memory enabled our entire portfolio the last 3 years based on our Terracotta portfolio. That means the extension in the future will be very strong and heavily focused on the AI capabilities. And I am delighted that we have Dr. Stefan Sigg on board, who is, especially in this data-centric universe of the digital economy going forward, an expert, and he is Head of R&D, as you know. What will come next beyond that, sure, it will be, for example, block chain on the process area. Also the subject, where first customers begin to [ spearhead ]. However, that will be a subject which we will probably see in 3 years, in 2 years, in 3 years on the revenue side. Now it's about fully exploiting our IoT capabilities in the cloud, therefore, we have bought Cumulocity and the AI enablement of our entire portfolio. This is why we have made those 2 investments. And we will go on. We will go on to invest in further capabilities in the cloud, in further capabilities in AI, machine learning and beyond that. It will be the block chain, the augmented reality on the user interface part and so on. That means innovation will continue. We will continue to be a leader in what we do. And therefore, our M&A focus is on further expediting our technological leadership we have.

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Operator [20]

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Your next question comes from the line of Martin Jungfleisch of Kepler Cheuvreux.

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Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [21]

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This is (inaudible). Yes, just a question on license performance in Digital Business Platform. It is -- can we see the trend also going in the second quarter? And was the Q1 performance mostly attributable to early closings in March? Or is it even the case that some deals slipped into Q2? And the -- what into Q1 and the Q1 performance should have been even stronger? And also in the Consulting segment, you had quite a good performance in the first quarter. Do you expect this revenue level to remain strong over the next few quarters?

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [22]

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This is Eric. So the first thing is when you have a performance like we had in Q1, with 18% growth, you certainly cannot expect that there were many deals that slip from Q1 to Q2. So that's not the case, right? I mean, we have, of course, always one deal here and there that could slip, et cetera, but this will always be the case, right? So there is -- there were no major massive slippage. On the contrary, I think that we had a really strong deal execution in Q1 and where any -- everything almost that we expected came to conclusion. So beautiful execution, beautiful result. Can we expect the same thing in Q2? As I said to Stacy, I mean, we have a pipeline that is bigger than what it was a year ago for Q2, so we hope that we can expect growth. I mean, the pipeline is also, and I mentioned that, a bit back-end loaded into H2 now rather than in Q2. But of course, we have the deals. We have what it takes. But I'm not in a position -- and I wish I could give you a very predictable call in terms of what's going to be every single quarter. My point is we will, on the 4-quarter trend, see certainly the growth that we are expecting and the guidance that we have given. So again, I stay firm on the fact that all the ingredients, all the elements give us confidence today that we can deliver on our total year guidance. Regarding GCS, I believe we are now on the trend since several quarters in a row where we see profitable growth coming from GCS because we moved away from, I would say, basic project management and project delivery to higher, let's say, value services that are also very much linked to the type of project we are engaging or engaged with. Yes, when you think about strong digital transformation, real business transformation, you are not talking about having a bunch of consultant implementing technology, you are talking about having architects and strong end-to-end consultant that can drive real business transformation. And this move to high-value services result clearly not only in revenue growth but, of course, in a profitable business for GCS. So I think, Martin, that this trend that you have seen in GCS will certainly continue going forward.

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Operator [23]

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Last question comes from the line of Gerardus Vos of Barclays.

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Gerardus Vos, Barclays PLC, Research Division - Senior Analyst [24]

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Just one for Arnd on the kind of headcounts. Could you help me a bit with how many net hires you expect to make during 2017? And then secondly, just going back on Knut's question earlier on, the kind of contribution and the seasonality of the Adabas division. Normally, if you adjust for the kind of unusual Q1 in '16, and normally, the license contribution is around 15% to 20% in Q1 for this kind of division, it looks that we're now running just below kind of 10%. Is that just because of the French and the kind of U.K. issues? Or is there potentially kind of higher decline than what we've seen in prior years in this division?

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [25]

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Regarding the headcount, let me make, first, remarks regarding what kind of divisions or business lines or cost lines we are talking about. It's -- on the one hand side, it's sales and marketing; the other one is R&D that we are talking about. So basically, the same like we have seen over the last 12 months. In -- there's a higher number is on the R&D side. And here, we look basically at guys being hired in India. The number is in excess of 100 on the Indian R&D side. And we look at the number of 50, 60 in the sales and marketing side.

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Gerardus Vos, Barclays PLC, Research Division - Senior Analyst [26]

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And is that net-net hires, Arnd?

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [27]

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Yes.

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [28]

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Okay, Gerardus back to the A&N seasonality. So let me, number one, be very straight. The Q1 performance on -- in A&N had nothing to do, 0, with the slow start in France and the execution issue that I was referring to for -- in the U.K., which is rather related to a Digital Business Platform performance. When you say and when you try to make the comparison saying, okay, yes, usually, Q1 for A&N is X percent, let's say, 15%, now it's 10%, does that mean that we have a reason to see a drop into this business line going forward? Again, this business has a very different seasonality than the Digital Business Platform. You cannot just think in terms of 15% Q1 and so on and so forth. We have a calendar, and I insist again, of Enterprise License Agreement renewal. The good news is our customers wants to evolve and stay with most of them, at least the vast majority, as I mentioned, wants to stay with Adabas & Natural. But this calendar has nothing to do with the seasonality -- or traditional seasonality of the software business. It really depends when this contract -- there are some of them 5 years old or 3 years old or sometimes even 7 years old -- come to, let's say, renewal time. So again, we cannot look at A&N in the same way than we look at any of our traditional software. We have the calendar of renewal and loyalty of the customers that give us the confidence, once again, we should deliver on our total year guidance, Gerardus. So no need to worry on that one for the time being.

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Arnd Zinnhardt, Software Aktiengesellschaft - CFO and Member of the Management Board [29]

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Let me just make one additional comment. We -- as Eric has said, we have a pretty good understanding of when is coming what. And you should not forget, we are talking about existing customers and existing insulation, so it's very different from digital, where the discussion is -- besides, is this deal going to happen? The discussion is also, are we the vendor of choice? This is not the discussion that we have on the Adabas & Natural side. So therefore, seasonality is -- I would even say the wrong phrase because it's very much driven by a single transaction that we can't predict very precisely, and this is -- the question is always the difference between one quarter to the other quarter rather than slippage over years or even not -- what's happening. So therefore, Eric is right. Based on what we see, I'm confident. And again, when we set the guidance for 2017, we already knew what is going to happen in Q1. So therefore, nothing changed -- no change has happened in the last 3 months.

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Eric Duffaut, Software Aktiengesellschaft - Chief Customer Officer and Member of Management Board [30]

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Thank you, everybody. Thank you, ladies and gentlemen, I'm afraid we have to close this call now. Thank you (inaudible). I think we'll be back with our results then on July 20, and happy to talk to you in between. All remaining questions, as always, will be handled by the IR team. But for now, we close this call. Thank you all. Goodbye.

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Operator [31]

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Ladies and gentlemen, this conference is now concluded, and you may disconnect your telephone. Thanks for joining, and have a pleasant day. Goodbye.