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Edited Transcript of SOWGn.DE earnings conference call or presentation 21-Oct-20 7:30am GMT

·40 min read

Q3 2020 Software AG Earnings Call Darmstadt Oct 21, 2020 (Thomson StreetEvents) -- Edited Transcript of Software AG earnings conference call or presentation Wednesday, October 21, 2020 at 7:30:00am GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Matthias Heiden Software Aktiengesellschaft - CFO & Member of Executive Board * Otmar F. Winzig Software Aktiengesellschaft - Senior VP & Head of IR * Sanjay Brahmawar Software Aktiengesellschaft - Chairman of the Management Board & CEO ================================================================================ Conference Call Participants ================================================================================ * Alastair P. Nolan Morgan Stanley, Research Division - Equity Analyst * Charles Brennan Crédit Suisse AG, Research Division - Research Analyst * Gautam Pillai Goldman Sachs Group, Inc., Research Division - Equity 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 * Stacy Elizabeth Pollard JPMorgan Chase & Co, Research Division - Head of Software and IT Equity Research ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Ladies and gentlemen, thank you for standing by. I'm Haley, your Chorus Call operator. Welcome, and thank you for joining the Software AG Financial Results Q3 2020 Conference Call. (Operator Instructions) I would now like to turn the conference over to Otmar Winzig, Head of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Otmar F. Winzig, Software Aktiengesellschaft - Senior VP & Head of IR [2] -------------------------------------------------------------------------------- Thank you. Good morning, ladies and gentlemen. Welcome to Software AG's telephone conference and webcast on our first update on preliminary Q3 and 9-month results. This call is going to be a bit different from our regular quarterly calls. We have been subject to a malware attack on our internal systems, which has delayed the consolidation of our Q3 results. However, we were able to aggregate the numbers from our sales system. In the following 30 minutes, our CEO, Sanjay Brahmawar; and our CFO, Dr. Matthias Heiden, will present the quarter key financials and the business update. In addition, we will provide a short description of the malware attack. As you will recognize, we are still doing the in-depth investigation of the attack and therefore can only provide you with an overview. Thus, please note that further details may not be disclosed as the investigation is ongoing and law enforcement agencies are still involved. Now some housekeeping remarks. Our telephone conference is broadcast via web. Access is via our website. The webcast will display the presentation slides related to this call, the same slides on our website for download. (Operator Instructions) The call and the webcast will be recorded and available for replay later today. Finally, let me remind you on our safe harbor statement, which is shown at the beginning of our slide presentation and is valid for the entire call. Thank you for your patience. Now let's start. And I hand over to Sanjay Brahmawar, the CEO of Software AG. Sanjay? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [3] -------------------------------------------------------------------------------- Thank you, Otmar. Good morning, everyone. Welcome to our Q3 update call. I hope you and those close to you are safe and well. Today's call is a little different than usual. The malware attack we've been responding to in recent weeks has interrupted our internal systems. As we have explained, this means that today is an update call. We cannot provide full detail on our Q3 performance. This will follow in due course. However, with the attack contained and many of our systems already back or starting to get back online, we are able to provide the most important financial headlines. These show that Q3 was another strong quarter for Software AG, which demonstrates continued transformation and resilience in the face of the pandemic. Before I go on to that and also make some comments on our Q4 development, I'll provide a brief update on the malware attack, including the decisive action we've taken to manage it. The way our team has responded with courage, adaptability and a relentless desire to support customers and colleagues reflects the success of the cultural and operational transformation taking place in our business. I'm proud of the way the team has stepped up in a year which continues to challenge us and in which we nevertheless continue to deliver the growth and innovation we promised. We first became aware that we were subject to a malware attack on the evening of Saturday, October 3. We took immediate action to protect our system, our people and our customers. We have no indication that our cloud operations have been impacted and customer support was continued throughout the attack. Our internal systems needed to be shut down for security. Our teams, with the support of external top cybersecurity companies, immediately began working 24/7 to ensure business continuity, investigate the possible extent of the data breach and ultimately achieve containment. Given the extent of the attack, we have not yet finalized our investigation. We established 24/7 hotlines for employees, customers and other stakeholders, making sure they had access to the latest information and explaining the efforts being made to limit damage from the attack. Despite having limited access to many of the normal tools we rely upon day-to-day to run our business, we ensured that all our services to customers, including our cloud services and technical support, remained up and running. With creativity and innovative spirit, our teams also built workarounds and interim solutions to maintain and grow our business. We continued close communication with customers, implemented new technology and signed new deals. I am heartened by a number of conversations with customers, which told me our activity hasn't gone unnoticed. As part of this incident, some data was stolen and made public by the hackers. Together with the authorities, we are taking all recommended actions in response. Our forensic analysis of the data is still ongoing, and we are in close communication with anyone we think may have been affected. We are proud of how our teams have responded to this attack. But we are also aware of how challenging this incident has been for our people and our customers. We would like to assure everyone that we are following expert advice, and we are doing everything possible to continue to protect our people and our customers. I'd now like to turn to our Q3 performance, the original purpose of this call. As a reminder, the numbers we're about to share are preliminary figures. They are first consolidation from our Salesforce system, presented as ranges rather than precise numbers for that reason. Even so, they tell a clear and consistent story. Despite change and ongoing turbulence in the external environment, Software AG continues to execute and deliver on its ambitious plan. For the third consecutive quarter, we delivered on our key transformation drivers. The shift to subscription has accelerated. The recurring proportion of our revenues has increased. And bookings growth, our most important indicator of business success, has continued to power ahead. Our transformation is delivering results. As we discussed before, this success and partly the strong progress in our shift to subscription is now showing through in our reported revenue. In Q3, this technical impact, with less revenue recognized upfront versus previous years and a higher recurring share to be recognized in the future, was more prominent than in previous quarters as our transformation gathers pace and customers respond to our new offerings. In the overall Digital Business, our largest business line, bookings growth was between EUR 80 million to EUR 82 million, a double-digit increase of approximately 16% in constant currency. The portion of our total bookings in the Digital Business booking from subscription and SaaS increased from 58% in Q3 2019 to between 75% and 80% in Q3 2020. And we also grew annual recurring revenue, ARR, roughly 10% year-on-year. Our IoT & Cloud business performed strongly again. Bookings there grew circa 60% in constant currency, ahead of consensus, driven by substantial IoT deals, including a multimillion deal with Eppendorf, a leading global medical equipment provider undertaking digital transformation. The remaining DBP business, with hybrid integration and API management at its core, delivered a good performance against a strong comparator period in Q3 2019 with bookings growth of between 3% and 5%, broadly in line with consensus. Cumulatively, this amounts to approximately 3% in bookings at group level at constant currency despite the expected small contribution from Adabas & Natural following a large deal pulled forward into the second quarter. During the quarter, we also continued to manage costs very tightly, targeting investment in the areas of most opportunity. Widening the view to our 9-month performance, we can see even more evidence of the successful transformation of our business in line with our plan. Our overall Digital Business achieved bookings growth within a range of 22% to 23% at constant currency, a clear demonstration that our core Digital Business has returned to growth. Within that, the proportion of our bookings coming from subscription and SaaS was roughly 79%. Our Adabas & Natural business achieved bookings growth of between 12% to 13%. And group bookings grew in the range of between 19% and 20% at constant currency, showing that there is momentum building right throughout our business. These results show that despite the near-term challenges we and all companies face, our market positioning is correct; the digitization trends we've spoken about remain in our favor; we are innovating and investing in the right areas; our software remains mission-critical to our clients; and we are building a track record of crisp execution and consistency in our delivery. Behind the numbers, we have clear evidence that the actions we've taken in our 3 transformation pillars are driving real business outcomes and impacting our financial results. In focus, we continue to innovate on products with IoT releases for Cumulocity and TrendMiner; new recognition and integration from Forrester and Gartner in their Waves and Magic Quadrants; and great customer responses from our academy and cloud rehosting projects taking place in Adabas & Natural. In execution, we once again showed strength in taking our products to market. Geographically, we delivered strong performance in North America, which exceeded our own expectations, and double-digit growth in the DACH and EMEA of plus 90% and plus 11%, respectively. We also continue to win against competition. In total, we delivered close to 50 new customers in the quarter, including a fantastic North American win for webMethods with the U.S. Navy. We also had a major competitive win against MuleSoft in EMEA through our partnership with Microsoft Azure, which continues to go from strength to strength. Our Microsoft partner pipeline was up 20% quarter-on-quarter and reflects an overall growing contribution from our partner ecosystem. During the quarter, we launched our industrial IoT strategy with Dell using its edge hardware, and we now have more than 10 customers in advanced discussions about the social distancing solution we have created with Tech Mahindra. In team, we continue to build strength and expertise while supporting our workforce through the pandemic. Despite the situation during Q3, we welcomed 166 new colleagues, bringing our total new hires to 380 since the beginning of March. We also kicked off our global digital leadership learning program, which welcomed its first cohort of 100 managers in July. These activities allowed us to close the quarter in a strong position. Despite the events of the last 3 weeks, we have maintained our momentum and continued to close engagements with customers. We stepped into Q4 confident in our pipeline quality and strength and have made a strong start in executing against it with roughly EUR 30 million of our plan booked already in the first 3 weeks of the quarter. As part of that, we have now signed a strategic new agreement with Walgreens Boots Alliance. This is a major deal for us, which will see Walgreens Boots Alliance extend our 20-plus year partnership and use webMethods to accelerate its digital transformation. The shape of our pipeline tells me our transition from event-based marketing activities to largely digital demand generation is working. And our strong start to Q4 execution gives us confidence in our ability to deliver on our full year guidance as well as our mid-term ambitions. With that, I'll now hand over to Matthias, who will add some color to the financials before we open for a short Q&A session. Matthias, over to you. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [4] -------------------------------------------------------------------------------- Thank you, Sanjay. I think it's fair to say that these aren't the circumstances in which I thought I'd be providing my first update as CFO of Software AG. However, I'm impressed by how professional our teams have been in dealing with this unprecedented situation. We have an amazing fighting spirit. And alongside the strong preliminary Q3 numbers we are reporting today, the way we are managing this adversity does give me comfort and belief in our ability to deliver in Q4. When we managed to discuss our Q2 earnings, I mentioned I would be trying to bring as much transparency as possible to our transformation project and help you better understand our business dynamics. That is as true now as it was then. And I'm happy to share our preliminary numbers with you today. Despite not having the full set of quarterly numbers at our disposal, I think there is enough here to paint a clear picture of Q3 performance and help you build on your understanding of our progress from previous quarters. Let's now have a closer look at the financials. They show the direction which our business has taken and the progress of our transformation even more clearly than in previous quarters. The growth in bookings proves that we are winning new customers and adding substantial new business as a result of the actions we have taken. And while the stated revenue in the quarter showed a decline, the shape of our revenue development tells you we are now in the phase in which we accelerate towards a higher share of subscription and recurring license revenue, which will be recognized over the quarters to come rather than showing through in our results in the current quarter. Importantly, the higher our share of subscription bookings, the more revenue will be recognized in future years and the larger the reported decline in the current quarter will be. And that is exactly what has happened so clearly in Q3. As Sanjay mentioned, bookings in our Digital Business grew by approximately 16% whereas revenue was down by 8% to 10% year-on-year. To explain that variance in some more detail, it was driven by a roughly 50% share of DBP subscription bookings coming with a 1-year license revenue recognition. And as you know, such contracts lead to a 3-year deal volume in bookings but only a 1-year license revenue in the first quarter of the contract. In contrast, our IoT & Cloud business shows growth in both bookings and revenue. The reason is that this line of business never had large perpetual license contracts and instead offer subscriptions and SaaS from the beginning. Therefore, bookings and revenues don't show the same level of divergence as in the integration webMethods business. Nevertheless, the fact that subscriptions and SaaS bookings portion within our Digital Business accelerated to between 75% and 80% in Q3 2020, up from 58% in the third quarter of 2019, explains why the revenue growth we have reported is still lower than our bookings growth. This is because the SaaS business shows only a fraction, to be precise [1/36] per month of the bookings volume in the quarter a contract is signed. Again, this deferred the record-high share of the SaaS deal volumes to future quarters, meaning bookings growth is and will continue to be higher than revenue growth. Now I hope you understand why a CFO must take a balanced view on a revenue decline during such a transformation and may even be pleased by an acceleration in bookings growth over revenue growth as long as the backlog is growing and outnumbering the decline at the reported revenue level. This is exactly what is happening at Software AG and is demonstrated by another leading KPI, our annual recurring revenue, short, ARR, which grew roughly 10% year-on-year in the quarter. Now with a quick word on Adabas & Natural. This is a stable business with an occasional quarterly volatility because large deals are not evenly spread over the fiscal year. This means comps can vary quite significantly year-on-year. For example, Q3 2019 was a particularly strong quarter for A&N. And this year's results should be seen in that context in order to be fully understood. This effect is exacerbated by another very strong performance in Q2 of this year with the early closing of a large deal rolled forward from Q3 benefited our results. With that deal accounted for in the second quarter, we see its absence in the quarterly numbers we have reported today. This kind of variance means it's more informative to look at the 9-month figures with same bookings growth and stable revenue for the A&N division. In terms of cost, we continue to manage our business efficiently and expect our cost to be roughly in line with the Q2 level, net of the impact from the sale of our Spanish professional services organization. Based on revenue development we have just discussed, our non-IFRS EBITA margin will be in a range of 16% to 17% for Q3 versus 30.5% in Q3 of last year, which in itself was an exceptionally strong comparative period due to a large deal in our U.S. government organization in that period. Importantly, our year-to-date 2020 margin is expected to be roughly 19%, showing a decline of roughly 8 and 9 percentage points, which is right in line with the expectations we explained in our Capital Markets Day back in February and is due to investments related to our move to subscription and the subsequent technical revenue impact of that shift. While today, we are not commenting on cash flow, let me just reconfirm that the number of requests for payment deferrals we receive continues to be very limited with no material impact from the company's liquidity position. Looking now at our outlook and guidance for the full year. You will have seen from our announcement that we have made no changes to our stated guidance ranges for the 2020 full year. Our headline numbers indicate that we have performed strongly in Q3. And while we continue to watch the ever-changing COVID-19 situation very closely, we have made a solid start in executing against our Q4 pipeline. While, of course, we will gain more granularity on our performance as our internal systems come back online, our market positioning and increasing execution ability underpin our confidence that we can deliver against the full year guidance ranges we have issued. With that, Otmar, over to you for the Q&A session. -------------------------------------------------------------------------------- Otmar F. Winzig, Software Aktiengesellschaft - Senior VP & Head of IR [5] -------------------------------------------------------------------------------- Yes, ladies and gentlemen, you now may ask questions. Operator, please repeat instructions how to proceed. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And the first question is from the line of Stacy Pollard of JPMorgan. -------------------------------------------------------------------------------- Stacy Elizabeth Pollard, JPMorgan Chase & Co, Research Division - Head of Software and IT Equity Research [2] -------------------------------------------------------------------------------- Just two for me, I think. First of all, how should we think about revenue recognition in Q4? It sounds like we should also be pushing that out and then maybe going into 2021. Maybe really my question is when should we expect to see the revenues hit the P&L, just so we kind of get that pattern right and have the right expectations there? And then secondly, just on the malware attack, do we expect any extra costs? Or do you anticipate any extra costs or any fee or fines from the data breach? Is there anything that we just need to be watching out for? -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [3] -------------------------------------------------------------------------------- All right. Stacy, it's Matthias. Thanks for your questions. If you allow me to, I will start with the latter, the question around cost/financial impact of the malware attack. Let me sort of comment on it as follows. The direct costs that relate to that impact, i.e., the costs that we are currently spending on advisers and consultants to contain and restart our systems, and as Sanjay described, to investigate the attack, will be based on what we know today, take a ballpark figure of a low to single-digit million range. That was a difficult expression, I'm sorry. And I hope that you can understand that at this point, we cannot comment or speculate on any further impact on our business itself. Let me just restate that the services, including our cloud services, have not been interrupted by the attack. But I think if you take a single mid-digit -- a single-digit mid figures of around EUR 5 million, then you should be okay for the moment for the direct costs. As for the revenue recognition pattern, Stacy, I will sort of have my answer limited to Q4 at the moment, given that we haven't done the full-blown analysis for 2021 yet. But I think the pattern that you have seen in terms of the acceleration during Q3, we do expect to continue during Q4. And we will certainly come back with more detail relating to 2021 the moment we have it. But that process was literally stopped in terms of the analysis. We are currently in the process of sort of refocusing on that. So please understand that I would need to come back on that later. -------------------------------------------------------------------------------- Stacy Elizabeth Pollard, JPMorgan Chase & Co, Research Division - Head of Software and IT Equity Research [4] -------------------------------------------------------------------------------- Yes. No, that's fair enough. And then your regular systems are now back online though. Is that right? So you're -- everything is back to normal? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [5] -------------------------------------------------------------------------------- Yes. Stacy, we have basically contained the situation very importantly. And then our normal systems are coming back up and some of them are already up. So that's -- we're in the process now and we are supporting, as we said, we had no interruptions, support to customers. -------------------------------------------------------------------------------- Operator [6] -------------------------------------------------------------------------------- The next question is from Gautam Pillai of Goldman Sachs. -------------------------------------------------------------------------------- Gautam Pillai, Goldman Sachs Group, Inc., Research Division - Equity Analyst [7] -------------------------------------------------------------------------------- Great. Firstly, a couple of questions on the cyber attack. On the data which was taken, is this data lost permanently for you? And also is there a reputational damage here which can impact conversion of the pipeline and more importantly building of new pipeline? And then a quick question on the operating margins perhaps to Matthias. Is it possible to provide some more color on the impact to EBIT split between the impact from subscription transition and also increased investments? It seems like you are continuing to hire quite actively. And also on the margin outlook, the first 9 months' margins are tracking below the full year guidance and needs a step-up in Q4. Can you talk about the drivers which give you confidence that you can hit the guidance for the year? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [8] -------------------------------------------------------------------------------- Gautam, Matthias is going to take the second question and then I'll come back to the first question. Go ahead, Matthias. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [9] -------------------------------------------------------------------------------- And Gautam, I will start with the second question and I will answer it to the best of my abilities, given the system access that we have as of today. So the easiest part of your question was the last part around the needed step-up in the margin profile during Q4 to meet full year guidance. I think that is exactly the reason why I focused on the 9-month number in my short presentation here today, it being slightly below the target corridor with the strongest quarter of the company yet to come, which is a relatively normal pattern for a software company, including Software AG. So we remain confident that from the operational execution and the continuous cost management, we will hit the target corridor. Just to not confuse the audience here, in addition to what I gave as a response to Stacy earlier, the current direct one-time costs for consultants and advisers to deal with the attack, we're most likely adjusting for in the non-IFRS operating margin because we do not consider them to be operating but one time. As for the investment question, that is something that I need to stay at a high level on because we do not have access to all of the details. But you heard the headcount numbers to begin with. Overall, we had a target of investing around EUR 50 million for the full year. We have spent EUR 25 million around about in the first half. And it could be an equal amount in the second half. Whether that, given the current circumstances plus the recurring pandemic, if one can say it like that, will stay slightly below that remains to be seen. This is also part of the process we are picking up at the moment. I apologize, Gautam, as I don't have the additional details that you asked for at the beginning of that question because we haven't done the deep dive on that. I will close by saying -- giving you one additional data point on SaaS bookings because that obviously also has had an impact on margins so far. Q3 SaaS bookings in percentage of DBP all-in bookings were 24% and in terms of overall total product bookings were 20%. And I hope that is a little helpful for you to put the pieces of the puzzle together. -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [10] -------------------------------------------------------------------------------- Great. Okay. Gautam, I'll come back to your first question. So let me just start by saying, look, we've been successful in containing the attack and now are in the process of restarting, recalibrating and getting our systems, internal systems up and running. Now cloud services and other customer services have remained unaffected through this. As we are working with experts, basically, we are able to bring our systems back up. And so your question around data permanent loss, to our knowledge so far, we are able to bring our systems back up. Of course, there is the issue about some data stolen, which we are monitoring very carefully and are assessing and analyzing. And we'll get back to any parties that are impacted. But as far as our systems are concerned, we are in the process of setting up and getting them running. -------------------------------------------------------------------------------- Gautam Pillai, Goldman Sachs Group, Inc., Research Division - Equity Analyst [11] -------------------------------------------------------------------------------- And on the point of pipeline then, any kind of reputational issue you might see here? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [12] -------------------------------------------------------------------------------- Yes. So our pipeline has been growing steadily and in a strong way. As I mentioned in my talk that basically our shift from event-based marketing to digital is really working. And we do see that growing the strength of the pipeline. In terms of reputational, well, we've been very proactive and very transparent as soon as we got to know about the incident, have been engaging with our customers. We do not see any signals in that direction. Of course, we hope for your understanding that at the moment, we cannot comment on this anymore. But we are continuing to interact consistently with our customers. And I guess our strong start into Q4 shows that customers value our relationships. -------------------------------------------------------------------------------- Operator [13] -------------------------------------------------------------------------------- The next question is from Michael Briest of UBS. -------------------------------------------------------------------------------- Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [14] -------------------------------------------------------------------------------- A couple for me as well. Just digging into the SaaS performance, I mean, 24% bookings you said, Matthias. That's very impressive. I think the guidance for the full year was 10%. I'm just curious, which product areas are really driving that? And maybe it's related, you said half of the bookings -- subscription bookings were 1 year in duration. Were these led by the client and maybe there's hesitancy about committing to a 3-year deal? So in some ways, we should look at this as a somewhat negative as the customers are sort of tiptoeing into the product. Or is it more led by you? And again, what products are typically profiling there? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [15] -------------------------------------------------------------------------------- Michael, it's Sanjay. Let me take the first part, which is what areas are we seeing this strong growth in Saas? So this is being driven by our areas around self-serve analytics, which is TrendMiner; our IoT, which is Cumulocity; our cloud-based process mining solutions in ARIS; and of course, our iPad solutions in webMethods. So these areas are actually driving a strong uptake, and we see a good response from the customers towards these innovation that we are offering now in our engagement with customers. And of course, we see an impact of COVID, which also pushes SaaS stronger. So we see that not only us, but we see that across our peers also. I'll pass on the second part to Matthias. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [16] -------------------------------------------------------------------------------- Yes. Michael, I will pick up on your comment relating to the customers potentially tiptoeing into the product. I cannot confirm that pattern. I'll tell you exactly why. Because we have a strict governance around this in our so-called deal approval process through which we clearly monitor 1-year contracts in particular. And then on the SaaS front, even more so than the delegation of authority behind that. So I have a very clear overview on those customer situations. And normally, what happens is that a lot of the customers in the areas that Sanjay just described, will have, for example, tried the product beforehand through a free trial of some ARIS stuff, for lack of a better expression there, so that they're not really tiptoeing when they signed the contract. But it does happen in customer situations that you need to align the length of the contract with something else that the customer has. So the customers do appreciate a right to converge contracts because they have a contractual event coming up in the future and then they like to align their SaaS subscription to that to then make a conscious decision of their entire consumption portfolio, just to give you a little bit of color on how that works for us. -------------------------------------------------------------------------------- Michael Briest, UBS Investment Bank, Research Division - MD of Global Technology Research Group & Head of the European Technology Research [17] -------------------------------------------------------------------------------- And maybe just any sense on what the gap between bookings and revenues might be in Q4? I mean Q3 seems quite substantial on the DBP side of things. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [18] -------------------------------------------------------------------------------- I think the -- if I hear you correctly, Michael, this is what I tried to sort of touch on my comments earlier when I said that the acceleration is expected to continue in terms of the subscription journey. We have no reason to believe that this would stop during Q4, which we expect to be the strongest quarter. And based on what we see in the pipeline and analysis, we feel this is continuing to stay. So in other words, that was a long-winded answer, that gap is going to continue from our perspective. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- The next question is from Knut Woller of Baader Bank. -------------------------------------------------------------------------------- Knut Woller, Baader-Helvea Equity Research - Analyst [20] -------------------------------------------------------------------------------- Looking at your guidance, which you confirmed, we can say after the 9 months, we have been tracking basically ahead of your full year targets, which leaves the relatively wide corridor for the final quarter of the year. So can you give us some more color and granularity on the expected Q4 performance? Do you rather expect to hit the high end of your bookings guidance in the segments? Or how should we think about that? And then looking at the start to Q4, the EUR 30 million bookings closed, including Walgreens, can you share some color on how it would look like excluding Walgreens and also give us some color on how the bookings already signed now in the first 3 weeks of the quarter and square to prior year's quarter to get a feeling how much the quarter is derisked after the strong start to the quarter? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [21] -------------------------------------------------------------------------------- Knut, it's Sanjay. Thank you for your questions. Look, let me start with the first one. See, we are very encouraged with the resilience in our business. But there's always considerable uncertainty at the macro level. And I think you're quite aware about all the challenges with the COVID resurgence, et cetera. So as a result, we're taking the prudent approach of reiterating our existing guidance, which demonstrates considerable progress for the year. We are very excited about the Q4 start. As you've seen, we've shown that it's a strong step. I'll answer your question about skew. You know that as part of our strategy, we have been working very hard to change the skew in the quarters and to get a better split across the 3 months of the quarter. Because in the past, there's been too much in the last 2 weeks of the quarter, particularly in Q4, which is our largest quarter. So this, to us, is a very strategic shift away from the past and a significant improvement from the past in terms of being able to close business in the first 3 weeks of the quarter, okay? And then in terms of your question on Walgreens Boots. Well, Walgreens Boots is a global leader in retail and wholesale pharmacy. As you know, this is a very exciting contract that we have signed with Walgreens, which supports their shift to digital and their digital transformation, together with partners like Microsoft and TCS. So it is a subscription transformation. In terms of the split of the business that we have signed, we would say Walgreens is about probably 2/3, 1/3. So we have 1/3 of all new business being signed and then a large deal with Walgreens, of course. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- The next question is from Charles Brennan of Crédit Suisse. -------------------------------------------------------------------------------- Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [23] -------------------------------------------------------------------------------- Just a couple of questions for me. Firstly, sorry to go back on the issue, but just on the security breach, you mentioned a figure of EUR 5 million. Does that include the cost of fixing your security systems? Or is that only the cost of investigating where the shortfalls are? And again, related to the security breach, are there any GDPR-type issues we need to consider and future fines as a result of the loss of data? And then just coming back to Q4 and the pipeline. Can you tell us what the pipeline conversion rate has been for the first 9 months of the year and what the pipeline cover looks like for Q4, just to get a sense whether it's an easy or a tough hurdle? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [24] -------------------------------------------------------------------------------- Let me take the first part and I will then pass on to -- the second part to Matthias. In terms of your question around the security breach and the cost, well, we are doing 2 actions at the same time. One is, of course, investigations and forensics, et cetera. But the second part is recovery. And part of our recovery, Charles, is also related to setting systems in the way that we need to. So I think that's what Matthias covered with the first. In the second, which was your question around GDPR, well, look, we take our regulatory obligations very seriously, so rest assured that we live to our legal obligations and have been. Our interactions with regulators are, at the moment, obviously confidential. But we have been updating the regulatory bodies systematically and being very systematic about it. And then Matthias, if you can take the second one. -------------------------------------------------------------------------------- Charles Brennan, Crédit Suisse AG, Research Division - Research Analyst [25] -------------------------------------------------------------------------------- So I'm not entirely clear. Should we be expecting some kind of impact or not? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [26] -------------------------------------------------------------------------------- Okay. Sorry. So at this point, we are still in the process of doing our investigations. And so we would like to ask for your understanding that we will finish our investigation, then be able to share more information. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [27] -------------------------------------------------------------------------------- And Charlie, it's Matthias. If I may sort of say on the pipeline conversion, I don't have that data at hand as of this morning, specifically related to Q3 and the first 9 months. We would need to follow up on that, which is due to the limited system access we have at the moment. -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [28] -------------------------------------------------------------------------------- Yes. The only thing we would say is that when we spoke to you last, we told you that our pipeline was more in the range of sort of close to 3x for DBP and about 3.15x for IoT. And obviously, in Adabas & Natural, we don't require that much for pipeline coverage. But the pipeline coverage in the last 30 days in creation is also good. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- The next question is from Martin Jungfleisch of Kepler Cheuvreux. -------------------------------------------------------------------------------- Martin Jungfleisch, Kepler Cheuvreux, Research Division - Junior Equity Research Analyst [30] -------------------------------------------------------------------------------- I have two, please. The first one is on your progressions with partners such as Microsoft, Dell, Siemens and also Tech Mahindra. I think in Q2, you mentioned that bookings with partners are up 23% with total share of bookings of 12%. Can you share these numbers or expected numbers for the third quarter and also provide some color how these partnerships have developed more recently? And then the second question is more on the regional performance. Can you shed some light on the regional performance of the group in the third quarter and what your observations are also regarding the impact of COVID-19 for Q4? So are there any regions which you would consider to remain challenging? And also, I would appreciate any update on the U.S. performance in the third quarter. -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [31] -------------------------------------------------------------------------------- Martin, thank you very much for the questions. Look, in terms of progression with partners, we are making solid progress in developing these relationships into real bookings and revenue. We talked about our partnership with Microsoft and 20% growth quarter-on-quarter in terms of the pipeline. As you know, last quarter, we mentioned that our systematic progress in partners is demonstrated through the percentage that is accounted by partners and channels. So just to give you a reference back, in 2018, it was about 3%. In 2019, we grew it to 5%. And in 2020 first quarter, it's now stepped up to 11% and above. So this trend continues. And you know that our mid-term objective is to get this contribution up to the 20%, 25% range. So I'm very, very satisfied with the way that we are progressing in this area. Not only is this relationship with Microsoft strengthening, but also our partnership with Adobe, with AWS, with Dell is also growing. And we also see significantly other ISVs that are partnering with us to bundle our products with their capabilities. So that's on the partnership side. In terms of the regions, well, as I mentioned, first and foremost, U.S., very importantly, continues to demonstrate strong performance. And that is something that we have worked quite hard on in 2019. And as you can see in the first 3 quarters of 2020, we have demonstrated consistent performance here in the U.S. and we see that continuing into Q4. Apart from the other regions, I also mentioned that DACH, which is our Germany, Austria, Switzerland region, demonstrated a phenomenal performance in Q3. They were almost plus 90% year-on-year. And also, we saw a very strong performance from our EMEA region, which was plus 11% year-on-year. So from a regional perspective, we are seeing very strong performance from all the regions. To your question about COVID-19, well, I would say, obviously, we are concerned about the developments in regions such as U.S., in regions such as India, also some parts of Asia, and I would say now somewhat the second wave here in Europe, where we can see in certain countries more incidents and more cases coming up. So we definitely are concerned about it. I would say that the need of digital, the step towards digital from our customers, we do not see an impact in terms of reduction of that need or demand. Customers are still needing to move more and more towards that with the new dynamics of COVID. -------------------------------------------------------------------------------- Operator [32] -------------------------------------------------------------------------------- And the last question is from Alastair Nolan of Morgan Stanley. -------------------------------------------------------------------------------- Alastair P. Nolan, Morgan Stanley, Research Division - Equity Analyst [33] -------------------------------------------------------------------------------- Just two for me. The first is just to try and get a better understanding of the acceleration you mentioned to subscription. If I look at last quarter, second quarter, you had, I think it was 88% of bookings subscription or SaaS. And that is 75% to 80% this quarter. And if I would go back and look at the, I guess, the comparative number for the respectives 2Q and 3Q in '19, it basically points to a 25% increase in both quarters. So I'm just trying to understand the, I guess, impact of subscription that you mentioned just because on the face of it, I'm struggling to get to that same conclusion, particularly when you mentioned 50% is 1 year in both this quarter and it was the case last quarter. So just trying to better understand what's going on there. Is it more SaaS or in the mix or what might that be? And then secondly, just, I guess, as well, the ARR, you mentioned growth of 10% in the third quarter. But that compares to 12% last quarter. And given that, I guess, normalizes for subscription and the impacts there, just trying to understand why that might have been the case, especially given we would have maybe expected the third quarter to be a much more favorable environment versus the second quarter. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [34] -------------------------------------------------------------------------------- So Alastair, it's Matthias. I'll take a stab at the first part of the question. I think you hit the nail on the head, the approach was accurate when you compare the Q3 performance rather to the Q3 2019 performance, the numbers you referred to were accurate rather than the Q2. We also need to see the overall seasonal pattern in the volume of the business that we do. So a higher portion of this obviously then had a stronger impact. And I did touch on the increasing SaaS impact as well. At the same time, one data point that we haven't mentioned so far is that we had currency headwinds of about 2% to 3%. And I think if we put all of that together, then that probably sort of gives you additional data points to help you with that. -------------------------------------------------------------------------------- Alastair P. Nolan, Morgan Stanley, Research Division - Equity Analyst [35] -------------------------------------------------------------------------------- And just maybe just a follow-up just on, I guess, the 3Q environment versus 2Q. Has there been a meaningful kind of change or shift there? Or are we right to think that things are improving, especially with 2Q being potentially the trough? Or is that the right way to think about it? -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [36] -------------------------------------------------------------------------------- Is the question more around the business demand? Or is the question around specific something else? Because what we see from a perspective of subscription and SaaS, that momentum continues. From a perspective of the business areas, I mentioned the areas where we see a higher uptick in cloud. But also in terms of subscription, we see a very strong demand from our customers. Is there anything specific that you were looking? -------------------------------------------------------------------------------- Alastair P. Nolan, Morgan Stanley, Research Division - Equity Analyst [37] -------------------------------------------------------------------------------- I guess it's just why ARR slowed from 12% to 10%, given I would have thought 3Q was a more favorable environment versus the uncertainty in the second quarter. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [38] -------------------------------------------------------------------------------- Yes. I think, Alastair, I'll be very transparent on this. Other than the currency impact that I just referred to, I cannot pride myself to have been able to do a much deeper analysis, given where we stand in terms of the system availability. I was happy to be able to do the 10% number on ARR and thought I should bring it to the table in the spirit of providing transparency. Now (inaudible) on providing additional transparency, but we can certainly follow up on that. -------------------------------------------------------------------------------- Sanjay Brahmawar, Software Aktiengesellschaft - Chairman of the Management Board & CEO [39] -------------------------------------------------------------------------------- Thank you, Alastair. So thank you very much for your questions, all. I just want to conclude in saying 3 key things. Number one, we are proud of the team for closing a very strong Q3. As you can see, the momentum into the transformation continues. The shift to subscription and SaaS continues in a strong way and the demand from our customers is solid. They consider our software as mission-critical. Second, in terms of the unfortunate malware attack, we have contained the situation. And now we are in the process of getting our operations all back to normal. And we look forward -- we made a strong start to Q4, and we look forward to coming back and reporting on that to you. So with that, please stay safe and well, and thank you very much. -------------------------------------------------------------------------------- Otmar F. Winzig, Software Aktiengesellschaft - Senior VP & Head of IR [40] -------------------------------------------------------------------------------- Thank you very much. We're closing the deal now -- the call now. Any additional question will be taken by the IR team, which is back online, even with our (inaudible). Thank you very much, and goodbye. -------------------------------------------------------------------------------- Matthias Heiden, Software Aktiengesellschaft - CFO & Member of Executive Board [41] -------------------------------------------------------------------------------- Thanks, everyone. Bye-bye. -------------------------------------------------------------------------------- Operator [42] -------------------------------------------------------------------------------- Ladies and gentlemen, the conference has now concluded and you may disconnect your telephone. Thank you for joining, and have a pleasant day. Goodbye.