January 29, 2020 / 6:45 AM / 20 days ago

Software AG shares drop on lower fourth quarter revenues, CEO calls investors for patience

BERLIN (Reuters) - Germany’s Software AG (SOWGn.DE) posted a 5% drop in fourth-quarter revenue on Wednesday, sending its shares to a three-month low, as its chief executive said the squeeze on revenue reflected investment in future growth.

Shares in the business software company dropped more than 13.5% after it said it saw 2020 operating margin between 20% to 22%, down from 29.2% last year, and cut its mid-term margin target.

CEO Sanjay Brahmawar, who has revamped the executive board and is shifting the business from a ‘lumpy’ license model to software subscriptions, called for investors to be patient and said the strategy would pay off.

Software AG, Germany’s oldest listed tech company, had warned that the quick shift toward a subscription-based model could squeeze margins for 2020, because license fees are paid upfront while subscriptions are spread over time.

“Investors that understand this journey... will look at the market opportunity and understand that the temporarily reduction in margin is worth the investment,” Brahmawar told Reuters in an interview.

Among those investors was hedge fund manager David Einhorn’s Greenlight Capital which last week said it had taken an unspecified stake in Software AG, describing its shares as undervalued.

Brahmawar said he had not spoken with Einhorn or Greenlight Capital yet, but that their investment was evidence that the company was on the right track.

A change in the company’s culture and its management board is part of Brahmawar’s overhaul, dubbed project Helix. Most recently it announced the appointment of Matthias Heiden as its chief financial officer.

“We have to demonstrate right from the top that… this is a company that is a learning company, rather than a know-it-all company,” Brahmawar said.

In pursuit of achieving annual revenue of 1 billion euros ($1.1 billion) by 2023, the Darmstadt-based firm said it was aiming to increase recurring revenue to 90% from 70%, Brahmawar said.

But in the fourth quarter, revenue slipped to 255 million euros and operating profit fell 23% to 65.9 million euros, below the mean forecast of 71.6 million euros returned by a poll of analysts posted on the company’s website.

Fourth-quarter sales at Digital Business Platform (DBP), Software AG’s largest unit, declined 2%, while those of its A&N database division fell 16% and licenses dropped 11% in the same period.

Reporting by Riham Alkousaa; Editing by Michelle Martin, Douglas Busvine and Jan Harvey

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