Software AG set to raise growth targets, CEO says

Software AG set to raise growth targets, CEO says

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As he nears the four-year anniversary of his appointment as chief executive of Software AG, Sanjay Brahmawar is spending little time looking back at his accomplishments. There’s a new five-year plan to prepare.

It has been an eventful six months for the 53-year-old company that, until the arrival of Brahmawar (pictured), was known mainly for a mainframe database and programming language. Last December it entered into a relationship with technology investment firm Silver Lake Partners LP that saw Silver Lake invest $378 million in the company and take two seats on the board.

In February, the company said it would acquire data integration company StreamSets Inc. for an undisclosed sum. Last month it delivered solid first first-quarter financial results that showed a 22% growth in bookings and 8% total revenue growth in constant currency terms. Recurring revenue now makes up roughly 91% of total revenue, up from 60% when Brahmawar came on board.

Beyond $1 billion

Software AG is in a good position to hit the $1 billion annual revenue target the CEO set four years ago. “We will get to $1 billion in 2023 as we committed,” he said in an interview with SiliconANGLE. “Our next stage will be to accelerate organic and inorganic growth.”

The reinvigorated company is hanging its fortunes on a combination of integration-platform-as-a-service, application programming interface management, business process transformation and “internet of things” analytics, markets that it collectively estimates total nearly $65 billion and are growing 16% annually. Its stated strategy is to grow through a “string of pearls” acquisition plan that emphasizes strategic purchases that add value in specific areas and are in demand by current customers.

StreamSets fits that plan, Brahmawar said. “It’s very synergistic around the buyer profile; the people who are buying WebMethods, API management and hybrid integration are the same profile who buy integration,” he said. “Large portions of requests from customers that we answer have this component that we normally were not able to answer and now today we can.”

Accelerating M&A

The company aims to accelerate its acquisitions activity in the future with the addition of Silver Lake Managing Direct Christian Lucas and former Red Hat Inc. CEO Jim Whitehurst to its board. “Our primary objective [in the Silver Lake deal] was not to raise cash but to find a partner with whom we can accelerate,” he said. “Silver Lake is very smart at identifying companies that are undervalued, have a good product set, high growth potential and therefore can be accelerated.”

Silver Lake will also play a major role in defining a new five-year plan to go into effect next year. That strategy is likely to feature faster growth and more acquisitions. “The $1 billion revenue target was purely organic growth,” Brahmawar said. “Now the path is a combination of organic and acquisitions. We will also major in some markets heavily with more go-to-market product specialization.”

Sales through hyperscale cloud providers and other partners will also get new emphasis with the intent of growing them from their current 11% share of revenue to 20%, the CEO said.

The 40% rule

Growth won’t come at all costs, however. Brahmawar adheres to the 40% rule, meaning that the ideal mix for a company like his is a combination of growth rate and margins that add up to 40%. With current margins at 20% and revenue growth at 10%, there is room to improve, and amid the current downturn in technology stock prices, he believes investors are more attuned to his company’s balanced strategy.

The money that has flowed out of equities over the past six months “is pretty much parked and I personally believe some of that money will come back into equities but it will be smartly decided,” he said. “Growth at all costs is not being very tolerated right now, but there is an appetite for growth at good margins. I believe as we continue to demonstrate growth, we will see more support.”

Charitable contribution

Software AG operates under somewhat unusual circumstances in that 31% of its shares are owned by a charitable foundation that was set up by founder Peter Schnell when the company went public in 1997. Although nonprofits might be expected to weigh dividends more heavily than valuation, “they understand our strategy and support it,” he said. “For the company not to grow is not a sustainable future.” Software AG will continue paying quarterly dividends, however.

The 750 companies that use the company’s mainframe have somewhat slowed the transition to a subscription revenue model but have been an asset overall, Brahmawar said. “The majority of those customers are Fortune 500 companies and they have very large wallets,” he said. “Because you have that 30-year relationship with the customer, you have that opportunity to have a discussion around new innovation. Today about 45% of our Adabas and Natural customers also have our digital solutions.”

And contrary to conventional wisdom, those products are growing. In the most recent quarter, Adabas and Natural brought in $34.7 million in revenue, up 43% over the previous year in constant currency terms.

Photo: SiliconANGLE

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