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Software AG: It's Starting To Feel A Lot Like A Turnaround

Mar. 03, 2020 10:00 PM ETSoftware Aktiengesellschaft (SWDAF)


  • Double-digit growth in bookings should induce top-line growth starting in 2021.
  • Growth investments put a pressure on margins in the mid-term while boosting top-line growth dynamics.
  • The rapid subscription and SaaS revenue growth promotes recurring revenue share reaching 85% by 2023.
  • Recent stock market sell-off presents a good entry point as fundamental and peer valuations suggest attractive upside potential of at least 60% in the mid-term.

Software AG (OTCQX:SWDAF) [ETR: SOW] hosted its annual Capital Markets Day on February 5 and provided an update on progress made in 2019 as well as further insights into its 2020 outlook and medium-term targets. The management tone was very upbeat celebrating the bumpy ride in 2019. They further explained that 2019 was a foundation year needed to generate momentum in 2020 and subsequently producing double-digit growth in the following years. Generally, there was a lot of hope in the management's speech and it seems that the turnaround is just around the corner, after years of lackluster growth.

The stock jumped more than 15% on that day to €33 recovering losses from the unexpected 2020 margin cut, which caught the market by surprise with stock tumbling by -14% (please see our article "Software AG: 2020 Guidance Caught The Market By Surprise, Stock Down -14%"). The stock stayed on that level just before the overall market selloff amid COVID-19 fears, pushing the stock down by -13% from its all-time high value. We believe this overall market setback is temporary with COVID-19 having only a limited impact on SOW operating performance, providing a good buying opportunity into the growth story of Software AG.

2019 was a year of a ramp-up for a big shift; 2020 building momentum

In 2019, the newly appointed management board hit a reset button with the primary focus on breaking inefficient structures and laying the foundation for future growth. According to CEO Sanjay Brahmawar, the key focus areas were:

1) Product re-bundling - given complex product structures the number of products sold separately was overwhelmingly high (more than 1000) which hindered overall sales efforts as well as any cross and upselling opportunities.

2) Salesforce setup - re-aligning sales force in North America for future SaaS and subscription push, which essentially

This article was written by

I am a former sell-side analyst with over 10 years of experience in the German small & mid-cap software market. Most of the German companies I cover, I know for years and have been closely working with the management. To uncover investment opportunities in other regions and profit from the overall growth dynamics in the software industry, as a transition to SaaS and cloud is evolving, I am expanding my coverage to include other European and North American software players.My goal is to write insightful and thorough research articles (à la sell-side style) for the companies I am either invested or considering investing in. I am based in Frankfurt, Germany.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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