independent research update software ag · update. software ag . 19th july 2013 . if you want a...

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INDEPENDENT RESEARCH UPDATE Software AG 19th July 2013 If you want a share of the action, go for it!

IT Software & Services Fair Value EUR32 vs. EUR28 (price EUR25.82) BUY vs. SELL

Bloomberg SOW GR Reuters SOWG.DE 12-month High / Low (EUR) 35.1 / 22.5 Market capitalisation (EURm) 2,244 Enterprise Value (BG estimates EURm) 2,245 Avg. 6m daily volume ('000 shares) 396.6 Free Float 66.4% 3y EPS CAGR 1.0% Gearing (12/12) -5% Dividend yield (12/13e) 1.78%

We are raising our rating to Buy (vs. Sell) and our DCF-derived fair value to EUR32 (vs. EUR28). Despite the volatile nature of growth, we think that strong trends in business process management and a more favourable revenue mix lend credibility to a positive growth scenario from Q4 2013 onwards, pending a higher EBIT margin in 2015. Buy with your eyes wide open....

Continued momentum in business process management. With growth forecast at 16-22% in 2013, BPE (Business Process Excellence) products (est. 45% of 2012 revenues), partly boosted by Terracotta (in-memory data management), should maintain vigorous momentum. These products are clawing back market share from rival Tibco, while Software AG is improving its offer thanks to acquisitions that address new challenges in BPM (Cloud, Big Data, Mobility and social networks).

Return of organic growth foreseeable in Q4 2013. After eight quarters of negative growth, we think that Software AG will be capable of restoring positive growth from Q4 2013: 1). BPE products are growing strongly again; 2). Sales of ETS products are continuing to fall, but the comparison base is becoming more supportive; and 3) the Consulting business has been repositioned.

Projected margin trends are priced in. Because of heavy sales and marketing investment in the BPE division in 2013 and, to a lesser extent, in 2014, we think EBIT margin is unlikely to improve before 2015. The stock reacted negatively to the announcement of this plan, and we think this news has now been priced in.

Attractive valuation. The stock is trading on EV/EBIT multiples of 8.5x 2013e and 7.5x 2014e, having suffered from: 1). Doubts about the execution of the 2018 Plan, which aims to generate revenues of EUR1bn in BPE; 2). The steep drop in revenues in the Consulting and ETS divisions in 2012; and 3). Question marks about the accounting recognition of licence revenues with staggered payments.

YE December 12/12 12/13e 12/14e 12/15e Revenue (€m) 1,047 1,018 1,097 1,187 EBITA €m) 301.1 265.1 281.7 316.3 Op.Margin (%) 28.7 26.0 25.7 26.6 Diluted EPS (€) 2.39 2.10 2.22 2.47 EV/Sales 2.1x 2.2x 1.9x 1.6x EV/EBITDA 7.0x 8.1x 7.1x 5.8x EV/EBITA 7.3x 8.5x 7.5x 6.0x P/E 10.8x 12.3x 11.7x 10.5x ROCE 22.2 18.1 19.6 22.1

19/7/13

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Source: Thomson Reuters Datastream

Analyst: Gregory Ramirez 33(0) 1 56 68 75 91 [email protected]

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Simplified Profit & Loss Account (EURm) 2010 2011 2012 2013e 2014e 2015e Revenues 1,120 1,098 1,047 1,018 1,097 1,187 Change (%) 32.1% -1.9% -4.6% -2.8% 7.8% 8.2% lfl change (%) 0.6% -0.7% -8.1% -1.5% 6.8% 8.2% Adjusted EBITDA 331 321 314 279 296 331 Depreciation & amortisation (13.5) (13.4) (12.9) (13.6) (14.1) (14.6) Adjusted EBIT 317 308 301 265 282 316 EBIT 269 269 248 230 242 279 Change (%) 23.1% 0.2% -7.8% -7.4% 5.2% 15.3% Financial results (14.2) (9.9) (8.8) (8.5) (6.9) (5.0) Pre-Tax profits 254 259 240 221 235 274 Exceptionals 0.0 0.0 0.0 0.0 0.0 0.0 Tax (78.7) (82.1) (74.8) (72.0) (76.4) (90.4) Profits from associates 0.0 0.0 0.0 0.0 0.0 0.0 Minority interests 0.22 0.25 0.17 0.15 0.20 0.30 Net profit 175 177 165 149 158 183 Restated net profit 218 214 213 186 197 219 Change (%) 24.4% -1.8% -0.8% -12.4% 5.6% 11.5% Cash Flow Statement (EURm) Operating cash flows 225 182 214 199 210 233 Change in working capital 2.6 16.4 (29.9) 0.25 (13.5) (7.5) Capex, net (10.8) (12.5) (12.6) (14.0) (14.0) (14.0) Financial investments, net 1.1 1.5 (1.1) 0.35 0.0 0.0 Acquisitions, net (53.9) (59.2) (18.0) (78.7) 0.0 0.0 Dividends (32.8) (37.2) (40.1) (40.0) (40.0) (39.6) Other (214) 8.0 (16.2) (16.5) (21.9) 18.1 Net debt 167 60.9 (49.6) 0.78 (135) (340) Free Cash flow 217 186 172 185 183 212 Balance Sheet (EURm) Tangible fixed assets 66.4 65.4 64.0 64.4 64.3 63.7 Intangibles assets & goodwill 950 1,000 971 1,015 984 956 Investments 5.3 3.4 10.3 10.0 10.0 10.0 Deferred tax assets 21.5 18.7 16.7 16.7 16.7 16.7 Current assets 455 376 394 387 420 451 Cash & equivalents 102 216 316 316 436 627 Total assets 1,601 1,681 1,772 1,808 1,932 2,124 Shareholders' equity 769 951 1,060 1,054 1,172 1,356 Provisions 198 133 151 151 151 151 Deferred tax liabilities 47.4 36.7 26.8 26.8 26.8 26.8 L & ST Debt 270 277 266 316 301 286 Current liabilities 316 282 268 260 281 304 Total Liabilities 1,601 1,681 1,772 1,808 1,932 2,124 Capital employed 937 1,012 1,010 1,054 1,037 1,015 Ratios Operating margin 28.36 28.02 28.75 26.04 25.67 26.64 Tax rate 30.95 31.66 31.25 32.50 32.50 33.00 Net margin 15.67 16.11 15.71 14.67 14.43 15.44 ROE (after tax) 22.80 18.60 15.52 14.17 13.51 13.52 ROCE (after tax) 25.10 22.02 22.17 18.09 19.61 22.10 Gearing 21.74 6.40 -4.68 0.07 -11.51 -25.10 Pay out ratio 20.46 22.57 24.30 26.78 25.00 25.00 Number of shares, diluted 86.15 88.79 88.77 88.77 88.77 88.77 Data per Share (EUR) EPS 2.04 2.04 1.89 1.72 1.82 2.11 Restated EPS 2.53 2.41 2.39 2.10 2.22 2.47 % change 24.4% -4.7% -0.8% -12.4% 5.6% 11.5% EPS bef. GDW 2.53 2.41 2.39 2.10 2.22 2.47 BVPS 8.93 10.72 11.94 11.87 13.20 15.27 Operating cash flows 2.61 2.05 2.42 2.24 2.37 2.63 FCF 2.52 2.10 1.94 2.09 2.06 2.39 Net dividend 0.42 0.46 0.46 0.46 0.46 0.53

Source: Company Data; Bryan, Garnier & Co ests.

Company description Founded in 1969, and listed on the Frankfurt Stock Exchange since 1999, Software AG markets enterprise software addressing two specific needs: 1). Business Process Management/Analysis (55% of 2012 Product revenues, with the webMethods product family, the ARIS platform, and the Terracotta in-memory data management tool), enabling users to design business processes and integrate existing applications and data into new business processes; 2). Modernisation of legacy IT systems (45% of 2012 Product revenues, with an ETS product family, including its Adabas database management system and its Natural programming language), providing mission-critical mainframe applications with technologies enhancing performance and opening new environments such as the Web and e-business.

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1. Upside potential after the fall

1.1. DCF model: EUR32 per share Fig. 1: DCF assumptions

Risk-free interest rate 3.0% Equity risk premium 6.1%

Beta 1.4

Return expected on equity 11.5%

Stock price (EUR) 25.82

Number of shares (m) 86.92

Market Capitalisation (EURm) 2,244

Net debt on 31/12/2013e (EURm) 1

Entreprise value (EURm) 2,245

Interest rate on debt 1.0%

Tax rate 33.0%

Sales growth rate to perpetuity 2.5%

WACC 11.5%

Source: Bryan, Garnier & Co ests.

Fig. 2: Discounted FCF

in EURm (FYE 31/12) 2012 2013e 2014e 2015e 2016e 2017e 2018e 2019e 2020e 2021e 2022e 2023e Sales 1,047.3 1,017.8 1,097.3 1,187.1 1,270.2 1,359.2 1,454.3 1,556.1 1,665.0 1,781.6 1,906.3 2,039.7 % chg -4.6% -2.8% 7.8% 8.2% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%

Adj. EBIT 301.1 265.1 281.7 316.3 355.7 380.6 407.2 435.7 466.2 498.8 533.8 571.1

as a % of sales 28.7% 26.0% 25.7% 26.6% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0% 28.0%

Theoretical tax rate 31.2% 32.5% 32.5% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0% 33.0%

Theoretical tax 94.1 86.1 91.5 104.4 117.4 125.6 134.4 143.8 153.8 164.6 176.1 188.5

NOPAT 207.0 178.9 190.1 211.9 238.3 255.0 272.8 291.9 312.4 334.2 357.6 382.7

Depreciation 12.9 13.6 14.1 14.6 14.0 15.0 16.0 17.1 18.3 19.6 21.0 22.4

as a % of sales 1.2% 1.3% 1.3% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%

Capex 13.3 14.0 14.0 14.0 14.0 15.0 16.0 17.1 18.3 19.6 21.0 22.4

as a % of sales 1.3% 1.4% 1.3% 1.2% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1% 1.1%

WCR 126.5 126.3 139.7 147.2 152.4 163.1 174.5 186.7 199.8 213.8 228.8 244.8

as a % of sales 12.1% 12.4% 12.7% 12.4% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0% 12.0%

Change in WCR 29.9 -0.3 13.5 7.5 5.2 10.7 11.4 12.2 13.1 14.0 15.0 16.0

Free cash flows 176.7 178.8 176.7 205.0 233.1 244.3 261.4 279.7 299.3 320.2 342.7 366.6

Discounted free cash flows 176.7 170.8 151.4 157.4 160.5 150.8 144.7 138.8 133.1 127.7 122.5 117.5

Sum of discounted FCF 1,457.8 Terminal value 1,360.7

Enterprise value 2,818.5

Fair value of associates 0.0

Fair value of financial assets 10.0

Provisions 151.0

Fair value minority interests 0.9

Dilution (s/o, warrants, conv bds) 44.7

NPV of tax credits 16.7

Net debt on 31/12/2012e 0.8

Equity value 2,737.2

Diluted nbr of shares (m) 84.80

Valuation per share (EUR) 32


Our fair value of EUR32 is derived from a DCF model that incorporates an adj. EBIT margin of 28% in the medium term

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The DCF model gives us a valuation of EUR32, 24% above today’s share price, based on a risk-free rate of 3%, an equity risk premium of 6.1% and a beta of 1.4.

Fig. 3: Sensitivity analysis – EBIT margin and WACC (EUR)

EBIT margin

32 24.0% 26.0% 28.0% 30.0% 32.0% 10.5% 32 35 37 39 42

WACC 11.0% 30 32 35 37 39

11.5% 28 30 32 35 37 12.0% 27 29 31 33 34 12.5% 25 27 29 31 33

Source: Bryan, Garnier & Co. ests.

Fig. 4: Justification of our change of fair value

Parameter New assumption Previous assumption Impact on fair value

Risk-free rate 3% 3.3% +EUR2

Revenue growth 2016-23e 7% 6% +EUR2

Fair value EUR32 EUR28 +EUR4


1.2. Analysis of the stock’s performance After falling by 22% in 2011 and rising by 12% in 2012, Software AG shares are down 21% since the start of 2013. This means that the stock has underperformed the DJ Euro Stoxx index by 5% in 2011, 3% in 2012 and 26% since the start of 2013.

Fig. 5: Software AG vs. DJ Technology and DJ Euro Stoxx indices

Source: Datastream.

In 2009-10, the stock benefited from the equity market rally, the return of growth in IT spending and successful cost synergies with IDS Scheer. The crisis of summer 2011 ended this run, with two disappointing quarters (Q2 and Q4 2011), difficulties in returning IDS Scheer Consulting to profitability and sales execution problems. This had the following impact on the share price: 1) a steep fall between July and October 2011 in the wake of the crisis; 2) a strong recovery in October 2011

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Software AG vs. DJ Technology Software AG vs. DJ EuroSTOXX

A highly volatile share price performance since 2011, marking the end of a continuous two-year upward cycle

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(+44% between 4th and 27th October 2011, from EUR22.2 to EUR32.1) thanks to better-than-expected Q3 2011 results; 3) a fresh plunge from 10th January 2012 following Q4 2011 results well below forecasts, with a trough of EUR22 reached on 12th July 2012; 4) another rally in July 2012 after the release of Q2 2012 results, taking the share price up to EUR35.1 on 28th January 2013 (+60% since 12th July 2012); and 5) another plunge in the share price since January 2013 following the unveiling of the 2018 plan and the subsequent release of disappointing Q1 2013 results. The bottom was reached on 24th June 2013 (EUR22.5, down 36% from 28th January 2013), and the stock has since rallied by 15%.

Down 22% over the past six months, Software AG’s shares have significantly underperformed the leading European software groups (SimCorp +48%, Temenos +26%, Micro Focus +21%, Dassault Systèmes +21%, Sage +12%, Aveva +12% and SAP 0%). This compares with performances in the US of +35% for Workday, +34% for Microsoft, +30% for Adobe, +19% for Symantec, +9% for Tibco, +4% for Intuit, +3% for IBM, +2% for Salesforce.com, and -5% for Oracle.

This pronounced underperformance over the past six months is attributable to the following factors:

Doubts about the execution of the 2018 plan. The targets of Software AG’s 2018 plan are: 1) an increase in product revenues in the BPE division to EUR1bn by 2018, representing a CAGR of 17% over 2012-18; 2) EPS of EUR3.00 by 2018, up from EUR1.90 in 2012 and EUR1.70-1.80 forecast in 2013. This implies an EPS CAGR of 11-12% over 2013-18, which suggests that EBIT margin will fall in 2013 – and possibly 2014 – before rising thereafter. Although management says these investments are the price to pay for creating value for shareholders and driving a rerating of the stock in the medium term, many investors think it is difficult to commit to such a long-term target in view of macroeconomic uncertainties and technological change.

The BPE business is hampered by the ETS division and Consulting. The BPE division is the growth driver of Software AG, with constant growth in licence revenues since 2005, despite a few quarters in decline (Q2 2009, Q3 2009, Q2 2011, Q4 2011 and Q1 2012). Although this business line should represent 45% of revenues in 2013, on our estimates, it continues to suffer from the steady drop in revenues in its historical division, ETS (Enterprise Transaction Systems, est. 27% of 2013 revenues) – the group’s cash cow – and Consulting (est. 28% of 2013 revenues) – because of the repositioning on higher-margin services, in particular on IDS Scheer Consulting.

A poorly understood strategic vision. Software AG has made small acquisitions since 2011 in very varied fields: complex event processing, IT portfolio management, universal middleware, in-memory data management, integration of mobile applications and master data management.

Question marks about the recognition of licence revenues with payment schedules. IFRS rules are less restrictive than US GAAP regarding the recognition of perpetual licence revenues with payment schedules. Whereas IFRS rules allowed the software group to recognise a licence as revenue when it is delivered to the client – even if the latter staggers its payment over 3-5 years – US GAAP requires licence revenues to be recognised as they are paid. However, Software AG has to apply a discount to revenues recorded for future payments, and it obviously records residual trade receivables on the balance sheet.

The pronounced underperformance of Software AG shares over the past six months stems from doubts about the execution of the 2018 plan, the decline in Consulting and ETS activities, a poorly understood strategic vision and question marks about the recognition of revenues.

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2. Potential to restore growth Since Q4 2011, Software AG’s revenues have been on a steady organic decline, reaching a trough in Q1 2013 that we estimate at -10.3%. While product revenues in the BPE division have been fairly strong over this period (est. +11% at constant currency in 2012, up from 7% at constant currency in 2011), Software AG’s organic revenue decline is mainly due to a steady fall in product revenues in the ETS division (est. -3% after -10%) and, even more so, in Consulting (est. -21% after +0.5%).

As can be seen in Fig. 6, we forecast a continued organic decline in Q2 and Q3 2013, but we think that Software AG should be able to restore positive organic growth in Q4 2013 – at least +5% lfl – thanks to: 1) the continuation of very positive momentum in the BPE division; 2) the steep drop in the weight of the ETS division and the slowdown in the revenue decline that we forecast from the end of 2013; and 3) the forthcoming stabilisation in Consulting given that IDS Scheer Consulting has already cut back sharply on low value-added services.

Fig. 6: Like-for-like revenue growth per quarter (2000-2015e)


2.1. Highly positive momentum at BPE Software AG became a major player in business process management (BPM) software in 2007 thanks to the acquisition of WebMethods, which at that time was world number three by market share in this field behind IBM and Tibco, before falling to fourth place in 2008 following Oracle’s acquisition of BEA Systems. This acquisition allowed Software AG to create a new growth driver to offset the foreseeable decline of the ETS business in the medium term and to bolster its presence and credibility in North America. WebMethods also allowed Software AG to build a comprehensive offer in BPM covering all aspects of the technical execution of business processes (application bus, data integration, composite applications, modernisation of applications, business rules, metadata and business process monitoring).

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The steady organic decline in Software AG’s revenues since Q4 2011 results from a steep drop in Consulting and ETS activities.

We think that Software AG could restore positive growth in Q4 2013 thanks to a more favourable revenue mix

The acquisition of WebMethods in 2007 gave Software AG a comprehensive offer in business process management, with a place in the global Top 5

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The acquisition of IDS Scheer in 2009, with its ARIS software package, enabled Software AG to cover the entire process design and modelling part – a field controlled by consultants, analysts and managers, in contrast to execution (WebMethods), which is the area of expertise of technical teams (IT and operational technicians, etc.). The combination of the WebMethods and ARIS packages formed the BPE division and allowed Software AG to become probably the first software group to bring to market an integrated model-to-execute offer in 2010.

Except in 2009, licence revenues in the BPE division continued to grow. As can be seen in Fig. 7, the three quarters of decline observed in 2011 stemmed from commercial execution problems, both on the value proposition and on the marketing drive and coverage. These faults were corrected fairly swiftly by management.

Problems encountered in Europe at the start of 2011 were swiftly resolved by the appointment in August 2011 of a new EMEA COO (Darren Roos, whose role was extended in April 2013 to the rest of the world excluding North America) and the implementation of a more rigorous approach to the qualification of the deal pipeline and sales (sell value rather than products, reduce the time between signing the first contract and selling additional products, etc.), with the first successful results in Q4 2011.

This approach was subsequently replicated in North America with the appointment in August 2012 of a new COO for North America (John Jay Johnson). In this market, however, Software AG had to address more deeply rooted execution problems, such as a lack of marketing coverage (sales representatives concentrated on the East coast around Washington and Boston, creating a need to recruit elsewhere in the US, i.e. California, the Midwest and Texas), weak recognition on the West coast and the need to create an accredited division for US federal administrations. These investments began to pay off in mid-2012, except with federal administrations, which suffered from the fiscal cliff at the end of 2012 and automatic spending cuts triggered by the budget sequester in early 2013.

Fig. 7: Quarterly growth in BPE licence revenues (2011-2013e)


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The acquisition of IDS Scheer made it possible to cover the entire process modelling part thanks to the ARIS platform

Except in 2009, BPE licence revenues continued to growth, with a swift resolution of commercial execution problems encountered in 2011 and 2012

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In terms of its competitive position, it seems that Software AG’s BPE division has recently clawed back market share from US rival Tibco, on the basis of licence revenues translated into euros, as is illustrated in Fig. 8. This is particularly true in the past three quarters. We think that Software AG has not recorded such market share gains relative to Tibco since end-2009/early-2010. In contrast, Software AG lost market share to Tibco between H2 2010 and early 2012 – the period when Tibco benefited from a positive growth cycle thanks to excellent sales execution and when Software AG was suffering from the opposite situation.

Fig. 8: Licence revenue growth of Software AG (BPE) and Tibco in EURm


Turning to software packages, Software AG’s BPE strategy has come face to face with the emergence of the Cloud, Big Data, corporate social networks and smartphones/tablets. The combination of these four trends is creating new needs for clients in terms of BPM because of the explosion of data volumes within companies. The group took advantage of this at the start of 2013 by grouping all its software packages under the name “Software AG Suite”, with four platforms (ARIS in process management, WebMethods in integration, Terracotta in Big Data and Adabas-Natural in transactions). The challenge is becoming more complex since it now involves integrating data, applications and processes with internal servers, public clouds, private clouds, social networks and mobile devices. At the same time, the challenge for Software AG is also to increase the size of its addressable market by targeting business users, not just experts. This resulted in 2011 in the implementation of a technological roadmap to create a new generation of BPM software packages incorporating these developments:

The development of a new generation data management system based on an in-memory processing technology. This principle led Software AG to acquire in May 2011 US software group Terracotta, which is set to become a key component of Software AG’s entire software offer. In 2012, Terracotta generated EUR16.5m in revenues – up from EUR5m at its acquisition – or 4.3% of product revenues (licences + maintenance) in the BPE division. Tibco’s former VP for sales in North America, Robin Gilthorpe, became CEO of this division. In 2013, he plans to double its headcount. To boost cross-selling with Software AG’s installed base, Terracotta’s sales representatives are located in regions where Software AG has a strong foothold, their objective being to target key accounts and to build an ecosystem. In 2013, 90% of Terracotta’s sales are expected to be generated from its historical Big Data (Big Memory) packages, compared with 10% for its new In-Genius solution available in H2.

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Software AG (BPE) (*FYE 31st Dec.) Tibco Software (*FYE 30th Nov.)

Since H2 2012, Software AG’s BPE division seems to have been clawing back market share from US rival Tibco

The BPE offer is being adapted to the emergence of new integration needs linked to the Cloud, to Big Data to corporate social networks and to mobility

The acquisition of fast-growing Terracotta has allowed Software AG to manage in-data memory flows

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The shift in the business process management platform towards a collaborative platform – potentially in SaaS mode. The first Software AG product to be made available on the Cloud was ARIS in its different versions in 2010-12.

The launch of BPM and data management solutions capable of processing in real time data from Clouds, mobile devices and social networks, together with the notion of Big Data. In 2013, Software AG is set to launch three major products incorporating these trends: ARIS 9, WebMethods 9 and In-Genius, the next development of Terracotta’s offer.

Lastly, Software AG has broadened its offer through acquisitions of modest size but focused on the latest innovations (six since the start of 2011). Besides Terracotta, the group has acquired other companies:

Metismo (May 2011) in mobile middleware;

My-Channel (April 2012) in universal messaging;

LongJump (April 2013), the US publisher of an IT applications development platform in SaaS mode for non-IT professionals, notably for the Cloud and mobile devices. This company mainly targets the subsidiaries of large groups and allows them to do without IT developers. It is small (revenues of EUR3m) but its price tag was EUR20-30m on our estimates;

Alfabet (July 2013, ongoing), a German software group with 90 staff specialising in IT architecture planning and optimisation software. Alfabet is a leader in this field, and its offer will be complementary with Software AG’s existing offer on ARIS. We estimate that Software AG paid around EUR20m for this acquisition;

The Apama division of Progress Software (July 2013, ongoing), which produces a platform dedicated to the processing of complex events (CEP), i.e. the correlation and analysis of data flows in real time so that immediate action can be taken in response to a complex event. This entity has 120 staff based in the UK and India, and its revenues represent less than 1% of those of Software AG (i.e. a maximum of EUR10m). We estimate its price tag at approximately EUR40m, or 4x revenues. The Apama platform will be combined with Terracotta’s technology to provide responses in less than a second to business events in the detection of fraud, algorithmic trading or customer experience;

In March 2013, Software AG acquired a minority stake with a purchase option in the small German software company Metaquark, whose software packages in SaaS mode manage the life cycle of applications developed for mobile devices.

We estimate that the three acquisitions this year (LongJump, Alfabet and Apama) will add around 1-2% of top-line growth in 2013 and around 2-3% of growth in BPE product revenues in 2013 – we are incorporating this in our model. We estimate that this will raise BPE product revenues towards the top end of the 2013 guidance range (+16%/+22%).

Software AG’s solutions are shifting more towards the Cloud, on-line collaborative platforms and real time

Six technological acquisitions since the start of 2011 (including three in 2013) to round out its offer

The three acquisitions in 2013 should add 2-3% of growth in the BPE division this year

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2.2. ETS’ share in revenues is falling sharply ETS, Software AG’s historical division, which primarily consists of the Adabas database and the Natural programming language, has not been the group’s biggest division since 2011. Its share in revenues is expected to fall from 61% in 2005 to just 27% in 2013 and around 20% in 2015, on our estimates. Over the past decade, this division’s growth mainly stemmed from the decision to take back direct control of the distribution rights to Adabas and Natural in certain territories. This applied to the US, Japan, Israel and South Africa, before ending with Brazil in late 2007. Once the installed base was recuperated, sales of additional modules proved insufficient to offset the slow erosion of the customer base (5% over the past 15 years) and the absence of new customers.

Fig. 9: Reduction in ETS’ share in total revenues (2005-2015e)


ETS is admittedly still a cash cow for Software AG because of its very strong margins thanks to the high share of recurrent sales (50% in the form of maintenance), reduced marketing efforts compared with those in the BPE division (20% of revenues invested in sales and marketing vs. more than 40%) and the gradual transfer of R&D costs to low-cost countries. Over the medium term, management estimates that the ETS Product division will experience single-digit revenue declines each year, with double-digit falls in licence revenues. Software AG is seeking to limit the erosion of maintenance revenues by offering customers higher value-added services.

2012 was an atypical year for ETS, since the group generated 1.1% growth in licence revenues thanks to advance signings in H1. But 2013 has a good chance of seeing growth fall below the medium-term downward trend for ETS, with Software AG forecasting since April that the decline in product revenues at constant currency will be closer to -9% than the range of -9%/-4% announced in January. ETS Product revenues decreased by 15.8% in Q1 2013, and we forecast declines of -18% in Q2 and -15% in Q3, while we would not be surprised if ETS were to grow in Q4 (we forecast +6%). From 2014 onwards, we think the decline in ETS’ revenues will be more in line with the medium-term trend projected by management, although it is difficult to estimate the exact fall each year.

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2005 2006 2007 2008 2009 2010 2011 2012 2013e 2014e 2015e

BPE Product ETS Product Consulting

We estimate that the ETS division will represent just 20% of revenues in 2015, versus 61% in 2005

This division still has very high margins…

…but its share in revenues is expected to fall to single digits (double-digit decline in licence revenues)

Software AG

11

2.3. Consulting is stabilising In January 2013, Software AG pooled its Services activities – services dedicated to BPE and ETS products + IDS Scheer Consulting – within a Consulting division, with the consolidation of its offices. This merger was justified by the need to harness synergies from Software AG’s full product range. At the same time, it ended the autonomy of IDS Scheer Consulting, a structurally loss-making entity whose repositioning since 2010 (exit of SAP activities and strengthening of those tied to BPM) has still not borne fruit on margins. To sum up, we estimate that the Consulting business breaks down as follows: 50% in services related to BPE products (down sharply since 2012), 20% in services related to ETS (more or less matching the decline in ETS licence revenues), 25% at IDS Scheer Consulting (very sharp decline on the installation of SAP licences but growth in expertise in business processes in an SAP environment) and 5% in SAP maintenance (non-strategic).

Software AG’s Services activities were stable in 2011 (-7% at IDS Scheer Consulting) and fell by 21% in 2012 (-34% at IDS Scheer Consulting). We forecast a decline of 17% in 2013 taking into account the disposal of SAP activities in North America. At constant scope, we estimate the decline in 2013 at around 11%. In Q2 2013, Software AG even forecasts a return of quarter-on-quarter growth in service revenues – a phenomenon that has not been seen in a second quarter since 2010. Thereafter, we estimate that revenues could stabilise in 2014, since Software AG will have completed the transition of its services offer to those linked to its own products.

Services linked to BPE products: the steep decline in 2012 was due to three quarters of falling licence revenues between Q2 2011 and Q1 2012, together with more services assigned to partner integrators thanks to Software AG’s implementation of an approach more geared towards pre-integrated solutions (combining several components to create an offer tailored to a particular industry) instead of an approach geared to components. In this way, Software AG has improved its management of partners, especially on network conflicts to avoid competition in the same sector. It now has six “Global Partners” (Accenture, Atos, Capgemini, Deloitte, CGI and T-Systems) and 30 “Preferred Partners” with a regional or local base. Lastly, new BPE products such as Terracotta will necessitate fewer supporting services.

IDS Scheer Consulting: the repositioning of IDS Scheer Consulting’s activities on the DACH region (Germany, Austria and Switzerland) and on value-added activities, which was begun in 2009 and continued in H1 2012 with the closure of offices in Russia and China, took another step forward in January 2013 with the sale of SAP activities in North America (revenues of around EUR20m) – inherited from Plaut Consulting – to NTT Data for around EUR6m. This repositioning is almost complete, although there are still opportunities to shrink the business scope in Eastern Europe (Hungary, Slovakia and the Czech Republic).

Software AG’s Services business comprises around 50% of services linked to BPE products, and IDS Scheer Consulting only represents around 25% today

We think the Services business could stabilise in 2014 thanks to a well-advanced repositioning

Software AG

12

3. Fewer risks to margins 3.1. 2018 plan: planned drop in margins in 2013 The 2018 plan announced by Software AG aims to generate EPS of EUR3.00 by this date, up from EUR1.90 in 2012 and EUR1.70-1.80 in 2013 thanks to investments in the BPE division. To attain revenues of EUR1bn from BPE products, the group plans to invest heavily in sales and marketing in 2013, with substantial new hirings. At its last investor day in February 2013, management stressed that if BPE’s revenue targets were not attained in 2013, the pace of new hirings would slow, thereby “protecting” the group’s EPS. Software AG could even beat its targets in this case.

Over time, we estimate that EBIT margin should approach 30%, up from 23.7% in 2012. Management has not announced any specific EBIT margin target for 2013, but we estimate it at 22.6% (versus the consensus forecast of 21.4%). EBIT margin fell by 3ppt to 18.5% in Q1 2013, but excluding exceptional items (disposal gain in North America, credit in R&D on projects financed by the European Union and currency hedging gains), it would have been 14.4%. In Q2 2013, we forecast a margin of 17.5% (consensus: 18%), with no impact from exceptional items. Lastly, we expect margins to stabilise in 2014 before a possible improvement in 2015 on condition that Software AG maintains strong top-line growth in the BPE division and that revenues do not collapse at ETS or in Consulting.

Fig. 10: Our forecasts for organic growth and EBIT margin


3.2. Investments well underway in BPE In 2012, Software AG stepped up its sales & marketing and R&D spending in its BPE division (by 20% and 22% respectively in 2012, with 150 new sales representatives), which had a negative impact on the business line margin in this division (operating margin before overheads). In the framework of the 2018 plan, the group has become far more aggressive, with an additional acceleration in BPE sales and marketing spending in 2013 – we estimate it at +39% – to benefit from strong growth opportunities in this division, while we estimate that growth in BPE R&D expenses will slow to +13%, despite the three acquisitions announced year-to-date. In all, we estimate that the BPE division will see its margin fall by 5.6ppt to 34.5% in 2013, before stabilising in 2014 and improving in 2015 as the recruitment of new sales representatives slows and

10%

12%

14%

16%

18%

20%

22%

24%

26%

-15%

-10%

-5%

0%

5%

10%

15%

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013e2014e2015e

Organic growth (%) (left scale) EBIT margin (%) (right scale)

The 2018 plan implies very strong marketing investment to drive growth

EBIT margin is set to fall sharply in 2013, to stabilise in 2014 and to improve in 2015

We forecast a 5.6ppt drop in the margin on BPE products in 2013, followed by an increase of 2ppt by 2015.

Software AG

13

their productivity increases. In Q1 2013, the BPE margin tumbled by 13ppt to 20.8% because of a 49% jump in sales and marketing costs resulting from an acceleration in new hirings, keeping in mind that it takes almost nine months for a sales representative to become fully productive. We estimate that growth in these costs should gradually slow to +21% in 2014 and +15% in 2015.

Fig. 11: Our forecasts for margins on BPE products

BPE Product (EURm) 2012 2013e 2014e 2015e

Revenues 385.5 454.7 545.8 641.5 o/w Licences 194.7 240.9 296.9 356.2

o/w Maintenance 190.0 211.6 244.8 280.3

o/w Services & Other 0.8 2.3 4.2 5.0

Gross profit 366.5 432.5 520.6 612.5

Gross margin (%) 95.1% 95.1% 95.4% 95.5% Sales & marketing costs -137.0 -190.8 -231.4 -266.1

% of revenues 35.5% 42.0% 42.4% 41.5%

R&D costs -75.0 -85.0 -99.1 -112.3

% of revenues -19.4% -18.7% -18.1% -17.5%

Business line result 154.5 156.7 190.2 234.1

Business line margin (%) 40.1% 34.5% 34.8% 36.5%


3.3. ETS remains the cash cow We estimate that the business line margin in the ETS division will fall temporarily in 2013 (-1.9ppt to 64.8%) because of the steep slide in licence revenues (est. BG: -15%). In Q1 2013, it fell by 3.9ppt on licence revenues down 27%. We expect the slide to steepen in Q2 2013 because of an even sharper drop in licence revenues. Since we do not rule out an increase in ETS licence revenues in Q4 2013 thanks to a more supportive base effect, the margin should stage a partial improvement. In 2014 and 2015, from the moment when we forecast a moderate drop in ETS revenues, we expect the business line margin to improve slightly.

Fig. 12: Our forecasts for margins on ETS products

ETS Product (EURm) 2012 2013e 2014e 2015e

Revenues 310.5 277.3 271.1 263.5 o/w Licences 121.3 103.5 93.2 83.9

o/w Maintenance 188.3 173.0 177.1 178.9


Gross profit 295.0 263.0 257.7 250.9


% of revenues 19.9% 20.8% 20.7% 20.4%

R&D costs -26.1 -25.7 -24.9 -24.1

% of revenues 8.4% 9.3% 9.2% 9.1%

Business line result 207.1 179.6 176.6 173.0

Business line margin (%) 66.7% 64.8% 65.2% 65.7%


The margin on ETS products should remain very high

Software AG

14

3.4. Consulting at breakeven IDS Scheer Consulting has been – and remains – a burden on Software AG’s margins. After its acquisition in August 2009, this entity was only just profitable, but it soon returned to the red in 2010. In 2011, restructuring efforts succeeded in improving its margin in H2, but this division generated a EUR12.9m loss for EUR125.1m sales in 2012 – with a gross margin of just 3.8%, when this type of business should have a gross margin of around 20% when it is well managed – because of a 34% drop in revenues after an exit from unprofitable countries and low value-added activities (services around SAP for SMEs). BPE and ETS services generated business line margins of 2.9% and 10% respectively in 2012, for gross margins of 11% and 14.8% respectively. Taken together, Software AG’s Consulting activities generated a business line loss of EUR2.6m, or a margin of -0.7%.

The repositioning on process-oriented Consulting around SAP solutions and staff reductions should make it possible to narrow IDS Scheer Consulting’s losses this year. With a less unfavourable sales mix, we estimate that the business line margin in Consulting should be slightly positive at 1.1%, for a gross margin rising from 8.9% to 13.7%. Although the consultant utilisation rate is starting to edge up slightly, it probably remains 15% below normal, creating huge room for improvement. Most of the cost-cutting at IDS Scheer Consulting involves subcontractors, who represents around 25-30% of the billable headcount. In all, we estimate that the business line margin in Consulting will rise back to 3.7% in 2015, with a gross margin of 14.9% – bearing in mind that Software AG’s target is to raise the business line margin to 5%, while a decent gross margin would be around 15% in our view.

Fig. 13: Our forecasts for margins in Consulting

Consulting (EURm) 2012 2013e 2014e 2015e

Revenues 351.3 285.8 280.4 282.1

o/w Licences 2.9 1.2 0.5 0.1

o/w Maintenance 15.0 6.6 5.6 4.4


Gross profit 31.3 39.1 40.8 42.1


% of revenues 9.6% 12.5% 12.1% 11.2%

R&D costs 0.0 0.0 0.0 0.0

% of revenues 0.0% 0.0% 0.0% 0.0%

Business line result -2.6 3.3 6.8 10.4

Business line margin (%) -0.7% 1.1% 2.4% 3.7%


IDS Scheer Consulting remains a burden on the profitability of Software AG, but services linked to BPE and ETS boast higher margins

We think the repositioning of Consulting should return this business to breakeven in 2013, but we do not foresee strong upside potential going forward

Software AG

15

4. Financial statements 4.1. Income statement

EURm (FYE 31/12) 2009 2010 2011 2012 2013e 2014e 2015e CAGR 12-15e

Net revenue 847.4 1,119.5 1,098.3 1,047.3 1,017.8 1,097.3 1,187.1 4.3%

% change 17.6% 32.1% -1.9% -4.6% -2.8% 7.8% 8.2%

Gross Margin 574.9 710.4 689.1 707.0 747.1 820.2 901.9

% of revenue 67.8% 63.5% 62.7% 67.5% 73.4% 74.7% 76.0%

Research & Development (82.2) (92.0) (88.0) (101.1) (110.6) (124.0) (136.4)

% of revenue 9.7% 8.2% 8.0% 9.7% 10.9% 11.3% 11.5%

Sales & Marketing (181.2) (218.9) (219.7) (236.9) (299.1) (340.9) (374.4)

% of revenue 21.4% 19.6% 20.0% 22.6% 29.4% 31.1% 31.5%

General & Administrative (67.8) (82.0) (73.6) (67.9) (72.3) (73.7) (74.8)

% of revenue 8.0% 7.3% 6.7% 6.5% 7.1% 6.7% 6.3%

Amortisation (0.6) (13.5) (13.4) (12.9) (13.6) (14.1) (14.6)

Net operating provisions 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Adjusted EBIT 243.7 317.5 307.7 301.1 265.1 281.7 316.3 1.7%

% of revenue 28.8% 28.4% 28.0% 28.7% 26.0% 25.7% 26.6%

Net restructuring charge (11.2) (20.0) (10.5) (10.0) 0.0 0.0 0.0

Capital gains or losses 0.0 0.0 0.0 0.0 3.3 0.0 0.0

Goodwill amortisation (48.9) (32.9) (32.9) (38.1) (37.6) (33.5) (31.6)

Stock-based compensation (2.9) (3.3) (1.5) (7.9) (8.4) (12.0) (12.0)

Other exceptional gains (losses) 37.5 7.3 6.4 3.2 7.6 5.7 6.3

EBIT 218.2 268.6 269.2 248.3 229.9 241.9 279.0 4.0%

% of revenue 25.7% 24.0% 24.5% 23.7% 22.6% 22.0% 23.5%

Cost of net debt (8.9) (14.2) (9.9) (8.8) (8.5) (6.9) (5.0)

Other financial gains (losses) 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Profit before tax 209.3 254.4 259.3 239.5 221.4 235.0 274.0 4.6%

Income taxes (68.5) (78.7) (82.1) (74.8) (72.0) (76.4) (90.4)

Tax rate 32.7% 31.0% 31.7% 31.2% 32.5% 32.5% 33.0%

Consolidated net profit 140.8 175.6 177.2 164.7 149.5 158.6 183.6 3.7%

% of revenue 16.6% 15.7% 16.1% 15.7% 14.7% 14.5% 15.5%

Profit from associates 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Minority interests (0.2) 0.2 0.2 0.2 0.2 0.2 0.3

Attributable net profit 141.0 175.4 177.0 164.5 149.3 158.4 183.3 3.7%

Average nb of shares - basic (m) 86.1 86.1 86.8 86.9 86.9 86.9 86.9

Average nb of shares - diluted

86.1 86.1 88.8 88.8 88.8 88.8 88.8

Basic EPS (EUR) 1.64 2.04 2.04 1.89 1.72 1.82 2.11 3.7%

% change 21.0% 24.4% 0.1% -7.1% -9.2% 6.1% 15.7%

Adjusted EPS (EUR) 2.04 2.53 2.41 2.39 2.10 2.22 2.47 1.0%

% change 23.0% 24.4% -4.7% -0.8% -12.4% 5.6% 11.5%


Software AG

16

4.2. Balance sheet

EURm (FYE 31/12) 2009 2010 2011 2012 2013e 2014e 2015e

Goodwill 686.3 717.3 752.2 756.4 812.4 793.9 777.3

Intangible fixed assets 236.6 232.6 248.2 214.4 202.4 190.4 178.4

Tangible fixed assets 67.1 66.4 65.4 64.0 64.4 64.3 63.7

Fixed assets and goodwill 989.9 1,016.3 1,065.8 1,034.8 1,079.2 1,048.6 1,019.4

Investments 5.7 5.3 3.4 10.3 10.0 10.0 10.0

Deferred tax assets 25.1 21.5 18.7 16.7 16.7 16.7 16.7

Inventories 0.7 1.3 0.5 0.1 0.1 0.1 0.1

Accounts receivables 352.3 362.0 327.8 341.3 335.0 364.7 390.7

Other short term assets 64.4 91.8 47.9 53.1 51.6 55.6 60.1

Current assets 417.4 455.1 376.2 394.4 386.6 420.4 450.9

Cash & cash equivalents 218.1 102.5 216.5 315.6 315.6 436.4 626.7

TOTAL ASSETS 1,656.2 1,600.6 1,680.7 1,771.9 1,808.2 1,932.1 2,123.7

Shareholders' equity 631.0 768.7 950.8 1,059.3 1,052.6 1,171.0 1,354.3

Minority interests 20.3 0.6 0.7 0.8 0.9 1.1 1.4

Consolidated equity 651.3 769.3 951.5 1,060.1 1,053.6 1,172.2 1,355.7

Long-term provisions 149.5 198.3 133.0 151.0 151.0 151.0 151.0

Deferred tax liabilities 66.7 47.4 36.7 26.8 26.8 26.8 26.8

Convertible bonds 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Long-term debt 291.4 132.9 251.3 213.4 213.4 213.4 213.4

Short-term debt 198.5 136.8 26.1 52.6 103.0 88.0 73.0

Debt 489.9 269.7 277.4 266.0 316.4 301.4 286.4

Accounts payable and accrued 62.3 60.6 58.5 48.1 46.7 50.3 54.5

Deferred revenues 120.1 129.9 105.9 111.9 108.8 117.3 126.9

Salary and income tax payable 42.3 53.1 20.2 30.7 29.8 32.2 34.8

Other liabilities 74.2 72.3 97.5 77.3 75.1 80.9 87.6

Current liabilities 298.8 315.9 282.1 267.9 260.4 280.7 303.7


Software AG

17

4.3. Cash Flow statement

EURm (FYE 31/12) 2009 2010 2011 2012 2013e 2014e 2015e

Operating cash flow 138.5 224.8 182.2 214.4 199.1 210.1 233.3

Change in WCR 62.0 2.6 16.4 (29.9) 0.3 (13.5) (7.5)

Capital expenditure (13.9) (12.5) (14.4) (13.3) (14.0) (14.0) (14.0)

Disposals in fixed assets 0.9 1.7 2.0 0.6 0.0 0.0 0.0

Net capex (13.0) (10.8) (12.5) (12.6) (14.0) (14.0) (14.0)

Free cash flow 187.5 216.7 186.2 171.8 185.4 182.6 211.8

Investments (2.8) (5.8) (1.4) (1.4) (0.1) 0.0 0.0

Disposals in investments 3.7 6.9 2.9 0.3 0.4 0.0 0.0

Acquisitions (goodwill) (320.4) (53.9) (59.2) (18.0) (78.7) 0.0 0.0

Cash flow after investing activity (132.0) 163.8 128.5 152.8 107.1 182.6 211.8

Dividends paid (31.5) (32.8) (37.2) (40.1) (40.0) (40.0) (39.6)

Issuance of shares 1.5 (32.6) 14.7 2.6 (116.0) 0.0 0.0

Cap. Incr. for minority interests 0.0 0.0 0.0 0.0 0.0 0.0 0.0

Incr. cash bef. loan repayments (162.0) 98.4 106.1 115.3 (48.9) 142.6 172.2

Repayment of loans 283.2 (214.1) 8.0 (16.2) (16.5) (21.9) 18.1

Net increase in cash 121.2 (115.7) 114.0 99.2 (65.4) 120.7 190.3


Software AG

18

Price Chart and Rating History

Software AG

Ratings Date Ratings Price 15/07/11 SELL EUR35.2 27/04/11 NEUTRAL EUR42.183 21/09/09 BUY EUR19.537 27/01/09 SELL EUR15.127 11/07/07 BUY EUR24.6

Target Price Date Target price 26/04/13 EUR28 30/01/13 EUR30 14/01/13 EUR32 31/10/12 EUR28 15/10/12 EUR29 30/04/12 EUR25 12/01/12 EUR22 20/09/11 EUR26 15/07/11 EUR31 27/04/11 EUR44 26/10/10 EUR39 27/04/10 EUR34 04/02/10 EUR28

19/7/13

2010 2011 2012 201320

25

30

35

40

45

SOFTWARE (XET)

Source: Thomson Reuters Datastream

Software AG

19

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating

BUY Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

NEUTRAL Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

SELL Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion.

Distribution of stock ratings

BUY ratings 55% NEUTRAL ratings 27.5% SELL ratings 17.4%

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14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report.

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Notice to US investors This research report (the “Report”) was prepared by Bryan Garnier & Co. Ltd. for information purposes only. The Report is intended for distribution in the United States to “Major US Institutional Investors” as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY 10022. Telephone: 1-212-337-7000. This Report is based on information obtained from sources that Bryan Garnier & Co. Ltd. believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co. Ltd. and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co. Ltd. may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies).

Bryan Garnier Securities, LLC and/or Bryan Garnier & Co. Ltd. are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available.

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