15896_Navigating Turbulent Waters_v1:Layout 1 14/06/2010 16:15 Page 1 THE TOP 100 EUROPEAN SOFTWARE INDEX NAVIGATING TURBULENT WATERS Software players continue to ride the waves 15896_Navigating Turbulent Waters_v1:Layout 1 14/06/2010 16:15 Page 2 DESPITE THE ECONOMIC STORM, EUROPEAN SOFTWARE CUTS A DASH THROUGH CHOPPY WATERS The European Software The sector has also performed resiliently headquarters of a significant number of through the recession, with most companies the US owned players. market is larger and more maintaining growth – unlike the battered broader TMT sectors, especially Media, or the At a high level the sector is highly profitable than you might adjacent IT hardware and services sectors. concentrated, with the top 10 players think – the Top 100 accounting for 58% of the revenues of the Our European Top 100 list is dominated by Top 100. The largest companies are familiar companies account for US owned companies – 44 of them names, with Microsoft, IBM, Oracle and SAP accounting for €34bn in sales, almost two dominant from a revenue perspective. over €52bn of revenue thirds of the total. Outside these, there are However, this macro picture masks a and €14bn in operating also a number of large European owned strong set of robust “beyond the top 10” players generating significant revenues – European headquartered companies, profit – an industry Germany has the second most valuable representing over €22bn of revenues. set of Software companies in the Top 100 average of over 25% with 11 German companies accounting for Despite the significant global economic margin approximiately €7bn annual revenue. UK slowdown, the Top 100 saw only a slight and France come next, housing the year-on-year revenue decline of c.0.6%, headquarters of companies representing while overall EBITDA margins actually saw a approximately €3bn of European software slight increase of 1%pt within these revenue each. However, the UK’s influence aggregate figures. However there were on the Software market is larger than it clear winners and losers, both at an appears as it plays host to the European individual and sector levels. Revenues of Top 100 European Software Companies by HQ Country (€bn) 34.3 7.2 3.2 2.9 2.9 1.3 0.8 USA Germany UK France Netherlands Other Europe¹ Other No. of Firms 44 11 15 9 4 13 4 in Top 100: 1. Includes Denmark, Germany, Norway, Poland, Spain, Sweden and Switzerland 01 Navigating Turbulent Waters 15896_Navigating Turbulent Waters_v1:Layout 1 14/06/2010 16:15 Page 3 Revenue Type Description More Subscription Fee (Typically for SaaS) ongoing fee, usually monthly, for continued use Recurring of software and support Maintenance and Maintenance Fee required for continued use of software (typically Support 15% to 40% of initial fee per year) Day-to-day support typically included within maintenance fee New license sales may have been FM / Hosting Facilities Management fees for remote hosting under ASP model challenging during the recession, but the overall impact has been Development and Bespoke development of additional functionality dampened by the breadth of revenue Consultancy types that many software players Customisation of software to needs of individual company have. In particular, some of the Training Training of staff in software use more recurring revenue streams are resilient to the economic cycle. Installation Fees relating to installation of software and integration with other systems Upfront Licence Fee Licence fee paid on initial installation of software Either perpetual licence (subject to continued payment of More maintenance fee) or fixed term (eg, 5 years) One-Off Hardware and Other Additional hardware sold in bundle with software The Top 100 comprises players from in this situation. Examples include Wincor RESILIENT PERFORMANCE across the software spectrum, although Nixdorf, Asseco, Cegedim and Amadeus. the greatest number are focused on multi- This sector also includes software platforms DRIVEN BY ROBUST sector enterprise software. Unlike some supporting Financial Services who are other major categories, these ‘Enterprise’ profiting from increasingly stringent REVENUE MODELS AND companies have seen revenue decline in compliance requirements. STICKY CUSTOMER the past year, alongside the ‘Industrial’ sector. One reason for this is the greater ‘Back Office’ software (Finance / HR / ERP / RELATIONSHIPS maturity of these sectors, with CRM) has also performed strongly driven by a accompanying high levels of existing range of factors, most importantly the software penetration, allowing many increasing pressure for companies to run customers to defer upgrades during the transparent and reliable reporting processes recent downturn in favour of making do that stay compliant to the latest local with existing systems. regulations (eg, accounting and HR). Consequently a number of robust national The 21 firms that offer ‘Sector Specific’ champions have emerged such as Sage, software have performed well above the UNIT4, DATEV, TeamSystem and Visma. average, growing revenues year on year by 6%. This is typically because such software Similarly, the ‘Security’ software sector is highly embedded and critical to company has remained a growth market due to the processes associated with how the sector ever increasing importance placed on functions, so removing the software or data and system security, a trend deferring an upgrade becomes impossible unaffected by recessionary pressures. Segmentation of Firms by Application Type Finally, Entertainment Software has, maybe surprisingly, also seen growth. Types of Applications Designed Weighted Average of Firm Growth No. of Firms Performance has been driven by some key % of Top 100 Software Revenue % Year-on-Year Revenue Growth in Top 100 underpinning positive trends such as the steady rise in discretionary time spent Enterprise 55% -2.2% 35 gaming plus a widening demographic profile. In this ‘hit-driven’ sector, the Finance / HR / 15% 2.9% 14 companies reaching the Top 100 have ERP / CRM benefited from successfully developing Sector Specific 11% 6.3% 21 consumer franchises which continued to perform well despite the recession. Entertainment 8% 4.2% 9 Security 7% 2.4% 12 Industrial 4% -15.5% 9 Navigating Turbulent Waters 02 15896_Navigating Turbulent Waters_v1:Layout 1 14/06/2010 16:15 Page 4 In terms of profitability trends, a slightly European Software Average Profitability by Application Type¹ different picture emerges. Enterprise software remains the highest margin sub- Latest Year Profitability Year-on-Year Performance sector (driven in no small part by the % EBITDA Margin % Pt Change presence of the global giants Microsoft and Oracle) and despite a net decline in Enterprise 31% Profitability driven by 1.5% revenues has seen a small rise in Oracle (45%) , Microsoft (39%) and CA (35%) profitability of c.1.5 %pts of EBITDA. Security 25% 1.5% Finance / HR / 23% 0.8% ERP / CRM Sector Specific 21% -0.1% +0.4% excluding Symbian (18%pt decline) Industrial 14% -2.1% Entertainment 8% 1.4% 1. Pre-exceptional items Industrial focused companies exhibited Entertainment companies are among the FLEXIBLE OPERATING 2%pt EBITDA margin decline, however most volatile, driven by the “hit” nature of MODELS ENABLE MARGINS when taken in the context of 16% revenue their markets, with Activision Blizzard decline such a modest fall in profitability benefiting from Modern Warfare and Guitar TO BE MAINTAINED DESPITE illustrates the cost-base flexibility of the Hero and Take-Two Interactive struggling industry and its ability to ‘weather the due to reduced demand and some delays in TOUGH ECONOMIC storm’. its product release schedule. CONDITIONS DRIVING At a company specific level, the key Symbian also struggled due to a revenue REVENUE DECLINES message is that most companies have been model based on unit shipments of hand- stable and resilient, especially given macro sets rather than a recurring revenue model trends, largely driven by the stability of – albeit still with strong potential upside as maintenance and support contracts. the market recovers. However, as is to be expected during such The winners also highlight some of the periods of economic uncertainty, there are macro trends occurring in the market, for a number of notable exceptions to the rule, example the growth of Security (Kaspersky with some interesting take-aways. Lab) and the rise of SaaS (Salesforce). Top Five Winners and Losers¹ By Revenue By EBITDA Margin % Year-on-Year Change % Pts Year-on-Year Change Kaspersky Lab 92% Security Progress Software 14% Enterprise iSoft 57% Sector Specific Temenos 10% Sector Specific Salesforce.com 51% Finance / HR / ERP / CRM BMC Software 10% Enterprise Top Activision Blizzard 47% Entertainment Misys 8% Sector Specific CompuGroup 43% Sector Specific Websense 7% Enterprise Avid -29% Entertainment UBISoft -8 % Entertainment THQ -31% Entertainment PTC -8 % Enterprise Rockwell Automation -32% Industrial Mentor Graphics -11% Industrial Bottom Autodesk -33% Industrial Symbian (Nokia) -18% Sector Specific Take-Two Interactive -54% Entertainment Take-Two Interactive -20% Entertainment 1. Excludes companies with significant M&A activity 03 Navigating Turbulent Waters 15896_Navigating Turbulent Waters_v1:Layout 1 14/06/2010 16:15 Page 5 OC&C AND ROTHSCHILD TOP 100 EUROPEAN SOFTWARE INDEX Rank Estimated European Change Latest European YoY Software vs Available Software-Led Revenue EBITDA Margin YoY EBITDA as % of Previous Primary Software Accounts Revenues Growth Pre-exceptionals Margin %pt Total