Source - RNS
RNS Number : 0124J
SQS Software Quality Systems AG
06 September 2016
 

6 September 2016

 

SQS Software Quality Systems AG

("SQS" or the "Company")

 

Results for the six months ended 30 June 2016

 

Software Quality Systems AG (AIM: SQS.L), the leading global specialist in end-to-end software and business process quality solutions, today announces its unaudited results for the six months ended 30 June 2016.

Financial Highlights

·      Total revenue increased by 10.9% to €166.6m (H1 2015: €150.3m)

 

·      Adjusted* gross profit increased by 12.5% to €52.8m (H1 2015: €47.0m)

 

·      Adjusted** PBT increased by 32.1% to €11.9m (H1 2015: €9.0m)

 

Reflecting improved gross margin and improved revenue mix

 

·      Adjusted EPS*** increased by 29.5% to €0.22 (H1 2015: €0.17)

 

·      Operating cash outflow at €(1.2)m (H1 2015: €(5.2)m) resulting from typical first half seasonality

 

·      Net debt €32.9m compared to €5.9m at 31 Dec 2015 (30 Jun 2015: €26.5m)

 

Reflecting €16.7m (H1 2015: €22.1m) cash outflow for investments on the acquisition of the final 25% of shares in SQS Pune (India) and IT infrastructure

 

·      Interim financial performance and ongoing strategic developments in line with management expectations

 

* adjusted for a non-cash amortisation of Bitmedia/Trissential acquired order backlog of €0.75m

** incl. effects under * and adjusted to add back €3.45m of IFRS amortisation of client relationship assets from the Bitmedia/Trissential acquisitions and €0.5m pro forma interests mainly arising from purchase price allocation for deferred payments on acquisitions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 31.0%, less €1.3m on minority interests (mainly for SQS India BFSI)

 

 

Operational Highlights

 

·      Continued progress on strategy to capitalise on market trends in global digitalisation of business processes:

Growth driven by US, Irish and Asian markets 

Customer wins driven by clients' investments in digital solutions such as connected cars, omni-channel commerce, mobile payments and smart grids

 

·      Broadened Management Consulting services portfolio and progressed industrialisation of quality assurance services

Appointed Martin Hodgson as an additional Executive Director to SQS' board to drive the Management Consulting business globally (post balance sheet event, effective 6 September 2016). Martin joined SQS in December 2015

 

·      Developing position as a trusted end-to-end quality assurance partner for software based business processes

 

·      Successfully integrated acquisitions which continue to perform well, driving double digit revenue and profit growth, and increasing diversification of vertical and regional split

 

·      Market share gains:

Enhanced market position, particularly in the US

Strong position in Europe maintained

New higher margin engagements fully compensating for circa €10m lower margin business SQS dis-engaged from during 2015

 

·      Strong growth in higher margin Managed Services and Management Consulting divisions, which combined now account for 64% of Group turnover (H1 2015: 57%)

 

·      Renamed two divisions to align more accurately with operating activities:

Managed Services ("MS") remains as described

Management Consulting ("MC"), formerly Specialist Consulting Services ("SCS")

Professional Services ("PS"), formerly Regular Testing Services ("RTS")

 

 

Diederik Vos, Chief Executive Officer of SQS, commented: 

 

"SQS has delivered a solid first half of the year, reporting double digit top line growth alongside a substantial improvement in profitability, both in PBT and EBIT. This growth has largely been driven by strong performances in both our Managed Services and Management Consulting divisions, where we are increasingly cross-selling our services to good effect. 

 

"The US has now become our second largest region after Germany making up 17% of revenues.  This shows the strides we have made since the acquisitions last year, and ensures we are on track with our strategy to capitalise on the huge market opportunity the US has to offer.  

 

"The digitised economy opens up new and exciting opportunities for SQS as it enables us to broaden our offering as an end-to-end quality solutions partner. With so many industries now reliant on digital solutions that can cope with consumer demand both now and for the future, companies need to know their systems will not fail. Through our vertical industry expertise and end-to-end business solutions, SQS is well placed to benefit from this global trend.

 

"The Group's pipeline of prospects continues to strengthen across all divisions and the Board believes that SQS is well-positioned to deliver in line with our expectations for the full year."

 

 

Enquiries:

 

SQS Software Quality Systems AG

Tel. +49 (0) 2203 91 54 0

Diederik Vos, Chief Executive Officer


Rene Gawron, Chief Financial Officer

 


Numis Securities - Nomad and Joint Broker

Tel +44 (0) 20 7260 1000

Simon Willis / Jamie Lillywhite / Mark Lander




 

Stockdale Securities - Joint Broker

 

Tel. +44 (0) 20 7601 6100

Robert Finlay / Antonio Bossi  


 

FTI Consulting - Financial Media and Investor Relations

 

Tel. +44 (0)20 3727 1000

Matt Dixon / Dwight Burden

[email protected]

 

About SQS

SQS is the leading global specialist in end-to-end software and business process quality solutions. This position stems from over 30 years of successful consultancy operations. SQS consultants provide solutions for all aspects of quality throughout the whole software product lifecycle driven by a standardised methodology, offshore automation processes and deep domain knowledge in various industries. Headquartered in Cologne, Germany, the company now employs approximately 4,600 staff. SQS has offices in Germany, UK, US, Australia, Austria, Egypt, Finland, France, India, Ireland, Italy, Malaysia, the Netherlands, Norway, Singapore, South Africa, Sweden, Switzerland and UAE. In addition, SQS maintains a minority stake in a company in Portugal. In 2015, SQS generated revenues of €320.7 million. 

SQS is the first German company to have a primary listing on AIM, a market operated by the London Stock Exchange. In addition, SQS shares are also traded on the German Stock Exchange in Frankfurt am Main. 

With over 10,000 completed projects under its belt, SQS has a strong client base, including half of the DAX 30, nearly a third of the STOXX 50 and 20 per cent of the FTSE 100 companies.  

For more information, see www.sqs.com

 

 

Chief Executive's Statement

 

Introduction

 

During the period under review, SQS reported a strong financial performance recording healthy growth to both revenue and profit. The particularly strong increase in profit before tax can be attributed to improved operating performance across all three divisions, an improved revenue mix, a strong financial result, and particularly strong growth in the US, Irish and Asian markets. This has been driven by our intended focus on more profitable work across all our business lines and disengagement from less profitable engagements. We continued to make progress on our strategy to diversify our revenue base both by geography and by end market vertical, as well as our increased focus on our higher margin Managed Services and Management Consultancy business divisions.

 

In the period, we renamed two of our three core divisions. Specialist Consultancy Services becomes 'Management Consulting' ("MC"); Regular Testing Services becomes 'Professional Services' ("PS"), whilst Managed Services ("MS") retains its name.  In consultation with our customers, we feel these new titles better represent the extended range of quality assurance services we are delivering and we expect this to enhance our marketing position.

 

MS and MC now make up 64% - nearly two thirds - of our revenue with MS, still the highest margin business line, contributing revenues of €77.6m in the period (H1 2015: €71.9m), an increase of 7.9% on the prior year and representing nearly half of group revenue. The increase was largely organic, driven primarily from extending existing long term contracts, but the division - along with MC - is also benefitting from on-going cross-selling from Professional Services.

 

MC has also had a strong first half, with revenues up 117% to €28.6m (H1 2015: €13.2m), representing a group revenue contribution of 17%. This division has particularly benefitted from the Trissential acquisition in 2015, with most of the growth coming from the US business with its first time consolidation of Trissential. In line with our strategy to broaden the geographic reach, we are also pleased to see strong performances coming from the UK and Ireland, two regions where we have invested to build-up their business analysis practices.

 

In line with our strategy, PS revenue continued to be an important but smaller part of our overall business with revenues coming down by -4.5% to €48.6m (H1 2015: €50.9m), representing a group revenue contribution of 29%.  Our focus remains on the higher margin MS and MC divisions, which we expect to drive the Company's future growth.  Going forward we expect this segment to range between 25% and 30% of our total revenue.

 

Other revenue sources, encompassing business with contractors, training & conferences and software testing tools, amounted to €11.8m of revenue in the period (H1 2015: €14.2m), a decrease of 17% on the prior year and representing 7% of group revenue.  This is largely a result of tactical revenue delivered by contractors.

 

We have made huge strides in diversifying our geographic reach and limiting overexposure to any one market.  Germany remains our biggest market generating 30% of group revenues.  The US is  now our second largest market generating 17% of group revenues with last year's acquisitions significantly enhancing our on-the-ground capabilities (H1 2015 US revenue contribution amounted to 6% of total). There are still some on-going tasks to fully adapt the Galmont (now called SQS North America) sales and delivery model to SQS' strategy, but a well-defined roadmap is being executed. With further growth expected we anticipate reaching our stated goal of a $100m run-rate revenue from the US without further acquisitions.

 

We also increased our market presence in India, Ireland and the Middle East, largely driven by increased demand for our MS offering, and we expect further growth in these territories.

 

In the first half of the year, the Company agreed to acquire the remaining 25% of the issued share capital of SQS India Infosystems, our Pune based entity that mainly serves as a delivery centre with strong competencies in non-financial services verticals. This follows a period of considerable investment in India over the past decade to ensure the Company can meet the growing service demands of our global clients, while seeking to drive more efficiency and output through industrialisation from our employee base.  

 

Foreign exchange movements, and in particular a weakened sterling, had a €0.5m negative translational impact on earnings for the period. Had the Pound/Swiss Franc/Indian Rupee/Swedish Krona/US-$/Euro exchange rates remained the same as in H1 2015, our non-Euro revenues for the period would have been €3.4m higher and the EBIT would have been €0.5m higher.

 

 

EU Referendum

 

The British referendum decision to leave the European Union is not expected to have a significant impact on SQS at an operational level.   Our broad geographic revenue split does not make us overly reliant on any one geography and our growing presence in the US further reduces our risk.  The UK currently generates 13% of SQS Group revenues.

 

Although in the short term we expect some headwinds to corporate spending, particularly in the UK where confidence is likely to be affected, the decision will also bring opportunities for SQS as new regulations will need to be implemented and tested, particularly serving our MC capabilities. SQS has temporarily already been impacted by foreign exchange rate movements and in particular a weakened sterling, which are likely to persist during the second half of the year.

 

 

New Business

 

Quality assurance has become an integral part of all business processes, across every sector, with both corporate reputations and business efficiencies driven by effective IT systems. Moreover, clients seeking to utilise digitalisation to enable new revenue and business streams are increasing their investments in digitalised IT solutions. 

 

Consequently, SQS has recorded notable wins in the automotive sector during the period, recently securing a €9m MS contract extension from a leading automotive producer to support its connected car solutions. SQS also won a significant management consulting contract for end-to-end quality assurance of electric and autonomous drive software from another blue-chip car producer in the period. 

 

Disruption, driven by technological innovation, raises both opportunities and threats for companies operating in this new digital environment, making Quality Assurance across the whole software product lifecycle more critical than ever. System failures are not tolerated by the customers who receive a poor service, nor by staff who cannot deliver their services to clients and subsequently miss out on sales.   

As companies seek end-to-end IT solutions that work now, as well as for the future - as we prepare for the digital transformation to connected cars, autonomous driving, onmi-channel eCommerce, mobile payments, smart cities, grids and buildings, 3D printing, as well as regulatory and compliance - we expect to see more digital innovation driven opportunities across all verticals supported by SQS.

 

 

Market & Industry Overview

 

According to recently published data (July 2016) by market research firm Nelson Hall, the global addressable quality assurance (QA) services market is growing at a healthy rate of 7% p.a. The US region is forecast to grow at 8% p.a., while European and Asian markets are expected to grow at 6% p.a. These growth rates continue to be substantially above the overall IT services market growth rate of 2% p.a.

 

SQS expects to continue to benefit from its positioning as a leading specialist provider to clients increasing their investment in digital transformation and DevOps. Demand for Managed Services and Management Consulting services in particular is expected to remain high, as enterprises become ever more dependent on the integrity of their IT infrastructure, irrespective of industry or geography, to protect their financial and reputational standing.

 

Furthermore, there are significant opportunities in high growth industry verticals, such as the automotive sector, where car driving sub-systems contain an unprecedented number of lines of code. According to recent data published by Continental Research, the market for automotive software will increase by >60% by 2020. SQS is already a well-established QA partner for several blue-chip car manufacturers, and so is well placed to take full advantage of the increased market demand.

 

The need for SQS' services as the trusted facilitator of such business-critical digital transformation processes has never been more relevant.

 

 

Acquisitions

 

During the period the Company agreed to acquire the remaining 25% of the issued share capital of SQS India Infosystems, our Pune based facility. This follows a period of considerable investment in India over the past decade to ensure the Company can meet the growing service demands of our global clients, while seeking to drive more efficiency and output from our employee base. 

 

 

Strategy

 

Our strategy of targeting higher margin MS and MC clients and engagements remains core as we seek to further grow SQS' business. The US remains a key geography for SQS, with a large addressable market and less exposed to Brexit related uncertainty. India also has a large potential as an end market and remains a focus for us as companies increasingly turn to quality assurance and testing services to drive efficiencies and increase output from their employees. We will continue to monitor the situation in the UK and Europe very closely. Although in the short term, there is likely to be some slowdown in customer spending, we expect this to increase as new regulations come into effect, driving demand for our business critical end-to-end solutions.

 

SQS has historically focussed on a few core sector verticals where it has established itself as a leader. Increasingly demand for QA is emerging in other industries developing new digitised processes, customer interfaces and user experiences. These are likely to significantly expand the addressable QA services market, currently worth approximately $20bn (Nelson Hall study, July 2016).

 

 

Dividend

 

In accordance with German law, SQS pays one dividend in each financial year. We expect to declare a dividend with our final results for the year ending 31 December 2016, in line with our current policy of paying out approximately 30% of adjusted profit after tax as a dividend.

 

 

Employees

 

Total headcount at the period end had remained almost unchanged at 4,612  (31 Dec 2015: 4,619), with further circa 250 contractors retained during the period. The almost unchanged headcount number reflects the positive effects of industrialisation of our delivery and the previously stated focus on more profitable client engagements.

 

 

Board

 

Effective as of 6 September 2016, SQS has appointed Martin Hodgson as an additional Executive Director to the SQS Board to drive the global Management Consulting practice. Martin has spent most of his professional life in management consulting with a particularly strong focus on the automotive industry. He joined SQS in December last year and has been promoted from a senior management position in SQS to the Board.

 

 

Outlook

 

SQS has delivered a solid first half of the year, reporting double digit top line growth alongside a substantial improvement in profitability, both in PBT and EBIT. This growth has largely been driven by strong performances in both our Managed Services and Management Consulting divisions, where we are increasingly cross-selling our services to good effect. 

 

The US has now become our second largest region after Germany making up 17% of revenues.  This shows the strides we have made since the acquisitions last year, and ensures we are on track with our strategy to capitalise on the huge market opportunity the US has to offer.  

 

The digitised economy opens up new and exciting opportunities for SQS as it enables us to broaden our offering as an end-to-end quality solutions partner. With so many industries now reliant on digital solutions that can cope with consumer demand both now and for the future, companies need to know their systems will not fail. Through our vertical industry expertise and end-to-end business solutions, SQS is well placed to benefit from this global trend.

 

The Group's pipeline of prospects continues to strengthen across all divisions and the Board believes that SQS is well-positioned to deliver in line with our expectations for the full year.

 

 

Diederik Vos

Chief Executive Officer

6 September 2016

 

 

Financial Review H1 2016

Summary

 

Revenues grew by 10.9% to €166.6m (H1 2015: €150.3m), including first time consolidation effects from the US acquisitions of €20.2m and a negative impact from translational forex on revenue of €3.4m, excluding such effect would have resulted in a revenue of €149.8m - broadly flat on the comparative period. Additionally SQS has dis-engaged from less profitable contracts, mainly in the Professional Services segment, equating to a €9.9m revenue reduction in H1 2016 compared with H1 2015. Excluding the effect of dis-engagements alongside the translational forex movements, organic constant currency revenue growth was 6.3%.

 

The business units, which represent the accounting segments according to IFRS 8, are:

•    Managed Services (MS) to meet the demand of clients seeking efficiency in long-term engagements (between twelve months and five years) of which a growing share (in many cases) is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products;

•    Management Consulting (MC) (previously called Specialist Consultancy Services (SCS)) to meet the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Business & Enterprise Architecture, Process Modelling and Business Analysis;

•    Professional Services (PS) (previously called Regular Testing Services (RTS)) to meet the demand of more price conscious clients in IT projects who tend to be given a smaller number of consultants on a more local basis and typically contracted for a short term period (e.g. three months);

Alongside these major segments we conduct business with contractors (as far as these have not been included in MS or MC), training & conferences and software testing tools summarised as "Other".

 

Breakdown by business unit

 

Managed Services (MS)

Revenue in MS, our largest segment and one of our strategic focus areas, amounted to €77.6m in the period (H1 2015: €71.9m), an increase of 7.9% on the prior year, representing a group revenue contribution of 47%. The increase in revenue predominantly came from the extension of existing long term managed services contracts.

 

Management Consulting (MC)

Revenue in this segment - our other strategic focus area - saw a strong increase during the period of 117% to €28.6m (H1 2015: €13.2m), representing a group revenue contribution of 17%. Growth for this segment was mainly driven by the contribution from the acquisition of our US business and growth in the UK and Ireland markets.

 

Professional Services (PS)

Revenue in this segment decreased by -4.5% to €48.6m (H1 2015: €50.9m) on the prior year period, representing a group revenue contribution of 29%. Our strategy continues to be to reduce the share of this segment to a range between 25% and 30% of our total revenue.

 

Other

Revenue in the "Other" segment amounted to €11.8m in the period (H1 2015: €14.2m), a decrease of 17% on the prior half-year and representing 7% of group revenue. A decrease in tactical revenue from contractors was the key driver for this development.

 

Margins and Profitability

 

Adjusted* gross profit improved by 12.5% to €52.8m (H1 2015: €47.0m), with the gross margin at 31.7% (H1 2015: 31.3%). The improvement in gross margin was mainly driven by a greater contribution from the two strategic areas MS and MC that deliver higher client value and better margins in the order of 35% and above. Gross margins in the PS segment have improved to 27.0% (H1 2015: 26.4%) after we disengaged from less profitable contracts during 2015.

 

Gross margins in the "Other" segment were at 16.7% (H1 2015: 22.2%) reflecting a changed business mix between contractor revenues and tool sales.

 

Adjusted** profit before tax for the period was €11.9m (H1 2015: €9.0m), an increase of 32.1%, with the adjusted profit margin at 7.1% (H1 2015: 6.0%). The profit before tax was driven by the higher gross margins in MS, MC and PS, lower interest expenses and a much improved finance result from €0.9m realised foreign exchange gains due to one-time effects on realised intercompany transactions from weakening currencies such as Pound Sterling and Egyptian Pounds.

 

Adjusted*** earnings per share are at €0.22 (H1 2015: €0.17) resulting from the above outlined improvements in margins and finance results.

 

* adjusted for a non-cash amortisation of Bitmedia/Trissential acquired order backlog of €0.75m

** incl. effects under * and adjusted to add back €3.45m of IFRS amortisation of client relationship assets from the Bitmedia/Trissential acquisitions and €0.5m pro forma interests mainly arising from purchase price allocation for deferred payments on acquisitions

*** adjusted to add back effects under ** at actual local GAAP tax rate of 31.0%, less €1.3m on minority interests (mainly for SQS India BFSI)

 

Costs

 

Total overhead costs (adjusted for effects under ** above) came down to 24.8% of revenue from 24.9% in H1 2015.

 

General & Administrative expenses (adjusted for effects under ** above) for the period were €27.9m (H1 2015: €24.8m). This represents an increase by 0.3 percentage points to 16.8% of revenue (H1 2015: 16.5%). The absolute growth was mainly due to the first time consolidation effects of the acquisitions, investment in the build out of the delivery centre infrastructure and the US business.

 

Sales & Marketing costs for the period were €11.7m (H1 2015: €10.9m), representing 7.0% of revenues (H1 2015: 7.3%). The 0.3% decrease as a percentage of revenues was due to improved efficiencies in the sales teams.

 

Research & Development expense during the period was flat at €1.7m (H1 2015: €1.7m) representing 1.0% (H1 2015: 1.1%) of revenues. Research & Development investment was mainly focused on the development of our proprietary software testing tools and the PractiQ methodology.

 

Cash Flow and Financing

 

Cash flow from operating activities was at €(1.2)m (H1 2015: €(5.2)m). This profile of first half operating cash flow is due to the typical seasonality we have seen in previous first half year periods, as receivable days, uninvoiced services and bonus payments increased by €12.5m since the last year end. We therefore expect an improved cash collection and full profit to cash conversion by the end of the full year, as in previous years.

 

Debtor days came down to 77 (H1 2015: 84) resulting from a reduction in some operations like SQS India BFSI, which previously had substantially higher receivable days than the SQS Group average.

 

Cash outflow from investments reduced to €6.3m (H1 2015: €22.1m outflow), predominantly due to last year's untypically high outflow as a consequence of the acquisitions of Bitmedia and Trissential during H1 2015. The current level of investments is largely a "normal" level for IT infrastructure spend and includes €1.4m outflow for the build out of the Pune and the Chennai delivery centres.

 

Total cash inflow from financing activities was €7.2m (H1 2015: €21.5m inflow) reflecting a net increase in finance loans of €21.4m during H1 2016, mainly to fund the outflow of € 10.4m for the acquisition of the final 25% of shares in SQS Pune (India) and the above mentioned investments. Additionally dividend payments to SQS shareholders resulted in an outflow of €4.2m (H1 2015: 4.0m outflow).

 

Balance Sheet

 

We closed the period with €26.4m (31 Dec 2015: €32.0m) of cash and cash equivalents on the balance sheet and borrowings of €59.3m (31 Dec 2015: €27.1m). The increase in borrowings was mainly due to the cash outflow of €10.4m for the acquisition of the remaining 25% shares in SQS Pune and the typical seasonal increase of working capital in the first six months. Cash reserves are increasingly held in a broader range of currencies and the transfer of funds is restricted in some geographies, like India. Therefore, the offset between cash and debt positions has become less flexible as we also seek to avoid the realisation of negative exchange rate movements. The resulting net debt position at the period end was €32.9m (31 Dec 2015: net debt of €5.9m).

 

During the period under review SQS has re-arranged its borrowing facilities with its four main banks and additionally continues to have local overdraft facilities in some countries such that in total its facilities are now €83m. The facilities with the four main banks are in place until 2021. These facilities are subject to customary covenants, are not secured and the borrowing costs are substantially lower than before.

 

The final purchase price allocation with regard to the Galmont acquisition (completed in September 2015) is still pending. Therefore, the full amounts for acquired net assets for Galmont (€14.8m) have been posted as "goodwill" and will be allocated to intangible assets and goodwill once the purchase price allocation has been finalised later this year.

 

For SQS India BFSI, Bitmedia and Trissential intangible assets for client relationships and order backlog with a fair value of €12.8m were recognised in the 30 June 2016 balance sheet, reflecting a further amortisation of €4.2m during the period. On average these intangible assets are amortised over a period of up to nine years.

 

As these amortisation charges are non-cash-items and do not impact the normal business of SQS, they are adjusted within the PBT and EPS reporting.

 

Taxation

 

The tax charge of €2.3m (H1 2015: €1.3m) includes current tax expenses of €3.7m (H1 2015: €3.0m) and deferred tax expenses of €(1.4)m (H1 2015: €(1.7)m). The tax rate on local GAAP results was 31.0% (H1 2015: 33.6%), the lower tax rate being a consequence of changes in the geographic spread of profits. Going forward, we expect an actual tax rate of c. 31%.

 

Foreign Exchange

 

Approximately 55.2% (H1 2015: 58.0%) of the Group's turnover is generated in Euros. For the conversion of revenues and costs generated in local currencies into Euros, the relevant official average exchange rate for the six-month-period of 2016 was applied. For the conversion of the balance sheet items from local currency into Euros, the official exchange rate as at 30 June 2016 was used.

 

Foreign exchange had a €0.5m negative translational impact on earnings for the period. Had the Pound/Swiss Franc/Indian Rupee/Swedish Krona/US-$/Euro exchange rates remained the same as in H1 2015, our non-Euro revenues for the period would have been €3.4m higher and the EBIT would have been €0.5m higher.

 

International Financial Reporting Standards (IFRS)

 

The Consolidated Financial Statements of SQS and its subsidiary companies ("SQS Group") are prepared in conformity with all IFRS (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are to be applied for those financial statements whose reporting period starts on or after 1 January 2016.

 

The SQS Group Consolidated Financial Statements for the 6-month period ended 30 June 2016 were prepared in accordance with uniform accounting and valuation principles in Euros.

 

 

Rene Gawron

Chief Financial Officer

6 September 2016

 

 

 

for the six months ended 30 June 2016





Six months ended 30 June 2016


Six months ended 30 June 2015


Year ended 31 December 2015



(Notes)


(unaudited)


(unaudited)


(audited)














k€


k€


k€










Revenue




166,623


150,254


320,716










Cost of sales


(4)


114,533


103,276


221,810










Gross profit




52,090


46,978


98,906










General and administrative expenses


(4)


31,350


28,552


60,411

Sales and marketing expenses


(4)


11,745


10,898


22,873

Research and development expenses


(4)


1,745


1,713


3,970










Profit before tax and finance costs (EBIT)




7,250


5,815


11,652










Finance income




1,197


572


1,565

Finance costs




1,281


1,191


2,946

Net finance costs


(5)


-84


-619


-1,381










Profit before taxes (EBT)




7,166


5,196


10,271










Income tax expense


(6)


2,276


1,316


3,049










Profit for the period




4,890


3,880


7,222










Attributable to:









Owners of the parent




4,478


3,979


7,166

Non-controlling interests


(13)


412


-99


56










Consolidated profit for the period




4,890


3,880


7,222




























Earnings per share, undiluted (€)


(7)


0.14


0.13


0.23










Earnings per share, diluted (€)


(7)


0.13


0.12


0.22










Adjusted earnings per share (€), for comparison only


(7)


0.22


0.17


0.40



















 

Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2016




















Six months ended 30 June 2016


Six months ended 30 June 2015


Year ended 31 December 2015




(unaudited)


(unaudited)


(audited)




k€


k€


k€









Profit for the period



4,890


3,880


7,222









Exchange differences on translating foreign operations



-6,189


3,034


4,570









Gains / losses arising from cash flow hedges



63


-65


168









Other comprehensive income to be reclassified








to profit or loss in subsequent periods



-6,126


2,969


4,738









Re-measurement losses on defined benefit plans



0


0


-561









Other comprehensive income not being reclassified








to profit or loss in subsequent periods



0


0


-561









Other comprehensive income for the period, net of tax


-6,126


2,969


4,177









Total comprehensive income for the period, net of tax


-1,236


6,849


11,399









Attributable to:








Owners of the parent



-2,086


6,236


10,483

Non-controlling interests



850


613


916

 

 

Consolidated Statement of Financial Position

as at 30 June 2016 (IFRS)























30 June 2016


30 June 2015


31 December 2015



(Notes)


(unaudited)


(unaudited)


(audited)














k€


k€


k€










Current assets









Cash and cash equivalents


(14)


26,399


18,308


31,990

Trade receivables




61,360


71,319


61,093

Other receivables




6,880


6,574


5,914

Work in progress




23,546


12,089


16,074

Income tax receivables




1,931


1,692


1,321





120,116


109,982


116,392










Non-current assets









Intangible assets


(8)


23,378


18,632


26,586

Goodwill


(8)


87,389


83,354


92,539

Property, plant and equipment


(9)


16,517


12,100


15,833

Financial assets




33


32


30

Income tax receivables




1,339


2,002


1,421

Deferred tax assets




5,443


2,771


5,429





134,099


118,891


141,838










Total Assets




254,215


228,873


258,230



















Current liabilities









Bank loans and overdrafts


(10)


59,062


34,511


27,064

Finance lease




63


135


62

Trade payables




6,038


7,883


10,518

Other provisions




0


0


0

Income tax accruals




5,176


2,768


3,745

Other current liabilities


(11)


40,500


42,210


56,374





110,839


87,507


97,763










Non-current liabilities









Bank loans


(10)


250


10,310


10,825

Finance lease




54


57


54

Other provisions




0


0


0

Pension provisions




5,927


4,970


5,682

Deferred tax liabilities




6,548


3,759


8,424

Other non-current liabilities


(11)


16,077


6,236


16,145





28,856


25,332


41,130










Total Liabilities




139,695


112,839


138,893



















Equity


(12)







Share capital




31,676


31,301


31,676

Share premium




56,686


55,973


56,478

Statutory reserves




53


53


53

Other reserves




-6,293


-1,350


271

Retained earnings




21,884


18,841


21,524

Equity attributable to owners of the parent



104,006


104,818


110,002










Non-controlling interests


(13)


10,514


11,216


9,335

Total Equity




114,520


116,034


119,337










Equity and Liabilities




254,215


228,873


258,230

 

 

Consolidated Statement of Cash Flows



for the six months ended 30 June 2016 (IFRS)































Six months ended 30 June 2016


Six months ended 30 June 2015


Year ended 31 December 2015



(Notes)


(unaudited)


(unaudited)


(audited)





k€


k€


k€










Net cash flow from operating activities









Profit before taxes




7,166


5,196


10,271

Add back for









Depreciation and amortisation


(4)


7,708


6,209


15,752

Loss on the sale of property, plant and equipment




269


28


45

Other non-cash income not affecting payments




2,368


1,289


1,269

Net finance costs


(5)


84


619


1,381

Operating profit before changes in the net current assets




17,595


13,341


28,718










Increase (Decrease) in trade receivables




-267


-5,127


7,616

Increase (Decrease) in work in progress and other receivables




-8,970


-5,384


-7,873

Decrease (Increase) in trade payables




-4,479


-4,643


-2,073

Decrease in other provisions




0


0


0

Increase (Decrease) in pension provisions




215


316


927

Decrease (Increase) in other liabilities and deferred income




-5,261


-3,750


4,130

Cash flow from operating activities




-1,167


-5,247


31,445










Interest payments


(5)


-594


-619


-1,260

Tax payments


(6)


-4,062


-3,065


-8,107

Net cash flow from operating activities




-5,823


-8,931


22,078










Cash flow from investment activities









Purchase of intangible assets




-3,763


-4,152


-5,065

Purchase of property, plant and equipment




-2,602


-2,666


-7,288

Purchase of net assets of acquired companies




-3


-14,603


-17,982

Interest received


(5)


112


-40


507

Net cash flow from investment activities




-6,256


-21,461


-29,828










Cash flow from financing activities









Dividends paid




-4,118


-3,973


-3,973

Capital increase




0


0


0

Proceeds from non-controlling interests on the exercise of stock options




330


194


295

Payments for the acquisition of non controlling interests




0


-425


-426

Dividends paid to non controlling interests




0


0


-1,979

Repayment of finance loans


(10)


-12,618


-6,457


-9,764

Increase of finance loans


(10)


34,041


32,291


28,304

Increase of finance lease




0


0


0

Payments to minority shareholders from put option




-10,403


0


0

Redemption of finance lease contracts




0


-176


-252

Net cash flow from financing activities




7,232


21,454


12,205










Change in the level of funds affecting payments




-4,847


-8,938


4,455

Changes in cash and cash equivalents due to exchange rate movements




-743


949


1,238

Cash and cash equivalents









at the beginning of the period




31,990


26,297


26,297

Cash and cash equivalents









at the end of the period




26,400


18,308


31,990










 


 Consolidated Statement of Changes in Equity 




for the six months ended 30 June 2016 (IFRS)



















































Attributed to equity owners of the parent


Non-


Total




Share


Share


Statutory


Other


cash flow


Translation


Retained


Total


 controlling


equity




capital


premium


reserves


reserves


hedge


of foreign


earnings




interest














reserve


operations












€k


€k


€k


€k


€k


€k


€k


€k


€k


€k























31 December 2014 (audited)



30,563


47,446


53


-1,693


-369


-1,545


19,213


93,668


10,208


103,876























Dividends paid















-3,973


-3,973




-3,973

Transactions with owners of the parent















-3,973


-3,973




-3,973

Business combinations

















0


248


248

Acquisition of subsidiary

















0




0

Capital increase



738


8,088












8,826


194


9,020

Acquisition of non-controlling interests















-378


-378


-47


-425

Share-based payments





439












439




439

Profit for the period















3,979


3,979


-99


3,880

Exchange differences on translating foreign operations













2,322




2,322


712


3,034

Gains arising from cash flow hedges











-65






-65




-65

Total comprehensive income











-65


2,322


3,979


6,236


613


6,849

30 June 2015 (unaudited)



31,301


55,973


53


-1,693


-434


777


18,841


104,818


11,216


116,034























Dividends paid

















0


-1,979


-1,979

Transactions with owners of the parent















0


0


-1,979


-1,979

Business combinations

















0


-248


-248

Capital increase



375


66












441


100


541

Acquisition of non-controlling interests















57


57


-57


0

Share-based payments





439












439




439

Profit for the period















3,187


3,187


155


3,342

Exchange differences on translating foreign operations













1,388




1,388


148


1,536

Re-measurement gains on defined benefit plans















-561


-561




-561

Gains arising from cash flow hedges











233






233




233

Total comprehensive income











233


1,388


2,626


4,247


303


4,550

31 December 2015 (audited)



31,676


56,478


53


-1,693


-201


2,165


21,524


110,002


9,335


119,337























Dividends paid















-4,118


-4,118




-4,118

Transactions with owners of the parent















-4,118


-4,118




-4,118

Business combinations

















0




0

Acquisition of subsidiary

















0




0

Capital increase

















0


329


329

Acquisition of non-controlling interests

















0




0

Share-based payments





208












208




208

Profit for the period















4,478


4,478


412


4,890

Exchange differences on translating foreign operations













-6,627




-6,627


438


-6,189

Gains arising from cash flow hedges











63






63




63

Total comprehensive income











63


-6,627


4,478


-2,086


850


-1,236

30 June 2016 (unaudited)



31,676


56,686


53


-1,693


-138


-4,462


21,884


104,006


10,514


114,520

 


Notes to the interim consolidated financial statements (unaudited) 

 

 

1.     Summary of Significant Accounting Policies

 

Basis of preparation and statement of compliance

 

The Interim Consolidated Financial Statements of SQS and its subsidiaries ("SQS Group") are prepared in conformity with all IFRS Standards (International Financial Reporting Standards) and Interpretations of the IASB (International Accounting Standards Board) which are mandatory at 30 June 2016. The interim reports are published in an abbreviated form according to IAS 34. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

 

The accounting policies applied preparing the Interim Consolidated Financial Statements 2016 are consistent with those used for the Consolidated Financial Statements at 31 December 2015.

 

The Financial Information has been prepared on a historical cost basis. The Financial Information is presented in Euros and amounts are rounded to the nearest thousand (€k) except when otherwise indicated. Negative amounts are presented in parentheses.

 

The interim consolidated financial statements do not include all information and disclosures required in the annual financial statements, and should be read in conjunction with the Group's annual financial statements as at 31 December 2015.

 

Basis of consolidation

As at 30 June 2016, the Company held interests in the share capital of more than 50 % of the following undertakings (all of those subsidiaries have been consolidated):

 

 

Consolidated companies

Country of incorporation

Six month ended 30 June 2016

Six month ended 30 June 2015

Year ended 31 December 2015

Share of capital

Share of capital

Share of capital



%

%

%






SQS Group Limited, London

UK

100.0

100.0

100.0

SQS Software Quality Systems (Ireland) Ltd., Dublin

Ireland

100.0

100.0

100.0

SQS Nederland BV, Utrecht

The Netherlands

95.1

95.1

95.1

SQS GesmbH, Vienna

Austria

100.0

100.0

100.0

SQS Software Quality Systems (Schweiz) AG, Zurich

Switzerland

100.0

100.0

100.0

SQS Group Management Consulting GmbH, Vienna

Austria

100.0

100.0

100.0

SQS Group Management Consulting GmbH, Munich

Germany

100.0

100.0

100.0

SQS Egypt S.A.E, Cairo

Egypt

100.0

100.0

100.0

SQS Software Quality Systems Nordic AB, Stockholm

Sweden

100.0

100.0

100.0

SQS Software Quality Systems Sweden AB, Stockholm

Sweden

100.0

100.0

100.0

SQS Software Quality Systems Norway AS, Oslo

Norway

100.0

100.0

100.0

SQS Software Quality Systems Finland OY, Espoo

Finland

100.0

100.0

100.0

SQS India Infosytems Private Limited, Pune

India

100.0

75.0

75.0

SQS France SASU, Paris

France

100.0

100.0

100.0

SQS USA Inc., Chicago (Illinois)

USA

100.0

100.0

100.0

SQS India BFSI Limited, Chennai

India

53.95

54.58

54.16

SQS Software Quality Systems Italia S.p.A., Rome

Italy

90.0

90.0

90.0

Trissential LLC, Minneapolis (Minnesota)

USA

100.0

100.0

100.0

Galmont Consulting LLC, Chicago (Illinois)

USA

100.0

n/a

100.0

 

SQS AG holds 15% of the shares of SQS Portugal Lda with a book value of € nil (previous year € nil).

SQS India BFSI Ltd. is the sole shareholder of SQS BFSI Pte. Ltd., Singapore, SQS BFSI Inc., USA, Thinksoft Global Services (Europe) GmbH, Germany, SQS BFSI UK Ltd., UK, and SQS BFSI FZE, United Arab Emirates. None of these companies has a major impact on the financial data of the group.

 

Significant Changes of Accounting Policies

 

Except from IFRS 15 and IFRS 16 none of the standards and amendments beginning after 1 January 2015 or later periods are expected to have any material impact on the annual consolidated financial statements of the SQS Group. For more information, see Note 2 'Summary of Significant Accounting Policies' to the annual Consolidated Financial Statements for the year 2015.

 

Use of estimates

 

The preparation of the Interim Financial Statements requires the disclosure of assumptions and estimates made by management, which have an effect on the amount and the presentation of revenues, expenses, assets and liabilities shown in the other comprehensive income or profit or loss, in the statement of financial position as well as any contingent items.

 

The main estimates and judgements of the management of SQS refer to:

 

·      the useful life of intangible assets and property, plant and equipment

·      the criteria regarding the capitalisation of development costs

·      the recoverability of deferred taxes on tax losses carried forward

·      the stage of completion of work in progress regarding fixed price contracts

·      the discount rate, future salary increases, mortality rates, future pension increases and future employee contributions regarding the valuation of defined benefit obligations

·      the inputs such as risk free rate, expected share volatility and expected dividends as well as expected forfeiture rate for the measurement of the share-based-payments.

 

There have been no changes in estimates compared to the year 2015.

 

 

2.     Segmental reporting

 

Based on the organisational structure and the different services rendered, SQS Group operates in the following segments:

 

·      Managed Services (MS) to meet the demand of clients seeking efficiency in long-term engagements (between six months up to five years) of which a growing share (in many cases) is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products

·      Management Consulting (MC) (previously called Specialist Consultancy Services (SCS)) to meet the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Business & Enterprise Architecture, Process Modelling and Business Analysis 

·      Professional Services (PS) (previously called Regular Testing Services (RTS)) to meet the demand of more price conscious clients in IT projects who tend to be served with a smaller number of consultants on a more local basis and typically contracted for a short term period (e.g. three months)

 

Alongside these major business activities there is the business with contractors (as far as these have not been included in MS), training & conferences and software testing tools. Each of these minor operating segments represents less than 10 % of the Group's revenues and the Group's profit. Thus, all these other segments are presented as "Other".

 

The group management board consisting of CEO (Chief Executive Officer), CFO (Chief Financial Officer) and COO (Chief Operations Officer) monitors the results of the operating segments separately in order to allocate resources and to assess the performance of each segment. Segment performance is evaluated based on gross profit. 

 

Non-profit centres represent important functions such as Project Management, Marketing, Finance & Administration, IT, Human Resources and Sales Support.

 

The non-profit centres are not allocated to the operating segments as they provide general services to the whole group. Their costs are shown under 'Non-allocated costs'.

 

The assets and liabilities relating to the operating segments are not reported separately to the Group Management Board. Finance costs and income taxes are managed on a group basis. Therefore they are not allocated to operating segments.

 

The following tables present revenue and profit information regarding the SQS Group's reportable segments for the interim periods ended 30 June 2016 and 30 June 2015 and for the year ended 31 December 2015, respectively.

 

 

Six month ended

30 June 2016 (unaudited)

MS

MC

PS

Other

Total


€k

€k

€k

€k

€k

Revenues

77,610

28,596

48,614

11,803

166,623

Segment profit (gross profit)

27,940

9,779

13,143

1,977

52,839

Non-allocated costs





(45,589)

EBIT





7,250

Financial result





(84)

Taxes on income





(2,276)

Result for the period





4,890

 

Six month ended

30 June 2015 (unaudited)

MS

MC

PS

Other

Total


€k

€k

€k

€k

€k

Revenues

71,948

13,209

50,895

14,202

150,254

Segment profit (gross profit)

25,830

4,558

13,437

3,153

46,978

Non-allocated costs





(41,163)

EBIT





5,815

Financial result





(619)

Taxes on income





(1,316)

Result for the period





3,880

 

Year ended  31

December 2015  (audited)

MS

MC

PS

Other

Total


€k

€k

€k

€k

€k

Revenues

153,201

36,644

99,251

31,620

320,716

Segment profit (Gross profit)

55,910

12,484

26,326

6,263

100,983

Non-allocated costs





(89,331)

EBIT





11,652

Financial result





(1,381)

Taxes on income





(3,049)

Result for the period





7,222

 

 

3.     Exercise of Put-/Call-Options

 

In May 2016 the shareholders of the remaining 25% in SQS India Infosystems Private Limited and SQS Software Quality Systems AG decided to exercise their mutual Put-/Call-Option regarding the remaining shares of SQS India. In order to receive the remaining shares and in line with the calculation scheme of the Put-/Call-Option contract SQS paid a consideration of INR 785 million (€10.4m). After having completed the transaction SQS now holds the entire shares in this Indian subsidiary. The transaction is accounted for as the payment of a liability as the obligation from the put option right had already been shown under other liabilities.

 

The exercise of the Put-/Call-Option is a related party transaction under the AIM rules as one of the previous shareholders is a director of SQS India. Considering the profit after tax generated by SQS India, the terms of the transaction have been evaluated to be fair and reasonable.

 

4.     Expenses

 

The Consolidated Income Statement presents expenses according to function. Additional information regarding the origin of these expenses by type of cost is provided below:

 

Cost of material

 

Cost of material included in the cost of sales in the interim period ended 30 June 2016 amounted to €12,254k (at mid-year 2015: €12,069k). Cost of material mainly relates to the procurement of external services such as contracted software engineers. In addition, certain project-related or internally used hardware and software is shown under cost of material.

 

Employee benefits expenses

 



Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k








Wages and salaries


100,654


87,921


190,567

Social security contributions


12,106


11,409


22,962

Expenses for retirement benefits


2,194


1,871


4,542

Total


114,954


101,201


218,071

 

The expenses for retirement benefits include current service costs from defined benefit plans and expenses for defined contribution plans.

 

Amortisation and depreciation

 

Amortisation and depreciation charged in the interim period ended 30 June 2016 amounted to €7,709k (at mid-year 2015: €6,209k). Of this, €1,113k (at mid-year 2015: €1,204k) was attributable to the amortisation of development costs and €4,192k to customer relationships and order backlog regarding SQS India BFSI, SQS Software Quality Systems Italia S.p.A. and Trissential LLC.

 

5.    Net finance costs

 

The net finance costs are comprised as follows:

 



Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k








Interest income


112


100


507

Exchange rate gains


1085


472


1,058

Total finance income


1,197


572


1,565

Interest expense


(1,081)


(649)


(2,093)

Exchange rate losses


(200)


(542)


(853)

Total finance costs


(1,281)


(1,191)


(2,946)








Net finance costs


(84)


(619)


(1,381)

 

Finance income mainly results from fixed deposit investments.

Interest expense relates to interest on bank liabilities and finance lease liabilities.

Finance income and costs are stated after foreign exchange rate gains and losses.

 

6.     Taxes on earnings

 

The line item includes current tax expenses in the amount of €4,065k (at mid-year 2015: €3,009k) and deferred tax income in the amount of €(1,789)k (at mid-year 2015 deferred tax income: €(1,693)k).

 

7.     Earnings per share

 

The earnings per share presented in accordance with IAS 33 are shown in the following table:

 



Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)








Profit for the year attributable to owners of the parent, €k


4,478


3,979


7,166

Diluted profit for the year, €k


4,478


3,979


7,166

Weighted average number of shares in issue, undiluted


31,675,617


30,623,823


31,003,989

Weighted average number of shares in issue, diluted


33,697,343


32,975,701


33,274,277

Undiluted profit per share, €


0.14


0.13


0.23

Diluted profit per share, €


0.13


0.12


0.22

Adjusted profit per share (optional), €


0.22


0.17


0.40

 

Undiluted profit per share is calculated by dividing the profit for the six months period attributable to owners of the parent by the weighted average number of shares in issue during the six month period ended 30 June 2016: 31,675,617 (at mid-year 2015: 30,623,823).

 

Diluted profit per share is determined by dividing the profit for the six months period attributable to owners of the parent by the weighted average number of shares in issue plus any share equivalents which would lead to a dilution.

 

Adjusted profit per share is calculated by adjusting the profit before tax for current taxes, amortised costs of acquired customer relationships and order backlog as part of the business combination SQS India BFSI, SQS Italia S.p.A. and Trissential LLC, interest expenses on Earn-out liabilities and non-controlling interest effects. This adjusted profit after tax divided by the weighted average number of shares in issue during the six month period ended 30 June 2016: 31,675,617 shares, (at mid-year 2015: 30,623,823 shares) shows adjusted earnings per share of €0.22 (at mid-year 2015: €0.17).

 

8.     Intangible assets

 

The composition of this item is as follows:

 

Book values


Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k








Goodwill


87,390


83,354


92,539

Development costs of software


2,832


4,005


3,694

Acquired Software


4,529


3,147


3,381

Other development costs


3,236


2,260


1,640

Acquired customer relationships


11,163


9,220


15,502

Order backlog


1,618


0


2,369

Intangible assets


23,378


18,632


26,586

Total


110,768


101,986


119,125

 

Development costs were capitalised in the interim period ended 30 June 2016 in the amount of €1,029k (at mid-year 2015: €1,627k). They are amortised over a period of 36 months. Other development costs mainly relate to the methodology 'PractiQ', used by SQS to provide Managed Services. The estimated useful life of these intangible assets covers a period of five years.

 

The customer relationships were acquired within the business combination of SQS India BFSI, SQS Software Quality Systems Italia S.p.A. and Trissential LLC. The order backlog was acquired within the business combinations of SQS Software Quality Systems Italia S.p.A. and Trissential LLC.

 

Amortisation over the expected useful life in years


Customer relationship


Order backlog






SQS India BFSI Limited


3


-

SQS Software Quality Systems Italia S.p.A.


6


3,9

Trissential LLC


10


0,75

 

The amortisation of development costs is shown in the research and development expenses. The amortisation of software and remaining intangible assets is allocated to the functional costs by an allocation key.

 

9.     Property, plant and equipment

 

The development of property, plant and equipment of the SQS Group is presented as follows:

 

Book values


Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k

Freehold land and buildings


5,355


5,548


5,541

Office and business equipment


4,236


4,151


4,108

Construction in progress


6,926


2,401


6,185

Total


16,517


12,100


15,834

 

 

10.   Bank loans and overdrafts

 

The finance liabilities are comprised as follows:

 



Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k








Bank overdrafts and other short-term bank loans


59,062


34,511


27,064

Bank loans with maturity between one and five years


250


10,310


10,825

Total bank liabilities


59,312


44,821


37,889

of these, secured


114


28,147


17,860

 

For SQS AG and some subsidiaries bank overdraft agreements are in place.

 

11.   Other current and non-current liabilities

 

The item is comprised as follows:

 



Six month ended 30 June 2016

(unaudited)


Six month ended 30 June 2015

(unaudited)


Year ended 31 December 2015

(audited)



€k


€k


€k








Personnel liabilities (leave, bonus claims)


15,594


12,905


19,104

Purchase obligations from SQS India


0


10,613


12,758

Purchase obligations from SQS USA


0


4,111


0

Put Option SQS Italia


994


894


971

Purchase obligation from Trissential


7,240


0


7,215

Purchase obligation from Galmont


10,251


0


10,084

Sales tax and value-added tax liabilities


6,709


7,234


7,147

Liabilities in regard to social security


3,515


3,418


3,853

Outstanding invoices


5,628


3,416


4,434

Granted rebates and discounts


521


415


524

Liabilities for employees' travelling expenses


1,129


870


     1,122

Liabilities against former shareholders of SQS Italia


0


683


0

Interest swap (fair value)


312


390


312

Deferred income


1,081


783


1,128

Remaining other liabilities


3,602


2,714


3,867

Total


56,576


48,446


72,519

 

The remaining other liabilities comprise trade accruals and other items due in short term. Their carrying amounts are considered to be reasonable approximation of fair value.

 

 

12.   Equity

 

SQS is listed on the AIM market in London and traded on the Open Market in Frankfurt (Main). The development of equity is presented in the Consolidated Statement of Changes in Equity.

 

Subscribed Capital

The subscribed capital amounts to €31,675,617 (at 31 December 2015: €31,675,617) and is divided into 31,675,617 (at 31 December 2015: 31,675,617) individual registered shares with an arithmetical share in the share capital of €1 each. Each share entitles the holder to one right to vote. No preference shares have been issued. The capital is fully paid up.

 

The movements in the subscribed capital are as follows:

 

Individual shares


Nominal value


Number


As at 31 December 2014

30,562,679


30,592,679

Capital increase against contribution in kind for the acquisition of Trissential LLC

 

737,804


 

737,804

Capital increase against contribution in kind for the acquisition of Galmont LLC

 

375,134


 

375,134

As at 31 December 2015

31,675,617


31,675,617

As at 30 June 2016

31,675,617


31,675,617

 

SQS had no shares in its ownership as at 30 June 2016.

 

Conditional Capital

 

The conditional capital is to be composed as follows:

-     the Conditional Capital 3 amounts to €1,300,000

-     the Conditional Capital 4 amounts to €1,050,000

-     the Conditional Capital 5 amounts to €700,000

 

The Conditional Capital 3 and the Conditional Capital 4 serve to grant share options to the management board members and employees respectively.

 

The Conditional Capital 5 serve to grant share options to the management board members and employees of SQS AG and management and employees of subsidiaries according to the share option programme 2015.

 

Authorised Capital

 

The Authorised Capital amounts to €13,887,062 (at 31 December 2015: €13,887,062).

 

The authorised capital developed as follows:


As at 1 January 2015

15,000,000

Usage of Authorised Capital for the Acquisition of Trissential

-737,804

Usage of Authorised Capital for the Acquisition of Galmont

-375,134

As at 31 December 2015

13,887,062

As at 30 June 2016

13,887,062

 

Statutory reserves

 

The statutory reserves in SQS AG were created in accordance with Section 150 of the Stock Corporation Act (Germany). Statutory reserves must not be used for dividends. 

 

Other reserves

 

Other reserves comprise differences from the translation of foreign operations, IPO costs from former years and a cash flow hedge reserve regarding the fair values of interest and currency swaps.

 

Retained earnings

 

Retained earnings represent the accumulated retained profits of SQS Group less dividend payments.

The General Meeting of 25 May 2016 resolved to pay a €0.13 dividends per share for the business year 2015 in the total amount of €4,117,830.21, that have been paid to the shareholders of SQS AG in 2016.

 

 

13.   Employee participation programme

 

Share-based Payment

 

SQS policy is to offer management and key employees share-based payments. Therefore SQS has decided and granted the share-based payment programs 2013 and 2014 and offered a further one in 2015.

 

The number and weighted-average exercise prices of share option granted in 2013 and 2014 were as follows:

 


            Granted in 2013

            Granted in 2014


For management board

For key employees

(Tranche I)

For key employees

(Tranche II)


Number of options

Weighted-average price

Number of options

Weighted-average price

Number of options

Weighted-average price

Outstanding at beginning of period

1,040,000

3.07

392,000

3.59

258,000

5.79

Revived per 1.1.2016

105,000

3.07

98,000

3.59

64,500

5.79

Granted during 01.01.-30.06.2016

---

---

---

---

---

---

Forfeited during 01.01.-30.06.2016

---

---

(20,000)

3.59

(67,500)

5.79

Exercised during 01.01.-30.06.2016

---

---

---

---

---

---

Outstanding at end of half period

1,145,000

3.07

470,000

3.59

255,000

5.79

Exercisable at end of period

---

---

---

---

---

---

 

The Supervisory Board passed on 25th May 2016 a resolution to revived stock options in the amount of 105,000 options rights regarding the Management Board. The Management Board passed a resolution to revived stock options in an amount of 162.500 options rights regarding key employees.

 

At the Shareholder's Meeting on 27 May 2015, SQS shareholders resolved a further share option scheme as incentive compensation for SQS AG key-employees and members of the management board.

 

With the approval of the supervisory board the management board has been authorised to grant up to 700,000 options for key employees and management board until 31 December 2016. The option scheme is based on Conditional Capital V for key employees and management board.

 

Each option gives its holder the right to buy one SQS share at the exercise price which is determined as the average closing price (reference price) of SQS depositary interests traded on the London Stock Exchange's Alternative Investment Market (ISIN DE 0005493514) over the period of 20 trading days preceding the 18th of March 2016 (Tranche I) / the 1st of June 2016 (Tranche II) less a deduction of 15%. The reference price in £ is converted into EURO using the exchange rate on the day prior to 18th March 2016/ 1st June 2016.

 

The options can only be exercised after the vesting period has ended and if the price of SQS depositary interests has increased at least 10% compared to the reference price. The vesting period lasts four years, the options will expire on 31st May 2025 latest. Further the options expire in case a member of the management board or a key employee leaves the entity under certain conditions or if certain yearly profit targets are not achieved.

 

The SQS share option scheme is accounted for as an equity-settled share-based payment transaction at the fair value of the options at the grant date. The fair value of the options is allocated to the vesting period as personnel expense. The corresponding accounting entry is an increase in equity. In the absence of market prices, the fair value of the options was determined by a binomial options pricing model.

 

The options expire if an employee terminates his or her employment contract or if the company terminates the employment for good cause.

 

The number and weighted-average exercise prices of the 2015 share option programme  were as follows:

 


            Granted in 2016


For key employees  &
management board

(Tranche I)

For key employees  &
management board

(Tranche II)


Number of options

Weighted-average price

Number of options

Weighted-average price

Outstanding at beginning of period

---

---

---

---

Granted during the year

180,000

5.65

100,000

5.27

Forfeited during the year

---

---

---

---

Exercised during the year

---

---

---

---

Outstanding at end of half period

180,000

5.65

100,000

5.27

Exercisable at end of period

---

---

---

---

 

The input used for measurement of the fair values at grant date was as follows:

 


Stock Option Program 2015


Granted in 2016


For key employees & management board

(Tranche I)

For key employees & management board

 (Tranche II)

 

Fair value at grant date

€0.88 (68.50 pence)

€0.85 (65.93 pence)

 

Weighted average share price

€6.52 (508.00 pence)

€6.06 (470.00 pence)

 

Exercise price

€5.65 (439.88 pence)

€5.27 (409.40 pence)

 

Reference price

€6.64 (517.50 pence)

€6.21 (481.65 pence)

 

Share price target

€7.31 (569.25 pence)

€6.83 (529.82 pence)

 

Expected share volatility

20 %

20 %

 

Expected option life

 6 years

6 years

 

Expected dividends

2.20 %

2.20 %

 

Risk-free interest rate

1.15 %

1.15 %

 

Vesting period

4 years

4 years

 

Option term

9 years

9 years

 

 

The input used for measurement of the fair values of granted options for 2013 and 2014 exist furthermore without change. For more information, see Note 19 'Employee participation programme' to the annual Consolidated Financial Statements for the year 2015.

 

Expected volatility has been based on an evaluation of the historical volatility of the company's share price for expected periods between 90 and 180 days.

 

14.   Non-controlling Interests

 

SQS attributes the profit or loss and each component of comprehensive income to the owners of the parent and to the non-controlling interests applying the relevant percentage of share on the contribution of profit or loss of each entity to the consolidated comprehensive income of the period. Non-controlling interests participate in the net assets recognised in the financial statement of SQS Group. Share-based payments relating to non-controlling interests are attributed exclusively to those non-controlling interests.

 

15.   Notes to the Statement of Cash flows

 

The consolidated Statement of Cash flows shows how the funds of the Group have changed in the course of the business year through outflows and inflows of funds. The payments are arranged according to investing, financing and operating activities.

 

The sources of funds on which the statement of cash flows is based consist of cash and cash equivalents (cash on hand and bank balances).

 

16.   Related party transactions

 

Under IAS 24, related persons and related companies are persons and companies who are able to control or to exercise a significant influence over their finance or business policy on the reporting entity. Regarding SQS Group, these are the management board and the supervisory board members. Further, two real estate investment funds who are landlords of SQS offices at Cologne are considered to be related parties as these entities are controlled by one supervisory board member and employees of SQS AG.

 

Except as disclosed above, there have been no changes in the composition of the members of the Management and Supervisory Board in the reporting half-year period compared to 31 December 2015.

 

The following related party transactions have taken place:

Mr. Vos, Mr. Gawron and some of the members of the supervisory board and their relatives received dividends as shareholders of SQS AG. At the date the dividends were paid Mr. Vos and Mr. Gawron held 0.2 % and the members of the supervisory board and their relatives held 12.0% of the shares in SQS AG.

 

SQS uses property owned by the closed real estate investment fund "S.T.O.L. Immobilien Verwaltung GmbH & Co. KG", Cologne, and the real estate investment fund "Immobilienfond Am Westhover Berg GbR mbH", Cologne. The shares in these companies are held by supervisory board members, employees and former management board members of SQS AG. The contractual conditions of the lease terms are based on market prices. The total expenses incurred under these contracts amounted in the interim period to €345k (at mid-year 2015: €451k).

 

The total emoluments of the management board members in the interim period ended 30 June 2016 amounted to €798k (at mid-year 2015: €1,235k).

 

The emoluments of the supervisory board members amounted in total to €168k (at mid-year 2015: €168k), of which €168k have not yet been paid by the end of the interim period.

 

Cologne, 05 September 2016

SQS Software Quality Systems AG






D.Vos


R. Gawron


R. Gillessen

SQS Software Quality Systems AG

Stollwerckstrasse 11

D-51149 Cologne

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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