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SQS Software Quality (SQS)

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Wednesday 13 September, 2017

SQS Software Quality

Half Year Report

RNS Number : 5638Q
SQS Software Quality Systems AG
13 September 2017
 

13 September 2017

 

SQS Software Quality Systems AG

("SQS" or the "Company")

 

Results for the six months ended 30 June 2017

 

 

SQS Software Quality Systems AG (AIM: SQS), the leading global provider of quality assurance services for digital business processes, today announces its unaudited results for the six months ended 30 June 2017.

 

These first half results further demonstrate progress in implementing the Company's medium term strategy to help customers migrate towards a more digital focused business model. In pursuing this strategy, SQS intends to deliver sustainable improvements in gross margin, adj. EBIT and the annual dividend distribution, which is evidenced in the numbers presented here.

 

 

Financial Highlights

 

·      Total revenue decreased 3.9% to €160.1m (H1 2016: €166.6; H2 2016: €160.5m)

At constant currencies, revenue would have been €1.7m higher at €161.8m

Decrease due to one banking client loss of €7.0m

 

·      Gross margin improved by 90bps to 32.6% reflecting more efficient and automated service delivery

 

·      Adjusted* gross profit decreased 1.1% to €52.2m (H1 2016: €52.8m)

 

·      Adjusted* EBIT increased by 5.4% to €12.1m (H1 2016: €11.5m)

Reflecting improved gross margin, continued focus on improved operating profit margins and strict cost management

Adj. EBIT margin increased to 7.5% (H1 2016: 6.9%)

 

·      Adjusted* PBT increased by 7.9% to €12.8m (H1 2016: €11.9m)

Includes a net positive finance result (net interest and realised forex results of €0.7m, H1 2016: €0.4m)

 

·      Adjusted EPS* increased by 18.2% to €0.26 (H1 2016: €0.22)

Driven by better operational profitability, a lower local GAAP tax rate and a positive effect from a lower minority profit share

 

·      Operating cash outflow at €(6.6)m (H1 2016: €(1.2)m)

Reflecting typical H1 seasonality from bonus pay outs and deferral of larger client invoicing and payments to H2

Full year expecting another year of strong EBITDA to operating cash flow conversion

 

·      Net debt €32.6m (at as 31 Dec 2016: net debt €12.4m, as at 30 June 2016: net debt €32.9m)

Reflecting effects from operating cash outflow, normalised capex outflow of €4.0m and dividend payments of €4.8m during H1

 

(*) Notes regarding adjustments can be found in the financial review section.

 

 

Operational Highlights

 

·      A number of new clients secured in H1 with further contracts expected to begin in the second half of the year

 

·      Momentum within Management Consulting ("MC") continued during the first half of 2017, now accounting for 18.8% of total revenues in H1 (H1 2016: 17.2%) 

 

·      Continued demand for Managed Services ("MS") offering (now at 46% of revenues, H1 2016 at 47%), including a €4.0m contract with a European online payments processing business

 

·      More than 52% of total revenues now derived from "digital" engagements where SQS executes on a digital strategy or transformation to open up new business models (up from 40% of total revenues in the year to 31 December 2016)

 

·      Improved operational efficiency through more consistent use of automation in project delivery

 

·      Healthy pipeline including opportunities across all major industries

 

 

Diederik Vos, Chief Executive Officer of SQS, commented:

 

"SQS continues to deliver on its strategy to equip its clients with best in class digital transformation services. This can be seen in solid gross margin and EBIT growth, a clear product of our continued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

 

We are seeing healthy demand for our service offering, with continued good performance across all our verticals - including our core technology and automotive sectors - and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company's approach, expertise and product set.  As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolving regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

 

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency headwinds. With an exciting market, a good pipeline and an improving EBIT margin we have a great opportunity to continue growing the returns to shareholders."

 

 

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 provider of quality assurance services for digital business processes. This position stems from over 35 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, industrialised automation processes and deep domain knowledge in various industries. Headquartered in Cologne, Germany, the company now employs approximately 4,400 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 2016, SQS generated revenues of €327.1 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, SQS has a strong client base, including half of the DAX 30, nearly a third of the EURO STOXX 50 and 20 per cent of the FTSE 100 companies.  

 

For more information, see www.sqs.com

 

 

Chief Executive's Statement

 

Introduction

 

Through digitisation and exciting advances in technology, the global business environment continues to evolve, and that shift also includes the space that SQS occupies.

 

SQS is helping to make customers more agile to the challenge by increasing the speed of new technology deployment, adding greater process automation, ultimately helping to create new revenue opportunities and recognise better returns on investment.

 

Recent high profile IT incidents have increased the pressure on companies to ensure that digital infrastructure is robust, secure and able to adapt to meet future business needs. Decisions around what level of digital transformation to undertake and how to ensure the continuous quality and integrity of those new systems therefore become increasingly important.  SQS, through its Management Consulting and Managed Services capabilities, is well positioned to support companies in these important areas.

 

At the same time, and because digital systems themselves change more frequently, there is growing demand for more efficient, automated and smarter processes for implementing quality assured software. 

 

It is this growing operational agility and intelligence that SQS, mainly through its MC and MS offerings, but also through its Professional Services ("PS") capabilities, is offering to customers across all end-markets.

 

As outlined in the 3 July trading update, MC will become the growth engine as customer demands shift towards solutions to deploy new digital environments and ultimately deliver the quality assurance for these. To respond effectively to the changing environment, SQS continues to look to, and invest in, process automation, which remains at a relatively early stage of reaching its full potential, to deliver its services more efficiently and profitably.

 

Our focus is on increased profitability from operations and, in the medium term, SQS expects to be able to deliver organically an adjusted EBIT margin of at least 9% and corresponding operating cash flow improvements - the two key metrics we use to measure successful progress.

 

New Business

 

We are seeing strong demand for MC services across a number of sectors, and are pleased to have secured new clients that are among some of the world's best known global technology brands, operating at the cutting edge of digital and technology trends. Demand within automotive and manufacturing remains particularly high as the necessity for reliable, quality assured, cutting edge software capable of enabling the introduction of connected and autonomous cars is expected to grow.

 

MS has accounted for 45.8% of total revenues in H1 2017 (H1 2016: 46.6%). The slight decline seen in the first half was largely due to the reduced mandate from one major banking client (as announced previously).  We continue to see good demand for our MS offering, evidenced by the award of a €4.0m MS contract from a European online payments processing business keen to optimise the manner in which it approaches quality assurance, and by further interest being demonstrated in the retail and logistics sectors.

 

In line with our strategy PS delivered 27.8% of revenues (H1 2016: 29.2%).

 

  

Regional Performance

 

Europe continues to be a significant growth market.  As the shift to digital systems takes hold in Europe, this opens up particular opportunities for growth where we already enjoy strong existing customer relationships and brand awareness. This is particularly the case in our core geographies of Germany, Ireland and Italy where we have made good progress, experiencing solid net organic growth. 

 

The US remains a key geography for us, given its position as the largest single addressable software quality and consulting services market.  As expected, revenue share from the US in H1 2017 was marginally down year-on-year at 15.0% of total revenue (H1 2016: 17.0%) as some of the key industries in which SQS is active in the US remain subdued.  Following recent market uncertainty we have seen businesses in the US delay making business decisions, particularly in healthcare and financial services, whilst some policy and regulatory frameworks remain uncertain under the current government.  At the same time we have won a number of initial contracts with US technology businesses which are expected to contribute to growth in the second half and beyond. The Company's acquisitions have given SQS the capabilities and brand awareness needed to drive future growth in this key geography.  

 

Strategy

 

SQS continues to deliver on its strategy to remain at the centre of digital transformation and, in doing so, support its clients across all stages in their shift to automation and digitisation, chiefly in:

 

·      assessing their digital readiness

·      shaping their digital strategy and ensuring its effective deployment

·      aligning software quality with business strategy

·      ensuring the continuous quality and integrity of the software once deployed

 

As we innovate and expand our services portfolio, we continue to increase the breadth of our capabilities and grow the scale of our service offering, to best cater to the needs of our clients. This includes deploying faster and better performing technology, and implementing process automation across the organisation, to open up new revenue streams and greater operational efficiencies for the businesses we work with. 

 

We are focussed on continuing to drive up profitability from our operations and believe we can achieve this organically to deliver an improved EBIT margin and operating cash flow.  Whilst we continue to integrate our US acquisitions, new acquisition opportunities are likely to be more focussed on Europe where they are expected to further strengthen the Company's offering for its clients.

 

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 2017, in line with our current policy of paying out approximately 30% of adjusted profit after tax as a dividend.

 

Employees  

 

Total headcount as at 30 June 2017 was 4,402 (30 June 2016: 4,612), with an additional circa 240 contractors retained during the period. This is in line with revenue development and reflects our continued focus on delivering an increasingly automated service to our clients. Further operational efficiencies can be expected.

 

Outlook

 

SQS continues to deliver on its strategy to equip its clients with best in class digital transformation services. This can be seen in solid gross margin and EBIT growth, a clear product of our continued focus on increasing profitability through our consistently improving service delivery and shift to higher margin MC projects, which will drive future growth.

 

We are seeing healthy demand for our service offering, with continued good performance across all our verticals - including our core technology and automotive sectors - and we are excited about the increasing breadth of our addressable market, as a result of the quality of the Company's approach, expertise and product set.  As an increasing number of businesses seek to use smarter, more automated processes to boost operational efficiency, meet evolving regulatory standards and remain competitive, the Company is well positioned to capitalise on favourable industry trends over the next few years.

 

Looking ahead, SQS expects H2 2017 revenues to be above H1, despite current currency headwinds. With an exciting market, a good pipeline and an improving EBIT margin we have a great opportunity to continue growing the returns to shareholders.

 

 

Diederik Vos

Chief Executive Officer

13 September 2017

 

 

Financial Review H1 2017

 

Summary

 

Revenues of €160.1m have remained at largely the same level as H2 2016, which represents a decline of 3.9% to H1 2016 (H2 2016 €160.5m, H1 2016: €166.6m), including a negative revenue impact from translational forex of €1.7m and the effect of one banking client loss of €7.0m.

 

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

 

·      Our Managed Services (MS) business unit meets the demand of clients seeking efficiency in long-term engagements (between twelve months and five years) of which a substantial share is delivered from nearshore and offshore delivery centres. This also includes long term engagements for quality assurance services on standard software package products. MS continues to perform well, generating good quality of earnings for the Group;

 

·      Our Management Consulting (MC) business unit meets the demand of clients seeking transformation and quality through IT Portfolio Programme and Project Management, Digital Transformation Consulting, Business & Enterprise Architecture, Process Modelling and Business Analysis. Our MC services portfolio offers strong opportunities for growth and opens broader addressable markets;

 

·      Our Professional Services (PS) business unit meets 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 €73.4m in the period (H1 2016: €77.6m), a decrease of (5.4)% on the prior year, representing 46% of Group revenue. The decrease in revenue predominantly came from the scope reduction of a larger banking managed services contract that had ended last year.

 

Management Consulting (MC)

Revenue in this segment, our other strategic focus area, saw an increase during the period of 5.2% to €30.1m (H1 2016: €28.6m), representing 19% of Group revenue, up from 17% at H1 2016. Growth for this segment was mainly driven by organic growth and a build up of MC business in the key European markets.

 

Professional Services (PS)

Revenue in this segment decreased by (8.4)% to €44.5m (H1 2016: €48.6m) on the prior year period, representing 28% of Group revenue. The revenue reduction has been in line with our strategy to continue to reduce the share of this lower margin segment to a range of around 25% of our total revenue.

 

Other

Revenue in the "Other" segment amounted to €12.1m in the period (H1 2016: €11.8m), an increase of 2.5% on the prior year and representing 7% of Group revenue. A slight increase in revenue from contractors was the key driver for this development.

 

Margins and Profitability

 

Operating profits and margins were adjusted(*), as in all previous reporting periods, by the following non-cash items and acquisition costs:

 

·      Adjustment on gross profit:

€0.33m for amortisation of order backlog of acquired companies

·      Adjustment on G&A costs:

€0.70m for amortisation of client relationship of acquired companies

€0.25 for acquisition costs

 

The above adjustments account for the difference between reported EBIT of €10.8m and Adjusted EBIT of €12.1m.  Further adjustments are made to the reported finance costs and tax charge as below, in order to derive Adjusted PBT and Adjusted Earnings respectively:

 

·      Adjustment on finance result:

€0.3m for pro forma interests on deferred payments for acquisitions

·      Adjustment on taxes:

€(0.6)m profit tax adjustment, as actual local GAAP profit taxes are higher than IFRS taxes including deferred taxes

 

Adjusted* gross profit decreased by 1.1% to €52.2m (H1 2016: €52.8m), with the gross margin up to 32.6% (H1 2016: 31.7%). The improvement in gross margin was driven by an increased blended contribution from MS and MC that deliver higher client value and better margins in the range above 36%. Gross margins in the PS segment also slightly improved to 27.6% (H1 2016: 27.0%).

 

Gross margins in the "Other" segment were at 20.1% (H1 2016: 16.7%) reflecting an improved  contractor gross margin and a lower share from tool licences re-selling.

 

Adjusted* earnings before interests and taxes (adj. EBIT) for the period was €12.1m (H1 2016: €11.5m), an increase of 5.4%, with the adjusted EBIT margin at 7.5% (H1 2016: 6.9%). The adj. EBIT was driven by a blended gross margin of about 36% in MS, MC and an increased share from these two strategic business lines of 65% of total revenue (H1 2016: 64% of total revenue).

 

Adjusted* profit before tax for the period was €12.8m (H1 2016: €11.9m), an increase of 7.9%, with the adjusted profit margin at 8.0% (H1 2016: 7.1%). The profit before tax was driven by the effects mentioned under EBIT above, and a slightly improved finance result from lower net interest costs and better net realised exchange rate gains.

 

Adjusted* earnings per share were €0.26 (H1 2016: €0.22) resulting from the above outlined improvements in margins and finance results and a positive effect from a reduced minority profit share mainly from SQS India BFSI of €(0.8)m (H1 2016: €(1.3)m).

 

Costs

 

Total overhead costs (adjusted for the non-finance effects under * above) moved up to 25.1% of revenue from 24.8% in H1 2016 due to lower revenues, but overall costs came down by €1.2m.

 

General & Administrative expenses (adjusted for the non-finance effects under * above) for the period were €26.2m (H1 2016: €27.9m). As a percentage of revenue these costs remained flat at 16.8% (H1 2016: 16.7%). The absolute reduction was mainly due to better operational efficiencies and the increased global use of shared services.

 

Sales & Marketing costs for the period were €11.7m (H1 2016: €11.7m), representing 7.3% of revenues (H1 2016: 7.0%).

 

Research & Development expenses during the period were up at €2.3m (H1 2016: €1.7m) representing 1.4% (H1 2016: 1.0%) of revenues. This investment was focused on the development of our proprietary software testing tools, the PractiQ methodology and new platforms around predictive quality analytics. Our research technology centre in Belfast was expanded during the period to improve the competitive positioning of SQS services with more intellectual property. We expect to maintain this slightly increased level of R&D spend going forward.

 

Finance Income and Costs

 

Net finance income of €0.4m comprises net interest costs of €(0.7)m offset by foreign exchange net gains of €1.1m

 

 

Cash Flow and Financing

 

Cash outflow from operating activities was at €(6.6)m (H1 2016: €(1.2)m outflow). This profile of an operating cash outflow during the first half is due to the typical seasonality we have seen in previous first half year periods, reflecting payment of staff bonuses and the usual seasonal increase in debtor days (which increased to 81 as compared to 70 at the end of 2016 and 77 days at mid-2016). We therefore expect an improved cash collection and full EBITDA to operating cash conversion by the end of the full year, as in previous years.

 

We have also during the period adopted a significantly accelerated month end accounts closing timetable which results in increased levels of work-in-progress and a corresponding decrease in trade debtors. This has no impact on the actual billing of customers or the timing of cash receipts.

 

Cash outflow from investments came down to €(4.0)m (H1 2016: €(6.3)m outflow), as no payments for acquisitions or building infrastructure investments were due. The current level of investment is largely a "normalised" level for IT infrastructure and R&D spend.

 

Total cash inflow from financing activities was €9.6m (H1 2016: €7.2m inflow) reflecting a net increase in finance loans of €14.3m during H1 2017, mainly to fund the outflow from operating and investment activities. Additionally dividend payments to SQS Group shareholders resulted in an outflow of €(4.8)m (H1 2016: €(4.1)m outflow).

 

Balance Sheet

 

We closed the period with €23.9m (31 Dec 2016: €29.8m) of cash and cash equivalents on the balance sheet and borrowings of €56.5m (31 Dec 2016: €42.2m). The increase in borrowings was mainly due to fund the seasonal first half requirements from working capital and dividend payments. Cash reserves are held in a broader range of currencies and the transfer of funds is restricted in some geographies, such as 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 €(32.6)m (31 Dec 2016: net debt of €(12.4)m; 30 June 2016: net debt of €(32.9)m).

 

SQS has borrowing facilities with four main banks and additionally continues to have local overdraft facilities in some countries. In total its facilities with the four main banks are now €83m and are in place until 2021. These facilities are subject to customary covenants, are not secured and the borrowing costs are lower than historically.

 

For the acquired companies Bitmedia, Trissential and Galmont, intangible assets for client relationships and order backlog with a fair value of €8.6m were recognised in the 30 June 2017 balance sheet, reflecting a further amortisation of €1.0m during the period. On average these intangible assets are amortised over a period of up to nine years.

 

In total goodwill and intangible assets from the acquired companies came down to €84.6m in the H1 2017 balance sheet (YE 2016: €89.1m) resulting from the aforementioned amortisation and forex adjustments of recognised goodwill.

 

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

 

Taxation

 

The tax charge of €3.1m (H1 2016: €2.3m) includes current tax expenses of €3.7m (H1 2016: €3.7m) and deferred tax income of €(0.6)m (H1 2016: €(1.4)m). The tax rate on local GAAP results was 28.9% (H1 2016: 31.0%), 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. 29%.

 

Foreign Exchange

 

Approximately 61.7% (H1 2016: 55.2%) of the Group's turnover is generated in Euro. For the conversion of revenues and costs generated in other currencies into Euro, the relevant official average exchange rate for the first six-month-period of 2017 was applied. For the conversion of the balance sheet items from other currencies into Euro, the official exchange rate as at 30 June 2017 was used.

 

Foreign exchange had a €0.3m positive translational impact on earnings for the period. Had the Pound Sterling/Swiss Franc/Indian Rupee/Swedish Krona/Egyptian Pound/US-$/Euro exchange rates remained the same as in H1 2016, our non-Euro revenues for the period would have been €1.7m higher and the adj. EBIT would have been €0.3m lower.

 

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 mandatory at 30 June 2017.

 

The SQS Group Consolidated Financial Statements for the 6-month period ended 30 June 2017 were prepared in accordance with uniform accounting and valuation principles in Euro.

 

 

Rene Gawron

Chief Financial Officer

13 September 2017

 

 

Consolidated Income Statement

for the six months ended 30 June 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended 30 June 2016

 

Year ended 31 December 2016

 

 

(Notes)

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

 

 

 

 

 

 

 

 

 

 

k€

 

k€

 

k€

 

 

 

 

 

 

 

 

 

Revenue

 

 

 

160,134

 

166,623

 

327,103

 

 

 

 

 

 

 

 

 

Cost of sales

 

(3)

 

108,222

 

114,533

 

223,482

 

 

 

 

 

 

 

 

 

Gross profit

 

 

 

51,912

 

52,090

 

103,621

 

 

 

 

 

 

 

 

 

General and administrative expenses

 

(3)

 

27,142

 

31,350

 

61,981

Sales and marketing expenses

 

(3)

 

11,678

 

11,745

 

23,898

Research and development expenses

 

(3)

 

2,306

 

1,745

 

4,154

 

 

 

 

 

 

 

 

 

Profit before  amortisation, tax and finance costs (EBIT)

 

 

 

10,786

 

7,250

 

13,588

 

 

 

 

 

 

 

 

 

Amortisation of goodwill

 

 

 

0

 

0

 

5,600

 

 

 

 

 

 

 

 

 

Profit before tax and finance costs (EBIT)

 

 

 

10,786

 

7,250

 

7,988

 

 

 

 

 

 

 

 

 

Finance income

 

 

 

1,750

 

1,197

 

9,754

Finance costs

 

 

 

1,332

 

1,281

 

3,002

Net finance income (costs)

 

(4)

 

418

 

-84

 

6,752

 

 

 

 

 

 

 

 

 

Profit before taxes (EBT)

 

 

 

11,204

 

7,166

 

14,740

 

 

 

 

 

 

 

 

 

Income tax expense

 

(5)

 

3,089

 

2,276

 

4,231

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

 

8,115

 

4,890

 

10,509

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

Owners of the parent

 

(6)

 

7,282

 

4,478

 

10,004

Non-controlling interests

 

(13)

 

833

 

412

 

505

 

 

 

 

 

 

 

 

 

Consolidated profit for the period

 

 

 

8,115

 

4,890

 

10,509

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings per share, undiluted (€)

 

(6)

 

0.23

 

0.14

 

0.32

 

 

 

 

 

 

 

 

 

Earnings per share, diluted (€)

 

(6)

 

0.22

 

0.13

 

0.30

 

 

 

 

 

 

 

 

 

Adjusted earnings per share (€), for comparison only

 

(6)

 

0.26

 

0.22

 

0.47

 

 

 

 

 

 

 

 

 

 

 

Consolidated Statement of Comprehensive Income

for the six months ended 30 June 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended 30 June 2017

 

Six months ended 30 June 2016

 

Year ended 31 December 2016

 

 

 

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

 

k€

 

k€

 

k€

 

 

 

 

 

 

 

 

 

 

Profit for the period

 

 

8,115

 

4,890

 

10,509

 

 

 

 

 

 

 

 

 

 

Exchange differences on translating foreign operations

 

 

-4,259

 

-6,189

 

-6,431

 

 

 

 

 

 

 

 

 

 

Gains / losses arising from cash flow hedges

 

 

15

 

63

 

86

 

 

 

 

 

 

 

 

 

 

Other comprehensive income to be reclassified

 

 

 

 

 

 

 

 

to profit or loss in subsequent periods

 

 

-4,244

 

-6,126

 

-6,345

 

 

 

 

 

 

 

 

 

 

Re-measurement losses on defined benefit plans

 

 

0

 

0

 

1,651

 

 

 

 

 

 

 

 

 

 

Other comprehensive income not being reclassified

 

 

 

 

 

 

 

 

to profit or loss in subsequent periods

 

 

0

 

0

 

1,651

 

 

 

 

 

 

 

 

 

 

Other comprehensive income for the period, net of tax

 

-4,244

 

-6,126

 

-4,694

 

 

 

 

 

 

 

 

 

 

Total comprehensive income for the period, net of tax

 

3,871

 

-1,236

 

5,815

 

 

 

 

 

 

 

 

 

 

Attributable to:

 

 

 

 

 

 

 

 

Owners of the parent

 

 

2,961

 

-2,086

 

4,907

 

Non-controlling interests

 

 

910

 

850

 

908

 

 

 

 

 

 

 

 

 

 

                         

 

 

Consolidated Statement of Financial Position

as at 30 June 2017 (IFRS)

 

 

 

 

30 June 2017

 

30 June 2016

 

31 December 2016

 

 

(Notes)

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

 

k€

 

k€

 

k€

Current assets

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

 

23,919

 

26,399

 

29,824

Trade receivables

 

 

 

50,292

 

61,360

 

56,424

Other receivables

 

 

 

10,950

 

6,880

 

7,207

Work in progress

 

 

 

36,812

 

23,546

 

17,207

Income tax receivables

 

 

 

3,172

 

1,931

 

3,261

 

 

 

 

125,145

 

120,116

 

113,923

 

 

 

 

 

 

 

 

 

Non-current assets

 

 

 

 

 

 

 

 

Intangible assets

 

(7)

 

22,198

 

23,378

 

23,121

Goodwill

 

(7)

 

75,916

 

87,389

 

78,860

Property, plant and equipment

 

(8)

 

15,987

 

16,517

 

16,711

Financial assets

 

 

 

30

 

33

 

30

Income tax receivables

 

 

 

192

 

1,339

 

285

Deferred tax assets

 

 

 

5,689

 

5,443

 

5,615

 

 

 

 

120,012

 

134,099

 

124,622

 

 

 

 

 

 

 

 

 

Total Assets

 

 

 

245,157

 

254,215

 

238,545

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

Bank loans and overdrafts

 

(9)

 

55,215

 

59,062

 

41,119

Finance lease

 

 

 

0

 

63

 

0

Trade payables

 

 

 

7,450

 

6,038

 

9,834

Other provisions

 

 

 

0

 

0

 

0

Income tax accruals

 

 

 

3,049

 

5,176

 

2,573

Other current liabilities

 

(10)

 

41,657

 

40,500

 

45,294

 

 

 

 

107,371

 

110,839

 

98,820

 

 

 

 

 

 

 

 

 

Non-current liabilities

 

 

 

 

 

 

 

 

Bank loans

 

(9)

 

1,275

 

250

 

1,058

Finance lease

 

 

 

110

 

54

 

115

Other provisions

 

 

 

0

 

0

 

0

Pension provisions

 

 

 

3,793

 

5,927

 

4,034

Deferred tax liabilities

 

 

 

5,399

 

6,548

 

6,136

Other non-current liabilities

 

(10)

 

8,288

 

16,077

 

8,845

 

 

 

 

18,865

 

28,856

 

20,188

 

 

 

 

 

 

 

 

 

Total Liabilities

 

 

 

126,236

 

139,695

 

119,008

 

 

 

 

 

 

 

 

 

Equity

 

(11)

 

 

 

 

 

 

Share capital

 

 

 

31,676

 

31,676

 

31,676

Share premium

 

 

 

57,148

 

56,686

 

56,902

Statutory reserves

 

 

 

53

 

53

 

53

Other reserves

 

 

 

-10,790

 

-6,293

 

-6,469

Retained earnings

 

 

 

31,593

 

21,884

 

29,062

Equity attributable to owners of the parent

 

 

109,680

 

104,006

 

111,224

 

 

 

 

 

 

 

 

 

Non-controlling interests

 

(13)

 

9,241

 

10,514

 

8,313

Total Equity

 

 

 

118,921

 

114,520

 

119,537

 

 

 

 

 

 

 

 

 

Equity and Liabilities

 

 

 

245,157

 

254,215

 

238,545

 

 

Consolidated Statement of Cash Flows

 

 

for the six months ended 30 June 2017 (IFRS)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended 30 June 2017

 

Six months ended 30 June 2016

 

Year ended 31 December 2016

 

 

(Notes)

 

(unaudited)

 

(unaudited)

 

(audited)

 

 

 

 

k€

 

k€

 

k€

Net cash flow from operating activities

 

 

 

 

 

 

 

 

Profit before taxes

 

 

 

11,204

 

7,166

 

14,740

Add back for

 

 

 

 

 

 

 

 

Depreciation and amortisation

 

(3)

 

4,384

 

7,708

 

15,824

Loss on the sale of property, plant and equipment

 

 

110

 

269

 

309

Other non-cash income not affecting payments

 

 

 

2,185

 

2,368

 

-2,455

Net finance costs

 

(4)

 

-418

 

84

 

-1,253

Operating profit before changes in the net current assets

 

17,465

 

17,595

 

27,165

 

 

 

 

 

 

 

 

 

Increase / Decrease in trade receivables

 

 

 

6,132

 

-267

 

4,669

Increase / Decrease in work in progress and other receivables

-23,127

 

-8,970

 

-2,276

Decrease / Increase in trade payables

 

 

 

-2,384

 

-4,479

 

-683

Decrease / Increase in pension provisions

 

 

 

-40

 

215

 

83

Decrease / Increase in other liabilities and deferred income

 

-4,661

 

-5,261

 

2,279

Cash flow from operating activities

 

 

 

-6,615

 

-1,167

 

31,237

 

 

 

 

 

 

 

 

 

Interest payments

 

(4)

 

-455

 

-594

 

-1,386

Tax payments

 

(5)

 

-3,713

 

-4,062

 

-8,037

Net cash flow from operating activities

 

 

 

-10,783

 

-5,823

 

21,814

 

 

 

 

 

 

 

 

 

Cash flow from investment activities

 

 

 

 

 

 

 

 

Purchase of intangible assets

 

 

 

-3,085

 

-3,763

 

-8,515

Purchase of property, plant and equipment

 

 

 

-972

 

-2,602

 

-3,299

Purchase of net assets of acquired companies

 

 

 

0

 

-3

 

0

Interest received

 

(4)

 

49

 

112

 

398

Net cash flow from investment activities

 

 

 

-4,008

 

-6,256

 

-11,416

 

 

 

 

 

 

 

 

 

Cash flow from financing activities

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

-4,751

 

-4,118

 

-4,118

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

18

 

330

 

345

Payments for the acquisition of non-controlling interests

 

 

 

0

 

0

 

-10,403

Dividends paid to non controlling interests

 

 

 

0

 

0

 

-2,274

Repayment of finance loans

 

(9)

 

-6,058

 

-12,618

 

-26,152

Increase of finance loans

 

(9)

 

20,371

 

34,041

 

30,440

Payments to minority shareholders from put option

 

 

 

0

 

-10,403

 

0

Redemption of finance lease contracts

 

 

 

-25

 

0

 

-116

Net cash flow from financing activities

 

 

 

9,555

 

7,232

 

-12,278

 

 

 

 

 

 

 

 

 

Change in the level of funds affecting payments

 

 

 

-5,236

 

-4,847

 

-1,880

Changes in cash and cash equivalents due to exchange rate movements

 

 

 

-669

 

-743

 

-286

Cash and cash equivalents

 

 

 

 

 

 

 

 

at the beginning of the period

 

 

 

29,824

 

31,990

 

31,990

Cash and cash equivalents

 

 

 

 

 

 

 

 

at the end of the period

 

 

 

23,919

 

26,400

 

29,824

 

Consolidated Statement of Changes in Equity 

 

 

 

for the six months ended 30 June 2017 (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 2015 (audited)

31,676

 

56,478

 

53

 

-1,693

 

-201

 

2,165

 

21,524

 

110,002

 

9,335

 

119,337

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

-4,117

 

-4,117

 

 

 

-4,117

Transactions with owners of the parent

 

 

 

 

 

 

 

 

 

 

 

 

-4,117

 

-4,117

 

 

 

-4,117

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

 

21,885

 

104,007

 

10,514

 

114,521

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

-2,274

 

-2,274

Capital increase out against contribution in kind

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

15

 

15

Transactions with owners of the parent

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

0

 

-2,259

 

-2,259

Business combinations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

0

 

0

Capital increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

0

Acquisition of non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

0

Share-based payments

 

 

216

 

 

 

 

 

 

 

 

 

 

 

216

 

 

 

216

Profit for the period

 

 

 

 

 

 

 

 

 

 

 

 

5,526

 

5,526

 

93

 

5,619

Exchange differences on translating foreign operations

 

 

 

 

 

 

 

 

 

 

-207

 

 

 

-207

 

-35

 

-242

Re-measurement gains on defined benefit plans

 

 

 

 

 

 

 

 

 

 

 

 

1,651

 

1,651

 

 

 

1,651

Gains arising from cash flow hedges

 

 

 

 

 

 

 

 

23

 

 

 

 

 

23

 

 

 

23

Other changes

 

 

 

 

 

 

8

 

 

 

 

 

 

 

8

 

 

 

8

Total comprehensive income

 

 

 

 

 

 

 

 

23

 

-207

 

7,177

 

6,993

 

58

 

7,051

31 December 2016 (audited)

31,676

 

56,902

 

53

 

-1,685

 

-115

 

-4,669

 

29,062

 

111,224

 

8,313

 

119,537

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends paid

 

 

 

 

 

 

 

 

 

 

 

 

-4,751

 

-4,751

 

 

 

-4,751

Transactions with owners of the parent

 

 

 

 

 

 

 

 

 

 

 

 

-4,751

 

-4,751

 

 

 

-4,751

Business combinations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

0

Acquisition of subsidiary

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

0

Capital increase

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

18

 

18

Acquisition of non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

 

 

0

Share-based payments

 

 

246

 

 

 

 

 

 

 

 

 

 

 

246

 

 

 

246

Profit for the period

 

 

 

 

 

 

 

 

 

 

 

 

7,282

 

7,282

 

833

 

8,115

Exchange differences on translating foreign operations

 

 

 

 

 

 

 

 

 

 

-4,336

 

 

 

-4,336

 

77

 

-4,259

Gains arising from cash flow hedges

 

 

 

 

 

 

 

 

15

 

 

 

 

 

15

 

 

 

15

Total comprehensive income

 

 

 

 

 

 

 

 

15

 

-4,336

 

7,282

 

2,961

 

910

 

3,871

30 June 2017 (unaudited)

31,676

 

57,148

 

53

 

-1,685

 

-100

 

-9,005

 

31,593

 

109,680

 

9,241

 

118,921

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

                                           

 

 

Notes to the interim consolidated financial statements (unaudited)

at 30 June 2017

 

 

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 2017. The interim consolidated financial statements for the six months ended 30 June 2017 have been prepared in accordance with IAS 34 Interim Financial Reporting. The Interim Consolidated Financial Statements have neither been audited nor reviewed.

 

The accounting policies applied preparing the Interim Consolidated Financial Statements 2017 are consistent with those used for the Consolidated Financial Statements at 31 December 2016.

 

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 the 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 2016.

 

 

New Standards, Interpretations and Amendments

 

The accounting policies adopted in the preparation of the interim consolidated financial statements are consistent with those followed in the preparation of the Group's annual consolidated financial statements for the year ended 31 December 2016, except for the adoption of new standards effective as of 1 January 2017. The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

The following changes to Standards and Interpretations published by the IASB are effective generally since 1 January 2017. The European Union has not endorsed the following standards and therefore these are not yet applicable for SQS:

 

IAS 7    Statement of Cash Flows - Disclosure Initiative (Amendment)

 

IAS 12  Recognition of Deferred Tax Assets for Unrealised Losses (Amendment)

 

Annual Improvements Cycle 2014 - 2016 Amendments to IFRS 12 Disclosure of Interests in Other Entities: Clarification of the scope of disclosure requirements in IFRS 12.

 

The Group does not expect significant impacts on its Consolidated Financial Statements.

 

 

Recent accounting pronouncement, not yet adopted

 

In July 2014, the IASB issued IFRS 9 Financial Instruments. The new standard is effective for annual reporting periods beginning on or after 1 January 2018, while early application is permitted. The Group will adopt IFRS 9 for the fiscal year beginning as of 1 January 2018. The amendments and improvements will not have any material impact on the consolidated financial statements of SQS Group.

 

In May 2014, the IASB issued IFRS 15 Revenue from Contracts with Customers. IFRS 15 supersedes IAS 11 Construction Contracts and IAS 18 Revenue as well as related interpretations. The standard is effective for annual periods beginning on or after 1  January 2018; early application is permitted. The Group will adopt the standard for the fiscal year beginning as of 1 January 2018. Currently, it is expected that changes in the total amount of revenue to be recognised for a customer contract will be very limited. Besides, changes to the Statement of Financial Position are expected, e.g. separate line items for contract assets and contract liabilities will be required, and quantitative and qualitative disclosures will be added. The Group does not expect significant impacts on its Consolidated Financial Statements.

 

In January 2016, the IASB issued IFRS 16 Leases. IFRS 16 is effective for annual periods beginning on or after 1 January 2019; earlier application is permitted if IFRS 15 is already applied.  The Group is currently assessing the impact of adopting IFRS 16 on the Group's Consolidated Financial Statements and will adopt the standard for the fiscal year beginning as of 1 January 2019.

 

 

Basis of consolidation

 

As at 30 June 2017, 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 2017

Six month ended 30 June 2016

Year ended 31 December 2016

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

100.0

100.0

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

53.84

53.95

53.9

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

Italy

90.0

90.0

90.0

Trissential LLC, Waukesha (Wisconsin)

USA

100.0

100.0

100.0

SQS North America LLC (previously: Galmont Consulting LLC), Chicago (Illinois)

USA

100.0

100.0

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 each has a main impact on the financial data of the group.

 

 

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

 

·      the assumptions regarding the fair value of assets and liabilities from business combinations

 

There have been no changes in estimates compared to the year 2016.

 

 

2.         Segmental reporting

 

Based on the organisational structure and the different services rendered, SQS Group operates 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 substantial 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), COO (Chief Operations Officer) and Executive Director Management Consulting 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 Portfolio Management, Marketing, Finance & Administration, IT and Human Resources.

 

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 2017 and 30 June 2016 and for the year ended 31 December 2016, respectively.

 

 

Six month ended

30 June 2017 (unaudited)

MS

MC

PS

Other

Total

 

€k

€k

€k

€k

€k

Revenues

73,438

30,094

44,505

12,097

160,134

Segment profit (gross profit)

26,833

10,698

11,949

2,431

51,912

Non-allocated costs

 

 

 

 

(41,126)

EBIT

 

 

 

 

10,786

Financial result

 

 

 

 

418

Taxes on income

 

 

 

 

(3,089)

Result for the period

 

 

 

 

8,115

 

 

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

 

 

Year ended 31

December 2016 (audited)

MS

MC

PS

Other

Total

 

€k

€k

€k

€k

€k

Revenues

146,411

57,317

93,409

29,966

327,103

Segment profit (Gross profit)

52,708

19,946

24,660

6,307

103,601

Non-allocated costs

 

 

 

 

(90,033)

Amortisation of goodwill

 

 

 

 

(5,600)

EBIT

 

 

 

 

7,988

Financial result

 

 

 

 

6,752

Taxes on income

 

 

 

 

(4,231)

Result for the period

 

 

 

 

10,509

 

 

3.         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 2017 amounted to €12,948k (at mid-year 2016: €12,254k). 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 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

 

 

 

 

 

 

 

Wages and salaries

 

95,676

 

100,654

 

196,197

Social security contributions

 

11,570

 

12,106

 

23,681

Expenses for retirement benefits

 

2,644

 

2,194

 

5,120

Total

 

109,890

 

114,954

 

224,998

 

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 2017 amounted to €4,384k (at mid-year 2016: €7,709k). Of this, €1,684k (at mid-year 2016: €1,828k) was attributable to the amortisation of development costs and €1,026k to customer relationships and order backlog regarding SQS Software Quality Systems Italia S.p.A., Trissential LLC and SQS North America LLC. In the interim period ended 30 Jun 2016 an amount of €4,192k had been recognised as amortisation of customer relationships and order backlog regarding SQS India BFSI, SQS Software Quality Systems Italia S.p.A. and Trissential LLC.

 

 

4.         Net finance costs

 

The net finance costs are comprised as follows:

 

 

 

Six month ended 30 June 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

 

 

 

 

 

 

 

Interest income

 

49

 

112

 

397

Exchange rate gains

 

1,701

 

1,085

 

3,857

Total finance income

 

1,750

 

1,197

 

4,254

Interest expense

 

(761)

 

(1,081)

 

(1,966)

Exchange rate losses

 

(571)

 

(200)

 

(1,036)

Total finance costs

 

(1,332)

 

(1,281)

 

(3,002)

Effects from the valuation of financial liabilities at fair value

 

0

 

0

 

5,500

 

 

 

 

 

 

 

Net finance costs

 

418

 

(84)

 

6,752

 

Interest expense relates to interest on bank loans, finance lease liabilities and pension obligations.

 

 

5.         Taxes on earnings

 

The line item includes current tax expenses in the amount of €3,693k (at mid-year 2016: €4,065k) and deferred tax income in the amount of €(604)k (at mid-year 2016 deferred tax income: €(1,789)k).

 

 

6.         Earnings per share

 

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

:

 

 

Six month ended 30 June 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

 

 

 

 

 

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

 

7,282

 

4,478

 

10,004

Diluted profit for the year, €k

 

7,282

 

4,478

 

10,004

Weighted average number of shares in issue, undiluted

 

31,675,617

 

31,675,617

 

31,675,617

Weighted average number of shares in issue, diluted

 

33,760,617

 

33,697,343

 

33,749,900

Undiluted profit per share, €

 

0.23

 

0.14

 

0.32

Diluted profit per share, €

 

0.22

 

0.13

 

0.30

Adjusted profit per share (optional), €

 

0.26

 

0.22

 

0.47

 

Undiluted profit per share is calculated by dividing the profit for the six month period attributable to owners of the parent by the weighted average number of shares in issue during the six month period ended 30 June 2017: 31,675,617 (at mid-year 2016: 31,675,617).

 

Diluted profit per share is determined by dividing the profit for the six month period attributable to equity shareholders 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 Italia S.p.A., SQS North America LLC and Trissential LLC, valuation differences 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 2017: 31,675,617 shares, (at mid-year 2016: 31,675,617 shares) shows adjusted earnings per share of €0.26 (at mid-year 2016: €0.22).

 

 

7.         Intangible assets

 

The composition of this item is as follows:

 

Book values

 

Six month ended 30 June 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

 

 

 

 

 

 

 

Goodwill

 

75,916

 

87,389

 

78,860

Development costs of software

 

3,221

 

2,832

 

2,473

Other development costs

Acquired Software

 

3,628

6,705

 

3,236

4,529

 

3,762

6,242

 

 

 

 

 

 

 

Customer relationships

 

7,678

 

11,163

 

8,950

Order backlog

 

966

 

1,618

 

1,292

Right to a design method

 

0

 

-

 

402

Intangible assets

 

22,198

 

23,378

 

23,121

Total

 

98,114

 

110,768

 

101,981

 

Development costs were capitalised in the interim period ended 30 June 2017 in the amount of €2,316k (at mid-year 2016: €1,540k). Development cost of software 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 Software Quality Systems Italia S.p.A., Trissential LLC and SQS North America LLC (previously Galmont Consulting LLC). The order backlog was acquired within the business combination of SQS Software Quality Systems Italia S.p.A.

 

Amortisation over the expected useful life in years

 

Customer relationship

 

Order backlog

 

 

 

 

SQS Software Quality Systems Italia S.p.A.

 

6

 

3,9

Trissential LLC

 

10

 

-

SQS North America LLC

 

4

 

-

 

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

 

 

8.         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 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

Freehold land and buildings

 

9,261

 

5,355

 

9,655

Office and business equipment

 

5,972

 

4,236

 

6,283

Construction in progress

 

754

 

6,926

 

773

Total

 

15,987

 

16,517

 

16,711

 

 

9.         Bank loans and overdrafts

 

The finance liabilities are comprised as follows:

 

 

 

Six month ended 30 June 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

 

 

 

 

 

 

 

Bank overdrafts and other short-term bank loans

 

55,215

 

59,062

 

41,119

Bank loans with maturity between one and five years

 

1,275

 

250

 

1,058

Total bank liabilities

 

56,490

 

59,312

 

42,177

of these, secured

 

0

 

114

 

0

 

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

 

 

10.       Other current and non-current liabilities

 

The item is comprised as follows:

 

 

 

Six month ended 30 June 2017

(unaudited)

 

Six month ended 30 June 2016

(unaudited)

 

Year ended 31 December 2016

(audited)

 

 

€k

 

€k

 

€k

 

 

 

 

 

 

 

Personnel liabilities (holiday, leave, bonus claims)

 

14,233

 

15,594

 

18,846

Put Option SQS Italia

 

1,039

 

994

 

1,017

Purchase obligation from Trissential

 

7,291

 

7,240

 

7,798

Purchase obligation from SQS North America LLC (previously Galmont Consulting LLC)

 

2,090

 

10,251

 

1,599

Sales tax and value-added tax liabilities

 

6,237

 

6,709

 

7,923

Liabilities in regard to social security

 

3,556

 

3,515

 

3,799

Outstanding invoices

 

6,823

 

5,628

 

4,922

Granted rebates and discounts

 

1,144

 

521

 

863

Liabilities for employees' travelling expenses

 

893

 

1,129

 

1,071

Interest swap (fair value)

 

123

 

312

 

166

Deferred income

 

4,025

 

1,081

 

1,701

Remaining other liabilities

 

2,491

 

3,602

 

4,434

Total

 

49,945

 

56,576

 

54,139

 

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

 

 

11.       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 2016: €31,675,617) and is divided into 31,675,617 (at 31 December 2016: 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.

 

SQS had no shares in its ownership as at 30 June 2017.

 

 

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, 4 and 5 serve to grant share options to the management board members and employees respectively.

 

There are no changes in the Conditional Capital compared to 31 December 2016.

 

 

Authorised Capital

 

The Authorised Capital amounts to €13,887,062 (at 31 December 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 24 May 2017 resolved to pay a €0.15 dividend per share for the business year 2016 in the total amount of €4,751,342.55, the dividends have been paid to the shareholders of SQS AG in 2017.

 

 

12.       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 programmes 2013, 2014 and 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

1,145,000

3.07

430,000

3.59

230,000

5.79

Outstanding at end of half period

1,145,000

3.07

430,000

3.59

230,000

5.79

Exercisable at end of period

---

---

---

---

---

---

 

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

180,000

5.65

100,000

5.27

Outstanding at end of half period

180,000

5.65

100,000

5.27

Exercisable at end of period

---

---

---

---

 

 

13.       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.

 

14.       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).

 

 

15.       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.

 

The following related party transactions have taken place:

 

Mr. Vos, Mr. Gawron and part 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 Westhofer 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 2016: €345k).

 

The total emoluments of the management board members in the interim period ended 30 June 2017 amounted to €1,088k (at mid-year 2016: €798k).

 

The emoluments of the supervisory board members amounted in total to €168k (at mid-year 2016: €168k), of which €168k have not yet been paid by the end of the interim period.

 

 

16. Events after the interim period

 

On May 24, 2017 the Management Board of SQS decided to increase the share capital of SQS AG by partially using the Authorised Capital in the amount of 330,360 by issuing new registered non-par value shares against contribution in kind. These new shares were used to fulfil remaining obligations from the purchase of Trissential LLC, Minnesota, USA. This resolution became effective by its registration in the commercial register of SQS AG on August 1, 2017.

 

 

 

Cologne, 12 September 2017

 

SQS Software Quality Systems AG

 

 

 

 

 

           

 

 

 

D. Vos

 

R. Gawron

 

R. Gillessen

 

M. Hodgson

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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