TIDMSQS
RNS Number : 5791C
SQS Software Quality Systems AG
09 March 2011
Embargoed until 7am
9 March 2011
SQS Software Quality Systems AG
("SQS" or the "Company")
Results for the full year ended 31 December 2010
SQS Software Quality Systems AG (AIM: SQS.L), the world's
largest pure play supplier of independent software testing and
quality management services, today announces its results for the
year ended 31 December 2010 (the "period").
Financial Highlights:
-- Turnover increased by 21.2% to EUR162.9 million (FY 2009:
EUR134.3 million), while testing services market in Europe was
forecast to grow by 6.5% in 2010 (Source: PAC November 2010)
-- Adjusted Gross Profit* up by 22.5% to EUR52.1 million (FY
2009: EUR42.5 million) on a Gross Profit Margin* of 32.0% (FY 2009:
31.7%)
-- Adjusted PBT** increased by 22.1% to EUR8.6 million (FY 2009:
EUR7.0 million) despite the significant investment in headcount and
Managed Services growth during the period
-- Adjusted EPS*** increased by 19.3% to EUR0.25 per share (FY
2009: EUR0.21 per share)
-- Net debt as at 31 December 2010 was EUR4.5 million (31
December 2009: net cash of EUR1.6 million) (30 June 2010: net debt
of EUR6.2 million) reflecting increased receivables is tying up
further working capital
-- Debtor days at period end steady at 55 (at 31 December 2009:
55)
* adjusted to add back EUR0.4 million accruals for partial
retirement due to a change in IFRS accounting rules.
** adjusted to add back IFRS effects of EUR0.2 million pro forma
interest on deferred payment milestones for acquisitions, EUR1.7
million of amortisation on intangible assets of acquired companies
and EUR0.4 million accruals for partial retirement.
*** includes effects under **) and at local GAAP tax rate which
is EUR0.3 million higher than under IFRS because of EUR0.3 million
deferred taxes under IFRS.
Operational Highlights:
-- A period of strong second half growth in revenues and
profits, and of continued substantial investment in staff and
infrastructure
-- Hired and fully trained 359 new billable consultants to meet
increasing demand for services
-- Normal utilisation with average billed days per consultant of
187 (FY 2009: 178 billed days)
-- Significant growth in Managed Services, now accounting for
11% of total revenues (FY 2009: 3%) with order intake of over EUR50
million in the period
-- Improving revenue visibility (average Managed Services
contract length of 3 years)
-- Continued expansion of offshore resources to meet high demand
for blended professional services - offshore staff equal to 30.6%
of billable workforce at 31 December 2010 (31 December 2009:
26.5%)
-- 137 new clients signed up during the period (FY 2009: 160)
including numerous blue-chip clients and underpinning our strategy
to focus towards larger contract sizes
Rudolf van Megen, Chief Executive Officer of SQS commented, "We
are delighted with the significant growth experienced during the
year, and particularly in the second half, in both revenues and
profitability. The investments made in the first half of the year
into infrastructure and sales staff and the continuing investment
into offshore consultancy staff have been successful. To satisfy
market demand we will see further strong staff recruitment in 2011.
Our growing offshore and nearshore resources are helping us to
become increasingly competitive and ultimately to improve overall
margins.
"In addition, our Managed Services business, with which we have
gone through a steep learning curve, has continued to grow strongly
and contracted over EUR50 million of revenue during the period,
although there are still areas where the performance of the
division can be improved. As well as improving revenue visibility,
Managed Services is also helping to increase brand awareness of
SQS, leading to ever larger contract wins. We are now in an
established growth pattern and, while our strategic focus for the
coming year will be to continue to improve and innovate our
services portfolio, further expansion of Managed Services, hiring
onshore and offshore resources and improving the gross profit.
Therefore, we are confident of a similar performance in 2011."
Enquiries:
SQS Software Quality Systems AG Tel. +49 (2203) 91 54
0
Rudolf van Megen, Chief Executive Officer
Rene Gawron, Chief Financial Officer
Arbuthnot Tel. +44 (0)20 7012 2000
Nick Tulloch
Paul Gillam
Walbrook PR Limited Tel. +44 (0)20 7933 8783
Bob Huxford
Jack Rich
About SQS
SQS is the world's largest pure play supplier of independent
software testing and quality management services. SQS consultants
design and oversee quality management processes during the software
and IT systems life cycle and test the resulting products for
errors and omissions.
Headquartered in Cologne, Germany, SQS has approximately 1,900
employees across Europe, Asia, North America and Africa. The Group
has a presence in Germany (Cologne, Munich, Frankfurt, Stuttgart,
Goerlitz and Hamburg), the UK (London, Woking, Birmingham,
Manchester, Belfast), Ireland, the Netherlands, Switzerland,
Austria, Sweden, Norway, Finland, India, Egypt, the United States
and South Africa. SQS also has a minor stake in an operation in
Portugal and a partnership operation in Spain.
With more than 5,000 completed projects, SQS has a strong
customer base including 20% of the FTSE-100 companies, more than
half of the DAX 30 and a third of the STOXX-50. It supports clients
in a wide range of industries, including major corporations such as
Allianz, Beazley, BP, Centrica, Daimler, Deutsche Post, Generali,
JP Morgan, Meteor, Reuters, SEB, Siemens and Volkswagen.
Chief Executive's Statement
Introduction
We were quick to respond to improving market conditions at the
beginning of 2010, accelerating our investment in infrastructure
and sales staff during the first half of the year, and continually
building up consultancy staff throughout 2010. We are therefore
delighted that the benefits of these investments, which impacted
profitability in the first half of the year, have already made a
significant contribution to revenues and profits in the second half
of the year. These investments will help us to benefit from the
market conditions for further growth in 2011.
We enjoyed strong revenue growth across all of our core
geographies during 2010 and the Company now appears to be in a well
established growth phase. Revenues grew by 21.2% to EUR162.9
million (FY 2009: EUR134.3 million) during the period,
significantly outperforming the predicted 6.5% growth for the
testing services market in Europe as a whole (Source: PAC November
2010), demonstrating that SQS continues to build market share and
extend its market leading position in independent software
testing.
Profits also grew at a similar rate with adjusted PBT increasing
by 22.1% to EUR8.6 million (FY 2009: EUR7.0 million). EUR6.2
million of this came through in the second half year with an
adjusted PBT margin of 7.0% (adj. PBT H1 2010: EUR2.4 million with
a margin of 3.2%), as positive effects of the first half investment
were realised.
Considerable investment went into improving business practises
and expanding staff numbers at our offshore centres during the
year, improving the efficiency and flexibility of our service
delivery. For example, recent political events in Egypt resulted in
minimal disruption as the provision of services was transferred to
alternative offshore and nearshore test centres. Staff numbers in
offshore (India, Egypt, South Africa) and nearshore (Goerlitz &
Belfast) test centres grew by 56% such that they accounted for 39%
of the total billable workforce as at 31 December 2010: (31
December 2009: 31.5%). Given the continuing buoyant market
conditions and the competitive pricing advantages afforded us by
our offshore and nearshore facilities, this is a trend we would
expect to see continuing into 2011.
In line with our stated strategy, we have also made further
progress in growing our Managed Services business such that this
now accounts for 11% of total revenues. In addition, Managed
Services has secured order intake of over EUR50 million during the
period. This pipeline gives us confidence that Managed Services can
achieve our stated target of doubling the total revenue within the
next 3 to 4 years, mainly with additional business from Managed
Services then expected to account for up to 40 to to 50% of
revenues. Ultimately this will lead to further improvements in
revenue visibility and higher profit margins.
New Business
During the first half of the period we invested considerable
resources into expanding our sales force, setting up dedicated
sales teams in each of the geographies in which we are present.
This, combined with the robust market conditions, has proved highly
successful, with 137 new clients (FY 2009: 160) signed during the
period. The now expanded sales force has been opening up new
clients but is also working on the existing ones to expand business
within those (e.g. opening new doors at other business units).
Despite the strong growth in our Managed Services offering the
majority of new wins were for traditional consultancy services to
assure or de-risk business and IT projects. We believe that these
wins indicate a growing trend towards assigning testing projects to
a specialist, independent testing provider. Our ongoing focus on
the sale and provision of blended onshore/offshore Managed Services
offerings has also proved highly successful during the period with
22 contracts or significant contract extensions signed (FY 2009:
15). Managed Services business is contracted in advance for longer
periods than the rolling three to six month contracts typical of
our traditional project business. As a result we are signing
significantly larger contracts than for consultancy services
previously, which leads to better visibility on revenues going
forward. Order intake for Managed Services contracts during 2010
was at over EUR50 million and conversion of this pipeline began in
HY2 2010 and is expected to take place over the next three years.
Operationally, Managed Services have been through a steep learning
curve and there are still areas where our operational performance
will be improved going forward. We therefore will continue to
invest into developing and training the managed services delivery
methodology.
In addition, our Managed Services offerings are contributing
towards improving our profile generally within the market. During
recent months we have experienced growing recognition as a premium
provider of testing services with the experience and capabilities
to deliver services quickly, efficiently and in a scalable manner.
This has meant that our traditional consultancy business is also
now competing for, and winning, projects of increasing scale
against the large European/US-system integrators as well as Indian
system integrators providing testing services.
Notable examples of Managed Services client wins secured during
the period include:
-- Our largest ever single-client contract win, a Managed
Services contract with an existing client worth at least EUR15
million over a three and a half year period
-- A three year Managed Services contract with Specsavers
involving a 50-strong SQS testing team based mainly in India
-- A blended onshore/offshore Managed Services contract with a
European telecommunications provider worth EUR6.5 million over
three years
In addition, a number of the initial Managed Services contracts
were extended into longer duration contracts during the year, an
encouraging reflection of the customer satisfaction we have
provided to date.
Examples of traditional consultancy client wins secured during
the period include:
-- An engagement with one of the world's leading insurance
brokers to undertake a quality assurance review of their full IT
programme delivery to ensure rigour and to provide a testing
roadmap into the medium term.
-- An ERP Migration project with a major UK environmental
recycling and services organisation. This end-to-end testing
project is due to run until end 2011.
In addition, a large number of consultancy commitments were
extended during the period:
-- A major utility organisation continues to extend SQS's
onshore and offshore services across a range of technical and
functional testing disciplines.
-- A major UK oil company extended its SQS on-shore based
commitment for an additional team of consultants to support the
User Acceptance Testing of their critical Oil trading platform
-- One of the largest Nordic banks recently extended their
project based testing commitment with SQS.
-- A leading listed South African financial institution has
recently extended its commitment to SQS to provide a significant
team of on-site testing consultants to support the continuing
implementation of business critical applications which in turn
provide 24/7 data to multiple corporates and partners.
Services and product lines
SQS has three services and product lines (Professional Services,
Software Testing Products and Training & Conferences) each of
which are reported as separate revenue and profit segments.
Professional Services is further split up into the regional
reporting segments Central Europe Middle East (CEME) and West
Organisation North South (WONS).
Professional Services for Business and IT
We offer three distinct forms of professional services for
business and IT, each catering to a specific stage of the software
lifecycle:
-- Management Consulting Services are provided early in the
lifecycle of a project at the business requirements phase. We
therefore help to initiate the resulting IT project and this can
lead to a closer relationship with the decision makers and
ultimately further work in the later stages of the project. This
service line accounted for 9% of total revenues in the period (FY
2009: 10%) and grew by 5% during the course of the year.
-- Testing Consultancy Services are provided at the software
implementation or development phase of the software lifecycle.
Typically run as an IT project with services provided onsite, we
provide professional testing services and quality management
consulting to help clients increase efficiencies and to de-risk
their IT projects. This service line accounted for 75% of total
revenues in the period (FY 2009: 82%) but grew in absolute terms by
11.5% during the year.
-- Managed Testing Services are typically provided for software
that is in productive use, i.e. in the 'maintenance phase'. We
provide Managed Testing Services under long term engagements to
provide regression testing for updates, patches and new releases.
Such services often involve blended offshore/onshore delivery and
accounted for 11% of total revenues in the period (FY 2009: 3%) and
grew by 336% during the course of the year.
Software Testing Products
Our unique suite of software testing products has been developed
from our experience of almost 30 years' working on software testing
projects, culminating in a product set that is able to provide
consistent and measurable support for testing services, several
components of which can be integrated into other market leading
tools. Our products are fully integrated into our services and
offerings and are used by staff in onshore projects and our
offshore centres, ensuring seamless interaction between the
two.
The SQS Software Testing Products are used in our consultancy
projects and Managed Services as a part of our asset based
consultancy services but they are also sold separately to clients.
Despite securing orders in the second half of the year we
experienced some slippage in revenues such that Tools and
Maintenance (incl. other third party tools) accounted for 2.7% of
total revenues in the period (FY 2009: 2.3%). However, these orders
are expected to complete post the year end during 2011.
IT Training and Conferences
During the year a total of seven iqnite(R) conferences were held
in various cities across the globe and we are confident this
service line will grow in the coming year. Our training division
recorded a small amount of growth during the period and we are
seeing increasing demand as companies begin to reallocate training
budgets post recession; however a risk may be that the demand for
testing is so big that employees at clients do not get time to be
trained. Revenue from training and conferences represented 2.4% of
total revenues in the period (FY 2009: 2.6%).
Acquisitions update
On July 4, 2010 the two year earn out period with Verisoft (now
SQS India) came to an end. Final earn-out accounts were agreed
during the second half of 2010 and Verisoft achieved the majority
of its targets. With the earn-out finalised, SQS has now acquired
75% of the issued Verisoft shares. There is an option for SQS to
acquire the remaining 25% of Verisoft which is exercisable either
by SQS or the vendors until April 2016.
The earn-out period for Validate (now SQS Nordics) is now in its
third year and will continue until June 2011.
Markets
A market study by PAC, published in November 2010, forecast an
expected growth rate for the software testing services market in
Europe of 6.5% per annum between 2010 and 2014. SQS significantly
outperformed this prediction during the year with revenue growth of
21.2%, demonstrating that we are winning market share and extending
our leading position as world leader in independent pure play
testing services. The corresponding growth rates are 20% per annum
for India and 13% per annum for South Africa.
The study further revealed for Germany that the industries with
the highest growth rates are insurances and utilities at 8.5% per
annum, while manufacturing is the largest industry segment with 22%
of the total testing market. In the UK the strongest growing
industries are utilities, insurance and banking with 8.5% per annum
each, while the public sector is the largest overall industry
covering 33% of the local market.
The same PAC stud highlighted that the size of the market for
testing tools in Europe is estimated at EUR390 million and is
growing at an annual rate of 5%, while the size of the testing tool
market e.g. in India is estimated to be EUR70 million and expected
to grow at 22% per annum.
During the year we experienced solid growth across all of the
geographies in which we are present.
US sales still account for only approx. 1% of revenue but are
growing. During the period, sales were achieved in the US via India
but we now have staff on the ground in the US looking to sell our
offerings. We have taken a strategic decision to grow the US
business in enterprise IT projects besides the games testing part
based on the delivery capabilities in India. This is to be a
gradual, careful expansion of the sales footprint and SQS is
confident it will contribute more going forward (possibly c. 2% in
the current year). US customers are used to sourcing testing work
from India so we do not need to evangelise the market additionally.
This is a low-risk approach.
We are currently witnessing positive signs of growth across a
wide-range of sectors in which we are present including energy
& utilities, retail, logistics, telecoms, insurance and the
rejuvenated financial sector.
Business strategy
Our core strategy for 2011 will be to achieve improvements to
gross and net profit margins in both consultancy projects and
Managed Services by focussing on utilisation and expansion of the
appropriate resources and through the increasing provision of our
asset based services. As part of this process we will be devoting
much of our attention to servicing our existing contracts such that
they can be fine tuned to provide clients with the optimal mix of
onshore and offshore resources, resulting in the best service ratio
for our clients and in improved margins for SQS long term. While we
expect project margins to improve as a greater proportion of the
workload for maturing projects is moved offshore, this process
requires careful management to ensure a smooth transition and to
maintain our high standards of service delivery and customer
satisfaction.
Increasing the proportion of revenues contributed by our Managed
Services business also remains a central part of our ongoing
strategy. Managed Services contracts accounted for 11% of total
revenues in 2010 (FY 2009: 3%) and we have an order book of over
EUR40 million of business contracted for the coming three
years.
Such contracts, which tend to be over a longer term than
traditional project work, often command a fixed fee for a defined
set of deliverables rather than the day-rate basis of our
traditional offerings. They therefore allow us to gain greater
visibility on revenues and further benefit SQS by allowing greater
flexibility and control over project staffing. Profit contribution
is also expected to increase at an accelerating rate as the
majority of costs associated with a Managed Services project are
borne at the beginning of the contract and reduce as elements of
the workload are progressively moved to nearshore/offshore test
centres. In addition, the large contract signings we have made with
Managed Services customers are giving us greater credibility within
our traditional markets, such that we are now winning larger
contracts for project based work with new and existing clients.
We anticipate that investment into non-billable staff (i.e.
administration, sales etc.) will be significantly lower than in
billable at this stage.
Dividend
Our stated policy is to pay out approximately 30% of the
adjusted profit after tax as a dividend.
SQS will therefore pay a dividend for the full year of EUR0.08
(2010: EUR0.07) per share.
Subject to shareholder meeting on 24 May 2011, the dividend will
be paid on 26 May 2011 to all shareholders on the register at 20
May 2011.
Employees
Significant investment was made during the period to expand the
headcount in order to meet the growing demands for our services and
to help capitalise on the many opportunities made available by the
ongoing robust market conditions.
The high levels of domain and methodology experience and
expertise among our onshore and offshore consultants enabled us to
hire and train a greater number of junior consultants during the
year. This, along with the hiring of a greater proportion of
offshore staff, has enabled us to reduce our average cost per
employee, such that we are better able to address the competitive
market environment in which we operate. In addition, investment
made during the year into improving our unique asset based
methodology, SQS PractiQ(R) , has enabled us to train new employees
more quickly and efficiently.
The average number of permanent consultants (without
administrative, R&D and sales staff) employed during the period
was 1,366 (FY 2009: 1,148), a rise of 19%. At 31 December 2010 the
permanent consultant headcount stood at 1,527, up 31% over the year
(31 December 2009: 1,168) and 22% over the average headcount of the
six months period (H1 2010: 1,249). The increase in the number of
consultants can be broken down into a net increase of 202 (year end
to year end) onshore consultants and 157 (year end to year end)
offshore consultants. At this current time all new staff members
appointed during 2010 have been fully trained and are already fee
generating.
Our permanent offshore consultant headcount grew 50.1% during
the year to 467 at 31 December 2010 (31 December 2009: 310).
Offshore consultants now represent 30.6% of total headcount against
26.5% at the start of the period and 30.8% at 30 June 2010.
In addition, 10.9% of our revenue during the period was achieved
via contractors (FY 2009: 9.1%).
On behalf of the Board, I would like to take this opportunity to
express our gratitude to all of our staff that contributed to SQS
during the period.
Board
On 2 March 2011, SQS has announced the appointment of Mr
Diederik Vos as Chief Operating Officer with immediate effect. Mr
Vos was previously European partner for Telecoms & High Tech at
Pcubed, Head of Professional Services EMEA at Avaya and has held a
number of roles at INS/Lucent Technologies and AT&T amongst
others. Mr Vos has considerable experience in building up and
running large service organisations, including offshore centres,
and will play a lead role in SQS's strategy to expand its Managed
Services division division as well to improve its operational
performance.
Outlook
We are delighted with the significant growth experienced during
the year, and particularly in the second half, in both revenues and
profitability. The investments made in the first half of the year
into infrastructure and sales staff and the continuing investment
into offshore consultancy staff have been successful. To satisfy
market demand we will see further strong staff recruitment in 2011.
Our growing offshore and nearshore resources are helping us to
become increasingly competitive and ultimately to improve overall
margins.
In addition, our Managed Services business, with which we have
gone through a steep learning curve, has continued to grow strongly
and contracted over EUR50 million of revenue during the period,
although there are still areas where the performance of the
division can be improved.As well as improving revenue visibility,
Managed Services is also helping to increase brand awareness of
SQS, leading to ever larger contract wins. We are now in an
established growth pattern and, while our strategic focus for the
coming year will be to continue to improve and innovate our
services portfolio, further expansion of Managed Services, hiring
onshore and offshore resources and improving the gross profit.
Therefore we are confident of a similar performance in 2011.
Rudolf van Megen
Chief Executive Officer
9 March 2011
Financial Review
Summary
Group turnover during the period was up by 21.2% to EUR162.9
million (FY 2009: EUR134.3 million).
Due to a change in the internal organisation of SQS, which
became effective as of 1 January 2010, we no longer manage the
Company by individual countries. Instead we have formed larger
regional entities, which can be roughly delineated by the language
predominantly spoken by the resident consultants.
Furthermore, by creating dedicated Managed Services units in
each of the two services business units, the new organisation
supports the implementation of more blended onshore/offshore
delivery.
The new business units, which also represent the new accounting
segments according to IFRS 8, are:
-- Central Europe Middle East (CEME), which includes the
services businesses in the markets of Germany, Switzerland,
Austria, Netherlands, Luxemburg and Egypt. In addition, this
segment manages all billable staff that are employed by the
aforementioned countries including the German/French-language
offshore centre in Egypt.
-- West Organisation North South (WONS), which includes the
services businesses in the markets of the United Kingdom, Ireland,
Sweden, Norway, Finland, USA, South Africa and India. Furthermore,
this segment manages all billable staff that are employed by the
aforementioned countries including the English-language offshore
centres in India and South Africa.
-- Other, which includes Software Testing Products, Training
& Conferences and central group activities such as research and
innovation.
Breakdown by Business Unit
Central Europe Middle East (CEME)
Revenue in CEME, our largest market, amounted to EUR96.4 million
(2009: EUR84.7 million) in the period, an increase of 13.8%. The
improvement in revenue was entirely organic and came from new
Managed Services contracts and additional demand for traditional IT
project services.
West Organisation North South (WONS)
Our business in predominantly English speaking geographies saw a
strong recovery during the period with a 40.8% rise in revenues to
EUR60.4 million (2009: EUR42.9 million). This occurred primarily as
the result of a strong surge in demand for our services from the
UK, Nordics and India and was especially encouraging given that our
UK business had been hardest hit by recession during 2009. The
majority of the growth came from the financial services, utilities
& energy and retail sectors.
Other Business
-- This segment experienced a decline in revenues in the period
of 9.0% to EUR6.1 million (2009: EUR6.7 million). The markets for
training, conferences and SQS software testing products remained
weak during the period, suffering from the 2009 recession as a
late-cycle business. Because SQS software testing products are an
integral part of our asset based services methodology and
additionally embedded in many managed services contracts their
profit contribution is not fully visible in this segment but partly
in the CEME and WONS results; especially as we can use our full
tool set also in our test centres and have a competitive advantage
over other Manages Service providers.
Foreign Exchange
Foreign exchange had a positive impact on the reported
performance for the period because the Euro weakened overall
against all other currencies relevant to the SQS business. In
total, 50% of the Group's revenue is generated in currencies other
than the Euro (2009: 42%). Specifically, 26% (FY 2009: 22%) of
Group revenue is generated in Sterling by our UK operation and 14%
(FY 2009: 14%) of Group revenue is generated in Swiss Francs by our
Swiss operation, the balance of 10% is generated in other
currencies. On a constant currency basis, our reported revenues
would have been EUR158.5 million (EUR162.9 million at reported
exchange rate) and we would therefore have recorded adjusted profit
before tax EUR0.4 million lower than the reported one of EUR8.6
million.
Margins and Profitability
Adjusted gross profit* was up 22.5% to EUR52.1m (FY 2009
EUR42.5m) with the adjusted gross margin* increasing to 32.0% (FY
2009: 31.7%). As a result of full utilisation of staff hired at the
beginning of the year, the adjusted gross margin* improved from
30.5% in H1 2010 (29.4% in H1 2009) to 33.2% in the second half
(33.9% in H2 2009).
Adjusted profit before tax** was up by 22.1% to EUR8.6 million
(FY 2009 EUR7.0 million) with the profit margin moving to 5.3% (FY
2009: 5.2%).
The lower margins in the first half were temporary and were due
to the build-up in consultants' headcount, test center
infrastructure, and project and commercial management resources,
all consequences of our strategic mid-term target to grow Managed
Services business to up to 50% of our total business. During the
second half we were able to make full use of those consultants
hired and trained in H1 2010, as evidenced by the improved gross
margin in H2 2010. We nevertheless continued to hire additional
consultants in H2 in order to satisfy strong market demand. As many
newly won Managed Services projects commenced in the second half
this period was again impacted by project start up costs despite
the overall improvement of gross margins. Typically, the costs in
Managed Services projects are front-end loaded in the first year
and projects tend to show much improved gross margins from year two
onwards when the majority of the work can be executed by offshore
resources.
Adjusted earnings per share*** was up by 19.3% to EUR0.25 (2009
EUR0.21).
* adjusted to add back EUR0.4 million accruals for partial
retirement due to a change in IFRS accounting rules
** adjusted to add back IFRS effects of EUR0.2 million pro forma
interest on deferred payment milestones for acquisitions, EUR1.7
million of amortisation on intangible assets of acquired companies
and EUR0.4 million accruals for partial retirement.
*** includes effects under ** above and at local GAAP tax rate
which is EUR0.3 million higher than under IFRS because of EUR0.3
million deferred taxes under IFRS.
Costs
Adjusted ****General & Administrative expenses totalled
EUR27.2 million (2009: EUR21.5 million), representing 16.7% of
Group revenues (2009: 16.0%). The absolute cost increase resulted
from additional administrative needs in the Managed Services
business as well as higher headcount in line with the general
growth of the Company during the year.
****adjusted to add back IFRS effects on amortisation of
intangible assets of acquired companies of EUR1.6 million an EUR0.1
million for revaluation of pension plans and stock options.
Sales & Marketing expenses totalled EUR13.0 million (2009:
EUR11.1 million) representing 8.0% of Group revenues (2009: 8.2%).
Cost increases resulted from adding sales capacity, mainly to
support managed testing services, and from additional marketing
campaigns undertaken in an effort to improve lead generation.
Research & Development expenses totalled EUR2.8 million
(2009: EUR2.4 million) representing 1.7% of Group revenues (2009:
1.8%). R&D costs resulted from investments in our software
testing tools with capitalised R&D of EUR3.1 million (2009:
EUR3.3 million) and amortisation of EUR2.8 million (2009: EUR2.4
million). This resulted in a net positive effect of EUR0.3 million
(2009: EUR0.9 million). Additionally EUR1.4 million regarding the
development of a new Managed Services methodology have been
capitalised.
Cash Flow and Balance Sheet
Cash flow from operating activities was EUR6.0 million (2009:
EUR9.1 million) which represents an adjusted EBIT conversion of
66%. This was lower than the full conversion rates of adjusted EBIT
into operating cash flow seen in previous years and this
predominantly resulted from a build-up of working capital. This was
due to the strong revenue growth seen in H2 2010 (+20.5% H2 2010
compared with H1 2010) and the strong increase of revenues from
Managed Services contracts, which tie up more working capital in
the first year of their existence due to investments in processes
and infrastructure. Debtor days remained steady at 55 (2009: 55) as
rapid invoicing and collection were maintained at the high level
achieved in previous years at the year end.
Cash flow from financing activities was EUR3.2 million (2009:
EUR0.7 million) and includes the payout of a dividend of EUR(1.9)
million in May 2010 (2009: EUR(2.9) million). Cash outflow from
investments was EUR(8.0) million (2009: EUR(8.2) million),
including EUR(4.5) million (2009: EUR(3.3) million) for capitalised
R&D on products and Managed Services methodology, EUR(0.9)
million (2009: EUR(2.6) million) for investments in IT
infrastructure and SAP as the SQS ERP system and EUR0 million
(2009: EUR(1.9) million) as cash payments for earn out payments on
acquisitions (2009: last earn out payment for Triton shares). Cash
at the year-end was EUR4.3 million (2009: EUR5.4 million).
No shares were issued during the year. As a post balance sheet
event 0.6 million shares were issued to satisfy deferred
consideration obligations with regards to previous acquisitions in
January 2011 (Validate and Verisoft). A further issue of 28,265
shares under a share purchase programme for SQS employees was also
carried out in January 2011.
Taxation
The reported tax charge of EUR1.5 million (2009: EUR1.3 million)
includes current tax expenses of EUR1.8 million and no
non-recurring tax credits as in 2009 (2009: tax credit of EUR0.6
million in the UK) and deferred taxes of EUR(0.3) million (2009:
EUR0.2 million). The 2010 tax charge was considerably lower than
anticipated due to a favourable tax structure over the legal
entities with higher profits in those entities under a lower tax
regime and lower profits in those entities under a higher tax
regime. We incurred especially low tax rates on our profits in
India and Egypt due to a special tax regime for most of our
business in India which is done in an Special Economic Zone (SEZ)
and the fact that we could offset tax losses in Egypt which we were
not allowed to capitalise as deferred tax assets in prior
years.
We anticipate a tax rate of 29% for 2011.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary
companies ("SQS Group" or "SQS Konzern") are prepared in conformity
with all IFRS Standards (International Financial Reporting
Standards) and Interpretations of the IASB (International
Accounting Standards Board) approved by the EU Commission and
translated into the German language which are to be applied for
those financial statements whose reporting period starts on or
after 1 January 2010. The new and revised Standards and
Interpretations of the IASB were not applied in the business year
2010 prior to the implementation date stipulated.
The SQS Group Consolidated Financial Statements for the twelve
month period ended 31 December 2010 is presented in Euros.
A copy of the SQS Group Consolidated Financial Statements
together with a notice of Annual General Meeting to be held at SQS
headquarters in Cologne on 24 May 2011will be posted to
shareholders shortly and electronic copies of these documents will
also be available from the Company's website at www.sqs.com.
Rene Gawron
Chief Financial Officer
9 March 2011
Consolidated Income Statement
For the year ended 31 December 2010 (IFRS)
Year ended Year ended
31 December 31 December
2010 2009
EUR'000 (Notes) unaudited audited
Revenue 162,880 134,344
Cost of sales 111,117 91,798
Gross profit 51,763 42,546
General and administrative expenses 28,950 23,223
Sales and marketing expenses 12,950 11,074
Research and development expenses 2,833 2,387
Profit before tax and finance
costs (EBIT) 7,030 5,862
Finance income 495 236
Finance costs 1,202 1,198
------------- -------------
Net finance costs (5) -707 -962
Profit before tax (PBT) 6,323 4,900
Income tax expense (6) 1,537 1,261
Profit for the year 4,786 3,639
Attributable to:
Owners of the parent 4,811 3,639
Non controlling interest -25 0
Consolidated profit for the
year 4,786 3,639
============= =============
Earnings per share, undiluted
(EUR) (7) 0.18 0.14
============= =============
Earnings per share, diluted
(EUR) (7) 0.17 0.13
============= =============
Adjusted earnings per share
(EUR), for comparison only (7) 0.25 0.21
============= =============
Consolidated Statement of Comprehensive Income
For the year ended 31 December 2010 (IFRS)
Year ended Year ended
31 December 31 December
2010 2009
EUR'000 unaudited audited
Profit for the period 4,786 3,639
Exchange differences on translating foreign
operations 2,138 2,351
Gains arising from effective hedging
instruments 8 0
Other comprehensive income for the period,
net of tax 2,146 2,351
Total comprehensive income for the period,
net of tax 6,932 5,990
Total comprehensive income attributable
to:
Owners of the parent 6,957 5,990
Non controlling interest -25 0
6,932 5,990
============= =============
Consolidated Statement of Financial Position
As at 31 December 2010 (IFRS)
31 December 31 December
2010 2009
EUR'000 (Notes) unaudited audited
Current assets
Cash and cash equivalents 4,296 5,351
Trade receivables 34,842 24,251
Other receivables 3,390 2,364
Work in progress 4,836 435
Income tax receivables 1,513 1,429
------------ ------------
48,877 33,830
Non-current assets
Intangible assets (8) 10,587 10,402
Goodwill (8) 48,471 47,513
Property, plant and equipment 3,563 3,352
Income tax receivables (6) 1,420 1,264
Deferred tax assets (6) 762 445
------------ ------------
64,803 62,976
Total Assets 113,680 96,806
============ ============
Current liabilities
Bank loans and overdrafts 6,779 1,656
Finance lease liabilities 639 650
Trade payables 6,240 3,652
Other provisions 10 19
Tax accruals (6) 618 672
Tax liabilities 5,263 3,531
Other current liabilities 15,504 12,991
------------ ------------
35,053 23,171
Non-Current liabilities
Bank loans 2,000 2,112
Finance lease liabilities 1,131 779
Other provisions 5 30
Pension provisions 228 120
Deferred tax liabilities (6) 2,366 2,347
Other non-current liabilities 4,821 6,637
------------ ------------
10,551 12,025
Total Liabilities 45,604 35,196
============ ============
Shareholders' equity (9)
Share capital 27,263 27,263
Share premium 36,190 34,747
Statutory reserves 52 53
Other reserves -5,214 -7,360
Retained earnings 9,810 6,907
------------ ------------
Equity attributable to owners of
the parent 68,101 61,610
Non controlling interest -25 0
------------ ------------
Total Equity 68,076 61,610
------------ ------------
Equity and Liabilities 113,680 96,806
============ ============
Consolidated Statement of Cash Flows
For the year ended 31 December 2010 (IFRS)
Year ended Year ended
31 December 31 December
2010 2009
EUR'000 unaudited audited
Net cash flow from operating activities
Profit before tax 6,323 4,900
Add back for
Depreciation and amortisation 7,548 6,535
Profit on the sale of property, plant
and equipment 203 31
Other non-cash income not affecting
payments 943 -1,435
Net interest income 707 976
------------- -------------
Operating profit before changes in the net
current assets 15,724 11,007
Increase (Decrease) in trade receivables
and
receivables from partly completed
contracts not yet billed -10,591 1,910
Increase in work in progress, other
assets,
pre-paid expenses and deferred charges -5,584 -476
Increase (Decrease) in trade creditors 2,588 -621
Increase (Decrease) in remaining
accruals 3,403 -3,151
Increase in pension accruals 59 35
Increase (Decrease) in other liabilities
and
deferred income 368 407
------------- -------------
Cash flow from operating activities 5,967 9,111
Cash effect of foreign exchange rate
movements -179 -15
Interest payments -794 -642
Tax payments -1,345 -1,419
------------- -------------
Net cash flow from current business
activities 3,649 7,035
Cash flow from investment activities
Purchase of intangible assets -5,903 -4,472
Purchase of property, plant and equipment -2,156 -1,801
Cashflows arising from business
combinations -203 -1,923
Proceeds from the sale of property, plant
and equipment 0 0
Foreign currency result 179 15
Interest received 34 24
------------- -------------
Net cash flow from investment activities -8,049 -8,157
Cash flow from financing activities
Dividends paid -1,909 -2,880
Proceeds from the issue of share capital 51 92
Increase of shareholder loans 0 700
Repayment of finance loans -112 -212
Repayment of shareholder loans -250 -650
Increase of finance loans 5,123 3,347
Increase of finance leasing 1,135 1,194
Redemption / termination of leasing
contracts -794 -871
------------- -------------
Net cash flow from financing activities 3,244 720
Change in the level of funds affecting
payments -1,156 -402
Changes in the financial resources due to
exchange rate movements 101 0
Cash and cash equivalents
at the beginning of the period 5,351 5,753
------------- -------------
Cash and cash equivalents
at the end of the period 4,296 5,351
============= =============
1. Description of business activities
SQS, based in Cologne, Germany, is one of the largest
independent European pure play providers of software testing and
quality management services by turnover. SQS is independent from
software vendors and other IT service suppliers. It can therefore
provide unbiased opinions to customers on the software products and
projects it is engaged to assess and improve. SQS offers services
designed to support the quality of software and IT systems from
initial project definition through the development stage and up to
final implementation and, thereafter, in relation to ongoing
maintenance. For more than twenty nine years, SQS has been offering
a comprehensive range of consulting services for enterprise and
technical software systems to its clients who include "blue chip"
companies in a variety of sectors, such as financial services,
telecommunications, logistics and manufacturing. SQS currently has
24 offices in 13 countries worldwide with 1,875 employees at the
end of 2010 (previous year 1,470 employees).
2. Summary of Significant Accounting Policies
Basis of preparation
The Consolidated Financial Statements of SQS and its subsidiary
companies ("SQS Group" or "SQS Konzern") are prepared in conformity
with all IFRS Standards (International Financial Reporting
Standards) and Interpretations of the IASB (International
Accounting Standards Board) approved by the EU Commission and
translated into the German language which are to be applied for
those financial statements whose reporting period starts on or
after 1 January 2010. The new and revised Standards and
Interpretations of the IASB were not applied in the business year
2010 prior to the implementation date stipulated.
The Financial Information has been prepared on the historical
cost basis. The Financial Information is presented in Euros and
amounts are rounded to the nearest thousand (EURk) except when
otherwise indicated.
Statement of compliance
The Financial Information of SQS and its subsidiaries ( the 'SQS
Group') has been prepared in accordance with IFRS as adopted for
use in the EU.
First-time application of new standards, change in accounting
policy and adjustment of figures from the previous year
SQS has applied the Standards and Interpretations of the IASB as
applicable in the EU which are binding for financial years
commencing on or after 1 January 2010. The changes do not have any
effect on the accounting treatment of assets and liabilities or
their valuation.
SQS does not apply any further changed or newly passed standards
prior to the implementation date stipulated. Further, according to
the assessment of SQS, the application of these standards would not
have any effect on the financial statements.
The adoption of follow new and amended IFRS and IFRIC
interpretations was mandatory for accounting periods beginning on
or after 1 January 2010 and relevant for the financial statements
or performance of the SQS Group:
IFRS 2 Group Cash-settled Share-based Payment Arrangements
(Amendment)
IFRS 3 Business Combination (revised)
IAS 27 Consolidated and Separate Financial Statements
(Amendment)
IFRS 2 Group cash-settled share-based payment arrangement - For
group reporting and consolidated financial statements, the
amendment clarifies that if an entity receives goods or services
that are cash settled by shareholders not without the group, they
are outside the scope of IFRS 2. In the financial year 2010 the
adoption of this amendment did not have any impact on the financial
position or the performance of the SQS Group.
IFRS 3 Business combinations - Comprehensive revision on
applying the acquisition method (effective from 1 July 2009). The
revised standard continues to apply the acquisition method to
business combinations, with some significant changes. For example,
all payments to purchase a business are to be recorded at fair
value at the acquisition date, with contingent payments classified
as debt subsequently re-measured through the income statement.
There is a choice on an acquisition-by-acquisition basis to measure
the non-controlling interest in the acquiree either at fair value
or at the non-controlling interest's proportionate share of the
acquiree's net assets. All acquisition-related costs should be
expensed. SQS have been applying IFRS 3 (Revised) prospectively to
all business combinations since 1(st) July 2009. In the financial
year 2010 SQS did not have any business combination.
IAS 27 Consolidated and Separate Financial Statements - The
revised standard requires the effects of all transactions with non
controlling interests to be recorded in equity if there is no
change in control. The standard also specifies the accounting when
control is lost. Any remaining interest in the entity is
re-measured to fair value, and a gain or loss is recognised in
profit or loss. The impact of this amendment is shown in the
statement of changes in equity.
The following new an amended IFRS and IFRIC are mandatory for
accounting periods beginning on or after 1 January 2010 but are not
relevant to the group's operations:
IFRS 1 First-Time Adoption of International Financial Reporting
Standards - Additional Exemptions for First-time Adopters
IAS 39 Financial Instruments: Recognition and Measurement -
Eligible Hedged Items (Amendment)
IFRIC 17 Distributions of Non-cash Assets to Owners
IFRS 1 Additional exemption for First-time adopters - The
amendment will provide relief to entities that are first-time
adopters with oil and gas assets or leases by reducing the cost of
transition to IFRS (effective on or after 1 January 2010).
IAS 39 Eligible Hedged Items - This amendment clarifies two
hedge accounting issues: The Inflation in a financial hedged item
and a one-sided risk in a hedged item.
IFRIC 17 Distributions of Non-Cash Assets to Owners (effective
from 1 July 2009). The Interpretation clarifies that a dividend
payable should be recognised when the dividend is appropriately
authorised and is no longer at the discretion of the entity.
Further it clarifies that an entity should measure the dividend
payable at the fair value of the net assets to be distributed and
an entity should recognise the difference between the dividend paid
and the carrying amount of the net assets distributed in profit or
loss.
The adoption of the interpretations and amendments to existing
standards which were part of the IASB annual Improvement Project
published in April 2009 did not have any material effect on results
of operations, financial position or cash flows of SQS.
The following standards and amendments to existing standards
have been published and are mandatory for the group's accounting
periods beginning on or after 1 January 2011 or later periods, but
the group has not early adopted them:
IFRS 1 First-Time Adoption of International Financial Reporting
Standards - Limited Exemption from Comparative IFRS 7 Disclosures
for First-time Adopters
IFRS 9 Financial Instruments: Classification and Measurement
IAS 24 Related Party Disclosures (Revised)
IAS 32 Financial Instruments: Presentation - Classification of
Rights Issues (Amendment)
IFRIC 14 Prepayments of a Minimum Funding Requirement
(Amendment)
IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments
IFRS 1 Limited Exemption from Comparative IFRS 7 Disclosures for
First-time Adopters - The amendment gives first-time adopters the
same transition provisions that Amendments to IFRS 7 provides to
current IFRS preparers. These provisions give relief from providing
comparative information in the disclosures required by the
amendments in the first year of application. The amendment is
effective on 1 July 2010, with earlier application permitted.
IFRS 9 Financial Instruments: Classification and Measurement -
The standard as issued reflects the first phase of the IASB's work
on the replacement of IAS 39. IFRS 9 introduces new requirements
for classifying and measuring financial assets and is likely to
impact the SQS Group's accounting for its financial assets. This
standard is effective for periods beginning on or after 1(st)
January 2013. However, the standard has not yet been endorsed by
the EU.
IAS 24 Related Party Disclosures - The revised standard
clarifies and simplifies the definition of a related party and
removes the requirement for government-related entities to disclose
details of all transactions with the government and other
government-related entities. The standard is mandatory for annual
periods beginning on or after 1(st) January 2011. SQS will need to
consider the revised definition of related parties to ensure all
the relevant information is still being capture.
IAS 32 Financial Instruments: Presentation - Classification of
Rights Issues - The amendment addresses the accounting for right
issues that are denominated in a currency of the issuer. Rights
issued in foreign currencies that were previously accounted for as
derivatives will now be classified as equity instruments. The
amendment applies to annual periods beginning on or after 1(st)
February 2010.
IFRIC 14 Prepayments of a Minimum Funding Requirement
(Amendment) - IFRIC 14 provides guidance on assessing the
recoverable amount of a net pension asset. The amendment permits an
entity to treat the prepayment of a minimum funding requirement as
an asset. The amendment is effective for annual periods beginning
1(st) January 2011.
IFRIC 19 Extinguishing Financial Liabilities with Equity
Instruments - The interpretation clarifies the accounting by an
entity when the terms of a financial liability are renegotiated and
result in the entity issuing equity instruments to a creditor of
the entity to extinguish all or part of the financial liability
(debt for equity swap).
Any gain or loss is recognised immediately in profit or loss,
which is measured as the difference between the carrying amount of
the financial liability and the fair value of the equity
instruments issued. IFRIC 19 is effective for annual periods
beginning on or after 1(st) July 2010.
Further, according to the assessment of SQS, the application of
these standards and interpretations will not have an significant
impact on results of operations, financial position or cash flows
of SQS.
The interpretations and amendments to existing standards which
are part of the IASB annual Improvement Project issued in 2010 have
no material effect on results of operations, financial position or
cash flows of SQS.
Basis of consolidation
The Financial Information comprises the financial statements of
SQS Software Quality Systems AG and its subsidiaries as at 31
December each year. Subsidiary company financial statements are
prepared on a basis consistent with those of other SQS Group
companies. All companies in the SQS Group have the same accounting
reference date of 31 December.
All inter-company balances and transactions, including
unrealised profits arising from intra-group transactions, have been
eliminated in full.
Subsidiaries are consolidated from the date on which control is
transferred to the SQS Group and cease to be consolidated from the
date on which control is transferred out of the SQS Group. SQS
obtains and exercises control through voting rights.
As at 31 December 2010, the Company held interests in the share
capital of more than 20 % of the following undertakings (all of
those subsidiaries have been consolidated):
Country of
incorporation 31.12.2010 31.12.2009
-------------------------- --------------------------
Result Result
Share for Share for
of the of the
capital Equity year capital Equity year
% EURk EURk % EURk EURk
Consolidated
companies
SQS Group
Limited,
London UK 100.0 7,095 2,101 100.0 5,413 873
SQS Software
Quality
Systems
(Ireland)
Ltd.,
Dublin Ireland 100.0 2,588 408 100.0 1,473 722
SQS Nederland The
BV, Houten Netherlands 90.5 (516) (265) 90.5 (251) (73)
SQS GesmbH,
Vienna Austria 100.0 1,110 537 100.0 575 227
SQS Software
Quality
Systems
(Schweiz)
AG, Zurich Switzerland 100.0 3,816 1.483 100.0 1,966 374
SQS Group
Management
Consulting
GmbH,
Vienna Austria 100.0 4,087 1,636 100.0 4,934 1,737
SQS Group
Management
Consulting
GmbH,
Munich Germany 100.0 112 (582) 100.0 684 563
SQS Egypt
S.A.E,
Cairo Egypt 100.0 (17) 71 100.0 (554) (410)
SQS Software
Quality
Systems
Nordic AB,
Kista Sweden 100.0 81 (229) 100.0 300 (23)
SQS India,
Pune India 75.0 1,402 753 60.0 563 118
-------------- --------------- -------- ------- ------- -------- ------- -------
In the first half of 2010 SQS AG paid in line with the SQS
Indias' acquisition contract a further amount of EUR203k
(INR13,005,000) as part of the purchase price obligation.
Furthermore, according to the agreement SQS purchased the further
15 % of the shares in SQS India with the effective date on 27
December 2010.
SQS AG holds 15% of the shares of SQS Portugal Lda with a book
value of EUR0 (previous year EUR0).
Foreign currency translation
The Euro (EUR) is the functional and reporting currency of the
Company and its Euroland subsidiaries. For these entities,
transactions in foreign currencies are initially recorded in the
functional currency at the exchange rates valid at the date of the
transaction. Monetary assets and liabilities denominated in foreign
currencies are translated at the functional currency spot rate of
exchange ruling at the balance sheet date. All differences are
taken to the consolidated income statement. Non-monetary items that
are measured at historical costs in a foreign currency are
translated using the exchange rate as at the date of initial
transaction.
The following subsidiaries have own functional currency:
Subsidiary Functional currency
-------------------------------------- ----------------------
SQS Group Ltd. with business activity GBP (Pounds Sterling)
in UK
-------------------------------------- ----------------------
SQS Group Ltd. with business activity ZAR (South African
in South Africa Rand)
-------------------------------------- ----------------------
SQS Software Quality System (Schweiz) CFH (Swiss Franc)
AG
-------------------------------------- ----------------------
SQS India INR (Indian Rupee).
-------------------------------------- ----------------------
SQS Nordic with business in Sweden SEK (Swedish Crona)
-------------------------------------- ----------------------
SQS Nordic with business in Norway NOK (Norwegian
Crona)
-------------------------------------- ----------------------
SQS Egypt EGP (Egyptian
Pound)
-------------------------------------- ----------------------
At the reporting date, the assets and liabilities of these
subsidiaries are translated into Euros at the exchange rate valid
at the balance sheet date. The items of the income statement are
translated at the weighted average exchange rate for the year. The
exchange differences arising on translation are recognised in other
comprehensive income and accumulated in a separate reserve in
equity.
On disposal of a foreign entity, the cumulative amount of
exchange differences relating to that particular foreign entity are
reclassified from equity to profit or loss as a reclassification
adjustment when the gain or loss on disposal is recognised.
3. Segmental reporting
In January 2010 the SQS Group has changed its organisational
structure. There are two major business units acting as provider
for consultancy services in their regions. Both regional business
units report their financial information to the management of SQS
AG as chief decision maker. The third reporting unit includes the
Training & Conferences business as well as the Software Testing
Products. Both, Training & Conferences (T&C) as well as
Software Testing Products (STP) are operating segments according to
IFRS 8 as they are reported separately to the management of SQS AG.
However, neither T&C nor STP fullfill the criteria of IFRS
8.13. Therefore the financial information according to T&C and
STP has been aggregated according to IFRS 8.12 under the reporting
segment "Other".
Based on this organisational structure the SQS Group has
established the three following reportable operating segments:
-- CEME (Central Europe Middle East),
-- WONS (West Organisation North & South),
-- Other (includes STP (Software Testing Products) and T&C
(Training & Conferences)).
The segments "WONS" and "CEME" administrate the existing places
of business as follows:
-- WONS: UKISA (UK, Ireland and Southafrika), SQS Nordic
(Sweden, Norway and Finland), SQS India (India, USA)
-- CEME: SQS Germany, SQS Switzerland, SQS Austria, SQS
Nederland, SQS Group Management Consulting, SQS Egypt.
The segment "Other" includes two important roles, namely selling
and leasing of Software Testing Products and providing of Trainings
as well as hosting of Conferences.
These profits centres run all revenue and profit generating
units as market facing profit centres.
The profit centre is reportable to the Group Management Board
(GMB) in Germany. Each segment has a regional board. The board
includes three roles CEO (Chief Executive Officer), CMO (Chief
Market Officer), and COO (Chief Operations Officer).
The Group Management Board monitors the operating results of the
operating segments separately for the purpose of making decisions
about resource allocation and performance assessment. Segment
performance is evaluated based on operating profit or loss.
Transactions between the segments or legal entities are made on
an arms length basis. Centrally incurred external costs relating to
subsidiaries are recharged to the subsidiaries affected. Cost
allocations between the segments or legal entities are not
charged.
The non-profit Centres include important functions such as
Portfolio Management, Marketing Communication, Finance &
Administration, IT, Human Resources, Managed Services Support and
Sales Support.
The non-profit Centres are allocated to the segments as far as
they do direct services to the segments. As far as they provide
general services to the whole group their costs are not allocated
and shown under 'Non-allocated costs'.
The assets and liabilities relating to the operating segments
are not reported because they are not reported to the Group
Management Board. Furthermore, Group financing (including finance
costs and finance income) and income taxes are managed on a group
basis and are not allocated to operating segments.
In fiscal year 2009 the Company had four reportable segments
namely Germany, UK based business (including Ireland, South Africa
and India as those countries are organised as a unit "UKISA"),
Switzerland, and other countries. The segment "Other countries"
included Austria, Nordic, Egypt, and the Netherlands.
Previous year information has been reclassified to correspond to
the new reporting format.
The following tables present revenue and profit information
regarding the SQS Group's operating segments for the years ended 31
December 2010 and 2009.
2010 CEME WONS Other Total
EURk EURk EURk EURk
Revenues from external
customers 96,400 60,354 6,126 162,880
Intersegment revenues 877 1,532 27 2,436
Segment profit or loss 8,216 4,208 (1,981) 10,443
Non-allocated costs (3,413)
EBIT 7,030
Financial result (707)
EBT 6,323
Taxes on income (1,536)
Result for the period 4,787
Profit share of minority
shareholders (25)
Result of the Group for
the period 4,812
-------------------------- ------- ------- -------- --------
2009 CEME WONS Other Total
EURk EURk EURk EURk
Revenues from external
customers 84,653 42,949 6,742 134,344
Intersegment revenues 859 2,043 0 2,902
Segment profit or loss 7,368 1,760 (61) 9,067
Non-allocated costs (3,205)
EBIT 5,862
Financial result (962)
EBT 4,900
Taxes on income (1,262)
Result for the period 3,639
Profit share of minority
shareholders 0
Result of the Group for
the period 3,639
-------------------------- ------- ------- ------ --------
4. Expenses
The Consolidated Income Statement presents expenses according to
function. Additional information concerning the origin of these
expenses, by type of cost, is provided below:
Cost of material
The cost of material included in the cost of sales in the year
ended 31 December 2010 amounted to EUR13,894k (2009: EUR9,640k).
Cost of material relates mainly to the procurement of outside
services such as contract software testing engineers. In addition,
certain project-related or internally used hardware and software is
shown under cost of material.
Employee benefits expenses
2010 2009
EURk EURk
Wages and salaries 86,917 72,619
Social security contributions 11,399 10,124
Expenses for retirement benefits 1,882 1,826
-------- -------
100,198 84,569
======== =======
The expenses for retirement benefits include the change in
pension accruals and expenses for defined contribution plans such
as direct insurance and provident fund costs.
The average numbers of employees in the operating segments of
the SQS Group were as follows:
2010 2009
No. No.
CEME 837 758
WONS 729 603
Other 184 86
Total 1,750 1,447
====== ======
Government grants
Government grants in the amount of EUR199k (2009: EUR578k) have
been granted for personnel expenses for the additional employees in
Gorlitz and in UK (2009: Gorlitz) and have been recognised as
income. Of these an amount of EUR176k (2009: EUR374k) had not yet
been paid to SQS at balance sheet date. There are no unfulfilled
conditions or contingencies attached to these grants.
Amortisation and Depreciation
Amortisation and depreciation charged in the year ended 31
December 2010 amounted to EUR7,548k (2009: EUR6,534k). Of this,
EUR2,833k (2009: EUR2,387k) was attributable to the amortisation of
development costs.
Rentals and leasing
Operating lease costs in connection with office space and
equipment in 2010 amounted to EUR6,261k (2009: EUR5,189k).
The lease contracts will expire between 2011 and 2014. Some of
them can be prolonged or renewed, some allow price alignments.
5. Net finance costs
The net finance costs are comprised as follows:
2010 2009
EURk EURk
Interest income 98 98
Exchange rate gains 397 138
-------- --------
Total finance income 495 236
-------- --------
Interest expense (984) (1,080)
Exchange rate losses (218) (118)
-------- --------
Total finance costs (1,202) (1,198)
-------- --------
Net finance costs (707) (962)
======== ========
Of which from:
Loans and receivables (510) (480)
Financial liabilities measured at amortised
cost (197) (482)
Finance income results from fixed deposit investments and
investments in securities maturing in the short term which yield
interest income, or securities negotiable at short notice.
Interest expense relates to interest on bank liabilities.
Further, an amount of EUR141k (2009: EUR387k) results from
discounting the liability from:
- the purchase of SQS Group Management Consulting GmbH EUR0k
(2009: EUR179k)
- the purchase of SQS Software Quality Systems Nordic AB EUR115k
(2009: EUR103k) and
- the purchase of SQS India EUR26k (2009: EUR105k) calculated
using the effective interest method.
Finance income and costs are stated after foreign exchange rate
gains and losses.
6. Taxes on earnings
Deferred income tax is provided, using the liability method, on
all temporary differences at the balance sheet date between the tax
bases of assets and liabilities and their carrying amounts for
financial reporting purposes. The calculation is based on the tax
rates anticipated in the respective countries as at the realisation
date. These are essentially based on the statutory provisions
applicable or passed by the government at the date of the Financial
Statements.
As a basic principle, SQS Software Quality Systems AG in Germany
is liable to corporate income tax, the solidarity surcharge and
trade tax. The results of the Company are subject to corporate
income tax. The German corporate income tax amounts to 15 % (2009:
15%). A 5.5% solidarity surcharge is imposed on corporate income
tax. The trade income tax amounts to 15.75% of the taxable income.
Consequently the total income tax rate amounts to approximately 30
%.
Consolidated income tax expense is as follows:
2010 2009
EURk EURk
Current tax expense 1,893 1,501
Deferred tax (289) (158)
Capitalisation of the corporation tax
credit (67) (81)
------ ------
Taxes on income 1,537 1,262
====== ======
A reconciliation of income tax applicable to the accounting
profit before income tax at the statutory income tax rate to the
income tax expense in the income statement is as follows:
2010 2009
EURk EURk
Profit before tax multiplied by the
standard rate of
German income tax of 30 % (2009: 30%) 1,897 1,470
Adjustments in respect of current income
tax of previous years 51 (711)
Interest cost of the purchase obligations 42 0
Tax of dividend payout of subsidiaries 38 521
Not allowable personnel expenses for
stock options 24 56
Expenditure not allowable for income
tax purposes 18 22
Adjustments for tax losses carried
forward 0 123
Differential tax rates in respect of
overseas subsidiaries (412) (143)
Capitalisation of the corporation tax
credit (67) (81)
Government grants (49) 0
Other (5) 5
At effective income tax rate of 24.3%
(2009: 25.8 %) 1,537 1,262
====== ======
Deferred taxes with an amount of EUR0k (2009: EUR79k) were
charged directly to equity.
In accordance with -- 37 KStG (German corporation tax law) SQS
has capitalised the corporation tax credit on 31 December 2010 at a
present value of EUR1,134k (2009: EUR1,264k). The present value has
been discounted using an interest rate of 5,5%. The tax credit will
be paid off by eight further instalments until 2017.
For the assessment of deferred tax assets and liabilities, SQS
Software Quality Systems AG applies a tax rate based on the current
tax law in Germany of 30% (2009: 30%) which takes into account
corporation tax, the solidarity surcharge and trade tax. For
deferred tax assets and liabilities of the overseas subsidiaries,
the local tax rates are taken as the basis.
Deferred income tax relates to the following:
31 December 31 December
2010 2009
EURk EURk
Losses carried forward 419 173
Pensions accruals 66 44
Personnel provisions for part retirement 83 0
Property subventions 185 115
Trade receivables 0 62
Other accruals 9 51
------------ ------------
Deferred tax assets 762 445
------------ ------------
Capitalised development costs (1,332) (852)
Trade receivables (14) (14)
Capitalisation of customer relations (955) (1,409)
Obligation from SQS Nordic and SQS
India purchase (45) (44)
Other (20) (28)
-------- --------
Deferred tax liabilities (2,366) (2,347)
-------- --------
Net deferred tax liabilities (1,604) (1,902)
======== ========
Deferred tax assets are recognised when it is considered
probable that economic benefit will flow to the entity. Based on
the earnings situation of the past and on the business expectations
for the foreseeable future, value adjustments are determined if
applicable.
Where a company has suffered losses, deferred tax credits
thereon are capitalised if the ability in the future to set off the
losses with future income is permissible under the respective
national provisions. According to the planning of SQS BV and SQS
Nordic, a return to taxable profits is regarded as very
probable.
SQS Egypt disposes of accumulated tax losses carried forward of
EUR526k. In respect of these losses no deferred tax asset have been
capitalised.
7. Earnings per share
The earnings per share presented in accordance with IAS 33 are
shown in the following table:
2010 2009
EURk EURk
Profit for the year attributable to
the equity shareholders 4,811 3,639
Diluted profit for the year 4,811 3,639
=========== ===========
Weighted average number of the shares
in issues, undiluted 27,263,419 26,242,287
Dilutive effect from stock option programme 728,122 776,492
Weighted average number of shares in
issues, diluted 27,991,541 27,018,779
=========== ===========
Undiluted profit per share EUR 0,18 0.14
Diluted profit per share EUR 0,17 0.13
Adjusted profit per share EUR 0,25 0.21
=========== ===========
Undiluted earnings per share are calculated by dividing the
profit for the year attributable to equity shareholders by the
weighted average number of shares in issue during 2010: 27,263,419
(2009: 26,242,287).
Diluted earnings per share are determined by dividing the profit
for the year attributable to equity shareholders by the weighted
average number of shares in issue plus any share equivalents which
would lead to a dilution.
The adjusted earnings per share 2010 and 2009 were calculated
based on the profit after tax:
- less the corporate income tax asset of EUR67k (2009:
EUR72k),
- plus the interest cost of the purchase obligations of EUR141k
(2009: EUR386k),
- plus amortisation cost of the acquired customer relationships
as part of the business combinations of EUR1,557k (2009:
EUR1,557k),
- plus expenses in terms of the employee participation program:
the difference between the market share price and the selling price
of shares EUR78k (2009: EUR23k),
- plus differences of evaluation of pensions according to IFRS
and HGB (German GAAP) of EUR66k (2009: EUR106k).
- plus pension interest expenses of EUR49k (2009: EUR46k),
- plus expenses and claims vested as part of partial retirement
of EUR356k (2009: EUR0k).
Further the difference between taxes on income payable under
local GAAP and IFRS of EUR(270)k (2009: EUR(230k)) has been
adjusted. This results in an adjusted profit after taxes of
EUR6,721k (2009: EUR5,527k). This divided by shares 27,263,419
(2009: 26,242,287) shows adjusted earnings per share of EUR0.25
(2009: EUR0.21).
Management considers that the stock options given to employees
may have a dilutive effect. On a weighted average basis shares
resulting from stock option programmes amounted to 728,122 (2009:
776,492) shares. This effect leads to an immaterial difference
between undiluted earnings and diluted earnings per share. The
number of potential shares is calculated on a pro rata basis.
Instruments that could potentially dilute basic earnings per
share in the future are authorised capital and conditional capital
(see note 9).
8. Intangible assets
The composition of this item is as follows:
Remaining
useful
Book values life 31.12.2010 31.12.2009
--------------------------------- ---------- ----------- -----------
Goodwill Years EURk EURk
SQS UK based business 29,941 29,014
SQS BV, Netherlands 555 555
SQS Group Management Consulting
GmbH 9,100 9,100
SQS Software Quality Systems
Nordic AB 6,455 6,714
SQS India 2,188 1,898
Other 232 232
--------------------------------- ---------- ----------- -----------
Goodwill 48,471 47,513
Development costs of software
Capitalisation 2008 0 0 685
Capitalisation 2009 1 1,168 2,236
Capitalisation 2010 2 2,051 0
----------- -----------
3,219 2,921
Software 1 to 3 2,631 2,634
Other development costs 1,449 0
Customer relationships 3,289 4,847
Intangible assets 10,587 10,402
--------------------------------- ---------- ----------- -----------
Development costs of software were capitalised in the business
year in the amount of EUR3,127k (in the previous year EUR3,320k)
and amortised over a period of 36 months. The other development
costs were capitalised, but not yet amortised in the business year.
These development costs relate to the consulting product 'Software
Tests as Managed Services'. The estimated usefull life of this
product covers a period of five years. Amortisation is expected to
start in the second half of 2011.
The amortisation of software and remaining intangible assets is
spread over the functional costs in accordance with an allocation
key.
In order to test the recoverability of goodwill SQS conducted
impairment tests, comparing the value in use of each cash
generating unit with their carrying amounts. Impairment tests were
carried out for the SQS UK based business (SQS UKISA), for SQS
Nederland B. V., for the SQS Group Management Consulting GmbH
(formerly Triton), for the SQS Software Quality Systems Nordic AB
(formerly Validate), as well as SQS India (formerly VeriSoft
InfoSystems and VeriSoft InfoServices).
Those entities are considered to be the cash generating units
which are relevant for impairment testing as they represent the
lowest level at which management of the SQS Group monitors the
underlying value of each goodwill acquired within each
transaction.
All impairment tests are based on the value in use of each cash
generating unit. In order to determine the values in use management
has set up budgets and forecasts for each cash generating unit. The
key assumptions on which management has based its cash flow
projections are the future development (growth) of revenues, the
development of the gross margin based on the expected capacity of
the SQS-consultants and the development of general and
administrative costs as well as sales and marketing costs in
relation to revenues.
In its budgets and forecasts management projected detailed cash
flows over a period of five years. For the periods thereafter
constant cash flows were assumed in accordance with the discounted
cash flow method.
The determination of the cash flows is based on the state of
knowledge as of November 2010. Beside experiences from the past,
management considered the recent global economical development, the
actual orders on hand, the actual number of SQS-consultants as well
as the strategy of SQS for the coming five years.
The budgets of the European cash generating units except SQS
Nordic show an increase in revenues for 2011 between 10 % and 31.2
% compared to the year 2010. For the years 2012 to 2015 the growth
per year is reduced to 10 % for each of those cash generating
units. Management expects that all subsidiaries are going to grow
higher than the market. Regarding SQS India management assumes a
growth of 69.1 % for 2011 and a further growth between 12 % and 20
%for each of the years 2012 until 2015.
Further management expects that the gross margin ratio will
slightly be increased and that the expense ratio of general and
administrative costs as well as sales and marketing costs will be
decreased for most of the subsidiaries of SQS.
In accordance with IAS 36, the impairment tests were based on
the following assumptions:
-- Expenses and income, assets and debts in connection with
taxes on earnings, such as active and passive deferred taxes, tax
reimbursement claims, tax liabilities and tax accruals, were
eliminated both from the carrying amount of the cash generating
unit and from the value in use,
-- The cash flows, either in or out, from financing activities
have not been taken into account,
-- For reasons of practicability, in compliance with IAS 36.79,
the trade receivables and trade creditors and also other
liabilities were included in the calculations when estimating the
future cash flows and the book value,
-- For the transition from the value of the entire business to
the value in use of the equity holders, the entire liabilities at
market value (= book value) were eliminated,
-- The growth rate in perpetuity of 1.0, and 1.5% for India,
respectively ,
-- The goodwill was allocated entirely to the carrying amount of
the cash generating unit in accordance with IAS 36.80 and IAS
36.81,
-- The discount rates applied to the cash flow projections were
pre-tax interest rates in a range between 8.5 % and 10.7 %.
Neither in 2010 nor in 2009 impairment losses or reversals of
impairment losses have been recognised.
9. Equity
SQS is listed on the AIM market in London and on the Open Market
in Frankfurt (Main).
Subscribed Capital
The subscribed capital amounts to EUR27,263,419 (in the previous
year EUR27,263,419 ). This is divided into (in the previous year
27,263,419) individual registered shares with an arithmetical share
in the share capital of EUR1 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 issued share capital are as follows:
Individual Nominal
shares value
---------------------------------------------------- ----------- -----------
Number EUR
---------------------------------------------------- ----------- -----------
As at 1 January 2009 26,185,075 26,185,075
---------------------------------------------------- ----------- -----------
Capital increase against contribution in kind for
the acquisition of the Triton Unternehmensberatung
GmbH (3rd tranche) ( Entry of 11 December 2009) 1,021,299 1,021,299
---------------------------------------------------- ----------- -----------
Capital increase against cash from authorised
capital for employee participation (Entry of
23 December 2009) 57,045 57,045
---------------------------------------------------- ----------- -----------
As at 31 December 2009 27,263,419 27,263,419
---------------------------------------------------- ----------- -----------
As at 31 December 2010 27,263,419 27,263,419
---------------------------------------------------- ----------- -----------
On 26 November 2010 the management board resolved to use
Authorised Capital I and increased the share capital from
EUR27,263,419 by EUR367,053 to EUR27,630,472 by using 367,053 new
registered non-par value shares against contribution in kind. The
supervisory board has consented to this resolution. This resolution
became effective with the entry in the commercial register on 7
January 2011.
On 29 November 2010 and 16 December 2010 the management board
resolved to use the Authorised Capital II and increased the share
capital from EUR27,630,472 by EUR28,265 to EUR27,658,737 by using
28,265 new registered non-par value shares against cash for
employee participation. The supervisory board has consented to this
resolution. This resolution became effective with the entry in the
commercial register on 24 January 2011.
On 17 December 2010 the management board resolved to use
Authorised Capital I and increased the share capital from
EUR27,658,737 by EUR234,552 to EUR27,893,289 by using 234,552 new
registered non-par value shares against contribution in kind. The
supervisory board has consented to this resolution. This resolution
became effective with the entry in the commercial register on 24
January 2011.
As the capital increases legally became effective in January
2011 as at 31. December 2010 the issues of shares are shown as
additional paid in capital in share premium.
SQS had no shares in its ownership as at 31 December 2010.
Conditional capital
The General Meeting of 2 June 2006 resolved a conditional
capital by an amount of up to EUR1,500,000 by issuance of up to
1,500,000 new individual registered shares (Conditional Capital
II). This resolution became effective with the entry of 30 June
2006. The Conditional Capital II serves to grant up to 1,500,000
share options as incentive compensation for SQS employees and
executives. The increase of the Conditional Capital will be made in
the case of exercising of the stock options from holders.
Authorised capital
The General Meeting of 20 May 2009 resolved a cancellation of
the Authorised Capital I, the Authorised Capital II, the Authorised
Capital III and the Authorised Capital IV and a creation of a new
Authorised Capital I and Authorised Capital II by issuing of up to
10,400,000 and up to 2,600,000 new registered non-par value shares,
respectively, against contributions in cash or in kind until 30
April 2014.
On 5 November 2009 the Authorised Capital I was partially used
by using of 1,021,299 new registered non-par value shares against
contribution in kind for the acquisition of Triton
Unternehmensberatung GmbH (3rd tranche).
Further the management board resolved on 11 November 2009 to use
the Authorised Capital II by issuing 57,045 new registered non-par
value shares against cash for employee participation.
Thereafter, the authorised capital developed as follows:
EUR
As at 1 January 2009 6,112,345
---------------------------------------- ------------
Cancellation of Authorised Capital I (851,113)
---------------------------------------- ------------
Cancellation of Authorised Capital II (1,444,514)
---------------------------------------- ------------
Cancellation of Authorised Capital III (2,881,540)
---------------------------------------- ------------
Cancellation of Authorised Capital VI (935,178)
---------------------------------------- ------------
Increase of Authorised Capital I 10,400,000
---------------------------------------- ------------
Increase of Authorised Capital II 2,600,000
---------------------------------------- ------------
Usage of Authorised Capital I (1,021,299)
---------------------------------------- ------------
Usage of Authorised Capital II (57,045)
---------------------------------------- ------------
As at 31 December 2009 11,921,656
---------------------------------------- ------------
As at 31 December 2010 11,921,656
---------------------------------------- ------------
On 26 November 2010 and 17 December 2010 the Authorised Capital
I was partially used by issuing of 601,605 new registered non-par
value shares against contribution in kind for the acquisition of
Validate Group and Verisoft Group (2nd tranche). The entry into the
commercial register took place on 24 January 2011. After its
partial utilisation the remaining Authorised Capital I now totals
8.777.096.
Further the management board resolved on 29 November 2010 and 16
December 2010 to use the Authorised Capital II by issuing 28,265
new registered non-par value shares against cash for employee
participation. After utilisation of the Authorised Capital II this
amounts to 2,514,690.
Share premium
Additional paid-in capital includes any premiums received on the
issuing of the share capital. Any transaction costs associated with
the issuing of shares are deducted or set off from additional
paid-in capital, net of any related income tax benefits.
Equity-settled share-based employee remuneration is also credited
to additional paid-in capital until related stock options are
exercised.
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 with an amount of EUR(4.088)k (2009:
EUR(6,226)k).
Further, other reserves comprise IPO costs from former years
that are accounted for net of taxes in the amount of EUR1,134k
(2009: EUR1,134k).
Retained earnings
Retained earnings represent the accumulated retained profits
less payments of dividend and losses of SQS Group.
The General Meeting of 26 May 2010 resolved to pay EUR0.07
dividends per share for the business year 2009 in the total amount
of EUR1,908,439.33.
Non Controlling Interests
Up to 1 January 2010 the excess and any further losses
applicable to minorities have been allocated against the majority
interest. In the case that the subsidiary reported profits, such
profits were allocated to the majority interest until the
minority's share of losses previously absorbed by the majority had
been recovered.
Since 1 January 2010 the pro rata profit or loss and each
component of other comprehensive income are attributed to the
minority interests even if those results have a deficit balance.
According to IAS 27 the profit or loss attribution for previous
periods has not been restated.
10. Notes to the Statement of Cash Flows
The cash flow statement 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
investment, financing and business activities.
The sources of funds on which the cash flow statement is based
consist of cash and cash equivalents (cash on hand and bank
balances).
Cologne, 9 March 2010
SQS Software Quality Systems AG
(D. Cotterell) (R. van Megen) (R. Gawron)
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
END
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