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TIDMSQS
RNS Number : 7345Y
SQS Software Quality Systems AG
06 March 2012
6 March 2012
SQS Software Quality Systems AG
("SQS" or the "Company")
Results for the year ended 31 December 2011
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 2011 (the "period").
Financial Highlights:
-- Turnover increased by 16.1% to EUR189.1 million (2010: EUR162.9 million),
o Exceeding testing services market growth rate forecast to have
been 6.5% in 2011 (Source: PAC market study)
-- Gross profit up by 10.7% to EUR57.7 million (2010: EUR52.1 million)
-- Gross profit margin* of 30.5% (2010: 32%)
-- Adjusted PBT** down by 16.5% to EUR7.3 million (2010: EUR8.7 million)
-- Adjusted earnings per share*** down by 28.0% to EUR0.18 (2010: EUR0.25)
-- Much improved operating cash flow of EUR10.2m (2010: EUR6.0 million)
-- Net debt as at 31 December 2011 was EUR9.3 million (31
December 2010: net debt of EUR4.5 million) (30 June 2011: net debt
of EUR13.8 million)
* adjusted in 2010 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 EUR0.1 million pro forma
interest on deferred payment milestones for acquisitions and
evaluation of pensions and EUR1.6 million of amortisation on
intangible assets of acquired companies. Figures of 2010 adjusted
due to changed accounting treatment of actuarial gains/losses on
pension obligations.
*** includes effects under ** above and at local GAAP tax rate
which is EUR0.9 million higher than under IFRS because of EUR0.8
million deferred taxes under IFRS and EUR0.1 million for a deferred
tax income tax asset.
Operational Highlights:
-- Period of investment in revenue growth and transition to a
recognised Managed Services supplier successfully completed
-- Managed Services now represents 22% of total revenues (FY
2010: 11%) with order intake exceeding EUR66.5 million during the
year
-- Gross margin of "mature" Managed Services contracts now at 38.4% of revenue (H1 2011: 36.9%)
-- EUR3 million of overhead costs removed going forward, profit effect visible during 2012
-- Profits impacted by c. EUR2 million of additional costs
incurred in relation to two earlier Managed Services contracts.
Both are now at an improved margin contribution.
-- Total staff numbers of 2,073 at period end (31 December 2010: 1,875)
-- Off/Nearshore staff equal to 42% of total consultancy staff at period end (31 Dec 2010: 39%)
-- Normal utilization rate with average billed days per
consultant of 186 (FY 2010: 186 billed days)
-- Average managed services contract length of 2.5 years further
improving visibility with order backlog of EUR64 million at YE 2011
(YE 2010: EUR39 million)
-- Signed largest ever contract worth EUR20 million over two and a half years
Rudolf van Megen, Chief Executive Officer of SQS, commented: "In
line with our stated strategy, 2011 has been a period of top line
growth, with a particular emphasis on becoming a recognised Managed
Services supplier in our field. This has been a considerable
success and SQS is now of the scale and size where it can compete,
and win against, the largest systems integrators on major testing
services projects for blue-chip companies. Managed Services
contracts now account for 22% of total revenues and we have
contracted a further EUR66.5 million of Managed Services orders
during 2011.
"By focusing on six key market segments we are now turning our
attentions toward profitability, with a strategic focus for 2012 on
improving the average price of engagements and margins. Given the
ongoing difficulties in the wider economy, we retain our cautious
outlook for the IT services industry as a whole. However, with EUR3
million of headcount costs already removed and an increasing number
of Managed Services contracts moving offshore we are confident of
improved performance going forward."
Enquiries:
SQS Software Quality Systems AG Tel. +49 (2203) 91 54
0
Rudolf van Megen, Chief Executive Officer
Rene Gawron, Chief Financial Officer
Westhouse Securities Tel. +44 (0)20 7601 6100
Antonio Bossi
Paul Gillam
Walbrook PR Limited Tel. +44 (0)20 7933 8783
Bob Huxford bob.huxford@walbrookpr.com
Helen Westaway helen.westaway@walbrookpr.com
About SQS
SQS is the world's leading specialist in software quality. This
position stems from 30 years of successful consultancy operation.
SQS consultants provide solutions for all aspects of quality
throughout the software product lifecycle driven by a standardised
methodology and deep experience in various industries.
Headquartered in Cologne, Germany, the company employs more than
2,100 staff. Along with a strong presence in Germany and the UK,
SQS has further subsidiaries in Egypt, Finland, France, India,
Ireland, the Netherlands, Norway, Austria, Sweden, Switzerland,
South Africa and the US. In addition, SQS maintains a minority
stake in a company in Portugal. In 2011, SQS generated revenues of
189.1 million Euros.
With over 5,000 completed projects under its belt, SQS has a
strong client base, including half of the DAX 30, nearly a third of
the STOXX 50 and 20 per cent of the FTSE 100 companies. These
include, among others, Allianz, Beazley, BP, Centrica, Daimler,
Deutsche Post, Generali, JP Morgan, Meteor, Reuters and Volkswagen
as well as companies from a large number of other industries.
For more information, see www.sqs.com
Chief Executive's Statement
Introduction
2011 has been a period of investment for SQS during which time
we have focused on building the size and scale of the Company to
better position us to compete for Managed Services projects with
the largest multi-national system integrators. This has been a
considerable success, with SQS winning larger contracts, including
our largest contract ever, worth EUR20 million over the next two
and a half years. These deals are also being won as a result of the
SQS brand becoming more visible and better recognised than ever
before. As we have now achieved a size close to EUR200 million in
annual revenues and with a number of successful reference projects
underway, we would expect to sign ever larger contracts.
Demand for our offerings has increased across all of our core
geographies during the year. Revenues increased by 16.1% to
EUR189.1 million (2010: EUR162.9 million), significantly
outperforming the software testing market, which was forecast to
grow by just 6.5% during 2011 (Source: PAC market study). SQS has,
therefore, continued to increase its leading market share in the
provision of independent testing services during 2011.
Profitability was impacted during the year, chiefly as a result
of the rapid increase in our Managed Services business to 22% of
total revenues (FY 2010: 11%). In the early stages of Managed
Services contracts, prior to the bulk of the work being moved
off-shore, costs are typically higher and margins lower. However,
our growing experience in the provision of such contracts has led
us to improve their structure resulting in improved early stage
margins and cash flow profile. All contracts signed from H2 2011
onwards have such an improved early stage profile.
In addition, the Company incurred additional costs during the
period in relation to investment into a significant cost reduction
programme, which is expected to result in savings of EUR3 million
per annum going forward.
Profitability was further impacted during 2011 as the result of
additional transition costs of EUR2 million relating to two earlier
Managed Service contracts. The full cost of transitioning these
clients to an optimised onshore/offshore delivery model was borne
by SQS in these instances. However, contracts are now structured in
such a way as to prevent these issues recurring. We remain in
discussions with the clients involved regarding the recovery of
some of these costs, although recouping a significant proportion
now appears unlikely.
Over EUR42.2 million of revenues were received from Managed
Services contracts during the year. Of these, EUR27.4 million
related to contracts now in the mature phase of their life cycle,
generating a gross margin of 38.4%. Revenues of EUR14.8million were
received from contracts in the less mature stages of their life
cycle (including the above mentioned two earlier contracts which
incurred and additional c. EUR2 million in costs), delivering a
lower gross margin of 12.9%.
Of the 1,675 fee earning staff employed by the Company at the
end of 2011, 701 were employed in our offshore and near-shore test
centres such that the number of staff in these locations has
increased to represent 42% of total billable staff numbers (FY
2010: 39%). This increase is in line with our stated strategy to
move to a "pyramid structure" in our delivery and enables us to
offer lower cost solutions to our clients and thereby continue to
increase our market share. All staff taken on during the year (in
total 148 new consultants) are now fully trained and fee earning
and this is expected to result in improved profitability going
forward.
During the year staff utilisation continued at normal levels
with the average number of billed days per consultant constant at
186 days (31 December 2010: 186 days).
New Business
New business wins, along with project extensions from existing
clients, were numerous during 2011. SQS signed 194 new clients
during the year (FY 2010: 137) across a wide variety of sectors,
thereby further reducing exposure to economic risk through
diversification. A number of these wins were also substantial,
examples of which include:
-- Our largest ever contract, worth EUR20 million over the next
two and a half years. The contract is to provide managed testing
services to UBS in Switzerland. As part of the deal, up to 30
testing specialists currently employed by the client will be
transferring to work under SQS.
-- Selection as a preferred partner by an industrial automation
supplier to provide in-the-field testing and maintenance testing
services during the roll-out of the supplier's standard package
software to its industrial clients. Contracts resulting from this
partnership are currently four smaller initial contracts and we are
confident that more opportunities will arise as the software is
rolled out across the partner's global client base.
-- A large European logistics company, to which SQS will provide
Test Management, Test Automation and Functional Testing services in
a contract worth EUR10 million over the next 2 years.
This increase in the number and size of contracts has very much
been in keeping with our strategy of building revenues during the
year, and to this end 2011 has been highly successful. This
strategy was initiated in order to build the scale necessary to bid
for, and secure, contracts with large multi-national clients.
Clients of this nature are keen to see that service providers have
the necessary size and capacity to be able to service large
contracts and scale them up at short notice without materially
affecting the structure of the providers business. With over 2,000
employees and close to EUR200m in revenues SQS believes it is now
of sufficient size to do this, and the size of the contracts we
have won, whilst bidding against some of the world's largest
systems integrators, is testament to this.
A number of these significant client wins, which we have thus
far delivered successfully, are now being used as flagship
references for SQS. This is helping to further build our visibility
and brand recognition in the market place as a leading supplier of
testing services, such that we are now entering a virtuous circle
in which significant client engagements are bringing SQS to the
attention of other blue-chip organisations.
Our strategic focus on the sale of Managed Services projects has
proven particularly successful during 2011 with 22 Managed Services
contracts or contract extensions signed during the period (FY 2010:
22). As a result, the average value and length of our contracts
continues to increase, leading to considerable improvements to
overall revenue visibility and an associated reduction in exposure
to economic uncertainties. Our order backlog of Managed Services
contracts currently stands at EUR63.7 million, with delivery to
take place over the next 3 years.
Services and product lines
SQS runs and monitors the major part of its business based on
two regional business units. Within these business units SQS offers
the following services and product lines.
Professional Services for Business and IT
SQS offers professional services for business and IT in three
major phases of the software lifecycle:
-- Business Requirements phase (PLAN):
SQS provides management consultancy for banking, insurance and
industrial business processes and helps to initiate resulting IT
projects. This service line accounted for 8% of total revenues in
the period (FY 2010: 9%), an increase in value of 12% compared with
FY 2010.
-- Software Implementation or Development phase (BUILD):
Typically run as an IT project, SQS provides professional
testing services and quality management consulting to de-risk IT
projects and to help clients increase efficiencies. These services
are predominantly provided onsite. This service line accounted for
65% of total revenues in the period (FY 2010: 75%), a decrease in
value of 2% compared with FY 2010 mainly due to the strong increase
in Managed Services revenues.
-- Maintenance phase (RUN):
SQS provides Managed Testing Services under long term contracts
providing regression testing for updates, patches and new releases.
Such services typically involve blended offshore / nearshore/
onshore delivery and accounted for 22% of total revenues in the
period (FY 2010: 11%). This represents EUR42.2 million over the
year (an increase of 140% compared with FY 2010) leading to
significantly improved revenue visibility going forward.
Software Testing Products
Our unique suite of software testing products provide consistent
and measurable support for testing services having been developed
from our 30 years experience of software testing projects. Our
products are fully integrated into our offerings, can be integrated
into other market leading tools and are also sold separately to
clients. Tools and Maintenance (incl. re-selling of other third
party tools) accounted for 3% of total revenues in the period (FY
2010: 3%), representing 31% growth to EUR5.8 million.
IT Training and Conferences
During the period a total of 6 iqnite(R) conferences were held
in Europe, South Africa and Australia. Revenue from training and
conferences represented 2% of total revenues in the period (FY
2010: 2%), representing 12% growth to EUR4.4 million.
Acquisitions update
0.6 million shares were issued in January 2011 to satisfy
deferred consideration obligations with regards to the previous
acquisitions of Validate (now SQS Nordics) and Verisoft (now SQS
India).
On 30 June 2011 the earn-out period for Validate came to an end.
No final payment was made and no further earn-out payments are
expected in relation to the Validate acquisition.
Markets
A recent study from Gartner predicted a 0.7% contraction in the
IT market for Western Europe during 2012. Despite this we continue
to witness strong momentum in the independent testing market and
continue to see moderate revenue growth. We are therefore confident
that we will be able to become more selective in our engagements
going forward.
During the period we experienced high demand and strong growth
across a wide variety of verticals mainly in retail, logistics,
insurance, energy & utilities and banking, thereby improving
our risk profile through diversification.
Business strategy
Our core strategy is to leverage our leading market position
through the continued provision of independent, integrated quality
and testing solutions and services. Going forward the company has
added the focus on business domains in the industries of financial
services, insurance, retail & logistics, telecommunications,
energy & utilities and manufacturing. This is in addition to
the previous focus on technology service (e.g. testing services,
requirements management). Over the past two years this has involved
focusing on revenue growth, paying particular attention to
expanding our Managed Services business, in order that leading
organisations recognise SQS as being of a scale sufficient to be
able to successfully execute large, long-term projects.
Typically, large companies are happy to engage testing services
providers in projects that are no larger than 5% to 10% of the
provider's revenues or client base. Now that SQS has close to
EUR200m in annual revenues and over 2,100 employees it is far
easier for us to be employed by large, multi-national organisations
on contracts of significant size. These organisations are
increasingly recognising that if a contract were to require scaling
up to 100 or more employees, SQS has sufficient size and
flexibility to easily effect such changes.
In order to rapidly build scale during this time it was
necessary for us to undertake some significant projects that were
less lucrative in their early stages than we might otherwise have
considered. These projects have had a detrimental effect on cash
flow and profitability during the years 2010 and 2011 but have
proved essential in enabling us to secure other contracts and in
providing the desired forward momentum.
The success of this strategy is evident given the significant
contracts we have signed during the year, which were won in
competition against some of the largest and most prominent systems
integrators. We believe the SQS brand is now more visible and
better recognised than ever before and, with a number of successful
projects underway with excellent reference clients, we expect that
the trend towards signing ever larger contracts will continue.
Having therefore reached critical mass in terms of the scale
needed to secure large contracts, our strategy for 2012 will be to
focus on improving profitability and cash flow. To this end we aim
to be increasingly selective in the engagements we undertake,
targeting projects that require a greater off-shore/near-shore
element, thereby offering more attractive margins.
As has already been mentioned, profitability was impacted during
2011 by additional transition costs of c. EUR2 million relating to
two earlier Managed Service contracts. The projects in question
required greater resources to move offshore than had initially been
expected, for which additional costs could not be recovered from
the client during 2011. However, SQS has since implemented changes
to the structure of its contracts to ensure that these problems do
not recur. Pricing in the early stages of Managed Services
contracts are now time-and-materials based and do not move to an
output based pricing model until the project is more mature and the
scope is fully understood. This eliminates the risk to SQS of any
project overrunning in its early, on-shore stages.
In addition, SQS conducted a significant cost reduction
programme during the year, which is expected to result in savings
of EUR3 million per annum going forward. This programme is now
complete and the vast majority of the positive effects arising from
it will be felt in 2012 and beyond.
In line with our previously stated strategy we will continue to
seek to increase the proportion of overall revenues derived from
our Managed Services business. Our aim is for Managed Services to
account for 40% or more of revenues by 2014 and our performance
during 2011, during which contracts of this kind grew to represent
22% of revenues (31 December 2010: 11%) lend us confidence in
achieving our goal. Such contracts are over a longer-term than
traditional projects, currently an average of 2.5 years, and
include protections against early termination and short-term
postponement. As a result, these contracts afford us far greater
revenue visibility, reduce our exposure to potential economic
downturns and allow for greater flexibility and control over
project staffing.
It is also our intention to continue our strategy of augmenting
the proportion of offshore/nearshore to onshore staff. This allows
us to offer our solutions at increasingly competitive prices and
margins, enabling us to continue to build market share and use the
ongoing pricing pressure within the software testing markets to our
advantage. Our considerable offshore resources also give us
multi-language and multi time-zone capabilities which has proved
highly beneficial in winning a number of contracts where
around-the-clock availability and language skills are of concern to
the client.
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 EUR0.05 (2010: EUR0.08) per
share.
Subject to approval at the shareholder meeting on 30 May 2012,
the dividend will be paid on 31 May 2012 to all shareholders on the
register at 25 May 2012.
Employees
Investment in employees during the latter half of 2011 was
focused on increasing the percentage of overall headcount
represented by offshore and nearshore staff rather than on simply
expanding headcount. This will enable us to better service the
increasing number of Managed Services contracts entering their
mature phase. In addition, this has enabled us to reduce our
average cost per employee such that we can more effectively address
the competitive demands of the market in which we operate.
Additionally SQS has removed a projected EUR3 million in
non-billable staff costs during the period, the vast majority of
the benefits of which will not be felt until 2012.
As a result of our investments permanent offshore and nearshore
test centre consultant headcount grew 19% during the period to 701
at 31 December 2011, (31 December 2010: 591). Test centre
consultants now represent 42% of total headcount.
The average number of total permanent consultants employed
during the period was 1,656 (FY 2010: 1,366), a rise of 21%. At 31
December 2011 the permanent consultant headcount stood at 1,675, up
1% over the six months (30 June 2011: 1,664) and up 10% in the
course of the year (31 December 2010: 1,527).
By the end of the period all new staff members had been fully
trained and have been fee generating.
In addition, approx. 230 contractors contributed to revenues in
the period representing 14% on top of the total number of fee
earning staff (H1 2010: 140, representing 10% on top of total
staff).
Our strategy for 2012 in relation to employees, will be to
remain focused on margin improvement and, as in the second half of
2011, we will only look to increase headcount in order to service
project work already contracted.
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
Rudolf van Megen has announced his decision to step down after
30 years as a CEO and main board member of SQS Software Quality
Systems AG by 30 September 2012.
Diederik Vos will succeed Rudolf van Megen as CEO of SQS and
Rene Gawron will continue as CFO of the Company.
Over the next six months he will hand over his activities to his
successor Diederik Vos to safeguard a smooth transition of his
present responsibilities.
SQS recognises Rudolf's invaluable achievement as co-founder of
the company and as an evangelist who helped to create the world's
largest independent software testing services company with close to
EUR200 million in revenues. A huge lifetime achievement.
Rudolf plans to stay actively involved as SQS's largest
shareholder, adopting a role in which he can provide maximum
benefit to the Company.
Outlook
In line with our stated strategy, 2011 has been a period of top
line growth, with a particular emphasis on investment in our
Managed Services business. This has been a considerable success and
SQS is now of the scale and size where it can compete, and win
against, the largest systems integrators on major testing services
projects for blue-chip companies. Managed Services contracts now
account for 22% of total revenues and we have contracted a further
EUR66.5 million of Managed Services orders in the year to date.
By focusing on six key market segments we are now turning our
attentions toward profitability, with a strategic focus for 2012 on
improving the average price of engagements and margins. Given the
ongoing difficulties in the wider economy, we retain our cautious
outlook for the IT services industry as a whole. However, with EUR3
million of headcount costs already removed and an increasing number
of Managed Services contracts moving offshore we are confident of
improved performance going forward.
Rudolf van Megen
Chief Executive Officer
6 March 2012
Financial Review
Summary
Group turnover during the period was up by 16.1% to EUR189.1
million (FY 2010: EUR162.9 million).
The business units, which also represent the 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, France, Luxemburg and Egypt. Furthermore, 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.
The segment "Other" includes software testing products (except
re-selling of 3rd party tools) , 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 EUR114.2
million (2010: EUR96.4 million) in the period, an increase of
18.5%. 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
healthy growth during the period with a 13.2% rise in revenues to
EUR68.4 million (2010: EUR60.4 million). This occurred primarily as
the result of a strong surge in demand for our services from the
UK, Ireland and India. The majority of the growth came from the
retail, utilities & energy and financial services sectors.
Other Business
This segment experienced an increase in revenues in the period
of 6.6% to EUR6.5 million (2010: EUR6.1 million). The markets for
training, conferences and software testing products showed some
improvements during the period, after suffering from the 2009
recession in recent years 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 is partly included in the CEME and WONS
results;
Foreign Exchange
Foreign exchange had a positive impact on the reported revenue
for the period but a negative impact on the profit because the Euro
weakened against the most important currencies relevant to the SQS
business. In total, 45% of the Group's revenue is generated in
currencies other than the Euro (2010: 50%). Specifically, 23% (FY
2010: 26%) of Group revenue is generated in Sterling by our UK
operation and 12% (FY 2010: 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 EUR186,7 million (EUR189.1
million at reported exchange rate) and we would have recorded
adjusted profit before tax EUR0.2 million better than the reported
one of EUR7.3 million.
Margins and Profitability
Gross profit was up 10.7% to EUR57.7 million (FY 2010: EUR52.1
million*) with the gross margin at 30.5% (FY 2010: 32.0%*). The
slight decrease in the gross margin was mainly influenced by two
earlier managed services contracts with a gross margin of 12.8%
(revenue of EUR13.8 million), that required greater resources to
move offshore than had been expected, and for which additional
costs could not be recovered from the client during 2011. Also an
above average 34.8% increase in contractor revenues at a gross
margin of 22.0% (revenue of EUR24.0 million) contributed to an
overall lower margin. Gross margins from our traditional consulting
business were at 33.3% (incl. new consultants in training; total
revenue of EUR112.7 million) and gross margins from managed
services contracts in a more mature part of their life cycle were
at 38.4% (revenue of EUR27.4 million).
Profitability was also impacted by costs associated with hiring
and training new staff to service the growth in revenues,
investments in office infrastructure and exchange rate losses.
Further investment into setting up operations in France and
increasing our sales force in the US.
Adjusted profit before tax** was down by 16.5% to EUR7.3 million
(FY 2010 EUR8.7 million) with the profit margin moving to 3.8% (FY
2010: 5.3%). The decline has been temporary and resulted from two
earlier Managed Services contracts which had longer initiation
phases than planned, during which they attracted lower margins and
ultimately incurred higher net interest payments.
Adjusted earnings per share*** was down by 18.0% to EUR0.18
(2010: EUR0.25).
* adjusted in 2010 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 EUR0.1 million pro forma
interest on deferred payment milestones for acquisitions and
evaluation of pensions and EUR1.6 million of amortisation on
intangible assets of acquired companies. Figures of 2010 adjusted
due to changed accounting treatment of actuarial gains/losses on
pension obligations.
*** includes effects under ** above and at local GAAP tax rate
which is EUR0.9 million higher than under IFRS because of EUR0.8
million deferred taxes under IFRS and EUR0.1 million for a deferred
tax income tax asset.
Costs
Adjusted General & Administrative expenses**** totaled
EUR31.2 million (2010: EUR27.1 million), representing 16.5% of
Group revenues (2010: 16.7%). The absolute cost increase resulted
chiefly from hiring and training costs, investment in IT and test
centre office infrastructure including some improved operational
efficiencies 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. Figures
of 2010 adjusted due to changed accounting treatment of actuarial
gains/losses on pension obligations.
Sales & Marketing expenses totaled EUR14.3 million (2010:
EUR13.0 million) representing 7.6% of revenues (2010: 8.0%).
Absolute cost increases resulted from adding sales capacity, mainly
to support Managed Services, and from additional marketing
campaigns undertaken in an effort to improve lead generation.
Research & Development expenses totaled EUR3.5million (2010:
EUR2.8 million) representing 1.9% of Group revenues (2010: 1.7%).
R&D costs resulted from investments in our software testing
tools with capitalised R&D of EUR2.5 million (2010: EUR3.1
million) and amortisation of EUR3.0 million (2010: EUR2.8 million),
resulting in a net negative effect of EUR(0.5)million (2010: net
positive effect of EUR0.3 million). Additionally EUR1.3 million
(2010: EUR1.4 million) regarding the development of a Managed
Services/PractiQ methodology have been capitalised and EUR0.2
million (2010: EUR0 million) were amortised, resulting in a net
positive effect of EUR1.0 million (2010: net positive effect of
EUR1.4 million). As all major SQS services have now been
productised and most SQS consultants are certified for these
products we expect that investment in Managed Services/PractiQ
methodology will be lower going forward.
Cash Flow and Balance Sheet
Cash flow from operating activities was EUR10.2 million (2010:
EUR6.0 million) which represents an adjusted EBIT conversion of
118%. This was better than the conversion rates of adjusted EBIT
into operating cash flow seen in previous years and this
predominantly resulted from a reduction of working capital and
debtor days in the second half of 2011. Debtor days ended above the
previous year at 64 (2010: 55) but were significantly reduced from
72 at the end of the first half.
Cash flow from financing activities was EUR7.3 million (2010:
EUR3.2 million) and includes the payout of a dividend of EUR(2.2)
million in May 2011 (2010: EUR(1.9) million). Cash outflow from
investments was EUR(8.9) million (2010: EUR(8.2) million),
including EUR(3.8) million (2010: EUR(4.5) million) for capitalised
R&D on products and Managed Services/PractiQ methodology;
EUR(2.1) million (2010: EUR(0.9) million) for investments in IT
infrastructure, software and SAP relating to the SQS ERP system;
and EUR(2.8) million (2010: EUR0 million) for investments in the
test centre building in Pune, India. There were no cash payments
for earn out payments on acquisitions in the last two years. Cash
at the year-end was EUR9.3 million (2010: EUR4.3 million).
0.6 million shares were issued in January 2011 to satisfy
deferred consideration obligations with regards to previous
acquisitions (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. . All these transactions were
economically settled and accounted for in 2010 but pending on
formal entry into the commercial register.
Taxation
The reported tax charge of EUR1.4 million (2010: EUR1.6 million)
includes current tax expenses of EUR2.2 million and deferred taxes
of EUR(0.9) million (2010: EUR(0.4) million). Deferred taxes mostly
occurred due to losses in legal entities and resulting tax assets
earned by these. The 2011 current tax charge on the adjusted PBT
was higher than anticipated partly due to a change in the taxation
on profits made in India, where revenue received in the Special
Economic Zone (SEZ) in Pune is now subject to an additional 18.5%
withholding tax. This withholding tax may be reclaimed after 10
years, subject to an audit by the local tax authorities confirming
all SEZ conditions have been fulfilled.
We anticipate a tax rate of 29% for 2012.
* Figures of 2010 adjusted due to changed accounting treatment
of actuarial gains/losses on pension obligations.
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 2011.
The SQS Group Consolidated Financial Statements for the twelve
month period ended 31 December 2011 are 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 30 May 2011 will 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
6 March 2012
Consolidated Income Statement
for the year ended 31 December
2011 (IFRS)
Year ended Year ended
31 December 31 December
2011 2010
(adjusted)
kEUR (Notes) unaudited audited
Revenue 189,103 162,880
Cost of sales 131,412 111,117
Gross profit 57,691 51,763
General and administrative expenses 32,793 28,835
Sales and marketing expenses 14,286 12,950
Research and development expenses 3,544 2,833
Profit before tax and finance
costs (EBIT) 7,068 7,145
Finance income 618 495
Finance costs 2,066 1,202
------------- -------------
Net finance costs (5) -1,448 -707
Profit before tax (PBT) 5,620 6,438
Income tax expense (6) 1,404 1,571
Profit for the year 4,216 4,867
Attributable to:
Owners of the parent 4,186 4,892
Non-controlling interests 30 -25
Consolidated profit for the year 4,216 4,867
============= =============
Earnings per share, undiluted
(EUR) (7) 0.15 0.18
============= =============
Earnings per share, diluted (EUR) (7) 0.15 0.17
============= =============
Adjusted earnings per share (EUR),
for comparison only (7) 0.18 0.25
============= =============
Consolidated Statement of Comprehensive
Income
for the year ended 31 December 2011
(IFRS)
Year ended Year ended
31 December 31 December
2011 2010
kEUR (adjusted)
unaudited audited
Profit for the period 4,216 4,867
Exchange differences on translating
foreign operations 469 2,138
Gains arising from effective hedging
instruments -488 8
Actuarial losses -369 -81
Other comprehensive income for the
period, net of tax -388 2,065
Total comprehensive income for the
period, net of tax 3,828 6,932
Total comprehensive income attributable
to:
Owners of the parent 3,798 6,932
Non-controlling interests 30 -25
3,828 6,907
============= =============
Consolidated Statement of Financial
Position
as at 31 December 2011 (IFRS)
31 December 31 December 1 January
2011 2010 2010
kEUR (Notes) (adjusted) (adjusted)
unaudited audited audited
Current assets
Cash and cash equivalents 6,270 4,296 5,351
Marketable securities 3,000 0 0
Trade receivables 40,396 34,842 24,251
Other receivables 2,657 3,390 2,364
Work in progress 7,622 4,836 435
Income tax receivables 1,097 1,513 1,429
------------ ------------ -----------
61,042 48,877 33,830
Non-current assets
Intangible assets (8) 9,620 10,587 10,402
Goodwill (8) 48,418 48,471 47,513
Property, plant and equipment 5,529 3,563 3,352
Income tax receivables (6) 1,229 1,420 1,264
Deferred tax assets (6) 1,944 1,095 778
------------ ------------ -----------
66,740 65,136 63,309
Total Assets 127,782 114,013 97,139
============ ============ ===========
Current liabilities
Bank loans and overdrafts 6,659 6,779 1,656
Finance lease liabilities 707 639 650
Trade payables 5,470 6,240 3,652
Other provisions 10 10 19
Tax accruals (6) 956 618 672
Other current liabilities 25,212 20,767 16,522
------------ ------------ -----------
39,014 35,053 23,171
Non-Current liabilities
Bank loans 11,937 2,000 2,112
Finance lease liabilities 1,241 1,131 779
Other provisions 5 5 30
Pension provisions 1,767 1,452 1,344
Deferred tax liabilities (6) 2,139 2,366 2,347
Other non-current liabilities 2,897 4,821 6,637
------------ ------------ -----------
19,986 11,775 13,249
Total Liabilities 59,000 46,828 36,420
============ ============ ===========
Equity (9)
Share capital 27,893 27,263 27,263
Share premium 35,560 36,189 34,747
Statutory reserves 53 53 53
Other reserves -5,233 -5,214 -7,360
Retained earnings 10,504 8,919 6,016
------------ ------------ -----------
Equity attributable to owners of
the parent 68,777 67,210 60,719
Non-controlling interests 5 -25 0
------------ ------------ -----------
Total Equity 68,782 67,185 60,719
------------ ------------ -----------
Equity and Liabilities 127,782 114,013 97,139
============ ============ ===========
Consolidated Statement of Cash Flows
for the year ended 31 December 2011 (IFRS)
Year ended Year ended
31 December 31 December
2011 2010
kEUR (adjusted)
unaudited audited
Net cash flow from operating activities
Profit before tax 5,620 6,438
Add back for
Depreciation and amortisation 7,399 7,077
Profit on the sale of property, plant and
equipment 121 203
Other non-cash income not affecting payments 1,325 1,299
Net interest income 1,448 707
------------- -------------
Operating profit before changes in the net
current assets 15,913 15,724
Increase in trade receivables and
receivables from partly completed contracts
not yet billed -5,554 -10,591
Increase in work in progress, other assets,
pre-paid expenses and deferred charges -2,053 -5,584
Decrease (Increase) in trade payables -770 2,588
Increase in other provisions 0 -34
Increase in pension provisions -119 59
Increase in other liabilities and
deferred income 2,759 3,805
------------- -------------
Cash flow from operating activities 10,176 5,967
Interest payments -1,366 -794
Tax payments -2,249 -1,345
------------- -------------
Net cash flow from current business activities 6,561 3,828
Cash flow from investment activities
Purchase of intangible assets -4,766 -5,903
Purchase of property, plant and equipment -4,340 -2,156
Cashflows arising from business combinations 0 -203
Interest received 183 34
------------- -------------
Net cash flow from investment activities -8,923 -8,228
Cash flow from financing activities
Dividends paid -2,231 -1,908
Proceeds from the issue of share capital 0 51
Repayment of finance loans -1,958 -112
Repayment of shareholder loans -450 -250
Increase of finance loans 11,775 5,122
Increase of finance leasing 1,014 1,135
Redemption / termination of leasing contracts -836 -794
------------- -------------
Net cash flow from financing activities 7,314 3,244
Change in the level of funds affecting payments 4,952 -1,156
Changes in the financial resources due to
exchange rate movements 22 101
Cash and cash equivalents
at the beginning of the period 4,296 5,351
------------- -------------
Cash and cash equivalents
at the end of the period 9,270 4,296
============= =============
Notes to the Financial Information
at 31 December 2011
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 thirty 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 2,073 employees at the
end of 2011 (previous year 1,875 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 2011.
The Financial Information has been prepared on the historical
cost basis. The Financial Information is presented in Euro 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
policies and correction of errors
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 2011. The changes do not have a
material effect on the financial statements of SQS Group.
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 material effect on the financial statements.
Compared to 2010 the accounting treatment of pension provisions
was amended according to the methods prescribed in IAS 19.93A. As a
consequence actuarial gains and losses are fully recognized
directly in equity and presented in other comprehensive income
without affecting the income statement. Management considers this
accounting policy to be more relevant to financial statement users
as actuarial gains and losses have no impact on the operating
activities of SQS group and therefore should not affect
consolidated profits presented.
Apart from the voluntary change in accounting for actuarial
gains and losses arising from the valuation of pension obligations,
the accounting policies adopted are consistent with those of the
previous financial year.
In addition, an error concerning the recognition of pension
provisions attributable to a subsidiary based in Switzerland has
been corrected retrospectively according to IAS 8.42. Pension
obligations that formerly have been considered as defined
contribution plans are now considered to be defined benefit
plans.
Both changes have led to the following retrospective
adjustments:
As of and As of and As of 1
for the for the January
year ended year ended 2010
31 December 31 December
2011 2010
---------------------------------- ------------- ------------- ---------
EURk EURk EURk
Statement of Financial Position:
Deferred tax assets 307 333 333
Pension provisions 1,395 1,224 1,224
Retained earnings (891) (891) (891)
Consolidated Income Statement:
Expenses for retirement benefits 476 115
Deferred Income tax expenses (107) (34)
Net effect on consolidated
profit for the year 369 81
Other Comprehensive Income:
Actuarial gains (+) and losses
(-) (369) (81)
In 2011 the effect is EUR0.01 on adjusted, unadjusted and
diluted earnings per share respectively. For 2010 the effect on
earnings per share is nil.
The adoption of the following new and amended IFRS and IFRIC
interpretations was mandatory for accounting periods beginning on
or after 1 January 2011 and relevant for the financial statements
or performance of SQS Group:
IAS 1 Presentation of Financial Statements (Improvements 2010)
The amendment clarifies that an entity may present an analysis
of each component of other comprehensive income either in the
statement of changes in equity or in the notes to the financial
statements.
The following standards and amendments to existing standards
have been published and are expected to be mandatory after
endorsement by the European Commission for the group's accounting
periods beginning on or after 1 July 2011 or later periods, but the
group has not early adopted them:
IAS 1 Financial Statement Presentation - Presentation of Items
of Other Comprehensive Income (Amendment)
IAS 12 Income Taxes - Recovery of Underlying Assets (Amendment)
IAS 19 Employee Benefits (Amendment)
IAS 27 Separate Financial Statements (as revised in 2011)
IAS 28 Investments in Associates and Joint Ventures (as revised in 2011)
IAS 32 Offsetting Financial Assets and Financial Liabilities (Amendment)
IFRS 1 Severe Hyperinflation and Removal of Fixed Dates for
First-Time Adopters (Amendment)
IFRS 7 Financial Instruments: Disclosures - Offsetting Financial
Assets and Financial Liabilities (Amendment)
IFRS 9 Financial Instruments: Classification and Measurement
IFRS 10 Consolidated Financial Statements
IFRS 11 Joint Arrangements
IFRS 12 Disclosure of Interests in Other Entities
IFRS 13 Fair Value Measurement
Of these, the following standards may have an impact on the
financial statements of SQS AG:
IAS 1 Financial Statement Presentation - Presentation of Items
of Other Comprehensive Income - The amendments may influence the
presentation of items that are reclassified into profit or loss
which have to be separated from items that will never be
reclassified.
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.
IFRS 13 Fair Value Measurement - The standard establishes a
single source of guidance under IFRS for all fair value
measurements. IFRS 13 does not change when an entity is required to
use fair value, but rather provides guidance on how to measure fair
value under IFRS when fair value is required or permitted. This
standard becomes effective for annual periods beginning on or after
1 January 2013. The SQS Group is currently assessing the impact
that this standard will have on the financial position and
performance.
All other new and amended IFRSs and IFRICs will not have any
material effect on the financial position or performance 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 2011, the Company held interests in the share
capital of more than 20 % of the following undertakings (all of
those subsidiaries have been consolidated):
Country 31.12.2011 31.12.2010
of incorporation
---------------------------- ----------------------------
Share Result Share Result
of Equity for of Equity for
capital the capital the
year year
% EURk EURk % EURk EURk
Consolidated companies
SQS Group Limited, London UK 100.0 9,393 2,081 100.0 7,095 2,101
SQS Software Quality Systems
(Ireland) Ltd., Dublin Ireland 100.0 3,000 412 100.0 2,588 408
SQS Nederland BV, Houten The Netherlands 90.5 (205) 311 90.5 (516) (265)
SQS GesmbH, Vienna Austria 100.0 2,698 1,588 100.0 1,110 537
SQS Software Quality Systems
(Schweiz) AG, Zurich Switzerland 100.0 2,752 (604) 100.0 3,816 1.483
SQS Group Management Consulting
GmbH, Vienna Austria 100.0 3,077 1,137 100.0 4,087 1,636
SQS Group Management Consulting
GmbH, Munich Germany 100.0 628 517 100.0 112 (582)
SQS Egypt S.A.E, Cairo Egypt 100.0 (139) (48) 100.0 (17) 71
SQS Software Quality Systems
Nordic AB, Kista Sweden 100.0 556 (476) 100.0 81 (229)
SQS India, Pune India 75.0 2,112 987 75.0 1,402 753
SQS France SASU, Paris
(since 8(th) December 2011) France 100.0 (8) (48) - - -
--------------------------------- ------------------- --------- -------- ------- --------- -------- -------
At 8(th) December 2011 SQS has opened a subsidiary in Paris. SQS
France SASU is a fully owned subsidiary and was founded by SQS
AG.
SQS AG holds 15% of the shares of SQS Portugal Lda with a book
value of EUR nil (previous year EUR nil).
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 cost in a foreign currency are
translated using the exchange rate as at the date of initial
transaction.
The following subsidiaries have their own functional
currency:
Subsidiary Functional currency
-------------------------------------- ----------------------
SQS Group Ltd. with business activity GBP (Pounds Sterling)
in UK
-------------------------------------- ----------------------
SQS Software Quality System (Schweiz) CHF (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. As the exchange rate did not fluctuate
significantly in 2011, the items of the income statement were
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
SQS Group has two major business units acting as provider for
consultancy services in their regions. Both regional business units
are operations segments and report their financial information to
the group management board 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 fulfill the quantity thresholds of IFRS 8.13.
Therefore the financial information according to T&C and STP
has been aggregated under the reporting segment "Other".
Based on this organisational structure SQS Group operates the
following three 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" represent the business regions as
follows:
-- WONS: UKISA (UK, Ireland and South Afrika), 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, SQS
France.
The segment "Other" includes selling and leasing of Software
Testing Products (except re-selling of 3(rd) party tools) and
providing Training as well as hosting of Conferences.
The group management board consisting of CEO (Chief Executive
Officer), CFO (Chief Financial Officer) and COO (Chief Operating
Officer) monitors the results of the operating segments separately
in order to allocate resources and to assess the performance of
each segment. Segment performance is evaluated based on operating
profit or loss.
Transactions between the segments are made on an arm's length
basis. Centrally incurred external costs relating to subsidiaries
are recharged to the subsidiaries affected. Cost allocations
between the segments are not charged.
Non-profit centres include important functions such as Portfolio
Management, Marketing, Finance & Administration, IT, Human
Resources, Managed Services Support and Sales Support.
The non-profit centres are allocated to the operating segments
as far as they provide 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'.
Assets and liabilities relating to the operating segments are
not reported because they are not reported to the Group Management
Board. Further, group financing (including finance costs and
finance income) and income taxes are managed on a group basis and
are not allocated to operating segments.
The following tables present revenue and profit information
regarding the SQS Group's reportable segments for the years ended
31 December 2011 and 2010.
2011 CEME WONS Other Total
EURk EURk EURk EURk
Revenues from external
customers 114,190 68,439 6,474 189,103
Intersegment revenues 430 1,503 0 1,933
Segment profit or loss 9,294 4,131 (2,058) 11,367
Non-allocated costs (4,299)
EBIT 7,068
Financial result (1,448)
EBT 5,620
Taxes on income (1,404)
Result for the period 4,216
Profit share of non-controlling
interest 30
Result attributable to
owners of the parent 4,186
Other information:
Depreciation and amortisation (1,884) (1,025) (2,933) (5,842)
--------------------------------- --------- --------- --------- ---------
2010 (adjusted) 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 8,331 4,208 (1,981) 10,558
Non-allocated costs (3,413)
EBIT 7,145
Financial result (707)
EBT 6,438
Taxes on income (1,571)
Result for the period 4,867
Profit share of non-controlling
interest (25)
Result attributable to
owners of the parent 4,892
Other information:
Depreciation and amortisation (1,759) (913) (2,848) (5,520)
--------------------------------- -------- ------- -------- --------
Additional Information
The following tables present additional information about the
revenues from external customers by individual services:
Services 2011 2010
EURk EURk
Professional Services
for Business and IT 178,932 154,542
of which from:
Management Consulting
Services 15,767 14,098
Testing Consulting Services 120,935 122,785
Managed Testing Services 42,230 17,659
Software Testing Products
(incl. re-selling of 3(rd)
party tools) 5,778 4,418
IT Training and Conferences 4,393 3,920
------------------------------ -------- --------
Total revenue 189,103 162,880
------------------------------ -------- --------
The following revenue information by geographical region is
based on the location of the customer. The information disclosed
for non-current assets relates to property, plant and equipment,
and intangible assets.
Revenues from Non-current
external customers Assets
2011 2010 2011 2010
EURk EURk EURk EURk
Germany 84,599 71,163 7,432 7,233
Other 104,504 91,717 56,135 55,388
--------- ---------- ---------- ------- -------
Total 189,103 162,880 63,567 62,621
--------- ---------- ---------- ------- -------
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 2011 amounted to EUR18,197k (2010: EUR13,894k).
Cost of material relates mainly to the procurement of outside
services such as contract software engineers. In addition, certain
project-related or internally used hardware and software is shown
under cost of material.
Employee benefits expenses
2011 2010
(adjusted)
---------------------------------- -------- ------------
EURk EURk
Wages and salaries 100,451 86,917
Social security contributions 13,441 11,399
Expenses for retirement benefits 2,943 1,767
---------------------------------- -------- ------------
116,835 100,083
---------------------------------- -------- ------------
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:
2011 2010
------- ------ ------
No. No.
CEME 952 837
WONS 887 729
Other 200 184
------- ------ ------
Total 2,039 1,750
------- ------ ------
Government grants
Government grants in the amount of EUR124 (2010: EUR199k) have
been granted for personnel expenses for the additional employees in
economically weak regions and have been recognised as income. Of
these an amount of EUR53k (2010: EUR176k) had not yet been paid to
SQS at the reporting 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 2011 amounted to EUR7,399k (2010: EUR7,077k). Of this,
EUR2,991k (2010: EUR2,833k) was attributable to the amortisation of
development costs.
Rentals and leasing
Operating lease costs in connection with office space and
equipment in 2011 amounted to EUR6,290k (2010: EUR6,261k).
The lease contracts will expire between 2012 and 2015. Some of
them can be prolonged or renewed, some allow price alignments.
5. Net finance costs
The net finance costs are comprised as follows:
2011 2010
------------------------------------ -------- --------
EURk EURk
Interest income 183 98
Exchange rate gains 435 397
------------------------------------ -------- --------
Total finance income 618 495
------------------------------------ -------- --------
Interest expense (1,367) (984)
Exchange rate losses (699) (218)
------------------------------------ -------- --------
Total finance costs (2,066) (1,202)
------------------------------------ -------- --------
Net finance costs (1,448) (707)
------------------------------------ -------- --------
Of which from:
Loans and receivables 618 495
Financial liabilities measured at
amortized cost (2,066) (1,202)
------------------------------------ -------- --------
Finance income results from fixed deposit investments which
yield interest income.
Interest expense relates to interest on bank liabilities,
finance lease liabilities and bonded loan.
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 % (2010:
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
2011 2010
(adjusted)
--------------------- ------ ------------
EURk EURk
Current tax expense 2,223 1,826
Deferred tax (819) (255)
--------------------- ------ ------------
Taxes on income 1,404 1,571
--------------------- ------ ------------
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:
2011 2010
(adjusted)
---------------------------------------- ------ ------------
EURk EURk
Profit before tax multiplied by the
standard rate of
German income tax of 30 % (2010:
30%) 1,686 1,931
Adjustments in respect of current
income tax of previous years 221 51
Interest cost of purchase obligations 8 42
Tax of dividend payout of subsidiaries 32 38
Not allowable personnel expenses
for stock options 0 24
Expenditure not allowable for income
tax purposes 44 18
Differential tax rates in respect
of overseas subsidiaries (421) (412)
Capitalisation of the corporation
tax credit (137) (67)
Government grants (37) (49)
Other 8 (5)
---------------------------------------- ------ ------------
At effective income tax rate of 25.0%
(2010: 24.4 %) 1,404 1,571
---------------------------------------- ------ ------------
Deferred taxes with an amount of EUR317k (2010: EUR2k) were
charged to other comprehensive income.
In accordance with -- 37 KStG (German corporation tax law) SQS
has capitalised the corporation tax credit on 31 December 2011 at a
present value of EUR997k (2010: EUR1,134k). The present value has
been discounted using an interest rate of 5.5%. The tax credit will
be paid off by six 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% (2010: 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
2011 2010 (adjusted)
------------------------------------------ ------------ ----------------
EURk EURk
Losses carried forward 1,015 419
Pensions provisions 498 399
Property, plant and equipment 207 185
Personnel provisions for part retirement 0 83
Other accruals 2 9
Other non-current liabilities from
interest swap 222 0
------------------------------------------ ------------ ----------------
Deferred tax assets 1,944 1,095
------------------------------------------ ------------ ----------------
Capitalised development costs (1,474) (1,332)
Capitalisation of customer relations (500) (955)
Property, plant and equipment (92) (0)
Translation of foreign operations (43) (0)
Other receivables from currency swap (16) (0)
Trade receivables (14) (14)
Obligation from SQS Nordic and SQS
India purchase (0) (45)
Other (0) (20)
------------------------------------------ ------------ ----------------
Deferred tax liabilities (2,139) (2,366)
------------------------------------------ ------------ ----------------
Net deferred tax liabilities (195) (1,271)
------------------------------------------ ------------ ----------------
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 assets thereon
are recognised 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 AG, SQS Switzerland,
SQS BV and SQS Nordic, a return to taxable profits is regarded as
very probable.
According to the tax losses of SQS Egypt with an amount of
EUR581k a return to taxable profit does not seen to be probable.
Therefore, regarding SQS Egypt no deferred tax assets have been
recognised.
7. Earnings per share
The earnings per share presented in accordance with IAS 33 are
shown in the following table:
2011 2010 (adjusted)
--------------------------------------- ----------- ----------------
EURk EURk
Profit for the year attributable to
the equity shareholders 4,186 4,892
Diluted profit for the year 4,186 4,892
Weighted average number of the shares
in issues, undiluted 27,868,969 27,263,419
Dilutive effect from stock option
programme 641,741 728,122
Weighted average number of shares
in issues, diluted 28,510,709 27,991,541
--------------------------------------- ----------- ----------------
Undiluted profit per share EUR 0.15 0.18
Diluted profit per share EUR 0.15 0.17
Adjusted profit per share EUR 0.18 0.25
--------------------------------------- ----------- ----------------
Undiluted profit per share is calculated by dividing the profit
for the year attributable to equity shareholders by the weighted
average number of shares in issue during 2011: 27,868,969 (2010:
27,263,419).
Diluted profit per share is 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 profit per share 2011 and 2010 is calculated based
on the profit after tax:
- less the corporate income tax asset of EUR137k (2010: EUR67k),
- plus the interest cost of the purchase obligations of EUR26k (2010: EUR141k),
- plus amortisation cost of the acquired customer relationships
as part of the business combinations of EUR1,557k (2010:
EUR1,557k),
- plus expenses in terms of the employee participation program:
the difference between the market share price and the selling price
of shares EUR0k (2010: EUR78k),
- plus differences of evaluation of pensions according to IFRS
and HGB (German GAAP) of EUR0k (2010: EUR66k),
- plus pension interest expenses of EUR51k (2010: EUR49k) ),
- plus expenses and claims vested as part of partial retirement of EUR0k (2010: EUR356k).
Further the difference between taxes on income payable under
local GAAP and IFRS of EUR(708)k (2010: EUR(270)k)) has been
adjusted. This results in an adjusted profit after taxes of
EUR4,894k (2010: EUR6,721k). This divided by the weighted average
number of shares in issue during the years: 27,868,969 shares
(2010: 27,263,419) shows adjusted profit per share of EUR0.18
(2010: EUR0.25).
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 641,741 (2010:
728,122) 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:
Book values Remaining 31.12.2011 31.12.2010
useful
life
--------------------------------- ---------- ----------- -----------
Goodwill Years EURk EURk
SQS UK based business 30,467 29,941
SQS BV, Netherlands 555 555
SQS Group Management Consulting
GmbH 9,100 9,100
SQS Software Quality Systems
Nordic AB 5,580 6,455
SQS India 2,484 2,188
Other 232 232
--------------------------------- ---------- ----------- -----------
Goodwill 48,418 48,471
--------------------------------- ---------- ----------- -----------
Development costs of software
Capitalisation 2009 0 0 1,168
Capitalisation 2010 1 1,026 2,051
Capitalisation 2011 2 1,718 0
----------- -----------
2,744 3,219
Software 1 to 3 2,623 2,630
Other development costs 4 to 5 2,520 1,448
Customer relationships 1 to 2 1,733 3,290
Intangible assets 9,620 10,587
--------------------------------- ---------- ----------- -----------
Development costs of software were capitalised in the year in
the amount of EUR2,515k (in the previous year EUR3,127k) and
amortised over a period of 36 months. The other development costs
relate to the consulting product 'Software Tests as Managed
Services'. The estimated useful life of this product covers a
period of five years. Amortisation has started in the second half
of 2011 and has amounted to EUR244k.
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 goodwill.
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 October 2011. Beside experiences from the past,
management considered the recent global economic 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 show an
increase in revenues for 2012 between -1.3 % and 37.1 % compared to
the year 2011. For the years 2013 to 2016 the growth per year is
reduced to a maximum of 10 % for each of those cash generating
units.
Management expects that all subsidiaries are going to grow
faster than market. Regarding SQS India management assumes a growth
of 51.4% for 2012 and a further declining growth rate between 20 %
and 5 % for each of the years from 2013 to 2016.
Further management expects that the gross margin ratio will be
increased slightly 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 was estimated to be nil,
-- 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 7.0% and 11.0 %.
Neither in 2011 nor in 2010 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 EUR27,893,289 (in the previous
year EUR27,263,419). This is divided into 27,893,289 (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 2010 27,263,419 27,263,419
------------------------------------------------------- ----------- -----------
As at 31 December 2010 27,263,419 27,263,419
------------------------------------------------------- ----------- -----------
Capital increase against contribution in kind
for the acquisition of the SQS Nordic (2(nd)
tranche) (Entry of 7 January 2011) 367,053 367,053
------------------------------------------------------- ----------- -----------
Capital increase against cash from authorised
capital II for employee participation (Entry
of 24 January 2011) 28,265 28,265
------------------------------------------------------- ----------- -----------
Capital increase against contribution in kind
for the acquisition of the SQS India (2(nd) tranche)
(Entry of 24 January 2011) 234,552 234,552
------------------------------------------------------- ----------- -----------
As at 31 December 2011 27,893,289 27,893,289
------------------------------------------------------- ----------- -----------
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 in
order to settle the earn-out-liability from the SQS Nordic
purchase. 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 in
order to settle the earn-out-liability from the SQS India purchase.
The supervisory board has consented to this resolution. This
resolution became effective with the entry in the commercial
register on 24 January 2011.
SQS had no shares in its ownership as at 31 December 2011.
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 authorised capital developed as follows:
EUR
As at 1 January 2010 11,921,656
-------------------------------- -----------
As at 31 December 2010 11,921,656
-------------------------------- -----------
Usage of Authorised Capital I (601,605)
-------------------------------- -----------
Usage of Authorised Capital II (28,265)
-------------------------------- -----------
As at 31 December 2011 11,291,786
-------------------------------- -----------
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
SQS Nordic and SQS India (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(3,619)k (2010:
EUR(4,088)k), IPO costs from former years that are accounted for
net of taxes in the amount of EUR1,134k (2010: EUR1,134k), a cash
flow hedge reserve with an amount of EUR(480)k (2010: EUR8k).
Retained earnings
Retained earnings represent the accumulated retained profits
less payments of dividend and losses of SQS Group and the actuarial
losses of pension provisions with an amount of EUR(1,260).
The General Meeting of 24 May 2011 resolved to pay EUR0.08
dividends per share for the business year 2010 in the total amount
of EUR2,231,463.12.
10. Non-Controlling Interests
The pro rata profit or loss and each component of other
comprehensive income have been attributed to the non-controlling
interests.
11. Notes to the Statement of Cash Flows
The 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
investment, financing and operating activities.
The sources of funds on which the statement of cash flows is
based consist of cash, cash equivalents (cash on hand and bank
balances) and marketable securities.
Cologne, March 6th, 2012
SQS Software Quality Systems AG
(R. van Megen) (R. Gawron) (D. Vos)
This information is provided by RNS
The company news service from the London Stock Exchange
END
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