TIDMSQS
RNS Number : 0124J
SQS Software Quality Systems AG
06 September 2016
6 September 2016
SQS Software Quality Systems AG
("SQS" or the "Company")
Results for the six months ended 30 June 2016
Software Quality Systems AG (AIM: SQS.L), the leading global
specialist in end-to-end software and business process quality
solutions, today announces its unaudited results for the six months
ended 30 June 2016.
Financial Highlights
-- Total revenue increased by 10.9% to EUR166.6m (H1 2015: EUR150.3m)
-- Adjusted* gross profit increased by 12.5% to EUR52.8m (H1 2015: EUR47.0m)
-- Adjusted** PBT increased by 32.1% to EUR11.9m (H1 2015: EUR9.0m)
o Reflecting improved gross margin and improved revenue mix
-- Adjusted EPS*** increased by 29.5% to EUR0.22 (H1 2015: EUR0.17)
-- Operating cash outflow at EUR(1.2)m (H1 2015: EUR(5.2)m)
resulting from typical first half seasonality
-- Net debt EUR32.9m compared to EUR5.9m at 31 Dec 2015 (30 Jun 2015: EUR26.5m)
o Reflecting EUR16.7m (H1 2015: EUR22.1m) cash outflow for
investments on the acquisition of the final 25% of shares in SQS
Pune (India) and IT infrastructure
-- Interim financial performance and ongoing strategic
developments in line with management expectations
* adjusted for a non-cash amortisation of Bitmedia/Trissential
acquired order backlog of EUR0.75m
** incl. effects under * and adjusted to add back EUR3.45m of
IFRS amortisation of client relationship assets from the
Bitmedia/Trissential acquisitions and EUR0.5m pro forma interests
mainly arising from purchase price allocation for deferred payments
on acquisitions
*** adjusted to add back effects under ** at actual local GAAP
tax rate of 31.0%, less EUR1.3m on minority interests (mainly for
SQS India BFSI)
Operational Highlights
-- Continued progress on strategy to capitalise on market trends
in global digitalisation of business processes:
o Growth driven by US, Irish and Asian markets
o Customer wins driven by clients' investments in digital
solutions such as connected cars, omni-channel commerce, mobile
payments and smart grids
-- Broadened Management Consulting services portfolio and
progressed industrialisation of quality assurance services
o Appointed Martin Hodgson as an additional Executive Director
to SQS' board to drive the Management Consulting business globally
(post balance sheet event, effective 6 September 2016). Martin
joined SQS in December 2015
-- Developing position as a trusted end-to-end quality assurance
partner for software based business processes
-- Successfully integrated acquisitions which continue to
perform well, driving double digit revenue and profit growth, and
increasing diversification of vertical and regional split
-- Market share gains:
o Enhanced market position, particularly in the US
o Strong position in Europe maintained
o New higher margin engagements fully compensating for circa
EUR10m lower margin business SQS dis-engaged from during 2015
-- Strong growth in higher margin Managed Services and
Management Consulting divisions, which combined now account for 64%
of Group turnover (H1 2015: 57%)
-- Renamed two divisions to align more accurately with operating activities:
o Managed Services ("MS") remains as described
o Management Consulting ("MC"), formerly Specialist Consulting
Services ("SCS")
o Professional Services ("PS"), formerly Regular Testing
Services ("RTS")
Diederik Vos, Chief Executive Officer of SQS, commented:
"SQS has delivered a solid first half of the year, reporting
double digit top line growth alongside a substantial improvement in
profitability, both in PBT and EBIT. This growth has largely been
driven by strong performances in both our Managed Services and
Management Consulting divisions, where we are increasingly
cross-selling our services to good effect.
"The US has now become our second largest region after Germany
making up 17% of revenues. This shows the strides we have made
since the acquisitions last year, and ensures we are on track with
our strategy to capitalise on the huge market opportunity the US
has to offer.
"The digitised economy opens up new and exciting opportunities
for SQS as it enables us to broaden our offering as an end-to-end
quality solutions partner. With so many industries now reliant on
digital solutions that can cope with consumer demand both now and
for the future, companies need to know their systems will not fail.
Through our vertical industry expertise and end-to-end business
solutions, SQS is well placed to benefit from this global
trend.
"The Group's pipeline of prospects continues to strengthen
across all divisions and the Board believes that SQS is
well-positioned to deliver in line with our expectations for the
full year."
Enquiries:
SQS Software Quality Systems AG Tel. +49 (0) 2203 91 54 0
Diederik Vos, Chief Executive Officer
Rene Gawron, Chief Financial Officer
Numis Securities - Nomad and Joint Broker Tel +44 (0) 20 7260 1000
Simon Willis / Jamie Lillywhite / Mark Lander
Stockdale Securities - Joint Broker Tel. +44 (0) 20 7601 6100
Robert Finlay / Antonio Bossi
FTI Consulting - Financial Media and Investor Relations Tel. +44 (0)20 3727 1000
Matt Dixon / Dwight Burden sqs@fticonsulting.com
About SQS
SQS is the leading global specialist in end-to-end software and
business process quality solutions. This position stems from over
30 years of successful consultancy operations. SQS consultants
provide solutions for all aspects of quality throughout the whole
software product lifecycle driven by a standardised methodology,
offshore automation processes and deep domain knowledge in various
industries. Headquartered in Cologne, Germany, the company now
employs approximately 4,600 staff. SQS has offices in Germany, UK,
US, Australia, Austria, Egypt, Finland, France, India, Ireland,
Italy, Malaysia, the Netherlands, Norway, Singapore, South Africa,
Sweden, Switzerland and UAE. In addition, SQS maintains a minority
stake in a company in Portugal. In 2015, SQS generated revenues of
EUR320.7 million.
SQS is the first German company to have a primary listing on
AIM, a market operated by the London Stock Exchange. In addition,
SQS shares are also traded on the German Stock Exchange in
Frankfurt am Main.
With over 10,000 completed projects under its belt, SQS has a
strong client base, including half of the DAX 30, nearly a third of
the STOXX 50 and 20 per cent of the FTSE 100 companies.
For more information, see www.sqs.com
Chief Executive's Statement
Introduction
During the period under review, SQS reported a strong financial
performance recording healthy growth to both revenue and profit.
The particularly strong increase in profit before tax can be
attributed to improved operating performance across all three
divisions, an improved revenue mix, a strong financial result, and
particularly strong growth in the US, Irish and Asian markets. This
has been driven by our intended focus on more profitable work
across all our business lines and disengagement from less
profitable engagements. We continued to make progress on our
strategy to diversify our revenue base both by geography and by end
market vertical, as well as our increased focus on our higher
margin Managed Services and Management Consultancy business
divisions.
In the period, we renamed two of our three core divisions.
Specialist Consultancy Services becomes 'Management Consulting'
("MC"); Regular Testing Services becomes 'Professional Services'
("PS"), whilst Managed Services ("MS") retains its name. In
consultation with our customers, we feel these new titles better
represent the extended range of quality assurance services we are
delivering and we expect this to enhance our marketing
position.
MS and MC now make up 64% - nearly two thirds - of our revenue
with MS, still the highest margin business line, contributing
revenues of EUR77.6m in the period (H1 2015: EUR71.9m), an increase
of 7.9% on the prior year and representing nearly half of group
revenue. The increase was largely organic, driven primarily from
extending existing long term contracts, but the division - along
with MC - is also benefitting from on-going cross-selling from
Professional Services.
MC has also had a strong first half, with revenues up 117% to
EUR28.6m (H1 2015: EUR13.2m), representing a group revenue
contribution of 17%. This division has particularly benefitted from
the Trissential acquisition in 2015, with most of the growth coming
from the US business with its first time consolidation of
Trissential. In line with our strategy to broaden the geographic
reach, we are also pleased to see strong performances coming from
the UK and Ireland, two regions where we have invested to build-up
their business analysis practices.
In line with our strategy, PS revenue continued to be an
important but smaller part of our overall business with revenues
coming down by -4.5% to EUR48.6m (H1 2015: EUR50.9m), representing
a group revenue contribution of 29%. Our focus remains on the
higher margin MS and MC divisions, which we expect to drive the
Company's future growth. Going forward we expect this segment to
range between 25% and 30% of our total revenue.
Other revenue sources, encompassing business with contractors,
training & conferences and software testing tools, amounted to
EUR11.8m of revenue in the period (H1 2015: EUR14.2m), a decrease
of 17% on the prior year and representing 7% of group revenue. This
is largely a result of tactical revenue delivered by
contractors.
We have made huge strides in diversifying our geographic reach
and limiting overexposure to any one market. Germany remains our
biggest market generating 30% of group revenues. The US is now our
second largest market generating 17% of group revenues with last
year's acquisitions significantly enhancing our on-the-ground
capabilities (H1 2015 US revenue contribution amounted to 6% of
total). There are still some on-going tasks to fully adapt the
Galmont (now called SQS North America) sales and delivery model to
SQS' strategy, but a well-defined roadmap is being executed. With
further growth expected we anticipate reaching our stated goal of a
$100m run-rate revenue from the US without further
acquisitions.
We also increased our market presence in India, Ireland and the
Middle East, largely driven by increased demand for our MS
offering, and we expect further growth in these territories.
In the first half of the year, the Company agreed to acquire the
remaining 25% of the issued share capital of SQS India Infosystems,
our Pune based entity that mainly serves as a delivery centre with
strong competencies in non-financial services verticals. This
follows a period of considerable investment in India over the past
decade to ensure the Company can meet the growing service demands
of our global clients, while seeking to drive more efficiency and
output through industrialisation from our employee base.
Foreign exchange movements, and in particular a weakened
sterling, had a EUR0.5m negative translational impact on earnings
for the period. Had the Pound/Swiss Franc/Indian Rupee/Swedish
Krona/US-$/Euro exchange rates remained the same as in H1 2015, our
non-Euro revenues for the period would have been EUR3.4m higher and
the EBIT would have been EUR0.5m higher.
EU Referendum
The British referendum decision to leave the European Union is
not expected to have a significant impact on SQS at an operational
level. Our broad geographic revenue split does not make us overly
reliant on any one geography and our growing presence in the US
further reduces our risk. The UK currently generates 13% of SQS
Group revenues.
Although in the short term we expect some headwinds to corporate
spending, particularly in the UK where confidence is likely to be
affected, the decision will also bring opportunities for SQS as new
regulations will need to be implemented and tested, particularly
serving our MC capabilities. SQS has temporarily already been
impacted by foreign exchange rate movements and in particular a
weakened sterling, which are likely to persist during the second
half of the year.
New Business
Quality assurance has become an integral part of all business
processes, across every sector, with both corporate reputations and
business efficiencies driven by effective IT systems. Moreover,
clients seeking to utilise digitalisation to enable new revenue and
business streams are increasing their investments in digitalised IT
solutions.
Consequently, SQS has recorded notable wins in the automotive
sector during the period, recently securing a EUR9m MS contract
extension from a leading automotive producer to support its
connected car solutions. SQS also won a significant management
consulting contract for end-to-end quality assurance of electric
and autonomous drive software from another blue-chip car producer
in the period.
Disruption, driven by technological innovation, raises both
opportunities and threats for companies operating in this new
digital environment, making Quality Assurance across the whole
software product lifecycle more critical than ever. System failures
are not tolerated by the customers who receive a poor service, nor
by staff who cannot deliver their services to clients and
subsequently miss out on sales.
As companies seek end-to-end IT solutions that work now, as well
as for the future - as we prepare for the digital transformation to
connected cars, autonomous driving, onmi-channel eCommerce, mobile
payments, smart cities, grids and buildings, 3D printing, as well
as regulatory and compliance - we expect to see more digital
innovation driven opportunities across all verticals supported by
SQS.
Market & Industry Overview
According to recently published data (July 2016) by market
research firm Nelson Hall, the global addressable quality assurance
(QA) services market is growing at a healthy rate of 7% p.a. The US
region is forecast to grow at 8% p.a., while European and Asian
markets are expected to grow at 6% p.a. These growth rates continue
to be substantially above the overall IT services market growth
rate of 2% p.a.
SQS expects to continue to benefit from its positioning as a
leading specialist provider to clients increasing their investment
in digital transformation and DevOps. Demand for Managed Services
and Management Consulting services in particular is expected to
remain high, as enterprises become ever more dependent on the
integrity of their IT infrastructure, irrespective of industry or
geography, to protect their financial and reputational
standing.
Furthermore, there are significant opportunities in high growth
industry verticals, such as the automotive sector, where car
driving sub-systems contain an unprecedented number of lines of
code. According to recent data published by Continental Research,
the market for automotive software will increase by >60% by
2020. SQS is already a well-established QA partner for several
blue-chip car manufacturers, and so is well placed to take full
advantage of the increased market demand.
The need for SQS' services as the trusted facilitator of such
business-critical digital transformation processes has never been
more relevant.
Acquisitions
During the period the Company agreed to acquire the remaining
25% of the issued share capital of SQS India Infosystems, our Pune
based facility. This follows a period of considerable investment in
India over the past decade to ensure the Company can meet the
growing service demands of our global clients, while seeking to
drive more efficiency and output from our employee base.
Strategy
Our strategy of targeting higher margin MS and MC clients and
engagements remains core as we seek to further grow SQS' business.
The US remains a key geography for SQS, with a large addressable
market and less exposed to Brexit related uncertainty. India also
has a large potential as an end market and remains a focus for us
as companies increasingly turn to quality assurance and testing
services to drive efficiencies and increase output from their
employees. We will continue to monitor the situation in the UK and
Europe very closely. Although in the short term, there is likely to
be some slowdown in customer spending, we expect this to increase
as new regulations come into effect, driving demand for our
business critical end-to-end solutions.
SQS has historically focussed on a few core sector verticals
where it has established itself as a leader. Increasingly demand
for QA is emerging in other industries developing new digitised
processes, customer interfaces and user experiences. These are
likely to significantly expand the addressable QA services market,
currently worth approximately $20bn (Nelson Hall study, July
2016).
Dividend
In accordance with German law, SQS pays one dividend in each
financial year. We expect to declare a dividend with our final
results for the year ending 31 December 2016, in line with our
current policy of paying out approximately 30% of adjusted profit
after tax as a dividend.
Employees
Total headcount at the period end had remained almost unchanged
at 4,612 (31 Dec 2015: 4,619), with further circa 250 contractors
retained during the period. The almost unchanged headcount number
reflects the positive effects of industrialisation of our delivery
and the previously stated focus on more profitable client
engagements.
Board
Effective as of 6 September 2016, SQS has appointed Martin
Hodgson as an additional Executive Director to the SQS Board to
drive the global Management Consulting practice. Martin has spent
most of his professional life in management consulting with a
particularly strong focus on the automotive industry. He joined SQS
in December last year and has been promoted from a senior
management position in SQS to the Board.
Outlook
SQS has delivered a solid first half of the year, reporting
double digit top line growth alongside a substantial improvement in
profitability, both in PBT and EBIT. This growth has largely been
driven by strong performances in both our Managed Services and
Management Consulting divisions, where we are increasingly
cross-selling our services to good effect.
The US has now become our second largest region after Germany
making up 17% of revenues. This shows the strides we have made
since the acquisitions last year, and ensures we are on track with
our strategy to capitalise on the huge market opportunity the US
has to offer.
The digitised economy opens up new and exciting opportunities
for SQS as it enables us to broaden our offering as an end-to-end
quality solutions partner. With so many industries now reliant on
digital solutions that can cope with consumer demand both now and
for the future, companies need to know their systems will not fail.
Through our vertical industry expertise and end-to-end business
solutions, SQS is well placed to benefit from this global
trend.
The Group's pipeline of prospects continues to strengthen across
all divisions and the Board believes that SQS is well-positioned to
deliver in line with our expectations for the full year.
Diederik Vos
Chief Executive Officer
6 September 2016
Financial Review H1 2016
Summary
Revenues grew by 10.9% to EUR166.6m (H1 2015: EUR150.3m),
including first time consolidation effects from the US acquisitions
of EUR20.2m and a negative impact from translational forex on
revenue of EUR3.4m, excluding such effect would have resulted in a
revenue of EUR149.8m - broadly flat on the comparative period.
Additionally SQS has dis-engaged from less profitable contracts,
mainly in the Professional Services segment, equating to a EUR9.9m
revenue reduction in H1 2016 compared with H1 2015. Excluding the
effect of dis-engagements alongside the translational forex
movements, organic constant currency revenue growth was 6.3%.
The business units, which represent the accounting segments
according to IFRS 8, are:
-- Managed Services (MS) to meet the demand of clients seeking
efficiency in long-term engagements (between twelve months and five
years) of which a growing share (in many cases) is delivered from
nearshore and offshore delivery centres. This also includes long
term engagements for quality assurance services on standard
software package products;
-- Management Consulting (MC) (previously called Specialist
Consultancy Services (SCS)) to meet the demand of clients seeking
transformation and quality through IT Portfolio Programme and
Project Management, Business & Enterprise Architecture, Process
Modelling and Business Analysis;
-- Professional Services (PS) (previously called Regular Testing
Services (RTS)) to meet the demand of more price conscious clients
in IT projects who tend to be given a smaller number of consultants
on a more local basis and typically contracted for a short term
period (e.g. three months);
Alongside these major segments we conduct business with
contractors (as far as these have not been included in MS or MC),
training & conferences and software testing tools summarised as
"Other".
Breakdown by business unit
Managed Services (MS)
Revenue in MS, our largest segment and one of our strategic
focus areas, amounted to EUR77.6m in the period (H1 2015:
EUR71.9m), an increase of 7.9% on the prior year, representing a
group revenue contribution of 47%. The increase in revenue
predominantly came from the extension of existing long term managed
services contracts.
Management Consulting (MC)
Revenue in this segment - our other strategic focus area - saw a
strong increase during the period of 117% to EUR28.6m (H1 2015:
EUR13.2m), representing a group revenue contribution of 17%. Growth
for this segment was mainly driven by the contribution from the
acquisition of our US business and growth in the UK and Ireland
markets.
Professional Services (PS)
Revenue in this segment decreased by -4.5% to EUR48.6m (H1 2015:
EUR50.9m) on the prior year period, representing a group revenue
contribution of 29%. Our strategy continues to be to reduce the
share of this segment to a range between 25% and 30% of our total
revenue.
Other
Revenue in the "Other" segment amounted to EUR11.8m in the
period (H1 2015: EUR14.2m), a decrease of 17% on the prior
half-year and representing 7% of group revenue. A decrease in
tactical revenue from contractors was the key driver for this
development.
Margins and Profitability
Adjusted* gross profit improved by 12.5% to EUR52.8m (H1 2015:
EUR47.0m), with the gross margin at 31.7% (H1 2015: 31.3%). The
improvement in gross margin was mainly driven by a greater
contribution from the two strategic areas MS and MC that deliver
higher client value and better margins in the order of 35% and
above. Gross margins in the PS segment have improved to 27.0% (H1
2015: 26.4%) after we disengaged from less profitable contracts
during 2015.
Gross margins in the "Other" segment were at 16.7% (H1 2015:
22.2%) reflecting a changed business mix between contractor
revenues and tool sales.
Adjusted** profit before tax for the period was EUR11.9m (H1
2015: EUR9.0m), an increase of 32.1%, with the adjusted profit
margin at 7.1% (H1 2015: 6.0%). The profit before tax was driven by
the higher gross margins in MS, MC and PS, lower interest expenses
and a much improved finance result from EUR0.9m realised foreign
exchange gains due to one-time effects on realised intercompany
transactions from weakening currencies such as Pound Sterling and
Egyptian Pounds.
Adjusted*** earnings per share are at EUR0.22 (H1 2015: EUR0.17)
resulting from the above outlined improvements in margins and
finance results.
* adjusted for a non-cash amortisation of Bitmedia/Trissential
acquired order backlog of EUR0.75m
** incl. effects under * and adjusted to add back EUR3.45m of
IFRS amortisation of client relationship assets from the
Bitmedia/Trissential acquisitions and EUR0.5m pro forma interests
mainly arising from purchase price allocation for deferred payments
on acquisitions
*** adjusted to add back effects under ** at actual local GAAP
tax rate of 31.0%, less EUR1.3m on minority interests (mainly for
SQS India BFSI)
Costs
Total overhead costs (adjusted for effects under ** above) came
down to 24.8% of revenue from 24.9% in H1 2015.
General & Administrative expenses (adjusted for effects
under ** above) for the period were EUR27.9m (H1 2015: EUR24.8m).
This represents an increase by 0.3 percentage points to 16.8% of
revenue (H1 2015: 16.5%). The absolute growth was mainly due to the
first time consolidation effects of the acquisitions, investment in
the build out of the delivery centre infrastructure and the US
business.
Sales & Marketing costs for the period were EUR11.7m (H1
2015: EUR10.9m), representing 7.0% of revenues (H1 2015: 7.3%). The
0.3% decrease as a percentage of revenues was due to improved
efficiencies in the sales teams.
Research & Development expense during the period was flat at
EUR1.7m (H1 2015: EUR1.7m) representing 1.0% (H1 2015: 1.1%) of
revenues. Research & Development investment was mainly focused
on the development of our proprietary software testing tools and
the PractiQ methodology.
Cash Flow and Financing
Cash flow from operating activities was at EUR(1.2)m (H1 2015:
EUR(5.2)m). This profile of first half operating cash flow is due
to the typical seasonality we have seen in previous first half year
periods, as receivable days, uninvoiced services and bonus payments
increased by EUR12.5m since the last year end. We therefore expect
an improved cash collection and full profit to cash conversion by
the end of the full year, as in previous years.
Debtor days came down to 77 (H1 2015: 84) resulting from a
reduction in some operations like SQS India BFSI, which previously
had substantially higher receivable days than the SQS Group
average.
Cash outflow from investments reduced to EUR6.3m (H1 2015:
EUR22.1m outflow), predominantly due to last year's untypically
high outflow as a consequence of the acquisitions of Bitmedia and
Trissential during H1 2015. The current level of investments is
largely a "normal" level for IT infrastructure spend and includes
EUR1.4m outflow for the build out of the Pune and the Chennai
delivery centres.
Total cash inflow from financing activities was EUR7.2m (H1
2015: EUR21.5m inflow) reflecting a net increase in finance loans
of EUR21.4m during H1 2016, mainly to fund the outflow of EUR 10.4m
for the acquisition of the final 25% of shares in SQS Pune (India)
and the above mentioned investments. Additionally dividend payments
to SQS shareholders resulted in an outflow of EUR4.2m (H1 2015:
4.0m outflow).
Balance Sheet
We closed the period with EUR26.4m (31 Dec 2015: EUR32.0m) of
cash and cash equivalents on the balance sheet and borrowings of
EUR59.3m (31 Dec 2015: EUR27.1m). The increase in borrowings was
mainly due to the cash outflow of EUR10.4m for the acquisition of
the remaining 25% shares in SQS Pune and the typical seasonal
increase of working capital in the first six months. Cash reserves
are increasingly held in a broader range of currencies and the
transfer of funds is restricted in some geographies, like India.
Therefore, the offset between cash and debt positions has become
less flexible as we also seek to avoid the realisation of negative
exchange rate movements. The resulting net debt position at the
period end was EUR32.9m (31 Dec 2015: net debt of EUR5.9m).
During the period under review SQS has re-arranged its borrowing
facilities with its four main banks and additionally continues to
have local overdraft facilities in some countries such that in
total its facilities are now EUR83m. The facilities with the four
main banks are in place until 2021. These facilities are subject to
customary covenants, are not secured and the borrowing costs are
substantially lower than before.
The final purchase price allocation with regard to the Galmont
acquisition (completed in September 2015) is still pending.
Therefore, the full amounts for acquired net assets for Galmont
(EUR14.8m) have been posted as "goodwill" and will be allocated to
intangible assets and goodwill once the purchase price allocation
has been finalised later this year.
For SQS India BFSI, Bitmedia and Trissential intangible assets
for client relationships and order backlog with a fair value of
EUR12.8m were recognised in the 30 June 2016 balance sheet,
reflecting a further amortisation of EUR4.2m during the period. On
average these intangible assets are amortised over a period of up
to nine years.
As these amortisation charges are non-cash-items and do not
impact the normal business of SQS, they are adjusted within the PBT
and EPS reporting.
Taxation
The tax charge of EUR2.3m (H1 2015: EUR1.3m) includes current
tax expenses of EUR3.7m (H1 2015: EUR3.0m) and deferred tax
expenses of EUR(1.4)m (H1 2015: EUR(1.7)m). The tax rate on local
GAAP results was 31.0% (H1 2015: 33.6%), the lower tax rate being a
consequence of changes in the geographic spread of profits. Going
forward, we expect an actual tax rate of c. 31%.
Foreign Exchange
Approximately 55.2% (H1 2015: 58.0%) of the Group's turnover is
generated in Euros. For the conversion of revenues and costs
generated in local currencies into Euros, the relevant official
average exchange rate for the six-month-period of 2016 was applied.
For the conversion of the balance sheet items from local currency
into Euros, the official exchange rate as at 30 June 2016 was
used.
Foreign exchange had a EUR0.5m negative translational impact on
earnings for the period. Had the Pound/Swiss Franc/Indian
Rupee/Swedish Krona/US-$/Euro exchange rates remained the same as
in H1 2015, our non-Euro revenues for the period would have been
EUR3.4m higher and the EBIT would have been EUR0.5m higher.
International Financial Reporting Standards (IFRS)
The Consolidated Financial Statements of SQS and its subsidiary
companies ("SQS Group") are prepared in conformity with all IFRS
(International Financial Reporting Standards) and Interpretations
of the IASB (International Accounting Standards Board) which are to
be applied for those financial statements whose reporting period
starts on or after 1 January 2016.
The SQS Group Consolidated Financial Statements for the 6-month
period ended 30 June 2016 were prepared in accordance with uniform
accounting and valuation principles in Euros.
Rene Gawron
Chief Financial Officer
6 September 2016
Consolidated Income Statement
for the six months ended 30 June 2016
Six months Six months Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(Notes) (unaudited) (unaudited) (audited)
kEUR kEUR kEUR
Revenue 166,623 150,254 320,716
Cost of sales (4) 114,533 103,276 221,810
Gross profit 52,090 46,978 98,906
General and administrative expenses (4) 31,350 28,552 60,411
Sales and marketing expenses (4) 11,745 10,898 22,873
Research and development expenses (4) 1,745 1,713 3,970
Profit before tax and
finance costs (EBIT) 7,250 5,815 11,652
Finance income 1,197 572 1,565
Finance costs 1,281 1,191 2,946
Net finance costs (5) -84 -619 -1,381
Profit before taxes (EBT) 7,166 5,196 10,271
Income tax expense (6) 2,276 1,316 3,049
Profit for the period 4,890 3,880 7,222
Attributable to:
Owners of the parent 4,478 3,979 7,166
Non-controlling interests (13) 412 -99 56
Consolidated profit for the period 4,890 3,880 7,222
Earnings per share, undiluted (EUR) (7) 0.14 0.13 0.23
Earnings per share, diluted (EUR) (7) 0.13 0.12 0.22
Adjusted earnings per
share (EUR), for comparison
only (7) 0.22 0.17 0.40
Consolidated Statement of Comprehensive Income
for the six months ended 30 June 2016
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2016 2015 2015
(unaudited) (unaudited) (audited)
kEUR kEUR kEUR
Profit for the period 4,890 3,880 7,222
Exchange differences on
translating foreign operations -6,189 3,034 4,570
Gains / losses arising
from cash flow hedges 63 -65 168
Other comprehensive income
to be reclassified
to profit or loss in subsequent
periods -6,126 2,969 4,738
Re-measurement losses on
defined benefit plans 0 0 -561
Other comprehensive income
not being reclassified
to profit or loss in subsequent
periods 0 0 -561
Other comprehensive income
for the period, net of tax -6,126 2,969 4,177
Total comprehensive income
for the period, net of tax -1,236 6,849 11,399
Attributable to:
Owners of the parent -2,086 6,236 10,483
Non-controlling interests 850 613 916
Consolidated Statement of Financial Position
as at 30 June 2016 (IFRS)
30 June 30 June 31 December
2016 2015 2015
(Notes) (unaudited) (unaudited) (audited)
kEUR kEUR kEUR
Current assets
Cash and cash equivalents (14) 26,399 18,308 31,990
Trade receivables 61,360 71,319 61,093
Other receivables 6,880 6,574 5,914
Work in progress 23,546 12,089 16,074
Income tax receivables 1,931 1,692 1,321
120,116 109,982 116,392
Non-current assets
Intangible assets (8) 23,378 18,632 26,586
Goodwill (8) 87,389 83,354 92,539
Property, plant
and equipment (9) 16,517 12,100 15,833
Financial assets 33 32 30
Income tax receivables 1,339 2,002 1,421
Deferred tax assets 5,443 2,771 5,429
134,099 118,891 141,838
Total Assets 254,215 228,873 258,230
Current liabilities
Bank loans and
overdrafts (10) 59,062 34,511 27,064
Finance lease 63 135 62
Trade payables 6,038 7,883 10,518
Other provisions 0 0 0
Income tax accruals 5,176 2,768 3,745
Other current liabilities (11) 40,500 42,210 56,374
110,839 87,507 97,763
Non-current liabilities
Bank loans (10) 250 10,310 10,825
Finance lease 54 57 54
Other provisions 0 0 0
Pension provisions 5,927 4,970 5,682
Deferred tax liabilities 6,548 3,759 8,424
Other non-current
liabilities (11) 16,077 6,236 16,145
28,856 25,332 41,130
Total Liabilities 139,695 112,839 138,893
Equity (12)
Share capital 31,676 31,301 31,676
Share premium 56,686 55,973 56,478
Statutory reserves 53 53 53
Other reserves -6,293 -1,350 271
Retained earnings 21,884 18,841 21,524
Equity attributable
to owners of the
parent 104,006 104,818 110,002
Non-controlling
interests (13) 10,514 11,216 9,335
Total Equity 114,520 116,034 119,337
Equity and Liabilities 254,215 228,873 258,230
Consolidated Statement of Cash Flows
for the six months ended 30 June 2016
(IFRS)
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2016 2015 2015
(Notes) (unaudited) (unaudited) (audited)
kEUR kEUR kEUR
Net cash flow from operating activities
Profit before taxes 7,166 5,196 10,271
Add back for
Depreciation and amortisation (4) 7,708 6,209 15,752
Loss on the sale of property, plant
and equipment 269 28 45
Other non-cash income not affecting
payments 2,368 1,289 1,269
Net finance costs (5) 84 619 1,381
Operating profit before changes in
the net current assets 17,595 13,341 28,718
Increase (Decrease) in trade receivables -267 -5,127 7,616
Increase (Decrease) in work in progress
and other receivables -8,970 -5,384 -7,873
Decrease (Increase) in trade payables -4,479 -4,643 -2,073
Decrease in other provisions 0 0 0
Increase (Decrease) in pension provisions 215 316 927
Decrease (Increase) in other liabilities
and deferred income -5,261 -3,750 4,130
Cash flow from operating activities -1,167 -5,247 31,445
Interest payments (5) -594 -619 -1,260
Tax payments (6) -4,062 -3,065 -8,107
Net cash flow from operating activities -5,823 -8,931 22,078
Cash flow from investment activities
Purchase of intangible assets -3,763 -4,152 -5,065
Purchase of property, plant and equipment -2,602 -2,666 -7,288
Purchase of net assets of acquired
companies -3 -14,603 -17,982
Interest received (5) 112 -40 507
Net cash flow from investment activities -6,256 -21,461 -29,828
Cash flow from financing activities
Dividends paid -4,118 -3,973 -3,973
Capital increase 0 0 0
Proceeds from non-controlling interests
on the exercise of stock options 330 194 295
Payments for the acquisition of non
controlling interests 0 -425 -426
Dividends paid to non controlling
interests 0 0 -1,979
Repayment of finance loans (10) -12,618 -6,457 -9,764
Increase of finance loans (10) 34,041 32,291 28,304
Increase of finance lease 0 0 0
Payments to minority shareholders
from put option -10,403 0 0
Redemption of finance lease contracts 0 -176 -252
Net cash flow from financing activities 7,232 21,454 12,205
Change in the level of funds affecting
payments -4,847 -8,938 4,455
Changes in cash and cash equivalents
due to exchange rate movements -743 949 1,238
Cash and cash equivalents
at the beginning of the period 31,990 26,297 26,297
Cash and cash equivalents
at the end of the period 26,400 18,308 31,990
Consolidated Statement of Changes in Equity
for the six months ended 30 June 2016 (IFRS)
Attributed to equity owners of the parent Non- Total
------------------------------------------------------------------------------
cash
Share Share Statutory Other flow Translation Retained Total controlling equity
capital premium reserves reserves hedge of foreign earnings interest
reserve operations
EURk EURk EURk EURk EURk EURk EURk EURk EURk EURk
31 December 2014
(audited) 30,563 47,446 53 -1,693 -369 -1,545 19,213 93,668 10,208 103,876
======= ======= ========= ======== ======= =========== ======== ======= ============ =======
Dividends paid -3,973 -3,973 -3,973
Transactions with
owners of the
parent -3,973 -3,973 -3,973
------- ------- --------- -------- ------- ----------- -------- ------- ------------ -------
Business
combinations 0 248 248
Acquisition of
subsidiary 0 0
Capital increase 738 8,088 8,826 194 9,020
Acquisition of
non-controlling
interests -378 -378 -47 -425
Share-based
payments 439 439 439
Profit for the
period 3,979 3,979 -99 3,880
Exchange
differences
on translating
foreign
operations 2,322 2,322 712 3,034
Gains arising
from cash flow
hedges -65 -65 -65
Total
comprehensive
income -65 2,322 3,979 6,236 613 6,849
30 June 2015
(unaudited) 31,301 55,973 53 -1,693 -434 777 18,841 104,818 11,216 116,034
======= ======= ========= ======== ======= =========== ======== ======= ============ =======
Dividends paid 0 -1,979 -1,979
Transactions with
owners of the
parent 0 0 -1,979 -1,979
------- ------- --------- -------- ------- ----------- -------- ------- ------------ -------
Business
combinations 0 -248 -248
Capital increase 375 66 441 100 541
Acquisition of
non-controlling
interests 57 57 -57 0
Share-based
payments 439 439 439
Profit for the
period 3,187 3,187 155 3,342
Exchange
differences
on translating
foreign
operations 1,388 1,388 148 1,536
Re-measurement
gains on defined
benefit plans -561 -561 -561
Gains arising
from cash flow
hedges 233 233 233
Total
comprehensive
income 233 1,388 2,626 4,247 303 4,550
31 December 2015
(audited) 31,676 56,478 53 -1,693 -201 2,165 21,524 110,002 9,335 119,337
======= ======= ========= ======== ======= =========== ======== ======= ============ =======
Dividends paid -4,118 -4,118 -4,118
Transactions with
owners of the
parent -4,118 -4,118 -4,118
------- ------- --------- -------- ------- ----------- -------- ------- ------------ -------
Business
combinations 0 0
Acquisition of
subsidiary 0 0
Capital increase 0 329 329
Acquisition of
non-controlling
interests 0 0
Share-based
payments 208 208 208
Profit for the
period 4,478 4,478 412 4,890
Exchange
differences
on translating
foreign
operations -6,627 -6,627 438 -6,189
Gains arising
from cash flow
hedges 63 63 63
Total
comprehensive
income 63 -6,627 4,478 -2,086 850 -1,236
30 June 2016
(unaudited) 31,676 56,686 53 -1,693 -138 -4,462 21,884 104,006 10,514 114,520
======= ======= ========= ======== ======= =========== ======== ======= ============ =======
Notes to the interim consolidated financial statements
(unaudited)
1. Summary of Significant Accounting Policies
Basis of preparation and statement of compliance
The Interim Consolidated Financial Statements of SQS and its
subsidiaries ("SQS Group") are prepared in conformity with all IFRS
Standards (International Financial Reporting Standards) and
Interpretations of the IASB (International Accounting Standards
Board) which are mandatory at 30 June 2016. The interim reports are
published in an abbreviated form according to IAS 34. The Interim
Consolidated Financial Statements have neither been audited nor
reviewed.
The accounting policies applied preparing the Interim
Consolidated Financial Statements 2016 are consistent with those
used for the Consolidated Financial Statements at 31 December
2015.
The Financial Information has been prepared on a historical cost
basis. The Financial Information is presented in Euros and amounts
are rounded to the nearest thousand (EURk) except when otherwise
indicated. Negative amounts are presented in parentheses.
The interim consolidated financial statements do not include all
information and disclosures required in the annual financial
statements, and should be read in conjunction with the Group's
annual financial statements as at 31 December 2015.
Basis of consolidation
As at 30 June 2016, the Company held interests in the share
capital of more than 50 % of the following undertakings (all of
those subsidiaries have been consolidated):
Consolidated companies Country Six month Six month Year ended
of incorporation ended ended 31 December
30 June 30 June 2015
2016 2015
------------ ------------ -------------
Share Share Share
of capital of capital of capital
% % %
SQS Group Limited,
London UK 100.0 100.0 100.0
SQS Software Quality
Systems (Ireland)
Ltd., Dublin Ireland 100.0 100.0 100.0
SQS Nederland BV,
Utrecht The Netherlands 95.1 95.1 95.1
SQS GesmbH, Vienna Austria 100.0 100.0 100.0
SQS Software Quality
Systems (Schweiz)
AG, Zurich Switzerland 100.0 100.0 100.0
SQS Group Management
Consulting GmbH,
Vienna Austria 100.0 100.0 100.0
SQS Group Management
Consulting GmbH,
Munich Germany 100.0 100.0 100.0
SQS Egypt S.A.E,
Cairo Egypt 100.0 100.0 100.0
SQS Software Quality
Systems Nordic AB,
Stockholm Sweden 100.0 100.0 100.0
SQS Software Quality
Systems Sweden AB,
Stockholm Sweden 100.0 100.0 100.0
SQS Software Quality
Systems Norway AS,
Oslo Norway 100.0 100.0 100.0
SQS Software Quality
Systems Finland OY,
Espoo Finland 100.0 100.0 100.0
SQS India Infosytems
Private Limited,
Pune India 100.0 75.0 75.0
SQS France SASU,
Paris France 100.0 100.0 100.0
SQS USA Inc., Chicago
(Illinois) USA 100.0 100.0 100.0
SQS India BFSI Limited,
Chennai India 53.95 54.58 54.16
SQS Software Quality
Systems Italia S.p.A.,
Rome Italy 90.0 90.0 90.0
Trissential LLC,
Minneapolis (Minnesota) USA 100.0 100.0 100.0
Galmont Consulting
LLC, Chicago (Illinois) USA 100.0 n/a 100.0
-------------------------- ------------------- ------------ ------------ -------------
SQS AG holds 15% of the shares of SQS Portugal Lda with a book
value of EUR nil (previous year EUR nil).
SQS India BFSI Ltd. is the sole shareholder of SQS BFSI Pte.
Ltd., Singapore, SQS BFSI Inc., USA, Thinksoft Global Services
(Europe) GmbH, Germany, SQS BFSI UK Ltd., UK, and SQS BFSI FZE,
United Arab Emirates. None of these companies has a major impact on
the financial data of the group.
Significant Changes of Accounting Policies
Except from IFRS 15 and IFRS 16 none of the standards and
amendments beginning after 1 January 2015 or later periods are
expected to have any material impact on the annual consolidated
financial statements of the SQS Group. For more information, see
Note 2 'Summary of Significant Accounting Policies' to the annual
Consolidated Financial Statements for the year 2015.
Use of estimates
The preparation of the Interim Financial Statements requires the
disclosure of assumptions and estimates made by management, which
have an effect on the amount and the presentation of revenues,
expenses, assets and liabilities shown in the other comprehensive
income or profit or loss, in the statement of financial position as
well as any contingent items.
The main estimates and judgements of the management of SQS refer
to:
-- the useful life of intangible assets and property, plant and equipment
-- the criteria regarding the capitalisation of development costs
-- the recoverability of deferred taxes on tax losses carried forward
-- the stage of completion of work in progress regarding fixed price contracts
-- the discount rate, future salary increases, mortality rates,
future pension increases and future employee contributions
regarding the valuation of defined benefit obligations
-- the inputs such as risk free rate, expected share volatility
and expected dividends as well as expected forfeiture rate for the
measurement of the share-based-payments.
There have been no changes in estimates compared to the year
2015.
2. Segmental reporting
Based on the organisational structure and the different services
rendered, SQS Group operates in the following segments:
-- Managed Services (MS) to meet the demand of clients seeking
efficiency in long-term engagements (between six months up to five
years) of which a growing share (in many cases) is delivered from
nearshore and offshore delivery centres. This also includes long
term engagements for quality assurance services on standard
software package products
-- Management Consulting (MC) (previously called Specialist
Consultancy Services (SCS)) to meet the demand of clients seeking
transformation and quality through IT Portfolio Programme and
Project Management, Business & Enterprise Architecture, Process
Modelling and Business Analysis
-- Professional Services (PS) (previously called Regular Testing
Services (RTS)) to meet the demand of more price conscious clients
in IT projects who tend to be served with a smaller number of
consultants on a more local basis and typically contracted for a
short term period (e.g. three months)
Alongside these major business activities there is the business
with contractors (as far as these have not been included in MS),
training & conferences and software testing tools. Each of
these minor operating segments represents less than 10 % of the
Group's revenues and the Group's profit. Thus, all these other
segments are presented as "Other".
The group management board consisting of CEO (Chief Executive
Officer), CFO (Chief Financial Officer) and COO (Chief Operations
Officer) monitors the results of the operating segments separately
in order to allocate resources and to assess the performance of
each segment. Segment performance is evaluated based on gross
profit.
Non-profit centres represent important functions such as Project
Management, Marketing, Finance & Administration, IT, Human
Resources and Sales Support.
The non-profit centres are not allocated to the operating
segments as they provide general services to the whole group. Their
costs are shown under 'Non-allocated costs'.
The assets and liabilities relating to the operating segments
are not reported separately to the Group Management Board. Finance
costs and income taxes are managed on a group basis. Therefore they
are not allocated to operating segments.
The following tables present revenue and profit information
regarding the SQS Group's reportable segments for the interim
periods ended 30 June 2016 and 30 June 2015 and for the year ended
31 December 2015, respectively.
Six month ended MS MC PS Other Total
30 June 2016
(unaudited)
EURk EURk EURk EURk EURk
Revenues 77,610 28,596 48,614 11,803 166,623
Segment profit
(gross profit) 27,940 9,779 13,143 1,977 52,839
Non-allocated
costs (45,589)
EBIT 7,250
Financial result (84)
Taxes on income (2,276)
Result for the
period 4,890
------------------ ------- ------- ------- ------- ---------
Six month ended MS MC PS Other Total
30 June 2015
(unaudited)
EURk EURk EURk EURk EURk
Revenues 71,948 13,209 50,895 14,202 150,254
Segment profit
(gross profit) 25,830 4,558 13,437 3,153 46,978
Non-allocated
costs (41,163)
EBIT 5,815
Financial result (619)
Taxes on income (1,316)
Result for the
period 3,880
------------------ ------- ------- ------- ------- ---------
Year ended 31 MS MC PS Other Total
December 2015
(audited)
EURk EURk EURk EURk EURk
Revenues 153,201 36,644 99,251 31,620 320,716
Segment profit
(Gross profit) 55,910 12,484 26,326 6,263 100,983
Non-allocated
costs (89,331)
EBIT 11,652
Financial result (1,381)
Taxes on income (3,049)
Result for the
period 7,222
------------------ -------- ------- ------- ------- ---------
3. Exercise of Put-/Call-Options
In May 2016 the shareholders of the remaining 25% in SQS India
Infosystems Private Limited and SQS Software Quality Systems AG
decided to exercise their mutual Put-/Call-Option regarding the
remaining shares of SQS India. In order to receive the remaining
shares and in line with the calculation scheme of the
Put-/Call-Option contract SQS paid a consideration of INR 785
million (EUR10.4m). After having completed the transaction SQS now
holds the entire shares in this Indian subsidiary. The transaction
is accounted for as the payment of a liability as the obligation
from the put option right had already been shown under other
liabilities.
The exercise of the Put-/Call-Option is a related party
transaction under the AIM rules as one of the previous shareholders
is a director of SQS India. Considering the profit after tax
generated by SQS India, the terms of the transaction have been
evaluated to be fair and reasonable.
4. Expenses
The Consolidated Income Statement presents expenses according to
function. Additional information regarding the origin of these
expenses by type of cost is provided below:
Cost of material
Cost of material included in the cost of sales in the interim
period ended 30 June 2016 amounted to EUR12,254k (at mid-year 2015:
EUR12,069k). Cost of material mainly relates to the procurement of
external services such as contracted software engineers. In
addition, certain project-related or internally used hardware and
software is shown under cost of material.
Employee benefits expenses
Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Wages and salaries 100,654 87,921 190,567
Social security contributions 12,106 11,409 22,962
Expenses for retirement
benefits 2,194 1,871 4,542
Total 114,954 101,201 218,071
------------------------------------ ------------- ------------- -------------
The expenses for retirement benefits include current service
costs from defined benefit plans and expenses for defined
contribution plans.
Amortisation and depreciation
Amortisation and depreciation charged in the interim period
ended 30 June 2016 amounted to EUR7,709k (at mid-year 2015:
EUR6,209k). Of this, EUR1,113k (at mid-year 2015: EUR1,204k) was
attributable to the amortisation of development costs and EUR4,192k
to customer relationships and order backlog regarding SQS India
BFSI, SQS Software Quality Systems Italia S.p.A. and Trissential
LLC.
5. Net finance costs
The net finance costs are comprised as follows:
Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Interest income 112 100 507
Exchange rate gains 1085 472 1,058
--------------------------- ------------- ------------- -------------
Total finance income 1,197 572 1,565
--------------------------- ------------- ------------- -------------
Interest expense (1,081) (649) (2,093)
Exchange rate losses (200) (542) (853)
--------------------------- ------------- ------------- -------------
Total finance costs (1,281) (1,191) (2,946)
--------------------------- ------------- ------------- -------------
Net finance costs (84) (619) (1,381)
--------------------------- ------------- ------------- -------------
Finance income mainly results from fixed deposit
investments.
Interest expense relates to interest on bank liabilities and
finance lease liabilities.
Finance income and costs are stated after foreign exchange rate
gains and losses.
6. Taxes on earnings
The line item includes current tax expenses in the amount of
EUR4,065k (at mid-year 2015: EUR3,009k) and deferred tax income in
the amount of EUR(1,789)k (at mid-year 2015 deferred tax income:
EUR(1,693)k).
7. Earnings per share
The earnings per share presented in accordance with IAS 33 are
shown in the following table:
Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
Profit for the year
attributable to owners
of the parent, EURk 4,478 3,979 7,166
------------------------------ ------------- ------------- -------------
Diluted profit for
the year, EURk 4,478 3,979 7,166
------------------------------ ------------- ------------- -------------
Weighted average number
of shares in issue,
undiluted 31,675,617 30,623,823 31,003,989
------------------------------ ------------- ------------- -------------
Weighted average number
of shares in issue,
diluted 33,697,343 32,975,701 33,274,277
------------------------------ ------------- ------------- -------------
Undiluted profit per
share, EUR 0.14 0.13 0.23
------------------------------ ------------- ------------- -------------
Diluted profit per
share, EUR 0.13 0.12 0.22
------------------------------ ------------- ------------- -------------
Adjusted profit per
share (optional), EUR 0.22 0.17 0.40
------------------------------ ------------- ------------- -------------
Undiluted profit per share is calculated by dividing the profit
for the six months period attributable to owners of the parent by
the weighted average number of shares in issue during the six month
period ended 30 June 2016: 31,675,617 (at mid-year 2015:
30,623,823).
Diluted profit per share is determined by dividing the profit
for the six months period attributable to owners of the parent by
the weighted average number of shares in issue plus any share
equivalents which would lead to a dilution.
Adjusted profit per share is calculated by adjusting the profit
before tax for current taxes, amortised costs of acquired customer
relationships and order backlog as part of the business combination
SQS India BFSI, SQS Italia S.p.A. and Trissential LLC, interest
expenses on Earn-out liabilities and non-controlling interest
effects. This adjusted profit after tax divided by the weighted
average number of shares in issue during the six month period ended
30 June 2016: 31,675,617 shares, (at mid-year 2015: 30,623,823
shares) shows adjusted earnings per share of EUR0.22 (at mid-year
2015: EUR0.17).
8. Intangible assets
The composition of this item is as follows:
Book values Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Goodwill 87,390 83,354 92,539
-------------------------------------- ------------- ------------- -------------
Development costs of
software 2,832 4,005 3,694
Acquired Software 4,529 3,147 3,381
Other development costs 3,236 2,260 1,640
Acquired customer relationships 11,163 9,220 15,502
Order backlog 1,618 0 2,369
Intangible assets 23,378 18,632 26,586
-------------------------------------- ------------- ------------- -------------
Total 110,768 101,986 119,125
-------------------------------------- ------------- ------------- -------------
Development costs were capitalised in the interim period ended
30 June 2016 in the amount of EUR1,029k (at mid-year 2015:
EUR1,627k). They are amortised over a period of 36 months. Other
development costs mainly relate to the methodology 'PractiQ', used
by SQS to provide Managed Services. The estimated useful life of
these intangible assets covers a period of five years.
The customer relationships were acquired within the business
combination of SQS India BFSI, SQS Software Quality Systems Italia
S.p.A. and Trissential LLC. The order backlog was acquired within
the business combinations of SQS Software Quality Systems Italia
S.p.A. and Trissential LLC.
Amortisation over the Customer relationship Order
expected useful life backlog
in years
------------------------ ---------------------- ---------
SQS India BFSI Limited 3 -
SQS Software Quality
Systems Italia S.p.A. 6 3,9
Trissential LLC 10 0,75
------------------------- ---------------------- ---------
The amortisation of development costs is shown in the research
and development expenses. The amortisation of software and
remaining intangible assets is allocated to the functional costs by
an allocation key.
9. Property, plant and equipment
The development of property, plant and equipment of the SQS
Group is presented as follows:
Book values Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Freehold land and buildings 5,355 5,548 5,541
Office and business
equipment 4,236 4,151 4,108
Construction in progress 6,926 2,401 6,185
Total 16,517 12,100 15,834
---------------------------------- ------------- ------------- -------------
10. Bank loans and overdrafts
The finance liabilities are comprised as follows:
Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Bank overdrafts and
other short-term bank
loans 59,062 34,511 27,064
------------------------------- ------------- ------------- -------------
Bank loans with maturity
between one and five
years 250 10,310 10,825
------------------------------- ------------- ------------- -------------
Total bank liabilities 59,312 44,821 37,889
of these, secured 114 28,147 17,860
------------------------------- ------------- ------------- -------------
For SQS AG and some subsidiaries bank overdraft agreements are
in place.
11. Other current and non-current liabilities
The item is comprised as follows:
Six month Six month Year ended
ended ended 31 December
30 June 30 June 2015
2016 2015
(unaudited) (unaudited) (audited)
EURk EURk EURk
Personnel liabilities
(leave, bonus claims) 15,594 12,905 19,104
Purchase obligations
from SQS India 0 10,613 12,758
Purchase obligations
from SQS USA 0 4,111 0
Put Option SQS Italia 994 894 971
Purchase obligation
from Trissential 7,240 0 7,215
Purchase obligation
from Galmont 10,251 0 10,084
Sales tax and value-added
tax liabilities 6,709 7,234 7,147
Liabilities in regard
to social security 3,515 3,418 3,853
Outstanding invoices 5,628 3,416 4,434
Granted rebates and
discounts 521 415 524
Liabilities for employees'
travelling expenses 1,129 870 1,122
Liabilities against
former shareholders
of SQS Italia 0 683 0
Interest swap (fair
value) 312 390 312
Deferred income 1,081 783 1,128
Remaining other liabilities 3,602 2,714 3,867
Total 56,576 48,446 72,519
---------------------------------- ------------- ------------- -------------
The remaining other liabilities comprise trade accruals and
other items due in short term. Their carrying amounts are
considered to be reasonable approximation of fair value.
12. Equity
SQS is listed on the AIM market in London and traded on the Open
Market in Frankfurt (Main). The development of equity is presented
in the Consolidated Statement of Changes in Equity.
Subscribed Capital
The subscribed capital amounts to EUR31,675,617 (at 31 December
2015: EUR31,675,617) and is divided into 31,675,617 (at 31 December
2015: 31,675,617) individual registered shares with an arithmetical
share in the share capital of 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 subscribed capital are as follows:
Individual Nominal
shares value
--------------------------------- ----------- -----------
Number EUR
--------------------------------- ----------- -----------
As at 31 December 2014 30,562,679 30,592,679
--------------------------------- ----------- -----------
Capital increase against
contribution in kind for
the acquisition of Trissential
LLC 737,804 737,804
--------------------------------- ----------- -----------
Capital increase against
contribution in kind for
the acquisition of Galmont
LLC 375,134 375,134
--------------------------------- ----------- -----------
As at 31 December 2015 31,675,617 31,675,617
--------------------------------- ----------- -----------
As at 30 June 2016 31,675,617 31,675,617
--------------------------------- ----------- -----------
SQS had no shares in its ownership as at 30 June 2016.
Conditional Capital
The conditional capital is to be composed as follows:
- the Conditional Capital 3 amounts to EUR1,300,000
- the Conditional Capital 4 amounts to EUR1,050,000
- the Conditional Capital 5 amounts to EUR700,000
The Conditional Capital 3 and the Conditional Capital 4 serve to
grant share options to the management board members and employees
respectively.
The Conditional Capital 5 serve to grant share options to the
management board members and employees of SQS AG and management and
employees of subsidiaries according to the share option programme
2015.
Authorised Capital
The Authorised Capital amounts to EUR13,887,062 (at 31 December
2015: EUR13,887,062).
The authorised capital developed as follows:
EUR
As at 1 January 2015 15,000,000
------------------------------------- -----------
Usage of Authorised Capital for the
Acquisition of Trissential -737,804
------------------------------------- -----------
Usage of Authorised Capital for the
Acquisition of Galmont -375,134
------------------------------------- -----------
As at 31 December 2015 13,887,062
------------------------------------- -----------
As at 30 June 2016 13,887,062
------------------------------------- -----------
Statutory reserves
The statutory reserves in SQS AG were created in accordance with
Section 150 of the Stock Corporation Act (Germany). Statutory
reserves must not be used for dividends.
Other reserves
Other reserves comprise differences from the translation of
foreign operations, IPO costs from former years and a cash flow
hedge reserve regarding the fair values of interest and currency
swaps.
Retained earnings
Retained earnings represent the accumulated retained profits of
SQS Group less dividend payments.
The General Meeting of 25 May 2016 resolved to pay a EUR0.13
dividends per share for the business year 2015 in the total amount
of EUR4,117,830.21, that have been paid to the shareholders of SQS
AG in 2016.
13. Employee participation programme
Share-based Payment
SQS policy is to offer management and key employees share-based
payments. Therefore SQS has decided and granted the share-based
payment programs 2013 and 2014 and offered a further one in
2015.
The number and weighted-average exercise prices of share option
granted in 2013 and 2014 were as follows:
Granted in 2013 Granted in
2014
------------------- ---------------------------------------------------------------- -------------------------------
For management For key employees For key employees
board (Tranche I) (Tranche II)
------------------- ------------------------------- ------------------------------- -------------------------------
Number Weighted-average Number Weighted-average Number Weighted-average
of options price of options price of options price
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Outstanding
at beginning
of period 1,040,000 3.07 392,000 3.59 258,000 5.79
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Revived
per 1.1.2016 105,000 3.07 98,000 3.59 64,500 5.79
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Granted --- --- --- --- --- ---
during
01.01.-30.06.2016
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Forfeited
during
01.01.-30.06.2016 --- --- (20,000) 3.59 (67,500) 5.79
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Exercised --- --- --- --- --- ---
during
01.01.-30.06.2016
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Outstanding
at end
of half
period 1,145,000 3.07 470,000 3.59 255,000 5.79
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
Exercisable --- --- --- --- --- ---
at end
of period
------------------- ------------ ----------------- ------------ ----------------- ------------ -----------------
The Supervisory Board passed on 25th May 2016 a resolution to
revived stock options in the amount of 105,000 options rights
regarding the Management Board. The Management Board passed a
resolution to revived stock options in an amount of 162.500 options
rights regarding key employees.
At the Shareholder's Meeting on 27 May 2015, SQS shareholders
resolved a further share option scheme as incentive compensation
for SQS AG key-employees and members of the management board.
With the approval of the supervisory board the management board
has been authorised to grant up to 700,000 options for key
employees and management board until 31 December 2016. The option
scheme is based on Conditional Capital V for key employees and
management board.
Each option gives its holder the right to buy one SQS share at
the exercise price which is determined as the average closing price
(reference price) of SQS depositary interests traded on the London
Stock Exchange's Alternative Investment Market (ISIN DE 0005493514)
over the period of 20 trading days preceding the 18th of March 2016
(Tranche I) / the 1st of June 2016 (Tranche II) less a deduction of
15%. The reference price in GBP is converted into EURO using the
exchange rate on the day prior to 18th March 2016/ 1st June
2016.
The options can only be exercised after the vesting period has
ended and if the price of SQS depositary interests has increased at
least 10% compared to the reference price. The vesting period lasts
four years, the options will expire on 31st May 2025 latest.
Further the options expire in case a member of the management board
or a key employee leaves the entity under certain conditions or if
certain yearly profit targets are not achieved.
The SQS share option scheme is accounted for as an
equity-settled share-based payment transaction at the fair value of
the options at the grant date. The fair value of the options is
allocated to the vesting period as personnel expense. The
corresponding accounting entry is an increase in equity. In the
absence of market prices, the fair value of the options was
determined by a binomial options pricing model.
The options expire if an employee terminates his or her
employment contract or if the company terminates the employment for
good cause.
The number and weighted-average exercise prices of the 2015
share option programme were as follows:
Granted in 2016
---------------- ----------------------------------------------------------------
For key employees For key employees
& &
management board management board
(Tranche I) (Tranche II)
---------------- ------------------------------- -------------------------------
Number Weighted-average Number Weighted-average
of options price of options price
---------------- ------------ ----------------- ------------ -----------------
Outstanding --- --- --- ---
at beginning
of period
---------------- ------------ ----------------- ------------ -----------------
Granted during
the year 180,000 5.65 100,000 5.27
---------------- ------------ ----------------- ------------ -----------------
Forfeited --- --- --- ---
during the
year
---------------- ------------ ----------------- ------------ -----------------
Exercised --- --- --- ---
during the
year
---------------- ------------ ----------------- ------------ -----------------
Outstanding
at end of
half period 180,000 5.65 100,000 5.27
---------------- ------------ ----------------- ------------ -----------------
Exercisable --- --- --- ---
at end of
period
---------------- ------------ ----------------- ------------ -----------------
The input used for measurement of the fair values at grant date
was as follows:
Stock Option Program 2015
-------------------- ----------------------------------------
Granted in 2016
-------------------- ----------------------------------------
For key employees For key employees
& management & management
board board
(Tranche I) (Tranche II)
-------------------- ------------------ ------------------
Fair value at EUR0.88 (68.50 EUR0.85 (65.93
grant date pence) pence)
-------------------- ------------------ ------------------
Weighted average EUR6.52 (508.00 EUR6.06 (470.00
share price pence) pence)
-------------------- ------------------ ------------------
Exercise price EUR5.65 (439.88 EUR5.27 (409.40
pence) pence)
-------------------- ------------------ ------------------
Reference price EUR6.64 (517.50 EUR6.21 (481.65
pence) pence)
-------------------- ------------------ ------------------
Share price target EUR7.31 (569.25 EUR6.83 (529.82
pence) pence)
-------------------- ------------------ ------------------
Expected share
volatility 20 % 20 %
-------------------- ------------------ ------------------
Expected option 6 years 6 years
life
-------------------- ------------------ ------------------
Expected dividends 2.20 % 2.20 %
-------------------- ------------------ ------------------
Risk-free interest
rate 1.15 % 1.15 %
-------------------- ------------------ ------------------
Vesting period 4 years 4 years
-------------------- ------------------ ------------------
Option term 9 years 9 years
-------------------- ------------------ ------------------
The input used for measurement of the fair values of granted
options for 2013 and 2014 exist furthermore without change. For
more information, see Note 19 'Employee participation programme' to
the annual Consolidated Financial Statements for the year 2015.
Expected volatility has been based on an evaluation of the
historical volatility of the company's share price for expected
periods between 90 and 180 days.
14. Non-controlling Interests
SQS attributes the profit or loss and each component of
comprehensive income to the owners of the parent and to the
non-controlling interests applying the relevant percentage of share
on the contribution of profit or loss of each entity to the
consolidated comprehensive income of the period. Non-controlling
interests participate in the net assets recognised in the financial
statement of SQS Group. Share-based payments relating to
non-controlling interests are attributed exclusively to those
non-controlling interests.
15. Notes to the Statement of Cash flows
The consolidated Statement of Cash flows shows how the funds of
the Group have changed in the course of the business year through
outflows and inflows of funds. The payments are arranged according
to investing, financing and operating activities.
The sources of funds on which the statement of cash flows is
based consist of cash and cash equivalents (cash on hand and bank
balances).
16. Related party transactions
Under IAS 24, related persons and related companies are persons
and companies who are able to control or to exercise a significant
influence over their finance or business policy on the reporting
entity. Regarding SQS Group, these are the management board and the
supervisory board members. Further, two real estate investment
funds who are landlords of SQS offices at Cologne are considered to
be related parties as these entities are controlled by one
supervisory board member and employees of SQS AG.
Except as disclosed above, there have been no changes in the
composition of the members of the Management and Supervisory Board
in the reporting half-year period compared to 31 December 2015.
The following related party transactions have taken place:
Mr. Vos, Mr. Gawron and some of the members of the supervisory
board and their relatives received dividends as shareholders of SQS
AG. At the date the dividends were paid Mr. Vos and Mr. Gawron held
0.2 % and the members of the supervisory board and their relatives
held 12.0% of the shares in SQS AG.
SQS uses property owned by the closed real estate investment
fund "S.T.O.L. Immobilien Verwaltung GmbH & Co. KG", Cologne,
and the real estate investment fund "Immobilienfond Am Westhover
Berg GbR mbH", Cologne. The shares in these companies are held by
supervisory board members, employees and former management board
members of SQS AG. The contractual conditions of the lease terms
are based on market prices. The total expenses incurred under these
contracts amounted in the interim period to EUR345k (at mid-year
2015: EUR451k).
The total emoluments of the management board members in the
interim period ended 30 June 2016 amounted to EUR798k (at mid-year
2015: EUR1,235k).
The emoluments of the supervisory board members amounted in
total to EUR168k (at mid-year 2015: EUR168k), of which EUR168k have
not yet been paid by the end of the interim period.
Cologne, 05 September 2016
SQS Software Quality Systems AG
D.Vos R. Gawron R. Gillessen
SQS Software Quality Systems AG
Stollwerckstrasse 11
D-51149 Cologne
This information is provided by RNS
The company news service from the London Stock Exchange
END
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