6th Mar 2008 07:00
SQS Software Quality Systems AG06 March 2008 SQS Software Quality Systems AG Preliminary Results for the year ended December 200706 March 2008 Preliminary Results For the year ended 31st December 2007 SQS Software Quality Systems AG (AIM: SQS.L), the global leader in independentsoftware testing and quality management services, today announces itspreliminary results for the year ended 31 December 2007. Financial Highlights: • Turnover up 53% to €121.1m (2006: €78.9m) • 27% organic turnover growth, significantly outpacing growth of IT services sector • Adj. Profit before tax* up 96% to €10.5m (2006: €5.3m) • Strong net cash position of €6.9m (2006: net debt of €3.2m) with excellent cash generation from operations of €11.4m (2006: €1.6m) • Adjusted** earnings per share up 46% to €0.41 (2006: €0.28) • Double two year dividend of €0.20 per share * adjusted to add back pro forma interests to be shown under IFRS of €0.6m on future payment milestones for acquisitions and €0.2m for amortisation on Triton intangible assets required under IFRS ** based on net income increased by €0.4m on IFRS tax differences, by €0.6m of pro forma interests, by €0.2m for amortisation on intangible assets from an acquisition but including actual profit taxes of €2.6m payable under local GAAP Corporate Highlights: • Further margin improvement due to higher pricing and excellent utilisation rates • New client wins extending across 11 different industry verticals • Strengthened delivery capabilities, investment in more than 246 new fee earning consultants • Increased number of long term contracts and offshore projects with offshore facility in South Africa and newly established German speaking offshore centre in Egypt • Successful placing in April 2007 raising £3,285,000 at 219 pence per share widening institutional investment base • Successful integration of Cresta Ltd and Triton GmbH - both immediately earnings enhancing • David Cotterell, previously MD of Cresta Ltd, appointed to SQS Group Management Board Commenting on the results, Rudolf van Megen, CEO, said: "SQS had an excellent year strengthening its position as the global leader inindependent software testing and quality management services. Higher pricing,excellent utilisation rates and tight cost control enabled us to furtherincrease gross margins. We are delighted to pay a double two year dividend of€0.20 per share. In 2008, our focus will continue to be on both organic and acquisitive growth,further strengthening our foothold in Europe and exploring opportunities toexpand our geographic footprint into the Asia/Oceanic region. Trading has been very good in the year to date, and we are seeing significantcustomer interest for our software testing services, well ahead of thecomparable period last year. More than 51% of the revenue expected for 2008 haseither already been booked or contracted, a record for SQS, and the pipeline isstrong. We look to the future with confidence." For further information please contact:SQS Software Quality Systems AG On the dayRudolf van Megen, CEO +44 (0) 20 7457 2020Rene Gawron, CFO Thereafter +49 22 03 91 54 0Altium 020 7484 4040Nick Tulloch / Penny LadkinCollege Hill 020 4457 2020Sara Musgrave / Ben Way Print resolution images are available for the media to view and download fromwww.vismedia.co.uk Notes to Editors SQS is the global leader in independent software testing and quality managementservices. SQS consultants design and oversee quality management processes duringsoftware and IT systems development and test the resulting products for errorsand omissions. Headquartered in Cologne, Germany, SQS now has more than 1000 employees acrossEurope and in South Africa. The Group has a strong presence in Germany (Cologne,Munich, Frankfurt, Stuttgart, Goerlitz and Hamburg) and in the UK (London,Woking, Birmingham, Manchester, Belfast), Ireland, Netherlands, Switzerland,Austria and South Africa. SQS also has a minor stake in an operation in Portugaland a partnership operation in Spain. SQS has three components to its service offering: • IT professional services: within its broad range of software testing and quality management services, SQS has enhanced its offerings in the fields of management consulting (e.g. project and risk management), application intelligence, and outsourcing/offshoring. • Tools, licences, and maintenance: SQS's specialist range of software testing tools which work independently from and as add-ons to the tools available from competitors has been enhanced by successful market deployment of version 8.0 of our SQS-Test Professional product. • IT training and IT events: the training business was extended. Two certification schemes were established (INTCCM for Configuration Management and IREB for Requirements Management); this will continue to result in additional courses including certification. ISTQB and ISEB courses were updated for the new versions of the syllabus. With more than 4,000 completed projects under its belt, SQS has approximately400 customers including 36 FTSE-100 companies, half of the DAX 30 and nearly athird of the STOXX-50. It supports clients across 17 vertical industries,including major corporations such as Zurich Group, Deutsche Telekom, Barclays,BP, Boots, Credit Suisse, Volkswagen, and Daimler The successful SQC conferences (Software and Systems Quality Conferences), heldin Germany, the UK and in Switzerland, are the largest quality management andsoftware testing events in Europe. SQS plans to expand these into Ireland andthe French speaking part of Switzerland (Geneva) in 2008. The total number ofdelegates attending increased to 1550 (2006: 1,470); the number of exhibitorsincreased from 82 to 88 while the number of sponsors stayed the same at 26. www.sqs-group.com Chief Executive's Statement Introduction I am delighted to report SQS's preliminary results for 2007. SQS had anotherexcellent year, recording a 53% increase in revenues and a 96% increase inprofits, beating market expectations by a comfortable margin. SQS achieved an organic growth rate of 27%, more than five times the 5% growthrate for the European IT Services Market calculated by IDC in 2007. At the time of our admission to AIM in September 2005 we indicated that it wasour plan to double the size of our business within a two year period. I ampleased to report that as a result of strong organic and acquisitive growth, SQShas more than doubled its revenues since joining AIM, further consolidating itsposition as the global leader in independent software testing and qualitymanagement services. I am also pleased to report that SQS has extended the vertical markets in whichit operates, experiencing above average growth in new verticals such as legaland media, electronics and technology and utilities. SQS currently hasapproximately 400 clients, spread across 11 verticals. Financial Results Turnover from continuing operations rose 53% to €121.1m (2006: €78.9m) andunderlying adjusted profit before tax increased by 96% to €10.5m (2006: €5.3m). SQS enjoyed strong organic growth of nearly 27% and 26% acquisitive growth fromthe first-time consolidation impact of Cresta Group Ltd. in the first half of2007 and a four month contribution from Triton. A favourable market environment, particularly in Germany, the UK and Switzerlandenabled pricing increases in excess of volume growth resulting in profits growthat almost twice the rate of sales. Utilisation of billable consultants remained strong throughout the Group at anaverage of 187 billed days per consultant (2006: 185 billed days). Turnover growth was highest in the United Kingdom, Ireland and South Africa(UKISA) growing by 105% across all three countries. This was primarily due tothe contribution from Cresta, acquired in July 2006, but also evidencescontinuing strong organic growth in these countries. In Germany, SQS experienced 33.1% organic growth and 27.9% organic growth inSwitzerland. This confirms our belief that our position as market leader inthose regional markets enables us to drive revenue growth significantly abovemarket growth rates. Adjusted earnings per share of €0.41 rose by 46.4% (2006: €0.28). This increasereflects the return to normalized tax rates (24%) payable under local GAAP(2006: 14% with tax breaks) and an increase of the weighted average number ofissued shares to 19.1m shares in 2007 (2006: 16.5m). In 2007 additional shareswere issued as deferred consideration of the acquisition of Cresta Ltd. and in asecondary placement to broaden the shareholder base. The balance sheet has been considerably strengthened during the year reflectingthe acquisitions of Triton and Cresta (second payment milestone) and theretained profits in 2007. We reduced our borrowings by €5.5m to €0.3m (2006: to€5.8m). Cash balances at the year end stood at €7.2m (2006: €2.6m) reflectingstrong operating cash flow. Business Review During 2007 we continued to strengthen our business, establishing clear marketleadership in the United Kingdom, Germany and Switzerland. In those regions weexperienced high utilisation rates whilst simultaneously reducing overheadsrelative to turnover. The acquisition of Triton in August 2007 boosted SQS's market position inAustria and expanded the Group's traditional software testing and qualitymanagement business into management consulting services. Immediately earningsenhancing, the acquisition provides SQS with valuable cross sellingopportunities into its software testing division. By the end of 2007 the total number of SQS employees stood at 1012, up from 733in 2006. We increased the number of fee earning SQS consultants by 246 to 809(2006: 563) mainly through recruitment and to a small extent by the acquisitionof Triton. In line with our existing employee base, our new consultantspredominantly have strong software engineering backgrounds as well as seniorproject management skills. All costs for recruiting and training the newemployees were fully expensed during 2007. The total number of SQS clients continues to stand at approximately 400. SQSkeeps a tight focus on the 55 'strategic' clients who contribute 65% to theGroup's revenue whilst striving to further develop the remaining odd 345accounts. Over the last few years, a strategic goal has been to increase therevenue contribution from the smaller vertical markets in which SQS operates andto that end I am pleased to report that SQS clients are now spread across 11verticals with the biggest client accounting for only 7% of revenue. Over thelast three years, the utility market has grown from 0.5% of total revenue to 6%,electronics & technology from 1% to 6% and legal & media from 3% to 5%. Thisdiversification underpins our strategy not to be dependent on too few clients orverticals. During the year we continued to develop our long term software testingoutsourcing business by increasing the revenue contribution from long termcontracts with a fixed order backlog exceeding 12 months to 11% (2006: 8%) ofthe total revenue. We have established a "home-shore" test centre in the eastern part of Germanywhich operates like an overseas off-shore centre, in that it providessignificant cost advantages over onsite resources, with the added advantage ofGerman speaking consultants. As a first step we hired 30 consultants in Q1 2008. We have also begun measures to establish a German speaking offshore centre inEgypt to help assist with client demand. Geographic review GermanyRevenue in Germany was up 33% to €55.7m in 2007 (2006: €41.9m) as the investmentin consultants to cater for additional demand paid off. Contribution to totalrevenue declined to 46% compared with 53% in the prior year. We secured keycontract renewals with all our large clients and other major customers, all ofwhich provide a solid base for the current year. The high calibre sales managershired in the last two years have enabled SQS to grow its business even strongerthan the organic growth rates in other Group regions. The EBIT margin of 6.3%slightly improved from 2006 (6.1%), and includes group costs borne by the Germanentity which acts both as a holding for the Group and the German business. United Kingdom/Ireland/South Africa ("UKISA"). The United Kingdom, the second largest regional segment and the largest Europeanmarket for IT services in general, generated revenues of €48.7m (2006: • 23.7m),40% of the Group's total. This represented a 105% increase year on year drivenmainly by the acquisition of Cresta which was consolidated in the first half ofthe year for the first time. On an unaudited pro forma basis adding Cresta forthe full year in 2006, revenue in UKISA would have increased by 34% from €36.3min 2006. Integration of SQS UK and Cresta has been very successful with furtherimproved EBIT margins, now at 11.5% compared with 10.4% in the previous year. SwitzerlandRevenue in Switzerland grew by 27.9% to €12.5m (2006: €9.8m), demonstratingcontinued high organic growth rates. This year on year increase resultedpredominantly from repeat project business with major Swiss clients in financialservices and telecommunications markets coupled with significant new wins withlarge clients. The number of local employees, mainly consultants, increased by59% to 65 at the year end (2006 year end: 41). Other European Countries (Austria, the Netherlands and other) The other European countries segment contributed an aggregate revenue of €4.1m(2006: €3.5m). Other European Countries represented 3.4% of the Group's totalturnover overall. The year on year increase of 16.5% came from our Dutchbusiness and the first time consolidation of Triton in Austria for the last fourmonths of 2007. The measures we announced last year have paid off by improvingmargins and reducing overhead costs which resulted in a strongly improvedpositive result of 8.2% in 2007. Market driversIn recent years, we have witnessed a growing desire within companies tooutsource their software testing requirements to trusted independent externalparties. This is a trend we see continuing. A new market research on the software testing market commissioned by SQS andconducted by Pierre Audouin Consultants in 13 European countries among approx.1000 IT decision makers in February 2008 revealed that: • 79% acknowledge that software testing is essential in IT product development;• two thirds consider the independence of the test team from the software development team as important;• 79% agree that test automation strongly contributes to real value returns in IT investments and• 34% believe that the budget for external test consultants will grow, 34% said it will stay the same but only 3% replied it will go down. Current regulatory market drivers include higher demands imposed on IT systemsby directives such as Basel II, SEPA (Single European Payment Area) or MiFID(Markets in Financial Instruments Directive). In addition to these regulatory developments, a high number of IT projectseither fail or run out of budget and/or time. This further demonstrates theimportance of independent software testing. Continuing return on investment(ROI) pressures, coupled with increasing "industrialisation" of the softwareengineering process have led to an increased demand for outsourced softwaretesting as well as better quality management of embedded systems. StrategyOur strategy is to strengthen our market position as the leading independentpan-European provider of quality management and testing services for softwaredevelopment by growing both organically and through acquisition. We aim to grow organically by adding more consultants and offering a greaterrange of services to our existing client base. In particular, we will look toincrease our market presence in test outsourcing, and offshoring. The existingclient relationships, of which we have over 400, are the backbone to our futuregrowth. SQS has a strong foothold in Europe and we will look to strengthen this footholdin certain key European markets with acquisitions. We will also look to widenour geographic footprint in 2008, exploring new attractive growth markets in theAsia/Oceanic region. Our strong operating cash flow will contribute to fundingfurther acquisitions. DividendAs previously announced, the Company proposes to pay a double dividend for its2007 financial year, incorporating the delayed 2006 dividend with the 2007dividend. The 2006 dividend was delayed because German law required SQS to reorganise itsnet asset base in order to pay a dividend to shareholders. This reorganisationis now complete allowing the Company to pay both the 2006 and 2007 dividend. Intotal a 20 •-cents dividend is proposed per share. Subject to shareholder assembly approval on 28 May 2008, the double dividendwill be paid on 29 May 2008 to all shareholders on the register at 28 May 2008. SQS proposes to continue to operate a dividend policy in line with earnings. The BoardHeinz Bons, Chief Operating Officer (COO) and co-founder of SQS, retired fromthe Management Board on 31 December 2007. In anticipation of Heinz Bons'retirement, SQS established three regional management teams - "Germany", "UK/Ireland/South Africa", and "Switzerland/Austria/The Netherlands/ManagementConsulting" - which now operate on a regional COO basis reporting directly tothe Executive Board. Heinz Bons continues to act as a principal consultant forthe Company going forward and on behalf of the Board I'd like to thank him forhis invaluable contribution to SQS over the last 25 years. At the supervisory board meeting on March 3, 2008, David Cotterell was appointedas a member of the Management Board effective July 1, 2008. Mr. Cotterellcurrently heads SQS's United Kingdom, Ireland and South African entities and wasthe managing director of Cresta Ltd. before it was acquired by SQS. EmployeesOn behalf of the board, I would like to thank all our employees for theircontribution, hard work, and excellent support and superior deliverables toprojects during the last year. I am confident that we have the team in place tocapitalise on the opportunities available and to enable us to deliver long termvalue to our shareholders. OutlookDuring 2007, SQS further strengthened its position as the global leader inquality management and testing services growing turnover and adjusted profit by53% and 96% respectively. In 2008, our focus will continue to be on both organic and acquisitive growth,further strengthening our foothold in Europe and exploring opportunities toexpand our geographic footprint into the Asia/Oceanic region. Trading has been very good in the year to date, and we are seeing significantcustomer interest for our software testing services, well ahead of thecomparable period last year. More than 51% of the revenue expected for 2008 haseither already been booked or contracted, a record for SQS, and the pipeline isstrong. We look to the future with confidence. Rudolf van MegenChief Executive Officer6th March 2008 Finance Director's Review ResultsTotal revenue for the year grew by 53.4% to €121.1m (2006: €78.9m). ITProfessional Services was the major contributor with revenue of €114.7m (2006:€73.6m), a 56% increase year on year. Revenue from tool licenses and maintenancewas €2.2m (2006: €2.5m) a 12% decrease year on year, with IT training and ITevents contributing • 4.2m (2006: €2.75m) a 52% increase. EBITDA was up 66.0% to €14.1m (2006: €8.5m) while profit before tax was €9.7m(2006: €5.1m). Adjusted profit before tax (adjusted to add back pro formainterests to be shown under IFRS of €0.6m on future payment milestones for theCresta Ltd. and Triton acquisitions and €0.2m for amortisation on Tritonintangible assets required by IFRS) was €10.5m (2006: €5.3m) up 95.8%. Theimproved result was based on better gross margins due to higher pricing andslightly improved consultant's utilisation, reduced overheads relative to salesand improved net interest. Adjusted* earnings per share improved to €0.41 (2006:€0.28). *based on net income increased by €0.4m on IFRS tax differences, by €0.6m of proforma interests, by €0.2m for amortisation on intangible assets from anacquisition but including actual profit taxes of €2.6m payable under local GAAP CostsIn 2007, SQS had administrative costs of €19.2m (2006: €12.2m), representing15.9% of turnover (2006: 15.4% of turnover). Costs increased in absolute termsbecause of the full year Cresta consolidation, build out of local infrastructurein Switzerland, hiring & training costs for new employees and includes €0.2m foramortisation on intangible assets from the Triton acquisition. Sales & marketingcosts of €8.6m (2006: €5.7m) slightly decreased relative to sales (to 7.1% from7.2%), as we made better use of the sales resources to support current andfuture organic growth of the business. Research and development costs of €3.6m(2006: €3.4m) fell significantly relative to sales (to 3.0% from 4.2%),reflecting amortisation of past capitalized expenditures for version 8.0 of theSQS-TEST Professional tool, the tool Test Strategist and course development forour training products. TaxationThe Group tax charge of €2.9m (2006: €0.4m) has two components; one is tax onprofits payable under local GAAP of €2.6m (2006: €0.8m), and the other is IFRSand other tax differences and deferred taxes that we are required to show underIFRS of €0.4m (2006: •(0.4)m). As the tax breaks SQS had enjoyed over the pastfew years have been nearly exhausted in 2007, actual and IFRS tax rates areexpected to be more in line with each other in the future. Cash Flow and FinancingThe group generated an operating cash inflow of €11.4m (2006: €1.6m) thusconverting more than its adjusted PBT (€10.5m) into cash flow. Despite thestrong organic growth rates the Company managed to improve operating cash flowdue to a faster invoicing process and quicker collection of receivables. Cashflow from financing activities was •(1.2)m (2006: €1.8m) and includes a pay backof borrowings of €5.5m and proceeds of €4.8m from a secondary placement of newshares in April 2007. Cash flow from investments was •(5.5)m (2006: •(1.7)m •),including •(2.1)m (2006: •(2.9)m) for capitalised R&D for products andinvestments in intangible assets and •(4.4)m (2006: •(4.5)m) as cash part forthe acquisition of the Triton shares (2006: Cresta shares). In total, cash wasat €7.2m (2006: €2.6m) at the year end. Foreign ExchangeApproximately 55% of the Group's turnover is generated in Euros. With theexception of SQS UK, the South African office and Software Quality Systems(Schweiz) AG, all subsidiaries of SQS are located in the currency area of theEuro. For the conversion of the local currency into Euros, the average officialfixed exchange rate was chosen. For the conversion of the balance sheet itemsfrom foreign currency into Euros, the official mean rate as at 31 December 2007was used. The Group's exposure to foreign exchange risks is negligible as more than 90% ofthe business is billed and served locally. AmortisationAmortisation of goodwill is no longer carried out due to the changed IFRSaccounting rules. On account of the high amortisation of these goodwill valuesin previous years, their book values today lie considerably below the originalacquisition costs. No reductions in value were necessary by reason of theimpairment tests carried out. Additionally the values of intangible assets from acquisitions (e.g. clientbase) need to be amortised under IFRS rules over the time period of theireconomic use and irrespective of the actual enterprise value, which may continueto be well above the current book value. Such amortisation applies for theTriton acquisition, of which a total amount of • 3.6m needs to be amortised overa time period of five years. The profit and loss statement effect for a fourmonths period in 2007 was • 0.2m. International Financial Reporting Standards (IRFS)The Consolidated Financial Statements of SQS and its subsidiary companies ("SQSGroup" or "SQS Konzern") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly IAS = InternationalAccounting Standards) and the Interpretations of the IASB (InternationalAccounting Standards Board) adopted by the EU Commission and translated into theGerman language which are to be applied for those financial statements whosereporting period starts on or after 1 January 2007. The new and revisedStandards and Interpretations of the IASB were not applied in the business year2007 prior to the implementation date stipulated. The Financial Information has been prepared on the historical cost basis. TheFinancial Information is presented in Euros and amounts are rounded to thenearest thousand (T•) except when otherwise indicated. Rene GawronChief Financial Officer6th March 2008 SQS Software Quality Systems AG, Cologne Consolidated Profit and Loss Account As at 31 December 2007 (IFRS) Year ended 31 Year ended 31 December 2007 December 2006T• (Notes) (unaudited) (audited) Revenue 121,059 78,933 Cost of sales 79,307 51,997 Gross profit 41,752 26,936 General and administrative expenses 19,245 12,185Sales and marketing expenses 8,621 5,666Research and development expenses 3,614 3,351 Profit before tax and financing result (EBIT) 10,272 5,734 Finance income 556 103Finance costs 1,163 768Net interest -607 -665 Profit before taxes (PBT) 9,665 5,069 Income tax (2) 2,932 383 Profit for the year 6,733 4,686 Attributable to:Equity shareholders 6,733 4,686Minority interests 0 0 Consolidated profit for the year 6,733 4,686 Earnings per share, undiluted (•) (3) 0.35 0.28 Earnings per share, diluted (•) (3) 0.34 0.28 Adjusted earnings per share (•), for comparison (3) 0.41 0.28only SQS Software Quality Systems AG, CologneConsolidated Balance SheetAs at 31 December 2007 (IFRS) 31 December 2007 31 December 2006T• (Notes) (unaudited) (audited) Current assetsCash and cash equivalents 7,220 2,565Marketable securities 0 0Trade receivables 27,173 22,231Other receivables 1,000 1,058pre-paid expenses and deferred chargesWork in progress 139 314Income tax receivables 157 264 35,689 26,432 Non-current assetsIntangible assets (4) 5,999 3,356Goodwill (4) 45,977 28,313Property, plant and equipment 2,243 1,057Income tax receivable (2) 1,512 1,426Deferred taxes (2) 867 1,881 56,598 36,033 Total Assets 92,287 62,465 Current liabilitiesBank loans and overdrafts 191 5,330Trade creditors 3,547 3,159Other provisions 102 76Tax accruals 1,668 667Tax liabilities 3,745 2,745Other current liabilities 24,677 15,553 33,930 27,530 Non-Current liabilitiesBank loans 105 465Other provisions 91 112Pension provisions 147 294Deferred taxes (2) 1,652 1,001Other non-current liabilities 7,343 6,564 9,339 8,436 Total Liabilities 43,269 35,966 Shareholders' equity (5)Share capital 21,546 17,191Share premium 25,028 13,322Statutory reserves 53 53Other reserves -1,381 -1,105Retained earnings 3,772 -2,962Equity attributable to equity shareholders 49,018 26,499 Minority interests (14) 0 0Total Equity 49,018 26,499 Equity and Liabilities 92,287 62,465 SQS Software Quality Systems AG, CologneConsolidated Cash Flow StatementAs at 21 December 2007 (IFRS) Year ended 31 Year ended 31 December 2007 December 2006T• (unaudited) (audited) Net cash flow from operating activitiesProfit before taxes 9,665 5,069Add back forDepreciation and amortisation 3,854 2,772Profit (Loss) on the sale of fixed assets 52 -36Other non-cash income not affecting payments -553 -1,356Net interest income 855 705Operating profit before changes in the net current 13,873 7,154assetsIncrease in trade receivables andreceivables from partly completed contracts not yet -3,991 -5,208billedIncrease (Decrease) in work in progress, otherassetsand pre-paid expenses and deferred charges 518 1,225Increase in trade creditors 1 325Increase in remaining accruals 3,780 556Increase (Decrease) in pension accruals -147 -11Decrease (Increase) in other liabilities anddeferred income -494 -1,043Cash flow from operating activities 13,540 2,998Cash effect of foreign exchange rate movements -249 -89Interest payments -497 -492Tax payments -1,440 -841Net cash flow from current business activities 11,354 1,576 Cash flow from investment activitiesPurchase of intangible assets -2,090 -2,874Purchase of tangible assets -840 -325Proceeds from the disposal of subsidiaries 0 221Cashflows arising from business combinations -3,088 -4,463Transfer into an notary trust account to purchase 0 0of sharesProceeds from the sale of tangible assets 0 60Sale/(Purchase) of marketable securities available 0 5,610for saleForeign currency result 249 39Interest received 241 63Net cash flow from investment activities -5,528 -1,669 Cash flow from financing activitiesProceeds from the issue of share capital 4,817 0Costs for IPO -100 0Dividends paid to minority interest 0Proceeds from borrowings 0 0Repayment of convertible bonds 0 0Repayment of finance loans -5,497 -2,506Increase of finance loans 0 4,325Redemption / termination of leasing contracts -391 0Net cash flow from financing activities -1,171 1,819 Change in the level of funds affecting payments 4,655 1,726Cash and cash equivalentsat the beginning of the period 2,565 839Cash and cash equivalentsat the end of the period 7,220 2,565 Notes 1. Summary of Significant Accounting Policies Basis of preparation The Consolidated Financial Statements of SQS and its subsidiary companies ("SQSGroup" or "SQS Konzern") are prepared in conformity with all IFRS Standards(International Financial Reporting Standards, formerly IAS = InternationalAccounting Standards) and the Interpretations of the IASB (InternationalAccounting Standards Board) adopted by the EU Commission and translated into theGerman language which are to be applied for those financial statements whosereporting period starts on or after 1 January 2007. The new and revisedStandards and Interpretations of the IASB were not applied in the business year2007 prior to the implementation date stipulated. The Financial Information has been prepared on the historical cost basis. TheFinancial Information is presented in Euros and amounts are rounded to thenearest thousand (T•) except when otherwise indicated. Statement of compliance The Financial Information of SQS and its subsidiaries (together the 'SQS Group')has been prepared in accordance with IFRS as adopted for use in the EU. First-time application of new standards, change in accounting policy andadjustment of figures from the previous year SQS has applied the Standards and Interpretations of the IASB as applicable inthe EU which are binding for financial years commencing on or after 1 January2007. The changes have led to some additional information in the notes but donot have any effect on the accounting treatment of assets and liabilities ortheir valuation. SQS does not apply any further changed or newly passed standards prior to theimplementation date stipulated. Further, according to the assessment of SQS, theapplication of these standards would not have any effect on the financialstatements. Basis of consolidation The Financial Information comprises the financial statements of SQS SoftwareQuality Systems AG and its subsidiaries as at 31 December each year. Subsidiarycompany financial statements are prepared on a basis consistent with those ofother SQS Group companies. All companies in the SQS Group have the sameaccounting reference date of 31 December. All inter-company balances and transactions, including unrealised profitsarising from intra-group transactions, have been eliminated in full. Subsidiaries are consolidated from the date on which control is transferred tothe SQS Group and cease to be consolidated from the date on which control istransferred out of the SQS Group. As at 31 December, the Company held interests in the share capital of more than20 % of the following undertakings: 1. Summary of Significant Accounting Policies (continued) Country of 31.12.2007 31.12.2006 incorporation Share Result Share Result of for the of for the capital Equity year capital Equity year % T• T• % T• T•Consolidated companiesSQS Group (UK) Limited (formerly UK 100.0 1 0 100.0 7 -205SIM Group Limited), WokingSQS Group Limited (formerly Cresta Group UK 100.0 4,711 2,822 100.0 3,905 887Limited), London, since 1 July 2006SQS Software Quality Systems (Ireland) Ireland 100.0 2,195 1,201 100.0 533 851Ltd., since 1 July 2006SQS Nederland BV, Zaltbommel Netherlands 90.5 -133 -52 90.5 -76 25SQS GesmbH, Vienna Austria 100.0 -274 -111 100.0 -163 -95Software Quality Systems (Schweiz) AG, Switzerland 97.0 1,231 705 97.0 1,094 614ZugTriton Unternehmensberatung GmbH, Vienna, Austria 100 877 492 - - -since 1 September 2007PPT Unternehmensberatung GmbH, Vienna, Austria 100 1,096 168 - - -since 1 September 2007SQS Group Management Consulting GmbH Germany 100 51 12 - - -(formely Triton Unternehmensberatung GmbHDeutschland), Germany Taking effect on 1 September 2007 SQS Software Quality System AG acquired 100 %of the shares of Triton Unternehmensberatung GmbH and its subsidiaries. Theacquisition comprises an initial consideration of 4.4 m• in cash, and deferredconsideration of up to 11.1 m• in total, to be paid in a combination of cash andshares (49 % cash / 51 % stock). The deferred consideration is subject to Tritonmeeting specific earnout targets over the next two years, including profit aftertax and revenue with additional customers. Triton has committed to an aggressivegrowth forecast in order to achieve the earnout targets. In addition, there is aprovision for the sellers to agree, at their discretion, to a third year earnoutwith higher targets. During the earnout period, Triton will stand as a separate business. Its threefounders will continue to run the business. 3 % of the shares in Software Quality Systems (Schweiz) AG are held for legalreasons by members of the board of this entity in accordance with the interestsof SQS. SQS AG holds 15% of the shares of SQS Portugal Lda. with a book value of 0 •(previous year 0 •). 2. Taxes on earnings Deferred income tax is provided, using the liability method, on all temporarydifferences at the balance sheet date between the tax bases of assets andliabilities and their carrying amounts for financial reporting purposes. Thecalculation is based on the tax rates anticipated in the respective countries asat the realisation date. These are essentially based on the statutory provisionsapplicable 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 tocorporate income tax, the solidarity surcharge and trade tax. The results of theCompany are subject to corporate income tax at 25%. A 5.5% solidarity surchargeis imposed on corporate income tax. The trade income tax amounts to 19% of thetaxable income and is deductible for the purpose of determining the taxableincome. This leads to a total income tax rate of approx. 40 %. Effective 01 January 2008 the German corporate income tax has been reduced from25% to 15%. Consequently the total income tax rate is reduced to approx. 30 %.Deferred taxes are recalculated with this new income tax rate. The tax credit granted to persons liable to tax in Germany follows the so-calledhalf-income system, i.e. only 50 % of the income from the company is liable totax in the hands of the shareholder. Consolidated income tax expense / (income) is as follows: 31 December 31 December 2007 2007 T• T•Current tax expense/ (income) 2,485 1,498Tax on IPO costs 40 -Adjustments in respect of current income tax of previous periods (70)Deferred Tax 493 381Capitalisation of corporation tax credit (86) (1,426)Taxes on Income 2,932 383 A reconciliation of income tax applicable to the accounting profit before incometax at the statutory income tax rate to the income tax expense in the incomestatement is as follows: 31 December 31 December 2007 2006Profit/ (loss) before tax multiplied by the standard rate of 3,866 2,027 German income tax of 40 % (previous 40%)Adjustments in respect of current income tax of previous years (143) (70)Differential tax rates in respect of overseas subsidiaries (1.065) (272)Recalculation of deferred taxes 80 0Expenditure not allowable for income tax purposes 148 26Not allowable personnel expenses for stock options 43 10Adjustmented tax losses carried forward 76 0Disposal of subsidiaries 0 88Other 13 0Capitalisation of the corporation tax credit (86) (1,426)At effective income tax rate of 28 % (2006: 8 %) 2,932 383 Deferred taxes with an amount of 111 T• were charged directly to equity. In accordance with (S) 37 KStG (German corporation tax law) SQS has capitalisedthe corporation tax credit on 31 December 2006 at present value of 1,426 T•. Asper 31 December 2007 unaccrued interest of 86 T• has been added to thecorporation tax credit. This tax credit is paid off by ten instalments from theyear 2008 to 2017. The present value has been discounted using an interest rateof 5,5 %. For the assessment of the deferred tax claims and debts, SQS Software QualitySystems AG applies a tax rate based on the current tax law in Germany of 30%(2006: 40%) which takes into account corporation tax, the solidarity surchargeand trade tax. For the deferred tax claims of the overseas subsidiaries, thelocal tax rates are taken as the basis. Deferred income tax relates to the following: 31 December 31 December 2007 2006 T• T•Losses carried forward 448 1,398Pension accruals 20 86Obligations from Cresta purchase 238 107Foreign currency adjustment 2 113Property subventions 53 53Other accruals 106 124Deferred tax assets 867 1,881 Capitalised development costs (594) (930)Capitalised Software (30) (40)Trade receivables (14) (18)Capitalisation Triton customer relations (1.014) (0)Other (0) (13)Deferred tax liabilities (1,652) (1,001)Net deferred tax assets (785) 880 Deferred tax assets are recognised when it is considered probable that economicbenefit will flow to the entity. Based on the earnings situation of the past andon the business expectations for the foreseeable future, value adjustments aredetermined if applicable. Where a company has suffered losses, deferred tax claims thereon are capitalisedif the ability in the future to set off the losses with later income ispermissible under the respective national provisions. According to the planningof SQS AG and SQS Austria, a return to taxable profits is regarded as veryprobable. Due to the limited utilisation of tax losses in The Netherlands anadjustment of (76) T• was made according to the deferred tax asset of SQS BV. SQS Austria has capitalised a tax asset with an amount of 162 T•. Although thecompany has suffered losses in the current and preceding periods the managementis expecting sustainable Increases in the future profits. 3. Earnings per share The earnings/ (loss) per share presented in accordance with IAS 33 are shown inthe following table: Undiluted earnings per share 31 December 2007 31 December 2007 T• T•Profit for the year attributable to equity shareholders 6,733 4,686Diluted profit for the year 6,733 4,686Weighted average number of shares in issue, undiluted 19,098,779 16,471,084Weighted average number of shares in issue, diluted 19,843,595 16,683,328Undiluted profit per share • 0,35 0.28Diluted profit per share • 0,34 0.28Adjusted profit per share • 0,41 0.28 Undiluted earnings per share are calculated by dividing the profit for the yearattributable to equity shareholders by the weighted average number of shares inissue during 2007: 19,098,779 (2006: 16,471,084). Diluted earnings per share are determined by dividing the profit for the yearattributable to equity shareholders by the weighted average number of shares inissue plus any share equivalents which would lead to a dilution. The adjusted earnings per share 2007 and 2006 were calculated by adjusting theprofit after tax for the corporate income tax asset of 86 T• (2006: 1,426 T•),the tax advantage of Cresta acquisition in the amount of 0 T• (2006: 656 T•),deferred taxes of 0 T• (2006: 381 T•), the interest cost of the Cresta andTriton purchase obligations of 561 T• (2006: 276 T•) and amortisation cost ofthe acquired customer relationship as part of a business combination Triton of241 T•. Further the difference between taxes on income payable under local GAAPand IFRS (468 T• (2006: 771 T•)) has been adjusted. This results in an adjustedprofit after taxes of 7,917 T• (2006: 4,573 T•). This divided by 19,098,779shares (2006: 16,471,084) shows adjusted earnings per share of 0.41 • (2006:0.28 •). The management board considers that there are share equivalents which could havea dilutive effect. One of these are the convertible bonds granted to the vendorof the shares in SQS Group (UK) Ltd in a total nominal amount of 53 T•, dividedinto 52,800 convertible bonds of a nominal value of • 1.00 each. The other oneare the stock options given to employees. On a weighted average basis over theyear this were 692,016 shares. Both effects lead to an immaterial differencebetween undiluted earnings and diluted earnings per share. The number ofpotential shares are calculated pro rata temporis. 4. Intangible assets The development of the intangible assets of the SQS Group is presented as anappendix to the Consolidated Notes (Consolidated Fixed Asset Analysis). The composition of this item is as follows:Book values Remaining useful life 31.12.2007 31.12.2006 Years T• T•SQS UK based business Part I 4,696, 4,696 Part II 6,105 6,105 Part III (Cresta) 24,444 16,724SQS BV, Netherlands 555 555Triton 9,944 0Other 233 233Goodwill 45,977 28,313 Development costs Capitalisation 2005 0 0 846 Capitalisation 2006 1 854 1,719 Capitalisation 2007 2 1,249 0 2,103 2,565Software 1 to 3 516 758Customer relationships Triton (2006: Remaining 3,380 33intangible assets)Intangible assets 5,999 3,356 No impairment losses in accordance with IAS 36 on account of falling anticipatedpayments were necessary in the business year 2007. Development costs werecapitalised in the business year in the amount of 1.874 T• (in the previous year2,578 T•) and amortised over a period of 36 months, as the conditions under IAS38 were fulfilled. The scheduled amortisation of goodwill was, in compliance with IFRS 3, no longercarried out. Under the performance of an impairment test in accordance with IAS36 in the version of 2007, no reduction in the value of the goodwill wasrequired. Taking effect from 1 July 2006 SQS purchased 100 % of the shares of Cresta GroupLtd. This transaction included purchased goodwill of T• 16,724 as per 01 July2006. In accordance with the terms of the purchase agreement SQS has theobligation to pay for the realised over achievement of Cresta. In 2007 this ledto an increase in goodwill of 7,720 T•. The management of SQS integrated this asset into the UK based business andallocated the goodwill to this segment. Effective on 1 September 2007, SQS acquired the shares of TritonUnternehmensberatung GmbH and its subsidiaries. According to IAS 36 theimpairment test was not required because of the short notice since the initialpurchase price allocation. As per 31 December 2007 no indications for anyimpairment losses had been observed. The business combination was analysed following IFRS 3 in the purchase priceallocation. This allocation lead to a goodwill of 9,944 T•. The impairment test was carried out in accordance with IAS 36.80 for SQS UKbased business, as well as for the Dutch subsidiary. This is the lowest level atwhich the management of the SQS Group continuously monitors the underlying valueof the goodwill acquired with each transaction. In order to test the recoverability of the goodwill held, the future estimatedcash flows of the business units are compared with the goodwill valuations usinga discounted cash flow methodology. For this purpose, the current plans of the companies, which take intoconsideration the status of the accounts up until the end of November of thebusiness year, were taken as the basis. For the year 2008, detailed planning isavailable in this regard; for the following years up until 2012, assumptionswere made for the individual result and asset or debt items. For the periodthereafter, a constant cash flow was assumed in accordance with the DCF method. With regard to the development of earnings, it is assumed for both subsidiariesthat also in the future an above-average growth in sales against the market canbe achieved. In both geographical markets, the justification is clear. In theUK, a growth of approximately 54 % against prior year was achieved in thebusiness year 2007 and 15 % in 2006. A corresponding further increase inpersonnel is planned. It is further assumed that the gross margin can beincreased. In addition, it is assumed that there will be an increase in theproductivity of the employees. The marketing costs and also the general andadministrative costs are planned to rise absolutely whilst falling relative tosales. The central administration is, with the capacities existing today,sufficient to cope with further growth. Also for the Netherlands an increase insales of 105 % is expected for 2008 due to the order backlog situation andscheduled hiring of additional consultants. For the following years the growthis reduced to 10 % from 2009 on. It is assumed that both headcounts and dailyrates will increase while general and administrative costs will decreaserelative to sales. In the planning period, on the basis of these expectations and planningassumptions, annual cash flows will be achieved which ensure a reasonable rateof return on the funds invested. In accordance with IAS 36, the following special features were taken intoaccount: • 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 book value and from the use value, • 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 our calculations when estimating the future cash flows and the book value, • For the transition from the value of the entire business to the use value of the equity holders, the entire liabilities at the market value (= book value) were eliminated, • Growth rate of the perpetuity of 2 %, • The goodwill was allocated entirely to the book value of the cash generating unit in accordance with IAS 36.80 and IAS 36.81, • The discount rate was determined in accordance with IAS 36.55-57; as the capital cost rate for the equity, a risk-adjusted pre-tax interest rate of 9.75 % p.a was assumed, which was calculated from a risk-free interest rate, an average risk surcharge and also a factor to take into consideration branch and other risks. For the interest on capital from outside sources, the actual interest rate of the companies of 5.7 % for capital from outside sources was taken, with a slightly increasing trend in the future. Neither interest rate is corrected by taxes. The discounting was then carried out with the average interest rate weighted according to the ratio of shareholders' equity / capital from outside sources. For the remaining goodwill values, the cash generating unit is the operatingunit which currently derives the benefit from the investment. This is, in theone case, the region North, in the other case the region West/East of SQSSoftware Quality Systems AG. In both cases, the remaining book values of thecash generating units or the goodwill are so small in relation to theanticipated returns that a detailed investigation was waived. The amortisation of development costs is included in the costs for research anddevelopment. The amortisation of software and remaining intangible assets aswell as the impairment losses under IAS 36 are spread over the functional costsin accordance with an allocation key. No write-ups on account of the lapse of the reasons which led to valueadjustments in previous years needed to be carried out in 2007, as was also thecase in the business year 2006. 5. Equity SQS is listed on the AIM market in London and on the Open Market in Frankfurt(Main). The development of the equity is presented in the Consolidated Development ofShareholders' Equity. Subscribed Capital The subscribed capital amounts to 21,546,309 • (in the previous year 17,190,823•). It is divided into 21,546,309 (in the previous year 17,190,823) individualregistered shares with an arithmetical share in the share capital of 1 • each.Each share entitles the holder to one right to vote. No preference shares havebeen issued. The capital is fully paid up. The movements in the issued share capital are as follows: Individual shares Nominal value Number •As at 1 January 2006 15,763,080 15,763,080Increase in capital against contributions in kind 1,427,743 1,427,743in the form of shares in Cresta Group Limited(Entry of 3 July 2006)As at 31 December 2006 17,190,823 17,190,823Increase in capital against cash 1,500,000 1,500,000(Entry of 3 April 2007)Increase in capital against redemption of obligations 2,855,486 2,855,486from Cresta purchase(Entry of 21 September 2007)As at 31 December 2007 21,546,309 21,546,309 By resolution of the General Meeting of 12 July 2005, the management board wasauthorized to increase the share capital by 1,500,000 • up until 12 July 2010with the approval of the Supervisory board, either through one single or severalissues of newly registered non-par value shares in return for cash orcontributions in kind (Authorised Capital II). The management board resolved on 21 March 2007 using in according to (S) 4.5 ofthe articles of association of SQS the authorisation on the increase of theshare capital until 12 July 2010 by issuance of 1,500,000 new registered non-parvalue shares against contribution in cash (Authorised Capital II). TheSupervisory board has consented to this resolution. This resolution becameeffective with the entry in the commercial register on 3 April 2007. By resolution of the General Meeting of 30 Mai 2007, the management board wasauthorized to increase the share capital by 4,300,000 • up until 30 May 2012with the approval of the Supervisory board, either through one single or severalissues of newly registered non-par value shares in return for cash orcontributions in kind (New Authorised Capital II). The Supervisory board has consented to the resolution of the management board ofthe Company dated 03 September 2007 on the capital increase out of theAuthorised Capital II from 18,690,823 • by 2,855,486 • to 21,546,309 • againstredemption of obligations from the Cresta purchase. The issue price amounted toEUR 1.00 per share. The capital increase was registered on the commercialregister on September 21, 2007. SQS had no shares in its ownership as at 31 December 2007. Conditional capital The General Meeting of 12 April 2002 resolved the conditional increase in theshare capital by an amount of up to 31,112 •. The resolution became effectivewith the entry of 6 June 2002. Following the increase in capital, theconditional capital amounted to 43,556.80 • as at 16 August 2005 and to74,668.80 • as at 20 September 2005 and the subsequent entry in the CommercialRegister of 23 September 2005, the existing conditional capital was revoked andincreased again by 52,800 •. The conditional capital serves as security for the convertible bonds. The General Meeting of 2 June 2006 resolved a new conditional capital by anamount of up to 1,500,000 • by issuance of up to 1,500,000 new individualregistered shares (Conditional Capital II). The conditional Capital II serves togrant up to 1,500,000 share options until 31 December 2008 as incentivecompensation for SQS employees and executives. This resolution became effectivewith the entry of 30 June 2006. Authorised capital The General Meeting of 30 Mai 2007 resolved the authorisation of the managementboard with the approval of the Supervisory board to increase of the sharecapital until 30 May 2012 by issuance of up to 4,300,000 new registered non-parvalue shares against contribution in cash or in kind (Authorised Capital II).This authorisation was partially used by issuance of 2,855,486 new registerednon-par value shares against contribution in kind. After this the residualAuthorised Capital II is amounted to 1,444,514 • 5. Equity (continued) Thereafter, the authorised capital developed as follows: T•As at 1 January 2006 5,000Usage of authorised capital 1 (1,428)Increase in authorised capital 3 2,882As at 31 December 2006 6,454Usage of authorised capital 2 (1,500)Increase of authorised capital 2 4,300Usage of authorised capital 2 (2,856)As at 31 December 2007 6,398 Statutory reserves The statutory reserves in SQS AG were formed in accordance with Section 150 ofthe Stock Corporation Act (Germany). Other reserves The foreign currency translation differences arise on conversion of the openingreserves of subsidiary undertakings where the functional currency of thesubsidiary is not the Euro. It amounts to (248) T• (2006: (31) T•). IPO costs are accounted for net of taxes in the amount of (1,133) T• (2006:(1,074) T•). Retained earnings Retained earnings represent the accumulated retained profits less losses of SQSGroup. No dividends have been paid or proposed in any of the financial years ended 31December 2006. Convertible bonds with conversion rights SQS has, on the basis of the resolution of the General Meeting of 14 September2005, undertaken to grant the vendor of the shares in SQS Group (UK) Ltdconvertible bonds in a total nominal amount of 53 T•, divided into 52,800convertible bonds of a nominal value of 1.00 • each, if the party entitled paysinto SQS the nominal amount of 1.00 • per share. The exercise of the right ofconversion expires on 31 July 2008. Up until completion of the preparation ofthese Financial Statements but after 31 December 2007, the party entitled hasexercised this right. This resulted in the issue of 52,800 new shares on 20February 2008. 6. Notes to the Cash Flow Statement The cash flow statement shows how the funds of the Group have changed in thecourse of the business year through outflows and inflows of funds. The paymentsare arranged according to investment, financing and business activities. The sources of funds on which the cash flow statement is based consist of cashand cash equivalents (cash on hand and bank balances). Cologne, 06 March 2008 SQS Software Quality Systems AG ________________________ ______________________(R. van Megen) (R. Gawron) SQS Software Quality Systems AGStollwerckstrasse 11D-51149 Cologne This information is provided by RNS The company news service from the London Stock ExchangeRelated Shares:
SQS Software Quality Systems AG